Moody’s assigns ‘junk’ B2 rating to Hastings bonds

Rating agency Moody’s has signed a B2 rating to the bonds Hastings will issue as part of Goldman Sachs’s investment in the company.

The rating is sub-investment grade, commonly referred to as ‘junk’.

Moody’s said the rating reflects the high level of debt that the company will hold under its new structure.

Hastings is issuing £415m-worth of bonds as part of a deal where Goldman Sachs’s merchant banking division is buying 50% of the personal lines broker and insurer.

Moody’s has also assigned a Ba3 financial strength rating to the Hastings group’s insurance operation, Advantage. This is equivalent to a BB- rating from Standard & Poor’s or Fitch, and is also sub-investment grade.

High debt levels

Moody’s said the debt level following the Goldman transaction was the main rating constraint.

The agency expects Hastings’s financial leverage – a measure of indebtedness – to rise above 95% from the already high 77% as a result of the deal.

Under the transaction, a new company called Hastings Insurance Group (Finance) will be created, which will issue the £415m of bonds and become an intermediate holding company within the group.

In addition, further legal entities set up under the new structure will issue £1m of ordinary shares and £305m of preference shares to existing shareholders and Goldman Sachs.

Moody’s counts the new bonds and the preference shares as debt in its leverage calculations.

‘Lean’ capital base

Also counting against Hastings is Advantage’s ‘lean’ capital base, according to Moody’s. This is because Advantage relies heavily on reinsurance, rather than its own capital, for underwriting capacity. The company cedes 50% of its business to reinsurers on a quota-share basis.

According to the rating agency, Advantage’s premium is 8.6 times its capital base. The agency said: “With limited retained earnings, the prospect for a material improvement in the lean equity base (particularly on a group consolidated basis) is considered remote in the medium term.”

Positive factors

Despite the negative points, Moody’s said that Hastings’s profitability is good. It reported a 2012 profit of £40m and return on capital (ROC) of 37%.

Moody’s said: “This high ROC reflects [Advantage’s] high operating leverage via quota share reinsurance, and cost-effective direct distribution, which enables Hastings to compete on price, while maintaining healthy loss ratios. This in turn allows the group to receive significant profit commissions from its reinsurers.”

However, Moody’s also noted that a challenge for Hastings would be maintaining its operating performance while growing profitably in the highly competitive UK motor insurance market, where rates have been falling.