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Insurer On a Roll

By Greg Pugh on September 28, 2012

Global specialty insurance company HCC Insurance Holdings (NYSE: HCC) is firing on all cylinders.

HCC, which underwrites property and casualty, accident and health, surety, credit and aviation insurance in approximately 180 countries, has delivered positive earnings surprises for four consecutive quarters, beating analysts’ consensus expectations by an average of 14.7 percent. The company enjoys strong ratings from insurance rating agencies and is enhancing shareholders’ value through share buybacks and increasing dividends.

The stock is up 22.7 percent year to date and surged to hit its 52-week high of $34.46 on September 25. But with a long-term earnings growth projection of 7.3 percent a year and good prospects for further positive earnings surprises in the near future, the stock offers an attractive investment opportunity today.  

HCC Insurance increased earnings by 49 percent in the second quarter of 2012 and 68 percent in the first six months of the year, compared to the same periods in 2011. Second-quarter earnings were $93.5 million, compared to $69.5 million for same year-ago quarter. The company’s revenue increased 8.1 percent year over year to $632.3 million. The revenue improvement came on the back of higher premiums and investment income.

Earnings per share (EPS) were $0.92 for the second quarter, versus $0.61 for the same quarter last year, and $176.1 million for the first six months of 2012, or $1.71 in EPS, versus $116.5 million, or $1.02 in EPS, for the same year-ago period.

HCC Insurance’s liquidity position remains strong, with $280.3 million of cash and short-term investments and $298.1 million of available capacity under its $600 million revolving loan facility. As of June 30, 2012, total assets were $10 billion, shareholders’ equity was $3.3 billion and the company’s debt to total capital ratio was 15 percent.

A.M. Best Co. has affirmed the company’ financial strength rating (FSR) of A+ (Superior), and issuer credit ratings (ICR) gives HCC Insurance an “aa” rating.

HCC Insurance repurchased 1.9 million shares of its common stock during the second quarter of 2012 for $59.5 million at an average cost of $31.17 per share. The Board just authorized a new share repurchase program that provides for the repurchase of up to an aggregate of $300 million of the company’s common stock. This stock repurchase is 9 percent of the company’s current market cap.

HCC Insurance just announced its 66th consecutive quarterly cash dividend. The company raised its quarterly dividend by 6.5 percent to $0.165 per share. This marks the 16th consecutive year in which HCC has raised its dividend. HCC Insurance has a current dividend yield of 1.96 percent, with a payout ratio of only 20 percent, indicating the dividend has room to rise.

Despite its share-price success this year, HCC Insurance still trades at a reasonable valuation, with a price-to-earnings (P/E) ratio of 11.2 and a price to book value of 1.06. This makes the stock a more compelling buy at its current price.

HCC Insurance has an equity summary score of 9.7 out of 10 for a VERY Bullish outlook. It has a 12-month price target of $40.

Methodology: Our Equity Summary Score provides a consolidated view of the ratings of 10+ independent research providers. It uses the providers’ relative, historical recommendation performance along with other factors to give you an aggregate, accuracy-weighted indication of the independent research firms’ stock sentiment. The normalized analysts’ recommendations and the accuracy weightings are combined to create a single score. For the largest 1,500 stocks by market capitalization, these scores are then forcibly ranked against all the other scores to create a standardized Equity Summary Score on a scale of 0.1 to 10.0 for the 1,500 stocks.

What do you think of this article? Please post your feedback in the “comments” section below!

Greg Pugh, an income-investing expert, publishes a newsletter called
Investing for Monthly Income.

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