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