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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  
     for the Quarterly Period Ended June 30, 2014.  
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  
     from                                to                                           

Commission file number 001-13790

HCC Insurance Holdings, Inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware    76-0336636

 

(State or other jurisdiction of

incorporation or organization)

  

(IRS Employer

Identification No.)

 

13403 Northwest Freeway, Houston, Texas    77040-6094

 

(Address of principal executive offices)    (Zip Code)

(713) 690-7300

 

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ    No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ    Accelerated filer ¨    Non-accelerated filer ¨    Smaller reporting company ¨
      (Do not check if a smaller reporting company)   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨    No þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

On July 25, 2014, there were approximately 100.0 million shares of common stock outstanding.

 

 

 


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Table of Contents

 

          Page     

Part I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

  

Consolidated Balance Sheets — June 30, 2014 and December 31, 2013

   5

Consolidated Statements of Earnings — Six and three months ended June 30, 2014 and 2013

   6

Consolidated Statements of Comprehensive Income — Six and three months ended June 30, 2014 and 2013

   7

Consolidated Statement of Changes in Shareholders’ Equity — Six months ended June 30, 2014

   8

Consolidated Statements of Cash Flows — Six months ended June 30, 2014 and 2013

   9

Notes to Consolidated Financial Statements

   10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   24

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   40

Item 4. Controls and Procedures

   40

Part II. OTHER INFORMATION

  

Item 1. Legal Proceedings

   41

Item 1A. Risk Factors

   41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   41

Item 3. Defaults Upon Senior Securities

   41

Item 4. Mine Safety Disclosures

   41

Item 5. Other Information

   41

Item 6. Exhibits

   42

Signatures

   43

 

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Table of Contents

FORWARD-LOOKING STATEMENTS

This Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. These forward-looking statements reflect our current expectations and projections about future events and include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this Report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as growth of our business and operations, business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Generally, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably” or similar expressions indicate forward-looking statements.

Many risks and uncertainties may have an impact on the matters addressed in these forward-looking statements, which could affect our future  financial results and performance, including, among other things:

 

     the effects of catastrophe losses,

 

     the cyclical nature of the insurance business,

 

     inherent uncertainties in the loss estimation process, which can adversely impact the adequacy of loss reserves,

 

     the impact of past and future potential economic or credit market downturns, including any potential ratings downgrade or  impairment of the debt securities of sovereign issuers,

 

     the effects of emerging claim and coverage issues,

 

     the effects of extensive governmental regulation of the insurance industry,

 

     changes to the country’s health care delivery system,

 

     the effects of climate change on the risks we insure,

 

     potential risk with agents and brokers,

 

     the effects of industry consolidations,

 

     our assessment of underwriting risk,

 

     our retention of risk, which could expose us to potential losses,

 

     the adequacy of reinsurance protection,

 

     the ability and willingness of reinsurers to pay balances due us,

 

     the occurrence of terrorist activities,

 

     our ability to maintain our competitive position,

 

     fluctuations in securities markets, which may reduce the value of our investment portfolio, reduce investment income or  generate realized investment losses,

 

     changes in our assigned financial strength ratings,

 

     our ability to raise capital and funds for liquidity in the future,

 

     attraction and retention of qualified employees,

 

3


Table of Contents
     our ability to successfully expand our business through the acquisition of insurance-related companies,

 

     impairment of goodwill,

 

     the ability of our insurance company subsidiaries to pay dividends in needed amounts,

 

     fluctuations in foreign exchange rates,

 

     failure of, or loss of security related to, our information technology systems,

 

     difficulties with outsourcing relationships, and

 

     change of control.

We described these risks and uncertainties in greater detail in Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013.

These events or factors could cause our results or performance to differ materially from those we express in our forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this Report, our inclusion of this information is not a representation by us or any other person that our objectives or plans will be achieved.

Our forward-looking statements speak only at the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this Report may not occur.

 

4


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited, in thousands except per share data)

 

               June 30,          

 

2014

         December 31,    

 

2013

 
ASSETS      

Investments

     

Fixed maturity securities – available for sale, at fair value (amortized cost: 2014 –
$6,078,453 and 2013 – $5,921,487)

   $ 6,333,191        $ 6,022,473    

Equity securities – available for sale, at fair value (cost: 2014 – $394,685
and 2013 – $464,388)

     448,685          517,466    

Short-term investments, at cost (approximates fair value)

     342,335          178,753    
  

 

 

    

 

 

 

Total investments

     7,124,211          6,718,692    
  

 

 

    

 

 

 

Cash

     70,907          58,301    

Restricted cash and securities

     130,920          125,777    

Premium, claims and other receivables

     676,340          580,107    

Reinsurance recoverables

     1,178,200          1,277,257    

Ceded unearned premium

     340,853          305,438    

Ceded life and annuity benefits

     53,406          56,491    

Deferred policy acquisition costs

     226,333          201,698    

Goodwill

     895,799          895,200    

Other assets

     165,022          125,559    
  

 

 

    

 

 

 

Total assets

   $ 10,861,991        $ 10,344,520    
  

 

 

    

 

 

 
LIABILITIES      

Loss and loss adjustment expense payable

   $ 3,841,497        $ 3,902,132    

Life and annuity policy benefits

     53,406          56,491    

Reinsurance, premium and claims payable

     388,855          332,985    

Unearned premium

     1,272,969          1,134,849    

Deferred ceding commissions

     100,571          89,528    

Notes payable

     734,174          654,098    

Accounts payable and accrued liabilities

     556,464          500,007    
  

 

 

    

 

 

 

Total liabilities

     6,947,936          6,670,090    
  

 

 

    

 

 

 
SHAREHOLDERS’ EQUITY      

Common stock, $1.00 par value; 250,000 shares authorized (shares issued: 2014 –
126,252 and 2013 – 125,577; outstanding: 2014 – 100,050 and 2013 – 100,336)

     126,252          125,577    

Additional paid-in capital

     1,091,773          1,073,105    

Retained earnings

     3,245,554          3,085,501    

Accumulated other comprehensive income

     220,422          118,651    

Treasury stock, at cost (shares: 2014 – 26,202 and 2013 – 25,241)

     (769,946)         (728,404)   
  

 

 

    

 

 

 

Total shareholders’ equity

     3,914,055          3,674,430    
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $       10,861,991        $     10,344,520    
  

 

 

    

 

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statements of Earnings

(unaudited, in thousands except per share data)

 

    

Six months ended June 30,

 

    

Three months ended June 30,

 

 
               2014                          2013                          2014                          2013            

REVENUE

           

Net earned premium

   $       1,134,860        $       1,122,542        $       572,248        $       561,356    

Net investment income

     113,244          111,433          56,438          55,668    

Other operating income

     19,249          16,629          9,983          7,784    

Net realized investment gain

     25,151          13,193          4,905          4,623    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     1,292,504          1,263,797          643,574          629,431    
  

 

 

    

 

 

    

 

 

    

 

 

 

EXPENSE

           

Loss and loss adjustment expense, net

     648,938          672,171          327,094          339,474    

Policy acquisition costs, net

     142,011          137,745          72,970          70,796    

Other operating expense

     194,955          164,572          99,001          87,719    

Interest expense

     13,984          13,082          6,865          6,611    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expense

     999,888          987,570          505,930          504,600    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income tax expense

     292,616          276,227          137,644          124,831    

Income tax expense

     87,569          82,215          40,508          36,669    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 205,047        $ 194,012        $ 97,136        $ 88,162    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

           

Basic

   $ 2.05        $ 1.93        $ 0.97        $ 0.88    
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 2.04        $ 1.92        $ 0.97        $ 0.87    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited, in thousands)

 

    

Six months ended June 30,

 

    

Three months ended June 30,

 

 
                 2014                              2013                              2014                              2013              

Net earnings

     $          205,047          $          194,012         $          97,136          $          88,162    

Other comprehensive income (loss)

           

Investment gains (losses):

           

Investment gains (losses) during the period

     179,825          (247,429)         93,745          (217,034)   

Income tax charge (benefit)

     63,818          (87,443)         33,248          (77,116)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment gains (losses), net of tax

     116,007          (159,986)         60,497          (139,918)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Less reclassification adjustments to:

           

Net realized investment gain

     25,151          13,193          4,905          4,623    

Income tax expense

     8,803          4,618          1,717          1,619    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reclassifications included in net earnings,
net of tax

     16,348          8,575          3,188          3,004    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized investment gains (losses)

     99,659          (168,561)         57,309          (142,922)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency translation adjustment

     1,691          (1,145)         903          911    

Income tax charge (benefit)

     (421)         (554)         11          (30)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency translation adjustment, net of tax

     2,112          (591)         892          941    
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     101,771          (169,152)         58,201          (141,981)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income (loss)

   $ 306,818        $ 24,860        $ 155,337        $ (53,819)   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

See Notes to Consolidated Financial Statements.

 

7


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

Six months ended June 30, 2014

(unaudited, in thousands except per share data)

 

     Common

 

stock

     Additional
paid-in

 

capital

     Retained

 

earnings

     Accumulated
other
comprehensive

 

income

     Treasury

 

stock

     Total
shareholders’

 

equity

 

Balance at December 31, 2013

   $ 125,577        $ 1,073,105        $ 3,085,501        $ 118,651        $ (728,404)       $ 3,674,430    

Net earnings

                     205,047                          205,047    

Other comprehensive income

                             101,771                  101,771    

Issuance of 301 shares for exercise of
options, including tax effect

     301          9,786                                  10,087    

Issuance of 44 shares for employee
stock purchase plan

     44          1,578                                  1,622    

Purchase of 961 common shares

                                     (41,542)         (41,542)   

Stock-based compensation

     330          7,304                                  7,634    

Cash dividends declared, $0.45 per share

                     (44,994)                         (44,994)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2014

   $   126,252        $    1,091,773        $    3,245,554        $    220,422        $   (769,946)       $   3,914,055    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited, in thousands)

 

    

Six months ended June 30,

 

 
              2014                        2013           

Operating activities

     

Net earnings

   $ 205,047        $ 194,012    

Adjustments to reconcile net earnings to net cash provided by operating activities:

     

Change in premium, claims and other receivables

     (109,043)         (99,897)   

Change in reinsurance recoverables

     96,770          (17,018)   

Change in ceded unearned premium

     (35,485)         (35,032)   

Change in loss and loss adjustment expense payable

     (57,118)         52,026    

Change in unearned premium

     138,248          119,759    

Change in reinsurance, premium and claims payable

     55,764          43,237    

Change in accounts payable and accrued liabilities

     (69,414)         (119,103)   

Stock-based compensation expense

     10,303          6,955    

Depreciation and amortization expense

     8,289          9,093    

Gain on investments

     (25,151)         (13,193)   

Other, net

     (22,924)         (38,849)   
  

 

 

    

 

 

 

Cash provided by operating activities

     195,286          101,990    
  

 

 

    

 

 

 

Investing activities

     

Sales of available for sale fixed maturity securities

     286,843          171,801    

Sales of equity securities

     170,182          44,308    

Sales of other investments

             23,719    

Maturity or call of available for sale fixed maturity securities

     269,468          375,924    

Cost of available for sale fixed maturity securities acquired

     (675,945)         (756,782)   

Cost of equity securities acquired

     (78,817)         (114,685)   

Change in short-term investments

     (168,241)         145,977    

Payments for purchase of businesses

     (2,579)         (8,214)   

Proceeds from sales of subsidiaries

     12,942          507    

Other, net

     (3,902)         (2,698)   
  

 

 

    

 

 

 

Cash used by investing activities

     (190,049)         (120,143)   
  

 

 

    

 

 

 

Financing activities

     

Advances on line of credit

     140,000          70,000    

Payments on line of credit

     (60,000)         (15,000)   

Sale of common stock

     11,709          7,408    

Purchase of common stock

     (41,542)         (46,586)   

Dividends paid

     (45,076)         (33,250)   

Other, net

     2,278          3,544    
  

 

 

    

 

 

 

Cash provided (used) by financing activities

     7,369          (13,884)   
  

 

 

    

 

 

 

Net increase (decrease) in cash

     12,606          (32,037)   

Cash at beginning of year

     58,301          71,390    
  

 

 

    

 

 

 

Cash at end of period

   $ 70,907        $ 39,353    
  

 

 

    

 

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

(1) General Information

HCC Insurance Holdings, Inc. (HCC) and its subsidiaries (collectively we, us or our) include domestic and foreign property and casualty and life insurance companies and underwriting agencies with offices in the United States, the United Kingdom, Spain and Ireland. We underwrite a variety of largely non-correlated specialty insurance products, including property and casualty, accident and health, surety and credit product lines, in approximately 180 countries. We market our products through a network of independent agents and brokers, through managing general agents owned by the company, and directly to consumers. In addition, we assume insurance written by other insurance companies.

Basis of Presentation

Our unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of HCC and its subsidiaries. We have made all adjustments that, in our opinion, are necessary for a fair statement of results of the interim periods, and all such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013. The consolidated balance sheet at December 31, 2013 was derived from the audited financial statements but does not include all disclosures required by GAAP.

Management must make estimates and assumptions that affect amounts reported in our consolidated financial statements and in disclosures of contingent assets and liabilities. Ultimate results could differ from those estimates.

Goodwill

An indicator of impairment of goodwill exists when the fair value of a reporting unit is less than its carrying value. We conducted our annual goodwill impairment test as of June 30, 2014, which is consistent with the timeframe for our annual assessment in prior years. This test consisted of a qualitative assessment in which we determined that it is more likely than not that the fair value of each of our five reporting units exceeded its carrying amount as of June 30, 2014.

Recent Accounting Guidance

A new accounting standard issued in the second quarter of 2014 will change the manner in which most companies recognize revenue. The standard requires that revenue reflect the transfer of goods or services to customers based on the consideration/payment the company expects to be entitled to in exchange for those goods or services; however, the standard does not change the accounting for insurance contracts or investment income. The new standard also requires enhanced disclosures about revenue. This accounting guidance is effective in the first quarter of 2017 and may be applied on a full retrospective or modified retrospective approach. We are currently assessing the impact the implementation of this standard will have on our consolidated financial statements.

 

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HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

(2)  Investments

The cost or amortized cost, gross unrealized gain or loss, and fair value of our fixed maturity and equity securities, all of which are classified as available for sale, were as follows:

 

     Cost or

 

amortized

 

            cost             

     Gross

 

unrealized

 

            gain             

     Gross

 

unrealized

 

            loss             

            Fair value         

June 30, 2014

           

U.S. government and government agency securities

   $ 84,479        $ 1,354        $ (206)       $ 85,627    

Fixed maturity securities of states, municipalities
and political subdivisions

     905,732          60,882          (909)         965,705    

Special purpose revenue bonds of states, municipalities
and political subdivisions

     2,263,181          121,364          (7,582)         2,376,963    

Corporate securities

     1,151,993          51,846          (4,128)         1,199,711    

Residential mortgage-backed securities

     753,516          19,881          (8,863)         764,534    

Commercial mortgage-backed securities

     530,075          20,941          (3,899)         547,117    

Asset-backed securities

     304,866          622          (1,092)         304,396    

Foreign government securities

     84,611          4,630          (103)         89,138    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

   $      6,078,453        $          281,520        $          (26,782)       $      6,333,191    
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

   $ 394,685        $ 59,130        $ (5,130)       $ 448,685    
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

U.S. government and government agency securities

   $ 91,047        $ 2,157        $ (495)       $ 92,709    

Fixed maturity securities of states, municipalities
and political subdivisions

     941,580          50,885          (5,979)         986,486    

Special purpose revenue bonds of states, municipalities
and political subdivisions

     2,240,412          71,541          (46,758)         2,265,195    

Corporate securities

     1,195,387          40,860          (11,009)         1,225,238    

Residential mortgage-backed securities

     622,766          15,289          (19,936)         618,119    

Commercial mortgage-backed securities

     502,069          16,155          (13,336)         504,888    

Asset-backed securities

     183,660          319          (1,587)         182,392    

Foreign government securities

     144,566          3,237          (357)         147,446    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

   $      5,921,487        $          200,443        $          (99,457)       $        6,022,473    
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

   $ 464,388        $ 58,842        $ (5,764)       $ 517,466    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

Substantially all of our fixed maturity securities are investment grade. The following tables display the gross unrealized losses and fair value of all available for sale securities that were in a continuous unrealized loss position for the periods indicated.

 

     Less than 12 months      12 months or more      Total  
       Fair value      

 

  Unrealized  

 

losses

       Fair value          Unrealized  

 

losses

       Fair value       

 

  Unrealized  

 

losses

 

June 30, 2014

                 

Fixed maturity securities

                 

U.S. government and government agency securities

   $ 5,838        $ (6)       $ 11,410        $ (200)       $ 17,248        $ (206)   

Fixed maturity securities of states, municipalities and political subdivisions

     6,015          (34)         38,173          (875)         44,188          (909)   

Special purpose revenue bonds of states, municipalities and political subdivisions

     51,330          (200)         327,557          (7,382)         378,887          (7,582)   

Corporate securities

     73,935          (366)         105,399          (3,762)         179,334          (4,128)   

Residential mortgage-backed securities

     58,198          (272)         259,170          (8,591)         317,368          (8,863)   

Commercial mortgage-backed securities

                     150,806          (3,899)         150,806          (3,899)   

Asset-backed securities

     115,769          (927)         7,080          (165)         122,849          (1,092)   

Foreign government securities

     19,363          (55)         7,193          (48)         26,556          (103)   

Equity securities

     63,229          (4,599)         6,952          (531)         70,181          (5,130)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 393,677        $ (6,459)       $ 913,740        $ (25,453)       $ 1,307,417        $ (31,912)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

                 

Fixed maturity securities

                 

U.S. government and government agency securities

   $ 23,717        $ (495)       $       $       $ 23,717        $ (495)   

Fixed maturity securities of states, municipalities and political subdivisions

     136,160          (5,277)         8,997          (702)         145,157          (5,979)   

Special purpose revenue bonds of states, municipalities and political subdivisions

     684,560          (35,832)         83,228          (10,926)         767,788          (46,758)   

Corporate securities

     277,853          (8,202)         35,437          (2,807)         313,290          (11,009)   

Residential mortgage-backed securities

     306,874          (15,861)         31,687          (4,075)         338,561          (19,936)   

Commercial mortgage-backed securities

     203,347          (12,611)         4,915          (725)         208,262          (13,336)   

Asset-backed securities

     126,922          (1,587)                         126,922          (1,587)   

Foreign government securities

     78,182          (357)                         78,182          (357)   

Equity securities

     75,620          (5,437)         7,016          (327)         82,636          (5,764)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  1,913,235        $  (85,659)       $  171,280        $  (19,562)       $  2,084,515        $  (105,221)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

At June 30, 2014, we held approximately 2,760 fixed maturity and equity securities, of which 20% included at least one lot in an unrealized loss position. A security has an impairment loss when its fair value is less than its cost or amortized cost at the balance sheet date. We evaluate our securities for possible other-than-temporary impairment losses at each quarter end. Our reviews cover all impaired securities where the loss exceeds $1.0 million and the loss either exceeds 10% of cost or the security had been in a loss position for longer than twelve consecutive months. We do not consider the $31.9 million of gross unrealized losses in our portfolio at June 30, 2014 to be other-than-temporary impairments as these losses relate to non-credit factors, such as interest rate changes and market conditions. We recognized no other-than-temporary impairment losses in the first six months of 2014 and 2013.

The amortized cost and fair value of our fixed maturity securities at June 30, 2014, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted-average life of our mortgage-backed and asset-backed securities was 5.5 years at June 30, 2014.

 

                                                                       
                 Cost or
  amortized cost  
            Fair value         

Due in 1 year or less

       $ 192,394        $ 195,936    

Due after 1 year through 5 years

         1,012,738          1,064,207    

Due after 5 years through 10 years

         1,366,848          1,450,529    

Due after 10 years through 15 years

         942,481          992,274    

Due after 15 years

         975,535          1,014,198    
      

 

 

    

 

 

 

Securities with contractual maturities

         4,489,996          4,717,144    

Mortgage-backed and asset-backed securities

         1,588,457          1,616,047    
      

 

 

    

 

 

 

Total fixed maturity securities

       $       6,078,453        $       6,333,191    
      

 

 

    

 

 

 

 

Realized pretax gains (losses) on the sale of investments included the following:

 

  

    Six months ended June 30,      Three months ended June 30,  
   

 

            2014             

   

 

            2013             

    

 

            2014             

    

 

            2013             

 

Gains

         

Fixed maturity securities

  $ 6,150       $ 4,139        $ 4,135        $ 635    

Equity securities

    25,863         5,989          1,425          4,649    

Other investments

           5,345                  817    
 

 

 

   

 

 

    

 

 

    

 

 

 

Total gains

    32,013         15,473          5,560          6,101    
 

 

 

   

 

 

    

 

 

    

 

 

 

Losses

         

Fixed maturity securities

    (3,688)        (994)         (650)         (306)   

Equity securities

    (3,174)        (1,286)         (5)         (1,172)   
 

 

 

   

 

 

    

 

 

    

 

 

 

Total losses

    (6,862)        (2,280)         (655)         (1,478)   
 

 

 

   

 

 

    

 

 

    

 

 

 

Net

         

Fixed maturity securities

    2,462         3,145          3,485          329    

Equity securities

    22,689         4,703          1,420          3,477    

Other investments

           5,345                  817    
 

 

 

   

 

 

    

 

 

    

 

 

 

Net realized investment gain

  $           25,151       $           13,193        $             4,905        $             4,623    
 

 

 

   

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

(3) Fair Value Measurements

Our financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in our financial statements. In determining fair value, we generally apply the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. We classify our financial instruments into the following three-level hierarchy:

 

  Level 1 – Inputs are based on quoted prices in active markets for identical instruments.

 

  Level 2 – Inputs are based on observable market data (other than quoted prices), or are derived from or corroborated by observable market data.

 

  Level 3 – Inputs are unobservable and not corroborated by market data.

Our Level 1 investments consist of U.S. Treasuries, money market funds and equity securities traded in an active exchange market. We use unadjusted quoted prices for identical instruments to measure fair value.

Our Level 2 investments include most of our fixed maturity securities, which consist of U.S. government agency securities, municipal bonds (including those held as restricted securities), corporate debt securities, bank loans, mortgage-backed and asset-backed securities (including collateralized loan obligations), and deposits supporting our Lloyd’s syndicate business. Level 2 also includes certificates of deposit and other interest-bearing deposits at banks, which we report as short-term investments. We measure fair value for the majority of our Level 2 investments using matrix pricing and observable market data, including benchmark securities or yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers, default rates, loss severity and other economic measures. We measure fair value for our structured securities using observable market data in cash flow models.

We are responsible for the prices used in our fair value measurements. We use independent pricing services to assist us in determining fair value for 99% of our Level 2 investments. The pricing services provide a single price or quote per security. We use data provided by our third party investment managers and Lloyd’s of London to value the remaining Level 2 investments. To validate that these quoted prices are reasonable estimates of fair value, we perform various quantitative and qualitative procedures, including: 1) evaluation of the underlying methodologies, 2) analysis of recent sales activity, 3) analytical review of our fair values against current market prices and 4) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. No markets for our investments were judged to be inactive at period end. Based on these procedures, we did not adjust the prices or quotes provided by our independent pricing services, third party investment managers or Lloyd’s of London as of June 30, 2014 or December 31, 2013.

Our Level 2 financial instruments also include our notes payable. We determine the fair value of our 6.30% Senior Notes based on quoted prices in an inactive market. The fair value of borrowings under our Revolving Loan Facility approximates the carrying amount because interest is based on 30-day LIBOR plus a margin.

Our Level 3 securities include certain fixed maturity securities and an insurance contract that we account for as a derivative and classify in other assets. Our Level 3 category also includes a liability for future earnout payments due to former owners of a business we acquired, which is classified within accounts payable and accrued liabilities. We determine fair value of the derivative and the earnout payments based on internally developed models that use assumptions or other data that are not readily observable from objective sources. Fixed maturity securities classified as Level 3 at December 31, 2013 included special purpose revenue bond auction rate securities, which had interest rates that reset at periodic intervals. These securities were thinly traded and observable market data was not readily available. We determined the fair value of these securities using prices quoted by a broker.

 

14


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

The following tables present the fair value of our financial instruments that were carried or disclosed at fair value. Unless indicated, these items were carried at fair value on our consolidated balance sheets.

 

                                                           
              Level 1                        Level 2                        Level 3                          Total            

June 30, 2014

       

Fixed maturity securities

       

U.S. government and government agency securities

  $ 77,934       $ 7,693       $      $ 85,627    

Fixed maturity securities of states, municipalities
and political subdivisions

           965,705                965,705    

Special purpose revenue bonds of states, municipalities
and political subdivisions

           2,376,963                2,376,963    

Corporate securities

           1,199,562         149         1,199,711    

Residential mortgage-backed securities

           764,534                764,534    

Commercial mortgage-backed securities

           547,117                547,117    

Asset-backed securities

           304,396                304,396    

Foreign government securities

           89,138                89,138    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    77,934         6,255,108         149         6,333,191    

Equity securities

    448,685                       448,685    

Short-term investments*

    186,602         155,733                342,335    

Restricted cash and securities

           2,269                2,269    

Premium, claims and other receivables

           63,802                63,802    

Other assets

    20                1,099         1,119    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

  $          713,241       $       6,476,912       $              1,248       $       7,191,401    
 

 

 

   

 

 

   

 

 

   

 

 

 

Notes payable*

  $      $ 783,738       $      $ 783,738    

Accounts payable and accrued liabilities - earnout liability

           2,269         7,386         9,655    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

  $      $ 786,007       $ 7,386       $ 793,393    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

* Carried at cost or amortized cost on consolidated balance sheet.

 

15


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

                                                           
              Level 1                        Level 2                        Level 3                          Total           

December 31, 2013

       

Fixed maturity securities

       

U.S. government and government agency securities

  $ 84,032       $ 8,677       $      $ 92,709    

Fixed maturity securities of states, municipalities
and political subdivisions

           986,486                986,486    

Special purpose revenue bonds of states, municipalities
and political subdivisions

           2,255,928         9,267         2,265,195    

Corporate securities

           1,225,088         150         1,225,238    

Residential mortgage-backed securities

           618,119                618,119    

Commercial mortgage-backed securities

           504,888                504,888    

Asset-backed securities

           182,392                182,392    

Foreign government securities

           147,446                147,446    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    84,032         5,929,024         9,417         6,022,473    

Equity securities

    517,466                       517,466    

Short-term investments*

    68,958         109,795                178,753    

Restricted cash and securities

           1,853                1,853    

Premium, claims and other receivables

           66,515                66,515    

Other assets

    20                941         961    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

  $          670,476       $       6,107,187       $            10,358       $       6,788,021    
 

 

 

   

 

 

   

 

 

   

 

 

 

Notes payable*

  $      $ 707,656       $      $ 707,656    

Accounts payable and accrued liabilities - earnout liability

           1,853         7,259         9,112    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

  $      $ 709,509       $ 7,259       $ 716,768    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

*Carried at cost or amortized cost on consolidated balance sheet.

In the first quarter of 2013, we purchased $9.4 million of special purpose revenue bond auction rate securities, which we continued to hold and classify in Level 3 at December 31, 2013. We sold these securities in the first quarter of 2014. There were no transfers between Level 1, Level 2 or Level 3 in the first six months of 2014 and 2013.

 

16


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

(4) Reinsurance

In the normal course of business, our insurance companies cede a portion of their premium to reinsurers through treaty and facultative reinsurance agreements. Although reinsurance does not discharge the direct insurer from liability to its policyholder, our insurance companies participate in such agreements in order to limit their loss exposure, protect them against catastrophic losses and diversify their business. The following tables present the effect of such reinsurance transactions on our premium, loss and loss adjustment expense and policy acquisition costs.

 

                                                                       
    Six months ended June 30,     Three months ended June 30,  
   

 

            2014             

   

 

            2013             

   

 

            2014             

   

 

            2013             

 

Direct written premium

  $       1,369,751       $       1,294,681       $          749,239       $          713,110    

Reinsurance assumed

    209,700         234,967         83,490         96,333    

Reinsurance ceded

    (342,255)        (321,430)        (185,715)        (180,409)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net written premium

  $ 1,237,196       $ 1,208,218       $ 647,014       $ 629,034    
 

 

 

   

 

 

   

 

 

   

 

 

 

Direct earned premium

  $ 1,288,995       $ 1,237,629       $ 651,682       $ 621,224    

Reinsurance assumed

    152,341         171,308         76,318         86,036    

Reinsurance ceded

    (306,476)        (286,395)        (155,752)        (145,904)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earned premium

  $ 1,134,860       $ 1,122,542       $ 572,248       $ 561,356    
 

 

 

   

 

 

   

 

 

   

 

 

 

Direct loss and loss adjustment expense

  $ 725,911       $ 693,480       $ 375,184       $ 335,968    

Reinsurance assumed

    63,274         110,708         21,472         71,017    

Reinsurance ceded

    (140,247)        (132,017)        (69,562)        (67,511)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and loss adjustment expense

  $ 648,938       $ 672,171       $ 327,094       $ 339,474    
 

 

 

   

 

 

   

 

 

   

 

 

 

Policy acquisition costs

  $ 215,210       $ 204,031       $ 110,565       $ 103,745    

Ceding commissions

    (73,199)        (66,286)        (37,595)        (32,949)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net policy acquisition costs

  $ 142,011       $ 137,745       $ 72,970       $ 70,796    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

The table below shows the components of our reinsurance recoverables in our consolidated balance sheets.

 

  

                June 30,     December 31,  
               

 

            2014             

   

 

            2013             

 

Reinsurance recoverable on paid losses

      $ 98,451       $ 156,026    

Reinsurance recoverable on outstanding losses

        453,653         459,134    

Reinsurance recoverable on incurred but not reported losses

        627,596         663,597    

Reserve for uncollectible reinsurance

        (1,500)        (1,500)   
     

 

 

   

 

 

 

Total reinsurance recoverables

      $       1,178,200       $       1,277,257    
     

 

 

   

 

 

 

 

17


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

Reinsurers not authorized by the respective states of domicile of our U.S. domiciled insurance companies are required to collateralize reinsurance obligations due to us. The table below shows letters of credit and cash that are available to us as collateral, as well as amounts we owe reinsurers that can be offset against amounts due to us.

 

                             
    June 30,     December 31,  
   

 

            2014             

   

 

            2013             

 

Payables to reinsurers

  $ 220,281       $ 208,850    

Letters of credit

    85,752         100,529    

Funds held in trust

    148,508         88,310    
 

 

 

   

 

 

 

Total credits

  $          454,541       $          397,689    
 

 

 

   

 

 

 

(5) Liability for Unpaid Loss and Loss Adjustment Expense

The table below provides a reconciliation of our liability for loss and loss adjustment expense payable (referred to as reserves).

 

                                                                   
    Six months ended June 30,     Three months ended June 30,  
   

 

            2014             

   

 

            2013             

   

 

            2014             

   

 

            2013             

 

Reserves at beginning of period

  $ 3,902,132       $ 3,767,850       $ 3,847,417       $ 3,774,162    

Less reinsurance recoverables on reserves

    1,122,731         1,018,047         1,098,576         1,012,920    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net reserves at beginning of period

    2,779,401         2,749,803         2,748,841         2,761,242    

Net loss and loss adjustment expense

    648,938         672,171         327,094         339,474    

Net loss and loss adjustment expense payments

    (674,070)        (586,326)        (319,114)        (286,797)   

Foreign currency adjustment

    5,979         (24,627)        3,427         (2,898)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net reserves at end of period

    2,760,248         2,811,021         2,760,248         2,811,021    

Plus reinsurance recoverables on reserves

    1,081,249         1,003,663         1,081,249         1,003,663    
 

 

 

   

 

 

   

 

 

   

 

 

 

Reserves at end of period

  $       3,841,497       $       3,814,684       $       3,841,497       $       3,814,684    
 

 

 

   

 

 

   

 

 

   

 

 

 

We recognized no loss development in the first six months or second quarter of 2014. In the first six months and second quarter of 2013, we recognized favorable development of $9.5 million in our U.S. Surety & Credit segment and $2.3 million in our International segment. Our review of reserves in our U.S. Surety & Credit segment at that time indicated better experience than our actuarial expectations compared to the prior year review. As a result, we recognized favorable development of $3.7 million and $5.8 million for our surety and credit lines of business, respectively, related to the 2010 and prior underwriting years. In the International segment, we released catastrophe reserves related to the 2010 New Zealand earthquake, due to settlement of these claims in 2013.

 

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Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

(6) Notes Payable

Our notes payable consisted of the following:

 

                                            
          June 30,     December 31,  
         

 

2014

   

 

2013

 

6.30% Senior Notes

    $ 299,174       $ 299,098    

Revolving Loan Facility

      435,000         355,000    
   

 

 

   

 

 

 

Total notes payable

    $          734,174       $          654,098    
   

 

 

   

 

 

 

 

On April 30, 2014, we entered into an agreement to modify our $600.0 million Revolving Loan Facility (Facility). The amended agreement increased the borrowing capacity under the Facility to $825.0 million and extended the term by two years to April 30, 2019, among other changes. The weighted-average interest rate on borrowings under the Facility at June 30, 2014 was 1.4%. The borrowings and letters of credit issued under the Facility reduced our available borrowing capacity on the Facility to $384.1 million at June 30, 2014.

 

There were no other material changes to the Facility or to the terms and conditions of our Senior Notes or Standby Letter of Credit Facility (Standby Facility) from those described in Note 7, “Notes Payable” to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

We were in compliance with debt covenants related to our 6.30% Senior Notes, the Facility and the Standby Facility at June 30, 2014.

 

(7) Accumulated Other Comprehensive Income

 

The components of accumulated other comprehensive income in our consolidated balance sheets were as follows:

 

      

    

  

  

  

       Net unrealized   
investment

gains
    Foreign
currency
translation
      adjustment      
    Accumulated
other
  comprehensive    
income
 

Six months ended June 30, 2014

     

Balance at December 31, 2013

  $ 99,960       $ 18,691       $ 118,651    

Other comprehensive income

    99,659         2,112         101,771    
 

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

  $ 199,619       $ 20,803       $ 220,422    
 

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2014

     

Balance at March 31, 2014

  $ 142,310       $ 19,911       $ 162,221    

Other comprehensive income

    57,309         892         58,201    
 

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

  $          199,619       $            20,803       $          220,422    
 

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

(8) Earnings Per Share

The following table details the numerator and denominator used in our earnings per share calculations.

 

    Six months ended June 30,     Three months ended June 30,  
   

 

            2014             

   

 

            2013             

   

 

            2014             

   

 

            2013             

 

Net earnings

  $         205,047       $         194,012       $           97,136       $           88,162    

Less: net earnings attributable to unvested restricted stock

    (3,282)        (3,227)        (1,590)        (1,445)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings available to common stock

  $ 201,765       $ 190,785       $ 95,546       $ 86,717    
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding

    98,551         98,965         98,442         98,870    

Dilutive effect of outstanding securities (determined using treasury stock method)

    240         245         218         251    
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares and potential common shares outstanding

    98,791         99,210         98,660         99,121    
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share

       

Basic

  $ 2.05       $ 1.93       $ 0.97       $ 0.88    
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 2.04       $ 1.92       $ 0.97       $ 0.87    
 

 

 

   

 

 

   

 

 

   

 

 

 

(9) Stock-Based Compensation

In 2014, we granted the following shares of common stock, restricted stock and restricted stock units.

 

    Number
     of shares     
        Weighted-average    
grant date

fair value
          Aggregate      
fair value
           Vesting       
period
 

Common stock

    38             $          46.41               $        1,771               None   

Restricted stock

    333               43.60                 14,525               0 - 4 years   

Restricted stock units

    13               45.14                 593               4 years   

For common stock grants, we measure fair value based on the closing stock price of our common stock on the grant date and expense it on the grant date.

Certain awards of restricted stock and restricted stock units contain a performance condition based on the ultimate results for the applicable underwriting year. The number of such shares that vest could be higher or lower than initially granted. We measure fair value for these awards based on the closing price of our common stock on the grant date, and we recognize expense on a straight-line basis over the vesting period for those restricted stock awards or units expected to vest.

Certain of our executive officers were granted performance-based restricted stock in 2014. This restricted stock vests after three years and can vest from 0% to 200% of the initial shares granted. Vesting is based equally on an operating return on equity performance factor and a total shareholder return performance factor.

 

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Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

(10) Segments

We report HCC’s results in six operating segments, including the following five insurance underwriting segments:

 

    U.S. Property & Casualty

 

    Professional Liability

 

    Accident & Health
  U.S. Surety & Credit

 

  International
 

 

The Investing segment includes our consolidated investment portfolio, as well as all investment income, investment related expenses, realized investment gains and losses, and other-than-temporary impairment credit losses on investments. All investment activity is reported as revenue, consistent with our consolidated presentation.

In addition to our segments, we include a Corporate & Other category to reconcile segment results to consolidated totals. The Corporate & Other category includes corporate operating expenses not allocated to the segments, interest expense on long-term debt, foreign currency expense (benefit), and underwriting results of our Exited Lines. Our Exited Lines include product lines that we no longer write and do not expect to write in the future.

The following tables present information by business segment.

 

    U.S. Property
& Casualty
     Professional 
Liability
    Accident
 & Health 
     U.S. Surety 
& Credit
    International      Investing       Corporate 
& Other
     Consolidated   

Six months ended June 30, 2014

               

Net earned premium

  $       185,588       $       173,577       $       472,481       $         97,134       $       205,460       $      $ 620       $ 1,134,860    

 

Other revenue

    9,946         470         5,502         868         1,899         138,395         564         157,644    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Segment revenue

    195,534         174,047         477,983         98,002         207,359         138,395         1,184         1,292,504    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Loss and LAE

    93,388         103,321         341,295         28,558         82,380                (4)        648,938    

 

Other expense

    58,148         34,545         74,254         53,407         79,979                50,617         350,950    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Segment expense

    151,536         137,866         415,549         81,965         162,359                50,613         999,888    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings (loss)

  $ 43,998       $ 36,181       $ 62,434       $ 16,037       $ 45,000       $       138,395       $       (49,429)      $ 292,616    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2013

               

Net earned premium

  $ 184,963       $ 185,223       $ 434,947       $ 97,231       $ 210,412       $      $ 9,766       $ 1,122,542    

 

Other revenue

    11,429         325         2,330         621         1,902         124,626         22         141,255    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Segment revenue

    196,392         185,548         437,277         97,852         212,314         124,626         9,788         1,263,797    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Loss and LAE

    107,394         111,821         320,566         18,851         104,916                8,623         672,171    

 

Other expense

    52,757         35,872         63,709         53,681         71,921                37,459         315,399    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Segment expense

    160,151         147,693         384,275         72,532         176,837                46,082         987,570    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings (loss)

  $ 36,241       $ 37,855       $ 53,002       $ 25,320       $ 35,477       $ 124,626       $ (36,294)      $ 276,227    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

    U.S. Property
& Casualty
     Professional 
Liability
    Accident
  & Health  
      U.S. Surety  
& Credit
    International       Investing         Corporate  
& Other
     Consolidated   

Three months ended June 30, 2014

               

Net earned premium

  $ 88,536       $ 88,127       $ 240,338       $ 50,191       $ 104,727       $      $ 329       $ 572,248    

 

Other revenue

    4,070         195         3,862         580         931         61,343         345         71,326    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Segment revenue

    92,606         88,322         244,200         50,771         105,658         61,343         674         643,574    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Loss and LAE

    46,733         52,189         172,296         14,862         40,765                249         327,094    

 

Other expense

    29,055         17,420         37,875         27,463         41,302                25,721         178,836    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Segment expense

    75,788         69,609         210,171         42,325         82,067                25,970         505,930    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings (loss)

  $ 16,818       $ 18,713       $ 34,029       $ 8,446       $ 23,591       $ 61,343       $ (25,296)      $ 137,644    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2013

               

Net earned premium

  $ 91,432       $ 92,444       $ 217,822       $ 50,054       $ 105,270       $      $ 4,334       $ 561,356    

 

Other revenue

    4,245         739         1,140         384         1,124         60,291         152         68,075    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Segment revenue

    95,677         93,183         218,962         50,438         106,394         60,291         4,486         629,431    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Loss and LAE

    55,238         55,435         160,139         5,637         58,997                4,028         339,474    

 

Other expense

    25,452         18,124         32,583         27,402         36,212                25,353         165,126    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Segment expense

    80,690         73,559         192,722         33,039         95,209                29,381         504,600    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings (loss)

  $       14,987       $       19,624       $       26,240       $           17,399       $       11,185       $       60,291       $       (24,895)      $ 124,831    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(11) Commitments and Contingencies

Catastrophe and Large Loss Exposure

We have exposure to catastrophic and other large losses caused by natural perils (such as hurricanes, earthquakes, floods, tsunamis, hail storms and tornados) and man-made events (such as terrorist attacks). The incidence, timing and severity of these losses are unpredictable. We assess our exposures in areas most vulnerable to natural catastrophes and apply procedures to ascertain our probable maximum loss from a single event. We maintain reinsurance protection to reduce our potential losses from a future event. In the first six months of 2014, we recognized accident year net catastrophe losses, after reinsurance and reinstatement premium, of $9.5 million related to various small catastrophes. We recognized $26.6 million in the first six months of 2013, primarily due to European floods during the second quarter and various small catastrophes.

Litigation

We are a party to lawsuits, arbitrations and other proceedings that arise in the normal course of our business. Many of such lawsuits, arbitrations and other proceedings involve claims under policies that we underwrite as an insurer or reinsurer, the liabilities for which, we believe, have been adequately included in our loss reserves. Also, from time to time, we are a party to lawsuits, arbitrations and other proceedings that relate to disputes with third parties, or that involve alleged errors and omissions on the part of our subsidiaries. We have provided accruals for these items to the extent we deem the losses probable and reasonably estimable. Although the ultimate outcome of these matters cannot be determined at this time, based on present information, the availability of insurance coverage and advice received from our outside legal counsel, we believe the resolution of any such matters will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

22


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

Indemnifications

In conjunction with the sales of business assets and subsidiaries, we have provided indemnifications to the buyers. Certain indemnifications cover typical representations and warranties related to our responsibilities to perform under the sales contracts. Under other indemnifications, we agree to reimburse the purchasers for taxes or ERISA-related amounts, if any, assessed after the sale date but related to pre-sale activities. We cannot quantify the maximum potential exposure covered by all of our indemnifications because the indemnifications cover a variety of matters, operations and scenarios and some have no time limit. For those with a time limit, the longest indemnification expires in 2025. We accrue a loss when a valid claim is made by a purchaser and we believe we have potential exposure.

(12) Supplemental Information

Supplemental cash flow information was as follows:

 

     Six months ended June 30,      Three months ended June 30,  
    

 

            2014             

                 2013                              2014                              2013              

Income taxes paid

   $           70,413        $           99,941        $           70,891        $           67,799    

Interest paid

     14,984          13,322          13,445          11,932    

Proceeds from sales of available for sale fixed maturity securities

     286,843          171,801          167,832          13,666    

Proceeds from sales of equity securities

     170,182          44,308          26,107          26,500    

Dividends declared but not paid at end of period

     22,493          16,523          

 

23


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis should be read in conjunction with our Consolidated Financial Statements and the related Notes as of June 30, 2014 and December 31, 2013.

Overview

We are a specialty insurance group with offices in the United States, the United Kingdom, Spain and Ireland, transacting business in approximately 180 countries. Our shares trade on the New York Stock Exchange and closed at $47.94 on July 25, 2014, resulting in market capitalization of $4.8 billion.

We underwrite and manage a variety of largely non-correlated specialty insurance products through these five insurance underwriting segments: U.S. Property & Casualty, Professional Liability, Accident & Health, U.S. Surety & Credit and International. We market our insurance products through a network of independent agents and brokers, through managing general agents owned by the company, and directly to consumers. In addition, we assume insurance written by other insurance companies.

Our organization is focused on generating consistent, industry-leading combined ratios. We concentrate our insurance writings in selected specialty lines of business in which we believe we can achieve meaningful underwriting profit. We rely on experienced underwriting personnel working within defined and monitored limits and our access to and expertise in the reinsurance marketplace to limit or reduce risk. By focusing on underwriting profitability, we are able to accomplish our primary objectives of maximizing net earnings and growing book value per share.

Our major insurance companies have financial strength ratings of AA (Very Strong) from Standard & Poor’s Corporation, A+ (Superior) from A.M. Best Company, Inc., AA (Very Strong) from Fitch Ratings, and A1 (Good Security) from Moody’s Investors Service, Inc.

Our results and key metrics for the six months and quarter ended June 30, 2014 were as follows:

 

    Six months ended June 30,     Three months ended June 30,  
   

 

            2014             

                2013                             2014                             2013              

Net earnings

  $          205,047       $          194,012       $           97,136       $           88,162    
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted share

  $ 2.04       $ 1.92       $ 0.97       $ 0.87    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    57.2      59.9      57.2      60.5 

 

Expense ratio

    26.0         24.6         26.3         24.8    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    83.2      84.5      83.5      85.3 
 

 

 

   

 

 

   

 

 

   

 

 

 

Key facts about our consolidated group as of and for the six months and quarter ended June 30, 2014 are as follows:

 

    We had consolidated shareholders’ equity of $3.9 billion, with book value per share of $39.12.

 

    We produced total revenue of $1.3 billion and $643.6 million in the first six months and second quarter, respectively.

 

    We purchased $41.5 million of our common stock at an average cost of $43.21 per share in the first six months.

 

    We declared dividends of $0.45 per share and paid $45.1 million of dividends in the first six months.

 

    Our debt to total capital ratio was 15.8%.

 

24


Table of Contents

Comparisons in the following sections refer to the first six months of 2014 compared to the same period of 2013, unless otherwise noted. Amounts in tables are in thousands, except for earnings per share, percentages, ratios and number of employees.

Revenue

Gross written premium, net written premium and net earned premium are detailed below by segment.

 

   

Six months ended June 30,

 

   

Three months ended June 30,

 

 
                2014                             2013                             2014                             2013              

U.S. Property & Casualty

  $ 357,287       $ 358,388       $ 184,280       $ 183,251    

Professional Liability

    245,930         246,393         140,502         142,374    

Accident & Health

    486,476         430,470         250,559         214,909    

U.S. Surety & Credit

    112,697         111,438         61,645         59,189    

International

    376,441         373,193         195,414         205,386    

Exited Lines

    620         9,766         329         4,334    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 1,579,451       $ 1,529,648       $ 832,729       $ 809,443    
 

 

 

   

 

 

   

 

 

   

 

 

 

U.S. Property & Casualty

  $ 185,385       $ 208,869       $ 95,377       $ 104,987    

Professional Liability

    163,805         163,761         94,204         96,135    

Accident & Health

    483,761         429,868         249,010         214,600    

U.S. Surety & Credit

    98,058         98,128         53,977         52,624    

International

    305,567         297,826         154,117         156,354    

Exited Lines

    620         9,766         329         4,334    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net written premium

  $ 1,237,196       $ 1,208,218       $ 647,014       $ 629,034    
 

 

 

   

 

 

   

 

 

   

 

 

 

U.S. Property & Casualty

  $ 185,588       $ 184,963       $ 88,536       $ 91,432    

Professional Liability

    173,577         185,223         88,127         92,444    

Accident & Health

    472,481         434,947         240,338         217,822    

U.S. Surety & Credit

    97,134         97,231         50,191         50,054    

International

    205,460         210,412         104,727         105,270    

Exited Lines

    620         9,766         329         4,334    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 1,134,860       $ 1,122,542       $ 572,248       $ 561,356    
 

 

 

   

 

 

   

 

 

   

 

 

 

Growth in written premium occurred primarily in the Accident & Health segment, from growth of our medical stop-loss and short-term medical products. See the “Segment Operations” section below for further discussion of the relationship and changes in premium revenue within each insurance underwriting segment.

Net investment income, which is included in our Investing segment, increased 2% year-over-year primarily due to higher dividend income from equity securities, partially offset by lower income from reduced reinvestment yields. We recognized $25.2 million of net realized investment gains in the first six months of 2014, principally due to the sale of equity securities in the first quarter, compared to $13.2 million in the first six months of 2013. See the “Investing Segment” section below for further discussion of our investing activities.

 

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Loss and Loss Adjustment Expense

The tables below detail our net loss and loss adjustment expense and our net loss ratios on a consolidated basis and for our segments.

 

   

Six months ended June 30,

 

   

Three months ended June 30,

 

 
                2014                             2013                             2014                             2013              

U.S. Property & Casualty

  $ 93,388       $ 107,394       $ 46,733       $ 55,238    

Professional Liability

    103,321         111,821         52,189         55,435    

Accident & Health

    341,295         320,566         172,296         160,139    

U.S. Surety & Credit

    28,558         18,851         14,862         5,637    

International

    82,380         104,916         40,765         58,997    

Exited Lines

    (4)        8,623         249         4,028    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and loss adjustment expense

  $ 648,938       $ 672,171       $ 327,094       $ 339,474    
 

 

 

   

 

 

   

 

 

   

 

 

 

U.S. Property & Casualty

    50.3      58.1      52.8      60.4 

Professional Liability

    59.5         60.4         59.2         60.0    

Accident & Health

    72.2         73.7         71.7         73.5    

U.S. Surety & Credit

    29.4         19.4         29.6         11.3    

International

    40.1         49.9         38.9         56.0    
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss ratio

    57.2      59.9      57.2      60.5 
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated accident year net loss ratio

    57.2      60.9      57.2      62.6 
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and loss adjustment expense (referred to as loss expense) decreased $23.2 million in the first six months of 2014 compared to the same period in 2013. The lower loss expense stemmed from our: 1) U.S. Property & Casualty segment, primarily due to lower losses in our public risk business, 2) Professional Liability segment, primarily due to lower earned premium and 3) International segment, due to lower earned premium, lower catastrophe losses in our property treaty line of business and a lower loss ratio in our surety & credit line of business. These decreases were partially offset by higher loss expense from: 1) our Accident & Health segment, due to growth of our medical stop-loss and short-term medical products and 2) favorable development in 2013, primarily in our U.S. Surety & Credit segment. We recognized no prior year reserve development in the first six months of 2014. See the “Segment Operations” section below for additional discussion of the changes in our loss expense, as well as discussion of the net loss ratios for each segment for 2014 and 2013.

 

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The table below provides a reconciliation of our consolidated reserves for loss and loss adjustment expense payable, net of reinsurance ceded, the amount of our paid claims, and our net paid loss ratio.

 

   

Six months ended June 30,

 

   

Three months ended June 30,

 

 
                2014                             2013                             2014                             2013              

Net reserves at beginning of period

  $ 2,779,401       $ 2,749,803       $ 2,748,841       $ 2,761,242    

Net loss and loss adjustment expense

    648,938         672,171         327,094         339,474    

Net loss and loss adjustment expense payments

    (674,070)        (586,326)        (319,114)        (286,797)   

Foreign currency adjustment

    5,979         (24,627)        3,427         (2,898)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net reserves at end of period

  $ 2,760,248       $ 2,811,021       $ 2,760,248       $ 2,811,021    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net paid loss ratio

    59.4      52.2      55.8      51.1 
 

 

 

   

 

 

   

 

 

   

 

 

 

The amount of claims paid fluctuates year-over-year due to the timing of claims settlement, the occurrence of catastrophic events and commutations, and the mix of our business. In the first six months of 2014, we paid $124.5 million to settle claims related to Spanish surety bonds, of which approximately 60% was reinsured, increasing the net paid loss ratio by 4.6 percentage points.

Policy Acquisition Costs

The percentage of policy acquisition costs to net earned premium was 12.5% and 12.3% for the first six months of 2014 and 2013, respectively, and 12.8% and 12.6% for the second quarter of 2014 and 2013, respectively. The difference between periods primarily related to increased commission rates on certain of our businesses.

Other Operating Expense

Other operating expense increased 18% year-over-year and 13% quarter-over-quarter in 2014 compared to 2013, primarily due to the fluctuation in foreign currency benefit/expense. Our foreign currency expense was $6.7 million and $2.8 million in the first six months and second quarter of 2014, respectively. We recognized a foreign currency benefit of $9.0 million and expense of $1.9 million in the first six months and second quarter of 2013, respectively. The foreign currency benefit/expense related to changes in the value of the British pound sterling and the Euro relative to the U.S. dollar.

Excluding the effect of foreign currency benefit/expense, other operating expense increased 8% year-over-year and 12% quarter-over-quarter, mainly due to increased compensation and benefit costs in 2014. Our employee count has grown to 1,933 from 1,900 at December 31, 2013, and our bonus expense increased in 2014 due to higher pretax earnings. Other operating expense included stock-based compensation expense of $9.3 million in 2014 and $7.2 million in 2013. At June 30, 2014, there was approximately $33.7 million of total unrecognized compensation expense related to unvested restricted stock awards and units, options and our employee stock purchase plan that is expected to be recognized over a weighted-average period of 2.5 years.

Interest Expense

Interest expense was $14.0 million and $13.1 million in the first six months of 2014 and 2013, respectively, and included $9.7 million for our Senior Notes in both years.

Income Tax Expense

Our effective income tax rate was 29.9% for the first six months of 2014, compared to 29.8% for the same period of 2013.

 

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Segment Operations

Each of our insurance segments bears risk for insurance coverage written within its portfolio of insurance products. Each segment generates income from premium written by our underwriting agencies, through third party agents and brokers, or on a direct basis. Certain segments also write facultative or individual account reinsurance, as well as treaty reinsurance business. In some cases, we purchase reinsurance to limit our losses from both individual policy losses and multiple policy losses from catastrophic occurrences and from aggregate losses in a year. Our segments maintain disciplined expense management and a streamlined management structure, which results in favorable expense ratios. The following provides operational information about our insurance underwriting segments, Investing segment and Corporate & Other category.

In 2014, we changed the presentation of certain categories of business that we disclose within our insurance underwriting segments and recast prior period financial data to be comparative with the revised presentation. However, we did not change our reportable segments. We believe this realignment of certain categories within segments provides better operational information for management and our shareholders.

U.S. Property & Casualty Segment

The following tables summarize the operations of the U.S. Property & Casualty segment.

 

   

Six months ended June 30,

 

   

Three months ended June 30,

 

 
                2014                             2013                             2014                             2013              

Net earned premium

  $ 185,588       $ 184,963       $ 88,536       $ 91,432    

Other revenue

    9,946         11,429         4,070         4,245    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    195,534         196,392         92,606         95,677    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    93,388         107,394         46,733         55,238    

Other expense

    58,148         52,757         29,055         25,452    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    151,536         160,151         75,788         80,690    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

  $ 43,998       $ 36,241       $ 16,818       $ 14,987    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    50.3      58.1      52.8      60.4 

Expense ratio

    29.7         26.9         31.4         26.6    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    80.0      85.0      84.2      87.0 
 

 

 

   

 

 

   

 

 

   

 

 

 

Aviation

  $ 54,130       $ 56,286       $ 27,371       $ 28,429    

Liability

    53,667         48,927         27,029         24,977    

Sports & Entertainment

    15,555         12,480         7,418         6,168    

Public Risk

    25,007         32,755         11,973         16,395    

Other

    37,229         34,515         14,745         15,463    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 185,588       $ 184,963       $ 88,536       $ 91,432    
 

 

 

   

 

 

   

 

 

   

 

 

 

Aviation

    60.9      63.0      61.9      64.3 

Liability

    59.9         63.7         59.8         64.3    

Sports & Entertainment

    49.3         61.6         51.0         74.3    

Public Risk

    58.4         76.7         58.0         75.1    

Other

    16.1         23.0         19.7         25.9    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss ratio

    50.3      58.1      52.8      60.4 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Six months ended June 30,

 

   

Three months ended June 30,

 

 
                2014                             2013                             2014                             2013              

Aviation

  $ 70,344       $ 75,182       $ 37,897       $ 38,184    

Liability

    92,145         76,432         48,673         39,339    

Sports & Entertainment

    77,090         81,528         34,948         47,093    

Public Risk

    35,570         37,105         14,847         15,664    

Other

    82,138         88,141         47,915         42,971    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 357,287       $ 358,388       $ 184,280       $ 183,251    
 

 

 

   

 

 

   

 

 

   

 

 

 

Aviation

  $ 58,650       $ 60,134       $ 33,327       $ 31,520    

Liability

    64,110         55,255         33,015         28,011    

Sports & Entertainment

    13,714         14,163         6,649         8,390    

Public Risk

    18,779         29,880         7,891         14,109    

Other

    30,132         49,437         14,495         22,957    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net written premium

  $ 185,385       $ 208,869       $ 95,377       $ 104,987    
 

 

 

   

 

 

   

 

 

   

 

 

 

Our U.S. Property & Casualty segment pretax earnings increased 21% year-over-year, and 12% quarter-over-quarter, primarily due to lower loss expense, partially offset by higher other expenses. Gross written premium decreased in 2014 due to: 1) reduced pricing from increased competition in Aviation and 2) cyclical reductions in Sports & Entertainment and title and residual value insurance (both included in Other). These decreases were largely offset by increased writings of our expanding casualty business, included in Liability, and timing of renewals for our brown water marine business (included in Other). Net written premium for Public Risk decreased in 2014 due to additional quota share reinsurance. Higher net earned premium, due to growth in our casualty business, was partially offset by reduced premium earned by Public Risk due to the change in our reinsurance program. Loss expense decreased in 2014, compared to 2013, primarily due to lower losses in Public Risk based on our re-underwriting of that book of business in 2013. The segment’s expense ratio increased in 2014 primarily due to higher compensation costs.

Regarding changes in presentation, the segment now includes Liability and Sports & Entertainment categories. The Liability category includes the prior E&O category, as well as employment practices liability, primary casualty and excess casualty, which were previously included in the Other category. The Sports & Entertainment category includes disability and contingency, which were previously included in the Other category.

 

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Professional Liability Segment

The following tables summarize the operations of the Professional Liability segment.

 

   

Six months ended June 30,

 

   

Three months ended June 30,

 

 
                2014                             2013                             2014                             2013              

Net earned premium

  $ 173,577       $ 185,223       $ 88,127       $ 92,444    

Other revenue

    470         325         195         739    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    174,047         185,548         88,322         93,183    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    103,321         111,821         52,189         55,435    

Other expense

    34,545         35,872         17,420         18,124    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    137,866         147,693         69,609         73,559    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

  $ 36,181       $ 37,855       $ 18,713       $ 19,624    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    59.5      60.4      59.2      60.0 

Expense ratio

    19.8         19.3         19.7         19.4    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    79.3      79.7      78.9      79.4 
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross written premium

  $ 245,930       $ 246,393       $ 140,502       $ 142,374    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net written premium

  $ 163,805       $ 163,761       $ 94,204       $ 96,135    
 

 

 

   

 

 

   

 

 

   

 

 

 

Our Professional Liability segment pretax earnings decreased 4% year-to-date in 2014, compared to the same period of 2013, due to lower net earned premium that was partially offset by an improved net loss ratio. The decrease in net earned premium related to lower net written premium in the second half of 2013, compared to the second half of 2012.

 

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Accident & Health Segment

The following tables summarize the operations of the Accident & Health segment.

 

   

Six months ended June 30,

 

   

Three months ended June 30,

 

 
                2014                             2013                             2014                             2013              

Net earned premium

  $ 472,481       $ 434,947       $ 240,338       $ 217,822    

Other revenue

    5,502         2,330         3,862         1,140    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    477,983         437,277         244,200         218,962    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    341,295         320,566         172,296         160,139    

Other expense

    74,254         63,709         37,875         32,583    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    415,549         384,275         210,171         192,722    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

  $ 62,434       $ 53,002       $ 34,029       $ 26,240    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    72.2      73.7      71.7      73.5 

Expense ratio

    15.5         14.6         15.5         14.9    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    87.7      88.3      87.2      88.4 
 

 

 

   

 

 

   

 

 

   

 

 

 

Medical Stop-loss

  $ 429,124       $ 404,604       $ 214,894       $ 202,010    

Other

    43,357         30,343         25,444         15,812    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 472,481       $ 434,947       $ 240,338       $ 217,822    
 

 

 

   

 

 

   

 

 

   

 

 

 

Medical Stop-loss

    74.8      75.2      74.8      75.2 

Other

    46.4         53.9         45.2         51.8    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss ratio

    72.2      73.7      71.7      73.5 
 

 

 

   

 

 

   

 

 

   

 

 

 

Medical Stop-loss

  $ 431,811       $ 405,039       $ 216,413       $ 202,231    

Other

    54,665         25,431         34,146         12,678    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 486,476       $ 430,470       $ 250,559       $ 214,909    
 

 

 

   

 

 

   

 

 

   

 

 

 

Medical Stop-loss

  $ 429,096       $ 404,604       $ 214,864       $ 202,010    

Other

    54,665         25,264         34,146         12,590    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net written premium

  $ 483,761       $ 429,868       $ 249,010       $ 214,600    
 

 

 

   

 

 

   

 

 

   

 

 

 

The Accident & Health segment pretax earnings increased 18% in the first six months of 2014, and 30% in the second quarter of 2014, compared to the respective periods in 2013. This increase was directly attributable to writing new medical stop-loss and short-term medical business, as well as rate increases on renewal business in 2014. The segment’s expense ratio increased in 2014 due to higher commissions related to the short-term medical product, as well as higher compensation costs.

 

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U.S. Surety & Credit Segment

The following tables summarize the operations of the U.S. Surety & Credit segment.

 

   

Six months ended June 30,

 

   

Three months ended June 30,

 

 
                2014                             2013                             2014                             2013          

Net earned premium

  $ 97,134       $ 97,231       $ 50,191       $ 50,054    

Other revenue

    868         621         580         384    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    98,002         97,852         50,771         50,438    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    28,558         18,851         14,862         5,637    

Other expense

    53,407         53,681         27,463         27,402    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    81,965         72,532         42,325         33,039    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

  $ 16,037       $ 25,320       $ 8,446       $ 17,399    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    29.4      19.4      29.6      11.3 

Expense ratio

    54.5         54.9         54.1         54.3    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    83.9      74.3      83.7      65.6 
 

 

 

   

 

 

   

 

 

   

 

 

 

Surety

  $ 71,723       $ 72,725       $ 36,878       $ 37,118    

Credit

    25,411         24,506         13,313         12,936    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 97,134       $ 97,231       $ 50,191       $ 50,054    
 

 

 

   

 

 

   

 

 

   

 

 

 

Surety

    24.9      19.8      24.7      14.9 

Credit

    42.2         18.1         43.2         0.8    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss ratio

 

 

 

 

29.4 

 

 

 

 

 

19.4 

 

 

 

 

 

29.6 

 

 

 

 

 

11.3 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Surety

  $ 80,333       $ 80,327       $ 43,131       $ 42,631    

Credit

    32,364         31,111         18,514         16,558    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 112,697       $ 111,438       $ 61,645       $ 59,189    
 

 

 

   

 

 

   

 

 

   

 

 

 

Surety

  $ 71,712       $ 72,146       $ 38,896       $ 38,456    

Credit

    26,346         25,982         15,081         14,168    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net written premium

  $ 98,058       $ 98,128       $ 53,977       $ 52,624    
 

 

 

   

 

 

   

 

 

   

 

 

 

Our U.S. Surety & Credit segment pretax earnings decreased $9.3 million year-over-year and $9.0 million quarter-over-quarter, due to $9.5 million of favorable loss development recognized in the first six months and second quarter of 2013. We recognized no loss development for the same periods of 2014.

In the second quarter of 2013, we conducted a limited review of the segment’s reserves due to the settlement of a large 2010 claim on favorable terms. This review indicated that actual loss experience for the 2010 and prior underwriting years was significantly better in 2013 compared to the prior year review. As a result, we recognized favorable development of $3.7 million for Surety and $5.8 million for Credit in the second quarter of 2013.

 

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International Segment

The following tables summarize the operations of the International segment.

 

    Six months ended June 30,     Three months ended June 30,  
   

 

            2014             

   

 

            2013             

   

 

            2014             

   

 

            2013             

 

Net earned premium

  $ 205,460       $ 210,412       $ 104,727       $ 105,270    

Other revenue

    1,899         1,902         931         1,124    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    207,359         212,314         105,658         106,394    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    82,380         104,916         40,765         58,997    

Other expense

    79,979         71,921         41,302         36,212    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    162,359         176,837         82,067         95,209    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

  $ 45,000       $ 35,477       $ 23,591       $ 11,185    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    40.1      49.9      38.9      56.0 

Expense ratio

    38.6         33.9         39.1         34.0    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    78.7      83.8      78.0      90.0 
 

 

 

   

 

 

   

 

 

   

 

 

 

Marine & Energy

  $ 43,550       $ 52,292       $ 21,703       $ 26,584    

Property Treaty

    51,413         58,498         26,648         29,743    

Surety & Credit

    40,139         36,066         20,203         17,853    

Liability

    40,365         35,583         21,229         18,408    

Other

    29,993         27,973         14,944         12,682    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 205,460       $ 210,412       $ 104,727       $ 105,270    
 

 

 

   

 

 

   

 

 

   

 

 

 

Marine & Energy

    49.8      48.0      51.8      46.5 

Property Treaty

    20.1         51.1         19.4         77.1    

Surety & Credit

    45.6         63.0         42.7         62.5    

Liability

    49.3         49.4         47.5         48.9    

Other

    40.4         34.3         37.8         27.9    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss ratios

 

 

 

 

40.1 

 

 

 

 

 

49.9 

 

 

 

 

 

38.9 

 

 

 

 

 

56.0 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Marine & Energy

  $ 118,602       $ 125,658       $ 80,854       $ 91,036    

Property Treaty

    99,929         113,995         31,937         41,650    

Surety & Credit

    55,251         46,196         28,894         25,030    

Liability

    50,078         40,210         27,387         22,077    

Other

    52,581         47,134         26,342         25,593    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 376,441       $ 373,193       $ 195,414       $ 205,386    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    

Six months ended June 30,

 

    

Three months ended June 30,

 

 
                 2014                              2013                              2014                              2013              

Marine & Energy

   $ 82,082        $ 82,972        $ 57,197        $ 61,499    

Property Treaty

     87,829          101,266          27,291          35,099    

Surety & Credit

     49,085          40,290          26,038          21,641    

Liability

     46,326          37,577          25,182          21,007    

Other

     40,245          35,721          18,409          17,108    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net written premium

   $          305,567        $          297,826        $          154,117        $          156,354    
  

 

 

    

 

 

    

 

 

    

 

 

 

Our International segment pretax earnings increased $9.5 million in the first six months and $12.4 million in the second quarter of 2014, compared to the same period of 2013, due to the favorable impact of lower net catastrophe losses in Property Treaty, partially offset by lower net earned premium and higher other expenses in 2014. Gross written premium and net written premium increased year-to-date in 2014, compared to 2013, due to increased writings in Surety & Credit, Liability and our direct and facultative property line of business (included in Other). These increases were largely offset by decreased writings of Marine & Energy and Property Treaty, due to reduced pricing and expanded competition in these lines. The segment’s expense ratio increased in 2014 primarily due to higher compensation expense and the stronger British pound sterling compared to the U.S. dollar in 2014.

In the second quarter of 2013, we recognized large catastrophe losses of $15.0 million related to European floods, including $2.0 million of inward reinstatement premium. There were no large catastrophe losses in the first six months of 2014. The remaining net catastrophe losses in 2014 and 2013 related to small catastrophes. The following table summarizes the segment’s net catastrophes losses, as well as the impact on key metrics:

 

    

Six months ended June 30,

 

   

Three months ended June 30,

 

 
                 2014                             2013                             2014                             2013              

Loss and loss adjustment expense, after reinsurance

   $            10,355       $            29,921       $             5,172       $            22,935    

Reinstatement premium, net

     (816)        (3,291)        (269)        (1,515)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net catastrophe losses

   $ 9,539       $ 26,630       $ 4,903       $ 21,420    
  

 

 

   

 

 

   

 

 

   

 

 

 

Impact of net catastrophe losses (percentage points):

        

Net loss ratio

     4.9      13.7      4.8      21.2 

Expense ratio

     (0.1)        (0.5)        (0.1)        (0.5)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     4.8      13.2      4.7      20.7 
  

 

 

   

 

 

   

 

 

   

 

 

 

In the second quarter of 2013, we recognized favorable loss development of $2.3 million in the direct and facultative property line of business related to our 2010 New Zealand earthquake catastrophe losses, due to settlement of these claims in 2013.

Regarding changes in presentation, the Marine & Energy category now includes the marine business, which was previously included in the Other category.

 

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Investing Segment

We invest the majority of our funds in highly-rated fixed maturity securities, which are designated as available for sale securities. We held $6.3 billion of fixed maturity securities at June 30, 2014. Substantially all of our fixed maturity securities were investment grade and 73% were rated AAA or AA. In addition, we held $448.7 million of equity securities at June 30, 2014.

The following tables summarize the results and certain key metrics of our Investing segment.

 

    

Six months ended June 30,

 

   

Three months ended June 30,

 

 
                 2014                              2013                             2014                             2013              

Net investment income from:

         

Fixed maturity securities

         

Taxable

   $ 47,279        $ 51,022       $ 24,019       $ 25,062    

Exempt from U.S. income taxes

     57,175          56,075         28,592         28,186    
  

 

 

    

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

     104,454          107,097         52,611         53,248    

Equity securities

     12,143          7,808         5,506         4,228    

Other

     728          399         297         434    
  

 

 

    

 

 

   

 

 

   

 

 

 

Total investment income

     117,325          115,304         58,414         57,910    

Investment expense

     (4,081)         (3,871)        (1,976)        (2,242)   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total net investment income

     113,244          111,433         56,438         55,668    

Net realized investment gain

     25,151          13,193         4,905         4,623    
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment pretax earnings

   $        138,395        $        124,626       $        61,343       $         60,291    
  

 

 

    

 

 

   

 

 

   

 

 

 

Fixed maturity securities:

         

Average yield *

     3.5 %         3.7      3.5      3.6 

Average tax equivalent yield *

     4.4 %         4.5      4.4      4.5 

Weighted-average life

     8.2 years             8.4 years       

Weighted-average duration

     4.7 years             5.5 years       

Weighted-average rating

     AA             AA       

 

 

* Excluding realized and unrealized gains and losses.

 

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This table summarizes our investments by type, all of which were reported at fair value, at June 30, 2014 and December 31, 2013.

 

     June 30, 2014     December 31, 2013  
    

 

        Amount        

    

 

            %             

   

 

        Amount        

    

 

            %             

 

Fixed maturity securities

          

U.S. government and government agency securities

   $ 85,627            $ 92,709         

Fixed maturity securities of states, municipalities
and political subdivisions

     965,705          14         986,486          15    

Special purpose revenue bonds of states, municipalities
and political subdivisions

     2,376,963          33         2,265,195          34    

Corporate securities

     1,199,711          17         1,225,238          18    

Residential mortgage-backed securities

     764,534          11         618,119            

Commercial mortgage-backed securities

     547,117                 504,888            

Asset-backed securities

     304,396                 182,392            

Foreign government securities

     89,138                 147,446            

Equity securities

     448,685                 517,466            

Short-term investments

     342,335                 178,753            
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $       7,124,211          100    $       6,718,692          100 
  

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2014, we held corporate fixed maturity securities issued by foreign corporations with an aggregate fair value of $484.3 million. In addition, we held securities issued by foreign governments, agencies or supranational entities with an aggregate fair value of $89.1 million. At December 31, 2013, we held $497.0 million and $147.4 million, respectively.

Our total investments increased $405.5 million in 2014, principally from a $154.7 million increase in the pretax net unrealized gain and newly generated cash flow. At June 30, 2014, the net unrealized gain on our investment portfolio was $308.7 million. The increase in the net unrealized gain was due to the decline in interest rates in 2014. Rates on 10-year U.S. Treasury notes declined 50 basis points in the first six months of 2014. The weighted-average duration of our fixed maturity securities portfolio decreased to 4.7 years at June 30, 2014 (compared to 5.1 years at December 31, 2013 and 5.5 years at June 30, 2013), primarily due to the impact of the lower market interest rates on our municipal securities with call options and structured securities with prepayment options.

In the first quarter of 2014, we sold equity securities with a book value of $142.0 million, and realized a net gain of $21.3 million, in order to reposition our overall investment portfolio. In July 2014, we sold equity securities with a book value of $197.0 million and realized a net gain of $35.2 million, which will be reported in the third quarter. Due to an increase in equity valuations in early July, we made a decision at that time to further reduce our overall equity exposure.

The ratings of our individual securities within our fixed maturity securities portfolio at June 30, 2014 were as follows:

 

             Amount                          %              

AAA

   $ 906,225          14 

AA

     3,753,885          59    

A

     1,268,221          20    

BBB

     253,753            

BB and below

     151,107            
  

 

 

    

 

 

 

Total fixed maturity securities

   $       6,333,191          100 
  

 

 

    

 

 

 

 

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Table of Contents

Corporate & Other

The following table summarizes activity in the Corporate & Other category.

 

    

Six months ended June 30,

 

      

Three months ended June 30,

 

 
             2014                      2013                        2014                      2013          

Net earned premium

   $ 620        $ 9,766          $ 329        $ 4,334    

Other revenue

     564          22            345          152    
  

 

 

    

 

 

      

 

 

    

 

 

 

Total revenue

     1,184          9,788            674          4,486    
  

 

 

    

 

 

      

 

 

    

 

 

 

Loss and loss adjustment expense, net

     (4)         8,623            249          4,028    

Other expense - Exited Lines

     1,872          2,523            919          1,184    

Other expense - Corporate

     28,207          31,138            15,236          15,773    

Interest expense

     13,861          12,843            6,800          6,457    

Foreign currency expense (benefit)

     6,677          (9,045)           2,766          1,939    
  

 

 

    

 

 

      

 

 

    

 

 

 

Total expense

     50,613          46,082            25,970          29,381    
  

 

 

    

 

 

      

 

 

    

 

 

 

Pretax loss

   $            (49,429)       $            (36,294)         $            (25,296)       $            (24,895)   
  

 

 

    

 

 

      

 

 

    

 

 

 

Net earned premium decreased year-over-year as we wrote less business due to our exiting HMO and medical excess reinsurance in late 2012. Premium related to the other products included in Exited Lines was insignificant in both periods. The loss and loss adjustment expense in 2013 related to the HMO and medical excess reinsurance products.

Our Corporate expenses not allocated to the segments decreased year-over-year, primarily due to lower compensation and benefit costs and allocation of certain stock-based compensation expense to our insurance underwriting segments beginning in 2014. The impact of foreign currency benefit/expense fluctuated period-over-period principally due to changes in the value of the British pound sterling and the Euro relative to the U.S. dollar. We hold available for sale securities denominated in non-functional currencies to economically hedge the currency exchange risk on our loss reserves denominated in non-functional currencies. The foreign currency benefit/expense related to loss reserves is recorded through the income statement, while the foreign currency benefit/expense related to available for sale securities is recorded through other comprehensive income within shareholders’ equity. This mismatch may cause fluctuations in our reported foreign currency benefit/expense in future periods.

 

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Table of Contents

Liquidity and Capital Management

We believe we have sufficient sources of liquidity at both a consolidated and insurance company legal entity level at a reasonable cost to pay claims and meet our other contractual obligations and liabilities as they become due in the short-term and long-term. Our current sources of liquidity include: 1) significant operating cash flow generated by our insurance companies, 2) our investment portfolio, most of which is held by our insurance companies, 3) our revolving loan and standby letter of credit facilities and 4) a $1.0 billion shelf registration. Our sources of liquidity are discussed below.

Cash Flow

We manage the liquidity of our insurance companies such that each subsidiary’s anticipated claims payments will be met by its own current operating cash flows, cash, short-term investments or investment maturities. Our insurance companies receive substantial cash from premiums, reinsurance recoverables, surety collateral, outward commutations, proceeds from sales and redemptions of investments, and investment income. Their principal cash outflows are for the payment of claims and loss adjustment expenses, premium payments to reinsurers, return of surety collateral, inward commutations, purchases of investments, policy acquisition costs, operating expenses, taxes and dividends paid to the parent company. We report all of the insurance companies’ investing activity in our Investing segment for segment reporting purposes. Our parent company’s principal cash inflows relate to its investment portfolio and dividends paid by the insurance companies, and its principal cash outflows relate to debt service, operating expenses, dividends paid to shareholders and common stock purchases. Cash provided by operating activities can fluctuate due to timing differences in the collection of premium receivables, reinsurance recoverables and surety collateral; the payment of losses, premium payables and return of surety collateral; and the completion of commutations.

The components of our net operating cash flows are summarized in the following table.

 

    

Six months ended June 30,

 

 
             2014                      2013          

Net earnings

   $ 205,047        $ 194,012    

Change in premium, claims and other receivables, net of reinsurance, premium and
claims payables

     (53,279)         (56,660)   

Change in unearned premium, net

     102,763          84,727    

Change in loss and loss adjustment expense payable, net of reinsurance recoverables

     39,652          35,008    

Change in accounts payable and accrued liabilities

     (69,414)         (119,103)   

Gain on investments

     (25,151)         (13,193)   

Other, net

     (4,332)         (22,801)   
  

 

 

    

 

 

 

Cash provided by operating activities

   $       195,286        $       101,990    
  

 

 

    

 

 

 

Our cash provided by operating activities was $195.3 million in the first six months of 2014, compared to $102.0 million in the same period of 2013. Cash provided by operating activities includes collateral funds we receive or refund for our U.S. surety business, for which we record a liability within accounts payable and accrued liabilities. We refunded U.S. surety collateral of $16.1 million in 2014 and $74.3 million in 2013. In addition, we paid $70.4 million of income tax payments in 2014, compared to $99.9 million in 2013. Other fluctuations in our cash provided by operating activities relate to the timing of the collection and the payment of insurance-related receivables and payables.

The net impact of our payment of claims and collection of recoverables related to Spanish surety bonds is expected to impact our cash provided by operating activities in future periods, although the amount and timing of such payments and receipts are not determinable at this time.

 

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Table of Contents

Investments

At June 30, 2014, we held a $7.1 billion investment portfolio, which included $342.3 million of liquid short-term investments. Our fixed maturity and equity securities portfolios are classified as available for sale. We expect to hold our fixed maturity securities until maturity, but we would be able to sell these securities, as well as our equity securities, to generate cash if needed. The parent company held $629.5 million of cash and investments at June 30, 2014, which are available to cover the holding company’s required cash disbursements.

Revolving Loan and Standby Letter of Credit Facilities

At June 30, 2014, we maintained an $825.0 million Revolving Loan Facility (Facility) with $384.1 million of available capacity. During the past several years, we used the Facility to fund purchases of our common stock. We expect to continue to use the Facility to opportunistically repurchase stock in 2014. We also have a $90.0 million Standby Letter of Credit Facility (Standby Facility) that is used to guarantee our performance in our Lloyd’s of London syndicate. The Facility expires in April 2019 and the Standby Facility expires in December 2017. See Note 7, “Notes Payable” to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 for additional information related to the Facility, the Standby Facility and our long-term debt.

Share Purchases

In 2012, the Board approved a $300.0 million stock purchase plan (the Plan). Purchases under the Plan may be made in the open market or in privately negotiated transactions from time-to-time in compliance with applicable laws, rules and regulations, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Purchases under the Plan will be made subject to market and business conditions, the level of cash generated from our operations, cash required for acquisitions, our debt covenant compliance, and other relevant factors. The Plan does not obligate us to purchase any particular number of shares, has no expiration date, and may be suspended or discontinued at any time at the Board’s discretion. As of July 25, 2014, $164.7 million of repurchase authority remains under the Plan.

We purchased our common stock in 2014 and 2013 as follows:

 

    

Six months ended June 30,

 

      

Three months ended June 30,

 

 
                 2014                              2013                                2014                              2013              

Shares of common stock

     961          1,024            225          290    

Total cost

   $     41,542        $     40,929          $     10,129        $     12,160    

Weighted-average cost per share

   $ 43.21        $ 39.96          $ 44.98        $ 41.94    

Shelf Registration

We have a “Universal Shelf” registration statement that expires in March 2015. The Universal Shelf provides for the issuance of $1.0 billion of securities, which may be debt securities, equity securities, or a combination thereof. The Universal Shelf provides us the means to access the debt and equity markets relatively quickly, if we are satisfied with the current pricing in the financial markets.

Recent Accounting Guidance

See Note 1, “General Information — Recent Accounting Guidance” to the Consolidated Financial Statements for a description of recently issued accounting guidance that will impact our consolidated financial statements in future periods.

Critical Accounting Policies

We provided information about our critical accounting policies in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies”, in our Annual Report on Form 10-K for the year ended December 31, 2013. We have made no changes in the identification or methods of application of these policies.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Act)) that are designed to ensure that required information is recorded, processed, summarized and reported within the required timeframe, as specified in rules set forth by the Securities and Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosures.

Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2014 using criteria established in the Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective in providing reasonable assurance of achieving the purposes described in Rule 13a-15(e) under the Act as of June 30, 2014.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II — Other Information

Item 1. Legal Proceedings

We are a party to lawsuits, arbitrations and other proceedings that arise in the normal course of our business. Many of such lawsuits, arbitrations and other proceedings involve claims under policies that we underwrite as an insurer or reinsurer, the liabilities for which, we believe, have been adequately included in our loss reserves. Also, from time to time, we are a party to lawsuits, arbitrations and other proceedings that relate to disputes with third parties, or that involve alleged errors and omissions on the part of our subsidiaries. We have provided accruals for these items to the extent we deem the losses probable and reasonably estimable. Although the ultimate outcome of these matters cannot be determined at this time, based on present information, the availability of insurance coverage and advice received from our outside legal counsel, we believe the resolution of any such matters will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes in the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In 2012, the Board approved the purchase of up to $300.0 million of our common stock (the Plan). Purchases under the Plan may be made in the open market or in privately negotiated transactions from time-to-time in compliance with applicable laws, rules and regulations, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Purchases under the Plan will be made, subject to market and business conditions, the level of cash generated from our operations, cash required for acquisitions, our debt covenant compliance, and other relevant factors. The Plan does not obligate us to purchase any particular number of shares, has no expiration date, and may be suspended or discontinued at any time at the Board’s discretion. Our purchases in the second quarter of 2014 were as follows:

 

Period                

        Total number of      
      shares purchased       
          Average price        
         paid per share        
        Total number of shares      
purchased as part of
publicly announced
plans or programs
  Approximate dollar
        value of shares that may        
yet be purchased under

the plans or programs
April   184,462   $44.77   184,462   $167,901,624
May     40,741   $45.94     40,741   $166,029,942
June              -             -              -   $166,029,942

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit
Number

        
3.1      Restated Certificate of Incorporation and Amendment of Certificate of Incorporation of HCC Insurance Holdings, Inc., filed with Delaware Secretary of State on July 23, 1996 and May 21, 1998, respectively (incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8 (Registration No. 333-61687) filed on August 17, 1998).
3.2      Fourth Amended and Restated Bylaws of HCC Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on August 22, 2013).
4.1      Indenture, dated August 23, 2001, between HCC Insurance Holdings, Inc. and First Union National Bank related to Debt Securities (Senior Debt) (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed on August 24, 2001).
4.2      Form of Fourth Supplemental Indenture, dated November 16, 2009, between HCC Insurance Holdings, Inc. and U.S. Bank National Association related to 6.30% Senior Notes due 2019 (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed on November 13, 2009).
10.1      Third Amendment to Loan Agreement, dated April 30, 2014, among HCC Insurance Holdings, Inc., Wells Fargo Bank, National Association, as Administrative Agent, Barclays Bank PLC and KeyBank National Association, as Co-Syndication Agents, Bank of America, N.A., BMO Harris Bank, N.A., JPMorgan Chase Bank, N.A., The Royal Bank of Scotland PLC and U.S. Bank National Association, as Co-Documentation Agents, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 1, 2014).
12  

   Statement Regarding Computation of Ratios.
31.1  

   Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2  

   Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1  

   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101  

   The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 formatted in XBRL: 1) Consolidated Balance Sheets, 2) Consolidated Statements of Earnings, 3) Consolidated Statements of Comprehensive Income, 4) Consolidated Statement of Changes in Shareholders’ Equity, 5) Consolidated Statements of Cash Flows and 6) Notes to Consolidated Financial Statements.

 

 

    Filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.