S&P Revises Swett & Crawford’s Rating Outlook to Negative

Standard & Poor’s Ratings Services has revised its outlook on HMSC Corp., the intermediate holding company of Swett & Crawford Group Inc., to negative from stable, while also affirming its ‘B’ counterparty credit rating on HMSC.

“The revised outlook reflects our belief that Swett & Crawford will not meet our stated expectations for 2007,” explained S&P credit analyst Tracy Dolin. “In addition, Swett & Crawford’s coverage metrics are starting to mirror those of lower rated peers.”

S&P said: “During the first nine months of 2007, the company’s adjusted EBITDA fixed-charge coverage was 1.7x, which is low for the current rating. Swett & Crawford’s operating and coverage metrics will likely deteriorate further in 2008 if property/casualty rates soften at an accelerating pace.”

The rating agency also indicated that the revised outlook is based on its “view of Swett & Crawford’s competitive position in the wholesale insurance brokerage space, which, though good, has deteriorated somewhat over the last year. Swett & Crawford’s market share (based on pro forma 2006 premiums), which had been No. One for 20 years, fell to No. Three.”

Moreover, S&P noted, the Group’s “peers have been more rapidly taking advantage of opportunistic acquisitions and have generated relatively more business from non-property/casualty insurance brokering revenue streams, which are less susceptible to current rate pressures.”

The ‘B’ rating reflects Swett & Crawford’s “highly leveraged capital structure, limited financial flexibility, and low-quality balance sheet, which is the result of a large amount of intangibles,” said the bulletin. “In addition, Swett & Crawford is more susceptible to the vagaries of underwriting cycles, particularly in excess and surplus lines, than its peers because of less earnings diversification. Swett & Crawford’s wholesale property/casualty brokerage segment contributed about 80 percent of commissions and fees, with the remainder derived from its managing general agency operations. In addition, the wholesale brokerage space has experienced increased competition.”

After detailing the negative factors, S&P did indicate that the Company’s “good competitive position as a leading wholesale insurance broker in the U.S. and a seasoned management team that has historically delivered strong operating margins relative to the company’s peers and positive cash flow,” should also be considered as “partially offsetting” factors.

In conclusion S&P said that, “if the company remains unable to meet our original performance expectations for the current rating level, which include adjusted EBITDA fixed-charge coverage of at least 1.9x, the ratings could be lowered.

“The ratings will come under pressure particularly if the company’s margins compress or property/casualty rates continue to soften at an accelerated pace, precipitating unsatisfactory coverage metrics.”

However, S&P added that, if “the Company is able to improve its financial profile materially,” it would “consider revising the outlook back to stable.”

Source: Standard & Poor’s – www.standardandpoors.com