HCC Files 3Q Loss, Prepares to Exit Workers’ Comp

November 12, 2001

HCC Insurance Holdings Inc. posted a third-quarter net loss, citing claims from Sept. 11 and reserve charges for discontinued businesses. The company also announced it will also exit the workers’ compensation insurance business written through its subsidiary, U.S. Specialty Insurance Co., with a related after-tax charge for discontinued lines of business of $29.6 million, or 50 cents a share. The majority of that amount applicable to goodwill and adequate reserving to cover the run-off obligations, according to HCC.

Operating earnings for the third quarter of 2001 were $417,000 or $0.01 per share, compared to $17.4 million or $0.33 per share for the third quarter of last year. Operating earnings for the nine months ended Sept. 30, 2001, were $36.7 million or $0.62 per share compared to $46.3 million or $0.90 per share in the same period of 2000. These operating results reflect an after tax loss of $22.8 million or $0.38 per share related to losses arising out of the events of Sept. 11, 2001, the continuing dilutive effects from the March 2001 equity offering and the net effect of two other catastrophe losses involving Petrobras and Totale.

Net earnings for the third quarter of 2001 were a loss of $29.1 million or $0.49 per share, principally as a result of losses associated with the events of Sept. 11, 2001, as well as other charges for discontinued lines of business.

Net earnings for the first nine months of 2001 were $6.4 million or $0.11 per share.

HCC Chairman and CEO Stephen L. Way stated, “Although rates are rising and profitability is returning to the workers’ compensation line, it is not one of our core businesses and does not represent sufficient premium volume to maintain the division.” He added, “With rates rising more dramatically in our specialty lines, we feel we can best use management’s time and the Company’s capital in other areas which are more likely to produce our expected return of at least 15 percent for next year.”

Total revenue showed strong growth in the third quarter of 2001, rising by 14 percent to $137.6 million and for the first nine months of 2001 by 3 percent to $373.3 million, both compared to the same periods of the previous year. As previously announced, this growth was expected to accelerate in the second half of this year, driven by increases in written and net retained premium.

Gross written premium grew 13 percent for the first nine months of 2001 to $688.9 million, net written premium increased 22 percent to $239.8 million and net earned premium increased 23 percent to $229.0 million, before discontinued lines of business and compared to the corresponding period in the previous year. This strong growth is a result of substantial rate increases, organic growth and higher net retained premium.

Management fees decreased during the first nine months of 2001 to $43.7 million compared to the corresponding period of 2000. This reduction was primarily due to the integration of several of the Company’s subsidiary underwriting agencies into its insurance company segment. Management fee income will benefit next year as a result of the acquisitions of ASU International and Professional Indemnity Agency, which were completed in October 2001. During the first nine months of 2001, commission income was almost flat at $34.3 million, primarily due to the reduced level of reinsurance being purchased by its insurance company subsidiaries. Commission income is expected to rebound next year, as increased rates will positively affect all of HCC’s agency operations.

Net investment income was flat in the third quarter of 2001 at $10.1 million, compared to the third quarter of 2000, despite substantially lower yields. For the first nine months of 2001, net investment income increased 7 percent to $30.6 million, compared to the same period in the previous year. Investment assets have grown substantially, rising 28 percent to $912 million since the end of last year and are helping offset rapidly falling interest rates.

During the first nine months of 2001, other operating income decreased to $15.8 million compared to the same period of 2000. This reduction was primarily the result of the disposition or closure of certain non-core operations during 2000 and the timing of recorded income from other operating investments, which varies from period to period.

During August 2001, the Company completed an offering of $172.5 million of convertible notes which bear interest at a rate of 2.0 percent per annum, have a 20 year term and are convertible into HCC’s common stock at $32.00 per share. The proceeds of the offering were used to repay the debt outstanding under the Company’s bank loan facility and to fund the recently completed acquisitions. The Company’s bank loan facility stands at $200 million, all of which is currently available at an interest rate of approximately 3 percent.

“We are very well positioned to continue the growth of our specialty lines and we expect underwriting profits to continue to accelerate through at least the next two years,” Way said. “We are still very active in the M&A arena and anticipate further transactions in the near future.”

As of Sept. 30, 2001, total assets were $3.2 billion, exceeding $3.0 billion for the first time and book value per share had increased 15 percent to $11.87 compared to Dec. 31, 2000.

HCC is one of the largest specialty insurance groups in the United States and consists of insurance company, underwriting agency and intermediary operations. HCC has assets of over $3.0 billion and its shares are traded on the NYSE with a market capitalization of over $1.5 billion. HCC is rated “AA” by Standard & Poor’s and “A+” by A. M. Best Company.

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