<PAGE> 1
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 June 30, 2000
[ ] 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.
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(Exact name of registrant as specified in its charter)
Delaware 76-0336636
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(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
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(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 4, 2000, there were 49,396,815 shares of Common Stock, $1.00 par
value issued and outstanding.
<PAGE> 2
HCC INSURANCE HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999........................................................3
Condensed Consolidated Statements of Earnings
Six Months Ended June 30, 2000 and
Six Months Ended June 30, 1999.............................................................4
Condensed Consolidated Statements of Earnings
Three Months Ended June 30, 2000 and
Three Months Ended June 30, 1999...........................................................5
Condensed Consolidated Statements of Changes in Shareholders' Equity
Six Months Ended June 30, 2000 and
Year Ended December 31, 1999...............................................................6
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and
Six Months Ended June 30, 1999.............................................................8
Notes to Condensed Consolidated Financial Statements............................................9
Item 2. Management's Discussion and Analysis...........................................................21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................27
Part II. OTHER INFORMATION.......................................................................................28
</TABLE>
2
<PAGE> 3
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Balance Sheets
(Unaudited)
----------
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed income securities, at market
(cost: 2000 $378,181,000; 1999 $343,534,000) $ 378,890,000 $ 342,641,000
Marketable equity securities, at market
(cost: 2000 $12,029,000; 1999 $22,493,000) 9,912,000 19,970,000
Short-term investments, at cost, which approximates market 243,949,000 215,694,000
Other investments, at cost, which approximates fair value 6,252,000 3,017,000
--------------- ---------------
Total investments 639,003,000 581,322,000
Cash 10,449,000 26,533,000
Restricted cash and cash investments 94,851,000 84,112,000
Premium, claims and other receivables 592,425,000 622,087,000
Reinsurance recoverables 744,488,000 736,485,000
Ceded unearned premium 135,420,000 133,657,000
Ceded life and annuity benefits 90,155,000 95,760,000
Deferred policy acquisition costs 42,974,000 40,450,000
Property and equipment, net 37,895,000 37,804,000
Goodwill 270,857,000 263,687,000
Other assets 30,201,000 42,827,000
--------------- ---------------
TOTAL ASSETS $ 2,688,718,000 $ 2,664,724,000
=============== ===============
LIABILITIES
Loss and loss adjustment expense payable $ 899,295,000 $ 871,104,000
Life and annuity policy benefits 90,155,000 95,760,000
Reinsurance balances payable 111,302,000 113,373,000
Unearned premium 200,214,000 188,524,000
Deferred ceding commissions 37,312,000 39,792,000
Premium and claims payable 587,147,000 598,638,000
Notes payable 243,241,000 242,546,000
Accounts payable and accrued liabilities 36,105,000 57,559,000
--------------- ---------------
Total liabilities 2,204,771,000 2,207,296,000
SHAREHOLDERS' EQUITY
Common Stock, $1.00 par value; 250,000,000 shares authorized;
(issued and outstanding: 2000 49,385,915 shares;
1999 48,839,027 shares) 49,386,000 48,839,000
Additional paid-in capital 181,038,000 176,359,000
Retained earnings 255,038,000 234,922,000
Accumulated other comprehensive income (loss) (1,515,000) (2,692,000)
--------------- ---------------
Total shareholders' equity 483,947,000 457,428,000
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,688,718,000 $ 2,664,724,000
=============== ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
HCC Insurance Holdings, Inc. and Subsidiaries
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Condensed Consolidated Statements of Earnings
(Unaudited)
----------
<TABLE>
<CAPTION>
For the six months ended June 30,
2000 1999
------------- -------------
<S> <C> <C>
REVENUE
Net earned premium $ 135,010,000 $ 62,084,000
Management fees 53,809,000 47,573,000
Commission income 22,000,000 34,008,000
Net investment income 18,175,000 14,927,000
Net realized investment gain (loss) (4,372,000) 91,000
Other operating income 14,556,000 15,787,000
------------- -------------
Total revenue 239,178,000 174,470,000
EXPENSE
Loss and loss adjustment expense 101,941,000 44,813,000
Operating expense:
Policy acquisition costs, net 15,502,000 1,185,000
Compensation expense 41,577,000 37,642,000
Provision for reinsurance -- 29,500,000
Other operating expense 27,620,000 23,418,000
------------- -------------
Net operating expense 84,699,000 91,745,000
Interest expense 10,336,000 5,911,000
------------- -------------
Total expense 196,976,000 142,469,000
------------- -------------
Earnings before income tax provision 42,202,000 32,001,000
Income tax provision 17,156,000 11,005,000
------------- -------------
NET EARNINGS $ 25,046,000 $ 20,996,000
============= =============
BASIC EARNINGS PER SHARE DATA:
Earnings per share $ 0.51 $ 0.43
============= =============
Weighted average shares outstanding 49,465,000 48,858,000
============= =============
DILUTED EARNINGS PER SHARE DATA:
Earnings per share $ 0.50 $ 0.42
============= =============
Weighted average shares outstanding 49,909,000 49,757,000
============= =============
Cash dividends declared, per share $ 0.10 $ 0.10
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
HCC Insurance Holdings, Inc. and Subsidiaries
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Condensed Consolidated Statements of Earnings
(Unaudited)
----------
<TABLE>
<CAPTION>
For the three months ended June 30,
2000 1999
--------------- -------------
<S> <C> <C>
REVENUE
Net earned premium $ 71,654,000 $ 28,105,000
Management fees 24,548,000 24,138,000
Commission income 9,015,000 16,253,000
Net investment income 9,936,000 7,663,000
Net realized investment loss (3,969,000) (79,000)
Other operating income 7,905,000 6,403,000
--------------- -------------
Total revenue 119,089,000 82,483,000
EXPENSE
Loss and loss adjustment expense 53,132,000 21,049,000
Operating expense:
Policy acquisition costs, net 6,181,000 (885,000)
Compensation expense 20,192,000 18,720,000
Provision for reinsurance -- 29,500,000
Other operating expense 13,702,000 11,135,000
--------------- -------------
Net operating expense 40,075,000 58,470,000
Interest expense 5,315,000 2,602,000
--------------- -------------
Total expense 98,522,000 82,121,000
--------------- -------------
Earnings before income tax provision 20,567,000 362,000
Income tax provision 8,156,000 75,000
--------------- -------------
NET EARNINGS $ 12,411,000 $ 287,000
=============== =============
BASIC EARNINGS PER SHARE DATA:
Earnings per share $ 0.25 $ 0.01
=============== =============
Weighted average shares outstanding 49,528,000 48,951,000
=============== =============
DILUTED EARNINGS PER SHARE DATA:
Earnings per share $ 0.25 $ 0.01
=============== =============
Weighted average shares outstanding 50,086,000 49,971,000
=============== =============
Cash dividends declared, per share $ 0.05 $ 0.05
=============== =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
HCC Insurance Holdings, Inc. and Subsidiaries
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Condensed Consolidated Statements of Changes in
Shareholders' Equity
For the six months ended June 30, 2000 and
for the year ended December 31, 1999
(Unaudited)
----------
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholders'
Stock capital earnings income (loss) equity
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998 $ 48,252,000 $ 162,102,000 $ 219,804,000 $ 9,705,000 $ 439,863,000
Net earnings -- -- 25,123,000 -- 25,123,000
Other comprehensive income (loss) -- -- -- (12,397,000) (12,397,000)
505,555 shares of Common Stock issued for exercise
of options, including tax benefit of $1,156,000 506,000 4,277,000 -- -- 4,783,000
101,330 shares of Common Stock issued for
purchased companies 101,000 1,899,000 -- -- 2,000,000
414,207 shares of Common Stock contractually
issuable in the future -- 8,271,000 -- -- 8,271,000
Cash dividends declared, $0.20 per share -- -- (9,733,000) -- (9,733,000)
Other (20,000) (190,000) (272,000) -- (482,000)
------------- ------------- ------------- ------------- -------------
BALANCE AS OF DECEMBER 31, 1999 $ 48,839,000 $ 176,359,000 $ 234,922,000 $ (2,692,000) $ 457,428,000
============= ============= ============= ============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Condensed Consolidated Statements of Changes in
Shareholders' Equity
For the six months ended June 30, 2000 and
for the year ended December 31, 1999
(Unaudited)
(continued)
----------
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive shareholders'
stock capital earnings income (loss) equity
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1999 $ 48,839,000 $ 176,359,000 $ 234,922,000 $ (2,692,000) $ 457,428,000
Net earnings -- -- 25,046,000 -- 25,046,000
Other comprehensive income -- -- -- 1,177,000 1,177,000
307,415 shares of Common Stock issued for
exercise of options, including tax benefit of
$798,000 307,000 3,679,000 -- -- 3,986,000
Issuance of 144,973 shares of
contractually issuable Common Stock 145,000 (145,000) -- -- --
Issuance of 94,500 shares of
contingently issuable Common Stock 95,000 1,145,000 -- -- 1,240,000
Cash dividends declared, $0.10 per share -- -- (4,930,000) -- (4,930,000)
------------- ------------- ------------- ------------- -------------
BALANCE AS OF JUNE 30, 2000 $ 49,386,000 $ 181,038,000 $ 255,038,000 $ (1,515,000) $ 483,947,000
============= ============= ============= ============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 8
HCC Insurance Holdings, Inc. and Subsidiaries
--------
Condensed Consolidated Statements of Cash Flows
(Unaudited)
--------
<TABLE>
<CAPTION>
For the six months ended June 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 25,046,000 $ 20,996,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Change in premium, claims and other receivables 24,845,000 53,093,000
Change in reinsurance recoverables (8,003,000) (162,536,000)
Change in ceded unearned premium (1,763,000) (18,143,000)
Change in loss and loss adjustment expense payable 28,191,000 150,474,000
Change in reinsurance balances payable (2,071,000) 21,869,000
Change in unearned premium 12,353,000 17,145,000
Change in premium and claims payable, net of restricted cash (21,545,000) (69,156,000)
Change in accounts payable and accrued liabilities (21,648,000) 6,385,000
Net realized investment (gain) loss 4,372,000 (91,000)
Gains on dispositions of strategic investments and non-core
subsidiaries (2,951,000) (5,523,000)
Provision for reinsurance -- 29,500,000
Depreciation and amortization expense 9,183,000 6,397,000
Other, net 5,066,000 (9,762,000)
------------- -------------
Cash provided by operating activities 51,075,000 40,648,000
Cash flows from investing activities:
Sales of fixed income securities 32,085,000 1,214,000
Maturity or call of fixed income securities 23,747,000 5,693,000
Sales of equity securities 6,538,000 1,520,000
Dispositions of strategic investments and non-core subsidiaries 20,503,000 15,905,000
Change in short-term investments (49,544,000) (24,383,000)
Cash paid for companies acquired, net of cash received (9,880,000) (57,863,000)
Cost of securities acquired (87,061,000) (30,811,000)
Purchases of property and equipment and other, net (3,630,000) (6,376,000)
------------- -------------
Cash used by investing activities (67,242,000) (95,101,000)
Cash flows from financing activities:
Proceeds from notes payable 24,000,000 204,000,000
Sale of Common Stock 3,986,000 3,219,000
Payments on notes payable (23,000,000) (147,600,000)
Dividends paid (4,903,000) (4,350,000)
------------- -------------
Cash provided by financing activities 83,000 55,269,000
------------- -------------
Net change in cash (16,084,000) 816,000
Cash at beginning of period 26,533,000 16,018,000
------------- -------------
CASH AT END OF PERIOD $ 10,449,000 $ 16,834,000
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
8
<PAGE> 9
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) GENERAL INFORMATION
HCC Insurance Holdings, Inc. ("the Company" or "HCC") and its
subsidiaries include domestic and foreign property and casualty and life
insurance companies, underwriting agencies, intermediaries and service
companies. HCC, through its subsidiaries, provides specialized property
and casualty and accident and health insurance to commercial customers in
the areas of accident and health reinsurance, aviation, marine, medical
stop-loss, property, offshore energy and workers' compensation insurance.
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. The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. 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 related notes thereto. The condensed consolidated balance
sheet as of December 31, 1999, and the condensed consolidated statement
of changes in shareholders' equity for the year then ended were derived
from audited financial statements, but do not include all disclosures
required by generally accepted accounting principles.
During December, 1999, the Company acquired all of the outstanding shares
of The Centris Group, Inc. ("Centris") in a transaction accounted for
using the purchase method of accounting. Therefore, the results of
operations and cash flows of the Centris companies are included in the
2000 condensed consolidated statement of earnings and cash flows but are
not included in the 1999 condensed consolidated statements of earnings
and cash flows.
Income Tax
For the six months ended June 30, 2000 and 1999, the income tax provision
has been calculated based on an estimated effective tax rate for each of
the fiscal years. The difference between the Company's effective tax rate
and the Federal statutory rate is the result of state income taxes, the
non-deductibility of certain goodwill amortization and the mitigation of
the effect of tax exempt municipal bond interest.
Effects of Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133 entitled
"Accounting for Derivative Instruments and Hedging Activities" was issued
in June, 1998 and becomes effective for the Company January 1, 2001, with
early adoption permitted. The Company has utilized derivative or hedging
strategies only infrequently in the past and in immaterial amounts,
although it is currently using derivatives and hedging strategies to a
somewhat greater extent as it expands its foreign operations. The Company
does not expect the adoption of SFAS No. 133 to have a material effect on
the Company's financial position, results of operations or cash flows.
9
<PAGE> 10
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(1) GENERAL INFORMATION, CONTINUED
During December, 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 entitled "Revenue Recognition in
Financial Statements" which becomes effective for the Company during the
fourth quarter of 2000. The Company does not expect the adoption of SAB
No. 101 to have a material effect on the Company's financial position,
results of operations or cash flows.
Reclassifications
Certain amounts in the 1999 condensed consolidated financial statements
have been reclassified to conform to the 2000 presentation. Such
reclassifications had no effect on the Company's net earnings,
shareholders' equity 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
non-affiliated 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 purposes of limiting their loss exposure, protecting
against catastrophic loss and diversifying their business. The majority
of assumed reinsurance was written by underwriting agency subsidiaries of
the Company utilizing unaffiliated insurance companies as the primary
writer. The following tables represent the effect of such reinsurance
transactions on net premium and loss and loss adjustment expense:
<TABLE>
<CAPTION>
Loss and Loss
Written Earned Adjustment
Premium Premium Expense
------------- ------------- -------------
<S> <C> <C> <C>
For the six months ended June 30, 2000:
Direct business $ 299,375,000 $ 290,691,000 $ 208,523,000
Reinsurance assumed 171,903,000 175,394,000 160,842,000
Reinsurance ceded (328,698,000) (331,075,000) (267,424,000)
------------- ------------- -------------
NET AMOUNTS $ 142,580,000 $ 135,010,000 $ 101,941,000
============= ============= =============
</TABLE>
10
<PAGE> 11
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(2) REINSURANCE, CONTINUED
<TABLE>
<CAPTION>
Loss and Loss
Written Earned Adjustment
Premium Premium Expense
------------- ------------- -------------
<S> <C> <C> <C>
For the six months ended June 30, 1999:
Direct business $ 138,828,000 $ 128,137,000 $ 124,930,000
Reinsurance assumed 147,901,000 149,275,000 209,433,000
Reinsurance ceded (225,590,000) (215,328,000) (289,550,000)
------------- ------------- -------------
NET AMOUNTS $ 61,139,000 $ 62,084,000 $ 44,813,000
============= ============= =============
For the three months ended June 30, 2000:
Direct business $ 154,750,000 $ 152,274,000 $ 113,296,000
Reinsurance assumed 109,390,000 97,276,000 100,701,000
Reinsurance ceded (182,220,000) (177,896,000) (160,865,000)
------------- ------------- -------------
NET AMOUNTS $ 81,920,000 $ 71,654,000 $ 53,132,000
============= ============= =============
For the three months ended June 30, 1999:
Direct business $ 88,790,000 $ 67,867,000 $ 78,193,000
Reinsurance assumed 56,296,000 63,928,000 118,921,000
Reinsurance ceded (114,366,000) (103,690,000) (176,065,000)
------------- ------------- -------------
NET AMOUNTS $ 30,720,000 $ 28,105,000 $ 21,049,000
============= ============= =============
</TABLE>
11
<PAGE> 12
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(2) REINSURANCE, CONTINUED
The table below represents the approximate composition of reinsurance
recoverables in the accompanying condensed consolidated balance sheets:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Reinsurance recoverable on paid losses $ 120,139,000 $ 91,318,000
Commuted receivable -- 53,210,000
Reinsurance recoverable on outstanding losses 373,940,000 382,565,000
Reinsurance recoverable on IBNR 256,330,000 214,933,000
Reserve for uncollectible reinsurance (5,921,000) (5,541,000)
------------- ----------------
TOTAL REINSURANCE RECOVERABLES $ 744,488,000 $ 736,485,000
============= ================
</TABLE>
The insurance company subsidiaries require reinsurers not authorized by
the subsidiaries' respective states of domicile to collateralize their
reinsurance obligations to the Company. The table below shows amounts
held by the Company as collateral plus other credits available for
potential offset.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------ -----------------
<S> <C> <C>
Payables to reinsurers $205,103,000 $ 212,962,000
Letters of credit 121,466,000 154,111,000
Cash deposits 25,898,000 19,882,000
------------ ----------------
TOTAL CREDITS $352,467,000 $ 386,955,000
============ ================
</TABLE>
The Company has established a reserve of $5.9 million as of June 30, 2000
for potential collectibility issues related to reinsurance recoverables.
The adverse economic environment in the worldwide insurance industry has
placed great pressure on reinsurers and the results of their operations.
Ultimately, these conditions could affect reinsurers' solvency.
Historically, there have been insolvencies following a period of
competitive pricing in the industry, such as the marketplace has
experienced for the last several years. Therefore, while management
believes that the reserve is adequate based on current available
information, conditions may change or additional information might be
obtained that would affect management's estimate of the adequacy of the
level of the reserve and which may result in a future increase or
decrease in the reserve. Management continually reviews the Company's
financial exposure to the reinsurance market and continues to take
actions to protect shareholders' equity.
12
<PAGE> 13
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) SEGMENT AND GEOGRAPHIC INFORMATION
The performance of each segment is evaluated by management based upon net
earnings. Net earnings is calculated after tax and after all corporate
expense allocations, purchase price allocations and intercompany
eliminations have been charged or credited to the individual segments. The
insurance company subsidiaries increased their policy issuance fees on
certain 2000 contracts to reflect current market conditions, which had the
effect of reducing the underwriting agency management fees by a like
amount. This amounted to $4.0 million during 2000. The following tables
show information by business segment and geographic location. Geographic
location is determined by physical location of the Company's offices and
does not represent the location of insureds or reinsureds from whom the
business was generated.
<TABLE>
<CAPTION>
Insurance Underwriting Other
Company Agency Intermediary Operations Corporate Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
For the six months ended June 30, 2000:
Revenue:
Domestic $ 141,531,000 $ 54,477,000 $ 12,108,000 $ 13,971,000 $ 445,000 $ 222,532,000
Foreign 2,379,000 2,775,000 11,492,000 -- -- 16,646,000
Inter-segment -- 6,121,000 94,000 715,000 -- 6,930,000
------------- -------------- ------------- ------------- ------------- -------------
Total segment revenue $ 143,910,000 $ 63,373,000 $ 23,694,000 $ 14,686,000 $ 445,000 246,108,000
============= ============= ============= ============= =============
Inter-segment revenue (6,930,000)
-------------
CONSOLIDATED TOTAL REVENUE $ 239,178,000
=============
Net earnings (loss):
Domestic $ 10,000,000 $ 12,168,000 $ 4,535,000 $ 3,033,000 $ (3,051,000) $ 26,685,000
Foreign (2,360,000) 632,000 574,000 -- -- (1,154,000)
------------- ------------- ------------- ------------- ------------- -------------
Total segment net earnings (loss) $ 7,640,000 $ 12,800,000 $ 5,109,000 $ 3,033,000 $ (3,051,000) 25,531,000
============= ============= ============= ============= =============
Inter-segment eliminations (485,000)
-------------
CONSOLIDATED NET EARNINGS $ 25,046,000
=============
Other items:
Net investment income $ 12,679,000 $ 3,368,000 $ 1,603,000 $ 244,000 $ 281,000 $ 18,175,000
Depreciation and amortization 1,636,000 5,590,000 1,454,000 218,000 285,000 9,183,000
Interest expense 10,000 4,686,000 2,615,000 -- 3,025,000 10,336,000
Capital expenditures 1,668,000 2,063,000 241,000 157,000 116,000 4,245,000
Income tax provision (benefit) 1,654,000 10,776,000 3,870,000 1,704,000 (547,000) 17,457,000
Inter-segment eliminations (301,000)
-------------
CONSOLIDATED INCOME TAX PROVISION $ 17,156,000
=============
</TABLE>
13
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HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
<TABLE>
<CAPTION>
Insurance Underwriting Other
Company Agency Intermediary Operations Corporate Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
For the six months ended June 30, 1999:
Revenue:
Domestic $ 68,746,000 $ 47,638,000 $ 20,527,000 $ 15,306,000 $ 26,000 $ 152,243,000
Foreign 5,865,000 1,807,000 14,555,000 -- -- 22,227,000
Inter-segment -- 853,000 345,000 564,000 -- 1,762,000
------------- ------------- ------------- ------------- ------------- -------------
Total segment revenue $ 74,611,000 $ 50,298,000 $ 35,427,000 $ 15,870,000 $ 26,000 176,232,000
============= ============= ============= ============= ============
Inter-segment revenue (1,762,000)
-------------
CONSOLIDATED TOTAL REVENUE $ 174,470,000
=============
Net earnings (loss):
Domestic $ (5,754,000) $ 9,653,000 $ 7,712,000 $ 5,524,000 $ (590,000) $ 16,545,000
Foreign 531,000 (35,000) 3,955,000 -- -- 4,451,000
------------- ------------- ------------- ------------- ------------- -------------
NET EARNINGS (LOSS) $ (5,223,000) $ 9,618,000 $ 11,667,000 $ 5,524,000 $ (590,000) $ 20,996,000
============= ============= ============= ============= ============= =============
Other items:
Net investment income $ 11,599,000 $ 1,917,000 $ 1,074,000 $ 177,000 $ 160,000 $ 14,927,000
Depreciation and amortization 1,271,000 2,821,000 1,782,000 247,000 276,000 6,397,000
Interest expense 11,000 1,883,000 1,876,000 -- 2,141,000 5,911,000
Capital expenditures 1,570,000 3,553,000 563,000 390,000 300,000 6,376,000
Income tax provision (benefit) (6,954,000) 7,393,000 7,506,000 3,100,000 (40,000) 11,005,000
</TABLE>
The insurance company segment incurred a provision for reinsurance of $19.2
million, net of income tax, during the first six months of 1999.
14
<PAGE> 15
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
<TABLE>
<CAPTION>
Insurance Underwriting Other
Company Agency Intermediary Operations Corporate Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended June 30, 2000:
Revenue:
Domestic $ 73,891,000 $ 24,804,000 $ 4,677,000 $ 7,792,000 $ 191,000 $111,355,000
Foreign 932,000 1,617,000 5,185,000 -- -- 7,734,000
Inter-segment -- 3,937,000 56,000 364,000 -- 4,357,000
------------ ------------ ------------ ------------ ------------ ------------
Total segment revenue $ 74,823,000 $ 30,358,000 $ 9,918,000 $ 8,156,000 $ 191,000 123,446,000
============ ============ =========== ============ ===========
Inter-segment revenue (4,357,000)
------------
CONSOLIDATED TOTAL REVENUE $119,089,000
============
Net earnings (loss):
Domestic $ 6,296,000 $ 5,191,000 $ 1,217,000 $ 2,067,000 $ (1,398,000) $ 13,373,000
Foreign (1,091,000) 540,000 (193,000) -- -- (744,000)
------------ ------------ ------------ ------------ ------------ ------------
Total segment net earnings (loss) $ 5,205,000 $ 5,731,000 $ 1,024,000 $ 2,067,000 $ (1,398,000) 12,629,000
============ ============ =========== ============ ===========
Inter-segment eliminations (218,000)
------------
CONSOLIDATED NET EARNINGS $ 12,411,000
============
Other items:
Net investment income $ 6,851,000 $ 1,928,000 $ 846,000 $ 131,000 $ 180,000 $ 9,936,000
Depreciation and amortization 847,000 2,761,000 845,000 111,000 180,000 4,744,000
Interest expense 5,000 2,404,000 1,330,000 -- 1,576,000 5,315,000
Capital expenditures 958,000 919,000 84,000 40,000 60,000 2,061,000
Income tax provision (benefit) 1,380,000 5,099,000 1,137,000 1,234,000 (567,000) 8,283,000
Inter-segment eliminations (127,000)
------------
CONSOLIDATED INCOME TAX PROVISION $ 8,156,000
============
</TABLE>
15
<PAGE> 16
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
<TABLE>
<CAPTION>
Insurance Underwriting Other
Companies Agencies Intermediaries Operations Corporate Total
------------ ------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended June 30, 1999:
Revenue:
Domestic $ 31,458,000 $ 24,198,000 $ 10,008,000 $ 6,090,000 $ 59,000 $ 71,813,000
Foreign 2,841,000 935,000 6,894,000 -- -- 10,670,000
Inter-segment -- 574,000 104,000 220,000 -- 898,000
------------ ------------ ------------ ------------ ------------ ------------
Total segment revenue $ 34,299,000 $ 25,707,000 $ 17,006,000 $ 6,310,000 $ 59,000 83,381,000
============ ============ ============ ============ ===========
Inter-segment revenue (898,000)
------------
CONSOLIDATED TOTAL REVENUE $ 82,483,000
============
Net earnings (loss):
Domestic $(11,956,000) $ 5,194,000 $ 3,647,000 $ 1,263,000 $ (196,000) $ (2,048,000)
Foreign 463,000 75,000 1,797,000 -- -- 2,335,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL NET EARNINGS (LOSS) $(11,493,000) $ 5,269,000 $ 5,444,000 $ 1,263,000 $ (196,000) $ 287,000
============ ============ ============ ============ ============ ============
Other items:
Net investment income $ 5,833,000 $ 1,008,000 $ 649,000 $ 96,000 $ 77,000 $ 7,663,000
Depreciation and amortization 646,000 1,458,000 902,000 184,000 127,000 3,317,000
Interest expense 2,000 734,000 957,000 -- 909,000 2,602,000
Capital expenditures 788,000 2,211,000 164,000 359,000 25,000 3,547,000
Income tax provision (benefit) (8,263,000) 4,026,000 3,578,000 794,000 (60,000) 75,000
</TABLE>
The insurance company segment incurred a provision for reinsurance of
$19.2 million, net of income tax, during the second quarter of 1999.
16
<PAGE> 17
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(4) EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of
common shares outstanding during the period divided into net earnings.
Diluted earnings per share is based on the weighted average number of
common shares outstanding plus the potential common shares outstanding
during the period divided into net earnings. Outstanding common stock
options, when dilutive, are considered to be potential common stock for
the purpose of the diluted calculation. The treasury stock method is used
to calculate potential common stock due to options. Contingent shares to
be issued are included in the earnings per share computation only when
the underlying conditions for issuance have been met.
The following table provides a reconciliation of the denominators used in
the earnings per share calculations:
<TABLE>
<CAPTION>
For the six months ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
Net earnings $ 25,046,000 $ 20,996,000
============ ============
Reconciliation of number of shares outstanding:
Shares of Common Stock outstanding at period end 49,386,000 48,694,000
Effect of Common Stock issued during the period (190,000) (250,000)
Common Stock contractually issuable in the future 269,000 414,000
------------ ------------
Weighted average Common Stock outstanding 49,465,000 48,858,000
Additional dilutive effect of outstanding options
(as determined by the application of the
treasury stock method) 444,000 899,000
------------ ------------
Weighted average Common Stock and potential
common stock outstanding 49,909,000 49,757,000
============ ============
</TABLE>
17
<PAGE> 18
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(4) EARNINGS PER SHARE, CONTINUED
<TABLE>
<CAPTION>
For the three months ended June 30,
2000 1999
------------ ------------
<S> <C> <C>
Net earnings $ 12,411,000 $ 287,000
============ ============
Reconciliation of number of shares outstanding:
Shares of Common Stock outstanding at period end 49,386,000 48,694,000
Effect of Common Stock issued during the period (127,000) (157,000)
Common Stock contractually issuable in the future 269,000 414,000
------------ ------------
Weighted average Common Stock outstanding 49,528,000 48,951,000
Additional dilutive effect of outstanding options
(as determined by the application of the
treasury stock method) 558,000 1,020,000
------------ ------------
Weighted average Common Stock and potential
common stock outstanding 50,086,000 49,971,000
============ ============
</TABLE>
As of June 30, 2000, there were approximately 3.3 million options that
were not included in the computation of diluted earnings per share
because to do so would have been antidilutive. There are 283,500 shares
of the Company's Common Stock to be issued if certain conditions are met
as of December 31, 2000, or in subsequent years. These shares were not
included in the earnings per share computation because the conditions for
issuance have not yet been met.
18
<PAGE> 19
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(5) OTHER INFORMATION
Supplemental Information
Supplemental information for the six months ended June 30, 2000 and 1999,
is summarized below:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Interest paid $ 7,498,000 $ 5,301,000
Income tax paid 5,123,000 17,288,000
Comprehensive income 26,223,000 12,641,000
Ceding commissions netted with policy acquisition costs 101,116,000 55,418,000
</TABLE>
Supplemental information for the three months ended June 30, 2000 and
1999, is summarized below:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Comprehensive income (loss) $ 13,687,000 $ (7,437,000)
Ceding commissions netted with policy acquisition costs 54,416,000 32,280,000
</TABLE>
Restructuring
As of December 31, 1999, the Company had accrued two separate
restructuring liabilities, relating to HCC's ongoing operations ("HCC
Internal") and to HCC's acquisition of Centris. Changes in the accruals
between December 31, 1999 and June 30, 2000 are shown in the tables
below:
HCC Internal Restructuring
<TABLE>
<CAPTION>
Accrued Paid 2000 Accrued
at 12/31/99 in 2000 Adjustments at 6/30/00
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Severance $3,115,000 $3,115,000 $ -- $ --
Other 911,000 93,000 (514,000) 304,000
---------- ---------- ---------- ----------
TOTAL $4,026,000 $3,208,000 $ (514,000) $ 304,000
========== ========== ========== ==========
</TABLE>
During the first quarter of 2000, the Company determined that one of the
leased offices scheduled to be closed would be retained. Therefore, the
Company reversed $789,000 (included as a credit in other operating
expenses) of the restructuring expense recorded during the fourth quarter
of 1999, of which $514,000 was the reversal of the accrual for the future
lease payments and $275,000 was the reversal of the write down of certain
assets.
19
<PAGE> 20
HCC Insurance Holdings, Inc. and Subsidiaries
----------
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Continued)
(5) OTHER INFORMATION, CONTINUED
Centris Restructuring
<TABLE>
<CAPTION>
Accrued Paid 2000 Accrued
at 12/31/99 in 2000 Adjustments at 6/30/00
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contractual executive severance
accruals $ 5,866,000 $ 5,963,000 $ 266,000 $ 169,000
Other severance accruals 397,000 303,000 102,000 196,000
Lease obligation accruals 848,000 475,000 329,000 702,000
------------ ------------ ------------ ------------
TOTAL $ 7,111,000 $ 6,741,000 $ 697,000 $ 1,067,000
============ ============ ============ ============
</TABLE>
The adjustments in 2000 were recorded as management decided to take
additional steps to integrate parts of the Centris operations. Management
continues to evaluate what additional actions, if any, are necessary to
finalize the integration of the Centris operations. In addition, there
are unresolved contingencies remaining from the acquisition. Any
additional accruals for either the unresolved contingencies or the
integration of operations will be recorded as an adjustment to the
purchase price allocation within one year of the acquisition date.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
During December, 1999, the Company acquired all of the outstanding shares of The
Centris Group, Inc. ("Centris") in a transaction accounted for using the
purchase method of accounting. Therefore, the results of operations and cash
flows of the Centris companies are included in the 2000 condensed consolidated
statement of earnings and cash flows, but are not included in the 1999 condensed
consolidated statement of earnings and cash flows.
Three months ended June 30, 2000 versus three months ended June 30, 1999
Results of Operations
Total revenue increased 44% to $119.1 million for the second quarter of 2000
from $82.5 million for the same period in 1999. This revenue increase was in the
insurance company segment and resulted from increased retentions of premium
underwritten by the Company's insurance company subsidiaries and increased
investment income. This increasing revenue is anticipated to continue into 2001.
Net investment income increased 30% to $9.9 million for the second quarter of
2000 from $7.7 million for the same period in 1999. This was due to a higher
level of invested assets and an increase in interest rates. The higher level of
invested assets was due to greater retentions of premium underwritten by the
Company's insurance company subsidiaries and the investment of cash received
from a commuted reinsurance agreement during the first quarter of 2000. In
connection with the Company's hiring of new investment advisors in 2000, an
in-depth review and restructuring of the Company's investment portfolio has been
undertaken. The Company has not significantly changed the credit rating and has
shortened the duration of its investment portfolio. The Company realized a $4.0
million loss in the second quarter of 2000 on the sale of securities or write
down of securities being sold, principally as a result of these actions. Net
investment income is expected to continue to increase into 2001.
Compensation expense increased $1.5 million during the second quarter of 2000
from the same period in 1999. This increase reflects a normal progressional
increase due to business growth plus the increase due to the Centris
acquisition, offset by the savings resulting from the 1999 fourth quarter
restructuring. Other operating expenses increased $2.6 million during the same
period for similar reasons. Also included in other operating expenses are
currency conversion gains of $251,000 for the second quarter of 2000, compared
to gains of $359,000 for the same period in 1999.
Interest expense was $5.3 million for the second quarter of 2000 compared to
$2.6 million for the same period in 1999. This increase is a result of higher
interest rates and increased debt outstanding, principally as a result of
funding for acquisitions.
Income tax expense was $8.2 million for the second quarter of 2000 compared to
$75,000 for the same period in 1999. This increase was due to the small amount
of earnings before income tax provision in the second quarter of 1999. The
Company's effective tax rate was 40% for the second quarter of 2000 due to the
non-deductibility of certain goodwill amortization and underwriting agency
income subject to state income taxes.
The Company recorded a provision for reinsurance recoverables in the amount of
$29.5 million during the second quarter of 1999 relating to one of the Company's
reinsurers that was subsequently placed into liquidation. The Company believes
that the provision should be sufficient to absorb the losses resulting from this
insolvency.
Net earnings for the second quarter of 2000 increased to $12.4 million or $0.25
per share from $287,000 or $0.01 per share for the same period in 1999. These
increases result from improved underwriting results, an increase in investment
income and the effect of the provision for reinsurance recorded during 1999.
The Company's book value per share was $9.75 as of June 30, 2000, up from $9.49
as of March 31, 2000.
21
<PAGE> 22
SEGMENTS
Insurance Companies
Gross written premium increased 82% to $264.1 million for the second quarter of
2000 from $145.1 million for the same period in 1999 due to new business, rate
increases and increased participation by the Company's insurance company
subsidiaries in the business underwritten by the Company's underwriting agency
subsidiaries. Net written premium for the second quarter of 2000 increased 167%
to $81.9 million from $30.7 million for the same period in 1999, as the
Company's insurance company subsidiaries have increased retentions on many of
their lines of business as underwriting results begin to improve. Net earned
premium increased 155% to $71.7 million for the same reasons. Premium increases
are expected to continue into 2001.
Loss and loss adjustment expense increased to $53.1 million for the second
quarter of 2000 from $21.0 million for the same period in 1999. The increase in
net loss and loss adjustment expense is due to the higher level of net retained
premium. The GAAP net loss ratio decreased to 74.2% for the second quarter of
2000 from 74.9% for the same period in 1999. The net loss ratio was negatively
affected by unfavorable underwriting results from the run-off of certain lines
of business written in 1999, offset by improving underwriting results from
business written in 2000. The GAAP gross loss ratio was 85.8% in the second
quarter of 2000 compared to 149.6% for the same period in 1999. The general
improvement in the Company's loss ratios represent the effects of increased
premium rates on certain lines of business, reduced writings on other
unprofitable lines of business, and a general improvement in market conditions,
particularly in the medical stop-loss and domestic aviation lines of business.
The GAAP combined ratio was 94.7% in the second quarter of 2000 compared to
191.4% for the same period in 1999. The reduction in the combined ratio in 2000
reflects the provision for reinsurance recorded in 1999 offset by reduced ceding
commissions in 2000. The Company's loss and combined ratios are anticipated to
continue to improve into 2001.
Policy acquisition costs, which are net of commissions on ceded reinsurance,
increased to $6.2 million during the second quarter of 2000 from a credit of
$885,000 for the same period in 1999. This increase in costs results from higher
retained premium and reduced ceding commissions.
Net earnings of the Company's insurance company subsidiaries increased to $5.2
million in the second quarter of 2000 from a net loss of $11.5 million for the
same period in 1999, principally as a result of the effect of the provision for
reinsurance recorded in 1999 and the increase in investment income.
Underwriting Agencies
Premiums underwritten by the Company's underwriting agencies increased 35% to
$287.3 million for the second quarter of 2000 from $213.3 million for the same
period in 1999. This increase resulted primarily from the increased premium
volume in the medical stop-loss line of business, which was due to rate
increases and the acquisition of Centris. Management fees were basically flat at
$24.5 million for the second quarter of 2000, compared to $24.1 million for the
same period in 1999. The increase in management fees was disproportionate to the
increase in written premium because of reduced management fees on some lines of
business as a result of increased policy issuing fees charged by the Company's
insurance company subsidiaries. Net earnings of the Company's underwriting
agency subsidiaries increased 9% to $5.7 million in the second quarter of 2000
from $5.3 million in 1999 due to increased revenue and higher pre-tax margins.
Intermediaries
Commission income decreased to $9.0 million in the second quarter of 2000 from
$16.3 million for the same period in 1999. Net earnings of the Company's
intermediary subsidiaries decreased to $1.0 million in the second quarter of
2000 from $5.4 million for the same period in 1999. These decreases were due to
a significant reduction in the amount of ceded reinsurance placed on behalf of
the Company's insurance company subsidiaries as a result of their planned
increase in retentions.
Other Operations
Other operating revenue increased to $7.9 million during the second quarter of
2000 from $6.4 million for the same period in 1999. Net earnings from the
Company's other operations increased to $2.1 million in 2000 from
22
<PAGE> 23
$1.3 million in 1999. Quarter to quarter comparisons will vary substantially
depending on income from strategic investments, or dispositions thereof, in any
given period.
Six months ended June 30, 2000 versus six months ended June 30, 1999
Results of Operations
Total revenue increased 37% to $239.2 million for the first six months of 2000
from $174.5 million for the same period in 1999. This revenue increase was in
the insurance company segment and resulted from increased retentions of premium
underwritten by the Company's insurance company subsidiaries and increased
investment income.
Net investment income increased 22% to $18.2 million for the first six months of
2000 from $14.9 million for the same period in 1999. This was due to a higher
level of invested assets and an increase in interest rates. The higher level of
invested assets was due to greater retentions of premium underwritten by the
Company's insurance company subsidiaries and the investment of cash received
from a commuted reinsurance agreement during the first quarter of 2000. In
connection with the Company's hiring of new investment advisors in 2000, an
in-depth review and restructuring of the Company's investment portfolio has been
undertaken. The Company has not significantly changed the credit rating and has
shortened the duration of its investment portfolio. The Company realized a $4.4
million loss on the sale of securities or write down of securities being sold in
the first six months of 2000, principally as a result of these actions. Net
investment income is expected to continue to increase into 2001.
Compensation expense increased $3.9 million during the first six months of 2000
from the same period in 1999. This increase reflects a normal progressional
increase due to business growth plus the increase due to the Centris
acquisition, offset by the savings resulting from the 1999 fourth quarter
restructuring. Other operating expenses increased $4.2 million during the same
period for similar reasons. Other operating expenses for the first six months of
2000 also included a credit of $789,000 reflecting the reversal of certain
restructuring charges previously recorded. Also included in other operating
expense are currency conversion losses of $348,000 for the first six months of
2000, compared to gains of $768,000 for the same period in 1999.
Interest expense was $10.3 million for the first six months of 2000 compared to
$5.9 million for the same period in 1999. This increase is a result of higher
interest rates and increased debt outstanding, principally as a result of
funding for acquisitions.
Income tax expense was $17.2 million for the first six months of 2000 compared
to $11.0 million for the same period in 1999. The Company's effective tax rate
was 41% in the 2000 period compared to 34% in 1999. Most of this increase was
due to the non-deductibility of goodwill amortization relating to the Centris
acquisition and increased underwriting agency income subject to state income
taxes.
The Company recorded a provision for reinsurance recoverables in the amount of
$29.5 million during the second quarter of 1999 relating to one of the Company's
reinsurers that was subsequently placed into liquidation. The Company believes
that the provision should be sufficient to absorb the losses resulting from this
insolvency.
Net earnings for the first six months of 2000 increased 19% to $25.0 million or
$0.50 per share from $21.0 million or $0.42 per share for the same period in
1999. These increases result from improved underwriting results, an increase in
investment income and the effect of the provision for reinsurance recorded
during 1999.
The Company's book value per share was $9.75 as of June 30, 2000, up from $9.29
as of December 31, 1999.
SEGMENTS
Insurance Companies
Gross written premium increased 64% to $471.3 million for the first six months
of 2000, from $286.7 million for the same period in 1999 due to new business,
rate increases and increased participation by the Company's insurance company
subsidiaries in the business underwritten by the Company's underwriting agency
subsidiaries.
23
<PAGE> 24
Net written premium for the first six months of 2000 increased 133% to $142.6
million from $61.1 million for the same period in 1999, as the Company's
insurance company subsidiaries have increased retentions on many of their lines
of business as underwriting results begin to improve. Net earned premium
increased 117% to $135.0 million for the same reasons. Premium increases are
expected to continue into 2001.
Loss and loss adjustment expense increased to $101.9 million for the first six
months of 2000 from $44.8 million for the same period in 1999. The increase in
net loss and loss adjustment expense is due to the higher level of net retained
premium and the higher loss ratio. The GAAP net loss ratio increased to 75.5%
for the first six months of 2000 from 72.2% for the same period in 1999. The net
loss ratio was negatively affected by unfavorable underwriting results from the
run-off of certain lines of business written in 1999 and higher international
aviation losses, offset by improving underwriting results from business written
in 2000. The GAAP gross loss ratio was 79.2% in the first six months of 2000
compared to 120.5% for the same period in 1999. The general improvement in the
Company's gross loss ratio represents the effects of increased premium rates on
certain lines of business, reduced writings on other unprofitable lines of
business and a general improvement in market conditions, particularly in the
medical stop-loss and domestic aviation lines of business. The GAAP combined
ratio was 99.1% in the first six months of 2000 compared to 138.8% for the same
period in 1999. The reduction in the combined ratio in 2000 reflects the
provision for reinsurance recorded in 1999, offset by reduced ceding commissions
in 2000. The Company's loss and combined ratios are anticipated to continue to
improve into 2001.
Policy acquisition costs, which are net of commissions on ceded reinsurance,
increased to $15.5 million during the first six months of 2000 from $1.2 million
for the same period in 1999. This increase in costs results from higher retained
premium and reduced ceding commissions.
Net earnings of the Company's insurance company subsidiaries increased to $7.6
million in the first six months of 2000 from a loss of $5.2 million for the same
period in 1999, primarily as a result of the effect of the provision for
reinsurance recorded in 1999 and the increase in investment income.
Underwriting Agencies
Premiums underwritten increased 31% to $556.3 million for the first six months
of 2000 from $424.1 million for the same period in 1999. Management fees
increased 13% to $53.8 million for the first six months of 2000, compared to
$47.6 million for the same period in 1999. These increases resulted primarily
from the increased premium volume in the medical stop-loss line of business,
which was due to rate increases and the acquisition of Centris. The increase in
management fees was disproportionate to the increase in written premium because
of reduced management fees on some lines of business as a result of increased
policy issuing fees charged by the Company's insurance company subsidiaries. Net
earnings of the Company's underwriting agency subsidiaries increased 33% to
$12.8 million in the first six months of 2000 from $9.6 million in 1999 due to
increased revenue and higher pretax margins. Management fees are expected to
show similar increases for the rest of the year.
Intermediaries
Commission income decreased to $22.0 million in the first six months of 2000
from $34.0 million for the same period in 1999. Net earnings of the Company's
intermediary subsidiaries decreased to $5.1 million in the first six months of
2000 from $11.7 million for the same period in 1999. These decreases were due to
a significant reduction in the amount of ceded reinsurance placed on behalf of
the Company's insurance company subsidiaries as a result of their planned
increase in retentions.
Other Operations
Other operating revenue decreased to $14.6 million during the first six months
of 2000 from $15.8 million for the same period in 1999. Net earnings of the
Company's other operations decreased to $3.0 million in 2000 from $5.5 million
in 1999. Period to period comparisons will vary substantially depending on
income from strategic investments, or dispositions thereof, in any given period.
24
<PAGE> 25
Restructuring
As of December 31, 1999, the Company had accrued two separate restructuring
liabilities, relating to HCC's ongoing operations ("HCC Internal") and to HCC's
acquisition of Centris. Changes in the accruals between December 31, 1999 and
June 30, 2000 are shown in the tables below:
HCC Internal Restructuring
<TABLE>
<CAPTION>
Accrued Paid 2000 Accrued
at 12/31/99 in 2000 Adjustments at 6/30/00
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Severance $ 3,115,000 $ 3,115,000 $ -- $ --
Other 911,000 93,000 (514,000) 304,000
------------ ------------ ------------ ------------
TOTAL $ 4,026,000 $ 3,208,000 $ (514,000) $ 304,000
============ ============ ============ ============
</TABLE>
During the first quarter of 2000, the Company determined that one of the leased
offices scheduled to be closed would be retained. Therefore, the Company
reversed $789,000 (included as a credit in other operating expenses) of the
restructuring expense recorded during the fourth quarter of 1999, of which
$514,000 was the reversal of the accrual for future lease payments and $275,000
was the reversal of the write down of certain assets.
Centris Restructuring
<TABLE>
<CAPTION>
Accrued Paid 2000 Accrued
at 12/31/99 in 2000 Adjustments at 6/30/00
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Contractual executive severance
accruals $ 5,866,000 $ 5,963,000 $ 266,000 $ 169,000
Other severance accruals 397,000 303,000 102,000 196,000
Lease obligation accruals 848,000 475,000 329,000 702,000
------------ ------------ ------------ ------------
TOTAL $ 7,111,000 $ 6,741,000 $ 697,000 $ 1,067,000
============ ============ ============ ============
</TABLE>
The adjustments in 2000 were recorded as management decided to take additional
steps to integrate parts of the Centris operations. Management continues to
evaluate what additional actions, if any, are necessary to finalize the
integration of the Centris operations. In addition, there are unresolved
contingencies remaining from the acquisition. Any additional accruals for
either the unresolved contingencies or the integration of operations will be
recorded as an adjustment to the purchase price allocation within one year of
the acquisition date.
Liquidity and Capital Resources
The Company receives substantial cash from premiums, reinsurance recoverables,
management fees and commission income and, to a lesser extent, investment
income and proceeds from sales and redemptions of investment and other assets.
The principal cash outflows are for the payment of claims and loss adjustment
expenses ("LAE"), payment of premiums to reinsurers, purchase of investments,
debt service, policy acquisition costs, operating expenses, income and other
taxes and dividends. Quarter to quarter variations in operating cash flows can
occur due to timing differences in either the payment of claims and the
collection of related recoverables or the collection of receivables and the
payment of related payable amounts. The Company continues to collect its
receivables and recoverables generally in the ordinary course and has not
incurred and does not expect to incur any significant liquidity difficulties.
The Company limits its liquidity exposure by holding funds, letters of credit
and other security such that net balances due to it are less than the gross
balances shown in the condensed consolidated balance sheet.
The Company's consolidated cash and investment portfolio increased $41.6
million, or 7% since December 31, 1999, and totaled $649.4 million as of June
30, 2000, of which $254.4 million was cash and short-term
25
<PAGE> 26
investments. The increase in investments resulted from the collection of the
commutation receivable. Total assets were unchanged at $2.7 billion as of June
30, 2000.
On December 17, 1999, the Company entered into a $300.0 million Revolving Loan
Facility (the "Facility") with a group of banks. Borrowings under the Facility
may be made from time to time by the Company for general corporate purposes
until the Facility's expiration on December 18, 2004. Outstanding advances
under the Facility bear interest at agreed upon rates. The Facility is
collateralized in part by the pledge of the stock the Company's principal
insurance company subsidiaries and by the pledge of stock of and guarantees
entered into by the Company's principal underwriting agency and intermediary
subsidiaries. The Facility agreement contains certain restrictive covenants,
including, without limitation, minimum net worth requirements for the Company
and certain subsidiaries, restrictions on certain extraordinary corporate
actions, notice requirements for certain material occurrences, and required
maintenance of specified financial ratios. Management believes that the
restrictive covenants and other obligations of the Company which are contained
in the Facility agreement are typical for comparable financing arrangements.
The initial funding available under the Facility was used, among other things,
to refinance existing indebtedness and to partially fund the Centris
acquisition. As of June 30, 2000, total debt outstanding under the Facility was
$236.0 million and the weighted average interest rate was 7.85%.
The Company believes that its operating cash flows, short-term investments and
the Facility will provide sufficient sources of liquidity to meet its operating
needs for the foreseeable future.
Effects of Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133 entitled
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June, 1998 and becomes effective for the Company January 1, 2001, with early
adoption permitted. The Company has utilized derivative or hedging strategies
only infrequently in the past and in immaterial amounts, although it is
currently using derivatives and hedging strategies to a somewhat greater extent
as it expands its foreign operations. The Company does not expect the adoption
of SFAS No. 133 to have a material effect on the Company's financial position,
results of operations or cash flow.
During December, 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 entitled "Revenue Recognition in Financial
Statements" which becomes effective for the Company during the fourth quarter
of 2000. The Company does not expect the adoption of SAB No. 101 to have a
material effect on the Company's financial position, results of operations or
cash flows.
Year 2000
The Year 2000 issue is the result of date coding within computer programs that
were written using just two digits rather than four digits to define the
applicable year. If not corrected, these date codes could cause computers to
fail to calculate dates beyond 1999 and, as a result, computer applications
could have failed or created erroneous information as a result of the Year 2000
date change. Although the Company experienced no material system failures
attributed to the year 2000 change-over, the Company may have exposure in the
property and casualty operations of its insurance company subsidiaries to
claims asserted under certain insurance policies for damages caused by an
insured's failure to address its own Year 2000 computer problems. The Company's
insurance company subsidiaries did not generally offer policies of insurance
marketed as Year 2000 liability coverage. However, due to the nature of certain
of the policies, such as policies of property insurance, an insured may submit
purported claims for coverage under such policies, which may result from Year
2000 related causes. In this regard, the Company continues to assess
appropriate responses to such attempted claims in light of Year 2000 coverage
issues under the insurance coverages offered by the insurance company
subsidiaries. The nature of the Company's response to such attempted claims is
generally dependent on the particular facts and circumstances of the underlying
claims and coverage. Management does not believe that Year 2000 coverage issues
associated with the insurance coverages offered by the Company's insurance
company subsidiaries will have a material adverse effect on the Company's
results of operations or cash flows.
26
<PAGE> 27
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the information
provided in Item 7A. "Quantitative and Qualitative Disclosures About Market
Risk" of the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
This report on Form 10-Q (the "Report") contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. Investors
are cautioned that all forward-looking statements necessarily 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, the financial viability of reinsurers, the expansion or
contraction in its various lines of business, the impact of inflation, changing
licensing requirements and regulations in the United States and in foreign
countries, the ability of the Company to integrate its recently acquired
businesses, the effect of pending or future acquisitions as well as
acquisitions which have recently been consummated, competition, pricing and
general market conditions. All statements, other than statements of historical
facts, included or incorporated by reference in this Report that address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including, without limitation, such things as
future capital expenditures (including the amount and nature thereof), business
strategy and measures to implement such strategy, competitive strengths, goals,
expansion and growth of the Company's businesses and operations, plans,
references to future success, as well as other statements which include words
such as "anticipate", "believe", "estimate", "expect", "intend", "plan",
"probably" and other similar expressions, constitute forward-looking
statements. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could over time prove to be inaccurate and, therefore, there can be
no assurance that the forward-looking statements included in this Report will
themselves prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
27
<PAGE> 28
PART II - OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders
On May 18, 2000, the Company held its 2000 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 2001 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:
<TABLE>
<CAPTION>
NAME FOR AGAINST ABSTAINED
<S> <C> <C> <C>
Stephen L. Way 40,527,784 0 1,359,577
James M. Berry 40,821,473 0 1,065,888
Frank J. Bramanti 40,535,134 0 1,352,227
Marvin P. Bush 40,817,834 0 1,069,527
Patrick B. Collins 40,808,063 0 1,079,298
James R. Crane 40,731,494 0 1,155,867
J. Robert Dickerson 40,819,884 0 1,067,477
Edwin H. Frank, III 40,713,994 0 1,173,367
Allan W. Fulkerson 40,644,372 0 1,242,989
Walter J. Lack 40,534,187 0 1,353,174
Stephen J. Lockwood 40,621,934 0 1,265,427
John N. Molbeck, Jr. 40,623,384 0 1,263,977
</TABLE>
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27 EDGAR Financial Data Schedule - June 30, 2000
(b) Reports on Form 8-K:
None.
28
<PAGE> 29
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, 2000 /s/ Stephen L. Way
--------------------------- --------------------------------------
(Date) Stephen L. Way, Chairman of the Board
and Chief Executive Officer
August 14, 2000 /s/ Edward H. Ellis, Jr.
--------------------------- --------------------------------------
(Date) Edward H. Ellis, Jr., Senior Vice
President and Chief Financial Officer
29
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 EDGAR Financial Data Schedule - June 30, 2000
</TABLE>
