Assurant Inc. (AIZ) has been on an uptrend since the beginning of this quarter, reflecting investors’ enthusiasm about its developments so far.
Among others A.M. Best Co. affirmed Assurant’s issuer credit ratings (ICR) at ‘bbb’. The outlook on the ratings was pulled up to positive from stable.
A.M. Best acknowledges Assurant’s diverse product base and distribution platform, established presence in various niche markets, adequate risk-adjusted capitalization, solid operating earnings, low debt-to-capital ratio and adequate interest coverage ratio. The company has sufficient financial flexibility with a moderate debt ratio of approximately 27.3% as of Sep, 30, 2013. Moreover, it has $350 million in a commercial paper program, fully backed by letters of credit.
The rating agency affirmed the financial strength rating (FSR) and the ICR of “A” and “a”, respectively, on the Assurant’s Property and Casualty (P&C), and pulled up the rating outlook to positive. It acknowledged the established presence of the business in the North American markets. The rating agency stated that the company is a leader in credit-related insurance products, creditor placed hazard insurance, manufactured housing insurance, vehicle service contracts and retail extended service contracts. A.M. Best attributed the strong performance and solid operating earnings of Assurant’s P&C business over the past five years, to its diverse product line.
However, the growth in Specialty Property in recent years has nevertheless increased the segment’s exposure to natural catastrophes. Also, the increase in catastrophe retention limit invites further earnings risk. Increased dependence on third party reinsurance are some other headwinds. The rating agency, however, said that it will monitor the company’s performance in the face of challenging macroeconomic conditions and developments in the mortgage servicing industry.
The rating affirmation of Assurant’s preneed companies in both markets ??? the current U.S. domestic market and in Canada, comes on the back of their established presence in the respective markets. Units in both the countries have grown profitably, displaying strong premium growth and at the same time maintaining adequate risk-adjusted capitalization.
However, an offsetting factor to the ratings is the ongoing low interest rate environment, given the long-duration nature of the business. Moreover since the segment’s domestic company gets all of its business from Service Corporation International, there is a chance of concentration risk.
The affirmation of FSR at “A-“ and ICRs at “a-” of Assurant’s Employee Benefits segment – with upgrade of outlook to positive, comes on the back of its niche position in the U.S. group dental, disability and group life insurance market. The unit primarily serves businesses with less than 500 employees. Though the unit sells its products both on traditional as well as voluntary basis, lately the emphasis has been on voluntary basis. The unit also maintains pricing discipline on new business and renewals. Expense and underwriting management along with innovative ways of marketing are other positives. However, macroeconomic factors will continue to adversely impact the segment’s earnings.
The rating affirmation for Assurant's health subsidiaries come on the back of the company’s adequate presence in the individual and small group major medical market. The rating agency is appreciative of the segment’s efforts of rolling out an innovative product line with attractive features. The company has also fared well in managing its costs. However, recently the segment has witnessed adverse earnings experience due to pricing actions and increase in tax rate.
Financial strength and credit ratings, which measures a company’s ability to meet policyholder obligations, are important factors affecting public confidence and creditworthiness of a company, and hence provide a company’s competitiveness. Securing an investment grade debt rating with a positive outlook reflects optimism about Assurant’s future performance
The rating agency may raise its ratings on Assurant if it continues to show a strong operating performance and maintain strong risk-adjusted capitalization.
However, negative rating actions cannot be ruled out in case the balance sheet strength deteriorates to a level which is below the rating agency’s minimum requirement for the current ratings.
On a separate development, Assurant's board of directors approved an increase of $600 million of share buyback.
With respect to earnings performance, Assurant delivered positive surprise in 3 of last 4 quarters with an average beat of 32.9%.
The latest price appreciation is certainly encouraging, but make sure to keep a close watch of this firm in the near future before investing in it.
Other players Chubb Corp. (CB), Principal Financial Group Inc. (PFG) Montpelier Re Holdings Ltd. (MRH) also carry investment grade ratings from A.M.Best.
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