UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the fiscal year ended December 31, 2010

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 incorporation or organization)	(IRS Employer Identification No.)
13403 Northwest Freeway, Houston, Texas (Address of principal executive offices)	77040-6094 (Zip Code)

(713) 690-7300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Name of each exchange on which registered:
Common Stock, $1.00 par Value	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.  Yes þ     No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ

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 þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

The aggregate market value on June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter) of the voting stock held by non-affiliates of the registrant was approximately $2.8 billion. For purposes of the determination of the above-stated amount, only Directors and executive officers are presumed to be affiliates, but neither the registrant nor any such person concede that they are affiliates of the registrant.

The number of shares outstanding of the registrant’s Common Stock, $1.00 par value, at February 18, 2011 was 114.9 million.

DOCUMENTS INCORPORATED BY REFERENCE:

Information called for in Part III of this Form 10-K is incorporated by reference to the registrant’s definitive Proxy Statement to be filed within 120 days of the close of the registrant’s fiscal year in connection with the registrant’s annual meeting of shareholders.

HCC INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

PART I.
		Page
ITEM 1.	Business	5
ITEM 1A.	Risk Factors	23
ITEM 1B.	Unresolved Staff Comments	32
ITEM 2.	Properties	32
ITEM 3.	Legal Proceedings	32
ITEM 4.	Reserved	32
PART II.
ITEM 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
ITEM 6.	Selected Financial Data	36
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	74
ITEM 8.	Financial Statements and Supplementary Data	75
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	75
ITEM 9A.	Controls and Procedures	75
ITEM 9B.	Other Information	76
PART III.
ITEM 10.	Directors, Executive Officers and Corporate Governance	76
ITEM 11.	Executive Compensation	77
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	77
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	77
ITEM 14.	Principal Accountant Fees and Services	78
PART IV.
ITEM 15.	Exhibits and Financial Statement Schedules	78
SIGNATURES		79

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FORWARD-LOOKING STATEMENTS

This Report on Form 10-K 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 growth of our business and operations, business strategy, competitive strengths, goals, plans, future capital expenditures 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 have an impact on the matters addressed in these forward-looking statements, which could affect our future financial results and performance, including, among other things:

•  the effects of catastrophic losses,

•  the cyclical nature of the insurance business,

•  inherent uncertainties in the loss estimation process, which can adversely impact the adequacy of loss reserves,

•  the impact of the credit market downturn and subprime market exposures,

•  the effects of emerging claim and coverage issues,

•  the effects of extensive governmental regulation of the insurance industry,

•  potential credit risk with brokers,

•  the effects of industry consolidations,

•  our assessment of underwriting risk,

•  our retention of risk, which could expose us to potential losses,

•  the adequacy of reinsurance protection,

•  the ability and willingness of reinsurers to pay balances due us,

•  the occurrence of terrorist activities,

•  our ability to maintain our competitive position,

•  changes in our assigned financial strength ratings,

•  our ability to raise capital and funds for liquidity in the future,

•  attraction and retention of qualified employees,

•  fluctuations in securities markets, including defaults, which may reduce the value of our investment assets, reduce investment income or generate realized investment losses,

•  our ability to successfully expand our business through the acquisition of insurance-related companies,

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•  impairment of goodwill,

•  the ability of our insurance company subsidiaries to pay dividends in needed amounts,

•  fluctuations in foreign exchange rates,

•  failures or constraints of our information technology systems,

•  changes to the country’s health care delivery system,

•  the effects, if any, of climate change, on the risks we insure,

•  change of control, and

•  difficulties with outsourcing relationships.

We describe these risks and uncertainties in greater detail in Item 1A, Risk Factors.

These events or factors 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 that are included in this Report, our inclusion of this information is not a representation by us or any other person that our objectives or plans will be achieved.

Our forward-looking statements speak only at 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.

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As used in this Report, unless otherwise required by the context, the terms “we,” “us” and “our” refer to HCC Insurance Holdings, Inc. and its consolidated subsidiaries and the term “HCC” refers only to HCC Insurance Holdings, Inc. All trade names or trademarks appearing in this Report are the property of their respective holders.

PART I

Item 1.  Business

Business Overview

HCC Insurance Holdings, Inc. is a leading specialty insurer with offices in the United States, the United Kingdom, Spain and Ireland. We underwrite a variety of relatively non-correlated specialty lines of business in more than 180 countries, including property and casualty, accident and health, surety, credit and aviation. Insurance products are marketed through a network of independent agents and brokers, managing general agents and directly to consumers. Our businesses are managed through five underwriting segments and our Investing segment. Our underwriting segments are U.S. Property & Casualty, Professional Liability, Accident & Health, U.S. Surety & Credit and International. Our principal executive offices are located in Houston, Texas.

Since our founding in 1974, we have been consistently profitable, generally reporting annual increases in total revenue and shareholders’ equity. During the five-year period from 2006 – 2010, our gross written premium increased from $2.2 billion to $2.6 billion, an increase of 15%, while net written premium increased 12% from $1.8 billion to $2.0 billion. Our revenue increased from $2.0 billion to $2.3 billion, an increase of 15%. Since December 31, 2006, our shareholders’ equity has increased 61% from $2.1 billion to $3.3 billion and our assets have increased 19% from $7.6 billion to $9.1 billion. Driving the increases in shareholders’ equity are our profitable underwriting results, as indicated by our average GAAP combined ratio of 84.0% for the period 2006 – 2010.

The diversity of our insurance offerings and our consistent underwriting performance have allowed us to maintain financial strength ratings of “AA (Very Strong)” from Standard & Poor’s Corporation (3rd of 21 ratings), “A+ (Superior)” from A.M. Best Company Inc. (2nd of 16 ratings), “AA (Very Strong)” from Fitch Ratings (3rd of 19 ratings), and “A1 (Good Security)” by Moody’s Investors Service, Inc. (5th of 21 ratings) for our major domestic and international insurance companies. These ratings are among the highest within the property and casualty insurance industry, and we believe they provide a competitive advantage in many of our chosen lines of business.

Our Strategy

Our business philosophy is to maximize underwriting profit while managing risk in order to preserve shareholders’ equity, grow book value and maximize earnings. We concentrate our insurance writings in selected specialty lines of business in which we believe we can achieve meaningful underwriting profit. We also rely on our experienced underwriting personnel and our access to and expertise in the reinsurance marketplace to limit or reduce risk. Our business plan is shaped by our underlying business philosophy. As a result, our primary objective is to increase net earnings and grow book value, rather than to grow our market share or our gross written premium.

Key elements of our strategy are further discussed below:

Non-correlated Specialty Lines of Business

We offer over 100 classes of specialty insurance through offices across the United States, in the United Kingdom, Ireland and Spain. The diversity of our product lines provides operational flexibility, which permits us to shift the focus of our insurance underwriting activity among our various lines of business. Shifting our underwriting activity allows us to emphasize more profitable lines of business during periods of

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increased premium rates and de-emphasize less profitable lines during periods of increased competition. We can accomplish these shifts by increasing or decreasing the amount of gross written premium or by adjusting the amount of business reinsured.

While the cycles are different for many of our lines of business, most of them have become more competitive in recent years. However, our underwriting activities remain profitable. During the past several years, we expanded our underwriting activities and increased our retention in lines of business with favorable expected profitability. We were able to accomplish this due to the increased diversification provided by our overall book of business and due to our increased capital strength. These higher retention levels increased our net written and earned premium and have resulted in additional underwriting profit, investment income, net earnings and growth in book value.

Underwriting and Pricing

Integral to our strategy is attracting and retaining professionals with the requisite skill and knowledge to underwrite our diverse specialty product lines. These professionals include industry-leading experts in our chosen specialty lines with the authority to make decisions and quickly respond to our clients’ and brokers’ unique and rapidly changing needs.

Although our underwriters focus deeply on different classes of specialty insurance, our culture and compensation practices promote disciplined underwriting and the generation of underwriting profit above all other measures. Pricing for each product is based on various factors, including premium rates, the availability and cost of reinsurance, policy terms and conditions, and market conditions. Core to our overall underwriting performance is the maintenance of an expense ratio that is substantially lower than our peers. We accomplish this through disciplined expense management and a streamlined management structure.

We write policies with a variety of net limits, which we refer to as:

•  Low limits – less than or equal to $5 million

•  Medium limits – greater than $5 million and up to $10 million

•  Large limits – greater than $10 million

The majority of our business is characterized by low limits, primarily in our U.S. Property & Casualty and Accident & Health segments and in the surety business within our U.S. Surety & Credit segment. However, we do write large limits in our Professional Liability segment, in our U.S. Surety & Credit segment and in various lines in our International segment, including energy, property treaty, surety and credit.

Reinsurance

We purchase reinsurance to limit our net losses from both individual and catastrophic risks. Through reinsurance, we may transfer or cede all or part of the risk we have underwritten to a reinsurance company in exchange for all or part of the premium we received to write the policy. The amount of reinsurance we purchase varies depending on the particular risks inherent in the policies underwritten; the pricing, coverage and terms of the reinsurance; and the competitive conditions within the relevant lines of business.

When we decide to retain more underwriting risk in a particular line of business, we do so with the intention of retaining a greater portion of any underwriting profit. In this regard, we may purchase less proportional or quota share reinsurance, thus accepting more of the risk. However, we may purchase specific excess of loss reinsurance, in which we transfer to reinsurers both premium and losses on a non-proportional basis for individual and catastrophic occurrence risks above a retention point. Additionally, we may obtain facultative reinsurance protection on individual risks. In some cases, we may choose not to purchase reinsurance in a line of business where there has been favorable loss history or our policy limits are relatively low and we determine there is a low likelihood of catastrophe exposure.

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Acquisitions

We have historically accomplished significant growth through the successful acquisition and integration of insurance companies and underwriting agencies, making over 40 acquisitions since becoming a public company in 1974. In recent years, we have also actively recruited and hired new underwriting teams that we believe present opportunities for future profits and expansion of our business. In considering potential acquisitions, we remain disciplined in pursuing those businesses that meet our requirements for return on investment and cultural fit. We expect to continue to acquire complementary businesses and underwriting teams. We believe we can enhance acquired businesses and platforms for new underwriting teams with our infrastructure, ratings and financial strength.

Investments

Our primary objective with respect to our investment portfolio is to preserve and grow HCC’s shareholders’ equity through disciplined investment selection and diversification. We invest substantially all of our available funds in highly-rated fixed income securities, the majority of which are designated as available for sale securities. Our historical investment strategy has been to maximize interest income and yield within our risk tolerance, rather than to maximize total return.

Segment and Geographic Information

Financial information concerning our operations by segment and geographic data is included in “Segment Operations” in Management’s Discussion and Analysis and Note 12, “Segments” to the Consolidated Financial Statements.

Insurance Underwriting Operations

Our insurance operations are managed within our insurance underwriting segments, each of which reports to an HCC executive who is responsible for the segment results. The following provides an overview of each of these segments.

U.S. Property & Casualty Segment

Our U.S. Property & Casualty segment includes specialty lines of insurance such as aviation, small account errors and omissions liability (E&O), public risk, employment practices liability (EPLI), title, residual value, disability, contingency, kidnap and ransom, difference in conditions, occupational accident and brown water marine. The majority of the business is primary coverage and claims are reported and settled on a short to medium-term basis. Business is produced from wholesale and specialty retail brokers, with limited reliance on large national retail operations. A portion of our aviation business is written on a direct to consumer basis.

Key lines of business within this segment are further described below:

Aviation

Aviation insurance has been a core business for us since 1974. In the United States, we are an industry leader, providing customized coverages for both private and commercial aircraft operators, excluding U.S. airlines. Private coverage includes planes ranging in size from small single-engine aircraft to executive jets. In the commercial and special risk segments of the market, we provide expert underwriting knowledge, writing coverage for risks such as air ambulances, vintage war birds, air races and rotor wing aircraft. We also write aviation business in 60 countries around the world, providing insureds with a unique understanding of local markets. We are the lead underwriter on most of the international business we write, which includes complex accounts such as national armed forces, law enforcement agencies and regional airlines.

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E&O

Our E&O business consists of low limit policies. We provide E&O coverage to more than 100 classes of professional service providers, of which architects, engineers and related construction practices represent the largest concentration of insured professionals. Our managing general agencies have provided insurance and risk management services for more than twenty years to these classes. We do not write a material amount of E&O coverage for the legal, medical or accounting professions. Our E&O business is produced through both wholesale and specialty retail brokers and is underwritten on both an admitted and surplus lines basis.

Public Risk

Through acquisition and organic growth, we have become a recognized leader in public risk insurance. This business is underwritten through three locations, which we collectively refer to as HCC Public Risk. We provide insurance and associated risk management services to municipal entities and special districts serving populations of less than 50,000 in the United States.

Other

We write low limit EPLI coverage for small businesses and restaurant franchises with less than 250 employees across the United States. Our risk management services offer clients the opportunity to educate their employees about employment practices in order to and proactively manage potentially volatile employment situations.

As a leader in the contingency market, we provide weather insurance and event cancellation, covering events such as collegiate championships, the All-Star Games, and large musical concerts. We write large limits and purchase significant proportional and excess of loss reinsurance to manage our contingency exposures. We also write kidnap & ransom insurance, providing coverage throughout the world. Our clients have access to our crisis response team that provides in-depth analysis of local dangers and political events. In addition, we are a leading underwriter of specialty disability products, providing coverage of irreplaceable human assets, such as high profile athletes, entertainers and business executives. Since 2004, we have written insurance and reinsurance related to various financial products produced by our own underwriting agency.

Professional Liability Segment

Our Professional Liability segment primarily consists of our directors’ and officers’ (D&O) liability business. In addition, we write related professional liability and crime business coverages, including large account E&O liability, fiduciary liability, fidelity and bankers blanket bonds, and EPLI for some D&O policyholders. The business is written for both U.S.-based and International-based policyholders from our offices in the United States, the United Kingdom and Spain.

Business is written for both public and private companies and for both a large number of commercial classes and financial institution classes. Financial institution classes include investment banks, depository institutions, insurance companies and brokers and investment advisors. We have a dedicated group of underwriters specifically focused on D&O and E&O coverages for investment advisors, including wealth management firms, mutual funds, hedge funds, funds of funds, real estate investment trusts, private real estate funds and private equity partnerships. We refer to the business generated by this group of underwriters as our diversified financial products business.

We write both primary and excess policies. A significant amount of the business is received from major worldwide insurance brokerage companies. A large amount of the public company and financial institution business is large limit that is subject to severity of loss on individual policies, as well as fluctuations in frequency of loss from changes in world-wide business and economic environments. The business written is typically “claims made” policies, which usually have a shorter period of time in which claims can be reported compared to “occurrence liability” policies; however, the nature of the claims results in long periods of time for significant claims to be settled, resulting in this being long-tail business.

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Most of the operations in this segment started in 2002 with our acquisition of a significant underwriting agency. The business is operated with specialized underwriting and claims professionals. Besides the specialization and experience of our employees, HCC’s financial strength ratings help us maintain a competitive position in the business.

Accident & Health Segment

Our Accident & Health segment includes medical stop-loss, short-term domestic and international medical, HMO reinsurance and medical excess coverages, which are written in the United States. The majority of the business covers groups of employees, and claims are reported and settled quickly.

We are a recognized market leader in the specialty accident and health industry. Since our first acquisition in 1996, we have achieved growth primarily through ongoing development of innovative products, as well as numerous acquisitions. As a result of our acquisitions, we have fortified our market position and retained an experienced senior management team. Our specialized product line combined with disciplined underwriting, innovative claims management and cost-efficient operations provides a superior operating margin for this segment.

Key lines of business within this segment are further described below:

Medical Stop-Loss

Medical stop-loss insurance, which provides protection for catastrophic losses to employers that self-fund their employee benefit plans, is the largest line of business in the Accident & Health segment. Medical stop-loss insurance is delivered through brokers, consultants and third party administrators via our five underwriting offices strategically located throughout the United States, allowing us to geographically manage our business. Our highly-trained medical stop-loss claims unit exclusively deals with the complex nature of catastrophic health claims and works closely with employers and their plan administrators to control plan costs.

Other

HMO reinsurance is coverage for high severity claims incurred by Health Maintenance Organizations (HMO). There are over 400 licensed HMOs throughout the United States, and HMO reinsurance is distributed through a network of consultants and brokers working directly with these organizations. Based on our long history of underwriting the HMO market, we have the expertise that allows us to truly underwrite each risk based on its own merits.

International travel accident coverage provides health insurance to travelers while outside the jurisdiction of their primary medical insurance coverage. It includes highly-specialized services designed to accommodate the unique needs of the international traveler. The products are purchased through an Internet portal accessed by brokers, consultants and individuals. In addition, we offer specially designed products for foreign nationals seeking citizenship in the United States and American expatriates returning from foreign service. We have customized systems and the experience to handle the complexities of worldwide health insurance.

U.S. Surety & Credit Segment

Our U.S. Surety & Credit segment conducts business through separate specialty surety underwriting operations and credit underwriting operations, which are further described below:

Surety

The surety business includes contract surety bonds, commercial surety bonds and bail bonds. A large amount of our contract surety book is characterized by relatively small limits and premiums. Significant classes within commercial surety are license and permit bonds, court bonds for fiduciaries as well as appeal bonds, and plug

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and abandonment bonds. Most of our commercial surety bond business is also small limit and small premium business, but in the past two years, we have started a Large Commercial Surety unit and are developing that business. The business is typically received from a large number of independent agents specializing in these coverages or from specialized units of large brokerage companies.

The surety business has lower expected loss ratios and higher expense ratios than most areas of the property and casualty insurance business. The lower expected loss ratios result because the product is a bond that serves as a financial protection to a third party in the event a principal is unable to honor an obligation, rather than an insurance policy that pays on behalf of a policyholder. When a bond is called upon, we often receive subrogation recovery against the loss, including recovery from the bond principal. The higher expense ratios result from higher acquisition expense than in most property and casualty lines and higher underwriting expense. The claims process can be complex, particularly on contract surety claims, and subrogation recovery frequently takes extended periods of time, resulting in the business having a medium tail.

Credit

The credit insurance business provides insurance policies insuring payment for export trade transactions, as well as structured trade transactions. Political risk insurance is also provided, as well as insurance for letters of credit being honored. The business is large limit and large premium business. Underwriting includes credit quality analysis of individual transactions, as well as controlling aggregation of limits by debtor and by country. Potential claims are reported promptly. Claim payments are generally made in a short time horizon, but subrogation recoveries frequently take an extended amount of time, resulting in the business having a medium tail.

International Segment

Our International segment includes energy, property treaty, liability, surety, credit, property (direct and facultative), ocean marine, accident and health and other smaller product lines written from operations in the United Kingdom, Spain and Ireland. A large part of the business is written from our London operations and some of that business is referred to in the insurance industry as a London Market Account. The business is written through our insurance company operations and our Lloyd’s syndicate and is primarily received from the major worldwide insurance brokerage companies.

The energy, property treaty and property lines are exposed to natural peril and other catastrophic occurrences. The underwriting process for these lines includes not only evaluation of individual risks but also aggregations of limits by peril by catastrophe area.

Key lines of business within this segment are further described below:

Energy

We provide cover for insureds involved in all areas of energy, ranging from upstream exploration and production, through midstream storage and transmission, to downstream refining and petrochemical activities. Offshore risks include drilling rigs, production and gathering platforms, and pipelines. Coverages underwritten include physical damage, liability, business interruption and various ancillary coverages. The business is characterized by large limits and large premiums and includes both primary and excess policies. Claims for this business are reported and settled on a medium-term basis.

Property Treaty

In late 2009, we acquired a new underwriting team that provides reinsurance to a variety of clients around the world, offering coverage on a range of products including property catastrophe treaty, property risk and engineering treaty, and property terrorism treaty. The portfolio is approximately 40% derived from North American insurance risks and 60% from international risks. Catastrophe excess of loss business is the largest

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portion of the portfolio, with a focus on high level layers. The business is characterized by large limits, large premiums and short-tail claims reporting and settlement.

Liability

Our liability lines include U.K. professional indemnity and U.K. employers’ liability and public liability coverages. Professional indemnity coverages are focused on small and medium size enterprises and cover a range of professions. The employers’ liability and public liability line provides specialist cover in stand-alone liability business on both a primary and excess basis for a range of professions, including high-risk contactors, manual workers overseas, North American exports and offshore support contractors. The business is characterized by small to medium limits and long-tail claims reporting and settlement.

Surety & Credit

Our surety business specializes in performance bonds for construction companies and also writes customs bonds, pension bonds, environment bonds and auctioneer’s bonds in the United Kingdom and Ireland. The business is written directly with the client or through insurance brokers. Our credit business is written through the U.K. specialist broker market with a focus on the construction sector. The business is characterized by small to medium limits and short-tail claims reporting and settlement.

Other

We write direct and facultative “all risks” property coverage, often with catastrophe exposure, for numerous classes including manufacturing, retail, real estate, hotels and municipalities, with a focus on excess of loss attachment. We provide coverage for both physical damage and business interruption on a worldwide basis to companies ranging in size from small to multinational. We also write “all risks” insurance for major ocean-going vessels, as well as port authority and marine properties around the world.

We provide a diverse range of products for the global accident and health insurance and reinsurance markets. We provide cover for personal injury income, disability protection and medical evacuation expenses. We also reinsure loss of life due to catastrophic events.

Combined Ratios

Combined Ratio — GAAP

An indicator of the underwriting experience of a property and casualty insurance company is its combined ratio. We calculate the GAAP combined ratio using financial data derived from the combined financial statements of our insurance company subsidiaries reported under accounting principles generally accepted in the United States of America (GAAP). Our insurance companies’ GAAP net loss ratios, expense ratios and combined ratios are shown in the following table:

	2010			2009			2008			2007			2006
Net loss ratio		59.4	%		59.7	%		60.4	%		59.6	%		59.2	%
Expense ratio		25.2			24.3			24.7			23.9			23.7
Combined ratio — GAAP *		84.6	%		84.0	%		85.1	%		83.5	%		82.9	%

* The GAAP combined ratio is a combination of the loss ratio (the ratio of loss and loss adjustment expense to net earned premium) and the expense ratio (sum of other expense for each of our insurance segments, divided by the sum of segment revenue for each of our insurance segments).

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Combined Ratio — Statutory

The statutory combined ratio is a combination of the loss ratio (the ratio of loss and loss adjustment expense to net earned premium) and the expense ratio (the ratio of policy acquisition costs and other underwriting expenses, net of ceding commissions, to net written premium). We calculate the statutory combined ratio using financial data derived from the combined financial statements of our insurance company subsidiaries reported in accordance with statutory accounting principles. The differences between statutory financial statements and financial statements prepared in accordance with GAAP vary between domestic and foreign jurisdictions. Our insurance companies’ statutory loss ratios, expense ratios and combined ratios are shown in the following table:

	2010				2009			2008			2007			2006
Loss ratio		59.2	%			60.7	%		60.8	%		60.6	%		60.0	%
Expense ratio		27.2				25.7			24.3			23.9			24.0
Combined ratio — Statutory		86.4	%			86.4	%		85.1	%		84.5	%		84.0	%
Industry average		103.0	%	*		100.7	%		103.9	%		95.7	%		92.5	%

* Estimated by A.M. Best Company, Inc.

The statutory ratio data is not intended to be a substitute for results of operations in accordance with GAAP. We believe including this information is useful to allow a comparison of our operating results with those of other companies in the insurance industry. The source of the industry average is A.M. Best Company, Inc. A.M. Best Company, Inc. reports insurer performance based on statutory financial data to provide more standardized comparisons among individual companies and to provide overall industry performance. This data is not an evaluation directed at investors.

Reserves

Our gross reserves for insurance claims, shown as loss and loss adjustment expense payable on our consolidated balance sheets, consist of reserves for reported claims (referred to herein as case reserves) and reserves for incurred but not reported losses (referred to herein as IBNR). Our IBNR reserves cover potential movement in reported losses, as well as claims that have occurred but have not yet been reported to us. Our net reserves reflect the offset of reinsurance recoverables due to us from third party reinsurers, based upon the contractual terms of our reinsurance agreements. In the normal course of our business, we cede a portion of our premium to domestic and foreign reinsurers through treaty and facultative reinsurance agreements. Although reinsurance does not discharge us from liability to our policyholders, we participate in reinsurance agreements to limit our loss exposure and to protect us against catastrophic losses.

Our recorded reserves represent management’s best estimate of unpaid losses and loss adjustment expenses as of each quarter end. The process of estimating our reserves is inherently uncertain and involves a considerable degree of judgment involving our management review and actuarial processes. Because we provide insurance coverage in specialized lines of business that often lack statistical stability, management considers many factors in determining ultimate losses and reserves. These factors include: 1) actuarial point estimates and the estimated ranges around these estimates, 2) information used to price the applicable policies, 3) historical loss information, where available, 4) public industry data for the product or similar products, 5) an assessment of current market conditions, 6) information on individual claims and 7) information from underwriting and claims personnel. The estimate of our reserves is increased or decreased as more information becomes known about the frequency and severity of losses for individual years. We believe our review process is effective, such that any required changes in reserves are recognized in the period of change as soon as the need for the change is evident.

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The reserving process is intended to reflect the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived trends. We underwrite risks denominated in foreign currencies and maintain the related loss reserves in the respective currencies. Generally, we match these reserves with assets denominated in the same foreign currency, which provides an economic hedge and mitigates the effect on our earnings of exchange rate fluctuations.

Loss development represents an increase or decrease in estimates of ultimate losses related to business written in prior accident years. A redundancy, also referred to as favorable development, means the original ultimate loss estimate was higher than the current estimate. A deficiency, or adverse development, means the current ultimate loss estimate is higher than the original estimate.

Our gross and net loss development triangles, presented below on a GAAP basis, detail the subsequent years’ changes in our loss estimates from our prior loss estimates, based on experience at the end of each succeeding year. The first line of each table shows the gross or net reserves, including the reserve for IBNR, recorded on our balance sheet at the indicated year end. The first section of each table shows, by year, the cumulative amount of losses and loss adjustment expenses paid at the end of each succeeding year. The second section shows the re-estimated reserves in later years for the years indicated. The cumulative redundancy (deficiency) line represents the difference between the latest re-estimated reserves and the originally estimated reserves.

This loss development triangle shows development in our loss and loss adjustment expense as of December 31, 2010 on a gross basis (in thousands):

	2010		2009		2008		2007		2006		2005		2004		2003			2002			2001			2000
Balance sheet reserves		$3,471,858		$3,492,309		$3,415,230		$3,227,080		$3,097,051		$2,813,720		$2,089,199		$1,525,313			$1,158,915			$1,132,258			$944,117
Reserve adjustments from
acquisitions (disposition) of
subsidiaries		—		8,630		33,143		63,572		52,169		28,169		6,617		—			5,587			—			(66,571	)
Adjusted reserves		3,471,858		3,500,939		3,448,373		3,290,652		3,149,220		2,841,889		2,095,816		1,525,313			1,164,502			1,132,258			877,546
Cumulative paid at:
One year later				1,028,627		887,040		902,352		797,217		689,126		511,766		396,077			418,809			390,232			400,279
Two years later						1,460,101		1,305,179		1,260,672		1,077,954		780,130		587,349			548,941			612,129			537,354
Three years later								1,644,497		1,527,443		1,385,011		993,655		772,095			659,568			726,805			667,326
Four years later										1,766,470		1,578,970		1,144,350		866,025			823,760			803,152			720,656
Five years later												1,753,416		1,231,166		1,002,058			886,458			921,920			758,126
Six years later														1,343,027		1,092,558			1,003,780			1,009,049			835,994
Seven years later																1,168,134			1,078,739			1,101,393			924,803
Eight years later																			1,131,265			1,167,307			964,763
Nine years later																						1,202,583			1,025,900
Ten years later																									1,046,143
Re-estimated liability at:
End of year		3,471,858		3,500,939		3,448,373		3,290,652		3,149,220		2,841,889		2,095,816		1,525,313			1,164,502			1,132,258			877,546
One year later				3,484,587		3,357,938		3,218,608		3,058,599		2,838,588		2,125,088		1,641,426			1,287,003			1,109,098			922,080
Two years later						3,300,229		3,076,603		2,942,090		2,727,116		2,118,920		1,666,931			1,393,143			1,241,261			925,922
Three years later								3,005,637		2,789,048		2,644,219		2,031,750		1,690,729			1,464,448			1,384,608			1,099,657
Four years later										2,752,292		2,520,344		2,005,726		1,619,744			1,506,360			1,455,046			1,102,636
Five years later												2,497,274		1,944,406		1,639,621			1,453,674			1,480,193			1,135,143
Six years later														1,937,316		1,617,970			1,467,540			1,433,630			1,137,652
Seven years later																1,602,913			1,463,702			1,462,481			1,079,353
Eight years later																			1,457,092			1,452,706			1,113,971
Nine years later																						1,444,531			1,115,242
Ten years later																									1,061,366
Cumulative redundancy
(deficiency)				$16,352		$148,144		$285,015		$396,928		$344,615		$158,500		($77,600	)		($292,590	)		($312,273	)		($183,820	)

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This loss development triangle shows development in our loss and loss adjustment expense as of December 31, 2010 on a net basis (in thousands):

	2010		2009		2008		2007		2006		2005		2004		2003			2002			2001			2000
Reserve, net of reinsurance		$2,537,772		$2,555,840		$2,416,271		$2,342,800		$2,108,961		$1,533,433		$1,059,283		$705,200			$458,702			$313,097			$249,872
Reserve adjustments from
acquisitions (disposition) of
subsidiaries		—		8,110		31,178		58,775		48,263		26,327		6,263		—			5,587			—			(6,048	)
Adjusted reserves, net of
reinsurance		2,537,772		2,563,950		2,447,449		2,401,575		2,157,224		1,559,760		1,065,546		705,200			464,289			313,097			243,824
Cumulative paid, net of
reinsurance, at:
One year later				763,140		618,699		687,675		556,096		222,336		172,224		141,677			115,669			126,019			102,244
Two years later						1,001,369		940,636		858,586		420,816		195,663		135,623			152,674			131,244			139,659
Three years later								1,177,900		1,013,122		588,659		337,330		124,522			115,214			163,808			118,894
Four years later										1,176,404		702,072		424,308		217,827			88,998			93,405			138,773
Five years later												822,133		495,642		313,315			155,708			59,936			158,935
Six years later														581,418		376,903			242,904			125,311			137,561
Seven years later																442,736			301,828			186,224			194,517
Eight years later																			351,404			236,299			240,590
Nine years later																						270,498			289,353
Ten years later																									310,220
Re-estimated liability, net of
reinsurance, at:
End of year		2,537,772		2,563,950		2,447,449		2,401,575		2,157,224		1,559,760		1,065,546		705,200			464,289			313,097			243,824
One year later				2,541,287		2,393,925		2,319,204		2,130,827		1,553,234		1,090,940		735,678			487,403			306,318			233,111
Two years later						2,339,854		2,229,955		2,020,400		1,526,741		1,090,218		770,497			500,897			338,194			222,330
Three years later								2,172,755		1,921,009		1,438,657		1,084,235		792,099			571,403			366,819			259,160
Four years later										1,888,648		1,369,152		1,043,428		808,261			585,741			418,781			267,651
Five years later												1,347,099		1,018,721		794,740			613,406			453,537			296,396
Six years later														1,018,972		792,896			597,666			462,157			305,841
Seven years later																783,442			602,546			455,279			311,344
Eight years later																			600,667			452,221			307,262
Nine years later																						449,576			317,933
Ten years later																									315,495
Cumulative redundancy (deficiency)				$22,663		$107,595		$228,820		$268,576		$212,661		$46,574		($78,242	)		($136,378	)		($136,479	)		($71,671	)

The redundancies reflected in the above triangles for 2004 through 2009 resulted from the favorable development we recorded in 2007 through 2010, as shown in the following table (in thousands):

	Gross		Net
2010	$	16,352	$	22,663
2009		90,435		53,524
2008		72,044		82,371
2007		90,621		26,397

The majority of this favorable development related to the 2002 – 2007 underwriting years for these products: 1) D&O in our Professional Liability segment, for the 2002 – 2006 underwriting years, 2) U.K. professional indemnity, energy and property (including redundancy on the 2005 and 2008 hurricanes) in our International segment, 3) surety in our U.S. Surety & Credit segment and 4) an assumed quota share program in our U.S. Property & Casualty segment. These changes primarily affected the 2003 – 2008 accident years.

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The deficiencies reflected in the above triangles for 2000 through 2003 resulted primarily from run-off assumed accident and health reinsurance business in our Exited Lines, recorded in 2003 through 2006, as shown in the following table (in thousands):

	Gross		Net
2006	$	15,054	$	25,097
2005		49,775		34,970
2004		127,707		27,326
2003		132,924		28,751

These deficiencies affected the 2001 and prior accident years and were recorded due to our receipt of additional information and our continuing evaluation of reserves on this business. This accident and health business is primarily excess coverage for large losses related to workers’ compensation policies. Losses tend to develop and affect excess covers considerably later than the original loss was incurred, which causes late reporting to us. Additionally, certain primary insurance companies that we reinsured experienced financial difficulties and were liquidated, leaving guaranty funds responsible for administering the business. While we have attempted to anticipate these conditions in setting our reserves, we have only been partially successful and there could be additional development of these reserves in the future. These losses were substantially reinsured, so the net deficiencies are lower than the gross deficiencies.

A large proportion of the net deficiencies discussed above resulted from reinsurance commutations totaling $20.2 million in 2006, $26.0 million in 2005 and $28.8 million in 2003. Commutations can produce adverse prior year development since, under GAAP, any excess of undiscounted reserves assumed over assets received must be recorded as a loss at the time the commutation is completed. Economically, the loss generally represents the discount for the time value of money that will be earned over the payout period of the reserves. Thus, the loss may be recouped as investment income is earned on the assets received.

The following table reconciles our gross reserve liability, presented on a GAAP basis (in thousands):

	2010			2009			2008
Gross reserves for loss and loss adjustment expense payable at beginning of year	$	3,492,309		$	3,415,230		$	3,227,080
Gross reserve additions from acquired businesses		8,630			37,839			32,131
Foreign currency adjustment		(30,054	)		31,844			(102,777	)
Incurred loss and loss adjustment expense:
Provision for loss and loss adjustment expense for claims occurring in current year		1,553,209			1,579,331			1,707,538
Decrease in estimated loss and loss adjustment expense for claims occurring in prior years*		(16,352	)		(90,435	)		(72,044	)
Incurred loss and loss adjustment expense		1,536,857			1,488,896			1,635,494
Loss and loss adjustment expense payments for claims occurring during:
Current year		507,257			594,460			474,346
Prior years		1,028,627			887,040			902,352
Loss and loss adjustment expense payments		1,535,884			1,481,500			1,376,698
Gross reserves for loss and loss adjustment
expense payable at end of year	$	3,471,858		$	3,492,309		$	3,415,230

* Decreases reflect the resolution of losses for an amount other than the original loss reserve, as well as subsequent adjustments of loss reserves.

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The following table reconciles our reserves, net of reinsurance ceded, presented on a GAAP basis (in thousands):

	2010			2009			2008
Net reserves for loss and loss adjustment expense payable at beginning of year	$	2,555,840		$	2,416,271		$	2,342,800
Net reserve additions from acquired businesses		8,110			36,522			29,053
Foreign currency adjustment		(21,127	)		25,067			(82,677	)
Incurred loss and loss adjustment expense:
Provision for loss and loss adjustment expense for claims occurring in current year		1,235,692			1,269,283			1,294,244
Decrease in estimated loss and loss adjustment expense for claims occurring in prior years*		(22,663	)		(53,524	)		(82,371	)
Incurred loss and loss adjustment expense		1,213,029			1,215,759			1,211,873
Loss and loss adjustment expense payments for claims occurring during:
Current year		454,940			519,080			397,103
Prior years		763,140			618,699			687,675
Loss and loss adjustment expense payments		1,218,080			1,137,779			1,084,778
Net reserves for loss and loss adjustment
expense payable at end of year	$	2,537,772		$	2,555,840		$	2,416,271

* Decreases reflect the resolution of losses for an amount other than the original loss reserve, as well as subsequent adjustments of loss reserves.

For additional discussion of our reserve processes and the changes in our loss and loss adjustment expense for 2010, 2009 and 2008, see “Critical Accounting Policies – Reserves” included in Management’s Discussion and Analysis.

Investment Operations

The Investing segment includes our consolidated investment portfolio, as well as the results from these investments, including investment income, investment related expenses, realized investment gains and losses, and other-than-temporary impairment credit losses on investments. We manage and evaluate our investments centrally as we believe this approach maximizes our investment performance and allows our underwriting segment managers to focus solely on the generation of underwriting results.

Our investment objectives are as follows:

•  Preserve and grow our shareholders’ equity,

•  Maximize net investment income on an after-tax basis,

•  Maintain an appropriate liquidity to satisfy the requirements of current operations and insurance reserve obligations,

•  Comply with all applicable regulatory requirements, and

•  Effectively hedge the economic exposures of insurance liabilities in their functional currency.

Our investment policy is determined by our Board of Directors and our Investment and Finance Committee and is reviewed on a regular basis. We engage an independent investment advisor to oversee our investments, based

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on guidelines established by the Investment and Finance Committee, and to make investment recommendations. These guidelines specify the types of permitted investments and the maximum concentration by issuer and by financial rating. The majority of our investment assets are held by our insurance companies. The investment policy for each of our domestic insurance company subsidiaries must comply with applicable state and Federal regulations that prescribe the type, quality and concentration of investments. Investments of our foreign insurance companies must comply with the regulations of their country of domicile.

We invest substantially all of our funds in highly-rated fixed income securities, the majority of which are designated as available for sale securities. We held $5.2 billion and $4.6 billion of fixed income securities at December 31, 2010 and 2009, respectively. At year-end 2010, 99% of our fixed income securities were investment grade, of which 83% were rated AAA or AA. The portfolio has a weighted-average life of 7.5 years and a weighted-average duration of 5.5 years.

For additional discussion about the composition and results of our Investing Segment, see “Investing Segment” included in Management’s Discussion and Analysis.

Corporate & Other

A Corporate & Other category includes operations not related to our segments, including unallocable corporate operating expenses, consolidated interest expense and underwriting results of our Exited Lines of business. The Exited Lines include: 1) accident and health business managed by our underwriting agency, LDG Reinsurance, 2) workers’ compensation, 3) provider excess, 4) Spanish medical malpractice, 5) U.K. motor and 6) film completion bonds. We no longer write the Exited Lines and do not expect to write these product lines in the future.

Enterprise Risk Management

Our Enterprise Risk Management (ERM) process provides us with a structured approach to identify, manage, report and respond to downside risks or threats, as well as business opportunities. This process enables us to assess risks in a more consistent and transparent manner, resulting in improved recognition, management and monitoring of risk. The key objectives of our ERM process are to support our decision making and to promote a culture of risk awareness throughout the organization, thereby allowing us to preserve shareholders’ equity and grow book value.

Our ERM initiative is supported by the Enterprise Risk Oversight Committee of our Board of Directors. Our internal risk management functions are led by a Corporate Vice President of our Enterprise Risk Management Department, who reports to the President and Chief Executive Officer. A Risk Committee that reports to the President and Chief Executive Officer assists the Board in risk assessment.

We use a variety of methods and tools company-wide in our risk assessment and management efforts. Our key methods and tools include: 1) underwriting risk management, where underwriting authority limits are set, 2) natural catastrophe risk management, where a variety of catastrophe modeling techniques, both internal and external, are used to monitor loss exposures, 3) a Reinsurance Security Policy Committee, which is responsible for monitoring reinsurers, reinsurance recoverable balances and changes in a reinsurer’s financial condition, 4) investment risk management, where the Investment and Finance Committee of our Board of Directors provides oversight of our capital and financial resources, and our investment policies, strategies, transactions and investment performance, and 5) the use of outside experts to perform scenario testing, where deemed beneficial. We plan to continue to invest in resources and technology to support our ERM process.

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Regulation

The following is a list of our insurance companies that are subject to regulation:

•  American Contractors Indemnity Company

•  Avemco Insurance Company

•  HCC Europe

•  HCC International Insurance Company

•  HCC Life Insurance Company

•  HCC Reinsurance Company Limited

•  HCC Specialty Insurance Company

•  Houston Casualty Company

•  Houston Casualty Company-London

•  Lloyd’s of London Syndicate 4141

•  Perico Life Insurance Company

•  Pioneer General Insurance Company

•  United States Surety Company

•  U.S. Specialty Insurance Company

The business of insurance is extensively regulated by the government. Our business depends on our compliance with applicable laws and regulations and our ability to maintain valid licenses and approvals for our operations. We devote a significant effort to obtain and maintain our licenses and to comply with the diverse and complex regulatory structure. In all jurisdictions, the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities. Generally, regulatory authorities are vested with broad discretion to grant, renew and revoke licenses and approvals and to implement regulations governing the business and operations of insurers, insurance agents, brokers and third party administrators.

At this time, the insurance business in the United States is regulated primarily by the individual states. Although the extent of the regulation varies, it relates to, among other things: 1) standards of solvency that must be met and maintained, 2) licensing of insurers and their agents, 3) the nature of and limitations on investments, 4) premium rates, 5) restrictions on the size of risks that may be insured under a single policy, 6) reserves and provisions for unearned premium, losses and other obligations, 7) approval of policy forms, 8) regulation of market conduct, as well as other underwriting claim practices and 9) usage of certain methods of accounting for statutory reporting purposes.

State insurance regulations are intended primarily for the protection of policyholders rather than shareholders. The state insurance departments monitor compliance with regulations through periodic reporting procedures and examinations. The quarterly and annual financial reports to the state insurance regulators utilize statutory accounting principles, which are different from the GAAP basis we use in our reports to shareholders. Statutory accounting principles, in keeping with the intent to assure the protection of policyholders, are generally based on a solvency concept, while the GAAP basis is based on a going-concern concept. The state insurance regulators utilize risk-based capital measurements, developed by the National Association of Insurance Commissioners (NAIC), to identify insurance companies that potentially are inadequately capitalized.

In the United States, state insurance regulators classify direct insurance companies and some individual lines of business as “admitted” (also known as licensed) insurance or “non-admitted” (also known as surplus lines) insurance. Surplus lines insurance is offered by non-admitted companies on risks that are not insured in the particular state by admitted companies. All surplus lines insurance is required to be written through licensed surplus lines insurance brokers, who are required to be knowledgeable of and to follow specific state laws prior to placing a risk with a surplus lines insurer. Our insurance companies offer products on both an admitted and surplus lines basis.

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The U.S. state insurance regulations also affect the payment of dividends and other distributions by insurance companies to their shareholders. Generally, insurance companies are limited by these regulations in the payment of dividends above a specified level. Dividends in excess of those thresholds are “extraordinary dividends” and are subject to prior regulatory approval. Many states require prior regulatory approval for all dividends.

Although the U.S. Federal government has not historically regulated the insurance industry, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), enacted in July 2010, expands the federal presence in insurance oversight. The Act’s requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance. This Act also establishes a new Federal Insurance Office within the U.S. Department of the Treasury with powers over all lines of insurance except health insurance, certain long-term care insurance and crop insurance. The Federal Insurance Office is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters, and preempt state insurance measures under certain circumstances.

In the United Kingdom, the Financial Services Authority supervises all securities, banking and insurance businesses, including Lloyd’s of London. The Financial Services Authority oversees compliance with: 1) established periodic auditing and reporting requirements, 2) risk assessment reviews, 3) minimum solvency margins, 4) dividend restrictions, 5) restrictions governing the appointment of key officers, 6) restrictions governing controlling ownership interests and various other requirements. All of our U.K. operations, including Houston Casualty Company-London, are authorized and regulated by the Financial Services Authority.

HCC Europe is domiciled in Spain and operates on the equivalent of an “admitted” basis throughout the European Union. HCC Europe’s primary regulator is the Spanish General Directorate of Insurance and Pension Funds of the Ministry of the Economy and Treasury (Dirección General de Seguros y Fondos de Pensiones del Ministerio de Economía y Hacienda).

The European Union is phasing in a new regulatory regime for the regulation of financial services known as “Solvency II”, which is built on a risk-based approach to setting capital requirements for insurers and reinsurers. It aims to establish a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements. Solvency II is expected to be implemented in 2012, and we will be required to meet its requirements.

The following is a list of our underwriting agencies that are subject to regulation:

•  HCC Specialty

•  HCC Global Financial Products

•  HCC Indemnity Guaranty Agency

•  HCC Underwriting Agency

•  HCC Medical Insurance Services

The jurisdictions in which each underwriting agency operates impose licensing and other requirements. These regulations relate primarily to: 1) licensing as agents, brokers, reinsurance brokers, managing general agents or third party administrators, 2) advertising and business practice rules, 3) contractual requirements, 4) limitations on authority, 5) financial security and 6) record keeping requirements.

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Risk-Based Capital

The NAIC has developed a formula for analyzing insurance companies called risk-based capital. The risk-based capital formula is intended to establish minimum capital thresholds that vary with the size and mix of an insurance company’s business and assets. It is designed to identify companies with capital levels that may require regulatory attention. At December 31, 2010, each of our domestic insurance companies’ total adjusted capital was significantly in excess of the authorized control level risk-based capital.

Insurance Regulatory Information System

The NAIC has developed a rating system, the Insurance Regulatory Information System, primarily intended to assist state insurance departments in overseeing the financial condition of all insurance companies operating within their respective states. The Insurance Regulatory Information System consists of eleven key financial ratios that address various aspects of each insurer’s financial condition and stability. Our insurance companies’ Insurance Regulatory Information System ratios generally fall within the usual prescribed ranges.

Insurance Holding Company Acts

Because we are an insurance holding company, we are subject to the insurance holding company system regulatory requirements of a number of states. Under these regulations, we are required to report information regarding our capital structure, financial condition and management. We are also required to provide prior notice to, or seek the prior approval of, insurance regulatory authorities of certain agreements and transactions between our affiliated companies. These agreements and transactions must satisfy certain regulatory requirements.

Assessments

Many states require insurers licensed to do business in the state to bear a portion of the loss suffered by some insureds as a result of the insolvency of other insurers or to bear a portion of the cost of insurance for “high-risk” or otherwise uninsured individuals. Depending upon state law, insurers can be assessed an amount that is generally limited to between 1% and 2% of premiums written for the relevant lines of insurance in that state. Part of these payments may be recoverable through premium rates, premium tax credits or policy surcharges. Significant increases in assessments could limit the ability of our insurance subsidiaries to recover such assessments through tax credits or other means. In addition, there have been some legislative efforts to limit policy surcharges or repeal the tax offset provisions. We cannot predict the extent to which such assessments may increase or whether there may be limits imposed on our ability to recover or offset such assessments.

Insurance Regulations Concerning Change of Control

Many state insurance regulatory laws contain provisions that require advance approval by state agencies of any change of control of an insurance company that is domiciled or, in some cases, has substantial business in that state. “Control” is generally presumed to exist through the ownership of 10% or more of the voting securities of a domestic insurance company or of any company that controls a domestic insurance company. HCC owns, directly or indirectly, all of the shares of stock of insurance companies domiciled in a number of states. Any purchaser of shares of common stock representing 10% or more of the voting power of our common stock will be presumed to have acquired control of our domestic insurance subsidiaries unless, following application by that purchaser, the relevant state insurance regulators determine otherwise. Any transaction that would constitute a change in control of any of our individual insurance subsidiaries would generally require prior approval by the insurance departments of the states in which the insurance subsidiary is domiciled. Also, one of our insurance subsidiaries is domiciled in the United Kingdom and another in Spain. Insurers in those countries are also subject to change of control restrictions under their individual regulatory frameworks. These requirements may deter or delay possible significant transactions in our common stock or the disposition of our insurance companies to third parties, including transactions which could be beneficial to our shareholders.

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Terrorism Risk Insurance Act

The Federal Terrorism Risk Insurance Act (TRIA) was initially enacted in 2002 for the purpose of ensuring the availability of insurance coverage for certain acts of terrorism, as defined in the TRIA. The Terrorism Risk Insurance Extension Act of 2005 extended TRIA through December 31, 2007. In 2007, the President signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2007 (Reauthorization Act). The Reauthorization Act extends the program through December 31, 2014. A major provision of the Reauthorization Act is the revision of the definition of “Act of Terrorism” to remove the requirement that the act of terrorism be committed by an individual acting on behalf of any foreign person or foreign interest in order to be certified under the Reauthorization Act. The Reauthorization Act requires a $100.0 million loss event to trigger coverage. For program years 2008 – 2014, the Federal government will reimburse 85% of an insurer’s losses in excess of the insurer’s deductible, up to the maximum annual Federal liability of $100.0 billion.

Under the Reauthorization Act, we are required to offer terrorism coverage to our commercial policyholders in certain lines of business, for which we may, when warranted, charge an additional premium. The policyholders may or may not accept such coverage. Our deductible for 2011 is approximately $148.6 million, which we would have to meet before Federal reimbursement would occur.

Legislative Initiatives

In recent years, state legislatures have considered or enacted laws that modify and, in many cases, increase state authority to regulate insurance companies and insurance holding company systems. State insurance regulators are members of the NAIC, which seeks to promote uniformity of and to enhance the state regulation of insurance. In addition, the NAIC and state insurance regulators, as part of the NAIC’s state insurance department accreditation program and in response to new federal laws, have re-examined existing state laws and regulations. Specifically they focused on insurance company investments, issues relating to the solvency of insurance companies, licensing and market conduct issues, streamlining agent licensing and policy form approvals, adoption of privacy rules for handling policyholder information, interpretations of existing laws, the development of new laws and the definition of extraordinary dividends.

In recent years, a variety of measures have been proposed at the federal level to reform the current process of Federal and state regulation of the financial services industries in the United States, which include the banking, insurance and securities industries. These measures, which are often referred to as financial services modernization, have as a principal objective, the elimination or modification of regulatory barriers to cross-industry combinations involving banks, securities firms and insurance companies. Also, the U.S. Federal government has recently expanded its presence in insurance oversight, as a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Although we believe state regulation of the insurance business would likely continue, an additional layer of federal regulation may arise in the future. In addition, some insurance industry trade groups are actively lobbying for legislation that would allow an option for a separate Federal charter for insurance companies. The full extent to which the Federal government could decide to directly regulate the business of insurance has not been determined by lawmakers.

State regulators in many states have initiated or are participating in industry-wide investigations of sales and marketing practices in the insurance industry. Such investigations have resulted in restitution and settlement payments by some companies and criminal charges against some individuals. The investigations have led to changes in the structure of compensation arrangements, the offering of certain products and increased transparency in the marketing of many insurance products.

We do not know at this time the full extent to which these Federal or state legislative or regulatory initiatives will or may affect our operations and no assurance can be given that they would not, if adopted or modified, have a material adverse effect on our business or our results of operations.

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Financial Strength Ratings

Our insurance companies have strong financial strength ratings from Standard & Poor’s Corporation, Fitch Ratings, Moody’s Investors Service, Inc. and A.M. Best Company, Inc., all of which are internationally recognized independent rating agencies. Financial strength ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and are not evaluations directed at investors. Our financial strength ratings for our major domestic and international insurance companies as of December 31, 2010 were as follows:

	Standard	Fitch
	& Poor’s	Ratings	Moody’s	A.M. Best
Domestic insurance companies:
American Contractors Indemnity Company	AA	AA	—	A+
Avemco Insurance Company	AA	AA	—	A+
HCC Life Insurance Company	AA	AA	A1	A+
HCC Specialty Insurance Company	AA	AA	—	A+
Houston Casualty Company	AA	AA	A1	A+
Perico Life Insurance Company	—	AA	—	A+
U.S. Specialty Insurance Company	AA	AA	A1	A+
United States Surety Company	AA	AA	—	A+
International insurance companies:
HCC Europe	AA	—	—	—
HCC International Insurance Company	AA	—	—	—
HCC Reinsurance Company Limited	AA	—	—	—

Employees

At December 31, 2010, we had 1,883 employees. Of this number, 463 were employed by our U.S. Property & Casualty segment, 163 by our Professional Liability segment, 369 by our Accident & Health segment, 299 by our Surety & Credit segment, 377 by our International segment and 212 at the corporate headquarters and elsewhere. We are not a party to any collective bargaining agreement and have not experienced work stoppages or strikes as a result of labor disputes. We consider our employee relations to be good.

Available Information

We maintain an Internet website at www.hcc.com. The reference to our Internet website address in this Report does not constitute the incorporation by reference of the information contained at the website in this Report. We will make available, free of charge through publication on our Internet website, a copy of our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and any current reports on Form 8-K or amendments to those reports, filed with or furnished to the Securities and Exchange Commission (SEC) as soon as reasonably practicable after we have filed or furnished such materials with the SEC.

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Item 1A.  Risk Factors

Risks Relating to our Industry

Because we are a property and casualty insurer, our business may suffer as a result of unforeseen catastrophic losses.

Property and casualty insurers are subject to claims arising from catastrophes. Catastrophic losses have had a significant impact on our historical results. Catastrophes can be caused by various events, including hurricanes, tsunamis, windstorms, earthquakes, hailstorms, explosions, flooding, severe winter weather and fires and may include man-made events, such as terrorist attacks and systemic risks. The incidence, frequency and severity of catastrophes are inherently unpredictable. Some scientists believe that in recent years, changing climate conditions have added to the unpredictability and frequency of natural disasters.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. Catastrophes can cause losses in a variety of our property and casualty lines, and most of our past catastrophe-related claims have resulted from hurricanes and earthquakes; however, we experienced a significant loss as a result of the September 11, 2001 terrorist attack. Most of our exposure to catastrophes comes from our International segment, particularly related to our property and property treaty businesses.

Although we typically purchase reinsurance protection for risks we believe bear a significant level of catastrophe exposure, the nature or magnitude of losses attributed to a catastrophic event or events may result in losses that exceed our reinsurance protection. It is therefore possible that a catastrophic event or multiple catastrophic events could have a material adverse effect on our financial position, results of operations and liquidity.

The insurance and reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates, which could cause our results to fluctuate.

The insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity, as well as periods when shortages of capacity permitted an increase in pricing and, thus, more favorable premium levels. An increase in premium levels is often, over time, offset by an increasing supply of insurance and reinsurance capacity, either by capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which may cause prices to decrease.

Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms and fewer opportunities to underwrite insurance risks, which could have a material adverse effect on our results of operations and cash flows. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance and reinsurance business significantly. These factors may also cause the price of our common stock to be volatile.

Our loss reserves are based on an estimate of our future liability, which may prove to be inadequate.

We maintain loss reserves to cover our estimated liability for unpaid losses and loss adjustment expenses, including legal and other fees, for reported and unreported claims incurred at the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates, which generally involve actuarial projections, are based on our assessment of facts and circumstances then known, as well as estimates of future trends in severity of claims, frequency of claims, judicial theories of liability and other factors. These variables are affected by both internal and external events that could increase our exposure to losses, including changes in claims handling procedures, inflation, climate change, judicial trends, and legislative changes.

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Recent events, such as the subprime credit issues, volatility in the financial markets, the economic downturn and decline in the equity markets, may result in an increase in the number of claims and the severity of the claims reported, particularly in lines of business such as directors’ and officers’ liability, errors and omissions liability and trade credit insurance. Many of these items are not directly quantifiable in advance. Additionally, there may be a significant reporting delay between the occurrence of the insured event and the time it is reported to us.

The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled. Adjustments to our loss and loss adjustment expenses are reflected in our results of operations in the periods in which such estimates are changed. Because setting reserves is inherently uncertain, there can be no assurance that current reserves will prove adequate in light of subsequent events, particularly in volatile economic times and the often related changes in behavior of claimants and policyholders, including an increase in fraudulent reporting of exposures and/or losses, reduced maintenance of insured properties or increased frequency of small claims. If actual claims prove to be greater than our reserves, our financial position, results of operations and liquidity may be materially adversely affected.

We may be impacted by claims relating to credit market downturns and subprime insurance exposures.

We write corporate directors’ and officers’ liability, errors and omissions liability and other insurance coverages for financial institutions and financial services companies. We also write trade credit business for policyholders who have credit and political risk. The volatility and downturn in the financial markets in the past several years has had an impact on this part of the industry. As a result, this part of the industry has been the subject of heightened scrutiny and, in some cases, investigations by regulators with respect to the industry’s actions. These events may give rise to increased claims litigation, including class action suits, which may involve our insureds. To the extent that the frequency or severity of claims relating to these events exceeds our current estimates used for establishing reserves, it could increase our exposure to losses from such claims and could have a material adverse effect on our financial condition and results of operations.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended liability for claims and coverage may emerge. These changing conditions may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued, and our financial position and results of operations may be materially adversely affected.

We are subject to extensive governmental regulation.

We are subject to extensive governmental regulation and supervision. Our business depends on compliance with applicable laws and regulations and our ability to maintain valid licenses and approvals for our operations. Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors. In the United States, this regulation is generally administered by departments of insurance in each state in which we do business and includes a comprehensive framework of oversight of our operations and review of our financial position. U.S. Federal legislation may lead to additional federal regulation of the insurance industry in the coming years. Also, foreign governments regulate our international operations. Each foreign jurisdiction has its own unique regulatory framework that applies to our operations in that jurisdiction.

Regulatory authorities have broad discretion to grant, renew or revoke licenses and approvals. Regulatory authorities may deny or revoke licenses for various reasons, including the violation of regulations. In some

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instances, we follow practices based on our interpretations of regulations, or those we believe to be generally followed by the industry, which ultimately may be different from the requirements or interpretations of regulatory authorities. If we do not have the requisite licenses and approvals and do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. That type of action could have a material adverse effect on our results of operations. Also, changes in the level of regulation of the insurance industry (whether federal, state or foreign), or changes in laws or regulations themselves or interpretations by regulatory authorities, could have a material adverse effect on our business.

Virtually all states require insurers licensed to do business in that state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies. In addition, states have from time to time passed legislation that has the effect of limiting the ability of insurers to manage catastrophe risk, such as legislation limiting insurers’ ability to increase rates and prohibiting insurers from withdrawing from catastrophe-exposed areas. The effect of these arrangements could materially adversely affect our results of operations.

Although the U.S. Federal government has not historically regulated the insurance business, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), enacted in July 2010, expands the federal presence in insurance oversight. The Act’s requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance (also known as surplus lines insurance, which is property or casualty insurance written by a company that is not licensed to sell policies of insurance in a given state). This legislation also establishes a new Federal Insurance Office within the U.S. Department of the Treasury with powers over all lines of insurance except health insurance, certain long-term care insurance and crop insurance. The Federal Insurance office is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters and preempt state insurance measures under certain circumstances. As this Act calls for numerous studies and contemplates further regulation, the future impact of the Act on our results of operations or our financial condition cannot be determined at this time.

The European Union is phasing in a new regulatory regime for the regulation of financial services known as “Solvency II”, which is built on a risk-based approach to setting capital requirements for insurers and reinsurers. Solvency II is expected to be implemented in 2012. We could be impacted by the implementation of Solvency II, depending on the costs associated with implementation by each EU country, any increased capital requirements applicable to us, and any costs associated with adjustments to our operations.

Our reliance on brokers subjects us to their credit risk.

In accordance with industry practice, we generally pay amounts owed on claims under our insurance and reinsurance contracts to brokers, and these brokers, in turn, pay these amounts to the clients that have purchased insurance or reinsurance from us. Although the law is unsettled and depends upon the facts and circumstances of the particular case, in some jurisdictions, if a broker fails to make such a payment, we might remain liable to the insured or ceding insurer for the deficiency. Conversely, in certain jurisdictions, when the insured or ceding insurer pays premiums for these policies to brokers for payment over to us, these premiums might be considered to have been paid and the insured or ceding insurer will no longer be liable to us for those amounts, whether or not we have actually received the premiums from the broker. Consequently, we assume a degree of credit risk associated with brokers with whom we transact business. However, due to the unsettled and fact-specific nature of the law, we are unable to quantify our exposure to this risk.

Consolidation in the insurance industry could adversely impact us.

Insurance industry participants may seek to consolidate through mergers and acquisitions. Continued consolidation within the insurance industry will further enhance the already competitive underwriting environment as we would likely experience more robust competition from larger, better capitalized competitors. These

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consolidated entities may use their enhanced market power and broader capital base to take business from us or to drive down pricing, which could adversely affect the results of our operations.

Risks Relating to our Business

Our inability to accurately assess underwriting risk could reduce our net earnings.

Our underwriting success is dependent on our ability to accurately assess the risks associated with the business on which the risk is retained. We rely on the experience of our underwriting staff in assessing these risks. If we fail to assess accurately the risks we retain, we may fail to establish appropriate premium rates and our reserves may be inadequate to cover our losses, which could reduce our net earnings. The underwriting process is further complicated by our exposure to unpredictable developments, including earthquakes, weather-related events and other natural catastrophes, as well as war and acts of terrorism and those that may result from volatility in the financial markets, the economic downturn and systemic risks.

Retentions in various lines of business expose us to potential losses.

We retain risk for our own account on business underwritten by our insurance companies. The determination to reduce the amount of reinsurance we purchase or not to purchase reinsurance for a particular risk or line of business is based on a variety of factors including market conditions, pricing, availability of reinsurance, the level of our capital and our loss history. Such determinations have the effect of increasing our financial exposure to losses associated with such risks or in such lines of business and, in the event of significant losses associated with such risks or lines of business, could have a material adverse effect on our financial position, results of operations and cash flows.

If we are unable to purchase adequate reinsurance protection for some of the risks we have underwritten, we will be exposed to any resulting unreinsured losses.

We purchase reinsurance for a portion of the risks underwritten by our insurance companies, especially volatile and catastrophe-exposed risks. Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase. In addition, the historical results of reinsurance programs and the availability of capital also affect the availability of reinsurance. Our reinsurance facilities are generally subject to annual renewal. We cannot assure that we can maintain our current reinsurance facilities or that we can obtain other reinsurance facilities in adequate amounts and at favorable rates. Further, we cannot determine what effect catastrophic losses will have on the reinsurance market in general and on our ability to obtain reinsurance in adequate amounts and, in particular, at favorable rates. If we are unable to renew or to obtain new reinsurance facilities on acceptable terms, either our net exposures would increase or, if we are unwilling to bear such an increase in exposure, we would have to reduce the level of our underwriting commitments, especially in catastrophe-exposed risks. Either of these potential developments could have a material adverse effect on our financial position, results of operations and cash flows.

If the companies that provide our reinsurance do not pay all of our claims, we could incur severe losses.

We purchase reinsurance by transferring, or ceding, all or part of the risk we have assumed as a direct insurer to a reinsurance company in exchange for all or part of the premium we receive in connection with the risk. Through reinsurance, we have the contractual right to collect the amount reinsured from our reinsurers. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us, the reinsured, of our full liability to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers.

We cannot assure that our reinsurers will pay all of our reinsurance claims, or that they will pay our claims on a timely basis. Additionally, catastrophic losses from multiple direct insurers may accumulate within the more concentrated reinsurance market and result in claims that adversely impact the financial condition of such reinsurers and thus their ability to pay such claims. Further, additional adverse developments in the capital

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markets could affect our reinsurers’ ability to meet their obligations to us. If we become liable for risks we have ceded to reinsurers or if our reinsurers cease to meet their obligations to us, because they are in a weakened financial position as a result of incurred losses or otherwise, our financial position, results of operations and cash flows could be materially adversely affected.

As a direct insurer, we may have significant exposure for terrorist acts.

To the extent that reinsurers have excluded coverage for terrorist acts or have priced such coverage at rates that we believe are not practical, we, in our capacity as a direct insurer, do not have reinsurance protection and are exposed for potential losses as a result of any terrorist acts. To the extent an act of terrorism is certified by the Secretary of Treasury, we may be covered under the Terrorism Risk Insurance Program Reauthorization Act of 2007, for up to 85% of our losses in 2011 up to the maximum amount set out in the Reauthorization Act. However, any such coverage would be subject to a mandatory deductible. Our deductible under the Reauthorization Act during 2011 is approximately $148.6 million.

In some jurisdictions outside of the United States, where we also have exposure to a loss from an act of terrorism, we have limited access to other government programs that may mitigate our exposure. If we become liable for risks that are not covered under the Reauthorization Act, our financial position, results of operations and cash flows could be materially adversely affected. In addition, because this law is relatively new and its interpretation is untested, there may be uncertainty as to how it will be applied to specific circumstances.

We may be unsuccessful in competing against larger or more well-established business rivals.

In our specialty insurance operations, we compete in narrowly-defined niche classes of business such as the insurance of private aircraft (in our U.S. Property & Casualty segment), directors’ and officers’ liability and errors and omissions liability (Professional Liability segment), employer sponsored, self-insured medical plans (Accident & Health segment), and surety (U.S. Surety & Credit and International segments), as distinguished from such general lines of business as automobile or homeowners insurance. We compete with a large number of other companies in our selected lines of business, including: Lloyd’s of London, ACE and XL in our International businesses; American International Group and U.S. Aviation Insurance Group (a subsidiary of Berkshire Hathaway, Inc.) in our aviation line of business; United Health and Symetra Financial Corp. in our Accident & Health businesses; and American International Group, The Chubb Corporation, ACE, St. Paul Travelers and XL in our Professional Liability businesses.

We face competition from specialty insurance companies, standard insurance companies and underwriting agencies, as well as from diversified financial services companies that are larger than we are and that have greater financial, marketing and other resources than we do. Some of these competitors also have longer experience and more market recognition than we do in certain lines of business. Furthermore, due to volatility in the financial markets and the related negative economic impact, the U.S. government has intervened in the operations of some of our competitors, which could lead to increased competition on uneconomic terms in certain of our lines of business. In addition to competition in the operation of our business, we face competition from a variety of sources in attracting and retaining qualified employees. We cannot assure that we will maintain our current competitive position in the markets in which we operate, or that we will be able to expand our operations into new markets. If we fail to do so, our results of operations and cash flows could be materially adversely affected.

If rating agencies downgrade our financial strength ratings, our business and competitive position in the industry may suffer.

Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Our insurance companies are rated by Standard & Poor’s Corporation, Fitch Ratings, Moody’s Investors Service, Inc. and A.M. Best Company, Inc. The financial strength ratings reflect their opinions of an insurance company’s and insurance holding company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders and are not evaluations directed to investors. Our

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ratings are subject to periodic review by those entities, and the continuation of those ratings at current levels cannot be assured. If our ratings are reduced from their current levels, it could affect our ability to compete for high quality business and, thus, our financial position and results of operations could be adversely affected.

We may require additional capital or funds for liquidity in the future, which may not be available or may only be available on unfavorable terms.

Our future capital and liquidity requirements depend on many factors, including our ability to write new business successfully, to establish premium rates and reserves at levels sufficient to cover losses, and to maintain our current line of credit. We may need to raise additional funds through financings or curtail our growth and reduce our assets. Any equity or debt financing, if available at all in periods of stress and volatility in the financial markets, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result and, in any case, such securities may have rights, preferences and privileges that are senior to those of our common stock. If we cannot obtain adequate capital or funds for liquidity on favorable terms or at all, our business, results of operations and liquidity could be adversely affected. We may also be pre-empted from making acquisitions.

Standard & Poor’s Corporation, Fitch Ratings, Moody’s Investors Service, Inc. and A.M. Best Company rate our credit strength. If our credit ratings are reduced, it might significantly impede our ability to raise capital and borrow money, which could materially affect our business, results of operations and liquidity.

We may be unable to attract and retain qualified employees.

We depend on our ability to attract and retain experienced underwriting talent and other skilled employees who are knowledgeable about our business. Certain of our senior underwriters and other skilled employees have employment agreements that are for definite terms, and there is no assurance we will retain these employees beyond the current terms of their agreements. If the quality of our underwriting team and other personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate and be unable to expand our operations into new markets, which could materially adversely affect our business.

We invest a significant amount of our assets in securities that have experienced market fluctuations, which may greatly reduce the value of our investment portfolio, reduce investment income or generate realized investment losses.

At December 31, 2010, $5.2 billion of our $5.7 billion investment portfolio was invested in fixed income securities. The fair value of these fixed income securities and the related investment income fluctuate depending on general economic and market conditions, including the continuing volatility in the market and economy as a whole. For our fixed income securities, the fair value generally increases or decreases in an inverse relationship with fluctuations in interest rates and credit spreads, while net investment income realized by us from future investments in fixed income securities will generally increase or decrease with interest rates. Mortgage-backed and other asset-backed securities may have different net investment income and/or cash flows from those anticipated at the time of investment. These securities have prepayment risk when there is a risk that the timing of cash flows that result from the repayment of principal might occur earlier than anticipated because of declining interest rates or extension risk when cash flows may be received later than anticipated because of rising interest rates.

Although 99% of our portfolio is investment grade, all of our fixed income securities are subject to credit risk. For mortgage-backed securities, credit risk exists if mortgagors default on the underlying mortgages. Notwithstanding the relatively low historical rates of default on many of these obligations, during an economic downturn, our state, municipal and non-U.S. sovereign bond portfolios could be subject to a higher risk of default or impairments due to declining tax bases and revenue. If any of the issuers of our fixed income securities suffer financial setbacks, the ratings on the fixed income securities could fall (with a concurrent fall

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in fair value) and, in a worst case scenario, the issuer could default on its financial obligations. If the issuer defaults, we could have realized losses associated with the impairment of the securities.

The impact of fluctuations in the market prices of securities affects our financial statements. Because the majority of our fixed income securities are classified as available for sale, changes in the fair value of our securities are reflected in our other comprehensive income. Similar treatment is not available for liabilities. Therefore, interest rate fluctuations could adversely affect our financial position. The unrealized pretax net investment gains on our available for sale fixed income securities were $134.6 million, $156.3 million and $14.6 million at December 31, 2010, 2009 and 2008, respectively.

In 2008 and 2009 and continuing in 2010, the financial markets and the economy have been severely affected by various events. This has impacted interest rates and has caused large writedowns in other companies’ financial instruments either due to the market fluctuations or the impact of the events on the debtors’ financial condition. The continuing turmoil in the financial markets and the economy could adversely affect the valuation of our investments and cause us to have to record other-than-temporary impairment losses on our investments, which could have a material adverse effect on our financial position and result of operations.

Our strategy of acquiring other companies for growth may not succeed.

Our strategy for growth includes growing through acquisitions of insurance industry related companies. This strategy presents risks that could have a material adverse effect on our business and financial performance, including:

•  the diversion of our management’s attention,

•  our ability to assimilate the operations and personnel of the acquired companies,

•  the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired companies,

•  the need to expand management, administration and operational systems, and

•  increased competition for suitable acquisition opportunities and qualified employees.

We cannot predict whether we will be able to find suitable acquisition targets, nor can we predict whether we would be able to acquire these additional companies on terms favorable to us or if we will be able to successfully integrate the acquired operations into our business. We do not know if we will realize any anticipated benefits of completed acquisitions or if there will be substantial unanticipated costs associated with new acquisitions. In addition, future acquisitions by us may result in potentially dilutive issuances of our equity securities, the incurrence of additional debt, and/or the recognition of potential impairment of goodwill and other intangible assets. Each of these factors could materially adversely affect our financial position and results of operations.

We are exposed to goodwill impairment risk as part of our business acquisition strategy.

We have recorded goodwill in connection with the majority of our business acquisitions. We are required to perform goodwill impairment tests at least annually and whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result of our annual and other periodic evaluations, we may determine that a portion of the goodwill carrying value needs to be written down to fair value, which could materially adversely affect our financial position and results of operations.

We are an insurance holding company and, therefore, may not be able to receive dividends in needed amounts from our subsidiaries.

Historically, we have had sufficient cash flow from our non-insurance company subsidiaries to meet our corporate cash flow requirements for paying principal and interest on outstanding debt obligations, dividends

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to shareholders and corporate expenses. However, in the future we may rely on dividends from our insurance companies to meet these requirements. The payment of dividends by our insurance companies is subject to regulatory restrictions and will depend on the surplus and future earnings of these subsidiaries, as well as the regulatory restrictions. As a result, should our other sources of funds prove to be inadequate, we may not be able to receive dividends from our insurance companies at times and in amounts necessary to meet our obligations, which could materially adversely affect our financial position and liquidity.

Because we operate internationally, fluctuations in currency exchange rates may affect our receivable and payable balances and our reserves.

We underwrite insurance coverages that are denominated in a number of foreign currencies, and we establish and maintain our loss reserves with respect to these policies in their respective currencies. We hold assets denominated in comparable foreign currencies to economically hedge the foreign currency risk related to these reserves and other liabilities denominated in foreign currencies. Our net earnings could be adversely affected by exchange rate fluctuations if we do not hold offsetting positions. Our principal area of exposure relates to fluctuations in exchange rates between the major European currencies (particularly the British pound sterling and the Euro) and the U.S. dollar. Consequently, a change in the exchange rate between the U.S. dollar and the British pound sterling or the Euro could have a materially adverse effect on our results of operations.

Our information technology systems may fail or suffer a loss of security, which could adversely affect our business.

Our business is highly dependent upon the successful and uninterrupted functioning of our computer systems. We rely on these systems to perform actuarial and other modeling functions necessary for writing business, to process our premiums and policies, to process and make claims payments, and to prepare all of our management and external financial statements and information. The failure of these systems could interrupt our operations. In addition, in the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a computer virus, a terrorist attack or war, our systems may be inaccessible for an extended period of time. These systems failures or disruptions could result in a material adverse effect on our business results.

In addition, a security breach of our computer systems could damage our reputation or result in liability. We retain confidential information regarding our business dealings in our computer systems. We may be required to spend significant capital and other resources to protect against security breaches or to alleviate problems caused by such breaches. It is critical that these facilities and infrastructure remain secure. Despite the implementation of security measures, this infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, we could be subject to liability if hackers were able to penetrate our network security or otherwise misappropriate confidential information.

Recent federal health care reform legislation may lead to changes in the country’s health care delivery system.

The Patient Protection and Affordable Care Act and the related amendments in the Health Care and Education Reconciliation Act, enacted in March 2010, may lead to changes in the country’s health care delivery system. As a result of this legislation, there may be numerous changes in the health care industry, including an increasing percentage of the population that is covered for health care costs. As the Patient Protection and Affordable Care Act contemplates further regulation, we are unable to assess with any certainty the full impact this legislation will have on our business. As a result, it could have a material adverse effect on the volume and profitability of our medical stop-loss, medical excess and short-term medical insurance products.

We cannot predict the effect, if any, climate change may have on the risks we insure.

Various scientists, environmentalists, international organizations, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity

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of natural disasters (including, but not limited to, hurricanes, tornadoes, freezes, other storms and fires) in certain parts of the world. In response to this belief, a number of legal and regulatory measures as well as social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions which may be chief contributors to global climate change.

We cannot predict the impact that changing climate conditions, if any, will have on our results of operations or our financial condition. Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business. However, to the extent climate change does increase the unpredictability, frequency or severity of natural disasters, we may face increased claims, which could have a material adverse effect on our financial position, results of operations and cash flows.

We may not be able to delay or prevent an inadequate or coercive offer for change in control, and regulatory rules and required approvals might delay or deter a favorable change of control.

Our certificate of incorporation and bylaws do not have provisions that could make it more difficult for a third party to acquire a majority of our outstanding common stock. As a result, we may be more susceptible to an inadequate or coercive offer that could result in a change in control than a company whose charter documents have provisions that could delay or prevent a change in control.

Many state insurance regulatory laws contain provisions that require advance approval by state agencies of any change of control of an insurance company that is domiciled or, in some cases, has substantial business in that state. “Control” is generally presumed to exist through the ownership of 10% or more of the voting securities of a domestic insurance company or of any company that controls a domestic insurance company. We own, directly or indirectly, all of the shares of stock of insurance companies domiciled in a number of states. Any purchaser of shares of common stock representing 10% or more of the voting power of our common stock will be presumed to have acquired control of our domestic insurance subsidiaries unless, following application by that purchaser, the relevant state insurance regulators determine otherwise. Any transactions that would constitute a change in control of any of our individual insurance subsidiaries would generally require prior approval by the insurance departments of the states in which the insurance subsidiary is domiciled. Also, one of our insurance subsidiaries is domiciled in the United Kingdom and another in Spain. Insurers in those countries are also subject to change of control restrictions under their individual regulatory frameworks. These requirements may deter or delay possible significant transactions in our common stock or the disposition of our insurance companies to third parties, including transactions that could be beneficial to our shareholders.

If we experience difficulties with outsourcing relationships, our ability to conduct our business might be negatively impacted.

We outsource certain business and administrative functions to third parties and may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third party providers fail to perform as anticipated, we may experience operational difficulties, increased costs and a loss of business that may have a material adverse effect on our results of operations or financial condition. By outsourcing certain business and administrative functions to third parties, we may be exposed to enhanced risk of data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which, in turn, could have a material adverse effect on our results of operations or financial condition.

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Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

Our principal and executive offices are located in Houston, Texas, in buildings owned by Houston Casualty Company. We also maintain offices in approximately 50 locations elsewhere in the United States, the United Kingdom, Spain and Ireland. The majority of these additional locations are in leased facilities.

Our principal office facilities, with more than 25,000 square feet, are as follows:

Segment	Location	Sq. Ft.	Termination date of lease
U.S. Property & Casualty and Corporate headquarters	Houston, Texas	51,000	Owned
U.S. Property & Casualty	Houston, Texas	77,000	Owned
	Mount Kisco, New York	38,000	Owned
	Wakefield, Massachusetts	28,000	February 28, 2017
	Dallas, Texas	28,000	August 31, 2013
	Auburn Hills, Michigan	27,000	May 31, 2012
Accident & Health	Atlanta, Georgia	31,000	December 31, 2011
	Minneapolis, Minnesota	25,000	September 30, 2012
U.S. Surety & Credit	Los Angeles, California	40,000	May 31, 2017
International	London, England	30,000	December 24, 2015

Item 3.  Legal Proceedings

Litigation

We are a party to lawsuits, arbitrations and other proceedings that arise in the normal course of our business. Many of such lawsuits, arbitrations 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, arbitrations and other proceedings that relate to disputes with third parties, or that involve alleged errors and omissions on the part of our subsidiaries. We have provided accruals for these items to the extent we deem the losses probable and reasonably estimable. Although the ultimate outcome of these matters cannot be determined at this time, based on present information, the availability of insurance coverage and advice received from our outside legal counsel, we believe the resolution of any such matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Item 4.  Reserved

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PART II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our common stock trades on the New York Stock Exchange under the ticker symbol “HCC.”

The intra-day high and low sales prices for quarterly periods from January 1, 2009 through December 31, 2010, as reported by the New York Stock Exchange, were as follows:

	2010				2009
	High		Low		High		Low
First quarter	$	29.00	$	26.29	$	26.68	$	20.07
Second quarter		28.10		23.85		27.54		23.02
Third quarter		26.57		24.10		28.81		23.42
Fourth quarter		29.18		25.66		29.01		25.58

On February 18, 2011, the last reported sales price of our common stock as reported by the New York Stock Exchange was $31.90 per share.

Shareholders

We have one class of authorized capital stock: 250.0 million shares of common stock, par value $1.00 per share. On February 18, 2011, there were 120.9 million shares of common stock issued and 114.9 million shares of common stock outstanding held by 680 shareholders of record; however, we estimate there are approximately 62,000 beneficial owners.

Dividend Policy

Cash dividends declared on a quarterly basis in 2010 and 2009 were as follows:

	2010		2009
First quarter	$	0.135	$	0.125
Second quarter		0.135		0.125
Third quarter		0.145		0.135
Fourth quarter		0.145		0.135

Beginning in June 1996, we announced a planned quarterly program of paying cash dividends to shareholders. Our Board of Directors may review our dividend policy from time to time, and any determination with respect to future dividends will be made in light of regulatory and other conditions at that time, including our earnings, financial condition, capital requirements, loan covenants and other related factors. Under the terms of our bank loan facility, we are prohibited from paying dividends in excess of an agreed upon maximum amount in any year. That limitation should not affect our ability to pay dividends in a manner consistent with our past practice and current expectations. While we have no formal dividend policy, we presently intend to continue dividend payments in an amount and frequency consistent with our past practice.

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Issuer Purchases of Equity Securities

On June 20, 2008, our Board of Directors approved the repurchase of up to $100.0 million of common stock. On June 1, 2010, we announced that our Board of Directors approved a new authorization for $300.0 million and cancelled $0.7 million remaining under the original authorization. The net share purchase plan authorizes purchases to be made in the open market or in privately negotiated transactions from time-to-time in compliance with applicable rules and regulations, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended.

Purchases under the plan are subject to market and business conditions, as well as HCC’s level of cash generated from operations, cash required for acquisitions, debt covenant compliance, trading price of the stock being at or below book value, and other relevant factors. The purchase plan does not obligate HCC to purchase any particular number of shares, and may be suspended or discontinued at any time at HCC’s discretion. As of December 31, 2010, we had purchased $133.9 million or 6.0 million shares of our common stock in the open market pursuant to these repurchase programs.

					Total number of shares		Approximate dollar
					purchased as part of		value of shares that may
	Total number of		Average price		publicly announced		yet be purchased under
Period	shares purchased		paid per share		plans or programs		the plans or programs
October 1 - October 31, 2010		—		—		—	$289,027,526
November 1 - November 30, 2010		754,310	$	28.02		754,310	$267,895,507
December 1 - December 31, 2010		90,000	$	28.32		90,000	$265,347,025
Total		844,310				844,310

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Performance Graph

The following graph shows a comparison of cumulative total returns for an investment of $100.00 made on December 31, 2005 in the common stock of HCC Insurance Holdings, Inc., the Standard & Poor’s Composite 1500 Index and the Standard & Poor’s Midcap 400 Index. The graph assumes that all dividends were reinvested.

COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN

Total Return to Shareholders
(includes reinvestment of dividends)

Company / Index	2005		2006		2007		2008		2009		2010
HCC Insurance Holdings, Inc.	$	100.00	$	109.39	$	99.13	$	94.27	$	100.54	$	106.22
S&P Composite 1500 Index		100.00		115.34		121.64		76.97		97.95		113.99
S&P MidCap 400 Index		100.00		110.32		119.12		75.96		104.36		132.16

This performance graph shall not be deemed to be incorporated by reference into our Securities and Exchange Commission filings and should not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

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Item 6.  Selected Financial Data

The selected consolidated financial data set forth below has been derived from the Consolidated Financial Statements. All information contained herein should be read in conjunction with the Consolidated Financial Statements and the related Notes and with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Report.

	Years ended December 31,
	2010			2009			2008			2007		2006
	(in thousands, except per share data)
Statement of earnings data
Revenue
Net earned premium	$	2,041,924		$	2,037,235		$	2,007,774		$	1,985,086	$	1,709,189
Net investment income		203,819			191,965			164,751			206,462		152,804
Other operating income		44,832			82,669			61,985			106,889		146,942
Net realized investment gain (loss)		12,104			12,076			(16,808	)		13,188		(841	)
Other-than-temporary impairment loss
Total loss		(378	)		(6,443	)		(11,133	)		—		—
Portion recognized in other comprehensive income		(47	)		1,014			—			—		—
Net loss recognized in earnings		(425	)		(5,429	)		(11,133	)		—		—
Total revenue		2,302,254			2,318,516			2,206,569			2,311,625		2,008,094
Expense
Loss and loss adjustment expense, net		1,213,029			1,215,759			1,211,873			1,183,947		1,011,856
Policy acquisition costs, net		322,046			308,554			308,587			289,862		252,684
Other operating expense		256,004			259,488			233,509			241,642		222,324
Interest expense		21,348			16,164			20,362			16,270		18,128
Total expense		1,812,427			1,799,965			1,774,331			1,731,721		1,504,992
Earnings before income tax expense		489,827			518,551			432,238			579,904		503,102
Income tax expense		144,731			164,683			130,118			188,351		165,191
Net earnings	$	345,096		$	353,868		$	302,120		$	391,553	$	337,911
Earnings per common share
Basic	$	3.00		$	3.14		$	2.63		$	3.47	$	3.04
Diluted	$	2.99		$	3.11		$	2.61		$	3.35	$	2.89
Weighted average shares outstanding
Basic		113,863			112,200			114,848			112,873		111,309
Diluted		114,077			113,058			115,463			116,997		116,736
Cash dividends declared, per share	$	0.56		$	0.52		$	0.47		$	0.42	$	0.375

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	December 31,
	2010		2009		2008		2007		2006
			(in thousands, except per share data)
Balance sheet data
Total investments	$	5,687,095	$	5,456,229	$	4,804,283	$	4,672,277	$	3,927,995
Premium, claims and other receivables		635,867		600,332		770,823		763,401		864,705
Reinsurance recoverables		1,006,855		1,016,411		1,054,950		956,665		1,169,934
Ceded unearned premium		278,663		270,436		234,375		244,684		226,125
Goodwill		821,648		822,006		858,849		776,046		742,677
Total assets	$	9,064,082	$	8,834,391	$	8,332,000	$	8,074,520	$	7,626,025
Loss and loss adjustment expense payable		3,471,858		3,492,309		3,415,230		3,227,080		3,097,051
Unearned premium		1,045,877		1,044,747		977,426		943,946		920,530
Premium and claims payable		144,495		154,596		405,287		497,974		646,224
Notes payable		298,637		298,483		343,649		319,471		297,574
Shareholders’ equity	$	3,296,432	$	3,031,183	$	2,640,023	$	2,443,695	$	2,050,009
Book value per share*	$	28.67	$	26.58	$	23.27	$	21.24	$	18.35
Shares outstanding		114,968		114,051		113,444		115,069		111,731

* Book value per share is calculated by dividing outstanding shares into total shareholders’ equity.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and related Notes.

Overview

We are a specialty insurance group with offices in the United States, the United Kingdom, Spain and Ireland, underwriting business in approximately 180 countries. Our shares trade on the New York Stock Exchange and closed at $31.90 on February 18, 2011, resulting in market capitalization of $3.7 billion.

We underwrite a variety of relatively non-correlated specialty lines of business, including property and casualty, accident and health, surety, credit and aviation. Insurance products are marketed through a network of independent agents and brokers, managing general agents and directly to consumers. In addition, we assume insurance written by other insurance companies. We manage our businesses through five underwriting segments and our Investing segment. Our underwriting segments are U.S. Property & Casualty, Professional Liability, Accident & Health, U.S. Surety & Credit and International.

Our business philosophy is to maximize underwriting profit while managing risk in order to preserve shareholders’ equity, grow book value and maximize earnings. We concentrate our insurance writings in selected specialty lines of business in which we believe we can achieve meaningful underwriting profit. We also rely on our experienced underwriting personnel and our access to and expertise in the reinsurance marketplace to limit or reduce risk. Our business plan is shaped by our underlying business philosophy. As a result, our primary objective is to increase net earnings and grow book value, rather than to grow our market share or our gross written premium.

Key facts about our consolidated group as of and for the year ended December 31, 2010 are as follows:

•  Our common shares closed at $28.94 per share.

•  We had consolidated shareholders’ equity of $3.3 billion, with a book value per share of $28.67.

•  We generated net earnings of $345.1 million, or $2.99 per diluted share.

•  We produced total revenue of $2.3 billion, of which 89% related to net earned premium and 9% related to net investment income.

•  Our new property treaty business, which is susceptible to catastrophic events and large losses, generated $47.6 million of net earned premium and had a net loss ratio of 58.2%, including catastrophic losses.

•  We recognized gross losses of $44.0 million and net losses, after reinsurance, of $22.5 million from various large losses, mainly in our property treaty business, which are viewed as catastrophic events in the specialty insurance market. The catastrophic net losses increased our net loss ratio and our combined ratio by 1.1 percentage points. In addition, we recognized $31.7 million of gross losses for the Deepwater Horizon rig disaster, for which we had a minimal net loss due to significant facultative and treaty reinsurance.

•  Our net loss ratio, including the catastrophic losses, was 59.4% and our combined ratio was 84.6%.

•  We increased our dividend for the 14th consecutive year and paid $63.2 million of dividends.

•  We purchased $35.1 million of our common stock at an average cost of $26.99 per share. At year-end, we had $265.3 million shares remaining under our $300.0 million share buyback authorization.

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•  We held a total investment portfolio of $5.7 billion, of which $5.2 billion were fixed income securities with an average rating of AA+.

The following sections discuss our key operating results. The reason for any significant variations between 2009 and 2008 are the same as those discussed for variations between 2010 and 2009, unless otherwise noted. Amounts in tables are in thousands, except for earnings per share, percentages, ratios and number of employees.

Reporting Segment Changes

In the third quarter of 2010, our chief executive officer, in the role of chief operating decision maker (CODM), completed the reorganization of HCC’s management structure in order to manage and evaluate the company’s operations from an insurance underwriting perspective, in line with our portfolio of insurance products. We have changed our segment reporting structure to reflect these changes. Previously, we reported our results in the Insurance Company, Agency, and Other Operations segments. We now report our results in the six operating segments identified above, each of which reports to an HCC executive who is responsible for the segment results. See Note 12, “Segments” to the Consolidated Financial Statements for additional discussion of our new reporting segments.

In connection with our resegmentation, we changed the presentation of our consolidated income statement and redefined the calculation of our expense ratio. We previously presented reinsurance ceding commissions that exceeded policy acquisition costs as a component of fee and commission income, within total revenue. We now present all ceding commissions as an offset to policy acquisition costs, within total expense.

We also now present an expense ratio for each reportable segment. All of our expense ratios are calculated using amounts included in our GAAP consolidated financial statements. The formulas are as follows:

•  Consolidated expense ratio – sum of other expense for each of our insurance segments, divided by the sum of segment revenue for each of our insurance segments.

•  Segment expense ratio – segment other expense divided by segment revenue.

Results of Operations

Our results and key metrics for the past three years were as follows:

	2010			2009			2008
Net earnings	$	345,096		$	353,868		$	302,120
Earnings per diluted share	$	2.99		$	3.11		$	2.61
Net loss ratio		59.4	%		59.7	%		60.4	%
Expense ratio		25.2			24.3			24.7
Combined ratio		84.6	%		84.0	%		85.1	%

In 2010, we had $22.7 million of favorable development of our prior years’ net loss reserves, primarily from our: 1) U.K. professional liability business, 2) an assumed quota share contract, 3) aviation and 4) prior years’ hurricanes. We had favorable development of $53.5 million in 2009 and $82.4 million in 2008, primarily from those same lines of businesses, as well as our directors’ and officers’ liability business in 2008. The redundancies in the three-year period primarily related to our 2002 – 2007 underwriting years.

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In late 2009, we began to write property treaty reinsurance business that covers catastrophic risks worldwide. In 2010, we wrote $59.9 million of net premium, which generated $47.6 million of earned premium. This line, which is susceptible to catastrophic events and large losses such as those described in the next paragraph, had a net loss ratio of 58.2% for 2010.

In 2010, we recognized gross losses of $44.0 million from various catastrophic events, the most significant of which was the Chilean earthquake. After reinsurance, our pretax losses were $22.5 million. In 2008, we incurred gross losses of $98.2 million from Hurricanes Gustav and Ike (referred to herein as the 2008 hurricanes). Our 2008 pretax losses after reinsurance were $22.3 million, which included $19.4 million of losses reported in loss and loss adjustment expense and $2.9 million of premiums to reinstate our excess of loss reinsurance protection, which reduced net earned premium.

Over the last three years, we had an average combined ratio below 85%. Our net loss ratios reflected the favorable development and catastrophic losses mentioned above. Our expense ratio represents expenses incurred by our insurance segments. The lower expense ratios in 2009 and 2008 primarily related to the benefit of $10.5 million and $11.9 million, respectively, of profit commissions from reinsurance, which offset our insurance companies’ operating expenses.

These items are discussed in greater detail below and in the following “Segment Operations” section.

Revenue

We generate our revenue from five primary sources:

•  risk-bearing earned premium produced by our underwriting segments,

•  investment income earned on our consolidated investment portfolio by our Investing segment,

•  fee and commission income received from third party insurers for premium produced for them by our underwriting agencies,

•  recurring, but less frequent, transaction-based revenues, primarily related to various financial products in our U.S. Property & Casualty segment, and

•  realized investment gains and losses and other-than-temporary impairment (OTTI) credit losses related to our fixed income securities portfolio.

Total revenue decreased $16.3 million in 2010, compared to 2009, primarily due to lower other operating income, partially offset by increased investment income from growth in our investment portfolio. Other operating income in 2009 included $25.0 million related to dissolution of a reinsurance contract with Mortgage Guarantee Insurance Company (MGIC), which is discussed below. Total revenue increased $111.9 million in 2009, compared to 2008, due to higher net earned premium, increased investment income and the $25.0 million MGIC fee. In addition, there were losses in 2008 on fixed income investments, alternative investments and trading securities, mainly due to the credit crisis.

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Gross written premium, net written premium and net earned premium are detailed below by segment.

	2010		2009		2008
U.S. Property & Casualty	$	538,475	$	603,408	$	619,283
Professional Liability		596,291		639,469		553,941
Accident & Health		761,729		745,035		725,925
U.S. Surety & Credit		226,866		203,522		183,384
International		453,478		337,562		350,449
Exited Lines		2,069		30,795		65,781
Total gross written premium	$	2,578,908	$	2,559,791	$	2,498,763
U.S. Property & Casualty	$	328,821	$	382,807	$	418,344
Professional Liability		401,562		447,080		412,383
Accident & Health		761,373		744,554		725,477
U.S. Surety & Credit		209,373		189,208		175,533
International		324,344		253,060		274,638
Exited Lines		724		29,580		54,243
Total net written premium	$	2,026,197	$	2,046,289	$	2,060,618
U.S. Property & Casualty	$	339,513	$	379,439	$	438,051
Professional Liability		425,226		444,534		361,630
Accident & Health		760,034		741,539		711,297
U.S. Surety & Credit		199,908		182,627		167,914
International		316,186		256,122		269,667
Exited Lines		1,057		32,974		59,215
Total net earned premium	$	2,041,924	$	2,037,235	$	2,007,774

The 2010 growth in premium from our insurance segments occurred primarily in the International segment, directly related to our new property treaty business that we began to write in late 2009. There were offsetting increases and decreases in premium in our other segments, which partially offset the reduction of premium in our Exited Lines. The 2009 growth in premium primarily occurred in the Professional Liability and Accident & Health segments, partially offset by a decrease in premium in our U.S. Property & Casualty and International segments. See the “Segment Operations” section below for further discussion of the relationship and changes in premium revenue within each segment.

Net investment income, which is included in our Investing segment, increased 6% in 2010 and 17% in 2009, primarily due to higher income from fixed income securities. Our fixed income securities portfolio increased 12% in 2010 and 9% in 2009, from $4.3 billion at December 31, 2008 to $4.6 billion at December 31, 2009 and $5.2 billion at December 31, 2010. The growth in fixed income securities resulted primarily from cash flow from operations and reinvestment of funds that were held in short-term investments during 2009 and in alternative investments during 2008. Short-term investment income declined due to lower average short-term investment balances in 2010 and significantly lower short-term market interest rates in 2009 and 2010. In 2008, we experienced $30.8 million of losses on alternative investments (primarily fund-of-fund hedge fund investments), which we redeemed in late 2008 and reinvested in fixed income securities.

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The sources of net investment income are detailed below.

	2010			2009			2008
Fixed income securities
Taxable	$	110,517		$	106,690		$	98,538
Exempt from U.S. income taxes		92,297			82,760			76,172
Total fixed income securities		202,814			189,450			174,710
Short-term investments		900			1,978			17,855
Other		4,344			4,338			(23,873	)
Total investment income		208,058			195,766			168,692
Investment expense		(4,239	)		(3,801	)		(3,941	)
Net investment income	$	203,819		$	191,965		$	164,751

As discussed above under “Reporting Segment Changes”, we made certain changes to our presentation of other operating income in connection with our resegmentation. The table below, which details the components of other operating income, reflects these presentation changes in all periods.

	2010		2009		2008
Fee and commission income	$	30,084	$	43,278	$	52,347
Strategic investments		688		4,538		12,218
Trading securities		—		—		(11,698	)
Financial instruments		8,767		4,703		(608	)
Contract using deposit accounting		—		25,532		2,013
Other		5,293		4,618		7,713
Other operating income	$	44,832	$	82,669	$	61,985

Fee and commission income related to third party agency and broker commissions decreased year-over-year, primarily in our International segment due to reduced brokerage volume following the sale of our U.K. reinsurance broker in late 2009. We sold 100% of the stock of Rattner Mackenzie Limited and realized a loss of $4.7 million, which is included in Other above. Strategic investments included gains of $2.4 million in 2009 and $9.2 million in 2008 related to sales of such investments. In 2008, trading securities included losses from the decline in the market value of these securities, which we sold in late 2008.

The financial instruments line, related to two derivative contracts denominated in British pound sterling, includes the effect of foreign currency fluctuations compared to the U.S. dollar. In 2010, financial instruments also included an $8.0 million gain related to commutation of one of these derivative contracts. In 2009, the contract using deposit accounting included a $25.0 million fee we received for dissolving all of our liability, loss-free, under the MGIC reinsurance contract. This contract provided reinsurance coverage for certain residential mortgage guaranty contracts. We had been recording revenue under this contract using the deposit method of accounting because we determined the contract did not transfer significant underwriting risk. Our $25.0 million fee was partially offset by $9.9 million of expenses for reinsurance and other direct costs, which were included in other operating expense. The income from dissolving the derivative contract and the MGIC contract is included in our U.S. Property & Casualty segment.

Loss and Loss Adjustment Expense

We incur expenses for insurance claims paid or payable to policyholders, as well as the potential liability for incurred but not reported claims, and the expense to adjust and settle all claims (collectively referred to as loss and loss adjustment expense). Our net loss ratio is the percentage of our loss and loss adjustment expense divided by our net earned premium in each year.

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Loss development represents an increase or decrease in estimates of ultimate losses related to business written in prior accident years. Such increases or decreases are recorded as loss and loss adjustment expense in the current reporting year. A redundancy, also referred to as favorable development, means the original ultimate loss estimate was higher than the current estimate. A deficiency, or adverse development, means the current ultimate loss estimate is higher than the original estimate.

The tables below detail our net loss and loss adjustment expense by segment, the amount of development by segment included in our net loss and loss adjustment expense, and the net loss ratio by segment.

	2010			2009			2008
U.S. Property & Casualty	$	191,108		$	201,311		$	241,151
Professional Liability		265,465			276,558			223,229
Accident & Health		556,848			540,917			515,211
U.S. Surety & Credit		52,940			54,618			39,829
International		143,412			94,550			129,429
Exited Lines		3,256			47,805			63,024
Net loss and loss adjustment expense	$	1,213,029		$	1,215,759		$	1,211,873
(Favorable) adverse development:
U.S. Property & Casualty	$	(15,891	)	$	(25,942	)	$	(23,540	)
Professional Liability		9,624			(674	)		(18,675	)
Accident & Health		9,840			3,061			(12,323	)
U.S. Surety & Credit		(7,181	)		(10,497	)		(3,882	)
International		(22,277	)		(30,894	)		(34,804	)
Exited Lines		3,222			11,422			10,853
Total favorable development		(22,663	)		(53,524	)		(82,371	)
Catastrophe losses		22,500			—			19,379
All other net loss and loss adjustment expense		1,213,192			1,269,283			1,274,865
Net loss and loss adjustment expense	$	1,213,029		$	1,215,759		$	1,211,873
U.S. Property & Casualty		56.3	%		53.1	%		55.1	%
Professional Liability		62.4			62.2			61.7
Accident & Health		73.3			72.9			72.4
U.S. Surety & Credit		26.5			29.9			23.7
International		45.4			36.9			48.0
Consolidated net loss ratio		59.4	%		59.7	%		60.4	%

The year-over-year change in our total loss and loss adjustment expense was minimal for the three-year period, although the amount of favorable development declined each year. Our loss and loss adjustment expense included favorable development of $22.7 million in 2010, $53.5 million in 2009 and $82.4 million in 2008. The International segment’s loss and loss adjustment expense increased in 2010 due to estimated losses on premium written for our new property treaty business, combined with the 2010 catastrophe losses. The International segment’s 2009 loss and loss adjustment expense decreased compared to 2008 due to the 2008 hurricanes occurring in that year. See the “Segment Operations” section below for additional discussion of the changes in our loss and loss adjustment expense, development and net loss ratios for each segment.

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Our net paid loss ratio is the percentage of losses paid, net of reinsurance, divided by net earned premium for the year. The table below provides a reconciliation of our consolidated reserves for loss and loss adjustment expense payable, net of reinsurance ceded, the amount of our paid claims, and our net paid loss ratio.

	2010			2009			2008
Net reserves for loss and loss adjustment expense payable at beginning of year	$	2,555,840		$	2,416,271		$	2,342,800
Net reserve additions from acquired businesses		8,110			36,522			29,053
Foreign currency adjustment		(21,127	)		25,067			(82,677	)
Net loss and loss adjustment expense		1,213,029			1,215,759			1,211,873
Net loss and loss adjustment expense payments		(1,218,080	)		(1,137,779	)		(1,084,778	)
Net reserves for loss and loss adjustment expense payable at end of year	$	2,537,772		$	2,555,840		$	2,416,271
Net paid loss ratio		59.7	%		55.8	%		54.0	%

Our net paid loss ratio was higher in 2010, primarily due to a higher amount of claims payments for our directors’ and officers’ liability and medical stop-loss products. In 2009, we commuted certain loss reserves related to the assumed accident and health business included in our Exited Lines for $43.9 million. This commutation had no material effect on net earnings but increased our 2009 net paid loss ratio by 2.1 percentage points.

Policy Acquisition Costs

Policy acquisition costs relate to direct costs we incur to issue insurance policies, including commissions, premium taxes and compensation of our underwriters. The percentage of policy acquisition costs to net earned premium was 15.8% in 2010, 15.1% in 2009 and 15.4% in 2008. The lower percentages in 2009 and 2008 primarily related to reinsurance profit commissions, which are recorded as a reduction of policy acquisition costs, of $1.6 million in 2010, $10.6 million in 2009 and $13.6 million in 2008. In addition, we recorded a $3.8 million premium deficiency reserve in our International segment at year-end 2008, which increased the amount of policy acquisition costs recognized in 2008 and reduced the amount recognized in 2009.

Other Operating Expense

Other operating expense, of which approximately 62% relates to compensation and benefits of our employees, decreased 1% in 2010 and increased 11% in 2009. We had 1,883 employees at December 31, 2010, compared to 1,864 at December 31, 2009 and 2008. In 2009, we sold our U.K. reinsurance broker and our commercial marine agency business, which reduced our other operating expense in 2010. Our other operating expense included $3.0 million in 2010 and $9.9 million in 2009 of direct costs related to dissolving the derivative contract and the MGIC reinsurance contract, respectively, discussed above. In addition, our 2009 other operating expense was higher than 2008 due to compensation and other operating expenses related to businesses acquired in late 2008 and 2009, as well as higher profit-related bonuses for our underwriters. The 2009 expense was partially offset by a $5.6 million benefit from reversal of a reserve for uncollectible reinsurance that was collected. We recognized $1.6 million of expense in 2010, compared to gains of $0.6 million in 2009 and $1.9 million in 2008, related to foreign currency conversion.

Other operating expense included $13.6 million, $16.0 million and $13.7 million in 2010, 2009 and 2008, respectively, of stock-based compensation expense, after the effect of the deferral and amortization of policy acquisition costs related to stock-based compensation for our underwriters. Stock-based compensation expense was lower in 2010 due to the forfeiture of restricted stock grants by former employees and full vesting of certain stock options. In 2010, we granted $25.0 million of restricted stock awards and units, with a weighted-average life of 5.7 years. At December 31, 2010, there was approximately $26.8 million of total unrecognized

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compensation expense related to unvested options and restricted stock awards and units that is expected to be recognized over a weighted-average period of 3.8 years.

Interest Expense

Interest expense on debt and short-term borrowings increased $5.2 million in 2010 and decreased $4.2 million in 2009. During 2008 and 2009, we had $124.7 million of 1.30% Convertible Notes outstanding and we borrowed and repaid our Revolving Loan Facility (the Facility) as needed. In the fourth quarter of 2009, we issued $300.0 million of 6.30% Senior Notes, with an effective interest rate of 6.37%, and redeemed the Convertible Notes and repaid the Facility. Our 2010 interest expense includes $19.3 million for the Senior Notes. The higher interest expense in 2008 primarily related to more borrowings on the Facility at a higher interest rate. Interest on the Facility was based on 30-day LIBOR plus 25 basis points.

Income Tax Expense

Our income taxes are due to U.S. Federal, state, local and foreign jurisdictions. Our effective income tax rate was 29.5% for 2010, compared to 31.8% for 2009 and 30.1% for 2008. The lower effective rate in 2010 related to: 1) a benefit in 2010 from adjusting our tax accruals to the actual amount of taxes paid for 2009, compared to expense in 2009 for a related adjustment of our 2008 tax accruals, 2) the reversal of certain liabilities for uncertain tax positions due to the expiration of various tax statutes and 3) the increased benefit from tax-exempt investment income relative to a lower pretax income base, which also lowered the effective rate in 2008.

Segment Operations

Each of our insurance segments bears risk for insurance coverage written within its portfolio of insurance products. Each segment generates income from premium written by our underwriting agencies, through third party agents and brokers, or on a direct basis. The insurance segments also write facultative or individual account reinsurance, as well as treaty reinsurance business. In some cases, we purchase reinsurance to limit the segments’ net losses from both individual and catastrophic risks. Our segments maintain disciplined expense management and a streamlined management structure, which results in favorable expense ratios. The following provides operational information about our five underwriting segments and our Investing segment.

U.S. Property & Casualty Segment

Our U.S. Property & Casualty segment writes specialty lines of insurance such as aviation, small account errors and omissions liability (E&O), public risk, employment practices liability, title, residual value, disability, contingency, kidnap and ransom, difference in conditions, occupational accident and brown water marine. The products are written through our underwriting agencies, third party agents and brokers, or on a direct basis in the United States. The majority of the business is primary coverage, with reinsurance on certain product lines. Certain products, including aviation, public risk and difference in conditions, have catastrophic exposure. Claims for most products are reported and settled on a short to medium-term basis.

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The following tables summarize the operations of the U.S. Property & Casualty segment.

	2010			2009			2008
Net earned premium	$	339,513		$	379,439		$	438,051
Other revenue		31,201			53,105			24,060
Segment revenue		370,714			432,544			462,111
Loss and loss adjustment expense, net		191,108			201,311			241,151
Other expense		103,229			115,198			119,823
Segment expense		294,337			316,509			360,974
Segment pretax earnings	$	76,377		$	116,035		$	101,137
Net loss ratio		56.3	%		53.1	%		55.1
Expense ratio		27.8			26.6			25.9
Combined ratio		84.1	%		79.7	%		81.0	%
Aviation	$	115,952		$	129,626		$	139,838
E&O		95,275			118,834			126,128
Public Risk		46,409			39,986			25,600
Other		81,877			90,993			146,485
Total net earned premium	$	339,513		$	379,439		$	438,051
Aviation		55.0	%		56.6	%		62.6	%
E&O		79.2			61.5			51.5
Public Risk		61.8			66.3			72.3
Other		28.4			31.2			47.9
Total net loss ratio		56.3	%		53.1	%		55.1	%
Aviation	$	162,539		$	176,073		$	185,786
E&O		81,567			109,163			127,530
Public Risk		64,802			66,176			42,871
Other		229,567			251,996			263,096
Total gross written premium	$	538,475		$	603,408		$	619,283
Aviation	$	110,539		$	124,336		$	136,019
E&O		81,443			109,026			127,177
Public Risk		46,844			48,524			28,553
Other		89,995			100,921			126,595
Total net written premium	$	328,821		$	382,807		$	418,344

The U.S. Property & Casualty segment pretax earnings declined 34% in 2010 primarily due to: 1) lower net earned premium, primarily related to pricing competition and 2) the year-over-year impact of a pretax gain of $5.0 million in 2010 and $15.6 million in 2009 related to the dissolution of two contracts discussed below. Segment earnings increased 15% in 2009 compared to 2008, primarily due to the $15.6 million pretax gain.

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In 2009 and again in 2010, we wrote less premium in most of these product lines due to continued pricing competition in the segment’s markets. In particular, aviation experienced price decreases in its U.S. markets. Our E&O volume also declined as we continued to re-underwrite that product in mid-2009, employing more stringent underwriting criteria in reaction to higher losses. Our public risk premium increased in 2009 due to the acquisition of several small agencies that specialize in public risk insurance in late 2008. Premium grouped in Other, which includes numerous types of specialty insurance products, declined in 2010 and 2009, primarily because we wrote less occupational accident and residual value insurance in 2010 and an assumed quota share contract expired in mid-2008.

The segment’s loss ratios reflect higher 2010 accident year losses, as well as the year-over-year change in loss development. The segment had favorable development of $15.9 million in 2010, compared $25.9 million in 2009 and $23.5 million in 2008. The 2010 favorable development primarily related to an assumed quota share contract that is in runoff, as well as to aviation, public risk and smaller product lines (included in Other). The 2009 and 2008 favorable development primarily related to aviation and the quota share contract. In 2010, E&O experienced higher 2010 accident year losses, as well as adverse development related to the 2006 – 2009 underwriting years. Higher 2009 accident year losses increased aviation’s loss ratio in 2009, compared to 2010. The 2008 hurricanes increased the 2008 loss ratios for aviation, public risk and the quota share contract.

We dissolved our interest in a derivative contract in 2010 and in the MGIC contract in 2009, which generated $5.0 million and $15.6 million, respectively, of pretax earnings in these years. Related to these transactions, we received cash of $8.3 million in 2010 and $25.0 million in 2009, which was included in other revenue, and incurred reinsurance and other direct costs of $3.0 million in 2010 and $9.9 million in 2009, which were included in other expense. These transactions increased the segment’s expense ratio by 0.8 percentage points in 2010 and 2.3 percentage points in 2009. The higher expense ratio in 2010 primarily related to the lower level of earned premium in that year. The segment’s remaining other revenue relates to fee and commission income earned by our agencies from third party insurance companies.

Professional Liability Segment

Our Professional Liability segment includes our directors’ and officers’ (D&O) liability, large account E&O liability, fiduciary liability, fidelity, bankers’ blanket bonds and, for some D&O policyholders, employment practices liability coverage. This business is written in the United States and internationally through our underwriting agencies. Policies provide both primary and excess coverage, are generally long-tailed and may have potential severity. Claims on the D&O excess layers generally take longer to settle than claims in our other segments, due to complex litigation by third parties against our insureds, which form the basis for claims on our policies.

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The following tables summarize the operations of the Professional Liability segment.

	2010			2009				2008
Net earned premium	$	425,226		$	444,534			$	361,630
Other revenue		981			(212	)			(736	)
Segment revenue		426,207			444,322				360,894
Loss and loss adjustment expense, net		265,465			276,558				223,229
Other expense		74,524			59,744				42,186
Segment expense		339,989			336,302				265,415
Segment pretax earnings	$	86,218		$	108,020			$	95,479
Net loss ratio		62.4	%		62.2		%		61.7		%
Expense ratio		17.5			13.4				11.7
Combined ratio		79.9	%		75.6		%		73.4		%
U.S. D&O	$	303,028		$	306,621			$	250,377
International D&O		47,358			59,082				57,366
Other		74,840			78,831				53,887
Total net earned premium	$	425,226		$	444,534			$	361,630
U.S. D&O		60.8	%		62.2		%		61.1		%
International D&O		60.8			53.3				47.8
Other		70.0			68.9				79.6
Total net loss ratio		62.4	%		62.2		%		61.7		%
U.S. D&O	$	388,369		$	426,027			$	347,707
International D&O		97,960			97,977				102,274
Other		109,962			115,465				103,960
Total gross written premium	$	596,291		$	639,469			$	553,941
U.S. D&O	$	288,306		$	316,468			$	279,327
International D&O		39,307			53,952				56,134
Other		73,949			76,660				76,922
Total net written premium	$	401,562		$	447,080			$	412,383

The Professional Liability segment pretax earnings declined 20% in 2010 compared to 2009 due to 1) lower net earned premium, 2) reduced profit commissions from reinsurers, 3) higher operating expenses and 4) the year-over-year effect of loss development. The compound effect of the first three factors caused the 2010 expense ratio to be higher than the 2009 expense ratio. Segment earnings increased 13% in 2009 compared to 2008 due to higher net earned premium, which more than offset the effect of $18.7 million of favorable loss development in 2008, compared to minimal development in 2009.

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Gross written premium decreased 7% in 2010 because we wrote less D&O business in the United States due to pricing competition. Gross written premium increased 15% in 2009, primarily due to increased demand for our policies, as the D&O market reacted to financial issues impacting other insurance companies. We obtained more reinsurance in 2010 for our International business and in 2009 for our U.S. business, in order to continue to offer large limits to insureds.

The segment had $9.6 million of adverse loss development in 2010, minimal development in 2009 and $18.7 million of favorable development in 2008. The 2010 development related to our diversified financial products business, which is included in Other, for the 2005 and 2008 underwriting years. In 2009, for our D&O products, we re-estimated our exposure on the 2004 – 2007 underwriting years. As a result, the International D&O reserves had favorable development, which was substantially offset by adverse development in the U.S. D&O reserves. The 2008 favorable development primarily related to the 2004 – 2006 underwriting years for International D&O, but was substantially offset by an increase in the 2007 underwriting year, primarily for our U.S. D&O business. The loss ratio for the products included in Other was higher in 2008 due to both 2008 accident year losses and adverse development from our diversified financial products business.

The segment generated minimal profit commissions in 2010, compared to $10.5 million in 2009 and $11.9 million in 2008. These profit commissions are reported as a reduction of other expense for segment and consolidated reporting purposes. The effect of these profit commissions decreased the segment’s 2009 and 2008 expense ratios by 2.4 percentage points and 3.3 percentage points, respectively. The higher expense ratio in 2010 related to higher operating costs relative to the lower net earned premium level.

Accident & Health Segment

Our Accident & Health segment includes medical stop-loss, short-term domestic and international medical, HMO reinsurance and medical excess coverages. The products are written in the United States through our underwriting agencies, third party agents and brokers, and an Internet portal. Medical stop-loss, which represents the majority of the segment’s business, provides catastrophic coverage to groups of employees who have primary coverage through employer sponsored self-funded plans. Due to the nature of this business, claims are reported and settled quickly, with minimal catastrophic exposure to us.

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The following tables summarize the operations of the Accident & Health segment.

	2010			2009			2008
Net earned premium	$	760,034		$	741,539		$	711,297
Other revenue		3,875			5,180			5,598
Segment revenue		763,909			746,719			716,895
Loss and loss adjustment expense, net		556,848			540,917			515,211
Other expense		117,308			117,189			110,869
Segment expense		674,156			658,106			626,080
Segment pretax earnings	$	89,753		$	88,613		$	90,815
Net loss ratio		73.3	%		72.9	%		72.4
Expense ratio		15.4			15.7			15.5
Combined ratio		88.7	%		88.6	%		87.9	%
Medical Stop-loss	$	654,335		$	633,572		$	616,900
Other		105,699			107,967			94,397
Total net earned premium	$	760,034		$	741,539		$	711,297
Medical Stop-loss		73.6	%		71.7	%		73.1	%
Other		71.0			80.5			67.8
Total net loss ratio		73.3	%		72.9	%		72.4	%
Medical Stop-loss	$	654,335		$	633,573		$	616,878
Other		107,394			111,462			109,047
Total gross written premium	$	761,729		$	745,035		$	725,925
Medical Stop-loss	$	654,335		$	633,571		$	616,878
Other		107,038			110,983			108,599
Total net written premium	$	761,373		$	744,554		$	725,477

The Accident & Health segment pretax earnings were relatively flat during the three-year period. Segment earnings in 2010 reflected higher net earned premium related to rate increases on our medical stop-loss product to cover the cost of inflation. In addition, our medical stop-loss premium increased in 2010 and 2009 due to the 2008 acquisition of an agency that writes medical stop-loss insurance. We also acquired an agency in 2008 that writes short-term medical insurance, which is reported in Other above. Our short-term medical premium increased in 2010, offset by a reduction related to products in this same category.

The segment had adverse loss development of $9.8 million and $3.1 million in 2010 and 2009, respectively, compared to $12.3 million of favorable development in 2008. The 2010 adverse development primarily related to the 2008 and 2009 underwriting years for our medical excess, short-term medical and HMO reinsurance products. The higher segment loss ratio in 2010 compared to 2009 reflected increased losses in our medical stop-loss product. The 2008 favorable reserve development primarily related to medical stop-loss. The segment’s accident year losses have declined over the past three years.

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U.S. Surety & Credit Segment

Our U.S. Surety & Credit segment includes surety products written in the United States and credit insurance managed in the United States. Our surety book includes contract surety bonds, commercial surety bonds, and bail bonds written by independent agents. Our credit insurance covers payments for export trade and structured trade transactions, political risk insurance and letters of credit. Surety bonds serve as financial protection to a third party in the event a principal is unable to honor an obligation, rather than as an insurance policy that pays on behalf of a policyholder. Claims for surety and credit products are reported quickly, but subrogation recovery frequently takes extended periods of time, resulting in medium-tailed business.

The following tables summarize the operations of the U.S. Surety & Credit segment.

	2010			2009			2008
Net earned premium	$	199,908		$	182,627		$	167,914
Other revenue		580			274			128
Segment revenue		200,488			182,901			168,042
Loss and loss adjustment expense, net		52,940			54,618			39,829
Other expense		109,685			98,518			88,242
Segment expense		162,625			153,136			128,071
Segment pretax earnings	$	37,863		$	29,765		$	39,971
Net loss ratio		26.5	%		29.9	%		23.7
Expense ratio		54.7			53.9			52.5
Combined ratio		81.2	%		83.8	%		76.2	%
Surety	$	160,373		$	147,803		$	140,979
Credit		39,535			34,824			26,935
Total net earned premium	$	199,908		$	182,627		$	167,914
Surety		22.8	%		22.8	%		17.1	%
Credit		41.5			59.9			58.5
Total net loss ratio		26.5	%		29.9	%		23.7	%
Surety	$	171,595		$	159,287		$	144,923
Credit		55,271			44,235			38,461
Total gross written premium	$	226,866		$	203,522		$	183,384
Surety	$	164,764		$	153,479		$	139,677
Credit		44,609			35,729			35,856
Total net written premium	$	209,373		$	189,208		$	175,533

The U.S. Surety & Credit segment pretax earnings increased 27% in 2010 compared to 2009 due to higher net earned premium and favorable accident year loss experience in 2010, partially offset by higher expenses. Segment earnings decreased 26% in 2009 compared to 2008 due to increased losses and substantially higher expenses, which more than offset the increase in net earned premium.

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In early 2009, we purchased a surety insurance company, which increased our written and earned surety premium in 2009. In 2010, increased pricing for commercial surety bonds written by the acquired company contributed to the growth in the 2010 gross written premium. In addition, our large commercial surety team, hired in 2009, wrote more premium in 2010. Our credit premium grew in 2009 and 2010 due to improved market pricing following the 2008 world-wide credit market crisis.

The segment had favorable loss development of $7.2 million in 2010, compared to $10.5 million in 2009 and $3.9 million in 2008. The favorable development was offset by higher accident year losses and lower subrogation in 2010 and 2009, due to the impact of the current economic environment on the construction industry and economic strain on principals on commercial surety bonds. The credit line experienced large losses in 2009 and 2008, due to weak economic conditions in the world credit markets, for which a substantial amount of subrogation was collected in 2010.

Historically, surety bonds and credit insurance have lower net loss ratios and higher expense ratios than other types of property and casualty insurance. The lower net loss ratios reflect the underwriting and claims processes in this business, including collateral drawdowns and subrogation recoveries. The higher expense ratios reflect the additional personnel time and costs required to underwrite these policies and administer claims, as well as higher commission rates paid to agents. The segment’s expense ratio was higher in 2010 compared to 2009 due to additional personnel costs to administer and underwrite the business and handle claims.

International Segment

Our International segment includes energy, property treaty, liability, surety, credit, property (direct and facultative), ocean marine, accident and health and other smaller product lines written outside the United States. Products in this segment are susceptible to catastrophic events and large losses, for which we maintain excess of loss, quota share and facultative reinsurance protection to limit our exposure to such losses. We write this business through our insurance companies in the United Kingdom, Spain and the United States, as well as through our Lloyd’s syndicate. In late 2009, we began writing property treaty business, for which we assume catastrophic risks that are written by other insurance companies. Claims for most products in this segment are reported and settled on a medium-term basis, although certain products are longer-tailed business.

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The following tables summarize the operations of the International segment.

	2010			2009			2008
Net earned premium	$	316,186		$	256,122		$	269,667
Other revenue		7,344			23,518			31,158
Segment revenue		323,530			279,640			300,825
Loss and loss adjustment expense, net		143,412			94,550			129,429
Other expense		120,956			115,342			135,207
Segment expense		264,368			209,892			264,636
Segment pretax earnings	$	59,162		$	69,748		$	36,189
Net loss ratio		45.4	%		36.9	%		48.0	%
Expense ratio		37.4			41.2			44.9
Combined ratio		82.8	%		78.1	%		92.9	%
Energy	$	52,671		$	49,099		$	57,206
Property Treaty		47,594			51			—
Liability		81,887			82,137			94,218
Surety & Credit		69,264			68,162			66,135
Other		64,770			56,673			52,108
Total net earned premium	$	316,186		$	256,122		$	269,667
Energy		22.2	%		25.7	%		43.3	%
Property Treaty		58.2			—			—
Liability		43.3			25.7			40.0
Surety & Credit		41.7			50.9			56.1
Other		61.3			46.1			57.3
Total net loss ratio		45.4	%		36.9	%		48.0	%
Energy	$	106,902		$	98,935		$	97,327
Property Treaty		74,514			284			—
Liability		86,681			87,142			108,026
Surety & Credit		75,106			75,775			75,175
Other		110,275			75,426			69,921
Total gross written premium	$	453,478		$	337,562		$	350,449
Energy	$	53,063		$	49,435		$	57,858
Property Treaty		59,878			284			—
Liability		79,959			78,472			98,262
Surety & Credit		64,847			68,887			65,905
Other		66,597			55,982			52,613
Total net written premium	$	324,344		$	253,060		$	274,638

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The International segment pretax earnings decreased 15% in 2010 compared to 2009 due to higher favorable loss development in 2009, partially offset by underwriting profit on our new property treaty business. Segment earnings almost doubled in 2009, primarily due to the effect of catastrophic losses that reduced 2008 earnings by $15.0 million, and lower operating costs in 2009.

The increase in gross written, net written and net earned premium in 2010, compared to 2009, principally related to our new property treaty business, which we began to write in late 2009. In addition, in 2010, we wrote more short-tail property business (included in Other), which was substantially reinsured.

In 2010, we recognized gross losses of $44.0 million from numerous catastrophic events, the most significant of which was the Chilean earthquake. After reinsurance, our pretax loss was $22.5 million, which primarily impacted our property treaty and property lines. We also recognized gross losses of $31.7 million for the Deepwater Horizon rig disaster in 2010. Due to significant facultative reinsurance, in addition to treaty reinsurance, our pretax net loss was minimal. In 2008, we incurred gross losses of $88.0 million from the 2008 hurricanes. Our 2008 pretax losses after reinsurance were $12.1 million, which primarily impacted our energy and property lines. The catastrophic losses increased the International segment’s net loss ratio by 7.1 percentage points in 2010 and 5.0 percentage points in 2008.

The segment had favorable loss development of $22.3 million in 2010, compared to $30.9 million in 2009 and $34.8 million in 2008. The 2010 development related to the 2006 – 2007 underwriting years for our energy and U.K. professional liability product (included in Liability), as well as the reduction of reserves for the 2005 and 2008 hurricanes (included in Energy). The 2009 development related to energy reserves for the 2005 hurricanes and to our U.K. professional liability product for the 2004 – 2006 underwriting years. The 2008 development related to our U.K. professional liability product and to the 2005 hurricanes. Our surety and credit businesses incurred higher losses in 2009 and 2008 due to weak macro-economic conditions, particularly in the U.K. and Spanish construction markets. Our jewelers block business (included in Other), which we stopped writing in 2010, had losses in 2010 with minimal net earned premium.

Other revenue in 2009 and 2008 included third party agency and broker commissions earned by Rattner Mackenzie Limited (RML), our U.K. reinsurance broker, which we sold in late 2009. The segment’s expense ratio was lower in 2010 compared to 2009 primarily due to the higher volume of net written premium with minimal incremental operating expense. The lower expense ratio in 2009 compared to 2008 related to a partial year of operating expenses for RML in 2009 and the effect of a $3.8 million premium deficiency reserve, recorded at year-end 2008, which also reduced the amount of policy acquisition costs recognized in 2009.

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Investing Segment

Our Investing segment includes our total investment portfolio, as well as all investment income, investment related expenses, realized investment gains and losses, and other-than-temporary impairment credit losses on investments. Our insurance segments generate the cash flow underlying these investments. We manage all investments and evaluate our investment results centrally and, thus, include them in a separate segment for reporting purposes.

The following tables summarize the investment results and key metrics related to our Investing segment.

	2010			2009			2008
Fixed income securities	$	202,814		$	189,450		$	174,710
Short-term investments		900			1,978			17,855
Other investment income		4,344			4,338			(23,873	)
Net realized investment gain (loss)		12,104			12,076			(16,808	)
Other-than-temporary impairment credit losses		(425	)		(5,429	)		(11,133	)
Investment expenses		(4,239	)		(3,801	)		(3,941	)
Segment pretax earnings	$	215,498		$	198,612		$	136,810
Average investments, at cost	$	5,413,762		$	5,071,688		$	4,627,484
Average short-term yield *		0.2	%		0.5	%		3.8	%
Average long-term yield *		4.1	%		4.2	%		4.4	%
Average long-term tax equivalent yield *		5.0	%		5.1	%		5.2	%
Average combined tax equivalent yield *		4.5	%		4.5	%		4.2	%
Weighted-average life of fixed income securities		7.5 years			6.5 years			6.0 years
Weighted-average duration of fixed income securities		5.5 years			4.9 years			4.8 years
Weighted-average combined duration		5.1 years			4.2 years			4.3 years
Weighted-average rating of fixed income securities		AA+			AA+			AA+

* Excluding realized and unrealized gains and losses.

The ratings of our fixed income securities at December 31, 2010 were as follows:

	Available for sale					Held to maturity
	at fair value					at amortized cost
	Amount		%			Amount		%
AAA	$	2,292,166		46	%	$	84,978		44	%
AA		1,896,998		38			28,421		14
A		716,918		14			78,982		41
BBB		57,979		1			1,287		1
BB and below		35,379		1			—		—
Total fixed income securities	$	4,999,440		100	%	$	193,668		100	%

We invest substantially all of our funds in highly-rated fixed income securities, the majority of which are designated as available for sale securities. We held $5.2 billion and $4.6 billion of fixed income securities at December 31, 2010 and 2009, respectively. At year-end 2010, 99% of our fixed income securities were investment grade, of which 83% were rated AAA or AA. The portfolio has a weighted-average life of 7.5 years and a weighted-average duration of 5.5 years.

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This table summarizes our investments by type, substantially all of which are reported at fair value, at December 31, 2010 and December 31, 2009.

	December 31,
	2010					2009
	Amount		%			Amount		%
U.S. government and government agency securities	$	337,260		6	%	$	328,535		6	%
Fixed income securities of states, municipalities and political subdivisions		1,082,057		19			1,059,426		19
Special purpose revenue bonds of states,
municipalities and political subdivisions		1,628,059		29			1,146,334		21
Corporate fixed income securities		683,690		12			693,915		13
Residential mortgage-backed securities		995,108		17			944,182		17
Commercial mortgage-backed securities		145,228		3			146,217		3
Asset-backed securities		12,566		—			14,365		—
Foreign government securities		309,140		5			307,891		6
Short-term investments		488,002		9			810,673		15
Other investments		5,985		—			4,691		—
Total investments	$	5,687,095		100	%	$	5,456,229		100	%

Our total investments increased $230.9 million principally from operating cash flow that we generated during the year, partially offset by a $21.7 million reduction in the unrealized pretax gain associated with our available for sale fixed income securities. During 2010, we substantially reduced our short-term investments, and re-invested the funds in long-term fixed income securities, in order to maximize our investment return. We continue to focus on reducing our holdings of short-term investments, given the extremely low market interest rates on such funds.

The methodologies used to determine the fair value of our investments are described in Note 2, “Fair Value Measurements” to the Consolidated Financial Statements. The fair value of our fixed income securities fluctuates depending on general economic and market conditions, including changing interest rates. As market interest rates and credit spreads increase, the fair value will generally decrease, and as market interest rates and credit spreads decrease, the fair value will generally increase. At December 31, 2010, the net unrealized gain on our available for sale fixed income securities portfolio was $134.6 million, compared to $156.3 million at December 31, 2009. The change in the net unrealized gain or loss, net of the related income tax effect, is recorded in other comprehensive income. Our general policy has been to hold our available for sale fixed income securities through periods of fluctuating interest rates.

The fluctuations in fair value are somewhat muted by the relatively short duration of our portfolio and our relatively high level of investments in state and municipal obligations. We estimate that a 100 basis point increase in market interest rates would decrease the fair value of our fixed income securities by approximately $285.0 million before tax and a 100 basis point decrease in market interest rates would increase the fair value by a like amount. Fluctuations in interest rates have a minimal effect on the value of our short-term investments due to their very short maturities.

A security has an impairment loss when its fair value is less than its cost or amortized cost at the balance sheet date. The gross unrealized losses of individual securities within our available for sale fixed income securities was $35.6 million at December 31, 2010 and $18.9 million at December 31, 2009. We evaluate the securities in our fixed income securities portfolio for possible other-than-temporary impairment losses at each quarter end. See the “Critical Accounting Policies — Other-than-temporary Impairments in Investments” section below for a description of the accounting policies and procedures that we use to determine our other-than-temporary impairment losses. Over the three-year period, we realized $17.0 million of

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other-than-temporary impairment credit losses through pretax earnings, including $0.4 million in 2010, $5.5 million in 2009 and $11.1 million in 2008.

In 2008, we began holding certain bonds in a held to maturity portfolio. This portfolio includes securities, denominated in currencies other than the functional currency of the investing subsidiary, for which we have the ability and intent to hold the securities to maturity or redemption. We hold these securities to hedge the foreign exchange risk associated with insurance claims that we will pay in foreign currencies. The amortized cost of bonds in our held to maturity portfolio was $193.7 million at December 31, 2010 and $102.8 million at December 31, 2009. Any foreign exchange gain/loss on these bonds will be recorded through income and will substantially offset any foreign exchange gain/loss on the related liabilities.

The average long-term tax equivalent yield of our fixed income securities portfolio was 5.0%, 5.1% and 5.2% in 2010, 2009 and 2008, respectively. These yields reflect general declines in market interest rates over this period, partially offset by longer average duration of our new investments. Realized gains and losses from sales of securities are usually minimal, unless we sell securities for investee credit-related reasons, or because we can reinvest the proceeds at a higher effective yield. We recognized net realized investment gains of $12.1 million in 2010 and 2009 and $16.8 million of net realized investment losses in 2008, due to credit market events in that year.

The table below indicates the expected maturity distribution of our fixed income securities at December 31, 2010. In the table, we allocated the maturities of asset-backed maturities and mortgage-backed securities based on the expected future principal payments. The weighted-average life of our asset-backed and mortgage-backed securities is approximately 4.9 years based on expected future cash flows.

						Mortgage-backed and
	Available for sale at					asset-backed at					Held to maturity at					Total fixed income
	amortized cost					amortized cost					amortized cost					securities
	Amount		%			Amount		%			Amount		%			Amount		%
One year or less	$	244,003		7	%	$	38,379		3	%	$	28,648		15	%	$	311,030		6	%
One year to five years		1,065,498		28			493,694		45			158,985		82			1,718,177		34
Five years to ten years		906,340		24			567,632		51			6,035		3			1,480,007		29
Ten years to fifteen years		748,163		20			8,008		1			—		—			756,171		15
More than fifteen years		793,089		21			—		—			—		—			793,089		16
Total fixed income securities	$	3,757,093		100	%	$	1,107,713		100	%	$	193,668		100	%	$	5,058,474		100	%

At December 31, 2010, we held $1.6 billion of special purpose revenue bonds, as well as $1.1 billion of general obligation bonds, which are issued by states, municipalities and political subdivisions and collectively referred to, in the investment market, as municipal bonds. The overall rating of our municipal bonds was AA+ at December 31, 2010. Within our municipal bond portfolio, we held $266.6 million of pre-refunded bonds, which are supported by U.S. government debt obligations. Our special purpose revenue bonds are secured by revenue sources specific to each security. At December 31, 2010, the percentages of our special purpose revenue bond portfolio supported by these major revenue sources were as follows: 1) water and sewer – 24%, 2) education – 17%, 3) transportation – 16%, 4) special tax – 10% and 5) pre-refunded bonds – 8%.

Many of our special purpose revenue bonds are insured by mono-line insurance companies or supported by credit enhancement programs of various states and municipalities. We view bond insurance as credit enhancement and not credit substitution. We base our investment decision on the strength of the issuer. A credit review is performed on each issuer and on the sustainability of the revenue source before we acquire a special purpose revenue bond and periodically, on an ongoing basis, thereafter. The underlying average credit rating of our special purpose revenue bond issuers, excluding any bond insurance, was AA at December 31, 2010. Although recent economic conditions in the United States may reduce the source of revenue to support certain of these securities, the majority are supported by revenue from essential sources, as indicated above, which we believe generate a stable source of revenue.

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At December 31, 2010, we held a portfolio of residential mortgage-backed securities (MBSs) and collateralized mortgage-obligations (CMOs) with a fair value of $995.1 million and a $12.6 million portfolio of asset-backed securities. In our residential MBS/CMO portfolio, $938.9 million, or 94%, of the securities were issued by the Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (GNMA) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which are supported by the U.S. government. For the remaining $56.2 million of securities, 71% are collateralized by prime mortgages. Within our residential MBSs and asset-backed securities, we held $5.9 million of bonds that are collateralized by Alt A and subprime mortgages and have an average rating of BBB+.

At December 31, 2010, we held a commercial MBS securities portfolio with a fair value of $145.2 million, an average rating of AA+ and an average loan-to-value ratio of 75%. We owned no collateralized debt obligations (CDOs) or collateralized loan obligations (CLOs), and we are not counterparty to any credit default swap transactions.

Some of our fixed income securities have call or prepayment options. In addition, mortgage-backed and certain asset-backed securities have prepayment, extension or other market-related credit risk. Calls and prepayments subject us to reinvestment risk should interest rates fall and issuers call their securities and we reinvest the proceeds at lower interest rates. Prepayment risk exists if cash flows from the repayment of principal occurs earlier than anticipated because of declining interest rates. Extension risk exists if cash flows from the repayment of principal occurs later than anticipated because of rising interest rates. Credit risk exists if mortgagees default on the underlying mortgages. Net investment income and/or cash flows from investments that have call or prepayment options and prepayment, extension or credit risk may differ from what was anticipated at the time of investment. We mitigate these risks by investing in investment grade securities with varied maturity dates so that only a portion of our portfolio will mature at any point in time.

Corporate & Other

A Corporate & Other category includes operations not related to our segments, including unallocable corporate operating expenses, consolidated interest expense and underwriting results of our Exited Lines of business. The Exited Lines include: 1) accident and health business managed by our underwriting agency, LDG Reinsurance, 2) workers’ compensation, 3) provider excess, 4) Spanish medical malpractice, 5) U.K. motor and 6) film completion bonds. We no longer write the Exited Lines and do not expect to write these product lines in the future.

The following table summarizes activity in the Corporate & Other category.

	2010			2009			2008
Net earned premium	$	1,057		$	32,974		$	59,215
Other revenue		851			804			1,777
Total revenue		1,908			33,778			60,992
Loss and loss adjustment expense, net		3,256			47,805			63,024
Other expense – Exited Lines		4,899			8,654			8,742
Other expense – Corporate		48,205			54,375			38,152
Interest expense		20,592			15,186			19,237
Total expense		76,952			126,020			129,155
Pretax loss	$	(75,044	)	$	(92,242	)	$	(68,163	)

Net earned premium and losses decreased year-over-year because we sold the renewal rights to provider excess in 2009 and we stopped writing film completion bonds and U.K. motor business in 2009 and 2008, respectively. The Exited Lines had adverse loss development of $3.2 million, $11.4 million and $10.9 million

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in 2010, 2009 and 2008, respectively, mainly in the accident and health, Spanish medical malpractice and U.K. motor businesses. In 2009, we also incurred larger than expected accident year losses on film completion bonds. The Exited Lines continue to incur minimal operating costs, primarily for claims personnel and facilities.

Our Corporate expenses not allocable to the segments decreased $6.2 million in 2010, principally due to lower expense for corporate bonuses, stock-based compensation and the fair value adjustment on two expired interest rate swap agreements. Corporate expenses not allocable to the segments increased $16.2 million in 2009, compared to 2008, primarily due to higher expense related to salaries and bonuses. Our consolidated interest expense increased in 2010 because we issued long-term debt in late 2009 at a higher fixed rate than the floating rate related to our prior line of credit borrowings. Interest expense decreased in 2009 compared to 2008 due to lower borrowings and interest rates on our Revolving Loan Facility.

Liquidity and Capital Resources

Credit market disruptions in recent years have resulted in a tightening of available sources of credit and significant liquidity concerns for many companies. We believe we have sufficient sources of liquidity at a reasonable cost at the present time, based on the following:

•  We held $585.9 million of cash and liquid short-term investments at December 31, 2010, compared to $940.1 million at December 31, 2009. We reinvested a substantial portion of our short-term investments in higher yielding fixed income securities during 2010 to maximize our net investment income. In addition, in early 2010, we used cash held at year-end 2009 to pay the final $64.5 million due for conversion of our 1.3% Convertible Notes.

•  During the three years ended December 31, 2010, we have averaged $501.3 million in cash provided by operating activities.

•  Our available for sale bond portfolio had a fair value of $5.0 billion at December 31, 2010, compared to $4.5 billion at December 31, 2009, and an average rating of AA+. We intend to hold these securities until their maturity, but we would be able to sell securities to generate cash if the need arises.

•  Our insurance companies have sufficient resources to pay potential claims. We project that our insurance companies will pay approximately $1.3 billion of claims in 2011, based on historical payment patterns and claims history. We also project that they will collect approximately $0.3 million of reinsurance recoveries in 2011. These companies have $5.1 billion of short-term investments and available for sale fixed income securities that are available to fund claims payments, if needed, after consideration of expected cash flow from the insurance companies’ 2011 operations.

•  Our long-term debt consists of $300.0 million of unsecured 6.30% Senior Notes due November 15, 2019. Our debt to total capital ratio was 8.3% at December 31, 2010.

•  We have a committed $575.0 million Revolving Loan Facility at a rate of 30-day LIBOR plus 25 basis points that matures December 19, 2011. Letters of credit issued on behalf of certain of our subsidiaries reduce available borrowing capacity under the facility. At December 31, 2010, we had $556.8 million of unused capacity, which we can draw against at any time at our request.

•  We have a $90.0 million Standby Letter of Credit Facility, which is used to guarantee our performance in two Lloyd’s of London syndicates, that expires on December 31, 2014.

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•  Our domestic insurance companies have the ability to pay $183.6 million in dividends to HCC, the parent company, in 2011 without obtaining special permission from state regulatory authorities. Our underwriting agencies have no restrictions on the amount of dividends that can be paid. HCC can utilize these dividends for any purpose, including to pay down debt, pay dividends to shareholders, fund acquisitions, purchase common stock and pay operating expenses.

•  HCC has a short-duration fixed income securities portfolio of $134.3 million and $105.1 million of short-term investments. Cash flow available to HCC in 2011 is expected to be ample to cover the holding company’s required cash disbursements.

•  We have a “Universal Shelf” registration statement that provides for the issuance of an aggregate of $1.0 billion of securities, of which we have $700.0 million of remaining capacity. These securities may be debt securities, equity securities, or a combination thereof. The shelf registration statement provides us the means to access the debt and equity markets relatively quickly, if we are satisfied with the current pricing in the financial market.

Cash Flow

We receive substantial cash from net premiums, ceding commissions on business reinsured, reinsurance recoverables, outward commutations, proceeds from sales and redemptions of investments and investment income. Our principal cash outflows are for the payment of claims and loss adjustment expenses, premium payments to reinsurers, inward commutations, purchases of investments, debt service, policy acquisition costs, operating expenses, taxes, dividends and common stock purchases. Cash provided by operating activities can fluctuate due to timing differences in the collection of premiums and reinsurance recoverables and the payment of losses and premium and reinsurance balances payable and the completion of commutations.

We generated cash from operations of $415.2 million in 2010, $582.8 million in 2009 and $506.0 million in 2008. The components of our net operating cash flows are summarized in the following table.

	2010			2009			2008
Net earnings	$	345,096		$	353,868		$	302,120
Change in premium, claims and other receivables, net of reinsurance, other payables and restricted cash		(16,655	)		(15,186	)		(41,248	)
Change in unearned premium, net		(3,607	)		14,259			43,835
Change in loss and loss adjustment expense payable, net of
reinsurance recoverables		4,625			64,960			89,910
Change in trading securities		—			—			49,091
(Gain) loss on investments		(12,168	)		(3,518	)		49,549
Other, net		97,909			168,414			12,711