Weak performance, caused by soft pricing and accident-year loss ratios, cost Virginia-based Markel Corp. a notch on its ratings outlook.
Standard & Poor’s Ratings Service, one of several that rates insurance companies, lowered its outlook on the property-casualty insurer from “stable” to “negative.”
“The outlook revision reflects our view that Markel’s operating performance has weakened because of soft pricing and the resulting increase in accident-year loss ratios,” said Standard & Poor’s credit analyst Taoufik Gharib in a statement.
The accident-year loss ratios of all three of Markel’s segments–excess and surplus (E&S) lines, specialty admitted, and London insurance market–deteriorated in 2008 and in the first quarter of this year. Standard & Poor’s said its concern is “the ongoing deterioration in underwriting profitability that we saw in 2008 and expect to continue in 2009.”
The ratings service said Markel’s 2008 underwriting performance was affected by a competitive pricing environment, $95 million of catastrophe losses and $18 million of expenses related to its initiative to integrate its systems and improve workflow. The company’s results benefited significantly from $164 million of favorable reserve development, Standard & Poor’s said. In the first quarter of this year, the accident-year combined ratios in Markel’s three main divisions remained above 100%.
Besides weakening underwriting performance, Markel suffered significant investment losses in 2008 because of its aggressive investment strategy, the ratings service said. The company has rebalanced its investment portfolio but still has a somewhat aggressive investment strategy, with a greater appetite for equities, which constituted about 14% of its investments as of March 31. The equity portfolio remains concentrated in the insurance/financial industry, which accentuates the correlation risk between Markel’s insurance operations and its investment holdings, the ratings service said.
“The ratings on Markel are based on its strong competitive position in the E&S market as a specialty underwriter focusing on hard-to-place risks. The company benefits from its extensive knowledge and expertise in various specialty niche markets,” according to Standard & Poor’s statement. The company has significantly deleveraged its balance sheet over the past five years. Partially offsetting these strengths are the company’s weakening operating performance, potential for adverse reserve development on legacy reserves, and significant investment risk, albeit reduced from historical levels, Standard & Poor’s said.
The rating service said it expects Markel’s competitive position will remain strong, especially in U.S. E&S market. However, gross premiums written will likely decline by 10% to 15% in 2009 because of competitive pressures and the global recession. Increased costs related to the company’s implementation of its One Markel initiative should also hurt profitability, it said.
If Markel’s operating performance continues to deteriorate this year and next because of underwriting or investments losses that weaken its financial position, its outlook could fall lower, Standard & Poor’s said. If the company can stabilize its results over the next year to 18 months, it could be rerated at “stable.”
Soft pricing, loss ratios force Virginia insurer’s outlook downward via IFAwebnews .