e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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for the Quarterly Period Ended September 30, 2011. |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 001-13790
HCC Insurance Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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76-0336636 |
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.) |
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13403 Northwest Freeway, Houston, Texas
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77040-6094 |
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(Address of principal executive offices)
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(Zip Code) |
(Registrants 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 o
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 o
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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the registrants classes of common stock as of
the latest practicable date.
On October 28, 2011, there were approximately 106.5 million shares of common stock
outstanding.
HCC Insurance Holdings, Inc. and Subsidiaries
Table of Contents
2
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. 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 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. 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 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:
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the effects of catastrophe losses, |
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the cyclical nature of the insurance business, |
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inherent uncertainties in the loss estimation process, which can adversely impact the
adequacy of loss reserves, |
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the impact of past and future potential credit market downturns, including the
potential future ratings downgrade and/or impairment or perceived impairment of debt
securities of sovereign issuers, including the United States of America, |
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the effects of emerging claim and coverage issues, |
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the effects of extensive governmental regulation of the insurance industry, |
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potential credit risk with brokers, |
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the effects of industry consolidations, |
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our assessment of underwriting risk, |
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our retention of risk, which could expose us to potential losses, |
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the adequacy of reinsurance protection, |
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the ability and willingness of reinsurers to pay balances due us, |
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the occurrence of terrorist activities, |
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our ability to maintain our competitive position, |
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changes in our assigned financial strength ratings, |
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our ability to raise capital and funds for liquidity in the future, |
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attraction and retention of qualified employees, |
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fluctuations in securities markets, including defaults, which may reduce the value of
our investment assets, reduce investment income or generate realized investment losses, |
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our ability to successfully expand our business through the acquisition of
insurance-related companies, |
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impairment of goodwill, |
3
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the ability of our insurance company subsidiaries to pay dividends in needed amounts, |
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fluctuations in foreign exchange rates, |
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failures or constraints of our information technology systems, |
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changes to the countrys health care delivery system, |
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the effects , if any, of climate change, on the risks we insure, |
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change of control, and |
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difficulties with outsourcing relationships. |
We describe 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, 2010.
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, 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 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
HCC Insurance Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited, in thousands except per share data)
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September 30, |
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December 31, |
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2011 |
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2010 |
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ASSETS |
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Investments |
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Fixed income securities available for sale, at fair value (amortized cost: 2011 $5,356,333;
2010 $4,864,806) |
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$ |
5,651,189 |
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$ |
4,999,440 |
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Fixed income securities held to maturity, at amortized cost (fair value: 2011 $170,556;
2010 $195,811) |
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168,614 |
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193,668 |
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Short-term investments, at cost, which approximates fair value |
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197,986 |
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488,002 |
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Other investments |
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34,297 |
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5,985 |
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Total investments |
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6,052,086 |
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5,687,095 |
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Cash |
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93,137 |
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97,857 |
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Restricted cash |
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227,562 |
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148,547 |
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Premium, claims and other receivables |
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677,641 |
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635,867 |
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Reinsurance recoverables |
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1,071,266 |
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1,006,855 |
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Ceded unearned premium |
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231,537 |
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278,663 |
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Ceded life and annuity benefits |
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56,868 |
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58,409 |
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Deferred policy acquisition costs |
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225,190 |
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212,786 |
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Goodwill |
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873,375 |
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821,648 |
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Other assets |
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133,326 |
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116,355 |
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Total assets |
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$ |
9,641,988 |
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$ |
9,064,082 |
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LIABILITIES |
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Loss and loss adjustment expense payable |
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$ |
3,686,570 |
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$ |
3,471,858 |
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Life and annuity policy benefits |
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56,868 |
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58,409 |
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Reinsurance, premium and claims payable |
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321,684 |
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345,730 |
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Unearned premium |
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1,071,340 |
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1,045,877 |
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Deferred ceding commissions |
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66,059 |
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72,565 |
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Notes payable |
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493,752 |
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298,637 |
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Accounts payable and accrued liabilities |
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678,576 |
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474,574 |
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Total liabilities |
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6,374,849 |
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5,767,650 |
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SHAREHOLDERS EQUITY |
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Common stock, $1.00 par value; 250,000 shares authorized (shares issued: 2011 122,661
and 2010 120,942; outstanding: 2011 106,511 and 2010 114,968) |
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122,661 |
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120,942 |
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Additional paid-in capital |
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998,585 |
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954,332 |
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Retained earnings |
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2,385,638 |
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2,257,895 |
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Accumulated other comprehensive income |
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202,018 |
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97,186 |
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Treasury stock, at cost (shares: 2011 16,150 and 2010 5,974) |
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(441,763 |
) |
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(133,923 |
) |
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Total shareholders equity |
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3,267,139 |
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3,296,432 |
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Total liabilities and shareholders equity |
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$ |
9,641,988 |
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$ |
9,064,082 |
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See Notes to Consolidated Financial Statements.
5
HCC Insurance Holdings, Inc. and Subsidiaries
Consolidated Statements of Earnings
(unaudited, in thousands except per share data)
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Nine months ended September 30, |
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Three months ended September 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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REVENUE |
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Net earned premium |
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$ |
1,576,987 |
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$ |
1,532,138 |
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$ |
544,256 |
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$ |
516,166 |
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Net investment income |
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158,782 |
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150,603 |
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54,765 |
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51,137 |
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Other operating income |
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23,625 |
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35,035 |
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8,829 |
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7,888 |
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Net realized investment gain |
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3,169 |
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7,897 |
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2,674 |
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1,057 |
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Other-than-temporary impairment credit losses |
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(3,479 |
) |
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(300 |
) |
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(300 |
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Total revenue |
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1,759,084 |
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1,725,373 |
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610,524 |
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575,948 |
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EXPENSE |
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Loss and loss adjustment expense, net |
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1,062,240 |
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922,645 |
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380,372 |
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297,138 |
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Policy acquisition costs, net |
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239,160 |
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242,078 |
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71,299 |
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80,748 |
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Other operating expense |
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198,511 |
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189,953 |
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70,451 |
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60,770 |
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Interest expense |
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16,597 |
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15,907 |
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5,610 |
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5,280 |
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Total expense |
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1,516,508 |
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1,370,583 |
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527,732 |
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443,936 |
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Earnings before income tax expense |
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242,576 |
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354,790 |
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82,792 |
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132,012 |
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Income tax expense |
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65,671 |
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106,993 |
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22,355 |
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38,949 |
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Net earnings |
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$ |
176,905 |
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$ |
247,797 |
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$ |
60,437 |
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$ |
93,063 |
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Earnings per common share |
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Basic |
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$ |
1.58 |
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$ |
2.15 |
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$ |
0.56 |
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$ |
0.81 |
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Diluted |
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$ |
1.57 |
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$ |
2.15 |
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$ |
0.56 |
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$ |
0.81 |
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See Notes to Consolidated Financial Statements.
6
HCC Insurance Holdings, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders Equity
(unaudited, in thousands except per share data)
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Accumulated |
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Additional |
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other |
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Total |
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Common |
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paid-in |
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Retained |
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comprehensive |
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Treasury |
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shareholders |
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stock |
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capital |
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earnings |
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income |
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stock |
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equity |
|
Balance at December 31, 2010 |
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$ |
120,942 |
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$ |
954,332 |
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$ |
2,257,895 |
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$ |
97,186 |
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|
$ |
(133,923 |
) |
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$ |
3,296,432 |
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Comprehensive income |
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Net earnings |
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|
176,905 |
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|
176,905 |
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Other comprehensive income |
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Change in net unrealized gain on
investments, net of tax |
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|
104,776 |
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|
104,776 |
|
Other, net of tax |
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|
|
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|
|
|
|
|
|
|
56 |
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|
56 |
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Total other
comprehensive income |
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|
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|
104,832 |
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|
Comprehensive income |
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|
281,737 |
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Issuance of 1,458 shares for exercise of
options, including tax effect |
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|
1,458 |
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|
34,787 |
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|
36,245 |
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Purchase of 10,176 common shares |
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(307,840 |
) |
|
|
(307,840 |
) |
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Stock-based compensation |
|
|
261 |
|
|
|
9,466 |
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|
|
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|
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|
|
|
|
|
|
|
|
|
9,727 |
|
|
|
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Cash dividends declared, $0.445 per share |
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|
|
|
(49,162 |
) |
|
|
|
|
|
|
|
|
|
|
(49,162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011 |
|
$ |
122,661 |
|
|
$ |
998,585 |
|
|
$ |
2,385,638 |
|
|
$ |
202,018 |
|
|
$ |
(441,763 |
) |
|
$ |
3,267,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
7
HCC Insurance Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited, in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
176,905 |
|
|
$ |
247,797 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Change in premium, claims and other receivables |
|
|
(76,927 |
) |
|
|
(36,040 |
) |
Change in reinsurance recoverables |
|
|
(56,510 |
) |
|
|
(32,474 |
) |
Change in ceded unearned premium |
|
|
47,477 |
|
|
|
(15,368 |
) |
Change in loss and loss adjustment expense payable |
|
|
196,046 |
|
|
|
76,829 |
|
Change in unearned premium |
|
|
24,655 |
|
|
|
30,471 |
|
Change in reinsurance, premium and claims payable, excluding restricted cash |
|
|
(34,052 |
) |
|
|
11,501 |
|
Change in accounts payable and accrued liabilities |
|
|
5,082 |
|
|
|
12,593 |
|
Stock-based compensation expense |
|
|
10,017 |
|
|
|
9,441 |
|
Depreciation and amortization expense |
|
|
13,214 |
|
|
|
12,894 |
|
(Gain) loss on investments |
|
|
310 |
|
|
|
(8,086 |
) |
Other, net |
|
|
(18,258 |
) |
|
|
5,073 |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
287,959 |
|
|
|
314,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Sales of available for sale fixed income securities |
|
|
494,532 |
|
|
|
132,897 |
|
Maturity or call of available for sale fixed income securities |
|
|
318,558 |
|
|
|
458,495 |
|
Maturity or call of held to maturity fixed income securities |
|
|
24,950 |
|
|
|
25,187 |
|
Cost of available for sale fixed income securities acquired |
|
|
(1,243,124 |
) |
|
|
(1,048,010 |
) |
Cost of held to maturity fixed income securities acquired |
|
|
|
|
|
|
(115,215 |
) |
Cost of other investments acquired |
|
|
(33,060 |
) |
|
|
|
|
Change in short-term investments |
|
|
288,909 |
|
|
|
328,951 |
|
Payments for purchase of businesses, net of cash received |
|
|
(1,892 |
) |
|
|
(36,348 |
) |
Proceeds from sale of subsidiaries and other investments |
|
|
2,793 |
|
|
|
19,855 |
|
Other, net |
|
|
(16,977 |
) |
|
|
(6,755 |
) |
|
|
|
|
|
|
|
Cash used by investing activities |
|
|
(165,311 |
) |
|
|
(240,943 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Advances on line of credit |
|
|
210,000 |
|
|
|
|
|
Payments on line of credit |
|
|
(15,000 |
) |
|
|
|
|
Payments on convertible notes |
|
|
|
|
|
|
(64,472 |
) |
Sale of common stock |
|
|
36,245 |
|
|
|
18,639 |
|
Purchase of common stock |
|
|
(303,311 |
) |
|
|
(11,444 |
) |
Dividends paid |
|
|
(49,301 |
) |
|
|
(46,532 |
) |
Other, net |
|
|
(6,001 |
) |
|
|
(1,126 |
) |
|
|
|
|
|
|
|
Cash used by financing activities |
|
|
(127,368 |
) |
|
|
(104,935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash |
|
|
(4,720 |
) |
|
|
(31,247 |
) |
Cash at beginning of year |
|
|
97,857 |
|
|
|
129,460 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
93,137 |
|
|
$ |
98,213 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
8
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 non-correlated specialty insurance products in more than 180 countries, including property and
casualty, accident and health, surety, credit and aviation product lines. We market our products
through a network of independent agents and brokers, producers, managing general agents and
directly to customers.
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, 2010. The consolidated balance sheet at
December 31, 2010 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. We have reclassified certain amounts in our 2010 consolidated
financial statements to conform to the 2011 presentation. None of our reclassifications had an
effect on our consolidated net earnings, shareholders equity or cash flows.
Recently Issued Accounting Guidance
A new accounting standard clarifies the definition of acquisition costs incurred by an insurance
company and limits capitalization to such costs directly related to renewing or acquiring new
insurance contracts. All costs incurred for unsuccessful marketing or underwriting efforts, along
with indirect costs, are to be expensed as incurred. We plan to adopt this guidance on January 1,
2012. The new guidance will have no impact on our cash flows, and we do not expect it to have a
significant impact on either our expenses or our pretax earnings. However, our adoption of the new
standard will result in a reduction of our deferred policy acquisition costs asset, an adjustment
to deferred income taxes, and a corresponding decrease in consolidated shareholders equity. We
expect to adopt the new standard retrospectively and estimate that the adjustment to our
consolidated shareholders equity at adoption will be less than $20.0 million.
New accounting guidance provides a consistent definition of fair value and ensures that fair value
measurements and required disclosures are similar between GAAP and International Financial
Reporting Standards. The new guidance also expands required disclosures for fair value
measurements that are estimated using significant unobservable (Level 3) inputs. We will apply the
new guidance prospectively beginning January 1, 2012. We do not expect adoption of the new
guidance to have a material impact on our consolidated financial position, results of operations or
cash flows.
A new accounting standard changes the disclosure of comprehensive income. The new guidance permits
entities to present total comprehensive income, net income and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. The current option of reporting other comprehensive income
and its components in the statement of changes in shareholders equity will be eliminated. This
guidance is effective on January 1, 2012 and must be applied retrospectively. The consolidated
financial statements included in our 2010 Form 10-K comply with the new guidance; however, our
interim consolidated financial statements have been prepared using the disclosure option that is
being eliminated. While the format of our interim consolidated financial statements will change
beginning in the first quarter of 2012, this change will not impact our consolidated financial
position, results of operations or cash flows.
9
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
A new accounting standard simplifies how entities test goodwill for impairment. The new standard
permits an entity to first assess qualitative factors to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment test. Previous
guidance required an entity to test goodwill for impairment, at least on an annual basis, by first
comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the
fair value of a reporting unit is less than its carrying amount, then the second step of the test
must be performed to measure the amount of the impairment loss, if any. Under the new rules, an
entity is not required to calculate the fair value of a reporting unit unless the entity determines
that it is more likely than not that its fair value is less than its carrying amount. The new
rules are effective on January 1, 2012. Since we perform our annual goodwill impairment test as of
June 30 each year, we will first have the option of using the qualitative approach at June 30,
2012. We do not expect application of the new guidance to have a material impact on our
consolidated financial position, results of operations or cash flows.
(2) Fair Value Measurements
We carry financial assets and financial liabilities at fair value. 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 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 income securities, which consist of U.S.
government agency securities, municipal bonds, certain corporate debt securities, and certain
mortgage-backed and asset-backed securities. We measure fair value for the majority of our Level 2
investments using quoted prices of securities with similar characteristics. The remaining
investments are valued using pricing models or matrix pricing. The fair value measurements consider
observable assumptions, including benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, two-sided markets, benchmark securities, bids, offers, default rates, loss severity and
other economic measures.
We use independent pricing services to assist us in determining fair value for approximately 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 manager to value the remaining Level 2 investments. To
validate that these quoted and modeled 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 or third party investment manager as of September 30,
2011 or December 31, 2010.
Our Level 3 securities include certain fixed income securities and an insurance contract,
classified in other assets, that we account for as a derivative. In the first quarter of 2010, we
terminated our interest in a similar insurance contract and recognized an $8.0 million gain. We
determine fair value of our Level 3 securities based on internally developed models that use
assumptions or other data that are not readily observable from objective sources.
We exclude from our fair value disclosures our held to maturity investment portfolio measured at
amortized cost.
10
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
The following tables present our assets that were measured at fair value at September 30, 2011 and
December 31, 2010. No liabilities were measured at fair value at either balance sheet date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency securities |
|
$ |
185,530 |
|
|
$ |
107,814 |
|
|
$ |
|
|
|
$ |
293,344 |
|
Fixed income securities of states, municipalities and
political subdivisions |
|
|
|
|
|
|
1,079,859 |
|
|
|
|
|
|
|
1,079,859 |
|
Special purpose revenue bonds of states, municipalities
and political subdivisions |
|
|
|
|
|
|
1,815,959 |
|
|
|
|
|
|
|
1,815,959 |
|
Corporate fixed income securities |
|
|
|
|
|
|
813,450 |
|
|
|
156 |
|
|
|
813,606 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
1,111,321 |
|
|
|
|
|
|
|
1,111,321 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
249,051 |
|
|
|
|
|
|
|
249,051 |
|
Asset-backed securities |
|
|
|
|
|
|
33,555 |
|
|
|
1,062 |
|
|
|
34,617 |
|
Foreign government securities |
|
|
|
|
|
|
253,432 |
|
|
|
|
|
|
|
253,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities available for sale |
|
|
185,530 |
|
|
|
5,464,441 |
|
|
|
1,218 |
|
|
|
5,651,189 |
|
Other investments |
|
|
34,088 |
|
|
|
|
|
|
|
|
|
|
|
34,088 |
|
Other assets |
|
|
|
|
|
|
|
|
|
|
1,373 |
|
|
|
1,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
219,618 |
|
|
$ |
5,464,441 |
|
|
$ |
2,591 |
|
|
$ |
5,686,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency securities |
|
$ |
148,217 |
|
|
$ |
176,050 |
|
|
$ |
|
|
|
$ |
324,267 |
|
Fixed income securities of states, municipalities and
political subdivisions |
|
|
|
|
|
|
1,082,057 |
|
|
|
|
|
|
|
1,082,057 |
|
Special purpose revenue bonds of states, municipalities
and political subdivisions |
|
|
|
|
|
|
1,628,059 |
|
|
|
|
|
|
|
1,628,059 |
|
Corporate fixed income securities |
|
|
|
|
|
|
570,152 |
|
|
|
242 |
|
|
|
570,394 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
995,108 |
|
|
|
|
|
|
|
995,108 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
145,228 |
|
|
|
|
|
|
|
145,228 |
|
Asset-backed securities |
|
|
|
|
|
|
11,370 |
|
|
|
1,196 |
|
|
|
12,566 |
|
Foreign government securities |
|
|
|
|
|
|
241,761 |
|
|
|
|
|
|
|
241,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities available for sale |
|
|
148,217 |
|
|
|
4,849,785 |
|
|
|
1,438 |
|
|
|
4,999,440 |
|
Other investments |
|
|
5,575 |
|
|
|
|
|
|
|
|
|
|
|
5,575 |
|
Other assets |
|
|
|
|
|
|
|
|
|
|
857 |
|
|
|
857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
153,792 |
|
|
$ |
4,849,785 |
|
|
$ |
2,295 |
|
|
$ |
5,005,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
The following tables present the changes in fair value of our Level 3 assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
|
Fixed |
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
|
|
|
|
|
|
|
income |
|
|
Other |
|
|
|
|
|
|
income |
|
|
Other |
|
|
|
|
|
|
securities |
|
|
assets |
|
|
Total |
|
|
securities |
|
|
assets |
|
|
Total |
|
Balance at beginning of year |
|
$ |
1,438 |
|
|
$ |
857 |
|
|
$ |
2,295 |
|
|
$ |
4,262 |
|
|
$ |
432 |
|
|
$ |
4,694 |
|
Settlements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,342 |
) |
|
|
(8,342 |
) |
Sales |
|
|
(144 |
) |
|
|
|
|
|
|
(144 |
) |
|
|
(100 |
) |
|
|
|
|
|
|
(100 |
) |
Gains and (losses) unrealized |
|
|
(11 |
) |
|
|
263 |
|
|
|
252 |
|
|
|
62 |
|
|
|
(141 |
) |
|
|
(79 |
) |
Gains and (losses) realized |
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
8,342 |
|
|
|
8,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31 |
|
|
1,281 |
|
|
|
1,120 |
|
|
|
2,401 |
|
|
|
4,224 |
|
|
|
291 |
|
|
|
4,515 |
|
Sales |
|
|
(55 |
) |
|
|
|
|
|
|
(55 |
) |
|
|
(395 |
) |
|
|
|
|
|
|
(395 |
) |
Gains and (losses) unrealized |
|
|
18 |
|
|
|
122 |
|
|
|
140 |
|
|
|
144 |
|
|
|
179 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30 |
|
|
1,244 |
|
|
|
1,242 |
|
|
|
2,486 |
|
|
|
3,973 |
|
|
|
470 |
|
|
|
4,443 |
|
Sales |
|
|
(43 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
(77 |
) |
|
|
|
|
|
|
(77 |
) |
Gains and (losses) unrealized |
|
|
17 |
|
|
|
131 |
|
|
|
148 |
|
|
|
70 |
|
|
|
216 |
|
|
|
286 |
|
Transfers out of Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,543 |
) |
|
|
|
|
|
|
(2,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30 |
|
$ |
1,218 |
|
|
$ |
1,373 |
|
|
$ |
2,591 |
|
|
$ |
1,423 |
|
|
$ |
686 |
|
|
$ |
2,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses on our Level 3 fixed income securities are reported in other
comprehensive income within shareholders equity, and unrealized gains and losses on our Level 3
other assets are reported in other operating income. There were no transfers between Level 1, Level
2 or Level 3 in the first nine months of 2011. We transferred investments from Level 3 to Level 2
in 2010 because we were able to determine their fair value using inputs based on observable market
data in the period transferred.
(3) Investments
Substantially all of our fixed income securities are investment grade. The cost or amortized cost,
gross unrealized gain or loss, and fair value of our fixed income securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
amortized |
|
|
unrealized |
|
|
unrealized |
|
|
|
|
|
|
cost |
|
|
gain |
|
|
loss |
|
|
Fair value |
|
September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency securities |
|
$ |
281,758 |
|
|
$ |
11,587 |
|
|
$ |
(1 |
) |
|
$ |
293,344 |
|
Fixed income securities of states, municipalities and political
subdivisions |
|
|
1,005,837 |
|
|
|
74,210 |
|
|
|
(188 |
) |
|
|
1,079,859 |
|
Special purpose revenue bonds of states, municipalities and
political subdivisions |
|
|
1,717,307 |
|
|
|
99,279 |
|
|
|
(627 |
) |
|
|
1,815,959 |
|
Corporate fixed income securities |
|
|
785,733 |
|
|
|
34,635 |
|
|
|
(6,762 |
) |
|
|
813,606 |
|
Residential mortgage-backed securities |
|
|
1,045,247 |
|
|
|
69,261 |
|
|
|
(3,187 |
) |
|
|
1,111,321 |
|
Commercial mortgage-backed securities |
|
|
245,651 |
|
|
|
9,180 |
|
|
|
(5,780 |
) |
|
|
249,051 |
|
Asset-backed securities |
|
|
34,489 |
|
|
|
179 |
|
|
|
(51 |
) |
|
|
34,617 |
|
Foreign government securities |
|
|
240,311 |
|
|
|
13,268 |
|
|
|
(147 |
) |
|
|
253,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities available for sale |
|
$ |
5,356,333 |
|
|
$ |
311,599 |
|
|
$ |
(16,743 |
) |
|
$ |
5,651,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
amortized |
|
|
unrealized |
|
|
unrealized |
|
|
|
|
|
|
cost |
|
|
gain |
|
|
loss |
|
|
Fair value |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency securities |
|
$ |
315,339 |
|
|
$ |
9,097 |
|
|
$ |
(169 |
) |
|
$ |
324,267 |
|
Fixed income securities of states, municipalities and political
subdivisions |
|
|
1,050,969 |
|
|
|
38,825 |
|
|
|
(7,737 |
) |
|
|
1,082,057 |
|
Special purpose revenue bonds of states, municipalities and
political subdivisions |
|
|
1,614,554 |
|
|
|
34,764 |
|
|
|
(21,259 |
) |
|
|
1,628,059 |
|
Corporate fixed income securities |
|
|
545,883 |
|
|
|
26,436 |
|
|
|
(1,925 |
) |
|
|
570,394 |
|
Residential mortgage-backed securities |
|
|
958,404 |
|
|
|
40,949 |
|
|
|
(4,245 |
) |
|
|
995,108 |
|
Commercial mortgage-backed securities |
|
|
136,746 |
|
|
|
8,518 |
|
|
|
(36 |
) |
|
|
145,228 |
|
Asset-backed securities |
|
|
12,563 |
|
|
|
78 |
|
|
|
(75 |
) |
|
|
12,566 |
|
Foreign government securities |
|
|
230,348 |
|
|
|
11,537 |
|
|
|
(124 |
) |
|
|
241,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities available for sale |
|
$ |
4,864,806 |
|
|
$ |
170,204 |
|
|
$ |
(35,570 |
) |
|
$ |
4,999,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity |
|
|
|
Cost or |
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
amortized |
|
|
unrealized |
|
|
unrealized |
|
|
|
|
|
|
cost |
|
|
gain |
|
|
loss |
|
|
Fair value |
|
September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
6,998 |
|
|
$ |
112 |
|
|
$ |
|
|
|
$ |
7,110 |
|
Corporate fixed income securities |
|
|
113,015 |
|
|
|
1,552 |
|
|
|
(569 |
) |
|
|
113,998 |
|
Foreign government securities |
|
|
48,601 |
|
|
|
896 |
|
|
|
(49 |
) |
|
|
49,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities held to maturity |
|
$ |
168,614 |
|
|
$ |
2,560 |
|
|
$ |
(618 |
) |
|
$ |
170,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities |
|
$ |
12,993 |
|
|
$ |
264 |
|
|
$ |
|
|
|
$ |
13,257 |
|
Corporate fixed income securities |
|
|
113,296 |
|
|
|
1,205 |
|
|
|
(277) |
|
|
|
114,224 |
|
Foreign government securities |
|
|
67,379 |
|
|
|
995 |
|
|
|
(44) |
|
|
|
68,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities held to maturity |
|
$ |
193,668 |
|
|
$ |
2,464 |
|
|
$ |
(321) |
|
|
$ |
195,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
All fixed income securities were income producing in 2011. The following table displays the gross
unrealized losses and fair value of all available for sale fixed income securities that were in a
continuous unrealized loss position for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair value |
|
|
losses |
|
|
Fair value |
|
|
losses |
|
|
Fair value |
|
|
losses |
|
September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency
securities |
|
$ |
2,250 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,250 |
|
|
$ |
(1 |
) |
Fixed income securities of states,
municipalities and
political
subdivisions |
|
|
15,360 |
|
|
|
(119 |
) |
|
|
1,476 |
|
|
|
(69 |
) |
|
|
16,836 |
|
|
|
(188 |
) |
Special purpose revenue bonds of states,
municipalities and
political
subdivisions |
|
|
73,022 |
|
|
|
(441 |
) |
|
|
29,074 |
|
|
|
(186 |
) |
|
|
102,096 |
|
|
|
(627 |
) |
Corporate fixed income securities |
|
|
192,727 |
|
|
|
(6,322 |
) |
|
|
16,964 |
|
|
|
(440 |
) |
|
|
209,691 |
|
|
|
(6,762 |
) |
Residential mortgage-backed securities |
|
|
50,867 |
|
|
|
(2,180 |
) |
|
|
8,031 |
|
|
|
(1,007 |
) |
|
|
58,898 |
|
|
|
(3,187 |
) |
Commercial mortgage-backed securities |
|
|
94,516 |
|
|
|
(5,780 |
) |
|
|
|
|
|
|
|
|
|
|
94,516 |
|
|
|
(5,780 |
) |
Asset-backed securities |
|
|
17,816 |
|
|
|
(51 |
) |
|
|
|
|
|
|
|
|
|
|
17,816 |
|
|
|
(51 |
) |
Foreign government securities |
|
|
6,602 |
|
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
|
6,602 |
|
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
453,160 |
|
|
$ |
(15,041 |
) |
|
$ |
55,545 |
|
|
$ |
(1,702 |
) |
|
$ |
508,705 |
|
|
$ |
(16,743 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency
securities |
|
$ |
20,976 |
|
|
$ |
(169 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
20,976 |
|
|
$ |
(169 |
) |
Fixed income securities of states,
municipalities and
political
subdivisions |
|
|
228,228 |
|
|
|
(7,621 |
) |
|
|
2,279 |
|
|
|
(116 |
) |
|
|
230,507 |
|
|
|
(7,737 |
) |
Special purpose revenue bonds of states,
municipalities and
political
subdivisions |
|
|
689,190 |
|
|
|
(21,156 |
) |
|
|
6,344 |
|
|
|
(103 |
) |
|
|
695,534 |
|
|
|
(21,259 |
) |
Corporate fixed income securities |
|
|
66,029 |
|
|
|
(1,925 |
) |
|
|
|
|
|
|
|
|
|
|
66,029 |
|
|
|
(1,925 |
) |
Residential mortgage-backed securities |
|
|
123,782 |
|
|
|
(3,081 |
) |
|
|
22,152 |
|
|
|
(1,164 |
) |
|
|
145,934 |
|
|
|
(4,245 |
) |
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
3,084 |
|
|
|
(36 |
) |
|
|
3,084 |
|
|
|
(36 |
) |
Asset-backed securities |
|
|
9,174 |
|
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
9,174 |
|
|
|
(75 |
) |
Foreign government securities |
|
|
10,699 |
|
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
10,699 |
|
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,148,078 |
|
|
$ |
(34,151 |
) |
|
$ |
33,859 |
|
|
$ |
(1,419 |
) |
|
$ |
1,181,937 |
|
|
$ |
(35,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the securities in our fixed income securities portfolio for
possible other-than-temporary impairment losses at each quarter end. Our reviews cover all impaired
securities where the loss exceeds $0.5 million and the loss either exceeds 10% of cost or the
security had been in a loss position for longer than twelve consecutive months. For
other-than-temporary impairment losses, we recognize an other-than-temporary impairment loss in
earnings in the period that we determine: 1) we intend to sell the security, 2) it is more likely
than not that we will be required to sell the security before recovery of its amortized cost basis
or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment
loss is recognized in shareholders equity.
14
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
Our other-than-temporary impairment losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Total other-than-temporary impairment loss |
|
$ |
(4,677 |
) |
|
$ |
(316 |
) |
|
$ |
|
|
|
$ |
(316 |
) |
Portion recognized in other comprehensive income |
|
|
1,198 |
|
|
|
16 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
other-than-temporary
impairment loss
recognized
in earnings |
|
$ |
(3,479 |
) |
|
$ |
(300 |
) |
|
$ |
|
|
|
$ |
(300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
We have recognized credit losses on certain impaired fixed income securities, for which each
security also had an impairment loss recorded in other comprehensive income. The rollforward of
these credit losses was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Balance at beginning of period |
|
$ |
4,273 |
|
|
$ |
3,848 |
|
|
$ |
3,847 |
|
|
$ |
3,848 |
|
Credit losses recognized in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities previously impaired |
|
|
1,597 |
|
|
|
300 |
|
|
|
|
|
|
|
300 |
|
Securities previously not impaired |
|
|
1,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold |
|
|
(3,905 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30 |
|
$ |
3,847 |
|
|
$ |
4,148 |
|
|
$ |
3,847 |
|
|
$ |
4,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had $1.2 million of after-tax other-than-temporary impairment losses, related to mortgage-backed
securities, included in accumulated other comprehensive income within shareholders equity at
September 30, 2011. This amount includes the after-tax unrealized gains and losses on these
impaired securities resulting from changes in their fair value subsequent to their initial
other-than-temporary impairment measurement dates.
We do not consider the $16.7 million of gross unrealized losses in our fixed income securities
portfolio at September 30, 2011 to be other-than-temporary impairments because: 1) we received
substantially all contractual interest and principal payments on these securities as of September
30, 2011, 2) we do not intend to sell the securities, 3) it is more likely than not that we will
not be required to sell the securities before recovery of their amortized cost bases and 4) the
unrealized loss relates to non-credit factors, such as interest rate changes and market conditions.
The amortized cost and fair value of our fixed income securities at September 30, 2011, 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 4.3 years at September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
Held to maturity |
|
|
|
Cost or |
|
|
|
|
|
|
|
|
|
|
|
|
amortized cost |
|
|
Fair value |
|
|
Amortized cost |
|
|
Fair value |
|
Due in 1 year or less |
|
$ |
247,391 |
|
|
$ |
251,201 |
|
|
$ |
56,204 |
|
|
$ |
56,501 |
|
Due after 1 year through 5 years |
|
|
1,084,679 |
|
|
|
1,135,759 |
|
|
|
111,560 |
|
|
|
113,123 |
|
Due after 5 years through 10 years |
|
|
1,080,746 |
|
|
|
1,161,310 |
|
|
|
850 |
|
|
|
932 |
|
Due after 10 years through 15 years |
|
|
740,889 |
|
|
|
791,922 |
|
|
|
|
|
|
|
|
|
Due after 15 years |
|
|
877,241 |
|
|
|
916,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities with fixed maturities |
|
|
4,030,946 |
|
|
|
4,256,200 |
|
|
|
168,614 |
|
|
|
170,556 |
|
Mortgage-backed and asset-backed securities |
|
|
1,325,387 |
|
|
|
1,394,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
5,356,333 |
|
|
$ |
5,651,189 |
|
|
$ |
168,614 |
|
|
$ |
170,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
The sources of net investment income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Fixed income securities |
|
$ |
158,941 |
|
|
$ |
150,001 |
|
|
$ |
54,896 |
|
|
$ |
50,921 |
|
Short-term investments |
|
|
420 |
|
|
|
631 |
|
|
|
99 |
|
|
|
271 |
|
Other |
|
|
2,992 |
|
|
|
3,053 |
|
|
|
962 |
|
|
|
1,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
162,353 |
|
|
|
153,685 |
|
|
|
55,957 |
|
|
|
52,203 |
|
Investment expense |
|
|
(3,571 |
) |
|
|
(3,082 |
) |
|
|
(1,192 |
) |
|
|
(1,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
158,782 |
|
|
$ |
150,603 |
|
|
$ |
54,765 |
|
|
$ |
51,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized pretax gains (losses) on the sale of investments, which exclude other-than-temporary
impairment credit losses, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
8,532 |
|
|
$ |
8,875 |
|
|
$ |
4,217 |
|
|
$ |
1,282 |
|
Losses |
|
|
(5,359 |
) |
|
|
(824 |
) |
|
|
(1,545 |
) |
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net fixed income securities |
|
$ |
3,173 |
|
|
$ |
8,051 |
|
|
$ |
2,672 |
|
|
$ |
1,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
6 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
|
|
Losses |
|
|
(10 |
) |
|
|
(156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other investments |
|
$ |
(4 |
) |
|
$ |
(154 |
) |
|
$ |
2 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
8,538 |
|
|
$ |
8,877 |
|
|
$ |
4,219 |
|
|
$ |
1,282 |
|
Losses |
|
|
(5,369 |
) |
|
|
(980 |
) |
|
|
(1,545 |
) |
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gain |
|
$ |
3,169 |
|
|
$ |
7,897 |
|
|
$ |
2,674 |
|
|
$ |
1,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The goodwill balances by reportable segment and the changes in goodwill are shown in the table
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property |
|
|
Professional |
|
|
Accident & |
|
|
U.S. Surety |
|
|
|
|
|
|
|
|
|
& Casualty |
|
|
Liability |
|
|
Health |
|
|
& Credit |
|
|
International |
|
|
Total |
|
Balance at beginning of year |
|
$ |
223,000 |
|
|
$ |
249,820 |
|
|
$ |
144,128 |
|
|
$ |
79,700 |
|
|
$ |
125,000 |
|
|
$ |
821,648 |
|
Earnout and other |
|
|
|
|
|
|
51,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011 |
|
$ |
223,000 |
|
|
$ |
301,547 |
|
|
$ |
144,128 |
|
|
$ |
79,700 |
|
|
$ |
125,000 |
|
|
$ |
873,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We conducted our 2011 goodwill impairment test as of June 30, 2011, which is consistent with the
timeframe for our annual assessment in prior years. Based on our latest impairment test, the fair
value of each of our reporting units exceeded its carrying amount.
16
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
We acquired HCC Global Financial Products (HCC Global), which underwrites our U.S. and
International directors and officers liability business, in 2002. The purchase agreement, as
amended, includes a contingency for future earnout payments. The earnout is based on HCC Globals
pretax earnings from the acquisition date through September 30, 2007, with no maximum amount due to
the former owners. When conditions specified under the purchase agreement are met, we record a net
amount owed to or due from the former owners based on our estimate, at that point in time, of how
claims will ultimately be settled. This net amount will fluctuate in the future, and the ultimate
total net earnout payments cannot be finally determined until all claims are settled or paid. In
March 2011, certain amendments were made to the purchase agreement, which resulted in an adjustment
to our estimate of the ultimate amounts to be settled under the agreement. As a result, we
increased goodwill by $20.0 million as of March 31, 2011. In September 2011, we increased goodwill
by $31.3 million for additional earnout earned and accrued in the quarter.
(5) Reinsurance
In the normal course of business, our insurance companies cede a portion of their premium to
domestic and foreign reinsurers through treaty and facultative reinsurance agreements. Although
ceding for reinsurance purposes 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 loss 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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Direct written premium |
|
$ |
1,724,869 |
|
|
$ |
1,697,054 |
|
|
$ |
555,427 |
|
|
$ |
565,417 |
|
Reinsurance assumed |
|
|
295,268 |
|
|
|
257,676 |
|
|
|
73,420 |
|
|
|
75,239 |
|
Reinsurance ceded |
|
|
(359,046 |
) |
|
|
(415,239 |
) |
|
|
(116,513 |
) |
|
|
(146,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium |
|
$ |
1,661,091 |
|
|
$ |
1,539,491 |
|
|
$ |
512,334 |
|
|
$ |
494,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct earned premium |
|
$ |
1,728,082 |
|
|
$ |
1,714,252 |
|
|
$ |
574,571 |
|
|
$ |
575,216 |
|
Reinsurance assumed |
|
|
255,293 |
|
|
|
217,621 |
|
|
|
96,799 |
|
|
|
76,473 |
|
Reinsurance ceded |
|
|
(406,388 |
) |
|
|
(399,735 |
) |
|
|
(127,114 |
) |
|
|
(135,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
$ |
1,576,987 |
|
|
$ |
1,532,138 |
|
|
$ |
544,256 |
|
|
$ |
516,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct loss and loss adjustment expense |
|
$ |
1,197,225 |
|
|
$ |
1,059,094 |
|
|
$ |
410,573 |
|
|
$ |
340,225 |
|
Reinsurance assumed |
|
|
186,805 |
|
|
|
131,202 |
|
|
|
44,600 |
|
|
|
25,413 |
|
Reinsurance ceded |
|
|
(321,790 |
) |
|
|
(267,651 |
) |
|
|
(74,801 |
) |
|
|
(68,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense |
|
$ |
1,062,240 |
|
|
$ |
922,645 |
|
|
$ |
380,372 |
|
|
$ |
297,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs |
|
$ |
338,625 |
|
|
$ |
330,174 |
|
|
$ |
114,778 |
|
|
$ |
111,216 |
|
Ceding commissions |
|
|
(99,465 |
) |
|
|
(88,096 |
) |
|
|
(43,479 |
) |
|
|
(30,468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net policy acquisition costs |
|
$ |
239,160 |
|
|
$ |
242,078 |
|
|
$ |
71,299 |
|
|
$ |
80,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
The table below shows the components of our reinsurance recoverables in our consolidated balance
sheets.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Reinsurance recoverable on paid losses |
|
$ |
55,778 |
|
|
$ |
75,262 |
|
Reinsurance recoverable on outstanding losses |
|
|
475,671 |
|
|
|
452,882 |
|
Reinsurance recoverable on incurred but not reported losses |
|
|
542,049 |
|
|
|
481,204 |
|
Reserve for uncollectible reinsurance |
|
|
(2,232 |
) |
|
|
(2,493 |
) |
|
|
|
|
|
|
|
Total reinsurance recoverables |
|
$ |
1,071,266 |
|
|
$ |
1,006,855 |
|
|
|
|
|
|
|
|
At each quarter end, we review our financial exposure to the reinsurance market based on our
individual reinsurance recoverable balances as of the prior quarter-end. We take actions to collect
outstanding balances or to mitigate our exposure to possible loss, including offsetting past due
amounts against letters of credit and other payables. There was no material change in recoverables
on paid losses that were outstanding for over 90 days as of September 30, 2011 compared to December
31, 2010. We have a reserve for potentially uncollectible amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
Balance at beginning of year |
|
$ |
2,493 |
|
|
$ |
2,945 |
|
Provision expense (recovery) |
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30 |
|
$ |
2,232 |
|
|
$ |
2,945 |
|
|
|
|
|
|
|
|
If we collect cash from or resolve a dispute with the reinsurer, we reduce the allowance account.
While we believe the reserve is adequate based on information currently available, market
conditions may change or additional information might be obtained that may require us to change the
reserve in the future.
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
the amounts of letters of credit and cash deposits held by us as collateral, plus other credits
available for potential offset at September 30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Payables to reinsurers |
|
$ |
230,503 |
|
|
$ |
243,990 |
|
Letters of credit |
|
|
135,299 |
|
|
|
145,914 |
|
Cash deposits |
|
|
91,380 |
|
|
|
81,966 |
|
|
|
|
|
|
|
|
Total credits |
|
$ |
457,182 |
|
|
$ |
471,870 |
|
|
|
|
|
|
|
|
The tables below show the calculation of net reserves, net unearned premium and net deferred policy
acquisition costs.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Loss and loss adjustment expense payable |
|
$ |
3,686,570 |
|
|
$ |
3,471,858 |
|
Reinsurance recoverable on outstanding losses |
|
|
(475,671 |
) |
|
|
(452,882 |
) |
Reinsurance recoverable on incurred but not reported losses |
|
|
(542,049 |
) |
|
|
(481,204 |
) |
|
|
|
|
|
|
|
Net reserves |
|
$ |
2,668,850 |
|
|
$ |
2,537,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premium |
|
$ |
1,071,340 |
|
|
$ |
1,045,877 |
|
Ceded unearned premium |
|
|
(231,537 |
) |
|
|
(278,663 |
) |
|
|
|
|
|
|
|
Net unearned premium |
|
$ |
839,803 |
|
|
$ |
767,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs |
|
$ |
225,190 |
|
|
$ |
212,786 |
|
Deferred ceding commissions |
|
|
(66,059 |
) |
|
|
(72,565 |
) |
|
|
|
|
|
|
|
Net deferred policy acquisition costs |
|
$ |
159,131 |
|
|
$ |
140,221 |
|
|
|
|
|
|
|
|
18
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
(6) Notes Payable
Notes payable were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
6.30% Senior Notes |
|
$ |
298,752 |
|
|
$ |
298,637 |
|
$600.0 million Revolving Loan Facility |
|
|
195,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable |
|
$ |
493,752 |
|
|
$ |
298,637 |
|
|
|
|
|
|
|
|
On March 8, 2011, we entered into a new agreement for a four-year $600.0 million Revolving Loan
Facility (Facility). The Facility replaced our $575.0 million Revolving Loan Facility, which was
due to expire on December 19, 2011. The Facility allows us to borrow up to the maximum allowed on a
revolving basis until the Facility expires on March 8, 2015. The borrowing rate is LIBOR plus 137.5
basis points, subject to increase or decrease based on changes in our debt rating. The contractual
interest rate on borrowings under the Facility at September 30, 2011 was 1.63%. In addition, we
pay a commitment fee of 20 basis points. Letters of credit issued under the Facility further
reduced our available borrowing capacity on the remaining Facility to $392.2 million at September
30, 2011. The Facility contains restrictive financial covenants that require HCC to maintain a
minimum consolidated net worth (excluding accumulated other comprehensive income) and a leverage
ratio of less than or equal to 35%.
We were in compliance with debt covenants related to our Senior Notes, the Facility, and a Standby
Letter of Credit Facility at September 30, 2011.
(7) 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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net earnings |
|
$ |
176,905 |
|
|
$ |
247,797 |
|
|
$ |
60,437 |
|
|
$ |
93,063 |
|
Less: net
earnings attributable to unvested restricted stock awards and restricted stock units |
|
|
(2,551 |
) |
|
|
(2,746 |
) |
|
|
(950 |
) |
|
|
(1,067 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common stock |
|
$ |
174,354 |
|
|
$ |
245,051 |
|
|
$ |
59,487 |
|
|
$ |
91,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
110,665 |
|
|
|
113,872 |
|
|
|
106,919 |
|
|
|
114,002 |
|
Dilutive
effect of outstanding options (determined using treasury stock method) |
|
|
245 |
|
|
|
254 |
|
|
|
129 |
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares and
potential common shares outstanding |
|
|
110,910 |
|
|
|
114,126 |
|
|
|
107,048 |
|
|
|
114,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options not included in treasury stock method computation |
|
|
2,279 |
|
|
|
4,431 |
|
|
|
2,744 |
|
|
|
4,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
(8) Stock-based Compensation
In 2011, we granted the following shares of common stock, restricted stock awards, restricted stock
units and options for the purchase of shares of our common stock. For all grants except stock
options, we measure fair value based on our closing stock price on the grant date. For stock
options, we use the Black-Scholes single option pricing model to determine the fair value of an
option on its grant date. The fair value of the common stock was expensed on the grant date. The
fair value of the restricted stock awards, restricted stock units and stock options will be
expensed over the vesting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
|
|
|
|
|
|
Number |
|
|
grant date |
|
|
Aggregate |
|
|
Vesting |
|
|
|
of shares |
|
|
fair value |
|
|
fair value |
|
|
period |
|
Common stock |
|
|
28 |
|
|
$ |
32.54 |
|
|
$ |
920 |
|
|
|
|
|
Restricted stock awards |
|
|
337 |
|
|
|
30.74 |
|
|
|
10,345 |
|
|
3-5 years |
Restricted stock units |
|
|
65 |
|
|
|
30.25 |
|
|
|
1,952 |
|
|
4 years |
Stock options |
|
|
291 |
|
|
|
8.42 |
|
|
|
2,450 |
|
|
1-5 years |
(9) Segments
We report HCCs results in six operating segments, each of which reports to an HCC executive who is
responsible for the segment results. Each of our five insurance-related 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. Fee and commission income earned by our agencies from third party insurance
companies is included in segment revenue. Each segment incurs insurance losses, acquisition costs
and other administrative expenses related to our insurance companies and underwriting agencies. We
monitor and assess each segments pretax results based on underwriting profit, gross and net
written premium, and its combined ratio, consisting of the net loss ratio and expense ratio.
Included in the portfolio of products for each underwriting segment are the following key
products:
|
|
|
U.S. Property & Casualty aviation, small account errors and omissions
liability, public risk, employment practices liability, title, residual value, disability,
contingency, kidnap and ransom, difference in conditions, occupational accident and brown
water marine written in the United States. |
|
|
|
Professional Liability directors and officers (D&O) liability, large
account errors and omissions liability, fiduciary liability, fidelity, bankers blanket
bonds and, for some D&O policyholders, employment practices liability written in the United
States and internationally. |
|
|
|
Accident & Health medical stop-loss, short-term domestic and international
medical, HMO reinsurance and medical excess written in the United States. |
|
|
|
U.S. Surety & Credit contract surety bonds, commercial surety bonds, and
bail bonds written in the United States and credit insurance managed in the United States. |
|
|
|
International energy, property treaty, liability, surety, credit, property
(direct and facultative), ocean marine, accident and health and other smaller product lines
written outside the United States. |
The Investing segment includes our total 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.
20
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
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
allocable to the segments, interest expense on long-term debt, and underwriting results of our
Exited Lines. Our Exited Lines include these six product lines that we no longer write and do not
expect to write in the future: 1) accident and health business managed by our underwriting agency,
LDG Reinsurance, 2) workers compensation, 3) provider excess, 4) Spanish medical malpractice, 5)
U.K. motor and 6) film completion bonds.
The following tables present information by business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & |
|
|
Professional |
|
|
Accident |
|
|
U.S. Surety |
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
Casualty |
|
|
Liability |
|
|
& Health |
|
|
& Credit |
|
|
International |
|
|
Investing |
|
|
& Other |
|
|
Consolidated |
|
Nine
months ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
$ |
245,121 |
|
|
$ |
307,240 |
|
|
$ |
603,656 |
|
|
$ |
153,309 |
|
|
$ |
267,458 |
|
|
$ |
|
|
|
$ |
203 |
|
|
$ |
1,576,987 |
|
Other revenue |
|
|
16,556 |
|
|
|
358 |
|
|
|
3,471 |
|
|
|
955 |
|
|
|
2,791 |
|
|
|
158,472 |
|
|
|
(506 |
) |
|
|
182,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue |
|
|
261,677 |
|
|
|
307,598 |
|
|
|
607,127 |
|
|
|
154,264 |
|
|
|
270,249 |
|
|
|
158,472 |
|
|
|
(303 |
) |
|
|
1,759,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE |
|
|
148,783 |
|
|
|
257,632 |
|
|
|
438,883 |
|
|
|
42,351 |
|
|
|
175,635 |
|
|
|
|
|
|
|
(1,044 |
) |
|
|
1,062,240 |
|
Other expense |
|
|
82,202 |
|
|
|
40,055 |
|
|
|
92,882 |
|
|
|
82,909 |
|
|
|
99,754 |
|
|
|
|
|
|
|
56,466 |
|
|
|
454,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment expense |
|
|
230,985 |
|
|
|
297,687 |
|
|
|
531,765 |
|
|
|
125,260 |
|
|
|
275,389 |
|
|
|
|
|
|
|
55,422 |
|
|
|
1,516,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax earnings (loss) |
|
$ |
30,692 |
|
|
$ |
9,911 |
|
|
$ |
75,362 |
|
|
$ |
29,004 |
|
|
$ |
(5,140 |
) |
|
$ |
158,472 |
|
|
$ |
(55,725 |
) |
|
$ |
242,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
$ |
258,427 |
|
|
$ |
321,849 |
|
|
$ |
567,739 |
|
|
$ |
148,427 |
|
|
$ |
234,471 |
|
|
$ |
|
|
|
$ |
1,225 |
|
|
$ |
1,532,138 |
|
Other revenue |
|
|
24,128 |
|
|
|
458 |
|
|
|
2,830 |
|
|
|
455 |
|
|
|
6,177 |
|
|
|
158,200 |
|
|
|
987 |
|
|
|
193,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue |
|
|
282,555 |
|
|
|
322,307 |
|
|
|
570,569 |
|
|
|
148,882 |
|
|
|
240,648 |
|
|
|
158,200 |
|
|
|
2,212 |
|
|
|
1,725,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE |
|
|
164,684 |
|
|
|
196,154 |
|
|
|
412,438 |
|
|
|
38,157 |
|
|
|
107,601 |
|
|
|
|
|
|
|
3,611 |
|
|
|
922,645 |
|
Other expense |
|
|
75,890 |
|
|
|
57,171 |
|
|
|
89,967 |
|
|
|
81,699 |
|
|
|
89,559 |
|
|
|
|
|
|
|
53,652 |
|
|
|
447,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment expense |
|
|
240,574 |
|
|
|
253,325 |
|
|
|
502,405 |
|
|
|
119,856 |
|
|
|
197,160 |
|
|
|
|
|
|
|
57,263 |
|
|
|
1,370,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax earnings (loss) |
|
$ |
41,981 |
|
|
$ |
68,982 |
|
|
$ |
68,164 |
|
|
$ |
29,026 |
|
|
$ |
43,488 |
|
|
$ |
158,200 |
|
|
$ |
(55,051 |
) |
|
$ |
354,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & |
|
|
Professional |
|
|
Accident |
|
|
U.S. Surety |
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
|
Casualty |
|
|
Liability |
|
|
& Health |
|
|
& Credit |
|
|
International |
|
|
Investing |
|
|
& Other |
|
|
Consolidated |
|
Three
months ended September 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
$ |
85,946 |
|
|
$ |
104,066 |
|
|
$ |
202,999 |
|
|
$ |
51,906 |
|
|
$ |
99,294 |
|
|
$ |
|
|
|
$ |
45 |
|
|
$ |
544,256 |
|
Other revenue |
|
|
6,890 |
|
|
|
109 |
|
|
|
1,277 |
|
|
|
254 |
|
|
|
889 |
|
|
|
57,439 |
|
|
|
(590 |
) |
|
|
66,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue |
|
|
92,836 |
|
|
|
104,175 |
|
|
|
204,276 |
|
|
|
52,160 |
|
|
|
100,183 |
|
|
|
57,439 |
|
|
|
(545 |
) |
|
|
610,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE |
|
|
56,355 |
|
|
|
119,617 |
|
|
|
147,278 |
|
|
|
12,664 |
|
|
|
45,242 |
|
|
|
|
|
|
|
(784 |
) |
|
|
380,372 |
|
Other expense |
|
|
26,627 |
|
|
|
6,023 |
|
|
|
30,887 |
|
|
|
27,657 |
|
|
|
35,734 |
|
|
|
|
|
|
|
20,432 |
|
|
|
147,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment expense |
|
|
82,982 |
|
|
|
125,640 |
|
|
|
178,165 |
|
|
|
40,321 |
|
|
|
80,976 |
|
|
|
|
|
|
|
19,648 |
|
|
|
527,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax earnings (loss) |
|
$ |
9,854 |
|
|
$ |
(21,465 |
) |
|
$ |
26,111 |
|
|
$ |
11,839 |
|
|
$ |
19,207 |
|
|
$ |
57,439 |
|
|
$ |
(20,193 |
) |
|
$ |
82,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
$ |
84,802 |
|
|
$ |
103,696 |
|
|
$ |
193,252 |
|
|
$ |
49,807 |
|
|
$ |
84,539 |
|
|
$ |
|
|
|
$ |
70 |
|
|
$ |
516,166 |
|
Other revenue |
|
|
5,033 |
|
|
|
20 |
|
|
|
1,113 |
|
|
|
127 |
|
|
|
1,466 |
|
|
|
51,894 |
|
|
|
129 |
|
|
|
59,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue |
|
|
89,835 |
|
|
|
103,716 |
|
|
|
194,365 |
|
|
|
49,934 |
|
|
|
86,005 |
|
|
|
51,894 |
|
|
|
199 |
|
|
|
575,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE |
|
|
61,883 |
|
|
|
63,212 |
|
|
|
138,869 |
|
|
|
10,296 |
|
|
|
23,227 |
|
|
|
|
|
|
|
(349 |
) |
|
|
297,138 |
|
Other expense |
|
|
21,289 |
|
|
|
18,866 |
|
|
|
30,908 |
|
|
|
28,007 |
|
|
|
29,654 |
|
|
|
|
|
|
|
18,074 |
|
|
|
146,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment expense |
|
|
83,172 |
|
|
|
82,078 |
|
|
|
169,777 |
|
|
|
38,303 |
|
|
|
52,881 |
|
|
|
|
|
|
|
17,725 |
|
|
|
443,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax earnings (loss) |
|
$ |
6,663 |
|
|
$ |
21,638 |
|
|
$ |
24,588 |
|
|
$ |
11,631 |
|
|
$ |
33,124 |
|
|
$ |
51,894 |
|
|
$ |
(17,526 |
) |
|
$ |
132,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Professional Liability segments 2011 pretax earnings were impacted by the combined effect
of net adverse loss development incurred by the segment and an increase in the 2011 accident year
loss ratio for the diversified financial products line of business, which is included in the
Professional Liability segment. The combined impact reduced pretax earnings by $75.1 million in the
first nine months and $58.1 million in the third quarter of 2011. Catastrophe losses reduced the
International segments pretax earnings by $101.7 million and $29.4 million in the first nine
months and third quarter of 2011, respectively, and $15.6 million in the first nine months of 2010.
(10) Commitments and Contingencies
Catastrophe Exposure
We have exposure to catastrophe losses caused by natural perils (such as hurricanes, earthquakes,
floods, tsunamis and tornados), as well as from man-made events (such as terrorist attacks). The
incidence, timing and severity of catastrophe 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 that we believe is sufficient
to limit our exposure to a foreseeable event. In 2011, we recognized gross losses of $168.0 million
from catastrophic events primarily in Japan, New Zealand, the United
States and Denmark. After reinsurance
and reinstatement premium, our pretax loss was $107.9 million. In 2010, we recognized gross losses
from catastrophic events, primarily the Chilean earthquake, of $26.9 million. After reinsurance,
our pretax loss was $15.6 million.
22
HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited, tables in thousands except per share data)
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. Certain of these indemnifications have no time limit.
For those with a time limit, the longest such indemnification expires in 2025. We accrue a loss
when a valid claim is made by a purchaser and we believe we have potential exposure. At September
30, 2011, we have recorded a liability of $9.0 million and have provided a $3.0 million escrow
account and $5.2 million of letters of credit to cover our obligations or anticipated payments
under these indemnifications.
(11) Supplemental Information
Supplemental information was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Income taxes paid |
|
$ |
88,973 |
|
|
$ |
101,164 |
|
|
$ |
31,366 |
|
|
$ |
34,949 |
|
Interest paid |
|
|
12,937 |
|
|
|
9,714 |
|
|
|
785 |
|
|
|
151 |
|
Cash paid for commutations |
|
|
37,849 |
|
|
|
|
|
|
|
4,210 |
|
|
|
|
|
Comprehensive income |
|
|
281,737 |
|
|
|
337,068 |
|
|
|
116,568 |
|
|
|
154,317 |
|
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following Managements Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements and the related Notes as of December 31, 2010 and September 30,
2011.
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 $27.35 on October 28, 2011, resulting in market capitalization of $2.9
billion.
We underwrite a variety of relatively non-correlated specialty insurance products, including
property and casualty, accident and health, surety, credit and aviation product lines. We market
our insurance products through a network of independent agents and brokers, managing general agents
and directly to consumers. In addition, we assume insurance written by other insurance companies.
We manage our businesses through five underwriting segments and our Investing segment. Our
underwriting segments are U.S. Property & Casualty, Professional Liability, Accident & Health, U.S.
Surety & Credit and International.
Our business philosophy is to maximize underwriting profit while managing risk in order to preserve
shareholders equity, grow book value and maximize earnings. We concentrate our insurance writings
in selected specialty insurance lines of business in which we believe we can achieve meaningful
underwriting profit. We also rely on our experienced underwriting personnel and our access to and
expertise in the reinsurance marketplace to limit or reduce risk. Our business plan is shaped by
our underlying business philosophy. As a result, our primary objective is to increase net earnings
and grow book value, rather than to grow our market share or our gross written premium.
Our major domestic and international insurance companies have financial strength ratings of AA
(Very Strong) from Standard & Poors Corporation, A+ (Superior) from A.M. Best Company, Inc., AA
(Very Strong) from Fitch Ratings and A1 (Good Security) from Moodys Investors Service, Inc.
Key facts about our consolidated group as of and for the nine months and quarter ended
September 30, 2011 were as follows:
|
|
|
Our common shares closed at $27.05 per share. |
|
|
|
|
We had consolidated shareholders equity of $3.3 billion, with a book value
per share of $30.67. |
|
|
|
|
We generated year-to-date net earnings of $176.9 million, or $1.57 per
diluted share. Our third quarter earnings were $60.4 million, or $0.56 per diluted
share. |
|
|
|
|
We produced revenue of $1.8 billion and $610.5 million in the first nine
months and third quarter, respectively. |
|
|
|
|
In the first nine months, we recognized gross losses of $168.0 million and
net losses, after reinsurance and reinstatement premium, of $107.9 million from
catastrophes primarily in Japan, New Zealand, the United States and
Denmark, mainly in our
International segment. The third quarter included net catastrophe losses of $34.6
million. |
|
|
|
|
Our year-to-date net loss ratio, including the 2011 catastrophe losses, was
67.4% and our combined ratio was 92.2%. The catastrophe losses increased the net loss
ratio by 6.5 percentage points and the combined ratio by 6.7 percentage points. |
|
|
|
|
We recorded net adverse (favorable) loss development of $21.6 million and
$(0.6) million in the first nine months and third quarter, respectively. We also
recognized an additional $28.2 million of losses in the third quarter related to the
2011 accident year, virtually all of which related to the diversified financial products
line of business in our Professional Liability segment. |
24
|
|
|
In the third quarter, we recognized $13.0 million of profit commissions due
from reinsurers related to the U.S. D&O and International D&O lines of
business. |
|
|
|
|
In the third quarter, we borrowed an additional $100.0 million against our
new four-year $600.0 million Revolving Loan Facility, primarily to fund share
repurchases. |
|
|
|
|
We purchased $307.8 million, or 10.2 million shares, of our common stock at
an average cost of $30.25 per share in the first nine months of 2011. |
|
|
|
|
We declared dividends of $0.445 per share and paid $49.3 million of
dividends in the first nine months of 2011. |
Comparisons in the following sections refer to the first nine months of 2011 compared to the same
period of 2010, unless otherwise noted. Amounts in tables are in thousands, except for earnings per
share, percentages, ratios and number of employees.
Results of Operations
Our results and key metrics for the nine months and quarter ended September 30, 2011 and 2010 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net earnings |
|
$ |
176,905 |
|
|
$ |
247,797 |
|
|
$ |
60,437 |
|
|
$ |
93,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share |
|
$ |
1.57 |
|
|
$ |
2.15 |
|
|
$ |
0.56 |
|
|
$ |
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
67.4 |
% |
|
|
60.2 |
% |
|
|
69.9 |
% |
|
|
57.6 |
% |
Expense ratio |
|
|
24.8 |
|
|
|
25.2 |
|
|
|
22.9 |
|
|
|
24.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
92.2 |
% |
|
|
85.4 |
% |
|
|
92.8 |
% |
|
|
82.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our 2011 and 2010 results include the impact of world-wide catastrophic events. We experienced
catastrophe losses primarily from the Japan earthquake and tsunami, New Zealand earthquakes,
the United States tornados and Hurricane Irene, and the Denmark storms in 2011 and the Chile earthquake in 2010. We
reinsure a portion of our exposure to such catastrophic events, although we incur some additional
cost for reinstatement premium to continue our reinsurance coverage for future loss events. The
following table summarizes our catastrophe losses, as well as the impact on our net earnings and
key metrics in 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Gross losses |
|
$ |
167,968 |
|
|
$ |
26,900 |
|
|
$ |
47,709 |
|
|
$ |
(5,000 |
) |
Net losses, after reinsurance and reinstatement premium |
|
$ |
107,915 |
|
|
$ |
15,588 |
|
|
$ |
34,587 |
|
|
$ |
(5,000 |
) |
Impact of net catastrophe losses on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per diluted share |
|
$ |
(0.63 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.21 |
) |
|
$ |
0.03 |
|
Net loss ratio (percentage points) |
|
|
6.5 |
% |
|
|
1.0 |
% |
|
|
6.2 |
% |
|
|
(0.9 |
)% |
Combined ratio (percentage points) |
|
|
6.7 |
% |
|
|
1.0 |
% |
|
|
6.3 |
% |
|
|
(0.9 |
)% |
Our third quarter 2011 catastrophe losses primarily related to Hurricane Irene in the United
States. These catastrophe losses were incurred in our U.S. Property and Casualty and International
segments. In the third quarter of 2010, we released $5.0 million of reserves related to the first
quarter 2010 catastrophic events, based on revised information related to our ultimate loss
exposures.
In addition to the catastrophe losses, we increased our loss reserves by $27.5 million in the third
quarter of 2011 to reflect the impact of net favorable prior year loss development and additional
accident year 2011 losses. The following table summarizes the impact of these items on our pretax
earnings in 2011, compared to 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Adverse
(favorable) loss development in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products line of business |
|
$ |
104,159 |
|
|
$ |
|
|
|
$ |
87,395 |
|
|
$ |
|
|
All other lines of business |
|
|
(82,536 |
) |
|
|
1,259 |
|
|
|
(88,038 |
) |
|
|
(907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adverse (favorable) loss development |
|
|
21,623 |
|
|
|
1,259 |
|
|
|
(643 |
) |
|
|
(907 |
) |
Accident year 2011 additional losses |
|
|
28,180 |
|
|
|
|
|
|
|
28,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in pretax earnings |
|
$ |
49,803 |
|
|
$ |
1,259 |
|
|
$ |
27,537 |
|
|
$ |
(907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
25
In the
third quarter of 2011, we experienced $87.4 million of adverse
loss development in the
diversified financial products line of business in our Professional Liability segment. In the same
quarter, we increased certain ultimate loss ratios for accident year 2011, primarily for
the diversified financial products line of business, which generated $28.2 million of
additional losses. The adverse loss development
was offset by $88.0 million of net favorable loss development, primarily in the U.S. D&O and
International D&O lines of business in our Professional Liability segment and in the U.K.
professional liability line of business in our International segment. See the Segment Operations
section below for further discussion of loss activity within each
segment. We also recognized $13.0
million of profit commissions due from reinsurers in the U.S. D&O and International D&O lines of
business in the third quarter of 2011.
Revenue
Total revenue increased $33.7 million in the first nine months of 2011, compared to the same period
in 2010, primarily due to higher net earned premium and net investment income, offset by lower
other operating income and net realized investment gains.
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
U.S. Property & Casualty |
|
$ |
409,733 |
|
|
$ |
415,139 |
|
|
$ |
144,222 |
|
|
$ |
146,010 |
|
Professional Liability |
|
|
392,903 |
|
|
|
414,436 |
|
|
|
130,631 |
|
|
|
144,920 |
|
Accident & Health |
|
|
600,584 |
|
|
|
567,785 |
|
|
|
202,761 |
|
|
|
194,377 |
|
U.S. Surety & Credit |
|
|
169,368 |
|
|
|
173,142 |
|
|
|
55,415 |
|
|
|
55,972 |
|
International |
|
|
447,355 |
|
|
|
381,975 |
|
|
|
95,774 |
|
|
|
99,197 |
|
Exited Lines |
|
|
194 |
|
|
|
2,253 |
|
|
|
44 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross written premium |
|
$ |
2,020,137 |
|
|
$ |
1,954,730 |
|
|
$ |
628,847 |
|
|
$ |
640,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
$ |
273,212 |
|
|
$ |
247,717 |
|
|
$ |
92,776 |
|
|
$ |
84,250 |
|
Professional Liability |
|
|
287,494 |
|
|
|
277,956 |
|
|
|
96,846 |
|
|
|
99,131 |
|
Accident & Health |
|
|
600,143 |
|
|
|
567,520 |
|
|
|
202,643 |
|
|
|
194,301 |
|
U.S. Surety & Credit |
|
|
155,761 |
|
|
|
159,626 |
|
|
|
50,660 |
|
|
|
52,067 |
|
International |
|
|
344,286 |
|
|
|
285,763 |
|
|
|
69,364 |
|
|
|
64,644 |
|
Exited Lines |
|
|
195 |
|
|
|
909 |
|
|
|
45 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net written premium |
|
$ |
1,661,091 |
|
|
$ |
1,539,491 |
|
|
$ |
512,334 |
|
|
$ |
494,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
$ |
245,121 |
|
|
$ |
258,427 |
|
|
$ |
85,946 |
|
|
$ |
84,802 |
|
Professional Liability |
|
|
307,240 |
|
|
|
321,849 |
|
|
|
104,066 |
|
|
|
103,696 |
|
Accident & Health |
|
|
603,656 |
|
|
|
567,739 |
|
|
|
202,999 |
|
|
|
193,252 |
|
U.S. Surety & Credit |
|
|
153,309 |
|
|
|
148,427 |
|
|
|
51,906 |
|
|
|
49,807 |
|
International |
|
|
267,458 |
|
|
|
234,471 |
|
|
|
99,294 |
|
|
|
84,539 |
|
Exited Lines |
|
|
203 |
|
|
|
1,225 |
|
|
|
45 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net earned premium |
|
$ |
1,576,987 |
|
|
$ |
1,532,138 |
|
|
$ |
544,256 |
|
|
$ |
516,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Related to the 2011 catastrophe losses, we recorded a net $14.0 million of reinstatement premium
($15.6 million ceded net of $1.6 million assumed) for continued reinsurance coverage, which reduced
the International segments 2011 net written and net earned premium. Growth in written premium
occurred primarily in the International segment, directly related to our property treaty business,
and in the Accident & Health segment related to our medical stop-loss product. See the Segment
Operations section below for further discussion of the changes in premium revenue within each
segment.
Net investment income, which is included in our Investing segment, increased 5% year-over-year
primarily due to higher income from fixed income securities, generated from an increased amount of
investments. Our fixed income securities portfolio increased 9% from $5.4 billion at September 30,
2010 to $5.8 billion at September 30, 2011. The growth in fixed income securities resulted
primarily from cash flow from operations and long-term investment of short-term funds.
The sources of net investment income are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Fixed income securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
84,228 |
|
|
$ |
82,416 |
|
|
$ |
30,009 |
|
|
$ |
27,613 |
|
Exempt from U.S. income taxes |
|
|
74,713 |
|
|
|
67,585 |
|
|
|
24,887 |
|
|
|
23,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
|
158,941 |
|
|
|
150,001 |
|
|
|
54,896 |
|
|
|
50,921 |
|
Short-term investments |
|
|
420 |
|
|
|
631 |
|
|
|
99 |
|
|
|
271 |
|
Other |
|
|
2,992 |
|
|
|
3,053 |
|
|
|
962 |
|
|
|
1,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
162,353 |
|
|
|
153,685 |
|
|
|
55,957 |
|
|
|
52,203 |
|
Investment expense |
|
|
(3,571 |
) |
|
|
(3,082 |
) |
|
|
(1,192 |
) |
|
|
(1,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
158,782 |
|
|
$ |
150,603 |
|
|
$ |
54,765 |
|
|
$ |
51,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the components of our other operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Fee and commission income |
|
$ |
18,658 |
|
|
$ |
21,465 |
|
|
$ |
7,391 |
|
|
$ |
6,311 |
|
Financial instruments |
|
|
516 |
|
|
|
8,595 |
|
|
|
131 |
|
|
|
216 |
|
Other |
|
|
4,451 |
|
|
|
4,975 |
|
|
|
1,307 |
|
|
|
1,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income |
|
$ |
23,625 |
|
|
$ |
35,035 |
|
|
$ |
8,829 |
|
|
$ |
7,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our fee and commission income in 2010 included deferred revenue from a subsidiary sold in late
2009. The financial instruments line relates to derivative contracts denominated in British pound
sterling and includes the effect of foreign currency fluctuations compared to the U.S. dollar. In
the first quarter of 2010, we terminated our interest in a long-term mortgage impairment insurance
contract that had been accounted for as a derivative financial instrument and recognized a $5.0
million pretax gain. We received £5.6 million ($8.3 million) of cash, which was included in other
operating income, and incurred related expenses of $3.0 million, which were included in other
operating expense. The gain was included in our U.S. Property & Casualty segments 2010 results.
27
Loss and Loss Adjustment Expense
The tables below detail, by segment, our net loss and loss adjustment expense, the amount of loss
development included in our net loss and loss adjustment expense, and our net loss ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
U.S. Property & Casualty |
|
$ |
148,783 |
|
|
$ |
164,684 |
|
|
$ |
56,355 |
|
|
$ |
61,883 |
|
Professional Liability |
|
|
257,632 |
|
|
|
196,154 |
|
|
|
119,617 |
|
|
|
63,212 |
|
Accident & Health |
|
|
438,883 |
|
|
|
412,438 |
|
|
|
147,278 |
|
|
|
138,869 |
|
U.S. Surety & Credit |
|
|
42,351 |
|
|
|
38,157 |
|
|
|
12,664 |
|
|
|
10,296 |
|
International |
|
|
175,635 |
|
|
|
107,601 |
|
|
|
45,242 |
|
|
|
23,227 |
|
Exited Lines |
|
|
(1,044 |
) |
|
|
3,611 |
|
|
|
(784 |
) |
|
|
(349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense |
|
$ |
1,062,240 |
|
|
$ |
922,645 |
|
|
$ |
380,372 |
|
|
$ |
297,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adverse (favorable) loss development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
$ |
(4,613 |
) |
|
$ |
9,751 |
|
|
$ |
(7,163 |
) |
|
$ |
4,427 |
|
Professional Liability |
|
|
48,137 |
|
|
|
2,202 |
|
|
|
31,153 |
|
|
|
(22 |
) |
Accident & Health |
|
|
2,540 |
|
|
|
2,642 |
|
|
|
230 |
|
|
|
186 |
|
U.S. Surety & Credit |
|
|
(2,767 |
) |
|
|
(7,853 |
) |
|
|
(2,786 |
) |
|
|
(3,654 |
) |
International |
|
|
(20,623 |
) |
|
|
(8,415 |
) |
|
|
(21,287 |
) |
|
|
(1,724 |
) |
Exited Lines |
|
|
(1,051 |
) |
|
|
2,932 |
|
|
|
(790 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adverse (favorable) loss development |
|
|
21,623 |
|
|
|
1,259 |
|
|
|
(643 |
) |
|
|
(907 |
) |
Catastrophe losses |
|
|
93,907 |
|
|
|
15,588 |
|
|
|
32,187 |
|
|
|
(5,000 |
) |
All other net loss and loss adjustment expense |
|
|
946,710 |
|
|
|
905,798 |
|
|
|
348,828 |
|
|
|
303,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expense |
|
$ |
1,062,240 |
|
|
$ |
922,645 |
|
|
$ |
380,372 |
|
|
$ |
297,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Property & Casualty |
|
|
60.7 |
% |
|
|
63.7 |
% |
|
|
65.6 |
% |
|
|
73.0 |
% |
Professional Liability |
|
|
83.9 |
|
|
|
60.9 |
|
|
|
114.9 |
|
|
|
61.0 |
|
Accident & Health |
|
|
72.7 |
|
|
|
72.6 |
|
|
|
72.6 |
|
|
|
71.9 |
|
U.S. Surety & Credit |
|
|
27.6 |
|
|
|
25.7 |
|
|
|
24.4 |
|
|
|
20.7 |
|
International |
|
|
65.7 |
|
|
|
45.9 |
|
|
|
45.6 |
|
|
|
27.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net loss ratio |
|
|
67.4 |
% |
|
|
60.2 |
% |
|
|
69.9 |
% |
|
|
57.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated accident year net loss ratio |
|
|
66.0 |
% |
|
|
60.0 |
% |
|
|
70.0 |
% |
|
|
57.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss development represents an increase or decrease in estimates of ultimate losses related to
prior accident years. Deficiencies and redundancies in ultimate loss estimates occur as we review
our loss exposure with our actuaries, increasing or reducing estimates of our ultimate losses as a
result of such reviews and as losses are finally settled or claims exposures change. We recognized
adverse (favorable) loss development of $21.6 million and $1.3 million in the first nine months of
2011 and 2010, respectively, and $(0.6) million and $(0.9) million in the third quarter of 2011 and
2010, respectively. In the third quarter of 2011, we increased reserves for our diversified financial products line of
business, included in the Professional Liability segment, by $114.7 million, which includes $87.4
million related to prior years, due to revised assumptions with respect to claims frequency and
severity in the 2009 2011 accident years. This adverse development was offset by net favorable
development of $88.0 million, primarily in our U.S. D&O and International D&O lines of business in
our Professional Liability segment and in the U.K. professional liability
28
line of business in our International segment. The favorable development in
these lines of business related to lower than expected reported loss development for accident years
2002 2005 for the D&O lines of business and primarily for accident years 2004 2009 for the
U.K. professional liability line of business. See the Segment Operations section below for
further discussion of the changes in our net loss and loss adjustment expense and net loss ratios
within each segment. Our consolidated accident year net loss ratio was higher in 2011, primarily
due to the higher amount of catastrophe losses and $28.2 million of additional losses related to
our third-quarter increase in certain ultimate loss ratios for accident year 2011, primarily
related to the diversified financial products line of business.
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net reserves for loss and loss adjustment expense payable
at beginning of period |
|
$ |
2,537,772 |
|
|
$ |
2,555,840 |
|
|
$ |
2,612,945 |
|
|
$ |
2,568,317 |
|
Net reserve additions from acquired businesses |
|
|
645 |
|
|
|
8,110 |
|
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
5,364 |
|
|
|
(11,677 |
) |
|
|
(22,622 |
) |
|
|
36,109 |
|
Net loss and loss adjustment expense |
|
|
1,062,240 |
|
|
|
922,645 |
|
|
|
380,372 |
|
|
|
297,138 |
|
Net loss and loss adjustment expense payments |
|
|
(937,171 |
) |
|
|
(872,838 |
) |
|
|
(301,845 |
) |
|
|
(299,484 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payable at end of period |
|
$ |
2,668,850 |
|
|
$ |
2,602,080 |
|
|
$ |
2,668,850 |
|
|
$ |
2,602,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid loss ratio |
|
|
59.4 |
% |
|
|
57.0 |
% |
|
|
55.5 |
% |
|
|
58.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The net paid loss ratio was higher year-to-date in 2011 primarily due to higher claims payments for
our directors and officers (D&O) lines of businesses and our property treaty and property (direct
and facultative) product lines, including $20.2 million related to the 2011 catastrophic events.
These increases were partially offset by lower claims payments for our medical stop-loss and
aviation businesses, as well as higher subrogation received related to our U.S. credit line of
business. In addition, in 2011 we commuted certain loss reserves included in our Exited Lines for
$37.8 million. These commutations increased our year-to-date net paid loss ratio by 2.4 percentage
points. The amount of claims paid fluctuates period to period due to our mix of business and the
timing of claims settlement and catastrophic events.
Our gross loss ratio was 69.8% and 61.6% in the first nine months of 2011 and 2010, respectively,
and 67.8% and 56.1% in the third quarter of 2011 and 2010, respectively. The 2011 catastrophe
losses increased our reported gross loss ratios by 8.4 percentage points in the first nine months
and 7.0 percentage points in the third quarter of 2011, while the 2010 catastrophe losses increased
our reported gross loss ratio by 1.4 percentage points in the first nine months of 2010.
Policy Acquisition Costs
Our policy acquisition cost percentage was 15.2% and 15.8% in the first nine months of 2011 and
2010, respectively, and 13.1% and 15.6% in the third quarter of 2011 and 2010, respectively. The
2011 year-to-date policy acquisition cost percentage was reduced 0.9 percentage points due to $15.3
million of profit commissions due from reinsurers (recorded as an offset to policy acquisition
costs) and increased 0.2 percentage points due to $14.0 million of reinstatement premium (recorded
as a reduction of net earned premium). The 2011 third quarter policy acquisition cost percentage
was reduced 2.8 percentage points due to $15.3 million of profit commissions due from reinsurers
and increased 0.1 percentage points due to $2.4 million of reinstatement premium. Profit commissions and reinstatement premium had minimal impact on the 2010 policy acquisition cost percentage. The remaining
increase in our policy acquisition cost percentage primarily related to higher average commission
and premium tax expense in 2011 due to changes in the mix of business.
Other Operating Expense
Other operating expense increased 5% year-over-year and 16% quarter-over-quarter in 2011, primarily
due to the combined effect of higher salary, employee benefits and information technology expense
in 2011, fluctuations in foreign currency rates period-over-period, and certain non-recurring costs
in 2010. We recognized currency conversion benefit (expense) of $2.5 million in the first nine
months and $0.5 million in the third quarter of 2011, compared to $(1.5) million in the first nine
months and $1.2 million in the third
29
quarter of 2010. The first nine months of 2010 included $3.0 million of direct costs incurred in
the first quarter to terminate a derivative contract.
For the first nine months of 2011, 67% of our other operating expense related to compensation and
benefits of our employees. We had 1,869 employees at September 30, 2011 compared to 1,878 a year
earlier. Other operating expense included year-to-date stock-based compensation expense of $10.4
million in 2011 and $9.9 million in 2010. At September 30, 2011, there was approximately $26.8
million of total unrecognized compensation expense related to unvested options and restricted stock
awards and units that is expected to be recognized over a weighted-average period of 3.6 years.
Interest Expense
Interest expense on debt and short-term borrowings was $16.6 million and $15.9 million in the first
nine months of 2011 and 2010, respectively, and $5.6 million and $5.3 million in the third quarter
of 2011 and 2010, respectively, primarily related to our fixed rate Senior Notes. The increase in
2011 related to $195.0 million of borrowings on our Revolving Loan Facility.
Income Tax Expense
Our effective income tax rate was 27.1% for the first nine months of 2011, compared to 30.2% for
the first nine months of 2010. The lower effective rate in 2011 related to the increased benefit
from tax-exempt investment income relative to a lower pretax income base.
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. The insurance segments also
write facultative or individual account reinsurance, as well as treaty reinsurance business. In
some cases, we purchase reinsurance to limit the segments net losses from both individual policy
losses and multiple policy losses from catastrophic events. Our segments maintain disciplined
expense management and a streamlined management structure, which results in favorable expense
ratios. The following provides operational information about our five underwriting segments and our
Investing segment.
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net earned premium |
|
$ |
245,121 |
|
|
$ |
258,427 |
|
|
$ |
85,946 |
|
|
$ |
84,802 |
|
Other revenue |
|
|
16,556 |
|
|
|
24,128 |
|
|
|
6,890 |
|
|
|
5,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue |
|
|
261,677 |
|
|
|
282,555 |
|
|
|
92,836 |
|
|
|
89,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net |
|
|
148,783 |
|
|
|
164,684 |
|
|
|
56,355 |
|
|
|
61,883 |
|
Other expense |
|
|
82,202 |
|
|
|
75,890 |
|
|
|
26,627 |
|
|
|
21,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment expense |
|
|
230,985 |
|
|
|
240,574 |
|
|
|
82,982 |
|
|
|
83,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax earnings |
|
$ |
30,692 |
|
|
$ |
41,981 |
|
|
$ |
9,854 |
|
|
$ |
6,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
60.7 |
% |
|
|
63.7 |
% |
|
|
65.6 |
% |
|
|
73.0 |
% |
Expense ratio |
|
|
31.4 |
|
|
|
26.9 |
|
|
|
28.7 |
|
|
|
23.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
92.1 |
% |
|
|
90.6 |
% |
|
|
94.3 |
% |
|
|
96.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Aviation |
|
$ |
83,879 |
|
|
$ |
87,248 |
|
|
$ |
29,279 |
|
|
$ |
28,950 |
|
E&O |
|
|
56,354 |
|
|
|
74,079 |
|
|
|
17,997 |
|
|
|
23,013 |
|
Public Risk |
|
|
36,523 |
|
|
|
34,526 |
|
|
|
13,344 |
|
|
|
11,600 |
|
Other |
|
|
68,365 |
|
|
|
62,574 |
|
|
|
25,326 |
|
|
|
21,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net earned premium |
|
$ |
245,121 |
|
|
$ |
258,427 |
|
|
$ |
85,946 |
|
|
$ |
84,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation |
|
|
64.9 |
% |
|
|
62.7 |
% |
|
|
67.1 |
% |
|
|
69.7 |
% |
E&O |
|
|
73.7 |
|
|
|
84.9 |
|
|
|
108.6 |
|
|
|
133.8 |
|
Public Risk |
|
|
84.5 |
|
|
|
58.8 |
|
|
|
115.1 |
|
|
|
37.3 |
|
Other |
|
|
32.1 |
|
|
|
42.8 |
|
|
|
7.1 |
|
|
|
31.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss ratio |
|
|
60.7 |
% |
|
|
63.7 |
% |
|
|
65.6 |
% |
|
|
73.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation |
|
$ |
116,933 |
|
|
$ |
121,600 |
|
|
$ |
37,877 |
|
|
$ |
44,692 |
|
E&O |
|
|
52,961 |
|
|
|
63,316 |
|
|
|
15,963 |
|
|
|
19,018 |
|
Public Risk |
|
|
55,724 |
|
|
|
50,397 |
|
|
|
21,426 |
|
|
|
15,706 |
|
Other |
|
|
184,115 |
|
|
|
179,826 |
|
|
|
68,956 |
|
|
|
66,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross written premium |
|
$ |
409,733 |
|
|
$ |
415,139 |
|
|
$ |
144,222 |
|
|
$ |
146,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation |
|
$ |
88,786 |
|
|
$ |
84,097 |
|
|
$ |
29,701 |
|
|
$ |
30,347 |
|
E&O |
|
|
52,035 |
|
|
|
63,256 |
|
|
|
15,449 |
|
|
|
19,019 |
|
Public Risk |
|
|
43,926 |
|
|
|
36,635 |
|
|
|
17,530 |
|
|
|
12,985 |
|
Other |
|
|
88,465 |
|
|
|
63,729 |
|
|
|
30,096 |
|
|
|
21,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net written premium |
|
$ |
273,212 |
|
|
$ |
247,717 |
|
|
$ |
92,776 |
|
|
$ |
84,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our U.S. Property & Casualty segment 2011 pretax earnings declined year-over-year, primarily due to
lower net earned premium, higher operating expenses, and the effect of a $5.0 million gain in 2010
related to termination of a derivative contract. The impact of these items was partially offset by
favorable loss development in 2011, compared to adverse development in 2010. The 2011 pretax
earnings increased quarter-to-quarter, primarily due to a similar trend in loss development.
Gross written premium was lower in 2011 due to competition and other business factors that
particularly affected the E&O product line. E&O premium was also impacted by our more restrictive
underwriting of this product line starting in 2009. Total net written premium increased in certain
other product lines, as changes in the timing and amount of our reinsurance program costs offset
the decrease in E&O premium. Net earned premium was lower in 2011 mainly due to reduced E&O
premium.
The segments lower net loss ratios in 2011, compared to 2010, primarily reflect the change in loss
development year-over-year. The segment had favorable development of $4.6 million in the first
nine months of 2011, compared to adverse development of $9.8 million in the same period of 2010.
The third quarter development was a favorable $7.2 million in 2011 and an adverse $4.4 million in
2010. Both years experienced adverse development in our E&O and employment practices liability
(included in Other) lines of business. In addition, 2011 experienced offsetting favorable
development in our disability, contingency and other lines of business (included in Other). Our
Public Risk product line incurred $5.0 million of catastrophe losses in the third quarter of 2011.
The segments expense ratios were higher year-over-year, primarily due to higher compensation costs
and lower segment revenue in 2011 compared to 2010. During 2010, we terminated our interest in a
derivative contract, which generated $5.0 million of pretax earnings. We recognized a gain of $8.0
million, which was included in other revenue, and incurred reinsurance and other direct costs of
$3.0 million, which were included in other expense.
31
Professional Liability Segment
The following tables summarize the operations of the Professional Liability segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net earned premium |
|
$ |
307,240 |
|
|
$ |
321,849 |
|
|
$ |
104,066 |
|
|
$ |
103,696 |
|
Other revenue |
|
|
358 |
|
|
|
458 |
|
|
|
109 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue |
|
|
307,598 |
|
|
|
322,307 |
|
|
|
104,175 |
|
|
|
103,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net |
|
|
257,632 |
|
|
|
196,154 |
|
|
|
119,617 |
|
|
|
63,212 |
|
Other expense |
|
|
40,055 |
|
|
|
57,171 |
|
|
|
6,023 |
|
|
|
18,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment expense |
|
|
297,687 |
|
|
|
253,325 |
|
|
|
125,640 |
|
|
|
82,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax earnings (loss) |
|
$ |
9,911 |
|
|
$ |
68,982 |
|
|
$ |
(21,465 |
) |
|
$ |
21,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
83.9 |
% |
|
|
60.9 |
% |
|
|
114.9 |
% |
|
|
61.0 |
% |
Expense ratio |
|
|
13.0 |
|
|
|
17.7 |
|
|
|
5.8 |
|
|
|
18.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
96.9 |
% |
|
|
78.6 |
% |
|
|
120.7 |
% |
|
|
79.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. D&O |
|
$ |
270,408 |
|
|
$ |
285,100 |
|
|
$ |
90,154 |
|
|
$ |
92,721 |
|
International D&O |
|
|
36,832 |
|
|
|
36,749 |
|
|
|
13,912 |
|
|
|
10,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net earned premium |
|
$ |
307,240 |
|
|
$ |
321,849 |
|
|
$ |
104,066 |
|
|
$ |
103,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. D&O |
|
|
96.6 |
% |
|
|
61.0 |
% |
|
|
151.3 |
% |
|
|
61.0 |
% |
International D&O |
|
|
(10.0 |
) |
|
|
60.5 |
|
|
|
(120.8 |
) |
|
|
60.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss ratio |
|
|
83.9 |
% |
|
|
60.9 |
% |
|
|
114.9 |
% |
|
|
61.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. D&O |
|
$ |
312,881 |
|
|
$ |
344,510 |
|
|
$ |
112,220 |
|
|
$ |
124,366 |
|
International D&O |
|
|
80,022 |
|
|
|
69,926 |
|
|
|
18,411 |
|
|
|
20,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross written premium |
|
$ |
392,903 |
|
|
$ |
414,436 |
|
|
$ |
130,631 |
|
|
$ |
144,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. D&O |
|
$ |
239,894 |
|
|
$ |
249,882 |
|
|
$ |
86,202 |
|
|
$ |
90,871 |
|
International D&O |
|
|
47,600 |
|
|
|
28,074 |
|
|
|
10,644 |
|
|
|
8,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net written premium |
|
$ |
287,494 |
|
|
$ |
277,956 |
|
|
$ |
96,846 |
|
|
$ |
99,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Professional Liability segment earnings declined in 2011, compared to 2010, due to adverse loss
development, partially offset by increased income related to profit commissions due from
reinsurers. The segments gross written premium decreased in 2011 because we wrote less D&O
business in the United States due to competition. Net written premium as a percentage of gross
written premium was higher in 2011 due to a change in our reinsurance programs.
The segment had adverse loss development of $48.1 million and $31.2 million for the first nine
months and third quarter of 2011, respectively, compared to $2.2 million and none in the same
periods of 2010. The 2011 development relates to the diversified financial products line of
business (included in U.S. D&O), which provides coverage for private equity partnerships, hedge
funds and investment managers.
32
In the third quarter of 2011, this line of business recorded $87.4 million of adverse
development, as well as $27.3 million of additional losses due to the increase in its 2011 accident
year loss ratio.
This adverse development resulted primarily from revised assumptions in the quarter with regards to the frequency and severity
of claims in the 2009 2011 accident years.
For year-to-date 2011, the diversified financial products line of business had
$104.2 million of adverse development.
Our U.S. D&O and International D&O lines of business had favorable development of $32.1 million and
$24.1 million, respectively, in the third quarter of 2011, which partially offset the adverse
development described above. The favorable development related to lower than expected reported loss
development in accident years 2002 2005. The higher 2011 loss ratios for U.S. D&O, shown above,
include the impact of the adverse development for the diversified financial products line of
business, partially offset by the favorable development for the U.S. D&O line of business. The
negative 2011 loss ratios for International D&O reflect the favorable development on that line of
business.
The segments lower expense ratios in 2011 primarily relate to prior years profit commissions due
from reinsurers, recorded by the U.S. D&O and International D&O lines of business in the third
quarter of 2011. The profit commissions, which offset the segments other expense, reduced the 2011
year-to-date and third quarter expense ratios by 4.3 percentage
points and 12.5 percentage points, respectively.
Accident & Health Segment
The following tables summarize the operations of the Accident & Health segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net earned premium |
|
$ |
603,656 |
|
|
$ |
567,739 |
|
|
$ |
202,999 |
|
|
$ |
193,252 |
|
Other revenue |
|
|
3,471 |
|
|
|
2,830 |
|
|
|
1,277 |
|
|
|
1,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue |
|
|
607,127 |
|
|
|
570,569 |
|
|
|
204,276 |
|
|
|
194,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net |
|
|
438,883 |
|
|
|
412,438 |
|
|
|
147,278 |
|
|
|
138,869 |
|
Other expense |
|
|
92,882 |
|
|
|
89,967 |
|
|
|
30,887 |
|
|
|
30,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment expense |
|
|
531,765 |
|
|
|
502,405 |
|
|
|
178,165 |
|
|
|
169,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax earnings |
|
$ |
75,362 |
|
|
$ |
68,164 |
|
|
$ |
26,111 |
|
|
$ |
24,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
72.7 |
% |
|
|
72.6 |
% |
|
|
72.6 |
% |
|
|
71.9 |
% |
Expense ratio |
|
|
15.3 |
|
|
|
15.8 |
|
|
|
15.1 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
88.0 |
% |
|
|
88.4 |
% |
|
|
87.7 |
% |
|
|
87.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Stop-loss |
|
$ |
527,255 |
|
|
$ |
488,256 |
|
|
$ |
176,199 |
|
|
$ |
164,698 |
|
Other |
|
|
76,401 |
|
|
|
79,483 |
|
|
|
26,800 |
|
|
|
28,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net earned premium |
|
$ |
603,656 |
|
|
$ |
567,739 |
|
|
$ |
202,999 |
|
|
$ |
193,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Medical Stop-loss |
|
|
74.2 |
% |
|
|
74.0 |
% |
|
|
74.5 |
% |
|
|
74.1 |
% |
Other |
|
|
62.6 |
|
|
|
64.4 |
|
|
|
59.8 |
|
|
|
59.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss ratio |
|
|
72.7 |
% |
|
|
72.6 |
% |
|
|
72.6 |
% |
|
|
71.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Stop-loss |
|
$ |
527,401 |
|
|
$ |
488,256 |
|
|
$ |
176,247 |
|
|
$ |
164,698 |
|
Other |
|
|
73,183 |
|
|
|
79,529 |
|
|
|
26,514 |
|
|
|
29,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross written premium |
|
$ |
600,584 |
|
|
$ |
567,785 |
|
|
$ |
202,761 |
|
|
$ |
194,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Stop-loss |
|
$ |
527,255 |
|
|
$ |
488,256 |
|
|
$ |
176,199 |
|
|
$ |
164,698 |
|
Other |
|
|
72,888 |
|
|
|
79,264 |
|
|
|
26,444 |
|
|
|
29,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net written premium |
|
$ |
600,143 |
|
|
$ |
567,520 |
|
|
$ |
202,643 |
|
|
$ |
194,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Accident & Health segment pretax earnings increased 11% in 2011, primarily due to higher
medical stop-loss premium from rate increases and writing new business. The segment had adverse
loss development of $2.5 million in the first nine months of 2011 and $2.6 million in the same
period of 2010. The adverse development primarily related to our short-term medical insurance and
HMO reinsurance lines of business (both included in Other).
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net earned premium |
|
$ |
153,309 |
|
|
$ |
148,427 |
|
|
$ |
51,906 |
|
|
$ |
49,807 |
|
Other revenue |
|
|
955 |
|
|
|
455 |
|
|
|
254 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue |
|
|
154,264 |
|
|
|
148,882 |
|
|
|
52,160 |
|
|
|
49,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net |
|
|
42,351 |
|
|
|
38,157 |
|
|
|
12,664 |
|
|
|
10,296 |
|
Other expense |
|
|
82,909 |
|
|
|
81,699 |
|
|
|
27,657 |
|
|
|
28,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment expense |
|
|
125,260 |
|
|
|
119,856 |
|
|
|
40,321 |
|
|
|
38,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax earnings |
|
$ |
29,004 |
|
|
$ |
29,026 |
|
|
$ |
11,839 |
|
|
$ |
11,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
27.6 |
% |
|
|
25.7 |
% |
|
|
24.4 |
% |
|
|
20.7 |
% |
Expense ratio |
|
|
53.7 |
|
|
|
54.9 |
|
|
|
53.0 |
|
|
|
56.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
81.3 |
% |
|
|
80.6 |
% |
|
|
77.4 |
% |
|
|
76.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surety |
|
$ |
121,093 |
|
|
$ |
119,325 |
|
|
$ |
40,284 |
|
|
$ |
39,777 |
|
Credit |
|
|
32,216 |
|
|
|
29,102 |
|
|
|
11,622 |
|
|
|
10,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net earned premium |
|
$ |
153,309 |
|
|
$ |
148,427 |
|
|
$ |
51,906 |
|
|
$ |
49,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Surety |
|
|
25.2 |
% |
|
|
22.2 |
% |
|
|
25.1 |
% |
|
|
15.9 |
% |
Credit |
|
|
36.6 |
|
|
|
40.3 |
|
|
|
21.8 |
|
|
|
39.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss ratio |
|
|
27.6 |
% |
|
|
25.7 |
% |
|
|
24.4 |
% |
|
|
20.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surety |
|
$ |
127,219 |
|
|
$ |
132,137 |
|
|
$ |
40,257 |
|
|
$ |
43,437 |
|
Credit |
|
|
42,149 |
|
|
|
41,005 |
|
|
|
15,158 |
|
|
|
12,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross written premium |
|
$ |
169,368 |
|
|
$ |
173,142 |
|
|
$ |
55,415 |
|
|
$ |
55,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surety |
|
$ |
119,780 |
|
|
$ |
127,348 |
|
|
$ |
37,037 |
|
|
$ |
42,038 |
|
Credit |
|
|
35,981 |
|
|
|
32,278 |
|
|
|
13,623 |
|
|
|
10,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net written premium |
|
$ |
155,761 |
|
|
$ |
159,626 |
|
|
$ |
50,660 |
|
|
$ |
52,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our U.S. Surety & Credit segment pretax earnings were flat year-over-year. The segment had
favorable loss development of $2.8 million and $7.9 million in the first nine months of 2011 and
2010, respectively, and $2.8 million and $3.7 million in the third quarter of 2011 and 2010,
respectively. The 2011 favorable development related to lower than expected reported loss
development in our Credit product line. The 2010 development related to revised loss estimates for
both our Surety and Credit product lines.
International Segment
The following tables summarize the operations of the International segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net earned premium |
|
$ |
267,458 |
|
|
$ |
234,471 |
|
|
$ |
99,294 |
|
|
$ |
84,539 |
|
Other revenue |
|
|
2,791 |
|
|
|
6,177 |
|
|
|
889 |
|
|
|
1,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment revenue |
|
|
270,249 |
|
|
|
240,648 |
|
|
|
100,183 |
|
|
|
86,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net |
|
|
175,635 |
|
|
|
107,601 |
|
|
|
45,242 |
|
|
|
23,227 |
|
Other expense |
|
|
99,754 |
|
|
|
89,559 |
|
|
|
35,734 |
|
|
|
29,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment expense |
|
|
275,389 |
|
|
|
197,160 |
|
|
|
80,976 |
|
|
|
52,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax income (loss) |
|
$ |
(5,140 |
) |
|
$ |
43,488 |
|
|
$ |
19,207 |
|
|
$ |
33,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio |
|
|
65.7 |
% |
|
|
45.9 |
% |
|
|
45.6 |
% |
|
|
27.5 |
% |
Expense ratio |
|
|
36.9 |
|
|
|
37.2 |
|
|
|
35.7 |
|
|
|
34.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
102.6 |
% |
|
|
83.1 |
% |
|
|
81.3 |
% |
|
|
62.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
$ |
47,369 |
|
|
$ |
39,566 |
|
|
$ |
18,686 |
|
|
$ |
12,777 |
|
Property Treaty |
|
|
64,528 |
|
|
|
32,533 |
|
|
|
26,563 |
|
|
|
16,924 |
|
Liability |
|
|
60,181 |
|
|
|
60,478 |
|
|
|
20,283 |
|
|
|
19,929 |
|
Surety & Credit |
|
|
56,009 |
|
|
|
53,800 |
|
|
|
19,952 |
|
|
|
17,916 |
|
Other |
|
|
39,371 |
|
|
|
48,094 |
|
|
|
13,810 |
|
|
|
16,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net earned premium |
|
$ |
267,458 |
|
|
$ |
234,471 |
|
|
$ |
99,294 |
|
|
$ |
84,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Energy |
|
|
52.5 |
% |
|
|
25.4 |
% |
|
|
41.2 |
% |
|
|
3.3 |
% |
Property Treaty |
|
|
95.9 |
|
|
|
47.0 |
|
|
|
85.2 |
|
|
|
(5.2 |
) |
Liability |
|
|
18.1 |
|
|
|
55.4 |
|
|
|
(47.1 |
) |
|
|
55.9 |
|
Surety & Credit |
|
|
40.9 |
|
|
|
38.1 |
|
|
|
40.2 |
|
|
|
37.5 |
|
Other |
|
|
140.0 |
|
|
|
58.8 |
|
|
|
119.0 |
|
|
|
34.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss ratio |
|
|
65.7 |
% |
|
|
45.9 |
% |
|
|
45.6 |
% |
|
|
27.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
$ |
113,410 |
|
|
$ |
97,053 |
|
|
$ |
17,029 |
|
|
$ |
16,731 |
|
Property Treaty |
|
|
124,750 |
|
|
|
71,404 |
|
|
|
20,635 |
|
|
|
16,309 |
|
Liability |
|
|
68,713 |
|
|
|
68,501 |
|
|
|
20,642 |
|
|
|
19,464 |
|
Surety & Credit |
|
|
65,853 |
|
|
|
57,019 |
|
|
|
18,664 |
|
|
|
16,774 |
|
Other |
|
|
74,629 |
|
|
|
87,998 |
|
|
|
18,804 |
|
|
|
29,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross written premium |
|
$ |
447,355 |
|
|
$ |
381,975 |
|
|
$ |
95,774 |
|
|
$ |
99,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
$ |
68,329 |
|
|
$ |
51,716 |
|
|
$ |
5,432 |
|
|
$ |
4,251 |
|
Property Treaty |
|
|
100,139 |
|
|
|
61,994 |
|
|
|
14,013 |
|
|
|
12,948 |
|
Liability |
|
|
63,248 |
|
|
|
63,410 |
|
|
|
18,815 |
|
|
|
17,663 |
|
Surety & Credit |
|
|
62,155 |
|
|
|
51,278 |
|
|
|
18,689 |
|
|
|
14,605 |
|
Other |
|
|
50,415 |
|
|
|
57,365 |
|
|
|
12,415 |
|
|
|
15,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net written premium |
|
$ |
344,286 |
|
|
$ |
285,763 |
|
|
$ |
69,364 |
|
|
$ |
64,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our International segments pretax earnings were impacted by losses from world-wide catastrophic
events in 2011 and 2010. We experienced catastrophe losses primarily from the Japan earthquake and
tsunami, New Zealand earthquakes, the United States tornados and
Hurricane Irene, and the Denmark storms in 2011 and
the Chile earthquake in 2010. The catastrophic events impacted our energy and property treaty
product lines, as well as our property (direct and facultative) and accident and health lines of
business (both included in Other). We reinsured a portion of our exposure to these catastrophic
events and incurred net reinstatement premium for continued reinsurance coverage, which reduced the
segments 2011 net written and net earned premium. The following table summarizes the segments
catastrophe losses, as well as the impact on key metrics in 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Loss and loss adjustment expense (benefit), after reinsurance |
|
$ |
87,672 |
|
|
$ |
15,588 |
|
|
$ |
27,000 |
|
|
$ |
(5,000 |
) |
Reinstatement premium, net |
|
|
14,008 |
|
|
|
|
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net catastrophe losses (benefit) |
|
$ |
101,680 |
|
|
$ |
15,588 |
|
|
$ |
29,400 |
|
|
$ |
(5,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of net catastrophe losses (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss ratio (in percentage points) |
|
|
34.4 |
% |
|
|
6.7 |
% |
|
|
27.7 |
% |
|
|
(5.9) |
% |
Expense ratio (in percentage points) |
|
|
1.8 |
|
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
36.2 |
% |
|
|
6.7 |
% |
|
|
28.6 |
% |
|
|
(5.9) |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in gross written, net written and net earned premium year-over-year principally
related to our new property treaty business, which we began to write in late 2009. In 2011, we
wrote more energy business due to industry rate increases and expansion of our wind storm
aggregates and retained a higher percentage of this business. Written and earned premium
in our international Surety & Credit and Other product lines
fluctuated year-over-year due to changes in market rate pricing and our reinsurance programs. Other revenue in 2010 included third
party revenue earned by our reinsurance broker, which we sold in late 2009.
36
The segment had $20.6 million and $21.3 million of favorable loss development in the first nine
months of 2011 and 2010 respectively, and $8.4 million and $1.7 million of favorable development in
the same period of 2010. The 2011 development included $18.9 million of favorable development for
our U.K. professional liability line of business (included in Liability). This business experienced
lower than expected reported loss development for accident years 2004 2010, with approximately
half of the favorable development in accident year 2009. The 2011 and 2010 year-to-date development
included $5.5 million and $9.1 million, respectively, of favorable development related to prior
years catastrophe losses.
The Liability net loss ratios reflect the 2011 favorable development. The Energy, Property Treaty
and Other net loss ratios reflect the catastrophe losses in the first nine months of 2011 and 2010,
as well as the favorable development related to prior years catastrophe losses.
The segments expense ratio was lower for the first nine months of 2011, primarily due to higher
segment revenue in 2011 compared to 2010, as well as currency conversion expense in 2010.
Investing Segment
We invest substantially all of our funds in highly-rated fixed income securities, the majority of
which are designated as available for sale securities. We held $5.8 billion of fixed income
securities at September 30, 2011, compared to $5.2 billion at December 31, 2010. At September 30,
2011, 99% of our fixed income securities were investment grade, of which 81% were rated AAA or AA.
The average rating of our fixed income securities portfolio was AA at September 30, 2011, compared
to AA+ at June 30, 2011. The decline in the average rating was a direct result of Standard & Poors
Corporations downgrade of the U.S. government debt rating in August 2011. The average long-term
tax equivalent yield of our fixed income securities portfolio was 4.8% on September 30, 2011. The
portfolio has a weighted-average life of 7.7 years and a weighted-average duration of 5.2 years.
The following tables summarize the investment results and key metrics related to our Investing
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Fixed income securities |
|
$ |
158,941 |
|
|
$ |
150,001 |
|
|
$ |
54,896 |
|
|
$ |
50,921 |
|
Short-term investments |
|
|
420 |
|
|
|
631 |
|
|
|
99 |
|
|
|
271 |
|
Other investments |
|
|
2,992 |
|
|
|
3,053 |
|
|
|
962 |
|
|
|
1,011 |
|
Net realized investment gain |
|
|
3,169 |
|
|
|
7,897 |
|
|
|
2,674 |
|
|
|
1,057 |
|
Other-than-temporary impairment credit losses |
|
|
(3,479 |
) |
|
|
(300 |
) |
|
|
|
|
|
|
(300 |
) |
Investment expense |
|
|
(3,571 |
) |
|
|
(3,082 |
) |
|
|
(1,192 |
) |
|
|
(1,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax earnings |
|
$ |
158,472 |
|
|
$ |
158,200 |
|
|
$ |
57,439 |
|
|
$ |
51,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investments, at cost |
|
$ |
5,646,500 |
|
|
$ |
5,334,463 |
|
|
$ |
5,701,695 |
|
|
$ |
5,350,244 |
|
Average long-term yield * |
|
|
4.0 |
% |
|
|
4.1 |
% |
|
|
4.0 |
% |
|
|
4.1 |
% |
Average long-term tax equivalent yield * |
|
|
4.8 |
% |
|
|
4.9 |
% |
|
|
4.8 |
% |
|
|
4.9 |
% |
Average combined tax equivalent yield * |
|
|
4.6 |
% |
|
|
4.5 |
% |
|
|
4.7 |
% |
|
|
4.6 |
% |
Weighted-average life of fixed income securities |
|
7.7 years |
|
|
6.7 years |
|
|
|
|
|
|
|
|
|
Weighted-average duration of fixed income securities |
|
5.2 years |
|
4.6 years |
|
|
|
|
|
|
|
|
Weighted-average combined duration |
|
5.0 years |
|
4.4 years |
|
|
|
|
|
|
|
|
Average rating of fixed income securities |
|
AA |
|
|
AA+ |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Excluding realized and unrealized gains and losses. |
37
The ratings of our fixed income securities at September 30, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
Held to maturity |
|
|
|
at fair value |
|
|
at amortized cost |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
AAA |
|
$ |
849,992 |
|
|
|
15 |
% |
|
$ |
53,195 |
|
|
|
31 |
% |
AA |
|
|
3,754,273 |
|
|
|
66 |
|
|
|
35,421 |
|
|
|
21 |
|
A |
|
|
838,381 |
|
|
|
15 |
|
|
|
78,717 |
|
|
|
47 |
|
BBB |
|
|
181,819 |
|
|
|
3 |
|
|
|
1,281 |
|
|
|
1 |
|
BB and below |
|
|
26,724 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
5,651,189 |
|
|
|
100 |
% |
|
$ |
168,614 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
This table summarizes our investments by type, substantially all of which were reported at fair
value, at September 30, 2011 and December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
U.S. government and government agency securities |
|
$ |
300,342 |
|
|
|
5 |
% |
|
$ |
337,260 |
|
|
|
6 |
% |
Fixed income securities of states, municipalities and political
subdivisions |
|
|
1,079,859 |
|
|
|
18 |
|
|
|
1,082,057 |
|
|
|
19 |
|
Special purpose revenue bonds of states, municipalities
and political subdivisions |
|
|
1,815,959 |
|
|
|
30 |
|
|
|
1,628,059 |
|
|
|
29 |
|
Corporate fixed income securities |
|
|
926,621 |
|
|
|
15 |
|
|
|
683,690 |
|
|
|
12 |
|
Residential mortgage-backed securities |
|
|
1,111,321 |
|
|
|
18 |
|
|
|
995,108 |
|
|
|
17 |
|
Commercial mortgage-backed securities |
|
|
249,051 |
|
|
|
4 |
|
|
|
145,228 |
|
|
|
3 |
|
Asset-backed securities |
|
|
34,617 |
|
|
|
1 |
|
|
|
12,566 |
|
|
|
|
|
Foreign government securities |
|
|
302,033 |
|
|
|
5 |
|
|
|
309,140 |
|
|
|
5 |
|
Short-term investments |
|
|
197,986 |
|
|
|
3 |
|
|
|
488,002 |
|
|
|
9 |
|
Other investments |
|
|
34,297 |
|
|
|
1 |
|
|
|
5,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
6,052,086 |
|
|
|
100 |
% |
|
$ |
5,687,095 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total investments increased $365.0 million in 2011, principally from operating cash flow and a
$160.2 million increase in the net unrealized gain at September 30, 2011 compared to December 31,
2010. In the past twelve months, we substantially reduced our short-term investments, and
re-invested the funds in long-term fixed income securities, in order to maximize our investment
return.
The methodologies used to determine the fair value of our investments are described in Note 2,
Fair Value Measurements, to the Consolidated Financial Statements. At September 30, 2011, the
net unrealized gain on our available for sale fixed income securities portfolio was $294.9 million,
compared to $194.0 million at June 30, 2011 and $134.6 million at December 31, 2010. The change in
the net unrealized gain or loss, net of the related income tax effect, is recorded in other
comprehensive income. Our general policy has been to hold our available for sale fixed income
securities through periods of fluctuating interest rates.
A security has an impairment loss when its fair value is less than its cost or amortized cost at
the balance sheet date. The gross unrealized losses of individual securities within our available
for sale fixed income securities was $16.7 million at September 30, 2011 and $35.6 million at
December 31, 2010. We evaluate the securities in our fixed income securities portfolio for possible
other-than-temporary impairment losses at each quarter end. We recognized $3.5 million of
other-than-temporary impairment credit losses in the first nine months of 2011, and $0.3 million in
the same period of 2010. For additional disclosures about these credit losses and a description of
the accounting polices and procedures that we use to determine our other-than-temporary impairment
losses, see Note 3, Investments to the Consolidated Financial Statements and Critical Accounting
Policies Other-than-temporary Impairments in Investments in Managements Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the
year ended December 31, 2010.
38
At September 30, 2011, we held $1.8 billion of special purpose revenue bonds, as well as $1.1
billion of general obligation bonds, which are issued by states, municipalities and political
subdivisions and collectively referred to, in the investment market, as municipal bonds. The
overall rating of our municipal bonds was AA+ at September 30, 2011. Within our municipal bond
portfolio, we held $226.1 million of pre-refunded bonds, which are supported by U.S. government
debt obligations. Our special purpose revenue bonds are secured by revenue sources specific to each
security. At September 30, 2011, the percentages of our special purpose revenue bond portfolio
supported by these major revenue sources were as follows: 1) water and sewer 24%, 2) education
21%, 3) transportation 19% and pre-refunded bonds 6%.
Many of our special purpose revenue bonds are insured by mono-line insurance companies or supported
by credit enhancement programs of various states and municipalities. We view bond insurance as
credit enhancement and not credit substitution. We base our investment decision on the strength of
the issuer. A credit review is performed on each issuer and on the sustainability of the revenue
source before we acquire a special purpose revenue bond and periodically, on an ongoing basis,
thereafter. The underlying average credit rating of our special purpose revenue bond issuers,
excluding any bond insurance, was AA at September 30, 2011. Although recent economic conditions in
the United States may reduce the sources of revenue to support certain of these securities, the
majority are supported by revenue from essential sources, as indicated above, which we believe
generate a stable source of revenue.
At September 30, 2011, we held a commercial MBS securities portfolio with a fair value of $249.1
million, an average rating of AA+ and an average loan-to-value ratio of 70%. We owned no
collateralized debt obligations (CDOs) or collateralized loan obligations (CLOs), and we are not
counterparty to any credit default swap transactions.
At September 30, 2011, we held $168.6 million of fixed income securities that we designated as held
to maturity. We maintain these securities, which are denominated in currencies other than the
functional currency of the investing subsidiary, to hedge the currency conversion risk associated
with insurance claims that we will pay in these same currencies. Effective in 2011, we discontinued
designating new investment purchases as held to maturity securities and plan to designate future
investment purchases as available for sale securities. Any unrealized currency conversion gains and
losses on available for sale securities must be recorded in other comprehensive income within
shareholders equity, rather than in net earnings. The pretax income statement benefit related to
this change in our investment management philosophy approximated $2.5 million in the first nine
months of 2011. This change will create greater volatility in our currency conversion benefit or
expense in future periods. All currency conversion benefit or expense, except for the conversion
gains and losses on available for sale securities, is recorded in Corporate & Other beginning in
2011.
Realized gains and losses from sales of securities are usually minimal, unless we sell securities
for investee credit-related reasons, or because we can reinvest the proceeds at a higher effective
yield. We recognized $3.2 million of net realized investment gains in the first nine months of
2011, compared to $7.9 million of net gain in the same period of 2010.
Corporate & Other
The following table summarizes Corporate & Other activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
Three months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net earned premium |
|
$ |
203 |
|
|
$ |
1,225 |
|
|
$ |
45 |
|
|
$ |
70 |
|
Other revenue |
|
|
(506 |
) |
|
|
987 |
|
|
|
(590 |
) |
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
(303 |
) |
|
|
2,212 |
|
|
|
(545 |
) |
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense |
|
|
(1,044 |
) |
|
|
3,611 |
|
|
|
(784 |
) |
|
|
(349 |
) |
Other expense Exited Lines |
|
|
3,285 |
|
|
|
3,124 |
|
|
|
1,183 |
|
|
|
1,049 |
|
Other expense Corporate |
|
|
37,000 |
|
|
|
35,152 |
|
|
|
13,802 |
|
|
|
11,909 |
|
Interest expense |
|
|
16,181 |
|
|
|
15,376 |
|
|
|
5,447 |
|
|
|
5,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
|
55,422 |
|
|
|
57,263 |
|
|
|
19,648 |
|
|
|
17,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax loss |
|
$ |
(55,725 |
) |
|
$ |
(55,051 |
) |
|
$ |
(20,193 |
) |
|
$ |
(17,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Our Corporate expenses not allocable to the segments increased $1.8 million year-over-year,
primarily due to higher information technology costs related to implementation of a new
company-wide financial reporting system and higher employee benefit costs, partially offset by a
$2.5 million currency conversion benefit in the first nine months of 2011. Interest expense
increased due to accelerated recognition of capitalized debt issuance costs in the first quarter of
2011 related to our previous Revolving Loan Facility, which we replaced in March 2011 (see further
discussion below).
Liquidity and Capital Resources
Credit market disruptions in recent years have resulted in a tightening of available sources of
credit and significant liquidity concerns for many companies. We believe we have sufficient
sources of liquidity at a reasonable cost at the present time, based on the following:
|
|
|
We held $291.1 million of unrestricted cash and liquid short-term investments at
September 30, 2011. |
|
|
|
|
Our available for sale bond portfolio, of which $113.3 million was held directly by the
parent company, had a fair value of $5.7 billion at September 30, 2011, compared to $5.0
billion at December 31, 2010. We intend to hold these
securities until their maturity, but we would be able to sell securities to generate cash
if the need arises. |
|
|
|
|
In March 2011, we replaced our $575.0 million Revolving Loan Facility with a four-year
$600.0 million Revolving Loan Facility that matures on March 8, 2015, of which $392.2
million of borrowing capacity remained at September 30, 2011. |
|
|
|
|
Our long-term debt consists of $300.0 million principal amount of unsecured 6.30%
Senior Notes due November 15, 2019. Our debt to total capital ratio was 13.1% at September
30, 2011 and 8.3% December 31, 2010, with the increase related to our borrowings under the
Revolving Loan Facility. |
|
|
|
|
We have a $90.0 million Standby Letter of Credit
Facility that expires on December 31, 2014, which is used to guarantee
our performance in two Lloyds of London syndicates. |
|
|
|
|
Our domestic insurance subsidiaries have the ability to pay $183.6 million in dividends
to the parent company in the fourth quarter of 2011 without obtaining special permission
from state regulatory authorities. Our underwriting agencies have no restrictions on the
amount of dividends that can be paid. HCC can utilize these dividends for any purpose,
including to pay down debt, pay dividends to shareholders, fund acquisitions, purchase our
common stock and pay operating expenses. |
|
|
|
|
We have a Universal Shelf registration statement that provides for the issuance of an
aggregate of $1.0 billion of securities, of which we have $700.0 million of remaining
capacity. These securities may be debt securities, equity securities, or a combination
thereof. The shelf registration statement provides us the means to access the debt and
equity markets relatively quickly, if we are satisfied with the current pricing in the
financial market. |
Capital Management
Revolving Loan Facility
On March 8, 2011, we entered into a new agreement for a four-year $600.0 million Revolving Loan
Facility (Facility). The Facility replaced our $575.0 million Revolving Loan Facility, which was
due to expire on December 19, 2011. The Facility allows us to borrow up to the maximum allowed on a
revolving basis until the Facility expires on March 8, 2015. As of September 30, 2011, we had
borrowed $195.0 million under the Facility, primarily to fund repurchases of our common stock. The
borrowing rate is LIBOR plus 137.5 basis points, subject to increase or decrease based on changes
in our debt rating. The contractual interest rate on borrowings under the Facility at September 30,
2011 was 1.63%. In addition, we pay a commitment fee of 20 basis points. Letters of credit issued
under the Facility further reduced our available borrowing capacity on the remaining Facility to
$392.2 million at September 30, 2011. The Facility contains restrictive financial covenants that
require HCC to maintain a minimum consolidated net worth (excluding accumulated other comprehensive
income) and a leverage ratio of less than or equal to 35%. We were in compliance with these
covenants at September 30, 2011.
40
Senior Notes
In 2009, we issued $300.0 million of 6.30% Senior Notes due 2019. The Senior Notes were priced at a
discount of $1.5 million, for an effective interest rate of 6.37%. We pay interest semi-annually in
arrears on May 15 and November 15 of each year. The Senior Notes may be redeemed in whole at any
time or in part from time to time, at our option, at the redemption price determined in the manner
described in the indenture governing the Senior Notes. The indenture contains restrictive covenants
that impose conditions on our ability to create liens on any capital stock of our restricted
subsidiaries (as defined in the indenture) or to engage in sales of the capital stock of our
restricted subsidiaries. We were in compliance with the requirements of these covenants at
September 30, 2011.
Standby Letter of Credit Facility
In 2010, we entered into a $90.0 million Standby Letter of Credit Facility (Standby Facility) that
is used to guarantee our performance in two Lloydss of London syndicates. The Standby Facility
expires on December 31, 2014. We pay an annual fee of 90 basis points. The Standby Facility
contains restrictive financial covenants that require HCC to maintain a minimum consolidated net
worth (excluding accumulated other comprehensive income) and a leverage ratio of less than or equal
to 35%. We were in compliance with these covenants at September 30, 2011.
Share Repurchases
On March 10, 2011, the Board approved the purchase of up to $300.0 million of our common stock.
This plan was exhausted in September and, on September 23, 2011, the Board approved purchases of an
additional $300.0 million (the Plan). Purchases 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 opportunistically from time-to-time, 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 Boards discretion. In the third quarter of 2011, we purchased $106.2 million, or 3.8
million shares, at an average cost of $27.73 per share, of which $7.8 million, or 0.3 million
shares, were purchased under the Plan. We purchased $307.8 million, or 10.2 million shares, at an
average cost of $30.25 in the first nine months of 2011.
Earnouts
We acquired HCC Global Financial Products (HCC Global), which underwrites our U.S. and
International directors and officers liability business, in 2002. The purchase agreement, as
amended, includes a contingency for future earnout payments. The earnout is based on HCC Globals
pretax earnings from the acquisition date through September 30, 2007, with no maximum amount due to
the former owners. When conditions specified under the purchase agreement are met, we record a net
amount owed to or due from the former owners based on our estimate, at that point in time, of how
claims will ultimately be settled. This net amount will fluctuate in the future, and the ultimate
total net earnout payments cannot be finally determined until all claims are settled or paid. In
March 2011, certain amendments were made to the purchase agreement, which resulted in an adjustment
to our estimate of the ultimate amounts to be settled under the agreement. As a result, we
increased goodwill by $20.0 million as of March 31, 2011. In September, 2011, we increased
goodwill by $31.3 million for additional earnout earned and accrued in the quarter related to
favorable loss development in the U.S. D&O and International D&O lines of business.
Cash Flow
We receive substantial cash from premiums, reinsurance recoverables, surety collateral, outward
commutations, proceeds from sales and redemptions of investments and investment income. Our
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,
debt service, policy acquisition costs, operating expenses, taxes, dividends 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.
41
We generated cash from operations of $288.0 million and $314.6 million in the first nine
months of 2011 and 2010, respectively. The components of our net operating cash flows are
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2011 |
|
|
2010 |
|
Net earnings |
|
$ |
176,905 |
|
|
$ |
247,797 |
|
Change in premium, claims and other receivables, net of reinsurance, premium and claims
payables
and excluding restricted cash |
|
|
(110,979 |
) |
|
|
(24,539 |
) |
Change in unearned premium, net |
|
|
72,132 |
|
|
|
15,103 |
|
Change in loss and loss adjustment expense payable, net of reinsurance recoverables |
|
|
139,536 |
|
|
|
44,355 |
|
(Gain) loss on investments |
|
|
310 |
|
|
|
(8,086 |
) |
Other, net |
|
|
10,055 |
|
|
|
40,001 |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
$ |
287,959 |
|
|
$ |
314,631 |
|
|
|
|
|
|
|
|
Cash provided by operating activities was lower in 2011 than in 2010 primarily due to higher claims
payments, activity related to surety collateral funds, and inward commutations completed in 2011.
We paid $26.5 million more claims in 2011 compared to 2010, of which $20.2 million related to the
2011 catastrophic events, and had a $4.2 million net outflow of surety collateral funds. In 2011,
we also paid $37.8 million to commute certain loss reserves in our Exited lines, which reduced our
2011 operating cash flow.
Recent Accounting Guidance
See Note 1, General Information to the Consolidated Financial Statements for a description of
recently issued accounting guidance that will impact our consolidated financial statements in
future periods.
Critical Accounting Policies
We provided information about our critical accounting policies in Item 7, Managements 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, 2010. 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, 2010.
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, 2011. Based on
this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were
effective as of September 30, 2011.
(b) Changes in Internal Control over Financial Reporting
During the third quarter of 2011, we identified no changes in our internal control over financial
reporting that occurred during the quarter ended September 30, 2011 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
42
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, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 23, 2011, the Board approved the purchase of up to an aggregate of $300.0 million of
our common stock (the Plan). This new authorization follows the completion of a $300.0 million
share repurchase program approved on March 10, 2011. 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 will be made opportunistically from time to, 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 Boards discretion.
During the third quarter of 2011, we purchased our common stock, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of shares |
|
|
Approximate dollar |
|
|
|
|
|
|
|
|
|
|
|
purchased as part of |
|
|
value of shares that may |
|
|
|
Total number of |
|
|
Average price |
|
|
publicly announced |
|
|
yet be purchased under |
|
Period |
|
shares purchased |
|
|
paid per share |
|
|
plans or programs |
|
|
the plans or programs |
|
March 2011 Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1 - July 31, 2011 |
|
|
314,379 |
|
|
$ |
30.96 |
|
|
|
314,379 |
|
|
$ |
88,619,230 |
|
August 1 - August 31, 2011 |
|
|
3,227,237 |
|
|
$ |
27.46 |
|
|
|
3,227,237 |
|
|
$ |
36 |
|
September 1 - September
30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2011 Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 - September
30, 2011 |
|
|
287,711 |
|
|
$ |
27.23 |
|
|
|
287,711 |
|
|
$ |
292,166,062 |
|
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved]
Item 5. Other Information
None.
43
Item 6. Exhibits
a. Exhibits
3.1 |
|
Restated Certificate of Incorporation and Certificate of Amendment of Certificate of
Incorporation of HCC Insurance Holdings, Inc., filed with the Secretary of State of Delaware
on July 23, 1996 and May 21, 1998, respectively (incorporated by reference to Exhibit 4.1 to
the Companys Registration Statement on Form S-8 (Registration No. 333-61687) filed on August
17, 1998). |
|
3.2 |
|
Amended and Restated Bylaws of HCC Insurance Holdings, Inc. (incorporated by reference to
Exhibit 3.1 to the Companys Current Report on Form 8-K filed on April 3, 2008). |
|
4.1 |
|
Indenture, dated August 23, 2001, between HCC Insurance Holdings, Inc. and First Union
National Bank related to Debt Securities (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed on August 24, 2001). |
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4.2 |
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Form of Fourth Supplemental Indenture, dated November 16, 2009, between HCC Insurance
Holdings, Inc. and U.S. Bank National Association related to the 6.30% Senior Notes due 2019
(incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K filed on
November 13, 2009). |
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10.1 |
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Separation Agreement, dated September 13, 2011, between HCC Insurance Holdings, Inc. and W.
Tobin Whamond (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on September 13, 2011). |
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10.2 |
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First Amendment to Loan Agreement, dated September 22, 2011, among HCC Insurance Holdings,
Inc., Wells Fargo Bank, National Association, as Administrative Agent, Barclays Bank PLC and
Bank of America, N.A., as Co-Syndication Agents, JPMorgan Chase Bank, N.A. and The Royal Bank
of Scotland PLC, as Co-Documentation Agents, and the other lenders party thereto (incorporated
by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September
28, 2011). |
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12 |
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Statement of Ratios |
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31.1 |
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Certification by Chief Executive Officer. |
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31.2 |
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Certification by Chief Financial Officer. |
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32 |
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Certification with Respect to Quarterly Report. |
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101 |
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The following financial statements from our Quarterly Report on Form 10-Q for the quarter
ended Septmeber 30, 2011, formatted in XBRL: (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Earnings, (iii) Consolidated Statement of Changes in Shareholders
Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial
Statements.* |
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* |
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The XBRL related information in Exhibit 101 shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to
liability of that section and shall not be incorporated by reference into any filing or other
document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set
forth by specific reference in such filing or document. |
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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.
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HCC Insurance Holdings, Inc. |
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(Registrant)
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November 7,
2011
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/s/ John N. Molbeck, Jr. |
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(Date)
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John N. Molbeck, Jr.,
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Chief Executive Officer |
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November 7, 2011
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/s/ Pamela J. Penny |
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(Date)
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Pamela J. Penny, Executive Vice President
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and Chief Accounting Officer |
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45