Acquisitions

CATCo Investment Management Acquisition

On December 8, 2015, the Company completed the acquisition of substantially all of the assets of CATCo Investment Management Ltd. (CATCo IM) and CATCo-Re Ltd. CATCo IM was a leading insurance-linked securities investment fund manager and reinsurance manager headquartered in Bermuda focused on building and managing highly diversified, collateralized retrocession and reinsurance portfolios covering global property catastrophe risks. Results attributable to Markel CATCo Investment Management Ltd. (Markel CATCo IM), the wholly-owned subsidiary formed in conjunction with this transaction, are included with the Company's non-insurance operations, which are not included in a reportable segment.

Total consideration for the acquisition was $205.7 million, all of which was cash. The purchase price was allocated to the acquired assets and liabilities based on estimated fair values on December 8, 2015. The Company recognized goodwill of $91.9 million, all of which is expected to be deductible for income tax purposes. The goodwill is primarily attributable to the Company's ability to achieve continued capital growth in excess of that which can be expected for the investment funds previously managed by CATCo IM. The Company also recognized other intangible assets of $113.0 million, primarily related to its investment management agreements. These intangible assets are expected to be amortized over a weighted average period of 14 years.

In connection with the acquisition, the Company instituted performance incentive and retention arrangements for former CATCo employees, whom are now employed by Markel CATCo IM. Pursuant to these agreements, the Company committed to the payment of performance bonuses derived from the results of the business through 2018 and retention bonuses that will be paid annually over the three year period following the acquisition. The total amount of these payments is currently estimated to be $100 million, all of which will be recognized in the consolidated financial statements as post-acquisition compensation expense over the performance period and as services are provided.

Markel Ventures Acquisitions

In December 2015, the Company acquired 80% of the outstanding shares of CapTech Ventures, Inc. (CapTech), a privately held company headquartered in Richmond, Virginia. CapTech is a leading management and IT consulting firm, providing services and solutions to a wide array of customers. Under the terms of the acquisition agreement for CapTech, the Company has the option to acquire the remaining equity interests and the remaining equity interests have the option to sell their interests to the Company in the future. The redemption value of the remaining equity interests is generally based on CapTech’s earnings in specified periods preceding the redemption date.

Total consideration for the CapTech acquisition was $60.6 million. Total consideration included the estimated fair value of contingent consideration we expect to pay based on CapTech's earnings, as defined in the stock purchase agreement, through 2018. The purchase price was allocated to the acquired assets and liabilities based on the estimated fair values at the acquisition date. The Company has preliminarily recognized goodwill of $48.5 million related to this acquisition, none of which is expected to be deductible for income tax purposes. The Company has also preliminarily recognized other intangible assets of $49.2 million, primarily related to customer relationships, and redeemable noncontrolling interest of $13.8 million. These intangible assets are expected to be amortized over a weighted average period of 14 years. Results attributable to this acquisition are included with the Company's non-insurance operations, which are not included in a reportable segment. Due to the one month lag in consolidating the results of the Company's Markel Ventures operations, the financial results for CapTech will be included in our consolidated statements of income and comprehensive income beginning in January 2016.

The Company has not completed the process of determining the fair value of the assets and liabilities acquired with CapTech. These valuations will be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a result, the fair value amounts recorded for these items are provisional estimates subject to adjustment. Once completed, any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed, the residual goodwill, and the fair value attributable to the noncontrolling equity interest holders.

In July 2014, the Company acquired 100% of the outstanding shares of Cottrell, Inc. (Cottrell), a privately held company headquartered in Gainesville, Georgia. Cottrell is a leading manufacturer of over-the-road car hauler equipment and related car hauler parts. In June and August 2014, ParkLand Ventures, Inc. (ParkLand) also completed the acquisition of several manufactured housing communities. Total consideration for these acquisitions was $187.0 million, which primarily consisted of cash consideration. Total consideration included the estimated fair value of contingent consideration we expected to pay based on Cottrell's earnings, as defined in the stock purchase agreement, in 2014 and 2015. The Company recognized goodwill of $38.7 million related to these acquisitions, the majority of which we expect to amortize for income tax purposes. The Company also recognized other intangible assets of $78.7 million, including $53.7 million of customer relationships and $13.0 million of trade names, which are expected to be amortized over a weighted average period of 17 years and 10 years, respectively. Results attributable to these acquisitions are included with the Company's non-insurance operations, which are not included in a reportable segment.

Acquisition of Alterra

a)Overview. On May 1, 2013, the Company completed the acquisition of 100% of the the issued and outstanding common stock of Alterra pursuant to an agreement dated December 18, 2012 (the Merger Agreement) which provided for the merger of Alterra with one of the Company's subsidiaries. Alterra was a Bermuda-headquartered global enterprise providing diversified specialty property and casualty insurance and reinsurance products to corporations, public entities and other property and casualty insurers. Results attributable to Alterra's property and casualty insurance and reinsurance business are included in each of the Company's underwriting segments. Previously, Alterra also offered life and annuity reinsurance products. In 2010, Alterra ceased writing life and annuity reinsurance contracts and placed this business into run-off. Results attributable to the run-off of Alterra's life and annuity reinsurance business are included in the Company's Other Insurance (Discontinued Lines) segment. See note 19 for further discussion of the Company's reportable segments.

Pursuant to the terms of the Merger Agreement, on the Acquisition Date, equity holders of Alterra received, in exchange for each share of Alterra common stock held (other than restricted shares that did not vest in connection with the transaction), (1) 0.04315 shares of the Company's common stock and (2) $10.00 in cash. Equity holders of Alterra received total consideration of $3.3 billion, consisting of cash consideration of $964.3 million and stock consideration of 4.3 million shares of the Company's common stock.

b)Purchase Price. The Company's total purchase price for Alterra as of the Acquisition Date was calculated as follows:



(in thousands, except per share amounts)
Shares of Alterra common stock outstanding as of the Acquisition Date	96,433
Exchange ratio per the Merger Agreement	0.04315
Markel share issuance to Alterra shareholders	4,161

Shares of Alterra restricted stock outstanding as of the Acquisition Date	2,239
Incentive award ratio per the Merger Agreement	0.06252
Markel restricted stock issuance to Alterra restricted stock holders	140

Multiplied by Markel's weighted average stock price on April 30, 2013 ⁽¹⁾	$	529.59

Markel share and restricted stock issuance consideration, net of taxes	$	2,267,648

Alterra common shares outstanding as of the Acquisition Date that received cash consideration	96,433
Multiplied by cash price per share component per the Merger Agreement	$	10.00
Markel cash consideration	$	964,330

Fair value of Markel warrant issuance to Alterra warrant holders as of the Acquisition Date	$	73,685
Fair value of Markel stock option issuance to Alterra stock option holders as of the Acquisition Date, net of taxes	$	12,335
Fair value of partially vested Markel restricted stock unit issuance as of the Acquisition Date, net of taxes	$	6,867
Unrecognized compensation on unvested restricted stock and restricted stock units	$	(20,572	)
Total acquisition consideration	$	3,304,293


⁽¹⁾	The fair value of the shares issued by the Company was calculated as the weighted average price of the Company's stock on April 30, 2013, the day preceding the Acquisition Date.

As part of the consideration, the Company issued replacement warrants, options and restricted stock awards to holders of Alterra warrants, options and restricted stock awards. The acquisition consideration related to the options, restricted stock and restricted stock units issued was net of income taxes of $1.9 million, $10.1 million and $0.7 million, respectively. See note 12 for additional information about the equity awards issued in connection with the acquisition.

c)Fair Value of Net Assets Acquired and Liabilities Assumed. The purchase price was allocated to the acquired assets and liabilities of Alterra based on estimated fair values at the Acquisition Date. The Company recognized goodwill of $295.7 million, of which $107.8 million was allocated to the U.S. Insurance segment, $65.2 million was allocated to the International Insurance segment and $122.7 million was allocated to the Reinsurance segment. The goodwill is primarily attributable to Alterra's assembled workforce and synergies that are expected to result upon integration of Alterra into the Company's insurance operations and investing activities. None of the goodwill that was recorded is deductible for income tax purposes. The Company also recognized indefinite lived intangible assets of $37.5 million and other intangible assets of $170.0 million, which will be amortized over a weighted average period of 17 years.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the Acquisition Date.



(dollars in thousands)
ASSETS
Investments	$	6,407,841
Cash and cash equivalents	1,036,274
Restricted cash and cash equivalents	414,497
Receivables	866,388
Reinsurance recoverable on unpaid losses	1,169,084
Reinsurance recoverable on paid losses	80,672
Prepaid reinsurance premiums	317,445
Other assets	859,884
LIABILITIES
Unpaid losses and loss adjustment expenses	4,719,461
Life and annuity benefits	1,477,482
Unearned premiums	1,075,610
Payables to insurance and reinsurance companies	342,858
Senior long-term debt	512,463
Other liabilities	223,108
Net assets	2,801,103
Goodwill	295,690
Intangible assets	207,500
Acquisition date fair value	$	3,304,293

An explanation of the significant adjustments for fair value and the related impact on amortization is as follows:

•

Investments - Fixed maturity investments acquired include a net increase of $223.1 million to adjust the historical carrying amount of Alterra's investments to their estimated fair value as of the Acquisition Date. The difference in the historical amortized cost of the fixed maturity investments acquired and their estimated fair value as of the Acquisition Date, $495.5 million, represents incremental premium that will be amortized to net investment income over the term of the underlying securities. The amount of the unamortized incremental premium as of December 31, 2015 and 2014 was $198.3 million and $281.1 million, respectively. The decrease in the unamortized incremental premium is due to amortization expense of $39.6 million, $59.3 million and $58.3 million for the years ended December 31, 2015, 2014 and 2013, respectively, and sales of securities.


•	Intangible assets - Establish the estimated fair value of intangible assets related to Alterra (see below for further detail).

•

Unearned Premiums - Unearned premiums acquired include a decrease of $176.3 million to adjust the carrying value of Alterra's historical unearned premiums to fair value as of the Acquisition Date. The adjustment consists of the present value of the expected underwriting profit within the unearned premiums liability less costs to service the related policies and a risk premium. This adjustment was amortized to underwriting, acquisition and insurance expenses over a weighted average period of approximately one year, as the contracts for business in-force as of the Acquisition Date expired. As of December 31, 2014, this adjustment was fully amortized.

•

Unpaid losses and loss adjustment expenses - Unpaid losses and loss adjustment expenses acquired include an increase of $120.8 million to adjust the carrying value of Alterra's historical unpaid losses and loss adjustment expenses, net of related reinsurance recoverable, to fair value as of the Acquisition Date. The estimated fair value consists of the present value of the expected net loss and loss adjustment expense payments plus a risk premium. This adjustment, plus the $26.5 million unamortized fair value adjustment included in Alterra's historical unpaid losses and loss adjustment expenses, will be amortized to losses and loss adjustment expenses over a weighted average period of approximately five years, based on the estimated payout pattern of net reserves as of the Acquisition Date. The amount of the unamortized fair value adjustment included in unpaid losses and loss adjustment expenses as of December 31, 2015 and 2014 was $91.0 million and $114.6 million, respectively.

•

Life and Annuity Benefits - Life and annuity benefits acquired include an increase of $329.6 million to adjust the carrying value of Alterra's historical life and annuity benefits to fair value as of the Acquisition Date. The estimated fair value consists of the present value of the expected net life and annuity benefit payments plus a risk premium. See note 10 for detail regarding accounting for life and annuity benefits.

•

Senior long-term debt - Senior long-term debt acquired includes an increase of $71.9 million to adjust the carrying value of Alterra's senior long-term debt to its estimated fair value based on prevailing interest rates and other factors as of the Acquisition Date. This adjustment will be amortized to interest expense over the term of the notes. See note 11. The amount of the unamortized premium on the acquired senior long-term debt as of December 31, 2015 and 2014 was $46.3 million and $56.7 million, respectively.

The following table summarizes the intangible assets recorded in connection with the acquisition.



(dollars in thousands)	Amount		Economic Useful Life
Customer relationships	$	132,000	18 years
Broker relationships	19,000		18 years
Technology	18,000		Ten years
Trade names	1,000		One year
Lloyd's syndicate capacity	12,000		Indefinite
Insurance licenses	25,500		Indefinite
Intangible assets as of the Acquisition Date	$	207,500

Customer relationships represent policyholder relationships and the network of insurance companies through which Alterra conducted its operations. The fair value of customer relationships and broker relationships was estimated using the income approach. Critical inputs into the valuation model for customer relationships and broker relationships include estimates of expected premium and attrition rates, and discounting at a weighted average cost of capital. Technology represents the intangible asset related to Alterra's internally developed software and was valued using the income approach.

The fair value of Lloyd's syndicate capacity and insurance licenses was estimated using the market approach. Lloyd's syndicate capacity represents Alterra's authorized premium income limit to write insurance business in the Lloyd's of London (Lloyd's) insurance market. The Lloyd's capacity is renewed annually at no cost to the Company or may be freely purchased or sold, subject to Lloyd's approval. The ability to write insurance business within the syndicate capacity is indefinite with the premium income limit being set annually by the Company, subject to Lloyd's approval.

d)Income Taxes. As a result of the acquisition, Alterra and its non-U.S. subsidiaries became controlled foreign corporations subject to U.S. income tax at a statutory rate of 35%. The acquisition was taxable to U.S. shareholders of Alterra, and Markel has elected to treat it as an asset acquisition under section 338(g) of the U.S. Internal Revenue Code of 1986 (IRC), as amended.

Effective May 1, 2013, the Company made an IRC section 953(d) election with respect to Markel Bermuda Limited (Markel Bermuda, formerly known as Alterra Bermuda Limited), a wholly-owned subsidiary of Alterra. As a result of the 953(d) election, Markel Bermuda is treated as a domestic corporation for U.S. tax purposes and, accordingly, is required to record deferred taxes at the 35% statutory U.S. rate.

As part of the allocation of the purchase price, the Company recorded net deferred tax assets of $310.1 million. Of this amount, $343.9 million represents deferred tax assets related to accrued losses and loss adjustment expenses and life and annuity benefits, which were partially offset by deferred tax liabilities of $64.6 million related to the estimated fair value of the intangible assets recorded. Other net deferred tax assets recorded primarily relate to differences between financial reporting and tax bases of the acquired assets and liabilities as of the Acquisition Date. As of the Acquisition Date, earnings of Alterra's foreign subsidiaries were considered reinvested indefinitely, consistent with the Company's other foreign subsidiaries, and no provision for deferred U.S. income tax was recorded.

e)Transaction and Acquisition-Related Costs. The following table summarizes transaction and acquisition-related costs incurred by the Company in connection with the acquisition, all of which were included in underwriting, acquisition and insurance expenses in the consolidated statements of income and comprehensive income.



(dollars in thousands)	Year Ended December 31, 2013
Transaction costs	$	15,981
Acquisition-related costs:
Severance costs	31,734
Stay bonuses	14,804
Acceleration of Alterra long-term incentive compensation awards and restricted stock awards	12,621
Total transaction and acquisition-related costs	$	75,140

Transaction costs primarily consist of due diligence, legal and investment banking costs. Per the terms of the Merger Agreement, transaction costs attributable to Alterra were recorded and paid by Alterra prior to the Acquisition Date ($23.0 million) and are not included within the Company's consolidated statements of income and comprehensive income.

In connection with the acquisition, Alterra instituted a retention plan for certain employees under which Alterra committed to the payment of stay bonuses to such employees one year from the Acquisition Date, provided they remain employed with the Company through that date. Payments may have been accelerated for certain qualifying employment terminations.

Prior to its acquisition by the Company, Alterra granted long term incentive awards to certain employees to be paid in the form of cash on March 1, 2016, provided they remain employed with the Company on that date. Payments may be accelerated prior to March 1, 2016 for certain qualifying employment terminations. Additionally, as part of the purchase consideration, the Company issued replacement restricted stock awards to holders of Alterra restricted stock awards. As a result of separations made in connection with the acquisition, the Company recognized expense totaling $12.6 million related to the acceleration of certain of these awards during the year ended December 31, 2013.

f)Financial Results. The following table summarizes the results of Alterra from the Acquisition Date through December 31, 2013 that have been included within the Company's consolidated statements of income and comprehensive income.



(dollars in thousands)	Year Ended December 31, 2013
Operating revenues	$	912,387
Net loss to shareholders	$	(93,074	)

g)Supplemental Pro Forma Information (unaudited). Alterra's results have been included in the Company's Consolidated Financial Statements from the Acquisition Date to December 31, 2015. The following table presents unaudited pro forma consolidated information for the year ended December 31, 2013 and assumes the Company's acquisition of Alterra occurred on January 1, 2012. The pro forma financial information is presented for informational purposes only and does not necessarily reflect the results that would have occurred had the acquisition taken place on January 1, 2012, nor is it necessarily indicative of future results. Significant adjustments used to determine pro forma results include amortization of intangible assets and amortization of fair value adjustments discussed in c) above, and the corresponding income tax effects. The Company also excluded certain charges from the pro forma results, including transaction costs incurred by the Company ($16.0 million) and Alterra ($23.0 million) totaling $39.0 million for the year ended December 31, 2013, severance costs attributable to the acquisition totaling $31.7 million for the year ended December 31, 2013, and stay bonuses of $14.8 million for the year ended December 31, 2013. The acceleration of compensation expense during the year ended December 31, 2013 related to Alterra's long-term incentive compensation awards and restricted stock awards was attributable to the acquisition; however, the incremental expense recognized during the period only represents a timing difference in the recognition of expense. Therefore, it was not excluded from the pro forma underwriting results.



	Unaudited
	Consolidated Pro Forma
(in thousands, except per share amounts)	Year Ended December 31, 2013
Earned premiums	$	3,680,220
Operating revenues	4,899,628
Net income to shareholders	422,829

U.S. GAAP combined ratio ⁽¹⁾	95		%

Basic net income per share	$	30.33
Diluted net income per share	$	30.19

Weighted average common shares outstanding:
Basic	14,007
Diluted	14,069


⁽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.

Acquisition of Abbey Protection

On January 17, 2014, the Company completed its acquisition of 100% of the share capital of Abbey Protection plc (Abbey), an integrated specialty insurance and consultancy group headquartered in London. Abbey's business is focused on the underwriting and sale of insurance products to small and medium-sized enterprises and affinity groups in the United Kingdom providing protection against legal expenses and professional fees incurred as a result of legal actions or investigations by tax authorities, as well as providing a range of complementary legal and professional consulting services. Results attributable to Abbey's insurance operations are included in the International Insurance segment. Results attributable to Abbey's consultancy operations are reported with the Company's non-insurance operations, which are not included in a reportable segment.

Total consideration for this acquisition was $190.7 million, all of which was cash consideration. The purchase price was allocated to the acquired assets and liabilities based on estimated fair values on January 17, 2014. The Company recognized goodwill of $65.8 million, of which $43.0 million was allocated to the International Insurance segment and $22.8 million was allocated to the Company's non-insurance operations. None of the goodwill recognized is expected to be deductible for income tax purposes. The goodwill is primarily attributable to Abbey's assembled workforce and synergies that are expected to result upon integration of Abbey into the Company's insurance operations. The Company also recognized other intangible assets of $113.4 million, including $103.5 million of customer relationships and $9.9 million of trade names. These intangible assets are expected to be amortized over 20 years and 14 years, respectively.

Acquisition of Essentia

Effective January 1, 2013, the Company completed its acquisition of 100% of the outstanding shares of Essentia Insurance Company, a company that underwrites insurance exclusively for Hagerty Insurance Agency and Hagerty Classic Marine Insurance Agency (collectively, Hagerty) throughout the United States. Hagerty offers insurance for classic cars, vintage boats, motorcycles and related automotive collectibles. The Company recognized intangible assets of $35.4 million associated with this acquisition, which includes $25.0 million of customer relationships to be amortized over a weighted average period of six years. Results attributable to this acquisition are included in the U.S. Insurance segment.

Effective January 1, 2014, Hagerty exercised its option to purchase 9.9% of the outstanding shares of Essentia, which reduced the Company's ownership interest in Essentia to 90.1%.