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

Fitch has also affirmed Hastings' GBP250 million senior unsecured notes at 'BBB+'. The Outlooks are Positive.

Key Rating Drivers

The Positive Outlook primarily reflects our expectation of improving capitalisation & leverage, specifically a strengthening of Hastings' Prism FBM score. In addition, the Outlook also reflects our view that Hastings' strategic importance to Sampo Plc is increasing. In December 2021, Sampo raised its stake in Hastings to 100%, which could facilitate greater integration and capital support between Hastings and Sampo.

Hastings' ratings benefit from a one-notch uplift to the issuer default Standalone Credit Profile (SCP) of 'bbb+' for ownership by Sampo Plc, which has a stronger credit profile than Hastings, in Fitch's view. Based on Fitch's group rating methodology we view Hastings as a strategically 'Important' subsidiary to Sampo. In our view a reassessment of Hastings' strategic importance to Sampo, to 'Very Important', could lead to an additional notch of uplift for ownership.

Hastings' SCP reflects its very strong financial performance, strong business profile and strong capitalisation & leverage.

Hastings' profitability is very strong, characterised by strong returns on equity (ROE) and low and stable combined ratios. In 2021 Hastings' net income ROE improved to 16% (2020: 9%) due to a strong underwriting result and the base effect of one-off transaction costs associated with the Sampo acquisition in 2020.

Fitch views Hastings' underwriting profitability as very strong, as reflected in its average five-year combined ratio of 89.6% at end-2021. The company's underwriting profitability improved in 2021, largely driven by an improvement in the calendar-year loss ratio. The latter was due to motor claims frequency remaining below pre-pandemic levels and favourable development on prior year claims. Hastings targets a loss ratio of below 76.0% over the medium term (2021: 62.2%). However, we believe there are near-term risks to this target level being achieved stemming from market-wide issues such as regulatory reforms and rising average claim costs.

Fitch assesses Hastings' business profile as 'moderate', based on the group's size and growing share of the UK private car insurance market. Hastings had GBP969.5 million of gross written premiums (GWP) in 2021 (2020: GBP980.4 million), with UK private car insurance accounting for over 90% of Hastings' GWP. Hastings maintained its share of the UK private car market at 8.4% in 2021 (2020: 8.3%), despite an increasingly competitive operating environment.

Our assessment of Hastings' capital strength is primarily driven by its Prism FBM score, based on the consolidated group profile. The group's Prism FBM score fell to the 'adequate' category at end-2021. However, we expect capital to improve as it becomes more integrated within Sampo. Hastings's financial leverage ratio was broadly stable at 27% in 2021 (2020: 28%).

RATING SENSITIVITIES

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

A sustained consolidated group Prism FBM score of 'Strong' while also maintaining very strong profitability.

A strengthening in Hastings' strategic importance to Sampo.

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

The Outlooks would be revised to Stable if Hastings fails to maintain a consolidated group capital score of 'Strong' in Fitch's Prism FBM.

A weakening in Hastings' strategic importance to Sampo would lead to a downgrade.

Deterioration in Hastings' SCP, as evidenced by a weakening of the Prism FBM score to below 'Adequate' or a deterioration in Hastings' underwriting profitability, as measured by a combined operating ratio of consistently above 98%, could also lead to a downgrade.

A substantial deterioration in Sampo's credit profile could lead to a downgrade.

ESG CONSIDERATIONS

The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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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