Fitch Affirms HCC's Ratings; Outlook Stable
CHICAGO -- March 26, 2013
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.
KEY RATING DRIVERS
Fitch's ratings reflect HCC's favorable niche in the specialty insurance
markets, conservative capitalization, consistent and disciplined underwriting
practices, and moderate financial leverage. The ratings also reflect
potentially increased earnings volatility from catastrophe losses, growth in
longer-tail product lines, and greater exposure to equities. Additionally,
HCC's scale remains modest relative to similarly rated peers.
Fitch views HCC's capitalization as solid, based on its net written premiums
to surplus ratio of 0.95 as of year-end 2012. The company's GAAP equity
increased by 7% to $3.5 billion as of Dec. 31, 2012, as strong earnings and
modest unrealized investment gains offset share repurchase activity and
stockholder dividends. Additionally, the score for HCC's insurance
subsidiaries on Fitch's Prism capital model was 'very strong' at year-end
HCC continues to report favorable underwriting results with a GAAP combined
ratio of 83.6% in 2012, which included 2.4 percentage points of catastrophe
losses. This compares with a combined ratio of 91.1% and 5.4 percentage points
of catastrophe losses in 2011. Also contributing to the improvement in 2012
was favorable reserve development, which reduced HCC's combined ratio by 3.6
percentage points compared with marginally adverse reserve development in
2011, which added less than one percentage point to its combined ratio in
Offsetting these favorable factors is catastrophe exposure associated with
HCC's property treaty book. The company reported nominal pretax catastrophe
losses in 2012 totaling $52.8 million, or approximately 2% of prior-year
surplus. Additionally, continued growth of longer-tail product lines could
lead to greater reserve volatility.
HCC has increased its exposure to equities and below investment -grade bonds;
however, this exposure remains below industry averages. Fitch continues to
view HCC's investment portfolio as conservative but significantly increased
volatility could lead to downward rating pressure.
HCC's financial leverage ratio remained moderate at 15.2% as of Dec. 31, 2012.
Continued share repurchase activity and/or modestly sized acquisitions could
lead to periodic increases in financial leverage. The company maintained solid
operating earnings-based interest coverage at 21.5x as of Dec. 31, 2012.
Fitch views a rating upgrade as unlikely, given HCC's modest scale and limited
resources in comparison to its rated peer group.
Key rating triggers that could lead to a downgrade include:
--Meaningful deterioration in capitalization, such as operating and net
leverage that exceeds 1.1x and 3.4x, respectively, or a score on Fitch's Prism
capital model below 'very strong';
--Significant and sustained deterioration in underwriting results or
significantly higher volatility;
--Material adverse reserve development;
--Financial leverage ratio - defined as debt-to-total-capital ex-unrealized
gains and losses - that exceeds 20%;
--GAAP operating earnings-based interest coverage that falls below 12x for a
--Risky assets (defined as below investment-grade bonds and equities) divided
by GAAP equity above 30%; or
--A significant decline in the property/casualty or life companies' risk-based
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';
--Senior shelf registration 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' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology -- Amended
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Dafina M. Dunmore, CFA
Fitch Ratings, Inc.
70 W. Madison
Chicago, IL 60602
Jim B. Auden, CPA
Keith M. Buckley, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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