Credit rating agency A.M. Best Co. affirmed the issuer credit rating (ICR) for Markel Corp. (MKL - Snapshot Report) at “bbb+” as well as the debt ratings on its senior unsecured debt at “bbb+”. The rating agency also affirmed the indicative ratings on the company’s shelf registered securities – preferred securities at “bbb-”, subordinated debt at “bbb” and senior unsecured debt at “bbb+”.
Additionally, A.M. Best affirmed the financial strength rating (FSR) of Markel’s subsidiary – Markel North America Insurance Group (Markel N.A.) – at “A” and its ICR at “a+”. Markel N.A. comprises Associated International Insurance Company, Essex Insurance Company, Evanston Insurance Company, Markel American Insurance Company and Markel Insurance Company.
The credit rating agency also affirmed the FSR and ICR of Markel’s subsidiary FirstComp Insurance Company at “B++” and “bbb+”, respectively, and those of Deerfield Insurance Company at “ A-“ and “a-“. A.M. Best maintains a stable outlook on all the ratings.
The affirmation of Markel N.A.’s ratings were based on its strong adjusted capitalization, regular profits from operations, admirable operating cash flows, leading market position in the excess and surplus lines business as well as ample liquidity and flexibility in financials proffered by the holding company.
While A.M. Best appreciates Markel N.A.’s positives, such as a well-established name among domestic wholesalers and retailers and conservativeness in loss reserve creation, these are partly offset by negatives such as higher expenses and a weak market scenario, which is negatively affecting underwriting results. Moreover, the conservative approach to creating loss reserve not only reduces volatility in earnings and enhances risk-adjusted capital, but also benefits the company since it maintains a higher underwriting leverage than the industry average.
The strong ratings on FirstComp were based on the strategic importance it holds for the group company despite its undiversified business profile, high competition and macroeconomic challenges. The ratings were also driven by sufficiency in risk-based capitalization, strong underwriting trend and favorable outlook for future underwriting performance. Unwavering support – in the form of 50% reinsurance of business written by FirstComp – provided by Markel N.A. and its business associate Evanston Insurance Company, also supports the strong ratings. Further, the ratings of Deerfield were driven by its low level of underwriting leverage and support provided by its holding company.
While the stable outlook indicates low possibility of a revision in the near term, improved operating metrics, enhanced operating environment and steady risk-adjusted capitalization are likely to result in an upward revision. On the other hand, a substantial deterioration in capitalization, adverse impact on underwriting results due to unfavorable claims frequency or severity trends, negative impact of a substantial downturn in equity market on the company’s investment portfolio and capitalization level and an unexpected surge in operating expenses could lead to a ratings downgrade. Moreover, higher-than-expected losses from Hurricane Sandy could adversely affect the ratings.
Last month, A.M. Best placed the ICR of Markel’s peer – Meadowbrook Insurance Group Inc. – as well as the FSR and ICR of Meadowbrook’s subsidiaries under review with negative implications. The action was based on the disclosure by the company that its third-quarter financial results will be unfavorably affected by an upward revision in its net ultimate loss estimates for 2011 and prior accident years.
Markel currently carries a Zacks #3 Rank (short-term Hold), along with a long-term ‘Outperform’ recommendation.