Feb 11, 2015
Operator
Ladies and gentlemen, 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 teleconference for today.
Statements made in this teleconference that are not historical facts, that include 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 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.
Your lines will again be placed on music hold until the conference begins. Thank you for your patience.
Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2014 Earnings 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. I would now like to turn the conference over to Mr.
Chris Williams, Chief Executive Officer. Sir, you may begin your conference.
Christopher Williams
Good morning everyone and welcome to the HCC fourth quarter 2014 earnings call. Joining me today is Bill Burke, our President; Brad Irick, our CFO; and Executive Vice Presidents, Mike Schell and Mark Callahan.
HCC has completed our third consecutive year of record earnings, with net earnings of $458 million or $4.61 per share, compared to last year's record of $407 million or $4.04 per share. For the quarter our EPS was a $1.16 compared to $1.14 for 2013.
Our ROE was 12.1 and operating ROE was 11% for the year. Once again we exceeded our goal of 10% over the risk-free rate.
Our combined ratio was 82.1% for the year and 81.9% for the quarter once again setting the bar for specialty insurers. We grew our book value by 10% to $40.44 per share.
We repurchased 4.7 million shares at an average cost of $47.70. We returned in total $327 million to shareholders in 2014 through dividends and share buybacks.
We achieved these results while growing our gross written premium by 4% and above $3 billion for the year, another record. We have a philosophy of steady, profitable growth and we believe that this approach has and will continue to serve us well.
Our accident year loss ratio was an impressive 57.8%. By any measure, it was a terrific year for HCC with all of our businesses performing extremely well.
Brad will now run through the financial details. Brad?
Brad Irick
Thanks, Chris. Our investing segment generated earnings of $288 million in 2014, our best annual performance to-date.
These earnings included $222 million of net investment income for the year and $54 million in the fourth quarter. Both essentially flat to the prior year.
We also realized gains of $66 million for the year from sales of a portion of our equity holdings, primarily in the third quarter. We remain cautious and conservative in an increasingly volatile market and believe our tax equivalent yield of 4.3% remains very acceptable.
Our strong underwriting performance allows us to think long-term and weather the low interest rate environment without feeling compelled to reach for yield. We do see opportunities in risk assets and will continue to be long-term equity investors with a focus on high-quality companies, with stable cash flows and attractive dividends.
We also see some opportunities in alternative investments for our surplus assets and will cautiously pursue those opportunities over time. We completed detailed reviews of our accident and health and U.S.
Surety and Credit reserves in the fourth quarter. We also reviewed reserves for exited lines.
The development by segment was accident and health, $13 million favorable and U.S. Surety and Credit, $23 million favorable.
There were no adjustments to reserves for exited lines. Based on our review, we remain comfortable with the level of our reserves on a segment and consolidated basis.
Cash flow from operations was $479 million for the year and $118 million for the quarter. With respect to liquidity we have approximately $650 million in short-term funds and available capacity under our credit facility.
Chris mentioned our share purchases for the year. For the quarter we purchased 1.7 million shares of our stock for $86.2 million at an average cost of $49.44.
We currently have $341 million remaining under our existing buyback authorization and remain active, opportunistic buyers. With our first quarter reporting we will include for the first time the results of ProAg.
As many of you know the agriculture business is seasonal with the majority of premiums written and earned in the second half of the year. We've mentioned in our previous comments that our immediate focus with ProAg is addressing its cost structure.
With limited earned premium in the first two quarters and its fixed cost structure we expect a net loss for ProAg in the first half of 2015. We project breakeven results for the full-year, so we expect offsetting profits in the second half of the year.
As we address expenses long-term and reach a run rate premium level, we will improve this result in subsequent years. Our future reporting will include separate disclosure of this new business, which we will refer to as agriculture.
Bill?
William Burke
Thanks Brad. We had a successful underwriting year in 2014 as shown by our overall 82% combined ratio, which included solid results across all segments.
This is a testament to our focus on underwriting and expense management along with our diversified portfolio. From a premium perspective we were able to grow gross written premium for 2014 by 4% and net written premium by 5%, slightly above our historical growth rate.
The lines driving this premium growth include Medical Stop Loss, short term medical, U.S. liability and certain lines in our international segment.
While we are continuing to see rate increases in a number of lines of business across all of our segments we had an overall decrease in rates for the fourth quarter in the low-single-digits. As you will likely recall our reporting on rate changes does not include certain lines such as surety, credit and accident and health.
The retention rate across all segments continued to be positive at 84%. Looking at specific segments, in professional liability we had another strong year with a combined ratio of 78%.
We are seeing a softer market in certain areas, particularly in excess layers, but there is less competition on primary layers where we are an industry leader. Our overall professional liability book continues to perform well.
Our U.S. Surety & Credit segment also had a strong underwriting year achieving a combined ratio of just under 77% and a 3% increase in net earned premium led by our trade credit business.
Our U.S. P&C segment had excellent results achieving a combined ratio of 73% for the year versus 78% for 2013.
If we look at the individual components of this segment aviation continues to face a very competitive market but was able to maintain favorable results with a 56% loss ratio for the year. We achieved strong premium growth in our liability business led by our primary, general liability and excess casualty lines as can be seen with the over 20% increase in gross written premium for the year.
Our continuing build out of our capabilities in different market segments is enabling this growth. As we have discussed all year, the net written net premium for our sports and entertainment lines declined in 2014 due to the cyclical timing of large events.
At the same time we continued to have good underwriting results with a 58 % loss ratio. In a similar manner our public risk business saw a decrease in net earned premium due to a change in reinsurance program, but still had improved results with a loss ratio of 51%, down significantly from the prior year's 76%.
Our grouping of other lines in the U.S. P&C segment also performed well.
This is a mix of over ten lines including various property lines, residual value and marine. We achieved a 6% increase in net earned premium and a very favorable loss ratio.
The international segment had a good underwriting year; achieving 87% combined ratio and even more impressive 40% accident year loss ratio. While the London market business remains competitive we continue to have good growth in a number of international segment lines outside of the London market, including surety and credit along with our small account liability business.
Chris?
Christopher Williams
Thanks, Bill. Turning back a short eight years ago we’ve grown our accident and health premium from just over $500 million to almost $1 billion today.
This includes our acquisition of MIS in 2008, which writes our short-term medical business. The A&H business has provided very consistent results that are not correlated to the general property casualty marketplace and is one of HCC’s many great franchises.
Our A&H business dominated by our medical stop loss product continues to grow, but more importantly maintaining a very consistent loss ratio under 74%. Our infrastructure and broad footprint makes us a market leader in this space.
Our medical stop loss premium increased 7% in 2014 and pricing continues to exceed trend at an adjusted 17.3% versus trend at 15.8%. Our average deductible increased to $108,000 for the year at an average case size of 490 lives.
On prior calls, we've referenced the growth in our short term medical product within MIS, which is included in other in the A&H segment. We grew MIS to $122 million of premium in 2014.
We're not expecting the same rate of growth this year. However, we were pleased with the results that this business is producing and certainly have an appetite to grow the book should we be able to maintain the underwriting margins.
2014 was a great year for HCC. Our diversified book within the U.S.
Property Casualty segment had another outstanding year, producing $114 million of operating income. Despite some headwinds in the UK our international segment had another wonderful year, as did our professional liability and U.S.
Surety and Credit businesses. As we look forward to 2015 and beyond we feel as though we are very well positioned with the majority of our reinsurance programs renewing at very satisfactory terms and conditions.
As previously announced we completed the acquisition of ProAg effective January 1st, and the integration is progressing as planned. The crop business is an excellent addition to our portfolio and we're delighted to welcome all of ProAg colleagues to the HCC team.
We'd now like to open up the lines for questions.
Operator
[Operator Instructions]. Our first question comes from the line of Matt Carletti with JMP Securities.
Matthew Carletti
Thanks. Good morning.
Chris, I took notice of your quote on the front page of the release, particularly about expecting to find new opportunities for growth in the coming year as merger and acquisition activity heats up. I was hoping maybe you could just provide a little more color there, you know, one, if you're talking more about finding M&A opportunities for HCC or more, there's always fall out when others do M&A and maybe that frees up some teams?
And secondly, are there certain lines or types of business that you have your eye on that you'd like to add to the HCC portfolio and maybe we shouldn't be surprised to see at some point in the future? Thanks.
Christopher Williams
Sure. Good morning, Matt.
Yes, look I think anytime activity such as we’ve got going on the moment, it always creates some dislocation and I don't think this is exclusive to HCC, but we're in conversations with various teams. Obviously we're focusing on the insurance side, not on the reinsurance side, but again with the deals that have been announced, most of them have got an insurance component involved.
So I think in the short-term we'll be looking at possible teams. We are, as you saw, we obviously did the ProAg deal last year.
If we found something that fits within the HCC program we'd certainly entertain another acquisition. We've certainly got the firepower to do it.
And I think in regard to your questions about lines, as I've said in the past I mean I think we’ll probably define goals by what we don't do rather than what we do. We still don't have an interest in workers compensation and personal lines doesn't really fit our portfolio too well.
So that leaves a lot of other lines of business there and if we can get the economics out of it that we look for, we'd obviously add them.
Matthew Carletti
Great. Well thanks for the answers and congrats on a nice ‘14 and best of luck in ‘15.
Christopher Williams
Thank you very much.
Operator
Your next question comes from the line of Mark Dwelle with RBC Capital Markets.
Mark Dwelle
Yes. Good morning.
I'd like to start with just drilling down into the ProAg a little bit. I mean, you gave some kind of broad outline about how to think about the premiums.
The 600 or so million of gross premium and just shy of $400 million net, I mean is that the general ballpark to think about or do your contemplate any major reductions or additions relative to the prior run rate?
Christopher Williams
Good morning, Mark. Yeah.
It moves around a bit obviously and also it’s dependent on what's happening in the commodity pricing. But to kind of give you some reference point, the program closed out last year with CUNA Mutual at about $564 million of premium.
What that translates to for 2015 is obviously going to be dependent on if we get any increased market share, and indeed what happens with the commodity pricing, but I think that’s a ballpark that you should look for.
Mark Dwelle
Okay. That's helpful.
And then Brad, you had mentioned kind of in describing the flow of premiums, that I think you said written and earned were more heavily weighted to the second half of the year. I guess in my experience with some other companies that are involved in this line, what I've usually seen is that the premiums written are heavy in the first quarter but then the earned is all back ended weighted.
Will your flow or earnings recognition - maybe premium recognition is a better word, be different than that?
Brad Irick
Mark, hey, this is Brad. I think the way you described that actually it’s some in the first quarter and the second quarter, early second quarter on the gross written premium and then with the planting dates when they come in that’s really when the, the earning process starts and that’s late second quarter and in the third quarter and so same pattern that you are experienced with.
Mark Dwelle
Okay. Good.
That's helpful. And then, I guess the last question relative to that, you have talked mostly about the gross written premium.
Any major plan changes or maybe you're still working with potential reinsurance partners on any type of quota share or anything else that you might do. Is the program going to be broadly similar to how it had been in the past?
Christopher Williams
Mark, it's Chris again. It'll be broadly similar - excuse me - with the following exception.
There was quite a lot of quota share purchased when CUNA Mutual owned it. We're unwinding those as we work our way through buying more XOL.
Several of the contracts were multi-year so there'll be some change in 2015. But you'll see the larger change in 2016.
Mark Dwelle
Okay. That's real good, helpful on that.
And then I guess the only other question I wanted to ask related to the accident and health business. At various points in time you’ve commented that you had seen some uptick in submission activity as companies reevaluate their various Affordable Care Act needs.
Has that been continuing into, I guess a late 2014 and early 2015 with more companies being required to implement now?
Christopher Williams
Yes. You saw we had some very nice growth again in 2014.
We had great quote activity at 1/1. As you know that's a major renewal date.
So the trend has continued in terms of activity. How much of that's actually going to translate to written business is yet to be determined, but it is still a very economical alternative for employers and I think as time goes on it more and more of them are testing the waters.
Mark Dwelle
Okay. I'll stop there and let someone else have a chance.
Thanks.
Christopher Williams
Thanks very much, Mark.
Operator
Your next question comes from the line of Ryan Byrnes with Janney Capital.
Ryan Byrnes
Hi. Good morning, everybody.
First question on the short term medical product, I thought that this year was going to be a little bit more of a one-off because of kind of ObamaCare confusion. Obviously growth nearly doubled this year.
But I think you mentioned that obviously the growth rates won't remain similar, but on an absolute dollar basis of premiums should we expect similar type premiums, or should we expect that to decline a little bit as I guess the confusion over ObamaCare goes away?
Christopher Williams
Yeah. Ryan I wouldn't anticipate it declining.
What I would anticipate is the rate of increase will slow. I mean, of interest, when we went through the most recent enrollment period, we were anticipating a pretty good fall off and that in fact did not occur.
So again, this is a short term interim product that people are buying in between whatever coverages they are taking. So it is a good alternative.
As I said I don't see it falling off, but likewise, I don't see it growing as significantly as it did in 2014.
Ryan Byrnes
Okay, great. Thanks for that.
And then, shifting over to the public risk book, I know that you guys bought a good deal more reinsurance in 2014, and the results look a lot better in 2014, and I'm afraid to say it sticks, but just wanted to get your thoughts on where that book is and will you guys buy less reinsurance in that book heading into 2015?
William Burke
Hi, Ryan. It's Bill Burke.
We would not want to declare victory in terms of the underwriting side of it. We continue to be very positive in terms of where we've gotten to but we will continue to focus on the underwriting.
From a reinsurance perspective we'll continue to buy at similar levels to what we bought in 2014.
Ryan Byrnes
Perfect, great. Thanks for that.
And then just the last one, I think you guys - I may have misheard it, but you may have mentioned that you may be looking to add more investments into alternative investments. Just want to make sure I heard that correctly and then also maybe if you guys could give a little bit of a flavor as to what type of investments you look at adding?
Brad Irick
Ryan, this is Brad. Yes, I mentioned that.
You'll see that the equity portfolio, we took some of that off the table earlier in the year and realized some nice gains on that. It's at year end we’re at about 4% to 5% risk assets.
We generally look to something closer to 10% and so we'll look for equities for that and then the alternative space is a pretty wide swath of different opportunities and we'll look at those opportunities. I don't have anything to announce today but something that we'll be actively looking at over the next few months.
Ryan Byrnes
And is there any sort of number or percentage of allocation you guys would be willing to put into alternatives?
Brad Irick
Well, I think if you think of the risk assets, with equities and other alternatives, up to about 10% I think that would give you a range of where we possibly would be.
Ryan Byrnes
Okay. Great.
Thanks for the color guys.
Operator
[Operator Instructions]. Your next question comes from the line of Vincent DeAugustino with KBW.
Vincent DeAugustino
Hi. Good morning, gentlemen.
Just to start on ProAg, you mentioned it here this morning and it was a conversation topic last quarter. But now that the deal has closed, I'm wondering if there's any change in the potential magnitude or timing of the expense saves that you kind of expect from ProAg now that you kind of dug in a little bit more?
Christopher Williams
Vince, this is Chris. Look, we are on track with where we thought we'd be.
The integration so far, bear in mind we're only just over a month into it, we closed on the first of the year, is progressing well. We obviously had conversations with the senior management before the close as to where we wanted to take things and nothing came as a surprise.
So no, we are on track and I think watch this space.
Vincent DeAugustino
Okay. Excellent to hear, and then based on the good results this quarter, I'm assuming that's not to be the case, but some of your competitors this quarter have been talking about some international professional lines accident year and reserve stress.
So again, it doesn't look like that's the case, but I just wanted to touch base and see if you guys are seeing any loss trends there on that business? Or either see that activity elsewhere or just not in your book or in your book just to get some color.
Christopher Williams
What I'd say, Vince, is the market is still very competitive there. There have been plenty of people trying to write the business, but we're very happy with the results from that book.
Vincent DeAugustino
Okay, very good. And then you had mentioned the flexibility on the deal front.
So I guess, maybe two embedded questions. One of the things that I've appreciated and I think other people do as well is the low volatility of your book that comes from a lot of the limited correlation between the various lines.
And so as we think about potential deals, and some other properties that might be on the market that are higher volatility property cat related. Should I take it that those are on your radar, or is it - or do they fall in to the lines of business that you wouldn't be interested in?
Christopher Williams
The latter. They would not be on our radar.
I think the property cat market is extremely competitive at the moment. We write a small amount of it, as you know.
We're very pleased with the results, but you should not look for that to be something that we're expanding.
Vincent DeAugustino
Okay. Easy enough.
Thanks guys.
Christopher Williams
Thank you.
Operator
Your next question comes from the line of Adam Klauber with William Blair.
Adam Klauber
Good morning everyone. When I look over from 2013 to 2014, it looked like your accident year loss ratio improved by almost 200 basis points.
What I guess, what was driving that? And do you think we could have further improvement in '15?
Christopher Williams
Well, I think part of it. Adam, obviously the book has performed very well.
Another answer is business mix. Obviously that moves things around a little bit.
Look, I think there's always room for improvement. I mean, we push our underwriters pretty hard.
I mean I think what you've seen historically with HCC is that we've been quite willing to let business go if we can't get the terms and conditions we want. So I think just continuing with disciplined underwriting if we can eke out a little bit better results we will certainly do so.
But I just think, if you look broadly across our portfolio, all of the businesses are performing very well.
Adam Klauber
Okay. Thanks.
And then, as far as, if we look at - and I apologize, I may have missed this - if you look at reserve development, favorable development for '14, which lines were the major contributor and which years?
Christopher Williams
Let's see. This last quarter, obviously, it was Credit and Surety and Accident and Health, and then in the third quarter there was favorable development in our international book.
Various U.S. P&C lines had favorable development.
So again, I think it's actually the comment somewhat consistent with my comment about the underwriting and that is the book of businesses or all of them have been performing very well. So in the detailed reserve reviews we do of our book in the latter part of the year, so hence it was the third quarter and fourth quarter.
Adam Klauber
Okay. Thanks.
And then in the med stop loss book, as you move more down market besides being smaller, what are the differences are in writing that business, is the profitability the same, is the expense the same? How should we think - how is that business different than some of the larger book?
Christopher Williams
I'm not sure I understand your question about smaller. I mean we are moving up the line in terms of case size, or are you talking about our short-term medical?
Adam Klauber
More of the short-term medical. Yeah.
Christopher Williams
Okay. So I am so - so the short-term medical is not medical stop loss.
That's more traditional indemnity type business. Very short tail business, just to give you a flavor on that.
The average policy term on that is about six weeks, so it's got somewhat different dynamics to medical stop loss.
Adam Klauber
Okay, and then, I apologize if you said this before but in the general professional liability, what rate did you get in 2014 across the book and what would you expect in 2015?
Michael Schell
This is Mike Schell. On U.S.
D&O we had modest rate increases for the year. International D&O we had modest rate reductions for the year and it's a competitive market and not much different than the way it has been and our underwriters will work to get the best prices they can relative to the market on risk they want to write.
Adam Klauber
Okay. Thanks a lot.
Christopher Williams
Thanks, Adam.
Operator
At this time there are no additional questions. I would like to turn it back over to Mr.
William for closing remarks.
Christopher Williams
Thanks, Stephanie. I would like to remind everyone that we'll be holding our Investor Day here in Houston on June 11.
We're guaranteeing cool weather. And finally, I'd like to thank all of my HCC colleagues whose outstanding contribution has once again rewarded our shareholders with another record year.
And I look forward to speaking with everyone to report our first quarter earnings; and everyone have a great day. Thank you.
Operator
Thank you. This concludes today's conference call.
You may now disconnect.