Fitch Upgrades Markel Corporation's Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has upgraded the Insurer Financial Strength (IFS) ratings of Markel Corporation's (NYSE: MKL) principal property and casualty insurance (P/C) subsidiaries to 'A+' from 'A'. Fitch has also upgraded the following ratings for MKL:

--Issuer Default Rating (IDR) to 'A-' from 'BBB+';

--Senior unsecured notes to 'BBB+' from 'BBB'.

The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.

KEY RATING DRIVERS

The rating upgrades reflect MKL's very strong balance sheet profile as well as its strong and improved business and operating risk profile following the 2013 acquisition of Alterra Capital Holdings Limited. The transaction resulted in a step up in scale into a larger market position, particularly in the U.S. and London market business platforms.

MKL's continued trend of improved operating performance and stronger credit metrics has persisted in the last three years on an absolute basis and relative to peers. Except for the interest coverage rating trigger established in the last review, all of Fitch's prior upgrade triggers have been met and surpassed in the current year and on a run rate basis.

Operating EBIT improved by $99 million to $512 million in 2014 but resulted in still moderate coverage of 4.4x. However, operating EBIT is expected to continue to grow, and resulting interest coverage to improve, as the company achieves higher margins through expense synergies and as MKL specialty market expertise is incorporated into the larger business platform.

Further adding to Fitch's belief that underwriting profits and operating EBIT coverage will be maintained at higher levels going forward are MKL's reserving practices that contribute to both balance sheet strength as well as quality of earnings. All legacy Alterra product offerings carry higher current accident-year (AY) loss ratios due to higher attritional loss ratios, as well as applying MKL's more conservative loss reserve philosophy. While MKL's overall loss ratios are expected to remain somewhat elevated in the near term in order to build Alterra's reserves until they are consistent with MKL's level of confidence, completion of that process will result in calendar-year (CY) and AY combined ratios that Fitch believes are sustainable at higher levels.

MKL's very strong balance sheet, including capitalization and reserves, compare with Fitch's 'AA' category median sector credit factor guideline (SCF). Consolidated GAAP operating leverage and net leverage were 0.54x and 2.32x, respectively, at year-end 2014. The score for U.S. subsidiaries on Fitch's Prism capital model was 'very strong' at year-end 2013 and Fitch expects a similar score for year-end 2014. UK and Bermuda operating company capital adequacy is consistent with the U.S.

MKL's income statement metrics compare to 'A' median SCF guidelines. The combined ratio of 95.4% in 2014 improved from 96.8% in 2013 and for the first three months of 2015, the combined ratio was 83.5%. Favorable prior-year development continues to exceed industry trends, trimming 11.3 points and 12.7 points from the combined ratio for 2014 and 2013, respectively, and 17.7 points for the first three months of 2015. The first quarter improvement was due in part to a non-recurring reinsurance transaction.

Fitch believes MKL will continue to maintain pricing and underwriting discipline. This was evidenced by a 9% decline in net premium volume for the three months ending March 31, 2015, from the prior year, driven by a 27% decline in Reinsurance net premium volume due to MKL's decision to exit UK motor reinsurance and materially scale back its quota share percentage on U.S. non-standard auto reinsurance.

MKL's financial leverage ratio (FLR) was 22.1% at March 31, 2015. GAAP operating EBIT coverage was 4.4x for 2014, improved to 9.0x for the first three months of 2015, and is augmented by holding company cash and liquid assets that covers projected 2015 debt service by more than 12x, as well as solid operating company maximum dividend capacity. Share repurchase activity has been minimal.

RATING SENSITIVITIES

Key rating triggers that could lead to an upgrade of MKL's ratings include very strong operating performance with a combined ratio consistently below 95%, GAAP operating EBIT coverage consistently at or above 10x, maintenance of GAAP net leverage below 2.5x, FLR maintained below 20% and further increases in operating scale.

Key rating triggers that could lead to a downgrade of MKL's ratings include failure to reach a sustainable operating EBIT coverage ratio of 5.0x over the next two years, any unexpected adverse developments from recent acquisitions, including a goodwill write down or a material deterioration in underwriting performance, and a decline in operating company shareholders' equity or surplus of 20% or greater.

Fitch has upgraded the following ratings:

Markel Corporation

--IDR to 'A-' from 'BBB+';

--7.125% senior notes due Sept. 30, 2019 to 'BBB+' from 'BBB';

--5.35% senior notes due June 1, 2021 to 'BBB+' from 'BBB';

--4.9% senior notes due July 1, 2022 to 'BBB+' from 'BBB';

--3.625% senior notes due March 30, 2023 to 'BBB+' from 'BBB';

--7.35% senior notes due Aug. 15, 2034 to 'BBB+' from 'BBB';

--5% senior notes due March 30, 2043 to 'BBB+' from 'BBB'.

Alterra Capital Holdings Limited

--IDR to 'A-' from 'BBB+'.

Alterra Finance LLC

--IDR to 'A-' from 'BBB+';

--6.25% senior notes due Sept. 30, 2020 to 'BBB+' from 'BBB'.

Alterra USA Holdings Limited

--IDR to 'A-' from 'BBB+';

--7.2% notes due April 14, 2017 to 'BBB+' from 'BBB'.

Alterra America Insurance Company

Alterra Excess & Surplus Insurance Company

Alterra Reinsurance USA Inc.

Associated International Insurance Co.

Deerfield Insurance Company

Essentia Insurance Company

Essex Insurance Company

Evanston Insurance Company

Markel American Insurance Company

Markel Bermuda Limited

Markel Europe plc

Markel Insurance Company

Markel International Insurance Company Limited

--IFS to 'A+' from 'A'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 4, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984638

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Martha M. Butler, CFA
Senior Director
+1-312-368-3191
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas M. Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Tertiary Analyst
Anna Bender
Associate Director
+44-203-530-1671
or
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1-312-368-3211
or
Media Relations
Alyssa Castelli
+1-212-908-0540
New York
[email protected]
or
Elizabeth Fogerty
+1-212-908-0526
New York
[email protected]

Source: Fitch Ratings

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