Moody’s Investors Service, a subsidiary of Moody’s Corporation, recently gave ratings to Assurant, Inc. (AIZ - Free Report) and its property and casualty (P&C) as well as life insurance operating subsidiaries. This rating action followed the closure of Assurant’s buyout of The Warranty Group from TPG Capital for about $2.5 billion. The credit rating giant downgraded Assurant's senior debt rating to Baa3 from Baa2 while for its P&C operating subsidiaries, the rating agency downgraded the insurance financial strength ratings to A3 from A2 and from A3 to Baa1 for its life insurance subsidiaries. The outlook for these ratings remained stable.
Ratings Representation of Assurant and its Units
Assurant’s substantial increase in financial leverage together with higher levels of goodwill and intangibles are reflected by the ratings downgrade. Moody’s projects consolidated financial leverage (on a pro forma basis) to increase approximately 28%, up from 22.6% from year-end 2017. However, the rating giant mentioned that the company’s financial leverage on the basis of tangible equity is likely to be much higher.
The buyout of The Warranty Group is likely to widen Assurant’s market presence in vehicle service contracts, apart from boosting its geographic diversification and achieving substantial savings through expense synergies. But the company’s exposure to catastrophe loss will render volatility to both earnings and capital.
The downgrade of insurance financial ratings for Assurant’s life insurance units, American Bankers Life Assurance Co of Florida and Union Security Insurance Company, is in line with the rating actions on Assurant.
With the stable outlook, the rating agency anticipates that Assurant will continue to deliver better-than-expected results, especially on the back of a lower tax incidence, which is likely to boost the company's bottom line, considerably in the near future.
Solid market position amongst a number of niche, specialty P&C insurance markets forms the basis of the Multi line insurer’s ratings.
However, considerable cat loss exposure plus a modest scale and susceptibility to adverse changes with respect to legal and regulatory environment are likely to offset the aforementioned strengths.
Factors Leading to an Upgrade or Downgrade
The factors that could lead to a ratings upgrade include a noticeable reduction in gross and net catastrophe exposures, consolidated financial leverage meaningfully lying below 25% on a sustained basis, better capitalization and solid profitability on a continued basis as well as parent company liquid resources around $500 million.
On the flip side, the factors that might lead to a downgrade are a considerable rise in catastrophe exposure (on gross or net basis) as a percentage of shareholder equity or a 10% or more decline in shareholder equity, consolidated financial leverage above 35% on a sustainable basis, earnings coverage of interest lower than 4x for an extended period and parent company liquid resources much below $250 million.
Rating affirmations or upgrades from credit rating agencies play an important role in retaining investor confidence as well as in maintaining credit worthiness of a stock. On the other hand, rating downgrades not only damage business but also increase the cost of future debt issuances.
Zacks Rank and Share Price Movement
Currently, Assurant carries a Zacks Rank #3 (Hold). Shares of Assurant have lost 6.7%, narrower than the industry’s decrease of 8.8%. We expect the company’s concerted efforts to diversify its product and service portfolio as well as its segmental performance and a robust capital position to turn the stock around in the near term.
Stocks to Consider
Some better-ranked stocks from the insurance industry are Alleghany Corporation (Y - Free Report) , Federated National Holding Company (FNHC - Free Report) and RLI Corp. (RLI - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 17.61%.
Federated National deals in insurance underwriting, distribution and claims processing business in the United States. The company came up with positive earnings surprises in all the trailing four quarters with an average beat of 23.03%.
RLI Corp. underwrites property and casualty insurance in the United States and globally. The company pulled off positive surprises in each of the last four quarters with an average beat of 33.65%.
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