Solid second quarter results, strong ratings from rating agencies and continued focus on enhancing shareholders’ value helped HCC Insurance Holdings Inc. ( HCC - Snapshot Report ) achieve a Zacks #1 Rank (Strong Buy) on September 26. This specialty insurance underwriter delivered positive earnings surprises for four consecutive quarters with an average beat of 14.7%.

Moreover, the stock surged to hit its 52-week high of $34.46 on September 25. With a year-to-date return of 22.7% and long-term earnings growth projection of 7.3%, the company offers an attractive investment opportunity.

The Rank Driver

On July 31, HCC Insurance Holdings delivered second quarter 2012 earnings of 95 cents a share, reflecting an increase of 28.4% from 74 cents earned in the year-ago quarter and escalating 26.7% from the Zacks Consensus Estimate of 75 cents. The outperformance came on the back of a sturdy top line.

Total revenue increased 8.1% year over year to gross $632.3 million. The improvement came on the back of higher premiums and investment income.

Net earned premium in the second quarter was $547.1 million, a year-over-year improvement of 8%.

Retention rate increased 200 basis points to 87%.

Investment income in the second quarter improved 1.7% year over year to $53.3 million.

Lower level of catastrophe activities led to a 430 basis points improvement in the combined ratio over the prior-year quarter to 84.9%.

HCC Insurance Holdings spent $59.5 million to buyback 1.9 million shares in the quarter.

On August 23, the company’s Board of Directors authorized a 6.4% hike in its quarterly cash dividend to 16.5 cents.

On August 27, the Board approved a share buyback program. Per the approval, the company is authorized to repurchase shares worth $300 million.

On September 26, credit rating agency, A.M. Best affirmed the ratings of HCC Insurance Holdings and its subsidiaries.

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 increased nearly 5% to $3.16 per share over the last 60 days. This also represents a year-over-year increase of 21.4%.

For 2013, the Zacks Consensus Estimate moved up by 1.3% to $3.19 per share, representing a year-over-year increase of 1.2%.

Valuation

HCC Insurance Holdings currently trades at a forward P/E of 10.7x, a 13% discount to the peer group average of 12.3x. On a price-to-book basis, the shares are trading at 1.0x, compared to the peer group average of 0.9x.

HCC Insurance Holdings has a trailing 12-month return on equity (ROE) of 9.8%, substantially higher than the peer group average of 7.3%.

About the company

Headquartered in Houston, Texas and founded in 1974, HCC Insurance Holdings underwrites non-correlated specialty insurance products including property and casualty, accident and health, surety and credit product lines. With offices in the United States, the United Kingdom, Spain and Ireland, it has a market capitalization of $3.36 billion.

Other Zacks #1 Rank financial service providers include Community Trust Bancorp Inc. ( CTBI - Snapshot Report ) and 1st Enterprise Bank ( FENB ) .