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 2008 Annual Report on Form 10-K for a more complete description of our critical accounting estimates.

Our Business

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

Our Excess and Surplus Lines segment writes property and casualty insurance outside of the standard market for hard-to-place risks including catastrophe-exposed property, professional liability, products liability, general liability, commercial umbrella and other coverages tailored for unique exposures. In 2008, our Excess and Surplus Lines segment was comprised of four underwriting units, each with product-focused specialists servicing brokers, agents and insureds across the United States from their respective underwriting unit locations. In late March 2009, we transitioned the four underwriting units included in our Excess and Surplus Lines segment to a customer-focused regional office model as part of our previously announced "One Markel" initiative. Under this new model, each of our five regional offices will be responsible for serving the needs of the wholesale producers located in its region. The underwriters at our regional offices have access to and expertise in all of our product offerings and are located closer to our producers.

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. During 2009, our Specialty Admitted segment consists of two underwriting units. Our Specialty Admitted segment included a third underwriting unit, Markel Global Marine and Energy, until late 2008 when we decided to close that unit and place its programs into run-off.

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

For purposes of segment reporting, the Other 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.



                                                   Three Months Ended
                                                        March 31,
             (dollars in thousands)                2009          2008
             Underwriting profit                 $  21,998     $  40,528
             Net investment income                  69,056        76,012
             Net realized investment losses        (55,183 )     (56,308 )
             Amortization of intangible assets      (1,179 )        (950 )
             Interest expense                      (11,390 )     (12,831 )
             Income tax expense                     (6,944 )     (12,463 )

             Net income                          $  16,358     $  33,988

Net income for the three months ended March 31, 2009 decreased due to lower underwriting profits and lower investment returns as compared to the same period of 2008. 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.

                                                          Three Months Ended
                                                               March 31,
    (dollars in thousands)                               2009            2008
    Gross premium volume                               $ 486,836       $ 570,514
    Net written premiums                               $ 438,055       $ 509,223
    Net retention                                             90 %            89 %
    Earned premiums                                    $ 457,246       $ 500,420
    Losses and loss adjustment expenses                $ 253,411       $ 280,144
    Underwriting, acquisition and insurance expenses   $ 181,837       $ 179,748
    Underwriting profit                                $  21,998       $  40,528


    U.S. GAAP Combined Ratios(1)
    Excess and Surplus Lines                                  89 %            88 %
    Specialty Admitted                                       110 %            98 %
    London Insurance Market                                   97 %            96 %
    Other                                                     NM (2)          NM (2)
    Markel Corporation (Consolidated)                         95 %            92 %

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

(2) NM - Ratio is not meaningful.

Our combined ratio was 95% for the first quarter of 2009 compared to 92% for the same period last year. The increase in the combined ratio was due to a higher current accident year loss ratio and a higher expense ratio, partially offset by more favorable development of prior years' loss reserves during the first quarter of 2009 compared to the same period in 2008. The expense ratio for the first quarter of 2009 included approximately $8 million, or 2 points on the combined ratio, of costs associated with the implementation of our One Markel initiative.

The combined ratio for the Excess and Surplus Lines segment was 89% for the first quarter of 2009 compared to 88% for the same period last year. The increase in the combined ratio was primarily attributable to a higher expense ratio, which was due to costs associated with the implementation of our One Markel initiative and a decline in earned premiums in 2009 compared to 2008. The unfavorable impact of a higher expense ratio was offset in part by more favorable development of prior years' loss reserves in the first quarter of 2009 compared to the same period of 2008, principally on our professional and product liability programs in this segment. The Excess and Surplus Lines segment's combined ratio for the quarter ended March 31, 2009 included $45.6 million of favorable development on prior years' loss reserves compared to $30.6 million of favorable development for the same period of 2008.

The combined ratio for the Specialty Admitted segment was 110% for the quarter ended March 31, 2009

compared to 98% for the same period of 2008. The increase in the combined ratio was primarily due to unfavorable development of prior years' loss reserves of $3.7 million during the first quarter of 2009 compared to favorable development of prior years' loss reserves of $4.9 million during the same period of 2008. The unfavorable development of prior years' loss reserves during the first quarter of 2009 was primarily due to an increase in the expected ultimate losses on the 2008 accident year for the excess liability program at the Markel Global Marine & Energy unit.

The combined ratio for the London Insurance Market segment was 97% for the quarter ended March 31, 2009 compared to 96% for the same period of 2008. The increase in the combined ratio in the first quarter of 2009 was due to a higher current accident year loss ratio, which was offset in part by a lower expense ratio compared to the first quarter of 2008. The higher current accident year loss ratio in 2009 was primarily the result of soft insurance market conditions, as well as adverse loss experience on the medical malpractice and construction professionals classes within the Professional and Financial Risks division. In late 2008, we ceased writing medical malpractice coverage at Markel International; however, premiums on this business will continue to be earned over the next several quarters. The London Insurance Market segment's combined ratio during the first quarter of both 2009 and 2008 included $15.0 million of favorable development on prior years' loss reserves.

The Other segment produced an underwriting loss of $0.5 million for the quarter ended March 31, 2009 compared to an underwriting profit of $0.7 million for the same period of 2008.

Premiums and Net Retentions

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



       Gross Premium Volume                                                              Net Written Premiums
   Three Months Ended March 31,                                                      Three Months Ended March 31,
     2009               2008                    (dollars in thousands)                 2009               2008
$       238,353    $       296,446                   Excess and Surplus Lines     $       216,409    $       263,319
         63,456             71,557                   Specialty Admitted                    57,459             63,967
        184,965            202,630                   London Insurance Market              164,078            182,258
             62               (119 )                 Other                                    109               (321 )

$       486,836    $       570,514                   Total                        $       438,055    $       509,223

Gross premium volume for the first quarter of 2009 decreased 15% compared to the same period of 2008 primarily due to continued intense competition across many of our product lines and to the effects of the current economic environment. Premiums for many of our product lines are based upon our insureds' revenues, gross receipts or payroll, which have been negatively impacted by the depressed levels of business activity that began in 2008. Also contributing to the decline in gross premium volume in 2009 are the effects of foreign currency exchange rate movements. Had currency exchange rates remained constant between the first quarter of 2009 and the first quarter of 2008, gross written premiums would have decreased 10%.

In late 2008, we reviewed the pricing for all of our major product lines and began pursuing price increases in many product areas. During the first quarter of 2009, we saw the rate of decline in prices slow and experienced moderate price increases in several product lines, most notably those offered by Markel International. 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.

As part of our underwriting philosophy, we seek to offer products with limits that do not require significant amounts of reinsurance. We purchase reinsurance in order to reduce our retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs. Net retention of gross premium volume for the first quarter of 2009 was 90% compared to 89% for the same period of 2008. Net retention of gross premium volume has increased consistent with our strategy to retain more of our profitable business.

The following table summarizes earned premiums by segment.

                                               Three Months Ended
                                                   March 31,
                  (dollars in thousands)        2009        2008
                  Excess and Surplus Lines   $  249,240   $ 277,397
                  Specialty Admitted             76,696      76,741
                  London Insurance Market       131,201     146,603
                  Other                             109        (321 )

                  Total                      $  457,246   $ 500,420

Earned premiums for the three months ended March 31, 2009 decreased 9% compared to the same period of 2008. The decrease in 2009 was due in part to the effects of foreign currency exchange rate movements. Had currency exchange rates remained constant between the first quarter of 2009 and the first quarter of 2008, earned premiums would have decreased 4%. Excluding the effects of foreign currency, the decrease in 2009 was primarily due to lower earned premiums in the Excess and Surplus Lines segment as a result of lower gross premium volume compared to 2008.

Investing Results

Net investment income for the three months ended March 31, 2009 was $69.1 million compared to $76.0 million for the same period of 2008. The decrease for the first quarter of 2009 was primarily due to having lower average invested assets and lower yields compared to the first quarter of 2008. Our investment yield has declined compared to 2008 as we have increased our allocation to short-term investments and cash and cash equivalents and short-term interest rates have declined. Additionally, dividend income was lower in the first quarter of 2009 compared to the same period of 2008. Net investment income for the first quarter of 2008 included an adverse change in the fair value of the credit default swap of $4.1 million. For the first quarter of 2009, the change in the fair value of the credit default swap was less than $0.1 million.

Net realized investment losses for the first quarter of 2009 were $55.2 million compared to $56.3 million for the first quarter of 2008. Net realized investment losses for the first quarter of 2009 included $55.5 million of write downs for other-than-temporary declines in the estimated fair value of investments compared to $72.0 million for the same period of 2008. The write downs in 2009 related to 28 equity securities and ten fixed maturities. The most significant write downs in 2009 related to our equity holdings in General Electric Company and United Parcel Service, Inc., for which we had write downs of $21.0 million and $9.5 million, respectively. Given the extent to which the fair value of these securities was below cost and management's belief that these securities were unlikely to recover in the near term, the decline in fair value for these securities was deemed other-than-temporary and was charged to earnings. These two investments represent 55% of the total write down for other-than-temporary declines in the estimated fair value of investments for the first quarter of 2009.

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 March 31, 2009, we held securities with gross unrealized losses of $230.2 million, or approximately 3% of our total invested assets. All securities with unrealized losses were reviewed, and we believe that there were no other securities with indications of declines in estimated fair value that were other-than-temporary at March 31, 2009. However, given the volatility in the debt and equity markets, we caution readers that further declines in fair value could be significant and may result in additional other-than-temporary impairment charges in future periods.

Other Expenses

Interest expense for the three months ended March 31, 2009 decreased to $11.4 million from $12.8 million in the same period of 2008 primarily due to the maturity of our 7.00% unsecured senior notes in May 2008.

The estimated annual effective tax rate was 30% and 27% for the three months ended March 31, 2009 and 2008, respectively. The increase in 2009 is primarily due to a higher effective tax rate on capital items. 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.

Comprehensive Loss

Comprehensive loss was $2.0 million for the three months ended March 31, 2009 compared to $19.9 million for the same period of 2008. Comprehensive loss for the first quarter of 2009 included net unrealized losses on investments, net of taxes, of $19.5 million, partially offset by net income of $16.4 million. Comprehensive loss for the first quarter of 2008 included net unrealized losses on investments, net of taxes, of $50.0 million, partially offset by net income of $34.0 million.

Financial Condition

Invested assets were $6.9 billion at both March 31, 2009 and December 31, 2008. Net unrealized holding gains on investments, net of taxes, were $39.1 million at March 31, 2009 compared to $58.7 million at December 31, 2008. Equity securities and investments in affiliates were $1.0 billion, or 15% of invested assets, at March 31, 2009 compared to $1.2 billion, or 17% of invested assets, at December 31, 2008.

Net cash provided by operating activities was $10.1 million for the three months ended March 31, 2009 compared to $48.9 million for the same period of 2008. The decrease in 2009 was primarily due to lower cash flows from underwriting activities in the Excess and Surplus Lines segment, partially offset by lower incentive compensation payments compared to the same period of 2008.

Net cash used by investing activities was $48.3 million for the three months ended March 31, 2009 compared to net cash provided by investing activities of $92.8 million for the same period of 2008. During the first quarter of 2009, we continued to increase our holdings of short-term investments and cash and cash equivalents. As bonds matured, we reinvested the proceeds in short-term investments. We did not purchase or sell significant amounts of equity securities or fixed maturities during the first quarter of 2009.

Net cash provided by financing activities was $50.0 million for the three months ended March 31, 2009 compared to net cash used by financing activities of $8.9 million for the same period of 2008. During the first

quarter of 2009, net borrowings under our revolving credit facility increased $50 million. During the first quarter of 2008, cash of $8.9 million was used to repurchase shares of our common stock.

We seek to maintain prudent levels of liquidity and financial leverage for the protection of our policyholders, creditors and shareholders. Our target capital structure includes approximately 30% debt. Our debt to total capital ratio was 25% at March 31, 2009 and 24% at December 31, 2008. From time to time, our debt to total capital ratio may increase due to business opportunities that may be financed in the short term with debt. Alternatively, our debt to total capital ratio may fall below our target capital structure, which provides us with additional borrowing capacity to respond quickly when future opportunities arise.

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

At March 31, 2009, our holding company had $707.6 million of invested assets compared to $650.6 million of invested assets at December 31, 2008.

Shareholders' equity was $2.2 billion at both March 31, 2009 and December 31, 2008. Book value per share decreased to $222.14 at March 31, 2009 from $222.20 at December 31, 2008 primarily due to $2.0 million of comprehensive loss in the first quarter of 2009.