Best Affirms HCC’s ‘A+’ Rating; Revises ICR Outlook to Positive

September 2, 2009

A.M. Best Co. has revised the outlook to positive from stable for the issuer credit ratings (ICR) of “aa-” and has affirmed the ICRs and financial strength rating (FSR) of ‘A+’ (Superior) of Houston Casualty Group (HCC) and its property/casualty members.

Best also upgraded the ICRs to “a+” from “a” and affirmed the FSRs of ‘A’ (Excellent) of Los Angeles-based American Contractors Indemnity Company (ACIC), Maryland-based United States Surety Company (USSC), and has affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Pioneer General Insurance Company of Denver, Colo.

In additionally Best affirmed the FSRs of ‘A+’ (Superior) and ‘A’ (Excellent) and ICRs of “aa-” and “a+” of Indianapolis-based HCC Life Insurance Company (HCC Life) and Perico Life Insurance Company of Dover, Del. respectively. The outlook for all the above ratings is stable, except where specified.

Concurrently, Best affirmed the ICR of “a-” and the debt rating of “a-” on $125 million of 1.3 percent convertible notes due 2023 of the holding company, HCC Insurance Holdings, Inc. and has also revised the outlook for these ratings to positive from stable. In addition Best assigned indicative ratings of “a-” to senior unsecured debt, “bbb+” to subordinated debt and “bbb+” to shelf trust preferred securities of HCC Capital Trusts I and II, which may be issued under HCC Holdings’ recently renewed shelf registration statement. The assigned outlook on the new indicative ratings is also positive.

Best noted that the $1 billion shelf registration replaces HCC Holdings’ previous $1 billion shelf registration that was set to expire on May 25, 2009, but was replaced shortly beforehand. Best has withdrawn its indicative ratings on the securities related to the expired shelf.

“These ratings reflect HCC’s sustained profitability, strong capitalization, as well as the moderate financial leverage and substantial financial flexibility at HCC Holdings,” Best explained.

The rating agency also noted that “HCC’s business strategies have focused on a conservative investment strategy and on underwriting within narrowly defined specialty lines, effective utilization of affiliated underwriting agencies/insurance intermediaries and the optimal utilization of reinsurance protection. These strategies have helped produce increased operating profits in recent years despite challenging market conditions. The ratings also acknowledge HCC’s near-term earnings prospects and its strong position in the specialty admitted and non-admitted markets.

“Financial leverage at HCC Holdings as of June 30, 2009 remained relatively low, as evidenced by a total debt-to-capital ratio of 13.4 percent. Furthermore, interest coverage continues to be exceptionally strong. For liquidity purposes, a $575 million revolving credit facility is maintained. As of July 31, 2009, the outstanding balance on the credit facility was $320 million leaving $255 million of capacity available to HCC Holdings.”

In addition to HCC’s P/C companies, Best pointed out that “HCC Life is a market leader in the medical stop-loss insurance industry, while Perico is active in writing smaller case size stop-loss coverage.” Best added that it “expects both HCC Life and Perico to continue generating favorable earnings due to their disciplined underwriting approach,” even though the cyclical medical stop-loss business continues to be in the soft part of the underwriting cycle.

For a complete listing of HCC Insurance Holdings, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please go to:

Source: A.M. Best

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