Fitch Ratings has affirmed at 'A+' (Strong) the Insurer Financial Strength (IFS) ratings for Markel Corporation's (MKL) principal property and casualty (P/C) insurance subsidiaries, MKL's senior unsecured notes at 'BBB+' and Issuer Default Rating at 'A-'.

The Rating Outlook is Stable.

The affirmation of MKL's ratings reflects the company's favorable company profile, strong balance sheet capitalization, with reasonable financial leverage, strong financial performance and strong investments and liquidity.

Key Rating Drivers

Specialty Market Expertise: MKL's company profile is viewed as favorable compared with all other U.S./Bermuda non-life (re)insurance organizations. This ranking aligns with Fitch's 'aa-' credit factor score. The company's principal business is marketing and underwriting specialty insurance and reinsurance products. In addition, MKL owns controlling interests in various insurance and non-insurance businesses that provide earnings diversification, fee-based income and unrestricted cash flows.

Strong Capitalization: MKL's capital position provides a strong and improving cushion against the operational and financial risks the company faces. MKL's U.S. (about 60% of total statutory surplus) and Bermuda (approximately 28% of total statutory surplus) operations scored 'Very Strong' and 'Extremely Strong', respectively, on Fitch's Prism capital model in both 2021 and 2020.

Reasonable Financial Leverage: MKL's financial leverage ratio (FLR) of 22.7% as of June 30, 2022 is up from 21.4% at YE 2021, but remains reasonable and in line with rating expectations. The FLR increase is due to a 13% drop in shareholders' equity to $12.8 billion at June 30, 2022 driven by $1.9 billion of pre-tax unrealized losses on equity securities, with additional equity market declines in 3Q22. The shareholders' equity decline also reflects $1.1 billion of pre-tax net unrealized losses on fixed-income securities due to a rise in interest rates, although Fitch removes unrealized fixed-income gains and losses included in shareholders' equity when calculating the FLR.

Volatile Earnings: Fitch views MKL's financial performance and earnings as strong, but volatile from equity investments and of higher influence on the IFS rating. MKL's most recent five-year (2017-2021) average ROAE of 9.2% is favorable, but has a standard deviation of 8.6%, which is higher than peers. In its underwriting operations, MKL demonstrates an entrenched focus on maintaining underwriting profitability by altering product offerings to maintain or improve profitability and in response to cyclical market conditions.

Strong Underwriting Results: Over the most recent five-year period (2017-2021), MKL produced a strong 97.0% average combined ratio, which included 6.8 points for catastrophes/COVID-19 and a 10.5-point benefit from prior-period reserve development. MKL posted a very strong combined ratio of 89.9% in 6M22, in line with 90.4% in 6M21. The underlying accident-year combined ratio, excluding catastrophes, improved to 92.4% in 6M22 from 95.5% in 6M21, due to a lower attritional loss ratio driven by market pricing improvements and a lower expense ratio. MKL will incur losses in 3Q22 from Hurricane Ian, however, Fitch believes that the impact will be manageable.

Equity Investment Risk: Investments and liquidity are viewed as strong, with high-quality, fixed maturity investments and manageable risky assets, although with a higher concentration of equity securities compared with the P/C industry, adding volatility to shareholders' equity, resulting in a higher influence on the IFS rating. MKL's ratio of equity investments to shareholders' equity is 56% at June 30, 2022. The company has favorable liquidity with an allocation to cash and short-term investments of 27% of the total portfolio at June 30, 2022.

Holding Company Cash: A significant source of capitalization support and financial flexibility is MKL's continued maintenance of sizeable holding company cash and marketable securities. This unrestricted liquidity supports operating company capitalization, if needed, as well as debt service and debt refinancing. At June 30, 2022, holding company cash and securities of $4.3 billion covered outstanding senior debt, excluding nonrecourse secured debt, by 1.1x.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Very strong operating performance, with a combined ratio consistently below 95%;

Fitch's overall assessment of capital and leverage at 'very strong';

An FLR maintained below 20%;

GAAP fixed-charge coverage consistently at or above 8.0x;

Reduced equity investment risk.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch's overall assessment of capitalization and leverage below an 'a+' (Strong) credit factor score and/or an FLR greater than 28%;

Maintenance of holding company cash and investments of less than $1.0 billion;

A fixed-charge coverage ratio sustained at 5.0x or below;

A material deterioration in underwriting performance;

Unexpected adverse developments from acquisitions, including sizable impairment of goodwill and intangible assets.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

(C) 2022 Electronic News Publishing, source ENP Newswire