8-K 1 a4576974.txt HCC INSURANCE HOLDINGS, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) February 19, 2004 HCC INSURANCE HOLDINGS, INC. (EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER) STATE OR OTHER COMMISSION IRS EMPLOYER JURISDICTION FILE NUMBER: IDENTIFICATION OF INCORPORATION: NUMBER: DELAWARE 001-13790 76-0336636 13403 NORTHWEST FREEWAY HOUSTON, TEXAS 77040-6094 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE - (713) 690-7300 --------------------------------------------- ITEM 12. Results of Operations and Financial Condition. On February 19, 2004, HCC Insurance Holdings, Inc. announced its results for the Fourth Quarter and full-year ended with 2003. A press release setting forth the announcement is set forth below. HCC Announces 2003 Results and 2004 Earnings Guidance HOUSTON--(BUSINESS WIRE)--Feb. 19, 2004--HCC Insurance Holdings, Inc. (NYSE:HCC) today reported results for the fourth quarter and for the full year that ended December 31, 2003. Net earnings for the fourth quarter 2003 increased significantly to $50.5 million, or $0.77 per share, compared to $31.5 million, or $0.50 per share, for the same period in 2002. Net earnings for the full year 2003 increased substantially to $143.6 million, or $2.23 per share, compared to $105.8 million, or $1.68 per share, for the full year 2002. Stephen L. Way, Chairman and Chief Executive Officer, said, "2003 was the best year in our history and we are very pleased with our results." He added, "We are not resting on our laurels and look forward to our future challenges and successes." The Company has provided 2004 net earnings guidance with a range between $2.65 and $2.75 per share. The Company expects total revenue to increase approximately 25% in 2004, including growth of net earned premium by 30%, fee and commission income by 15% and investment income by 10%. The GAAP combined ratio is expected to remain fairly constant around 85% to 88% on significantly increased net earned premium. There were several non-recurring items recorded in the fourth quarter 2003 and a summary of these important items follows: The Company completed the sale of all of the assets of its retail broking subsidiary HCC Employee Benefits, Inc., following an unsolicited approach from Houston based Capital Risk LLC, a subsidiary of Jardine Lloyd Thompson Group, PLC. The initial after tax gain related to this sale, which was recorded in the fourth quarter 2003, was $30.1 million, or $0.47 per share. This transaction is subject to an earnout formula and could result in a further gain, which would be recorded in 2004. In accordance with GAAP, all operating results from this operation and this gain are shown separately in the Company's consolidated statements of earnings as "Discontinued Operations", but are included in the Company's net earnings. The operating earnings and the gain are shown separately. Management believes that the disposition of this non-core business was opportunistic and the resulting cashflow was immediately utilized in the Company's recent acquisition of American Contractors Indemnity Company. The Company reached an agreement with various reinsurers to commute certain reinsurance recoverables relating to the Company's discontinued A&H line of business. This transaction results in the Company receiving a cash payment from the reinsurers in consideration for discounting the recoverables and reassuming any losses. The after tax discount recorded was $18.7 million, or $0.29 per share. The pre-tax discount is included in loss and loss adjustment expenses in the Company's consolidated statements of earnings in the fourth quarter of 2003. It is expected that future investment income will overcome the discount given on this transaction. Management has been proactive about commuting some of its reinsurance recoverables and will continue to do this where it is in the best interest of the Company. Management has a positive view of commutations such as this because they result in removing older recoverables from the Company's balance sheet, increased future investment income and a reduction in the overall amount of recoverables. The Company and its independent auditors have determined that the Company needs to adjust the basis upon which the fee and commission income of its agency and intermediary subsidiaries are accounted. Accordingly, the Company has restated its financial statements for the first three quarters of 2003 and the Company will amend previously filed quarterly reports on Form 10-Q for those quarters. The cumulative effect of the change, $3.9 million, which is recorded in the first quarter of 2003, is not material to prior years but the effect of the change in basis of accounting became material in 2003 as a result of recent acquisitions. It is strictly a timing difference. The maximum timing difference is twelve months and the average timing difference is approximately six months on the portion of the affected revenue and the related components. The change does not impact the overall amount of fee and commissions ultimately earned or previously collected in cash by the Company. The change does not affect the net earnings of the Company's reporting segments but, rather, results solely from adjustments to the consolidating entries made in the preparation of the Company's consolidated financial statements. Likewise, the change does not affect cash flow from operations. The effect of this change on earnings for fiscal year 2003 is $13.0 million, or $0.20 per share. The effect of this change has been reflected in management's guidance for 2004. See the table attached which shows the effect on earnings and earnings per share for the first three quarters of 2003. Mr. Way commented, "There is no effect on the future growth prospects of the Company from this accounting change." Total revenue for the full year 2003 increased by 41% to a record $929.1 million compared to 2002, driven by significant increases in net earned premium, fee and commission income and investment income. The Company anticipates continued revenue growth in 2004. Comparing the full year 2003 to the previous year, the Company's insurance company subsidiaries' net written premium increased 59% to $865.5 million and net earned premium increased 46% to $738.3 million. During the same period, gross written premium reached a record $1.74 billion, growing 50% from the previous year. Premium growth is due to increased rates, a reduction in ceded reinsurance, organic growth and greater renewal retentions. The Company expects premium to continue to grow through at least 2004. The GAAP combined ratio was higher in 2003 at 91% compared to 86% in the previous year. This increase was primarily the impact of the reinsurance commutation recorded in the fourth quarter, which added 4% to the full year loss ratio. Management is confident of maintaining its combined ratio at or below this level going forward on rising earned premium revenue. For the full year of 2003 compared to the same period in 2002, fee and commission income increased 22% to $129.8 million, primarily due to organic growth of existing lines of business and acquisitions made in late 2002. During the same period, other operating income increased to $13.2 million from $7.0 million, due in part to the timing of acquisitions and dispositions of strategic investments. In 2003, cashflow from operations was significantly higher rising more than 200% to $528.1 million compared to the previous year. During the same period, net investment income grew 25% to $47.3 million, primarily due to substantially increased investment assets resulting from increased loss reserves due to higher retentions, as well as significant cash flow from operations and despite low yields from our continuing short duration and conservative investment philosophy. As of December 31, 2003, total assets increased 32% to $4.9 billion; total investments increased 46% to $1.7 billion; shareholders' equity increased 19% to $1.0 billion; and book value per share increased 16% to $16.37, all compared to December 31, 2002 and all at record levels. See attached tables. HCC will hold an open conference call beginning at 4:00 p.m. Central Time on Thursday, February 19. To participate, the number for domestic calls is (888) 243-0813 and the number for international calls is (703) 925-2400. In addition, there will be a live webcast available on a listen-only basis, that can be accessed through the HCC website at www.hcch.com. A replay of the webcast will be available until Friday, February 27, 2004. HCC is an international holding company and a leading specialty insurance group since 1974, headquartered in Houston, Texas, with offices in Bermuda, Spain and the UK. HCC has assets of $4.9 billion, shareholders' equity of more than $1 billion and is rated AA (Very Strong) by Standard & Poor's and A+ (Superior) by A.M. Best Company. For more information, visit our website at www.hcch.com. Forward-looking statements contained in this press release are made under "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The types of risks and uncertainties which may affect the Company are set forth in its periodic reports filed with the Securities and Exchange Commission. HCC Insurance Holdings, Inc. Financial Highlights December 31, 2003 (amounts in thousands, except per share data) Twelve Months Ended December 31, 2003 2002 --------------------------------------------- ----------- ----------- Gross written premium $1,739,894 $1,159,249 Net written premium 865,502 545,911 Net earned premium 738,272 505,521 Fee and commission income 129,763 106,425 Net investment income 47,335 37,755 Other operating income 13,215 6,985 Total revenue 929,112 657,139 Net earnings 143,561 105,828 Earnings per share (diluted) 2.23 1.68 Cash flow from operations 528,098 175,122 Weighted average shares outstanding (diluted) 64,383 62,936 GAAP net loss ratio 66.2% (a) 60.6% GAAP combined ratio 91.0% (a) 86.0% December 31, December 31, 2003 2002 ----------- ------------ Total investments $1,703,346 $1,167,636 Total assets 4,880,192 3,704,151 Shareholders' equity 1,046,920 882,907 Debt to total capital 22.9% 20.7% Book value per share $16.37 $14.15 (a) Includes effect of commutation. HCC Insurance Holdings, Inc. Financial Highlights December 31, 2003 (amounts in thousands, except per share data) Three Months Ended December 31, 2003 2002 ------------------------------------------ ------------ ------------- Gross written premium $440,127 $307,165 Net written premium 199,375 143,683 Net earned premium 202,918 143,122 Fee and commission income 33,381 25,859 Net investment income 12,476 9,986 Other operating income 4,948 3,714 Total revenue 253,898 181,975 Net earnings 50,460 31,495 Earnings per share (diluted) 0.77 0.50 Cash flow from operations 202,208 52,294 Weighted average shares outstanding (diluted) 65,110 63,109 GAAP net loss ratio 73.7% (a) 59.6% GAAP combined ratio 96.6% (a) 83.0% December 31, December 31, 2003 2002 --------------------------- Total investments $1,703,346 $1,167,636 Total assets 4,880,192 3,704,151 Shareholders' equity 1,046,920 882,907 Debt to total capital 22.9% 20.7% Book value per share $16.37 $14.15 (a) Includes effect of commutation. HCC Insurance Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (unaudited, in thousands) December 31, December 31, 2003 2002 ------------- ------------ ASSETS Investments: Fixed income securities $1,164,166 $841,548 Marketable equity securities 12,002 15,609 Short-term investments 518,482 307,215 Other investments 8,696 3,264 ------------- ------------ Total investments 1,703,346 1,167,636 Cash 96,416 40,306 Restricted cash and cash investments 210,301 189,396 Premium, claims and other receivables 899,031 753,527 Reinsurance recoverables 907,211 798,934 Ceded unearned premium 291,591 164,224 Ceded life and annuity benefits 77,548 78,951 Deferred policy acquisition costs 127,018 68,846 Goodwill 386,507 335,288 Other assets 181,223 107,043 ------------- ------------ Total assets $4,880,192 $3,704,151 ============= ============ LIABILITIES Loss and loss adjustment expense payable $1,535,288 $1,155,290 Life and annuity policy benefits 77,548 78,951 Reinsurance balances payable 287,937 166,659 Unearned premium and other deferred revenue 614,178 331,050 Deferred ceding commissions 86,337 49,963 Premium and claims payable 745,559 730,801 Notes payable 310,404 230,027 Accounts payable and accrued liabilities 176,021 78,503 ------------- ------------ Total liabilities 3,833,272 2,821,244 SHAREHOLDERS' EQUITY Common stock 63,964 62,358 Additional paid-in capital 447,671 416,406 Retained earnings 509,159 383,378 Accumulated other comprehensive income 26,126 20,765 ------------- ------------ Total shareholders' equity 1,046,920 882,907 ------------- ------------ Total liabilities and shareholders' equity $4,880,192 $3,704,151 ============= ============ Note: Certain amounts from the prior year have been reclassified to be consistent with the Current classifications. HCC Insurance Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (unaudited, in thousands, except per share data) For the For the three years ended months ended December 31, December 31, 2003 2002 2003 2002 --------- --------- --------- --------- REVENUE Net earned premium $738,272 $505,521 $202,918 $143,122 Fee and commission income 129,763 106,425 33,381 25,859 Net investment income 47,335 37,755 12,476 9,986 Net realized investment gain (loss) 527 453 175 (706) Other operating income 13,215 6,985 4,948 3,714 --------- --------- --------- --------- Total revenue 929,112 657,139 253,898 181,975 EXPENSE Loss and loss adjustment expense 488,652 306,491 149,587 85,245 Operating expense: Policy acquisition costs, net 125,360 90,027 31,224 26,655 Compensation expense 82,947 58,567 25,035 14,403 Other operating expense 56,287 39,560 18,042 8,410 --------- --------- --------- --------- Net operating expense 264,594 188,154 74,301 49,468 Interest expense 7,453 8,301 1,956 1,409 --------- --------- --------- --------- Total expense 760,699 502,946 225,844 136,122 --------- --------- --------- --------- Earnings from continuing operations before income tax provision income tax provision 168,413 154,193 28,054 45,853 Income tax provision 60,494 53,615 10,014 15,688 --------- --------- --------- --------- Earnings from continuing operations 107,919 100,578 18,040 30,165 Gain from sale of discontinued operations 30,141 -- 30,141 -- Earnings from discontinued operations 5,501 5,250 2,279 1,330 --------- --------- --------- --------- Net earnings $143,561 $105,828 $50,460 $31,495 ========= ========= ========= ========= Basic earnings per share data: Earnings from continuing operations $1.70 $1.62 $0.28 $0.48 Gain from sale of discontinued operations 0.48 -- 0.47 -- Earnings from discontinued operations 0.09 0.08 0.04 0.02 --------- --------- --------- --------- Net earnings $2.27 $1.70 $0.79 $0.50 ========= ========= ========= ========= Weighted average shares outstanding 63,279 62,225 63,875 62,387 ========= ========= ========= ========= Diluted earnings per share data: Earnings from continuing operations $1.68 $1.60 $0.28 $0.48 Gain from sale of discontinued operations 0.47 -- 0.46 -- Earnings from discontinued operations 0.08 0.08 0.03 0.02 --------- --------- --------- --------- Net earnings $2.23 $1.68 $0.77 $0.50 ========= ========= ========= ========= Weighted average shares outstanding 64,383 62,936 65,110 63,109 ========= ========= ========= ========= Cash dividends declared, per share $0.28 $0.255 $0.075 $0.065 ========= ========= ========= ========= Note: Certain amounts from the prior year have been reclassified to be consistent with the Current classifications. HCC Insurance Holdings, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited, in thousands) For the three For the years ended months ended December 31, December 31, 2003 2002 2003 2002 ----------- ---------- --------- --------- Cash flows from operating activities: Net earnings $143,561 $105,828 $50,460 $31,495 Adjustments to reconcile net earnings to net cash provided by operating activities: Change in premium, claims and other receivables (122,312) (41,330) 55,568 11,110 Change in reinsurance recoverables (108,277) 103,870 (569) 50,901 Change in ceded unearned premium (127,367) (88,940) (36,190) (25,047) Change in loss and loss adjustment expense payable 379,998 (57,747) 128,445 (11,442) Change in reinsurance balances payable 121,278 70,672 35,962 12,260 Change in unearned premium and other deferred revenue 283,128 122,811 38,295 22,011 Change in premium and claims payable, net of restricted cash (34,063) (76,039) (95,033) (59,174) Gains on dispositions of subsidiaries and other operating investments (52,682) -- (52,682) -- Depreciation, amortization and impairments 12,828 10,808 4,343 2,875 Other, net 32,006 25,189 73,609 17,305 ----------- ---------- --------- --------- Cash provided by operating activities 528,098 175,122 202,208 52,294 Cash flows from investing activities: Sales of fixed income securities 167,357 217,370 35,473 19,904 Maturity or call of fixed income securities 142,652 53,918 30,404 20,967 Sales of equity securities 4,165 3,958 3,000 541 Disposition of subsidiaries and other operating investments 82,618 -- 65,772 -- Change in short-term investments (202,904) 84,799 (88,103) 28,932 Cost of securities acquired (694,211) (505,099) (173,720) (92,578) Payments for purchase of subsidiaries, net of cash received (16,680) (39,227) -- (39,227) Purchases of property and equipment (21,820) (5,782) (1,560) (1,834) ----------- ---------- --------- --------- Cash used by investing activities (538,823) (190,063) (128,734) (63,295) Cash flows from financing activities: Issuance of notes payable, net of costs 174,845 76,000 40,000 36,000 Sale of common stock 20,279 11,207 2,803 1,169 Payments on notes payable (108,813) (31,969) (40,090) (16,560) Dividends paid and other, net (19,476) (16,882) (4,775) (4,051) ----------- ---------- --------- --------- Cash provided (used) by financing activities 66,835 38,356 (2,062) 16,558 ----------- ---------- --------- --------- Net change in cash 56,110 23,415 71,412 5,557 Cash at beginning of period 40,306 16,891 25,004 34,749 ----------- ---------- --------- --------- Cash at end of period $96,416 $40,306 $96,416 $40,306 =========== ========== ========= ========= Note: Certain amounts from the prior year have been reclassified to be consistent with the current classifications. HCC Insurance Holdings, Inc. Insurance Company Premium December 31, 2003 ($ in thousands) Full Year Full Year Change 2003 2002 % ----------- ----------- ---------- GROSS WRITTEN Group life, accident & health $565,494 $503,263 12% Diversified financial products 553,501 178,653 210 London market account 223,149 199,816 12 Aviation 214,718 212,518 1 Other specialty lines 148,239 32,563 355 ----------- ----------- ---------- 1,705,101 1,126,813 51% Discontinued lines 34,793 32,436 ----------- ----------- $1,739,894 $1,159,249 =========== =========== NET WRITTEN Group life, accident & health $299,913 $244,554 23% Diversified financial products 183,560 43,731 320 London market account 155,987 113,925 37 Aviation 99,447 99,826 (0) Other specialty lines 109,408 25,621 327 ----------- ----------- ---------- 848,315 527,657 61% Discontinued lines 17,187 18,254 ----------- ----------- $865,502 $545,911 =========== =========== NET EARNED PREMIUM Group life, accident & health $290,009 $240,070 21% Diversified financial products 123,562 23,102 435 London market account 137,572 89,260 54 Aviation 97,536 100,960 (3) Other specialty lines 57,551 22,337 158 ----------- ----------- ---------- 706,230 475,729 48% Discontinued lines 32,042 29,792 ----------- ----------- $738,272 $505,521 =========== =========== HCC Insurance Holdings, Inc. Insurance Company Premium December 31, 2003 ($ in thousands) 4th Qtr 4th Qtr Change 2003 2002 % ----------- ----------- ---------- GROSS WRITTEN Group life, accident & health $139,332 $124,700 12% Diversified financial products 153,311 64,823 137 London market account 34,087 37,417 (9) Aviation 49,438 58,610 (16) Other specialty lines 60,846 16,109 278 ----------- ----------- ---------- 437,014 301,659 45% Discontinued lines 3,113 5,506 ----------- ----------- $440,127 $307,165 =========== =========== NET WRITTEN Group life, accident & health $66,324 $68,035 (3)% Diversified financial products 49,143 15,001 228 London market account 20,046 21,971 (9) Aviation 23,682 24,085 (2) Other specialty lines 36,767 12,368 197 ----------- ----------- ---------- 195,962 141,460 39% Discontinued lines 3,413 2,223 ----------- ----------- $199,375 $143,683 =========== =========== NET EARNED PREMIUM Group life, accident & health $69,756 $69,915 (0)% Diversified financial products 43,163 9,072 376 London market account 35,839 26,955 33 Aviation 24,757 24,361 2 Other specialty lines 21,718 8,990 142 ----------- ----------- ---------- 195,233 139,293 40% Discontinued lines 7,685 3,829 ----------- ----------- $202,918 $143,122 =========== =========== HCC Insurance Holdings, Inc. Consolidated Insurance Companies Net Loss Ratios December 31, 2003 ($ in thousands) Full Year 2003 Full Year 2002 Net Net Earned Actual Loss Earned Actual Loss Line of Business Premium Losses Ratio Premium Losses Ratio -------------------- ------------------------ ------------------------ Group life, accident & health $290,009 $178,561 61.6% $240,070 $149,251 62.2% Diversified financial products 123,562 59,112 47.8 23,102 10,708 46.4 London market account 137,572 73,254 53.2 89,260 45,937 51.5 Aviation 97,536 59,952 61.5 100,960 46,732 46.3 Other specialty lines 57,551 46,632 81.0 22,337 22,581 101.1 ------------------------ ------------------------ 706,230 417,511 59.1 475,729 275,209 57.8 Discontinued lines 32,042 71,141 222.0 29,792 31,282 105.0 ------------------------ ------------------------ Total $738,272 $488,652 66.2% $505,521 $306,491 60.6% HCC Insurance Holdings, Inc. Schedule of Adjustments to the First Three Quarters of 2003 (unaudited) Third Quarter Second Quarter ---------------------------- ---------------------------- Basic Diluted Basic Diluted Earnings Earnings Earnings Earnings Per Per Per Per Amount Share Share Amount Share Share -------- --------- --------- -------- --------- --------- Earnings from continuing operations $37,888 $0.59 $0.58 $33,069 $0.53 $0.52 Effect of adjustment on operations for the quarter (1,985) (0.03) (0.03) (1,694) (0.03) (0.03) Cumulative adjustment -- -- -- -- -- -- -------- --------- --------- -------- --------- --------- Earnings from continuing operations, as adjusted $35,903 $0.56 $0.55 $31,375 $0.50 $0.49 ======== ========= ========= ======== ========= ========= Net earnings, as reported $38,351 $0.60 $0.59 $34,662 $0.55 $0.54 Effect of adjustment on operations for the quarter (1,985) (0.03) (0.03) (1,694) (0.03) (0.02) Cumulative adjustment -- -- -- -- -- -- -------- --------- --------- -------- --------- --------- Net earnings, as adjusted $36,366 $0.57 $0.56 $32,968 $0.52 $0.52 ======== ========= ========= ======== ========= ========= First Quarter ------------------------------------ Basic Diluted Earnings Earnings Per Per Amount Share Share ----------- ----------- ----------- Earnings from continuing operations $29,109 $0.46 $0.46 Effect of adjustment on operations for the quarter (2,618) (0.04) (0.04) Cumulative adjustment (3,890) (0.06) (0.06) ----------- ----------- ----------- Earnings from continuing operations, as adjusted $22,601 $0.36 $0.36 =========== =========== =========== Net earnings, as reported $30,275 $0.48 $0.48 Effect of adjustment on operations for the quarter (2,618) (0.04) (0.04) Cumulative adjustment (3,890) (0.06) (0.06) ----------- ----------- ----------- Net earnings, as adjusted $23,767 $0.38 $0.38 =========== =========== =========== CONTACT: HCC Insurance Holdings, Inc., Houston L. Byron Way, 713-690-7300 The information contained herein shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act. 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 hereunto duly authorized. Dated: February 19, 2004 HCC INSURANCE HOLDINGS, INC. By: /s/ Christopher L. Martin -------------------------------------------- Christopher L. Martin Executive Vice President and General Counsel