HCC Insurance Holdings, Inc. Q1 2010 Earnings Call Transcript

HCC Insurance Holdings, Inc. Q1 2010 Earnings Call Transcript
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HCC Insurance Holdings, Inc. (HCC)

Q1 2010 Earnings Conference Call

May 5, 2010 9:00 AM ET

Executives

John Molbeck – President and COO

Tobin Whamond – CFO

Mike Schell – Chief Underwriting Officer

Analysts

Beth Malone – Wunderlich Securities

Michael Nannizzi – Oppenheimer & Co.

Mark Dwelle – RBC Capital Markets

Amit Kumar – Macquarie

Presentation

Operator

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Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2010 release conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

(Operator instructions)

I would now like to turn the call over to John Molbeck, President and COO of HCC Insurance Holdings Incorporated. Please go ahead sir.

John Molbeck

Welcome everyone to HCC’s first quarter conference call. Joining me today is Tobin Whamond, our CFO; Pam Penny, our Chief Accounting Officer, Mike Schell, our Chief Underwriting Officer and Randy Rinicella, our General Counsel.

HCC’s performance for the first quarter continued to demonstrate our commitment to underwriting performance while at the same time limiting our exposure to catastrophic events despite the continued competitive market and low interest rates. We are very pleased with our GAAP combined ratio of 90.3% including catastrophes and 86.3% excluding the catastrophe.

Our accident year combined ratio remained excellent at 89.3% including catastrophes and 85.3% excluding the catastrophes.

Our expense ratio remains low at 26.2% for the quarter, down slightly from the 26.6% for the fourth quarter of last year. We continue to moderately grow our premium base compared to the first quarter of 2009 despite the competitiveness of the market. Our combined ratio demonstrated this premium growth has not been at the sacrifice of maintaining our underwriting discipline. Our renewal percentage on our business that renews annually was 83%, which is the highest percentage in the last five quarters. The premium growth has been driven by new teams in our public risk and property treaty lines of business, which is more than offset the loss of business resulted from the sale of our motor business and the non-renewal of our colony quote share treaty in 2008.

We continue to pay claims on these facilities which are in runoff, which has slightly impacted our pay loss ratio for the quarter.

Tobin will now review with you our financial highlights for the quarter.

Tobin Whamond

Gross written premium of HCC’s insurance companies increased 3% over the first quarter of 2009 to $622 million for the first quarter of 2010, net earned premium of $510 million was up slightly compared to the same period in 2009. John commented on the drivers behind the topline.

Revenue for the first quarter of 2010 totaling $594 million was down slightly compared to the first quarter of 2009. Our fee and commission income decreased $9 million, mainly due to the sale in 2009 of the operations of CUL and the sale of RML. Our other operating income also decreased $13 million. The first quarter of 2010 includes an $8 million gain from committing a mortgage derivative contract. The prior year quarter included $20 million from commuting the magic reinsurance contract.

Offsetting these lower revenue items with a 9% increase in net investment income, more on that in a moment.

We had $5 million of adverse prior-year reserve development in the first quarter of 2010, primarily to HMO coverage in the group life, accident and health business that we acquired from Allianz at the end of 2006. This business takes a longer time for losses to develop. We made corrective actions in 2009 and believe the business will be profitable in 2010. This amount compared to $4.7 million adverse development for the same period in 2009.

Our operating cash flow was $42 million in the first quarter of 2010, compared to $134 million in the same period of 2009, due principally to a $36 million increase in paid losses in the credit, D&O and group life, accident and health lines, a $35 million change in the timing of premium payments to reinsurers, and $12 million lower net earnings in the first quarter of 2010 compared to the first quarter of 2009.

We estimate our cash flow will be approximately $100 per quarter for the remainder of the year based on a paid loss ratio, which could range from 55% to 60% for any given quarter. For subprime related claims for this quarter, we had one full-side D&O, one E&O and no additional side A only claims. As we have said before, based on our current knowledge, we believe that we have adequately provided for the ultimate losses that will be incurred on this business.

In the first quarter of 2010, net investment increased to $49 million, compared to $45 million for the same period in 2009, driven primarily by an increase in the size of our long-term fixed income investment portfolio. Duration of our fixed income portfolio increased slightly from 4.8 years for the first quarter of 2009 to five years for the first quarter of 2010.

With our overall duration at 4.5 years compared to 4.2 years in the comparable period of 2009. The quality of the portfolio remained at AA plus, and had an average tax equivalent yield of 5%. We recognized no OTTI in the first quarter of 2010.

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