Fitch Affirms Markel Corporation's Ratings; Outlook Stable
Fitch has also affirmed the following ratings for MKL:
--Issuer Default Rating (IDR) at 'A-';
--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 reflects 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.
MKL's continued trend of improved operating performance and stronger credit metrics has persisted on an absolute basis and relative to peers and resulted in a ratings upgrade in May 2015.
For the first nine months of 2015, operating EBIT improved to \\$584 million and resulted in operating EBIT coverage of 6.6x improved from still moderate coverage of 4.4x for the full year 2014. 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.
Adding to Fitch's belief that underwriting profits and operating EBIT coverage will be sustainable at higher levels going forward are MKL's reserving practices, which contribute to both balance sheet strength and earnings quality. 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. 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.
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 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 89.1% for nine months ended Sept. 30, 2015 (9M15), compared to 97.4% for the same period in 2014 and 95.4% for full year 2014. Favorable prior-year development continues to exceed industry trends, trimming 16.0 points, 9.1 points and 11.3 points respectively, from the combined ratio for 9M15, 9M14 and full year 2014, respectively. The improvement was due in part to a first quarter non-recurring reinsurance transaction.
Fitch believes MKL will continue to maintain pricing and underwriting discipline. This was evidenced by an almost 3% decline in net premium volume for the nine months ending Sept. 30, 2015, from the prior year, driven by a 16% 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.
Common shareholders' equity grew to \\$7.7 billion at Sept. 30, 2015, as net income more than offset lower unrealized gains primarily on equity investments, for which MKL has a higher than average allocation. MKL's financial leverage ratio (FLR) was 22.2%. Debt servicing capabilities are augmented by holding company cash and liquid assets that cover projected 2015 debt service by more than 12x. Operating company maximum dividend capacity is solid and 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 surplus or shareholders' equity of 20% or greater.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Markel Corporation
--IDR at 'A-';
--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 'A-'.
Alterra Finance LLC
--IDR at 'A-';
--6.25% senior notes due Sept. 30, 2020 at 'BBB+'.
Alterra USA Holdings Limited
--IDR at 'A-';
--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 Insurance Company
Markel International Insurance Company Limited
--IFS at 'A+'.
The Rating Outlook is Stable.
Fitch has withdrawn the 'A+' IFS rating for Markel Europe plc as the result of the company's merger with the surviving entity, Markel International Insurance Company Limited. Accordingly, Fitch will no longer provide ratings or analytical coverage for Markel Europe plc.
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