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