Nov 5, 2008
Operator
Good morning. My name is Chastity and I will be your conference operator today.
At this time, I would like to welcome everyone to the Third Quarter 2008 Earnings Press 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. [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 in this telephone conference that are not historical facts, including statements of our expectations of future events or our future financial performance are 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 with the Securities and Exchange Commission.
This conference call and the contents thereof and any recordings, broadcast or publication thereof by HCC Insurance Holdings Inc. are the sole property of HCC Insurance Holdings Inc.
and may not be re-recorded, rebroadcast or published in whole or in part, without the express written consent of HCC Insurance Holdings. Thank you, please hold until the conference begins.
Thank you. I will now turn the conference over to Mr.
Frank Bramanti, CEO of HCC. You may begin, sir.
Frank J. Bramanti
Thank you, operator. Good morning and thank you for joining us on HCC's third quarter 2008 earnings conference call.
Joining me here in Houston today is John Molbeck our President and COO, Ed Ellis, our CFO; Mike Schell the company's Chief Underwriting Officer, Craig Kelbel Executive Vice President in charge of our Life, Accident and Health Operations; along with a number of our other senior officers. We will use the similar format to prior calls.
I will make a few opening comments followed by John Molbeck who will review our operations for you and then we'll open up the call for questions. There was strong operating performance in the third quarter of 2008 which was impacted by hurricanes Gustav and Ike and the investment turmoil that continues to rule the market.
Our earnings were $59.1 million or $0.51 per share for the quarter. The net after tax effect of the 2008 hurricanes was $15.9 million or $0.14 per share.
The OTGI and realized losses totaled $11.2 million or $0.10 per share and the alternative investment losses were $9.3 million or $0.08 per share. Those were all after tax effects.
In light of the alternative investment performance during 2008, in August we decided to liquidate all of our hedge fund positions and alternative investments, to reduce the volatility of our earnings. The proceeds from these liquidations will be redeployed in our fixed income portfolio upon receipt of funds which is expected in January.
Our net pre-tax unrealized loss on our investment portfolio was $98 million as of September 30th that was up $64 million from June 30th. We believe our portfolio of highly rated securities held up quite well and will continue to hold up in value despite the market's volatility.
The average rating of our fixed income portfolio is AA plus and we've not been required to take large OTGI charges. During the third quarter, we were proactive and disposed of the preferred issues we held along with the debt securities we held at AIG and Lehman Brothers.
We'll continue our focus in maintaining a high quality low risk investment portfolio to augment our above market underwriting margins and continue to deliver superior results to our shareholders. We've been pressured over time to buyback our stock as many of our competitors have done.
We've taken the position that ultimately we have a better use for our capital. But we'd be only be willing to buyback our stock below book value.
We are even more convinced of our position following the dramatic volatility in the marketplace that we've seen. Significant capital has evaporated from balance sheets, yet ours remain intact.
HCC's total shareholders equity including the impact of mark-to-market has increased to $2.55 billion as of September 30th, from $2.44 billion as of 12/31/07. Our equity was flat compared to June 30th, '08 after all of the marks.
Our book value per share at September 30th, is $22.13 up from $21.21 of 12/31/07. We are one of the highest rated insurers in America with a strong balance sheet and excellent liquidity.
We have a capital to expand our writings and to take advantage of the many opportunities that are presenting themselves in this market. I would like to welcome to our Board of Director's Bob Rosholt, who was elected in August, in addition Chris Williams was elected Chairman of our Board that same month.
I thank them for agreeing to serve and I look forward to working with them in the future. With that I am going to turn the call over to John Molbeck for a little more color on our review of operations.
John N. Molbeck Jr.
Thanks Frank and good morning everyone. The third quarter may well prove to be one of the most interesting quarters in financial history.
The largest U.S. Property and Casualty Insurance company was bailed out by the government and a number of others staggered into the fourth quarter while Gustav and Ike were battling the Gulf Coast, causing havoc to third quarter earnings.
And as to our quarter, gross, net and earned premiums all exceeded the same quarter last year, as well as the year-to-date in our own budget. The increase in premium income is primarily the result of our acquisition of MNU in January, as well as our increase in our diversified financial products line.
Nobody wants a hurricane, but we're extremely pleased with our hurricane result. Our total gross loss from both storms is approximately $90 million, with a combined net loss of about $24.5 million.
The net loss comes, the gross and net loss comes primarily from our energy book. Our hurricane loss for the quarter represents less than 1% of our shareholders equity and is considerably less than one quarter's pre tax earnings for both events.
We do believe that certainly Ike changed the dynamics in the hurricane industry if there is such a thing as the traditional scale of management of hurricanes strength came into question. Because the amount of damage created by Ike was significantly greater than a category too would have been projected to create.
As a result of that a new scale is now being created, in its infancy, the Integrated Kinetic Energy scale or IKE which takes into consideration a number of other factors and I think you'll see it used in the future with respect to new storms. And the result of that, people will not be deliberately changing their PML's and they won't be as focus as they are in whether it's a category two or category three.
But they'll also take into consideration the breadth of the storm as well as the velocity of the winds. Our gross loss is well within our probable maximum loss assessment which Frank put out for Gustav at the time the storm was bearing down on the Gulf Coast and despite the two storms we anticipate a profit on our energy growth in 2008.
I'm going to give you some numbers now about loss ratios, so that you don't have to pull them out of the financial statements. But, our loss ratio for the first nine months of 2008 is 61.2% as reported, 59.5% excluding hurricanes and 61% excluding both net reserve releases in hurricanes.
This compares the 59.6% as reported in 2007 and 61.1% excluding net reserve releases. Loss ratio for the third quarter was 64.3% as reported, 59.4% excluding hurricanes and 61% excluding both net reserve releases and hurricanes.
This compares to 2007's third quarter reported loss ratio of 57.2% and 60.3% excluding net reserve releases. Our expense ratio to date of 24.1% continues to be excellent and compares to our 2007 expense ratio of 23.3%.
The main difference in the increase in the expense ratio results directly from the mix of business. As Frank said in the press release, we had $44 million worth of positive prior year reserve developed in the third quarter.
And this was largely from our diversified financial products booked and compared to $23 million in the same quarter in 2007. The reserve releases were predominantly ...
positive reserve developments predominantly from years 2005 and prior. At the same time, we booked $35 million in additional reserves for the 2008 accident year relating to business primarily written in 2007, with the largest amount attributable to our diversified financial products book.
Pricing continues to be positive in our life, accident and health and our financial institutions and credit businesses. The early signs of improvement in our international aviation business that we noted last quarter, has in fact translated into premium increases and new businesses.
This is the trend that we expect to continue. We have seen a further tightening of rates during the month of October which has been led by energy pricing.
The question is will the events of the third quarter change the market. It's too early to tell, what can report is that even in the third quarter price reductions were less; fewer accounts moved to new markets and the pricing of acquisitions was more realistic and frankly more urgent.
There is definitely a flight to quality led by brokers and just as importantly by buyers. HCC's strong ratings are even more important in this uncertain environment.
During the quarter we were successful in both our acquisitions and we are in the process of completing the third. The aggregate premium buying the estimates of those acquisitions will be somewhere between $60 and $70 million written premium in the year 2009.
We continue to provide a very comprehensive disclosure on our sub-prime DNO activity. We've noticed most of our competition does not continue to provide as comprehensive information.
During the quarter we had six new DNO claims and additional three side A claims, four fiduciary claims and two ENO claims and an updated summary is included in our press release. About a third of those claims where claims on policies that were written in 2008.
As of 2009, it's early days but for the first time we feel very optimistic. With that, operator, I would like to turn over to questions.
Operator? Question And Answer
Operator
[Operator Instructions]. Your first question comes from the line of David Lewis with Raymond James.
David Lewis
Thank you and good morning.
John N. Molbeck Jr.
Good morning, David.
David Lewis
Congratulations on a very impressive quarter given the headwinds that everybody faced. Couple of questions, first on the debts [ph] and off shores reserve addition of $35 million, do you see anything different out there in the market or is it just an opportunistic addition given that you had to release some development from the prior accident years?
John N. Molbeck Jr.
This is John. We really don't see anything unusual going on in the market place.
With as much turmoil is going on in the market place we though it would be folly to release reserves from prior years and it would be a much more conservative an ATC approach to put them into the effectively the 2007 year, just from the sake of prudence. From day one, when sub-prime became an issue, we said that our reserves of overall and our DNO group for adequate we continue to maintain that position.
David Lewis
That's helpful and kind of reviewing again kind of the pricing outlook, it seems to me that we ... with some of the turmoil for the health insurers that you may start to actually see some improved pricing trends out of the stop-loss which I guess accounts for close to 35% of your total book.
You agree with that and you think what are ... that you are already starting to see some improvement, clearly we are seeing in the financial DNO and international aviation?
Frank J. Bramanti
Well, I will speak to the non-active life and health book. This October we've actually seen price improvements on almost every line of business.
Well that can be defined as two types, one is a less of a reduction than we would have been giving a month before or actual price increases. We are getting price increases in international aviation, we're getting price increases in energy and property business, we're getting price increases in our A&H book internationally, we are certainly getting price increases in our financial products area.
So it is pretty widespread. But we don't know is, how long it's going to last.
And everybody can speculate, why are we're getting price increases. I think part of it is, is brokers are concerned about the quality of security of some of our competitors.
I think, a part of it is a number of our competitors have taken significant hits to their book value this quarter which we did not have, which we did not experience. And brokers are hedging their bets by not placing as bigger volumes with certain insurance companies and therefore creating an environment where pricing can be attractive.
Now when we talk about price increases, we are not talking about other than the financial lines, we are not talking about 50% price increases. We are talking about 2%, 5% and maybe 10% price increases.
The energy book of business is now just rolling up for renewal and the tough property business is just rolling up for renewal for January 1. So, we'll ...
in the next couple of months we'll have a real good feel for what's going to effectively take place in those lines of business. But without a doubt Gulf Coast wind storm premium is going to go up.
Craig can you comment about the A&H.
Craig J. Kelbel
Sure. I mean through the first nine months of this year we continue to be able to get an effective rate increase that is a 2 ...
2.5 points ahead of the trend on the book that's renewing. So that's the first time that that's really continued to exist for almost a whole year now or probably three to four years.
So the pricing market from our perspective in the A&H division primarily in the medical staff loss seems to continue to be no more competitive, no less competitive in a stable environment where we can outpace trend. January, it's too early where we'll see what the fully insured markets will do.
That's where about 40% of our book of business renews. We are just now getting into the middle of it.
So I think at the end of the next quarter, probably we'll have a lot of more information to tell you what impact their pricing may have on our book of business.
David Lewis
That's helpful. I've got additional questions I will re-queue it.
Thank you.
Frank J. Bramanti
Thanks David.
Operator
Thank you. Your next question comes from Josh Shanker with Citi.
Joshua Shanker
Good morning.
Frank J. Bramanti
Good morning, Josh.
Joshua Shanker
Hi there. I wonder if you can talk about market share and sizing the medical stop-loss business, and talking about the size, the opportunity five years out and I have asked you this question before but now when we do have it official, we have President elected Obama, I am wondering your thoughts on the medical stop-loss business in a expanded national healthcare environment?
John N. Molbeck Jr.
I think it's way too early to tell what any government proposal might be related to healthcare. It seems as so based on the information I saw last night based on polls healthcare is considerably down the list of items to be attended to.
We don't see anything that has been proposed that would have impact the medical stop-loss business in the short term or for that matter even in the long-term. So our outlook of the business is as you saw, we recently did an acquisition.
We feel very confident that the book of business can grow, can continue to perform as it has over the years and at very predictable pattern. So I'd say we're ...
our ... my position would be, I'm very positive on the outlook of the book of business as it is today.
Joshua Shanker
Well post acquisition; what would you think your market share is in the stop-loss business?
Frank J. Bramanti
Well, that's a really difficult question because it's no place to go and say how much premium is really attached to self funded business. But if it was, I am going to say, market size is anywhere between $5 and $6 billion, our market share would be 15% or so.
So, there is considerable growth opportunities with that small percentage of the market.
Joshua Shanker
And do you think that you are the largest player?
Frank J. Bramanti
Again there's no statistic to prove yes or no, but I would say if we are not the largest we are clearly one of the very largest that there is in the United States.
Joshua Shanker
And given that now that you know but you obviously see a lot of stuff. There is a lot of fragmentation to continue to or look into insurance M&A?
Frank J. Bramanti
I think there is plenty of opportunities, our books-to-business by the smaller MCU we recently acquired Cox, which was approximately a $50 million book of business. I think there is a more direct set of smaller MCU business because it's harder to find reinsurance to support the program.
So we have had considerable activity in the last 3 to 4 months with the uncertainty of capital gains tax as well of whether you should maybe look into selling your operation now before there is a change. So effectively doing a little tax rate is also probably a big motivation behind some of the individuals who have their major turn around as a result of consideration.
So I do think that there is opportunities and I think the opportunities will continue into 2009.
Joshua Shanker
Okay and regarding your surety business, given the closure of capital margins what not. Do you think that has affect on surety prices rise with the difficulty of giving?
Is that how you get bonded for things these days?
John N. Molbeck Jr.
Wellthe vast majority of the surety we write is small account surety business. We are talking about sub-contractors and people like that.
We're talking about court funds and miscellaneous funds and so that ... while there is a greater demand for surety businesses less jobs taking place.
So I think overall the impact is flat across the country.
Joshua Shanker
For your segment of the market?
John N. Molbeck Jr.
We don't compete with AIG and Chubb and Travelers. We don't trying to write these big ...
the big digs [ph] and things like that. We compete for the air conditioning contractor, for the roofing contractor.
We focus on the smaller side of the business.
Joshua Shanker
Okay. Well, thank you very much.
Operator
Thank you. Your next question comes from Beth Malone with KeyBanc.
Elizabeth Malone
Hey good morning. Yes, could you talk a little bit about what you are seeing in the other specialty lines in the London market because it looks like gross written premiums in both of those lines were lower than they were a year ago and sequentially?
Frank J. Bramanti
Well part of that is, in the other specialty lines we had the colony codeshare reinsurance contract, which was $75 million annual and that expired in April 1. So there is very little written premium going into that line of business for this year and then I think that would represent a significant portion of that drop.
Elizabeth Malone
Okay, good, if did that have been the case in the second quarter too because it was ... the revenues were higher in second quarter?
Frank J. Bramanti
Well, it expired in April the 1st. Okay.
Elizabeth Malone
Okay.
Frank J. Bramanti
So there is about a 60 day lag in reporting the premium. So that's...
Elizabeth Malone
Oh,okay.
Frank J. Bramanti
That would give you the right math.
Elizabeth Malone
Okay, and then but in London?
Frank J. Bramanti
In London we wrote less energy business than we wrote a year ago because we were ... prices even though they are significantly up from 2005 they weren't as attractive as they were before and we brought a significant amount of facultative reinsurance which is one of the reasons why our hurricane loss you will find is probably about a third of where people thought it would have been.
And so, I think that's just good underwriting in a difficult market.
Elizabeth Malone
Sure those prices, although improving still haven't gotten back to where you would be comfortable writing the biz?
Frank J. Bramanti
Well we are writing the business. We are fact ...
we fact a lot of it out, we believe that energy pricing across the board is going to go up not just Gulf of Mexico and we believe Gulf of Mexico will go up significantly, when I say significantly I am saying 10 to 25% with January 1 renewal. Either that or what could happen is buyers may decide not to buy.
I don't think so because now we have an oil price market that's going down and therefore they are going to want to protect their business interruption and their assets a lot more than when it was at $147 a barrel. So I think they will buy.
John N. Molbeck Jr.
That's one of the things, if you are looking at year-to-date DWP, we decided to exit the Marine XL business in January and so that's $15 million to $20 million worth of premium that's out of there versus the prior period.
Elizabeth Malone
Good. And when you are ...
I know, you made a couple of nice tucking [ph] for an acquisitions recently, do you see... are you more optimistic given market conditions especially given what's happened in the investment community to pour opportunities to make more significant acquisitions in some key areas?
Frank J. Bramanti
I think any time there is turmoil in the market, there is that possibility. We've been extremely disciplined to find the right kind of deals out there and Cox is the perfect example of first and foremost a cultural fit and therefore you enter that acquisition with very little integration risk because you've got the biggest of the factors neatly tucked away, there is going to be, if the markets continue to be as volatile as they've been, there is going to be capital stress in a lot of companies.
There were huge amounts of capital evaporate and if we go through another period of time like that this whole view of excess capital in the insurance market will change and there are going to be companies that are going to be capital constrained without many alternatives to raise or correct that capital position. We are also coming into a period of time that the industries results have deteriorated dramatically even if you exclude investment issues that have been running through the financial statements; combined ratios, they're not inching up, they are moving up significantly.
And that's going to cause problems for people going forward. And how are they going to be able to continue to effectively compete, when they are bleeding.
So I think we are entering, getting near the bottom of the cycle and coming out of there, there is usually some opportunities we tend to not to be bottom seeders. We tend to try to make acquisitions of quality companies without problems, not with problems.
But as John said, what we've seen, you know they might be on the smaller side but we've seen an increased urgency of sellers, some trying to be ahead of any tax change and capital gains rates, some trying to be ahead of problems in the marketplace from people pulling paper or people reducing their involvements in different areas. So, I think the activity is going to be up.
I think we will take advantage of the opportunities that make sense for us. But there are plenty of them out there.
Elizabeth Malone
Okay, and then just one last question on AIG presence in the market. Is that ...
do you believe that's having a bearing on the markets that you are in or are you able to avoid AIG circumstances because of the private business you are writing.
John N. Molbeck Jr.
Company of the size of AIG has an impact on the entire worldwide insurance marketplace and in our specialty lines, they are in just about every single specialty line of business we are in. So we are seeing ...
there will be an impact, there is an impact, there will be an impact what the end result is too early to tell.
Elizabeth Malone
Okay and then one last question on the diversified financial. What was the actual to your loss ratio?
John N. Molbeck Jr.
We don't have that.
Elizabeth Malone
Okay.
John N. Molbeck Jr.
We don't have the outline fraction here.
Elizabeth Malone
Okay alright thank you.
Operator
Thank you. Your next question comes from Doug [indiscernible] with RBC Capital Markets.
Unidentified Analyst
Hi good morning guys. I had two categories of questions.
First just a quick confirmation on your statement about selling a clinical equity and equity linked securities. I would assume that you would retain your interest in Tower group in ASI that they would be considered more strategic investments than part of your investment portfolio per se?
John N. Molbeck Jr.
Previously disposed off, both of them, completely.
Unidentified Analyst
Okay. So Tower group and ASI would also be included in that category?
John N. Molbeck Jr.
Yes, we have no equity, no direct equity exposure at this point and the hedge fund, so the indirect investment in equity exposures are liquidation notices are already in.
Unidentified Analyst
Okay. That's very helpful.
And also in the other income, did you realize any income from your contract of MGIC that was notable in the quarter?
Frank J. Bramanti
It was, from memory, it was less than $1 million.
Unidentified Analyst
Okay. And just if you look at the financial products business, it was a pretty sharp increase in the top line, about 14%.
What ... and just roughly how would you break that down between, I guess, unit growth for policy growth and pricing?
John N. Molbeck Jr.
I would say it's 80% pricing and remainder would be unit growth and that was between the DNO and related line and our credit line. Obviously we have a small book of credit business and with the banks withdrawing capacity we increased premium on a written basis for the quarter by about $5 million.
So that's going to give you a pretty good chunk of the difference, principally in those two areas.
Unidentified Analyst
Okay, that's helpful. And my last question, is another follow-up on the life and health; just getting ...
obviously getting lot of attention this morning. Just kind of experience in life and health business so ...
but I have seen the wholesale collapse of managed care companies in the last couple of months. And I was wondering if it is ...
are you going to track the market where they're going to try to get back their lost profits by increasing prices which would drive business into self insurance or do you think there's a adverse scenario possibility where they would try to recoup some of their lost profits by reaching into your market may be with some less than optimal pricing?
Craig J. Kelbel
This is Craig Kelbel, I would say your first scenario is much more would be my view is that the only way that they can recoup their net income bottom line is by raising their prices on the fully insured products that they sell, but self funded ... to give you an idea of the self funded plan, the premium that we had is only 10% of a plan cost.
So even if they reached into that market it is so insignificant of a premium to make up for their short fall but I think they have no alternative to increase their prices to recoup their profit margins.
Unidentified Analyst
Yeah, and have you seen any ... because I am sure they are starting to at least start negotiating price increases.
Are you seeing increased submissions from smaller companies that previously had gone with the United Health or InSignia [ph] saying can you do better?
Frank J. Bramanti
I think again it's too early, the January season has just been engaged. But I would tell you that our volume in the middle of the year actually showed some decrease year-over-year, but our volume picking up through towards the end of the third quarter going into the fourth is higher than it was last year.
So not significantly higher but higher which is a pretty good trend early on into the renewal season.
Unidentified Analyst
Okay, thank you very much. That's all of my questions.
Operator
Thank you. Your next question comes from Justin Maurer with Lord Abbett.
Justin Maurer
Good morning, guys.
Frank J. Bramanti
Good morning.
Justin Maurer
Frank, philosophical question on DNO, with the markets waterfall down in October, do you think that it's actually beneficial to you guys in a weird way in the sense that it makes it that much difficult more difficult for anybody to point out any potential incidents of fraud or what have you because everything has just kind of come down together?
Frank J. Bramanti
Well that is one of the issues there I think the market, the insurance market place is using in its approach to defend that if you are required to show direct action, cause and effect and you have a total market impact, it's world wide now. How was it that you can pin it on any given company.
Now we've maintained all along, there are going to be claims in the market price. But in general these are market things, not company specific events.
So I think it's going to be hard when you have a total market meltdown. I mean you've got 20% and 30% moves by the market as a whole to turn to one particular company and say see, you caused this to happen.
I think that's potential help but we are a couple of years away from knowing how these ... the court are going to respond to the policies out there and that's why we've taken a pretty conservative approach.
We are on top of the DNO claims. Our people are extremely focused on what the issues are in the marketplace.
We can't lose sight of the fact that we write DNO insurance. We provide that policy to our clients and we are out there everyday continuing to operate in the marketplace.
But all of our management team and all of the DNO people are extremely focused on these issues and we continue to monitor it, we continue to write in this marketplace, so we know what's going on and unfortunately to a certain extent we are going to have to wait till some of the core actions are seen over the next couple of years as these things wind through. But we are comfortable where we're at, we are maintaining a conservative stance on it.
And we think it provides a quite attractive opportunity going forward to continue to write this business, take advantage of price increases and potentially expand some of the writings in the DNO account as a whole as some of our competitors have had issues in the market.
Justin Maurer
And even though you are obviously talking early science of it looking better. Does that attract capital in anyway in terms of either new entrants or people who had been in a token way that are trying to become more meaningful players or is early just worried about putting up own fires that they haven't got around to?
Frank J. Bramanti
One thing that is certainly part of the DNO culture is just because a new market comes into town doesn't mean the brokers and clients are going to use them, especially on the primary and first excess layer. And just because you take a team of people from the xyz insurance company and move to a new company that doesn't have any claims paying history, never issued a policy before and there is not a direct relationship between getting into the business and being able to write that.
And if you had A plus, AA paper, that might be one thing. But if you don't have A plus AA paper that business is going to gravitate towards debt security.
So I think we feel we're in a very good position and yes, there'll be competition from new players. I would think that's going to be primarily on the excess and in the very high excess capacity.
Justin Maurer
Okay. Thanks a lot.
Operator
Thank you. [Operator Instructions] Your next question comes from David Lewis with Raymond James.
David Lewis
Craig got a couple of questions. First I want to go back to the stop-loss insurance and may be I don't understand healthcare that much or at least of what Obama may do, but your stocks are coming under some pressure here at the open.
Even though that I have been getting your people reflecting on kind of what the Obama healthcare plan may be, its my understanding, the democratic healthcare plans if wanted to get the uninsured insured. Not take away and takeover corporate America's healthcare programs which is what you're basically helping to reinsure, any initial thoughts on that?
Frank J. Bramanti
I'll give my two cents and then like Craig's gotten in ... and then I think, what we've seen during the campaign, our people focused on trying to get the uninsured insured and there are a couple of things that have been suggested that that can have a significant impact.
There are a lot of people that have coverage available to them that they choose not to have. A lot of young people think they're bulletproof and therefore they don't buy the coverage that's available, they are part of this 47 million or whatever the number was of uninsured.
So there are things that can be easily done to get part of that solved. Then there is a core group there that don't have coverage available, don't have alternatives and so the question is going to be the real question is, how do they somehow take care of that remaining group and government's response to that is we will put it in a government program.
I am not sure we want our government to efficiently run our healthcare plans. But I think that's where some of that's going to lead.
That doesn't necessarily take away from what is being provided by corporate America on the health side. We will just have to see.
Craig you want to chime in and add.
Craig J. Kelbel
As I said before I think it's far too early to predict what the initiatives might be in healthcare. But keep in mind that even if the government took on a greater participation in the uninsured and generally a lot of it is around children.
These programs are the risk takers and are the provider groups. And keep in mind we also have a product line within the A&H division where we sell excess loss, really the same kind of medical stop-loss that we sell through foyers, we sell to provider groups.
And I think there will be more opportunities for those lines of business to grow because risk will end up somewhere with healthcare for catastrophic claims. Because nobody wants to, whether it's a provider, whether it's a government, whether it's a core group; nobody wants take the full claim of a million dollar or potential for that they want to lay part of risk off.
And we have the facility to take it from a variety of places whether it's a foyer groups, provider groups, hospital groups. It really does not matter much to us where it is because we have the facility to capture that as premium and capture that within our divisions.
So I think one, it's too early to tell what happens with healthcare I don't think it's a high priority. Two, if it becomes high priority [ph], I think it will affect as Frank said the uninsured.
Don't confuse uninsured with people who can't afford to buy coverage though. And that's the one thing the government does constantly.
David Lewis
That's helpful. And regarding the two acquisitions here so get $60 million to $70 million of premiums in 2007 IKE coming on your books, just want to clarify that.
And second would you anticipate those margins to be fairly similar to what you are seeing in your current stop-loss book?
Frank J. Bramanti
Well, only one of the acquisitions is stop-loss.
David Lewis
So that's the majority, its $50 million plus right?
Frank J. Bramanti
Yeah, it's $50 million and next year we are estimating about $42 million for that and the remainder of the business is, business that we would associate with our PIA entity, it's mainly governmental business. When I say that I am talking about governmental authorities, townships, county governments and things of that nature, we already have a significant market share and we're continuing to grow it in different areas of the country.
And loss ratios and the combined ratios will be the same as the rest of our book of business.
David Lewis
Okay and on the other income, since you don't have a trading portfolio in place anymore. What might be the guidance, I think previously you talked maybe $3 million to $4 million a quarter and let's think about magic kind of building over the next year too.
So maybe as we kind of go into 2009 what would be your guess be at this point?
John N. Molbeck Jr.
Its hard ... our guidance I think would be the same as what we said in the past, ex-Magic and its still early for us to really have a feel for it, how that's going to flow in.
I think the volume that's come to date has been under what we would have estimated at this point in time. So I think we are just going to have to wait to see how this flows through the end of the year and what they are ...
what they can kind of tell us for next year. But it has not been significant.
David Lewis
Okay fine. And then lastly, we had projected that year end excess capital might approach $400 million at the end of '08 and given the fact that you've been a little more aggressive on your repurchases given the opportunities, you've made two acquisitions.
Where do you think that stands are we going to be closer to 300?
Frank J. Bramanti
I think, one of the things that's going to have a big impact on for us is how much premium we anticipate writing next year. I think we are ahead of our projections for 2008 and kind of our initial budget pass with our operations, people are quite optimistic for next year.
So I think we will be utilizing some of our capital, this with an increase in business. So I think it's a little bit early to say how we're going to end up because it's going to really be dictated upon what our writing expectation is for 2009.
But it's likely to be less than more. Our capital remains intact following the market value movements.
But, we're writing more and we think there's going to be some additional acquisitions we'll do. They are not going to necessarily be significant but again when we make an acquisition we both spend capital for that acquisition and then immediately start writing that business which utilize this capital again.
So, again it'll be less than what we said but in a positive manner, and that we're utilizing the capital to the right premium, which is where we're going to get best return for our shareholders.
David Lewis
That's helpful. Thank you very much.
Operator
Thank you. There are no further questions at this time.
Frank J. Bramanti
Thank you everyone for being on the call and we will talk to you in February.
Operator
Thank you for joining today's conference call. You may now disconnect.
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