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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

or

Commission File Number 001-15811

MARKEL CORPORATION

(Exact name of registrant as specified in its charter)

4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148

(Address of principal executive offices)

(Zip Code)

(804) 747-0136

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year,

if changed since last report)

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 for 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes x    No ¨

Number of shares of the registrant’s common stock outstanding at April 28, 2005: 9,840,273

Table of Contents

Markel Corporation

Form 10-Q

Index

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PART I. FINANCIAL INFORMATION

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income (Loss)

See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The consolidated balance sheet as of March 31, 2005 and the related consolidated statements of income and comprehensive income (loss), changes in shareholders’ equity and cash flows for the three months ended March 31, 2005 and 2004 are unaudited. In the opinion of management, all adjustments necessary for fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal, recurring items. Interim results are not necessarily indicative of results of operations for the entire year. The consolidated balance sheet as of December 31, 2004 was derived from the Company’s audited annual consolidated financial statements.

The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. Readers are urged to review the Company’s 2004 annual report on Form 10-K for a more complete description of the Company’s business and accounting policies.

Certain prior year amounts have been reclassified to conform to the current presentation.

Net income per share was determined by dividing net income by the applicable weighted average shares outstanding.

The Company applies the intrinsic value recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for stock-based compensation plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (Statement) No. 123, Accounting for Stock-Based Compensation, as amended by Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure.

Stock-based compensation expense, net of taxes, included in net income under APB Opinion No. 25 was $0.4 million and $0.5 million for the three months ended March 31, 2005 and 2004, respectively. Under the fair value method principles of Statement No. 123, pro forma stock-based compensation expense, net of taxes, and pro forma net income would not have differed from reported amounts for the three months ended March 31, 2005 and 2004.

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The following table summarizes the effect of reinsurance on premiums written and earned.

Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $24.4 million and $82.9 million for the three months ended March 31, 2005 and 2004, respectively.

On January 8, 1997, the Company arranged the sale of $150 million of Company-Obligated Mandatorily Redeemable Preferred Capital Securities (8.71% Capital Securities) issued under an Amended and Restated Declaration of Trust dated January 13, 1997 (the Declaration) by Markel Capital Trust I (the Trust), a statutory business trust sponsored and wholly-owned by the Company. Proceeds from the sale of the 8.71% Capital Securities were used to purchase the Company’s 8.71% Junior Subordinated Debentures due January 1, 2046, issued to the Trust under an indenture dated January 13, 1997 (the Indenture). The 8.71% Junior Subordinated Debentures are the sole assets of the Trust. The Company has the right to defer interest payments on the 8.71% Junior Subordinated Debentures for up to five years. The 8.71% Capital Securities and related 8.71% Junior Subordinated Debentures are redeemable by the Company on or after January 1, 2007. Taken together, the Company’s obligations under the Debentures, the Indenture, the Declaration and a guarantee made by the Company provide, in the aggregate, a full, irrevocable and unconditional guarantee of payments of distributions and other amounts due on the 8.71% Capital Securities. No other subsidiary of the Company guarantees the 8.71% Junior Subordinated Debentures or the 8.71% Capital Securities. In the event of default under the Indenture, the Trust may not make distributions on, or repurchases of, the Trust’s common securities. During a period in which the Company elects to defer interest payments or in the event of default under the Indenture, the Company may not make distributions on, or repurchases of, the Company’s capital stock or debt securities ranking equal or junior to the 8.71% Junior Subordinated Debentures.

During 2001, the Company issued $408.0 million principal amount at maturity, $112.9 million net proceeds, of Liquid Yield Option Notes^™ (LYONs). The LYONs are zero coupon senior notes, which were issued at a price of $283.19 per LYON, representing a yield to maturity of 4.25%. The LYONs mature on June 5, 2031. The Company uses the effective yield method to recognize the accretion of discount from the issue price to the face amount of the LYONs at maturity. The accretion of discount is included in interest expense.

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In accordance with their terms, each LYON is convertible into 1.1629 shares of common stock upon the occurrence of certain events. Effective April 1, 2005, each LYON became convertible because the closing price of the Company’s common shares exceeded the conversion trigger price of $336.49 for at least 20 of the last 30 consecutive trading days in the quarter ended March 31, 2005. No LYONs have been converted as of the date of this filing; however, holders may convert LYONs at any time through June 4, 2031. Approximately 335,000 shares would be issued if all of the LYONs were to be converted. These shares were included in the Company’s calculation of diluted earnings per share for the three months ended March 31, 2005 and 2004.

LYONs holders have the right to require the Company to repurchase the LYONs on June 5^th of 2006, 2011, 2016, 2021 and 2026 at their accreted value on these dates as follows:

The Company may choose to settle any LYONs tendered for repurchase in cash or common shares of the Company. The Company may redeem the LYONs for cash on or after June 5, 2006 at their accreted value.

The Company will pay contingent cash interest to the holders of the LYONs during the six-month period commencing June 5, 2006 and during any six-month period thereafter if the average market price of a LYON for a specified period equals or exceeds 120% of the sum of the issue price and accrued original issue discount of the LYON.

Other comprehensive income (loss) is primarily comprised of net holding gains (losses) on securities arising during the period less reclassification adjustments for net gains included in net income. Other comprehensive income (loss) also includes foreign currency translation adjustments. The related tax expense (benefit) on net holding gains (losses) on securities arising during the period was $(42.8) million and $31.2 million, respectively, for the three months ended March 31, 2005 and 2004. The related tax expense on the reclassification adjustments for net gains included in net income was $5.9 million and $2.6 million, respectively, for the three months ended March 31, 2005 and 2004. The related tax benefit on foreign currency translation adjustments was $6.1 million and $0.6 million, respectively, for the three months ended March 31, 2005 and 2004.

The Company operates in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets.

All investing activities are included in the Investing segment. Discontinued programs and non-strategic insurance subsidiaries are included in Other for purposes of segment reporting.

The Company considers many factors, including the nature of the underwriting units’ insurance products, production sources, distribution strategies and regulatory environment in determining how to aggregate operating segments.

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Segment profit or loss for each of the Company’s operating segments is measured by underwriting profit or loss. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit or loss does not replace operating income or net income computed in accordance with U.S. generally accepted accounting principles (U.S. GAAP) as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company’s underwriting performance. Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses.

The Company does not allocate assets to the Excess and Surplus Lines, Specialty Admitted and London Insurance Market operating segments for management reporting purposes. Total investments and cash and cash equivalents are allocated to the Investing segment. The Company does not allocate capital expenditures for long-lived assets to any of its operating segments for management reporting purposes.

a) The following tables summarize the Company’s segment disclosures.

Three Months Ended March 31, 2005

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Three Months Ended March 31, 2004

b) The following table reconciles segment assets to the Company’s consolidated financial statements.

On January 31, 2001, the Company received notice of a lawsuit filed in the United States District Court for the Southern District of New York against Terra Nova Insurance Company Limited by Palladium Insurance Limited and Bank of America, N.A. seeking approximately $27 million plus interest and exemplary damages in connection with alleged reinsurance agreements. The discovery phase of this matter ended in late 2004 and a trial date has not yet been determined. The Company believes it has numerous defenses to this claim, including the defense that the alleged reinsurance agreements and insurance policy were not valid. The Company intends to vigorously defend this matter.

This and other contingencies arise in the normal conduct of the Company’s operations. In the opinion of management, the resolutions of these contingencies are not expected to have a material impact on the Company’s financial condition or results of operations. However, adverse outcomes are possible and could negatively impact the Company’s financial condition and results of operations.

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a) Expenses relating to all of the Company’s defined contribution plans were $2.3 million and $2.2 million, respectively, for the three months ended March 31, 2005 and 2004.

b) The following table presents the components of net periodic benefit cost for the Terra Nova Pension Plan, the Company’s defined benefit plan.

The Company contributed $0.3 million to the Terra Nova Pension Plan during the first quarter of 2005. The Company expects plan contributions to total $1.3 million in 2005. If necessary, the Company will make any additional contributions to the plan to meet minimum funding requirements or to ensure that the fair value of plan assets at December 31, 2005 exceeds the accumulated benefit obligation.

On January 11, 2005, the Company sold its wholly-owned reinsurance subsidiary, Corifrance, to a subsidiary of Fairfax Financial Holdings Limited (the buyer). Under the terms of the sales agreement, the Company has agreed to indemnify the buyer through December 31, 2007 for any adverse development of loss reserves up to the purchase price. Corifrance was considered by the Company to be a non-strategic subsidiary, and its results have been included in the Other segment since the acquisition of Markel International. Proceeds from the sale of approximately $57 million were received in April 2005. The gain on the sale of Corifrance was $5.5 million and was included in underwriting, acquisition and insurance expenses in the Other segment. Included in the gain was the realization of the cumulative foreign currency translation adjustment on Corifrance. The gain was partially offset by the establishment of a contingent obligation to indemnify the buyer if loss reserves prove to be deficient.

The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and all subsidiaries.

Critical Accounting Estimates

Critical accounting estimates are defined as those estimates that are both important to the portrayal of our financial condition and results of operations and require us to exercise significant judgment. The preparation of financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of material contingent assets and liabilities, including litigation contingencies. These estimates, by necessity, are based on assumptions about numerous factors.

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We review our critical accounting estimates and assumptions quarterly. These reviews include evaluating the adequacy of both reserves for unpaid losses and loss adjustment expenses and the reinsurance allowance for doubtful accounts, analyzing the recoverability of deferred tax assets, assessing goodwill for impairment and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

Readers are urged to review our 2004 annual report on Form 10-K for a more complete description of our critical accounting estimates.

Our Business

We market and underwrite 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 & 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.

Our Excess and Surplus Lines segment is comprised of five underwriting units, our Specialty Admitted segment consists of two underwriting units and our London Insurance Market segment is comprised of the ongoing operations of Markel International.

Our Excess and Surplus Lines segment writes property and casualty insurance outside of the standard market for hard-to-place risks including catastrophe-exposed property, professional liability, products liability, general liability, commercial umbrella and other coverages tailored for unique exposures.

Our Specialty Admitted segment writes risks that are unique and hard-to-place in the standard market but must remain with an admitted insurance company for marketing and regulatory reasons. Our underwriting units in this segment write specialty program insurance for well-defined niche markets and personal and commercial property and liability coverages.

We participate in the London Market through Markel International, which includes Markel Capital Limited and Markel International Insurance Company Limited, two of our wholly-owned subsidiaries. Markel Capital Limited is the corporate capital provider for Markel Syndicate 3000 at Lloyd’s, which is managed by Markel Syndicate Management Limited, a wholly-owned subsidiary. Our London Insurance Market segment writes specialty property, casualty and marine insurance and reinsurance.

Our discontinued lines of business and non-strategic insurance subsidiaries are included in Other for segment reporting purposes. For the three months ended March 31, 2005, the Other segment consisted primarily of discontinued Markel International programs. In prior periods, the Other segment also included the results of Corifrance, our wholly-owned reinsurance subsidiary, which we sold on January 11, 2005. See note 11 of the notes to consolidated financial statements for a discussion of the sale of Corifrance.

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Key Performance Indicators

We measure success by our ability to compound growth in book value per share over a five-year period. We recognize that it may be difficult to grow book value consistently each year, so we measure ourselves over a longer period of time. 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 measure underwriting results by our underwriting profit and combined ratio. These measures are discussed in greater detail under “Results of Operations.”

Results of Operations

The following table compares the components of net income.

Net income for the three months ended March 31, 2005 increased 79% compared to the same period of 2004. The increase in net income is primarily due to improved underwriting results. Each of the components of net income are discussed in further detail under “Underwriting Results,” “Investment Results” and “Other Expenses.”

Underwriting Results

Underwriting profits are a key component of our strategy to grow book value per share. 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. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. We use underwriting profit or loss as a basis of evaluating our underwriting performance.

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The following table compares selected data from our underwriting operations.

We reported a combined ratio of 90% for the first quarter of 2005 compared to 96% for the same period last year. The increase in underwriting profit for the quarter ended March 31, 2005 was primarily due to improved underwriting performance in the London Insurance Market segment.

The combined ratio for the Excess and Surplus Lines segment was 84% for the quarter ended March 31, 2005 compared to 83% for the same period of 2004. The increase in the combined ratio is primarily due to a higher expense ratio in 2005 as a result of lower reinsurance commissions as we continue to increase our retention of gross written premiums.

The Specialty Admitted segment produced improved underwriting results for the quarter ended March 31, 2005 compared to the same period of 2004. The combined ratio for the first quarter of 2005 benefited from lower current year losses compared to 2004.

The London Insurance Market segment’s combined ratio for the quarter ended March 31, 2005 improved primarily due to less development on prior years’ loss reserves, partially offset by a higher expense ratio in 2005 compared to 2004. In 2004, the London Insurance Market segment’s underwriting results included a $30 million increase in prior years’ loss reserves.

The Other segment produced an underwriting profit of $2.0 million for the quarter ended March 31, 2005 compared to an underwriting loss of $2.3 million for the same period in 2004. The Other underwriting profit for the first quarter of 2005 included a $5.5 million gain on the sale of Corifrance. Prior to the sale, the operating results of Corifrance were included in the Other segment.

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Premiums and Net Retention

The following table compares gross premium volume and net written premiums by underwriting segment.

Gross premium volume for the first quarter of 2005 declined 12% compared to the same period of 2004. Approximately two-thirds of the decline was due to lower 2005 premium writings at Markel International and the Investors Brokered Excess and Surplus Lines unit and to the sale of Corifrance. During the first quarter of 2005, gross premium volume at Markel International declined primarily due to increased competition, which reduced new and renewal business opportunities compared to the same period of 2004, and due to our exit from the aviation insurance market in late 2004. The decline in gross premium volume at the Investors Brokered Excess and Surplus Lines unit was primarily due to the re-underwriting of the casualty and excess and umbrella books of business beginning in early 2004 and the withdrawal from the California residential contractors market in early 2005.

During the first quarter of 2005, we continued to receive rate increases compared to the same period of the prior year for many product lines. However, the rate of increase has slowed and, in certain lines, rates have declined. We continue to experience market pressure to reduce prices in select lines of business on both new and renewal accounts. When we believe the prevailing market rates will not support our underwriting profit targets, the business is not written. Our 2005 business plans continue to focus on new product development, producer relationships and achieving our ultimate goal of underwriting profitability.

As part of our underwriting philosophy, we seek to offer products with limits that do not require significant amounts of reinsurance. We purchase reinsurance in order to reduce our retention on individual risks and enable us to write policies with sufficient limits to meet policyholder needs. Net retention of gross premium volume has increased consistent with our strategy to retain more of our profitable business. Net retention of gross premium volume for the first quarter of 2005 was 85% compared to 81% for 2004. The increase was primarily due to changes in the mix of premium writings and purchasing less reinsurance in the Excess and Surplus Lines segment during 2005 compared to 2004.

The following table compares earned premiums by underwriting segment.

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Earned premium for the three months ended March 31, 2005 decreased 2% compared to the same period of 2004. This decrease was primarily due to lower gross premium volume at Markel International partially offset by higher retentions in the Excess and Surplus Lines segment compared to 2004.

Investment Results

First quarter 2005 net investment income was $58.8 million compared to $48.7 million in the first quarter of 2004. The increase in 2005 was primarily due to higher invested assets and higher investment yields compared to the same period of 2004.

For the three months ended March 31, 2005, net realized gains were $16.8 million compared to $7.4 million for the same period last year. Variability in the timing of realized and unrealized investment gains and losses is to be expected.

At March 31, 2005, we held securities with gross unrealized losses of approximately $44.8 million, or less than 1% of total invested assets. At March 31, 2005, all of these securities were reviewed and management believes there were no indications of other-than-temporary impairment.

Other Expenses

Interest expense for the three months ended March 31, 2005 increased 24% to $16.0 million from $12.9 million for the same period of 2004. The increase was primarily due to the August 2004 issuance of $200 million of 7.35% unsecured senior notes.

The estimated annual effective tax rate was 30% for the three months ended March 31, 2005 compared to 32% for the same period in 2004. For both periods, the estimated annual effective tax rate differs from the statutory tax rate of 35% primarily as a result of tax-exempt investment income.

Comprehensive Income (Loss)