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Rating Update:

MOODY'S AFFIRMS A2 ISSUER RATING OF NCCI HOLDINGS, INC. (FL); OUTLOOK IS STABLE

01 Oct 2010

NO OUTSTANDING RATED DEBT FOR MEMBERSHIP CORPORATION

Not-for-Profit Organization
FL

Opinion

NEW YORK, Oct 1, 2010 -- Moody's Investors Service has affirmed the A2 issuer rating assigned to NCCI Holdings, Inc. ("NCCI"). The rating outlook is stable. The organization has no outstanding rated debt, but has $55 million of senior unsecured notes, which have a bullet maturity in 2014.

INTEREST RATE DERIVATIVES: None

STRENGTHS:

*Unmatched market position as the nation's largest and most experienced provider of workers compensation and employee injury data and statistics for a large variety of private and governmental constituents, including insurance companies and state governments. The organization's key market strength is its comprehensive database of historical claims that would be difficult to replicate for competitive purposes. NCCI has invested heavily in data and technology both of which enable it to provide a wide range of products and services, as well as industry-focused research and actuarial analysis.

*Favorable operating performance before income taxes, by Moody's calculation, due to a diversified revenue base and a strong financial management team. During FY 2007-2009, NCCI's annual operating margin, as calculated by Moody's, averaged 2.5% (including 5% of a three-year rolling average of cash and investments; including revenues net of customer credits; excluding any income tax benefits or expenses). Operating cash flow in FY 2009 covered debt service a strong 5.4 times, although debt service coverage is high partly because the organization is currently making only interest payments on its debt. Based on unaudited interim financial data (through second quarter of 2010), we expect thinner operating results in FY 2010 (fiscal year-end of 12/31); however, NCCI is tracking ahead of its second quarter budget. Management continues to focus on expense containment in FY 2010, but also has some financial flexibility on additional revenue generation from its ability to implement annual price adjustments and hold back on discretionary customer invoice credits. NCCI has not issued customer invoice credits since FY 2007, when it credited $3.5 million back to customers and does not expect to issue credits in FY 2010.

*No future debt plans for the Boca Raton, Florida based organization. NCCI funds its capital needs from operating cash flow and has little deferred maintenance. The market value of NCCI's Boca Raton headquarters has declined due to the downturn in the real estate market, the market value at $55.1 million is still above the building's purchase price of $52.5 million. NCCI has no plans to sell the building. Moody's notes that its financial resource calculations exclude plant equity.

*Good governance and strong management team, including board consisting of independent members and representatives of the insurance industry and major constituencies.

CHALLENGES:

*Debt structure and risks associated with refinancing of debt. NCCI's $55 million of privately placed senior unsecured notes mature in 2014 with no principal amortization. The notes are fixed rate (paying 5.09%) and can be accelerated with the occurrence of specified Events of Default. The organization is bound by two financial covenants. The first is a Consolidated Adjusted Net Worth Covenant, which must be greater than $30 million at all times ($44.7 million as of June 30, 2010, including 50% of the gain on the headquarters facility as permitted by the covenant calculation). The second is a limitation on Priority Debt (as defined in the agreement) to no more than 10% of consolidated total assets with NCCI having none at this time. NCCI could refinance its outstanding notes at maturity (2014) or may refund the debt earlier. NCCI's ability to build cash and investments through retained operating surpluses to meet the maturity schedule, would be a credit strength, in the event it is unable to refinance the debt. The organization has a $20 million revolving credit facility with Bank of America, N.A. which can be increased upon NCCI's request to $30 million. The line of credit has never been used. We will continue to discuss with the management team its plans for refinancing the outstanding debt in coming years.

*Cash and investments provide thin coverage of debt and operating base ($151 million of operating expenses in FY 2009). In FY 2009 (12/31 fiscal year end), NCCI had $57.8 million of cash and investments that covers debt 1.05 times and operations 0.16 times.

*Thin net asset base further depressed by accrued pension and postretirement liabilities. The pension liability has more than doubled since FY 2007 ($26.7 million in FY 2009). Management reports that the plan's funding status is over 90% and that funding levels have never fallen below Employee Retirement Income Security Act (ERISA) requirements. In FY 2009, expendable financial resources of $23.5 million covered debt and operations 0.43 times and 0.16 times, respectively. However, most of NCCI's financial resources are legally unrestricted, which Moody's believes is a credit strength because it provides financial flexibility. NCCI has adequate monthly days cash on hand of 131 days or about 4.5 months. We do not expect NCCI to generate large operating surpluses and grow its balance sheet significantly, although management reports a long-range goal of maintaining members' equity (net assets) close to $50-$55 million ($40 million in FY 2009).

*Exposure to the underwriting cycle in the workers' compensation insurance sector. NCCI's management attributes the contraction in premiums since 2008 to the challenging economic climate, job losses, and lower premiums charged by insurers (approximately 15% contraction in states where NCCI operates and performs revenue collection in FY 2009). Since half of NCCI's revenues are derived from its premium-based services, revenue generation has therefore been stressed during this period of significant revenue contraction. Management is forecasting a FY 2011 budget with revenues and expenses that are relatively flat compared to the FY 2010 budget. We will continue to monitor the impact of these industry-wide trends, as well as the impact of healthcare reform on NCCI's operating performance.

*Data integrity and safety is a key risk, as NCCI's main product is its large database of workers compensation insurance information. NCCI has invested substantially in technology infrastructure and services to minimize the risk of data loss or integrity.

RECENT DEVELOPMENTS

As of June 30, 2010, NCCI's pension investment asset allocation is comprised of 63.7% fixed income, 26.3% domestic equity, 8.1% international equity, and 2% cash. Corporate cash investments remain invested in money market and short-term certificates of deposit. Management may change target allocations, but does not plan to shift to a riskier asset allocation.

Outlook

NCCI Holding's stable rating outlook is based on Moody's expectation that the organization will continue its pivotal role as an organization serving the workers compensation industry, maintain healthy cash flow to cover debt service, maintain acceptable balance sheet resources and will incur no additional debt in the medium-term.

What Could Change the Rating - UP

Significant growth in financial resources through favorable operating performance and limited additional debt

What Could Change the Rating - DOWN

Deterioration or significant change in market position or significant change in regulatory structure of workers compensation insurance industry, as well as emergence of viable competitors; sustained deterioration of cash and investment balances and/or annual operating cash flow

KEY DATA AND RATIOS (FY 2009 financial results):

Senior Unsecured Notes: $55.0 million

Monthly Liquidity: $50.4 million

Monthly Days Cash on Hand (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 131.2 days

Total Financial Resources: $23.5 million

Total Cash and Investments: $57.8 million

Unrestricted Resources to Debt: 0.43 times

Total Cash and Investments to Debt: 1.05 times

Unrestricted Resources to Operations: 0.16 times

Three-Year Average Operating Margin: 2.5%, net of customer credits

Operating Cash Flow Margin: 10.2%

CONTACT:

NCCI Holdings, Inc.: Alfredo T. Guerra, Chief Financial Officer, (561) 893-3371; Craig F. Ehrnst, Treasurer, (561) 893-3396, Gregory Quinn, Media Contact, (607) 723-7878

RATING METHODOLOGY:

The issuer-level rating on NCCI Holdings, Inc.'s bonds was assigned by evaluating factors believed to be relevant to the credit profile of NCCI such as 1) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, v) the nature of the dedicated revenue stream pledged to the bonds, vi) the debt service coverage provided by such revenue stream, vii) the legal structure that documents the revenue stream and the source of payment, and vii) the issuer's management and governance structure related to payment.

The last rating action with respect to NCCI Holdings, Inc. was on September 14, 2009 when a municipal finance scale rating of A2 with a stable outlook was assigned to NCCI Holdings, Inc. That rating was subsequently recalibrated to A2 with a stable outlook on May 7, 2010.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Erin V. Ortiz
Analyst
Public Finance Group
Moody's Investors Service

Kimberly S. Tuby
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S AFFIRMS A2 ISSUER RATING OF NCCI HOLDINGS, INC. (FL); OUTLOOK IS STABLE
No Related Data.
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