Edgar Filing: HCC INSURANCE HOLDINGS INC/DE/

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the Quarterly Period Ended June 30, 2012.

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

from to

Commission file number 001-13790

HCC Insurance Holdings, Inc.

(Exact name of registrant as specified in its charter)


Delaware		76-0336636
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

13403 Northwest Freeway, Houston, Texas		77040-6094
(Address of principal executive offices)		(Zip Code)

(713) 690-7300

(Registrant’s telephone number, including area code)

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

Yes þ No ¨

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 ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(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 ¨ 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 27, 2012, there were approximately 100.7 million shares of common stock outstanding.

HCC Insurance Holdings, Inc. and Subsidiaries

Table of Contents


		Page
Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets — June 30, 2012 and December 31, 2011		5

Consolidated Statements of Earnings — Six months and three months ended June 30, 2012 and 2011		6

Consolidated Statements of Comprehensive Income — Six months and three months ended June 30, 2012 and 2011		7

Consolidated Statement of Changes in Shareholders’ Equity — Six months ended June 30, 2012		8

Consolidated Statements of Cash Flows — Six months ended June 30, 2012 and 2011		9

Notes to Consolidated Financial Statements		10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		42

Item 4. Controls and Procedures		42

Part II. OTHER INFORMATION

Item 1. Legal Proceedings		43

Item 1A. Risk Factors		43

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43

Item 3. Defaults Upon Senior Securities		43

Item 4. Mine Safety Disclosures		43

Item 5. Other Information		43

Item 6. Exhibits		44

Signatures		45

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. These forward-looking statements reflect our current expectations and projections about future events and 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. Generally, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably” or similar expressions indicate 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 catastrophe 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 past and future potential credit market downturns, including any potential additional ratings downgrade and/or impairment or perceived impairment of the debt securities of sovereign issuers, including the United States of America,

•

the effects of emerging claim and coverage issues,

•

the effects of extensive governmental regulation of the insurance industry,

•

changes to the country’s health care delivery system,

•

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

•

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,

•

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

•

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,

•

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,

•

failure of, or loss of security related to, our information technology systems,

•

difficulties with outsourcing relationships, and

•

change of control.

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, 2011.

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, 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

Consolidated Balance Sheets

(unaudited, in thousands except per share data)


	June 30, 2012		December 31, 2011
			(as adjusted)
ASSETS

Investments
Fixed maturity securities – available for sale, at fair value (amortized cost: 2012 – $5,712,890 and 2011 – $5,385,432)	$	6,097,866	$	5,718,834
Fixed maturity securities – held to maturity, at amortized cost (fair value: $163,136)		-		161,102
Equity securities – available for sale, at fair value (cost: $92,580)		93,660		-
Short-term investments, at cost (approximates fair value)		217,087		133,917
Other investments, at fair value (amortized cost: 2012 – $38,053 and 2011 – $38,230)		37,720		35,897

Total investments		6,446,333		6,049,750

Cash		63,184		104,550
Restricted cash		202,642		229,821
Premium, claims and other receivables		679,569		688,732
Reinsurance recoverables		1,056,999		1,056,068
Ceded unearned premium		255,078		222,300
Ceded life and annuity benefits		59,803		61,061
Deferred policy acquisition costs		204,387		189,633
Goodwill		873,627		872,814
Other assets		167,519		122,549


Total assets	$	10,009,141	$	9,597,278


LIABILITIES

Loss and loss adjustment expense payable	$	3,755,699	$	3,658,317
Life and annuity policy benefits		59,803		61,061
Reinsurance, premium and claims payable		359,260		366,499
Unearned premium		1,147,121		1,031,034
Deferred ceding commissions		71,767		62,364
Notes payable		590,867		478,790
Accounts payable and accrued liabilities		681,367		665,231

Total liabilities		6,665,884		6,323,296


SHAREHOLDERS’ EQUITY

Common stock, $1.00 par value; 250,000 shares authorized (shares issued: 2012 – 123,449 and 2011 – 122,720; outstanding: 2012 – 100,737 and 2011 – 104,101)		123,449		122,720
Additional paid-in capital		1,019,570		1,001,308
Retained earnings		2,574,411		2,429,818
Accumulated other comprehensive income		259,776		227,659
Treasury stock, at cost (shares: 2012 – 22,712 and 2011 – 18,619)		(633,949)		(507,523)

Total shareholders’ equity		3,343,257		3,273,982


Total liabilities and shareholders’ equity	$	10,009,141	$	9,597,278

See Notes to Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statements of Earnings

(unaudited, in thousands except per share data)


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011

REVENUE

Net earned premium	$	1,112,472	$	1,032,731	$	565,331	$	524,251
Net investment income		110,300		104,017		53,290		52,422
Other operating income		12,389		14,796		7,188		7,475
Net realized investment gain		7,047		495		6,876		1,054
Other-than-temporary impairment credit losses		(397)		(3,479)		(397)		(350)


Total revenue		1,241,811		1,148,560		632,288		584,852


EXPENSE

Loss and loss adjustment expense, net		665,753		681,868		336,825		334,282
Policy acquisition costs, net		143,934		135,684		74,490		65,841
Other operating expense		167,706		160,237		80,424		82,390
Interest expense		13,139		10,987		6,230		5,434


Total expense		990,532		988,776		497,969		487,947

Earnings before income tax expense		251,279		159,784		134,319		96,905
Income tax expense		75,202		43,316		40,826		27,427


Net earnings	$	176,077	$	116,468	$	93,493	$	69,478


Earnings per common share

Basic	$	1.71	$	1.02	$	0.92	$	0.61


Diluted	$	1.71	$	1.02	$	0.92	$	0.61

See Notes to Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited, in thousands)


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011

Net earnings	$	176,077	$	116,468	$	93,493	$	69,478

Other comprehensive income:

Investment gains (losses):
Investment gains during the period		61,313		55,378		39,673		77,835
Income tax charge		21,804		15,297		14,501		27,620


Investment gains, net of tax		39,509		40,081		25,172		50,215


Less reclassification adjustments for:
Gains (losses) included in net earnings		6,659		(2,978)		6,488		714
Income tax charge (benefit)		2,331		(1,042)		2,271		250


Gains (losses) included in net earnings, net of tax		4,328		(1,936)		4,217		464


Net unrealized investment gains		35,181		42,017		20,955		49,751


Foreign currency translation adjustment		(3,313)		8,162		(5,846)		2,137
Income tax charge (benefit)		(249)		1,478		(372)		1,478


Foreign currency translation adjustment, net of tax		(3,064)		6,684		(5,474)		659


Other comprehensive income		32,117		48,701		15,481		50,410


Comprehensive income	$	208,194	$	165,169	$	108,974	$	119,888

See Notes to Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

Six months ended June 30, 2012

(unaudited, in thousands except per share data)


	Common stock		Additional paid-in capital		Retained earnings		Accumulated other comprehensive income		Treasury stock		Total shareholders’ equity
Balance at December 31, 2011 (as previously reported)	$	122,720	$	1,001,308	$	2,447,850	$	227,659	$	(507,523)	$	3,292,014

Cumulative effect of accounting change (deferred policy acquisition costs)		-		-		(18,032)		-		-		(18,032)


Balance at December 31, 2011 (as adjusted)		122,720		1,001,308		2,429,818		227,659		(507,523)		3,273,982

Net earnings		-		-		176,077		-		-		176,077

Other comprehensive income		-		-		-		32,117		-		32,117

Issuance of 516 shares for exercise of options, including tax effect		516		13,128		-		-		-		13,644

Purchase of 4,093 common shares		-		-		-		-		(126,426)		(126,426)

Stock-based compensation		213		5,134		-		-		-		5,347

Cash dividends declared, $0.31 per share		-		-		(31,484)		-		-		(31,484)


Balance at June 30, 2012	$	123,449	$	1,019,570	$	2,574,411	$	259,776	$	(633,949)	$	3,343,257

See Notes to Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited, in thousands)


	Six months ended June 30,
	2012		2011
Operating activities
Net earnings	$	176,077	$	116,468
Adjustments to reconcile net earnings to net cash provided by operating activities:
Change in premium, claims and other receivables		(68,083)		(103,245)
Change in reinsurance recoverables		2,921		(84,728)
Change in ceded unearned premium		(32,951)		36,870
Change in loss and loss adjustment expense payable		84,925		147,870
Change in unearned premium		116,448		63,015
Change in reinsurance, premium and claims payable, excluding restricted cash		3,290		(30,413)
Change in accounts payable and accrued liabilities		(44,867)		(19,426)
Stock-based compensation expense		6,168		7,137
Depreciation and amortization expense		9,133		8,769
Other, net		(8,510)		(20,533)


Cash provided by operating activities		244,551		121,784


Investing activities
Sales of available for sale fixed maturity securities		218,572		246,331
Sales of equity securities		1,739		-
Maturity or call of available for sale fixed maturity securities		325,046		285,637
Maturity or call of held to maturity fixed maturity securities		28,579		24,932
Cost of available for sale fixed maturity securities acquired		(628,278)		(835,368)
Cost of equity securities acquired		(94,706)		-
Change in short-term investments		(62,621)		292,365
Cost of other investments acquired		-		(27,784)
Payments for purchase of businesses, net of cash received		(32,143)		(1,892)
Other, net		(6,982)		(10,942)


Cash used by investing activities		(250,794)		(26,721)


Financing activities
Advances on line of credit		140,000		95,000
Payments on line of credit		(28,000)		-
Sale of common stock		13,644		35,236
Purchase of common stock		(126,442)		(200,302)
Dividends paid		(32,002)		(33,305)
Other, net		(2,323)		(2,307)


Cash used by financing activities		(35,123)		(105,678)


Net decrease in cash		(41,366)		(10,615)
Cash at beginning of year		104,550		97,857


Cash at end of period	$	63,184	$	87,242

See Notes to Consolidated Financial Statements.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

(1) General Information

HCC Insurance Holdings, Inc. (HCC) and its subsidiaries (collectively we, us or our) include domestic and foreign property and casualty and life insurance companies and underwriting agencies with offices in the United States, the United Kingdom, Spain and Ireland. We underwrite a variety of relatively non-correlated specialty insurance products, including property and casualty, accident and health, surety, credit and aviation product lines, in approximately 180 countries. We market our products through a network of independent agents and brokers, producers, managing general agents and directly to customers.

Basis of Presentation

Our unaudited 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 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 consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011. The consolidated balance sheet at December 31, 2011 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 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 2011 consolidated financial statements to conform to the 2012 presentation. None of our reclassifications had an effect on our consolidated net earnings, shareholders’ equity or cash flows.

Derivative Financial Instrument

We utilize the British pound sterling and the Euro as the functional currency in certain of our foreign operations. As a result, we have exposure to fluctuations in exchange rates between these currencies and the U.S. dollar. From time to time, we may use derivative instruments to protect our investment in these foreign operations by limiting our exposure to fluctuations in exchange rates.

During the second quarter of 2012, we entered into a forward contract to sell 45.0 million Euros for U.S. dollars in the third quarter of 2013. This transaction has been designated and qualifies as a hedge of our net investment in a Euro-functional currency subsidiary. Changes in the fair value of the forward contract, net of the related deferred tax effect, are recognized in our foreign currency translation adjustment, which is a component of accumulated other comprehensive income. This amount will offset changes in the value of the net investment being hedged, as the cumulative translation adjustment related to the foreign subsidiary, representing the effect of translating the subsidiary’s assets and liabilities from Euros to U.S. dollars, is also reported in our foreign currency translation adjustment.

The fair value of the forward contract was a $0.9 million liability at June 30, 2012. This amount is reported in accounts payable and accrued liabilities on our consolidated balance sheet. At inception of the hedge and quarterly thereafter, we assess whether the hedge transaction is effective. Any ineffectiveness would be recognized in earnings immediately as other operating expense. There was no ineffectiveness on the forward contract for the second quarter of 2012.

We enter into derivative transactions only with highly-rated financial institutions. At inception of the hedge and quarterly thereafter, we monitor counterparty exposures and any credit risk associated with the counterparty. We consider the risk of counterparty default to be minimal.

Goodwill

An indicator of impairment of goodwill exists when the fair value of a reporting unit is less than its carrying value. We conducted our annual goodwill impairment test as of June 30, 2012, which is consistent with the timeframe for our annual assessment in prior years. For this assessment, we applied a new accounting standard that was effective for us in 2012. That guidance permits us to assess qualitative factors to determine whether it is more likely than not that the fair value of each of our reporting units is less than its carrying amount. Based on our assessment, we determined that it was more likely than not that the fair value of each of our five reporting units exceeded its carrying amount as of June 30, 2012.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

Accounting Guidance Adopted in 2012

Deferred Policy Acquisition Costs

A new accounting standard clarifies the definition of acquisition costs incurred by an insurance company and limits capitalization to such costs directly related to renewing or acquiring new insurance contracts. Under the new standard, we expense all costs incurred for unsuccessful marketing or underwriting efforts, along with indirect costs, as incurred. We adopted this guidance on January 1, 2012 through retrospective adjustment of the capitalized deferred policy acquisition costs, deferred income taxes and consolidated shareholders’ equity in our prior years’ consolidated financial statements. We also reclassified expenses in our prior years’ consolidated income statements to reflect the new definition of policy acquisition costs. Application of the new guidance did not impact our reported consolidated net earnings or cash flows in prior years. The following line items in our consolidated financial statements were affected by this change in accounting guidance:


	December 31, 2011

	As originally reported		Change			As adjusted
Deferred policy acquisition costs	$	217,608	$	(27,975	)	$	189,633
Accounts payable and accrued liabilities (deferred income taxes)		675,174		(9,943	)		665,231
Retained earnings		2,447,850		(18,032	)		2,429,818


	Six months ended June 30, 2011						Three months ended June 30, 2011

	As originally reported		Change		As adjusted		As originally reported		Change		As adjusted
Policy acquisition costs, net	$	167,861	$	(32,177)	$	135,684	$	84,483	$	(18,642)	$	65,841
Other operating expense		128,060		32,177		160,237		63,748		18,642		82,390

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

(2) Investments

On March 31, 2012, we reclassified our entire portfolio of fixed maturity securities classified as held to maturity, which consisted of corporate, U.S. government and foreign government securities, to fixed maturity securities classified as available for sale. Financial markets recently have been disrupted by several events, including the European debt crisis and the August 2011 downgrade of U.S. government debt by Standard & Poor’s Corporation. Due to these market disruptions and our desire to maintain greater flexibility in managing our entire investment portfolio in an uncertain economy, we changed our prior intent to hold these securities to maturity. On the date of transfer, these securities had a fair value of $139.1 million and an amortized cost of $136.0 million. The securities’ net unrealized appreciation, net of tax, increased our accumulated other comprehensive income and shareholders’ equity by $2.0 million as of March 31, 2012.

During the second quarter of 2012, we began investing in equity securities, which we classified as available for sale and report at fair value.

The cost or amortized cost, gross unrealized gain or loss, and fair value of our fixed maturity and equity securities were as follows:


	Cost or amortized cost		Gross unrealized gain		Gross unrealized loss		Fair value
June 30, 2012

Fixed maturity securities – available for sale
U.S. government and government agency securities	$	220,995	$	7,991	$	(15)	$	228,971
Fixed maturity securities of states, municipalities and political subdivisions		982,569		91,307		(8)		1,073,868
Special purpose revenue bonds of states, municipalities and political subdivisions		1,858,848		148,858		(158)		2,007,548
Corporate securities		1,088,342		46,363		(5,048)		1,129,657
Residential mortgage-backed securities		854,262		50,485		(1,915)		902,832
Commercial mortgage-backed securities		382,595		34,109		(4)		416,700
Asset-backed securities		45,954		237		(9)		46,182
Foreign government securities		279,325		13,109		(326)		292,108


Total fixed maturity securities – available for sale	$	5,712,890	$	392,459	$	(7,483)	$	6,097,866


Equity securities – available for sale	$	92,580	$	2,957	$	(1,877)	$	93,660

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)


	Cost or amortized cost		Gross unrealized gain		Gross unrealized loss		Fair value
December 31, 2011

U.S. government and government agency securities	$	285,166	$	10,523	$	(10)	$	295,679
Fixed maturity securities of states, municipalities and political subdivisions		999,940		85,528		(127)		1,085,341
Special purpose revenue bonds of states, municipalities and political subdivisions		1,741,297		122,746		(155)		1,863,888
Corporate securities		817,886		35,221		(6,774)		846,333
Residential mortgage-backed securities		1,036,436		65,771		(2,121)		1,100,086
Commercial mortgage-backed securities		244,535		15,162		(3,573)		256,124
Asset-backed securities		34,655		147		(56)		34,746
Foreign government securities		225,517		11,203		(83)		236,637


Total fixed maturity securities – available for sale	$	5,385,432	$	346,301	$	(12,899)	$	5,718,834


U.S. government securities	$	6,998	$	69	$	-	$	7,067
Corporate securities		110,284		1,814		(455)		111,643
Foreign government securities		43,820		746		(140)		44,426


Total fixed maturity securities – held to maturity	$	161,102	$	2,629	$	(595)	$	163,136

Substantially all of our fixed maturity securities are investment grade and only one security was non-income producing in 2012. The following table displays the gross unrealized losses and fair value of all available for sale securities that were in a continuous unrealized loss position for the periods indicated.


	Less than 12 months				12 months or more				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
June 30, 2012

Fixed maturity securities
U.S. government and government agency securities	$	34,791	$	(15)	$	-	$	-	$	34,791	$	(15)
Fixed maturity securities of states, municipalities and political subdivisions		2,177		(8)		-		-		2,177		(8)
Special purpose revenue bonds of states, municipalities and political subdivisions		36,514		(143)		1,288		(15)		37,802		(158)
Corporate securities		235,506		(5,048)		-		-		235,506		(5,048)
Residential mortgage-backed securities		18,221		(503)		7,747		(1,412)		25,968		(1,915)
Commercial mortgage-backed securities		10,844		(4)		-		-		10,844		(4)
Asset-backed securities		10,263		(9)		-		-		10,263		(9)
Foreign government securities		43,739		(326)		-		-		43,739		(326)
Equity securities		32,880		(1,877)		-		-		32,880		(1,877)


Total	$	424,935	$	(7,933)	$	9,035	$	(1,427)	$	433,970	$	(9,360)

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)


	Less than 12 months				12 months or more				Total
	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses

December 31, 2011

U.S. government and government agency securities	$	13,984	$	(10)	$	-	$	-	$	13,984	$	(10)
Fixed maturity securities of states, municipalities and political subdivisions		10,256		(107)		899		(20)		11,155		(127)
Special purpose revenue bonds of states, municipalities and political subdivisions		21,856		(67)		6,796		(88)		28,652		(155)
Corporate securities		154,856		(6,391)		18,005		(383)		172,861		(6,774)
Residential mortgage-backed securities		32,430		(1,364)		7,582		(757)		40,012		(2,121)
Commercial mortgage-backed securities		39,075		(3,573)		-		-		39,075		(3,573)
Asset-backed securities		19,648		(56)		-		-		19,648		(56)
Foreign government securities		4,198		(83)		-		-		4,198		(83)


Total	$	296,303	$	(11,651)	$	33,282	$	(1,248)	$	329,585	$	(12,899)

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 our securities for possible other-than-temporary impairment losses at each quarter end. Our reviews cover all impaired securities where the loss exceeds $0.5 million and the loss either exceeds 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. Any non-credit portion of the other-than-temporary impairment loss is recognized in shareholders’ equity.

Our other-than-temporary impairment losses were as follows:


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
Total other-than-temporary impairment loss	$	(2,260)	$	(4,677)	$	(2,260)	$	(1,548)
Portion recognized in other comprehensive income		1,863		1,198		1,863		1,198


Net other-than-temporary impairment loss recognized in earnings	$	(397)	$	(3,479)	$	(397)	$	(350)

We have recognized credit losses on certain impaired fixed maturity securities, for which each security also had an impairment loss recorded in other comprehensive income. The rollforward of these credit losses was as follows:
	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
Balance at beginning of period	$	5,047	$	4,273	$	5,047	$	6,685
Credit losses recognized in earnings
Securities previously impaired		268		1,597		268		350
Securities not previously impaired		129		1,882		129		-
Securities sold		-		(3,905)		-		(3,188)


Balance at June 30	$	5,444	$	3,847	$	5,444	$	3,847

We had $1.2 million after-tax other-than-temporary impairment losses, related to mortgage-backed securities, included in accumulated other comprehensive income within shareholders’ equity at June 30, 2012. This amount includes the after-tax unrealized gains and losses on these impaired securities resulting from changes in their fair value subsequent to their initial other-than-temporary impairment measurement dates.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

We do not consider the $9.4 million of gross unrealized losses on fixed maturity and equity securities in our portfolio at June 30, 2012 to be other-than-temporary impairments because: 1) as of June 30, 2012, we have received substantially all contractual interest and principal payments on the fixed maturity securities, 2) we do not intend to sell these securities, 3) it is more likely than not that we will not be required to sell the securities before recovery of their amortized cost or 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 maturity securities at June 30, 2012, 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 was 4.4 years at June 30, 2012.


	Cost or amortized cost		Fair value
Due in 1 year or less	$	370,576	$	374,881
Due after 1 year through 5 years		1,049,481		1,097,141
Due after 5 years through 10 years		1,244,147		1,352,001
Due after 10 years through 15 years		831,135		906,673
Due after 15 years		934,740		1,001,456

Securities with contractual maturities		4,430,079		4,732,152
Mortgage-backed and asset-backed securities		1,282,811		1,365,714


Total fixed maturity securities	$	5,712,890	$	6,097,866

The sources of net investment income were as follows:


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
Fixed maturity securities
Taxable	$	58,218	$	54,219	$	27,103	$	27,124
Exempt from U.S. income taxes		52,872		49,826		26,260		24,915

Total fixed maturity securities		111,090		104,045		53,363		52,039
Equity securities		993		-		993		-
Short-term investments		102		321		40		165
Other investment income		868		2,030		401		1,388

Total investment income		113,053		106,396		54,797		53,592
Investment expense		(2,753)		(2,379)		(1,507)		(1,170)


Net investment income	$	110,300	$	104,017	$	53,290	$	52,422

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to 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 credit losses, included the following:


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
Gains	$	8,127	$	4,319	$	7,913	$	4,099
Losses		(1,080)		(3,824)		(1,037)		(3,045)


Net realized investment gain (loss)	$	7,047	$	495	$	6,876	$	1,054

(3) Fair Value Measurements

Our financial instruments include assets and liabilities carried at fair value, as well as assets and liabilities carried at cost or amortized cost but disclosed at fair value in our financial statements. 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 consist of U.S. Treasuries, money market funds, and equity securities traded in an active exchange market. We use unadjusted quoted prices for identical instruments to measure fair value.

Our Level 2 investments include most of our fixed maturity securities, which consist of U.S. government agency securities, municipal bonds, corporate debt securities, bank loans, and mortgage-backed and asset-backed securities. Level 2 also includes certificates of deposit and other interest-bearing deposits at banks, which we report as short-term investments, and a forward contract, which we designate as a hedge of our net investment in a Euro-functional currency foreign subsidiary. 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.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

We use independent pricing services to assist us in determining fair value for approximately 99% of our Level 2 investments. The pricing services provide a single price or quote per security. We use data provided by our third party investment managers 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. No markets for our investments were judged to be inactive at period end. 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, 2012 or December 31, 2011.

Our Level 2 financial instruments also include our notes payable. We determine the fair value of our 6.30% Senior Notes based on quoted prices, but the market is inactive. The fair value of borrowings under our Revolving Loan Facility approximates the carrying amount because interest is based on 30-day LIBOR plus a margin.

Our Level 3 securities include certain fixed maturity securities and an insurance contract that we account for as a derivative and classify in other assets. We determine fair value of our Level 3 securities based on internally developed models that use assumptions or other data that are not readily observable from objective sources.

The following tables present the fair value of our financial instruments that were carried or disclosed at fair value. Unless indicated, these items were carried at fair value on our consolidated balance sheet.


	Level 1		Level 2		Level 3		Total

June 30, 2012

Fixed maturity securities – available for sale
U.S. government and government agency securities	$	188,757	$	40,214	$	-	$	228,971
Fixed maturity securities of states, municipalities and political subdivisions		-		1,073,868		-		1,073,868
Special purpose revenue bonds of states, municipalities and political subdivisions		-		2,007,548		-		2,007,548
Corporate securities		-		1,129,498		159		1,129,657
Residential mortgage-backed securities		-		902,832		-		902,832
Commercial mortgage-backed securities		-		416,700		-		416,700
Asset-backed securities		-		46,182		-		46,182
Foreign government securities		-		292,108		-		292,108

Total fixed maturity securities – available for sale		188,757		5,908,950		159		6,097,866
Equity securities – available for sale		93,660		-		-		93,660
Short-term investments*		129,828		87,259		-		217,087
Other investments		37,720		-		-		37,720
Other assets		-		-		1,847		1,847


Total assets measured at fair value	$	449,965	$	5,996,209	$	2,006	$	6,448,180


Notes payable*	$	-	$	635,479	$	-	$	635,479
Accounts payable and accrued liabilities – forward contract		-		926		-		926


Total liabilities measured at fair value	$	-	$	636,405	$	-	$	636,405

*Carried at cost or amortized cost on our consolidated balance sheet.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)


	Level 1		Level 2		Level 3		Total

December 31, 2011

Fixed maturity securities – available for sale
U.S. government and government agency securities	$	201,582	$	94,097	$	-	$	295,679
Fixed maturity securities of states, municipalities and political subdivisions		-		1,085,341		-		1,085,341
Special purpose revenue bonds of states, municipalities and political subdivisions		-		1,863,888		-		1,863,888
Corporate securities		-		846,178		155		846,333
Residential mortgage-backed securities		-		1,100,086		-		1,100,086
Commercial mortgage-backed securities		-		256,124		-		256,124
Asset-backed securities		-		33,731		1,015		34,746
Foreign government securities		-		236,637		-		236,637

Total fixed maturity securities – available for sale		201,582		5,516,082		1,170		5,718,834
Fixed maturity securities – held to maturity*		-		163,136		-		163,136
Short-term investments*		67,288		66,629		-		133,917
Other investments		35,720		-		-		35,720
Other assets		-		-		1,516		1,516


Total assets measured at fair value	$	304,590	$	5,745,847	$	2,686	$	6,053,123


Notes payable*	$	-	$	505,671	$	-	$	505,671

*Carried at cost or amortized cost on our consolidated balance sheet.

The following tables present the changes in fair value of our Level 3 financial instruments.


	2012						2011
	Fixed						Fixed
	income		Other				income		Other
	securities		assets		Total		securities		assets		Total
Balance at beginning of year	$	1,170	$	1,516	$	2,686	$	1,438	$	857	$	2,295
Net gains (losses) – realized		-		-		-		(2)		-		(2)
Net gains (losses) – unrealized		2		215		217		(11)		263		252
Sales		-		-		-		(144)		-		(144)
Transfers out of Level 3		(1,015)		-		(1,015)		-		-		-

Balance at March 31		157		1,731		1,888		1,281		1,120		2,401
Net gains (losses) – realized		(1)		-		(1)		-		-		-
Net gains (losses) – unrealized		3		116		119		18		122		140
Sales		-		-		-		(55)		-		(55)


Balance at June 30	$	159	$	1,847	$	2,006	$	1,244	$	1,242	$	2,486

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

We transferred an investment from Level 3 to Level 2 in the first quarter of 2012 because we were able to determine its fair value using inputs based on observable market data in the period transferred. There were no transfers between Level 1, Level 2 or Level 3 in the second quarter of 2012 or the first six months of 2011.

(4) 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 reinsurance 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 losses and diversify their business. The following tables present the effect of such reinsurance transactions on our premium, loss and loss adjustment expense and policy acquisition costs.


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
Direct written premium	$	1,222,766	$	1,169,442	$	677,996	$	661,301
Reinsurance assumed		251,476		221,848		113,557		80,781
Reinsurance ceded		(273,750)		(242,533)		(149,465)		(132,209)


Net written premium	$	1,200,492	$	1,148,757	$	642,088	$	609,873


Direct earned premium	$	1,193,537	$	1,153,511	$	602,354	$	578,703
Reinsurance assumed		168,882		158,494		86,544		79,113
Reinsurance ceded		(249,947)		(279,274)		(123,567)		(133,565)


Net earned premium	$	1,112,472	$	1,032,731	$	565,331	$	524,251


Direct loss and loss adjustment expense	$	727,921	$	786,652	$	362,529	$	343,898
Reinsurance assumed		61,035		142,205		24,326		68,298
Reinsurance ceded		(123,203)		(246,989)		(50,030)		(77,914)


Net loss and loss adjustment expense	$	665,753	$	681,868	$	336,825	$	334,282


Policy acquisition costs	$	198,156	$	191,670	$	102,421	$	93,847
Ceding commissions		(54,222)		(55,986)		(27,931)		(28,006)


Net policy acquisition costs	$	143,934	$	135,684	$	74,490	$	65,841

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


	June 30,		December 31,
	2012		2011
Reinsurance recoverable on paid losses	$	51,795	$	83,109
Reinsurance recoverable on outstanding losses		518,288		477,760
Reinsurance recoverable on incurred but not reported losses		488,416		497,074
Reserve for uncollectible reinsurance		(1,500)		(1,875)


Total reinsurance recoverables	$	1,056,999	$	1,056,068

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

Reinsurers not authorized by the respective states of domicile of our U.S. domiciled insurance companies are required to collateralize reinsurance obligations due to us. The table below shows the amounts of letters of credit and cash available to us as collateral, plus other potential offsets at June 30, 2012 and December 31, 2011.


	June 30,		December 31,
	2012		2011
Payables to reinsurers	$	229,525	$	195,806
Letters of credit		104,097		120,589
Cash		105,586		83,731


Total credits	$	439,208	$	400,126

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


	June 30,		December 31,
	2012		2011
Loss and loss adjustment expense payable	$	3,755,699	$	3,658,317
Reinsurance recoverable on outstanding losses		(518,288)		(477,760)
Reinsurance recoverable on incurred but not reported losses		(488,416)		(497,074)


Net reserves	$	2,748,995	$	2,683,483


Unearned premium	$	1,147,121	$	1,031,034
Ceded unearned premium		(255,078)		(222,300)


Net unearned premium	$	892,043	$	808,734


Deferred policy acquisition costs	$	204,387	$	189,633
Deferred ceding commissions		(71,767)		(62,364)


Net deferred policy acquisition costs	$	132,620	$	127,269

(5) Notes Payable

Notes payable were as follows:


	June 30,		December 31,
	2012		2011
6.30% Senior Notes	$	298,867	$	298,790
$600.0 million Revolving Loan Facility		292,000		180,000


Total notes payable	$	590,867	$	478,790

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

We have a $90.0 million Standby Letter of Credit Facility that is used to guarantee our performance in our Lloyd’s of London Syndicate 4141. There have been no changes to the terms and conditions related to our Senior Notes, the $600.0 million Revolving Loan Facility (the Facility) or the Standby Letter of Credit Facility from those described in Note 7, “Notes Payable” to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011.

The weighted-average interest rate on borrowings under the Facility at June 30, 2012 was 1.62%. The borrowings and letters of credit issued under the Facility reduced our available borrowing capacity on the Facility to $298.1 million at June 30, 2012.

We were in compliance with debt covenants related to our Senior Notes, the Facility and the Standby Letter of Credit Facility at June 30, 2012.

(6) 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,
	2012		2011		2012		2011
Net earnings	$	176,077	$	116,468	$	93,493	$	69,478
Less: net earnings attributable to unvested restricted stock		(3,238)		(1,601)		(1,775)		(1,003)


Net earnings available to common stock	$	172,839	$	114,867	$	91,718	$	68,475


Weighted-average common shares outstanding		100,802		112,569		99,563		111,389
Dilutive effect of outstanding options (determined using treasury stock method)		181		375		288		368

Weighted-average common shares and potential common shares outstanding		100,983		112,944		99,851		111,757

Anti-dilutive stock options not included in treasury stock method computation		1,990		917		642		424

(7) Stock-Based Compensation

In 2012, we granted the following shares of common stock, restricted stock awards, 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 the closing stock price of our common stock 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 awards, restricted stock units and stock options is being expensed over the vesting period.


			Weighted-average
	Number of shares		grant date fair value		Aggregate fair value		Vesting period
Common stock		29	$	31.49	$	920		None
Restricted stock awards		218		30.69		6,689		2-4 years
Restricted stock units		13		30.60		403		4 years
Stock options		158		7.95		1,253		1-5 years

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

(8) Segments

We report HCC’s results in six operating segments. Our insurance segments consist of the following:

•

U.S. Property & Casualty

•

Professional Liability

•

Accident & Health

•

U.S. Surety & Credit

•

International

The Investing segment includes our consolidated investment portfolio, as well as all investment income, investment related expenses, realized investment gains and losses, and other-than-temporary impairment credit losses on investments. All investment activity is reported as revenue, consistent with our consolidated presentation.

In addition to our segments, we include a Corporate & Other category to reconcile segment results to consolidated totals. The Corporate & Other category includes corporate operating expenses not allocable to the segments, interest expense on long-term debt, foreign currency expense (benefit), and underwriting results of our Exited Lines. Our Exited Lines include product lines that we no longer write and do not expect to write in the future.

The following tables present information by business segment.


	U.S. Property & Casualty		Professional Liability		Accident & Health		U.S. Surety & Credit		International		Investing		Corporate & Other		Consolidated
Six months ended June 30, 2012

Net earned premium	$	177,852	$	200,905	$	436,397	$	100,844	$	196,472	$	-	$	2	$	1,112,472
Other revenue		6,885		267		2,496		415		2,135		116,950		191		129,339

Segment revenue		184,737		201,172		438,893		101,259		198,607		116,950		193		1,241,811


Loss and LAE		100,927		134,323		324,717		26,723		79,623		-		(560)		665,753
Other expense		59,767		36,207		63,482		55,523		68,765		-		41,035		324,779

Segment expense		160,694		170,530		388,199		82,246		148,388		-		40,475		990,532

Segment pretax earnings (loss)	$	24,043	$	30,642	$	50,694	$	19,013	$	50,219	$	116,950	$	(40,282)	$	251,279

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)


	U.S. Property & Casualty		Professional Liability		Accident & Health		U.S. Surety & Credit		International		Investing		Corporate & Other		Consolidated

Six months ended June 30, 2011
Net earned premium	$	159,175	$	203,174	$	400,657	$	101,403	$	168,164	$	-	$	158	$	1,032,731
Other revenue		9,666		249		2,194		701		1,902		101,033		84		115,829

Segment revenue		168,841		203,423		402,851		102,104		170,066		101,033		242		1,148,560


Loss and LAE		92,428		138,015		291,605		29,687		130,393		-		(260)		681,868
Other expense		55,575		34,032		61,995		55,252		64,020		-		36,034		306,908

Segment expense		148,003		172,047		353,600		84,939		194,413		-		35,774		988,776

Segment pretax earnings (loss)	$	20,838	$	31,376	$	49,251	$	17,165	$	(24,347)	$	101,033	$	(35,532)	$	159,784


Three months ended June 30, 2012
Net earned premium	$	88,834	$	99,467	$	218,730	$	53,115	$	105,188	$	-	$	(3)	$	565,331
Other revenue		4,522		134		1,158		200		941		59,769		233		66,957

Segment revenue		93,356		99,601		219,888		53,315		106,129		59,769		230		632,288


Loss and LAE		51,666		65,168		163,004		15,690		41,856		-		(559)		336,825
Other expense		30,045		18,676		32,164		27,403		36,612		-		16,244		161,144

Segment expense		81,711		83,844		195,168		43,093		78,468		-		15,685		497,969

Segment pretax earnings (loss)	$	11,645	$	15,757	$	24,720	$	10,222	$	27,661	$	59,769	$	(15,455)	$	134,319


Three months ended June 30, 2011
Net earned premium	$	78,921	$	102,424	$	202,117	$	50,039	$	90,717	$	-	$	33	$	524,251
Other revenue		4,787		48		1,178		455		894		53,126		113		60,601

Segment revenue		83,708		102,472		203,295		50,494		91,611		53,126		146		584,852


Loss and LAE		44,944		71,752		146,747		14,648		56,221		-		(30)		334,282
Other expense		27,169		16,928		31,577		26,997		32,355		-		18,639		153,665

Segment expense		72,113		88,680		178,324		41,645		88,576		-		18,609		487,947

Segment pretax earnings (loss)	$	11,595	$	13,792	$	24,971	$	8,849	$	3,035	$	53,126	$	(18,463)	$	96,905

Catastrophe losses reduced the International segment’s pretax earnings by $8.3 million and $72.3 million in the first six months of 2012 and 2011, respectively, and $4.7 million and $22.8 million in the second quarter of 2012 and 2011, respectively.

HCC Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited, tables in thousands except per share data)

(9) Commitments and Contingencies

Catastrophe and Large Loss Exposure

We have exposure to catastrophic losses caused by natural perils (such as hurricanes, earthquakes, floods, tsunamis and tornados), as well as from man-made events (such as terrorist attacks). The incidence, timing and severity of catastrophe 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. Following a catastrophic loss, we often incur additional costs for reinstatement premium to continue our reinsurance coverage for future loss events. Our pretax catastrophe losses were $14.8 million gross and $12.3 million net (after reinsurance and reinstatement premium) in the first six months of 2012 and $120.3 million gross and $73.3 million net in the same period of 2011.

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, individually or in the aggregate, 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, 2012, we have an accrued liability of $11.2 million, as well as $6.2 million in escrow and $3.2 million of letters of credit, to cover our obligations or anticipated payments under these indemnifications.

(10) Supplemental Information

Supplemental cash flow information was as follows:


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
Income taxes paid	$	39,448	$	57,607	$	33,664	$	38,501
Interest paid		12,000		12,152		10,929		9,866
Proceeds from sales of available for sale fixed maturity securities		218,572		246,331		153,469		197,399
Proceeds from sales of equity securities		1,739		-		1,739		-
Dividends declared but not paid at end of period		15,618		15,992

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 Consolidated Financial Statements and the related Notes as of June 30, 2012 and December 31, 2011.

Overview

We are a specialty insurance group with offices in the United States, the United Kingdom, Spain and Ireland, transacting business in approximately 180 countries. Our shares trade on the New York Stock Exchange and closed at $30.81 on July 27, 2012, resulting in market capitalization of $3.1 billion.

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

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

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

Key facts about our consolidated group as of and for the six months and quarter ended June 30, 2012 were as follows:

•

We had consolidated shareholders’ equity of $3.3 billion, with a book value per share of $33.19.

•

We generated year-to-date net earnings of $176.1 million, or $1.71 per diluted share. Our second quarter earnings were $93.5 million, or $0.92 per diluted share.

•

We produced total revenue of $1.2 billion and $632.3 million in the first six months and second quarter, respectively. In the first six months, 90% related to net earned premium and 9% related to net investment income.

•

In the first six months, we recognized $12.3 million of net catastrophe losses — $4.0 million in our U.S. Property & Casualty segment from storms in the United States and $8.3 million in our International segment from other small catastrophes. The second quarter included net catastrophe losses of $4.7 million.

•

Our year-to-date net loss ratio was 59.8% and our combined ratio was 85.0%.

•

Our debt to capital ratio was 15.0%.

•

We purchased $126.4 million, or 4.1 million shares, of our common stock at an average cost of $30.88 per share in the first six months of 2012.

•

We declared dividends of $0.31 per share and paid $32.0 million of dividends in the first six months of 2012.

Comparisons in the following sections refer to the first six months of 2012 compared to the same period of 2011, unless otherwise noted. Certain 2011 amounts have been adjusted to reflect our adoption of a new accounting standard as of January 1, 2012. See Note 1, “General Information — Accounting Guidance Adopted in 2012” to the Consolidated Financial Statements for a description of this guidance and the impact of our retrospective adoption on prior year results. Amounts in tables are in thousands, except for earnings per share, percentages, ratios and number of employees.

Results of Operations

Our results and key metrics for the six months and quarter ended June 30, 2012 and 2011 were as follows:


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011

Net earnings	$	176,077		$	116,468		$	93,493		$	69,478

Earnings per diluted share	$	1.71		$	1.02		$	0.92		$	0.61


Net loss ratio		59.8	%		66.0	%		59.6	%		63.8	%
Expense ratio		25.2			25.9			25.3			25.4


Combined ratio		85.0	%		91.9	%		84.9	%		89.2	%

In 2012, we recognized catastrophe losses from United States storms, primarily in our public risk line of business within our U.S. Property and Casualty segment and from other small catastrophes in our property treaty line of business within our International segment. In 2011, we recognized losses from catastrophic events in Japan, New Zealand, Australia, the United States and Denmark. We reinsure a portion of our exposure to catastrophic events, although we incur some additional cost for reinstatement premium to continue our reinsurance coverage for future loss events. The following table summarizes our catastrophe losses, as well as the impact on our net earnings and key metrics in 2012 and 2011:


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011
Gross losses	$	14,795		$	120,259		$	7,735		$	15,059
Net losses, after reinsurance and reinstatement premium	$	12,257		$	73,328		$	4,653		$	21,863
Impact of net catastrophe losses on:
Net earnings per diluted share	$	(0.08)		$	(0.42)		$	(0.03)		$	(0.13)
Net loss ratio (percentage points)		1.1	%		6.6	%		0.9	%		3.9	%
Combined ratio (percentage points)		1.1	%		6.9	%		0.8	%		4.1	%

Revenue

Total revenue increased $93.3 million in the first six months of 2012, compared to the same period in 2011, primarily due to higher net earned premium.

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


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
U.S. Property & Casualty	$	318,613	$	265,511	$	165,466	$	135,961
Professional Liability		245,750		262,272		144,505		161,152
Accident & Health		434,264		397,823		218,141		201,523
U.S. Surety & Credit		110,702		113,953		56,209		60,182
International		364,911		351,581		207,235		183,233
Exited Lines		2		150		(3)		31


Total gross written premium	$	1,474,242	$	1,391,290	$	791,553	$	742,082


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
U.S. Property & Casualty	$	197,894	$	180,436	$	105,566	$	93,714
Professional Liability		171,137		190,648		100,224		116,857
Accident & Health		433,740		397,500		217,856		201,395
U.S. Surety & Credit		96,096		105,101		51,392		55,394
International		301,623		274,922		167,053		142,482
Exited Lines		2		150		(3)		31


Total net written premium	$	1,200,492	$	1,148,757	$	642,088	$	609,873


U.S. Property & Casualty	$	177,852	$	159,175	$	88,834	$	78,921
Professional Liability		200,905		203,174		99,467		102,424
Accident & Health		436,397		400,657		218,730		202,117
U.S. Surety & Credit		100,844		101,403		53,115		50,039
International		196,472		168,164		105,188		90,717
Exited Lines		2		158		(3)		33


Total net earned premium	$	1,112,472	$	1,032,731	$	565,331	$	524,251

Growth in premium occurred in the U.S. Property & Casualty segment from our new business lines added in 2011 and increased aviation, public risk, contingency, residual value and title reinsurance premium; the Accident & Health segment from higher writings of our medical stop-loss product; and the International segment from new business and pricing increases in our energy line of business. In 2011, we recorded $11.6 million ($12.7 million ceded, net of $1.1 million assumed) of catastrophe-related reinstatement premium, which reduced the International segment’s 2011 net written and net earned premium. See the “Segment Operations” section below for further discussion of the relationship and changes in premium revenue within each segment.

Net investment income, which is included in our Investing segment, increased 6% year-over-year primarily due to higher income from fixed maturity securities, generated from an increased amount of investments. Our fixed maturity portfolio increased 9% from $5.6 billion at June 30, 2011 to $6.1 billion at June 30, 2012. In addition, we invested $92.6 million in an equities portfolio in the second quarter of 2012. The growth in investments resulted primarily from cash flow from operations and a $192.7 million increase in the net unrealized gain on available for sale securities since June 30, 2011.

The following table details the components of our other operating income. The fee and commission income relates to third party agency and broker commissions.


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
Fee and commission income	$	10,542	$	13,221	$	6,139	$	6,612
Financial instruments		330		385		115		122
Other		1,517		1,190		934		741


Other operating income	$	12,389	$	14,796	$	7,188	$	7,475

Loss and Loss Adjustment Expense

The tables below detail, by segment, our net loss and loss adjustment expense and our net loss ratios.


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011
U.S. Property & Casualty	$	100,927		$	92,428		$	51,666		$	44,944
Professional Liability		134,323			138,015			65,168			71,752
Accident & Health		324,717			291,605			163,004			146,747
U.S. Surety & Credit		26,723			29,687			15,690			14,648
International		79,623			130,393			41,856			56,221
Exited Lines		(560)			(260)			(559)			(30)


Net loss and loss adjustment expense	$	665,753		$	681,868		$	336,825		$	334,282


U.S. Property & Casualty		56.7	%		58.1	%		58.2	%		56.9	%
Professional Liability		66.9			67.9			65.5			70.1
Accident & Health		74.4			72.8			74.5			72.6
U.S. Surety & Credit		26.5			29.3			29.5			29.3
International		40.5			77.5			39.8			62.0


Consolidated net loss ratio		59.8	%		66.0	%		59.6	%		63.8	%


Consolidated accident year net loss ratio		59.8	%		63.9	%		59.6	%		61.2	%

Loss development represents an increase or decrease in estimates of ultimate losses related to prior accident years. Deficiencies and redundancies in ultimate loss estimates occur as we review our loss exposure with our actuaries, increasing or reducing estimates of our ultimate losses as a result of such reviews and as losses are finally settled or claims exposures change. The excess of total recorded net reserves over the actuarial point estimate approximated 4.3% of our recorded net reserves at June 30, 2012, compared to 4.2% at December 31, 2011. We recognized no development in the first six months of 2012, compared to adverse development of $22.3 million in the first six months of 2011 (of which $13.3 million was recognized in the second quarter), primarily in our Professional Liability segment. Our consolidated accident year net loss ratio was lower in 2012, compared to 2011, primarily due to higher catastrophe losses in 2011. See the “Segment Operations” section below for additional discussion of the changes in our net loss and loss adjustment expense and net loss ratios for each segment.

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


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011
Net reserves for loss and loss adjustment expense payable at beginning of period	$	2,683,483		$	2,537,772		$	2,699,717		$	2,611,096
Net reserve additions from acquired businesses		14,705			645			-			-
Foreign currency adjustment		(4,456)			27,986			(21,579)			5,770
Net loss and loss adjustment expense		665,753			681,868			336,825			334,282
Net loss and loss adjustment expense payments		(610,490)			(635,326)			(265,968)			(338,203)

Net reserves for loss and loss adjustment expense payable at end of period	$	2,748,995		$	2,612,945		$	2,748,995		$	2,612,945


Net paid loss ratio		54.9	%		61.5	%		47.0	%		64.5	%

Our net paid loss ratio decreased in 2012 due to substantially lower claims payments in our Professional Liability segment and our energy line of business in the second quarter of 2012, compared to the same period in 2011. We paid $27.5 million in the first quarter of 2012 and $26.7 million in the second quarter of 2011 to commute large contracts included in our Exited Lines. These commutations had no material effect on net earnings but increased our net paid loss ratios by 2.5 percentage points for the first six months of 2012, and 2.6 percentage points and 5.1 percentage points for the first six months and second quarter of 2011, respectively. The amount of claims paid fluctuates period to period due to our mix of business and the timing of claims settlement and catastrophic events.

Policy Acquisition Costs

Our policy acquisition cost percentage was 12.9% and 13.1% for the first six months of 2012 and 2011, respectively, and 13.2% and 12.6% for the second quarter of 2012 and 2011, respectively. The lower year-to-date percentage primarily relates to a change in the mix of business. The 2011 policy acquisition cost percentage was increased 0.1 percentage points due to $11.6 million of reinstatement premium (recorded as a reduction of net earned premium).

Other Operating Expense

For the first six months of 2012, 62% of our other operating expense related to compensation and benefits for our 1,866 employees. Other operating expense increased 5% year-over-year, primarily due to increased bonus expense related to higher net earnings in 2012. Other operating expense decreased 2% quarter-over-quarter, primarily due to higher foreign currency benefit in 2012. We recognized foreign currency benefit of $1.4 million and $4.2 million in the first six months and second quarter of 2012, respectively, directly related to the fluctuations in the British pound sterling. The foreign currency benefit was $2.0 million and $0.8 million in the first six months and second quarter of 2011, respectively. Other operating expense included stock-based compensation expense of $6.4 million in 2012 and $7.8 million in 2011. At June 30, 2012, there was approximately $26.7 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 2.8 years.

Interest Expense

Interest expense on debt and short-term borrowings was $13.1 million and $11.0 million in the first six months of 2012 and 2011, respectively, and $6.2 million and $5.4 million in the second quarter of 2012 and 2011, respectively. Our interest expense increased in 2012 due to a higher amount of outstanding borrowings on our $600.0 million Revolving Loan Facility, primarily to fund purchases of our common stock. Our interest expense for 2012 and 2011 included $9.7 million for our Senior Notes.

Income Tax Expense

Our effective income tax rate was 29.9% for the first six months of 2012, compared to 27.1% for the same period of 2011. The higher effective rate in 2012 is due to the relationship of pretax income and tax-exempt investment income in the two periods. Our pretax income was substantially lower in the first six months of 2011 due to $73.3 million of net catastrophe losses, whereas our tax-exempt investment income was essentially flat during the 2012 and 2011 six-month periods.

Segment Operations

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

U.S. Property & Casualty Segment

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


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011

Net earned premium	$	177,852		$	159,175		$	88,834		$	78,921
Other revenue		6,885			9,666			4,522			4,787


Segment revenue		184,737			168,841			93,356			83,708


Loss and loss adjustment expense, net		100,927			92,428			51,666			44,944
Other expense		59,767			55,575			30,045			27,169


Segment expense		160,694			148,003			81,711			72,113


Segment pretax earnings	$	24,043		$	20,838		$	11,645		$	11,595


Net loss ratio		56.7	%		58.1	%		58.2	%		56.9	%
Expense ratio		32.4			32.9			32.2			32.5


Combined ratio		89.1	%		91.0	%		90.4	%		89.4	%


Aviation	$	58,220		$	54,600		$	29,397		$	27,318
E&O		31,979			38,357			15,602			18,800
Public Risk		31,792			23,179			16,574			11,927
Other		55,861			43,039			27,261			20,876


Total net earned premium	$	177,852		$	159,175		$	88,834		$	78,921


Aviation		55.8	%		63.7	%		64.5	%		68.9	%
E&O		60.8			57.3			60.6			55.0
Public Risk		77.8			66.9			63.9			60.5
Other		43.4			46.8			46.4			41.0


Total net loss ratio		56.7	%		58.1	%		58.2	%		56.9	%


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011

Aviation	$	82,870	$	79,056	$	45,780	$	37,608
E&O		31,493		36,998		14,602		17,305
Public Risk		43,245		34,298		23,461		16,845
Other		161,005		115,159		81,623		64,203


Total gross written premium	$	318,613	$	265,511	$	165,466	$	135,961


Aviation	$	63,405	$	59,085	$	35,898	$	31,691
E&O		30,235		36,586		13,730		17,020
Public Risk		35,567		26,396		19,973		13,144
Other		68,687		58,369		35,965		31,859


Total net written premium	$	197,894	$	180,436	$	105,566	$	93,714

Our U.S. Property & Casualty segment pretax earnings increased 15% year-over-year due to higher net earned premium and a lower net loss ratio. Net earned premium was higher in 2012 due to $6.0 million of additional premium from our new technical property, primary casualty and excess casualty underwriting teams, as well as increases in aviation, public risk, contingency, residual value and title reinsurance premium. These increases more than offset lower premium in our E&O line of business. Our new underwriting teams wrote $28.4 million of gross premium in the first six months of 2012, compared to $4.5 million in the same period of 2011. Segment earnings were impacted by $4.0 million of net catastrophe losses in the first quarter of 2012, primarily in our public risk line of business. The 2011 segment earnings and net loss ratio reflect the impact of $2.5 million of adverse loss development, including $1.0 million in the second quarter of 2011. The segment had no loss development in 2012.

Professional Liability Segment

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


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011

Net earned premium	$	200,905		$	203,174		$	99,467		$	102,424
Other revenue		267			249			134			48


Segment revenue		201,172			203,423			99,601			102,472


Loss and loss adjustment expense, net		134,323			138,015			65,168			71,752
Other expense		36,207			34,032			18,676			16,928


Segment expense		170,530			172,047			83,844			88,680


Segment pretax earnings	$	30,642		$	31,376		$	15,757		$	13,792


Net loss ratio		66.9	%		67.9	%		65.5	%		70.1	%
Expense ratio		18.0			16.7			18.8			16.5


Combined ratio		84.9	%		84.6	%		84.3	%		86.6	%


U.S. D&O	$	170,667		$	180,254		$	84,413		$	90,279
International D&O		30,238			22,920			15,054			12,145


Total net earned premium	$	200,905		$	203,174		$	99,467		$	102,424


U.S. D&O		69.7	%		69.3	%		68.3	%		72.2	%
International D&O		51.0			57.2			50.1			54.3


Total net loss ratio		66.9	%		67.9	%		65.5	%		70.1	%


U.S. D&O	$	186,184		$	200,661		$	111,188		$	123,470
International D&O		59,566			61,611			33,317			37,682


Total gross written premium	$	245,750		$	262,272		$	144,505		$	161,152


U.S. D&O	$	136,826		$	153,692		$	81,121		$	94,081
International D&O		34,311			36,956			19,103			22,776


Total net written premium	$	171,137		$	190,648		$	100,224		$	116,857

Our Professional Liability segment pretax earnings decreased 2% year-to-date due to lower net earned premium in 2012 and increased 14% quarter-over-quarter due to adverse development in 2011. Premium was lower in 2012 primarily due to reunderwriting our diversified financial products (DFP) product, which is included in U.S. D&O. In addition, we obtained more reinsurance in 2012. In 2011, the segment had adverse loss development related to DFP of $17.0 million (representing 6.0 percentage points of the net loss ratio) in the first six months, and $10.8 million (11.9 percentage points) in the second quarter. The segment had no adverse loss development in 2012. We increased DFP’s ultimate loss ratio on underwriting year 2011 in the third quarter of 2011 and continued to use that same ultimate loss ratio in 2012 for DFP’s underwriting year 2011 premium that earned in 2012.

Accident & Health Segment

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


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011

Net earned premium	$	436,397		$	400,657		$	218,730		$	202,117
Other revenue		2,496			2,194			1,158			1,178


Segment revenue		438,893			402,851			219,888			203,295


Loss and loss adjustment expense, net		324,717			291,605			163,004			146,747
Other expense		63,482			61,995			32,164			31,577


Segment expense		388,199			353,600			195,168			178,324


Segment pretax earnings	$	50,694		$	49,251		$	24,720		$	24,971


Net loss ratio		74.4	%		72.8	%		74.5	%		72.6	%
Expense ratio		14.5			15.4			14.6			15.5


Combined ratio		88.9	%		88.2	%		89.1	%		88.1	%


Medical Stop-loss	$	387,673		$	351,056		$	194,586		$	176,147
Other		48,724			49,601			24,144			25,970


Total net earned premium	$	436,397		$	400,657		$	218,730		$	202,117


Medical Stop-loss		75.5	%		74.0	%		75.7	%		74.1	%
Other		65.9			64.2			65.3			62.2


Total net loss ratio		74.4	%		72.8	%		74.5	%		72.6	%


Medical Stop-loss	$	387,974		$	351,154		$	194,741		$	176,197
Other		46,290			46,669			23,400			25,326


Total gross written premium	$	434,264		$	397,823		$	218,141		$	201,523


Medical Stop-loss	$	387,673		$	351,056		$	194,586		$	176,147
Other		46,067			46,444			23,270			25,248


Total net written premium	$	433,740		$	397,500		$	217,856		$	201,395

The Accident & Health segment pretax earnings increased 3% in the first six months of 2012, compared to 2011. This increase was directly related to higher net earned premium in our medical stop-loss product line due to writing new business and rate increases, which were in line with medical loss cost trends, on renewal business.

U.S. Surety & Credit Segment

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


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011

Net earned premium	$	100,844		$	101,403		$	53,115		$	50,039
Other revenue		415			701			200			455


Segment revenue		101,259			102,104			53,315			50,494


Loss and loss adjustment expense, net		26,723			29,687			15,690			14,648
Other expense		55,523			55,252			27,403			26,997


Segment expense		82,246			84,939			43,093			41,645


Segment pretax earnings	$	19,013		$	17,165		$	10,222		$	8,849


Net loss ratio		26.5	%		29.3	%		29.5	%		29.3	%
Expense ratio		54.8			54.1			51.4			53.5


Combined ratio		81.3	%		83.4	%		80.9	%		82.8	%


Surety	$	79,608		$	80,809		$	39,688		$	40,148
Credit		21,236			20,594			13,427			9,891


Total net earned premium	$	100,844		$	101,403		$	53,115		$	50,039


Surety		24.8	%		25.3	%		24.8	%		25.2	%
Credit		33.0			44.9			43.7			45.8


Total net loss ratio		26.5	%		29.3	%		29.5	%		29.3	%


Surety	$	80,762		$	86,962		$	40,836		$	45,257
Credit		29,940			26,991			15,373			14,925


Total gross written premium	$	110,702		$	113,953		$	56,209		$	60,182


Surety	$	73,385		$	82,743		$	37,251		$	42,985
Credit		22,711			22,358			14,141			12,409


Total net written premium	$	96,096		$	105,101		$	51,392		$	55,394

Our U.S. Surety & Credit segment pretax earnings increased 11% year-over-year and 16% quarter-over-quarter. Gross and net written premium in our surety line of business decreased in 2012 due to lower production of commercial bonds. New quota share reinsurance on certain products also reduced the 2012 net written premium. In the first quarter of 2012, we had a large loss in our credit line of business, which had significant reinsurance recoveries. Our losses net of these reinsurance recoveries were limited, resulting in a lower 2012 year-to-date loss ratio. The benefit related to the lower loss ratio was partially offset by a reduction of net written premium and net earned premium due to $4.3 million of reinstatement premium related to this large loss.

International Segment

The following tables summarize the operations of the International segment.


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011

Net earned premium	$	196,472		$	168,164		$	105,188		$	90,717
Other revenue		2,135			1,902			941			894


Segment revenue		198,607			170,066			106,129			91,611


Loss and loss adjustment expense, net		79,623			130,393			41,856			56,221
Other expense		68,765			64,020			36,612			32,355


Segment expense		148,388			194,413			78,468			88,576


Segment pretax income (loss)	$	50,219		$	(24,347	)	$	27,661		$	3,035


Net loss ratio		40.5	%		77.5	%		39.8	%		62.0	%
Expense ratio		34.6			37.6			34.5			35.3


Combined ratio		75.1	%		115.1	%		74.3	%		97.3	%


Energy	$	40,889		$	28,683		$	25,795		$	16,634
Property Treaty		49,007			37,965			26,918			21,961
Liability		39,131			39,898			19,649			19,966
Surety & Credit		34,945			36,057			17,184			18,683
Other		32,500			25,561			15,642			13,473


Total net earned premium	$	196,472		$	168,164		$	105,188		$	90,717


Energy		41.6	%		59.8	%		44.2	%		44.5	%
Property Treaty		17.7			103.4			21.7			86.5
Liability		49.5			51.2			47.9			50.6
Surety & Credit		58.2			41.2			48.2			42.0
Other		43.7			151.3			44.2			88.2


Total net loss ratios		40.5	%		77.5	%		39.8	%		62.0	%


Energy	$	110,714		$	96,381		$	90,119		$	80,078
Property Treaty		113,855			104,115			44,517			32,296
Liability		40,242			48,071			20,982			23,953
Surety & Credit		43,451			47,189			22,493			20,516
Other		56,649			55,825			29,124			26,390


Total gross written premium	$	364,911		$	351,581		$	207,235		$	183,233


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
Energy	$	81,013	$	62,897	$	68,189	$	57,845
Property Treaty		99,819		86,126		37,517		24,966
Liability		37,316		44,433		19,424		22,073
Surety & Credit		39,813		43,466		20,786		18,708
Other		43,662		38,000		21,137		18,890


Total net written premium	$	301,623	$	274,922	$	167,053	$	142,482

Our International segment pretax earnings were impacted in both years by net catastrophe losses, which were substantially higher in 2011. The 2012 losses related to small catastrophes in our property treaty business. In 2011, we experienced losses from catastrophes in Japan, New Zealand, Australia, the United States and Denmark. The 2011 catastrophic events impacted our energy and property treaty lines of business, as well as our property (direct and facultative) and accident and health lines of business (both included in Other). We reinsured a portion of our exposure to these catastrophic events and incurred net reinstatement premium for continued reinsurance coverage, which reduced 2011 net written and net earned premium. The following table summarizes the segment’s catastrophe losses, as well as the impact on key metrics:


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011
Loss and loss adjustment expense, after reinsurance	$	8,668		$	60,672		$	5,835		$	18,300
Reinstatement premium, net		(411)			11,608			(1,182)			4,515


Total net catastrophe losses	$	8,257		$	72,280		$	4,653		$	22,815


Impact of net catastrophe losses (percentage points):
Net loss ratio		4.3	%		38.7	%		5.2	%		22.2	%
Expense ratio		(0.1	)		2.4			(0.4	)		1.6


Combined ratio		4.2	%		41.1	%		4.8	%		23.8	%

The segment’s increase in net earned premium primarily related to higher writings in our energy product line, as well as the impact of reinstatement premium in our property treaty and property (direct and facultative) lines. The energy, property treaty and Other net loss ratios reflect the catastrophe losses. The higher expense ratios in 2011 were due to the impact of reinstatement premium on net earned premium.

Investing Segment

We invest the majority of our funds in highly-rated fixed maturity securities, which are designated as available for sale securities. We held $6.1 billion of fixed maturity securities at June 30, 2012. Substantially all of our fixed maturity securities were investment grade and 77% were rated AAA or AA. At June 30, 2012, the portfolio’s average tax equivalent yield was 4.8%, the weighted-average life was 7.8 years, and the weighted-average duration was 4.5 years.

The following tables summarize the investment results of our Investing segment.


	Six months ended June 30,						Three months ended June 30,
	2012			2011			2012			2011
Fixed maturity securities	$	111,090		$	104,045		$	53,363		$	52,039
Equity securities		993			-			993			-
Short-term investments		102			321			40			165
Other investments		868			2,030			401			1,388
Net realized investment gain		7,047			495			6,876			1,054
Other-than-temporary impairment credit losses		(397)			(3,479)			(397)			(350)
Investment expenses		(2,753)			(2,379)			(1,507)			(1,170)


Segment pretax earnings	$	116,950		$	101,033		$	59,769		$	53,126


Fixed maturity securities:
Average yield *		3.9	%		3.9	%		3.8	%		3.9	%
Average tax equivalent yield *		4.8	%		4.8	%		4.6	%		4.7	%
Weighted-average life		7.8 years			7.2 years
Weighted-average duration		4.5 years			5.3 years
Weighted-average rating		AA			AA+

* Excluding realized and unrealized gains and losses.

In 2012, we began investing in bank loans (classified as Corporate securities), which we expect will generate attractive yields and lower our overall duration without altering the weighted-average duration of the portfolio. We also began investing in publicly-traded equity securities. As of June 30, 2012, we have invested $98.7 million in bank loans and $92.6 million in equity securities.

The weighted-average duration of our fixed maturity securities portfolio dropped between June 30, 2011 and June 30, 2012, primarily due to the impact of lower market interest rates on our municipal and structured securities with prepayment options. The decline in the weighted-average rating of our portfolio, which occurred in the third quarter of 2011, was a direct result of Standard & Poor’s Corporation’s downgrade of the U.S. government debt rating in August 2011.

On March 31, 2012, we reclassified our entire portfolio of fixed maturity securities classified as held to maturity, which consisted of corporate securities, U.S. government and foreign government securities, to fixed maturity securities classified as available for sale. Financial markets have been disrupted recently by several events, including the European debt crisis and the August 2011 downgrade of U.S. government debt by Standard & Poor’s Corporation. Due to these market disruptions and our desire to maintain greater flexibility in managing our entire investment portfolio in an uncertain economy, we changed our prior intent to hold these securities to maturity. On the date of transfer, these securities had a fair value of $139.1 million and an amortized cost of $136.0 million. The transferred securities’ net unrealized appreciation, net of tax, increased our accumulated other comprehensive income and shareholders’ equity by $2.0 million as of March 31, 2012.

This table summarizes our investments by type, substantially all of which were reported at fair value, at June 30, 2012 and December 31, 2011.


	June 30, 2012					December 31, 2011
	Amount		%			Amount		%
Fixed maturity securities
U.S. government and government agency securities	$	228,971		4	%	$	302,677		5	%
Fixed maturity securities of states, municipalities and political subdivisions		1,073,868		17			1,085,341		18
Special purpose revenue bonds of states, municipalities and political subdivisions		2,007,548		31			1,863,888		31
Corporate securities		1,129,657		17			956,617		16
Residential mortgage-backed securities		902,832		14			1,100,086		18
Commercial mortgage-backed securities		416,700		6			256,124		4
Asset-backed securities		46,182		1			34,746		1
Foreign government securities		292,108		5			280,457		4
Equity securities		93,660		1			-		-
Short-term investments		217,087		3			133,917		2
Other investments		37,720		1			35,897		1


Total investments	$	6,446,333		100	%	$	6,049,750		100	%

Our total investments increased $396.6 million in 2012, principally from: 1) operating cash flow, 2) consolidation of our Lloyd’s of London Syndicate 4040 upon its merger into Syndicate 4141 as of January 1, 2012 and 3) a $54.7 million increase in the pretax net unrealized gain associated with our available for sale securities in the first six months of 2012. During 2011, we substantially reduced our short-term investments and re-invested the funds in long-term fixed maturity securities in order to maximize our investment return.

The ratings of our individual securities within our fixed maturity securities portfolio at June 30, 2012 were as follows:


	Amount		%
AAA	$	855,164		14	%
AA		3,837,496		63
A		1,039,604		17
BBB		254,520		4
BB and below		111,082		2


Total fixed maturity securities	$	6,097,866		100	%

At June 30, 2012, we held $2.0 billion of special purpose revenue bonds, as well as $1.1 billion of general obligation bonds, which are issued by states, municipalities and political subdivisions and collectively referred to, in the investment market, as municipal bonds. The overall rating of our municipal bonds was AA at June 30, 2012. Within our municipal bond portfolio, we held $366.8 million of pre-refunded bonds, which are supported by U.S. government debt obligations. Our special purpose revenue bonds are secured by revenue sources specific to each security. At June 30, 2012, the percentages of our special purpose revenue bond portfolio supported by these major revenue sources were as follows: 1) water and sewer – 25%, 2) education – 22%, 3) transportation – 20%, 4) leasing – 9% and 5) electric – 7%.

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, 2012. Although recent economic conditions in the United States may reduce the source of revenue to support certain of these securities, the majority are supported by revenue from essential sources, as indicated above, which we believe generate a stable source of revenue.

At June 30, 2012, we held corporate fixed maturity securities issued by foreign corporations with an aggregate fair value of $422.1 million. In addition, we held securities issued by foreign governments, agencies or supranational entities with an aggregate fair value of $292.1 million. At June 30, 2012, our holdings of foreign debt were relatively unchanged from our holdings of foreign debt at December 31, 2011.

At June 30, 2012, we held a commercial mortgage-backed securities portfolio with a fair value of $416.7 million, an average rating of AA+ and an average loan-to-value ratio of 71%. We owned no collateralized debt obligations (CDOs) or collateralized loan obligations (CLOs), and we are not a counterparty to any credit default swap transactions.

The methodologies used to determine the fair value of our investments are described in Note 3, “Fair Value Measurements” to the Consolidated Financial Statements. The accounting policies and procedures that we use to determine our other-than-temporary impairment losses are described in Note 2, “Investments” to the 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, 2011.

Corporate & Other

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


	Six months ended June 30,				Three months ended June 30,
	2012		2011		2012		2011
Net earned premium	$	2	$	158	$	(3)	$	33
Other revenue		191		84		233		113

Total revenue		193		242		230		146

Loss and loss adjustment expense, net		(560)		(260)		(559)		(30)
Other expense – Exited Lines		1,625		2,101		980		1,034
Other expense – Corporate		28,006		25,204		13,427		13,080
Interest expense		12,844		10,734		6,042		5,305
Foreign currency benefit		(1,440)		(2,005)		(4,205)		(780)

Total expense		40,475		35,774		15,685		18,609


Pretax loss	$	(40,282)	$	(35,532)	$	(15,455)	$	(18,463)

Our Corporate expenses not allocable to the segments increased $2.8 million in 2012, primarily due to higher employee compensation and benefit costs and incremental expense related to our new technology systems. Our interest expense increased due to a higher amount of outstanding borrowings on our $600.0 million Revolving Loan Facility in 2012.

The impact of foreign currency fluctuated period-over-period due to our increased level of available for sale securities denominated in foreign currencies and weakening of the British pound sterling relative to the U.S. dollar in 2012. We hold available for sale securities denominated in foreign currencies to economically hedge the currency exchange risk on our foreign-denominated loss reserves. The foreign currency gain or loss related to loss reserves is recorded through the income statement, while the foreign currency gain or loss related to available for sale securities is recorded through other comprehensive income within shareholders’ equity. This mismatch may cause fluctuations in our reported foreign currency benefit or expense in future periods.

Liquidity and Capital Resources

We believe we have sufficient sources of liquidity at a reasonable cost at the present time. Our primary sources of liquidity are as follows:

•

We held $280.3 million of cash and liquid short-term investments at June 30, 2012.

•

Our available for sale securities portfolio had a fair value of $6.2 billion at June 30, 2012, of which $209.4 million was bonds and equity securities that are held directly by the parent company. We generally intend to hold fixed maturity securities until their maturity, but we would be able to sell securities to generate cash if the need arises.

•

We have a four-year $600.0 million Revolving Loan Facility that expires on March 8, 2015. We had $298.1 million of borrowing capacity available at June 30, 2012.

•

Our long-term 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 15.0% at June 30, 2012 and 12.8% at December 31, 2011, with the increase related to our borrowings under the Revolving Loan Facility.

•

We have a $90.0 million Standby Letter of Credit Facility that expires on December 31, 2015, which is used to guarantee our performance in our Lloyd’s of London syndicate.

•

Our domestic insurance subsidiaries have the ability to pay $255.1 million in dividends in 2012 to the parent company without obtaining special permission from state regulatory authorities. HCC can utilize these dividends for any purpose, including paying down debt, paying dividends to shareholders, funding acquisitions, purchasing our common stock and paying operating expenses.

•

We have a new “Universal Shelf” registration statement, which was filed and became effective in March 2012 and expires in March 2015. The current shelf registration statement provides for the issuance of an aggregate of $1.0 billion of securities. 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.

Capital Management

Notes Payable

There have been no changes to the terms and conditions related to our Senior Notes, the $600.0 million Revolving Loan Facility (the Facility) or the Standby Letter of Credit Facility from those described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in our Annual Report on Form 10-K for the year ended December 31, 2011.

As of June 30, 2012, we had outstanding borrowings under the Facility of $292.0 million, primarily to fund purchases of our common stock. The weighted-average interest rate on borrowings under the Facility at June 30, 2012 was 1.62%. The borrowings and letters of credit issued under the Facility reduced our available borrowing capacity on the Facility to $298.1 million at June 30, 2012.

We were in compliance with debt covenants related to our Senior Notes, the Facility, and the Standby Letter of Credit Facility at June 30, 2012.

Share Repurchases

On September 23, 2011, the Board approved the purchase of up to $300.0 million of our common stock (the Plan). Purchases under the Plan may be made in the open market or in privately negotiated transactions from time-to-time in compliance with applicable laws, rules and regulations, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Purchases under the Plan will be made opportunistically from time-to-time, subject to market and business conditions, the level of cash generated from our operations, cash required for acquisitions, our debt covenant compliance, and other relevant factors. The Plan does not obligate us to purchase any particular number of shares, has no expiration date, and may be suspended or discontinued at any time at the Board’s discretion.

In the second quarter of 2012, we purchased $59.5 million, or 1.9 million shares, at an average cost of $31.17 per share. We purchased $126.4 million, or 4.1 million shares, at an average cost of $30.88 per share in the first six months of 2012. As of July 27, 2012, $100.0 million of repurchase authority remains under the Plan.

Hedge of Investment in Subsidiary

During the second quarter of 2012, we entered into a forward contract to sell 45.0 million Euros for U.S. dollars in the third quarter of 2013. This transaction hedges our net investment in a Euro-functional currency subsidiary by limiting the negative impact of future decreases in the Euro relative to the U.S. dollar. Because this transaction qualifies as a hedge of our net investment in a Euro-functional currency subsidiary, changes in fair value of the forward contract will offset changes in the value of the net investment in subsidiary that is being hedged, with no impact on pretax earnings. The fair value of the forward contract was a $0.9 million liability at June 30, 2012. See Note 1, “General Information —Derivative Financial Instrument” to the Consolidated Financial Statements.

Cash Flow

We receive substantial cash from premiums, reinsurance recoverables, surety collateral, outward commutations, proceeds from sales and redemptions of investments, and investment income. Our principal cash outflows are for the payment of claims and loss adjustment expenses, premium payments to reinsurers, return of surety collateral, 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 premium receivables, reinsurance recoverables and surety collateral; the payment of losses, premium payables, return of surety collateral; and the completion of commutations.

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


	Six months ended June 30,
	2012		2011
Net earnings	$	176,077	$	116,468
Change in premium, claims and other receivables, net of reinsurance, premium and claims payables
and excluding restricted cash		(64,793)		(133,658)
Change in unearned premium, net		83,497		99,885
Change in loss and loss adjustment expense payable, net of reinsurance recoverables		87,846		63,142
Other, net		(38,076)		(24,053)


Cash provided by operating activities	$	244,551	$	121,784

We generated $122.8 million more cash flow from operating activities in the first six months of 2012 than in the same period of 2011. The increase was primarily from additional premium collections, lower paid losses and the timing of tax payments. Our cash flow from operating activities was reduced $27.5 million in 2012 and $26.7 million in 2011 for payments we made to commute large contracts in our assumed accident and health reinsurance business reported in Exited Lines. Receipt and repayment of collateral funds related to surety bonds also decreased our cash flow from operating activities by $21.2 million and $18.4 million in 2012 and 2011, respectively.

Accounting Guidance Adopted in 2012

See Note 1, “General Information — Accounting Guidance Adopted in 2012” to the Consolidated Financial Statements for a description of recently adopted accounting guidance related to deferred policy acquisition costs and its retrospective impact on our prior year consolidated financial statements.

Critical Accounting Policies

We provided information about our critical accounting policies 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, 2011. We have made no changes in the identification or methods of application of these policies.

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, 2011, except as follows:

During the second quarter of 2012, we entered into a forward contract to sell 45.0 million Euros for U.S. dollars in the third quarter of 2013. The fair value of the forward contract was a $0.9 million liability at June 30, 2012. A 10% increase (decrease) in the value of the Euro relative to the U.S. dollar would result in a $5.7 million decrease (increase) in the fair value of the forward contract.

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, 2012. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2012.

(b) Changes in Internal Control over Financial Reporting

During the second quarter of 2012, we changed our third party provider for certain investment accounting and reporting functions in order to increase the overall efficiency of our financial reporting process. Other than this change, there were no changes in our internal control over financial reporting in the second quarter of 2012 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

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, 2011.

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

On September 23, 2011, the Board approved the purchase of up to $300.0 million of our common stock (the Plan). Purchases under the Plan may be made in the open market or in privately negotiated transactions from time-to-time in compliance with applicable laws, rules and regulations, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Purchases under the Plan will be made opportunistically, subject to market and business conditions, the level of cash generated from our operations, cash required for acquisitions, our debt covenant compliance, and other relevant factors. The Plan does not obligate us to purchase any particular number of shares, has no expiration date, and may be suspended or discontinued at any time at the Board’s discretion. During the second quarter of 2012, we purchased our common stock, as follows:


Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Approximate dollar value of shares that may yet be purchased under the plans or programs

April		983,987		$31.18		983,987		$128,779,510
May		723,802		$31.16		723,802		$106,228,203
June		200,677		$31.14		200,677		$99,979,638

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits


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

3.2		Second Amended and Restated Bylaws of HCC Insurance Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on May 25, 2012).

4.1		Indenture, dated August 23, 2001, between HCC Insurance Holdings, Inc. and First Union National Bank related to Debt Securities (incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed on August 24, 2001).

4.2		Form of Fourth Supplemental Indenture, dated November 16, 2009, between HCC Insurance Holdings, Inc. and U.S. Bank National Association related to the 6.30% Senior Notes due 2019 (incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed on November 13, 2009).

10.1		Amendment to Employment Agreement, dated May 15, 2012, between HCC Insurance Holdings, Inc. and John N. Molbeck, Jr. (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 15, 2012).

10.2		Amendment to Employment Agreement, dated May 15, 2012, between HCC Insurance Holdings, Inc. and Christopher J. B. Williams (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed on May 15, 2012).

†10.3		Form of Restricted Stock Award Agreement under the HCC Insurance Holdings, Inc. 2008 Flexible Incentive Plan (budget performance shares).

†12		Statement of Ratios.

†31.1		Certification by Chief Executive Officer.

†31.2		Certification by Chief Financial Officer.

†32.1		Certification with Respect to Quarterly Report.

†101		The following financial statements from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Earnings, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statement of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.*

†	Filed herewith.

The XBRL related information in Exhibit 101 shall not be deemed “filed” for the 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 3, 2012				/s/ John N. Molbeck, Jr.
(Date)				John N. Molbeck, Jr.,
				Chief Executive Officer


August 3, 2012				/s/ Pamela J. Penny
(Date)				Pamela J. Penny, Executive Vice President
				and Chief Accounting Officer