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Fitch Assigns ‘AA-‘ IFS Rtg to HCC Insurance Group; Affs HCC Insurance Holdings

Fitch Assigns ‘AA-‘ IFS Rtg to HCC Insurance Group; Affs HCC Insurance Holdings

Business Editors

CHICAGO–(BUSINESS WIRE)–Aug. 12, 2003

Fitch Ratings assigned a ‘AA-‘ insurer financial strength (IFS) rating to HCC Insurance Group, which is led by Houston Casualty Company. Fitch also affirmed the ‘A-‘ long-term issuer and ‘A-‘ senior debt rating of HCC Insurance Holdings, Inc. (HCC). The Rating Outlook is Stable.

The ratings are based on HCC’s market position in a number of specialty insurance segments, as well as the company’s strong capital position at its insurance subsidiaries and at the parent holding company, conservative investment profile, adequate loss reserves, and favorable historical and recent operating profitability. The company’s operations in insurance underwriting, and fee based underwriting agency and intermediary businesses provide significant earnings and cash flow diversity, and a unique approach to managing underwriting risk that has proven successful over an extended period.

HCC has traditionally utilized significant amounts of reinsurance to manage underwriting risk. While this strategy allowed the company to effectively manage net loss exposures relative to capital and mitigate undue risk concentrations, it also created significant reinsurance recoverable balances and a requirement to carefully manage credit exposures to reinsurers In response to more favorable market conditions, changes in business mix, and less attractive reinsurance pricing, the company increased its premium retention level (net written premium divided by gross written premium) to 47% in 2002 versus 37% in 2001, which is still relatively low retention relative to industry norms. These changes led to a decline in HCC’s consolidated GAAP reinsurance recoverables in 2002. The ratio of reinsurance recoverables to shareholders’ equity was 109% at year-end 2002 compared with 127% in 2001.

Led by Houston Casualty Co., HCC’s insurance operations focus on several specialty lines, including medical stop loss, aviation, marine, property, directors & officers liability, accident & health and professional liability. The company has historically reported very favorable underwriting results. In 2002, HCC’s GAAP combined ratio declined to 86.0% from 103.7% in 2001 (which was adversely affected by the September 11 tragedy and HCC’s discontinuance of its primary workers’ compensation business). Net income improved to $105.8 million in 2002 compared with $30.2 million in 2001.

Operating performance continued to trend favorably in the first half of 2003. Net earned premium increased by 53% relative to the first half of 2002 to $345.9 million as HCC benefited from business growth and a continued strong pricing environment in its chosen segments. The GAAP combined ratio was 88.9% for the first half of 2003, versus 85.9% in the prior year first half. Net income increased to $64.9 million in the first half of 2003, compare with $50.0 million for the same period in 2002.

HCC reported GAAP consolidated assets of $4.4 billion and shareholders’ equity of $960.8 million at June 30, 2003. The company’s debt to total capital ratio increased to 24.5% at June 30, 2003 from 20.7% at year-end 2002 due to the March 2003 issuance of $125 million of 1.3% senior convertible notes due April 2023. Financial leverage is likely to decline gradually over time due to growth in retained earnings. Interest coverage has been highly favorable for HCC, and was 29.3 times (x) for the first half of 2003.

Entity/Issue/Type Action Rating/Outlook

HCC Insurance Holdings, Inc.

–Long-term issuer Affirm ‘A-‘/Stable;

–Senior debt Affirm ‘A-‘/Stable.

Houston Casualty Company

–Insurer financial strength Assign ‘AA-‘/Stable.

Avemco Insurance Co.

–Insurer financial strength Assign ‘AA-‘/Stable.

U.S. Specialty Insurance Co.

–Insurer financial strength Assign ‘AA-‘/Stable.

HCC Life Insurance Co.

–Insurer financial strength Assign ‘AA-‘/Stable.

HCC Specialty Insurance Co.

–Insurer financial strength Assign ‘AA-‘/Stable.

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