Fitch Ratings has affirmed at 'A+' (Strong) the Insurer Financial Strength (IFS) ratings for
The Rating Outlook is Stable.
The affirmation of MKL's ratings reflects the company's favorable company profile, strong balance sheet capitalization, with reasonable financial leverage, strong financial performance and strong investments and liquidity.
Key Rating Drivers
Specialty Market Expertise: MKL's company profile is viewed as favorable compared with all other
Strong Capitalization: MKL's capital position provides a strong and improving cushion against the operational and financial risks the company faces. MKL's
Reasonable Financial Leverage: MKL's financial leverage ratio (FLR) of 22.7% as of
Volatile Earnings: Fitch views MKL's financial performance and earnings as strong, but volatile from equity investments and of higher influence on the IFS rating. MKL's most recent five-year (2017-2021) average ROAE of 9.2% is favorable, but has a standard deviation of 8.6%, which is higher than peers. In its underwriting operations, MKL demonstrates an entrenched focus on maintaining underwriting profitability by altering product offerings to maintain or improve profitability and in response to cyclical market conditions.
Strong Underwriting Results: Over the most recent five-year period (2017-2021), MKL produced a strong 97.0% average combined ratio, which included 6.8 points for catastrophes/COVID-19 and a 10.5-point benefit from prior-period reserve development. MKL posted a very strong combined ratio of 89.9% in 6M22, in line with 90.4% in 6M21. The underlying accident-year combined ratio, excluding catastrophes, improved to 92.4% in 6M22 from 95.5% in 6M21, due to a lower attritional loss ratio driven by market pricing improvements and a lower expense ratio. MKL will incur losses in 3Q22 from Hurricane Ian, however, Fitch believes that the impact will be manageable.
Equity Investment Risk: Investments and liquidity are viewed as strong, with high-quality, fixed maturity investments and manageable risky assets, although with a higher concentration of equity securities compared with the P/C industry, adding volatility to shareholders' equity, resulting in a higher influence on the IFS rating. MKL's ratio of equity investments to shareholders' equity is 56% at
Holding Company Cash: A significant source of capitalization support and financial flexibility is MKL's continued maintenance of sizeable holding company cash and marketable securities. This unrestricted liquidity supports operating company capitalization, if needed, as well as debt service and debt refinancing. At
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Very strong operating performance, with a combined ratio consistently below 95%;
Fitch's overall assessment of capital and leverage at 'very strong';
An FLR maintained below 20%;
GAAP fixed-charge coverage consistently at or above 8.0x;
Reduced equity investment risk.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's overall assessment of capitalization and leverage below an 'a+' (Strong) credit factor score and/or an FLR greater than 28%;
Maintenance of holding company cash and investments of less than
A fixed-charge coverage ratio sustained at 5.0x or below;
A material deterioration in underwriting performance;
Unexpected adverse developments from acquisitions, including sizable impairment of goodwill and intangible assets.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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