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Fitch Ratings : Hiscox’s IFS rating affirmed at ‘A’ with a stable outlook

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Hiscox has been affirmed an insurer financial strength rating at ‘A’ by the credit rating agency Fitch Ratings and a long-term insurer default rating of all Hiscox holding companies affirmed at ‘BBB+’. The outlooks on all the ratings are stable.

The rating affirmations reflect the resilience of Hiscox’s risk-adjusted capital position to significant natural catastrophic losses in H111. Based on Fitch’s internal assessment, Hiscox’s capitalisation remains supportive of the rating level. This is despite the reporting of an interim operating loss in 2011 and the insurer’s continued commitment to a progressive dividend policy. Fitch views the key short-term risk for Hiscox’s capital position as being the industry’s common risk of higher catastrophic activity in H211.

The agency continues to recognise Hiscox’s sound track record of profitability as a favourable rating factor. The stability of the insurer’s performance has been aided by a reasonable balance in its sources of income and diversification by business unit. While an unprecedented level of catastrophic claims led Hiscox to report a H111 combined ratio of 116.9%, (H110: 93.6%), this was in line with many peers. Subsequently, Fitch anticipates that Hiscox will report a weaker operating result for full-year 2011.

Hiscox anticipates that it will benefit from counter-cycle management efforts, which included tighter underwriting in the reinsurance segments and were reflected in a moderate reduction of premiums written. Fitch believes these efforts will have a limited near-term effect and the insurer’s full-year profit will be significantly dependent on investment income and prior-year reserve releases.

The insurer’s developing profile remains an offsetting factor. The agency believes that the US and European businesses have yet to reach the operational scale required to achieve a stable level of profitability, although to some extent the European unit has supported the interim technical result in 2011. Fitch also notes relatively high competition in these markets as a challenge for Hiscox, but views the insurer’s cautious approach to developing new markets and territories as a mitigating factor.

Fitch views a rating upgrade as unlikely in the near term given the expected weakening in the insurer’s underwriting performance in 2011 and low interest rate environment. In a longer-term perspective, the ratings could be upgraded if Hiscox demonstrates the ability to deliver earnings and profitability that continue to outperform key peers. Fitch would consider the earnings contribution of each of the insurer’s operating segments when making this assessment.

Conversely, a downgrade may be triggered by a considerable erosion of capital to a level not commensurate with the current rating. According to Fitch’s internal assessment, this will need to be equivalent to the loss of 20%-25% of shareholders’ funds. A marked deterioration in profitability compared with peers could also result in downward rating pressure.

Hiscox is a specialist non-life insurance underwriting group focusing on a particular range of personal and commercial risks. Hiscox Syndicates Limited is the managing agent of Syndicates 33, 3624 and 6104. Hiscox Insurance Company Limited operates in the UK and Europe outside the Lloyd’s market, covering a wide range of specialist insurance for professionals and business customers. The group’s other insurance vehicles include Hiscox Insurance Company (Bermuda) Limited and Hiscox Insurance Company (Guernsey) Limited. Hiscox Ltd is the ultimate Bermudian-based holding company of Hiscox.

Source : Fitch Ratings