Feb 25, 2009
Operator
Good morning. My name is Brandi, and I will be your conference operator today.
At this time, I would like to welcome everyone to the fourth quarter and full year 2008 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. (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 recorded, rebroadcast or published in whole or in part, without the express written consent of HCC Insurance Holdings, Inc. Today’s call will begin momentarily.
I would now like to turn the call over to Frank Bramanti, Chief Executive Officer. Please go ahead, sir.
Frank Bramanti
Thank you, operator. Good morning everyone.
You for joining us for our fourth quarter and full year 2008 earnings conference call. Joining me in Houston today is our team led by John Molbeck, our President and Chief Operating Officer; Ed Ellis, our CFO; Mike Schell, Chief Underwriting Officer the company; Craig Kelbel who heads up our Life, Accident and Health Operations; Pam Penny, our Chief Accounting Officer; Cory Moulton, who heads up our US Property and Casualty operations; and Randy Rinicella, our General Counsel.
We are going to utilize a similar format to past conference calls. I’m going to make a few opening remarks followed by John Molbeck’s review of operations, and then we'll open up the call to questions.
We had fantastic 2008 despite the meltdown we’ve all lived through. Book value at HCC was up 10% to $23.27 a share after $0.47 in dividends during the year.
Our return on average equity was 12%. Total shareholders’ equity end up the year at $2.6 billion.
Our investment portfolio where most of the problems in the industry came from performed quite well during 2008. Unrealized gain as of the end of the year was $14.6 million, down from $25 million at 12/31/07 on a fixed income securities portfolio of over $4 billion.
The sectors that we regularly invest in have held up remarkably during the year. During 2008, we repurchased 3 million of our shares in the open market.
We still have $37 million of remaining authorization and we will continue to only repurchase our shares below book value. Yesterday afternoon, we issued EPS guidance of $2.65 to $2.85 per share for 2009.
While we are extremely pleased with the position of HCC in the marketplace and are optimistic about the industry's prospects, the market has not yet turned. Hopefully 12 months from now, we can speak of a market that has actually turned the corner.
With that I'm going to turn the call over to John Molbeck, HCC’s President, Chief Operating Officer a for discussion of our operating results and insurance operations.
John Molbeck
Thank you, Frank, and welcome everyone. Not too often an industry or any industry agrees on anything, but I think we've all agreed on one thing, we are glad to see 2008 behind us.
Frank has discussed HCC’s book value growth and return on equity. As you can see from our press release, our combined ratio for the year was 85.4%.
We are very pleased with these metrics. Once again in 2008, we limited our exposure to catastrophe and once again we outperformed our peers.
We did have to revisit our reserves in Gustav and Ike in the fourth quarter. We further reduce them another 10%.
Again a great result compared to our peers. Gross written premium of HCC's insurance company subsidiaries of $2.5 million was a 1.9% increase over 2007.
While net written premium of $2.1 billion was up 3.8%, and net earned premium of $2 billion was essentially flat for the year. Our loss ratio for the year was 60.4% as reported, 59.3% excluding hurricanes, and 61.4% excluding both net reserve releases and hurricanes.
This compares to 59.6% as reported in 2007 and 61% excluding net reserve releases. So if you look at that, in 2008, excluding reserve releases and hurricanes we were at 61.4%, 2007 was 61%.
The loss ratio for the fourth quarter was 58% as reported, 58.7% excluding hurricanes and 62.6% excluding both net reserve releases and hurricanes. This compares to 2007’s fourth quarter reported loss ratio of 59.7% and 60.8%, excluding reserve releases.
Our expense ratio continues to be an industry leader at 25%, and it compares to a 23.8% expense ratio for 2007. And before you ask me, the difference between the two is really a mix of business.
If you go back and look at 2006, our expense ratio was 25%. And between 25% and 26% is what we expect the run ratio to be for 2009.
The $82.4 million of net positive reserve development for 2008 compares to 2007’s $26.4 million. And during the year, we increased our (inaudible) to reflect the unprecedented uncertainty in the economic environment.
These changes were primarily for D&O credit and surety lines of business to which we added $57 million to reserves. Total IBNR, net IBNR at year-end was $1.23 billion, compared to last year's $1.19 billion.
At 2008 year end, IBNR was 4.4% over the actuarial point estimate compared to 2007’s 4.2%. All of our reinsurances due February 01, which is the majority, have all renewed within budget.
This quarter, we’ve had four new subprime D&O claims and an additional three ‘Side A only’ claims, one fiduciary claim, and two E&O claims. These claims are continuing to work their way slowly through the legal process.
As we have said before, based on our current knowledge, we believe that we have adequately [ph] provided for the ultimate losses that will be incurred on this business. We continue to provide a summary of subprime as an attachment to our press release.
A few words about the market overall. Having listened to most of the conference calls, I'm surprised that the competitions who are stating almost unequivocally that the market has turned.
Citing such lines as EPLI and E&O. We find that some of the same companies that are saying that the market has turned are the same companies that we see undercutting prices in those lines.
Yes, some lines are experiencing material price increases, financial institution, professional liability, Gulf of Mexico offshore energy, credit, and international aviation are all lines of business experiencing significant price increases. Our other lines are flat or slightly down and prices have continued to decrease, the rate of decline has certainly decreased.
We remain optimistic that all lines will be positively impacted by the second half of 2009. Unfortunately, most of that, if it occurs will not hit the bottom line until 2010.
Our guidance does not reflect any material change to pricing over what we are currently experiencing. And with that, operator, I would like to open up the call to questions.
Operator
(Operator instructions) Your first question comes from the line of Mark Lane with William Blair & Company.
Mark Lane
Good morning. Just got a couple quick ones.
So as of year-end, can you give us an idea what's the total net reserve position in the economically sensitive lines that you’ve highlighted D&O credit and surety of the total company's net reserves.
John Molbeck
Mark, we don't break down our net reserves by line of business. Ultimately when the K is filed, you will find it in the K which is not long from now.
Mark Lane
Okay. And regarding market conditions and I appreciate your candid assessment, so on the D&O side do you have an appetite to grow that business of this year, certainly a lot of dislocation in that market.
What's your strategy going into 2009?
John Molbeck
Our strategy is not any different than it has been in the past other than we continued to remain opportunistic and obviously there's a lot more opportunity in 2009 than was in previous years. Buyers even more than the retail brokers have want to step up the quality of the insurance companies that provide coverage.
And HCC being one of the few that are A plus and AA rated, we are seeing opportunities in 2009, for a relatively newcomer being in the business less than 10 years that we wouldn't otherwise see. We have great relationships with the major brokers that produce those lines of business and we expect to take advantage of it in 2009.
Mark Lane
It is the pricing there for you to take share, I mean the approach is – you said the approach is the same now as it was in the past, but your interest levels got to be dramatically higher than it's ever been?
John Molbeck
Well, we are getting into too greater detail. I would say that the premium on financial institution businesses is certainly, let’s say, more than 30% over expiring.
And the overall book of business is actually counting the non-financial institution businesses are more than 10%. And we are only into the month of January.
So I think – and we certainly are seeing the opportunities to play at areas and levels where we haven't had the opportunity before. And Andy Stone who runs the US operations, Matt Fairfield who runs the international operations are known as individuals that brokers can come to and work out solutions to solve their problems.
Mark Lane
I’ll re-queue. Thank you.
Operator
Your next question comes from the line of David Lewis with Raymond James.
David Lewis
Great, thank you. John, just follow up on the last question to make sure I heard you correctly, the non-financial professional liabilities up 10%?
John Molbeck
No, I would say that though overall book in total is up more than 10%. I would say the non-financial institution business now has gone from down a negative, let's say 10 in 2008 to a flat to a slight increase in the first quarter of 2009.
I think as people continue to look for capacity on all D&O business, that we are likely to see meaningful price increases by the time we get to the second half of 2009. There is a lot of new entrants in the market but most of those new entrants want to write excess and in fact maybe all of those new entrants want to write excess of $100 million which doesn't really solve the problem when you have two of the major carriers that play within the first or even three of the major carriers that play within the first $100 million no longer acceptable to some buyers.
David Lewis
That's helpful. John, just kind of broad, but is there any way you can kind of go through the major business lines and give us some general sense of what you're seeing on pricing versus six or 12 months ago?
And one question, I guess, I have on the aviation side, I know that the international aviation has been hard for the past several months. But some of the commercial airline accidents in the US, will that have any impact on US operations pricing?
John Molbeck
One would hope that it would, but if we separate international from domestic aviation, on the international aviation side we are seeing price increases of 10% or better, and some improved terms and conditions. If you look at our direct of business, which is Avemco, that business is pretty much flat.
And if we look at our Houston Casualty and USSIC aviation US domestic business that is still experiencing price decreases of 5% to 10%. If we look at all of our international book of business, international D&O as of the fourth quarter was down 3%.
We think that has now flattened out. And every other line of business that we have internationally was anywhere from flat to up 10%.
If we look at our domestic book of business, D&O was definitely up; life, accident and health which is up about 3% over trend in the fourth quarter. And the other lines of business, and I already mentioned international aviation being up 5%.
Our credit business is up – it's a small business but it's up over 30% and the rest of the business is in the fourth quarter down between 1% and 5%.
David Lewis
And the Lloyd's energy operation, that's up what?
John Molbeck
Well, recognizing that – let us break it into two pieces, you have about three pieces. You have your international energy book.
You have your US energy book, which is not windstorm exposed. All you have your windstorm business.
All other lines are up. The biggest potential for price increases is the windstorm in the Gulf of Mexico.
According to our calculations, the amount overall capacity in the marketplace is somewhere between 50% and 65% of what it was a year ago. And we actually have the ability to provide more capacity relative to total capacity in 2009 than we did in 2008.
Most of the business renews June 1, between June 01 and July 01, the vast majority of that business renews. So you won't see that impacting our figures until the second quarter.
David Lewis
That's helpful. Thank you.
And Frank, I assume the 2009 guidance which is a little lower than the mean estimates, probably largely reflective of the fact that we are getting lower returns on the conservative investment portfolio that you hold. Do you have your sense of what new investment yields for your purchases are relative to the average portfolio yield is today?
Frank Bramanti
Well, our average was about 5.2 for the portfolio. An area that we are currently investing in on the short end are government guaranteed debt so debt issued under the TARP or other programs.
Current yield is about 2.5% of what we're seeing in the market. On the intermediate side high grade industrial corporates which are yielding about five.
And agency backed mortgages, which are yielding four and a quarter-ish. And then on the long end we're still investing in the municipal side.
Tax effective rate of a little over 5%, 5.25%. So what I think is we had a significant impact last year and will have a continuing impact in the 2009 is really the dramatic drop on the short end of the rates.
If you just kind of blend these numbers together, the rates are going to be down but it's really being driven by the shorter end of it. We have a relatively short duration portfolio, so we are continually reinvesting our portfolio and we will continue to that.
Our cash flow has been very strong from operations. So even in a lower rate environment, we're adding to a growing portfolio.
So that will offset some of the reduced rates.
David Lewis
That's helpful. And assuming no new acquisitions in 2009 and no material change in pricing, would you expect that your excess capital probably approaches $300 million?
Frank Bramanti
We'll have to see what transpires during the course of the year. We certainly have adequate capital at this point.
And we expect to generate with our guidance 300 million-ish of earnings during the course 2009. And our written premium is, while it's up it's not up more than a few percentage points from our estimated standpoint for 2009.
So that should – we're going to stay in the same position. We’ve got excess capital.
I think most of our property casualty industry is sitting on a little dry powder out of necessity. You have to assume the capital markets are closed.
And I think everyone is acting a little more prudently, a little more conservatively going forward because of the uncertainties and lack of availability on any end, be it debt or equity. We think we are going to be in a very good position.
We think we still have capital to make acquisitions along the way. We are going to look to do that.
David Lewis
That's helpful, and congratulations on a solid 2008.
Frank Bramanti
Thank you.
Operator
Your next question comes from the line of Beth Malone with Wunderlich.
Beth Malone
Good morning. Yes, thank you.
On the outlook you say that you expect price – your assumptions on that pricing is in line with what it is currently today. But as John mentioned, there is several lines where pricing is up.
Could you go into a little bit more – does that have any impact on the expectations for the 2009 earnings or is that really going to just be affecting 2010?
John Molbeck
The lines of business that I indentify where pricing is already up, we've included in the forecast. It is certainly conceivable that pricing that pricing be up even greater than what we anticipated.
We put in what we believe could be a reasonable estimate for the remainder of the year. To the extent that pricing is up in the second half of the year, it's going to affect us more on a gross written basis than on a net earned basis.
So while there might be some impact in 2009, most of that impact will be in 2010.
Beth Malone
Okay. And then on the other income line, are we to assume then that going into 2009, you are going to be generating any income in that revenue line?
John Molbeck
I wouldn't say any. We gave some guidance during the course of 2008 that said we had $3 million-ish a quarter that we thought we are going to roll through there regularly.
We now have two big items that are reported through there. One is couple derivative contracts we have that were written out of our New York office.
And the full impact of that. It’s a mortgage guarantee contract in the UK, and it is performed – as anticipated it has performed quite well but the total impact of the change in the value of this contract, including any exchange gains or losses and the value of the profit in this contract runs through there.
So there could be some volatility and that's what you saw in the fourth quarter. The other contract that's running through there is our magic guarantee contract, MGIC.
And it's – we wrote it early last year, in the second quarter of last year. And we can't really say we know what the flow is going to be after that.
And how the level of activity in the economy, the number of closings they have, the amount of their ability to continue to write business is all going to dictate the amount of flow in that. So, it's very difficult for us to project, even with the original assumptions under the contract, what the volume is going to be there.
So, I wouldn't expect it to be that volatile and we expect it to kind of be $3 million, $4 million on a quarterly basis going forward. But we will have to see because a couple of those items are just a bit outside of our control.
We really don't even have the ability to project with any certainty the flow that's going to be on a couple of those contracts.
Beth Malone
Okay. And then one last question on the diversified financials.
You mentioned that you did – some more claims came in the quarter and you did say that in the press release that's within your expected. As you renew these policies or as new policies come on the books, is there an anticipation – you added to the future loss.
Is there going to be a lumpiness in this diversified financial where the claims are coming from the most current two years and then you expect them to level off?
John Molbeck
Let’s be clear about one thing. These are potential notices of claims.
These are really not claims. We are so early in the process that very, very few things have been settled.
I think Merrill Lynch had a class action settlement, I think there has been three settlements so far. So these are just notices of claims and more a reflection of our concern over the economic environment causes us to be cautious about what might happen in the future than any particular grouping of claims leaves us to believe that ultimately will pay out any specific amount of money.
Beth Malone
And is that a greater – I guess the market would be, there's greater demand for this coverage now than may have been in the past? Are people recognizing the need for it?
Or is just the pricing in the current market going up?
John Molbeck
I think it's more – in the first place you have two competitors that are certainly wounded at the moment, which could put as much as $100 million worth of capacity on the first $100 million worth of D&O and related coverages. And therefore, when you have a gap that big, it's going to affect the pricing in the overall product.
So it's not a desire necessarily by boards to buy more coverage although there is some of that. But the vast majority of it is the same exposure for just the higher premium.
While I can’t say the same exposure, actually a lessened exposure for a higher premium. Most of the actions that have taken when you renew the policies, you exclude them on a go forward basis.
Beth Malone
Okay. Thank you.
John Molbeck
You are welcome.
Operator
Your next question comes from the line of Doug Mewhirter with RBC Capital Markets.
Doug Mewhirter
Hi, good morning. Just a couple numbers questions.
First, I definitely got your message about the expense ratio and where you expect it to be. I noticed in the quarter there seemed to be how you allocated seemed to be shifted around quite a bit.
I got the actual insurance related expense ratio at just over 27 but there's actually a corresponding lower allocation to, I guess the corporate or the brokerage side. I don’t know if you had any accruals or there is some seasonality to how you allocate those expenses.
With those distributions sort of revert back to how it had been earlier in the year going forward or is this – have you sort of changed the way you looked at how you allocate expenses?
John Molbeck
No, really we haven't changed anything about the way we allocate expense, not at all.
Doug Mewhirter
The second question. The sources of reserve development, was that almost all from Gustav and Ike or (inaudible) come from other lines?
The favorable prior year developments.
John Molbeck
Well, it came from multiple lines of business. You are talking about the fourth quarter?
Doug Mewhirter
Yes.
John Molbeck
In the fourth quarter we go through the process of truing up all the IBNR for the insurance companies as opposed to the agency driven companies. It's part of the normal practice and as a result of that having reviewed it, we made the changes that are reflected in the fourth quarter’s financials.
Doug Mewhirter
Any particular accident years or trends, is it more prior to 2003 or is it more recent accident years that came out?
John Molbeck
It’s primarily 2005 and prior.
Frank Bramanti
And Doug, just to be sure, we’ve reduced our hurricane losses by what was it? $2.5 million.
Doug Mewhirter
Okay. But I guess that will be reflected in the current year adjustment?
Frank Bramanti
Correct.
Doug Mewhirter
And, my last question. I saw that in your guidance you assumed a diluted share count of about 118 million.
And it looks like you're standing at 114 million now. Is that mostly – I guess where would those extra 4 million shares come from?
Is it new acquisitions? Is there stock based earnouts in there?
Share based compensation.
John Molbeck
We are forced to use some kind of an estimate for share price in order to get the calculations for diluted shares. And so we assumed same kind of multiple we've had for a lot of last year, 1.1 to 1.2 on increased book value.
So that put the share price we use in our calculation at a number that generated a 118 million of shares outstanding, which is roughly the same number we used for 2008.
Doug Mewhirter
Okay, so I guess more options would be in the money.
John Molbeck
Correct, correct. There were no assumptions or acquisitions or anything of the sort.
Doug Mewhirter
Okay, thanks. That's all my questions.
John Molbeck
Just one thing Doug, any earnout that we have on the table, all those payments are in cash. So that would impact the guidance.
Doug Mewhirter
Okay, thank you very much.
Operator
Your next question comes from the line of Ken Billingsley with Signal Hill.
Ken Billingsley
Hi, good morning. Just a few follow-up questions.
On the 57 million of increases for economic sensitive lines where reserves were increased. How much of that incurred in the fourth quarter?
John Molbeck
About $22 million, something like that.
Ken Billingsley
So, $22 million. And other part mostly was in the third quarter?
The remaining $35 million was probably in the third quarter?
John Molbeck
Yes.
Ken Billingsley
Okay. On the commission and fee income, I understand that you're trying to take on more the risk of in utilizing your capital.
Is that a reason for the commission and fee income being down? Or is there some other outlying factors there?
John Molbeck
No, I think that’s it. I mean, a lot it is generated either in our agency operations which are – who have historically written on some third party policies and we've moved a lot of that under our own paper so that tends to go away.
The other place that generates the fee income is on our proportional reinsurance contracts and we really haven't been expanding much quota share reinsurance and the more appetite we have for retention, the more that reduces.
Ken Billingsley
Would we expect to see that continue and maybe even accelerate with you retaining the risk yourself instead of passing it on?
John Molbeck
Yes, I don’t think it will change materially from 2008, but I think it's safe to assume that it would be flat to slightly down.
Ken Billingsley
Flat to slightly down? Okay.
John Molbeck
We don't lose that income or that revenue. It just shifts over to the insurance company underwriting side.
So, it gets recorded as earned premium and lower policy acquisition cost expenses rather than showing up as fee income as revenue.
Ken Billingsley
But we are not expected to see a bigger shift in that it should remain fairly flat for ’09?
John Molbeck
It might be down a little bit. But as John said, it is not going to be significant one way or the other.
Ken Billingsley
The alternative investments had a $14 million charge in the quarter. Could it just talk about what was there?
It was half of what was for the year. It was a kind of taking out at the end of the year so we can clean it up or may we see a few more items there in 2009?
Frank Bramanti
I'm sure everybody on the call felt the same impact. We had about a $135 million exposed as of October 1 for the quarter.
At that point, we already had redemption notices in on everything. One liquidated during the fourth quarter.
And these were all $25 million investments, just kind of round numbers. One liquidated during the quarter, two were liquidated early in January and those amounts were shown as receivables at year end.
The alternative investment amount was about $50 million at year end. One fund to fund hedge fund that – whose liquidation date was on our – the anniversary date of our inception of the investment.
So we'll be out as of March 31. So we have 25 million exposed to alternative investments in the marketplace.
And I understand that January's results on that was up 1% after that would be repeated in February. And then we have one bond fund that we're in that literally, we had just gotten into when we made the decision to get out of all of these funds.
And that will be liquidated over the course of 2009, and we expect to be out by the third quarter. It’s not going to have the – it’s a bond fund, so it doesn’t have any equity exposure.
Unfortunately, it’s going to be accounted for as an equity investment. So the unrealized valuation on those bonds is going to run through the income statement.
So we may have some volatility there. But again our exposure is down to 50, it will be down to 25 at 3/31 and run off over the course of the next couple quarters.
Ken Billingsley
In next few quarters, you'll be out of it completely?
Frank Bramanti
Yes. And we've done everything we need to do.
The timing is out. From an equity standpoint, you know, we're at the end of February now.
We’ve got 30 days left, and we are out of the equity investment.
Ken Billingsley
Okay, excellent. On capital requirements from the rating agency, when you look at underwriting leverage, underwriting leverage is higher today than it was in ’07 for the industry, but it’s still much lower than it was back in 2003, 2004.
When you talk about pricing and the fact that people aren’t necessarily raising their rates as they are talking about. Is there really a capital crunch out there or is it just going to be an underwriting profitability issue that's going to cause people to flatten rates and possibly raise them.
Frank Bramanti
I think it's a capital crunch. There was a significant amount of capital that both was lost from an underwriting standpoint and with hurricanes.
And that evaporated in the capital market. I was reading one of the reports this week, AM Best estimated a 104.7% combined ratio for the industry, and the industry is losing money.
And on top of that you had unrealized and realized losses on the capital accounts that were significant. So there is less capital.
And there are going to acute situations in some of our competitors and peers that had particular issues and it could be – the other factor in there is that the capital markets are aren't very helpful at this point in time. So, in a normal situation if a company made an acquisition or was growing and needed more capital, they could go out and get it.
That might not be available to them. So they could be constrained for positive reasons but constrained nonetheless.
Then you had companies that lost 25%, 30% of their equity during the course of the year which puts most strain on. And everyone was assuming that the industry and each participant had excess capital and that wasn't necessarily the case.
Not everyone is the same. So I think it is a function of constrain.
And on top of that you got some distressed players and/or anyone who's had some fairly significant negative results are being to a certain extent shunned by the marketplace which is throwing more premium out into the marketplace to be written by people that that lost at least a portion of the excess capital they had. So I think it's capital driving it.
And if you look at the capital market results year to date, there isn't going to be any help there for anybody’s balance sheet. I think everyone that's running a property casualty company is very concerned about the capital account and unfortunately there is not much you're going to be able to do to support your balance sheet or to restock the shelves so to speak.
And so I think that’s going to start having an impact. We hope it's going to have turned the market by the end of the year.
But it’s going to impact people's prices.
Ken Billingsley
Thanks. Just two more questions here.
Under the universal health care plan being pushed by the current administration, how does this impact your group life business or at least your plans for the future of how you are going to look that from an acquisition or growth standpoint?
Frank Bramanti
Well, when you say the proposal of universal health care, I'm not sure there is any proposed plan yet that you can really look at and tell you what it's going to be. From early indications of what we see that’s been battered around.
It would appear that it would not impact our group accident and health business in any way. That it's more, again they are trying to make the coverage more affordable or everybody must pay concept which doesn't impact our business really in what we write.
So I don't think there is any clear indication of what health care reform or if there's going to be. Last night, the speech really didn't talk about health care other than investment in the systems related to health care to automate them to make them more efficient, which will drive down costs which in essence could improve our overall loss ratio.
So that in fact does happen. So, we haven't seen anything yet.
Too early to know until something specific comes out from the administration that we can react to and there isn’t really anything there yet.
Ken Billingsley
So, at health care if the attempt is to make it more affordable and I agree there was not specific plan out there. But if the goal is to make it more affordable you're not expecting it to have a major impact on people moving away from the self-insured.
Frank Bramanti
Well, actually self insurance for the first year in 2008 grew as the number of employers are more inclined to go to self-funded than remain in the fully insured market. And that trend and based upon our January results, beating our expectations I would say there's no indication that self funded does not clearly still a very valid and good concept to fund health care.
Ken Billingsley
And the last question I have is you briefly were touching on it in one specific line. In places where there's flexibility for the customer as rates are going up, rates versus exposure.
Are you seeing the customer actively taking their limits down? I agree they are increasing the deductible or buying less coverage as the rates are going up.
Is that happening now as the economy continues to weaken?
Frank Bramanti
I don’t think right now. If you are buyer, that decision is a decision where you actually, your overall costs including your deductible makes more sense for you.
And I don't think that’s happened yet. The area where people might look at it is lines of business we write is going to the Gulf of Mexico wind exposure.
And you're going to see people looking hard at whether or not they can afford the premium or whether they can afford to run a bigger deductible. A number of people did that in 2008 a number of those energy companies took a hit when they thought they were going to be flushed with cash.
And unfortunately, in the second half of the year they saw the price of oil go from $147 a barrel to less than $50 a barrel. Plus, you have banks out there that are more skittish than ever and a lot of the loan covenants require them to carry the insurance anyway.
I don't think that’s happened yet. Where it typically happens is where the insurance product is offered to you below the burning costs, and you’d say, “Well, I'd be stupid not to take it if my actual insurance premium is going to be less than my losses.”
But I don't think that's the kind of environment we are in right now. And I don't think we are going to see that environment for a while.
Ken Billingsley
Great. Thank you for the answers and congratulations on 2008.
Frank Bramanti
Thank you.
Operator
Your next question comes from the line of Matt Carletti with Fox-Pitt Kelton.
Matt Carletti
Good morning. Just a couple of questions, first is on surety.
Can you just give us an update, year-end ’08, how big is your surety book now, maybe kind of geographic spread and then kind of by product, roughly how it splits out?
Mike Schell
Well, this is Mike Schell. In the US, we write $150 million of surety business.
And the book is split between a small contractors’ surety book of business and also a significant commercial surety with a very good, small premium, small limit license and permit bond element to it. And we also have a very good core bond business.
So none of this involves the major contractors and major work programs like most of the large US surety underwriters have. We're in a different business on the contract side, it’s all small to medium size contractors with one element of it being what we refer to internally as standard contract and another being locally called specialty contract.
So, that’s our US business, $150 million of premium. And we've got a model on it to produce an 80% to 85% combined ratio every year.
We have a solid reinsurance program and have a terrific spread of risk. And it's very good business for us.
Outside the US, we have a book of business in the UK and a book of business in Spain. And Spain, we've been writing contract surety book of about $20 million or so since the end of 2002.
And in the UK, I believe it’s been 2004 or so that we’ve written. And in the UK we have a book of business that is about dependent on the Pound exchange rate, $20 million to $30 million.
So internationally we have a book of business of about $50 million. We have a, what I would call a seasoned book.
And it's focused specifically in those areas although it's international business to our colleagues in the UK, it's UK domestic business and to our colleagues in Spain, it’s domestic Spanish business. So we have a seasoned book of business.
We have long-term the reinsurance programs in place. We spend a lot of time evaluating the business in the UK and Spain and tracking the few losses that we have.
And it's been a very high profit margin business for us and it’s one that we spend quite a bit of time managing.
Matt Carletti
Very help full. And then just going back to medical stop-loss as you came to renewals at year end, did you see any change in behavior from the fully insured versus kind of the I guess the improvement or traction that you are starting to see throughout ’08?
Frank Bramanti
I think the fully insured carriers really haven't changed much from the last six months of last year. I think because self-funding has grown as an increase option for the larger employer groups, I think that's a message that they are not particularly satisfied with either the service or the coverage that they get from the fully insured side.
We don't see any dramatic changes still in the market. It still is what it has been really for the last six months to 12 months.
Matt Carletti
Okay, thanks a lot.
Operator
And we have a follow-up question from the line of Beth Malone with Wunderlich.
Beth Malone
Yes. Could you on the fourth quarter of 2008 for the London market, it looked like, according to my calculations, the loss expense ratio went down more than it has in the first nine months.
And I was just wondering do I have that right or is that just a timing issue?
John Molbeck
Did you say loss and expense?
Beth Malone
No, just losses, the loss expense.
John Molbeck
We reduced the hurricane loss by $2.5 million.
Beth Malone
Okay. That's where that shows up, okay.
All right, thank you.
Operator
At this time, there are no further questions. Are there any closing remarks?
Frank Bramanti
Yes, thank you operator. Again, we are optimistic about 2009, but are cautious given the economic environment that we are in.
The market hasn’t turned, but we are hopeful that it will turn during the course of the year. And we are continuing to manage a business that is well capitalized, well positioned, and has tremendous talent running our organization to take advantage of the opportunities.
But we are going to manage it prudently, cautiously, conservatively in this economic environment. Last year showed everyone that you have to have an eye out for what could happen, what if because it can happen at any time.
I think HCC has shown that it is conscious of what could happen in the marketplace, yet prepared to take advantage of the opportunities that that creates. So with, thank you very much for participating in the call, and we look forward to your participation in our next conference call after our first quarter release.
Thank you very much.
Operator
This concludes today's HCC Insurance Holdings, Inc. fourth quarter and full year 2008 earnings release conference call.
You may now disconnect.