Markel CorporationMKL and its units recently received rating action from Moody's Investors Service, an affiliate of Moody's Corporation MCO . The credit rating giant affirmed the Baa2 senior debt ratings for the property and casualty (P&C) insurer and the A2 insurance financial strength (IFS) ratings of the insurer's operating units.
Consequently, the rating agency affirmed the Baa2 senior unsecured debt ratings of Alterra Finance LLC and Alterra USA Holdings Limited. Markel acts as guarantor for these companies.
The ratings affirmation represents the P&C insurer's decent risk-adjusted capitalization, scale and strong foothold in the specialty and excess and surplus (E&S) industry, diversified mix of specialty insurance and reinsurance and a sensible reserving policy.
However, the company's slightly lower profitability than its specialty competitors, exposure to catastrophe losses and a number of volatile and long-tail lines of business, and a comparatively high investment allocation to equities can offset the ratings affirmation.
Notably, solid and sustained earnings through the insurance cycle (return-on-capital consistently above 7%) and adjusted financial leverage of 25% or below with pre-tax interest coverage of more than 6x, might result in a ratings upgrade. Conversely, adjusted financial leverage above 30% or interest coverage below 4x, and gross underwriting leverage above 4x might lead to a ratings downgrade.
The company's shares have been on an uptrend in recent times. We expect the company's strategic initiatives as well as the ratings affirmation to instill confidence in the investors about the company's financial health. This in turn should drive its share price higher in the future.
Rating affirmations or upgrades from credit rating agencies play an important role in retaining investors' confidence in the stock as well as maintaining credit worthiness in the market. Hence, ratings actions like this are expected to help the company write more business, going forward.
Stocks that Warrant a Look
Cincinnati Financial engages in the P&C insurance business in the United States. The company delivered positive surprises in all of the last four quarters with an average beat of 11.82%.
Mercury General deals in writing personal automobile insurance in the United States. The company delivered positive surprises in two of the last four quarters, but with an average negative surprise of 21.04%.
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