Houston Casualty Co. Affirmed

Standard & Poor’s Ratings Services affirmed its “AA” counterparty credit and financial strength ratings on Houston Casualty Co., Avemco Insurance Co., U.S. Specialty Insurance Co., HCC Specialty Insurance Co., HCC Life Insurance Co. and affirmed its “AA” financial strength rating on Houston Casualty Co. Europe Seguros & Reaseguros S.A. Also affirmed was the “A” counterparty credit rating on HCC Insurance Holdings Inc. The outlook is stable.

The ratings reflect HCC’s strong competitive position, very strong operating performance, and good financial flexibility. 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. Spain-based HCC Europe’s ratings is based on an unconditional guarantee provided to HCC Europe by HCC Holding’s largest insurance subsidiary, Houston Casualty Co. HCC’s strong market positions in its key market segments 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.

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 peers.

The group reported a 65 percent increase in net premiums at year-end 2003. Risk concerns over this aggressive growth rate are partially offset by HHC’s conservative reserving practice, use of quality reinsurers, and because 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, it is lower than that of 2002. S&P expects capital adequacy in 2004 to improve, but remain below historical levels 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 and strong operating cash flows.

Topics Excess Surplus Europe Underwriting Reinsurance Casualty