HOUSTON, May 6, 2008 (PRIME NEWSWIRE) -- 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 following 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.
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, December 31,
2008 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)
Amortized Market
Cost Value
----------- -----------
Fixed Income Securities $ 3,903,397 $ 3,929,549
=========== ===========
Residential Mortgage Backed
Securities & Collateralized
Mortgage Obligations
Agency $ 640,074 $ 657,389
Non-Agency
Prime 105,233 102,172
Alt A 11,586 11,117
Subprime 5,204 4,266
----------- -----------
Total Residential MBS/CMO $ 762,097 $ 774,944
=========== ===========
Commercial Mortgaged Backed
Securities $ 202,717 $ 200,922
=========== ===========
Municipal Bond Portfolio $ 1,900,653 $ 1,909,847
=========== ===========
Insurance Enhanced $ 1,205,396 $ 1,208,141
=========== ===========
Insured - Underlying Ratings $ 1,205,396 $ 1,208,141
=========== ===========
Non-Insured $ 695,257 $ 701,706
=========== ===========
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
=========== ===========
Average Ratings
----------------------------------------------------
AAA AA A BBB & Other Aver-
below age
---------- -------- -------- ------- ------ -----
Fixed Income
Securities $2,743,218 $814,596 $297,074 $74,661 $ -- AA+
Residential
Mortgage
Backed
Securities &
Collateralized
Mortgage
Obligations
Agency 657,389 -- -- -- -- AAA
Non-Agency
Prime 102,172 -- -- -- -- AAA
Alt A 10,695 211 211 -- -- AAA
Subprime 3,197 -- -- 1,069 -- AA
Total
Residential
MBS/CMO
Commercial
Mortgaged
Backed
Securities 200,922 -- -- -- -- AAA
Municipal
Bond
Portfolio 1,073,525 715,429 98,548 22,345 -- AA+
Insurance
Enhanced 779,251 327,043 79,496 22,351 -- AA+
Insured -
Underlying
Ratings 192,699 688,761 300,827 483 25,371 AA
Non-Insured 294,857 387,622 19,227 -- -- AA+
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
--------------------------------
Net Earned Incurred Loss
Line of Business Premium Losses Ratio
----------------------------- ---------- ---------- -----
Diversified financial
products $ 192,177 $ 88,723 46.2%
Group life, accident
& health 192,446 143,393 74.5
Aviation 34,993 20,153 57.6
London market account 27,090 8,998 33.2
Other specialty lines 46,846 31,362 66.9
Discontinued lines (6) 397 nm
---------- ---------- -----
Total $ 493,546 $ 293,026 59.4%
========== ========== =====
Full Year 2007
--------------------------------
Net Earned Incurred Loss
Line of Business Premium Losses Ratio
----------------------------- ---------- ---------- -----
Diversified financial
products $ 777,414 $ 315,409 40.6%
Group life, accident
& health 758,516 579,780 76.4
Aviation 153,121 89,683 58.6
London market account 124,609 68,798 55.2
Other specialty lines 171,824 115,804 67.4
Discontinued lines (398) 14,473 nm
---------- ---------- -----
Total $1,985,086 $1,183,947 59.6%
========== ========== =====
nm - Not meaningful comparison