Edgar Filing: MARKEL CORP

MKL 03.31.2015 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________

FORM 10-Q

___________________________________________



x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2015



¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______

Commission File Number: 001-15811

___________________________________________

MARKEL CORPORATION

(Exact name of registrant as specified in its charter)

___________________________________________



Virginia		54-1959284
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148

(Address of principal executive offices)

(Zip Code)

(804) 747-0136

(Registrant's telephone number, including area code)

___________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Number of shares of the registrant's common stock outstanding at April 29, 2015: 13,945,734

Table of Contents

Markel Corporation

Form 10-Q

Index




		Page Number
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets—March 31, 2015 and December 31, 2014	3

	Consolidated Statements of Income and Comprehensive Income—Three Months Ended March 31, 2015 and 2014	4

	Consolidated Statements of Changes in Equity—Three Months Ended March 31, 2015 and 2014	5

	Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2015 and 2014	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23

	Critical Accounting Estimates	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	35

Safe Harbor and Cautionary Statement		36

PART II. OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 6.	Exhibits	38

Signatures		39

Exhibit Index		40

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands)



	March 31, 2015		December 31, 2014
	(unaudited)
ASSETS
Investments, available-for-sale, at estimated fair value:
Fixed maturities (amortized cost of $9,371,731 in 2015 and $9,929,137 in 2014)	$	9,971,814	$	10,422,882
Equity securities (cost of $2,096,586 in 2015 and $1,951,658 in 2014)	4,340,849		4,137,576
Short-term investments (estimated fair value approximates cost)	1,731,872		1,594,849
Total Investments	16,044,535		16,155,307
Cash and cash equivalents	1,958,087		1,960,169
Restricted cash and cash equivalents	550,610		522,225
Receivables	1,193,405		1,135,217
Reinsurance recoverable on unpaid losses	1,949,974		1,868,669
Reinsurance recoverable on paid losses	113,816		102,206
Deferred policy acquisition costs	369,632		353,410
Prepaid reinsurance premiums	365,496		365,458
Goodwill	1,039,911		1,049,115
Intangible assets	680,357		702,747
Other assets	987,566		985,834
Total Assets	$	25,253,389	$	25,200,357
LIABILITIES AND EQUITY
Unpaid losses and loss adjustment expenses	$	10,280,037	$	10,404,152
Life and annuity benefits	1,189,140		1,305,818
Unearned premiums	2,316,508		2,245,690
Payables to insurance and reinsurance companies	286,102		276,122
Senior long-term debt and other debt (estimated fair value of $2,525,000 in 2015 and $2,493,000 in 2014)	2,249,554		2,253,594
Other liabilities	999,542		1,051,931
Total Liabilities	17,320,883		17,537,307
Redeemable noncontrolling interests	55,108		61,048
Commitments and contingencies
Shareholders' equity:
Common stock	3,320,323		3,308,395
Retained earnings	2,753,963		2,581,866
Accumulated other comprehensive income	1,795,372		1,704,557
Total Shareholders' Equity	7,869,658		7,594,818
Noncontrolling interests	7,740		7,184
Total Equity	7,877,398		7,602,002
Total Liabilities and Equity	$	25,253,389	$	25,200,357

See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income

(Unaudited)



	Three Months Ended March 31,
	2015			2014
	(dollars in thousands, except per share data)
OPERATING REVENUES
Earned premiums	$	943,650		$	949,375
Net investment income	92,875			86,715
Net realized investment gains:
Other-than-temporary impairment losses	(5,092		)	—
Net realized investment gains, excluding other-than-temporary impairment losses	10,663			17,394
Net realized investment gains	5,571			17,394
Other revenues	260,058			186,171
Total Operating Revenues	1,302,154			1,239,655
OPERATING EXPENSES
Losses and loss adjustment expenses	446,995			542,303
Underwriting, acquisition and insurance expenses	340,685			355,505
Amortization of intangible assets	14,640			13,999
Other expenses	231,001			182,168
Total Operating Expenses	1,033,321			1,093,975
Operating Income	268,833			145,680
Interest expense	29,312			29,699
Income Before Income Taxes	239,521			115,981
Income tax expense	45,515			28,480
Net Income	194,006			87,501
Net income (loss) attributable to noncontrolling interests	3,014			(215		)
Net Income to Shareholders	$	190,992		$	87,716

OTHER COMPREHENSIVE INCOME
Change in net unrealized gains on investments, net of taxes:
Net holding gains arising during the period	$	121,022		$	147,296
Change in unrealized other-than-temporary impairment losses on fixed maturities arising during the period	167			(20		)
Reclassification adjustments for net gains included in net income	(9,053		)	(5,944		)
Change in net unrealized gains on investments, net of taxes	112,136			141,332
Change in foreign currency translation adjustments, net of taxes	(21,814		)	913
Change in net actuarial pension loss, net of taxes	463			319
Total Other Comprehensive Income	90,785			142,564
Comprehensive Income	284,791			230,065
Comprehensive income (loss) attributable to noncontrolling interests	2,984			(208		)
Comprehensive Income to Shareholders	$	281,807		$	230,273

NET INCOME PER SHARE
Basic	$	13.57		$	6.28
Diluted	$	13.49		$	6.25

See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity

(Unaudited)



(in thousands)	Common Shares		Common Stock			Retained Earnings			Accumulated Other Comprehensive Income		Total Shareholders' Equity			Noncontrolling Interests			Total Equity			Redeemable Noncontrolling Interests
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)						87,716			—		87,716			(324		)	87,392			109
Other comprehensive income						—			142,557		142,557			—			142,557			7
Comprehensive Income (Loss)											230,273			(324		)	229,949			116
Issuance of common stock	22		4,363			—			—		4,363			—			4,363			—
Repurchase of common stock	(39	)	—			(17,282		)	—		(17,282		)	—			(17,282		)	—
Restricted stock units expensed	—		8,421			—			—		8,421			—			8,421			—
Adjustment of redeemable noncontrolling interests	—		—			117			—		117			—			117			(117		)
Purchase of noncontrolling interest	—		647			—			—		647			—			647			(18,405		)
Other	—		7			9			—		16			3,945			3,961			(862		)
March 31, 2014	13,969		$	3,302,301		$	2,365,469		$	1,232,362	$	6,900,132		$	8,054		$	6,908,186		$	52,915

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						190,992			—		190,992			511			191,503			2,503
Other comprehensive income (loss)						—			90,815		90,815			—			90,815			(30		)
Comprehensive Income											281,807			511			282,318			2,473
Issuance of common stock	5		429			—			—		429			—			429			—
Repurchase of common stock	(21	)	—			(17,548		)	—		(17,548		)	—			(17,548		)	—
Restricted stock units expensed	—		10,632			—			—		10,632			—			10,632			—
Adjustment of redeemable noncontrolling interests	—		—			(1,347		)	—		(1,347		)	—			(1,347		)	1,347
Purchase of noncontrolling interest	—		(903		)	—			—		(903		)	—			(903		)	(8,609		)
Other	—		1,770			—			—		1,770			45			1,815			(1,151		)
March 31, 2015	13,946		$	3,320,323		$	2,753,963		$	1,795,372	$	7,869,658		$	7,740		$	7,877,398		$	55,108

See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Three Months Ended March 31,
	2015			2014
	(dollars in thousands)
OPERATING ACTIVITIES
Net income	$	194,006		$	87,501
Adjustments to reconcile net income to net cash provided by operating activities	(171,174		)	(65,084		)
Net Cash Provided By Operating Activities	22,832			22,417
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities and equity securities	71,721			660,447
Proceeds from maturities, calls and prepayments of fixed maturities	388,522			440,891
Cost of fixed maturities and equity securities purchased	(232,551		)	(1,114,736		)
Net change in short-term investments	(146,545		)	130,557
Proceeds from sales of equity method investments	15,003			82,518
Cost of equity method investments	(600		)	(8,050		)
Change in restricted cash and cash equivalents	(40,841		)	152,897
Additions to property and equipment	(23,606		)	(10,725		)
Acquisitions, net of cash acquired	—			(153,735		)
Other	(441		)	384
Net Cash Provided By Investing Activities	30,662			180,448
FINANCING ACTIVITIES
Additions to senior long-term debt and other debt	27,711			10,120
Repayment of senior long-term debt and other debt	(29,160		)	(8,608		)
Repurchases of common stock	(17,548		)	(17,282		)
Issuance of common stock	429			4,363
Purchase of noncontrolling interests	(10,314		)	(17,758		)
Distributions to noncontrolling interests	(1,159		)	(1,168		)
Other	(3,407		)	(609		)
Net Cash Used By Financing Activities	(33,448		)	(30,942		)
Effect of foreign currency rate changes on cash and cash equivalents	(22,128		)	971
Increase (decrease) in cash and cash equivalents	(2,082		)	172,894
Cash and cash equivalents at beginning of period	1,960,169			1,978,526
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,958,087		$	2,151,420

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Markel Corporation is a diverse financial holding company serving a variety of niche markets. Markel Corporation's principal business markets and underwrites specialty insurance products and programs. 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.

The consolidated balance sheet as of March 31, 2015 and the related consolidated statements of income and comprehensive income, changes in equity and cash flows for the three months ended March 31, 2015 and 2014 are unaudited. In the opinion of management, all adjustments necessary for fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal, recurring items. Interim results are not necessarily indicative of results of operations for the entire year. The consolidated balance sheet as of December 31, 2014 was derived from Markel Corporation's audited annual consolidated financial statements.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and its subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. 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.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company's annual consolidated financial statements and notes. Readers are urged to review the Company's 2014 Annual Report on Form 10-K for a more complete description of the Company's business and accounting policies.

2. 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. ASU No. 2014-09 becomes effective for the Company during the first quarter of 2017 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 not permitted. On April 29, 2015, the FASB proposed a one-year deferral of the effective date for ASU 2014-09. Early application would be permitted for all entities, but not before the original effective date for public business entities. 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 significant impact on the Company's insurance operations, but will impact the Company's non-insurance operations.

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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. Early adoption is allowed. The Company is currently evaluating ASU No. 2015-02 to determine the potential impact that adopting this standard will have on its consolidated financial statements.

3. Investments

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



	March 31, 2015
(dollars in thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Unrealized Other-Than- Temporary Impairment Losses			Estimated Fair Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	612,368	$	17,212	$	(764	)	$	—		$	628,816
Obligations of states, municipalities and political subdivisions	3,956,064		251,023		(2,661		)	—			4,204,426
Foreign governments	1,336,176		213,901		(191		)	—			1,549,886
Commercial mortgage-backed securities	408,016		8,861		(1,255		)	—			415,622
Residential mortgage-backed securities	920,185		44,219		(1,774		)	(2,258		)	960,372
Asset-backed securities	77,341		73		(295		)	—			77,119
Corporate bonds	2,061,581		78,801		(3,198		)	(1,611		)	2,135,573
Total fixed maturities	9,371,731		614,090		(10,138		)	(3,869		)	9,971,814
Equity securities:
Insurance, banks and other financial institutions	588,140		798,628		(1,740		)	—			1,385,028
Industrial, consumer and all other	1,508,446		1,458,816		(11,441		)	—			2,955,821
Total equity securities	2,096,586		2,257,444		(13,181		)	—			4,340,849
Short-term investments	1,731,862		13		(3		)	—			1,731,872
Investments, available-for-sale	$	13,200,179	$	2,871,547	$	(23,322	)	$	(3,869	)	$	16,044,535

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	December 31, 2014
(dollars in thousands)	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Unrealized Other-Than- Temporary Impairment Losses			Estimated Fair Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	662,462	$	12,963	$	(2,163	)	$	—		$	673,262
Obligations of states, municipalities and political subdivisions	4,075,748		245,158		(3,359		)	—			4,317,547
Foreign governments	1,458,255		154,707		(1,041		)	—			1,611,921
Commercial mortgage-backed securities	427,904		5,325		(2,602		)	—			430,627
Residential mortgage-backed securities	954,263		34,324		(3,482		)	(2,258		)	982,847
Asset-backed securities	100,073		99		(682		)	—			99,490
Corporate bonds	2,250,432		69,016		(10,441		)	(1,819		)	2,307,188
Total fixed maturities	9,929,137		521,592		(23,770		)	(4,077		)	10,422,882
Equity securities:
Insurance, banks and other financial institutions	523,739		789,717		(1,531		)	—			1,311,925
Industrial, consumer and all other	1,427,919		1,403,566		(5,834		)	—			2,825,651
Total equity securities	1,951,658		2,193,283		(7,365		)	—			4,137,576
Short-term investments	1,594,819		36		(6		)	—			1,594,849
Investments, available-for-sale	$	13,475,614	$	2,714,911	$	(31,141	)	$	(4,077	)	$	16,155,307

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



	March 31, 2015
	Less than 12 months					12 months or longer					Total
(dollars in thousands)	Estimated Fair Value		Gross Unrealized Holding and Other-Than- Temporary Impairment Losses			Estimated Fair Value		Gross Unrealized Holding and Other-Than- Temporary Impairment Losses			Estimated Fair Value		Gross Unrealized Holding and Other-Than- Temporary Impairment Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	5,716	$	(3	)	$	125,651	$	(761	)	$	131,367	$	(764	)
Obligations of states, municipalities and political subdivisions	95,257		(547		)	61,394		(2,114		)	156,651		(2,661		)
Foreign governments	16,965		(68		)	44,204		(123		)	61,169		(191		)
Commercial mortgage-backed securities	51,673		(157		)	107,698		(1,098		)	159,371		(1,255		)
Residential mortgage-backed securities	3,726		(2,277		)	167,295		(1,755		)	171,021		(4,032		)
Asset-backed securities	10,147		(17		)	45,378		(278		)	55,525		(295		)
Corporate bonds	74,273		(1,742		)	373,451		(3,067		)	447,724		(4,809		)
Total fixed maturities	257,757		(4,811		)	925,071		(9,196		)	1,182,828		(14,007		)
Equity securities:
Insurance, banks and other financial institutions	16,810		(1,740		)	—		—			16,810		(1,740		)
Industrial, consumer and all other	158,284		(11,441		)	—		—			158,284		(11,441		)
Total equity securities	175,094		(13,181		)	—		—			175,094		(13,181		)
Short-term investments	440,985		(3		)	—		—			440,985		(3		)
Total	$	873,836	$	(17,995	)	$	925,071	$	(9,196	)	$	1,798,907	$	(27,191	)

At March 31, 2015, the Company held 424 securities with a total estimated fair value of $1.8 billion and gross unrealized losses of $27.2 million. Of these 424 securities, 281 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $925.1 million and gross unrealized losses of $9.2 million. All 281 securities were fixed maturities. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost.

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	December 31, 2014
	Less than 12 months					12 months or longer					Total
(dollars in thousands)	Estimated Fair Value		Gross Unrealized Holding and Other-Than- Temporary Impairment Losses			Estimated Fair Value		Gross Unrealized Holding and Other-Than- Temporary Impairment Losses			Estimated Fair Value		Gross Unrealized Holding and Other-Than- Temporary Impairment Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	108,250	$	(62	)	$	163,359	$	(2,101	)	$	271,609	$	(2,163	)
Obligations of states, municipalities and political subdivisions	58,583		(542		)	92,441		(2,817		)	151,024		(3,359		)
Foreign governments	18,856		(386		)	56,217		(655		)	75,073		(1,041		)
Commercial mortgage-backed securities	45,931		(210		)	147,558		(2,392		)	193,489		(2,602		)
Residential mortgage-backed securities	9,613		(2,285		)	207,374		(3,455		)	216,987		(5,740		)
Asset-backed securities	30,448		(20		)	45,160		(662		)	75,608		(682		)
Corporate bonds	141,176		(2,263		)	621,821		(9,997		)	762,997		(12,260		)
Total fixed maturities	412,857		(5,768		)	1,333,930		(22,079		)	1,746,787		(27,847		)
Equity securities:
Insurance, banks and other financial institutions	16,219		(1,531		)	—		—			16,219		(1,531		)
Industrial, consumer and all other	86,062		(5,834		)	—		—			86,062		(5,834		)
Total equity securities	102,281		(7,365		)	—		—			102,281		(7,365		)
Short-term investments	181,964		(6		)	—		—			181,964		(6		)
Total	$	697,102	$	(13,139	)	$	1,333,930	$	(22,079	)	$	2,031,032	$	(35,218	)

At December 31, 2014, the Company held 552 securities with a total estimated fair value of $2.0 billion and gross unrealized losses of $35.2 million. Of these 552 securities, 396 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $1.3 billion and gross unrealized losses of $22.1 million. All 396 securities were fixed maturities.

The Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. All securities with unrealized losses are reviewed. The Company considers many factors in completing its quarterly review of securities with unrealized losses for other-than-temporary impairment, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer. For equity securities, the ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery is considered. For fixed maturities, the Company considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery, the implied yield-to-maturity, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due.

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

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When assessing whether it intends to sell a fixed maturity or if it is likely to be required to sell a fixed maturity before recovery of its amortized cost, the Company evaluates facts and circumstances including decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and, ultimately, current market prices.

c)The amortized cost and estimated fair value of fixed maturities at March 31, 2015 are shown below by contractual maturity.



(dollars in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	617,588	$	620,740
Due after one year through five years	1,904,996		1,962,240
Due after five years through ten years	1,925,821		2,054,347
Due after ten years	3,517,784		3,881,374
	7,966,189		8,518,701
Commercial mortgage-backed securities	408,016		415,622
Residential mortgage-backed securities	920,185		960,372
Asset-backed securities	77,341		77,119
Total fixed maturities	$	9,371,731	$	9,971,814

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



	Three Months Ended March 31,
(dollars in thousands)	2015			2014
Interest:
Municipal bonds (tax-exempt)	$	25,852		$	23,104
Municipal bonds (taxable)	14,100			8,996
Other taxable bonds	35,138			35,744
Short-term investments, including overnight deposits	1,251			1,474
Dividends on equity securities	19,024			16,856
Income from equity method investments	1,344			3,583
Other	61			1,179
	96,770			90,936
Investment expenses	(3,895		)	(4,221		)
Net investment income	$	92,875		$	86,715

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e)Cumulative credit losses recognized in net income on fixed maturities where other-than-temporary impairment was identified and a portion of the other-than-temporary impairment was included in other comprehensive income were $10.7 million at March 31, 2015 and $12.7 million at December 31, 2014.

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



	Three Months Ended March 31,
(dollars in thousands)	2015			2014
Realized gains:
Sales of fixed maturities	$	1,586		$	4,583
Sales of equity securities	15,957			12,145
Other	1,307			9,955
Total realized gains	18,850			26,683
Realized losses:
Sales of fixed maturities	(142		)	(8,484		)
Sales of equity securities	(160		)	(146		)
Other-than-temporary impairments	(5,092		)	—
Other	(7,885		)	(659		)
Total realized losses	(13,279		)	(9,289		)
Net realized investment gains	$	5,571		$	17,394
Change in net unrealized gains on investments:
Fixed maturities	$	106,338		$	148,811
Equity securities	58,345			66,453
Short-term investments	(20		)	1
Net increase	$	164,663		$	215,265

Other-than-temporary impairment losses recognized in net income and included in net realized investment gains included losses attributable to equity securities totaling $5.1 million for the three months ended March 31, 2015. There were no writedowns for other-than-temporary declines in the estimated fair value of investments for the three months ended March 31, 2014.

4. Fair Value Measurements

FASB ASC 820-10, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability.

Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are defined as follows:

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

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

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

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

Investments available-for-sale. Investments available-for-sale are recorded at fair value on a recurring basis and include fixed maturities, equity securities and short-term investments. Short-term investments include certificates of deposit, commercial paper, discount notes and treasury bills with original maturities of one year or less. Fair value for investments available-for-sale is determined by the Company after considering various sources of information, including information provided by a third party pricing service. The pricing service provides prices for substantially all of the Company's fixed maturities and equity securities. In determining fair value, the Company generally does not adjust the prices obtained from the pricing service. The Company obtains an understanding of the pricing service's valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. The Company validates prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances.

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

Fair value for investments available-for-sale is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices, fixed maturities are classified as Level 2 investments. The fair value of fixed maturities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data described above. If there are no recent reported trades, the fair value of fixed maturities may be derived through the use of matrix pricing or model processes, where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Significant inputs used to determine the fair value of obligations of states, municipalities and political subdivisions, corporate bonds and obligations of foreign governments include reported trades, benchmark yields, issuer spreads, bids, offers, credit information and estimated cash flows. Significant inputs used to determine the fair value of commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities include the type of underlying assets, benchmark yields, prepayment speeds, collateral information, tranche type and volatility, estimated cash flows, credit information, default rates, recovery rates, issuer spreads and the year of issue.

Senior long-term debt and other debt. Senior long-term debt and other debt is carried at amortized cost with the estimated fair value disclosed on the consolidated balance sheets. Senior long-term debt and other debt is classified as Level 2 within the fair value hierarchy due to variations in trading volumes and the lack of quoted market prices. Fair value for senior long-term debt and other debt is generally derived through recent reported trades for identical securities, making adjustments through the reporting date, if necessary, based upon available market observable data including U.S. Treasury securities and implied credit spreads. Significant inputs used to determine the fair value of senior long-term debt and other debt include reported trades, benchmark yields, issuer spreads, bids and offers.

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The following tables present the balances of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy.



	March 31, 2015
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investments available-for-sale:
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	—	$	628,816	$	—	$	628,816
Obligations of states, municipalities and political subdivisions	—		4,204,426		—		4,204,426
Foreign governments	—		1,549,886		—		1,549,886
Commercial mortgage-backed securities	—		415,622		—		415,622
Residential mortgage-backed securities	—		960,372		—		960,372
Asset-backed securities	—		77,119		—		77,119
Corporate bonds	—		2,135,573		—		2,135,573
Total fixed maturities	—		9,971,814		—		9,971,814
Equity securities:
Insurance, banks and other financial institutions	1,385,028		—		—		1,385,028
Industrial, consumer and all other	2,955,821		—		—		2,955,821
Total equity securities	4,340,849		—		—		4,340,849
Short-term investments	1,618,657		113,215		—		1,731,872
Total investments available-for-sale	$	5,959,506	$	10,085,029	$	—	$	16,044,535



	December 31, 2014
(dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets:
Investments available-for-sale:
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government agencies	$	—	$	673,262	$	—	$	673,262
Obligations of states, municipalities and political subdivisions	—		4,317,547		—		4,317,547
Foreign governments	—		1,611,921		—		1,611,921
Commercial mortgage-backed securities	—		430,627		—		430,627
Residential mortgage-backed securities	—		982,847		—		982,847
Asset-backed securities	—		99,490		—		99,490
Corporate bonds	—		2,307,188		—		2,307,188
Total fixed maturities	—		10,422,882		—		10,422,882
Equity securities:
Insurance, banks and other financial institutions	1,311,925		—		—		1,311,925
Industrial, consumer and all other	2,825,651		—		—		2,825,651
Total equity securities	4,137,576		—		—		4,137,576
Short-term investments	1,469,975		124,874		—		1,594,849
Total investments available-for-sale	$	5,607,551	$	10,547,756	$	—	$	16,155,307

There were no transfers into or out of Level 1 and Level 2 during the three months ended March 31, 2015 and 2014.

The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2015 and 2014.

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5. Segment Reporting Disclosures

The Company monitors and reports its ongoing underwriting operations in the following three segments: U.S. Insurance, International Insurance and Reinsurance. In determining how to aggregate and monitor its underwriting results, the Company 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 the Company's insurance subsidiaries domiciled in the United States. The International Insurance segment includes all direct business and facultative placements written by the Company's insurance subsidiaries domiciled outside of the United States, including the Company's syndicate at Lloyd's of London. The Reinsurance segment includes all treaty reinsurance written across the Company. Results for lines of business discontinued prior to, or in conjunction with, acquisitions, including the results attributable to the run-off of life and annuity reinsurance business, are reported in the Other Insurance (Discontinued Lines) segment. All investing activities related to the Company's insurance operations are included in the Investing segment.

The Company's non-insurance operations include the Company's Markel Ventures operations, which primarily consist of controlling interests in various industrial and service businesses. The Company's non-insurance operations also include the results of the Company's legal and professional consulting services. For purposes of segment reporting, the Company's non-insurance operations are not considered to be a reportable segment.

Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses. Segment profit or loss for each of the Company's underwriting segments is measured by underwriting profit or loss. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit or loss does not replace operating income or net income computed in accordance with U.S. GAAP as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company's underwriting performance. Segment profit or loss for the Company's underwriting segments also includes other revenues and other expenses, primarily related to the run-off of managing general agent operations that were discontinued in conjunction with acquisitions. Other revenues and other expenses in the Other Insurance (Discontinued Lines) segment are comprised of the results attributable to the run-off of life and annuity reinsurance business.

For management reporting purposes, the Company allocates assets to its underwriting, investing and non-insurance operations. Underwriting assets are all assets not specifically allocated to the Investing segment or to the Company's non-insurance operations. Underwriting and investing assets are not allocated to the U.S. Insurance, International Insurance, Reinsurance or Other Insurance (Discontinued Lines) segments since the Company does not manage its assets by underwriting segment. The Company does not allocate capital expenditures for long-lived assets to any of its underwriting segments for management reporting purposes.

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



	Three Months Ended March 31, 2015
(dollars in thousands)	U.S. Insurance			International Insurance			Reinsurance			Other Insurance (Discontinued Lines)				Investing		Consolidated
Gross premium volume	$	585,365		$	289,227		$	377,837		$	44			$	—	$	1,252,473
Net written premiums	496,169			222,708			316,212			341				—		1,035,430

Earned premiums	514,554			205,961			222,754			381				—		943,650
Losses and loss adjustment expenses:
Current accident year	(316,757		)	(148,844		)	(148,740		)	—				—		(614,341		)
Prior accident years	67,581			76,650			26,387			(3,272		)		—		167,346
Underwriting, acquisition and insurance expenses	(185,260		)	(78,794		)	(76,553		)	(78		)		—		(340,685		)
Underwriting profit (loss)	80,118			54,973			23,848			(2,969		)		—		155,970
Net investment income	—			—			—			—				92,875		92,875
Net realized investment gains	—			—			—			—				5,571		5,571
Other revenues (insurance)	1,402			5,387			423			(23		)		—		7,189
Other expenses (insurance)	(905		)	(1,404		)	—			(7,349		)		—		(9,658		)
Segment profit (loss)	$	80,615		$	58,956		$	24,271		$	(10,341	)		$	98,446	$	251,947
Other revenues (non-insurance)																252,869
Other expenses (non-insurance)																(221,343		)
Amortization of intangible assets																(14,640		)
Interest expense																(29,312		)
Income before income taxes																$	239,521
U.S. GAAP combined ratio ⁽¹⁾	84		%	73		%	89		%	NM			⁽²⁾			83		%


⁽¹⁾	The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.


⁽²⁾	NM – Ratio is not meaningful.

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	Three Months Ended March 31, 2014
(dollars in thousands)	U.S. Insurance			International Insurance			Reinsurance			Other Insurance (Discontinued Lines)				Investing		Consolidated
Gross premium volume	$	575,233		$	294,236		$	489,961		$	327			$	—	$	1,359,757
Net written premiums	474,054			229,120			435,997			140				—		1,139,311

Earned premiums	483,735			222,147			243,315			178				—		949,375
Losses and loss adjustment expenses:
Current accident year	(312,413		)	(163,379		)	(173,900		)	—				—		(649,692		)
Prior accident years	43,554			42,297			28,200			(6,662		)		—		107,389
Underwriting, acquisition and insurance expenses	(193,529		)	(80,009		)	(81,972		)	5				—		(355,505		)
Underwriting profit (loss)	21,347			21,056			15,643			(6,479		)		—		51,567
Net investment income	—			—			—			—				86,715		86,715
Net realized investment gains	—			—			—			—				17,394		17,394
Other revenues (insurance)	2,110			7,348			2,136			43				—		11,637
Other expenses (insurance)	(1,647		)	(3,595		)	—			(8,615		)		—		(13,857		)
Segment profit (loss)	$	21,810		$	24,809		$	17,779		$	(15,051	)		$	104,109	$	153,456
Other revenues (non-insurance)																174,534
Other expenses (non-insurance)																(168,311		)
Amortization of intangible assets																(13,999		)
Interest expense																(29,699		)
Income before income taxes																$	115,981
U.S. GAAP combined ratio ⁽¹⁾	96		%	91		%	94		%	NM			⁽²⁾			95		%


⁽¹⁾	The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.


⁽²⁾	NM – Ratio is not meaningful.


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



(dollars in thousands)	March 31, 2015		December 31, 2014
Segment assets:
Investing	$	18,450,247	$	18,531,150
Underwriting	5,584,980		5,422,445
Total segment assets	24,035,227		23,953,595
Non-insurance operations	1,218,162		1,246,762
Total assets	$	25,253,389	$	25,200,357

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6. Other Revenues and Other Expenses

The following table summarizes the components of other revenues and other expenses.



	Three Months Ended March 31,
	2015					2014
(dollars in thousands)	Other Revenues			Other Expenses		Other Revenues		Other Expenses
Insurance:
Managing general agent operations	$	5,870		$	2,309	$	9,178	$	4,881
Life and annuity	(23		)	7,349		43		8,615
Other	1,342			—		2,416		361
	7,189			9,658		11,637		13,857
Non-Insurance:
Markel Ventures: Manufacturing	177,762			151,800		100,611		95,889
Markel Ventures: Non-Manufacturing	67,681			63,830		70,595		65,511
Other	7,426			5,713		3,328		6,911
	252,869			221,343		174,534		168,311
Total	$	260,058		$	231,001	$	186,171	$	182,168

The Company's Markel Ventures operations primarily consist of controlling interests in various industrial and service businesses and are viewed by management as separate and distinct from the Company's insurance operations. While each of the companies is operated independently from one another, management aggregates financial results into two industry groups: manufacturing and non-manufacturing.

7. Reinsurance

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



	Three Months Ended March 31,
	2015						2014
(dollars in thousands)	Written			Earned			Written			Earned
Direct	$	801,580		$	844,570		$	795,311		$	828,292
Assumed	450,893			312,835			564,446			347,699
Ceded	(217,043		)	(213,755		)	(220,446		)	(226,616		)
Net premiums	$	1,035,430		$	943,650		$	1,139,311		$	949,375

The percentage of ceded earned premiums to gross earned premiums was 18% and 19%, respectively, for the three months ended March 31, 2015 and 2014. The percentage of assumed earned premiums to net earned premiums was 33% and 37%, respectively, for the three months ended March 31, 2015 and 2014.

Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $88.8 million and $97.6 million, respectively, for the three months ended March 31, 2015 and 2014.

On March 9, 2015, the Company completed a retrospective reinsurance transaction to cede a portfolio of policies comprised of liabilities arising from asbestos and environmental exposures that originated before 1992 in exchange for payments totaling $89.0 million, which included cash paid at closing of $69.9 million. At the time of the transaction, reserves for unpaid losses and loss adjustment expenses on the policies ceded totaled $94.1 million, resulting in a deferred gain of $5.1 million which will be recognized in earnings in future periods in proportion to actual reinsurance recoveries received pursuant to the transaction. The ceded reserves represented approximately 35% of our net asbestos and environmental reserves for losses and loss adjustment expenses as of December 31, 2014.

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8. Income Taxes

The estimated annual effective tax rate was 19% and 25% for the three months ended March 31, 2015 and 2014, respectively. For the three months ended March 31, 2015, the estimated annual effective tax rate differs from the U.S. statutory tax rate of 35% primarily as a result of tax-exempt investment income and foreign tax credits for foreign taxes paid. In previous periods, foreign taxes paid were not available for use as tax credits against the Company's U.S. provision for income taxes. Based on the Company's estimated earnings from foreign operations in 2015, the Company expects that significant foreign taxes paid, both in the current period and prior periods, will be available for use as credits against its U.S. provision for income taxes in 2015. For the three months ended March 31, 2014, the estimated annual effective tax rate differs from the U.S. statutory tax rate of 35% primarily as a result of tax-exempt investment income. The decrease in the estimated annual effective tax rate in 2015 compared to 2014 was primarily due to the impact of the foreign tax credits described above.

9. Net Income per Share

Net income per share was determined by dividing adjusted net income to shareholders by the applicable weighted average shares outstanding. 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 period.