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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 September 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 October 24, 2014, there were approximately 96.8 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 — September 30, 2014 and December 31, 2013

   5

Consolidated Statements of Earnings — Nine and three months ended September 30, 2014 and 2013

   6

Consolidated Statements of Comprehensive Income — Nine and three months ended September  30, 2014 and 2013

   7

Consolidated Statement of Changes in Shareholders’ Equity — Nine months ended September 30, 2014

   8

Consolidated Statements of Cash Flows — Nine months ended September 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

   26

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   44

Item 4. Controls and Procedures

   44

Part II. OTHER INFORMATION

  

Item 1. Legal Proceedings

   45

Item 1A. Risk Factors

   45

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

   45

Item 3. Defaults Upon Senior Securities

   45

Item 4. Mine Safety Disclosures

   45

Item 5. Other Information

   45

Item 6. Exhibits

   46

Signatures

   47

 

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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)

 

           September 30,      

 

2014

         December 31,    

 

2013

 
ASSETS      

Investments

     

Fixed maturity securities – available for sale, at fair value (amortized cost: 2014 – $6,339,054 and 2013 – $5,921,487)

   $ 6,576,541        $ 6,022,473    

Equity securities – available for sale, at fair value (cost: 2014 – $280,663
and 2013 – $464,388)

     286,194          517,466    

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

     250,867          178,753    
  

 

 

    

 

 

 

Total investments

     7,113,602          6,718,692    
  

 

 

    

 

 

 

Cash

     70,817          58,301    

Restricted cash and securities

     131,516          125,777    

Premium, claims and other receivables

     650,751          580,107    

Reinsurance recoverables

     1,194,034          1,277,257    

Ceded unearned premium

     330,224          305,438    

Ceded life and annuity benefits

     50,114          56,491    

Deferred policy acquisition costs

     230,350          201,698    

Goodwill

     899,148          895,200    

Other assets

     147,419          125,559    
  

 

 

    

 

 

 

Total assets

   $ 10,817,975        $ 10,344,520    
  

 

 

    

 

 

 
LIABILITIES      

Loss and loss adjustment expense payable

   $ 3,776,924        $ 3,902,132    

Life and annuity policy benefits

     50,114          56,491    

Reinsurance, premium and claims payable

     375,299          332,985    

Unearned premium

     1,263,307          1,134,849    

Deferred ceding commissions

     97,276          89,528    

Notes payable

     744,213          654,098    

Accounts payable and accrued liabilities

     620,177          500,007    
  

 

 

    

 

 

 

Total liabilities

     6,927,310          6,670,090    
  

 

 

    

 

 

 
SHAREHOLDERS’ EQUITY      

Common stock, $1.00 par value; 250,000 shares authorized (shares issued: 2014 –
126,371 and 2013 – 125,577; outstanding: 2014 – 98,162 and 2013 – 100,336)

     126,371          125,577    

Additional paid-in capital

     1,103,774          1,073,105    

Retained earnings

     3,356,841          3,085,501    

Accumulated other comprehensive income

     170,632          118,651    

Treasury stock, at cost (shares: 2014 – 28,209 and 2013 – 25,241)

     (866,953)         (728,404)   
  

 

 

    

 

 

 

Total shareholders’ equity

     3,890,665          3,674,430    
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 10,817,975        $ 10,344,520    
  

 

 

    

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statements of Earnings

(unaudited, in thousands except per share data)

 

    

Nine months ended September 30,

 

    

Three months ended September 30,

 

 
               2014                          2013                          2014                          2013            

REVENUE

           

Net earned premium

   $       1,721,795        $       1,679,210        $       586,935        $       556,668    

Net investment income

     167,480          165,641          54,236          54,208    

Other operating income

     28,732          24,308          9,483          7,679    

Net realized investment gain

     64,535          31,115          39,384          17,922    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

     1,982,542          1,900,274          690,038          636,477    
  

 

 

    

 

 

    

 

 

    

 

 

 

EXPENSE

           

Loss and loss adjustment expense, net

     960,875          992,547          311,937          320,376    

Policy acquisition costs, net

     218,221          203,387          76,210          65,642    

Other operating expense

     285,299          268,357          90,344          103,785    

Interest expense

     20,874          19,656          6,890          6,574    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expense

     1,485,269          1,483,947          485,381          496,377    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings before income tax expense

     497,273          416,327          204,657          140,100    

Income tax expense

     151,959          124,140          64,390          41,925    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings

   $ 345,314        $ 292,187        $ 140,267        $ 98,175    
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

           

Basic

   $ 3.45        $ 2.91        $ 1.41        $ 0.98    
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 3.45        $ 2.90        $ 1.41        $ 0.98    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited, in thousands)

 

    

Nine months ended September 30,

 

    

Three months ended September 30,

 

 
                 2014                              2013                              2014                              2013              

Net earnings

     $          345,314          $          292,187          $          140,267         $          98,175    

Other comprehensive income (loss)

           

Investment gains (losses):

           

Investment gains (losses) during the period

     153,489          (232,481)         (26,336)         14,948    

Income tax charge (benefit)

     54,351          (82,526)         (9,467)         4,917    
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment gains (losses), net of tax

     99,138          (149,955)         (16,869)         10,031    
  

 

 

    

 

 

    

 

 

    

 

 

 

Less reclassification adjustments to:

           

Net realized investment gain

     64,535          31,115          39,384          17,922    

Income tax expense

     22,587          10,890          13,784          6,272    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total reclassifications included in net earnings,
net of tax

     41,948          20,225          25,600          11,650    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net unrealized investment gains (losses)

     57,190          (170,180)         (42,469)         (1,619)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency translation adjustment

     (5,368)         4,265          (7,059)         5,410    

Income tax charge (benefit)

     (159)         (646)         262          (92)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency translation adjustment, net of tax

     (5,209)         4,911          (7,321)         5,502    
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     51,981          (165,269)         (49,790)         3,883    
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 397,295        $ 126,918        $ 90,477        $ 102,058    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

Nine months ended September 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

                     345,314                          345,314    

Other comprehensive income

                             51,981                  51,981    

Issuance of 363 shares for exercise of options, including tax effect

     363          12,275                                  12,638    

Issuance of 92 shares for employee stock purchase plan

     92          3,347                                  3,439    

Purchase of 2,968 common shares

                                     (138,549)         (138,549)   

Stock-based compensation

     339          15,047                                  15,386    

Cash dividends declared, $0.745 per share

                     (73,974)                         (73,974)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2014

   $   126,371        $    1,103,774        $    3,356,841        $    170,632        $   (866,953)       $   3,890,665    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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)

 

    

Nine months ended September 30,

 

 
              2014                        2013           

Operating activities

     

Net earnings

   $ 345,314        $ 292,187    

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

     

Change in premium, claims and other receivables

     (56,631)         (52,395)   

Change in reinsurance recoverables

     60,074          (138,103)   

Change in ceded unearned premium

     (25,071)         (44,809)   

Change in loss and loss adjustment expense payable

     (95,341)         241,126    

Change in unearned premium

     129,226          95,395    

Change in reinsurance, premium and claims payable

     44,117          21,516    

Change in accounts payable and accrued liabilities

     (43,608)         (145,740)   

Stock-based compensation expense

     18,718          10,100    

Depreciation and amortization expense

     12,476          13,962    

Gain on investments

     (64,535)         (31,115)   

Other, net

     35,625          9,288    
  

 

 

    

 

 

 

Cash provided by operating activities

     360,364          271,412    
  

 

 

    

 

 

 

Investing activities

     

Sales of available for sale fixed maturity securities

     314,424          337,895    

Sales of equity securities

     436,126          95,989    

Sales of other investments

             23,719    

Maturity or call of available for sale fixed maturity securities

     413,290          488,817    

Cost of available for sale fixed maturity securities acquired

     (1,159,975)         (1,109,233)   

Cost of equity securities acquired

     (191,639)         (226,601)   

Change in short-term investments

     (79,714)         134,515    

Payments for purchase of businesses, net of cash received

     (7,003)         (8,214)   

Proceeds from sales of subsidiaries

     16,589          1,327    

Other, net

     (5,051)         (6,575)   
  

 

 

    

 

 

 

Cash used by investing activities

     (262,953)         (268,361)   
  

 

 

    

 

 

 

Financing activities

     

Advances on line of credit

     195,000          130,000    

Payments on line of credit

     (105,000)         (60,000)   

Sale of common stock

     16,077          8,725    

Purchase of common stock

     (126,226)         (47,869)   

Dividends paid

     (67,564)         (49,773)   

Other, net

     2,818          (487)   
  

 

 

    

 

 

 

Cash used by financing activities

     (84,895)         (19,404)   
  

 

 

    

 

 

 

Net increase (decrease) in cash

     12,516          (16,353)   

Cash at beginning of year

     58,301          71,390    
  

 

 

    

 

 

 

Cash at end of period

   $ 70,817        $ 55,037    
  

 

 

    

 

 

 

 

 

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

We conducted our 2014 goodwill impairment test as of June 30, 2014, which is consistent with the timeframe for our annual assessment in prior years. Based on our latest assessment, the fair value of each reporting unit exceeded its carrying amount.

Recent Accounting Guidance

A new accounting standard issued in 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.

Acquisition

On September 29, 2014, we executed a definitive purchase agreement to acquire all of the capital stock of Producers Ag Insurance Group, Inc. (ProAg) for $110.0 million cash, subject to a net worth adjustment at closing as described in the purchase agreement. The transaction is expected to close in early 2015 following the necessary regulatory approvals. ProAg writes multi-peril crop, crop hail, named peril and livestock insurance.

 

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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         

September 30, 2014

           

U.S. government and government agency securities

   $ 66,347        $ 1,063        $ (263)       $ 67,147    

Fixed maturity securities of states, municipalities
and political subdivisions

     919,617          59,857          (497)         978,977    

Special purpose revenue bonds of states, municipalities
and political subdivisions

     2,272,817          134,571          (3,119)         2,404,269    

Corporate securities

     1,234,819          37,584          (9,535)         1,262,868    

Residential mortgage-backed securities

     827,975          16,893          (9,770)         835,098    

Commercial mortgage-backed securities

     603,859          16,567          (5,405)         615,021    

Asset-backed securities

     329,358          365          (1,752)         327,971    

Foreign government securities

     84,262          1,932          (1,004)         85,190    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

   $      6,339,054        $          268,832        $          (31,345)       $      6,576,541    
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

   $ 280,663        $ 16,731        $ (11,200)       $ 286,194    
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

September 30, 2014

                 

Fixed maturity securities

                 

U.S. government and government agency securities

   $ 15,675        $ (30)       $ 11,129        $ (233)       $ 26,804        $ (263)   

Fixed maturity securities of states, municipalities and political subdivisions

     12,500          (81)         29,505          (416)         42,005          (497)   

Special purpose revenue bonds of states, municipalities and political subdivisions

     26,622          (104)         176,961          (3,015)         203,583          (3,119)   

Corporate securities

     357,022          (4,672)         96,757          (4,863)         453,779          (9,535)   

Residential mortgage-backed securities

     179,700          (917)         253,192          (8,853)         432,892          (9,770)   

Commercial mortgage-backed securities

     110,383          (840)         144,183          (4,565)         254,566          (5,405)   

Asset-backed securities

     148,445          (863)         51,313          (889)         199,758          (1,752)   

Foreign government securities

     29,089          (924)         7,162          (80)         36,251          (1,004)   

Equity securities

     123,984          (10,217)         4,406          (983)         128,390          (11,200)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,003,420        $ (18,648)       $ 774,608        $ (23,897)       $ 1,778,028       $ (42,545)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2014, we held approximately 2,860 fixed maturity and equity securities, of which 28% 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 $42.5 million of gross unrealized losses in our portfolio at September 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 nine months of 2014 and 2013.

The amortized cost and fair value of our fixed maturity securities at September 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 5.6 years at September 30, 2014.

 

                                                                       
                 Cost or
  amortized cost  
            Fair value         

Due in 1 year or less

       $ 176,344        $ 179,920    

Due after 1 year through 5 years

         1,066,029          1,101,193    

Due after 5 years through 10 years

         1,353,043          1,429,453    

Due after 10 years through 15 years

         944,332          1,001,521    

Due after 15 years

         1,038,114          1,086,364    
      

 

 

    

 

 

 

Securities with contractual maturities

         4,577,862          4,798,451    

Mortgage-backed and asset-backed securities

         1,761,192          1,778,090    
      

 

 

    

 

 

 

Total fixed maturity securities

       $       6,339,054        $       6,576,541    
      

 

 

    

 

 

 

 

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

 

  

    Nine months ended September 30,      Three months ended September 30,  
   

 

            2014             

   

 

            2013             

    

 

            2014             

    

 

            2013             

 

Gains

         

Fixed maturity securities

  $ 7,634       $ 15,848        $ 1,484        $ 11,709    

Equity securities

    68,590         12,932          42,727          6,943    

Other investments

           5,345                    
 

 

 

   

 

 

    

 

 

    

 

 

 

Total gains

    76,224         34,125          44,211          18,652    
 

 

 

   

 

 

    

 

 

    

 

 

 

Losses

         

Fixed maturity securities

    (4,889)        (994)         (1,201)           

Equity securities

    (6,800)        (2,016)         (3,626)         (730)   
 

 

 

   

 

 

    

 

 

    

 

 

 

Total losses

    (11,689)        (3,010)         (4,827)         (730)   
 

 

 

   

 

 

    

 

 

    

 

 

 

Net

         

Fixed maturity securities

    2,745         14,854          283          11,709    

Equity securities

    61,790         10,916          39,101          6,213    

Other investments

           5,345                    
 

 

 

   

 

 

    

 

 

    

 

 

 

Net realized investment gain

  $           64,535       $           31,115        $           39,384        $           17,922    
 

 

 

   

 

 

    

 

 

    

 

 

 

 

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 September 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 liabilities for future earnout payments due to former owners of businesses we acquired, which are 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            

September 30, 2014

       

Fixed maturity securities

       

U.S. government and government agency securities

  $ 59,796       $ 7,351       $      $ 67,147    

Fixed maturity securities of states, municipalities
and political subdivisions

           978,977                978,977    

Special purpose revenue bonds of states, municipalities

    and political subdivisions

           2,404,269                2,404,269    

Corporate securities

           1,262,719         149         1,262,868    

Residential mortgage-backed securities

           835,098                835,098    

Commercial mortgage-backed securities

           615,021                615,021    

Asset-backed securities

           327,971                327,971    

Foreign government securities

           85,190                85,190    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    59,796         6,516,596         149         6,576,541    

Equity securities

    286,194                       286,194    

Short-term investments*

    107,702         143,165                250,867    

Restricted cash and securities

           2,348                2,348    

Premium, claims and other receivables

           59,736                59,736    

Other assets

    19                1,201         1,220    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets measured at fair value

  $          453,711       $       6,721,845       $              1,350       $       7,176,906    
 

 

 

   

 

 

   

 

 

   

 

 

 

Notes payable*

  $      $ 793,162       $      $ 793,162    

Accounts payable and accrued liabilities - earnout liabilities

           2,348         9,039         11,387    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities measured at fair value

  $      $ 795,510       $ 9,039       $ 804,549    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

 

* 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 nine 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.

 

                                                                       
    Nine months ended September 30,     Three months ended September 30,  
   

 

            2014             

   

 

            2013             

   

 

            2014             

   

 

            2013             

 

Direct written premium

  $       2,033,094       $       1,911,619       $          663,343       $          616,938    

Reinsurance assumed

    277,171         296,942         67,471         61,975    

Reinsurance ceded

    (487,875)        (478,609)        (145,620)        (157,179)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net written premium

  $ 1,822,390       $ 1,729,952       $ 585,194       $ 521,734    
 

 

 

   

 

 

   

 

 

   

 

 

 

Direct earned premium

  $ 1,952,997       $ 1,860,093       $ 664,002       $ 622,464    

Reinsurance assumed

    231,599         252,902         79,258         81,594    

Reinsurance ceded

    (462,801)        (433,785)        (156,325)        (147,390)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earned premium

  $ 1,721,795       $ 1,679,210       $ 586,935       $ 556,668    
 

 

 

   

 

 

   

 

 

   

 

 

 

Direct loss and loss adjustment expense

  $ 1,139,471       $ 1,210,862       $ 413,560       $ 517,382    

Reinsurance assumed

    80,267         119,315         16,993         8,607    

Reinsurance ceded

    (258,863)        (337,630)        (118,616)        (205,613)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and loss adjustment expense

  $ 960,875       $ 992,547       $ 311,937       $ 320,376    
 

 

 

   

 

 

   

 

 

   

 

 

 

Policy acquisition costs

  $ 331,985       $ 309,285       $ 116,775       $ 105,254    

Ceding commissions

    (113,764)        (105,898)        (40,565)        (39,612)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net policy acquisition costs

  $ 218,221       $ 203,387       $ 76,210       $ 65,642    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

  

                September 30,     December 31,  
               

 

2014

   

 

2013

 

Reinsurance recoverable on paid losses

      $ 108,186       $ 156,026    

Reinsurance recoverable on outstanding losses

        454,046         459,134    

Reinsurance recoverable on incurred but not reported losses

        633,302         663,597    

Reserve for uncollectible reinsurance

        (1,500)        (1,500)   
     

 

 

   

 

 

 

Total reinsurance recoverables

      $ 1,194,034       $ 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.

 

                             
    September 30,     December 31,  
   

 

            2014             

   

 

            2013             

 

Payables to reinsurers

  $ 195,643       $ 208,850    

Letters of credit

    83,320         100,529    

Funds held in trust

    133,282         88,310    
 

 

 

   

 

 

 

Total credits

  $          412,245       $          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).

 

                                                                   
    Nine months ended September 30,     Three months ended September 30,  
   

 

            2014             

   

 

            2013             

   

 

            2014             

   

 

            2013             

 

Reserves at beginning of period

  $ 3,902,132       $ 3,767,850       $ 3,841,497       $ 3,814,684    

Less reinsurance recoverables on reserves

    1,122,731         1,018,047         1,081,249         1,003,663    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net reserves at beginning of period

    2,779,401         2,749,803         2,760,248         2,811,021    

Net loss and loss adjustment expense

    960,875         992,547         311,937         320,376    

Net loss and loss adjustment expense payments

    (1,024,673)        (884,022)        (350,603)        (297,696)   

Foreign currency adjustment

    (26,027)        (2,296)        (32,006)        22,331    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net reserves at end of period

    2,689,576         2,856,032         2,689,576         2,856,032    

Plus reinsurance recoverables on reserves

    1,087,348         1,165,815         1,087,348         1,165,815    
 

 

 

   

 

 

   

 

 

   

 

 

 

Reserves at end of period

  $       3,776,924       $       4,021,847       $       3,776,924       $       4,021,847    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

The table below details our loss and loss adjustment expense on a consolidated basis, as well as the net (favorable) adverse loss development by segment.

 

   

    Nine months ended September 30,     Three months ended September 30,  
   

 

            2014             

   

 

            2013             

   

 

            2014             

   

 

            2013             

 

Net (favorable) adverse loss development

       

U.S. Property & Casualty

  $ (40,307)      $ (40,754)      $ (40,307)      $ (40,754)   

Professional Liability

    (978)        (26,284)        (978)        (26,284)   

U.S. Surety & Credit

           (9,492)                 

International

    15,685         36,896         15,685         39,196    

Exited Lines

    (5,051)               (5,051)          
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net favorable loss development

    (30,651)        (39,634)        (30,651)        (27,842)   

Accident year catastrophe losses

    15,886         48,055         5,531         18,134    

All other net loss and loss adjustment expense

    975,640         984,126         337,057         330,084    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and loss adjustment expense

  $       960,875       $       992,547       $       311,937       $       320,376    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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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)

 

In the third quarter of 2014 and 2013, we conducted our annual review of the reserves in our U.S. Property & Casualty, Professional Liability and International segments. Based on these annual reviews, we recognized net favorable loss development of $30.7 million and $27.8 million, respectively. These amounts included favorable development of $5.1 million and $5.0 million, respectively from the release of prior years’ catastrophe reserves. In the second quarter of 2013, we conducted a limited review of our U.S. Surety & Credit reserves and recognized favorable development of $9.5 million. We also released $2.3 million of prior years’ catastrophe reserves in the International segment. The primary drivers of development in the respective periods by segment are described below.

U.S. Property & Casualty

In the third quarter of 2014, net favorable loss development of $40.3 million was due to better than expected loss experience, primarily in underwriting years 2012 and prior, compared to the same review conducted in the third quarter of 2013. The majority of the development related to our liability business ($20.7 million), our aviation business ($6.6 million) and a run-off assumed quota share contract ($5.0 million).

In 2013, net favorable development of $40.8 million was due to better than expected loss experience, primarily in underwriting years 2011 and prior, compared to the same review in the third quarter of 2012. This amount included $17.0 million of favorable development related to the run-off assumed quota share contract, which we wrote from 2003 – 2008, for which expected ultimate losses have continued to decline over the past three years.

Professional Liability

In the third quarter of 2014, we recognized minimal loss development based on our annual review of reserves.

In 2013, net favorable development of $26.3 million was due to better than expected loss experience, compared to the same review conducted in the third quarter of 2012. This development included reserve releases related to underwriting years prior to 2007 as well as 2009 and 2010 (totaling $64.2 million), partially offset by reserve strengthening of $37.9 million in underwriting years 2007 and 2008, which were impacted by the worldwide financial crisis.

U.S. Surety & Credit

We recognized no loss development in 2014.

In the second quarter of 2013, we recognized favorable development of $9.5 million. Our review of reserves at that time indicated better experience than our actuarial expectations compared to the prior year review conducted in the fourth quarter of 2012. 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.

International

In the third quarter of 2014, the segment’s $15.7 million net adverse loss development related to $43.5 million of adverse development for the surety & credit line of business, partially offset by $23.2 million of net favorable loss development in various lines of business and a $4.6 million reduction of prior years’ catastrophe reserves. We increased our reserves on a specific class of Spanish surety bonds to reflect our revised estimates of our liability under these bonds in light of our settlement of a large majority of the outstanding claims during the third quarter of 2014. The favorable development primarily related to our energy, property treaty and liability lines of business, which had better than expected loss experience in underwriting years 2013 and prior, compared to our review conducted in the same quarter of 2013. The net favorable development related to catastrophe reserves was primarily due to reserve releases for the 2013 European floods ($6.0 million), partially offset by reserve increases for the 2011 Denmark storms ($1.5 million).

 

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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)

 

In the third quarter of 2013, net adverse development of $39.2 million was due to $70.3 million of adverse development in the surety & credit line of business, partially offset by net favorable development in several other lines of business, primarily energy and liability. For surety & credit, we increased our reserves on the Spanish surety bonds discussed above. The increase was made to reflect our revised estimates of our liability under these bonds in light of an adverse Spanish Supreme Court ruling published in September 2013 against an unaffiliated insurance company with respect to a surety bond similar to ours. We recognized net favorable development in our energy ($10.1 million) and U.K. professional liability ($16.1 million) products based on better than expected loss experience, primarily in underwriting years 2011 and prior. In addition, we recognized $3.4 million of favorable development from the release of 2012 catastrophe reserves for Superstorm Sandy, due to lower than expected losses.

In the second quarter of 2013, we recognized $2.3 million of favorable development on prior years’ catastrophe reserves, due to settlement of the remaining claims related to the 2010 New Zealand earthquake.

(6) Notes Payable

Our notes payable consisted of the following:

 

                                            
        September 30,     December 31,  
       

 

2014

   

 

2013

 

6.30% Senior Notes

    $ 299,213       $ 299,098    

Revolving Loan Facility

      445,000         355,000    
   

 

 

   

 

 

 

Total notes payable

    $          744,213       $          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 September 30, 2014 was 1.4%. The borrowings and letters of credit issued under the Facility reduced our available borrowing capacity on the Facility to $374.1 million at September 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 September 30, 2014.

 

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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)

 

(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
 

Nine months ended September 30, 2014

     

Balance at December 31, 2013

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

Other comprehensive income (loss)

    57,190         (5,209)        51,981    
 

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

  $ 157,150       $ 13,482       $ 170,632    
 

 

 

   

 

 

   

 

 

 

Three months ended September 30, 2014

     

Balance at June 30, 2014

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

Other comprehensive loss

    (42,469)        (7,321)        (49,790)   
 

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

  $          157,150       $            13,482       $        170,632    
 

 

 

   

 

 

   

 

 

 

(8) Earnings Per Share

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

 

   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                             2013              

Net earnings

  $         345,314       $         292,187       $           140,267       $           98,175    

Less: net earnings attributable to unvested restricted stock

    (5,610)        (4,754)        (2,328)        (1,527)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings available to common stock

  $ 339,704       $ 287,433       $ 137,939       $ 96,648    
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding

    98,340         98,881         97,909         98,723    

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

    238         254         225         270    
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares and potential common shares outstanding

    98,578         99,135         98,134         98,993    
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share

       

Basic

  $ 3.45       $ 2.91       $ 1.41       $ 0.98    
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 3.45       $ 2.90       $ 1.41       $ 0.98    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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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)

 

(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

    355               43.92                 15,603               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.

(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.

 

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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)

 

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   

Nine months ended September 30, 2014

               

Net earned premium

  $ 271,718       $ 261,457       $ 723,051       $ 148,496       $ 316,591       $      $ 482       $ 1,721,795    

Other revenue

    14,933         800         7,865         1,576         2,745         232,015         813         260,747    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    286,651         262,257         730,916         150,072         319,336         232,015         1,295         1,982,542    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss and LAE

    106,442         154,172         519,497         43,108         142,809                (5,153)        960,875    

Other expense

    86,807         49,533         114,855         82,052         128,080                63,067         524,394    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    193,249         203,705         634,352         125,160         270,889                57,914         1,485,269    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings (loss)

  $ 93,402       $ 58,552       $ 96,564       $ 24,912       $ 48,447       $ 232,015       $ (56,619)      $ 497,273    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine months ended September 30, 2013

               

Net earned premium

  $ 276,647       $ 277,662       $ 657,995       $ 144,673       $ 311,261       $      $ 10,972       $ 1,679,210    

Other revenue

    16,198         304         3,736         1,027         2,790         196,756         253         221,064    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    292,845         277,966         661,731         145,700         314,051         196,756         11,225         1,900,274    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss and LAE

    121,060         141,921         483,709         32,287         204,137                9,433         992,547    

Other expense

    84,801         46,781         97,414         80,182         114,534                67,688         491,400    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    205,861         188,702         581,123         112,469         318,671                77,121         1,483,947    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings (loss)

  $ 86,984       $ 89,264       $ 80,608       $ 33,231       $ (4,620)      $ 196,756       $ (65,896)      $ 416,327    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended September 30, 2014

               

Net earned premium

  $ 86,130       $ 87,880       $ 250,570       $ 51,362       $ 111,131       $      $ (138)      $ 586,935    

Other revenue

    4,987         330         2,363         708         846         93,620         249         103,103    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    91,117         88,210         252,933         52,070         111,977         93,620         111         690,038    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss and LAE

    13,054         50,851         178,202         14,550         60,429                (5,149)        311,937    

Other expense

    28,659         14,988         40,601         28,645         48,101                12,450         173,444    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    41,713         65,839         218,803         43,195         108,530                7,301         485,381    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings (loss)

  $ 49,404       $ 22,371       $ 34,130       $ 8,875       $ 3,447       $ 93,620       $ (7,190)      $ 204,657    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended September 30, 2013

               

Net earned premium

  $ 91,684       $ 92,439       $ 223,048       $ 47,442       $ 100,849       $      $ 1,206       $ 556,668    

Other revenue

    4,769         (21)        1,406         406         888         72,130         231         79,809    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    96,453         92,418         224,454         47,848         101,737         72,130         1,437         636,477    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss and LAE

    13,666         30,100         163,143         13,436         99,221                810         320,376    

Other expense

    32,044         10,909         33,705         26,501         42,613                30,229         176,001    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    45,710         41,009         196,848         39,937         141,834                31,039         496,377    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings (loss)

  $ 50,743       $ 51,409       $ 27,606       $ 7,911       $ (40,097)      $ 72,130       $ (29,602)      $ 140,100    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

 

In the first nine months and third quarter of 2013, the Professional Liability segment pretax earnings included net favorable loss development of $26.3 million. In the first nine months and third quarter of 2014, the International segment pretax income included adverse development of $43.5 million related to strengthening reserves for Spanish surety bonds, compared to $70.3 million in the same periods of 2013.

(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 nine months of 2014, we recognized accident year net catastrophe losses, after reinsurance and reinstatement premium, of $14.3 million related to various small catastrophes. We recognized $44.5 million in the first nine months of 2013, primarily due to European floods, German hail storms 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.

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.

 

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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)

 

(12) Supplemental Information

Supplemental cash flow information was as follows:

 

    

Nine months ended September 30,

 

    

Three months ended September 30,

 

 
                 2014                              2013                              2014                              2013              

Income taxes paid

   $           95,678        $           126,295        $           25,265        $           26,354    

Interest paid

     16,758          14,808          1,774          1,486    

Proceeds from sales of available for sale fixed maturity securities

     314,424          337,895          27,581          166,094    

Proceeds from sales of equity securities

     436,126          95,989          265,944          51,681    

Dividends declared but not paid at end of period

     28,985          22,540          

Purchases of common stock not paid at end of period

     12,323                  

 

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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 September 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 $49.79 on October 24, 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 nine months and quarter ended September 30, 2014 were as follows:

 

    

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                 2014                             2013                             2014                             2013              

Net earnings

   $          345,314       $          292,187       $           140,267       $           98,175    
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per diluted share

   $ 3.45       $ 2.90       $ 1.41       $ 0.98    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

     55.8      59.1      53.1      57.6 

Expense ratio

     26.4         25.0         27.0         25.9    
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     82.2      84.1      80.1      83.5 
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

    We had consolidated shareholders’ equity of $3.9 billion, with book value per share of $39.64 .

 

    We produced total revenue of $2.0 billion and $690.0 million in the first nine months and third quarter, respectively.

 

    We purchased $138.5 million of our common stock at an average cost of $46.69 per share in the first nine months.

 

    We declared dividends of $0.745 per share and paid $67.6 million of dividends in the first nine months.

 

    Our debt to total capital ratio was 16.1%.

 

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Comparisons in the following sections refer to the first nine 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.

 

   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                             2013              

U.S. Property & Casualty

  $ 524,682       $ 534,509       $ 167,395       $ 176,121    

Professional Liability

    371,402         371,184         125,472         124,791    

Accident & Health

    746,346         652,782         259,870         222,312    

U.S. Surety & Credit

    173,674         169,805         60,977         58,367    

International

    493,781         469,324         117,340         96,131    

Exited Lines

    380         10,957         (240)        1,191    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 2,310,265       $ 2,208,561       $ 730,814       $ 678,913    
 

 

 

   

 

 

   

 

 

   

 

 

 

U.S. Property & Casualty

  $ 288,706       $ 307,893       $ 103,321       $ 99,024    

Professional Liability

    246,917         247,183         83,112         83,422    

Accident & Health

    741,752         651,860         257,991         221,992    

U.S. Surety & Credit

    152,417         147,976         54,359         49,848    

International

    392,116         364,068         86,549         66,242    

Exited Lines

    482         10,972         (138)        1,206    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net written premium

  $ 1,822,390       $ 1,729,952       $ 585,194       $ 521,734    
 

 

 

   

 

 

   

 

 

   

 

 

 

U.S. Property & Casualty

  $ 271,718       $ 276,647       $ 86,130       $ 91,684    

Professional Liability

    261,457         277,662         87,880         92,439    

Accident & Health

    723,051         657,995         250,570         223,048    

U.S. Surety & Credit

    148,496         144,673         51,362         47,442    

International

    316,591         311,261         111,131         100,849    

Exited Lines

    482         10,972         (138)        1,206    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 1,721,795       $ 1,679,210       $ 586,935       $ 556,668    
 

 

 

   

 

 

   

 

 

   

 

 

 

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, was flat year-over-year primarily due to higher dividend income from equity securities, offset by lower income from reduced reinvestment yields. We recognized $64.5 million of net realized investment gains in the first nine months of 2014, compared to $31.1 million in the first nine months of 2013. The 2014 net realized investment gains were principally due to the sale of equity securities in the first and third quarters of 2014. 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.

 

   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                             2013              

U.S. Property & Casualty

  $ 106,442       $ 121,060       $ 13,054       $ 13,666    

Professional Liability

    154,172         141,921         50,851         30,100    

Accident & Health

    519,497         483,709         178,202         163,143    

U.S. Surety & Credit

    43,108         32,287         14,550         13,436    

International

    142,809         204,137         60,429         99,221    

Exited Lines

    (5,153)        9,433         (5,149)        810    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and loss adjustment expense

  $ 960,875       $ 992,547       $ 311,937       $ 320,376    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (favorable) adverse loss development

       

U.S. Property & Casualty

  $ (40,307)      $ (40,754)      $ (40,307)      $ (40,754)   

Professional Liability

    (978)        (26,284)        (978)        (26,284)   

U.S. Surety & Credit

           (9,492)                 

International

    15,685         36,896         15,685         39,196    

Exited Lines

    (5,051)               (5,051)          
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net favorable loss development

    (30,651)        (39,634)        (30,651)        (27,842)   

Accident year catastrophe losses

    15,886         48,055         5,531         18,134    

All other net loss and loss adjustment expense

    975,640         984,126         337,057         330,084    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and loss adjustment expense

  $ 960,875       $ 992,547       $ 311,937       $ 320,376    
 

 

 

   

 

 

   

 

 

   

 

 

 

U.S. Property & Casualty

    39.2      43.8      15.2      14.9 

Professional Liability

    59.0         51.1         57.9         32.6    

Accident & Health

    71.8         73.5         71.1         73.1    

U.S. Surety & Credit

    29.0         22.3         28.3         28.3    

International

    45.1         65.6         54.4         98.4    
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net loss ratio

    55.8      59.1      53.1      57.6 
 

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated accident year net loss ratio

    57.5      61.5      58.1      62.6 
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and loss adjustment expense (referred to as loss expense) decreased $31.7 million in the first nine months of 2014, compared to the same period in 2013, primarily due to lower catastrophe losses in 2014. Our International segment incurred catastrophe losses, before reinstatement premium, of $15.9 million in 2014, compared to $48.1 million in 2013. Various catastrophes that were not individually significant events to us or the industry (which we refer to as “small catastrophes”) totaled $15.9 million in the first nine months of 2014 ($5.5 million in the third quarter) and $18.1 million ($5.1 million) in the comparable periods of 2013. In 2013, we recognized $30.0 million of large catastrophe losses, which consisted of $13.0 million for German hail storms (in the third quarter) and $17.0 million for European floods (in the second quarter). We recognized no large catastrophe losses in 2014. See “Segment Operations — International Segment” section below for additional discussion of our pretax net catastrophe losses.

Fluctuations in net loss development also impacted the change in loss expense in the Professional Liability and International segments. The net adverse development in the International segment for the first nine months of 2014 and 2013 included $43.5 million and $70.3 million, respectively, of adverse development related to strengthening reserves for Spanish surety bonds. 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.

 

   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                             2013              

Net reserves at beginning of period

  $ 2,779,401       $ 2,749,803       $ 2,760,248       $ 2,811,021    

Net loss and loss adjustment expense

    960,875         992,547         311,937         320,376    

Net loss and loss adjustment expense payments

    (1,024,673)         (884,022)        (350,603)        (297,696)   

Foreign currency adjustment

    (26,027)        (2,296)        (32,006)        22,331    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net reserves at end of period

  $ 2,689,576       $ 2,856,032       $ 2,689,576       $ 2,856,032    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net paid loss ratio

    59.5      52.6      59.7      53.5 
 

 

 

   

 

 

   

 

 

   

 

 

 

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 nine months and third quarter of 2014, we paid $199.9 million and $75.4 million, respectively, to settle claims related to Spanish surety bonds, of which approximately 60% was reinsured. This activity increased the respective net paid loss ratios by 4.4 and 3.9 percentage points.

Policy Acquisition Costs

The percentage of policy acquisition costs to net earned premium was 12.7% and 12.1% for the first nine months of 2014 and 2013, respectively, and 13.0% and 11.8% for the third quarter of 2014 and 2013, respectively. The difference between periods primarily related to higher commission rates on certain of our businesses, increased commissions due to higher writings of our short-term medical product, and lower profit commissions from reinsurers. We record profit commissions due from reinsurers as an offset to policy acquisition costs.

Other Operating Expense

Other operating expense increased 6% year-over-year and decreased 13% quarter-over-quarter in 2014, compared to the same periods in 2013. The changes in other operating expense were primarily due to the fluctuations in foreign currency benefit/expense and higher employee compensation and benefit costs in 2014. We recognized a foreign currency benefit of $8.9 million in the first nine months of 2014 and minimal expense in the same period of 2013. We recognized a $15.6 million benefit in the third quarter of 2014, compared to $9.2 million of expense in the third quarter of 2013. 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 10% year-over-year and 12% quarter-over-quarter, mainly due to increased compensation and benefit costs in 2014. Our employee count has grown to 1,976 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 $17.7 million in 2014 and $10.4 million in 2013. At September 30, 2014, there was approximately $26.9 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 1.7 years.

Interest Expense

Interest expense was $20.9 million and $19.7 million in the first nine months of 2014 and 2013, respectively, and included $14.5 million for our Senior Notes in both years.

Income Tax Expense

Our effective income tax rate was 30.6% for the first nine 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.

 

   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                             2013              

Net earned premium

  $ 271,718       $ 276,647       $ 86,130       $ 91,684    

Other revenue

    14,933         16,198         4,987         4,769    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    286,651         292,845         91,117         96,453    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    106,442         121,060         13,054         13,666    

Other expense

    86,807         84,801         28,659         32,044    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    193,249         205,861         41,713         45,710    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

  $ 93,402       $ 86,984       $ 49,404       $ 50,743    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    39.2      43.8      15.2      14.9 

Expense ratio

    30.3         29.0         31.5         33.2    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    69.5      72.8      46.7      48.1 
 

 

 

   

 

 

   

 

 

   

 

 

 

Aviation

  $ 81,919       $ 84,191       $ 27,789       $ 27,905    

Liability

    82,560         74,560         28,893         25,633    

Sports & Entertainment

    21,464         20,207         5,909         7,727    

Public Risk

    36,443         48,530         11,436         15,775    

Other

    49,332         49,159         12,103         14,644    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 271,718       $ 276,647       $ 86,130       $ 91,684    
 

 

 

   

 

 

   

 

 

   

 

 

 

Aviation

    53.7      52.7      39.6      31.8 

Liability

    37.6         51.7         (3.7)        28.9    

Sports & Entertainment

    57.1         61.1         77.4         60.2    

Public Risk

    49.4         73.2         29.6         66.0    

Other

    2.3         (19.8)        (39.9)        (120.7)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss ratio

    39.2      43.8      15.2      14.9 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                 2013  

Aviation

  $ 109,566       $ 115,001       $ 39,222       $ 39,819    

Liability

    137,920         111,955         45,775         35,523    

Sports & Entertainment

    106,311         122,654         29,221         41,126    

Public Risk

    56,107         57,757         20,537         20,652    

Other

    114,778         127,142         32,640         39,001    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 524,682       $ 534,509       $ 167,395       $ 176,121    
 

 

 

   

 

 

   

 

 

   

 

 

 

Aviation

  $ 92,790       $ 91,540       $ 34,140       $ 31,406    

Liability

    102,139         81,677         38,029         26,422    

Sports & Entertainment

    18,808         23,415         5,094         9,252    

Public Risk

    33,262         47,110         14,483         17,230    

Other

    41,707         64,151         11,575         14,714    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net written premium

  $ 288,706       $ 307,893       $ 103,321       $ 99,024    
 

 

 

   

 

 

   

 

 

   

 

 

 

Our U.S. Property & Casualty segment pretax earnings increased 7% year-over-year, primarily due to a lower net loss ratio in 2014, compared to 2013. 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 from growth in our casualty business was offset by reduced premium earned by Public Risk due to the change in reinsurance. Loss expense and the 2014 accident year net loss ratio 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 year-to-date expense ratio increased in 2014 primarily due to additional compensation costs related to new underwriting teams.

In 2014 and 2013, we recognized net favorable loss development based on our annual review of reserves for this segment, which we conduct in the third quarter of each year. The majority of the lines of business in this segment provide primary coverage, and claims are reported and settled on a short to medium-term basis. Accordingly, changes to our ultimate losses for a given underwriting year typically result from revised actuarial expectations, as compared to the prior year reserve review, with respect to the settlement value of known claims.

The segment’s net favorable loss development by line of business was as follows:

 

    

Nine months ended September 30,

 

    

Three months ended September 30,

 

 
                 2014                              2013                              2014                  2013  

Aviation

   $ (6,584)       $ (8,402)       $ (6,584)       $ (8,402)   

Liability

     (20,704)         (9,144)         (20,704)         (9,144)   

Sports & Entertainment

     (1,304)         (2,312)         (1,304)         (2,312)   

Public Risk

     (4,628)         (567)         (4,628)         (567)   

Other

     (7,087)         (20,329)         (7,087)         (20,329)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net favorable loss development

   $ (40,307)       $ (40,754)       $ (40,307)       $ (40,754)   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Our Aviation line of business had a higher net loss ratio year-over-year and quarter-over-quarter due to higher losses in the third quarter of 2014, as well as lower net favorable development recognized in 2014. The 2014 development was based on recording our Aviation reserves in line with actuarially-indicated results since our 2013 annual review. In 2013, we recognized favorable development for treaty years 2011 and prior due to better than expected actuarially-indicated results since our 2012 annual review.

In our Liability line of business, we experienced lower losses and loss ratios in 2014, compared to 2013, due to higher favorable development in the professional lines, which include our E&O and employment practices liability products. In 2014, we recognized favorable development in our professional lines based on better than expected actuarially-indicated results since our 2013 annual review, primarily for underwriting years 2012 and prior. In 2013, we recognized favorable development for underwriting years 2010 – 2011 due to better than expected actuarially-indicated results since our 2012 annual review.

In Sports & Entertainment, the net favorable development in 2014 and 2013 primarily was due to expired risks for underwriting years 2013 and 2012, respectively.

Our Public Risk line of business had a lower loss ratio year-over-year and quarter-over-quarter, primarily due to our expectation of lower ultimate losses in 2014 following our re-underwriting the book of business in 2013. In addition, we recognized higher favorable development in 2014 based on better than expected actuarially-indicated results since our 2013 annual review. The development recorded in 2014 included the release of $0.5 million of prior years’ catastrophe reserves related to 2012 Superstorm Sandy.

The majority of the favorable loss development in Other relates to the run off of an assumed quota share contract for business that we wrote from 2003 – 2008. We recognized $5.0 million in 2014 and $17.0 million in 2013, due to continued better than expected results since the prior annual review. This assumed quota share contract is no longer earning premium, resulting in negative loss ratios in total for the Other line. The remaining development in Other was not material for any one product line in either year.

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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Table of Contents

Professional Liability Segment

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

 

   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
              2014                           2013                             2014                             2013              

Net earned premium

  $ 261,457       $ 277,662       $ 87,880       $ 92,439    

Other revenue

    800         304         330         (21)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    262,257         277,966         88,210         92,418    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    154,172         141,921         50,851         30,100    

Other expense

    49,533         46,781         14,988         10,909    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    203,705         188,702         65,839         41,009    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

  $ 58,552       $ 89,264       $ 22,371       $ 51,409    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    59.0      51.1      57.9      32.6 

Expense ratio

    18.9         16.8         17.0         11.8    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    77.9      67.9      74.9      44.4 
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross written premium

  $ 371,402       $ 371,184       $ 125,472       $ 124,791    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net written premium

  $ 246,917       $ 247,183       $ 83,112       $ 83,422    
 

 

 

   

 

 

   

 

 

   

 

 

 

Our Professional Liability segment pretax earnings decreased $30.7 million year-to-date in 2014, and $29.0 million quarter-to-date, compared to the same periods of 2013, primarily due to $25.3 million more net favorable loss development in 2013 than in 2014. The remaining reduction related to lower net earned premium in 2014 and an increase in the expense ratio, primarily due to the lower net earned premium in 2014 and higher reinsurance profit commissions, which offset the segment’s other expense, in 2013.

The segment had net favorable loss development of $1.0 million in the first nine months and third quarter of 2014, compared to $26.3 million in the same periods of 2013. The development in each period resulted from our annual review of reserves for this segment, which we conduct in the third quarter of each year. The majority of the insurance coverage in this segment is provided through “claims made” policies, and the final settlement value of these claims is not expected to be determined for several years due to the underlying complex nature of the claims. Accordingly, changes to our ultimate losses for a given underwriting year typically result from management’s revised expectations, as compared to the prior year reserve review, with respect to the settlement value of known claims.

The 2014 development related to our U.S. D&O products. We reduced reserves by $24.5 million for underwriting years prior to 2007 due to better than expected experience compared to our 2013 annual review. We also strengthened reserves primarily for underwriting year 2007 by $23.5 million due to indications of higher ultimate losses.

The 2013 development consisted of $15.8 million for our U.S. D&O products and $10.5 million for our International D&O product. Our 2013 review indicated better than expected experience for underwriting years prior to 2007 as well as 2009 and 2010 (totaling $64.2 million), partially offset by reserve strengthening of $37.9 million in underwriting years 2007 and 2008, which were impacted by the worldwide financial crisis.

 

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Table of Contents

Accident & Health Segment

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

 

   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                             2013              

Net earned premium

  $ 723,051       $ 657,995       $ 250,570       $ 223,048    

Other revenue

    7,865         3,736         2,363         1,406    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    730,916         661,731         252,933         224,454    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    519,497         483,709         178,202         163,143    

Other expense

    114,855         97,414         40,601         33,705    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    634,352         581,123         218,803         196,848    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

  $ 96,564       $ 80,608       $ 34,130       $ 27,606    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    71.8      73.5      71.1      73.1 

Expense ratio

    15.7         14.7         16.1         15.0    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    87.5      88.2      87.2      88.1 
 

 

 

   

 

 

   

 

 

   

 

 

 

Medical Stop-loss

  $ 647,824       $ 609,693       $ 218,700       $ 205,089    

Other

    75,227         48,302         31,870         17,959    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 723,051       $ 657,995       $ 250,570       $ 223,048    
 

 

 

   

 

 

   

 

 

   

 

 

 

Medical Stop-loss

    74.9      75.2      74.9      75.2 

Other

    46.0         52.5         45.4         50.0    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss ratio

    71.8      73.5      71.1      73.1 
 

 

 

   

 

 

   

 

 

   

 

 

 

Medical Stop-loss

  $ 652,359       $ 610,366       $ 220,548       $ 205,327    

Other

    93,987         42,416         39,322         16,985    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 746,346       $ 652,782       $ 259,870       $ 222,312    
 

 

 

   

 

 

   

 

 

   

 

 

 

Medical Stop-loss

  $ 647,765       $ 609,693       $ 218,669       $ 205,089    

Other

    93,987         42,167         39,322         16,903    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net written premium

  $ 741,752       $ 651,860       $ 257,991       $ 221,992    
 

 

 

   

 

 

   

 

 

   

 

 

 

The Accident & Health segment pretax earnings increased 20% in the first nine months of 2014, and 24% in the third 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 incentive compensation expense.

 

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Table of Contents

U.S. Surety & Credit Segment

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

 

   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                             2013              

Net earned premium

  $ 148,496       $ 144,673       $ 51,362       $ 47,442    

Other revenue

    1,576         1,027         708         406    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    150,072         145,700         52,070         47,848    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    43,108         32,287         14,550         13,436    

Other expense

    82,052         80,182         28,645         26,501    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    125,160         112,469         43,195         39,937    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

  $ 24,912       $ 33,231       $ 8,875       $ 7,911    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    29.0      22.3      28.3      28.3 

Expense ratio

    54.7         55.0         55.0         55.4    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    83.7      77.3      83.3      83.7 
 

 

 

   

 

 

   

 

 

   

 

 

 

Surety

  $ 108,784       $ 109,370       $ 37,061       $ 36,645    

Credit

    39,712         35,303         14,301         10,797    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 148,496       $ 144,673       $ 51,362       $ 47,442    
 

 

 

   

 

 

   

 

 

   

 

 

 

Surety

    24.9      21.5      25.0      24.9 

Credit

    40.3         24.8         37.1         40.1    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss ratio

 

 

 

 

29.0 

 

 

 

 

 

22.3 

 

 

 

 

 

28.3 

 

 

 

 

 

28.3 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Surety

  $ 121,321       $ 125,235       $ 40,988       $ 44,908    

Credit

    52,353         44,570         19,989         13,459    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 173,674       $ 169,805       $ 60,977       $ 58,367    
 

 

 

   

 

 

   

 

 

   

 

 

 

Surety

  $ 109,476       $ 111,746       $ 37,764       $ 39,600    

Credit

    42,941         36,230         16,595         10,248    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net written premium

  $ 152,417       $ 147,976       $ 54,359       $ 49,848    
 

 

 

   

 

 

   

 

 

   

 

 

 

Our U.S. Surety & Credit segment pretax earnings decreased $8.3 million year-over-year due to $9.5 million of favorable loss development recognized in the second quarter of 2013. We recognized no loss development in the first nine months 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 Credit 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, which reduced the year-to-date net loss ratios.

 

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Table of Contents

International Segment

The following tables summarize the operations of the International segment.

 

    Nine months ended September 30,     Three months ended September 30,  
   

 

            2014             

   

 

            2013             

   

 

            2014             

   

 

            2013             

 

Net earned premium

  $ 316,591       $ 311,261       $ 111,131       $ 100,849    

Other revenue

    2,745         2,790         846         888    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment revenue

    319,336         314,051         111,977         101,737    
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss and loss adjustment expense, net

    142,809         204,137         60,429         99,221    

Other expense

    128,080         114,534         48,101         42,613    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment expense

    270,889         318,671         108,530         141,834    
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings (loss)

  $ 48,447       $ (4,620)      $ 3,447       $ (40,097)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss ratio

    45.1      65.6      54.4      98.4 

Expense ratio

    40.1         36.5         43.0         41.9    
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    85.2      102.1      97.4      140.3 
 

 

 

   

 

 

   

 

 

   

 

 

 

Marine & Energy

  $ 72,280       $ 74,978       $ 28,730       $ 22,686    

Property Treaty

    76,369         85,067         24,956         26,569    

Surety & Credit

    57,359         54,186         17,220         18,120    

Liability

    63,564         54,671         23,199         19,088    

Other

    47,019         42,359         17,026         14,386    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net earned premium

  $ 316,591       $ 311,261       $ 111,131       $ 100,849    
 

 

 

   

 

 

   

 

 

   

 

 

 

Marine & Energy

    40.4      36.5      26.3      9.9 

Property Treaty

    8.4         54.6         (15.9)        62.3    

Surety & Credit

    114.0         189.4         273.3         441.0    

Liability

    32.8         29.2         4.1         (8.5)   

Other

    44.6         27.7         52.0         14.9    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss ratios

 

 

 

 

45.1 

 

 

 

 

 

65.6 

 

 

 

 

 

54.4 

 

 

 

 

 

98.4 

 

 

 

 

   

 

 

   

 

 

   

 

 

 

Marine & Energy

  $ 142,149       $ 143,849       $ 23,547       $ 18,191    

Property Treaty

    126,817         133,578         26,888         19,583    

Surety & Credit

    79,091         68,186         23,840         21,990    

Liability

    74,520         59,992         24,442         19,782    

Other

    71,204         63,719         18,623         16,585    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total gross written premium

  $ 493,781       $ 469,324       $ 117,340       $ 96,131    
 

 

 

   

 

 

   

 

 

   

 

 

 

Marine & Energy

  $ 93,375       $ 86,489       $ 11,293       $ 3,517    

Property Treaty

    108,038         113,169         20,209         11,903    

Surety & Credit

    65,962         59,326         16,877         19,036    

Liability

    69,061         56,259         22,735         18,682    

Other

    55,680         48,825         15,435         13,104    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net written premium

  $ 392,116       $ 364,068       $ 86,549       $ 66,242    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Our International segment pretax earnings increased $53.1 million in the first nine months and $43.5 million in the third quarter of 2014, compared to the same periods of 2013, due to 1) higher net earned premium, 2) the favorable impact of lower net catastrophe losses and 3) lower net adverse loss development year-over-year in 2014. The net adverse loss development for 2014 and 2013 included $43.5 million and $70.3 million, respectively, related to strengthening reserves for certain Spanish surety bonds. These increases were partially offset by higher other expenses.

Gross written premium and net written premium increased year-to-date in 2014, compared to 2013, primarily due to increased writings in Surety & Credit, Liability and our accident and health and direct and facultative property lines of business (included in Other). These increases were partially offset by decreased writings of Property Treaty business, due to reduced pricing and expanded competition in this line. The segment’s expense ratio increased in 2014 primarily due to higher compensation and benefits expense and the impact of the stronger British pound sterling compared to the U.S. dollar in 2014, as most of the segment’s operating expenses are British pound sterling expenses.

Our Property Treaty line of business incurred lower net catastrophe losses in 2014 than in 2013. We recognized no large catastrophe losses in 2014. In the third quarter of 2013, we recognized pretax catastrophe losses of $13.0 million related to German hail storms. In the second quarter of 2013, we recognized pretax catastrophe losses of $15.0 million related to European floods, including $2.0 million of inward reinstatement premium. The remaining 2013 net catastrophe losses, as well as the 2014 losses, related to small catastrophes. The following table summarizes the segment’s net catastrophe losses, as well as the impact on key metrics:

 

   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                             2013              

Net losses, after reinsurance

  $ 15,886       $ 48,055       $ 5,531       $ 18,134    

Reinstatement premium, net

    (1,578)        (3,508)        (762)        (217)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net catastrophe losses

  $ 14,308       $ 44,547       $ 4,769       $ 17,917    
 

 

 

   

 

 

   

 

 

   

 

 

 

Impact of net catastrophe losses (in percentage points) on:

       

Net loss ratio

    4.8      14.9      4.7      17.8 

Expense ratio

    (0.2)        (0.4)        (0.3)        (0.1)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

    4.6      14.5      4.4      17.7 
 

 

 

   

 

 

   

 

 

   

 

 

 
The International segment recognized $15.7 million of net adverse loss development in the first nine months and third quarter of 2014, compared to $36.9 million and $39.2 million in the same periods of 2013. The net (favorable) adverse loss development recognized by line of business was as follows:     
   

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                2014                             2013                             2014                             2013              

Marine & Energy

  $ (6,266)      $ (11,329)      $ (6,266)      $ (11,329)   

Property Treaty

    (9,500)        (3,291)        (9,500)        (3,291)   

Surety & Credit

    43,462         70,321         43,462         70,321    

Liability

    (9,881)        (13,335)        (9,881)        (13,335)   

Other

    (2,130)        (5,470)        (2,130)        (3,170)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net adverse loss development

  $ 15,685       $ 36,896       $ 15,685       $ 39,196    
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The lines of business in our International segment provide a variety of coverages, most of which are medium to long-tail lines with moderate timing for claims reporting and medium to high reserve volatility. This segment incurs most of our catastrophe losses. In Marine & Energy, we insure complex, worldwide energy production facilities, oil rigs and offshore platforms that are subject to expensive business interruption claims and replacement costs. Catastrophe-related claims for energy projects may take several years to settle and can involve significant reserve volatility for coverage on both a primary and excess basis. The Property Treaty and direct and facultative property lines are short-tail with relatively fast claims reporting and lower reserve volatility.

We generally conduct our annual review of the International segment’s reserves in the fourth quarter. However, we accelerated our 2014 and 2013 annual reviews to the third quarter of each year due to the timing of issues related to certain Spanish surety bonds and a growing actuarially-indicated redundancy in several lines of business.

The adverse loss development in the Surety & Credit line of business primarily related to strengthening our reserves on a specific class of Spanish surety bonds, the majority of which were written prior to 2006. In the third quarter of 2013, we increased our reserves to reflect our revised estimates of our liability under these bonds in light of an adverse Spanish Supreme Court ruling published in September 2013 against an unaffiliated insurance company with respect to a surety bond similar to ours. This resulted in recognition of $70.3 million of net adverse loss development in that quarter. We paid claims related to these bonds throughout 2014 and settled a large majority of the outstanding claims in the third quarter of 2014. In light of these settlements, we revised our estimates of our liability under these bonds and strengthened these reserves in the third quarter of 2014, which resulted in recognition of $43.5 million of net adverse development.

Our actual loss experience for Marine & Energy was better than the actuarial expectations in our current year reserve review compared to the prior year review. We conducted a detailed review of outstanding claims during each annual review to assist in determining our Marine & Energy reserves. The net favorable development recognized in 2014 related to the 2012 and prior accident years, partially offset by $10.0 million of reserve strengthening for the 2013 accident year. The net favorable development recognized in 2013 related to the 2008 – 2010 and 2012 accident years, as well as the release of $3.4 million of prior years’ catastrophe reserves related to Superstorm Sandy.

In Property Treaty, the 2014 net favorable development included the release of $6.0 million of prior years’ catastrophe reserves related to the 2013 European floods, as well as $1.5 million of reserve strengthening for the 2011 Denmark storms. The remaining net favorable development in 2014 and 2013 related to better than expected loss results based on a detailed review of outstanding claims and actuarial indications used in our current year reserve review compared to the prior year review.

The 2014 and 2013 net favorable development in Liability related primarily to our U.K. professional liability product, for which actual loss experience was better than the actuarially-indicated results in the current year reserve review compared to the prior year review. In 2014 and 2013, we recognized $12.7 million (for accident years 2013 and prior) and $16.1 million (for accident years 2011 and prior), respectively, for this product. In addition, 2014 and 2013 included adverse development related to other liability business, primarily for accident years 2011 and prior.

In the Other line of business, the net favorable loss development related to better than actuarially-indicated results, in our current reserve review compared to the prior year review, for our accident and health and direct and facultative property lines. In the second quarter of 2013, we recognized $2.3 million of favorable loss development in our direct and facultative property line related to settlement of claims for the 2010 New Zealand earthquake.

The previously-discussed favorable and adverse loss development, as well as the lower accident year catastrophe losses, caused the significant variances in the segment and line of business net loss ratios for the nine months and third quarter of 2014, compared to the same periods of 2013.

Regarding changes in presentation, the Marine & Energy category now includes the marine business, which was previously included in the Other category in 2013.

 

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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 $6.6 billion of fixed maturity securities at September 30, 2014. Substantially all of our fixed maturity securities were investment grade and 74% were rated AAA or AA. In addition, we held $286.2 million of equity securities at September 30, 2014.

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

 

    

Nine months ended September 30,

 

   

Three months ended September 30,

 

 
                 2014                             2013                             2014                             2013              

Net investment income from:

        

Fixed maturity securities

        

Taxable

   $ 72,068       $ 75,407       $ 24,789       $ 24,385    

Exempt from U.S. income taxes

     85,602         85,063         28,427         28,988    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

     157,670         160,470         53,216         53,373    

Equity securities

     14,231         10,758         2,088         2,950    

Other

     1,232         472         504         73    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     173,133         171,700         55,808         56,396    

Investment expense

     (5,653)        (6,059)        (1,572)        (2,188)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net investment income

     167,480         165,641         54,236         54,208    

Net realized investment gain

     64,535         31,115         39,384         17,922    
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment pretax earnings

   $        232,015       $        196,756       $        93,620       $         72,130    
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturity securities:

        

Average yield *

     3.5      3.6      3.4      3.6 

Average tax equivalent yield *

     4.3      4.5      4.3      4.4 

Weighted-average life

     8.3 years        8.2 years       

Weighted-average duration

     4.8 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 September 30, 2014 and December 31, 2013.

 

     September 30, 2014     December 31, 2013  
    

 

        Amount        

    

 

            %             

   

 

        Amount        

    

 

            %             

 

Fixed maturity securities

          

U.S. government and government agency securities

   $ 67,147            $ 92,709         

Fixed maturity securities of states, municipalities
and political subdivisions

     978,977          14         986,486          15    

Special purpose revenue bonds of states, municipalities
and political subdivisions

     2,404,269          34         2,265,195          34    

Corporate securities

     1,262,868          18         1,225,238          18    

Residential mortgage-backed securities

     835,098          12         618,119            

Commercial mortgage-backed securities

     615,021                 504,888            

Asset-backed securities

     327,971                 182,392            

Foreign government securities

     85,190                 147,446            

Equity securities

     286,194                 517,466            

Short-term investments

     250,867                 178,753            
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $       7,113,602          100    $       6,718,692          100 
  

 

 

    

 

 

   

 

 

    

 

 

 

At September 30, 2014, we held corporate fixed maturity securities issued by foreign corporations with an aggregate fair value of $472.7 million. In addition, we held securities issued by foreign governments, agencies or supranational entities with an aggregate fair value of $85.2 million. At December 31, 2013, we held $497.0 million and $147.4 million, respectively.

Our total investments increased $394.9 million in 2014, principally from newly generated cash flow and an $89.0 million increase in the pretax net unrealized gain. At September 30, 2014, the net unrealized gain on our investment portfolio was $243.0 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 54 basis points in the first nine months of 2014. The weighted-average duration of our fixed maturity securities portfolio decreased to 4.8 years at September 30, 2014 (compared to 5.1 years at December 31, 2013 and 5.5 years at September 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. 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 September 30, 2014 were as follows:

 

             Amount                          %              

AAA

   $ 1,039,212          16 

AA

     3,797,870          58    

A

     1,303,627          20    

BBB

     281,412            

BB and below

     154,420            
  

 

 

    

 

 

 

Total fixed maturity securities

   $       6,576,541          100 
  

 

 

    

 

 

 

 

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Corporate & Other

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

 

    

Nine months ended September 30,

 

      

Three months ended September 30,

 

 
             2014                      2013                        2014                      2013          

Net earned premium

   $ 482        $ 10,972          $ (138)       $ 1,206    

Other revenue

     813          253            249          231    
  

 

 

    

 

 

      

 

 

    

 

 

 

Total revenue

     1,295          11,225            111          1,437    
  

 

 

    

 

 

      

 

 

    

 

 

 

Loss and loss adjustment expense, net

     (5,153)         9,433            (5,149)         810    

Other expense - Exited Lines

     2,786          3,575            914          1,052    

Other expense - Corporate

     48,477          44,641            20,270          13,503    

Interest expense

     20,728          19,337            6,867          6,494    

Foreign currency expense (benefit)

     (8,924)         135            (15,601)         9,180    
  

 

 

    

 

 

      

 

 

    

 

 

 

Total expense

     57,914          77,121            7,301          31,039    
  

 

 

    

 

 

      

 

 

    

 

 

 

Pretax loss

   $            (56,619)       $            (65,896)         $            (7,190)       $            (29,602)   
  

 

 

    

 

 

      

 

 

    

 

 

 

Net earned premium decreased year-over-year as we exited the HMO and medical excess reinsurance products 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. In the third quarter of 2014, we recognized $5.0 million of favorable loss development in our Spanish medical malpractice exited line of business due to reduced frequency of claims.

Our Corporate expenses not allocated to the segments increased year-over-year and quarter-over-quarter, primarily due to 1) higher incentive compensation based on the increase in pretax earnings and 2) expense related to certain unvested restricted stock awards for which the performance criteria were achieved in 2014. This higher expense was partially offset by 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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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.

 

    

Nine months ended September 30,

 

 
             2014                      2013          

Net earnings

   $ 345,314        $ 292,187    

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

     (12,514)         (30,879)   

Change in unearned premium, net

     104,155          50,586    

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

     (35,267)         103,023    

Change in accounts payable and accrued liabilities

     (43,608)         (145,740)   

Gain on investments

     (64,535)         (31,115)   

Other, net

     66,819          33,350    
  

 

 

    

 

 

 

Cash provided by operating activities

   $       360,364        $       271,412    
  

 

 

    

 

 

 

Our cash provided by operating activities was $360.4 million in the first nine months of 2014, compared to $271.4 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 $21.8 million in 2014 and $127.9 million in 2013. In addition, we paid $95.7 million of income tax payments in 2014, compared to $126.3 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. In regards to Spanish surety bonds, we paid claims of $199.9 million and collected reinsurance of $146.2 million in the first nine months of 2014. The related paid loss recoverables from reinsurers at September 30, 2014 were $69.5 million. At September 30, 2014, we had gross reserves of $140.3 million and ceded reserves of $78.4 million, or net reserves of $61.9 million, related to Spanish surety bonds. The net impact of our payment of claims and collection of recoverables related to these bonds will continue 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.

On September 29, 2014, we executed a definitive purchase agreement to acquire all of the capital stock of Producers Ag Insurance Group, Inc. (ProAg) for $110.0 million cash, subject to a net worth adjustment at closing as described in the purchase agreement. We expect to close the transaction in the first quarter of 2015.

 

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Investments

At September 30, 2014, we held a $7.1 billion investment portfolio, which included $250.9 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 $559.7 million of cash and investments at September 30, 2014, which are available to cover the holding company’s required cash disbursements.

Revolving Loan and Standby Letter of Credit Facilities

At September 30, 2014, we maintained an $825.0 million Revolving Loan Facility (Facility) with $374.1 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. 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

On August 20, 2014, our Board of Directors authorized a new $500.0 million stock purchase plan (the Plan) and cancelled $130.9 million remaining under a previous authorization. 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 October 24, 2014, $373.1 million of repurchase authority remains under the Plan.

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

 

    

Nine months ended September 30,

 

      

Three months ended September 30,

 

 
                 2014                              2013                                2014                              2013              

Shares of common stock

     2,968          1,055            2,007          31    

Total cost

   $     138,549        $     42,212          $     97,007        $     1,283    

Weighted-average cost per share

   $ 46.69        $ 40.02          $ 48.35        $ 42.00    

Shelf Registration

We have a “Universal Shelf” registration statement that expires in March 2015, which we expect to renew. 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.

 

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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.

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 September 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 September 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 September 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

On August 23, 2012, the Board approved the purchase of up to $300.0 million of our common stock (the 2012 Plan). On August 20, 2014, the Board approved a new authorization for $500.0 million (the 2014 Plan) and cancelled $130.9 million remaining under the 2012 Plan. Purchases under the 2014 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 2014 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 2014 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 third 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
2012 Plan        
July   192,048   $47.43   192,048   $156,921,443
August   548,342   $47.37   548,342                       -
2014 Plan        
August                 -             -                 -   $500,000,000
September   1,265,799   $48.92   1,265,799   $438,078,263

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

       
2.1     Stock Purchase Agreement, dated September 29, 2014, by and among CMFG Life Insurance Company, CUNA Mutual Investment Corporation and HCC Insurance Holdings, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed on September 30, 2014).
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).
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 September 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.

 

   

HCC Insurance Holdings, Inc.

    (Registrant)
October 31, 2014    

/s/ Christopher J.B. Williams

       (Date)     Christopher J.B. Williams,
    Chief Executive Officer
October 31, 2014    

/s/ Pamela J. Penny

       (Date)    

Pamela J. Penny, Executive Vice President

and Chief Accounting Officer

 

47