Fitch Ratings Affirms HCC Insurance Holdings

Business Wire, Dec 28, 2004

CHICAGO -- Fitch has affirmed all ratings of HCC Insurance Holdings, Inc. (HCC), including HCC's 'A-' long term issuer and senior debt rating, and the 'AA-' insurer financial strength (IFS) rating of Houston Casualty Company, and several other insurance subsidiaries. All ratings are listed below. The Rating Outlook is Stable.

The ratings continue to be based on HCC's market position in a number of specialty insurance segments, as well as the company's strong capital position at its insurance subsidiaries and the parent holding company, conservative investment profile, adequate loss reserves, and favorable historical underwriting performance.

The company's operations in insurance underwriting, and fee based insurance intermediary businesses provide significant earnings and cash flow diversity. HCC's insurance operations focus on several specialty lines, including: medical stop loss, aviation, marine, property, directors & officers liability, accident & health, surety and professional liability.

HCC has traditionally utilized significant amounts of reinsurance to manage underwriting risk, allowing the company to effectively manage net loss exposures relative to capital and mitigate undue risk concentrations, but also creating significant reinsurance recoverable balances and a need to skillfully manage reinsurer credit exposures. Reinsurance recoverables were approximately 130% of shareholders' equity at Sept. 30, 2004. In response to more favorable market conditions and changes in business mix, the company has gradually increased its premium retention level (net written premium divided by gross written premium) to 54% for the nine months ending Sept. 30, 2004, which is still a relatively low retention relative to industry norms.

HCC has historically reported very favorable underwriting results. In the first nine months of 2004, HCC's GAAP combined ratio increased to 92.9% from 88.8% in the first nine months of 2003. The increase was attributable mainly to losses from third quarter hurricanes in Florida and the southeastern U.S. Net income improved to $106.8 million in the first nine months of 2004 compared with $93.1 million for the same period in 2003. The company reported GAAP consolidated assets of $5.6 billion and shareholders' equity of approximately $1.2 billion at Sept. 30, 2004.

HCC recently completed a common stock offering that raised proceeds of approximately $95 million. HCC contributed $75 million of these funds to its insurance subsidiaries capital base. HCC's pro forma debt to total capital ratio is approximately 20.3% following this offering. Interest coverage was very strong for the first nine months of 2004 at 27.3 times (x), compared with 23.3x for the full year 2003.

Entity/Issue/Type              Action        Rating/Outlook

HCC Insurance Holdings, Inc.

-- $172 million 2% convertible notes due 2021

-- $125 million 1.3% convertible notes due 2023

-- Long-term issuer rating      Affirm          'A-'/Stable.

Houston Casualty Company

Avemco Insurance Company

HCC Life Insurance Company

HCC Specialty Insurance Company

U.S. Specialty Insurance Company

-- Insurer financial strength   Affirm         'AA-'/Stable.