Edgar Filing: HCC INSURANCE HOLDINGS INC/DE/

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 Quarterly Period Ended June 30, 2010.


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

from to

Commission file number 001-13790

HCC Insurance Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware		76-0336636

(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

13403 Northwest Freeway, Houston, Texas		77040-6094

(Address of principal executive offices)		(Zip Code)

(713) 690-7300

(Registrant’s telephone number, including area code)

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

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

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


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

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

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

HCC INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS


	Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets — June 30, 2010 and December 31, 2009 (unaudited)		5

Condensed Consolidated Statements of Earnings — Six months and three months ended June 30, 2010 and 2009 (unaudited)		6

Condensed Consolidated Statement of Changes in Shareholders’ Equity — Six months ended June 30, 2010 (unaudited)		7

Condensed Consolidated Statements of Cash Flows — Six months ended June 30, 2010 and 2009 (unaudited)		8

Notes to Condensed Consolidated Financial Statements (unaudited)		9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27

Item 3. Quantitative and Qualitative Disclosures About Market Risk		43

Item 4. Controls and Procedures		43

Part II. OTHER INFORMATION
Item 1. Legal Proceedings		44

Item 1A. Risk Factors		44

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		44

Item 6. Exhibits		44

Signatures		46
EX-10.2
EX-12
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

FORWARD-LOOKING STATEMENTS

This Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this Report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as growth of our business and operations, business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably” or similar expressions, we are making forward-looking statements.

Many risks and uncertainties may have an impact on the matters addressed in these forward-looking statements, which could affect our future financial results and performance, including, among other things:

	•		the effects of catastrophic losses,

	•		the cyclical nature of the insurance business,

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

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

	•		the effects of emerging claim and coverage issues,

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

	•		potential credit risk with brokers,

	•		the effects of industry consolidations,

	•		our assessment of underwriting risk,

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

	•		the adequacy of reinsurance protection,

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

	•		the occurrence of terrorist activities,

	•		our ability to maintain our competitive position,

	•		changes in our assigned financial strength ratings,

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

	•		attraction and retention of qualified employees,

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

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

	•		impairment of goodwill,

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

	•		fluctuations in foreign exchange rates,

	•		failures or constraints of our information technology systems,

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

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

	•		change of control, and

	•		difficulties with outsourcing relationships.

We describe these risks and uncertainties in greater detail in Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2009.

These events or factors could cause our results or performance to differ materially from those we express in our forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this Report, our inclusion of this information is not a representation by us or any other person that our objectives or plans will be achieved.

Our forward-looking statements speak only at the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this Report may not occur.

HCC Insurance Holdings, Inc. and Subsidiaries

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


	June 30,			December 31,
	2010			2009
ASSETS

Investments
Fixed income securities — available for sale, at fair value (amortized cost: 2010 — $4,678,263; 2009 — $4,381,762)	$	4,903,206		$	4,538,073
Fixed income securities — held to maturity, at amortized cost (fair value: 2010 — $174,653; 2009 — $104,008)		172,349			102,792
Short-term investments, at cost, which approximates fair value		476,176			810,673
Other investments		433			4,691

Total investments		5,552,164			5,456,229

Cash		84,162			129,460
Restricted cash and cash investments		159,756			146,133
Premium, claims and other receivables		695,670			600,332
Reinsurance recoverables		1,054,659			1,016,411
Ceded unearned premium		271,783			270,436
Ceded life and annuity benefits		59,480			61,313
Deferred policy acquisition costs		216,988			208,463
Goodwill		821,729			822,006
Other assets		130,028			123,608


Total assets	$	9,046,419		$	8,834,391


LIABILITIES

Loss and loss adjustment expense payable	$	3,528,606		$	3,492,309
Life and annuity policy benefits		59,480			61,313
Reinsurance balances payable		183,631			182,661
Unearned premium		1,069,355			1,044,747
Deferred ceding commissions		68,657			71,595
Premium and claims payable		166,675			154,596
Notes payable		298,560			298,483
Accounts payable and accrued liabilities		472,605			497,504


Total liabilities		5,847,569			5,803,208


SHAREHOLDERS’ EQUITY

Common stock, $1.00 par value; 250,000 shares authorized (shares issued: 2010 — 119,867 and 2009 — 118,724; outstanding: 2010 — 115,144 and 2009 — 114,051)		119,867			118,724
Additional paid-in capital		930,276			914,339
Retained earnings		2,101,047			1,977,254
Accumulated other comprehensive income		147,682			119,665
Treasury stock, at cost (shares: 2010 — 4,723 and 2009 — 4,673)		(100,022	)		(98,799	)


Total shareholders’ equity		3,198,850			3,031,183


Total liabilities and shareholders’ equity	$	9,046,419		$	8,834,391

See Notes to Condensed Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

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


	Six months ended June 30,					Three months ended June 30,
	2010		2009			2010		2009
REVENUE

Net earned premium	$	1,015,972	$	1,004,366		$	506,385	$	501,978
Fee and commission income		40,168		56,426			19,175		26,132
Net investment income		99,466		93,629			50,217		48,411
Other operating income		11,993		28,419			2,087		5,523
Net realized investment gain		6,840		3,988			2,315		933
Other-than-temporary impairment loss
Total loss		—		(5,709	)		—		(2,596	)
Portion recognized in other comprehensive income		—		755			—		755

Net loss recognized in earnings		—		(4,954	)		—		(1,841	)


Total revenue		1,174,439		1,181,874			580,179		581,136


EXPENSE

Loss and loss adjustment expense, net		625,507		608,136			298,986		292,570
Policy acquisition costs, net		186,344		178,940			93,688		90,248
Other operating expense		129,183		130,524			62,515		61,526
Interest expense		10,627		8,267			5,237		3,628


Total expense		951,661		925,867			460,426		447,972


Earnings before income tax expense		222,778		256,007			119,753		133,164
Income tax expense		68,044		81,252			36,373		41,579


Net earnings	$	154,734	$	174,755		$	83,380	$	91,585


Earnings per common share

Basic	$	1.34	$	1.55		$	0.72	$	0.81


Diluted	$	1.34	$	1.54		$	0.72	$	0.81

See Notes to Condensed Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

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


								Accumulated
			Additional					other						Total
	Common		paid-in		Retained			comprehensive			Treasury			shareholders’
	stock		capital		earnings			income			stock			equity
Balance at December 31, 2009	$	118,724	$	914,339	$	1,977,254		$	119,665		$	(98,799	)	$	3,031,183

Comprehensive income

Net earnings		—		—		154,734			—			—			154,734

Other comprehensive income Change in unrealized gain on investments, net of tax		—		—		—			44,237			—			44,237

Other, net of tax		—		—		—			(16,220	)		—			(16,220	)


Total other comprehensive income															28,017


Comprehensive income															182,751

Issuance of 506 shares for exercise of options, including tax effect		506		9,637		—			—			—			10,143

Purchase of 50 common shares		—		—		—			—			(1,223	)		(1,223	)

Stock-based compensation		637		6,300		—			—			—			6,937

Cash dividends declared, $0.27 per share		—		—		(30,941	)		—			—			(30,941	)


Balance at June 30, 2010	$	119,867	$	930,276	$	2,101,047		$	147,682		$	(100,022	)	$	3,198,850

See Notes to Condensed Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

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


	Six months ended June 30,
	2010			2009
Operating activities
Net earnings	$	154,734		$	174,755
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in premium, claims and other receivables		(79,735	)		(14,383	)
Change in reinsurance recoverables		(60,013	)		(24,117	)
Change in ceded unearned premium		(4,630	)		(25,841	)
Change in loss and loss adjustment expense payable		99,370			97,956
Change in reinsurance balances payable		3,253			35,985
Change in unearned premium		32,541			67,388
Change in premium and claims payable, net of restricted cash		9,127			(59,802	)
Change in accounts payable and accrued liabilities		(15,389	)		7,090
Stock-based compensation expense		6,937			8,906
Depreciation and amortization expense		8,249			7,652
(Gain) loss on investments		(7,329	)		1,924
Other, net		(7,789	)		(15,337	)

Cash provided by operating activities		139,326			262,176


Investing activities
Sales of available for sale fixed income securities		133,856			199,744
Maturity or call of available for sale fixed income securities		260,053			160,470
Maturity or call of held to maturity fixed income securities		25,253			85,991
Cost of available for sale fixed income securities acquired		(703,341	)		(570,529	)
Cost of held to maturity fixed income securities acquired		(96,383	)		(59,580	)
Change in short-term investments		320,927			(160,119	)
Proceeds from sales of strategic and other investments		4,577			97,407
Payments for purchase of businesses, net of cash received		(36,348	)		(32,966	)
Proceeds from sale of subsidiaries		15,278			5,500
Other, net		(9,405	)		(8,916	)

Cash used by investing activities		(85,533	)		(282,998	)


Financing activities
Advances on line of credit		—			105,000
Payments on line of credit		—			(15,032	)
Payments on convertible notes		(64,472	)		—
Sale of common stock		10,143			5,385
Purchase of common stock		(472	)		(35,464	)
Dividends paid		(30,983	)		(28,204	)
Other, net		(13,307	)		(2,596	)

Cash provided (used) by financing activities		(99,091	)		29,089


Net increase (decrease) in cash		(45,298	)		8,267
Cash at beginning of year		129,460			27,347


Cash at end of period	$	84,162		$	35,614

See Notes to Condensed Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

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

(1)

General Information

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

		Basis of Presentation

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

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

		Accounting Guidance in 2010

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

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

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

		Derivative Financial Instruments

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

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

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

		Goodwill

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

		Stock-based Compensation

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


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

		Income Taxes

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

		Disposition

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

(2)

Fair Value Measurements

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

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

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

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

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

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

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

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

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

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


	Level 1		Level 2			Level 3		Total
June 30, 2010
Fixed income securities
U.S. government and government agency securities	$	169,556	$	181,528		$	—	$	351,084
Fixed income securities of states, municipalities and political subdivisions		—		1,090,158			—		1,090,158
Special purpose revenue bonds of states, municipalities and political subdivisions		—		1,392,736			—		1,392,736
Corporate fixed income securities		—		657,636			153		657,789
Residential mortgage-backed securities		—		1,064,299			—		1,064,299
Commercial mortgage-backed securities		—		145,359			2,543		147,902
Asset-backed securities		—		10,269			1,277		11,546
Foreign government securities		—		187,692			—		187,692

Total fixed income securities		169,556		4,729,677			3,973		4,903,206
Other investments		11		—			—		11
Other assets		—		—			470		470


Total assets measured at fair value	$	169,567	$	4,729,677		$	4,443	$	4,903,687


Accounts payable and accrued liabilities	$	—	$	(1,122	)	$	—	$	(1,122	)


Total liabilities measured at fair value	$	—	$	(1,122	)	$	—	$	(1,122	)

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


	Level 1		Level 2			Level 3		Total
December 31, 2009
Fixed income securities
U.S. government and government agency securities	$	178,927	$	134,620		$	—	$	313,547
Fixed income securities of states, municipalities and political subdivisions		—		1,059,426			—		1,059,426
Special purpose revenue bonds of states, municipalities and political subdivisions		—		1,146,334			—		1,146,334
Corporate fixed income securities		—		686,170			151		686,321
Residential mortgage-backed securities		—		944,182			—		944,182
Commercial mortgage-backed securities		—		143,412			2,805		146,217
Asset-backed securities		—		13,059			1,306		14,365
Foreign government securities		—		227,681			—		227,681

Total fixed income securities		178,927		4,354,884			4,262		4,538,073
Other investments		14		—			—		14
Other assets		—		—			432		432


Total assets measured at fair value	$	178,941	$	4,354,884		$	4,694	$	4,538,519


Accounts payable and accrued liabilities	$	—	$	(2,367	)	$	—	$	(2,367	)


Total liabilities measured at fair value	$	—	$	(2,367	)	$	—	$	(2,367	)

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

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


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


Balance at June 30	$	3,973		$	470		$	4,443		$	5,982		$	19,757	$	25,739

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


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


Balance at June 30	$	3,973		$	470	$	4,443		$	5,982		$	19,757	$	25,739

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

(3)

Investments

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


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


Total available for sale fixed income securities	$	4,678,263	$	232,480	$	(7,537	)	$	4,903,206

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


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


Total available for sale fixed income securities	$	4,381,762	$	175,201	$	(18,890	)	$	4,538,073

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


	June 30, 2010				December 31, 2009
	Amortized				Amortized
	cost		Fair value		cost		Fair value
U.S. government and government agency securities	$	19,812	$	20,209	$	14,988	$	15,257
Corporate fixed income securities		93,383		94,111		7,594		7,685
Foreign government securities		59,154		60,333		80,210		81,066


Total held to maturity fixed income securities	$	172,349	$	174,653	$	102,792	$	104,008

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

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


	Less than 12 months					12 months or more					Total
			Unrealized					Unrealized					Unrealized
	Fair value		losses			Fair value		losses			Fair value		losses
June 30, 2010

Fixed income securities of states, municipalities and political subdivisions	$	38,338	$	(465	)	$	11,833	$	(615	)	$	50,171	$	(1,080	)
Special purpose revenue bonds of states, municipalities and political subdivisions		79,536		(340	)		23,150		(446	)		102,686		(786	)
Corporate fixed income securities		22,602		(1,024	)		—		—			22,602		(1,024	)
Residential mortgage-backed securities		12,822		(96	)		37,822		(2,867	)		50,644		(2,963	)
Commercial mortgage-backed securities		1,224		(5	)		16,551		(855	)		17,775		(860	)
Asset-backed securities		773		(147	)		4,568		(665	)		5,341		(812	)
Foreign government securities		4,483		(12	)		—		—			4,483		(12	)


Total	$	159,778	$	(2,089	)	$	93,924	$	(5,448	)	$	253,702	$	(7,537	)


December 31, 2009

U.S. government and government agency securities	$	101,542	$	(1,326	)	$	—	$	—		$	101,542	$	(1,326	)
Fixed income securities of states, municipalities and political subdivisions		48,836		(985	)		19,816		(1,342	)		68,652		(2,327	)
Special purpose revenue bonds of states, municipalities and political subdivisions		76,305		(1,305	)		25,261		(478	)		101,566		(1,783	)
Corporate fixed income securities		13,773		(117	)		—		—			13,773		(117	)
Residential mortgage-backed securities		147,621		(2,018	)		40,568		(4,133	)		188,189		(6,151	)
Commercial mortgage-backed securities		30,209		(418	)		73,451		(5,352	)		103,660		(5,770	)
Asset-backed securities		2,476		(246	)		7,532		(952	)		10,008		(1,198	)
Foreign government securities		4,153		(130	)		8,593		(88	)		12,746		(218	)


Total	$	424,915	$	(6,545	)	$	175,221	$	(12,345	)	$	600,136	$	(18,890	)

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

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

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

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

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

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


	Available for sale				Held to maturity
	Cost or
	amortized cost		Fair value		Amortized cost		Fair value
Due in 1 year or less	$	268,234	$	272,713	$	23,758	$	23,981
Due after 1 year through 5 years		1,070,303		1,126,852		137,148		138,823
Due after 5 years through 10 years		836,824		887,794		11,443		11,849
Due after 10 years through 15 years		726,382		757,952		—		—
Due after 15 years		613,895		634,148		—		—

Securities with fixed maturities		3,515,638		3,679,459		172,349		174,653
Mortgage-backed and asset-backed securities		1,162,625		1,223,747		—		—


Total fixed income securities	$	4,678,263	$	4,903,206	$	172,349	$	174,653

The sources of net investment income were as follows:


	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Fixed income securities	$	99,080		$	92,912		$	50,481		$	47,474
Short-term investments		360			1,470			170			586
Other		2,042			1,051			534			1,103

Total investment income		101,482			95,433			51,185			49,163
Investment expense		(2,016	)		(1,804	)		(968	)		(752	)


Net investment income	$	99,466		$	93,629		$	50,217		$	48,411

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

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


	Six months ended June 30,
	2010								2009
	Gains		Losses			Net			Gains		Losses			Net
Fixed income securities	$	7,593	$	(599	)	$	6,994		$	5,633	$	(2,167	)	$	3,466
Other		2		(156	)		(154	)		683		(161	)		522


Realized investment gain (loss)	$	7,595	$	(755	)	$	6,840		$	6,316	$	(2,328	)	$	3,988


	Three months ended June 30,
	2010								2009
	Gains		Losses			Net			Gains		Losses			Net
Fixed income securities	$	2,692	$	(376	)	$	2,316		$	1,967	$	(1,020	)	$	947
Other		—		(1	)		(1	)		—		(14	)		(14	)


Realized investment gain (loss)	$	2,692	$	(377	)	$	2,315		$	1,967	$	(1,034	)	$	933

(4)

Earnings Per Share

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


	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Net earnings	$	154,734		$	174,755		$	83,380		$	91,585
Less: net earnings attributable to unvested restricted stock and restricted stock units		(1,679	)		(899	)		(927	)		(503	)


Net earnings available to common stock	$	153,055		$	173,856		$	82,453		$	91,082


Weighted-average common shares outstanding		113,805			112,286			113,935			111,776
Dilutive effect of outstanding options (determined using treasury stock method)		322			259			253			277
Dilutive effect of convertible debt (determined using treasury stock method)		—			365			—			467


Weighted-average common shares and potential common shares outstanding		114,127			112,910			114,188			112,520


Anti-dilutive stock options not included in treasury stock method computation		4,392			6,336			4,680			5,734

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

(5)

Segment and Geographic Data

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

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

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


	Insurance					Other
Six months ended June 30, 2010	company		Agency			operations		Corporate			Total

Revenue:
Domestic	$	906,448	$	22,375		$	3,455	$	1,362		$	933,640
Foreign		235,417		5,382			—		—			240,799
Inter-segment		—		39,353			473		—			39,826


Total segment revenue	$	1,141,865	$	67,110		$	3,928	$	1,362			1,214,265


Inter-segment eliminations												(39,826	)


Consolidated total revenue											$	1,174,439


Net earnings (loss):
Domestic	$	137,331	$	(683	)	$	1,385	$	(14,496	)	$	123,537
Foreign		28,489		(715	)		—		—			27,774


Total segment net earnings (loss)	$	165,820	$	(1,398	)	$	1,385	$	(14,496	)		151,311


Inter-segment eliminations												3,423


Consolidated net earnings											$	154,734


Other items:
Net investment income	$	97,978	$	117		$	1	$	1,370		$	99,466
Depreciation and amortization		2,545		3,732			45		1,927			8,249
Interest expense		363		7,815			—		2,449			10,627
Capital expenditures		986		1,768			1		6,650			9,405

Tax expense:
Income tax expense (benefit)	$	67,808	$	(284	)	$	503	$	(2,371	)	$	65,656
Inter-segment eliminations												2,388


Consolidated income tax expense											$	68,044

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


	Insurance				Other
Six months ended June 30, 2009	company		Agency		operations			Corporate			Total

Revenue:
Domestic	$	924,553	$	30,989	$	4,737		$	1,521		$	961,800
Foreign		207,800		12,274		—			—			220,074
Inter-segment		—		50,803		487			—			51,290


Total segment revenue	$	1,132,353	$	94,066	$	5,224		$	1,521			1,233,164


Inter-segment eliminations												(51,290	)


Consolidated total revenue											$	1,181,874


Net earnings (loss):
Domestic	$	138,925	$	7,379	$	2,161		$	(13,664	)	$	134,801
Foreign		38,257		1,134		—			—			39,391


Total segment net earnings (loss)	$	177,182	$	8,513	$	2,161		$	(13,664	)		174,192


Inter-segment eliminations												563


Consolidated net earnings											$	174,755


Other items:
Net investment income	$	91,727	$	334	$	7		$	1,561		$	93,629
Depreciation and amortization		2,576		3,669		44			1,363			7,652
Interest expense (benefit)		537		7,343		(13	)		400			8,267
Capital expenditures		2,156		3,686		13			3,061			8,916

Tax expense:
Income tax expense (benefit)	$	77,614	$	6,739	$	1,148		$	(4,454	)	$	81,047
Inter-segment eliminations												205


Consolidated income tax expense											$	81,252

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


	Insurance				Other
Three months ended June 30, 2010	company		Agency		operations		Corporate			Total

Revenue:
Domestic	$	445,970	$	11,449	$	1,536	$	679		$	459,634
Foreign		118,454		2,091		—		—			120,545
Inter-segment		—		24,646		288		—			24,934


Total segment revenue	$	564,424	$	38,186	$	1,824	$	679			605,113


Inter-segment eliminations											(24,934	)


Consolidated total revenue										$	580,179


Net earnings (loss):
Domestic	$	66,637	$	2,643	$	570	$	(9,045	)	$	60,805
Foreign		22,499		374		—		—			22,873


Total segment net earnings (loss)	$	89,136	$	3,017	$	570	$	(9,045	)		83,678


Inter-segment eliminations											(298	)


Consolidated net earnings										$	83,380


Other items:
Net investment income	$	49,480	$	58	$	—	$	679		$	50,217
Depreciation and amortization		1,375		1,877		23		1,003			4,278
Interest expense		103		3,569		—		1,565			5,237
Capital expenditures		179		879		—		4,523			5,581

Tax expense:
Income tax expense (benefit)	$	35,276	$	2,510	$	247	$	(1,646	)	$	36,387
Inter-segment eliminations											(14	)


Consolidated income tax expense										$	36,373

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


	Insurance				Other
Three months ended June 30, 2009	company		Agency		operations			Corporate			Total

Revenue:
Domestic	$	454,167	$	12,979	$	2,459		$	869		$	470,474
Foreign		104,697		5,965		—			—			110,662
Inter-segment		—		27,056		233			—			27,289


Total segment revenue	$	558,864	$	46,000	$	2,692		$	869			608,425


Inter-segment eliminations												(27,289	)


Consolidated total revenue											$	581,136


Net earnings (loss):
Domestic	$	69,012	$	4,218	$	1,148		$	(6,058	)	$	68,320
Foreign		22,255		919		—			—			23,174


Total segment net earnings (loss)	$	91,267	$	5,137	$	1,148		$	(6,058	)		91,494


Inter-segment eliminations												91


Consolidated net earnings											$	91,585


Other items:
Net investment income	$	47,507	$	124	$	3		$	777		$	48,411
Depreciation and amortization		1,450		1,922		22			679			4,073
Interest expense (benefit)		258		3,609		(6	)		(233	)		3,628
Capital expenditures		1,660		1,598		3			2,173			5,434

Tax expense:
Income tax expense (benefit)	$	39,378	$	3,363	$	559		$	(1,975	)	$	41,325
Inter-segment eliminations												254


Consolidated income tax expense											$	41,579

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

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


	Six months ended June 30,					Three months ended June 30,
	2010		2009			2010			2009
Diversified financial products
Directors’ and officers’	$	183,639	$	172,488		$	90,721		$	89,686
Errors and omissions		106,691		118,282			52,798			58,877
Other		21,364		20,767			9,538			9,791
U.S. surety and credit		98,620		89,727			51,871			45,235
International surety and credit		35,884		32,651			17,695			16,242

		446,198		433,915			222,623			219,831


Group life, accident and health
Medical stop-loss		323,558		315,842			161,792			156,359
Other medical		50,618		66,229			25,597			33,176
Other		12,597		16,100			5,742			7,548

		386,773		398,171			193,131			197,083


Aviation		58,298		65,461			29,355			32,647


London market account
Energy		26,789		22,439			10,602			13,204
Property treaty		15,609		—			8,855			—
Other		29,215		26,940			15,988			12,501

		71,613		49,379			35,445			25,705


Other specialty lines
Public risk		22,926		17,807			11,436			9,187
HCC Lloyd’s		19,187		20,940			9,002			10,150
Other		10,945		18,703			5,403			7,389

		53,058		57,450			25,841			26,726


Discontinued lines		32		(10	)		(10	)		(14	)


Total net earned premium	$	1,015,972	$	1,004,366		$	506,385		$	501,978



Property and casualty	$	34,326	$	45,697		$	16,646		$	21,279
Accident and health		5,842		10,729			2,529			4,853


Fee and commission income	$	40,168	$	56,426		$	19,175		$	26,132

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

(6)

Reinsurance

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


							Loss and loss
	Written			Earned			adjustment
	premium			premium			expense
Six months ended June 30, 2010

Direct business	$	1,131,637		$	1,139,036		$	718,869
Reinsurance assumed		182,437			141,148			105,789
Reinsurance ceded		(269,021	)		(264,212	)		(199,151	)


Net amounts	$	1,045,053		$	1,015,972		$	625,507


Six months ended June 30, 2009

Direct business	$	1,150,471		$	1,105,248		$	696,623
Reinsurance assumed		133,233			124,963			65,003
Reinsurance ceded		(249,102	)		(225,845	)		(153,490	)


Net amounts	$	1,034,602		$	1,004,366		$	608,136


Three months ended June 30, 2010

Direct business	$	622,445		$	567,074		$	357,918
Reinsurance assumed		69,133			71,908			52,954
Reinsurance ceded		(144,776	)		(132,597	)		(111,886	)


Net amounts	$	546,802		$	506,385		$	298,986


Three months ended June 30, 2009

Direct business	$	618,439		$	556,211		$	334,353
Reinsurance assumed		62,878			60,823			28,338
Reinsurance ceded		(137,965	)		(115,056	)		(70,121	)


Net amounts	$	543,352		$	501,978		$	292,570

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

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

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


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


Total reinsurance recoverables	$	1,054,659		$	1,016,411

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


	June 30,			December 31,
	2010			2009
Loss and loss adjustment expense payable	$	3,528,606		$	3,492,309
Reinsurance recoverable on outstanding losses		(485,101	)		(495,964	)
Reinsurance recoverable on incurred but not reported losses		(475,188	)		(440,505	)


Net reserves	$	2,568,317		$	2,555,840


Unearned premium	$	1,069,355		$	1,044,747
Ceded unearned premium		(271,783	)		(270,436	)


Net unearned premium	$	797,572		$	774,311


Deferred policy acquisition costs	$	216,988		$	208,463
Deferred ceding commissions		(68,657	)		(71,595	)


Net deferred policy acquisition costs	$148,331			$	136,868

(7)

Supplemental Information

Supplemental information was as follows:


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

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

(8)

Commitments and Contingencies

		Catastrophe and Large Loss Exposure

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

		Litigation

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

		Indemnifications

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

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

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

Overview

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

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

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

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

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

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

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

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

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

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

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

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

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

Results of Operations

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

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

These items are described more fully below:

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

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

•		In the first quarter of 2009, we commuted, loss-free, all liability under a contract with MGIC to provide reinsurance coverage for certain residential mortgage guaranty contracts. We had been recording revenue under this contract using the deposit method of accounting because we determined the contract did not transfer significant underwriting risk. We received a cash termination payment of $25.0 million. As a result of the termination, our year-to-date other operating income increased $20.5 million, and fee and commission income increased $5.0 million. This additional revenue was partially offset by $9.9 million of expenses for reinsurance and other direct costs, which were recorded in other operating expense.

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


	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Net earned premium		86.5	%		85.0	%		87.3	%		86.4	%
Fee and commission income		3.4			4.8			3.3			4.5
Net investment income		8.5			7.9			8.7			8.3
Other operating income		1.0			2.4			0.3			1.0
Net realized investment gain		0.6			0.3			0.4			0.1
Other-than-temporary impairment loss		—			(0.4	)		—			(0.3	)

Total revenue		100.0			100.0			100.0			100.0
Loss and loss adjustment expense, net		53.3			51.5			51.5			50.4
Policy acquisition costs, net		15.9			15.1			16.1			15.5
Other operating expense		10.9			11.0			10.9			10.6
Interest expense		0.9			0.7			0.9			0.6

Earnings before income tax expense		19.0			21.7			20.6			22.9
Income tax expense		5.8			6.9			6.2			7.1

Net earnings		13.2	%		14.8	%		14.4	%		15.8	%

Revenue

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

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

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


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

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


	Six months ended June 30,				Three month ended June 30,
	2010		2009		2010		2009
Agencies	$	28,949	$	44,033	$	13,888	$	19,457
Insurance companies		11,219		12,393		5,287		6,675

Fee and commission income	$	40,168	$	56,426	$	19,175	$	26,132

The sources of net investment income are detailed below.


	Six months ended June 30,						Three months ended June 30,
	2010			2009			2010			2009
Fixed income securities
Taxable	$	54,803		$	52,099		$	27,935		$	26,994
Exempt from U.S. income taxes		44,277			40,813			22,546			20,480

Total fixed income securities		99,080			92,912			50,481			47,474
Short-term investments		360			1,470			170			586
Other		2,042			1,051			534			1,103

Total investment income		101,482			95,433			51,185			49,163
Investment expense		(2,016	)		(1,804	)		(968	)		(752	)

Net investment income	$	99,466		$	93,629		$	50,217		$	48,411

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

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

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


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

Other operating income	$	11,993	$	28,419	$	2,087	$	5,523

Expenses

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

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

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

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

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

Segments

Insurance Company Segment

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

Premium

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

The following tables provide premium information by line of business.


	Gross		Net		NWP			Net
	written		written		as % of			earned
Six months ended June 30, 2010	premium		premium		GWP			premium

Diversified financial products
Directors’ and officers’	$	219,740	$	146,699		67	%	$	183,639
Errors and omissions		113,499		96,478		85			106,691
Other		32,339		24,225		75			21,364
U.S. surety and credit		117,170		107,559		92			98,620
International surety and credit		40,245		36,673		91			35,884

		522,993		411,634		79			446,198


Group life, accident and health
Medical stop-loss		323,558		323,558		100			323,558
Other medical		49,356		49,356		100			50,618
Other		38,010		10,067		26			12,597

		410,924		382,981		93			386,773


Aviation		76,908		53,750		70			58,298


London market account
Energy		80,322		47,465		59			26,789
Property treaty		55,095		49,046		89			15,609
Other		63,610		41,250		65			29,215

		199,027		137,761		69			71,613


Other specialty lines
Public risk		34,691		23,650		68			22,926
HCC Lloyd’s		27,369		24,898		91			19,187
Other		42,130		10,347		25			10,945

		104,190		58,895		57			53,058


Discontinued lines		32		32		nm			32


Totals	$	1,314,074	$	1,045,053		80	%	$	1,015,972


	Gross			Net			NWP			Net
	written			written			as % of			earned
Six months ended June 30, 2009	premium			premium			GWP			premium

Diversified financial products
Directors’ and officers’	$	232,710		$	167,141			72	%	$	172,488
Errors and omissions		127,857			111,359			87			118,282
Other		44,581			35,433			79			20,767
U.S. surety and credit		96,339			91,794			95			89,727
International surety and credit		39,575			35,135			89			32,651

		541,062			440,862			81			433,915


Group life, accident and health
Medical stop-loss		315,844			315,842			100			315,842
Other medical		63,459			63,459			100			66,229
Other		46,026			15,370			33			16,100

		425,329			394,671			93			398,171


Aviation		83,751			60,876			73			65,461


London market account
Energy		77,632			47,735			61			22,439
Property treaty		—			—			—			—
Other		56,589			32,806			58			26,940

		134,221			80,541			60			49,379


Other specialty lines
Public risk		35,877			27,851			78			17,807
HCC Lloyd’s		23,613			18,917			80			20,940
Other		39,861			10,894			27			18,703

		99,351			57,662			58			57,450


Discontinued lines		(10	)		(10	)		nm			(10	)


Totals	$	1,283,704		$	1,034,602			81	%	$	1,004,366


	Gross			Net			NWP			Net
	written			written			as % of			earned
Three months ended June 30, 2010	premium			premium			GWP			premium

Diversified financial products
Directors’ and officers’	$	135,572		$	90,743			67	%	$	90,721
Errors and omissions		57,151			48,515			85			52,798
Other		15,927			11,304			71			9,538
U.S. surety and credit		63,149			60,140			95			51,871
International surety and credit		18,940			17,037			90			17,695

		290,739			227,739			78			222,623


Group life, accident and health
Medical stop-loss		161,792			161,792			100			161,792
Other medical		27,038			27,038			100			25,597
Other		15,712			4,919			31			5,742

		204,542			193,749			95			193,131


Aviation		39,387			27,729			70			29,355


London market account
Energy		63,740			37,623			59			10,602
Property treaty		17,465			13,789			79			8,855
Other		23,860			17,799			75			15,988

		105,065			69,211			66			35,445


Other specialty lines
Public risk		17,979			14,445			80			11,436
HCC Lloyd’s		9,767			8,625			88			9,002
Other		24,109			5,314			22			5,403

		51,855			28,384			55			25,841


Discontinued lines		(10	)		(10	)		nm			(10	)


Totals	$	691,578		$	546,802			79	%	$	506,385


	Gross			Net			NWP			Net
	written			written			as % of			earned
Three months ended June 30, 2009	premium			premium			GWP			premium

Diversified financial products
Directors’ and officers’	$	138,426		$	99,674			72	%	$	89,686
Errors and omissions		65,498			56,707			87			58,877
Other		18,807			13,601			72			9,791
U.S. surety and credit		52,206			49,392			95			45,235
International surety and credit		21,013			18,125			86			16,242

		295,950			237,499			80			219,831


Group life, accident and health
Medical stop-loss		156,358			156,358			100			156,359
Other medical		31,853			31,853			100			33,176
Other		20,125			7,404			37			7,548

		208,336			195,615			94			197,083


Aviation		41,799			30,265			72			32,647


London market account
Energy		62,818			41,558			66			13,204
Property treaty		—			—			—			—
Other		26,654			12,589			47			12,501

		89,472			54,147			61			25,705


Other specialty lines
Public risk		15,943			12,735			80			9,187
HCC Lloyd’s		12,391			9,236			75			10,150
Other		17,440			3,869			22			7,389

		45,774			25,840			56			26,726


Discontinued lines		(14	)		(14	)		nm			(14	)


Totals	$	681,317		$	543,352			80	%	$	501,978


nm — Not meaningful

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

•

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

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

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

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

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

Losses and Loss Adjustment Expenses

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

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


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

Net incurred loss and loss adjustment expense	$	625,507		61.6	%	$	608,136			60.5	%	$	298,986			59.0	%	$	292,570			58.3	%

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

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

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

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


	Six months ended June 30,											Three months ended June 30,
	2010					2009						2010						2009
	Net		Net			Net			Net			Net			Net			Net			Net
	earned		loss			earned			loss			earned			loss			earned			loss
	premium		ratio			premium			ratio			premium			ratio			premium			ratio
Diversified financial products
Directors’ and officers’	$	183,639		62.5	%	$	172,488			62.1	%	$	90,721			61.9	%	$	89,686			63.4	%
Errors and omissions		106,691		56.6			118,282			49.5			52,798			56.1			58,877			43.8
Other		21,364		41.3			20,767			47.7			9,538			50.3			9,791			45.2
U.S. surety and credit		98,620		28.3			89,727			30.9			51,871			29.9			45,235			31.4
International surety and credit		35,884		38.4			32,651			55.4			17,695			32.7			16,242			57.7

		446,198		50.6			433,915			51.0			222,623			50.2			219,831			50.3


Group life, accident and health
Medical stop-loss		323,558		73.9			315,842			73.5			161,792			74.0			156,359			74.4
Other medical		50,618		68.6			66,229			78.7			25,597			60.5			33,176			68.7
Other		12,597		58.3			16,100			58.4			5,742			63.3			7,548			59.8

		386,773		72.7			398,171			73.8			193,131			71.9			197,083			72.9


Aviation		58,298		59.3			65,461			57.0			29,355			61.9			32,647			52.7


London market account
Energy		26,789		36.7			22,439			7.7			10,602			(26.1	)		13,204			(7.6	)
Property treaty		15,609		103.5			—			—			8,855			47.5			—			—
Other		29,215		60.8			26,940			42.6			15,988			44.4			12,501			35.5

		71,613		61.1			49,379			26.7			35,445			24.1			25,705			13.4


Other specialty lines
Public risk		22,926		69.6			17,807			66.4			11,436			69.2			9,187			64.2
HCC Lloyd’s		19,187		62.1			20,940			65.1			9,002			63.2			10,150			62.6
Other		10,945		87.6			18,703			91.2			5,403			96.7			7,389			72.6

		53,058		70.6			57,450			74.0			25,841			72.9			26,726			65.9


Discontinued lines		32		nm			(10	)		nm			(10	)		nm			(14	)		nm


Totals	$	1,015,972		61.6	%	$	1,004,366			60.5	%	$	506,385			59.0	%	$	501,978			58.3	%


Expense ratio				26.4						25.0						26.6						25.5


Combined ratio				88.0	%					85.5	%					85.6	%					83.8	%


nm — Not meaningful

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

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

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

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

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


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


Net reserves for loss and loss adjustment expense payable at end of period	$	2,568,317		$	2,563,196		$	2,568,317		$	2,563,196


Net paid loss ratio		56.4	%		52.3	%		52.5	%		50.6	%

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

Policy Acquisition Costs

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

Agency Segment

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

Other Operations Segment

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

Liquidity and Capital Resources

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

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

	•		Our available for sale bond portfolio had a fair value of $4.9 billion at June 30, 2010, compared to $4.5 billion at December 31, 2009, and has an average rating of AA+. We intend to hold these securities until their maturity, but we would be able to sell securities to generate cash if the need arises. Should we sell certain securities in the portfolio before their maturity, we cannot be assured that we would recoup the full reported fair value of the securities sold at the time of sale.

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

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

	•		We have a committed $575.0 million Revolving Loan Facility at a rate of 30-day LIBOR plus 25 basis points that matures December 19, 2011. Letters of credit issued on behalf of certain of our subsidiaries reduce available borrowing capacity under the facility. At June 30, 2010, we had $553.4 million of unused capacity, which we can draw against at any time at our request. The facility agreement contains two restrictive financial covenants, with which we were in compliance at June 30, 2010.

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

	•		Our domestic insurance subsidiaries have the ability to pay $217.8 million in dividends in 2010 to our holding company without obtaining special permission from state regulatory authorities. Our underwriting agencies have no restrictions on the amount of dividends that can be paid to our holding company. The holding company can utilize these dividends for any purpose, including to pay down debt, pay dividends to shareholders, fund acquisitions, purchase common stock and pay operating expenses. Cash flow available to the holding company in 2010 is expected to be more than ample to cover the holding company’s required cash disbursements.

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

Cash Flow

We receive substantial cash from premiums, reinsurance recoverables, outward commutations, fee and commission income, proceeds

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

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


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


Cash provided by operating activities	$	139,326		$	262,176

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

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

Investments

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


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


Total investments	$	5,552,164		100	%	$	5,456,229		100	%

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


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


*		Excluding realized and unrealized gains and losses.

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


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


Total fixed income securities	$	4,903,206		100	%	$	172,349		100	%

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


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


Total		100	%		100	%

Many of our special purpose revenue bonds are insured by mono-line insurance companies or supported by credit enhancement programs of various states and municipalities. We view bond insurance as credit enhancement and not credit substitution. We base our investment decision on the strength of the issuer. A credit review is performed on each issuer and on the sustainability of the revenue source before we acquire a special purpose revenue bond and periodically, on an ongoing basis, thereafter. The underlying average credit rating of our special purpose revenue bond issuers, excluding any bond insurance, was AA+ at June 30, 2010. Although recent economic conditions in the United States may reduce the source of revenue to support certain of these securities, the majority are supported by revenue from essential sources, such as water and sewer, education and transportation fees, which we believe generate a stable source of revenue.

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

At June 30, 2010, we also held a portfolio of residential mortgage-backed securities (MBSs) and collateralized mortgage-obligations (CMOs) with a fair value of $1.1 billion. Within our residential MBS/CMO portfolio, $1.0 billion of securities, or 95%, were issued by the Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Association (GNMA) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which are backed by the U.S. government. Of the remaining $52.9 million of residential mortgage-backed securities, 91% were collateralized by prime mortgages.

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

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


						Mortgage-backed and
	Available for sale at					asset-backed at					Held to maturity at					Total fixed income
	amortized cost					amortized cost					amortized cost					securities
	Amount		%			Amount		%			Amount		%			Amount		%
One year or less	$	268,234		8	%	$	146,347		12	%	$	23,758		14	%	$	438,339		9	%
One year to five years		1,070,303		30			881,634		76			137,148		80			2,089,085		43
Five years to ten years		836,824		24			128,918		11			11,443		6			977,185		20
Ten years to fifteen years		726,382		21			5,726		1			—		—			732,108		15
More than fifteen years		613,895		17			—		—			—		—			613,895		13


Total fixed income securities	$	3,515,638		100	%	$	1,162,625		100	%	$	172,349		100	%	$	4,850,612		100	%

A security has an impairment loss when its fair value is less than its cost or amortized cost at the balance sheet date. The gross unrealized losses of the individual securities within our available for sale fixed income securities portfolios were $7.5 million at June 30, 2010, compared to $18.9 million at December 31, 2009. We evaluate the securities in our fixed income securities portfolio for possible other-than-temporary impairment losses at each quarter end. For a description of the accounting polices and procedures that we use to determine our other-than-temporary impairment losses, see Footnote 3, “Investments,” in the notes to these condensed consolidated financial statements and “Critical Accounting Policies — Other-than-temporary Impairments in Investments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2009. We recognized no other-than-temporary impairment credit losses in 2010, compared to $5.0 million and $1.8 million in the first six months and second quarter of 2009, respectively.

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

Accounting Guidance in 2010

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

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

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

Critical Accounting Policies

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

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

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

(b) Changes in Internal Control over Financial Reporting

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

Part II — Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

On June 20, 2008, our Board of Directors approved the purchase of up to $100.0 million of our common stock. On May 27, 2010, our Board of Directors approved a new authorization for $300.0 million and cancelled the $0.7 million remaining under the original authorization. The new share purchase plan authorizes purchases to be made in the open market or in privately negotiated transactions from time-to-time in compliance with applicable rules and regulations, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Purchases under the plan will be subject to market and business conditions, as well as the level of cash generated from our operations, cash required for acquisitions, debt covenant compliance, trading price of the stock being at or below book value and other relevant factors. The purchase plan does not obligate us to purchase any particular number of shares, and may be suspended or discontinued at any time at our discretion. As of June 30, 2010, we had paid $100.0 million to purchase 4,722,911 shares of our common stock in the open market pursuant to these purchase programs.

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


					Total number of shares		Approximate dollar
					purchased as part of		value of shares that may
	Total number of		Average price		publicly announced		yet be purchased under
Period	shares purchased		paid per share		plans or programs		the plans or programs
2008 Authorization
April 1 — April 30, 2010		—	$	—		—	$	1,201,217
May 1 — May 31, 2010		19,650		24.00		19,650		—

2010 Authorization
May 1 — May 31, 2010		—	$	—		—	$	300,000,000
June 1 — June 30, 2010		30,500		24.63		30,500		299,248,840

Item 6. Exhibits

a. Exhibits


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


3.2		Amended and Restated Bylaws of HCC Insurance Holdings, Inc., as amended (incorporated by reference to Exhibit 3.1 to our Form 8-K filed April 3, 2008).

10.1		First Amendment to Employment Agreement effective April 19, 2010, between HCC Insurance Holdings, Inc. and William T. Whamond (incorporated by reference to Exhibit 10.01 to our Form 8-K filed April 19, 2010).*

10.2		Employment Agreement dated May 27, 2010, between HCC Insurance Holdings, Inc. and Brad T. Irick.*

12		Statement of Ratio of Earnings to Fixed Charges.

31.1		Certification by Chief Executive Officer.

31.2		Certification by Chief Financial Officer.

32		Certification with Respect to Quarterly Report.

101		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Earnings, (iii) Condensed Consolidated Statement of Changes in Shareholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements.**


*		Executive Compensation Plans and Arrangements

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

SIGNATURES

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


		HCC Insurance Holdings, Inc.
		(Registrant)

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

August 6, 2010		/s/ Pamela J. Penny
(Date)		Pamela J. Penny, Executive Vice President
		and Chief Accounting Officer