Form 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, 2010

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  ¨    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   ¨         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 Exchange Act).    Yes  ¨    No  x

Number of shares of the registrant’s common stock outstanding at April 30, 2010: 9,806,051

 

 

 


Table of Contents

Markel Corporation

Form 10-Q

Index

 

            Page
Number

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  
  

Consolidated Balance Sheets—March 31, 2010 and December 31, 2009

   3
  

Consolidated Statements of Income and Comprehensive Income (Loss)—Three Months Ended March  31, 2010 and 2009

   4
  

Consolidated Statements of Changes in Equity—Three Months Ended March 31, 2010 and 2009

   5
  

Consolidated Statements of Cash Flows—Three Months Ended March 31, 2010 and 2009

   6
  

Notes to Consolidated Financial Statements

   7

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   23
  

Critical Accounting Estimates

   23

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   30

Item 4. Controls and Procedures

   31

Safe Harbor and Cautionary Statement

   32

PART II. OTHER INFORMATION

  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   34

Item 6. Exhibits

   34

Signatures

   35

Exhibit Index

   36

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

 

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

ASSETS

     

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

     

Fixed maturities (amortized cost of $5,263,852 in 2010 and $4,961,745 in 2009)

   $ 5,451,154    $ 5,112,136

Equity securities (cost of $930,153 in 2010 and $843,841 in 2009)

     1,544,543      1,349,829

Short-term investments (estimated fair value approximates cost)

     342,002      492,581

Investments in affiliates

     —        43,633
             

Total Investments

     7,337,699      6,998,179
             

Cash and cash equivalents

     637,672      850,494

Receivables

     303,735      279,879

Reinsurance recoverable on unpaid losses

     852,791      886,442

Reinsurance recoverable on paid losses

     66,562      65,703

Deferred policy acquisition costs

     165,976      156,797

Prepaid reinsurance premiums

     67,288      68,307

Goodwill and intangible assets

     501,301      502,833

Other assets

     406,927      433,262
             

Total Assets

   $ 10,339,951    $ 10,241,896
             

LIABILITIES AND EQUITY

     

Unpaid losses and loss adjustment expenses

   $ 5,368,766    $ 5,427,096

Unearned premiums

     745,869      717,728

Payables to insurance companies

     70,551      46,853

Senior long-term debt and other debt (estimated fair value of $1,052,000 in 2010 and $1,011,000 in 2009)

     996,386      963,648

Other liabilities

     235,920      294,857
             

Total Liabilities

     7,417,492      7,450,182
             

Commitments and contingencies

     

Shareholders’ equity:

     

Common stock

     872,587      872,876

Retained earnings

     1,552,580      1,514,398

Accumulated other comprehensive income

     479,056      387,086
             

Total Shareholders’ Equity

     2,904,223      2,774,360

Noncontrolling interests

     18,236      17,354
             

Total Equity

     2,922,459      2,791,714
             

Total Liabilities and Equity

   $ 10,339,951    $ 10,241,896
             

See accompanying notes to consolidated financial statements.

 

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Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income (Loss)

 

     Three Months Ended
March 31,
 
     2010     2009  
    

(dollars in thousands,

except per share data)

 

OPERATING REVENUES

    

Earned premiums

   $ 412,135      $ 457,246   

Net investment income

     68,402        68,743   

Net realized investment gains (losses):

    

Other-than-temporary impairment losses

     (1,785     (55,474

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

     (566     —     
                

Other-than-temporary impairment losses recognized in net income

     (2,351     (55,474

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

     18,094        291   
                

Net realized investment gains (losses)

     15,743        (55,183

Other revenues

     40,439        24,371   
                

Total Operating Revenues

     536,719        495,177   
                

OPERATING EXPENSES

    

Losses and loss adjustment expenses

     260,170        253,411   

Underwriting, acquisition and insurance expenses

     156,668        181,837   

Amortization of intangible assets

     3,958        1,472   

Other expenses

     35,397        22,549   
                

Total Operating Expenses

     456,193        459,269   
                

Operating Income

     80,526        35,908   
                

Interest expense

     17,959        11,817   
                

Income Before Income Taxes

     62,567        24,091   

Income tax expense

     19,361        7,655   
                

Net Income

   $ 43,206      $ 16,436   
                

Less net income attributable to noncontrolling interests

     637        78   
                

Net Income to Shareholders

   $ 42,569      $ 16,358   
                

OTHER COMPREHENSIVE INCOME (LOSS)

    

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

    

Net holding gains (losses) arising during the period

   $ 97,441      $ (55,034

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

     731        —     

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

     (10,540     35,503   
                

Change in net unrealized gains on investments, net of taxes

     87,632        (19,531

Change in currency translation adjustments, net of taxes

     4,219        881   

Change in net actuarial pension loss, net of taxes

     350        296   
                

Total Other Comprehensive Income (Loss)

     92,201        (18,354
                

Comprehensive Income (Loss)

   $ 135,407      $ (1,918

Less comprehensive income attributable to noncontrolling interests

     868        78   
                

Comprehensive Income (Loss) to Shareholders

   $ 134,539      $ (1,996
                

NET INCOME PER SHARE

    

Basic

   $ 4.34      $ 1.67   

Diluted

   $ 4.33      $ 1.67   
                

See accompanying notes to consolidated financial statements.

 

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MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

 

     Three Months Ended
March 31,
 
     2010     2009  
     (dollars in thousands)  

COMMON STOCK

    

Balance at beginning of period

   $ 872,876      $ 869,744   

Restricted stock units expensed

     (289     830   

Other

     —          572   
                

Balance at end of period

   $ 872,587      $ 871,146   
                

RETAINED EARNINGS

    

Balance at beginning of period

   $ 1,514,398      $ 1,297,901   

Net income to shareholders

     42,569        16,358   

Repurchases of common stock

     (4,387     —     
                

Balance at end of period

   $ 1,552,580      $ 1,314,259   
                

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

    

Net unrealized holding gains on investments, net of taxes:

    

Balance at beginning of period

   $ 433,241      $ 58,652   

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

     85,312        (19,531
                

Balance at end of period

     518,553        39,121   

Unrealized other-than-temporary impairment losses on fixed maturities, net of taxes:

    

Balance at beginning of period

     (15,452     —     

Change in unrealized other-than-temporary impairment losses on fixed maturities, net of taxes

     2,320        —     
                

Balance at end of period

     (13,132     —     

Cumulative translation adjustments, net of taxes:

    

Balance at beginning of period

     3,772        (15,416

Change in currency translation adjustments, net of taxes

     3,988        881   
                

Balance at end of period

     7,760        (14,535

Net actuarial pension loss, net of taxes:

    

Balance at beginning of period

     (34,475     (30,207

Change in net actuarial pension loss, net of taxes

     350        296   
                

Balance at end of period

     (34,125     (29,911
                

Balance at end of period

   $ 479,056      $ (5,325
                

SHAREHOLDERS’ EQUITY AT END OF PERIOD

   $ 2,904,223      $ 2,180,080   
                

NONCONTROLLING INTERESTS

    

Balance at beginning of period

   $ 17,354      $ 261   

Net income

     637        78   

Other

     245        59   
                

Balance at end of period

   $ 18,236      $ 398   
                

TOTAL EQUITY AT END OF PERIOD

   $ 2,922,459      $ 2,180,478   
                

See accompanying notes to consolidated financial statements.

 

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Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

     Three Months Ended
March 31,
 
     2010     2009  
     (dollars in thousands)  

OPERATING ACTIVITIES

    

Net income

   $ 43,206      $ 16,436   

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

     (38,887     (3,733
                

Net Cash Provided By Operating Activities

     4,319        12,703   
                

INVESTING ACTIVITIES

    

Proceeds from sales of fixed maturities and equity securities

     77,690        10,314   

Proceeds from maturities, calls and prepayments of fixed maturities

     79,616        59,612   

Cost of fixed maturities and equity securities purchased

     (498,987     (8,474

Net change in short-term investments

     148,411        (135,967

Acquisitions, net of cash acquired

     (23,046     (3,326

Other

     (14,237     25,396   
                

Net Cash Used By Investing Activities

     (230,553     (52,445
                

FINANCING ACTIVITIES

    

Additions to senior long-term debt and other debt

     23,476        153,915   

Repayments of senior long-term debt and other debt

     (1,318     (102,182

Repurchases of common stock

     (4,387     —     

Other

     —          59   
                

Net Cash Provided By Financing Activities

     17,771        51,792   
                

Effect of foreign currency rate changes on cash and cash equivalents

     (4,359     (4,389
                

Increase (decrease) in cash and cash equivalents

     (212,822     7,661   

Cash and cash equivalents at beginning of period

     850,494        640,379   
                

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 637,672      $ 648,040   
                

See accompanying notes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Markel Corporation markets and underwrites specialty insurance products and programs to a variety of niche markets.

The consolidated balance sheet as of March 31, 2010, the related consolidated statements of income and comprehensive income (loss), changes in equity and cash flows for the three months ended March 31, 2010 and 2009 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, 2009 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. 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 and, as a result, the Company consolidated the two entities that had previously been accounted for as investments in affiliates. This change had no impact on the Company’s net income to shareholders for the three months ended March 31, 2009. The Company consolidates the results of its non-insurance subsidiaries on a one-month lag.

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 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 2009 Annual Report on Form 10-K for a more complete description of the Company’s business and accounting policies.

 

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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)

   2010    2009

Net income to shareholders

   $ 42,569      $16,358
             

Basic common shares outstanding

     9,813      9,814

Dilutive potential common shares

     10      9
             

Diluted shares outstanding

     9,823      9,823
             

Basic net income per share

   $ 4.34    $ 1.67
             

Diluted net income per share

   $ 4.33    $ 1.67
             

3. Reinsurance

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

 

     Three Months Ended March 31,  

(dollars in thousands)

   2010     2009  
     Written     Earned     Written     Earned  

Direct

   $ 409,391      $ 404,470      $ 407,218      $ 462,892   

Assumed

     80,793        51,798        79,618        50,874   

Ceded

     (43,682     (44,133     (48,781     (56,520
                                

Net premiums

   $ 446,502      $ 412,135      $ 438,055      $ 457,246   
                                

Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $7.9 million and $16.1 million for the three months ended March 31, 2010 and 2009, respectively.

 

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4. Investments

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

 

     March 31, 2010

(dollars in thousands)

   Amortized
Cost
   Gross
Unrealized

Holding
Gains
   Gross
Unrealized

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

Fixed maturities:

            

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

   $ 361,397    $ 19,318    $ (57   $ —        $ 380,658

Obligations of states, municipalities and political subdivisions

     2,174,317      65,502      (8,665     —          2,231,154

Foreign governments

     467,661      19,665      (1,014     —          486,312

Residential mortgage-backed securities

     441,280      28,467      (994     (11,775     456,978

Asset-backed securities

     23,156      598      (1     —          23,753

Public utilities

     131,461      8,159      —          —          139,620

Convertible bonds

     32,906      —        —          —          32,906

All other corporate bonds

     1,631,674      81,981      (6,168     (7,714     1,699,773
                                    

Total fixed maturities

     5,263,852      223,690      (16,899     (19,489     5,451,154

Equity securities:

            

Insurance companies, banks and trusts

     382,975      303,886      (1,093     —          685,768

Industrial, consumer and all other

     547,178      311,686      (89     —          858,775
                                    

Total equity securities

     930,153      615,572      (1,182     —          1,544,543

Short-term investments

     342,000      7      (5     —          342,002
                                    

Investments, available-for-sale

   $ 6,536,005    $ 839,269    $ (18,086   $ (19,489   $ 7,337,699
                                    
      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      20      (2     —          492,581
                                    

Investments, available-for-sale

   $ 6,298,149    $ 710,712    $ (31,549   $ (22,766   $ 6,954,546
                                    

 

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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, 2010  
     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

   $ 24,837    $ (57   $ —      $ —        $ 24,837    $ (57

Obligations of states, municipalities and political subdivisions

     300,121      (3,132     152,870      (5,533     452,991      (8,665

Foreign governments

     77,760      (1,014     —        —          77,760      (1,014

Residential mortgage-backed securities

     33,920      (11,854     12,032      (915     45,952      (12,769

Asset-backed securities

     —        —          6      (1     6      (1

All other corporate bonds

     295,532      (12,381     35,182      (1,501     330,714      (13,882
                                             

Total fixed maturities

     732,170      (28,438     200,090      (7,950     932,260      (36,388

Equity securities:

               

Insurance companies, banks and trusts

     24,646      (1,093     —        —          24,646      (1,093

Industrial, consumer and all other

     3,346      (89     —        —          3,346      (89
                                             

Total equity securities

     27,992      (1,182     —        —          27,992      (1,182

Short-term investments

     76,550      (5     —        —          76,550      (5
                                             

Total

   $ 836,712    $ (29,625   $ 200,090    $ (7,950   $ 1,036,802    $ (37,575
                                             

At March 31, 2010, the Company held 198 securities with a total estimated fair value of $1.0 billion and gross unrealized losses of $37.6 million. Of these 198 securities, 62 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $200.1 million and gross unrealized losses of $8.0 million. All 62 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.

 

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Table of Contents
     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
                                             

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.

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 that is considered to be other-than-temporary is recognized in net income based on the fair value of the security

 

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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 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 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.

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.

 

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c) The amortized cost and estimated fair value of fixed maturities at March 31, 2010 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

   $ 44,135    $ 44,806

Due after one year through five years

     171,563      183,673

Due after five years through ten years

     141,620      147,993

Due after ten years

     4,079      4,186
             

Total

     361,397      380,658
             

Obligations of states, municipalities and political subdivisions:

     

Due in one year or less

     —        —  

Due after one year through five years

     52,197      53,848

Due after five years through ten years

     644,294      668,268

Due after ten years

     1,477,826      1,509,038
             

Total

     2,174,317      2,231,154
             

Foreign governments:

     

Due in one year or less

     3,053      3,063

Due after one year through five years

     165,396      172,496

Due after five years through ten years

     290,336      301,950

Due after ten years

     8,876      8,803
             

Total

     467,661      486,312
             

Residential mortgage-backed securities:

     

Due in one year or less

     1,448      1,451

Due after one year through five years

     12,049      12,649

Due after five years through ten years

     33,078      34,054

Due after ten years

     394,705      408,824
             

Total

     441,280      456,978
             

Asset-backed securities:

     

Due in one year or less

     —        —  

Due after one year through five years

     10,986      11,233

Due after five years through ten years

     1,000      1,110

Due after ten years

     11,170      11,410
             

Total

     23,156      23,753
             

Public utilities:

     

Due in one year or less

     34,031      34,864

Due after one year through five years

     76,798      82,467

Due after five years through ten years

     20,632      22,289

Due after ten years

     —        —  
             

Total

     131,461      139,620
             

Convertible bonds and all other corporate bonds:

     

Due in one year or less

     186,391      193,147

Due after one year through five years

     642,824      681,159

Due after five years through ten years

     630,212      656,068

Due after ten years

     205,153      202,305
             

Total

     1,664,580      1,732,679
             

Total fixed maturities:

     

Due in one year or less

     269,058      277,331

Due after one year through five years

     1,131,813      1,197,525

Due after five years through ten years

     1,761,172      1,831,732

Due after ten years

     2,101,809      2,144,566
             

Total fixed maturities

   $ 5,263,852    $ 5,451,154
             

 

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d) 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.

 

     Three Months Ended
March  31,

2010
 

(dollars in thousands)

  

Cumulative credit loss, beginning balance

   $ 9,141   

Additions:

  

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

     1,109   

Reductions:

  

Sales of fixed maturities on which credit losses were recognized

     (19
        

Cumulative credit loss, ending balance

   $ 10,231   
        

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

 

     Three Months Ended
March 31,
 

(dollars in thousands)

   2010     2009  

Realized gains:

    

Sales of fixed maturities

   $ 6,949      $ 1,954   

Sales of equity securities

     10,298        12   

Other

     4,122        —     
                

Total realized gains

     21,369        1,966   
                

Realized losses:

    

Sales of fixed maturities

     (575     (1,101

Sales of equity securities

     —          (13

Other-than-temporary impairments

     (2,351     (55,474

Other

     (2,700     (561
                

Total realized losses

     (5,626     (57,149
                

Net realized investment gains (losses)

   $ 15,743      $ (55,183
                

Change in net unrealized gains on investments:

    

Fixed maturities

   $ 36,911      $ 49,186   

Equity securities

     108,402        (79,699

Short-term investments

     (16     4   
                

Net increase (decrease)

   $ 145,297      $ (30,509
                

 

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

 

     Three Months Ended
March 31,
 

(dollars in thousands)

   2010     2009  

Fixed maturities:

    

Corporate bonds

   $ —        $ (1,867

Residential mortgage-backed securities

     (1,109     (1,389
                

Total fixed maturities

     (1,109     (3,256

Equity securities:

    

Insurance companies, banks and trusts

     —          (13,694

Industrial, consumer and all other

     —          (38,524
                

Total equity securities

     —          (52,218
                

Other

     (1,242     —     
                

Total

   $ (2,351   $ (55,474
                

Net realized investment gains for the quarter ended March 31, 2010 included $2.4 million of write downs for other-than-temporary declines in the estimated fair value of investments. Net realized investment losses for the quarter ended March 31, 2009 included $55.5 million of write downs for other-than-temporary declines in the estimated fair value of investments.

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

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 an acquisition. The Company’s non-insurance operations consist of controlling interests in various businesses, principally manufacturing operations. For purposes of segment reporting, the Company’s non-insurance operations are not considered to be an 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.

 

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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 and net investment income 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.

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

Three Months Ended March 31, 2010

 

(dollars in thousands)

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

Gross premium volume

   $ 211,683      $ 70,333      $ 208,168      $ —        $ —      $ 490,184   

Net written premiums

     193,329        63,113        190,058        2        —        446,502   

Earned premiums

     203,895        72,041        136,197        2        —        412,135   

Losses and loss adjustment expenses:

             

Current year

     (140,274     (45,644     (112,714     —          —        (298,632

Prior years

     24,204        (3,663     15,755        2,166        —        38,462   

Underwriting, acquisition and insurance expenses

     (78,964     (26,089     (51,541     (74     —        (156,668
                                               

Underwriting profit (loss)

     8,861        (3,355     (12,303     2,094        —        (4,703
                                               

Net investment income

     —          —          —          —          68,402      68,402   

Net realized investment gains

     —          —          —          —          15,743      15,743   

Other revenues (insurance)

     —          —          3,191        —          —        3,191   

Other expenses (insurance)

     —          —          (2,986     —          —        (2,986
                                               

Segment profit (loss)

   $ 8,861      $ (3,355   $ (12,098   $ 2,094      $ 84,145    $ 79,647   
                                               

Other revenues (non-insurance)

                37,248   

Other expenses (non-insurance)

                (32,411

Amortization of intangible assets

                (3,958

Interest expense

                (17,959
                   

Income before income taxes

              $ 62,567   
                   

U.S. GAAP combined ratio(1)

     96     105     109     NM (2)       —        101
                                               

 

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Three Months Ended March 31, 2009

 

(dollars in thousands)

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

Gross premium volume

   $ 238,353      $ 63,456      $ 184,965      $ 62      $ —        $ 486,836   

Net written premiums

     216,409        57,459        164,078        109        —          438,055   

Earned premiums

     249,240        76,696        131,201        109        —          457,246   

Losses and loss adjustment expenses:

            

Current year

     (164,926     (50,473     (94,720     —          —          (310,119

Prior years

     45,606        (3,740     15,081        (239     —          56,708   

Underwriting, acquisition and insurance expenses

     (103,683     (30,203     (47,556     (395     —          (181,837
                                                

Underwriting profit (loss)

     26,237        (7,720     4,006        (525     —          21,998   
                                                

Net investment income

     —          —          —          —          68,743        68,743   

Net realized investment losses

     —          —          —          —          (55,183     (55,183
                                                

Segment profit (loss)

   $ 26,237      $ (7,720   $ 4,006      $ (525   $ 13,560      $ 35,558   
                                                

Other revenues (non-insurance)

               24,371   

Other expenses (non-insurance)

               (22,549

Amortization of intangible assets

               (1,472

Interest expense

               (11,817
                  

Income before income taxes

             $ 24,091   
                  

U.S. GAAP combined ratio(1)

     89     110     97     NM (2)      —          95
                                                

 

(1)

The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.

(2)

NM – Ratio is not meaningful.

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

 

(dollars in thousands)

   March 31,
2010
   December  31,
2009

Segment Assets:

     

Investing

   $ 7,972,392    $ 7,844,052

Underwriting

     2,148,634      2,214,991
             

Total Segment Assets

   $ 10,121,026    $ 10,059,043
             

Non-insurance operations

     218,925      182,853
             

Total Assets

   $ 10,339,951    $ 10,241,896
             

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 March 31, 2010, the notional amount of the credit default swap was $33.1 million, which represented the Company’s aggregate exposure to losses if specified credit events involving third party reference entities occur. These third party reference entities are specified under the terms of the agreement and represent a portfolio of names upon which the Company has assumed credit risk from the counterparty. The Company’s exposure to loss from any one reference entity is limited to $20.0 million. The credit default swap has a scheduled termination date of December 2014.

 

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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, 2010, the credit default swap had a fair value of $26.6 million. The fair value of the credit default swap is determined by the Company using an external valuation model that is dependent upon several inputs, including changes in interest rates, credit spreads, expected default rates, changes in credit quality, future expected recovery rates and other market factors. The fair value of the credit default swap is included in other liabilities on the consolidated balance sheet. Net investment income for the three months ended March 31, 2010 included a favorable change in the fair value of the credit default swap of $0.3 million. Net investment income for the three months ended March 31, 2009 included a favorable change in the fair value of the credit default swap of less than $0.1 million.

The Company had no other material derivative instruments at March 31, 2010.

7. Employee Benefit Plans

a) Expenses relating to all of the Company’s defined contribution plans were $3.3 million and $3.1 million for the three months ended March 31, 2010 and 2009, respectively.

b) The following table presents the components of net periodic benefit cost for the Terra Nova Pension Plan, a defined benefit plan.

 

     Three Months Ended
March 31,
 

(dollars in thousands)

   2010     2009  

Service cost

   $ 311      $ 381   

Interest cost

     1,714        1,361   

Expected return on plan assets

     (2,175     (1,550

Amortization of net actuarial pension loss

     486        455   
                

Net periodic benefit cost

   $ 336      $ 647   
                

The Company contributed $5.7 million to the Terra Nova Pension Plan during the first quarter of 2010. The Company expects plan contributions to total $6.6 million in 2010.

8. Contingencies

On February 10, 2009, Guaranty Bank, an insured under a program written by the Company covering financial institutions against defaults on second mortgages and home equity loans, filed a lawsuit against the Company’s subsidiary, Evanston Insurance Company (Evanston), and the managing general agent for the program, Universal Assurors Agency, Inc., in the United States District Court for the Eastern District of Wisconsin. The lawsuit alleges violations of the Wisconsin insurance code relating to Guaranty Bank’s policy, which has been in force since 2004, and seeks, among other things, the return of all premiums paid under the policy and a declaration requiring continued coverage of losses notwithstanding the claim for return of premiums paid.

Premiums paid from inception of Guaranty Bank’s policy through March 31, 2010 have been approximately $65 million and covered losses have been approximately $49 million. At March 31, 2010, the policy insured a portfolio of loans totaling approximately $528 million, and the limit of the Company’s liability for additional losses with respect to the covered loans is estimated to be approximately $109 million.

 

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On March 23, 2009, Guaranty Bank filed a motion for a preliminary injunction with the court, asking that it be relieved from paying premiums while the litigation is pending, with Evanston still being required to pay losses. On July 14, 2009, the court issued an order denying the motion for a preliminary injunction.

In October 2009, the Company was separately notified that the Office of the Commissioner of Insurance of Wisconsin had undertaken an investigation and was alleging that the insurance policies written by Evanston in Wisconsin, including Guaranty Bank’s policy, were mortgage guaranty insurance and could not be written on a surplus lines basis in that state. In settlement of the allegations and without admitting any violation, Evanston agreed to pay a fine of $100,000 and to refrain from writing similar policies in the future. The Guaranty Bank policy accounts for over 95% of the premiums written under this program in Wisconsin.

Evanston has been notified that Guaranty Bank intends to file an amended complaint alleging additional grounds upon which it contends that it is entitled to a refund of past premiums and a reduction in the future premiums that can be charged under the policy. Guaranty Bank has stated that the proposed amended complaint would add new claims for damages based on allegations of fraud, misrepresentation and violation of the Racketeer Influenced and Corrupt Organizations Act and Wisconsin Organized Crime Control Act, and that it intends to assert that it is entitled to recover, among other things, treble damages, interest and attorneys’ fees. Although the proposed amended complaint has not yet been filed, the court has entered an order granting Guaranty Bank leave to file it.

While the Company does not believe Guaranty Bank is entitled to the relief it is seeking, the final outcome of the lawsuit cannot be predicted at this time.

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

9. Recent Accounting Pronouncements

Effective in the first quarter of 2010, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements, which expands disclosure requirements related to fair value measurements. ASU No. 2010-06 requires disclosure of the amounts of and reasons for significant transfers into and out of Level 1 and Level 2 fair value measurements. This guidance also requires gross rather than net disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. Disclosures about the valuation techniques and inputs used to measure fair value for Level 2 and Level 3 fair value measurements are required as well. Since ASU No. 2010-06 addresses financial statement disclosures only, the adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows. The Company has included the disclosures required by ASU No. 2010-06 in note 10.

In June 2009, the FASB issued Statement of Financial Accounting Standards (Statement) No. 167, Amendments to FASB Interpretation No. 46(R). In December 2009, the FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, to amend their codification for Statement No. 167. This guidance removes the scope exception for qualifying special-purpose entities, includes new criteria for determining the primary beneficiary of a variable interest entity and increases the frequency of required assessments to determine whether an entity is the primary beneficiary of a variable interest entity. In January 2010, the FASB decided to indefinitely defer the consolidation requirements of ASU No. 2009-17 for

 

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interests in certain investment entities. The FASB also decided to revise the provisions of ASU No. 2009-17 for determining whether service-provider or decision-maker fee arrangements represent a variable interest. Both the provisions of ASU No. 2009-17 as issued and the subsequent revisions to this guidance became effective for the Company on January 1, 2010. The adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows.

10. Fair Value Measurements

FASB ASC 820-10, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are defined as follows:

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

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

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

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

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.

 

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Fair value for investments available-for-sale is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices for fixed maturities, the fair value of fixed maturities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data described above. If there are no recent reported trades, the fair value of fixed maturities may be derived through the use of matrix pricing or model processes, where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate.

The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Level 1 investments include those traded on an active exchange, such as the New York Stock Exchange. Level 2 investments include U.S. Treasury securities and obligations of U.S. government agencies, municipal bonds, foreign government bonds, residential mortgage-backed securities and corporate debt securities.

Derivatives. Derivatives are recorded at fair value on a recurring basis and include a credit default swap. The fair value of the credit default swap is measured by the Company using a third party pricing model. See note 6 for a discussion of the valuation model for the credit default swap, including the key inputs and assumptions to the model. Due to the significance of unobservable inputs required in measuring the fair value of the credit default swap, the credit default swap has been classified as Level 3 within the fair value hierarchy.

 

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

 

(dollars in thousands)

   Level 1    Level 2    Level 3    Total

Assets:

           

Investments available-for-sale:

           

Fixed maturities:

           

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

   $ —      $ 380,658    $ —      $ 380,658

Obligations of states, municipalities and political subdivisions

     —        2,231,154      —        2,231,154

Foreign governments

     —        486,312      —        486,312

Residential mortgage-backed securities

     —        456,978      —        456,978

Asset-backed securities

     —        23,753      —        23,753

Public utilities

     —        139,620      —        139,620

Convertible bonds

     —        32,906      —        32,906

All other corporate bonds

     —        1,699,773      —        1,699,773
                           

Total fixed maturities

     —        5,451,154      —        5,451,154
                           

Equity securities:

           

Insurance companies, banks and trusts

     685,768      —        —        685,768

Industrial, consumer and all other

     858,775      —        —        858,775
                           

Total equity securities

     1,544,543      —        —        1,544,543
                           

Short-term investments

     288,199      53,803      —        342,002
                           

Total investments available-for-sale

     1,832,742      5,504,957      —        7,337,699
                           

Liabilities:

           

Derivative contracts

   $ —      $ —      $ 26,625    $ 26,625
                           

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)

   2010     2009  

Derivatives, Beginning of Period

   $ 26,968      $ 29,964   

Total gains included in:

    

Net income

     (343     (6

Other comprehensive income (loss)

     —          —     

Transfers into Level 3

     —          —     

Transfers out of Level 3

     —          —     
                

Derivatives, End of Period

   $ 26,625      $ 29,958   
                

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

   $ 343 (1)    $ 6 (1) 
                

 

(1)

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

There were no transfers into or out of Level 1 and Level 2 during the three months ended March 31, 2010. 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, 2010. At March 31, 2010, the Company did not hold material investments in auction

 

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rate securities, loans held for sale or mortgage-backed securities backed by subprime or Alt-A collateral, which were financial instruments whose valuations, in many cases, were significantly affected by the lack of market liquidity during the first quarter of 2009.

 

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 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 2009 Annual Report on Form 10-K for a more complete description of our critical accounting estimates.

Our Business

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.

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. In March 2009, we transitioned the four underwriting units included in our Excess and Surplus Lines segment to a customer-focused regional office model as part of our “One Markel” initiative. Under this new model, each regional office is responsible for serving the wholesale producers located in its region. The underwriters at our regional offices have access to and expertise in all of our product offerings and are located closer to our producers.

 

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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 and personal and commercial property and liability coverages. Our Specialty Admitted segment is comprised of two underwriting units, the Markel Specialty and Markel American Specialty Personal and Commercial Lines units. 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.

Our London Insurance Market segment writes specialty property, casualty, professional liability, equine and marine 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 an acquisition.

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.

Our non-insurance operations 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.

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. 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. We measure underwriting results by our underwriting profit or loss and combined ratio. These measures are discussed in greater detail under “Results of Operations.”

 

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Results of Operations

The following table presents the components of net income to shareholders.

 

     Three Months Ended
March 31,
 

(dollars in thousands)

   2010     2009  

Underwriting profit (loss)

   $ (4,703   $ 21,998   

Net investment income

     68,402        68,743   

Net realized investment gains (losses)

     15,743        (55,183

Other revenues

     40,439        24,371   

Amortization of intangible assets

     (3,958     (1,472

Other expenses

     (35,397     (22,549

Interest expense

     (17,959     (11,817

Income tax expense

     (19,361     (7,655

Noncontrolling interests

     (637     (78
                

Net income to shareholders

   $ 42,569      $ 16,358   
                

Net income to shareholders for the three months ended March 31, 2010 increased due to improved investment returns primarily resulting from lower write downs for other-than-temporary declines in the estimated fair value of investments in 2010 compared to 2009. The improved investment returns were partially offset by a decline in underwriting performance principally due to underwriting losses resulting from the earthquakes in Chile, which occurred in February 2010. 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.

 

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The following table presents selected data from our underwriting operations.

 

     Three Months Ended
March 31,
 

(dollars in thousands)

   2010     2009  

Gross premium volume

   $ 490,184      $ 486,836   

Net written premiums

   $ 446,502      $ 438,055   

Net retention

     91     90

Earned premiums

   $ 412,135      $ 457,246   

Losses and loss adjustment expenses

   $ 260,170      $ 253,411   

Underwriting, acquisition and insurance expenses

   $ 156,668      $ 181,837   

Underwriting profit (loss)

   $ (4,703   $ 21,998   
                

U.S. GAAP Combined Ratios(1)

    

Excess and Surplus Lines

     96     89

Specialty Admitted

     105     110

London Insurance Market

     109     97

Other Insurance (Discontinued Lines)

     NM (2)      NM (2) 

Markel Corporation (Consolidated)

     101     95

 

(1)

The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss.

(2)

NM – Ratio is not meaningful.

Our combined ratio was 101% for the first quarter of 2010 compared to 95% for the same period last year. The increase in the combined ratio was due to a higher current accident year loss ratio and less favorable development of prior years’ loss reserves partially offset by a lower expense ratio for the first quarter of 2010 compared to the same period in 2009. The higher current accident year loss ratio in 2010 was primarily the result of $17.0 million, or 4 points, of underwriting loss related to the Chilean earthquakes. The expense ratio for the first quarter of both 2010 and 2009 included approximately 2 points of costs associated with the implementation of our One Markel initiative.

The combined ratio for the Excess and Surplus Lines segment was 96% for the first quarter of 2010 compared to 89% for the same period last year. The increase in the combined ratio was primarily due to less favorable development of prior years’ loss reserves in 2010 than in 2009. The Excess and Surplus Lines segment’s combined ratio for the quarter ended March 31, 2010 included $24.2 million of favorable development on prior years’ loss reserves compared to $45.6 million of favorable development for the same period of 2009. The favorable development of prior years’ loss reserves during the first quarter of 2010 was partially offset by $13.7 million of adverse development on an errors and omissions program for mortgage servicing companies, which was impacted by the unusual conditions in the mortgage market during 2008 and 2007. Also contributing to the decrease in redundancies on prior years’ loss reserves in the first quarter of 2010 was less favorable development on our professional and products liability programs compared to the same period of 2009.

The combined ratio for the Specialty Admitted segment was 105% for the quarter ended March 31, 2010 compared to 110% for the same period of 2009. The decrease in the combined ratio was primarily due to a lower current accident year loss ratio and a lower expense ratio. The improvement in the combined ratio reflects lower underwriting losses at the former Markel Global Marine & Energy unit and improved underwriting performance at the Markel American Specialty Personal and Commercial Lines unit. In the first quarter of 2010, the expense ratio benefitted from a $4.0 million anticipated recovery under our corporate insurance program.

 

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The combined ratio for the London Insurance Market segment was 109% for the quarter ended March 31, 2010 compared to 97% for the same period of 2009. The increase in the combined ratio in the first quarter of 2010 was primarily due to a higher current accident year loss ratio compared to the same period of 2009. The higher current accident year loss ratio in 2010 was primarily due to $17.0 million, or 12 points, of underwriting loss related to the Chilean earthquakes. The London Insurance Market segment’s combined ratio for the quarter ended March 31, 2010 included $15.8 million of favorable development on prior years’ loss reserves compared to $15.0 million of favorable development for the same period of 2009.

In addition to the underwriting results of Markel International, results for the London Insurance Market segment for the quarter ended March 31, 2010 also included the results of Elliott Special Risks (ESR), a Canadian managing general agent that we acquired in October 2009. During the first quarter of 2010, ESR produced approximately $22 million of premium volume, including $2.5 million of premiums for Markel International, and had operating revenues of $3.2 million, which primarily related to commission income. Operating revenues and expenses for ESR are included in other revenues and other expenses in the consolidated statement of income and comprehensive income (loss).

The Other Insurance (Discontinued Lines) segment produced an underwriting profit of $2.1 million for the quarter ended March 31, 2010 compared to an underwriting loss of $0.5 million for the same period of 2009.

Premiums and Net Retentions

The following table summarizes gross premium volume and net written premiums by segment.

 

Gross Premium Volume
Three Months Ended March 31,
        Net Written Premiums
Three Months Ended March 31,
2010    2009   

(dollars in thousands)

   2010    2009
$211,683    $ 238,353    Excess and Surplus Lines    $ 193,329    $ 216,409
70,333      63,456    Specialty Admitted      63,113      57,459
208,168      184,965    London Insurance Market      190,058      164,078
—        62    Other Insurance (Discontinued Lines)      2      109
                         
$490,184    $ 486,836    Total    $ 446,502    $ 438,055
                         

Gross premium volume for the first quarter of 2010 increased 1% compared to the same period of 2009 primarily due to the effects of foreign currency exchange rate movements. Had currency exchange rates remained constant between the first quarter of 2010 and the first quarter of 2009, gross written premiums would have decreased 1%. Gross premium volume in the first quarter of 2010 was impacted by continued competition across many of our product lines, particularly within the Excess and Surplus Lines segment. In general, we believe prevailing rates within the property and casualty insurance marketplace are lower than our targeted pricing levels. 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 premium volume for many of our product lines has declined and, if the competitive environment does not improve, could decline further in the future.

During the first quarter of 2010, gross premium volume in both the Excess and Surplus Lines and Specialty Admitted segments was impacted by the transition of certain professional liability programs from the Excess

 

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and Surplus Lines segment to the Specialty Admitted segment. This transition had no impact on total gross premium volume and was made to better align the reporting of these programs with their distribution strategy. For the quarter ended March 31, 2010, the Specialty Admitted segment included approximately $6 million of gross premium volume on these transferred programs.

Net retention of gross premium volume for the first quarter of 2010 was 91% compared to 90% for the same period of 2009. As part of our underwriting philosophy, we seek to offer products with limits that do not require significant amounts of reinsurance. We purchase reinsurance in order to reduce our retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs. Net retention of gross premium volume has increased consistent with our strategy to retain more of our profitable business.

The following table summarizes earned premiums by segment.

 

     Three Months Ended
March 31,

(dollars in thousands)

   2010    2009

Excess and Surplus Lines

   $ 203,895    $ 249,240

Specialty Admitted

     72,041      76,696

London Insurance Market

     136,197      131,201

Other Insurance (Discontinued Lines)

     2      109
             

Total

   $ 412,135    $ 457,246
             

Earned premiums for the three months ended March 31, 2010 decreased 10% compared to the same period of 2009. The decrease in 2010 was partially offset by the effects of foreign currency exchange rate movements. Had currency exchange rates remained constant between the first quarter of 2010 and the first quarter of 2009, earned premiums would have decreased 11%. Excluding the effects of foreign currency, the decrease in earned premiums in 2010 was primarily due to lower earned premiums in the Excess and Surplus Lines segment as a result of lower gross premium volume compared to 2009.

Investing Results

Net investment income for the three months ended March 31, 2010 was $68.4 million compared to $68.7 million for the same period of 2009. For the first quarter of 2010, lower investment yields were offset by having higher average invested assets compared to the first quarter of 2009.

Net realized investment gains for the first quarter of 2010 were $15.7 million compared to net realized investment losses of $55.2 million for the first quarter of 2009. Net realized investment gains (losses) included $2.4 million and $55.5 million of write downs for other-than-temporary declines in the estimated fair value of investments for the quarters ended March 31, 2010 and 2009, respectively.

We complete a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. At March 31, 2010, we held securities with gross unrealized losses of $37.6 million, or less than 1% of our total invested assets. All securities with unrealized losses were reviewed, and we believe that there were no other securities with indications of declines in estimated fair value that were other-than-temporary at March 31, 2010. However, given the volatility in the debt and equity markets, we caution readers that further declines in fair value could be significant and may result in additional other-than-temporary impairment charges in future periods. Variability in the timing of realized and unrealized gains and losses is to be expected.

 

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Non-Insurance Operations (Markel Ventures)

Our non-insurance operations include the results of AMF Bakery Systems, ParkLand Ventures, Inc., Panel Specialists, Inc. (effective October 2009) and Ellicott Dredge Enterprises, LLC (effective November 2009). Operating revenues and expenses associated with our non-insurance operations are included in other revenues and other expenses in the consolidated statements of income and comprehensive income (loss). Revenues for our non-insurance operations were $37.2 million for the quarter ended March 31, 2010 compared to $24.4 million for the same period of 2009.

Interest Expense and Income Taxes

Interest expense for the three months ended March 31, 2010 increased to $18.0 million from $11.8 million in the same period of 2009 primarily due to our $350 million issuance of 7.125% unsecured senior notes in September 2009.

The estimated annual effective tax rate was 31% and 32% for the three months ended March 31, 2010 and 2009, respectively. For both periods, the estimated annual effective tax rate differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income. During the first quarter of 2010, the tax benefit related to tax-exempt investment income was partially offset by a higher effective tax rate related to our foreign operations. During the first quarter of 2009, the tax benefit related to tax-exempt investment income was partially offset by a higher effective tax rate on capital items.

Comprehensive Income (Loss) to Shareholders

Comprehensive income to shareholders was $134.5 million for the three months ended March 31, 2010 compared to comprehensive loss to shareholders of $2.0 million for the same period of 2009. Comprehensive income to shareholders for the first quarter of 2010 included an increase in net unrealized gains on investments, net of taxes, of $87.6 million and net income to shareholders of $42.6 million. Comprehensive loss to shareholders for the first quarter of 2009 included a decrease in net unrealized gains on investments, net of taxes, of $19.5 million, partially offset by net income to shareholders of $16.4 million.

Financial Condition

Invested assets were $8.0 billion at March 31, 2010 compared to $7.8 billion at December 31, 2009. Net unrealized gains on investments, net of taxes, were $505.4 million at March 31, 2010 compared to $417.8 million at December 31, 2009. Equity securities were $1.5 billion, or 19% of invested assets, at March 31, 2010 compared to $1.3 billion, or 17% of invested assets, at December 31, 2009.

Net cash provided by operating activities was $4.3 million for the three months ended March 31, 2010 compared to $12.7 million for the same period of 2009. The net cash provided by operating activities in the first quarter of both 2010 and 2009 reflects low levels of cash flows from underwriting activities in the Excess and Surplus Lines segment as a result of declining premium volume, as well as the impact of employee profit sharing and agent incentive compensation payments and pension contributions, which were made in the first quarter of each year.

 

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Net cash used by investing activities was $230.6 million for the three months ended March 31, 2010 compared to $52.4 million for the same period of 2009. As a result of the significant disruptions in the financial markets, we increased our holdings of short-term investments and cash and cash equivalents during the first quarter of 2009 and as bonds matured, we reinvested the proceeds in short-term investments. Further, we did not purchase or sell significant amounts of equity securities or fixed maturities during the first quarter of 2009. During the first quarter of 2010, given the improvement in the financial markets over the latter half of 2009 and into early 2010, we increased our purchases of fixed maturities and equity securities and have been gradually shifting our investment portfolio’s allocation from short-term investments and cash and cash equivalents to higher yielding investment securities. During the first quarter of 2010, cash of $23.0 million was used by ParkLand Ventures, Inc., a subsidiary of Markel Ventures, to acquire additional manufactured housing communities.

Net cash provided by financing activities was $17.8 million for the three months ended March 31, 2010 compared to $51.8 million for the same period of 2009. During the first quarter of 2010, ParkLand Ventures, Inc. increased its borrowings by $15.6 million in conjunction with the acquisition of additional manufactured housing communities. During the first quarter of 2010, cash of $4.4 million was used to repurchase shares of our common stock. During the first quarter of 2009, net borrowings under our revolving credit facility increased $50 million. No amounts were outstanding under the revolving credit facility at March 31, 2010. We intend to seek a replacement facility for the existing revolving credit agreement prior to its expiration in December 2010.

We seek to maintain prudent levels of liquidity and financial leverage for the protection of our policyholders, creditors and shareholders. Our target capital structure includes approximately 30% debt. Our debt to total capital ratio was 25% at March 31, 2010 and 26% at December 31, 2009. From time to time, our debt to total capital ratio may increase due to business opportunities that may be financed in the short term with debt. Alternatively, our debt to total capital ratio may fall below our target capital structure, which provides us with additional borrowing capacity to respond quickly when future opportunities arise.

We have access to various capital sources, including dividends from certain of our insurance subsidiaries, holding company invested assets, undrawn capacity under our revolving credit facility and access to the debt and equity capital markets. We believe that we have sufficient liquidity to meet our capital needs.

Our holding company had $1.0 billion of invested assets at both March 31, 2010 and December 31, 2009.

Shareholders’ equity was $2.9 billion at March 31, 2010 compared to $2.8 billion at December 31, 2009. Book value per share increased to $296.17 at March 31, 2010 from $282.55 at December 31, 2009 primarily due to $134.5 million of comprehensive income to shareholders in the first quarter of 2010.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Our consolidated balance sheets include assets and liabilities with estimated fair values that

 

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are subject to market risk. Historically, our primary market risks have been equity price risk associated with investments in equity securities, interest rate risk associated with investments in fixed maturities and foreign currency exchange rate risk associated with our international operations. We have no material commodity risk.

During the first quarter of 2010, there were no material changes to the market risk components described in our Annual Report on Form 10-K for the year ended December 31, 2009.

We monitor our portfolio to ensure that credit risk does not exceed prudent levels. We have consistently invested in high credit quality, investment grade securities. Our fixed maturity portfolio has an average rating of “AA,” with approximately 91% rated “A” or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturities that are unrated or rated below investment grade. At March 31, 2010, 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 estimated fair value of our investment portfolio at March 31, 2010 was $8.0 billion, 81% of which was invested in fixed maturities, short-term investments and cash and cash equivalents and 19% of which was invested in equity securities. At December 31, 2009, the estimated fair value of our investment portfolio was $7.8 billion, 82% of which was invested in fixed maturities, short-term investments and cash and cash equivalents and 18% of which was invested in equity securities and investments in affiliates.

Our fixed maturities, equity securities and short-term investments are recorded at fair value, which is measured based upon quoted prices in active markets, if available. We determine fair value for these investments after considering various sources of information, including information provided by a third party pricing service. The pricing service provides prices for substantially all of our fixed maturities and equity securities. In determining fair value, we generally do not adjust the prices obtained from the pricing service. We obtain an understanding of the pricing service’s valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. We validate prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances. At March 31, 2010, we did not hold material investments in auction rate securities, loans held for sale or mortgage-backed securities backed by subprime or Alt-A collateral, which were financial instruments whose valuations, in many cases, were significantly affected by the lack of market liquidity during the first quarter of 2009.

 

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15 (Disclosure Controls). This evaluation was conducted under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO).

Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system

 

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must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based upon our controls evaluation, the CEO and CFO concluded that effective Disclosure Controls were in place to ensure that the information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in our internal control over financial reporting during the first quarter of 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Safe Harbor and Cautionary Statement

This report contains statements concerning or incorporating our expectations, assumptions, plans, objectives, future financial or operating performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

There are risks and uncertainties that may cause actual results to differ materially from predicted results in forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additional factors that could cause actual results to differ from those predicted are set forth under “Risk Factors” and “Safe Harbor and Cautionary Statement” in our 2009 Annual Report on Form 10-K or are included in the items listed below:

 

   

our anticipated premium volume is based on current knowledge and assumes no significant man-made or natural catastrophes, no significant changes in products or personnel and no adverse changes in market conditions;

 

   

we are legally required in certain instances to offer terrorism insurance and have attempted to manage our exposure; however, if there is a covered terrorist attack, we could sustain material losses;

 

   

the impact of the events of September 11, 2001 will depend on the resolution of on-going insurance coverage litigation and arbitrations;

 

   

the frequency and severity of catastrophic events is unpredictable and may be exacerbated if, as many forecast, conditions in the oceans and atmosphere result in increased hurricane or other adverse weather-related activity;

 

   

changing legal and social trends and inherent uncertainties (including but not limited to those uncertainties associated with our asbestos and environmental reserves) in the loss estimation process can adversely impact the adequacy of loss reserves and the allowance for reinsurance recoverables;

 

   

adverse developments in insurance coverage litigation could result in material increases in our estimates of loss reserves;

 

   

the loss estimation process may become more uncertain if we experience a period of rising inflation;

 

   

the costs and availability of reinsurance may impact our ability to write certain lines of business;

 

   

industry and economic conditions can affect the ability and/or willingness of reinsurers to pay balances due;

 

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after the commutation of ceded reinsurance contracts, any subsequent adverse development in the re-assumed loss reserves will result in a charge to earnings;

 

   

regulatory actions can impede our ability to charge adequate rates and efficiently allocate capital;

 

   

economic conditions, volatility in interest and foreign currency exchange rates and changes in market value of concentrated investments can have a significant impact on the fair value of fixed maturities and equity securities, as well as the carrying value of other assets and liabilities, and this impact is heightened by the recent levels of market volatility;

 

   

we cannot predict the extent and duration of the current economic recession; the effects of government intervention into the markets to address the recent financial crisis (including, among other things, financial stability and recovery initiatives; the government’s ownership interest in American International Group, Inc. and the restructuring of that company; potential regulatory changes affecting the insurance and financial services industries and the securities and derivatives markets; changes in tax policy; and pending legislation overhauling the federal financial regulatory structure); and their combined impact on our industry, business and investment portfolio;

 

   

because of adverse conditions in the financial services industry, access to capital has generally become more difficult and/or more expensive, which may adversely affect our ability to take advantage of business opportunities as they may arise;

 

   

we cannot predict the impact of recently adopted U.S. health care reform legislation and regulations under that legislation on our business;

 

   

our OneMarkel initiative may take longer to implement and cost more than we anticipate and may not achieve some or all of its objectives;

 

   

we completed a number of acquisitions in late 2009 and may engage in additional acquisition activity in the future, which may increase operational and control risks for a period of time;

 

   

if we experience a pandemic or a localized catastrophic event in an area where we have offices, our business operations could be adversely affected;

 

   

loss of services of any executive officers could impact our operations; and

 

   

adverse changes in our assigned financial strength or debt ratings could impact our ability to attract and retain business or obtain capital.

Our premium volume, underwriting and investment results and results from our non-insurance operations have been and will continue to be potentially materially affected by these factors. By making forward-looking statements, we do not intend to become obligated to publicly update or revise any such statements whether as a result of new information, future events or other changes. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as at their dates.

 

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PART II. OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes our common stock repurchases for the quarter ended March 31, 2010.

Issuer Purchases of Equity Securities

 

     (a)    (b)    (c)    (d)

Period

   Total
Number  of
Shares

Purchased
   Average
Price
Paid per
Share
   Total
Number of
Shares

Purchased as
Part

of Publicly
Announced
Plans

or  Programs1
   Approximate
Dollar
Value of
Shares that

May Yet Be
Purchased
Under

the Plans or
Programs
(in thousands)

January 1, 2010 through January 31, 2010

   —        —      —      $ 63,417

February 1, 2010 through February 28, 2010

   13,100    $ 334.84    13,100    $ 59,031

March 1, 2010 through March 31, 2010

   —        —      —      $ 59,031
               

Total

   13,100    $ 334.84    13,100    $ 59,031
                       

 

1

The Board of Directors approved the repurchase of up to $200 million of our common stock pursuant to a share repurchase program publicly announced on August 22, 2005 (the Program). Under the Program, we may repurchase outstanding shares of our common stock from time to time, primarily through open-market transactions. The Program has no expiration date but may be terminated by the Board of Directors at any time.

 

Item 6. Exhibits

See Exhibit Index for a list of exhibits filed as part of this report.

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 5th day of May, 2010.

 

  Markel Corporation
  By  

/S/    ALAN I. KIRSHNER        

    Alan I. Kirshner
   

Chief Executive Officer and Chairman

of the Board of Directors

  By  

/S/    RICHARD R. WHITT, III        

    Richard R. Whitt, III
    Senior Vice President and
    Chief Financial Officer
   

(Principal Financial Officer and

Principal Accounting Officer)

 

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Exhibit Index

 

Number

  

Description

3(i)

   Amended and Restated Articles of Incorporation, as amended (3(i))a

3(ii)

   Bylaws, as amended (3.1)b

4(i)

   Form of Credit Agreement dated August 25, 2005, among Markel Corporation, the lenders from time to time party thereto, SunTrust Bank, as Administrative Agent and Swingline Lender, Wachovia Bank, N.A., as Syndication Agent, and Barclays Bank PLC and HSBC Bank USA, N.A., as Co-Documentation Agents (4)c

4(ii)

   First Amendment dated March 17, 2006 to Credit Agreement dated August 25, 2005 among Markel Corporation, the banks and financial institutions from time to time party thereto, and SunTrust Bank, as Administrative Agent and Swingline Lender (4(ii))d
   The registrant hereby agrees to furnish to the Securities and Exchange Commission a copy of all instruments defining the rights of holders of long-term debt of the registrant and subsidiaries shown on the Consolidated Balance Sheet of the registrant at March 31, 2010 and the respective Notes thereto, included in this Quarterly Report on Form 10-Q.

10.1

   Description of Awards under Executive Bonus Plan*

10.2

   Form of Restricted Stock Unit Award Agreement for Executive Officers*

31.1

   Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)*

31.2

   Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)*

32.1

   Certification of Principal Executive Officer furnished Pursuant to 18 U.S.C. Section 1350*

32.2

   Certification of Principal Financial Officer furnished Pursuant to 18 U.S.C. Section 1350*

 

a. Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended March 31, 2000.
b. Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 8-K filed on August 20, 2007.
c. Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended September 30, 2005.
d. Incorporated by reference from the Exhibit shown in parentheses filed with the Commission in the Registrant’s report on Form 10-Q for the quarter ended March 31, 2006.
* Filed with this report.

 

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