<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended JUNE 30, 1996
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from __________ to __________
Commission file number 0-20766
HCC Insurance Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 76-0336636
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13403 Northwest Freeway, Houston, Texas 77040-6094
(Address of principal executive offices) (Zip Code)
(713) 690-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
On August 9, 1996, there were 34,679,057 shares of Common Stock, $1 par value
issued and outstanding.
The Index to Exhibits is located on page 19.
The total number of sequentially numbered pages is 22.
<PAGE>
HCC INSURANCE HOLDINGS, INC.
INDEX
PAGE NO.
--------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 .................. 3
Condensed Consolidated Statements of Earnings
Six Months Ended June 30, 1996 and
Six Months Ended June 30, 1995 ....................... 4
Condensed Consolidated Statements of Earnings
Three Months Ended June 30, 1996 and
Three Months Ended June 30, 1995 ..................... 5
Condensed Consolidated Statements of Changes in
Shareholders' Equity
Six Months Ended June 30, 1996 and
Year Ended December 31, 1995 ......................... 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and
Six Months Ended June 30, 1995 ....................... 8
Notes to Condensed Consolidated Financial Statements ... 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................................... 13
Part II. OTHER INFORMATION ......................................... 17
2
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Balance Sheets
----------
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
Investments:
Securities available for sale:
Fixed income securities, at market
(cost: 1996 $234,888,000;
1995 $231,807,000) $ 232,359,000 $ 234,881,000
Marketable equity securities, at market
(cost: 1996 $ 9,153,000;
1995 $10,097,000) 12,287,000 13,812,000
Mortgage loans, at unpaid principal
balance, net - 81,000
Real estate, net of accumulated
depreciation and amortization
(1996 $1,778,000; 1995 $1,780,000) 4,286,000 4,287,000
Short-term investments, at cost,
which approximates market 66,652,000 56,513,000
------------ ------------
Total investments 315,584,000 309,574,000
Cash 5,214,000 3,574,000
Restricted cash and short-term investments 35,321,000 23,495,000
Reinsurance recoverables 120,823,000 103,408,000
Premium, claims and other receivables 141,067,000 133,257,000
Ceded unearned premium 72,434,000 73,282,000
Deferred policy acquisition costs 17,607,000 16,431,000
Property and equipment, net 4,871,000 5,153,000
Deferred income tax 14,247,000 2,921,000
Other assets, net 12,987,000 13,454,000
------------ ------------
TOTAL ASSETS $ 740,155,000 $684,549,000
------------ ------------
------------ ------------
LIABILITIES
Loss and loss adjustment expense payable $ 174,008,000 $158,451,000
Reinsurance balances payable 59,629,000 68,463,000
Unearned premium 126,942,000 118,732,000
Deferred ceding commissions 16,914,000 17,497,000
Premium and claims payable 117,908,000 98,995,000
Notes payable 16,538,000 16,661,000
Accounts payable and accrued liabilities 10,598,000 10,291,000
------------ ------------
Total liabilities 522,537,000 489,090,000
SHAREHOLDERS' EQUITY
Common Stock, $1 par value; 100,000,000
shares authorized; (issued and outstanding:
1996 34,674,232 shares and 1995 13,838,802 shares) 34,674,000 13,839,000
Additional paid-in capital 130,450,000 123,257,000
Retained earnings 52,099,000 53,950,000
Unrealized investment gain, net 393,000 4,417,000
Foreign currency translation adjustment 2,000 (4,000)
------------ ------------
Total shareholders' equity 217,618,000 195,459,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $740,155,000 $684,549,000
------------ ------------
------------ ------------
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Earnings
(Unaudited)
----------
For the six months ended
June 30,
1996 1995
----------- -----------
REVENUE
Net earned premium $ 45,956,000 $38,597,000
Fee and commission income 20,053,000 15,590,000
Net investment income 7,254,000 6,024,000
Net realized investment gain 1,997,000 463,000
----------- -----------
Total revenue 75,260,000 60,674,000
EXPENSE
Loss and loss adjustment expense 26,366,000 24,504,000
Operating expense:
Policy acquisition costs 16,451,000 13,740,000
Compensation expense 10,538,000 13,080,000
Other operating expense 6,472,000 6,027,000
Ceding commissions (14,100,000) (12,003,000)
----------- -----------
Net operating expense 19,361,000 20,844,000
Compensatory stock grant and
merger related expenses 26,160,000 -
Interest expense 577,000 1,652,000
Currency conversion (gain) loss 171,000 (94,000)
----------- -----------
Total expense 72,635,000 46,906,000
----------- -----------
Earnings before income tax provision 2,625,000 13,768,000
Income tax provision (benefit) (2,779,000) 3,414,000
------------ ------------
NET EARNINGS $ 5,404,000 $ 10,354,000
------------ ------------
------------ ------------
EARNINGS PER SHARE DATA:
Earnings per share $ 0.15 0.34
------------ ------------
------------ ------------
Weighted average shares outstanding 35,718,000 30,211,000
------------ ------------
------------ ------------
PROFORMA INFORMATION (SEE NOTE 3):
Net earnings $ 19,711,000 $ 12,216,000
------------ ------------
------------ ------------
Earnings per share $ 0.55 $ 0.40
------------ ------------
------------ ------------
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Earnings
(Unaudited)
----------
For the three months ended
June 30,
1996 1995
------------- ------------
REVENUE
Net earned premium $ 22,459,000 $ 20,532,000
Fee and commission income 10,536,000 8,182,000
Net investment income 3,588,000 3,105,000
Net realized investment gain 1,185,000 367,000
------------- ------------
Total revenue 37,768,000 32,186,000
EXPENSE
Loss and loss adjustment
expense 12,128,000 13,227,000
Operating expense:
Policy acquisition costs 8,357,000 7,074,000
Compensation expense 5,672,000 6,299,000
Other operating expense 3,376,000 3,037,000
Ceding commissions (7,419,000) (6,365,000)
------------- ------------
Net operating expense 9,986,000 10,045,000
Compensatory stock grant and
merger related expenses 24,984,000 -
Interest expense 288,000 836,000
Currency conversion loss 44,000 124,000
------------- ------------
Total expense 47,430,000 24,232,000
------------- ------------
Earnings (loss) before
income tax provision (9,662,000) 7,954,000
Income tax provision (benefit) (5,602,000) 1,987,000
------------- ------------
NET EARNINGS (LOSS) $ (4,060,000) $ 5,967,000
------------- ------------
------------- ------------
EARNINGS PER SHARE DATA:
Earnings (loss) per share $ (0.11) $ 0.20
------------- ------------
------------- ------------
Weighted average shares
outstanding 35,785,000 30,506,000
------------- ------------
------------- ------------
PROFORMA INFORMATION (SEE NOTE 3):
Net earnings $ 10,311,000 $ 6,582,000
------------- ------------
------------- ------------
Earnings per share $ 0.29 $ 0.22
------------- ------------
------------- ------------
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 1996 and
for the year ended December 31, 1995
(Unaudited)
----------
<TABLE>
Foreign
Additional Unrealized currency Total
Common paid-in Retained investment translation shareholders'
Stock capital earnings gain (loss) adjustment equity
----------- ------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1994 $11,767,000 $76,480,000 $31,442,000 $(5,301,000) $ (14,000) $114,374,000
58,876 shares of Common Stock issued
for exercise of options, including
tax benefit of $252,000 59,000 770,000 - - - 829,000
2,012,500 shares of Common Stock issued
in public offering, net of costs 2,013,000 45,957,000 - - - 47,970,000
Capital contribution to LDG
prior to acquisition - 50,000 - - - 50,000
Net earnings - - 24,337,000 - - 24,337,000
Cash dividends to shareholders of
LDG prior to acquisition - - (1,829,000) - - (1,829,000)
Unrealized investment gain on fixed income
securities, net of deferred tax
charge of $4,293,000 - - - 7,973,000 - 7,973,000
Unrealized investment gain on marketable
equity securities, net of deferred tax
charge of $934,000 - - - 1,745,000 - 1,745,000
Other - - - - 10,000 10,000
----------- ------------ ----------- ----------- ---------- ------------
BALANCE AS OF DECEMBER 31, 1995 $13,839,000 $123,257,000 $53,950,000 $ 4,417,000 $ (4,000) $195,459,000
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 1996 and
for the year ended December 31, 1995
(Unaudited)
(continued)
----------
<TABLE>
Foreign
Additional Unrealized currency Total
Common paid-in Retained investment translation shareholders'
Stock capital earnings gain (loss) adjustment equity
----------- ------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1995 $ 13,839,000 $123,257,000 $53,950,000 $ 4,417,000 $ (4,000) $195,459,000
20,758,172 shares of Common Stock issued
for 150% stock dividend (see Note 1) 20,758,000 (20,758,000) - - - -
77,258 shares of Common Stock issued
for exercise of options, including
tax benefit of $ 306,000 77,000 538,000 - - - 615,000
Net earnings - - 5,404,000 - - 5,404,000
Compensatory grant of LDG stock
prior to acquisition - 23,682,000 - - - 23,682,000
Cash dividends to shareholders of
LDG prior to acquisition - - (3,683,000) - - (3,683,000)
Capitalize undistributed earnings of LDG
upon conversion from S Corporation - 3,572,000 (3,572,000) - - -
Unrealized investment loss on fixed income
securities, net of deferred tax
benefit of $1,961,000 - - - (3,642,000) - (3,642,000)
Unrealized investment loss on marketable
equity securities, net of deferred tax
benefit of $199,000 - - - (382,000) - (382,000)
Other - 159,000 - - 6,000 165,000
----------- ------------ ----------- ------------ ------- ------------
BALANCE AS OF JUNE 30, 1996 $34,674,000 $130,450,000 $52,099,000 $ 393,000 $ 2,000 $217,618,000
----------- ------------ ----------- ------------ ------- ------------
----------- ------------ ----------- ------------ ------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Cash Flows
(Unaudited)
----------
For the six months ended
June 30,
1996 1995
------------- -------------
Cash flows from operating activities:
Net earnings $ 5,404,000 $ 10,354,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Change in reinsurance recoverables (17,415,000) (5,103,000)
Change in premium, claims and other receivables (7,810,000) 1,350,000
Change in ceded unearned premium 848,000 3,274,000
Change in Deferred income tax, net of tax
effect of unrealized gain or loss (9,166,000) (735,000)
Change in loss and loss adjustment
expense payable 15,557,000 20,761,000
Change in reinsurance balances payable (8,834,000) (11,913,000)
Change in unearned premium 8,210,000 14,312,000
Change in premium and claims payable,
net of restricted cash 7,087,000 (4,039,000)
Net realized investment gain (1,997,000) (463,000)
Noncash compensation expense 23,841,000 -
Depreciation and amortization expense 938,000 761,000
Other, net (762,000) 2,113,000
------------- -------------
Cash provided by operating activities 15,901,000 30,672,000
Cash flows from investing activities:
Sales of fixed income securities 3,465,000 -
Maturity or call of fixed income securities 3,720,000 953,000
Sales of equity securities 6,870,000 5,318,000
Cost of investments acquired (14,557,000) (14,718,000)
Other, net (429,000) (1,180,000)
------------- -------------
Cash used by investing activities (931,000) (9,627,000)
Cash flows from financing activities:
Payments on notes payable (123,000) (21,624,000)
Sale of Common Stock 615,000 42,290,000
Dividends to shareholders of LDG (3,683,000) (1,511,000)
------------- -------------
Cash provided (used) by financing activities (3,191,000) 19,155,000
------------- -------------
Net increase in cash and short-term
investments 11,779,000 40,200,000
Cash and short-term investments at
beginning of period 60,087,000 49,082,000
------------- -------------
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 71,866,000 $ 89,282,000
------------- -------------
------------- -------------
Supplemental cash flow information:
Interest paid $ 549,000 $ 1,480,000
------------- -------------
------------- -------------
Income tax paid $ 6,285,000 $ 3,560,000
------------- -------------
------------- -------------
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) GENERAL INFORMATION
HCC Insurance Holdings, Inc. ("the Company" or "HCCH") and its
subsidiaries (collectively, "the Companies") include domestic and
foreign property and casualty insurance companies and managing general
agents, surplus lines insurance brokers and wholesale insurance and
reinsurance brokers. The Company, through its subsidiaries, provides
specialized property and casualty insurance to commercial customers,
underwritten on both a direct and reinsurance basis, and insurance
agency services, particularly in commercial accident and health
coverages.
On May 24, 1996, the Company issued 6,250,000 shares of its Common Stock
to acquire all of the outstanding common stock of LDG Management Company
Incorporated and affiliated companies ("LDG"). This business
combination has been accounted for as a pooling of interests and,
accordingly, the Company's condensed consolidated financial statements
have been restated to include the accounts and operations of LDG for all
periods prior to the merger.
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and
include all adjustments which are, in the opinion of management,
necessary for fair presentation of the results of the interim periods.
All adjustments made to the interim periods are of a normal recurring
nature. All significant intercompany balances and transactions have been
eliminated. The condensed consolidated financial statements for periods
reported should be read in conjunction with the annual consolidated
financial statements and notes related thereto. The condensed
consolidated balance sheet as of December 31, 1995, and the statement of
shareholders' equity for the year then ended were derived from audited
financial statements, of HCCH and LDG as separate entities prior to the
merger, but do not include all disclosures required by generally
accepted accounting principles.
INCOME TAX
For the Companies other than LDG, the income tax provision for the six
months ended June 30, 1996 and 1995, has been calculated based on an
estimated effective tax rate for each of the fiscal years. The
difference between these Companies' effective tax rate and the Federal
statutory rate is primarily the result of nontaxable municipal bond
interest included in pretax income.
LDG had been an S Corporation prior to its reorganization and merger
with the Company. Federal income tax expense was not provided
for on LDG's earnings during the period it was an S Corporation. A
deferred tax benefit has been recorded on LDG's pre-tax loss for the
time period after the S Corporation election was terminated. LDG will
be included in the Company's consolidated Federal income tax return and
subject to U.S. Federal income taxes beginning May 24, 1996.
STOCK SPLIT
In April, 1996, the Board of Directors declared a five for two stock
split in the form of a 150% stock dividend on the Company's $1.00 par
value Common Stock, payable to shareholders of record April 30, 1996.
The par value of the Company's Common Stock remains unchanged. As of
March 31, 1996, the $20.8 million par value of additional shares to be
issued was transferred from additional paid-in capital to Common Stock.
9
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(1) GENERAL INFORMATION, CONTINUED
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common
and common equivalent shares outstanding during the period divided into
net earnings. Outstanding common stock options, when dilutive, are
considered to be common stock equivalents for the purpose of this
calculation. The treasury stock method is used to calculate common
stock equivalents due to options. There is no difference between
primary and fully diluted earnings per share. All per share and
weighted average shares outstanding data presented in the condensed
consolidated financial statements and notes thereto have been adjusted
to reflect the effects of the split and the shares issued with the
acquisition of LDG.
RECLASSIFICATIONS
Certain amounts in the 1995 condensed consolidated financial statements
have been reclassified to conform to the 1996 presentation. Such
reclassifications had no effect on the Company's shareholders' equity,
net earnings or cash flows.
(2) REINSURANCE
In the normal course of business the Company's insurance company
subsidiaries cede a substantial portion of their premium to unrelated
domestic and foreign reinsurers through quota share, surplus, excess of
loss and facultative reinsurance agreements. Although the ceding of
reinsurance does not discharge the primary insurer from liability to its
policyholder, the subsidiaries participate in such agreements for the
purpose of limiting their loss exposure and diversifying their business.
In addition, certain of the insurance company subsidiaries' business was
assumed from other unrelated insurance and reinsurance companies. The
following table represents the approximate effect of such reinsurance
transactions on net premium and loss and loss adjustment expense:
Loss and Loss
Written Premium Adjustment
Premium Earned Expense
------------- ------------ --------------
For the six months ended June 30, 1996:
Direct business $ 46,518,000 $ 51,812,000 $ 28,921,000
Reinsurance assumed 76,518,000 63,146,000 51,271,000
Reinsurance ceded (68,155,000) (69,002,000) (53,826,000)
------------- ------------- ------------
NET AMOUNTS $ 54,881,000 $ 45,956,000 $ 26,366,000
------------- ------------- ------------
------------- ------------- ------------
For the six months ended June 30, 1995:
Direct business $ 45,949,000 $ 45,063,000 $ 34,820,000
Reinsurance assumed 64,025,000 50,685,000 37,700,000
Reinsurance ceded (53,876,000) (57,151,000) (48,016,000)
------------- ------------- ------------
NET AMOUNTS $ 56,098,000 $ 38,597,000 $ 24,504,000
------------- ------------- ------------
------------- ------------- ------------
10
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(2) REINSURANCE, CONTINUED
Substantially all of the reinsurance assumed in the six months ended
June 30, 1996 and 1995, respectively, was underwritten directly by the
Companies but issued by other companies in order to satisfy local
licensing or other requirements, predominantly on non-U.S.A. business.
The table below represents the approximate composition of reinsurance
recoverables in the accompanying condensed consolidated balance sheets:
June 30, December 31,
1996 1995
------------- -------------
Reinsurance recoverable on paid losses $ 24,256,000 $ 13,678,000
Reinsurance recoverable on outstanding losses 92,790,000 83,847,000
Reinsurance recoverable on IBNR 6,632,000 8,278,000
Reserve for uncollectible reinsurance (2,855,000) (2,395,000)
------------- -------------
TOTAL REINSURANCE RECOVERABLES $ 120,823,000 $ 103,408,000
------------- -------------
------------- -------------
The Companies require reinsurers not authorized by the Texas Department
of Insurance to collateralize their reinsurance obligations to the
Companies with letters of credit or cash deposits. At June 30, 1996,
the Companies held letters of credit and cash deposits in the amounts of
$64.2 million and $14.5 million, respectively, to collateralize certain
reinsurance balances. The Companies have established a reserve of $2.9
million as of June 30, 1996, to reduce the effects of any recoverable
problems. In order to minimize their exposure to reinsurance credit
risk, the Companies evaluate the financial condition of the reinsurers
and place their reinsurance with a diverse group of financially sound
companies.
11
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) ACQUISITION OF LDG MANAGEMENT COMPANY INCORPORATED
On May 24, 1996, the Company issued 6,250,000 shares of its Common Stock
to acquire all of the outstanding common stock of LDG. This business
combination has been accounted for as a pooling of interests and,
accordingly, the Company's condensed consolidated financial statements
have been restated to include the accounts and operations of LDG for all
periods prior to the merger.
The condensed consolidated financial statements include adjustments made
to conform LDG's accounting policies for fee and commission income to
that of HCCH. HCCH's policy is to recognize fee and commission income
on the revenue recognition date (the later of the effective date of the
policy, the date when premium can be reasonably estimated, or the date
when substantially all required services relating to the placement have
been rendered to the client), and subsequent policy adjustments and
contingent profit commissions are recognized when events occur and
amounts are known or can be reasonably estimated. LDG previously
recognized fee and commission income on the later of the effective date
or the reporting date, subsequent adjustments were recognized when they
became due, and contingent profit commission was recognized when
received. This had no material effect on LDG's net income for the six
months ended June 30, 1995.
Separate total revenue and net earnings (loss) amounts of the merged
entities are presented for the periods prior to the merger in the
following table:
For the five For the six
months ended months ended
May 31, 1996 June 30, 1995
------------- -------------
HCCH $ 48,771,000 $ 46,661,000
LDG 12,893,000 14,013,000
------------- -------------
TOTAL REVENUE $ 61,664,000 $ 60,674,000
------------- -------------
------------- -------------
HCCH $ 12,144,000 $ 9,124,000
LDG (9,919,000) 1,230,000
------------- -------------
NET EARNINGS $ 2,225,000 $ 10,354,000
------------- -------------
------------- -------------
Of the nonrecurring expenses, $24.0 million was related to the
compensatory grant of LDG stock to certain key employees by LDG's
majority shareholder immediately prior to the combination. Other
nonrecurring expenses, which totalled $2.1 million, included legal,
accounting and investment banking fees in connection with the merger.
The following table presents proforma net income and earnings per share
amounts which reflect the elimination of nonrecurring compensation and
merger related expenses in 1996, proforma adjustments to 1995 and 1996
figures to present income taxes on LDG's earnings prior to its
reorganization and merger with the Company and proforma adjustments to
reduce 1995 compensation expense to the 1996 level.
For the six months ended
June 30,
1996 1995
------------ -----------
Net earnings $ 5,404,000 $10,354,000
Nonrecurring expenses 26,160,000 -
Compensation adjustment, net of state income tax - 3,454,000
Proforma Federal income tax 11,853,000 1,592,000
------------ -----------
PROFORMA NET EARNINGS $19,711,000 $12,216,000
------------ -----------
------------ -----------
PROFORMA EARNINGS PER SHARE $ 0.55 $ 0.40
------------ -----------
------------ -----------
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE MONTHS ENDED JUNE 30, 1995.
Gross written premium increased 16% to $67.8 million for the second quarter
of 1996 from $58.4 million for the same period in 1995. This is slower
growth than previously reported due in part to the planned reduction in
offshore energy business as a result of reckless competition that has driven
premium rates below acceptable levels and the softening of marine rates.
However, property and aviation both continue to grow profitably, although
more slowly. Net written premium for the second quarter of 1996 decreased 4%
to $22.1 million from $23.0 million for the same period in 1995. This
decrease is due to the increased use of facultative reinsurance and reduced
offshore energy and marine premium. Net earned premium increased 9% to $22.5
million for the second quarter of 1996 from $20.5 million for the same period
in 1995, with much of the growth coming from aviation, where substantially
more premium is retained by the Company due to the lack of catastrophe
exposure in the business written.
Fee and commission income increased 29% to $10.5 million for the second
quarter of 1996 compared to $8.2 million for the same period in 1995. Fee and
commission income (non-risk bearing revenue) increased during the second
quarter of 1996 from both existing subsidiaries as well as from the newly
acquired LDG Management Company. The Company expects fee and commission
income to continue to grow during 1996 and 1997 from growth in LDG's
business, increases in facultative reinsurance placed on behalf of insurance
company subsidiaries as premium rates become more competitive and from
further acquisitions.
Net investment income increased 16% to $3.6 million for the second quarter of
1996 compared to $3.1 million for the same period in 1995 reflecting a higher
level of investment assets. Net realized investment gains from sales of
equity securities were $1.2 million during the second quarter of 1996
compared to gains of $367,000 for the same period in 1995. The Company is in
the process of liquidating its equity portfolio to redeploy those investment
assets in fixed income securities.
Loss and LAE decreased $1.1 million or 8% during the second quarter of 1996,
to $12.1 million, as the Company's GAAP loss ratio decreased to 54% from 64%.
Other operating expense increased 11% to $3.4 million for the second quarter
of 1996. These expenses reflect increased expenditures required to meet the
overall growth in business. Goodwill amortization expense was $72,000 for
the second quarters of both 1996 and 1995 and is included in other operating
expense.
13
<PAGE>
Interest expense decreased 66% to $288,000 during the second quarter of 1996
from $836,000 due to the reduced level of indebtedness as a portion of the
proceeds of the June, 1995 public offering of Common Stock was used to retire
debt. During the second quarter of 1996, currency conversion losses amounted
to $44,000 compared to losses of $124,000 for the same period in 1995.
The Company reported a net loss of $4.1 million for the second quarter of
1996 compared to earnings of $6.0 million for the same period in 1995. This
loss was a result of merger related expenses and non-recurring compensation
expense of $14.4 million (net of a $9.6 million tax benefit) recorded by LDG
in connection with a compensatory stock grant from LDG's majority shareholder
to certain key employees prior to the Company's May, 1996 acquisition of LDG.
The compensation expense was a non-cash item however, $9.6 million of actual
cash tax savings will be recognized. The net loss per share was $0.11 for
the second quarter of 1996 compared to earnings per share of $0.20 for the
second quarter of 1995. On a proforma basis, and excluding the non-recurring
compensation charge and the merger related expenses, net earnings for the
second quarter of 1996 would have been $10.3 million, an increase of 57% over
second quarter of 1995 and earnings per share would have been $0.29, a 32%
increase over comparable 1995 figures.
The Company's insurance company subsidiaries' statutory combined ratio was
68.1% for the second quarter of 1996, as compared to 73.6% for the same
period in 1995.
The Company's book value per share was $6.28 as of June 30, 1996, up from
$5.87 as of March 31, 1996. The second quarter 1996 net loss reduced book
value $0.12 per share, while the unrealized loss incurred during the quarter
on the investment portfolio, which is entirely marked-to-market, amounted to
$1.9 million, net of tax, or $0.05 per share. The grant of stock to certain
key employees by LDG's majority shareholder caused equity to increase $23.7
million or $0.68 per share during the second quarter of 1996.
SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995.
Gross written premium increased 12% to $123.0 million for the first six
months of 1996 from $110.0 million for the same period in 1995. This is
slower growth than previously reported due in part to the planned reduction
in offshore energy business as a result of reckless competition that has
driven premium rates below acceptable levels and the softening of marine
rates. However, property and aviation both continue to grow profitably,
although more slowly. Net written premium for the first six months of 1996
decreased 2% to $54.9 million from $56.1 million for the same period in 1995
due in part to the increased use of facultative reinsurance and reduced
offshore energy and marine premium. The first six months 1995 was inflated
by the initial impact of the reduction in the amount of non-catastrophe
proportional reinsurance purchased by the Company. Net earned premium
increased 19%
14
<PAGE>
to $46.0 million for the first six months of 1996 from $38.6 million for the
same period in 1995, with much of the growth coming from aviation, where
substantially more premium is retained by the Company due to the lack of
catastrophe exposure in the business written.
Fee and commission income increased 29% to $20.1 million for the first six
months of 1996 compared to $15.6 million for the same period in 1995. Fee
and commission income (non-risk bearing revenue) increased during the first
six months of 1996 from both existing subsidiaries as well as from the newly
acquired LDG Management Company. The Company expects fee and commission
income to continue to grow during 1996 and 1997 from growth in LDG's
business, increases in facultative reinsurance placed on behalf of insurance
company subsidiaries as premium rates become more competitive and from
further acquisitions.
Net investment income increased 20% to $7.3 million for the first six months
of 1996 compared to $6.0 million for the same period in 1995 reflecting a
higher level of investment assets. Net realized investment gains from sales
of equity securities were $2.1 million during the first six months of 1996
compared to gains of $467,000 for the same period in 1995. The Company is in
the process of liquidating its equity portfolio to redeploy those investment
assets in fixed income securities. Net realized investment losses from
dispositions of fixed income securities were $105,000 during the first six
months of 1996 compared to losses of $4,000 for the same period in 1995.
Loss and LAE increased $1.9 million or 8% during the first six months of
1996, to $26.4 million, reflecting the overall increase in business, however
the Company's GAAP loss ratio decreased to 57% from 63%.
Other operating expense increased 7% to $6.5 million for the first six months
of 1996. These expenses reflect increased expenditures required to meet the
overall growth in business. Goodwill amortization expense was $145,000 for
the first half of both 1996 and 1995 and is included in other operating
expense.
Interest expense decreased 65% to $577,000 during the first six months of
1996 from $1.7 million in 1995, due to the reduced level of indebtedness as a
portion of the proceeds of the June, 1995 public offering of Common Stock was
used to retire debt. During the first six months of 1996, currency
conversion losses amounted to $171,000 compared to gains of $94,000 for the
same period in 1995.
Net earnings decreased 48% to $5.4 million for the first six months of 1996
from $10.4 million for the same period in 1995. This decrease was a result
of merger related expenses of $2.1 million and a non-recurring compensation
expense of $14.4 (net of a $9.6 million tax benefit) recorded by LDG in
connection with a compensatory stock grant from LDG's majority shareholder to
certain key employees prior to the Company's May,
15
<PAGE>
1996 acquisition of LDG. The compensation expense was a non-cash item
however, $9.6 million of actual cash tax savings will be recognized.
Earnings per share decreased 56% to $0.15 for the first six months of 1996
from $0.34 for the first six months of 1995. Excluding the non-recurring
compensation charge and the merger related expenses, net earnings for the
first six months of 1996 would have been $19.7 million, an increase of 61%
over the same period in 1995 and earnings per share would have been $0.55, a
38% increase over comparable 1995 figures.
The Company's insurance company subsidiaries' statutory combined ratio was
75.4% for the first six months of 1996, as compared to 78.7% for the same
period in 1995.
The Company's book value per share was $6.28 as of June 30, 1996, up from
$5.65 as of December 31, 1995. Earnings added $0.15 per share to book value
during the first six months of 1996, while the unrealized loss incurred
during the first six months of 1996 on the investment portfolio, which is
entirely marked-to-market, amounted to $4.0 million, net of tax, or $0.12 per
share. The grant of stock to certain key employees by LDG's majority
shareholder caused equity to increase $23.7 million or $0.68 per share during
the first six months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash and investment portfolio increased $7.7
million or 2% since December 31, 1995, and totalled $320.8 million as of June
30, 1996, of which $71.9 million was cash and short-term investments. Total
assets increased to $740.2 million as of June 30, 1996, from $684.5 million
as of December 31, 1995, an 8% increase.
FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q ARE MADE PURSUANT TO THE SAFE
HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTY, INCLUDING WITHOUT LIMITATION, THE RISK OF A SIGNIFICANT NATURAL
DISASTER, THE INABILITY OF THE COMPANY TO REINSURE CERTAIN RISKS, THE
ADEQUACY OF ITS LOSS RESERVES, CHANGING REGULATIONS IN FOREIGN COUNTRIES, AS
WELL AS GENERAL MARKET CONDITIONS, COMPETITION AND PRICING. PLEASE REFER TO
THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS, COPIES OF WHICH ARE
AVAILABLE FROM THE COMPANY WITHOUT CHARGE, FOR FURTHER INFORMATION.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS:
There are no material pending legal proceedings to which
the registrant is a party or of which any of the property
of the registrant is the subject, except for claims
arising in the ordinary course of business of its wholly
owned insurance company subsidiaries, none of which are
considered material.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
On May 16, 1996, the Company held a Special Meeting of
Shareholders. At such time the following item was
submitted to a vote of shareholders through the
solicitation of proxies:
(a) The shareholders of the Company were requested to
approve and adopt the Agreement and Plan of
Reorganization dated as of February 22, 1996, and
to approve the merger of Merger Sub, Inc.
with and into LDG Management Company Incorporated.
Such plan was approved by the shareholders, who
voted 46,917,818 shares in favor, 22,763 votes
against, and 101,818 shares who abstained or
withheld authority to vote.
On May 23, 1996, the Company held its 1996 Annual Meeting
of Shareholders. At such time the following items were
submitted to a vote of shareholders through the
solicitation of proxies:
(a) Election of Directors.
The following persons were elected to serve on the
Board of Directors until the 1997 Annual Meeting of
Shareholders or until their successors have been duly
elected and qualified. The Directors received the
votes set forth opposite their respective names:
Name For Against Abstained
---- --- ------- ---------
James M. Berry 43,897,838 4,680 42,000
Patrick B. Collins 43,900,805 1,713 42,000
J. Robert Dickerson 43,901,588 930 42,000
Edwin H. Frank, III 43,897,838 4,680 42,000
John L. Kavanaugh 43,901,588 930 42,000
Walter J. Lack 43,837,680 64,838 42,000
Stephen J. Lockwood 43,901,588 930 42,000
Stephen L. Way 43,901,588 930 42,000
Hugh T. Wilson 43,901,588 930 42,000
(b) The shareholders of the Company were requested to
approve the amendment to the Company's Certificate of
Incorporation to increase the number of authorized
shares of Common Stock, par value $1.00, from 50
million shares to 100 million shares. Such amendment
was approved by the shareholders, who voted 43,172,420
shares in favor, 624,845 votes against, and 107,883
shares who abstained or withheld authority to vote.
(c) The shareholders of the Company were requested to
approve the Company's 1996 Nonemployee Director Stock
Option Plan, authorizing the possible issuance of
250,000 shares of Common Stock to certain nonemployee
directors. Such plan was approved by the shareholders,
who voted 38,652,713 shares in favor, 4,548,975 votes
against, and 105,383 shares who abstained or withheld
authority to vote.
(d) The shareholders of the Company were requested to
approve the amendment to the Company's 1995 Flexible
Incentive Plan ("Flexible Plan"), authorizing an
increase in the possible number of shares issuable
under such plan from 1,250,000 to 2,500,000 shares,
and deleting the provision in the Flexible Plan that
limits stock option grants to certain named
executive officers to 250,000 shares. Such plan was
approved by the shareholders, who voted
17
<PAGE>
32,006,558 shares in favor, 11,169,463 votes against,
and 130,925 shares who abstained or withheld authority
to vote.
(e) The shareholders of the Company were requested to
ratify the appointment of Coopers & Lybrand, L.L.P.,
as independent auditors for the Company and its
subsidiaries to audit the accounts of the Company and
its subsidiaries for the year ended December 31, 1996.
Such appointment was approved by the shareholders, who
voted 43,518,708 shares in favor, 16,463 votes against,
and 61,695 shares who abstained or withheld authority
to vote.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
The exhibits listed on the accompany Index to Exhibits
on page 19 are filed as part of this report.
(b) Reports on Form 8-K:
On April 19, 1996, the Registrant filed a report on
Form 8-K reporting the declaration of the five for two
stock split in the form of a 150% stock dividend on the
Company's $1.00 par value Common Stock.
On May 24, 1996, the Registrant filed a report on
Form 8-K reporting the consummation of the acquisition
of all of the outstanding shares of Common Stock of LDG
Management Company Incorporated.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCC Insurance Holdings, Inc.
---------------------------------------
(Registrant)
August 14, 1996 /s/ Frank J. Bramanti
- --------------- ---------------------------------------
(Date) Frank J. Bramanti, Executive Vice
President and Chief Financial Officer
18
<PAGE>
INDEX TO EXHIBITS
11 - Statement Regarding Computation of Earnings Per Share.
27 - EDGAR Financial Statement Schedule
19
<PAGE>
Exhibit 11
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
For the six months ended
June 30,
1996 1995
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Net earnings $ 5,404,000 $10,354,000
----------- -----------
----------- -----------
Primary:
Weighted average Common Stock and common
stock equivalents outstanding 35,718,000 30,211,000
----------- -----------
----------- -----------
Earnings per share $ 0.15 $ 0.34
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 34,674,000 13,574,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,063,000 150,000
Changes in Common Stock for issuance (19,000) (1,640,000)
Effect of five for two stock split (1) - 18,127,000
----------- -----------
Weighted average Common Stock and common
stock equivalents outstanding 35,718,000 30,211,000
----------- -----------
----------- -----------
Fully Diluted:
Weighted average Common Stock and common
stock equivalents outstanding 35,798,000 30,261,000
----------- -----------
----------- -----------
Earnings per share $ 0.15 $ 0.34
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 34,674,000 13,574,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,124,000 164,000
Changes in Common Stock for issuance - (1,634,000)
Effect of five for two stock split (1) - 18,157,000
----------- -----------
Weighted average Common Stock and common
stock equivalents outstanding 35,798,000 30,261,000
----------- -----------
----------- -----------
(1) In April, 1996, the Board of Directors declared a five for two stock
split in the form of a 150% stock dividend on the Company's $1.00
par value Common Stock, payable to shareholders of record April 30,
1996. The par value of the Company's Common Stock remains unchanged.
Adjustments have been made to 1995 amounts to present weighted average
shares outstanding and earnings per share on a consistent basis.
Note: Shares outstanding for all periods have been adjusted to include the
6,250,000 shares issued with the acquisition of LDG.
20
<PAGE>
Exhibit 11
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
For the three months ended
June 30,
1996 1995
- ------------------------------------------------------------------------------
Net earnings (loss) $(4,060,000) $ 5,967,000
----------- -----------
----------- -----------
Primary:
Weighted average Common Stock and common
stock equivalents outstanding 35,785,000 30,506,000
----------- -----------
----------- -----------
Earnings (loss) per share $ (0.11) $ 0.20
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 34,674,000 13,574,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,113,000 147,000
Changes in Common Stock for issuance (2,000) (1,519,000)
Effect of five for two stock split (1) - 18,304,000
----------- -----------
Weighted average Common Stock and common
stock equivalents outstanding 35,785,000 30,506,000
----------- -----------
----------- -----------
Fully Diluted:
Weighted average Common Stock and common
stock equivalents outstanding 35,801,000 30,549,000
----------- -----------
----------- -----------
Earnings (loss) per share $ (0.11) $ 0.20
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 34,674,000 13,574,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,127,000 165,000
Changes in Common Stock for issuance - (1,519,000)
Effect of five for two stock split (1) - 18,329,000
----------- -----------
Weighted average Common Stock and common
stock equivalents outstanding 35,801,000 30,549,000
----------- -----------
----------- -----------
(1) In April, 1996, the Board of Directors declared a five for two stock
split in the form of a 150% stock dividend on the Company's $1.00
par value Common Stock, payable to shareholders of record April 30,
1996. The par value of the Company's Common Stock remains unchanged.
Adjustments have been made to 1995 amounts to present weighted average
shares outstanding and earnings per share on a consistent basis.
Note: Shares outstanding for all periods have be adjusted to include the
6,250,000 shares issued with the acquisition of LDG.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONDENSED
CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 232,359,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 12,287,000
<MORTGAGE> 0
<REAL-ESTATE> 4,286,000
<TOTAL-INVEST> 315,584,000
<CASH> 5,214,000
<RECOVER-REINSURE> 120,823,000
<DEFERRED-ACQUISITION> 17,607,000
<TOTAL-ASSETS> 740,155,000
<POLICY-LOSSES> 174,008,000
<UNEARNED-PREMIUMS> 126,942,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 16,538,000
0
0
<COMMON> 36,674,000
<OTHER-SE> 182,944,000
<TOTAL-LIABILITY-AND-EQUITY> 740,155,000
45,956,000
<INVESTMENT-INCOME> 7,254,000
<INVESTMENT-GAINS> 1,997,000
<OTHER-INCOME> 20,053,000
<BENEFITS> 26,366,000
<UNDERWRITING-AMORTIZATION> 16,451,000
<UNDERWRITING-OTHER> 2,910,000
<INCOME-PRETAX> 2,625,000
<INCOME-TAX> (2,799,000)
<INCOME-CONTINUING> 5,404,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,404,000
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
<RESERVE-OPEN> 66,326,000
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 74,586,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
