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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 for the Quarter Ended June 30, 2007.
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 from  to
 Commission file number 001-13790
 HCC Insurance Holdings, Inc.
  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)
  
   þ o
  þ o o
  o þ




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HCC INSURANCE HOLDINGS, INC.
TABLE OF CONTENTS
 PagePart I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets  June 30, 2007 and December 31, 2006 (unaudited)
    
    
    5Condensed Consolidated Statements of Earnings  Six months and three months ended June 30, 2007 and 2006 (unaudited)
    
    
    6Condensed Consolidated Statement of Changes in Shareholders Equity  Six months ended June 30, 2007 (unaudited)
    
    
    7Condensed Consolidated Statements of Cash Flows  Six months and three months ended June 30, 2007 and 2006 (unaudited)
    
    
    8Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    33Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    35Item 4.
Submission of Matters to a Vote of Security Holders
    
    
    35Item 6. Exhibits
    
    
    36Signatures
    
    
    36Certification by Chief Executive OfficerCertification by Chief Financial OfficerCertification with Respect to Quarterly Report
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FORWARD-LOOKING STATEMENTS
 This Report on Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
which are intended to be covered by the safe harbors created by those laws. We have based these
forward-looking statements on our current expectations and projections about future events. These
forward-looking statements include information about possible or assumed future results of our
operations. All statements, other than statements of historical facts, included or incorporated by
reference in this Report that address activities, events or developments that we expect or
anticipate may occur in the future, including such things as growth of our business and operations,
business strategy, competitive strengths goals, plans, future capital expenditures, and references
to future successes may be considered forward-looking statements. Also, when we use words such as
anticipate, believe, estimate, expect, intend, plan, probably or similar expressions,
we are making forward-looking statements.
 Many risks and uncertainties may impact the matters addressed in these forward-looking statements,
which could affect our future financial results and performance, including, among other things:
 
    
    the effects of catastrophic losses;
    
    the cyclical nature of the insurance business;
    
    inherent uncertainties in the loss estimation process, which can adversely impact the
adequacy of loss reserves;
    
    the effects of emerging claim and coverage issues;
    
    the effects of extensive governmental regulation of the insurance industry;
    
    potential credit risk with brokers;
    
    our assessment of underwriting risk;
    
    our increased retention of risk, which could expose us to greater potential losses;
    
    the adequacy of reinsurance protection;
    
    the ability or willingness of reinsurers to pay balances due us;
    
    the occurrence of terrorist activities;
    
    our ability to maintain our competitive position;
    
    changes in our assigned financial strength ratings;
    
    our ability to raise capital in the future;
    
    attraction and retention of qualified employees;
    
    fluctuations in the fixed income securities market, which may reduce the value of our investment assets;
    
    our ability to successfully expand our business through the acquisition of insurance-related companies;
    
    our ability to receive dividends from our insurance company subsidiaries in needed amounts;
    
    fluctuations in foreign exchange rates;
    
    failures of our information technology systems;
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
    
    impairment of goodwill;
    
    developments in the SECs inquiry related to our past stock option granting procedures;
    
    litigation related to our past stock option granting procedures; and
    
    change of control.
 These events or factors could cause our results or performance to differ materially from those we
express in our forward-looking statements. Although we believe that the assumptions underlying our
forward-looking statements are reasonable, any of these assumptions, and, therefore, also the
forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In
light of the significant uncertainties inherent in the forward-looking statements that are included
in this Report, our inclusion of this information is not a representation by us or any other person
that our objectives and plans will be achieved.
 Our forward-looking statements speak only at the date made, and we will not update these
forward-looking statements unless the securities laws require us to do so. In light of these risks,
uncertainties and assumptions, any forward-looking events discussed in this Report may not occur.
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June 30,
    
    
    December 31,2007
    
    
    2006ASSETSInvestments:Fixed income securities, at fair value
(amortized cost: 2007 - $3,454,272; 2006 - $3,008,818)
    
    $
    3,401,787
    
    
    $
    3,007,193Short-term investments, at cost, which approximates fair value
    
    
    732,912
    
    
    
    714,685Other investments, at fair value (cost: 2007 - $175,187; 2006 - $183,450)
    
    
    214,812
    
    
    
    206,117Total investments
    
    
    4,349,511
    
    
    
    3,927,995Cash
    
    
    41,931
    
    
    
    48,290Restricted cash and cash investments
    
    
    171,215
    
    
    
    176,424Premium, claims and other receivables
    
    
    829,781
    
    
    
    864,705Reinsurance recoverables
    
    
    1,075,313
    
    
    
    1,169,934Ceded unearned premium
    
    
    247,374
    
    
    
    226,125Ceded life and annuity benefits
    
    
    68,038
    
    
    
    70,923Deferred policy acquisition costs
    
    
    197,375
    
    
    
    182,410Goodwill
    
    
    743,239
    
    
    
    742,677Other assets
    
    
    216,360
    
    
    
    220,649Total assets
    
    $
    7,940,137
    
    
    $
    7,630,132LIABILITIESLoss and loss adjustment expense payable
    
    $
    3,202,988
    
    
    $
    3,097,051Life and annuity policy benefits
    
    
    68,038
    
    
    
    70,923Reinsurance balances payable
    
    
    121,932
    
    
    
    122,805Unearned premium
    
    
    983,232
    
    
    
    920,350Deferred ceding commissions
    
    
    71,496
    
    
    
    64,949Premium and claims payable
    
    
    598,915
    
    
    
    646,224Notes payable
    
    
    347,590
    
    
    
    308,887Accounts payable and accrued liabilities
    
    
    350,769
    
    
    
    356,140Total liabilities
    
    
    5,744,960
    
    
    
    5,587,329SHAREHOLDERS EQUITYCommon stock, $1.00 par value; 250.0 million shares authorized
(shares issued and outstanding: 2007  112,483; 2006  111,731)
    
    
    112,483
    
    
    
    111,731Additional paid-in capital
    
    
    820,272
    
    
    
    798,213Retained earnings
    
    
    1,273,614
    
    
    
    1,098,887Accumulated other comprehensive income (loss)
    
    
    (11,192
    )
    
    
    33,972Total shareholders equity
    
    
    2,195,177
    
    
    
    2,042,803Total liabilities and shareholders equity
    
    $
    7,940,137
    
    
    $
    7,630,132
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Six months ended June 30,
    
    
    Three months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUENet earned premium
    
    $
    991,986
    
    
    $
    783,891
    
    
    $
    494,386
    
    
    $
    403,320Fee and commission income
    
    
    63,261
    
    
    
    65,547
    
    
    
    31,136
    
    
    
    33,878Net investment income
    
    
    98,164
    
    
    
    72,754
    
    
    
    48,697
    
    
    
    36,173Net realized investment loss
    
    
    (624
    )
    
    
    (1,497
    )
    
    
    (69
    )
    
    
    (199
    )Other operating income
    
    
    38,685
    
    
    
    38,795
    
    
    
    20,100
    
    
    
    20,045Total revenue
    
    
    1,191,472
    
    
    
    959,490
    
    
    
    594,250
    
    
    
    493,217EXPENSELoss and loss adjustment expense, net
    
    
    603,763
    
    
    
    453,092
    
    
    
    303,291
    
    
    
    231,025Policy acquisition costs, net
    
    
    174,527
    
    
    
    152,809
    
    
    
    85,428
    
    
    
    76,577Other operating expense
    
    
    111,108
    
    
    
    97,002
    
    
    
    53,467
    
    
    
    49,669Interest expense
    
    
    4,399
    
    
    
    4,437
    
    
    
    1,096
    
    
    
    2,283Total expense
    
    
    893,797
    
    
    
    707,340
    
    
    
    443,282
    
    
    
    359,554Earnings before income tax expense
    
    
    297,675
    
    
    
    252,150
    
    
    
    150,968
    
    
    
    133,663Income tax expense
    
    
    99,813
    
    
    
    83,864
    
    
    
    49,796
    
    
    
    44,519Net earnings
    
    $
    197,862
    
    
    $
    168,286
    
    
    $
    101,172
    
    
    $
    89,144Basic earnings per share data:Net earnings per share
    
    $
    1.76
    
    
    $
    1.51
    
    
    $
    0.90
    
    
    $
    0.80Weighted average shares outstanding
    
    
    112,117
    
    
    
    111,117
    
    
    
    112,273
    
    
    
    111,218Diluted earnings per share data:Net earnings per share
    
    $
    1.69
    
    
    $
    1.44
    
    
    $
    0.86
    
    
    $
    0.76Weighted average shares outstanding
    
    
    117,381
    
    
    
    116,885
    
    
    
    117,728
    
    
    
    116,860Cash dividends declared, per share
    
    $
    0.20
    
    
    $
    0.175
    
    
    $
    0.10
    
    
    $
    0.10
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AccumulatedAdditional
    
    
    
    
    
    
    other
    
    
    TotalCommon
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    shareholdersstock
    
    
    capital
    
    
    earnings
    
    
    income (loss)
    
    
    equityBalance at December 31, 2006
    
    $
    111,731
    
    
    $
    798,213
    
    
    $
    1,098,887
    
    
    $
    33,972
    
    
    $
    2,042,803Cumulative effect of accounting change
(adoption of FIN 48)
    
    
    
    
    
    
    
    
    
    
    (678
    )
    
    
    
    
    
    
    (678
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    197,862
    
    
    
    
    
    
    
    197,862Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,164
    )
    
    
    (45,164
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152,020Issuance of 730 shares for exercise of
options, including tax benefit of $2,517
    
    
    730
    
    
    
    15,692
    
    
    
    
    
    
    
    
    
    
    
    16,422Issuance of 22 shares to directors
    
    
    22
    
    
    
    695
    
    
    
    
    
    
    
    
    
    
    
    717Stock-based compensation
    
    
    
    
    
    
    5,672
    
    
    
    
    
    
    
    
    
    
    
    5,672Cash dividends declared, $0.20 per share
    
    
    
    
    
    
    
    
    
    
    (22,457
    )
    
    
    
    
    
    
    (22,457
    )Balance at June 30, 2007
    
    $
    112,483
    
    
    $
    820,272
    
    
    $
    1,273,614
    
    
    $
    (11,192
    )
    
    $
    2,195,177
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Six months ended June 30,
    
    
    Three months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cash flows from operating activities:Net earnings
    
    $
    197,862
    
    
    $
    168,286
    
    
    $
    101,172
    
    
    $
    89,144Adjustments to reconcile net earnings to
net cash provided by operating activities:Change in premium, claims and other
receivables
    
    
    30,041
    
    
    
    (10,298
    )
    
    
    (57,125
    )
    
    
    (54,660
    )Change in reinsurance recoverables
    
    
    94,621
    
    
    
    8,695
    
    
    
    (16,646
    )
    
    
    (3,937
    )Change in ceded unearned premium
    
    
    (21,249
    )
    
    
    1,135
    
    
    
    (23,139
    )
    
    
    1,249Change in loss and loss adjustment
expense payable
    
    
    105,937
    
    
    
    104,721
    
    
    
    89,492
    
    
    
    80,946Change in reinsurance balances payable
    
    
    (873
    )
    
    
    (22,706
    )
    
    
    7,452
    
    
    
    4,351Change in unearned premium
    
    
    62,882
    
    
    
    103,079
    
    
    
    65,504
    
    
    
    84,813Change in premium and claims payable,
net of restricted cash
    
    
    (42,100
    )
    
    
    (17,222
    )
    
    
    44,587
    
    
    
    13,096Change in trading portfolio
    
    
    4,865
    
    
    
    (84,491
    )
    
    
    (6,093
    )
    
    
    (36,497
    )Depreciation and amortization expense
    
    
    7,861
    
    
    
    7,644
    
    
    
    4,125
    
    
    
    3,819Stock-based compensation expense
    
    
    6,389
    
    
    
    6,090
    
    
    
    4,178
    
    
    
    3,387Other, net
    
    
    (45,936
    )
    
    
    (4,992
    )
    
    
    (43,518
    )
    
    
    (3,861
    )Cash provided by operating activities
    
    
    400,300
    
    
    
    259,941
    
    
    
    169,989
    
    
    
    181,850Cash flows from investing activities:Sales of fixed income securities
    
    
    174,718
    
    
    
    164,097
    
    
    
    146,235
    
    
    
    98,443Maturity or call of fixed income securities
    
    
    158,121
    
    
    
    117,698
    
    
    
    87,973
    
    
    
    58,472Cost of securities acquired
    
    
    (736,873
    )
    
    
    (791,385
    )
    
    
    (369,678
    )
    
    
    (319,771
    )Change in short-term investments
    
    
    (26,014
    )
    
    
    218,856
    
    
    
    (50,871
    )
    
    
    (27,894
    )Sale of strategic investment
    
    
    39,816
    
    
    
    17,363
    
    
    
    16,866
    
    
    
    Payments for purchase of subsidiaries, net
of cash received
    
    
    (51,681
    )
    
    
    (37,457
    )
    
    
    (45,764
    )
    
    
    (13,457
    )Other, net
    
    
    (5,356
    )
    
    
    (5,097
    )
    
    
    (3,188
    )
    
    
    (3,050
    )Cash used by
investing activities
    
    
    (447,269
    )
    
    
    (315,925
    )
    
    
    (218,427
    )
    
    
    (207,257
    )Cash flows from financing activities:Advances on line of credit
    
    
    62,000
    
    
    
    39,000
    
    
    
    51,000
    
    
    
    28,000Payments on notes payable and line of credit
    
    
    (12,887
    )
    
    
    (11,249
    )
    
    
    (1,548
    )
    
    
    (142
    )Sale of common stock
    
    
    16,422
    
    
    
    9,660
    
    
    
    8,382
    
    
    
    2,022Dividends paid
    
    
    (22,381
    )
    
    
    (16,648
    )
    
    
    (11,208
    )
    
    
    (8,338
    )Other
    
    
    (2,544
    )
    
    
    5,628
    
    
    
    1,251
    
    
    
    (2,904
    )Cash provided by financing
activities
    
    
    40,610
    
    
    
    26,391
    
    
    
    47,877
    
    
    
    18,638Net decrease in cash
    
    
    (6,359
    )
    
    
    (29,593
    )
    
    
    (561
    )
    
    
    (6,769
    )Cash at beginning of period
    
    
    48,290
    
    
    
    73,935
    
    
    
    42,492
    
    
    
    51,111Cash at end of period
    
    $
    41,931
    
    
    $
    44,342
    
    
    $
    41,931
    
    
    $
    44,342
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(1)
    
    GENERAL INFORMATIONHCC Insurance Holdings, Inc. and its subsidiaries (collectively, we, us or our) include
domestic and foreign property and casualty and life insurance companies, underwriting
agencies and reinsurance brokers. We provide specialized property and casualty, surety, and
group life, accident and health insurance coverages and related agency and reinsurance
brokerage services to commercial customers and individuals. We market our products both
directly to customers and through a network of independent and affiliated brokers, producers
and agents. Our lines of business include diversified financial products (which includes
directors and officers liability, professional indemnity, employment practices liability,
surety and credit); group life, accident and health; aviation; our London market account
(which includes energy, marine, property, and accident and health); and other specialty lines
of insurance. We operate primarily in the United States, the United Kingdom, Spain, Bermuda
and Ireland, although some of our operations have a broader international scope.Basis of PresentationOur unaudited condensed consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America (generally
accepted accounting principles) and include the accounts of HCC Insurance Holdings, Inc. and
its subsidiaries. We have made all adjustments that, in our opinion, are necessary for a
fair presentation of results of the interim periods, and all such adjustments are of a normal
recurring nature. All significant intercompany balances and transactions have been
eliminated in consolidation. The condensed consolidated financial statements should be read
in conjunction with our annual audited consolidated financial statements and related notes.
The condensed consolidated balance sheet at December 31, 2006 was derived from audited
financial statements, but does not include all disclosures required by generally accepted
accounting principles.Management must make estimates and assumptions that affect amounts reported in our condensed
consolidated financial statements and in disclosures of contingent assets and liabilities.
Ultimate results could differ from those estimates.We completed an acquisition as of June 30, 2006 and two more in the second half of 2006. Our
condensed consolidated statements of earnings and cash flows for the six months and three
months ended June 30, 2006 do not contain any operations of the acquired entities.AcquisitionOn October 2, 2006, we acquired the Health Products Division of Allianz Life Insurance
Company of North America (the Health Products Division) in a purchase business combination
for $140.0 million. In addition, we assumed the Health Products Divisions outstanding loss
reserves totaling $149.7 million and net miscellaneous other liabilities of $0.4 million.
Allianz paid us the net amount of $10.1 million in cash. We acquired the Health Products
Division to expand our medical stop-loss line and diversify our business by adding several
new medical excess products; to add skilled underwriters and managers with extensive
experience with medical stop-loss and medical excess products; to apply our unique synergies
to the Health Products Divisions business to increase its profitability; and to strengthen
our competitive position as a leader in the medical stop-loss and excess lines.We expect the Health Products Division to generate a profit and positive cash flow due to the
unique synergies (specialized systems, claims administration, operational focus and
management expertise) our existing medical stop-loss business will contribute to the
combined, post-acquisition business. For our purchase price allocation,
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we assessed the value of these synergies, as well as the value of the assembled workforce.
The value of these items was subsumed into goodwill in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations. We valued all
identifiable assets and liabilities at fair value, including discounting the loss reserves by
$2.9 million. The following table summarizes the fair value of assets acquired and
liabilities assumed and the resulting $137.2 million of goodwill:
 Premium, claims and other receivables
    
    $
    6,372Goodwill
    
    
    137,154Other assets
    
    
    280Total assets acquired
    
    
    143,806Loss and loss adjustment expense payable
    
    
    146,811Reinsurance balances payable
    
    
    746Premium and claims payable
    
    
    4,375Accounts payable and accrued liabilities
    
    
    1,961Total liabilities assumed
    
    
    153,893Net cash received
    
    $
    10,087
 Income TaxFor the six months ended June 30, 2007 and 2006, the income tax provision was calculated
based on an estimated effective tax rate for each fiscal year. Our effective tax rate
differs from the United States Federal statutory rate primarily due to tax-exempt municipal
bond interest and state income taxes.Stock-Based CompensationDuring the second quarter of 2007, fully-vested common stock valued at $80,000 was granted to
each non-management director as part of their annual compensation for serving on our Board of
Directors. The number of shares granted to each director was based on the closing price on
the grant date, which was either the day of the Annual Meeting of Shareholders or the day the
director joined the Board, if later. The shares granted had an aggregate fair value of $0.7
million, which we recognized as compensation expense on the grant date.In the second quarter of 2007, we granted options for the purchase of 475,000 shares of our
common stock at $31.92 per share. In the first quarter of 2007, we granted options for the
purchase of 2,050,750 shares of our common stock at $31.11 per share. The aggregate fair
value of options granted in 2007 was $16.9 million, which will be expensed over a vesting
period of three to five years.
 2006 Stock Option Matter
 We incurred $3.6 million of expense in 2007 for professional services, consulting fees and
other related charges for ongoing issues associated with our 2006 stock option matter, which
is described in more detail in Note 7  Commitments and Contingencies. In order to maintain
our excellent employee relations and treat our employees fairly, our Board of Directors
decided to incur certain costs and reimburse employees for certain expenses related to our
2006 stock option matter. During the first quarter, we paid the personal tax liabilities
that our employees incurred under Section 409A of the Internal Revenue Code for options
exercised in 2006, thus resolving the $2.3 million liability accrued at December 31, 2006.
We commenced a Tender Offer on July 9, 2007 relating to our plan to reprice certain
employees unexercised discounted options and provide cash reimbursements for the increase in
option price. The tender offer expired on August 7, 2007, and all employees accepted our
offer to
reprice their options. We will make the initial cash reimbursements on January 15, 2008.
The estimated cost of $4.0 million for the aggregate reimbursements was accrued at December
31, 2006. During the first quarter of 2007, we collected $6.1 million of receivables due
from certain former executives related to the 2006 stock option matter.
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Recent Accounting ChangesFIN 48FIN No. 48, Accounting for Uncertainty in Income Taxes, issued by the Financial Accounting
Standards Board (FASB) in 2006, became effective January 1, 2007. FIN 48 clarifies the
accounting for uncertain income tax positions. Under FIN 48, a company may only recognize the
tax benefit from an uncertain tax position if it is more-likely-than-not the tax position
will be sustained upon examination by the tax authority. To adopt FIN 48, a company must
recognize a tax liability related to the uncertain tax positions, to the extent the liability
is not already recorded. The cumulative effect of the accounting change is reflected as a
reduction of beginning retained earnings on the date of adoption.On January 1, 2007, the date we adopted FIN 48, our gross tax benefits related to uncertain
tax positions totaled $9.9 million and related potential interest totaled $1.4 million, for
which we had previously recorded $9.2 million of gross tax liabilities on unrecognized tax
benefits. To adopt FIN 48 and record the additional required tax and interest liabilities, we
reduced beginning retained earnings by $0.7 million, primarily for potential interest net of
the related Federal tax benefit. Subsequent to adoption, we will report any potential
interest and penalties in interest expense and other operating expense, respectively, in our
consolidated statement of earnings, consistent with our prior classification of such
expenses. In addition, changes in the recognition or amount of our uncertain tax positions
generally will be reflected as a component of income tax expense.Of the total amount of our tax benefits related to uncertain tax positions, $9.1 million
would positively affect the effective tax rate if the uncertain tax benefits were recognized
as a reduction of income tax expense currently. As of the date of adoption, it was
reasonably possible that the liabilities for our unrecognized tax benefits could decrease by
$1.4 million in the subsequent twelve months, mainly due to the expiration of the statute of
limitations related to state tax liabilities. As of June 30, 2007, it is reasonably possible
that the liabilities for our unrecognized tax benefits could decrease by an additional $1.1
million in the next twelve months, mainly due to the settlement of ongoing audits with
foreign tax authorities. We are subject to examination by the Internal Revenue Service and
most state tax jurisdictions for the years 2003 and forward and by major foreign tax
jurisdictions for the years 2001 and forward.SFAS 157 and 159The FASB has issued SFAS No. 157, Fair Value Measurements, which clarifies the definition of
fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurement. SFAS 157 does not require any new fair value measurements and
eliminates inconsistencies in guidance found in various prior accounting pronouncements. The
FASB has also issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 permits a company to choose to measure eligible financial assets and
liabilities at fair value that are not currently required to be measured at fair value.
Unrealized gains and losses for those items are reported in current earnings at each
subsequent reporting date. Both SFAS 157 and SFAS 159 will be effective on January 1, 2008.
We are currently assessing what impact SFAS 157 will have on our consolidated financial
statements and whether we will adopt SFAS 159.
 11




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##### Table of Contents



(2)
    
    REINSURANCEIn the normal course of business, our insurance companies cede a portion of their premium to
domestic and foreign reinsurers through treaty and facultative reinsurance agreements.
Although ceding for reinsurance purposes does not discharge the primary insurer from
liability to its policyholder, our insurance companies participate in such agreements in
order to limit their loss exposure, protect them against catastrophic loss and diversify
their business. The following table presents the effect of such reinsurance transactions on
our premium and loss and loss adjustment expense.
 Loss and lossWritten
    
    
    Earned
    
    
    adjustmentpremium
    
    
    premium
    
    
    expenseSix months ended June 30, 2007Primary business
    
    $
    1,011,630
    
    
    $
    978,161
    
    
    $
    570,661Reinsurance assumed
    
    
    253,072
    
    
    
    227,101
    
    
    
    152,399Reinsurance ceded
    
    
    (233,917
    )
    
    
    (213,276
    )
    
    
    (119,297
    )Net amounts
    
    $
    1,030,785
    
    
    $
    991,986
    
    
    $
    603,763Six months ended June 30, 2006Primary business
    
    $
    932,332
    
    
    $
    866,566
    
    
    $
    476,183Reinsurance assumed
    
    
    159,780
    
    
    
    135,596
    
    
    
    83,123Reinsurance ceded
    
    
    (215,579
    )
    
    
    (218,271
    )
    
    
    (106,214
    )Net amounts
    
    $
    876,533
    
    
    $
    783,891
    
    
    $
    453,092Three months ended June 30, 2007Primary business
    
    $
    553,128
    
    
    $
    492,791
    
    
    $
    283,210Reinsurance assumed
    
    
    112,473
    
    
    
    110,628
    
    
    
    89,402Reinsurance ceded
    
    
    (131,781
    )
    
    
    (109,033
    )
    
    
    (69,321
    )Net amounts
    
    $
    533,820
    
    
    $
    494,386
    
    
    $
    303,291Three months ended June 30, 2006Primary business
    
    $
    522,141
    
    
    $
    444,056
    
    
    $
    248,933Reinsurance assumed
    
    
    63,913
    
    
    
    64,716
    
    
    
    37,332Reinsurance ceded
    
    
    (102,572
    )
    
    
    (105,452
    )
    
    
    (55,240
    )Net amounts
    
    $
    483,482
    
    
    $
    403,320
    
    
    $
    231,025
 Ceding commissions netted with policy acquisition costs in the condensed consolidated
statements of earnings were $21.8 million in the first six months of 2007 and $22.5 million
in the first six months of 2006.
 12




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##### Table of Contents



The table below shows the components of reinsurance recoverables in our condensed
consolidated balance sheets.
 June 30,
    
    
    December 31,2007
    
    
    2006Commutation receivable
    
    $
    
    
    
    $
    100,000Reinsurance recoverable on paid losses
    
    
    109,567
    
    
    
    96,727Reinsurance recoverable on outstanding losses
    
    
    502,963
    
    
    
    529,562Reinsurance recoverable on incurred but not reported losses
    
    
    473,209
    
    
    
    458,528Reserve for uncollectible reinsurance
    
    
    (10,426
    )
    
    
    (14,883
    )Total reinsurance recoverables
    
    $
    1,075,313
    
    
    $
    1,169,934
 Our reserve for uncollectible reinsurance covers potential collectibility issues, including
disputed amounts and associated expenses. While we believe the reserve is adequate based on
information currently available, conditions may change or additional information might be
obtained that may require us to change the reserve in the future. We periodically review our
financial exposure to the reinsurance market and the level of our reserve and continue to
take actions in an attempt to mitigate our exposure to possible loss.We limit the liquidity exposure related to our reinsurance recoverables by holding funds,
letters of credit or other security, with the result that net balances due are significantly
less than the gross balances shown in our condensed consolidated balance sheets.
Additionally, our U.S. domiciled insurance companies require certain reinsurers (those not
authorized by the insurance companys state of domicile) to collateralize their reinsurance
obligations due to us. The table below shows the amounts of letters of credit and cash
deposits held by us as collateral, plus other credits available for potential offset.
 June 30,
    
    
    December 31,2007
    
    
    2006Payables to reinsurers
    
    $
    297,025
    
    
    $
    268,079Letters of credit
    
    
    255,806
    
    
    
    326,204Cash deposits
    
    
    59,345
    
    
    
    61,002Total credits
    
    $
    612,176
    
    
    $
    655,285
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##### Table of Contents



The tables below present the calculation of net reserves, net unearned premium and net
deferred policy acquisition costs.
 June 30,
    
    
    December 31,2007
    
    
    2006Loss and loss adjustment expense payable
    
    $
    3,202,988
    
    
    $
    3,097,051Reinsurance recoverable on outstanding losses
    
    
    (502,963
    )
    
    
    (529,562
    )Reinsurance recoverable on incurred but not reported losses
    
    
    (473,209
    )
    
    
    (458,528
    )Net reserves
    
    $
    2,226,816
    
    
    $
    2,108,961Unearned premium
    
    $
    983,232
    
    
    $
    920,350Ceded unearned premium
    
    
    (247,374
    )
    
    
    (226,125
    )Net unearned premium
    
    $
    735,858
    
    
    $
    694,225Deferred policy acquisition costs
    
    $
    197,375
    
    
    $
    182,410Deferred ceding commissions
    
    
    (71,496
    )
    
    
    (64,949
    )Net deferred policy acquisition costs
    
    $
    125,879
    
    
    $
    117,461
 (3)
    
    NOTES PAYABLEThe following table shows the detail of notes payable.
 June 30,
    
    
    December 31,2007
    
    
    20061.30% Convertible Notes
    
    $
    124,723
    
    
    $
    124,9772.00% Convertible Exchange Notes
    
    
    171,867
    
    
    
    172,174$300.0 million Revolving Loan Facility
    
    
    51,000
    
    
    
    Other
    
    
    
    
    
    
    11,736Total notes payable
    
    $
    347,590
    
    
    $
    308,887
 Our 1.30% Convertible Notes are due in 2023. We pay interest semi-annually on April 1 and
October 1. Each one thousand dollar principal amount of notes is convertible into 44.1501
shares of our common stock, which represents an initial conversion price of $22.65 per share.
The initial conversion price is subject to standard anti-dilution provisions designed to
maintain the value of the conversion option in the event we take certain actions with respect
to our common stock, such as stock splits, reverse stock splits, stock dividends and
extraordinary dividends, that affect all of the holders of our common stock equally and that
could have a dilutive effect on the value of the conversion rights of the holders of the
notes or that confer a benefit upon our current stockholders not otherwise available to the
Convertible Notes. Holders may surrender notes for conversion if, as of the last day of the
preceding calendar quarter, the closing sale price of our common stock for at least 20
consecutive trading days during the period of 30 consecutive trading days ending on the last
trading day of that quarter is more than 130% ($29.45 per share) of the conversion price per
share of our common stock. We must settle any conversions by paying cash for the principal
amount of the notes and issuing our common stock for the value of the conversion premium. We
can redeem the notes for cash at any time on or after April 1, 2009. Holders may require us
to repurchase the notes on April 1, 2009, 2014 or 2019, or if a change in control of HCC
Insurance Holdings, Inc.
 14




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##### Table of Contents



occurs on or before April 1, 2009. The repurchase price to settle any such put or change in
control provisions will equal the principal amount of the notes plus accrued and unpaid
interest and will be paid in cash.Our 2.00% Convertible Exchange Notes are due in 2021. We pay interest semi-annually on March
1 and September 1. Each one thousand dollar principal amount is convertible into 46.8823
shares of our common stock, which represents an initial conversion price of $21.33 per share.
The initial conversion price is subject to standard anti-dilution provisions designed to
maintain the value of the conversion option in the event we take certain actions with respect
to our common stock, such as stock splits, reverse stock splits, stock dividends and
extraordinary dividends, that affect all of the holders of our common stock equally and that
could have a dilutive effect on the value of the conversion rights of the holders of the
notes or that confer a benefit upon our current stockholders not otherwise available to the
Convertible Exchange Notes. Holders may surrender notes for conversion if, as of the last
day of the preceding calendar quarter, the closing sale price of our common stock for at
least 20 trading days in the period of 30 consecutive trading days ending on the last trading
day of that quarter is more than 120% ($25.60 per share) of the conversion price per share of
our common stock. We must settle any conversion by paying cash for the principal amount of
the notes and issuing our common stock for the value of the conversion premium. We can redeem
the notes for cash at any time on or after September 1, 2007. Holders may require us to
repurchase the notes on September 1, 2007, 2011 or 2016, or if a change in control of HCC
Insurance Holdings, Inc. occurs on or before September 1, 2007. The repurchase price to
settle any such put or change in control provisions will equal the principal amount of the
notes plus accrued and unpaid interest and will be paid in cash.In April 2007, we replaced our $300.0 million Revolving Loan Facility with a similar
facility, which allows us to borrow up to the maximum allowed by the facility on a revolving
basis until the facility expires on December 19, 2011. The new facility has more favorable
terms than our prior facility. At our option, subject to the lenders ability to obtain the
necessary commitments, the amount available under the facility may be increased to an
aggregate of $700.0 million.(4)
    
    EARNINGS PER SHAREThe following table details the numerator and denominator used in the earnings per share
calculations.
 Six months ended June 30,
    
    
    Three months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings
    
    $
    197,862
    
    
    $
    168,286
    
    
    $
    101,172
    
    
    $
    89,144Weighted average common shares
outstanding
    
    
    112,117
    
    
    
    111,117
    
    
    
    112,273
    
    
    
    111,218Dilutive effect of outstanding options
(determined using the treasury stock
method)
    
    
    1,045
    
    
    
    1,492
    
    
    
    1,069
    
    
    
    1,442Dilutive effect of convertible debt
(determined using the treasury stock
method)
    
    
    4,219
    
    
    
    4,276
    
    
    
    4,386
    
    
    
    4,200Weighted average common shares and
potential common shares outstanding
    
    
    117,381
    
    
    
    116,885
    
    
    
    117,728
    
    
    
    116,860Anti-dilutive stock options not included in
treasury stock method computation
    
    
    2,482
    
    
    
    2,733
    
    
    
    3,268
    
    
    
    2,914
 15




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##### Table of Contents



(5)
    
    SEGMENT AND GEOGRAPHIC INFORMATIONThe performance of each segment is evaluated by our management based on net earnings. Net
earnings is calculated after tax and after corporate expense allocations, interest expense on
debt incurred at the purchase date, and intercompany eliminations have been charged or
credited to our individual segments. All stock-based compensation is included in the
corporate segment since it is not included in managements evaluation of the other segments.
The following tables show information by business segment and geographic location.
Geographic location is determined by physical location of our offices and does not represent
the location of insureds or reinsureds from whom the business was generated. Effective April
1, 2006, we consolidated our London underwriting agency (agency segment) into HCC
International Insurance Company (insurance company segment).
 Insurance
    
    
    
    
    
    
    OtherCompany
    
    
    Agency
    
    
    Operations
    
    
    Corporate
    
    
    TotalSix months ended June 30, 2007Revenue:Domestic
    
    $
    916,844
    
    
    $
    29,999
    
    
    $
    38,226
    
    
    $
    997
    
    
    $
    986,066Foreign
    
    
    186,850
    
    
    
    18,556
    
    
    
    
    
    
    
    
    
    
    
    205,406Inter-segment
    
    
    
    
    
    
    37,650
    
    
    
    
    
    
    
    
    
    
    
    37,650Total segment revenue
    
    $
    1,103,694
    
    
    $
    86,205
    
    
    $
    38,226
    
    
    $
    997
    
    
    
    1,229,122Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,650
    )Consolidated total revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,191,472Net earnings (loss):Domestic
    
    $
    132,349
    
    
    $
    12,162
    
    
    $
    24,177
    
    
    $
    (9,566
    )
    
    $
    159,122Foreign
    
    
    36,037
    
    
    
    2,108
    
    
    
    
    
    
    
    
    
    
    
    38,145Total segment net earnings
(loss)
    
    $
    168,386
    
    
    $
    14,270
    
    
    $
    24,177
    
    
    $
    (9,566
    )
    
    
    197,267Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595Consolidated net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    197,862Other items:Net investment income
    
    $
    90,794
    
    
    $
    4,721
    
    
    $
    2,010
    
    
    $
    639
    
    
    $
    98,164Depreciation and amortization
    
    
    2,353
    
    
    
    3,945
    
    
    
    148
    
    
    
    1,415
    
    
    
    7,861Interest expense (benefit)
    
    
    836
    
    
    
    5,894
    
    
    
    5
    
    
    
    (2,336
    )
    
    
    4,399Capital expenditures
    
    
    2,457
    
    
    
    987
    
    
    
    316
    
    
    
    1,596
    
    
    
    5,356Income tax expense (benefit)
    
    $
    79,965
    
    
    $
    12,110
    
    
    $
    12,824
    
    
    $
    (5,733
    )
    
    $
    99,166Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    647Consolidated income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    99,813
 Share-Based Payment
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##### Table of Contents



Insurance
    
    
    
    
    
    
    OtherCompany
    
    
    Agency
    
    
    Operations
    
    
    Corporate
    
    
    TotalSix months ended June 30, 2006Revenue:Domestic
    
    $
    703,602
    
    
    $
    29,675
    
    
    $
    38,894
    
    
    $
    2,514
    
    
    $
    774,685Foreign
    
    
    164,999
    
    
    
    19,806
    
    
    
    
    
    
    
    
    
    
    
    184,805Inter-segment
    
    
    13
    
    
    
    37,169
    
    
    
    
    
    
    
    
    
    
    
    37,182Total segment revenue
    
    $
    868,614
    
    
    $
    86,650
    
    
    $
    38,894
    
    
    $
    2,514
    
    
    
    996,672Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,182
    )Consolidated total revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    959,490Net earnings (loss):Domestic
    
    $
    104,695
    
    
    $
    13,373
    
    
    $
    25,115
    
    
    $
    (6,044
    )
    
    $
    137,139Foreign
    
    
    24,798
    
    
    
    6,244
    
    
    
    
    
    
    
    
    
    
    
    31,042Total segment net earnings
(loss)
    
    $
    129,493
    
    
    $
    19,617
    
    
    $
    25,115
    
    
    $
    (6,044
    )
    
    
    168,181Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Consolidated net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    168,286Other items:Net investment income
    
    $
    65,381
    
    
    $
    4,576
    
    
    $
    1,878
    
    
    $
    919
    
    
    $
    72,754Depreciation and amortization
    
    
    2,271
    
    
    
    4,037
    
    
    
    254
    
    
    
    1,082
    
    
    
    7,644Interest expense (benefit)
    
    
    720
    
    
    
    5,868
    
    
    
    264
    
    
    
    (2,415
    )
    
    
    4,437Capital expenditures
    
    
    1,179
    
    
    
    1,189
    
    
    
    495
    
    
    
    3,267
    
    
    
    6,130Income tax expense (benefit)
    
    $
    60,457
    
    
    $
    14,077
    
    
    $
    12,459
    
    
    $
    (3,291
    )
    
    $
    83,702Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162Consolidated income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    83,864
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Insurance
    
    
    
    
    
    
    OtherCompany
    
    
    Agency
    
    
    Operations
    
    
    Corporate
    
    
    TotalThree months ended June 30, 2007Revenue:Domestic
    
    $
    458,084
    
    
    $
    15,042
    
    
    $
    19,950
    
    
    $
    600
    
    
    $
    493,676Foreign
    
    
    92,041
    
    
    
    8,533
    
    
    
    
    
    
    
    
    
    
    
    100,574Inter-segment
    
    
    
    
    
    
    23,664
    
    
    
    
    
    
    
    
    
    
    
    23,664Total segment revenue
    
    $
    550,125
    
    
    $
    47,239
    
    
    $
    19,950
    
    
    $
    600
    
    
    
    617,914Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,664
    )Consolidated total revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    594,250Net earnings (loss):Domestic
    
    $
    65,554
    
    
    $
    7,458
    
    
    $
    12,798
    
    
    $
    (3,481
    )
    
    $
    82,329Foreign
    
    
    18,656
    
    
    
    1,887
    
    
    
    
    
    
    
    
    
    
    
    20,543Total segment net earnings
(loss)
    
    $
    84,210
    
    
    $
    9,345
    
    
    $
    12,798
    
    
    $
    (3,481
    )
    
    
    102,872Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,700
    )Consolidated net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    101,172Other items:Net investment income
    
    $
    45,029
    
    
    $
    2,283
    
    
    $
    1,023
    
    
    $
    362
    
    
    $
    48,697Depreciation and amortization
    
    
    1,174
    
    
    
    2,199
    
    
    
    36
    
    
    
    716
    
    
    
    4,125Interest expense (benefits)
    
    
    372
    
    
    
    3,129
    
    
    
    (25
    )
    
    
    (2,380
    )
    
    
    1,096Capital expenditures
    
    
    1,429
    
    
    
    333
    
    
    
    316
    
    
    
    1,110
    
    
    
    3,188Income tax expense (benefit)
    
    $
    39,884
    
    
    $
    7,638
    
    
    $
    6,334
    
    
    $
    (3,196
    )
    
    $
    50,660Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (864
    )Consolidated income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    49,796
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Insurance
    
    
    
    
    
    
    OtherCompany
    
    
    Agency
    
    
    Operations
    
    
    Corporate
    
    
    TotalThree months ended June 30, 2006Revenue:Domestic
    
    $
    359,914
    
    
    $
    14,906
    
    
    $
    19,113
    
    
    $
    1,337
    
    
    $
    395,270Foreign
    
    
    88,150
    
    
    
    9,797
    
    
    
    
    
    
    
    
    
    
    
    97,947Inter-segment
    
    
    7
    
    
    
    19,211
    
    
    
    
    
    
    
    
    
    
    
    19,218Total segment revenue
    
    $
    448,071
    
    
    $
    43,914
    
    
    $
    19,113
    
    
    $
    1,337
    
    
    
    512,435Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,218
    )Consolidated total revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    493,217Net earnings (loss):Domestic
    
    $
    54,726
    
    
    $
    8,138
    
    
    $
    12,126
    
    
    $
    (2,930
    )
    
    $
    72,060Foreign
    
    
    14,710
    
    
    
    2,555
    
    
    
    
    
    
    
    
    
    
    
    17,265Total segment net earnings
(loss)
    
    $
    69,436
    
    
    $
    10,693
    
    
    $
    12,126
    
    
    $
    (2,930
    )
    
    
    89,325Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (181
    )Consolidated net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    89,144Other items:Net investment income
    
    $
    33,374
    
    
    $
    2,280
    
    
    $
    243
    
    
    $
    276
    
    
    $
    36,173Depreciation and amortization
    
    
    1,133
    
    
    
    2,024
    
    
    
    127
    
    
    
    535
    
    
    
    3,819Interest expense (benefit)
    
    
    345
    
    
    
    3,022
    
    
    
    150
    
    
    
    (1,234
    )
    
    
    2,283Capital expenditures
    
    
    718
    
    
    
    374
    
    
    
    57
    
    
    
    1,901
    
    
    
    3,050Income tax expense (benefit)

    
    $
32,361
    
    
    $
    7,409
    
    
    $
    6,318
    
    
    $
    (1,433
    )
    
    $
    44,655Inter-segment eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (136
    )Consolidated income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    44,519
  19




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##### Table of Contents



The following tables present selected revenue items by line of business.
 Six months ended June 30,
    
    
    Three months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Diversified financial products
    
    $
    385,851
    
    
    $
    348,319
    
    
    $
    193,337
    
    
    $
    179,207Group life, accident and health
    
    
    384,640
    
    
    
    256,023
    
    
    
    192,224
    
    
    
    128,262Aviation
    
    
    77,091
    
    
    
    72,231
    
    
    
    37,747
    
    
    
    39,034London market account
    
    
    64,499
    
    
    
    48,865
    
    
    
    30,603
    
    
    
    26,937Other specialty lines
    
    
    80,335
    
    
    
    58,536
    
    
    
    40,597
    
    
    
    29,896Discontinued lines
    
    
    (430
    )
    
    
    (83
    )
    
    
    (122
    )
    
    
    (16
    )Net earned premium
    
    $
    991,986
    
    
    $
    783,891
    
    
    $
    494,386
    
    
    $
    403,320Property and casualty
    
    $
    53,960
    
    
    $
    53,451
    
    
    $
    26,485
    
    
    $
    28,044Accident and health
    
    
    9,301
    
    
    
    12,096
    
    
    
    4,651
    
    
    
    5,834Fee and commission income
    
    $
    63,261
    
    
    $
    65,547
    
    
    $
    31,136
    
    
    $
    33,878
 (6)
    
    SUPPLEMENTAL INFORMATIONSupplemental cash flow information was as follows.
 Six months ended June 30,
    
    Three months ended June 30,2007
    
    2006
    
    2007
    
    2006Cash received from commutations
    
    $
    101,040
    
    
    $
    
    
    
    $
    
    
    
    $
    Income taxes paid
    
    
    82,492
    
    
    
    74,874
    
    
    
    72,107
    
    
    
    58,836Interest paid
    
    
    3,596
    
    
    
    3,488
    
    
    
    278
    
    
    
    553Comprehensive income
    
    
    152,020
    
    
    
    143,218
    
    
    
    60,722
    
    
    
    80,596
 (7)
    
    COMMITMENTS AND CONTINGENCIES
 2006 Stock Option Matter
 In 2006, based on a voluntary independent investigation by a Special Committee of the Board
of Directors of our past practices related to granting stock options, we determined that the
price on the actual measurement date for a number of our stock option grants from 1997
through 2005 and into 2006 did not correspond to the price on the stated grant date and that
certain option grants were retroactively priced. The investigation was conducted with the
help of a law firm that was not previously involved with our stock option plans and
procedures. The Committee completed the investigation on November 16, 2006. Based on the
Committees recommendations, the Board of Directors took specific actions as a result
thereof. The SEC commenced an inquiry upon notification by us of the initiation of our
investigation. We have provided the results of our internal review and independent
investigation to the SEC, and we have responded to requests from the SEC for documents and
additional information. In March 2007, the SEC issued a formal order directing a private
investigation. We intend to fully cooperate with the SEC. We are unable to predict the
outcome of or the future costs related to the ongoing inquiry.
 20




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##### Table of Contents



LitigationWe are party to lawsuits, arbitrations and other proceedings that arise in the normal course
of our business. Many such lawsuits, arbitrations and other proceedings involve claims under
policies that we underwrite as an insurer or reinsurer, the liabilities for which, we
believe, have been adequately included in our loss reserves. Also, from time to time, we are
a party to lawsuits, arbitrations and other proceedings that relate to disputes over
contractual relationships with third parties, or that involve alleged errors and omissions on
the part of our subsidiaries. We have provided accruals for these items to the extent we deem
the losses probable and reasonably estimable. Although the ultimate outcome of these matters
cannot be determined at this time, based on present information, the availability of
insurance coverage and advice received from our outside legal counsel, we believe the
resolution of these matters will not have a material adverse effect on our consolidated
financial position, results of operations or cash flows.In addition to the litigation discussed above, the following lawsuits related to our 2006 stock option matter have been filed:Civil Action No. 07-456 (Consolidated); Bacas and Halgren, derivatively on behalf of HCC
Insurance Holdings, Inc. v. Way et al.; In the United States District Court for the Southern
District of Texas, Houston Division. This action consolidates all pending derivative suits
into one action (Bacassuits). The Bacasaction was filed on February 1, 2007, and the
Halgrenaction was filed on February 28, 2007. We are named as a nominal defendant in this
putative derivative action. The action purports to assert claims on behalf of us against
several current and former officers and directors alleging improper manipulation of grant
dates for option grants from 1995 through 2006, and includes causes of action for an
accounting, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, abuse of
control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment and
rescission, as well as a claim under Sections 10(b), 14(a) and 20(a) of the Securities
Exchange Act. Plaintiffs seek on our behalf, damages, punitive damages, disgorgement,
restitution, rescission, an accounting, imposition of a constructive trust and changes in our
corporate governance and internal controls. Plaintiffs also seek to recover their attorneys
fees and costs from us for prosecuting the derivative claims. We have not yet responded to
the complaint; however, our motion to stay the proceedings is pending a decision by the
court.Civil Action No. 07-1084; Intermountain Ironworkers Trust Fund, derivatively and on behalf of
HCC Insurance Holdings, Inc. v. Way et al.; In the United States District Court for the
Southern District of Texas, Houston Division. The action was filed on March 30, 2007. We are
named as a nominal defendant in this putative derivative action. The complaint asserts
similar factual allegations and legal claims as asserted in the Bacassuits and seeks similar
relief and remedies as sought in that action. On April 11, 2007, the Intermountain
Ironworkers Trust Fund filed a motion seeking to consolidate this action with the Bacas
action. On May 9, 2007, after the action was consolidated with Bacas,this claimant
voluntarily withdrew from the suit.Civil Action No. 07-0801; In re HCC Insurance Holdings, Inc. Securities Litigation;In the
United States District Court for the Southern District of Texas, Houston Division (formerly
referred to as Bristol County Retirement System, individually and on behalf of all others
similarly situated v. HCC Insurance Holdings, Inc. et al.). This action was filed on March
8, 2007. We are named as a defendant in this putative class action along with certain current
and former officers and directors. In their amended complaint, plaintiffs seek to represent
a class of persons who purchased or otherwise acquired our securities between May 3, 2005 and
November 17, 2006, inclusive. The amended complaint purports to assert claims arising out of
improper manipulation of option grant dates, alleging violation of Sections 20(a) and 10(b)
of the Securities Exchange Act, as well as Rule 10b-5 promulgated thereunder. Plaintiff
seeks recovery of compensatory damages for the putative class and costs and expenses. Our
response to the amended complaint is due September 7, 2007.
 21




---



##### Table of Contents



IndemnificationsIn conjunction with the sales of business assets and subsidiaries, we have provided
indemnifications to the buyers. Certain indemnifications cover typical representations and
warranties related to our responsibilities to perform under the sales contracts. Other
indemnifications agree to reimburse the buyers for taxes or ERISA-related amounts, if any,
assessed after the sale date but related to pre-sale activities. We cannot quantify the
maximum potential exposure covered by all of our indemnifications because the
indemnifications cover a variety of matters, operations and scenarios. Certain of these
indemnifications have no time limit. For those with a time limit, the longest indemnification
expires on December 31, 2009.We accrue a loss related to our indemnifications when a valid claim is made by a buyer and we
believe we have potential exposure. We currently have several claims under indemnifications
that cover certain net losses alleged to have been incurred in periods prior to our sale of
certain subsidiaries or otherwise alleged to be covered under indemnification agreements
related to such sales. As of June 30, 2007, we have recorded a liability of $16.6 million and
have provided $5.2 million of letters of credit to cover our obligations or anticipated
payments under these indemnifications.Pursuant to our by-laws, Delaware Corporate law and certain contractual agreements, we are
required to advance attorneys fees and other expenses and may be required to indemnify our
current and former directors and officers for liabilities arising from any action, suit or
proceeding brought because the individual was acting as an officer or director of our
company. Under certain limited circumstances, the individual may be required to reimburse us
for any advances or indemnification payments made by us. In addition, we maintain directors
and officers liability insurance, which may cover certain of these costs. We expense
payments as advanced and recognize offsets if cash reimbursement is expected or received. In
2006 and 2007, we paid $2.1 million of attorneys fees incurred by current and former
directors and officers who claimed the right to indemnity in conjunction with our 2006 stock
option matter. It is not possible to determine the maximum potential impact on our
consolidated net earnings, since our by-laws, Delaware law and our contractual agreements do
not limit any such advances or indemnification payments.
 22




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
  Overview
       Effective dateCompany
    
    Segment
    
    acquiredHealth Products Division of Allianz
Life Insurance Company
    
    Insurance Company
    
    October 2, 2006G.B. Kenrick & Associates, Inc.
    
    Agency
    
    July 1, 2006Novia Underwriters, Inc.
    
    Agency
    
    June 30, 2006
  23




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##### Table of Contents



Results of Operations
   Six months ended June 30,
    
    Three months ended June 30,2007
    
    2006
    
    2007
    
    2006Net earned premium
    
    
    83.3
    %
    
    
    81.7
    %
    
    
    83.2
    %
    
    
    81.8
    %Fee and commission income
    
    
    5.3
    
    
    
    6.8
    
    
    
    5.2
    
    
    
    6.9Net investment income
    
    
    8.2
    
    
    
    7.6
    
    
    
    8.2
    
    
    
    7.3Net realized investment loss
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.1
    )Other operating income
    
    
    3.3
    
    
    
    4.1
    
    
    
    3.4
    
    
    
    4.1Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Loss and loss adjustment expense, net
    
    
    50.7
    
    
    
    47.2
    
    
    
    51.0
    
    
    
    46.8Policy acquisition costs, net
    
    
    14.6
    
    
    
    15.9
    
    
    
    14.4
    
    
    
    15.5Other operating expense
    
    
    9.3
    
    
    
    10.1
    
    
    
    9.0
    
    
    
    10.1Interest expense
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.2
    
    
    
    0.5Earnings before income tax expense
    
    
    25.0
    
    
    
    26.3
    
    
    
    25.4
    
    
    
    27.1Income tax expense
    
    
    8.4
    
    
    
    8.8
    
    
    
    8.4
    
    
    
    9.0Net earnings
    
    
    16.6
    %
    
    
    17.5
    %
    
    
    17.0
    %
    
    
    18.1
    %Total revenue increased 24% to $1.2 billion in 2007, driven by significant growth in net
earned premium and investment income. Approximately 60% of the increase in revenue in 2007
was due to the businesses acquired in 2006.Gross written premium, net written premium and net earned premium are detailed below.
Premium increased from organic growth in certain products and from acquisitions. Increased
retentions also contributed to the growth in net written and earned premiums. See the
Insurance Company Segment section below for further discussion of the relationship and
changes in premium revenue.Six months ended June 30,
    
    Three months ended June 30,2007
    
    2006
    
    2007
    
    2006Gross written premium
    
    $
    1,264,702
    
    
    $
    1,092,112
    
    
    $
    665,601
    
    
    $
    586,054Net written premium
    
    
    1,030,785
    
    
    
    876,533
    
    
    
    533,820
    
    
    
    483,482Net earned premium
    
    
    991,986
    
    
    
    783,891
    
    
    
    494,386
    
    
    
    403,320Fee and commission income declined slightly in 2007. The table below shows the source of our
fee and commission income.Six months ended June 30,
    
    Three months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Agency
    
    $
    45,133
    
    
    $
    45,931
    
    
    $
    21,777
    
    
    $
    22,870Insurance companies
    
    
    18,128
    
    
    
    19,616
    
    
    
    9,359
    
    
    
    11,008Fee and commission income
    
    $
    63,261
    
    
    $
    65,547
    
    
    $
    31,136
    
    
    $
    33,878
 24




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##### Table of Contents



Six months ended June 30,
    
    
    Three months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Fixed income securities
    
    $
    70,396
    
    
    $
    51,491
    
    
    $
    36,389
    
    
    $
    27,186Short-term investments
    
    
    18,022
    
    
    
    14,025
    
    
    
    8,349
    
    
    
    6,485Other investments
    
    
    12,569
    
    
    
    10,252
    
    
    
    5,049
    
    
    
    3,840Total investment income
    
    
    100,987
    
    
    
    75,768
    
    
    
    49,787
    
    
    
    37,511Investment expense
    
    
    (2,823
    )
    
    
    (3,014
    )
    
    
    (1,090
    )
    
    
    (1,338
    )Net investment income
    
    $
    98,164
    
    
    $
    72,754
    
    
    $
    48,697
    
    
    $
    36,173
     Six months ended June 30,
    
    Three months ended June 30,2007
    
    2006
    
    2007
    
    2006Average yield
    
    
    4.5
    %
    
    
    4.1
    %
    
    
    4.3
    %
    
    
    4.1
    %Average tax equivalent yield
    
    
    5.3
    %
    
    
    5.0
    %
    
    
    5.1
    %
    
    
    5.0
    %Weighted average maturity
    
    
    7.0 years
    
    
    

    8.0 yearsWeighted average duration
    
    

    4.9 years
    
    
    

    4.9 years
 25




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##### Table of Contents



Six months ended June 30,
    
    
    Three months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Strategic investments
    
    $
    23,237
    
    
    $
    12,749
    
    
    $
    11,578
    
    
    $
    544Trading securities
    
    
    8,274
    
    
    
    21,854
    
    
    
    6,093
    
    
    
    17,168Financial instruments
    
    
    2,693
    
    
    
    1,992
    
    
    
    1,506
    
    
    
    1,169Other
    
    
    4,481
    
    
    
    2,200
    
    
    
    923
    
    
    
    1,164Other operating income
    
    $
    38,685
    
    
    $
    38,795
    
    
    $
    20,100
    
    
    $
    20,045
     Segments
 Insurance Company Segment
  Premium
  26




---



##### Table of Contents



Gross
    
    
    Net
    
    
    NWP as
    
    
    Netwritten
    
    
    written
    
    
    % of
    
    
    earnedpremium
    
    
    premium
    
    
    GWP
    
    
    premiumSix
months ended June 30, 2007Diversified financial products
    
    $
    472,402
    
    
    $
    379,715
    
    
    
    80
    %
    
    $
    385,851Group life, accident and health
    
    
    405,174
    
    
    
    383,948
    
    
    
    95
    
    
    
    384,640Aviation
    
    
    106,093
    
    
    
    77,843
    
    
    
    73
    
    
    
    77,091London market account
    
    
    149,222
    
    
    
    93,969
    
    
    
    63
    
    
    
    64,499Other specialty lines
    
    
    132,276
    
    
    
    95,741
    
    
    
    72
    
    
    
    80,335Discontinued lines
    
    
    (465
    )
    
    
    (431
    )
    
    nm
    

    
    
    (430
    )Totals
    
    $
    1,264,702
    
    
    $
    1,030,785
    
    
    
    82
    %
    
    $
    991,986Six months ended June 30, 2006Diversified financial products
    
    $
    450,733
    
    
    $
    373,765
    
    
    
    83
    %
    
    $
    348,319Group life, accident and health
    
    
    272,758
    
    
    
    258,888
    
    
    
    95
    
    
    
    256,023Aviation
    
    
    115,096
    
    
    
    90,364
    
    
    
    79
    
    
    
    72,231London market account
    
    
    158,165
    
    
    
    90,517
    
    
    
    57
    
    
    
    48,865Other specialty lines
    
    
    95,123
    
    
    
    63,093
    
    
    
    66
    
    
    
    58,536Discontinued lines
    
    
    237
    
    
    
    (94
    )
    
    nm
    


    
    
    (83
    )Totals
    
    $
    1,092,112
    
    
    $
    876,533
    
    
    
    80
    %
    
    $
    783,891Three months ended June 30, 2007Diversified financial products
    
    $
    260,149
    
    
    $
    207,923
    
    
    
    80
    
    
    $
    193,337Group life, accident and health
    
    
    202,268
    
    
    
    191,522
    
    
    
    95
    
    
    
    192,224Aviation
    
    
    54,430
    
    
    
    38,240
    
    
    
    70
    
    
    
    37,747London market account
    
    
    81,087
    
    
    
    48,837
    
    
    
    60
    
    
    
    30,603Other specialty lines
    
    
    67,781
    
    
    
    47,420
    
    
    
    70
    
    
    
    40,597Discontinued lines
    
    
    (114
    )
    
    
    (122
    )
    
    nm
    

    
    
    (122
    )Totals
    
    $
    665,601
    
    
    $
    533,820
    
    
    
    80
    %
    
    $
    494,386Three months ended June 30, 2006Diversified financial products
    
    $
    253,487
    
    
    $
    212,120
    
    
    
    84
    %
    
    $
    179,207Group life, accident and health
    
    
    138,604
    
    
    
    129,445
    
    
    
    93
    
    
    
    128,262Aviation
    
    
    58,862
    
    
    
    54,939
    
    
    
    93
    
    
    
    39,034London market account
    
    
    83,658
    
    
    
    51,794
    
    
    
    62
    
    
    
    26,937Other specialty lines
    
    
    51,234
    
    
    
    35,193
    
    
    
    69
    
    
    
    29,896Discontinued lines
    
    
    209
    
    
    
    (9
    )
    
    nm
    

    
    
    (16
    )Totals
    
    $
    586,054
    
    
    $
    483,482
    
    
    
    82
    %
    
    $
    403,320
 
 nm  Not meaningful comparison 27




---



##### Table of Contents




    
    Diversified financial products  The growth in our gross written
premium in 2007 resulted principally from organic growth in our surety and credit
businesses, where pricing is stable and competition is reasonable. Gross written
premium declined slightly in our directors and officers liability business, as we
chose to write less business in foreign markets due to strong pricing competition.
Premium volume in our other major products was stable, although pricing for these
products is down slightly. The growth in net written and net earned premium was
due to increased gross written premium.
    
    Group life, accident and health  Gross written, net written and net
earned premium of our medical stop-loss product increased $129.9 million in 2007
from the acquisition of the Health Products Division. We retain all of our medical
stop-loss business because the business is non-volatile and has very little
catastrophe exposure. Profit margins remain at acceptable levels despite
competition from the fully insured market.
    
    Aviation Our domestic aviation business is stable, while gross
written premium of our international business has declined. We have exercised
underwriting discipline and written less international business due to competition
and the resultant pressure on pricing. However, margins on decreased premium
volume are still acceptable. Net written premium increased $11.3 million in the
second quarter of 2006 due to a portfolio transfer of in-force premium to a new
reinsurance program with a higher retention and decreased $2.5 million in the
second quarter of 2007 due to a portfolio transfer with a lower retention.
    
    London market account  Gross written premium decreased slightly in
2007, as we wrote less energy and property business in a more competitive market.
Premium rates are down. We reduced our aggregate property exposure in Florida and
other hurricane-exposed onshore areas in 2006 and we are maintaining the reduced
exposure in 2007. Additionally, due to the tightening of policy terms and
conditions, our energy catastrophe exposure was significantly reduced in 2006, even
though our business increased, and continues as such in 2007. Net written premium
and net earned premium increased due to higher retentions.
    
    Other specialty lines  We experienced growth in our other specialty
lines of business from increased writings in several products and from an
acquisition. Net written premium and net earned premium increased due to higher
gross written premium and retentions. Rates in this line have been relatively
stable.
 Losses and Loss Adjustment Expenses
  28




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##### Table of Contents



Six months ended June 30,
    
    
    Three months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net
    
    
    Net
    
    
    Net
    
    
    Net
    
    
    Net
    
    
    Net
    
    
    Net
    
    
    Netearned
    
    
    loss
    
    
    earned
    
    
    loss
    
    
    earned
    
    
    loss
    
    
    earned
    
    
    losspremium
    
    
    ratio
    
    
    premium
    
    
    ratio
    
    
    premium
    
    
    ratio
    
    
    premium
    
    
    ratioDiversified
financial products
    
    $
    385,851
    
    
    
    43.0
    %
    
    $
    348,319
    
    
    
    50.4
    %
    
    $
    193,337
    
    
    
    40.4
    %
    
    $
    179,207
    
    
    
    50.0
    %Group life, accident
and health
    
    
    384,640
    
    
    
    76.9
    
    
    
    256,023
    
    
    
    70.1
    
    
    
    192,224
    
    
    
    78.3
    
    
    
    128,262
    
    
    
    70.5Aviation
    
    
    77,091
    
    
    
    54.5
    
    
    
    72,231
    
    
    
    56.4
    
    
    
    37,747
    
    
    
    59.1
    
    
    
    39,034
    
    
    
    58.1London market account
    
    
    64,499
    
    
    
    63.7
    
    
    
    48,865
    
    
    
    45.5
    
    
    
    30,603
    
    
    
    70.8
    
    
    
    26,937
    
    
    
    43.4Other specialty lines
    
    
    80,335
    
    
    
    69.4
    
    
    
    58,536
    
    
    
    59.6
    
    
    
    40,597
    
    
    
    69.0
    
    
    
    29,896
    
    
    
    55.5Discontinued lines
    
    
    (430
    )
    
    nm

    

    
    
    (83
    )
    
    nm

    

    
    
    (122
    )
    
    nm

    

    
    
    (16
    )
    
    nmTotals
    
    $
    991,986
    
    
    
    60.9
    %
    
    $
    783,891
    
    
    
    57.8
    %
    
    $
    494,386
    
    
    
    61.3
    %
    
    $
    403,320
    
    
    
    57.3
    %Expense ratio
    
    
    
    
    
    
    23.1
    
    
    
    
    
    
    
    26.4
    
    
    
    
    
    
    
    22.6
    
    
    
    
    
    
    
    25.7Combined ratio
    
    
    
    
    
    
    84.0
    %
    
    
    
    
    
    
    84.2
    %
    
    
    
    
    
    
    83.9
    %
    
    
    
    
    
    
    83.0
    %
 
 nm  Not meaningful comparison  
    
    Diversified financial products  The decrease in the loss ratio was due to better
underwriting results for certain business written in 2006 and earned in 2007,
compared to business written in 2005 and earned in 2006, and positive loss
development on our international professional indemnity and D&O lines of business.
Additionally, our surety and credit businesses, which have lower loss ratios than
other businesses in this line, are growing and reducing the overall loss ratio.
    
    Group life, accident and health  The net loss ratio was higher on business
acquired in the Health Products Division acquisition. Over time, as the acquired
business is re-underwritten, we expect its loss ratio will decline to the level of
our existing medical stop-loss business. The net loss ratio was also higher due to
higher than expected claims and more of our business being written on a net of
commission basis. While the net business increased our loss ratio (since the
denominator is lower), it reduced our expense ratio such that our combined ratio and
margin for this business remained stable.
    
    London market account  The higher loss ratio was principally due to negative
development in our London accident and health and energy lines of
business due to higher than expected claims.
    
    Other specialty lines  The increase relates to losses in our marine and UK
liability lines of business.
  Policy Acquisition Costs
  29




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##### Table of Contents



Agency Segment
  Other Operations Segment
  Liquidity and Capital Resources
    Six months ended June 30,
    
    
    Three months ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net earnings
    
    $
    197,862
    
    
    $
    168,286
    
    
    $
    101,172
    
    
    $
    89,144Change in premium, claims and other
receivables, net of reinsurance, other
payables and restricted cash
    
    
    (12,932
    )
    
    
    (50,226
    )
    
    
    (5,086
    )
    
    
    (37,213
    )Change in unearned premium, net
    
    
    41,633
    
    
    
    104,214
    
    
    
    42,365
    
    
    
    86,062Change in loss and loss adjustment
expense payable, net of reinsurance
recoverables
    
    
    200,558
    
    
    
    113,416
    
    
    
    72,846
    
    
    
    77,009Change in trading portfolio
    
    
    4,865
    
    
    
    (84,491
    )
    
    
    (6,093
    )
    
    
    (36,497
    )Other, net
    
    
    (31,686
    )
    
    
    8,742
    
    
    
    (35,215
    )
    
    
    3,345Cash provided by operating activities
    
    $
    400,300
    
    
    $
    259,941
    
    
    $
    169,989
    
    
    $
    181,850
 30




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##### Table of Contents



2006 Stock Option Matter
  31




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##### Table of Contents



Recent Accounting Changes
 FIN 48
 Accounting for Uncertainty in Income Taxes
   32




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##### Table of Contents



SFAS 157 and 159
 Fair Value Measurements The Fair Value Option for Financial Assets and Financial
Liabilities
 Critical Accounting Policies
 Accounting for Uncertainty in Income Taxes,
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
      33




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##### Table of Contents



Part II  Other Information
 
 Item 1. Legal Proceedings
    Civil Action No. 07-456 (Consolidated); Bacas and Halgren, derivatively on behalf of HCC
Insurance Holdings, Inc. v. Way et al Bacas Bacas Halgren
 Civil Action No. 07-1084; Intermountain Ironworkers Trust Fund, derivatively and on behalf of
HCC Insurance Holdings, Inc. v. Way et al. Bacas Bacas Bacas,
 Civil Action No. 07-0801; In re HCC Insurance Holdings, Inc. Securities Litigation; Bristol County Retirement System, individually and on behalf of all others
similarly situated v. HCC Insurance Holdings, Inc. et al
 34




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##### Table of Contents



Item 1A. Risk Factors
  
 Item 4. Submission of Matters to a Vote of Security Holders
  a.
    
    Election of DirectorsThe following persons were elected to serve on the Board of Directors until the 2008
Annual Meeting of Shareholders or until their successors have been duly elected and
qualified. The Directors received the votes next to their respective names.
 Name
    
    For
    
    Votes WithheldFrank J. Bramanti
    
    
    96,958,470
    
    
    
    5,649,457Patrick B. Collins
    
    
    91,034,717
    
    
    
    11,573,210James R. Crane
    
    
    89,854,255
    
    
    
    12,753,672J. Robert Dickerson
    
    
    88,548,478
    
    
    
    14,059,449Walter M. Duer
    
    
    91,901,636
    
    
    
    10,706,291Edward H. Ellis, Jr.
    
    
    92,332,256
    
    
    
    10,275,671James C. Flagg, Ph.D.
    
    
    90,348,720
    
    
    
    12,259,207Allan W. Fulkerson
    
    
    97,836,381
    
    
    
    4,771,546John N. Molbeck, Jr.
    
    
    95,930,280
    
    
    
    6,677,647Michael A. F. Roberts
    
    
    88,759,383
    
    
    
    13,848,544
 b.
    
    Adoption of the 2007 Incentive Compensation PlanShareholders were requested to approve the adoption of the 2007 Incentive Compensation
Plan. The Plan was approved by the shareholders, who voted as follows: 87,848,840
shares in favor, 3,892,967 against, 325,635 abstained, and 10,540,486 broker non-votes.c.
    
    Ratification of PricewaterhouseCoopers LLPShareholders were requested to ratify the appointment of PricewaterhouseCoopers LLP, as
our independent registered public accounting firm for the year ended December 31, 2007.
Such appointment was approved by the shareholders, who voted as follows:
98,525,041shares in favor, 4,063,875 against, and 19,009 abstained.d.
    
    Vote on Shareholder ProposalShareholders were requested to vote on a shareholder proposal requesting that management
implement equal employment opportunity policies regarding sexual orientation. The
proposal was rejected by the shareholders, who voted as follows: 43,491,825 shares in
favor, 39,775,764 against, 8,799,851 abstained, and 10,540,488 broker non-votes. For
the proposal to pass under Delaware law, the shares in favor must exceed 50% of the
total shares present at the meeting, in person or by proxy, and entitled to vote (102,607,928, in this case).
 35




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##### Table of Contents



Item 6. Exhibits
  31.1
    
    Certification by Chief Executive Officer31.2
    
    Certification by Chief Financial Officer32.1
    
    Certification with Respect to Quarterly Report
 
 SIGNATURES
  HCC Insurance Holdings, Inc.(Registrant)August 9,
2007
    
    
    
    /s/ Frank J. Bramanti(Date)
    
    
    
    Frank J. Bramanti, Chief Executive OfficerAugust 9,
2007
    
    
    
    /s/ Edward H. Ellis, Jr.(Date)
    
    
    
    Edward H. Ellis, Jr., Executive Vice Presidentand Chief Financial Officer
 36




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##### Table of Contents



Index to Exhibits
 31.1
    
    Certification by Chief Executive Officer31.2
    
    Certification by Chief Financial Officer32.1
    
    Certification with Respect to Quarterly Report