Rating agencies put HCC & Tokio on negative watch

The proposed acquisition of US specialty insurer HCC Insurance by Tokio Marine Holdings for $7.5 billion has spurred a negative review from the rating agencies.

Through its subsidiary Tokio Marine & Nichido Fire Insurance, Tokio Marine will pay a 35.8 percent premium on the average share price over the past month.

Both Fitch and Standard & Poor’s (S&P) have placed HCC on negative watch, while Moody’s has placed Tokio Marine & Nichido Fire Insurance on a negative outlook.

Fitch explained that HCC’s ratings could be constrained by Tokio Marine’s lower ratings, which are also affected by the Japanese sovereign rating of ‘A’.

“Resolution of the rating watch is anticipated to coincide with the closing of the transaction, and will consider how HCC fits within the management and corporate structure of Tokio Marine, future operating strategies and profit expectations for HCC, and any changes in capital management targets going forward,” said Fitch.

It added that the review will include an assessment of Tokio Marine's plans to utilise capital distributions from US insurance operations to meet holding company obligations.

Neil Stein, an S&P credit analyst, noted that HCC's current group credit profile is one notch higher than that of Tokio Marine.

S&P said: “After the close of the transaction, we could downgrade HCC by no more than one notch depending on our assessment of its strategic relationship to its new parent according to our group rating methodology criteria and our assessment of HCC's stand-alone credit profile including any  potential effect regulations and rules could have on its capital  prospectively.”

The rating agency will also review HCC's future business strategy with regard to how it will operate under the new ownership.

Moody’s affirmed the financial strength rating of Tokio Marine & Nichido Fire Insurance, but placed the outlook on a negative watch. The rating agency said this reflected “the considerable increase in goodwill and deterioration of capital and financial flexibility as well as the challenges of successfully integrating HCC's relatively sizeable operations”.

Moody’s added that the acquisition will lead to an increment in high severity, low frequency exposures, with long tail risk and high correlation risks among their business lines, which could lead to potential losses for Tokio Marine.

At the time of publication, AM Best was yet to comment.