Edgar Filing: MARKEL CORP

Form 10-K

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, 2009

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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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.

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, 2009 was approximately $2,478,412,657.

The number of shares of the registrant’s Common Stock outstanding at February 18, 2010: 9,807,051.

Documents Incorporated By Reference

The portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 10, 2010, referred to in Part III.

Index and Cross References-Form 10-K Annual Report


Item No.		Page

Part I
1.	Business	12-31, 124-126
1A.	Risk Factors	29-31
1B.	Unresolved Staff Comments	NONE
2.	Properties (note 5)	51
3.	Legal Proceedings (note 15)	66-67
4.	[Reserved]
4A.	Executive Officers of the Registrant	127

Part II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	84, 124-125
6.	Selected Financial Data	32-33
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	85-123
7A.	Quantitative and Qualitative Disclosures About Market Risk	116-120
8.	Financial Statements and Supplementary Data The response to this item is submitted in Item 15 and on page 84.
9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	NONE
9A.	Controls and Procedures	81-83, 121
9B.	Other Information	NONE

Part III
10.	Directors, Executive Officers and Corporate Governance*	127
	Code of Conduct	126
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 10 and Items 11, 12, 13 and 14 will be incorporated by reference from the Registrant’s 2010 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, 2009 and 2008	34

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2009, 2008 and 2007	35

	Consolidated Statements of Changes in Equity for the Years Ended December 31, 2009, 2008 and 2007	36

	Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007	37

	Notes to Consolidated Financial Statements for the Years Ended December 31, 2009, 2008 and 2007	38-79

	Reports of Independent Registered Public Accounting Firm	80-82

	(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 generally do not fit the underwriting criteria of standard carriers. For example, United States insurance regulations generally require an Excess and Surplus Lines (E&S) account to be declined by 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 than in the standard insurance market and more on other value-based considerations, such as availability, service and expertise. While specialty market exposures may have higher perceived insurance risks than their standard market counterparts, we seek to manage these risks to achieve higher financial returns. To reach our financial and operational goals, we must have extensive knowledge and expertise in our chosen markets. 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, accident and medical coverage for students, 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

The E&S market focuses on hard-to-place risks and loss exposures that generally cannot be written in the standard market. E&S eligibility allows our insurance subsidiaries to underwrite unique loss exposures with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more restrictive and more expensive than coverages in the standard admitted market. In 2008, the E&S market represented approximately $34 billion, or 7%, of the approximately $490 billion United States property and casualty (P&C) industry.⁽¹⁾

⁽¹⁾	U.S. Surplus Lines – 2009 Market Review Special Report, A.M. Best Research (September 2009).

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We are the sixth largest E&S writer in the United States as measured by direct premium writings.⁽¹⁾In 2009, we wrote $1.0 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. In 2009, we wrote $302 million of business in our Specialty Admitted segment.

The London market, which produced approximately $46 billion of gross written premium in 2008, is the largest insurance market in Europe and third largest in the world.⁽²⁾The London market is known for its ability to provide innovative, tailored coverage and capacity for unique and hard-to-place risks. It is primarily a broker market, which means that insurance brokers bring most of the business to the market. The London market is also largely a subscription market, which means that loss exposures brought into the market are typically insured by more than one insurance company or Lloyd’s syndicate, often due to the high limits of insurance coverage required. We write business on both a direct and subscription basis in the London market. When we write business in the subscription market, we prefer to participate as lead underwriter in order to control underwriting terms, policy conditions and claims handling.

In 2008, gross premium written through Lloyd’s syndicates generated approximately two-thirds of the London market’s international insurance business⁽²⁾, making Lloyd’s the world’s second largest commercial surplus lines insurer⁽¹⁾and fifth largest reinsurer.⁽³⁾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 2008, corporate capital providers accounted for approximately 94% of total underwriting capacity in Lloyd’s.⁽ ⁴⁾

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 2009, we wrote $641 million of business in our London Insurance Market segment.

In 2009, 26% of consolidated premium writings related to foreign risks (i.e., coverage for risks located outside of the United States), of which 28% were from the United Kingdom. In 2008, 23% of our premium writings related to foreign risks, of which 32% were from the United Kingdom. In 2007, 24% of our premium writings related to foreign risks, of which 33% were from the United Kingdom. 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.

⁽²⁾	International Financial Markets in the UK, International Financial Services of London Research (November 2009).

⁽³⁾	Top Ten Global Reinsurers by Net Reinsurance Premiums Written 2008, Business Insurance (August 2009).

⁽⁴⁾	Lloyd’s Highlights 2009, Lloyd’s.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Competition

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

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

The Insurance Market Cycle 2000 - 2009

After a decade of soft market conditions, the insurance industry experienced favorable conditions beginning in late 2000, which continued through 2003 for most product lines. During 2004, we continued to receive rate increases; however, the rate of increase slowed and, in certain lines, rates declined. In 2005, the industry showed continued signs of softening as competition became more intense. With the exception of rate increases on catastrophe-exposed business, we continued to experience increased competition and a deterioration in pricing throughout 2006 and 2007. Competition in the property and casualty insurance industry remained strong throughout 2008. We experienced further price deterioration in virtually all of our product areas as a result of this intense competition, which included the increased presence of standard insurance companies in our markets. However, given the rapid deterioration in underwriting capacity as a result of the disruptions in the financial markets and losses from catastrophes during 2008, the rate of decline began to slow. In late 2008, we reviewed the pricing for all of our major product lines and began pursuing price increases in many product areas; however, as a result of continued soft insurance market conditions, our targeted price increases were met with resistance in the marketplace, particularly within the Excess and Surplus Lines segment. During 2009, the effects of the economic environment also contributed to the decline in gross premium volume. Premiums for many of our product lines are based upon our insureds’ revenues, gross receipts or payroll, which have been negatively impacted by the depressed levels of business activity that began in 2008. In 2009, we saw the rate of decline in prices slow and have begun to experience moderate price increases in several product lines, most notably those offered by Markel International. When we believe the prevailing market price will not support our underwriting profit targets, the business is not written. As a result of our underwriting discipline, gross written premium has declined and, if the competitive environment does not improve, could decline further in the future.

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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 2009, our combined ratio was 95%. 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, the Excess and Surplus Lines, Specialty Admitted and London markets. See note 18 of the notes to consolidated financial statements for additional segment reporting disclosures.

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

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

MARKEL CORPORATION

2009 CONSOLIDATED GROSS PREMIUM VOLUME ($1.9 billion)

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Excess and Surplus Lines Segment

Our Excess and Surplus Lines segment reported gross premium volume of $1.0 billion, earned premiums of $0.9 billion and an underwriting profit of $36.2 million in 2009.

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

Before 2009, our Excess and Surplus Lines segment was comprised of individual underwriting units, each with product-focused specialists servicing brokers, agents and insureds across the United States from their respective underwriting unit locations. In March 2009, we transitioned the four underwriting units included in our Excess and Surplus Lines segment to a customer-focused regional office model as part of our previously announced “One Markel” initiative.

We divided the country into five regions, and each regional underwriting office is responsible for serving the needs of the wholesale producers located in its region. Our regional teams focus primarily on customer service, marketing, underwriting and distributing our insurance solutions and are able to provide customers easy access to the majority of our products.

In the Excess and Surplus Lines segment, we wrote business through the following regional underwriting offices during 2009:

•

Markel Northeast (Red Bank, NJ)

•

Markel Southeast (Glen Allen, VA)

•

Markel Midwest (Deerfield, IL)

•

Markel Mid South (Plano, TX)

•

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

We also have established a product line leadership group that has primary responsibility for both developing and maintaining underwriting and pricing guidelines and for new product development. The product line leadership group is also responsible for delegating underwriting authority to the regional underwriters to ensure that the products needed by our customers are available through the regional offices and for providing underwriting training and development so that our regional underwriting teams have the expertise to underwrite the risk or to refer risks to our product line

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experts as needed. The product line leadership group is under the direction of our Chief Underwriting Officer, who also is ultimately responsible for the underwriting activities of our Specialty Admitted and London Insurance Market segments.

Product line groups included in the Excess and Surplus Lines segment are:

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Professional and Products Liability

•

Property and Casualty

•

Environmental

•

Excess and Umbrella

•

Transportation

•

Inland Marine

•

Ocean Marine

•

Miscellaneous Coverages

The product offerings included in each product line group are generally available in all of the regional offices included in the Excess and Surplus Lines segment.

EXCESS AND SURPLUS LINES SEGMENT

2009 GROSS PREMIUM VOLUME ($1.0 BILLION)

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The professional and products liability product line group offers unique solutions for highly specialized professions; third party protection to manufacturers, distributors, importers and re-packagers of manufactured products; and employment practices liability, not-for-profit directors’ and officers’ liability and tenant discrimination coverages. This product line group also offers claims-made medical malpractice coverage for individual or groups of doctors, dentists, podiatrists and other medical professionals; claims-made professional liability coverage to individual healthcare providers such as therapists, pharmacists, physician assistants and nurse anesthetists; and coverages for medical facilities and other allied healthcare risks such as clinics, laboratories, medical spas, home health agencies, small hospitals, pharmacies and nursing homes.

The property and casualty product line group offers a variety of liability coverages focusing on light-to-medium casualty exposures such as restaurants and bars, child and adult care facilities, vacant properties, builder’s risk, general or artisan contractors, office buildings and light manufacturing operations. This product line group also provides property coverages for similar 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

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

water damage) and other specialized property coverages (including catastrophe-exposed property risks such as earthquake and wind on both an excess and primary basis). These catastrophe-exposed property risks are typically larger and are low frequency and high severity in nature than more standard property risks.

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

The excess and umbrella product line group offers products that are written on both a primary and excess basis over approved underlying insurance carriers, primarily for commercial businesses. Coverage can be written on either an occurrence or claims-made basis. Targeted classes of business include commercial and residential construction contractors and subcontractors, manufacturers, wholesalers, retailers, service providers, municipalities and school districts.

The transportation product line group offers physical damage coverages for high-value automobiles such as race cars and antique vehicles, as well as all types of specialty commercial vehicles including dump trucks, coal haulers, logging trucks, bloodmobiles, mobile stores, public autos, couriers and house moving vehicles. Also included in this product line group is dealer’s open lot and garagekeeper’s legal liability coverage for physical damage to vehicles held for sale or in the insured’s care while performing work. Targeted classes in this product line group include used car and truck dealers, motorcycle dealers, mobile home and recreational vehicle dealers and repair shops. This product line group also provides liability coverage to operators of small to medium-sized owned and operated taxicab fleets and multi-line specialty products designed for the unique characteristics of the garage industry. Targeted classes of business for this group include used car dealers, repair/service centers, truck trailer sales and repair centers, mobile detail shops, stereo sales and installation operations, tire dealers and valet service operations.

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

The ocean marine product line group offers a variety of coverages including general liability, professional liability, property and cargo for many marine-related classes. Targeted marine classes include marine artisan contractors, boat dealers and marina owners. Coverages offered include hull physical damage, protection and indemnity, as well as third party property coverage for ocean cargo.

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Miscellaneous coverages offered include casualty facultative reinsurance, public entity insurance and reinsurance and specialized insurance programs for specific classes of business. Casualty facultative reinsurance is written for individual casualty risks focusing on general liability, products liability, automobile liability and certain classes of miscellaneous professional liability. Targeted classes include low frequency, high severity, short-tail general liability risks. Casualty facultative placements offer coverages that possess favorable underwriting characteristics, such as control of individual risk selection and pricing. Public entity insurance and reinsurance programs provide coverage for government entities including counties, municipalities, special districts, schools and community colleges.

Specialty Admitted Segment

Our Specialty Admitted segment reported gross premium volume of $301.8 million, earned premiums of $303.9 million and an underwriting profit of $2.3 million in 2009.

In the Specialty Admitted market, we wrote business through the following underwriting units during 2009:

•

Markel Specialty (Glen Allen, VA)

•

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

Our Specialty Admitted segment included a third underwriting unit, Markel Global Marine and Energy, until late 2008 when we decided to close that unit and place its programs into run-off.

SPECIALTY ADMITTED SEGMENT

2009 GROSS PREMIUM VOLUME ($302 MILLION)

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

The Markel Specialty unit is organized into product areas that concentrate on particular markets and customer groups. The property and casualty division writes commercial coverages for youth and recreation oriented organizations, such as children’s camps, conference centers, YMCAs, YWCAs, Boys and Girls Clubs, child care centers, nursery schools, private and Montessori schools and gymnastics, martial arts and dance schools. This division also writes commercial coverages for social service organizations, museums and historic homes, performing arts organizations, bed and breakfast inns, outfitters and guides, hunting and fishing lodges, dude ranches and rod and gun clubs. The horse and farm division specializes in insurance coverages for horse-related risks, such as horse mortality

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

coverage and property and liability coverages for farms, boarding, breeding and training facilities. The accident and health division writes liability and accident insurance for amateur sports organizations, accident and medical insurance for colleges, universities, public schools and private schools, monoline accident and medical coverage for various niche markets, short-term medical insurance, pet health insurance, stop-loss insurance for self-insured medical plans and medical excess reinsurance coverage. The garage division provides commercial coverages for auto repair garages, gas stations and convenience stores and used car dealers. The general agent programs division develops partnerships with managing general agents to offer single source admitted and non-admitted programs for a specific class or line of business. We seek general agents who utilize retailers as their primary source of distribution. Underwriting, policy issuance and business development authority are delegated to the managing general agent. The Markel Risk Solutions facility works with select retail producers on a national basis to provide admitted market solutions to accounts having difficulty finding coverage in the standard marketplace. Accounts of various classes and sizes are written with emphasis placed on individual risk underwriting and pricing.

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

MARKEL SPECIALTY

2009 GROSS PREMIUM VOLUME ($210 MILLION)

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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 marine, recreational vehicle, property and other personal line coverages. The marine division markets personal lines insurance coverage for watercraft, older boats, high performance boats, moderately priced yachts and newer watercraft up to 26 feet. The marine division also provides coverage for small fishing ventures, charters and small boat rentals. The recreational vehicle division provides coverage for motorcycles, snowmobiles and ATVs and targets mature riders of touring and cruising bikes, snowmobiles and ATV riders. The property division provides coverage for mobile homes and dwellings that do not qualify for standard homeowners coverage, as well as contents coverage for renters. Mobile home coverages include both personally used mobile and motor homes as well as motor home rental operations. Other products offered by this unit include special event protection, which provides for cancellation and/or liability coverage for weddings, anniversary celebrations and other personal events; supplemental natural disaster coverage, which offers additional living expense protection for loss due to specific named perils including flood; renters’ protection coverage,

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which provides tenant homeowner’s coverage on a broader form than the standard renter’s policy; and collector vehicle coverage, which provides comprehensive coverage for a variety of collector vehicles including antique autos and motorcycles.

Markel American Specialty Personal and Commercial Lines products are characterized by high numbers of transactions, low average premiums and creative solutions for under-served and emerging markets. The unit distributes its marine, property and other products through wholesale or specialty retail producers. The recreational vehicle program 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.

MARKEL AMERICAN SPECIALTY PERSONAL AND COMMERCIAL LINES

2009 GROSS PREMIUM VOLUME ($90 MILLION)

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London Insurance Market Segment

Our London Insurance Market segment reported gross premium volume of $641.2 million, earned premiums of $572.4 million and an underwriting profit of $52.5 million in 2009.

LONDON INSURANCE MARKET SEGMENT

2009 GROSS PREMIUM VOLUME ($641 MILLION)

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

This segment is comprised of Markel International, which is headquartered in London, England. In addition to seven branch offices in the United Kingdom, Markel International has offices in Spain, 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 24% of writings coming from the United States.

Effective October 1, 2009, this segment includes the results of Elliott Special Risks (ESR), a Canadian managing general agent that provides insurance underwriting and administrative services to insurers, which we acquired for approximately $70 million. ESR was established in 1966 and has offices located in Toronto and Montreal. ESR specializes in niche commercial liability and property coverages. In 2009, ESR produced approximately $90 million of gross premium volume, including approximately $9 million of premiums for Markel International. Markel International expects to significantly increase its share of the premium writings produced by ESR in 2010.

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:

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Marine and Energy

•

Non-Marine Property

•

Professional and Financial Risks

•

Retail

•

Specialty

•

Equine

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 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, intellectual property, some miscellaneous defense costs, incidental commercial crime and general liability coverages. The professional indemnity account offers unique solutions in four main professional classes including miscellaneous professionals and consultants, construction professionals, financial service professionals and professional practices. The miscellaneous

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professionals and consultants class includes coverages for a wide range of professionals including management consultants, publishers, broadcasters, pension trustees and public officials. The construction class includes coverages for surveyors, engineers, architects and estate agents. The financial services class includes coverages for insurance brokers, insurance agents, financial consultants, stockbrokers, fund managers, venture capitalists and bankers. The professional practices class includes coverages for accountants and solicitors. The directors’ and officers’ liability account offers coverage to public, private and non-profit companies of all sizes on either an individual or blanket basis. The Professional and Financial Risks division writes business on a worldwide basis, limiting exposure in the United States.

The Retail division offers a full range of professional liability products, including professional indemnity, directors’ and officers’ liability and employment practices liability, through six branch offices in England and one branch office in Scotland. In addition, coverage is provided for small to 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 division also underwrites certain niche liability products such as coverages for social welfare organizations.

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. Coverage includes bankers blanket bond, computer crime, commercial fidelity, professional sports liability, event cancellation, non-appearance and prize indemnity.

The Equine division writes bloodstock, livestock and aquaculture related products. The bloodstock account provides coverage for risks of mortality, theft, infertility and specified perils for insureds ranging in size from large stud farms to private horse owners. The livestock account provides coverage for farms, zoos, animal theme parks and safari parks. The aquaculture account provides comprehensive coverage for fish at onshore farms, offshore farms and in-transit risks.

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,

| 23

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

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, 2009. 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 $952.1 million reinsurance recoverable balance.


Reinsurers	A.M. Best Rating	Reinsurance Recoverable
		(dollars in thousands)
Munich Re Group	A+	$	169,611
Fairfax Financial Group	A		96,120
Lloyd’s of London	A		88,846
Swiss Re Group	A		81,266
XL Capital Group	A		65,187
Ace Group	A+		51,333
White Mountains Insurance Group	A-		40,273
HDI Group	A		34,285
W.R. Berkley Group	A+		33,147
Everest Re Group	A+		29,451

Reinsurance recoverable on paid and unpaid losses for ten largest reinsurers			689,519

Total reinsurance recoverable on paid and unpaid losses		$	952,145

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

See note 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.

24 |

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 two-thirds 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 employees.

Total investment return includes items that impact net income (loss), such as net investment income and net realized investment gains or losses, as well as changes in net unrealized gains on investments, which do not impact net income (loss). In 2009, net investment income was $259.8 million and net realized investment losses were $96.1 million. During the year ended December 31, 2009, net unrealized gains on investments increased by $566.7 million. We do not lower the quality of our investment portfolio in order to enhance or maintain yields. We focus on long-term total investment return, understanding that the level of realized and unrealized investment gains or losses may vary from one period to the next.

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

ANNUAL TAXABLE EQUIVALENT TOTAL INVESTMENT RETURNS


	Years Ended December 31,															Weighted Average Five-Year Annual Return		Weighted Average Ten-Year Annual Return
	Years Ended December 31,
	2005			2006			2007			2008			2009
Equities		(0.3	%)		25.9	%		(0.4	%)		(34.0	%)		25.7	%	2.0	%	6.3	%
Fixed maturities⁽¹⁾		3.9	%		5.2	%		5.6	%		0.2	%		9.8	%	5.0	%	5.7	%
Total portfolio, before foreign currency effect		2.9	%		9.6	%		4.1	%		(6.9	%)		11.7	%	4.2	%	5.7	%
Total portfolio		1.5	%		11.2	%		4.8	%		(9.6	%)		13.2	%	4.1	%	6.0	%

Invested assets, end of year (in millions)	$	6,588		$	7,524		$	7,775		$	6,893		$	7,849

⁽¹⁾	Includes short-term investments and cash and cash equivalents.

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

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

| 25

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

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 approximately 90% rated “A” or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturities that are unrated or rated below investment grade. At December 31, 2009, approximately 2% of our fixed maturity portfolio was unrated or rated below investment grade. Our fixed maturity portfolio includes securities issued with financial guaranty insurance. We purchase fixed maturities based on our assessment of the credit quality of the underlying assets without regard to insurance.

The following chart presents our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2009.

2009 CREDIT QUALITY OF FIXED MATURITY PORTFOLIO ($5.1 BILLION)

LOGO

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

Non-Insurance Operations (Markel Ventures)

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

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

26 |

Our non-insurance operations, also referred to as Markel Ventures, are comprised of a diverse portfolio of companies from various industries, including a manufacturer of dredging equipment, a manufacturer of high-speed bakery equipment, an owner and operator of manufactured housing communities and a manufacturer of laminated furniture products.

Our non-insurance operations reported revenues of $85.7 million and income before income taxes of $6.4 million in 2009.

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, 2009, book value per share increased 27% primarily due to a $374.4 million increase in net unrealized gains on investments, net of taxes, and net income to shareholders of $201.6 million. For the year ended December 31, 2008, book value per share decreased 16% primarily due to a $329.9 million decrease in net unrealized gains on investments, net of taxes, and net loss to shareholders of $58.8 million. Over the past five years, we have grown book value per share at a compound annual rate of 11% to $282.55 per share.

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

LOGO

| 27

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Regulatory Environment

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

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

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

The laws of the domicile states of our insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Corporation. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary as opposed to ordinary dividends. At December 31, 2009, our United States insurance subsidiaries could pay up to $154.5 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.

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.

28 |

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 2009, we paid rating agencies, including Best and Fitch, $0.9 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.

We may experience losses from catastrophes. Because we are a property and casualty insurance company, we 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. If, as many forecast, climate change results in an increase in the frequency and severity of weather-related catastrophes, we may experience additional catastrophe-related losses.

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

•

trends in claim frequency and severity,

•

changes in operations,

•

emerging economic and social trends,

•

uncertainties relating to asbestos and environmental exposures,

•

inflation, and

•

changes in the regulatory and litigation environments.

| 29

Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

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

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

Our ability to make payments on debt or other obligations depends on the receipt of funds from our subsidiaries. We are a holding company, and substantially all of our operations are conducted through our regulated subsidiaries. As a result, our cash flow and 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. In 2010, we will continue to pursue price increases in many product lines. If we are not successful in achieving our targeted rate increases, it may be difficult for us to improve underwriting margins and grow or maintain premium volume levels.

We invest a significant portion of our invested assets in equity securities, which may result in significant variability in our investment results and may adversely impact shareholders’ equity. Additionally, our equity investment portfolio is concentrated and declines in value on these significant investments could adversely affect our financial results. Equity securities were 49% of our shareholders’ equity at both December 31, 2009 and 2008. Equity securities have historically produced higher returns than fixed maturities; however, investing in equity securities may result in significant variability in investment returns from one period to the next. In times of heightened market volatility such as 2008 and early

30 |

2009, we could experience significant declines in the fair value of our equity investment portfolio, which would result in a material decrease in shareholders’ equity. Our equity portfolio is concentrated in particular issuers and industries and, as a result, a decline in the fair value of these significant investments also could result in a material decrease in shareholders’ equity. A material decrease in shareholders’ equity may adversely impact our ability to carry out our business plans.

Deterioration in the public debt and equity markets could lead to investment losses and adverse effects on our business. The severe downturn in the public debt and equity markets during 2008 and early 2009 resulted in significant realized and unrealized losses in our investment portfolio. While market conditions improved significantly in the latter half of 2009, we do not believe markets have fully recovered. We could incur substantial additional realized and unrealized losses if the financial markets experience similar significant disruptions in the future, which would have an adverse impact on our results of operations, financial condition, debt and financial strength ratings, insurance subsidiaries’ capital and ability to access capital markets. In addition, because of adverse conditions in the financial services industry, access to capital has generally become more difficult, which may adversely affect our ability to take advantage of business opportunities as they arise.

If we are not successful in the implementation of our One Markel initiative, we may experience increased costs, a decline in premium volume or increased internal control risk. Our One Markel initiative involves transitioning the business model for our Excess and Surplus Lines segment to a customer-focused, regional strategy. In the new model, our underwriters have access to and expertise in all of our product offerings and are located closer to our producers. The overall goal of One Markel is to grow our business while maintaining our underwriting integrity, with unified systems greatly enhancing our ability to accomplish this goal. We expect to incur higher expenses in the short term as we implement our new model and systems; however, if we are unsuccessful in implementing One Markel, we could also experience increased costs due to delays or disruptions from system conversions or lower underwriting profits if we cannot maintain our underwriting standards under the new model. In addition, adopting this new business model and implementing new information technology systems in support of this initiative will change the design of our system of internal controls, which may increase internal control risk for a period of time. We have made significant progress during 2009 towards achieving the goals of One Markel. However, we still have risk in the areas mentioned above until the business model is fully integrated with internal and producer processes and new system development is completed, tested and implemented.

Associates

At December 31, 2009, we had approximately 2,800 employees, of which approximately 2,100 were employed within our insurance operations and approximately 700 were employed within our non-insurance operations.

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Markel Corporation & Subsidiaries

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


	2009			2008			2007
RESULTS OF OPERATIONS
Earned premiums	$	1,816		$	2,022		$	2,117
Net investment income		260			282			305
Total operating revenues		2,069			1,977			2,551
Net income (loss) to shareholders		202			(59	)		406
Comprehensive income (loss) to shareholders		591			(403	)		337
Diluted net income (loss) per share	$	20.52		$	(5.95	)	$	40.64


FINANCIAL POSITION
Total investments and cash and cash equivalents	$	7,849		$	6,893		$	7,775
Total assets		10,242			9,512			10,164
Unpaid losses and loss adjustment expenses		5,427			5,492			5,526
Convertible notes payable		—			—			—
Senior long-term debt and other debt		964			694			691
8.71% Junior Subordinated Debentures		—			—			—
Shareholders’ equity		2,774			2,181			2,641
Common shares outstanding (at year end, in thousands)		9,819			9,814			9,957


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

OPERATING DATA
Book value per common share outstanding	$	282.55		$	222.20		$	265.26
Growth (decline) in book value per share		27	%		(16	%)		15	%
5-Year CAGR in book value per share ⁽⁴⁾		11	%		10	%		18	%
Closing stock price	$	340.00		$	299.00		$	491.10


RATIO ANALYSIS
U.S. GAAP combined ratio ⁽⁵⁾		95	%		99	%		88	%
Investment yield ⁽⁶⁾		4	%		4	%		4	%
Taxable equivalent total investment return ⁽⁷⁾		13	%		(10	%)		5	%
Investment leverage ⁽⁸⁾		2.8			3.2			2.9
Debt to total capital		26	%		24	%		21	%

⁽¹⁾

Reflects our acquisition of 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 FASB ASC 350-20-35, 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.

32 |


2006			2005			2004			2003			2002			2001			2000			10-Year CAGR ⁽⁴⁾
$	2,184		$	1,938		$	2,054		$	1,864		$	1,549		$	1,207		$	939		15	%
	269			242			204			183			170			171			154		11	%
	2,576			2,200			2,262			2,092			1,770			1,397			1,094		15	%
	393			148			165			123			75			(126	)		(28	)	—
	551			64			273			222			73			(77	)		81		—
$	39.40		$	14.80		$	16.41		$	12.31		$	7.53		$	(14.73	)	$	(3.99	)	—



$	7,524		$	6,588		$	6,317		$	5,350		$	4,314		$	3,591		$	3,136		17	%
	10,117			9,814			9,398			8,532			7,409			6,441			5,473		15	%
	5,584			5,864			5,482			4,930			4,367			3,700			3,037		15	%
	—			99			95			91			86			116			—		—
	760			609			610			522			404			265			573		—
	106			141			150			150			150			150			150		—
	2,296			1,705			1,657			1,382			1,159			1,085			752		22	%
	9,994			9,799			9,847			9,847			9,832			9,820			7,331		—



$	229.78		$	174.04		$	168.22		$	140.38		$	117.89		$	110.50		$	102.63		15	%
	32	%		3	%		20	%		19	%		7	%		8	%		50	%	—
	16	%		11	%		20	%		13	%		13	%		18	%		21	%	—
$	480.10		$	317.05		$	364.00		$	253.51		$	205.50		$	179.65		$	181.00		—


	87	%		101	%		96	%		99	%		103	%		124	%		114	%	—
	4	%		4	%		4	%		4	%		4	%		5	%		6	%	—
	11	%		2	%		8	%		11	%		8	%		8	%		12	%	—
	3.3			3.9			3.8			3.9			3.7			3.3			4.2		—
	27	%		33	%		34	%		36	%		36	%		33	%		49	%	—

⁽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 fair value of the investment portfolio and the effect of foreign currency exchange rate movements during the period as a percentage of average invested assets. Tax-exempt interest and dividend payments are grossed up using the U.S. corporate tax rate to reflect an equivalent taxable yield.

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

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Markel Corporation & Subsidiaries

CONSOLIDATED BALANCE SHEETS


	December 31,
	2009		2008
	*(dollars in thousands)*
ASSETS
Investments, available-for-sale, at estimated fair value:
Fixed maturities (amortized cost of $4,961,745 in 2009 and $4,722,371 in 2008)	$	5,112,136	$	4,592,552
Equity securities (cost of $843,841 in 2009 and $855,188 in 2008)		1,349,829		1,073,769
Short-term investments (estimated fair value approximates cost)		492,581		508,834
Investments in affiliates		43,633		77,272

TOTAL INVESTMENTS		6,998,179		6,252,427

Cash and cash equivalents		850,494		640,379
Receivables		279,879		278,096
Reinsurance recoverable on unpaid losses		886,442		1,026,858
Reinsurance recoverable on paid losses		65,703		71,890
Deferred policy acquisition costs		156,797		183,755
Prepaid reinsurance premiums		68,307		86,534
Goodwill and intangible assets		502,833		361,424
Other assets		433,262		610,691

TOTAL ASSETS	$	10,241,896	$	9,512,054


LIABILITIES AND EQUITY
Unpaid losses and loss adjustment expenses	$	5,427,096	$	5,492,339
Unearned premiums		717,728		827,888
Payables to insurance companies		46,853		42,399
Senior long-term debt and other debt (estimated fair value of $1,011,000 in 2009 and $626,000 in 2008)		963,648		694,409
Other liabilities		294,857		274,084

TOTAL LIABILITIES		7,450,182		7,331,119

Commitments and contingencies
Shareholders’ equity:
Common stock		872,876		869,744
Retained earnings		1,514,398		1,297,901
Accumulated other comprehensive income		387,086		13,029

TOTAL SHAREHOLDERS’ EQUITY		2,774,360		2,180,674
Noncontrolling interests		17,354		261

TOTAL EQUITY		2,791,714		2,180,935

TOTAL LIABILITIES AND EQUITY	$	10,241,896	$	9,512,054

See accompanying notes to consolidated financial statements.

34 |

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)


	Years Ended December 31,
	2009			2008			2007
	*(dollars in thousands, except per share data)*
OPERATING REVENUES
Earned premiums	$	1,815,835		$	2,022,184		$	2,117,294
Net investment income		259,809			282,148			305,247
Net realized investment gains (losses):
Other-than-temporary impairment losses		(95,570	)		(339,164	)		(19,841	)
Less other-than-temporary impairment losses recognized in other comprehensive income (loss)		5,620			—			—

Other-than-temporary impairment losses recognized in net income (loss)		(89,950	)		(339,164	)		(19,841	)
Net realized investment gains (losses), excluding other-than-temporary impairment losses		(6,150	)		(68,430	)		79,345

Net realized investment gains (losses)		(96,100	)		(407,594	)		59,504
Other revenues		89,782			79,845			68,534

TOTAL OPERATING REVENUES		2,069,326			1,976,583			2,550,579


OPERATING EXPENSES
Losses and loss adjustment expenses		992,863			1,269,025			1,096,203
Underwriting, acquisition and insurance expenses		736,660			738,546			756,699
Amortization of intangible assets		6,698			5,742			3,387
Other expenses		80,499			74,889			63,993

TOTAL OPERATING EXPENSES		1,816,720			2,088,202			1,920,282

OPERATING INCOME (LOSS)		252,606			(111,619	)		630,297

Interest expense		53,969			48,210			57,236

INCOME (LOSS) BEFORE INCOME TAXES		198,637			(159,829	)		573,061

Income tax expense (benefit)		(3,782	)		(101,395	)		167,184

NET INCOME (LOSS)	$	202,419		$	(58,434	)	$	405,877

Less net income attributable to noncontrolling interests		781			333			208

NET INCOME (LOSS) TO SHAREHOLDERS	$	201,638		$	(58,767	)	$	405,669


OTHER COMPREHENSIVE INCOME (LOSS)
Change in net unrealized gains on investments, net of taxes:
Net holding gains (losses) arising during the period	$	326,959		$	(594,767	)	$	(33,638	)
Unrealized other-than-temporary impairment losses on fixed maturities arising during the period		(5,405	)		—			—
Reclassification adjustments for net gains (losses) included in net income (loss)		52,883			264,898			(40,323	)

Change in net unrealized gains on investments, net of taxes		374,437			(329,869	)		(73,961	)
Change in currency translation adjustments, net of taxes		19,239			(7,893	)		3,793
Change in net actuarial pension loss, net of taxes		(4,268	)		(6,740	)		1,546

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)		389,408			(344,502	)		(68,622	)

COMPREHENSIVE INCOME (Loss)	$	591,827		$	(402,936	)	$	337,255
Less comprehensive income attributable to noncontrolling interests		832			333			208

COMPREHENSIVE INCOME (LOSS) TO SHAREHOLDERS	$	590,995		$	(403,269	)	$	337,047

NET INCOME (LOSS) PER SHARE
Basic	$	20.54		$	(5.95	)	$	40.73
Diluted	$	20.52		$	(5.95	)	$	40.64

See accompanying notes to consolidated financial statements.

| 35

Markel Corporation & Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


	Common Shares		Common Stock		Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders’ Equity			Non-controlling Interests			Total Equity
	*(in thousands)*
January 1, 2007	9,994		$	854,561	$	1,015,679		$	426,153		$	2,296,393		$	(344	)	$	2,296,049
Net income	—			—		405,669			—			405,669			208			405,877
Change in net unrealized gains on investments, net of taxes	—			—		—			(73,961	)		(73,961	)		—			(73,961	)
Change in currency translation adjustments, net of taxes	—			—		—			3,793			3,793			—			3,793
Change in net actuarial pension loss, net of taxes	—			—		—			1,546			1,546			—			1,546

Comprehensive income												337,047			208			337,255
Issuance of common stock	12			5,626		—			—			5,626			—			5,626
Repurchase of common stock	(49	)		—		(24,210	)		—			(24,210	)		—			(24,210	)
Cumulative effect of adoption of FASB ASC 740-10	—			2,831		20,131			—			22,962			—			22,962
Restricted stock units expensed	—			2,812		—			—			2,812			—			2,812
Other	—			532		—			—			532			—			532

December 31, 2007	9,957			866,362		1,417,269			357,531			2,641,162			(136	)		2,641,026
Net loss	—			—		(58,767	)		—			(58,767	)		333			(58,434	)
Change in net unrealized gains on investments, net of taxes	—			—		—			(329,869	)		(329,869	)		—			(329,869	)
Change in currency translation adjustments, net of taxes	—			—		—			(7,893	)		(7,893	)		—			(7,893	)
Change in net actuarial pension loss, net of taxes	—			—		—			(6,740	)		(6,740	)		—			(6,740	)

Comprehensive loss												(403,269	)		333			(402,936	)
Issuance of common stock	10			—		—			—			—			—			—
Repurchase of common stock	(153	)		—		(60,601	)		—			(60,601	)		—			(60,601	)
Restricted stock units expensed	—			2,187		—			—			2,187			—			2,187
Other	—			1,195		—			—			1,195			64			1,259

December 31, 2008	9,814			869,744		1,297,901			13,029			2,180,674			261			2,180,935
Net income	—			—		201,638			—			201,638			781			202,419
Change in net unrealized gains on investments, net of taxes	—			—		—			374,437			374,437			—			374,437
Cumulative effect of adoption of FASB ASC 320-10, net of taxes	—			—		15,300			(15,300	)		—			—			—
Change in currency translation adjustments, net of taxes	—			—		—			19,188			19,188			51			19,239
Change in net actuarial pension loss, net of taxes	—			—		—			(4,268	)		(4,268	)		—			(4,268	)

Comprehensive income												590,995			832			591,827
Issuance of common stock	6			—		—			—			—			—			—
Restricted stock units expensed	—			2,638		—			—			2,638			—			2,638
Acquisitions	—			—		—			—			—			16,204			16,204
Other	(1	)		494		(441	)		—			53			57			110

DECEMBER 31, 2009	9,819		$	872,876	$	1,514,398		$	387,086		$	2,774,360		$	17,354		$	2,791,714

See accompanying notes to consolidated financial statements.

36 |

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2009			2008			2007
	*(dollars in thousands)*
OPERATING ACTIVITIES
Net income (loss)	$	202,419		$	(58,434	)	$	405,877
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income tax expense (benefit)		(9,144	)		(100,417	)		31,935
Depreciation and amortization		31,172			31,191			32,563
Net realized investment losses (gains)		96,100			407,594			(59,504	)
Decrease in receivables		21,035			24,829			27,457
Decrease in deferred policy acquisition costs		26,958			18,536			16,101
Increase in unpaid losses and loss adjustment expenses, net		6,213			235,045			102,185
Decrease in unearned premiums, net		(91,933	)		(84,244	)		(64,314	)
Increase (decrease) in payables to insurance companies		(8,260	)		2,609			(19,917	)
Other		7,903			(79,709	)		24,144

NET CASH PROVIDED BY OPERATING ACTIVITIES		282,463			397,000			496,527


INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities		205,561			683,316			1,000,148
Proceeds from maturities, calls and prepayments of fixed maturities		312,951			404,444			213,975
Cost of fixed maturities and equity securities purchased		(726,954	)		(702,292	)		(1,652,284	)
Net change in short-term investments		23,616			(467,026	)		91,063
Cost of investments in affiliates		—			(8,481	)		(2,732	)
Acquisitions, net of cash acquired		(154,920	)		(10,070	)		(8,103	)
Additions to property and equipment		(21,906	)		(17,673	)		(14,495	)
Other		27,943			(34,190	)		(1,979	)

NET CASH USED BY INVESTING ACTIVITIES		(333,709	)		(151,972	)		(374,407	)


FINANCING ACTIVITIES
Additions to senior long-term debt and other debt		507,346			102,425			5,290
Repayment and retirement of senior long-term debt and other debt		(255,293	)		(100,190	)		(75,592	)
Retirement of Junior Subordinated Deferrable Interest Debentures		—			—			(111,012	)
Repurchases of common stock		—			(60,601	)		(24,210	)
Other		(441	)		64			—

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES		251,612			(58,302	)		(205,524	)


Effect of foreign currency rate changes on cash and cash equivalents		9,749			(24,387	)		5,849


Increase (decrease) in cash and cash equivalents		210,115			162,339			(77,555	)
Cash and cash equivalents at beginning of year		640,379			478,040			555,595

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	850,494		$	640,379		$	478,040

See accompanying notes to consolidated financial statements.

| 37

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.

Prior to the fourth quarter of 2009, the Company accounted for its two non-insurance subsidiaries as investments in affiliates under the equity method of accounting. The Company had determined that the differences between the equity method of accounting and consolidation accounting for these two entities were immaterial to the consolidated financial statements. During the fourth quarter of 2009, the Company acquired two additional businesses that operate outside of the specialty insurance marketplace. As a result, the Company consolidated the two entities that had previously been accounted for as investments in affiliates for all periods presented in this Annual Report on Form 10-K. This change had no impact on the Company’s net income (loss) to shareholders for any period presented. Total assets and total liabilities increased approximately $34 million from the amounts previously reported on the consolidated balance sheet as of December 31, 2008. The Company consolidates the results of its non-insurance subsidiaries on a one-month lag.

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. Unrealized gains and losses on investments, net of deferred income taxes, are included in accumulated other comprehensive income in shareholders’ equity. The Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary.

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

d) Investments in Affiliates. Investments in affiliates include investments 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

38 |

1. Summary of Significant Accounting Policies (continued)

other equity distributions are recorded as a reduction of the investment. The Company reviews investments in affiliates for impairment when events or circumstances indicate that a decline in the fair value of the investment below its carrying value is other-than-temporary.

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.

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 twenty years, and are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable.

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, 20 to 40 years for buildings, three to ten years for furniture and equipment and three to fifteen years for other property).

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 (benefit).

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.

| 39

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. Other revenues primarily consist of sales of products manufactured by the Company’s non-insurance operations. Revenue from manufactured products is generally recognized at the time title transfers to the customer, which occurs at the point of shipment or delivery to the customer, depending on the terms of the sales arrangement.

m) Stock-based Compensation. Stock-based compensation expense is recognized as part of underwriting, acquisition and insurance expenses over the requisite service period. Stock-based compensation expense, net of taxes, was $1.8 million in 2009, $1.3 million in 2008 and $2.9 million in 2007.

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 (loss).

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

The Company’s foreign currency forward contracts are 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.

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

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

40 |

1. Summary of Significant Accounting Policies (continued)

r) Recent Accounting Pronouncements. Effective April 1, 2009, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320-10-65, Investments – Debt and Equity Securities. This guidance amends the requirements for recognizing other-than-temporary impairment on debt securities and modifies the presentation of other-than-temporary impairment losses in the financial statements. The guidance requires other-than-temporary impairment of a debt security to be separated into two components when there are credit-related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security and it is more likely than not that it will not be required to sell the security before recovery of the security’s amortized cost. The amount of the other-than-temporary impairment related to a credit loss is recognized in net income (loss), and the amount of the other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss), net of taxes. The guidance also expands disclosure requirements related to other-than-temporary impairment, but does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.

Upon adoption of FASB ASC 320-10-65, the Company recorded an increase of $15.3 million, net of taxes, to the opening balance of retained earnings with a corresponding decrease to accumulated other comprehensive income to reclassify the non-credit portion of previously recognized other-than-temporary impairment losses on debt securities held as of April 1, 2009 for which the Company did not intend to sell the securities and did not believe that it would be required to sell the securities before recovery of their amortized cost.

Effective in the second quarter of 2009, the Company adopted FASB ASC 820-10-65, Fair Value Measurements and Disclosures, which provides additional guidance on how to estimate fair value when the volume and level of market activity for an asset or liability have significantly decreased. Under the provisions of this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity for an asset or liability (or similar assets and liabilities), then transactions or quoted prices may not accurately reflect fair value. In such instances, further analysis of the transactions or quoted prices is required, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value. FASB ASC 820-10-65 also provides guidance on identifying circumstances that may indicate a transaction is not orderly. Under the provisions of this guidance, if evidence indicates that a transaction is not orderly, an entity should place little, if any, weight on that transaction price when estimating fair value. The adoption of FASB ASC 820-10-65 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Effective in the second quarter of 2009, the Company adopted FASB ASC 825-10-65, Financial Instruments. This guidance requires disclosures about the fair value of financial instruments to be included in interim financial statements, adding to the existing requirement to provide those disclosures in annual financial statements. This guidance also requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments and to highlight any changes in these methods and assumptions from prior periods. Since FASB ASC 825-10-65 addresses financial statement disclosures only, the adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows.

Effective in the second quarter of 2009, the Company adopted FASB ASC 885-10, Subsequent Events, which provides guidance on the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. The adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows.

| 41

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. Summary of Significant Accounting Policies (continued)

In June 2009, the FASB issued Statement of Financial Accounting Standards (Statement) No. 167, Amendments to FASB Interpretation No. 46(R). In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, to amend their codification for Statement No. 167. This guidance removes the scope exception for qualifying special-purpose entities, includes new criteria for determining the primary beneficiary of a variable interest entity and increases the frequency of required assessments to determine whether an entity is the primary beneficiary of a variable interest entity. In January 2010, the FASB decided to indefinitely defer the consolidation requirements of ASU No. 2009-17 for interests in certain investment entities. The FASB also decided to revise the provisions of ASU No. 2009-17 for determining whether service-provider or decision-maker fee arrangements represent a variable interest. Both the provisions of ASU No. 2009-17 as issued and the subsequent revisions to this guidance are effective for the Company beginning January 1, 2010. The Company is currently evaluating ASU No. 2009-17 and the subsequent revisions to determine the potential impact that adopting this guidance will have on its consolidated financial statements.

Effective December 31, 2009, the Company adopted FASB ASC 715-20-65, Compensation – Retirement Benefits. FASB ASC 715-20-65 expands disclosure requirements regarding the investment strategies, fair value measurements and concentrations of risk for plan assets of a defined benefit pension or other postretirement plan. Since FASB ASC 715-20-65 addresses financial statement disclosures only, the adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows. The Company has included the disclosures required by FASB ASC 715-20-65 in note 19.

2. Investments

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

December 31, 2009

(dollars in thousands)

Amortized
Cost

Gross
Unrealized
Holding
Gains

Gross
Unrealized
Holding
Losses

Unrealized Other-
Than-Temporary
Impairment Losses

Estimated
Fair
Value

Fixed maturities:

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

358,360

18,053

(91

)

—

376,322

Obligations of states, municipalities and political subdivisions

2,068,714

65,824

(8,798

)

—

2,125,740

Foreign governments

410,435

14,912

(2,335

)

—

423,012

Residential mortgage-backed securities

419,707

24,223

(1,534

)

(12,342

)

430,054

Asset-backed securities

27,052

244

(1,001

)

—

26,295

Public utilities

136,302

7,317

—

143,619

Convertible bonds

30,750

—

30,750

All other corporate bonds

1,510,425

70,285

(13,942

)

(10,424

)

1,556,344

Total fixed maturities

4,961,745

200,858

(27,701

)

(22,766

)

5,112,136

Equity securities:

Insurance companies, banks and trusts

338,369

243,669

(3,521

)

—

578,517

Industrial, consumer and all other

505,472

266,165

(325

)

—

771,312

Total equity securities

843,841

509,834

(3,846

)

—

1,349,829

Short-term investments

492,563

)

—

492,581

INVESTMENTS, AVAILABLE-FOR-SALE

6,298,149

710,712

(31,549

)

(22,766

)

6,954,546

42 |

2. Investments (continued)


	December 31, 2008
*(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	$	354,601	$	25,428	$	(73	)	$	379,956
Obligations of states, municipalities and political subdivisions		1,909,522		14,114		(76,797	)		1,846,839
Foreign governments		285,188		16,468		(97	)		301,559
Residential mortgage-backed securities		511,294		8,060		(4,413	)		514,941
Asset-backed securities		29,168		21		(1,492	)		27,697
Public utilities		144,874		1,225		(2,759	)		143,340
Convertible bonds		24,969		—		—			24,969
All other corporate bonds		1,462,755		21,069		(130,573	)		1,353,251

Total fixed maturities		4,722,371		86,385		(216,204	)		4,592,552
Equity securities:
Insurance companies, banks and trusts		308,019		173,913		(4,524	)		477,408
Industrial, consumer and all other		547,169		69,719		(20,527	)		596,361

Total equity securities		855,188		243,632		(25,051	)		1,073,769
Short-term investments		508,812		42		(20	)		508,834

INVESTMENTS, AVAILABLE-FOR-SALE	$	6,086,371	$	330,059	$	(241,275	)	$	6,175,155

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


	December 31, 2009
	Less than 12 months					12 months or longer					Total
*(dollars in thousands)*	Estimated Fair Value		Gross Unrealized Holding and Other- Than-Temporary Impairment Losses			Estimated Fair Value		Gross Unrealized Holding and Other- Than-Temporary Impairment Losses			Estimated Fair Value		Gross Unrealized Holding and Other- Than-Temporary Impairment Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	23,798	$	(91	)	$	—	$	—		$	23,798	$	(91	)
Obligations of states, municipalities and political subdivisions		214,792		(2,388	)		148,570		(6,410	)		363,362		(8,798	)
Foreign governments		92,166		(2,335	)		—		—			92,166		(2,335	)
Residential mortgage- backed securities		33,223		(12,748	)		11,162		(1,128	)		44,385		(13,876	)
Asset-backed securities		—		—			10,607		(1,001	)		10,607		(1,001	)
All other corporate bonds		217,072		(18,890	)		143,057		(5,476	)		360,129		(24,366	)

Total fixed maturities		581,051		(36,452	)		313,396		(14,015	)		894,447		(50,467	)
Equity securities:
Insurance companies, banks and trusts		45,917		(3,521	)		—		—			45,917		(3,521	)
Industrial, consumer and all other		10,943		(325	)		—		—			10,943		(325	)

Total equity securities		56,860		(3,846	)		—		—			56,860		(3,846	)
Short-term investments		4,298		(2	)		—		—			4,298		(2	)

TOTAL	$	642,209	$	(40,300	)	$	313,396	$	(14,015	)	$	955,605	$	(54,315	)

| 43

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments (continued)

At December 31, 2009, the Company held 190 securities with a total estimated fair value of $955.6 million and gross unrealized losses of $54.3 million. Of these 190 securities, 78 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $313.4 million and gross unrealized losses of $14.0 million. All 78 securities were fixed maturities where the Company expects to receive all interest and principal payments when contractually due. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost.


	December 31, 2008
	Less than 12 months					12 months or longer					Total
(dollars in thousands)	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	$	5,626	$	(38	)	$	12,933	$	(35	)	$	18,559	$	(73	)
Obligations of states, municipalities and political subdivisions		811,255		(32,860	)		431,826		(43,937	)		1,243,081		(76,797	)
Foreign governments		20,380		(97	)		—		—			20,380		(97	)
Residential mortgage-backed securities		57,423		(1,948	)		17,235		(2,465	)		74,658		(4,413	)
Asset-backed securities		13,290		(682	)		12,321		(810	)		25,611		(1,492	)
Public utilities		44,926		(2,677	)		4,110		(82	)		49,036		(2,759	)
All other corporate bonds		557,014		(61,822	)		425,228		(68,751	)		982,242		(130,573	)

Total fixed maturities		1,509,914		(100,124	)		903,653		(116,080	)		2,413,567		(216,204	)
Equity securities:
Insurance companies, banks and trusts		23,386		(4,524	)		—		—			23,386		(4,524	)
Industrial, consumer and all other		129,974		(19,268	)		21,761		(1,259	)		151,735		(20,527	)

Total equity securities		153,360		(23,792	)		21,761		(1,259	)		175,121		(25,051	)
Short-term investments		34,690		(20	)		—		—			34,690		(20	)

TOTAL	$	1,697,964	$	(123,936	)	$	925,414	$	(117,339	)	$	2,623,378	$	(241,275	)

At December 31, 2008, the Company held 606 securities with a total estimated fair value of $2.6 billion and gross unrealized losses of $241.3 million. Of these 606 securities, 232 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $925.4 million and gross unrealized losses of $117.3 million. Of these securities, 230 securities were fixed maturities and two were equity securities.

Gross unrealized losses on fixed maturities, which were impacted by the widening of credit spreads, were $216.2 million at December 31, 2008. The market disruptions during 2008 resulted in a lack of liquidity within the credit markets, which increased credit risk in the financial markets and resulted in the widening of credit spreads. During the latter half of 2009, as conditions in the U.S. financial markets improved, credit spreads narrowed, which reduced the Company’s gross unrealized losses on fixed maturities to $50.5 million at December 31, 2009.

The Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. All securities with unrealized losses are reviewed. The Company considers many factors in completing its quarterly review of securities with unrealized losses for other-than-temporary impairment, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer. For equity securities, the ability and intent to hold the security for a period of time

44 |

2. Investments (continued)

sufficient to allow for anticipated recovery is considered. For fixed maturities, the Company considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery, the implied yield-to-maturity, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due.

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

When assessing whether it intends to sell a fixed maturity or if it is likely to be required to sell a fixed maturity before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing. Additional information on the methodology and significant inputs, by security type, that the Company used in 2009 to determine the amount of credit loss recognized on fixed maturities with declines in fair value below amortized cost that were considered to be other-than-temporary is provided below.

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

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

•

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

•

fundamentals of the industry in which the issuer operates;

•

expectations of defaults and recovery rates;

•

changes in ratings by the rating agencies;

•

other relevant market considerations; and

•

receipt of interest payments

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

| 45

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments (continued)

c) The amortized cost and estimated fair value of fixed maturities at December 31, 2009 are shown below by contractual maturity and investment type.


*(dollars in thousands)*	Amortized Cost		Estimated Fair Value
U.S. Treasury securities and obligations of U.S. government agencies:
Due in one year or less	$	46,501	$	47,235
Due after one year through five years		169,593		181,191
Due after five years through ten years		141,604		147,159
Due after ten years		662		737

TOTAL		358,360		376,322

Obligations of states, municipalities and political subdivisions:
Due in one year or less		—		—
Due after one year through five years		51,220		52,358
Due after five years through ten years		595,850		616,623
Due after ten years		1,421,644		1,456,759

TOTAL		2,068,714		2,125,740

Foreign governments:
Due in one year or less		4,035		4,043
Due after one year through five years		157,197		163,494
Due after five years through ten years		249,203		255,475
Due after ten years		—		—

TOTAL		410,435		423,012

Residential mortgage-backed securities:
Due in one year or less		2,271		2,277
Due after one year through five years		12,852		13,495
Due after five years through ten years		40,436		41,376
Due after ten years		364,148		372,906

TOTAL		419,707		430,054

Asset-backed securities:
Due in one year or less		1,907		1,919
Due after one year through five years		12,513		11,521
Due after five years through ten years		1,000		1,085
Due after ten years		11,632		11,770

TOTAL		27,052		26,295

Public utilities:
Due in one year or less		23,517		24,135
Due after one year through five years		90,413		96,006
Due after five years through ten years		22,372		23,478
Due after ten years		—		—

TOTAL		136,302		143,619

Convertible bonds and all other corporate bonds:
Due in one year or less		163,845		169,168
Due after one year through five years		657,916		689,088
Due after five years through ten years		618,874		633,342
Due after ten years		100,540		95,496

TOTAL		1,541,175		1,587,094

Total fixed maturities:
Due in one year or less		242,076		248,777
Due after one year through five years		1,151,704		1,207,153
Due after five years through ten years		1,669,339		1,718,538
Due after ten years		1,898,626		1,937,668

TOTAL FIXED MATURITIES	$	4,961,745	$	5,112,136

46 |

2. Investments (continued)

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 4.3 years.

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


	Years Ended December 31,
*(dollars in thousands)*	2009			2008			2007
Interest:
Municipal bonds (tax-exempt)	$	83,695		$	80,975		$	73,942
Taxable bonds		150,169			170,400			179,372
Short-term investments, including overnight deposits		5,597			18,979			27,630
Dividends on equity securities		24,883			35,048			33,902
Income (loss) from investments in affiliates		(379	)		1,136			3,858
Change in fair value of credit default swap		2,996			(13,698	)		(3,115	)
Other		(151	)		(1,903	)		(601	)

		266,810			290,937			314,988
Less investment expenses		7,001			8,789			9,741

NET INVESTMENT INCOME	$	259,809		$	282,148		$	305,247

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


	Year Ended December 31,
*(dollars in thousands)*	2009
Cumulative credit loss, beginning of year	$	—
Adoption of FASB ASC 320-10		237

Additions:
Other-than-temporary impairment losses not previously recognized		7,019
Increases related to other-than-temporary impairment losses previously recognized		2,062

Total additions		9,318
Reductions:
Sales of fixed maturities on which credit losses were recognized		(177	)

Cumulative credit loss, end of year	$	9,141

| 47

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments (continued)

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


	Years Ended December 31,
*(dollars in thousands)*	2009			2008			2007
Realized gains:
Sales of fixed maturities	$	5,752		$	9,647		$	7,143
Sales of equity securities		7,605			64,709			82,306
Other		5,781			1,267			2,102

Total realized gains		19,138			75,623			91,551

Realized losses:
Sales of fixed maturities		(25,230	)		(102,925	)		(7,057	)
Sales of equity securities		(58	)		(39,827	)		(516	)
Other-than-temporary impairments		(89,950	)		(339,164	)		(19,841	)
Other		—			(1,301	)		(4,633	)

Total realized losses		(115,238	)		(483,217	)		(32,047	)

NET REALIZED INVESTMENT GAINS (LOSSES)	$	(96,100	)	$	(407,594	)	$	59,504

Change in net unrealized gains on investments:
Fixed maturities	$	280,210		$	(135,455	)	$	1,053
Equity securities		287,407			(372,215	)		(116,132	)
Short-term investments		(4	)		22			—

NET INCREASE (DECREASE)	$	567,613		$	(507,648	)	$	(115,079	)

Net realized investment losses for the year ended December 31, 2009 included $90.0 million of write downs for other-than-temporary declines in the estimated fair value of investments. Total write downs for other-than-temporary declines in the estimated fair value of investments for 2009 were $95.6 million, of which $90.0 million was recognized in net income and $5.6 million was recognized in other comprehensive income. The write downs for other-than-temporary declines in the estimated fair value of investments for 2009 related to 29 equity securities, 15 fixed maturities and two investments in affiliates. Write downs for 2009 included write downs to the Company’s equity holdings in General Electric Company and United Parcel Service, Inc. of $21.0 million and $9.5 million, respectively. Given the extent to which the fair value of these equity securities was below cost and management’s belief that these securities were unlikely to recover in the near term, the decline in fair value for these securities was deemed other-than-temporary and was recognized in net income. Write downs for other-than-temporary declines in the estimated fair value of investments for 2009 also included a $20.5 million write down related to the Company’s investment in First Market Bank due to an anticipated merger with Union Bankshares Corporation that was expected to reduce the value of the Company’s investment. In the first quarter of 2010, this merger was completed and did not result in a material adjustment to net income.

Net realized investment losses for the year ended December 31, 2008 included $339.2 million of write downs for other-than-temporary declines in the estimated fair value of investments. Net realized investment gains for the year ended December 31, 2007 included $19.8 million of write downs for other-than-temporary declines in the estimated fair value of investments.

48 |

2. Investments (continued)

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


	Years Ended December 31,
*(dollars in thousands)*	2009			2008			2007
Fixed maturities:
Corporate bonds	$	(7,310	)	$	(46,452	)	$	—
Residential mortgage-backed securities		(3,541	)		(7,691	)		—
Other		(1,487	)		—			—

Total fixed maturities		(12,338	)		(54,143	)		—

Equity securities:
Insurance companies, banks and trusts		(15,978	)		(99,226	)		(19,841	)
Industrial, consumer and all other		(38,548	)		(176,795	)		—

Total equity securities		(54,526	)		(276,021	)		(19,841	)

Nonredeemable preferred stocks		—			(9,000	)		—
Investments in affiliates		(23,086	)		—			—

TOTAL	$	(89,950	)	$	(339,164	)	$	(19,841	)

h) The Company had $1.5 billion and $1.3 billion of investments and cash and cash equivalents (invested assets) held in trust or on deposit for the benefit of policyholders, reinsurers or banks in the event of default by the Company on its obligations at December 31, 2009 and 2008, respectively. These invested assets and the related liabilities are included on the Company’s consolidated balance sheets. The following discussion provides additional detail regarding irrevocable undrawn letters of credit and investments held in trust or on deposit.

The Company’s United States insurance companies had invested assets with a carrying value of $39.1 million and $39.6 million on deposit with state regulatory authorities at December 31, 2009 and 2008, respectively.

Invested assets with a carrying value of $3.0 million and $5.1 million at December 31, 2009 and 2008, 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 $58.4 million and $81.2 million at December 31, 2009 and 2008, 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 $32.2 million and $30.6 million at December 31, 2009 and 2008, respectively, were held in trust for the benefit of MIICL’s United States surplus lines policyholders.

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 $27.5 million and $29.9 million at December 31, 2009 and 2008, respectively, as collateral against these letters of credit.

| 49

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. Investments (continued)

The Company had deposited $333.8 million and $212.1 million of invested assets with Lloyd’s to support its underwriting activities at December 31, 2009 and 2008, respectively. In addition, the Company had invested assets with a carrying value of $1.0 billion and $0.9 billion at December 31, 2009 and 2008, respectively, held in trust for the benefit of syndicate policyholders.

In accordance with the terms of its credit default swap agreement, the Company had $33.1 million and $37.3 million of invested assets on deposit at December 31, 2009 and 2008, respectively.

i) At December 31, 2009 and December 31, 2008, investments in U.S. Treasury securities and obligations of U.S. government agencies were the only investments in any one issuer that exceeded 10% of shareholders’ equity.

At December 31, 2009, the Company’s ten largest equity holdings represented $772.4 million, or 57%, of the equity portfolio. Investments in the property and casualty insurance industry represented $363.6 million, or 27%, of the equity portfolio at December 31, 2009. Investments in the property and casualty insurance industry included a $183.9 million investment in the common stock of Berkshire Hathaway Inc.

3. Receivables

The following table presents the components of receivables.


	December 31,
*(dollars in thousands)*	2009		2008
Amounts receivable from agents, brokers and insureds	$	206,514	$	208,329
Less allowance for doubtful receivables		6,360		6,955

		200,154		201,374
Employee stock loans receivable (see note 11)		15,821		16,903
Loan participations (see note 15)		27,326		25,099
Other		36,578		34,720

RECEIVABLES	$	279,879	$	278,096

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)*	2009			2008			2007
Balance, beginning of year	$	183,755		$	202,291		$	218,392
Policy acquisition costs deferred		413,858			487,990			501,702
Amortization of policy acquisition costs		(440,816	)		(506,526	)		(517,803	)

DEFERRED POLICY ACQUISITION COSTS	$	156,797		$	183,755		$	202,291

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


	Years Ended December 31,
*(dollars in thousands)*	2009		2008		2007
Amortization of policy acquisition costs	$	440,816	$	506,526	$	517,803
Other operating expenses		295,844		232,020		238,896

UNDERWRITING, ACQUISITION AND INSURANCE EXPENSES	$	736,660	$	738,546	$	756,699

50 |

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)*	2009		2008
Land	$	28,453	$	18,645
Buildings		14,173		3,150
Leasehold improvements		38,607		37,922
Furniture and equipment		110,641		84,716
Other		13,510		5,147

		205,384		149,580
Less accumulated depreciation and amortization		105,145		85,445

PROPERTY AND EQUIPMENT	$	100,239	$	64,135

Depreciation and amortization expense of property and equipment was $14.8 million, $12.3 million and $11.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.

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

6. Goodwill and Intangible Assets

The following table presents the components of goodwill.


(*dollars in thousands)*	Excess and Surplus Lines Segment		Specialty Admitted Segment		London Insurance Market Segment		Other ⁽¹⁾		Total
January 1, 2008	$	81,770	$	1,888	$	248,558	$	6,163	$	338,379
Acquisitions		—		—		—		—		—

December 31, 2008	$	81,770	$	1,888	$	248,558	$	6,163	$	338,379
Acquisitions (see note 22)		—		—		42,860		20,235		63,095
Foreign currency movements		—		—		1,045		—		1,045

December 31, 2009	$	81,770	$	1,888	$	292,463	$	26,398	$	402,519

⁽¹⁾	See note 18 for a discussion of the Company’s non-insurance operations included in Other above.

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 were no indications of goodwill impairment during 2009 or 2008.

| 51

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. Goodwill and Intangible Assets (continued)

The following table presents the components of intangible assets.


	December 31,
*(dollars in thousands)*	2009					2008
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Customer relationships	$	83,791	$	(12,391	)	$	26,512	$	(6,937	)
Trade names		18,988		(215	)		1,400		(135	)
Technology		7,900		(1,095	)		1,900		(779	)
Non-competition agreements		3,450		(2,114	)		3,450		(2,366	)
Order backlog		2,000		—			—		—

TOTAL	$	116,129	$	(15,815	)	$	33,262	$	(10,217	)

Amortization of intangible assets was $6.7 million, $5.7 million and $3.4 million for the years ended December 31, 2009, 2008 and 2007, respectively. Amortization of intangible assets is estimated to be $14.9 million for 2010, $11.4 million for 2011, $8.5 million for 2012, $7.6 million for 2013 and $6.8 million for 2014.

In 2009, the Company acquired $84.0 million of intangible assets, which are expected to be amortized over a weighted average period of 12.9 years. The intangible assets acquired during 2009 include customer relationships and trade names, which are expected to be amortized over a weighted average period of 11.7 and 20.0 years, respectively.

7. Income Taxes

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


	Years Ended December 31,
*(dollars in thousands)*	2009		2008			2007
Domestic	$	86,592	$	(100,512	)	$	437,495
Foreign		112,045		(59,317	)		135,566

INCOME (LOSS) BEFORE INCOME TAXES	$	198,637	$	(159,829	)	$	573,061

Income tax expense (benefit) includes the following components.


	Years Ended December 31,
*(dollars in thousands)*	2009			2008			2007
Current:
Domestic	$	8,076		$	(1,041	)	$	131,519
Foreign		(2,714	)		63			3,730

Total current tax expense (benefit)		5,362			(978	)		135,249

Deferred:
Domestic		(6,763	)		(63,702	)		(1,984	)
Foreign		(2,381	)		(36,715	)		33,919

Total deferred tax expense (benefit)		(9,144	)		(100,417	)		31,935

INCOME TAX EXPENSE (BENEFIT)	$	(3,782	)	$	(101,395	)	$	167,184

52 |

7. Income Taxes (continued)

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

In 2009, income tax benefit included interest and penalties of $2.7 million. In 2008, income tax benefit included a benefit from interest and penalties of $3.5 million. In 2007, income tax expense included interest and penalties of $3.8 million. At December 31, 2009 and 2008, other liabilities on the consolidated balance sheets included $6.3 million and $3.6 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 income tax payments of $21.2 million, $29.0 million and $137.8 million in 2009, 2008 and 2007, respectively. Income taxes receivable were $13.2 million and $33.1 million at December 31, 2009 and 2008, respectively, and were included in other assets on the consolidated balance sheets. The income tax receivables at December 31, 2009 and 2008 were due in part to the carryback of $38.7 million and $93.2 million, respectively, of capital losses generated as a result of sales of equity securities and fixed maturities that had tax bases in excess of fair value on the dates of sale.

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


	Years Ended December 31,
	2009		2008		2007
United States corporate tax rate	35	%	35	%	35	%
Tax-exempt investment income	(14	)	18		(5	)
Uncertain tax positions	2		(6	)	—
Tax credits	(3	)	19		—
Foreign operations	(21	)	(2	)	(1	)
Other	(1	)	(1	)	—

EFFECTIVE TAX RATE	(2	%)	63	%	29	%

The 2009 effective tax rate includes a 21% income tax benefit related to foreign operations, of which 17% is the result of a one-time tax benefit related to a change in the United Kingdom tax law that became effective in the third quarter of 2009.

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.

| 53

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. Income Taxes (continued)

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


	December 31,
*(dollars in thousands)*	2009		2008
Assets:
Differences between financial reporting and tax bases	$	67,815	$	44,309
Unpaid losses and loss adjustment expenses not yet deductible for income tax purposes		102,999		110,032
Unearned premiums recognized for income tax purposes		32,080		38,733
Other-than-temporary impairments not yet deductible for income tax purposes		68,084		69,340
Net operating loss carryforwards		154,406		179,401
Tax credit carryforwards		17,780		27,916

Total gross deferred tax assets		443,164		469,731
Less valuation allowance		—		(1,749	)

Total gross deferred tax assets, net of allowance		443,164		467,982

Liabilities:
Differences between financial reporting and tax bases		19,498		14,570
Deferred policy acquisition costs		37,597		46,671
Net unrealized gains on investments		193,495		37,737
Undistributed investment in foreign subsidiaries		31,418		—

Total gross deferred tax liabilities		282,008		98,978

NET DEFERRED TAX ASSET	$	161,156	$	369,004

The decrease in the net deferred tax asset in 2009 was primarily due to an increase in the deferred tax liability related to accumulated other comprehensive income items resulting from an increase in net unrealized gains on investments during 2009. The net deferred tax assets at December 31, 2009 and 2008 were included in other assets on the consolidated balance sheets.

In December 2008, Markel Corporation received $110.0 million in distributions made by Markel International. In January 2009, Markel Corporation received an additional $101.7 million in distributions made by Markel International. Pursuant to guidance included in FASB ASC 740, Income Taxes, approximately $46 million in foreign paid taxes became available for use by the Company as foreign tax credits as a result of these distributions. Of the approximately $46 million in foreign tax credits, approximately $20 million have been used as of December 31, 2009, and the remaining $26 million are available for the Company to carry forward. If unused, the credits available for carry forward will expire in 2019.

At December 31, 2009, the Company had net operating losses of $520.9 million. These losses can be carried forward indefinitely to offset future taxable income in the United Kingdom. Of the $520.9 million of net operating losses, $122.3 million also can be utilized to offset future Markel Capital Limited, a wholly-owned subsidiary, income that is taxable in the United States. The Company’s ability to utilize these losses in the United States expires between the years 2018 and 2026.

54 |

7. Income Taxes (continued)

The Company estimates that it will realize $282.0 million of the gross deferred tax assets, including net operating losses, recorded at December 31, 2009 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 $161.2 million of gross deferred tax assets by generating future taxable income and by using prudent and feasible tax planning strategies if future taxable income is not sufficient. While management believes that a valuation allowance at December 31, 2009 was not necessary, changes in management’s estimate of future taxable income to be generated by its foreign subsidiaries, changes in the Company’s ability to use tax planning strategies or significant declines in the estimated fair value of investments could result in a need to record a valuation allowance through a charge to earnings.

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, which is now included in FASB ASC 740-10, Income Taxes. Upon adoption, 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.

At December 31, 2009, the Company had unrecognized tax benefits of $24.9 million. If recognized, $19.4 million of these tax benefits would decrease the annual effective tax rate. The Company does not currently anticipate any significant changes in unrecognized tax benefits during 2010.

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


	Years Ended December 31,
*(dollars in thousands)*	2009			2008
Unrecognized Tax Benefits, Beginning of Year	$	59,237		$	48,371
Increases based upon tax positions taken during the current year		1,140			13,112
Increases for tax positions taken in prior years		9,022			—
Decreases for tax positions taken in prior years		(42,601	)		—
Settlement with taxing authorities		(1,858	)		—
Lapse of statute of limitations		—			(2,246	)

UNRECOGNIZED TAX BENEFITS, END OF YEAR	$	24,940		$	59,237

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

Provisions for United States income taxes on undistributed earnings of foreign subsidiaries are made only on those amounts in excess of the amounts that are considered to be permanently reinvested. 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, 2006.

| 55

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Unpaid Losses and Loss Adjustment Expenses

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


	Years Ended December 31,
*(dollars in thousands)*	2009			2008			2007
NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR	$	4,465,481		$	4,452,655		$	4,326,426
Foreign currency movements, commutations and other		86,362			(192,838	)		40,656

ADJUSTED NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR		4,551,843			4,259,817			4,367,082

Incurred losses and loss adjustment expenses:
Current year		1,228,152			1,432,808			1,293,529
Prior years		(235,289	)		(163,783	)		(197,326	)

TOTAL INCURRED LOSSES AND LOSS ADJUSTMENT EXPENSES		992,863			1,269,025			1,096,203

Payments:
Current year		247,814			310,953			226,861
Prior years		759,522			727,609			783,795

TOTAL PAYMENTS		1,007,336			1,038,562			1,010,656

Effect of foreign currency rate changes		3,284			(20,080	)		1,166
Other		—			(4,719	)		(1,140	)

NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR		4,540,654			4,465,481			4,452,655

Reinsurance recoverable on unpaid losses		886,442			1,026,858			1,072,918

GROSS RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR	$	5,427,096		$	5,492,339		$	5,525,573

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 2009, beginning of year net reserves for losses and loss adjustment expenses were increased by a movement of $74.8 million in foreign currency rates of exchange, most notably between the United States Dollar and the United Kingdom Sterling. In 2008, beginning of year net reserves for losses and loss adjustment expenses were decreased by a movement of $195.7 million in foreign currency rates of exchange, most notably between the United States Dollar and the United Kingdom Sterling. In 2007, beginning of year net reserves for losses and loss adjustment expenses were increased by a movement of $49.6 million in foreign currency rates of exchange, most notably between the United States Dollar and the United Kingdom Sterling, which was offset in part by an $8.9 million decrease related to the completion of several reinsurance commutations.

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

56 |

8. Unpaid Losses and Loss Adjustment Expenses (continued)

Current year incurred losses and loss adjustment expenses for 2008 included $91.1 million of estimated net losses on Hurricanes Gustav and Ike (2008 Hurricanes). The estimated net losses on the 2008 Hurricanes were net of estimated reinsurance recoverables of $58.6 million. Both the gross and net loss estimates on the 2008 Hurricanes represented the Company’s best estimate of losses at December 31, 2008 based upon information available at that time. The Company used various loss estimation techniques to develop these estimates, including analyses of reported claims and detailed policy level reviews.

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

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 Markel International and on the professional and products liability programs within the Excess and Surplus Lines segment as a result of the favorable insurance market conditions experienced from 2000 through 2004. 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.

During the third quarter of each of the past three years, the Company completed an in-depth, actuarial review of its asbestos and environmental exposures. During the 2009 review, the Company increased its estimate of the number of claims that will ultimately be closed with an indemnity payment. During the 2008 and 2007 reviews, the Company noted that claims had been closed with total indemnity payments that were higher than had been anticipated, and as a result of this higher than expected average severity on closed claims, the Company’s actuaries updated their average severity assumptions for both open claims and claims incurred but not yet reported. In each of the past three years, the Company’s actuarial estimates of the ultimate liability for asbestos and environmental loss reserves were increased, and management increased prior years’ loss reserves for asbestos and environmental exposures accordingly.

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

The Company uses a variety of techniques to establish the liabilities for unpaid losses and loss adjustment expenses, all of which involve significant judgments and assumptions. These techniques include detailed statistical analysis of past claim reporting, settlement activity, claim frequency and severity, policyholder loss experience, industry loss experience and changes in market conditions, policy forms and exposures. Greater judgment may be required when new product lines are introduced or when there have been changes in claims handling practices, as the statistical data available may be insufficient. The Company’s estimates reflect implicit and explicit assumptions regarding the potential effects of external factors, including economic and social inflation, judicial decisions, law changes, general

| 57

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. Unpaid Losses and Loss Adjustment Expenses (continued)

economic conditions and recent trends in these factors. In some of the Company’s markets, and where the Company acts as a reinsurer, the timing and amount of information reported about underlying claims are in the control of third parties. This can also affect estimates and require re-estimation as new information becomes available.

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

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

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

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.


	Years Ended December 31,
*(dollars in thousands)*	2009			2008			2007
NET RESERVES FOR A&E LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR	$	238,272		$	221,654		$	214,439
Commutations and other		(500	)		(191	)		(14,454	)

ADJUSTED NET RESERVES FOR A&E LOSSES AND LOSS ADJUSTMENT EXPENSES, BEGINNING OF YEAR		237,772			221,463			199,985
Incurred losses and loss adjustment expenses		2,657			22,106			33,254
Payments		(11,399	)		(5,297	)		(11,585	)

NET RESERVES FOR A&E LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR		229,030			238,272			221,654

Reinsurance recoverable on unpaid losses		153,078			154,901			123,483

GROSS RESERVES FOR A&E LOSSES AND LOSS ADJUSTMENT EXPENSES, END OF YEAR	$	382,108		$	393,173		$	345,137

Incurred losses and loss adjustment expenses for 2009, 2008 and 2007 were primarily due to adverse development of asbestos-related reserves. At December 31, 2009, asbestos-related reserves were $298.0 million and $162.1 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 $133.8 million and $95.2 million, respectively, at December 31, 2009. Inception-to-date net paid losses and loss adjustment expenses for A&E related exposures totaled $343.1 million at December 31, 2009, which includes $63.9 million of litigation-related expense.

58 |

8. Unpaid Losses and Loss Adjustment Expenses (continued)

The Company’s reserves for losses and loss adjustment expenses related to A&E exposures represent management’s best estimate of ultimate settlement values. A&E reserves are monitored by management, and the Company’s statistical analysis of these reserves is reviewed by the Company’s independent actuaries. A&E exposures are subject to significant uncertainty due to potential loss severity and frequency resulting from the uncertain and unfavorable legal climate. A&E reserves could be subject to increases in the future; however, management believes the Company’s gross and net A&E reserves at December 31, 2009 are adequate.

9. Senior Long-Term Debt and Other Debt

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


	December 31,
*(dollars in thousands)*	2009		2008
Unsecured borrowings under $375 million revolving credit facility, at 3.82% at December 31, 2008, expires December 31, 2010	$	—	$	100,000

6.80% unsecured senior notes, due February 15, 2013, interest payable semi-annually, net of unamortized discount of $851 in 2009 and $1,121 in 2008		245,814		245,544

7.125% unsecured senior notes, due September 30, 2019, interest payable semi-annually, net of unamortized discount of $2,757 in 2009		347,243		—

7.35% unsecured senior notes, due August 15, 2034, interest payable semi-annually, net of unamortized discount of $2,609 in 2009 and $2,715 in 2008		197,391		197,285

7.50% unsecured senior debentures, due August 22, 2046, interest payable quarterly, net of unamortized discount of $4,206 in 2009 and $4,320 in 2008		145,794		145,680

Secured subsidiary debt, at various interest rates ranging from 2.7% to 6.5%		27,406		5,900

SENIOR LONG-TERM DEBT AND OTHER DEBT	$	963,648	$	694,409

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

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 (0.20% at December 31, 2009) on the unused portion of the facility based on the Company’s debt to total capital ratio as calculated under the agreement. The Company intends to seek a replacement facility for the existing revolving credit agreement prior to its expiration on December 31, 2010.

At December 31, 2009, the Company was in compliance with all covenants contained in its revolving credit facility. To the extent that the Company is not in compliance with its covenants, the Company’s access to the credit facility could be restricted. While the Company believes this to be unlikely, the inability to access the credit facility could adversely affect the Company’s liquidity.

| 59

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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 and other debt was $1.0 billion and $626 million at December 31, 2009 and 2008, respectively.

The following table summarizes the future principal payments due at maturity on senior long-term debt and other debt as of December 31, 2009.


Years Ending December 31,	(dollars in thousands)
2010	$	733
2011		743
2012		2,207
2013		251,652
2014		4,035
2015 and thereafter		714,701

TOTAL PRINCIPAL PAYMENTS	$	974,071
Less unamortized discount		(10,423	)

SENIOR LONG-TERM DEBT AND OTHER DEBT	$	963,648

The Company paid $47.1 million, $47.5 million and $56.2 million in interest on its senior long-term debt and other debt during the years ended December 31, 2009, 2008 and 2007, respectively.

10. Junior Subordinated Deferrable Interest 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. The Company redeemed the outstanding 8.71% Junior Subordinated Debentures for $111.0 million on January 2, 2007.

11. Shareholders’ Equity

a) The Company had 50,000,000 shares of no par value common stock authorized of which 9,819,151 shares and 9,813,962 shares were issued and outstanding at December 31, 2009 and 2008, 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, 2009 or 2008.

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 2009, the Company did not repurchase any shares of common stock under the Program. As of December 31, 2009, the Company had repurchased 360,800 shares of common stock at a cost of $136.6 million.

60 |

11. Shareholders’ Equity (continued)

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


	Years Ended December 31,
*(in thousands, except per share amounts)*	2009		2008			2007
Net income (loss) to shareholders	$	201,638	$	(58,767	)	$	405,669

Basic common shares outstanding		9,815		9,876			9,961
Dilutive potential common shares		11		—			20

Diluted shares outstanding		9,826		9,876			9,981

Basic net income (loss) per share	$	20.54	$	(5.95	)	$	40.73

Diluted net income (loss) per share	$	20.52	$	(5.95	)	$	40.64

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

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

c) The Company’s Employee Stock Purchase and Bonus Plan provides a method for employees and directors to purchase shares of the Company’s common stock on the open market. The plan encourages share ownership by providing for the award of bonus shares to participants equal to 10% of the net increase in the number of shares owned under the plan in a given year, excluding shares acquired through the plan’s loan program component. Under the loan program, the Company offers subsidized unsecured loans so participants may purchase shares and awards bonus shares equal to 5% of the shares purchased with a loan. The Company has authorized 100,000 shares for purchase under this plan, of which 70,874 and 78,134 shares were available for purchase at December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, loans outstanding under the plan, which are included in receivables on the consolidated balance sheets, totaled $15.8 million and $16.9 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, 2009, there were 133,347 shares reserved for issuance under the Omnibus Incentive Plan. Restricted Stock Units are awarded to certain associates and executive officers based upon meeting performance conditions determined by a subcommittee of the Compensation Committee. Awards granted to associates and executive officers generally vest at the end of the fifth year following the year for which the Compensation Committee determines performance conditions have been met. At the end of the vesting period, recipients are entitled to receive one share of the Company’s common stock for each vested Restricted Stock Unit. During 2009, the Company awarded 4,227 Restricted Stock Units to certain associates and executive officers. During 2009, the Company awarded 1,200 shares of restricted stock to its non-employee directors. The shares awarded to non-employee directors will vest in 2010.

| 61

Markel Corporation & Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

11. Shareholders’ Equity (continued)

The following table summarizes nonvested share-based awards.


	Number of Awards		Weighted Average Grant-Date Fair Value
Nonvested awards at January 1, 2009	25,569		$	430.09
Granted	5,427			275.93
Vested	(7,146	)		362.06
Forfeited	—			—

Nonvested awards at December 31, 2009	23,850		$	415.39

The fair value of the Company’s share-based awards 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 the Company’s share-based awards granted in 2009, 2008 and 2007 was $275.93, $461.65 and $492.30, respectively. As of December 31, 2009, unrecognized compensation cost related to nonvested share-based awards was $4.1 million, which is expected to be recognized over a weighted average period of 2.6 years. The fair value of the Company’s share-based awards that vested during 2009, 2008 and 2007 was $2.6 million, $2.1 million and $0.3 million, respectively.

12. Other Comprehensive Income (Loss)

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

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


	Years Ended December 31,
*(in thousands, except per share amounts)*	2009			2008			2007
Change in net unrealized gains on investments:
Net holding gains (losses) arising during the period	$	190,978		$	(320,314	)	$	(18,566	)
Unrealized other-than-temporary impairment losses on fixed maturities arising during the period		(1,118	)		—			—
Reclassification adjustments for net gains (losses) included in net income (loss)		25,912			142,638			(21,712	)

Change in net unrealized gains on investments		215,772			(177,676	)		(40,278	)
Change in c