OREANDA-NEWS. Fitch Ratings has affirmed the ratings for HCC Insurance Holdings, Inc. (NYSE: HCC), including the senior debt rating at 'A'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings for HCC's operating subsidiaries at 'AA'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

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 recent newer ventures particularly the crop insurance and property treaty reinsurance. HCC's operating scale remains modest relative to similarly rated peers.

Fitch views HCC's property and casualty (p/c) insurance subsidiaries as solidly capitalized, based on its performance under traditional capitalization metrics and 'extremely strong' score on Fitch's Prism capital model.

HCC reported a GAAP calendar year combined ratio of 82.1% for full year 2014, which represents a modest improvement over 2013's result of 83.4%. For full year 2014 HCC recognized \$26 million in catastrophes compared to \$52 million in 2013 and \$53 million in 2012.

Overall, loss reserves developed favorably by a net \$56 million in 2014, improving the calendar year combined ratio by 2.4 percentage points compared to 3.3 pp in the prior year. While overall reserve development was favorable, the International Surety and Credit line of business continued to post adverse development, although less from prior year, related to Spanish cooperative housing bonds. The company noted that claims date back to the purchase of St. Paul Espana in 2002 and has now finalized over 80% of the outstanding claims.

In addition to improvement in International's Surety and Credit, the U.S. Property & Casualty segment also improved by approximately 5 pp on a calendar year basis and 4 pp on an accident year basis. Within the U.S. Property & Casualty segment the Liability line of business improvement came from growth in premiums and Public risk line of business which benefited from a reunderwriting of this line that began in 2012.

Offsetting these favorable factors is catastrophe exposure associated with HCC's property treaty book and continued growth in longer-tail product lines, which could increase underwriting and reserve volatility. HCC recently started writing crop insurance. To the extent that management aggressively grows this line of business or this line of business exhibits poor results this could be a catalyst for a downgrade.

Fitch notes that HCC's current ratings benefit from better than industry average underwriting performance but also low volatility in generating these results. If performance were to still be better than average but with higher volatility Fitch could lower current ratings.

Fitch has modest concerns of an increased allocation of equities in HCC's investment portfolio but notes that during 2014 HCC recognized a realized gain of \$62 million as the company reduced common equity holdings. HCC's remaining investment portfolio is dominated by high quality fixed income securities. Fitch will continue to monitor HCC's asset allocation to risky assets defined by Fitch to include: common stocks, below-investment grade bonds, and Schedule BA assets.

HCC's financial leverage ratio remained moderate at 18.1% and fixed charge coverage was solid at 22.2x as of December 31, 2014.

RATING SENSITIVITIES

Fitch views a rating upgrade as unlikely, given HCC's modest scale and limited resources in comparison to its rated peer group.

Key rating triggers that could lead to a downgrade include:

--Meaningful deterioration in capitalization, such as operating and net leverage that exceeds 1.1x and 3.4x, respectively, a score on Fitch's Prism capital model below 'very strong' or a significant decline in the property/casualty or life companies' risk-based capital ratio;
--Significant and sustained deterioration in underwriting results or significantly higher volatility;
--Material adverse reserve development;
--Financial leverage ratio - defined as debt-to-total-capital ex-unrealized gains and losses - that exceeds 20%;
--GAAP operating earnings-based interest coverage that falls below 12x for a sustained period; or
--Risky assets ratio (defined as below investment-grade bonds and equities divided by GAAP equity) above 30%.

Fitch has affirmed the following ratings with a Stable Outlook:

HCC Insurance Holdings, Inc.
--Issuer Default Rating at 'A+';
--\$300 million 6.3% senior notes due Nov. 15, 2019 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 ratings at 'AA'.