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 (loss).



                                                    Quarter Ended                Nine Months Ended
                                                    September 30,                  September 30,
(dollars in thousands)                          2009            2008            2009            2008
Underwriting profit (loss)                    $  17,980      $ (126,315 )    $   42,659      $  (60,887 )
Net investment income                            66,663          68,232         200,765         220,765
Net realized investment losses                  (29,770 )      (168,679 )      (100,389 )      (200,247 )
Amortization of intangible assets                (1,179 )        (1,141 )        (3,536 )        (3,239 )
Interest expense                                (12,000 )       (11,024 )       (34,984 )       (35,789 )
Income tax benefit                               17,432          96,640           3,767          53,340
Net income (loss)                             $  59,126      $ (142,287 )    $  108,282      $  (26,057 )

The results for both the quarter and nine months ended September 30, 2009 improved primarily due to better underwriting performance as a result of a benign hurricane season and increased underwriting profits from our international operations, as well as lower net realized investment losses as compared to the same periods of 2008. Both periods of 2008 included $115.1 million of underwriting loss related to Hurricanes Gustav and Ike (2008 Hurricanes). The components of net income (loss) 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                     Nine Months Ended
                                               September 30,                       September 30,
(dollars in thousands)                    2009              2008              2009               2008
Gross premium volume                    $ 484,777        $  563,896        $ 1,477,288        $ 1,747,561
Net written premiums                    $ 430,955        $  498,103        $ 1,325,203        $ 1,542,288
Net retention                                  89 %              88 %               90 %               88 %
Earned premiums                         $ 448,398        $  516,063        $ 1,360,858        $ 1,520,187
Losses and loss adjustment expenses     $ 237,331        $  456,172        $   776,881        $ 1,029,005
Underwriting, acquisition and
insurance expenses                      $ 193,087        $  186,206        $   541,318        $   552,069
Underwriting profit (loss)              $  17,980        $ (126,315 )      $    42,659        $   (60,887 )

U.S. GAAP Combined Ratios(1)
Excess and Surplus Lines                       94 %             110 %               98 %               97 %
Specialty Admitted                             99 %             123 %               99 %              107 %
London Insurance Market                        91 %             136 %               93 %              111 %
Other                                          NM (2)            NM (2)             NM (2)             NM (2)
Markel Corporation (Consolidated)              96 %             124 %               97 %              104 %

(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 96% and 97%, respectively, for the quarter and nine months ended September 30, 2009 compared to 124% (including 22 points of losses on the 2008 Hurricanes) and 104% (including 8 points of losses on the 2008 Hurricanes), respectively, for the same periods in 2008. Aside from the impact of the 2008 Hurricanes, the combined ratio for the third quarter of 2009 decreased as compared to the same period of 2008 due to a lower current accident year loss ratio and more favorable development of prior years' loss reserves, offset in part by a higher expense ratio. Aside from the impact of the 2008 Hurricanes, the combined ratio for the nine months ended September 30, 2009 increased as compared to the same period of 2008 due to a higher expense ratio and a higher current accident year loss ratio, which were partially offset by more favorable development of prior years' loss reserves. The expense ratio for the quarter and nine months ended September 30, 2009 included approximately $6 million and $24 million, respectively, of costs associated with the implementation of our One Markel initiative, which represents one and two points, respectively, on the combined ratio for the quarter and nine months ended September 30, 2009. The expense ratio for the quarter and nine months ended September 30, 2008 included approximately $4 million and $8 million, respectively, of costs associated with our One Markel initiative, which represented less than one point on the combined ratio in each period of 2008.

The combined ratio for the Excess and Surplus Lines segment was 94% and 98%, respectively, for the quarter and nine months ended September 30, 2009 compared to 110% (including 15 points of losses on the 2008 Hurricanes) and 97% (including 5 points of losses on the 2008 Hurricanes), respectively, for the same periods in 2008. Aside from the impact of the storms, the improved combined ratio for the third quarter of 2009 was primarily due to greater favorable development of prior years' loss reserves, which was partially offset by a higher expense ratio compared to the same period of 2008. Aside from the impact of the storms, the increase in the combined ratio for the nine months ended September 30, 2009 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 due in part to a decline in earned premiums and to costs associated with the implementation of our One Markel initiative. For the third quarter of 2009, the expense ratio also increased due to higher profit sharing costs as a result of improved underwriting and investing results. For the nine months ended September 30, 2009, the higher current accident year loss ratio was due in part to higher than expected incurred losses during 2009 in certain professional liability programs, most notably our architects and engineers book of business, as a result of recent economic conditions.

The Excess and Surplus Lines segment's combined ratio for the quarter and nine months ended September 30, 2009 included $37.5 million and $88.5 million, respectively, of favorable development on prior years' loss reserves compared to $24.5 million and $72.3 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 due to lower loss severity than originally anticipated. As the average claim severity estimates on these long-tailed books of business have decreased, our actuarial estimates of the ultimate liability for unpaid losses and loss adjustment expenses were reduced, and management reduced prior years' loss reserves accordingly.

The combined ratio for the Specialty Admitted segment was 99% for both the quarter and nine months ended September 30, 2009 compared to 123% (including 18 points of losses on the 2008 Hurricanes) and 107% (including 6 points of losses on the 2008 Hurricanes), respectively, for the same periods in 2008. Aside from the impact of the storms, the combined ratio benefited in both periods of 2009 from a lower current accident year loss ratio compared to the same periods of 2008. In both periods of 2008, the current accident year loss ratio was adversely impacted by a greater than expected incidence of high severity property losses at the Markel Specialty Program Insurance unit. The Specialty Admitted segment's combined ratio for the quarter and nine months ended September 30, 2009 included $4.4 million and $4.8 million, respectively, of favorable development on prior years' loss reserves compared to $5.3 million and $9.8 million, respectively, for the same periods in 2008.

The combined ratio for the London Insurance Market segment was 91% and 93%, respectively, for the quarter and nine months ended September 30, 2009 compared to 136% (including 36 points of losses on the 2008 Hurricanes) and 111% (including 13 points of losses on the 2008 Hurricanes), respectively, for the same periods in 2008. Aside from the impact of the storms, the improved combined ratio for both periods of 2009 was primarily due to greater favorable development of prior years' loss reserves. The London Insurance Market segment's combined ratio for the quarter and nine months ended September 30, 2009 included $29.3 million and $67.2 million, respectively, of favorable development on prior years' loss reserves compared to $13.6 million and $42.7 million, respectively, for the same periods in 2008. During both periods of 2009, actual

incurred losses and loss adjustment expenses on reported claims for the 2003 to 2006 accident years were less than we expected in our actuarial analyses. This favorable experience occurred in a variety of programs across each of our divisions, most notably the professional liability programs at the Retail and Professional and Financial Risks divisions.

The Other segment produced an underwriting loss of $9.5 million and $5.3 million, respectively, for the quarter and nine months ended September 30, 2009 compared to an underwriting loss of $24.3 million and $23.6 million, respectively, for the same periods in 2008. The underwriting loss for both the quarter and nine months ended September 30, 2009 included $10.0 million of loss reserve development on asbestos and environmental exposures compared to $24.9 million in both periods of 2008. The increase in asbestos and environmental reserves in all periods was a result of the completion of our annual review of these exposures during the third quarters of 2009 and 2008. During our 2009 review, we increased our estimate of the number of claims that will ultimately be closed with an indemnity payment and, as a result, increased prior years' loss reserves accordingly. During our 2008 review, we noted that claims had been closed with total indemnity payments that were higher than had been anticipated, and as a result of this higher than expected average severity on closed claims, our actuaries updated their average severity assumptions for both open claims and claims incurred but not yet reported. The need to increase asbestos and environmental loss reserves in each of the past two years demonstrates that these reserves are subject to significant uncertainty due to potential loss severity and frequency resulting from an uncertain and unfavorable legal climate. Our asbestos and environmental reserves are not discounted to present value and are forecasted to pay out over the next 50 years. We seek to establish appropriate reserve levels for asbestos and environmental exposures; however, these reserves could be subject to increases in the future.

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 September 30,                                                 Nine Months Ended September 30,
     2009               2008                (dollars in thousands)                2009                 2008
$       246,790    $       298,180         Excess and Surplus Lines         $         740,485    $         909,031
         86,146             99,050            Specialty Admitted                      226,697              266,238
        151,768            166,484         London Insurance Market                    509,967              571,819
             73                182                  Other                                 139                  473
$       484,777    $       563,896                  Total                   $       1,477,288    $       1,747,561

Gross premium volume for the quarter and nine months ended September 30, 2009 decreased 14% and 15%, 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 in our London Insurance Market segment, which accounted for two points and three points, respectively, of the decrease for the quarter and nine months ended September 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; however, as a result of continued soft insurance market conditions, our targeted price increases have been met with resistance in the marketplace, particularly within the Excess and Surplus Lines segment. 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 September 30,                                                 Nine Months Ended September 30,
     2009               2008                (dollars in thousands)                 2009                  2008
$       219,237    $       264,974         Excess and Surplus Lines          $        666,237        $    799,906
         79,135             91,447            Specialty Admitted                      209,007             242,082
        132,543            141,541          London Insurance Market                   450,099             500,147
             40                141                   Other                               (140 )               153
$       430,955    $       498,103                   Total                   $      1,325,203        $  1,542,288

Net retention of gross premium volume was 89% and 90%, respectively, for the third quarter and nine months ended September 30, 2009 compared to 88% for both 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 September 30,                                                 Nine Months Ended September 30,
     2009               2008                (dollars in thousands)                 2009                  2008
$       226,650    $       275,893         Excess and Surplus Lines          $        717,453        $    826,856
         73,456             78,707            Specialty Admitted                      226,945             234,154
        148,252            161,320          London Insurance Market                   416,600             459,022
             40                143                   Other                               (140 )               155
$       448,398    $       516,063                   Total                   $      1,360,858        $  1,520,187

Earned premiums for the quarter and nine months ended September 30, 2009 decreased 13% and 10%, 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 to the effects of foreign currency exchange rate movements in our London Insurance Market segment, which accounted for two points and three points, respectively, of the decrease for the quarter and nine months ended September 30, 2009 compared to the same periods of 2008.

Investing Results

Net investment income for the third quarter of 2009 was $66.7 million compared to $68.2 million for the third quarter of 2008. Net investment income for the nine months ended September 30, 2009 was $200.8 million compared to $220.8 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. For the quarter and nine months ended September 30, 2009, net investment income included a favorable change in the fair value of our credit default swap of $0.6 million and $3.0 million, respectively, compared to an adverse change in the fair value of our credit default swap of $7.7 million and $11.7 million, respectively, in the same periods of 2008.

Effective April 1, 2009, we modified the presentation of other-than-temporary impairment losses in the financial statements in accordance with Financial Accounting Standards Board Accounting Standards Codification 320-10-65, Investments-Debt and Equity Securities. This guidance 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 (loss), 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 losses.

                                                    Quarter Ended                Nine Months Ended
                                                    September 30,                  September 30,
(dollars in thousands)                          2009            2008            2009            2008
Other-than-temporary impairment losses        $ (26,651 )    $  (94,607 )    $  (93,888 )    $ (187,145 )
Less other-than-temporary impairment losses
recognized in other comprehensive income
(loss)                                            4,219              -            7,976              -
Other-than-temporary impairment losses
recognized in net income (loss)                 (22,432 )       (94,607 )       (85,912 )      (187,145 )
Net realized investment losses, excluding
other-than- temporary impairment losses          (7,338 )       (74,072 )       (14,477 )       (13,102 )
Net realized investment losses                $ (29,770 )    $ (168,679 )    $ (100,389 )    $ (200,247 )

Net realized investment losses for the third quarter of 2009 were $29.8 million compared to $168.7 million for the third quarter of 2008. For the nine months ended September 30, 2009, net realized investment losses were $100.4 million compared to $200.2 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 third quarter of 2009 were $26.7 million, of which $22.4 million was recognized in net income and $4.2 million was recognized in other comprehensive income. The write downs for other-than-temporary declines in the estimated fair value of investments for the third quarter of 2009 related to one equity security, four fixed maturities and one investment in affiliate. Total write downs for other-than-temporary declines in the estimated fair value of investments for the nine months ended September 30, 2009 were $93.9 million, of which $85.9 million was recognized in net income and $8.0 million was recognized . . .