10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended June 30, 2010.

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

from                      to                      

Commission file number 001-13790

HCC Insurance Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware	76-0336636
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)
13403 Northwest Freeway, Houston, Texas	77040-6094
(Address of principal executive offices)	(Zip Code)

(713) 690-7300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition 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

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

On July 31, 2010, there were approximately 115.2 million shares of common stock outstanding.

HCC INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

	Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets — June 30, 2010 and December 31, 2009 (unaudited)		5
Condensed Consolidated Statements of Earnings — Six months and three months ended June 30, 2010 and 2009 (unaudited)		6
Condensed Consolidated Statement of Changes in Shareholders’ Equity — Six months ended June 30, 2010 (unaudited)		7
Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2010 and 2009 (unaudited)		8
Notes to Condensed Consolidated Financial Statements (unaudited)		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3. Quantitative and Qualitative Disclosures About Market Risk		43
Item 4. Controls and Procedures		43
Part II. OTHER INFORMATION
Item 1. Legal Proceedings		44
Item 1A. Risk Factors		44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 6. Exhibits		44
Signatures		46
EX-10.2
EX-12
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

2

FORWARD-LOOKING STATEMENTS

This Report on Form 10-Q 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, 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,

• impairment of goodwill,

3

• 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 in our Annual Report on Form 10-K for the year ended December 31, 2009.

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.

4

HCC Insurance Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets
(unaudited, in thousands except per share data)

	June 30,			December 31,
	2010			2009
ASSETS
Investments
Fixed income securities — available for sale, at fair value (amortized cost: 2010 — $4,678,263; 2009 — $4,381,762)	$	4,903,206		$	4,538,073
Fixed income securities — held to maturity, at amortized cost (fair value: 2010 — $174,653; 2009 — $104,008)		172,349			102,792
Short-term investments, at cost, which approximates fair value		476,176			810,673
Other investments		433			4,691
Total investments		5,552,164			5,456,229
Cash		84,162			129,460
Restricted cash and cash investments		159,756			146,133
Premium, claims and other receivables		695,670			600,332
Reinsurance recoverables		1,054,659			1,016,411
Ceded unearned premium		271,783			270,436
Ceded life and annuity benefits		59,480			61,313
Deferred policy acquisition costs		216,988			208,463
Goodwill		821,729			822,006
Other assets		130,028			123,608
Total assets	$	9,046,419		$	8,834,391
LIABILITIES
Loss and loss adjustment expense payable	$	3,528,606		$	3,492,309
Life and annuity policy benefits		59,480			61,313
Reinsurance balances payable		183,631			182,661
Unearned premium		1,069,355			1,044,747
Deferred ceding commissions		68,657			71,595
Premium and claims payable		166,675			154,596
Notes payable		298,560			298,483
Accounts payable and accrued liabilities		472,605			497,504
Total liabilities		5,847,569			5,803,208
SHAREHOLDERS’ EQUITY
Common stock, $1.00 par value; 250,000 shares authorized (shares issued: 2010 — 119,867 and 2009 — 118,724; outstanding: 2010 — 115,144 and 2009 — 114,051)		119,867			118,724
Additional paid-in capital		930,276			914,339
Retained earnings		2,101,047			1,977,254
Accumulated other comprehensive income		147,682			119,665
Treasury stock, at cost (shares: 2010 — 4,723 and 2009 — 4,673)		(100,022	)		(98,799	)
Total shareholders’ equity		3,198,850			3,031,183
Total liabilities and shareholders’ equity	$	9,046,419		$	8,834,391

See Notes to Condensed Consolidated Financial Statements.

5

HCC Insurance Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings
(unaudited, in thousands except per share data)

	Six months ended June 30,					Three months ended June 30,
	2010		2009			2010		2009
REVENUE
Net earned premium	$	1,015,972	$	1,004,366		$	506,385	$	501,978
Fee and commission income		40,168		56,426			19,175		26,132
Net investment income		99,466		93,629			50,217		48,411
Other operating income		11,993		28,419			2,087		5,523
Net realized investment gain		6,840		3,988			2,315		933
Other-than-temporary impairment loss
Total loss		—		(5,709	)		—		(2,596	)
Portion recognized in other comprehensive income		—		755			—		755
Net loss recognized in earnings		—		(4,954	)		—		(1,841	)
Total revenue		1,174,439		1,181,874			580,179		581,136
EXPENSE
Loss and loss adjustment expense, net		625,507		608,136			298,986		292,570
Policy acquisition costs, net		186,344		178,940			93,688		90,248
Other operating expense		129,183		130,524			62,515		61,526
Interest expense		10,627		8,267			5,237		3,628
Total expense		951,661		925,867			460,426		447,972
Earnings before income tax expense		222,778		256,007			119,753		133,164
Income tax expense		68,044		81,252			36,373		41,579
Net earnings	$	154,734	$	174,755		$	83,380	$	91,585
Earnings per common share
Basic	$	1.34	$	1.55		$	0.72	$	0.81
Diluted	$	1.34	$	1.54		$	0.72	$	0.81

See Notes to Condensed Consolidated Financial Statements.

6

HCC Insurance Holdings, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Shareholders’ Equity
(unaudited, in thousands except per share data)

								Accumulated
			Additional					other						Total
	Common		paid-in		Retained			comprehensive			Treasury			shareholders’
	stock		capital		earnings			income			stock			equity
Balance at December 31, 2009	$	118,724	$	914,339	$	1,977,254		$	119,665		$	(98,799	)	$	3,031,183
Comprehensive income
Net earnings		—		—		154,734			—			—			154,734
Other comprehensive income Change in unrealized gain on investments, net of tax		—		—		—			44,237			—			44,237
Other, net of tax		—		—		—			(16,220	)		—			(16,220	)
Total other comprehensive income															28,017
Comprehensive income															182,751
Issuance of 506 shares for exercise of options, including tax effect		506		9,637		—			—			—			10,143
Purchase of 50 common shares		—		—		—			—			(1,223	)		(1,223	)
Stock-based compensation		637		6,300		—			—			—			6,937
Cash dividends declared, $0.27 per share		—		—		(30,941	)		—			—			(30,941	)
Balance at June 30, 2010	$	119,867	$	930,276	$	2,101,047		$	147,682		$	(100,022	)	$	3,198,850

See Notes to Condensed Consolidated Financial Statements.

7

HCC Insurance Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(unaudited, in thousands)

	Six months ended June 30,
	2010			2009
Operating activities
Net earnings	$	154,734		$	174,755
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in premium, claims and other receivables		(79,735	)		(14,383	)
Change in reinsurance recoverables		(60,013	)		(24,117	)
Change in ceded unearned premium		(4,630	)		(25,841	)
Change in loss and loss adjustment expense payable		99,370			97,956
Change in reinsurance balances payable		3,253			35,985
Change in unearned premium		32,541			67,388
Change in premium and claims payable, net of restricted cash		9,127			(59,802	)
Change in accounts payable and accrued liabilities		(15,389	)		7,090
Stock-based compensation expense		6,937			8,906
Depreciation and amortization expense		8,249			7,652
(Gain) loss on investments		(7,329	)		1,924
Other, net		(7,789	)		(15,337	)
Cash provided by operating activities		139,326			262,176
Investing activities
Sales of available for sale fixed income securities		133,856			199,744
Maturity or call of available for sale fixed income securities		260,053			160,470
Maturity or call of held to maturity fixed income securities		25,253			85,991
Cost of available for sale fixed income securities acquired		(703,341	)		(570,529	)
Cost of held to maturity fixed income securities acquired		(96,383	)		(59,580	)
Change in short-term investments		320,927			(160,119	)
Proceeds from sales of strategic and other investments		4,577			97,407
Payments for purchase of businesses, net of cash received		(36,348	)		(32,966	)
Proceeds from sale of subsidiaries		15,278			5,500
Other, net		(9,405	)		(8,916	)
Cash used by investing activities		(85,533	)		(282,998	)
Financing activities
Advances on line of credit		—			105,000
Payments on line of credit		—			(15,032	)
Payments on convertible notes		(64,472	)		—
Sale of common stock		10,143			5,385
Purchase of common stock		(472	)		(35,464	)
Dividends paid		(30,983	)		(28,204	)
Other, net		(13,307	)		(2,596	)
Cash provided (used) by financing activities		(99,091	)		29,089
Net increase (decrease) in cash		(45,298	)		8,267
Cash at beginning of year		129,460			27,347
Cash at end of period	$	84,162		$	35,614

See Notes to Condensed Consolidated Financial Statements.

8

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

(1) General Information

HCC Insurance Holdings, Inc. and its subsidiaries (collectively, we, us or our) include domestic and foreign property and casualty and life insurance companies and underwriting agencies. We provide specialized property and casualty, surety and credit, and group life, accident and health insurance coverages and related agency services to commercial customers and individuals. We market our products both directly to customers and through a network of independent brokers, producers, agents and third party administrators. Our lines of business include diversified financial products (which includes directors’ and officers’ liability, errors and omissions liability (known as professional indemnity outside the U.S.), employment practices liability, surety, credit, and fidelity coverages); group life, accident and health (which includes medical stop-loss, short-term medical, occupational accident, and other coverages); aviation; our London market account (which includes energy, property, property treaty, marine, and accident and health coverages); and other specialty lines of insurance (which includes public entity, U.K. liability, event cancellation, contingency, and other coverages). We operate primarily in the United States, the United Kingdom, Spain and Ireland, although some of our operations have a broader international scope.

Basis of Presentation

Our unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of HCC Insurance Holdings, Inc. and its subsidiaries. We have made all adjustments that, in our opinion, are necessary for a fair statement of results of the interim periods, and all such adjustments are of a normal recurring nature. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009. The condensed consolidated balance sheet at December 31, 2009 was derived from the audited financial statements, but does not include all disclosures required by GAAP.

Management must make estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and in disclosures of contingent assets and liabilities. Ultimate results could differ from those estimates. We have reclassified certain amounts in our 2009 condensed consolidated financial statements to conform to the 2010 presentation. None of our reclassifications had an effect on our consolidated net earnings, shareholders’ equity or cash flows.

Accounting Guidance in 2010

A new accounting standard, originally issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), became effective January 1, 2010. The guidance, which was incorporated into Accounting Standards Codification (ASC) Topic 810, Consolidation, changes various aspects of accounting for and disclosures of interests in variable interest entities. Our adoption of this guidance as of January 1, 2010 had no material impact on our condensed consolidated financial statements.

Effective January 1, 2010, we adopted Accounting Standards Update (ASU) No. 2010-06, which incorporated changes in disclosure requirements into ASC Topic 820, Fair Value Measurements and Disclosures. Where applicable, we have included the additional required disclosures in the notes to our condensed consolidated financial statements.

A new accounting standard, ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, was issued in July 2010. The new guidance expands disclosures related to financing receivables, including the nature of credit risk in financing receivables, how that risk is analyzed in determining the related allowance for credit losses, and changes to the allowance during the reporting period. We will provide the additional required disclosures in our Form 10-K for the year ended December 31, 2010.

Derivative Financial Instruments

At December 31, 2009, we had interests in two long-term mortgage impairment insurance contracts that were denominated in British pound sterling. The exposure with respect to these two contracts was measured based on movement in a specified United Kingdom housing index. In the first quarter of 2010, we commuted our interest in one contract for $8.3 million cash. We recognized a gain of $8.0 million, which is included in other operating income in our condensed consolidated statements of earnings. The remaining contract qualifies as a derivative financial instrument, is unhedged and is reported at fair value in other

9

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

assets in our condensed consolidated balance sheets. We record changes in fair value and any foreign exchange gain/loss on this contract as a component of other operating income.

Goodwill

An indicator of impairment of goodwill exists when the fair value of a reporting unit is less than its carrying amount. We assess our goodwill for impairment annually, or sooner if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We conducted our 2010 goodwill impairment test as of June 30, 2010, which is consistent with the timeframe for our annual assessment in prior years. Based on our latest impairment test, the fair value of each of our reporting units exceeded its carrying amount.

Stock-based Compensation

In the first six months of 2010, we granted the following shares of common stock, restricted stock, restricted stock units and stock options for the purchase of shares of our common stock. For all grants except stock options, we measure fair value based on our closing stock price on the grant date. For stock options, we use the Black-Scholes single option pricing model to determine the fair value of an option on its grant date. The fair value of the common stock was expensed on the grant date. The fair value of the restricted stock, restricted stock units and stock options will be expensed over the vesting period.

			Weighted-average
	Number		grant date		Aggregate		Vesting
	of shares		fair value		fair value		period
Common stock		33	$	25.33	$	840		—
Restricted stock		631		28.07		17,732	3-10 years
Restricted stock units		60		25.96		1,555	3-10 years
Stock options		180		6.55		1,178	5 years

Income Taxes

For the six months ended June 30, 2010 and 2009, the income tax provision was calculated based on an estimated effective tax rate for each year. Our effective tax rate differs from the U.S. Federal statutory rate primarily due to the effect of tax-exempt municipal bond interest.

Disposition

In 2010, we sold an inactive subsidiary, HCC Insurance Company, for $14.7 million cash and realized a $0.5 million gain.

(2) Fair Value Measurements

We value financial assets and financial liabilities at fair value. In determining fair value, we generally apply the market approach, which uses prices and other relevant data based on market transactions involving identical or comparable assets and liabilities. We classify our financial instruments into the following three-level hierarchy:

• Level 1 — Inputs are based on quoted prices in active markets for identical instruments.

• Level 2 — Inputs are based on observable market data (other than quoted prices), or are derived from or corroborated by observable market data.

• Level 3 — Inputs are unobservable and not corroborated by market data.

Our Level 1 investments are primarily U.S. Treasuries listed on stock exchanges. We use quoted prices for identical instruments to measure fair value.

10

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

Our Level 2 investments include most of our fixed income securities, which consist of U.S. government agency securities, municipal bonds, certain corporate debt securities, and certain mortgage-backed and asset-backed securities. Our Level 2 instruments also include our interest rate swap agreements, which are reflected as liabilities in our condensed consolidated balance sheets. We measure fair value for the majority of our Level 2 investments using quoted prices of securities with similar characteristics. The remaining investments are valued using pricing models or matrix pricing. The fair value measurements consider observable assumptions, including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, default rates, loss severity and other economic measures.

We use independent pricing services to assist us in determining fair value for over 99% of our Level 1 and Level 2 investments. The pricing services provide a single price or quote per security. We use data provided by our third party investment manager to value the remaining Level 2 investments. To validate that these quoted and modeled prices are reasonable estimates of fair value, we perform various quantitative and qualitative procedures, including: 1) evaluation of the underlying methodologies, 2) analysis of recent sales activity, 3) analytical review of our fair values against current market prices, and 4) comparison of the pricing services’ fair value to other pricing services’ fair value for the same investment. Based on these procedures, we did not adjust the prices or quotes provided by our independent pricing services or third party investment managers as of June 30, 2010 or December 31, 2009. In addition, we did not apply GAAP criteria for determining the fair value of securities in inactive markets since no markets for our investments were judged to be inactive as of June 30, 2010 or December 31, 2009.

Our Level 3 securities include certain fixed income securities, and an insurance contract that we account for as a derivative classified in other assets. We determine fair value based on internally developed models that use assumptions or other data that are not readily observable from objective sources. Because we use the lowest level significant input to determine our hierarchy classifications, a financial instrument may be classified in Level 3 even though there may be significant readily-observable inputs. In the first quarter of 2010, we commuted our interest in a second insurance contract that was accounted for as a derivative and also classified in other assets in Level 3 at December 31, 2009.

The following tables present our assets and interest rate swap liabilities that were measured at fair value.

	Level 1		Level 2			Level 3		Total
June 30, 2010
Fixed income securities
U.S. government and government agency securities	$	169,556	$	181,528		$	—	$	351,084
Fixed income securities of states, municipalities and political subdivisions		—		1,090,158			—		1,090,158
Special purpose revenue bonds of states, municipalities and political subdivisions		—		1,392,736			—		1,392,736
Corporate fixed income securities		—		657,636			153		657,789
Residential mortgage-backed securities		—		1,064,299			—		1,064,299
Commercial mortgage-backed securities		—		145,359			2,543		147,902
Asset-backed securities		—		10,269			1,277		11,546
Foreign government securities		—		187,692			—		187,692
Total fixed income securities		169,556		4,729,677			3,973		4,903,206
Other investments		11		—			—		11
Other assets		—		—			470		470
Total assets measured at fair value	$	169,567	$	4,729,677		$	4,443	$	4,903,687
Accounts payable and accrued liabilities	$	—	$	(1,122	)	$	—	$	(1,122	)
Total liabilities measured at fair value	$	—	$	(1,122	)	$	—	$	(1,122	)

11

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

	Level 1		Level 2			Level 3		Total
December 31, 2009
Fixed income securities
U.S. government and government agency securities	$	178,927	$	134,620		$	—	$	313,547
Fixed income securities of states, municipalities and political subdivisions		—		1,059,426			—		1,059,426
Special purpose revenue bonds of states, municipalities and political subdivisions		—		1,146,334			—		1,146,334
Corporate fixed income securities		—		686,170			151		686,321
Residential mortgage-backed securities		—		944,182			—		944,182
Commercial mortgage-backed securities		—		143,412			2,805		146,217
Asset-backed securities		—		13,059			1,306		14,365
Foreign government securities		—		227,681			—		227,681
Total fixed income securities		178,927		4,354,884			4,262		4,538,073
Other investments		14		—			—		14
Other assets		—		—			432		432
Total assets measured at fair value	$	178,941	$	4,354,884		$	4,694	$	4,538,519
Accounts payable and accrued liabilities	$	—	$	(2,367	)	$	—	$	(2,367	)
Total liabilities measured at fair value	$	—	$	(2,367	)	$	—	$	(2,367	)

We excluded from our fair value disclosures our held to maturity investment portfolio measured at amortized cost and two other investments measured at cost, which were redeemed in the second quarter of 2010. Our held to maturity portfolio had a fair value of $174.7 million at June 30, 2010 and $104.0 million at December 31, 2009. The two other investments collectively were valued at $4.1 million at December 31, 2009.

The following table presents the changes in fair value of our Level 3 assets.

	2010									2009
	Fixed									Fixed
	income			Other						income			Other
	securities			assets			Total			securities			assets		Total
Balance at beginning of year	$	4,262		$	432		$	4,694		$	6,515		$	16,100	$	22,615
Net redemptions		(495	)		(8,342	)		(8,837	)		(1,263	)		—		(1,263	)
Gains and (losses) — unrealized		206			38			244			531			3,657		4,188
Gains and (losses) — realized		—			8,342			8,342			30			—		30
Transfers into Level 3		—			—			—			1,915			—		1,915
Transfers out of Level 3		—			—			—			(1,746	)		—		(1,746	)
Balance at June 30	$	3,973		$	470		$	4,443		$	5,982		$	19,757	$	25,739

12

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

	2010								2009
	Fixed								Fixed
	income			Other					income			Other
	securities			assets		Total			securities			assets		Total
Balance at March 31	$	4,224		$	291	$	4,515		$	5,085		$	16,463	$	21,548
Net redemptions		(395	)		—		(395	)		(982	)		—		(982	)
Gains and (losses) — unrealized		144			179		323			(36	)		3,294		3,258
Transfers into Level 3		—			—		—			1,915			—		1,915
Balance at June 30	$	3,973		$	470	$	4,443		$	5,982		$	19,757	$	25,739

Unrealized gains and losses on our Level 3 fixed income securities are reported in other comprehensive income within shareholders’ equity, and unrealized gains and losses on our Level 3 other assets are reported in other operating income. We transferred an investment into Level 3 in the second quarter of 2009 due to our inability to obtain a fair value using inputs based on observable market data. We transferred investments from Level 3 to Level 2 in 2009 because we were able to determine their fair value using inputs based on observable market data in the quarter transferred.

(3) Investments

Substantially all of our fixed income securities are investment grade and 97% are rated “A” or better. The cost or amortized cost, gross unrealized gain or loss, and fair value of investments in fixed income securities that are classified as available for sale were as follows:

	Cost or		Gross		Gross
	amortized		unrealized		unrealized
	cost		gain		loss			Fair value
June 30, 2010
U.S. government and government agency securities	$	340,147	$	10,937	$	—		$	351,084
Fixed income securities of states, municipalities and political subdivisions		1,036,365		54,873		(1,080	)		1,090,158
Special purpose revenue bonds of states, municipalities and political subdivisions		1,337,135		56,387		(786	)		1,392,736
Corporate fixed income securities		625,600		33,213		(1,024	)		657,789
Residential mortgage-backed securities		1,007,753		59,509		(2,963	)		1,064,299
Commercial mortgage-backed securities		143,121		5,641		(860	)		147,902
Asset-backed securities		11,751		607		(812	)		11,546
Foreign government securities		176,391		11,313		(12	)		187,692
Total available for sale fixed income securities	$	4,678,263	$	232,480	$	(7,537	)	$	4,903,206

13

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

	Cost or		Gross		Gross
	amortized		unrealized		unrealized
	cost		gain		loss			Fair value
December 31, 2009
U.S. government and government agency securities	$	308,618	$	6,255	$	(1,326	)	$	313,547
Fixed income securities of states, municipalities and political subdivisions		1,012,262		49,491		(2,327	)		1,059,426
Special purpose revenue bonds of states, municipalities and political subdivisions		1,101,566		46,551		(1,783	)		1,146,334
Corporate fixed income securities		657,653		28,785		(117	)		686,321
Residential mortgage-backed securities		915,203		35,130		(6,151	)		944,182
Commercial mortgage-backed securities		151,357		630		(5,770	)		146,217
Asset-backed securities		15,118		445		(1,198	)		14,365
Foreign government securities		219,985		7,914		(218	)		227,681
Total available for sale fixed income securities	$	4,381,762	$	175,201	$	(18,890	)	$	4,538,073

The amortized cost and fair value of investments in fixed income securities that are classified as held to maturity were as follows:

	June 30, 2010				December 31, 2009
	Amortized				Amortized
	cost		Fair value		cost		Fair value
U.S. government and government agency securities	$	19,812	$	20,209	$	14,988	$	15,257
Corporate fixed income securities		93,383		94,111		7,594		7,685
Foreign government securities		59,154		60,333		80,210		81,066
Total held to maturity fixed income securities	$	172,349	$	174,653	$	102,792	$	104,008

14

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

All fixed income securities were income producing in 2010. The following table displays the gross unrealized losses and fair value of all available for sale fixed income securities that were in a continuous unrealized loss position for the periods indicated.

	Less than 12 months					12 months or more					Total
			Unrealized					Unrealized					Unrealized
	Fair value		losses			Fair value		losses			Fair value		losses
June 30, 2010
Fixed income securities of states, municipalities and political subdivisions	$	38,338	$	(465	)	$	11,833	$	(615	)	$	50,171	$	(1,080	)
Special purpose revenue bonds of states, municipalities and political subdivisions		79,536		(340	)		23,150		(446	)		102,686		(786	)
Corporate fixed income securities		22,602		(1,024	)		—		—			22,602		(1,024	)
Residential mortgage-backed securities		12,822		(96	)		37,822		(2,867	)		50,644		(2,963	)
Commercial mortgage-backed securities		1,224		(5	)		16,551		(855	)		17,775		(860	)
Asset-backed securities		773		(147	)		4,568		(665	)		5,341		(812	)
Foreign government securities		4,483		(12	)		—		—			4,483		(12	)
Total	$	159,778	$	(2,089	)	$	93,924	$	(5,448	)	$	253,702	$	(7,537	)
December 31, 2009
U.S. government and government agency securities	$	101,542	$	(1,326	)	$	—	$	—		$	101,542	$	(1,326	)
Fixed income securities of states, municipalities and political subdivisions		48,836		(985	)		19,816		(1,342	)		68,652		(2,327	)
Special purpose revenue bonds of states, municipalities and political subdivisions		76,305		(1,305	)		25,261		(478	)		101,566		(1,783	)
Corporate fixed income securities		13,773		(117	)		—		—			13,773		(117	)
Residential mortgage-backed securities		147,621		(2,018	)		40,568		(4,133	)		188,189		(6,151	)
Commercial mortgage-backed securities		30,209		(418	)		73,451		(5,352	)		103,660		(5,770	)
Asset-backed securities		2,476		(246	)		7,532		(952	)		10,008		(1,198	)
Foreign government securities		4,153		(130	)		8,593		(88	)		12,746		(218	)
Total	$	424,915	$	(6,545	)	$	175,221	$	(12,345	)	$	600,136	$	(18,890	)

A security has an impairment loss when its fair value is less than its cost or amortized cost at the balance sheet date. We evaluate the securities in our fixed income securities portfolio for possible other-than-temporary impairment losses at each quarter end. During 2010 and 2009, our reviews covered all impaired securities where the loss exceeded $0.5 million and the loss either exceeded 10% of cost or the security had been in a loss position for longer than twelve consecutive months.

For other-than-temporary impairment losses, we recognize an other-than-temporary impairment loss in earnings in the period that we determine: 1) we intend to sell the security, 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or 3) the security has a credit loss. We recognized no other-than-temporary impairment credit losses in 2010, compared to $5.0 million and $1.8 million in the six months and three months ended June 30, 2009, respectively.

15

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

Since April 1, 2009, when we adopted the new accounting standard for other-than-temporary impairment losses, we have recognized $3.8 million in credit losses on impaired fixed income securities in earnings for which a portion of the total impairment was recorded in other comprehensive income. This amount has not changed since December 31, 2009 because we had no additional credit losses on these previously-impaired securities and no sales or maturities of these securities in 2010. We had $5.0 million after-tax of other-than-temporary impairments, primarily related to mortgage-backed and asset-backed securities, included in accumulated other comprehensive income within shareholders’ equity at June 30, 2010.

We do not consider the $7.5 million of gross unrealized losses in our fixed income securities portfolio at June 30, 2010 to be other-than-temporary impairments as of that date because: 1) we received substantially all contractual interest and principal payments on these securities as of June 30, 2010, 2) we do not intend to sell the securities, 3) it is more likely than not that we will not be required to sell the securities before recovery of their amortized cost bases and 4) the unrealized loss relates to non-credit factors, such as interest rate changes and market conditions.

The amortized cost and fair value of our fixed income securities at June 30, 2010, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The weighted-average life of our mortgage-backed and asset-backed securities at June 30, 2010 was 2.8 years.

	Available for sale				Held to maturity
	Cost or
	amortized cost		Fair value		Amortized cost		Fair value
Due in 1 year or less	$	268,234	$	272,713	$	23,758	$	23,981
Due after 1 year through 5 years		1,070,303		1,126,852		137,148		138,823
Due after 5 years through 10 years		836,824		887,794		11,443		11,849
Due after 10 years through 15 years		726,382		757,952		—		—
Due after 15 years		613,895		634,148		—		—
Securities with fixed maturities		3,515,638		3,679,459		172,349		174,653
Mortgage-backed and asset-backed securities		1,162,625		1,223,747		—		—
Total fixed income securities	$	4,678,263	$	4,903,206	$	172,349	$	174,653

The sources of net investment income were as follows:

	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Fixed income securities	$	99,080		$	92,912		$	50,481		$	47,474
Short-term investments		360			1,470			170			586
Other		2,042			1,051			534			1,103
Total investment income		101,482			95,433			51,185			49,163
Investment expense		(2,016	)		(1,804	)		(968	)		(752	)
Net investment income	$	99,466		$	93,629		$	50,217		$	48,411

16

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

     Realized pretax gains (losses) on the sale of investments, which exclude other-than-temporary impairment losses, were as follows:

	Six months ended June 30,
	2010								2009
	Gains		Losses			Net			Gains		Losses			Net
Fixed income securities	$	7,593	$	(599	)	$	6,994		$	5,633	$	(2,167	)	$	3,466
Other		2		(156	)		(154	)		683		(161	)		522
Realized investment gain (loss)	$	7,595	$	(755	)	$	6,840		$	6,316	$	(2,328	)	$	3,988

	Three months ended June 30,
	2010								2009
	Gains		Losses			Net			Gains		Losses			Net
Fixed income securities	$	2,692	$	(376	)	$	2,316		$	1,967	$	(1,020	)	$	947
Other		—		(1	)		(1	)		—		(14	)		(14	)
Realized investment gain (loss)	$	2,692	$	(377	)	$	2,315		$	1,967	$	(1,034	)	$	933

(4) Earnings Per Share

The following table details the numerator and denominator used in our earnings per share calculations.

	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Net earnings	$	154,734		$	174,755		$	83,380		$	91,585
Less: net earnings attributable to unvested restricted stock and restricted stock units		(1,679	)		(899	)		(927	)		(503	)
Net earnings available to common stock	$	153,055		$	173,856		$	82,453		$	91,082
Weighted-average common shares outstanding		113,805			112,286			113,935			111,776
Dilutive effect of outstanding options (determined using treasury stock method)		322			259			253			277
Dilutive effect of convertible debt (determined using treasury stock method)		—			365			—			467
Weighted-average common shares and potential common shares outstanding		114,127			112,910			114,188			112,520
Anti-dilutive stock options not included in treasury stock method computation		4,392			6,336			4,680			5,734

17

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

(5) Segment and Geographic Data

The performance of each segment is evaluated by our management based on net earnings. Net earnings is calculated on an after-tax basis and after corporate expense allocations, interest expense on debt incurred for acquired companies and intercompany eliminations have been charged or credited to our individual segments. All stock-based compensation is included in the corporate segment because it is not included in management’s evaluation of the other segments. All contractual and discretionary bonuses are expensed in the respective employee’s segment in the year the bonuses are earned. Any such bonuses that will be paid by restricted stock awards, which will be granted by the Compensation Committee in the following year, are reversed on the corporate segment, which will record the appropriate stock-based compensation expense as the awards vest in future years.

The following tables show information by business segment and geographic location. Geographic location is determined by physical location of our offices and does not represent the location of insureds or reinsureds from whom the business was generated.

18

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

	Insurance					Other
Six months ended June 30, 2010	company		Agency			operations		Corporate			Total
Revenue:
Domestic	$	906,448	$	22,375		$	3,455	$	1,362		$	933,640
Foreign		235,417		5,382			—		—			240,799
Inter-segment		—		39,353			473		—			39,826
Total segment revenue	$	1,141,865	$	67,110		$	3,928	$	1,362			1,214,265
Inter-segment eliminations												(39,826	)
Consolidated total revenue											$	1,174,439
Net earnings (loss):
Domestic	$	137,331	$	(683	)	$	1,385	$	(14,496	)	$	123,537
Foreign		28,489		(715	)		—		—			27,774
Total segment net earnings (loss)	$	165,820	$	(1,398	)	$	1,385	$	(14,496	)		151,311
Inter-segment eliminations												3,423
Consolidated net earnings											$	154,734
Other items:
Net investment income	$	97,978	$	117		$	1	$	1,370		$	99,466
Depreciation and amortization		2,545		3,732			45		1,927			8,249
Interest expense		363		7,815			—		2,449			10,627
Capital expenditures		986		1,768			1		6,650			9,405
Tax expense:
Income tax expense (benefit)	$	67,808	$	(284	)	$	503	$	(2,371	)	$	65,656
Inter-segment eliminations												2,388
Consolidated income tax expense											$	68,044

19

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

	Insurance				Other
Six months ended June 30, 2009	company		Agency		operations			Corporate			Total
Revenue:
Domestic	$	924,553	$	30,989	$	4,737		$	1,521		$	961,800
Foreign		207,800		12,274		—			—			220,074
Inter-segment		—		50,803		487			—			51,290
Total segment revenue	$	1,132,353	$	94,066	$	5,224		$	1,521			1,233,164
Inter-segment eliminations												(51,290	)
Consolidated total revenue											$	1,181,874
Net earnings (loss):
Domestic	$	138,925	$	7,379	$	2,161		$	(13,664	)	$	134,801
Foreign		38,257		1,134		—			—			39,391
Total segment net earnings (loss)	$	177,182	$	8,513	$	2,161		$	(13,664	)		174,192
Inter-segment eliminations												563
Consolidated net earnings											$	174,755
Other items:
Net investment income	$	91,727	$	334	$	7		$	1,561		$	93,629
Depreciation and amortization		2,576		3,669		44			1,363			7,652
Interest expense (benefit)		537		7,343		(13	)		400			8,267
Capital expenditures		2,156		3,686		13			3,061			8,916
Tax expense:
Income tax expense (benefit)	$	77,614	$	6,739	$	1,148		$	(4,454	)	$	81,047
Inter-segment eliminations												205
Consolidated income tax expense											$	81,252

20

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

	Insurance				Other
Three months ended June 30, 2010	company		Agency		operations		Corporate			Total
Revenue:
Domestic	$	445,970	$	11,449	$	1,536	$	679		$	459,634
Foreign		118,454		2,091		—		—			120,545
Inter-segment		—		24,646		288		—			24,934
Total segment revenue	$	564,424	$	38,186	$	1,824	$	679			605,113
Inter-segment eliminations											(24,934	)
Consolidated total revenue										$	580,179
Net earnings (loss):
Domestic	$	66,637	$	2,643	$	570	$	(9,045	)	$	60,805
Foreign		22,499		374		—		—			22,873
Total segment net earnings (loss)	$	89,136	$	3,017	$	570	$	(9,045	)		83,678
Inter-segment eliminations											(298	)
Consolidated net earnings										$	83,380
Other items:
Net investment income	$	49,480	$	58	$	—	$	679		$	50,217
Depreciation and amortization		1,375		1,877		23		1,003			4,278
Interest expense		103		3,569		—		1,565			5,237
Capital expenditures		179		879		—		4,523			5,581
Tax expense:
Income tax expense (benefit)	$	35,276	$	2,510	$	247	$	(1,646	)	$	36,387
Inter-segment eliminations											(14	)
Consolidated income tax expense										$	36,373

21

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

	Insurance				Other
Three months ended June 30, 2009	company		Agency		operations			Corporate			Total
Revenue:
Domestic	$	454,167	$	12,979	$	2,459		$	869		$	470,474
Foreign		104,697		5,965		—			—			110,662
Inter-segment		—		27,056		233			—			27,289
Total segment revenue	$	558,864	$	46,000	$	2,692		$	869			608,425
Inter-segment eliminations												(27,289	)
Consolidated total revenue											$	581,136
Net earnings (loss):
Domestic	$	69,012	$	4,218	$	1,148		$	(6,058	)	$	68,320
Foreign		22,255		919		—			—			23,174
Total segment net earnings (loss)	$	91,267	$	5,137	$	1,148		$	(6,058	)		91,494
Inter-segment eliminations												91
Consolidated net earnings											$	91,585
Other items:
Net investment income	$	47,507	$	124	$	3		$	777		$	48,411
Depreciation and amortization		1,450		1,922		22			679			4,073
Interest expense (benefit)		258		3,609		(6	)		(233	)		3,628
Capital expenditures		1,660		1,598		3			2,173			5,434
Tax expense:
Income tax expense (benefit)	$	39,378	$	3,363	$	559		$	(1,975	)	$	41,325
Inter-segment eliminations												254
Consolidated income tax expense											$	41,579

22

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

The following tables present selected revenue items by line of business and major product lines.

	Six months ended June 30,					Three months ended June 30,
	2010		2009			2010			2009
Diversified financial products
Directors’ and officers’	$	183,639	$	172,488		$	90,721		$	89,686
Errors and omissions		106,691		118,282			52,798			58,877
Other		21,364		20,767			9,538			9,791
U.S. surety and credit		98,620		89,727			51,871			45,235
International surety and credit		35,884		32,651			17,695			16,242
		446,198		433,915			222,623			219,831
Group life, accident and health
Medical stop-loss		323,558		315,842			161,792			156,359
Other medical		50,618		66,229			25,597			33,176
Other		12,597		16,100			5,742			7,548
		386,773		398,171			193,131			197,083
Aviation		58,298		65,461			29,355			32,647
London market account
Energy		26,789		22,439			10,602			13,204
Property treaty		15,609		—			8,855			—
Other		29,215		26,940			15,988			12,501
		71,613		49,379			35,445			25,705
Other specialty lines
Public risk		22,926		17,807			11,436			9,187
HCC Lloyd’s		19,187		20,940			9,002			10,150
Other		10,945		18,703			5,403			7,389
		53,058		57,450			25,841			26,726
Discontinued lines		32		(10	)		(10	)		(14	)
Total net earned premium	$	1,015,972	$	1,004,366		$	506,385		$	501,978
Property and casualty	$	34,326	$	45,697		$	16,646		$	21,279
Accident and health		5,842		10,729			2,529			4,853
Fee and commission income	$	40,168	$	56,426		$	19,175		$	26,132

23

HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

(6) Reinsurance

In the normal course of business, our insurance companies cede a portion of their premium to domestic and foreign reinsurers through treaty and facultative reinsurance agreements. Although ceding for reinsurance purposes does not discharge the direct insurer from liability to its policyholder, our insurance companies participate in such agreements in order to limit their loss exposure, protect them against catastrophic loss and diversify their business. The following table presents the effect of such reinsurance transactions on our premium and loss and loss adjustment expense.

							Loss and loss
	Written			Earned			adjustment
	premium			premium			expense
Six months ended June 30, 2010
Direct business	$	1,131,637		$	1,139,036		$	718,869
Reinsurance assumed		182,437			141,148			105,789
Reinsurance ceded		(269,021	)		(264,212	)		(199,151	)
Net amounts	$	1,045,053		$	1,015,972		$	625,507
Six months ended June 30, 2009
Direct business	$	1,150,471		$	1,105,248		$	696,623
Reinsurance assumed		133,233			124,963			65,003
Reinsurance ceded		(249,102	)		(225,845	)		(153,490	)
Net amounts	$	1,034,602		$	1,004,366		$	608,136
Three months ended June 30, 2010
Direct business	$	622,445		$	567,074		$	357,918
Reinsurance assumed		69,133			71,908			52,954
Reinsurance ceded		(144,776	)		(132,597	)		(111,886	)
Net amounts	$	546,802		$	506,385		$	298,986
Three months ended June 30, 2009
Direct business	$	618,439		$	556,211		$	334,353
Reinsurance assumed		62,878			60,823			28,338
Reinsurance ceded		(137,965	)		(115,056	)		(70,121	)
Net amounts	$	543,352		$	501,978		$	292,570

Ceding commissions that are netted against policy acquisition costs in the condensed consolidated statements of earnings were $32.6 million and $25.4 million for the six months ended June 30, 2010 and 2009, respectively. The comparable amounts were $16.2 million and $12.9 million for the second quarter of 2010 and 2009, respectively.

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HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

The table below shows the components of reinsurance recoverables in our condensed consolidated balance sheets.

	June 30,			December 31,
	2010			2009
Reinsurance recoverable on paid losses	$	97,315		$	82,887
Reinsurance recoverable on outstanding losses		485,101			495,964
Reinsurance recoverable on incurred but not reported losses		475,188			440,505
Reserve for uncollectible reinsurance		(2,945	)		(2,945	)
Total reinsurance recoverables	$	1,054,659		$	1,016,411

The tables below present the calculation of net reserves, net unearned premium and net deferred policy acquisition costs.

	June 30,			December 31,
	2010			2009
Loss and loss adjustment expense payable	$	3,528,606		$	3,492,309
Reinsurance recoverable on outstanding losses		(485,101	)		(495,964	)
Reinsurance recoverable on incurred but not reported losses		(475,188	)		(440,505	)
Net reserves	$	2,568,317		$	2,555,840
Unearned premium	$	1,069,355		$	1,044,747
Ceded unearned premium		(271,783	)		(270,436	)
Net unearned premium	$	797,572		$	774,311
Deferred policy acquisition costs	$	216,988		$	208,463
Deferred ceding commissions		(68,657	)		(71,595	)
Net deferred policy acquisition costs	$148,331			$	136,868

(7) Supplemental Information

Supplemental information was as follows:

	Six months ended June 30,				Three months ended June 30,
	2010		2009		2010		2009
Income taxes paid	$	66,215	$	88,816	$	53,365	$	68,602
Interest paid		9,563		6,249		9,341		2,807
Proceeds from sales of available for sale fixed income securities		133,856		199,744		66,167		80,652
Comprehensive income		182,751		218,707		114,814		111,171

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HCC Insurance Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited, tables in thousands except per share data)

(8) Commitments and Contingencies

Catastrophe and Large Loss Exposure

We have exposure to catastrophic losses caused by natural perils (such as hurricanes and earthquakes), as well as from man-made events (such as terrorist attacks). The incidence, timing and severity of catastrophic losses are unpredictable. We assess our exposures in areas most vulnerable to natural catastrophes and apply procedures to ascertain our probable maximum loss from a single event. We maintain reinsurance protection that we believe is sufficient to limit our exposure to a foreseeable event. In the first quarter of 2010, we recognized gross losses from catastrophic events, primarily the Chilean earthquake, of $31.9 million. After reinsurance, our pretax loss was $20.6 million. In the second quarter of 2010, we recognized gross losses for the Deepwater Horizon rig disaster of $28.2 million. Due to significant facultative reinsurance, our pretax net loss was minimal.

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.

Indemnifications

In conjunction with the sales of business assets and subsidiaries, we have provided indemnifications to the buyers. Certain indemnifications cover typical representations and warranties related to our responsibilities to perform under the sales contracts. Under other indemnifications, we agree to reimburse the purchasers for taxes or ERISA-related amounts, if any, assessed after the sale date but related to pre-sale activities. We cannot quantify the maximum potential exposure covered by all of our indemnifications because the indemnifications cover a variety of matters, operations and scenarios. Certain of these indemnifications have no time limit. For those with a time limit, the longest such indemnification expires in 2025. We accrue a loss when a valid claim is made by a purchaser and we believe we have potential exposure. At June 30, 2010, we have recorded a liability of $11.8 million and have provided a $3.0 million escrow account and $9.7 million of letters of credit to cover our obligations or anticipated payments under these indemnifications.

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Item 2. 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 Condensed Consolidated Financial Statements and the related Notes thereto.

Overview

We are a specialty insurance group with offices in the United States, the United Kingdom, Spain and Ireland, transacting business in approximately 150 countries. Our group consists of insurance companies, underwriting agencies and 100% participation in an active Lloyd’s of London syndicate that we manage. Our shares trade on the New York Stock Exchange and closed at $24.76 on June 30, 2010. We had a market capitalization of $2.9 billion at July 31, 2010.

We underwrite a variety of relatively non-correlated specialty lines of business identified as diversified financial products; group life, accident and health; aviation; London market account; and other specialty lines of business. Products in each segment are marketed by our insurance companies, agencies and the syndicate through a network of independent agents and brokers, directly to customers or through third party administrators. The majority of our business is low limit or small premium business that has less intense price competition, as well as lower catastrophe and volatility risk. We reinsure a significant portion of our catastrophic exposure to hurricanes, earthquakes and large losses to minimize the impact on our net earnings and shareholders’ equity.

Our major domestic and international insurance companies have a financial strength rating of “AA (Very Strong)” from Standard & Poor’s Corporation. Our major domestic insurance companies have a financial strength rating of “AA (Very Strong)” from Fitch Ratings, “A1 (Good Security)” from Moody’s Investors Service, Inc., and “A+ (Superior)” from A.M. Best Company, Inc.

Key facts about our consolidated group as of and for the six months and quarter ended June 30, 2010 are as follows:

• We had consolidated shareholders’ equity of $3.2 billion. Our book value per share increased in the first six months to $27.78.

• We had year-to-date net earnings of $154.7 million, or $1.34 per diluted share. Our second quarter earnings were $83.4 million, or $0.72 per diluted share.

• We produced total revenue of $1.2 billion and $580.2 million in the first half and second quarter, respectively.

• In the first quarter, we recognized gross losses from catastrophic events, primarily from the Chilean earthquake, of $31.9 million. After reinsurance, our pretax loss was $20.6 million. In the second quarter, we recognized gross losses for the Deepwater Horizon rig disaster of $28.2 million. Due to significant facultative reinsurance, our pretax net loss was minimal. The catastrophe losses increased our net loss ratio and combined ratio by 2.0 percentage points and decreased net earnings by $0.12 per diluted share for the six-month period.

• Our year-to-date net loss ratio, including the catastrophic losses, was 61.6% and our combined ratio was 88.0%.

• We declared dividends of $0.27 per share and paid $31.0 million of dividends in the first six months of 2010.

• We hold a $5.1 billion portfolio of fixed income securities with an average rating of AA+, and a total investment portfolio of $5.6 billion.

• We purchased $1.2 million of our common stock at an average cost of $24.38 per share during the quarter.

Comparisons in the following sections refer to the first six months of 2010 compared to the same period of 2009, unless otherwise noted. Amounts in tables are in thousands, except for earnings per share, percentages, ratios and number of employees.

Results of Operations

Net earnings were $154.7 million ($1.34 per diluted share) in the first half of 2010, compared to $174.8 million ($1.54 per diluted share) in the same period of 2009 and $83.4 million ($0.72 per diluted share) in the second quarter of 2010, compared to $91.6 million

27

($0.81 per diluted share) in the second quarter of 2009. Net earnings for the first six months of 2010 included $20.6 million (pretax) of net catastrophic losses, primarily from the Chilean earthquake, partially offset by a $5.0 million pretax gain, net of related expenses, that we realized from commuting a derivative contract. The year-to-date 2009 net earnings included a $15.6 million pretax gain, net of related expenses, from the commutation of a reinsurance contract with Mortgage Guarantee Insurance Corporation (MGIC). Net earnings decreased quarter-over-quarter primarily due to redundant reserve development in the 2009 quarter.

These items are described more fully below:

• We had net adverse reserve development of $2.2 million in the first six months of 2010, compared to $11.3 million of net redundant development in first six months of 2009. We had net redundant development of $2.8 million in the second quarter of 2010, compared to $16.0 million in the comparable 2009 period. See the “Losses and Loss Adjustment Expenses” section below for further discussion of these reserve changes.

• In the first quarter of 2010, we commuted our interest in a long-term mortgage impairment insurance contract that had been accounted for as a derivative financial instrument. The contract was denominated in British pound sterling. We received £5.6 million ($8.3 million) of cash and recognized a gain of $8.0 million, which was included in other operating income, and incurred related expenses of $3.0 million, which were included in other operating expense in the year-to-date condensed consolidated statements of earnings.

• In the first quarter of 2009, we commuted, loss-free, all liability under a contract with MGIC to provide 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. We received a cash termination payment of $25.0 million. As a result of the termination, our year-to-date other operating income increased $20.5 million, and fee and commission income increased $5.0 million. This additional revenue was partially offset by $9.9 million of expenses for reinsurance and other direct costs, which were recorded in other operating expense.

The following table sets forth the relationships of income statement line items as a percent of total revenue.

	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Net earned premium		86.5	%		85.0	%		87.3	%		86.4	%
Fee and commission income		3.4			4.8			3.3			4.5
Net investment income		8.5			7.9			8.7			8.3
Other operating income		1.0			2.4			0.3			1.0
Net realized investment gain		0.6			0.3			0.4			0.1
Other-than-temporary impairment loss		—			(0.4	)		—			(0.3	)
Total revenue		100.0			100.0			100.0			100.0
Loss and loss adjustment expense, net		53.3			51.5			51.5			50.4
Policy acquisition costs, net		15.9			15.1			16.1			15.5
Other operating expense		10.9			11.0			10.9			10.6
Interest expense		0.9			0.7			0.9			0.6
Earnings before income tax expense		19.0			21.7			20.6			22.9
Income tax expense		5.8			6.9			6.2			7.1
Net earnings		13.2	%		14.8	%		14.4	%		15.8	%

Revenue

Total revenue decreased $7.4 million in the first six months of 2010, compared to the same period in 2009, due to: 1) the $25.0 million from the 2009 commutation of the MGIC reinsurance contract, partially offset by 2) higher net earned premium in 2010 and 3) $8.0 million of revenue in 2010 related to the gain on the commutation of a derivative contract.

Gross written premium, net written premium and net earned premium are detailed below. Growth in written premium occurred primarily in our London market account line of business, directly related to property treaty business that we began to write in late

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2009. The increase in net earned premium was primarily due to growth in our directors’ and officers’ liability business in 2009 and 2010. There were offsetting increases and decreases in net earned premium in our other lines of business. See the “Insurance Company Segment” section below for further discussion of the relationship and changes in premium revenue.

	Six months ended June 30,				Three months ended June 30,
	2010		2009		2010		2009
Gross written premium	$	1,314,074	$	1,283,704	$	691,578	$	681,317
Net written premium		1,045,053		1,034,602		546,802		543,352
Net earned premium		1,015,972		1,004,366		506,385		501,978

The table below shows the source of our fee and commission income, which decreased 29% year-over-year. The decrease in 2010 primarily related to the sale of our U.K. reinsurance broker and the sale of the operations of our commercial marine agency business, both in 2009, and a $5.0 million termination payment from the 2009 commutation of the MGIC reinsurance contract.

	Six months ended June 30,				Three month ended June 30,
	2010		2009		2010		2009
Agencies	$	28,949	$	44,033	$	13,888	$	19,457
Insurance companies		11,219		12,393		5,287		6,675
Fee and commission income	$	40,168	$	56,426	$	19,175	$	26,132

The sources of net investment income are detailed below.

	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Fixed income securities
Taxable	$	54,803		$	52,099		$	27,935		$	26,994
Exempt from U.S. income taxes		44,277			40,813			22,546			20,480
Total fixed income securities		99,080			92,912			50,481			47,474
Short-term investments		360			1,470			170			586
Other		2,042			1,051			534			1,103
Total investment income		101,482			95,433			51,185			49,163
Investment expense		(2,016	)		(1,804	)		(968	)		(752	)
Net investment income	$	99,466		$	93,629		$	50,217		$	48,411

Net investment income increased 6% year-over-year and 4% quarter-over-quarter, primarily due to higher income from fixed income securities, generated from an increased amount of investments. Our fixed income securities portfolio increased 11% from $4.6 billion at June 30, 2009 to $5.1 billion at June 30, 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 at December 31, 2009. Short-term investment income declined in the three and six month periods, due to lower average short-term investment balances and lower short-term market interest rates. Other interest income for the six month periods included $0.6 million of interest related to a tax refund in 2010, and a $1.0 million loss on hedge fund investments in 2009, which were liquidated in late 2008.

Other operating income was $12.0 million in the first half of 2010, compared to $28.4 million in the first half of 2009 and $2.1 million in the second quarter of 2010, compared to $5.5 million in the second quarter of 2009. The first half of 2010 included an $8.0 million gain related to commuting a derivative contract. The first half of 2009 included $20.5 million from the commutation of the MGIC reinsurance contract. Period to period comparisons of our other operating income may vary substantially, depending on earnings generated by new transactions or investments, income or loss related to changes in the fair value of certain investments, and gains or losses related to dispositions.

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The following table details the components of our other operating income.

	Six months ended June 30,				Three months ended June 30,
	2010		2009		2010		2009
Contract using deposit accounting	$	—	$	20,532	$	—	$	—
Financial instruments		8,379		3,657		179		3,294
Strategic investments		557		1,855		147		1,105
Other		3,057		2,375		1,761		1,124
Other operating income	$	11,993	$	28,419	$	2,087	$	5,523

Expenses

Loss and loss adjustment expense increased year-over-year primarily due to the $20.6 million of net catastrophic losses incurred in the first quarter of 2010. Our loss ratio for the first six months of 2010 was 61.6% (which included 2.0 percentage points for the catastrophes), compared to 60.5% in the first six months of 2009. The loss ratio was 59.0% and 58.3% in the second quarter of 2010 and 2009, respectively. Policy acquisition costs increased 4% year-over-year because: 1) our 2009 policy acquisition costs were lower due to the effect of a $3.8 million premium deficiency reserve recorded at December 31, 2008, which reduced the amount of policy acquisition costs recognized throughout 2009 and 2) the higher amount of premium earned in 2010. See the “Insurance Company Segment” section below for further discussion of the changes in our loss and loss adjustment expense and policy acquisition costs.

Other operating expense, which includes compensation expense, decreased 1% year-over-year and increased 2% quarter-over-quarter. We had 1,893 employees at June 30, 2010 compared to 1,922 a year earlier. In 2009, we sold our U.K. reinsurance broker and the operations of our commercial marine agency business, which primarily accounts for the reduction in other operating expense and the number of employees in 2010. In addition, year-to-date other operating expense for 2010 and 2009 included $3.0 million and $9.9 million of expense for costs directly related to the commutations of a derivative contract and the MGIC reinsurance contract, respectively. Currency conversion expense was $2.7 million and $1.2 million in the first six months and the second quarter of 2010, respectively, compared to a $0.2 million and $0.1 million benefit in the first six months and the second quarter of 2009, respectively.

Other operating expense includes $7.3 million and $7.9 million in the first six months of 2010 and 2009, 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. In the first half of 2010, we granted $19.3 million of restricted stock awards and units, with a weighted-average life of 6.5 years. At June 30, 2010, there was approximately $27.3 million of total unrecognized compensation expense related to unvested options and restricted stock awards and units that is expected to be recognized over a weighted-average period of 4.0 years.

Our effective income tax rate was 30.5% for the first six months of 2010, compared to 31.7% for the first six months of 2009. The lower effective rate in 2010 related to the increased benefit from tax-exempt investment income relative to a lower pretax income base.

At June 30, 2010, total assets were $9.0 billion and shareholders’ equity was $3.2 billion, compared to $8.8 billion and $3.0 billion, respectively, at December 31, 2009. Our book value per share was $27.78, which increased from $26.58 at December 31, 2009.

Segments

Insurance Company Segment

Net earnings of our insurance company segment decreased $11.4 million, or 6%, and $2.1 million, or 2%, in the first six months and second quarter of 2010, compared to the same periods in 2009. We recognized catastrophe losses in the first quarter of 2010 of $20.6 million (pretax and net of reinsurance). In addition, the commutation of the MGIC reinsurance contract generated $20.5 million in insurance company revenue in the first quarter of 2009. These two items more than offset the effect of higher net earned premium and greater investment income recognized in the first six months of 2010, as well as the gain in the first half of 2010 from the commutation of a derivative contract.

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Premium

Gross written premium was 2% higher in the first six months and second quarter of 2010, compared to the same periods in 2009, due to the addition of our property treaty business, which we began writing in late 2009, partially offset by reductions in other lines of business due to the soft insurance market. The overall percentage of retained premium, as measured by the percent of net written premium to gross written premium, was 80% and 81% in the first six months of 2010 and 2009, respectively.

The following tables provide premium information by line of business.

	Gross		Net		NWP			Net
	written		written		as % of			earned
Six months ended June 30, 2010	premium		premium		GWP			premium
Diversified financial products
Directors’ and officers’	$	219,740	$	146,699		67	%	$	183,639
Errors and omissions		113,499		96,478		85			106,691
Other		32,339		24,225		75			21,364
U.S. surety and credit		117,170		107,559		92			98,620
International surety and credit		40,245		36,673		91			35,884
		522,993		411,634		79			446,198
Group life, accident and health
Medical stop-loss		323,558		323,558		100			323,558
Other medical		49,356		49,356		100			50,618
Other		38,010		10,067		26			12,597
		410,924		382,981		93			386,773
Aviation		76,908		53,750		70			58,298
London market account
Energy		80,322		47,465		59			26,789
Property treaty		55,095		49,046		89			15,609
Other		63,610		41,250		65			29,215
		199,027		137,761		69			71,613
Other specialty lines
Public risk		34,691		23,650		68			22,926
HCC Lloyd’s		27,369		24,898		91			19,187
Other		42,130		10,347		25			10,945
		104,190		58,895		57			53,058
Discontinued lines		32		32		nm			32
Totals	$	1,314,074	$	1,045,053		80	%	$	1,015,972

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	Gross			Net			NWP			Net
	written			written			as % of			earned
Six months ended June 30, 2009	premium			premium			GWP			premium
Diversified financial products
Directors’ and officers’	$	232,710		$	167,141			72	%	$	172,488
Errors and omissions		127,857			111,359			87			118,282
Other		44,581			35,433			79			20,767
U.S. surety and credit		96,339			91,794			95			89,727
International surety and credit		39,575			35,135			89			32,651
		541,062			440,862			81			433,915
Group life, accident and health
Medical stop-loss		315,844			315,842			100			315,842
Other medical		63,459			63,459			100			66,229
Other		46,026			15,370			33			16,100
		425,329			394,671			93			398,171
Aviation		83,751			60,876			73			65,461
London market account
Energy		77,632			47,735			61			22,439
Property treaty		—			—			—			—
Other		56,589			32,806			58			26,940
		134,221			80,541			60			49,379
Other specialty lines
Public risk		35,877			27,851			78			17,807
HCC Lloyd’s		23,613			18,917			80			20,940
Other		39,861			10,894			27			18,703
		99,351			57,662			58			57,450
Discontinued lines		(10	)		(10	)		nm			(10	)
Totals	$	1,283,704		$	1,034,602			81	%	$	1,004,366

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	Gross			Net			NWP			Net
	written			written			as % of			earned
Three months ended June 30, 2010	premium			premium			GWP			premium
Diversified financial products
Directors’ and officers’	$	135,572		$	90,743			67	%	$	90,721
Errors and omissions		57,151			48,515			85			52,798
Other		15,927			11,304			71			9,538
U.S. surety and credit		63,149			60,140			95			51,871
International surety and credit		18,940			17,037			90			17,695
		290,739			227,739			78			222,623
Group life, accident and health
Medical stop-loss		161,792			161,792			100			161,792
Other medical		27,038			27,038			100			25,597
Other		15,712			4,919			31			5,742
		204,542			193,749			95			193,131
Aviation		39,387			27,729			70			29,355
London market account
Energy		63,740			37,623			59			10,602
Property treaty		17,465			13,789			79			8,855
Other		23,860			17,799			75			15,988
		105,065			69,211			66			35,445
Other specialty lines
Public risk		17,979			14,445			80			11,436
HCC Lloyd’s		9,767			8,625			88			9,002
Other		24,109			5,314			22			5,403
		51,855			28,384			55			25,841
Discontinued lines		(10	)		(10	)		nm			(10	)
Totals	$	691,578		$	546,802			79	%	$	506,385

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	Gross			Net			NWP			Net
	written			written			as % of			earned
Three months ended June 30, 2009	premium			premium			GWP			premium
Diversified financial products
Directors’ and officers’	$	138,426		$	99,674			72	%	$	89,686
Errors and omissions		65,498			56,707			87			58,877
Other		18,807			13,601			72			9,791
U.S. surety and credit		52,206			49,392			95			45,235
International surety and credit		21,013			18,125			86			16,242
		295,950			237,499			80			219,831
Group life, accident and health
Medical stop-loss		156,358			156,358			100			156,359
Other medical		31,853			31,853			100			33,176
Other		20,125			7,404			37			7,548
		208,336			195,615			94			197,083
Aviation		41,799			30,265			72			32,647
London market account
Energy		62,818			41,558			66			13,204
Property treaty		—			—			—			—
Other		26,654			12,589			47			12,501
		89,472			54,147			61			25,705
Other specialty lines
Public risk		15,943			12,735			80			9,187
HCC Lloyd’s		12,391			9,236			75			10,150
Other		17,440			3,869			22			7,389
		45,774			25,840			56			26,726
Discontinued lines		(14	)		(14	)		nm			(14	)
Totals	$	681,317		$	543,352			80	%	$	501,978

nm — Not meaningful

The changes in premium volume and retention levels resulted principally from the following factors:

• Diversified financial products — Gross written premium was higher in 2009 because we wrote more directors’ and officers’ liability and errors and omissions liability business due to the perception in the market place at that time about the financial strength of some of our competitors. In addition, pricing on these product lines was lower in 2010. The pricing for credit insurance improved in 2010, and our premium has increased accordingly. Our retention rate was lower in 2010 due to lower quota share retention on our international directors’ and officers’ liability business, as well as additional reinsurance on our U.S. business in order to increase gross maximum limits per account. Net earned premium increased in 2010 primarily due to the high volume of directors’ and officers’ liability business written in 2009, primarily in the second half of the year.

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• Group life, accident and health — The decrease in premium was due to our discontinuance of the provider excess business in late 2009.

• Aviation — We wrote less aviation premium in 2010 due to continuing competition for U.S. business. Our international writings were stable due to improved pricing in the international market.

• London market account — Premium increased primarily due to our new property treaty business, which we started writing in late 2009. On a full year basis, our retention on the property treaty business is expected to approximate 80%.

• Other specialty lines — Although premium and retention ratios by product changed year-over-year due to changes in the mix of business, total premium and the overall retention rate were essentially flat for our other specialty lines.

Losses and Loss Adjustment Expenses

Our gross loss ratio was 64.4% and 61.9% in the first six months of 2010 and 2009, respectively, and 64.3% and 58.8% in the second quarter of 2010 and 2009, respectively. The 2010 year-to-date and second quarter gross loss ratios included 4.7 percentage points and 4.4 percentage points, respectively, for the catastrophe losses that occurred in the first quarter and the Deepwater Horizon rig disaster that occurred in the second quarter.

The table below shows the composition of net incurred loss and loss adjustment expense.

	Six months ended June 30,											Three months ended June 30,
	2010					2009						2010						2009
			Loss						Loss						Loss						Loss
	Amount		ratio			Amount			ratio			Amount			ratio			Amount			ratio
2010 catastrophes	$	20,588		2.0	%	$	—			—	%	$	—			—	%	$	—			—	%
(Redundant) adverse reserve development		2,166		0.2			(11,272	)		(1.1	)		(2,844	)		(0.6	)		(15,999	)		(3.2	)
All other net incurred loss and loss adjustment expense		602,753		59.4			619,408			61.6			301,830			59.6			308,569			61.5
Net incurred loss and loss adjustment expense	$	625,507		61.6	%	$	608,136			60.5	%	$	298,986			59.0	%	$	292,570			58.3	%

Our adverse development for the six months of 2010 primarily resulted from the effect of: 1) a $3.0 million increase in reserves on our discontinued assumed accident and health line, due to receipt of new claims information and 2) re-estimation of our net claims exposure for products in the life, accident and health line of business, partially offset by reduction of our reserves for the 2005 and 2008 hurricanes. The redundant development in the six months of 2009 primarily resulted from reduction of our loss reserves for: 1) the 2005 hurricanes, 2) the U.K. professional indemnity business for the 2004 — 2006 underwriting years and 3) our aviation business for the 2001 — 2006 underwriting years. This redundancy was partially offset by adverse development related to re-estimation of claims exposure for certain products in the life, accident and health line of business. Deficiencies and redundancies in reserves occur as we review our loss reserves with our actuaries, increasing or reducing loss reserves as a result of such reviews and as losses are finally settled or claims exposures change.

We provide directors’ and officers’ liability, errors and omissions liability and fiduciary liability coverage for certain financial institutions, which have potential exposure to shareholders’ lawsuits related to subprime issues. During the second quarter of 2010, there were no new subprime-related claims. We have no material exposure to environmental or asbestos losses.

We believe we have provided for all material net incurred losses as of June 30, 2010.

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The following table provides comparative net loss ratios by line of business and major product lines.

	Six months ended June 30,											Three months ended June 30,
	2010					2009						2010						2009
	Net		Net			Net			Net			Net			Net			Net			Net
	earned		loss			earned			loss			earned			loss			earned			loss
	premium		ratio			premium			ratio			premium			ratio			premium			ratio
Diversified financial products
Directors’ and officers’	$	183,639		62.5	%	$	172,488			62.1	%	$	90,721			61.9	%	$	89,686			63.4	%
Errors and omissions		106,691		56.6			118,282			49.5			52,798			56.1			58,877			43.8
Other		21,364		41.3			20,767			47.7			9,538			50.3			9,791			45.2
U.S. surety and credit		98,620		28.3			89,727			30.9			51,871			29.9			45,235			31.4
International surety and credit		35,884		38.4			32,651			55.4			17,695			32.7			16,242			57.7
		446,198		50.6			433,915			51.0			222,623			50.2			219,831			50.3
Group life, accident and health
Medical stop-loss		323,558		73.9			315,842			73.5			161,792			74.0			156,359			74.4
Other medical		50,618		68.6			66,229			78.7			25,597			60.5			33,176			68.7
Other		12,597		58.3			16,100			58.4			5,742			63.3			7,548			59.8
		386,773		72.7			398,171			73.8			193,131			71.9			197,083			72.9
Aviation		58,298		59.3			65,461			57.0			29,355			61.9			32,647			52.7
London market account
Energy		26,789		36.7			22,439			7.7			10,602			(26.1	)		13,204			(7.6	)
Property treaty		15,609		103.5			—			—			8,855			47.5			—			—
Other		29,215		60.8			26,940			42.6			15,988			44.4			12,501			35.5
		71,613		61.1			49,379			26.7			35,445			24.1			25,705			13.4
Other specialty lines
Public risk		22,926		69.6			17,807			66.4			11,436			69.2			9,187			64.2
HCC Lloyd’s		19,187		62.1			20,940			65.1			9,002			63.2			10,150			62.6
Other		10,945		87.6			18,703			91.2			5,403			96.7			7,389			72.6
		53,058		70.6			57,450			74.0			25,841			72.9			26,726			65.9
Discontinued lines		32		nm			(10	)		nm			(10	)		nm			(14	)		nm
Totals	$	1,015,972		61.6	%	$	1,004,366			60.5	%	$	506,385			59.0	%	$	501,978			58.3	%
Expense ratio				26.4						25.0						26.6						25.5
Combined ratio				88.0	%					85.5	%					85.6	%					83.8	%

nm — Not meaningful

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The changes in net loss ratios between periods resulted principally from the following factors:

• Group life, accident and health — The lower 2010 loss ratios for the other medical products resulted from improvements in our medical excess business.

• Aviation — The 2009 loss ratios included favorable prior year development, which reduced the year-to-date and second quarter loss ratio by 7.6 percentage points and 15.4 percentage points, respectively.

• London market account — The 2010 net loss ratios for all major product lines included the effect of the first quarter catastrophe losses, which increased the year-to-date total London market account loss ratio by 28.7 percentage points. The 2010 and 2009 net loss ratios included redundant reserve development on prior year hurricanes. The redundancies reduced the total London market account loss ratio by 9.5 percentage points and 17.9 percentage points for year-to-date 2010 and 2009, respectively, and 21.5 percentage points and 30.3 percentage points in the second quarter of 2010 and 2009, respectively.

The table below provides a reconciliation of our reserves for loss and loss adjustment expense payable, net of reinsurance ceded, the amount of our paid claims and our net paid loss ratios.

	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Net reserves for loss and loss adjustment expense payable at beginning of period	$	2,555,840		$	2,416,271		$	2,555,670		$	2,472,475
Net reserve additions from acquired businesses		8,110			34,922			—			4,713
Foreign currency adjustment		(47,786	)		29,355			(20,673	)		47,627
Incurred loss and loss adjustment expense		625,507			608,136			298,986			292,570
Loss and loss adjustment expense payments		(573,354	)		(525,488	)		(265,666	)		(254,189	)
Net reserves for loss and loss adjustment expense payable at end of period	$	2,568,317		$	2,563,196		$	2,568,317		$	2,563,196
Net paid loss ratio		56.4	%		52.3	%		52.5	%		50.6	%

The net paid loss ratio is the percentage of losses paid, net of reinsurance, divided by net earned premium for the period. The net paid loss ratio was higher in the 2010 periods, primarily due to a higher amount of claims payments for our directors’ and officers’ liability, credit and medical stop-loss businesses than in the same prior year periods.

Policy Acquisition Costs

Policy acquisition costs, which are reported net of the related portion of commissions on reinsurance ceded, as a percentage of net earned premium increased to 18.3% in the first six months of 2010 from 17.8% in the first six months of 2009, principally due to the effect of a $3.8 million premium deficiency reserve recorded at December 31, 2008, which reduced the amount of policy acquisition costs recognized throughout 2009. The GAAP expense ratio of 26.4% in the first six months of 2010 exceeded the expense ratio of 25.0% in the first six months of 2009, primarily due to higher expenses related to our international business and higher currency conversion expense. In addition, the expense ratio for the first six months of 2009 included a benefit from reversing a provision for uncollectible reinsurance.

Agency Segment

Revenue from our agency segment was $67.1 million in the first six months of 2010, compared to $94.1 million in the first six months of 2009. The reduction was expected due to the sale of our U.K. reinsurance broker and the sale of the operations of our commercial marine agency business in 2009. In addition, we had $5.0 million of revenue in the first six months of 2009 from a termination payment from the commutation of the MGIC reinsurance contract. As a result of this lower revenue, the segment had a net loss of $1.4 million in the first six months of 2010, compared to net earnings of $8.5 million in the same period of 2009. The segment had $3.0 million of net earnings in the second quarter of 2010. We expect the agency segment will generate net earnings for full year 2010 due to the seasonality of business written by our largest agency.

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Other Operations Segment

Revenue and net earnings from our other operations segment were $3.9 million and $1.4 million, respectively, in the first six months of 2010 compared to $5.2 million and $2.2 million, respectively, in the first six months of 2009. Results of this segment may vary substantially period to period depending on our investment in or disposition of strategic investments.

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 $560.3 million of cash and liquid short-term investments at June 30, 2010.

• Our available for sale bond portfolio had a fair value of $4.9 billion at June 30, 2010, compared to $4.5 billion at December 31, 2009, and has 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. Should we sell certain securities in the portfolio before their maturity, we cannot be assured that we would recoup the full reported fair value of the securities sold at the time of sale.

• Our insurance companies have sufficient resources to pay potential claims in 2010. As of December 31, 2009, we projected that during 2010 they will pay $1.2 billion of claims and collect approximately $314.7 million of reinsurance recoveries on claims incurred as of year-end 2009. At December 31, 2009, our insurance companies had approximately $1.2 billion of cash, short-term investments, maturing bonds, and principal payments from mortgage-backed and asset-backed securities that will be available to pay these expected claims in 2010. As of June 30, 2010, there has been no significant change in our expectations of our subsidiaries’ ability to pay claims.

• Our debt consists of $300.0 million principal amount of unsecured 6.30% Senior Notes due November 15, 2019. Our debt to total capital ratio was 8.5% at June 30, 2010 and 9.0% at December 31, 2009.

• 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 June 30, 2010, we had $553.4 million of unused capacity, which we can draw against at any time at our request. The facility agreement contains two restrictive financial covenants, with which we were in compliance at June 30, 2010.

• During 2010, there was no significant change in our Standby Letter of Credit Facility used to guarantee our performance in our Lloyd’s of London syndicates.

• Our domestic insurance subsidiaries have the ability to pay $217.8 million in dividends in 2010 to our holding company without obtaining special permission from state regulatory authorities. Our underwriting agencies have no restrictions on the amount of dividends that can be paid to our holding company. The holding company 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. Cash flow available to the holding company in 2010 is expected to be more than 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 premiums, reinsurance recoverables, outward commutations, fee and commission income, proceeds

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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 $139.3 million and $262.2 million in the first six months of 2010 and 2009, respectively. The components of our net operating cash flows are summarized in the following table.

	Six months ended June 30,
	2010			2009
Net earnings	$	154,734		$	174,755
Change in premium, claims and other receivables, net of reinsurance, other payables and restricted cash		(67,355	)		(38,200	)
Change in unearned premium, net		27,911			41,547
Change in loss and loss adjustment expense payable, net of reinsurance recoverables		39,357			73,839
(Gain) loss on investments		(7,329	)		1,924
Other, net		(7,992	)		8,311
Cash provided by operating activities	$	139,326		$	262,176

We had $47.9 million of higher claims payments in 2010, compared to 2009, which was the largest contributor to the reduction in cash provided by operating activities. Timing differences in the collection of premium and payment of reinsurance balances payable reduced our cash provided by operating activities in 2010 compared to 2009. In 2010, we received $8.3 million of cash to commute a derivative contract and in 2009, we received $25.0 million to commute the MGIC reinsurance contract. Cash provided by operating activities can fluctuate due to timing differences in the collection of premium and reinsurance recoverables and the payment of claims and premium and reinsurance balances payable.

We maintain a substantial level of cash and liquid short-term investments to meet anticipated payment obligations. During January 2010, we paid the final $64.5 million due to previous holders of our 1.3% Convertible Notes that were submitted for conversion in December 2009 using cash held as of December 31, 2009. Our combined cash and short-term investments totaled $560.3 million at June 30, 2010.

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Investments

At June 30, 2010, we had $5.6 billion of total investments, an increase of $95.9 million from December 31, 2009. This table summarizes our investments by type, substantially all of which are reported at fair value, at June 30, 2010 and December 31, 2009.

	June 30, 2010					December 31, 2009
	Amount		%			Amount		%
U.S. government and government agency securities	$	370,896		7	%	$	328,535		6	%
Fixed income securities of states, municipalities and political subdivisions		1,090,158		20			1,059,426		19
Special purpose revenue bonds of states, municipalities and political subdivisions		1,392,736		25			1,146,334		21
Corporate fixed income securities		751,172		14			693,915		13
Residential mortgage-backed securities		1,064,299		19			944,182		17
Commercial mortgage-backed securities		147,902		2			146,217		3
Asset-backed securities		11,546		—			14,365		—
Foreign government securities		246,846		4			307,891		6
Short-term investments		476,176		9			810,673		15
Other investments		433		—			4,691		—
Total investments	$	5,552,164		100	%	$	5,456,229		100	%

This table shows the average amount of investments, net income earned, related yields and duration, and average rating of our fixed income securities.

	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Average investments, at cost	$	5,324,304		$	4,968,017		$	5,338,843		$	5,057,271
Net investment income *		99,466			93,629			50,217			48,411
Average short-term yield *		0.1	%		0.5	%		0.1	%		0.4	%
Average long-term yield *		4.1	%		4.2	%		4.1	%		4.3	%
Average long-term tax equivalent yield *		5.0	%		5.1	%		5.0	%		5.2	%
Average combined tax equivalent yield *		4.5	%		4.5	%		4.5	%		4.6	%
Weighted-average life of fixed income securities	6.5 years			6.7 years
Weighted-average duration of fixed income securities	4.8 years			5.0 years
Weighted-average combined duration	4.4 years			4.4 years
Average rating of fixed income securities	AA+			AA+

* Excluding realized and unrealized gains and losses.

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This table summarizes our investments in fixed income securities by their rating category at June 30, 2010.

	Available for sale					Held to maturity
	at fair value					at amortized cost
	Amount		%			Amount		%
AAA	$	2,354,670		48	%	$	83,006		48	%
AA		1,803,499		37			26,200		15
A		607,169		12			61,851		36
BBB		99,325		2			1,292		1
BB and below		38,543		1			—		—
Total fixed income securities	$	4,903,206		100	%	$	172,349		100	%

The overall rating of our municipal bonds (consisting of our fixed income securities of states, municipalities and political subdivisions and our special purpose revenue bonds of states, municipalities and political subdivisions) was AA+ at June 30, 2010. Our portfolio of special purpose revenue bonds at June 30, 2010 and December 31, 2009 included $111.9 million and $138.7 million, respectively, of pre-refunded bonds that are supported by U.S. government debt obligations. The remaining special purpose bonds are secured by revenue sources specific to each security, such as water, sewer and utility fees; highway tolls; airport usage fees; property, sales and fuel taxes; college tuition and services fees; electric utilities and lease income. The table below summarizes our percentage holdings of special purpose revenue bonds by revenue source.

	June 30,			December 31,
	2010			2009
Water and sewer		26	%		27	%
Education		16			14
Transportation		13			13
Special tax		10			11
Pre-refunded		9			13
Leasing		8			8
Electric		8			7
Other		10			7
Total		100	%		100	%

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 June 30, 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, such as water and sewer, education and transportation fees, which we believe generate a stable source of revenue.

At June 30, 2010, we held a corporate bond portfolio with a carrying value of $751.2 million, an overall rating of A+, and a weighted-average life of approximately 3.2 years.

At June 30, 2010, we also held a portfolio of residential mortgage-backed securities (MBSs) and collateralized mortgage-obligations (CMOs) with a fair value of $1.1 billion. Within our residential MBS/CMO portfolio, $1.0 billion of securities, or 95%, 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 backed by the U.S. government. Of the remaining $52.9 million of residential mortgage-backed securities, 91% were collateralized by prime mortgages.

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At June 30, 2010, we held a commercial MBS securities portfolio with a fair value of $147.9 million, an average rating of AA+, an average loan-to-value ratio of 72%, and a weighted-average life of approximately 4.5 years. We owned no collateralized debt obligations (CDOs) or collateralized loan obligations (CLOs), and we have never been counterparty to any credit default swap transactions.

This table indicates the expected maturity distribution of our fixed income securities at June 30, 2010.

						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	$	268,234		8	%	$	146,347		12	%	$	23,758		14	%	$	438,339		9	%
One year to five years		1,070,303		30			881,634		76			137,148		80			2,089,085		43
Five years to ten years		836,824		24			128,918		11			11,443		6			977,185		20
Ten years to fifteen years		726,382		21			5,726		1			—		—			732,108		15
More than fifteen years		613,895		17			—		—			—		—			613,895		13
Total fixed income securities	$	3,515,638		100	%	$	1,162,625		100	%	$	172,349		100	%	$	4,850,612		100	%

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 the individual securities within our available for sale fixed income securities portfolios were $7.5 million at June 30, 2010, compared to $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. For a description of the accounting polices and procedures that we use to determine our other-than-temporary impairment losses, see Footnote 3, “Investments,” in the notes to these condensed consolidated financial statements and “Critical Accounting Policies — Other-than-temporary Impairments in Investments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009. We recognized no other-than-temporary impairment credit losses in 2010, compared to $5.0 million and $1.8 million in the first six months and second quarter of 2009, respectively.

At June 30, 2010, the net unrealized gain on our available for sale fixed income securities portfolio was $224.9 million, compared to $156.3 million at December 31, 2009. The change in the net unrealized gain, net of the related income tax effect, is recorded in other comprehensive income and fluctuates with changes in market interest rates. Our general policy has been to hold our fixed income securities, most of which are primarily classified as available for sale, through periods of fluctuating interest rates and to not realize significant gains or losses from their sale. We recognized $6.8 million and $4.0 million of pretax net realized investment gains in the first six months of 2010 and 2009, respectively.

Accounting Guidance in 2010

A new accounting standard, originally issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), became effective January 1, 2010. The guidance, which was incorporated into Accounting Standards Codification (ASC) Topic 810, Consolidation, changes various aspects of accounting for and disclosures of interests in variable interest entities. Our adoption of this guidance as of January 1, 2010 had no material impact on our condensed consolidated financial statements.

Effective January 1, 2010, we adopted Accounting Standards Update (ASU) No. 2010-06, which incorporated changes in disclosure requirements into ASC Topic 820, Fair Value Measurements and Disclosures. Where applicable, we have included the additional required disclosures in the notes to our condensed consolidated financial statements.

A new accounting standard, ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, was issued in July 2010. The new guidance expands disclosures related to financing receivables, including the nature of credit risk in financing receivables, how that risk is analyzed in determining the related allowance for credit losses, and changes to the allowance during the reporting period. We will provide the additional required disclosures in our Form 10-K for the year ended December 31, 2010.

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Critical Accounting Policies

We have made no changes in the identification or methods of application of our critical accounting policies from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies”, in our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk from the information provided in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Act)) that are designed to ensure that required information is recorded, processed, summarized and reported within the required timeframe, as specified in rules set forth by the Securities and Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow timely decisions regarding required disclosures.

Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2010.

(b) Changes in Internal Control over Financial Reporting

During the second quarter of 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II — Other Information

Item 1. Legal Proceedings

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 1A. Risk Factors

There have been no material changes in the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On June 20, 2008, our Board of Directors approved the purchase of up to $100.0 million of our common stock. On May 27, 2010, our Board of Directors approved a new authorization for $300.0 million and cancelled the $0.7 million remaining under the original authorization. The new 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 will be subject to market and business conditions, as well as the level of cash generated from our 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 us to purchase any particular number of shares, and may be suspended or discontinued at any time at our discretion. As of June 30, 2010, we had paid $100.0 million to purchase 4,722,911 shares of our common stock in the open market pursuant to these purchase programs.

During the second quarter of 2010, we purchased our common stock, as follows:

					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
2008 Authorization
April 1 — April 30, 2010		—	$	—		—	$	1,201,217
May 1 — May 31, 2010		19,650		24.00		19,650		—
2010 Authorization
May 1 — May 31, 2010		—	$	—		—	$	300,000,000
June 1 — June 30, 2010		30,500		24.63		30,500		299,248,840

Item 6. Exhibits

a. Exhibits

3.1 Restated Certificate of Incorporation and Certificate of Amendment of Certificate of Incorporation of HCC Insurance Holdings, Inc., filed with the Delaware Secretary of State on July 23, 1996 and May 21, 1998, respectively (incorporated by reference to Exhibit 4.1 to our Registration Statement of Form S-8 (Registration No. 333-61687) filed August 17, 1998).

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3.2	Amended and Restated Bylaws of HCC Insurance Holdings, Inc., as amended (incorporated by reference to Exhibit 3.1 to our Form 8-K filed April 3, 2008).
10.1	First Amendment to Employment Agreement effective April 19, 2010, between HCC Insurance Holdings, Inc. and William T. Whamond (incorporated by reference to Exhibit 10.01 to our Form 8-K filed April 19, 2010).*
10.2	Employment Agreement dated May 27, 2010, between HCC Insurance Holdings, Inc. and Brad T. Irick.*
12	Statement of Ratio of Earnings to Fixed Charges.
31.1	Certification by Chief Executive Officer.
31.2	Certification by Chief Financial Officer.
32	Certification with Respect to Quarterly Report.
101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Earnings, (iii) Condensed Consolidated Statement of Changes in Shareholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.**

*

Executive Compensation Plans and Arrangements

**

The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HCC Insurance Holdings, Inc.
	(Registrant)
August 6, 2010	/s/ John N. Molbeck, Jr.
(Date)	John N. Molbeck, Jr., President
	and Chief Executive Officer
August 6, 2010	/s/ Pamela J. Penny
(Date)	Pamela J. Penny, Executive Vice President
	and Chief Accounting Officer

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EX-10.2

Exhibit 10.2

Execution Document

EMPLOYMENT AGREEMENT

     This EMPLOYMENT AGREEMENT (“Agreement”) is entered into effective as of the 10th day of May, 2010 (the “Effective Date”), by and between the Company, as hereinafter defined, and Brad T. Irick (“Executive” or “Employee”). As used herein, the “Company” shall mean HCC Insurance Holdings, Inc., a Delaware corporation, or such other HCC entity as is designated by the Chief Executive Officer of HCC, for which Executive devotes from time to time a substantial portion of his efforts. The Company shall sometimes be referred to herein as “HCC.” Executive and the Company are sometimes collectively referred to herein as the “Parties” and individually as a “Party.”

RECITALS:

     WHEREAS, Executive is to be employed as an officer or key employee of the Company;

     WHEREAS, the Company will engage Executive as an officer or key employee of the Company; and

     WHEREAS, the Company will employ Executive on the terms herein provided.

     NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements set forth below, the Parties agree as follows:

AGREEMENT

     1. Term. Effective as of the Effective Date, the Company hereby employs Executive, and Executive hereby accepts such employment, on the terms and conditions set forth herein, for the period (the “Term”) commencing on the Effective Date and expiring at the earlier to occur of (a) 11:59 p.m. on May 31, 2014 (the “Expiration Date”) or (b) the Termination Date (as hereinafter defined). If the Company continues to employ Executive after the Expiration Date, then Executive shall be an employee-at-will, unless the parties agree in writing to an extension of this Agreement.

     2. Duties.

          (a) Duties as Executive of the Company. Executive shall, subject to the supervision of the Chief Executive Officer of HCC (the “CEO”) or such other person designated by the CEO, act as the Executive Vice President and, as provided below in this Section 2(a), Chief Financial Officer of the Company in the ordinary course of its business with all such powers reasonably incident to the position or other such responsibilities or duties that may be from time to time assigned by the CEO. On August 10, 2010, Executive shall also assume the position of Chief Financial Officer. After his appointment as Chief Financial Officer, Executive may be reassigned or transferred to another management position with the same or greater level of responsibility, as designated by the CEO. During normal business hours, Executive shall devote his full time and attention to diligently attending to the business of the Company. During the Term, Executive shall not directly or indirectly render any services of a business, commercial, or professional nature to any other person, firm, corporation, or organization, whether for compensation or otherwise, without the prior written consent of the CEO. However, Executive shall have the right

to engage in such activities as may be appropriate in order to manage his personal investments and in educational, charitable and philanthropic activities so long as such activities do not materially interfere or conflict with the performance of his duties to the Company hereunder. The conduct of such activity shall not be deemed to materially interfere or conflict with Executive’s performance of his duties until Executive has been notified in writing thereof and given a reasonable period in which to cure the same.

          (b) Other Duties.

          (1) If elected, Executive agrees to serve as a member of such managerial committees of the Company and of any of its direct or indirect parents or subsidiaries (collectively, “Affiliates”) and in one or more executive offices of any of the Affiliates, provided Executive is indemnified for serving in any and all such capacities in a manner acceptable to the Company and Executive. If elected, Executive agrees that he shall not be entitled to receive any compensation for serving as a director of the Company, or in any capacities for the Company or the Company’s Affiliates other than the compensation to be paid to Executive by the Company pursuant to this Agreement.

          (2) Executive acknowledges and agrees that he has read and considered the written business policies and procedures of HCC as posted on HCC’s intranet and that he will abide by such policies and procedures throughout the term of his employment with the Company. Executive further agrees that he will familiarize himself with any amendments to the policies and procedures and that he will abide by such policies and procedures as they may change from time to time.

     3. Compensation and Related Matters.

          (a) Base Salary. Executive shall receive an initial base salary paid by the Company of $425,000 per year during the Term. At the sole discretion of HCC, the base salary may be increased. For purposes of this Agreement, “Base Salary” shall mean Executive’s initial base salary or, if increased, then the increased base salary. The Base Salary shall be paid, subject to all applicable withholdings and deductions, in substantially equal semi-monthly installments.

          (b) Bonus Plan. During the Term, Executive shall be eligible to receive, in addition to the Base Salary, an annual cash and/or stock bonus payment in an amount, which may be zero, to be determined at the sole discretion of the CEO or such other person as shall be designated by the CEO in accordance with HCC’s policies. Except as provided below for 2010, the CEO or such other person may unilaterally reduce or eliminate any annual bonus payment, if any, up until the time the bonus is actually paid (and notwithstanding any earlier, tentative determination of the bonus amount). Subject to Sections 4(c) and 4(d), no bonus payment shall be paid to Executive for a year if Executive’s Termination Date occurs at any time during such year. Moreover, even if Executive is employed by the Company on the last day of the year for which a bonus may be payable, Executive shall not be eligible for the payment of bonus compensation for such year if this Agreement or his employment with the Company terminates for any reason, other than Death or Disability, prior to the payment of such bonus compensation. Notwithstanding the foregoing, Executive’s bonus payment for the year ended December 31, 2010 shall be $200,000 and shall be paid in cash. Such payment shall occur after December 31, 2010 and on or before March 15, 2011.

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          (c) Expenses. During the Term, Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by him (in accordance with the policies and procedures established by the Company) in performing services hereunder, provided that Executive properly accounts therefor in accordance with Company policy. The amount of expenses eligible for reimbursement during a calendar year shall not affect the expenses eligible for reimbursement in any other calendar year. Reimbursement of eligible expenses shall be made on or before the last day of the calendar year following the calendar year in which the expenses were incurred.

          (d) Other Benefits. From time to time the Company and/or HCC may make available other compensation and employee benefit plans and arrangements. Executive shall be eligible to participate in such other compensation and employee benefit plans and arrangements on the same basis as similarly situated employees, subject to and on a basis consistent with the terms, conditions, and overall administration of such plans and arrangements, as amended from time to time. Nothing in this Agreement shall be deemed to confer upon Executive or any other person (including any beneficiary) any rights under or with respect to any such plan or arrangement or to amend any such plan or arrangement, and Executive and each other person (including any beneficiary) shall be entitled to look only to the express terms of any such plan or arrangement for his or her rights thereunder. Nothing paid to Executive under any such plan or arrangement presently in effect or made available in the future shall be deemed to be in lieu of the Base Salary payable to Executive pursuant to Section 3(a).

          (e) Vacation. Executive shall be entitled to twenty (20) vacation days each year of full employment during the Term, exclusive of holidays, as long as the scheduling of Executive’s vacation does not interfere with the Company’s normal business operation. Vacation not used by Executive during the calendar year will be forfeited. For purposes of this Paragraph, weekends shall not count as Vacation days. Executive shall also be entitled to all paid holidays given by the Company.

          (f) Proration. The Base Salary and perquisites payable to Executive hereunder in respect of any calendar year during which Executive is employed by the Company for less than the entire year, unless otherwise provided on Appendix 1, shall be prorated in accordance with the number of days in such calendar year during which he is so employed.

          (g) Stock Options. Stock options, if any, issued to Executive during the Term shall be issued under a stock option agreement containing terms with respect to vesting and exercise upon the occurrence of certain termination events that are substantially the same as those set forth in Exhibit 3(g) hereto, subject to any then required approval by the Compensation Committee of the Board.

          (h) Relocation Costs. Benefits in connection with Executive’s relocation to Houston, Texas, which shall include reasonable temporary housing costs and reimbursement of closing costs to purchase a primary residence, shall be in accordance with the terms of that certain Relocation Policy and Reimbursement Agreement to be entered into substantially contemporaneously herewith.

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          (i) Life Insurance. The Company shall provide to Executive a term life insurance policy or policies in an aggregate face amount of $1,000,000.00 and shall pay the premiums therefore during the Term. Upon Executive’s cessation as an employee of the Company during or after the Term for any reason other than death, the Company shall assign such policy or policies to Executive. The life insurance provided in this Section 3(i) shall be in addition to the group life insurance program covering Executive and substantially all of the employees of the Company during the Term.

     4. Termination.

          (a) Definitions.

          (1) “Cause” shall mean:

          (i) Executive’s failure or refusal to perform substantially his material duties, responsibilities and obligations (other than a failure resulting from Executive’s incapacity due to physical or mental illness or other reasons beyond the control of Executive) as determined in the sole discretion of the CEO;

          (ii) any act involving fraud, misrepresentation, theft, embezzlement, dishonesty or moral turpitude (“Fraud”) which results in material harm to Company or HCC;

          (iii) conviction of (or a plea of nolo contendre) to an offense which is a felony in the jurisdiction or which is a misdemeanor in the jurisdiction involved but which involves Fraud;

          (iv) a material breach of this Agreement by Executive, including, without limitation, any breach of the non-competition or confidentiality provisions of this Agreement; or

          (v) Executive’s failure to act or discharge or negligently acting or discharging any material part of his duties or obligations as determined in the sole discretion of the CEO.

Provided that in the event that any of the foregoing events is capable of being cured, the Company shall provide written notice to Executive describing the nature of such event and Executive shall thereafter have ten (10) calendar days to cure such event to the satisfaction of the Company.

          (2) A “Change of Control” shall be deemed to have occurred if:

     (i) Any “person” or “group” (within the meaning of sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act

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of 1934), directly or indirectly, of 50% or more of the Company’s then outstanding voting common stock; or

     (ii) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation (a) in which a majority of the directors of the surviving entity were directors of the Company prior to such consolidation or merger, and (b) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being changed into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities or the surviving entity outstanding immediately after such merger or consolidation; or

     (iii) The shareholders approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

          (3) A “Disability” shall mean the inability of Executive, with reasonable accommodation, to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months. Executive shall be considered to have a Disability (i) if he is determined to be totally disabled by the Social Security Administration or (ii) if he is determined to be disabled under HCC’s long-term disability plan in which Executive participates and if such plan defines “disability” in a manner that is consistent with the immediately preceding sentence.

          (4) A “Good Reason” shall mean any of the following (without Executive’s express written consent):

          (i) A material diminution in Executive’s Base Salary;

     (ii) Executive’s involuntary relocation to any place, other than the executive offices as a result of the Company relocating its executive offices, exceeding a distance of fifty (50) miles from the place of Executive’s normal place of employment on the Effective Date, except for reasonably required travel by Executive on the Company’s business; or

     (iii) Any material breach by the Company of any material provision of this Agreement.

However, Good Reason shall exist with respect to an above specified matter only if such matter is not corrected, or begun to be corrected, by the Company within thirty (30) days after the Company’s receipt of written notice of such matter from Executive. Any such notice from Executive must be provided within thirty (30) days after the initial existence of the specified event. In no event shall a termination by Executive occurring more than ninety (90) days following the initial date of the event described be a termination for Good Reason due to such event, whether that event is corrected or not.

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          (5) “Termination Date” shall mean the date Executive’s employment with the Company terminates or is terminated for any reason pursuant to this Agreement, and which constitutes a “separation from service” for purposes of Section 409A of the Internal Revenue Code of 1986, as amended, or any regulations or Treasury guidance promulgated thereunder (the “Code”).

          (b) Termination Without Cause or for Good Reason: Benefits. In the event the Company involuntarily terminates Executive’s employment with the Company and HCC without Cause or if Executive terminates employment with the Company and HCC for Good Reason (a “Termination Event”), this Agreement shall terminate and Executive shall be entitled to the following severance benefits:

          (1) An amount equal to the Base Salary (as defined in Section 3(a)) that would have been payable after the Termination Date and before the Expiration Date, at the rate in effect immediately prior to the Termination Event, payable in a lump sum discounted at the rate of return on 90-day Treasury bills in existence on the Termination Date to take into consideration the lump sum early payment within ninety (90) days after the Termination Date; provided that such payment shall in any event occur on or after such Termination Date and before March 15 of the year following the year containing such Termination Date;

          (2) Payment of accrued Base Salary and unreimbursed business expenses through the Termination Date in accordance with
Section 3(c). Such amounts shall be paid to Executive in a lump sum in cash within thirty (30) days after the Termination Date; and

          (3) Executive shall be free to accept other employment during the Restricted Period and the Non-Solicitation Period (as defined in Section 5), and other than as set forth herein, there shall be no offset of any employment compensation earned by Executive in such other employment during the Restricted Period and the Non-Solicitation Period against payments due Executive under this Section 4, and there shall be no offset in any compensation received from such other employment against the severance benefits set forth above, unless Executive is employed in a position of competing with the Company as described in Section 5 below.

          (c) Termination In Event of Death: Benefits. If Executive’s employment with the Company and HCC is terminated by reason of Executive’s death during the Term, this Agreement shall terminate without further obligation to Executive’s legal representatives under this Agreement, other than for payment of all accrued Base Salary through the Termination Date, unreimbursed business expenses through the Termination Date in accordance with Section 3(d), the amount of any bonus under Section 3(b) that relates to a prior year and that is unpaid as of the date of death, and an amount equal to six (6) months’ Base Salary. Such amounts shall be paid to Executive’s estate in a lump sum in cash within ninety (90) days after the date of death; provided that such payment shall in any event occur on or after such date of death and before March 15 of the year following the year of death. Executive shall be entitled to consideration for a bonus payment under Section 3(b) with respect to the year in which Executive dies; provided that the payment of any such bonus, if any, shall in any event occur on or after such date of death and before March 15 of the year following the year of death.

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          (d) Termination In Event of Disability: Benefits. If Executive’s employment with the Company and HCC is terminated by reason of Executive’s Disability during the Term, this Agreement shall terminate, but the Company shall pay Executive all accrued Base Salary through the Termination Date, unreimbursed business expenses through the Termination Date in accordance with Section 3(c), and the amount of any bonus under Section 3(b) that relates to a prior year and that is unpaid as of the date of Disability, and an amount equal to six (6) months’ Base Salary. Such amounts shall be paid to Executive in a lump sum in cash within ninety (90) days after the Termination Date due to Disability; provided that such payment shall in any event occur on or after such Termination Date and before March 15 of the year following the year containing such Termination Date. Executive shall be entitled to consideration for a bonus payment under Section 3(b) with respect to the year in which Executive’s employment terminates due to Disability; provided that any payment of such bonus, if any, shall in any event occur on or after such Termination Date and before March 15 of the year following the year containing such Termination Date.

          (e) Voluntary Termination by Executive and Termination for Cause: Benefits. Executive may terminate his employment with the Company by giving written notice of his intent and stating an effective Termination Date at least ninety (90) days after the date of such notice; provided, however, that the Company may accelerate such effective date by paying Executive through the proposed Termination Date (but not to exceed ninety (90) days). Upon such a termination by Executive or upon termination of Executive’s employment with the Company and HCC for Cause by the Company, this Agreement shall terminate and the Company shall pay to Executive all accrued Base Salary and all unreimbursed business expenses through the Termination Date in accordance with Section 3(c). Such amounts shall be paid to Executive in a lump sum in cash within thirty (30) days after the Termination Date. Executive shall have no entitlement to any bonus for the year in which the Termination Date occurs or for any unpaid bonus for the prior year.

          (f) Voluntary Termination by Executive after a Change of Control: Benefits. If Executive’s authority, duties, or responsibilities are materially diminished within twelve (12) months after a Change of Control occurs, Executive notifies the Company of such diminution within thirty (30) days, and the Company does not fully correct the condition within thirty (30) days after receiving such notice, Executive may voluntarily terminate his employment with the Company and shall be entitled to the following severance benefits:

          (1) An amount equal to the Base Salary (as defined in Section 3(a)) that would have been payable after the Termination Date and before the Expiration Date, at the rate in effect immediately prior to the Termination Event, payable in a lump sum discounted at the rate of return on 90-day Treasury bills in existence on the Termination Date to take into consideration the lump sum early payment within ninety (90) days after the Termination Date; provided that such payment shall in any event occur on or after such Termination Date and before March 15 of the year following the year containing such Termination Date;

          (2) All unreimbursed business expenses through the Termination Date in accordance with Section 3(d). Such amounts shall be paid to Executive in a lump sum in cash within thirty (30) days after the Termination Date;

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          (3) All stock options granted to Executive prior to the Effective Date shall vest immediately, regardless of any limitation or condition when granted, and each such option shall be exercisable for the period provided in the respective option grant agreement with respect to such option. The provisions of this Section 4(f)(3) constitute an amendment to the terms of each applicable option agreement (including agreements for options granted on or after the Effective Date); and

          (4) Executive shall be free to accept other employment during such period, and other than as set forth herein, there shall be no offset of any employment compensation earned by Executive in such other employment during such period against payments due Executive under this Section 4, and there shall be no offset in any compensation received from such other employment against the severance benefits set forth above, unless Executive is employed in a position of competing with the Company as described in Section 5 below.

          (g) Director and Officer Positions. Executive agrees that upon termination of employment, for any reason, Executive will immediately tender his resignation from any and all Board or officer positions held with the Company and/or any of its Affiliates.

     5. Agreement Regarding Non-Competition, Non-Solicitation and Confidentiality. During Executive’s employment with the Company and HCC agree to give Executive access to some or all of its Confidential Information (including, without limitation, Confidential Information, as defined below, of the Company’s Affiliates) that Executive has not had access to or knowledge of before the execution of this Agreement. The Company and HCC agree to provide Executive with Specialized Training, which Executive has not had access to or knowledge of before the execution of this Agreement. “Specialized Training” includes the training the Company provides to its employees that is unique to its business and enhances Executive’s ability to perform Executive’s job duties effectively. Specialized Training includes, without limitation, orientation training; sales methods/techniques training; operation methods training; and computer and systems training.

          (a) Non-Competition During Employment. Executive agrees that, in consideration for the Company’s and HCC’s promise to provide Executive with Confidential Information and Specialized Training, during the Term, he will not compete with the Company by engaging in the conception, design, development, production, marketing, or servicing of any product or service that is substantially similar to the products or services which the Company provides, and that he will not work for, in any capacity, assist, or become affiliated with as an owner, partner, etc., either directly or indirectly, any individual or business which offers or performs services, or offers or provides products substantially similar to the services and products provided by Company; provided, however, Executive shall not be prevented from owning no more than 2% of any company whose stock is publicly traded.

          (b) Conflicts of Interest. Executive agrees that during the Term, he will not engage, either directly or indirectly, in any activity
(a “Conflict of Interest”) that might adversely affect the Company or its Affiliates, including ownership of a material investment in a competitor of the Company or its Affiliates, ownership of a material interest in any supplier, contractor, distributor, subcontractor, customer or other entity with which the Company does business or acceptance of any material payment, service, loan, gift, trip, entertainment, or other favor from a

8

supplier, contractor, distributor, subcontractor, customer or other entity with which the Company does business, and that Executive will promptly inform the CEO as to each offer received by Executive to engage in any such activity. Executive further agrees to disclose to the Company any other facts of which Executive becomes aware which in Executive’s good faith judgment could reasonably be expected to involve or give rise to a Conflict of Interest or potential Conflict of Interest.

          (c) Non-Competition After Termination from Employment. Executive agrees that in order to protect the Company’s and HCC’s Confidential Information and Specialized Training, it is necessary to enter into the following restrictive covenant, which is ancillary to the enforceable promises between the Company and Executive otherwise contained in this Agreement. Executive agrees that Executive shall not, at any time during the Restricted Period (as hereinafter defined), within any of the markets in which the Company has sold products or services or formulated a plan to sell products or services into a market during the last twelve (12) months of Executive’s employ, engage in or contribute Executive’s knowledge to any work which is competitive with or similar to a product, process, apparatus, service, or development on which Executive worked while employed by the Company. It is understood that the geographical area set forth in this covenant is divisible so that if this clause is invalid or unenforceable in an included geographic area, that area is severable and the clause remains in effect for the remaining included geographic areas in which the clause is valid. For the purpose of this Agreement, “Restricted Period” means a period of twelve (12) months after termination for any reason whatsoever, whether by Executive or the Company, of Executive’s employment with the Company. The Restricted Period shall commence at the time Executive ceases to be a full-time employee of the Company.

          (d) Confidential Information. Executive agrees that he will not, except as the Company or HCC may otherwise consent or direct in writing, reveal or disclose, sell, use, lecture upon, publish or otherwise disclose to any third party any Confidential Information or proprietary information of the Company or HCC, or authorize anyone else to do these things at any time either during or subsequent to his employment with the Company. This Paragraph shall continue in full force and effect after termination of Executive’s employment and after the termination of this Agreement. Executive’s obligations under this Paragraph with respect to any specific Confidential Information and proprietary information shall cease when that specific portion of the Confidential Information and proprietary information becomes publicly known, in its entirety and without combining portions of such information obtained separately. It is understood that such Confidential Information and proprietary information of the Company and HCC include matters that Executive conceives or develops, as well as matters Executive learns from other employees of the Company or HCC. “Confidential Information” is defined to include information: (1) disclosed to or known by Executive as a consequence of or through his employment with the Company; (2) not generally known outside the Company or HCC; and (3) that relates to any aspect of the Company, HCC or their business, finances, operation plans, budgets, research, or strategic development. “Confidential Information” includes, but is not limited to, the Company’s and HCC’s trade secrets, proprietary information, financial documents, long range plans, customer lists, employer compensation, marketing strategy, data bases, costing data, computer software developed by the Company or HCC, investments made by the Company or HCC, and any information provided to the Company or HCC by a third party under restrictions against disclosure or use by the Company, HCC or others.

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          (e) Non-Solicitation. To protect the Company’s and HCC’s Confidential Information and Specialized Training, and in the event of Executive’s termination of employment for any reason whatsoever, whether by Executive or the Company, it is necessary to enter into the following restrictive covenant, which is ancillary to the enforceable promises between the Company and Executive otherwise contained in this Agreement. Executive covenants and agrees that during Executive’s employment and for a period of twenty-four (24) months from the date of termination of Executive’s employment for any reason whatsoever (the “Non-Solicitation Period”), Executive will not, directly or indirectly, either individually or as a principal, partner, agent, consultant, contractor, employee or as a director or officer of any corporation or association, or in any other manner or capacity whatsoever, except on behalf of the Company, solicit business, or attempt to solicit business, and products or services competitive with products or services sold by the Company, from the Company’s clients or customers, or those individuals or entities with whom the Company did business during Executive’s employment. Executive further agrees that during Executive’s employment and for the Non-Solicitation Period, Executive will not, either directly or indirectly, or by acting in concert with others, solicit or influence any Company employee to leave the Company’s employment.

          (f) Return of Documents, Equipment, Etc. All writings, records, and other documents and things comprising, containing, describing, discussing, explaining, or evidencing any Confidential Information, and all equipment, components, parts, tools, and the like in Executive’s custody or possession that have been obtained or prepared in the course of Executive’s employment with the Company shall be the exclusive property of the Company or HCC, shall not be copied and/or removed from the premises of the Company, except in pursuit of the business of the Company, and shall be delivered to the Company or HCC, without Executive retaining any copies, upon notification of the termination of Executive’s employment or at any other time requested by the Company or HCC. The Company and HCC shall have the right to retain, access, and inspect all property of Executive of any kind in the office, work area, and on the premises of the Company upon termination of Executive’s employment and at any time during employment by the Company to ensure compliance with the terms of this Agreement.

          (g) Reaffirm Obligations. Upon termination of Executive’s employment with the Company, Executive, if requested by Company or HCC, shall reaffirm in writing Executive’s recognition of the importance of maintaining the confidentiality of the Company’s and HCC’s Confidential Information and proprietary information, and reaffirm any other obligations set forth in this Agreement.

          (h) Prior Disclosure. Executive represents and warrants that Executive has not used or disclosed any Confidential Information he may have obtained from the Company or HCC prior to signing this Agreement, in any way inconsistent with the provisions of this Agreement.

          (i) No Previous Restrictive Agreements. Executive represents that, except as disclosed in writing to the Company, Executive is not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of Executive’s employment by the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. Executive further represents that Executive’s performance of all the terms of this Agreement

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and Executive’s work duties for the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by Executive in confidence or in trust prior to Executive’s employment with the Company, and Executive will not disclose to the Company or induce the Company to use any confidential or proprietary information or material belonging to any previous employer or other party.

          (j) Breach. Executive agrees that any breach of Sections 5(a) through (f) above cannot be remedied solely by money damages, and that in addition to any other remedies Company or HCC may have, Company and HCC are entitled to obtain injunctive relief against Executive. Nothing herein, however, shall be construed as limiting the Company’s or HCC’s right to pursue any other available remedy at law or in equity, including recovery of damages and termination of this Agreement and/or any termination or offset against any payments that may be due pursuant to this Agreement.

          (k) Right to Enter Agreement. Executive represents and covenants to the Company that he has full power and authority to enter into this Agreement and that the execution and performance of this Agreement will not breach or constitute a default of any other agreement or contract to which he is a party or by which he is bound.

          (l) Enforceability. The agreements contained in this Section 5 are independent of the other agreements contained herein. Accordingly, failure of the Company or HCC to comply with any of its obligations outside of this Section does not excuse Executive from complying with the agreements contained herein.

          (m) Survivability. The agreements contained in this Section 5 shall survive the termination of this Agreement and/or the termination of Executive’s employment for any reason.

          (n) Reformation. If a court concludes that any time period or the geographic area specified in Sections 5(c) or (e) of this Agreement are unenforceable, then the time period will be reduced by the number of months, or the geographic area will be reduced by the elimination of the overbroad portion, or both, so that the restrictions may be enforced in the geographic area and for the time to the fullest extent permitted by law.

     6. Assignment. This Agreement, and any rights and obligations hereunder, may not be assigned by Executive and may be assigned by the Company only to a successor by merger or purchasers of substantially all of the assets of the Company. The Company shall obtain the assumption and performance of this Agreement by any such successor or purchasers; provided, however, that such commitment by the Company (including a failure to satisfy such commitment) shall not give Executive the right to object to or enjoin any transaction among the Company, any of its affiliates, and any such successor or purchasers. To the extent a failure by the Company to satisfy the foregoing commitment constitutes a material breach of this Agreement and to the extent not cured in accordance with Section 4(a)(4), such failure shall constitute “Good Reason” pursuant to Section 4(a) (4)(iii).

     7. Binding Agreement. Executive understands that his obligations under this Agreement are binding upon Executive’s heirs, successors, personal representatives, and legal representatives.

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     8. Notices. All notices pursuant to this Agreement shall be in writing and sent certified mail, return receipt requested, addressed as set forth below, or by delivering the same in person to such party, or by transmission by facsimile to the number set forth below (which shall not constitute notice). Notice deposited in the United States Mail, mailed in the manner described hereinabove, shall be effective upon deposit. Notice given in any other manner shall be effective only if and when received:

If to Executive:	Brad T. Irick
	SN-13 Lake Cherokee
	Henderson, Texas 75652
If to Company:	HCC Insurance Holdings, Inc.
	13403 Northwest Freeway
	Houston, Texas 77040
	Attn: General Counsel
	Fax: (713) 744-9648

     9. Waiver. No waiver by either party to this Agreement of any right to enforce any term or condition of this Agreement, or of any breach hereof, shall be deemed a waiver of such right in the future or of any other right or remedy available under this Agreement.

     10. Severability. If any provision of this Agreement is determined to be void, invalid, unenforceable, or against public policy, such provisions shall be deemed severable from the Agreement, and the remaining provisions of the Agreement will remain unaffected and in full force and effect.

     11. Entire Agreement. The terms and provisions contained herein shall constitute the entire agreement between the parties with respect to Executive’s employment with Company during the time period covered by this Agreement. This Agreement replaces and supersedes any and all existing Agreements entered into between Executive and the Company relating generally to the same subject matter, if any, and shall be binding upon Executive’s heirs, executors, administrators, or other legal representatives or assigns.

     12. Modification of Agreement. This Agreement may not be changed or modified or released or discharged or abandoned or otherwise terminated, in whole or in part, except by an instrument in writing signed by Executive and an officer or other authorized executive of Company.

     13. Understand Agreement. Executive represents and warrants that he has read and understood each and every provision of this Agreement, and Executive understands that he has the right to obtain advice from legal counsel of his choice, if necessary and desired, in order to interpret any and all provisions of this Agreement, and that Executive has freely and voluntarily entered into this Agreement.

     14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, without regard to the conflicts of laws principles thereof.

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     15. Jurisdiction and Venue. With respect to any litigation regarding this Agreement, Executive agrees to venue in the state or federal courts in Harris County, Texas, and agrees to waive and does hereby waive any defenses and/or arguments based upon improper venue and/or lack of personal jurisdiction. By entering into this Agreement, Executive agrees to personal jurisdiction in the state and federal courts in Harris County, Texas.

     16. Tolling. If Executive violates any of the restrictions contained in Sections 5(c) or (e), the Restricted Period and the Non-Solicitation Period, respectively, will be suspended and will not run in favor of Executive from the time of the commencement of any violation until the time when Executive cures the violation to the Company’s satisfaction.

     17. Compliance With Section 409A.

          (a) Delay in Payments. Notwithstanding anything to the contrary in this Agreement, if upon the Termination Date, Executive is a “specified employee” within the meaning of Code Section 409A and the deferral of any amounts otherwise payable under this Agreement as a result of Executive’s termination of employment is necessary in order to prevent any accelerated or additional tax to Executive under Code Section 409A, then the Company will defer the payment of any such amounts hereunder until the earlier of: (i) the date that is six (6) months following the date of Executive’s termination of employment with the Company, or (ii) the date of Executive’s death, at which time any such delayed amounts will be paid to Executive in a single lump sum, with interest from the date otherwise payable at the United States prime rate as published in the “Money Rates” section of The Wall Street Journal on the first publication date coincident with or immediately following the Termination Date.

          (b) Overall Compliance. In the event that it is reasonably determined by the Company or Executive that, as a result of Code Section 409A, any of the payments that Executive is entitled to under the terms of this Agreement or any nonqualified deferred compensation plan (as defined under Section 409A) may not be made at the time contemplated by the terms hereof or thereof, as the case may be, without causing Executive to be subject to an income tax penalty and interest, the Company will make such payment (with interest thereon) on the first day that would not result in Executive incurring any tax liability under Section 409A. In addition, other provisions of this Agreement or any other plan notwithstanding, the Company shall have no right to accelerate any such payment or to make any such payment as the result of an event if such payment would, as a result, be subject to the tax imposed by Section 409A.

          (c) Reformation. If any provision of this Agreement would cause Executive to incur any additional tax under Code Section 409A, the parties will in good faith attempt to reform the provision in a manner that maintains, to the extent possible, the original intent of the applicable provision without violating the provision of Code Section 409A.

          (d) Consultation with Tax Advisor. Executive is hereby advised to consult immediately with his own tax advisor regarding the tax consequences of this Agreement, including the consequences of Code Section 409A.

     18. Other Financial Arrangements. Executive represents to the Company that he is not a party to any financial arrangement with PricewaterhouseCoopers, including any of its affiliates, past or

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present (“PwC”), other than one providing for regular payment of a fixed dollar amount that is not dependent upon the revenues, profits or earnings of PwC, and is through a fully funded retirement plan or rabbi trust. Executive understands and agrees that this representation is a material term of this Agreement.

[signature page follows]

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     IN WITNESS WHEREOF, the Parties have executed this Agreement in multiple copies, effective as of the date first written above.

EXECUTIVE :

/s/ Brad T. Irick
Brad T. Irick
HCC:
HCC Insurance Holdings, Inc.
By:	/s/ John N. Molbeck, Jr.,
	JOHN N. MOLBECK, JR.,
	President & Chief Executive Officer

Signature Page
Employment Agreement — Brad T. Irick

Exhibit 3(g)
Option Vesting and Exercise Provisions

Termination of Employment.

1. In the event the employment of the Employee is terminated by the Employee for Good Reason (as defined in the Employment Agreement between the Company and the Employee entered into effective as of May 10, 2010 (the “Employment Agreement”) or by the Company without Cause (as such term is defined in the Employment Agreement), the Employee shall have the right to exercise this option for the full number of shares not previously exercised or any portion thereof, except as to the issuance of fractional shares, to the full extent of this option at any time within the unexpired term of this option.

2. In the event the employment of the Employee is terminated for Cause or by Employee without Good Reason, the Employee shall have the right at any time within thirty (30) days after the termination of such employment or, if shorter, during the unexpired term of this option, to exercise this option for the full number of shares not previously exercised or any portion thereof, except as to the issuance of fractional shares, but only to the extent this option was otherwise exercisable in accordance with Paragraph 4 hereof as of the date of such termination of employment.

3. In the event the employment of the Employee is terminated by reason of Disability, then the Employee shall have the right to exercise this option for the full number of shares not previously exercised or any portion thereof, except as to the issuance of fractional shares, to the full extent of this option at any time within the unexpired term of this option.

4. In the event of the death of the Employee while in the employ of the Company or the Subsidiaries, this option may be exercised for the full number of shares not previously exercised, or any portion thereof, except as to the issuance of fractional shares, to the full extent of this option at any time within the unexpired term of this option, by the person or persons to whom the Employee’s rights under this option shall pass by the Employee’s will or by the laws of descent and distribution, whichever is applicable.

5. In the event the Employee terminates his employment on a Change of Control (as defined in the Employment Agreement), then the Employee shall have the right to exercise this option for the full number of shares not previously exercised or any portion thereof, except as to the issuance of fractional shares, to the full extent of this option at any time within the unexpired term of this option.

Exhibit 3(g)

EX-12

Exhibit 12

HCC Insurance Holdings, Inc. and Subsidiaries
Statement of Ratio of Earnings to Fixed Charges
(unaudited, in thousands)

	Six months ended June 30,				Three months ended June 30,
	2010		2009		2010		2009
Interest factor of rent expense (1)	$	2,664	$	2,641	$	1,296	$	1,377
Interest expense		10,627		8,267		5,237		3,628
Capitalized interest		—		51		—		—
Total fixed charges	$	13,291	$	10,959	$	6,533	$	5,005
Earnings before income tax expense	$	222,778	$	256,007	$	119,753	$	133,164
Interest factor of rent expense (1)		2,664		2,641		1,296		1,377
Interest expense		10,627		8,267		5,237		3,628
Earnings per calculation	$	236,069	$	266,915	$	126,286	$	138,169
Ratio of earnings to fixed charges (2)		17.76		24.36		19.33		27.61

(1)	Estimated to be 33% of total rent expense.
(2)	Earnings per calculation divided by total fixed charges.

EX-31.1

Exhibit 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, John N. Molbeck, Jr., certify that:

1.	I have reviewed this quarterly report on Form 10-Q of HCC Insurance Holdings, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 6, 2010	/s/ John N. Molbeck, Jr.
(Date)	John N. Molbeck, Jr., President
	and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, William T. Whamond, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of HCC Insurance Holdings, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 6, 2010	/s/ William T. Whamond
(Date)	William T. Whamond, Executive Vice President
	and Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION WITH RESPECT TO
QUARTERLY REPORT OF
HCC INSURANCE HOLDINGS, INC.

          The undersigned, being the Chief Executive Officer and Chief Financial Officer of HCC Insurance Holdings, Inc. (the Company), pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, do hereby certify to the best of their knowledge with respect to the Quarterly Report of the Company on Form 10-Q, as filed with the Securities and Exchange Commission for the quarter ended June 30, 2010 (the Report):

1.	that the Report fully complies with all requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended; and
2.	that the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

August 6, 2010	/s/ John N. Molbeck, Jr.
(Date)	John N. Molbeck, Jr., President
	and Chief Executive Officer

August 6, 2010	/s/ William T. Whamond
(Date)	William T. Whamond, Executive Vice President
	and Chief Financial Officer

A signed original of this written statement required by §906 has been provided to HCC Insurance Holdings, Inc. and will be retained by HCC Insurance Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.