UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarter Ended March 31, 2003.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from _______ to __________
Commission file number 001-13790
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HCC Insurance Holdings, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 76-0336636
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13403 Northwest Freeway, Houston, Texas 77040-6094
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(Address of principal executive offices) (Zip Code)
(713)690-7300
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(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 [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
On May 6, 2003, there were 62.8 million shares of common stock, $1.00 par value
issued and outstanding.
Explanatory Note
This amendment includes changes from the previous report to reflect the impact
of a restatement due to the accounting for certain fee and commission income as
described herein. Revenue and net income for the three months ended March 31,
2003 were reduced by $10.9 million and $6.5 million, respectively, as a result
of the restatement.
1
HCC INSURANCE HOLDINGS, INC.
INDEX
PAGE NO.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 ....................................... 3
Condensed Consolidated Statements of Earnings
For the three months ended March 31, 2003 and 2002 ......................... 4
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 2003 .................................. 5
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2003 and 2002 ......................... 6
Notes to Condensed Consolidated Financial Statements............................. 7
Item 2. Management's Discussion and Analysis............................................. 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 24
Item 4. Controls and Procedures.......................................................... 24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 25
Item 6. Exhibits and Reports on Form 8-K................................................. 25
Signatures................................................................................ 26
This report on Form 10-Q/A 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. We have based these forward-looking statements on
our current expectations and projections about future events. These
forward-looking statements 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 future capital expenditures, business strategy,
competitive strengths, goals, growth of our business and operations, plans and
references to future successes may be considered forward-looking statements.
Also, when we use words such as "anticipate," "believe," "estimate," "expect,"
"intend," "plan," "probably" or similar expressions, we are making
forward-looking statements. Many risks and uncertainties may impact the matters
addressed in these forward-looking statements.
Many possible events or factors could affect our future financial results and
performance. These 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 also 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 which
are included in this report, our inclusion of this information is not a
representation by us or any other person that our objectives and plans will be
achieved.
Our forward-looking statements speak only as of 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.
2
HCC Insurance Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(unaudited, in thousands, except per share data)
March 31, 2003 December 31, 2002
-------------- -----------------
(restated)
ASSETS
Investments:
Fixed income securities, at market
(cost: 2003 - $821,003; 2002 - $807,772) $ 854,671 $ 841,548
Marketable equity securities, at market
(cost: 2003 - $15,331; 2002 - $15,815) 15,132 15,609
Short-term investments, at cost, which approximates market 455,604 307,215
Other investments, at estimated fair value
(cost: 2003 - $2,175; 2002 - $3,264) 2,175 3,264
-------------- -----------------
Total investments 1,327,582 1,167,636
Cash 18,776 40,306
Restricted cash 208,150 189,396
Premium, claims and other receivables 814,199 753,527
Reinsurance recoverables 845,966 798,934
Ceded unearned premium 188,655 164,224
Ceded life and annuity benefits 78,675 78,951
Deferred policy acquisition costs 71,071 68,846
Goodwill 336,945 335,288
Other assets 166,681 107,043
-------------- -----------------
TOTAL ASSETS $ 4,056,700 $ 3,704,151
============== =================
LIABILITIES
Loss and loss adjustment expense payable $ 1,234,211 $ 1,155,290
Life and annuity policy benefits 78,675 78,951
Reinsurance balances payable 195,494 166,659
Unearned premium 387,274 331,050
Deferred ceding commissions 57,488 49,963
Premium and claims payable 789,435 730,801
Notes payable 311,692 230,027
Accounts payable and accrued liabilities 96,047 78,503
-------------- -----------------
Total liabilities 3,150,316 2,821,244
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; 250.0 million shares authorized;
(shares issued and outstanding: 2003 - 62,679; 2002 - 62,358) 62,679 62,358
Additional paid-in capital 420,692 416,406
Retained earnings 403,071 383,378
Accumulated other comprehensive income 19,942 20,765
-------------- -----------------
Total shareholders' equity 906,384 882,907
-------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,056,700 $ 3,704,151
============== =================
See Notes to Condensed Consolidated Financial Statements.
3
HCC Insurance Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(unaudited, in thousands, except per share data)
For the three months ended March 31,
2003 2002
-------------- ------------
(restated)
REVENUE
Net earned premium $ 162,422 $ 111,478
Fee and commission income 30,118 33,947
Net investment income 10,998 8,694
Net realized investment gain (loss) (21) 502
Other operating income 876 1,463
-------------- ------------
Total revenue 204,393 156,084
EXPENSE
Loss and loss adjustment expense 100,032 68,331
Operating expense:
Policy acquisition costs, net 31,912 20,949
Compensation expense 20,500 16,677
Other operating expense 13,678 12,029
-------------- ------------
Total operating expense 66,090 49,655
Interest expense 1,682 2,378
-------------- ------------
Total expense 167,804 120,364
-------------- ------------
Earnings before income tax provision 36,589 35,720
Income tax provision 12,822 12,438
-------------- ------------
Net earnings $ 23,767 $ 23,282
============== ============
BASIC EARNINGS PER SHARE DATA:
Earnings per share $ 0.38 $ 0.38
============== ============
Weighted average shares outstanding 62,637 61,936
============== ============
DILUTED EARNINGS PER SHARE DATA:
Earnings per share $ 0.38 $ 0.37
============== ============
Weighted average shares outstanding 63,335 62,713
============== ============
Cash dividends declared, per share $ 0.065 $ 0.0625
============== ============
See Notes to Condensed Consolidated Financial Statements.
4
HCC Insurance Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 2003 (restated)
(unaudited, in thousands, except per share data)
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholders'
stock capital Earnings income equity
------------ ---------- --------- ------------- -------------
BALANCE AS OF DECEMBER 31, 2002 $ 62,358 $ 416,406 $ 383,378 $ 20,765 $ 882,907
Net earnings -- -- 23,767 -- 23,767
Other comprehensive income (loss) -- -- -- (823) (823)
-------------
Comprehensive income 22,944
269 shares of common stock issued for
exercise of options, including tax benefit of
$876 269 4,338 -- -- 4,607
Issuance of 52 shares of
Contractually issuable common stock 52 (52) -- -- --
Cash dividends declared, $0.065 per share -- -- (4,074) -- (4,074)
------------ ---------- --------- ------------- -------------
BALANCE AS OF MARCH 31, 2003 $ 62,679 $ 420,692 $ 403,071 $ 19,942 $ 906,384
============ ========== ========= ============= =============
See Notes to Condensed Consolidated Financial Statements.
5
HCC Insurance Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands, except per share data)
For the three months ended March 31,
2003 2002
---- ----
(restated)
Cash flows from operating activities:
Net earnings $ 23,767 $ 23,282
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Change in premium, claims and other receivables (62,217) 9,286
Change in reinsurance recoverables (47,032) 617
Change in ceded unearned premium (24,431) (2,488)
Change in loss and loss adjustment expense payable 78,921 17,100
Change in reinsurance balances payable 28,835 3,147
Change in unearned premium 56,224 12,138
Change in premium and claims payable, net of restricted cash 39,880 (54,819)
Depreciation and amortization expense 2,976 2,747
Other, net 4,948 2,092
----------- -----------
Cash provided by operating activities 101,871 13,102
Cash flows from investing activities:
Sales of fixed income securities 95,229 68,311
Maturity or call of fixed income securities 27,358 9,812
Sales of equity securities 983 1,189
Change in short-term investments (148,199) (1,193)
Cost of securities acquired (164,237) (92,951)
Purchases of property and equipment (1,523) (1,325)
----------- -----------
Cash used by investing activities (190,389) (16,157)
Cash flows from financing activities:
Proceeds from notes payable, net of costs 134,845 --
Sale of common stock 3,731 6,570
Payments on notes payable (67,527) (2,527)
Dividends paid and other, net (4,061) (5,067)
----------- -----------
Cash provided (used) by financing activities 66,988 (1,024)
----------- -----------
Net change in cash (21,530) (4,079)
Cash at beginning of period 40,306 16,891
----------- -----------
CASH AT END OF PERIOD $ 18,776 $ 12,812
=========== ===========
See Notes to Condensed Consolidated Financial Statement
6
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data)
(1) GENERAL INFORMATION
HCC Insurance Holdings, Inc. and its subsidiaries ("we," "us" and
"our") provide specialized property and casualty and accident and
health insurance coverages, underwriting agency and intermediary
services to commercial customers and individuals. Our lines of business
include group life, accident and health; aviation; our London market
account (which includes energy, marine, property and some accident and
health); diversified financial products (which includes directors and
officers liability, errors and omissions, employment practices
liability and surety); and other specialty lines of insurance. We
operate primarily in the United States, the United Kingdom and Spain,
although some of our operations have a broader international scope. We
market our products both directly to customers and through a network of
independent and affiliated agents and brokers.
Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in
the United States of America and include all adjustments which are, in
our opinion, necessary for a fair presentation of the results of the
interim periods. All adjustments made to the interim periods are of a
normal recurring nature. The condensed consolidated financial
statements include the accounts of HCC Insurance Holdings, Inc. and
those of our wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The condensed
consolidated financial statements for periods reported should be read
in conjunction with the annual audited consolidated financial
statements and related notes. The condensed consolidated balance sheet
as of December 31, 2002, and the condensed consolidated statement of
changes in shareholders' equity for the year then ended were derived
from audited financial statements, but do not include all disclosures
required by accounting principles generally accepted in the United
States of America.
This Form 10-Q/A has amended our previously filed Form 10-Q to reflect
a restatement to change the basis upon which the fee and commission
income of our underwriting agency and intermediary subsidiaries are
accounted. This restatement relates only to business underwritten by
our underwriting agencies or placed by our intermediaries that passes
through one of our affiliated insurance companies to an unrelated
reinsurance company. This income had previously been recognized at the
later of the effective date of a policy, the date when the premium
could be reasonably established or the date when substantially all the
services relating to the insurance placement had been rendered to the
client. This income is now recognized pro rata over the term of the
underlying policy. The cumulative effect of the restatement related to
prior years, $3.9 million, which is recorded in the first quarter of
2003, is not material to prior years or 2003. The effect of the change
only became material in 2003 as a result of recent acquisitions. The
change is a timing difference which generally reverses over a twelve
month period. The restatement does not impact the overall amount of
fees and commissions ultimately earned or previously collected in cash.
Additionally, it does not change the net earnings of our reporting
segments but, rather, results solely from changes to the consolidating
entries made in the preparation of our condensed consolidated financial
statements. Likewise, it does not change cash flow from operations.
7
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(1) GENERAL INFORMATION, CONTINUED
The effect of the restatement on revenue was a reduction of $10.9
million for the first three months of 2003. This amount includes $6.5
million associated with the cumulative effect of the restatement
related to prior years. The table below shows the effect on net
earnings and earnings per share for the first quarter of 2003.
Earnings per share
Amount Basic Diluted
--------- --------- ---------
Net earnings, as previously reported $ 30,275 $ 0.48 $ 0.48
Effect of adjustment on operations for the period (2,618) (0.04) (0.04)
Cumulative adjustment (3,890) (0.06) (0.06)
--------- --------- ---------
Net earnings, as reported herein $ 23,767 $ 0.38 $ 0.38
========= ========= =========
During the fourth quarter of 2002, we completed three acquisitions. The
results of operations of these entities are included in our
consolidated financial statements beginning on the effective date of
each transaction. Thus, our condensed consolidated statements of
earnings and cash flows for the three months ended March 31, 2002 do
not contain any activity generated by these three entities. We are
still in the process of completing the purchase price allocations for
two of these acquisitions, as we are still gathering some of the
information needed to make the required calculations and, additionally,
in the case of HCC Europe, we have not yet completed the final
determination of the purchase price, which will be based upon an
agreed-upon final closing date balance sheet. Any subsequent net
adjustment will result in a change to recorded goodwill.
During the first quarter of 2003, we adopted prospectively Financial
Accounting Standards Board Interpretation ("FIN") No. 46 entitled
"Consolidation of Variable Interest Entities". We now consolidate an
investment in a partnership that owns an office building leased to
unaffiliated third parties, whereas previously we used the equity
method of accounting to account for this investment. The partnership is
not material to our financial position, results of operations or cash
flows.
8
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(1) GENERAL INFORMATION, CONTINUED
Fee and Commission Income
Our fee and commission income in our condensed consolidated statements
of earnings includes fee income from our underwriting agencies and
commission income from our intermediaries earned by underwriting on
behalf of and/or placing business with unaffiliated (re)insurers and
proceeds from ceded reinsurance (ceding commissions in excess of policy
acquisition costs).
Income Tax
For the three months ended March 31, 2003 and 2002, the income tax
provision has been calculated based on an estimated effective tax rate
for each of the fiscal years. The difference between our effective tax
rate and the Federal statutory rate is primarily the result of state
income taxes and tax exempt municipal bond interest.
Stock Options
We account for stock options granted to employees using the intrinsic
value method of APB Opinion No. 25 entitled "Accounting for Stock
Issued to Employees". All options have been granted at fixed exercise
prices at the market price of our common stock at the grant date.
Because of that, no stock-based employee compensation cost is reflected
in our reported net income. Options vest over a period of up to seven
years and expire four to ten years after grant date. The following
table illustrates the effects on net income and earnings per share if
we had used the fair value method of SFAS No. 123 entitled "Accounting
for Stock-Based Compensation".
For the three months ended March 31,
2003 2002
---------- ----------
Reported net earnings $ 23,767 $ 23,282
Stock-based compensation using the fair value
method, net of income tax (1,939) (1,085)
---------- ----------
Pro forma net earnings $ 21,828 $ 22,197
========== ==========
Reported basic earnings per share $ 0.38 $ 0.38
Fair value stock-based compensation (0.03) (0.02)
---------- ----------
Pro forma basic earnings per share $ 0.35 $ 0.36
========== ==========
Reported diluted earnings per share $ 0.38 $ 0.37
Fair value stock-based compensation (0.04) (0.02)
---------- ----------
Pro forma diluted earnings per share $ 0.34 $ 0.35
========== ==========
9
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(1) GENERAL INFORMATION, CONTINUED
Reclassifications
Certain amounts in our 2002 condensed consolidated financial statements
have been reclassified to conform to the 2003 presentation. Among these
reclassifications, proceeds from ceded reinsurance (ceding commissions
in excess of acquisition costs) have been classified as fee and
commission income rather than a reduction of operating expenses. Also,
compensation and other operating expenses of our underwriting agency
subsidiaries representing acquisition costs have been classified as
policy acquisition costs to be offset by the portion of ceding
commissions which represent the reimbursement of those acquisition
costs. Such reclassifications had no effect on our net earnings,
shareholders' equity or cash flows.
(2) REINSURANCE
In the normal course of business our insurance companies cede a portion
of their premium to non-affiliated domestic and foreign reinsurers
through treaty and facultative reinsurance agreements. Although the
ceding of reinsurance does not discharge the primary insurer from
liability to its policyholder, our insurance companies participate in
such agreements for the purpose of limiting their loss exposure,
protecting them against catastrophic loss and diversifying their
business. The following table represents the effect of such reinsurance
transactions on premium and loss and loss adjustment expense:
Loss and Loss
Written Earned Adjustment
Premium Premium Expense
--------------- --------------- ---------------
For the three months ended March 31, 2003:
Direct business $ 296,780 $ 255,871 $ 167,216
Reinsurance assumed 82,668 61,948 51,827
Reinsurance ceded (186,947) (155,397) (119,011)
--------------- --------------- ---------------
NET AMOUNTS $ 192,501 $ 162,422 $ 100,032
=============== =============== ===============
For the three months ended March 31, 2002:
Direct business $ 192,090 $ 184,559 $ 143,216
Reinsurance assumed 55,678 49,528 19,100
Reinsurance ceded (125,496) (122,609) (93,985)
--------------- --------------- ---------------
NET AMOUNTS $ 122,272 $ 111,478 $ 68,331
=============== =============== ===============
10
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(2) REINSURANCE, CONTINUED
The table below represents the composition of reinsurance recoverables
in our condensed consolidated balance sheets:
March 31, 2003 December 31, 2002
-------------- -----------------
Reinsurance recoverable on paid losses $ 117,638 $ 108,104
Reinsurance recoverable on outstanding losses 289,516 304,220
Reinsurance recoverable on incurred but not reported losses 446,548 393,752
Reserve for uncollectible reinsurance (7,736) (7,142)
-------------- -----------
TOTAL REINSURANCE RECOVERABLES $ 845,966 $ 798,934
============== ===========
Our insurance companies require their reinsurers not authorized by the
respective states of domicile of our insurance companies to
collateralize the reinsurance obligations due to us. The table below
shows amounts held by us as collateral plus other credits available for
potential offset.
March 31, 2003 December 31, 2002
-------------- -----------------
Payables to reinsurers $ 268,777 $ 235,727
Letters of credit 140,979 141,490
Cash deposits 9,014 9,384
---------- ----------
TOTAL CREDITS $ 418,770 $ 386,601
========== ==========
The tables below present the calculation of net reserves, net unearned
premium and net deferred policy acquisition costs:
March 31, 2003 December 31, 2002
-------------- -----------------
Loss and loss adjustment expense payable $ 1,234,211 $ 1,155,290
Reinsurance recoverable on outstanding losses (289,516) (304,220)
Reinsurance recoverable on incurred but not reported losses (446,548) (393,752)
-------------- -----------------
NET RESERVES $ 498,147 $ 457,318
============== =================
Unearned premium $ 387,274 $ 331,050
Ceded unearned premium (188,655) (164,224)
-------------- -----------------
NET UNEARNED PREMIUM $ 198,619 $ 166,826
============== =================
Deferred policy acquisition costs $ 71,071 $ 68,846
Deferred ceding commissions (57,488) (49,963)
-------------- -----------------
NET DEFERRED POLICY ACQUISITION COSTS $ 13,583 $ 18,883
============== =================
11
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(2) REINSURANCE, CONTINUED
We have a reserve of $7.7 million as of March 31, 2003 for potential
collectibility issues and associated expenses related to reinsurance
recoverables. The adverse economic environment in the worldwide
insurance industry, the decline in the market value of investments in
equity securities and the terrorist attack on September 11, 2001 have
placed great pressure on reinsurers and the results of their
operations. Ultimately, these conditions could affect reinsurers'
solvency. Historically, there have been insolvencies following a period
of competitive pricing in the industry. We limit our exposure by
holding funds, letters of credit or other security such that net
balances due are significantly less than the gross balances shown in
our condensed consolidated balance sheets. While we believe that the
reserve is adequate based on currently available information,
conditions may change or additional information might be obtained which
may result in a future change in the reserve. We periodically review
our financial exposure to the reinsurance market and the level of our
reserve and continue to take actions in an attempt to mitigate our
exposure to possible loss.
A number of reinsurers have delayed or suspended the payment of amounts
recoverable under certain reinsurance contracts to which we are a
party. Such delays have affected, although not materially to date, the
investment income of our insurance companies, but not to any extent
their liquidity. In some instances, the reinsurers have withheld
payment without reference to a substantive basis for the delay or
suspension. In other cases, the reinsurers have claimed they are not
liable for payment to us of all or part of the amounts due under the
applicable reinsurance agreement. We believe these claims are
substantially without merit and expect to collect the full amounts
recoverable. We are currently in negotiations with most of these
parties, but if such negotiations do not result in a satisfactory
resolution of the matters in question, we may seek or be involved in a
judicial or arbitral determination of these matters. In some cases, the
final resolution of such disputes through arbitration or litigation may
extend over several years. In this regard, as of March 31, 2003, our
insurance companies had initiated two litigation proceedings against
reinsurers. As of such date, our insurance companies had an aggregate
amount of $4.2 million which had not been paid to us under the
agreements and we estimate that there could be up to an additional $9.5
million of incurred losses and loss expenses and other balances which
become due under the subject agreements.
(3) SEGMENT AND GEOGRAPHIC INFORMATION
The performance of each segment is evaluated based upon net earnings
and is calculated after tax and after all corporate expense
allocations, purchase price allocations and intercompany eliminations
have been charged or credited to the individual segments. The following
tables show information by business segment and geographic location.
Geographic location is determined by physical location of our offices
and does not represent the location of insureds or reinsureds from whom
the business was generated. The revenues within our underwriting agency
and intermediary segments for 2002, have been reclassified to be
consistent with the 2003 presentation. This reclassification did not
change segment total revenue or segment net earnings from amounts
previously reported. Certain reinsurance proceeds of our insurance
subsidiaries have also been reclassified to revenue to be consistent
with the classification in the condensed consolidated financial
statements.
12
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
Insurance Underwriting Other
Company Agency Intermediary Operations Corporate Total
----------- --------- ------------ ---------- --------- ---------
For the three months ended
March 31, 2003:
Revenue:
Domestic $ 137,236 $ 10,518 $ 4,971 $ 447 $ 1 $ 153,173
Foreign 44,322 1,399 5,499 -- -- 51,220
Inter-segment -- 25,492 1,553 -- -- 27,045
----------- --------- ------------ ---------- --------- ---------
TOTAL SEGMENT REVENUE $ 181,558 $ 37,409 $ 12,023 $ 447 $ 1 231,438
=========== ========= ============ ========== =========
Inter-segment revenue (27,045)
---------
CONSOLIDATED TOTAL REVENUE $ 204,393
=========
Net earnings:
Domestic $ 15,973 $ 8,745 $ 1,542 $ (590) $ (219) $ 25,451
Foreign 3,387 1,171 1,157 -- -- 5,715
----------- --------- ------------ ---------- --------- ---------
TOTAL SEGMENT NET EARNINGS (LOSS) $ 19,360 $ 9,916 $ 2,699 $ (590) $ (219) 31,166
=========== ========= ============ ========== =========
Inter-segment eliminations (7,399)
---------
CONSOLIDATED NET EARNINGS $ 23,767
=========
Other items:
Net investment income $ 10,030 $ 749 $ 184 $ 4 $ 31 $ 10,998
Depreciation and amortization 821 1,595 82 239 239 2,976
Interest expense (benefit) 9 1,812 638 193 (970) 1,682
Capital expenditures 440 517 301 -- 265 1,523
Income tax provision (benefit) 8,761 5,834 2,021 (282) 758 17,092
Inter-segment eliminations (4,270)
---------
CONSOLIDATED INCOME TAX PROVISION $ 12,822
=========
13
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
Insurance Underwriting Other
Company Agency Intermediary Operations Corporate Total
----------- --------- ------------ ---------- --------- ---------
For the three months ended
March 31, 2002:
Revenue:
Domestic $ 110,097 $ 17,398 $ 5,138 $ 293 $ 613 $ 133,539
Foreign 16,795 507 5,243 -- -- 22,545
Inter-segment -- 8,443 257 -- -- 8,700
----------- --------- ---------- ---------- --------- ---------
TOTAL SEGMENT REVENUE $ 126,892 $ 26,348 $ 10,638 $ 293 $ 613 164,784
=========== ========= ========== ========== =========
Inter-segment revenue (8,700)
---------
CONSOLIDATED TOTAL REVENUE $ 156,084
=========
Net earnings:
Domestic $ 14,364 $ 5,235 $ 565 $ 65 $ 1,348 $ 21,577
Foreign 536 258 1,144 -- -- 1,938
----------- --------- ---------- ---------- --------- ---------
TOTAL SEGMENT NET EARNINGS $ 14,900 $ 5,493 $ 1,709 $ 65 $ 1,348 23,515
=========== ========= ========== ========== =========
Inter-segment eliminations (233)
---------
CONSOLIDATED NET EARNINGS $ 23,282
=========
Other items:
Net investment income $ 7,692 $ 715 $ 222 $ 20 $ 45 $ 8,694
Depreciation and amortization 758 1,607 86 50 246 2,747
Interest expense (benefit) 73 1,986 644 -- (325) 2,378
Capital expenditures 502 424 290 -- 109 1,325
Income tax provision (benefit) 7,319 3,137 1,701 (9) 449 12,597
Inter-segment eliminations (159)
---------
CONSOLIDATED INCOME TAX PROVISION $ 12,438
=========
14
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
The following tables present selected revenue items by line of business
for the periods indicated:
For the three months ended March 31,
2003 2002
---------- ----------
Group life, accident and health $ 71,983 $ 51,567
Diversified financial products 18,306 2,703
London market account 29,376 16,252
Aviation 23,882 25,183
Other specialty lines of business 9,528 3,635
---------- ----------
153,075 99,340
Discontinued lines of business 9,347 12,138
---------- ----------
NET EARNED PREMIUM $ 162,422 $ 111,478
========== ==========
Group life, accident and health $ 19,945 $ 22,829
Property and casualty 10,173 11,118
---------- ----------
FEE AND COMMISSION INCOME $ 30,118 $ 33,947
========== ==========
15
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(4) EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of
common shares outstanding during the period divided into net earnings.
Diluted earnings per share is based on the weighted average number of
common shares outstanding plus the potential common shares outstanding
during the period divided into net earnings. Outstanding common stock
options, when dilutive, are considered to be potential common shares
for the purpose of the diluted calculation. The treasury stock method
is used to calculate potential common shares due to options. Contingent
shares to be issued are included in the earnings per share computation
when the underlying conditions for issuance have been met.
The following table provides a reconciliation of the denominators used
in the earnings per share calculations:
For the three months ended March 31,
2003 2002
---------- ----------
Net earnings $ 23,767 $ 23,282
========== ==========
Reconciliation of number of shares outstanding:
Shares of common stock outstanding at period end 62,679 62,023
Effect of common shares issued during the period (42) (139)
Common shares contractually issuable in the future -- 52
---------- ----------
Weighted average common shares outstanding 62,637 61,936
Additional dilutive effect of outstanding options
(as determined by the application of the
treasury stock method) 698 777
---------- ----------
Weighted average common shares and
potential common shares outstanding 63,335 62,713
========== ==========
Anti-dilutive shares not included in computation 2,218 362
========== ==========
16
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(5) NOTES PAYABLE
The table below shows the composition of our notes payable as shown in
our condensed consolidated balance sheets.
March 31, 2003 December 31, 2002
-------------- -----------------
1.3% Convertible notes $ 125,000 $ --
2% Convertible notes 172,451 172,451
$200 million revolving loan facility -- 53,000
Other debt 14,241 4,576
-------------- -----------------
TOTAL NOTES PAYABLE $ 311,692 $ 230,027
============== =================
In a public offering on March 25, 2003, we sold an aggregate $125.0
million principal amount of 1.3% Convertible Notes due in 2023. Each $1
thousand principal amount of notes is convertible into 29.4377 shares
of our common stock, which represents an initial conversion price of
$33.97 per share. The initial conversion price is subject to change
under certain conditions. Interest is to be paid by us on April 1 and
October 1 each year, commencing October 1, 2003. Holders may surrender
notes for conversion into shares of our common stock if, as of the last
day of the preceding calendar quarter, the closing sale price of our
common stock for at least 20 consecutive trading days during the period
of 30 consecutive trading days ending on the last trading day of that
quarter is more than 130% ($44.16 per share) of the conversion price
per share of our common stock. We can redeem the notes for cash at any
time on or after April 4, 2009. Holders of the notes may require us to
repurchase the notes on April 1, 2009, 2014 and 2019 at a price equal
to the principal amount of the note plus accrued and unpaid interest.
If the holders require us to repurchase these notes, we may choose to
pay the purchase price in cash, in shares of our common stock, or in a
combination thereof. We paid $3.2 million in underwriting discounts and
expenses in connection with this offering, which is being amortized
from the issue date until April 1, 2009. We used $66.0 million of the
proceeds from this offering to pay down existing indebtedness under our
bank facility, while the remainder is available to assist in financing
future acquisitions and strategic investments and for general corporate
purposes.
(6) SUPPLEMENTAL INFORMATION
Supplemental information for the three months ended March 31, 2003 and
2002, is summarized below:
2003 2002
--------- ---------
Interest paid $ 2,431 $ 2,070
Income tax paid 5,931 1,565
Comprehensive income 22,944 20,121
Ceding commissions netted with policy acquisition costs 24,379 19,417
17
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, in thousands, except per share data, continued)
(7) COMMITMENTS AND CONTINGENCIES
In addition to the matters discussed in Note (2) Reinsurance, we are
party to numerous lawsuits and other proceedings that arise in the
normal course of our business. Many of such lawsuits 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 and other proceedings which relate to disputes
over contractual relationships with third parties, or which involve
alleged errors and omissions on the part of our subsidiaries. In
addition, we are presently engaged in litigation initiated by the
appointed liquidator of a former reinsurer concerning payments made to
us prior to the date of the appointment of the liquidator. The disputed
payments were made by the now insolvent reinsurer in connection with a
commutation agreement. Our understanding is that such litigation is one
of a number of similar actions brought by the liquidator. We intend to
vigorously contest the action. We are also presently engaged in
litigation, along with other insurers, with a state health insurance
association concerning the change in calculation methodology of its
assessments. We do not believe the resolution of any of these matters
will have a material adverse effect on our financial condition, results
of operations or cash flows.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This Form 10-Q/A has amended our previously filed Form 10-Q to reflect a
restatement to change the basis upon which the fee and commission income of our
underwriting agency and intermediary subsidiaries are accounted. This
restatement relates only to business underwritten by our underwriting agencies
or placed by our intermediaries that passes through one of our affiliated
insurance companies to an unrelated reinsurance company. This income had
previously been recognized at the later of the effective date of a policy, the
date when the premium could be reasonably established or the date when
substantially all the services relating to the insurance placement had been
rendered to the client. This income is now recognized pro rata over the term of
the underlying policy. The cumulative effect of the restatement related to prior
years, $3.9 million, which is recorded in the first quarter of 2003, is not
material to prior years or 2003. The effect of the change only became material
in 2003 as a result of recent acquisitions. The change is a timing difference
which generally reverses over a twelve month period. The restatement does not
impact the overall amount of fees and commissions ultimately earned or
previously collected in cash. Additionally, it does not change the net earnings
of our reporting segments but, rather, results solely from changes to the
consolidating entries made in the preparation of our condensed consolidated
financial statements. Likewise, it does not change cash flow from operations.
The effect of the restatement on revenue was a reduction of $10.9 million for
the first three months of 2003. This amount includes $6.5 million associated
with the cumulative effect of the restatement related to prior years. The table
below shows the effect on net earnings and earnings per share for the first
quarter of 2003.
Earnings per share
Amount Basic Diluted
---------- ------------------ ----------
Net earnings, as previously reported $ 30,275 $ 0.48 $ 0.48
Effect of adjustment on operations for the period (2,618) (0.04) (0.04)
Cumulative adjustment (3,890) (0.06) (0.06)
---------- ------------------ ----------
Net earnings, as reported herein $ 23,767 $ 0.38 $ 0.38
========== ================== ==========
Three months ended March 31, 2003 versus three months ended March 31, 2002
Results of Operations
Total revenue increased 31% to $204.4 million for the first quarter of 2003 from
$156.1 million for the same period in 2002. The revenue increase resulted from
premium rate increases, increased business in all three operating segments and
subsidiaries acquired during the fourth quarter of 2002.
Net investment income increased 27% to $11.0 million for the first quarter of
2003 from $8.7 million for the same period in 2002. This increase was due to the
higher level of invested assets resulting primarily from cash flow generated by
operating activities and from the insurance company we acquired in December,
2002. Cash flow from operating activities was $101.9 million for the first
quarter of 2003 compared to $13.1 million for the same period in 2002,
continuing a trend of increasing operating cash flow that began in 2002. The
majority of the increase in cash flow from operations results from increased
earnings and net premium flow into our insurance companies. We expect the
positive cash flow provided by operating activities to continue, most of which
will increase invested assets and thus the related investment income. If market
interest rates were to rise, the growth in investment income would be
accelerated as our current portfolio has a relatively short average duration,
and would be available to be invested on a longer term basis to take advantage
of higher rates. For the first quarter of 2003 our annualized, weighted average,
tax equivalent yield was 3.9% compared to 4.7% for the same period in 2002.
19
Compensation expense increased to $20.5 million during the first quarter of 2003
from $16.7 million for the same period in 2002. Most of the increase is due to
subsidiaries acquired during the fourth quarter of 2002. Other operating expense
increased to $13.7 million during the first quarter of 2003 compared to $12.0
million in 2002 for the same reason.
Interest expense was $1.7 million for the first quarter of 2003 compared to $2.4
million for the same period in 2002. Included in the 2002 amount is $1.1 million
representing the amortization of underwriting discounts and expenses related to
our issuance of our 2% convertible notes.
Income tax expense was $12.8 million for the first quarter of 2003 compared to
$12.4 million for the same period in 2002. Our effective tax rate was 35.0% in
the 2003 quarter compared to 34.8% in 2002.
Net earnings increased to $23.8 million, or $0.38 per diluted share, for the
first quarter of 2003 from $23.3 million, or $0.37 per diluted share, for the
same period in 2002. Included in 2003 net earnings is a reduction of $3.9
million, or $0.06 per share, due to the prior years' cumulative effect of the
restatement to change our accounting for certain fee and commission income.
At March 31, 2003, total assets exceeded $4.0 billion for the first time,
shareholders equity was $906.4 million and book value per share was $14.46, up
from $14.15 as of December 31, 2002.
20
SEGMENTS
Insurance Companies
The following tables provide information by line of business (amounts in
thousands):
Gross Net Net Net
written written earned loss
premium premium premium ratio
---------- ------------ ------------- ------
For the three months ended March 31, 2003:
Group life, accident and health $ 139,320 $ 76,185 $ 71,983 63.6%
Diversified financial products 107,320 33,307 18,306 43.7
London market accounts 60,718 37,232 29,376 42.2
Aviation 44,531 20,679 23,882 65.5
Other specialty lines of business 20,880 17,450 9,528 66.2
---------- ------------ ------------- ------
372,769 184,853 153,075 57.5
Discontinued lines of business 6,679 7,648 9,347 127.7
---------- ------------ ------------- ------
TOTALS $ 379,448 $ 192,501 $ 162,422 61.6%
========== ============ =============
Expense Ratio 27.2
------
Combined Ratio 88.8%
======
Gross Net Net Net
written written earned loss
premium premium premium ratio
---------- ------------ ------------- ------
For the three months ended March 31, 2002:
Group life, accident and health $ 122,904 $ 51,820 $ 51,567 62.0%
Diversified financial products 15,813 7,341 2,703 36.0
London market accounts 47,545 28,536 16,252 44.6
Aviation 44,114 22,633 25,183 58.5
Other specialty lines of business 4,202 3,581 3,635 93.8
---------- ------------ ------------- ------
234,578 113,911 99,340 58.7
Discontinued lines of business 13,190 8,361 12,138 82.3
---------- ------------ ------------- ------
TOTALS $ 247,768 $ 122,272 $ 111,478 61.3%
========== ============ =============
Expense Ratio 26.0
------
Combined Ratio 87.3%
======
Gross written premium increased 53% to $379.4 million for the first quarter of
2003 from $247.8 million for the same period in 2002. All of the lines of
business showed some increase as a result of increases in premium rates as well
as organic growth, but the largest growth was the diversified financial products
line of business, which our insurance companies began writing in 2002. Net
written premium for the first quarter of 2003 increased 57% to $192.5 million
and net earned premium increased 46% to $162.4 million, both due principally to
the growth in gross premium. The increase in premium is expected to continue
throughout 2003 and into 2004.
21
Loss and loss adjustment expense was $100.0 million for the first quarter of
2003 compared to $68.3 million for the same period in 2002. The net loss ratio
was 61.6% for the first quarter of 2003 compared to 61.3% for the same period in
2002. For the same period, the gross loss ratio was 68.9% in 2003 compared to
69.3% in 2002. Prior year net reserve deficiency included in loss and loss
adjustment expense approximated $1.3 million for the first quarter of 2003
compared to a redundancy of $1.8 million for the same period in 2002. The
deficiency and redundancy resulted from the settlement of claims for different
amounts than previously reserved.
The loss ratio in the aviation line of business increased slightly from the
first quarter of 2002 principally due to some adverse development on a few old
claims plus a bad month of March 2003. Loss experience in the other specialty
lines improved in 2003 to a more usual level from the prior year. The loss ratio
in the discontinued lines of business increased in the first quarter of 2003
primarily due to prior year reserve development as we increase reserves towards
the mid level of the actuarial range.
Policy acquisition costs, which are net of commissions on reinsurance ceded,
increased to $31.9 million during the first quarter of 2003, from $20.9 million
in the same period in 2002. This increase is due to and in proportion to the
increase in net earned premium.
Net earnings of our insurance companies increased to $19.4 million in the first
quarter of 2003 from $14.9 million for the same period in 2002 due to increased
premium volume and continuing profitable underwriting results. We expect this
growth to continue into 2004.
Underwriting Agencies
Revenue from our underwriting agencies (primarily fee income) increased 42% to
$37.4 million for the first quarter of 2003 compared to $26.3 million for the
same period in 2002. This growth was both from acquisitions made during the
fourth quarter of 2002 and from internal growth at our underwriting agencies.
Net earnings in this segment increased to $9.9 million in the first quarter of
2003 from $5.5 million in 2002 for the same reasons and we expect this growth to
continue into 2004.
Intermediaries
Revenue from our intermediaries (primarily commission income) increased 13% to
$12.0 million for the first quarter of 2003 compared to $10.6 million for the
same period in 2002 due to improved market conditions and growth in
non-affiliated business. Net earnings of our intermediaries increased to $2.7
million for the first quarter of 2003 compared to $1.7 million for the same
period of 2002 for the same reason. We expect continued improvement in the
intermediary segment during the remainder of 2003.
Other Operations
There was very little activity in the other operations segment during either
first quarter. Quarter to quarter comparisons may vary substantially depending
on other operating investments or dispositions thereof in any given period.
Corporate
The net loss of the corporate segment was $0.2 million for the first quarter of
2003 compared to net earnings of $1.3 million for the same period in 2002. This
resulted from the difference between years in intersegment income tax
adjustments and the adjustment of certain accruals to their ultimate liability,
which positively affected the 2002 quarter.
22
Liquidity and Capital Resources
We receive substantial cash from premiums, reinsurance recoverables, management
fees and commission income and, to a lesser extent, investment income and
proceeds from sales and redemptions of investments and other assets. Our
principal cash outflows are for the payment of claims and loss adjustment
expenses, payment of premiums to reinsurers, purchase of investments, debt
service, policy acquisition costs, operating expenses, income and other taxes
and dividends. Variations in operating cash flows can occur due to timing
differences in either the payment of claims and the collection of related
recoverables or the collection of receivables and the payment of related payable
amounts.
We maintain a substantial level of cash and liquid short-term investments which
are used to meet anticipated payment obligations. Our consolidated cash and
investment portfolio increased $138.4 million, or 11% , during the first quarter
of 2003 and totaled $1.3 billion as of March 31, 2003 of which $474.4 million
was cash and short-term investments. The increase in investments resulted from
the positive operating cash flows and part of the proceeds from the 1.3%
Convertible Notes discussed below.
In a public offering on March 25, 2003, we sold an aggregate $125.0 million
principal amount of 1.3% Convertible Notes due in 2023. Each $1 thousand
principal amount of notes is convertible into 29.4377 shares of our common
stock, which represents an initial conversion price of $33.97 per share. The
initial conversion price is subject to change under certain conditions. Interest
is to be paid by us on April 1 and October 1 each year, commencing October 1,
2003. Holders may surrender notes for conversion into shares of our common stock
if, as of the last day of the preceding calendar quarter, the closing sale price
of our common stock for at least 20 consecutive trading days during the period
of 30 consecutive trading days ending on the last trading day of that quarter is
more than 130% ($44.16 per share) of the conversion price per share of our
common stock. We can redeem the notes for cash at any time on or after April 4,
2009. Holders of the notes may require us to repurchase the notes on April 1,
2009, 2014 and 2019 at a price equal to the principal amount of the note plus
accrued and unpaid interest. If the holders require us to repurchase these
notes, we may choose to pay the purchase price in cash, in shares of our common
stock, or in a combination thereof. We paid $3.2 million in underwriting
discounts and expenses in connection with this offering, which is being
amortized from the issue date until April 1, 2009. We used $66.0 million of the
proceeds from this offering to pay down existing indebtedness under our bank
facility, while the remainder is available to assist in financing future
acquisitions and strategic investments and for general corporate purposes.
Reinsurance recoverables increased during the first quarter of 2003 due to the
increase in reinsurance recoverables on incurred but not reported losses. A
significant portion of this increase comes from the diversified financial
products line of business, new in 2002, which is more heavily reinsured than our
other lines of business. Reinsurance recoverables on outstanding losses was
slightly reduced during the first quarter of 2003, but this was offset by a
slight increase in reinsurance recoverables on paid losses.
We have a reserve of $7.7 million as of March 31, 2003 for potential
collectibility issues and associated expenses related to reinsurance
recoverables. The adverse economic environment in the worldwide insurance
industry, the decline in the market value of investments in equity securities
and the terrorist attack on September 11, 2001 have placed great pressure on
reinsurers and the results of their operations. Ultimately, these conditions
could affect reinsurers' solvency. Historically, there have been insolvencies
following a period of competitive pricing in the industry. We limit our exposure
by holding funds, letters of credit or other security such that net balances due
are significantly less than the gross balances shown in our condensed
consolidated balance sheets. While we believe that the reserve is adequate based
on currently available information, conditions may change or additional
information might be obtained which may result in a future change in the
reserve. We periodically review our financial exposure to the reinsurance market
and the level of our reserve and continue to take actions in an attempt to
mitigate our exposure to possible loss.
23
A number of reinsurers have delayed or suspended the payment of amounts
recoverable under certain reinsurance contracts to which we are a party. Such
delays have affected, although not materially to date, the investment income of
our insurance companies, but not to any extent their liquidity. In some
instances, the reinsurers have withheld payment without reference to a
substantive basis for the delay or suspension. In other cases, the reinsurers
have claimed they are not liable for payment to us of all or part of the amounts
due under the applicable reinsurance agreement. We believe these claims are
substantially without merit and expect to collect the full amounts recoverable.
We are currently in negotiations with most of these parties, but if such
negotiations do not result in a satisfactory resolution of the matters in
question, we may seek or be involved in a judicial or arbitral determination of
these matters. In some cases, the final resolution of such disputes through
arbitration or litigation may extend over several years. In this regard, as of
March 31, 2003, our insurance companies had initiated two litigation proceedings
against reinsurers. As of such date, our insurance companies had an aggregate
amount of $4.2 million which had not been paid to us under the agreements and we
estimate that there could be up to an additional $9.5 million of incurred losses
and loss expenses and other balances which become due under the subject
agreements.
We believe that our operating cash flows, short-term investments, bank facility
and shelf registration on file with the United states Securities and Exchange
Commission will provide sufficient sources of liquidity to meet our operating
needs for the foreseeable future.
Critical Accounting Policies
We have made no changes in our methods of application of our critical accounting
policies from the information provided in our Annual Report on Form 10-K for the
year ended December 31, 2002.
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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, we carried out an
evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. This evaluation was performed under the supervision of, and
with the participation of, our management, including the Chief
Executive Officer and Chief Financial Officer. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to HCC Insurance
Holdings, Inc. and its subsidiaries required to be included in our
periodic SEC filings.
b. Changes in internal controls.
There have been no significant changes in our internal controls or in
other factors which could significantly affect internal controls
subsequent to the date we carried out our evaluation.
24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In addition to the matters discussed in Note (2) Reinsurance, we are
party to numerous lawsuits and other proceedings that arise in the
normal course of our business. Many of such lawsuits 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 and other proceedings which relate to disputes
over contractual relationships with third parties, or which involve
alleged errors and omissions on the part of our subsidiaries. In
addition, we are presently engaged in litigation initiated by the
appointed liquidator of a former reinsurer concerning payments made to
us prior to the date of the appointment of the liquidator. The disputed
payments were made by the now insolvent reinsurer in connection with a
commutation agreement. Our understanding is that such litigation is one
of a number of similar actions brought by the liquidator. We intend to
vigorously contest the action. We are also presently engaged in
litigation, along with other insurers, with a state health insurance
association concerning the change in calculation methodology of its
assessments. We do not believe the resolution of any of these matters
will have a material adverse effect on our financial condition, results
of operations or cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification by Chief Executive Officer.
31.2 Certification by Chief Financial Officer.
32.1 Certification with respect to quarterly report.
(b) Reports on Form 8-K
On January 28, 2003, we furnished on Form 8-K the text
material used for presentations at various investor
conferences.
On February 20, 2003, we reported on Form 8-K our announcement
of financial results for the fourth quarter and full year of
2002.
On March 3, 2003, we furnished on Form 8-K the text materials
used for presentations at various investor conferences.
On March 28, 2003, we reported on Form 8-K our public offering
of 1.3% Convertible Notes due in 2023 and filed various
exhibits related thereto.
25
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)
March 1, 2004 /s/ Stephen L. Way
----------------- --------------------------------------
(Date) Stephen L. Way, Chairman of the Board
Chief Executive Officer and President
March 1, 2004 /s/ Edward H. Ellis, Jr.
----------------- --------------------------------------
(Date) Edward H. Ellis, Jr., Executive Vice
President and Chief Financial Officer
26
INDEX TO EXHIBIT
31.1 Certification by Chief Executive Officer.
31.2 Certification by Chief Financial Officer.
32.1 Certification with respect to quarterly report.