Houston Insurance Holdings is a leading specialty insurer based in Texas, USA. However, its scope of operation extends beyond the United States of America and has offices in the United Kingdom, Spain and Ireland. The insurance company underwrites 100 classes of specialty insurance products in 180 countries around the world. The company has five underwriting segments namely: Professional liability, U.S Property Casualty, Accident and Health and U.S Surety and Credit International.
The firm engages in the diverse business portfolio in order to ensure consistent underwriting results irrespective of the market cycles. This has contributed to an impressive performance of the company as compared to its peer rivals in the market registering an average combined ratio of 86% over the last five years. This has also been marked with a corresponding increase in shareholders’ equity of 46% within the same period. By combining organic growth and acquisitions, the company has grown its written premium by 14% over the last five years. The shareholders have also reaped dividends from the strong performance and this has also enabled the firm to repurchase some of its common stock. Houston has managed to maintain healthy financial strength ratings within the Property and Casualty insurance industry recording an A+ (superior) from the A.M Best Company Inc., Report for the major domestic and international companies.
In line with the organization’s focus of generating consistent combined ratios and underwriting profitability, the company has adopted a number of strategies. The firm has concentrated its underwriting in diverse and non-correlated lines of business with a view to shielding the firm away from market volatility. This has been achieved through underwriting in the five business segments meaning that an economic cycle impacting one segment may not affect the other of its segment, and if it does, in lesser measure. Besides generating consistent underwriting profits, the diversity also ensures operational flexibility in that it enables the firm to shift its focus from one line of business to another depending on the market forces at a particular period. In this instance, the firm is able to emphasize on the profitable lines of business during periods of more premium rates and shifting away from the less profitable business segments in periods of intense competition. This is done by tinkering with the amount of gross premium written or by adjusting the amount of business reinsured.
The company has also been able to attract and retain its key experienced underwriting professionals in various segments to ensure prudent decision making and quick response to the ever changing needs of its customers. The remuneration practices of the company have facilitated this and consequently that the best talent with expertise in underwriting is put to use for the firm’s clients.
Further, the strong underwriting performance has been as a result of the low expense ratio as indicated in the company’s annual report. A disciplined management of expenses coupled with a flat management structure has gone a long way in effecting the low expense ratio. Similarly, the company has shied away from setting up branches in the United States instead centering its international business in London and Barcelona where there exists access to the lines of business that are of interest to the company. This move of ensuring a small operational footprint in comparison to its international market share has had the effect of keeping the expense ratio low. The company has also enabled significant growth through acquisition of other underwriting agencies, having acquired 50 such agencies since its incorporation in 1992. Whilst doing this, the firm has consistently pursued those companies that meet the cut for return on risk-adjusted capital and cultural fit.
The firm has a disciplined investment portfolio aimed at growing and protecting the cash flows and profits accruing from underwriting in its diverse business segments. The firm has invested in highly rated fixed-matured securities and has in the recent past ventured into equity securities with impressive dividend yields. The firm has a conservative policy when it comes to investment in a bid to cut on investment losses by adoption of a buy and hold investment philosophy.
The company has adopted an underwriting criteria which diversifies its operations I n different business segments. One of the business segments is the U.S Property and Casualty segment that has recorded impressive results based on the A.M Best Company report. Some of the key lines of business within this segment include aviation, public risk, contingency, disability, title and mortgage insurance, small account errors and omissions liability, employment practices liability, technical property and primary and excess casualty. Most of the coverage by the firm is primary and most of the claims are settled on a short and medium-term basis. Some of the lines of business covered by the company such as aviation, public risk, contingency and technical property are susceptible to catastrophic occurrences and natural danger.
The company has always provided aviation insurance cover since 1974 and is an industry leader in the sector covering private and commercial aircraft operators with the exception of major airlines. The small account error and omissions insurance focuses on major professional service providers mainly in the construction sector such as architects, engineers and other professionals with policies of less than 5 million. The company, however, does not cover professionals in the legal, medical and accounting sectors. In the public risk business, Houston Insurance writes municipal entities and special districts with a population of less than 50,000 people in automobile physical damage and liability, crime, boiler and machinery, general liability and law enforcement liability.
In the contingency and disability market, the company underwrites weather insurance and event cancellation such as international games event and market concerts. The firm also covers kidnap and ransom insurance as well as specialty disability products covering irreplaceable human assets such as high profile athletes, entertainers and business leaders. The company, in 2011, started covering casualty business with two teams that focused on primary general liability and excess casualty coverage. The primary general liability focuses on low limit policies on a surplus lines basis through wholesale brokers.
In the Professional Liability segment, the firm underwrites directors and officer’s business and crime business coverage such as large account liability, fiduciary liability and bankers blanket bonds. Most of this business comes from major insurance brokerage companies around the world and is written from the firm’s offices in the United States, the United Kingdom and Spain. The company also writes both primary and excess policies for public and private companies which subsume investment banks, insurance companies and brokers, depository institutions, investment advisors and private equity companies. Nonetheless, just like in the casualty business, final settlement value of claims is bound to take a long time owing to third party complex litigation inherent in the cover.
In the Accident and Health segment, the company has been a major player since 1996 owing to its major acquisitions in the industry and development of innovative products. A huge chunk of this coverage includes employees, and these claims are usually settled quickly. This segment includes medical stop-loss insurance which involves providing protection to employers who self-fund their employees benefit plans from catastrophic losses. This kind of insurance reaches employers through consultants, insurance brokers and third party administrators.
The other segment of Houston Insurance Company is the U.S Surety and Credit segment which underwrites both credit and surety operations. The surety business is usually received from independent agents who specialize in this coverage and consists of contract surety bonds, commercial surety bonds and bail bonds. Most of the contract and commercial surety bonds are of small premium and small limit business. Compared to the property and casualty insurance industry, the surety insurance industry has lower expected loss ratios and higher expense ratios. The lower expected loss ratios results because the surety bond serves as protection to a third party only in the event the principal fails to meet his obligation as opposed to where the insurance policy pays on behalf of a policy holder. The higher expense ratios on the other hand result from the higher acquisitions and underwriting expenses occasioned as compared to the property and casualty businesses.
The credit risk is of large limit and large premiums and is provided to banks, trading companies and manufacturers. The insurance policies provided also insure against political risk and non-payment of trade related transactions and financing. The international segment on the other hand includes property treaty, liability, surety, credit, ocean marine and energy written from operations in the UK, Spain and Ireland. These lines of business are exposed to natural danger and catastrophes and as such the underwriting process involves not only an evaluation of individual risks but also a sum of limits by danger by catastrophe area.
The investing segment encompasses the investment portfolio and other investment results such as investment incomes, investment related expenses, and realized investment gains and losses. All this helps in achieving the investment objectives of the company which include preserving and growing the shareholder’s equity, maximizing net investment income, maintaining appropriate liquidity, hedging the economic exposures of insurance liabilities in their functional currency as well as ensuring compliance with all applicable regulatory requirements. The insurance firm boasts of good employee relations having engaged 1,870 employees and not having suffered any strikes due to any labor disputes as per the 2012 annual report.
Catastrophe exposures
Owing to its nature of underwriting especially as a property and casualty insurer, the firm has had to deal with a number of claims. Catastrophes caused by various natural events include hurricanes, tsunamis, tornadoes, windstorms, earthquakes, hailstorms, explosions and flooding. More so, others have occurred as a result of man-made events like terrorist attacks and systemic risks. The frequency and severity of these catastrophes has become unpredictable owing to the changing climatic conditions in recent years. The extent of losses suffered after a catastrophe is difficult to quantify and usually depend on the amount of cover as well as the severity of the disaster. The 2001 U.S terrorist attack and the 2011 Tsunami attack for instance, had a huge impact on the firm’s financial position. Most of the catastrophic exposure of the company comes from its international segment mainly in the property, property treaty and energy lines of businesses. The insurance company normally purchases reinsurance protection but this can even prove inadequate in the event of a severe or multiple catastrophes occurring. Other risk factors are the cyclical nature of insurance businesses. At one period, it consists of intense price competition owing to excessive underwriting capacity and periods of capacity shortages causing an increase in pricing and more favorable premium levels.
Further, the loss reserves provided by the company may prove to be inadequate since they are an estimate of future liability. In most of the cases, the reserves may not represent an exact calculation of liability. Economic events, regulatory changes and volatility in financial markets among other factors may cause in an increase in number and severity of claims reported especially in lines of business such as directors and officer’s liability, errors and omissions liability and trade and credit insurance. The reporting delay usually occasioned between the occurrence of an insured event and the time of reporting to the firm is also significant.
Also, due to the dynamic nature of the legal, judicial, social and environmental conditions in the industry, unanticipated and unintended claims and coverage may present themselves. This will have the effect of making it difficult to ascertain the full extent of liability under the insured contracts until after a number of years of issuance of the cover.
Houston Insurance Holdings, being a player in the highly regulated insurance industry, is bound by extensive governmental regulation and supervision. As a result, the continued operation of the business is dependent on compliance with the relevant legislation in the different legal regimes within which the country has establishment. Most of the regulations are designed to protect the interests of the insured as opposed to the insurer and its investors. Besides, in the United States, the relevant regulations are administered by the insurance departments in the different states in which HCC has business. Thus is the case with the other foreign jurisdiction in which the company has set shop. In addition, the regulatory authorities are vested with the powers to grant, renew and cancel licenses and approvals for various reasons some of them being violating the very regulations. The interpretations of these regulations could come in conflict with those of the insurance company and subject it to penalties or revoking of its license. It is also important to note that some of the legislation passed in some states has had the effect of limiting the ability of the insurer to manage catastrophic risk by reducing the rates insurers can charge and precluding them from withdrawing from areas that are exposed to catastrophes.
The changes in health care legislation such as The Patient Protection and Affordable Care Act among others, climate change and the company’s dependence on brokers may have the effect of materially affecting the financial results of the company. It is also wise to note that the increasing and continued consolidated within the insurance industry through mergers and acquisitions will lead to enhanced competitive underwriting environment and this has the net effect of cutting down on the company’s performance.
Reinsurance
Houston insurance Holdings purchases reinsurance by transferring, or ceding, all or part of the risk it has assumed as a direct insurer to a reinsurance company in exchange for all or part of the premium received for the particular risk. The company purchases reinsurance for the risks underwritten by the company especially for catastrophic risks and the volatile risks. While the reinsurer becomes to the firm in the event of the risk occurring, it is no assurance that the claims arising as a result will be paid out, and if so, on a timely period. This could be caused by the several claims brought by several direct insurers against the reinsurer over the catastrophic losses that could impact on the ability of the reinsurer to pay. Related to this, is the impact of a terrorist attack on the company as a direct insurer. Houston Insurance Holdings does not have a reinsurance cover on terrorism owing to the exclusion of such risk by the insurer and the high rate of coverage sought. As a result, in the event of a terror attack, it would impact heavily on the financial position of the company especially if it occurs outside the United States where there exists no mitigation measure.
Results of the consolidated annual report of 2012 indicate that HCC had a consolidated shareholder’s equity of $3.5 billion and a book value per share of $35.10. The company generated a total revenue of $2.5 billion of which 89% emanated from premium while 9% came from investment income. The net loss ratio of the firm was 58.2% and a combined ratio of 83.6%.the net to debt capital ratio of the company was 14.2% and paid a quarterly cash dividend of $0.165 per share for the 16th consecutive year marked by increase in dividend payout. This is indicative of consistent good performance. However, the company suffered losses of $84.8 million and net losses of $52.8 million after reinsurance owing to accident year catastrophes, key among them the Superstorm Sandy, in the firm’s International segment. The net earnings of the company were $391,240 million which accounted for Earnings per diluted share of $3.83. Most of the revenue for the company was generated from underwritten premium, investment income, fee and commissions received from third party insurers for premium produced for them and realized investment gains and losses from the investment portfolio.
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