Credit ratings agency Fitch has affirmed its long-term Issuer Default Rating (IDR) and Insurer Financial Strength (IFS) ratings on HCC Insurance Holdings Inc. (HCC - Free Report) . The rating agency provided IDR of “A+“ for HCC Insurance Holdings Inc. which included the debt rating of “A” on the company’s 6.3% senior notes worth $300 million scheduled to expire in 2019. It also confirmed the IFS ratings of “AA“ to the insurance company subsidiaries of HCC. Both the ratings carry a stable outlook.
The insurance company subsidiaries to which the IFS ratings have been assigned are Houston Casualty Company, Avemco Insurance Company, U.S. Specialty Insurance Company, HCC Specialty Insurance Company, HCC Life Insurance Company, Perico Life Insurance Company, American Contractors Indemnity Company and United States Surety Company.
The ratings affirmation came on the back of HCC’s steady performance, competitive position in the specialty insurance market, sturdy capitalization and low financial leverage. The company’s insurance subsidiaries scored ‘very strong’ under Prism capital model. Nevertheless the ratings also take into account higher earnings instability owing to catastrophe losses, growth in longer tail product lines, greater exposure to equities and a relatively modest scale in comparison to its peers.
As per Fitch HCC’s net written premiums to surplus ratio of 0.95 reflects its strong capitalization. Its GAAP equity increased 7% year over year to $3.5 billion in 2012. Moreover the combined ratio of HCC improved 750 basis points year over year to 83.6% in 2012 owing to relatively lower catastrophe losses and favorable reserve development. HCC also had strong operating earnings-based interest coverage of 21.5x in 2012.
Fitch stated that HCC’s limited scale and resources debars it to upgrade the company’s ratings. The ratings on HCC is subject to a downgrade if the company’s operating and net leverage goes above 1.1x and 3.4x respectively or a decline in the score on Fitch's Prism capital model below 'very strong'.
Other factors that can add to a downgrade in the ratings include deterioration in underwriting results or higher instability, adverse reserve development, financial leverage ratio above 20%, GAAP operating earnings-based interest coverage below 12x for a continued period, risky assets divided by GAAP equity above 30% or a fall in the property/casualty or life companies' risk-based capital ratio.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining the creditworthiness in the market. We believe that the company’s present score with the credit rating agencies will help it write more business going forward.
Earlier, in Oct 2012, Fitch affirmed the IFS ratings of “AA” on HCC’s operating units and the senior debt rating at “A”. Both the ratings carried a stable outlook.
HCC currently carries a Zacks Rank #2 (Buy).Among others from the industry Arch Capital Group Ltd. (ACGL - Free Report) , Axis Capital Holdings Limited (AXS - Free Report) and Cincinnati Financial Corp. (CINF - Free Report) carry a favorable Zacks Rank #1 (Strong Buy) and are worth noting.