March 20, 2012 / 2:47 PM / 5 years ago

TEXT-Fitch affirms HCC's ratings

March 20 - Fitch Ratings has affirmed the ratings of HCC Insurance Holdings,
Inc. (NYSE:HCC), 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.	
	
Offsetting rating factors include increased catastrophe risk since 2009, driven
by growth in HCC's property treaty book, and greater reserve volatility
associated with longer tail product lines. These factors could lead to a change
in Fitch's view of HCC's risk profile and result in downward rating pressure.	
	
HCC remains strongly capitalized with modest operating leverage (as measured by
net premiums written to surplus) of 1.0 at year-end 2011 compared with 0.92 at
year-end 2010. Continued premium growth relative to surplus could lead to
downward rating pressure. The company's GAAP equity remained relatively flat at
$3.3 billion through 2011, as earnings and unrealized investment gains were
offset by share repurchase activity.	
	
HCC continues to generate solid underwriting results with a 2011 GAAP combined
ratio of 90.8%, which included 5.4 percentage points of catastrophe related
losses. This compares with an 84.6% combined ratio and 1.1 percentage points of
catastrophe losses in 2010. The company incurred $117.9 million of net
catastrophe losses during 2011 related to the Japan earthquake and tsunami, New
Zealand earthquake, U.S. tornadoes, and Denmark and Thailand flooding compared
with $21 million in 2010.	
	
In 2011, HCC recorded a modest $10 million of net adverse loss reserve
development on prior policy years, as reserve changes between segments largely
offset one another. The company's diversified financial products (DFP) line of
business, which provides directors & officers' coverage to investment banks,
private equity partnerships and hedge funds, reported $104 million of adverse
reserve development and $37 million of additional losses related to an increase
in its ultimate loss ratio for accident year 2011. Favorable reserve development
in other segments largely offset these results. HCC began re-underwriting its
DFP book in fourth quarter 2011, which included rate increases, higher
deductibles along with non-renewing less profitable policies.	
	
HCC's ratings also reflect moderate financial leverage with a debt-to-capital
ratio of 13.5%, excluding unrealized investment gains and losses. Continued
share repurchase activity and/or modestly sized acquisitions could lead to
periodic increases in financial leverage; however, Fitch expects run rate
leverage to remain below 20%. The company maintained solid operating
earnings-based interest coverage at 16 times (x) at year-end 2011.	
	
Fitch views a rating upgrade as unlikely, given HCC's 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 or
significantly higher volatility;	
--Materially adverse reserve development;	
--Long-term debt-to-total-capital ratio (ex-unrealized gains and losses) that
exceeds 20%;	
--GAAP operating earnings-based interest coverage that falls below 12x for a
sustained period;	
--Meaningful deterioration in capitalization, such as operating and net leverage
that exceeds 1.1x and 3.4x, respectively; or	
--A significant decline in the property/casualty or life companies' risk-based
capital ratio.	
	
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'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.	
	
Applicable Criteria & Related Research:	
--'Insurance Rating Methodology' (Sept. 22, 2011).	
	
Applicable Criteria and Related Research:	
Insurance Rating Methodology

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