Houston Casualty Co. Affirmed, Outlook Stable

April 23, 2004

Standard & Poor’s Ratings Services announced the affirmation of its “AA” counterparty credit and financial strength ratings on Houston Casualty Co., Avemco Insurance Co. (Avemco), U.S. Specialty Insurance Co., HCC Specialty Insurance Co. (HCC Specialty) and HCC Life Insurance Co. (HCC Life). S&P also affirmed its “AA” financial strength rating on Houston Casualty Co. Europe Seguros & Reaseguros S.A. (HCC Europe; all collectively, HCC).

Additionally, S&P affirmed its “A” counterparty credit rating on HCC Insurance Holdings Inc. (HCC Holdings). The outlook is stable.

“The ratings reflect HCC’s strong competitive position, very strong operating performance, and good financial flexibility,” stated S&P credit analyst Polina Chernyak.

Partially offsetting these factors are increased balance sheet risk and greater utilization of capital at the operating level, resulting from aggressive premium growth, relatively high reinsurance recoverable risk, and significant appetite for acquisitions.

The rating on the Spain-based HCC Europe, a subsidiary of property/casualty (P/C) specialty writer HCC Holdings, is based on an unconditional guarantee provided to HCC Europe by HCC Holding’s largest insurance subsidiary, Houston Casualty Co.

HCC enjoys strong market positions in its key market segments, which affords the group significant leverage in these markets. Management is committed to producing an underwriting profit in each line of business, with underwriting discipline closely maintained by the effective use of reinsurance and strict underwriting guidelines.

HCC’s core strategy consists of maintaining a diversified revenue base by engaging in risk-taking business through its insurance companies and nonrisk businesses through its ownership of several underwriting agencies and insurance intermediaries. This strategy provides HCC with significant benefits including lower earnings volatility due to a diversified earnings stream, as well as no reliance on dividends from the insurance companies to cover interest expense on debt and dividends.

In 2003 HCC Group produced very favorable operating results driven by a strong underwriting performance and investment activities, with a combined ratio of 91.2 percent. The group’s ROR (12.5 percent) and surplus (9 percent) compare favorably with those produced by its commercial casualty industry peers.

The group reported a 65 percent increase in net premiums at year-end 2003. This aggressive growth rate increases the group’s risk profile, but this concern is partially offset by its conservative reserving practice an its use of quality reinsurers. Also, some of the growth comes from business underwritten by HCC’s agencies for several years, but are only now being retained by the insurance companies under improved rate and policy terms and conditions.

Although the group’s consolidated (including HCC Life) capital adequacy ratio remained strong at about 140 percent at year-end 2003, this constitutes a significant decline compared with 2002. S&P expects that capital adequacy in 2004 will improved, but will remain below its historical level, as premium growth mitigates earnings growth.

HCC’s business model relies on the significant use of reinsurance. Although HCC’s diligent use of reinsurance provides the group with significant balance sheet protection, reinsurance recoverable exposure is a certain concern, with total recoverables constituting 141 percent of the P/C operation’s surplus at year-end 2003.

Partially offsetting these concerns are limited cat exposure and high quality reinsurers the Group has maintained throughout its history, the spread of credit risk with recoverables from any one reinsurer representing less than 10 percent of surplus and its proactive approach to monitoring the quality of its recoverables, as well as the group’s strong operating cash flows.

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