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 and intangible assets 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 2011 Annual Report on Form 10-K for a more complete description of our critical accounting estimates.

Our Business

We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products and programs. We 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. We also own interests in various businesses that operate outside of the specialty insurance marketplace. Our financial goals are to earn consistent underwriting and operating 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. Our Excess and Surplus Lines segment is comprised of five regions, and each regional office is responsible for serving the wholesale producers located in its region. Our regional teams focus on customer service and marketing, underwriting and distributing our insurance solutions and provide customers easy access to our products.

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, personal and commercial property and liability coverages and workers' compensation insurance. Our Specialty Admitted segment is comprised of three underwriting units: the Markel Specialty and Markel American Specialty Personal and Commercial Lines units and our FirstComp workers' compensation insurance unit.

Our London Insurance Market segment writes specialty property, casualty, professional liability, equine, marine, energy and trade credit 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 Insurance (Discontinued Lines) segment includes lines of business that have been discontinued in conjunction with acquisitions. This segment also includes development on asbestos and environmental loss reserves.

Through our wholly-owned subsidiary Markel Ventures, Inc., we own interests in various industrial and service businesses that operate outside of the specialty insurance marketplace. These businesses are viewed by management as separate and distinct from our insurance operations. Local management teams oversee the day-to-day operations of these companies, while strategic decisions are made in conjunction with members of our executive management team, principally our President and Chief Investment Officer. The financial results of those companies in which we own controlling interests have been consolidated in our financial statements. The financial results of those companies in which we hold a noncontrolling interest are accounted for under the equity method of accounting.

Our strategy in making these private equity investments is similar to our strategy for purchasing equity securities. We seek to invest in profitable companies, with honest and talented management, that exhibit reinvestment opportunities and capital discipline, at reasonable prices. We intend to own the businesses acquired for a long period of time.

Our non-insurance operations are comprised of a diverse portfolio of industrial and service companies from various industries, including manufacturers of dredging equipment, high-speed bakery equipment, laminated furniture products, food processing equipment and laminated oak and composite wood flooring used in truck trailers, an owner and operator of manufactured housing communities, a real estate investment fund manager, a concierge medical and executive health services company, a retail intelligence services company, a company that manages behavioral health programs and a manufacturer and lessor of trailer tubes used by industrial, chemical and distribution companies to transport gas and liquids.

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. To mitigate the effects of short-term volatility, 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 presents the components of net income to shareholders.

                                        Quarter Ended June 30,          Six Months Ended June 30,
(dollars in thousands)                    2012            2011             2012              2011
Underwriting profit (loss)           $    67,178      $  (13,327 )   $      69,556       $  (66,894 )
Net investment income                     63,602          64,253           143,396          134,352
Net realized investment gains              8,216           1,344            20,125           12,584
Other revenues                           108,373          91,370           220,209          168,514
Amortization of intangible assets         (8,315 )        (5,555 )         (17,119 )        (11,563 )
Other expenses                           (97,719 )       (79,473 )        (198,123 )       (147,968 )
Interest expense                         (22,209 )       (21,898 )         (44,376 )        (40,860 )
Income tax expense                       (28,358 )        (5,065 )         (45,187 )         (6,655 )
Net income attributable to
noncontrolling interests                  (1,081 )        (1,335 )          (1,541 )         (2,924 )
Net income to shareholders           $    89,687      $   30,314     $     146,940       $   38,586

Net income to shareholders for the quarter and six months ended June 30, 2012 increased primarily due to improved underwriting results compared to the same periods of 2011. The components of net income to shareholders are discussed in further detail under "Underwriting Results," "Investing Results," "Non-Insurance Operations" and "Interest Expense and Income Taxes."

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 presents selected data from our underwriting operations.

                                        Quarter Ended June 30,          Six Months Ended June 30,
(dollars in thousands)                    2012            2011            2012             2011
Gross premium volume                 $    646,922     $  597,193     $   1,295,540     $ 1,187,976
Net written premiums                 $    566,614     $  530,688     $   1,147,780     $ 1,049,700
Net retention                                  88 %           89 %              89 %            88 %
Earned premiums                      $    513,056     $  490,201     $   1,042,652     $   953,312
Losses and loss adjustment expenses  $    221,094     $  306,683     $     509,615     $   621,011
Underwriting, acquisition and
insurance expenses (1)               $    224,784     $  196,845     $     463,481     $   399,195
Underwriting profit (loss)           $     67,178     $  (13,327 )   $      69,556     $   (66,894 )
U.S. GAAP Combined Ratios (2)
Excess and Surplus Lines                       87 %           92 %              92 %            88 %
Specialty Admitted                            102 %          107 %             108 %           106 %
London Insurance Market                        74 %          110 %              86 %           130 %
Other Insurance (Discontinued Lines)       NM (3)         NM (3)            NM (3)          NM (3)
Markel Corporation (Consolidated)              87 %          103 %              93 %           107 %

(1) Effective January 1, 2012, we prospectively adopted Financial Accounting Standards Board Accounting Standards Update (ASU) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. At December 31, 2011, deferred acquisition costs included approximately $43 million of costs that no longer met the criteria for deferral as of January 1, 2012. Pursuant to the new guidance, these costs will be amortized primarily over the first nine months of 2012, consistent with policy terms. As a result of the prospective adoption of ASU No. 2010-26, underwriting, acquisition and insurance expenses for the quarter and six months ended June 30, 2012 included $14.3 million and $34.6 million of costs that were deferred as of December 31, 2011 and no longer met the criteria for deferral.

(2) 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.

(3) NM - Ratio is not meaningful.

Our combined ratio was 87% and 93%, respectively, for the quarter and six months ended June 30, 2012 compared to 103% and 107%, respectively, for the same periods in 2011. The prospective adoption of ASU No. 2010-26 increased our underwriting, acquisition and insurance expenses for the quarter and six months ended June 30, 2012 by approximately $14.3 million, or three points on the combined ratio and $34.6 million, or three points on the combined ratio, respectively. The combined ratio for the second quarter of 2011 included $30.4 million, or six points, of underwriting loss related to U.S. storms and additional losses from the Japanese earthquake and tsunami (Japanese catastrophe) that occurred during the first quarter of 2011. The combined ratio for the six months ended June 30, 2011 included $99.0 million, or 10 points, of underwriting loss related to the U.S. storms, Australian floods, New Zealand earthquake and Japanese catastrophe. Excluding the impact of the prospective adoption of ASU No. 2010-26 in 2012 and the effects of the catastrophe losses in 2011, our combined ratio for both periods of 2012 improved due to a lower current accident year loss ratio and to more favorable development of prior years' loss reserves within the London Insurance Market segment compared to the same periods of 2011. The improvement in the current accident year loss ratio was primarily due to lower attritional losses in the Excess and Surplus Lines and London Insurance Market segments.

The combined ratio for the Excess and Surplus Lines segment was 87% and 92%, respectively, for the quarter and six months ended June 30, 2012 compared to 92% and 88%, respectively, for the same periods in 2011. For the quarter ended June 30, 2012, a lower current accident year loss ratio was partially offset by less favorable development on prior years' loss reserves and a higher expense ratio compared to the same period of 2011. For the six months ended June 30, 2012, less favorable development on prior years' loss reserves and a higher expense ratio were partially offset by a lower current accident year loss ratio. For the quarter and six months ended June 30, 2012, the increase in the expense ratio was attributable to the impact of prospective adoption of ASU No. 2010-26, which added approximately $6.0 million, or three points, and $14.5 million, or four points, respectively, to the segment's combined ratio. Excluding the impact of prospective adoption of ASU No. 2010-26 from the quarter and six months ended June 30, 2012, the improvement in the expense ratio was primarily due to an increase in earned premium and to a reduction in general expenses compared to the same periods of 2011. The current accident year loss ratio for the quarter and six months ended June 30, 2011 included $9.8 million, or five points and three points, respectively, of losses from U.S. storms that occurred during the second quarter of 2011. The improvement in the current accident year loss ratio also was due to lower attritional property losses during the quarter and six months ended June 30, 2012. The Excess and

Surplus Lines segment's combined ratio for the quarter and six months ended June 30, 2012 included $50.7 million and $81.3 million, respectively, of favorable development on prior years' loss reserves compared to $52.6 million and $109.4 million of favorable development for the same periods in 2011. In the first quarter of 2011, we resolved a significant portion of our outstanding liabilities associated with an errors and omissions program for mortgage servicing companies and, as a result, reduced prior years' loss reserves by $15.8 million. The redundancies on prior years' loss reserves experienced within the Excess and Surplus Lines segment during both periods of 2012 and 2011 were most significant on our professional and products liability programs.

The combined ratio for the Specialty Admitted segment was 102% and 108%, respectively, for the quarter and six months ended June 30, 2012 compared to 107% and 106%, respectively, for the same periods of 2011. For the quarter ended June 30, 2012, the decrease in the combined ratio was primarily due to more favorable development on prior years' loss reserves, which was partially offset by a higher expense ratio. For the six months ended June 30, 2012, 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. For the quarter and six months ended June 30, 2012, the increase in the expense ratio was primarily attributable to the impact of prospective adoption of ASU No. 2010-26, which added approximately $4.5 million, or three points, and $10.3 million, or four points, respectively, to the segment's combined ratio. Also contributing to the increase in the expense ratio for the six months ended June 30, 2012 was the write off of previously capitalized software development costs. These unfavorable impacts were partially offset by more favorable development of prior years' loss reserves in both periods of 2012. The Specialty Admitted segment's combined ratio for the quarter and six months ended June 30, 2012 included $11.9 million and $16.2 million, respectively, of favorable development on prior years' loss reserves compared to $1.8 million and $2.0 million of favorable development for the same periods in 2011. The redundancies on prior years' loss reserves experienced within the Specialty Admitted segment during the quarter and six months ended June 30, 2012 were most notable on the 2011 accident year across several product lines. For the six months ended June 30, 2012, the higher current accident year loss ratio was primarily due to an increased frequency in large losses on our general liability product lines and to higher earned premiums on our workers' compensation product line (which carries a higher loss ratio) during 2012 compared to 2011. The Specialty Admitted segment included an underwriting loss of $21.4 million on our workers' compensation line for the six months ended June 30, 2012 compared to an underwriting loss of $12.2 million for the same period of 2011. The workers' compensation insurance market continues to be adversely impacted by high rates of unemployment, unfavorable economic conditions and a challenging pricing environment.

The combined ratio for the London Insurance Market segment was 74% and 86%, respectively, for the quarter and six months ended June 30, 2012 compared to 110% and 130%, respectively, for the same periods of 2011. For both the quarter and six months ended June 30, 2012, the decrease in the combined ratio was due to a lower current accident year loss ratio and more favorable development on prior years' loss reserves, which was partially offset by a higher expense ratio compared to the same periods of 2011. The combined ratio for the second quarter of 2011 included $17.0 million, or 10 points, of underwriting loss related to U.S. storms and additional losses from the Japanese catastrophe that occurred during the first quarter of 2011 and $10.0 million, or six points, of underwriting loss related to two large losses in the Marine and Energy division. The combined ratio for the six months ended June 30, 2011 included $84.0 million, or 25 points, of underwriting loss related to the Australian floods, the New Zealand earthquake, the Japanese catastrophe and U.S. storms and $23.0 million, or seven points, of underwriting loss related to two large losses in the Marine and Energy division. The London Insurance Market segment's combined ratio for the quarter and six months ended June 30, 2012 included $64.8 million and $86.3 million, respectively, of favorable development on prior years' loss reserves compared to $22.6 million and $35.2 million of favorable development for the same periods in 2011. Favorable development of prior years' loss reserves in 2012 was primarily on the 2008 and 2009 accident years and occurred in a variety of programs across each of our divisions. The loss reserve redundancies for the quarter and six months ended ended June 30, 2012 also included $14.8 million and $18.3 million, respectively, of favorable loss reserve development on the 2001 and prior accident years. For the quarter and six months ended June 30, 2012, the increase in the expense ratio was primarily attributable to the impact of prospective adoption of ASU No. 2010-26, which added approximately $3.7 million, or two points, and $9.8 million, or three points, respectively, to the segment's combined ratio. For the quarter ended June 30, 2012, the increase in the expense ratio (excluding the impact of prospective adoption of ASU No. 2010-26) was due to higher profit sharing costs, partially offset by the impact of higher earned premiums compared to the same period of 2011.

The Other Insurance (Discontinued Lines) segment produced an underwriting loss of $0.9 million and an underwriting profit of $6.4 million for the quarter and six months ended June 30, 2012, respectively, compared to an underwriting loss of $0.7 million and an underwriting profit of $4.1 million for the same periods of 2011. Underwriting profits for the six months ended June 30, 2012 and 2011 were primarily due to the release of allowances for reinsurance bad debt related to discontinued lines of business originally written by Markel International.

Premiums and Net Retentions

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

                                          Gross Premium Volume
    Quarter Ended June 30,                                                 Six Months Ended June 30,
     2012             2011              (dollars in thousands)                2012             2011
$    229,906      $  225,979           Excess and Surplus Lines         $      452,835     $   427,350
     180,150         143,530              Specialty Admitted                   328,272         277,851
     236,874         227,682           London Insurance Market                 514,440         482,683
          (8 )             2     Other Insurance (Discontinued Lines)               (7 )            92
$    646,922      $  597,193                    Total                   $    1,295,540     $ 1,187,976

Gross premium volume for the quarter and six months ended June 30, 2012 increased 8% and 9%, respectively compared to the same periods of 2011. The increase in gross premium volume in both periods of 2012 was attributable to higher gross premium volume in each of our three operating segments. For the quarter and six months ended June 30, 2012, the Specialty Admitted segment included $62.5 million and $134.8 million, respectively, of gross premium volume attributable to our workers' compensation product line, compared to $51.7 million and $110.0 million for the same periods of 2011. For the quarter and six months ended June 30, 2012, the Specialty Admitted segment also included $26.3 million of gross premium volume attributable to THOMCO, which was acquired in the first quarter of 2012. Foreign currency exchange rate movements did not have a significant impact on gross premium volume for the quarter and six months ended June 30, 2012.

During the latter part of 2011, we saw price declines stabilize and achieved modest price increases in several lines, most notably the marine and energy products within the London Insurance Market segment. In the first half of 2012, we generally saw flat to small single digit favorable rate changes compared to flat to small single digit rate declines in the same period of 2011.

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 may vary depending on the competitive environment.

                                         Net Written Premiums
   Quarter Ended June 30,                                                 Six Months Ended June 30,
     2012            2011              (dollars in thousands)               2012             2011
$    193,291     $  194,048           Excess and Surplus Lines         $     386,204     $   369,585
     169,276        136,292              Specialty Admitted                  309,828         263,531
     204,054        200,472           London Insurance Market                451,754         416,611
          (7 )         (124 )   Other Insurance (Discontinued Lines)              (6 )           (27 )
$    566,614     $  530,688                    Total                   $   1,147,780     $ 1,049,700

Net retention of gross premium volume for the quarter and six months ended June 30, 2012 was 88% and 89%, respectively, compared to 89% and 88%, respectively, for the same periods of 2011. 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,
     2012            2011              (dollars in thousands)                2012              2011
$    189,668     $  187,206           Excess and Surplus Lines         $      389,046      $  368,263
     144,695        131,364              Specialty Admitted                   278,170         253,840
     178,699        171,754           London Insurance Market                 375,441         331,237
          (6 )         (123 )   Other Insurance (Discontinued Lines)               (5 )           (28 )
$    513,056     $  490,201                    Total                   $    1,042,652      $  953,312

Earned premiums for the quarter and six months ended June 30, 2012 increased 5% and 9%, respectively, compared to the same periods in 2011. The increase in earned premiums in both periods of 2012 was attributable to higher earned premiums in each of our three operating segments. For the quarter and six months ended June 30, 2012, the Specialty Admitted segment included $58.9 million and $115.5 million, respectively, of earned premiums from FirstComp, compared to $48.6 million and $92.4 million for the same periods of 2011. Foreign currency exchange rate movements did not have a significant impact on earned premiums for the quarter and six months ended June 30, 2012.

Investing Results

Net investment income for the second quarter of 2012 was $63.6 million compared to $64.3 million for the second quarter of 2011. Net investment income was $143.4 million for the six months ended June 30, 2012 and $134.4 million for the six months ended June 30, 2011. For the six months ended June 30, 2012, net investment income included a favorable change in the fair value of our credit default swap of $12.2 million compared to $0.6 million for the same period in 2011. The fair value of our credit default swap is driven by observable and unobservable inputs as discussed in note 6 of our consolidated financial statements. During the first quarter of 2012, financial markets improved and credit spreads narrowed, which favorably impacted the fair value of the credit default swap. Changes in the fair value of this derivative instrument could be . . .