Business & Finance
Business and Finance
Business and Finance
Fri, February 27, 2009 Fitch Ratings Affirms HCC Insurance Holdings; Outlook Stable
CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings affirms all ratings for HCC Insurance Holdings, Inc. (NYSE: HCC) as follows:
--Long-term Issuer Default Rating (IDR) at 'A+';
--$125 million 1.3% convertible notes due April 1, 2023 at 'A'.
Fitch has also affirmed the 'AA' Insurer Financial Strength ratings (IFS) of HCC's insurance subsidiaries. A full rating list is shown below. The Rating Outlook is Stable.
Fitch's ratings on HCC reflect the company's leading market position in a number of narrowly defined, non-correlated specialty insurance segments; solid capital position at its insurance subsidiaries and low financial leverage at the holding company; conservative investment profile; and adequate loss reserves.
While most property/casualty insurers had a decline in shareholders' equity in 2008, HCC's GAAP equity increased 8% to $2.6 billion due to strong underwriting results and minimal investment losses.
Fitch considers HCC's investment portfolio to be conservative with the majority of assets invested in high-quality fixed income securities. The company has no direct exposure to equities and during the third quarter of 2008 HCC notified its fund managers of its intention to liquidate its alternative investments, primarily fund-of-fund hedge fund investments. At Dec. 31, 2008 the market value of these funds was roughly $50 million. HCC's exposure to subprime and Alt-A securities is approximately $10 million, or 0.2% of the total investment portfolio.
The company recognized $28 million of realized investment losses in 2008, including other-than-temporary impairments of $11 million. The net unrealized gain on the bond portfolio was $15 million at Dec. 31, 2008, down from $25 million at year-end 2007. While all insurers remain exposed to volatile credit market conditions, Fitch believes HCC's investment strategy should enable the company to withstand continued market turmoil without suffering significant reductions in capital.
Fitch believes that given more uncertain capital market conditions, HCC's current capital structure poses greater risk than would be expected at the current rating level. The company has approximately $125 million of convertible notes that are subject to redemption any time after April 1, 2009 and $220 million of debt outstanding under its $575 million bank line of credit facility that expires in December 2011. The facility contains a covenant whereby an event of default would occur if HCC's statutory combined ratio on a trailing four-quarter basis were greater than 105%. While HCC's combined ratio has historically been well below this level, Fitch believes the company's financial flexibility and liquidity would be diminished in the event of a large underwriting loss.
Fitch believes HCC has demonstrated its underwriting discipline throughout pricing cycles as well as its ability to select and integrate acquisitions as evidenced by an average combined ratio of 89% from 1991-2008. In 2008, HCC reported a combined ratio of 85.4%, which included 1.2 points of catastrophe losses offset by 4.1 points of favorable reserve development.
Fitch notes that while HCC's asset portfolio has been largely unscathed by the recent credit market crisis, HCC remains exposed from a liability perspective through its directors and officers (D&O), errors and omissions (E&O), fidelity, surety and credit books of business. In 2008 the company added $57 million in reserves in excess of its initial loss picks. Fitch believes the company's exposure is manageable and will not result in a significant uptick in the company's loss ratio.
HCC's unadjusted debt to total capital ratio was 11.6% at Dec. 31, 2008 and GAAP earnings-based interest coverage was very strong at 29.5 times (x).
The following ratings have been affirmed, with a Stable Outlook:
HCC Insurance Holdings, Inc.
--IDR at 'A+';
--$125 million 1.3% convertible notes due April 1, 2023 at 'A'.
In addition, the following IFS ratings have been affirmed, with a Stable Outlook:
Houston Casualty Company
Avemco Insurance Company
HCC Life Insurance Company
HCC Specialty Insurance Company
U.S. Specialty Insurance Company
Perico Life Insurance Company
HCC Insurance Company
American Contractors Indemnity Company
United States Surety Company
--IFS at 'AA'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, [ www.fitchratings.com ]. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
