OREANDA-NEWS. Fitch Ratings has assigned Hiscox Ltd's (Hiscox) proposed issue of dated subordinated notes an expected rating of 'BBB-(EXP)'.

The final rating is contingent on the receipt of final documents conforming to information already received. The notes are rated three notches below Hiscox's IDR of 'A-' to reflect their subordination and moderate non-performance risk, in line with Fitch's notching criteria.

Fitch has simultaneously affirmed Hiscox's group core entities' Insurer Financial Strength (IFS) rating at 'A+'. Fitch has also affirmed the Long-term Issuer Default Ratings (IDRs) of all Hiscox's holding companies at 'A-'. The Outlooks on all ratings are Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
Hiscox, the holding company for the group registered and domiciled in Bermuda, is proposing to issue subordinated fixed to floating rate notes due in 2045. The proceeds of the subordinated notes will be used to replace letters of credit for funds at Lloyd's as well as for business development purposes.

Fitch classifies Bermuda as an effective group solvency regulatory environment. The baseline recovery assumption for the subordinated debt issued by the holding company is 'poor' which results in two downward notches being applied to the IDR for expected recovery. Furthermore, the issuance is structured to qualify as Tier II regulatory capital with mandatory deferral triggers referencing a solvency capital event, which results in a 'Moderate' risk of non-performance and consequently a further notch down from the IDR. As a result the expected rating on the debt is three notches below the IDR at 'BBB-(EXP)'.

According to Fitch's methodology, the subordinated bond is classified as 100% capital due to regulatory override within Fitch's risk-based capital calculation and is classified as 100% debt for the agency's financial leverage calculations.

The affirmation reflects Hiscox's solid capitalisation, strong underwriting performance, and very conservative approach to reserving. However, the ratings are constrained by the group's medium market position and size/scale.

At end-2014, Hiscox's risk-adjusted capitalisation was 'Extremely Strong', as measured by Fitch's Prism Factor Based Model, which is further supported by strong retained earnings.

Hiscox's strong track record of underwriting profitability is a key positive rating driver. In 1H15 Hiscox reported a combined ratio of 82.5% (1H14: 82.0%). The historical stability of Hiscox's earnings has been aided by a diversified business mix, combining volatile but more profitable products with more stable lines of business. Several years of benign catastrophe activity has helped boost Hiscox's profits, although the group has less exposure to the volatile catastrophe business than most of its peers.

RATING SENSITIVITIES
Deterioration in profitability, reflected in a combined ratio consistently above 97% or net return on equity consistently below 10%, could lead to a downgrade.

Fitch considers an upgrade of Hiscox's ratings unlikely given the group's market position and size/scale, which is not expected to change materially in the medium term.

FULL LIST OF RATING ACTIONS
The rating actions are as follows:

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: assigned 'BBB-(EXP)'.