-----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, MPwkNlBmMkINJPGk0bum8SOl5YcKhs+4L5qc/bKh1fygRUHpNL+hmL4e9zUU1/yc Gw7TdxZ162z6mLSDvXPWzg== 0000950129-04-000931.txt : 20040302 0000950129-04-000931.hdr.sgml : 20040302 20040302122954 ACCESSION NUMBER: 0000950129-04-000931 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20040302 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13790 FILM NUMBER: 04641739 BUSINESS ADDRESS: STREET 1: 13403 NORTHWEST FRWY CITY: HOUSTON STATE: TX ZIP: 77040-6094 BUSINESS PHONE: 7136907300 10-Q/A 1 h12994ae10vqza.txt HCC INSURANCE HOLDINGS, INC.- MARCH 31, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended March 31, 2003. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from _______ to __________ Commission file number 001-13790 ------------------------------------------------------ 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12B-2 of the Act). 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 May 6, 2003, there were 62.8 million shares of common stock, $1.00 par value issued and outstanding. Explanatory Note This amendment includes changes from the previous report to reflect the impact of a restatement due to the accounting for certain fee and commission income as described herein. Revenue and net income for the three months ended March 31, 2003 were reduced by $10.9 million and $6.5 million, respectively, as a result of the restatement. 1 HCC INSURANCE HOLDINGS, INC. INDEX
PAGE NO. -------- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 2003 and December 31, 2002 ....................................... 3 Condensed Consolidated Statements of Earnings For the three months ended March 31, 2003 and 2002 ......................... 4 Condensed Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 2003 .................................. 5 Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2003 and 2002 ......................... 6 Notes to Condensed Consolidated Financial Statements............................. 7 Item 2. Management's Discussion and Analysis............................................. 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 24 Item 4. Controls and Procedures.......................................................... 24 Part II. OTHER INFORMATION Item 1. Legal Proceedings................................................................ 25 Item 6. Exhibits and Reports on Form 8-K................................................. 25 Signatures................................................................................ 26
This report on Form 10-Q/A contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as future capital expenditures, business strategy, competitive strengths, goals, growth of our business and operations, plans and references to future successes may be considered forward-looking statements. Also, when we use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "probably" or similar expressions, we are making forward-looking statements. Many risks and uncertainties may impact the matters addressed in these forward-looking statements. Many possible events or factors could affect our future financial results and performance. These could cause our results or performance to differ materially from those we express in our forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and therefore also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements which are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. Our forward-looking statements speak only as of the date made and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this report may not occur. 2 HCC Insurance Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (unaudited, in thousands, except per share data)
March 31, 2003 December 31, 2002 -------------- ----------------- (restated) ASSETS Investments: Fixed income securities, at market (cost: 2003 - $821,003; 2002 - $807,772) $ 854,671 $ 841,548 Marketable equity securities, at market (cost: 2003 - $15,331; 2002 - $15,815) 15,132 15,609 Short-term investments, at cost, which approximates market 455,604 307,215 Other investments, at estimated fair value (cost: 2003 - $2,175; 2002 - $3,264) 2,175 3,264 -------------- ----------------- Total investments 1,327,582 1,167,636 Cash 18,776 40,306 Restricted cash 208,150 189,396 Premium, claims and other receivables 814,199 753,527 Reinsurance recoverables 845,966 798,934 Ceded unearned premium 188,655 164,224 Ceded life and annuity benefits 78,675 78,951 Deferred policy acquisition costs 71,071 68,846 Goodwill 336,945 335,288 Other assets 166,681 107,043 -------------- ----------------- TOTAL ASSETS $ 4,056,700 $ 3,704,151 ============== ================= LIABILITIES Loss and loss adjustment expense payable $ 1,234,211 $ 1,155,290 Life and annuity policy benefits 78,675 78,951 Reinsurance balances payable 195,494 166,659 Unearned premium 387,274 331,050 Deferred ceding commissions 57,488 49,963 Premium and claims payable 789,435 730,801 Notes payable 311,692 230,027 Accounts payable and accrued liabilities 96,047 78,503 -------------- ----------------- Total liabilities 3,150,316 2,821,244 SHAREHOLDERS' EQUITY Common stock, $1.00 par value; 250.0 million shares authorized; (shares issued and outstanding: 2003 - 62,679; 2002 - 62,358) 62,679 62,358 Additional paid-in capital 420,692 416,406 Retained earnings 403,071 383,378 Accumulated other comprehensive income 19,942 20,765 -------------- ----------------- Total shareholders' equity 906,384 882,907 -------------- ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,056,700 $ 3,704,151 ============== =================
See Notes to Condensed Consolidated Financial Statements. 3 HCC Insurance Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (unaudited, in thousands, except per share data)
For the three months ended March 31, 2003 2002 -------------- ------------ (restated) REVENUE Net earned premium $ 162,422 $ 111,478 Fee and commission income 30,118 33,947 Net investment income 10,998 8,694 Net realized investment gain (loss) (21) 502 Other operating income 876 1,463 -------------- ------------ Total revenue 204,393 156,084 EXPENSE Loss and loss adjustment expense 100,032 68,331 Operating expense: Policy acquisition costs, net 31,912 20,949 Compensation expense 20,500 16,677 Other operating expense 13,678 12,029 -------------- ------------ Total operating expense 66,090 49,655 Interest expense 1,682 2,378 -------------- ------------ Total expense 167,804 120,364 -------------- ------------ Earnings before income tax provision 36,589 35,720 Income tax provision 12,822 12,438 -------------- ------------ Net earnings $ 23,767 $ 23,282 ============== ============ BASIC EARNINGS PER SHARE DATA: Earnings per share $ 0.38 $ 0.38 ============== ============ Weighted average shares outstanding 62,637 61,936 ============== ============ DILUTED EARNINGS PER SHARE DATA: Earnings per share $ 0.38 $ 0.37 ============== ============ Weighted average shares outstanding 63,335 62,713 ============== ============ Cash dividends declared, per share $ 0.065 $ 0.0625 ============== ============
See Notes to Condensed Consolidated Financial Statements. 4 HCC Insurance Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 2003 (restated) (unaudited, in thousands, except per share data)
Accumulated Additional other Total Common paid-in Retained comprehensive shareholders' stock capital Earnings income equity ------------ ---------- --------- ------------- ------------- BALANCE AS OF DECEMBER 31, 2002 $ 62,358 $ 416,406 $ 383,378 $ 20,765 $ 882,907 Net earnings -- -- 23,767 -- 23,767 Other comprehensive income (loss) -- -- -- (823) (823) ------------- Comprehensive income 22,944 269 shares of common stock issued for exercise of options, including tax benefit of $876 269 4,338 -- -- 4,607 Issuance of 52 shares of Contractually issuable common stock 52 (52) -- -- -- Cash dividends declared, $0.065 per share -- -- (4,074) -- (4,074) ------------ ---------- --------- ------------- ------------- BALANCE AS OF MARCH 31, 2003 $ 62,679 $ 420,692 $ 403,071 $ 19,942 $ 906,384 ============ ========== ========= ============= =============
See Notes to Condensed Consolidated Financial Statements. 5 HCC Insurance Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited, in thousands, except per share data)
For the three months ended March 31, 2003 2002 ---- ---- (restated) Cash flows from operating activities: Net earnings $ 23,767 $ 23,282 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in premium, claims and other receivables (62,217) 9,286 Change in reinsurance recoverables (47,032) 617 Change in ceded unearned premium (24,431) (2,488) Change in loss and loss adjustment expense payable 78,921 17,100 Change in reinsurance balances payable 28,835 3,147 Change in unearned premium 56,224 12,138 Change in premium and claims payable, net of restricted cash 39,880 (54,819) Depreciation and amortization expense 2,976 2,747 Other, net 4,948 2,092 ----------- ----------- Cash provided by operating activities 101,871 13,102 Cash flows from investing activities: Sales of fixed income securities 95,229 68,311 Maturity or call of fixed income securities 27,358 9,812 Sales of equity securities 983 1,189 Change in short-term investments (148,199) (1,193) Cost of securities acquired (164,237) (92,951) Purchases of property and equipment (1,523) (1,325) ----------- ----------- Cash used by investing activities (190,389) (16,157) Cash flows from financing activities: Proceeds from notes payable, net of costs 134,845 -- Sale of common stock 3,731 6,570 Payments on notes payable (67,527) (2,527) Dividends paid and other, net (4,061) (5,067) ----------- ----------- Cash provided (used) by financing activities 66,988 (1,024) ----------- ----------- Net change in cash (21,530) (4,079) Cash at beginning of period 40,306 16,891 ----------- ----------- CASH AT END OF PERIOD $ 18,776 $ 12,812 =========== ===========
See Notes to Condensed Consolidated Financial Statement 6 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data) (1) GENERAL INFORMATION HCC Insurance Holdings, Inc. and its subsidiaries ("we," "us" and "our") provide specialized property and casualty and accident and health insurance coverages, underwriting agency and intermediary services to commercial customers and individuals. Our lines of business include group life, accident and health; aviation; our London market account (which includes energy, marine, property and some accident and health); diversified financial products (which includes directors and officers liability, errors and omissions, employment practices liability and surety); and other specialty lines of insurance. We operate primarily in the United States, the United Kingdom and Spain, although some of our operations have a broader international scope. We market our products both directly to customers and through a network of independent and affiliated agents and brokers. Basis of Presentation The unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include all adjustments which are, in our opinion, necessary for a 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 HCC Insurance Holdings, Inc. and those of our 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 audited consolidated financial statements and related notes. The condensed consolidated balance sheet as of December 31, 2002, 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 accounting principles generally accepted in the United States of America. This Form 10-Q/A has amended our previously filed Form 10-Q to reflect a restatement to change the basis upon which the fee and commission income of our underwriting agency and intermediary subsidiaries are accounted. This restatement relates only to business underwritten by our underwriting agencies or placed by our intermediaries that passes through one of our affiliated insurance companies to an unrelated reinsurance company. This income had previously been recognized at the later of the effective date of a policy, the date when the premium could be reasonably established or the date when substantially all the services relating to the insurance placement had been rendered to the client. This income is now recognized pro rata over the term of the underlying policy. The cumulative effect of the restatement related to prior years, $3.9 million, which is recorded in the first quarter of 2003, is not material to prior years or 2003. The effect of the change only became material in 2003 as a result of recent acquisitions. The change is a timing difference which generally reverses over a twelve month period. The restatement does not impact the overall amount of fees and commissions ultimately earned or previously collected in cash. Additionally, it does not change the net earnings of our reporting segments but, rather, results solely from changes to the consolidating entries made in the preparation of our condensed consolidated financial statements. Likewise, it does not change cash flow from operations. 7 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (1) GENERAL INFORMATION, CONTINUED The effect of the restatement on revenue was a reduction of $10.9 million for the first three months of 2003. This amount includes $6.5 million associated with the cumulative effect of the restatement related to prior years. The table below shows the effect on net earnings and earnings per share for the first quarter of 2003.
Earnings per share Amount Basic Diluted --------- --------- --------- Net earnings, as previously reported $ 30,275 $ 0.48 $ 0.48 Effect of adjustment on operations for the period (2,618) (0.04) (0.04) Cumulative adjustment (3,890) (0.06) (0.06) --------- --------- --------- Net earnings, as reported herein $ 23,767 $ 0.38 $ 0.38 ========= ========= =========
During the fourth quarter of 2002, we completed three acquisitions. The results of operations of these entities are included in our consolidated financial statements beginning on the effective date of each transaction. Thus, our condensed consolidated statements of earnings and cash flows for the three months ended March 31, 2002 do not contain any activity generated by these three entities. We are still in the process of completing the purchase price allocations for two of these acquisitions, as we are still gathering some of the information needed to make the required calculations and, additionally, in the case of HCC Europe, we have not yet completed the final determination of the purchase price, which will be based upon an agreed-upon final closing date balance sheet. Any subsequent net adjustment will result in a change to recorded goodwill. During the first quarter of 2003, we adopted prospectively Financial Accounting Standards Board Interpretation ("FIN") No. 46 entitled "Consolidation of Variable Interest Entities". We now consolidate an investment in a partnership that owns an office building leased to unaffiliated third parties, whereas previously we used the equity method of accounting to account for this investment. The partnership is not material to our financial position, results of operations or cash flows. 8 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (1) GENERAL INFORMATION, CONTINUED Fee and Commission Income Our fee and commission income in our condensed consolidated statements of earnings includes fee income from our underwriting agencies and commission income from our intermediaries earned by underwriting on behalf of and/or placing business with unaffiliated (re)insurers and proceeds from ceded reinsurance (ceding commissions in excess of policy acquisition costs). Income Tax For the three months ended March 31, 2003 and 2002, the income tax provision has been calculated based on an estimated effective tax rate for each of the fiscal years. The difference between our effective tax rate and the Federal statutory rate is primarily the result of state income taxes and tax exempt municipal bond interest. Stock Options We account for stock options granted to employees using the intrinsic value method of APB Opinion No. 25 entitled "Accounting for Stock Issued to Employees". All options have been granted at fixed exercise prices at the market price of our common stock at the grant date. Because of that, no stock-based employee compensation cost is reflected in our reported net income. Options vest over a period of up to seven years and expire four to ten years after grant date. The following table illustrates the effects on net income and earnings per share if we had used the fair value method of SFAS No. 123 entitled "Accounting for Stock-Based Compensation".
For the three months ended March 31, 2003 2002 ---------- ---------- Reported net earnings $ 23,767 $ 23,282 Stock-based compensation using the fair value method, net of income tax (1,939) (1,085) ---------- ---------- Pro forma net earnings $ 21,828 $ 22,197 ========== ========== Reported basic earnings per share $ 0.38 $ 0.38 Fair value stock-based compensation (0.03) (0.02) ---------- ---------- Pro forma basic earnings per share $ 0.35 $ 0.36 ========== ========== Reported diluted earnings per share $ 0.38 $ 0.37 Fair value stock-based compensation (0.04) (0.02) ---------- ---------- Pro forma diluted earnings per share $ 0.34 $ 0.35 ========== ==========
9 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (1) GENERAL INFORMATION, CONTINUED Reclassifications Certain amounts in our 2002 condensed consolidated financial statements have been reclassified to conform to the 2003 presentation. Among these reclassifications, proceeds from ceded reinsurance (ceding commissions in excess of acquisition costs) have been classified as fee and commission income rather than a reduction of operating expenses. Also, compensation and other operating expenses of our underwriting agency subsidiaries representing acquisition costs have been classified as policy acquisition costs to be offset by the portion of ceding commissions which represent the reimbursement of those acquisition costs. Such reclassifications had no effect on our net earnings, shareholders' equity or cash flows. (2) REINSURANCE In the normal course of business our insurance companies cede a portion of their premium to non-affiliated domestic and foreign reinsurers through treaty and facultative reinsurance agreements. Although the ceding of reinsurance does not discharge the primary insurer from liability to its policyholder, our insurance companies participate in such agreements for the purpose of limiting their loss exposure, protecting them against catastrophic loss and diversifying their business. The following table represents the effect of such reinsurance transactions on premium and loss and loss adjustment expense:
Loss and Loss Written Earned Adjustment Premium Premium Expense --------------- --------------- --------------- For the three months ended March 31, 2003: Direct business $ 296,780 $ 255,871 $ 167,216 Reinsurance assumed 82,668 61,948 51,827 Reinsurance ceded (186,947) (155,397) (119,011) --------------- --------------- --------------- NET AMOUNTS $ 192,501 $ 162,422 $ 100,032 =============== =============== =============== For the three months ended March 31, 2002: Direct business $ 192,090 $ 184,559 $ 143,216 Reinsurance assumed 55,678 49,528 19,100 Reinsurance ceded (125,496) (122,609) (93,985) --------------- --------------- --------------- NET AMOUNTS $ 122,272 $ 111,478 $ 68,331 =============== =============== ===============
10 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (2) REINSURANCE, CONTINUED The table below represents the composition of reinsurance recoverables in our condensed consolidated balance sheets:
March 31, 2003 December 31, 2002 -------------- ----------------- Reinsurance recoverable on paid losses $ 117,638 $ 108,104 Reinsurance recoverable on outstanding losses 289,516 304,220 Reinsurance recoverable on incurred but not reported losses 446,548 393,752 Reserve for uncollectible reinsurance (7,736) (7,142) -------------- ----------- TOTAL REINSURANCE RECOVERABLES $ 845,966 $ 798,934 ============== ===========
Our insurance companies require their reinsurers not authorized by the respective states of domicile of our insurance companies to collateralize the reinsurance obligations due to us. The table below shows amounts held by us as collateral plus other credits available for potential offset.
March 31, 2003 December 31, 2002 -------------- ----------------- Payables to reinsurers $ 268,777 $ 235,727 Letters of credit 140,979 141,490 Cash deposits 9,014 9,384 ---------- ---------- TOTAL CREDITS $ 418,770 $ 386,601 ========== ==========
The tables below present the calculation of net reserves, net unearned premium and net deferred policy acquisition costs:
March 31, 2003 December 31, 2002 -------------- ----------------- Loss and loss adjustment expense payable $ 1,234,211 $ 1,155,290 Reinsurance recoverable on outstanding losses (289,516) (304,220) Reinsurance recoverable on incurred but not reported losses (446,548) (393,752) -------------- ----------------- NET RESERVES $ 498,147 $ 457,318 ============== ================= Unearned premium $ 387,274 $ 331,050 Ceded unearned premium (188,655) (164,224) -------------- ----------------- NET UNEARNED PREMIUM $ 198,619 $ 166,826 ============== ================= Deferred policy acquisition costs $ 71,071 $ 68,846 Deferred ceding commissions (57,488) (49,963) -------------- ----------------- NET DEFERRED POLICY ACQUISITION COSTS $ 13,583 $ 18,883 ============== =================
11 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (2) REINSURANCE, CONTINUED We have a reserve of $7.7 million as of March 31, 2003 for potential collectibility issues and associated expenses related to reinsurance recoverables. The adverse economic environment in the worldwide insurance industry, the decline in the market value of investments in equity securities and the terrorist attack on September 11, 2001 have 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. We limit our exposure by holding funds, letters of credit or other security such that net balances due are significantly less than the gross balances shown in our condensed consolidated balance sheets. While we believe that the reserve is adequate based on currently available information, conditions may change or additional information might be obtained which may result in a future change in the reserve. We periodically review our financial exposure to the reinsurance market and the level of our reserve and continue to take actions in an attempt to mitigate our exposure to possible loss. A number of reinsurers have delayed or suspended the payment of amounts recoverable under certain reinsurance contracts to which we are a party. Such delays have affected, although not materially to date, the investment income of our insurance companies, but not to any extent their liquidity. In some instances, the reinsurers have withheld payment without reference to a substantive basis for the delay or suspension. In other cases, the reinsurers have claimed they are not liable for payment to us of all or part of the amounts due under the applicable reinsurance agreement. We believe these claims are substantially without merit and expect to collect the full amounts recoverable. We are currently in negotiations with most of these parties, but if such negotiations do not result in a satisfactory resolution of the matters in question, we may seek or be involved in a judicial or arbitral determination of these matters. In some cases, the final resolution of such disputes through arbitration or litigation may extend over several years. In this regard, as of March 31, 2003, our insurance companies had initiated two litigation proceedings against reinsurers. As of such date, our insurance companies had an aggregate amount of $4.2 million which had not been paid to us under the agreements and we estimate that there could be up to an additional $9.5 million of incurred losses and loss expenses and other balances which become due under the subject agreements. (3) SEGMENT AND GEOGRAPHIC INFORMATION The performance of each segment is evaluated based upon net earnings and 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 following tables show information by business segment and geographic location. Geographic location is determined by physical location of our offices and does not represent the location of insureds or reinsureds from whom the business was generated. The revenues within our underwriting agency and intermediary segments for 2002, have been reclassified to be consistent with the 2003 presentation. This reclassification did not change segment total revenue or segment net earnings from amounts previously reported. Certain reinsurance proceeds of our insurance subsidiaries have also been reclassified to revenue to be consistent with the classification in the condensed consolidated financial statements. 12 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
Insurance Underwriting Other Company Agency Intermediary Operations Corporate Total ----------- --------- ------------ ---------- --------- --------- For the three months ended March 31, 2003: Revenue: Domestic $ 137,236 $ 10,518 $ 4,971 $ 447 $ 1 $ 153,173 Foreign 44,322 1,399 5,499 -- -- 51,220 Inter-segment -- 25,492 1,553 -- -- 27,045 ----------- --------- ------------ ---------- --------- --------- TOTAL SEGMENT REVENUE $ 181,558 $ 37,409 $ 12,023 $ 447 $ 1 231,438 =========== ========= ============ ========== ========= Inter-segment revenue (27,045) --------- CONSOLIDATED TOTAL REVENUE $ 204,393 ========= Net earnings: Domestic $ 15,973 $ 8,745 $ 1,542 $ (590) $ (219) $ 25,451 Foreign 3,387 1,171 1,157 -- -- 5,715 ----------- --------- ------------ ---------- --------- --------- TOTAL SEGMENT NET EARNINGS (LOSS) $ 19,360 $ 9,916 $ 2,699 $ (590) $ (219) 31,166 =========== ========= ============ ========== ========= Inter-segment eliminations (7,399) --------- CONSOLIDATED NET EARNINGS $ 23,767 ========= Other items: Net investment income $ 10,030 $ 749 $ 184 $ 4 $ 31 $ 10,998 Depreciation and amortization 821 1,595 82 239 239 2,976 Interest expense (benefit) 9 1,812 638 193 (970) 1,682 Capital expenditures 440 517 301 -- 265 1,523 Income tax provision (benefit) 8,761 5,834 2,021 (282) 758 17,092 Inter-segment eliminations (4,270) --------- CONSOLIDATED INCOME TAX PROVISION $ 12,822 =========
13 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED
Insurance Underwriting Other Company Agency Intermediary Operations Corporate Total ----------- --------- ------------ ---------- --------- --------- For the three months ended March 31, 2002: Revenue: Domestic $ 110,097 $ 17,398 $ 5,138 $ 293 $ 613 $ 133,539 Foreign 16,795 507 5,243 -- -- 22,545 Inter-segment -- 8,443 257 -- -- 8,700 ----------- --------- ---------- ---------- --------- --------- TOTAL SEGMENT REVENUE $ 126,892 $ 26,348 $ 10,638 $ 293 $ 613 164,784 =========== ========= ========== ========== ========= Inter-segment revenue (8,700) --------- CONSOLIDATED TOTAL REVENUE $ 156,084 ========= Net earnings: Domestic $ 14,364 $ 5,235 $ 565 $ 65 $ 1,348 $ 21,577 Foreign 536 258 1,144 -- -- 1,938 ----------- --------- ---------- ---------- --------- --------- TOTAL SEGMENT NET EARNINGS $ 14,900 $ 5,493 $ 1,709 $ 65 $ 1,348 23,515 =========== ========= ========== ========== ========= Inter-segment eliminations (233) --------- CONSOLIDATED NET EARNINGS $ 23,282 ========= Other items: Net investment income $ 7,692 $ 715 $ 222 $ 20 $ 45 $ 8,694 Depreciation and amortization 758 1,607 86 50 246 2,747 Interest expense (benefit) 73 1,986 644 -- (325) 2,378 Capital expenditures 502 424 290 -- 109 1,325 Income tax provision (benefit) 7,319 3,137 1,701 (9) 449 12,597 Inter-segment eliminations (159) --------- CONSOLIDATED INCOME TAX PROVISION $ 12,438 =========
14 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (3) SEGMENT AND GEOGRAPHIC INFORMATION, CONTINUED The following tables present selected revenue items by line of business for the periods indicated:
For the three months ended March 31, 2003 2002 ---------- ---------- Group life, accident and health $ 71,983 $ 51,567 Diversified financial products 18,306 2,703 London market account 29,376 16,252 Aviation 23,882 25,183 Other specialty lines of business 9,528 3,635 ---------- ---------- 153,075 99,340 Discontinued lines of business 9,347 12,138 ---------- ---------- NET EARNED PREMIUM $ 162,422 $ 111,478 ========== ========== Group life, accident and health $ 19,945 $ 22,829 Property and casualty 10,173 11,118 ---------- ---------- FEE AND COMMISSION INCOME $ 30,118 $ 33,947 ========== ==========
15 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, 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 shares for the purpose of the diluted calculation. The treasury stock method is used to calculate potential common shares due to options. Contingent shares to be issued are included in the earnings per share computation 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:
For the three months ended March 31, 2003 2002 ---------- ---------- Net earnings $ 23,767 $ 23,282 ========== ========== Reconciliation of number of shares outstanding: Shares of common stock outstanding at period end 62,679 62,023 Effect of common shares issued during the period (42) (139) Common shares contractually issuable in the future -- 52 ---------- ---------- Weighted average common shares outstanding 62,637 61,936 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 698 777 ---------- ---------- Weighted average common shares and potential common shares outstanding 63,335 62,713 ========== ========== Anti-dilutive shares not included in computation 2,218 362 ========== ==========
16 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (5) NOTES PAYABLE The table below shows the composition of our notes payable as shown in our condensed consolidated balance sheets.
March 31, 2003 December 31, 2002 -------------- ----------------- 1.3% Convertible notes $ 125,000 $ -- 2% Convertible notes 172,451 172,451 $200 million revolving loan facility -- 53,000 Other debt 14,241 4,576 -------------- ----------------- TOTAL NOTES PAYABLE $ 311,692 $ 230,027 ============== =================
In a public offering on March 25, 2003, we sold an aggregate $125.0 million principal amount of 1.3% Convertible Notes due in 2023. Each $1 thousand principal amount of notes is convertible into 29.4377 shares of our common stock, which represents an initial conversion price of $33.97 per share. The initial conversion price is subject to change under certain conditions. Interest is to be paid by us on April 1 and October 1 each year, commencing October 1, 2003. Holders may surrender notes for conversion into shares of our common stock if, as of the last day of the preceding calendar quarter, the closing sale price of our common stock for at least 20 consecutive trading days during the period of 30 consecutive trading days ending on the last trading day of that quarter is more than 130% ($44.16 per share) of the conversion price per share of our common stock. We can redeem the notes for cash at any time on or after April 4, 2009. Holders of the notes may require us to repurchase the notes on April 1, 2009, 2014 and 2019 at a price equal to the principal amount of the note plus accrued and unpaid interest. If the holders require us to repurchase these notes, we may choose to pay the purchase price in cash, in shares of our common stock, or in a combination thereof. We paid $3.2 million in underwriting discounts and expenses in connection with this offering, which is being amortized from the issue date until April 1, 2009. We used $66.0 million of the proceeds from this offering to pay down existing indebtedness under our bank facility, while the remainder is available to assist in financing future acquisitions and strategic investments and for general corporate purposes. (6) SUPPLEMENTAL INFORMATION Supplemental information for the three months ended March 31, 2003 and 2002, is summarized below:
2003 2002 --------- --------- Interest paid $ 2,431 $ 2,070 Income tax paid 5,931 1,565 Comprehensive income 22,944 20,121 Ceding commissions netted with policy acquisition costs 24,379 19,417
17 HCC Insurance Holdings, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (unaudited, in thousands, except per share data, continued) (7) COMMITMENTS AND CONTINGENCIES In addition to the matters discussed in Note (2) Reinsurance, we are party to numerous lawsuits and other proceedings that arise in the normal course of our business. Many of such lawsuits and other proceedings involve claims under policies that we underwrite as an insurer or reinsurer, the liabilities for which, we believe, have been adequately included in our loss reserves. Also, from time to time, we are a party to lawsuits and other proceedings which relate to disputes over contractual relationships with third parties, or which involve alleged errors and omissions on the part of our subsidiaries. In addition, we are presently engaged in litigation initiated by the appointed liquidator of a former reinsurer concerning payments made to us prior to the date of the appointment of the liquidator. The disputed payments were made by the now insolvent reinsurer in connection with a commutation agreement. Our understanding is that such litigation is one of a number of similar actions brought by the liquidator. We intend to vigorously contest the action. We are also presently engaged in litigation, along with other insurers, with a state health insurance association concerning the change in calculation methodology of its assessments. We do not believe the resolution of any of these matters will have a material adverse effect on our financial condition, results of operations or cash flows. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS This Form 10-Q/A has amended our previously filed Form 10-Q to reflect a restatement to change the basis upon which the fee and commission income of our underwriting agency and intermediary subsidiaries are accounted. This restatement relates only to business underwritten by our underwriting agencies or placed by our intermediaries that passes through one of our affiliated insurance companies to an unrelated reinsurance company. This income had previously been recognized at the later of the effective date of a policy, the date when the premium could be reasonably established or the date when substantially all the services relating to the insurance placement had been rendered to the client. This income is now recognized pro rata over the term of the underlying policy. The cumulative effect of the restatement related to prior years, $3.9 million, which is recorded in the first quarter of 2003, is not material to prior years or 2003. The effect of the change only became material in 2003 as a result of recent acquisitions. The change is a timing difference which generally reverses over a twelve month period. The restatement does not impact the overall amount of fees and commissions ultimately earned or previously collected in cash. Additionally, it does not change the net earnings of our reporting segments but, rather, results solely from changes to the consolidating entries made in the preparation of our condensed consolidated financial statements. Likewise, it does not change cash flow from operations. The effect of the restatement on revenue was a reduction of $10.9 million for the first three months of 2003. This amount includes $6.5 million associated with the cumulative effect of the restatement related to prior years. The table below shows the effect on net earnings and earnings per share for the first quarter of 2003.
Earnings per share Amount Basic Diluted ---------- ------------------ ---------- Net earnings, as previously reported $ 30,275 $ 0.48 $ 0.48 Effect of adjustment on operations for the period (2,618) (0.04) (0.04) Cumulative adjustment (3,890) (0.06) (0.06) ---------- ------------------ ---------- Net earnings, as reported herein $ 23,767 $ 0.38 $ 0.38 ========== ================== ==========
Three months ended March 31, 2003 versus three months ended March 31, 2002 Results of Operations Total revenue increased 31% to $204.4 million for the first quarter of 2003 from $156.1 million for the same period in 2002. The revenue increase resulted from premium rate increases, increased business in all three operating segments and subsidiaries acquired during the fourth quarter of 2002. Net investment income increased 27% to $11.0 million for the first quarter of 2003 from $8.7 million for the same period in 2002. This increase was due to the higher level of invested assets resulting primarily from cash flow generated by operating activities and from the insurance company we acquired in December, 2002. Cash flow from operating activities was $101.9 million for the first quarter of 2003 compared to $13.1 million for the same period in 2002, continuing a trend of increasing operating cash flow that began in 2002. The majority of the increase in cash flow from operations results from increased earnings and net premium flow into our insurance companies. We expect the positive cash flow provided by operating activities to continue, most of which will increase invested assets and thus the related investment income. If market interest rates were to rise, the growth in investment income would be accelerated as our current portfolio has a relatively short average duration, and would be available to be invested on a longer term basis to take advantage of higher rates. For the first quarter of 2003 our annualized, weighted average, tax equivalent yield was 3.9% compared to 4.7% for the same period in 2002. 19 Compensation expense increased to $20.5 million during the first quarter of 2003 from $16.7 million for the same period in 2002. Most of the increase is due to subsidiaries acquired during the fourth quarter of 2002. Other operating expense increased to $13.7 million during the first quarter of 2003 compared to $12.0 million in 2002 for the same reason. Interest expense was $1.7 million for the first quarter of 2003 compared to $2.4 million for the same period in 2002. Included in the 2002 amount is $1.1 million representing the amortization of underwriting discounts and expenses related to our issuance of our 2% convertible notes. Income tax expense was $12.8 million for the first quarter of 2003 compared to $12.4 million for the same period in 2002. Our effective tax rate was 35.0% in the 2003 quarter compared to 34.8% in 2002. Net earnings increased to $23.8 million, or $0.38 per diluted share, for the first quarter of 2003 from $23.3 million, or $0.37 per diluted share, for the same period in 2002. Included in 2003 net earnings is a reduction of $3.9 million, or $0.06 per share, due to the prior years' cumulative effect of the restatement to change our accounting for certain fee and commission income. At March 31, 2003, total assets exceeded $4.0 billion for the first time, shareholders equity was $906.4 million and book value per share was $14.46, up from $14.15 as of December 31, 2002. 20 SEGMENTS Insurance Companies The following tables provide information by line of business (amounts in thousands):
Gross Net Net Net written written earned loss premium premium premium ratio ---------- ------------ ------------- ------ For the three months ended March 31, 2003: Group life, accident and health $ 139,320 $ 76,185 $ 71,983 63.6% Diversified financial products 107,320 33,307 18,306 43.7 London market accounts 60,718 37,232 29,376 42.2 Aviation 44,531 20,679 23,882 65.5 Other specialty lines of business 20,880 17,450 9,528 66.2 ---------- ------------ ------------- ------ 372,769 184,853 153,075 57.5 Discontinued lines of business 6,679 7,648 9,347 127.7 ---------- ------------ ------------- ------ TOTALS $ 379,448 $ 192,501 $ 162,422 61.6% ========== ============ ============= Expense Ratio 27.2 ------ Combined Ratio 88.8% ======
Gross Net Net Net written written earned loss premium premium premium ratio ---------- ------------ ------------- ------ For the three months ended March 31, 2002: Group life, accident and health $ 122,904 $ 51,820 $ 51,567 62.0% Diversified financial products 15,813 7,341 2,703 36.0 London market accounts 47,545 28,536 16,252 44.6 Aviation 44,114 22,633 25,183 58.5 Other specialty lines of business 4,202 3,581 3,635 93.8 ---------- ------------ ------------- ------ 234,578 113,911 99,340 58.7 Discontinued lines of business 13,190 8,361 12,138 82.3 ---------- ------------ ------------- ------ TOTALS $ 247,768 $ 122,272 $ 111,478 61.3% ========== ============ ============= Expense Ratio 26.0 ------ Combined Ratio 87.3% ======
Gross written premium increased 53% to $379.4 million for the first quarter of 2003 from $247.8 million for the same period in 2002. All of the lines of business showed some increase as a result of increases in premium rates as well as organic growth, but the largest growth was the diversified financial products line of business, which our insurance companies began writing in 2002. Net written premium for the first quarter of 2003 increased 57% to $192.5 million and net earned premium increased 46% to $162.4 million, both due principally to the growth in gross premium. The increase in premium is expected to continue throughout 2003 and into 2004. 21 Loss and loss adjustment expense was $100.0 million for the first quarter of 2003 compared to $68.3 million for the same period in 2002. The net loss ratio was 61.6% for the first quarter of 2003 compared to 61.3% for the same period in 2002. For the same period, the gross loss ratio was 68.9% in 2003 compared to 69.3% in 2002. Prior year net reserve deficiency included in loss and loss adjustment expense approximated $1.3 million for the first quarter of 2003 compared to a redundancy of $1.8 million for the same period in 2002. The deficiency and redundancy resulted from the settlement of claims for different amounts than previously reserved. The loss ratio in the aviation line of business increased slightly from the first quarter of 2002 principally due to some adverse development on a few old claims plus a bad month of March 2003. Loss experience in the other specialty lines improved in 2003 to a more usual level from the prior year. The loss ratio in the discontinued lines of business increased in the first quarter of 2003 primarily due to prior year reserve development as we increase reserves towards the mid level of the actuarial range. Policy acquisition costs, which are net of commissions on reinsurance ceded, increased to $31.9 million during the first quarter of 2003, from $20.9 million in the same period in 2002. This increase is due to and in proportion to the increase in net earned premium. Net earnings of our insurance companies increased to $19.4 million in the first quarter of 2003 from $14.9 million for the same period in 2002 due to increased premium volume and continuing profitable underwriting results. We expect this growth to continue into 2004. Underwriting Agencies Revenue from our underwriting agencies (primarily fee income) increased 42% to $37.4 million for the first quarter of 2003 compared to $26.3 million for the same period in 2002. This growth was both from acquisitions made during the fourth quarter of 2002 and from internal growth at our underwriting agencies. Net earnings in this segment increased to $9.9 million in the first quarter of 2003 from $5.5 million in 2002 for the same reasons and we expect this growth to continue into 2004. Intermediaries Revenue from our intermediaries (primarily commission income) increased 13% to $12.0 million for the first quarter of 2003 compared to $10.6 million for the same period in 2002 due to improved market conditions and growth in non-affiliated business. Net earnings of our intermediaries increased to $2.7 million for the first quarter of 2003 compared to $1.7 million for the same period of 2002 for the same reason. We expect continued improvement in the intermediary segment during the remainder of 2003. Other Operations There was very little activity in the other operations segment during either first quarter. Quarter to quarter comparisons may vary substantially depending on other operating investments or dispositions thereof in any given period. Corporate The net loss of the corporate segment was $0.2 million for the first quarter of 2003 compared to net earnings of $1.3 million for the same period in 2002. This resulted from the difference between years in intersegment income tax adjustments and the adjustment of certain accruals to their ultimate liability, which positively affected the 2002 quarter. 22 Liquidity and Capital Resources We receive 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 investments and other assets. Our principal cash outflows are for the payment of claims and loss adjustment expenses, payment of premiums to reinsurers, purchase of investments, debt service, policy acquisition costs, operating expenses, income and other taxes and dividends. 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. We maintain a substantial level of cash and liquid short-term investments which are used to meet anticipated payment obligations. Our consolidated cash and investment portfolio increased $138.4 million, or 11% , during the first quarter of 2003 and totaled $1.3 billion as of March 31, 2003 of which $474.4 million was cash and short-term investments. The increase in investments resulted from the positive operating cash flows and part of the proceeds from the 1.3% Convertible Notes discussed below. In a public offering on March 25, 2003, we sold an aggregate $125.0 million principal amount of 1.3% Convertible Notes due in 2023. Each $1 thousand principal amount of notes is convertible into 29.4377 shares of our common stock, which represents an initial conversion price of $33.97 per share. The initial conversion price is subject to change under certain conditions. Interest is to be paid by us on April 1 and October 1 each year, commencing October 1, 2003. Holders may surrender notes for conversion into shares of our common stock if, as of the last day of the preceding calendar quarter, the closing sale price of our common stock for at least 20 consecutive trading days during the period of 30 consecutive trading days ending on the last trading day of that quarter is more than 130% ($44.16 per share) of the conversion price per share of our common stock. We can redeem the notes for cash at any time on or after April 4, 2009. Holders of the notes may require us to repurchase the notes on April 1, 2009, 2014 and 2019 at a price equal to the principal amount of the note plus accrued and unpaid interest. If the holders require us to repurchase these notes, we may choose to pay the purchase price in cash, in shares of our common stock, or in a combination thereof. We paid $3.2 million in underwriting discounts and expenses in connection with this offering, which is being amortized from the issue date until April 1, 2009. We used $66.0 million of the proceeds from this offering to pay down existing indebtedness under our bank facility, while the remainder is available to assist in financing future acquisitions and strategic investments and for general corporate purposes. Reinsurance recoverables increased during the first quarter of 2003 due to the increase in reinsurance recoverables on incurred but not reported losses. A significant portion of this increase comes from the diversified financial products line of business, new in 2002, which is more heavily reinsured than our other lines of business. Reinsurance recoverables on outstanding losses was slightly reduced during the first quarter of 2003, but this was offset by a slight increase in reinsurance recoverables on paid losses. We have a reserve of $7.7 million as of March 31, 2003 for potential collectibility issues and associated expenses related to reinsurance recoverables. The adverse economic environment in the worldwide insurance industry, the decline in the market value of investments in equity securities and the terrorist attack on September 11, 2001 have 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. We limit our exposure by holding funds, letters of credit or other security such that net balances due are significantly less than the gross balances shown in our condensed consolidated balance sheets. While we believe that the reserve is adequate based on currently available information, conditions may change or additional information might be obtained which may result in a future change in the reserve. We periodically review our financial exposure to the reinsurance market and the level of our reserve and continue to take actions in an attempt to mitigate our exposure to possible loss. 23 A number of reinsurers have delayed or suspended the payment of amounts recoverable under certain reinsurance contracts to which we are a party. Such delays have affected, although not materially to date, the investment income of our insurance companies, but not to any extent their liquidity. In some instances, the reinsurers have withheld payment without reference to a substantive basis for the delay or suspension. In other cases, the reinsurers have claimed they are not liable for payment to us of all or part of the amounts due under the applicable reinsurance agreement. We believe these claims are substantially without merit and expect to collect the full amounts recoverable. We are currently in negotiations with most of these parties, but if such negotiations do not result in a satisfactory resolution of the matters in question, we may seek or be involved in a judicial or arbitral determination of these matters. In some cases, the final resolution of such disputes through arbitration or litigation may extend over several years. In this regard, as of March 31, 2003, our insurance companies had initiated two litigation proceedings against reinsurers. As of such date, our insurance companies had an aggregate amount of $4.2 million which had not been paid to us under the agreements and we estimate that there could be up to an additional $9.5 million of incurred losses and loss expenses and other balances which become due under the subject agreements. We believe that our operating cash flows, short-term investments, bank facility and shelf registration on file with the United states Securities and Exchange Commission will provide sufficient sources of liquidity to meet our operating needs for the foreseeable future. Critical Accounting Policies We have made no changes in our methods of application of our critical accounting policies from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2002. ITEM 3. 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" in our Annual Report on Form 10-K for the year ended December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES a. Evaluation of disclosure controls and procedures. Within the 90 days prior to the date of this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was performed under the supervision of, and with the participation of, our management, including the Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to HCC Insurance Holdings, Inc. and its subsidiaries required to be included in our periodic SEC filings. b. Changes in internal controls. There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date we carried out our evaluation. 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings In addition to the matters discussed in Note (2) Reinsurance, we are party to numerous lawsuits and other proceedings that arise in the normal course of our business. Many of such lawsuits and other proceedings involve claims under policies that we underwrite as an insurer or reinsurer, the liabilities for which, we believe, have been adequately included in our loss reserves. Also, from time to time, we are a party to lawsuits and other proceedings which relate to disputes over contractual relationships with third parties, or which involve alleged errors and omissions on the part of our subsidiaries. In addition, we are presently engaged in litigation initiated by the appointed liquidator of a former reinsurer concerning payments made to us prior to the date of the appointment of the liquidator. The disputed payments were made by the now insolvent reinsurer in connection with a commutation agreement. Our understanding is that such litigation is one of a number of similar actions brought by the liquidator. We intend to vigorously contest the action. We are also presently engaged in litigation, along with other insurers, with a state health insurance association concerning the change in calculation methodology of its assessments. We do not believe the resolution of any of these matters will have a material adverse effect on our financial condition, results of operations or cash flows. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification by Chief Executive Officer. 31.2 Certification by Chief Financial Officer. 32.1 Certification with respect to quarterly report. (b) Reports on Form 8-K On January 28, 2003, we furnished on Form 8-K the text material used for presentations at various investor conferences. On February 20, 2003, we reported on Form 8-K our announcement of financial results for the fourth quarter and full year of 2002. On March 3, 2003, we furnished on Form 8-K the text materials used for presentations at various investor conferences. On March 28, 2003, we reported on Form 8-K our public offering of 1.3% Convertible Notes due in 2023 and filed various exhibits related thereto. 25 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) March 1, 2004 /s/ Stephen L. Way - ----------------- -------------------------------------- (Date) Stephen L. Way, Chairman of the Board Chief Executive Officer and President March 1, 2004 /s/ Edward H. Ellis, Jr. - ----------------- -------------------------------------- (Date) Edward H. Ellis, Jr., Executive Vice President and Chief Financial Officer 26 INDEX TO EXHIBIT 31.1 Certification by Chief Executive Officer. 31.2 Certification by Chief Financial Officer. 32.1 Certification with respect to quarterly report. EX-31.1 3 h12994aexv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION BY CHIEF EXECUTIVE OFFICER I, Stephen L. Way, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of HCC Insurance Holdings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 1, 2004 /s/ Stephen L. Way - ----------------- --------------------------------------- (Date) Stephen L. Way, Chairman of the Board, Chief Executive Officer and President EX-31.2 4 h12994aexv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION BY CHIEF FINANCIAL OFFICER I, Edward H. Ellis, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of HCC Insurance Holdings, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 1, 2004 /s/ Edward H. Ellis, Jr. - ----------------- ------------------------------------- (Date) Edward H. Ellis, Jr., Executive Vice President and Chief Financial Officer EX-32.1 5 h12994aexv32w1.txt CERTIFICAITON PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION WITH RESPECT TO QUARTERLY REPORT OF HCC INSURANCE HOLDINGS, INC. The undersigned, being the chief executive officer and chief financial officer of HCC Insurance Holdings, Inc. (the "Company"), pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, do hereby certify to the best of their knowledge with respect to the Quarterly Report of the Company on Form 10-Q/A, as filed with the Securities and Exchange Commission for the quarter ended March 31, 2003, (the "Report"): 1. that the Report fully complies with all requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended; and 2. that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 1, 2004 /s/ Stephen L. Way - ----------------- -------------------------------------- (Date) Stephen L. Way, Chairman of the Board, Chief Executive Officer and President March 1, 2004 /s/ Edward H. Ellis, Jr. - ----------------- --------------------------------------- (Date) Edward H. Ellis, Jr., Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to HCC Insurance Holdings, Inc. and will be retained by HCC Insurance Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----