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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2003

Commission File Number 001-15811

MARKEL CORPORATION

(Exact name of registrant as specified in its charter)

Telephone (804) 747-0136

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value New York Stock Exchange

(title and class and name of the exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

The aggregate market value of the shares of the registrant’s Common Stock held by non-affiliates as of June 30, 2003 was approximately $2,151,556,608.

The number of shares of the registrant’s Common Stock outstanding at February 25, 2004: 9,855,410.

Documents Incorporated By Reference

The portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 11, 2004, referred to in Part III.

Index and Cross References-Form 10-K

Annual Report

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW

We sell specialty insurance products and programs to a variety of niche markets and believe that our specialty product focus and niche market strategy enable us to develop expertise and specialized market knowledge. We seek to differentiate ourselves from competitors by reason of our expertise, service, continuity and other value-based considerations. We compete in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets. Our financial goals are to earn consistent underwriting profits and superior investment returns to build shareholder value.

Specialty Insurance

The specialty insurance market differs significantly from the standard market. In the standard market, insurance rates and forms are highly regulated, products and coverages are largely uniform with relatively predictable exposures and companies tend to compete for customers on the basis of price. In contrast, the specialty market provides coverage for hard-to-place risks that do not fit the underwriting criteria of the standard carriers. For example, United States insurance regulations generally require an Excess and Surplus Lines (E&S) risk to be declined by three admitted carriers before an E&S company may write the risk. Hard-to-place risks written in the Specialty Admitted Market include insureds engaged in similar, but highly specialized activities, who require a total insurance program not otherwise available from standard insurers or insurance products that are overlooked by large admitted carriers. Hard-to-place risks in the London Market are generally distinguishable from standard risks due to the complexity or significant size of the risk.

Competition in the specialty insurance market tends to focus less on price and more on availability, service and other value-based considerations. While specialty market exposures may have higher perceived insurance risks than their standard market counterparts, we manage these risks to achieve higher financial returns. To reach our financial and operational goals, we must have extensive knowledge and expertise in our chosen markets. Most of our risks are considered on an individual basis where customized forms and tailored solutions are employed.

By focusing on the distinctive risk characteristics of our insureds, we have been able to identify a variety of niche markets where we can add value with our specialty product offerings. Examples of niche markets that we have targeted include: wind and earthquake exposed commercial properties, liability coverage for highly specialized professionals, horse mortality and other horse related risks, personal watercraft, high-value motorcycles, aviation and energy related activities. Our market strategy in each of these areas of specialization is tailored to the unique nature of the risk, coverage and services required by insureds. In each of our niche markets, we assign teams of experienced underwriters and claims specialists who provide a full range of insurance services.

Markets

Our eight underwriting units are focused on three specialty market segments. We have five underwriting units that compete in the E&S Market, two that compete in the Specialty Admitted Market and one that competes in the London Market. See note 18 of the notes to consolidated financial statements for additional segment reporting disclosures.

The E&S Market focuses on hard-to-place risks and risks that admitted insurers specifically refuse to write. E&S eligibility allows our insurance subsidiaries to underwrite unique risks with more flexible policy forms and unregulated premium rates. This typically results in coverages that are more restrictive and more expensive than coverages in the standard admitted market. In 2002, the E&S Market represented approximately $26 billion, or 6% of the $407 billion United States property and casualty (P&C) industry.⁽¹⁾

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We are the third largest domestic E&S writer in the United States as measured by direct premium writings.⁽¹⁾ Five of our underwriting units, Essex Excess and Surplus Lines, Shand Professional/Products Liability, Investors Brokered Excess and Surplus Lines, Markel Southwest Underwriters and Markel Re (formed January 1, 2003) write in the E&S Market. In 2003, we wrote $1.5 billion of E&S business in our Excess and Surplus Lines segment.

We also write business in the Specialty Admitted Market. Most of these risks are unique and hard-to-place in the standard market, but for marketing and regulatory reasons, must remain with an admitted insurance company. We estimate that the Specialty Admitted Market is comparable in size to the E&S Market. The Specialty Admitted Market is subject to more state regulation than the E&S Market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans.

Two of our underwriting units, Markel Specialty Program Insurance and Markel American Specialty Personal and Commercial Lines, write in the Specialty Admitted Market. In 2003, we wrote $271 million of specialty admitted business.

The London Market, which produced approximately $37 billion of gross written premium in 2002, is the largest insurance market in Europe and third largest in the world.⁽²⁾ The London Market is known for its ability to provide innovative, tailored coverage and capacity for unique and hard-to-place risks. It is primarily a broker market, which means that insurance brokers bring most of the business to the market. The London Market is also largely a subscription market, which means that risks brought into the market are typically insured by more than one insurance company or Lloyd’s syndicate, often due to the high limits of insurance coverage required. We write business on both a direct and subscription basis in the London Market. When we write business in the subscription market, we prefer to participate primarily as lead underwriter in order to control underwriting terms and conditions.

Gross premium written through Lloyd’s accounts for approximately one-half of the London Market’s international insurance business, making Lloyd’s the world’s second largest commercial insurer and sixth largest reinsurer.⁽³⁾ Beginning with the 1994 year of account, Lloyd’s began to allow corporate entities to become capital providers. This source of capital has grown steadily and represented approximately 87% of total underwriting capacity in 2003.⁽⁴⁾ Corporate capital providers often provide a majority of all of a syndicate’s capacity and also often own or control the syndicate’s managing agent. This structure permits the capital provider to exert greater influence on, and demand greater accountability for, underwriting results.

We participate in the London Market through Markel International which includes Markel Capital Limited (Markel Capital) and Markel International Insurance Company Limited (MIICL). Markel Syndicate Management Limited (Markel Syndicate Management) manages our syndicate at Lloyd’s, Markel Syndicate 3000. In 2003, we wrote $738 million of business in the London Market.

Approximately 25% of our 2003 premium writings were foreign risks (i.e., coverage for risks located outside of the United States). Approximately 40% of our 2003 premium writings from foreign risks were from the United Kingdom. In 2002, approximately 23% of our premium writings were foreign risks, of which approximately 39% related to the United Kingdom. For 2001, approximately 32% of our

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

premium writings were foreign risks, of which approximately 40% related to the United Kingdom. In each of these years, the United Kingdom was the only individual foreign country from which premium writings were material. Premium writings are attributed to individual countries based upon location of risk.

Competition

We compete with numerous domestic and international insurance companies and reinsurers, Lloyd’s syndicates, risk retention groups, insurance buying groups, risk securitization programs and alternative self-insurance mechanisms. Competition may take the form of lower prices, broader coverages, greater product flexibility, higher quality services or higher ratings by independent rating agencies. In all of our markets, we compete by developing specialty products to satisfy well-defined market needs and by maintaining relationships with brokers and insureds who rely on our expertise. This expertise is our principal means of competition. We offer over 90 major product lines. Each of these products has its own distinct competitive environment. With each of our products, we seek to compete with innovative ideas, appropriate pricing, expense control and quality service to policyholders, agents and brokers.

Few barriers exist to prevent insurers from entering our segments of the P&C industry, but many of the larger P&C insurance companies have historically been unwilling to write specialty coverages. For many years, the P&C industry experienced a soft market due to what was perceived by many as excessive amounts of capital in the industry. In an attempt to utilize their capital, many insurance companies often sought to write additional premiums without appropriate regard for its ultimate profitability.

During 2000, the Company began to experience what is commonly referred to within the insurance industry as a hard market. A hard insurance market is characterized by stricter coverage terms, higher prices and lower underwriting capacity. Premium rates continued to increase as a result of significant insured losses from the terrorist attacks of September 11, 2001. During 2003, we continued to achieve rate increases in most product lines compared to the prior year; however, rate increases have begun to slow and, in certain lines of business, rates have declined. Lines of business that have experienced rate declines include large direct and reinsurance property accounts, aviation and marine war accounts. While it is not anticipated that rates will continue to increase at the same pace the P&C industry has experienced during the last three years, we are committed to maintaining adequate pricing and will not sacrifice our goal of underwriting profitability in order to maintain premium growth. As a result, premium volume may vary when we alter our product offerings to maintain or improve underwriting profitability.

Underwriting Philosophy

By focusing on market niches where we have underwriting expertise, we seek to earn consistent underwriting profits. Underwriting profits are a key component of our strategy. We believe that the ability to achieve consistent underwriting profits demonstrates knowledge and expertise, commitment to superior customer service and the ability to manage insurance risk. We use underwriting profit or loss as a basis of evaluating our underwriting performance.

The combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums. A combined ratio less than 100% indicates an underwriting profit, while a

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combined ratio greater than 100% reflects an underwriting loss. In 2003, our combined ratio was 99%. See Management’s Discussion & Analysis of Financial Condition and Results of Operations for a further discussion of our underwriting results. Beginning in 2000, our combined ratio has included the underwriting results of Markel International which was acquired in March 2000. The combined ratio for the continuing business of Markel International has steadily improved and the London underwriting divisions continue to work towards our goal of underwriting profitability.

The following graph shows our combined ratio on a U.S. GAAP basis as compared to the P&C industry for the past five years:

The Underwriting Segments

We define our underwriting segments based on the areas of the specialty insurance market in which we compete. We have five underwriting units that compete in the Excess and Surplus Lines Market, two that compete in the Specialty Admitted Market and one that competes in the London Market.

Discontinued lines of business and non-strategic insurance subsidiaries are included in Other for segment reporting purposes. These lines were discontinued because we believed some aspect of the product, such as risk profile or competitive environment, would not allow us to earn consistent underwriting profits.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Excess and Surplus Lines Segment

During 2003, our Excess and Surplus Lines segment reported gross premium volume of $1.5 billion, earned premiums of $1.0 billion and an underwriting profit of $108.2 million. See note 18 of the notes to consolidated financial statements for a reconciliation of underwriting profit to pretax income and for additional segment reporting disclosures.

In the E&S Market, we write business through the following five units: Essex Excess and Surplus Lines; Shand Professional/Products Liability; Investors Brokered Excess and Surplus Lines; Markel Southwest Underwriters and beginning in 2003, Markel Re.

Essex Excess and Surplus Lines. The Essex Excess and Surplus Lines unit (Essex E&S unit) writes a variety of coverages focusing on light-to-medium casualty exposures for businesses such as artisan contractors, habitational risks, restaurants and bars, child and adult care facilities, vacant properties, office buildings and light manufacturing operations. The Essex E&S unit also writes property insurance on classes of business ranging from small, single-location risks to large, multi-state, multi-location risks. Property coverages consist principally of fire and allied lines, such as windstorm, hail and water damage and more specialized property coverages. In addition, the Essex E&S unit offers coverages for highly exposed property risks on both an excess and primary basis, including earthquake and wind, through its Essex Special Property (ESP) division. These risks are typically larger and are of a low frequency/high severity nature.

The Essex E&S unit’s inland marine facility provides coverages for risks that include motor truck cargo, warehouseman’s legal liability, builder’s risk and contractor’s equipment. The ocean marine facility writes risks that include marinas, hull coverage, cargo and builder’s risk for yacht manufacturers. The special transportation division focuses on physical damage coverage for all types of commercial vehicles such as trucks, buses and high-value automobiles. The railroad division writes all risk property coverages on railroad cars including shortline and regional railroads, tourist and scenic railroads, modern commuter rail and light rail, leased railroad equipment and railroad equipment owned by non-railroad companies.

Most of the Essex E&S unit’s business is generated by approximately 180 professional surplus lines general agents who have limited quoting and binding authority. ESP, brokerage inland marine and ocean marine produce business on a brokerage basis through approximately 260 wholesale brokers. The Essex E&S unit seeks to be a substantial underwriter for its producers in order to enhance the

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likelihood of receiving the most desirable underwriting opportunities. The Essex E&S unit writes the majority of its business in Essex Insurance Company (Essex). Essex is admitted in Delaware and is eligible to write E&S insurance in 49 states and the District of Columbia.

Shand Professional/Products Liability. The primary focus of the Shand Professional/Products Liability unit is tailored coverages that offer unique solutions for highly specialized professions. These include medical malpractice for physicians and allied healthcare risks, and professional liability for lawyers, architects and engineers, agents and brokers and management consultants. Specified professions errors and omissions coverage is targeted to start-up companies, small businesses and emerging technologies. Special risks include claims-made products liability coverage focused on new business products and technology. In addition, the Shand Professional/Products Liability unit offers not-for-profit directors’ and officers’ liability and employment practices liability (EPL) coverage. The unit also provides EPL clients a full menu of loss prevention programs offering consultation services which can be accessed through telephone inquiry, the Internet and live seminars across the United States.

Business is written nationwide and is developed through approximately 320 wholesale brokers. The Shand Professional/Products Liability unit writes the majority of its business in Evanston Insurance Company (EIC). EIC is admitted in Illinois and is eligible to write E&S insurance in 48 states and the District of Columbia. Admitted programs for some of these coverages are written either in Markel Insurance Company (MIC) or Markel American Insurance Company (MAIC).

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Investors Brokered Excess and Surplus Lines. The Investors Brokered E&S unit is comprised of the following divisions: primary casualty, property, excess and umbrella and environmental. The primary casualty division’s areas of expertise are hard-to-place, large general liability and products liability accounts. The majority of the general liability book of business is comprised of coverages for commercial and residential contractors. The division also specializes in writing manufacturing accounts with heavy products liability exposures. The property division focuses on monoline property and package coverages for mercantile, industrial, habitational and builders’ risk exposures. The excess and umbrella division provides coverage primarily for medium to large commercial insureds. The environmental division offers environmental professional liability, contractors’ pollution liability and site-specific environmental impairment liability coverages. The unit operates through approximately 200 wholesale brokers and writes the majority of its business in EIC.

Markel Southwest Underwriters. Markel Southwest Underwriters (MSU) writes a variety of commercial casualty and property coverages using underwriting guidelines that are modeled after those used by the Essex E&S unit. MSU’s business is concentrated in the western, southwestern and southeastern United States. Casualty coverages consist of light-to-medium casualty exposures including artisan contractors, habitational risks, office buildings, light manufacturing operations and vacant properties. MSU also writes property insurance on classes of business ranging from small, single location risks to large, multi-state, multi-location risks. Property coverages consist principally of fire and allied lines, such as windstorm, hail and water damage and more specialized property coverages.

Most of MSU’s business is generated by approximately 80 contracted professional surplus lines general agents who have limited quoting and binding authority. MSU seeks to be a substantial underwriter for its producers in order to enhance the likelihood of receiving the most desirable underwriting opportunities. The majority of its business is written in EIC.

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Markel Re. Markel Re began writing business in the second quarter of 2003, concentrating on direct excess and umbrella risks and casualty facultative reinsurance in the E&S Market. Facultative placements have all of the characteristics that we value in our underwriting units including control of individual risk selection and pricing. During the third quarter of 2003, Markel Re formed Specialized Markel Alternative Risk Transfer (SMART) as a specialty niche facility for alternative risk transfer business. Using targeted production sources, Markel Re will use this facility to provide innovative solutions and quality products to buyers who commit significant resources to assuming insurance risk.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Specialty Admitted Segment

Our Specialty Admitted segment reported gross premium volume of $270.6 million, earned premiums of $235.3 million and an underwriting profit of $23.1 million in 2003. See note 18 of the notes to consolidated financial statements for a reconciliation of underwriting profit to pretax income and for additional segment reporting disclosures.

In the Specialty Admitted Market, we write business through the Markel Specialty Program Insurance and the Markel American Specialty Personal and Commercial Lines units.

Markel Specialty Program Insurance. Markel Specialty Program Insurance focuses on providing total insurance programs for businesses engaged in similar but highly specialized activities. These activities typically do not fit the risk profiles of standard insurers which makes complete coverage difficult to obtain from a single insurer.

The Markel Specialty Program Insurance unit is organized into four product areas that concentrate on particular markets and customer groups. The Property and Casualty division writes commercial coverages for youth and recreation oriented organizations, such as children’s summer camps, conference centers, YM/YWCAs, Boys and Girls Clubs, child care centers, nursery, private and Montessori schools and gymnastics, martial arts and dance schools. This division also writes commercial coverages for social service organizations, garages, gas stations, used car dealers and moving and storage operations. The Agriculture division specializes in insurance coverages for horse-related risks, such as horse mortality coverage and property and liability coverages for horse farms and boarding, breeding and training facilities. The Accident and Health division writes liability and accident insurance for sports organizations and accident and medical insurance for colleges, universities and private schools. The Markel Risk Solutions facility works with select retail producers on a national basis to provide admitted market solutions to accounts facing difficulty in the standard marketplace. Accounts of various classes and sizes are written with emphasis placed on individual risk underwriting and pricing.

The majority of Markel Specialty Program Insurance business is produced by approximately 3,500 retail insurance agents. Management grants very limited underwriting authority to a few carefully selected agents and controls agency business through regular audits and pre-approvals. Certain products and programs are also marketed directly to consumers or through wholesale producers. Markel Specialty Program Insurance is underwritten by MIC. MIC is licensed to write P&C insurance in all 50 states, including its state of domicile, Illinois, and the District of Columbia.

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Markel American Specialty Personal and Commercial Lines. Markel American Specialty Personal and Commercial Lines offers its insurance products in niche markets that are overlooked by large admitted carriers and focuses its underwriting on watercraft and commercial marine, yacht, motorcycle and property coverages. The watercraft program markets personal lines insurance coverage for personal watercraft, older boats and high performance boats; while small fishing ventures and small boat rentals are the focus of the commercial marine program. The yacht program is designed for experienced owners of moderately priced yachts. The motorcycle program’s target market is mature riders of high-valued bikes. The property program provides coverage for dwellings which do not qualify for standard homeowners coverage.

Markel American Specialty Personal and Commercial Lines products are characterized by high numbers of transactions, low average premiums and creative solutions for under-served and emerging markets. The unit distributes the watercraft, yacht and property products through wholesale and retail producers. The motorcycle program is marketed directly to the consumer, using direct mail, Internet and telephone promotions as well as relationships with various motorcycle manufacturers, dealers and associations. The Markel American Specialty Personal and Commercial Lines unit writes the majority of its business in MAIC. MAIC is licensed to write P&C business in 49 states, including its state of domicile, Virginia, and the District of Columbia.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

London Insurance Market Segment

The underwriting operations in our London Insurance Market segment are aligned along product lines into six underwriting divisions as follows:

To better serve our customers’ needs, these six underwriting divisions have the ability to write business through either MIICL or Markel Syndicate 3000. We write specialty property, casualty, marine and aviation insurance on a direct and reinsurance basis. We take a service-oriented approach to underwriting these complex and unique risks. Business is written world-wide with approximately 19% of writings coming from the United States.

During 2003, our London Insurance Market segment reported gross premium volume of $738.4 million, earned premiums of $575.1 million and an underwriting loss of $25.2 million. See note 18 of the notes to consolidated financial statements for a reconciliation of underwriting profit (loss) to pretax income and for additional segment reporting disclosures.

Aviation. The Aviation underwriting division offers three categories of aviation-related coverage: airlines, non-airlines and aviation products. Airlines coverage is provided for regional/commuter aircraft which carry in excess of 60 passengers and larger cargo aircraft. Non-airlines coverage is provided for fixed wing and rotary wing operators with preference given to fleet operators. Aviation products coverage is provided for manufacturers of non-critical aircraft components, small airports, light maintenance facilities and regional catering operations. Aviation business is written on a world-wide basis, limiting exposure in the United States.

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Marine and Energy. The Marine and Energy division underwrites a portfolio of coverages for cargo, energy, hull, liability, protection and indemnity, war 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. Coverage includes, but is not limited to, property damage, business interruption and oil well control. The hull account covers physical damage to ocean-going tonnage. Also offered are coverages for high-valued 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 protection and indemnity account provides a fixed premium facility for owners, managers and charterers of commercial ships. The war account covers the hulls of ships and aircraft, and other related interests, against war and associated perils. The specie account includes coverage for fine art on exhibit and in private collections, securities, bullion, precious metals, cash in transit and jewelry.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Non-Marine Property. The Non-Marine Property division writes property and liability business on a world-wide basis providing coverage for a wide range of insureds. Property coverage ranges from fire to catastrophe perils such as earthquake and wind storm. Business written is divided into three market categories: open market (world-wide excluding the United Kingdom and Europe), delegated authority, and United Kingdom and Europe. The open market account writes direct and facultative reinsurance coverage, frequently on an all risks basis, where coverage is not limited to specific named perils. The delegated authority account provides property and liability coverage including commercial property, homeowners, inland marine, auto physical damage and commercial general liability. The coverage provided by the delegated authority account is primarily written in the United States. Brokers underwriting this business on our behalf are closely monitored, frequently audited and must adhere to strict underwriting guidelines. The United Kingdom and Europe account writes personal lines and small commercial property business on both an open market and delegated authority basis with business being geographically limited to the United Kingdom and Europe.

Professional Indemnity. The Professional Indemnity division underwrites professional indemnity and directors’ and officers’ liability coverage. The professional indemnity account offers unique solutions in four main professional classes. Covered risks include miscellaneous professionals and consultants, construction professionals, financial service professionals and professional practices. The miscellaneous professionals and consultants class includes coverages for a wide range of professionals including management consultants, publishers, broadcasters, pension trustees and political officials. The construction class includes coverages for surveyors, engineers, architects and estate agents. The financial services class includes coverages for insurance brokers, insurance agents, financial consultants, stockbrokers, fund managers, venture capitalists and bankers. The professional practices class includes coverages for accountants and solicitors. The directors’ and officers’ liability account offers coverage to public, private and non-profit companies of all sizes on either an individual or blanket basis.

The Professional Indemnity division writes business on a world-wide basis, limiting exposure in the United States.

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Retail. The Retail division has four branch offices in the United Kingdom, all of which offer a full range of professional liability products including professional indemnity, directors’ and officers’ liability and employment practices liability coverage. 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 specialized knowledge of the local markets.

Specialty. The Specialty underwriting division (formerly referred to as the Reinsurance and Accident division) provides property treaty reinsurance including excess of loss, stop loss, aggregate excess and proportional coverage. A significant portion of the division’s excess of loss catastrophe and per risk treaty business comes from the United States and risk is balanced by international property treaties. The Specialty division also offers direct coverage for a number of specialist classes including financial institutions, contingency and other special risks. Coverages include bankers blanket bond, computer crime, commercial fidelity, event cancellation, non-appearance and prize indemnity.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Ceded Reinsurance

We purchase reinsurance coverage in order to reduce our retention on individual risks and to enable us to offer our clients policies with sufficient limits for their needs. The ceding of insurance does not legally discharge the ceding company from its primary liability for the full amount of the policies, and the ceding company is required to pay the loss and bear collection risk if the reinsurer fails to meet its obligations under the reinsurance agreement. Our underwriting philosophy is to offer products with limits which do not require us to purchase significant amounts of reinsurance. We purchase catastrophe reinsurance coverage for our catastrophe exposed policies, and we seek to manage our exposures under this coverage so that no exposure to any one reinsurer is material to our ongoing business. Reinsurance needs are assessed and purchased at the underwriting unit level with corporate oversight.

We attempt to minimize credit exposure to reinsurers through adherence to internal reinsurance guidelines. To become our reinsurance partner, prospective companies generally must: (i) maintain an A.M. Best or Standard & Poor’s rating of “A” (excellent); (ii) maintain minimum capital and surplus of $200 million and (iii) provide collateral for recoverables in excess of an individually established amount. In addition, certain foreign reinsurers for our United States insurance operations must provide collateral equal to 100% of recoverables, with the exception of reinsurers who are Lloyd’s syndicates.

As we have acquired insurance operations, we have reviewed the use of reinsurance and existing reinsurance agreements and have attempted to commute or reassume risks where appropriate. We have also exited programs and products which require large amounts of reinsurance protection and have substantially reduced the limits of coverage offered on most of our ongoing products so that the need to purchase reinsurance is reduced.

The following table displays our ten largest reinsurers by group and balances recoverable at December 31, 2003. The contractual obligations under reinsurance agreements are typically with individual subsidiaries of the group or syndicates at Lloyd’s and are not typically guaranteed by other group members or syndicates at Lloyd’s. These ten reinsurance groups represent approximately 60% of our $1.8 billion reinsurance recoverable.

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Reinsurance recoverable balances for the ten largest reinsurers are shown before consideration of balances owed to reinsurers and any potential rights of offset, any collateral held by us and allowances for bad debts.

See note 14 of the notes to consolidated financial statements and Management’s Discussion & Analysis of Financial Condition and Results of Operations for additional information about our reinsurance programs and exposures.

Reinsurance treaties are generally subject to cancellation on the anniversary date and are subject to annual renegotiations. In most circumstances, the reinsurer remains responsible for all business produced prior to termination. Treaties also typically contain provisions concerning ceding commissions, required reports to reinsurers, responsibility for taxes, arbitration in the event of a dispute and provisions which allow us to demand that a reinsurer post letters of credit or assets as security if a reinsurer becomes an unapproved reinsurer under applicable regulations.

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

Investments

Our business strategy clearly recognizes the importance of both consistent underwriting profits and superior investment returns to build shareholder value. We rely on sound underwriting practices to produce investable funds while minimizing underwriting risk. Approximately three quarters of our investable assets come from premiums paid by policyholders. Policyholder funds are invested predominately in high-quality corporate, government and municipal bonds with relatively short durations. The balance, comprised of shareholder funds, is available to be invested in equity securities, which over the long run, have produced higher returns relative to fixed maturity investments. We seek to invest in companies with solid business plans, capable and honest management and the potential for appreciation. We seek to hold these investments over the long term. The investment portfolio is managed by company officers.

Total investment returns include items which impact net income, such as net investment income and realized gains or losses from the sales of investments, as well as changes in unrealized holding gains or losses, which do not impact net income. Our investment portfolio produced net investment income of $182.6 million and net realized gains of $45.0 million in 2003. During the year ended December 31, 2003, net unrealized gains on the investment portfolio increased by $91.6 million, net of tax. We do not lower the quality of our investment portfolio in order to enhance or maintain yields. Our focus on long-term total investment returns results in variability in the level of realized and unrealized investment gains or losses from one period to the next.

The ultimate success of our investment strategy is best analyzed from the review of total investment returns over several years. The following table presents taxable equivalent total returns before and after the effects of foreign currency movements:

ANNUAL TAXABLE EQUIVALENT TOTAL RETURNS

Taxable equivalent total return provides a measure of investment performance which considers the yield of both taxable and tax-exempt investments on an equivalent basis.

Our disciplined, value-oriented investment approach generated solid investment results in 2003, and over the long term, as evidenced by the previous table.

We monitor our portfolio to ensure that credit risk does not exceed prudent levels. Standard & Poor’s (S&P’s) and Moody’s Investors Service (Moody’s) provide corporate and municipal debt ratings based on their assessment of the credit quality of an obligor with respect to a specific obligation. S&P’s ratings range from “AAA” (capacity to pay interest and repay principal is extremely strong)

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to “D” (debt is in payment default). Securities with ratings of “BBB” or higher are referred to as investment grade securities. Debt rated “BB” and below is regarded by S&P as having predominately speculative characteristics with respect to capacity to pay interest and repay principal. Moody’s ratings range from “Aaa” to “C” with ratings of “Baa” or higher considered investment grade.

Our fixed maturity portfolio has an average rating of “AA,” with 91% rated “A” or better by at least one nationally recognized rating organization. Our policy is to invest in securities which are rated investment grade and to minimize investments in fixed maturity securities that are unrated or rated below investment grade.

See Market Risk Disclosures in Management’s Discussion & Analysis of Financial Condition and Results of Operations for additional information about investments.

The following chart shows our fixed maturity portfolio, at estimated fair value, by rating category at December 31, 2003:

Shareholder Value

Our financial goals are to earn consistent underwriting profits and superior investment returns to build shareholder value. More specifically, we assess our effectiveness in building shareholder value through the measurement of growth in book value per share. We believe that growth in book value per share is the most comprehensive measure of our success because it includes all underwriting and investing results. We recognize that it may be difficult to grow book value consistently each year, so we measure ourselves over a longer period of time. Our objective is to grow book value per share by an annual compound growth rate of 20%, measured over a five year period. For the year ended December 31, 2003, book value per share increased 19% primarily due to net income of $123.5 million and $91.6 million of increases in net unrealized gains, net of taxes. For the year ended December 31, 2002, book value per share increased 7% primarily due to 2002 net income of $75.3 million. Over the past five years, we have grown book value per share at a compound annual rate of 13% to $140.38 per share. Excluding the effect of 1.8 million common shares issued in 2000 to

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Markel Corporation & Subsidiaries

BUSINESS OVERVIEW (continued)

acquire Markel International and 2.5 million common shares issued in the 2001 equity offerings, book value per share grew at a compound annual rate of 7% over the past five years. The following graph presents the Company’s book value per share for the past five years:

Regulatory Environment

Our insurance subsidiaries are subject to regulation and supervision by the insurance regulatory authorities of the various jurisdictions in which they conduct business. Regulation is intended for the benefit of policyholders rather than shareholders.

United States. In the United States, state regulatory authorities have broad regulatory, supervisory and administrative powers relating to solvency standards, the licensing of insurers and their agents, the approval of forms and policies used, the nature of, and limitations on, insurers’ investments, the form and content of annual statements and other reports on the financial condition of such insurers and the establishment of reserves.

As an insurance holding company, we are also subject to certain state laws. Under these laws, insurance departments may, at any time, examine us, require disclosure of material transactions, require approval of certain extraordinary transactions, such as extraordinary dividends from our insurance subsidiaries to us or require approval of changes in control of an insurer or an insurance holding company. Generally, control for these purposes is defined as ownership or voting power of 10% or more of a company’s shares.

The laws of the domicile states of our insurance subsidiaries govern the amount of dividends that may be paid to our holding company, Markel Corporation. Generally, statutes in the domicile states of our insurance subsidiaries require prior approval for payment of extraordinary as opposed to ordinary dividends. At December 31, 2003, our United States insurance subsidiaries could pay up to $126.4 million during the following 12 months under the ordinary dividend regulations without prior regulatory approval.

United Kingdom and Lloyd’s Regulation. With the enactment of the Financial Services and Markets Act, the United Kingdom government authorized the Financial Services Authority (FSA) to supervise all securities, banking and insurance businesses, including Lloyd’s. The FSA oversees compliance with established periodic auditing and reporting requirements, risk assessment reviews, minimum solvency margins, dividend restrictions, restrictions governing the appointment of key officers, restrictions governing controlling ownership interests and various other requirements. Both MIICL and Markel Syndicate Management are authorized and regulated by the FSA. We are required to provide 14 days advance notice to the FSA for any dividends from MIICL.

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In addition, both Markel Capital and Markel Syndicate Management are subject to regulation and supervision by the Council of Lloyd’s (the Council). The Council prescribes, in respect of each business, certain minimum standards relating to management and control, solvency, risk-based capital and various other requirements. On January 1, 2003, the Council delegated certain of these responsibilities to the newly formed Lloyd’s Franchise Board. Markel Syndicate Management’s annual business plan must be reviewed and approved by the Lloyd’s Franchise Board before it can participate in a new year of account at Lloyd’s.

Ratings

Financial stability and strength are important purchase considerations of policyholders and insurance agents and brokers. Because an insurance premium paid today purchases coverage for losses that might not be paid for many years, the financial viability of the insurer is of critical concern. Various independent rating agencies provide information and assign ratings to assist buyers in their search for financially sound insurers. Rating agencies periodically re-evaluate assigned ratings based upon changes in the insurer’s operating results, financial condition or other significant factors influencing the insurer’s business. Changes in assigned ratings could have an adverse impact on an insurer’s ability to write new business.

A.M. Best Company (Best) assigns financial strength ratings (FSRs) to P&C insurance companies based on quantitative criteria such as profitability, leverage and liquidity, as well as qualitative assessments such as the spread of risk, the adequacy and soundness of reinsurance, the quality and estimated market value of assets, the adequacy of loss reserves and surplus and the competence, experience and integrity of management. Best’s FSRs range from “A++” (superior) to “F” (in liquidation).

Best has assigned our United States insurance subsidiaries a group rating of “A” (excellent). During 2003, Best upgraded the FSR for MIICL, our London based insurance subsidiary, to “A-” (excellent) from “B++” (very good) and assigned a rating of “A-” (excellent) to Markel Syndicate 3000, our syndicate at Lloyd’s.

In addition to Best, our United States insurance subsidiaries are rated “A” (high) by Fitch, an independent rating agency. MIICL has been assigned a FSR of “A-” (high) by Fitch.

Associates

At December 31, 2003, we had 1,759 employees, six of whom were executive officers.

As a service organization, our continued profitability and growth are dependent upon the talent and enthusiasm our associates bring to their jobs. We have structured incentive compensation plans and stock purchase plans to encourage associates to achieve corporate objectives and think and act like owners. Associates are offered many opportunities to become shareholders. Associates eligible to participate in the Company’s 401(k) plan receive one-third of our contribution in Markel stock and may purchase stock with their own contributions. Stock may be acquired through a payroll deduction plan, and associates (other than executive officers and directors as required by the Sarbanes-Oxley Act) are given the opportunity to purchase stock with loans financed by us with a partially subsidized interest rate. Under our incentive compensation plans, associates may earn a meaningful bonus based on individual and company performance. At December 31, 2003, we estimate associates’ ownership, including executive officers and directors, at approximately 15% of our outstanding shares. We believe that employee stock ownership and rewarding value-added performance align associates’ interests with the interests of non-employee shareholders.

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Markel Corporation & Subsidiaries

SELECTED FINANCIAL DATA (dollars in millions, except per share data) (1, 2)

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Markel Corporation & Subsidiaries

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)