S&P Affirms Markel’s ‘BBB’ Ratings; Outlook Negative

August 26, 2010

Standard & Poor’s Ratings Services has affirmed its ‘BBB’ unsolicited counterparty credit rating on Markel Corp. However, S&P said the “outlook on Markel remains negative.”

Credit analyst Taoufik Gharib explained: “The affirmation reflects Markel’s strong competitive position in the excess and surplus market as a specialty underwriter focusing on hard-to-place risks. Markel is one of the leading excess and surplus (E&S) carriers in the U.S., with extensive knowledge and expertise in this market.”

S&P indicated that “within this segment, it has strong underwriting capabilities, many distribution channels, and numerous product offerings (more than 100 product lines). The company writes business on admitted and non-admitted bases. It is well diversified, generating one-third of its business through the London market (on both direct and subscription bases).”

Markel has strong and redundant capital adequacy, as measured by S&P’s risk-adjusted capital model at year-end 2009 and as of June 30, 2010. In addition, the company’s liquidity is strong, with various capital sources.

On the negative side, S&P indicated that “Markel’s operating performance has deteriorated because of soft market conditions and a high expense ratio. Other weaknesses include Markel’s potential to incur adverse development on legacy asbestos and environmental reserves. The company also has an aggressive investment strategy with a great appetite for equities.

“Markel has been disciplined over the past few years by not chasing top-line growth. Its gross premiums written (GPW) declined 14 percent (down 12 percent excluding foreign-currency movements) to $1.91 billion in 2009 because of competitive pressures and the global recession. However, in the first six months of 2010, GPW was up slightly (1.4 percent) to $1 billion, partly because of the acquisition of Canadian managing general agent Elliott Special Risks in late 2009.”

Gharib added: “The outlook is negative, reflecting our view that Markel’s operating performance has weakened because of soft market conditions and its One Markel initiative expenditures that continue to affect its results.”

S&P said that it expects Markel’s competitive position “will remain strong, especially in U.S. E&S and specialty admitted lines of business. GPW will likely grow by 3 percent-5 percent in 2010, partly because of the contribution from Elliott Special Risks acquisition, which could add about $40 million-$50 million to the top line. Overall net retentions will likely stay at about 90 percent.

In addition S&P said that it expects Markel’s underwriting results “will likely break even in 2010. This performance reflects a negative industry-wide pricing trend, catastrophe losses in the first half of the year, and increased costs related to the company’s implementation of its One Markel initiative.

“Factors that could contribute to an outlook revision to stable over the next 12 months would include sustained improvement in the expense ratio as the One Markel cost is fully absorbed, and in the overall operating performance, with an ROR of 13 percent-15 percent.

“Factors that could contribute to a one-notch downgrade would include material adverse reserve developments or investments losses that impede earnings or underwriting losses, with a combined ratio above 100 percent (excluding major catastrophe losses) for the year and compares unfavorably to those of similarly rated peers.”

Source: Standard & Poor’s

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