Rating Action on Hilltop's Arm – Analyst Blog

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Ratings agency A.M. Best Co. demoted the credit rating of National Lloyds Insurance Co. (NLIC) – a property-casualty (P&C) wing of Hilltop Holdings Inc. (HTH) – by a notch. The rating was lowered on the backdrop of weak operating performance over the past several years.

Accordingly, the ratings agency downgraded the issuer credit rating (ICR) of NLIC to “a” from “a+”. While NLIC maintains its financial adequacy with a strong risk-based capitalization, A.M. Best remains concerned over its weak underwriting performance that has been delivering losses. Particularly, increased catastrophe losses in Texas, NLIC’s primary operating area, over the past few years have escalated the claims ratio, thereby affecting the earnings.

Nevertheless, NLIC is taking proactive steps through a conservative investment strategy and firm grasp on the local P&C insurance market. These steps are aiding the company to tighten policy coverage, eliminate loss-making products and increase rates on existing products. Such efforts are expected to improve underwriting operations as well as overall profitability in the future.

Meanwhile, the ratings agency pulled out the ICR of “bbb+” that was assigned on Hilltop in Apr 2010 and was affirmed last year. This was backed by Hilltop’s recent acquisition of Plains Capital Corp., following which Hilltop became a bank holding company, which curbed the business contribution from its P&C insurance operations.

However, A.M. Best affirmed the financial strength rating (FSR) at “A” on both NLIC and American Summit Insurance Co. (ASIC) with an overall stable outlook. The ratings agency also reiterated the ICR of “a” on ASIC. Both ASIC and NLIC are the affiliates of Hilltop’s primary subsidiary NLASCO Inc., through which the company conducts its P&C operations in the U.S.

The ratings agency remains confident of ASIC’s right-sized product basket that helps it retain a strong position in the mobile home insurance market, primarily based out of Ariz. While catastrophe losses are a consistent risk, prudent management entails cautious reinsurance programs that help in mitigating a majority of the losses for this division of Hilltop. Going ahead, any improvement or deceleration from the current level should direct A.M. Best’s revisions in the ratings of Hilltop and its subsidiaries.

Apart from Hilltop, other stocks that are outperforming in the insurance sector include Progressive Corp. (PGR), XL Group Plc (XL) and Navigators Group Inc. (NAVG). All these stocks carry a Zacks Rank #1 (Strong Buy).
HILLTOP HLDGS (HTH): Free Stock Analysis Report

NAVIGATORS GRP (NAVG): Free Stock Analysis Report

PROGRESSIVE COR (PGR): Free Stock Analysis Report

XL GROUP PLC (XL): Free Stock Analysis Report

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