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    2017 Markel Corporation Annual Report & Form 10-K


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    T H E C O R P O R AT E P R O F I L E Markel Corporation is a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products. In each of our businesses, we seek to provide quality products and excellent customer service so that we can be a market leader. Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. THE MARKEL STYLE Markel has a Commitment to Success. We believe in hard work and a zealous pursuit of excellence while keeping a sense of humor. Our creed is honesty and fairness in all our dealings. The Markel way is to seek to be a market leader in each of our pursuits. We seek to know our customers’ needs and to provide our customers with quality products and service. Our pledge to our shareholders is that we will build the financial value of our Company. We respect our relationship with our suppliers and have a commitment to our communities. We are encouraged to look for a better way to do things…to challenge management. We have the ability to make decisions or alter a course quickly. The Markel approach is one of spontaneity and flexibility. This requires a respect for authority but a disdain of bureaucracy. At Markel,we hold the individual’s right to self-determination in the highest light, providing an atmosphere in which people can reach their personal potential. Being results-oriented, we are willing to put aside individual concerns in the spirit of teamwork to achieve success. Above all, we enjoy what we are doing. There is excitement at Markel, one that comes from innovating, creating, striving for a better way, sharing success with others…winning.


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    Highlights FINANCIAL HIGHLIGHTS (dollars in millions, except per share data) 2017 2016 2015 Gross premium volume $ 5,507 $ 4,797 $ 4,633 Net written premiums 4,418 4,001 3,819 Earned premiums 4,248 3,866 3,824 U.S. GAAP combined ratio 105% 92% 89% Total operating revenues 6,062 5,612 5,370 Net income to shareholders 395 456 583 Comprehensive income to shareholders 1,175 667 233 Total investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) $ 20,570 $ 19,059 $ 18,181 Total assets 32,805 25,875 24,939 Senior long-term debt and other debt 3,099 2,575 2,239 Shareholders’ equity 9,504 8,461 7,834 Debt to capital 25% 23% 22% P E R S H A R E D ATA Common shares outstanding (at year end, in thousands) 13,904 13,955 13,959 Diluted net income $ 25.81 $ 31.27 $ 41.74 Book value $ 683.55 $ 606.30 $ 561.23 Growth in book value 13% 8% 3% O P E R AT I N G H I G H L I G H T S • Book value per share increased to $683.55, representing a compound annual growth rate of 13% and 11% over the one-year and five-year periods, respectively • Total operating revenues surpassed $6 billion • Strong investment performance with an increase in net unrealized gains on investments of over $1 billion • Combined ratio of 105%, including 13 points of catastrophe losses • Growth in our insurance operations included the acquisition of SureTec, a surety company primarily offering contract, commercial and court bonds, and State National, which added a premier fronting platform and collateral protection coverages to our operations • Growth in our Markel Ventures operations included the acquisition of Costa Farms, a grower of house and garden plants Contents Letter to Business Partners 2 Consolidated Financial Statements 51 Business Overview 12 Notes to Consolidated Financial Risk Factors 38 Statements 55 Selected Financial Data 46 Management’s Discussion & Analysis 115 Management’s Report on Internal Critical Accounting Estimates 117 Control over Financial Reporting 48 Safe Harbor and Cautionary Statement 160 Reports of Independent Registered Other Information 162 Public Accounting Firm 49, 50 Directors and Executive Officers 164 Index for Form 10-K 165


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    2017 To Our Business Partners At Markel, we aspire to build one of “The World’s annual report as a public company in 1986. Namely, Great Companies.” as we said then, “our corporate strategy is one of diversification and specialization.” Here is our annual report to you for 2017. In it, we review the year that just ended, as well as our plans We serve customers anywhere and everywhere around and dreams for the future. We try to write everything the globe. We do so by providing them with insurance that we would want to know about Markel if our roles and financial backstops to protect them when were reversed. unforeseen events create havoc. We help them put Humpty Dumpty back together when things fall apart. We define a great company as one that serves its We also provide customers with an array of necessary customers, associates, and shareholders, consistently industrial equipment, vital information services, and dependably over time. As we do so we grow in housing, personal products, and healthcare services every dimension. to help them operate their businesses and live life to its fullest. We’re proud of our record over multiple decades, and we are incredibly optimistic about our ability to We serve our associates by operating a “values” based continue on this path in the future. The design and company. The Markel Style describes our unchanging components of Markel are unique. Our strategy cultural values that we offer to associates of Markel. remains the same as what we stated in our initial We provide a home that rewards and celebrates FINANCIAL HIGHLIGHTS (in millions, except per share data) 2017 2016 2015 2014 2013 2012 2011 2010 2009 Total operating revenues $ 6,062% 5,612% 5,370% 5,134% 4,323% 3,000% 2,630% 2,225% 2,069% Gross written premiums $ 5,507% 4,797% 4,633% 4,806% 3,920% 2,514% 2,291% 1,982% 1,906% Combined ratio 105% 92% 89% 95% 97% 97% 102% 97% 95% Investment portfolio $ 20,570% 19,059% 18,181% 18,638% 17,612% 9,333% 8,728% 8,224% 7,849% Portfolio per share $1,479.45%1,365.72% 1,302.48%1,334.89%1,259.26% 969.23% 907.20% 846.24% 799.34% Net income (loss) to shareholders $ 395% 456% 583% 321% 281% 253% 142% 267% 202% Comprehensive income (loss) to shareholders $ 1,175% 667% 233% 936% 459% 504% 252% 431% 591% Shareholders’ equity $ 9,504% 8,461% 7,834% 7,595% 6,674% 3,889% 3,388% 3,172% 2,774% Book value per share $ 683.55% 606.30% 561.23% 543.96% 477.16% 403.85% 352.10% 326.36% 282.55% 5-Year CAGR in book 2 value per share (1) 11% 11% 11% 14% 17% 9% 9% 13% 11%) (1) CAGR— compound annual growth rate


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    creative, hardworking, talented people motivated beautiful tapestry. That tapestry depicts the narrative by the idea of service to our customers. We are of “building one of the world’s great companies.” explicit about our commitment to integrity and continuous improvement. Our culture is not for We’re pleased to report to you that we continued to everyone, but it is attractive to those who seek what weave that multi decade tapestry in 2017. we offer. We’ve also found that it applies and works all around the world. Progress did not take place in a straight line in 2017. It almost never does. This report will appropriately We serve our shareholders by producing financial discuss the financial impact of the record setting results which reflect our skills at serving our catastrophes that took place last year. Those financial customers and associates. Excellent financial results losses should not obscure or diminish the progress we create the opportunity to grow, to do more, and offer made in the rest of our insurance operations, our more, over time. Without financial progress, our ability Markel Ventures activities, in our investment portfolio, to serve customers and associates disappears. and in the development and continuity of our management team. The 2017 financial statements accompanying this letter provide you with numbers that reflect this year’s At the bottom of the page in this letter we show a economic progress towards the goal of “building one table that depicts 21 years of our key financial of the world’s great companies.” As is the case with highlights. The constant and annually recurring review any single year, those numbers tell only part of our of decades of financial results helps us to remain story. Over the course of time though, the numbers focused on the long term. become more robust and meaningful. They continuously reveal more chapters of the book. The We’ve made great progress over decades not just in numbers themselves become inseparable threads in a narrow financial terms. Our story demonstrates personal progress and accomplishment for many 20-Year 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 CAGR(1) $ 1,977)% 2,551% 2,576% 2,200% 2,262% 2,092% 1,770% 1,397)% 1,094)% 524% 426% 419% 14% $ 2,213)% 2,359% 2,536% 2,401% 2,518% 2,572% 2,218% 1,774)% 1,132)% 595% 437% 423% 14% 99%) 88% 87% 101% 96% 99% 103% 124%) 114%) 101% 98% 99% —% $ 6,893)% 7,775% 7,524% 6,588% 6,317% 5,350% 4,314% 3,591)% 3,136)% 1,625% 1,483% 1,410% 14% $702.34)% 780.84% 752.80% 672.34% 641.49% 543.31% 438.79% 365.70)% 427.79)% 290.69% 268.49% 257.51% 9% $ (59)% 406% 393% 148% 165% 123% 75% (126)% (28)% 41% 57% 50% 11% $ (403)% 337% 551% 64% 273% 222% 73% (77)% 82% (40)% 68% 92% 14% $ 2,181)% 2,641% 2,296% 1,705% 1,657% 1,382% 1,159% 1,085)% 752)% 383% 425% 357% 18% $222.20)% 265.26% 229.78% 174.04% 168.22% 140.38% 117.89% 110.50)% 102.63)% 68.59% 77.02% 65.18% 12% 10%) 18% 16% 11% 20% 13% 13% 18%) 21%) 22% 23% 26% —% 3


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    people. It is a composite story of resilience, investment portfolio with returns of 26% on our adaptability, creativity, dependability, and equity holdings and 3% on our fixed income holdings. conservatism. And it is a story which carries the implication of continuity and replicability into the We produced an overall underwriting loss of $205 future. The story of Markel is one of excellent initial million in 2017 vs underwriting profits of $317 design, and thousands of subsequent actions, ideas, million in 2016 and Markel Ventures EBITDA was and iterations, which keep our story moving forward $178 million in 2017 vs $165 million last year. In every single day. total our comprehensive income was $1.2 billion in 2017 vs $667 million in 2016 and we repurchased In 1997 at the beginning of this 21 year chart we $111 million of our own common stock during the reported that we had 830 associates. course of the year. As we write this letter, there are over 15,000. When we write this letter, we look back at previous letters to give us a sense of how we’ve talked in years Over the last two decades, 14,000 additional people past. It is easy to see words and phrases such as have joined the ranks of your company. We’ve built an “transformational”, or “watershed events” in previous organization in which our people can grow, learn new annual reports. If we knew then, what we know now, skills, take on new challenges, and fully utilize their we might have saved those words for years like 2017. abilities. We’ve also created opportunities for more We hope by the time you finish reading this report and more people to join us in our quest. A virtuous that you’ll understand why we are using those words cycle of serving our customers effectively and again. efficiently and producing sound financial results while doing so creates this dynamic. “Rinse and repeat”, as Here are the headlines from 2017: it says on the shampoo bottle. 1- 2017 broke the financial record for the highest It is a joy to report this record of growth over time and ever total level of insured catastrophes. Hurricanes we appreciate the associates, the customers, and the Harvey, Irma, Maria and Nate, along with wildfires providers of capital, who made it possible. in California, earthquakes in Mexico, cyclones in Asia, weather and crop damage in Europe, and 2017 Review other events caused record financial losses 2- We acquired SureTec and State National in our In 2017 we produced total revenues of $6.1 billion vs insurance operations $5.6 billion in 2016, up 8%. Our insurance premiums 3- We acquired Costa Farms in our Markel Venture totaled $4.2 billion vs $3.9 billion, an increase of operations 10%. Our Markel Ventures operations produced 4- We made these substantial acquisitions on our revenues of $1.3 billion vs $1.2 billion, an increase of base of internal equity capital and each share of 10%. We earned 10% on our publicly traded your Markel stock owns a bigger business than it 4 did a year ago


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    Markel Corporation 5- We worked diligently to improve the efficiency and total expected losses of $565 million. Across all our effectiveness of our existing and new operations lines of insurance coverages we paid out $2.2 billion 6- We earned record returns in our investment in 2017 to help our customers recover from difficult operations events. In total, your company grew by roughly one quarter in The good news is that these payments demonstrate total size and scale during 2017 with major that our customers can count on us in their time of acquisitions in our insurance and Markel Ventures need. This is why people buy insurance in the first businesses. We responded to, and served our place. It also speaks to why we manage Markel in a insurance customers effectively as they experienced conservative and prudent way. We do so in order to record natural catastrophes, and we earned record have the ability to respond quickly, and appropriately, investment returns. to help our customers get back on their feet. We keep our promises. 2017 stands as a transformational and watershed year for Markel (yet again). In each and every period of heavy catastrophes, we’ve learned something about how to improve our Taking each one of these items in order, here is a operations. We’ve learned how to better select and review of the headlines. accept risks, and how to price those risks more appropriately. It is important to note that despite the 1- CATS, CATS, CATS large dollar amount of our losses in 2017, those amounts were in line with our estimates of what we We wish that we were talking about internet videos expected in the event of major catastrophes. with this headline but unfortunately that is not the case. In the insurance business, catastrophic events As we continue to offer insurance to our customers get described with the shorthand term of CATs. 2017 to protect them in the event of catastrophic events, set a new high water mark for the record books. we continue to iterate and adjust our prices and Financially, the insured loss toll exceeded every other exposures. If events become more common and more single year in human history. costly, we adjust our prices accordingly, to maintain the financial resources needed to pay claims when Total industry losses from hurricanes Harvey, Irma and they occur. Maria along with the wildfires in California, earthquakes in Mexico, cyclones in Asia, and European We also provide coverage and protect our clients more weather events, currently are expected to exceed efficiently and cost effectively than they could on $135 billion. As such, it is not surprising that our their own. We do so by maintaining a spread of losses from these events also set a new record. We geographically dispersed exposures. Events in one paid out claims of $159 million in response to the area tend not to affect other geographic areas. By catastrophic losses suffered by our customers, with collecting and managing a pool of insurance risks 5


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    and premiums from all around the world, we can Both companies contacted Markel when they effectively offer protection and insurance to individual considered their own futures. Our longstanding policyholders at an efficient cost to our policyholders. reputation and performance in helping companies The geographic spread, in and of itself, creates an flourish and grow, and our culture of integrity and efficiency that allows us to offer protection to our continuous improvement, created the opportunity for clients at a lower cost. us to engage in discussions with both firms. Great companies do things "for their customers" In the case of SureTec, the founder John Knox, rather than "to their customers" and our ability to contacted us directly, as he believed that Markel efficiently operate a diverse pool of catastrophic risk would offer the best option for SureTec and its creates the ability to serve our customers better and associates to grow and continue to build the value of more efficiently than they could do themselves. the firm. 2- SureTec and State National Acquisitions John and his team did a wonderful job of launching SureTec in 1998 and growing a successful surety During the course of 2017 we acquired SureTec and operation. SureTec’s largest markets are in their home State National. These two additions represent new state of Texas, along with California. While they do and substantial venues to continue our longstanding business in many other states as well, as part of strategy of specialization and diversification. SureTec Markel, they will immediately be able to expand the brings specialized knowledge of the surety market, a distribution and awareness of their surety products to unique and critical insurance function, which we Markel’s existing nationwide client base. previously had not been able to offer to our clients in a meaningful way. State National also brings new We already do business with many of the agents, skills and specialized insurance services with their contractors, and current and potential customers of historical knowledge of certain insurance SureTec, and our ability to help them grow through management and program services, as well as access to our distribution channels and customer base collateral protection products. creates a win-win situation for SureTec and Markel. John and his SureTec team win by knowing that their Both companies are experts and leaders in their firm will be part of the permanent capital structure of respective fields. By joining Markel, both companies Markel. They can grow and provide long term will be able to increase the amount of business they potential for their current and future associates with write, add specialized knowledge to better serve our the larger and long term base of Markel capital. clients, and help us continue on our path of diversification. The diversification adds margins of We at Markel win by adding surety to our array of safety to our financial strength and performance, insurance products and services. Surety requires which stands behind our promises to our clients. specialized expertise and we can serve our customers 6


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    Markel Corporation more fulsomely by adding the surety skills that are combine to offer new and unique insurance products now part of Markel. that are fully and appropriately regulated, and reviewed by government and rating agency personnel. State National also stands as a strategically valuable and important addition to Markel. The Ledbetter As part of the larger Markel organization, State family built State National over two generations. They National can continue to expand the size and scale of provided two primary lines of business. In one line, their offerings and we can learn about the ways in State National served as a “fronting” company for which technology continues to change the other property and casualty insurance companies. In fundamental nature of insurance pricing, marketing, the other line, they offered collateral protection and distribution. This acquisition adds additional sets insurance that works to protect credit unions and their of specialized skills to Markel and further diversifies customers. the set of products we can offer our customers. In the fronting business, State National often works 3- Costa Farms with insurers experiencing some vulnerability, or risks, to their ratings and marketplace acceptance. State Costa Farms is the largest grower of houseplants in National would stand in the shoes of their insurance the world. You can find their plants on the shelves of company clients, and provide services and assurance the leading home improvement and general to regulators and rating agencies, that the client merchandise retailers as well as online. The company insurance companies could, and would, maintain is in its third generation of Costa family leadership and appropriate levels of service and financial stability. generation four is in the building. In developing the skills to provide these important The Costa family demonstrates everything that can be services, State National also developed the skills to wonderful about a family business. In their words they assist the growing “Fintech” and venture capital talk about the foundation of “customers, culture, and funded entrants in the insurance industry. These new growth.” With that focus, starting from scratch, three participants often have unique marketing skills, risk generations built a wonderful business. They work pricing abilities, and product packaging and design each day to make themselves indispensable to their approaches. At the same time, they often do not have customers, and they keep a long term focus. All of the array of licenses required to offer insurance these activities stem from, and go hand in hand with, products or financial strength ratings to provide building a business that you expect to continue into comfort to potential buyers. future generations. Short cuts, and short term time horizons, have no place when this mentality pervades State National can work with those firms to solve their your business. challenges of regulatory and financial rating agency requirements. By partnering, State National and the newer entrants into the insurance business can 7


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    Just as is the case at Markel, this mindset goes beyond substantial increase in our size and scale, and we were people with the same last name or blood lines. Family able to pay for these purchases without additional becomes a matter of choice as associates join a firm equity financing. and choose to live with the same long term values. At the same time as we funded these acquisitions, we To be an associate of Markel is to be a member of the began making record levels of claims payments to our “Markel Family” in a figurative sense. We all share policyholders from the CAT losses and normal the same basic values and commitment to long term insurance operations. We believe this combination of success. We were pleased that the Costa family saw activities and events stands as strong evidence of our this culture at Markel and sought us out as partners financial strength, investment excellence, and to help them to continue to build their business in conservative financial practices. We were in a financial the future. position to pay record claim losses and execute three substantial acquisitions all in the space of the same Costa stands as the largest acquisition to date for year. Additionally, our financial position enables us to Markel Ventures. They have the specialized fully seek and accept property insurance risks in the knowledge and skills to grow more than 100 million post CAT environment of higher pricing and plants per year in varied locations, and get those prospectively better financial returns. living, breathing products onto store shelves, or delivered to your home and office, all around the We work every day to build and protect our financial country. They are the leading firm in their industry, strength. Those daily activities over many years paid and we expect that they will continue to grow off in 2017 as demonstrated by our ability to take organically (please pardon the pun) and inorganically. advantage of these opportunities to grow. We provide capital, and a time horizon, that matches the generational views of the Costa family. Separately, we raised $300 million of 30 year fixed rate financing at 4.30% in the fourth quarter. We The Costa acquisition represents a new level of size believe that the ability to lock in such a long term, and scope for Markel Ventures. We are excited to fixed rate debt makes prudent financial sense and is continue to add specialized knowledge and skills to consistent with the conservative way in which we Markel and to provide additional margin of safety to manage our financial affairs. our customers, associates, and shareholders. 5- Operational Developments 4- Acquisition Financing Amidst the headlines about the new things that I’m pleased to report to you that we paid for the happened at Markel this year it can be easy to forget acquisitions of SureTec, Costa, and State National about the thousands of operational details and with cash. We issued no dilutive equity to fund these improvements that took place in all of our global purchases. These deals increase the size and revenue operations. 8 footprint of Markel by about a quarter. This is a


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    Markel Corporation In each and every aspect of our insurance and There are no activities within the Markel organization industrial businesses we worked diligently to improve that are not being actively worked on to be made the efficiency by which we serve our clients. We have better. As it says in the Markel Style we look for “a and continue to focus on using all of the tools in the better way to do things.” The most important aspect toolbox labeled “technology”, to build and maintain of that statement is the mindset of continuous our competitive position in the world. improvement that infuses the people of Markel. The tools and technology we use to make that journey In 2017 our expense ratio stood at 37% compared to change over time but the path is one we’ve been on 39% in the prior year. This progress shows results for decades. We commit to remaining on that path to from our ongoing efforts to increase our internal improvement in every facet of your company. efficiency and offer our customers the best possible value for their insurance needs. There are no businesses on planet earth that do not face the same challenge. Any degree of complacency Our overall combined ratio of 105% reflects the or satisfaction with current processes or ways of doing record amount of CAT losses. CATs in total added business has no place in today’s world. There are no 13 points to our combined ratio and the change in elements of any aspect of Markel, in any business, in UK government mandated discount rate applied to any country, that are not constantly being refined, our run-off UK auto business added two points to reviewed, analyzed, changed and adapted to remain the total. relevant in 2018 and beyond. We remain fully committed to the discipline of 6- Investment Results underwriting profits. Our long term record of consistency with this goal stands as evidence that we We earned excellent returns in 2017. We earned 26% mean it and we fully expect to produce underwriting on our publicly traded equity portfolio and 3% on our profits in 2018. fixed income holdings. The total portfolio earned 10%. In dollar terms, we earned more than $1 billion Throughout the organization we continued to increase of unrealized gains, realized gains and dividends from the tools created by technological developments. We our public equity holdings and this represents a new changed the way we offered renewals to existing record. policyholders, we streamlined internal accounting and financial processes, we adapted our claims The double barreled win is that we also achieved this process to reflect more granular understanding of performance at a cost lower than passive index funds. policyholder losses, we increased the efficiency and We manage the vast majority of our investments effectiveness of our marketing efforts, and so on and internally. The total cost of our in house management so on and so on. stands at a single number of basis points. 9


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    We believe that we manage our investment That approach and formula has not changed since our operations with a triple play advantage of, ultra-low initial public offering in 1986 and despite the swirling costs, tax efficiency, and rigorous and continuous pace of change in so many aspects of life, we believe intellectual engagement and management of our the philosophy remains completely relevant and portfolio holdings. Two of those three aspects are durable. We continue to find productive ways to invest currently popular in the investment world. Specifically, our capital. In the short run, anything can and will indexing and passive investing are relatively low cost happen and results will be volatile. In the long run, and tax efficient. With our internal management, we we’ve earned spectacular returns with this keep our costs lower than passive indexers, we time-tested approach and we’re confident in our operate with tax efficiency, AND, we obsess about ability to continue to do so. what we own and why we own it. We do so in order to attempt to adapt and change as the world changes. In our fixed income operations we maintain the highest possible credit quality holdings we can find. Our multi-decade record of outperformance in our We match the duration and currencies of our holdings investment results speaks to the effectiveness of to our expectations of our insurance liabilities. This our approach. has been our longstanding and consistent practice and it has served us well. We also believe the approach is As we’ve written every year since 1999 we maintain a low cost and durable in the future. four step approach to selecting and managing our equity investments. In total, our net unrealized gains from this longstanding approach stood at $3.7 billion at year 1- We look for profitable businesses with excellent end. With the change in the tax law that occurred long term returns on capital and modest leverage during the fourth quarter of 2017, we reduced the deferred taxes associated with these gains and 2- We look for management teams with equal increased shareholders equity by $402 million due measures of talent and integrity to the reduction in the U.S. corporate tax rate from 35% to 21%. 3- We look for companies that can reinvest their earnings at high rates of return and/or demonstrate Next skill in acquisitions or other capital management activities The spectacular news about Markel is that there is always a chapter that starts with the headline NEXT. 4- We look for these investments at reasonable prices which should produce acceptable returns over time From the very beginning of our firm, with Sam Markel’s creative solution to a customer need, the entire history of this company has been figuring out what to do next. 10


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    Markel Corporation We’ve done so by following the precepts of the Markel We followed our process of using our financial Style. As the Style says, we’ve worked hard. We’ve resources to support organic growth in our pursued excellence, we’ve kept our sense of humor, existing businesses, acquiring new companies, and we’ve adhered to a creed of honesty and fairness adding to our investment portfolio of publicly in all our dealings. We’ve done so on a daily basis for traded securities and repurchasing our own years and we will do it the next day as well. stock. We will follow those same four steps next year and the year after that. We tested our design and fundamental strategy of specialization and diversification in 2017. While a 2017 indeed stands as a transformational record amount of catastrophic losses took place year in our longstanding goal to build one worldwide, our insurance operations were able to of “The World’s Great Companies.” There have absorb those losses. At the same time, our investment been transformational and watershed years and industrial operations produced excellent financial in our past and we aspire to more in the years results, and we maintained overall comprehensive to come. profitability for the company. We look forward to the next results from our varied operations as we expect Next. them to reveal the same story of long term progress. Respectfully submitted, Alan I. Kirshner, Executive Chairman Thomas S. Gayner, Co-Chief Executive Officer Anthony F. Markel, Vice Chairman Richard R. Whitt, III, Co-Chief Executive Officer Steven A. Markel, Vice Chairman 11


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) We are a diverse financial holding company serving a variety of niche markets. Our principal business markets and underwrites specialty insurance products. 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 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 business is comprised of the following types of operations: • Underwriting - our underwriting operations are comprised of our risk-bearing insurance operations, which include the run-off of underwriting operations that were discontinued in conjunction with acquisitions • Investing - our investing activities are primarily related to our underwriting operations • Program Services - our program services business serves as a fronting platform that provides other insurance companies access to the U.S. property and casualty insurance market • Markel CATCo - our Markel CATCo operations include an investment fund manager that offers insurance-linked securities to investors • Markel Ventures - our Markel Ventures operations include our controlling interests in a diverse portfolio of businesses that operate outside of the specialty insurance marketplace Underwriting Specialty Insurance and Reinsurance The specialty insurance market differs significantly from the standard market. In the standard market, insurance rates and forms are highly regulated, products and coverages are largely uniform with relatively predictable exposures and companies tend to compete for customers on the basis of price. In contrast, the specialty market provides coverage for hard-to-place risks that generally do not fit the underwriting criteria of standard carriers. Competition in the specialty insurance market tends to focus less on price than in the standard insurance market and more on other value-based considerations, such as availability, service and expertise. While specialty market exposures may have higher perceived insurance risks than their standard market counterparts, we seek to manage these risks to achieve higher financial returns. To reach our financial and operational goals, we must have extensive knowledge and expertise in our chosen markets. Many of our accounts are considered on an individual basis where customized forms and tailored solutions are employed. By focusing on the distinctive risk characteristics of our insureds, we have been able to identify a variety of niche markets where we can add value with our specialty product offerings. Examples of niche insurance markets that we have targeted include wind and earthquake-exposed commercial properties, liability coverage for highly specialized professionals, equine-related risks, workers’ compensation insurance for small businesses, classic cars and marine, energy and environmental-related activities. Our market strategy in each of these areas of specialization is tailored to the unique nature of the loss exposure, coverage and services required by insureds. In each of our niche markets, we assign teams of experienced underwriters and claims specialists who provide a full range of insurance services. We also participate in the reinsurance market in certain classes of reinsurance product offerings. In the reinsurance market, our clients are other insurance companies, or cedents. We typically write our reinsurance products in the form of treaty reinsurance contracts, which are contractual arrangements that provide for automatic reinsuring of a type or category of risk underwritten by cedents. Generally, we participate on reinsurance treaties with a number of other reinsurers, each with an allocated portion of the treaty, with the terms and conditions of the treaty being substantially the same for each participating reinsurer. With treaty reinsurance contracts, we do not separately evaluate each of the individual risks assumed under the contracts and are largely dependent on the individual underwriting decisions made by the cedent. Accordingly, we review and analyze the cedent’s risk management and underwriting practices in deciding whether to provide treaty reinsurance and in pricing of treaty reinsurance contracts. 12


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    Our reinsurance products are written on both a quota share and excess of loss basis. Quota share contracts require us to share the losses and expenses in an agreed proportion with the cedent. Excess of loss contracts require us to indemnify the cedent against all or a specified portion of losses and expenses in excess of a specified dollar or percentage amount. In both types of contracts, we may provide a ceding commission to the cedent. We distinguish ourselves in the reinsurance market by the expertise of our underwriting teams, our access to global reinsurance markets, our ability to offer large lines and our ability to customize reinsurance solutions to fit our client’s needs. Our specialty reinsurance product offerings include coverage for general casualty, professional liability, property, workers’ compensation and credit and surety risks. Markets In the United States, we write business in the excess and surplus lines (E&S) and specialty admitted insurance and reinsurance markets. In 2016, the E&S market represented $42 billion, or 7%, of the $613 billion United States property and casualty industry.(1) In 2016, we were the sixth largest E&S writer in the United States as measured by direct premium writings.(1) Our E&S insurance operations are conducted through Evanston Insurance Company (Evanston), domiciled in Illinois. The majority of our specialty admitted insurance operations are conducted through Markel Insurance Company (MIC), domiciled in Illinois; Markel American Insurance Company (MAIC), domiciled in Virginia; FirstComp Insurance Company (FCIC), domiciled in Nebraska and Essentia Insurance Company (Essentia), domiciled in Missouri. Beginning in 2017, our specialty admitted operations also include Suretec Insurance Company (SIC), Suretec Indemnity Company (SINC), State National Insurance Company, Inc. (SNIC) and National Specialty Insurance Company (NSIC), all of which are domiciled in Texas. Our United States reinsurance operations are conducted through Markel Global Reinsurance Company (Markel Global Re), a Delaware-domiciled reinsurance company. In Europe, we participate in the London insurance market primarily through Markel Capital Limited (Markel Capital) and Markel International Insurance Company Limited (MIICL). Markel Capital is the corporate capital provider for Markel Syndicate 3000, through which our Lloyd’s of London (Lloyd’s) operations are conducted. Markel Syndicate 3000 is managed by Markel Syndicate Management Limited (MSM). Markel Capital and MIICL are headquartered in London, England and have offices across the United Kingdom, Europe, Canada, Latin America, Asia Pacific and the Middle East through which we are able to offer insurance and reinsurance. The London insurance market produced approximately $62 billion of gross written premium in 2016.(2) In 2016, the United Kingdom non-life insurance market was the second largest in Europe and fifth largest in the world.(3) In 2016, gross premium written through Lloyd’s syndicates generated roughly 65% of the London market’s international insurance business,(2) making Lloyd’s the world’s largest commercial surplus lines insurer(1) and sixth largest reinsurer.(4) Corporate capital providers often provide a majority of a syndicate’s capacity and also generally own or control the syndicate’s managing agent. This structure permits the capital provider to exert greater influence on, and demand greater accountability for, underwriting results. In 2016, corporate capital providers accounted for approximately 90% of total underwriting capacity in Lloyd’s.(5) In Latin America, we provide reinsurance through MIICL, using our representative office in Bogota, Colombia, and our service company in Buenos Aires, Argentina; through Markel Resseguradora do Brasil S.A. (Markel Brazil Re), our reinsurance company in Rio de Janeiro, Brazil; and through Markel Syndicate 3000, using Lloyd’s admitted status in Rio de Janeiro. Additionally, MIICL and Markel Syndicate 3000 are able to offer reinsurance in a number of Latin American countries through offices outside of Latin America. Beginning in 2017, we provide insurance through Markel Seguradora do Brasil S.A. (Markel Brazil), our insurance company in Rio de Janeiro, Brazil. (1) U.S. Surplus Lines Segment Review Special Report, A.M. Best (September 1, 2017). (2) London Company Market Statistics Report, International Underwriting Association (October 2017). (3) Swiss Re Sigma (March 2017). (4) Global Reinsurance Segment Review Special Report, A.M. Best (September 5, 2017). (5) Lloyd’s Annual Report 2016. 13


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) In Bermuda, we write business in the worldwide insurance and reinsurance markets. The Bermuda property and casualty insurance and reinsurance market produced $64 billion of gross written premium in 2015.(2) We conduct our Bermuda operations through Markel Bermuda Limited (Markel Bermuda), which is registered as a Class 4 insurer and Class C long-term insurer under the insurance laws of Bermuda. Our reinsurance operations, which include our operations based in the United States, the United Kingdom, Latin America and Bermuda, as described above, made us the 37th largest reinsurer in 2016, as measured by worldwide gross reinsurance premium writings.(1) In 2017, 21% of gross premium writings from our underwriting segments related to foreign risks (i.e., coverage for risks or cedents located outside of the United States), of which 34% were from the United Kingdom and 12% were from Canada. In 2016, 23% of our premium writings related to foreign risks, of which 32% were from the United Kingdom and 11% were from Canada. In 2015, 24% of our premium writings related to foreign risks, of which 37% were from the United Kingdom and 10% were from Canada. In each of these years, there was no other individual foreign country from which premium writings were material. Premium writings are attributed to individual countries based upon location of risk or cedent. Most of our business is placed through insurance and reinsurance brokers. Some of our insurance business is also placed through managing general agents. We seek to develop and capitalize on relationships with insurance and reinsurance brokers, insurance and reinsurance companies, large global corporations and financial intermediaries to develop and underwrite business. A significant volume of premium for the property and casualty insurance and reinsurance industry is produced through a small number of large insurance and reinsurance brokers. During the years ended December 31, 2017, 2016 and 2015, the top three independent brokers accounted for 27%, 28% and 27%, respectively, of gross premiums written in our underwriting segments. Competition We compete with numerous domestic and international insurance companies and reinsurers, Lloyd’s syndicates, risk retention groups, insurance buying groups, risk securitization programs, alternative capital sources and alternative self-insurance mechanisms. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets, particularly companies with new or “disruptive” technologies or business models. Competition may take the form of lower prices, broader coverages, greater product flexibility, higher coverage limits, higher quality services or higher ratings by independent rating agencies. In all of our markets, we compete by developing specialty products to satisfy well-defined market needs and by maintaining relationships with agents, brokers and insureds who rely on our expertise. This expertise is our principal means of competing. We offer a diverse portfolio of products, each with its own distinct competitive environment, which enables us to be responsive to changes in market conditions for individual product lines. With each of our products, we seek to compete with innovative ideas, appropriate pricing, expense control and quality service to policyholders, agents and brokers. Few barriers exist to prevent insurers and reinsurers from entering our markets of the property and casualty industry. Market conditions and capital capacity influence the degree of competition at any point in time. Periods of intense competition, which typically include broader coverage terms, lower prices and excess underwriting capacity, are referred to as a “soft market.” A favorable insurance market is commonly referred to as a “hard market” and is characterized by stricter coverage terms, higher prices and lower underwriting capacity. During soft markets, unfavorable conditions exist due in part to what many perceive as excessive amounts of capital in the industry. In an attempt to use their capital, many insurance companies seek to write additional premiums without appropriate regard for ultimate profitability, and standard insurance companies are more willing to write specialty coverages. The opposite is typically true during hard markets. Historically, the performance of the property and casualty reinsurance and insurance industries has tended to fluctuate in cyclical periods of price competition and excess (1) Global Reinsurance Segment Review Special Report, A.M. Best (September 5, 2017). (2) Bermuda Monetary Authority 2016 Annual Report. 14


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    underwriting capacity, followed by periods of high premium rates and shortages of underwriting capacity. This cyclical market pattern can be more pronounced in the specialty insurance and reinsurance markets in which we compete than the standard insurance market. We experienced soft insurance market conditions, including price deterioration in virtually all of our product lines, starting in the mid-2000s. Beginning in 2012, prices stabilized and we generally saw low to mid-single digit favorable rate changes in many of our product lines in the following years as market conditions improved and revenues, gross receipts and payrolls of our insureds were favorably impacted by improving economic conditions. However, beginning in 2013 and continuing through the end of 2017, we experienced softening prices across most of our property product lines, as well as on our marine and energy lines. Our large account business has also been subject to more pricing pressure and competition remains strong in the reinsurance market. Following the high level of natural catastrophes that occurred in the third and fourth quarters of 2017, beginning in first quarter of 2018, we saw more favorable rates, particularly on our catastrophe exposed product lines. We are also seeing more stabilized pricing on our other product lines and continue to see pricing margins in most reinsurance lines of business. Despite stabilization of prices on certain product lines during the last several years, we still consider the overall property and casualty insurance market to be soft. We routinely review the pricing of our major product lines and will continue to pursue price increases in 2018, when possible. However, 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 when we alter our product offerings to maintain or improve underwriting profitability. Underwriting Philosophy By focusing on market niches where we have underwriting expertise, we seek to earn consistent underwriting profits, which are a key component of our strategy. 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 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. We use underwriting profit or loss as a basis for evaluating our underwriting performance. To facilitate this strategy, we have a product line leadership group that has primary responsibility for both developing and maintaining underwriting and pricing guidelines on our existing products and new product development. The product line leadership group is under the direction of our Chief Underwriting Officer. The 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. In 2017, our combined ratio was 105%. See Management’s Discussion & Analysis of Financial Condition and Results of Operations for further discussion of our underwriting results. The following graph compares our combined ratio to the property and casualty industry’s combined ratio for the past five years. C O M B I N E D R AT I O S Markel Corporation Industry Average* 110% 100% 107% 105% 105% 90% 101% 102% 102% 101% 97% 97% 96% 95% 97% 97% 98% 97% 96% 95% 97% 89% 92% 80% 2013 2014 2015 2016 2017 * Source: A.M. Best Company. Industry Average is estimated for 2017. 15


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Underwriting Segments Through December 31, 2017, we monitored and reported our ongoing underwriting operations in the following three segments: U.S. Insurance, International Insurance and Reinsurance. In determining how to aggregate and monitor our underwriting results, management considered many factors, including the geographic location and regulatory environment of the insurance entity underwriting the risk, the nature of the insurance product sold, the type of account written and the type of customer served. The U.S. Insurance segment includes all direct business and facultative placements written by our insurance subsidiaries domiciled in the United States. The International Insurance segment includes all direct business and facultative placements written by our insurance subsidiaries domiciled outside of the United States, including our syndicate at Lloyd’s. The Reinsurance segment includes all treaty reinsurance written across the Company. Results for lines of business discontinued prior to, or in conjunction with, acquisitions are reported in the Other Insurance (Discontinued Lines) segment. The lines were discontinued because we believed some aspect of the product, such as risk profile or competitive environment, would not allow us to earn consistent underwriting profits. Results attributable to the run-off of life and annuity reinsurance business are included in our Other Insurance (Discontinued Lines) segment. With the continued growth and diversification of our business, beginning in 2018, we no longer consider the geographic location of the insurance entity underwriting the risk when monitoring our underwriting operations and will monitor and report our ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. The Insurance segment will include all direct business and facultative placements written across the Company, which currently are reported in our U.S. Insurance and International Insurance segments. The Reinsurance segment will remain unchanged. See note 20 of the notes to consolidated financial statements for additional segment reporting disclosures. M A R K E L C O R P O R AT I O N 2017 G R O S S P R E M I U M V O L U M E ($5.3 BILLION) 55% U.S. Insurance 24% International Insurance Reinsurance 21% 16


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    U.S. Insurance Segment Our U.S. Insurance segment includes both hard-to-place risks written outside of the standard market on an excess and surplus lines basis and unique and hard-to-place risks that must be written on an admitted basis due to marketing and regulatory reasons. Business in this segment is written primarily through our Wholesale, Specialty and Global Insurance divisions. As a result of the acquisition of State National Companies, Inc. (State National), effective November 17, 2017, we created the State National division. The State National division’s collateral protection underwriting business is included in the U.S. Insurance segment and the remainder is included in our program services business. Effective January 1, 2018, our Wholesale and Global Insurance divisions were combined to form the Markel Assurance division. 42% Specialty Wholesale 46% Global Insurance 11% 1% - State National Wholesale Division The Wholesale division writes commercial risks, primarily on an excess and surplus lines basis. The E&S market focuses on hard-to-place risks and loss exposures that generally cannot be written in the standard market. United States insurance regulations generally require an E&S account to be declined by admitted carriers before an E&S company may write the business. E&S eligibility allows our insurance subsidiaries to underwrite unique loss exposures with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more restrictive and more expensive than coverages in the standard market. Our E&S business is written through two distribution channels: professional surplus lines general agents who have limited quoting and binding authority and wholesale brokers. Our E&S business produced by this segment is written on a surplus lines basis through Evanston, which is authorized to write business in all 50 states and the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands. Specialty Division The Specialty division writes program insurance and other specialty coverages for well-defined niche markets, primarily on an admitted basis. Our business written in the admitted market focuses on risks that, although unique and hard-to-place in the standard market, must remain with an admitted insurance company for marketing and regulatory reasons. Hard-to-place risks written in the admitted market cover insureds engaged in similar, but highly specialized, activities that require a total insurance program not otherwise available from standard insurers or insurance products that are overlooked by large admitted carriers. The admitted market is subject to more state regulation than the E&S market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. The majority of our business written in the Specialty division is written by retail insurance agents who have very limited or no underwriting authority although we also utilize managing general agents, who have broader underwriting authority, for certain of our product lines. Agents are carefully selected and agency business is controlled through regular audits and pre-approvals. Certain products and programs are marketed directly to consumers or distributed through wholesale producers. Personal lines coverages included in this segment are marketed directly to the consumer using direct mail, internet and telephone promotions, as well as relationships with various motorcycle and boat manufacturers, dealers and associations. 17


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) The majority of the business produced by this division is written either through MIC, MAIC, FCIC, Essentia, SIC, and SINC. MIC, MAIC and Essentia are licensed to write property and casualty insurance in all 50 states and the District of Columbia. MAIC is also licensed to write property and casualty insurance in Puerto Rico. Essentia specializes in coverage for classic cars and boats. FCIC is currently licensed in 28 states and specializes in workers’ compensation coverage. SIC and SINC specialize in surety coverages. SIC is currently licensed in all 50 states and the District of Columbia. SINC is currently licensed in California and Texas. Global Insurance Division The Global Insurance division writes risks outside of the standard market on both an admitted and non-admitted basis. The portion of Global Insurance division business written by our U.S. insurance subsidiaries is included in this segment, and the remainder is included in the International Insurance segment. U.S. business produced by this division is primarily written on Evanston and MAIC. State National Division The State National division writes collateral protection insurance (CPI), which insures personal automobiles and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies through its lender services product line on both an admitted and non-admitted basis. This business is primarily written on SNIC and NSIC, which are licensed to write property and casualty insurance in all 50 states and the District of Columbia. Our U.S. Insurance segment reported gross premium volume of $2.9 billion, earned premiums of $2.4 billion and an underwriting profit of $119.9 million in 2017. U.S. I N S U R A N C E S E G M E N T 2017 G R O S S P R E M I U M V O L U M E ($2.9 BILLION) 15% 16% Professional Liability 14% Personal Lines Property Workers’ Compensation General Liability 11% Specialty 27% Programs 11% 6% Other Product offerings within the U.S. Insurance segment fall within the following major product groupings: • General Liability • Professional Liability • Property • Personal Lines • Specialty Programs • Workers’ Compensation • Other Product Lines 18


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    General Liability product offerings include a variety of primary and excess liability coverages targeting apartments and office buildings, retail stores and contractors, as well as business in the life sciences, energy, medical, recreational and hospitality industries. Specific products include the following: • excess and umbrella products, which provide coverage over approved underlying insurance carriers on either an occurrence or claims-made basis; • products liability products, which provide coverage on either an occurrence or claims-made basis to manufacturers, distributors, importers and re-packagers of manufactured products; • environmental products, which provide coverage on either an occurrence or claims-made basis and include environmental consultants’ professional liability, contractors’ pollution liability and site-specific environmental impairment liability coverages; and • casualty facultative reinsurance written for individual casualty risks focusing on general liability, products liability, automobile liability and certain classes of miscellaneous professional liability and targeting classes which include low frequency, high severity general liability risks. Professional liability coverages include unique solutions for highly specialized professions, including architects and engineers, lawyers, agents and brokers, service technicians and computer consultants. We offer claims-made medical malpractice coverage for doctors and dentists; claims-made professional liability coverage to individual healthcare providers such as therapists, pharmacists, physician assistants and nurse anesthetists; and coverages for medical facilities and other allied healthcare risks such as clinics, laboratories, medical spas, home health agencies, small hospitals, pharmacies and senior living facilities. Other professional liability coverages include errors and omissions, union liability, executive liability for financial institutions and Fortune 1000 companies and management liability. Our management liability coverages, which can be bundled with other coverages or written on a standalone basis, include employment practices liability, directors’ and officers’ liability and fiduciary liability coverages. Additionally, we offer cyber liability products, which provide coverage primarily for data breach and privacy liability, data breach loss to insureds and electronic media coverage. Property coverages consist principally of fire, allied lines (including windstorm, hail and water damage) and other specialized property coverages, including catastrophe-exposed property risks such as earthquake and wind on both a primary and excess basis. Catastrophe-exposed property risks are typically larger and are lower frequency and higher severity in nature than more standard property risks. Our property risks range from small, single-location accounts to large, multi-state, multi-location accounts. Other types of property products include: • inland marine products, which provide a number of specialty coverages for risks such as motor truck cargo coverage for damage to third party cargo while in transit, warehouseman’s legal liability coverage for damage to third party goods in storage, contractor’s equipment coverage for first party property damage and builder’s risk coverage; and • railroad-related products, which provide first party coverages for short-line and regional railroads, scenic and tourist railroads, commuter and light rail trains and railroad equipment. Personal lines products provide first and third party coverages for classic cars, motorcycles and a variety of personal watercraft, including vintage boats, high performance boats and yachts and recreational vehicles, such as motorcycles, snowmobiles and ATVs. Based on the seasonal nature of much of our personal lines business, we generally will experience higher claims activity during the second and third quarters of the year. Additionally, property coverages are offered for mobile homes, dwellings and homeowners that do not qualify for standard homeowner’s coverage. Other products offered include special event protection, performance bicycle coverage, pet health coverage, supplemental natural disaster coverage, renters’ protection coverage and excess flood coverage. 19


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Specialty programs business included in this segment is offered on a standalone or package basis and generally targets specialized commercial markets and customer groups. Targeted groups include youth and recreation oriented organizations and camps, child care operators, schools, social service organizations, museums and historic homes, performing arts organizations, senior living facilities and wineries. Other specialty programs business written in this segment includes: • general agent programs that use managing general agents to offer single source admitted and non-admitted programs for a specific class or line of business; • first and third party coverages for medical transport, small fishing ventures, charters, utility boats and boat rentals; and • property and liability coverages for farms and animal boarding, breeding and training facilities. Workers’ compensation products provide wage replacement and medical benefits to employees injured in the course of employment and target main-street, service and artisan contractor businesses, retail stores and restaurants. Other product lines within the U.S. Insurance segment include: • ocean marine products, which provide general liability, professional liability, property and cargo coverages for marine artisan contractors, boat dealers and marina owners including hull physical damage, protection and indemnity and third party property coverages for ocean cargo; • surety products, which consist primarily of contract, commercial and court bonds; • CPI, which provides coverage on automobiles or other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies; and • coverages for equine-related risks, such as horse mortality, theft, infertility, transit and specified perils. International Insurance Segment Our International Insurance segment writes risks that are characterized by either the unique nature of the exposure or the high limits of insurance coverage required by the insured. Business included in this segment is produced through our Markel International and Global Insurance divisions. 78% Markel International Global Insurance 22% Markel International Division The Markel International division writes business worldwide from our London-based platform and branch offices around the world. This platform includes Markel Syndicate 3000, through which our Lloyd’s operations are conducted, and MIICL. The London insurance market is known for its ability to provide innovative, tailored coverage and capacity for unique and hard-to-place risks. Hard-to-place risks in the London market are generally distinguishable from standard risks due to the complexity or significant size of the risk. It is primarily a broker market, which means that insurance brokers bring most of the business to the market. Risks written in the Markel International division are written on either a direct basis or a subscription basis, the latter of which means that loss exposures brought into the market are typically insured by more than one insurance company or Lloyd’s syndicate, often due to the high limits of insurance coverage required. When we write business in the subscription market, we prefer to participate as lead underwriter in order to control underwriting terms, policy conditions and claims handling. 20


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    Global Insurance Division Global Insurance division business written by our non-U.S. insurance subsidiaries, which primarily targets Fortune 1000 accounts, is included in the International Insurance segment. The Global Insurance division is comprised of business written through Markel Bermuda and MIICL. In 2017, 63% of gross premium written in the International Insurance segment related to foreign risks, of which 36% was from the United Kingdom and 15% was from Canada. In 2016, 64% of gross premium written in the International Insurance segment related to foreign risks, of which 36% was from the United Kingdom and 16% was from Canada. In 2015, 66% of gross premium written in the International Insurance segment related to foreign risks, of which 40% was from the United Kingdom and 13% was from Canada. In each of these years, there was no other individual foreign country from which premium writings were material. Our International Insurance segment reported gross premium volume of $1.3 billion, earned premiums of $949.9 million and an underwriting loss of $33.6 million in 2017. I N T E R N AT I O N A L I N S U R A N C E S E G M E N T 2017 G R O S S P R E M I U M V O L U M E ($1.3 BILLION) 29% Marine and Energy 14% General Liability Professional Liability 31% Property 11% Other 15% Product offerings within the International segment fall within the following major product groupings: • Professional Liability • Marine and Energy • General Liability • Property • Other Product Lines Professional liability products are written on a worldwide basis and include professional indemnity, directors’ and officers’ liability, errors and omissions, employment practices liability, intellectual property and cyber liability. Our target industries include U.S. and international public companies, as well as large professional firms, including lawyers, financial institutions, accountants, consultants, and architects and engineers. Marine and energy products include a portfolio of coverages for cargo, energy, hull, liability, war and terrorism risks. The cargo account is an international transit-based book covering many types of cargo. Energy coverage includes all aspects of oil and gas activities. The hull account covers physical damage to ocean-going tonnage, yachts and mortgagees’ interests. Liability coverage provides for a broad range of energy liabilities, as well as traditional marine exposures including charterers, terminal operators and ship repairers. The war account covers the hulls of ships and aircraft, and other related interests, against war and associated perils. Terrorism coverage provides for property damage and business interruption related to political violence including war and civil war. 21


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) General liability products are written on a worldwide basis and include general and products liability coverages targeting consultants, construction professionals, financial service professionals, professional practices, social welfare organizations and medical products. We also write excess liability coverage, which includes excess product liability, excess medical malpractice and excess product recall insurance in the following industries: healthcare, pharmaceutical, medical products, life sciences, transportation, heavy industrial and energy. Property products target a wide range of insureds, providing coverage ranging from specie risks and fire to catastrophe perils such as earthquake and windstorm. Business is written primarily on an open market basis for direct and facultative risks targeting Fortune 1000 and large, multi-national companies on a worldwide basis. We also provide property coverage for small to medium-sized commercial risks on both a stand-alone and package basis. The specie account includes coverage for fine art on exhibition and in private collections, securities, bullion, precious metals, cash in transit and jewelry. Other product lines within the International Insurance segment include: • crime coverage primarily targeting financial institutions and providing protection for bankers’ blanket bond, computer crime and commercial fidelity; • contingency coverage including event cancellation, non-appearance and prize indemnity; • accident and health coverage targeting affinity groups and schemes, high value and high risks accounts and sports groups; • coverage for equine-related risks such as horse mortality, theft, infertility, transit and specified perils; • coverage for legal expenses including before the event products that protect commercial clients in the event of legal actions and after the event products covering a wide range of litigation; • specialty coverages include mortality risks for farms, zoos, animal theme parks and safari parks; and • short-term trade credit coverage for commercial risks, including insolvency and protracted default as well as political risks coverage in conjunction with commercial risks for currency inconvertibility, government action, import and export license cancellation, public buyer default and war. Reinsurance Segment Our Reinsurance segment includes property and casualty treaty reinsurance products offered to other insurance and reinsurance companies globally through the broker market. Our treaty reinsurance offerings include both quota share and excess of loss reinsurance and are typically written on a participation basis, which means each reinsurer shares proportionally in the business ceded under the reinsurance treaty written. Our reinsurance products may include features such as contractual provisions that require our cedent to share in a portion of losses resulting from ceded risks, may require payment of additional premium amounts if we incur greater losses than those projected at the time of the execution of the contract, may require reinstatement premium to restore the coverage after there has been a loss occurrence or may provide for experience refunds if the losses we incur are less than those projected at the time the contract is executed. Our reinsurance product offerings are underwritten by our Global Reinsurance division and our Markel International division. The Global Reinsurance division operates from platforms in the United States and Bermuda. Business written in the Global Reinsurance division is produced through Markel Global Re and Markel Bermuda. Markel Global Re is licensed or accredited to provide reinsurance in all 50 states and the District of Columbia. Markel Bermuda conducts its reinsurance operations from Bermuda. The Markel International division conducts its reinsurance operations from its London-based platform, as described above, and from its platform in Latin America, which includes Markel Brazil. 22


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    In 2017, 27% of gross premium written in the Reinsurance segment related to foreign risks, of which 31% was from the United Kingdom. In 2016, 37% of gross premium written in the Reinsurance segment related to foreign risks, of which 25% was from the United Kingdom. In 2015, 36% of gross premium written in the Reinsurance segment related to foreign risks, of which 32% was from the United Kingdom. In each of these years, there was no other individual foreign country from which premium writings were material. 80% Global Reinsurance Markel International 20% Our Reinsurance segment reported gross premium volume of $1.1 billion, earned premiums of $934.1 million and an underwriting loss of $299.2 million in 2017. REINSURANCE SEGMENT 2017 G R O S S P R E M I U M V O L U M E ($1.1 BILLION) 39% 31% Property Casualty Specialty 30% Product offerings within the Reinsurance segment fall within the following major product groupings: • Property • Casualty • Specialty Property treaty products are offered on an excess of loss and quota share basis for catastrophe, per risk and retrocessional exposures worldwide. Our catastrophe exposures are generally written on an excess of loss basis and target both personal and commercial lines of business providing coverage for losses from natural disasters, including hurricanes, wind storms and earthquakes. We also reinsure individual property risks such as buildings, structures, equipment and contents and provide coverage for both personal lines and commercial property exposures. Our retrocessional products provide coverage for all types of underlying exposures and geographic zones. A significant portion of the property treaty business covers United States exposures, with the remainder coming from international property exposures. 23


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Our casualty treaty reinsurance programs are written on a quota share and excess of loss basis and include general liability, professional liability, workers’ compensation, medical malpractice, environmental impairment liability and auto liability. General liability reinsurance includes umbrella and excess casualty products that are written worldwide. Our professional liability reinsurance programs are offered worldwide and consist of directors and officers liability, including publicly traded, private, and non-profit companies in both commercial and financial institution arenas; lawyers errors and omissions for small, medium and large-sized law firms; accountants errors and omissions for small and medium-sized firms; technology errors and omissions and cyber liability focusing on network security and privacy exposures. Auto reinsurance treaty products include commercial and non standard personal auto exposures predominantly in the United States. Our workers’ compensation business includes catastrophe-exposed workers’ compensation business. Medical malpractice reinsurance products are offered in the United States and include quota share, excess of loss and stop loss coverage for physician, surgeon, hospital and long term care medical malpractice writers. Environmental treaty reinsurance provides coverage for pollution legal liability, contractors pollution and professional liability exposures on both a nationwide and regional basis within the United States. Specialty treaty reinsurance products offered in the Reinsurance segment include structured and whole turnover credit, political risk, mortgage and contract and commercial surety reinsurance programs covering worldwide exposures, public entity reinsurance products, aviation, whole account, accident and health catastrophe coverage, marine and agriculture reinsurance products. Our public entity reinsurance products offer customized programs for government risk solutions, including counties, municipalities, schools, public housing authorities and special districts (e.g. water, sewer, parks) located in the United States. Types of coverage for public entities include general liability, environmental impairment liability, workers’ compensation and errors and omissions. Our aviation business includes commercial airline hull and liability coverage as well as general aviation for risks worldwide. Our accident and health catastrophe products cover personal accident, life, medical and workers’ compensation coverage. Marine reinsurance products include offshore and onshore marine and energy risks on a worldwide basis, including hull, cargo and liability. Agriculture reinsurance covers Multi-Peril Crop Insurance, hail and related exposures, for risks located in the United States and Canada. Ceded Reinsurance Within our underwriting operations, we purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. In reinsurance and retrocession transactions, an insurance or reinsurance company transfers, or cedes, all or part of its exposure in return for a portion of the premium. We purchase catastrophe reinsurance coverage for our catastrophe-exposed policies to ensure that our net retained catastrophe risk is within our corporate tolerances. Net retention of gross premium volume in our underwriting segments was 84% in 2017 and 83% in 2016. We do not purchase or sell finite reinsurance products or use other structures that would have the effect of discounting loss reserves. Our ceded reinsurance and retrocessional contracts do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. We attempt to minimize credit exposure to reinsurers through adherence to internal ceded reinsurance guidelines. We manage our exposures so that no exposure to any one reinsurer is material to our ongoing business. To participate in our reinsurance program, prospective companies generally must: (i) maintain an A.M. Best Company (Best) or Standard & Poor’s (S&P) rating of “A” (excellent) or better; (ii) maintain minimum capital and surplus of $500 million and (iii) provide collateral for recoverables in excess of an individually established amount. In addition, certain foreign reinsurers for our United States insurance operations must provide collateral equal to 100% of recoverables, with the exception of reinsurers who have been granted certified or authorized status by an insurance company’s state of domicile. Our credit exposure to Lloyd’s syndicates is managed through individual and aggregate exposure thresholds. When appropriate, we pursue reinsurance commutations that involve the termination of ceded reinsurance and retrocessional contracts. Our commutation strategy related to ceded reinsurance and retrocessional contracts is to reduce credit exposure and eliminate administrative expenses associated with the run-off of ceded reinsurance placed with certain reinsurers. 24


  • Page 27

    The following table displays balances recoverable from our ten largest reinsurers by group from our underwriting operations at December 31, 2017. The contractual obligations under reinsurance and retrocessional contracts are typically with individual subsidiaries of the group or syndicates at Lloyd’s and are not typically guaranteed by other group members or syndicates at Lloyd’s. These ten reinsurance groups represent approximately 61% of our $2.6 billion reinsurance recoverable balance attributed to our underwriting operations, before considering allowances for bad debts. Reinsurance Group A.M. Best Rating Reinsurance Recoverable (dollars in thousands) Fairfax Financial Group A $ 262,806 Munich Re Group A+ 214,441 AXIS Capital Holdings Limited A+ 184,662 Lloyd’s of London A 163,317 Alleghany Corporation A+ 151,033 RenaissanceRe Holdings Ltd A 136,753 EXOR S.p.A A 125,599 Liberty Mutual Holding Company A 123,068 Swiss Re Group A+ 110,377 Everest Re Group A+ 94,306 Reinsurance recoverable on paid and unpaid losses for ten largest reinsurers 1,566,362 Total reinsurance recoverable on paid and unpaid losses $ 2,585,823 Reinsurance recoverable balances in the preceding table are shown before consideration of balances owed to reinsurers and any potential rights of offset, any collateral held by us and allowances for bad debts. Reinsurance and retrocessional treaties are generally purchased on an annual or biennial basis and are subject to renegotiations at renewal. In most circumstances, the reinsurer remains responsible for all business produced before termination. Treaties typically contain provisions concerning ceding commissions, required reports to reinsurers, responsibility for taxes, arbitration in the event of a dispute and provisions that allow us to demand that a reinsurer post letters of credit or assets as security if a reinsurer becomes an unauthorized reinsurer under applicable regulations or if its rating falls below an acceptable level. See note 15 of the notes to consolidated financial statements and Management’s Discussion & Analysis of Financial Condition and Results of Operations for additional information about our ceded reinsurance programs and exposures. Investments Our business strategy recognizes the importance of both consistent underwriting and operating profits and superior investment returns to build shareholder value. We rely on sound underwriting practices to produce investable funds while minimizing underwriting risk. The majority of our investable assets come from premiums paid by policyholders. Policyholder funds are invested predominantly in high-quality corporate, government and municipal bonds that generally match the duration of our loss reserves. The balance, comprised of shareholder funds, is available to be invested in equity securities, which over the long run, have produced higher returns relative to fixed maturity investments. When 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 hold these investments over the long term. Substantially all of our investment portfolio is managed by company employees. 25


  • Page 28

    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) We evaluate our investment performance by analyzing net investment income and net realized gains (losses) as well as our taxable equivalent total investment return, which is a non-GAAP financial measure. Taxable equivalent total investment return includes items that impact net income, such as coupon interest on fixed maturities, dividends on equity securities and realized investment gains or losses, as well as changes in unrealized gains or losses, which do not impact net income. Certain items that are included in net investment income have been excluded from the calculation of taxable equivalent total investment return, such as amortization and accretion of premiums and discounts on our fixed maturity portfolio, to provide a comparable basis for measuring our investment return against industry investment returns. The calculation of taxable equivalent total investment return also includes the current tax benefit associated with income on certain investments that is either taxed at a lower rate than the statutory income tax rate or is not fully included in federal taxable income. We believe the taxable equivalent total investment return is a better reflection of the economics of our decision to invest in certain asset classes. We do not lower the quality of our investment portfolio in order to enhance or maintain yields. We focus on long-term total investment return, understanding that the level of realized and unrealized investment gains or losses may vary from one period to the next. The following table summarizes our investment performance. Years Ended December 31, (dollars in thousands) 2017 2016 2015 2014 2013 Net investment income $ 405,709%) $ 373,230% $ 353,213%) $ 363,230% $ 317,373% Net realized investment gains (losses) $ (5,303)% $ 65,147% $ 106,480%) $ 46,000% $ 63,152% Increase (decrease) in net unrealized gains on investments $ 1,125,440%) $ 342,111% $ (457,584)% $ 981,035% $ 261,995% Investment yield (1) 2.6%) 2.4% 2.3%) 2.4% 2.6% (1) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost. We believe our investment performance is best analyzed from the review of taxable equivalent total investment return over several years. The following table presents taxable equivalent total investment return before and after the effects of foreign currency movements. A N N U A L T A X A B L E E Q U I VA L E N T T O TA L I N V E S T M E N T R E T U R N S Years Ended December 31, Five-Year Ten-Year Annual Annual 2017 2016 2015 2014 2013 Return Return Equities 25.5% 13.5% (2.5)% 18.6% 33.3% 17.0% 10.6% Fixed maturities (1) 3.4% 2.4% 1.6% 6.5% —% 2.7% 4.1% Total portfolio, before foreign currency effect 9.2% 5.0% 0.5% 8.9% 6.9% 6.1% 5.7% Total portfolio 10.2% 4.4% (0.7)% 7.4% 6.8% 5.5% 5.3% Invested assets, end of year (in millions) $20,570 $19,059 $18,181 $18,638 $17,612 (1) Includes short-term investments, cash and cash equivalents and restricted cash and cash equivalents. 26


  • Page 29

    The following table reconciles investment yield to taxable equivalent total investment return. Years Ended December 31, 2017 2016 2015 2014 2013 Investment yield (1) 2.6% 2.4% 2.3% 2.4% 2.6% Adjustment of investment yield from amortized cost to fair value (0.5)% (0.4)% (0.4)% (0.4)% (0.3)% Net amortization of net premium on fixed maturities 0.4% 0.4% 0.5% 0.6% 0.7% Net realized investment gains and change in net unrealized gains on investments 5.9% 2.3% (2.0)% 5.9% 2.3% Taxable equivalent effect for interest and dividends (2) 0.4% 0.4% 0.4% 0.4% 0.4% Other (3) 1.4% (0.7)% (1.5)% (1.5)% 1.1% Taxable equivalent total investment return 10.2% 4.4% (0.7)% 7.4% 6.8% (1) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost. (2) Adjustment to tax-exempt interest and dividend income to reflect a taxable equivalent basis. (3) Adjustment to reflect the impact of changes in foreign currency exchange rates and time-weighting the inputs to the calculation of taxable equivalent total investment return. We monitor our investment portfolio to ensure that credit risk does not exceed prudent levels. S&P and Moody’s provide corporate and municipal debt ratings based on their assessments of the credit quality of an obligor with respect to a specific obligation. S&P’s ratings range from “AAA” (capacity to pay interest and repay principal is extremely strong) to “D” (debt is in payment default). Securities with ratings of “BBB” or higher are referred to as investment grade securities. Debt rated “BB” and below is regarded by S&P as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. Moody’s ratings range from “Aaa” to “C” with ratings of “Baa” or higher considered investment grade. Our fixed maturity portfolio has an average rating of “AA,” with 98% rated “A” or better by at least one nationally recognized rating organization. Our policy is to invest in investment grade securities and to minimize investments in fixed maturities that are unrated or rated below investment grade. At December 31, 2017, less than 1% of our fixed maturity portfolio was unrated or rated below investment grade. Our fixed maturity portfolio includes securities issued with financial guaranty insurance. We purchase fixed maturities based on our assessment of the credit quality of the underlying assets without regard to insurance. The following chart presents our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2017. 2017 C R E D I T Q UA L I T Y OF F I X E D M AT U R I T Y P O RT F O L I O ($9.9 BILLION) 92% AAA/AA A 6% 1% 1% BBB Other See “Market Risk Disclosures” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for additional information about investments. 27


  • Page 30

    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Program Services In November 2017, we completed the acquisition of State National. Following the acquisition, our other operations expanded to include program services business, which is provided through our newly formed State National division. Our program services business generates fee income, in the form of ceding (program service) fees, by offering issuing carrier capacity to both specialty general agents and other producers (GAs), who sell, control, and administer books of insurance business that are supported by third parties that assume reinsurance risk. These reinsurers are domestic and foreign insurers and institutional risk investors (capacity providers) that want to access specific lines of U.S. property and casualty insurance business. Issuing carrier (fronting) arrangements refer to our business in which we write insurance on behalf of a capacity provider and then reinsure the risk under these policies with the capacity provider in exchange for program services fees. Through our program services business, we write a wide variety of insurance products, principally including general liability insurance, commercial liability insurance, commercial multi-peril insurance, property insurance and workers compensation insurance. Program services business written through our State National division is separately managed from our underwriting divisions, which write similar products, in order to protect our customers and eliminate internal competition for this business. Our program services business is written through SNIC, NSIC and City National Insurance Company (CNIC), all of which are domiciled in Texas, and United Specialty Insurance Company (USIC), which is domiciled in Delaware. SNIC, NSIC and CNIC are licensed to write property and casualty insurance in all 50 states and the District of Columbia. USIC is eligible to write business in all 50 states, the District of Columbia and the U.S. Virgin Islands. Many of our programs are arranged with the assistance of brokers that are seeking to provide customized insurance solutions for specialty insurance business that requires an A.M Best “A” rated carrier. Our specialized business model relies on our GAs or capacity providers to provide the infrastructure associated with providing policy administration, claims handling, cash handling, underwriting, or other traditional insurance company services. We believe there are relatively few active competitors in the fronting business. We compete primarily on the basis of price, customer service, geographic coverage, financial strength ratings, licenses, reputation, business model and experience. Total revenues attributed to our program services business from the acquisition date to December 31, 2017 were $15.3 million. Our program services business generated $253.9 million of gross written premium volume from the acquisition date to December 31, 2017. In our program services business, we generally enter into a 100% quota share reinsurance agreement whereby we cede to the capacity provider (reinsurer) substantially all of our gross liability under all policies issued by and on behalf of us by the GA. The capacity provider is generally entitled to 100% of the net premiums received on policies reinsured, less the ceding fee to us, the commission paid to the GA and premium taxes on the policies. In connection with writing this business, we also enter into agency agreements with both the producer (typically GAs) and the capacity provider whereby the producer and capacity provider are generally required to deal directly with each other to develop business structures and terms to implement and maintain the ongoing contractual relationship. In a number of cases, the producer and capacity provider for a program are part of the same organization or are otherwise affiliated. As a result of our contract design, substantially all of the underwriting risk and business risk inherent in the arrangement is borne by the capacity provider. The capacity provider assumes and is liable for substantially all losses incurred in connection with the risks under the reinsurance agreement, including judgments and settlements. Our contracts with capacity providers do not legally discharge us from our primary liability for the full amount of the policies, and we will be required to pay the loss and bear collection risk if the capacity provider fails to meet its obligations under the reinsurance agreement. As a result, we remain exposed to the credit risk of capacity providers, or the risk that one of our capacity providers becomes insolvent or otherwise unable or unwilling to pay policyholder claims. We mitigate this credit risk generally by either selecting well capitalized, highly rated authorized capacity providers or requiring that the capacity provider post substantial collateral to secure the reinsured risks. 28


  • Page 31

    The following table displays balances recoverable from our ten largest reinsurers by group for our program services business, based on gross reinsurance recoverable balances at December 31, 2017. The contractual obligations under reinsurance and retrocessional contracts are typically with individual subsidiaries of the group or syndicates at Lloyd’s and are not typically guaranteed by other group members or syndicates at Lloyd’s. Reinsurance recoverable balances are shown before consideration of balances owed to reinsurers and any potential rights of offset, and allowances for bad debts. These ten reinsurance groups represent 79% of our $2.2 billion reinsurance recoverable balance attributed to our program services business, before considering allowances for bad debts. Gross Net A.M. Best Reinsurance Collateral Reinsurance Reinsurance Group Rating Recoverable Applied(1) Recoverable (dollars in thousands) Fosun International Holdings Ltd. B++ $ 538,227 $ 537,659 $ 568 Knight Insurance Company Ltd. B++ 397,070 397,070 — Lloyd’s of London A 297,494 — 297,494 James River Group Holdings, Ltd. A 139,507 139,507 — Tokio Marine Holdings A++ 102,284 1,172 101,112 Enstar Group Limited A- 75,289 39,349 35,940 State Automobile Mutual Insurance Company A- 50,886 50,886 — Greenlight Capital Re, Ltd. A- 48,833 48,833 — SOMPO Holdings, Inc. A+ 42,535 — 42,535 Allianz SE A+ 42,534 — 42,534 Reinsurance recoverable on paid and unpaid losses for ten largest gross reinsurers 1,734,659 1,214,476 520,183 Total reinsurance recoverable on paid and unpaid losses $ 2,193,542 $ 1,510,671 $ 682,871 (1) Collateral is applied to each reinsurer, up to the amount of the gross recoverable, to determine the net recoverable for each reinsurer presented in this table. As of December 31, 2017, we were the beneficiary of total letters of credit, trust accounts and funds withheld in the amount of $1.5 billion collateralizing reinsurance recoverable balances from our top 10 reinsurers and $1.9 billion for our total reinsurance recoverable balance. Markel CATCo Investment Management Our other operations also include our Markel CATCo operations, which are conducted through Markel CATCO Investment Management Ltd. (MCIM). MCIM is a leading insurance-linked securities investment fund manager and reinsurance manager headquartered in Bermuda focused on building and managing highly diversified, collateralized retrocession and reinsurance portfolios covering global property catastrophe risks. MCIM receives management fees for its investment and insurance management services, as well as performance fees based on the annual performance of the investment funds that it manages. Total revenues attributed to MCIM for the year ended December 31, 2017 were $28.7 million. As of December 31, 2017, MCIM’s total investment and insurance assets under management were $6.2 billion, which includes $6.0 billion for unconsolidated variable interest entities. 29


  • Page 32

    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Markel Ventures Through our wholly owned subsidiary Markel Ventures, Inc. (Markel Ventures), we own interests in various 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. Our strategy in making these 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 Markel Ventures operations are comprised of a diverse portfolio of businesses. While each of the businesses is operated independently from one another, we aggregate their financial results into two industry groups: manufacturing and non-manufacturing. Our manufacturing operations are comprised of manufacturers of transportation and other industrial equipment. Our non-manufacturing operations are comprised of businesses from several industry groups, including consumer goods and services (including healthcare) and business services. We historically monitored and assessed the performance of each of our Markel Ventures businesses separately with no single business being individually significant to the operations of the Company as a whole. Following the continued growth in our Markel Ventures operations and its aggregate significance to our financial results, beginning in 2018, we will monitor and report our Markel Ventures operations as a single operating segment, consistent with the way our chief operating decision maker now reviews and assesses Markel Ventures’ performance. In 2017, our Markel Ventures operations reported revenues of $1.3 billion, net income to shareholders of $103.6 million and earnings before interest, income taxes, depreciation and amortization (EBITDA) of $177.6 million. We use Markel Ventures EBITDA as an operating performance measure in conjunction with revenues and net income. See “Markel Ventures Operations” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for more information on EBITDA. See note 21 of the notes to consolidated financial statements and Management’s Discussion & Analysis of Financial Condition and Results of Operations for additional information about our Markel Ventures operations. Shareholder Value Our financial goals are to earn consistent underwriting and operating profits and superior investment returns to build shareholder value. More specifically, we measure financial success by our ability to grow 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 generally use five-year time periods to measure ourselves. Growth in book value per share is an important measure of our success because it includes all underwriting, operating and investing results. For the year ended December 31, 2017, book value per share increased 13% primarily due to a $763.0 million increase in net unrealized gains on investments, net of taxes, and net income to shareholders of $395.3 million. For the year ended December 31, 2016, book value per share increased 8% primarily due to net income to shareholders of $455.7 million and a $242.2 million increase in net unrealized gains on investments, net of taxes. Over the past five years, we have grown book value per share at a compound annual rate of 11% to $683.55 per share. As we continue to expand our operations beyond underwriting and investing, we recognize that book value per share does not capture all of the economic value in our business, as a growing portion of our operations are not recorded at fair value or otherwise captured in book value. As a result, beginning in 2018, we will also measure our financial success through the growth in the market price of a share of our stock, or total shareholder return, over a long period of time. For the year ended December 31, 2017, our share price increased 26%. Over the past five years, our share price increased at a compound annual rate of 21%. 30


  • Page 33

    The following graph presents book value per share and share price for the past five years as of December 31. $1,200 1,139.13 Book Value Per Share Share Price $1,000 904.50 883.35 $800 $600 682.84 580.35 $400 683.55 561.23 606.30 543.96 477.16 $200 $0 2013 2014 2015 2016 2017 Regulatory Environment Our insurance subsidiaries are subject to regulation and supervision by the insurance regulatory authorities of the various jurisdictions in which they conduct business. This regulation is intended for the benefit of policyholders rather than shareholders or holders of debt securities. The jurisdictions of our principal insurance subsidiaries are the United States (U.S.), the United Kingdom (U.K.) and Bermuda. Our Markel Ventures, Markel CATCo and other businesses also are subject to regulation and supervision by regulatory authorities of the various jurisdictions in which they conduct business. United States Insurance Regulation Overview. Our U.S. insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business. Each state has its own regulatory authority for insurance that is generally responsible for the direct regulation of the business of insurance conducted in that state. In addition, the National Association of Insurance Commissioners (NAIC), comprised of the insurance commissioners of each U.S. jurisdiction, develops or amends model statutes and regulations that in turn most states adopt. While the U.S. federal government and its regulatory agencies generally do not directly regulate the business of insurance, there have been recent federal initiatives that impact the business of insurance. State Insurance Regulation. In the United States, authority for the regulation, supervision and administration of the business of insurance in each state is generally delegated to a state commissioner heading a regulatory body responsible for the business of insurance. Through this authority, state regulatory authorities have broad regulatory, supervisory and administrative powers relating to solvency standards; the licensing of insurers and their agents; the approval of forms and policies used; the nature of, and limitations on, insurers’ investments; the form and content of annual statements and other reports on the financial condition of insurers; and the establishment of loss reserves. Our U.S. insurance subsidiaries that operate on an admitted basis are typically subject to regulatory rate and form review, while our U.S. excess and surplus lines insurance subsidiaries generally operate free of rate and form regulation. Holding Company Statutes. In addition to regulatory supervision of our domestic insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Typically, such statutes require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition, material transactions with affiliates and general business operations. In addition, these statutes also require approval of changes in control of an insurer or an insurance holding company. Generally, control for these purposes is defined as ownership or voting power of 10% or more of a company’s voting shares. Additional requirements include group-level reporting, submission of an annual enterprise risk report by a regulated insurance company’s ultimate controlling person and information 31 regarding an insurer’s non-insurer affiliates.


  • Page 34

    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Risk Based Capital Requirements. The NAIC uses a risk based capital formula that is designed to measure the capital of an insurer taking into account the company’s investments and products. These requirements provide a formula which, for property and casualty insurance companies, establishes capital thresholds for four categories of risk: asset risk, insurance risk, interest rate risk and business risk. At December 31, 2017, the capital and surplus of each of our United States insurance subsidiaries was above the minimum regulatory thresholds. Own Risk and Solvency Assessment. We must submit annually to the Illinois Department of Insurance, our lead state insurance regulator, an Own Risk and Solvency Assessment Summary Report (ORSA). The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks. Excess and Surplus Lines. The regulation of our U.S. insurance subsidiaries’ excess and surplus lines insurance business differs significantly from the regulation of our admitted business. Our surplus lines subsidiaries are subject to the surplus lines regulation and reporting requirements of the jurisdictions in which they are eligible to write surplus lines insurance. Although the surplus lines business is generally less regulated than admitted business, regulations apply to surplus lines placements under the laws of every state. Dividends. The laws of the domicile states of our U.S. insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Corporation. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary, as opposed to ordinary, dividends. At December 31, 2017, our United States insurance subsidiaries could pay up to $436.4 million during the following 12 months under the ordinary dividend regulations. Trade Practices. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, data security, policyholder services, claims management, anti-fraud controls and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations. Investment Regulation. Investments by our domestic insurance companies must comply with applicable laws and regulations that prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications. The Terrorism Risk Insurance Act. The Terrorism Risk Insurance Act of 2002, as amended (TRIA), has established a federal program that provides for a system of shared public and private compensation for certain insured losses resulting from acts of terrorism. In early 2015 the program was extended for another six years, and is now scheduled to expire in 2020. In addition, the most recent extension of TRIA (1) raised the threshold for the program to go into effect (the triggering event) from $100 million in losses to $200 million, in $20 million increments starting in January 2016 and (2) increased the amount that insurers must cover as a whole through co-payments and deductibles, which is known in the industry as the aggregate retention. Starting in 2016, the aggregate retention amount rises by $2 billion a year to $37.5 billion from $27.5 billion. TRIA is applicable to almost all commercial lines of property and casualty insurance but excludes commercial auto, burglary and theft, surety, professional liability and farm owners’ multi-peril insurance. Insurers with direct commercial property and casualty insurance exposure in the United States are required to participate in the program and make available coverage for certified acts of terrorism. Federal participation will be triggered under TRIA when the Secretary of Treasury certifies an act of terrorism. Cybersecurity. The New York Department of Financial Services (NYDFS) has issued Cybersecurity Requirements for Financial Services Companies that require certain of our insurance operations to, among other things, establish and maintain a cybersecurity policy designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry. The regulation went into effect on March 1, 2017 and has transition periods ranging from 180 days to two years. In addition, the NAIC recently adopted the Insurance Data Security Model Law in October 2017. The purpose of the model law is to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. It is not clear whether state legislatures will begin adopting the model law, or in what form or when they will do so. 32


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    Federal Regulation. The federal government and its regulatory agencies generally do not directly regulate the business of insurance. However, two federal government bodies, the Federal Insurance Office (FIO) and the Financial Stability Oversight Council (FSOC), each created under The Dodd Frank Wall Street Reform and Consumer Protection Act enacted in 2010, may impact the regulation of insurance. Although the FIO is prohibited from directly regulating the business of insurance, it has authority to represent the United States in international insurance matters and has limited powers to preempt certain types of state insurance laws. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the United States financial stability in the event of the insurer’s material financial distress or failure. We have not been so designated. United Kingdom Insurance Regulation Under the Financial Services and Markets Act 2000 (FSMA), it is unlawful to carry on insurance business in the United Kingdom without permission to do so from the relevant regulators, currently the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). An independent Financial Policy Committee at the Bank of England supervises the financial services sector at a macro level, responding to sectoral issues that could threaten economic and financial stability. MIICL, MSM, our Lloyd’s managing agent, and E.C. Insurance Company Limited (ECIC), which we acquired in November 2017, are authorized by the PRA and regulated by both the PRA and the FCA. In addition, our United Kingdom insurance operations include FCA-authorized insurance intermediaries that produce insurance for MIICL, Syndicate 3000 and third party insurance carriers. The PRA is a subsidiary of the Bank of England and is responsible for the prudential regulation and supervision of banks, building societies, credit unions, major investment firms and insurers, including the Society of Lloyd’s and managing agents that participate in the Lloyd’s market. The two primary statutory objectives of the PRA are to promote the safety and soundness of the firms it regulates and, specific to insurers, to contribute to securing an appropriate degree of protection for those who are, or may become, policyholders. A secondary objective of the PRA is to facilitate effective competition. The FCA, which is separate from the Bank of England, is accountable to HM Treasury and ultimately the United Kingdom Parliament. The FCA supervises the day-to-day conduct of insurance firms and other authorized firms operating in the United Kingdom, including those participating in the Lloyd’s market and U.K. insurance intermediaries. The overarching strategic objective of the FCA is to ensure that the relevant markets function well. The FCA also has three operational objectives: securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the U.K. financial system, and promoting effective competition in the interests of consumers. The PRA assesses the insurance firms it regulates on a continuous cycle, requiring firms to submit sufficient data of appropriate quality to support their judgments about key risks, through meetings of directors, officers and other employees with PRA supervisors. The PRA also oversees compliance with minimum solvency and capital requirements under the Solvency II Directive (Solvency II) and imposes dividend restrictions. Both the PRA and the FCA oversee compliance with risk assessment reviews, restrictions governing the appointment of key officers, restrictions governing controlling ownership interests and various other requirements. In addition, both the PRA and FCA have arrangements with Lloyd’s for cooperation on supervision and enforcement of the Lloyd’s market. MIICL and ECIC must provide advance notice to the PRA for any dividends and any transaction or proposed transaction with a connected or related person. MSM is required to satisfy the solvency requirements of Lloyd’s. In addition, our United Kingdom subsidiaries must comply with the United Kingdom Companies Act of 2006, which provides that dividends may only be paid out of profits available for that purpose. 33


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) In addition, under Solvency II, the regulatory framework for the European insurance industry in place effective January 1, 2016, MIICL must give the PRA advance notice of any material intra-group transaction which Markel International Limited (the indirect parent of MIICL) or any of its subsidiaries intends to enter into with a group entity outside the European Economic Area and any material payment, including the payment of a dividend, other distribution or capital extraction which Markel International Limited or any of its subsidiaries intends to make to a group entity outside the European Economic Area. MIICL, MSM and ECIC each submit, at least annually, an ORSA to the PRA and Lloyd’s, respectively. The ORSA is a confidential internal assessment of the material risks associated with the current business plans for MIICL, MSM and ECIC and the sufficiency of capital resources in place to support those risks. On June 23, 2016, the United Kingdom voted to exit the European Union (E.U.) (Brexit). For discussion regarding Brexit, see “Brexit Developments” under Management’s Discussion & Analysis of Financial Condition and Results of Operations and the Risk Factor titled “The United Kingdom’s vote to leave, and the eventual exit of the United Kingdom from, the European Union could adversely affect us.” Bermuda Insurance Regulation The insurance and reinsurance industry in Bermuda is regulated by the Bermuda Monetary Authority (BMA). Markel Bermuda is regulated by the BMA as a Class 4 general business and Class C long-term business insurer under the Insurance Act 1978 of Bermuda and its related regulations (Bermuda Insurance Act). The Bermuda Insurance Act imposes on Markel Bermuda solvency and liquidity standards, restrictions on the reduction of statutory capital and auditing and reporting requirements. The Bermuda Insurance Act grants to the BMA powers to cancel insurance licenses, supervise, investigate and intervene in the affairs of Bermuda insurance and reinsurance companies and, in certain circumstances, share information with foreign regulators. Bermuda’s prudential framework for the supervision of insurance and reinsurance companies and groups is deemed to be fully equivalent to the regulatory standards applied to European insurance and reinsurance companies and groups under Solvency II. As a result, Bermuda is considered by European member states as applying an equivalent statutory insurance regime in accordance with the requirements of Solvency II with respect to reinsurance, group solvency calculations and group supervision. The equivalence recognition applies to Bermuda’s commercial Class 3A, 3B, 4, Class C, Class D and Class E insurers and reinsurers and groups. Markel Bermuda is subject to enhanced capital requirements in addition to minimum solvency and liquidity requirements. The enhanced capital requirement is determined by reference to a risk-based capital model that determines a control threshold for statutory capital and surplus by taking into account the risk characteristics of different aspects of the insurer’s business. At December 31, 2017, Markel Bermuda satisfied both the enhanced capital requirements and the minimum solvency and liquidity requirements. Markel Bermuda also must submit annually to the BMA a Commercial Insurer Solvency Self-Assessment (CISSA) and a Financial Condition Report (FCR). The CISSA is a confidential internal assessment of the material and relevant risks associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks. The FCR is an assessment of the insurer’s business and performance, governance structure, risk profile, solvency valuation and capital management, and is available to the public upon written request. Under the Bermuda Insurance Act, Markel Bermuda is prohibited from paying or declaring dividends during a fiscal year if it is in breach of its enhanced capital requirement, solvency margin or minimum liquidity ratio or if the declaration or payment of the dividend would cause a breach of those requirements. If an insurer fails to meet its solvency margin or minimum liquidity ratio on the last day of any financial year, it is prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA. Further, Markel Bermuda is prohibited from declaring or paying in any financial year dividends of more than 25% of its total statutory capital and surplus as set forth in its previous year’s 34


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    statutory balance sheet unless at least seven days before payment of those dividends it files with the BMA an affidavit stating that it will continue to meet its solvency margin and minimum liquidity ratio. Markel Bermuda must obtain the BMA’s prior approval for a reduction by 15% or more of the total statutory capital as set forth in its previous year’s financial statements. In addition, as a Class C long-term insurer, Markel Bermuda may not declare or pay a dividend to any person other than a policyholder unless the value of the assets in its long-term business fund, as certified by Markel Bermuda’s approved actuary, exceeds the liabilities of its long-term business. The amount of the dividend cannot exceed the aggregate of that excess and any other funds legally available for the payment of the dividend. At December 31, 2017, Markel Bermuda could pay up to $443.5 million in dividends during the following 12 months without making any additional filings with the BMA. Markel CATCo Re Ltd (Markel CATCo Re) is licensed as a Bermuda Class 3 reinsurance company and is subject to regulation and supervision of the BMA. See “Regulation of Markel CATCo” under “Other Regulation” below for more information about the regulation of Markel CATCo Re. Other Insurance Jurisdictions The European Union implemented Solvency II effective January 1, 2016. Solvency II replaces existing insurance directives and creates a pan-European, risk based solvency regime which affects all insurers and reinsurers throughout the E.U. The Solvency II regime is based on three pillars: financial requirements; governance and risk management requirements; and disclosure requirements. The European Commission has developed detailed rules that complement the high-level principles of Solvency II. At present the United States is not recognized as Solvency II “equivalent.” Therefore, MIICL has agreed on “other methods” with the PRA which includes the provision to the PRA of certain specified information regarding Markel Corporation and its insurance companies. In addition, as a global provider of specialty insurance and reinsurance, our insurance subsidiaries must comply with various regulatory requirements in jurisdictions where they conduct business in addition to the jurisdictions in which they are domiciled. For example, MIICL and our Lloyd’s operations must comply with applicable Latin America regulatory requirements in connection with our Latin American reinsurance operations. In addition to the regulatory requirements imposed by the jurisdictions in which an insurer or reinsurer is licensed, a reinsurer’s business operations are affected by regulatory requirements governing credit for reinsurance in other jurisdictions in which its ceding companies are located. In general, a ceding company that obtains reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the liability for unearned premiums and loss reserves and loss expense reserves ceded to the reinsurer. Many jurisdictions also permit ceding companies to take credit on their statutory financial statements for reinsurance obtained from unlicensed or non-admitted reinsurers if certain prescribed security arrangements are made. As an example, Markel Bermuda currently is not licensed, accredited or approved in every jurisdiction where its reinsurance customers are domiciled. As a result, Markel Bermuda may be required to provide a letter of credit or other security arrangement for its reinsurance customers domiciled in those jurisdictions. In most U.S. states Markel Bermuda has obtained approval of a trust arrangement that satisfies the credit for reinsurance requirements for Markel Bermuda’s customers domiciled in those states. The insurance and reinsurance industry in Brazil is regulated by the Conselho Nacional de Seguros Privados (CNSP) and supervised by the Superintendência de Seguros Privados (SUSEP) on behalf of the Ministry of Finance. Markel Seguradora do Brasil S.A. (Markel Brazil) and Markel Resseguradora do Brasil S.A. (Markel Brazil Re) are each authorized by SUSEP as a local Brazilian insurance company and reinsurance company, respectively. Markel Brazil and Markel Brazil Re are required to submit monthly returns, audited annual returns and annual financial statements to SUSEP. On June 23, 2016, the United Kingdom voted to exit the European Union (Brexit). For discussion regarding Brexit, see “Brexit Developments” under Management’s Discussion & Analysis of Financial Condition and Results of Operations and the Risk Factor titled “The United Kingdom’s vote to leave, and the eventual exit of the United Kingdom from, the European Union could adversely affect us.” 35


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Global Supervisory College; Global Common Framework The global insurance regulatory framework now also includes supervisory colleges. A supervisory college is a forum of the regulators having jurisdictional authority over an insurance holding company’s worldwide insurance subsidiaries. The supervisory college meets with executive management to evaluate the insurance group on both a group-wide and legal-entity basis, particularly with respect to its financial data, business strategies, enterprise risk management and corporate governance. The Illinois Department of Insurance, our lead insurance regulator, and several other regulators conducted an initial supervisory college with management in December 2016. A regulator only meeting of our supervisory college was conducted in July 2017. The next supervisory college with management is scheduled for August 2018. The NAIC and state insurance regulators, as well as regulators in countries where we have operations, are currently working with the International Association of Insurance Supervisors (IAIS) to develop a global common framework (ComFrame) for the supervision of internationally active insurance groups (IAIGs). If adopted, ComFrame would require the designation of a group-wide supervisor (regulator) for each IAIG and would impose a group capital requirement that would be applied to an IAIG in addition to the current legal entity capital requirements imposed by state insurance regulators. In response to ComFrame, the NAIC revised the model Insurance Holding Company System Regulatory Act to allow state insurance regulators in the U.S. to be designated as group-wide supervisors for U.S. based IAIGs. Additionally, the NAIC is developing a group capital standard that would be applied to U.S. based insurance groups. Other Regulation Markel Ventures. Our Markel Ventures businesses are subject to a wide variety of U.S. federal, state, and local laws and regulations, as well as foreign laws and regulations applicable to their non-U.S. operations, including: • For our Markel Ventures manufacturing operations, and certain consumer operations, laws and regulations in the areas of safety, health, employment and environmental pollution controls, as well as U.S. and international trade and anti-corruption laws and regulations; and • For our Markel Ventures non-manufacturing operations, laws and regulations in the areas of data privacy and security, health care, government contracting and employment. Solicitors Regulation Authority. LHS Solicitors LLP (LHS), a wholly owned subsidiary, is a full service commercial law firm with offices in Manchester and Croydon, England. LHS employs approximately 65 lawyers who provide legal services to small and medium-sized enterprises in the United Kingdom. LHS is authorized and regulated by the Solicitors Regulation Authority (SRA). The SRA is an independent regulatory body of the Law Society of England and Wales which regulates the conduct of solicitors and law firms to protect consumers and to support the rule of law and the administration of justice. The SRA works within a statutory framework for regulation provided by the Solicitors Act 1974, the Administration of Justice Act 1985 and, primarily, by the Legal Services Act 2007. Regulation of Markel CATCo. We conduct our Markel CATCo operations through three Bermuda companies: MCIM, Markel CATCo Reinsurance Fund Ltd. (Markel CATCo Fund) and Markel CATCo Re. MCIM is a Bermuda exempted company with limited liability. MCIM holds investment business and insurance management licenses, issued by the BMA under the Investment Business Act 2003 and the Insurance Act 1978, respectively, and is regulated by the BMA. MCIM is not registered as an investment company under the U.S. Investment Company Act of 1940, an investment adviser under the U.S. Investment Advisers Act of 1940 or as a “commodity pool operator” or “commodity trading advisor” with the U.S. Commodity Futures Trading Commission. Markel CATCo Fund is a mutual fund company with limited liability under the Companies Act 1981 of Bermuda and is registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000. 36


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    Markel CATCo Re is also registered as a segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000 and is licensed as a Bermuda Class 3 reinsurance company subject to regulation and supervision of the BMA. Under the Bermuda Insurance Act, and related regulations and policies of the BMA, Markel CATCo Re is subject to, among other things, capital, surplus and liquidity requirements, solvency standards, restrictions on dividends and distributions and certain periodic examinations of the company and its financial condition. In addition, Markel CATCo Re must obtain prior approval of ownership and transfer of shares and maintain a principal office and appoint and maintain a principal representative in Bermuda. The BMA also requires that Markel CATCo Re contract for local services, such as corporate secretary, insurance manager and registered representative, at market rates. Ratings Financial stability and strength are important purchase considerations of policyholders, cedents and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and assign ratings to assist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the insurer’s operating results, financial condition or other significant factors influencing the insurer’s business. Changes in assigned ratings could have an adverse impact on an insurer’s ability to write new business. Best assigns financial strength ratings (FSRs) to property and casualty insurance companies based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as the spread of risk, the adequacy and soundness of ceded reinsurance, the quality and estimated market value of assets, the adequacy of loss reserves and surplus and the competence, experience and integrity of management. Best’s FSRs range from “A++” (superior) to “F” (in liquidation). Seventeen of our nineteen insurance subsidiaries are rated by Best. All seventeen of our insurance subsidiaries rated by Best have been assigned an FSR of “A” or “A-” (excellent). Our Lloyd’s syndicate is part of a group rating for the Lloyd’s overall market, which has been assigned an FSR of “A” (excellent) by Best. Nine of our nineteen insurance subsidiaries are rated by S&P. All nine of our insurance subsidiaries rated by S&P have been assigned an FSR of “A” (strong). Our Lloyd’s syndicate is part of a group rating for the Lloyd’s overall market, which has been assigned an FSR of “A+” (strong) by S&P. Eight of our nineteen insurance subsidiaries are rated by Fitch Ratings (Fitch). All eight of our insurance subsidiaries rated by Fitch have been assigned an FSR of “A+” (strong). Our Lloyd’s syndicate is part of a group rating for the Lloyd’s overall market, which has been assigned an FSR of “AA-” (very strong) by Fitch. Five of our nineteen insurance subsidiaries are rated by Moody’s Corporation (Moody’s). All five insurance subsidiaries rated by Moody’s have been assigned an FSR of “A2” (good). The various rating agencies typically charge companies fees for the rating and other services they provide. During 2017, we paid rating agencies, including Best, S&P, Fitch and Moody’s, $2.0 million for their services. 37


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) Risk Factors A wide range of factors could materially affect our future prospects and performance. The matters addressed under “Safe Harbor and Cautionary Statement,” “Critical Accounting Estimates” and “Market Risk Disclosures” in Management’s Discussion and Analysis of Financial Condition and Results of Operations and other information included or incorporated in this report describe many of the significant risks that could affect our operations and financial results. We are also subject to the following risks. We may experience losses or disruptions from catastrophes. As a company with significant property and casualty insurance underwriting operations, we may experience losses from man-made or natural catastrophes. Catastrophes include, but are not limited to, windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter weather and fires and may include events related to terrorism and political unrest. While we employ catastrophe modeling tools in our underwriting process, we cannot predict how severe a particular catastrophe will be before it occurs. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency and severity of the events, the effectiveness of our catastrophe risk management program and the adequacy of our reinsurance coverage. Most catastrophes occur over a small geographic area; however, some catastrophes may produce significant damage in large, heavily populated areas. In addition, catastrophes may have a material adverse effect on the investment management and performance fees earned by our insurance-linked securities (ILS) investment fund management business and returns on our investments in ILS funds. Catastrophes also may result in significant disruptions in our insurance and other operations, as well as loss of income and assets. If, as many forecast, climate change results in an increase in the frequency and severity of weather-related catastrophes, we may experience additional catastrophe-related losses or disruptions, which may be material. Our results may be affected because actual insured or reinsured losses differ from our loss reserves. Significant periods of time often elapse between the occurrence of an insured or reinsured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expenses. The process of estimating loss reserves is a difficult and complex exercise involving many variables and subjective judgments. This process may become more difficult if we experience a period of rising inflation. As part of the reserving process, we review historical data and consider the impact of such factors as: • trends in claim frequency and severity, • changes in operations, • emerging economic and social trends, • trends in insurance rates, • inflation or deflation, and • changes in the regulatory and litigation environments. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, and actual results will differ from original estimates. As part of the reserving process, we regularly review our loss reserves and make adjustments as necessary. Future increases in loss reserves will result in additional charges to earnings, which may be material. In addition, reinsurance reserves are subject to greater uncertainty than insurance reserves primarily because a reinsurer relies on (i) the original underwriting decisions made by ceding companies and (ii) information and data from ceding companies. As a result, we are subject to the risk that our ceding companies may not have adequately evaluated the risks reinsured by us and the premiums ceded may not adequately compensate us for the risks we assume. In addition, reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer and ultimate resolution or settlement of the loss. 38


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    Changes in the assumptions and estimates used in establishing reserves for our life and annuity reinsurance book could result in material increases in our estimated loss reserves for such business. Our run-off life and annuity reinsurance book exposes us to mortality risk, which is the risk that the level of death claims may differ from that which we assumed in establishing the reserves for our life and annuity reinsurance contracts. Some of our life and annuity reinsurance contracts expose us to longevity risk, which is the risk that an insured person will live longer than expected when the reserves were established, or morbidity risk, which is the risk that an insured person will become critically ill or disabled. Our reserving process for the life and annuity reinsurance book is designed with the objective of establishing appropriate reserves for the risks we assumed. Among other things, these processes rely heavily on analysis of mortality, longevity and morbidity trends, lapse rates, interest rates and expenses. As of December 31, 2017, our reserves for life and annuity benefits totaled $1.1 billion. We expect mortality, morbidity, longevity, and lapse experience to fluctuate somewhat from period to period, but believe they should remain reasonably predictable over a period of many years. Mortality, longevity, morbidity or lapse experience that is less favorable than the mortality, longevity, morbidity or lapse rates that we used in establishing the reserves for a reinsurance agreement will negatively affect our net income because the reserves we originally set for the risks we assumed may not be sufficient to cover the future claims and expense payments. Furthermore, even if the total benefits paid over the life of the contract do not exceed the expected amount, unexpected increases in the incidence of deaths or illness can cause us to pay more benefits in a given reporting period than expected, adversely affecting our net income in any particular reporting period. Fluctuations in interest rates will impact the performance of our investments. If there are changes to any of the above factors to the point where a reserve deficiency exists, a charge to earnings will be recorded, which may have a material adverse impact on our results of operations and financial condition. We are subject to regulation by insurance regulatory authorities that may affect our ability to implement and achieve our business objectives. Our insurance subsidiaries are subject to supervision and regulation by the insurance regulatory authorities in the various jurisdictions in which they conduct business. This regulation is intended for the benefit of policyholders rather than shareholders or holders of debt securities. Insurance regulatory authorities have broad regulatory, supervisory and administrative powers relating to data protection and data privacy, solvency standards, licensing, coverage requirements, policy rates and forms and the form and content of financial reports. Regulatory and legislative authorities continue to implement enhanced or new regulatory requirements intended to prevent future financial crises or otherwise assure the stability of financial institutions. Regulatory authorities also may seek to exercise their supervisory or enforcement authority in new or more aggressive ways, such as imposing increased capital requirements. Any such actions, if they occur, could affect the competitive market and the way we conduct our business and manage our capital and could result in lower revenues and higher costs. As a result, such actions could materially affect our results of operations, financial condition and liquidity. Our ability to make payments on debt or other obligations depends on the receipt of funds from our subsidiaries. We are a holding company, and substantially all of our insurance operations are conducted through our regulated insurance subsidiaries. As a result, our cash flow and our ability to service our debt are dependent upon the earnings of our subsidiaries and on the distribution of earnings, loans or other payments by our subsidiaries to us. In addition, payment of dividends by our insurance subsidiaries may require prior regulatory notice or approval. Our investment results may be impacted by changes in interest rates, U.S. and international monetary and fiscal policies as well as broader economic conditions. We receive premiums from customers for insuring their risks. We invest these funds until they are needed to pay policyholder claims or until they are recognized as profits. Fluctuations in the value of our investment portfolio can occur as a result of changes in interest rates and U.S. and international monetary and fiscal policies as well as broader economic conditions (including, for example, equity market conditions and significant inflation or deflation). Our investment results may be materially impacted by one or more of these factors. Competition in the insurance and reinsurance markets could reduce our underwriting profits. Insurance and reinsurance markets are highly competitive. We compete on an international and regional basis with major U.S., Bermuda, European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing, and management resources than we do. Recent industry consolidation, including business combinations among insurance and other financial services companies, has resulted in larger competitors with even greater financial resources. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets, particularly companies with new or “disruptive” technologies or business models. In addition, capital market participants have created alternative products that are intended to 39


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) compete with reinsurance products. Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our underwriting profits and have a material adverse effect on our results of operations and financial condition. The historical cyclicality in the property and casualty insurance industry could adversely affect our ability to improve or maintain underwriting profits or to grow or maintain premium volume. The insurance and reinsurance markets have historically been cyclical, characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted more favorable rate levels. Among our competitive strengths have been our specialty product focus and our niche market strategy. These strengths also make us vulnerable in periods of intense competition to actions by other insurance companies who seek to write additional premiums without appropriate regard for underwriting profitability. During soft markets, it is very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. If we are not successful in maintaining rates or achieving rate increases, it may be difficult for us to improve or maintain underwriting profits or to grow or maintain premium volume levels. We invest a significant portion of our invested assets in equity securities, which may result in significant variability in our investment results and net income and may adversely impact shareholders’ equity. Additionally, our equity investment portfolio is concentrated, and declines in the value of these significant investments could adversely affect our financial results. Equity securities were 63% and 56% of our shareholders’ equity at December 31, 2017 and 2016, respectively. Equity securities have historically produced higher returns than fixed maturities; however, investing in equity securities may result in significant variability in investment returns from one period to the next. In volatile financial markets, we could experience significant declines in the fair value of our equity investment portfolio, which would result in a material decrease in shareholders’ equity. Our equity portfolio is concentrated in particular issuers and industries and, as a result, a decline in the fair value of these concentrated investments also could result in a material decrease in shareholders’ equity. A material decrease in shareholders’ equity may adversely impact our ability to carry out our business plans. Beginning in the first quarter of 2018, changes in the fair value of our equity securities will be presented in net income rather than in other comprehensive income. As a result, variability in our investment returns could also have a material adverse effect on net income. General economic, market or industry conditions could lead to investment losses, adverse effects on our businesses and limit our access to the capital markets. General economic and market conditions and industry specific conditions, including extended economic recessions or expansions; prolonged periods of slow economic growth; inflation or deflation; fluctuations in foreign currency exchange rates, commodity and energy prices and interest rates; volatility in the credit and capital markets; and other factors, could lead to substantial realized and unrealized investment losses in future periods, declines in demand for or increased claims made under our insurance products or limited or no access to the capital markets, any of which could have a material adverse effect on our results of operations, financial condition, debt and financial strength ratings or our insurance subsidiaries’ capital. We rely on the purchase of reinsurance and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. Our underwriting operations purchase reinsurance and retrocessional reinsurance to manage our net retention on individual risks and overall exposure to losses, while providing us with the ability to offer policies with sufficient limits to meet policyholder needs. Our program services business reinsures substantially all of its underwriting and operating risks in connection with its fronting arrangements. The ceding of insurance does not legally discharge us from our primary liability for the full amount of the policies. Reliance on reinsurance may create credit risk as a result of the reinsurer’s inability or unwillingness to pay reinsurance claims when due. We generally select well capitalized and highly rated reinsurers and in certain instances we require reinsurers to post substantial collateral to secure the reinsured risks. Deterioration in the credit quality of existing reinsurers or disputes over the terms of reinsurance could result in charges to earnings, which may have a material adverse impact on our results of operations and financial condition. In addition, collateral may not be sufficient to cover our liability, and we may not be able to cause the reinsurer to deliver additional collateral. 40


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    As of December 31, 2017, we were the beneficiary of letters of credit, trust accounts and funds withheld in the aggregate amount of $2.7 billion, collateralizing $4.7 billion in reinsurance recoverables. The remaining unsecured reinsurance recoverables are ceded to highly-rated, well capitalized reinsurers. Our reinsurance recoverables are based on estimates, and our actual liabilities may exceed the amount we are able to recover from our reinsurers or any collateral securing the liabilities. The failure of a reinsurer to meet its obligations to us, whether due to insolvency, dispute or other unwillingness or inability to pay, or due to our inability to access sufficient collateral to cover our liabilities, could have a material adverse effect on our results of operations and financial condition. The availability and cost of reinsurance are determined by market conditions beyond our control. There is no guarantee that our desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future. Our information technology systems could fail or suffer a security breach, which could adversely affect our business, reputation, results of operations or financial condition or result in the loss of sensitive information. Our businesses are dependent upon the operational effectiveness and security of our enterprise systems and those maintained by third parties. Among other things, we rely on these systems to interact with producers, insureds, customers, clients, and other third parties, to perform actuarial and other modeling functions, to underwrite business, to prepare policies and process premiums, to process claims and make claims payments, to prepare internal and external financial statements and information, as well as to engage in a wide variety of other business activities. A significant failure of our enterprise systems, or those of third parties upon which we may rely, whether because of a natural disaster, network outage or a cyber-attack on our systems, could compromise our personal, confidential and proprietary information as well as that of our customers and business partners, impede or interrupt our business operations and could result in other negative consequences, including remediation costs, loss of revenue, additional regulatory scrutiny and fines, litigation and monetary and reputational damages. Although we have implemented controls and take protective actions to reduce the risk of an enterprise failure and protect against a security breach, such measures may be insufficient to prevent, or mitigate the effects of, a natural disaster, network outage or a cyber-attack on our systems that could result in liability to us, cause our data to be corrupted or stolen and cause us to commit resources, management time and money to prevent or correct those failures. In addition, we are subject to numerous data privacy laws and regulations enacted in the jurisdictions in which we do business. A misuse or mishandling of confidential or proprietary information being sent to or received from a client, employee or third party could damage our businesses or our reputation or result in significant monetary damages, regulatory enforcement actions, fines and criminal prosecution in one or more jurisdictions. For example, under the European General Data Protection Regulation there are significant new punishments for non-compliance which could result in a penalty of up to 4% of a firm’s global annual revenue. In addition, a violation of data privacy laws and regulations could result in defaults under our outstanding indebtedness or credit facilities. Those monetary damages, penalties, regulatory or legal actions or defaults, or the damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. Third parties to whom we outsource certain functions are also subject to these risks, and their failure to adhere to these laws and regulations also could damage our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. Further, we routinely transmit, receive and store personal, confidential and proprietary information by email and other electronic means. Although we attempt to protect this confidential and proprietary information, we may be unable to do so in all cases, especially with customers, business partners and other third parties who may not have or use appropriate controls to protect confidential information. While we maintain cyber risk insurance providing first party and third party coverages, such insurance may not cover all costs associated with the consequences of personal and confidential and proprietary information being compromised. A material cyber security breach could have a material adverse effect on our results of operations and financial condition. We may not find suitable acquisition candidates or new ventures. As part of our growth strategy, we continue to evaluate possible acquisition transactions on an ongoing basis, and at any given time we may be engaged in discussions with respect to possible acquisitions and new ventures. We may not be able to identify suitable acquisition targets or ventures, any such transactions may not be financed or completed on acceptable terms and our future acquisitions or ventures may not be successful. 41


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) The integration of acquired companies may not be as successful as we anticipate. We have recently engaged in a number of acquisitions in an effort to achieve profitable growth in our underwriting operations and to create additional value on a diversified basis in our other operations. Acquisitions present operational, strategic and financial risks, as well as risks associated with liabilities arising from the previous operations of the acquired companies. All of these risks are magnified in the case of a large acquisition. Assimilation of the operations and personnel of acquired companies may prove more difficult than anticipated, which may result in failure to achieve financial objectives associated with the acquisition or diversion of management attention. In addition, integration of formerly privately-held companies into the management and internal control and financial reporting systems of a publicly-held company presents additional risks. Impairment in the value of our goodwill or other intangible assets could have a material adverse effect on our operating results and financial condition. As of December 31, 2017, goodwill and intangible assets totaled $3.1 billion and represented 33.0% of shareholders’ equity. We record goodwill and intangible assets at fair value upon the acquisition of a business. Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if conditions warrant, by comparing the carrying value of a reporting unit to its estimated fair value. Intangible assets with definite lives are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of a reporting unit could result in an impairment of goodwill or intangible assets and, in turn, a charge to net income. Such a charge could have a material adverse effect on our results of operations or financial condition. For example, in 2017 we recorded $1.3 billion in goodwill and intangible assets in connection with the acquisitions of SureTec, Costa Farms and State National. Developments that adversely affect the future cash flows or earnings of the acquired businesses may cause the goodwill or intangible assets recorded for the acquired businesses to be impaired. The failure of any of the loss limitation methods we employ could have a material adverse effect on our financial condition or on our results of operations. We seek to limit our loss exposure in a variety of ways, including adhering to maximum limitations on policies written in defined geographical zones, limiting program size for each client, establishing per risk and per occurrence limitations for each event, employing coverage restrictions and following prudent underwriting guidelines for each program written. We also seek to limit our loss exposure through geographic diversification. Underwriting is a matter of judgment, involving assumptions about matters that are inherently unpredictable and beyond our control, and for which historical experience and probability analysis may not provide sufficient guidance. One or more future events could result in claims that substantially exceed our expectations, which could have a material adverse effect on our financial condition and our results of operations, possibly to the extent of eroding away our shareholders’ equity. In addition, we seek to limit loss exposures by policy terms, exclusion from coverage and choice of legal forum. Disputes relating to coverage and choice of legal forum also arise. As a result, various provisions of our policies, such as choice of forum, limitations or exclusions from coverage may not be enforceable in the manner we intend and some or all of our loss limitation methods may prove ineffective. The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either broadening coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued. We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel. Our success depends on our ability to retain the services of our existing key executives and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct or grow our business. 42


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    We have substantial international operations and investments, which expose us to increased political, operational and economic risks. A substantial portion of our revenues and income is derived from our operations and investments outside the U.S., including from the United Kingdom, Bermuda, Europe, Asia, South America and the Middle East. Our international operations and investments expose us to increased political, operational and economic risks. These risks include foreign currency and credit risk. Changes in the value of the U.S. dollar relative to other currencies could have an adverse effect on our results of operations and financial condition. Our investments in non-U.S. dollar-denominated securities are subject to fluctuations in non-U.S. securities and currency markets, and those markets can be volatile. Deterioration or volatility in foreign and international financial markets or general economic and political conditions could adversely affect our operating results, financial condition and liquidity. Concerns about the economic conditions, capital markets, political and economic stability and solvency of certain countries have contributed to global market volatility. Political changes in the jurisdictions where we operate and elsewhere, some of which may be disruptive, can also interfere with our customers and our activities in a particular location. Our international operations also may be subject to a number of additional risks, particularly in emerging economies, including restrictions such as price controls, capital controls, currency exchange limits, ownership limits and other restrictive or anti-competitive governmental actions or requirements, which could have an adverse effect on our businesses. The impact of the Tax Cuts and Jobs Act could be materially different from our current estimates and expectations. On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (TCJA), which made significant modifications to U.S. federal income tax law, most of which are effective January 1, 2018. As a result, we recorded a one-time tax benefit of $339.9 million in the fourth quarter of 2017, a portion of which is considered provisional. We expect that overall the TCJA will have a favorable impact on our future after-tax earnings, primarily due to the reduction of the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. The overall impact of the TCJA, including the final amount of the one-time tax benefit recorded in the fourth quarter of 2017 and the TCJA’s impact on our effective tax rate, is uncertain due to ambiguities in the application of certain provisions of the TCJA, the impact of future regulatory and administrative guidance, interpretations or rules issued by government agencies in applying the TCJA, statutory technical corrections that are subsequently enacted, and potential court decisions interpreting the legislation. Changes in the application or interpretation of the TCJA could have an adverse impact on our results of operation and financial condition. We are rated by Best, S&P, Fitch and Moody’s, and a downgrade or potential downgrade in one or more of these ratings could adversely affect our businesses, financial condition, results of operations, liquidity and access to capital markets. Financial strength ratings are an important factor in establishing the competitive position of insurance and reinsurance companies. Our senior debt ratings also affect the availability and cost of capital. Certain of our insurance and reinsurance company subsidiaries are rated by Best, S&P, Fitch or Moody’s, and our senior debt securities, and those of certain of our subsidiaries, also are rated by Best, S&P, Fitch or Moody’s. Our financial strength and debt ratings are subject to periodic review, and are subject to revision or withdrawal at any time. The financial strength ratings of our insurance subsidiaries are significantly influenced by their statutory surplus amounts and leverage and capital adequacy ratios. Rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of capital our insurance subsidiaries must hold in order to maintain their current ratings. For certain of our insurance subsidiaries, rating agencies may take into account in their leverage calculations the collateral provided to us by reinsurers. A change in this practice could adversely impact our ratings. In addition, rating agencies may downgrade the investments held in our portfolio, which could result in a reduction of our capital and surplus. We cannot be sure that we will be able to retain our current or any future ratings. If our ratings are reduced from their current levels by one or more rating agencies, our competitive position in our target markets within the insurance industry could suffer and it would be more difficult for us to market our products. A significant downgrade could: • result in a substantial loss of business as policyholders and ceding company clients move to other companies with higher claims-paying and financial strength ratings; and • trigger contract provisions that allow cedents to terminate their reinsurance contracts on terms disadvantageous to us or require us to collateralize our obligations through trusts or letters of credit. A ratings downgrade could also adversely affect our liquidity, including the availability of our letter of credit facilities, and limit our access to capital markets, increase our cost of borrowing or issuing debt and require us to post collateral. 43


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    Markel Corporation & Subsidiaries B U S I N E S S O V E R V I E W (continued) We depend on a few brokers for a large portion of our revenues and the loss of business provided by any one of them could adversely affect us. We market our insurance and reinsurance worldwide through insurance and reinsurance brokers. For the year ended December 31, 2017, our top three independent brokers represented 27% of the gross premiums written by our underwriting operations. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business. Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. There have been a number of cases involving misconduct by employees in a broad range of industries in recent years, and we run the risk that employee misconduct could occur. Instances of fraud, illegal acts, errors, failure to document transactions properly or to obtain proper internal authorization, or failure to comply with regulatory requirements or our internal policies may result in losses. It is not always possible to deter or prevent employee errors or misconduct, and the controls that we have in place to prevent and detect this activity may not be effective in all cases. We are subject to applicable laws and regulations relating to economic and trade sanctions and bribery and corruption, the violation of which could have a material adverse effect on us. We are required to comply with the economic and trade sanctions and embargo programs administered by the United States Department of the Treasury’s Office of Foreign Assets Control and similar multi-national bodies and governmental agencies worldwide, as well as applicable anti-corruption laws and regulations of the United States and other jurisdictions where we operate. A violation of a sanction, embargo program, or anti-corruption law, could subject us, and individual employees, to a regulatory enforcement action as well as significant civil and criminal penalties. In addition, a violation could result in defaults under our outstanding indebtedness or credit facilities or damage our businesses or our reputation. Those penalties or defaults, or damage to our businesses or reputation, could have a material adverse effect on our results of operations and financial condition. In some cases the requirements and limitations applicable to the global operations of U.S. companies and their affiliates are more restrictive than those applicable to non-U.S. companies and their affiliates, which also could have a material adverse effect on our results of operations and financial condition. The legal and regulatory requirements applicable to our businesses are extensive. Failure to comply could have a material adverse effect on us. Our businesses are highly dependent on our ability to engage on a daily basis in a large number of financial and operational activities, including among others insurance underwriting, claim processing, investment activities and the management of third party capital, many of which are highly complex. These activities are subject to internal guidelines and policies, as well as legal and regulatory standards, including, among others, those related to privacy, anti-corruption, anti-bribery and global finance and insurance matters. Our continued expansion into new businesses and markets has brought about additional requirements. While we believe that we have adopted appropriate risk management and compliance programs, compliance risks will continue to exist, particularly as we become subject to new rules and regulations. Failure to comply with, or to obtain, appropriate authorizations and/or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business and could subject us to fines, penalties, equitable relief and changes to our business practices. In addition, a failure to comply could result in defaults under our outstanding indebtedness or credit facilities or damage our businesses or our reputation. Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations could materially increase our direct and indirect compliance and other expenses of doing business, and have a material adverse effect on our results of operations and financial condition. Regulators may challenge our use of fronting arrangements in states in which our capacity providers are not licensed. Our program services business enters into fronting arrangements with general agents and domestic and foreign insurers that want to access specific U.S. property and casualty insurance business in states in which the capacity providers are not licensed or are not authorized to write particular lines of insurance. Some state insurance regulators may object to these fronting arrangements. In certain states, an insurance commissioner has the authority to prohibit an authorized insurer from acting as an issuing carrier for an unauthorized insurer. In addition, insurance departments in states in which there is no such statutory or regulatory prohibition, could deem the assuming insurer to be transacting insurance business without a license and the issuing carrier to be aiding and abetting the unauthorized sale of insurance. 44


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    If regulators in any of the states where we conduct our fronting business were to prohibit or limit those arrangements, we would be prevented or limited from conducting that business for which a capacity provider is not authorized in those states, unless and until the capacity provider is able to obtain the necessary licenses. This could have a material adverse effect on our results of operations and financial condition. We may be exposed to risk in connection with our management of third party capital. Some of our operating subsidiaries may owe certain legal duties and obligations to third party investors. A failure to fulfill any such duties or obligations could result in significant liabilities, penalties or other losses, and harm our businesses and results of operations. In addition, third party investors may decide not to renew their interests in the funds we manage, which could materially impact the financial condition of those funds, and could, in turn, have an adverse impact on our results of operations and financial condition. Moreover, we may not be able to raise additional third party capital for the funds we manage or for potential new funds and therefore we may forego existing or potential fee income and other income generating opportunities. The United Kingdom’s vote to leave, and the eventual exit of the United Kingdom from, the European Union could adversely affect us. On June 23, 2016, the U.K. voted to exit the E.U. (Brexit), and on March 29, 2017, the U.K. government delivered formal notice to the other E.U. member countries that it is leaving the E.U. A two-year period has now commenced during which the U.K. and the E.U. will negotiate the future terms of the U.K.’s relationship with the E.U., including the terms of trade between the U.K. and the E.U. Unless this period is extended, the U.K. will automatically exit the E.U., with or without an agreement in place, after two years. During this period the U.K. will remain a part of the E.U. After Brexit terms are agreed, Brexit could be implemented in stages over a multi-year period. The effects of Brexit will depend in part on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. Brexit could impair or end the ability of both MIICL and our Lloyd’s syndicate to transact business in E.U. countries from our U.K. offices and MIICL’s ability to maintain its current branches in E.U. member countries and in Switzerland. We have started the process to obtain regulatory approval to establish an insurance company in Germany in order to continue transacting E.U. business if U.K. access to E.U. markets ceases or is materially impaired. The Society of Lloyd’s has announced that it will be setting up a new European insurance company in Brussels in order to maintain access to E.U. business for Lloyd’s syndicates. Access to E.U. markets through a solution devised by the Society of Lloyd’s may supplement, or serve as an alternative to, a new E.U.-based insurance carrier for business we transact in the E.U. The eventual exit of the U.K. from the E.U., and negotiations leading up to that exit, could continue to contribute to instability in global financial markets, including foreign currency markets, and adversely affect European and worldwide economic or market conditions. In addition, no member country has previously left the E.U., and the rules for exit (contained in Article 50 of the Treaty on European Union) are brief. Accordingly, there are significant uncertainties related to the political, monetary and economic impacts of Brexit, including related tax, accounting and financial reporting implications. Brexit could also lead to legal uncertainty and potentially a large number of new and divergent national laws and regulations, including new tax rules, as the U.K. determines which E.U. laws to replace or replicate. Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, results of operations, financial condition and cash flows. Associates At December 31, 2017, we had approximately 15,600 employees, of whom approximately 11,400 were employed within our Markel Ventures operations. 45


  • Page 48

    Markel Corporation & Subsidiaries SELECTED FINANCIAL DATA (dollars in millions, except per share data) (1) 2017 2016 2015 R E S U LT S OF O P E R AT I O N S Earned premiums $ 4,248% $ 3,866% $ 3,824% Net investment income 406% 373% 353% Total operating revenues 6,062% 5,612% 5,370% Net income (loss) to shareholders 395% 456% 583% Comprehensive income (loss) to shareholders 1,175% 667% 233% Diluted net income (loss) per share $ 25.81% $ 31.27% $ 41.74% FINANCIAL POSITION Total investments, cash and cash equivalents and restricted cash and cash equivalents (invested assets) $ 20,570% $ 19,059% $ 18,181% Total assets 32,805% 25,875% 24,939% Unpaid losses and loss adjustment expenses 13,584% 10,116% 10,252% Senior long-term debt and other debt 3,099% 2,575% 2,239% Shareholders’ equity 9,504% 8,461% 7,834% Common shares outstanding (at year end, in thousands) 13,904% 13,955% 13,959% O P E R A T I N G P E R F O R M A N C E M E A S U R E S (1,2) O P E R AT I N G D ATA Book value per common share outstanding $ 683.55% $ 606.30% $ 561.23% Growth (decline) in book value per share 13% 8% 3% 5-Year CAGR in book value per share (3) 11% 11% 11% Closing stock price $ 1,139.13% $ 904.50% $ 883.35% R AT I O A N A LY S I S U.S. GAAP combined ratio(4) 105% 92% 89% Investment yield(5) 3% 2% 2% Taxable equivalent total investment return(6) 10% 4% (1)% Investment leverage(7) 2.2% 2.3% 2.3% Debt to capital 25% 23% 22% (1) Reflects the acquisition of Alterra Capital Holdings Limited effective May 1, 2013, which included the issuance of equity totaling $2.3 billion. (2) Operating Performance Measures provide a basis for management to evaluate our performance. The method we use to compute these measures may differ from the methods used by other companies. See further discussion of management’s evaluation of these measures in Management’s Discussion & Analysis of Financial Condition and Results of Operations. (3) CAGR— compound annual growth rate. 46


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    5-Year 10-Year 2014 2013 2012 2011 2010 2009 2008 CAGR(3) CAGR(3) $ 3,841% $ 3,232% $ 2,147% $ 1,979% $ 1,731% $ 1,816% $ 2,022)% 15% 7% 363% 317% 282% 264% 273% 260% 282)% 8% 3% 5,134% 4,323% 3,000% 2,630% 2,225% 2,069% 1,977)% 15% 9% 321% 281% 253% 142% 267% 202% (59)% — — 936% 459% 504% 252% 431% 591% (403)% — — $ 22.27% $ 22.48% $ 25.89% $ 14.60% $ 27.27% $ 20.52% $ (5.95)% — — $ 18,638% $ 17,612% $ 9,333% $ 8,728% $ 8,224% $ 7,849% $ 6,893)% 17% 10% 25,198% 23,956% 12,557% 11,532% 10,826% 10,242 % 9,512)% 21% 12% 10,404% 10,262% 5,371% 5,399% 5,398% 5,427 % 5,492)% 20% 9% 2,251% 2,256% 1,493% 1,294% 1,016% 964 % 694)% — — 7,595% 6,674% 3,889% 3,388% 3,172% 2,774 % 2,181)% 20% 14% 13,962% 13,986% 9,629% 9,621% 9,718% 9,819 % 9,814)% — — $ 543.96% $ 477.16% $ 403.85% $ 352.10% $ 326.36% $ 282.55% $ 222.20)% 11% 10% 14% 18% 15% 8% 16% 27% (16)%) — — 14% 17% 9% 9% 13% 11% 10%) — — $ 682.84% $ 580.35% $ 433.42% $ 414.67% $ 378.13% $ 340.00% $ 299.00)% — — 95% 97% 97% 102% 97% 95% 99% — — 2% 3% 4% 4% 4% 4% 4% — — 7% 7% 9% 7% 8% 13% (10)% — — 2.5% 2.6% 2.4 2.6 2.6% 2.8% 3.2% — — 23% 25% 28% 28% 24% 26% 24% — — (4) The U.S. GAAP combined ratio measures the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums. (5) Investment yield reflects net investment income as a percentage of monthly average invested assets at amortized cost. (6) See “Investing Results” in Management’s Discussion & Analysis of Financial Condition and Results of Operations for detail regarding the calculation of taxable equivalent total investment return. (7) Investment leverage represents total invested assets divided by shareholders’ equity. 47


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    Markel Corporation & Subsidiaries MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING ® Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management does not expect that its internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The design of any system of internal control over financial reporting also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Under the supervision and with the participation of management, including the Principal Executive Officer and the Principal Financial Officer, we evaluated the effectiveness of our internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, we have concluded that we maintained effective internal control over financial reporting as of December 31, 2017. In conducting our evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017, we excluded internal controls over financial reporting associated with Costa Farms and State National Companies, Inc., which were acquired in August 2017 and November 2017, respectively. These operations represent 15% of our consolidated assets as of December 31, 2017 and 2% of our consolidated operating revenues for the year then ended. KPMG LLP, our independent registered public accounting firm, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2017, which is included herein. Alan I. Kirshner Anne G. Waleski Executive Chairman Executive Vice President and Chief Financial Officer (Principal Executive Officer) (Principal Financial Officer) February 23, 2018 48

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