OREANDA-NEWS. Fitch Ratings has affirmed Jersey-based Hastings Insurance Group (Finance) plc's Long-term foreign currency Issuer Default Rating (IDR) at 'B+' with a Stable Outlook. Fitch has also affirmed Hastings Insurance Group (Finance) plc's GBP150m senior secured floating-rate notes due 2019 and its 8% GBP266.5m senior secured fixed- rate notes due July 2020 at 'BB-'/'RR3'.

The affirmation reflects Hastings' robust business model, positive cash flow generation and continued deleveraging profile. The insurer has maintained a favourable underwriting performance in the face of a competitive motor insurance market, while broker fee income generation remains strong. The affirmation does not factor in any potential improvement in the group's financial profile following successful completion of the IPO.

KEY RATING DRIVERS
Consistent Underwriting/Broker Profitability
Advantage Insurance Company Limited (AICL), the group's underwriter, continues to achieve sub-100% combined ratios (i.e. the company underwrites profitably) in a highly competitive and challenging operating environment. AICL reported a combined ratio of 90% at HY15 (HY14: 90.4%), in line with the group's business plan. Underwriting performance continues to compare well with peers. Hastings' broker arm (Hastings Insurance Services Ltd (HISL)) also continues to report growing fee and commission income.

Broker/Underwriter Business Model
HISL operates a traditional insurer panel on which both AICL and third-party insurers sit. This provides the broker with a greater ability to channel customers between AICL and third-party panel insurers, adjusting volumes to current pricing conditions in accordance with AICL's risk appetite.

High Execution Risk
The group is concentrated in the UK motor market, which is subject to significant competition, resulting in pricing pressures. Moreover, the group's main distribution channel is aggregator websites, which are highly price sensitive. Risk is exacerbated by the requirement for the company to achieve significant revenue growth across the duration of its business plan. Both the broker and the underwriter could be subject to significant volatility given the high execution risk. This will constrain the IDR at 'B+' unless considerable revenue growth is achieved in an environment of increased competition.

Deleveraging Driven by Broker
Funds from operations (FFO)-based leverage and coverage metrics continue to be supported by the cash generated by HISL's broking income, contributing to free cash flow margins of around 10% in 2016-2017. AICL also remains profitable, as reflected in a reported combined ratio of 90% in 1H15. However, because AICL needs to maintain its regulatory capital buffer at all times ahead of Solvency II implementation, this limits the amount of cash available for debt service. Fitch forecasts FFO adjusted leverage to decline from approximately 4.5x at year-end 2014 to 4.0x in 2017. FFO fixed charge cover is expected to increase from 2.6x at year-end 2014 to above 3.0x by year-end 2017.

Successful Completion of IPO
The execution of a successful IPO would be a positive development for the group's credit profile, as the company plans to use proceeds to reduce leverage on its balance sheet. Hastings expects to issue new shares to raise approximately GBP180m in gross proceeds and sell a proportion of existing shares. The proceeds would be used to redeem a portion of the outstanding senior secured notes. The company anticipates using new bank facilities to redeem the remainder of the notes later in the year.

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 4.0x on a sustained basis.
- Sustained increase in margin to 26%, indicating an improved competitive position 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.
- Significant underperformance of HISL/AICL or adverse reserve developments in AICL resulting in margin pressure.