September 5, 2017 / 7:07 PM / a year ago

Fitch Affirms TMHCC's IFS Ratings at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, September 05 (Fitch) Fitch Ratings has affirmed HCC Insurance Holdings, Inc.'s (TMHCC) operating subsidiaries' Insurer Financial Strength (IFS) ratings at 'AA-'(Very Strong) with a Stable Outlook. In addition, Fitch has affirmed TMHCC's Long-Term Issuer Default Rating (IDR) at 'A' with a Stable Outlook. A complete list of ratings follows at the end of this release. KEY RATING DRIVERS Fitch's rationale for the affirmation of TMHCC's ratings reflects the company's very strong earnings, capitalization, and a reserve position that Fitch views as sufficient. The rating also takes into account parent ownership and the company's growth in crop insurance which accounted for 17% of net written premiums in 2016. TMHCC is owned by Tokio Marine Holdings, Inc's (IFS rated A+/Stable Outlook). The Tokio Marine operating company 'A+' IFS is constrained by the Japanese operations' exposure to country risks in Japan, which Fitch views as only indirectly impacting U.S.-based TMHCC. Fitch aligns TMHCC's operating company IDR to that of its parent's core operating companies, but allows the IFS rating to be one notch above the core operating companies of Tokio Marine. Fitch believes that Tokio Marine's ownership does not alter TMHCC's stand-alone rating profile and has only a modest influence on the management of TMHCC, similar to past U.S.-based acquisitions Tokio Marine has made, such as Delphi Financial Group, Inc., which was acquired for $2.7 billion in 2012, and Philadelphia Consolidated Holding Corp., which was acquired for $4.5 billion in 2008. Fitch considers TMHCC to be 'Very Important' in terms of its strategic fit with Tokio Marine, and may migrate to 'Core' over time. TMHCC reported a GAAP calendar year combined ratio of 88% for first quarter 2017 (1Q17) which is marginally higher compared to 87% reported for 1Q16. Fitch notes that for year-end 2012-2016 financials the combined ratio averaged 84.8%. The recently higher results are, in part, explained by the growth in crop insurance which reported a full-year 2016 ratio result of 92%. Fitch notes that TMHCC is a specialty company, thus significant attention is paid to bottom line performance more than to top-line growth. TMHCC's financial leverage was 19% as of year-end 2017, in line with expectations. Fixed-charge coverage was 46x. TMHCC's interest coverage is aided by the low interest rates on its debt that are variable and unhedged; as of year-end 2016 both were under 200bps. To the extent there are sharp increases in interest rates, Fitch believes TMHCC would hedge some of the interest rate risk, but notes that even a modest increase in LIBOR would still produce very low rates. RATING SENSITIVITIES Key rating sensitivities that could lead to a downgrade include: --A downgrade of Tokio Marine's operating company IDR or a two-notch or more downgrade in HCC's standalone assessment. Fitch believes it unlikely that any potential future downgrade of the TMHCC ratings would be to levels lower than those of the parent. Fitch views a near-term rating upgrade as unlikely, but an upgrade of parent Tokio Marine's IDR could result in an upgrade to TMHCC's ratings. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: HCC Insurance Holdings, Inc. --IDR at 'A'. American Contractors Indemnity Company Avemco Insurance Company HCC Life Insurance Company HCC Specialty Insurance Company Houston Casualty Company U.S. Specialty Insurance Company United States Surety Company --IFS at 'AA-'. Contact: Gerald Glombicki, CPA Director +1-312-606-2354 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst James B. Auden, CFA Managing Director +1-312-368-3146 Committee Chairperson Keith M. Buckley, CFA Managing Director +1-312-368-3211 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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