EX-99.1 2 mkl-proformafs.htm EX-99.1 MKL - Pro Forma FS 03.31.13
Exhibit 99.1

PRELIMINARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

On December 18, 2012, Markel Corporation (Markel or the Company) entered into a definitive agreement and plan of merger with Alterra Capital Holdings Limited (Alterra), pursuant to which Alterra merged with one of the Company's wholly-owned subsidiaries (the Alterra Merger Agreement). The Company completed the transaction on May 1, 2013 (the Acquisition Date). The following preliminary unaudited pro forma consolidated financial statements are based on the separate historical financial statements of Markel and Alterra after giving effect to the acquisition of Alterra by Markel and the issuance of Markel common stock in connection therewith, and the assumptions and adjustments described in the accompanying notes to the preliminary unaudited pro forma consolidated financial statements. The preliminary unaudited pro forma consolidated balance sheet as of March 31, 2013 is presented as if the transaction had occurred on March 31, 2013. The preliminary unaudited pro forma consolidated income statements for the three months ended March 31, 2013 and for the year ended December 31, 2012 are presented as if the transaction had occurred on January 1, 2012. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the transaction and, with respect to the income statement only, expected to have a continuing impact on consolidated results of operations.

The preparation of the preliminary unaudited pro forma consolidated financial statements and related adjustments required management to make certain assumptions and estimates. The preliminary unaudited pro forma consolidated financial statements should be read together with:
•
the accompanying notes to the preliminary unaudited pro forma consolidated financial statements;
•
Markel's separate audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2012, included in Markel's Annual Report on Form 10-K for the year ended December 31, 2012;
•
Alterra's separate audited historical consolidated financial statements and accompanying notes as of and for the year ended December 31, 2012, included in Alterra's Annual Report on Form 10-K for the year ended December 31, 2012;
•
Markel's separate unaudited historical consolidated financial statements and accompanying notes as of and for the three months ended March 31, 2013 included in Markel's Quarterly Report on Form 10-Q for the three months ended March 31, 2013; and
•
Alterra's separate unaudited historical consolidated financial statements and accompanying notes as of and for the three months ended March 31, 2013 included in Alterra's Quarterly Report on Form 10-Q for the three months ended March 31, 2013.
    
The preliminary unaudited pro forma consolidated financial information has been prepared using the acquisition method of accounting for business combinations under U.S. generally accepted accounting principles (U.S. GAAP). Markel is the acquirer for accounting purposes.
    
The preliminary unaudited pro forma adjustments, including the allocation of the acquisition consideration, have been made solely for the purpose of providing preliminary unaudited pro forma consolidated financial information.
    
A final determination of the acquisition consideration and fair values of Alterra's assets and liabilities will be based on the actual net tangible and intangible assets of Alterra that existed on May 1, 2013, the date the transaction was completed.

Amounts preliminarily allocated to goodwill and intangible assets could change significantly from those allocations used in the preliminary unaudited pro forma consolidated financial statements presented herein and could result in a material change in amortization of acquired intangible assets.
    
The adjustments that will be recorded as of the completion of the acquisition may differ materially from the information presented in these preliminary unaudited pro forma consolidated financial statements as a result of changes in estimates, assumptions, valuations, and tax studies which have not progressed to a stage where there is sufficient information to make a definitive allocation of acquisition consideration.

The preliminary unaudited pro forma consolidated financial statements do not include the effects of the costs associated with any restructuring or integration activities resulting from the transaction, as they are nonrecurring in nature.

1


The preliminary unaudited pro forma consolidated financial statements are provided for informational purposes only. Additionally, the preliminary unaudited pro forma consolidated financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the transaction been completed as of the dates indicated or that may be achieved in the future. Lastly, the preliminary unaudited pro forma consolidated financial statements do not give consideration to the impact of possible revenue enhancements, expense efficiencies, synergies or asset dispositions that may result from the transaction.

2

PRELIMINARY UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)

 
March 31, 2013
 
Markel
 
Alterra
 
Adjustments
 
Total
ASSETS
 
 
 
 
 
 
 
Fixed maturities (available for sale)
$
4,809,825

 
$
5,068,520

 
$
1,395,262

(a) 
$
11,273,607

Fixed maturities (trading)
—

 
406,378

 
(406,378
)
(a) 
—

Fixed maturities (held to maturity)
—

 
818,656

 
(818,656
)
(a) 
—

Equity securities
2,708,449

 
—

 
—

 
2,708,449

Short-term investments
1,380,318

 
—

 
24,744

(a) 
1,405,062

Equity method investments
48,595

 
116,294

 
271,127

(b) 
436,016

Other investments
—

 
290,861

 
(290,861
)
(b) 
—

Total Investments
8,947,187

 
6,700,709

 
175,238

 
15,823,134

Cash and cash equivalents
779,859

 
958,108

 
(986,270
)
(c) 
751,697

Restricted cash and cash equivalents
119,216

 
340,329

 
—

 
459,545

Receivables
511,073

 
853,446

 
—

 
1,364,519

Reinsurance recoverable on unpaid losses
721,813

 
1,304,103

 
(44,938
)
(d) 
1,980,978

Reinsurance recoverable on paid losses
52,679

 
—

 
44,938

(d) 
97,617

Deferred policy acquisition costs
178,682

 
169,239

 
(169,239
)
(e) 
178,682

Prepaid reinsurance premiums
114,175

 
301,437

 
—

 
415,612

Goodwill
674,918

 
19,173

 
407,759

(f) 
1,101,850

Intangible assets
400,007

 
35,351

 
152,149

(g) 
587,507

Other assets
618,382

 
152,277

 
(6,712
)
(h) 
763,947

Total Assets
$
13,117,991

 
$
10,834,172

 
$
(427,075
)
 
$
23,525,088

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Unpaid losses and loss adjustment expenses
$
5,286,068

 
$
4,686,705

 
$
120,784

(i) 
$
10,093,557

Unearned premiums
1,094,312

 
1,187,030

 
(166,382
)
(j) 
2,114,960

Payables to insurance and reinsurance companies
134,405

 
197,637

 
—

 
332,042

Senior long-term debt and other debt
1,732,250

 
440,538

 
67,662

(k) 
2,240,450

Other liabilities
640,034

 
322,305

 
(221,154
)
(l) 
741,185

Life and annuity benefits
—

 
1,124,600

 
329,557

(m) 
1,454,157

Total Liabilities
8,887,069

 
7,958,815

 
130,467

 
16,976,351

Redeemable noncontrolling interests
74,501

 
—

 
—

 
74,501

Commitments and contingencies
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
 
 
Common stock
911,330

 
96,192

 
2,233,050

(n) 
3,240,572

Retained earnings
2,160,060

 
862,151

 
(873,578
)
(o) 
2,148,633

Accumulated other comprehensive income
1,080,119

 
192,753

 
(192,753
)
(p) 
1,080,119

Additional paid-in capital
—

 
1,724,261

 
(1,724,261
)
(q) 
—

Total Shareholders' Equity
4,151,509

 
2,875,357

 
(557,542
)
 
6,469,324

Noncontrolling interests
4,912

 
—

 
—

 
4,912

Total Equity
4,156,421

 
2,875,357

 
(557,542
)
 
6,474,236

Total Liabilities and Equity
$
13,117,991

 
$
10,834,172

 
$
(427,075
)
 
$
23,525,088


See accompanying notes to the preliminary unaudited pro forma consolidated financial statements.


3

PRELIMINARY UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(dollars in thousands, except per share data)

 
Three Months Ended March 31, 2013
 
Markel
 
Alterra
 
Adjustments
 
Total
OPERATING REVENUES
 
 
 
 
 
 
 
Earned premiums
$
564,587

 
$
345,261

 
$
—

 
$
909,848

Net investment income
64,617

 
49,099

 
(1,867
)
(r) 
111,849

Other-than-temporary impairment losses
—

 
(369
)
 
—

 
(369
)
Other-than-temporary impairment losses recognized in other comprehensive income
—

 
217

 
—

 
217

Other-than-temporary impairment losses recognized in net income
—

 
(152
)
 
—

 
(152
)
Net realized and unrealized investment gains, excluding other-than-temporary impairment losses
17,917

 
40,395

 
804

(s) 
59,116

Net realized investment gains
17,917

 
40,243

 
804

 
58,964

Other revenues
172,743

 
6,342

 
—

 
179,085

Total Operating Revenues
819,864

 
440,945

 
(1,063
)
 
1,259,746

OPERATING EXPENSES
 
 
 
 
 
 
 
Losses and loss adjustment expenses
287,896

 
203,557

 
(1,261
)
(t) 
490,192

Underwriting, acquisition and insurance expenses
228,673

 
—

 
114,590

(u) 
343,263

Acquisition costs
—

 
56,773

 
(56,773
)
(u) 
—

General and administrative expenses
—

 
57,817

 
(57,817
)
(u) 
—

Amortization of intangible assets
9,615

 
—

 
2,167

(v) 
11,782

Other expenses
152,317

 
14,763

 
(8,353
)
(w) 
158,727

Total Operating Expenses
678,501

 
332,910

 
(7,447
)
 
1,003,964

Operating Income
141,363

 
108,035

 
6,384

 
255,782

Interest expense
23,574

 
8,132

 
(1,731
)
(x) 
29,975

Income Before Income Taxes
117,789

 
99,903

 
8,115

 
225,807

Income tax expense
28,526

 
719

 
37,060

(y) 
66,305

Net Income
$
89,263

 
$
99,184

 
$
(28,945
)
 
$
159,502

Net income attributable to noncontrolling interests
361

 
—

 
—

 
361

Net Income to Shareholders
$
88,902

 
$
99,184

 
$
(28,945
)
 
$
159,141

NET INCOME PER SHARE
 
 
 
 
 
 
 
Basic
$
9.53

 
$
1.04

 
n/m

 
$
11.55

Diluted
$
9.50

 
$
0.99

 
n/m

 
$
11.50


n/m - not meaningful

See accompanying notes to the preliminary unaudited pro forma consolidated financial statements.


4

PRELIMINARY UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(dollars in thousands, except per share data)

 
Year Ended December 31, 2012
 
Markel
 
Alterra
 
Adjustments
 
Total
OPERATING REVENUES
 
 
 
 
 
 
 
Earned premiums
$
2,147,128

 
$
1,362,706

 
$
—

 
$
3,509,834

Net investment income
282,107

 
218,964

 
(10,769
)
(r) 
490,302

Other-than-temporary impairment losses
(12,078
)
 
(9,552
)
 
—

 
(21,630
)
Other-than-temporary impairment losses recognized in other comprehensive income
—

 
2,644

 
—

 
2,644

Other-than-temporary impairment losses recognized in net income
(12,078
)
 
(6,908
)
 
—

 
(18,986
)
Net realized and unrealized investment gains, excluding other-than-temporary impairment losses
43,671

 
70,886

 
(3,830
)
(s) 
110,727

Net realized investment gains
31,593

 
63,978

 
(3,830
)
 
91,741

Other revenues
539,284

 
12,818

 
—

 
552,102

Total Operating Revenues
3,000,112

 
1,658,466

 
(14,599
)
 
4,643,979

OPERATING EXPENSES
 
 
 
 
 
 
 
Losses and loss adjustment expenses
1,154,068

 
926,445

 
1,887

(t) 
2,082,400

Underwriting, acquisition and insurance expenses
929,472

 
—

 
481,356

(u) 
1,410,828

Acquisition costs
—

 
250,097

 
(250,097
)
(u) 
—

General and administrative expenses
—

 
231,259

 
(231,259
)
(u) 
—

Amortization of intangible assets
33,512

 
—

 
8,669

(v) 
42,181

Other expenses
478,248

 
59,330

 
(27,338
)
(w) 
510,240

Total Operating Expenses
2,595,300

 
1,467,131

 
(16,782
)
 
4,045,649

Operating Income
404,812

 
191,335

 
2,183

 
598,330

Interest expense
92,762

 
35,644

 
(6,718
)
(x) 
121,688

Income Before Income Taxes
312,050

 
155,691

 
8,901

 
476,642

Income tax expense
53,802

 
11,885

 
21,121

(y) 
86,808

Net Income
$
258,248

 
$
143,806

 
$
(12,220
)
 
$
389,834

Net income attributable to noncontrolling interests
4,863

 
—

 
—

 
4,863

Net Income to Shareholders
$
253,385

 
$
143,806

 
$
(12,220
)
 
$
384,971

NET INCOME PER SHARE
 
 
 
 
 
 
 
Basic
$
25.96

 
$
1.47

 
n/m

 
$
27.22

Diluted
$
25.89

 
$
1.43

 
n/m

 
$
27.10


n/m - not meaningful

See accompanying notes to the preliminary unaudited pro forma consolidated financial statements.


5

NOTES TO PRELIMINARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Pro Forma Presentation
    
The preliminary unaudited pro forma consolidated balance sheet as of March 31, 2013 and the preliminary unaudited pro forma consolidated income statements for the three months ended March 31, 2013 and the year ended December 31, 2012 are based on the historical financial statements of Markel and Alterra after giving effect to the completion of the acquisition of Alterra by Markel and the assumptions and adjustments described in the accompanying notes. They do not reflect cost savings or operating synergies expected to result from the transaction, the costs to achieve these cost savings or operating synergies, or any disposition of assets that may result from the integration of the operations of the two companies.
    
The transaction will be accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (ASC) 805, Business Combinations, with Markel as the acquiring entity. In business combination transactions in which the consideration given is not in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement of the acquisition consideration is based on the fair value of the consideration given or the fair value of the assets (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable.
    
Under ASC 805, all of the Alterra assets acquired and liabilities assumed in this business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. Changes in deferred tax asset valuation allowances and income tax uncertainties, if any, after the acquisition date will generally affect income tax expense.
    
The preliminary unaudited pro forma information is presented solely for informational purposes and is not necessarily indicative of the consolidated results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company. Certain amounts have been reclassified to conform to the current presentation, including the reclassification of underwriting results for Alterra's life and annuity reinsurance business into other revenues and other expenses.

2. Preliminary Acquisition Consideration

On December 18, 2012, Markel and Alterra entered into the Alterra Merger Agreement. The purchase consideration to Alterra equity holders included approximately 4.4 million shares of Markel common stock and approximately $1.0 billion of cash. At the closing (as defined in the Alterra Merger Agreement) each outstanding Alterra common share (other than any restricted shares that did not vest in connection with the transaction) were converted into the right to receive 0.04315 shares of Markel common stock and $10.00 in cash (Merger Consideration). Under the Alterra Merger Agreement the 1.7 million stock options outstanding under Alterra's equity incentive plans were exchanged for Markel stock options at an exchange ratio of 0.06252 (the Incentive Award Exchange Ratio). Each outstanding Alterra restricted stock unit and restricted common share was converted into a Markel restricted stock unit or restricted stock based upon the Incentive Award Exchange Ratio. Each outstanding Alterra warrant was converted into the right to receive the Merger Consideration.
    
The share price used in determining the preliminary acquisition consideration was based upon the value of shares of Markel common stock on April 30, 2013 and Alterra common shares and equity awards outstanding as of March 31, 2013. The preliminary acquisition consideration also includes the fair value of Alterra restricted stock and restricted stock units, options, and warrants that are vested and either exercised or converted as of the closing of the transaction.


6

The preliminary acquisition consideration is calculated as follows:

Calculation of Acquisition Consideration
(dollars and shares in thousands, except per share data)
 
 
Alterra common shares outstanding as of March 31, 2013 (including the dilutive effect of warrants)
 
98,627

Exchange ratio per the Alterra Merger Agreement
 
0.04315

Markel share issuance to Alterra shareholders
 
4,256

Shares of Alterra restricted stock and restricted stock units outstanding as of March 31, 2013
 
2,543

Incentive Award Exchange Ratio per the Alterra Merger Agreement
 
0.06252

Markel restricted stock and restricted stock unit issuance to Alterra restricted stock and restricted stock unit holders
 
159

Multiplied by Markel's weighted average price per share on April 30, 2013 (1)
 
$
529.59

Markel share, restricted stock, and restricted stock unit issuance consideration, net of taxes
 
$
2,313,681

Alterra common shares outstanding as of March 31, 2013 that would receive cash consideration (including dilutive effect of warrants)
 
98,627

Multiplied by Markel's cash price component, per share
 
$
10.00

Markel cash consideration
 
$
986,270

Estimated fair value of Markel stock option issuance to Alterra stock option holders as of March 31, 2013, net of taxes
 
$
9,430

Unrecognized compensation on unvested restricted stock and restricted stock units
 
$
(22,898
)
Total acquisition consideration
 
$
3,286,483

(1)
The fair value of the shares issued by the Company was calculated as the weighted average price of the Company's stock on April 30, 2013, the day preceding the Acquisition Date.

3. Preliminary Acquisition Consideration Allocation

Under the acquisition method of accounting, the total acquisition consideration is allocated to the acquired tangible and identifiable intangible assets and assumed liabilities of Alterra based on their estimated fair values as of the closing of the transaction. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.

The acquisition consideration is preliminary because the shares of Alterra common stock outstanding and restricted stock and restricted stock units used herein were the number outstanding as of March 31, 2013. The preliminary allocation is based on estimates, assumptions, valuations, and tax studies which have not progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the acquisition consideration allocation reflected in the preliminary unaudited pro forma adjustments will remain preliminary until Markel management determines the final acquisition consideration and the fair values of assets acquired and liabilities assumed. The final determination of the acquisition consideration allocation is anticipated to be completed as soon as practicable and will be based on the value of the Markel weighted average share price at April 30, 2013 of $529.59. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the preliminary unaudited pro forma consolidated financial statements.

7


The total preliminary acquisition consideration is allocated to Alterra's tangible and identifiable intangible assets and liabilities as of March 31, 2013 based on their preliminary fair values as follows:

Preliminary Acquisition Consideration Allocation
(dollars in thousands)
March 31, 2013
ASSETS
 
Investments
$
6,875,947

Cash and cash equivalents
958,108

Restricted cash and cash equivalents
340,329

Receivables
853,446

Reinsurance recoverable on unpaid losses
1,259,165

Reinsurance recoverable on paid losses
44,938

Prepaid reinsurance premiums
301,437

Other assets
381,090

LIABILITIES
 
Unpaid losses and loss adjustment expenses
$
4,807,489

Life and annuity benefits
1,454,157

Unearned premiums
1,020,648

Payables to insurance and reinsurance companies
197,637

Senior long-term debt
508,200

Other liabilities
354,278

Net assets
$
2,672,051

Goodwill
426,932

Intangible assets
187,500

Acquisition Consideration
$
3,286,483


Approximately $150 million has been preliminarily allocated to amortizable intangible assets acquired. The amortization related to the preliminary fair value of amortizable intangible assets is reflected as a pro forma adjustment to the preliminary unaudited pro forma consolidated financial statements.

8



Identifiable intangible assets.    The preliminary fair values of intangible assets were determined based on the provisions of ASC 805, which defines fair value in accordance with ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The preliminary allocation to intangible assets is as follows:

(dollars in thousands)
March 31, 2013
 
Estimated Useful Life (Years)
Customer relationships
$
113,000

 
18
Broker relationships
18,000

 
18
Technology
18,000

 
10
Trade names
1,000

 
1
Lloyd's syndicate capacity
12,000

 
indefinite
Licenses
25,500

 
indefinite
Total Identified Intangible Assets
$
187,500

 
 
    
Goodwill.  Goodwill represents the excess of the preliminary acquisition consideration over the preliminary fair value of the underlying net tangible and intangible assets. Among the factors that contributed to a purchase price in excess of the fair value of the identifiable net tangible and intangible assets are the skill sets, operations and synergies that can be leveraged to enable the combined company to build a stronger enterprise. In accordance with ASC 350, Intangibles-Goodwill and Other, goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. If management determines that the value of goodwill has become impaired, the combined company will incur a charge to earnings for the amount of the impairment during the period in which the determination is made.

4. Preliminary Unaudited Pro Forma and Acquisition Accounting Adjustments

The preliminary unaudited pro forma financial information is not necessarily indicative of what the financial position and results from operations actually would have been had the transaction been completed at the dates indicated and includes adjustments which are preliminary and may be revised. Such revisions may result in material changes. The financial position shown herein is not necessarily indicative of what the past financial position of the combined company would have been, nor necessarily indicative of the financial position of the post-transaction periods. The preliminary unaudited pro forma financial information does not give consideration to the impact of expense efficiencies, synergies, integration costs, asset dispositions, or other actions that may result from the transaction.

9


    
The following preliminary unaudited pro forma adjustments result from accounting for the transaction, including the determination of fair value of the assets, liabilities, and commitments which Markel, as the acquirer for accounting purposes, will acquire and assume from Alterra. The descriptions related to these preliminary adjustments are as follows:

Balance Sheet
(dollars in thousands)
Increase (decrease) as of March 31, 2013
(a)
Adjustments to fixed maturity securities, available for sale
$
1,395,262

 
To reclassify trading securities to available for sale to conform accounting policies
(406,378
)
 
To reclassify the carrying value of held to maturity securities to available for sale to conform accounting policies
(818,656
)
 
To reclassify fixed maturity securities, available for sale to short term investments to conform accounting policies
24,744

 
To reflect fixed maturity securities, available for sale, at fair value
194,972

(b)
Adjustments to equity method investments
271,127

 
To reclassify hedge funds at fair value to equity method investments to conform accounting policies
290,861

 
     To reflect equity method investments at fair value
(19,734
)
(c)
To reflect cash paid to Alterra's shareholders
(986,270
)
(d)
To reclassify reinsurance recoverable on paid losses to conform presentation
(44,938
)
(e)
To reflect deferred acquisition costs at fair value
(169,239
)
(f)
To reflect goodwill at fair value
407,759

(g)
To reflect intangible assets at fair value
152,149

(h)
Adjustments to other assets
(6,712
)
 
To reclassify Markel's net deferred tax liabilities to other assets
(264,554
)
 
To reflect the deferred tax effects of the acquisition
267,006

 
     To reflect other assets at fair value
(9,164
)
(i)
To reflect unpaid losses and loss adjustment expenses at fair value
120,784

(j)
To reflect unearned premiums at fair value
(166,382
)
(k)
To reflect the Alterra senior notes at fair value
67,662

(l)
Adjustments to other liabilities
(221,154
)
 
To reflect estimated transaction costs, net of taxes, as of the closing date
32,512

 
To reflect other liabilities at fair value
10,888

 
To reclassify Markel's net deferred tax liabilities to other assets
(264,554
)
(m)
To reflect life and annuity benefits at fair value
329,557

(n)
Adjustments to common stock
2,233,050

 
To reflect the elimination of Alterra's common stock
(96,192
)
 
To reflect the issuance of Markel equity instruments
2,329,242

(o)
To reflect estimated transaction costs, net of taxes, and the elimination of Alterra's retained earnings
(873,578
)
(p)
To reflect the elimination of Alterra's accumulated other comprehensive income
(192,753
)
(q)
To reflect the elimination of Alterra's additional paid-in capital
(1,724,261
)

10


 Income Statements
(dollars in thousands)
Increase (decrease) for the
Three Months Ended
March 31, 2013
 
Increase (decrease) for
Year Ended
December 31, 2012
(r)
To amortize the fair value adjustment of fixed maturity securities, available for sale, net of historical amortization
$
(1,867
)
 
$
(10,769
)
(s)
To reclassify unrealized gains in conjunction with the reclassification of fixed maturities, trading to fixed maturities, available for sale
804

 
(3,830
)
(t)
To amortize the fair value adjustment of unpaid losses and loss adjustment expenses to net income, net of historical amortization
(1,261
)
 
1,887

(u)
Adjustments to reclassify underwriting, acquisition and insurance expenses
114,590

 
481,356

 
To reclassify policy acquisition costs to conform accounting presentation
(56,773
)
 
(250,097
)
 
To reclassify general and administrative expenses to conform presentation
(57,817
)
 
(231,259
)
(v)
To amortize the fair value adjustment of intangible assets, net of historical amortization expense
2,167

 
8,669

(w)
Adjustment to other expenses
(8,353
)
 
(27,338
)
 
To amortize the fair value adjustment of life and annuity benefits
(5,679
)
 
(21,232
)
 
To reflect the reversal of the effects of nonrecurring transaction costs
(2,674
)
 
(6,106
)
(x)
To amortize the fair value adjustment of senior notes
(1,731
)
 
(6,718
)
(y)
To reflect income tax expense at the U.S. statutory rate of 35%
37,060

 
21,121



5. Income Taxes

Alterra and Alterra Bermuda Limited are incorporated in Bermuda and under Bermuda law and prior to the acquisition were not taxed on either income or capital gains. Alterra's other consolidated subsidiaries are based in the United States, Ireland, Latin America and the United Kingdom and are subject to the tax laws of those jurisdictions and the jurisdictions in which they operate. As a result of the acquisition, as of May 1, 2013 Alterra and its non-U.S. subsidiaries became controlled foreign corporations or are now treated as U.S. entities in accordance with the Internal Revenue Code and, therefore, are subject to U.S. income tax at a statutory rate of 35%. The acquisition was taxable to U.S. shareholders of Alterra, and Markel elected to treat it as an asset acquisition under section 338(g) of the U.S. Internal Revenue Code of 1986, as amended. The tax impact of the preliminary pro forma adjustments is estimated on each pro forma financial statement based on the applicable tax impact on the entity that is expected to sustain the related pre-tax charge or benefit.



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6. Net Income Per Share    

Preliminary pro forma net income per share for the three months ended March 31, 2013 and for the year ended December 31, 2012 have been calculated using Markel's historic weighted average common shares outstanding plus the common shares assumed to be issued to Alterra shareholders in accordance with the Alterra Merger Agreement as of such dates.
    
The following table sets forth the calculation of basic and diluted preliminary pro forma net income per share for the three months ended March 31, 2013.
 
 
Three Months Ended March 31, 2013
(in thousands, except per share amounts)
Basic
 
Diluted
Preliminary pro forma net income to shareholders
$
159,141

 
$
159,141

Adjustment of Markel redeemable noncontrolling interests
2,886

 
2,886

Adjusted preliminary pro forma net income to shareholders
$
162,027

 
$
162,027

Weighted average common shares outstanding:
 
 
 
Historic Markel
9,636

 
9,636

Historic Markel dilutive potential common shares
—

 
30

Adjusted weighted average common shares outstanding
9,636

 
9,666

Markel share issuance to Alterra shareholders
4,391

 
4,391

Dilutive effect of Markel option, restricted stock and restricted stock unit issuance to Alterra option, restricted stock and restricted stock unit holders
—

 
35

Preliminary pro forma adjusted weighted average common shares outstanding
14,027

 
14,092

Preliminary pro forma net income per share
$
11.55

 
$
11.50


The following table sets forth the calculation of basic and diluted preliminary pro forma net income per share for the year ended December 31, 2012.
 
 
Year Ended December 31, 2012
(in thousands, except per share amounts)
Basic
 
Diluted
Preliminary pro forma net income to shareholders
$
384,971

 
$
384,971

Adjustment of Markel redeemable noncontrolling interests
(3,101
)
 
(3,101
)
Adjusted preliminary pro forma net income to shareholders
$
381,870

 
$
381,870

Weighted average common shares outstanding:
 
 
 
Historic Markel
9,640

 
9,640

Historic Markel dilutive potential common shares
—

 
26

Adjusted weighted average common shares outstanding
9,640

 
9,666

Markel share issuance to Alterra shareholders
4,391

 
4,391

Dilutive effect of Markel option, restricted stock and restricted stock unit issuance to Alterra option, restricted stock and restricted stock unit holders
—

 
35

Preliminary pro forma adjusted weighted average common shares outstanding
14,031

 
14,092

Preliminary pro forma net income per share
$
27.22

 
$
27.10



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