Fitch Affirms HCC's IFS at 'AA-'; Outlook Remains Negative
KEY RATING DRIVERS
Fitch's rating action aligns HCC's operating company IDR to that of its parent's (Tokio Marine Holdings, Inc.; IFS rated 'A+'/Negative Outlook) core operating companies, but allows the IFS rating to be one notch above the core operating companies of Tokio Marine.
The Tokio Marine operating company 'A+' IFS rating is constrained by the Japanese operations' exposure to country risks in Japan, which Fitch views as only indirectly impacting U. S.-based HCC. Japan has a local currency sovereign rating of 'A' with a Negative Outlook.
Fitch believes that Tokio Marine's ownership does not alter HCC's stand-alone rating profile and has only a modest influence on the management of HCC, similar to past U. S. based acquisitions Tokio Marine has made, such as Delphi Financial Group, Inc. (Delphi), which was acquired for $2.7 billion in 2012, and Philadelphia Consolidated Holding Corp. (Philadelphia), which was acquired for $4.5 billion in 2008. Fitch considers HCC to be 'Very Important' in terms of strategic fit to Tokio Marine and may migrate to 'Core' over time.
Fitch's ratings reflect HCC's consistent and disciplined underwriting practices, conservative capitalization, moderate financial leverage, and niche in several specialty insurance markets. The ratings also reflect potentially increased earnings volatility from crop insurance and property treaty reinsurance.
HCC reported a GAAP calendar year combined ratio of 87.9% for first half 2016, which represents a modest deterioration over first half 2015's result of 86.7%. The deterioration was primarily attributable to growth in crop insurance.
While HCC's financial leverage ratio remained flat at approximately 19% for first half 2016 the fixed charge coverage ratio of almost 48x improved significantly over prior period due to significantly lower interest rates on the company's new debt which bears an interest rate of sub 200 bps.
Fitch recognizes there are several synergies between the Tokio Marine companies; for example, HCC investments are expected to leverage Delphi's investment experience, reinsurance structures can be modified to leverage efficiencies, and the potential for cross selling of products.
Fitch will likely compress holding company notching if any further downgrades to the IFS ratings occur therefore the outlook on the holding company is Stable.
Key rating triggers that could lead to a downgrade include:
--A downgrade of Tokio Marine's operating company operating company IDR.
--A material change in operating profile.
--A reduction in operating performance.
Fitch believes it is unlikely that any potential future downgrade of the HCC 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 HCC's ratings.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following rating with a Stable Outlook:
HCC Insurance Holdings, Inc.
--IDR at 'A'.
Fitch has affirmed the following ratings and has revised the Outlook to Negative from Stable:
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 ratings at 'AA-'.