Fitch Affirms HCC's Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings of HCC Insurance Holdings, Inc. (NYSE: HCC), including the senior debt rating at 'A'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of HCC's operating subsidiaries at 'AA'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

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 solidly capitalized, based on its net written premiums to surplus ratio of 0.90 and 'extremely strong' score on Fitch's Prism capital model at year-end 2012. HCC's p/c and life companies reported a 287% and 206% company action level risk-based capital ratio, respectively, at year-end 2013. The company's GAAP equity increased by approximately 4% in 2013 to $3.7 billion at year-end, as strong earnings offset unrealized investment losses and share repurchases during the year.

HCC reported a combined ratio of 83.4% in 2013, essentially flat with 2012. Catastrophe losses contributed approximately two percentage points to the combined ratio in 2013 and 2012 while favorable reserve development benefited the result by roughly 3pp during both periods. All segments reported an underwriting profit in 2013 although the strength of results varied by product with losses related to Spanish surety bonds being offset by favorable results in other lines of business.

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 demonstrated conservatism when estimating reserves and continues to take prompt and sufficient measures when claims diverge from initial estimates. In 2013, the company reported $74 million of favorable reserve development with all segments contributing except International. The adverse development in the International segment relates to a specific class of Spanish surety bonds, the majority of which were written prior to 2006. HCC increased its estimated liability following an adverse Spanish Supreme Court ruling in September 2013 against a peer company with a similar product and features. HCC has made significant progress towards settling claims and anticipates that ultimate losses will fall within current reserve levels.

Fitch continues to view HCC's investment portfolio as conservative but significantly increased volatility could lead to negative rating pressure. HCC has gradually increased its investment exposure to equities and below investment-grade bonds over the past two years, which, in aggregate, make up approximately 10% of total investments as of Dec. 31, 2013. This allocation compares with no direct exposure to equities and essentially no exposure to below investment-grade bonds two years ago. Still, exposure to these asset classes remains below industry peers and Fitch's median guidelines for the 'AAA' rating category.

HCC's financial leverage ratio remained moderate at 15.3% and fixed charge coverage was solid at 21.2x as of Dec. 31, 2013.

Fitch has withdrawn the ratings of Perico Life Insurance Company (Perico), due to the reorganization of the entity. Perico is an inactive shell company that no longer writes new business after transferring essentially all assets and liabilities to HCC Life Insurance Company.

RATING SENSITIVITIES

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, a score on Fitch's Prism capital model below 'very strong' or a significant decline in the property/casualty or life companies' risk-based capital ratio;

--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 sustained period; or

--Risky assets ratio (defined as below investment-grade bonds and equities divided by GAAP equity) above 30%.

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

American Contractors Indemnity Company

United States Surety Company

--IFS ratings at 'AA'.

Fitch has withdrawn the following rating with a Stable Outlook:

Perico Life Insurance Company at 'AA'.

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

Applicable Criteria & Related Research:

--'Insurance Rating Methodology' (November 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824984

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Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA, +1 312-368-3136
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jim B. Auden, CPA, +1 312-326-3146
Managing Director
or
Committee Chairperson
Keith M. Buckley, CFA, +1 312-368-3211
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Dafina M. Dunmore, CFA, +1 312-368-3136
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jim B. Auden, CPA, +1 312-326-3146
Managing Director
or
Committee Chairperson
Keith M. Buckley, CFA, +1 312-368-3211
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com