HCC Insurance Holdings CEO Discusses Q2 2012 Results - Earnings Call Transcript

HCC Insurance Holdings (HCC)

Q2 2012 Earnings Call

August 1, 2012 09:00 AM ET


John Molbeck - CEO

Brad Irick - CFO

Chris Williams - President

Bill Burke - CFO

Mike Schell - EVP, Chief Property & Casualty Insurance Officer


Mark Dwelle - RBC Capital Markets

John Thomas - William Blair & Company

Brian Perry - Sampson Partners



Welcome to the Second Quarter 2012 Earnings Release Conference Call. (Operator Instructions). I would now like to turn the conference John Molbeck, Chief Executive Officer. Sir, you may begin your conference.

John Molbeck

Thank you operator and good morning everyone and welcome to HCC’s 2012 second quarter conference call. Joining me today is Chris Williams, our President, Bill Burke, our Chief Financial Officer, Brad Irick, our Chief Financial Officer and Mike Schell, our Chief Property and Casualty Insurance Officer.

Brad will provide a financial overview and Chris and Bill will provide additional insight into the quarter’s results. As you can see by our press release HCC has a strong second quarter and first half in each segment. Annualized operating return and equity was 11.3% for the quarter and 11.1% for the six months. Net earnings were $93.5 million or $0.92 per share for the quarter and a $176.1 million or a $1.71 per share for the first six months. The earnings of both periods are records for earnings per share.

Gross written premium increased 7% for the quarter and 6% for the six months and our gap combined ratio was 84.9% for the quarter and 85% for the first six months which included 8/10th percentage points of catastrophe losses in the quarter and 1.1% for the six months. Our expense ratio remained excellent at 25.3% for the quarter and 25.2% for the six months and book value increased for the year by 5.5% to $33.19 per share.

Brad will now review with you our financial highlights, Brad?

Brad Irick

Thanks John, for the first time in our history total assets were as above $10 billion driven by growth in our investment portfolio of nearly 7% since year end 2011 to $6.4 billion. Investment performance included the following items. A year-to-date long term tax equivalent yield of 4.8% at a book yield of 3.9%. A decrease in portfolio duration to 4.5 years driven by decreases in market rates which impacted call and prepayment expectations for municipal and structured securities. Our unrealized gain position increased by $33 million compared to March 2012 to $386 million. In addition, realized investment gains of $7 million primarily from sales of lower yielding investments to fund our new investment initiatives which I will address later and some portfolio repositioning in the muni book. During the quarter, our portfolio yield decreased slightly for two reasons, reinvestment rates decreased nearly 50 basis points in-line with a drop in the 10 year U.S. treasury.

Second, the quarter results included 2 million adjustments related to prepayment assumptions for structured securities which reduced net investment income.

Assuming rates and spreads remain at their current levels we expect book yield for the full year largely in-line with our year-to-date results. As John mentioned at our investor conference in June we are now investing in bank loans and high dividend equities. At quarter end we had invested approximately $100 million in each asset class and then tend to invest between 5% to 10% of the portfolio in these classes overtime.

These changes diversify our portfolio and shorten our overall duration without impacting average credit quality. As the year goes on we expect these investments to help improve our reinvestment rate as well. We continue to monitor developments in Europe and consider the impact on our foreign investments. As we have disclosed in the past, our foreign investments remain modest relative to the overall portfolio and are of high quality with virtually no exposures in the most troubled countries. With respect to reserves, we had no loss development and based on our quarterly review of reserved adequacy estimate our recorded reserves exceeded at actual point estimate by 4.3% in-line with where we ended 2011.

In the quarter, we had pretax net catastrophe losses at $4.7 million related to various small cats impacting our property treaty line of business. From a capital management perspective we remain opportunistic buyers of our stock with purchases of 1.9 million shares for $59 million in the quarter leaving $100 million under our current authorization.

We continue to utilize our revolving credit facility to fund these purchases resulting at a debt to total capital ratio of 15%. Operating cash flow continues to be very strong at $170 million driven by the favorable paid loss ratio of 47% for the quarter. Year-to-date operating cash flows are about $125 million ahead of the prior year. While we don’t expect the paid loss ratio to continue at this low level for the rest of the year we are positioned to once again deliver operating cash flows in excess of $400 million for the year. Chris?

Chris Williams

Thanks Brad, as John and Brad have mentioned we had a strong second quarter and first half of the year. As you know HCC is driven by underwriting profit which is reflected in the results of our various business segments. With benign catastrophes this year our loss ratio was 59.8% for the first six months of 2012 compared to 66% for the first six months of 2011.

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