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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WCDOBk5tObVlnqG0hHisJDJQb5kidAtMoNoOgsFRJO8Pj8415pUpihaeVzmOfy2D 0XK2goFTUJw0pCZLg4nGDw== 0000950129-07-002414.txt : 20070510 0000950129-07-002414.hdr.sgml : 20070510 20070509195543 ACCESSION NUMBER: 0000950129-07-002414 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070510 DATE AS OF CHANGE: 20070509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCC INSURANCE HOLDINGS INC/DE/ CENTRAL INDEX KEY: 0000888919 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 760336636 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13790 FILM NUMBER: 07834249 BUSINESS ADDRESS: STREET 1: 13403 NORTHWEST FRWY CITY: HOUSTON STATE: TX ZIP: 77040-6094 BUSINESS PHONE: 7136907300 10-Q 1 h46355e10vq.htm FORM 10-Q e10vq

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 Quarter Ended March 31, 2007.


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 incorporation or organization)		(IRS Employer 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

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 April 30, 2007, there were approximately 112.1 million shares of common stock, $1.00 par value issued and outstanding.

HCC INSURANCE HOLDINGS, INC.
TABLE OF CONTENTS


	Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets — March 31, 2007 (unaudited) and December 31, 2006		5

Condensed Consolidated Statements of Earnings — Three months ended March 31, 2007 and 2006 (unaudited)		6

Condensed Consolidated Statement of Changes in Shareholders’ Equity — Three months ended March 31, 2007 (unaudited)		7

Condensed Consolidated Statements of Cash Flows — Three months ended March 31, 2007 and 2006 (unaudited)		8

Notes to Condensed Consolidated Financial Statements (unaudited)		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3. Quantitative and Qualitative Disclosures About Market Risk		29

Item 4. Controls and Procedures		29

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		30

Item 1A. Risk Factors		31

Item 6. Exhibits		31

Signatures		31
Employment Agreement
Certification by CEO
Certification by CFO
Certification with Respect to Quarterly Report

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 impact 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 effects of emerging claim and coverage issues;

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

	•		potential credit risk with brokers;

	•		our assessment of underwriting risk;

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

	•		the adequacy of reinsurance protection;

	•		the ability or 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 in the future;

	•		attraction and retention of qualified employees;

	•		fluctuations in the fixed income securities market, which may reduce the value of our investment assets;

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

	•		our ability to receive dividends from our insurance company subsidiaries in needed amounts;

	•		fluctuations in foreign exchange rates;

	•		failures of our information technology systems, which could adversely affect our business;

	•		impairment of goodwill;

	•		developments in the SEC’s inquiry related to our past stock option granting procedures;

	•		litigation related to our past stock option granting procedures; and

	•		change of control.

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

Our forward-looking statements speak only 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.

HCC Insurance Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited, in thousands except per share data)


	March 31,		December 31,
	2007		2006
ASSETS

Investments:
Fixed income securities, at fair value (amortized cost: 2007 - $3,298,475; 2006 - $3,008,818)	$	3,298,657	$	3,007,193
Short-term investments, at cost, which approximates fair value		682,041		714,685
Other investments, at fair value (cost: 2007 - $175,186; 2006 - $183,450)		202,358		206,117

Total investments		4,183,056		3,927,995
Cash		42,492		48,290
Restricted cash and cash investments		171,159		176,424
Premium, claims and other receivables		771,462		864,705
Reinsurance recoverables		1,058,667		1,169,934
Ceded unearned premium		224,235		226,125
Ceded life and annuity benefits		70,133		70,923
Deferred policy acquisition costs		185,202		182,410
Goodwill		742,607		742,677
Other assets		183,079		220,649


Total assets	$	7,632,092	$	7,630,132


LIABILITIES

Loss and loss adjustment expense payable	$	3,113,496	$	3,097,051
Life and annuity policy benefits		70,133		70,923
Reinsurance balances payable		114,480		122,805
Unearned premium		917,728		920,350
Deferred ceding commissions		64,946		64,949
Premium and claims payable		554,272		646,224
Notes payable		298,281		308,887
Accounts payable and accrued liabilities		366,307		356,140


Total liabilities		5,499,643		5,587,329

SHAREHOLDERS’ EQUITY

Common stock, $1.00 par value; 250.0 million shares authorized (shares issued and outstanding: 2007 – 112,078; 2006 – 111,731)		112,078		111,731
Additional paid-in capital		808,100		798,213
Retained earnings		1,183,691		1,098,887
Accumulated other comprehensive income		28,580		33,972


Total shareholders’ equity		2,132,449		2,042,803


Total liabilities and shareholders’ equity	$	7,632,092	$	7,630,132

See Notes to Condensed Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(unaudited, in thousands except per share data)


	Three months ended March 31,
	2007			2006
REVENUE

Net earned premium	$	497,600		$	380,571
Fee and commission income		32,125			31,669
Net investment income		49,467			36,581
Net realized investment loss		(555	)		(1,298	)
Other operating income		18,585			18,750


Total revenue		597,222			466,273


EXPENSE

Loss and loss adjustment expense, net		300,472			222,067
Policy acquisition costs, net		89,099			76,232
Other operating expense		57,641			47,333
Interest expense		3,303			2,154


Total expense		450,515			347,786


Earnings before income tax expense		146,707			118,487
Income tax expense		50,017			39,345


Net earnings	$	96,690		$	79,142


Basic earnings per share data:

Net earnings per share	$	0.86		$	0.71


Weighted average shares outstanding		111,959			111,014


Diluted earnings per share data:

Net earnings per share	$	0.83		$	0.68


Weighted average shares outstanding		117,009			116,896


Cash dividends declared, per share	$	0.100		$	0.075

See Notes to Condensed Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Shareholders’ Equity

Three months ended March 31, 2007

(unaudited, in thousands except per share data)


								Accumulated
			Additional					other			Total
	Common		paid-in		Retained			comprehensive			shareholders’
	stock		capital		earnings			income			equity
Balance at December 31, 2006	$	111,731	$	798,213	$	1,098,887		$	33,972		$	2,042,803

Cumulative effect of accounting change (adoption of FIN 48)		—		—		(678	)		—			(678	)

Net earnings		—		—		96,690			—			96,690

Other comprehensive loss		—		—		—			(5,392	)		(5,392	)


Comprehensive income												91,298

Issuance of 347 shares for exercise of options, including tax benefit of $1,571		347		7,693		—			—			8,040

Stock-based compensation		—		2,194		—			—			2,194

Cash dividends declared, $0.10 per share		—		—		(11,208	)		—			(11,208	)


Balance at March 31, 2007	$	112,078	$	808,100	$	1,183,691		$	28,580		$	2,132,449

See Notes to Condensed Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)


	Three months ended March 31,
	2007			2006
Cash flows from operating activities:
Net earnings	$	96,690		$	79,142
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in premium, claims and other receivables		87,166			44,362
Change in reinsurance recoverables		111,267			12,632
Change in ceded unearned premium		1,890			(114	)
Change in loss and loss adjustment expense payable		16,445			23,775
Change in reinsurance balances payable		(8,325	)		(27,057	)
Change in unearned premium		(2,622	)		18,266
Change in premium and claims payable, net of restricted cash		(86,687	)		(30,318	)
Change in trading portfolio		10,958			(47,994	)
Depreciation and amortization expense		3,736			3,825
Stock-based compensation expense		2,211			2,703
Other, net		(2,418	)		(1,131	)

Cash provided by operating activities		230,311			78,091


Cash flows from investing activities:
Sales of fixed income securities		28,483			65,654
Maturity or call of fixed income securities		70,148			59,226
Cost of securities acquired		(367,195	)		(471,614	)
Change in short-term investments		24,857			246,750
Sale of strategic investments		22,950			17,363
Payments for purchase of subsidiaries, net of cash received		(5,917	)		(24,000	)
Other, net		(2,168	)		(2,047	)

Cash used by investing activities		(228,842	)		(108,668	)


Cash flows from financing activities:
Issuance of notes payable		11,000			11,000
Payments on notes payable		(11,339	)		(11,107	)
Sale of common stock		8,040			7,638
Dividends paid		(11,173	)		(8,310	)
Other, net		(3,795	)		8,532

Cash provided (used) by financing activities		(7,267	)		7,753


Net decrease in cash		(5,798	)		(22,824	)

Cash at beginning of period		48,290			73,935


Cash at end of period	$	42,492		$	51,111

See Notes to Condensed Consolidated Financial Statements.

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, underwriting agencies and reinsurance brokers. We provide specialized property and casualty, surety, and group life, accident and health insurance coverages and related agency and reinsurance brokerage services to commercial customers and individuals. We market our products both directly to customers and through a network of independent and affiliated brokers, producers and agents. Our lines of business include diversified financial products (which includes directors’ and officers’ liability, professional indemnity, employment practices liability and surety); group life, accident and health; aviation; our London market account (which includes energy, marine, property, and accident and health); and other specialty lines of insurance. We operate primarily in the United States, the United Kingdom, Spain, Bermuda 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 (generally accepted accounting principles) 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 presentation 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 audited consolidated financial statements and related notes. The condensed consolidated balance sheet at December 31, 2006 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.

		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 completed several acquisitions during 2006. The results of operations of the acquired entities are included in our condensed consolidated financial statements beginning on the effective date of each acquisition. Thus, our condensed consolidated statements of earnings and cash flows for the three months ended March 31, 2007 and 2006 do not contain any operations of the entities acquired in 2006 prior to their acquisition date.

		Acquisition

		On October 2, 2006, we acquired the Health Products Division of Allianz Life Insurance Company of North America (the Health Products Division), which primarily specializes in medical stop-loss insurance for self-insured corporations and groups, in a purchase business combination for $140.0 million in cash. In addition, we assumed the Health Products Division’s outstanding loss reserves totaling $149.7 million and net miscellaneous other liabilities of $0.4 million, for which Allianz paid us cash. We valued all identifiable assets and liabilities at fair value, including discounting the loss reserves by $2.9 million, and allocated $137.2 million to goodwill in our initial purchase price allocation. During the first quarter of 2007, we completed our purchase price allocation and determined there are no separately identifiable intangible assets that are not subsumed into goodwill, resulting in no change to the original goodwill amount.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition, based on our finalization of the purchase price allocation.


Premium, claims and other receivables	$	6,372
Goodwill		137,154
Other assets		280

Total assets acquired		143,806


Loss and loss adjustment expense payable		146,811
Reinsurance balances payable		746
Premium and claims payable		4,375
Accounts payable and accrued liabilities		1,961

Total liabilities assumed		153,893


Net liabilities assumed	$	10,087

Income Tax

For the three months ended March 31, 2007 and 2006, the income tax provision was calculated based on an estimated effective tax rate for each fiscal year. Our effective tax rate differs from the United States Federal statutory rate primarily due to tax-exempt municipal bond interest and state income taxes.

Stock-Based Compensation

In the first quarter of 2007, we granted options for the purchase of 2.1 million shares of our common stock at $31.11 per share. The aggregate fair value of options granted was $14.1 million, which will be expensed over a vesting period of four to five years.

2006 Stock Option Matter

We incurred $2.8 million of expense in the first quarter of 2007 for professional services, consulting fees and other related charges for ongoing issues associated with our 2006 stock option matter. During the first quarter, we paid our employees’ personal tax liabilities under Section 409A of the Internal Revenue Code for options exercised in 2006, thus resolving the $2.3 million liability accrued at December 31, 2006. We are awaiting a response to a no-action request letter we sent to the Securities and Exchange Commission (SEC) relating to our plan to reprice certain employees’ unexercised discounted options and reimburse them for their lost spread. The estimated cost to reimburse employees was accrued at December 31, 2006. We expect to complete this plan before December 31, 2007. During the first quarter of 2007, we collected the $6.1 million of receivables due from certain terminated executives related to the 2006 stock option matter.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

Recent Accounting Changes

FIN 48

FIN No. 48, Accounting for Uncertainty in Income Taxes, issued by the Financial Accounting Standards Board (FASB) in 2006, became effective January 1, 2007. FIN 48 clarifies the accounting for uncertain income tax positions. Under FIN 48, a company may only recognize the tax benefit from an uncertain tax position if it is more-likely-than-not the tax position will be sustained upon examination by the tax authority. To adopt FIN 48, a company must recognize a tax liability related to the uncertain tax positions, to the extent the liability is not already recorded. The cumulative effect of the accounting change is reflected as a reduction of beginning retained earnings on the date of adoption.

On January 1, 2007, the date we adopted FIN 48, our gross tax benefits related to uncertain tax positions totaled $9.9 million and related potential interest totaled $1.4 million, for which we had previously recorded $9.9 million of gross tax liabilities on unrecognized tax benefits. To adopt FIN 48 and record the additional required tax and interest liabilities, we reduced beginning retained earnings by $0.7 million, primarily for potential interest net of the related Federal tax benefit. Subsequent to adoption, we will recognize any potential interest in interest expense and any potential penalties in other operating expense, consistent with our prior classification of such expenses. In addition, changes in the recognition or amount of our uncertain tax positions generally will be reflected as a component of income tax expense.

Of the total amount of our tax benefits related to uncertain tax positions, $9.1 million would positively affect the effective tax rate if the uncertain tax benefits were recognized as a reduction of income tax expense currently. As of the date of adoption, it is reasonably possible that the liabilities for our unrecognized tax benefits could decrease by $1.4 million in the next twelve months, mainly due to the expiration of the statute of limitations related to state tax liabilities. We are subject to examination by the Internal Revenue Service and most state tax jurisdictions for 2003 and forward and by major foreign tax jurisdictions for 2000 and forward.

SFAS 157 and 159

The FASB has issued SFAS No. 157, Fair Value Measurements, which clarifies the definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurement. SFAS 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. The FASB has also issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits a company to choose to measure eligible financial assets and liabilities at fair value that are not currently required to be measured at fair value. Unrealized gains and losses for those items are reported in current earnings at each subsequent reporting date. Both SFAS 157 and SFAS 159 will be effective on January 1, 2008. We are currently assessing what impact SFAS 157 will have on our consolidated financial statements and whether we will adopt SFAS 159.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

(2)		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 primary 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
Three months ended March 31, 2007

Primary business	$	458,502		$	485,370		$	287,451
Reinsurance assumed		140,599			116,473			62,997
Reinsurance ceded		(102,136	)		(104,243	)		(49,976	)


Net amounts	$	496,965		$	497,600		$	300,472


Three months ended March 31, 2006

Primary business	$	410,191		$	422,510		$	227,250
Reinsurance assumed		95,867			70,880			45,791
Reinsurance ceded		(113,007	)		(112,819	)		(50,974	)


Net amounts	$	393,051		$	380,571		$	222,067

Ceding commissions netted with policy acquisition costs in the condensed consolidated statements of earnings were $11.2 million in 2007 and $10.0 million in 2006.

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.


	March 31,			December 31,
	2007			2006
Commutation receivable	$	—		$	100,000
Reinsurance recoverable on paid losses		97,073			96,727
Reinsurance recoverable on outstanding losses		511,587			529,562
Reinsurance recoverable on incurred but not reported losses		465,392			458,528
Reserve for uncollectible reinsurance		(15,385	)		(14,883	)

Total reinsurance recoverables	$	1,058,667		$	1,169,934

Our reserve for uncollectible reinsurance covers potential collectibility issues, including disputed amounts and associated expenses. While we believe the reserve is adequate based on information currently available, conditions may change or additional information might be obtained that may require us to change the reserve in the future. We periodically review our financial exposure to the reinsurance market and the level of our reserve and continue to take actions in an attempt to mitigate our exposure to possible loss.

We limit the liquidity exposure related to our reinsurance recoverables by holding funds, letters of credit or other security, such that net balances due are significantly less than the gross balances shown in our condensed consolidated balance sheets. Additionally, our U.S. domiciled insurance companies require certain reinsurers (those not authorized by the insurance company’s state of domicile) to collateralize their reinsurance obligations due to us. The table below shows the amounts of letters of credit and cash deposits held by us as collateral, plus other credits available for potential offset.


	March 31,		December 31,
	2007		2006
Payables to reinsurers	$	286,260	$	268,079
Letters of credit		293,626		326,204
Cash deposits		59,586		61,002


Total credits	$	639,472	$	655,285

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

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


	March 31,			December 31,
	2007			2006
Loss and loss adjustment expense payable	$	3,113,496		$	3,097,051
Reinsurance recoverable on outstanding losses		(511,587	)		(529,562	)
Reinsurance recoverable on incurred but not reported losses		(465,392	)		(458,528	)


Net reserves	$	2,136,517		$	2,108,961


Unearned premium	$	917,728		$	920,350
Ceded unearned premium		(224,235	)		(226,125	)


Net unearned premium	$	693,493		$	694,225


Deferred policy acquisition costs	$	185,202		$	182,410
Deferred ceding commissions		(64,946	)		(64,949	)


Net deferred policy acquisition costs	$	120,256		$	117,461

(3)		EARNINGS PER SHARE

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


	Three months ended March 31,
	2007		2006
Net earnings	$	96,690	$	79,142


Weighted average common shares outstanding		111,959		111,014
Dilutive effect of outstanding options (determined using the treasury stock method)		1,008		1,528
Dilutive effect of convertible debt (determined using the treasury stock method)		4,042		4,354


Weighted average common shares and potential common shares outstanding		117,009		116,896


Anti-dilutive stock options not included in treasury stock method computation		2,229		2,563

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

(4)		SEGMENT AND GEOGRAPHIC INFORMATION

		The performance of each segment is evaluated by our management based on net earnings. Net earnings is calculated after tax and after corporate expense allocations, interest expense on debt incurred at the purchase date, and intercompany eliminations have been charged or credited to our individual segments. All stock-based compensation is included in the corporate segment since it is not included in management’s evaluation of the other segments. The following tables show information by business segment and geographic location. Geographic location is determined by physical location of our offices and does not represent the location of insureds or reinsureds from whom the business was generated. Effective April 1, 2006, we consolidated our London underwriting agency (agency segment) into HCC International Insurance Company (insurance company segment).


	Insurance				Other
	Company		Agency		Operations		Corporate			Total
Three months ended March 31, 2007

Revenue:
Domestic	$	458,760	$	14,957	$	18,276	$	397		$	492,390
Foreign		94,809		10,023		—		—			104,832
Inter-segment		—		13,986		—		—			13,986


Total segment revenue	$	553,569	$	38,966	$	18,276	$	397			611,208


Inter-segment eliminations											(13,986	)


Consolidated total revenue										$	597,222


Net earnings (loss):
Domestic	$	66,795	$	4,704	$	11,379	$	(6,085	)	$	76,793
Foreign		17,381		221		—		—			17,602


Total segment net earnings (loss)	$	84,176	$	4,925	$	11,379	$	(6,085	)		94,395


Inter-segment eliminations											2,295


Consolidated net earnings										$	96,690


Other items:
Net investment income	$	45,765	$	2,438	$	987	$	277		$	49,467
Depreciation and amortization		1,179		1,746		112		699			3,736
Interest expense		464		2,765		30		44			3,303
Capital expenditures		1,028		654		—		486			2,168

Income tax expense (benefit)		40,081		4,472		6,490		(2,537	)		48,506
Inter-segment eliminations											1,511


Consolidated income tax expense										$	50,017

During 2007, the corporate segment incurred after-tax expense of $1.5 million for SFAS 123(R) and $1.8 million for issues related to our 2006 stock option matter.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited, tables in thousands except per share data)


	Insurance				Other
	Company		Agency		Operations		Corporate			Total
Three months ended March 31, 2006

Revenue:
Domestic	$	343,688	$	14,769	$	19,781	$	1,177		$	379,415
Foreign		76,849		10,009		—		—			86,858
Inter-segment		6		17,958		—		—			17,964


Total segment revenue	$	420,543	$	42,736	$	19,781	$	1,177			484,237


Inter-segment eliminations											(17,964	)


Consolidated total revenue										$	466,273


Net earnings (loss):
Domestic	$	49,969	$	5,235	$	12,989	$	(3,114	)	$	65,079
Foreign		10,088		3,689		—		—			13,777


Total segment net earnings (loss)	$	60,057	$	8,924	$	12,989	$	(3,114	)		78,856


Inter-segment eliminations											286


Consolidated net earnings										$	79,142

Other items:
Net investment income	$	32,007	$	2,296	$	1,635	$	643		$	36,581
Depreciation and amortization		1,138		2,013		127		547			3,825
Interest expense (benefit)		375		2,846		114		(1,181	)		2,154
Capital expenditures		461		815		438		1,366			3,080

Income tax expense (benefit)		28,096		6,668		6,141		(1,858	)		39,047
Inter-segment eliminations											298


Consolidated income tax expense										$	39,345

During 2006, the corporate segment incurred after-tax expense of $1.9 million for SFAS 123(R).

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.


	Three months ended March 31,
	2007			2006
Diversified financial products	$	192,514		$	169,112
Group life, accident and health		192,416			127,761
Aviation		39,344			33,197
London market account		33,896			21,928
Other specialty lines		39,738			28,640
Discontinued lines		(308	)		(67	)


Net earned premium	$	497,600		$	380,571


Property and casualty	$	27,475		$	25,407
Accident and health		4,650			6,262


Fee and commission income	$	32,125		$	31,669

(5)		SUPPLEMENTAL INFORMATION

		Supplemental cash flow information was as follows.


	Three months ended March 31,
	2007		2006
Cash received from commutations	$	101,040	$	—
Income taxes paid		10,385		16,038
Interest paid		3,318		2,935
Comprehensive income		91,298		62,622

(6)		COMMITMENTS AND CONTINGENCIES

		2006 Stock Option Matter

		Based on a voluntary independent investigation by a Special Committee of the Board of Directors in 2006 of our past practices related to granting stock options, we determined that the price on the actual measurement date for a number of our stock option grants from 1997 through 2005 and into 2006 did not correspond to the price on the stated grant date and that certain option grants were retroactively priced. The investigation was conducted with the help of a law firm that was not previously involved with our stock option plans and procedures. The Committee completed the investigation on November 16, 2006. Based on the Committee’s recommendations, the Board of Directors took specific actions as a result thereof. The SEC commenced an inquiry upon notification by us of the initiation of our investigation. In this connection, we received document requests from the SEC, and the SEC has been reviewing the work of the independent investigation. In March 2007, the SEC issued a formal order directing a private investigation. We intend to fully cooperate with the SEC. We are unable to predict the outcome of or the future costs related to the ongoing inquiry.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

Litigation

We are 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 over contractual relationships 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 these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

The following lawsuits related to our 2006 stock option matter have been filed:

Civil Action No. 07-456; Bacas, derivatively on behalf of HCC Insurance Holdings, Inc. v. Way et al.; In the United States District Court for the Southern District of Texas, Houston Division; and Civil Action No. 07-709, Halgren, derivatively on behalf of HCC Insurance Holdings, Inc. v. Way et al.; In the United States District Court for the Southern District of Texas, Houston Division (we refer to these actions collectively as the “Bacas suits”). The Bacas action was filed on February 1, 2007, and the Halgren action was filed on February 28, 2007. We are named as a nominal defendant in these putative derivative actions. These actions purport to assert claims on behalf of us against several current and former officers and directors alleging improper manipulation of grant dates for option grants from 1995 through 2006. The complaints purport to allege causes of action for accounting, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment and rescission, as well as a claim under Section 14(a) of the Securities Exchange Act. Plaintiffs seek on our behalf, damages, punitive damages, disgorgement, restitution, rescission, accounting, imposition of a constructive trust and changes in our corporate governance and internal controls. Plaintiffs also seek to recover their attorneys’ fees and costs from us for prosecuting the derivative claims. These actions are now consolidated into a single action and the consolidated complaint is due to be filed in May 2007. We have not yet responded to the complaints.

Civil Action No. 07-1084; Intermountain Ironworkers Trust Fund, derivatively and on behalf of HCC Insurance Holdings, Inc. v. Way et al.; In the United States District Court for the Southern District of Texas, Houston Division. The action was filed on March 30, 2007. We are named as a nominal defendant in this putative derivative action. The complaint asserts similar factual allegations and legal claims as asserted in the Bacas suits and seeks similar relief and remedies as sought in that action. On April 11, 2007, the Intermountain Ironworkers Trust Fund filed a motion seeking to consolidate this action with the Bacas action. We have not yet responded to the complaint.

Civil Action No. 07-550; International Brotherhood of Electrical Workers Local 98 Pension Fund, derivatively on behalf of nominal defendant HCC Insurance Holdings, Inc. v. Way et al.; In the United States District Court for the Southern District of Texas, Houston Division. The action was filed on February 8, 2007 and dismissed on March 29, 2007.

Civil Action No. 07-0801; Bristol County Retirement System, individually and on behalf of all others similarly situated v. HCC Insurance Holdings, Inc. et al.; In the United States District Court for the Southern District of Texas, Houston Division (we refer to this action as the “Bristol County action”). The Bristol County action was filed on March 8, 2007. We are named as a defendant in this putative class action along with certain current and former officers and directors. Plaintiff seeks to represent a class of persons who purchased or otherwise acquired our securities between May 3, 2005 and November 17, 2006, inclusive. The action purports to assert claims arising out of improper manipulation of option grant dates, alleging violation of Sections 20(a) and 10(b) of the Securities Exchange Act, as well as Rule 10b-5 promulgated thereunder. Plaintiff also purports to assert a claim for violation of Section 14(a) of the Securities Exchange Act and Rules 14a-1 and 14a-9 promulgated thereunder. Plaintiff seeks recovery of compensatory damages for the putative class and costs and expenses. We have not yet responded to the complaint.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

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. Other indemnifications agree to reimburse the buyers 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 indemnification expires on December 31, 2009.

We accrue a loss related to our indemnifications when a valid claim is made by a buyer and we believe we have potential exposure. We currently have several claims under indemnifications that cover certain net losses alleged to have been incurred in periods prior to our sale of certain subsidiaries or otherwise alleged to be covered under indemnification agreements related to such sales. As of March 31, 2007, we have recorded a liability of $17.2 million and have provided $5.2 million of letters of credit to cover our obligations or anticipated payments under these indemnifications.

Pursuant to our by-laws, Delaware Corporate law and certain contractual agreements, we are required to advance attorneys’ fees and other expenses and may be required to indemnify our current and former Directors and officers for liabilities arising from any action, suit or proceeding brought because the individual was acting as an officer or director of our company. Under certain limited circumstances, the individual may be required to reimburse us for any advances or indemnification payments made by us. In addition, we maintain directors’ and officers’ liability insurance, which may cover certain of these costs. We expense payments as advanced and recognize offsets if cash reimbursement is received. In 2006 and 2007, we expensed $1.6 million of attorneys’ fees incurred by current and former Directors and officers who claimed the right to indemnity in conjunction with our 2006 stock option matter. It is not possible to determine the maximum potential impact on our consolidated net earnings, since our by-laws, Delaware law and our contractual agreements do not limit any such advances or indemnification payments.

Revolving Loan Facility

In April 2007, we replaced our $300.0 million Revolving Loan Facility with a similar facility, which allows us to borrow up to the maximum allowed by the facility on a revolving basis until the facility expires on December 19, 2011. The new facility has more favorable warranties and loan covenants than our prior facility and, at our option, the amount available under the facility may be increased to an aggregate of $700.0 million. The facility agreement contains certain restrictive covenants, which we believe are typical for similar financing arrangements.

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, Bermuda and Ireland transacting business in more than 100 countries. Our group consists of insurance companies, underwriting agencies and reinsurance brokers. Our shares are traded on the New York Stock Exchange and had a market capitalization of $3.5 billion at March 31, 2007. We earned $96.7 million or $0.83 per diluted share in the first quarter of 2007, compared to $79.1 million or $0.68 per diluted share in 2006. Shareholders’ equity increased by 21% from a year ago to $2.1 billion at March 31, 2007, principally due to net earnings.

We underwrite a variety of 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 line are marketed by our insurance companies and agencies, either through a network of independent agents and brokers, or directly to customers. With the exception of our public company directors’ and officers’ liability business, certain international aviation risks and our London market business, the majority of our business is generally lower limit, smaller premium business that is less susceptible to price competition, severity of loss or catastrophe risk.

Our major insurance companies are rated “AA (Very Strong)” by Standard & Poor’s Corporation, “AA- (Very Strong)” by Fitch Ratings and “A+ (Superior)” by A.M. Best Company, Inc.

We generate our revenue from five primary sources: 1) risk-bearing earned premium produced by our insurance company operations, 2) non-risk-bearing fee and commission income received by our underwriting agency and intermediary operations, 3) ceding commissions in excess of policy acquisition costs earned by our insurance company operations, 4) investment income earned by all of our operations and 5) other operating income. We produced $597.2 million of revenue in the first quarter of 2007, an increase of 28% over the first quarter of 2006, primarily from higher net earned premium from recent acquisitions, organic growth and increased retentions, as well as increased investment income.

During the past several years, we substantially increased our shareholders’ equity by retaining most of our earnings and issuing additional shares of common stock. With this additional equity, we increased the underwriting capacity of our insurance companies and made strategic acquisitions, adding new lines of business or expanding those with favorable underwriting characteristics.

Our 2006 acquisitions are listed below. Net earnings and cash flows from each acquired business are included in our operations beginning on the effective date of each transaction.


		Effective date
Company	Segment	acquired
Health Products Division of
Allianz Life Insurance Company	Insurance company	October 2, 2006
G.B. Kenrick & Associates, Inc.	Agency	July 1, 2006
Novia Underwriters, Inc.	Agency	June 30, 2006

The following section discusses our key operating results. Amounts in the following tables are in thousands, except for earnings per share, percentages, ratios and number of employees. Comparisons refer to first quarter 2007 compared to first quarter 2006, unless otherwise noted.

Results of Operations

Net earnings increased 22% to $96.7 million ($0.83 per diluted share) in 2007 from $79.1 million ($0.68 per diluted share) in 2006. Growth in underwriting profits and net investment income generated the increase in 2007 earnings.

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


	Three months ended March 31,
	2007			2006
Net earned premium		83.3	%		81.7	%
Fee and commission income		5.4			6.8
Net investment income		8.3			7.8
Net realized investment loss		(0.1	)		(0.3	)
Other operating income		3.1			4.0

Total revenue		100.0			100.0
Loss and loss adjustment expense, net		50.3			47.6
Policy acquisition costs, net		14.9			16.3
Other operating expense		9.7			10.2
Interest expense		0.5			0.5

Earnings before income tax expense		24.6			25.4
Income tax expense		8.4			8.4

Net earnings		16.2	%		17.0	%

Total revenue increased 28% to $597.2 million in 2007, driven by significant growth in net earned premium and investment income. Approximately 53% of the increase in revenue in 2007 was due to the acquisition of businesses. We expect total revenue to continue to grow throughout 2007.

Gross written premium, net written premium and net earned premium are detailed below. Premium increased from organic growth in certain lines of business and from acquisitions. Increased retentions also contributed to the growth in net written and earned premiums. See the Insurance Company Segment section below for further discussion of the relationship and changes in premium revenue.


	Three months ended March 31,
	2007		2006
Gross written premium	$	599,101	$	506,058

Net written premium		496,965		393,051

Net earned premium		497,600		380,571

Fee and commission income was flat in 2007. The table below shows the source of our fee and commission income.


	Three months ended March 31,
	2007		2006
Agencies	$	23,356	$	23,061
Insurance companies		8,769		8,608


Fee and commission income	$	32,125	$	31,669

The sources of net investment income are detailed below.


	Three months ended March 31,
	2007			2006
Fixed income securities	$	34,007		$	24,305
Short-term investments		9,673			7,540
Other investments		7,520			6,412


Total investment income		51,200			38,257
Investment expense		(1,733	)		(1,676	)


Net investment income	$	49,467		$	36,581

Net investment income increased 35% in 2007. This increase was primarily due to higher investment assets, which increased 24% to $4.2 billion at March 31, 2007 compared to $3.4 billion at March 31, 2006, and higher interest rates. The growth in investment assets resulted from: 1) cash flow from operations, 2) higher retentions, 3) commutations of reinsurance recoverables in late 2006, and 4) the increase in net loss reserves particularly from our diversified financial products line of business, which generally has a longer time period between reporting and payment of claims. Average yields on our short-term investments increased from 4.2% in 2006 to 5.5% in 2007 and our long-term tax equivalent yield increased from 5.0% in 2006 to 5.3% in 2007. We continue to invest our funds primarily in fixed income securities, with a weighted average duration of 4.7 years at March 31, 2007. We expect investment assets to continue to increase in 2007, consistent with our anticipated growth in revenue and earnings.

At March 31, 2007, our unrealized gain on fixed income securities was $0.2 million, compared to an unrealized loss of $1.6 million at December 31, 2006, due to fluctuations in market interest rates. The change in the unrealized gain or loss, 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, which are classified as available for sale, through periods of fluctuating interest rates and to not realize significant gains or losses from their sale. The unrealized loss on our fixed income securities at April 30, 2007 was $1.4 million.

Information about our portfolio of fixed income securities is as follows:


	Three months ended March 31,
	2007			2006
Average yield		4.4	%		4.1	%
Average tax equivalent yield		5.3	%		5.0	%
Weighted average maturity	6.9 years			7.8 years
Weighted average duration	4.7 years			5.0 years

Other operating income in 2007 was flat compared to 2006. The gain from sale of our strategic investments primarily resulted from the sale of a strategic investment that we liquidated during 2006 and 2007. In April 2007, we sold all remaining shares of this investment. We also liquidated the majority of our trading portfolio in the fourth quarter of 2006. Period to period comparisons in this category may vary substantially, depending on acquisition of new investments, income or loss related to changes in the market values of certain investments, and gains or losses related to any disposition. The following table details the components of our other operating income.


	Three months ended March 31,
	2007		2006
Strategic investments	$	11,659	$	12,205
Trading securities		2,181		4,686
Financial instruments		1,187		823
Other		3,558		1,036


Other operating income	$	18,585	$	18,750

Loss and loss adjustment expense increased 35% and policy acquisition costs increased 17% in 2007, primarily due to the growth in net earned premium. See the Insurance Company Segment section below for further discussion of the changes in loss and loss adjustment expense and policy acquisition costs.

Other operating expense increased 22% in 2007. The increase primarily related to compensation and other operating expenses of subsidiaries acquired in the second half of 2006 and $2.8 million of professional fees and legal costs in the first quarter of 2007 related to our 2006 stock option matter. We had 1,632 employees at March 31, 2007 compared to 1,458 a year earlier, with the increase primarily due to acquisitions.

Our effective income tax rate was 34.1% for 2007, compared to 33.2% for 2006. The higher effective rate primarily relates to a decline in tax-exempt income as a percentage of our overall pretax income, the tax gain on the sale of a strategic investment greater than the book gain, and the effect of our uncertain tax positions under FIN 48 during the first quarter of 2007.

At March 31, 2007, book value per share was $19.03, up from $18.28 at December 31, 2006. Total assets were $7.6 billion and shareholders’ equity was $2.1 billion, compared to $7.6 billion and $2.0 billion, respectively, at December 31, 2006.

Segments

Insurance Company Segment

Net earnings of our insurance company segment increased 40% to $84.2 million in 2007 compared to $60.1 million in 2006. The growth in segment net earnings was driven by: 1) greater underwriting profits, 2) the operations of acquired subsidiaries, 3) increased investment income and 4) increased retentions, which resulted in higher earned premium. In October 2006, we acquired the Health Products Division, which generated $64.0 million of net written premium in 2007. Effective April 1, 2006, we consolidated our London underwriting agency into an insurance company; all operations after those dates have been reported in our insurance company segment. Even though there is some pricing competition in certain of our markets, our margins remain at an acceptable level of profitability due to our underwriting expertise and discipline. We expect net earnings from our insurance companies to continue to grow in 2007.

Premium

Gross written premium increased 18% to $599.1 million in 2007, primarily from the Health Products Division acquisition. We expect gross written premium to continue to grow in 2007. Net written premium increased 26% to $497.0 million and net earned premium increased 31% to $497.6 million in 2007. These increases were primarily due to higher gross written premium and the mix of business due to increased premium in lines where we had greater retentions. The overall percentage of retained premium, as measured by the percent of net written premium to gross written premium, increased to 83% in 2007 from 78% in 2006. Net written and net earned premium are expected to continue to grow in 2007.

The following tables provide premium information by line of business.


	Gross			Net			NWP			Net
	written			written			as % of			earned
	premium			premium			GWP			premium
Three months ended March 31, 2007

Diversified financial products	$	212,253		$	171,792			81	%	$	192,514
Group life, accident and health		202,906			192,426			95			192,416
Aviation		51,663			39,603			77			39,344
London market account		68,135			45,132			66			33,896
Other specialty lines		64,495			48,321			75			39,738
Discontinued lines		(351	)		(309	)	nm				(308	)


Totals	$	599,101		$	496,965			83	%	$	497,600

Three months ended March 31, 2006

Diversified financial products	$	197,246		$	161,645			82	%	$	169,112
Group life, accident and health		134,154			129,443			96			127,761
Aviation		56,234			35,425			63			33,197
London market account		74,507			38,723			52			21,928
Other specialty lines		43,889			27,900			64			28,640
Discontinued lines		28			(85	)	nm				(67	)


Totals	$	506,058		$	393,051			78	%	$	380,571

nm — Not meaningful comparison

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

	•		Diversified financial products — The growth in our gross written premium in 2007 resulted principally from organic growth in our surety and credit businesses, where pricing is stable and competition is reasonable. Gross written premium declined slightly in our directors’ and officers’ liability business, as we chose to write less business in foreign markets due to strong pricing competition. Premium volume in our other major products was stable, although pricing for these products is down slightly. The growth in net written and net earned premium was due to increased gross written premium.

	•		Group life, accident and health — Gross written, net written and net earned premium of our medical stop-loss product increased $64.0 million in 2007 from the acquisition of the Health Products Division. We retain all of our medical stop-loss business because the business is non-volatile and has very little catastrophe exposure. Profit margins remain at acceptable levels despite competition from the fully insured market.

	•		Aviation — Our domestic aviation business is stable, while gross written premium of our international business has declined. We have exercised underwriting discipline and written less international business due to competition and resultant pressure on pricing. However, margins on decreased premium volume are still acceptable. Retention increased as a result of a reduction in proportional reinsurance.

	•		London market account — Gross written premium decreased in 2007 due to lower energy and property writings, as we wrote less business in a more competitive market. Premium rates are down slightly. We reduced our aggregate property exposure in Florida and other hurricane-exposed onshore areas in 2006 compared to 2005, and we are maintaining the reduced exposure in 2007. Additionally, due to tightening of policy terms and conditions, our energy catastrophe exposure was significantly reduced in 2006 and continues as such in 2007. Net written premium and net earned premium increased due to higher retentions.

	•		Other specialty lines — We experienced growth in our other specialty lines of business from increased writings in several products and from an acquisition. Net written premium and net earned premium increased due to higher gross written premium and retentions. Rates in this line have been relatively stable.

Losses and Loss Adjustment Expenses

Our net adverse development relating to prior year losses included in net incurred loss and loss adjustment expense was $0.2 million in 2007 and $4.1 million in 2006. Deficiencies and redundancies in reserves occur as a result of our continuing review and as losses are finally settled or claims exposures change. We have no material exposure to environmental or asbestos losses and believe we have provided for all material net incurred losses.

Our gross loss ratio was 58.2% in 2007 and 55.3% in 2006, increasing primarily due to expected higher losses related to the business acquired in the Health Products Division acquisition. The following table provides comparative net loss ratios by line of business.


	Three months ended March 31,
	2007						2006
	Net			Net			Net			Net
	earned			loss			earned			loss
	premium			ratio			premium			ratio
Diversified financial products	$	192,514			45.5	%	$	169,112			50.8	%
Group life, accident and health		192,416			75.5			127,761			69.7
Aviation		39,344			50.1			33,197			54.3
London market account		33,896			57.3			21,928			48.1
Other specialty lines		39,738			69.8			28,640			63.9
Discontinued lines		(308	)	nm				(67	)	nm


Totals	$	497,600			60.4	%	$	380,571			58.4	%


Expense ratio					23.6						27.1


Combined ratio					84.0	%					85.5	%


nm – Not meaningful comparison

The change in net loss ratios between years resulted principally from the following factors:

•

Diversified financial products — The decrease in the loss ratio was due to better underwriting results for certain business written in 2006 compared to business written in 2005. Additionally, our surety business, which has a lower loss ratio than other business in this line, is growing and reducing the overall loss ratio.

	•		Group life, accident and health — The net loss ratio was higher in 2007 due to the expected higher loss ratio related to the business acquired in the Health Products Division acquisition. Over time, as this business is re-underwritten, we expect its loss ratio will decline to the level of our existing medical stop-loss business.

	•		Aviation and London market account — The lower loss ratio for aviation and the higher loss ratio for the London market account were due to positive and negative adjustments in reserves, respectively, as a result of our settlement, in the first quarter of 2007, of litigation related to a reinsurer that became insolvent in 1999. These 2007 adjustments decreased the aviation loss ratio by 10.1 percentage points and increased the London market account loss ratio by 7.9 percentage points. These adjustments, together with other smaller adjustments related to this settlement that affected the group life, accident and health and discontinued lines, had a minimal impact on our consolidated incurred losses.

	•		Other specialty lines — The increase relates to losses in our marine line of business.

Our net paid loss ratios were 54.8% in 2007 and 46.1% in 2006. The paid loss ratio is the percentage of losses paid, net of reinsurance, divided by net earned premium for the period. The increase was due to payment of claims related to the acquired Health Products Division business.

Policy Acquisition Costs

Policy acquisition costs, which are net of the related portion of commissions on reinsurance ceded, increased to $89.1 million in the first quarter of 2007 from $76.2 million in the first quarter of 2006, due to growth in net earned premium. Policy acquisition costs as a percentage of net earned premium decreased to 17.9% in 2007 from 20.0% in 2006, principally due to lower commission costs on business written in 2006 and earned in 2007, than on business written in 2005 and earned in 2006. The GAAP expense ratio of 23.6% in 2007 decreased in comparison to 27.1% in 2006 for the same reason.

Agency Segment

Revenue from our agency segment decreased to $39.0 million in 2007 from $42.7 million in 2006, primarily due to consolidation of our London underwriting agency into one of our life insurance companies, effective April 1, 2006, and a reduction of business produced in certain lines, partially offset by business from a company acquired in 2006. Segment net earnings decreased in 2007 to $4.9 million from $8.9 million in 2006, due to the consolidation and the reduced revenue, combined with the fact that the majority of this segment’s operating costs are fixed.

Other Operations Segment

Revenue and net earnings from our other operations segment decreased to $18.3 million and $11.4 million, respectively, in 2007 from $19.8 million and $13.0 million, respectively, in 2006 primarily due to lower income from strategic investments and trading securities. We liquidated the majority of our trading portfolio in the fourth quarter of 2006. Results of this segment may vary substantially period to period depending on our investment in or disposition of strategic investments and activity in our trading portfolio.

Liquidity and Capital Resources

We receive substantial cash from premiums, reinsurance recoverables, commutations, fee and commission income, proceeds from sales and redemptions of investments and investment income. Our principal cash outflows are for the payment of claims and loss adjustment expenses, premium payments to reinsurers, purchases of investments, debt service, policy acquisition costs, operating expenses, taxes and dividends.

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, the completion of commutations and activity in the trading portfolio. Our cash provided by operating activities has been strong in recent years due to: 1) our increasing net earnings, 2) growth in net written premium and net loss reserves due to organic growth, acquisitions and increased retentions, 3) commutations of selected reinsurance agreements and 4) expansion of our diversified financial products line of business as a result of which we retain premium for a longer duration than had been the case prior to entering this business.

The components of our net operating cash flows are detailed in the following table.


	Three months ended March 31,
	2007			2006
Net earnings	$	96,690		$	79,142
Change in premium, claims and other receivables, net of reinsurance, other payables and restricted cash		(7,846	)		(13,013	)
Change in unearned premium, net		(732	)		18,152
Change in loss and loss adjustment expense payable, net of reinsurance recoverables		127,712			36,407
Change in trading portfolio		10,958			(47,994	)
Other, net		3,529			5,397


Cash provided by operating activities	$	230,311		$	78,091

Cash provided by operating activities increased $152.2 million in 2007. Cash received from commutations, included in cash provided by operating activities, totaled $101.0 million in 2007. Excluding commutations, cash provided by operating activities increased $51.2 million in 2007, mainly from changes in our trading portfolio as it was liquidated.

Our combined cash and investment portfolio increased by $249.3 million during 2007 to a total of $4.2 billion at March 31, 2007. We maintain a substantial level of cash and liquid short-term investments to meet anticipated payment obligations.

Our debt to total capital ratio was 12.3% at March 31, 2007 and 13.1% at December 31, 2006.

As a result of our common stock trading at specified price levels in the first quarter of 2007, holders may elect to surrender our 1.30% Convertible Notes and 2.00% Convertible Exchange Notes (Notes) in the second quarter for cash equal to the principal amount of the Notes ($296.9 million at March 31, 2007) and common stock for the value of the conversion premium. We expect to use the Revolving Loan Facility to fund any Notes surrendered in the second quarter. Historical surrenders have been minimal. Assuming an average price of $31.00 for our stock, we would issue approximately 4.0 million shares of common stock should all Note holders elect conversion. The dilutive effect of these shares is included in the calculation of our diluted earnings per share in all periods. Our common stock must meet the specified price levels in each subsequent quarter in order for the Notes to be eligible for conversion in the following quarter.

We have filed a “Universal Shelf” registration statement with the SEC that provides for the issuance of an aggregate of $1.0 billion of our securities. These securities may be debt securities, equity securities, trust preferred securities or a combination thereof. As a result of certain delayed filings in 2006, we are ineligible to register our securities on Form S-3 or use our Universal Shelf registration statement until January 2008. We may use Form S-1 to raise capital and borrow money utilizing public debt or to complete acquisitions of other companies, which could increase transaction costs and adversely impact our ability to raise capital and borrow money or complete acquisitions in a timely manner.

We believe that our operating cash flows, investments, Revolving Loan Facility and other sources of liquidity are sufficient to meet our operating needs for the foreseeable future.

2006 Stock Option Matter

In connection with a voluntary independent investigation by a Special Committee of the Board of Directors of our past practices related to granting stock options, the SEC commenced an inquiry into our past option pricing practices. We have provided the results of our internal review and independent investigation to the SEC and we have responded to requests for documents and additional information. In March 2007, the SEC issued a formal order directing a private investigation. We intend to fully cooperate with the SEC. We are unable to predict the outcome of or the future costs related to the ongoing inquiry, but it may result in additional professional fees including our advancement of attorneys’ fees incurred by our Directors, certain officers and certain former executives and Directors; may continue to occupy the time and attention of our management team; and could negatively impact our business and our ability to raise and borrow additional funds in the future. Furthermore, if we are subject to adverse findings in this or any other regulatory proceeding or governmental enforcement action, we could be required to pay damages and penalties or have other remedies imposed, which could harm our business, financial condition, results of operations and cash flows.

Issues related to our 2006 stock option matter have exposed us to greater risks associated with litigation. Publicity resulting from this litigation may materially adversely affect us, regardless of the cause or effect of the actions. Since December 31, 2006, four derivative actions have been filed naming a number of current and former officers and Directors as defendants, although one was dismissed. The Company is a nominal defendant. In addition, one class action has been filed against us and certain current and former officers and Directors. We cannot assure you about the outcome of these derivative and class action lawsuits or any future litigation. The conduct and resolution of litigation could be time consuming, expensive, cause us to have to advance expenses in certain instances to current and former officers and Directors, and may distract management from the conduct of our business. In addition, damages and other remedies awarded in any such litigation could harm our business and financial condition.

Related to the 2006 stock option matter, we have incurred $17.0 million of expense for professional services, consulting fees and other related charges, of which $2.8 million was incurred in the first quarter of 2007. During the first quarter, we paid our employees’ personal tax liabilities under Section 409A of the Internal Revenue Code for options exercised in 2006, thus resolving the $2.3 million liability accrued at December 31, 2006. We are awaiting a response to a no-action request letter we sent to the Securities and Exchange Commission (SEC) relating to our plan to reprice certain employees’ unexercised discounted options and reimburse them for their lost spread. The estimated cost to reimburse employees was accrued at December 31, 2006. We expect to complete this plan before December 31, 2007. During the first quarter of 2007, we collected the $6.1 million of receivables due from certain terminated executives related to the 2006 stock option matter.

Recent Accounting Changes

FIN 48

In addition, changes in the recognition or amount of our uncertain tax positions generally will be reflected as a component of income tax expense.

SFAS 157 and 159

Critical Accounting Policies

We have made no changes in our methods of application of our critical accounting policies from the information provided in our Annual Report on Form 10-K for the year ended December 31, 2006, except for our adoption of FIN No. 48, Accounting for Uncertainty in Income Taxes, effective January 1, 2007, as described in Recent Accounting Changes above.

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, 2006.

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 March 31, 2007. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2007.

(b) Changes in Internal Control over Financial Reporting

During the first quarter of 2007, 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.

Part II — Other Information

Item 1. Legal Proceedings

Based on a voluntary independent investigation by a Special Committee of the Board of Directors in 2006 of our past practices related to granting stock options, we determined that the price on the actual measurement date for a number of our stock option grants from 1997 through 2005 and into 2006 did not correspond to the price on the stated grant date and that certain option grants were retroactively priced. The investigation was conducted with the help of a law firm that was not previously involved with our stock option plans and procedures. The Committee completed the investigation on November 16, 2006. Based on the Committee’s recommendations, the Board of Directors took specific actions as a result thereof. The SEC commenced an inquiry upon notification by us of the initiation of our investigation. In this connection, we received document requests from the SEC, and the SEC has been reviewing the work of the independent investigation. In March 2007, the SEC issued a formal order directing a private investigation. We intend to fully cooperate with the SEC. We are unable to predict the outcome of or the future costs related to the ongoing inquiry.

The following lawsuits related to our 2006 stock option matter have been filed:

Item 1A. Risk Factors

There have been no material changes in our risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2006.

Item 6. Exhibits

a. Exhibits

10.1		Employment Agreement effective as of December 1, 2005 between HCC Service Company (UK) Branch and Barry Cook

31.1		Certification by Chief Executive Officer

31.2		Certification by Chief Financial Officer

32.1		Certification with Respect to Quarterly Report

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.

EX-10.1 2 h46355exv10w1.htm EMPLOYMENT AGREEMENT exv10w1

Exhibit 10.1

Dated June 1 2006

HCC SERVICE COMPANY LIMITED (UK) BRANCH

- and -

BARRY COOK

SERVICE AGREEMENT

THIS AGREEMENT is made on June 1 2006

B E T W E E N

(1)		HCC SERVICE COMPANY LIMITED (UK) BRANCH a Texas Limited Partnership of 40 Lime Street, London EC3M 5BS (the “Company”); and

(2)		BARRY COOK of Pilgrim’s House, Brasted Lane, Knockholt, Sevenoaks, Kent TN14 7PJ (the “Executive”)

WHEREBY IT IS AGREED as follows:-

1.		Definitions

		In this Agreement:


		“Associated Company”		means a company which is from time to time a subsidiary or a holding company of the Company or a subsidiary (other than the Company) of a holding company of the Company. In this definition “subsidiary” and “holding company” have the same meanings as in Section 736 of the Companies Act 1985, as originally enacted.

		the “Board”		means the Board of Directors of HCC Insurance Holdings Inc from time to time.

		“HCCIH”		means HCC Insurance Holdings (International) Limited

		“HCC”		means HCC Insurance Holdings Inc

2.		Term of Appointment

2.1		The Executive shall be employed by the Company subject to the terms and conditions set out in this Agreement as Chief Executive Officer of HCCIH or in such other capacity of a like status as the Company may require for a fixed term of three years with effect from 1 January 2006 subject to his employment being terminated at any time before the expiry of the said three year fixed term by either the Executive or the Company giving to the other not less than six months’ notice in writing.

2.2		For the avoidance of doubt, previous employment with the Company will count as part of the Executive’s period of continuous employment with the Company.

2.3		The Company may, in its absolute discretion, lawfully terminate the employment of the Executive at any time with immediate effect or by the giving of six months’ notice in writing under clause 2.1 above. If the Company terminates this agreement with immediate effect other than pursuant to clause 18 then the Company shall pay to the Executive a sum equal to the Executive’s base salary and benefits (excluding bonus) for the period of notice under Clause 2.1. In addition, if the employment of the Executive is

		terminated by the Company during the three year fixed term, other than pursuant to Clause 18, the Company will, in addition to the Executive’s base salary for the six month notice period, pay to the Executive his base salary and benefits (excluding bonus) for the unexpired portion of the three year fixed term, less the payment for the six month notice period referred to above.

2.4		The Executive’s employment shall in any event terminate on the date on which the Executive reaches the age of 65.

3.		Powers and Duties

3.1		The Executive shall:

3.1.1		exercise such powers and perform such duties in relation to the business of the Company or any Associated Company as may from time to time be vested in or assigned to him by the Company. The Executive shall comply with all reasonable directions from, and all regulations of, the Company or, as appropriate, any Associated Company;

3.1.2		report to the Board and shall at all times promptly give to the Board or its his nominated representative (in writing if so requested) all information, advice and explanations as it may reasonably require in connection with matters relating to his employment or directorship under this Agreement or in relation to the business of the Company or any Associated Company generally;

3.1.3		devote the whole of his time, attention and abilities during his working hours to carrying out his duties under this agreement in a proper, loyal and efficient manner;

3.1.4		at all times promote the interests of and maintain the goodwill of the Company and any Associated Company and not knowingly do or willing permit to be done anything that may result in loss or harm to the Company or any Associated Company; and

3.1.5		not at any time make any untrue or misleading statement relating to the Company or any Associated Company. Further, the Executive shall promptly disclose any information which comes into his possession or attention which affects adversely or may affect adversely the Company or any Associated Company or its or their business. Such information shall include but not be limited to the plans of any employee to leave the Company or any Associated Company (whether alone or in concert with other employees); the plans of any employee (whether alone or in concert with other employees) to join a competitor or to establish a business in competition with the Company or any Associated Company; any steps taken by any employee to implement either of such plans and the misuse or the intended misuse by any employee of any confidential information belonging to the Company or any Associated Company.

4.		Hours of Work

4.1		The Executive shall work such hours as may reasonably be required, and as are necessary, for the proper performance of his duties under this agreement.

4.2		The Executive hereby agrees that the limit on average weekly working time set out in paragraph 4(1) of the Working Time Regulations 1998 will not apply to him although he may withdraw such agreement at any time subject to giving the Company three months’ prior written notice.

5.		Place of Work

5.1		The Executive’s normal place of work shall be in London or at such other place within the United Kingdom as the Company may from time to time determine.

5.2		In addition, the Executive shall, in the proper performance of his duties and for the purpose of business trips, travel to such places both within the United Kingdom and abroad as the Company may from time to time require.

6.		Salary

6.1		The Executive shall receive a base salary with effect from 1 December 2005 of £350,000 per annum. With effect from 1 January 2007 the Executive’s base salary shall increase to £375,000 per annum, and from 1 January 2008 shall increase to £400,000 per annum. The Executive’s base salary will be subject to normal PAYE deductions and will be payable in arrears by twelve monthly instalments by direct credit transfer to the Executive’s bank account by no later than the 25th day of each month.

6.2		The Executive shall be eligible to be considered for a discretionary bonus at the sole discretion of the Chief Executive Officer of HCC (or such other person as he may nominate) but the Executive shall not be entitled to receive any bonus if, on the date such bonus is due to be paid, the Executive is under notice of termination (regardless of whether the Company or the Executive has given such notice) he is on garden leave pursuant to clause 17 or if his employment has terminated. For the avoidance of doubt the Executive shall not be entitled to a pro rata bonus.

6.3		The Executive shall not be entitled to any other salary or fees as an ordinary or executive director or employee of the Company or any Associated Company and the Executive shall, as the Company may direct, either waive his right to any such salary or fees or account for the same to the Company.

7.		Pension

7.1		Subject to any limit imposed by the Inland Revenue and to the rules of the Scheme from time to time in force, the Company shall pay for the benefit of the Executive, in twelve equal monthly instalments, an annual contribution of £58,000 to the HCC Service Company Limited Retirement and Death Benefit Scheme (“the Scheme”). The Executive may elect, by written notice to the Company to convert the Company’s annual pension contribution referred to above to base salary. If the Executive so elects, the increase in the Executive’s base salary will be subject to normal PAYE deductions and, for the avoidance of doubt, the Company will have no ongoing obligation to pay a contribution to the Scheme on behalf of the Executive.

7.2		No contracting out certificate issued by the Contributions Agency is in force in respect of the employment under this Agreement.

8.		Other Benefits

8.1		The Executive will be eligible to participate in the private medical insurance scheme operated by the Company which provides cover for the Executive, his spouse and dependent children, subject to cover being accepted by the insurance company and to any conditions that the insurance company may impose.

8.2		The Company shall bear the premium cost of providing the Executive with life assurance cover in accordance with the terms of any life assurance scheme from time to time in force. The cover provided shall be subject to any limit imposed by the Inland Revenue from time to time.

8.3		The Executive will be eligible to join the permanent health insurance plan operated by the Company from time to time and the premium in connection with such plan will be paid for by the Company. Benefit will be payable only in accordance with the terms of the plan. If benefit is refused by the insurer there will be no obligation on the Company to make any payment to the Executive. If the insurer accepts a claim under the terms of the plan from time to time in force, the Executive shall, from the date of such acceptance, no longer be eligible to receive any base salary or benefits under this agreement save for the Executive will continue to be eligible to participate in the private medical insurance scheme pursuant to Clause 8.1 above, subject to cover being accepted by the insurance company and to any conditions the insurance company may impose.

8.4		The Executive will be granted options to purchase a further 100,000 shares of HCC common stock. These options will be subject to the rules of that scheme as in force from time to time which rules shall not form part of the Executive’s service contract. In particular, if the Executive’s employment should terminate for any reason (including as a result of a repudiatory breach of contract by the Company) he will not be entitled to any compensation for any loss of any right or benefit or prospective right or benefit under any such scheme which he may have enjoyed whether such compensation is claimed by way of damages for wrongful dismissal or other breach of contract or by way of compensation for loss of office or otherwise.

8.5		The Executive will be required to use his own vehicle for business purposes. The Company will provide a car allowance to the Executive in the sum of £18,000 per annum such contribution to be paid in twelve equal monthly instalments at the same time as the Executive’s monthly salary payments. The payments will be made subject to deductions for tax and any other contributions. The Executive will be responsible for all running costs and risks incurred in respect of his own vehicle including ensuring adequate insurance cover and providing a replacement vehicle if required in order to perform his duties.

9.		Expenses

		The Company shall reimburse to the Executive against production of receipts, if requested, all reasonable travelling, hotel, entertainment and other out-of-pocket expenses which he may from time to time be authorised to incur in the execution of his duties under this agreement.

10.		Holidays

10.1		In addition to normal bank and public holidays applicable in England the Executive will be entitled to 30 working days paid holiday in every calendar year to be taken at such time or times as may be approved by the Board.

10.2		The Company’s holiday year runs from 1 January to 31 December. Holidays not taken in the calendar year of entitlement will be lost.

10.3		Upon termination the Company may at its discretion require the Executive to take, during his notice period, any holiday entitlement which has accrued by the date of the termination of his employment but which has not been taken.

10.4		If the Executive’s employment commences or terminates part way through a holiday year, the Executive’s entitlement to holiday during that year will be assessed on a pro rata basis. If, on termination, the Executive has taken more holiday than his accrued holiday entitlement, he will be required to reimburse to the Company in respect of the excess days taken and the Executive hereby authorises the Company to make deductions in respect of the same from his final salary payment. Subject to the Company’s discretion at Clause 10.3 above, payment for holiday entitlement accrued but not taken will only be made on termination of employment. For the avoidance of doubt, a days holiday pay is 1/365 of the Executive’s base salary.

11.		Confidential Information

11.1		For the purposes of this Clause 11, confidential information means, without limitation:

	(i)		trade secrets,

	(ii)		any inventions or improvements which the Executive may from time to time make or discover in the course of his duties,

	(iii)		details of clients including insureds and reinsureds, prices charged to them and the services provided and the Company’s or any Associated Company’s terms of business with clients,

	(iv)		marketing plans and sales forecasts,

	(v)		any proposals relating to the future of the Company or any Associated Company or its or their business or any part thereof,

	(vi)		details of employees and officers of the Company or any Associated Company and of the remuneration and other benefits paid to them,

	(vii)		information relating to business matters, corporate plans, management systems, finances, marketing or sales of any past, present or future products or services, processes, inventions, designs, know how, pitch lists, discoveries, policy wordings, broker lists, intermediary lists, customer lists, technical specifications and other technical information relating to the creation, production or supply of any past, present or future products or services of the Company or any Associated Company, any information given to the Company or any Associated Company in confidence by clients, insureds, reinsureds, reinsurers, brokers, agents, intermediaries, or other persons and any other information (whether or not recorded in documentary form, or on computer disk or tape) which is confidential or commercially sensitive and is not in the public domain, and

	(viii)		any other information which is notified to the Executive as confidential.

11.2		The Executive shall not, either during his employment or thereafter, except in the proper course of his duties or as required by law, use for his own or another party’s benefit, or divulge or disclose to any person any Confidential Information concerning the business or affairs of the Company or any Associated Company, or any of its or their clients or customers, which may have come to his knowledge at any time during his employment by the Company or any Associated Company. This Clause will cease to apply to information which enters the public domain other than (directly or indirectly) through the acts or omissions of the Executive.

12.		Competitive Activities

		During the term of this agreement the Executive shall not (unless otherwise agreed in writing by the Company) undertake any other business or profession or be or become an employee or agent of any other firm, company or other person or assist, be concerned in or have any financial interest, whether directly or indirectly, in any other business or profession including a business that is not trading. The Executive may, however, hold or acquire no more than 3% by way of bona fide investment only of the shares or other securities of any company which are listed or dealt in on any recognised Stock Exchange, unless the Company shall require him not to do so in any particular case on the ground that such other company is or may be carrying on a business competing or intending to compete with the business of the Company or any Associated Company. In addition the Executive shall be entitled to engage in such activities as may be appropriate in order to manage his personal investments in so far as such activities do not materially interfere or conflict with the Executive’s performance of his duties under this Agreement. Whether such activities materially interfere or conflict with the Executive’s performance of his duties under this Agreement shall be the sole decision of the Company (acting reasonably). Any material conflict will be notified in writing to the Executive who shall be given a period of 14 days in which to remedy such conflict to the satisfaction of the Company. Failure by the Executive to remedy such conflict after written notification by the Company shall be a material breach by the Executive of the

terms of this Agreement entitling the Company to terminate the Executive’s employment with immediate effect without payment in lieu of notice.

13.		Post-termination Restrictions

13.1		In this Clause 13 the following words and phrases shall have the following meanings:

	(i)		“Garden Leave” means the rules applicable to the Executive during any period of notice as set out in Clause 17 below.

	(ii)		“Restricted Business” means those of the businesses of the Company and any Associated Company as at the Termination Date with which the Executive was involved to a material extent at any time during the period of 12 months ending on the Termination Date;

	(iii)		“Restricted Customer” means any firm, company or other person who at any time during the period of 12 months ending on the Termination Date, was:

	(a)		insured or reinsured with; or

	(b)		a coverholder of; or

	(c)		in the habit of dealing with.

	the Company or any Associated Company and with whom the Executive dealt to a material extent on behalf of the Company or any Associated Company during that period;

	(iv)		“Restricted Employee” means any person who, as at the Termination Date was an employee of the Company or any Associated Company (excluding secretarial or clerical staff), who could materially damage the interests of the Company or any Associated Company if they became engaged or employed in any business concern in competition with any Restricted Business and with whom the Executive worked closely during the period of 12 months ending on the Termination Date;

	(v)		“Restricted Supplier” means any firm, company or other person who at any time during the period of 12 months ending on the Termination Date, was a provider or supplier of goods or services (other than utilities and goods or services supplied for administrative purposes) to the Company or any Associated Company but including any individual who provided services to the Company or any Associated Company by way of a consultancy agreement, and with whom the Executive dealt to a material extent during that period; and

	(vi)		“Termination Date” means the date of termination of the Executive’s employment under this Agreement; and

(vii)

“Restricted Period” means the period of 12 months after the Termination Date, less any period that the Executive has spent on garden leave pursuant to clause 17 of this agreement or working at the Company’s request, during the notice period referred to in clause 2.1.

13.2		The Executive will not, without the prior written consent of the Board, for the Restricted Period, solicit or endeavour to entice away from the Company or any Associated Company the business of a Restricted Customer with a view to providing goods or services to that Restricted Customer in competition with any Restricted Business.

13.3		The Executive will not, without the prior written consent of the Board, for the Restricted Period, provide goods or services to or otherwise have any business dealings with any Restricted Customer in the course of any business concern which is in competition with any Restricted Business.

13.4		The Executive will not, without the prior written consent of the Board, for the Restricted Period, interfere or endeavour to interfere with the continuance of the provision of goods or services to the Company or any Associated Company by any Restricted Supplier.

13.5		The Executive will not, without the prior written consent of the Board, for the Restricted Period, in the course of any business concern which is in competition with any Restricted Business offer employment to or otherwise endeavour to entice away from the Company or any Associated Company any Restricted Employee.

13.6		The Executive will not, without the prior written consent of the Board, for the Restricted Period, be engaged in or concerned in any capacity in any business concern which is in competition with any Restricted Business. This Clause shall not restrain the Executive from being engaged or concerned in any business concern in so far as the Executive’s duties or work shall relate solely:-

	(i)		to geographical areas where the business concern is not in competition with the Restricted Business; or

	(ii)		to services or activities of a kind with which the Executive was not concerned to a material extent during the period of 12 months ending on the Termination Date.

13.7		The obligations imposed on the Executive by this clause extend to him acting not only on his own account but also on behalf of any other firm, company or other person and shall apply whether he acts directly or indirectly.

13.8		The Executive agrees, and acknowledges that before entering into this Agreement he had the opportunity to obtain independent legal advice on the restrictions in this Clause 13 that the restrictions set out above are no wider or more restrictive than is reasonably necessary for the protection of the Company’s legitimate business interests and further that the effect of those restrictions is not such as to prevent the Executive from earning a living.

13.9		The Executive agrees that each of the restrictions contained in Clause 13 of this Agreement shall be read and construed independently of the others and that all such restrictions are considered reasonable by the parties to this Agreement. In the event that any such restriction shall be found or held to be void in circumstances where it would be valid if some part of it were deleted or the period scope or distance of application reduced the parties to this Agreement agree that such restriction shall apply with such modification as may be necessary to make it valid and effective and that any such modification shall not affect the validity of any other restriction contained in this Agreement.

13.10		Without prejudice to the Company’s right to enforce this Agreement in respect of any Associated Company it is agreed that the covenants contained in this Clause 13 shall inure for the benefit of any relevant Associated Company and that the same shall be enforceable against the Executive by that Associated Company as if it were a party to this Agreement.

14.		Return of Property

14.1		For the purposes of this Clause 14, Property means keys, mobile telephones, computer equipment, all lists of clients or customers, correspondence and all other documents, papers and records (including, without limitation, any records stored by electronic means, together with any codes or implements necessary to give full access to such records), system designs, software designs, software programmes (in whatever media), presentations, proposals or specifications which may have been prepared by the Executive or have come into his possession, custody or control in the course of his employment.

14.2		The Executive shall promptly whenever requested by the Company and in any event upon the termination of his employment or during any period of Garden Leave pursuant to Clause 17 deliver up to the Company all Property of the Company or any Associated Company and the Executive shall not be entitled to and shall not retain any copies thereof. At the request of the Company the Executive will warrant at the time of returning such Property that he has not forwarded, transferred or in any way communicated any information that was part of or was contained in the Property.

15.		Directorship

		The removal of the Executive from the office of director of the Company or any Associated Company or the failure of the Company in general meeting to re-elect the Executive as a director of the Company if under the Articles of Association for the time being of the Company he shall be obliged to retire by rotation or otherwise shall not terminate his employment under this Agreement. The Executive shall not except with the prior written consent of the Company during his employment resign his office as a director of the Company or any Associated Company or do anything which could cause him to be disqualified from continuing to act as such a director.

16.		Sickness

16.1		In respect of any absence by reason of sickness or injury lasting more than seven days, the Executive shall produce on the seventh day of sickness or injury a certificate stating the reason for his absence, such certificate to be signed by a registered medical practitioner. If the sickness or injury continues, the Executive shall produce further certificates as required.

16.2		Subject to production of medical certificates satisfactory to the Company, if the Executive is absent from work due to sickness or accident for a period of six consecutive months or 180 days in total in any period of one year, he shall continue to be paid full salary and benefits under this Agreement. Such remuneration shall include any sums the Company is obliged to pay to the Executive pursuant to any social security or sick pay legislation. The Company may reduce remuneration during incapacity by an amount equal to the benefit (excluding any lump sum benefit) which the Executive would be entitled to claim during such incapacity under the then current social security legislation (whether or not such benefit is claimed by the Executive).

16.3		If the Executive either:

	(i)		becomes entitled to payment of benefit under the terms of any permanent health insurance scheme from time to time in force; or

	(ii)		is refused benefit under that scheme,

		all entitlement to salary and benefits under this Agreement shall cease from the earlier of the commencement of payment of such benefit or the expiry of the period specified in Clause 16.2, unless otherwise agreed by the Company in writing and subject to any appeal against a refusal of benefit made by the Executive.

16.4		The Company may require the Executive from time to time to undergo a medical examination by a medical practitioner nominated by the Company. The Company shall bear the cost of any such examination. The Executive agrees that this Agreement shall be taken as the Executive’s written authorisation to the nominated medical practitioner to disclose to and discuss with the Company the results of the examination and the matters which arise from it so that the Company can be notified of any matters it considers might impair the Executive’s ability properly to discharge his duties. The Company undertakes that, where such information is disclosed to it, it shall be disclosed at the same time to the Executive. The Company shall keep such information confidential and shall limit disclosure of such medical information to only those officers and employees of the Company who have a proper and necessary need to be given the information.

16.5		The Company reserves the right to withdraw payment to the Executive under Clause 16.2 if the Executive is certified fit to return to work by a medical practitioner nominated by the Company.

17.		Garden Leave

		Once notice to terminate the Executive’s employment has been given by the Company or the Executive pursuant to Clause 2.1., the Company shall be under no obligation to vest in or assign to the Executive any powers or duties or to provide any work for the Executive and may exclude the Executive from any premises of the Company or any Associated Company provided always that salary and all other contractual benefits (excluding bonus) shall not cease to be payable or provided by reason only of the Company exercising its rights pursuant to this clause. In addition, the Company may require the Executive to resign from any directorship, trusteeship or other office he may hold with the Company or with any Associated Company or any pension scheme, employee share scheme or other trust established by the Company and upon being so required the Executive shall be deemed simultaneously to have submitted his resignation and he shall have no claim or right of action against the Company for compensation, damages or otherwise in respect of such resignation, but this provision shall not otherwise prejudice any of his rights in respect of the termination of this agreement or of his employment.

18.		Summary Termination of Employment

18.1		The Company may terminate the employment of the Executive, without notice or payment in lieu of notice if the Executive:

	(i)		shall be or become incapacitated from any cause whatsoever from effectively performing his duties hereunder for a period of 180 days or more in any twelve month period; or

	(ii)		shall become of unsound mind or become a patient for any purpose under any statute relating to mental health; or

	(iii)		is convicted of any criminal offence (other than a motoring offence for which no custodial sentence is given to him); or

	(iv)		shall become bankrupt or makes any composition or enters into any deed of arrangement with his creditors; or

	(v)		shall be or become prohibited by law from being a director; or

	(vi)		shall be guilty of serious misconduct (which, for the avoidance of doubt, includes any conduct which tends to bring the Company or any Associated Company into disrepute) or shall commit any serious or persistent breach of any of his obligations to the Company or any Associated Company (whether under this Agreement or otherwise); or

	(vii)		shall refuse or neglect to comply with any lawful orders given to him by the Company.

18.2		Any delay or forbearance by the Company in exercising any right of termination under this Clause shall not constitute a waiver of it.

18.3		In order to investigate a complaint of misconduct against the Executive the Company is entitled to suspend the Executive on full pay for such period as it considers reasonable.

19.		Intellectual Property

19.1		For the purposes of this Clause 19 the following words and phrases shall have the following meanings:

	(i)		“Works” means all works, designs, innovations, inventions, improvements, processes, get-up, trade marks and trade names.

	(ii)		“Company Works” means all Works authored, originated, conceived, written or made by the Executive alone or with others (except only those Works which are authored, originated, conceived, written or made by the Executive wholly outside the course of his employment).

	(iii)		“Intellectual Property Rights” means any and all patents, trade marks, signs and services marks, rights in designs, trade or business names or signs, copyrights, database rights and topography rights (whether or not any of these is registered and including applications for registration of any such thing) and all rights or forms of protection of a similar nature or having equivalent or similar effect to any of these which may subsist anywhere in the world.

19.2

The parties foresee that the Executive may create and make Works, during the course of his employment and duties with the Company and that all Company Works shall vest in and be owned by the Company immediately upon their creation. It shall be part of the Executive’s normal duties at all times to:

	(i)		consider in what manner and by what new methods or devices the products, services, processes, equipment or systems of the Company with which the Executive is concerned or for which the Executive is responsible might be improved; and

	(ii)		promptly disclose to the Company full details of any invention or improvement which the Executive may from time to time make or discover in the course of his duties including, without limitation, details of all Company Works; and

	(iii)		further the interests of the Company’s undertaking with regard thereto

with the intent that subject to the Patents Act 1977, the Company shall be entitled to the sole and absolute ownership of any such Company Works and to the exclusive use thereof free of charge and any third party rights.

19.3

To the extent such rights do not vest immediately in the Company the Executive hereby agrees to assign to the Company all of the Executive’s right, title and interest in the

Company Works together with all of his right, title and interest in any and all Intellectual Property Rights which subsist from time to time in the Company Works.

19.4		To the extent such rights do not vest immediately in the Company the Executive hereby assigns to the Company all future copyright in the Company Works and the parties agree that all such future copyright shall vest in the Company by operation of law pursuant to section 91 of the Copyright, Designs and Patents Act 1988.

19.5		The Executive hereby irrevocably and unconditionally waives, in favour of the Company, its licensees and successors-in-title any and all moral rights conferred on the Executive by Chapter IV of Part I of the Copyright, Designs and Patents Act 1988 in relation to the Company Works (existing or future) and any and all other moral rights under any legislation now existing or in future enacted in any part of the world including, without limitation, the right conferred by section 77 of that Act to be identified as the author of any of the Company Works and the right conferred by section 80 of that Act not to have any such work subjected to derogatory treatment. The Executive shall, at the Company’s request and expense, take all steps that may be necessary or desirable to the Company to enforce against any third party the Executive’s moral rights in any of the Company Works.

19.6		The Executive acknowledges that, for the purpose of the proviso to section 2(1) of the Registered Designs Act 1949 (as amended), the covenants on the part of the Executive and the Company will be treated as good consideration and the Company will be the proprietor of any design which forms part of the Company Works.

19.7		Nothing in this Clause 19 shall be construed as restricting the rights of the Executive or the Company under sections 39 to 43 (inclusive) of the Patents Act 1977.

19.8		The Executive shall not knowingly do anything to imperil the validity of any patent or protection or any application relating to any of the Company Works but shall at the cost of the Company render all possible assistance to the Company both in obtaining and in maintaining such patents or other protection.

19.9		The Executive shall not either during the Executive’s employment or thereafter exploit or assist others to exploit any of the Company Works or any invention or improvement which the Executive may from time to time make or discover in the course of his duties or (unless the same shall have become public knowledge) make public or disclose any such Company Works or invention or improvement or give any information in respect of it except to the Company or as the Company may direct.

19.10		The Executive hereby irrevocably authorises the Company for the purposes of this Clause 19 to make use of his name and to sign and to execute any documents or do any thing on his behalf (or where permissible to obtain the patent or other protection in the Company’s own name or in that of its nominees in relation to any of the Company Works).

19.11		The Executive shall forthwith and from time to time both during his employment under this contract and thereafter, at the request and expense of the Company, do all things

		and execute all documents necessary or desirable to give effect to the provisions of this Clause 19 including, without limitation, all things necessary or conducive to obtain letters patent or other protection for any invention or improvement relating to any of the Company Works in any part of the world and to vest such letters patent or other protection in the Company or its nominees.

20.		Other Agreements

		The Executive acknowledges and warrants that there are no agreements or arrangements whether written, oral or implied between the Company or any Associated Company and the Executive relating to the employment of the Executive other than those expressly set out in this Agreement and that he is not entering into this Agreement in reliance on any representation not expressly set out herein.

21.		Waiver of Rights

		If the Executive’s employment is terminated:

	(i)		by reason of liquidation of the Company for the purpose of amalgamation or reconstruction; or

	(ii)		as part of any arrangement for the amalgamation of the undertaking of the Company not including liquidation or the transfer of the whole or part of the undertaking of the Company to any Associated Company; and

	(iii)		the Executive is offered employment of a similar nature with the amalgamated or reconstructed company for a period of not less than the then unexpired term of this Agreement and on terms not generally less favourable to the Executive than the terms of this Agreement,

		the Executive will have no claim against the Company under this Agreement in respect of that termination.

22.		Data Protection

		The Executive consents to the Company or any Associated Company holding and processing both electronically and manually the data it collects which relates to the Executive for the purposes of the administration and management of its employees and its business and for compliance with applicable procedures, laws and regulations. The Executive also consents to the transfer of such personal information to other offices the Company may have or to an Associated Company or to other third parties whether or not outside the European Economic Area for administration purposes and other purposes in connection with the Executive’s employment where it is necessary or desirable for the Company to do so.

23.		Communications

		Telephone calls made and received by the Executive using the Company’s equipment and use of the Company’s e-mail system to send or receive personal correspondence may be recorded by the Company on its communications systems. Any recordings made shall at all times remain the property of the Company and, if necessary, will be used as evidence in the case of disputes with employees or clients.

24.		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.

25.		Confirmation of Agreement

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

26.		Miscellaneous Matters

26.1		Other than as set out in this Agreement, there are no explicit disciplinary rules in force in relation to the Executive who is expected at all times to conduct himself in a manner consistent with his senior status. In the event that there are allegations of misconduct or any other matter which requires it, the Company may suspend the Executive from his duties for a reasonable period in order that the Company can carry out a full and proper investigation.

26.2		If the Executive has a grievance relating to his employment he should write to the Board setting out full details of the matter. Disciplinary and grievance procedures applicable to the Executive and which will be considered by the Board in this regard are set out in the Company’s Employee Handbook. The decision of the Board on such matter shall be final.

26.3		There are no collective agreements which directly affect the terms and conditions set out in this Agreement.

26.4		At any time during the period of this agreement, and, in any event, upon the termination of the Executive’s employment (for whatever reason and howsoever arising) the Executive shall immediately repay all outstanding debts or loans due to the Company or any Associated Company and the Company is hereby authorised to deduct from any payment of wages due to the Executive a sum in repayment of all or any part of such debts or loans.

27.		Notices

		Any notice may be given personally to the Executive or to the Secretary of the Company (as the case may be) or may be posted to the Company (for the attention of its Secretary) at its registered office for the time being or to the Executive either at his address given above or at his last known address. Any such notice sent by post shall be deemed served forty-eight hours after it is posted and in proving such service it shall be sufficient to prove that the notice was properly addressed and put in the post.

28.		Variation

		Any material variation of this Agreement must be contained in a written document executed by both parties.

29.		Governing Law

		This Agreement shall be governed by and construed under English law and each of the parties hereby irrevocably agrees for the exclusive benefit of the Company that the Courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement.

IN WITNESS whereof this Agreement has been signed by or on behalf of the parties hereto the day and year first before written.


SIGNED by John N. Molbeck, Jr. on behalf	)	By:

of the Company in the presence of:	)

Christopher L. Martin]	)	By:	/s/ John N. Molbeck, Jr.

	)	Name:	John N. Molbeck, Jr.
	)	Title:	President & COO


		/s/ Christopher L. Martin

		Executive Vice President & Secretary


		/s/ C. L. C. Manchester

		C. L. C. Manchester
		[Home address redacted]

EX-31.1 3 h46355exv31w1.htm CERTIFICATION BY CEO exv31w1

Exhibit 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Frank J. Bramanti, certify that:

I have reviewed this quarterly report on Form 10-Q of HCC Insurance Holdings, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order 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;

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;

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

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 registrant’s board of directors (or persons performing 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.

EX-31.2 4 h46355exv31w2.htm CERTIFICATION BY CFO exv31w2

Exhibit 31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, Edward H. Ellis, Jr., certify that:

I have reviewed this quarterly report on Form 10-Q of HCC Insurance Holdings, Inc.;

	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

	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.


May 9, 2007 (Date)				/s/ Edward H. Ellis, Jr. Edward H. Ellis, Jr., Executive Vice President and Chief Financial Officer

EX-32.1 5 h46355exv32w1.htm CERTIFICATION WITH RESPECT TO QUARTERLY REPORT exv32w1

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 March 31, 2007 (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.

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.

-----END PRIVACY-ENHANCED MESSAGE-----

HCC Insurance Holdings, Inc.

(Registrant)

May 9, 2007

(Date)

/s/ Frank J. Bramanti

Frank J. Bramanti, Chief Executive Officer

May 9, 2007

(Date)

/s/ Edward H. Ellis, Jr.

Edward H. Ellis, Jr., Executive Vice President and Chief Financial Officer