December 15, 2016 / 5:15 PM / 8 months ago

Fitch Affirms Hiscox at IFS 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, December 15 (Fitch) Fitch Ratings has affirmed Hiscox Ltd's (Hiscox) core entities at Insurer Financial Strength Rating (IFS) 'A+'. Fitch has also affirmed the Long-Term Issuer Default Ratings (IDRs) of all Hiscox holding companies at 'A-'. The Outlooks on all ratings are Stable. Hiscox's subordinated notes have also been affirmed at 'BBB-'. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS The rating affirmation reflects Hiscox's solid capitalisation, strong underwriting performance, and conservative approach to reserving. However, the ratings are constrained by the business profile of Hiscox given its moderate market position and medium size. In the year to 3Q16 Hiscox's retail lines remained the biggest contributor to gross written premiums (GWP). Strong growth was maintained in GWP, particularly in the Hiscox USA division and Hiscox Re. Hiscox USA reported GWP growth of 33% on a local currency basis in the year to 3Q16, supported by continued marketing. Hiscox Re reported a 26.8% increase in GWP in the same period, driven by growth in casualty and specialty lines as well as in insurance-linked securities; however, on a net basis premiums declined 5.2%. Hiscox has a strong track record of underwriting profitability. In 1H16 Hiscox reported a combined ratio of 80.7% (1H15: 82.5%), flattered by foreign exchange movements. On a local currency basis Hiscox's combined ratio was 88.4% for 1H16 (1H15: 80.3%). The deterioration from prior year resulted from continued pressure on rates and a slightly worse catastrophe experience compared with 1H15. Fitch recognises that the current operating environment remains challenging. Rates remain under pressure, particularly in Hiscox London market business with aviation, marine and energy and US big-ticket property facing the most pressure. The historical stability of Hiscox's earnings has been aided by the group's diversified business mix, combining volatile but more profitable products with more stable lines of business. Several years of benign catastrophe activity has also helped boost Hiscox's profits. At end-2015, Hiscox's risk-adjusted capitalisation was 'Extremely Strong', as measured by Fitch's Prism Factor Based Model. It is further supported by strong retained earnings and low debt in the capital structure, with a Fitch-calculated financial leverage of 15% at end-2015. Hiscox's reserve releases have been consistently strong in past years, which Fitch views as indicative of a prudent approach to reserving. In 2015, reserve releases were 14% of prior-year equity. RATING SENSITIVITIES Deterioration in profitability, reflected in a combined ratio consistently above 97% or net income return on equity consistently below 10% (2015: 14.1%), could lead to a downgrade. An upgrade is unlikely given the group's modest market position and size, which Fitch does not expect to change materially in the medium term. FULL LIST OF RATING ACTIONS Hiscox Insurance Company Limited: IFS affirmed at 'A+'; Outlook Stable Hiscox Insurance Company (Guernsey) Limited: IFS affirmed at 'A+'; Outlook Stable Hiscox Insurance Company (Bermuda) Limited: IFS affirmed at 'A+'; Outlook Stable Hiscox Plc: Long-Term IDR affirmed at A-'; Outlook Stable Hiscox Ltd: Long-Term IDR affirmed at 'A-'; Outlook Stable Hiscox Ltd: subordinated debt: affirmed at 'BBB-' Contact: Primary Analyst Graham Coutts Director +44 20 3530 1654 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Ekaterina Ishchenko Associate Director +44 20 3530 1532 Committee Chairperson Stephan Kalb Senior Director +49 69 768076 118 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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