Fitch Affirms Markel Corporation's Ratings; Outlook Stable
Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) ratings of Markel Corporation's (NYSE: MKL) seven principal property and casualty insurance subsidiaries. Fitch has also affirmed the following ratings for MKL:
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured notes at 'BBB'.
The Rating Outlook is Stable. A full ratings list is provided at the end of this release.
MKL's rating strengths include pricing and underwriting discipline through market cycles, and expertise in a number of specialty property/casualty insurance products and niche markets.
Operating company capitalization is considered adequate and is supported by very strong holding company cash and invested assets, amounting to $1.1 billion at Sept. 30, 2012. Consolidated GAAP operating leverage of 0.59 times (x) at Sept. 30, 2012 has improved steadily over the last five years and remains within ratings expectations.
Fitch believes that MKL's conservative reserving practices contribute to balance sheet strength. MKL has posted cumulative reserve redundancies (exceeding actuarially calculated point estimates) in each of the last eight full years. Favorable prior year reserve development continues to exceed industry trends and trimmed 16.5 points from the combined ratio through nine months 2012, compared with 17.9 points and 16 points for the full years 2011 and 2010, respectively. Reserves are backed by a high-quality, liquid fixed-income investment portfolio.
Rating concerns are principally related to the challenges posed by competitive market conditions affecting MKL's core specialty business. For the first nine months of 2012, the company reported a combined ratio of 95.9%, compared to 102.1% and 96.5% for the full years 2011 and 2010, respectively.
MKL's business has moderate exposure to catastrophe losses. The combined ratio for nine months 2012, included 0.6 points in catastrophe losses. This compares with an average 3.2 points in catastrophe losses over the five years ending 2011. Fitch believes MKL's losses related to Hurricane Sandy will not be outsized relative to their industry market share of less than 1% and will be an earnings, not a capital, event for the company.
MKL's financial leverage ratio (FLR), which excludes non-recourse secured subsidiary debt and FAS 115, of 27.8% at Sept. 30, 2012, remained within ratings expectations. The pro forma FLR, excluding the planned repayment from holding company cash of $250 million of senior notes due February 2013, was 24.1%.
Debt-servicing capabilities remain ample due to solid operating company maximum dividend capacity and holding company cash position. Share repurchase activity has been modest.
Key ratings triggers that could lead to a downgrade of MKL's ratings include a material deterioration in underwriting or balance sheet strengths, and material underperformance of newly acquired businesses. Fitch's rating rationale anticipates consolidated GAAP operating leverage to remain below 1.0x and FLR to remain below 30%.
Key ratings triggers that could lead to an upgrade of MKL's ratings include continued improvement in operating company capitalization along with GAAP operating EBIT to financing charges consistently above 8.0x, or a decrease in the target for maximum FLR to below 25%.
Fitch has affirmed the following ratings with a Stable Outlook:
--IDR at 'BBB+';
--$250 million 6.8% senior notes due Feb. 15, 2013 at 'BBB';
--$350 million 7.125% senior notes due Sept. 30, 2019 at 'BBB';
--$250 million 5.35% senior notes due June 1, 2021 at 'BBB';
--$350 million 4.9% senior notes due July 1, 2022 'BBB'.
--$200 million 7.35% senior notes due Aug. 15, 2034 at 'BBB'.
Associated International Insurance Co.
Deerfield Insurance Company
Essex Insurance Company
Evanston Insurance Company
Markel American Insurance Company
Markel Insurance Company
Markel International Insurance Company Limited
--Insurer Financial Strength (IFS) at 'A'.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended
Martha M. Butler, CFA, +1-312-368-3191
70 W. Madison Street
Chicago, IL 60602
Associate Director, +44 20 3530-1330
Douglas M. Pawlowski, CFA, +1-312-368-2054
R. Andrew Davidson, CFA, +1-312-368-3144
Brian Bertsch, +1-212-908-0549