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HCC Insurance Holdings (HCC - Snapshot Report) fourth quarter adjusted earnings of 94 cents breezed past the Zacks Consensus Estimate by 46.9%. Results were up 23.7% year over year from 76 cents earned in the year ago quarter.

Operating income for the reported quarter included net favorable loss development of $35.4 million.

Including net realized investment gain net of tax worth $14.7 million and foreign currency expense of $0.5 million, HCC reported net income of $1.06 in the fourth quarter, up 43.2% year over year.

Quarterly Operational Update

Total revenues increased 6.1% year over year to $652.3 million in the fourth quarter. This was driven by solid improvement in net realized investment gain (up from $0.5 million in the year-ago quarter), net earned premiums (up 3% year over year) and net investment income (up 4.7% year over year). It surpassed the Zacks Consensus Estimate of $628 million.

Net written premiums in the quarter increased 0.3% year over year to $522.6 million.

Total expenses of $502.8 million in the quarter showed a marginal increase of 0.1% year over year mainly due to increases in interest expense (up 0.8% year over year) and other operating expenses (up 5.6% year over year).

Combined ratio for the company improved 250 basis points year over year to 84.5%.

Behind the Headlines

Net written premiums in the U.S. Property & Casualty division decreased 9% year over year to $86.1 million in the fourth quarter.

In the Professional Liability division, net written premiums declined 9% year over year to $113.7 million.

Accident & Health reported net written premiums of $213 million, up 11% year over year.

Net written premiums in the U.S. Surety &Credit reduced 8% year over year to $49.0 million.

In the International division, net written premium increased 7% year over year to $51 million.

Net written premiums in the Exited Lines declined 1% year over year to $9.8 million.

Full Year Highlights

Adjusted earnings of $3.74 per share improved 59.8% year over year. Results exceeded the Zacks Consensus Estimate of $3.42 per share.

Including net realized investment gain net of tax worth $20.2 million, OTTI credit losses net of tax worth $0.7 million and foreign currency expense of $4.0 million, net income for 2012 was $391.2 million or $3.83 per share as against $255.2 million or $2.30 per share in 2011.

Total revenues for full year 2012 increased 6.4% year over year to $2.5 billion.

Combined ratio improved 750 basis points from the year ago-period to 83.6%. For full year 2012, loss ratio was 56.7% compared to 58.9% in 2011.

Financial Position

HCC exited 2012 with cash and short term investments of $434.4 million and $305.1 million of available capacity under its revolving loan facility of $600 million.

Net cash from operating activities stood at $661.1 million in 2012, up 56.9% year over year.

As of Dec 31, 2012, total assets of the company were $10.3 billion, up 7.3% year over year.

Shareholders’ equity increased 6.1% year over year to $3.5 billion at 2012 end. The debt to capital ratio of the company deteriorated 140 basis points to 14.2%.

2013 Guidance

It projects adjusted income to be between $3.20 per share to $3.50 per share.

Net written premium is expected to increase by 1%. Combined ratio is expected to be in the range of 86%-88%.

Zacks Rank

HCC currently carries a Zacks Rank #1 (Strong Buy). AmTrust Financial Services Inc. (AFSI - Snapshot Report), First American Financial (FAF - Snapshot Report) and Fidelity National Financial inc. (FNF - Snapshot Report) sharing the same Zacks Rank are expected to report their fourth quarter and full year 2012 results shortly.

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