S&P Raises Markel’s Ratings to ‘BBB’ From ‘BBB-‘; Outlook Stable

Standard & Poor’s Ratings Services has raised its counterparty credit rating on Markel Corp. to ‘BBB’ from ‘BBB-‘ and affirmed a stable. S&P said: “The upgrade is based on Markel’s strong competitive position in excess and surplus (E&S) and specialty admitted lines of business, strong operating performance led by Markel North America (MNA), significant deleveraging of the balance sheet, and improved enterprise risk management, specifically in catastrophe risk management.

“Partially offsetting these strengths are Markel’s international (MINT) operations’ performance (which is good, but not as strong as its North American operations), the potential for adverse reserve development on legacy reserves, and an aggressive investment strategy.”

Credit analyst Taoufik Gharib added: “Markel has a strong competitive position as a specialty underwriter focusing on hard-to-place risks and benefiting from extensive knowledge and expertise within various specialty niche markets. “Markel is one of the leading E&S carriers in the U.S. and has a strong track record in this market. Within this segment, it has strong underwriting capabilities, many distribution channels, and numerous product offerings.”

S&P reaffirmed Markel’s strength in the E&S market, adding that, “the smaller specialty admitted segment has also performed strongly and complements the E&S operations. Markel has significantly deleveraged its balance sheet, and continues to deliver strong earnings.

“There have been significant improvements in underwriting and controls in the international operations. Markel’s consolidated reserve position is adequate, though there is the potential for Markel to incur adverse reserve development on legacy reserves.”

S&P said the “stable outlook reflects our expectations that Markel’s earnings will continue to be strong in 2008, with flat-to-declining premium growth and supported by improved results in MINT. We expect Markel’s consolidated GAAP ROR to be 13 percent-15 percent, and the combined ratio is likely to deteriorate to around 95 percent as a result of price softening.

“With improved property catastrophe risk management and recent exposure reductions to a single event after hurricanes Katrina, Rita, and Wilma in 2005, we expect any reduction to Markel’s capital following a large natural catastrophe to be modest. In 2008, we expect debt-to-capital leverage to stay in the range of 20 percent-25 percent, and interest coverage to remain at more than 7x. The risk-adjusted capitalization is expected to remain strong.”

In addition, S&P indicated that it believes a “positive outlook in the near future is unlikely. Alternatively, if Markel’s financial position were to weaken because of one of the following occurrences, we could revise the outlook to negative: Substantial adverse reserve development leading to a material and surprising loss within MINT, if the company were to suffer significant property catastrophe losses outside its stated tolerance, or if it incurs a large investment loss that significantly weakens its capital base.”

Source: Standard & Poor’s – www.standardandpoors.com