<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-20766
HCC INSURANCE HOLDINGS 401(k) PLAN
HCC INSURANCE HOLDINGS, INC.
(Name of Issuer of the securities held pursuant to the Plan)
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040
(Address of principal executive office)
(713) 690-7300
(Registrant's telephone number, including area code)
----------------------------
<PAGE>
REQUIRED INFORMATION
1. Audited Statement of Net Assets Available for Benefits (with Fund
Information) as of December 31, 1998 and 1997. Incorporated by
reference to the HCC Insurance Holdings 401(k) Plan Financial
Statements and Supplemental Schedules attached hereto as Exhibit 99.1.
2. Audited Statement of Changes in Net Assets Available to Benefits (with
Fund Information) for the years ended December 31, 1998. Incorporated
by reference to the HCC Insurance Holdings 401(k) Plan Financial
Statements and Supplemental Schedules attached hereto as Exhibit 99.1.
3. Notes to Financial Statements (with Fund Information). Incorporated by
reference to the HCC Insurance Holdings 401(k) Plan Financial
Statements and Supplemental Schedules attached hereto as Exhibit 99.1.
4. Schedule 1 - Item 27a - Schedule of Assets Held for Investment purposes
(with Fund Information) as of December 31, 1998. Incorporated by
reference to the HCC Insurance Holdings 401(k) Plan Financial
Statements and Supplemental Schedules attached hereto as Exhibit 99.1.
5. Schedule 2 - Item 27d - Schedule of Reportable Transactions (with Fund
Information) for the year ended December 31, 1998. Incorporated by
reference to the HCC Insurance Holdings 401(k) Plan Financial
Statements and Supplemental Schedules attached hereto as Exhibit 99.1.
6. Schedule 3 - Item 27e - Schedule of Nonexempt Transactions for the year
ended December 31, 1998. Incorporated by reference to the HCC Insurance
Holdings 401(k) Plan Financial Statements and Supplemental Schedules
attached hereto as Exhibit 99.1.
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP
99.1 HCC Insurance Holdings 401(k) Plan Financial Statements and
Supplemental Schedules
</TABLE>
<PAGE>
SIGNATURES
THE PLAN Pursuant to the requirements of the Securities Exchange Act of 1934,
the administrator of the HCC Insurance Holdings 401(k) Plan has duly
caused this annual report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Houston,
State of Texas, on the 28th day of June, 1999.
HCC INSURANCE HOLDINGS 401(k) PLAN
By: HCC Insurance Holdings, Inc., Administrator
By: /s/ John N. Molbeck, Jr.
----------------------------------------------
Name: John N. Molbeck, Jr.
Title: President
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-68771) of HCC Insurance Holdings, Inc. of our
report dated June 15, 1999 relating to the financial statements of the HCC
Insurance Holdings 401(k) Plan, which appears in this Form 11-K.
PricewaterhouseCoopers LLP
Hartford, Connecticut
June 25, 1999
<PAGE>
Exhibit 99.1
HCC INSURANCE HOLDINGS
401(k) PLAN
FINANCIAL STATEMENTS AND
SUPPLEMENTAL SCHEDULES
DECEMBER 31, 1998 AND 1997
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
INDEX
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Page
<S> <C>
Financial Statements:
Report of Independent Accountants 1
Statement of Net Assets Available for Benefits, with Fund Information 2-4
Statement of Changes in Net Assets Available for Benefits, with Fund Information 5-6
Notes to Financial Statements 7-13
Supplemental Schedules:
Schedule I - Schedule of Assets Held for Investment Purposes 14-15
Schedule II - Schedule of Reportable Transactions 16-17
Schedule III - Schedule of Nonexempt Transactions 18
</TABLE>
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
FUND INFORMATION
Charter Charter
Charter Guaranteed Charter Charter Large
Guaranteed Government Foreign Corporate Company
Long-Term Securities Stock III Bond Stock
Fund Fund Fund Fund Index Fund
---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Assets
Investments, at fair value
CIGNA Charter Guaranteed Long-Term $1,590,656
Account
CIGNA Charter Guaranteed Government
Securities Account $2,510,951
CIGNA Charter Foreign Stock III Fund $307,089
CIGNA Charter Corporate Bond Fund $12,765
CIGNA Charter Large Company Stock Index $2,509,145
Fund
CIGNA Fidelity Advisor Growth
Opportunities Fund
CIGNA Fidelity Advisor Balanced Fund
CIGNA Warburg Pincus Advisor Emerging
Growth Fund
Cash equivalents 253,473 21,176 13,501 179,448
---------- ---------- -------- ------- ----------
Net assets available for benefits $1,844,129 $2,532,127 $307,089 $26,266 $2,688,593
---------- ---------- -------- ------- ----------
---------- ---------- -------- ------- ----------
Warburg
Fidelity Pincus
Advisor Fidelity Advisor
Growth Advisor Emerging
Opportunities Balanced Growth
Fund Fund Fund
------------- -------- --------
<S> <C> <C> <C>
Assets
Investments, at fair value
CIGNA Charter Guaranteed Long-Term
Account
CIGNA Charter Guaranteed Government
Securities Account
CIGNA Charter Foreign Stock III Fund
CIGNA Charter Corporate Bond Fund
CIGNA Charter Large Company Stock Index
Fund
CIGNA Fidelity Advisor Growth $2,940,369
Opportunities Fund
CIGNA Fidelity Advisor Balanced Fund $805,180
CIGNA Warburg Pincus Advisor Emerging
Growth Fund $10,820
Cash equivalents 143,134 278
---------- -------- -------
Net assets available for benefits $3,083,503 $805,180 $11,098
---------- -------- -------
---------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
(CONTINUED)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
FUND INFORMATION
----------------
INVESCO Founders Founders Janus Templeton HCC
Dynamics Balanced Growth Worldwide Foreign Common
Fund Fund Fund Fund Fund Stock
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments, at fair value
CIGNA Charter Guaranteed Long-Term Account
Account
CIGNA Charter Guaranteed Government
Securities Account
CIGNA Charter Foreign Stock III Fund
CIGNA Charter Corporate Bond Fund
CIGNA Charter Large Company Stock Index
Fund
CIGNA Fidelity Advisor Growth
Opportunities Fund
CIGNA Fidelity Advisor Balanced Fund
CIGNA Warburg Pincus Advisor Emerging
Growth Fund
CIGNA INVESCO Dynamics Fund $ 13,744
CIGNA Founders Balanced Fund $ 102,676
CIGNA Founders Growth Fund $ 35,573
CIGNA Janus Worldwide Fund $ 59,700
CIGNA Templeton Foreign Fund $ 6,871
HCC Common Stock $1,374,587
Participant notes receivable
Cash equivalents 1,632 9,784 5,603 18,867 367
---------- ---------- ---------- ---------- ---------- ----------
Net assets available for benefits $ 15,376 $ 112,460 $ 41,176 $ 78,567 $ 7,238 $1,374,587
========== ========== ========== ========== ========== ==========
December 31, 1998
FUND INFORMATION
----------------
Participant
Notes
Receivable Total
<S> <C> <C>
Assets
Investments, at fair value
CIGNA Charter Guaranteed Long-Term Account $ 1,590,656
CIGNA Charter Guaranteed Government
Securities Account 2,510,951
CIGNA Charter Foreign Stock III Fund 307,089
CIGNA Charter Corporate Bond Fund 12,765
CIGNA Charter Large Company Stock Index 2,509,145
Fund
CIGNA Fidelity Advisor Growth 2,940,369
Opportunities Fund
CIGNA Fidelity Advisor Balanced Fund 805,180
CIGNA Warburg Pincus Advisor Emerging
Growth Fund 10,820
CIGNA INVESCO Dynamics Fund 13,744
CIGNA Founders Balanced Fund 102,676
CIGNA Founders Growth Fund 35,573
CIGNA Janus Worldwide Fund 59,700
CIGNA Templeton Foreign Fund 6,871
HCC Common Stock 1,374,587
Participant notes receivable $ 46,617 46,617
Cash equivalents 647,263
---------- -----------
Net assets available for benefits $ 46,617 $12,974,006
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
FUND INFORMATION
----------------
Charter
Charter Large Fidelity
Charter Guaranteed Charter Company Advisor Fidelity
Guaranteed Government Foreign Stock Growth Advisor
Long-Term Securities Stock III Index Opportunities Balanced
Fund Fund Fund Fund Fund Fund Total
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Investments, at fair value
CIGNA Charter Guaranteed Long - Term
Account $ 247,052 $ 247,052
CIGNA Charter Guaranteed Government
Securities Account $ 166,783 166,783
CIGNA Charter Foreign Stock III Fund $ 180,217 180,217
CIGNA Charter Large Company Stock
Index Fund $ 385,538 385,538
CIGNA Fidelity Advisor Growth
Opportunities Fund $ 910,035 910,035
CIGNA Fidelity Advisor Balanced Fund $ 320,274 320,274
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net assets available for benefits $ 247,052 $ 166,783 $ 180,217 $ 385,538 $ 910,035 $ 320,274 $2,209,899
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS, WITH FUND INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998
FUND INFORMATION
Charter
Charter Large
Charter Guaranteed Charter Charter Company
Guaranteed Government Foreign Corporate Stock
Long-Term Securities Stock III Bond Index
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Additions to net assets attributed to:
Investment income
Interest $ 31,004 $ 228,716
Net appreciation (depreciation) in fair
value of investments $ 25,197 $ 93 $ 323,530
----------- ----------- -------- ------- -----------
31,004 228,716 25,197 93 323,530
----------- ----------- -------- ------- -----------
Contributions
Employer 172,888 55,732 55,864 751 522,833
Employee 831,316 116,566 105,153 22,243 929,751
----------- ----------- -------- ------- -----------
1,004,204 172,298 161,017 22,994 1,452,584
----------- ----------- -------- ------- -----------
Total additions 1,035,208 401,014 186,214 23,087 1,776,114
Deductions from net assets attributed to:
Benefit payments 579,957 5,588,317 17,394 143,129
Transaction charge 56 59 90
----------- ----------- -------- ------- -----------
Total deductions 580,013 5,588,376 17,394 143,219
Change in forfeiture reserve, net 47,122 (48,072) (567) (3,826)
----------- ----------- -------- ------- -----------
Net increase (decrease) prior to interfund
transfers 502,317 (5,235,434) 168,253 23,087 1,629,069
Interfund transfers, net 1,094,760 5,643 (41,381) 3,179 673,986
Transfer of assets due to plan merger 7,595,135
----------- ----------- -------- ------- -----------
Net increase 1,597,077 2,365,344 126,872 26,266 2,303,055
Net assets available for benefits at
beginning of year 247,052 166,783 180,217 - 385,538
----------- ----------- -------- ------- -----------
Net assets available for
benefits at end of year $ 1,844,129 $ 2,532,127 $307,089 $26,266 $ 2,688,593
----------- ----------- -------- ------- -----------
----------- ----------- -------- ------- -----------
Warburg
Fidelity Pincus
Advisor Fidelity Advisor
Growth Advisor Emerging
Opportunities Balanced Growth
Fund Fund Fund
<S> <C> <C> <C>
Additions to net assets attributed to:
Investment income
Interest
Net appreciation (depreciation) in fair
value of investments $ 451,765 $ (22,490) $ 1,217
----------- -------- -------
451,765 (22,490) 1,217
----------- -------- -------
Contributions
Employer 573,838 186,158 904
Employee 985,119 268,863 2,469
----------- -------- -------
1,558,957 455,021 3,373
----------- -------- -------
Total additions 2,010,722 432,531 4,590
Deductions from net assets attributed to:
Benefit payments 243,047 1,268,493
Transaction charge 85 10
----------- -------- -------
Total deductions 243,132 1,268,503
Change in forfeiture reserve, net (7,911) (2,342)
----------- -------- -------
Net increase (decrease) prior to interfund
transfers 1,759,679 (838,314) 4,590
Interfund transfers, net 413,789 1,323,220 6,508
Transfer of assets due to plan merger
----------- -------- -------
Net increase 2,173,468 484,906 11,098
Net assets available for benefits at
beginning of year 910,035 320,274 -
----------- -------- -------
Net assets available for
benefits at end of year $ 3,083,503 $805,180 $11,098
----------- -------- -------
----------- -------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS,
WITH FUND INFORMATION (CONTINUED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998
FUND INFORMATION
INVESCO Founders Founders Janus Templeton
Dynamics Balanced Growth Worldwide Foreign
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Additions to net assets attributed to:
Investment income
Interest
Dividends
Net appreciation (depreciation) in fair
value of investments $ 1,687 $ 2,202 $ 3,240 $ 4,877 $ (19)
------- -------- -------- -------- ------
1,687 2,202 3,240 4,877 (19)
Contributions
Employer 1,507 3,736 2,658 3,396 565
Employee 6,350 68,435 18,101 41,139 1,169
------- -------- -------- -------- ------
7,857 72,171 20,759 44,535 1,734
Loan principal transfer
------- -------- -------- -------- ------
Total additions 9,544 74,373 23,999 49,412 1,715
Deductions from net assets attributed to:
Benefit payments
Transaction charge
Total deductions
Change in forfeiture reserve, net
------- -------- -------- -------- ------
Net increase (decrease) prior to interfund
transfers 9,544 74,373 23,999 49,412 1,715
Interfund transfers, net 5,832 38,087 17,177 29,155 5,523
Transfer of assets due to plan merger
------- -------- -------- -------- ------
Net increase 15,376 112,460 41,176 78,567 7,238
Net assets available for benefits at
beginning of year - - - - -
------- -------- -------- -------- ------
Net assets available for benefits at end of
year $15,376 $112,460 $ 41,176 $ 78,567 $7,238
------- -------- -------- -------- ------
------- -------- -------- -------- ------
HCC Participant
Common Notes
Stock Receivable Total
<S> <C> <C> <C>
Additions to net assets attributed to:
Investment income
Interest $ 1,643 $ 261,363
Dividends $ 22,996 22,996
Net appreciation (depreciation) in fair
value of investments (326,336) 464,963
---------- ------- -----------
(303,340) 1,643 749,322
Contributions
Employer 315 1,581,145
Employee 498 3,397,172
---------- ------- -----------
813 4,978,317
Loan principal transfer 28,193 28,193
---------- ------- -----------
Total additions (302,527) 29,836 5,755,832
Deductions from net assets attributed to:
Benefit payments 1,031,902 8,872,239
Transaction charge 13,363 13,663
Total deductions 1,045,265 8,885,902
Change in forfeiture reserve, net (7,237) (22,833)
---------- ------- -----------
Net increase (decrease) prior to interfund
transfers (1,355,029) 29,836 (3,152,903)
Interfund transfers, net (3,592,259) 16,781 -
Transfer of assets due to plan merger 6,321,875 13,917,010
---------- ------- -----------
Net increase 1,374,587 46,617 10,764,107
Net assets available for benefits at
beginning of year - - 2,209,899
---------- ------- -----------
Net assets available for benefits at end of
year $1,374,587 $46,617 $12,974,006
---------- ------- -----------
---------- ------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. Description of Plan
The following description of the HCC Insurance Holdings ("HCC") 401(k)
Plan (the "Plan") provides only general information. As a result of the
merger of several other qualified plans of acquired companies into the
Plan during 1997 and 1998 the Plan has been amended to include certain
specific provisions applicable only to merged participants.
Participants should refer to the Plan agreement for a more complete
description of the Plan's provisions.
General
The Plan is a defined contribution plan established effective January
1, 1992 and most recently amended effective November 30, 1998. Full
time employees of HCC Insurance Holdings, Inc. (the "Company")
generally become eligible to participate in the Plan on the first day
of the month after the employee attains the age of 21. The Plan is
subject to the provisions of the Employee Retirement Income Security
Act of 1974 ("ERISA").
Contributions
Participants may contribute an amount equal to not less than 2 percent
nor more than 15 percent of their compensation for the contribution
period. The Company will make a matching contribution in an amount
equal to $1.00 for each $1.00 contributed by an employee, up to a
maximum of 6 percent of the participant's compensation. The Company may
also make a discretionary nonelective contribution. A participant in
not eligible to receive matching contributions or nonelective
contributions until such participant has completed one year of service.
Participant Accounts
Each participant's account is credited with the participant's
contribution and allocation of the Company's contribution and Plan
earnings. Earnings are allocated by fund based on the ratio of a
participant's account invested in a particular fund to all
participants' investments in that fund. The benefit to which a
participant is entitled is the benefit that can be provided from the
participant's account.
Vesting
Participants are immediately vested in their voluntary contributions
plus actual earnings thereon. The balance of vesting in the
participants' accounts is based on years of service. A participant
becomes 20 percent vested after two years of service, 40 percent vested
after three years of service, 60 percent vested after four years of
service, 80 percent vested after five years of service and 100 percent
vested after six years of service. However, if an active participant
dies prior to attaining the normal retirement age, the participant's
account becomes 100 percent vested.
7
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Investment Options
Upon enrollment in the Plan, a participant may currently direct
contributions among any of the following investment options:
- Charter Guaranteed Long-Term Fund - Funds are invested in the
CIGNA Charter Guaranteed Long-Term Account, which provides a
guaranteed rate of return reset semiannually.
- Charter Guaranteed Government Securities Fund - Funds are
invested in the CIGNA Charter Guaranteed Government Securities
Account, which provides a guaranteed rate of return.
- Charter Foreign Stock III Fund - Funds are invested in the
CIGNA Charter Foreign Stock III Fund, which invests in
international equity securities.
- Charter Corporate Bond Fund - Funds are invested in the CIGNA
Charter Bond Account, which invests primarily in investment
grade, publicly traded U.S. dollar denominated corporate bonds.
- Charter Large Company Stock Index Fund - Funds are invested in
the CIGNA Charter Large Company Stock Index Fund, which is a
separate account which provides an investment portfolio
designed to reflect the composition of the Standard & Poor's
500 Composite Stock Price Index.
- Fidelity Advisor Growth Opportunities Fund - Funds are
invested solely in units of the CIGNA Fidelity Advisor Growth
Opportunities Fund, which in turn invests solely in shares of
the Fidelity Advisor Growth Opportunities Fund.
- Fidelity Advisor Balanced Fund - Funds are invested solely in
units of the CIGNA Fidelity Advisor Balanced Fund, which in turn
invests solely in shares of the Fidelity Advisor Balanced Fund.
- Warburg Pincus Advisor Emerging Growth Fund - Funds are
invested solely in units of the CIGNA Warburg Pincus Advisor
Emerging Growth Fund, which in turn invests solely in shares
of the Warburg Pincus Advisor Emerging Growth Fund.
- INVESCO Dynamics Fund - Funds are invested solely in units of
the CIGNA INVESCO Dynamics Fund, which in turn invests solely
in shares of the INVESCO Dynamics Fund.
- Founders Balanced Fund - Funds are invested solely in units of
the CIGNA Founders Balanced Fund, which in turn invests solely
in shares of the Founders Balanced Fund.
8
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- Founders Growth Fund - Funds are invested solely in units of
the CIGNA Founders Growth Fund, which in turn invests solely
in shares of the Founders Growth Fund.
- Janus Worldwide Fund - Funds are invested solely in units of
the CIGNA Janus Worldwide Fund, which in turn invests solely
in shares of the Janus Worldwide Fund.
- Templeton Foreign Fund - Funds are invested solely in units of
the CIGNA Templeton Foreign Fund, which in turn invests solely
in shares of the Templeton Foreign Fund.
- HCC Common Stock - Funds are invested solely in shares of HCC
common stock.
Participants may change their investment options at any time.
Payment of Benefits
On termination of service, a participant may elect to receive either a
lump-sum amount equal to the value of his or her account, a
distribution in the form of an annuity, or a combination of both.
Distributions are subject to the applicable provisions of the Plan
agreement.
Participant Notes Receivable
Participants may borrow up to the lesser of $50,000 or 50 percent of
the vested portion of their account balance, subject to certain
restrictions, in accordance with interest rates and collateral
requirements established by the Company.
Cash Equivalents
Contributions received prior to year end awaiting investment in the
appropriate investment option at December 31, 1998 are invested in the
CIGNA Charter Guaranteed Short-Term Account, which is recorded at fair
value, and is included as a cash equivalent within the fund in which
units are subsequently purchased.
9
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. Summary of Accounting Policies
Method of Accounting
The Plan's financial statements are prepared on the accrual basis of
accounting, and reflect management's estimates and assumptions, such as
those regarding fair value, that affect the recorded amounts.
Significant estimates used are discussed throughout the notes to
financial statements.
Investments
Investments in pooled separate accounts (CIGNA Charter Foreign Stock
III Fund, CIGNA Charter Corporate Bond Fund, CIGNA Charter Large
Company Stock Index Fund, CIGNA Fidelity Advisor Growth Opportunities
Fund, CIGNA Fidelity Advisor Balanced Fund, CIGNA Warburg Pincus
Advisor Emerging Growth Fund, CIGNA INVESCO Dynamics Fund, CIGNA
Founders Balanced Fund, CIGNA Founders Growth Fund, CIGNA Janus
Worldwide Fund and CIGNA Templeton Foreign Fund) are recorded at fair
value, as determined by the unit value as reported by the Connecticut
General Life Insurance Company ("CG Life"). Investments in the CIGNA
Charter Guaranteed Long-Term Account and CIGNA Charter Guaranteed
Government Securities Account are non-fully benefit responsive and are
recorded at fair value. Participant notes receivable are valued at cost
which approximates fair value. The HCC common stock is valued at its
quoted market price.
Effective March, 1998, HCC common stock valued at approximately
$6,300,000 was transferred into the Plan in connection with the merger
of the Avemco Corporation Profit Sharing Plan. The Avemco plan had
previously acquired Avemco stock as an investment over a period of
years. The HCC stock transferred to the Plan had been received by the
Avemco plan in exchange for Avemco stock in connection with the
acquisition of Avemco by HCC on June 17, 1997.
Contributions
Employee contributions are recorded in the period during which the
Company makes payroll deductions from the participants' earnings.
Matching Company contributions are recorded monthly. Discretionary
nonelective contributions, if any, are recorded at the end of the plan
year.
Benefits
Benefit claims are recorded as expenses when they have been approved
for payment and paid by the Plan.
10
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. Deposits With Insurance Company
The Plan participates in contracts with CG Life via investments in the
CIGNA Charter Guaranteed Long-Term Account and the CIGNA Charter
Guaranteed Government Securities Account. CG Life commingles the assets
of the CIGNA Charter Guaranteed Long-Term Account with other assets.
For the Plan's investment in the CIGNA Charter Guaranteed Long-Term
Account, the Plan is credited with interest at the rate specified in
the contract which was 5.65% for the year ended December 31, 1998, net
of asset charges. CG Life prospectively guaranteed the interest rates
credited for the CIGNA Charter Guaranteed Long-Term Account for six
months. For the Plan's investment in the CIGNA Charter Guaranteed
Government Securities Account, the Plan is credited with interest at a
yield which averaged 3.89% for the year ended December 31, 1998, net of
asset charges. As discussed in Note 2, the CIGNA Charter Guaranteed
Long-Term Account and the CIGNA Charter Guaranteed Government
Securities Account are included in the financial statements at fair
value which, principally because of the periodic rate reset process,
approximates contract value.
4. Investments
Investments that represent 5 percent or more of the Plan's net assets
are separately identified below.
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
CIGNA Charter Guaranteed Long-Term Account $1,590,656
interest rate, 5.65%
CIGNA Charter Guaranteed Government Securities Account 2,510,951
interest rate, 3.89%
CIGNA Charter Large Company Stock Index Fund 2,509,145
units, 40,634
CIGNA Fidelity Advisor Growth Opportunities Fund 2,940,369
units, 38,386
CIGNA Fidelity Advisor Balanced Fund 805,180
units, 25,432
HCC Common Stock 1,374,587
shares, 78,548
</TABLE>
11
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. Participant Notes Receivable
Under the terms of the Plan, participants may borrow from their
accounts up to the lesser of $50,000 or 50% of their vested account
balance. Loan transactions are treated as a transfer to/from the
investment fund from/to Participant Notes Receivable. A loan is secured
by the balance in the participant's account and bears interest at a
rate commensurate with market rates for similar loans, as defined
(8.00% to 10.00% for the year ended December 31, 1998).
6. Plan Termination
Although it has not expressed any intent to do so, the Company has the
right under the Plan to discontinue its contributions at any time and
to terminate the Plan subject to the provisions of ERISA. In the event
of Plan termination, participants will become 100 percent vested in
their accounts.
7. Income Taxes
The Plan has not yet filed for a determination letter from the Internal
Revenue Service to determine that the Plan is designed in accordance
with applicable sections of the Internal Revenue Code ("IRC"). However,
the Plan's administrator and tax counsel believe the Plan is designed
and is currently being operated in compliance with the applicable
requirements of the IRC. Subsequent to year end the Plan filed for, but
had not yet received, a determination letter from the Internal Revenue
Service.
Management has determined that nonexempt transactions occurred during
1998. These violations involved the submission of two months of
employee contributions to the Plan later than the 15th business day of
the month following the month of withholding from compensation. These
exceptions occurred during the first quarter of 1998 as a result of a
complete change in the Company's systems for administering payroll and
plan contributions; no such incidents occurred subsequently during the
year. Management is pursuing the necessary corrective actions and
believes that the transactions should not affect the tax-qualified
status of the Plan. Therefore, no provision for income taxes has been
included in the Plan's financial statements
8. Reconciliation of Plan Financial Statements to the Form 5500
Certain balances included on lines 31 and 32 of the Annual
Return/Report of Employee Benefit Plan (the "Form 5500") have been
reclassified for purposes of presentation in these financial statements
to provide additional disclosure.
12
<PAGE>
HCC INSURANCE HOLDINGS
401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
9. Transfer From Affiliated Plan
During March 1998, assets of the AVEMCO Corporation Profit Sharing Plan
and the NASRA 401(k) and Profit Sharing Plan were transferred to the
Plan and participants became eligible to participate in the Plan
subject to the provisions of the Plan agreement.
10. Forfeitures
The net change in forfeiture reserve represents the net change in the
available forfeiture reserve balance from the prior year plus the
current year forfeitures generated. Forfeitures result from nonvested
benefit payments remaining in the Plan for all terminated employees.
Upon reaching the break-in-service requirement, as defined in the Plan
agreement, forfeitures generated are added to the forfeiture reserve
balance. The forfeiture reserve of $52,132 at December 31, 1998, is
included in the CIGNA Charter Guaranteed Long-Term Account and is
available to offset contributions or pay Plan expenses, which would be
otherwise payable by the Company, in accordance with the Plan
agreement.
13
<PAGE>
HCC INSURANCE HOLDINGS SUPPLEMENTAL SCHEDULE
401(K) PLAN SCHEDULE I
LINE 27A FORM 5500 - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(c)
(b) Description of investment including
Identity of Issue, borrower, maturity date, rate of interest, (d) (e)
(a) lessor, or similar party collateral, par or maturity value Cost Current value
<S> <C> <C> <C> <C>
Connecticut General Life CIGNA Charter Guaranteed
* Insurance Company Long-Term Account
5.65% $1,590,656 $1,590,656
Connecticut General Life CIGNA Charter Guaranteed
* Insurance Company Government Securities Fund
3.89% 2,510,951 2,510,951
Connecticut General Life CIGNA Charter Foreign Stock III Fund
* Insurance Company $74.67/unit 274,579 307,089
Connecticut General Life CIGNA Charter Corporate Bond Fund
* Insurance Company $10.55/unit 12,672 12,765
Connecticut General Life CIGNA Charter Large Company Stock
* Insurance Company Index Fund
$61.75/unit 2,119,816 2,509,145
Connecticut General Life CIGNA Fidelity Advisor Growth
* Insurance Company Opportunities Fund
$76.60/unit 2,229,510 2,940,369
Connecticut General Life CIGNA Fidelity Advisor Balanced Fund
* Insurance Company $31.66/unit 729,973 805,180
Connecticut General Life CIGNA Warburg Pincus Advisor
* Insurance Company Emerging Growth Fund
$47.79/unit 9,603 10,820
Connecticut General Life CIGNA INVESCO Dynamics Fund
* Insurance Company $21.59/unit 12,056 13,744
</TABLE>
* Indicates an identified person known to be a party-in-interest to the Plan.
14
<PAGE>
HCC INSURANCE HOLDINGS SUPPLEMENTAL SCHEDULE
401(K) PLAN SCHEDULE I
LINE 27A FORM 5500 - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1998 (CONTINUED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(c)
(b) Description of investment including
Identity of Issue, borrower, maturity date, rate of interest, (d) (e)
(a) lessor, or similar party collateral, par or maturity value Cost Current value
<S> <C> <C> <C> <C>
Connecticut General Life CIGNA Founders Balanced Fund
* Insurance Company $14.94/unit $ 100,473 $ 102,676
Connecticut General Life CIGNA Founders Growth Fund
* Insurance Company $26.99/unit 32,334 35,573
Connecticut General Life CIGNA Janus Worldwide Fund
* Insurance Company $53.69/unit 54,822 59,700
Connecticut General Life CIGNA Templeton Foreign Fund
* Insurance Company $10.87/unit 6,890 6,871
HCC Insurance HCC Common Stock
* Holdings, Inc. $17.50/share 1,668,693 1,374,587
Connecticut General Life Cash Equivalents (CIGNA Charter
* Insurance Company Guaranteed Short-Term Account) 647,263 647,263
* Participant Notes Receivable 8.00% - 10.00% 46,617 46,617
</TABLE>
* Indicates an identified person known to be a party-in-interest to the Plan.
15
<PAGE>
<TABLE>
<CAPTION>
HCC INSURANCE HOLDINGS SUPPLEMENTAL SCHEDULE
401(K) PLAN SCHEDULE II
LINE 27d FORM 5500 - SCHEDULE OF REPORTABLE TRANSACTIONS
YEAR ENDED DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
(b) (f) (h)
Description of asset Expense Current value
(a) (include interest rate (c) (d) (e) incurred (g) of asset on (i)
Identity of party and maturity in case Purchase Selling Lease with Cost of transaction Net gain
involved of a loan) price price rental transaction asset date or (loss)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Connecticut General Purchases into
Life Insurance CIGNA Charter Guaranteed
Company Long-Term Account
$2,051,453 N/A N/A N/A $2,051,453 $2,051,453 -
Connecticut General Sales from CIGNA
Life Insurance Charter Guaranteed
Company Long-Term Account N/A $ 740,372 N/A N/A 740,372 740,372 -
Purchases into CIGNA
Connecticut General Charter Guaranteed
Life Insurance Government Securities
Company Fund 9,160,198 N/A N/A N/A 9,160,198 9,160,198 -
Sales from CIGNA
Connecticut General Charter Guaranteed
Life Insurance Government
Company Securities Fund N/A 6,960,865 N/A N/A 6,960,865 6,960,865 -
Connecticut General Purchases into CIGNA
Life Insurance Charter Foreign Stock III
Company Fund 194,994 N/A N/A N/A 194,994 194,994 -
Connecticut General Sales from CIGNA
Life Insurance Charter Foreign Stock III
Company Fund N/A 93,319 N/A N/A 85,042 93,319 $ 8,277
Connecticut General Purchases into CIGNA
Life Insurance Charter Large Company
Company Stock Index Fund 2,217,489 N/A N/A N/A 2,217,489 2,217,489 -
Connecticut General Sales from CIGNA
Life Insurance Charter Large Company
Company Stock Index Fund N/A 417,412 N/A N/A 423,748 417,412 (6,336)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
HCC INSURANCE HOLDINGS SUPPLEMENTAL SCHEDULE
401(K) PLAN SCHEDULE II
LINE 27d FORM 5500 - SCHEDULE OF REPORTABLE TRANSACTIONS
YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
(h)
(b) (f) Current
Description of asset Expense value
(a) (include interest rate (c) (d) (e) incurred (g) of asset on (i)
Identity of party and maturity in case Purchase Selling Lease with Cost of transaction Net gain
involved of a loan) price price rental transaction asset date or (loss)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Connecticut General Purchases into CIGNA
Life Insurance Fidelity Advisor Growth
Company Opportunities Fund $2,013,159 N/A N/A N/A $2,013,159 $2,013,159 -
Connecticut General Sales from CIGNA
Life Insurance Fidelity Advisor Growth
Company Opportunities Fund N/A $ 434,590 N/A N/A 370,266 434,590 $ 64,324
Connecticut General Purchases into CIGNA
Life Insurance Fidelity Advisor
Company Balanced Fund 2,013,174 N/A N/A N/A 2,013,174 2,013,174 -
Connecticut General Sales from CIGNA
Life Insurance Fidelity Advisor
Company Balanced Fund N/A 1,505,778 N/A N/A 1,525,756 1,505,778 (19,978)
National Financial Purchases into
Services Corporation HCC Common Stock 6,322,688 N/A N/A N/A 6,322,688 6,322,688 -
National Financial Sales from
Services Corporation HCC Common Stock N/A 4,644,761 N/A N/A 4,676,990 4,644,761 (32,229)
</TABLE>
17
<PAGE>
HCC INSURANCE HOLDINGS SUPPLEMENTAL SCHEDULE
401(K) PLAN SCHEDULE III
LINE 27e FORM 5500 - SCHEDULE OF NONEXEMPT TRANSACTIONS
YEAR ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(c)
Description of
transactions
(b) including (g)
Relationship maturity Expenses (j)
to plan, date, rate incurred in (h) (i) Net gain
(a) employer, or of interest, (d) (e) (f) connection Cost Current or (loss)
Identity of other party-in collateral, par Purchase Selling Lease with of value of on each
party involved interest or maturity value price price rental transaction asset asset transaction
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Failure to remit
employee
contributions to
HCC Insurance the trust on a
Holdings Employer timely basis N/A N/A $ 538.67** N/A N/A N/A -*
Failure to remit
employee
contributions to
HCC Insurance the trust on a
Holdings Employer timely basis N/A N/A $ 482.29** N/A N/A N/A -*
</TABLE>
* Title I of ERISA requires that all employee contributions are submitted to
the Plan as soon as administratively possible but no later than the 15th
business day of the month following the month of being withheld from
compensation. Failure to remit employee contributions into the Plan on a
timely basis is considered a nonexempt transaction with a party-in-interest.
A Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, will
be filed to pay the excise tax on such nonexempt transactions. As discussed
in Note 7, management believes that this transaction will not affect the
tax-qualified status of the Plan. Therefore, no provision for income taxes
has been included in the Plan's financial statements.
** The failure to deposit the contributions in a timely manner is analogous to a
loan or extension of credit to the employer. The amount involved is the cost
of the use of funds not deposited, or remitted as reflected in column (f).
18
<PAGE>
Report of Independent Accountants
To the Participants and Administrator
of the HCC Insurance Holdings 401(k) Plan
In our opinion, the accompanying statements of net assets available for benefits
and the related statements of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of the HCC Insurance Holdings 401(k) Plan at December 31, 1998 and 1997, and the
changes in net assets available for benefits for the year ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Plan's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets held
for investment purposes, reportable transactions, and nonexempt transactions are
presented for the purpose of additional analysis and are not a required part of
the basic financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. The Fund Information in the
statements of net assets available for benefits and the statements of changes in
net assets available for benefits is presented for purposes of additional
analysis rather than to present the net assets available for benefits and
changes in net assets available for benefits of each fund. These supplemental
schedules and Fund Information are the responsibility of the Plan's management.
The supplemental schedules and Fund Information have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, are fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
As discussed in Note 7, nonexempt transactions were identified. Management's
evaluation of these matters and its plan for corrective actions are also
described in Note 7.
June 15, 1999
