MKL 03.31.2012 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
 FORM 10-Q
___________________________________________
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2012
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number: 001-15811
___________________________________________
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________
 
Virginia
 
54-1959284
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148
(Address of principal executive offices)
(Zip Code)
(804) 747-0136
(Registrant’s telephone number, including area code)
 ___________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No  ¨
Indicate by check mark 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  o
  
Non-accelerated filer  o
  
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Number of shares of the registrant’s common stock outstanding at May 2, 2012: 9,652,596

Table of Contents

Markel Corporation
Form 10-Q
Index
 
 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
 
 
March 31,
2012
 
December 31,
2011
 
(dollars in thousands)
ASSETS
 
 
 
Investments, available-for-sale, at estimated fair value:
 
 
 
Fixed maturities (amortized cost of $5,125,773 in 2012 and $5,172,952 in 2011)
$
5,507,664

 
$
5,538,174

Equity securities (cost of $1,252,214 in 2012 and $1,156,294 in 2011)
2,166,841

 
1,873,927

Short-term investments (estimated fair value approximates cost)
463,694

 
541,014

Total Investments
8,138,199

 
7,953,115

Cash and cash equivalents
691,797

 
775,032

Receivables
459,978

 
350,237

Reinsurance recoverable on unpaid losses
786,736

 
791,102

Reinsurance recoverable on paid losses
45,880

 
38,208

Deferred policy acquisition costs
181,686

 
194,674

Prepaid reinsurance premiums
101,149

 
97,074

Goodwill and intangible assets
967,625

 
867,558

Other assets
486,234

 
465,103

Total Assets
$
11,859,284

 
$
11,532,103

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
5,357,151

 
$
5,398,869

Unearned premiums
975,832

 
915,930

Payables to insurance companies
127,913

 
64,327

Senior long-term debt and other debt (estimated fair value of $1,424,000 in 2012 and $1,391,000 in 2011)
1,305,573

 
1,293,520

Other liabilities
416,847

 
397,111

Total Liabilities
8,183,316

 
8,069,757

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Common stock
902,441

 
891,507

Retained earnings
1,890,040

 
1,835,086

Accumulated other comprehensive income
809,612

 
660,920

Total Shareholders’ Equity
3,602,093

 
3,387,513

Noncontrolling interests
73,875

 
74,833

Total Equity
3,675,968

 
3,462,346

Total Liabilities and Equity
$
11,859,284

 
$
11,532,103

See accompanying notes to consolidated financial statements.

3
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
 
 
Three Months Ended
March 31,
 
2012
 
2011
 
(dollars in thousands,
except per share data)
OPERATING REVENUES
 
 
 
Earned premiums
$
529,596

 
$
463,111

Net investment income
79,794

 
70,099

Net realized investment gains
11,909

 
11,240

Other revenues
111,836

 
77,144

Total Operating Revenues
733,135

 
621,594

OPERATING EXPENSES
 
 
 
Losses and loss adjustment expenses
288,521

 
314,328

Underwriting, acquisition and insurance expenses
238,697

 
202,350

Amortization of intangible assets
8,804

 
6,008

Other expenses
100,404

 
68,495

Total Operating Expenses
636,426

 
591,181

Operating Income
96,709

 
30,413

Interest expense
22,167

 
18,962

Income Before Income Taxes
74,542

 
11,451

Income tax expense
16,829

 
1,590

Net Income
$
57,713

 
$
9,861

Net income attributable to noncontrolling interests
460

 
1,589

Net Income to Shareholders
$
57,253

 
$
8,272

 
 
 
 
OTHER COMPREHENSIVE INCOME
 
 
 
Change in net unrealized gains on investments, net of taxes:
 
 
 
Net holding gains arising during the period
$
153,455

 
$
20,321

Unrealized other-than-temporary impairment losses on fixed maturities arising during the period
(138
)
 
(176
)
Reclassification adjustments for net gains included in net income
(7,931
)
 
(6,464
)
Change in net unrealized gains on investments, net of taxes
145,386

 
13,681

Change in foreign currency translation adjustments, net of taxes
2,823

 
2,439

Change in net actuarial pension loss, net of taxes
483

 
346

Total Other Comprehensive Income
148,692

 
16,466

Comprehensive Income
$
206,405

 
$
26,327

Comprehensive income attributable to noncontrolling interests
460

 
1,589

Comprehensive Income to Shareholders
$
205,945

 
$
24,738

 
 
 
 
NET INCOME PER SHARE
 
 
 
Basic
$
5.94

 
$
0.85

Diluted
$
5.92

 
$
0.85

See accompanying notes to consolidated financial statements.

4
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
 
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
 
(dollars in thousands)
December 31, 2010
$
884,457

 
$
1,735,973

 
$
551,093

 
$
3,171,523

 
$
16,169

 
$
3,187,692

Net income
 
 
8,272

 
—

 
8,272

 
1,589

 
9,861

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

 
13,681

 
13,681

 
—

 
13,681

Change in foreign currency translation adjustments, net of taxes
 
 
—

 
2,439

 
2,439

 
—

 
2,439

Change in net actuarial pension loss, net of taxes
 
 
—

 
346

 
346

 
—

 
346

Comprehensive Income
 
 
 
 
 
 
24,738

 
1,589

 
26,327

Issuance of common stock
163

 
—

 
—

 
163

 
—

 
163

Restricted stock units expensed
1,902

 
—

 
—

 
1,902

 
—

 
1,902

Acquisitions
—

 
—

 
—

 
—

 
47,292

 
47,292

Other
52

 
—

 
—

 
52

 
(359
)
 
(307
)
March 31, 2011
$
886,574

 
$
1,744,245

 
$
567,559

 
$
3,198,378

 
$
64,691

 
$
3,263,069

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
$
891,507

 
$
1,835,086

 
$
660,920

 
$
3,387,513

 
$
74,833

 
$
3,462,346

Net income
 
 
57,253

 
—

 
57,253

 
460

 
57,713

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

 
145,386

 
145,386

 
—

 
145,386

Change in foreign currency translation adjustments, net of taxes
 
 
—

 
2,823

 
2,823

 
—

 
2,823

Change in net actuarial pension loss, net of taxes
 
 
—

 
483

 
483

 
—

 
483

Comprehensive Income
 
 
 
 
 
 
205,945

 
460

 
206,405

Issuance of common stock
8,274

 
—

 
—

 
8,274

 
—

 
8,274

Repurchase of common stock
—

 
(2,299
)
 
—

 
(2,299
)
 
—

 
(2,299
)
Restricted stock units expensed
2,366

 
—

 
—

 
2,366

 
—

 
2,366

Other
294

 
—

 
—

 
294

 
(1,418
)
 
(1,124
)
March 31, 2012
$
902,441

 
$
1,890,040

 
$
809,612

 
$
3,602,093

 
$
73,875

 
$
3,675,968

See accompanying notes to consolidated financial statements.

5
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 
 
Three Months Ended
March 31,
 
2012
 
2011
 
(dollars in thousands)
OPERATING ACTIVITIES
 
 
 
Net income
$
57,713

 
$
9,861

Adjustments to reconcile net income to net cash used by operating activities
(122,105
)
 
(19,064
)
Net Cash Used By Operating Activities
(64,392
)
 
(9,203
)
INVESTING ACTIVITIES
 
 
 
Proceeds from sales of fixed maturities and equity securities
69,063

 
69,917

Proceeds from maturities, calls and prepayments of fixed maturities
119,291

 
112,952

Cost of fixed maturities and equity securities purchased
(205,926
)
 
(142,282
)
Net change in short-term investments
79,233

 
(107,606
)
Acquisitions, net of cash acquired
(80,870
)
 
(3,886
)
Additions to property and equipment
(12,917
)
 
(12,839
)
Other
1,476

 
(7,784
)
Net Cash Used By Investing Activities
(30,650
)
 
(91,528
)
FINANCING ACTIVITIES
 
 
 
Additions to senior long-term debt and other debt
32,317

 
35,717

Repayments of senior long-term debt and other debt
(27,868
)
 
(33,873
)
Repurchases of common stock
(2,299
)
 
—

Other
6,953

 
(103
)
Net Cash Provided By Financing Activities
9,103

 
1,741

Effect of foreign currency rate changes on cash and cash equivalents
2,704

 
3,678

Decrease in cash and cash equivalents
(83,235
)
 
(95,312
)
Cash and cash equivalents at beginning of period
775,032

 
745,259

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
691,797

 
$
649,947

See accompanying notes to consolidated financial statements.

6
Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation
Markel Corporation is a diverse financial holding company serving a variety of niche markets. Markel Corporation’s principal business markets and underwrites specialty insurance products and programs. Markel Corporation also owns interests in various industrial and service businesses that operate outside of the specialty insurance marketplace.
The consolidated balance sheet as of March 31, 2012, the related consolidated statements of income and comprehensive income, changes in equity and cash flows for the three months ended March 31, 2012 and 2011 are unaudited. In the opinion of management, all adjustments necessary for fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal, recurring items. Interim results are not necessarily indicative of results of operations for the entire year. The consolidated balance sheet as of December 31, 2011 was derived from Markel Corporation’s audited annual consolidated financial statements.
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and all subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company consolidates the results of its non-insurance subsidiaries on a one-month lag. Certain prior year amounts have been reclassified to conform to the current presentation.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.
The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. Readers are urged to review the Company’s 2011 Annual Report on Form 10-K for a more complete description of the Company’s business and accounting policies.
ParkLand Ventures, Inc., a subsidiary of the Company, has formed subsidiaries for the purpose of acquiring and financing real estate (the real estate subsidiaries). The assets of the real estate subsidiaries, which are not material to the Company, are consolidated in accordance with U.S. GAAP but are not available to satisfy the debt and other obligations of the Company or any affiliates other than the real estate subsidiaries.

2. Net Income per Share
Net income per share was determined by dividing net income to shareholders by the applicable weighted average shares outstanding. 
 
Three Months Ended
March 31,
(in thousands, except per share amounts)
2012
 
2011
Net income to shareholders
$
57,253

 
$
8,272

Basic common shares outstanding
9,642

 
9,717

Dilutive potential common shares
29

 
40

Diluted shares outstanding
9,671

 
9,757

Basic net income per share
$
5.94

 
$
0.85

Diluted net income per share
$
5.92

 
$
0.85




7
Table of Contents

3. Reinsurance
The following table summarizes the effect of reinsurance on premiums written and earned.
 
Three Months Ended March 31,
(dollars in thousands)
2012
 
2011
 
Written
 
Earned
 
Written
 
Earned
Direct
$
518,540

 
$
509,589

 
$
473,210

 
$
446,138

Assumed
130,078

 
83,842

 
117,573

 
81,450

Ceded
(67,452
)
 
(63,835
)
 
(71,771
)
 
(64,477
)
Net premiums
$
581,166

 
$
529,596

 
$
519,012

 
$
463,111

 
 
 
 
 
 
 
 
Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $40.1 million and $48.5 million for the three months ended March 31, 2012 and 2011, respectively.

4. Investments
a)
The following tables summarize the Company’s available-for-sale investments.
 
March 31, 2012
(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
$
325,998

 
$
20,302

 
$
(222
)
 
$
—

 
$
346,078

Obligations of states, municipalities and political subdivisions
2,709,251

 
208,549

 
(924
)
 
—

 
2,916,876

Foreign governments
576,187

 
44,863

 
(331
)
 
—

 
620,719

Residential mortgage-backed securities
331,526

 
23,990

 
(5
)
 
(2,258
)
 
353,253

Asset-backed securities
15,779

 
688

 
—

 
—

 
16,467

Public utilities
65,294

 
5,536

 
—

 
—

 
70,830

All other corporate bonds
1,101,738

 
88,804

 
(303
)
 
(6,798
)
 
1,183,441

Total fixed maturities
5,125,773

 
392,732

 
(1,785
)
 
(9,056
)
 
5,507,664

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance companies, banks and trusts
417,044

 
351,298

 
—

 
—

 
768,342

Industrial, consumer and all other
835,170

 
563,930

 
(601
)
 
—

 
1,398,499

Total equity securities
1,252,214

 
915,228

 
(601
)
 
—

 
2,166,841

Short-term investments
463,697

 
4

 
(7
)
 
—

 
463,694

Investments, available-for-sale
$
6,841,684

 
$
1,307,964

 
$
(2,393
)
 
$
(9,056
)
 
$
8,138,199


8
Table of Contents

 
December 31, 2011
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Unrealized
Other-Than-
Temporary
Impairment
Losses
 
Estimated
Fair
Value
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
299,413

 
$
22,789

 
$
(9
)
 
$
—

 
$
322,193

Obligations of states, municipalities and political subdivisions
2,729,838

 
201,477

 
(794
)
 
—

 
2,930,521

Foreign governments
572,253

 
45,629

 
(1,068
)
 
—

 
616,814

Residential mortgage-backed securities
366,859

 
24,601

 
(18
)
 
(2,258
)
 
389,184

Asset-backed securities
16,096

 
731

 
(9
)
 
—

 
16,818

Public utilities
63,965

 
5,462

 
—

 
—

 
69,427

All other corporate bonds
1,124,528

 
78,053

 
(2,750
)
 
(6,614
)
 
1,193,217

Total fixed maturities
5,172,952

 
378,742

 
(4,648
)
 
(8,872
)
 
5,538,174

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance companies, banks and trusts
389,421

 
296,648

 
(1,366
)
 
—

 
684,703

Industrial, consumer and all other
766,873

 
425,131

 
(2,780
)
 
—

 
1,189,224

Total equity securities
1,156,294

 
721,779

 
(4,146
)
 
—

 
1,873,927

Short-term investments
541,014

 
4

 
(4
)
 
—

 
541,014

Investments, available-for-sale
$
6,870,260

 
$
1,100,525

 
$
(8,798
)
 
$
(8,872
)
 
$
7,953,115

b)
The following tables summarize gross unrealized investment losses by the length of time that securities have continuously been in an unrealized loss position.
 
March 31, 2012
 
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
$
78,023

 
$
(222
)
 
$
—

 
$
—

 
$
78,023

 
$
(222
)
Obligations of states, municipalities and political subdivisions
12,592

 
(240
)
 
16,189

 
(684
)
 
28,781

 
(924
)
Foreign governments
35,520

 
(331
)
 
—

 
—

 
35,520

 
(331
)
Residential mortgage-backed securities
551

 
(2,263
)
 
—

 
—

 
551

 
(2,263
)
Asset-backed securities
—

 
—

 
—

 
—

 
—

 
—

All other corporate bonds
15,137

 
(6,954
)
 
5,908

 
(147
)
 
21,045

 
(7,101
)
Total fixed maturities
141,823

 
(10,010
)
 
22,097

 
(831
)
 
163,920

 
(10,841
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance companies, banks and trusts
—

 
—

 
—

 
—

 
—

 
—

Industrial, consumer and all other
32,272

 
(590
)
 
99

 
(11
)
 
32,371

 
(601
)
Total equity securities
32,272

 
(590
)
 
99

 
(11
)
 
32,371

 
(601
)
Short-term investments
46,995

 
(7
)
 
—

 
—

 
46,995

 
(7
)
Total
$
221,090

 
$
(10,607
)
 
$
22,196

 
$
(842
)
 
$
243,286

 
$
(11,449
)

9
Table of Contents

At March 31, 2012, the Company held 57 securities with a total estimated fair value of $243.3 million and gross unrealized losses of $11.4 million. Of these 57 securities, 12 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $22.2 million and gross unrealized losses of $0.8 million. Of these securities, 11 were fixed maturities and one was an equity security. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost.
 
December 31, 2011
 
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
$
32,384

 
$
(9
)
 
$
—

 
$
—

 
$
32,384

 
$
(9
)
Obligations of states, municipalities and political subdivisions
1,016

 
(2
)
 
17,261

 
(792
)
 
18,277

 
(794
)
Foreign governments
40,340

 
(1,068
)
 
—

 
—

 
40,340

 
(1,068
)
Residential mortgage-backed securities
489

 
(2,263
)
 
2,045

 
(13
)
 
2,534

 
(2,276
)
Asset-backed securities
—

 
—

 
32

 
(9
)
 
32

 
(9
)
All other corporate bonds
74,812

 
(7,829
)
 
7,923

 
(1,535
)
 
82,735

 
(9,364
)
Total fixed maturities
149,041

 
(11,171
)
 
27,261

 
(2,349
)
 
176,302

 
(13,520
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance companies, banks and trusts
26,514

 
(1,366
)
 
—

 
—

 
26,514

 
(1,366
)
Industrial, consumer and all other
70,555

 
(2,774
)
 
18,525

 
(6
)
 
89,080

 
(2,780
)
Total equity securities
97,069

 
(4,140
)
 
18,525

 
(6
)
 
115,594

 
(4,146
)
Short-term investments
295,991

 
(4
)
 
—

 
—

 
295,991

 
(4
)
Total
$
542,101

 
$
(15,315
)
 
$
45,786

 
$
(2,355
)
 
$
587,887

 
$
(17,670
)

At December 31, 2011, the Company held 76 securities with a total estimated fair value of $587.9 million and gross unrealized losses of $17.7 million. Of these 76 securities, 17 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $45.8 million and gross unrealized losses of $2.4 million. Of these securities, 16 securities were fixed maturities and one was an equity security.
The Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. All securities with unrealized losses are reviewed. The Company considers many factors in completing its quarterly review of securities with unrealized losses for other-than-temporary impairment, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer. For equity securities, the ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery is considered. For fixed maturities, the Company considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery, the implied yield-to-maturity, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due.
For equity securities, a decline in fair value that is considered to be other-than-temporary is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. For fixed maturities where the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, a decline in fair value is considered to be other-than-temporary and is recognized in net income 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, resulting in a new cost basis for the security. Any remaining decline in fair value represents the non-credit

10
Table of Contents

portion of the other-than-temporary impairment, which is recognized in other comprehensive income. The discount rate used to calculate the estimated present value of the cash flows expected to be collected is the effective interest rate implicit for the security at the date of purchase.
When assessing whether it intends to sell a fixed maturity or if it is likely to be required to sell a fixed maturity before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing. Additional information on the methodology and significant inputs, by security type, that the Company used to determine the amount of credit loss recognized on fixed maturities with declines in fair value below amortized cost that were considered to be other-than-temporary is provided below.
Residential mortgage-backed securities. For mortgage-backed securities, credit impairment is assessed by estimating future cash flows from the underlying mortgage loans and interest payments. The cash flow estimate incorporates actual cash flows from the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including prepayment rates, default rates, recovery rates on foreclosed properties and loss severity assumptions. Management develops specific assumptions using market data and internal estimates, as well as estimates from rating agencies and other third party sources. Default rates are estimated by considering current underlying mortgage loan performance and expectations of future performance. Estimates of future cash flows are discounted to present value. If the present value of expected cash flows is less than the amortized cost, the Company recognizes the estimated credit loss in net income.
Corporate bonds. For corporate bonds, credit impairment is assessed by evaluating the underlying issuer. As part of this assessment, the Company analyzes various factors, including the following:
•
fundamentals of the issuer, including current and projected earnings, current liquidity position and ability to raise capital;
•
fundamentals of the industry in which the issuer operates;
•
expectations of defaults and recovery rates;
•
changes in ratings by rating agencies;
•
other relevant market considerations; and
•
receipt of interest payments
Default probabilities and recovery rates from rating agencies are key factors used in calculating the credit loss. Additional research of the industry and issuer is completed to determine if there is any current information that may affect the fixed maturity or its issuer in a negative manner and require an adjustment to the cash flow assumptions.
c)
The amortized cost and estimated fair value of fixed maturities at March 31, 2012 are shown below by contractual maturity.
(dollars in thousands)
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
296,224

 
$
301,089

Due after one year through five years
1,356,224

 
1,460,975

Due after five years through ten years
1,601,045

 
1,730,807

Due after ten years
1,524,975

 
1,645,073

 
4,778,468

 
5,137,944

Residential mortgage-backed securities
331,526

 
353,253

Asset-backed securities
15,779

 
16,467

Total fixed maturities
$
5,125,773

 
$
5,507,664


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d)
At March 31, 2012 and 2011, cumulative 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 were $21,370 and $10,307, respectively. There were no changes in cumulative credit losses for the three months ended March 31, 2012 or 2011.
 
 
 
 
 
 
 
 
e)
The following table presents net realized investment gains and the change in net unrealized gains on investments. 
 
Three Months Ended March 31,
(dollars in thousands)
2012
 
2011
Realized gains:
 
 
 
Sales of fixed maturities
$
1,859

 
$
7,988

Sales of equity securities
9,694

 
2,071

Other
521

 
1,425

Total realized gains
12,074

 
11,484

Realized losses:
 
 
 
Sales of fixed maturities
(165
)
 
(244
)
Other-than-temporary impairments
—

 
—

Other
—

 
—

Total realized losses
(165
)
 
(244
)
Net realized investment gains
$
11,909

 
$
11,240

Change in net unrealized gains on investments:
 
 
 
Fixed maturities
$
16,669

 
$
(16,396
)
Equity securities
196,994

 
36,857

Short-term investments
(3
)
 
3

Net increase
$
213,660

 
$
20,464

 
 
 
 
f)
There were no writedowns for other-than-temporary declines in the estimated fair value of investments for the three months ended March 31, 2012 and 2011.
 
 
 
 
 
 
 
 


12
Table of Contents

5. Segment Reporting Disclosures
The Company operates in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets. The Company considers many factors, including the nature of its insurance products, production sources, distribution strategies and regulatory environment in determining how to aggregate operating segments.
All investing activities related to our insurance operations are included in the Investing segment. For purposes of segment reporting, the Other Insurance (Discontinued Lines) segment includes lines of business that have been discontinued in conjunction with acquisitions. The Company’s non-insurance operations primarily consist of controlling interests in various industrial and service businesses. For purposes of segment reporting, the Company’s non-insurance operations are not considered to be a reportable operating segment.
Segment profit or loss for each of the Company’s operating segments is measured by underwriting profit or loss. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit or loss does not replace operating income or net income computed in accordance with U.S. GAAP as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company’s underwriting performance. Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses.
For management reporting purposes, the Company allocates assets to its underwriting, investing and non-insurance operations. Underwriting assets are all assets not specifically allocated to the Investing segment or to the Company’s non-insurance operations. Underwriting assets are not allocated to the Excess and Surplus Lines, Specialty Admitted, London Insurance Market or Other Insurance (Discontinued Lines) segments since the Company does not manage its assets by operating segment. Invested assets related to our insurance operations are allocated to the Investing segment since these assets are available for payment of losses and expenses for all operating segments. The Company does not allocate capital expenditures for long-lived assets to any of its operating segments for management reporting purposes.

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Table of Contents

a)
The following tables summarize the Company’s segment disclosures.
Three Months Ended March 31, 2012
(dollars in thousands)
Excess and
Surplus
Lines
 
Specialty
Admitted
 
London
Insurance
Market
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
222,929

 
$
148,122

 
$
277,566

 
$
1

 
$
—

 
$
648,618

Net written premiums
192,913

 
140,552

 
247,700

 
1

 
—

 
581,166

Earned premiums
199,378

 
133,475

 
196,742

 
1

 
—

 
529,596

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(128,067
)
 
(92,693
)
 
(131,746
)
 
—

 
—

 
(352,506
)
Prior accident years
30,587

 
4,326

 
21,465

 
7,607

 
—

 
63,985

Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 


Prospective adoption of ASU 2010-26(1)
(8,487
)
 
(5,764
)
 
(6,037
)
 
—

 
—

 
(20,288
)
All other expenses
(85,857
)
 
(57,266
)
 
(75,003
)
 
(283
)
 
—

 
(218,409
)
Underwriting profit (loss)
7,554

 
(17,922
)
 
5,421

 
7,325

 
—

 
2,378

Net investment income
—

 
—

 
—

 
—

 
79,794

 
79,794

Net realized investment gains
—

 
—

 
—

 
—

 
11,909

 
11,909

Other revenues (insurance)
—

 
10,448

 
4,383

 
—

 
—

 
14,831

Other expenses (insurance)
—

 
(11,201
)
 
(974
)
 
—

 
—

 
(12,175
)
Segment profit (loss)
$
7,554

 
$
(18,675
)
 
$
8,830

 
$
7,325

 
$
91,703

 
$
96,737

Other revenues (non-insurance)
 
 
 
 
 
 
 
 
 
 
97,005

Other expenses (non-insurance)
 
 
 
 
 
 
 
 
 
 
(88,229
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
(8,804
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(22,167
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
74,542

U.S. GAAP combined ratio(2)
96
%
 
113
%
 
97
%
 
NM

(3) 
 
 
100
%
Three Months Ended March 31, 2011
(dollars in thousands)
Excess and
Surplus
Lines
 
Specialty
Admitted
 
London
Insurance
Market
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
201,371

 
$
134,321

 
$
255,001

 
$
90

 
$
—

 
$
590,783

Net written premiums
175,537

 
127,239

 
216,139

 
97

 
—

 
519,012

Earned premiums
181,057

 
122,476

 
159,483

 
95

 
—

 
463,111

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(122,507
)
 
(78,470
)
 
(187,876
)
 
—

 
—

 
(388,853
)
Prior accident years
56,792

 
198

 
12,634

 
4,901

 
—

 
74,525

Underwriting, acquisition and insurance expenses
(85,920
)
 
(49,473
)
 
(66,725
)
 
(232
)
 
—

 
(202,350
)
Underwriting profit (loss)
29,422

 
(5,269
)
 
(82,484
)
 
4,764

 
—

 
(53,567
)
Net investment income
—

 
—

 
—

 
—

 
70,099

 
70,099

Net realized investment gains
—

 
—

 
—

 
—

 
11,240

 
11,240

Other revenues (insurance)
—

 
9,186

 
—

 
—

 
—

 
9,186

Other expenses (insurance)
—

 
(11,740
)
 
(8
)
 
—

 
—

 
(11,748
)
Segment profit (loss)
$
29,422

 
$
(7,823
)
 
$
(82,492
)
 
$
4,764

 
$
81,339

 
$
25,210

Other revenues (non-insurance)
 
 
 
 
 
 
 
 
 
 
67,958

Other expenses (non-insurance)
 
 
 
 
 
 
 
 
 
 
(56,747
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
(6,008
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(18,962
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
11,451

U.S. GAAP combined ratio(2)
84
%
 
104
%
 
152
%
 
NM

(3) 
 
 
112
%
(1)
Effective January 1, 2012, the Company prospectively adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. At December 31, 2011, deferred policy acquisition costs included approximately $43 million of costs that no longer met the criteria for deferral as of January 1, 2012 and will be recognized into income primarily over the first nine months of 2012, consistent with policy terms. The three months ended March 31, 2012 included $20.3 million of underwriting, acquisition and insurance expenses that were deferred as of December 31, 2011 and no longer met the criteria for deferral as of January 1, 2012.
(2)
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
(3)
NM – Ratio is not meaningful.

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b)
The following table reconciles segment assets to the Company’s consolidated balance sheets.
(dollars in thousands)
March 31,
2012
 
December 31,
2011
Segment Assets:
 
 
 
Investing
$
8,795,416

 
$
8,692,391

Underwriting
2,427,176

 
2,209,431

Total Segment Assets
$
11,222,592

 
$
10,901,822

Non-insurance operations
636,692

 
630,281

Total Assets
$
11,859,284

 
$
11,532,103


6. Derivatives
The Company is a party to a credit default swap agreement, under which third party credit risk is transferred from a counterparty to the Company. The Company entered into the credit default swap agreement for investment purposes. At both March 31, 2012 and December 31, 2011, the notional amount of the credit default swap was $33.1 million, which represented the Company’s aggregate exposure to losses if specified credit events involving third party reference entities occur. These third party reference entities are specified under the terms of the agreement and represent a portfolio of names upon which the Company has assumed credit risk from the counterparty. The Company’s exposure to loss from any one reference entity is limited to $20.0 million. The credit default swap has a scheduled termination date of December 2014.
The credit default swap is accounted for as a derivative instrument and is recorded at fair value with any changes in fair value recorded in net investment income. At March 31, 2012 and December 31, 2011, the credit default swap had a fair value of $18.3 million and $29.3 million, respectively. The fair value of the credit default swap is included in other liabilities on the consolidated balance sheets. Net investment income for the three months ended March 31, 2012 and 2011 included favorable changes in the fair value of the credit default swap of $11.1 million and $1.7 million, respectively.
The fair value of the credit default swap is determined by the Company using a Gaussian copula valuation model, a market standard model for valuing credit default swaps. The fair value is dependent upon several inputs, including changes in interest rates, credit spreads, expected default rates, changes in credit quality, future expected recovery rates and other market factors. The significant unobservable inputs used in the fair value measurement of the credit default swap are expected default rates and future expected recovery rates. The Company determines these unobservable inputs based upon default rates and recovery rates used to price similar credit default swap indices. A significant increase in expected default rates in isolation results in a significantly higher fair value measurement, while a significant decrease in expected default rates results in a significantly lower fair value measurement. A significant increase in future expected recovery rates in isolation results in a significantly lower fair value measurement, while a significant decrease in future expected recovery rates results in a significantly higher fair value measurement. Generally, a change in the assumption used for expected default rates is accompanied by a directionally opposite change in future expected recovery rates. The fair value measurement of the credit default swap at March 31, 2012 included expected default rates ranging between 1% and 37%, with a weighted-average expected default rate of 5%, and future expected recovery rates ranging between 19% and 52%, with a weighted-average future expected recovery rate of 39%. The fair value measurement of the credit default swap at December 31, 2011 included expected default rates ranging between 2% and 37%, with a weighted-average expected default rate of 9%, and future expected recovery rates ranging between 19% and 52%, with a weighted-average future expected recovery rate of 39%.
The Company's valuation policies and procedures for the credit default swap are determined by an internal investment manager with oversight provided by the Company's Chief Financial Officer and Chief Investment Officer. Fair value measurements are analyzed quarterly to ensure the change in fair value from prior periods is reasonable relative to recent market trends. Additionally, the reported fair value of the credit default swap is compared to results from similar valuation models.
The Company had no other material derivative instruments at March 31, 2012.



15
Table of Contents

7. Employee Benefit Plans
a)
Expenses relating to the Company’s defined contribution plans were $4.7 million and $4.4 million for the three months ended March 31, 2012 and 2011, respectively.
b)
The following table presents the components of net periodic benefit cost (income) for the Terra Nova Pension Plan, a defined benefit plan.
 
Three Months Ended
March 31,
(dollars in thousands)
2012
 
2011
Service cost
$
90

 
$
337

Interest cost
1,693

 
1,768

Expected return on plan assets
(2,432
)
 
(2,443
)
Amortization of net actuarial pension loss
643

 
474

Net periodic benefit cost (income)
$
(6
)
 
$
136

The Company contributed $5.7 million to the Terra Nova Pension Plan during the first quarter of 2012 and expects plan contributions to total $5.7 million in 2012.

8. Contingencies
Contingencies arise in the normal course of the Company’s operations and are not expected to have a material impact on the Company’s financial condition or results of operations.

9. Fair Value Measurements
FASB Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are defined as follows:
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3 – Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.
In accordance with FASB ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including the market, income and cost approaches. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value, including an indication of the level within the fair value hierarchy in which each asset or liability is generally classified.

16
Table of Contents

Investments available-for-sale. Investments available-for-sale are recorded at fair value on a recurring basis and include fixed maturities, equity securities and short-term investments. Short-term investments include certificates of deposit, commercial paper, discount notes and treasury bills with original maturities of one year or less. Fair value for investments available-for-sale is determined by the Company after considering various sources of information, including information provided by a third party pricing service. The pricing service provides prices for substantially all of the Company’s fixed maturities and equity securities. In determining fair value, the Company generally does not adjust the prices obtained from the pricing service. The Company obtains an understanding of the pricing service’s valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. The Company validates prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances.
The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Level 1 investments include those traded on an active exchange, such as the New York Stock Exchange. Level 2 investments include U.S. Treasury securities and obligations of U.S. government agencies, municipal bonds, foreign government bonds, residential mortgage-backed securities and corporate debt securities.
Fair value for investments available-for-sale is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices, fixed maturities are classified as Level 2 investments. The fair value of fixed maturities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data described above. If there are no recent reported trades, the fair value of fixed maturities may be derived through the use of matrix pricing or model processes, where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Significant inputs used to determine the fair value of obligations of states, municipalities and political subdivisions, corporate bonds and obligations of foreign governments include reported trades, benchmark yields, issuer spreads, bids, offers, credit information and estimated cash flows. Significant inputs used to determine the fair value of residential mortgage-backed securities include the type of underlying mortgage loans, benchmark yields, prepayment speeds, collateral information, tranche type and volatility, estimated cash flows, credit information, default rates, recovery rates, issuer spreads and the year of issue.
Derivatives. Derivatives are recorded at fair value on a recurring basis and include a credit default swap. The fair value of the credit default swap is measured by the Company using an external valuation model. See note 6 for a discussion of the valuation model for the credit default swap, including the key inputs and assumptions used in the model and a description of the valuation processes used by the Company. Due to the significance of unobservable inputs required in measuring the fair value of the credit default swap, the credit default swap has been classified as Level 3 within the fair value hierarchy.
Senior long-term debt and other debt. Senior long-term debt and other debt is carried at amortized cost with the estimated fair value disclosed on the consolidated balance sheets. Senior long-term debt and other debt is classified as Level 2 within the fair value hierarchy due to variations in trading volumes and the lack of quoted market prices. Fair value for senior long-term debt and other debt is generally derived through recent reported trades for identical securities, making adjustments through the reporting date, if necessary, based upon available market observable data including U.S. Treasury securities and implied credit spreads. Significant inputs used to determine the fair value of senior long-term debt and other debt include reported trades, benchmark yields, issuer spreads, bids and offers.



17
Table of Contents

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy.
 
March 31, 2012
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
—

 
$
346,078

 
$
—

 
$
346,078

Obligations of states, municipalities and political subdivisions
—

 
2,916,876

 
—

 
2,916,876

Foreign governments
—

 
620,719

 
—

 
620,719

Residential mortgage-backed securities
—

 
353,253

 
—

 
353,253

Asset-backed securities
—

 
16,467

 
—

 
16,467

Public utilities
—

 
70,830

 
—

 
70,830

All other corporate bonds
—

 
1,183,441

 
—

 
1,183,441

Total fixed maturities
—

 
5,507,664

 
—

 
5,507,664

Equity securities:
 
 
 
 
 
 
 
Insurance companies, banks and trusts
768,342

 
—

 
—

 
768,342

Industrial, consumer and all other
1,398,499

 
—

 
—

 
1,398,499

Total equity securities
2,166,841

 
—

 
—

 
2,166,841

Short-term investments
401,162

 
62,532

 
—

 
463,694

Total investments available-for-sale
2,568,003

 
5,570,196

 
—

 
8,138,199

Liabilities:
 
 
 
 
 
 
 
Derivative contracts
$
—

 
$
—

 
$
18,270

 
$
18,270

 
December 31, 2011
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
—

 
$
322,193

 
$
—

 
$
322,193

Obligations of states, municipalities and political subdivisions
—

 
2,930,521

 
—

 
2,930,521

Foreign governments
—

 
616,814

 
—

 
616,814

Residential mortgage-backed securities
—

 
389,184

 
—

 
389,184

Asset-backed securities
—

 
16,818

 
—

 
16,818

Public utilities
—

 
69,427

 
—

 
69,427

All other corporate bonds
—

 
1,193,217

 
—

 
1,193,217

Total fixed maturities
—

 
5,538,174

 
—

 
5,538,174

Equity securities:
 
 
 
 
 
 
 
Insurance companies, banks and trusts
684,703

 
—

 
—

 
684,703

Industrial, consumer and all other
1,189,224

 
—

 
—

 
1,189,224

Total equity securities
1,873,927

 
—

 
—

 
1,873,927

Short-term investments
477,348

 
63,666

 
—

 
541,014

Total investments available-for-sale
2,351,275

 
5,601,840

 
—

 
7,953,115

Liabilities:
 
 
 
 
 
 
 
Derivative contracts
$
—

 
$
—

 
$
29,331

 
$
29,331


18
Table of Contents

The following table summarizes changes in Level 3 liabilities measured at fair value on a recurring basis.
 
Three Months Ended March 31,
 
(dollars in thousands)
2012
 
2011
 
Derivatives, Beginning of Period
$
29,331

 
$
25,228

 
Total gains included in:
 
 
 
 
Net income
(11,061
)
 
(1,661
)
 
Other comprehensive income
—

 
—

 
Transfers into Level 3
—

 
—

 
Transfers out of Level 3
—

 
—

 
Derivatives, End of Period
$
18,270

 
$
23,567

 
Net unrealized gains included in net income relating to liabilities held at March 31, 2012 and 2011
$
11,061

(1) 
$
1,661

(1) 
(1)
Included in net investment income in the consolidated statements of income and comprehensive income.
 
 
 
 
 
There were no transfers into or out of Level 1 and Level 2 during the three months ended March 31, 2012 and 2011. The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2012 and 2011.

10. Acquisitions
On January 1, 2012, the Company acquired 100% of the outstanding membership units of Thompson Insurance Enterprises, LLC (THOMCO), a privately held program administrator headquartered in Kennesaw, Georgia that underwrites multi-line, industry-focused insurance programs. Results attributable to this acquisition are included in the Specialty Admitted segment.
Total consideration for this acquisition was $108.5 million, which included cash consideration of $100.5 million. The purchase price was allocated to the acquired assets and liabilities of THOMCO based on estimated fair values at the acquisition date. The Company recognized goodwill of $26.1 million, which is primarily attributable to synergies that are expected to result upon integration of THOMCO into the Company's insurance operations. All of the goodwill recognized is expected to be deductible for income tax purposes. The Company also recognized other intangible assets of $81.2 million, including $68.5 million of customer relationships, $11.5 million of trade names and $1.0 million of technology. These intangible assets are expected to be amortized over a weighted average period of 23 years, 10 years and three years, respectively.

11. Recent Accounting Pronouncements
Effective January 1, 2012, the Company adopted FASB ASU No. 2010-26, which addresses diversity in practice within the insurance industry regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. This guidance specifies that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be capitalized. The Company elected prospective adoption of ASU No. 2010-26. At December 31, 2011, deferred policy acquisition costs included approximately $43 million of costs that no longer met the criteria for deferral as of January 1, 2012 and will be recognized into income primarily over the first nine months of 2012, consistent with policy terms. Upon adoption of ASU No. 2010-26, the Company's policy is to defer commissions and premium taxes that meet the criteria for deferral under the new guidance. During the three months ended March 31, 2012, the Company deferred $99.0 million of policy acquisition costs and amortized $112.0 million of policy acquisition costs. Under its previous policy, the Company would have deferred $126.6 million of policy acquisition costs and amortized $119.3 million of policy acquisition costs for the three months ended March 31, 2012.
Effective January 1, 2012, the Company adopted FASB ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends FASB ASC 820 to achieve a uniform framework for fair value measurement and disclosures in U.S. GAAP and International Financial Reporting Standards. ASU No. 2011-04 prohibits the grouping of financial instruments for purposes of determining fair value, except when market and credit risks are managed on the basis of the Company's net exposure, and extends the prohibition against the use of block discounts to Level 2 and Level 3 fair value measurements. The guidance also requires expanded disclosures for Level 3 fair value measurements including quantitative information about unobservable inputs, the sensitivity of fair value measurements to a change in unobservable inputs and a description of the Company's valuation processes. Additionally, the guidance requires disclosure of the hierarchy classification for assets and liabilities not measured at fair value, but whose fair value is disclosed. 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 additional disclosures required by ASU No. 2011-04 in notes 6 and 9.

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Effective January 1, 2012, the Company adopted FASB ASU No. 2011-05, Comprehensive Income and FASB ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-05 requires comprehensive income to be reported in either a single statement that presents the components of net income, the components of other comprehensive income and total comprehensive income, or in two consecutive statements, and it eliminates the option to report other comprehensive income and its components in the statement of changes in equity. This guidance also requires the presentation of separate line items on the statements of income for reclassification adjustments of items out of accumulated other comprehensive income into net income. ASU No. 2011-12 deferred the requirement to present separate line items on the statements of income and instead requires the presentation of reclassification adjustments within other comprehensive income or in the notes to the consolidated financial statements. The adoption of ASU No. 2011-05 and ASU No. 2011-12 did not have an impact on the Company's financial position, results of operations, cash flows or financial statement presentation.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and all subsidiaries.

Critical Accounting Estimates
Critical accounting estimates are those estimates that both are important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingent assets and liabilities, including litigation contingencies. These estimates, by necessity, are based on assumptions about numerous factors.

We review our critical accounting estimates and assumptions quarterly. These reviews include evaluating the adequacy of reserves for unpaid losses and loss adjustment expenses, the reinsurance allowance for doubtful accounts and income tax liabilities, as well as analyzing the recoverability of deferred tax assets, assessing goodwill and intangibles for impairment and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

Readers are urged to review our 2011 Annual Report on Form 10-K for a more complete description of our critical accounting estimates.

Our Business
We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products and programs. We believe that our specialty product focus and niche market strategy enable us to develop expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by our expertise, service, continuity and other value-based considerations. We compete in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets. We also own interests in various businesses that operate outside of the specialty insurance marketplace. Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value.
Our Excess and Surplus Lines segment writes property and casualty insurance outside of the standard market for hard-to-place risks including catastrophe-exposed property, professional liability, products liability, general liability, commercial umbrella and other coverages tailored for unique exposures. Our Excess and Surplus Lines segment is comprised of five regions, and each regional office is responsible for serving the wholesale producers located in its region. Our regional teams focus on customer service and marketing, underwriting and distributing our insurance solutions and provide customers easy access to our products.
Our Specialty Admitted segment writes risks that, although unique and hard-to-place in the standard market, must remain with an admitted insurance company for marketing and regulatory reasons. Our underwriting units in this segment write specialty program insurance for well-defined niche markets, personal and commercial property and liability coverages and workers' compensation insurance. Our Specialty Admitted segment is comprised of three underwriting units: the Markel Specialty and Markel American Specialty Personal and Commercial Lines units and our FirstComp workers' compensation insurance unit.

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Our London Insurance Market segment writes specialty property, casualty, professional liability, equine, marine, energy and trade credit insurance and reinsurance on a worldwide basis. We participate in the London market through Markel International, which includes Markel Capital Limited and Markel International Insurance Company Limited, wholly-owned subsidiaries. Markel Capital Limited is the corporate capital provider for Markel Syndicate 3000 at Lloyd's, which is managed by Markel Syndicate Management Limited, a wholly-owned subsidiary.
For purposes of segment reporting, the Other Insurance (Discontinued Lines) segment includes lines of business that have been discontinued in conjunction with acquisitions. This segment also includes development on asbestos and environmental loss reserves.
Through our wholly-owned subsidiary Markel Ventures, Inc., we own interests in various industrial and service businesses that operate outside of the specialty insurance marketplace. These businesses are viewed by management as separate and distinct from our insurance operations. Local management teams oversee the day-to-day operations of these companies, while strategic decisions are made in conjunction with members of our executive management team, principally our President and Chief Investment Officer. The financial results of those companies in which we own controlling interests have been consolidated in our financial statements. The financial results of those companies in which we hold a noncontrolling interest are accounted for under the equity method of accounting.
Our strategy in making these private equity investments is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.
Our non-insurance operations are comprised of a diverse portfolio of industrial and service companies from various industries, including manufacturers of dredging equipment, high-speed bakery equipment, laminated furniture products and food processing equipment, an owner and operator of manufactured housing communities, a real estate investment fund manager, a concierge medical and executive health services company, a retail intelligence services company, a company that manages behavioral health programs and a manufacturer and lessor of trailer tubes used by industrial, chemical and distribution companies to transport gas and liquids.
Key Performance Indicators
We measure financial success by our ability to compound growth in book value per share at a high rate of return over a long period of time. To mitigate the effects of short-term volatility, we measure ourselves over a five-year period. We believe that growth in book value per share is the most comprehensive measure of our success because it includes all underwriting and investing results. We measure underwriting results by our underwriting profit or loss and combined ratio. These measures are discussed in greater detail under “Results of Operations.”

Results of Operations
The following table presents the components of net income to shareholders.
 
Three Months Ended
March 31,
 
(dollars in thousands)
2012
 
2011
Underwriting profit (loss)
$
2,378

 
$
(53,567
)
Net investment income
79,794

 
70,099

Net realized investment gains
11,909

 
11,240

Other revenues
111,836

 
77,144

Amortization of intangible assets
(8,804
)
 
(6,008
)
Other expenses
(100,404
)
 
(68,495
)
Interest expense
(22,167
)
 
(18,962
)
Income tax expense
(16,829
)
 
(1,590
)
Net income attributable to noncontrolling interests
(460
)
 
(1,589
)
Net income to shareholders
$
57,253

 
$
8,272


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Net income to shareholders for the three months ended March 31, 2012 increased primarily due to improved underwriting results compared to the same period of 2011. The components of net income to shareholders are discussed in further detail under “Underwriting Results,” “Investing Results,” “Non-Insurance Operations” and “Interest Expense and Income Taxes.”
Underwriting Results
Underwriting profits are a key component of our strategy to grow book value per share. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We use underwriting profit or loss as a basis for evaluating our underwriting performance.
The following table presents selected data from our underwriting operations.
 
Three Months Ended
March 31,
 
 
(dollars in thousands)
2012
 
2011
 
Gross premium volume
$
648,618

 
$
590,783

 
Net written premiums
$
581,166

 
$
519,012

 
Net retention
90
%
 
88
%
 
Earned premiums
$
529,596

 
$
463,111

 
Losses and loss adjustment expenses
$
288,521

 
$
314,328

 
Underwriting, acquisition and insurance expenses (1)
$
238,697

 
$
202,350

 
Underwriting profit (loss)
$
2,378

 
$
(53,567
)
 
U.S. GAAP Combined Ratios (2)
 
 
 
 
Excess and Surplus Lines
96
%
 
84
%
 
Specialty Admitted
113
%
 
104
%
 
London Insurance Market
97
%
 
152
%
 
Other Insurance (Discontinued Lines)
NM

(3) 
NM