Fitch Downgrades HCC's Ratings Following Tokio Marine Acquisition

CHICAGO--()--Fitch Ratings has downgraded HCC Insurance Holdings, Inc.'s (NYSE: HCC) Issuer Default Rating (IDR) to 'A' from 'A+' and the Insurer Financial Strength (IFS) ratings for HCC's operating subsidiaries to 'AA-' from 'AA' with a Stable Outlook; all ratings were previously on Rating Watch Negative. A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

Fitch's rating action follows the announcement today that Tokio Marine Holdings, Inc. (Tokio Marine; 'A+' IFS) has completed the acquisition of HCC. The downgrade reflects ownership by a lower-rated parent. Fitch's rating action aligns HCC's operating company IDR with that of its new parent's core operating companies, but allows the IFS rating to be one notch above those same core operating companies. The Tokio Marine operating company IFS rating of 'A+' is constrained by the Japanese operations' exposure to country risks in Japan (Fitch local currency sovereign rating of 'A'), which Fitch views as only indirectly affecting U.S.-based HCC.

Tokio Marine paid approximately $7.5 billion for HCC, or approximately a 38% premium to the closing stock price prior to announcement, in an all-cash transaction. The purchase price was 1.9x book value. HCC will offer an earnings diversity stream to Tokio Marine as the transaction further diversifies Tokio Marine's non-Japan-generated premiums to approximately 38%, up from 32%, and internationally generated profits to approximately 46%, up from 38%.

Tokio Marine ownership will not alter HCC's standalone rating profile and have only modest influence on management of HCC, similar to past U.S.-based acquisitions Tokio Marine made of Delphi Financial Group, Inc. (Delphi) which was acquired for $2.7 billion in 2012 and Philadelphia Consolidated Holding Corp. (Philadelphia) which was acquired for $4.5 billion in 2008. Fitch considers HCC to be 'Very Important' in terms of strategic fit to Tokio Marine and this may be revised to 'Core' over time.

Fitch recognizes there may be several areas of synergies between the companies; for example, HCC investments may leverage Dephi's investment experience, reinsurance structures can be modified to leverage efficiencies, and the potential for cross-selling of products exists.

Fitch's ratings reflect HCC's consistent and disciplined underwriting practices, conservative capitalization, moderate financial leverage, and niche in several specialty insurance markets. The ratings also reflect the potential for increased earnings volatility from recent newer ventures, particularly the crop insurance and property treaty reinsurance.

HCC's property and casualty (p/c) insurance subsidiaries are solidly capitalized, based on traditional capitalization metrics of statutory operating and net leverage of 0.4x and 1.7x, respectively, at year-end 2014, 105% of 'extremely strong' score on Fitch's Prism capital model at year-end 2014, and risk-based capital ratios of 268% and 246% for the property/casualty and life insurance companies at year-end 2014.

HCC reported a GAAP calendar-year combined ratio of 86.7% for the first half of 2015 (1H15), which represents a modest deterioration over 1H14's result of 83.6%. The deterioration was primarily attributable to expenses associated with newly acquired crop insurance and foreign currency charges.

HCC's financial leverage ratio remained moderate at 19% and fixed charge coverage was solid at 18x as of June 30, 2015.

RATING SENSITIVITIES

Key rating triggers that could lead to a downgrade include:

--A downgrade of Tokio Marine's operating company operating company IDR;

--A material change in operating profile post acquisition;

--A reduction in operating performance due to crop insurance or new business activities.

Fitch believes it is unlikely that any potential future downgrade in the ratings of HCC would be to levels lower than those of the parent, which essentially floor the HCC ratings under most circumstances.

Fitch views a near-term rating upgrade as unlikely, but an upgrade in parent Tokio Marine's IDR could result in an upgrade to HCC's ratings.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings and assigned them a Stable Outlook:

HCC Insurance Holdings, Inc.

--Issuer Default Rating to 'A' from 'A+';

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

American Contractors Indemnity Company

Avemco Insurance Company

HCC Life Insurance Company

HCC Specialty Insurance Company

Houston Casualty Company

U.S. Specialty Insurance Company

United States Surety Company

--IFS ratings to 'AA-' from 'AA'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992974

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992974

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Gerald Glombicki, CPA
Director
+1-312-606-2354
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA
Managing Director
+1-312-368-3146
or
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1-312-368-3211
or
Media Relations
Hannah James, + 1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gerald Glombicki, CPA
Director
+1-312-606-2354
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA
Managing Director
+1-312-368-3146
or
Committee Chairperson
Keith M. Buckley, CFA
Managing Director
+1-312-368-3211
or
Media Relations
Hannah James, + 1 646-582-4947
hannah.james@fitchratings.com