Moody's Investors Service last week lowered the senior debt ratings of Markel Corporation, which recently bought Bermuda-registered Terra Nova Holdings Ltd., from Baa2 to Baa3.

And Moody's also dropped Markel's preferred securities from "baa3'' to "ba1'') and its subsidiary, Terra Nova Holdings Plc's senior debt ratings from Baa2 to Baa3).

The agency said the actions reflected the rating agency's expectation that earnings on a consolidated basis will be moderate over the near term.

Furthermore, the outlook for the ratings is negative, reflecting the possibility that further deterioration may occur, as Markel continues to re-evaluate the quality of the Terra Nova book of business.

While some of the deterioration seen in Terra Nova's results over the past six months includes charges that may be considered non-recurring, operating returns have substantially weakened, Moody's said.

"Markel's management is active in addressing the unprofitable business within the Terra Nova portfolio, however, Moody's feels that they face a greater challenge than in past acquisitions due to the distinct business practices in the London market, remoteness of operations and sheer size of the book they are attempting to re-underwrite,'' the agency said.

"This will prolong a significant improvement in results. Additionally, Terra Nova's severe underperformance since the announcement of the acquisition raises questions about the future franchise value of Terra Nova to Markel.

While the broader geographic scope of Terra Nova may have created a platform for geographic expansion, Markel is reducing its commitment to several of the Lloyd's syndicates, has placed the Bermuda subsidiary in run-off, is evaluating the strategic fit of Corifrance, a French insurer.'' Moody's added: "While management's actions to date reflect sound decisions to improve the bottom line, it is unclear whether in the long run the combination will result in a financially and operationally stronger company.'' The rating agency noted that Markel has historically demonstrated conservative financial management and sound underwriting discipline.

Its US operations have performed well, and Moody's does not expect a deterioration in results from the US companies. However, concerns regarding the future profitability of the combined organisation are heightened when viewed in context of Markel's limited financial flexibility resulting from additional debt incurred to finance the acquisition and significant goodwill on the company's balance sheet.