10-K 1 mkl_12312015x10k.htm FORM 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015
Commission File Number 001-15811
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
A Virginia Corporation
IRS Employer Identification No. 54-1959284
4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (804) 747-0136
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value
New York Stock Exchange, Inc.
(title of each class and name of the exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x        Accelerated filer  ¨        Non-accelerated filer  ¨        Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
The aggregate market value of the shares of the registrant's Common Stock held by non-affiliates as of June 30, 2015 was approximately $10,847,000,000.
The number of shares of the registrant's Common Stock outstanding at February 8, 2016: 13,961,293.
Documents Incorporated By Reference
The portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 16, 2016, referred to in Part III.



Index and Cross References-Form 10-K Annual Report
Item No.
 
Page
Part I
 
 
1.
Business
2-29, 134-135

1A.
Risk Factors
24-29

1B.
Unresolved Staff Comments
NONE

2.
Properties (note 6 and note 16)
59, 77

3.
Legal Proceedings (note 16)
77

4.
Mine Safety Disclosures
NONE

Part II
 
 
5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
91, 134-135

6.
Selected Financial Data
30-31

7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
92-133

7A.
Quantitative and Qualitative Disclosures About Market Risk
127-129

8.
Financial Statements and Supplementary Data
The response to this item is submitted in Item 15.
 
9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
NONE

9A.
Controls and Procedures
32-33, 131

9B.
Other Information
NONE

Part III
 
 
10.
Directors, Executive Officers and Corporate Governance*
136

 
Code of Conduct
135

11.
Executive Compensation*
 
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*
 
13.
Certain Relationships and Related Transactions, and Director Independence*
 
14.
Principal Accounting Fees and Services*
 
*Portions of Item 10 and Items 11, 12, 13 and 14 will be incorporated by reference from the Registrant's Proxy Statement for its 2016 Annual Meeting of Shareholders pursuant to instructions G(1) and G(3) of the General Instructions to Form 10-K.
 
Part IV
 
 
 
 
15.
Exhibits, Financial Statement Schedules
 
 
a.
Documents filed as part of this Form 10-K
 
 
 
(1)
Reports of Independent Registered Public Accounting Firm
33-34

 
 
 
Financial Statements
 
 
 
 
Consolidated Balance Sheets
35

 
 
 
Consolidated Statements of Income and Comprehensive Income
36

 
 
 
Consolidated Statements of Changes in Equity
37

 
 
 
Consolidated Statements of Cash Flows
38

 
 
 
Notes to Consolidated Financial Statements
39-91

 
 
(2)
Schedules have been omitted since they either are not required or are not applicable, or the information called for is shown in the Consolidated Financial Statements and Notes thereto.
 
 
 
(3)
See Index to Exhibits on page 137 for a list of Exhibits filed as part of this report
 
 
b.
See Index to Exhibits and Item 15a(3)
 
 
c.
See Index to Financial Statements and Item 15a(2)
 



BUSINESS OVERVIEW

We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products. We believe that our specialty product focus and niche market strategy enable us to develop expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by our expertise, service, continuity and other value-based considerations. We also own interests in various industrial and service businesses that operate outside of the specialty insurance marketplace. Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value.

On May 1, 2013, we completed the acquisition of Alterra Capital Holdings Limited (Alterra), 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.

Specialty Insurance and Reinsurance


The specialty insurance market differs significantly from the standard market. In the standard market, insurance rates and forms are highly regulated, products and coverages are largely uniform with relatively predictable exposures and companies tend to compete for customers on the basis of price. In contrast, the specialty market provides coverage for hard-to-place risks that generally do not fit the underwriting criteria of standard carriers.

Competition in the specialty insurance market tends to focus less on price than in the standard insurance market and more on other value-based considerations, such as availability, service and expertise. While specialty market exposures may have higher perceived insurance risks than their standard market counterparts, we seek to manage these risks to achieve higher financial returns. To reach our financial and operational goals, we must have extensive knowledge and expertise in our chosen markets. Many of our accounts are considered on an individual basis where customized forms and tailored solutions are employed.

By focusing on the distinctive risk characteristics of our insureds, we have been able to identify a variety of niche markets where we can add value with our specialty product offerings. Examples of niche insurance markets that we have targeted include wind and earthquake-exposed commercial properties, liability coverage for highly specialized professionals, equine-related risks, workers' compensation insurance for small businesses, classic cars and marine, energy and environmental-related activities. Our market strategy in each of these areas of specialization is tailored to the unique nature of the loss exposure, coverage and services required by insureds. In each of our niche markets, we assign teams of experienced underwriters and claims specialists who provide a full range of insurance services.

We also participate in the reinsurance market in certain classes of reinsurance product offerings, which were expanded in 2013 through the acquisition of Alterra. In the reinsurance market, our clients are other insurance companies, or cedents. We typically write our reinsurance products in the form of treaty reinsurance contracts, which are contractual arrangements that provide for automatic reinsuring of a type or category of risk underwritten by cedents. Generally, we participate on reinsurance treaties with a number of other reinsurers, each with an allocated portion of the treaty, with the terms and conditions of the treaty being substantially the same for each participating reinsurer. With treaty reinsurance contracts, we do not separately evaluate each of the individual risks assumed under the contracts and are largely dependent on the individual underwriting decisions made by the cedent. Accordingly, we review and analyze the cedent's risk management and underwriting practices in deciding whether to provide treaty reinsurance and in pricing of treaty reinsurance contracts.

Our reinsurance products are written on both a quota share and excess of loss basis. Quota share contracts require us to share the losses and expenses in an agreed proportion with the cedent. Excess of loss contracts require us to indemnify the cedent against all or a specified portion of losses and expenses in excess of a specified dollar or percentage amount. In both types of contracts, we may provide a ceding commission to the cedent.

We distinguish ourselves in the reinsurance market by the expertise of our underwriting teams, our access to global reinsurance markets, our ability to offer large lines and our ability to customize reinsurance solutions to fit our client's needs. Our specialty reinsurance product offerings include coverage for general casualty, professional liability, property, workers' compensation and credit and surety risks.


2


Markets

 

In the United States, we write business in the excess and surplus lines (E&S) and specialty admitted insurance and reinsurance markets. In 2014, the E&S market represented approximately $40 billion, or 7%, of the approximately $570 billion United States property and casualty industry.(1) In 2014, we were the sixth largest E&S writer in the United States as measured by direct premium writings.(1)  

Our E&S insurance operations are conducted through Essex Insurance Company (Essex), domiciled in Delaware, and Evanston Insurance Company (Evanston), domiciled in Illinois. Through 2015, our E&S insurance operations were also conducted through Alterra Excess & Surplus Insurance Company, which was merged into Evanston effective December 31, 2015. The majority of our specialty admitted insurance operations are conducted through Markel Insurance Company (MIC), domiciled in Illinois; Markel American Insurance Company (MAIC), domiciled in Virginia; FirstComp Insurance Company (FCIC), domiciled in Nebraska; Essentia Insurance Company (Essentia), domiciled in Missouri; and Alterra America Insurance Company (AAIC), domiciled in Delaware. Our United States reinsurance operations are conducted through Markel Global Reinsurance Company (Markel Global Re, formerly known as Alterra Reinsurance USA Inc.), a Delaware-domiciled reinsurance company.

In Europe, we participate in the London insurance market through Markel Capital Limited (Markel Capital) and Markel International Insurance Company Limited (MIICL). Markel Capital is the corporate capital provider for Markel Syndicate 3000, through which our Lloyd's of London (Lloyd's) operations are conducted. Markel Syndicate 3000 is managed by Markel Syndicate Management Limited (MSM). Our Lloyd's operations previously included Lloyd's Syndicate 1400. Business previously written by Alterra on Lloyd's Syndicate 1400 is now being written on Markel Syndicate 3000 and through early 2016, MSM managed the run-off of Lloyd's Syndicate 1400. Markel Capital and MIICL are headquartered in London, England and have offices across the United Kingdom, Europe, Canada, Latin America, Asia Pacific and the Middle East through which we are able to offer insurance and reinsurance. The London insurance market produced approximately $68 billion of gross written premium in 2014.(2) In 2014, the United Kingdom non-life insurance market was the second largest in Europe and fourth largest in the world.(3) In 2014, gross premium written through Lloyd's syndicates generated roughly 61% of the London market's international insurance business,(2) making Lloyd's the world's largest commercial surplus lines insurer(1) and sixth largest reinsurer.(4) Corporate capital providers often provide a majority of a syndicate's capacity and also generally own or control the syndicate's managing agent. This structure permits the capital provider to exert greater influence on, and demand greater accountability for, underwriting results. In 2014, corporate capital providers accounted for approximately 89% of total underwriting capacity in Lloyd's.(5)  

In Latin America, we provide reinsurance through MIICL, using our representative office in Bogota, Colombia, and our service company in Buenos Aires, Argentina; through Markel Resseguradora do Brasil S.A. (Markel Brazil), our reinsurance company in Rio de Janeiro, Brazil; and through Markel Syndicate 3000, using Lloyd's admitted status in Rio de Janeiro. Additionally, MIICL and Markel Syndicate 3000 are able to offer reinsurance in a number of Latin American countries through offices outside of Latin America.

In Bermuda, we write business in the worldwide insurance and reinsurance markets. Bermuda's share of the global reinsurance market was approximately 8% in 2013.(6) We conduct our Bermuda operations through Markel Bermuda Limited (Markel Bermuda), which is registered as a Class 4 insurer and Class C long-term insurer under the insurance laws of Bermuda.

Our reinsurance operations, which include our operations based in the United States, the United Kingdom, Latin America and Bermuda, as described above, made us the 35th largest reinsurer in 2014, as measured by worldwide gross reinsurance premium writings.(4)  



(1)  U.S. Surplus Lines Segment Review Special Report, A.M. Best (August 27, 2015).
(2)  London Company Market Statistics Report, International Underwriting Association (October 2015).
(3)  Swiss Re Sigma (April 2015).
(4)  Global Reinsurance Segment Review Special Report, A.M. Best (September 2, 2015).
(5)  Lloyd's Annual Report 2014.
(6) Bermuda Insurance Market Report 2014, Deloitte Limited (2014).

3


In 2015, 24% of consolidated gross premium writings related to foreign risks (i.e., coverage for risks located outside of the United States), of which 37% were from the United Kingdom and 10% were from Canada. In 2014, 27% of our premium writings related to foreign risks, of which 34% were from the United Kingdom and 10% were from Canada. In 2013, 25% of our premium writings related to foreign risks, of which 25% were from the United Kingdom and 13% were from Canada. In each of these years, there was no other individual foreign country from which premium writings were material. Premium writings are attributed to individual countries based upon location of risk.

Most of our business is placed through insurance and reinsurance brokers. Some of our insurance business is also placed through managing general agents. We seek to develop and capitalize on relationships with insurance and reinsurance brokers, insurance and reinsurance companies, large global corporations and financial intermediaries to develop and underwrite business. A significant volume of premium for the property and casualty insurance and reinsurance industry is produced through a small number of large insurance and reinsurance brokers. During the years ended December 31, 2015, 2014 and 2013, the top three independent brokers accounted for approximately 27%, 28% and 24%, respectively, of our gross premiums written.

Competition


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

Few barriers exist to prevent insurers and reinsurers from entering our markets of the property and casualty industry. Market conditions and capital capacity influence the degree of competition at any point in time. Periods of intense competition, which typically include broader coverage terms, lower prices and excess underwriting capacity, are referred to as a "soft market." A favorable insurance market is commonly referred to as a "hard market" and is characterized by stricter coverage terms, higher prices and lower underwriting capacity. During soft markets, unfavorable conditions exist due in part to what many perceive as excessive amounts of capital in the industry. In an attempt to use their capital, many insurance companies seek to write additional premiums without appropriate regard for ultimate profitability, and standard insurance companies are more willing to write specialty coverages. The opposite is typically true during hard markets. Historically, the performance of the property and casualty reinsurance and insurance industries has tended to fluctuate in cyclical periods of price competition and excess underwriting capacity, followed by periods of high premium rates and shortages of underwriting capacity. This cyclical market pattern can be more pronounced in the specialty insurance and reinsurance markets in which we compete than the standard insurance market.

We experienced soft insurance market conditions, including price deterioration in virtually all of our product lines, starting in the mid-2000s. Beginning in 2012, prices stabilized and we generally saw low to mid-single digit favorable rate changes in many of our product lines in the following years as market conditions improved and revenues, gross receipts and payrolls of our insureds were favorably impacted by improving economic conditions. We have continued to see small price increases across many of our product lines during 2015. However, beginning in 2013 and continuing through 2015, we have experienced softening prices across most of our property product lines, as well as on our marine and energy lines. Our large account business is also subject to more pricing pressure. Despite stabilization of prices on certain product lines during the last three years, we still consider the overall property and casualty insurance market to be soft. We routinely review the pricing of our major product lines and will continue to pursue price increases for most product lines in 2016, when possible. However, 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 may vary when we alter our product offerings to maintain or improve underwriting profitability.



4


Underwriting Philosophy


By focusing on market niches where we have underwriting expertise, we seek to earn consistent underwriting profits, which are a key component of our strategy. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. We use underwriting profit or loss as a basis for evaluating our underwriting performance. To facilitate this strategy, we have a product line leadership group that has primary responsibility for both developing and maintaining underwriting and pricing guidelines on our existing products and new product development. The product line leadership group is under the direction of our Chief Underwriting Officer.

The combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums. A combined ratio less than 100% indicates an underwriting profit, while a combined ratio greater than 100% reflects an underwriting loss. In 2015, our combined ratio was 89%. See Management's Discussion & Analysis of Financial Condition and Results of Operations for further discussion of our underwriting results.

The following graph compares our combined ratio to the property and casualty industry's combined ratio for the past five years.


Underwriting Segments

 

We monitor and report our ongoing underwriting operations in the following three segments: U.S. Insurance, International Insurance and Reinsurance. In determining how to aggregate and monitor our underwriting results, management considers many factors, including the geographic location and regulatory environment of the insurance entity underwriting the risk, the nature of the insurance product sold, the type of account written and the type of customer served.

The U.S. Insurance segment includes all direct business and facultative placements written by our insurance subsidiaries domiciled in the United States. The International Insurance segment includes all direct business and facultative placements written by our insurance subsidiaries domiciled outside of the United States, including our syndicate at Lloyd's. The Reinsurance segment includes all treaty reinsurance written across the Company. Results for lines of business discontinued prior to, or in conjunction with, acquisitions, are reported in the Other Insurance (Discontinued Lines) segment. The lines were discontinued because we believed some aspect of the product, such as risk profile or competitive environment, would not allow us to earn consistent underwriting profits. Results attributable to the run-off of life and annuity reinsurance business are included in our Other Insurance (Discontinued Lines) segment.

See note 19 of the notes to consolidated financial statements for additional segment reporting disclosures.


5


Markel Corporation
2015 Consolidated Gross Premium Volume ($4.6 billion)

U.S. Insurance Segment

Our U.S. Insurance segment includes both hard-to-place risks written outside of the standard market on an excess and surplus lines basis and unique and hard-to-place risks that must be written on an admitted basis due to marketing and regulatory reasons. Business in this segment is written through our Wholesale, Specialty and Global Insurance divisions.

Wholesale Division
The Wholesale division writes commercial risks, primarily on an excess and surplus lines basis. The E&S market focuses on hard-to-place risks and loss exposures that generally cannot be written in the standard market. United States insurance regulations generally require an E&S account to be declined by admitted carriers before an E&S company may write the business. E&S eligibility allows our insurance subsidiaries to underwrite unique loss exposures with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more restrictive and more expensive than coverages in the standard market.

6



Our E&S business is written through two distribution channels, professional surplus lines general agents who have limited quoting and binding authority and wholesale brokers. The majority of our E&S business produced by this segment is written on a surplus lines basis through Essex or Evanston. Essex is authorized to write business in 49 states and the District of Columbia and Guam. Evanston is authorized to write business in all 50 states and the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands.

Specialty Division
The Specialty division writes program insurance and other specialty coverages for well-defined niche markets, primarily on an admitted basis. Our business written in the admitted market focuses on risks that, although unique and hard-to-place in the standard market, must remain with an admitted insurance company for marketing and regulatory reasons. Hard-to-place risks written in the admitted market cover insureds engaged in similar, but highly specialized activities who require a total insurance program not otherwise available from standard insurers or insurance products that are overlooked by large admitted carriers. The admitted market is subject to more state regulation than the E&S market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans.

The majority of our business written in the Specialty division is written by retail insurance agents who have very limited or no underwriting authority. Agents are carefully selected and agency business is controlled through regular audits and pre- approvals. Certain products and programs are marketed directly to consumers or distributed through wholesale producers. Personal lines coverages included in this segment are marketed directly to the consumer using direct mail, internet and telephone promotions, as well as relationships with various motorcycle and boat manufacturers, dealers and associations.

The majority of the business produced by this division is written either through MIC, MAIC, FCIC or Essentia. MIC, MAIC and Essentia are licensed to write property and casualty insurance in all 50 states and the District of Columbia. MAIC is also licensed to write property and casualty insurance in Puerto Rico. Essentia specializes in coverage for classic cars and boats. FCIC is currently licensed in 28 states and specializes in workers' compensation coverage.

Global Insurance Division
The Global Insurance division writes risks outside of the standard market on both an admitted and non-admitted basis. The portion of Global Insurance division business written by our U.S. insurance subsidiaries is included in this segment, and the remainder is included in the International Insurance segment. U.S. business produced by this division is primarily written on either Evanston or AAIC. AAIC is licensed to write property and casualty insurance in all 50 states and the District of Columbia.

Our U.S. Insurance segment reported gross premium volume of $2.5 billion, earned premiums of $2.1 billion and an underwriting profit of $238.2 million in 2015.


7


U.S. Insurance Segment
2015 Gross Premium Volume ($2.5 billion)


Product offerings within the U.S. Insurance segment fall within the following major product groupings:
General Liability
Professional Liability
Property
Personal Lines
Programs
Workers' Compensation
Other Product Lines

General Liability product offerings include a variety of primary and excess liability coverages targeting apartments and office buildings, retail stores and contractors, as well as business in the life sciences, energy, medical, recreational and hospitality industries. Specific products include the following:
excess and umbrella products, which provide coverage over approved underlying insurance carriers on either an occurrence or claims-made basis;
products liability products, which provide coverage on either an occurrence or claims-made basis to manufacturers, distributors, importers and re-packagers of manufactured products;
environmental products, which include environmental consultants' professional liability, contractors' pollution liability and site-specific environmental impairment liability coverages; and
casualty facultative reinsurance written for individual casualty risks focusing on general liability, products liability, automobile liability and certain classes of miscellaneous professional liability and targeting classes which include low frequency, high severity general liability risks.

Professional liability coverages include unique solutions for highly specialized professions, including architects and engineers, lawyers, agents and brokers, service technicians and computer consultants. We offer claims-made medical malpractice coverage for doctors and dentists; claims-made professional liability coverage to individual healthcare providers such as therapists, pharmacists, physician assistants and nurse anesthetists; and coverages for medical facilities and other allied healthcare risks such as clinics, laboratories, medical spas, home health agencies, small hospitals, pharmacies and senior living facilities. Other professional liability coverages include errors and omissions, union liability, executive liability for financial institutions and Fortune 1000 companies, and management liability. Our management liability coverages, which can be bundled with other coverages or written on a standalone basis, include employment practices liability, directors' and officers' liability and fiduciary liability coverages. Additionally, we offer a data privacy and security product, which provides coverage for data breach and privacy liability, data breach loss to insureds and electronic media coverage.

8



Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess basis. Catastrophe-exposed property risks are typically larger and are lower frequency and higher severity in nature than more standard property risks. Our property risks range from small, single-location accounts to large, multi-state, multi-location accounts. Other types of property products include:
inland marine products, which provide a number of specialty coverages for risks such as motor truck cargo coverage for damage to third party cargo while in transit, warehouseman's legal liability coverage for damage to third party goods in storage, contractor's equipment coverage for first party property damage, and builder's risk coverage; and
railroad-related products, which provide first party coverages for short-line and regional railroads, scenic and tourist railroads, commuter and light rail trains and railroad equipment.

Personal lines products provide first and third party coverages for classic cars, motorcycles and a variety of personal watercraft, including vintage boats, high performance boats and yachts and recreational vehicles, such as motorcycles, snowmobiles and ATVs. Based on the seasonal nature of much of our personal lines business, we generally will experience higher claims activity during the second and third quarters of the year. Additionally, property coverages are offered for mobile homes, dwellings and homeowners that do not qualify for standard homeowner's coverage. Other products offered include special event protection, supplemental natural disaster coverage, renters' protection coverage and excess flood coverage.

Program business included in this segment is offered on a standalone or package basis and generally targets specialized commercial markets and customer groups. Targeted groups include youth and recreation oriented organizations and camps, child care operators, social service organizations, museums and historic homes, performing arts organizations, senior living facilities and wineries. Other program business written in this segment includes:
general agent programs that use managing general agents to offer single source admitted and non-admitted programs for a specific class or line of business;
first and third party coverages for medical transport, small fishing ventures, charters, utility boats and boat rentals; and
property and liability coverages for farms and animal boarding, breeding and training facilities.

Workers' compensation products provide wage replacement and medical benefits to employees injured in the course of employment and target main-street, service and artisan contractor businesses, retail stores and restaurants.

Other product lines within the U.S. Insurance segment include:
ocean marine products, which provide general liability, professional liability, property and cargo coverages for marine artisan contractors, boat dealers and marina owners including hull physical damage, protection and indemnity and third party property coverages for ocean cargo; and
coverages for equine-related risks, such as horse mortality, theft, infertility, transit and specified perils.

9



International Insurance Segment

Our International Insurance segment writes risks that are characterized by either the unique nature of the exposure or the high limits of insurance coverage required by the insured. Business included in this segment is produced through our Markel International and Global Insurance divisions.


Markel International Division
The Markel International division writes business worldwide from our London-based platform, including Markel Syndicate 3000, through which our Lloyd's operations are conducted, and MIICL. The London insurance market is known for its ability to provide innovative, tailored coverage and capacity for unique and hard-to-place risks. Hard-to-place risks in the London market are generally distinguishable from standard risks due to the complexity or significant size of the risk. It is primarily a broker market, which means that insurance brokers bring most of the business to the market. Risks written in the Markel International division are written on either a direct basis or a subscription basis, the latter of which means that loss exposures brought into the market are typically insured by more than one insurance company or Lloyd's syndicate, often due to the high limits of insurance coverage required. When we write business in the subscription market, we prefer to participate as lead underwriter in order to control underwriting terms, policy conditions and claims handling.

Global Insurance Division
Global Insurance division business written by our non-U.S. insurance subsidiaries, which primarily targets Fortune 1000 accounts, is included in the International Insurance segment. The Global Insurance division is comprised of business written through Markel Bermuda and MIICL.

In 2015, 66% of gross premium written in the International Insurance segment related to foreign risks, of which 40% was from the United Kingdom and 13% was from Canada. In 2014, 67% of gross premium written in the International Insurance segment related to foreign risks, of which 37% was from the United Kingdom and 14% was from Canada. In 2013, 68% of gross premium written in the International Insurance segment related to foreign risks, of which 24% was from the United Kingdom and 17% was from Canada. In each of these years, there was no other individual foreign country from which premium writings were material.

Our International Insurance segment reported gross premium volume of $1.2 billion, earned premiums of $879.4 million and an underwriting profit of $125.7 million in 2015.

10



International Insurance Segment
2015 Gross Premium Volume ($1.2 billion)


Product offerings within the International segment fall within the following major product groupings:
Professional Liability
Marine and Energy
General Liability
Property
Other Product Lines

Professional liability products are written on a worldwide basis and include professional indemnity, directors' and officers' liability, errors and omissions, employment practices liability and intellectual property. Our target industries include U.S. and international public companies, as well as large professional firms, including lawyers, financial institutions, accountants, consultants, and architects and engineers.

Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks. The cargo account is an international transit-based book covering many types of cargo. Energy coverage includes all aspects of oil and gas activities. The hull account covers physical damage to ocean-going tonnage, yachts and mortgagees' interests. Liability coverage provides for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators and ship repairers. The war account covers the hulls of ships and aircraft, and other related interests, against war and associated perils. Terrorism coverage provides for property damage and business interruption related to political violence including war and civil war.

General liability products are written on a worldwide basis and include general and products liability coverages targeting consultants, construction professionals, financial service professionals, professional practices, social welfare organizations and medical products. We also write excess liability coverage, which includes excess product liability, excess medical malpractice and excess product recall insurance in the following industries: healthcare, pharmaceutical, medical products, life sciences, transportation, heavy industrial and energy. 

Property products target a wide range of insureds, providing coverage ranging from specie risks and fire to catastrophe perils such as earthquake and windstorm. Business is written primarily on an open market basis for direct and facultative risks targeting Fortune 1000 and large, multi-national companies on a worldwide basis. We also provide property coverage for small to medium-sized commercial risks on both a stand-alone and package basis. The specie account includes coverage for fine art on exhibition and in private collections, securities, bullion, precious metals, cash in transit and jewelry.


11


Other product lines within the International Insurance segment include:
crime coverage primarily targeting financial institutions and providing protection for bankers' blanket bond, computer crime and commercial fidelity;
contingency coverage including event cancellation, non-appearance and prize indemnity;
accident and health coverage targeting affinity groups and schemes, high value and high risks accounts and sports groups;
coverage for equine-related risks such as horse mortality, theft, infertility, transit and specified perils;
specialty coverages include mortality risks for farms, zoos, animal theme parks and safari parks; and
short-term trade credit coverage for commercial risks, including insolvency and protracted default as well as political risks coverage in conjunction with commercial risks for currency inconvertibility, government action, import and export license cancellation, public buyer default and war.

Reinsurance Segment

Our Reinsurance segment includes property and casualty treaty reinsurance products offered to other insurance and reinsurance companies globally through the broker market. Our treaty reinsurance offerings include both quota share and excess of loss reinsurance and are typically written on a participation basis, which means each reinsurer shares proportionally in the business ceded under the reinsurance treaty written. Our reinsurance products may include features such as contractual provisions that require our cedent to share in a portion of losses resulting from ceded risks, may require payment of additional premium amounts if we incur greater losses than those projected at the time of the execution of the contract, may require reinstatement premium to restore the coverage after there has been a loss occurrence or may provide for experience refunds if the losses we incur are less than those projected at the time the contract is executed. Our reinsurance product offerings are underwritten by our Global Reinsurance division and our Markel International division. The Global Reinsurance division operates from platforms in the United States and Bermuda. Business written in the Global Reinsurance division is produced through Markel Global Re and Markel Bermuda. Markel Global Re is licensed or accredited to provide reinsurance in all 50 states and the District of Columbia. Markel Bermuda conducts its reinsurance operations from Bermuda. The Markel International division conducts its reinsurance operations from its London-based platform, as described above, and from its platform in Latin America, which includes Markel Brazil.

In 2015, 36% of gross premium written in the Reinsurance segment related to foreign risks, of which 32% was from the United Kingdom. In 2014, 43% of gross premium written in the Reinsurance segment related to foreign risks, of which 31% was from the United Kingdom. In 2013, 42% of gross premium written in the Reinsurance segment related to foreign risks, of which 27% was from the United Kingdom. In each of these years, there was no other individual foreign country from which premium writings were material.


12


Our Reinsurance segment reported gross premium volume of $1.0 billion, earned premiums of $838.5 million and an underwriting profit of $86.3 million in 2015.

Reinsurance Segment
2015 Gross Premium Volume ($1.0 billion)
Product offerings within the Reinsurance segment fall within the following major product groupings:
Property
Casualty
Other

Property treaty products are offered on an excess of loss and quota share basis for catastrophe, per risk and retrocessional exposures worldwide. Our catastrophe exposures are generally written on an excess of loss basis and target both personal and commercial lines of business providing coverage for losses from natural disasters, including hurricanes, wind storms and earthquakes. We also reinsure individual property risks such as buildings, structures, equipment and contents and provide coverage for both personal lines and commercial property exposures. Our retrocessional products provide coverage for all types of underlying exposures and geographic zones. A significant portion of the property treaty business covers United States exposures, with the remainder coming from international property exposures.

Our casualty treaty reinsurance programs are written on a quota share and excess of loss basis and include general liability, professional liability, auto, workers' compensation, medical malpractice and environmental impairment liability. General liability reinsurance includes umbrella and excess casualty products that are written worldwide. Our professional liability reinsurance programs are offered worldwide and consist of directors and officers liability, including publicly traded, private, and non-profit companies in both commercial and financial institution arenas; lawyers errors and omissions for small, medium and large-sized law firms; accountants errors and omissions for small and medium-sized firms; technology errors and omissions and cyber liability focusing on network security and privacy exposures. Auto reinsurance treaty products include commercial and non standard personal auto exposures predominantly in the United States. Our workers' compensation business includes catastrophe-exposed workers' compensation business. Medical malpractice reinsurance products are offered in the United States and include quota share, excess of loss and stop loss coverage for physician and surgeon medical malpractice specialty writers, member-owned hospital writers focusing on small-to-medium size facilities, national hospital writers focused on primary or lower excess layers on medium size facilities and long-term care writers focused on privately held, religious based or state sponsored non-profit programs. Environmental treaty reinsurance provides coverage for pollution legal liability, contractors pollution and professional liability exposures on both a nationwide and regional basis within the United States.

13



Other treaty reinsurance products offered in the Reinsurance segment include:
aviation, which includes commercial airline hull and liability coverage as well as general aviation for risks worldwide;
accident and health catastrophe coverage for personal accident, life, medical and workers' compensation;
structured and whole turnover credit, political risk, mortgage and contract and commercial surety reinsurance programs covering worldwide exposures;
onshore and offshore marine and energy risks on a worldwide basis, including hull, cargo and liability;
agriculture reinsurance for Multi-Peril Crop Insurance, hail and related exposures, covering risks located in the United States and Canada; and
public entity reinsurance products, which offer customized programs for government risk solutions, including counties, municipalities, schools, public housing authorities and special districts (e.g. water, sewer, parks) located in the United States. Types of coverage include general liability, environmental impairment liability, workers' compensation and errors and omissions.

Ceded Reinsurance


We purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. In a reinsurance transaction, an insurance company transfers, or cedes, all or part of its exposure in return for a portion of the premium. In a retrocession transaction, a reinsurer transfers, or cedes, all or part of its exposure in return for a portion of the premium. We purchase catastrophe reinsurance coverage for our catastrophe-exposed policies, and we seek to manage our exposures under this coverage so that no exposure to any one reinsurer is material to our ongoing business. Net retention of gross premium volume was 82% in 2015 and 2014. We do not purchase or sell finite reinsurance products or use other structures that would have the effect of discounting loss reserves.

Our ceded reinsurance and retrocessional contracts do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. We attempt to minimize credit exposure to reinsurers through adherence to internal ceded reinsurance guidelines. To participate in our reinsurance program, prospective companies generally must: (i) maintain an A.M. Best Company (Best) or Standard & Poor's (S&P) rating of "A" (excellent) or better; (ii) maintain minimum capital and surplus of $500 million and (iii) provide collateral for recoverables in excess of an individually established amount. In addition, certain foreign reinsurers for our United States insurance operations must provide collateral equal to 100% of recoverables, with the exception of reinsurers who have been granted authorized status by an insurance company's state of domicile. Our credit exposure to other Lloyd's syndicates is managed through individual and aggregate exposure thresholds.

When appropriate, we pursue reinsurance commutations that involve the termination of ceded reinsurance and retrocessional contracts. Our commutation strategy related to ceded reinsurance and retrocessional contracts is to reduce credit exposure and eliminate administrative expenses associated with the run-off of ceded reinsurance placed with certain reinsurers.

The following table displays balances recoverable from our ten largest reinsurers by group at December 31, 2015. The contractual obligations under reinsurance and retrocessional contracts are typically with individual subsidiaries of the group or syndicates at Lloyd's and are not typically guaranteed by other group members or syndicates at Lloyd's. These ten reinsurance groups represent approximately 68% of our $2.1 billion reinsurance recoverable balance before considering allowances for bad debts.

14


Reinsurers
A.M. Best
Rating
 
Reinsurance
Recoverable
 
 
 
(dollars in
thousands)
Fairfax Financial Group
A
 
$
361,170

Munich Re Group
A+
 
209,772

AXIS Capital Holdings Limited
A
 
162,493

Alleghany Corporation
A
 
147,394

RenaissanceRe Holdings Ltd
A
 
127,810

Partner Re Group
A
 
113,599

Lloyd's of London
A
 
111,313

Swiss Re Group
A+
 
85,725

XL Capital Group
A
 
71,846

Arch Insurance Group
A
 
64,509

Reinsurance recoverable on paid and unpaid losses for ten largest reinsurers
 
1,455,631

Total reinsurance recoverable on paid and unpaid losses
 
$
2,126,138


Reinsurance recoverable balances in the preceding table are shown before consideration of balances owed to reinsurers and any potential rights of offset, any collateral held by us and allowances for bad debts.

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

See note 15 of the notes to consolidated financial statements and Management's Discussion & Analysis of Financial Condition and Results of Operations for additional information about our ceded reinsurance programs and exposures.

Investments

 

Our business strategy recognizes the importance of both consistent underwriting and operating profits and superior investment returns to build shareholder value. We rely on sound underwriting practices to produce investable funds while minimizing underwriting risk. The majority of our investable assets come from premiums paid by policyholders. Policyholder funds are invested predominantly in high-quality corporate, government and municipal bonds with relatively short durations. The balance, comprised of shareholder funds, is available to be invested in equity securities, which over the long run, have produced higher returns relative to fixed maturity investments. When 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 hold these investments over the long term. Substantially all of our investment portfolio is managed by company employees.

15



We evaluate our investment performance by analyzing taxable equivalent total investment return. Taxable equivalent total investment return includes items that impact net income, such as coupon interest on fixed maturities, dividends on equity securities and realized investment gains or losses, as well as changes in unrealized gains or losses, which do not impact net income. Certain items that are included in net investment income have been excluded from the calculation of taxable equivalent total investment return, such as amortization and accretion of premiums and discounts on our fixed maturity portfolio, to provide a comparable basis for measuring our investment return against industry investment returns. The calculation of taxable equivalent total investment return also includes the current tax benefit associated with income on certain investments that is either taxed at a lower rate than the statutory income tax rate or is not fully included in federal taxable income. We believe the taxable equivalent total investment return is a better reflection of the economics of our decision to invest in certain asset classes. See "Investing Results" in Management's Discussion & Analysis of Financial Condition and Results of Operations for further detail regarding the components of taxable equivalent total investment return. In 2015, net investment income was $353.2 million and net realized investment gains were $106.5 million. During the year ended December 31, 2015, net unrealized gains on investments decreased by $457.6 million. We do not lower the quality of our investment portfolio in order to enhance or maintain yields. We focus on long-term total investment return, understanding that the level of realized and unrealized investment gains or losses may vary from one period to the next.

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

Annual Taxable Equivalent Total Investment Returns

 
 
 
 
 
 
 
 
 
 
 
Weighted
Average
Five-Year
Annual
Return
 
Weighted
Average
Ten-Year
Annual
Return
 
Years Ended December 31,
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
Equities
(2.5
)%
 
18.6
%
 
33.3
%
 
19.6
%
 
3.8
%
 
13.7
%
 
11.2
%
Fixed maturities (1)
1.6
 %
 
6.5
%
 
0.0
%
 
5.1
%
 
7.6
%
 
3.8
%
 
4.3
%
Total portfolio, before foreign currency effect
0.5
 %
 
8.9
%
 
6.9
%
 
8.6
%
 
6.7
%
 
5.9
%
 
5.7
%
Total portfolio
(0.7
)%
 
7.4
%
 
6.8
%
 
9.0
%
 
6.5
%
 
5.2
%
 
5.3
%
Invested assets, end of year (in millions)
$
18,181

 
$
18,638

 
$
17,612

 
$
9,333

 
$
8,728

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

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

Our fixed maturity portfolio has an average rating of "AA," with approximately 97% rated "A" or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturities that are unrated or rated below investment grade. At December 31, 2015, less than 1% 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.

At December 31, 2015, we held fixed maturities of $29.8 million, or less than 1% of invested assets, from sovereign and non-sovereign issuers domiciled in Portugal, Ireland, Italy, Greece, Spain or Brazil and $1.7 billion, or 9% of invested assets, from sovereign and non-sovereign issuers domiciled in other European countries, including supranationals. At December 31, 2014, we held fixed maturities of $41.3 million, or less than 1% of invested assets, from sovereign and non-sovereign issuers domiciled in Portugal, Ireland, Italy, Greece, Spain or Brazil and $1.9 billion, or 10% of invested assets, from sovereign and non-sovereign issuers domiciled in other European countries including supranationals.


16


The following chart presents our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2015.

2015 Credit Quality of Fixed Maturity Portfolio ($9.4 billion)


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

Markel Ventures

 

Through our wholly-owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own interests in various industrial and service businesses that operate outside of the specialty insurance marketplace. These businesses are viewed by management as separate and distinct from our insurance operations. Local management teams oversee the day-to-day operations of these companies, while strategic decisions are made in conjunction with members of our executive management team.

Our strategy in making these 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 Markel Ventures operations are comprised of a diverse portfolio of businesses from various industries, including manufacturers of transportation and industrial equipment, and providers of healthcare, housing, data and consulting services. While each of the businesses in our Markel Ventures operations are operated independently from one another, we aggregate their financial results into two industry groups: manufacturing and non-manufacturing.

In 2015, our Markel Ventures operations reported revenues of $1.0 billion, net income to shareholders of $11.0 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $91.3 million. We use Markel Ventures EBITDA as an operating performance measure in conjunction with revenues and net income. See "Markel Ventures Operations" in Management's Discussion & Analysis of Financial Condition and Results of Operations for more information on EBITDA.

See note 20 of the notes to consolidated financial statements and Management's Discussion & Analysis of Financial Condition and Results of Operations for additional information about our Markel Ventures operations.


17


Markel CATCo Investment Management


In December 2015, we 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. Following the acquisition, we are operating this business through Markel CATCo Investment Management Ltd. (Markel CATCo IM). Beginning January 1, 2016, Markel CATCo IM will receive management fees for its investment and insurance management services, as well as performance fees based on the annual performance of the investment funds that it manages. In 2016, assets under management of Markel CATCo IM are expected to be in excess of $3 billion.

Shareholder Value
 

Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. More specifically, we measure financial success by our ability to compound growth in book value per share at a high rate of return over a long period of time. To mitigate the effects of short-term volatility, we generally use five-year time periods to measure ourselves. We believe that growth in book value per share is the most comprehensive measure of our success because it includes all underwriting, operating and investing results. For the year ended December 31, 2015, book value per share increased 3% primarily due to net income to shareholders of $582.8 million, partially offset by a $320.5 million decrease in net unrealized gains on investments, net of taxes. For the year ended December 31, 2014, book value per share increased 14% primarily due to net income to shareholders of $321.2 million and a $661.7 million increase in net unrealized gains on investments, net of taxes. Over the past five years, we have grown book value per share at a compound annual rate of 11% to $561.23 per share.

The following graph presents book value per share for the past five years as of December 31.

Book Value Per Share



18


Regulatory Environment

 

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

United States Insurance Regulation

Overview. Our U.S. insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business. Each state has its own regulatory authority for insurance that is generally responsible for the direct regulation of the business of insurance conducted in that state. In addition, the National Association of Insurance Commissioners (NAIC), comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that in turn most states adopt. While the U.S. federal government and its regulatory agencies generally do not directly regulate the business of insurance, there have been recent federal initiatives that impact the business of insurance.

State Insurance Regulation. In the United States, authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state commissioner heading a regulatory body responsible for the business of insurance. Through this authority, state regulatory authorities have broad regulatory, supervisory and administrative powers relating to solvency standards; the licensing of insurers and their agents; the approval of forms and policies used; the nature of, and limitations on, insurers' investments; the form and content of annual statements and other reports on the financial condition of insurers; and the establishment of loss reserves. Our U.S. insurance subsidiaries that operate on an admitted basis are typically subject to regulatory rate and form review, while our U.S. excess and surplus lines insurance subsidiaries generally operate free of rate and form regulation.

Holding Company Statutes. In addition to regulatory supervision of our domestic insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Typically, such statutes require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition, material transactions with affiliates and general business operations. In addition, these statutes also require approval of changes in control of an insurer or an insurance holding company. Generally, control for these purposes is defined as ownership or voting power of 10% or more of a company's voting shares. Additional requirements include group-level reporting, submission of an annual enterprise risk report by a regulated insurance company's ultimate controlling person and information regarding an insurer's non-insurer affiliates.

Risk Based Capital Requirements. The NAIC uses a risk based capital formula that is designed to measure the capital of an insurer taking into account the company's investments and products. These requirements provide a formula which, for property and casualty insurance companies, establishes capital thresholds for four categories of risk: asset risk, insurance risk, interest rate risk and business risk. At December 31, 2015, the capital and surplus of each of our United States insurance subsidiaries was above the minimum regulatory thresholds.

Own Risk and Solvency Assessment. We must submit annually to the Illinois Department of Insurance our lead state insurance regulator, an Own Risk and Solvency Assessment Summary Report (ORSA). The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks.

Excess and Surplus Lines. The regulation of our U.S. insurance subsidiaries' excess and surplus lines insurance business differs significantly from the regulation of our admitted business. Our surplus lines subsidiaries are subject to the surplus lines regulation and reporting requirements of the jurisdictions in which they are eligible to write surplus lines insurance. Although the surplus lines business is generally less regulated than admitted business, regulations apply to surplus lines placements under the laws of every state.

Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Corporation. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. At December 31, 2015, our United States insurance subsidiaries could pay up to $354.0 million during the following 12 months under the ordinary dividend regulations.


19


Trade Practices. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, data security, policyholder services, claims management, anti-fraud controls and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.

Investment Regulation. Investments by our domestic insurance companies must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications.

The Terrorism Risk Insurance Act. The Terrorism Risk Insurance Act of 2002, as amended (TRIA), has established a federal program that provides for a system of shared public and private compensation for certain insured losses resulting from acts of terrorism. In early 2015 the program was extended for another six years, and is now scheduled to expire in 2020. In addition, the most recent extension of TRIA (1) raises the threshold for the program to go into effect (the triggering event) from $100 million in losses to $200 million, in $20 million increments starting in January 2016 and (2) increases the amount that insurers must cover as a whole through co-payments and deductibles, which is known in the industry as the aggregate retention. The aggregate retention amount will rise by $2 billion a year to $37.5 billion from $27.5 billion, starting in 2016. TRIA is applicable to almost all commercial lines of property and casualty insurance but excludes commercial auto, burglary and theft, surety, professional liability and farm owners' multi-peril insurance. Insurers with direct commercial property and casualty insurance exposure in the United States are required to participate in the program and make available coverage for certified acts of terrorism. Federal participation will be triggered under TRIA when the Secretary of Treasury certifies an act of terrorism.

Federal Regulation. The federal government and its regulatory agencies generally do not directly regulate the business of insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act enacted in 2010, may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the United States in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the United States financial stability in the event of the insurer's material financial distress or failure. We have not been so designated.

United Kingdom Insurance Regulation

Under the Financial Services and Markets Act 2000 (FSMA), it is unlawful to carry on insurance business in the United Kingdom without permission to do so from the relevant regulators. Before April 1, 2013, the Financial Services Authority (FSA) was responsible for supervising all securities, banking and insurance business in the United Kingdom. With the enactment of the Financial Services Act 2012 (which amended FSMA), the FSA was replaced by two regulators: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). An independent Financial Policy Committee (FPC) at the Bank of England supervises the financial services sector at a macro level, responding to sectoral issues that could threaten economic and financial stability.

Both MIICL and MSM, our Lloyd's managing agent, are authorized by the PRA and regulated by both the PRA and the FCA. In addition, Abbey Protection Group Limited is an FCA-authorized insurance intermediary that produces insurance for both MIICL and third party insurance carriers in the UK.

The PRA is a subsidiary of the Bank of England and is responsible for the prudential regulation and supervision of banks, building societies, credit unions, major investment firms and insurers, including the Society of Lloyd's and managing agents that participate in the Lloyd's market. The two primary statutory objectives of the PRA are to promote the safety and soundness of the firms it regulates and, specific to insurers, to contribute to securing an appropriate degree of protection for those who are, or may become, policyholders. In 2014 the PRA was given a secondary objective which is to facilitate effective competition. The FCA, which is separate from the Bank of England, is accountable to HM Treasury and ultimately the United Kingdom Parliament. The FCA supervises the day-to-day conduct of insurance firms and other authorized firms operating in the United Kingdom, including those participating in the Lloyd's market and UK insurance intermediaries. The overarching strategic objective of the FCA is to ensure that the relevant markets function well. The FCA also has three operational objectives: securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the UK financial system, and promoting effective competition in the interests of consumers.

20



The PRA assesses the insurance firms it regulates on a continuous cycle, requiring firms to submit sufficient data of appropriate quality to support their judgments about key risks, through meetings of directors, officers and other employees with PRA supervisors. The PRA also oversees compliance with minimum solvency and capital requirements under the Solvency II Directive (Solvency II) and imposes dividend restrictions. Both the PRA and the FCA oversee compliance with risk assessment reviews, restrictions governing the appointment of key officers, restrictions governing controlling ownership interests and various other requirements. In addition, both the PRA and FCA have arrangements with Lloyd's for cooperation on supervision and enforcement of the Lloyd's market.

MIICL must provide advance notice to the PRA for any dividends from MIICL and any transaction or proposed transaction with a connected or related person. MSM is required to satisfy the solvency requirements of Lloyd's. In addition, our United Kingdom subsidiaries must comply with the United Kingdom Companies Act of 2006, which provides that dividends may only be paid out of profits available for that purpose.

In addition, under Solvency II, a new regulatory framework for the European insurance industry in place effective January 1, 2016, MIICL must give the PRA advance notice of any material intra-group transaction which Markel International Limited (the indirect parent of MIICL) or any of its subsidiaries intends to enter into with a group entity outside the European Economic Area and any material payment, including the payment of a dividend, other distribution or capital extraction which Markel International Limited or any of its subsidiaries intends to make to a group entity outside the European Economic Area.

Bermuda Insurance Regulation

The insurance and reinsurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Markel Bermuda is regulated by the BMA as a Class 4 general business and Class C long-term business insurer under the Insurance Act 1978 of Bermuda and its related regulations (Bermuda Insurance Act). The Bermuda Insurance Act imposes solvency and liquidity standards and auditing and reporting requirements on Markel Bermuda and grants to the BMA powers to supervise, investigate and intervene in the affairs of Bermuda insurance and reinsurance companies. Effective January 1, 2016, Bermuda's prudential framework for the supervision of insurance and reinsurance companies and groups was deemed to be fully equivalent to the regulatory standards applied to European insurance and reinsurance companies and groups under Solvency II. As a result, Bermuda will be considered by all European member states as applying an equivalent statutory insurance regime in accordance with the requirements of Solvency II with respect to reinsurance, group solvency calculations and group supervision. The equivalence recognition applies to Bermuda's commercial Class 3A, 3B, 4, Class C, Class D and Class E insurers and reinsurers and groups.

Markel Bermuda is subject to enhanced capital requirements in addition to minimum solvency and liquidity requirements. The enhanced capital requirement is determined by reference to a risk-based capital model that determines a control threshold for statutory capital and surplus by taking into account the risk characteristics of different aspects of the insurer's business. At December 31, 2015, Markel Bermuda satisfied both the enhanced capital requirements and the minimum solvency and liquidity requirements.

Under the Bermuda Insurance Act, Markel Bermuda is prohibited from paying or declaring dividends during a fiscal year if it is in breach of its enhanced capital requirement, solvency margin or minimum liquidity ratio or if the declaration or payment of the dividend would cause a breach of those requirements. If an insurer fails to meet its solvency margin or minimum liquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA. Further, Markel Bermuda is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus as set forth in its previous year's statutory balance sheet unless at least seven days before payment of those dividends it files with the BMA an affidavit stating that it will continue to meet its solvency margin and minimum liquidity ratio. Markel Bermuda must obtain the BMA's prior approval for a reduction by 15% or more of the total statutory capital as set forth in its previous year's financial statements. In addition, as a Class C long-term insurer, Markel Bermuda may not declare or pay a dividend to any person other than a policyholder unless the value of the assets in its long-term business fund, as certified by Markel Bermuda's approved actuary, exceeds the liabilities of its long-term business. The amount of the dividend cannot exceed the aggregate of that excess and any other funds legally available for the payment of the dividend. At December 31, 2015, Markel Bermuda could pay up to $491.5 million in dividends during the following 12 months without making any additional filings with the BMA.

Markel CATCo Re Ltd (Markel CATCo Re) is licensed as a Bermuda Class 3 reinsurance company and is subject to regulation and supervision of the BMA. See "Regulation of Markel CATCo" under "Other Regulation" below for more information about the regulation of Markel CATCo Re.

21



Other Insurance Jurisdictions

The European Union (E.U.) implemented Solvency II effective January 1, 2016. Solvency II replaces existing insurance directives and creates a pan-European, risk based solvency regime which affects all insurers and reinsurers throughout the E.U. The Solvency II regime is based on three pillars: financial requirements; governance and risk management requirements; and disclosure requirements. The European Commission has developed detailed rules that complement the high-level principles of Solvency II.

At present the United States is not recognized as Solvency II "equivalent." Therefore, MIICL has agreed on "other methods" with the PRA which includes the provision to the PRA of certain specified information regarding Markel Corporation and its insurance companies.

In addition, as a global provider of specialty insurance and reinsurance, our insurance subsidiaries must comply with various regulatory requirements in jurisdictions where they conduct business in addition to the jurisdictions in which they are domiciled. For example, MIICL and our Lloyd's operations must comply with applicable Latin America regulatory requirements in connection with our Latin American reinsurance operations. In addition to the regulatory requirements imposed by the jurisdictions in which an insurer or reinsurer is licensed, a reinsurer's business operations are affected by regulatory requirements governing credit for reinsurance in other jurisdictions in which its ceding companies are located. In general, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the liability for unearned premiums and loss reserves and loss expense reserves ceded to the reinsurer. Many jurisdictions also permit ceding companies to take credit on their statutory financial statements for reinsurance obtained from unlicensed or non-admitted reinsurers if certain prescribed security arrangements are made. As an example, Markel Bermuda currently is not licensed, accredited or approved in every jurisdiction where its reinsurance customers are domiciled. As a result, Markel Bermuda may be required to provide a letter of credit or other security arrangement for its reinsurance customers domiciled in those jurisdictions. In most U.S. states Markel Bermuda has obtained approval of a trust arrangement that satisfies the credit for reinsurance requirements for Markel Bermuda’s customers domiciled in those states.

The insurance and reinsurance industry in Brazil is regulated by the Conselho Nacional de Seguros Privados (CNSP) and supervised by the Superintendência de Seguros Privados (SUSEP) on behalf of the Ministry of Finance. Markel Resseguradora do Brasil SA (Markel Brazil) is authorized by SUSEP as a local Brazilian reinsurance company. Markel Brazil is required to submit monthly returns, audited annual returns and annual financial statements to SUSEP.

Other Regulation

Markel Ventures. Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and regulations, as well as foreign laws and regulations applicable to their non-U.S. operations, including:
For our Markel Ventures manufacturing operations, laws and regulations in the areas of safety, health, employment and environmental pollution controls, as well as U.S. and international trade and anti-corruption laws and regulations; and
For our Markel Ventures non-manufacturing operations, laws and regulations in the areas of data privacy and security, health care, government contracting and employment.

Solicitors Regulation Authority. LHS Solicitors LLP (LHS), a wholly owned subsidiary of Abbey Protection Group Ltd., is a full service commercial law firm in Manchester, England. LHS employs approximately 70 lawyers who provide legal services to small and medium-sized enterprises in the United Kingdom. LHS is authorized and regulated by the Solicitors Regulation Authority (SRA). The SRA is an independent regulatory body of the Law Society of England and Wales which regulates the conduct of solicitors and law firms to protect consumers and to support the rule of law and the administration of justice. The SRA works within a statutory framework for regulation provided by the Solicitors Act 1974, the Administration of Justice Act 1985 and, primarily, by the Legal Services Act 2007.

22



Regulation of Markel CATCo. We conduct our Markel CATCo operations through three companies: Markel CATCo IM, Markel CATCo Reinsurance Fund Ltd. (Markel CATCo Fund) and Markel CATCo Re. Markel CATCo IM is the investment manager of Markel CATCo Fund and the insurance manager of Markel CATCo Re. Markel CATCo Fund offers multiple classes of non-voting, redeemable, participating shares to third party investors that allow investors to participate in the investment returns of various insurance-linked securities, primarily reinsurance and retrocessional reinsurance arrangements entered by Markel CATCo Re. Results of operations of Markel CATCo Fund and Markel CATCo Re are attributed to preference shareholders in these entities and are not included in our consolidated financial statements.

Markel CATCo IM is a Bermuda exempted limited liability company. Markel CATCo IM holds an investment business license issued by the BMA under the Investment Business Act 2003 and is regulated by the BMA. Markel CATCo IM is not registered as an investment company under the U.S. Investment Company Act of 1940, an investment adviser under the U.S. Investment Advisers Act of 1940 or as a "commodity pool operator" or "commodity trading advisor" with the U.S. Commodity Futures Trading Commission.

Markel CATCo Fund is a mutual fund company with limited liability under the Companies Act 1981 of Bermuda and is registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000.

Markel CATCo Re is licensed as a Bermuda Class 3 reinsurance company and is subject to regulation and supervision of the BMA. Under the Bermuda Insurance Act, and related regulations and policies of the BMA, Markel CATCo Re must, among other things, (i) maintain a minimum level of capital, surplus and liquidity; (ii) satisfy solvency standards; (iii) restrict dividends and distributions; (iv) obtain prior approval of ownership and transfer of shares; (v) maintain a principal office and appoint and maintain a principal representative in Bermuda; and (vi) provide for the performance of certain periodic examinations of Markel CATCo Re and its financial condition. In addition, the BMA requires that Markel CATCo Re contract for local services, such as corporate secretary, insurance manager and registered representative, at market rates.

Ratings

Financial stability and strength are important purchase considerations of policyholders, cedents and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and assign ratings to assist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the insurer's operating results, financial condition or other significant factors influencing the insurer's business. Changes in assigned ratings could have an adverse impact on an insurer's ability to write new business.

Best assigns financial strength ratings (FSRs) to property and casualty insurance companies based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as the spread of risk, the adequacy and soundness of ceded reinsurance, the quality and estimated market value of assets, the adequacy of loss reserves and surplus and the competence, experience and integrity of management. Best's FSRs range from "A++" (superior) to "F" (in liquidation).

Ten of our twelve insurance subsidiaries are rated by Best. All ten of our insurance subsidiaries rated by Best have been assigned an FSR of "A" (excellent). Our Lloyd's syndicate is part of a group rating for the Lloyd's overall market, which has been assigned an FSR of "A" (excellent) by Best.

Eleven of our twelve insurance subsidiaries are rated by S&P. All eleven of our insurance subsidiaries rated by S&P have been assigned an FSR of "A" (strong). Our Lloyd's syndicate is part of a group rating for the Lloyd's overall market, which has been assigned an FSR of "A+" (strong) by S&P.

Ten of our twelve insurance subsidiaries are rated by Fitch Ratings (Fitch). All ten of our insurance subsidiaries rated by Fitch have been assigned an FSR of "A+" (strong). Our Lloyd's syndicate is part of a group rating for the Lloyd's overall market, which has been assigned an FSR of "AA-" (very strong) by Fitch.

Six of our twelve insurance subsidiaries are rated by Moody's Corporation (Moody's). All six insurance subsidiaries rated by Moody's have been assigned an FSR of "A2" (good).

The various rating agencies typically charge companies fees for the rating and other services they provide. During 2015, we paid rating agencies, including Best, S&P, Fitch and Moody's, $1.6 million for their services.

23


Risk Factors


A wide range of factors could materially affect our future prospects and performance. The matters addressed under "Safe Harbor and Cautionary Statements," "Critical Accounting Estimates" and "Market Risk Disclosures" in Management's Discussion and Analysis of Financial Condition and Results of Operations and other information included or incorporated in this report describe many of the significant risks that could affect our operations and financial results. We are also subject to the following risks.

We may experience losses from catastrophes. As a property and casualty insurance company, we may experience losses from man-made or natural catastrophes. Catastrophes may have a material adverse effect on operations. Catastrophes include, but are not limited to, windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter weather and fires and may include events related to terrorism and political unrest. While we employ catastrophe modeling tools in our underwriting process, we cannot predict how severe a particular catastrophe will be before it occurs. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Most catastrophes occur over a small geographic area; however, some catastrophes may produce significant damage in large, heavily populated areas. If, as many forecast, climate change results in an increase in the frequency and severity of weather-related catastrophes, we may experience additional catastrophe-related losses, which may be material.

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

trends in claim frequency and severity,
changes in operations,
emerging economic and social trends,
trends in insurance rates,
inflation or deflation,
changes in the regulatory and litigation environments, and
uncertainties relating to asbestos and environmental exposures.

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

In addition, reinsurance reserves are subject to greater uncertainty than insurance reserves primarily because a reinsurer relies on (i) the original underwriting decisions made by ceding companies and (ii) information and data from ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss.

Changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book could result in material increases in our estimated loss reserves for such business.  Our run-off life and annuity reinsurance book exposes us to mortality risk, which is the risk that the level of death claims may differ from that which we assumed in establishing the reserves for our life and annuity reinsurance contracts. Some of our life and annuity reinsurance contracts expose us to longevity risk, which is the risk that an insured person will live longer than expected when the reserves were established, or morbidity risk, which is the risk that an insured person will become critically ill or disabled. Our reserving process for the life and annuity reinsurance book is designed with the objective of establishing appropriate reserves for the risks we assumed. Among other things, these processes rely heavily on analysis of mortality, longevity and morbidity trends, lapse rates, interest rates and expenses. As of December 31, 2015, our reserves for life and annuity benefits totaled $1.1 billion.


24


We expect mortality, morbidity, longevity, and lapse experience to fluctuate somewhat from period to period, but believe they should remain reasonably predictable over a period of many years. Mortality, longevity, morbidity or lapse experience that is less favorable than the mortality, longevity, morbidity or lapse rates that we used in establishing the reserves for a reinsurance agreement will negatively affect our net income because the reserves we originally set for the risks we assumed may not be sufficient to cover the future claims and expense payments. Furthermore, even if the total benefits paid over the life of the contract do not exceed the expected amount, unexpected increases in the incidence of deaths or illness can cause us to pay more benefits in a given reporting period than expected, adversely affecting our net income in any particular reporting period. Fluctuations in interest rates will impact the performance of our investments. If there are changes to any of the above factors to the point where a reserve deficiency exists, a charge to earnings will be recorded, which may have a material adverse impact on our results of operations and financial condition.

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

Our ability to make payments on debt or other obligations depends on the receipt of funds from our subsidiaries. We are a holding company, and substantially all of our insurance operations are conducted through our regulated insurance subsidiaries. As a result, our cash flow and our ability to service our debt are dependent upon the earnings of our subsidiaries and on the distribution of earnings, loans or other payments by our subsidiaries to us. In addition, payment of dividends by our insurance subsidiaries may require prior regulatory notice or approval.

Our investment results may be impacted by changes in interest rates, U.S. and international monetary and fiscal policies as well as broader economic conditions. We receive premiums from customers for insuring their risks. We invest these funds until they are needed to pay policyholder claims or until they are recognized as profits. Fluctuations in the value of our investment portfolio can occur as a result of changes in interest rates and U.S. and international monetary and fiscal policies as well as broader economic conditions (including, for example, equity market conditions and significant inflation or deflation). Our investment results may be materially impacted by one or more of these factors.

Competition in the insurance and reinsurance markets could reduce our underwriting margins. Insurance and reinsurance markets are highly competitive. We compete on an international and regional basis with major U.S., Bermuda, European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing, and management resources than we do. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets. In addition, capital market participants have created alternative products that are intended to compete with reinsurance products. Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting margins and have a material adverse effect on our results of operations and financial condition.

The historical cyclicality in the property and casualty insurance industry could adversely affect our ability to improve or maintain underwriting margins or to grow or maintain premium volume. The insurance and reinsurance markets have historically been cyclical, characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted more favorable rate levels. Among our competitive strengths have been our specialty product focus and our niche market strategy. These strengths also make us vulnerable in periods of intense competition to actions by other insurance companies who seek to write additional premiums without appropriate regard for underwriting profitability. During soft markets, it is very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. If we are not successful in maintaining rates or achieving rate increases, it may be difficult for us to improve or maintain underwriting margins or to grow or maintain premium volume levels.


25


We invest a significant portion of our invested assets in equity securities, which may result in significant variability in our investment results and may adversely impact shareholders' equity. Additionally, our equity investment portfolio is concentrated, and declines in the value of these significant investments could adversely affect our financial results. Equity securities were 52% and 54% of our shareholders' equity at December 31, 2015 and 2014, respectively. Equity securities have historically produced higher returns than fixed maturities; however, investing in equity securities may result in significant variability in investment returns from one period to the next. In volatile financial markets, we could experience significant declines in the fair value of our equity investment portfolio, which would result in a material decrease in shareholders' equity. Our equity portfolio is concentrated in particular issuers and industries and, as a result, a decline in the fair value of these concentrated investments also could result in a material decrease in shareholders' equity. A material decrease in shareholders' equity may adversely impact our ability to carry out our business plans.

General economic, market or industry conditions could lead to investment losses, adverse effects on our businesses and limit our access to the capital markets. General economic and market conditions and industry specific conditions, including extended economic recessions or expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations in foreign currency exchange rates, commodity and energy prices and interest rates; volatility in the credit and capital markets; and other factors, could lead to substantial realized and unrealized investment losses in future periods, declines in demand for or increased claims made under our insurance products or limited or no access to the capital markets, any of which could have a material adverse effect on our results of operations, financial condition, debt and financial strength ratings or our insurance subsidiaries' capital.

We rely on the purchase of reinsurance and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. We purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies. Reliance on reinsurance may create credit risk as a result of the reinsurer's inability or unwillingness to pay reinsurance claims when due. Deterioration in the credit quality of existing reinsurers or disputes over the terms of reinsurance could result in charges to earnings, which may have a material adverse impact on our results of operations and financial condition. The availability and cost of reinsurance are determined by market conditions beyond our control. There is no guarantee that our desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future.

Our information technology systems could fail or suffer a security breach, which could adversely affect our business or reputation or result in the loss of sensitive information. Our businesses are dependent upon the successful functioning and security of our computer systems or the computer systems of third parties. Among other things, we rely on these systems to interact with producers, insureds, customers, clients, and other third parties, to perform actuarial and other modeling functions, to underwrite business, to prepare policies and process premiums, to process claims and make claims payments, to prepare internal and external financial statements and information, as well as to engage in a wide variety of other business activities. A significant failure of our computer systems, or those of third parties upon which we may rely, whether because of a breakdown, natural disaster or an attack on our systems, could compromise our personal, confidential and proprietary information as well as that of our customers and business partners, impede or interrupt our business operations and could result in other negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and fines, litigation and monetary and reputational damages. Although we have implemented controls and take protective actions to reduce the risk of a failure of our computer systems or a security breach, such measures may be insufficient to prevent, or mitigate the effects of, a breakdown, natural disaster or an attack on our systems that could result in liability to us, cause our data to be corrupted and cause us to commit resources, management time and money to prevent or correct those failures.

In addition, we are subject to numerous data privacy laws and regulations enacted in the jurisdictions in which we do business. A misuse or mishandling of confidential or proprietary information being sent to or received from a client, employee or third party could result in legal liability, regulatory action and reputational harm. Third parties to whom we outsource certain of our functions are also subject to these risks, and their failure to adhere to these laws and regulations could negatively impact us.

Further, we routinely transmit, receive and store personal, confidential and proprietary information by email and other electronic means. Although we attempt to protect this confidential and proprietary information, we may be unable to do so in all cases, especially with customers, business partners and other third parties who may not have or use appropriate controls to protect confidential information.

While we maintain cyber risk insurance providing first party and third party coverages, such insurance may not cover all costs associated with the consequences of personal and confidential and proprietary information being compromised. As a result, in the event of a material cyber security breach, our results of operations could be materially, adversely affected.

26



We may not find suitable acquisition candidates or new insurance or non-insurance ventures and even if we do, we may not successfully integrate any such acquired companies or successfully invest in such ventures. As part of our growth strategy, we continue to evaluate possible acquisition transactions on an ongoing basis, and at any given time we may be engaged in discussions with respect to possible acquisitions and new ventures. We may not be able to identify suitable acquisition targets or ventures, any such transactions may not be financed or completed on acceptable terms and our future acquisitions or ventures may not be successful.

The integration of acquired companies may not be as successful as we anticipate. We have recently engaged in a number of acquisitions in an effort to achieve profitable growth in our insurance operations and to create additional value on a diversified basis in our Markel Ventures operations. Acquisitions present operational, strategic and financial risks, as well as risks associated with liabilities arising from the previous operations of the acquired companies. All of these risks are magnified in the case of a large acquisition. Assimilation of the operations and personnel of acquired companies may prove more difficult than anticipated, which may result in failure to achieve financial objectives associated with the acquisition or diversion of management attention. In addition, integration of formerly privately-held companies into the management and internal control and financial reporting systems of a publicly-held company presents additional risks.

Impairments in the value of our goodwill could have a material adverse effect on our operating results and financial condition. Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired. Goodwill is evaluated for impairment annually, or more frequently if conditions warrant, by comparing the carrying value of a reporting unit to its estimated fair value. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of a reporting unit could result in a goodwill impairment and, in turn, a charge to net income. Such a charge could have a material adverse effect on our results of operations or financial condition.

The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or on our results of operations. We seek to limit our loss exposure in a variety of ways, including adhering to maximum limitations on policies written in defined geographical zones, limiting program size for each client, establishing per risk and per occurrence limitations for each event, employing coverage restrictions and following prudent underwriting guidelines for each program written. We also seek to limit our loss exposure through geographic diversification. Underwriting is a matter of judgment, involving assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more future events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our financial condition and our results of operations, possibly to the extent of eliminating our shareholders' equity. In addition, we seek to limit loss exposures by policy terms, exclusion from coverage and choice of legal forum. Disputes relating to coverage and choice of legal forum also arise. As a result, various provisions of our policies, such as choice of forum, limitations or exclusions from coverage may not be enforceable in the manner we intend and some or all of our loss limitation methods may prove ineffective.

The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either broadening coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued.

We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel. Our success depends on our ability to retain the services of our existing key executives and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct or grow our business.

Our expanding international operations expose us to increased investment, political and economic risks, including foreign currency and credit risk. Our expanding international operations, including in the United Kingdom, Bermuda, Europe, Asia, South America and the Middle East, expose us to increased investment, political and economic risks, including foreign currency and credit risk. Changes in the value of the U.S. dollar relative to other currencies could have an adverse effect on our results of operations and financial condition. Our investments in non-U.S. dollar-denominated securities are subject to fluctuations in non-U.S. securities and currency markets, and those markets can be volatile.

27



Changes in U.S. tax laws or in the tax laws of other jurisdictions in which we operate could adversely impact us. Tax laws may change in ways that adversely impact us. For example, a significant portion of our invested assets consist of tax exempt securities and we receive certain tax benefits relating to such securities based on current laws and regulations. Our portfolio has also benefited from certain other laws and regulations, including among others, tax credits. Federal or state tax legislation could be enacted in connection with deficit reduction or various types of fundamental tax reform that would lessen or eliminate some or all of the tax advantages currently benefiting us and therefore could materially and adversely impact our results of operations.

We are rated by Best, S&P, Fitch and Moody's, and a decline in these ratings could affect our standing in the insurance industry and cause our sales and earnings to decrease. Ratings are an important factor in establishing the competitive position of insurance and reinsurance companies. Certain of our insurance and reinsurance company subsidiaries are rated by Best, S&P, Fitch or Moody's. Our ratings are subject to periodic review, and we cannot be sure that we will be able to retain our current or any future ratings. If our ratings are reduced from their current levels by the rating agencies, our competitive position in our target markets within the insurance industry could suffer and it would be more difficult for us to market our products. A ratings downgrade could also adversely limit our access to capital markets, which may increase the cost of debt. A significant downgrade could result in a substantial loss of business as policyholders move to other companies with higher claims-paying and financial strength ratings.

We depend on a few brokers for a large portion of our revenues and the loss of business provided by any one of them could adversely affect us. We market our insurance and reinsurance worldwide through insurance and reinsurance brokers. For the year ended December 31, 2015, our top three independent brokers represented approximately 27% of our gross premiums written. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.

Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. There have been a number of cases involving misconduct by employees in a broad range of industries in recent years, and we run the risk that employee misconduct could occur. Instances of fraud, illegal acts, errors, failure to document transactions properly or to obtain proper internal authorization, or failure to comply with regulatory requirements or our internal policies may result in losses. It is not always possible to deter or prevent employee errors or misconduct, and the controls that we have in place to prevent and detect this activity may not be effective in all cases.

We are subject to applicable laws and regulations relating to economic and trade sanctions and bribery, the violation of which could have a material adverse effect on us. We are required to comply with the economic and trade sanctions and embargo programs administered by the United States Department of the Treasury's Office of Foreign Assets Control and similar multi-national bodies and governmental agencies worldwide, as well as applicable anti-corruption laws and regulations of the United States and other jurisdictions where we operate, including the United Kingdom and Europe. A violation of a sanction, embargo program, or anti-corruption law, could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties. In addition, a violation could result in defaults under our outstanding indebtedness or credit facilities or damage our businesses or our reputation. Those penalties or defaults, or damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. In some cases the requirements and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive than those applicable to non-U.S. companies and their affiliates, which also could have a material adverse effect on our results of operations and financial condition.

28



The legal and regulatory requirements applicable to our businesses are extensive. Failure to comply could have a material adverse effect on us. Our businesses are highly dependent on our ability to engage on a daily basis in a large number of financial and operational activities, including among others insurance underwriting, claim processing, investment activities and the management of third party capital, many of which are highly complex. These activities are subject to internal guidelines and policies, as well as legal and regulatory standards, including, among others, those related to privacy, anti-corruption, anti-bribery and global finance and insurance matters. Our continued expansion into new businesses and markets has brought about additional requirements. While we believe that we have adopted appropriate risk management and compliance programs, compliance risks will continue to exist, particularly as we adapt to new rules and regulations. Failure to comply with, or to obtain, appropriate authorizations and/or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business and could subject us to fines, penalties, equitable relief and changes to our business practices. In addition, a failure to comply could result in defaults under our outstanding indebtedness or credit facilities or damage our businesses and/or our reputation. Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations could materially increase our direct and indirect compliance and other expenses of doing business, and have a material adverse effect on our results of operations and financial condition.

We may be exposed to risk in connection with our management of third party capital. Some of our operating subsidiaries may owe certain legal duties and obligations to third party investors. Our failure to fulfill any such duties or obligations could result in significant liabilities, penalties or other losses, and harm our businesses and results of operations. In addition, third party investors may decide not to renew their interests in the funds we manage, which could materially impact the financial condition of those funds, and could, in turn, have an adverse impact on our results of operations and financial condition. Moreover, we may not be able to raise additional third party capital for the funds we manage or for potential new funds and therefore we may forego existing or potential fee income and other income generating opportunities.

Associates

At December 31, 2015, we had approximately 10,600 employees, of whom approximately 3,600 were employed within our insurance operations and approximately 7,000 were employed within our Markel Ventures operations.


29


SELECTED FINANCIAL DATA (dollars in millions, except per share data) (1) 

 
2015
 
2014
 
2013
Results of Operations
 
 
 
 
 
Earned premiums
$
3,824

 
$
3,841

 
$
3,232

Net investment income
353

 
363

 
317

Total operating revenues
5,370

 
5,134

 
4,323

Net income (loss) to shareholders
583

 
321

 
281

Comprehensive income (loss) to shareholders
233

 
936

 
459

Diluted net income (loss) per share
$
41.74

 
$
22.27

 
$
22.48

Financial Position
 
 
 
 
 
Total investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets)
$
18,181

 
$
18,638

 
$
17,612

Total assets
24,941

 
25,200

 
23,956

Unpaid losses and loss adjustment expenses
10,252

 
10,404

 
10,262

Senior long-term debt and other debt
2,241

 
2,254

 
2,256

Shareholders' equity
7,834

 
7,595

 
6,674

Common shares outstanding (at year end, in thousands)
13,959

 
13,962

 
13,986

OPERATING PERFORMANCE MEASURES (1, 2)
 
 
 
 
 
Operating Data
 
 
 
 
 
Book value per common share outstanding
$
561.23

 
$
543.96

 
$
477.16

Growth (decline) in book value per share
3
 %
 
14
%
 
18
%
5-Year CAGR in book value per share (3)
11
 %
 
14
%
 
17
%
Closing stock price
$
883.35

 
$
682.84

 
$
580.35

Ratio Analysis
 
 
 
 
 
U.S. GAAP combined ratio (4)
89
 %
 
95
%
 
97
%
Investment yield (5)
2
 %
 
2
%
 
3
%
Taxable equivalent total investment return (6)
(1
)%
 
7
%
 
7
%
Investment leverage (7)
2.3

 
2.5

 
2.6

Debt to capital
22
 %
 
23
%
 
25
%
(1) 
Reflects the acquisition of Alterra Capital Holdings Limited effective May 1, 2013, which included the issuance of equity totaling $2.3 billion.
(2) 
Operating Performance Measures provide a basis for management to evaluate our performance. The method we use to compute these measures may differ from the methods used by other companies. See further discussion of management's evaluation of these measures in Management's Discussion & Analysis of Financial Condition and Results of Operations.
(3) 
CAGR—compound annual growth rate.
(4) 
The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
(5) 
Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost.
(6) 
See "Investing Results" in Management's Discussion & Analysis of Financial Condition and Results of Operations for detail regarding the calculation of taxable equivalent total investment return.
(7) 
Investment leverage represents total invested assets divided by shareholders' equity.

30




2012
 
2011
 
2010
 
2009
 
2008
 
2007
 
2006
 
5-Year CAGR (3)
 
10-Year CAGR (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,147

 
$
1,979

 
$
1,731

 
$
1,816

 
$
2,022

 
$
2,117

 
$
2,184

 
17
%
 
7
%
282

 
264

 
273

 
260

 
282

 
305

 
269

 
5
%
 
4
%
3,000

 
2,630

 
2,225

 
2,069

 
1,977

 
2,551

 
2,576

 
19
%
 
9
%
253

 
142

 
267

 
202

 
(59
)
 
406

 
393

 

 

504

 
252

 
431

 
591

 
(403
)
 
337

 
551

 

 

$
25.89

 
$
14.60

 
$
27.27

 
$
20.52

 
$
(5.95
)
 
$
40.64

 
$
39.40

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
9,333

 
$
8,728

 
$
8,224

 
$
7,849

 
$
6,893

 
$
7,775

 
$
7,524

 
17
%
 
11
%
12,557

 
11,532

 
10,826

 
10,242

 
9,512

 
10,164

 
10,117

 
18
%
 
10
%
5,371

 
5,399

 
5,398

 
5,427

 
5,492

 
5,526

 
5,584

 
14
%
 
6
%
1,493

 
1,294

 
1,016

 
964

 
694

 
691

 
866

 

 

3,889

 
3,388

 
3,172

 
2,774

 
2,181

 
2,641

 
2,296

 
20
%
 
16
%
9,629

 
9,621

 
9,718

 
9,819

 
9,814

 
9,957

 
9,994

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
403.85

 
$
352.10

 
$
326.36

 
$
282.55

 
$
222.20

 
$
265.26

 
$
229.78

 
11
%
 
12
%
15
%
 
8
%
 
16
%
 
27
%
 
(16
)%
 
15
%
 
32
%
 

 

9
%
 
9
%
 
13
%
 
11
%
 
10
 %
 
18
%
 
16
%
 

 

$
433.42

 
$
414.67

 
$
378.13

 
$
340.00

 
$
299.00

 
$
491.10

 
$
480.10

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
97
%
 
102
%
 
97
%
 
95
%
 
99
 %
 
88
%
 
87
%
 

 

4
%
 
4
%
 
4
%
 
4
%
 
4
 %
 
4
%
 
4
%
 

 

9
%
 
7
%
 
8
%
 
13
%
 
(10
)%
 
5
%
 
11
%
 

 

2.4

 
2.6

 
2.6

 
2.8

 
3.2

 
2.9

 
3.3

 

 

28
%
 
28
%
 
24
%
 
26
%
 
24
 %
 
21
%
 
27
%
 

 




31


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING


Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management does not expect that its internal control over financial reporting 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. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. 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. The design of any system of internal control over financial reporting 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.

Under the supervision and with the participation of management, including the Principal Executive Officer and the Principal Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, we have concluded that we maintained effective internal control over financial reporting as of December 31, 2015.

KPMG LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting, which is included herein.

 
 
 
Alan I. Kirshner
 
 
 
Anne G. Waleski
Executive Chairman
 
 
 
Executive Vice President and Chief Financial Officer
(Principal Executive Officer)
 
 
 
(Principal Financial Officer)
 
 
 
 
 
February 26, 2016
 
 
 
 

32



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders
Markel Corporation:

We have audited Markel Corporation's (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Markel Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Markel Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 26, 2016 expressed an unqualified opinion on those consolidated financial statements.


Richmond, Virginia
February 26, 2016

33



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholders
Markel Corporation:

We have audited the accompanying consolidated balance sheets of Markel Corporation and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Markel Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Markel Corporation's internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2016 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.


Richmond, Virginia
February 26, 2016




34


MARKEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 
December 31,
 
2015
 
2014
 
(dollars in thousands)
ASSETS
 
 
 
Investments, available-for-sale, at estimated fair value:
 
 
 
Fixed maturities (amortized cost of $9,038,158 in 2015 and $9,929,137 in 2014)
$
9,394,468

 
$
10,422,882

Equity securities (cost of $2,208,834 in 2015 and $1,951,658 in 2014)
4,074,475

 
4,137,576

Short-term investments (estimated fair value approximates cost)
1,642,261

 
1,594,849

Total Investments
15,111,204

 
16,155,307

Cash and cash equivalents
2,630,009

 
1,960,169

Restricted cash and cash equivalents
440,132

 
522,225

Receivables
1,113,703

 
1,135,217

Reinsurance recoverable on unpaid losses
2,016,665

 
1,868,669

Reinsurance recoverable on paid losses
50,123

 
102,206

Deferred policy acquisition costs
352,756

 
353,410

Prepaid reinsurance premiums
322,362

 
365,458

Goodwill
1,167,844

 
1,049,115

Intangible assets
792,372

 
702,747

Other assets
944,101

 
985,834

Total Assets
$
24,941,271

 
$
25,200,357

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
10,251,953

 
$
10,404,152

Life and annuity benefits
1,123,275

 
1,305,818

Unearned premiums
2,166,105

 
2,245,690

Payables to insurance and reinsurance companies
224,921

 
276,122

Senior long-term debt and other debt (estimated fair value of $2,403,000 in 2015 and $2,493,000 in 2014)
2,241,427

 
2,253,594

Other liabilities
1,030,023

 
1,051,931

Total Liabilities
17,037,704

 
17,537,307

Redeemable noncontrolling interests
62,958

 
61,048

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Common stock
3,342,357

 
3,308,395

Retained earnings
3,137,285

 
2,581,866

Accumulated other comprehensive income
1,354,508

 
1,704,557

Total Shareholders' Equity
7,834,150

 
7,594,818

Noncontrolling interests
6,459

 
7,184

Total Equity
7,840,609

 
7,602,002

Total Liabilities and Equity
$
24,941,271

 
$
25,200,357


See accompanying notes to consolidated financial statements.


35


MARKEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 
Years Ended December 31,
 
2015
 
2014
 
2013
 
(dollars in thousands, except per share data)
OPERATING REVENUES
 
 
 
 
 
Earned premiums
$
3,823,532

 
$
3,840,912

 
$
3,231,616

Net investment income
353,213

 
363,230

 
317,373

Net realized investment gains:
 
 
 
 
 
Other-than-temporary impairment losses
(44,481
)
 
(4,784
)
 
(4,706
)
Net realized investment gains, excluding other-than-temporary impairment losses
150,961

 
50,784

 
67,858

Net realized investment gains
106,480

 
46,000

 
63,152

Other revenues
1,086,758

 
883,525

 
710,942

Total Operating Revenues
5,369,983

 
5,133,667

 
4,323,083

OPERATING EXPENSES
 
 
 
 
 
Losses and loss adjustment expenses
1,938,745

 
2,202,467

 
1,816,273

Underwriting, acquisition and insurance expenses
1,455,080

 
1,460,882

 
1,312,312

Amortization of intangible assets
68,947

 
57,627

 
55,223

Other expenses
1,046,805

 
854,871

 
663,528

Total Operating Expenses
4,509,577

 
4,575,847

 
3,847,336

Operating Income
860,406

 
557,820

 
475,747

Interest expense
118,301

 
117,442

 
114,004

Income Before Income Taxes
742,105

 
440,378

 
361,743

Income tax expense
152,963

 
116,690

 
77,898

Net Income
$
589,142

 
$
323,688

 
$
283,845

Net income attributable to noncontrolling interests
6,370

 
2,506

 
2,824

Net Income to Shareholders
$
582,772

 
$
321,182

 
$
281,021

 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
Change in net unrealized gains on investments, net of taxes:
 
 
 
 
 
Net holding gains (losses) arising during the period
$
(240,170
)
 
$
687,735

 
$
225,545

Change in unrealized other-than-temporary impairment losses on fixed maturities arising during the period
160

 
173

 
(141
)
Reclassification adjustments for net gains included in net income
(80,482
)
 
(26,161
)
 
(40,830
)
Change in net unrealized gains on investments, net of taxes
(320,492
)
 
661,747

 
184,574

Change in foreign currency translation adjustments, net of taxes
(29,278
)
 
(32,241
)
 
(10,143
)
Change in net actuarial pension loss, net of taxes
(352
)
 
(14,750
)
 
4,065

Total Other Comprehensive Income (Loss)
(350,122
)
 
614,756

 
178,496

Comprehensive Income
$
239,020

 
$
938,444

 
$
462,341

Comprehensive income attributable to noncontrolling interests
6,297

 
2,510

 
2,852

Comprehensive Income to Shareholders
$
232,723

 
$
935,934

 
$
459,489

 
 
 
 
 
 
NET INCOME PER SHARE
 
 
 
 
 
Basic
$
41.99

 
$
22.38

 
$
22.57

Diluted
$
41.74

 
$
22.27

 
$
22.48


See accompanying notes to consolidated financial statements.

36


MARKEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands)
Common
Shares
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders'
Equity
 
Noncontrolling
Interests
 
Total Equity
 
Redeemable Noncontrolling Interests
December 31, 2012
9,629

 
$
908,980

 
$
2,068,340

 
$
911,337

 
$
3,888,657

 
$
360

 
$
3,889,017

 
$
86,225

Net income (loss)
 
 
 
 
281,021

 

 
281,021

 
(958
)
 
280,063

 
3,782

Other comprehensive income
 
 
 
 

 
178,468

 
178,468

 

 
178,468

 
28

Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
459,489

 
(958
)
 
458,531

 
3,810

Issuance of common stock
71

 
24,518

 

 

 
24,518

 

 
24,518

 

Repurchase of common stock
(109
)
 

 
(57,388
)
 

 
(57,388
)
 

 
(57,388
)
 

Restricted stock awards expensed
(3
)
 
25,239

 

 

 
25,239

 

 
25,239

 

Acquisition of Alterra
4,398

 
2,330,199

 

 

 
2,330,199

 

 
2,330,199

 

Adjustment of redeemable noncontrolling interests

 

 
1,963

 

 
1,963

 

 
1,963

 
(1,963
)
Purchase of noncontrolling interest

 
(136
)
 

 

 
(136
)
 

 
(136
)
 
(11,716
)
Other

 
63

 
973

 

 
1,036

 
5,031

 
6,067

 
(4,173
)
December 31, 2013
13,986

 
3,288,863

 
2,294,909

 
1,089,805

 
6,673,577

 
4,433

 
6,678,010

 
72,183

Net income (loss)
 
 
 
 
321,182

 

 
321,182

 
(1,981
)
 
319,201

 
4,487

Other comprehensive income
 
 
 
 

 
614,752

 
614,752

 

 
614,752

 
4

Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
935,934

 
(1,981
)
 
933,953

 
4,491

Issuance of common stock
19

 
5,691

 

 

 
5,691

 

 
5,691

 

Repurchase of common stock
(43
)
 

 
(26,053
)
 

 
(26,053
)
 

 
(26,053
)
 

Restricted stock awards expensed

 
22,935

 

 

 
22,935

 

 
22,935

 

Adjustment of redeemable noncontrolling interests

 

 
(8,186
)
 

 
(8,186
)
 

 
(8,186
)
 
8,186

Purchase of noncontrolling interest

 
(10,257
)
 

 

 
(10,257
)
 
905

 
(9,352
)
 
(18,566
)
Other

 
1,163

 
14

 

 
1,177

 
3,827

 
5,004

 
(5,246
)
December 31, 2014
13,962

 
3,308,395

 
2,581,866

 
1,704,557

 
7,594,818

 
7,184

 
7,602,002

 
61,048

Net income (loss)
 
 
 
 
582,772

 

 
582,772

 
(988
)
 
581,784

 
7,358

Other comprehensive loss
 
 
 
 

 
(350,049
)
 
(350,049
)
 

 
(350,049
)
 
(73
)
Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
232,723

 
(988
)
 
231,735

 
7,285

Issuance of common stock
34

 
4,752

 

 

 
4,752

 

 
4,752

 

Repurchase of common stock
(37
)
 

 
(31,491
)
 

 
(31,491
)
 

 
(31,491
)
 

Restricted stock awards expensed

 
24,129

 

 

 
24,129

 

 
24,129

 

Acquisition of CapTech

 

 

 

 

 

 

 
13,817

Adjustment of redeemable noncontrolling interests

 

 
4,144

 

 
4,144

 

 
4,144

 
(4,144
)
Purchase of noncontrolling interest

 
(1,447
)
 

 

 
(1,447
)
 

 
(1,447
)
 
(8,224
)
Other

 
6,528

 
(6
)
 

 
6,522

 
263

 
6,785

 
(6,824
)
December 31, 2015
13,959

 
$
3,342,357

 
$
3,137,285

 
$
1,354,508

 
$
7,834,150

 
$
6,459

 
$
7,840,609

 
$
62,958

See accompanying notes to consolidated financial statements.

37


MARKEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Years Ended December 31,
 
2015
 
2014
 
2013
 
(dollars in thousands)
OPERATING ACTIVITIES
 
 
 
 
 
Net income
$
589,142

 
$
323,688

 
$
283,845

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Deferred income tax expense (benefit)
(9,678
)
 
84,543

 
4,050

Depreciation and amortization
200,987

 
203,580

 
190,066

Net realized investment gains
(106,480
)
 
(46,000
)
 
(63,152
)
Decrease in receivables
5,604

 
21,148

 
142,065

Increase in deferred policy acquisition costs
(7,360
)
 
(99,387
)
 
(103,704
)
Increase (decrease) in unpaid losses and loss adjustment expenses, net
(91,960
)
 
249,873

 
290,130

Decrease in life and annuity benefits
(85,257
)
 
(62,883
)
 
(40,235
)
Increase (decrease) in unearned premiums, net
(4,522
)
 
147,840

 
97,249

Decrease in payables to insurance and reinsurance companies
(31,829
)
 
(45,204
)
 
(150,764
)
Increase (decrease) in income taxes payable
27,817

 
(46,576
)
 
81,995

Increase in accrued expenses
97,273

 
56,042

 
19,144

Other
67,414

 
(69,872
)
 
(5,168
)
Net Cash Provided By Operating Activities
651,151

 
716,792

 
745,521

INVESTING ACTIVITIES
 
 
 
 
 
Proceeds from sales of fixed maturities and equity securities
538,978

 
1,286,871

 
879,564

Proceeds from maturities, calls and prepayments of fixed maturities
1,503,616

 
1,420,817

 
1,475,938

Cost of fixed maturities and equity securities purchased
(1,576,254
)
 
(3,153,055
)
 
(1,651,397
)
Net change in short-term investments
(62,124
)
 
(129,164
)
 
(470,423
)
Proceeds from sales of equity method investments
23,155

 
107,292

 
313,557

Cost of equity method investments
(21,849
)
 
(16,081
)
 
(38,018
)
Change in restricted cash and cash equivalents
62,324

 
264,701

 
(263,014
)
Additions to property and equipment
(79,755
)
 
(82,132
)
 
(47,725
)
Acquisitions, net of cash acquired
(261,521
)
 
(319,086
)
 
(12,198
)
Other
(797
)
 
(2,368
)
 
1,103

Net Cash Provided (Used) By Investing Activities
125,773

 
(622,205
)
 
187,387

FINANCING ACTIVITIES
 
 
 
 
 
Additions to senior long-term debt and other debt
69,797

 
89,480

 
547,214

Repayment and retirement of senior long-term debt and other debt
(88,020
)
 
(83,722
)
 
(321,978
)
Repurchases of common stock
(31,491
)
 
(26,053
)
 
(57,388
)
Issuance of common stock
4,752

 
5,691

 
24,518

Purchase of redeemable noncontrolling interests
(12,474
)
 
(25,918
)
 
(11,852
)
Distributions to noncontrolling interests
(6,287
)
 
(5,245
)
 
(5,124
)
Other
(10,488
)
 
(21,357
)
 
(23
)
Net Cash Provided (Used) By Financing Activities
(74,211
)
 
(67,124
)
 
175,367

Effect of foreign currency rate changes on cash and cash equivalents
(32,873
)
 
(45,820
)
 
6,485

Increase (decrease) in cash and cash equivalents
669,840

 
(18,357
)
 
1,114,760

Cash and cash equivalents at beginning of year
1,960,169

 
1,978,526

 
863,766

CASH AND CASH EQUIVALENTS AT END OF YEAR
$
2,630,009

 
$
1,960,169

 
$
1,978,526


See accompanying notes to consolidated financial statements.


38


MARKEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Markel Corporation is a diverse financial holding company serving a variety of niche markets. Markel Corporation's principal business markets and underwrites specialty insurance products. Through its wholly-owned subsidiary, Markel Ventures, Inc. (Markel Ventures), Markel Corporation also owns interests in various industrial and service businesses that operate outside of the specialty insurance marketplace.

On May 1, 2013 (the Acquisition Date), Markel Corporation completed the acquisition of 100% of the issued and outstanding common stock of Alterra Capital Holdings Limited (Alterra).

a)Basis of Presentation. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and its consolidated subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements include the results of operations and cash flows of Alterra from the Acquisition Date to December 31, 2015 and not in any prior periods, except with respect to the Supplemental Pro Forma Information included in note 2. The Company consolidates the results of its Markel Ventures subsidiaries on a one-month lag. Certain prior year amounts have been reclassified to conform to the current presentation.

b)Use of Estimates. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Management periodically reviews its estimates and assumptions. Quarterly reviews include evaluating the adequacy of reserves for unpaid losses and loss adjustment expenses, life and annuity reinsurance benefit reserves, litigation contingencies, the reinsurance allowance for doubtful accounts and income tax liabilities, as well as analyzing the recoverability of deferred tax assets, estimating reinsurance premiums written and earned and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Estimates and assumptions for goodwill and intangible assets are reviewed in conjunction with an acquisition, and goodwill and indefinite-lived intangible assets are reassessed at least annually for impairment. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

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

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

Investments accounted for under the equity method of accounting are recorded at cost within other assets on the consolidated balance sheets and subsequently increased or decreased by the Company's proportionate share of the net income or loss of the investee. The Company records its proportionate share of net income or loss of the investee in net investment income. The Company records its proportionate share of other comprehensive income or loss of the investee as a component of other comprehensive income (loss). Dividends or other equity distributions are recorded as a reduction of the investment. The Company reviews equity method investments for impairment when events or circumstances indicate that a decline in the fair value of the investment below its carrying value is other-than-temporary.

d)Cash and Cash Equivalents. The Company considers all investments with original maturities of 90 days or less to be cash equivalents. The carrying value of the Company's cash and cash equivalents and restricted cash and cash equivalents approximates fair value.


39


e)Receivables. Receivables include amounts receivable from agents, brokers and insureds, which represent premiums that are both currently due and amounts not yet due on insurance and reinsurance policies. Premiums for insurance policies are generally due at inception. Premiums for reinsurance policies generally become due over the period of coverage based on the policy terms. The Company monitors the credit risk associated with premiums receivable, taking into consideration the fact that in certain instances credit risk may be reduced by the Company's right to offset loss obligations or unearned premiums against premiums receivable. Amounts deemed uncollectible are charged to net income in the period they are determined. Changes in the estimate of reinsurance premiums written will result in an adjustment to premiums receivable in the period they are determined.

f)Reinsurance Recoverables. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. Allowances are established for amounts deemed uncollectible and reinsurance recoverables are recorded net of these allowances. The Company evaluates the financial condition of its reinsurers and monitors concentration risk to minimize its exposure to significant losses from individual reinsurers.

g)Deferred Policy Acquisition Costs. Costs directly related to the acquisition of insurance premiums are deferred and amortized over the related policy period, generally one year. The Company only defers acquisition costs incurred that are related directly to the successful acquisition of new or renewal insurance contracts, including commissions to agents and brokers and premium taxes. Commissions received related to reinsurance premiums ceded are netted against broker commissions in determining acquisition costs eligible for deferral. To the extent that future policy revenues on existing policies are not adequate to cover related costs and expenses, deferred policy acquisition costs are charged to earnings. The Company does not consider anticipated investment income in determining whether a premium deficiency exists.

h)Goodwill and Intangible Assets. Goodwill and intangible assets are recorded as a result of business acquisitions. Goodwill represents the excess of the amount paid to acquire a business over the net fair value of assets acquired and liabilities assumed at the date of acquisition. Indefinite-lived and other intangible assets are recorded at fair value as of the acquisition date. The determination of the fair value of certain assets acquired and liabilities assumed involves significant judgment and the use of valuation models and other estimates, which require assumptions that are inherently subjective. Goodwill and indefinite-lived intangible assets are tested for impairment at least annually. The Company completes an annual test during the fourth quarter of each year based upon the results of operations through September 30. Intangible assets with definite lives are amortized using the straight-line method over their estimated useful lives, generally five to 20 years, and are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable.

i)Property and Equipment. Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment are calculated using the straight-line method over the estimated useful lives (generally, the life of the lease for leasehold improvements, ten to 40 years for buildings, seven to 40 years for land improvements, three to ten years for furniture and equipment and three to 25 years for other property and equipment).

j)Redeemable Noncontrolling Interests. The Company owns controlling interests in various companies through its Markel Ventures operations. In some cases, 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 the respective company's earnings in specified periods preceding the redemption date. The redeemable noncontrolling interests generally become redeemable through 2020.

The Company recognizes changes in the redemption value that exceed the carrying value of redeemable noncontrolling interests to retained earnings as if the balance sheet date were also the redemption date. Changes in the redemption value also result in an adjustment to net income to shareholders in the calculation of basic and diluted net income per share. The change in the redemption value of redeemable noncontrolling interests in 2015, 2014 and 2013 resulted in an adjustment to retained earnings of an increase of $4.1 million, a decrease of $8.2 million, and an increase of $2.0 million, respectively.


40


k)Income Taxes. The Company records deferred income taxes to reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets are reduced by a valuation allowance when management believes it is more likely than not that some, or all, of the deferred tax assets will not be realized. The Company recognizes the tax benefit from an uncertain tax position taken or expected to be taken in income tax returns only if it is more likely than not that the tax position will be sustained upon examination by tax authorities, based on the technical merits of the position. Tax positions that meet the more likely than not threshold are then measured using a probability weighted approach, whereby the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement is recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

l)Unpaid Losses and Loss Adjustment Expenses. Unpaid losses and loss adjustment expenses on our property and casualty insurance business are based on evaluations of reported claims and estimates for losses and loss adjustment expenses incurred but not reported. Estimates for losses and loss adjustment expenses incurred but not reported are based on reserve development studies, among other things. The Company does not discount reserves for losses and loss adjustment expenses to reflect estimated present value, except for reserves assumed in connection with an acquisition, which are recorded at fair value at the acquisition date. Recorded reserves are estimates, and the ultimate liability may be greater or less than the estimates.

m)Life and Annuity Benefits. The Company previously acquired a block of long duration reinsurance contracts for life and annuity benefits which subject the Company to mortality, longevity and morbidity risks. The assumptions used to determine policy benefit reserves are generally locked-in for the life of the contract unless an unlocking event occurs. To the extent existing policy reserves, together with the present value of future gross premiums and expected investment income earned thereon, are not adequate to cover the present value of future benefits, settlement and maintenance costs, the locked-in assumptions are revised to current best estimate assumptions and a charge to earnings for life and annuity benefits is recognized at that time. Because of the assumptions and estimates used in establishing reserves for life and annuity benefit obligations and the long-term nature of these reinsurance contracts, the ultimate liability may be greater or less than the estimates.

Results attributable to the run-off of life and annuity reinsurance business are included in other revenues and other expenses in the Company's consolidated statements of income and comprehensive income and as part of the Company's Other Insurance (Discontinued Lines) segment.

n)Revenue Recognition.

Property and Casualty Premiums

Insurance premiums are generally earned on a pro rata basis over the policy period, typically one year. The cost of reinsurance ceded is initially recorded as prepaid reinsurance premiums and is amortized over the reinsurance contract period in proportion to the amount of insurance protection provided. Premiums ceded are netted against premiums written.

Assumed reinsurance premiums are recorded at the inception of each contract based upon contract terms and information received from cedents and brokers and are earned on a pro rata basis over the coverage period, or for multi-year contracts, in proportion with the underlying risk exposure to the extent there is variability in the exposure through the coverage period. Changes in reinsurance premium estimates are expected and may result in significant adjustments in any period. These estimates change over time as additional information regarding changes in underlying exposures is obtained. Any subsequent differences arising on such estimates are recorded as premiums written in the period they are determined and are earned on a pro rata basis over the coverage period. The Company uses the periodic method to account for assumed reinsurance from foreign reinsurers. The Company's foreign reinsurers provide sufficient information to record foreign assumed business in the same manner as the Company records assumed business from United States reinsurers.

Certain contracts that the Company writes provide for reinstatement of coverage. Reinstatement premiums are the premiums for the restoration of the insurance or reinsurance limit of a contract to its full amount after a loss occurrence by the insured or reinsured. The Company accrues for reinstatement premiums resulting from losses recorded. Such accruals are based upon contractual terms and management judgment is involved with respect to the amount of losses recorded. Changes in estimates of losses recorded on contracts with reinstatement premium features will result in changes in reinstatement premiums based on contractual terms. Reinstatement premiums are recognized at the time losses are recorded and are earned on a pro-rata basis over the coverage period.


41


Other Revenues

Other revenues primarily relate to the Company's Markel Ventures operations and consist of revenues from the sale of manufactured products and service revenues. Revenues from manufactured products are generally recognized at the time title transfers to the customer, which typically occurs at the point of shipment or delivery to the customer, depending on the terms of the sales arrangement. Revenues from services are generally recognized as the services are performed. Services provided pursuant to a contract are recognized either over the contract period or upon completion of the elements specified in the contract, depending on the terms of the contract.

o)Stock-based Compensation. Stock-based compensation expense is generally recognized as part of underwriting, acquisition and insurance expenses over the requisite service period. Stock-based compensation expense, net of taxes, was $16.3 million in 2015, $18.7 million in 2014 and $18.4 million in 2013. See note 12.

p)Foreign Currency Translation. The functional currencies of the Company's foreign operations are the currencies in which the majority of their business is transacted. Assets and liabilities of foreign operations are translated into the United States Dollar using the exchange rates in effect at the balance sheet date. Revenues and expenses of foreign operations are translated using the average exchange rate for the period. Gains or losses from translating the financial statements of foreign operations denominated in a functional currency are included, net of taxes, in shareholders' equity as a component of accumulated other comprehensive income. Gains and losses arising from transactions denominated in a foreign currency, other than a functional currency, are included in net income.

The Company manages its exposure to foreign currency risk primarily by matching assets, other than goodwill and intangible assets, and liabilities denominated in the same currency. To the extent that assets and liabilities in foreign currencies are not matched, the Company is exposed to foreign currency risk. For functional currencies, the related exchange rate fluctuations are reflected in other comprehensive income (loss). The cumulative foreign currency translation adjustment, net of taxes, was a loss of $72.7 million and $43.5 million at December 31, 2015 and 2014, respectively.

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

The Company's foreign currency forward contracts are generally designated and qualify as hedges of a net investment in a foreign operation. The effective portion of the change in fair value resulting from these hedges is reported in currency translation adjustments as part of other comprehensive income (loss). The ineffective portion of the change in fair value is recognized in earnings.

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

s)Net Income Per Share. Basic net income per share is computed by dividing adjusted net income to shareholders by the weighted average number of common shares outstanding during the year. Diluted net income per share is computed by dividing adjusted net income to shareholders by the weighted average number of common shares and dilutive potential common shares outstanding during the year. See note 12(b).

42



t)Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies in all industries. The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such as insurance contracts. ASU No. 2014-09's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, which deferred the original effective date of ASU No. 2014-09 by one year. As a result, ASU No. 2014-09 becomes effective for the Company during the first quarter of 2018 and may be applied retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. Early application is permitted, but not before the first quarter of 2017. The Company is currently evaluating ASU No. 2014-09 to determine the potential impact that adopting this standard will have on its consolidated financial statements. Adoption of this ASU is not expected to have a material impact on the Company's insurance operations, but may have a material impact on the Company's non-insurance operations.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which the decision making rights are conveyed through a contractual arrangement. ASU No. 2015-02 becomes effective for the Company during the first quarter of 2016 and may be applied retrospectively or under a modified retrospective method where the cumulative-effect adjustment to retained earnings is recognized as of the beginning of the fiscal year of adoption. Reporting enterprises may also restate previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The adoption of this ASU is not expected to have a material impact on the Company's financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt will no longer be recorded as a separate asset on the balance sheet. The amortization of debt issuance costs will continue to be included in interest expense. ASU No. 2015-03 becomes effective for the Company during the first quarter of 2016 and will be applied retrospectively to all prior periods presented. The adoption of this ASU is not expected to have a material impact on the Company's financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which clarifies that software licenses contained in a cloud computing arrangement should be capitalized if the customer has the right to take possession of the software and the ability to run the software outside of the cloud computing arrangement. ASU No. 2015-05 becomes effective for the Company during the first quarter of 2016 and may be applied prospectively or retrospectively. The adoption of this ASU is not expected to have a material impact on the Company's financial position, results of operations or cash flows.

43



In May 2015, the FASB issued ASU No. 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. The ASU requires significant new disclosures for insurers relating to short-duration insurance contract claims and the unpaid claims liability rollforward for long and short-duration contracts. The guidance requires annual tabular disclosure, on a disaggregated basis, of undiscounted incurred and paid claim and allocated claim adjustment expense development by accident year, on a net basis after reinsurance, for up to 10 years. Tables must also include the total incurred but not reported claims liabilities, plus expected development on reported claims, and claims frequency for each accident year. A description of estimation methodologies and any significant changes in methodologies and assumptions used to calculate the liability and frequency is also required. Based on the disaggregated claims information in the tables, disclosure of historical average annual percentage payout of incurred claims is also required. Interim period disclosures must include a tabular rollforward and related qualitative information for the liability for unpaid losses and loss adjustment expenses for both long-duration and short-duration contracts. ASU No. 2015-09 becomes effective for the Company during 2016, with interim disclosures required beginning in the first quarter of 2017. The ASU must be applied retrospectively by providing comparative disclosures for each period presented. Early application is permitted. The adoption of this ASU is not expected to have a material impact on the Company's financial position, results of operations or cash flows, but will expand the nature and extent of its insurance contract disclosures, as described above.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The ASU changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value and eliminates the requirement to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. ASU 2015-11 becomes effective for the Company during the first quarter of 2017 and will be applied prospectively. The Company is currently evaluating ASU 2015-11 but does not expect adoption of this ASU to have a material impact on the Company's financial position, results of operations or cash flows.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The ASU eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. ASU 2015-16 becomes effective for the Company during the first quarter of 2016 and will be applied prospectively. The adoption of this ASU is not expected to have a material impact on the Company's financial position, results of operations or cash flows.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU significantly changes the income statement impact of equity investments and the recognition of changes in fair value of financial liabilities attributable to an entities own credit risk when the fair value option is elected. The ASU requires equity instruments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value and to recognize any changes in fair value in net income rather than other comprehensive income. ASU 2016-01 becomes effective for the Company during the first quarter of 2018 and will be applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The provisions related to equity investments without a readily determinable fair value will be applied prospectively to equity investments as of the adoption date. Early adoption is permitted for certain provisions of the ASU. The Company is currently evaluating ASU No. 2016-01 to determine the potential impact that adopting this standard will have on the consolidated financial statements. Adoption of this ASU is not expected to have a material impact on the Company's financial position, cash flows, or total comprehensive income, but will have a significant impact on the Company's results of operations as changes in fair value will be presented in net income rather than other comprehensive income.

2. 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.

44



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.

45



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
$