e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the fiscal year ended
December 31, 2007
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Commission file number 001-13790
HCC Insurance Holdings,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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76-0336636
(IRS Employer
Identification No.)
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13403 Northwest Freeway,
Houston, Texas
(Address of principal
executive offices)
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77040-6094
(Zip Code)
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(713) 690-7300
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class:
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Name of each exchange on which registered:
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Common Stock, $1.00 par Value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer as defined in Rule 405 of the Securities
Act.
Yes
þ No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act.
Yes
o No
þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein and will
not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and
large accelerated filer 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
(Do not check if a smaller reporting company)
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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
The aggregate market value on June 30, 2007 (the last
business day of the registrants most recently completed
second fiscal quarter) of the voting stock held by
non-affiliates of the registrant was approximately
$3.7 billion. For purposes of the determination of the
above-stated amount, only Directors and executive officers are
presumed to be affiliates, but neither the registrant nor any
such person concede that they are affiliates of the registrant.
The number of shares outstanding of the registrants Common
Stock, $1.00 par value, at February 15, 2008 was
115.3 million.
DOCUMENTS
INCORPORATED BY REFERENCE:
Information called for in Part III of this
Form 10-K
is incorporated by reference to the registrants definitive
Proxy Statement to be filed within 120 days of the close of
the registrants fiscal year in connection with the
registrants annual meeting of shareholders.
HCC
INSURANCE HOLDINGS, INC.
TABLE OF CONTENTS
FORWARD-LOOKING
STATEMENTS
This report on
Form 10-K
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.
2
Many risks and uncertainties may impact 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 catastrophic 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 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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our assessment of underwriting risk;
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our increased retention of risk, which could expose us to
greater potential losses;
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the adequacy of reinsurance protection;
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the ability or 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 in the future;
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attraction and retention of qualified employees;
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fluctuations in the fixed income securities market, which may
reduce the value of our investment assets;
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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;
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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 of our information technology systems;
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developments in the SECs inquiry related to our stock
option granting procedures; and
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change of control.
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We describe these risks and uncertainties in greater detail
in Item 1A, Risk Factors.
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 and 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.
3
PART I
Business
Overview
HCC Insurance Holdings, Inc. is a Delaware corporation, which
was formed in 1991. Its predecessor corporation was formed in
1974. Our principal executive offices are located at 13403
Northwest Freeway, Houston, Texas 77040, and our telephone
number is
(713) 690-7300.
We maintain an Internet website at www.hcc.com. The
reference to our Internet website address in this Report does
not constitute the incorporation by reference of the information
contained at the website in this Report. We will make available,
free of charge through publication on our Internet website, a
copy of our Annual Report on
Form 10-K
and quarterly reports on
Form 10-Q
and any current reports on
Form 8-K
or amendments to those reports, filed with or furnished to the
Securities and Exchange Commission (SEC) as soon as reasonably
practicable after we have filed or furnished such materials with
the SEC.
As used in this report, unless otherwise required by the
context, the terms we, us and
our refer to HCC Insurance Holdings, Inc. and its
consolidated subsidiaries and the term HCC refers
only to HCC Insurance Holdings, Inc. All trade names or
trademarks appearing in this report are the property of their
respective holders.
We provide specialized property and casualty, surety, and group
life, accident and health insurance coverages and related agency
and reinsurance brokerage services to commercial customers and
individuals. We concentrate our activities in selected, narrowly
defined, specialty lines of business. We operate primarily in
the United States, the United Kingdom, Spain, Bermuda, Belgium
and Ireland. Some of our operations have a broader international
scope. We underwrite on both a direct basis, where we insure a
risk in exchange for a premium, and on a reinsurance (assumed)
basis, where we insure all or a portion of another, or ceding,
insurance companys risk in exchange for all or a portion
of the ceding insurance companys premium for the risk. We
market our products both directly to customers and through a
network of independent and affiliated brokers, producers, agents
and third party administrators.
Since our founding, we have been consistently profitable,
generally reporting annual increases in total revenue and
shareholders equity. During the period 2003 through 2006,
which is the latest period for which industry information is
available, we had an average statutory combined ratio of 89.4%
versus the less favorable 97.9% (source: A.M. Best Company,
Inc.) recorded by the U.S. property and casualty insurance
industry overall. During the period 2003 through 2007, our gross
written premium increased from $1.7 billion to
$2.5 billion, an increase of 41%, while net written premium
increased 129% from $0.9 billion to $2.0 billion.
During this period, our revenue increased from $0.9 billion
to $2.4 billion, an increase of 154%. During the period
December 31, 2003 through December 31, 2007, our
shareholders equity increased 133% from $1.0 billion
to $2.4 billion and our assets increased 65% from
$4.9 billion to $8.1 billion.
Our insurance companies are risk-bearing and focus their
underwriting activities on providing insurance
and/or
reinsurance in the following lines of business:
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Diversified financial products
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Group life, accident and health
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Aviation
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London market account
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Other specialty lines
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Our domestic operating insurance companies are rated AA
(Very Strong) (3rd of 23 ratings) by Standard &
Poors Corporation and AA (Very Strong) by
Fitch Ratings (3rd of 21 ratings). Our international operating
insurance companies are rated AA (Very Strong) by
Standard & Poors Corporation. Avemco Insurance
Company, HCC Life Insurance Company, Houston Casualty Company
and U.S. Specialty Insurance Company are rated
A+ (Superior) (2nd of 16 ratings) by A.M. Best
Company, Inc. American Contractors
4
Indemnity Company, Perico Life Insurance Company, United States
Surety Company and HCC Insurance Company are rated A
(Excellent) (3rd of 16 ratings) by A.M. Best Company,
Inc. Standard & Poors, Fitch Ratings
and A.M. Best are internationally recognized independent
rating agencies. These financial strength ratings are intended
to provide an independent opinion of an insurers ability
to meet its obligations to policyholders and are not evaluations
directed at investors.
Our underwriting agencies underwrite on behalf of our insurance
companies and in certain situations for other unaffiliated
insurance companies. They receive fees for these services and do
not bear any of the insurance risk of the companies for which
they underwrite. Our underwriting agencies generate revenues
based on fee income and profit commissions. The agencies
specialize in the following types of business: contingency
(including contest indemnification, event cancellation and
weather coverages); directors and officers
liability; individual disability (for athletes and other high
profile individuals); kidnap and ransom; employment practices
liability; marine; professional indemnity; public entity;
various financial products; short-term medical; and other
specialty business. Our principal underwriting agencies are
Covenant Underwriters, G.B. Kenrick & Associates, HCC
Global Financial Products, HCC Indemnity Guaranty Agency, HCC
Specialty Underwriters, MultiNational Underwriters, LLC,
Professional Indemnity Agency and RA&MCO Insurance Services.
Our brokers provide reinsurance and insurance brokerage services
for our insurance companies, agencies and our clients and
receive fees for their services. A reinsurance broker structures
and arranges reinsurance between insurers seeking to cede
insurance risks and reinsurers willing to assume such risks.
Reinsurance brokers do not bear any of the insurance risks of
their client companies. They earn commission income, and to a
lesser extent, fees for certain services, generally paid by the
insurance and reinsurance companies with whom the business is
placed. Insurance broker operations consist of consulting with
retail and wholesale clients by providing information about
insurance coverage and marketing, placing and negotiating
particular insurance risks. Our brokers specialize in placing
insurance and reinsurance for group life, accident and health,
aviation, surety, marine, and property and casualty lines of
business. Our brokers are Continental Underwriters, HCC Risk
Management and Rattner Mackenzie.
Our
Strategy
Our business philosophy is to maximize underwriting profits and
produce non-risk-bearing fee and commission income while
limiting risk in order to preserve shareholders equity and
maximize earnings. We concentrate our insurance writings in
selected, narrowly defined, specialty lines of business in which
we believe we can achieve an underwriting profit. We also rely
on our experienced underwriting personnel and our access to and
expertise in the reinsurance marketplace to achieve our
strategic objectives. We market our insurance products both
directly to customers and through affiliated and independent
brokers, agents, producers and third party administrators.
The property and casualty insurance industry and individual
lines of business within the industry are cyclical. There are
times when a large number of companies offer insurance on
certain lines of business, causing premiums to trend downward.
During other times, insurance companies limit their writings in
certain lines of business due to lack of capital or following
periods of excessive losses. This results in an increase in
premiums for those companies that continue to write insurance in
those lines of business.
In our insurance company operations, we believe our operational
flexibility, which permits us to shift the focus of our
insurance underwriting activity among our various lines of
business, allows us to implement a strategy of emphasizing more
profitable lines of business during periods of increased premium
rates and de-emphasizing less profitable lines of business
during periods of increased competition. In addition, we believe
that our underwriting agencies and brokers complement our
insurance underwriting activities. Our ability to utilize
affiliated insurers, underwriting agencies and reinsurance
brokers permits us to retain a greater portion of the gross
revenue derived from our written premium.
Following a period in which premium rates rose substantially,
premium rates in several of our lines of business became more
competitive during the past four years. The rate decreases were
more gradual than the prior rate increases; thus, our
underwriting activities remain profitable. During the past
several years, we expanded our underwriting activities and
increased our retentions in response to these market conditions,
to
5
the increased spread provided by our overall book of business,
and to our increased capital strength. During 2005 and 2006, we
increased our retentions on certain of our lines of business
that were not generally exposed to catastrophe risk and where
profit margins were usually more predictable. These higher
retention levels increased our net written and earned premium
and have resulted in additional underwriting profits, investment
income and net earnings.
Through reinsurance, our insurance companies transfer or cede
all or part of the risk we have underwritten to a reinsurance
company in exchange for all or part of the premium we receive in
connection with the risk. We purchase reinsurance to limit the
net loss to our insurance companies from both individual and
catastrophic risks. The amount of reinsurance we purchase varies
depending on, among other things, the particular risks inherent
in the policies underwritten, the pricing of reinsurance and the
competitive conditions within the relevant line of business.
When we decide to retain more underwriting risk in a particular
line of business, we do so with the intention of retaining a
greater portion of any underwriting profits without increasing
our exposure to severe or catastrophe losses. In this regard, we
may purchase less proportional or quota share reinsurance
applicable to that line, thus accepting more of the risk but
possibly replacing it with specific excess of loss reinsurance,
in which we transfer to reinsurers both premium and losses on a
non-proportional basis for individual and catastrophic risks
above a retention point. Additionally, we may obtain facultative
reinsurance protection on individual risks. In some cases, we
may choose not to purchase reinsurance in a line of business in
which we believe there has been a favorable loss history, our
policy limits are relatively low or we determine there is a low
likelihood of catastrophe exposure.
We also acquire or make strategic investments in companies that
present an opportunity for future profits or for the enhancement
of our business. We expect to continue to acquire complementary
businesses. We believe that we can enhance acquired businesses
through the synergies created by our underwriting capabilities
and our other operations.
Our business plan is shaped by our underlying business
philosophy, which is to maximize underwriting profit and net
earnings while preserving and achieving long-term growth of
shareholders equity. As a result, our primary objective is
to increase net earnings rather than market share or gross
written premium.
In our ongoing operations, we will continue to:
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emphasize the underwriting of lines of business in which there
is an anticipation of underwriting profits based on various
factors including premium rates, the availability and cost of
reinsurance, policy terms and conditions, and market conditions;
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limit our insurance companies aggregate net loss exposure
from a catastrophic loss through the use of reinsurance for
those lines of business exposed to such losses and
diversification into lines of business not exposed to such
losses; and
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consider the potential acquisition of specialty insurance
operations and other strategic investments.
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Industry
Segment and Geographic Information
Financial information concerning our operations by industry
segment and geographic data is included in the Consolidated
Financial Statements and Notes thereto.
Acquisitions
We have made a series of acquisitions that have furthered our
overall business strategy. Our major transactions during the
last three years are described below:
On February 25, 2005, we acquired United States Surety
Company through a merger effected with its parent company, USSC
Holdings, Inc. We issued 1.2 million shares of our common
stock in connection with the acquisition. United States Surety
Company is a Maryland-domiciled surety company and operates as a
part of our HCC Surety Group.
6
On July 14, 2005, we acquired the remaining 66% of De
Montfort Group Limited that we did not already own for
$10.5 million and 274,000 shares of our common stock.
We acquired our initial 34% interest in January 2005. The key
operating subsidiary, De Montfort Insurance Company, provides
surety and credit insurance. It was renamed HCC International
Insurance Company, and a significant amount of our other United
Kingdom operations were combined with this company.
On December 1, 2005, we acquired Perico Ltd., a medical
stop-loss insurance underwriting agency headquartered in St.
Louis, Missouri. We paid $30.0 million and issued
158,599 shares of our common stock in connection with the
acquisition. The operations of Perico Ltd. have been
consolidated into Perico Life Insurance Company.
On December 13, 2005, we acquired MIC Life Insurance
Corporation, a Delaware-domiciled insurance company, for
$20.0 million. MIC was renamed Perico Life Insurance
Company and operates in St. Louis, Missouri.
On December 21, 2005, we acquired the remaining 80% of HCCL
Holdings Limited (UK), formerly Illium Insurance Group, Ltd.,
that we did not already own for $2.5 million. We acquired
our initial 20% interest in March 2004. HCCL Holdings Limited
(UK) is the parent of HCC Underwriting Agency Ltd. (UK), a
managing agent for Syndicates 4040 and 4141 at Lloyds of
London, which specialize in United Kingdom third party
liability, employers liability and commercial motor risks
and short-term medical risks, respectively. One of our insurance
companies is a substantial participant in these syndicates.
On July 1, 2006, we acquired G.B. Kenrick &
Associates, Inc., an underwriting agency located in Auburn
Hills, Michigan, recognized as a premier underwriter of public
entity insurance, for $18.0 million cash. Kenrick operates
as a subsidiary of Professional Indemnity Agency.
On October 2, 2006, we acquired the assets of the Health
Products Division of Allianz Life Insurance Company of North
America (the Health Products Division) for cash consideration of
$140.0 million and assumed the outstanding loss reserves.
The Health Products Divisions operations include medical
stop-loss insurance for self-insured corporations and groups;
medical excess insurance for HMOs; provider excess insurance for
integrated delivery systems; excess medical reinsurance to small
and regional insurance carriers; and LifeTrac, a network for
providing organ and bone marrow transplants. During 2007, the
Health Products Division wrote $241.0 million in annual
gross premium. We integrated the Health Products Divisions
operations into HCC Life Insurance Company.
On January 2, 2008, we acquired MultiNational Underwriters,
LLC, an underwriting agency located in Indianapolis, Indiana for
cash consideration of $42.0 million and possible additional
cash consideration depending upon future underwriting profit
levels. This agency writes domestic and international short-term
medical insurance. We formed Syndicate 4141 at Lloyds of
London to write the international business.
We continue to evaluate acquisition opportunities, and we may
complete additional acquisitions during 2008. Any future
acquisitions will be designed to expand and strengthen our
existing lines of business or to provide access to additional
specialty sectors, which we expect to contribute to our overall
growth.
7
Insurance
Company Operations
Lines
of Business
This table shows our insurance companies total premium
written, otherwise known as gross written premium, by line of
business and the percentage of each line to total gross written
premium (dollars in thousands):
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2007
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2006
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2005
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Diversified financial products
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$
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963,355
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39
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%
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$
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956,057
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43
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%
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$
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908,526
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45
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%
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Group life, accident and health
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798,684
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33
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621,639
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28
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593,382
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29
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Aviation
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195,809
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8
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216,208
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10
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210,530
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10
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London market account
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213,716
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9
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234,868
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10
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144,425
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7
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Other specialty lines
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280,040
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11
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205,651
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9
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176,139
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9
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Discontinued lines of business
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(425
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)
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1,225
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5,284
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Total gross written premium
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$
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2,451,179
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100
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%
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$
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2,235,648
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100
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%
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$
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2,038,286
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100
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%
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This table shows our insurance companies actual premium
retained, otherwise known as net written premium, by line of
business and the percentage of each line to total net written
premium (dollars in thousands):
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2007
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2006
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2005
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Diversified financial products
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$
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771,648
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39
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%
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$
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794,232
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44
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%
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$
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675,942
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45
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%
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Group life, accident and health
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759,207
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38
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590,811
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33
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502,805
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34
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Aviation
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145,761
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7
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166,258
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9
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130,743
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9
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London market account
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118,241
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6
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127,748
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7
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78,809
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5
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Other specialty lines
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191,151
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10
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133,481
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7
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109,106
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7
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Discontinued lines of business
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(399
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)
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22
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3,819
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Total net written premium
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$
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1,985,609
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100
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%
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$
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1,812,552
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|
|
|
100
|
%
|
|
$
|
1,501,224
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This table shows our insurance companies net written
premium as a percentage of gross written premium, otherwise
referred to as percentage retained, for our continuing lines of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Diversified financial products
|
|
|
80
|
%
|
|
|
83
|
%
|
|
|
74
|
%
|
Group life, accident and health
|
|
|
95
|
|
|
|
95
|
|
|
|
85
|
|
Aviation
|
|
|
74
|
|
|
|
77
|
|
|
|
62
|
|
London market account
|
|
|
55
|
|
|
|
54
|
|
|
|
55
|
|
Other specialty lines
|
|
|
68
|
|
|
|
65
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated percentage retained
|
|
|
81
|
%
|
|
|
81
|
%
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
We underwrite business produced through affiliated underwriting
agencies, through independent and affiliated brokers, producers
and third party administrators, and by direct marketing efforts.
We also write facultative or individual account reinsurance, as
well as some treaty reinsurance business.
8
Diversified
Financial Products
We underwrite a variety of financial insurance risks in our
diversified financial products line of business. These risks
include:
|
|
|
directors and officers liability
|
|
surety and credit
|
employment practices liability
|
|
various financial products
|
professional indemnity
|
|
|
We began to underwrite this line of business through a
predecessor company in 1977. Our insurance companies started
participating in this business in 2001. We have substantially
increased our level of business through the acquisition of a
number of agencies and insurance companies that operate in this
line of business, both domestically and internationally. Each of
the acquired entities has significant experience in its
respective specialty within this line of business. We have also
formed entities developed around teams of experienced
underwriters that offer these products.
In 2002 and 2003, following several years of insurance industry
losses, significant rate increases were experienced throughout
our diversified financial products line of business,
particularly directors and officers liability, which
we began underwriting in 2002. We benefited greatly from these
improved conditions despite the fact that we had not been
involved in the past losses. Rates softened between 2004 and
2007 for some of the products in this line, but our underwriting
margins are still very profitable. There is also considerable
investment income derived from diversified financial products
due to the extended periods involved in claims resolution.
We had previously maintained reinsurance on our diversified
financial products line of business, primarily on a proportional
basis, but over the past three years we have substantially
increased our retentions. Although individual losses in the
directors and officers public company liability
business may have potential severity, we expect this business to
be profitable. Net premium written for the public company
directors and officers liability was approximately
$202.0 million in 2007. The remainder of the diversified
financial products business is less volatile with relatively low
limits.
Group
Life, Accident and Health
We write medical stop-loss business through HCC Life Insurance
Company and, since its December 2005 acquisition, Perico Life
Insurance Company. Our medical stop-loss insurance provides
coverages to companies, associations and public entities that
elect to self-insure their employees medical coverage for
losses within specified levels, allowing them to manage the risk
of excessive health insurance exposure by limiting aggregate and
specific losses to a predetermined amount. We first began
writing this business through a predecessor company in 1980. Our
insurance companies started participating in this business in
1997. This line of business has grown both organically and
through acquisitions. We are considered a market leader in
medical stop-loss insurance. We also underwrite a small program
of group life insurance, offered to our insureds as a complement
to our medical stop-loss products.
Premium rates for medical stop-loss business rose substantially
beginning in 2000 and, although competition has increased in
recent years and the amount of premium rate increases has
decreased, underwriting results have remained profitable.
Premium rate increases together with deductible increases are
still adequate to cover medical cost trends. Medical stop-loss
business has relatively low limits, a low level of catastrophe
exposure and a generally predictable result. Therefore, we have
increased our retentions since 2001 and currently buy no
reinsurance for this line of business.
Our risk management business is composed of provider excess, HMO
and medical excess risks. This business has relatively lower
limits and a low level of catastrophe exposure. The business is
competitive, but remains profitable.
9
We began writing alternative workers compensation and
occupational accident insurance in 1996. This business is
currently written through U.S. Specialty Insurance Company.
These products have relatively low limits, a relatively low
level of catastrophe exposure and a generally predictable result.
With the acquisition of MultiNational Underwriters, LLC, we
began writing short-term domestic and international medical
insurance that covers individuals when there is a lapse in
coverage or when traveling internationally. This business has
relatively low limits and the term is generally of short
duration. This business is primarily produced on an internet
platform.
Aviation
We are a market leader in the general aviation insurance
industry insuring aviation risks, both domestically and
internationally. Types of aviation business we insure include:
|
|
|
antique and vintage military aircraft
|
|
fixed base operations
|
cargo operators
|
|
military and law enforcement aircraft
|
commuter airlines
|
|
private aircraft owners
|
corporate aircraft
|
|
rotor wing aircraft
|
We offer coverages that include hulls, engines, avionics and
other systems, liabilities, cargo and other ancillary coverages.
We generally do not insure major airlines, major manufacturers,
products or satellites. Insurance claims related to general
aviation business tend to be seasonal, with the majority of the
claims being incurred during warm weather months.
We have been underwriting aviation risks through Houston
Casualty Company since 1981 and since 1959 in Avemco Insurance
Company and U.S. Specialty Insurance Company, which were
acquired in 1997. We are one of the largest writers of personal
aircraft insurance in the United States. Our aviation gross
premium has remained relatively stable since 1998, although we
have increased our retentions as this business is predominantly
written with small limits and has generally predictable results.
The market related to international risks is very competitive
and has seen rate decreases over the last few years, but is now
showing signs of stabilizing.
London
Market Account
Our London market account business consists of marine, energy,
property, and accident and health business and has been
primarily underwritten by Houston Casualty Companys London
branch office. During 2006, we began to utilize HCC
International Insurance Company to underwrite the non-U.S. based
risks that comprise this line of business. This line includes
most of our catastrophe exposures. We have underwritten these
risks for more than 15 years, increasing or decreasing our
premium volume depending on market conditions, which can be very
volatile in this line. The following table presents the details
of net premium written within the London market account line of
business (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Marine
|
|
$
|
30,685
|
|
|
$
|
26,664
|
|
|
$
|
23,799
|
|
Energy
|
|
|
45,962
|
|
|
|
57,619
|
|
|
|
15,621
|
|
Property
|
|
|
19,856
|
|
|
|
18,049
|
|
|
|
18,379
|
|
Accident and health
|
|
|
21,738
|
|
|
|
25,416
|
|
|
|
21,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total London market account net written premium
|
|
$
|
118,241
|
|
|
$
|
127,748
|
|
|
$
|
78,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We underwrite marine risks for ocean-going vessels including
hull, protection and indemnity, liabilities and cargo. We have
underwritten marine risks since 1984 in varying amounts
depending on market conditions.
10
In our energy business, we underwrite physical damage, business
interruption and other ancillary coverages. We have been
underwriting both onshore and offshore energy risks since 1988.
This business includes but is not limited to:
|
|
|
drilling rigs
|
|
petrochemical plants
|
gas production and gathering platforms
|
|
pipelines
|
natural gas facilities
|
|
refineries
|
Rates were relatively low for an extended period of time,
reaching levels where underwriting profitability was difficult
to achieve. As a result, we have underwritten energy risks on a
very selective basis, striving for quality rather than quantity.
Underwriting profitability was adversely impacted by hurricane
activity that occurred in 2004 and 2005, but this resulted in
2006 rates increasing substantially and policy conditions
becoming more stringent. Competitive pressures increased in
2007, adversely affecting prices, causing us to write less of
this business. The business was very profitable in 2006 and 2007
because there were no catastrophe losses. However, we continue
to reinsure much of our catastrophe exposure, buying substantial
amounts of reinsurance on an excess of loss basis.
We underwrite property business specializing in risks of large,
often multinational, corporations, covering a variety of
commercial properties, which include but are not limited to:
|
|
|
factories
|
|
office buildings
|
hotels
|
|
retail locations
|
industrial plants
|
|
utilities
|
We have written property business since 1986, including business
interruption, physical damage and catastrophe risks, such as
flood and earthquake. Rates increased significantly following
September 11, 2001, but trended downward by 2005 despite
the hurricane activity in 2004. Massive losses from hurricanes
in 2005 resulted in substantial rate increases, but due to over
capacity, policy conditions have remained unchanged, unlike
energy risks. Accordingly, we substantially reduced our
involvement in policies with exposures in the Florida and U.S.
Gulf Coast regions. We continue to buy substantial catastrophe
reinsurance, unlike many industry participants, which was shown
to be adequate during 2004 and 2005 when large amounts of
industry capital were lost. While the hurricane activity
seriously affected our earnings in the third quarters of 2004
and 2005, we still were able to produce record annual earnings
in those years, and this business was profitable in 2006 and
2007 as there were no significant catastrophe losses.
We began writing London market accident and health risks in
1996, including trip accident, medical and disability. Due to
past experience and other market factors, we significantly
decreased premiums starting in 2004, although our business is
now much more stable and profitable.
Our London market account is reinsured principally on an excess
of loss basis. We closely monitor catastrophe exposure and
purchase reinsurance to limit our net exposure to a level such
that any loss is not expected to impact our capital. Previous
net catastrophe losses from Hurricane Andrew in 1992, the
Northridge Earthquake in 1994, the terrorist attacks on
September 11, 2001, and the hurricanes of 2004 and 2005 did
not exceed net earnings in the affected quarter.
Other
Specialty Lines
In addition to the above, we underwrite various other specialty
lines of business, including different types of property and
liability business, for which individual premiums by type of
business are not at this time significant to our overall results
of operations.
11
Insurance
Companies
Houston
Casualty Company
Houston Casualty Company is our largest insurance company
subsidiary. It is domiciled in Texas and insures risks
worldwide. Houston Casualty Company underwrites business
produced by independent agents and brokers, affiliated
underwriting agencies, one unaffiliated underwriting agency,
reinsurance brokers, and other insurance and reinsurance
companies. Houston Casualty Company writes diversified financial
products, aviation, London market account and other specialty
lines of business. Houston Casualty Companys 2007 gross
written premium, including Houston Casualty Company-London, was
$664.6 million.
Houston
Casualty Company-London
Houston Casualty Company operates a branch office in London,
England, in order to more closely align its underwriting
operations with the London market, a historical focal point for
some of the business that it underwrites. Houston Casualty
Company-London underwrites diversified financial products and
London market account business, some of which is produced by our
affiliated underwriting agencies. In 2006, we focused the
underwriting activities of Houston Casualty
Company-Londons office on risks based in the United
States. We began to use HCC International Insurance Company as a
platform for much of the European and other international risks
previously underwritten by Houston Casualty Company-London.
HCC
International Insurance Company
HCC International Insurance Company PLC writes diversified
financial products business, primarily surety, credit and
professional indemnity products, and non-United States based
London market account risks. HCC International Insurance
Company has been in operation since 1982 and is domiciled in the
United Kingdom. HCC International Insurance Companys
2007 gross written premium was $230.2 million. We intend to
continue to expand the underwriting activities of HCC
International Insurance Company and to use it as an integral
part of a European platform for our international insurance
operations.
U.S.
Specialty Insurance Company
U.S. Specialty Insurance Company is a Texas-domiciled property
and casualty insurance company. It primarily writes diversified
financial products, aviation and accident and health business.
U.S. Specialty Insurance Company acts as an issuing carrier for
certain business underwritten by our underwriting agencies. U.S.
Specialty Insurance Companys gross written premium in 2007
was $490.0 million.
HCC
Life Insurance Company
HCC Life Insurance Company is an Indiana-domiciled life
insurance company. It operates as a group life, accident and
health insurer. This business is produced by unaffiliated
agents, brokers and third party administrators. In early 2005,
we consolidated the operations of our underwriting agency, HCC
Benefits Corporation, into HCC Life Insurance Company. In 2006,
the Health Products Division was acquired and integrated into
HCC Life Insurance Company. HCC Life Insurance Companys
gross written premium in 2007 was $711.6 million.
Avemco
Insurance Company
Avemco Insurance Company is a Maryland-domiciled property and
casualty insurer and operates as a direct market underwriter of
general aviation business. It has also been an issuing carrier
for accident and health business and some other lines of
business underwritten by our underwriting agencies and an
affiliated underwriting agency. Avemco Insurance Companys
gross written premium in 2007 was $66.3 million.
American
Contractors Indemnity Company
American Contractors Indemnity Company is a California-domiciled
surety company. It writes court, specialty contract, license and
permit, and bail bonds. American Contractors Indemnity Company
has been in
12
operation since 1990 and operates as a part of our HCC Surety
Group. American Contractors Indemnity Companys 2007 gross
written premium was $96.7 million.
HCC
Europe
Houston Casualty Company Europe, Seguros y Reaseguros, S.A. is a
Spanish insurer. It underwrites diversified financial products
business. HCC Europe is also an issuing carrier for business
underwritten by our underwriting agencies and has been in
operation since 1978. HCC Europes gross written premium in
2007 was $136.9 million.
HCC
Reinsurance Company
HCC Reinsurance Company Limited is a Bermuda-domiciled
reinsurance company that writes assumed reinsurance from our
insurance companies and a limited amount of direct insurance.
HCC Reinsurance Company is an issuing carrier for diversified
financial products business underwritten by our underwriting
agency, HCC Indemnity Guaranty. HCC Reinsurance Company also
reinsures our proportional interests in Lloyds of London
Syndicates 4040 and 4141. HCC Reinsurance Companys gross
written premium in 2007 was $116.4 million.
HCC
Specialty Insurance Company
HCC Specialty Insurance Company is an Oklahoma-domiciled
property and casualty insurance company in operation since 2002.
It writes diversified financial products and other specialty
lines of business produced by affiliated underwriting agencies
and one unaffiliated underwriting agency. HCC Specialty
Insurance Companys gross written premium in 2007 was
$19.0 million and was 100% ceded to Houston Casualty
Company.
United
States Surety Company
United States Surety Company is a Maryland-domiciled surety
company that has been in operation since 1996. It writes
contract bonds and operates as a part of our HCC Surety Group.
United States Surety Companys 2007 gross written premium
was $25.5 million.
Perico
Life Insurance Company
Perico Life Insurance Company was a previously dormant company
acquired in December 2005 and is a Delaware-domiciled life
insurance company. Perico Life Insurance Company now operates as
a group life, accident and health insurer. In 2006, we
consolidated the operations of Perico Ltd. into Perico Life
Insurance Company. Perico Life Insurance Companys 2007
gross written premium was $47.2 million.
HCC
Insurance Company
HCC Insurance Company is an Indiana-domiciled property and
casualty insurance company. It writes business included in our
other specialty lines of business that is produced by one of our
underwriting agencies. HCC Insurance Companys gross
written premium in 2007 was 100% ceded to Houston Casualty
Company.
Lloyds
of London Syndicates
We currently have an 87% participation in Lloyds of London
Syndicate 4040, which writes business included in our other
specialty lines of business, and a 100% participation in
recently formed Lloyds of London Syndicate 4141,
which writes business in our group life, accident and health
line of business. These syndicates are managed by HCC
Underwriting Agency, Ltd. (UK). Our participation in these
syndicates is reinsured by HCC Reinsurance Company. We expect to
use our Lloyds of London platform and the licenses it
affords us to write business that is unique to Lloyds of
London and to write business in countries where our other
insurance companies are not currently licensed.
13
Underwriting
Agency Operations
Historically, we have acquired underwriting agencies with
seasoned books of business and experienced underwriters. These
agencies control the distribution of their business. After we
acquire an agency, we generally begin to write some or all of
its business through our insurance companies and in some cases
the insurance companies reinsure some of the business with
unaffiliated insurance companies. Over time, we retain greater
percentages of this business, reducing the revenues of our
underwriting agencies, but increasing our underwriting profits.
We have also consolidated certain of our underwriting agencies
with our insurance companies when our retention of their
business approached 100%. We plan to continue this process into
the future.
Our underwriting agencies act on behalf of affiliated and
unaffiliated insurance companies and provide insurance
underwriting management and claims administration services. Our
underwriting agencies do not assume any insurance or reinsurance
risk themselves and generate revenues based entirely on fee
income and profit commissions. These subsidiaries are in a
position to direct and control business they produce. Our
insurance companies serve as policy issuing companies for the
majority of the business written by our underwriting agencies.
If an unaffiliated insurance company serves as the policy
issuing company, our insurance companies may reinsure the
business written by our underwriting agencies. Our underwriting
agencies generated total revenue in 2007 of $146.5 million.
Professional
Indemnity Agency
Professional Indemnity Agency, Inc., based in Mount Kisco, New
York and with operations in San Francisco, California, Concord,
California, and Auburn Hills, Michigan, acts as an underwriting
manager for diversified financial products specializing in
directors and officers liability and professional
indemnity, kidnap and ransom, employment practice liability,
public entity, and other specialty lines of business on behalf
of affiliated and unaffiliated insurance companies. It has been
in operation since 1977.
HCC
Specialty Underwriters
HCC Specialty Underwriters Inc., with its home office in
Wakefield, Massachusetts and with branch offices in London,
England, Los Angeles, California and New York, New York, acts as
an underwriting manager for sports disability, contingency, film
completion and other group life, accident and health and
specialty lines of business on behalf of affiliated and
unaffiliated insurance companies. It has been in operation since
1982.
HCC
Global Financial Products
HCC Global Financial Products, LLC acts as an underwriting
manager for diversified financial products, specializing in
directors and officers liability business on behalf
of affiliated insurance companies. It has been in operation
since 1999, underwriting domestic business from Farmington,
Connecticut, Jersey City, New Jersey and Houston, Texas and
international business from Barcelona, Spain, London, England,
and Miami, Florida.
Covenant
Underwriters
Covenant Underwriters, Ltd. is an underwriting agency based in
Covington, Louisiana with an office in New York, New York,
specializing in commercial marine insurance underwritten on
behalf of affiliated and unaffiliated insurance companies. It
has been in operation through predecessor entities since 1993.
HCC
Indemnity Guaranty Agency
HCC Indemnity Guaranty Agency, Inc. is an underwriting agency
based in New York, New York, specializing in writing insurance
and reinsurance related to various financial products. It writes
on behalf of affiliated insurance companies. It has been in
operation since 2004.
14
HCC
Underwriting Agency, Ltd. (UK)
HCC Underwriting Agency, Ltd. (UK) is a managing agent for
two Lloyds of London syndicates, which specialize in
United Kingdom third party liability, employers liability,
commercial motor and short-term medical risks. One of our
insurance companies is a participant in these syndicates, with
our current participation of 87% in Syndicate 4040 and 100% in
Syndicate 4141. We plan to use HCC Underwriting Agency, Ltd.
(UK) and its managed syndicates as a platform for expanding our
operations within the Lloyds of London market. HCC
Underwriting Agency, Ltd. (UK) has been in operation since 2004.
MultiNational
Underwriters, LLC
MultiNational Underwriters, LLC, based in Indianapolis, Indiana,
is an underwriting agency specializing in domestic and
international short-term medical insurance, which is written
principally through an internet platform. The domestic business
is written on behalf of one of our domestic insurance companies
and the international business is written by Lloyds of
London Syndicate 4141, which is managed by one of our
subsidiaries and in which we have a 100% participation.
Reinsurance
and Insurance Broker Operations
Our reinsurance and insurance brokers provide a variety of
services, including marketing, placing, consulting on and
servicing insurance risks for their clients, which include
medium to large corporations, unaffiliated and affiliated
insurance and reinsurance companies, and other risk-taking
entities. The brokers earn commission income and, to a lesser
extent, fees for certain services, which are generally paid by
the underwriters with whom the business is placed. Some of these
risks may be initially underwritten by our insurance companies
and they may retain a portion of the risk. Total revenue
generated by our brokers in 2007 amounted to $32.1 million.
Rattner
Mackenzie
Rattner Mackenzie Limited is a reinsurance broker based in
London, England, with additional operations in Hamilton, Bermuda
and Mt. Kisco, New York. Rattner Mackenzie specializes in group
life, accident and health reinsurance and some specialty
property and casualty lines of business. It operates as a
Lloyds of London broker for insurance and reinsurance
business placed on behalf of unaffiliated and affiliated
insurance companies, reinsurance companies and underwriting
agencies and has been in operation since 1989.
Continental
Underwriters
Continental Underwriters Ltd. is an insurance broker based in
Covington, Louisiana, specializing in commercial marine
insurance and has been in operation since 1970.
HCC
Risk Management
HCC Risk Management Corporation, based in Houston, Texas, is a
reinsurance broker specializing in placing reinsurance on behalf
of affiliated and unaffiliated insurance companies and has been
in operation since 1991.
Other
Operations
Other operating income consists of the following:
|
|
|
|
|
Equity in the earnings of mainly insurance-related companies in
which we invest;
|
|
|
|
Dividends and interest from certain other insurance-related
strategic investments and gains or losses from the disposition
of these investments;
|
|
|
|
Income related to two mortgage impairment insurance contracts
which, while written as insurance policies, receive accounting
treatment as derivative financial instruments;
|
15
|
|
|
|
|
The profit or loss from a portfolio of trading securities; and
|
|
|
|
Other miscellaneous income.
|
Other operating income was $43.5 million in 2007 and
$77.0 million in 2006, and can vary considerably from
period to period depending on the amount of investment or
disposition activity. In the fourth quarter of 2006, we began
liquidating our trading portfolio, a process that was completed
in 2007 with the exception of two investment positions. We
invested the proceeds primarily in fixed income securities.
Operating
Ratios
Premium
to Surplus Ratio
This table shows the ratio of statutory gross written premium
and net written premium to statutory policyholders surplus
for our property and casualty insurance companies (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Gross written premium
|
|
$
|
2,460,498
|
|
|
$
|
2,243,843
|
|
|
$
|
2,049,116
|
|
|
$
|
1,992,361
|
|
|
$
|
1,746,413
|
|
Net written premium
|
|
|
1,985,641
|
|
|
|
1,812,896
|
|
|
|
1,495,931
|
|
|
|
1,121,343
|
|
|
|
867,795
|
|
Policyholders surplus
|
|
|
1,744,889
|
|
|
|
1,342,054
|
|
|
|
1,110,268
|
|
|
|
844,851
|
|
|
|
591,889
|
|
Gross written premium ratio
|
|
|
141.0
|
%
|
|
|
167.2
|
%
|
|
|
184.6
|
%
|
|
|
235.8
|
%
|
|
|
295.1
|
%
|
Gross written premium industry average(1)
|
|
|
*
|
|
|
|
171.0
|
%
|
|
|
192.7
|
%
|
|
|
201.6
|
%
|
|
|
219.3
|
%
|
Net written premium ratio
|
|
|
113.8
|
%
|
|
|
135.1
|
%
|
|
|
134.7
|
%
|
|
|
132.7
|
%
|
|
|
146.6
|
%
|
Net written premium industry average(1)
|
|
|
*
|
|
|
|
90.4
|
%
|
|
|
99.8
|
%
|
|
|
108.5
|
%
|
|
|
117.4
|
%
|
|
|
|
(1) |
|
Source: A.M. Best Company, Inc. |
|
* |
|
Not available |
While there is no statutory requirement regarding a permissible
premium to policyholders surplus ratio, guidelines
established by the National Association of Insurance
Commissioners provide that a property and casualty
insurers annual statutory gross written premium should not
exceed 900% and net written premium should not exceed 300% of
its policyholders surplus. However, industry and rating
agency guidelines place these ratios at 300% and 200%,
respectively. Our property and casualty insurance companies have
maintained ratios lower than such guidelines.
Combined
Ratio GAAP
The underwriting experience of a property and casualty insurance
company is indicated by its combined ratio. The GAAP combined
ratio is a combination of the loss ratio (the ratio of incurred
losses and loss adjustment expenses to net earned premium) and
the expense ratio (the ratio of policy acquisition costs and
other underwriting expenses, net of ceding commissions, to net
earned premium). We calculate the GAAP combined ratio using
financial data derived from our consolidated financial
statements reported under accounting principles generally
accepted in the United States of America (generally accepted
accounting principles). Our insurance companies GAAP loss
ratios, expense ratios and combined ratios are shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Loss ratio
|
|
|
59.6
|
%
|
|
|
59.2
|
%
|
|
|
67.1
|
%
|
|
|
63.8
|
%
|
|
|
66.1
|
%
|
Expense ratio
|
|
|
23.8
|
|
|
|
25.0
|
|
|
|
26.1
|
|
|
|
26.7
|
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio GAAP
|
|
|
83.4
|
%
|
|
|
84.2
|
%
|
|
|
93.2
|
%
|
|
|
90.5
|
%
|
|
|
90.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Combined
Ratio Statutory
The statutory combined ratio is a combination of the loss ratio
(the ratio of incurred losses and loss adjustment expenses to
net earned premium) and the expense ratio (the ratio of policy
acquisition costs and other underwriting expenses, net of ceding
commissions, to net written premium). We calculate the statutory
combined ratio using financial data derived from the combined
financial statements of our insurance company subsidiaries
reported in accordance with statutory accounting principles. Our
insurance companies statutory loss ratios, expense ratios
and combined ratios are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Loss ratio
|
|
|
60.6
|
%
|
|
|
60.0
|
%
|
|
|
67.1
|
%
|
|
|
64.3
|
%
|
|
|
66.8
|
%
|
Expense ratio
|
|
|
23.9
|
|
|
|
24.0
|
|
|
|
25.5
|
|
|
|
26.7
|
|
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio Statutory
|
|
|
84.5
|
%
|
|
|
84.0
|
%
|
|
|
92.6
|
%
|
|
|
91.0
|
%
|
|
|
89.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry average
|
|
|
*
|
|
|
|
92.5
|
%
|
|
|
100.7
|
%
|
|
|
98.3
|
%
|
|
|
100.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The statutory ratio data is not intended to be a substitute for
results of operations in accordance with generally accepted
accounting principles. We believe including this information is
useful to allow a comparison of our operating results with those
of other companies in the insurance industry. The source of the
industry average is A.M. Best Company, Inc. A.M. Best
Company, Inc. reports insurer performance based on statutory
financial data to provide more standardized comparisons among
individual companies and to provide overall industry
performance. This data is not an evaluation directed at
investors.
Reserves
Our net loss and loss adjustment expense reserves are composed
of reserves for reported losses and reserves for incurred but
not reported losses, less a reduction for reinsurance
recoverables related to those reserves. Reserves are recorded by
product line and are undiscounted, except for reserves related
to acquisitions.
The process of estimating our loss and loss adjustment expense
reserves involves a considerable degree of judgment by
management and is inherently uncertain. The recorded reserves
represent managements best estimate of unpaid loss and
loss adjustment expense by line of business. Because we provide
insurance coverage in specialized lines of business that often
lack statistical stability, management considers many factors
and not just actuarial point estimates in determining ultimate
expected losses and the level of net reserves required and
recorded.
To record reserves on our lines of business, we utilize expected
loss ratios, which management selects based on the following:
|
|
|
|
|
Information used to price the applicable policies;
|
|
|
|
Historical loss information where available;
|
|
|
|
Any public industry data for that line or similar lines of
business; and
|
|
|
|
An assessment of current market conditions.
|
Management also considers the point estimates and ranges
calculated by our actuaries, together with input from our
experienced underwriting and claims personnel. Because of the
nature and complexities of the specialized types of business we
insure, management may give greater weight to the expectations
of our underwriting and claims personnel, who often perform a
claim by claim review, rather than to the actuarial estimates.
However, we utilize the actuarial point and range estimates to
monitor the adequacy and reasonableness of our recorded reserves.
17
Each quarter-end, management compares recorded reserves to the
most recent actuarial point estimate and range for each line of
business. If the recorded reserves vary significantly from the
actuarial point estimate, management determines the reasons for
the variances and may adjust the reserves up or down to an
amount that, in managements judgment, is adequate based on
all of the facts and circumstances considered, including the
actuarial point estimates. We consistently maintain total
consolidated net reserves above the total actuarial point
estimate but within the actuarial range.
Our actuaries utilize standard actuarial techniques in making
their actuarial point estimates. These techniques require a high
degree of judgment, and changing conditions can cause
fluctuations in the reserve estimates. We believe that our
review process is effective, such that any required changes are
recognized in the period of change as soon as the need for the
change is evident. Reinsurance recoverables offset our gross
reserves based upon the contractual terms of our reinsurance
agreements.
With the exception of 2004, our net reserves historically have
shown favorable development except for the effects of losses
from commutations, which we have completed in the past and may
negotiate in the future. Commutations can produce adverse prior
year development since, under generally accepted accounting
principles, any excess of undiscounted reserves assumed over
assets received must be recorded as a loss at the time the
commutation is completed. Economically, the loss generally
represents the discount for the time value of money that will be
earned over the payout of the reserves; thus, the loss may be
recouped as investment income is earned on the assets received.
Based on our reserving techniques and our past results, we
believe that our net reserves are adequate.
The reserving process is intended to reflect the impact of
inflation and other factors affecting loss payments by taking
into account changes in historical payment patterns and
perceived trends. There is no precise method for the subsequent
evaluation of the adequacy of the consideration given to
inflation, or to any other specific factor, or to the way one
factor may impact another.
We underwrite risks that are denominated in a number of foreign
currencies and, therefore, maintain loss reserves with respect
to these policies in the respective currencies. These reserves
are subject to exchange rate fluctuations, which may have an
effect on our net earnings.
The loss development triangles below show changes in our
reserves in subsequent years from the prior loss estimates,
based on experience at the end of each succeeding year, on the
basis of generally accepted accounting principles. The estimate
is increased or decreased as more information becomes known
about the frequency and severity of losses for individual years.
A redundancy means the original estimate was higher than the
current estimate; a deficiency means that the current estimate
is higher than the original estimate.
The first line of each loss development triangle presents, for
the years indicated, our gross or net reserve liability,
including the reserve for incurred but not reported losses. The
first section of each table shows, by year, the cumulative
amounts of loss and loss adjustment expense paid at the end of
each succeeding year. The second section sets forth the
re-estimates in later years of incurred losses, including
payments, for the years indicated. The cumulative
redundancy (deficiency) represents, at the date indicated,
the difference between the latest
re-estimated
liability and the reserves as originally estimated.
18
This loss development triangle shows development in loss
reserves on a gross basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
|
|
Balance sheet reserves
|
|
$
|
3,227,080
|
|
|
$
|
3,097,051
|
|
|
$
|
2,813,720
|
|
|
$
|
2,089,199
|
|
|
$
|
1,525,313
|
|
|
$
|
1,158,915
|
|
|
$
|
1,132,258
|
|
|
$
|
944,117
|
|
|
$
|
871,104
|
|
|
$
|
460,511
|
|
|
$
|
275,008
|
|
Reserve adjustments from acquisition and disposition of
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,587
|
|
|
|
|
|
|
|
(66,571
|
)
|
|
|
(32,437
|
)
|
|
|
(136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted reserves
|
|
|
3,227,080
|
|
|
|
3,097,051
|
|
|
|
2,813,720
|
|
|
|
2,089,199
|
|
|
|
1,525,313
|
|
|
|
1,164,502
|
|
|
|
1,132,258
|
|
|
|
877,546
|
|
|
|
838,667
|
|
|
|
460,375
|
|
|
|
275,008
|
|
Cumulative paid at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
|
|
|
|
797,217
|
|
|
|
689,126
|
|
|
|
511,766
|
|
|
|
396,077
|
|
|
|
418,809
|
|
|
|
390,232
|
|
|
|
400,279
|
|
|
|
424,379
|
|
|
|
229,746
|
|
|
|
160,324
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
1,077,954
|
|
|
|
780,130
|
|
|
|
587,349
|
|
|
|
548,941
|
|
|
|
612,129
|
|
|
|
537,354
|
|
|
|
561,246
|
|
|
|
367,512
|
|
|
|
209,724
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993,655
|
|
|
|
772,095
|
|
|
|
659,568
|
|
|
|
726,805
|
|
|
|
667,326
|
|
|
|
611,239
|
|
|
|
419,209
|
|
|
|
241,523
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
866,025
|
|
|
|
823,760
|
|
|
|
803,152
|
|
|
|
720,656
|
|
|
|
686,730
|
|
|
|
435,625
|
|
|
|
259,067
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
886,458
|
|
|
|
921,920
|
|
|
|
758,126
|
|
|
|
721,011
|
|
|
|
453,691
|
|
|
|
262,838
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,009,049
|
|
|
|
835,994
|
|
|
|
725,639
|
|
|
|
462,565
|
|
|
|
267,038
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
924,803
|
|
|
|
752,733
|
|
|
|
462,126
|
|
|
|
270,362
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
817,615
|
|
|
|
464,748
|
|
|
|
268,939
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474,358
|
|
|
|
269,751
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,708
|
|
Re-estimated liability at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
3,227,080
|
|
|
|
3,097,051
|
|
|
|
2,813,720
|
|
|
|
2,089,199
|
|
|
|
1,525,313
|
|
|
|
1,164,502
|
|
|
|
1,132,258
|
|
|
|
877,546
|
|
|
|
838,667
|
|
|
|
460,375
|
|
|
|
275,008
|
|
One year later
|
|
|
|
|
|
|
3,006,430
|
|
|
|
2,810,419
|
|
|
|
2,118,471
|
|
|
|
1,641,426
|
|
|
|
1,287,003
|
|
|
|
1,109,098
|
|
|
|
922,080
|
|
|
|
836,775
|
|
|
|
550,409
|
|
|
|
308,501
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
2,698,947
|
|
|
|
2,112,303
|
|
|
|
1,666,931
|
|
|
|
1,393,143
|
|
|
|
1,241,261
|
|
|
|
925,922
|
|
|
|
868,438
|
|
|
|
545,955
|
|
|
|
316,250
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,025,133
|
|
|
|
1,690,729
|
|
|
|
1,464,448
|
|
|
|
1,384,608
|
|
|
|
1,099,657
|
|
|
|
854,987
|
|
|
|
547,179
|
|
|
|
304,281
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,619,744
|
|
|
|
1,506,360
|
|
|
|
1,455,046
|
|
|
|
1,102,636
|
|
|
|
900,604
|
|
|
|
537,968
|
|
|
|
305,022
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,453,674
|
|
|
|
1,480,193
|
|
|
|
1,135,143
|
|
|
|
887,272
|
|
|
|
522,183
|
|
|
|
295,975
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,433,630
|
|
|
|
1,137,652
|
|
|
|
894,307
|
|
|
|
521,399
|
|
|
|
296,816
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,079,353
|
|
|
|
899,212
|
|
|
|
513,918
|
|
|
|
292,544
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
879,805
|
|
|
|
511,323
|
|
|
|
291,164
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497,774
|
|
|
|
287,021
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,284
|
|
Cumulative redundancy (deficiency)
|
|
|
|
|
|
$
|
90,621
|
|
|
$
|
114,773
|
|
|
$
|
64,066
|
|
|
$
|
(94,431
|
)
|
|
$
|
(289,172
|
)
|
|
$
|
(301,372
|
)
|
|
$
|
(201,807
|
)
|
|
$
|
(41,138
|
)
|
|
$
|
(37,399
|
)
|
|
$
|
(8,726
|
)
|
19
The gross redundancies reflected in the above table for 2004
through 2006 resulted primarily from the following activity in
2007:
|
|
|
|
|
We recorded favorable development of $46.5 million on
certain run-off assumed accident and health reinsurance business
reported in our discontinued lines of business due to our
continuing evaluation of reserves, primarily on the 2000
accident year.
|
|
|
|
We recorded favorable development of $44.1 million on our
other lines of business. Most of this was from the 2003 and 2004
underwriting years in our diversified financial products line of
business, which affected 2003 through 2005 accident years.
|
The gross deficiencies reflected in the above table for 1999
through 2003 resulted from the following:
|
|
|
|
|
During 2005, 2004 and 2003, we recorded $49.8 million,
$127.7 million and $132.9 million, respectively, in
gross losses on certain run-off assumed accident and health
reinsurance business reported in our discontinued lines of
business, due to our processing of additional information
received and our continuing evaluation of reserves on this
business. Collectively, these transactions primarily affected
the 1999, 2000 and 2001 accident years.
|
|
|
|
The 2000 and 1999 years in the table were also adversely
affected by late reporting loss information received during 2001
for certain other discontinued business.
|
The gross reserves in the discontinued lines of business,
particularly with respect to run-off assumed accident and health
reinsurance business, produced substantial adverse development
from 2003 through 2005, partially offset by a reduction in 2007.
This assumed accident and health reinsurance is primarily excess
coverage for large losses related to workers compensation
policies. Losses tend to develop and affect excess covers
considerably after the original loss was incurred. Additionally,
certain primary insurance companies that we reinsured have
experienced financial difficulty and some of them are in
liquidation, with guaranty funds now responsible for
administering the business. Losses related to this business are
historically late reporting. While we attempt to anticipate
these conditions in setting our gross reserves, we have only
been partially successful to date and there could be additional
adverse development in these reserves in the future. The gross
losses that have developed adversely have been substantially
reinsured and, therefore, the net effects have been much less.
20
The following table provides a reconciliation of the gross
liability for loss and loss adjustment expense payable on the
basis of generally accepted accounting principles (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Reserves for loss and loss adjustment expense payable at
beginning of year
|
|
$
|
3,097,051
|
|
|
$
|
2,813,720
|
|
|
$
|
2,089,199
|
|
Reserve additions from acquired businesses
|
|
|
826
|
|
|
|
146,811
|
|
|
|
19,236
|
|
Incurred loss and loss adjustment expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loss and loss adjustment expense for claims
occurring in current year
|
|
|
1,443,031
|
|
|
|
1,222,139
|
|
|
|
1,567,501
|
|
Increase (decrease) in estimated loss and loss adjustment
expense for claims occurring in prior years*
|
|
|
(90,621
|
)
|
|
|
(3,301
|
)
|
|
|
29,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred loss and loss adjustment expense
|
|
|
1,352,410
|
|
|
|
1,218,838
|
|
|
|
1,596,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense payments for claims occurring
during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
425,990
|
|
|
|
393,192
|
|
|
|
379,722
|
|
Prior years
|
|
|
797,217
|
|
|
|
689,126
|
|
|
|
511,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense payments
|
|
|
1,223,207
|
|
|
|
1,082,318
|
|
|
|
891,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss adjustment expense payable at end
of year
|
|
$
|
3,227,080
|
|
|
$
|
3,097,051
|
|
|
$
|
2,813,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Changes in loss and loss adjustment expense reserves for losses
occurring in prior years reflect the gross effect of the
resolution of losses for other than the reserve value and the
subsequent adjustments of loss reserves.
|
The adverse development for 2005 was caused by increasing
reserves on certain run-off assumed accident and health business
reported in our discontinued lines, partially offset by reserve
reductions on prior year hurricanes. The favorable development
for 2007 was caused by decreasing reserves on the same run-off
accident and health business, plus other reductions primarily
from our diversified financial products line of business on the
2003 and 2004 underwriting years.
21
This loss development triangle shows development in loss
reserves on a net basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
|
|
Reserves, net of reinsurance
|
|
$
|
2,342,800
|
|
|
$
|
2,108,961
|
|
|
$
|
1,533,433
|
|
|
$
|
1,059,283
|
|
|
$
|
705,200
|
|
|
$
|
458,702
|
|
|
$
|
313,097
|
|
|
$
|
249,872
|
|
|
$
|
273,606
|
|
|
$
|
118,912
|
|
|
$
|
119,634
|
|
Reserve adjustments from acquisition (disposition) of
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,587
|
|
|
|
|
|
|
|
(6,048
|
)
|
|
|
(3,343
|
)
|
|
|
(410
|
)
|
|
|
|
|
Effect on loss reserves of 1999 write off of reinsurance
recoverables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,851
|
|
|
|
15,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted reserves, net of reinsurance
|
|
|
2,342,800
|
|
|
|
2,108,961
|
|
|
|
1,533,433
|
|
|
|
1,059,283
|
|
|
|
705,200
|
|
|
|
464,289
|
|
|
|
313,097
|
|
|
|
243,824
|
|
|
|
270,263
|
|
|
|
182,353
|
|
|
|
134,642
|
|
Cumulative paid, net of reinsurance, at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
|
|
|
|
556,096
|
|
|
|
222,336
|
|
|
|
172,224
|
|
|
|
141,677
|
|
|
|
115,669
|
|
|
|
126,019
|
|
|
|
102,244
|
|
|
|
145,993
|
|
|
|
56,052
|
|
|
|
48,775
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
420,816
|
|
|
|
195,663
|
|
|
|
135,623
|
|
|
|
152,674
|
|
|
|
131,244
|
|
|
|
139,659
|
|
|
|
174,534
|
|
|
|
103,580
|
|
|
|
64,213
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337,330
|
|
|
|
124,522
|
|
|
|
115,214
|
|
|
|
163,808
|
|
|
|
118,894
|
|
|
|
185,744
|
|
|
|
113,762
|
|
|
|
80,227
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,827
|
|
|
|
88,998
|
|
|
|
93,405
|
|
|
|
138,773
|
|
|
|
180,714
|
|
|
|
121,293
|
|
|
|
81,845
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,708
|
|
|
|
59,936
|
|
|
|
158,935
|
|
|
|
197,416
|
|
|
|
120,452
|
|
|
|
84,986
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,311
|
|
|
|
137,561
|
|
|
|
200,833
|
|
|
|
127,254
|
|
|
|
87,626
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,517
|
|
|
|
188,901
|
|
|
|
131,631
|
|
|
|
89,194
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,069
|
|
|
|
132,614
|
|
|
|
88,061
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,815
|
|
|
|
88,229
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,321
|
|
Re-estimated liability, net of reinsurance, at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
2,342,800
|
|
|
|
2,108,961
|
|
|
|
1,533,433
|
|
|
|
1,059,283
|
|
|
|
705,200
|
|
|
|
464,289
|
|
|
|
313,097
|
|
|
|
243,824
|
|
|
|
270,263
|
|
|
|
182,353
|
|
|
|
134,642
|
|
One year later
|
|
|
|
|
|
|
2,082,564
|
|
|
|
1,526,907
|
|
|
|
1,084,677
|
|
|
|
735,678
|
|
|
|
487,403
|
|
|
|
306,318
|
|
|
|
233,111
|
|
|
|
260,678
|
|
|
|
186,967
|
|
|
|
120,049
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
1,500,414
|
|
|
|
1,083,955
|
|
|
|
770,497
|
|
|
|
500,897
|
|
|
|
338,194
|
|
|
|
222,330
|
|
|
|
254,373
|
|
|
|
175,339
|
|
|
|
116,745
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,077,972
|
|
|
|
792,099
|
|
|
|
571,403
|
|
|
|
366,819
|
|
|
|
259,160
|
|
|
|
244,650
|
|
|
|
171,165
|
|
|
|
110,673
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
808,261
|
|
|
|
585,741
|
|
|
|
418,781
|
|
|
|
267,651
|
|
|
|
258,122
|
|
|
|
163,349
|
|
|
|
107,138
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613,406
|
|
|
|
453,537
|
|
|
|
296,396
|
|
|
|
254,579
|
|
|
|
155,931
|
|
|
|
103,243
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462,157
|
|
|
|
305,841
|
|
|
|
271,563
|
|
|
|
157,316
|
|
|
|
101,538
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311,344
|
|
|
|
277,841
|
|
|
|
156,376
|
|
|
|
99,872
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279,412
|
|
|
|
155,016
|
|
|
|
97,965
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,514
|
|
|
|
96,205
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,951
|
|
Cumulative redundancy (deficiency)
|
|
|
|
|
|
$
|
26,397
|
|
|
$
|
33,019
|
|
|
$
|
(18,689
|
)
|
|
$
|
(103,061
|
)
|
|
$
|
(149,117
|
)
|
|
$
|
(149,060
|
)
|
|
$
|
(67,520
|
)
|
|
$
|
(9,149
|
)
|
|
$
|
22,839
|
|
|
$
|
35,691
|
|
22
The net redundancies reflected in the above table for 2005 and
2006 resulted primarily from the following:
|
|
|
|
|
Reserve reductions in 2007 from the 2003 and 2004 underwriting
years in our diversified financial products line of business,
which primarily affected the 2003 through 2005 accident years.
|
|
|
|
Reserve reductions in 2006 on prior year hurricanes and
aviation, affecting primarily the 2004 and 2005 accident years.
|
The net deficiencies reflected in the above table for 1999
through 2004 resulted primarily from activity on certain run-off
assumed accident and health business reported in our
discontinued lines of business, as follows:
|
|
|
|
|
Commutation charges of $20.2 million, $26.0 million
and $28.8 million recorded in 2006, 2005 and 2003,
respectively.
|
|
|
|
Reserve strengthening of $27.3 million in 2004 to bring net
reserves above our actuarial point estimate.
|
|
|
|
Collectively, these transactions primarily affected the 1999,
2000 and 2001 accident years.
|
The table below provides a reconciliation of the liability for
loss and loss adjustment expense payable, net of reinsurance
ceded, on the basis of generally accepted accounting principles
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net reserves for loss and loss adjustment expense payable at
beginning of year
|
|
$
|
2,108,961
|
|
|
$
|
1,533,433
|
|
|
$
|
1,059,283
|
|
Net reserve additions from acquired businesses
|
|
|
742
|
|
|
|
146,811
|
|
|
|
12,491
|
|
Incurred loss and loss adjustment expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loss and loss adjustment expense for claims
occurring in current year
|
|
|
1,210,344
|
|
|
|
1,018,382
|
|
|
|
894,303
|
|
Increase (decrease) in estimated loss and loss adjustment
expense for claims occurring in prior years*
|
|
|
(26,397
|
)
|
|
|
(6,526
|
)
|
|
|
25,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred loss and loss adjustment expense
|
|
|
1,183,947
|
|
|
|
1,011,856
|
|
|
|
919,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense payments for claims occurring
during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
394,754
|
|
|
|
360,803
|
|
|
|
285,814
|
|
Prior years
|
|
|
556,096
|
|
|
|
222,336
|
|
|
|
172,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense payments
|
|
|
950,850
|
|
|
|
583,139
|
|
|
|
458,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for loss and loss adjustment expense payable at
end of year
|
|
$
|
2,342,800
|
|
|
$
|
2,108,961
|
|
|
$
|
1,533,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Changes in loss and loss adjustment expense reserves for losses
occurring in prior years reflect the net effect of the
resolution of losses for other than the reserve value and the
subsequent adjustments of loss reserves.
|
The adverse development for 2005 primarily related to a
commutation charge from our reinsurance on certain run-off
assumed accident and health business reported in our
discontinued lines. The favorable development for 2006 related
to a reduction in prior year hurricane reserves and a reduction
in aviation reserves, mostly offset by another commutation
charge on the run-off accident and health business. The
favorable development for 2007 related primarily to reserve
reductions in our diversified financial products line of
business from the 2003 and 2004 underwriting years.
Deficiencies and redundancies in the reserves occur as we
continually review our loss reserves with our actuaries,
increasing or reducing loss reserves as a result of such reviews
and as losses are finally settled and claims exposures are
reduced. We believe we have provided for all material net
incurred losses.
23
We have no material exposure to asbestos claims or environmental
pollution losses. Our largest insurance company subsidiary only
began writing business in 1981, and its policies normally
contain pollution exclusion clauses that limit pollution
coverage to sudden and accidental losses only, thus
excluding intentional dumping and seepage claims. Policies
issued by our other insurance company subsidiaries do not have
significant environmental exposures because of the types of
risks covered.
Enterprise
Risk Management
In 2006, we began a formalized Enterprise Risk Management (ERM)
initiative to provide us with a structured process for
identifying business opportunities as well as downside risks or
threats. This process will enable us to assess risks in a more
transparent and consistent manner, resulting in improved
recognition, management and monitoring of risk. With ERM, we are
creating a risk awareness culture throughout the organization
that will allow us to continue to achieve strong risk management
practices. In support of our ERM initiative, a Corporate Vice
President who reports to the President is responsible for
implementation, professionals with ERM expertise assist us, and
our Risk Committee oversees the process.
Regulation
The business of insurance is extensively regulated by the
government. At this time, the insurance business in the United
States is regulated primarily by the individual states.
Additional federal regulation of the insurance industry may
occur in the future.
Our business depends on our compliance with applicable laws and
regulations and our ability to maintain valid licenses and
approvals for our operations. We devote a significant effort
toward obtaining and maintaining our licenses and compliance
with the diverse and complex regulatory structure. In all
jurisdictions, the applicable laws and regulations are subject
to amendment or interpretation by regulatory authorities.
Generally, regulatory authorities are vested with broad
discretion to grant, renew and revoke licenses and approvals and
to implement regulations governing the business and operations
of insurers, insurance agents, brokers and third party
administrators.
Insurance
Companies
Our insurance companies are subject to regulation and
supervision by the states and by other jurisdictions in which
they do business. Regulation by the states varies, but generally
involves regulatory and supervisory powers of a state insurance
official. In the United States, the regulation and supervision
of our insurance operations relates primarily to:
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approval of policy forms and premium rates;
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licensing of insurers and their agents;
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periodic examinations of our operations and finances;
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prescribing the form and content of records of financial
condition required to be filed;
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requiring deposits for the benefit of policyholders;
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requiring certain methods of accounting;
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requiring reserves for unearned premium, losses and other
purposes;
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restrictions on the ability of our insurance companies to pay
dividends;
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restrictions on the nature, quality and concentration of
investments;
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restrictions on transactions between insurance companies and
their affiliates;
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restrictions on the size of risks insurable under a single
policy; and
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24
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standards of solvency, including risk-based capital measurement
(which is a measure developed by the National Association of
Insurance Commissioners and used by state insurance regulators
to identify insurance companies that potentially are
inadequately capitalized).
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In the United States, state insurance regulations are intended
primarily for the protection of policyholders rather than
shareholders. The state insurance departments monitor compliance
with regulations through periodic reporting procedures and
examinations. The quarterly and annual financial reports to the
state insurance regulators utilize statutory accounting
principles, which are different from the generally accepted
accounting principles we use in our reports to shareholders.
Statutory accounting principles, in keeping with the intent to
assure the protection of policyholders, are generally based on a
liquidation concept, while generally accepted accounting
principles are based on a going-concern concept.
In the United States, state insurance regulators classify direct
insurance companies and some individual lines of business as
admitted (also known as licensed)
insurance or non-admitted (also known as
surplus lines) insurance. Surplus lines insurance is
offered by non-admitted companies on risks that are not insured
in the particular state by admitted companies. All surplus lines
insurance is required to be written through licensed surplus
lines insurance brokers, who are required to be knowledgeable of
and to follow specific state laws prior to placing a risk with a
surplus lines insurer. Our insurance companies offer products on
both an admitted and surplus lines basis.
U.S. state insurance regulations also affect the payment of
dividends and other distributions by insurance companies to
their shareholders. Generally, insurance companies are limited
by these regulations in the payment of dividends above a
specified level. Dividends in excess of those thresholds are
extraordinary dividends and are subject to prior
regulatory approval. Many states require prior regulatory
approval for all dividends.
In the United Kingdom, the Financial Services Authority
supervises all securities, banking and insurance businesses,
including Lloyds of London. The Financial Services
Authority oversees compliance with established periodic auditing
and reporting requirements, risk assessment reviews, minimum
solvency margins, dividend restrictions, restrictions governing
the appointment of key officers, restrictions governing
controlling ownership interests and various other requirements.
All of our United Kingdom operations, including Houston Casualty
Company-London, are authorized and regulated by the Financial
Services Authority.
HCC Europe is domiciled in Spain and operates on the equivalent
of an admitted basis throughout the European Union.
HCC Europes primary regulator is the Spanish General
Directorate of Insurance and Pension Funds of the Ministry of
the Economy and Treasury (Dirección General de Seguros y
Fondos de Pensiones del Ministerio de Economía y Hacienda).
Underwriting
Agencies and Reinsurance and Insurance Brokers
In addition to the regulation of insurance companies, the states
impose licensing and other requirements on the underwriting
agency and service operations of our other subsidiaries. These
regulations relate primarily to:
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advertising and business practice rules;
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contractual requirements;
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financial security;
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licensing as agents, brokers, reinsurance brokers, managing
general agents or third party administrators;
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limitations on authority; and
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recordkeeping requirements.
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25
Statutory
Accounting Principles
The principal differences between statutory accounting
principles for our domestic insurance company subsidiaries and
generally accepted accounting principles, the method by which we
report our consolidated financial results to our shareholders,
are as follows:
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a liability is recorded for certain reinsurance recoverables
under statutory accounting principles whereas, under generally
accepted accounting principles, there is no such provision
unless the recoverables are deemed to be doubtful of collection;
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certain assets that are considered non-admitted
assets are eliminated from a balance sheet prepared in
accordance with statutory accounting principles, but are
included in a balance sheet prepared in accordance with
generally accepted accounting principles;
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only some of the deferred tax asset is recognized under
statutory accounting principles;
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fixed income investments classified as available for sale are
recorded at market value for generally accepted accounting
principles and at amortized cost under statutory accounting
principles;
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outstanding losses and unearned premium are reported on a gross
basis under generally accepted accounting principles and on a
net basis under statutory accounting principles; and
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under statutory accounting principles, policy acquisition costs
are expensed as incurred and, under generally accepted
accounting principles, such costs are deferred and amortized to
expense as the related premium is earned.
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Our international insurance company subsidiaries
accounting principles are prescribed by regulatory authorities
in each country. The prescribed principles do not vary
significantly from generally accepted accounting principles.
Insurance
Holding Company Acts
Because we are an insurance holding company, we are subject to
the insurance holding company system regulatory requirements of
a number of states. Under these regulations, we are required to
report information regarding our capital structure, financial
condition and management. We are also required to provide prior
notice to, or seek the prior approval of, insurance regulatory
authorities of certain agreements and transactions between our
affiliated companies. These agreements and transactions must
satisfy certain regulatory requirements.
Assessments
Many states require insurers licensed to do business in the
state to bear a portion of the loss suffered by some insureds as
a result of the insolvency of other insurers or to bear a
portion of the cost of insurance for high-risk or
otherwise uninsured individuals. Depending upon state law,
insurers can be assessed an amount that is generally limited to
between 1% and 2% of premiums written for the relevant lines of
insurance in that state. Part of these payments may be
recoverable through premium rates, premium tax credits or policy
surcharges. Significant increases in assessments could limit the
ability of our insurance subsidiaries to recover such
assessments through tax credits or other means. In addition,
there have been some legislative efforts to limit policy
surcharges or repeal the tax offset provisions. We cannot
predict the extent to which such assessments may increase or
whether there may be limits imposed on our ability to recover or
offset such assessments.
Insurance
Regulations Concerning Change of Control
Many state insurance regulatory laws contain provisions that
require advance approval by state agencies of any change of
control of an insurance company that is domiciled or, in some
cases, has substantial business in that state.
Control is generally presumed to exist through the
ownership of 10% or more of the voting securities of a domestic
insurance company or of any company that controls a domestic
insurance company.
26
HCC owns, directly or indirectly, all of the shares of stock of
insurance companies domiciled in a number of states. Any
purchaser of shares of common stock representing 10% or more of
the voting power of our common stock will be presumed to have
acquired control of our domestic insurance subsidiaries unless,
following application by that purchaser, the relevant state
insurance regulators determine otherwise. Any transactions that
would constitute a change in control of any of our individual
insurance subsidiaries would generally require prior approval by
the insurance departments of the states in which the insurance
subsidiary is domiciled. Also, one of our insurance subsidiaries
is domiciled in the United Kingdom and another in Spain.
Insurers in those countries are also subject to change of
control restrictions under their individual regulatory
frameworks. These requirements may deter or delay possible
significant transactions in our common stock or the disposition
of our insurance companies to third parties, including
transactions which could be beneficial to our shareholders.
Risk-Based
Capital
The National Association of Insurance Commissioners has
developed a formula for analyzing insurance companies called
risk-based capital. The risk-based capital formula is intended
to establish minimum capital thresholds that vary with the size
and mix of an insurance companys business and assets. It
is designed to identify companies with capital levels that may
require regulatory attention. At December 31, 2007, each of
our domestic insurance companies total adjusted capital
was significantly in excess of the authorized control level
risk-based capital.
Insurance
Regulatory Information System
The National Association of Insurance Commissioners has
developed a rating system, the Insurance Regulatory Information
System, primarily intended to assist state insurance departments
in overseeing the financial condition of all insurance companies
operating within their respective states. The Insurance
Regulatory Information System consists of eleven key financial
ratios that address various aspects of each insurers
financial condition and stability. Our insurance companies
Insurance Regulatory Information System ratios generally fall
within the usual prescribed ranges.
Terrorism
Risk Insurance Act
The Federal Terrorism Risk Insurance Act (TRIA) was initially
enacted in 2002 for the purpose of ensuring the availability of
insurance coverage for certain acts of terrorism, as defined in
the TRIA. The Terrorism Risk Insurance Extension Act of 2005
extended TRIA through December 31, 2007. On
December 26, 2007, the President signed into law the
Terrorism Risk Insurance Program Reauthorization Act of 2007
(Reauthorization Act). The Reauthorization Act extends the
program through December 31, 2014. A major provision of the
Reauthorization Act is the revision of the definition of
Act of Terrorism to remove the requirement that the
act of terrorism be committed by an individual acting on behalf
of any foreign person or foreign interest in order to be
certified under the Reauthorization Act. The Reauthorization Act
sets the Federal share of compensation (subject to a
$100.0 million program trigger) for program years
2008 2014 at 85%, excess of our retention
level, up to the maximum annual liability cap of
$100.0 billion.
Under the Reauthorization Act, we are required to offer
terrorism coverage to our commercial policyholders in certain
lines of business, for which we may, when warranted, charge an
additional premium. The policyholders may or may not accept such
coverage. The Reauthorization Act also established a deductible
that each insurer would have to meet before Federal
reimbursement would occur. For 2008, our deductible is
approximately $99.8 million.
Legislative
Initiatives
In recent years, state legislatures have considered or enacted
laws that modify and, in many cases, increase state authority to
regulate insurance companies and insurance holding company
systems. State insurance regulators are members of the National
Association of Insurance Commissioners, which seeks to promote
uniformity of and to enhance the state regulation of insurance.
In addition, the National Association
27
of Insurance Commissioners and state insurance regulators, as
part of the National Association of Insurance
Commissioners state insurance department accreditation
program and in response to new federal laws, have re-examined
existing state laws and regulations, specifically focusing on
insurance company investments, issues relating to the solvency
of insurance companies, licensing and market conduct issues,
streamlining agent licensing and policy form approvals, adoption
of privacy rules for handling policyholder information,
interpretations of existing laws, the development of new laws
and the definition of extraordinary dividends.
In recent years, a variety of measures have been proposed at the
federal level to reform the current process of Federal and state
regulation of the financial services industries in the United
States, which include the banking, insurance and securities
industries. These measures, which are often referred to as
financial services modernization, have as a principal objective
the elimination or modification of regulatory barriers to
cross-industry combinations involving banks, securities firms
and insurance companies. A form of financial services
modernization legislation was enacted at the Federal level in
1999 through the Gramm-Leach-Bliley Act. That Federal
legislation was expected to have significant implications on the
banking, insurance and securities industries and to result in
more cross-industry consolidations among banks, insurance
companies and securities firms and increased competition in many
of the areas of operations. Such wide-spread cross-industry
consolidation has not occurred to date. It also mandated the
adoption of laws allowing reciprocity among the states in the
licensing of agents and, along with other Federal laws, mandated
the adoption of laws and regulations dealing with the protection
of the privacy of policyholder information. Also, the Federal
Government has from time to time considered whether to impose
overall federal regulation of insurers. If so, we believe state
regulation of the insurance business would likely continue. This
could result in an additional layer of federal regulation. In
addition, some insurance industry trade groups are actively
lobbying for legislation that would allow an option for a
separate Federal charter for insurance companies. The full
extent to which the Federal Government could decide to directly
regulate the business of insurance has not been determined by
lawmakers.
State regulators in many states have initiated or are
participating in industry-wide investigations of sales and
marketing practices in the insurance industry. Such
investigations have resulted in restitution and settlement
payments by some companies and criminal charges against some
individuals. The investigations have led to changes in the
structure of compensation arrangements, the offering of certain
products and increased transparency in the marketing of many
insurance products. We have cooperated fully with any such
investigations and, based on presently available information, do
not expect any adverse results from such investigations.
We do not know at this time the full extent to which these
Federal or state legislative or regulatory initiatives will or
may affect our operations and no assurance can be given that
they would not, if adopted, have a material adverse effect on
our business or our results of operations.
Employees
At December 31, 2007, we had 1,682 employees. Of this
number, 938 are employed by our insurance companies, 470 are
employed by our underwriting agencies, 97 are employed by our
reinsurance and insurance brokers and 177 are employed at the
corporate headquarters and elsewhere. We are not a party to any
collective bargaining agreement and have not experienced work
stoppages or strikes as a result of labor disputes. We consider
our employee relations to be good.
Risks
Relating to our Industry
Because
we are a property and casualty insurer, our business may suffer
as a result of unforeseen catastrophic losses.
Property and casualty insurers are subject to claims arising
from catastrophes. Catastrophic losses have had a significant
impact on our historical results. Catastrophes can be caused by
various events, including hurricanes, tsunamis, windstorms,
earthquakes, hailstorms, explosions, severe winter weather and
fires and
28
may include man-made events, such as terrorist attacks. The
incidence, frequency and severity of catastrophes are inherently
unpredictable. The extent of losses from a catastrophe is a
function of both the total amount of insured exposure in the
area affected by the event and the severity of the event.
Insurance companies are not permitted to reserve for a
catastrophe until it has occurred. Catastrophes can cause losses
in a variety of our property and casualty lines, and most of our
past catastrophe-related claims have resulted from hurricanes
and earthquakes; however, we experienced a significant loss as a
result of the September 11, 2001 terrorist attack. Most of
our exposure to catastrophes comes from our London market
account. Although we typically purchase reinsurance protection
for risks we believe bear a significant level of catastrophe
exposure, the nature or magnitude of losses attributed to a
catastrophic event or events may result in losses that exceed
our reinsurance protection. It is therefore possible that a
catastrophic event or multiple catastrophic events could have a
material adverse effect on our financial position, results of
operations and liquidity.
The
insurance and reinsurance business is historically cyclical, and
we expect to experience periods with excess underwriting
capacity and unfavorable premium rates, which could cause our
results to fluctuate.
The insurance and reinsurance business historically has been a
cyclical industry characterized by periods of intense price
competition due to excessive underwriting capacity, as well as
periods when shortages of capacity permitted an increase in
pricing and, thus, more favorable premium levels. An increase in
premium levels is often, over time, offset by an increasing
supply of insurance and reinsurance capacity, either by capital
provided by new entrants or by the commitment of additional
capital by existing insurers or reinsurers, which may cause
prices to decrease. Any of these factors could lead to a
significant reduction in premium rates, less favorable policy
terms and fewer opportunities to underwrite insurance risks,
which could have a material adverse effect on our results of
operations and cash flows. In addition to these considerations,
changes in the frequency and severity of losses suffered by
insureds and insurers may affect the cycles of the insurance and
reinsurance business significantly. These factors may also cause
the price of our common stock to be volatile.
Our
loss reserves are based on an estimate of our future liability,
which may prove to be inadequate.
We maintain loss reserves to cover our estimated liability for
unpaid losses and loss adjustment expenses, including legal and
other fees as well as a portion of our general expenses, for
reported and unreported claims incurred at the end of each
accounting period. Reserves do not represent an exact
calculation of liability. Rather, reserves represent an estimate
of what we expect the ultimate settlement and administration of
claims will cost. These estimates, which generally involve
actuarial projections, are based on our assessment of facts and
circumstances then known, as well as estimates of future trends
in claims severity, frequency, judicial theories of liability
and other factors. These variables are affected by both internal
and external events that could increase our exposure to losses
including changes in claims handling procedures, inflation,
judicial trends, legislative changes and current events, such as
those recently affecting the credit markets. Many of these items
are not directly quantifiable in advance. Additionally, there
may be a significant reporting delay between the occurrence of
the insured event and the time it is reported to us. The
inherent uncertainties of estimating reserves are greater for
certain types of liabilities, particularly those in which the
various considerations affecting the type of claim are subject
to change and in which long periods of time may elapse before a
definitive determination of liability is made. Reserve estimates
are continually refined in a regular and ongoing process as
experience develops and further claims are reported and settled.
Adjustments to reserves are reflected in our results of
operations in the periods in which such estimates are changed.
Because setting reserves is inherently uncertain, there can be
no assurance that current reserves will prove adequate in light
of subsequent events. If actual claims prove to be greater than
our reserves, our financial position, results of operations and
liquidity may be adversely affected.
The
effects of emerging claim and coverage issues on our business
are uncertain.
As industry practices and legal, judicial, social and other
environmental conditions change, unexpected and unintended
issues related to claims and coverage may emerge. These issues
may adversely affect our business by either extending coverage
beyond our underwriting intent or by increasing the number or
size of
29
claims. In some instances, these changes may not become apparent
until some time after we have issued insurance or reinsurance
contracts that are affected by the changes. As a result, the
full extent of liability under our insurance or reinsurance
contracts may not be known for many years after a contract is
issued and our financial position and results of operations may
be adversely affected.
We are
subject to extensive governmental regulation, which could
adversely affect our business.
We are subject to extensive governmental regulation and
supervision. Our business depends on compliance with applicable
laws and regulations and our ability to maintain valid licenses
and approvals for our operations. Most insurance regulations are
designed to protect the interests of policyholders rather than
shareholders and other investors. In the United States, this
regulation is generally administered by departments of insurance
in each state in which we do business and includes a
comprehensive framework of oversight of our operations and
review of our financial position. U.S. Federal legislation may
lead to additional federal regulation of the insurance industry
in the coming years. Also, foreign governments regulate our
international operations. Each foreign jurisdiction has its own
unique regulatory framework that applies to our operations in
that jurisdiction. Regulatory authorities have broad discretion
to grant, renew or revoke licenses and approvals. Regulatory
authorities may deny or revoke licenses for various reasons,
including the violation of regulations. In some instances, we
follow practices based on our interpretations of regulations, or
those we believe to be generally followed by the industry, which
may be different from the requirements or interpretations of
regulatory authorities. If we do not have the requisite licenses
and approvals and do not comply with applicable regulatory
requirements, the insurance regulatory authorities could
preclude or temporarily suspend us from carrying on some or all
of our activities or otherwise penalize us. That type of action
could have a material adverse effect on our results of
operations. Also, changes in the level of regulation of the
insurance industry (whether federal, state or foreign), or
changes in laws or regulations themselves or interpretations by
regulatory authorities, could have a material adverse effect on
our business. Virtually all states require insurers licensed to
do business in that state to bear a portion of the loss suffered
by some insureds as the result of impaired or insolvent
insurance companies. The effect of these arrangements could
adversely affect our results of operations.
Our
reliance on brokers subjects us to their credit
risk.
In accordance with industry practice, we generally pay amounts
owed on claims under our insurance and reinsurance contracts to
brokers, and these brokers, in turn, pay these amounts to the
clients that have purchased insurance or reinsurance from us.
Although the law is unsettled and depends upon the facts and
circumstances of the particular case, in some jurisdictions, if
a broker fails to make such a payment, we might remain liable to
the insured or ceding insurer for the deficiency. Conversely, in
certain jurisdictions, when the insured or ceding insurer pays
premiums for these policies to brokers for payment over to us,
these premiums might be considered to have been paid and the
insured or ceding insurer will no longer be liable to us for
those amounts, whether or not we have actually received the
premiums from the broker. Consequently, we assume a degree of
credit risk associated with brokers with whom we transact
business. However, due to the unsettled and fact-specific nature
of the law, we are unable to quantify our exposure to this risk.
To date, we have not experienced any material losses related to
these credit risks.
Risks
Relating to our Business
Our
inability to accurately assess underwriting risk could reduce
our net earnings.
Our underwriting success is dependent on our ability to
accurately assess the risks associated with the business on
which the risk is retained. We rely on the experience of our
underwriting staff in assessing these risks. If we fail to
assess accurately the risks we retain, we may fail to establish
appropriate premium rates and our reserves may be inadequate to
cover our losses, which could reduce our net earnings. The
underwriting process is further complicated by our exposure to
unpredictable developments, including earthquakes,
weather-related events and other natural catastrophes, as well
as war and acts of terrorism.
30
Our
increased retentions in various lines of business expose us to a
greater portion of potential losses.
Over the past few years, we have significantly increased our
retentions, or the part of the risk we retain for our own
account, in a number of the lines of business underwritten by
our insurance companies. The determination to reduce the amount
of reinsurance we purchase or not to purchase reinsurance for a
particular risk or line of business is based on a variety of
factors including market conditions, pricing, availability of
reinsurance, the level of our capital and loss history. Such
determinations have the effect of increasing our financial
exposure to losses associated with such risks or in the subject
line of business and could have a material adverse effect on our
financial position, results of operations and cash flows in the
event of significant losses associated with such risks or lines
of business.
If we
are unable to purchase adequate reinsurance protection for some
of the risks we have underwritten, we will be exposed to any
resulting losses.
We purchase reinsurance for a portion of the risks underwritten
by our insurance companies, especially volatile and
catastrophe-exposed risks. Market conditions beyond our control
determine the availability and cost of the reinsurance
protection we purchase. In addition, the historical results of
reinsurance programs and the availability of capital also affect
the availability of reinsurance. Our reinsurance facilities are
generally subject to annual renewal. We cannot assure that we
can maintain our current reinsurance facilities or that we can
obtain other reinsurance facilities in adequate amounts and at
favorable rates. Further, we cannot determine what effect
catastrophic losses will have on the reinsurance market in
general and on our ability to obtain reinsurance in adequate
amounts and at favorable rates in particular. If we are unable
to renew or to obtain new reinsurance facilities, either our net
exposures would increase or, if we are unwilling to bear such an
increase, we would have to reduce the level of our underwriting
commitments, especially in catastrophe-exposed risks. Either of
these potential developments could have a material adverse
effect on our financial position, results of operations and cash
flows. The lack of available reinsurance may also adversely
affect our ability to generate fee and commission income in our
underwriting agency and reinsurance broker operations.
If the
companies that provide our reinsurance do not pay all of our
claims, we could incur severe losses.
We purchase reinsurance by transferring, or ceding, all or part
of the risk we have assumed as a direct insurer to a reinsurance
company in exchange for all or part of the premium we receive in
connection with the risk. Through reinsurance, we have the
contractual right to collect the amount reinsured from our
reinsurers. Although reinsurance makes the reinsurer liable to
us to the extent the risk is transferred or ceded to the
reinsurer, it does not relieve us, the reinsured, of our full
liability to our policyholders. Accordingly, we bear credit risk
with respect to our reinsurers. We cannot assure you that our
reinsurers will pay all of our reinsurance claims, or that they
will pay our claims on a timely basis. Additionally,
catastrophic losses from multiple direct insurers may accumulate
within the more concentrated reinsurance market and result in
claims that adversely impact the financial condition of such
reinsurers and thus their ability to pay such claims. If we
become liable for risks we have ceded to reinsurers or if our
reinsurers cease to meet their obligations to us, whether
because they are in a weakened financial position as a result of
incurred losses or otherwise, our financial position, results of
operations and cash flows could be materially adversely affected.
As a
direct insurer, we may have significant exposure for terrorist
acts.
To the extent that reinsurers have excluded coverage for
terrorist acts or have priced such coverage at rates that we
believe are not practical, we, in our capacity as a direct
insurer, do not have reinsurance protection and are exposed for
potential losses as a result of any terrorist acts. To the
extent an act of terrorism is certified by the Secretary of
Treasury, we may be covered under the Terrorism Risk Insurance
Program Reauthorization Act of 2007, for up to 85% of our losses
in 2008 up to the maximum amount set out in the Reauthorization
Act. However, any such coverage would be subject to a mandatory
deductible. Our deductible under the Reauthorizaion Act during
2008 is approximately $99.8 million.
In some jurisdictions outside of the United States, where we
also have exposure to a loss from an act of terrorism, we have
limited access to other government programs that may mitigate
our exposure. If we become
31
liable for risks that are not covered under the Reauthorization
Act, our financial position, results of operations and cash
flows could be materially adversely affected.
We may
be unsuccessful in competing against larger or more
well-established business rivals.
In our specialty insurance operations, we compete in
narrowly-defined niche classes of business such as the insurance
of private aircraft (aviation), directors and
officers liability (diversified financial products),
employer sponsored, self-insured medical plans (medical
stop-loss), professional indemnity (diversified financial
products) and surety (diversified financial products), as
distinguished from such general lines of business as automobile
or homeowners insurance. We compete with a large number of other
companies in our selected lines of business, including:
Lloyds of London, ACE and XL in our London market
business; American International Group and U.S. Aviation
Insurance Group (a subsidiary of Berkshire Hathaway, Inc.) in
our aviation line of business; United Health, Symetra Financial
Corp. and Hartford Life in our group life, accident and health
business; and American International Group, The Chubb
Corporation, ACE, St. Paul Travelers and XL in our diversified
financial products business. We face competition from specialty
insurance companies, underwriting agencies and reinsurance
brokers, as well as from diversified financial services
companies that are larger than we are and that have greater
financial, marketing and other resources than we do. Some of
these competitors also have longer experience and more market
recognition than we do in certain lines of business. In addition
to competition in the operation of our business, we face
competition from a variety of sources in attracting and
retaining qualified employees. We cannot assure you that we will
maintain our current competitive position in the markets in
which we operate, or that we will be able to expand our
operations into new markets. If we fail to do so, our results of
operations and cash flows could be materially adversely affected.
If
rating agencies downgrade our financial strength ratings, our
business and competitive position in the industry may
suffer.
Ratings have become an increasingly important factor in
establishing the competitive position of insurance companies.
Our insurance companies are rated by Standard &
Poors Corporation, Fitch Ratings and A.M. Best Company,
Inc. The financial strength ratings reflect their opinions of an
insurance companys and insurance holding companys
financial strength, operating performance, strategic position
and ability to meet its obligations to policyholders and are not
evaluations directed to investors. Our ratings are subject to
periodic review by those entities and the continuation of those
ratings at current levels cannot be assured. If our ratings are
reduced from their current levels, our financial position and
results of operations could be adversely affected.
We may
require additional capital in the future, which may not be
available or may only be available on unfavorable
terms.
Our future capital requirements depend on many factors,
including our ability to write new business successfully and to
establish premium rates and reserves at levels sufficient to
cover losses. We may need to raise additional funds through
financings or curtail our growth and reduce our assets. Any
equity or debt financing, if available at all, may be on terms
that are not favorable to us. In the case of equity financings,
dilution to our shareholders could result and, in any case, such
securities may have rights, preferences and privileges that are
senior to those of our common stock. If we cannot obtain
adequate capital on favorable terms or at all, our business,
results of operations and liquidity could be adversely affected.
Standard & Poors Corporation, Fitch Ratings and
A.M. Best Company rate our credit strength. If our credit
ratings are reduced, it might significantly impede our ability
to raise capital and borrow money.
We may
be unable to attract and retain qualified
employees.
We depend on our ability to attract and retain experienced
underwriting talent and other skilled employees who are
knowledgeable about our business. Certain of our senior
underwriters and other skilled employees have employment
agreements that are for definite terms, and there is no
assurance we will retain these employees beyond the current
terms of their agreements. If the quality of our underwriting
team and
32
other personnel decreases, we may be unable to maintain our
current competitive position in the specialized markets in which
we operate and be unable to expand our operations into new
markets, which could adversely affect our business.
We
invest a significant amount of our assets in fixed income
securities that have experienced market fluctuations, which may
greatly reduce the value of our investment
portfolio.
At December 31, 2007, $3.7 billion of our
$4.7 billion investment portfolio was invested in fixed
income securities. The fair value of these fixed income
securities and the related investment income fluctuate depending
on general economic and market conditions, including the recent
downturn in the market due to subprime issues. For our fixed
income securities, the fair value generally increases or
decreases in an inverse relationship with fluctuations in
interest rates, while net investment income realized by us from
future investments in fixed income securities will generally
increase or decrease with interest rates. Mortgage-backed and
other asset-backed securities may have different net investment
income and/or cash flows from those anticipated at the time of
investment. These securities have prepayment risk when there is
a risk that the timing of cash flows that result from the
repayment of principal might occur earlier than anticipated
because of declining interest rates or later than anticipated
because of rising interest rates. Credit risk exists if
mortgagees default on the underlying mortgages. Although we
maintain an investment grade portfolio (99% are rated
A or better), all of our fixed income securities are
subject to credit risk. If any of the issuers of our fixed
income securities suffer financial setbacks, the ratings on the
fixed income securities could fall (with a concurrent fall in
fair value) and, in a worst case scenario, the issuer could
default on its financial obligations. If the issurer defaults,
we could have realized losses associated with the impairment of
the securities.
The impact of market fluctuations affects our financial
statements. Because all of our fixed income securities are
classified as available for sale, changes in the fair value of
our securities are reflected in our other comprehensive income.
Similar treatment is not available for liabilities. Therefore,
interest rate fluctuations could adversely affect our financial
position. Unrealized pre-tax net investment gains (losses) on
investments in fixed income securities were $26.7 million
in 2007, $6.9 million in 2006 and $(29.3) million in 2005.
In 2007 and continuing into 2008, the credit markets have been
severely affected by various events. This has impacted interest
rates and has caused large writedowns in other companies
financial instruments either due to the market fluctuations or
the impact of the events on the debtors financial
condition. The continuing turmoil in the credit market could
adversely affect the valuation of our investments and cause us
to have to record realized impairment losses on our investments.
Our
strategy of acquiring other companies for growth may not
succeed.
Our strategy for growth includes growing through acquisitions of
insurance industry related companies. This strategy presents
risks that could have a material adverse effect on our business
and financial performance, including: 1) the diversion of
our managements attention, 2) our ability to
assimilate the operations and personnel of the acquired
companies, 3) the contingent and latent risks associated
with the past operations of, and other unanticipated problems
arising in, the acquired companies, 4) the need to expand
management, administration and operational systems and
5) increased competition for suitable acquisition
opportunities and qualified employees. We cannot predict whether
we will be able to acquire additional companies on terms
favorable to us or if we will be able to successfully integrate
the acquired operations into our business. We do not know if we
will realize any anticipated benefits of completed acquisitions
or if there will be substantial unanticipated costs associated
with new acquisitions. In addition, future acquisitions by us
may result in potentially dilutive issuances of our equity
securities, the incurrence of additional debt and/or the
recognition of potential impairment of goodwill and other
intangible assets. Each of these factors could adversely affect
our financial position and results of operations.
33
We are
exposed to goodwill impairment risk as part of our business
acquisition strategy.
We have recorded goodwill in connection with the majority of our
business acquisitions. We are required to perform goodwill
impairment tests at least annually and whenever events or
circumstances indicate that the carrying value may not be
recoverable from estimated future cash flows. As a result of our
annual and other periodic evaluations, we may determine that a
portion of the goodwill carrying value needs to be written down
to fair value, which could adversely affect our financial
position and results of operations.
We are
an insurance holding company and, therefore, may not be able to
receive dividends in needed amounts from our
subsidiaries.
Historically, we have had sufficient cash flow from our
non-insurance company subsidiaries to meet our corporate cash
flow requirements for paying principal and interest on
outstanding debt obligations, dividends to shareholders and
corporate expenses. However, in the future we may rely on
dividends from our insurance companies to meet these
requirements. The payment of dividends by our insurance
companies is subject to regulatory restrictions and will depend
on the surplus and future earnings of these subsidiaries, as
well as the regulatory restrictions. As a result, should our
other sources of funds prove to be inadequate, we may not be
able to receive dividends from our insurance companies at times
and in amounts necessary to meet our obligations, which could
adversely affect our financial position and liquidity.
Because
we operate internationally, fluctuations in currency exchange
rates may affect our receivable and payable balances and our
reserves.
We underwrite insurance coverages that are denominated in a
number of foreign currencies, and we establish and maintain our
loss reserves with respect to these policies in their respective
currencies. We hold assets denominated in comparable foreign
currencies to hedge the foreign currency risk related to these
reserves and other liabilities denominated in foreign
currencies. Our net earnings could be adversely affected by
exchange rate fluctuations if we do not hold offsetting
positions. Our principal area of exposure relates to
fluctuations in exchange rates between the major European
currencies (particularly the British pound sterling and the
Euro) and the U.S. dollar. Consequently, a change in the
exchange rate between the U.S. dollar and the British pound
sterling or the Euro could have an adverse effect on our results
of operations.
Our
information technology systems may fail or suffer a loss of
security, which could adversely affect our
business.
Our business is highly dependent upon the successful and
uninterrupted functioning of our computer and data processing
systems. We rely on these systems to perform actuarial and other
modeling functions necessary for writing business, as well as to
process and make claims payments. We have a highly trained staff
that is committed to the development and maintenance of these
systems. However, the failure of these systems could interrupt
our operations. This could result in a material adverse effect
on our business results.
In addition, a security breach of our computer systems could
damage our reputation or result in liability. We retain
confidential information regarding our business dealings in our
computer systems. We may be required to spend significant
capital and other resources to protect against security breaches
or to alleviate problems caused by such breaches. It is critical
that these facilities and infrastructure remain secure. Despite
the implementation of security measures, this infrastructure may
be vulnerable to physical break-ins, computer viruses,
programming errors, attacks by third parties or similar
disruptive problems. In addition, we could be subject to
liability if hackers were able to penetrate our network security
or otherwise misappropriate confidential information.
The
SECs inquiry related to our stock option granting
procedures is ongoing, and the scope and outcome could have a
negative impact on the price of our securities and on our
business.
In 2006, based on a voluntary independent investigation by a
Special Committee of the Board of Directors of our past
practices related to granting stock options, the SEC commenced
an inquiry into our option pricing practices. We have provided
the results of our internal review and independent investigation
to the SEC, and we have responded to requests from the SEC for
documents and additional information. We are
34
fully cooperating with the SEC. We are unable to predict the
outcome of the ongoing inquiry, but it may result in additional
professional fees, including our advancement of attorneys
fees incurred by our directors, certain officers and certain
former executives and Directors; may continue to occupy the time
and attention of our management team; could trigger a downgrade
in our financial strength ratings; could have a material adverse
impact on our stock price, including increased stock price
volatility; and could negatively impact our business and our
ability to raise and borrow additional funds in the future.
Furthermore, if we are subject to adverse findings in this or
any other regulatory proceeding or governmental enforcement
action, we could be required to pay damages and penalties or
have other remedies imposed, which could harm our business,
financial condition, results of operations and cash flows.
We may
not be able to delay or prevent an inadequate or coercive offer
for change in control and regulatory rules and required
approvals might delay or deter a favorable change of
control.
Our certificate of incorporation and bylaws do not have
provisions that could make it more difficult for a third party
to acquire a majority of our outstanding common stock. As a
result, we may be more susceptible to an inadequate or coercive
offer that could result in a change in control than a company
whose charter documents have provisions that could delay or
prevent a change in control.
Many state insurance regulatory laws contain provisions that
require advance approval by state agencies of any change of
control of an insurance company that is domiciled or, in some
cases, has substantial business in that state.
Control is generally presumed to exist through the
ownership of 10% or more of the voting securities of a domestic
insurance company or of any company that controls a domestic
insurance company. We own, directly or indirectly, all of the
shares of stock of insurance companies domiciled in a number of
states. Any purchaser of shares of common stock representing 10%
or more of the voting power of our common stock will be presumed
to have acquired control of our domestic insurance subsidiaries
unless, following application by that purchaser, the relevant
state insurance regulators determine otherwise. Any transactions
that would constitute a change in control of any of our
individual insurance subsidiaries would generally require prior
approval by the insurance departments of the states in which the
insurance subsidiary is domiciled. Also, one of our insurance
subsidiaries is domiciled in the United Kingdom and another in
Spain. Insurers in those countries are also subject to change of
control restrictions under their individual regulatory
frameworks. These requirements may deter or delay possible
significant transactions in our common stock or the disposition
of our insurance companies to third parties, including
transactions that could be beneficial to our shareholders.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our principal and executive offices are located in Houston,
Texas, in buildings owned by Houston Casualty Company. We also
maintain offices in 45 locations elsewhere in the United States,
the United Kingdom, Spain, Bermuda, Belgium and Ireland. The
majority of these additional locations are in leased facilities.
We are not dependent on our facilities to conduct business and
such office space is suitable for the conduct of our business.
35
Our principal office facilities are as follows:
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
Segment
|
|
Location
|
|
Sq. Ft.
|
|
Termination Date of Lease
|
|
HCC and Houston Casualty Company
|
|
Insurance Company
and Corporate
|
|
Houston, Texas
|
|
51,000
|
|
Owned
|
Houston Casualty Company
|
|
Insurance Company
|
|
Houston, Texas
|
|
77,000
|
|
Owned
|
Professional Indemnity Agency
|
|
Agency
|
|
Mount Kisco,
New York
|
|
38,000
|
|
Owned
|
HCC Life Insurance Company
|
|
Insurance Company
|
|
Atlanta, Georgia
|
|
31,000
|
|
December 31, 2011
|
U.S. Specialty Insurance Company Aviation Division
|
|
Insurance Company
|
|
Dallas, Texas
|
|
28,000
|
|
August 31, 2013
|
HCC Specialty Underwriters
|
|
Agency
|
|
Wakefield,
Massachusetts
|
|
28,000
|
|
December 31, 2010
|
G. B. Kenrick & Associates, Inc.
|
|
Agency
|
|
Auburn Hills,
Michigan
|
|
27,000
|
|
May 31, 2012
|
HCC Surety Group
|
|
Insurance Company
|
|
Los Angeles,
California
|
|
26,000
|
|
May 31, 2009
|
Health Products Division
|
|
Insurance Company
|
|
Minneapolis,
Minnesota
|
|
25,000
|
|
September 30, 2012
|
HCC International and Rattner MacKenzie
|
|
Insurance Company
and Agency
|
|
London, England
|
|
17,000
|
|
December 24, 2015
|
See also Note 12 to our Consolidated Financial Statements
included in this
Form 10-K.
|
|
Item 3.
|
Legal
Proceedings
|
Based on a voluntary independent investigation by a Special
Committee of the Board of Directors in 2006 of our past
practices related to granting stock options, we determined that
the price on the actual measurement date for a number of our
stock option grants from 1997 through 2005 and into 2006 did not
correspond to the price on the stated grant date and that
certain option grants were retroactively priced. The
investigation was conducted with the help of a law firm that was
not previously involved with our stock option plans and
procedures. The Special Committee completed the investigation on
November 16, 2006. Based upon the Special Committees
recommendations, the Board of Directors took specific actions.
The SEC commenced an informal inquiry upon notification by us of
the initiation of our investigation. We provided the results of
our internal review and independent investigation to the SEC,
and we have responded to requests from the SEC for documents and
additional information. In March 2007, the SEC issued a
formal order directing a private investigation. We are fully
cooperating with the SEC.
We are 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 over contractual relationships 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.
In addition to the litigation discussed above, the following
lawsuits related to the outcome of our stock option
investigation have been filed:
Civil Action
No. 07-456
(Consolidated); Bacas and Halgren, derivatively on behalf of HCC
Insurance Holdings, Inc. v. Way et al.; In the United States
District Court for the Southern District of Texas, Houston
Division. This action consolidates all pending derivative suits
into one action (Bacas suits). The Bacas action
was filed on February 1, 2007, and the Halgren
action was filed on February 28, 2007. On February 1,
2008, the parties appeared before the Court to seek approval of
a proposed settlement in the case. On April 1, 2008,
36
the Court will hold a final hearing. At the final hearing, we
intend to seek final approval of the settlement. Under the terms
of the settlement, we have or will implement certain corporate
governance reforms. We and our directors and
officers liability insurers have agreed to pay up to
$3.0 million to plaintiffs counsel for their
attorneys fees, subject to approval by the Court.
Civil Action
No. 07-0801;
In re HCC Insurance Holdings, Inc. Securities Litigation; In
the United States District Court for the Southern District of
Texas, Houston Division (formerly referred to as Bristol
County Retirement System, individually and on behalf of all
others similarly situated v. HCC Insurance Holdings, Inc.
et al.). This action was filed on March 8, 2007.
We are named as a defendant in this putative class action along
with certain current and former officers and directors. On
February 7, 2008, the parties reached an agreement to
settle the case and will propose the settlement to the Court for
approval. The terms of the settlement, which includes no
admission of liability or wrongdoing by HCC or any other
defendants, provide for a full and complete release of all
claims in the litigation and payment of $10.0 million to be
paid into a settlement fund, pending approval by the Court of a
plan of distribution. The $10.0 million will be paid by our
directors and officers liability insurers.
In each of these lawsuits, certain of our current and former
officers and directors have requested that they be indemnified
for any losses and that their legal fees be advanced. Pursuant
to our bylaws, our charter, applicable law and certain
agreements entered into with some of the defendants, we are
currently advancing legal fees.
Although the ultimate outcome of the above 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 these
matters will not have a material adverse effect on our
consolidated financial position, results of operations or cash
flows.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
There were no matters submitted to a vote of security holders
during the fourth quarter of 2007.
37
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock trades on the New York Stock Exchange under the
ticker symbol HCC.
The intra-day high and low sales prices for quarterly periods
from January 1, 2006 through December 31, 2007, as
reported by the New York Stock Exchange, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
32.89
|
|
|
$
|
29.39
|
|
|
$
|
34.89
|
|
|
$
|
29.25
|
|
Second quarter
|
|
|
34.45
|
|
|
|
30.43
|
|
|
|
34.92
|
|
|
|
28.51
|
|
Third quarter
|
|
|
34.21
|
|
|
|
25.12
|
|
|
|
33.99
|
|
|
|
28.82
|
|
Fourth quarter
|
|
|
31.64
|
|
|
|
27.99
|
|
|
|
35.15
|
|
|
|
28.81
|
|
On February 15, 2008, the last reported sales price of our
common stock as reported by the New York Stock Exchange was
$27.03 per share.
Shareholders
We have one class of authorized capital stock:
250.0 million shares of common stock, par value $1.00 per
share. On February 15, 2008, there were 115.3 million
shares of issued and outstanding common stock held by
781 shareholders of record; however, we estimate there are
approximately 64,000 beneficial owners.
Dividend
Policy
Cash dividends declared on a quarterly basis in 2007 and 2006
were as follows:
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|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
First quarter
|
|
$
|
.100
|
|
|
$
|
.075
|
|
Second quarter
|
|
|
.100
|
|
|
|
.100
|
|
Third quarter
|
|
|
.110
|
|
|
|
.100
|
|
Fourth quarter
|
|
|
.110
|
|
|
|
.100
|
|
Beginning in June 1996, we announced a planned quarterly program
of paying cash dividends to shareholders. Our Board of Directors
may review our dividend policy from time to time and any
determination with respect to future dividends will be made in
light of regulatory and other conditions at that time, including
our earnings, financial condition, capital requirements, loan
covenants and other related factors. Under the terms of our bank
loan facility, we are prohibited from paying dividends in excess
of an agreed upon maximum amount in any year. That limitation
should not affect our ability to pay dividends in a manner
consistent with our past practice and current expectations.
38
Performance
Graph
The following graph shows a comparison of cumulative total
returns for an investment of $100.00 made on December 31,
2002 in the common stock of HCC Insurance Holdings, Inc., the
Standard & Poors Composite 1500 Index and the
Standard & Poors Midcap 400 Index. The graph
assumes that all dividends were reinvested.
COMPARISON
OF CUMULATIVE FIVE YEAR TOTAL RETURN
Total
Return to Shareholders
(Includes reinvestment of dividends)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company/Index
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
HCC Insurance Holdings, Inc.
|
|
$
|
100.00
|
|
|
$
|
130.52
|
|
|
$
|
137.30
|
|
|
$
|
186.94
|
|
|
$
|
204.49
|
|
|
$
|
185.32
|
|
S&P Composite 1500 Index
|
|
|
100.00
|
|
|
|
129.59
|
|
|
|
144.85
|
|
|
|
153.04
|
|
|
|
176.51
|
|
|
|
186.17
|
|
S&P Midcap 400 Index
|
|
|
100.00
|
|
|
|
135.62
|
|
|
|
157.97
|
|
|
|
177.81
|
|
|
|
196.16
|
|
|
|
211.81
|
|
This performance graph shall not be deemed to be incorporated by
reference into our Securities and Exchange Commission filings
and should not constitute soliciting material or otherwise be
considered filed under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended.
39
|
|
Item 6.
|
Selected
Financial Data
|
The selected consolidated financial data set forth below has
been derived from the Consolidated Financial Statements. All
information contained herein should be read in conjunction with
the Consolidated Financial Statements, the related Notes thereto
and Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this
Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
Statement of earnings data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
1,985,086
|
|
|
$
|
1,709,189
|
|
|
$
|
1,369,988
|
|
|
$
|
1,010,692
|
|
|
$
|
738,272
|
|
Fee and commission income
|
|
|
140,092
|
|
|
|
137,131
|
|
|
|
132,628
|
|
|
|
183,802
|
|
|
|
142,615
|
|
Net investment income
|
|
|
206,462
|
|
|
|
152,804
|
|
|
|
98,851
|
|
|
|
64,885
|
|
|
|
47,335
|
|
Net realized investment gain (loss)
|
|
|
13,188
|
|
|
|
(841
|
)
|
|
|
1,448
|
|
|
|
5,822
|
|
|
|
527
|
|
Other operating income
|
|
|
43,545
|
|
|
|
77,012
|
|
|
|
39,773
|
|
|
|
19,406
|
|
|
|
13,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,388,373
|
|
|
|
2,075,295
|
|
|
|
1,642,688
|
|
|
|
1,284,607
|
|
|
|
941,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net
|
|
|
1,183,947
|
|
|
|
1,011,856
|
|
|
|
919,697
|
|
|
|
645,230
|
|
|
|
488,000
|
|
Policy acquisition costs, net
|
|
|
366,610
|
|
|
|
319,885
|
|
|
|
261,708
|
|
|
|
222,323
|
|
|
|
137,212
|
|
Other operating expense
|
|
|
241,642
|
|
|
|
222,324
|
|
|
|
180,990
|
|
|
|
168,045
|
|
|
|
144,574
|
|
Interest expense
|
|
|
10,304
|
|
|
|
11,396
|
|
|
|
7,684
|
|
|
|
8,374
|
|
|
|
7,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
1,802,503
|
|
|
|
1,565,461
|
|
|
|
1,370,079
|
|
|
|
1,043,972
|
|
|
|
777,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income tax expense
|
|
|
585,870
|
|
|
|
509,834
|
|
|
|
272,609
|
|
|
|
240,635
|
|
|
|
164,725
|
|
Income tax expense on continuing operations
|
|
|
190,441
|
|
|
|
167,549
|
|
|
|
84,177
|
|
|
|
81,940
|
|
|
|
59,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
395,429
|
|
|
|
342,285
|
|
|
|
188,432
|
|
|
|
158,695
|
|
|
|
105,343
|
|
Earnings from discontinued operations, net of income taxes(1)
|
|
|
|
|
|
|
|
|
|
|
2,760
|
|
|
|
4,004
|
|
|
|
36,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
395,429
|
|
|
$
|
342,285
|
|
|
$
|
191,192
|
|
|
$
|
162,699
|
|
|
$
|
142,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
3.50
|
|
|
$
|
3.08
|
|
|
$
|
1.78
|
|
|
$
|
1.63
|
|
|
$
|
1.11
|
|
Earnings from discontinued operations(1)
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
0.04
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3.50
|
|
|
$
|
3.08
|
|
|
$
|
1.81
|
|
|
$
|
1.67
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
112,873
|
|
|
|
111,309
|
|
|
|
105,463
|
|
|
|
97,257
|
|
|
|
94,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
3.38
|
|
|
$
|
2.93
|
|
|
$
|
1.72
|
|
|
$
|
1.61
|
|
|
$
|
1.09
|
|
Earnings from discontinued operations(1)
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
0.04
|
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3.38
|
|
|
$
|
2.93
|
|
|
$
|
1.75
|
|
|
$
|
1.65
|
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
116,997
|
|
|
|
116,736
|
|
|
|
109,437
|
|
|
|
98,826
|
|
|
|
96,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared, per share
|
|
$
|
0.420
|
|
|
$
|
0.375
|
|
|
$
|
0.282
|
|
|
$
|
0.213
|
|
|
$
|
0.187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
4,672,277
|
|
|
$
|
3,927,995
|
|
|
$
|
3,257,428
|
|
|
$
|
2,468,491
|
|
|
$
|
1,707,300
|
|
Premium, claims and other receivables
|
|
|
763,401
|
|
|
|
864,705
|
|
|
|
884,654
|
|
|
|
891,360
|
|
|
|
934,252
|
|
Reinsurance recoverables
|
|
|
956,665
|
|
|
|
1,169,934
|
|
|
|
1,361,983
|
|
|
|
1,104,026
|
|
|
|
900,775
|
|
Ceded unearned premium
|
|
|
244,684
|
|
|
|
226,125
|
|
|
|
239,416
|
|
|
|
311,973
|
|
|
|
291,591
|
|
Goodwill
|
|
|
776,046
|
|
|
|
742,677
|
|
|
|
532,947
|
|
|
|
444,031
|
|
|
|
388,023
|
|
Total assets
|
|
|
8,074,645
|
|
|
|
7,630,132
|
|
|
|
7,028,800
|
|
|
|
5,900,568
|
|
|
|
4,883,345
|
|
Loss and loss adjustment expense payable
|
|
|
3,227,080
|
|
|
|
3,097,051
|
|
|
|
2,813,720
|
|
|
|
2,089,199
|
|
|
|
1,525,313
|
|
Unearned premium
|
|
|
943,946
|
|
|
|
920,350
|
|
|
|
807,109
|
|
|
|
741,706
|
|
|
|
592,311
|
|
Premium and claims payable
|
|
|
497,974
|
|
|
|
646,224
|
|
|
|
753,859
|
|
|
|
766,765
|
|
|
|
784,038
|
|
Notes payable
|
|
|
324,714
|
|
|
|
308,887
|
|
|
|
309,543
|
|
|
|
311,277
|
|
|
|
310,404
|
|
Shareholders equity
|
|
|
2,440,365
|
|
|
|
2,042,803
|
|
|
|
1,690,435
|
|
|
|
1,325,498
|
|
|
|
1,046,405
|
|
Book value per share(2)
|
|
$
|
21.21
|
|
|
$
|
18.28
|
|
|
$
|
15.26
|
|
|
$
|
12.99
|
|
|
$
|
10.91
|
|
|
|
|
(1) |
|
We sold our retail brokerage operation, HCC Employee Benefits,
Inc., in 2003. The net earnings of HCC Employee Benefits, the
2003 gain on sale and the subsequent gains in 2004 and 2005 from
a contractual earnout are classified as discontinued operations.
Consistent with this presentation, all pre-sale revenue and
expense of HCC Employee Benefits was reclassified to
discontinued operations. |
|
(2) |
|
Book value per share is calculated by dividing outstanding
shares into total shareholders equity. |
41
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following Managements Discussion and Analysis should
be read in conjunction with the Selected Financial Data, the
Consolidated Financial Statements and the related Notes thereto.
Overview
We are a specialty insurance group with offices in the United
States, the United Kingdom, Spain, Bermuda, Belgium and Ireland
transacting business in more than 100 countries. Our group
consists of insurance companies, underwriting agencies and
brokers. Our shares are traded on the New York Stock Exchange,
and we had a market capitalization of $3.1 billion at
February 15, 2008. We earned $395.4 million or $3.38
per diluted share in 2007, compared to $342.3 million or
$2.93 per diluted share in 2006. The increase in earnings in
2007 was due to increased earned premium, higher investment
income and increased underwriting profit. We grew
shareholders equity by 19% in 2007 to $2.4 billion at
December 31, 2007, principally from net earnings.
We underwrite a variety of specialty lines of business
identified as diversified financial products; group life,
accident and health; aviation; London market account; and other
specialty lines of business. Products in each line are marketed
by our insurance companies and agencies, through a network of
independent agents and brokers, directly to customers or through
third party administrators. With the exception of our public
company directors and officers liability business,
certain international aviation and special financial product
risks, and our London market business, the majority of our
business is generally lower limit, smaller premium business that
is less susceptible to price competition, severity of loss or
catastrophe risk.
Our major domestic insurance companies are rated AA (Very
Strong) by Standard & Poors Corporation,
AA (Very Strong) by Fitch Ratings and A+
(Superior) by A.M. Best Company, Inc., and our
international insurance companies are rated AA by
Standard & Poors Corporation.
We generate our revenue from five primary sources:
|
|
|
|
|
Risk-bearing earned premium produced by our insurance company
operations;
|
|
|
|
Non-risk-bearing fee and commission income received by our
underwriting agency and broker operations;
|
|
|
|
Ceding commissions in excess of policy acquisition costs earned
by our insurance company operations;
|
|
|
|
Investment income earned by all of our operations; and
|
|
|
|
Other operating income.
|
We produced $2.4 billion of revenue in 2007, an increase of
15% over 2006, primarily from higher net earned premium, which
resulted from both recent acquisitions and organic growth in
certain lines of business, and from increased investment income.
During the past several years, we substantially increased our
shareholders equity by retaining most of our earnings and
issuing additional shares of common stock. With this additional
equity, we increased the underwriting capacity of our insurance
companies and made strategic acquisitions, adding new lines of
business or expanding those with favorable underwriting
characteristics.
42
Our major acquisitions during the past three years are listed
below. Net earnings and cash flows from each acquired entity are
included in our operations beginning on the effective date of
each transaction.
|
|
|
|
|
Company
|
|
Segment
|
|
Effective Date Acquired
|
|
United States Surety Company
|
|
Insurance Company
|
|
March 1, 2005
|
HCC International Insurance Company
|
|
Insurance Company
|
|
July 1, 2005
|
Perico Life Insurance Company
|
|
Insurance Company
|
|
November 30, 2005
|
Perico Ltd.
|
|
Agency
|
|
December 1, 2005
|
HCCL Holdings Limited (UK) (formerly Illium Insurance Group,
Ltd.)
|
|
Agency
|
|
December 31, 2005
|
G.B. Kenrick & Associates, Inc.
|
|
Agency
|
|
July 1, 2006
|
Health Products Division (Allianz Life Insurance Company)
|
|
Insurance Company
|
|
October 2, 2006
|
The following section discusses our key operating results. The
reasons for any significant variations between 2006 and 2005 are
the same as those discussed for variations between 2007 and
2006, unless otherwise noted. Amounts in the following tables
are in thousands, except for earnings per share, percentages,
ratios and number of employees.
Results
of Operations
Net earnings increased 16% to $395.4 million ($3.38 per
diluted share) in 2007 from $342.3 million ($2.93 per
diluted share) in 2006. The increase in 2007 net earnings
resulted from growth in underwriting profits, the absence of a
large commutation loss, favorable prior year loss reserve
development, and higher net investment income. Net earnings
increased 79% to $342.3 million ($2.93 per diluted share)
in 2006 from $191.2 million ($1.75 per diluted share) in
2005. Net earnings in 2006 included after-tax losses of
$13.1 million ($0.11 per diluted share) due to a
reinsurance commutation and $9.3 million ($0.08 per diluted
share) for costs related to our stock option investigation. Net
earnings in 2005 included after-tax losses of $58.2 million
($0.53 per diluted share) due to the combined effects of five
hurricanes and $16.9 million ($0.15 per diluted share) due
to a reinsurance commutation. Growth in underwriting profit, net
investment income, other operating income, favorable prior year
loss development and the lack of hurricane losses contributed to
the increase in 2006 net earnings.
During 2006 and 2005, we reached agreements with various
reinsurers to commute two large reinsurance contracts related to
certain run-off assumed accident and health reinsurance business
included in our discontinued lines, for which we had reinsurance
recoverables of $120.2 million in 2006 and
$145.7 million in 2005 at the date of commutation. In
consideration for discounting the recoverables and reassuming
the associated loss reserves, we agreed to accept cash payments
that were less than the related recoverables. We recorded
pre-tax losses of $20.2 million in 2006 and
$26.0 million in 2005 related to these commutations, which
were included in loss and loss adjustment expense in our
insurance company segment. We expect to recoup these losses over
future years as we earn interest on the cash proceeds from the
commutations prior to the related claims being paid.
In 2005, the property and casualty insurance industry suffered
record losses from five major hurricanes that affected the Gulf
Coast of the United States. We recorded gross losses of
$394.6 million from these hurricanes in 2005. Recoveries
expected from our reinsurance programs reduced this gross loss
to a pre-tax loss of $89.7 million. This pre-tax loss was
after reinsurance recoveries and included the cost of premiums
to reinstate our reinsurance protection. There were no major
hurricane losses in 2007 or 2006.
43
The following table sets forth the relationships of certain
income statement items as a percent of total revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net earned premium
|
|
|
83.1
|
%
|
|
|
82.3
|
%
|
|
|
83.4
|
%
|
Fee and commission income
|
|
|
5.9
|
|
|
|
6.6
|
|
|
|
8.1
|
|
Net investment income
|
|
|
8.6
|
|
|
|
7.4
|
|
|
|
6.0
|
|
Net realized investment gain
|
|
|
0.6
|
|
|
|
|
|
|
|
0.1
|
|
Other operating income
|
|
|
1.8
|
|
|
|
3.7
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Loss and loss adjustment expense, net
|
|
|
49.6
|
|
|
|
48.8
|
|
|
|
56.0
|
|
Policy acquisition costs, net
|
|
|
15.4
|
|
|
|
15.4
|
|
|
|
15.9
|
|
Other operating expense
|
|
|
10.1
|
|
|
|
10.7
|
|
|
|
11.0
|
|
Interest expense
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income tax expense
|
|
|
24.5
|
|
|
|
24.6
|
|
|
|
16.6
|
|
Income tax expense
|
|
|
7.9
|
|
|
|
8.1
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
16.6
|
%
|
|
|
16.5
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue increased 15% to $2.4 billion in 2007 and 26%
to $2.1 billion in 2006, driven by significant growth in
net earned premium and higher investment income and, in 2006,
higher other operating income. Approximately 55% of the increase
in revenue in 2007 and 28% in 2006 was due to the acquisition of
businesses.
Gross written premium, net written premium and net earned
premium are detailed below. Premium increased in 2007
principally as a result of acquisitions. See the Insurance
Company Segment section below for further discussion of the
relationship and changes in our premium revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Gross written premium
|
|
$
|
2,451,179
|
|
|
$
|
2,235,648
|
|
|
$
|
2,038,286
|
|
Net written premium
|
|
|
1,985,609
|
|
|
|
1,812,552
|
|
|
|
1,501,224
|
|
Net earned premium
|
|
|
1,985,086
|
|
|
|
1,709,189
|
|
|
|
1,369,988
|
|
The table below shows the source of our fee and commission
income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Agencies
|
|
$
|
92,230
|
|
|
$
|
92,566
|
|
|
$
|
94,972
|
|
Insurance companies
|
|
|
47,862
|
|
|
|
44,565
|
|
|
|
37,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee and commission income
|
|
$
|
140,092
|
|
|
$
|
137,131
|
|
|
$
|
132,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sources of net investment income are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Fixed income securities
|
|
$
|
150,594
|
|
|
$
|
112,878
|
|
|
$
|
77,842
|
|
Short-term investments
|
|
|
37,764
|
|
|
|
30,921
|
|
|
|
21,208
|
|
Other investments
|
|
|
23,930
|
|
|
|
14,178
|
|
|
|
3,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
212,288
|
|
|
|
157,977
|
|
|
|
102,665
|
|
Investment expense
|
|
|
(5,826
|
)
|
|
|
(5,173
|
)
|
|
|
(3,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
206,462
|
|
|
$
|
152,804
|
|
|
$
|
98,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Net investment income increased 35% in 2007 and 55% in 2006.
These increases were primarily due to higher investment assets,
which increased to $4.7 billion at December 31, 2007
compared to $3.9 billion at December 31, 2006 and
$3.3 billion at December 31, 2005, and higher interest
rates. The growth in investment assets resulted from the
following: cash flow from operations; higher retentions;
commutations of reinsurance recoverables; our public offerings
of common stock in 2005; and the increase in net loss reserves,
particularly from our diversified financial products line of
business, which generally has a longer time period between
reporting and payment of claims. Average yields on our
short-term investments increased from 4.5% in 2006 to 5.2% in
2007 and our long-term tax equivalent yield increased from 5.2%
in 2006 to 5.4% in 2007. We continue to invest our funds
primarily in fixed income securities, with a weighted average
duration of 4.9 years at December 31, 2007.
At December 31, 2007, our unrealized gain on fixed income
securities was $25.0 million, compared to an unrealized
loss of $1.6 million at December 31, 2006, due to
fluctuations in market interest rates. The change in the
unrealized gain or loss, net of the related income tax effect,
is recorded in other comprehensive income and fluctuates with
changes in market interest rates. Our general policy has been to
hold our fixed income securities, which are classified as
available for sale, through periods of fluctuating interest
rates and to not realize significant gains or losses from their
sale. The unrealized gain on our fixed income securities
increased to $72.7 million at January 31, 2008 due to
a decrease in interest rates.
In 2007, we had a $13.2 million net realized investment
gain compared to a net loss of $0.8 million in 2006 and a
net gain of $1.4 million in 2005. The 2007 gain included
$13.4 million of embedded currency conversion gains on
certain available for sale fixed income securities that we sold
in December 2007. These securities were denominated in foreign
currencies and were purchased to economically hedge liabilities,
principally loss and loss expense payables, denominated in
matching functional currencies. This realized gain was offset by
a $13.4 million foreign currency loss recorded in other
operating expense. See the discussion of other operating expense
below.
Other operating income decreased $33.5 million in 2007 and
increased $37.2 million in 2006. The 2007 decrease and the
2006 increase were due to changes in the net gains from trading
securities and the sales of strategic investments. Period to
period comparisons in this category may vary substantially
depending on market values of trading securities and other
financial instruments and on income from strategic investments
or dispositions of such investments. The following table details
the components of other operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Strategic investments
|
|
$
|
27,627
|
|
|
$
|
43,627
|
|
|
$
|
10,241
|
|
Trading securities
|
|
|
3,881
|
|
|
|
24,100
|
|
|
|
16,619
|
|
Financial instruments
|
|
|
5,572
|
|
|
|
4,772
|
|
|
|
3,898
|
|
Sale of non-operating assets
|
|
|
2,051
|
|
|
|
|
|
|
|
4,271
|
|
Other
|
|
|
4,414
|
|
|
|
4,513
|
|
|
|
4,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income
|
|
$
|
43,545
|
|
|
$
|
77,012
|
|
|
$
|
39,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense increased 17% in 2007 and 10%
in 2006. Both years increased due to growth in net retained
premium. Policy acquisition costs increased 15% in 2007 and 22%
in 2006, primarily due to the growth in net earned premium. See
the Insurance Company Segment section below for further
discussion of the changes in loss and loss adjustment expense
and policy acquisition costs.
Other operating expense, which includes compensation expense,
increased 9% in 2007 and 23% in 2006. The increase in 2007 is
primarily due to inclusion of a full year of operations of the
Health Products Division, acquired in the last quarter of 2006,
partially offset by lower costs related to our stock option
investigation. In addition, 2007 included a $13.4 million
charge to correct the accounting for embedded currency
conversion gains on certain fixed income securities classified
as available for sale. Since 2005, we used certain available for
sale fixed income securities, denominated in British pound
sterling, to economically hedge foreign currency exposure on
certain insurance reserves and other liabilities, denominated in
the same currency. We incorrectly recorded the unrealized
exchange rate fluctuations on these securities through earnings
as an offset
45
to the opposite fluctuations in the liabilities they hedged,
rather than through other comprehensive income within
shareholders equity. In 2007, to correct our accounting,
we reversed $13.4 million of cumulative unrealized exchange
rate gains. We recorded this reversal as a charge to our gain or
loss from currency conversion account, with an offsetting credit
to other comprehensive income. We reported our net loss from
currency conversion, which included this $13.4 million
charge, as a component of other operating expense in the
consolidated statements of earnings. In 2007, we sold these
available for sale securities and realized the
$13.4 million of embedded cumulative currency conversion
gains. This gain was included in the net realized investment
gain (loss) line of our consolidated statements of earnings. The
offsetting effect of these transactions had no impact on our
2007 consolidated net earnings. See the discussion above related
to realized investment gains. Our 2006 other operating expense
increased for stock option expense under Statement of Financial
Accounting Standards (SFAS) No. 123(R); higher professional
fees, legal costs and other expenses related to our stock option
investigation; and operating expenses of subsidiaries acquired
in 2006 and the second half of 2005. We had 1,682 employees
at December 31, 2007, compared to 1,660 a year earlier.
In 2007 and 2006, we expensed $11.3 million
($7.4 million after-tax or $0.06 per diluted share) and
$13.1 million ($9.4 million after-tax or $0.08 per
diluted share) of stock-based compensation, after the effect of
the deferral and amortization of related policy acquisition
costs. Effective January 1, 2006, we adopted
SFAS No. 123(R), Share-Based Payment, using the
modified prospective method. We are recognizing compensation
expense for all previously-granted but unvested stock options as
of January 1, 2006, and for all options granted after that
date. Prior to adoption, we accounted for our stock options in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and recognized
compensation expense of $3.0 million in 2005. The 2005
consolidated financial statements were not restated to reflect
our adoption of SFAS 123(R). At December 31, 2007,
there was approximately $28.8 million of total unrecognized
compensation expense related to unvested options that is
expected to be recognized over a weighted-average period of
3.0 years.
Our effective income tax rate on earnings from continuing
operations was 32.5% for 2007, compared to 32.9% for 2006 and
30.9% for 2005. The effective tax rate was lower in 2005 because
our tax exempt interest income was a greater percentage of our
pre-tax income and we recorded a special $2.8 million
repatriation tax benefit.
At December 31, 2007, book value per share was $21.21 up
from $18.28 at December 31, 2006 and $15.26 at
December 31, 2005. Total assets were $8.1 billion and
shareholders equity was $2.4 billion, up from
$7.6 billion and $2.0 billion, respectively, at
December 31, 2006.
46
Segments
We operate our businesses in three segments: insurance company,
agency and other operations. Our Chief Executive Officer, as
chief decision maker, monitors and evaluates the individual
financial results of each subsidiary in the insurance company
and agency segments. Each subsidiary provides monthly reports of
its actual and budgeted results, which are aggregated on a
segment basis for management review and monitoring. The
operating results of our insurance company, agency, and other
operations segments are discussed below.
Insurance
Company Segment
Net earnings of our insurance company segment increased 32% to
$357.8 million in 2007 compared to $272.0 million in
2006 and $126.1 million in 2005. The 2006 net earnings
included $13.1 million of after-tax losses related to a
commutation. The 2005 net earnings included
$75.2 million of after-tax losses related to hurricanes and
a commutation. The growth in segment net earnings was driven by
improved underwriting results, increased investment income, and
the operations of acquired subsidiaries. Also, effective
April 1, 2006, we consolidated one of our underwriting
agencies into one of our insurance companies; all operations
after that date were reported in our insurance company segment.
Even though there is pricing competition in all of our markets,
our margins remain at an acceptable level of profitability due
to our underwriting expertise and discipline.
Premium
Gross written premium increased 10% in both 2007 and 2006. Net
written premium increased 10% to $2.0 billion and net
earned premium increased 16% to $2.0 billion in 2007
compared to increases of 21% and 25%, respectively, in 2006. The
2007 increases were primarily due to our 2006 acquisition of the
Health Products Division and organic growth in our surety,
credit and other specialty lines of business. The overall
percentage of retained premium remained constant at 81% in 2007
and 2006. The 2006 net premium increase exceeded the gross
premium increase due to higher retention levels on most
non-catastrophe business.
The following table details premium amounts and their
percentages of gross written premium.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Direct
|
|
$
|
2,000,552
|
|
|
|
82
|
%
|
|
$
|
1,867,908
|
|
|
|
84
|
%
|
|
$
|
1,768,284
|
|
|
|
87
|
%
|
Reinsurance assumed
|
|
|
450,627
|
|
|
|
18
|
|
|
|
367,740
|
|
|
|
16
|
|
|
|
270,002
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium
|
|
|
2,451,179
|
|
|
|
100
|
|
|
|
2,235,648
|
|
|
|
100
|
|
|
|
2,038,286
|
|
|
|
100
|
|
Reinsurance ceded
|
|
|
(465,570
|
)
|
|
|
(19
|
)
|
|
|
(423,096
|
)
|
|
|
(19
|
)
|
|
|
(537,062
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium
|
|
|
1,985,609
|
|
|
|
81
|
|
|
|
1,812,552
|
|
|
|
81
|
|
|
|
1,501,224
|
|
|
|
74
|
|
Change in unearned premium
|
|
|
(523
|
)
|
|
|
|
|
|
|
(103,363
|
)
|
|
|
(5
|
)
|
|
|
(131,236
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
1,985,086
|
|
|
|
81
|
%
|
|
$
|
1,709,189
|
|
|
|
76
|
%
|
|
$
|
1,369,988
|
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
The following tables provide premium information by line of
business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
NWP
|
|
|
|
|
|
|
Written
|
|
|
Net Written
|
|
|
as% of
|
|
|
Net Earned
|
|
|
|
Premium
|
|
|
Premium
|
|
|
GWP
|
|
|
Premium
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products
|
|
$
|
963,355
|
|
|
$
|
771,648
|
|
|
|
80
|
%
|
|
$
|
777,414
|
|
Group life, accident and health
|
|
|
798,684
|
|
|
|
759,207
|
|
|
|
95
|
|
|
|
758,516
|
|
Aviation
|
|
|
195,809
|
|
|
|
145,761
|
|
|
|
74
|
|
|
|
153,121
|
|
London market account
|
|
|
213,716
|
|
|
|
118,241
|
|
|
|
55
|
|
|
|
124,609
|
|
Other specialty lines
|
|
|
280,040
|
|
|
|
191,151
|
|
|
|
68
|
|
|
|
171,824
|
|
Discontinued lines
|
|
|
(425
|
)
|
|
|
(399
|
)
|
|
|
nm
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,451,179
|
|
|
$
|
1,985,609
|
|
|
|
81
|
%
|
|
$
|
1,985,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products
|
|
$
|
956,057
|
|
|
$
|
794,232
|
|
|
|
83
|
%
|
|
$
|
728,861
|
|
Group life, accident and health
|
|
|
621,639
|
|
|
|
590,811
|
|
|
|
95
|
|
|
|
591,070
|
|
Aviation
|
|
|
216,208
|
|
|
|
166,258
|
|
|
|
77
|
|
|
|
152,886
|
|
London market account
|
|
|
234,868
|
|
|
|
127,748
|
|
|
|
54
|
|
|
|
112,362
|
|
Other specialty lines
|
|
|
205,651
|
|
|
|
133,481
|
|
|
|
65
|
|
|
|
123,981
|
|
Discontinued lines
|
|
|
1,225
|
|
|
|
22
|
|
|
|
nm
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,235,648
|
|
|
$
|
1,812,552
|
|
|
|
81
|
%
|
|
$
|
1,709,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products
|
|
$
|
908,526
|
|
|
$
|
675,942
|
|
|
|
74
|
%
|
|
$
|
531,136
|
|
Group life, accident and health
|
|
|
593,382
|
|
|
|
502,805
|
|
|
|
85
|
|
|
|
504,382
|
|
Aviation
|
|
|
210,530
|
|
|
|
130,743
|
|
|
|
62
|
|
|
|
136,197
|
|
London market account
|
|
|
144,425
|
|
|
|
78,809
|
|
|
|
55
|
|
|
|
93,017
|
|
Other specialty lines
|
|
|
176,139
|
|
|
|
109,106
|
|
|
|
62
|
|
|
|
97,721
|
|
Discontinued lines
|
|
|
5,284
|
|
|
|
3,819
|
|
|
|
nm
|
|
|
|
7,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,038,286
|
|
|
$
|
1,501,224
|
|
|
|
74
|
%
|
|
$
|
1,369,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm |
|
Not meaningful comparison |
The changes in premium volume and retention levels between years
resulted principally from the following factors:
|
|
|
|
|
Diversified financial products The growth in our
gross written premium in both years resulted primarily from
organic growth in our surety and credit businesses, where
pricing is stable and competition is reasonable. This was offset
by a decline in our directors and officers liability
business, as competition has resulted in less premium being
written. Net written premium also declined in 2007 due to
additional quota share reinsurance purchased for our
international directors and officers liability
insurance. Net earned premium for diversified financial products
increased in both years due to the 2006 increase in net written
premium.
|
|
|
|
Group life, accident and health Gross written, net
written and net earned premium of our medical stop-loss and
medical excess products increased due to the 2006 acquisition of
the Health Products Division. We retain all of our medical
stop-loss and medical excess business because the business is
non-volatile and has very little catastrophe exposure. Profit
margins remain at acceptable levels despite competition from the
fully-insured market.
|
48
|
|
|
|
|
Aviation Our domestic aviation business has been
stable, while gross written premium of our international
business has declined. We have exercised underwriting discipline
and written less international business due to competition and
the resultant pressure on pricing. However, margins on decreased
premium volume are still acceptable. Net written premium
increased $12.5 million in 2006 due to a portfolio transfer
of in-force premium to a new reinsurance program with a higher
retention and decreased $2.5 million in 2007 due to a
portfolio transfer with a lower retention.
|
|
|
|
London market account Net written premium decreased
slightly in 2007 due to competition increasing in this line of
business. This followed a large increase in energy writings in
2006 that resulted from significantly increased rates after the
2005 hurricanes. We reduced our aggregate property exposure in
Florida and other hurricane-exposed onshore areas in 2006, and
we maintained the reduced exposure in 2007. Additionally, due to
the tightening of policy terms and conditions, our energy
catastrophe exposure was significantly reduced in 2006, even
though our business increased, and continued at this reduced
level in 2007. Net earned premium increased in both years due to
the amount of energy business written in 2006.
|
|
|
|
Other specialty lines We experienced growth in our
other specialty lines of business from expansion of our
Lloyds of London syndicate participation, increased
writings in several products, and a 2006 acquisition. The
changing mix of products affected the retention percentages.
Markets for these products are competitive and rates are down
slightly.
|
Reinsurance
Annually, we analyze our threshold for risk in each line of
business and on an overall consolidated basis, based on a number
of factors, including market conditions, pricing, competition
and the inherent risks associated with each business type, and
then we structure a reinsurance program. Based on our analysis
of these factors, we may determine not to purchase reinsurance
for some lines of business. We generally purchase reinsurance to
reduce our net liability on individual risks and to protect
against catastrophe losses and volatility. We purchase
reinsurance on a proportional basis to cover loss frequency,
individual risk severity and catastrophe exposure. Some of the
proportional reinsurance agreements may have maximum loss
limits, most of which are at or greater than a 200% loss ratio.
We also purchase reinsurance on an excess of loss basis to cover
individual risk severity and catastrophe exposure. Additionally,
we may obtain facultative reinsurance protection on a single
risk. The type and amount of reinsurance we purchase varies year
to year based on our risk assessment, our desired retention
levels based on profitability and other considerations, and the
market availability of quality reinsurance at prices we consider
acceptable. Our reinsurance programs renew throughout the year
and the price changes in recent years have not been material to
our net underwriting results. Our reinsurance generally does not
cover war or terrorism risks, which are excluded from most of
our policies.
We decided for the 2006 and 2005 underwriting years to retain
more underwriting risk in certain lines of business in order to
retain a greater proportion of expected underwriting profits. In
doing so, we purchased less reinsurance and converted some
reinsurance from proportional to excess of loss, which
significantly reduced the amount of ceded premium in 2006. Ceded
premium as a percentage of gross written premium remained
constant at 19% in 2007 compared to 2006. We have chosen not to
purchase any reinsurance on business where volatility or
catastrophe risks are considered remote.
In our proportional reinsurance programs, we generally receive
an overriding (ceding) commission on the premium ceded to
reinsurers. This compensates our insurance companies for the
direct costs associated with production of the business, the
servicing of the business during the term of the policies ceded,
and the costs associated with placement of the related
reinsurance. In addition, certain of our reinsurance treaties
allow us to share in any net profits generated under such
treaties with the reinsurers. Various reinsurance brokers,
including subsidiaries, arrange for the placement of this
proportional and other reinsurance coverage on our behalf and
are compensated, directly or indirectly, by the reinsurers.
Our reinsurance recoverables decreased in amount and as a
percentage of our shareholders equity in 2007 and 2006, as
we reinsured less business, especially on a proportional basis,
and as the 2005 hurricane
49
losses were paid and we collected amounts due from our
reinsurers for their part of these paid losses. Our Reinsurance
Security Committee carefully monitors the credit quality of the
reinsurers we do business with on a current basis. Our
recoverables are due principally from highly-rated reinsurers.
We have a reserve of $8.5 million at December 31, 2007
for potential collectibility issues related to reinsurance
recoverables, including disputed amounts and associated
expenses. While we believe the reserve is adequate based on
information currently available, conditions may change or
additional information might be obtained that may require us to
change the reserve in the future. We periodically review our
financial exposure to the reinsurance market and the level of
our reserve and continue to take actions in an attempt to
mitigate our exposure to possible loss.
Losses
and Loss Adjustment Expenses
The table below shows the composition of gross incurred loss and
loss adjustment expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Loss Ratio
|
|
|
Amount
|
|
|
Loss Ratio
|
|
|
Amount
|
|
|
Loss Ratio
|
|
|
2005 hurricanes
|
|
$
|
|
|
|
|
|
%
|
|
$
|
12,670
|
|
|
|
0.6
|
%
|
|
$
|
394,625
|
|
|
|
19.9
|
%
|
2004 hurricanes
|
|
|
|
|
|
|
|
|
|
|
(2,984
|
)
|
|
|
(0.2
|
)
|
|
|
(13,423
|
)
|
|
|
(0.7
|
)
|
Discontinued accident and health adjustments
|
|
|
(46,531
|
)
|
|
|
(1.9
|
)
|
|
|
15,054
|
|
|
|
0.7
|
|
|
|
49,775
|
|
|
|
2.5
|
|
Discontinued medical malpractice adjustments
|
|
|
11,568
|
|
|
|
0.5
|
|
|
|
2,353
|
|
|
|
0.1
|
|
|
|
821
|
|
|
|
|
|
Other reserve redundancies
|
|
|
(55,658
|
)
|
|
|
(2.3
|
)
|
|
|
(30,394
|
)
|
|
|
(1.4
|
)
|
|
|
(7,901
|
)
|
|
|
(0.4
|
)
|
All other gross incurred loss and loss adjustment expense
|
|
|
1,443,031
|
|
|
|
59.2
|
|
|
|
1,222,139
|
|
|
|
56.9
|
|
|
|
1,172,876
|
|
|
|
59.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross incurred loss and loss expense adjustment
|
|
$
|
1,352,410
|
|
|
|
55.5
|
%
|
|
$
|
1,218,838
|
|
|
|
56.7
|
%
|
|
$
|
1,596,773
|
|
|
|
80.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our gross redundant (adverse) reserve development relating to
prior years losses was $90.6 million in 2007,
$3.3 million in 2006, and $(29.3) million in 2005.
The gross losses related to prior accident years on certain
run-off assumed accident and health reinsurance business
reported in our discontinued lines of business have fluctuated
due to our processing of additional information received and our
continuing evaluation of gross and net reserves related to this
business. We considered a combination of factors including:
1) the nature of the business, which is primarily excess of
loss reinsurance, 2) late reported losses by insureds,
reinsureds and state guaranty associations and 3) changes
in our actuarial assumptions to reflect additional information
received during the year. The run-off assumed accident and
health reinsurance business is primarily reinsurance that
provides excess coverage for large losses related to
workers compensation policies. This business is slow to
develop and may take as many as twenty years to pay out. Losses
in lower layers must develop first before our excess coverage
attaches. Thus, the losses are reported to excess of loss
reinsurers later in the life cycle of the claim. Compounding
this late reporting is the fact that a number of large insurance
companies that were cedants of this business failed and were
taken over by state regulatory authorities in 2002 and 2003. The
state guaranty associations covering these failed companies have
been slow to report losses to us. Based on the higher amount of
actual losses reported, we revised the expected loss ratios used
in our actuarial calculations, particularly in 2005. After
consideration of all currently available information, we
adjusted our gross and net reserves each year to amounts that
management determined were appropriate to cover projected
losses, given the risk inherent in this type of business.
Because of substantial reinsurance, the net effects of these
adjustments on our consolidated net earnings have been much less
than the gross effects shown above.
50
The other gross reserve redundancies resulted primarily from our
review and reduction of reserves where the anticipated
development was considered to be less than the recorded
reserves. Deficiencies and redundancies also occur as a result
of claims being settled for amounts different from recorded
reserves, or as claims exposures change. Loss reserves on
international medical malpractice business, in run-off since we
acquired the subsidiary that wrote this business in 2002, were
strengthened in 2007 in response to a deteriorating legal and
settlement environment. The other gross reserve redundancies in
2007 related primarily to reserve reductions in our diversified
financial products line of business from the 2003 and 2004
underwriting years. The other gross reserve redundancies in 2006
related primarily to a reduction in aviation reserves from the
2004 and 2005 accident years.
The table below shows the composition of net incurred loss and
loss adjustment expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Loss Ratio
|
|
|
Amount
|
|
|
Loss Ratio
|
|
|
Amount
|
|
|
Loss Ratio
|
|
|
2005 hurricanes
|
|
$
|
|
|
|
|
|
%
|
|
$
|
(15,215
|
)
|
|
|
(0.9
|
)%
|
|
$
|
73,185
|
|
|
|
5.3
|
%
|
2004 hurricanes
|
|
|
|
|
|
|
|
|
|
|
(2,483
|
)
|
|
|
(0.2
|
)
|
|
|
(7,167
|
)
|
|
|
(0.5
|
)
|
Discontinued accident and health commutations
|
|
|
2,616
|
|
|
|
0.1
|
|
|
|
20,199
|
|
|
|
1.2
|
|
|
|
26,041
|
|
|
|
1.9
|
|
Discontinued accident and health adjustments
|
|
|
376
|
|
|
|
|
|
|
|
4,898
|
|
|
|
0.3
|
|
|
|
8,929
|
|
|
|
0.7
|
|
Discontinued medical malpractice adjustments
|
|
|
11,568
|
|
|
|
0.6
|
|
|
|
2,738
|
|
|
|
0.2
|
|
|
|
856
|
|
|
|
|
|
Other reserve redundancies
|
|
|
(40,957
|
)
|
|
|
(2.1
|
)
|
|
|
(16,663
|
)
|
|
|
(1.0
|
)
|
|
|
(3,265
|
)
|
|
|
(0.2
|
)
|
All other net incurred loss and loss adjustment expense
|
|
|
1,210,344
|
|
|
|
61.0
|
|
|
|
1,018,382
|
|
|
|
59.6
|
|
|
|
821,118
|
|
|
|
59.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred loss and loss adjustment expense
|
|
$
|
1,183,947
|
|
|
|
59.6
|
%
|
|
$
|
1,011,856
|
|
|
|
59.2
|
%
|
|
$
|
919,697
|
|
|
|
67.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net redundant (adverse) reserve development relating to
prior years losses was $26.4 million in 2007,
$6.5 million in 2006, and $(25.4) million in 2005,
including amounts due to commutations that affected our
discontinued line of business. The commutation losses primarily
represent the discount for the time value of money on the
reinsurance recoverables commuted. The discontinued accident and
health business was substantially reinsured; therefore, the
impact on our net earnings was substantially less than the
amount of the gross losses. Loss reserves on international
medical malpractice business, in run-off since we acquired the
subsidiary that wrote this business in 2002, were strengthened
in 2007 in response to a deteriorating legal and settlement
environment. These losses were not reinsured. We reduced our net
loss reserves on prior years hurricanes in 2006 and 2005
to reflect current estimates of our remaining liabilities. The
other net reserve redundancies in 2007 related primarily to
reserve reductions in our diversified financial products line of
business from the 2003 and 2004 underwriting years. The other
net reserve redundancies in 2006 related primarily to a
reduction in aviation reserves from the 2004 and 2005 accident
years. A portion of these reserves were reinsured. We have no
material exposure to environmental or asbestos losses and
believe we have provided for all material net incurred losses.
51
The following table provides comparative net loss ratios by line
of business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Net
|
|
|
Net
|
|
|
Net
|
|
|
Net
|
|
|
Net
|
|
|
Net
|
|
|
|
Earned
|
|
|
Loss
|
|
|
Earned
|
|
|
Loss
|
|
|
Earned
|
|
|
Loss
|
|
|
|
Premium
|
|
|
Ratio
|
|
|
Premium
|
|
|
Ratio
|
|
|
Premium
|
|
|
Ratio
|
|
|
Diversified financial products
|
|
$
|
777,414
|
|
|
|
40.6
|
%
|
|
$
|
728,861
|
|
|
|
48.2
|
%
|
|
$
|
531,136
|
|
|
|
48.1
|
%
|
Group life, accident and health
|
|
|
758,516
|
|
|
|
76.4
|
|
|
|
591,070
|
|
|
|
73.1
|
|
|
|
504,382
|
|
|
|
71.6
|
|
Aviation
|
|
|
153,121
|
|
|
|
58.6
|
|
|
|
152,886
|
|
|
|
53.8
|
|
|
|
136,197
|
|
|
|
67.3
|
|
London market account
|
|
|
124,609
|
|
|
|
55.2
|
|
|
|
112,362
|
|
|
|
43.0
|
|
|
|
93,017
|
|
|
|
106.0
|
|
Other specialty lines
|
|
|
171,824
|
|
|
|
67.4
|
|
|
|
123,981
|
|
|
|
56.0
|
|
|
|
97,721
|
|
|
|
72.6
|
|
Discontinued lines
|
|
|
(398
|
)
|
|
|
nm
|
|
|
|
29
|
|
|
|
nm
|
|
|
|
7,535
|
|
|
|
nm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,985,086
|
|
|
|
59.6
|
%
|
|
$
|
1,709,189
|
|
|
|
59.2
|
%
|
|
$
|
1,369,988
|
|
|
|
67.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense ratio
|
|
|
|
|
|
|
23.8
|
|
|
|
|
|
|
|
25.0
|
|
|
|
|
|
|
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
|
|
|
|
83.4
|
%
|
|
|
|
|
|
|
84.2
|
%
|
|
|
|
|
|
|
93.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nm |
|
Not meaningful comparison |
The change in net loss ratios by line of business between years
resulted principally from the following factors:
|
|
|
|
|
Diversified financial products The decrease in the
2007 loss ratio was due to better underwriting results for
certain business written in 2006 and earned in 2007, compared to
business written in 2005 and earned in 2006, and favorable loss
development on our directors and officers and
international professional indemnity businesses, primarily on
our 2003 and 2004 underwriting years. Additionally, our surety
and credit businesses, which have lower loss ratios than other
businesses in this line, are growing and reducing the overall
loss ratio. Our domestic surety business also had favorable loss
development during 2007.
|
|
|
|
Group life, accident and health The net loss ratio
was higher on business acquired with the Health Products
Division in 2006. Over time, as the acquired business is
re-underwritten, we expect the loss ratio will decline. The net
loss ratio was also higher than expected as more of our business
is being written on a net of commission basis. While the net
business increased our loss ratio (since the denominator is
lower), it reduced our expense ratio such that our combined
ratio and margin for this business remain relatively stable.
|
|
|
|
Aviation The 2005 hurricanes increased the net loss
ratio by 5.0 percentage points in 2005. The 2005 net
loss ratio also included a favorable impact from the release of
redundant reserves related to 2004 hurricanes. Excluding the
impact of the hurricanes, 2005 had worse than expected
underwriting experience due to some unusually large
international losses, while 2006 underwriting results were
better than expected, due in part to the release of redundant
reserves on the 2004 and 2005 accident years.
|
|
|
|
London market account The loss ratio in 2007 was
slightly higher than expected due to adverse development in our
London accident and health and energy businesses. The 2005
hurricanes increased the 2005 net loss ratio by
63.2 percentage points. Subsequent reduction of these
reserves reduced the 2006 net loss ratio by
9.1 percentage points. The 2006 net loss ratio was
also affected by higher than expected attritional losses for
energy losses and poor underwriting results on marine business.
The London market account line of business can have relatively
high year-to-year volatility due to catastrophe exposure.
|
|
|
|
Other specialty lines The 2005 hurricanes increased
the 2005 net loss ratio by 14.0 percentage points.
Subsequent reduction of these reserves reduced the 2006 net
loss ratio by 3.9 percentage points. The increase in the
2007 net loss ratio related to losses in our marine and
United Kingdom liability lines of business.
|
52
|
|
|
|
|
Discontinued lines All years were adversely affected
by the commutations and net loss reserve adjustments discussed
previously. In addition, loss reserves on our international
medical malpractice business, in run-off since we acquired the
subsidiary that wrote this business in 2002, were strengthened
in 2007 in response to a deteriorating legal and settlement
environment.
|
The table below provides a reconciliation of our reserves for
loss and loss adjustment expense payable, net of reinsurance
ceded, the amount of our paid claims and our net paid loss
ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Reserves for loss and loss adjustment expense payable at
beginning of year
|
|
$
|
2,108,961
|
|
|
$
|
1,533,433
|
|
|
$
|
1,059,283
|
|
Reserve additions from acquired businesses
|
|
|
742
|
|
|
|
146,811
|
|
|
|
12,491
|
|
Incurred loss and loss adjustment expense
|
|
|
1,183,947
|
|
|
|
1,011,856
|
|
|
|
919,697
|
|
Loss and loss adjustment expense payments
|
|
|
(950,850
|
)
|
|
|
(583,139
|
)
|
|
|
(458,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss adjustment expense payable at end
of year
|
|
$
|
2,342,800
|
|
|
$
|
2,108,961
|
|
|
$
|
1,533,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid loss ratio
|
|
|
47.9
|
%
|
|
|
34.1
|
%
|
|
|
33.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net paid loss ratio is the percentage of losses paid, net of
reinsurance, divided by net earned premium for that year. The
increase in loss and loss adjustment expense payments in 2007
was due to payment of claims related to the Health Products
Division business acquired in 2006 and the 2005 hurricanes.
Payments in 2006 and 2005 were reduced $100.0 million and
$119.7 million, respectively, due to the discontinued
accident and health commutations recorded in those years. The
commutations decreased our net paid loss ratios by 5.9 and 8.7
percentage points in 2006 and 2005, respectively.
Policy
Acquisition Costs
Policy acquisition costs, which are net of the related portion
of commissions on reinsurance ceded, increased to
$366.6 million in 2007 from $319.9 million in 2006 and
$261.7 million in 2005. Policy acquisition costs as a
percentage of net earned premium decreased to 18.5% in 2007 from
18.7% in 2006 and 19.1% in 2005. The decreases are due to a
change in the mix of business and reductions in commission rates
on certain lines of business. The GAAP expense ratio of 23.8% in
2007 decreased in comparison to 25.0% in 2006 and 26.1% in 2005
for the same reasons and, in addition, net earned premium
increased at a higher rate than the expenses that are used to
calculate the expense ratio.
Statutory
Regulatory guidelines suggest that a property and casualty
insurers annual statutory gross written premium should not
exceed 900% of its statutory policyholders surplus and net
written premium should not exceed 300% of its statutory
policyholders surplus. However, industry and rating agency
guidelines place these ratios at 300% and 200%, respectively.
Our property and casualty insurance companies have maintained
premium to surplus ratios lower than such guidelines. For 2007,
our statutory gross written premium to policyholders
surplus was 141.0% and our statutory net written premium to
policyholders surplus was 113.8%. At December 31,
2007, each of our domestic insurance companies total
adjusted capital was significantly in excess of the authorized
control level risk-based capital level prescribed by the
National Association of Insurance Commissioners.
Agency
Segment
Revenue from our agency segment decreased to $178.6 million
in 2007 from $180.0 million in 2006 and $188.9 million
in 2005, primarily due to the consolidation of one of our
underwriting agencies into one of our insurance companies
effective April 1, 2006, less business being produced in
certain lines of business, and the overall effect of ceding less
reinsurance. These effects were partially offset by 2006
acquisitions and growth in certain other lines of business.
While the consolidation and increased retentions resulted in
less fee and
53
commission income to our agency segment, they resulted in
increased insurance company revenue and net earnings. Segment
earnings decreased to $33.9 million in 2007 from
$42.3 million in 2006 due to the lower revenue, change in
the mix of business that resulted in lower pre-tax margin, a
higher income tax rate, and increased corporate cost
allocations. Segment net earnings were $38.5 million in
2005 and would have decreased in 2006, except the agency segment
benefited from lower corporate cost allocations.
Other
Operations Segment
Revenue and net earnings from our other operations segment
decreased to $38.9 million and $22.8 million,
respectively, in 2007 from $75.1 million and
$48.8 million, respectively, in 2006, primarily as a result
of less income from trading securities and the sale of strategic
investments. The 2006 amounts increased from $35.3 million
and $22.6 million, respectively, in 2005 due to increased
income from trading securities and the sale of strategic
investments. In the fourth quarter of 2006, we began liquidating
our trading portfolio, which we substantially completed in the
first quarter of 2007 with the exception of two
insurance-related securities, and invested the proceeds in fixed
income securities. Results of this segment may vary
substantially period to period depending on our investment in or
disposition of strategic investments and activity in our trading
portfolio.
Liquidity
and Capital Resources
Cash
Flow
We receive substantial cash from premiums, reinsurance
recoverables, commutations, fee and commission income, 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,
purchases of investments, debt service, policy acquisition
costs, operating expenses, taxes and dividends.
Cash provided by operating activities can fluctuate due to
timing differences in the collection of premiums and reinsurance
recoverables and the payment of losses and premium and
reinsurance balances payable, the completion of commutations,
and activity in our trading portfolio. Our cash provided by
operating activities has been strong in recent years due to:
|
|
|
|
|
Our increasing net earnings,
|
|
|
|
Growth in net written premium and net loss reserves due to
organic growth and increased retentions,
|
|
|
|
Commutations of selected reinsurance agreements, and
|
|
|
|
Expansion of our diversified financial products line of business
as a result of which we retain premium for a longer duration
than had been the case prior to entering this business.
|
The components of our net operating cash flows are detailed in
the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net earnings
|
|
$
|
395,429
|
|
|
$
|
342,285
|
|
|
$
|
191,192
|
|
Change in premium, claims and other receivables, net of
reinsurance, other payables and restricted cash
|
|
|
(60,671
|
)
|
|
|
(139,906
|
)
|
|
|
(59,717
|
)
|
Change in unearned premium, net
|
|
|
3,062
|
|
|
|
122,571
|
|
|
|
121,242
|
|
Change in loss and loss adjustment expense payable, net of
reinsurance recoverables
|
|
|
342,556
|
|
|
|
328,569
|
|
|
|
454,859
|
|
Change in trading portfolio
|
|
|
9,362
|
|
|
|
(19,919
|
)
|
|
|
(66,809
|
)
|
Other, net
|
|
|
36,698
|
|
|
|
19,788
|
|
|
|
(16,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
726,436
|
|
|
$
|
653,388
|
|
|
$
|
623,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities increased
$73.0 million in 2007 and $29.4 million in 2006. Cash
received from commutations, included in cash provided by
operating activities, totaled $101.0 million,
$12.8 million and $180.8 million in 2007, 2006 and
2005, respectively. Excluding the commutations, cash
54
provided by operating activities decreased $15.2 million in
2007 and increased $197.4 million in 2006. The decrease in
2007 resulted principally from reductions of our loss and loss
adjustment expense payable balances, partially offset by an
increase in net earnings. The increase in 2006 was primarily due
to the increase in net earnings and activity in our trading
portfolio.
Investments
At December 31, 2007, we had $4.7 billion of
investment assets, an increase of $744.3 million from the
end of 2006. The increase resulted from strong operating cash
flows. The majority of our investment assets are held by our
insurance companies. We held $3.7 billion of fixed income
securities, all of which are classified as available for sale
and recorded at market value. The fair value of these fixed
income securities and the related investment income fluctuate
depending on general economic and market conditions, including
the recent downturn in the market due to subprime issues. In
2007 and continuing into 2008, the credit markets have been
severely affected by various events. Although this has affected
interest rates and caused other companies to record large
write-downs of their investments, we have had no realized
impairment losses on our fixed income securities.
Our investment policy is determined by our Board of Directors
and our Investment and Finance Committee and is reviewed on a
regular basis. Our policy for each of our insurance company
subsidiaries must comply with applicable state and Federal
regulations which prescribe the type, quality and concentration
of investments. These regulations permit investments, within
specified limits and subject to certain qualifications, in
federal, state and municipal obligations, obligations of foreign
countries, corporate bonds and preferred and common equity
securities. The regulations generally allow certain other types
of investments subject to maximum limitations.
We engage independent investment advisors to oversee our fixed
income investments and to make investment recommendations. We
invest our funds principally in highly-rated fixed income
securities. Our historical investment strategy is to maximize
interest income and yield, rather than to maximize total return.
In accordance with our strategy, realized gains and losses from
sales of investment securities are usually minimal, unless we
decide to capture gains to enhance statutory capital and surplus
of our insurance company subsidiaries. Although we generally
intend to hold fixed income securities to maturity, we regularly
re-evaluate our position based on market conditions. Our
portfolio turnover will fluctuate, depending upon opportunities
to increase yields by replacing one security with another higher
yielding security.
At December 31, 2007, we had cash and short-term
investments of $822.8 million, of which $586.9 million
was held by our insurance companies. We maintain cash and liquid
short-term instruments in our insurance companies in order to be
able to fund losses of our insureds. Cash and short-term
investments were higher than normal at December 31, 2007
due to proceeds from the sale of fixed income securities that
hedged certain foreign currency denominated liabilities and, at
December 31, 2006, due to proceeds from the liquidation of
our trading portfolio.
This table shows a profile of our fixed income and short-term
investments. The table shows the average amount of investments,
income earned and the yield thereon.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Average investments, at cost
|
|
$
|
4,214,798
|
|
|
$
|
3,529,671
|
|
|
$
|
2,822,686
|
|
Net investment income*
|
|
|
206,462
|
|
|
|
152,804
|
|
|
|
98,851
|
|
Average short-term yield*
|
|
|
5.2
|
%
|
|
|
4.5
|
%
|
|
|
2.7
|
%
|
Average long-term yield*
|
|
|
4.5
|
%
|
|
|
4.4
|
%
|
|
|
4.0
|
%
|
Average long-term tax equivalent yield*
|
|
|
5.4
|
%
|
|
|
5.2
|
%
|
|
|
4.9
|
%
|
Weighted average combined tax equivalent yield*
|
|
|
5.6
|
%
|
|
|
5.0
|
%
|
|
|
4.1
|
%
|
Weighted average maturity
|
|
|
7.0 years
|
|
|
|
6.9 years
|
|
|
|
7.6 years
|
|
Weighted average duration
|
|
|
4.9 years
|
|
|
|
4.6 years
|
|
|
|
4.9 years
|
|
Average S&P rating
|
|
|
AAA
|
|
|
|
AAA
|
|
|
|
AAA
|
|
|
|
|
* |
|
Excluding realized and unrealized investment gains and losses. |
55
This table summarizes our investments by type, substantially all
of which are reported at fair value, at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
|
Short-term investments
|
|
$
|
783,650
|
|
|
|
17
|
%
|
U.S. government
|
|
|
163,583
|
|
|
|
4
|
|
States, municipalities and political subdivisions
|
|
|
724,305
|
|
|
|
16
|
|
Special revenue fixed income securities
|
|
|
1,097,976
|
|
|
|
23
|
|
Corporate fixed income securities
|
|
|
297,568
|
|
|
|
6
|
|
Asset-backed and mortgage-backed securities
|
|
|
1,009,692
|
|
|
|
22
|
|
Foreign securities
|
|
|
373,581
|
|
|
|
8
|
|
Other investments
|
|
|
221,922
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
4,672,277
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, we held subprime-related securities
with a fair value of $17.8 million, which represented 1.8%
of our asset-backed and mortgage-backed securities portfolio and
0.5% of our total fixed income securities portfolio. Our
subprime-related securities had a total unrealized loss of
$0.6 million at December 31, 2007, and none had an
other-than-temporary impairment. The average rating on these
bonds was AAA, and all bonds were current as to principal and
interest. We had no realized losses from sales of our
subprime-related securities during 2007 or through
February 15, 2008. We owned no collateralized debt
obligations, collateralized loan obligations or auction rate
securities at December 31, 2007.
This table summarizes, by rating, the fair value of our
investments in fixed income securities at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
|
AAA
|
|
$
|
2,971,589
|
|
|
|
81
|
%
|
AA
|
|
|
420,842
|
|
|
|
11
|
|
A
|
|
|
243,774
|
|
|
|
7
|
|
BBB
|
|
|
30,107
|
|
|
|
1
|
|
BB and below
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
3,666,705
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
This table indicates the expected maturity distribution of the
fair value of our fixed income securities at December 31,
2007.
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
%
|
|
|
One year or less
|
|
$
|
179,763
|
|
|
|
5
|
%
|
One year to five years
|
|
|
759,231
|
|
|
|
21
|
|
Five years to ten years
|
|
|
682,303
|
|
|
|
19
|
|
Ten years to fifteen years
|
|
|
502,752
|
|
|
|
14
|
|
More than fifteen years
|
|
|
532,964
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Securities with fixed maturities
|
|
|
2,657,013
|
|
|
|
73
|
|
Asset-backed and mortgage-backed securities
|
|
|
1,009,692
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
3,666,705
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The weighted average life of our asset-backed and
mortgage-backed securities is 5.6 years.
The fair value of our fixed income securities is sensitive to
changing interest rates. As interest rates increase, the fair
value will generally decrease and as rates decrease, the fair
value will generally increase. The fluctuations in fair value
are somewhat muted by the relatively short duration of our
portfolio and our
56
relatively high level of investments in state and municipal
obligations. During 2007, the net pre-tax unrealized gain on our
fixed income securities increased $26.7 million due to
market value changes resulting from interest rate changes. We
estimate that a 1% increase (e.g. from 5% to 6%) in market
interest rates would decrease the fair value of our fixed income
securities by approximately $179.7 million and a 1%
decrease in market interest rates would increase the fair value
by a like amount. Fluctuations in interest rates have a minimal
effect on the value of our short-term investments due to their
very short maturities. In our current position, higher interest
rates would have a positive effect on net earnings.
Some of our fixed income securities have call or prepayment
options. In addition, mortgage-backed and certain asset-backed
securities have prepayment or other market-related credit risk.
Prepayment risk exists if the timing of cash flows that result
from the repayment of principal might occur earlier than
anticipated because of declining interest rates or later than
anticipated because of rising interest rates. Credit risk exists
if mortgagees default on the underlying mortgages. Net
investment income
and/or cash
flows from investments that carry call or prepayment options and
prepayment or credit risk may differ from those anticipated at
the time of investment. Calls and prepayments subject us to
reinvestment risk should interest rates fall or issuers call
their securities and we reinvest the proceeds at lower interest
rates. For asset-backed and mortgage-backed securities,
prepayment or credit risk could reduce the yield or the return
of the remaining principal of these securities. We mitigate this
risk by investing in investment grade securities with varied
maturity dates, so that only a portion of our portfolio will
mature at any point in time.
The average duration of claims in many of our lines of business
is relatively short and, accordingly, our investment portfolio
has a relatively short duration. In recent years, we have
expanded the directors and officers liability and
professional indemnity components of our diversified financial
products line of business, which have a longer claims duration
than our other lines of business. We are taking these changes
into consideration in determining the duration of our investment
portfolio.
The following table compares our insurance company
subsidiaries cash and investment maturities with their
estimated future claims payments at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities/Estimated Payment Dates
|
|
|
|
Total
|
|
|
2008
|
|
|
2009-2010
|
|
|
2011-2012
|
|
|
Thereafter
|
|
|
Cash and investment maturities of insurance companies
|
|
$
|
4,463,560
|
|
|
$
|
978,950
|
|
|
$
|
610,523
|
|
|
$
|
556,154
|
|
|
$
|
2,317,933
|
|
Estimated loss and loss adjustment expense payments, net of
reinsurance
|
|
|
2,342,800
|
|
|
|
839,689
|
|
|
|
769,576
|
|
|
|
368,712
|
|
|
|
364,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated available cash flow
|
|
$
|
2,120,760
|
|
|
$
|
139,261
|
|
|
$
|
(159,053
|
)
|
|
$
|
187,442
|
|
|
$
|
1,953,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We maintain sufficient liquidity from our current cash and
investment maturities, in combination with future operating cash
flow, to pay anticipated policyholder claims on their expected
payment dates. We manage the liquidity of our insurance company
subsidiaries such that each subsidiarys anticipated claims
payments will be met by its own current operating cash flows,
cash, short-term investments or investment maturities. We do not
foresee the need to sell securities prior to their maturity to
fund claims payments, nor do we anticipate needing to use our
$575.0 million Revolving Loan Facility to pay claims.
However, this credit facility can provide additional short-term
liquidity if an unexpected event were to occur.
57
Contractual
Obligations
The following table presents a summary of our total contractual
cash payment obligations by estimated payment date at
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Payment Dates
|
|
|
|
Total
|
|
|
2008
|
|
|
2009-2010
|
|
|
2011-2012
|
|
|
Thereafter
|
|
|
Gross loss and loss adjustment expense payable(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products
|
|
$
|
1,486,047
|
|
|
$
|
384,260
|
|
|
$
|
607,690
|
|
|
$
|
322,950
|
|
|
$
|
171,147
|
|
Group life, accident and health
|
|
|
351,883
|
|
|
|
292,305
|
|
|
|
48,522
|
|
|
|
8,530
|
|
|
|
2,526
|
|
Aviation
|
|
|
169,754
|
|
|
|
76,890
|
|
|
|
60,030
|
|
|
|
19,361
|
|
|
|
13,473
|
|
London market account
|
|
|
377,316
|
|
|
|
164,019
|
|
|
|
150,484
|
|
|
|
51,425
|
|
|
|
11,388
|
|
Other specialty lines
|
|
|
342,810
|
|
|
|
115,053
|
|
|
|
139,199
|
|
|
|
57,108
|
|
|
|
31,450
|
|
Discontinued lines
|
|
|
499,270
|
|
|
|
101,142
|
|
|
|
112,364
|
|
|
|
59,539
|
|
|
|
226,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense payable
|
|
|
3,227,080
|
|
|
|
1,133,669
|
|
|
|
1,118,289
|
|
|
|
518,913
|
|
|
|
456,209
|
|
Life and annuity policy benefits
|
|
|
66,199
|
|
|
|
2,350
|
|
|
|
4,451
|
|
|
|
4,138
|
|
|
|
55,260
|
|
1.30% Convertible Notes(2)
|
|
|
127,146
|
|
|
|
1,621
|
|
|
|
125,525
|
|
|
|
|
|
|
|
|
|
$575.0 million Revolving Loan Facility(3)
|
|
|
237,841
|
|
|
|
9,200
|
|
|
|
18,941
|
|
|
|
209,700
|
|
|
|
|
|
Operating leases
|
|
|
73,715
|
|
|
|
12,499
|
|
|
|
22,967
|
|
|
|
15,853
|
|
|
|
22,396
|
|
Earnout liabilities
|
|
|
31,713
|
|
|
|
29,028
|
|
|
|
2,685
|
|
|
|
|
|
|
|
|
|
Indemnifications
|
|
|
26,698
|
|
|
|
6,473
|
|
|
|
10,852
|
|
|
|
6,248
|
|
|
|
3,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$
|
3,790,392
|
|
|
$
|
1,194,840
|
|
|
$
|
1,303,710
|
|
|
$
|
754,852
|
|
|
$
|
536,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In preparing the previous table, we made the following estimates
and assumptions.
|
|
|
(1) |
|
The estimated loss and loss adjustment expense payments for
future periods assume that the percentage of ultimate losses
paid from one period to the next will be relatively consistent
over time. Actual payments will be influenced by many factors
and could vary from the estimated amounts above. |
|
(2) |
|
The 1.30% Convertible Notes mature in 2023, but are shown
in the 2009 - 2010 column since the holders may require us to
repurchase the Notes on April 1, 2009. The Notes have
various put and redemption dates as disclosed in Note 6 to
the Consolidated Financial Statements. Amounts include interest
payable in respective periods. |
|
(3) |
|
The $575.0 million Revolving Loan Facility expires on
December 19, 2011. Interest on $200.0 million of the
facility is included at an effective fixed rate of 4.6% through
November 2009 due to interest rate swaps. Interest on the
remaining facility is included at LIBOR plus 25 basis
points (4.85% at December 31, 2007). |
Our acquisition of HCC Global Financial Products, LLC (HCC
Global) included a contingency for earnout payments based on
earnings after the acquisition date, as defined in the purchase
agreement. When the conditions for accrual have been satisfied
under the applicable purchase agreement, we record a liability
to the former owners with an offsetting increase to goodwill.
Accrued amounts are generally paid in the next year. At
December 31, 2007, we accrued earnout payments totaling
$31.7 million related to this acquisition. The purchase
agreement for HCC Global requires us to pay an earnout based on
pre-tax earnings on business underwritten by HCC Global from the
acquisition date through September 30, 2007, with no
maximum amount due to the former owners. The contractual pre-tax
earnings include underwriting results on longer-duration
business written by HCC Global and, per the agreement, the
earnout cannot be finally determined until all future losses are
paid.
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
58
to perform under the sales contracts. Other indemnifications
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 on December 31, 2009.
We accrue a loss related to our indemnifications when a valid
claim is made by a buyer and we believe we have potential
exposure. We currently have several claims under
indemnifications that cover certain net losses alleged to have
been incurred in periods prior to our sale of certain
subsidiaries or otherwise alleged to be covered under
indemnification agreements related to such sales. As of
December 31, 2007, we have recorded a liability of
$14.8 million and have provided $5.2 million of
letters of credit to cover our obligations or anticipated
payments under these indemnifications.
Pursuant to our by-laws, Delaware Corporate law and certain
contractual agreements, we are required to advance
attorneys fees and other expenses and indemnify our
current and former directors and officers for liabilities
arising from any action, suit or proceeding brought because the
individual was acting as an officer or director of our company.
Under certain limited circumstances, the individual may be
required to reimburse us for any advances or indemnification
payments made by us. In addition, we maintain directors
and officers liability insurance, which may cover certain
of these costs. We expense payments as advanced and recognize
offsets if cash reimbursement is expected or received. It is not
possible to determine the maximum potential impact on our future
consolidated net earnings of any such indemnification costs,
since our by-laws, Delaware law and our contractual agreements
do not limit any such advances or indemnification payments.
Subsidiary
Dividends
The principal assets of HCC are the shares of capital stock of
its insurance company subsidiaries. Historically, we have not
relied on dividends from our insurance companies to meet the
parent holding companys obligations, which are primarily
outstanding debt and debt service obligations, dividends to
shareholders and corporate expenses, since we have had
sufficient cash flow from our agencies and reinsurance brokers
to meet our corporate cash flow requirements. However, as more
profit is now expected to be earned in our insurance companies,
we may have to partially depend on cash flow from our insurance
companies in the future.
The payment of dividends by our insurance companies is subject
to regulatory restrictions and will depend on the surplus and
future earnings of these subsidiaries. HCCs direct
domestic insurance company subsidiaries can pay an aggregate of
$160.8 million in dividends in 2008 without obtaining
special permission from state regulatory authorities. In 2007,
2006 and 2005, our insurance company subsidiaries paid HCC
dividends of $22.6 million, $44.0 million and
$50.0 million, respectively. The 2005 dividends were then
contributed to another insurance company subsidiary.
Lines
of Credit
Our $575.0 million Revolving Loan Facility allows us to
borrow up to the maximum allowed by the facility on a revolving
basis until the facility expires on December 19, 2011. At
our option, subject to the lenders ability to obtain the
necessary commitments, the amount available under the facility
may be increased to $700.0 million. The interest rate is
LIBOR plus a margin of 15 to 50 basis points, depending on our
debt rating. The facility is collateralized by guarantees
entered into by our domestic underwriting agencies and
reinsurance brokers. The facility agreement contains certain
restrictive covenants, which we believe are typical for similar
financing arrangements. We had $200.0 million outstanding
at December 31, 2007, which we borrowed in 2007 to fund
conversion of our 2.00% Convertible Exchange Notes. At
December 31, 2007, the contractual interest rate on the
outstanding balance was LIBOR plus 25 basis points (4.85%), but
the effective interest rate was 4.6% due to the fixed interest
rate swaps discussed below.
In 2007, we entered into three interest rate swap agreements to
exchange LIBOR (4.6% at December 31, 2007) for a 4.6%
fixed rate on the $200.0 million outstanding balance of our
Revolving Loan Facility. The swaps mature in November 2009 and
qualify for cash flow hedge accounting treatment.
59
In 2007, we increased our Standby Letter of Credit Facility from
$34.0 million to $52.0 million with an increase to
$82.0 million in 2008. This facility was entered into in
2006 to replace a portion of our funds at Lloyds of London
with standby letters of credit to guarantee our performance in
two Lloyds of London syndicates. Letters of credit issued
under the Standby Letter of Credit Facility are unsecured
commitments of HCC. The Standby Letter of Credit Facility
contains standard restrictive covenants similar to our Revolving
Loan Facility.
At December 31, 2007, certain of our subsidiaries
maintained revolving lines of credit with a bank in the combined
maximum amount of $43.3 million available through
November 30, 2009. Advances under the lines of credit are
limited to amounts required to fund draws, if any, on letters of
credit issued by the bank on behalf of the subsidiaries and
short-term direct cash advances. The lines of credit are
collateralized by securities having an aggregate market value of
up to $54.1 million, the actual amount of collateral at any
one time being 125% of the aggregate amount outstanding.
Interest on the lines is payable at the banks prime rate
of interest (7.25% at December 31, 2007) for draws on
the letters of credit and either prime or prime less 1% on
short-term cash advances. At December 31, 2007, letters of
credit totaling $20.5 million had been issued to insurance
companies by the bank on behalf of our subsidiaries, with total
securities of $25.6 million collateralizing the lines.
Other
Our debt to total capital ratio was 11.7% at December 31,
2007 and 13.1% at December 31, 2006.
In 2006, we filed a Universal Shelf registration
statement with the SEC, which replaced our previously filed
shelf registration and provides for the issuance of an aggregate
of $1.0 billion of our securities. These securities may be
debt securities, equity securities, trust preferred securities,
or a combination thereof. We sold 4.7 million shares of our
common stock at $32.05 per share in 2005 under our previous
shelf registration. Net proceeds of $150.0 million in 2005
were used to make $108.0 million of capital contributions
to our insurance company subsidiaries and to fund acquisitions.
We believe that our operating cash flows, investments, Revolving
Loan Facility, Standby Letter of Credit Facility, shelf
registration and other sources of liquidity are sufficient to
meet our operating needs for the foreseeable future.
Impact of
Inflation
Our operations, like those of other property and casualty
insurers, are susceptible to the effects of inflation because
premiums are established before the ultimate amounts of loss and
loss adjustment expense are known. Although we consider the
potential effects of inflation when setting premium rates, our
premiums, for competitive reasons, may not fully offset the
effects of inflation. However, because the majority of our
business is comprised of lines that have relatively short lead
times between the occurrence of an insured event, reporting of
the claims to us and the final settlement of the claims, or have
claims that are not significantly impacted by inflation, the
effects of inflation are minimized.
A portion of our revenue is related to healthcare insurance and
reinsurance products that are subject to the effects of the
underlying inflation of healthcare costs. Such inflation in the
costs of healthcare tends to generate increases in premiums for
medical stop-loss coverage, resulting in greater revenue but
also higher claim payments. Inflation also may have a negative
impact on insurance and reinsurance operations by causing higher
claim settlements than may originally have been estimated,
without an immediate increase in premiums to a level necessary
to maintain profit margins. We do not specifically provide for
inflation when setting underwriting terms and claim reserves,
although we do consider trends. We continually review claim
reserves to assess their adequacy and make necessary adjustments.
Inflation can also affect interest rates. Any
significant increase in interest rates could have a material
adverse effect on the fair value of our investments. In
addition, the interest rate payable under our Revolving Loan
Facility fluctuates with market interest rates. Any significant
increase in interest rates could have a material adverse effect
on our net earnings, depending on the unhedged amount borrowed
on that facility. We
60
have entered into interest rate swap agreements that fix the
interest rate on the $200.0 million outstanding balance of
our Revolving Loan Facility at 4.6% through November 2009.
Foreign
Exchange Rate Fluctuations
We underwrite risks that are denominated in a number of foreign
currencies. As a result, we have receivables and payables in
foreign currencies and we establish and maintain loss reserves
with respect to our insurance policies in their respective
currencies. There could be a negative impact on our net earnings
from the effect of exchange rate fluctuations on these assets
and liabilities. Our principal area of exposure is related to
fluctuations in the exchange rates between the British pound
sterling, the Euro and the U.S. dollar. We constantly
monitor the balance between our receivables and payables and
loss reserves to mitigate the potential exposure should an
imbalance be expected to exist for other than a short period of
time. Imbalances are generally net liabilities, and we hedge
such imbalances with cash and short-term investments denominated
in the same foreign currency as the net imbalance. Our loss from
currency conversion, excluding a $13.4 million charge, was
$1.8 million in 2007 compared to zero in 2006 and
$1.0 million in 2005. This charge was to correct the
accounting for unrealized cumulative foreign exchange gains
related to certain available for sale securities discussed
previously. This loss was offset by a $13.4 million
realized gain for embedded net foreign currency exchange gains
when the securities were sold in 2007.
Critical
Accounting Policies
The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America (generally accepted accounting
principles) requires us to make estimates and assumptions when
applying our accounting policies. The following sections provide
information about our estimation processes related to certain of
our critical accounting policies.
Loss
and Loss Adjustment Expense
Our net loss and loss adjustment expense reserves are composed
of reserves for reported losses and reserves for incurred but
not reported losses, less a reduction for reinsurance
recoverables related to those reserves. Reserves are recorded by
product line and are undiscounted, except for reserves related
to acquisitions.
The process of estimating our loss and loss adjustment expense
reserves involves a considerable degree of judgment by
management and is inherently uncertain. The recorded reserves
represent managements best estimate of unpaid loss and
loss adjustment expense by line of business. Because we provide
insurance coverage in specialized lines of business that often
lack statistical stability, management considers many factors,
and not just the actuarial point estimates discussed below, in
determining ultimate expected losses and the level of net
reserves required and recorded.
To record reserves on our lines of business, we utilize expected
loss ratios, which management selects based on the following:
1) information used to price the applicable policies,
2) historical loss information where available, 3) any
public industry data for that line or similar lines of business
and 4) an assessment of current market conditions.
Management also considers the point estimates and ranges
calculated by our actuaries, together with input from our
experienced underwriting and claims personnel. Because of the
nature and complexities of the specialized types of business we
insure, management may give greater weight to the expectations
of our underwriting and claims personnel, who often perform a
claim by claim review, rather than to the actuarial estimates.
However, we utilize the actuarial point and range estimates to
monitor the adequacy and reasonableness of our recorded reserves.
Each quarter-end, management compares recorded reserves to the
most recent actuarial point estimate and range for each line of
business. If the recorded reserves vary significantly from the
actuarial point estimate, management determines the reasons for
the variances and may adjust the reserves up or down to an
amount that, in managements judgment, is adequate based on
all of the facts and circumstances considered, including the
actuarial point estimates. We consistently maintain total
consolidated net reserves above the total actuarial point
estimate but within the actuarial range.
61
The table below shows our recorded net reserves at
December 31, 2007 by line of business, the actuarial
reserve point estimates, and the high and low ends of the
actuarial reserve range as determined by our reserving actuaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
Actuarial
|
|
|
Low End of
|
|
|
High End of
|
|
|
|
Net Reserves
|
|
|
Point Estimate
|
|
|
Actuarial Range
|
|
|
Actuarial Range
|
|
|
Total net reserves
|
|
$
|
2,342,800
|
|
|
$
|
2,248,305
|
|
|
$
|
2,094,693
|
|
|
$
|
2,467,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual lines of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products
|
|
$
|
1,038,444
|
|
|
$
|
991,359
|
|
|
$
|
850,959
|
|
|
$
|
1,175,578
|
|
Group life, accident and health
|
|
|
330,603
|
|
|
|
320,360
|
|
|
|
290,854
|
|
|
|
352,117
|
|
Aviation
|
|
|
104,885
|
|
|
|
101,016
|
|
|
|
93,322
|
|
|
|
110,314
|
|
London market account
|
|
|
209,885
|
|
|
|
199,111
|
|
|
|
189,156
|
|
|
|
224,939
|
|
Other specialty lines
|
|
|
226,669
|
|
|
|
213,238
|
|
|
|
201,718
|
|
|
|
241,312
|
|
Discontinued lines
|
|
|
432,314
|
|
|
|
423,221
|
|
|
|
371,976
|
|
|
|
510,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net reserves
|
|
$
|
2,342,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The excess of the total recorded net reserves over the actuarial
point estimate was 4.2% of recorded net reserves at
December 31, 2007 compared to 2.2% at December 31,
2006. The percentage will vary in total and by line depending on
current economic events, the potential volatility of the line,
the severity of claims reported and of claims incurred but not
reported, managements judgment with respect to the risk of
development, the nature of business acquired in acquisitions and
historical development patterns.
The actuarial point estimates represent our actuaries
estimate of the most likely amount that will ultimately be paid
to settle the net reserves we have recorded at a particular
point in time. While, from an actuarial standpoint, a point
estimate is considered the most likely amount to be paid, there
is inherent uncertainty in the point estimate, and it can be
thought of as the expected value in a distribution of possible
reserve estimates. The actuarial ranges represent our
actuaries estimate of a likely lowest amount and highest
amount that will ultimately be paid to settle the net reserves
we have recorded at a particular point in time. While there is
still a possibility of ultimately paying an amount below the
range or above the range, the actuarial probability is very
small. The range determinations are based on estimates and
actuarial judgments and are intended to encompass reasonably
likely changes in one or more of the variables that were used to
determine the point estimates.
The low end of the actuarial range and the high end of the
actuarial range for the total net reserves will not equal the
sum of the low and high ends for the individual lines of
business. Moreover, in actuarial terms, it would not be
appropriate to add the ranges for each line of business to
obtain a range around the total net reserves because this would
not reflect the diversification effects across our various lines
of business. The diversification effects result from the fact
that losses across the different lines of business are not
completely correlated.
In actuarial practice, some of our lines of business are more
effectively modeled by a statistical distribution that is skewed
or non-symmetric. These distributions are usually skewed towards
large losses, which causes the midpoint of the range to be above
the actuarial point estimate or mean value of the range. This
should be kept in mind when using the midpoint as a proxy for
the mean. Our assumptions, estimates and judgments can change
based on new information and changes in conditions and, if they
change, it will affect the determination of the range amounts.
62
The following table details, by major products within our lines
of business, the characteristics and major actuarial assumptions
utilized by our actuaries in the determination of actuarial
point estimates and ranges. We considered all major lines of
business written by the insurance industry when determining the
relative characteristics of claims duration, speed of loss
reporting and reserve volatility. Other companies may classify
their own insurance products in different lines of business or
utilize different actuarial assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
|
|
|
|
|
|
|
|
|
|
|
Characteristics
|
|
|
|
|
|
|
|
|
|
|
|
|
Speed of
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim
|
|
Reserve
|
|
Major Actuarial
|
Line of Business
|
|
Products
|
|
Underwriting
|
|
Duration
|
|
Reporting
|
|
Volatility
|
|
Assumptions
|
|
Diversified financial products
|
|
Directors and
officers liability
|
|
Direct and
subscription
|
|
Medium to
long
|
|
Moderate
|
|
Medium to
high
|
|
Historical and industry loss reporting patterns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional indemnity
|
|
Direct
|
|
Medium
|
|
Moderate
|
|
Medium
|
|
Historical loss reporting patterns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surety
|
|
Direct
|
|
Medium
|
|
Fast
|
|
Low
|
|
Historical loss payment and reporting patterns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group life, accident and health
|
|
Medical stop-loss
|
|
Direct
|
|
Short
|
|
Fast
|
|
Low
|
|
Medical cost and utilization trends
Historical loss payment and reporting patterns
Rate changes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical excess
|
|
Direct and
assumed
|
|
Short
|
|
Fast
|
|
Low to
medium
|
|
Historical loss payment and reporting patterns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation
|
|
Aviation
|
|
Direct and
subscription
|
|
Medium
|
|
Fast
|
|
Medium
|
|
Historical loss payment and reporting patterns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
London market account
|
|
Accident and health
|
|
Direct and
assumed
|
|
Medium to
long
|
|
Slow
|
|
High
|
|
Historical loss payment and reporting patterns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy*
|
|
Subscription
|
|
Medium
|
|
Moderate
|
|
Medium
|
|
Historical and industry loss payment and reporting patterns
Historical large loss experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property*
|
|
Subscription
|
|
Medium
|
|
Moderate
|
|
Medium
|
|
Historical loss payment and reporting patterns
Historical large loss experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
Subscription
|
|
Medium
|
|
Moderate
|
|
Medium
|
|
Historical loss payment and reporting patterns
Historical large loss experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other specialty
|
|
Liability
|
|
Direct and
assumed
|
|
Medium
|
|
Moderate
|
|
Medium
|
|
Historical loss payment and reporting patterns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
Direct and
assumed
|
|
Short
|
|
Fast
|
|
Low
|
|
Historical loss payment and reporting patterns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
|
|
Accident and health
reinsurance
|
|
Assumed
|
|
Long
|
|
Slow
|
|
High
|
|
Historical and industry loss payment and reporting patterns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical malpractice
|
|
Direct
|
|
Medium to
long
|
|
Moderate
|
|
Medium to
high
|
|
Historical loss payment and reporting patterns
|
|
|
|
* |
|
Includes catastrophe losses |
63
Direct insurance is coverage that is originated by our insurance
companies and brokers in return for premium. Assumed reinsurance
is coverage written by another insurance company, for which we
assume all or a portion of the risk in exchange for all or a
portion of the premium. Subscription business is direct
insurance or assumed reinsurance where we only take a percentage
of the total risk and premium and other insurers take their
proportionate percentage of the remaining risk and premium.
Assumed reinsurance represented 18% of our gross written premium
in 2007 and 28% of our gross reserves at December 31, 2007.
Approximately 39% of the assumed reinsurance reserves related to
business in our discontinued lines, 30% related to assumed
reinsurance in our London market account, aviation and
diversified financial products lines of business, 13% related to
assumed quota share surplus lines business in our other
specialty lines, 9% related to assumed business in our group
life, accident and health line of business, and 9% related
Lloyds of London business in our other specialty lines.
The remaining assumed reinsurance reserves covered various other
reinsurance programs. The table above recaps the underwriting,
claims characteristics and major actuarial assumptions for our
assumed reinsurance business.
The run-off assumed accident and health reinsurance business is
primarily reinsurance that provides excess coverage for large
losses related to workers compensation policies. As
discussed previously, we recorded significant increases in
assumed reserves in 2003, 2004 and 2005. These losses resulted
from late reporting of claims by cedants and state guaranty
associations and changes in our actuarial assumptions related to
this business. To mitigate our exposure to unexpected losses
reported by cedants, our claims personnel review reported losses
to ensure they are reasonable and consistent with our
expectations. In addition, our claims personnel periodically
audit the cedants claims processing functions to assess
whether cedants are submitting timely and accurate claims
reports to us. Disputes with insureds related to claims or
coverage issues are administered in the normal course of
business or settled through arbitration. Based on the negative
factors we experienced and the higher risk of this discontinued
line of business relative to our continuing lines of business,
management believes there may be a greater likelihood of future
adverse development in the run-off assumed accident and health
reinsurance business than in our other lines of business. We
periodically reassess loss reserves for this assumed business
and adjust them, if needed.
Our assumed quota share surplus lines business in our other
specialty lines is recorded monthly with a two-month time lag.
Case reserves are reported directly to us by the cedant, and we
establish incurred but not reported reserves based on our
estimates. We periodically contact and visit the cedant to
discuss loss trends and review claim files. We also receive
copies of the cedants loss triangles on individual
products. Because of the frequent communication, we receive
sufficient information to use many of the same methods and
assumptions we would use to set reserves for comparable direct
business. We have not had any disputes with the cedant.
The majority of the assumed reinsurance in our London market
account, aviation and diversified financial products lines of
business is facultative reinsurance. This business involves
reinsurance of a companys entire captive insurance program
or business that must be written through another insurance
company licensed to write insurance in a particular country or
locality. In all cases, we underwrite the business and
administer the claims, which are reported without a lag by the
brokers. Disputes, if any, generally relate to claims or
coverage issues with insureds and are administered in the normal
course of business. We establish loss reserves for this assumed
reinsurance using the same methods and assumptions we use to set
reserves for comparable direct business.
The majority of the assumed reinsurance in our group life,
accident and health line of business is due to medical excess
products in our Health Products Division. Although very similar
to our direct medical stop-loss business, it is written as
excess reinsurance of HMOs, provider groups, hospitals and other
insurance companies. Our Lloyds of London business is
reported as reinsurance. We underwrite the assumed group life,
accident and health and Lloyds of London business and
administer the claims. Disputes, if any, are administered in the
normal course of business. We establish loss reserves for this
business using the same methods and assumptions we would use to
set reserves for comparable direct business.
64
The following tables show the composition of our gross, ceded
and net reserves at the respective balance sheet dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Net
|
|
|
|
|
|
|
|
|
|
|
|
|
IBNR to
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Total
|
|
|
|
Gross
|
|
|
Ceded
|
|
|
Net
|
|
|
Reserves
|
|
|
At December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported loss reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products
|
|
$
|
593,378
|
|
|
$
|
187,256
|
|
|
$
|
406,122
|
|
|
|
|
|
Group life, accident and health
|
|
|
194,670
|
|
|
|
2,244
|
|
|
|
192,426
|
|
|
|
|
|
Aviation
|
|
|
116,983
|
|
|
|
44,219
|
|
|
|
72,764
|
|
|
|
|
|
London market account
|
|
|
242,918
|
|
|
|
134,658
|
|
|
|
108,260
|
|
|
|
|
|
Other specialty lines
|
|
|
131,012
|
|
|
|
45,672
|
|
|
|
85,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal reported reserves
|
|
|
1,278,961
|
|
|
|
414,049
|
|
|
|
864,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred but not reported reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products
|
|
|
892,669
|
|
|
|
260,347
|
|
|
|
632,322
|
|
|
|
61
|
%
|
Group life, accident and health
|
|
|
157,213
|
|
|
|
19,036
|
|
|
|
138,177
|
|
|
|
42
|
|
Aviation
|
|
|
52,771
|
|
|
|
20,650
|
|
|
|
32,121
|
|
|
|
31
|
|
London market account
|
|
|
134,398
|
|
|
|
32,773
|
|
|
|
101,625
|
|
|
|
48
|
|
Other specialty lines
|
|
|
211,798
|
|
|
|
70,469
|
|
|
|
141,329
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal incurred but not reported reserves
|
|
|
1,448,849
|
|
|
|
403,275
|
|
|
|
1,045,574
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued lines reported reserves
|
|
|
335,177
|
|
|
|
44,141
|
|
|
|
291,036
|
|
|
|
|
|
Discontinued lines incurred but not reported reserves
|
|
|
164,093
|
|
|
|
22,815
|
|
|
|
141,278
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense payable
|
|
$
|
3,227,080
|
|
|
$
|
884,280
|
|
|
$
|
2,342,800
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported loss reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products
|
|
$
|
507,739
|
|
|
$
|
177,274
|
|
|
$
|
330,465
|
|
|
|
|
|
Group life, accident and health
|
|
|
156,058
|
|
|
|
1,627
|
|
|
|
154,431
|
|
|
|
|
|
Aviation
|
|
|
108,851
|
|
|
|
39,506
|
|
|
|
69,345
|
|
|
|
|
|
London market account
|
|
|
311,862
|
|
|
|
206,344
|
|
|
|
105,518
|
|
|
|
|
|
Other specialty lines
|
|
|
83,105
|
|
|
|
30,231
|
|
|
|
52,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal reported reserves
|
|
|
1,167,615
|
|
|
|
454,982
|
|
|
|
712,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred but not reported reserves:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified financial products
|
|
|
782,571
|
|
|
|
264,400
|
|
|
|
518,171
|
|
|
|
61
|
%
|
Group life, accident and health
|
|
|
176,955
|
|
|
|
14,210
|
|
|
|
162,745
|
|
|
|
51
|
|
Aviation
|
|
|
63,460
|
|
|
|
28,592
|
|
|
|
34,868
|
|
|
|
33
|
|
London market account
|
|
|
142,358
|
|
|
|
42,192
|
|
|
|
100,166
|
|
|
|
49
|
|
Other specialty lines
|
|
|
150,459
|
|
|
|
51,405
|
|
|
|
99,054
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal incurred but not reported reserves
|
|
|
1,315,803
|
|
|
|
400,799
|
|
|
|
915,004
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued lines reported reserves
|
|
|
398,193
|
|
|
|
74,580
|
|
|
|
323,613
|
|
|
|
|
|
Discontinued lines incurred but not reported reserves
|
|
|
215,440
|
|
|
|
57,729
|
|
|
|
157,711
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss and loss adjustment expense payable
|
|
$
|
3,097,051
|
|
|
$
|
988,090
|
|
|
$
|
2,108,961
|
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
We determine our incurred but not reported reserves by first
projecting the ultimate expected losses by product within each
line of business. We then subtract paid losses and reported loss
reserves from the ultimate loss reserves. The remainder is our
incurred but not reported reserves. The level of incurred but
not reported reserves in relation to total reserves depends upon
the characteristics of the specific line of business,
particularly with respect to the speed with which losses are
reported and outstanding claims reserves are adjusted. Lines for
which losses are reported fast will have a lower percentage of
incurred but not reported loss reserves than slower reporting
lines, and lines for which reserve volatility is low will have a
lower percentage of incurred but not reported loss reserves than
high volatility lines.
The reserves for reported losses related to our direct business
and certain reinsurance assumed are initially set by our claims
personnel or independent claims adjusters we retain. The
reserves are subject to our review, with a goal of setting them
at the ultimate expected loss amount as soon as possible when
the information becomes available. Reserves for reported losses
related to other reinsurance assumed are recorded based on
information supplied to us by the ceding company. Our claims
personnel monitor these reinsurance assumed reserves on a
current basis and audit ceding companies claims to
ascertain that claims are being recorded currently and that net
reserves are being set at levels that properly reflect the
liability related to the claims.
The percentage of net incurred but not reported reserves to net
total reserves was 51% at both December 31, 2007 and 2006.
The reasons, by line of business, for changes in net reserves
and the percentage of incurred but not reported reserves to
total net reserves, other than changes related to normal
maturing of claims, follow:
|
|
|
|
|
Diversified financial products Total net reserves in
our diversified financial products line of business increased
$189.8 million from 2006 to 2007 as this relatively new
line of business continues to grow. The incurred but not
reported portion of the total reserves for this line of business
is higher than in most of our other lines, since these losses
report slower and have a longer duration. The percentage will
decrease as the claims start to mature.
|
|
|
|
Group life, accident and health The percentage of
incurred but not reported reserves decreased in 2007 as we
integrated the Health Products Division, acquired in 2006, into
our normal reserving practices. The acquired reserves did not
include a case basis factor similar to our other medical
stop-loss reserves. This refinement caused a reduction in
incurred but not reported reserves and an increase in reported
loss reserves.
|
|
|
|
Other specialty lines Total net reserves increased
$74.7 million due to increased participation and activity
in our Lloyds of London syndicate and more assumed quota
share surplus lines business.
|
|
|
|
Discontinued lines Total net reserves for our
discontinued lines decreased $49.3 million in 2007 as a
result of claims payments.
|
Our net reserves historically have shown favorable development
except for the effects of commutations, which we have completed
in the past and may negotiate in the future. Commutations can
produce adverse prior year development since, under generally
accepted accounting principles, any excess of undiscounted
reserves assumed over assets received must be recorded as a loss
at the time the commutation is completed. Economically, the loss
generally represents the discount for the time value of money
that will be earned over the payout of the reserves; thus, the
loss may be recouped as investment income is earned on the
assets received. Based on our reserving techniques and our past
results, we believe that our net reserves are adequate.
We conducted a detailed review of our loss exposure to current
market events, including subprime issues that have recently
affected credit markets in the United States. In reviewing our
exposure, we considered the types of risks we wrote, the
industry of our insured, attachment points with respect to
excess business, types of coverage, policy limits, actual claims
reported, and current legal interpretations and decisions. Based
on that review and our current knowledge, we believe our losses
with respect to current events will be contained within the
applicable loss reserves that have been recorded for the related
exposures.
66
We have no material exposure to asbestos claims or environmental
pollution losses. Our largest insurance company subsidiary only
began writing business in 1981, and its policies normally
contain pollution exclusion clauses that limit pollution
coverage to sudden and accidental losses only, thus
excluding intentional dumping and seepage claims. Policies
issued by our other insurance company subsidiaries do not have
significant environmental exposures because of the types of
risks covered.
Reinsurance
Recoverables
We limit our liquidity exposure for uncollected recoverables by
holding funds, letters of credit or other security, such that
net balances due from reinsurers are significantly less than the
gross balances shown in our consolidated balance sheets. We
constantly monitor the collectibility of the reinsurance
recoverables of our insurance companies and record a reserve for
uncollectible reinsurance when we determine an amount is
potentially uncollectible. Our evaluation is based on our
periodic reviews of our disputed and aged recoverables, as well
as our assessment of recoverables due from reinsurers known to
be in financial difficulty. In some cases, we make estimates as
to what portion of a recoverable may be uncollectible. Our
estimates and judgment about the collectibility of the
recoverables and the financial condition of reinsurers can
change, and these changes can affect the level of reserve
required.
The reserve was $8.5 million at December 31, 2007,
compared to $14.9 million at December 31, 2006. We
increased the reserve in 2007 by $2.2 million to cover
additional recoverables for which changed conditions caused us
to believe that part or all of the outstanding balances may not
be collectible. We wrote off $8.6 million of uncollectible
balances in 2007. We assessed the collectibility of our year-end
recoverables and believe amounts are collectible and any
potential losses are adequately reserved based on currently
available information.
Deferred
Taxes
We recognize deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and
the tax bases of assets and liabilities. We regularly review our
deferred tax assets for recoverability and establish a valuation
allowance based on our history of earnings, expectations for
future earnings, taxable income in carry back years and the
expected timing of the reversals of existing temporary
differences. Although realization is not assured, we believe
that, as of December 31, 2007, it is more likely than not
that we will be able to realize the benefit of recorded deferred
tax assets, with the exception of certain pre-acquisition tax
loss carryforwards for which valuation allowances have been
provided. If there is a material change in the tax laws such
that the actual effective tax rate changes or the time periods
within which the underlying temporary differences become taxable
or deductible change, we will need to reevaluate our
assumptions, which could result in a change in the valuation
allowance required.
Valuation
of Goodwill
We assess the impairment of goodwill annually, or sooner if an
event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying
amount. In determining the fair value of a reporting unit, we
utilize the expected cash flow approach in Statement of
Financial Accounting Concepts No. 7, Using Cash Flow
Information and Present Values in Accounting Measurements.
This approach utilizes estimated future cash flows,
probabilities as to occurrence of these cash flows, a risk-free
rate of interest and a risk premium for uncertainty in the cash
flows. We utilize our budgets and projections of future
operations based on historical and expected industry trends to
estimate our future cash flows and the probability of their
occurring as projected. Based on our latest impairment test, the
fair value of each of our reporting units exceeded its carrying
amount by a satisfactory margin.
Other-Than-Temporary
Impairments on Investments
Declines in the market value of invested assets below cost are
evaluated for other-than-temporary impairment losses on a
quarterly basis. Impairment losses for declines in value of
fixed income securities below cost attributable to
issuer-specific events, including recent subprime market issues,
are based on all
67
relevant facts and circumstances for each investment and are
recognized when appropriate. For fixed income securities with
unrealized losses due to market conditions or industry-related
events where we have the positive intent and ability to hold the
investment for a period of time sufficient to allow a market
recovery or to maturity, declines in value below cost are not
assumed to be other-than-temporary. At December 31, 2007,
we had gross unrealized losses on fixed income securities of
$18.3 million (0.5% of aggregate fair value) compared to
$24.3 million (0.8% of aggregate fair value) at
December 31, 2006. We did not have any impairment losses in
2007 or 2006 with respect to these securities.
Recent
Accounting Pronouncements
FIN No. 48, Accounting for Uncertainty in Income
Taxes, became effective January 1, 2007. Under
FIN 48, a company may only recognize the tax benefit from
an uncertain tax position if it is more likely than not the tax
position will be sustained upon examination by the tax
authority. See Note 7 to our Consolidated Financial
Statements for discussion about our adoption of FIN 48.
The FASB has issued SFAS No. 157, Fair Value
Measurements, which clarifies the definition of fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurement. SFAS 157 does not
require any new fair value measurements and eliminates
inconsistencies in guidance found in various prior accounting
pronouncements. The FASB has also issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 allows a company to measure fair
value of eligible financial assets and liabilities that are not
otherwise measured at fair value. Unrealized gains and losses
for those items are reported in current earnings at each
subsequent reporting date. Both SFAS 157 and SFAS 159
are effective January 1, 2008. We do not expect their
adoption to have a material impact on our consolidated financial
statements.
The FASB has issued SFAS No. 141 (revised 2007)
(SFAS 141(R)), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of
Accounting Research Bulletin No. 51. SFAS 141(R)
will change the accounting treatment for business combinations
and will impact presentation of financial statements on the
acquisition date and accounting for acquisitions in subsequent
periods. SFAS 160 will change the accounting and reporting
for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
shareholders equity. SFAS 141(R) and SFAS 160
will be effective January 1, 2009 and early adoption is not
permitted. We are evaluating the impact SFAS 141(R) and
SFAS 160 will have on our consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our principal assets and liabilities are financial instruments
that are subject to the market risk of potential losses from
adverse changes in market rates and prices. Our primary market
risk exposures are interest rate risk on fixed income securities
and variable rate debt and on foreign currency exchange rate
risk.
Caution should be used in evaluating overall market risk
utilizing the information below. Actual results could differ
materially from estimates below for a variety of reasons,
including: 1) amounts and balances on which the estimates
are based are likely to change over time, 2) assumptions
used in the models may prove to be inaccurate, 3) market
changes could be different from market changes assumed below and
4) not all factors and balances are taken into account.
Interest
Rate Risk
To manage the exposures of our investment risks, we generally
invest in investment grade securities with characteristics of
duration and liquidity to reflect the underlying characteristics
of the insurance liabilities of our insurance companies. We have
not used derivatives to manage any of our investment-related
market risks. The value of our portfolio of fixed income
securities is inversely correlated to changes in the market
interest rates. In addition, some of our fixed income securities
have call or prepayment options. This could subject us to
reinvestment risk should interest rates fall or issuers call
their securities and we reinvest the proceeds at lower interest
rates. We attempt to mitigate this risk by investing in
securities with varied maturity dates, so that only a portion of
the portfolio will mature at any point in time.
68
The fair value of our fixed income securities was
$3.7 billion at December 31, 2007 and
$3.0 billion at December 31, 2006. If market interest
rates were to change 1% (e.g. from 5% to 6%), the fair value of
our fixed income securities would have changed approximately
$179.7 million at December 31, 2007. This compares to
a change in fair value of $138.3 million at
December 31, 2006 for the same 1% change in market interest
rates. The change in fair value was determined using duration
modeling assuming no prepayments.
Our $575.0 million Revolving Loan Facility is subject to
variable interest rates. At December 31, 2007, the outstanding
balance of $200.0 million was effectively converted to
fixed rate debt at 4.6% through the use of interest rate swaps.
Our 1.30% Convertible Notes are not subject to interest
rate changes.
Foreign
Exchange Risk
The table below shows the net amounts of significant foreign
currency balances for subsidiaries with a U.S. dollar
functional currency at December 31, 2007 and 2006 converted
to U.S. dollars. It also shows the expected dollar change
in fair value (in thousands) that would occur if exchange rates
changed 10% from exchange rates in effect at those times.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
Hypothetical
|
|
|
|
U.S. Dollar
|
|
|
10% Change
|
|
|
U.S. Dollar
|
|
|
10% Change
|
|
|
|
Equivalent
|
|
|
in Fair Value
|
|
|
Equivalent
|
|
|
in Fair Value
|
|
|
British pound sterling
|
|
$
|
42,340
|
|
|
$
|
4,234
|
|
|
$
|
37,701
|
|
|
$
|
3,770
|
|
Euro
|
|
|
1,041
|
|
|
|
104
|
|
|
|
1,942
|
|
|
|
194
|
|
Canadian dollar
|
|
|
1,355
|
|
|
|
135
|
|
|
|
816
|
|
|
|
82
|
|
See Foreign Exchange Rate Fluctuations section contained in
Item 7, Managements Discussion and Analysis, and
Note 1 in the Notes to Consolidated Financial Statements
for additional information.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The financial statements and financial statement schedules
listed in the accompanying Index to Consolidated Financial
Statements and Schedules are filed as part of this Report.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosures
|
None.
Item 9A. Controls
and Procedures
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 December 31, 2007.
Based on this evaluation, our CEO and CFO concluded that our
disclosure controls and procedures were effective as of
December 31, 2007.
69
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Act. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of
America (generally accepted accounting principles). Internal
control over financial reporting includes those policies and
procedures that: 1) pertain to the maintenance of our
records that, in reasonable detail, accurately and fairly
reflect our transactions and dispositions of our assets,
2) provide reasonable assurance that we have recorded
transactions as necessary to permit us to prepare consolidated
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are
being made only in accordance with authorizations of our
management and Board of Directors and 3) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our consolidated financial
statements.
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over
financial reporting is a process that involves human diligence
and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there
is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk.
Management, including our CEO and CFO, conducted an assessment
of the effectiveness of our internal control over financial
reporting as of December 31, 2007 based on criteria
established in the Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on the results of this assessment, management concluded
that our internal control over financial reporting was effective
as of December 31, 2007 and that the consolidated financial
statements included in this Report present fairly, in all
material respects, our financial position, results of operations
and cash flows for the years presented in accordance with
generally accepted accounting principles.
The effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report, which is included in
Item 8 of this Report.
Changes
in Internal Control Over Financial Reporting
During the fourth quarter of 2007, there were no changes in our
internal control of financial reporting that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other
Information
We have disclosed all information required to be disclosed in a
current report on
Form 8-K
during the fourth quarter of 2007 in previously filed reports on
Form 8-K.
70
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Code of
Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics which
applies to all employees, officers and directors of our company.
The complete text of our Code of Business Conduct and Code of
Ethics is available on our website at www.hcc.com and will be
provided to any person free of charge upon request made to: HCC
Insurance Holdings, Inc., Investor Relations Department, 13403
Northwest Freeway, Houston, Texas 77040. Any amendments to, or
waivers of, the Code of Business Conduct and Ethics which apply
to the Chief Executive Officer and the Senior Financial Officers
will be disclosed on our website.
For information regarding our Directors, Executive Officers and
Corporate Governance, reference is made to our definitive proxy
statement for our Annual Meeting of Shareholders, which will be
filed with the Securities and Exchange Commission within
120 days after December 31, 2007 and which is
incorporated herein by reference.
On May 17, 2007, we filed with the New York Stock Exchange
the Annual CEO Certification regarding our compliance with the
New York Stock Exchanges Corporate Governance listing
standards as required by
Section 303A-12(a)
of the New York Stock Exchange Listed Company Manual. The Annual
CEO Certification was issued without qualification. In addition,
we have filed as exhibits to this Annual Report on
Form 10-K
for the year ended December 31, 2007 and to the Annual
Report on
Form 10-K
for the year ended December 31, 2006, the applicable
certifications of our Chief Executive Officer and our Chief
Financial Officer required under Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Item 11.
|
Executive
Compensation
|
For information regarding Executive Compensation, reference is
made to our definitive proxy statement for our Annual Meeting of
Shareholders, which will be filed with the Securities and
Exchange Commission within 120 days after December 31,
2007 and which is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
For information regarding Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters, reference is made to our definitive proxy statement for
our Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission within 120 days after
December 31, 2007 and which is incorporated herein by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
For information regarding Certain Relationships and Related
Transactions and Director Independence, reference is made to our
definitive proxy statement for our Annual Meeting of
Shareholders, which will be filed with the Securities and
Exchange Commission within 120 days after December 31,
2007 and which is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
For information regarding Principal Accountant Fees and
Services, reference is made to our definitive proxy statement
for our Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission within 120 days
after December 31, 2007 and which is incorporated herein by
reference.
71
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Financial Statement Schedules
The financial statements and financial statement schedules
listed in the accompanying Index to Consolidated Financial
Statements and Schedules are filed as part of this Report.
(b) Exhibits
The exhibits listed on the accompanying Index to Exhibits are
filed as part of this Report.
72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HCC Insurance Holdings,
Inc.
(Registrant)
|
|
|
Dated: February 29, 2008
|
|
By: /s/ Frank
J.
Bramanti (Frank
J. Bramanti)
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
/s/ Frank
J.
Bramanti (Frank
J. Bramanti)
|
|
Director and Chief Executive Officer (Principal Executive
Officer)
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Patrick
B. Collins*
(Patrick
B. Collins)
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ J.
Robert Dickerson*
(J.
Robert Dickerson)
|
|
Director, Chairman of the Board and Lead Independent Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Walter
M. Duer*
(Walter
M. Duer)
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Edward
H. Ellis, Jr.
(Edward
H. Ellis, Jr.)
|
|
Director, Executive Vice President and Chief Financial
Officer
(Chief Accounting Officer)
|
|
February 29, 2008
|
|
|
|
|
|
/s/ James
C. Flagg, Ph.D.*
(James
C. Flagg, Ph.D.)
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Allan
W. Fulkerson*
(Allan
W. Fulkerson)
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ John
N. Molbeck, Jr.*
(John
N. Molbeck, Jr.)
|
|
Director, President and
Chief Operating Officer
|
|
February 29, 2008
|
|
|
|
|
|
/s/ James
E. Oesterreicher*
(James
E. Oesterreicher)
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Michael
A. F. Roberts*
(Michael
A. F. Roberts)
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Christopher
J. B. Williams*
(Christopher
J. B. Williams)
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Edward
H. Ellis, Jr.
Edward
H. Ellis, Jr.,
Attorney-in-fact
|
|
|
|
|
73
INDEX TO
EXHIBITS
Items denoted by a letter are incorporated by reference to
other documents previously filed with the Securities and
Exchange Commission as set forth at the end of this index. Items
not denoted by a letter are being filed herewith.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
|
|
|
A3
|
.1
|
|
|
|
Restated Certificate of Incorporation and Amendment of
Certificate of Incorporation of HCC Insurance Holdings, Inc.,
filed with the Delaware Secretary of State on July 23, 1996 and
May 21, 1998, respectively.
|
|
B3
|
.2
|
|
|
|
Bylaws of HCC Insurance Holdings, Inc., as amended.
|
|
B4
|
.1
|
|
|
|
Specimen of Common Stock Certificate, $1.00 par value, of
HCC Insurance Holdings, Inc.
|
|
C4
|
.2
|
|
|
|
Indenture dated August 23, 2001 between HCC Insurance Holdings,
Inc. and First Union National Bank related to Debt Securities
(Senior Debt).
|
|
D4
|
.3
|
|
|
|
Second Supplemental Indenture dated March 28, 2003 between HCC
Insurance Holdings, Inc. and Wachovia Bank, National Association
(as successor to First Union National Bank) related to
1.30% Convertible Notes Due 2023.
|
|
E4
|
.4
|
|
|
|
First Amendment to Second Supplemental Indenture dated December
22, 2004 between HCC Insurance Holdings, Inc. and Wachovia Bank,
National Association related to 1.30% Convertible Notes Due
2023.
|
|
F10
|
.1
|
|
|
|
Loan Agreement ($300,000,000 Revolving Loan Facility) dated as
of April 4, 2007 among HCC Insurance Holdings, Inc.; Wells Fargo
Bank, National Association; Citibank, N.A.; Wachovia Bank,
National Association; Royal Bank of Scotland; Amegy Bank,
National Association and The Bank of New York.
|
|
G10
|
.2
|
|
|
|
First Amendment to Loan Agreement dated as of October 23, 2007
by and among HCC Insurance Holdings, Inc. and Wells Fargo Bank,
National Association; Citibank, N.A.; Wachovia Bank, National
Association; Royal Bank of Scotland; Amegy Bank, National
Association; The Bank of New York; Key Bank National
Association; Bank of America, N.A.; and Deutsche Bank AG New
York Branch.
|
|
H10
|
.3
|
|
|
|
Master Agreement dated August 3, 2006 by and among Allianz Life
Insurance Company of North America, Allianz Life Insurance
Company of New York and HCC Life Insurance Company.
|
|
I10
|
.4
|
|
|
|
HCC Insurance Holdings, Inc. 2001 Flexible Incentive Plan, as
amended and restated.
|
|
J10
|
.5
|
|
|
|
Form of Incentive Stock Option Agreement under the HCC Insurance
Holdings, Inc. 2001 Flexible Incentive Plan.
|
|
K10
|
.6
|
|
|
|
HCC Insurance Holdings, Inc. 2004 Flexible Incentive Plan.
|
|
L10
|
.7
|
|
|
|
Form of Incentive Stock Option Agreement under the HCC Insurance
Holdings, Inc. 2004 Incentive Plan.
|
|
M10
|
.8
|
|
|
|
HCC Insurance Holdings, Inc. 2007 Incentive Compensation Plan.
|
|
N10
|
.9
|
|
|
|
Employment Agreement effective January 1, 2007, between HCC
Insurance Holdings, Inc. and Frank J. Bramanti.
|
|
O10
|
.10
|
|
|
|
Employment Agreement effective March 1, 2007, between HCC
Insurance Holdings, Inc. and John N. Molbeck, Jr.
|
|
O10
|
.11
|
|
|
|
Employment Agreement effective March 1, 2007, between HCC
Insurance Holdings, Inc. and Craig J. Kelbel.
|
|
O10
|
.12
|
|
|
|
Employment Agreement effective June 1, 2007, between HCC
Insurance Holdings, Inc. and Michael J. Schell.
|
|
O10
|
.13
|
|
|
|
Employment Agreement effective March 1, 2007, between HCC
Insurance Holdings, Inc. and Edward H. Ellis, Jr.
|
|
P10
|
.14
|
|
|
|
Service Agreement effective as of January 1, 2006, between HCC
Service Company Limited (UK) Branch and Barry J. Cook.
|
|
Q10
|
.15
|
|
|
|
HCC Insurance Holdings, Inc. Nonqualified Deferred Compensation
Plan for Frank J. Bramanti.
|
|
Q10
|
.16
|
|
|
|
HCC Insurance Holdings, Inc. Nonqualified Deferred Compensation
Plan for John N. Molbeck.
|
74
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
|
|
|
R10
|
.17
|
|
|
|
Consulting Agreement and Resignation effective as of November
17, 2006 by and between HCC Insurance Holdings, Inc. and Stephen
L. Way.
|
|
S10
|
.18
|
|
|
|
Amendment No. 1 to Consulting Agreement and Resignation
effective as of February 21, 2007 by and between HCC Insurance
Holdings, Inc. and Stephen L. Way.
|
|
12
|
|
|
|
|
Statement Regarding Computation of Ratios.
|
|
21
|
|
|
|
|
Subsidiaries of HCC Insurance Holdings, Inc.
|
|
23
|
|
|
|
|
Consent of Independent Registered Public Accounting
Firm PricewaterhouseCoopers LLP dated February 29,
2008.
|
|
24
|
|
|
|
|
Powers of Attorney.
|
|
31
|
.1
|
|
|
|
Certification by Chief Executive Officer.
|
|
31
|
.2
|
|
|
|
Certification by Chief Financial Officer.
|
|
32
|
.1
|
|
|
|
Certification with respect to Annual Report of HCC Insurance
Holdings, Inc.
|
|
|
|
A |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s Registration Statement on
Form S-8
(Registration
No. 333-61687)
filed August 17, 1998. |
|
B |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s Registration Statement on
Form S-1
(Registration
No. 33-48737)
filed October 27, 1992. |
|
C |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 8-K
dated August 19, 2001. |
|
D |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 8-K
dated March 25, 2003. |
|
E |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 8-K
dated December 22, 2004. |
|
F |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 8-K
dated April 4, 2007. |
|
G |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 8-K
dated October 24, 2007. |
|
H |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 10-Q
for the quarter ended June 30, 2006. |
|
I |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s Definitive Proxy Statement for the
May 22, 2002 Annual Meeting of Shareholders filed
April 26, 2002. |
|
J |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 10-K
for the year ended December 31, 2002. |
|
K |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s Definitive Proxy Statement for the
May 13, 2004 Annual Meeting of Shareholders filed
April 16, 2004. |
|
L |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 10-K
for the year ended December 31, 2004. |
|
M |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s Definitive Proxy Statement for the
May 10, 2007 Annual Meeting of Shareholders filed
April 13, 2007. |
|
N |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 8-K
dated April 12, 2007. |
|
O |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 8-K
dated August 10, 2007. |
|
P |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 10-Q
for the quarter ended March 31, 2007. |
|
Q |
|
Incorporated by reference to the Exhibits to HCC Insurance
Holdings, Inc.s
Form 8-K
dated August 30, 2007. |
75
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
|
|
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Schedules:
|
|
|
|
|
|
|
|
S-1
|
|
|
|
|
S-2
|
|
|
|
|
S-7
|
|
|
|
|
S-8
|
|
|
|
|
S-9
|
|
Schedules other than those listed above have been omitted
because they are either not required, not applicable, or the
required information is shown in the Consolidated Financial
Statements and Notes thereto or other Schedules.
76
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
HCC Insurance Holdings, Inc.
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of HCC Insurance Holdings, Inc. and its
subsidiaries at December 31, 2007 and 2006, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2007 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial
statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedules, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedules, and
on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertain tax positions in 2007 and the manner in which it
accounts for share-based compensation in 2006.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Houston, TX
February 29, 2008
F-1
HCC
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed income securities, at fair value (amortized cost:
2007 $3,641,667; 2006 $3,008,818)
|
|
$
|
3,666,705
|
|
|
$
|
3,007,193
|
|
Short-term investments, at cost, which approximates fair value
|
|
|
783,650
|
|
|
|
714,685
|
|
Other investments
|
|
|
221,922
|
|
|
|
206,117
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
4,672,277
|
|
|
|
3,927,995
|
|
Cash
|
|
|
39,135
|
|
|
|
48,290
|
|
Restricted cash and cash investments
|
|
|
193,151
|
|
|
|
176,424
|
|
Premium, claims and other receivables
|
|
|
763,401
|
|
|
|
864,705
|
|
Reinsurance recoverables
|
|
|
956,665
|
|
|
|
1,169,934
|
|
Ceded unearned premium
|
|
|
244,684
|
|
|
|
226,125
|
|
Ceded life and annuity benefits
|
|
|
66,199
|
|
|
|
70,923
|
|
Deferred policy acquisition costs
|
|
|
192,773
|
|
|
|
182,410
|
|
Goodwill
|
|
|
776,046
|
|
|
|
742,677
|
|
Other assets
|
|
|
170,314
|
|
|
|
220,649
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,074,645
|
|
|
$
|
7,630,132
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Loss and loss adjustment expense payable
|
|
$
|
3,227,080
|
|
|
$
|
3,097,051
|
|
Life and annuity policy benefits
|
|
|
66,199
|
|
|
|
70,923
|
|
Reinsurance balances payable
|
|
|
129,838
|
|
|
|
122,805
|
|
Unearned premium
|
|
|
943,946
|
|
|
|
920,350
|
|
Deferred ceding commissions
|
|
|
68,968
|
|
|
|
64,949
|
|
Premium and claims payable
|
|
|
497,974
|
|
|
|
646,224
|
|
Notes payable
|
|
|
324,714
|
|
|
|
308,887
|
|
Accounts payable and accrued liabilities
|
|
|
375,561
|
|
|
|
356,140
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
5,634,280
|
|
|
|
5,587,329
|
|
|
SHAREHOLDERS EQUITY
|
Common stock, $1.00 par value; 250.0 million shares
authorized (shares issued and outstanding: 2007
115,069; 2006 111,731)
|
|
|
115,069
|
|
|
|
111,731
|
|
Additional paid-in capital
|
|
|
831,419
|
|
|
|
798,213
|
|
Retained earnings
|
|
|
1,445,995
|
|
|
|
1,098,887
|
|
Accumulated other comprehensive income
|
|
|
47,882
|
|
|
|
33,972
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,440,365
|
|
|
|
2,042,803
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
8,074,645
|
|
|
$
|
7,630,132
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-2
HCC
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
1,985,086
|
|
|
$
|
1,709,189
|
|
|
$
|
1,369,988
|
|
Fee and commission income
|
|
|
140,092
|
|
|
|
137,131
|
|
|
|
132,628
|
|
Net investment income
|
|
|
206,462
|
|
|
|
152,804
|
|
|
|
98,851
|
|
Net realized investment gain (loss)
|
|
|
13,188
|
|
|
|
(841
|
)
|
|
|
1,448
|
|
Other operating income
|
|
|
43,545
|
|
|
|
77,012
|
|
|
|
39,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
2,388,373
|
|
|
|
2,075,295
|
|
|
|
1,642,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net
|
|
|
1,183,947
|
|
|
|
1,011,856
|
|
|
|
919,697
|
|
Policy acquisition costs, net
|
|
|
366,610
|
|
|
|
319,885
|
|
|
|
261,708
|
|
Other operating expense
|
|
|
241,642
|
|
|
|
222,324
|
|
|
|
180,990
|
|
Interest expense
|
|
|
10,304
|
|
|
|
11,396
|
|
|
|
7,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
1,802,503
|
|
|
|
1,565,461
|
|
|
|
1,370,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income tax expense
|
|
|
585,870
|
|
|
|
509,834
|
|
|
|
272,609
|
|
Income tax expense on continuing operations
|
|
|
190,441
|
|
|
|
167,549
|
|
|
|
84,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
|
395,429
|
|
|
|
342,285
|
|
|
|
188,432
|
|
Earnings from discontinued operations, net of income taxes of
$1,686
|
|
|
|
|
|
|
|
|
|
|
2,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
395,429
|
|
|
$
|
342,285
|
|
|
$
|
191,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
3.50
|
|
|
$
|
3.08
|
|
|
$
|
1.78
|
|
Earnings from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3.50
|
|
|
$
|
3.08
|
|
|
$
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
112,873
|
|
|
|
111,309
|
|
|
|
105,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
3.38
|
|
|
$
|
2.93
|
|
|
$
|
1.72
|
|
Earnings from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3.38
|
|
|
$
|
2.93
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
116,997
|
|
|
|
116,736
|
|
|
|
109,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
HCC
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net earnings
|
|
$
|
395,429
|
|
|
$
|
342,285
|
|
|
$
|
191,192
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses) during the year, net of income tax
charge (benefit) of $14,416 in 2007, $14,212 in 2006, and
$(2,946) in 2005
|
|
|
27,464
|
|
|
|
26,142
|
|
|
|
(4,257
|
)
|
Less reclassification adjustment for gains included in net
earnings, net of income tax charge of $13,111 in 2007, $13,484
in 2006, and $2,479 in 2005
|
|
|
(24,350
|
)
|
|
|
(25,043
|
)
|
|
|
(4,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses)
|
|
|
3,114
|
|
|
|
1,099
|
|
|
|
(8,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge loss, net of income tax benefit of $871
|
|
|
(1,617
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of income tax
charge (benefit) of $863 in 2007, $3,249 in 2006, and $(762) in
2005
|
|
|
12,413
|
|
|
|
13,799
|
|
|
|
(9,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
13,910
|
|
|
|
14,898
|
|
|
|
(18,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
409,339
|
|
|
$
|
357,183
|
|
|
$
|
172,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
Balance at December 31, 2004
|
|
$
|
68,038
|
|
|
$
|
582,566
|
|
|
$
|
637,259
|
|
|
$
|
37,635
|
|
|
$
|
1,325,498
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
191,192
|
|
|
|
|
|
|
|
191,192
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,561
|
)
|
|
|
(18,561
|
)
|
Issuance of 4,688 shares in public offering, net of costs
|
|
|
4,688
|
|
|
|
145,276
|
|
|
|
|
|
|
|
|
|
|
|
149,964
|
|
Issuance of 2,439 shares for exercise of options, including tax
benefit of $6,168
|
|
|
1,785
|
|
|
|
40,522
|
|
|
|
|
|
|
|
|
|
|
|
42,307
|
|
Issuance of 1,624 shares for purchased companies and
convertible debt
|
|
|
1,227
|
|
|
|
26,226
|
|
|
|
|
|
|
|
|
|
|
|
27,453
|
|
Stock-based compensation
|
|
|
|
|
|
|
2,645
|
|
|
|
|
|
|
|
|
|
|
|
2,645
|
|
Three-for-two stock split
|
|
|
35,065
|
|
|
|
(35,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared, $0.282 per share
|
|
|
|
|
|
|
|
|
|
|
(30,063
|
)
|
|
|
|
|
|
|
(30,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
110,803
|
|
|
|
762,170
|
|
|
|
798,388
|
|
|
|
19,074
|
|
|
|
1,690,435
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
342,285
|
|
|
|
|
|
|
|
342,285
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,898
|
|
|
|
14,898
|
|
Issuance of 928 shares for exercise of options, including
tax benefit of $3,396
|
|
|
928
|
|
|
|
18,071
|
|
|
|
|
|
|
|
|
|
|
|
18,999
|
|
Stock-based compensation
|
|
|
|
|
|
|
14,022
|
|
|
|
|
|
|
|
|
|
|
|
14,022
|
|
Reimbursement, net of income taxes of $2,127
|
|
|
|
|
|
|
3,950
|
|
|
|
|
|
|
|
|
|
|
|
3,950
|
|
Cash dividends declared, $0.375 per share
|
|
|
|
|
|
|
|
|
|
|
(41,786
|
)
|
|
|
|
|
|
|
(41,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
111,731
|
|
|
|
798,213
|
|
|
|
1,098,887
|
|
|
|
33,972
|
|
|
|
2,042,803
|
|
Cumulative effect of accounting change (adoption of FIN 48)
|
|
|
|
|
|
|
|
|
|
|
(678
|
)
|
|
|
|
|
|
|
(678
|
)
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
395,429
|
|
|
|
|
|
|
|
395,429
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,910
|
|
|
|
13,910
|
|
Issuance of 1,101 shares for exercise of options, including
tax benefit of $3,352
|
|
|
1,101
|
|
|
|
23,432
|
|
|
|
|
|
|
|
|
|
|
|
24,533
|
|
Issuance of 22 shares to directors
|
|
|
22
|
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
|
717
|
|
Issuance of 2,215 shares for debt conversions
|
|
|
2,215
|
|
|
|
(2,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
11,294
|
|
|
|
|
|
|
|
|
|
|
|
11,294
|
|
Cash dividends declared, $0.42 per share
|
|
|
|
|
|
|
|
|
|
|
(47,643
|
)
|
|
|
|
|
|
|
(47,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
115,069
|
|
|
$
|
831,419
|
|
|
$
|
1,445,995
|
|
|
$
|
47,882
|
|
|
$
|
2,440,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-5
HCC
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
395,429
|
|
|
$
|
342,285
|
|
|
$
|
191,192
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in premium, claims and other receivables
|
|
|
97,304
|
|
|
|
40,955
|
|
|
|
(6,094
|
)
|
Change in reinsurance recoverables
|
|
|
213,353
|
|
|
|
192,049
|
|
|
|
(250,829
|
)
|
Change in ceded unearned premium
|
|
|
(18,436
|
)
|
|
|
13,291
|
|
|
|
82,433
|
|
Change in loss and loss adjustment expense payable
|
|
|
129,203
|
|
|
|
136,520
|
|
|
|
705,688
|
|
Change in reinsurance balances payable
|
|
|
7,002
|
|
|
|
(54,834
|
)
|
|
|
(49,772
|
)
|
Change in unearned premium
|
|
|
21,498
|
|
|
|
109,280
|
|
|
|
38,809
|
|
Change in premium and claims payable, net of restricted cash
|
|
|
(164,977
|
)
|
|
|
(126,027
|
)
|
|
|
(3,851
|
)
|
Gain on sale of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(8,717
|
)
|
Change in trading portfolio
|
|
|
9,362
|
|
|
|
(19,919
|
)
|
|
|
(66,809
|
)
|
Depreciation and amortization expense
|
|
|
15,982
|
|
|
|
14,980
|
|
|
|
14,647
|
|
Stock-based compensation expense
|
|
|
12,011
|
|
|
|
13,126
|
|
|
|
2,645
|
|
Other, net
|
|
|
8,705
|
|
|
|
(8,318
|
)
|
|
|
(25,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
726,436
|
|
|
|
653,388
|
|
|
|
623,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of fixed income securities
|
|
|
438,057
|
|
|
|
338,927
|
|
|
|
237,480
|
|
Maturity or call of fixed income securities
|
|
|
302,876
|
|
|
|
247,072
|
|
|
|
186,075
|
|
Cost of securities acquired
|
|
|
(1,377,750
|
)
|
|
|
(1,389,984
|
)
|
|
|
(1,054,529
|
)
|
Change in short-term investments
|
|
|
(72,279
|
)
|
|
|
129,919
|
|
|
|
(72,703
|
)
|
Sale of strategic investments
|
|
|
46,612
|
|
|
|
63,285
|
|
|
|
14,146
|
|
Payments for purchase of subsidiaries, net of cash received
|
|
|
(65,112
|
)
|
|
|
(45,722
|
)
|
|
|
(94,056
|
)
|
Sale of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
21,116
|
|
Other, net
|
|
|
(9,741
|
)
|
|
|
(11,971
|
)
|
|
|
(10,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities
|
|
|
(737,337
|
)
|
|
|
(668,474
|
)
|
|
|
(772,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances on line of credit and issuance of notes payable
|
|
|
232,000
|
|
|
|
140,000
|
|
|
|
46,528
|
|
Payments on line of credit and notes payable
|
|
|
(205,763
|
)
|
|
|
(140,616
|
)
|
|
|
(48,181
|
)
|
Sale of common stock, net of costs
|
|
|
24,533
|
|
|
|
18,999
|
|
|
|
186,103
|
|
Dividends paid
|
|
|
(46,158
|
)
|
|
|
(38,923
|
)
|
|
|
(27,644
|
)
|
Other, net
|
|
|
(2,866
|
)
|
|
|
9,981
|
|
|
|
(3,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities
|
|
|
1,746
|
|
|
|
(10,559
|
)
|
|
|
152,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(9,155
|
)
|
|
|
(25,645
|
)
|
|
|
4,002
|
|
Cash at beginning of year
|
|
|
48,290
|
|
|
|
73,935
|
|
|
|
69,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
39,135
|
|
|
$
|
48,290
|
|
|
$
|
73,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
HCC
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
(tables
in thousands, except per share data)
|
|
(1)
|
General
Information and Significant Accounting and Reporting
Policies
|
HCC Insurance Holdings, Inc. and its subsidiaries (collectively,
we, us or our) include domestic and foreign property and
casualty and life insurance companies, underwriting agencies and
reinsurance brokers. We provide specialized property and
casualty, surety, and group life, accident and health insurance
coverages and related agency and reinsurance brokerage services
to commercial customers and individuals. We market our products
both directly to customers and through a network of independent
and affiliated brokers, producers, agents and third party
administrators. Our lines of business include diversified
financial products (which includes directors and
officers liability, professional indemnity, employment
practices liability, surety and credit); group life, accident
and health; aviation; our London market account (which includes
energy, marine, property, and accident and health); and other
specialty lines of insurance. We operate primarily in the United
States, the United Kingdom, Spain, Bermuda, Belgium and Ireland,
although some of our operations have a broader international
scope.
Our principal domestic insurance companies are Houston Casualty
Company, U.S. Specialty Insurance Company, HCC Life
Insurance Company, Avemco Insurance Company and American
Contractors Indemnity Company. These companies operate
throughout the United States with headquarters in Houston,
Texas, Atlanta, Georgia, Frederick, Maryland and Los Angeles,
California, respectively. All of our principal domestic
insurance companies operate on an admitted basis, except Houston
Casualty Company, which also insures international risks. Our
foreign insurance companies are HCC International Insurance
Company, HCC Europe, HCC Reinsurance Company and the London
branch of Houston Casualty Company. These companies operate
principally from the United Kingdom, Spain and Bermuda. We also
participate in two Lloyds of London syndicates, which are
managed by our subsidiary, HCC Underwriting Agency, Ltd. (UK),
operating in London, England.
Our underwriting agencies provide underwriting management and
claims servicing for insurance and reinsurance companies in
specialized lines of business within the property and casualty
and group life, accident and health insurance sectors. Our
principal domestic agencies are Professional Indemnity Agency,
HCC Global Financial Products, Covenant Underwriters, HCC
Specialty Underwriters, HCC Indemnity Guaranty Agency,
RA&MCO Insurance Services, MultiNational Underwriters, LLC
and G.B. Kenrick & Associates. Our agencies operate
throughout the United States. Our principal foreign agency
is HCC Global Financial Products, with headquarters in
Barcelona, Spain.
Our reinsurance and insurance brokers provide brokerage,
consulting and other broker services to insurance and
reinsurance companies, commercial customers and individuals in
the same lines of business as the insurance companies and
underwriting agencies operate. Our principal reinsurance brokers
are Rattner Mackenzie and HCC Risk Management, operating
principally in the United Kingdom, Bermuda and Houston, Texas.
Our insurance broker is Continental Underwriters.
Basis
of Presentation
Our consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America (generally accepted accounting
principles) and include the accounts of HCC Insurance Holdings,
Inc. and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
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.
F-7
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
Net
Earned Premium, Policy Acquisition Costs and Ceding
Commissions
Substantially all of the property and casualty, surety, and
accident and health policies written by our insurance companies
qualify as short-duration contracts. We recognize in current
earned income the portion of the premium that provides insurance
coverage in the period. Written premium, net of reinsurance, is
primarily recognized in earnings on a pro rata basis over the
term of the related policies. However, for certain policies,
written premium is recognized in earnings over the period of
risk in proportion to the amount of insurance risk provided.
Unearned premium represents the portion of premium written that
relates to the unexpired term of coverage. Premium for
commercial title insurance and group life policies is recognized
in earnings when the premium is due. When the limit under a
specific excess of loss reinsurance layer has been exhausted, we
effectively expense the remaining premium for that limit and
defer and amortize the reinstatement premium over the remaining
period of risk.
We defer our direct costs to underwrite insurance policies, less
amounts reimbursed by reinsurers, and charge or credit the costs
to earnings proportionate with the premium earned. These policy
acquisition costs include commissions, taxes, fees, and other
direct underwriting costs. Historical and current loss
adjustment expense experience and anticipated investment income
are considered in determining premium deficiencies and the
recoverability of deferred policy acquisition costs.
Fee
and Commission Income
Fee and commission income in our consolidated statements of
earnings includes fee income from our underwriting agencies,
commission income from our reinsurance brokers and proceeds from
ceded reinsurance (ceding commissions in excess of acquisition
costs). When there is no significant future servicing
obligation, we recognize fee and commission income from third
parties on the later of the effective date of the policy, the
date when the premium can be reasonably established, or the date
when substantially all services related to the insurance
placement have been rendered to the client. We record revenue
from profit commissions based on the profitability of business
written, calculated using the respective commission formula and
actual underwriting results through the date of calculation.
Such amounts are adjusted should experience change. When
additional services are required, the service revenue is
deferred and recognized over the service period. We record an
allowance for estimated return commissions that we may be
required to pay on the early termination of policies. Proceeds
from ceded reinsurance are earned pro rata over the term of the
underlying policy.
When our underwriting agencies utilize one of our insurance
company subsidiaries as the policy issuing company and the
business is reinsured with a third-party reinsurer, we eliminate
in consolidation the fee and commission income against the
related insurance companys policy acquisition costs and
defer the policy acquisition costs of the underwriting agencies.
Premium,
Claims and Other Receivables
We use the gross method for reporting receivables and payables
on brokered transactions. We review the collectibility of our
receivables on a current basis and provide an allowance for
doubtful accounts if we deem that there are accounts that are
doubtful of collection. The allowance was $6.4 million and
$6.5 million at December 31, 2007 and 2006,
respectively. Our estimate of the level of the allowance could
change as conditions change in the future.
Loss
and Loss Adjustment Expense Payable
Loss and loss adjustment expense payable by our insurance
companies is based on estimates of payments to be made for
reported losses, incurred but not reported losses, and
anticipated receipts from salvage and
F-8
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
subrogation. Reserves are recorded on an undiscounted basis,
except for reserves of acquired companies. The discount on those
reserves is not material. Estimates for reported losses are
based on all available information, including reports received
from ceding companies on assumed business. Estimates for
incurred but not reported losses are based both on our
experience and the industrys experience. While we believe
that amounts included in our consolidated financial statements
are adequate, such estimates may be more or less than the
amounts ultimately paid when the claims are settled. We
continually review the estimates with our actuaries and any
changes are reflected in loss and loss adjustment expense in the
period of the change.
Reinsurance
We record all reinsurance recoverables and ceded unearned
premium as assets, and deferred ceding commissions as
liabilities. All such amounts are recorded in a manner
consistent with the underlying reinsured contracts. We record a
reserve for uncollectible reinsurance based on our assessment of
reinsurers credit worthiness, reinsurance contract terms
and collectibility. Information utilized to calculate the
reserve is subject to change, which could affect the level of
the reserve in the future.
Cash
and Short-term Investments
Cash consists of cash in banks, generally in operating accounts.
We classify certificates of deposit and money market funds as
short-term investments. Short-term investments are classified as
investments in our consolidated balance sheets as they relate
principally to our investment activities.
We generally maintain our cash deposits in major banks and
invest our short-term funds in institutional money-market funds
and short-term financial instruments. These securities typically
mature within ninety days and, therefore, bear minimal risk.
Certain fiduciary funds totaling $213.4 million and
$295.7 million were included in short-term investments and
fixed income securities at December 31, 2007 and 2006,
respectively. These funds are held by underwriting agencies,
reinsurance brokers or surety companies for the benefit of
insurance or reinsurance clients. We earn interest, net of
expenses, on these funds.
Restricted
Cash and Cash Investments
Our agencies withhold premium funds for the payment of claims.
These funds are shown as restricted cash and cash investments in
our consolidated balance sheets. The corresponding liability is
included within premium and claims payable in our consolidated
balance sheets. These amounts are considered fiduciary funds,
and interest earned on these funds accrues to the benefit of the
insurance companies from whom the funds were withheld.
Therefore, we do not include these amounts as cash in our
consolidated statements of cash flows.
Investments
All fixed income securities are classified as available for sale
and reported at quoted market value, if readily marketable, or
at managements estimated fair value, if not readily
marketable. The change in unrealized gain or loss on these
securities is recorded as a component of other comprehensive
income, net of the related deferred income tax effect. For fixed
income securities denominated in currencies other than the
U.S. dollar, the change in unrealized gain or loss includes
the effect of exchange rate fluctuations. We purchase fixed
income securities with the intent to hold to maturity, but they
may be available for sale if market conditions warrant or if our
investment policies dictate in order to maximize our investment
yield.
F-9
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
For asset-backed and mortgage-backed securities in our fixed
income portfolio, we recognize income using a constant effective
yield based on anticipated prepayments and the estimated
economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the estimated
economic life is recalculated and the remaining unamortized
premium or discount is amortized prospectively over the
remaining economic life.
Short-term investments and restricted cash investments are
carried at cost, which approximates fair value. Other
investments include other alternative investments, which are
accounted for using the equity method of accounting, and trading
securities, which are carried at fair value. The carrying value
of our alternative investments and trading securities was
$172.8 million and $49.1 million, respectively, at
December 31, 2007, and $147.6 million and
$58.5 million, respectively, at December 31, 2006.
Changes in carrying value are included in the consolidated
statements of earnings in net investment income for other
alternative investments and in other operating income for
trading securities.
Realized gains or losses are determined on an average cost basis
and included in earnings on the trade date. When impairment of
the value of an investment is considered other-than-temporary,
the decrease in value is reported in earnings as a realized
investment loss and a new cost basis is established. Declines in
the market value of invested assets below cost are evaluated for
other-than-temporary impairment losses on a quarterly basis.
Impairment losses for declines in value of fixed income
securities below cost attributable to issuer-specific events are
based on all relevant facts and circumstances for each
investment and are recognized when we deem the impairment
other-than-temporary. For fixed income securities with
unrealized losses due to market conditions or industry-related
events where we have the positive intent and ability to hold the
investment for a period of time sufficient to allow a market
recovery or to maturity, declines in value below cost are not
assumed to be other-than-temporary.
Derivative
Financial Instruments
We have reinsured interests in two long-term mortgage impairment
insurance contracts. The exposure with respect to these two
contracts is measured based on movement in a specified UK
housing index. These insurance contracts qualify as derivative
financial instruments, are unhedged and are reported in other
assets at fair value, which was $16.8 million and
$11.2 million at December 31, 2007 and 2006,
respectively. We determine fair value based on our estimate of
the present value of expected future cash flows, modified to
reflect specific contract terms and validated based on current
market quotes. Changes in fair value are recorded each period as
a component of other operating income in the consolidated
statements of earnings.
We have interest rate swap agreements that effectively convert
the $200.0 million outstanding balance on our Revolving
Loan Facility from a variable rate to a fixed rate. These
agreements are derivative financial instruments and qualify for
hedge accounting treatment as cash flow hedges. Changes in fair
value of the swap agreements are recorded each period as a
component of other comprehensive income, net of the related
deferred income tax effect.
Strategic
Investments and Other Operating Income
Included in other assets are certain strategic investments in
insurance-related companies. For any strategic investment in
which we own a 20% to 50% equity interest, the investment and
income are recorded using the equity method of accounting. The
related income is reported in other operating income in the
consolidated statements of earnings. We carry the remaining
investments that are marketable at fair value and the remaining
investments that are not readily marketable at managements
estimate of fair value. We record any interest, dividends and
realized gains or losses in other operating income and
unrealized gains or losses in other comprehensive income.
F-10
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
Goodwill
and Intangible Assets
When we complete a business combination, goodwill is either
allocated to the acquired business or, if there are synergies
with our other businesses, allocated to the different reporting
units based on their respective share of the estimated future
cash flows. In our agency segment, the reporting units are
individual subsidiaries. In our insurance company segment, the
reporting units are either individual subsidiaries or groups of
subsidiaries that share common licensing and other
characteristics.
To determine the fair value of a reporting unit, we utilize the
expected cash flow approach in Statement of Financial Accounting
Concepts No. 7, Using Cash Flow Information and Present
Value in Accounting Measurements. This approach utilizes
estimated future cash flows, probabilities as to occurrence of
these cash flows, a risk-free rate of interest and a risk
premium for uncertainty in the cash flows. We utilize our
budgets and projection of future operations based on historical
and expected industry trends to estimate our future cash flows
and their probability of occurring as projected.
We assess the impairment of goodwill annually, or sooner if an
event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying
amount. Based on our latest impairment test, the fair value of
each of our reporting units exceeded its carrying amount.
Intangible assets not subject to amortization are tested for
impairment annually, or sooner if an event occurs or
circumstances change that indicate that an intangible asset
might be impaired. Other intangible assets are amortized over
their respective useful lives.
Foreign
Currency
The functional currency of some of our foreign subsidiaries and
branches is the U.S. dollar. Assets and liabilities
recorded in foreign currencies are translated into
U.S. dollars at exchange rates in effect at the balance
sheet date. For available for sale securities, unrealized gains
and losses related to fluctuations in exchange rates are
recorded as a component of other comprehensive income, net of
the related deferred income tax effect. Transactions in foreign
currencies are translated at the rates of exchange in effect on
the date the transaction occurs. Transaction gains and losses
are recorded in earnings and included in other operating expense
in the consolidated statements of earnings. Our foreign currency
transactions are principally denominated in British pound
sterling and the Euro.
We utilize the Euro and British pound sterling as the functional
currency in our other foreign operations. The cumulative
translation adjustment, representing the effect of translating
these subsidiaries assets and liabilities into
U.S. dollars, is included in the foreign currency
translation adjustment, net of the related deferred income tax
effect, within accumulated other comprehensive income. The
effect of exchange rate changes on cash balances held in foreign
currencies was immaterial for all periods presented and is not
shown separately in the consolidated statements of cash flows.
Income
Taxes
We file a consolidated Federal income tax return and include the
foreign subsidiaries income to the extent required by law.
Deferred income tax is accounted for using the liability method,
which reflects the tax impact of temporary differences between
the bases of assets and liabilities for financial reporting
purposes and such bases as measured by tax laws and regulations.
We provide a deferred tax liability for un-repatriated earnings
of our foreign subsidiaries at prevailing statutory rates when
required. Due to our history of earnings, expectations for
future earnings, and taxable income in carryback years, we
expect to be able to fully realize the benefit of any net
deferred tax asset.
F-11
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
Effective January 1, 2007, we recorded a liability for our
uncertain tax positions where we determined it is not more
likely than not the tax position will be sustained upon
examination by the appropriate tax authority. Changes in the
liability for our uncertain tax positions are reflected in
income tax expense or goodwill, if related to an acquisition, in
the period a new uncertain tax position arises, we change our
judgment about the likelihood of uncertainty, the tax issue is
settled, or the statute of limitations expires. We report any
potential net interest income or expense and penalties related
to changes in our uncertain tax positions in our consolidated
statements of earnings as interest expense and other operating
expense, respectively.
Stock-Based
Compensation
Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, requires companies
to charge the fair value of stock-based compensation to
earnings. Effective January 1, 2006, we adopted
SFAS 123(R) using the modified prospective method. We are
recognizing compensation expense in 2006 and thereafter for all
previously granted but unvested stock options as of
January 1, 2006, and all options granted after that date.
We use the Black-Scholes single option pricing model to
determine the fair value of an option on its grant date and
expense that value on a straight-line basis over the
options vesting period. In 2005, we accounted for options
granted to employees in accordance with Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees. The 2005 consolidated financial statements
were not restated to reflect our adoption of SFAS 123(R).
Prior to the adoption of SFAS 123(R), we accounted for
stock-based compensation using the intrinsic value method
prescribed in APB 25 and related interpretations. Under APB 25,
compensation cost was measured as of the date the number of
options and exercise price became fixed. The terms of an award
were generally fixed on the date of grant, requiring the option
to be accounted for as a fixed award. For fixed awards,
compensation expense was measured as the excess, if any, of the
quoted closing price of our stock at the date of grant over the
exercise price of the option granted. Compensation expense for
fixed awards, if any, was recognized ratably over the option
vesting period using the straight-line single option method.
Prior to 2006, compensation expense for variable awards was
recognized in accordance with Financial Accounting Standards
Board (FASB) Interpretation (FIN) No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or
Award Plans. If the number of options or exercise price was
not fixed on the date of grant, the option was accounted for as
a variable award until the number of options or the exercise
price became fixed, or until the option was exercised, canceled
or expired unexercised. For variable awards, intrinsic value was
remeasured each period and was equal to the closing price of our
stock on the last day of the reporting period less the grant
exercise price. As a result, the amount of compensation expense
or benefit recognized each period fluctuated based on changes in
our closing stock price from the last day of the previous period
to the last day of the current period. In cases when our closing
stock price did not exceed the recipients exercise price,
no compensation expense resulted.
Prior to 2006, we accounted for modifications to stock options
in accordance with APB 25, as subsequently interpreted by
FIN No. 44, Accounting for Certain Transactions
involving Stock Compensation. Modifications included, but
were not limited to, acceleration of vesting, extension of the
exercise period following termination of employment,
and/or
continued vesting while not providing substantive services.
Compensation expense for modified awards was recorded in the
period of modification for the intrinsic value of the vested
portion of the award, including vesting that occurred while not
providing substantive services, after the date of modification.
The intrinsic value of the award was the difference between the
closing price of our common stock on the date of modification
and the recipients exercise price.
Prior to 2006, stock options issued to non-employees were
accounted for in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, and Emerging
Issues Task Force (EITF) Issue
F-12
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services. Compensation expense for stock options
issued to non-employees was valued using the Black-Scholes model
and amortized over the option vesting period in accordance with
FIN 28.
Earnings
Per Share
Basic earnings per share is computed by dividing net earnings by
the weighted average common shares outstanding during the year.
Diluted earnings per share is computed by dividing net earnings
by the weighted average common shares outstanding plus the
weighted average potential common shares outstanding during the
year. Outstanding common stock options, when dilutive, are
included in the weighted average potential common shares
outstanding. Also included in the weighted average potential
common shares outstanding are common shares that would be issued
for any premium in excess of the principal amount of our
convertible debt. We use the treasury stock method to calculate
the dilutive effect of potential common shares outstanding due
to options and our convertible debt.
Large
Loss Events
During 2006 and 2005, we reached agreements with various
reinsurers to commute two large reinsurance contracts related to
run-off assumed accident and health reinsurance business
included in our discontinued lines. We had $120.2 million
in 2006 and $145.7 million in 2005 of reinsurance
recoverables at the date of commutation. In consideration for
discounting the recoverables and reassuming the associated loss
reserves, we agreed to accept cash payments that were less than
the related recoverables. We recorded a pre-tax loss of
$20.2 million in 2006 and $26.0 million in 2005
related to these commutations, which was included in loss and
loss adjustment expense in our insurance company segment. Net
earnings were reduced $13.1 million in 2006 and
$16.9 million in 2005 as a result of these commutations.
During 2005, we incurred catastrophic losses related to three
major and two minor hurricanes (collectively, the 2005
hurricanes) and recognized $89.7 million of pre-tax losses.
This amount included $73.2 million of losses recorded in
loss and loss adjustment expense and $16.5 million for
premiums to reinstate our excess of loss reinsurance protection,
which reduced net earned premium. The effect of the 2005
hurricanes reduced consolidated and insurance company segment
net earnings $58.2 million in 2005.
Recent
Accounting Pronouncements
FIN No. 48, Accounting for Uncertainty in Income
Taxes, became effective January 1, 2007. Under
FIN 48, a company may only recognize the tax benefit from
an uncertain tax position if it is more likely than not the tax
position will be sustained upon examination by the tax
authority. See Note 7 for discussion about our adoption of
FIN 48.
The FASB has issued SFAS No. 157, Fair Value
Measurements, which clarifies the definition of fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurement. SFAS 157 does not
require any new fair value measurements and eliminates
inconsistencies in guidance found in various prior accounting
pronouncements. The FASB has also issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 allows a company to measure fair
value of eligible financial assets and liabilities that are not
otherwise measured at fair value. Unrealized gains and losses
for those items are reported in current earnings at each
subsequent reporting date. Both SFAS 157 and SFAS 159
are effective January 1, 2008. We do not expect their
adoption to have a material impact on our consolidated financial
statements.
F-13
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
The FASB has issued SFAS No. 141 (revised 2007)
(SFAS 141(R)), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of
Accounting Research Bulletin No. 51. SFAS 141(R)
will change the accounting treatment for business combinations
and will impact presentation of financial statements on the
acquisition date and accounting for acquisitions in subsequent
periods. SFAS 160 will change the accounting and reporting
for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
shareholders equity. SFAS 141(R) and SFAS 160
will be effective January 1, 2009 and early adoption is not
permitted. We are evaluating the impact SFAS 141(R) and
SFAS 160 will have on our consolidated financial statements.
|
|
(2)
|
Acquisitions,
Disposition and Goodwill
|
Acquisitions
During the past three years, we have completed numerous
acquisitions. We acquired these companies to diversify into new
specialty lines of business or to grow existing lines of
business. The business combinations were recorded using the
purchase method of accounting, and the results of operations of
the acquired businesses were included in our consolidated
financial statements beginning on the effective date of each
transaction. The following table provides additional information
on these acquisitions (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Date of
|
|
|
Initial
|
|
|
Goodwill
|
|
|
Deductible
|
|
|
|
Acquisition
|
|
|
Consideration
|
|
|
Recognized
|
|
|
Goodwill
|
|
|
United States Surety Company
|
|
|
March 1, 2005
|
|
|
$
|
19.4
|
|
|
$
|
12.6
|
|
|
|
No
|
|
HCC International Insurance Company
|
|
|
July 1, 2005
|
|
|
|
24.6
|
|
|
|
17.3
|
|
|
|
No
|
|
Perico Life Insurance Company
|
|
|
November 30, 2005
|
|
|
|
20.0
|
|
|
|
|
|
|
|
Yes
|
|
Perico Ltd.
|
|
|
December 1, 2005
|
|
|
|
33.4
|
|
|
|
31.8
|
|
|
|
Yes
|
|
HCCL Holdings Limited (UK) (formerly Illium Insurance Group,
Ltd.)
|
|
|
December 31, 2005
|
|
|
|
3.0
|
|
|
|
2.1
|
|
|
|
No
|
|
Novia Underwriters, Inc.
|
|
|
June 30, 2006
|
|
|
|
5.5
|
|
|
|
5.2
|
|
|
|
No
|
|
G.B. Kenrick & Associates, Inc.
|
|
|
July 1, 2006
|
|
|
|
18.0
|
|
|
|
16.9
|
|
|
|
No
|
|
Health Products Division
|
|
|
October 2, 2006
|
|
|
|
140.0
|
|
|
|
137.2
|
|
|
|
Yes
|
|
Promoregistration.com
|
|
|
March 2, 2007
|
|
|
|
4.1
|
|
|
|
|
|
|
|
Yes
|
|
Pioneer General Insurance Company
|
|
|
November 1, 2007
|
|
|
|
12.0
|
|
|
|
4.8
|
|
|
|
No
|
|
In the above table, the initial consideration column represents
cash and the value of our common stock paid for the acquisition.
The goodwill recognized column represents goodwill recorded
through December 31, 2007. The deductible goodwill column
indicates if the goodwill is deductible for income tax purposes.
On November 1, 2007, we acquired Ponderosa Management Inc.,
the parent company of Pioneer General Insurance Company, for
$12.0 million in cash. Pioneer General writes surety bonds
and its operations are included in our insurance company
segment. We valued all identifiable assets and liabilities at
fair value and allocated $4.8 million to goodwill in our
initial purchase price allocation. We are currently obtaining
additional information to complete our purchase price
allocation, which we expect to complete in the first quarter of
2008.
F-14
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
On October 2, 2006, we acquired the Health Products
Division of Allianz Life Insurance Company of North America
(the Health Products Division) in a purchase business
combination for $140.0 million. In addition, we assumed the
Health Products Divisions outstanding loss reserves
totaling $149.7 million and net miscellaneous other
liabilities of $0.4 million. Allianz paid us the net amount
of $10.1 million in cash. We acquired the Health Products
Division to expand our medical stop-loss line and diversify our
business by adding several new medical excess products; to add
skilled underwriters and managers with extensive experience with
medical stop-loss and medical excess products; to apply our
unique synergies to the Health Products Divisions business
to increase its profitability; and to strengthen our competitive
position as a leader in the medical stop-loss and excess lines.
The Health Products Division generated a profit in 2007, and we
expect it to continue to generate a profit and positive cash
flow due to the unique synergies (specialized systems, claims
administration, operational focus and management expertise) our
existing medical stop-loss business contributed to the combined,
post-acquisition business. For our purchase price allocation, we
assessed the value of these synergies, as well as the value of
the assembled workforce. The value of these items was subsumed
into goodwill in accordance with SFAS No. 141,
Business Combinations. We valued all identifiable assets
and liabilities at fair value, including discounting the loss
reserves by $2.9 million. The following table summarizes
the fair value of assets acquired and liabilities assumed and
the resulting $137.2 million of goodwill:
|
|
|
|
|
Premium, claims and other receivables
|
|
$
|
6,372
|
|
Goodwill
|
|
|
137,154
|
|
Other assets
|
|
|
280
|
|
|
|
|
|
|
Total assets acquired
|
|
|
143,806
|
|
|
|
|
|
|
Loss and loss adjustment expense payable
|
|
|
146,811
|
|
Reinsurance balances payable
|
|
|
746
|
|
Premium and claims payable
|
|
|
4,375
|
|
Accounts payable and accrued liabilities
|
|
|
1,961
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
153,893
|
|
|
|
|
|
|
Net cash received
|
|
$
|
10,087
|
|
|
|
|
|
|
Our prior acquisition of HCC Global Financial Products, LLC on
October 1, 2002 for $6.9 million of initial
consideration includes a contingency for earnout payments based
on earnings after the acquisition date, as defined in the
purchase agreement. The agreement requires us to pay an earnout
based on pre-tax earnings on business underwritten by HCC Global
from the acquisition date through September 30, 2007, with
no maximum amount due to the former owners. The contractual
pre-tax earnings include underwriting results on longer-duration
business written by HCC Global and, per the agreement, the
earnout cannot be finally determined until all future losses are
paid. When the conditions for accrual have been satisfied under
the purchase agreement, we record a liability to the former
owners with an offsetting increase to goodwill. At
December 31, 2007, we had accrued earnouts totaling
$31.7 million, of which $29.0 million and
$2.7 million will be paid in 2008 and 2009, respectively.
The total earnout and the related goodwill recognized from the
acquisition date through December 31, 2007 was
$166.3 million.
F-15
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
Subsequent
Acquisition
On January 2, 2008, we acquired MultiNational Underwriters,
LLC, for $42.0 million in cash and a possible additional
earnout depending upon future underwriting profit levels. This
agency writes domestic and international short-term medical
insurance.
Disposition
The earnings from discontinued operations represents the final
earnout payment we received for a business sold in 2003.
Goodwill
When we complete a business combination, goodwill is either
allocated to the acquired business or, if there are synergies
with our other businesses, allocated to the different reporting
units based on their respective share of the estimated future
cash flows. In 2007, we transferred $3.3 million of
goodwill associated with a strategic investment to the carrying
cost of that investment. The changes in goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Agency
|
|
|
Operations
|
|
|
Corporate
|
|
|
Total
|
|
|
Balance at December 31, 2005
|
|
$
|
340,069
|
|
|
$
|
192,878
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
532,947
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
151,717
|
|
|
|
7,005
|
|
|
|
|
|
|
|
3,323
|
|
|
|
162,045
|
|
Earnouts
|
|
|
41,034
|
|
|
|
6,651
|
|
|
|
|
|
|
|
|
|
|
|
47,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
532,820
|
|
|
|
206,534
|
|
|
|
|
|
|
|
3,323
|
|
|
|
742,677
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
3,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,503
|
|
Earnouts
|
|
|
27,984
|
|
|
|
5,206
|
|
|
|
|
|
|
|
|
|
|
|
33,190
|
|
Other
|
|
|
(323
|
)
|
|
|
|
|
|
|
323
|
|
|
|
(3,323
|
)
|
|
|
(3,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
563,984
|
|
|
$
|
211,740
|
|
|
$
|
323
|
|
|
$
|
|
|
|
$
|
776,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
Substantially all of our fixed income securities are investment
grade and 99% are rated A or better. The cost or
amortized cost, gross unrealized gain or loss, and fair value of
investments in fixed income securities, all of which are
classified as available for sale, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
159,147
|
|
|
$
|
4,445
|
|
|
$
|
(9
|
)
|
|
$
|
163,583
|
|
States, municipalities and political subdivisions
|
|
|
1,802,417
|
|
|
|
22,494
|
|
|
|
(2,630
|
)
|
|
|
1,822,281
|
|
Corporate fixed income securities
|
|
|
299,288
|
|
|
|
2,778
|
|
|
|
(4,498
|
)
|
|
|
297,568
|
|
Asset-backed and mortgage-backed securities
|
|
|
1,001,423
|
|
|
|
12,692
|
|
|
|
(4,423
|
)
|
|
|
1,009,692
|
|
Foreign securities
|
|
|
379,392
|
|
|
|
956
|
|
|
|
(6,767
|
)
|
|
|
373,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
3,641,667
|
|
|
$
|
43,365
|
|
|
$
|
(18,327
|
)
|
|
$
|
3,666,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
121,641
|
|
|
$
|
689
|
|
|
$
|
(750
|
)
|
|
$
|
121,580
|
|
States, municipalities and political subdivisions
|
|
|
1,350,509
|
|
|
|
16,008
|
|
|
|
(4,815
|
)
|
|
|
1,361,702
|
|
Corporate fixed income securities
|
|
|
334,750
|
|
|
|
765
|
|
|
|
(4,950
|
)
|
|
|
330,565
|
|
Asset-backed and mortgage-backed securities
|
|
|
787,838
|
|
|
|
4,989
|
|
|
|
(6,785
|
)
|
|
|
786,042
|
|
Foreign securities
|
|
|
414,080
|
|
|
|
214
|
|
|
|
(6,990
|
)
|
|
|
407,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
3,008,818
|
|
|
$
|
22,665
|
|
|
$
|
(24,290
|
)
|
|
$
|
3,007,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
All fixed income securities were income producing during 2007,
except for one security valued at $0.4 million. The
following table displays the gross unrealized losses and fair
value of all investments 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
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
671
|
|
|
$
|
(2
|
)
|
|
$
|
2,234
|
|
|
$
|
(7
|
)
|
|
$
|
2,905
|
|
|
$
|
(9
|
)
|
States, municipalities and political subdivisions
|
|
|
236,494
|
|
|
|
(1,535
|
)
|
|
|
149,584
|
|
|
|
(1,095
|
)
|
|
|
386,078
|
|
|
|
(2,630
|
)
|
Corporate fixed income securities
|
|
|
34,577
|
|
|
|
(2,316
|
)
|
|
|
107,084
|
|
|
|
(2,182
|
)
|
|
|
141,661
|
|
|
|
(4,498
|
)
|
Asset-backed and mortgage-backed securities
|
|
|
89,112
|
|
|
|
(1,205
|
)
|
|
|
220,651
|
|
|
|
(3,218
|
)
|
|
|
309,763
|
|
|
|
(4,423
|
)
|
Foreign securities
|
|
|
82,971
|
|
|
|
(861
|
)
|
|
|
217,555
|
|
|
|
(5,906
|
)
|
|
|
300,526
|
|
|
|
(6,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
443,825
|
|
|
$
|
(5,919
|
)
|
|
$
|
697,108
|
|
|
$
|
(12,408
|
)
|
|
$
|
1,140,933
|
|
|
$
|
(18,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
|
|
$
|
6,892
|
|
|
$
|
(19
|
)
|
|
$
|
49,922
|
|
|
$
|
(731
|
)
|
|
$
|
56,814
|
|
|
$
|
(750
|
)
|
States, municipalities and political subdivisions
|
|
|
188,704
|
|
|
|
(801
|
)
|
|
|
239,299
|
|
|
|
(4,014
|
)
|
|
|
428,003
|
|
|
|
(4,815
|
)
|
Corporate fixed income securities
|
|
|
60,037
|
|
|
|
(236
|
)
|
|
|
194,020
|
|
|
|
(4,714
|
)
|
|
|
254,057
|
|
|
|
(4,950
|
)
|
Asset-backed and mortgage-backed securities
|
|
|
207,133
|
|
|
|
(909
|
)
|
|
|
263,886
|
|
|
|
(5,876
|
)
|
|
|
471,019
|
|
|
|
(6,785
|
)
|
Foreign securities
|
|
|
272,668
|
|
|
|
(4,340
|
)
|
|
|
92,152
|
|
|
|
(2,650
|
)
|
|
|
364,820
|
|
|
|
(6,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
735,434
|
|
|
$
|
(6,305
|
)
|
|
$
|
839,279
|
|
|
$
|
(17,985
|
)
|
|
$
|
1,574,713
|
|
|
$
|
(24,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We regularly review our investments for possible impairments and
assess whether any impairments are other-than-temporary. The
determination that a security has incurred an
other-than-temporary decline in value and the amount of any
current loss recognition requires management judgment and a
continual review of market conditions and our investment
portfolio. We considered all of the unrealized losses at
December 31, 2007 and 2006 shown above to be temporary
based on the results of our review. There were no
other-than-temporary realized losses on our fixed income
securities in 2007 or 2006.
F-18
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
The amortized cost and fair value of our fixed income securities
at December 31, 2007, 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 asset-backed and
mortgage-backed securities at December 31, 2007 was
5.6 years.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Due in 1 year or less
|
|
$
|
179,988
|
|
|
$
|
179,763
|
|
Due after 1 year through 5 years
|
|
|
755,590
|
|
|
|
759,231
|
|
Due after 5 years through 10 years
|
|
|
677,588
|
|
|
|
682,303
|
|
Due after 10 years through 15 years
|
|
|
497,485
|
|
|
|
502,752
|
|
Due after 15 years
|
|
|
529,593
|
|
|
|
532,964
|
|
|
|
|
|
|
|
|
|
|
Securities with fixed maturities
|
|
|
2,640,244
|
|
|
|
2,657,013
|
|
Asset-backed and mortgage-backed securities
|
|
|
1,001,423
|
|
|
|
1,009,692
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
$
|
3,641,667
|
|
|
$
|
3,666,705
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, our domestic insurance companies had
deposited fixed income securities of $49.3 million
(amortized cost of $47.7 million) to meet the deposit
requirements of various insurance departments. In addition, we
had a deposit of fixed income securities of $23.6 million
(amortized cost of $23.1 million) at Lloyds of
London, which serves as security for our participation in two
Lloyds of London syndicates. There are withdrawal and
other restrictions on these deposits, but we direct how the
deposits are invested and we earn interest on the funds.
The sources of net investment income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Fixed income securities
|
|
$
|
150,594
|
|
|
$
|
112,878
|
|
|
$
|
77,842
|
|
Short-term investments
|
|
|
37,764
|
|
|
|
30,921
|
|
|
|
21,208
|
|
Other investments
|
|
|
23,930
|
|
|
|
14,178
|
|
|
|
3,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
212,288
|
|
|
|
157,977
|
|
|
|
102,665
|
|
Investment expense
|
|
|
(5,826
|
)
|
|
|
(5,173
|
)
|
|
|
(3,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
206,462
|
|
|
$
|
152,804
|
|
|
$
|
98,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
Realized pre-tax gains (losses) on the sale of investments were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
Losses
|
|
|
Net
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
14,728
|
|
|
$
|
(1,266
|
)
|
|
$
|
13,462
|
|
Other investments
|
|
|
305
|
|
|
|
(579
|
)
|
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss)
|
|
$
|
15,033
|
|
|
$
|
(1,845
|
)
|
|
$
|
13,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
886
|
|
|
$
|
(1,771
|
)
|
|
$
|
(885
|
)
|
Other investments
|
|
|
93
|
|
|
|
(49
|
)
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss)
|
|
$
|
979
|
|
|
$
|
(1,820
|
)
|
|
$
|
(841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
3,562
|
|
|
$
|
(1,475
|
)
|
|
$
|
2,087
|
|
Other investments
|
|
|
156
|
|
|
|
(795
|
)
|
|
|
(639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss)
|
|
$
|
3,718
|
|
|
$
|
(2,270
|
)
|
|
$
|
1,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since 2005, we used certain available for sale fixed income
securities, denominated in British pound sterling, to
economically hedge foreign currency exposure on certain
insurance reserves and other liabilities, denominated in the
same currency. We incorrectly recorded the unrealized exchange
rate fluctuations on these securities through earnings as an
offset to the opposite fluctuations in the liabilities they
hedged, rather than through other comprehensive income within
shareholders equity. In 2007, to correct our accounting,
we reversed $13.4 million of cumulative unrealized exchange
rate gains. We recorded this reversal as a charge to our gain or
loss from currency conversion account, with an offsetting credit
to other comprehensive income. We reported our net loss from
currency conversion, which included this $13.4 million
charge, as a component of other operating expense in the
consolidated statements of earnings. In 2007, we sold these
available for sale securities and realized the
$13.4 million of embedded cumulative currency conversion
gains. This gain was included in the net realized investment
gain (loss) line of our consolidated statements of earnings. The
offsetting effect of these transactions had no impact on our
2007 consolidated net earnings. Our loss from currency
conversion, excluding the $13.4 million charge, was
$1.8 million, zero and $1.0 million in 2007, 2006 and
2005, respectively.
Unrealized pre-tax net gains (losses) on investments during each
year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Fixed income securities
|
|
$
|
26,663
|
|
|
$
|
6,890
|
|
|
$
|
(29,265
|
)
|
Strategic and other investments
|
|
|
(22,244
|
)
|
|
|
(5,063
|
)
|
|
|
14,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains (losses)
|
|
$
|
4,419
|
|
|
$
|
1,827
|
|
|
$
|
(14,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
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 table presents the
effect of such reinsurance transactions on our premium and loss
and loss adjustment expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and Loss
|
|
|
|
Written
|
|
|
Earned
|
|
|
Adjustment
|
|
|
|
Premium
|
|
|
Premium
|
|
|
Expense
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct business
|
|
$
|
2,000,552
|
|
|
$
|
2,001,329
|
|
|
$
|
1,119,384
|
|
Reinsurance assumed
|
|
|
450,627
|
|
|
|
433,951
|
|
|
|
233,026
|
|
Reinsurance ceded
|
|
|
(465,570
|
)
|
|
|
(450,194
|
)
|
|
|
(168,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts
|
|
$
|
1,985,609
|
|
|
$
|
1,985,086
|
|
|
$
|
1,183,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct business
|
|
$
|
1,867,908
|
|
|
$
|
1,790,636
|
|
|
$
|
990,800
|
|
Reinsurance assumed
|
|
|
367,740
|
|
|
|
357,799
|
|
|
|
228,038
|
|
Reinsurance ceded
|
|
|
(423,096
|
)
|
|
|
(439,246
|
)
|
|
|
(206,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts
|
|
$
|
1,812,552
|
|
|
$
|
1,709,189
|
|
|
$
|
1,011,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct business
|
|
$
|
1,768,284
|
|
|
$
|
1,694,446
|
|
|
$
|
1,329,931
|
|
Reinsurance assumed
|
|
|
270,002
|
|
|
|
292,944
|
|
|
|
266,842
|
|
Reinsurance ceded
|
|
|
(537,062
|
)
|
|
|
(617,402
|
)
|
|
|
(677,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts
|
|
$
|
1,501,224
|
|
|
$
|
1,369,988
|
|
|
$
|
919,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceding commissions netted with policy acquisition costs in the
consolidated statements of earnings were $45.8 million in
2007, $45.8 million in 2006 and $96.0 million in 2005.
The table below shows the components of reinsurance recoverables
reported in our consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Commutation receivable
|
|
$
|
|
|
|
$
|
100,000
|
|
Reinsurance recoverable on paid losses
|
|
|
80,915
|
|
|
|
96,727
|
|
Reinsurance recoverable on outstanding losses
|
|
|
458,190
|
|
|
|
529,562
|
|
Reinsurance recoverable on incurred but not reported losses
|
|
|
426,090
|
|
|
|
458,528
|
|
Reserve for uncollectible reinsurance
|
|
|
(8,530
|
)
|
|
|
(14,883
|
)
|
|
|
|
|
|
|
|
|
|
Total reinsurance recoverables
|
|
$
|
956,665
|
|
|
$
|
1,169,934
|
|
|
|
|
|
|
|
|
|
|
F-21
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
Our U.S. domiciled insurance companies require reinsurers
not authorized by the respective states of domicile of our
insurance companies to collateralize their 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
December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Payables to reinsurers
|
|
$
|
246,745
|
|
|
$
|
268,079
|
|
Letters of credit
|
|
|
188,400
|
|
|
|
326,204
|
|
Cash deposits
|
|
|
114,549
|
|
|
|
61,002
|
|
|
|
|
|
|
|
|
|
|
Total credits
|
|
$
|
549,694
|
|
|
$
|
655,285
|
|
|
|
|
|
|
|
|
|
|
The tables below present the calculation of net reserves, net
unearned premium and net deferred policy acquisition costs at
December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Loss and loss adjustment expense payable
|
|
$
|
3,227,080
|
|
|
$
|
3,097,051
|
|
Reinsurance recoverable on outstanding losses
|
|
|
(458,190
|
)
|
|
|
(529,562
|
)
|
Reinsurance recoverable on incurred but not reported losses
|
|
|
(426,090
|
)
|
|
|
(458,528
|
)
|
|
|
|
|
|
|
|
|
|
Net reserves
|
|
$
|
2,342,800
|
|
|
$
|
2,108,961
|
|
|
|
|
|
|
|
|
|
|
Unearned premium
|
|
$
|
943,946
|
|
|
$
|
920,350
|
|
Ceded unearned premium
|
|
|
(244,684
|
)
|
|
|
(226,125
|
)
|
|
|
|
|
|
|
|
|
|
Net unearned premium
|
|
$
|
699,262
|
|
|
$
|
694,225
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
$
|
192,773
|
|
|
$
|
182,410
|
|
Deferred ceding commissions
|
|
|
(68,968
|
)
|
|
|
(64,949
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred policy acquisition costs
|
|
$
|
123,805
|
|
|
$
|
117,461
|
|
|
|
|
|
|
|
|
|
|
F-22
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
In order to reduce our exposure to reinsurance credit risk, we
evaluate the financial condition of our reinsurers and place our
reinsurance with a diverse group of companies and syndicates,
which we believe to be financially sound. The following table
shows reinsurance balances relating to our reinsurers with a net
recoverable balance greater than $25.0 million at
December 31, 2007 and 2006. The total recoverables column
includes paid losses recoverable, outstanding losses
recoverable, incurred but not reported losses recoverable and
ceded unearned premium. The total credits column includes
letters of credit, cash deposits and other payables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
Net
|
|
Reinsurer
|
|
Rating
|
|
Location
|
|
Recoverables
|
|
|
Credits
|
|
|
Recoverables
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hannover Rueckversicherungs AG
|
|
A
|
|
Germany
|
|
$
|
97,224
|
|
|
$
|
26,195
|
|
|
$
|
71,029
|
|
Swiss Reinsurance America Corp.
|
|
A+
|
|
New York
|
|
|
61,147
|
|
|
|
3,133
|
|
|
|
58,014
|
|
Harco National Insurance Company
|
|
A-
|
|
Illinois
|
|
|
57,679
|
|
|
|
4,259
|
|
|
|
53,420
|
|
Arch Reinsurance Ltd.
|
|
A
|
|
Bermuda
|
|
|
45,283
|
|
|
|
2,816
|
|
|
|
42,467
|
|
ACE Property & Casualty Insurance Co.
|
|
A+
|
|
Pennsylvania
|
|
|
45,450
|
|
|
|
6,385
|
|
|
|
39,065
|
|
Transatlantic Reinsurance Company
|
|
A+
|
|
New York
|
|
|
44,175
|
|
|
|
9,061
|
|
|
|
35,114
|
|
Everest Reinsurance Company
|
|
A+
|
|
Delaware
|
|
|
27,674
|
|
|
|
70
|
|
|
|
27,604
|
|
Lloyds Syndicate Number 2791
|
|
A
|
|
United Kingdom
|
|
|
28,518
|
|
|
|
1,990
|
|
|
|
26,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hannover Rueckversicherungs AG
|
|
A
|
|
Germany
|
|
$
|
114,715
|
|
|
$
|
24,833
|
|
|
$
|
89,882
|
|
Arch Reinsurance Ltd.
|
|
A
|
|
Bermuda
|
|
|
55,909
|
|
|
|
12,771
|
|
|
|
43,138
|
|
Harco National Insurance Company
|
|
A-
|
|
Illinois
|
|
|
47,540
|
|
|
|
6,461
|
|
|
|
41,079
|
|
Swiss Reinsurance America Corp.
|
|
A+
|
|
New York
|
|
|
46,828
|
|
|
|
6,580
|
|
|
|
40,248
|
|
ACE Property & Casualty Insurance Co.
|
|
A+
|
|
Pennsylvania
|
|
|
42,289
|
|
|
|
3,885
|
|
|
|
38,404
|
|
Everest Reinsurance Company
|
|
A+
|
|
Delaware
|
|
|
51,256
|
|
|
|
14,833
|
|
|
|
36,423
|
|
Odyssey America Reinsurance Corp.
|
|
A
|
|
Connecticut
|
|
|
31,948
|
|
|
|
869
|
|
|
|
31,079
|
|
Platinum Underwriters Reinsurance Co.
|
|
A
|
|
Maryland
|
|
|
31,313
|
|
|
|
681
|
|
|
|
30,632
|
|
Ratings for companies are published by A.M. Best Company,
Inc. Lloyds of London is an insurance and reinsurance
marketplace composed of many independent underwriting syndicates
financially supported by a central trust fund. Lloyds of
London is rated A by A.M. Best Company, Inc.
We have a reserve of $8.5 million at December 31, 2007
for potential collectibility issues related to reinsurance
recoverables, including disputed amounts and associated
expenses. 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. We periodically review our
financial exposure to the reinsurance market and the level of
our reserve and continue to take actions in an attempt to
mitigate our exposure to possible loss.
HCC Life Insurance Company previously sold its entire block of
individual life insurance and annuity business to Swiss Re
Life & Health America, Inc. (rated A+ by
A.M. Best Company, Inc.) in the form of an
F-23
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
indemnity reinsurance contract. Ceded life and annuity benefits
amounted to $66.2 million and $70.9 million at
December 31, 2007 and 2006, respectively.
|
|
(5)
|
Liability
for Unpaid Loss and Loss Adjustment Expense
|
The following table provides a reconciliation of the liability
for unpaid loss and loss adjustment expense payable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Reserves for loss and loss adjustment expense payable at
beginning of year
|
|
$
|
3,097,051
|
|
|
$
|
2,813,720
|
|
|
$
|
2,089,199
|
|
Less reinsurance recoverables
|
|
|
988,090
|
|
|
|
1,280,287
|
|
|
|
1,029,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at beginning of year
|
|
|
2,108,961
|
|
|
|
1,533,433
|
|
|
|
1,059,283
|
|
Net reserve addition from acquired businesses
|
|
|
742
|
|
|
|
146,811
|
|
|
|
12,491
|
|
Incurred loss and loss adjustment expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loss and loss adjustment expense for claims
occurring in current year
|
|
|
1,210,344
|
|
|
|
1,018,382
|
|
|
|
894,303
|
|
Increase (decrease) in estimated loss and loss adjustment
expense for claims occurring in prior years
|
|
|
(26,397
|
)
|
|
|
(6,526
|
)
|
|
|
25,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred loss and loss adjustment expense
|
|
|
1,183,947
|
|
|
|
1,011,856
|
|
|
|
919,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense payments for claims occurring
during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
394,754
|
|
|
|
360,803
|
|
|
|
285,814
|
|
Prior years
|
|
|
556,096
|
|
|
|
222,336
|
|
|
|
172,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense payments
|
|
|
950,850
|
|
|
|
583,139
|
|
|
|
458,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at end of year
|
|
|
2,342,800
|
|
|
|
2,108,961
|
|
|
|
1,533,433
|
|
Plus reinsurance recoverables
|
|
|
884,280
|
|
|
|
988,090
|
|
|
|
1,280,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for loss and loss adjustment expense at end of
year
|
|
$
|
3,227,080
|
|
|
$
|
3,097,051
|
|
|
$
|
2,813,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net loss and loss adjustment expense was impacted by
redundant (adverse) reserve development relating to prior
years losses of $26.4 million in 2007,
$6.5 million in 2006 and $(25.4) million in 2005. The
adverse development for 2005 primarily related to a
$26.0 million commutation charge from our reinsurance on
certain run-off assumed accident and health business reported in
our discontinued lines. The redundant development for 2006
related to reduction in prior year hurricane reserves and a
reduction in aviation reserves, mostly offset by a
$20.2 million commutation charge on the run-off accident
and health business. The redundant development for 2007 related
primarily to reserve reductions in our diversified financial
products line of business from the 2003 and 2004 underwriting
years.
We have no material exposure to asbestos claims or environmental
pollution losses. Our largest insurance company subsidiary only
began writing business in 1981, and its policies normally
contain pollution exclusion clauses that limit pollution
coverage to sudden and accidental losses only, thus
excluding intentional dumping and seepage claims. Policies
issued by our other insurance company subsidiaries do not have
significant environmental exposures because of the types of
risks covered.
F-24
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
Notes payable at December 31, 2007 and 2006 are shown in
the table below. The aggregate estimated fair value of our 1.30%
and 2.00% convertible notes ($162.4 million and
$436.0 million at December 31, 2007 and 2006,
respectively) is based on quoted market prices. The estimated
fair value of our Revolving Loan Facility is based on current
borrowing rates offered to us and approximates the carrying
value at both balance sheet dates.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
1.30% Convertible Notes
|
|
$
|
124,714
|
|
|
$
|
124,977
|
|
2.00% Convertible Exchange Notes
|
|
|
|
|
|
|
172,174
|
|
$575.0 million Revolving Loan Facility
|
|
|
200,000
|
|
|
|
|
|
Other debt
|
|
|
|
|
|
|
11,736
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
$
|
324,714
|
|
|
$
|
308,887
|
|
|
|
|
|
|
|
|
|
|
Our 1.30% Convertible Notes are due in 2023. We pay
interest semi-annually on April 1 and October 1. Each one
thousand dollar principal amount of notes is convertible into
44.1501 shares of our common stock, which represents an
initial conversion price of $22.65 per share. The initial
conversion price is subject to standard anti-dilution provisions
designed to maintain the value of the conversion option in the
event we take certain actions with respect to our common stock,
such as stock splits, reverse stock splits, stock dividends and
extraordinary dividends, that affect all of the holders of our
common stock equally and that could have a dilutive effect on
the value of the conversion rights of the holders of the notes
or that confer a benefit upon our current shareholders not
otherwise available to the Convertible Notes. Holders may
surrender notes for conversion if, as of the last day of the
preceding calendar quarter, the closing sale price of our common
stock for at least 20 consecutive trading days during the period
of 30 consecutive trading days ending on the last trading day of
that quarter is more than 130% ($29.45 per share) of the
conversion price per share of our common stock. We must settle
any conversions by paying cash for the principal amount of the
notes and issuing our common stock for the value of the
conversion premium. We can redeem the notes for cash at any time
on or after April 1, 2009. Holders may require us to
repurchase the notes on April 1, 2009, 2014 or 2019, or if
a change in control of HCC Insurance Holdings, Inc. occurs on or
before April 1, 2009. The repurchase price to settle any
such put or change in control provisions will equal the
principal amount of the notes plus accrued and unpaid interest
and will be paid in cash.
In 2007, we announced our intention to redeem the
2% Convertible Exchange Notes, as provided for in the terms
of the notes. All notes were surrendered for conversion prior to
the redemption date. Each one thousand dollar principal amount
was converted into 46.8823 shares of our common stock. We
settled the conversions by paying cash for the principal amount
of the notes and issuing 2.2 million shares of our common
stock for the value of the conversion premium.
Our $575.0 million Revolving Loan Facility allows us to
borrow up to the maximum allowed by the facility on a revolving
basis until the facility expires on December 19, 2011. At
our option, subject to the lenders ability to obtain the
necessary commitments, the amount available under the facility
may be increased to $700.0 million. The interest rate is
LIBOR plus a margin of 15 to 50 basis points, depending on our
debt rating. The facility is collateralized by guarantees
entered into by our domestic underwriting agencies and
reinsurance brokers. The facility agreement contains certain
restrictive covenants, which we believe are typical for similar
financing arrangements. At December 31, 2007, the
contractual interest rate on the outstanding balance was LIBOR
plus 25 basis points (4.85%), but the effective interest rate
was 4.6% due to the fixed interest rate swaps discussed below.
F-25
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
In 2007, we entered into three interest rate swap agreements to
exchange LIBOR (4.6% at December 31, 2007) for a 4.6%
fixed rate on the $200.0 million outstanding balance of our
Revolving Loan Facility. The swaps mature in November 2009 and
qualify for cash flow hedge accounting treatment. At
December 31, 2007, the swaps had an unrealized loss of
$2.5 million, which was recorded in other comprehensive
income within shareholders equity.
We have a $52.0 million Standby Letter of Credit Facility
that is used to guarantee our performance in two Lloyds of
London syndicates. Letters of credit issued under the Standby
Letter of Credit Facility are unsecured commitments of HCC
Insurance Holdings, Inc. The Standby Letter of Credit Facility
contains standard restrictive covenants similar to our Revolving
Loan Facility.
At December 31, 2007, certain of our subsidiaries
maintained revolving lines of credit with a bank in the combined
maximum amount of $43.3 million available through
November 30, 2009. Advances under the lines of credit are
limited to amounts required to fund draws, if any, on letters of
credit issued by the bank on behalf of the subsidiaries and
short-term direct cash advances. The lines of credit are
collateralized by securities having an aggregate market value of
up to $54.1 million, the actual amount of collateral at any
one time being 125% of the aggregate amount outstanding.
Interest on the lines is payable at the banks prime rate
of interest (7.25% at December 31, 2007) for draws on
the letters of credit and either prime or prime less 1% on
short-term cash advances. At December 31, 2007, letters of
credit totaling $20.5 million had been issued to insurance
companies by the bank on behalf of our subsidiaries, with total
securities of $25.6 million collateralizing the lines.
F-26
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
At December 31, 2007 and 2006, we had current income taxes
payable of $17.3 million and $4.4 million,
respectively, included in accounts payable and accrued
liabilities in the consolidated balance sheets.
The following table summarizes the differences between our
effective tax rate for financial statement purposes and the
Federal statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax on continuing operations at statutory rate
|
|
$
|
205,054
|
|
|
$
|
178,442
|
|
|
$
|
95,413
|
|
Nontaxable municipal bond interest and dividends received
deduction
|
|
|
(18,215
|
)
|
|
|
(15,291
|
)
|
|
|
(12,267
|
)
|
Non-deductible expenses
|
|
|
1,233
|
|
|
|
781
|
|
|
|
1,785
|
|
State income taxes, net of federal tax benefit
|
|
|
3,855
|
|
|
|
3,820
|
|
|
|
3,591
|
|
Foreign income taxes
|
|
|
37,406
|
|
|
|
22,548
|
|
|
|
15,024
|
|
Foreign tax credit
|
|
|
(37,396
|
)
|
|
|
(22,405
|
)
|
|
|
(14,981
|
)
|
Dividends received deduction on repatriated foreign earnings
|
|
|
|
|
|
|
|
|
|
|
(2,784
|
)
|
Uncertain tax positions (net of federal tax benefit on state
positions of $232)
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
65
|
|
|
|
(346
|
)
|
|
|
(1,604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense from continuing operations
|
|
$
|
190,441
|
|
|
$
|
167,549
|
|
|
$
|
84,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate, continuing operations
|
|
|
32.5
|
%
|
|
|
32.9
|
%
|
|
|
30.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax on discontinued operations at statutory rate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,556
|
|
State income taxes, net of federal tax benefit
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense on discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate, discontinued operations
|
|
|
|
%
|
|
|
|
%
|
|
|
37.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
190,441
|
|
|
$
|
167,549
|
|
|
$
|
85,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effective tax rate
|
|
|
32.5
|
%
|
|
|
32.9
|
%
|
|
|
31.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
The components of income tax expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal current
|
|
$
|
113,950
|
|
|
$
|
128,167
|
|
|
$
|
69,113
|
|
Federal deferred
|
|
|
34,948
|
|
|
|
10,957
|
|
|
|
(5,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federal
|
|
|
148,898
|
|
|
|
139,124
|
|
|
|
63,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State current
|
|
|
2,795
|
|
|
|
3,842
|
|
|
|
4,266
|
|
State deferred
|
|
|
3,135
|
|
|
|
2,035
|
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total state
|
|
|
5,930
|
|
|
|
5,877
|
|
|
|
5,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign current
|
|
|
38,043
|
|
|
|
24,665
|
|
|
|
15,155
|
|
Foreign deferred
|
|
|
(637
|
)
|
|
|
(2,117
|
)
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign
|
|
|
37,406
|
|
|
|
22,548
|
|
|
|
15,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions
|
|
|
(1,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense from continuing operations
|
|
$
|
190,441
|
|
|
$
|
167,549
|
|
|
$
|
84,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal current
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,528
|
|
Federal deferred
|
|
|
|
|
|
|
|
|
|
|
(2,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federal
|
|
|
|
|
|
|
|
|
|
|
1,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State current
|
|
|
|
|
|
|
|
|
|
|
475
|
|
State deferred
|
|
|
|
|
|
|
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total state
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense from discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
190,441
|
|
|
$
|
167,549
|
|
|
$
|
85,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
The net deferred tax asset is included in other assets in our
consolidated balance sheets. The composition of deferred tax
assets and liabilities at December 31, 2007 and 2006 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Excess of financial unearned premium over tax
|
|
$
|
24,801
|
|
|
$
|
34,638
|
|
Effect of loss reserve discounting and salvage and subrogation
accrual for tax
|
|
|
58,591
|
|
|
|
48,758
|
|
Excess of financial accrued expenses over tax
|
|
|
8,896
|
|
|
|
9,621
|
|
Allowance for bad debts, not deductible for tax
|
|
|
12,156
|
|
|
|
15,047
|
|
Stock option compensation under SFAS 123(R) in excess of
deduction for tax
|
|
|
6,716
|
|
|
|
4,375
|
|
Federal tax net operating loss carryforwards
|
|
|
650
|
|
|
|
1,087
|
|
State tax net operating loss carryforwards
|
|
|
2,996
|
|
|
|
3,227
|
|
Foreign branch net operating loss carryforwards
|
|
|
|
|
|
|
388
|
|
Federal benefit of state uncertain tax positions
|
|
|
655
|
|
|
|
|
|
Valuation allowance
|
|
|
(6,521
|
)
|
|
|
(7,822
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
108,940
|
|
|
|
109,319
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on increase in value of securities
|
|
|
22,340
|
|
|
|
20,129
|
|
Deferred policy acquisition costs, net of ceding commissions,
deductible for tax
|
|
|
23,025
|
|
|
|
11,432
|
|
Amortizable goodwill for tax
|
|
|
37,281
|
|
|
|
27,676
|
|
Book basis in net assets of foreign subsidiaries in excess of tax
|
|
|
15,148
|
|
|
|
17,527
|
|
Property and equipment depreciation and other items
|
|
|
10,366
|
|
|
|
8,421
|
|
Reimbursement receivable
|
|
|
|
|
|
|
2,127
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
108,160
|
|
|
|
87,312
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
780
|
|
|
$
|
22,007
|
|
|
|
|
|
|
|
|
|
|
Changes in the valuation allowance account applicable to
deferred tax assets result primarily from the acquisition and
expiration of net operating losses and other tax attributes
related to acquired businesses. In 2005, we eliminated a
valuation allowance that we had established when we acquired a
subsidiary in 2002. Changes in the valuation allowance were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance at beginning of year
|
|
$
|
7,822
|
|
|
$
|
10,293
|
|
|
$
|
17,358
|
|
Reduction related to 2002 acquisition
|
|
|
|
|
|
|
|
|
|
|
(5,511
|
)
|
Other
|
|
|
(1,301
|
)
|
|
|
(2,471
|
)
|
|
|
(1,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
6,521
|
|
|
$
|
7,822
|
|
|
$
|
10,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, we had Federal and state tax net
operating loss carryforwards of approximately $1.9 million
and $45.3 million, respectively, which will expire in
varying amounts through 2027. Future use of certain
carryforwards is subject to statutory limitations due to prior
changes of ownership. We have recorded valuation allowances of
$0.7 million against our Federal loss carryforwards,
substantially all of which would reduce goodwill if the
carryforwards are realized, and $2.7 million against our
state loss carryforwards. Based on our history of taxable income
in our domestic insurance and other operations and our
projections of future
F-29
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
taxable income in our domestic and foreign insurance operations,
we believe it is more likely than not that the deferred tax
assets related to our loss carryforwards, for which there are no
valuation allowances, will be realized.
On January 1, 2007, we adopted FIN No. 48,
Accounting for Uncertainty in Income Taxes. As a result
of adopting FIN 48, our unrecognized gross tax benefits
related to uncertain tax positions totaled $9.9 million and
related potential interest totaled $1.4 million, for which
we had previously recorded $9.2 million of gross tax
liabilities on unrecognized tax benefits. To adopt FIN 48
and record the additional required tax and interest liabilities,
we reduced beginning retained earnings by $0.7 million,
primarily for potential interest net of the related Federal tax
benefit. At December 31, 2007, our unrecognized gross tax
benefits totaled $7.6 million. A reconciliation of our
unrecognized gross tax benefits was as follows:
|
|
|
|
|
|
|
2007
|
|
|
Balance at January 1, 2007
|
|
$
|
9,869
|
|
Gross increases:
|
|
|
|
|
Tax positions of current year
|
|
|
953
|
|
Tax positions of prior years
|
|
|
248
|
|
Acquisitions
|
|
|
72
|
|
Gross decreases:
|
|
|
|
|
Statute expirations
|
|
|
(1,468
|
)
|
Settlements
|
|
|
(1,327
|
)
|
Tax positions of prior years
|
|
|
(305
|
)
|
Acquisitions
|
|
|
(183
|
)
|
Other
|
|
|
(237
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
7,622
|
|
|
|
|
|
|
Of the total amount of our unrecognized tax benefits related to
uncertain tax positions, $7.2 million would reduce our
annual effective tax rate if the uncertain tax benefits were
recognized as a reduction of income tax expense currently. At
the date of adoption, it was reasonably possible that the
liabilities for our unrecognized tax benefits could decrease
$1.4 million in the subsequent twelve months, mainly due to
the expiration of the statute of limitations related to state
tax liabilities. At December 31, 2007, it is reasonably
possible that liabilities for unrecognized tax benefits could
decrease $0.8 million in the next twelve months, mainly due
to the expiration of federal and state statutes of limitation.
We report any potential net interest income and expense and
penalties related to changes in our uncertain tax positions in
our consolidated statement of earnings as interest expense and
other operating expense, respectively. In 2007, we recognized a
net $0.4 million of interest income and no penalties. We
had $1.0 million and $0.2 million accrued as of
December 31, 2007 for interest expense and penalties,
respectively.
We file income tax returns in the U.S. Federal
jurisdiction, and various states and foreign jurisdictions. With
a few exceptions, we are no longer subject to U.S. Federal,
state and local, or foreign income tax examinations by tax
authorities for years before 2002. In 2007, the Internal Revenue
Service commenced an examination of our 2004 and 2005
U.S. income tax returns. We do not expect that the results
of this examination will have a material effect on our
consolidated financial position, results of operations or cash
flows.
F-30
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
In 2007, we granted fully-vested common stock valued at $80,000
to each non-management director as part of their annual
compensation for serving on our Board of Directors. The number
of shares granted to each director was based on the closing
price on the grant date, which was either the day of the Annual
Meeting of Shareholders or the day the director joined the
Board, if later. The shares granted had an aggregate fair value
of $0.7 million, which we recognized as compensation
expense on the grant date.
In 2005, we sold 4.7 million shares of our common stock in
a public offering at a price of $32.05 per share. Net proceeds
from the offering totaled $150.0 million after deducting
the underwriting discount and offering expenses. We used
$108.0 million of the proceeds to make capital
contributions to our insurance company subsidiaries and used the
remainder for acquisitions.
The components of accumulated other comprehensive income in our
consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Unrealized
|
|
|
Cash Flow
|
|
|
Foreign
|
|
|
Other
|
|
|
|
Investment
|
|
|
Hedge
|
|
|
Currency
|
|
|
Comprehensive
|
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
Translation
|
|
|
Income
|
|
|
Balance at December 31, 2004
|
|
$
|
25,781
|
|
|
$
|
|
|
|
$
|
11,854
|
|
|
$
|
37,635
|
|
Net change for year
|
|
|
(8,862
|
)
|
|
|
|
|
|
|
(9,699
|
)
|
|
|
(18,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
16,919
|
|
|
|
|
|
|
|
2,155
|
|
|
|
19,074
|
|
Net change for year
|
|
|
1,099
|
|
|
|
|
|
|
|
13,799
|
|
|
|
14,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
18,018
|
|
|
|
|
|
|
|
15,954
|
|
|
|
33,972
|
|
Net change for year
|
|
|
3,114
|
|
|
|
(1,617
|
)
|
|
|
12,413
|
|
|
|
13,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
21,132
|
|
|
$
|
(1,617
|
)
|
|
$
|
28,367
|
|
|
$
|
47,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. insurance companies are limited to the amount of
dividends they can pay to their parent by the laws of their
state of domicile. The maximum dividends that our direct
domestic subsidiaries can pay in 2008 without special permission
is $160.8 million.
The following table details the numerator and denominator used
in the earnings per share calculations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net earnings
|
|
$
|
395,429
|
|
|
$
|
342,285
|
|
|
$
|
191,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
112,873
|
|
|
|
111,309
|
|
|
|
105,463
|
|
Dilutive effect of outstanding options (determined using the
treasury stock method)
|
|
|
760
|
|
|
|
1,177
|
|
|
|
1,659
|
|
Dilutive effect of convertible debt (determined using the
treasury stock method)
|
|
|
3,364
|
|
|
|
4,250
|
|
|
|
2,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and potential common shares
outstanding
|
|
|
116,997
|
|
|
|
116,736
|
|
|
|
109,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock options not included in treasury stock
method computation
|
|
|
4,714
|
|
|
|
1,588
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
|
|
(10)
|
Stock-Based
Compensation
|
Our stock option plans, the 2004 Flexible Incentive Plan and
2001 Flexible Incentive Plan, are administered by the
Compensation Committee of the Board of Directors. Options
granted under these plans may be used to purchase one share of
our common stock. Options vest over a period of up to seven
years, which is the requisite service period, and expire four to
eight years after grant date.
In 2007, we expensed $11.3 million ($7.4 million
after-tax or $0.06 per diluted share) of stock-based
compensation, after the effect of the deferral and amortization
of related policy acquisition costs. In 2006, we expensed
$13.1 million ($9.4 million after-tax or $0.08 per
diluted share) on a comparable basis as 2007. At
December 31, 2007, there was approximately
$28.8 million of total unrecognized compensation expense
related to unvested options that is expected to be recognized
over a weighted-average period of 3.0 years. In 2008, we
expect to recognize $11.8 million of expense, including the
amortization of deferred policy acquisition costs, related to
stock-based compensation for options currently outstanding.
The table below shows the weighted-average fair value of options
granted and the related weighted-average assumptions used in the
Black-Scholes model, which we use to determine the fair value of
an option on its grant date. The risk-free interest rate is
based on the U.S. Treasury rate that most closely
approximates each options expected term. We based our
expected volatility on the historical volatility of our stock
over a period matching each options expected term. Our
dividend yield is based on an average of our historical dividend
payments divided by the stock price. We used historical exercise
patterns by grant type to estimate the expected option life.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Fair value of options granted
|
|
$
|
6.59
|
|
|
$
|
7.20
|
|
|
$
|
8.90
|
|
Risk free interest rate
|
|
|
4.4
|
%
|
|
|
4.7
|
%
|
|
|
4.0
|
%
|
Expected volatility
|
|
|
21.0
|
%
|
|
|
22.0
|
%
|
|
|
32.0
|
%
|
Expected dividend yield
|
|
|
1.3
|
%
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
Expected option life
|
|
|
4.3 years
|
|
|
|
3.8 years
|
|
|
|
4.8 years
|
|
The following table details our stock option activity during
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
|
Outstanding, beginning of year
|
|
|
7,181
|
|
|
$
|
22.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,920
|
|
|
|
30.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,103
|
)
|
|
|
19.28
|
|
|
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
(433
|
)
|
|
|
27.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
8,565
|
|
|
|
25.79
|
|
|
|
3.5 years
|
|
|
$
|
33,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest, end of period
|
|
|
7,766
|
|
|
|
25.56
|
|
|
|
3.4 years
|
|
|
|
32,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of period
|
|
|
3,067
|
|
|
|
21.70
|
|
|
|
2.3 years
|
|
|
|
22,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value (the amount by which the fair
value of the underlying stock exceeds the exercise price) of
options exercised during 2007, 2006 and 2005 was
$12.5 million, $13.8 million and $27.9 million,
respectively. At December 31, 2007, 10.5 million
shares of our common stock were authorized
F-32
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
and reserved for the exercise of options and stock grants to
directors, of which 8.6 million shares were reserved for
options previously granted and 1.9 million shares were
reserved for future issuance.
Exercise of options during 2007, 2006 and 2005 resulted in cash
receipts of $21.1 million, $15.6 million and
$36.1 million, respectively. We generally recognize a tax
benefit when our employees exercise options. SFAS 123(R)
requires that we report the tax benefit related to the excess of
the tax deductible amount over the recognized compensation
expense as financing cash flow, rather than as operating cash
flow under APB 25. We recorded a $3.4 million benefit as
financing cash flow in 2007 and 2006, and $6.2 million as
operating cash flow in 2005.
In December 2006, we increased the exercise price of all
outstanding discounted options held by directors and certain
officers to match the closing price of our stock on the actual
accounting measurement date, as determined by our stock option
investigation. In most cases, these modifications resulted in a
lower fair value under the Black-Scholes model. In accordance
with the guidance of SFAS 123(R), we will not recognize
less expense over the term of the options than the original
grant date fair value of these awards. Because the exercise
prices were increased, these options are no longer subject to
Section 409A of the Internal Revenue Code.
Section 409A imposes certain restrictions and additional
taxes on recipients of discounted options.
In 2006, certain executives terminated employment and executed
agreements to reimburse us for the difference between the actual
gain realized from all past option exercises and the gain if
mis-priced options had been granted at the closing price of our
stock on the actual accounting measurement date as determined by
our stock option investigation. We recorded a $6.1 million
receivable related to these contractual reimbursements and a
corresponding $4.0 million increase to additional paid-in
capital, net of $2.1 million of taxes payable on these
reimbursements, in 2006. The receivable was collected in 2007.
In August 2007, we completed a tender offer to reprice certain
employees unexercised discounted options and to provide
future cash reimbursements for the increase in option price. The
offer resulted from our stock option investigation and the
potential adverse tax ramifications under Section 409A that
might result if the options were not repriced. All employees
accepted our offer to reprice their options. The estimated cost
of $4.0 million for the aggregate reimbursements was
accrued in 2006. Employees will receive the cash reimbursements
as their options vest through 2011. We paid $2.1 million as
the initial payment in January 2008.
In 2007, we paid $2.1 million to the Internal Revenue
Service to cover our employees personal tax liabilities
under Section 409A for options exercised in 2006. This
liability was accrued at December 31, 2006. In 2007, we
accrued $0.6 million to cover our employees personal
tax liabilities under Section 409A for options exercised in
2007 before completion of the tender offer and paid this amount
to employees in February 2008.
F-33
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
In 2005, we recorded compensation expense of $3.0 million,
in accordance with APB 25. Prior to adoption of
SFAS 123(R), we were required to disclose the effect on net
earnings and earnings per share if we had used the fair value
method of SFAS No. 123, Accounting for Stock-Based
Compensation, to value stock options. If we had valued our
options using the fair value method under SFAS 123 and the
assumptions listed above, the effect on our consolidated
financial results would have been as follows:
|
|
|
|
|
|
|
2005
|
|
|
Reported net earnings
|
|
$
|
191,192
|
|
Stock-based compensation included in reported net earnings, net
of income taxes
|
|
|
2,114
|
|
Stock-based compensation using fair value method, net of income
taxes
|
|
|
(8,258
|
)
|
|
|
|
|
|
Pro forma net earnings
|
|
$
|
185,048
|
|
|
|
|
|
|
Reported basic earnings per share
|
|
$
|
1.81
|
|
Fair value stock-based compensation
|
|
|
(0.06
|
)
|
|
|
|
|
|
Pro forma basic earnings per share
|
|
$
|
1.75
|
|
|
|
|
|
|
Reported diluted earnings per share
|
|
$
|
1.75
|
|
Fair value stock-based compensation
|
|
|
(0.06
|
)
|
|
|
|
|
|
Pro forma diluted earnings per share
|
|
$
|
1.69
|
|
|
|
|
|
|
|
|
(11)
|
Segment
and Geographic Data
|
We classify our activities into the following three operating
business segments based on services provided: 1) insurance
company, 2) agency and 3) other operations. See
Note 1 for a description of the principal subsidiaries
included in and the services provided by our insurance company
and agency segments. Our other operations segment includes
insurance-related investments, which we make periodically, and
our trading portfolio. Corporate includes general corporate
operations and those minor operations not included in a segment.
Inter-segment revenue consists primarily of fee and commission
income of our agency segment charged to our insurance company
segment. Inter-segment pricing (either flat rate fees or as a
percentage of premium) approximates what is charged to unrelated
parties for similar services. Effective April 1, 2006, we
consolidated our London underwriting agency (agency segment)
into HCC International Insurance Company (insurance segment).
The performance of each segment is evaluated by our management
based on net earnings. Net earnings is calculated after tax and
after corporate expense allocations, interest expense on debt
incurred at the purchase date, and intercompany eliminations
have been charged or credited to our individual segments. All
stock-based compensation is included in the corporate segment
since it is not included in managements evaluation of the
other segments.
F-34
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
The following tables show information by business segment and
geographic location. Geographic location is determined by
physical location of our offices and does not represent the
location of insureds or reinsureds from whom the business was
generated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Agency
|
|
|
Operations
|
|
|
Corporate
|
|
|
Total
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,849,620
|
|
|
$
|
62,246
|
|
|
$
|
38,904
|
|
|
$
|
4,553
|
|
|
$
|
1,955,323
|
|
Foreign
|
|
|
395,495
|
|
|
|
37,555
|
|
|
|
|
|
|
|
|
|
|
|
433,050
|
|
Inter-segment
|
|
|
|
|
|
|
78,836
|
|
|
|
|
|
|
|
|
|
|
|
78,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenue
|
|
$
|
2,245,115
|
|
|
$
|
178,637
|
|
|
$
|
38,904
|
|
|
$
|
4,553
|
|
|
|
2,467,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,388,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
277,331
|
|
|
$
|
29,043
|
|
|
$
|
22,801
|
|
|
$
|
(20,168
|
)
|
|
$
|
309,007
|
|
Foreign
|
|
|
80,502
|
|
|
|
4,810
|
|
|
|
|
|
|
|
|
|
|
|
85,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net earnings (loss)
|
|
$
|
357,833
|
|
|
$
|
33,853
|
|
|
$
|
22,801
|
|
|
$
|
(20,168
|
)
|
|
|
394,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
395,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
192,486
|
|
|
$
|
9,520
|
|
|
$
|
2,498
|
|
|
$
|
1,958
|
|
|
$
|
206,462
|
|
Depreciation and amortization
|
|
|
4,921
|
|
|
|
8,030
|
|
|
|
219
|
|
|
|
2,812
|
|
|
|
15,982
|
|
Interest expense (benefit)
|
|
|
1,579
|
|
|
|
11,606
|
|
|
|
(51
|
)
|
|
|
(2,830
|
)
|
|
|
10,304
|
|
Capital expenditures
|
|
|
5,462
|
|
|
|
3,416
|
|
|
|
412
|
|
|
|
2,780
|
|
|
|
12,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
162,058
|
|
|
|
25,853
|
|
|
|
13,211
|
|
|
|
(11,531
|
)
|
|
|
189,591
|
|
Inter-segment eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income tax expense on continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
190,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2007, earnings before income taxes were $453.2 million
for our domestic subsidiaries and $132.7 million for our
foreign subsidiaries and branches. During 2007, the corporate
segment incurred after-tax expense of $7.4 million for
SFAS 123(R) expense and $3.8 million for our stock
option investigation.
F-35
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Agency
|
|
|
Operations
|
|
|
Corporate
|
|
|
Total
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,536,675
|
|
|
$
|
65,866
|
|
|
$
|
75,077
|
|
|
$
|
6,198
|
|
|
$
|
1,683,816
|
|
Foreign
|
|
|
357,092
|
|
|
|
34,387
|
|
|
|
|
|
|
|
|
|
|
|
391,479
|
|
Inter-segment
|
|
|
25
|
|
|
|
79,795
|
|
|
|
|
|
|
|
|
|
|
|
79,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenue
|
|
$
|
1,893,792
|
|
|
$
|
180,048
|
|
|
$
|
75,077
|
|
|
$
|
6,198
|
|
|
|
2,155,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,075,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
205,024
|
|
|
$
|
32,281
|
|
|
$
|
48,844
|
|
|
$
|
(20,900
|
)
|
|
$
|
265,249
|
|
Foreign
|
|
|
66,991
|
|
|
|
10,038
|
|
|
|
|
|
|
|
|
|
|
|
77,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net earnings (loss)
|
|
$
|
272,015
|
|
|
$
|
42,319
|
|
|
$
|
48,844
|
|
|
$
|
(20,900
|
)
|
|
|
342,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
342,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
137,896
|
|
|
$
|
9,484
|
|
|
$
|
2,610
|
|
|
$
|
2,814
|
|
|
$
|
152,804
|
|
Depreciation and amortization
|
|
|
4,603
|
|
|
|
7,593
|
|
|
|
509
|
|
|
|
2,275
|
|
|
|
14,980
|
|
Interest expense (benefit)
|
|
|
1,887
|
|
|
|
11,552
|
|
|
|
517
|
|
|
|
(2,560
|
)
|
|
|
11,396
|
|
Capital expenditures
|
|
|
4,199
|
|
|
|
2,317
|
|
|
|
757
|
|
|
|
5,731
|
|
|
|
13,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
129,857
|
|
|
|
25,483
|
|
|
|
23,645
|
|
|
|
(11,262
|
)
|
|
|
167,723
|
|
Inter-segment eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income tax expense on continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
167,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2006, earnings before income taxes were $393.1 million
for our domestic subsidiaries and $116.7 million for our
foreign subsidiaries and branches. During 2006, the insurance
company segment recorded an after-tax loss of $13.1 million
due to a commutation, and the corporate segment incurred
after-tax expense of $9.4 million for SFAS 123(R)
expense and $9.3 million for our stock option investigation.
F-36
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Agency
|
|
|
Operations
|
|
|
Corporate
|
|
|
Total
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,216,894
|
|
|
$
|
62,111
|
|
|
$
|
35,324
|
|
|
$
|
6,784
|
|
|
$
|
1,321,113
|
|
Foreign
|
|
|
281,697
|
|
|
|
39,878
|
|
|
|
|
|
|
|
|
|
|
|
321,575
|
|
Inter-segment
|
|
|
158
|
|
|
|
86,877
|
|
|
|
|
|
|
|
|
|
|
|
87,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment revenue
|
|
$
|
1,498,749
|
|
|
$
|
188,866
|
|
|
$
|
35,324
|
|
|
$
|
6,784
|
|
|
|
1,729,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,642,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
119,634
|
|
|
$
|
31,158
|
|
|
$
|
22,605
|
|
|
$
|
352
|
|
|
$
|
173,749
|
|
Foreign
|
|
|
6,488
|
|
|
|
7,294
|
|
|
|
|
|
|
|
|
|
|
|
13,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net earnings
|
|
$
|
126,122
|
|
|
$
|
38,452
|
|
|
$
|
22,605
|
|
|
$
|
352
|
|
|
|
187,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
901
|
|
Earnings from discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
191,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
88,397
|
|
|
$
|
7,437
|
|
|
$
|
794
|
|
|
$
|
2,223
|
|
|
$
|
98,851
|
|
Depreciation and amortization
|
|
|
4,825
|
|
|
|
7,381
|
|
|
|
459
|
|
|
|
1,982
|
|
|
|
14,647
|
|
Interest expense (benefit)
|
|
|
445
|
|
|
|
9,173
|
|
|
|
699
|
|
|
|
(2,633
|
)
|
|
|
7,684
|
|
Capital expenditures
|
|
|
2,134
|
|
|
|
3,046
|
|
|
|
716
|
|
|
|
4,937
|
|
|
|
10,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
49,327
|
|
|
|
26,174
|
|
|
|
10,282
|
|
|
|
(2,034
|
)
|
|
|
83,749
|
|
Inter-segment eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income tax expense on continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
84,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2005, earnings before income taxes were $257.8 million
for our domestic subsidiaries (including discontinued
operations) and $19.3 million for our foreign subsidiaries
and branches. During 2005, the insurance company segment
recorded after-tax losses of $58.2 million due to the 2005
hurricanes and $16.9 million due to a commutation.
F-37
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
The following tables present selected revenue items by line of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Diversified financial products
|
|
$
|
777,414
|
|
|
$
|
728,861
|
|
|
$
|
531,136
|
|
Group life, accident and health
|
|
|
758,516
|
|
|
|
591,070
|
|
|
|
504,382
|
|
Aviation
|
|
|
153,121
|
|
|
|
152,886
|
|
|
|
136,197
|
|
London market account
|
|
|
124,609
|
|
|
|
112,362
|
|
|
|
93,017
|
|
Other specialty lines
|
|
|
171,824
|
|
|
|
123,981
|
|
|
|
97,721
|
|
Discontinued lines
|
|
|
(398
|
)
|
|
|
29
|
|
|
|
7,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
1,985,086
|
|
|
$
|
1,709,189
|
|
|
$
|
1,369,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty
|
|
$
|
121,307
|
|
|
$
|
114,400
|
|
|
$
|
113,725
|
|
Accident and health
|
|
|
18,785
|
|
|
|
22,731
|
|
|
|
18,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee and commission income
|
|
$
|
140,092
|
|
|
$
|
137,131
|
|
|
$
|
132,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets by business segment and geographic location are shown in
the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Agency
|
|
|
Operations
|
|
|
Corporate
|
|
|
Total
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
5,131,724
|
|
|
$
|
438,779
|
|
|
$
|
78,527
|
|
|
$
|
298,157
|
|
|
$
|
5,947,187
|
|
Foreign
|
|
|
1,730,569
|
|
|
|
396,889
|
|
|
|
|
|
|
|
|
|
|
|
2,127,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,862,293
|
|
|
$
|
835,668
|
|
|
$
|
78,527
|
|
|
$
|
298,157
|
|
|
$
|
8,074,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
4,598,206
|
|
|
$
|
499,871
|
|
|
$
|
135,391
|
|
|
$
|
220,665
|
|
|
$
|
5,454,133
|
|
Foreign
|
|
|
1,624,625
|
|
|
|
551,374
|
|
|
|
|
|
|
|
|
|
|
|
2,175,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,222,831
|
|
|
$
|
1,051,245
|
|
|
$
|
135,391
|
|
|
$
|
220,665
|
|
|
$
|
7,630,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
|
Commitments
and Contingencies
|
Litigation
Based on a voluntary independent investigation by a Special
Committee of the Board of Directors in 2006 of our past
practices related to granting stock options, we determined that
the price on the actual measurement date for a number of our
stock option grants from 1997 through 2005 and into 2006 did not
correspond to the price on the stated grant date and that
certain option grants were retroactively priced. The
investigation was conducted with the help of a law firm that was
not previously involved with our stock option plans and
procedures. The Special Committee completed the investigation on
November 16, 2006. Based upon the Special Committees
recommendations, the Board of Directors took specific actions.
The SEC commenced an informal inquiry upon notification by us of
the initiation of our investigation. We provided the results of
our internal review and independent investigation to the SEC,
and we have responded to requests from the SEC for documents and
additional information. In March 2007, the SEC issued a formal
order directing a private investigation. We are fully
cooperating with the SEC.
We are 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
F-38
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
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 over
contractual relationships 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.
In addition to the litigation discussed above, the following
lawsuits related to the outcome of our stock option
investigation have been filed:
Civil Action
No. 07-456
(Consolidated); Bacas and Halgren, derivatively on behalf of HCC
Insurance Holdings, Inc. v. Way et al.; In the
United States District Court for the Southern District of Texas,
Houston Division. This action consolidates all
pending derivative suits into one action (Bacas suits).
The Bacas action was filed on February 1, 2007, and
the Halgren action was filed on February 28, 2007.
On February 1, 2008, the parties appeared before the Court
to seek approval of a proposed settlement in the case. On
April 1, 2008, the Court will hold a final hearing. At the
final hearing, we intend to seek final approval of the
settlement. Under the terms of the settlement, we have or will
implement certain corporate governance reforms. We and our
directors and officers liability insurers have
agreed to pay up to $3.0 million to plaintiffs
counsel for their attorneys fees, subject to approval by
the Court.
Civil Action
No. 07-0801;
In re HCC Insurance Holdings, Inc. Securities Litigation; In the
United States District Court for the Southern District of Texas,
Houston Division (formerly referred to as Bristol County
Retirement System, individually and on behalf of all others
similarly situated v. HCC Insurance Holdings, Inc. et
al.). This action was filed on March 8,
2007. We are named as a defendant in this putative class action
along with certain current and former officers and directors. On
February 7, 2008, the parties reached an agreement to
settle the case and will propose the settlement to the Court for
approval. The terms of the settlement, which includes no
admission of liability or wrongdoing by HCC or any other
defendants, provide for a full and complete release of all
claims in the litigation and payment of $10.0 million to be
paid into a settlement fund, pending approval by the Court of a
plan of distribution. The $10.0 million will be paid by our
directors and officers liability insurers.
In each of these lawsuits, certain of our current and former
officers and directors have requested that they be indemnified
for any losses and that their legal fees be advanced. Pursuant
to our bylaws, our charter, applicable law and certain
agreements entered into with some of the defendants, we are
currently advancing legal fees.
Although the ultimate outcome of the above 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 these
matters will not have a material adverse effect on our
consolidated financial position, results of operations or cash
flows.
Catastrophe
Exposure
We have exposure to catastrophic losses caused by natural perils
(such as hurricanes and earthquakes), as well as from man-made
events (such as terrorist attacks). The incidence and severity
of catastrophic losses is unpredictable. We assess our exposures
in areas most vulnerable to natural catastrophes and apply
procedures to ascertain our probable maximum loss from any
single event. We maintain reinsurance protection that we believe
is sufficient to limit our exposure to a foreseeable event.
F-39
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
Indemnifications
In conjunction with the sales of business assets and
subsidiaries, we have provided indemnifications to the buyers.
Certain indemnifications cover typical representations and
warranties related to our responsibilities to perform under the
sales contracts. Other indemnifications 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 on
December 31, 2009.
We accrue a loss related to our indemnifications when a valid
claim is made by a buyer and we believe we have potential
exposure. We currently have several claims under
indemnifications that cover certain net losses alleged to have
been incurred in periods prior to our sale of certain
subsidiaries or otherwise alleged to be covered under
indemnification agreements related to such sales. As of
December 31, 2007, we have recorded a liability of
$14.8 million and have provided $5.2 million of
letters of credit to cover our obligations or anticipated
payments under these indemnifications.
Pursuant to our by-laws, Delaware Corporate law and certain
contractual agreements, we are required to advance
attorneys fees and other expenses and indemnify our
current and former directors and officers for liabilities
arising from any action, suit or proceeding brought because the
individual was acting as an officer or director of our company.
Under certain limited circumstances, the individual may be
required to reimburse us for any advances or indemnification
payments made by us. In addition, we maintain directors
and officers liability insurance, which may cover certain
of these costs. We expense payments as advanced and recognize
offsets if cash reimbursement is expected or received. It is not
possible to determine the maximum potential impact on our future
consolidated net earnings of any such indemnification costs,
since our by-laws, Delaware law and our contractual agreements
do not limit any such advances or indemnification payments.
Terrorist
Exposure
Under the Terrorism Risk Insurance Program Reauthorization Act
of 2007, we are required to offer terrorism coverage to our
commercial policyholders in certain lines of business, for which
we may, when warranted, charge an additional premium. The
policyholders may or may not accept such coverage. This law
establishes a deductible that each insurer would have to meet
before U.S. Federal reimbursement would occur. For 2008,
our deductible is approximately $99.8 million. The Federal
government would provide reimbursement for 85% of any additional
covered losses in 2008 up to the maximum amount set out in the
Act. Currently, the Act expires on December 31, 2014.
Leases
We lease administrative office facilities and transportation
equipment under operating leases that expire at various dates
through 2025. The agreements generally require us to pay rent,
utilities, real estate taxes, insurance and repairs. We
recognize rent expense on a straight-line basis over the term of
the lease, including free-rent periods. Rent expense under
operating leases totaled $11.1 million in 2007,
$10.3 million in 2006 and $9.8 million in 2005.
F-40
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
At December 31, 2007, future minimum rental payments
required under long-term, non-cancelable operating leases,
excluding certain expenses payable by us, were as follows:
|
|
|
|
|
Years ended December 31,
|
|
|
|
|
2008
|
|
$
|
12,499
|
|
2009
|
|
|
11,843
|
|
2010
|
|
|
11,124
|
|
2011
|
|
|
8,924
|
|
2012
|
|
|
6,929
|
|
Thereafter
|
|
|
22,396
|
|
|
|
|
|
|
Total future minimum rental payments
|
|
$
|
73,715
|
|
|
|
|
|
|
|
|
(13)
|
Related
Party Transactions
|
At December 31, 2007, 2006 and 2005, we had accruals of
$31.7 million, $47.7 million and $32.3 million,
respectively, for amounts owed to former owners of businesses we
acquired, who now are officers of certain of our subsidiaries.
These accruals represent amounts due under the terms of various
acquisition agreements. We paid $49.0 million in 2007,
$32.3 million in 2006 and $35.1 million in 2005
related to such agreements.
We own equity interests in three companies for which we use the
equity method of accounting. During 2005, we acquired the
remaining interest in two other companies we owned a minority
interest in and included 100% of their earnings in our
consolidated financial statements beginning on the effective
date of the acquisitions. We recorded gross written premium from
business originating at the five companies (until the
acquisition date for the two companies that are now
subsidiaries) of $15.7 million in 2007, $16.9 million
in 2006 and $40.2 million in 2005. During 2007, 2006 and
2005, we also ceded written premium of $3.7 million,
$9.3 million and $8.0 million, respectively, to one of
these companies under a quota share reinsurance agreement.
|
|
(14)
|
Statutory
Information
|
Our insurance companies file financial statements prepared in
accordance with statutory accounting principles prescribed or
permitted by domestic or foreign insurance regulatory
authorities. The differences between statutory financial
statements and financial statements prepared in accordance with
generally accepted accounting principles vary between domestic
and foreign jurisdictions.
Statutory policyholders surplus and net income, after
intercompany eliminations, included in those companies
respective filings with regulatory authorities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory policyholders surplus
|
|
$
|
1,744,889
|
|
|
$
|
1,342,054
|
|
|
$
|
1,110,268
|
|
Statutory net income
|
|
|
365,308
|
|
|
|
303,758
|
|
|
|
112,231
|
|
The 2006 statutory net income was reduced $13.1 million due
to a large commutation. The 2005 statutory net income was
reduced $58.2 million due to the 2005 hurricanes and
$20.3 million due to a large commutation. The statutory
surplus of each of our insurance companies is significantly in
excess of regulatory risk-based capital requirements.
F-41
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued, tables in thousands, except per share data)
|
|
(15)
|
Supplemental
Information
|
Supplemental cash flow information was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash received from commutations
|
|
$
|
101,040
|
|
|
$
|
12,750
|
|
|
$
|
180,789
|
|
Income taxes paid
|
|
|
146,829
|
|
|
|
167,086
|
|
|
|
78,309
|
|
Interest paid
|
|
|
8,618
|
|
|
|
9,387
|
|
|
|
6,168
|
|
Dividends declared but not paid at year end
|
|
|
12,658
|
|
|
|
11,173
|
|
|
|
8,310
|
|
The unrealized gain or loss on securities available for sale,
deferred taxes related thereto and the issuance of our common
stock for the purchase of subsidiaries are non-cash transactions
that have been included as direct increases or decreases in our
consolidated shareholders equity.
|
|
(16)
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
Third Quarter
|
|
|
Second Quarter
|
|
|
First Quarter
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Total revenue
|
|
$
|
614,407
|
|
|
$
|
599,108
|
|
|
$
|
582,494
|
|
|
$
|
516,697
|
|
|
$
|
594,250
|
|
|
$
|
493,217
|
|
|
$
|
597,222
|
|
|
$
|
466,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
99,642
|
|
|
$
|
80,742
|
|
|
$
|
97,925
|
|
|
$
|
93,257
|
|
|
$
|
101,172
|
|
|
$
|
89,144
|
|
|
$
|
96,690
|
|
|
$
|
79,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
0.87
|
|
|
$
|
0.72
|
|
|
$
|
0.87
|
|
|
$
|
0.84
|
|
|
$
|
0.90
|
|
|
$
|
0.80
|
|
|
$
|
0.86
|
|
|
$
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
114,641
|
|
|
|
111,635
|
|
|
|
112,652
|
|
|
|
111,359
|
|
|
|
112,273
|
|
|
|
111,218
|
|
|
|
111,959
|
|
|
|
111,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
0.85
|
|
|
$
|
0.69
|
|
|
$
|
0.84
|
|
|
$
|
0.80
|
|
|
$
|
0.86
|
|
|
$
|
0.76
|
|
|
$
|
0.83
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
117,085
|
|
|
|
117,115
|
|
|
|
116,323
|
|
|
|
117,003
|
|
|
|
117,728
|
|
|
|
116,860
|
|
|
|
117,009
|
|
|
|
116,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of 2006, we recorded a
$13.1 million after-tax loss due to a large commutation and
$7.6 million of after-tax expenses related to our stock
option investigation.
The sum of earnings per share for the quarters may not equal the
annual amounts due to rounding.
F-42
SCHEDULE 1
HCC
INSURANCE HOLDINGS, INC.
SUMMARY
OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Column D
|
|
|
|
|
|
|
|
|
|
Amount at Which
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Shown in the
|
|
Type of Investment
|
|
Cost
|
|
|
Value
|
|
|
Balance Sheet
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds United States government and government
agencies and authorities
|
|
$
|
159,147
|
|
|
$
|
163,583
|
|
|
$
|
163,583
|
|
Bonds states, municipalities and political
subdivisions
|
|
|
716,491
|
|
|
|
724,305
|
|
|
|
724,305
|
|
Bonds special revenue
|
|
|
1,085,926
|
|
|
|
1,097,976
|
|
|
|
1,097,976
|
|
Bonds corporate
|
|
|
299,288
|
|
|
|
297,568
|
|
|
|
297,568
|
|
Asset-backed and mortgage-backed securities
|
|
|
1,001,423
|
|
|
|
1,009,692
|
|
|
|
1,009,692
|
|
Bonds foreign
|
|
|
379,392
|
|
|
|
373,581
|
|
|
|
373,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
3,641,667
|
|
|
$
|
3,666,705
|
|
|
|
3,666,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks banks, trusts and insurance companies
|
|
|
54,078
|
|
|
|
61,985
|
|
|
|
61,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
54,078
|
|
|
$
|
61,985
|
|
|
|
61,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
|
783,650
|
|
|
|
|
|
|
|
783,650
|
|
Other investments
|
|
|
159,937
|
|
|
|
|
|
|
|
159,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
4,639,332
|
|
|
|
|
|
|
$
|
4,672,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-1
SCHEDULE 2
HCC
INSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Cash
|
|
$
|
440
|
|
|
$
|
167
|
|
Short-term investments
|
|
|
36,479
|
|
|
|
19,892
|
|
Investment in subsidiaries
|
|
|
2,596,741
|
|
|
|
2,187,461
|
|
Intercompany loans to subsidiaries for acquisitions
|
|
|
217,041
|
|
|
|
208,008
|
|
Receivable from subsidiaries
|
|
|
52,683
|
|
|
|
38,384
|
|
Other assets
|
|
|
43,122
|
|
|
|
31,088
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,946,506
|
|
|
$
|
2,485,000
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Payable to subsidiaries
|
|
$
|
88,255
|
|
|
$
|
89,428
|
|
Notes payable
|
|
|
324,714
|
|
|
|
297,151
|
|
Deferred Federal income tax
|
|
|
19,059
|
|
|
|
21,205
|
|
Accounts payable and accrued liabilities
|
|
|
74,113
|
|
|
|
34,413
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
506,141
|
|
|
|
442,197
|
|
Total shareholders equity
|
|
|
2,440,365
|
|
|
|
2,042,803
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,946,506
|
|
|
$
|
2,485,000
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Information.
S-2
SCHEDULE 2
HCC
INSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF EARNINGS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Equity in earnings of subsidiaries
|
|
$
|
401,973
|
|
|
$
|
351,657
|
|
|
$
|
188,202
|
|
Interest income from subsidiaries
|
|
|
9,345
|
|
|
|
8,196
|
|
|
|
6,799
|
|
Net investment income
|
|
|
1,794
|
|
|
|
2,698
|
|
|
|
2,082
|
|
Other operating income (loss)
|
|
|
(103
|
)
|
|
|
1,130
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
413,009
|
|
|
|
363,681
|
|
|
|
197,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
8,950
|
|
|
|
9,199
|
|
|
|
6,552
|
|
Other operating expense
|
|
|
12,060
|
|
|
|
16,172
|
|
|
|
3,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
|
21,010
|
|
|
|
25,371
|
|
|
|
9,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense
|
|
|
391,999
|
|
|
|
338,310
|
|
|
|
187,652
|
|
Income tax benefit
|
|
|
(3,430
|
)
|
|
|
(3,975
|
)
|
|
|
(3,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
395,429
|
|
|
$
|
342,285
|
|
|
$
|
191,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Information.
S-3
SCHEDULE 2
HCC
INSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net earnings
|
|
$
|
395,429
|
|
|
$
|
342,285
|
|
|
$
|
191,192
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) during the year, net of income tax charge
(benefit) of $1,336 in 2007, $1,373 in 2006 and $(129) in 2005
|
|
|
1,771
|
|
|
|
2,623
|
|
|
|
(239
|
)
|
Less reclassification adjustment for losses included in net
earnings, net of income tax benefit of $163 in 2006
|
|
|
|
|
|
|
303
|
|
|
|
|
|
Consolidated subsidiaries investment gains (losses) during
the year, net of income tax charge (benefit) of $13,080 in 2007,
$12,839 in 2006 and $(2,817) in 2005
|
|
|
25,693
|
|
|
|
23,519
|
|
|
|
(4,018
|
)
|
Less consolidated subsidiaries reclassification adjustment
for gains included in net earnings, net of income tax charge of
$13,111 in 2007, $13,647 in 2006 and $2,479 in 2005
|
|
|
(24,350
|
)
|
|
|
(25,346
|
)
|
|
|
(4,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses)
|
|
|
3,114
|
|
|
|
1,099
|
|
|
|
(8,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge loss, net of income tax benefit of $871
|
|
|
(1,617
|
)
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of income tax
charge (benefit) of $863 in 2007, $3,249 in 2006 and $(762) in
2005
|
|
|
12,413
|
|
|
|
13,799
|
|
|
|
(9,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
13,910
|
|
|
|
14,898
|
|
|
|
(18,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
409,339
|
|
|
$
|
357,183
|
|
|
$
|
172,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Information.
S-4
SCHEDULE 2
HCC
INSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
395,429
|
|
|
$
|
342,285
|
|
|
$
|
191,192
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed net income of subsidiaries
|
|
|
(371,873
|
)
|
|
|
(272,409
|
)
|
|
|
(116,122
|
)
|
Change in accrued interest receivable added to intercompany loan
balances
|
|
|
(9,345
|
)
|
|
|
(7,788
|
)
|
|
|
(6,712
|
)
|
Change in accounts payable and accrued liabilities
|
|
|
18,812
|
|
|
|
5,788
|
|
|
|
(10,999
|
)
|
Other, net
|
|
|
(9,254
|
)
|
|
|
(2,396
|
)
|
|
|
1,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
23,769
|
|
|
|
65,480
|
|
|
|
58,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash contributions to subsidiaries
|
|
|
(227
|
)
|
|
|
(64,299
|
)
|
|
|
(162,872
|
)
|
Payments for purchase of subsidiaries, net of cash received
|
|
|
(12,021
|
)
|
|
|
(23,455
|
)
|
|
|
(98,829
|
)
|
Change in short-term investments
|
|
|
(16,587
|
)
|
|
|
18,290
|
|
|
|
(7,176
|
)
|
Sales and maturities of fixed income securities
|
|
|
|
|
|
|
30,587
|
|
|
|
6,200
|
|
Cost of securities acquired
|
|
|
(912
|
)
|
|
|
(10,626
|
)
|
|
|
(3,400
|
)
|
Change in receivable/payable from subsidiaries
|
|
|
|
|
|
|
|
|
|
|
33,303
|
|
Intercompany loans to subsidiaries for acquisitions
|
|
|
(52,257
|
)
|
|
|
(32,708
|
)
|
|
|
(39,685
|
)
|
Payments on intercompany loans to subsidiaries
|
|
|
52,570
|
|
|
|
33,461
|
|
|
|
56,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities
|
|
|
(29,434
|
)
|
|
|
(48,750
|
)
|
|
|
(215,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances on line of credit and issuance of notes payable
|
|
|
232,000
|
|
|
|
140,000
|
|
|
|
36,000
|
|
Payments on line of credit and notes payable
|
|
|
(204,437
|
)
|
|
|
(140,249
|
)
|
|
|
(36,015
|
)
|
Sale of common stock, net of costs
|
|
|
24,533
|
|
|
|
18,999
|
|
|
|
186,103
|
|
Dividends paid
|
|
|
(46,158
|
)
|
|
|
(38,923
|
)
|
|
|
(27,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided (used) by financing activities
|
|
|
5,938
|
|
|
|
(20,173
|
)
|
|
|
158,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
273
|
|
|
|
(3,443
|
)
|
|
|
1,368
|
|
Cash at beginning of year
|
|
|
167
|
|
|
|
3,610
|
|
|
|
2,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
440
|
|
|
$
|
167
|
|
|
$
|
3,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Financial Information.
S-5
HCC
INSURANCE HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL INFORMATION
|
|
|
|
(1)
|
The accompanying condensed financial information should be read
in conjunction with the consolidated financial statements and
the related notes thereto of HCC Insurance Holdings, Inc. and
Subsidiaries. Investments in subsidiaries are accounted for
using the equity method.
|
|
|
(2)
|
Intercompany loans to subsidiaries are demand notes issued
primarily to fund the cash portion of acquisitions. They bear
interest at a rate set by management, which approximates the
interest rate charged for similar debt. At December 31,
2007, the interest rate on intercompany loans was 6.75%.
|
|
|
(3)
|
Other operating expense includes $5.8 million in 2007 and
$12.0 million in 2006 related to the companys stock
option investigation.
|
|
|
(4)
|
Dividends received from subsidiaries were $30.1 million,
$79.2 million and $72.1 million in 2007, 2006 and
2005, respectively.
|
S-6
SCHEDULE 3
HCC
INSURANCE HOLDINGS, INC.
SUPPLEMENTARY
INSURANCE INFORMATION
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column F
|
|
|
Column G
|
|
|
Column H
|
|
|
Column I
|
|
|
Column J
|
|
|
Column K
|
|
|
|
|
|
|
(1)
|
|
|
(1)
|
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Future Policy
|
|
|
|
|
|
|
|
|
|
|
|
Claims,
|
|
|
of Deferred
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
Benefits, Losses,
|
|
|
|
|
|
|
|
|
Net
|
|
|
Losses and
|
|
|
Policy
|
|
|
Other
|
|
|
|
|
|
|
Acquisition
|
|
|
Claims and Loss
|
|
|
Unearned
|
|
|
Premium
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premium
|
|
Segments
|
|
Costs
|
|
|
Expenses
|
|
|
Premiums
|
|
|
Revenue
|
|
|
Income
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Company
|
|
$
|
123,805
|
|
|
$
|
3,293,279
|
|
|
$
|
943,946
|
|
|
$
|
1,985,086
|
|
|
$
|
192,487
|
|
|
$
|
1,183,947
|
|
|
$
|
366,610
|
|
|
$
|
127,942
|
|
|
$
|
1,985,609
|
|
Agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,520
|
|
|
|
|
|
|
|
|
|
|
|
73,518
|
|
|
|
|
|
Other Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,497
|
|
|
|
|
|
|
|
|
|
|
|
3,032
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,958
|
|
|
|
|
|
|
|
|
|
|
|
37,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
123,805
|
|
|
$
|
3,293,279
|
|
|
$
|
943,946
|
|
|
$
|
1,985,086
|
|
|
$
|
206,462
|
|
|
$
|
1,183,947
|
|
|
$
|
366,610
|
|
|
$
|
241,642
|
|
|
$
|
1,985,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Company
|
|
$
|
117,461
|
|
|
$
|
3,167,974
|
|
|
$
|
920,350
|
|
|
$
|
1,709,189
|
|
|
$
|
137,896
|
|
|
$
|
1,011,856
|
|
|
$
|
319,885
|
|
|
$
|
110,438
|
|
|
$
|
1,812,552
|
|
Agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,484
|
|
|
|
|
|
|
|
|
|
|
|
70,151
|
|
|
|
|
|
Other Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,610
|
|
|
|
|
|
|
|
|
|
|
|
1,839
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,814
|
|
|
|
|
|
|
|
|
|
|
|
39,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
117,461
|
|
|
$
|
3,167,974
|
|
|
$
|
920,350
|
|
|
$
|
1,709,189
|
|
|
$
|
152,804
|
|
|
$
|
1,011,856
|
|
|
$
|
319,885
|
|
|
$
|
222,324
|
|
|
$
|
1,812,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Company
|
|
$
|
88,367
|
|
|
$
|
2,887,135
|
|
|
$
|
807,109
|
|
|
$
|
1,369,988
|
|
|
$
|
88,397
|
|
|
$
|
919,697
|
|
|
$
|
261,708
|
|
|
$
|
84,838
|
|
|
$
|
1,501,224
|
|
Agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,437
|
|
|
|
|
|
|
|
|
|
|
|
84,107
|
|
|
|
|
|
Other Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
794
|
|
|
|
|
|
|
|
|
|
|
|
1,732
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,223
|
|
|
|
|
|
|
|
|
|
|
|
10,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88,367
|
|
|
$
|
2,887,135
|
|
|
$
|
807,109
|
|
|
$
|
1,369,988
|
|
|
$
|
98,851
|
|
|
$
|
919,697
|
|
|
$
|
261,708
|
|
|
$
|
180,990
|
|
|
$
|
1,501,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Columns C and D are shown ignoring the effects of reinsurance. |
|
(2) |
|
Net investment income was allocated to the subsidiary, and
therefore the segment, on which the related investment asset was
recorded. |
|
(3) |
|
Other operating expenses is after all corporate expense
allocations have been charged or credited to the individual
segments. |
Note: Column E is omitted because we have no
other policy claims and benefits payable.
S-7
SCHEDULE 4
HCC
INSURANCE HOLDINGS, INC.
REINSURANCE
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
Column F
|
|
|
|
|
|
|
|
|
|
Assumed from
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Ceded to Other
|
|
|
Other
|
|
|
|
|
|
Amount
|
|
|
|
Direct Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Net Amount
|
|
|
Assumed to Net
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
1,267,547
|
|
|
$
|
417,479
|
|
|
$
|
|
|
|
$
|
850,068
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and liability insurance
|
|
$
|
1,329,889
|
|
|
$
|
415,699
|
|
|
$
|
291,592
|
|
|
$
|
1,205,782
|
|
|
|
24
|
%
|
Accident and health insurance
|
|
|
671,440
|
|
|
|
34,495
|
|
|
|
142,359
|
|
|
|
779,304
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,001,329
|
|
|
$
|
450,194
|
|
|
$
|
433,951
|
|
|
$
|
1,985,086
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
1,371,637
|
|
|
$
|
374,753
|
|
|
$
|
|
|
|
$
|
996,884
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and liability insurance
|
|
$
|
1,246,650
|
|
|
$
|
408,632
|
|
|
$
|
255,303
|
|
|
$
|
1,093,321
|
|
|
|
23
|
%
|
Accident and health insurance
|
|
|
543,986
|
|
|
|
30,614
|
|
|
|
102,496
|
|
|
|
615,868
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,790,636
|
|
|
$
|
439,246
|
|
|
$
|
357,799
|
|
|
$
|
1,709,189
|
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
1,359,529
|
|
|
$
|
404,228
|
|
|
$
|
|
|
|
$
|
955,301
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and liability insurance
|
|
$
|
1,116,713
|
|
|
$
|
546,275
|
|
|
$
|
266,651
|
|
|
$
|
837,089
|
|
|
|
32
|
%
|
Accident and health insurance
|
|
|
577,733
|
|
|
|
71,127
|
|
|
|
26,293
|
|
|
|
532,899
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,694,446
|
|
|
$
|
617,402
|
|
|
$
|
292,944
|
|
|
$
|
1,369,988
|
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-8
SCHEDULE 5
HCC
INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Reserve for uncollectible reinsurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
14,883
|
|
|
$
|
12,141
|
|
|
$
|
20,425
|
|
Provision charged to expense
|
|
|
2,231
|
|
|
|
5,649
|
|
|
|
5,750
|
|
Reclassification to indemnification liability
|
|
|
|
|
|
|
|
|
|
|
(9,000
|
)
|
Amounts written off
|
|
|
(8,584
|
)
|
|
|
(2,907
|
)
|
|
|
(5,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
8,530
|
|
|
$
|
14,883
|
|
|
$
|
12,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
6,514
|
|
|
$
|
7,394
|
|
|
$
|
4,911
|
|
Provision charged to expense
|
|
|
1,124
|
|
|
|
576
|
|
|
|
1,917
|
|
Amounts (written off) recovered and other
|
|
|
(1,251
|
)
|
|
|
(1,456
|
)
|
|
|
566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
6,387
|
|
|
$
|
6,514
|
|
|
$
|
7,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-9