RPT-Fitch Rates UK's Hastings 'B+'/Stable

Tue Feb 11, 2014 6:30am EST

Feb 11 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned UK-based Hastings Insurance Group (Finance) plc a final Long-term foreign currency Issuer Default Rating (IDR) of 'B+' with a Stable Outlook.

Fitch has also assigned Hastings Insurance Group (Finance) plc's GBP150m senior secured floating rate notes due 2019 and its 8% GBP266.5m senior secured fixed rate notes maturing July 2020 a final rating of 'BB-'/'RR3'. The notes were used to refinance existing debt facilities and to fund the equity consideration of purchase price of Hastings Insurance Group (HIG) by Goldman Sachs Principal Investments.

KEY RATING DRIVERS

Ability to Manage Business Volumes through Integrated Broker/Underwriter

Business Model

Hastings Insurance Services Ltd (HISL), the retail broking arm of Hastings Insurance Group operates a traditional insurer panel model on which both Advantage Insurance Company Limited (AICL) and third party insurers sit. This provides HISL with greater ability to channel customers between AICL and third-party panel insurers, thus adjusting volumes to current pricing conditions in accordance with AICL's risk appetite. Price comparison websites are the company's main distribution channel (90% of policies), followed by 'direct to website' and call centres (10%).

Improved Underwriting Profitability in a Challenging Environment Advantage Insurance Company Limited, the underwriting arm, has achieved a notable improvement in its loss ratio in recent years despite a competitive environment in the UK motor market. This was achieved by discontinuing unprofitable policies and improved fraud prevention measures. As a result, the underwriting business has achieved sub-100% combined ratios over the past two years.

On-going Competitive Pressures

Hastings faces significant competition in its core market. Leaders in the UK private car market are well recognised names such as the Direct Line Group (15% market share), the Admiral Group (9%), AA (8%), Aviva (8%) and LV=(7%). Hastings' exposure is heavily concentrated in the UK motor market. This segment of the market is subject to significant volatility and competition, which could cause pricing pressures. The group's main distribution channel of aggregator websites also tend to be characterised by high price sensitivity. Competitive pressure is further increased by the sale and distribution of products through web-based aggregators and broker panels, where customers are more price-sensitive.

Weakening Financial Flexibility Due To A Challenging Economic Climate The long-dated maturity profile of the notes, combined with forecasted deleveraging through funds from operations (FFO) generation (5.0x in 2014 to 3.85x in 2017) provides Hastings with considerable financial flexibility at present. However, the business could be subject to significant volatility, given its target market and customer acquisition techniques. Hastings needs to achieve significant EBITDA growth over the next several years to achieve sufficient deleveraging. If growth does not take place as envisaged by the business plan, in an environment of softening prices, credits metrics are likely to come under pressure and cause a reduction in financial flexibility.

Management Execution of Business Plan

To a significant extent, the success of Hastings' largely new senior management team is key to determining the outcome of the business plan.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating action include:

--FFO gross leverage below 3.5x on a sustained basis

--FFO interest cover above 3.0x on a sustained basis

--Sustained increase in margin to 26%, indicating an improved competitive positions across divisions

Negative: Future developments that could lead to negative rating action include:

--FFO gross leverage above 5.0x on a sustained basis

--FFO interest cover below 2.5x on a sustained basis

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