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Fitch Affirms HCC's Ratings;; Outlook Stable

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  Published in Business and Finance on Friday, September 16th 2011 at 14:11 GMT by Market Wire
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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed HCC Insurance Holdings, Inc.'s (NYSE:HCC) holding company ratings, including the senior debt rating at 'A', as well as the Insurer Financial Strength (IFS) ratings of its operating subsidiaries at 'AA'. The Rating Outlook is Stable. See below for a complete listing of all ratings.

Fitch's ratings reflect HCC's solid niche in the specialty insurance markets, strong capitalization, disciplined underwriting, and low financial leverage. The ratings also reflect the company's conservative investment profile and reserving practices.

HCC remains strongly capitalized with low operating leverage (as measured by net premiums written to surplus) of 0.71 for its property/casualty companies and 0.91 for total operations at year-end 2010. The company's GAAP equity remained relatively flat at $3.3 billion through the first half of 2011, as earnings and unrealized investment gains were offset by share repurchase activity.

HCC continues to generate solid underwriting profits despite a persistent soft pricing environment. Through the first six months of 2011, HCC reported a GAAP combined ratio of 91.9% (89.8% on an accident year basis), which compares to 87.1% (86.6% on an accident year basis) during the prior year period.

The company incurred $73 million of net catastrophe losses during the first half of 2011 related to the Japan earthquake and tsunami, New Zealand earthquake and U.S. tornadoes. This compares to $21 million in the prior year period. Fitch expects increased earnings volatility due to catastrophe exposure in HCC's growing property treaty business; however, wide swings in results could put downward pressure on the rating.

HCC's ratings also reflect its low debt-to-capital ratio of 11.3%, excluding FAS 115. Continued share repurchase activity and/or modestly sized acquisitions could lead to periodic increases in financial leverage. The company maintains solid operating earnings-based interest coverage at 15.8 times (x) as of June 30, 2011.

Fitch views HCC's current rating as constrained by its size and limited resources in comparison to its rated peer group.

Key rating drivers that could lead to a downgrade include significant and sustained deterioration in underwriting results, adverse reserve development that exceeds 5% of prior year surplus, funded debt-to-total-capital ratio (ex-FAS 115) that exceeds 20% and GAAP operating earnings-based interest coverage that falls below 12x for a sustained period. In addition, meaningful deterioration in capitalization, such as operating and net leverage that exceeds 1.1x and 3.4x for total property/casualty companies, respectively, or a significant decline in the life companies' risk-based capital ratio could also lead to a downgrade.

Fitch has affirmed the following ratings with a Stable Outlook:

HCC Insurance Holdings, Inc.

--IDR at 'A+';

--$300 million 6.3% senior notes due Nov. 15, 2019 at 'A'.

Houston Casualty Company

Avemco Insurance Company

HCC Life Insurance Company

HCC Specialty Insurance Company

U.S. Specialty Insurance Company

Perico Life Insurance Company

American Contractors Indemnity Company

United States Surety Company

--IFS ratings at 'AA'.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria & Related Research:

--'Insurance Rating Methodology' (March 31, 2011);

--'Non-Life Insurance Rating Methodology' (March 31, 2011);

--'Life Insurance Rating Methodology' (March 31, 2011);

--'Short-Term Ratings Criteria for Non-Financial Corporate' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Short-Term Ratings Criteria for Non-Financial Corporate

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647249 ]

Life Insurance Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=612905 ]

Non-Life Insurance Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604366 ]

Insurance Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614266 ]

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