HCC Insurance Holdings, Inc. ( HCC) Q3 2011 Conference Call November 2, 2011 9:00 AM ET Executives John Molbeck – CEO Brad Irick – EVP and CFO Craig Kelbel – CEO, HCC Life William Whamond – EVP and COO Analysts Amit Kumar – Macquarie Dean Evans – KBW Kenneth Billingsley – BGB Securities Mark Dwelle – RBC Capital Markets Michael Nannizzi – Goldman Sachs Matthew Carletti – JMP Securities Adam Klauber – William Blair Brian Pirie – Sansome Partners Presentation Operator
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Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2011 Earnings 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.I would now like to turn the conference over to Mr. John Molbeck, Chief Executive Officer. Sir, you may begin your conference. John Molbeck Thank you, operator. Welcome, everyone, to HCC’s third quarter conference call. Joining me today is Chris Williams, our President; Brad Irick, our Chief Financial Officer; Mike Schell, our Chief Property and Casualty Insurance Officer and Craig Kelbel, our CEO of HCC Life. We are pleased with our overall results for the quarter despite the adverse 2011 accident year development of diversified financial products and the continued catastrophes. Diversified financial products or DFP as we refer to it includes insurance for private equity, hedge funds, investment managers and general partnerships. Brad and I will provide more details relating to DFP later in the call. Once again we accomplished our objective of managing our catastrophe exposure as our tax net loss from 2011 catastrophes was only 2.1% of December 31 2010 shareholders’ equity. A result that we believe remains at the lower end of the range in the industry. The catastrophe losses added 6.2% to overall GAAP loss ratio of 69.9% for the quarter, but despite the catastrophes our annualized return on average equity was 7.4% for the quarter and 7.2% year-to-date. Book value per share grew to $30.67 or 3.4% in the quarter and by 7% year-to-date. This reflected our net earnings as well as an increase in our unrealized gain position. Some additional highlights for the quarter, a GAAP combined ratio of 92.8%, a GAAP expense ratio of 22.9% and accident year combined ratio of 95.7% including catastrophes and 89.6% excluding catastrophes and a paid loss ratio of 55.5%.
Earned premium was up 5% for the quarter and net written premium by 4%. Our renewal retention remains strong at approximately 83% in the third quarter for business for which we capture this statistics.Brad will now review with you our financial highlights. Brad? Brad Irick Thanks, John. In the third quarter, net investment income rose 7% to $55 million, reflecting growth in our portfolio through investment of operating cash flows and the benefit of our continued efforts to deploy short-term investments into the fixed income portfolio. Some investment related highlights in the quarter included, an increase of 10 basis points in yield driven by short duration securities being reinvested longer, led by new purchases of municipals, a slightly lower overall duration of the portfolio to 5.2 years due to increased prepayments of mortgage-backed securities driven by the treasury rally. An increase of more than $100 million in the unrealized gain position of our available for sale portfolio also driven by the treasury rally and strong performance from municipals. And finally, a decrease in the average rating of our portfolio from AA+ to AA, a direct result of S&P’s downgrade for the U.S. Government’s debt rating in August. Next, I’ll summarize the reserve activity in the quarter. This quarter, we completed schedule reviews for U.S. Property and Casualty and Professional Liability segments and our quarterly evaluation of all catastrophe reserves. We also included UK Professional Liability in the International segment in our review as indications were that its reserves were significantly in excess of the actuarial point estimate. Based on our review, we recorded a net increase to our loss reserves of $28 million. This includes a net favorable loss development of less than a million offset by $28 million of additional reserves due to an increase in 2011 accident year loss ratios. The net favorable development includes $58 million from international – the U.S. and International D&O in the Professional Liability segment and $19 million from U.K. Professional Liability. Read the rest of this transcript for free on seekingalpha.com