HCC Insurance Holdings, Inc. ( HCC) Q4 2011 Earnings Conference Call February 22, 2012 9:00 AM ET Executives John Molbeck – Chief Executive Officer Brad Irick – Executive Vice President and Chief Financial Officer Chris Williams – President Analysts Michael Nannizzi – Goldman Sachs Ray Iardella – Macquarie Research Doug Mewhirter – RBC Capital Markets Presentation Operator
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Ladies and gentlemen, thank you for standing by and welcome to the Fourth 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. I think it is appropriate that we have this conference call in the first day of Lent after 2011. Welcome everybody to our year-end 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. Brad will follow my initial remarks with financial highlights, and then Chris will give some commentary on the quarter. HCC had a strong fourth quarter despite another $10 million in catastrophe losses from the Thailand floods. Clearly 2011 was a difficult year for the industry. We faced record catastrophes, sustained low interest rates, economic unrest and more importantly a continued soft market. Still HCC grew book value per share by 3.1% for the quarter and 10.3% for the year. And we declared a dividend of $0.60 a share. Our GAAP combined ratio was 86.8% for the quarter, and 90.8% for the year. Our expense ratio was 25.5% for the quarter, and 25% for the year. Our accident year combined ratio was 88.8% for the quarter and 91% for the year, including catastrophes, and 85.6% excluding catastrophes. Our 2011 paid loss ratio was 58.9%, compared to 2010’s 59.7%. Earned premium was up 8% for the quarter, and 4% for the year, while net written premiums was up 7% for the quarter and 8% for the year. Our renewal retention remained strong at 83%.
Brad will now review a few of our financial highlights. Brad?Brad Irick Thanks, John, and good morning everyone. Net investment income in the quarter was $53.5 million, up slightly from the prior year. The portfolio continues to benefit from our efforts to deploy short-term investments into the fixed income portfolio. Short-term investments and cash decreased $53 million in the quarter as a result of these efforts, and $347 million for the year. Long-term tax equivalent yield was unchanged from the third quarter at 4.8%. It is down only 20 basis points from a year ago. Long-term book yields are stable at approximately 4%. We are pleased with our continued success in maintaining yields in this difficult rate environment. Duration decreased slightly to just under five years, and our realized gain position increased almost $40 million. Both were primarily impacted by municipals. The quality of the portfolio remains very high with an average rating of AA. Our exposure to foreign government bonds was $281 million at year-end. 3 million of that exposure was from Spain, and none was from Greece, Italy, Ireland or Portugal. Exposure to foreign financial institutions totaled $150 million. As a general commentary, we have held the view for quite a while that rates would remain low for an extended period. As a result, we have not kept the portfolio duration short in anticipation of an increase. With the Fed’s recent announcements it is clear that rates will remain low into 2014. Our strong cash flows, underwriting profitability, and investment leverage continue to allow us to maintain an overall duration beyond that of many of our competitors. This quarter, we completed the scheduled reviews of our reserves in the Accident and Health, U.S. Surety & Credit, and International segments. We also evaluated all catastrophe reserves. Based on our review, we recognized net favorable development of $11.5 million, primarily in our U.S. Surety & Credit and Accident and Health segments.
At December 31, 2011, our recorded reserves exceeded the actuarial point estimate by 4.2%. Fourth-quarter cash flow remained strong at $133 million. Operating cash flow, which excludes outflows from commutations was $465 million year-to-date, exceeding the prior year by more than $30 million.Read the rest of this transcript for free on seekingalpha.com