Q3 2007 HCC Insurance Holdings Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the HCC third quarter earnings conference call. (OPERATOR INSTRUCTIONS)

This telephone conference call relates to HCC Insurance Holdings Inc. Before we begin, the Company has requested that I read the following statement, which will govern the telephone conference today. Statements made today in this telephone conference that are not historical facts, including statements of our expectations of future events or future financial performance or forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, and we caution investors that a number of factors could cause our actual results to differ materially from those contained in any such forward-looking statements. These factors and other risks and uncertainties are described in detail from time to time, in our filings in with the Securities and Exchange Commission. This conference call and the contents there of, and any recordings, broadcast, or publications thereof by HCC Insurance Holdings Inc., are the sole property of HCC Insurance Holdings Inc. and may not be recorded, broadcast or published in whole or in part without the expressed written consent of HCC Insurance Holdings Inc. Thank you.

I would now like to turn the conference over to Mr. Frank Bramanti. Please go ahead, sir.

FRANK BRAMANTI, CEO, EXEC. DIRECTOR, HCC INSURANCE HOLDINGS INC.: Good morning, ladies and gentlemen. Thank you for participating in HCC's third quarter earnings conference call.

With me today here in Houston is John Molbeck, our President and Chief Operating Officer, Ed Ellis, our Chief Financial Officer, Pam Penny ,who is Senior Vice President, Finance here, Mike Schell, who heads up our Property Casualty Insurance Company Operations, Randy Rinicella,our General Counsel, our new head of IR, Barney White, who a number of you have met or spoken with. And on the phone is Craig Kelbel from Atlanta, who heads up our Life, Accident and Health Operations.

EDWARD ELLIS, EXEC. VP, CFO, HCC INSURANCE HOLDINGS INC.: As you can see from our release, in another fine quarter. Earnings were $97.9 million or 84 cents per share for the quarter, and $295.8 million or $2.54 per share for the first nine months of 2007. Earnings were $97.9 million or $0.84 cents per share for the quarter, and $295.8 million or $2.54 per share for the first nine months of 2007. Our book values increased to $20.39 per share. Return on equity on an analyzed basis was over 18% for 2007.

We are very pleased with our results and where the company is positioned in this softening marketplace. We had a number of capital activities during the quarter, and I just want to run through some of those. During the third quarter, we called our 2% convertible note issue, and funded the repayment with advances under our line of credit Just recently we have announced an increase in that line of credit to $575 million. We appreciate the commitments from our existing bank group, and we also added a few additional members to that group. From a capital standpoint, we increased our dividend by 10% for the payment that was made at the beginning of the fourth quarter, and we are committed to take any additional appropriate steps to continue to manage our capital account. We feel our capital position is appropriate for where we are, but we are monitoring it. Without any significant acquisition activity, we expect to be generating additional capital as we get into next year.

We have our annual review with A.M. Best coming up, so we'll get their input as to the adequacy of our capital position before year end. We also had Fitch upgrade our insurer financial strength rating to AA from AA-. We appreciate their confidence in our operation.

We have recently announced that one of our directors has come off our Board after serving for the last eight, plus years. Jim Crane recently announced is going to focus his efforts on his own business activities and we want to thank him for his service to HCC.

With that I'm going to turn it over to John Molbeck, who's going to get into some details about our operations and about the results for the quarter, and then we'll open it up for questions and try to address those issues that people might have. John?

JOHN MOLBECK, PRESIDENT, COO, HCC INSURANCE HOLDINGS INC.: Thank you, Frank.

As Frank said, the third quarter was another excellent quarter from an insurance perspective. Those of you whose life is to listen to conference calls, especially insurance conference calls, I want to tell to you a large extent you have heard before, but HCC is a little bit different than the competition. The situation is really not much changed from the second quarter. Large accounts suffer more competition than smaller accounts. The international business remains extremely competitive. We are experiencing our third year in a row of 10% to 15% rate reductions, which is reflective of the extraordinary margins that heretofore have been earned on the international business. Surplus lines business is suffering more than the specialty business as the standard markets are now finding a way to write what they previously considered surplus lines business. However the competition remains responsible however from an HCC perspective, we really are not, as a general rule, we are not a large account writer. Our international business is 20% of our or all portfolio, and about half of that is really U.S. business written in the international market. And less than 10% of our overall book of business is considered surplus lines, the vast majority of it is specialty business.

As we look at the each of the individual lines of business, and our diversified products line, which is made up of directors and officers, liability, errors and omissions, professional indemnity, credit and surety; overall, we are experiencing a flat to a 5% reduction in pricing. DNO is experiencing the greatest reduction. The price reductions we really anticipated that would take place in the first quarter of up to 10% really has started impacting us on the third quarter business. Our credit and surety business, however, is actually generating either flat or 5% to 10% increases in renewal pricing. And as we look at the remainder of the lines of business, the ENO and the PNI business, our pricing is somewhere between a 0 or flat to a 5% overall rate reduction. Our group life accident and health business remains stable. Competition still largely is from the fully insured market. There are some slight signs of an improvement that may happen in that market, but as you know, the January 1 renewals are just now taking place and it is too early to call that.

Domestic aviation business is experiencing continuing to experience price reductions in about the 5% range. But our franchise in that business has enabled us to continue to achieve acceptable margins. International aviation, which has suffered the most competition on our overall book of business, still remains competitive, but the rash of major losses in the third quarter appears to begin to tighten up that international aviation market or certainly the portion of the market that we are involved …