Fitch Ratings has upgraded Hastings Group Holdings Limited's (Hastings) and Hastings Group (Finance) plc's (Hastings Finance) Long-Term Issuer Default Ratings (IDR) to 'A' from 'A-'.

The Outlooks are Stable.

The upgrade follows a significant improvement in the group's capitalisation and leverage, helped by a capital injection by the parent company, Sampo Plc (Sampo) in September 2022. Fitch's assessment of Hastings' strategic importance to Sampo has also improved to 'Very Important' from 'Important' following our assessment of stronger integration and capital support between Hastings and Sampo.

Hastings' standalone credit quality reflects its very strong financial performance and strong company profile, capitalisation and leverage.

Key Rating Drivers

Improved Standalone Credit Quality: Fitch assesses that Hastings' issuer default standalone credit quality has improved to 'a-' from 'bbb+' due to a significant improvement in the group's capital position, as reflected by a consolidated group Prism Factor-Based Model (FBM) score of 'Extremely Strong' at end-9M22 (end-2021: 'Adequate'), following the capital injection from Sampo. Fitch therefore assesses Hastings' capitalisation and leverage rating driver as 'Strong' under our scoring guidelines.

Reduced Financial Leverage: Hastings also redeemed GBP250 million of its senior unsecured notes in September 2022. We estimate Hastings' Fitch-calculated financial leverage ratio to have reduced to around 5% at end-9M22 from 27% at end-2021 following the debt repayment. Fitch expects Hastings' capitalisation and financial flexibility to continue to benefit from being a more integrated part of the Sampo group.

Very Important to Sampo: Further to the capital injection and evidence of stronger integration with its parent company, we now view Hastings as a strategically 'Very Important' subsidiary to Sampo. As a result, Hastings' ratings benefit from a one-notch uplift from its issuer default standalone credit quality of 'a-' for ownership by Sampo, which has a stronger credit profile than Hastings, in Fitch's view.

Very Strong Financial Performance: Fitch assesses Hastings' underwriting profitability as very strong; however, rising claims inflation, regulatory pricing reforms and the normalisation of claims frequency have led to a deteriorated reported loss ratio to 78% in 9M22 from 64% in 9M21. Hastings targets a loss ratio of below 76% over the medium term. Hastings' five-year average reported combined ratio was 90% at end-2021.

Fitch expects pressure on Hastings' underwriting performance and the increase in equity base to lead to lower returns on equity in 2022 and in 2023 (2021: 16%) although returns are likely to remain supportive of its rating.

Strong Company Profile: Fitch assesses Hastings' business profile as 'Moderate' compared with other UK insurers', based on the group's modest size and its growing share of the UK private car insurance market. Hastings reported around GBP834 million of gross written premiums (GWP) in 9M22 (2021: GBP970 million), with UK private car insurance dominating the business mix. Hastings maintained its share of the UK private car market at 8.4% in 2021 (2020: 8.3%), despite an increasingly competitive operating environment.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A strengthening in Sampo's credit profile while the strategic importance of Hastings to Sampo improves to 'Core'

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A weakening in Hastings' strategic importance to Sampo

A substantial deterioration in Sampo's credit profile

A deterioration in Hastings' standalone credit quality, as manifested in a weakening of the Prism FBM score to 'Adequate' or a deterioration in underwriting profitability, as measured by a combined ratio consistently above 98%

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

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