HCC Attacks Specialty Lines From All Angles

Way builds growing empire with underwriters, agency ownerships, strategic investments

Such a choice may have struck his buddies as unusual to say the least. But if it did, he will certainly have the last laugh now as nearly four decades later his HCC Insurance Holdings Inc. looks forward to a record year with over $2 billion in premium in the sometimes cutthroat world of specialty insurance.

The Houston-based company includes a diverse group of affiliatesspecialty insurers, managing general underwriting agencies and a reinsurance intermediary. But there is a method to his madness.

"We write only specialty business and stay very focused," said Mr. Way, chairman and chief executive officer of HCC Insurance Holdings in Houston, Texas. "Most of our subsidiaries operate independently. There is no major effort to cross sell."

Mr. Way also sees the companys own risk management policy as one of the keys to success. "A lot of insurance companies are taking risk off of Corporate Americas balance sheet and putting it on theirs. They dont stop to look at their own risk management to protect their own capital," Mr. Way said.

HCCs policy of reinsuring all catastrophe risk remains key to the companys risk management program.

"We also protect ourselves against volatility in any one particular line of business," Mr. Way said. "So we are smoothing out potential bumps in specialty insurance to make it a more predictable outcome."

When prices soften dramatically, the company will often reinsure more risk than it would normally. "But that is not a market we are looking for," Mr. Way said. "That is a market that comes along and we are forced to deal with it as our competitors do."

For the most part HCCs impressive numbers over the past decade have won analysts' praise. But Standard & Poors Polina Chernyak said the companys significant use of reinsurance posed a recoverable risk.

At a recent S&P seminar, Mr. Way commented on the industrywide recoverability problem. "Everyone pays claims today, but when you get to the bottom of the cycle, they [reinsurers] often dont pay willingly," he said.

Company spokesperson Byron Way (Stephens son) said the firms decreasing reliance on reinsurance as it retains more of its own risk will in turn ameliorate any recoverable issues.

Success in specialty lines requires the kind of underwriting discipline that is often extolled from top insurance executives, but sometimes honored mainly in the breach. The successful carriers have a keen sense for making sure rates and risk are in line in numerous kinds of businesses, industry analysts note.

"It is not so much going in and out of lines, because we will generally stay in a line of business," Mr. Way said. "But dont try to grow your company if the profit is not there because it will blow your company up," he warned.

The companys rapid premium growth has raised some concerns. Gross premiums in HCC Insurance Holdings Diversified Financial Products Division rose 56 percent in the second quarter. (Diversified represents directors and officers liability insurance as well as errors and omissions coverage.)

Ms. Chernyak sees some potential pitfalls in this kind of growth. "We are concerned with their increased balance sheet risk and greater utilization of capital at the operating level," Ms. Chernyak said. "They are stretching their capacity right now."

In addition, HCC is retaining more of the risk in response to favorable market conditions in its lines of business. But while the companys appetite for more liability risk increases, it will still shy away from general liability and umbrella covers that have caused its rivals so many troubles.

HCCs "double-A" S&P rating puts it in the catbird seat, at least within its peer group, when it comes to negotiating terms and conditions, according to Mr. Way.

One thing Ms. Chernyak admires about the HCC model is the good revenue diversification the company achieves through risk activities in its insurance companies and non-risk business through its ownership of several underwriting agencies and insurance intermediaries.

For example, last year fee and commission income grew 23 percent from 2002, and Mr. Way sees it rising again this year, noting it increased 41 percent in the first six months of 2004.

Craig Kelbel, HCC executive vice president, who heads up the companys agency operations, said the tight supervision kept over the managing general underwriting agencies contributes to solid bottom line results and few nasty surprises.

"I think the one thing we do different is that we do actually manage our agencies," Mr. Kelbel said. "We are very involved in their businesses and are able to compare one agency to another to get a good feeling of what the results should be."

HCC MGAs include:

HCC Benefits Corp., which sells medical stop-loss products and group life products.

Professional Indemnity Agency Inc., which sells D&O, kidnap and ransom, and miscellaneous errors and omissions policies.

Continental Underwriters, which writes commercial marine business.

HCC Global Financial, which provides D&O coverage to public and private companies.

Mr. Kelbel said HCC benefits from the agencies expertise and long-time relationships with distributors, while they in turn benefit from the parent's "double-A" rating.

Even though HCC is rapidly approaching midsized status, Mr. Kelbel said its "small-company mentality" ensures that critical elements such as fast turnaround time for quotes and responsiveness to claims do not get lost in the shuffle.

HCC reported roughly $200 million in shareholders' equity in 1995a figure which stood at more than $1.1 billion on June 30, 2004while assets now top $5 billion, according to second-quarter financial reports. Such growth could not have been accomplished without a robust mergers and acquisitions program that has usually resulted in a couple of deals each year.

Most recently, the company expanded in the surety business with the acquisition of American Contractors Indemnity Corp. In addition, strategic investments that fall short of full ownershipsuch as the companys $40 million stake in Argonautcomplete the picture.

"We use these investments to create opportunities for future acquisitions, to share in business that we do not access through our existing operations, or simply make an investment return," Mr. Way said in his chairmans letter this year.

So far, Mr. Way plans to stick to investments in the specialty lines business, not only for the margins but to keep better control of his companys destiny.

While Ms. Chernyak sees such a "significant appetite for acquisitions" portending possible future indigestion, others disagree.

Advest Inc. equity analyst Elizabeth Malone has given the company its highest rating with a target price of $38, up from its current price of $29.58. "We believe the company will continue to successfully execute its unique acquisition strategy," she said.

Such a spike will be particularly welcome for Mr. Way, considering the opposite direction the share price took at the heart of the soft market in 1999 when he told shareholders that it was not a good time to look for top-line revenue growth.

"We were practicing full disclosure long before it was mandatory," Mr. Way said.

What started out as Stephen L. Way International wholesale and reinsurance brokerage in 1974, today is an enterprise that garnered nearly $1 billion in revenue last year.

While a tale such as his might seem pretty unlikely today with capital requirements as they are, Mr. Way was asked if he were the same teen today, would he have ended up founding Google? "That wouldnt be such a bad plan," he said with a laugh.


Who Is HCC?

Focus: Specialty insurance since 1974

Locations: Based in Houston, Texas, with international offices in Bermuda, Spain and the United Kingdom.

Operations include insurance companies, underwriting agencies and intermediaries.

Property-Casualty Insurance Companies:

Houston Casualty Company, the principal insurance company subsidiary in Houston, operates on a surplus lines basis in the United States and worldwide, writing accident and health, directors and officers, errors and omissions, aviation insurance.

Houston Casualty Company-London Branch, a full branch office for accident and health; D&O, E&O, property, marine and energy insurance on a worldwide basis.

Houston Casualty Company Europe, a Spanish property-casualty insurer operating throughout the European Union, writing surety, E&O, D&O.

US Specialty Insurance Company, a Texas- domiciled p-c insurer company operating on an admitted basis throughout the United States; writes aviation, occupational accident, alternative workers' compensation, E&O, D&O.

Avemco Insurance Company, a Maryland-domiciled admitted carrier writing aviation insurance on a direct-response basis, and accident and health insurance underwritten through an affiliated underwriting agency and non-affiliates.

Underwriting Agencies:

ASU International Inc., based in Woburn, Mass. Specialties: event cancellation; specialty disability insurance for athletes, entertainers and high-profile individuals.

HCC Diversified Financial Products Ltd., based in London, specializing in E&O throughout the United Kingdom.

HCC Benefits Corp., based in Atlanta. Specialties: medical stop-loss and group term life insurance for employer-sponsored, self-insured health plans.

HCC Global Financial Products, based in Farmington, Conn. Specializes in D&O.

Professional Indemnity Agency Inc., based in Mount Kisco, N.Y. Specialties: kidnap & ransom; miscellaneous E&O; D&O.

Intermediaries:

HCC Risk Management Corp., based in Houston, is a wholesale and reinsurance broker marketing and servicing large, complicated insurance and reinsurance programs in all of the specialty lines written by the group.

Rattner Mackenzie Ltd., based in London. is a specialist insurance and reinsurance broker.

Financial Information:

Total Assets$5.3 billion at June 30, 2004.

Shareholders' equity of $1.1 billion at June 30, 2004.

Gross written premiums: $980.8 million for first-half 2004, $1.7 billion in 2003, and $1.2 billion in 2002.

Net written premiums were $544.8 million for first-half 2004, $865.5 in 2003, and $545.9 million in 2002.

Ratings: "A-plus" (superior) from A.M. Best Company; "double-A" (very strong) from Standard & Poors.

Source: HCC Holdings Web site (www.hcch.com)


Heard At This Year's S&P Conference

While Standard & Poor's analysts report that reinsurance recoverables at $172 billion fell as a percentage of surplusto 49 percent in 2003the level of reinsurance disputes is still being disputed.

HCC's CEO Stephen Way was one of the speakers who weighed in on the issue at the S&P conference in June, countering comments made by a representative of a reinsurance brokerage.

"I definitely think there has not been an uptick in the number of disputes," said Roderick Thaler, executive vice president and national director for Willis Re in New York. "What reinsurers are doing is asking a lot more questions, and that's only prudent. If you have long-tail claims that are coming out of 10, 20 years ago, you should ask questions."

"Now the real story," countered Stephen Way, chairman and CEO of HCC Insurance Holdings in Houston. "More questions, more excuses."

"You see it at the bottom of the cycle. You don't see it in the hard market. Everyone pays their claims today. They want your business, they want the premiums, they want their profits. But when you get to the bottom of the cycle, they don't pay. They don't pay because they can't pay, or they don't pay because they don't want to pay."

"Solvent reinsurers that don't pay are a much bigger problem in this industry than insolvent reinsurersby 100 times," he added.

By Susanne Sclafane

Reproduced from National Underwriter Edition, September 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.