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HCC Earnings Beat but Fall Y/Y

Zacks Equity Research

HCC Insurance Holdings’ (HCC) third quarter adjusted earnings of 93 cents per share breezed past the Zacks Consensus Estimate of 79 cents per share. However, results were behind the year-ago earnings of $1.11 per share.

The decline came on the back of increased catastrophe losses during the quarter as compared to the year-ago quarter.

Including net realized investment gains and foreign currency expenses, HCC Insurance reported net income of $98.2 million or 98 cents per share in the third quarter, compared to $107.1 million or $1.05 per share for the third quarter of 2012. The decline was mainly attributable to catastrophe losses.

Quarterly Operational Update

Total revenues increased 0.8% year over year to $636.5 million in the third quarter, driven by solid growth in net realized investment gains. Revenues also surpassed the Zacks Consensus Estimate of $630 million.

Gross premiums written for the quarter increased 2% to $678.9 million while net written premiums decreased 1.6% year over year to $521.7 million.

Total expenses of $496.4 million in the quarter increased 3.8% year over year mainly due to higher loss and loss adjustment expenses and other operating expenses.

Combined ratio for HCC Insurance deteriorated 440 basis points year over year to 83.5%. However, this ratio remains below 85% and is at par with the company’s expectations.

Behind the Headlines

Net written premiums in the U.S. Property & Casualty division decreased 1% year over year to $99 million in the third quarter. The decline was mainly attributable to poor performance across the Public Risk and E&O block, partially offset by higher premiums in the Aviation block of business.

In the Professional Liability division, net written premiums declined 11% year over year to $83.4 million, due to lower premiums written in the U.S. D&O block.

Accident & Health reported net written premiums of $221 million, up 6% year over year.

Net written premiums in the U.S. Surety &Credit reduced 2% year over year to $49.8 million, due to a decline in the credit block.

In the International division, net written premiums stood at $66.2 million, almost in line with the year-ago number.

Net written premiums in the Exited Lines declined 2% year over year to $521.7 million.

Financial Position

As of Sep 30, 2013, HCC Insurance had cash and short term investments of $284.2 million and $239.1 million of available capacity under its revolving loan facility of $600 million.

Cash flow from operating activities stood at $271.4 million in the first nine months of 2013, down 45.3% year over year, mainly due to a $127.9 million reduction in U.S. Surety collateral repayments.

As of Sep 30, 2013, total assets of HCC Insurance were $10.4 billion, up 1.8% from year end 2012.

At Sep 30, 2013, shareholders’ equity of HCC Insurance stood at $3.6 billion, up 1.3% from year end 2012. The debt-to-capital ratio of HCC Insurance deteriorated 120 basis points from 2012 end to 15.4%.


Based on the first nine months’ results, management increased its 2013 earnings guidance to $3.70– $3.80 per share from the previously provided guidance of $3.20– $3.50 per share. This translates to a projected loss ratio of 2.7 for net catastrophe losses. The Zacks Consensus Estimate of earnings of $3.46 per share is within HCC Insurance’s guidance range.

Our Take

Although HCC Insurance earnings exceeded our expectations, an increase in catastrophe losses resulted in a year-over-year decline. On the other hand, the top line fared well on both counts. However, despite the increase in revenues, higher expenses led to a decline in operating margin during the reported quarter. Among the operating divisions of HCC Insurance, the U.S. Property & Casualty and Professional Liability was a drag, mainly on account of lower premiums.

While the cash position remained weak during the first nine months, a hike in quarterly dividend, announced during the third quarter, brought some respite. Management came up with a 36.4% hike in its quarterly dividend figures and this marks HCC Insurance’s 70th consecutive quarter of dividend payout and 17th consecutive year of dividend hike. However, increasing expenses and an exposure to catastrophic events remain a concern going forward.

Zacks Rank

HCC Insurance currently carries a Zacks Rank #4 (Sell). Montpelier Re Holdings Ltd. (MRH),  Cincinnati Financial Corp. (CINF) and Fidelity National Financial Inc. (FNF) are some of the companies in the financial services space that carry a Zacks Rank #1 (Strong Buy) and appear well-positioned.

Read the Full Research Report on CINF
Read the Full Research Report on MRH
Read the Full Research Report on FNF
Read the Full Research Report on HCC

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