-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ofyv4NUojy1Xy12cKD5qhsYhJI+bCcIhAKf0Pw0A4WBMrgMdgK+fe/RKNLG1Wn1N kOnRK9jYNHpAGmAa8I5GfA== 0000912057-96-026556.txt : 19961118 0000912057-96-026556.hdr.sgml : 19961118 ACCESSION NUMBER: 0000912057-96-026556 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCC INSURANCE HOLDINGS INC/DE/ CENTRAL INDEX KEY: 0000888919 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 760336636 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13790 FILM NUMBER: 96666144 BUSINESS ADDRESS: STREET 1: 13403 NORTHWEST FRWY CITY: HOUSTON STATE: TX ZIP: 77040-6094 BUSINESS PHONE: 7136907300 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended SEPTEMBER 30, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from __________ to __________ Commission file number 0-20766 ------- HCC INSURANCE HOLDINGS, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 76-0336636 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13403 NORTHWEST FREEWAY, HOUSTON, TEXAS 77040-6094 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (713) 690-7300 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. On November 4, 1996, there were 34,679,307 shares of Common Stock, $1 par value issued and outstanding. The Index to Exhibits is located on page 18. The total number of sequentially numbered pages is 21. 1 HCC INSURANCE HOLDINGS, INC. INDEX PAGE NO. Part I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets September 30, 1996 and December 31, 1995.......................3 Condensed Consolidated Statements of Earnings Nine months ended September 30, 1996 and Nine months ended September 30, 1995...........................4 Condensed Consolidated Statements of Earnings Three Months Ended September 30, 1996 and Three Months Ended September 30, 1995..........................5 Condensed Consolidated Statements of Changes in Shareholders' Equity Nine months ended September 30, 1996 and Year ended December 31, 1995...................................6 Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 1996 and Nine months ended September 30, 1995...........................8 Notes to Condensed Consolidated Financial Statements.............9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................13 Part II. OTHER INFORMATION....................................................17 2 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Balance Sheets ---------- September 30, December 31, 1996 1995 ------------ ------------ (Unaudited) ASSETS Investments: Securities available for sale: Fixed income securities, at market (cost: 1996 $251,633,000; 1995 $231,807,000) $250,899,000 $234,881,000 Marketable equity securities, at market (cost: 1996 $4,681,000; 1995 $10,097,000) 6,176,000 13,812,000 Mortgage loans, at unpaid principal balance, net - 81,000 Real estate, net of accumulated depreciation and amortization (1996 $2,090,000; 1995 $1,780,000) 3,994,000 4,287,000 Short-term investments, at cost, which approximates market 55,817,000 56,513,000 ------------ ------------ Total investments 316,886,000 309,574,000 Cash 6,219,000 3,574,000 Restricted cash and short-term investments 39,249,000 23,495,000 Reinsurance recoverables 122,793,000 103,408,000 Premium, claims and other receivables 139,956,000 133,257,000 Ceded unearned premium 69,097,000 73,282,000 Deferred policy acquisition costs 17,318,000 16,431,000 Property and equipment, net 4,803,000 5,153,000 Deferred income tax 14,312,000 2,921,000 Other assets, net 12,557,000 13,454,000 ------------ ------------ TOTAL ASSETS $743,190,000 $684,549,000 ------------ ------------ ------------ ------------ LIABILITIES Loss and loss adjustment expense payable $182,028,000 $158,451,000 Reinsurance balances payable 43,341,000 68,463,000 Unearned premium 117,451,000 118,732,000 Deferred ceding commissions 16,639,000 17,497,000 Premium and claims payable 130,602,000 98,995,000 Notes payable 16,476,000 16,661,000 Accounts payable and accrued liabilities 8,790,000 10,291,000 ------------ ------------ Total liabilities 515,327,000 489,090,000 SHAREHOLDERS' EQUITY Common Stock, $1 par value; 100,000,000 shares authorized; (issued and outstanding: 1996 34,679,307 shares and 1995 13,838,802 shares) 34,679,000 13,839,000 Additional paid-in capital 130,638,000 123,257,000 Retained earnings 62,040,000 53,950,000 Unrealized investment gain, net 495,000 4,417,000 Foreign currency translation adjustment 11,000 (4,000) ------------ ------------ Total shareholders' equity 227,863,000 195,459,000 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $743,190,000 $684,549,000 ------------ ------------ ------------ ------------
See Notes to Condensed Consolidated Financial Statements. 3 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Earnings (Unaudited) ---------- For the nine months ended September 30, 1996 1995 ------------- ------------- REVENUE Net earned premium $ 66,102,000 $ 58,851,000 Fee and commission income 30,035,000 23,450,000 Net investment income 11,154,000 9,592,000 Net realized investment gain 3,531,000 316,000 ------------- ------------- Total revenue 110,822,000 92,209,000 EXPENSE Loss and loss adjustment expense 36,874,000 37,021,000 Operating expense: Policy acquisition costs 25,010,000 21,867,000 Compensation expense 15,810,000 20,363,000 Other operating expense 9,268,000 9,035,000 Ceding commissions (22,055,000) (19,767,000) ------------- ------------- Net operating expense 28,033,000 31,498,000 Compensatory stock grant and merger related expenses 26,160,000 - Interest expense 868,000 1,953,000 ------------- ------------- Total expense 91,935,000 70,472,000 ------------- ------------- Earnings before income tax provision 18,887,000 21,737,000 Income tax provision 2,153,000 5,747,000 ------------- ------------- NET EARNINGS $ 16,734,000 $ 15,990,000 ------------- ------------- ------------- ------------- EARNINGS PER SHARE DATA: Earnings per share $ 0.47 $ 0.50 ------------- ------------- ------------- ------------- Weighted average shares outstanding 35,823,000 31,828,000 ------------- ------------- ------------- ------------- PROFORMA INFORMATION (SEE NOTE 3): Net earnings $ 31,041,000 $ 19,027,000 ------------- ------------- ------------- ------------- Earnings per share $ 0.87 $ 0.60 ------------- ------------- ------------- ------------- See Notes to Condensed Consolidated Financial Statements. 4 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Earnings (Unaudited) ---------- For the three months ended September 30, --------------------------------- 1996 1995 ------------- ------------- REVENUE Net earned premium $ 20,145,000 $ 20,254,000 Fee and commission income 9,981,000 7,860,000 Net investment income 3,909,000 3,569,000 Net realized investment gain (loss) 1,534,000 (148,000) ------------- ------------- Total revenue 35,569,000 31,535,000 EXPENSE Loss and loss adjustment expense 10,508,000 12,517,000 Operating expense: Policy acquisition costs 8,559,000 8,127,000 Compensation expense 4,786,000 7,283,000 Other operating expense 3,118,000 3,102,000 Ceding commissions (7,955,000) (7,764,000) ------------- ------------- Net operating expense 8,508,000 10,748,000 Interest expense 292,000 301,000 ------------- ------------- Total expense 19,308,000 23,566,000 ------------- ------------- Earnings before income tax provision 16,261,000 7,969,000 Income tax provision 4,931,000 2,333,000 ------------- ------------- NET EARNINGS $ 11,330,000 $ 5,636,000 ------------- ------------- ------------- ------------- EARNINGS PER SHARE DATA: Earnings per share $ 0.31 $ 0.16 ------------- ------------- ------------- ------------- Weighted average shares outstanding 35,993,000 34,999,000 ------------- ------------- ------------- ------------- PROFORMA INFORMATION (SEE NOTE 3): Net earnings $ 6,811,000 ------------- ------------- Earnings per share $ 0.19 ------------- ------------- See Notes to Condensed Consolidated Financial Statements. 5 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the nine months ended September 30, 1996 and for the year ended December 31, 1995 (Unaudited) ---------- Foreign Additional Unrealized currency Total Common paid-in Retained investment translation shareholders' Stock capital earnings gain (loss) adjustment equity ------------ ------------ ------------ ------------ ---------- ------------ BALANCE AS OF DECEMBER 31, 1994 $ 11,767,000 $ 76,480,000 $ 31,442,000 $ (5,301,000) $ (14,000) $114,374,000 58,876 shares of Common Stock issued for exercise of options, including tax benefit of $252,000 59,000 770,000 - - - 829,000 2,012,500 shares of Common Stock issued in public offering, net of costs 2,013,000 45,957,000 - - - 47,970,000 Capital contribution to LDG prior to acquisition - 50,000 - - - 50,000 Net earnings - - 24,337,000 - - 24,337,000 Cash dividends to shareholders of LDG prior to acquisition - - (1,829,000) - - (1,829,000) Unrealized investment gain on fixed income securities, net of deferred tax charge of $4,293,000 - - - 7,973,000 - 7,973,000 Unrealized investment gain on marketable equity securities, net of deferred tax charge of $934,000 - - - 1,745,000 - 1,745,000 Other - - - - 10,000 10,000 ------------ ------------ ------------ ------------ ---------- ------------ BALANCE AS OF DECEMBER 31, 1995 $ 13,839,000 $123,257,000 $53,950,000 $ 4,417,000 $ (4,000) $195,459,000
See Notes to Condensed Consolidated Financial Statements. 6 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Changes in Shareholders' Equity For the nine months ended September 30, 1996 and for the year ended December 31, 1995 (Unaudited) (continued) ---------- Foreign Additional Unrealized currency Total Common paid-in Retained investment translation shareholders' Stock capital earnings gain (loss) adjustment equity ----------- ------------ ----------- ----------- ----------- ------------- BALANCE AS OF DECEMBER 31, 1995 $13,839,000 $123,257,000 $53,950,000 $ 4,417,000 $(4,000) $195,459,000 20,758,172 shares of Common Stock issued for 150% stock dividend (see Note 1) 20,758,000 (20,758,000) - - - - 82,333 shares of Common Stock issued for exercise of options, including tax benefit of $328,000 82,000 590,000 - - - 672,000 Net earnings - - 16,734,000 - - 16,734,000 Cash dividends declared, $0.04 per share - - (1,387,000) - - (1,387,000) Compensatory grant of LDG stock prior to acquisition - 23,682,000 - - - 23,682,000 Cash dividends to shareholders of LDG prior to acquisition - - (3,683,000) - - (3,683,000) Capitalize undistributed earnings of LDG upon conversion from S Corporation - 3,574,000 (3,574,000) - - - Unrealized investment loss on fixed income securities, net of deferred tax benefit of $1,332,000 - - - (2,475,000) - (2,475,000) Unrealized investment loss on marketable equity securities, net of deferred tax benefit of $773,000 - - - (1,447,000) - (1,447,000) Other - 293,000 - - 15,000 308,000 ----------- ------------ ----------- ----------- ------- ------------ BALANCE AS OF SEPTEMBER 30, 1996 $34,679,000 $130,638,000 $62,040,000 $ 495,000 $11,000 $227,863,000 ----------- ------------ ----------- ----------- ------- ------------ ----------- ------------ ----------- ----------- ------- ------------
See Notes to Condensed Consolidated Financial Statements. 7 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Condensed Consolidated Statements of Cash Flows (Unaudited) ---------- For the nine months ended September 30, 1996 1995 ------------- ------------- Cash flows from operating activities: Net earnings $ 16,734,000 $ 15,990,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in reinsurance recoverables (19,385,000) (7,670,000) Change in premium, claims and other receivables (6,699,000) 8,883,000 Change in ceded unearned premium 4,185,000 2,988,000 Change in deferred income tax, net of tax effect of unrealized gain or loss (9,286,000) (1,136,000) Change in loss and loss adjustment expense payable 23,577,000 24,418,000 Change in reinsurance balances payable (25,122,000) (18,772,000) Change in unearned premium (1,281,000) 12,570,000 Change in premium and claims payable, net of restricted cash 15,853,000 (4,258,000) Change in accounts payable and accrued liabilities (2,195,000) 6,949,000 Net realized investment gain (3,531,000) (316,000) Noncash compensation expense 23,975,000 - Depreciation and amortization expense 1,767,000 1,203,000 Other, net (516,000) (285,000) ------------- ------------- Cash provided by operating activities 18,076,000 40,564,000 Cash flows from investing activities: Sales of fixed income securities 3,465,000 13,059,000 Maturity or call of fixed income securities 8,285,000 5,597,000 Sales of equity securities 13,764,000 6,846,000 Cost of investments acquired (36,926,000) (83,434,000) Other, net (826,000) (2,773,000) ------------- ------------- Cash used by investing activities (12,238,000) (60,705,000) Cash flows from financing activities: Payments on notes payable (185,000) (28,185,000) Sale of Common Stock 672,000 48,635,000 Dividends paid (4,376,000) (1,613,000) ------------- ------------- Cash provided (used) by financing activities (3,889,000) 18,837,000 ------------- ------------- Net increase in cash and short-term investments 1,949,000 (1,304,000) Cash and short-term investments at beginning of period 60,087,000 49,082,000 ------------- ------------- CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 62,036,000 $ 47,778,000 ------------- ------------- ------------- ------------- Supplemental cash flow information: Interest paid $ 1,090,000 $ 2,299,000 ------------- ------------- ------------- ------------- Income tax paid $ 10,158,000 $ 7,226,000 ------------- ------------- ------------- -------------
See Notes to Condensed Consolidated Financial Statements. 8 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (1) GENERAL INFORMATION HCC Insurance Holdings, Inc. ("the Company" or "HCCH") and its subsidiaries (collectively, "the Companies") include domestic and foreign property and casualty insurance companies and managing general agents, surplus lines insurance brokers and wholesale insurance and reinsurance brokers. The Company, through its subsidiaries, provides specialized property and casualty insurance to commercial customers, underwritten on both a direct and reinsurance basis, and insurance agency services, particularly in commercial accident and health coverages. On May 24, 1996, the Company issued 6,250,000 shares of its Common Stock to acquire all of the outstanding common stock of LDG Management Company Incorporated and affiliated companies ("LDG"). This business combination has been accounted for as a pooling of interests and, accordingly, the Company's condensed consolidated financial statements have been restated to include the accounts and operations of LDG for all periods prior to the merger. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include all adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim periods. All adjustments made to the interim periods are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated. The condensed consolidated financial statements for periods reported should be read in conjunction with the annual consolidated financial statements and notes related thereto. The condensed consolidated balance sheet as of December 31, 1995, and the statement of shareholders' equity for the year then ended were derived from audited financial statements, of HCCH and LDG as separate entities prior to the merger, but do not include all disclosures required by generally accepted accounting principles. INCOME TAX For the Companies other than LDG, the income tax provision for the nine months ended September 30, 1996 and 1995, has been calculated based on an estimated effective tax rate for each of the fiscal years. The difference between these Companies' effective tax rate and the Federal statutory rate is primarily the result of nontaxable municipal bond interest included in pretax income. LDG had been a S Corporation prior to its reorganization and merger with the Company. Federal income tax expense was not provided for on LDG's earnings during the period it was a S Corporation. A deferred tax benefit has been recorded on LDG's pre-tax loss for the time period after the S Corporation election was terminated. LDG will be included in the Company's consolidated Federal income tax return and subject to U.S. Federal income taxes beginning May 24, 1996. STOCK SPLIT In April, 1996, the Board of Directors declared a five for two stock split in the form of a 150% stock dividend on the Company's $1.00 par value Common Stock, payable to shareholders of record April 30, 1996. The par value of the Company's Common Stock remains unchanged. As of March 31, 1996, the $20.8 million par value of additional shares to be issued was transferred from additional paid-in capital to Common Stock. 9 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (1) GENERAL INFORMATION, CONTINUED EARNINGS PER SHARE Earnings per share are based on the weighted average number of common and common equivalent shares outstanding during the period divided into net earnings. Outstanding common stock options, when dilutive, are considered to be common stock equivalents for the purpose of this calculation. The treasury stock method is used to calculate common stock equivalents due to options. There is no significant difference between primary and fully diluted earnings per share. All per share and weighted average shares outstanding data presented in the condensed consolidated financial statements and notes thereto have been adjusted to reflect the effects of the split and the shares issued in connection with the acquisition of LDG. RECLASSIFICATIONS Certain amounts in the 1995 condensed consolidated financial statements have been reclassified to conform to the 1996 presentation. Such reclassifications had no effect on the Company's shareholders' equity, net earnings or cash flows. (2) REINSURANCE In the normal course of business the Company's insurance company subsidiaries cede a substantial portion of their premium to unrelated domestic and foreign reinsurers through quota share, surplus, excess of loss and facultative reinsurance agreements. Although the ceding of reinsurance does not discharge the primary insurer from liability to its policyholder, the subsidiaries participate in such agreements for the purpose of limiting their loss exposure and diversifying their business. In addition, certain of the insurance company subsidiaries' business was assumed from other unrelated insurance and reinsurance companies. The following table represents the approximate effect of such reinsurance transactions on net premium and loss and loss adjustment expense: Loss and Loss Written Premium Adjustment Premium Earned Expense ------------- ------------- ------------ For the nine months ended September 30, 1996: Direct business $ 62,411,000 $ 76,188,000 $ 43,462,000 Reinsurance assumed 109,713,000 97,284,000 72,822,000 Reinsurance ceded (103,185,000) (107,370,000) (79,410,000) ------------- ------------- ------------ NET AMOUNTS $ 68,939,000 $ 66,102,000 $ 36,874,000 ------------- ------------- ------------ ------------- ------------- ------------ For the nine months ended September 30, 1995: Direct business $ 76,723,000 $ 71,615,000 $ 53,519,000 Reinsurance assumed 88,160,000 80,717,000 50,769,000 Reinsurance ceded (90,492,000) (93,481,000) (67,267,000) ------------- ------------- ------------ NET AMOUNTS $ 74,391,000 $ 58,851,000 $ 37,021,000 ------------- ------------- ------------ ------------- ------------- ------------ 10 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (2) REINSURANCE, CONTINUED Substantially all of the reinsurance assumed in the nine months ended September 30, 1996 and 1995, respectively, was underwritten directly by the Companies but issued by other companies in order to satisfy local licensing or other requirements, predominantly on non-U.S.A. business and as reinsurance of captives. The table below represents the approximate composition of reinsurance recoverables in the accompanying condensed consolidated balance sheets: September 30, December 31, 1996 1995 ------------ ------------ Reinsurance recoverable on paid losses $ 18,859,000 $ 13,678,000 Reinsurance recoverable on outstanding losses 99,806,000 83,847,000 Reinsurance recoverable on IBNR 6,513,000 8,278,000 Reserve for uncollectible reinsurance (2,385,000) (2,395,000) ------------ ------------ TOTAL REINSURANCE RECOVERABLES $122,793,000 $103,408,000 ------------ ------------ ------------ ------------ In order to minimize their exposure to reinsurance credit risk, the Companies evaluate the financial condition of the reinsurers and place their reinsurance with a diverse group of financially sound companies. In addition, the Companies require reinsurers not authorized by the Texas Department of Insurance to collateralize their reinsurance obligations to the Companies with letters of credit or cash deposits. At September 30, 1996, the Companies held letters of credit and cash deposits in the amounts of $67.9 million and $12.0 million, respectively, to collateralize certain reinsurance balances. The Companies have established a reserve of $2.4 million as of September 30, 1996, to reduce the effects of any recoverable problems. (3) ACQUISITION OF LDG MANAGEMENT COMPANY INCORPORATED On May 24, 1996, the Company issued 6,250,000 shares of its Common Stock to acquire all of the outstanding common stock of LDG. This business combination has been accounted for as a pooling of interests and, accordingly, the Company's condensed consolidated financial statements have been restated to include the accounts and operations of LDG for all periods prior to the merger. The condensed consolidated financial statements include adjustments made to conform LDG's accounting policies for fee and commission income to that of HCCH. HCCH's policy is to recognize fee and commission income on the revenue recognition date (the later of the effective date of the policy, the date when premium can be reasonably estimated, or the date when substantially all required services relating to the placement have been rendered to the client), and subsequent policy adjustments and contingent profit commissions are recognized when events occur and amounts are known or can be reasonably estimated. LDG previously recognized fee and commission income on the later of the effective date or the reporting date, subsequent adjustments were recognized when they became due, and contingent profit commission was recognized when received. 11 HCC Insurance Holdings, Inc. and Subsidiaries ---------- Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) (3) ACQUISITION OF LDG MANAGEMENT COMPANY INCORPORATED, CONTINUED Separate total revenue and net earnings (loss) amounts of the merged entities are presented for the periods prior to the merger in the following table: For the five For the nine months ended months ended May 31, 1996 Sept. 30, 1995 ------------ -------------- Total revenue: HCCH $48,771,000 $71,524,000 LDG 12,893,000 20,685,000 ----------- ----------- TOTAL REVENUE $61,664,000 $92,209,000 ----------- ----------- ----------- ----------- Net earnings: HCCH $12,144,000 $14,858,000 LDG (9,919,000) 1,132,000 ----------- ----------- NET EARNINGS $ 2,225,000 $15,990,000 ----------- ----------- ----------- ----------- Certain nonrecurring expenses were incurred during the first six months of 1996. Of the nonrecurring expenses, $24.0 million was related to the compensatory grant of LDG stock to certain key employees by LDG's majority shareholder immediately prior to the combination. Other nonrecurring expenses, which totalled $2.1 million, included legal, accounting and investment banking fees in connection with the merger. The following table presents proforma net income and earnings per share amounts which reflect the elimination of nonrecurring compensation and merger related expenses in 1996, proforma adjustments to 1995 and 1996 figures to present income taxes on LDG's earnings prior to its reorganization and merger with the Company and proforma adjustments to reduce 1995 compensation expense to the 1996 level. For the nine months ended September 30, 1996 1995 ----------- ----------- Net earnings $16,734,000 $15,990,000 Nonrecurring expenses 26,160,000 - Compensation adjustment, net of state income tax - 5,183,000 Proforma Federal income tax 11,853,000 2,146,000 ----------- ----------- PROFORMA NET EARNINGS $31,041,000 $19,027,000 ----------- ----------- ----------- ----------- PROFORMA EARNINGS PER SHARE $ 0.87 $ 0.60 ----------- ----------- ----------- ----------- (4) PENDING ACQUISITIONS On September 6, 1996, the Company announced that it had reached an agreement in principle to acquire all of the outstanding shares of the North American Special Risk Associates, Inc. group of companies ("NASRA") in exchange for 1,212,000 shares of the Company's Common Stock. The acquisition is subject to the parties finalizing definitive agreements and is expected to close during the fourth quarter of 1996. On November 11, 1996, the Company announced that it had agreed to acquire all of the occupational accident business of the TRM International, Inc. group of companies ("TRM") in exchange for 266,667 shares of the Company's Common Stock and $6.55 million in cash. The acquisition is to be effective as of December 1, 1996, subject to the parties finalizing definitive agreements. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS THREE MONTHS ENDED SEPTEMBER 30, 1995. Gross written premium decreased 11% to $49.1 million for the third quarter of 1996 from $54.9 million for the same period in 1995. The decrease in gross written premium was a result of the planned exit from offshore energy business as well as continued softening in marine rates and, more recently, property rates as well, however, aviation premium continues to increase. Net written premium for the third quarter of 1996 decreased 23% to $14.1 million from $18.3 million for the same period in 1995. This decrease is due to the increased use of facultative reinsurance as rates become more competitive and the overall reduction in gross written premium. Net earned premium was substantially unchanged at $20.1 million for the third quarter of 1996 compared to $20.3 million for the same period in 1995. Fee and commission (non-risk bearing) revenue increased 27% to $10.0 million for the third quarter of 1996 compared to $7.9 million for the same period in 1995. Fee and commission revenue increased during the third quarter of 1996 both from existing subsidiaries as well as from the newly acquired LDG Management Company. The decrease in premium revenue is more than offset by an increase in the more profitable fee and commission revenue, which the Company believes will continue to increase as the Company expands its agency (non-risk bearing) operations through internal growth, increases in facultative reinsurance placed on behalf of insurance company subsidiaries and from strategic acquisitions. Net investment income increased 10% to $3.9 million for the third quarter of 1996 compared to $3.6 million for the same period in 1995 reflecting a higher level of investment assets. Net realized investment gains from sales of equity securities were $1.6 million during the third quarter of 1996 compared to gains of $76,000 for the same period in 1995. The Company is in the process of liquidating its equity security portfolio to redeploy those investment assets in fixed income securities. Net realized investment losses from dispositions of fixed income securities were $96,000 for the third quarter of 1996 compared to losses of $226,000 for the same period in 1995. Loss and loss adjustment expense ("LAE") decreased $2.0 million or 16% during the third quarter of 1996, to $10.5 million, as the Company's GAAP loss ratio decreased to 52% from 62% due to favorable underwriting results and a reduction in the amount of redundant loss reserves. 13 Other operating expense was substantially unchanged for the third quarter of 1996 at $3.1 million. Goodwill amortization expense was $72,000 for the third quarters of both 1996 and 1995 and is included in other operating expense. Net earnings increased 101% to $11.3 million for the third quarter of 1996 from $5.6 million for the same period in 1995. Earnings per share increased 94% to $0.31 for the third quarter of 1996 from $0.16 for the third quarter of 1995. The Company's insurance company subsidiaries' statutory combined ratio was 75.0% for the third quarter of 1996, the same as the corresponding period in 1995. The Company's book value per share was $6.57 as of September 30, 1996, up from $6.28 as of June 30, 1996. Third quarter net income increased book value $0.33 per share. The unrealized gain of $1.2 million, net of tax, or $0.03 per share on fixed income securities, was due to a slight decrease in interest rates. This was offset by a decrease of $1.1 million, net of tax, or $0.03 per share due to a reduction in the unrealized gain on equity securities as gains were realized. NINE MONTHS ENDED SEPTEMBER 30, 1996 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 1995. Gross written premium increased 4% to $172.1 million for the first nine months of 1996 from $164.9 million for the same period in 1995. This is slower growth than previously reported due to the planned exit from offshore energy business as a result of reckless competition that has driven rates below acceptable levels and the continued softening of marine rates. Property and aviation have grown profitably, but increased competition is now beginning to effect these lines as well. Net written premium for the first nine months of 1996 decreased 7% to $68.9 million from $74.4 million for the same period in 1995 due in part to the increased use of facultative reinsurance. Net earned premium increased 12% to $66.1 million for the first nine months of 1996 from $58.9 million for the same period in 1995, with much of the growth coming from aviation, where substantially more premium is retained by the Company due to the lack of catastrophe exposure in the business written. Fee and commission (non-risk bearing) revenue increased 28% to $30.0 million for the first nine months of 1996 compared to $23.5 million for the same period in 1995. Fee and commission revenue increased during the first nine months of 1996 both from existing subsidiaries as well as from the newly acquired LDG Management Company. The Company expects fee and commission revenue to continue to increase as the Company expands its agency (non-risk bearing) operations through internal growth, increases in facultative reinsurance placed on behalf of insurance company subsidiaries and from strategic acquisitions. 14 Net investment income increased 16% to $11.2 million for the first nine months of 1996 compared to $9.6 million for the same period in 1995 reflecting a higher level of investment assets. Net realized investment gains from sales of equity securities were $3.7 million during the first nine months of 1996 compared to gains of $543,000 for the same period in 1995. The Company is in the process of liquidating its equity security portfolio to redeploy those investment assets in fixed income securities. Net realized investment losses from dispositions of fixed income securities were $201,000 during the first nine months of 1996 compared to losses of $229,000 for the same period in 1995. Loss and LAE decreased $147,000 during the first nine months of 1996, to $36.9 million. The Company's GAAP loss ratio decreased to 56% from 63% due to favorable underwriting results and a reduction in the amount of redundant loss reserves from prior years. Other operating expense was substantially unchanged at $9.3 million for the first nine months of 1996. Goodwill amortization expense was $217,000 for the first nine months of both 1996 and 1995 and is included in other operating expense. Interest expense decreased 56% to $868,000 during the first nine months of 1996 from $2.0 million in 1995, due to the reduced level of indebtedness as a portion of the proceeds of the June, 1995 public offering of Common Stock was used to retire debt. Net earnings increased 5% to $16.7 million for the first nine months of 1996 from $16.0 million for the same period in 1995. Included in these amounts were merger related expenses of $2.1 million and a non-recurring compensation expense of $14.4 (net of a $9.6 million tax benefit) recorded by LDG in connection with a compensatory stock grant from LDG's majority shareholder to certain key employees prior to the Company's May, 1996 acquisition of LDG. The compensation expense was a non-cash item however, $9.6 million of actual cash tax savings will be recognized. Earnings per share decreased 6% to $0.47 for the first nine months of 1996 from $0.50 for the first nine months of 1995. Excluding the non-recurring compensation charge and the merger related expenses, net earnings for the first nine months of 1996 would have been $31.0 million, an increase of 63% over the same period in 1995 and earnings per share would have been $0.87, a 45% increase over comparable 1995 figures. 15 The Company's insurance company subsidiaries' statutory combined ratio improved to 74.7% for the first nine months of 1996, compared to 77.7% for the same period in 1995. The Company's book value per share was $6.57 as of September 30, 1996, up from $5.65 as of December 31, 1995. Earnings added $0.48 per share to book value during the first nine months of 1996, while the unrealized loss incurred during the first nine months of 1996 on the investment portfolio, which is entirely marked-to-market, amounted to $3.9 million, net of tax, or $0.11 per share. The grant of stock to certain key employees by LDG's majority shareholder caused equity to increase $23.7 million or $0.68 per share during the second quarter of 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated cash and investment portfolio increased $10.0 million or 3% since December 31, 1995, and totalled $323.1 million as of September 30, 1996, of which $62.0 million was cash and short-term investments. Total assets increased to $743.2 million as of September 30, 1996, from $684.5 million as of December 31, 1995, a 9% increase. FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. INVESTORS ARE CAUTIONED THAT ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTY, INCLUDING WITHOUT LIMITATION, THE RISK OF A SIGNIFICANT NATURAL DISASTER, THE INABILITY OF THE COMPANY TO REINSURE CERTAIN RISKS, THE ADEQUACY OF ITS LOSS RESERVES, CHANGING REGULATIONS IN FOREIGN COUNTRIES, AS WELL AS GENERAL MARKET CONDITIONS, COMPETITION AND PRICING. PLEASE REFER TO THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS, COPIES OF WHICH ARE AVAILABLE FROM THE COMPANY WITHOUT CHARGE, FOR FURTHER INFORMATION. 16 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS: There are no material pending legal proceedings to which the registrant is a party or of which any of the property of the registrant is the subject, except for claims arising in the ordinary course of business of its wholly owned insurance company subsidiaries, none of which are considered material. Item 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits: The exhibits listed on the accompanying Index to Exhibits on page 18 are filed as part of this report. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the three months ended September 30, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HCC INSURANCE HOLDINGS, INC. ------------------------------------ (Registrant) NOVEMBER 14, 1996 /s/ FRANK J. BRAMANTI - ----------------- ------------------------------------ (Date) Frank J. Bramanti, Executive Vice President and Chief Financial Officer 17 INDEX TO EXHIBITS 11 - Statement Regarding Computation of Earnings Per Share. 27 - EDGAR Financial Data Schedule 18 EX-11 2 EXHIBIT 11 Exhibit 11 HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ For the nine months ended September 30, 1996 1995 - ------------------------------------------------------------------------------ Net earnings $16,734,000 $15,990,000 ----------- ----------- ----------- ----------- Primary: Weighted average Common Stock and common stock equivalents outstanding 35,823,000 31,828,000 ----------- ----------- ----------- ----------- Earnings per share $ 0.47 $ 0.50 ----------- ----------- ----------- ----------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 34,679,000 13,839,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,161,000 166,000 Changes in Common Stock for issuance (17,000) (1,274,000) Effect of five for two stock split (1) - 19,097,000 ----------- ----------- Weighted average Common Stock and common stock equivalents outstanding 35,823,000 31,828,000 ----------- ----------- ----------- ----------- Fully Diluted: Weighted average Common Stock and common stock equivalents outstanding 36,021,000 31,955,000 ----------- ----------- ----------- ----------- Earnings per share $ 0.46 $ 0.50 ----------- ----------- ----------- ----------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 34,679,000 13,839,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,342,000 211,000 Changes in Common Stock for issuance - (1,268,000) Effect of five for two stock split (1) - 19,173,000 ----------- ----------- Weighted average Common Stock and common stock equivalents outstanding 36,021,000 31,955,000 ----------- ----------- ----------- ----------- (1) In April, 1996, the Board of Directors declared a five for two stock split in the form of a 150% stock dividend on the Company's $1.00 par value Common Stock, payable to shareholders of record April 30, 1996. The par value of the Company's Common Stock remains unchanged. Adjustments have been made to 1995 amounts to present weighted average shares outstanding and earnings per share on a consistent basis. Note: Shares outstanding for all periods have been adjusted to include the 6,250,000 shares issued with the acquisition of LDG. 19 Exhibit 11 HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (UNAUDITED) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ For the three months ended September 30, 1996 1995 - ------------------------------------------------------------------------------ Net earnings $11,330,000 $ 5,636,000 ----------- ----------- ----------- ----------- Primary: Weighted average Common Stock and common stock equivalents outstanding 35,993,000 34,999,000 ----------- ----------- ----------- ----------- Earnings per share $ 0.31 $ 0.16 ----------- ----------- ----------- ----------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 34,679,000 13,839,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,316,000 193,000 Changes in Common Stock for issuance (2,000) (32,000) Effect of five for two stock split (1) - 20,999,000 ----------- ----------- Weighted average Common Stock and common stock equivalents outstanding 35,993,000 34,999,000 ----------- ----------- ----------- ----------- Fully Diluted: Weighted average Common Stock and common stock equivalents outstanding 36,054,000 35,056,000 ----------- ----------- ----------- ----------- Earnings per share $ 0.31 $ 0.16 ----------- ----------- ----------- ----------- Reconciliation of number of shares outstanding: Common Stock outstanding at period end 34,679,000 13,839,000 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 1,375,000 215,000 Changes in Common Stock for issuance - (32,000) Effect of five for two stock split (1) - 21,034,000 ----------- ----------- Weighted average Common Stock and common stock equivalents outstanding 36,054,000 35,056,000 ----------- ----------- ----------- ----------- (1) In April, 1996, the Board of Directors declared a five for two stock split in the form of a 150% stock dividend on the Company's $1.00 par value Common Stock, payable to shareholders of record April 30, 1996. The par value of the Company's Common Stock remains unchanged. Adjustments have been made to 1995 amounts to present weighted average shares outstanding and earnings per share on a consistent basis. Note: Shares outstanding for all periods have be adjusted to include the 6,250,000 shares issued with the acquisition of LDG. 20 EX-27 3 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 250,899,000 0 0 6,176,000 0 3,994,000 316,886,000 6,219,000 122,793,000 17,318,000 743,190,000 182,028,000 117,451,000 0 0 16,476,000 0 0 34,679,000 193,184,000 743,190,000 66,102,000 11,154,000 3,531,000 30,035,000 36,874,000 25,010,000 3,023,000 18,887,000 2,153,000 16,734,000 0 0 0 16,734,000 0.47 0.46 66,326,000 0 0 0 0 75,709,000 0
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