Best Affirms Markel Corp. and U.S. Subs Ratings; Outlook Stable

November 14, 2012

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a+” of the members of the Markel North America Insurance Group. Best also affirmed the FSR of ‘B++’ (Good) and ICR of “bbb+” of Omaha-based FirstComp Insurance Company, as well as the FSR of ‘A’- (Excellent) and ICR of “a-” of Illinois-based Deerfield Insurance Company, and the ICR of “bbb+” and all debt ratings of the publicly traded parent, Markel Corporation (MKL), which is based in Glen Allen, Virginia.

The outlook for all of the ratings is stable. The announcement was issued concurrently with A.M. Best Europe’s affirmation for all of the ratings of Markel International.

The rating affirmations of Markel recognize its “well-established market position as one of the leading excess and surplus lines organizations in the United States, its sustained operating profitability and solid risk-adjusted capitalization,” Best explained. “Additionally, these ratings acknowledge Markel’s excellent operating cash flow, adequate liquidity and the financial flexibility afforded by MKL.”

Best observed, however, that “while Markel continues to benefit from its long-standing reputation among U.S. wholesalers and retailers, Markel’s recent underwriting performance continues to be adversely affected by prevailing soft market conditions as well as increased expenses. Markel has long maintained underwriting leverage higher than the average of the surplus lines composite. However, this is tempered by Markel’s conservative loss reserving practices and the release of prior years’ loss reserves, which has served Markel well in terms of risk adjusted capital and lower earnings volatility.”

The report noted that MKL acquired FirstComp in October 2010; as a result the “ratings recognize its strategic role within the group but also take into consideration its relatively narrow business profile, competitive market pressures and the challenges related to today’s current macroeconomic factors.

“The ratings of FirstComp also consider its adequate risk-adjusted capitalization, favorable historical and prospective underwriting performance and the explicit support provided by Markel and its affiliate, Evanston Insurance Company, through quota share reinsurance, which covers 50 percent of all business written on and after November 1, 2010. FirstComp has become one of the leading providers of workers’ compensation coverage in the United States, specializing in small, main street businesses in underserved rural markets across 28 states.”

Best explained that its ratings for Deerfield “acknowledge its low underwriting leverage and the partial rating enhancement it receives through the implied support of Markel.

“MKL’s financial leverage remains supportive of its current ratings. MKL’s total debt-to-capital ratio as of September 30, 2012 was 28 percent, increasing to 35 percent when debt is measured relative to adjusted tangible capital. Markel’s financial leverage is expected to improve following repayment of the $250 million unsecured senior notes at their maturity on February 15, 2013.”

The report concluded that “potential upward movement in Markel’s ratings could result from improved performance measures and operating conditions as well as sustained risk-adjusted capitalization.

“Downward movement could result from a material decline in its capitalization, negative trends in claim frequency or severity that could materially impair underwriting results, a significant decline in equity capital markets and its impact on the organization’s investment portfolio and capitalization, as well as any unforeseen material increase in operating expenses. Markel’s losses from Hurricane Sandy are unknown at this time and losses that exceed Best’s expectations may unfavorably impact its ratings.”

Best summarized the ratings of the companies affected by its actions as follows:
The FSR of ‘A’ (Excellent) and ICR of “a+” have been affirmed for the following members of Markel North America Insurance Group:
• Associated International Insurance Company • Essex Insurance Company • Evanston Insurance Company • Markel American Insurance Company • Markel Insurance Company

The following debt ratings have been affirmed:
Markel Corporation—
— “bbb+” on $250 million, 5.35 percent senior unsecured notes, due 2021
— “bbb+” on $250 million, 6.80 percent senior unsecured notes, due 2013
— “bbb+” on $350 million, 7.125 percent senior unsecured notes, due 2019
— “bbb+” on $200 million, 7.35 percent senior unsecured notes, due 2034
— “bbb+” on $350 million, 4.90 percent senior unsecured notes, due 2022

The following indicative ratings have been affirmed under the existing shelf registration:
Markel Corporation—
— “bbb-” on preferred securities
— “bbb” on subordinated debt
— “bbb+” on senior unsecured debt

Source: A.M. Best

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