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HCCInsuranceHoldings(HCC)ChristopherNeczypor($millions,exceptpershare)Goldman,Sachs&Co.20062007E2008E2009E2010EIncomestatement:UnderwritingGrosswrittenpremiumgrowth9.7%11.0%4.5%4.0%3.5%Netwrittenpremiumgrowth20.7%12.0%7.5%4.0%3.5%Earnedpremiumgrowth24.8%17.0%6.0%5.5%3.5%Lossratio59.2%59.6%60.7%62.6%64.0%Acquisitionexpenseratio18.7%17.5%17.5%17.5%17.5%Operatingexpenseratio6.3%5.6%5.5%5.4%5.5%Combinedratio84.2%82.7%83.7%85.5%87.0%InvestmentincomeInvestmentincomegrowth54.6%31.0%10.0%8.0%7.0%Impliedyield4.18%4.60%4.43%4.40%4.38%OtherFeeandcommissionincome2.1%3.5%5.0%7.0%7.5%Sharesoutstanding116.7116.8117.9119.1120.2ResultingEPS2.943.453.503.503.50Resultingbookvaluepershare18.2821.2324.2827.2730.17ResultingROE17.5%17.5%15.4%13.6%12.2%Balancesheet:AssetsFixedassetgrowth32.6%27.1%14.0%10.5%9.3%Equityassetgrowth0.0%0.0%0.0%0.0%0.0%Premiumreceivable(asa%ofgwp)38.7%32.0%30.5%29.0%27.5%Deferredacquisitioncosts(asa%ofunearnedpremiums19.8%19.8%19.8%19.8%19.8%LiabilitiesUnpaidlossesandlaegrowth,net37.5%8.0%4.0%2.0%2.0%Unearnedpremiumsgrowth14.0%5.0%-1.0%-1.0%-1.0%Other,net0.00.00.00.00.0Increaseindebt0.00.00.00.00.0Shareholders'equitySharerepurchase($)0.00.00.00.00.0Dividendpershare0.310.400.440.510.60Impliedprice/bookvalueDepreciation10.010.010.010.010.0DCF:Risk-freerate5.0%Costofequity5.0%Beta1.05Long-termeconomicgrowthrate5.0%Premiums/equitytargetleverage125.0%Capitalexpenditures25.025.025.025.025.0Source:GoldmanSachsResearchandCompanydataChristopherNeczyporGoldman,Sachs&Co.2011E3.0%3.0%3.0%65.2%17.5%5.6%88.3%6.0%4.35%7.5%121.33.5033.6811.0%8.4%0.0%26.0%19.8%2.0%-1.0%0.00.00.00.7010.025.0HCCInsuranceHoldings(HCC)($millions,exceptpershare)ValuationassumptionsInputs20062007E2008E2009E2010EOperatingincomepershare2.943.453.503.503.50Bookvaluepershare17.5918.2821.2324.2827.2730.17OperatingROE13.9%1749.7%1745.2%1537.5%1357.0%1218.9%Riskfreerate5.0%Equityriskpremium5.0%Beta1.05Costofequitycapital10.3%Long-termgrowth5.0%Relativeprice/earnings:Inputs20062007E2008E2009E2010ELow48%24.5928.8629.2929.2929.31High119%61.1471.7672.8472.8272.88Median71%36.2742.5843.2143.2043.24S&P500absoluteP/E17.5Note:Lowandhighinputsrepresenthistoricaltradingrange,excludingthe10%lowestandhighestoutliersofvaluePrice/bookvalue:Inputs20062007E2008E2009E2010ELow1.7331.5736.6541.9347.0952.10High3.9572.1683.7895.86107.64119.10Median2.1539.2345.5652.1258.5364.76Note:Lowandhighinputsrepresenthistoricaltradingrange,excludingthe10%lowestandhighestoutliersofvalueROE-costofequity(basedonannualoperatingdata):5-Year20062007E2008E2009E2010EImpliedshareprice29.725,845.465,830.355,134.714,529.774,067.06Impliedprice/bookvalue1.69332.32331.46291.91257.52231.21Note:Impliedpriceisbasedoncurrentbookmultipliedbytheimpliedprice/bookmultiplebasedontheestimatedROEforeachyear.Discountedcashflow(basedonfive-yearoperatingmodel):Impliedequityvalue:Value%oftotalValue%oftotalValue%oftotalNPVoffive-yearoperatingFCF1,35735.3%1,35736.9%1,35736.1%NPVofterminalFCF2,48564.7%2,32263.1%2,40363.9%Totalequityvalue3,8413,6783,760Pershare333232Sharesoutstanding116.7(1)Assumesgrowthinterminalvalue(2)Assumesnogrowthinterminalvalue(3)Averageofhigh/lowvaluesSource:GoldmanSachsResearchandCompanydataHigh(1)Low(2)Average(3)Impliedshareprice:Impliedshareprice:Impliedshareprice:HCCInsuranceHoldings(HCC)($millions,exceptpershare)20062007E2008E2009E2010E2011EGrosspremiumswritten2,235.62,481.62,593.22,697.02,791.42,875.1%Increase9.711.04.54.03.53.0Netpremiumswritten1,812.62,030.12,182.32,269.62,349.02,419.5%Increase20.712.07.54.03.53.0Net/gross81.181.884.284.284.284.2Premiumsearned1,709.21,999.82,119.72,236.32,314.62,384.0%Increase24.817.06.05.53.53.0Losses-1,011.9-1,191.9-1,286.7-1,399.9-1,481.3-1,554.4Acquisitionexpenses-319.9-350.0-371.0-391.4-405.1-417.2Operatingexpenses-107.4-112.0-115.5-120.8-126.1-132.3GAAPunderwriting(p/t)270.1346.0346.6324.3302.1280.1Lossratio59.259.660.762.664.065.2Acquisitionexpenseratio18.717.517.517.517.517.5Operatingexpenseratio6.35.65.55.45.55.6Combinedratio84.282.783.785.587.088.3Investmentincome(p/t)152.8200.2220.2237.8254.5269.7%Increase54.631.010.08.07.06.0Feeandcommissionincome137.1141.9149.0159.5171.4184.3%Increase2.13.55.07.07.57.5Otheroperatingincome77.043.025.025.025.025.0Otheroperatingexpenses-114.9-117.0-115.0-115.0-115.0-115.0Goodwillamortization0.00.00.00.00.00.0Interestexpense-11.4-9.5-10.0-10.0-10.0-10.0P/CGAAPincome(p/t)510.7604.6615.8621.5627.9634.1Taxes-167.8-201.9-203.2-205.1-207.2-209.3Taxrate32.933.433.033.033.033.0Operatingincome(a/t)342.8402.6412.6416.4420.7424.9Operatingincomepershare2.943.453.503.503.503.50Discontinuedoperations0.02.52.52.52.52.5AccountingchangeNon-recurringitemsRealizedgains(inv.sales)-0.5-0.4Netincome342.3404.7415.1418.9423.2427.4Netincomepershare2.933.473.523.523.523.521%changeinCR(a/t)11.113.013.814.515.015.5Pershare0.100.110.120.120.130.13Outstandingshares116.7116.8117.9119.1120.2121.3Bookvaluepershare18.2821.2324.2827.2730.1733.68Returnonaverageequity17.517.515.413.612.211.0ReservedevelopmentU/(F)-23.4-30.0-20.0-10.0-5.0-5.0C