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

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3 Markel International Insurance Company Limited Annual Report and Financial Statements for the year ended 31 December Contents Directors and administration 1 Directors' report 2 Statement of Directors' responsibilities 8 Independent Auditor's report 9 Profit and Loss Account: Technical Account 11 Profit and Loss Account: Non-Technical Account 12 Statement of Total Recognised Gains and Losses 13 Balance Sheet: Assets 14 Balance Sheet: Liabilities 15 Notes to the Financial Statements 16

4 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 (Appointed: 3 January 2012) Nicholas J S Line Ralph C Snedden William D Stovin Company Secretary Andrew J Bailey Registered office The Markel Building 49 Leadenhall Street London EC3A 2EA Investment manager Markel Gayner Asset Management Corporation Bankers Bank of New York Barclays Bank Citibank N.A. Royal Trust Northern Trust Registered Auditor KPMG Audit Plc, London Lawyers Norton Rose, London 1 Markel International Insurance Company Limited

5 Annual Report and Financial Statements for the year ended 31 December Directors' report The Directors submit the Annual Report and Financial Statements of Markel International Insurance Company Limited ("the Company") for the year ended 31 December. Principal activity The Company is a subsidiary of Markel International Limited ( Markel International ). Its ultimate holding company is Markel Corporation ( Markel ), which is incorporated in Virginia in the United States. The Company s principal activity is the transaction of general insurance from its office in London and its branch operations in Spain, Sweden and the Netherlands. 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. Business profile and divisions The Company operates seven underwriting divisions, namely Marine and Energy, MGA, Professional and Financial Risks, Retail, Specialty, Equine, and Trade Credit. Marine and Energy The Marine and Energy division 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 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. The terrorism account covers full political violence (including war and civil war) for property and business interruption. The specie account includes coverage for fine art on exhibit and in private collections, securities, bullion, precious metals, cash in transit and jewellery. MGA The MGA division writes property and liability business for a wide range of insurers worldwide, providing coverage ranging from fire to catastrophe perils such as earthquake and windstorm. Business is written on a binding or delegated authority basis. The delegated authority account focuses mainly on small commercial insureds and is written through a network of coverholders, primarily in the United States and Canada. Coverholders underwriting this business are closely monitored, subject to audit and must adhere to strict underwriting guidelines. Professional Liability The Professional Liability division underwrites professional indemnity, directors and officers liability and general liability coverage's. The professional indemnity account offers unique solutions in four main professional classes: miscellaneous professionals and consultants, construction professionals, financial service professionals and professional practices. The miscellaneous professionals and consultants class includes coverage's for a wide range of professionals including management consultants, publishers, broadcasters, pension trustees and public officials. The construction class includes coverage's for surveyors, engineers, architects and estate agents. The financial services class includes coverage's for insurance brokers, insurance agents, financial consultants, stockbrokers, fund managers, venture capitalists and bankers. The professional practices class includes coverage's for accountants and solicitors. Markel International Insurance Company Limited 2

6 Annual Report and Financial Statements for the year ended 31 December The Professional Liability division writes business on a worldwide basis, limiting exposure in the United States. Retail The Retail division offers a full range of professional liability products, including professional indemnity, directors and officers liability and employment practices liability, through six branch offices in England and one branch office in Scotland. 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 division also underwrites certain niche liability products such as coverages for social welfare organisations. Specialty The Specialty division provides property treaty reinsurance on an excess of loss and proportional basis for per risk and catastrophe exposures. A significant portion of the division 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 division also offers direct coverage for a number of specialist classes including financial institutions, contingency and other special risks. Coverage includes bankers blanket bond, computer crime, commercial fidelity, professional sports liability, event cancellation, non-appearance and prize indemnity. The division also writes open market property business on a direct and facultive basis. Equine The Equine division writes bloodstock and livestock on a worldwide basis. The bloodstock 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, animal theme parks and safari parks. Trade Credit The Trade Credit division writes short-term trade credit coverage for commercial risks, including insolvency and protracted default. Political risks are covered in conjunction with commercial risks for currency inconvertibility, government action, import/export license cancellation, public buyer default and war. Products include coverages for captive reinsurance, trade receivables securitization, vendor financing, pre-credit/work in progress, anticipatory credit, factoring and contract replacement. Policy structures are on an excess of loss basis or ground up for specific or named buyer risks. Results and dividends The results for the Company for the year show a profit on ordinary activities before taxation of $26.2m (, profit $111.6m). Shareholders funds as at 31 December were $407.8m (, $523.5m). During the year dividends of $125.0m were paid (, nil). Business review The Company reported a combined ratio of 108.4% for the year compared to 77.5% in. The underwriting results for were impacted by an unprecedented level of natural catashrophes during the year, which included the Japanese earthquake and subsequent tsunami and the Thailand floods. Whilst none of these losses individually or in total exceeded the Company's risk appetite for market events of this size, they contributed to an underwriting loss for of $18.8m (, profit of $45.1m). The underwriting losses related to natural catastrophes were $32.7m net of reinsurance, representing 15.1 points on the 3 Markel International Insurance Company Limited

7 Annual Report and Financial Statements for the year ended 31 December combined ratio. The result included a release from prior year reserves of $39.9m (, $72.6m). 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 $267.7m for the year represent an increase on prior year of 18.5%, primarily due to increased volumes at the Marine and Specialty divisions. Reinsurers share of claims outstanding fell by $12.6m during the year as a result of the Company s successful commutation strategy and focus on dealing with legacy claims and reinsurance issues. Gross claims outstanding increased by $12.3m during the year due primarily to catastrophe losses experienced in. Foreign currency gains on liabilities were offset by exchange losses on investments held for currency matching purposes. The investment return of $40.6m comprises income of $42.3m, net realised gains of $1.5m and unrealised losses of $3.2m, 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

8 Annual Report and Financial Statements for the year ended 31 December Key Performance Indicators Profit and Loss Account 2007 $m 2008 $m 2009 $m $m $m Gross written premiums Net written premiums Retention rate 89.6% 85.8% 89.4% 91.4% 88.6% Net Earned Premiums Underwriting Result (1) (18.8) Loss and LAE ratio 60.3% 57.6% 53.0% 39.6% 68.0% Expense ratio 32.6% 36.6% 34.6% 37.9% 40.4% Combined Ratio 92.9% 94.2% 87.6% 77.5% 108.4% Investment return (2) 24.2 (81.9) Investment yield 2.1% (7.5)% 6.5% 6.1% 3.5% Operating profit/(loss) (3) 42.1 (58.5) Balance Sheet 2007 $m 2008 $m 2009 $m $m $m Financial investments (2) 1, , , , ,109.3 Reinsurers' share of claims outstanding Gross claims outstanding Net claims outstanding Shareholders' Equity Individual Capital Assessment (ICA) Shareholders' Equity / ICA 196.9% 176.1% 220.8% 261.8% 203.9% (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 shareholder funds 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. 5 Markel International Insurance Company Limited

9 Annual Report and Financial Statements for the year ended 31 December Principal risks and uncertainties The Company has a risk register detailing the risks to which it is exposed. Risks are grouped under the following categories: Underwriting and reserving risk Market risk Credit risk Operational risk Liquidity risk Group risk There are currently 55 risks in the risk register. Items on the risk register are reviewed at a monthly risk committee meeting. A formal review by the Board occurs at least annually to ensure that the risk register identifies all the risks to which the Company is exposed. Key controls are identified to mitigate each risk and confirmation is sought from the owners of these controls that they are in place and operating effectively. Under Solvency II the Company is seeking internal model approval and is currently engaged in undertaking all the enhancements necessary to achieve the standards required. The Company s use of financial instruments and its management of financial risk are disclosed in note 2 to the financial statements. Business environment and future prospects The significant losses reported by the insurance industry during have had a positive impact on pricing and 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 rates are not acceptable. The Company will continue to look to develop new lines of business and markets, within the parameters of the overall underwriting strategy. 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. 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 (Appointed: 3 January 2012) Nicholas J S Line Ralph C Snedden William D Stovin Markel International Insurance Company Limited 6

10 Annual Report and Financial Statements for the year ended 31 December Markel maintains liability insurance cover on behalf of the Directors and named Officers of the Company and its subsidiaries. Charitable and political donations No charitable or political donations were made in the year (, nil). 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). 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 auditors are 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 auditors are 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 Audit Plc will, therefore, continue in office. By order of the Board, Andrew J Bailey Company Secretary London 27 March Markel International Insurance Company Limited

11 Annual Report and Financial Statements for the year ended 31 December Statement of Directors' responsibilities The Directors are responsible for preparing 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 for that period. In preparing those 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. Markel International Insurance Company Limited 8

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, as set out on pages 11 to 34. 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 the 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 22. 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 8, 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 (APB 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 APB'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 Markel International Insurance Company Limited

13 Annual Report and Financial Statements for the year ended 31 December Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Directors Report for the financial year for which the Financial Statements are prepared is consistent with the Financial Statements. 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 require 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. N B Priestley (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants 15 Canada Square, London, E14 5GL 27 March 2012 Markel International Insurance Company Limited 10

14 Annual Report and Financial Statements for the year ended 31 December Profit and Loss Account: Technical Account Notes Earned premiums, net of reinsurance Gross written premiums 3 267, ,958 Outward reinsurance premiums (30,515) (19,412) Net written premiums 237, ,546 Change in the gross provision for unearned premiums (16,346) (8,317) Change in the provision for unearned premiums. reinsurers' share 3,829 1,980 (12,517) (6,337) Net Earned Premiums 224, ,209 Claims incurred, net of reinsurance Claims paid Gross amount (141,034) (124,034) Reinsurers' share 18,544 17,637 Net paid claims (122,490) (106,397) Change in the provision for claims Gross amount (17,859) 39,310 Reinsurers' share (12,231) (12,227) Net change in provision (30,090) 27,083 Net claims incurred (152,580) (79,314) Net operating expenses 5 (90,869) (75,836) Change in the equalisation provision 22 4,670 (3,820) Balance on the technical account (14,145) 41,239 The notes on pages 16 to 34 form part of these Financial Statements. 11 Markel International Insurance Company Limited

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 (14,145) 41,239 Investment income 6 50,748 54,442 Investment expenses and charges 7 (6,911) (6,387) Unrealised (losses)/gains on investments (3,262) 21,619 Net foreign exchange (losses)/gains (280) 722 Profit on ordinary activities before taxation 9 26, ,635 Taxation on profit on ordinary activities 11 (7,764) (30,947) Profit for the financial year 18,386 80,688 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 16 to 34 form part of these Financial Statements. Markel International Insurance Company Limited 12

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 18,386 80,688 Net foreign exchange gains/ (losses) 216 (934) (Loss)/ profit recognised in pension schemes 26 (12,627) 3,102 Movement on deferred tax relating to pension liability/(asset) 3,250 (937) Total Recognised Gains relating to the year 9,225 81,919 The notes on pages 16 to 34 form part of these Financial Statements. 13 Markel International Insurance Company Limited

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 8,258 8,456 Other financial investments 15 1,109,301 1,178,420 Deposits with ceding undertakings ,118,054 1,187,387 Reinsurer's share of technical provisions Provisions for unearned premiums 22 12,996 9,277 Claims outstanding 22 70,549 83,129 Debtors 83,545 92,406 Debtors arising out of direct insurance operations 16 30,097 35,500 Debtors arising out of reinsurance operations 16 9,651 7,594 Deferred taxation asset 17 24,519 30,660 Other debtors 18 6,978 2,828 71,245 76,582 Other Assets Tangible fixed assets 19-1,361 Cash at bank ,699 Prepayments and accured income Accrued interest and rent 14,040 14,869 Deferred acquisition costs 23,659 20,908 37,699 35,777 Total assets excluding pension asset 1,310,969 1,393,851 Pension asset 26-3,155 Total Assets 1,310,969 1,397,006 The notes on pages 16 to 34 form part of these Financial Statements. Markel International Insurance Company Limited 14

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 21 98,313 98,313 Profit and loss account 21 82, ,340 Shareholders' funds attributable to equity interests , ,529 Technical provisions Provisions for unearned premiums ,716 87,391 Claims outstanding , ,526 Equalisation provision 22 7,459 12, , ,046 Provisions for other risks and charges 23 2,527 2,574 Creditors Creditors arising out of direct insurance operations 24 3,236 (2,351) Other creditors including taxation and social security ,292 (2,143) Net liabilities excluding pension liability 1,309,588 1,397,006 Pension liability 26 1,381 - Total Liabilities 1,310,969 1,397,006 Approved by the Board of Directors on 27 March 2012 and signed on behalf of the Company by, Andrew J Davies Director London, 27 March 2012 The notes on pages 16 to 34 form part of these Financial Statements. 15 Markel International Insurance Company Limited

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 ). 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: (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, less an allowance for cancellations. 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 surplus 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. 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 Markel International Insurance Company Limited 16

20 Annual Report and Financial Statements for the year ended 31 December 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. 17 Markel International Insurance Company Limited

21 Annual Report and Financial Statements for the year ended 31 December b) Pension costs The Company operates two pension schemes providing benefits based on final pensionable pay. The assets of the Schemes are held separately from those of the Company. Pension scheme assets are measured using market 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 surplus (to the extent that it is recoverable) or deficit is recognised in full. The movement in the Scheme surplus/deficit is split between service costs and returns recognised in the profit and loss account, contributions and actuarial gains and losses 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 investments 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 the write down amount is reported within realised losses in the non-technical profit and loss account. All other investments are stated at market 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) Fixed assets and depreciation Fixed assets are capitalised and depreciated over their expected useful lives using the straight line method. Useful lives for motor vehicles, office equipment and fixtures are estimated to be five years, and for computer equipment three years. Leasehold improvements are depreciated over the term of the lease. g) Operating leases Annual rentals relating to operating leases are charged to operating profit on a straight line basis over the lease term. h) Exchange rates 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 Markel International Insurance Company Limited 18

22 Annual Report and Financial Statements for the year ended 31 December retranslation of the opening Balance Sheet and the Profit and Loss Account to the closing rate of exchange are included in the Statement of Total Recognised Gains and Losses. All other exchange differences are reported in the Profit and Loss Account. i) Taxation Taxation is charged by reference to the taxable income included in the non-technical Profit and Loss Account. j) 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. Individual Capital Assessment 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) 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 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. (b) 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: Reinsurance recoverables Amounts due from insurance intermediaries 19 Markel International Insurance Company Limited

23 Annual Report and Financial Statements for the year ended 31 December Amounts due from 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 91% 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. c) 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. 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 28,808 28,406 (18,672) (9,793) (3,186) (3,245) 16,948 17,505 (14,485) (5,761) (2,834) (5,575) Third party liability 129, ,343 (60,113) (43,903) (19,592) 5,735 Miscellaneous 10,782 9,038 (2,648) (3,665) (8,108) (5,383) Total Direct 185, ,292 (95,918) (63,122) (33,720) (8,468) Reinsurance 81,984 67,028 (62,975) (27,871) 13,471 (10,347) Total 267, ,320 (158,893) (90,993) (20,249) (18,815) 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 26,848 25,051 (17,985) (8,863) (3,807) (5,604) 19,932 19,981 (11,816) (9,526) (9,360) (10,721) Third party liability 126, ,005 (31,661) (44,430) (11,237) 41,677 Miscellaneous 6,091 3,430 (2,763) (961) (529) (823) Total Direct 179, ,467 (64,225) (63,780) (24,933) 24,529 Reinsurance 46,321 40,174 (20,499) (12,154) 13,009 20,530 Total 225, ,641 (84,724) (75,934) (11,924) 45,059 Markel International Insurance Company Limited 20

24 Annual Report and Financial Statements for the year ended 31 December b) Analysis of premium by geographic area by origin: United Kingdom Gross Written Premiums Profit /(Loss) Before Taxation Direct and Reinsurance 224, ,138 (10,552) 51,001 United States Direct 22,963 29,463 (11) 308 Europe (excluding UK) Direct 20,425 17,357 (8,252) (6,250) 267, ,958 (18,815) 45,059 Change in the equalisation provision - - 4,670 (3,820) Investment return ,575 69,674 Foreign exchange (losses)/ gains - - (280) 722 Profit on ordinary activities before taxation , ,635 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, $142.3m (, $132.8m) relates to direct insurance. by destination: Gross Written Premiums United States 38,192 37,596 United Kingdom 112, ,461 Europe (excluding UK) 59,469 42,457 Rest of the world 56,915 31,711 Canada Total 267, ,958 4 Movement in prior year's provision for claims outstanding The Company experienced a net favourable loss development in the year of $39.9m (, net favourable loss development of $72.6m). This comprised the following developments by class: Marine, aviation & transport 1, Fire and other damage to property 10,850 7,803 Third party liability 23,145 61,341 Miscellaneous 500 1,500 Reinsurance 4,400 1,500 Total 39,895 72, Markel International Insurance Company Limited

25 Annual Report and Financial Statements for the year ended 31 December 5 Net operating expenses Acquisition costs 74,366 63,621 Change in deferred acquisition costs (2,917) (1,812) Administrative expenses 19,544 14,125 Gross operating expenses 90,993 75,934 Reinsurance commissions (124) (98) Net operating expenses 90,869 75,836 Total commissions for direct insurance accounted for during the year amounted to $34.5m (, $34.6m). 6 Investment income Income from investments 48,212 48,808 Gains on the realisation of investments 2,536 5,634 Total 50,748 54,442 7 Investment expenses and charges Investment management expenses, including interest 4,103 3,788 Amortisation of fixed interest securities 1,810 1,651 Losses on the realisation of investments Total 6,911 6,387 8 Investment return Investment income 50,748 54,442 Investment expenses and charges (6,911) (6,387) Unrealised (losses)/ gains on investments (3,262) 21,619 Actual return on investments 40,575 69,674 Markel International Insurance Company Limited 22

26 Annual Report and Financial Statements for the year ended 31 December 9 Profit on ordinary activities before taxation Profit on ordinary activities before taxation is stated after charging: Depreciation and other amounts written off tangible fixed assets - Owned 1,361 1,212 Rentals under operating leases - land and buildings 3,439 4, 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 Taxation a) Analysis of charge for the year Taxation charge for the year comprises: Current Taxation - - Deferred Taxation Movement arising due to change in the Corporation tax rate effective from 1 April , Origination and reversal of timing differences 5,475 30,347 Taxation charge on result on ordinary activities 7,764 30,947 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 26.5%. The differences are explained below: Profit on ordinary activities before taxation 26, ,635 Profit on ordinary activities multiplied by standard effective rate of corporation taxation in the UK of 26.5% (, 28.0%) 6,929 31,258 Effects of Depreciation in excess of capital allowances Dividend income not taxable (863) (725) Utilisation of tax losses brought forward (4,735) (29,376) Loss on revaluation of investments in subsidiaries Pension and other adjustments (1,745) (1,699) Current taxation charge Markel International Insurance Company Limited

27 Annual Report and Financial Statements for the year ended 31 December 12 Directors' emoluments The disclosed emoluments are paid by Markel International Services Limited ("MISL") to directors for their services to Markel International Insurance Company Limited. The emoluments are disclosed here in full as this is the Company to which the largest proportion of their emoluments relate. Aggregate emoluments 1,473,125 2,086,580 Company pension contributions to money purchase schemes 120,279 97,956 Company pension contributions to defined benefit schemes 82,793 77,663 Retirement benefits are accruing to three Directors under defined contribution pension schemes (, three) and to two Directors under a defined benefit scheme (, two). In May, 3,475 Markel shares were awarded to two directors. With respect to this award, 20% of the shares vest after one year, and the balance after five years, with pro rata vesting in case of death, disability or retirement. Shares will be issued in respect of the initial 20% of the units promptly after vesting. The remaining shares will be issued only following termination of employment, except that issuance may occur earlier if designated share price targets are attained. Violation of non-competition agreements contained in the award agreement may result in cancellation of the award, even after vesting. In March, 676 Markel shares were awarded to two directors vesting on 31 December 2015 based on continued employment to that date. In May, 750 Markel shares were awarded to three directors vesting on 9 May 2016 based on continuous employment to that date. Highest paid director Aggregate emoluments and benefits under long term incentives (excluding gains on exercise of share options and value of shares received) 343, ,866 Company (and subsidiaries) pension contributions to money purchase schemes 48,550 40,000 The highest paid director did not participate in the defined benefit scheme. In May, 2,085 Markel shares were awarded to the highest paid director. With respect to this award, 20% of the shares vest after one year, and the balance after five years, with pro rata vesting in case of death, disability or retirement. Shares will be issued in respect of the initial 20% of the units promptly after vesting. The remaining shares will be issued only following termination of employment, except that issuance may occur earlier if designated share price targets are attained. Violation of non-competition agreements contained in the award agreement may result in cancellation of the award, even after vesting. In March, 425 Markel shares were awarded to the highest paid director vesting on 31 December 2015 based on continued employment to that date. Markel International Insurance Company Limited 24