Markel’s Ratings ‘Unaffected’ by Investment Losses Says S&P

Standard & Poor’s Ratings Services has indicated that its ‘BBB’ counterparty credit rating on Markel Corp (MKL) “is not affected by today’s announcement of fourth quarter 2008 earnings.”

S&P noted that the Company “reported a $59 million net loss for the year as results were hampered by weaker underwriting performance due to price deteoriation and a $95 million loss from hurricanes Gustav and Ike, generating a combined ratio of 99.3 percent.

“Furthermore, profitability was further hampered by $408 million in realized investment losses that include $339 million of other than temporary impairments given the company’s equity concentration in the insurance and financial institution industries.

“Besides realized investment losses, MKL incurred $330 million in unrealized losses net of taxes resulting in a comprehensive loss of $403 million. As a result, the company’s shareholder’s equity balance declined to $2.18 billion at year end 2008 from $2.64 billion in the prior year.”

S&P indicated that, although the decrease is significant, “MKL is still appropriately capitalized for the rating. However, the company’s capital redundancy has diminished compared with its historical levels. Despite the losses, the company’s debt leverage and interest coverage remained strong at 24.0 percent and 6.3x, respectively, at year-end 2008. The debt leverage increased from 20.3 percent in the prior quarter because of the decrease in shareholders equity and the issuance of $100 million in debt drawn from its credit facility.”

S&P also pointed out that Markel “has rebalanced its investment portfolio,” but it “still has an aggressive investment strategy with about 17 percent of the investment portfolio in equities. In addition, given its equity concentration within the insurance industry, there is a correlation risk between Markel’s insurance operation and its investment holdings.”

S&P concluded that if the “Company incurs further investment losses that materially affect its capital position,” Its ratings outlook could be revised or lowered.

Source: Standard & Poor’s – www.standardandpoors.com