<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarter Ended SEPTEMBER 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
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HCC INSURANCE HOLDINGS, INC.
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(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
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(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 November 4, 1996, there were 34,679,307 shares of Common Stock, $1 par
value issued and outstanding.
The Index to Exhibits is located on page 18.
The total number of sequentially numbered pages is 21.
1
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HCC INSURANCE HOLDINGS, INC.
INDEX
PAGE NO.
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets
September 30, 1996 and December 31, 1995.......................3
Condensed Consolidated Statements of Earnings
Nine months ended September 30, 1996 and
Nine months ended September 30, 1995...........................4
Condensed Consolidated Statements of Earnings
Three Months Ended September 30, 1996 and
Three Months Ended September 30, 1995..........................5
Condensed Consolidated Statements of Changes in
Shareholders' Equity
Nine months ended September 30, 1996 and
Year ended December 31, 1995...................................6
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1996 and
Nine months ended September 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
----------
<TABLE>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale:
Fixed income securities, at market
(cost: 1996 $251,633,000;
1995 $231,807,000) $250,899,000 $234,881,000
Marketable equity securities, at market
(cost: 1996 $4,681,000;
1995 $10,097,000) 6,176,000 13,812,000
Mortgage loans, at unpaid principal
balance, net - 81,000
Real estate, net of accumulated
depreciation and amortization
(1996 $2,090,000; 1995 $1,780,000) 3,994,000 4,287,000
Short-term investments, at cost,
which approximates market 55,817,000 56,513,000
------------ ------------
Total investments 316,886,000 309,574,000
Cash 6,219,000 3,574,000
Restricted cash and short-term investments 39,249,000 23,495,000
Reinsurance recoverables 122,793,000 103,408,000
Premium, claims and other receivables 139,956,000 133,257,000
Ceded unearned premium 69,097,000 73,282,000
Deferred policy acquisition costs 17,318,000 16,431,000
Property and equipment, net 4,803,000 5,153,000
Deferred income tax 14,312,000 2,921,000
Other assets, net 12,557,000 13,454,000
------------ ------------
TOTAL ASSETS $743,190,000 $684,549,000
------------ ------------
------------ ------------
LIABILITIES
Loss and loss adjustment expense payable $182,028,000 $158,451,000
Reinsurance balances payable 43,341,000 68,463,000
Unearned premium 117,451,000 118,732,000
Deferred ceding commissions 16,639,000 17,497,000
Premium and claims payable 130,602,000 98,995,000
Notes payable 16,476,000 16,661,000
Accounts payable and accrued liabilities 8,790,000 10,291,000
------------ ------------
Total liabilities 515,327,000 489,090,000
SHAREHOLDERS' EQUITY
Common Stock, $1 par value; 100,000,000
shares authorized; (issued and outstanding:
1996 34,679,307 shares and 1995 13,838,802 shares) 34,679,000 13,839,000
Additional paid-in capital 130,638,000 123,257,000
Retained earnings 62,040,000 53,950,000
Unrealized investment gain, net 495,000 4,417,000
Foreign currency translation adjustment 11,000 (4,000)
------------ ------------
Total shareholders' equity 227,863,000 195,459,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $743,190,000 $684,549,000
------------ ------------
------------ ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Earnings
(Unaudited)
----------
For the nine months ended
September 30,
1996 1995
------------- -------------
REVENUE
Net earned premium $ 66,102,000 $ 58,851,000
Fee and commission income 30,035,000 23,450,000
Net investment income 11,154,000 9,592,000
Net realized investment gain 3,531,000 316,000
------------- -------------
Total revenue 110,822,000 92,209,000
EXPENSE
Loss and loss adjustment expense 36,874,000 37,021,000
Operating expense:
Policy acquisition costs 25,010,000 21,867,000
Compensation expense 15,810,000 20,363,000
Other operating expense 9,268,000 9,035,000
Ceding commissions (22,055,000) (19,767,000)
------------- -------------
Net operating expense 28,033,000 31,498,000
Compensatory stock grant and
merger related expenses 26,160,000 -
Interest expense 868,000 1,953,000
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Total expense 91,935,000 70,472,000
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Earnings before income tax provision 18,887,000 21,737,000
Income tax provision 2,153,000 5,747,000
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NET EARNINGS $ 16,734,000 $ 15,990,000
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EARNINGS PER SHARE DATA:
Earnings per share $ 0.47 $ 0.50
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------------- -------------
Weighted average shares outstanding 35,823,000 31,828,000
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PROFORMA INFORMATION (SEE NOTE 3):
Net earnings $ 31,041,000 $ 19,027,000
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Earnings per share $ 0.87 $ 0.60
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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
September 30,
---------------------------------
1996 1995
------------- -------------
REVENUE
Net earned premium $ 20,145,000 $ 20,254,000
Fee and commission income 9,981,000 7,860,000
Net investment income 3,909,000 3,569,000
Net realized investment gain (loss) 1,534,000 (148,000)
------------- -------------
Total revenue 35,569,000 31,535,000
EXPENSE
Loss and loss adjustment expense 10,508,000 12,517,000
Operating expense:
Policy acquisition costs 8,559,000 8,127,000
Compensation expense 4,786,000 7,283,000
Other operating expense 3,118,000 3,102,000
Ceding commissions (7,955,000) (7,764,000)
------------- -------------
Net operating expense 8,508,000 10,748,000
Interest expense 292,000 301,000
------------- -------------
Total expense 19,308,000 23,566,000
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Earnings before income tax provision 16,261,000 7,969,000
Income tax provision 4,931,000 2,333,000
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NET EARNINGS $ 11,330,000 $ 5,636,000
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EARNINGS PER SHARE DATA:
Earnings per share $ 0.31 $ 0.16
------------- -------------
------------- -------------
Weighted average shares outstanding 35,993,000 34,999,000
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PROFORMA INFORMATION (SEE NOTE 3):
Net earnings $ 6,811,000
-------------
-------------
Earnings per share $ 0.19
-------------
-------------
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 nine months ended September 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 nine months ended September 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) - - - -
82,333 shares of Common Stock issued
for exercise of options, including
tax benefit of $328,000 82,000 590,000 - - - 672,000
Net earnings - - 16,734,000 - - 16,734,000
Cash dividends declared, $0.04 per share - - (1,387,000) - - (1,387,000)
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 - 3,574,000 (3,574,000) - - -
Unrealized investment loss on fixed income
securities, net of deferred tax
benefit of $1,332,000 - - - (2,475,000) - (2,475,000)
Unrealized investment loss on marketable
equity securities, net of deferred tax
benefit of $773,000 - - - (1,447,000) - (1,447,000)
Other - 293,000 - - 15,000 308,000
----------- ------------ ----------- ----------- ------- ------------
BALANCE AS OF SEPTEMBER 30, 1996 $34,679,000 $130,638,000 $62,040,000 $ 495,000 $11,000 $227,863,000
----------- ------------ ----------- ----------- ------- ------------
----------- ------------ ----------- ----------- ------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Cash Flows
(Unaudited)
----------
<TABLE>
For the nine months ended
September 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 16,734,000 $ 15,990,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Change in reinsurance recoverables (19,385,000) (7,670,000)
Change in premium, claims and other receivables (6,699,000) 8,883,000
Change in ceded unearned premium 4,185,000 2,988,000
Change in deferred income tax, net of tax
effect of unrealized gain or loss (9,286,000) (1,136,000)
Change in loss and loss adjustment expense payable 23,577,000 24,418,000
Change in reinsurance balances payable (25,122,000) (18,772,000)
Change in unearned premium (1,281,000) 12,570,000
Change in premium and claims payable,
net of restricted cash 15,853,000 (4,258,000)
Change in accounts payable and accrued liabilities (2,195,000) 6,949,000
Net realized investment gain (3,531,000) (316,000)
Noncash compensation expense 23,975,000 -
Depreciation and amortization expense 1,767,000 1,203,000
Other, net (516,000) (285,000)
------------- -------------
Cash provided by operating activities 18,076,000 40,564,000
Cash flows from investing activities:
Sales of fixed income securities 3,465,000 13,059,000
Maturity or call of fixed income securities 8,285,000 5,597,000
Sales of equity securities 13,764,000 6,846,000
Cost of investments acquired (36,926,000) (83,434,000)
Other, net (826,000) (2,773,000)
------------- -------------
Cash used by investing activities (12,238,000) (60,705,000)
Cash flows from financing activities:
Payments on notes payable (185,000) (28,185,000)
Sale of Common Stock 672,000 48,635,000
Dividends paid (4,376,000) (1,613,000)
------------- -------------
Cash provided (used) by financing activities (3,889,000) 18,837,000
------------- -------------
Net increase in cash and short-term
investments 1,949,000 (1,304,000)
Cash and short-term investments at
beginning of period 60,087,000 49,082,000
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CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $ 62,036,000 $ 47,778,000
------------- -------------
------------- -------------
Supplemental cash flow information:
Interest paid $ 1,090,000 $ 2,299,000
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------------- -------------
Income tax paid $ 10,158,000 $ 7,226,000
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------------- -------------
</TABLE>
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 nine
months ended September 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 a 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 a 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
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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 significant 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 in connection 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 nine months ended September 30, 1996:
Direct business $ 62,411,000 $ 76,188,000 $ 43,462,000
Reinsurance assumed 109,713,000 97,284,000 72,822,000
Reinsurance ceded (103,185,000) (107,370,000) (79,410,000)
------------- ------------- ------------
NET AMOUNTS $ 68,939,000 $ 66,102,000 $ 36,874,000
------------- ------------- ------------
------------- ------------- ------------
For the nine months ended September 30, 1995:
Direct business $ 76,723,000 $ 71,615,000 $ 53,519,000
Reinsurance assumed 88,160,000 80,717,000 50,769,000
Reinsurance ceded (90,492,000) (93,481,000) (67,267,000)
------------- ------------- ------------
NET AMOUNTS $ 74,391,000 $ 58,851,000 $ 37,021,000
------------- ------------- ------------
------------- ------------- ------------
10
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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 nine months ended
September 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 and as
reinsurance of captives.
The table below represents the approximate composition of reinsurance
recoverables in the accompanying condensed consolidated balance sheets:
September 30, December 31,
1996 1995
------------ ------------
Reinsurance recoverable on paid losses $ 18,859,000 $ 13,678,000
Reinsurance recoverable on outstanding losses 99,806,000 83,847,000
Reinsurance recoverable on IBNR 6,513,000 8,278,000
Reserve for uncollectible reinsurance (2,385,000) (2,395,000)
------------ ------------
TOTAL REINSURANCE RECOVERABLES $122,793,000 $103,408,000
------------ ------------
------------ ------------
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. In
addition, 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 September 30,
1996, the Companies held letters of credit and cash deposits in the amounts
of $67.9 million and $12.0 million, respectively, to collateralize certain
reinsurance balances. The Companies have established a reserve of $2.4
million as of September 30, 1996, to reduce the effects of any recoverable
problems.
(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.
11
<PAGE>
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) ACQUISITION OF LDG MANAGEMENT COMPANY INCORPORATED, CONTINUED
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 nine
months ended months ended
May 31, 1996 Sept. 30, 1995
------------ --------------
Total revenue:
HCCH $48,771,000 $71,524,000
LDG 12,893,000 20,685,000
----------- -----------
TOTAL REVENUE $61,664,000 $92,209,000
----------- -----------
----------- -----------
Net earnings:
HCCH $12,144,000 $14,858,000
LDG (9,919,000) 1,132,000
----------- -----------
NET EARNINGS $ 2,225,000 $15,990,000
----------- -----------
----------- -----------
Certain nonrecurring expenses were incurred during the first six months of
1996. 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 nine months ended
September 30,
1996 1995
----------- -----------
Net earnings $16,734,000 $15,990,000
Nonrecurring expenses 26,160,000 -
Compensation adjustment, net of
state income tax - 5,183,000
Proforma Federal income tax 11,853,000 2,146,000
----------- -----------
PROFORMA NET EARNINGS $31,041,000 $19,027,000
----------- -----------
----------- -----------
PROFORMA EARNINGS PER SHARE $ 0.87 $ 0.60
----------- -----------
----------- -----------
(4) PENDING ACQUISITIONS
On September 6, 1996, the Company announced that it had reached an
agreement in principle to acquire all of the outstanding shares of the
North American Special Risk Associates, Inc. group of companies ("NASRA")
in exchange for 1,212,000 shares of the Company's Common Stock. The
acquisition is subject to the parties finalizing definitive agreements and
is expected to close during the fourth quarter of 1996.
On November 11, 1996, the Company announced that it had agreed to acquire
all of the occupational accident business of the TRM International, Inc.
group of companies ("TRM") in exchange for 266,667 shares of the
Company's Common Stock and $6.55 million in cash. The acquisition is to
be effective as of December 1, 1996, subject to the parties finalizing
definitive agreements.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1995.
Gross written premium decreased 11% to $49.1 million for the third quarter of
1996 from $54.9 million for the same period in 1995. The decrease in gross
written premium was a result of the planned exit from offshore energy
business as well as continued softening in marine rates and, more recently,
property rates as well, however, aviation premium continues to increase. Net
written premium for the third quarter of 1996 decreased 23% to $14.1 million
from $18.3 million for the same period in 1995. This decrease is due to the
increased use of facultative reinsurance as rates become more competitive and
the overall reduction in gross written premium. Net earned premium was
substantially unchanged at $20.1 million for the third quarter of 1996
compared to $20.3 million for the same period in 1995.
Fee and commission (non-risk bearing) revenue increased 27% to $10.0 million
for the third quarter of 1996 compared to $7.9 million for the same period in
1995. Fee and commission revenue increased during the third quarter of 1996
both from existing subsidiaries as well as from the newly acquired LDG
Management Company. The decrease in premium revenue is more than offset by
an increase in the more profitable fee and commission revenue, which the
Company believes will continue to increase as the Company expands its agency
(non-risk bearing) operations through internal growth, increases in
facultative reinsurance placed on behalf of insurance company subsidiaries
and from strategic acquisitions.
Net investment income increased 10% to $3.9 million for the third quarter of
1996 compared to $3.6 million for the same period in 1995 reflecting a higher
level of investment assets. Net realized investment gains from sales of
equity securities were $1.6 million during the third quarter of 1996 compared
to gains of $76,000 for the same period in 1995. The Company is in the
process of liquidating its equity security portfolio to redeploy those
investment assets in fixed income securities. Net realized investment losses
from dispositions of fixed income securities were $96,000 for the third
quarter of 1996 compared to losses of $226,000 for the same period in 1995.
Loss and loss adjustment expense ("LAE") decreased $2.0 million or 16% during
the third quarter of 1996, to $10.5 million, as the Company's GAAP loss ratio
decreased to 52% from 62% due to favorable underwriting results and a
reduction in the amount of redundant loss reserves.
13
<PAGE>
Other operating expense was substantially unchanged for the third quarter of
1996 at $3.1 million. Goodwill amortization expense was $72,000 for the
third quarters of both 1996 and 1995 and is included in other operating
expense.
Net earnings increased 101% to $11.3 million for the third quarter of 1996
from $5.6 million for the same period in 1995. Earnings per share increased
94% to $0.31 for the third quarter of 1996 from $0.16 for the third quarter
of 1995.
The Company's insurance company subsidiaries' statutory combined ratio was
75.0% for the third quarter of 1996, the same as the corresponding period in
1995.
The Company's book value per share was $6.57 as of September 30, 1996, up
from $6.28 as of June 30, 1996. Third quarter net income increased book
value $0.33 per share. The unrealized gain of $1.2 million, net of tax, or
$0.03 per share on fixed income securities, was due to a slight decrease in
interest rates. This was offset by a decrease of $1.1 million, net of tax, or
$0.03 per share due to a reduction in the unrealized gain on equity
securities as gains were realized.
NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS NINE MONTHS ENDED SEPTEMBER 30,
1995.
Gross written premium increased 4% to $172.1 million for the first nine
months of 1996 from $164.9 million for the same period in 1995. This is
slower growth than previously reported due to the planned exit from offshore
energy business as a result of reckless competition that has driven rates
below acceptable levels and the continued softening of marine rates.
Property and aviation have grown profitably, but increased competition is now
beginning to effect these lines as well. Net written premium for the first
nine months of 1996 decreased 7% to $68.9 million from $74.4 million for the
same period in 1995 due in part to the increased use of facultative
reinsurance. Net earned premium increased 12% to $66.1 million for the first
nine months of 1996 from $58.9 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 (non-risk bearing) revenue increased 28% to $30.0 million
for the first nine months of 1996 compared to $23.5 million for the same
period in 1995. Fee and commission revenue increased during the first nine
months of 1996 both from existing subsidiaries as well as from the newly
acquired LDG Management Company. The Company expects fee and commission
revenue to continue to increase as the Company expands its agency (non-risk
bearing) operations through internal growth, increases in facultative
reinsurance placed on behalf of insurance company subsidiaries and from
strategic acquisitions.
14
<PAGE>
Net investment income increased 16% to $11.2 million for the first nine
months of 1996 compared to $9.6 million for the same period in 1995
reflecting a higher level of investment assets. Net realized investment
gains from sales of equity securities were $3.7 million during the first
nine months of 1996 compared to gains of $543,000 for the same period in
1995. The Company is in the process of liquidating its equity security
portfolio to redeploy those investment assets in fixed income securities.
Net realized investment losses from dispositions of fixed income securities
were $201,000 during the first nine months of 1996 compared to losses of
$229,000 for the same period in 1995.
Loss and LAE decreased $147,000 during the first nine months of 1996, to
$36.9 million. The Company's GAAP loss ratio decreased to 56% from 63% due to
favorable underwriting results and a reduction in the amount of redundant
loss reserves from prior years.
Other operating expense was substantially unchanged at $9.3 million for the
first nine months of 1996. Goodwill amortization expense was $217,000 for
the first nine months of both 1996 and 1995 and is included in other
operating expense.
Interest expense decreased 56% to $868,000 during the first nine months of
1996 from $2.0 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.
Net earnings increased 5% to $16.7 million for the first nine months of 1996
from $16.0 million for the same period in 1995. Included in these amounts
were 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, 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 6% to
$0.47 for the first nine months of 1996 from $0.50 for the first nine months
of 1995. Excluding the non-recurring compensation charge and the merger
related expenses, net earnings for the first nine months of 1996 would have
been $31.0 million, an increase of 63% over the same period in 1995 and
earnings per share would have been $0.87, a 45% increase over comparable 1995
figures.
15
<PAGE>
The Company's insurance company subsidiaries' statutory combined ratio
improved to 74.7% for the first nine months of 1996, compared to 77.7% for
the same period in 1995.
The Company's book value per share was $6.57 as of September 30, 1996, up
from $5.65 as of December 31, 1995. Earnings added $0.48 per share to book
value during the first nine months of 1996, while the unrealized loss
incurred during the first nine months of 1996 on the investment portfolio,
which is entirely marked-to-market, amounted to $3.9 million, net of tax, or
$0.11 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash and investment portfolio increased $10.0
million or 3% since December 31, 1995, and totalled $323.1 million as of
September 30, 1996, of which $62.0 million was cash and short-term
investments. Total assets increased to $743.2 million as of September 30,
1996, from $684.5 million as of December 31, 1995, a 9% 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 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
The exhibits listed on the accompanying Index to Exhibits on
page 18 are filed as part of this report.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months
ended September 30, 1996.
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)
NOVEMBER 14, 1996 /s/ FRANK J. BRAMANTI
- ----------------- ------------------------------------
(Date) Frank J. Bramanti, Executive Vice
President and Chief Financial Officer
17
<PAGE>
INDEX TO EXHIBITS
11 - Statement Regarding Computation of Earnings Per Share.
27 - EDGAR Financial Data Schedule
18
<PAGE>
Exhibit 11
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
For the nine months ended
September 30,
1996 1995
- ------------------------------------------------------------------------------
Net earnings $16,734,000 $15,990,000
----------- -----------
----------- -----------
Primary:
Weighted average Common Stock and common stock
equivalents outstanding 35,823,000 31,828,000
----------- -----------
----------- -----------
Earnings per share $ 0.47 $ 0.50
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 34,679,000 13,839,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,161,000 166,000
Changes in Common Stock for issuance (17,000) (1,274,000)
Effect of five for two stock split (1) - 19,097,000
----------- -----------
Weighted average Common Stock and common stock
equivalents outstanding 35,823,000 31,828,000
----------- -----------
----------- -----------
Fully Diluted:
Weighted average Common Stock and common stock
equivalents outstanding 36,021,000 31,955,000
----------- -----------
----------- -----------
Earnings per share $ 0.46 $ 0.50
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 34,679,000 13,839,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,342,000 211,000
Changes in Common Stock for issuance - (1,268,000)
Effect of five for two stock split (1) - 19,173,000
----------- -----------
Weighted average Common Stock and common stock
equivalents outstanding 36,021,000 31,955,000
----------- -----------
----------- -----------
(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.
19
<PAGE>
Exhibit 11
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
For the three months ended
September 30,
1996 1995
- ------------------------------------------------------------------------------
Net earnings $11,330,000 $ 5,636,000
----------- -----------
----------- -----------
Primary:
Weighted average Common Stock and common stock
equivalents outstanding 35,993,000 34,999,000
----------- -----------
----------- -----------
Earnings per share $ 0.31 $ 0.16
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 34,679,000 13,839,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,316,000 193,000
Changes in Common Stock for issuance (2,000) (32,000)
Effect of five for two stock split (1) - 20,999,000
----------- -----------
Weighted average Common Stock and common stock
equivalents outstanding 35,993,000 34,999,000
----------- -----------
----------- -----------
Fully Diluted:
Weighted average Common Stock and common stock
equivalents outstanding 36,054,000 35,056,000
----------- -----------
----------- -----------
Earnings per share $ 0.31 $ 0.16
----------- -----------
----------- -----------
Reconciliation of number of shares outstanding:
Common Stock outstanding at period end 34,679,000 13,839,000
Additional dilutive effect of outstanding
options (as determined by the application
of the treasury stock method) 1,375,000 215,000
Changes in Common Stock for issuance - (32,000)
Effect of five for two stock split (1) - 21,034,000
----------- -----------
Weighted average Common Stock and common stock
equivalents outstanding 36,054,000 35,056,000
----------- -----------
----------- -----------
(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.
20
<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
SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 250,899,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,176,000
<MORTGAGE> 0
<REAL-ESTATE> 3,994,000
<TOTAL-INVEST> 316,886,000
<CASH> 6,219,000
<RECOVER-REINSURE> 122,793,000
<DEFERRED-ACQUISITION> 17,318,000
<TOTAL-ASSETS> 743,190,000
<POLICY-LOSSES> 182,028,000
<UNEARNED-PREMIUMS> 117,451,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 16,476,000
0
0
<COMMON> 34,679,000
<OTHER-SE> 193,184,000
<TOTAL-LIABILITY-AND-EQUITY> 743,190,000
66,102,000
<INVESTMENT-INCOME> 11,154,000
<INVESTMENT-GAINS> 3,531,000
<OTHER-INCOME> 30,035,000
<BENEFITS> 36,874,000
<UNDERWRITING-AMORTIZATION> 25,010,000
<UNDERWRITING-OTHER> 3,023,000
<INCOME-PRETAX> 18,887,000
<INCOME-TAX> 2,153,000
<INCOME-CONTINUING> 16,734,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,734,000
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.46
<RESERVE-OPEN> 66,326,000
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 75,709,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
