Markel Reports 2017 Financial Results

RICHMOND, Virginia, Feb. 7 -- Markel, a financial holding company, issued the following news release:

Markel Corporation (NYSE: MKL) reported book value per common share outstanding of $683.55 at December 31, 2017, up 13% from $606.30 at December 31, 2016. Over the five-year period ended December 31, 2017, the compound annual growth in book value per common share outstanding was 11%. Comprehensive income to shareholders was $1.2 billion for the year ended December 31, 2017 compared to $667.0 million in 2016. The combined ratio was 105% in 2017 compared to 92% in 2016. Diluted net income per share was $25.81 for the year ended December 31, 2017 compared to $31.27 in 2016.

Alan I. Kirshner, Executive Chairman, commented, "We finished 2017 with record comprehensive income of more than $1 billion which drove double-digit growth in book value over the past one-year and five-year periods. This was largely due to outstanding performance in our equity portfolio and reflects the benefit of our diversified operations. Our revenues also set a record, exceeding $6 billion, and reflect both organic growth and contributions from recent acquisitions. In the fourth quarter, we completed the acquisition of State National, which adds a premier fronting platform and collateral protection coverages to our insurance operations. Earlier this year we added Costa Farms to our portfolio of Markel Ventures companies and we also completed the acquisition of SureTec in our insurance operations. We are excited about the opportunities each of these acquisitions brings to Markel as we continue to focus on building long-term value for our shareholders."

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Comprehensive income to shareholders for 2017 was $1.2 billion compared to $667.0 million in 2016. The increase was due to an increase in net unrealized gains on investments, net of taxes, of $763.0 million in 2017 compared to $242.2 million in 2016, partially offset by lower net income to shareholders in 2017 compared to 2016. The increase in net unrealized gains on investments, net of taxes, in 2017 was attributable to an increase in the fair value of our equity portfolio as of December 31, 2017 compared to December 31, 2016. Net income to shareholders was $395.3 million in 2017 and $455.7 million in 2016. The decrease in net income to shareholders and diluted net income per share during 2017 was driven by an underwriting loss and net realized investment losses in 2017 compared to an underwriting profit and net realized investment gains in 2016. These decreases were partially offset by an income tax benefit in 2017 resulting from the enactment of the Tax Cuts and Jobs Act (TCJA).

On December 22, 2017, the United States enacted the TCJA, which made significant modifications to U.S. federal income tax law, most of which are effective January 1, 2018. The TCJA, among other changes, (1) reduces the U.S. corporate tax rate from 35% to 21%, (2) imposes a one-time deemed repatriation tax on unremitted foreign earnings which were not previously subject to U.S. income tax, (3) moves the U.S. from a worldwide tax system towards a territorial tax system and (4) modifies the manner in which property and casualty insurance loss reserves are computed for federal income tax purposes. U.S. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, we recorded a onetime tax benefit of $339.9 million in the fourth quarter of 2017, a portion of which is considered provisional.

In November 2017, we completed the acquisition of State National Companies, Inc., (State National), a Texas-based leading specialty provider of property and casualty insurance that includes both fronting services and collateral protection insurance. Results attributable to the collateral protection insurance business are included in the U.S. Insurance segment. Results attributable to the fee-based fronting business (program services) are reported separate from our underwriting operations and are not included in a reportable segment.

In August 2017, we acquired 81% of Costa Farms, a Florida-based privately held grower of house and garden plants. Results attributable to this acquisition are included with our Markel Ventures operations, which are not included in a reportable segment.

In April 2017, the Company completed the acquisition of SureTec Financial Corp. (SureTec), a Texas-based privately held surety company primarily offering contract, commercial and court bonds. Results attributable to this acquisition are included in the U.S. Insurance segment.

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The estimated net losses and loss adjustment expenses on the 2017 Catastrophes are net of estimated reinsurance recoveries of $490.3 million. Both the gross and net loss estimates on the 2017 Catastrophes represent our best estimate of losses based upon information currently available. Our estimate for these losses is based on claims received to date and detailed

policy level reviews, industry loss estimates, output from both industry and proprietary models as well as a review of in-force contracts. The estimate is dependent on broad assumptions about coverage, liability and reinsurance. Due to these factors, we believe our gross and net loss estimates on the 2017 Catastrophes have a high degree of volatility. While we believe our reserves for the 2017 Catastrophes as of December 31, 2017 are adequate, we continue to closely monitor reported claims and will adjust our estimates of gross and net losses as new information becomes available. The net losses for the 2017 Catastrophes were within our risk tolerance for events of this magnitude.

The consolidated combined ratio was 105% in 2017 compared to 92% in 2016. The increase in the consolidated combined ratio was driven by the impact of the 2017 Catastrophes. Excluding the impact of underwriting losses related to the 2016 Catastrophes and 2017 Catastrophes described above, the combined ratio increased due to a higher current accident year loss ratio and less favorable prior accident year loss ratio, partially offset by a lower expense ratio. The increase in the current accident year loss ratio is primarily due to higher current accident year loss ratios in our International Insurance and Reinsurance segments in 2017 compared to 2016. The decrease in the expense ratio in 2017 compared to 2016 is primarily driven by a favorable impact from higher earned premium volume and a decrease in profit sharing expenses in 2017 compared to 2016. These decreases in the expense ratio were partially offset by an unfavorable impact from changes in the mix of business in our International Insurance and Reinsurance segments.

The 2017 combined ratio included $501.5 million of favorable development on prior years' loss reserves compared to $505.2 million in 2016. Although favorable development on prior years' loss reserves remained consistent in 2017 compared to 2016, development on prior years' loss reserves had a less favorable impact on the combined ratio in 2017 due to higher earned

premium volume in 2017 compared to 2016. In 2017, prior years' loss reserves in our Reinsurance segment included $85.0 million, or two points, of adverse development on prior years' loss reserves resulting from a decrease in the discount rate, known as the Ogden Rate, required in the calculation of lump sum awards in United Kingdom bodily injury cases. In 2016, favorable development on prior years' loss reserves in our U.S. Insurance segment was net of $71.2 million, or two points on the consolidated combined ratio, of adverse development on our medical malpractice and specified medical product lines. There was no significant development on these lines in 2017.

U.S. Insurance Segment

The combined ratio for the U.S. Insurance segment for 2017 was 95% (including six points for the underwriting loss on the 2017 Catastrophes) compared to 93% (including one point for the underwriting loss on the 2016 Catastrophes) in 2016. The increase in the 2017 combined ratio was due to the impact of the 2017 Catastrophes, partially offset by more favorable

development of prior years' loss reserves. The U.S. Insurance segment's 2017 combined ratio included $301.9 million of favorable development on prior years' loss reserves compared to $204.9 million in 2016. The increase in favorable development was primarily due to adverse development on our medical malpractice and specified medical product lines in 2016, which

totaled $71.2 million or three points on the segment combined ratio. There was no significant development on these product lines in 2017. Also contributing to the increase in favorable development on prior years' loss reserves was favorable development on our specialty programs business in 2017 compared to slightly adverse development on this business in 2016 and more favorable development on our workers' compensation product line in 2017 compared to 2016. These increases in favorable development were partially offset by less favorable development on our property product lines in 2017 compared to 2016. The favorable development on prior years' loss reserves in 2017 was most significant on our general liability, professional liability and workers' compensation product lines as well as our personal lines business. In 2016, favorable development on prior years' loss reserves was most significant on our general liability, workers' compensation, property and non-medical professional liability product lines.

International Insurance Segment

The combined ratio for the International Insurance segment was 104% (including 13 points for the underwriting loss on the 2017 Catastrophes) for 2017 compared to 94% (including one point for the underwriting loss on the 2016 Catastrophes) for 2016. The increase in the 2017 combined ratio was driven by the impact of the 2017 Catastrophes, partially offset by a lower expense ratio and more favorable development of prior years' loss reserves. Excluding the impact of underwriting losses related to the 2016 Catastrophes and 2017 Catastrophes described above, the current accident year loss ratio increased, primarily due to higher attritional losses on our property product lines in 2017 compared to 2016. The International Insurance

segment's 2017 combined ratio included $198.7 million of favorable development on prior years' loss reserves compared to $164.7 million of favorable development in 2016. The increase in favorable development in 2017 compared to 2016 was driven by more favorable development on our general liability product lines in 2017. In both 2017 and 2016, favorable development on prior years' loss reserves occurred across several product lines, but was most significant on our professional liability, general liability and marine and energy product lines. The decrease in the expense ratio was attributable to the write off of previously capitalized software development costs in 2016 and lower profit sharing in 2017 compared to 2016. These decreases were partially offset by an unfavorable impact from changes in the mix of business in this segment, most notably as the result of higher retentions on products with higher net commission rates in 2017 compared to 2016.

Reinsurance Segment

The combined ratio for the Reinsurance segment was 132% (including 32 points for the underwriting loss on the 2017 Catastrophes) for 2017 compared to 87% (including four points for the underwriting loss on the 2016 Catastrophes) for 2016. The increase in the 2017 combined ratio was driven by the impact of the 2017 Catastrophes and adverse development on prior years' loss reserves attributable to the decrease in the Ogden rate in 2017. These increases were partially offset by a lower expense ratio in 2017 compared to 2016. Excluding the impact of underwriting losses related to the 2016 Catastrophes and 2017 Catastrophes described above, the current accident year loss ratio increased, primarily due to more unfavorable premium adjustments in 2017 compared to 2016. The Reinsurance segment's 2017 combined ratio included $7.8 million of adverse development on prior years' loss reserves compared to $125.5 million of favorable development in 2016. The adverse development in 2017 is primarily due to the decrease in the Ogden Rate, as previously discussed, which resulted in $85.0 million of adverse development, or nine points on the Reinsurance segment's combined ratio. We also experienced adverse development in 2017 on our professional liability product line. Largely offsetting this adverse development in 2017 was favorable development on our property product lines. In 2016, favorable development on prior years' loss reserves was most

significant on our property product lines. The decrease in the expense ratio in 2017 compared to 2016 was primarily due to lower profit sharing expenses and a favorable impact from higher earned premium, including reinstatement premiums related to the 2017 Catastrophes. These decreases in the expense ratio were partially offset by the impact of higher earned premium on our quota share business in 2017 compared to 2016, which carries a higher commission rate than other business in the Reinsurance segment.

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Gross Premium Volume

Gross premium volume in our underwriting segments increased 10% in 2017 compared to 2016. The increase in gross premium volume was attributable to an increase in gross premium volume across all three of our ongoing underwriting segments. Also impacting consolidated gross premium volume was $253.9 million of gross premium written through our program services business acquired as part of the State National transaction. All gross premium written in our program services business was ceded to third parties in 2017.

Gross premium volume in our U.S. Insurance segment increased 9% in 2017 compared to 2016. The increase in gross premium volume was driven by growth within our general liability product lines, personal lines and specialty programs business as well as the contribution of premiums from our new surety and collateral protection product lines which were acquired in 2017.

Gross premium volume in our International Insurance segment increased 12% in 2017 compared to 2016. The increase in gross premium volume was primarily due to higher premium volume within our marine and energy and general liability product lines.

Gross premium volume in our Reinsurance segment increased 7% in 2017 compared to 2016. The increase in gross premium volume was driven by $136.5 million of premium related to two large specialty quota share treaties entered into in the first quarter of 2017, as well as a favorable impact from assumed reinstatement premiums in our property product lines resulting from the 2017 Catastrophes. These increases were partially offset by lower gross premium volume in our auto and general liability product lines. Significant variability in gross premium volume can be expected in our Reinsurance segment due to individually significant deals and multi-year contracts.

Net Retention

Net retention of gross premium volume in our underwriting segments was 84% in 2017 and 83% in 2016. Higher retention in our International Insurance and Reinsurance segments was partially offset by lower retention in our U.S. Insurance segment. The increase in net retention within the International Insurance segment in 2017 was largely due to higher retention on our professional liability product lines. The increase in net retention within the Reinsurance segment for 2017 was primarily due to changes in the mix of business. Net retention in the U.S. Insurance segment decreased in 2017 compared to 2016 due to lower retention on our specialty programs and personal lines business, partially offset by higher retention on our casualty product lines. Within our underwriting operations, we purchase reinsurance and retrocessional reinsurance in order to manage our net retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs.

Earned Premiums

Earned premiums increased 10% in 2017 compared to 2016. The increase in earned premiums was attributable to higher earned premiums across all three of our ongoing underwriting segments and the favorable impact of net assumed reinstatement premiums.

The increase in earned premiums in our U.S. Insurance segment was primarily due to an increase in gross premium volume and higher retention in our general liability product lines. The increase was also attributable to earned premiums within our new surety and collateral protection product lines, as described above.

The increase in earned premiums in our International Insurance segment was attributable to an increase in gross premium volume in our marine and energy product line and an increase in gross premium volume and higher retention in our professional liability product lines.

The increase in earned premiums in our Reinsurance segment was primarily due to higher earned premiums in our property product lines due to the favorable impact of reinstatement premiums related to the 2017 Catastrophes, higher earned premium from the two large specialty quota share treaties entered into in the first quarter of 2017, as described above, as well as higher earned premiums in our professional liability and general liability product lines. These increases were partially offset by lower earned premiums in our auto product line.

Investing Results

Net investment income for 2017 was $405.7 million compared to $373.2 million in 2016. The increase in 2017 was driven by an increase in short-term investment income, primarily due to higher short-term interest rates, and higher dividend income due to increased equity holdings.

Net realized investment losses for 2017 were $5.3 million compared to net realized investment gains of $65.1 million in 2016. Net realized investment losses for 2017 included losses of $52.0 million on our investment in certain insurance-linked securities funds (ILS Funds) as a result of a decrease in the net asset value of the ILS Funds, which was driven by the impact of losses from Hurricanes Harvey, Irma and Maria and the wildfires in California on the underlying reinsurance contracts in which the ILS Funds are invested. Net realized investment losses for 2017 included $7.6 million of write downs for other-thantemporary declines in the estimated fair value of investments compared to $18.4 million of write downs in 2016. The 2017 and 2016 write downs were all attributable to equity securities. Net realized gains from the sale of equity securities in 2017 were $38.3 million compared to $63.2 million in 2016. Variability in the timing of realized and unrealized investment gains and losses is to be expected.

Markel Ventures Operation

The results of Markel Ventures, a diverse portfolio of companies in which we have a controlling interest, are included in other revenues and other expenses. In 2017, other revenues from our Markel Ventures operations were $1.3 billion compared to $1.2 billion in 2016. Other expenses from our Markel Ventures operations were $1.2 billion in 2017 compared to $1.1 billion in 2016. Net income to shareholders from our Markel Ventures operations was $103.6 million in 2017 compared to $56.2 million in 2016 and earnings before interest, income taxes, depreciation and amortization (EBITDA) was $177.6 million in 2017 compared to $165.1 million in 2016. See below for a reconciliation of net income to shareholders to Markel Ventures EBITDA.

The increase in revenues from our Markel Ventures operations in 2017 compared to 2016 was primarily due to the acquisition of Costa Farms and higher sales volumes in our non-manufacturing operations, partially offset by lower revenues in our manufacturing operations, primarily driven by lower sales volumes at one of our transportation related businesses.

Net income to shareholders and EBITDA from our Markel Ventures operations increased in 2017 compared to 2016 due in part to insurance recoveries in excess of 2017 storm losses totaling $44.4 million related to Hurricane Irma. Insurance recoveries include payments for the replacement cost of damaged structures and expected profits from damaged inventory that

would have otherwise been sold in 2017 and 2018. Additionally, 2016 included an $18.7 million goodwill impairment charge related to one of our manufacturing reporting units. There was no similar charge in 2017. These favorable changes were partially offset by a larger increase in our estimate of contingent consideration payments in 2017 compared to 2016. During 2017, operating expenses for our non-manufacturing operations included $19.0 million of expense as a result of an increase in our estimate of the contingent consideration obligation related to the acquisition of Costa Farms. During 2016, operating expenses for our non-manufacturing operations included $10.3 million of expense as a result of an increase in our estimate of the contingent consideration obligation related to the 2015 acquisition of CapTech.

Net income to shareholders from Markel Ventures also increased in 2017 compared to 2016 as a result of recording a provisional one-time tax benefit of $37.1 million in the fourth quarter of 2017 following the enactment of the TCJA, as previously discussed.

Excluding the impact of insurance recoveries, goodwill impairment charges, contingent consideration adjustments and the TCJA on 2016 and 2017, net income to shareholders and EBITDA decreased as a result of higher materials costs and lower sales volumes in certain of our manufacturing operations, partially offset by higher sales volumes in certain of our nonmanufacturing operations.

Interest Expense, Loss on Early Extinguishment of Debt and Income Taxes

Interest Expense and Loss on Early Extinguishment of Debt

Interest expense for 2017 was $132.5 million compared to $129.9 million in 2016. The increase in interest expense in 2017 compared to 2016 was due to interest expense associated with our 5.0% unsecured senior notes which were issued in the second quarter of 2016 and our 3.50% and 4.30% unsecured senior notes issued during the fourth quarter of 2017, partially offset by the partial purchase of our 7.125% unsecured senior notes and our 7.35% unsecured senior notes in the second quarter of 2016 and the repayment of our 7.20% unsecured senior notes in the second quarter of 2017.

In connection with the partial purchase of our 7.125% unsecured senior notes and our 7.35% unsecured senior notes in the second quarter of 2016, we recognized a loss on early extinguishment of debt of $44.1 million during 2016.

Income Taxes

The effective tax rate for the year ended December 31, 2017 is not meaningful as a result of the significant tax benefit resulting from enactment of the TCJA. Therefore, we also analyzed our adjusted effective tax rate, which excludes the impact of the TCJA and is a non-GAAP measure. The following table summarizes our effective tax rate and adjusted effective tax rate for the years ended December 31, 2017 and 2016.

Years Ended December 31,

2017.....2016

Effective tax rate.....(359)%.....27%

Impact of TCJA on effective tax rate.....(389).....--

Adjusted effective tax rate.....30 %.....27%

Our adjusted effective tax rate in 2017 differs from the statutory rate of 35% primarily as a result of tax-exempt investment income partially offset by the impact of a lower tax benefit from losses attributable to our foreign operations, which are taxed at a lower rate. The increase in the adjusted effective tax rate in 2017 compared to the effective tax rate in 2016 was primarily due to an increase in the proportion of U.S. earnings taxed at 35% in 2017 compared to 2016 and the impact of losses from our foreign operations on our 2017 effective tax rate. These increases were partially offset by the impact of tax-exempt investment income, which, relative to lower income before income taxes in 2017 compared to 2016, produced a larger benefit on our effective tax rate in 2017.

Financial Condition

Invested assets were $20.6 billion at December 31, 2017 compared to $19.1 billion at December 31, 2016. Equity securities were $6.0 billion, or 29% of invested assets, at December 31, 2017 compared to $4.7 billion, or 25% of invested assets, at December 31, 2016. During 2017, we increased our holdings of equity securities, cash and cash equivalents and fixed maturities and reduced our holdings of short-term investments. At both December 31, 2017 and 2016, short-term investments, cash and cash equivalents and restricted cash represented 23% of our invested assets. Fixed maturities represented 48% of our invested assets at December 31, 2017 compared to 52% at December 31, 2016. Net unrealized gains on investments, net of taxes, were $2.5 billion at December 31, 2017 compared to $1.7 billion at December 31, 2016. At December 31, 2017, we held securities with gross unrealized losses of $57.3 million, or less than 1% of invested assets.

In November 2017, we issued $300 million of 3.50% unsecured senior notes due November 1, 2027 and $300 million of 4.30% unsecured senior notes due November 1, 2047. Net proceeds were $297.4 million and $295.5 million, respectively, to be used for general corporate purposes.

At December 31, 2017, our holding company held $2.7 billion of invested assets compared to $2.5 billion of invested assets at December 31, 2016. The increase in holding company invested assets is primarily due to dividends received from our subsidiaries and net proceeds from our fourth quarter issuance of unsecured senior notes, partially offset by cash paid for acquisitions and capital contributions to our subsidiaries.

Net cash provided by operating activities was $858.5 million in 2017 compared to $534.6 million in 2016. Net cash flows from operating activities for the year ended December 31, 2017 reflected higher premium collections, primarily in the U.S. Insurance and Reinsurance segments, and lower payments for income taxes and employee profit sharing compared to the same period of 2016. Also reflected in net cash flows from operating activities for 2017 was higher claims settlement activity across all of our underwriting segments compared to 2016, primarily as a result of the 2017 Catastrophes that occurred in the second half of 2017. As of December 31, 2017, we had paid 27% of our total estimated net losses on the 2017 Catastrophes.

Net cash provided by operating activities for the years ended December 31, 2017 and December 31, 2016 was net of cash payments of $45.8 million and $51.9 million, respectively, made in connection with commutations that were completed during the respective periods. Cash flows in 2016 included payments totaling $47.0 million to settle contingent purchase obligations, of which $32.9 million was included in operating activities.

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