EX-99.1 2 h56612exv99w1.htm EARNINGS PRESS RELEASE exv99w1
 

Exhibit 99.1
(LOGO)
HCC INSURANCE HOLDINGS REPORTS RESULTS
FOR FIRST QUARTER OF 2008
HOUSTON (May 6, 2008) . . .
HCC Insurance Holdings, Inc. (NYSE: HCC) today released earnings for the first quarter of 2008, which ended March 31.
Net earnings for the first quarter of 2008 were $81.1 million, compared with $96.7 million during the first quarter of 2007. During the same periods, net earnings per diluted share were $0.70 compared to $0.83 in 2007.
The net earnings of the Insurance Company segment increased during the first quarter of 2008, due to favorable underwriting margins despite conditions in the insurance market. The GAAP combined ratio remained consistent for the first three months of 2008 at 83.7 percent compared to 84.0 percent for the corresponding period of 2007.
“We are very pleased with our underwriting results for the first quarter of 2008 given the softening market. We have projected a combined ratio of 85 percent for 2008 and our results for the first quarter are on track,” HCC Chief Executive Officer Frank J. Bramanti said.
The decline in first quarter consolidated net earnings was principally due to unrealized losses in HCC’s trading portfolio — which consists of investments in American Safety Insurance Holdings, Ltd. and Tower Group, Inc. — of $9.0 million pretax ($5.9 million after tax) in 2008, versus a realized and unrealized pretax gain of $2.2 million ($1.4 million after tax) in 2007; a pretax loss of $1.2 million ($0.8 million after tax) on the Company’s alternative investments portfolio in 2008, versus pretax income of $7.0 million ($4.5 million after tax) in 2007; and a gain of $10.8 million pretax ($7.0 million after tax) on the sale of a strategic investment in 2007, versus no activity in 2008. This investment-related activity reduced diluted earnings per share by $0.06 in 2008 and increased diluted earnings per share by $0.11 in 2007.
Book value per share increased to $21.88 at March 31, 2008, up three percent since December 31, 2007. The Company’s annualized return on average equity as of March 31, 2008 was 13.1 percent.
Total revenue of $567.4 million in the first quarter of 2008 was $29.8 million lower than in the same quarter of 2007. The decrease was primarily due to the $30.2 million pretax change in the investment-related items discussed above.

 

 

Net earned premium of the Company’s insurance company subsidiaries was $493.5 million, down one percent during the first three months of 2008, compared with $497.6 million for the first quarter of 2007. During the same period, net written premium also decreased one percent to $493.6 million, while gross written premium declined three percent to $583.0 million compared to the first quarter of 2007. This trend is in line with the Company’s expectations for 2008.
“Gross written premium, net written premium and net earned premium were all down slightly from 2007 amounts due to the impact of softening rates in several of our markets, which has curtailed our risk appetite. Despite these softening rates, our margins remain at acceptable levels of profitability thanks to our consistent underwriting discipline,” Mr. Bramanti said.
During the first quarter of 2008, fee and commission income decreased slightly to $31.0 million, compared to $32.1 million during the same period in 2007.
Investment income from the Company’s fixed income securities increased 20 percent during the first quarter of 2008, while total net investment income declined four percent in 2008 to $47.6 million from $49.5 million in 2007. The decline in income from the Company’s $159.8 million alternative investments portfolio exceeded the increase in income on its fixed income securities portfolio.
As of March 31, 2008, HCC’s fixed income securities portfolio had an average rating of AA+, average duration of five years and an average tax equivalent yield of 5.3 percent. The Company held only $15.4 million of subprime-related securities, which had an average rating of AAA, and owned no CDO or CLO securities.
“We are pleased with the growth in income produced by our fixed income securities portfolio and remain confident that our high quality investment portfolio and our conservative investment policy will continue to help protect our shareholders’ equity from the volatility and excessive losses being experienced in the marketplace,” Mr. Bramanti said.
Other operating income (loss) was $(4.9) million in 2008, compared to $18.6 million in 2007. The 2008 loss includes the $9.0 million loss on the Company’s trading portfolio discussed above. HCC’s projection for other operating income for 2008 is approximately $3.3 million per quarter, excluding the effect of any trading portfolio activity or sales of strategic investments.
As of March 31, 2008, total investments increased to $4.8 billion, total assets exceeded $8.2 billion, shareholders’ equity was more than $2.5 billion and the Company’s debt to total capital ratio remained very conservative at 12.6 percent. (See attached tables).
The Company continues to closely monitor its D&O and E&O exposure to subprime issues. While the environment remains challenging, based upon the Company’s current

 

 

knowledge, the Company continues to believe that it has provided for the ultimate losses that will eventually be incurred on this business and that its D&O and E&O business remains profitable.
“The difficult underwriting environment highlights the strength of our ability to manage the bottom half of the underwriting cycle. Our continuing discipline and focus on underwriting profitability should allow us to minimize the impact of declining rates on our operating results and financial position,” Mr. Bramanti said.
HCC will hold an open conference call beginning at 8:00 a.m. Central Daylight Time on Wednesday, May 7. To participate, the number for domestic calls is (800) 374-0290 and the number for international calls is (706) 634-1303. In addition, there will be a live webcast available on a listen-only basis that can be accessed through the HCC website at www.hcc.com. A replay of the webcast will be available on the website until Tuesday, May 20, 2008.
Headquartered in Houston, Texas, HCC Insurance Holdings, Inc. (HCC) is a leading international specialty insurance group with offices across the United States and in Belgium, Bermuda, Ireland, Spain and the United Kingdom. HCC has assets of more than $8.2 billion, shareholders’ equity in excess of $2.5 billion and is rated AA (Very Strong) by Standard & Poor’s and AA (Very Strong) by Fitch Ratings. In addition, HCC’s major domestic insurance companies are rated A+ (Superior) by A.M. Best Company.
For more information, visit our website at www.hcc.com.
Contact:   Barney White, HCC Vice President of Investor Relations
Telephone: (713) 744-3719
Forward-looking statements contained in this press release are made under “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The types of risks and uncertainties which may affect the Company are set forth in its periodic reports filed with the Securities and Exchange Commission.
* * * * *

 

 

HCC Insurance Holdings, Inc. and Subsidiaries
Financial Highlights
March 31, 2008
(Unaudited, in thousands except per share data)
                 
    Three months ended March 31,
    2008   2007
Gross written premium
   $ 582,999     $ 599,101  
Net written premium
     493,647       496,965  
Net earned premium
     493,546       497,600  
Fee and commission income
     30,999       32,125  
Net investment income
     47,621       49,467  
Other operating income (loss)
     (4,946 )     18,585  
Total revenue
     567,388       597,222  
Net earnings
     81,101       96,690  
Earnings per share (diluted)
     0.70       0.83  
Cash flow from operations
     135,800       230,311  
Weighted average shares outstanding (diluted)
     116,372       117,009  
GAAP net loss ratio
     59.4 %     60.4 %
GAAP combined ratio
     83.7 %     84.0 %
Paid loss ratio
     47.7 %     54.8 %
 
    March 31, 2008   December 31, 2007
Total investments
   $ 4,799,702     $ 4,672,277  
Total assets
     8,218,418       8,074,645  
Shareholders’ equity
     2,522,194       2,440,365  
Debt to total capital
     12.6 %     11.7 %
Book value per share
   $ 21.88     $ 21.21  

 

 

HCC Insurance Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)
                 
    March 31,     December 31,  
    2008     2007  
ASSETS
                
 
                
Investments:
                
Fixed income securities
   $ 3,929,549     $ 3,666,705  
Short-term investments
     655,598       783,650  
Other investments
     214,555       221,922  
 
            
Total investments
     4,799,702       4,672,277  
Cash
     24,688       39,135  
Restricted cash and cash investments
     180,754       193,151  
Premium, claims and other receivables
     775,126       763,401  
Reinsurance recoverables
     953,925       956,665  
Ceded unearned premium
     224,785       244,684  
Ceded life and annuity benefits
     65,892       66,199  
Deferred policy acquisition costs
     194,957       192,773  
Goodwill
     817,372       776,046  
Other assets
     181,217       170,314  
 
            
 
                
Total assets
   $ 8,218,418     $ 8,074,645  
 
            
 
LIABILITIES
                
 
                
Loss and loss adjustment expense payable
   $ 3,318,811     $ 3,227,080  
Life and annuity policy benefits
     65,892       66,199  
Reinsurance balances payable
     124,077       129,838  
Unearned premium
     926,940       943,946  
Deferred ceding commissions
     62,562       68,968  
Premium and claims payable
     442,379       497,974  
Notes payable
     364,714       324,714  
Accounts payable and accrued liabilities
     390,849       375,561  
 
            
 
                
Total liabilities
     5,696,224       5,634,280  
 
                
SHAREHOLDERS’ EQUITY
                
 
                
Common stock
     115,298       115,069  
Additional paid-in capital
     838,648       831,419  
Retained earnings
     1,514,414       1,445,995  
Accumulated other comprehensive income
     53,834       47,882  
 
            
 
                
Total shareholders’ equity
     2,522,194       2,440,365  
 
            
 
                
Total liabilities and shareholders’ equity
   $ 8,218,418     $ 8,074,645  
 
            

 

 

HCC Insurance Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited, in thousands except per share data)
                 
    Three months ended  
    March 31,  
    2008     2007  
REVENUE
                
Net earned premium
   $ 493,546     $ 497,600  
Fee and commission income
     30,999       32,125  
Net investment income
     47,621       49,467  
Net realized investment gain (loss)
     168       (555 )
Other operating income (loss)
     (4,946 )     18,585  
 
            
 
                
Total revenue
     567,388       597,222  
 
            
 
                
EXPENSE
                
Loss and loss adjustment expense, net
     293,026       300,472  
Policy acquisition costs, net
     92,268       89,099  
Other operating expense
     59,204       57,641  
Interest expense
     3,959       3,303  
 
            
 
                
Total expense
     448,457       450,515  
 
            
 
                
Earnings before income tax expense
     118,931       146,707  
Income tax expense
     37,830       50,017  
 
            
 
                
Net earnings
   $ 81,101     $ 96,690  
 
            
 
                
Basic earnings per share data:
                
Net earnings per share
   $ 0.70     $ 0.86  
 
            
 
                
Weighted average shares outstanding
     115,234       111,959  
 
            
 
                
Diluted earnings per share data:
                
Net earnings per share
   $ 0.70     $ 0.83  
 
            
 
                
Weighted average shares outstanding
     116,372       117,009  
 
            
 
                
Cash dividends declared, per share
   $ 0.11     $ 0.10  
 
            

 

 

HCC Insurance Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)
                 
    Three months ended  
    March 31,  
    2008     2007  
Cash flows from operating activities:
                
Net earnings
   $ 81,101     $ 96,690  
Adjustments to reconcile net earnings to net cash provided by operating activities:
                
Change in premium, claims and other receivables
     3,779       87,166  
Change in reinsurance recoverables
     2,671       111,267  
Change in ceded unearned premium
     19,899       1,890  
Change in loss and loss adjustment expense payable
     91,845       16,445  
Change in reinsurance balances payable
     (5,761 )     (8,325 )
Change in unearned premium
     (16,960 )     (2,622 )
Change in premium and claims payable, net of restricted cash
     (45,449 )     (86,687 )
Change in trading portfolio
     9,062       10,958  
Depreciation and amortization expense
     3,390       3,736  
Stock-based compensation expense
     2,866       2,211  
Other, net
     (10,643 )     (2,418 )
 
            
Cash provided by operating activities
     135,800       230,311  
 
            
 
                
Cash flows from investing activities:
                
Sales of fixed income securities
     120,075       28,483  
Maturity or call of fixed income securities
     75,875       70,148  
Cost of securities acquired
     (455,973 )     (367,195 )
Change in short-term investments
     128,052       24,857  
Sales of other investments
     19,038       —  
Sale of strategic investments
     —       22,950  
Payments for purchase of subsidiaries, net of cash received
     (71,486 )     (5,917 )
Other, net
     (1,670 )     (2,168 )
 
            
Cash used by investing activities
     (186,089 )     (228,842 )
 
            
 
                
Cash flows from financing activities:
                
Advances on line of credit
     40,000       11,000  
Payments on line of credit and notes payable
     —       (11,339 )
Sale of common stock
     4,592       8,040  
Dividends paid
     (12,658 )     (11,173 )
Other, net
     3,908       (3,795 )
 
            
Cash provided (used) by financing activities
     35,842       (7,267 )
 
            
 
                
Net decrease in cash
     (14,447 )     (5,798 )
 
                
Cash at beginning of period
     39,135       48,290  
 
            
 
                
Cash at end of period
   $ 24,688     $ 42,492  
 
            

 

 

HCC Insurance Holdings, Inc. and Subsidiaries
Insurance Company Premium
March 31, 2008
(Unaudited, in thousands)
                         
    1st Qtr     1st Qtr     Change  
    2008     2007     %  
GROSS WRITTEN
                        
 
                        
Diversified financial products
   $ 211,364     $ 212,253       — %
Group life, accident & health
     210,534       202,906       4  
Aviation
     44,828       51,663       (13 )
London market account
     40,936       68,135       (40 )
Other specialty lines
     75,343       64,495       17  
Discontinued lines
     (6 )     (351 )   nm  
 
                  
 
   $ 582,999     $ 599,101       (3 )%
 
                  
 
                        
NET WRITTEN
                        
 
                        
Diversified financial products
   $ 180,501     $ 171,792       5 %
Group life, accident & health
     202,375       192,426       5  
Aviation
     32,346       39,603       (18 )
London market account
     29,028       45,132       (36 )
Other specialty lines
     49,403       48,321       2  
Discontinued lines
     (6 )     (309 )   nm  
 
                  
 
   $ 493,647     $ 496,965       (1 )%
 
                  
 
                        
NET EARNED PREMIUM
                        
 
                        
Diversified financial products
   $ 192,177     $ 192,514       — %
Group life, accident & health
     192,446       192,416       —  
Aviation
     34,993       39,344       (11 )
London market account
     27,090       33,896       (20 )
Other specialty lines
     46,846       39,738       18  
Discontinued lines
     (6 )     (308 )   nm  
 
                  
 
   $ 493,546     $ 497,600       (1 )%
 
                  
 
nm   - Not meaningful comparison

 

 

HCC Insurance Holdings, Inc. and Subsidiaries
Investments — Selected Disclosures
March 31, 2008
(Unaudited, in thousands)
                                                                 
                    Average Ratings  
    Amortized Cost     Market Value     AAA     AA     A     BBB & below     Other     Average  
Fixed Income Securities
   $ 3,903,397     $ 3,929,549     $ 2,743,218     $ 814,596     $ 297,074     $ 74,661     $ —     AA+
 
                                                            
Residential Mortgage Backed Securities & Collateralized Mortgage Obligations
                                                                
 
                                                                
Agency
   $ 640,074     $ 657,389       657,389       —       —       —       —     AAA
 
                                                                
Non-Agency
                                                                
Prime
     105,233       102,172       102,172       —       —       —       —     AAA
Alt A
     11,586       11,117       10,695       211       211       —       —     AAA
Subprime
     5,204       4,266       3,197       —       —       1,069       —     AA
 
                                                            
 
                                                                
Total Residential MBS/CMO
   $ 762,097     $ 774,944                                                  
 
                                                            
 
                                                                
Commercial Mortgaged Backed Securities
   $ 202,717     $ 200,922       200,922       —       —       —       —     AAA
 
                                                            
 
                                                                
Municipal Bond Portfolio
   $ 1,900,653     $ 1,909,847       1,073,525       715,429       98,548       22,345       —     AA+
 
                                                            
 
                                                                
Insurance Enhanced
   $ 1,205,396     $ 1,208,141       779,251       327,043       79,496       22,351       —     AA+
 
                                                            
 
                                                                
Insured — Underlying Ratings
   $ 1,205,396     $ 1,208,141       192,699       688,761       300,827       483       25,371     AA
 
                                                            
 
                                                                
Non-Insured
   $ 695,257     $ 701,706       294,857       387,622       19,227       —       —     AA+
 
                                                            
 
                                                                
Short-Term
                                                                
Bank Sweep Accounts — US
   $ 39,503     $ 39,503                                                  
Bank Sweep Accounts — Non-US
     135,795       135,795                                                  
Taxable Money Market Funds
     366,654       366,654                                                  
Short-term Non US Gov Bonds
     113,646       113,646                                                  
 
                                                            
 
                                                                
Total Short-Term
   $ 655,598     $ 655,598                                                  
 
                                                            
Notes:
There are no CDOs/CLOs in the portfolio.
Other Ratings are bonds with at least one enhanced rating; each issuer has an equivalent investment grade rating.
Received paydown of $1.4 million on subprime and Alt A securities in first quarter 2008.

 

 

HCC Insurance Holdings, Inc. and Subsidiaries
Subprime Liability Exposure
March 31, 2008
•   As of March 31, the Company had 32 “non-Side A only” D&O or E&O claims and nine “Side A only” D&O claims relating to subprime issues.
 
•   Of the D&O claims reported, one is on a primary policy with a gross policy limit of $5 million.  The remaining D&O claims are on excess policies.
 
•   The average policy limit on the “non-Side A only” claims is $12.4 million gross and $8.5 million net, with an average attachment point exceeding $90 million.
 
•   The average policy limit for “Side A only” claims is $14.4 million gross and $11.7 million net, with an average attachment point of $180 million.
 
•   The majority of this D&O business is written excess and usually with high attachment points.
 
•   The majority of the Company’s E&O business is written with limits of $1 million or less.
 
•   Except for run-off policies, HCC has not written multi-year policies.
 
•   The insurance provided is “claims made” with defense costs included within the policy limits.
 
•   Many major financial institutions purchase “Side A only” coverage.
 
•   Based upon the Company’s current knowledge, the Company continues to believe it has provided for the ultimate losses that will be incurred on its D&O and E&O businesses relating to subprime issues.

 

 

HCC Insurance Holdings, Inc. and Subsidiaries
Consolidated Insurance Companies
Net Loss Ratios
March 31, 2008
(Unaudited, in thousands)
                                                 
    Year to Date 2008     Full Year 2007  
    Net Earned     Incurred     Loss     Net Earned     Incurred     Loss  
Line of Business   Premium     Losses     Ratio     Premium     Losses     Ratio  
Diversified financial products
   $ 192,177     $ 88,723       46.2 %   $ 777,414     $ 315,409       40.6 %
Group life, accident & health
     192,446       143,393       74.5       758,516       579,780       76.4  
Aviation
     34,993       20,153       57.6       153,121       89,683       58.6  
London market account
     27,090       8,998       33.2       124,609       68,798       55.2  
Other specialty lines
     46,846       31,362       66.9       171,824       115,804       67.4  
Discontinued lines
     (6 )     397     nm       (398 )     14,473     nm  
 
                                    
Total
   $ 493,546     $ 293,026       59.4 %   $ 1,985,086     $ 1,183,947       59.6 %
 
                                    
 
nm   - Not meaningful comparison