Fitch Affirms Markel Corporation's Ratings; Outlook Stable

CHICAGO & LONDON--()--Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) ratings of Markel Corporation's (NYSE: MKL) principal property and casualty insurance (P/C) 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 complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The affirmation recognizes the increase in capital to a sizable level of shareholders' equity and step-up in scale into a larger and more favorable market position, particularly in its U.S. and London Market business platforms, from MKL's acquisition of Alterra Capital Holdings Limited (closed on May 1, 2013). Fitch believes the integration of Alterra thus far has been a relatively smooth process that has maintained a complementary and disciplined approach to risk management.

MKL's rating strengths include pricing and underwriting discipline and expertise in a number of specialty property/casualty insurance products and niche markets. MKL maintains a broad product portfolio of primary insurance and reinsurance. Net premiums written of $3.2 billion in 2013 were 59% direct and facultative placements written by U.S. domiciled subsidiaries, 26% direct and facultative placements written by subsidiaries domiciled outside the U.S. and 15% treaty reinsurance. With its product flexibility, Fitch expects MKL will continue to successfully manage through various market conditions and cycles.

MKL's combined ratio of 96.8% in 2013 improved modestly from 2012 and included $75 million, or 2.3 points for transaction and other acquisition-related costs. MKL reported a combined ratio of 94.6% for the first three months of 2014, with an expense ratio of 37.4%, which compared with an expense ratio of 40.5% for the full year 2013. Over time, Fitch expects the company to achieve higher margins as expense synergies, and MKL's specialty market expertise are incorporated into the larger business platform.

Fitch believes that MKL's conservative reserving practices contribute to balance sheet strength and quality of earnings. MKL has posted cumulative reserve redundancies (exceeding actuarially calculated point estimates) in each of the last ten years. Favorable prior year development continues to exceed industry trends, trimming 12.7 points and 18.6 points from the combined ratio in 2013 and 2012, respectively. No prior year development (favorable or adverse) was recorded for the Alterra's reserves as management plans to build the loss reserves until they are consistent with its confidence level.

Shareholders' equity increased to $6.9 billion at March 31, 2014. GAAP operating leverage and net leverage were conservative at 0.49x and 2.38x, respectively, at year-end 2013. Operating company capital adequacy in the U.S., UK and Bermuda are consistent with the rating category and supported by very strong holding company cash and invested assets of $1.1 billion at March 31, 2014. The score for U.S. subsidiaries on Fitch's Prism capital model was 'strong' at year-end 2012.

MKL's financial leverage ratio (FLR) was 24.1% at year-end 2013. Debt-servicing capabilities remain ample with holding company cash that covers projected 2014 debt service by almost 11x as well as solid operating company maximum dividend capacity. Share repurchase activity has been modest.

RATING SENSITIVITIES

Key rating triggers that could lead to an upgrade of MKL's ratings include further seasoning of the acquisition while maintaining a combined ratio below 98%, GAAP net leverage below 2.75x, GAAP operating interest coverage of 5x or better, holding company cash and invested assets of at least $1 billion; or a decrease in the target for maximum FLR to below 25%.

Key rating triggers that could lead to a downgrade of MKL's ratings include a sustained material deterioration in underwriting, a sustained decline in operating company capitalization of 20% or greater, or an increase in the target for maximum FLR to above 30%.

Fitch affirms the following ratings with a Stable Outlook:

Markel Corporation

--IDR at 'BBB+';

--7.125% senior notes due Sept. 30, 2019 at 'BBB';

--5.35% senior notes due June 1, 2021 at 'BBB';

--4.9% senior notes due July 1, 2022 at 'BBB'.

--3.625% senior notes due March 30, 2023 at 'BBB';

--7.35% senior notes due Aug. 15, 2034 at 'BBB'.

--5% senior notes due March 30, 2043 at 'BBB'.

Alterra Capital Holdings Limited

--IDR at 'BBB+'.

Alterra Finance LLC

--IDR at 'BBB+';

--6.25% senior notes due Sept. 30, 2020 at 'BBB'.

Alterra USA Holdings Limited

--IDR at 'BBB+';

--7.2% notes due April 14, 2017 at '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 at 'A'.

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

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830143

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Contacts

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
R. Andrew Davidson, CFA
Senior Director
+1-312-368-3144
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

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
R. Andrew Davidson, CFA
Senior Director
+1-312-368-3144
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com