Best Affirms Markel and Affiliates Ratings; Outlooks Stable

March 25, 2014

A.M. Best 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, as well as the FSR of ‘B++’ (Good) and the ICR of “bbb+” of FirstComp Insurance Company, based in Omaha, Nebraska.

Best has also affirmed the FSR of ‘A-‘ (Excellent) and the ICR of “a-” of Deerfield Insurance Company, based in Illinois and the ICR of “bbb+” and all debt ratings of the publicly traded parent, Markel Corporation (MKL), based in Glen Allen, Virginia.

In addition Best has affirmed the FSR of ‘A’ (Excellent) and the ICRs of “a” of Markel Bermuda Limited, formerly Alterra Bermuda Limited, and its affiliated operating companies. Markel Bermuda was acquired by MKL in May 2013.

Best has also affirmed the ICR of “bbb” of Markel Bermuda’s immediate parent company, Alterra Capital Holdings Limited, and all debt ratings of Alterra, Alterra USA Holdings Limited and Alterra Finance, LLC (both domiciled in Delaware). Best concurrently withdrew the debt rating of “bb+” on the preferred securities of Alterra Capital Trust I, as this entity was dissolved.

All the above named companies are domiciled in Bermuda, unless otherwise specified. The outlook for all ratings is stable.

In a separate announcement Best reported that it has affirmed the financial strength ratings of ‘A’ (Excellent) and issuer credit ratings of “a+” of UK-based Markel International (MIICL) and Lloyd’s Syndicate 3000. The outlook for MIICL’s ratings remains stable, and the outlook for syndicate 3000’s ratings remains positive.

These rating affirmations “follow MKL’s fourth quarter earnings announcement and consider the integration and continued assimilation of Alterra and its operating companies into MKL as well as the benefits to be garnered from this combination in terms of enhanced scale, global reach, investment float, brand, broader distribution and Markel’s solidified leadership position in the U.S. wholesale and specialty commercial marketplace,” Best explained.

“These benefits also consider the organization’s enhanced diversification attributes and its ability to participate using a larger balance sheet.” With assimilation efforts still in progress, Best said it would “continue to maintain a dialogue with management to review and discuss future plans and the ultimate alignment of existing entities.”

Best also noted that the ratings of Markel and its members “reflect the specialty niche markets and businesses that each of these entities serve and their defined roles within the group.

“Markel also benefits from its relationships, particularly with wholesalers and retailers, and its leadership position among excess and surplus lines insurers in the United States. The ability to customize and create solutions for its insureds is a key component to Markel’s success over the years.”

In addition Best indicated that the group “benefits from its ability to seek out and find new specialty niche opportunities in the admitted market as demonstrated by some of its more recent acquisitions and partnerships.”

Best added: “These ratings acknowledge Markel’s supportive risk-adjusted capitalization, excellent operating cash flow, adequate liquidity and the financial flexibility afforded to it through MKL. Despite Markel’s high loss reserve leverage, its loss reserves are generally viewed as conservative, which has served the group well in terms of favorable reserve development.”

Best said its ratings of FirstComp “are afforded partial rating enhancement—given the explicit financial support provided and its strategic role within the group—these ratings also take into consideration the company’s relatively narrow business profile, competitive market pressures and the challenges related to today’s current macroeconomic factors.

“The ratings of FirstComp also consider its supportive risk-adjusted capitalization, as well as its favorable historical and prospective underwriting performance. Explicit support is provided by Markel’s affiliate, Evanston Insurance Company, through quota share reinsurance, which covers 50 percent of all business written on and after November 1, 2010. FirstComp is 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 said its ratings for Deerfield “also recognize its niche role within the group and are afforded partial rating enhancement through the implied support of Markel.

“The ratings of Markel Bermuda and its subsidiaries reflect the niche markets and businesses that each of these entities serve and their current roles within Markel Bermuda and MKL.”

Best’s report added that while it “acknowledges the inherent benefits from the merger of Alterra and MKL—and that the combination should ultimately prove to be beneficial—the ratings of Markel Bermuda receive no rating enhancement until the fruits of management’s integration/assimilation efforts are solidified.

“Aside from this, Markel Bermuda’s ratings reflect its broad acceptance among the broker market, supportive risk-adjusted capitalization and the advantages of being part of a larger organization. These attributes are somewhat offset by legacy reserves associated with U.S. casualty business, soft reinsurance pricing due to the emergence of new alternative capital flowing into the reinsurance space, low new money yields and the recent reserve strengthening actions taken in 2013.

“Post-merger, MKL’s financial leverage remains supportive of its current ratings. MKL’s total debt (preferred stock) -to-capital ratio as of December 31, 2013 was 25.3 percent, increasing to 30.5 percent when debt is measured relative to adjusted tangible capital. Parent holding company cash flow, liquidity and debt servicing capabilities are all supportive of the ratings.

In conclusion Best said: “Drivers that could lead to a downgrading of the ratings and/or a revision of the outlook to negative include unfavorable operating profitability trends, outsized catastrophe or investment losses in a given quarter or year, material adverse loss reserve development and/or a material decline in the organization’s risk-adjusted capital.

“Alternatively, triggers that could lead to an upgrading of the ratings include continued favorable operating profitability, coupled with maintenance of a strong risk-adjusted capital level and/or changes to the explicit or implicit support from MKL and its members.

Best summarized the entities covered by its analysis as follows:

The FSR of ‘A’ (Excellent) and ICRs of “a+” have been affirmed for the following members of Markel North America Insurance Group:

Associated International Insurance Company

Essex Insurance Company

Essentia Insurance Company

Evanston Insurance Company

Markel American Insurance Company

Markel Insurance Company

The FSR of ‘A’ (Excellent) and ICRs of “a” have been affirmed for Markel Bermuda Limited and its following operating affiliates:

Markel Europe plc

Alterra America Insurance Company

Alterra Excess & Surplus Insurance Company

Alterra Reinsurance USA Inc.

The following debt ratings have been affirmed:

Markel Corporation—

— “bbb+” on $250 million, 5.35 percent senior unsecured notes, due 2021

— “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

— “bbb+” on $250 million, 3.625 percent senior unsecured notes, due 2023

— “bbb+” on $250 million, 5.0 percent senior unsecured notes, due 2043

Alterra USA Holdings Limited (guaranteed by Alterra Capital Holdings Limited)—

— “bbb” on $100 million, 7.2 percent senior unsecured notes, due 2017

Alterra Finance, LLC (guaranteed by Alterra Capital Holdings Limited)—

— “bbb” on $350 million, 6.25 percent senior unsecured notes, due 2020

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

Alterra Capital Holdings Limited—

— “bb+” on preferred securities

— “bbb-” on subordinated debt

— “bbb” on senior unsecured debt

Alterra USA Holdings Limited (guaranteed by Alterra Capital Holdings Limited)—

— “bbb-” on subordinated debt

— “bbb” on senior secured debt

Source: A.M. Best

Topics USA Carriers Trends Excess Surplus Reinsurance Bermuda

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