The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and all subsidiaries.

Critical Accounting Estimates

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

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

Readers are urged to review our 2007 Annual Report on Form 10-K for a more complete description of our critical accounting estimates.

Our Business

We market and underwrite specialty insurance products and programs to a variety of niche markets and believe that our specialty product focus and niche market strategy enable us to develop expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by our expertise, service, continuity and other value-based considerations. We compete in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets. Our financial goals are to earn consistent underwriting profits and superior investment returns to build shareholder value.

Our Excess and Surplus Lines segment is comprised of four underwriting units, our Specialty Admitted segment consists of three underwriting units and our London Insurance Market segment is comprised of Markel International's operations. In 2007, our Excess and Surplus Lines segment was comprised of five underwriting units. In early 2008, it was determined that the products previously written by the Markel Re unit would be combined into two of our existing underwriting units. After all ongoing business is transferred, Markel Re's excess and umbrella program and casualty facultative placements will be written out of the Markel Brokered Excess and Surplus Lines unit, while the alternative risk transfer programs will be combined with the Markel Specialty Program Insurance unit. All business previously written by the Markel Re unit will continue to be included in the Excess and Surplus Lines segment's results.

Our Excess and Surplus Lines segment writes property and casualty insurance outside of the standard market for hard-to-place risks including catastrophe-exposed property, professional liability, products liability, general

liability, commercial umbrella and other coverages tailored for unique exposures.

Our Specialty Admitted segment writes risks that, although unique and hard-to-place in the standard market, must remain with an admitted insurance company for marketing and regulatory reasons. Our underwriting units in this segment write specialty program insurance for well-defined niche markets and personal and commercial property and liability coverages.

We participate in the London Market through Markel International, which includes Markel Capital Limited and Markel International Insurance Company Limited, wholly-owned subsidiaries. Markel Capital Limited is the corporate capital provider for Markel Syndicate 3000 at Lloyd's, which is managed by Markel Syndicate Management Limited, a wholly-owned subsidiary. Our London Insurance Market segment writes specialty property, casualty, professional liability and marine insurance and reinsurance.

For purposes of segment reporting, the Other segment includes lines of business that have been discontinued in conjunction with an acquisition.

Key Performance Indicators

We measure financial success by our ability to compound growth in book value per share at a high rate of return over a long period of time. We recognize that it is difficult to grow book value consistently each year, so we measure ourselves over a five-year period. We believe that growth in book value per share is the most comprehensive measure of our success because it includes all underwriting and investing results. We measure underwriting results by our underwriting profit or loss and combined ratio. These measures are discussed in greater detail under "Results of Operations."

Results of Operations

The following table compares the components of net income.



                                               Quarter Ended             Six Months Ended
                                                 June 30,                    June 30,
 (dollars in thousands)                     2008          2007          2008          2007
 Underwriting profit                      $  24,900     $  59,612     $  65,428     $ 129,685
 Net investment income                       76,521        77,167       152,533       154,549
 Net realized investment gains (losses)      24,740        51,581       (31,568 )      61,730
 Amortization of intangible assets           (1,148 )        (598 )      (2,098 )        (598 )
 Interest expense                           (11,934 )     (14,335 )     (24,765 )     (29,784 )
 Income tax expense                         (30,837 )     (52,226 )     (43,300 )     (95,707 )

 Net income                               $  82,242     $ 121,201     $ 116,230     $ 219,875

Net income for the quarter and six months ended June 30, 2008 decreased 32% and 47%, respectively, compared to the same periods of 2007. The decrease in net income for the quarter and six months ended June 30, 2008 was due in part to $20.5 million and $92.5 million, respectively, of write downs for other-than-temporary declines in the estimated fair value of investments. Net income in both periods of 2008 also decreased due to lower underwriting profits as compared to the same periods of 2007. The components of net income are discussed in further detail under "Underwriting Results," "Investing Results" and "Other Expenses."

Underwriting Results

Underwriting profits are a key component of our strategy to grow book value per share. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We use underwriting profit or loss as a basis for evaluating our underwriting performance.

The following table compares selected data from our underwriting operations.

                                                Quarter Ended                   Six Months Ended
                                                  June 30,                          June 30,
(dollars in thousands)                      2008            2007             2008              2007
Gross premium volume                      $ 613,151       $ 627,631       $ 1,183,665       $ 1,256,934
Net written premiums                      $ 534,962       $ 554,611       $ 1,044,185       $ 1,100,136
Net retention                                    87 %            88 %              88 %              88 %
Earned premiums                           $ 503,704       $ 531,165       $ 1,004,124       $ 1,062,575
Losses and loss adjustment expenses       $ 292,689       $ 279,087       $   572,833       $   553,822
Underwriting, acquisition and insurance
expenses                                  $ 186,115       $ 192,466       $   365,863       $   379,068
Underwriting profit                       $  24,900       $  59,612       $    65,428       $   129,685

U.S. GAAP Combined Ratios(1)
Excess and Surplus Lines                         92 %            84 %              90 %              83 %
Specialty Admitted                              100 %            91 %              99 %              93 %
London Insurance Market                          99 %            96 %              98 %              95 %
Other                                            NM (2)          NM (2)            NM (2)            NM (2)
Markel Corporation (Consolidated)                95 %            89 %              93 %              88 %

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

(2) NM - Ratio is not meaningful.

Our combined ratio was 95% and 93%, respectively, for the quarter and six months ended June 30, 2008 compared to 89% and 88%, respectively, for the same periods in 2007. The combined ratio for both the quarter and six months ended June 30, 2008 increased primarily due to lower underwriting profits within the Excess and Surplus Lines segment as compared to the same periods of 2007.

The combined ratio for the Excess and Surplus Lines segment was 92% and 90%, respectively, for the quarter and six months ended June 30, 2008 compared to 84% and 83%, respectively, for the same periods in 2007. For both periods of 2008, the increase in the combined ratio was due to a higher current accident year loss ratio and lower favorable development of prior years' loss reserves than in the same periods of 2007. The higher current accident year loss ratio in both periods of 2008 is primarily attributable to softening insurance market conditions, which have resulted in price deterioration across most of our product lines. The Excess and Surplus Lines segment's combined ratio for the quarter and six months ended June 30, 2008 included $17.1 million and $47.8 million, respectively, of favorable development on prior years' loss reserves compared to $34.0 million and $67.9 million, respectively, for the same periods in 2007.

The redundancies on prior years' loss reserves experienced within the Excess and Surplus Lines segment during both periods of 2008 and 2007 were primarily on our professional liability programs at the Markel Shand Professional/Products Liability unit. In both periods of 2008, these prior year loss reserve redundancies have decreased from the same periods of 2007 due to the softening of the insurance market, which has resulted in a deterioration in pricing at this unit in recent years. The loss reserve redundancies experienced in both periods of 2008 and 2007 were partially offset by adverse loss reserve development at the Markel Re unit, which resulted from higher than expected average claim frequency and severity on two general liability programs within the Specialized Markel Alternative Risk Transfer (SMART) division. Both of these programs were cancelled in the first quarter of 2007.

During the second quarter of 2008, the Markel Re unit experienced $16.6 million of adverse development on prior years' loss reserves, of which $12.5 million related to two general liability programs within the SMART division. This adverse development was primarily on the 2005 and 2006 accident years. Prior to 2008, the majority of the open claims on these two programs were handled by a third-party administrator that was overseen by claims personnel at the Markel Re unit. During the second half of 2007, we began to transfer the handling of open claims from the third-party administrator to the Markel Re claims department. As part of this process, we conducted reviews of all transferred claims files. This claim-by-claim review revealed that case reserve strengthening was necessary. As a result, during the second quarter of 2008, our actuaries revised their estimates of the ultimate losses on these programs and management increased prior years' loss reserves accordingly.

The combined ratio for the Specialty Admitted segment was 100% and 99%, respectively, for the quarter and six months ended June 30, 2008 compared to 91% and 93%, respectively, for the same periods in 2007. For both periods of 2008, the increase in the combined ratio was due to a higher current accident year loss ratio and lower favorable development of prior years' loss reserves than in the same periods of 2007. The higher current accident year loss ratio in both periods of 2008 is primarily attributable to increased loss severity at the Markel Global Marine and Energy unit. The Specialty Admitted segment's combined ratio for the second quarter of 2008 included $0.4 million of adverse development on prior years' loss reserves compared to $4.9 million of favorable development on prior years' loss reserves for the same period of 2007. For the six months ended June 30, 2008, the Specialty Admitted segment's combined ratio included $4.5 million of favorable development on prior years' loss reserves compared to $7.1 million for the same period of 2007.

The combined ratio for the London Insurance Market segment was 99% and 98%, respectively, for the quarter and six months ended June 30, 2008 compared to 96% and 95%, respectively, for the same periods in 2007. The increase in the combined ratio in both periods of 2008 was primarily the result of a higher expense ratio due in part to lower earned premiums compared to the same periods of 2007. In both periods of 2008, a higher current accident year loss ratio more than offset greater favorable development on prior years' loss reserves compared to the same periods of 2007. The higher current accident year loss ratio in 2008 was the result of softening insurance market conditions. The London Insurance Market segment's combined ratio for the quarter and six months ended June 30, 2008 included $14.0 million and $29.0 million, respectively, of favorable development on prior years' loss reserves compared to $6.0 million and $12.6 million, respectively, for the same periods in 2007. The redundancies on prior years' loss reserves experienced within the London Insurance Market segment during both periods of 2008 were primarily within the Professional and Financial Risks, Retail and Marine and Energy divisions at Markel International. This favorable development on prior years' loss

reserves was primarily on the 2002 to 2005 accident years and reflects improved risk selection and the favorable rates and terms associated with the London market in those years.

Premiums and Net Retentions

The following tables summarize gross premium volume, net written premiums and
earned premiums by underwriting segment.



                                             Gross Premium Volume
  Quarter Ended June 30,                                                         Six Months Ended June 30,
     2008          2007                  (dollars in thousands)                     2008            2007
    $  314,405   $ 339,684                          Excess and Surplus Lines   $      610,851    $   682,346
        95,631     100,652                          Specialty Admitted                167,188        172,742
       202,705     186,873                          London Insurance Market           405,335        400,330
           410         422                          Other                                 291          1,516

    $  613,151   $ 627,631                          Total                      $    1,183,665    $ 1,256,934

Gross premium volume for the quarter and six months ended June 30, 2008 decreased 2% and 6%, respectively, compared to the same periods in 2007. The decrease in both periods of 2008 was primarily the result of increased competition across many of our product lines and our decision to exit certain alternative risk transfer programs during 2007 that were previously underwritten by the Markel Re unit.

We expect that competition in the property and casualty insurance industry will remain strong throughout 2008. We continue to see price deterioration in virtually all of our product areas as a result of intense competition, including the increased presence of standard insurance companies in our markets. 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 has declined and, if the competitive environment does not improve, could decline further in the future.

                                           Net Written Premiums
 Quarter Ended June 30,                                                         Six Months Ended June 30,
    2008          2007                  (dollars in thousands)                     2008            2007
  $  271,613    $ 292,627                          Excess and Surplus Lines   $      534,932    $   584,428
      86,668       92,394                          Specialty Admitted                150,635        160,486
     176,348      169,378                          London Insurance Market           358,606        353,828
         333          212                          Other                                  12          1,394

  $  534,962    $ 554,611                          Total                      $    1,044,185    $ 1,100,136

Net retention of gross premium volume was 87% for the second quarter of 2008 and 88% for the six months ended June 30, 2008 compared to 88% for both periods of 2007. As part of our underwriting philosophy, we seek to offer products with limits that do not require significant amounts of reinsurance. We purchase reinsurance in order to reduce our retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs.

                                     Earned Premiums
 Quarter Ended June 30,                                        Six Months Ended June 30,
    2008          2007          (dollars in thousands)            2008            2007
  $  273,566    $ 290,835         Excess and Surplus Lines   $      550,963    $   583,394
      78,706       79,643         Specialty Admitted                155,447        157,520
     151,099      160,475         London Insurance Market           297,702        320,267
         333          212         Other                                  12          1,394

  $  503,704    $ 531,165         Total                      $    1,004,124    $ 1,062,575

Earned premiums for the quarter and six months ended June 30, 2008 decreased 5% and 6%, respectively, compared to the same periods in 2007. The decrease in both periods of 2008 was primarily due to lower earned premiums in the Excess and Surplus Lines and London Insurance Market segments as a result of lower gross premium volume over the last several quarters.

Investing Results

Net investment income for the second quarter of 2008 was $76.5 million compared to $77.2 million for the second quarter of 2007. Net investment income for the six months ended June 30, 2008 was $152.5 million compared to $154.5 million for the same period of 2007. Investment yields in both periods of 2008 were flat compared to both periods of 2007. For the six months ended June 30, 2008, the decrease in net investment income was primarily due to a $4.1 million change in the fair value of our credit default swap since December 31, 2007, which was partially offset by the impact of having higher average invested assets compared to the six months ended June 30, 2007.

Net realized investment gains for the second quarter of 2008 were $24.7 million compared to net realized investment gains of $51.6 million for the second quarter of 2007. For the six months ended June 30, 2008, net realized investment losses were $31.6 million compared to net realized investment gains of $61.7 million for the same period of 2007. Variability in the timing of realized and unrealized investment gains and losses is to be expected.

Net realized investment gains for the second quarter of 2008 included $20.5 million of write downs for other-than-temporary declines in the estimated fair value of investments. Included in the writedowns for the second quarter of 2008 was a $17.0 million writedown related to one equity security that had a fair value of approximately 48% of its cost at June 30, 2008. Given the magnitude of this unrealized loss and management's belief that the security was unlikely to recover in the near term, the decline in value was deemed other-than-temporary and was charged to earnings. The remaining $3.5 million of write downs related to five equity securities that were in an unrealized loss position at June 30, 2008. We sold portions of our holdings in these five securities during the first six months of 2008. As a result, we determined that we no longer had the intent to hold these securities until they fully recovered their value.

Net realized investment gains (losses) included $92.5 million and $3.5 million of write downs for other-than-temporary declines in the estimated fair value of investments for the six months ended June 30, 2008 and 2007, respectively. Net realized investment losses for the six months ended June 30, 2008 included write downs for eleven equity securities and two fixed maturities. Approximately two-thirds of the write downs for the six months ended June 30, 2008 were due to the determination that we no longer had the intent to hold these securities until they fully recover in value as we have begun selling a portion of the securities in order to allocate

capital to other securities with greater potential for long-term investment returns. Approximately one-third of the write downs related to securities that had other indications of other-than-temporary impairment, including having fair values of less than 80% of cost for more than 180 days. The most significant impairment related to our investment in Citigroup Inc., a security that we began selling in March 2008, for which we had write downs totaling $37.6 million for the six months ended June 30, 2008.

We complete a detailed analysis each quarter to assess whether the decline in the value of any investment below its cost basis is deemed other-than-temporary. At June 30, 2008, we held securities with gross unrealized losses of $217.7 million, or less than 3% of invested assets. All securities in an unrealized loss position were reviewed, and we believe that there were no other securities with indication of declines in estimated fair value that were other-than-temporary at June 30, 2008.

Other Expenses

Interest expense for the second quarter of 2008 decreased to $11.9 million from $14.3 million in the second quarter of 2007. Interest expense for the six months ended June 30, 2008 decreased to $24.8 million from $29.8 million in the same period of 2007. For both periods of 2008, the decrease compared to the same periods of 2007 was primarily due to the maturity of our 7.00% and 7.20% unsecured senior notes in May 2008 and August 2007, respectively.

The estimated annual effective tax rate was 27% and 30% for the six months ended June 30, 2008 and 2007, respectively. For both periods, the estimated annual effective tax rate differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income. The decrease in the estimated annual effective tax rate is primarily the result of anticipating comparable levels of tax-exempt investment income, while estimating lower income before income taxes in 2008 compared to 2007.

Comprehensive Income (Loss)

Comprehensive loss was $93.7 million for the second quarter of 2008 compared to comprehensive income of $70.2 million for the same period of 2007. Comprehensive loss for the second quarter of 2008 included net unrealized losses on investments, net of taxes, of $180.6 million, partially offset by net income of $82.2 million. Comprehensive income for the second quarter of 2007 included net income of $121.2 million, which was partially offset by net unrealized losses on investments, net of taxes, of $52.7 million. For the six months ended June 30, 2008, comprehensive loss was $113.6 million compared to comprehensive income of $146.9 million for the same period in 2007. Comprehensive loss for the six months ended June 30, 2008 included net unrealized losses on investments, net of taxes, of $230.6 million, partially offset by net income of $116.2 million. Comprehensive income for the six months ended June 30, 2007 included net income of $219.9 million, partially offset by net unrealized losses on investments, net of taxes, of $75.3 million.

Financial Condition

Invested assets were $7.5 billion at June 30, 2008 compared to $7.8 billion at December 31, 2007. Net unrealized holding gains on investments, net of taxes, were $157.9 million at June 30, 2008 compared to $388.5 million at December 31, 2007. The decrease in net unrealized holding gains on investments, net of taxes, for the six months ended June 30, 2008 was primarily due to a decline in the market value of our equity portfolio, which was due in part to the ongoing disruptions in the financial markets. Equity securities and investments in

affiliates were $1.5 billion, or 20% of invested assets, at June 30, 2008 compared to $1.9 billion, or 25% of invested assets, at December 31, 2007.

Net cash provided by operating activities was $234.4 million for the six months ended June 30, 2008 compared to $237.1 million for the same period of 2007.

Net cash used by financing activities was $135.0 million for the six months ended June 30, 2008 compared to $135.2 million for the same period of 2007. During the second quarter of 2008, we repaid $93.1 million on our 7.00% unsecured senior notes, which matured May 15, 2008. During the first quarter of 2007, we redeemed the outstanding Junior Subordinated Deferrable Interest Debentures for $111.0 million. In both 2008 and 2007, cash was used to repurchase shares of our common stock.

During the first quarter of 2008, we entered into treasury lock agreements in order to mitigate our interest rate risk associated with a potential issuance of fixed-rate debt. The treasury lock agreements had an aggregate notional amount of $225.0 million and were designated as cash flow hedges. In May 2008, due to unfavorable market conditions, we determined it was unlikely that we would issue fixed-rate debt prior to the scheduled termination date of the treasury lock agreements. As a result, we settled the treasury lock agreements and received . . .