Markel International Insurance Company Limited

Transcription

1 Markel International Insurance Company Limited Annual Report and Financial Statements for the year ended 31 December Registered Number

2 Markel International Insurance Company Limited Annual Report and Financial Statements for the year ended 31 December Contents Directors and administration 1 Strategic report 2 Directors' report 7 Statement of Directors' responsibilities 9 Independent Auditor's report 10 Profit and Loss Account: Technical Account 12 Profit and Loss Account: Non-Technical Account 13 Statement of Total Recognised Gains and Losses 14 Balance Sheet: Assets 15 Balance Sheet: Liabilities 16 Notes to the Financial Statements 17

3 Annual Report and Financial Statements for the year ended 31 December Directors and administration Board of Directors Ian Marshall (Chairman) Jeremy W Brazil Stephen M Carroll Andrew J Davies Paul H Jenks Nicholas J S Line Hugh A J Maltby (Appointed: 20 March 2015) Ralph C Snedden William D Stovin Anne Whitaker Company Secretary Andrew J Bailey Registered office 20 Fenchurch Street London EC3M 3AZ Investment manager Markel Gayner Asset Management Corporation Bankers Bank of New York Barclays Bank Citibank N.A. Royal Trust Northern Trust Registered Auditor KPMG LLP, London Lawyers Norton Rose Fulbright LLP, London 1 Markel International Insurance Company Limited

4 Annual Report and Financial Statements for the year ended 31 December Strategic report The Directors submit their strategic report for Markel International Insurance Company Limited ("the Company") for the year ended 31 December. Review of the business The Company is a subsidiary of Markel Capital Holdings Limited ( MCH ). Its ultimate holding company is Markel Corporation ( Markel ), which is incorporated in Virginia in the United States and its ultimate EEA parent company is Markel International Limited ("MINT"). The Company s principal activity is the transaction of general insurance from its office in London and its branch operations in Spain, Sweden, the Netherlands and Germany, and reinsurance through its overseas operations in Latin America. In addition, Markel (UK) Limited underwrites on behalf of the Company through its UK branch network. The Company holds Surplus Lines Licences and is an Accredited Reinsurer in most US States. It is also able to write general insurance in a number of other overseas territories. On 1 January 2015, the Company opened new branches in Ireland and Switzerland and established a representative office in Colombia. Business profile and units The Company operates seven underwriting units, namely Marine and Energy, Professional Liability, Retail, Specialty, Equine, Trade Credit and Casualty Treaty. The Company's operations in Latin America transact reinsurance business on a range of product lines including accident and health, property and surety. Marine and Energy The Marine and Energy unit underwrites a portfolio of coverages for cargo, energy, hull, liability, war, terrorism and specie risks. The cargo account is an international transit-based book covering many types of cargo. The energy account includes all aspects of oil and gas activities. The hull account covers physical damage to ocean-going tonnage, yachts, building risks and mortgagee s interest. The liability account provides coverage 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 including piracy. The terrorism account covers physical damage resulting from terrorism, strikes, riots, war and political violence. The specie account includes coverage for fine art on exhibit and in private collections, securities, bullion, precious metals, cash in transit and jewellery. Professional Liability The Professional Liability unit underwrites professional indemnity, emerging risks, management liability and financial institutions insurance. The professional indemnity account services most core and regulated professions as well as emerging professions and specialist risks such as patents, libel and slander, data breach and electronic risk (cyber). The emerging risks account includes specialisms in media, patent and intellectual property insurance as well as information technology, telecommunications and cyber/privacy risks. The management liability account spans a wide range of industries and coverage includes directors' and officers' liability (D&O), employment practices liability (EPL) and limited liability partnership (LLP) cover. Financial institutions insurance can provide cover on a stand alone basis or as a blended package to include Markel International Insurance Company Limited 2

5 Annual Report and Financial Statements for the year ended 31 December bankers blanket bond, professional indemnity and D&O, depending on the client's requirements. The Professional Liability division writes business on a worldwide basis, limiting exposure in the United States. Retail The Retail unit offers a full range of professional liability products, including professional indemnity, directors and officers liability and employment practices liability, through five branch offices in England. In addition, coverage is provided for small to medium-sized commercial property risks on both a stand-alone and package basis. The branch offices provide insureds and brokers with direct access to decision-making underwriters who possess specialised knowledge of their local markets. The unit also underwrites certain niche liability products such as coverages for social welfare organisations. The Retail unit also includes business written through Abbey Protection Group, acquired by MCH in January. Abbey sells and underwrites insurance products which provide protection against legal expenses and other professional fees incurred by clients as a result of legal actions and HMRC investigations. It also provides legal, human resources and specialist tax consultancy services. Specialty The Specialty unit provides property treaty reinsurance on an excess of loss and proportional basis for per risk and catastrophe exposures. A significant portion of the unit s excess of loss catastrophe and per risk treaty business comes from the United States with the remainder coming from international property treaties. The Specialty unit also offers direct coverage for a number of specialist classes including contingency, property open market, accident and health and other special risks. Equine The Equine unit writes equine and livestock accounts on a worldwide basis. The equine account provides coverage for risks of mortality, theft, infertility and specified perils for insureds ranging in size from large stud farms to private horse owners. The livestock account provides coverage for farms, zoos and animals in transit. Trade Credit The Trade Credit unit writes short-term trade credit coverage for commercial risks, including insolvency, protracted default and contract frustration. Political risks are covered in conjunction with commercial risks for currency inconvertibility, government action, import/export licence cancellation, public buyer default and war. Products include coverages for captive reinsurance, trade receivables securitization, vendor financing, precredit/work in progress, anticipatory credit, factoring and contract replacement. Policies are designed to provide clients with certainty of cover and are underwritten with the aim of establishing a long-term partnership with the insured. Casualty Treaty The Casualty Treaty unit underwrites a diversified account, including motor and auto, general liability, professional indemnity, directors' and officers' liability and medical malpractice. The portfolio is worldwide, excluding US domiciled business. The unit ceased writing UK motor reinsurance business in the fourth quarter of. 3 Markel International Insurance Company Limited

6 Annual Report and Financial Statements for the year ended 31 December Results and performance The results of the Company for the year, as set out on pages show a profit on ordinary activities before taxation of $90.1m (, profit $142.2m). Shareholders funds as at 31 December were $564.1m (, $491.4m). The Company reported an underwriting profit of $18.7m for the year (, $40.3m profit), having benefited from benign large loss and catastrophe activity during the year. This represents a combined ratio of 93.8% (, 85.0%). The result included a release from prior year reserves of $54.5m (, $58.1m). This release is a result of the Markel strategy to reserve prudently, together with the work of our claims department in dealing with claims in an expeditious manner. Gross Written Premiums of $424.5m for the year represent an increase on prior year of 24.1%, primarily due to premiums written in the new Casualty Treaty unit and increased premium volume in the Retail units, predominately due to Abbey. Reinsurers share of claims outstanding increased by $4.7m during the year. This increase was primarily as a result of increased recoveries relating to the Company's marine quota share arrangement with Markel Bermuda Limited. Gross claims outstanding increased by $17.9m during the year, primarily due to the Company's prudent reserving strategy on the increased premium writings. The investment return of $78.6m comprises income of $32.2m, net realised gains of $6.1m and unrealised gains of $40.2m, primarily on the equity portfolio. The Company s operating performance and balance sheet remains strong and this was recognised by both AM Best and Fitch, who maintained their ratings at A (Excellent) and A (High) respectively. Markel International Insurance Company Limited 4

7 Annual Report and Financial Statements for the year ended 31 December Key Performance Indicators Profit and Loss Account 2010 $m 2011 $m 2012 $m $m $m Gross written premiums Net written premiums Retention rate 91.4% 88.6% 89.4% 77.4% 82.2% Net earned premiums Underwriting result (1) 45.1 (18.8) Loss and LAE ratio 39.6% 68.0% 40.6% 45.4% 52.1% Expense ratio 37.9% 40.4% 42.5% 39.6% 41.7% Combined ratio 77.5% 108.4% 83.1% 85.0% 93.8% Investment return (2) Investment yield 6.1% 3.5% 6.0% 9.0% 5.9% Operating profit (3) Balance Sheet 2010 $m 2011 $m 2012 $m $m $m Financial investments (2) 1, , , , ,367.7 Reinsurers' share of claims outstanding Gross claims outstanding Net claims outstanding Shareholders' Equity Individual Capital Guidance (ICG) Shareholders' Equity / ICG 252.3% 187.1% 193.4% 202.6% 213.8% (1) excluding movement on equalisation provision (2) excluding investments in subsidiaries (3) operating profit/(loss) is equal to profit or loss before taxation for all years. Financial success is measured by growth in shareholders' equity over time as this reflects the impact of both underwriting and investment performance and is consistent with Markel s key financial goal of building shareholder value. Underwriting performance is measured by underwriting profit or loss and combined ratio, whilst investment performance is measured by total investment return. Business environment and future prospects With disciplined underwriting and a strong balance sheet the Company is in an excellent position to capitalise on opportunities as they arise. The Company will continue to apply Markel s underwriting discipline of underwriting for profit rather than volume and, accordingly, will decline business where the rates are not acceptable. 5 Markel International Insurance Company Limited

8 Annual Report and Financial Statements for the year ended 31 December The Company will continue to look to develop new lines of business and markets, within the parameters of the overall underwriting strategy. The Company invests in high-quality corporate, government and municipal bonds as well as a diverse equity portfolio and plans to continue this investment strategy in Going concern No material uncertainties that cast doubt about the ability of the Company to continue as a going concern have been identified by the Directors. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus, the Directors continue to adopt the going concern basis of accounting in preparing the Financial Statements. Principal risks and uncertainties MINT has a risk register detailing the risks to which it is exposed, which includes all business underwritten by the Company. Risks are grouped under the following categories: Underwriting Risk Reserving Risk Market Risk Credit Risk Operational Risk Liquidity Risk Group Risk There are currently 24 risks in the risk register. A formal review by the Risk Committee and the Board occurs at least annually to ensure that the risk register identifies all the risks to which MINT is exposed. Key controls are identified to mitigate each risk and quarterly confirmation is sought from the owners of these controls that they are in place and are operating effectively. Our Risk Committee meets quarterly to consider Key Risk Indicators and any Risk issues that have arisen. These are summarised in the Director of Risk Management s quarterly report to the Board. At least annually an Own Risk and Solvency assessment report is produced being a forward looking assessment of the risk profile and adequacy of the Company's capital to meet solvency needs over the business planning time horizon. The Company is implementing compliance with Solvency 2 and will be seeking internal model approval. By order of the Board, Andrew J Bailey Company Secretary London 24 March 2015 Markel International Insurance Company Limited 6

9 Annual Report and Financial Statements for the year ended 31 December Directors' report The Directors submit the Annual Report and Financial Statements of the Company for the year ended 31 December. Future developments Likely future developments in the business of the Company are discussed in the Strategic report on page 5. Dividends No dividends were paid in the year (, $50.0m). Directors The Directors of the Company who served during and up to the date of this report were as follows: Ian Marshall (Chairman) Jeremy W Brazil Stephen M Carroll Andrew J Davies Paul H Jenks Nicholas J S Line Hugh A J Maltby (Appointed: 20 March 2015) Ralph C Snedden William D Stovin Anne Whitaker Markel maintains liability insurance cover on behalf of the Directors and named Officers of the Company and its subsidiaries. Financial instruments and risk management Information on the use of financial instruments by the Company and its management of the associated financial risk is disclosed in note 2 of these Financial Statements. In particular the Company's exposures to price risk, credit risk and liquidity risk are separately disclosed in that note. The Company's exposure to cash flow risk is addressed under the headings of 'Market risk', 'Credit risk' and 'Liquidity risk'. Branches outside the UK Branches outside the UK are discussed in the Strategic report on page 2. Political donations No political donations were made in the year (, Nil). 7 Markel International Insurance Company Limited

10 Annual Report and Financial Statements for the year ended 31 December Carbon policy As set out in the Markel Style the Company has a commitment to its communities which we recognise includes environmental responsibilities. Our goal is to minimise our environmental impact whilst still adhering to our other Company principles as expressed in the Markel Style and our Company Profile. Through the development of best practices in our business, we aim to use no more consumables than are necessary and recycle the maximum of those we do use. We also believe that embedding environmental awareness throughout the organisation will be best achieved through a continuous programme of employee education. Company number The Company's registered number is (England and Wales). Post balance sheet events On the 9 March 2015, with the exception of one account, the Company entered into agreements with a third party to reinsure its remaining liabilities and exposures relating to business underwritten with respect to 1992 and all prior underwriting years. With effect from 18 March 2015, the third party have taken over the management of claims and all future administration relating to these liabilities and exposures. As part of a consolidation of Markel s European underwriting entities Markel Europe plc ( ME ), a subsidiary of MCH, will, subject to court and regulatory approvals, be merging into the Company in It is proposed that the Merger will take effect on 1 July 2015, with ME being immediately dissolved. The Merger will be achieved in accordance with applicable UK and Irish cross-border merger legislation such that from the effective date of the Merger, the assets and liabilities of ME will transfer to the Company. Disclosure of information to the Auditor The Directors who held office at the date of approval of this Directors' report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's Auditor is aware of that information. Auditor In accordance with Section 487 of the Companies Act 2006, the Auditor will be deemed to be reappointed and KPMG LLP will, therefore, continue in office. By order of the Board, Andrew J Bailey Company Secretary London 24 March 2015 Markel International Insurance Company Limited 8

11 Annual Report and Financial Statements for the year ended 31 December Statement of Directors' responsibilities The Directors are responsible for preparing the Strategic report, the Directors report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have elected to prepare the Financial Statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). Under Company law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these Financial Statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its Financial Statements comply with the Companies Act They have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included in the Company s website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions. 9 Markel International Insurance Company Limited

12 Annual Report and Financial Statements for the year ended 31 December Independent Auditor's report to the Members of Markel International Insurance Company Limited We have audited the Financial Statements of Markel International Insurance Company Limited for the year ended 31 December, set out on pages 12 to 37. The financial reporting framework that has been applied in their preparation is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), having regard to the statutory requirement for insurance companies to maintain equalisation provisions. The nature of equalisation provisions, the amounts set aside at 31 December, and the effect of movement in those provisions during the year on shareholders' funds, the balance on the general business technical account and profit before tax, are disclosed in note 21. This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditor As explained more fully in the Directors Responsibilities Statement set out on page 9, the Directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those Standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the Financial Statements A description of the scope of an audit of Financial Statements is provided on the Financial Reporting Council s website at Opinion on Financial Statements In our opinion the Financial Statements: give a true and fair view of the Company s affairs as at 31 December and of its profit for the year then ended; have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors' Report for the financial year for which the Financial Statements are prepared is consistent with the Financial Statements. Markel International Insurance Company Limited 10

13 Annual Report and Financial Statements for the year ended 31 December Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the Financial Statements are not in agreement with the accounting records and returns; or certain disclosures of Directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Ben Priestley (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 24 March Markel International Insurance Company Limited

14 Annual Report and Financial Statements for the year ended 31 December Profit and Loss Account: Technical Account Earned premiums, net of reinsurance Notes Gross written premiums 3 424, ,232 Outward reinsurance premiums (75,521) (77,439) Net written premiums 348, ,793 Change in the gross provision for unearned premiums (46,203) (9,568) Change in the provision for unearned premiums reinsurers' share (1,118) 13,986 (47,321) 4,418 Net Earned Premiums 301, ,211 Claims incurred, net of reinsurance Claims paid Gross amount (135,726) (144,872) Reinsurers' share 26,766 11,016 Net paid claims (108,960) (133,856) Change in the provision for claims Gross amount (58,017) (25,478) Reinsurers' share 9,852 37,123 Net change in provision (48,165) 11,645 Net claims incurred (157,125) (122,211) Net operating expenses 5 (125,777) (106,676) Change in the equalisation provision 21 (5,594) (8,185) Balance on the technical account 13,142 32,139 The notes on pages 17 to 37 form part of these Financial Statements. Markel International Insurance Company Limited 12

15 Annual Report and Financial Statements for the year ended 31 December Profit and Loss Account: Non-Technical Account Notes Balance on the technical account 13,142 32,139 Investment income 6 45,923 49,167 Investment expenses and charges 7 (7,578) (6,776) Unrealised gains on investments 40,228 67,527 Net foreign exchange (losses)/gains (1,659) 146 Profit on ordinary activities before taxation 9 90, ,203 Taxation on profit on ordinary activities 11 (16,359) (32,220) Profit for the financial year 73, ,983 The results have been all from continuing operations. In accordance with the amendment to FRS3 published in June 1999, no note of historical cost profits and losses has been prepared as the Company s only material gains and losses on assets relate to the holding and disposal of investments. The notes on pages 17 to 37 form part of these Financial Statements. 13 Markel International Insurance Company Limited

16 Annual Report and Financial Statements for the year ended 31 December Statement of Total Recognised Gains and Losses Notes Profit for the financial year 73, ,983 Net foreign exchange gains/(losses) 1,406 (678) (Loss)/profit recognised in pension schemes 25 (13,980) 7,818 Movement on deferred tax relating to pension asset 3,084 (1,228) Movement on pension asset recognition limit 8,469 (11,313) Total Recognised Gains relating to the year 72, ,582 The notes on pages 17 to 37 form part of these Financial Statements. Markel International Insurance Company Limited 14

17 Annual Report and Financial Statements for the year ended 31 December Balance Sheet: Assets as at 31 December Notes Investments Investments in group undertakings and participating Interests 15 6,459 7,381 Other financial investments 15 1,367,674 1,278,245 Deposits with ceding undertakings ,374,604 1,286,142 Reinsurers' share of technical provisions Provisions for unearned premiums 21 25,030 26,942 Claims outstanding , ,489 Debtors 137, ,431 Debtors arising out of direct insurance operations 16 54,984 48,222 Debtors arising out of reinsurance operations 16 31,485 33,948 Deferred taxation asset ,817 Other debtors 18 15, ,044 84,144 Prepayments and accrued income Accrued interest and rent 9,735 10,268 Deferred acquisition costs 28,943 16,099 38,678 26,367 Total Assets 1,652,515 1,531,084 The notes on pages 17 to 37 form part of these Financial Statements. 15 Markel International Insurance Company Limited

18 Annual Report and Financial Statements for the year ended 31 December Balance Sheet: Liabilities as at 31 December Notes Capital and reserves Called up share capital , ,876 Share premium account 20 98,313 98,313 Profit and loss account , ,259 Shareholders' funds attributable to equity interests , ,448 Technical provisions Provisions for unearned premiums , ,018 Claims outstanding , ,237 Equalisation provision 21 23,378 17, , ,039 Provisions for other risks and charges 22 1,377 2,055 Creditors Creditors arising out of direct insurance operations 23 6,105 12,729 Creditors arising out of reinsurance operations 23 63,837 43,199 Other creditors including taxation and social security 24 17,615 42,614 87,557 98,542 Net liabilities excluding pension liability 1,652,515 1,531,084 Pension liability Total Liabilities 1,652,515 1,531,084 Approved by the Board of Directors on 24 March 2015 and signed on behalf of the Company by Andrew Davies, Company Director. Andrew J Davies Director London, 24 March 2015 The notes on pages 17 to 37 form part of these Financial Statements. Markel International Insurance Company Limited 16

19 Annual Report and Financial Statements for the year ended 31 December Notes to the Financial Statements 1 Accounting policies These Financial Statements have been prepared under the provision of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 and in accordance with the applicable Accounting Standards in the United Kingdom and with the Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers dated December 2005 (as amended in December 2006) (the ABI SORP ). These Financial Statements have been reported in US Dollars, which is in line with the functional currency of Markel. The Company is, by virtue of Section 401 of the Companies Act 2006, exempt from the requirement to prepare group Financial Statements on the grounds that the consolidated Financial Statements of its ultimate parent, Markel, for the year ended 31 December are equivalent to the Financial Statements which would be drawn up under the Seventh Directive as modified by the provisions of the Insurance Accounts Directive. These Financial Statements present information about the Company as an individual undertaking and not about its group. These Financial Statements have been prepared in accordance with the historical cost convention modified by the revaluation of certain assets as required by the Regulations. A summary of the more important accounting policies that have been applied consistently is set out below. The Company has taken the above exemption available to subsidiaries of companies who produce Financial Statements which are publicly available, as provided in Financial Reporting Standard 1 (revised). a) Underwriting result The underwriting result is determined using an annual basis of accounting, whereby the incurred cost of claims, commission and expenses are charged against the earned proportion of premiums, net of reinsurance, as follows: i) Written premiums relate to business incepted during the year, together with any difference between booked premiums for prior years and those previously accrued, and include estimates of premiums not yet due or notified to the Company. Premiums are shown gross of brokerage payable and excludes taxes and duties levied on them. ii) Unearned premiums represent the proportion of premiums written in the year that relates to unexpired terms of policies in force at the balance sheet date, calculated on the basis of established earnings patterns or time apportionment as appropriate. In the opinion of the Directors, the resulting provision is not materially different from one based on the pattern of incidence of risk. iii) Outwards reinsurance premiums are accounted for in the same accounting period as the premiums for the related direct or inwards reinsurance business being reinsured. iv) Acquisition costs, which represent commission and other expenses related to the production of business, are deferred and amortised over the period in which the related premiums are earned. v) Provision for unexpired risks is made where claims, related expenses and deferred acquisition costs likely to arise after the end of the financial year in respect of contracts concluded before that date are expected to exceed the unearned premiums receivable under these contracts. Provision for unexpired risks is calculated separately by class and excludes any allowance for investment income. Unexpired risk surpluses and deficits are offset where in the opinion of the Directors the business classes concerned are managed together and in such cases a provision for unexpired risks is made only where there is an aggregate deficit. 17 Markel International Insurance Company Limited

20 Annual Report and Financial Statements for the year ended 31 December vi) Claims incurred comprise claims and claims handling expenses paid in the year and the change in provisions for outstanding claims, including provisions for claims incurred but not reported and claims handling expenses. The adequacy of the outstanding claims provisions is assessed by reference to projections of the ultimate development of claims in respect of each underwriting year. Management continually attempts to improve its loss estimation process by refining its ability to analyse loss development patterns, claims payments and other information, but many reasons remain for potential adverse development of estimated ultimate liabilities. The process of estimating loss reserves is a difficult and complex exercise involving many variables and subjective judgements. As part of the reserving process, the Company reviews historical data and considers the impact of various factors such as trends in claim frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in regulatory and litigation environments. Significant delays occur in notifying certain claims and a large measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the balance sheet date. The reserve for unpaid losses and loss adjustment expenses is determined on the basis of information currently available. However, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent development. The two most critical assumptions as regards these claims provisions are that the past is a reasonable predictor of the likely level of claims development and that the models used for current business are fair reflections of the likely level of ultimate claims to be incurred. However, the Company believes the process of evaluating past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. Management currently believes the Company s gross and net reserves, including the reserves for environmental and asbestos exposures, are adequate. There is no precise method, however, for evaluating the impact of any significant factor on the adequacy of reserves, and actual results are likely to differ from original estimates. Management has considered environmental and latent injury claims and claims expenses in establishing the Company s reserve for unpaid losses and loss adjustment expenses. The Company continues to be advised of claims asserting injuries from hazardous materials and alleged damages to cover various clean-up costs affecting policies written in prior years. Coverage and claim settlement issues, such as determining that coverage exists and defining an occurrence, may cause the actual loss development to show more variation than the rest of the Company s book of business. Traditional reserving techniques cannot be used to estimate asbestos-related and environmental pollution claims and so the uncertainty about the ultimate cost of these types of claims is greater than the uncertainty relating to standard lines of business. The Company believes it has made reasonable provisions for claims, although the ultimate liability may be more or less than held reserves. The Company believes that future losses associated with these claims will not have a material adverse effect on its financial position. Still, there is no assurance that such losses will not materially affect the Company s results of operations for any period. Management is not able to estimate the additional loss, or range of loss, that is reasonably possible. vii) Equalisation provisions are established in accordance with the requirements of INSPRU 1.4. This provision, which is in addition to the provisions required to meet the anticipated ultimate cost of settlement of claims outstanding as at the balance sheet date, is required by Schedule 3 to SI2008/410 to be included within technical provisions within the balance sheet notwithstanding that it did not represent liabilities as at the balance sheet date. viii) Underwriting acquisition costs, general overheads and other expenses are charged as incurred to the technical profit and loss account, net of the change in deferred acquisition costs. Deferred acquisition costs represent the proportion of acquisition costs incurred, which corresponds to the unearned premiums provision. Markel International Insurance Company Limited 18

21 Annual Report and Financial Statements for the year ended 31 December b) Pension costs The Company operates a pension scheme providing benefits based on final pensionable pay. The assets of the Scheme are held separately from those of the Company. Pension scheme assets are measured using current values. Pension scheme liabilities are measured using a projected unit method and are discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. The Pension Scheme deficit is recognised in full, but any surplus is not recognised. The movement in the Scheme is split between service costs and returns recognised in the profit and loss account, and contributions, actuarial gains and losses and asset recognition limits recognised in the Statement of Total Recognised Gains and Losses (STRGL). c) Investment income and expenses Investment income comprises interest and dividends receivable for the year gross of investment expenses. Dividends receivable are stated after adding back any withholding taxation deducted at source. Investment expenses are charged to the non-technical profit and loss account on an incurred basis and include the amortisation change in respect of investments carried at amortised cost. Realised gains or losses represent the difference between net sales proceeds and purchase price, or in the case of investments carried at amortised cost, the latest carrying value. Realised losses may also include losses recognised on impairment of securities. Unrealised gains and losses on investments represent the difference between the current value of investments at the balance sheet date and their purchase price. The movement in unrealised investment gains/losses includes an adjustment for previously recognised unrealised gains/losses on investments disposed of in the accounting period. In the event that an unrealised investment loss is deemed more permanent in nature, the loss is recognised as a realised loss and unrealised losses are adjusted accordingly. d) Investments Redeemable fixed income securities, which are part of a portfolio of such securities intended to be held on an ongoing basis are stated at amortised cost. If there is objective evidence that a security is impaired, the amortised cost is written down and reported within realised losses in the non-technical profit and loss account. All other investments are stated at current value, representing stock market values for listed securities. e) Investments in subsidiary undertakings Shares in subsidiary undertakings are stated at the Directors estimate of current value. f) Operating leases Annual rentals relating to operating leases are charged to operating profit on a straight line basis over the lease term. g) Foreign currency translation Transactions in foreign currencies are translated at the average rates of exchange for the period. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the Balance Sheet date. US Dollars, Sterling, Canadian dollars, Euros and Australian dollars are treated as branches under SSAP20 and the exchange differences arising on the retranslation of the opening Balance Sheet and the Profit and Loss Account to the closing rate of exchange are included in the STRGL. All other exchange differences are reported in the Profit and Loss Account. 19 Markel International Insurance Company Limited

22 Annual Report and Financial Statements for the year ended 31 December h) Taxation Taxation is charged by reference to the taxable income included in the non-technical Profit and Loss Account. i) Deferred taxation Full provision is made for deferred taxation assets and liabilities arising from timing differences between the recognition of gains and losses in the Financial Statements and their treatment for taxation purposes on an undiscounted basis. Deferred taxation assets are recognised to the extent that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. 2 Management of financial risk Financial risk management objectives The Company is exposed to financial risks primarily through its financial assets, reinsurance assets and policyholder liabilities. The Company's risk management process is controlled via the use of a risk register. Solvency II principles are used to manage the Company's capital requirements and to ensure that it has the financial strength to support the growth of the business and meet the requirements of policyholders, regulators and rating agencies. The key financial risks assessed are market risk, credit risk and liquidity risk. a) Underwriting risk Underwriting Risk is the risk of loss arising from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities, focusing on risks that arise from the acceptance of business. All underwriting at MINT is governed by high level underwriting principles that set out imperatives for underwriting. The first of these is related to underwriting profitable business and is price business at a level which would enable us to achieve the agreed target combined ratios under US GAAP. Our fundamental objective is to underwrite profitably on a gross basis and to achieve target combined ratios. A combined ratio is the ultimate loss ratio plus expense ratio. This measure of underwriting performance excludes any benefit from investment return and focuses attention on premium charged, coverage granted, commissions and other deductions and all direct and indirect expenses. Our underwriters and units are assigned combined ratio targets and underwriting bonuses are based on the achievement of these targets. Bonuses are readjusted, and payments made over a number of years in line with management s assessment of how the claims are developing on that particular year s underwriting. The readjustment ensures that rewards are based on a continuing profitability of a year of account over its historical development and the phasing of payments assists in the retention of key underwriting staff. We set prudent maximum linesizes. All underwriters have written underwriting authorities and there are peer reviews/review processes in place to ensure that business underwritten does not exceed authority or is outside our business plan. We do not permit risks to be written for longer than 18 months without the prior, written approval of the Director of Underwriting or the COO, although we do make certain general exceptions. For example, in respect of Marine Construction risks we have matching reinsurance and have agreed this in advance as part of our underwriting strategy. Compliance with linesize and policy duration is monitored by our Legal and Regulatory department. Technical pricing has been developed for many classes, and we have monitored rate movements since Markel International Insurance Company Limited 20

23 Annual Report and Financial Statements for the year ended 31 December An independent reviewer performs a qualitative review of underwriting. For natural catastrophe risk a key method of monitoring our aggregate exposures is the production of a quarterly Aggregations pack which sets out our exposures, both gross and net, to each material region\peril we are exposed to. This is reviewed at a quarterly meeting by executives and other senior management along with the catastrophe modelling team and representatives from relevant units. Units are given aggregate limits for catastrophe business in each zone and adherence to these is monitored within the pack. Natural catastrophe exposures form part of Risk Management s quarterly assessment of risk to the Risk Committee and to the Board. b) Reserving risk Reserving risk is the risk of loss arising from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities, focusing on risks that arise from the quantification of those liabilities. Claims handling guidelines set out our approach to claims, including: Claims diaries claims adjusters must ensure that they diarise relevant dates when necessary and/or stipulated in the relevant divisional claims handling protocols. There are protocols regarding which types of claims are subject to diary management, and targets set are monitored on a monthly basis. Panel of third party advisors a panel of approved third party advisors (Attorneys and Adjusters) has been established. Third party advisors can only be appointed with sign off from a claims manager. Claims peer review audits each underwriting unit is subject to a periodic claims audit of selected claims files for identifying strengths and weaknesses in the handling of claims. Senior independent claims personnel are responsible for the qualitative review of the handling of files. Static outstandings reports on claims that have not been reviewed for 12 months are discussed by management. A full Actuarial reserving exercise occurs quarterly. This involves internal review within the Actuarial department and discussions with relevant underwriters and claims staff. IBNR packs are produced which contain gross and net projections for all classes of business written at MINT. The IBNR packs are discussed in detail at quarterly Combined Ratio Meetings, which are attended by members of the Board, each unit and the reserving Actuaries. The quarterly reserving process must comply with Sarbanes Oxley legislation. A full reserving process document is maintained and control owners confirm quarterly that key controls are in place and are operating effectively. c) Market risk Market risk is the risk that the Company suffers loss from volatility or over-concentration in its investment portfolio or due to currency mismatch between assets and liabilities. The Company's investment manager, Markel Gayner Asset Management Corporation ("MGAM") produces a quarterly Investment Report and in conjunction with the Company, produces a Board report to explain movements in the investment mix, performance against benchmark indices and any changes in investment strategy. The principal market risks and how exposure to these risks is managed are as follows: Interest rate risk: The Company works to manage the impact of interest rate fluctuations on the fixed maturity portfolio. The effective duration of the fixed maturity profile is managed with consideration given to the estimated duration of policyholder liabilities. Foreign exchange risk: Foreign Exchange Risk is managed primarily by matching assets and liabilities in each foreign currency as closely as possible. To assist in the matching of assets and 21 Markel International Insurance Company Limited

24 Annual Report and Financial Statements for the year ended 31 December liabilities in foreign currencies the Company may purchase foreign exchange forward contracts or buy and sell foreign currencies in the open market. No foreign exchange forward contracts have been entered into during the year. Equity price risk: The Company sets limits on the amount of equities that can be held with any one issuer. The overall equity portfolio is also monitored to ensure that equity risk does not exceed the Company s risk appetite. d) Credit risk Credit Risk is the risk that a counterparty will be unable to pay amounts in full when they fall due. Key areas where the Company is exposed to credit risk are: Amounts recoverable from reinsurers Amounts due from insurance intermediaries and insurance contract holders Amounts due from corporate bond issuers The Company s fixed maturity portfolio is monitored to ensure credit risk does not exceed the Company s risk appetite. In addition, the Company places limits on exposures to a single counterparty or concentrations of exposures to a specific counterparty. At least 90% of the Company's fixed maturity portfolio is rated 'A' or better. The Company takes a proactive approach to the collection of reinsurance recoveries, including the pursuit of commutations. New reinsurers may be required to post collateral depending on their size, rating and potential debt to the Company. If a reinsurer is not willing to post collateral then their line size is reduced to an acceptable level in accordance with their applicable rating and capital level. e) Liquidity risk Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost, primarily claims to policyholders. The Company monitors the projected settlement of liabilities and, in conjunction with MGAM, sets guidelines on the composition of the portfolio in order to manage this risk. f) Group risk Group Risk is the risk that actions or events within one part of Markel adversely affect an entity, or all entities, within MINT. We consider being part of a larger, experienced insurance group, with considerable financial resources and sound reputation to be a strength. We have a number of controls, such as our internal committees that consider the interests of MINT s legal entities and we endeavour to communicate the MINT perspective to Markel, with whom we enjoy an excellent relationship. We also consider the risk of the Company and Syndicate 3000 being part of MINT. Our policy is always to consider the interests of each legal entity, and our single risk strategy, risk management approach, operational procedures and standards are effective in ensuring that each entity is treated equitably. Markel International Insurance Company Limited 22

25 3 Analysis of underwriting result a) Analysis of business by class Gross Written Premiums Direct Insurance Marine, aviation and transport Fire and other damage to property Gross Earned Premiums Gross Claims Incurred Gross Operating Expenses Reinsurance Balance Total 44,431 40,937 (14,477) (14,544) (2,394) 9,522 14,195 14,142 (9,448) (5,024) (827) (1,157) Third party liability 153, ,030 (90,366) (53,658) (8,833) (1,827) Miscellaneous 89,872 61,551 (36,129) (21,868) (3,600) (46) Total Direct 301, ,660 (150,420) (95,094) (15,654) 6,492 Reinsurance 122, ,617 (43,323) (31,542) (23,508) 12,244 Total 424, ,277 (193,743) (126,636) (39,162) 18,736 Gross Written Premiums Direct Insurance Marine, aviation and transport Fire and other damage to property Gross Earned Premiums Gross Claims Incurred Gross Operating Expenses Reinsurance Balance Total 44,127 42,293 (13,297) (14,453) (7,726) 6,817 15,772 19,309 (3,089) (5,166) (7,628) 3,426 Third party liability 135, ,296 (111,119) (44,245) 21, Miscellaneous 33,027 31,830 (2,557) (10,817) (17,462) 994 Total Direct 228, ,728 (130,062) (74,681) (11,470) 11,515 Reinsurance 114, ,936 (40,288) (32,550) (3,289) 28,809 Total 342, ,664 (170,350) (107,231) (14,759) 40,324 b) Analysis of premium by geographic area by origin: United Kingdom Gross Written Premiums Profit /(Loss) Before Taxation Direct and Reinsurance 373, ,973 37,424 39,715 United States Direct 3,248 4,975 (992) (558) Europe (excluding UK) Direct 47,935 39,284 (17,696) 1, , ,232 18,736 40,324 Change in the equalisation provision (5,594) (8,185) Investment return 78, ,918 Foreign exchange (losses)/ gains (1,659) 146 Profit on ordinary activities before taxation 90, , Markel International Insurance Company Limited

26 Direct insurance written in the United States comprises Excess and Surplus Lines business written in those states where the Company is an authorised insurer. Of the premiums written in the UK, $250.4m (, $215.2m) relates to direct insurance. by destination: Gross Written Premiums United States 27,951 40,297 United Kingdom 252, ,658 Europe (excluding UK) 96,601 95,725 Rest of the world 48,272 65,440 Canada (485) 1,112 Total 424, ,232 4 Movement in prior year's provision for claims outstanding The Company experienced a net favourable loss development in the year of $54.5m (, $58.1m). This comprised the following developments by class: Marine, aviation & transport 13,250 22,500 Fire and other damage to property - 1,000 Third party liability 28,268 10,810 Miscellaneous 3,500 1,500 Reinsurance 9,500 22,328 Total 54,518 58,138 5 Net operating expenses Acquisition costs 73,094 48,988 Change in deferred acquisition costs (14,636) 2,400 Administrative expenses 68,178 55,843 Gross operating expenses 126, ,231 Reinsurance commissions (859) (555) Net operating expenses 125, ,676 Total commissions for direct insurance accounted for during the year amounted to $65.3m (, $43.6m). Markel International Insurance Company Limited 24

27 6 Investment income Income from investments 39,572 39,204 Gains on the realisation of investments 6,351 9,963 Total 45,923 49,167 7 Investment expenses and charges Investment management expenses, including interest 4,841 3,900 Amortisation of fixed interest securities 2,495 2,566 Losses on the realisation of investments Total 7,578 6,776 8 Investment return Investment income 45,923 49,167 Investment expenses and charges (7,578) (6,776) Unrealised gains on investments 40,228 67,527 Actual return on investments 78, ,918 9 Profit on ordinary activities before taxation Profit on ordinary activities before taxation is stated after charging: Rentals under operating leases - land and buildings 8,951 5, Rates of exchange The rates of exchange used for the principal foreign currency translations are as follows: Year-End Rate Average Rate Year-End Rate Average Rate Sterling Canadian Dollar Euro Australian Dollar Markel International Insurance Company Limited

28 11 Taxation a) Analysis of charge for the year Taxation charge for the year comprises: Current Taxation 14,671 34,271 Deferred Taxation Movement arising due to change in the Corporation tax rate effective from 1 April Origination and reversal of timing differences 1,688 (2,083) Taxation charge on result on ordinary activities 16,359 32,220 b) Factors affecting the taxation charge for the year The taxation charge assessed for the year is lower than the standard rate of corporation taxation in the UK of 21.50%. The differences are explained below: Profit on ordinary activities before taxation 90, ,203 Profit on ordinary activities multiplied by standard effective rate of corporation taxation in the UK of 21.50% (, 23.25%) Effects of 19,362 33,062 Depreciation in excess of capital allowances (30) (40) Dividend income not taxable (966) (941) Loss on revaluation of investments in subsidiaries Other permanent differences (1,141) 1,443 Prior year adjustment (2,768) 661 Payments in respect of group relief claims 2,474 - Recovery due from HMRC (2,458) - Current taxation charge 14,671 34, Directors' emoluments The disclosed emoluments are paid by Markel International Services Limited ("MISL") to Directors for their services to the Company. The emoluments are disclosed here in full as this is the Company to which the largest proportion of their emoluments relate. Aggregate emoluments 4,771,621 4,853,454 Company pension contributions to money purchase schemes 102, ,232 Company pension contributions to defined benefit schemes - 10,684 Retirement benefits are accruing to four Directors under defined contribution pension schemes (, four) and to two Directors under a defined benefit scheme (, two). In February 2015, 1,885 Markel shares were awarded to six Directors vesting on 31 December 2017 based on continuous employment to that date. Markel International Insurance Company Limited 26

29 Highest paid Director Aggregate emoluments and benefits under long term incentives (excluding gains on exercise of share options and value of shares received) 1,006,811 1,109,496 Company (and subsidiaries) pension contributions to money purchase schemes - - The highest paid Director did not participate in the defined benefit scheme. In February 2015, 520 Markel shares were awarded to the highest paid Director vesting on 31 December 2017 based on continuous employment to that date. 13 Staff numbers and costs Staff are employed by MISL. For a full breakdown of employment costs, please refer to the Annual Report and Financial Statements of MISL. 14 Auditor's remuneration $ Audit of these Financial Statements 251, ,600 Audit-related assurance services 120,600 96,700 Total 371, ,300 $ 15 Investments Investments in group undertakings and participating interests Carrying Value Cost Shares in group undertakings at beginning of year 7,381 7,347 8,538 8,135 Purchase of additional shares in subsidiary Revaluation (922) (369) - - Shares in group undertaking at end of year 6,459 7,381 8,538 8,538 Set out below are the Company's subsidiaries as at 31 December. Name of Company Country of Registration Holding Nature of Business Markel Syndicate Management Limited England and Wales 100% Ordinary Shares Underwriting Agent Markel International Services Limited England and Wales 100% Ordinary Shares* Expense Services Markel Europe Limited England and Wales 100% Ordinary Shares* *held by Markel Syndicate Management Limited Insurance Agent Service Company 27 Markel International Insurance Company Limited

30 Other financial investments Shares and other variable yield securities and units in unit trusts Carrying Value Cost 318, , , ,884 Debt securities and other fixed income securities 774, , , ,569 Short term investments (debt securities and commercial paper) 45, ,884 45, ,884 Money market funds 79,550 51,970 79,550 51,970 Deposits with credit institutions 150, , , ,626 Total 1,367,674 1,278,245 1,194,519 1,144,933 With the exception of deposits with credit institutions, all financial investments are listed on recognised stock exchanges. The debt and other fixed income securities which are shown at amortised cost are analysed below: Cost 779, ,569 Cumulative amortisation (5,111) (4,319) Amortised cost 774, ,250 Market Value 836, ,519 The redemption value of investments held at the year end was $13.3m lower (, $14.0m lower) than the amortised cost. 16 Debtors arising out of direct insurance operations and reinsurance operations Direct Insurance Operations Reinsurance Operations Amounts owed by other group undertakings 776 4, Amounts owed by intermediaries 54,208 43,495 31,485 33,948 Total 54,984 48,222 31,485 33,948 Markel International Insurance Company Limited 28

31 17 Deferred taxation The provision for deferred taxation has been made on a full provision basis. The deferred taxation asset comprises amounts arising on: Difference between accumulated depreciation and capital allowances Other timing differences - 1,625 Trading losses carried forward - - Total asset 129 1,817 The movement in the deferred taxation asset/(liability) during the year is as follows: Deferred Tax Asset Pension Tax Liability Total Total At beginning of year 1,817 (5,286) (3,469) (3,170) Profit and Loss Account charge - deferred (1,688) - (1,688) 2,051 Profit and Loss Account charge - current - (967) (967) (1,122) Movement in STRGL - 3,084 3,084 (1,228) At end of year 129 (3,169) (3,040) (3,469) Deferred taxation is calculated at the anticipated standard rate of UK corporation tax effective from 1 April 2015 of 20.0% (, 20.0%). No deferred tax is recognised in respect of the pension asset. The standard rate of UK corporation tax for the period from 1 April to 31 March 2015 will be at 21% but in view of the uncertainties over the period in which the timing differences will reverse due to the nature of the company's insurance activities it is not considered meaningful to attempt to quantify the amount of the reversal in that period. 18 Other debtors Amounts owed by other group undertakings 15,396 0 Other debtors Total 15, Share capital The share capital of the Company is as follows: Called up, allotted and fully paid Ordinary shares of $10.00, at end of year 226, , Markel International Insurance Company Limited

32 20 Movements in reserves and reconciliation of movements in shareholders' funds Share Capital Share Premium Profit & Loss Account Total Capital & Reserves At beginning of year 226,876 98, , ,448 Profit for the financial year 73,697 73,697 Net foreign exchange gains 1,406 1,406 Loss recognised in pension schemes (13,980) (13,980) Movement on deferred tax relating to pension asset 3,084 3,084 Movement on pension asset recognition limit 8,469 8,469 At end of year 226,876 98, , , Technical provisions The Company has considered long-tail claims, including environmental and latent injury claims, in establishing the liability for claims outstanding. Substantially all environmental and latent injury claims relate to policies written between 1971 and Latent claims cannot be estimated using traditional reserving techniques and, accordingly, the uncertainty with respect to the ultimate cost of these types of claims is greater than the uncertainty arising from other lines of business. The Company believes it has established adequate provisions for such claims, although the ultimate liability may be more or less than the reserves actually held by the Company, and considers that were future losses associated with those claims to arise, they would not have a material adverse impact on the financial position of the Company. The Company is required to establish an equalisation provision in accordance with the requirements of INSPRU 1.4. The equalisation provision is in addition to the provisions required to meet the anticipated ultimate cost of settlement of outstanding claims at 31 December. It is required by Schedule 3 to SI 2008/410 to be included within technical provisions. The provision requirement at 31 December was $23.4m (, $17.8m). The movement in the provision resulted in an increase of $5.6m (, increase of $8.2m) in the general business technical account result before tax and had the effect of increasing the movement in shareholders' funds by $4.5m (, $6.8m). Equalisation Provision Provision at beginning of year 17,784 9,599 Net transfer in during year 5,594 8,185 Provision at end of year 23,378 17,784 Markel International Insurance Company Limited 30

33 Provision for unearned premiums Provision for claims outstanding Gross 124, ,237 Reinsurance (26,942) (107,489) Net at beginning of the year 97, ,748 Movement in foreign exchange (8,534) (34,886) Movement in the provision 47,321 48,165 Net movement 38,787 13,279 Of which: Gross 160, ,186 Reinsurance (25,030) (112,159) Net at end of the year 135, , Provision for other risks and charges LUC Provision At beginning of year 2,055 Profit and Loss Account charge (21) Other recognised losses - foreign exchange (79) Payments (578) At end of year 1,377 Guarantees have been given by the Company in favour of the Prudential Assurance Company Limited and the Royal Bank of Scotland (Industrial Leasing) Limited in respect of leases granted to Market Building in connection with the development of the London Underwriting Centre ( LUC ). The fire that occurred in August 1991, during the course of fitting out the LUC, gave rise to the possibility of some shortfall of rental income in the future. The Directors consider that the provision recognised at 31 December represents the best estimate of the possible expenditure required to maintain the LUC as a trading centre. 23 Creditors arising out of direct insurance operations and reinsurance operations Direct Insurance Operations Reinsurance Operations Amounts owed to other group undertakings ,981 26,271 Amounts owed to intermediaries 6,105 12,729 12,856 16,928 Total 6,105 12,729 63,837 43, Markel International Insurance Company Limited

34 24 Other creditors, including taxation and social security Amounts owed to other group undertakings - 1,263 Current taxation 14,227 30,143 Other creditors 3,388 11,208 Total 17,615 42,614 Balances payable to other creditors fall due for payment within one year of the Balance Sheet date. 25 Pension Scheme The Company contributes to a pension scheme (the Terra Nova Insurance Company Limited Pension and Life Assurance Scheme ) providing benefits based on final pensionable pay. On 11 November 2008 an agreement was signed resulting in a bulk transfer of assets and liabilities (amounting to 11.5m) from the Lloyd s Superannuation Fund (LSF) into the Terra Nova Insurance Company Limited Pension and Life Assurance Scheme ( the Scheme ). With effect from that date, the Scheme was divided into two legally segregated sections: the TN Fund and the new LSF Fund. The contributions to the defined benefit scheme are determined by the Company with agreement of the Trustee and in conjunction with an independent qualified actuary using the attained age method. The contribution to the Scheme for the period was 3.4m (, 3.4m), and was paid on behalf of the Company by MISL. The assets of the Scheme are held separately from those of the Company, being invested in listed United Kingdom and overseas equities, fixed interest securities and cash deposits. An escrow agreement has been put in place which requires the Company to make additional contributions to the LSF Fund should the Company s AM Best credit rating fall below A-. A full actuarial valuation was carried out at 30 September 2012, which showed that the market value of the Scheme s assets was 78.4m. This actuarial valuation determined that the assets of the scheme at the valuation date represented 93% of the accrued liabilities based on the projected final pensionable salaries. This was equivalent to a deficit of 5.7m. Following discussions with the Company and the Trustees it was agreed that the Company would pay an additional five contributions of 3.4m per annum on 31 January 2010 and on that date each year, through to 31 January. No contributions are planned during In addition to the contributions set out above, the Company will meet the cost of any augmentations to members benefits as they fall due and the Company will meet the administrative expenses of operating the Scheme and the Pension Protection Fund Levy. The Scheme is closed to new members. The Company recognises that as a closed scheme the current service cost will increase as the members of the Scheme approach retirement but the valuation has been undertaken on an attained age basis to limit the volatility of the funding rate. On 1 April 2012, the Company closed the Scheme to future service accrual. Those employees affected were invited to join the Markel International Pension Scheme. As the Scheme is now closed for future service accrual, the Company is not permitted to recognise any surplus on the Scheme at the balance sheet date. At 31 December, there was a net surplus of $12.7m (, $21.1) on the Scheme that has not been recognised in the accounts. Any deficit on the Scheme will be recognised in full. Markel International Insurance Company Limited 32

35 An independent actuarial valuation of both the TN Fund and the LSF Fund was carried out as at 31 December using the projected unit method. The principal assumptions used by the actuary were: 2012 Discount rate 3.75% 4.70% 4.50% Inflation assumption 3.10% 3.45% 3.00% Deferred pension revaluation 2.10% 2.45% 2.30% Salary increase assumption 2.85% 3.20% 3.05% Pension increase assumption 3.00% 3.30% 2.90% The assumed life expectancies on retirement at age 65 are: Current pensioners: LSF Fund TN Fund LSF Fund TN Fund Men Women Future pensioners: Men Women The assets in the Scheme and the expected rate of return were: LSF Fund TN Fund LSF Fund TN Fund % % % % Equities 6.0% 7, % 37, % 9, % 51,356 Bonds 2.5% 18, % 66, % 13, % 39,862 Cash 0.5% - 0.5% - 0.5% - 0.5% - Total market value of assets Actuarial value of liability 25, ,171 23,593 91,218 (23,252) (95,694) (18,756) (80,037) Surplus in the Scheme 2,679 7,477 4,837 11,181 Related deferred tax liability Limit on pension asset recognition (536) (1,495) (967) (2,236) (2,143) (5,982) (3,870) (8,945) Net Pension The equity and bond investments which are held in Scheme assets are quoted and are valued at the current bid price. 33 Markel International Insurance Company Limited

36 Reconciliation of present value of Scheme liabilities Total LSF Fund TN Fund Total LSF Fund TN Fund At beginning of year 98,794 18,756 80,038 93,411 18,024 75,387 Interest cost 4, ,707 4, ,349 Discretionary expenses Benefits paid (2,681) (356) (2,325) (2,256) (337) (1,919) Actuarial loss 17,954 3,679 14,275 3, ,220 At end of year 118,947 23,252 95,695 98,793 18,756 80,037 Reconciliation of fair value of Scheme assets Total LSF Fund TN Fund Total LSF Fund TN Fund At beginning of year 114,812 23,593 91, ,291 21,695 79,596 Expected return on Scheme assets 4, ,707 4, ,349 Employer contributions 3,400-3,400 3,400-3,400 Benefits paid (2,681) (356) (2,325) (2,256) (337) (1,919) Actuarial gain 8,992 1,821 7,171 8,224 1,432 6,792 At end of year 129,103 25, , ,811 23,593 91,218 Scheme assets do not include any of the Company's own financial instruments or any property occupied by the Company. The expected return on Scheme assets is determined by considering returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equities reflect the long term real rates of return experienced in the market. The actual return on Scheme assets in the year was a gain of 13.6m (, gain 12.4m) Movement in surplus during the year Total LSF Fund TN Fund Total LSF Fund TN Fund Surplus in the Scheme at the beginning of the year 16,018 4,837 11,181 7,880 3,671 4,209 Movement in the year: Contributions 3,400-3,400 3,400-3,400 Discretionary expenses (300) (300) Actuarial (loss)/ gain (8,962) (1,858) (7,104) 4,738 1,166 3,572 Surplus in the Scheme at the end of year 10,156 2,679 7,477 16,018 4,837 11,181 Markel International Insurance Company Limited 34

37 Movement in surplus during the year Total LSF Fund TN Fund Total LSF Fund TN Fund Surplus in the Scheme at the end of year 15,843 4,179 11,664 26,430 7,981 18,449 Related deferred tax liability (3,169) (836) (2,333) (5,286) (1,596) (3,690) Limit on pension asset recognition (12,674) (3,343) (9,331) (21,144) (6,385) (14,759) Pension asset The movement disclosed in the STRGL shows the limit on pension asset recognition is $12.7m (, $21.1m). The actuarial loss recognised on the pension scheme is 9.0m, or $14.0m (, gain of 4.7m or $7.8m). The movement on deferred tax relating to the actuarial loss is a credit of $3.1m (, charge of $1.2m). Analysis of amount recognised in STRGL Total LSF Fund TN Fund Total LSF Fund TN Fund Actual return less expected return on Scheme assets 8,992 1,821 7,171 8,224 1,432 6,792 Discretionary expenses (300) (300) Experience (losses)/ gains on Scheme liabilities (20) (21) 1 (34) 84 (118) Changes in assumptions underlying the Scheme liabilities (12,505) (3,358) (14,276) (10,309) (1,445) (8,864) Movement in year on limit on pension asset recognition 5,429 1,950 3,479 (6,857) (1,095) (5,762) (Loss)/gain in STRGL (3,533) 92 (3,625) (2,119) 71 (2,190) Total LSF Fund TN Fund Total LSF Fund TN Fund (Loss)/gain recognised in STRGL (5,511) 144 (5,655) (3,498) 117 (3,614) The cumulative amount of loss recognised in the STRGL is 16.0m (, 12.4m). Excluding the limit on pension asset recognition, the cumulative amount of loss recognised in the STRGL is 8.5m (, gain of 0.5m). Analysis of amount charged to operating profit Current service cost - - Total operating charge - - Analysis of net return on Pension Scheme Expected return on Pension Scheme assets 4,580 4,152 Interest on pension liabilities (4,580) (4,152) Net return Markel International Insurance Company Limited

38 History of defined benefit assets and obligations and experience gains and losses Difference between expected and actual on return schemes: Amount 8,992 8,224 5,083 (4,172) 5,538 Percentage of scheme assets 7% 7% 5% (5)% 6% Experience (gains)/losses on scheme liabilities: Amount (2,818) Percentage of scheme liabilities 0% 0% (1)% 0% (3)% History of defined benefit assets and obligations Defined benefit obligations 118,947 98,793 93,411 91,075 83,504 Fair value of scheme assets 129, , ,291 89,887 86,275 (Surplus)/deficit (10,156) (16,018) (7,880) 1,188 (2,771) The movement in the deferred taxation liability on the Pension Scheme during the year is as follows: At beginning of year (5,286) (2,936) Profit and Loss Account tax charge (967) (1,122) Tax credit/(charge) taken to STRGL 3,084 (1,228) At end of year (3,169) (5,286) 26 Contingencies and capital commitments a) The Company, as the leaseholder, had the following commitments to pay rentals in 2015, analysed according to the period in which the lease expires: Expiring within one year 1, Expiring between one and five years Expiring after more than five years - 3,465 2,323 4,265 Rental costs in the year are paid for by MISL. For a full breakdown of rental costs, please refer to the MISL Annual Report and Financial Statements. b) The Company has outstanding liabilities, covered by certain assets, in respect of outstanding letters of credit amounting to $19.1m (, $19.5m). c) Certain investments are deposited in the UK and overseas, in accordance with local laws and regulations, as security for policyholders. d) An escrow agreement was put in place in connection with the LSF Fund section of the Terra Nova Insurance Company Limited Pension and Life Assurance Scheme, whereby the Company is required to make additional contributions to the LSF Fund Section should the AM best credit rating of the Company fall below A-. e) The Company has a contingent asset of $12.7m (, $21.1m) in respect of the net surplus on the Terra Nova Insurance Company Limited Pension and Life Assurance Scheme at 31 December. Markel International Insurance Company Limited 36

39 27 Related party information The Company has taken advantage of the exemption in FRS8 not to disclose transactions with other wholly owned subsidiaries of Markel Corporation. During the Company wrote gross written premiums of $3.5m (, $11.2m) and paid commissions of $0.4m (, $1.5m) in respect of business written through RK Harrison, a thirdparty broker of which director Ralph Snedden is also a director. 28 Ultimate holding company The Company's ultimate holding company is Markel Corporation, which is incorporated in the USA. Copies of the holding company s consolidated Financial Statements may be obtained from 4521 Highwoods Parkway, Glen Allen, Virginia 23060, USA. The website address is 37 Markel International Insurance Company Limited