Moody's Ups View on Markel - Analyst Blog

Moody's Investor Service of Moody's Corp. MCO has affirmed the credibility of Markel Corp. MKL, while also upgrading its outlook.The move acknowledges the company's improved operating leverage.

The ratings agency avowed the senior debt rating of “Baa2” for Markel and the financial units of Alterra Capital Holdings Ltd., which was acquired by Markel in May 2013.  Additionally, it reaffirmed the insurance financial strength (IFS) of “A2” for Markel and its operating subsidiaries.

Meanwhile, the outlook on all of the aforementioned ratings were revised to ‘stable' from ‘negative'. Furthermore, Moody's lifted the IFS rating of Markel Bermuda Ltd. to “A2” from “A3”, while the outlook remained stable.

Basis of Ratings

Post one year of acquisition of Alterra, Moody's remains confident of its successful integration as well as decent capital adequacy from its primary subsidiary, Markel Bermuda Ltd. Markel's efforts to break even Alterra's loss reserves, to retain business and improve branding are also bearing fruit now.

Markel's strengths also lie in its diversified product portfolio, moderate catastrophe exposures, disciplined underwriting and proactive reserve management. On the capital front, Markel enjoys decent risk-based capitalization and liquidity with $1.1 billion of cash and short-term investments at Mar 2014-end.

However, Moody's posed concern over Markel's investment portfolio, which is highly exposed to volatile equity markets. As well, the company's financial leverage (26% at Mar 2014-end) is higher in the peer group. Markel also faces intense competition and exposure to businesses that are volatile in nature, and specific losses for which may not be known immediately, while claims may reportedly be significant. These factors add to operating and financial risks.

Nevertheless, the ratings agency opines that Markel has the potential to diminish its risk exposures through strong underwriting and by shifting away from businesses that no longer pay the value for the undertaken risk. Going ahead, Moody's expects Markel to maintain pre-tax interest coverage of 4x−6x, adjusted financial leverage within 20−30% and return on capital of about 8%, among other metrics.

Both Markel and Moody's carry a Zacks Rank #3 (Hold). However, some better-ranked insurers include HCI Group Inc. HCI and Hallmark Financial Services Inc. HALL, both of which sporta Zacks Rank #1 (Strong Buy).

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