TEXT-S&P affirms Markel Corp. at 'BBB', outlook stable

Wed Dec 19, 2012 4:39pm EST

Overview
     -- Markel Corp. intends to acquire Alterra Capital Holdings Ltd.
 
     -- We are affirming our 'BBB' counterparty credit rating on Markel.
     -- Although the acquisition may pose integration risk to Markel, we 
believe senior management can handle the process successfully.

Rating Action
On Dec. 19, 2012, Standard & Poor's Ratings Services affirmed its 'BBB' 
long-term counterparty credit rating on Markel Corp. The outlook is stable.

Rationale
The rating on Markel Corp. incorporates the planned acquisition of Alterra and 
reflects the proposed entity's strong competitive position and scale in its 
key primary specialty insurance segments, its expansion into the specialty 
niche reinsurance arena, and its primary specialty offerings to larger 
corporate customers. The proposed combined entity will benefit from the strong 
operating performance, historical risk mitigation, and underwriting strengths 
developed under each platform. Both entities have demonstrated robust earnings 
and profitability versus primary insurance and reinsurance peers, even during 
catastrophe event years. We view Markel's and Alterra's recent losses from 
Hurricane Sandy as manageable and reflective of losses that have affected 
other insurers in the industry. We expect the best practices in enterprise 
risk and underwriting at each of the insurance company platforms to enhance 
loss mitigation, risk controls, and strategic capital management. The rating 
also reflects the combined entities' capital adequacy.

The combined company is susceptible to catastrophe losses from the aggregation 
of risk or from overlapping exposures in the near term, which can contribute 
to operating performance volatility. Although Markel's catastrophe-prone 
operating volatility may increase following the purchase of Alterra, we 
believe the current enterprise-wide reinsurance and net retentions would 
mitigate severe catastrophe losses. The rating considers the risk inherent in 
the integration of these diversified insurance operations, and the concern 
that differences in senior management, strategy, or focus may affect the 
overall enterprise. Although these concerns are inherent in any acquisition, 
as Markel integrates Alterra and reaches operational seasoning we would be 
comfortable with the combined company's strategy and focus.

We view the financing of the acquisition with Markel's common equity and 
internal cash liquidity as a strength to the rating. The predominance of 
equity in the transaction reduces the combined entities' financial leverage at 
the onset of the transaction, providing for greater financial flexibility 
going forward. We view the consolidated interest coverage at the current level 
as appropriate for the rating.

Alterra's Bermuda-based insurance operations contribute a majority of 
consolidated net premiums written (after retrocession) and GAAP equity to the 
Alterra business, so less-restricted capital can be upstreamed to the future 
holding company, Markel Corp. Markel's liquidity balances at the holding 
company cover 12 months of interest and fixed charges by at least 10.0x on 
historical and prospective bases. Although Markel has been acquiring insurance 
and noninsurance operations recently, we believe its maintenance of an average 
of $1 billion of cash and invested assets during the past few fiscal years 
demonstrates its conservative liquidity profile. Finally, we view Markel 
Ventures as a supplemental source of unregulated cash flow given its 
noninsurance operations.

Outlook
The outlook is stable. Alterra's size may pose integration risk to Markel, but 
we believe both companies' senior management have relevant experience from 
migrating and successfully integrating past, smaller acquisitions. We expect 
the best practices in reserves, risk mitigation, reinsurance, strategic 
capital management, economic modeling, and catastrophe loss limits to be 
instituted across the new Markel enterprise over time, but would like to see 
integration of enterprise risk management (ERM) and underwriting best 
practices following the acquisition close. We acknowledge Markel's greater 
penetration capacity in its excess and surplus and Lloyd's insurance segments 
given Alterra's current platform, and expect Markel to leverage its new 
combined market-share position following the transaction close. We expect 
operating performance metrics to meet the industry averages, and given its 
conservative underwriting and reserving philosophies, we expect Markel's loss 
ratios to be lower than peers'. We expect capital management strategies to be 
consistent with recent history, and capital adequacy to be redundant above the 
current rating category. We expect Markel to continue to access the capital 
markets, and would be comfortable at the current rating with a maximum 
debt-to-capital ratio of 28%, and 12-month EBITDA fixed-charge coverage of 
more than 5.25x starting Sept. 30, 2013.

We could raise the ratings if we deem the integration risks to be minimal and 
we see seasoning of the newly acquired insurance operations within 12-24 
months of the acquisition's closing. Although not likely, we could raise the 
ratings sooner than that if we see immediate integration benefits and success 
in the execution of the Alterra business; specifically greater leveraged 
market share, continued strong operating performance well above peers', 
significant synergies and integration of the various business lines supported 
under an improved ERM framework, and an integrated and successful financial 
profile that results in a debt-to-capital ratio of 25% or less and an EBITDA 
fixed-charge ratio of more than 5.50x.

We would reexamine the ratings for a possible downgrade if the company's 
combined ratio exceeds 102% in a normal catastrophe loss environment. We could 
downgrade the company if Markel experiences significant and unexpected 
integration issues following the acquisition close. If Markel's 
capital-management strategy changes, altering our view of its capital position 
or financial flexibility, we would reassess the company's financial risk 
profile, which could lead to a downgrade.

Related Criteria And Research
Holding Company Analysis, June 11, 2009

Ratings List
Ratings Affirmed

Markel Corp.
 Counterparty Credit Rating
  Local Currency                        BBB/Stable/--      
 Senior Unsecured                       BBB                

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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