HCC Subs Assigned ‘AA’ Ratings

August 16, 2004

Standard & Poor’s Ratings Services assigned its “AA” financial strength ratings to American Contractors Indemnity Co. (ACIC) and HCC Reinsurance Co. Ltd. (HCC Re), both subsidiaries of Houston-based property/casualty specialty writer HCC Insurance Holdings Inc. (HCC). The outlook is stable.

S&P said the ratings on ACIC and HCC RE are based on unconditional guarantees provided to the companies by HCC’s largest insurance subsidiary, Houston Casualty Co. (AA/Stable/–).

S&P’s ratings on HCC and its insurance subsidiaries are based on HCC’s strong business profile, very strong operating performance, strong capitalization, and good financial flexibility. Partially offsetting these factors are increased balance sheet risk and greater utilization of capital at the operating level (as the group increases net retention), relatively high reinsurance recoverable risk, and significant appetite for acquisitions.

HCC RE primarily writes surety, transportation and aviation excess of loss coverage, and medical stop loss reinsurance for related entities. Prospectively, S&P expects HCC RE in addition to its existing mix of business to write on limited basis the mortgage guaranty and residual value insurance produced by HCC Indemnity Guaranty, underwriting agency formed by HCC in July 2004.

ACIC was acquired by HCC on Feb. 4, 2004. Immediately following the acquisition, HCC contributed additional funds to increase ACIC’s capital base to $30 million. Prospectively, S&P expects ACIC’s surety business mix to primarily consist of court, bail, specialty contract, and license and permit bonds. Its gross written premium is estimated to be about $60 million for 2004.

HCC’s operating performance is expected to remain very strong, with the GAAP consolidated combined ratio in the 89 percent – 92 percent range in 2004 as the earnings effect of growth in 2004 begins to show. Much of this growth has been attributable to the directors and officers (D&O) lines of business, with which HCC has had relatively little experience, however, it is underwritten by an experienced and seasoned group of D&O underwriters.

If the foreseen earnings do not materialize, HCC might not have enough additions to surplus necessary to improve its risk based capital position. 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 both HCC’s historical levels and the levels customarily associated with the present rating. S&P expects that capital adequacy in 2004 will improve, but will remain below its historical level, as premium growth mitigates earnings growth.

Accordingly, S&P will be monitoring this position very carefully thoughout the year. Debt leverage is expected to remain at or less than 25 percent, with interest coverage at more than 15x in the medium term.

Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit analysis system, at www.ratingsdirect.com.

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