Fitch Upgrades Markel Debt; Affirms IFS Rtg With Positive Outlook.CHICAGO & LONDON -- Fitch Ratings Fitch RatingsAn international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. today upgraded Markel Corporation's (Markel) Issuer Default Rating (IDR IDR In currencies, this is the abbreviation for the Indonesian Rupiah. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) to 'BBB+' from 'BBB' and Markel's senior debt ratings to 'BBB' from 'BBB-'. Fitch also upgraded the trust preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. rating of Markel Capital Trust to 'BBB-' from 'BB+'. Additionally, Fitch affirmed the 'A' Insurer Financial Strength (IFS) ratings of the members of the Markel North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. insurance group (see list below). Fitch also affirmed the 'A-' IFS rating of Markel International Insurance Company (MIICL). The Rating Outlook is Positive. The debt and preferred stock upgrades reflect a material reduction in pro-forma financial leverage at Markel. Markel achieved this reduction in leverage through a combination of increased retained earnings Retained Earnings The percentage of net earnings not paid out in dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders equity on the balance sheet. and capital market transactions. Earlier this year, Markel announced the redemption of its convertible debt issue. These securities were convertible into common stock at the option of the debt holders who chose to convert rather than be redeemed. As a result, approximately $101 million of debt converted into common stock. Markel also announced its intent to redeem all $107 million of its outstanding trust preferred securities as of Jan. 1, 2007. Fitch expects financial leverage to fall to the 25 to 27% range as a result of these transactions. Markel's financial leverage had previously exceeded 30%. Additionally, Markel's capital structure will be significantly simplified, consisting of only senior debt and common stock, after the redemption of the trust preferred securities. The positive outlook considers the insurance operation's strong underwriting results and operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. . Markel surpassed its target of an underwriting profit Underwriting profit is a term used in the insurance industry. It consists of the earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investment income earned on held premiums. in the first nine months of 2006, reporting a combined ratio of 88%. These results compare favorably to the comparable period in 2005. However, Fitch recognizes that they largely reflect the relatively benign natural catastrophe losses in 2006 compared to record catastrophe losses in 2005. Markel was affected by the 2005 hurricane season Hurricane season refers to a period in a year when hurricanes usually form. For more information see: Tropical cyclone#Times of formation. For a lists of past seasons, see:
Markel's rating outlook also benefits from conservative reserving and accounting practices, a value-investing strategy that has historically produced returns in excess of market indices and a number of commutations that reduced Markel's exposure to lower rated reinsurers. Conversely, Fitch notes that Markel has a history of acquisitions. Historically, these acquisitions have occurred in soft market conditions, when organic premium growth was difficult to achieve, and were financed with significant amounts of debt. Fitch believes the insurance market is softening. If Markel were to make a major acquisition or significantly increase its financial leverage, Fitch would have to re-evaluate the ratings and rating outlook. The ratings also consider Markel's moderate operating leverage Operating Leverage A measurement of the degree to which a firm or project relies on fixed rather than variable costs. Notes: The higher the degree of operating leverage, the greater the potential danger from forecasting risk. , including high exposure to reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. recoverables, though this is somewhat mitigated by strong collateral and the aforementioned commutations. Markel also employs significant investment leverage, allocating a much larger portion of its investment portfolio to equities, but a lower portion to non-investment grade bonds, than peers. Absent unusual large losses, such as another intense hurricane season, Fitch expects Markel North America to meet Markel's combined ratio target in 2007, which varies but is below 100%. Fitch continues to believe the positive actions taken at MIICL will ultimately result in underwriting results that meet Markel's 100% combined ratio target. However, Fitch recognizes that this achievement has taken longer than anticipated. The combined ratio for MIICL in the first nine months of 2006 was 105%. In 2005-6, MIICL has made significant progress in building up a reserve buffer, bringing its reserving methodology into line with that of the group and in commuting reinsurance recoverables. Although MIICL's ultimate profitability continues to lag below the expected level for a company in the 'A'-range, it is expected that future reserve releases will bolster improved underlying performance and that a return commensurate with that of the rest of the group will be achieved in 2007-8, at which point an upgrade could be envisaged and the rating of MIICL equalized with that of the operating companies operating company A business that engages in transactions with outsiders. of Markel North America. Fitch expects Markel will continue to hold cash and investments at the holding company equal to at least 2 times (x) annual interest expense. Fitch also expects 2007 fixed-charge coverage fixed-charge coverage The number of times that a firm's operating income exceeds its fixed payments. Fixed-charge coverage is a measure of a firm's ability to meet contractually fixed payments, with high coverage indicating significant flexibility for making will meet, or exceed, the 4x level that is the threshold for the current rating level. Markel Corporation markets and underwrites specialty insurance products and programs to a variety of niche markets A niche market also known as a target market is a focused, targetable portion (subset) of a market sector. By definition, then, a business that focuses on a niche market is addressing a need for a product or service that is not being addressed by mainstream providers. . In each of these markets, the company seeks to provide quality products and excellent customer service so that it can be a market leader. The following ratings are affirmed with a Positive Outlook: Associated International Insurance Co. Deerfield Insurance Company Essex Insurance Company Evanston Insurance Company Markel American Insurance Company Markel Insurance Company --Insurer financial strength (IFS) at 'A'. Markel International Insurance Company --IFS at 'A-'. The following ratings are upgraded: Markel Corporation --Issuer Default Rating (IDR) to 'BBB+' from 'BBB' with a Positive Outlook; --7.2% Senior notes due Aug. 15, 2007 to 'BBB' from 'BBB-'; --7.0% Senior notes due May 15, 2008'BBB' from 'BBB-'; --6.8% Senior notes due Feb. 15, 2013 'BBB' from 'BBB-'; --7.35% Senior notes due Aug. 15, 2034 'BBB' from 'BBB-'; --7.5% Senior notes due Aug. 22, 2046 'BBB' from 'BBB-'. The 4.25% Liquid Yield Option Notes Liquid yield option note (LYON) Zero-coupon, callable, putable, convertible bond developed by Merrill Lynch & Co. due June 5, 2031, rated 'BBB-', have been Paid in Full. Markel Capital Trust --8.71% Capital securities due Jan. 1, 2046 to 'BBB-' from 'BB+'. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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