Markel downgraded due to possible negative impact from $1.2bn M&A activity

Ratings agency S&P Global has lowered its long-term counterparty credit and senior unsecured debt ratings on Markel Corporation to 'BBB' from 'BBB+' following its recent M&A activity. The outlook is stable.

The agency has also revised its outlook on Markel's core insurance operating subsidiaries to 'stable' from 'positive', and affirmed its 'A' long-term counterparty credit and financial strength ratings on the subsidiaries.

US insurer Markel recently announced the acquisition of two entities, State National Companies (in a $919 million deal) and Costa Farms, for a total of approximately $1.2 billion that it will fund entirely through internal cash and invested assets.

S&P stated that the downgrade reflects the company's announced acquisitions, as well as the potential for additional large transactions in the next few years, which will negatively affect the strength of the balance sheet and risk-adjusted capital (as the ratio of intangibles-to-equity increases).

"We are lowering our long-term counterparty credit and senior unsecured debt ratings on Markel by one notch to 'BBB' from 'BBB+' because, in our view, the strength of the company's balance sheet and risk–adjusted capital will decline."

"We are affirming our 'A' ratings on Markel's insurance subsidiaries and revising the outlook on them to stable from positive, because our view of capitalisation will remain constrained due to potential for additional acquisitions," S&P added.

The ratings agency believes that the prospective liquidity at the holding company will likely not stay at the same level as in the last few years ($2.5 billion as of Dec. 31, 2016) as Markel deploys excess capital for current and potential acquisitions.

The agency further stated that it could lower the ratings in the next 24 months if Markel's capital adequacy position falls below very strong, the group experiences sustained deterioration in its competitive position, as shown by earnings performance consistently below peers', or if underwriting losses are meaningfully outside the company's tolerances.

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