Ratings Roundup: Progressive Motor, Markel (notes), Service

Standard & Poor’s Ratings Services today said it assigned its ‘A+’ insurance financial strength rating on Progressive Motor Insurance Co. (PMIC); however, the outlook is negative.”The rating on PMIC is based on the support of a guarantee provided by Progressive Corp.,” explained credit analyst Neil Stein. It is rated ‘A+’, but also has a negative outlook. S&P said that according to its rating criteria, “the evaluation of the creditworthiness of the primary obligor is shifted to an evaluation of the creditworthiness of the guarantor and the compliance of the guarantee.” Stein added: “The ratings on Progressive reflect the group’s very strong competitive position and well-recognized franchise. The ratings also reflect Progressive’s dominant market presence in the personal lines automobile segment, dynamic multiple-channel distribution platform, and very strong, though weakened, operating and underwriting performance. “These positive attributes are offset by strong but weaker financial flexibility at the holding company and capital adequacy at the operating companies as a result of lower operating results, mainly because of investment losses and a larger debt load,” he continued. S&P cited a “relatively narrow line-of-business focus and vulnerability to earnings volatility from significant exposure to preferred equities as well as other investments that have experienced credit impairments,” as additional weaknesses.” The rating g agency explained that the negative outlook reflects its opinion that the “potential for future credit impairments plus continued pressures in the highly competitive and commoditized automobile insurance market will inhibit operating performance to a level that is more in line with lower-rated peers.”

A.M. Best Co. has assigned a debt rating of “bbb+” to the new issuance of $350 million 7.125 percent 10-year senior unsecured notes, due 2019 of the Virginia-based Markel Corporation, and has assigned the ratings a stable outlook. Proceeds from the current offering will be used for general corporate purposes, including acquisitions. Best noted: “At June 30, 2009, Markel’s debt-to-capital stood at 24 percent, generally consistent with levels maintained over the last few years. With the inclusion of Markel’s $350 million senior notes issuance and reflecting the $150 million repayment of the remaining balance owed on its revolving bank line of credit earlier in third quarter 2009, the company’s pro forma debt to capital as of September 30, 2009 will be 27.5 percent, well within the range of financial leverage A.M. Best has established for similarly-rated holding companies. It is expected that some of the capital raised will be used to fund the acquisition of Elliot Special Risks, a leading managing general agency in Canada, for approximately CAD 75 million, in a deal that is expected to close on October 1, 2009.” Best added that, “while the competitive property/casualty operating environment places pressure on 2009 underwriting results and it is still possible that there will be further volatility in the investment markets,” it nonetheless believes that “strong operating fundamentals will allow Markel to post solid operating results.” Best also expects improved operating results to further enhance the company’s interest and fixed charge cash coverage ratios.

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Service Insurance Group and its member, Service Lloyds Insurance Company. “The ratings are based on the consolidated results of Service Lloyds Insurance Company and its run-off subsidiary, Heartland Lloyds Insurance Company, although the ratings apply only to Service Lloyds Insurance Company,” Best added. The rating agency also affirmed FSR of ‘B+’ (Good) and ICR of “bbb-” of Service Life & Casualty Insurance Company. The outlook for all ratings is stable. All of the companies are domiciled in Austin, Texas. “The ratings of Service reflect the group’s excellent capitalization, strong operating earnings achieved through prudent reserving practices and solid investment income, and established market presence within its niche segments,” Best explained. “Partially offsetting these positive factors is Service’s concentration risk as a single state workers’ compensation writer, which potentially exposes the group to changes occurring within the economic, legislative and regulatory environments.” In addition Best noted that the “affirmation of the ratings for Service Life & Casualty recognizes its adequate level of capitalization and positive earnings performance over a five-year period. Offsetting factors include the company’s weakened business profile as it has stopped the direct issuance of new credit insurance policies. Additionally, Service Life & Casualty has experienced declining credit insurance premiums and has a high concentration of real estate, mortgage loans and other NAIC Schedule BA asset investments, all of which are less liquid, relative to its capital position.”