Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the HCC Insurance Holdings Second Quarter 2008 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [Operator Instructions]. This telephone conference call relates to HCC Insurance Holdings Incorporated. Before we begin, the company has requested that I read the following statement, which will govern the telephone conference today. Statements made in this telephone conference that are not historical facts, including statements of our expectations of future events or future financial performance are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, and we caution investors that a number of factors could cause our actual results to differ materially from those contained in any such forward-looking statements. These factors and other risks and uncertainties are described in detail from time to time in our filings with the Securities and Exchange Commission. This conference call and the contents thereof and any recording, broadcast or republication thereof HCC Insurance Holdings Incorporated are the sole property of HCC Insurance Holdings Incorporated and may not be recorded, rebroadcast or published in whole or in part without the express written consent of HCC Insurance Holdings Incorporated. Thank you. [Operator Instructions]. I would like to turn the conference over to Mr. Frank Bramanti. You may begin, sir.

Thank you, operator. Good morning ladies and gentlemen. Thank you for participating in HCC's second quarter 2008 conference call. With me today in Houston is Ed Ellis, our CFO; Mike Schell, Executive Vice President in charge of our domestic Property and Casualty Operations; Craig Kelbel, EVP in charge of our Life, Accident and Health Operations; Randy Rinicella, our General Counsel and Pam Penny, our Senior Vice President of Finance. Our format today will begin with the review of the quarter followed by a Q&A session immediately after. I am going to just start right in. We had a very good quarter as a whole. Our insurance operations remain strong. Underwriting results have been consistent year-over-year. Our investment results were not as strong as those in 2007, principally as a result of significantly less income generated from our alternative investment portfolio. We earned $92.3 million in the second quarter or $0.80 per share and 173.4 million or $1.49 per share in the first half of 2008. These were down from the peak in 2007, but within the range of guidance for 2008 we had previously given. During June, our Board authorized a $100 million share repurchase. As of July 31st, we have purchased a total of 1.59 million shares for a total cost of $21.9 million. The average purchase price of the shares repurchased was $20.65. As we announced, we had settled all remaining option-related issues including this class action litigation and litigation with the SEC. Since the SEC's conclusion, A.M. Best has changed the outlook on our stock on our insurance operations from negative to stable. Despite soft market conditions, the second quarter was another strong quarter with respect to our insurance operations. Gross net and earned premium all exceeded the same quarter last year as well as year-to-date and…

Thank you. [Operator Instructions]. Your first question comes from the line of Matt Carletti with Fox-Pitt Kelton.

A couple of questions, first of which is, Frank, I heard you mention kind of briefly the little bit of improvement in the medical stop-loss line, and I recall you looking forward to July 1 renewals. Could you elaborate a little bit on what you saw and what might have I guess pleased you in what you saw?

I am going to let Craig Kelbel answer that question since he is right here.

All right.

I think it's not just July, but just the... as we mentioned in the opening remarks that we are able to continue to get effective rate increases which are higher than the trend on the book of business. So it was nothing in July in particular, but just a continuation of a stabilized market in the [ph] medical stop-loss business.

And then thinking forward, I mean if you look at kind of historical I guess cycles in the medical stop-loss market, I mean when you come off a trough and margins start to stabilize or expand, how much can they expand, say, trough to peak? What kind of spread is there?

I think that's a challenging question to answer, but I guess in the best of times, it could improve by as much as 5 to 7% historically for us. So it... and I am not saying that that will repeat, but I mean that's has been historically the peaks and valleys of the book of business.

Okay, great. And than another question, I apologize if I missed it, your holdings in tower group and ASI [American Safety Insurance Holdings, Ltd.], you are still holding on to those? Have those found their way out of the portfolio? Could you update us on that status?

We disposed of our position in ASI during the second quarter and we have reduced our position on Tower considerably.

Great. And then a last question is on the D&O, E&O disclosure, is there any chance you could give us a rough split of the total count? How many fall in the D&O bucket and how many fall in the E&O bucket?

I don't have that split.

Okay. Thanks.

Okay, thank you.

Your next question comes from the line of David Lewis with Raymond James.

Congratulations on a solid quarter. I wonder if someone can kind of maybe go through some of the lines. Frank, you mentioned that aviation on the international side is starting to see some improvements there. Maybe give us a little more detail. The London market did better than we anticipate as well as diversified financial products. Maybe give us a little more color in some of the areas that you are getting some better penetration.

I am going to let Mike Schell address that question.

International aviation, remember, that we don't first tier country airlines. So most of the headline rate activity that you see on international aviation doesn't apply to us. However, there is some correlation to our pricing with the movement of airline rates. And on international aviation, we have basically been in a down market for a rating since 2003 to 2004. Well, that reached a trough at year end. In the second quarter, our brook of business, we had about half of our business that renewed as expiring and we had about half with rate increases. If you look at our overall experience in the aviation for the last four or five years, we have been able to rider that [ph]. We have good diversification with the U.S. aviation and we made good margins overall. The debt portion of the business we are seeing improvement. As far as diversified financial products go, the area that we have the biggest strength is consistent where there is expected exposure increases. We have a credit insurance book of business, and where getting rate increases that we think are needed. We have had good margins on that business. We expect to maintain good margins on that business. And the other areas Frank talked about is diversified financial products has to do with professional liability and... excuse me, has to do with professional liability on financial institution business. And there, has to be written carefully, evaluated carefully, but the basic dynamics of the exposure in the rates of change. And those are the areas where we are seeing the upside.

And Mike, on the financial... diversified financial products area where you are finding some opportunities on the professional liability for financial institutions, what kind of rate increases are we talking about, 20, 30? Are we are talking about 100 or 200% rate increases?

There is not a base rate change that gives applied on an account-by-account basis. It very much depends upon the individual circumstances of the account and the business is very much written on an individual account-by-account basis. I would say that institutionally, the area that we do have some base rate change is on hedge funds. And on hedge funds, the exposures... the exposure environment is different enough I think I would say for the next two years that on each and every basis, we have rate increases. But on that book of business, it would go from 10 to 20%. On the large financial institution business, it's very much individual rating along with policy language and restrictions on the policy language.

And is the financial institutions business more side A?

The financial institution business has a significant amount of side A, but it's the subset of the subset that's side A. It's the major investment banks and the major money center banks that are most prone to having side A business. And substantial numbers of them, that's what they have. You get down below that level, it's much more mixed.

That's helpful. And Frank, can you just give us an update on kind of what you are seeing out on M&A activity and whether sellers are getting any more realistic on pricing please?

Yes, every time I answer the question and say I think it's getting a little more realistic, somebody sells at 2.7 times book. And then the rest of the market thinks that they are worth that price. I would have said that it feels like the amount of product or the number of businesses that are out there looking to be acquired has been down, although I think we have some pretty good opportunities that we are looking at. I think in this market, and I've said this before, you just have to be more patient and really search for the right fit, right cultural fit. We are really looking for teams that share our focus on underwriting profitability. And once you do that, I think you find that the match is so compelling that it's a little bit easier to come to terms. Some of my peers have made... have answered these questions during this earnings season. I think patience is the name of the game. The market is still soft, prices are still going down. I think 2009 is going to be a tougher year for the industry than 2008 has been to date. And I think those that are patient are going to find there are certainly companies that are going to be up for sale and we'll still be out there looking for the right fit.

That's helpful, thank you.

Your next question comes from the line of Josh Shanker with Citi.

Good morning.

Good morning Josh.

The first thing I mentioned [ph] is you commentary on aviation. I realized your book of business was in commercial aviation like everyone else's [ph]. But this is the first time that I have heard about any aviation improvements. I want to know what you are seeing anecdotally that's leading you to be more optimistic.

Well I don't think it's so much optimism, Josh, is that we have seen it and we started seeing in the first quarter where for the first time in three years, we were getting any rate increase at all on any accounts. And that has continued and again, our business is generally aviation account. So it's local commuters, it's cargo operators, it's helicopter operators in lots of tough places. And I think the tie to the airline market where you really see and hear about the activity is that there were some reductions in capacity last year in response to continuing falling prices and results that we are going to prove to be an underwriting loss for 2007. And I think that restricted capacity along with again deteriorating numbers on the space side, some losses early in the year created an underwriting scenario where there just was insufficient premium to pay the losses. So we started seeing a rate increase here there. We started seeing renewals that were as expiring and we started seeing a big change in the disparity and pricing on slips. And so all of that is just proving to be a favorable environment in our international aviation business that at this point already has progressed to, as Mike said, 50:50 where 50% of renewals are expiring, the other 50% are getting rate increases. And if accounts have had losses on them, I understand that the rate increases are fairy substantial. So I think it's getting back into a more sensible underwriting environment on the aviation side.

Very good. Second question involves the new businesses and where the AA factors in... is the AA even issuing these new businesses that you are going into? And as the market softness further, is... does the AA really protect your pricing?

I think it helps at different times. You asked a lot and I am going to ramble with my answer a little bit. I think it helps our fidelity, the establishment of our fidelity book. I think it very much helps there. I think it has no impact on the D&O that we are looking to write currently... excuse me, DIC. I think at the absolute bottom of the cycle where there have been casualties, where businesses have turned unprofitable, where the whole market is trying to react and recover, I think there's in general a flight to quality. And so the higher ratings tend to assist people coming out of the absolute bottom. At this point, it probably doesn't. The industry as a whole still has pretty solid balance sheets. People really aren't concerned about security. And so I think certain particular lines of business, the rating could matter. I think it does and always has on the D&O side. But again, I think it's going to be mixed until we actually get to the bottom of the cycle and start our way back up, in which case I think it's a true advantage.

Okay. I appreciate the ramble [ph]. Two other quickies. One, did you move something into the discontinued category this quarter? I noticed that discontinued lines had some reasonable premium in it.

No, we had some adjusted premium come through on the back of audits that we have done on some of that discontinued business. So that was just premium that's coming through off the back of the previously discontinued business.

Okay. And finally, and I don't mean to ask a toughie, but I've got to know the answer. When the stock was down at 20.50, did you buy as much as you possibly could? Or another way of asking the question, the harder way, why didn't you buy more?

Well, we had just initiated our first buyback where we actually purchased shares. We came up with a plan to buy a set number of shares. We bought that number of shares for a number of straight days. Could we have been more aggressive? Yes. We instituted the buyback in response to our shares trading below book value. We didn't do it with an intention to go out and acquire a bunch of our shares. We did it to try to be opportunistic if they were going to trade below. We bought what we bought. Next go round, would be buy a little bit more? We might be a little more aggressive. Hopefully, it won't get back into the area of our appetite.

Well I hope so. Thank you very much.

Your next question comes from the line of Beth Malone with KeyBanc.

Congratulations on the quarter.

Hey Beth.

I have a couple of questions. First, on the SEC investigation. Now it has ended, does that change anything about what you are able to do or not do as a result of that being taken out of the picture?

No, I think it just closes that chapter of our history, and there is no limitations. We made some governance changes with respect to the derivative action we previously settled, most of which we had already... were already in place at just as course of good governance. But those were the only changes that we made.

Does it have any impact on your operating results as a consequence [ph] no more costs associated with it? Or is that already built into your guidance?

No, I think, if anything, the costs related to the issue have dropped off significantly this year. There were other than a few minor legal charges, there were minimal charges this year with respect to the investigation.

Okay. And then on the financial institutions, that exposure, you had said in past conference calls that you didn't really anticipate seeing significant losses [ph] from all of that crisis that has occurred in the credit markets because of how that business is written. Is that developing as you had anticipated?

Well, at this point, I wouldn't say it's developing much at all. We are... claims are being reported. It's going to be a couple of years before the market is going to really have a intelligent view of how this is going to play out. These cases are going to have to start working their way through the courts to see how they are going to play out. We are not concerned about the number of claims that we have been reported. It's certainly not giving us any great cause for concern versus what we would have anticipated. And we are just going to have to see how it plays out. I think we have spent a significant amount of time understanding what we have written, how we have written it, who many accounts we have, where we play on them, the approach that's going to be made in defending some of these accounts. And I think corporately, we are on top of where our exposures are. We are very closely monitoring them. We are certainly cognizant of the potential magnitude of the estimates that have been out there. We are... we feel like we are on top of it. But we are going to have to continue to monitor it for years to come.

Okay. And then when you talk about acquisition timing, where... do we see more acquisition activity as actually when the underwriting cycle starts to improve, or is it... it's got to be at the bottom of the cycle where people just throw up their hands and realize they can't go on?

Yes, I am not sure about that. So far, the biggest acquisitions have been at the highest prices on the way down towards the bottom. I find that is very interesting. You obviously haven't seen any real distressed buying yet because there is not a lot of distress in the marketplace. As I said, balance sheets are in pretty good shape, people are still making money, people are still making pretty good return for that matter. So we haven't seen that yet. I think on the MGA side, as companies begin to have problems, insurance companies begin to have problems, that potentially puts some of those properties on the marketplace. I think we just try to respond to the opportunities that exist in all of the marketplace. HCC tended to not be a distressed buyer. So that didn't necessarily increase. It might have increased the number of people we looked at, but we are not... our approach is really to buy quality product and then try to improve the growth rate on that quality product versus buying companies that have problems and gaining value by correcting those problems. That just isn't our approach.

Okay. All right, then one last question. Just on the... you had mentioned that you thought that 2009 might be tougher than 2008. Could you elaborate a little bit? Do you anticipate that pricing pressures will accelerate through 2009?

I didn't say that; you said that.

I am just trying to get clarification.

I was really just stating the obvious that we went through 2007 with 10 to 15% price reduction, and really the price reduction started in 2006 in general. Some lines, people were suggesting it started earlier than that. We are going through 2008 with another somewhere in there, 10 to 15% price reduction. And if we go into 2009 and the price reductions, even if there is no acceleration, even if it's just another 10% increase, we are talking about getting near 50% of the rate we used to have. So each year that follows in a soft market has to be from, an underwriting standpoint, has to be worse than previous years. And when you look at [indiscernible] the results for 2006 and 2007, those were benign cat years. So I think none of that bodes very well for 2009 or bodes worse for 2009 than 2008. And you could have said same the thing about 2008 versus 2007, until we start getting prices to renew as existing... or start getting price increases, results have to continue to deteriorate. I think ours have held up pretty well. We thought our combined ratio was going to hold up through this year and it has to date. But each year, where you got another rating rate reduction on top of reduced rates you have, it's going to put more pressure on peoples combined ratios.

Okay, well, thank you.

Your next question comes from the line of Harris Hall with Round Hill Asset Management.

Congratulations on a pretty good quarter.

Thank you.

You said a couple of things, I wonder if you could elaborate, you talked about losing [ph] 30 to 50% of competitors when they come in to your markets what do you mean by that exactly?

What I said was is that when... we try to... especially in the down markets turn our book of business in to renewal book. So you try to be proactive in early renewing your book of business, so it doesn't go out to market, so you don't get that kind of competitive pressure on and with new players in the market place, the only thing they are bringing is especially if we want to compare to HCC, they aren't many competitors that we face that have our ratings or higher. So in order to move business, it's going to be predominantly price driven. So again, if somebody comes in and try to take 10% off of the rate on one of our businesses, we're probably going to compete for it. But it's going to get to minus 20, minus 30 in order to move that business, especially from a company that might have higher ratings in the business and we watch this business that we lose. When we loss pieces of business we try to determine where that price was and we see a lot of... we see competitors moving business from us at rate reductions of 30 up 50%. And if those competitors are running this business at the same loss picks that we are, how are they going to do that. And that was part of our core business, it generated our results. How do you take 30 points off, or 20 points off for that matter? All of our prices generated the same kind of loss picks and it just doesn't seem like you can have.

And was that in any specific line of business, that you are talking about that? Are you seeing that happen or is that just general commentary?

I think that's pretty general commentary, we certainly seen some competition on the professional indemnity side, that would have us question peoples lost picks and it tends to happen more significantly on higher, larger policies, higher premium policies.

Okay. And then could you talk a little bit more about the two new businesses that were already bond [ph] in, I thought it was mortgage insurance, right?

Well we wrote a reinsurance contract for MGIC and announced it a while back. I can talk about that, we have negotiated with MGIC for a considerable period a time to reinsure a portion of their new business going forward. We are very pleased with the relationship with MGIC, certainly has worked hard to try to get the problems of the past behind them. They've raised capital, they've certainly improved their underwriting standards and pricing going forward. And we've reinsured a part of that business to take the advantage of some of that increased pricing and give them a little capital relief from a rating agency perspective to allow them to continue to expand their business. On the other lines that we started, we hired a couple of gentlemen that have a very good reputation of fidelity bonding business. The producer relationships, [ph] quality underwriting, talent and they joined our PIA operation and they have been off to a very good start. I think they are known, well respected underwriting talent on the fidelity side and we think that the business will follow them to PIA. And on the DIC side, we were able to hire a team of underwriters on the west coast, to so actively [ph] underwrite DIC. We are attempting to try to take advantage of some pricing anomalies in the market place to sparingly use our capacity, where you can draw appropriate price levels. And the gentlemen we hired are very good underwriters, have good distribution following which was keen to us. So that they can see a follow over the [ph] business and we think they will do quite well for us. So we are very happy with the additions and we are continuing to work to add teams to HCC to expand the footprint a little bit, and that's our investment in the future. So that when the market does turn we have expanded capabilities to generate per unit income.

So the MGIC reinsurance contract was kind of a one-off, it's not one of the new lines of business you are talking about?

Correct.

And what is the DIC stand for?

Difference in Conditions, it's predominantly a quake exposure, although could be flood, could be other types of conditions, but predominantly quake.

How is that different than normal property and casualty?

It's specifically limited to Harold's [ph] not covered by a property casually policy that they have in already. And at that point, I am going to let Mike Schell and get me, dig me out of the hole.

That's no hole, Frank answered that correctly. It is a property casual recover. It's a line that we haven't specifically written before. Now we have capabilities to write exposure in that line and we will build a foundation to do so and wait for our opportunity.

And is that all commercial... you are not doing someone else there right?

That's all commercial.

Great Thanks a lot. I will jump back in the queue.

Thank you.

Your next question comes from the line of Mark Fellman with Mechashio [ph]

Frank, was wondering if you can give us some of the financial metrics that you and the Board would look at in the M&A scenario and what kind of comparative investments you might compare to. When I look at obviously the buy back has been extremely accretive at this point. I am wondering what kind of financial metrics, the deal would has to pose, in order for it to be more attractive than that at this point?

We use a couple of different analysis. And one, I am going to compare all of these to the stock buy backs because I think that's where your question is going.

I guess, first part of question is, do you compare to your share repurchase when you consider an M&A transaction?

Well, now we do. But up until this point I think the company and the Board were aligned in that because our stock trades of book value that buying our shares back below book seems to be reducing that book value per share, and therefore see radically reducing the value to our shareholders. We... and I am just going to give the landscape of how we look at things. We expect to deliver to shareholders a 15% return on equity over the entire cycle and as a hurdle rate for our investments, we have used that same 15%, that if we can return 15% on our invested dollars in an acquisition, then it isn't worth doing, because it's going to reduce our overall return over that cycle. But having said that, we expect that our acquisitions are going to delivery higher than 15%. Just coincidently, this year the guidance that we have previous given suggests the 15% return on equity for the current year. So now they are all aligned. And when we are doing the analysis, we have total comfort in delivering our guidance for the current year. And so if an acquisition is marginal, if it's going to get to 15% and we are not going to be able to grow into that over the short term, we much more would rather invest in our stock at this current level. That isn't necessarily the case at any point of time. What our Board said when they approved the authorization was only below book value, because we didn't want to destroy or reduce book... remaining book value per share by buying it over book. On the acquisition side, we certainly think there are plenty of opportunities out there to continue to expand via acquisition. When prices are high, it just takes a little more looking to find the right kind of opportunities for us and we are out there doing that every day.

Right, thank you.

Your next question comes from the line of Kenneth Billingsley with Signal Hill.

Just a couple of questions. The first one is I know your comments about Bermuda and some of the players are more directed at their primary U.S. business. But looking as the price competition, have you looked changing your retentions and going into 2009 utilizing other peoples balance sheet a little bit more?

I think in general, the answer is no. And I think you will find that most of our peers have the same view that our business is pretty profitable and we, certainly HCC, views use ourselves as a gross line underwriter. So we intend to make money on a gross basis. So the inclination is to retrain that business. In this marketplace to date, I think the most discipline has been shown by the reinsurance marketplace as a whole. So I don't think there are the opportunities that existed in prior cycles to lean maybe a little bit more on the reinsurance marketplace. But we look at that and we look at our expectations of business and other peoples appetites for it. But again, as a way to protect our results and not as a way to write unprofitable businesses ceded to others. So I think we are just going to continue to monitor the markets, but we like the business we have. We think it's all holding up pretty well. As we get towards the end of the third quarter, we are going to start looking at our 1/1 reinsurance renewals and start making those decisions for 2009.

On the fee income line, it seems that it's scaled back just a little bit. Is this the current rate or pace that we should expect on the fee and commission income line being at more in the low 30s rather than the mid to upper 30s?

Yes, I think that's right. I mean we have continued to try to put most of the business that we write on HCC paper somewhere. And so there was another couple pieces of business that were being issued by third parties that are now being issued by HCC in 2008, and that's caused a little bit of a pull back. But I think in the 30s is about the right run rate going forward.

And on in the other income line, was there a boost in there from the sale of ASI shares and Tower?

No, we had the sale of a strategic investment we had made in Heritage, which was a Lloyd's underwriting manger that sold during the second quarter to Argo Group in Bermuda.

And can you say how much that was?

It was between 9 and $10 million, $9 million, something like that.

Okay. Great, thank you. Congratulations on the quarter.

Thank you.

Your next question comes from the line of Mark Dwelle with RBC Capital Markets.

Yes, good morning. Really, just following up on that last point then. In the other income line for the quarter, it was primarily just the Heritage sale and nothing beyond that?

Right. We had... I want to say it was about... hang on one second while we dig it out... yes, I was going to say a little over $2 million... we had a $2.7 million loss on our trading securities. So that was the disposal of ASI and a chunk of Tower that really offset the recurring income running through other income. And what impact [ph] was that gain on Heritage.

Okay. And then in the past you had commented sort of 3 million or so a quarter as being the right way to think about that line. With most of the strategic investments now dispersed, is that still the right way to think?

Yes. Yes, it is. I mean our original guidance this year, which is still good with one exception is about a little over $3 million per quarter. And the only add on to that, and that will change going forward in 2009, is that the MGIC transaction's revenue are going to run through this line. So that line will be growing over time.

Okay. So, but that will be more for... that's in '09?

Correct. I mean there will be some impact over the third and fourth quarters and we are trying to get a good feel for that. But I... so I mean I don't have a lot to add on that, but the 3 million cost is what the right run rate is going forward.

Okay, very good. That's all my questions. Thank you.

Thanks.

Your next question comes from the line of Justin Maurer with Lord Abbett.

Frank, just on that point with the MGIC res, is that going to be a net number that runs through there I presume?

Yes, we're recording the net margin on that business running through other income.

Okay. And the 3 million-ish number, are there any $1 million size buckets or something that you could speak to or is it just a bunch of miscellaneous?

In other income?

Yes.

Well, there is a detail in our Q that breaks it out by type of transaction. And if you look past the trading security and strategic investments, it's a little bit here, a little bit there, not a whole lot. I think the biggest single transaction currently running through there is we have a derivative, a couple of derivative contracts with Abbey National in the UK that generate... I don't have it right here... $1 million a quarter.

Okay, got it. Thanks a lot.

Thank you.

Your next question comes from the line of Dan Johnson with Citadel Investment.

Good morning. A question on the reserve releases. Can you just give us a little color as to what the underlying sources were, please?

Sure. First off, it's primarily from our international operations and about half of the number came from UK PI or leases [ph] from '04 and '05 and the remainder from a London Market account. Again, '04, '05 and a little from our '06 property account.

Got it. Okay, that's it. Thanks very much.

Thanks Dan.

Thank you. There are no further questions at this time. I would like to now turn the conference back over to Mr. Bramanti for closing remarks.

Thank you ladies and gentlemen for participating. Look forward to speaking to you on our third quarter call in November. Have a good day.