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.



                                                     Quarter Ended                Six Months Ended
                                                        June 30,                      June 30,
(dollars in thousands)                            2009           2008           2009           2008
Underwriting profit                             $   2,681      $  24,900      $  24,679      $  65,428
Net investment income                              65,046         76,521        134,102        152,533
Net realized investment gains (losses)            (15,436 )       24,740        (70,619 )      (31,568 )
Amortization of intangible assets                  (1,178 )       (1,148 )       (2,357 )       (2,098 )
Interest expense                                  (11,594 )      (11,934 )      (22,984 )      (24,765 )
Income tax expense                                 (6,721 )      (30,837 )      (13,665 )      (43,300 )

Net income                                      $  32,798      $  82,242      $  49,156      $ 116,230

Net income for the quarter and six months ended June 30, 2009 decreased 60% and 58%, respectively, compared to the same periods of 2008. The decrease in net income for the quarter and six months ended June 30, 2009 was primarily due to lower underwriting profits and lower investment returns as compared to the same periods 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.

                                                Quarter Ended                      Six Months Ended
                                                  June 30,                             June 30,
(dollars in thousands)                     2009              2008              2009               2008
Gross premium volume                     $ 505,675         $ 613,151         $ 992,511         $ 1,183,665
Net written premiums                     $ 456,193         $ 534,962         $ 894,248         $ 1,044,185
Net retention                                   90 %              87 %              90 %                88 %
Earned premiums                          $ 455,214         $ 503,704         $ 912,460         $ 1,004,124
Losses and loss adjustment expenses      $ 286,139         $ 292,689         $ 539,550         $   572,833
Underwriting, acquisition and
insurance expenses                       $ 166,394         $ 186,115         $ 348,231         $   365,863
Underwriting profit                      $   2,681         $  24,900         $  24,679         $    65,428


U.S. GAAP Combined Ratios(1)
Excess and Surplus Lines                       110 %              92 %              99 %                90 %
Specialty Admitted                              89 %             100 %              99 %                99 %
London Insurance Market                         91 %              99 %              94 %                98 %
Other                                           NM  (2)           NM  (2)           NM  (2)             NM  (2)
Markel Corporation (Consolidated)               99 %              95 %              97 %                93 %

(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 99% and 97%, respectively, for the quarter and six months ended June 30, 2009 compared to 95% and 93%, respectively, for the same periods in 2008. The combined ratio for both the quarter and six months ended June 30, 2009 increased primarily due to a higher combined ratio for the Excess and Surplus Lines segment, which was partially offset by improved underwriting profitability in the London Insurance Market segment as compared to the same periods of 2008. The expense ratio for the quarter and six months ended June 30, 2009 included approximately $10 million and $18 million, respectively, of costs associated with the implementation of our One Markel initiative, which represents two points on the combined ratio in each period of 2009.

The combined ratio for the Excess and Surplus Lines segment was 110% and 99%, respectively, for the quarter and six months ended June 30, 2009 compared to 92% and 90%, respectively, for the same periods in 2008. For the second quarter of 2009, the increase in the combined ratio was due to a higher current accident year loss ratio, less favorable development of prior years' loss reserves and a higher expense ratio compared to the same period of 2008. For the six months ended June 30, 2009, the increase in the combined ratio was due to a higher current accident year loss ratio and a higher expense ratio, which were partially offset by more favorable development of prior years' loss reserves compared to the same period in 2008. The higher expense ratio in

both periods of 2009 was primarily due to costs associated with the implementation of our One Markel initiative and a decline in earned premiums, which were partially offset by lower profit sharing costs compared to the same periods of 2008. The higher current accident year loss ratio in both periods of 2009 is due in part to soft insurance market conditions, which have resulted in price deterioration across most of our product lines. Additionally, given the current economic environment, we have experienced higher than expected incurred losses during 2009 in certain professional liability programs, most notably our architects and engineers and lawyers books of business.

The Excess and Surplus Lines segment's combined ratio for the quarter and six months ended June 30, 2009 included $5.4 million and $51.0 million, respectively, of favorable development on prior years' loss reserves compared to $17.1 million and $47.8 million, respectively, for the same periods in 2008. The redundancies on prior years' loss reserves experienced within the Excess and Surplus Lines segment during both periods of 2009 and 2008 were primarily on our professional and products liability programs. The loss reserve redundancies in the second quarter of 2009 were partially offset by adverse loss reserve development in our casualty product lines, resulting primarily from higher than expected losses on reported claims. Contributing significantly to the higher than expected losses were unfavorable court rulings on two coverage litigation matters.

The combined ratio for the Specialty Admitted segment was 89% and 99%, respectively, for the quarter and six months ended June 30, 2009 compared to 100% and 99%, respectively, for the same periods in 2008. In both periods of 2009, the combined ratio benefited from a lower expense ratio primarily due to lower profit sharing costs compared to the same periods of 2008. The Specialty Admitted segment's combined ratio for the second quarter of 2009 included $4.2 million of favorable development on prior years' loss reserves compared to adverse development of prior years' loss reserves of $0.4 million for the same period of 2008. For the six months ended June 30, 2009, the combined ratio included favorable development on prior years' loss reserves of $0.4 million compared to $4.5 million for the same period in 2008.

The combined ratio for the London Insurance Market segment was 91% and 94%, respectively, for the quarter and six months ended June 30, 2009 compared to 99% and 98%, respectively, for the same periods in 2008. For both periods of 2009, a higher current accident year loss ratio was more than offset by greater favorable development of prior years' loss reserves and a lower expense ratio compared to the same periods of 2008. The higher current accident year loss ratio in both periods of 2009 was primarily the result of soft insurance market conditions, as well as the effects of the current economic downturn. These conditions have adversely impacted our best estimate of loss reserves, most notably within our professional liability programs at the Professional and Financial Risks and Retail divisions. The London Insurance Market segment's combined ratio for the quarter and six months ended June 30, 2009 included $22.8 million and $37.9 million, respectively, of favorable development on prior years' loss reserves compared to $14.0 million and $29.0 million, respectively, for the same periods in 2008.

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,
      2009           2008       (dollars in thousands)        2009             2008
      $255,342    $  314,405   Excess and Surplus Lines   $     493,695    $    610,851
        77,095        95,631   Specialty Admitted               140,551         167,188
       173,234       202,705   London Insurance Market          358,199         405,335
             4           410   Other                                 66             291

      $505,675    $  613,151   Total                      $     992,511    $  1,183,665

Gross premium volume for the quarter and six months ended June 30, 2009 decreased 18% and 16%, respectively, compared to the same periods in 2008. The decrease in both periods of 2009 was primarily due to continued intense competition across many of our product lines and 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 are the effects of foreign currency exchange rate movements, which accounted for two points and three points, respectively, of the decrease for the quarter and six months ended June 30, 2009 compared to the same periods of 2008.

In late 2008, we reviewed the pricing for all of our major product lines and began pursuing price increases in many product areas. During 2009, we have seen the rate of decline in prices slow and have begun to experience 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.

                              Net Written Premiums

     Quarter Ended June 30,                                   Six Months Ended June 30,
       2009            2008       (dollars in thousands)        2009              2008
   $    230,591      $ 271,613   Excess and Surplus Lines   $    447,000       $   534,932
         72,413         86,668   Specialty Admitted              129,872           150,635
        153,478        176,348   London Insurance Market         317,556           358,606
           (289 )          333   Other                              (180 )              12

   $    456,193      $ 534,962   Total                      $    894,248       $ 1,044,185

Net retention of gross premium volume was 90% for both the second quarter and the six months ended June 30, 2009 compared to 87% and 88%, respectively, for the same periods of 2008. 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 has increased consistent with our strategy to retain more of our profitable business.

                                Earned Premiums

     Quarter Ended June 30,                                   Six Months Ended June 30,
       2009            2008       (dollars in thousands)        2009              2008
   $    241,563      $ 273,566   Excess and Surplus Lines   $    490,803       $   550,963
         76,793         78,706   Specialty Admitted              153,489           155,447
        137,147        151,099   London Insurance Market         268,348           297,702
           (289 )          333   Other                              (180 )              12

   $    455,214      $ 503,704   Total                      $    912,460       $ 1,004,124

Earned premiums for the quarter and six months ended June 30, 2009 decreased 10% and 9%, respectively, compared to the same periods in 2008. The decrease in both periods of 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 the same periods of 2008. The decrease was also due in part to the effects of foreign currency exchange rate movements, which accounted for two points and three points, respectively, of the decrease for the quarter and six months ended June 30, 2009 compared to the same periods of 2008.

Investing Results

Net investment income for the second quarter of 2009 was $65.0 million compared to $76.5 million for the second quarter of 2008. Net investment income for the six months ended June 30, 2009 was $134.1 million compared to $152.5 million for the same period of 2008. The decrease in both periods of 2009 was primarily due to having lower yields and average invested assets compared to the same periods of 2008. Our investment yield in 2009 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 in 2009 was lower than dividend income in 2008.

Effective April 1, 2009, we adopted Financial Accounting Standards Board Staff Position (FSP) No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP No. FAS 115-2 and FAS 124-2 amends the requirements for recognizing other-than-temporary impairment on debt securities and modifies the presentation of other-than-temporary impairment losses in the financial statements. FSP No. FAS 115-2 and FAS 124-2 requires other-than-temporary impairment of a debt security to be separated into two components when there are credit-related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security and it is more likely than not that it will not be required to sell the security before recovery of the security's amortized cost. The amount of the other-than-temporary impairment related to a credit loss is recognized in net income, and the amount of the other-than-temporary impairment related to other factors is recognized in other comprehensive income (loss), net of applicable taxes.

The following table compares the components of net realized investment gains (losses).

                                                     Quarter Ended                Six Months Ended
                                                        June 30,                      June 30,
(dollars in thousands)                            2009           2008           2009           2008
Other-than-temporary impairment losses          $ (11,763 )    $ (20,510 )    $ (67,237 )    $ (92,538 )
Less other-than-temporary impairment losses
recognized in other comprehensive income
(loss)                                              3,757             -           3,757             -

Other-than-temporary impairment losses
recognized in net income                           (8,006 )      (20,510 )      (63,480 )      (92,538 )
Net realized investment gains (losses),
excluding other-than- temporary impairment
losses                                             (7,430 )       45,250         (7,139 )       60,970

Net realized investment gains (losses)          $ (15,436 )    $  24,740      $ (70,619 )    $ (31,568 )

Net realized investment losses for the second quarter of 2009 were $15.4 million compared to net realized investment gains of $24.7 million for the second quarter of 2008. For the six months ended June 30, 2009, net realized investment losses were $70.6 million compared to net realized investment losses of $31.6 million for the same period of 2008. Variability in the timing of realized and unrealized investment gains and losses is to be expected.

Total write downs for other-than-temporary declines in the estimated fair value of investments for the second quarter of 2009 were $11.8 million, of which $8.0 million was recognized in net income and $3.8 million was recognized in other comprehensive income. The write downs for other-than-temporary declines in the estimated fair value of investments for the second quarter of 2009 related to two equity securities and nine fixed maturities. Total write downs for other-than-temporary declines in the estimated fair value of investments for the six months ended June 30, 2009 were $67.2 million, of which $63.5 million was recognized in net income and $3.8 million was recognized in other comprehensive income. The write downs for other-than-temporary declines in the estimated fair value of investments for the six months ended June 30, 2009 related to 29 equity securities and 15 fixed maturities. The most significant write downs for the six months ended June 30, 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 equity 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 recognized in net income. These two investments represent 45% of the total write down for other-than-temporary declines in the estimated fair value of investments for the six months ended June 30, 2009.

We complete a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its costs basis is deemed other-than-temporary. At June 30, 2009, we held securities with gross unrealized losses of $139.6 million, or less than 2% 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 June 30, 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 second quarter of 2009 decreased to $11.6 million from $11.9 million in the second quarter of 2008. Interest expense for the six months ended June 30, 2009 decreased to $23.0 million from $24.8 million in the same period of 2008. For both periods of 2009, the decrease compared to the same periods of 2008 was primarily due to the maturity of our 7.00% unsecured senior notes in May 2008.

The estimated annual effective tax rate was 22% and 27% for the six months ended June 30, 2009 and 2008, 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 tax-exempt investment income to be a larger percentage of income before income taxes in 2009 compared to 2008.

Comprehensive Income (Loss)

Comprehensive income was $171.9 million for the second quarter of 2009 compared to comprehensive loss of $93.7 million for the same period of 2008. Comprehensive income for the second quarter of 2009 included net unrealized gains on investments, net of taxes, of $131.8 million and net income of $32.8 million. 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. For the six months ended June 30, 2009, comprehensive income was $169.9 million compared to comprehensive loss of $113.6 million for the same

period in 2008. Comprehensive income for the six months ended June 30, 2009 included net unrealized gains on investments, net of taxes, of $112.2 million and net income of $49.2 million. 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.

Financial Condition

Invested assets were $7.3 billion at June 30, 2009 compared to $6.9 billion at . . .