Fitch Affirms HCC's Ratings; Outlook Stable
CHICAGO -- October 1, 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. A complete list of ratings is provided at the end of
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 property and casualty (p/c) insurance subsidiaries as
strongly capitalized, based on its net written premiums to surplus ratio of
0.95 and 'very strong' score on Fitch's Prism capital model at year-end 2012.
HCC's p/c and life companies reported a 229% and 198% company action level
risk-based capital ratio, respectively, at year-end 2012. The company's GAAP
equity declined by a modest 1% during first-half 2013 to $3.5 billion as of
June 30, 2013, as earnings were offset by the erosion of unrealized gains
along with share repurchase activity and shareholder dividends.
HCC continues to report solid underwriting results with a GAAP combined ratio
of 84.5% for first-half 2013, which included 2.4 percentage points of
catastrophe losses. This compares with a combined ratio of 85.3% and 1.1
percentage points of catastrophe losses in the year ago period. Additionally,
HCC recognized $11.8 million of favorable prior-year loss development during
first-half 2013 and none in the prior-year period.
Offsetting these favorable factors is catastrophe exposure associated with
HCC's property treaty book and continued growth in longer-tail product lines,
which could increase underwriting and 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 15.8% and fixed charge
coverage was solid at 21x as of June 30, 2013.
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.
--Issuer Default Rating 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'.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (August 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
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Dafina M. Dunmore, CFA, +1 312-368-3136
Fitch Ratings, Inc.
70 W. Madison
Chicago, IL 60602
Jim B. Auden, CPA, +1 312-326-3146
Keith M. Buckley, CFA, +1 312-368-3211
Brian Bertsch, +1 212-908-0549
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