Edgar Filing: HCC INSURANCE HOLDINGS INC/DE/

10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2014

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 (Zip Code)
(Address of principal executive offices)

(713) 690-7300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:		Name of each exchange on which registered:
Common Stock, $1.00 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.

Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ

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). þ Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 ¨ (Do not check if a smaller reporting company)		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

The aggregate market value on June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter) of the voting stock held by non-affiliates of the registrant was approximately $4.8 billion. For purposes of the determination of the above-stated amount, only Directors and executive officers are presumed to be affiliates, but neither the registrant nor any such person concede that they are affiliates of the registrant.

The number of shares outstanding of the registrant’s Common Stock, $1.00 par value, at February 13, 2015 was 96.3 million.

DOCUMENTS INCORPORATED BY REFERENCE:

Information called for in Part III of this Form 10-K is incorporated by reference to the registrant’s definitive Proxy Statement to be filed within 120 days of the close of the registrant’s fiscal year in connection with the registrant’s annual meeting of shareholders.

HCC INSURANCE HOLDINGS, INC.

TABLE OF CONTENTS

PART I.


		Page

ITEM 1.	Business	5
ITEM 1A.	Risk Factors	20
ITEM 1B.	Unresolved Staff Comments	28
ITEM 2.	Properties	29
ITEM 3.	Legal Proceedings	29
ITEM 4.	Mine Safety Disclosures	29

PART II.

ITEM 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
ITEM 6.	Selected Financial Data	33
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	64
ITEM 8.	Financial Statements and Supplementary Data	66
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	66
ITEM 9A.	Controls and Procedures	66
ITEM 9B.	Other Information	67

PART III.

ITEM 10.	Directors, Executive Officers and Corporate Governance	68
ITEM 11.	Executive Compensation	68
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	68
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	69
ITEM 14.	Principal Accountant Fees and Services	69
PART IV.

ITEM 15.	Exhibits and Financial Statement Schedules	69
SIGNATURES

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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,

•

volatility in crop prices and crop yields,

•

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 economic or credit market downturns, including any potential ratings downgrade or impairment of the debt securities of sovereign issuers,

•

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 of climate change on the risks we insure,

•

potential risk with agents and 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, which may reduce the value of our investment portfolio, 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.

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.

As used in this Report, unless otherwise required by the context, the terms “we,” “us” and “our” refer to HCC Insurance Holdings, Inc. and its consolidated subsidiaries and the term “HCC” refers only to HCC Insurance Holdings, Inc. All trade names or trademarks appearing in this Report are the property of their respective holders.

PART I

Item 1. Business

Business Overview

HCC Insurance Holdings, Inc. is a leading specialty insurer with offices in the United States, the United Kingdom, Spain and Ireland. We underwrite over 100 classes of specialty insurance products in approximately 180 countries through five insurance underwriting segments. Our insurance underwriting segments are U.S. Property & Casualty, Professional Liability, Accident & Health, U.S. Surety & Credit and International. We market our insurance products through a network of independent agents and brokers, through managing general agents owned by the company, and directly to consumers. In addition, we assume insurance written by other insurance companies. Our principal executive office is located in Houston, Texas.

Our diverse portfolio of businesses is largely non-correlated and designed to generate consistent underwriting results regardless of market cycles. As a result, we have achieved an average combined ratio of 85.0% for the period 2010 – 2014, with less volatility over that period than our specialty peers. These profitable underwriting results have driven a 30% increase in shareholders’ equity over the past five years, while during the same period we paid $361.9 million in dividends to our shareholders and repurchased $854.3 million of our common stock. We generated 8.9% compounded growth in book value per share over that same period. We have been able to grow our gross written premium by 17% during the past five years as well, through a combination of organic growth, acquisitions and new underwriting teams.

We maintain financial strength ratings that are among the highest within the property and casualty insurance industry: “AA (Very Strong)” from Standard & Poor’s Financial Services LLC, “A+ (Superior)” from A.M. Best Company, Inc., “AA (Very Strong)” from Fitch Ratings, and “A1 (Good Security)” from Moody’s Investors Service, Inc. for our major domestic and international insurance companies. These ratings provide a competitive advantage in many of our lines of business.

Our Strategy

Our organization is focused on generating consistent, industry-leading combined ratios. By focusing on underwriting profitability, we are able to accomplish our primary objectives of maximizing net earnings and growing book value per share. We are aligned with this strategy through our culture and our performance incentives.

Key elements of our strategy are discussed below:

Diverse, Non-correlated Specialty Lines of Business

We concentrate our insurance writings in diverse specialty lines of business in which we believe we can achieve meaningful underwriting profits and, collectively, generate combined ratios consistently in the mid-80s. The diversity of our product lines results in our operating within five insurance underwriting segments that are largely non-correlated, meaning that insurance or economic cycles impacting one segment may not impact other segments or impact them to a lesser degree. We intentionally built the company around these non-correlated products as we believe this approach increases our chances of generating consistent underwriting results over time and through market cycles.

Our product diversity also provides operational flexibility, which permits us to shift the focus of our insurance underwriting activities among our various lines of business, emphasizing more profitable lines of business during periods of increased premium rates and de-emphasizing less profitable lines during periods of increased competition. We accomplish these shifts by increasing or decreasing the amount of gross premium written or by adjusting the amount of business reinsured.

Experienced Underwriting Professionals Aligned with Our Strategy

Integral to our strategy is attracting, developing and retaining professionals with the requisite skills and knowledge to underwrite our diverse specialty product lines. These professionals include experienced underwriters in our chosen specialty lines with the authority to make decisions and quickly respond to our clients’ unique and rapidly changing needs. Our senior underwriters generally have more than 15 years of experience in their specialty line of business.

Our underwriters are aligned with our strategy and underwriting culture. This alignment is reinforced by our compensation practices, which are designed to reward disciplined underwriting and the generation of underwriting profit above all other measures. As a result, our underwriters have the expertise, mind-set and incentives to utilize the operational flexibility afforded by our diverse specialty lines of business.

Low Expense Ratio

Core to our overall underwriting performance is the maintenance of a low expense ratio. We accomplish this through disciplined expense management and a flat management structure. We also have a relatively small operational footprint despite the international breadth of our product offerings. We have resisted the tendency for the proliferation of branch offices in the United States and have centered our international business in London and Barcelona where we believe we have access to the lines of specialty international business that we desire.

New Lines of Business and Growth

We have historically accomplished significant growth through the successful acquisition and integration of insurance companies and underwriting agencies, making 50 acquisitions since becoming a public company in 1992. In recent years, we have actively recruited and hired new underwriting teams that we believe present opportunities for future profit and expansion of our business. We expect to continue to acquire complementary specialty insurance businesses and underwriting teams, while organically growing our current businesses. In considering new teams and potential acquisitions, we remain disciplined in pursuing those that meet our requirements for return on risk-adjusted capital and cultural fit. We believe our infrastructure, ratings and financial strength provide a solid operating platform for our future growth.

Effective January 1, 2015, we entered the crop insurance business through the acquisition of all of the capital stock of Producers Ag Insurance Group, Inc. (ProAg) from CUNA Mutual Group for $104.5 million cash. ProAg writes multi-peril crop, crop hail, named peril and livestock insurance and is currently the 7^th largest multi-peril crop company in the U.S. with over $550.0 million of gross premium in 2014. Crop insurance is a non-correlated line of business we strategically targeted to add to our diversified portfolio of specialty insurance businesses. With an experienced management team and quality infrastructure, we expect ProAg to grow profitably over time and deliver results consistent with our return goals once fully integrated. ProAg’s operations will be included in our consolidated results of operations, financial position and cash flows beginning in 2015.

Effective Use of Reinsurance

Our financial strength and the profitability of our products provide significant flexibility with respect to the amount and types of reinsurance we buy. Our bias is towards retaining our business, which allows us to be flexible in our reinsurance purchases. Accordingly, the amount of reinsurance we purchase varies depending on the particular risks inherent in the policies underwritten; the pricing, coverage and terms of the reinsurance; and the competitive conditions within the relevant lines of business. Historically, we have purchased more reinsurance on new lines of business where we have less experience. As we gain experience with these new lines of business, we generally retain more of the business. When we decide to retain more underwriting risk in a particular line of business, we do so to retain more of the expected profitability of the business.

Disciplined Investment Portfolio

Our investment objective is to protect and conservatively grow the cash flows and profits generated by our insurance underwriting segments. Our investment philosophy is guided by a focus on maximizing after-tax net investment income while generating long-term growth in shareholder value. Our investments include highly-rated fixed maturity securities and equity securities with attractive dividend yields.

Segment and Geographic Information

For financial information concerning our operations by segment and geographic data, see “Segment Operations” included in Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations (Management’s Discussion and Analysis) and Note 12, “Segments” to the Consolidated Financial Statements.

Insurance Underwriting Operations

Our insurance operations are managed within our insurance underwriting segments. The following provides an overview of each of these segments.

U.S. Property & Casualty Segment

Our U.S. Property & Casualty segment includes specialty lines of insurance such as aviation, primary and excess casualty, small account errors and omissions liability (E&O), employment practices liability (EPLI), disability, contingency, public risk, technical and construction property, title and mortgage reinsurance, residual value, and brown water marine written in the U.S. The majority of the business is primary coverage, and claims are reported and settled on a short to medium-term basis. The aviation, contingency, public risk, technical and construction property, and brown water marine lines are exposed to natural peril and other catastrophic occurrences. Business is produced primarily from wholesale and specialty retail brokers.

Key lines of business within this segment are described below:

Aviation

Aviation insurance has been a core business for us since 1974. In the United States, we are an industry leader, providing customized coverages for both private and commercial aircraft operators, excluding major U.S. airlines. Private coverage, which is written on a direct to consumer basis, covers planes ranging in size from small single-engine aircraft to executive jets. With our commercial and special risk products, we provide coverage for risks such as air ambulances, vintage war birds and rotor wing aircraft. We also write aviation business internationally, including complex accounts such as national armed forces, law enforcement agencies and regional airlines. We are the lead underwriter on numerous policies in our international aviation portfolio.

Liability

Our liability business primarily consists of our casualty and small account E&O business. We began the casualty business in 2011 with two new underwriting teams focused on writing primary general liability and excess casualty coverages. The primary casualty unit typically writes policies with low limits ($5.0 million or less) on a surplus lines basis through wholesale brokers. The excess casualty unit also typically operates on a surplus lines basis through wholesale brokers, but these policies typically have low limits to medium limits (up to $10.0 million). The attachment points for excess policies are typically below $25.0 million. Due to the underlying nature of the claims associated with casualty business, the final settlement value of claims may not be determined for long periods of time.

Our small account E&O business consists of policies with low limits. We provide E&O coverage to many classes of professional service providers, of which architects, engineers and related construction practices represent the largest concentration of insured professionals. Managing general agencies that we have acquired have provided insurance and risk management services for more than twenty years to these classes. We do not write a material amount of E&O coverage for the legal, medical or accounting professions. Our E&O business is produced through both wholesale and specialty retail brokers and is underwritten on both an admitted and surplus lines basis.

Sports & Entertainment

We are a leading underwriter of specialty sports and entertainment disability products, providing coverage of irreplaceable human assets, such as high profile athletes, entertainers and business executives. As a leader in the contingency market, we provide weather insurance and event cancellation, covering events such as collegiate championships, All-Star Games and large musical concerts. We also write kidnap and ransom insurance, providing coverage throughout the world. We write large limits (greater than $10.0 million) and purchase significant proportional and excess of loss reinsurance to manage these exposures.

Public Risk

We provide insurance coverage and associated risk management services to municipal entities and special districts, mainly serving populations of less than 100,000 in the United States. Types of coverage provided include automobile physical damage, automobile liability, boiler and machinery, crime, EPLI, general liability, inland marine, law enforcement liability, public officials liability, and property. We typically write large limits for property coverage, and low limits and medium limits for the other types of coverage.

Professional Liability Segment

Our Professional Liability segment primarily consists of our directors’ and officers’ (D&O) liability business. In addition, we write related professional liability and crime business coverages, including large account E&O liability, fiduciary liability, fidelity and bankers blanket bonds, EPLI, transactional insurance and cyber liability. The business is written for both U.S.-based and International-based policyholders from our offices in the United States, the United Kingdom and Spain. A significant amount of the business is received from major worldwide insurance brokerage companies. Along with the specialization and experience of our underwriters, HCC’s financial strength ratings help us maintain a competitive position in our D&O business.

We write both primary and excess policies for public and private companies. Our policies cover a large number of commercial classes and financial institution classes, which include investment banks, depository institutions, private equity companies, insurance companies, and brokers and investment advisors. A large amount of the public company and financial institution business is large limit that is subject to severity of loss on individual policies, as well as fluctuations in frequency of loss from changes in worldwide business and economic environments. Coverage is typically provided through “claims made” policies. However, the final settlement value of claims may not be determined for long periods of time due to the underlying nature of the claims, which involve complex litigation by third parties against our insureds.

Accident & Health Segment

Our Accident & Health segment includes medical stop-loss and short-term medical products primarily written in the United States. Our short-term medical product experienced significant growth in 2014 as individuals selected this product in lieu of coverage under the U.S. Affordable Care Act, which began enrollments in late 2013.

We are a recognized market leader in the specialty accident and health industry. Since 1996, we have achieved growth primarily through acquisitions and ongoing development of specialized products. As a result of our acquisitions, we have fortified our market position and retained an experienced senior management team with an average of over 20 years of experience. Our more recent growth has been organic as we leverage our scale and relationships with brokers, as well as our Internet marketing capabilities. Our specialized product line combined with disciplined underwriting, innovative claims management and cost-efficient operations provides a superior operating margin for this segment.

Key lines of business within this segment are described below:

Medical Stop-Loss

Medical stop-loss insurance provides protection for catastrophic losses to employers that self-fund their employee benefit plans. We deliver this insurance to employers through insurance brokers, consultants and third party administrators. Our underwriting offices are strategically located throughout the United States, allowing us to geographically manage the business. Our highly-trained medical stop-loss claims unit exclusively deals with the complex nature of catastrophic health claims and works closely with employers and their plan administrators to control plan costs. Claims are reported and settled within 12 to 15 months for each reporting year. Each policy is underwritten annually, providing us the ability to maintain pricing in line with medical cost inflation.

Short-term Medical

Our short-term medical insurance provides temporary coverage, up to eleven months, for individuals in the United States without primary insurance during transitional periods. Our international medical insurance plans provide health insurance and specialized travel services to individuals outside their home country. Several types of international medical products are offered, including short and long-term individual and group plans. Both the short-term domestic and international medical products are purchased through an Internet portal accessed by consumers, brokers and consultants. The average policy term for short-term medical coverage is less than six months, and claims are reported and settled quickly.

U.S. Surety & Credit Segment

Our U.S. Surety & Credit segment conducts business through separate specialty surety underwriting operations and credit underwriting operations, which are described below:

Surety

Our surety business includes contract surety bonds, commercial surety bonds and bail bonds. A large amount of our contract surety book is characterized by relatively small limits and premiums. Significant classes within commercial surety are license and permit bonds, court bonds for fiduciaries as well as appeal bonds, and plug and abandonment bonds for the energy sector. Most of our commercial surety bond business is small limit and small premium business, but we also have a large commercial surety business that has higher limits. Our surety business is typically received from a large number of independent agents specializing in these coverages or from specialized units of large brokerage companies.

The surety industry has lower expected loss ratios and higher expense ratios than most areas of the property and casualty insurance industry. The lower expected loss ratios reflect the fact that the bond serves as financial protection to a third party in the event a principal is unable to honor an obligation, rather than an insurance policy that pays on behalf of a policyholder. In the event of a claim against a bond, we often receive subrogation recovery against the loss, including recovery from the bond principal. The higher expense ratios result from higher acquisition and underwriting expenses than in most property and casualty lines. The claims process can be complex, particularly on contract surety claims, and subrogation recovery frequently takes extended periods of time, resulting in medium tail business.

Credit

Our credit business provides insurance policies that insure against the risk of non-payment on trade-related transactions and financings. These policies are provided to manufacturers, banks and trading companies. Coverage is provided on a single debtor or multiple debtor basis, with multi-debtor coverage generally provided on an excess of loss basis. Political risk insurance is also provided. The business is large limit and large premium business. Underwriting includes credit quality analysis of individual transactions, as well as controlling aggregation of limits by debtor and by country. Potential claims are reported promptly. While most policies have a term of two years or less, coverage can be as long as five years. In most claims, there is the possibility of subrogation recoveries, although these can extend over several years. As a result, the business has a medium tail.

International Segment

Our International segment includes energy, ocean marine, property treaty, surety, credit, liability, property (direct and facultative), accident and health and other smaller product lines written from operations in the United Kingdom, Spain and Ireland. A large part of the business is written in London through both our insurance company operations and our Lloyd’s syndicate and is primarily received from the major worldwide insurance brokerage companies.

Our energy, ocean marine, property treaty, property and accident and health lines are exposed to natural peril and other catastrophic occurrences. The underwriting process for these lines includes not only evaluation of individual risks but also aggregations of limits by peril by catastrophe area.

Key lines of business within this segment are described below:

Marine & Energy

We provide coverage for insureds involved in all areas of energy, ranging from upstream exploration and production, through midstream storage and transmission, to downstream refining and petrochemical activities. Offshore risks include drilling rigs, production and gathering platforms, and pipelines. We underwrite physical damage, liability, business interruption and various ancillary coverages. We also underwrite marine risks for ocean-going vessels. The marine and energy business is characterized by large limits and large premiums and includes both primary and excess policies. Claims for this business are reported and settled on a medium-term basis.

Property Treaty

Our property treaty line provides reinsurance to a variety of clients worldwide, offering a range of treaty coverages including property catastrophe, property risk and engineering, which covers property risks during construction. Catastrophe excess of loss business is the largest portion of the portfolio. The business is characterized by large limits, large premiums and short to medium-tail claims reporting and settlement.

Surety & Credit

Our surety business specializes in performance bonds for construction companies and also writes customs, pension, environment, auctioneer’s and other miscellaneous classes of bonds in the United Kingdom, Ireland, Spain and France. The business is written directly with the client or through insurance brokers. Our credit business is written through the U.K. specialist broker market with a focus on the construction sector. The credit business is characterized by small to medium limits and short-tail claims reporting and settlement.

Liability

Our liability lines primarily include U.K. professional indemnity, employers’ liability and public liability coverages. Professional indemnity coverages are focused on small and medium size enterprises and cover a range of professions. The employers’ liability and public liability lines provide coverage on both a primary and excess basis for a range of companies. The business is characterized by small to medium limits and long-tail claims reporting and settlement.

Property (Direct and Facultative)

We write direct and facultative property coverage on a following basis, often with catastrophe exposure, for numerous classes including manufacturing, retail, real estate, hotels and municipalities. We provide coverage for both physical damage and business interruption on a worldwide basis to companies ranging in size from small to multinational.

Investing Segment

The Investing segment includes our consolidated investment portfolio, as well as the results from these investments, including investment income, investment related expenses, realized investment gains and losses, and other-than-temporary impairment credit losses on investments. We manage and evaluate our investments centrally as we believe this approach maximizes our investment performance and allows our underwriting segment managers to focus solely on the generation of underwriting results.

Our investment objectives are as follows:

•

Preserve and grow our shareholders’ equity,

•

Maximize net investment income on an after-tax basis,

•

Maintain appropriate liquidity to satisfy the requirements of current operations and insurance reserve obligations,

•

Comply with all portfolio risk constraints established by management and the Board of Directors,

•

Comply with all applicable regulatory requirements, and

•

Effectively hedge the economic exposures of insurance liabilities in their functional currency.

For additional discussion about the composition and results of our Investing Segment, see “Investing Segment” included in Management’s Discussion and Analysis and Note 2, “Investments” to the Consolidated Financial Statements.

Enterprise Risk Management

Enterprise Risk Management (ERM) is an integral part of our business and financial management processes, from our strategic planning process to our day-to-day operations. ERM helps us identify, analyze, assess, monitor, manage and communicate material risks (both internal and external) and opportunities that may affect our performance and reputation. Our business objectives drive the company’s activities and, therefore, the key objectives of our ERM process are to support our decision making and to promote a culture of risk awareness throughout the company, thereby allowing us to preserve and grow our shareholders’ equity.

Our ERM initiative is supported by the Enterprise Risk Oversight Committee of our Board of Directors. Our internal risk management functions are led by the Senior Vice President of our Enterprise Risk Management Department, who reports to the Chief Executive Officer. In addition, an internal Risk Committee, comprised of our senior executives, reports to the Chief Executive Officer and assists the Board in identifying and assessing risks.

We use a variety of methods and tools company-wide in our risk assessment and management efforts. Our key methods and tools include: 1) underwriting risk management, in which we set underwriting authority limits and approvals required for exceptions to established limits and monitor significant accumulations of exposures, particularly across business units and segments, 2) natural catastrophic risk management, where a variety of catastrophe modeling techniques, both internal and external, are used to monitor exposures against our stated risk tolerance, 3) a Reinsurance Security Policy Committee, which is responsible for monitoring reinsurers, reinsurance recoverable balances and changes in a reinsurer’s financial condition, 4) investment risk management, where the Investment and Finance Committee of our Board of Directors provides oversight of our capital and financial resources, as well as our investment policies, strategies, transactions and investment performance, 5) development and use of various analytical tools (including our economic capital model), which assist us with decisions on risk and expected return on risk, 6) the use of outside experts to perform scenario testing, where deemed beneficial and 7) a risk reporting framework, including a risk dashboard, to regularly communicate to management and the Board of Directors our risk profile related to our risk appetite and tolerances, which guide our risk and reward preferences over time. We plan to continue to invest in resources and technology to support our ERM process.

Reserves for Insurance Claims

We underwrite insurance risks and establish actual and estimated reserves for insurance claims under the policies we have written. Our gross reserves for insurance claims, shown as loss and loss adjustment expense payable on our consolidated balance sheet, consist of reserves for reported claims (referred to herein as case reserves) and reserves for incurred but not reported losses (referred to herein as IBNR). Our IBNR reserves also cover potential movement in claims already reported. Our net reserves reflect the offset of reinsurance recoverables due to us from third party reinsurers, based upon the contractual terms of our reinsurance agreements. In the normal course of our business, we cede a portion of our premium to domestic and foreign reinsurers through treaty and facultative reinsurance agreements. Although reinsurance does not discharge us from liability to our policyholders, we participate in reinsurance agreements to limit our loss exposure and to protect us against catastrophic losses.

Our recorded reserves represent management’s best estimate of unpaid losses and loss adjustment expense as of each quarter end. The process of estimating our reserves is inherently uncertain and involves a considerable degree of judgment involving our management review and actuarial processes. The estimate of our reserves is increased or decreased as more information becomes known about the frequency and severity of losses for individual years. We believe our review process is effective, such that any required changes in reserves are recognized in the period of change as soon as the need for the change is evident. See “Critical Accounting Policies – Reserves” included in Management’s Discussion and Analysis for a full discussion of our reserving policies and procedures.

Loss development represents an increase or decrease in our estimates of ultimate losses related to business written in prior accident years. A redundancy, also referred to as favorable development, means our original ultimate loss estimate was higher than the current estimate. A deficiency, or adverse development, means our current ultimate loss estimate is higher than the original estimate. A loss development triangle details the subsequent years’ changes in our loss estimates from the prior loss estimates, based on experience at the end of each succeeding year.

The table below shows development of our reserves from 2004 through 2014, as of December 31, 2014. The first line shows our net reserves, including reserves for IBNR, recorded on our consolidated balance sheet at the indicated year-end. The first section of the table shows, by year, the cumulative amount of net losses and loss adjustment expenses paid at the end of each succeeding year. The second section shows the re-estimated net liability in later years for the years indicated. The cumulative redundancy (deficiency) line represents the difference between the latest re-estimated net liability and the originally estimated net reserves. The bottom section of the table shows our gross reserves and reinsurance recoverables, as well as re-estimated amounts at the indicated year-end.


(in thousands)	2014		2013			2012			2011			2010			2009			2008			2007		2006		2005		2004

Reserves, net of reinsurance	$	2,657,622	$	2,779,401		$	2,749,803		$	2,683,483		$	2,537,772		$	2,555,840		$	2,416,271		$	2,342,800	$	2,108,961	$	1,533,433	$	1,059,283
Reserve adjustments*		—		—			—			14,705			20,969			32,569			59,303			70,242		46,761		21,997		6,613

Adjusted reserves, net of reinsurance		2,657,622		2,779,401			2,749,803			2,698,188			2,558,741			2,588,409			2,475,574			2,413,042		2,155,722		1,555,430		1,065,896
Cumulative paid, net of reinsurance, at:
One year later				856,896			736,351			729,335			726,445			763,140			618,699			687,675		556,096		222,336		172,224
Two years later							1,236,328			1,109,699			1,114,541			1,144,929			1,001,369			940,636		858,586		420,816		195,663
Three years later										1,494,937			1,369,086			1,432,617			1,263,091			1,177,900		1,013,122		588,659		337,330
Four years later													1,668,676			1,645,216			1,408,275			1,331,379		1,176,404		702,072		424,308
Five years later																1,875,365			1,604,167			1,392,797		1,299,663		822,133		495,642
Six years later																			1,791,769			1,543,849		1,375,431		927,657		581,418
Seven years later																						1,672,995		1,448,100		988,152		661,517
Eight years later																								1,584,105		1,053,879		701,979
Nine years later																										1,182,851		763,445
Ten years later																												871,736
Re-estimated liability, net of reinsurance, at:
End of year		2,657,622		2,779,401			2,749,803			2,698,188			2,558,741			2,588,409			2,475,574			2,413,042		2,155,722		1,555,430		1,065,896
One year later				2,723,044			2,676,061			2,628,177			2,568,888			2,565,746			2,422,050			2,330,671		2,129,325		1,548,904		1,091,290
Two years later							2,635,256			2,608,244			2,506,803			2,525,266			2,367,979			2,241,422		2,018,898		1,522,411		1,090,568
Three years later										2,617,578			2,502,208			2,482,192			2,292,210			2,184,222		1,919,507		1,434,327		1,084,585
Four years later													2,530,782			2,518,979			2,254,239			2,107,876		1,887,146		1,364,822		1,043,778
Five years later																2,559,085			2,255,310			2,017,782		1,825,976		1,342,769		1,019,071
Six years later																			2,295,129			2,207,316		1,797,913		1,292,149		1,019,322
Seven years later																						2,055,768		1,839,545		1,316,416		983,932
Eight years later																								1,869,068		1,389,602		1,003,117
Nine years later																										1,438,312		1,071,886
Ten years later																												1,074,603
Cumulative redundancy (deficiency), net of reinsurance			$	56,357		$	114,547		$	80,610		$	27,959		$	29,324		$	180,445		$	357,274	$	286,654	$	117,118	($	8,707	)


Gross reserves, end of year*	$	3,728,085	$	3,902,132		$	3,767,850		$	3,678,271		$	3,497,954		$	3,528,628		$	3,484,886		$	3,309,621	$	3,150,213	$	2,838,231	$	2,096,940
Reinsurance recoverables*		1,070,463		1,122,731			1,018,047			980,083			939,213			940,219			1,009,312			896,579		994,491		1,282,801		1,031,044

Net reserves, end of year*	$	2,657,622	$	2,779,401		$	2,749,803		$	2,698,188		$	2,558,741		$	2,588,409		$	2,475,574		$	2,413,042	$	2,155,722	$	1,555,430	$	1,065,896


Re-estimated gross liability	$	3,728,085	$	3,902,453		$	3,878,287		$	3,852,960		$	3,730,358		$	3,783,421		$	3,539,020		$	3,128,566	$	2,938,020	$	2,798,852	$	2,285,094
Re-estimated reinsurance recoverables		1,070,463		1,179,409			1,243,031			1,235,382			1,199,576			1,224,336			1,243,891			1,072,798		1,068,952		1,360,540		1,210,491

Re-estimated net liability	$	2,657,622	$	2,723,044		$	2,635,256		$	2,617,578		$	2,530,782		$	2,559,085		$	2,295,129		$	2,055,768	$	1,869,068	$	1,438,312	$	1,074,603


Cumulative gross redundancy (deficiency)			($	321	)	($	110,437	)	($	174,689	)	($	232,404	)	($	254,793	)	($	54,134	)	$	181,055	$	212,193	$	39,379	($	188,154	)

* Adjusted for acquisitions and dispositions.

Most of our lines of business have historically experienced favorable loss development. The cumulative redundancies shown in the loss triangle table resulted from the net favorable loss development that we reported in our financial statements from 2007 through 2014. The amounts in the table below (in thousands) exclude adverse development related to both our diversified financial products in 2011 and the Spanish surety bonds in 2011 – 2014, which are discussed following the table.


	Gross		Net

2014	$	82,184	$	99,819
2013		139,968		144,063
2012		159,110		118,911
2011		171,617		106,830
2010		16,352		22,663
2009		90,435		53,524
2008		72,044		82,371
2007		90,621		26,397

The majority of the net favorable development in the table above related to these products: 1) D&O in our Professional Liability segment, for the 2002 – 2006 underwriting years, 2) U.K. professional liability, energy and property (including redundancy on the 2005, 2008 and 2011 catastrophe losses) in our International segment, 3) surety in our U.S. Surety & Credit segment and 4) an assumed quota share program that we wrote from 2003 to 2008 in our U.S. Property & Casualty segment.

During the past four years, we increased our reserves related to a specific class of Spanish surety bonds, the majority of which were written prior to 2006. We increased net reserves by $43.5 million in 2014, $70.3 million in 2013, $48.9 million in 2012 and $12.8 million in 2011. See “Segment Operations – International Segment” included in Management’s Discussion and Analysis for additional discussion.

During 2011, we increased our net reserves by $104.2 million for the diversified financial products (DFP) line of business, which provides coverage for private equity partnerships, hedge funds, investment managers and similar groups. This increase resulted from revised assumptions with regards to the frequency and severity of claims, primarily in the 2009 and 2010 accident years. Our expectation prior to our 2011 reserve review was that the frequency and severity of claims after 2008 would be more consistent with our experience prior to the worldwide financial crisis in 2007 and 2008. However, our reserve review indicated that loss experience was emerging consistent with the financial crisis period, prompting our revised assumptions at that time.

The early years in the loss triangle table were also impacted by adverse development from a block of run-off assumed accident and health reinsurance business in our Exited Lines. This business was primarily excess coverage for large losses related to workers’ compensation policies. We increased our net reserves by $25.1 million in 2006 and $35.0 million in 2005, primarily due to reinsurance commutations totaling $20.2 million in 2006 and $26.0 million in 2005. Commutations can produce adverse development since, under generally accepted accounting principles, any excess of undiscounted reserves assumed over assets received must be recorded as a loss at the time the commutation is completed. The remaining adverse development affected the 2001 and prior accident years.

Regulation

The business of insurance is extensively regulated by the government. Our business depends on our compliance with applicable laws and regulations and our ability to maintain valid licenses and approvals for our operations. Generally, regulatory authorities are vested with broad discretion to grant, renew and revoke licenses and approvals and to implement regulations governing the business and operations of insurers, insurance agents, brokers and third party administrators. In all jurisdictions, the applicable laws and regulations are subject to amendment or interpretation by regulatory authorities.

United States

State Governments

At this time, the insurance business in the United States is regulated primarily by the individual states. Although the extent of the regulation varies, it relates to, among other things: 1) standards of solvency that must be met and maintained, 2) licensing of insurers and their agents, 3) approval of policy forms, 4) restrictions on the size of risks that may be insured under a single policy, 5) regulation of market conduct, as well as other underwriting claim practices, 6) premium rates, 7) reserves and provisions for unearned premium, losses and other obligations, 8) the nature of and limitations on investments and 9) usage of certain methods of accounting for statutory reporting purposes.

State insurance regulations are intended primarily for the protection of policyholders rather than shareholders. The state insurance departments monitor compliance with regulations through periodic reporting procedures and examinations. The quarterly and annual financial reports to the state insurance regulators utilize statutory accounting principles, which are different from generally accepted accounting principles (GAAP) that we use in our reports to shareholders. Statutory accounting principles, in keeping with the intent to assure the protection of policyholders, are generally based on a solvency concept, while GAAP is based on a going-concern concept.

The state insurance regulators utilize risk-based capital measurements, developed by the National Association of Insurance Commissioners (NAIC), to identify insurance companies that potentially are inadequately capitalized. The NAIC’s risk-based capital model is intended to establish minimum capital thresholds that vary with the size and mix of an insurance company’s business and assets. It is designed to identify companies with capital levels that may require regulatory attention. At December 31, 2014, each of our domestic insurance companies’ total adjusted capital was significantly in excess of the authorized control level risk-based capital.

In 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment (ORSA) Model Act, which, following enactment at the state level, will be effective in 2015. ORSA requires U.S. insurance companies and their groups to regularly, but no less than annually: 1) conduct an assessment of the adequacy of its risk management framework and current and estimated future solvency position, 2) internally document the process and results of such assessment and 3) provide a confidential, high level summary of such assessment to certain state regulatory authorities. We are currently in the process of completing our initial submission and believe we have an ERM framework in place that is effective in meeting the ORSA requirements.

The U.S. state insurance regulations also affect the payment of dividends and other distributions by insurance companies to their shareholders. Generally, insurance companies are limited by these regulations in the payment of dividends above a specified level. Dividends in excess of those thresholds are “extraordinary dividends” and are subject to prior regulatory approval. Some states require prior regulatory approval for all dividends.

Because we are an insurance holding company, we are subject to the insurance holding company system regulatory requirements of a number of states. Under these regulations, we are required to report information regarding our capital structure, financial condition and management. We are also required to provide prior notice to, or seek the prior approval of, insurance regulatory authorities of certain agreements and transactions between our affiliated companies. These agreements and transactions must satisfy certain regulatory requirements.

Federal Government

Although the U.S. Federal government has not historically regulated the insurance industry, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), enacted in 2010, expands the federal presence in insurance oversight. The Dodd-Frank Act’s requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance. The Dodd-Frank Act also established the Federal Insurance Office (FIO) within the U.S. Department of the Treasury, with powers over most lines of insurance, and the Financial Stability Oversight Council (FSOC).

The FIO is authorized to gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters, and preempt state insurance measures under certain circumstances. Although the FIO is prohibited from directly regulating the business of insurance, the FIO may also recommend enhanced regulations to state regulatory authorities or recommend to the FSOC that it designate an insurer as a “systemically important financial institution” (SIFI). An insurer designated as a SIFI could be subject to Federal Reserve supervision and heightened regulatory standards. While we do not believe that HCC or any of its companies qualify as a SIFI, it is possible the FSOC could conclude otherwise.

Our crop insurance business writes multi-peril crop insurance through the federal crop insurance program administered by the U.S. Department of Agriculture’s Risk Management Agency (RMA). The RMA sets all policy terms and conditions, mandates rates and forms, and establishes and monitors compliance standards under the program. We are a party to a Standard Reinsurance Agreement, which defines the reinsurance relationship between private insurance companies and the Federal Crop Insurance Corporation and specifies the terms and conditions of the underwriting risks each party will bear.

United Kingdom

In 2013, the United Kingdom reshaped the regulation of all financial services companies, including the insurance industry, by enacting three separate regulatory bodies. The Financial Policy Committee, a committee within the Bank of England, is responsible for identifying emerging risks to the financial system as a whole and providing strategic direction for the entire regulatory regime. The Prudential Regulatory Authority is responsible for promoting the safety and soundness of systemically important firms, including insurers, and ensuring policyholders are protected in the event of a company’s failure. The Financial Conduct Authority is responsible for overseeing consumer protection, promoting effective competition and protecting the integrity of the U.K. financial system. These bodies regulate operations in our U.K. insurance company, as well as its Spanish branch. Effective December 31, 2014, we received approval to merge our Spanish insurance company into our U.K. insurance company in early 2015.

We maintain 100% participation in Lloyd’s Syndicate 4141. Under our membership agreement with Lloyd’s, we must comply with all Lloyd’s rules and regulations, as well as applicable provisions of the Lloyd’s Acts and Financial Services and Markets Act 2000. Our underwriting capacity on Syndicate 4141 must be supported by a deposit of cash, securities or letters of credit (referred to as “Funds at Lloyd’s”), which is determined annually by Lloyd’s. Lloyd’s requires annual approval of Syndicate 4141’s business plan, including maximum underwriting capacity, and may require changes to any business plan or additional capital to support the underwriting capacity. If a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund. Lloyd’s has the power to assess current Lloyd’s members up to 3% of the member’s underwriting capacity in any one year as a Central Fund contribution.

Our U.K. insurance companies will be required to meet the requirements of the European Union’s (EU) new financial services regulatory regime known as “Solvency II,” which is built on a risk-based approach to setting capital requirements for insurers. Solvency II establishes a revised set of EU-wide capital requirements and risk management standards that will replace the current solvency requirements. Solvency II is effective on January 1, 2016. We have made significant progress in meeting the Solvency II requirements in our U.K. companies; however, the broader impact to us will depend on whether the U.S. insurance regulatory regime is deemed “equivalent” to Solvency II. Whether the U.S. insurance regulatory regime will be deemed “equivalent” is still under consideration by EU authorities, so we are currently unable to predict the full impact of the Solvency II implementation.

The Financial Stability Board (FSB), consisting of representatives of national financial authorities of the G20 nations, has issued a series of frameworks and recommendations intended to produce significant changes in how financial companies should be regulated. These frameworks and recommendations address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance including compensation, and related issues associated with responses to the financial crisis. The FSB has directed the International Association of Insurance Supervisors (IAIS) to create standards relative to these areas and incorporate them in that body’s Insurance Core Principles, which form the baseline for how countries’ financial services regulatory efforts are measured relative to the insurance sector. That measurement is made by periodic Financial Sector Assessment Program (FSAP) reviews conducted by the World Bank and the International Monetary Fund, and the reports thereon spur development of country-specific additional or amended regulatory changes. Lawmakers and regulatory authorities in a number of jurisdictions in which our companies conduct business have already begun implementing legislative and regulatory changes consistent with these recommendations.

Insurance Companies

The following is a list of our insurance companies that are subject to regulation:

United States

•

American Contractors Indemnity Company

•

Avemco Insurance Company

•

HCC Life Insurance Company

•

HCC Specialty Insurance Company

•

Houston Casualty Company

•

Producers Agriculture Insurance Company

•

Producers Lloyds Insurance Company

•

United States Surety Company

•

U.S. Specialty Insurance Company

United Kingdom

•

HCC International Insurance Company PLC

•

Houston Casualty Company-London

•

Lloyd’s of London Syndicate 4141

Bermuda

•

HCC Reinsurance Company Limited

Agencies

The jurisdictions in which each of our underwriting agencies operate impose licensing and other requirements. These regulations relate primarily to: 1) licensing as agents, brokers, reinsurance brokers, managing general agents or third party administrators, 2) advertising and business practice rules, 3) contractual requirements, 4) limitations on authority, 5) financial security and 6) record keeping requirements.

The following is a list of our underwriting agencies that are subject to regulation:

•

HCC Casualty Insurance Services, Inc.

•

HCC Global Financial Products

•

HCC Indemnity Guaranty Agency

•

HCC Medical Insurance Services

•

HCC Specialty Underwriters, Inc.

•

HCC Underwriting Agency Ltd.

•

Pro Ag Management, Inc.

•

Professional Indemnity Agency, Inc.

Terrorism Risk Insurance Act

The Federal Terrorism Risk Insurance Act (TRIA) was initially enacted in 2002 to ensure the availability of insurance coverage for certain acts of terrorism, as defined in the TRIA. The Terrorism Risk Insurance Program Reauthorization Act of 2007 extended the program through December 31, 2014 and revised the definition of “act of terrorism.” On January 13, 2015, the President signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2015 (Reauthorization Act). The Reauthorization Act extends the program through December 31, 2020.

Under the Reauthorization Act, we are required to offer terrorism coverage to our commercial policyholders in certain lines of business, for which we may charge an additional premium. The policyholders may or may not accept such coverage. In 2015, the Reauthorization Act requires a $100.0 million terrorism-related loss event to trigger coverage. The Federal government will reimburse 85% of an insurer’s losses in excess of the insurer’s deductible, up to the maximum annual Federal liability of $100.0 billion. Our deductible for 2015 is approximately $151.2 million, which we would have to meet before the Federal reimbursement would occur.

Beginning in 2016, the trigger for the terrorism-related loss event increases by $20 million each year to reach $200 million by 2020. In addition, the Federal government reimbursement will decrease by 1% each year to reach 80% by 2020.

Executive Officers

The following is a list of our Executive Officers:


Name	Principal occupation during past five years	Age	Served HCC since

William N. Burke, Jr.	Mr. Burke has served as our President and Chief Operating Officer since December 2012. He previously served as our Executive Vice President and Chief Operating Officer from March 2012 until December 2012. Prior to joining HCC, Mr. Burke served as Chief Operating Officer for Aon Risk Solutions – US Retail. He served in various other positions with Aon Corporation and its successor company for almost 30 years. He commenced his insurance career in 1977 with the Home Insurance Company.	59	2012

Mark W. Callahan	Mr. Callahan has served as our Executive Vice President since August 2010. During that time, he also served as our Chief Underwriting Officer from March 2011 to March 2013 and our Chief Actuary from August 2010 to March 2011. Prior to joining HCC, Mr. Callahan served as the Chief Risk, Underwriting, and Actuarial Services Officer for XL Insurance. During 12 years there, he also held the positions of Senior Vice President and Underwriter for XL Financial Solutions and Executive Vice President and Chief Actuarial Officer for XL Insurance.	44	2010

Barry J. Cook	Mr. Cook has served as our Executive Vice President of International Operations and Chief Executive Officer of HCC Insurance Holdings (International) Limited, with oversight for our international operations, since 2006. From 1992 to 2005, Mr. Cook served as Chief Executive Officer of Rattner Mackenzie Limited, which we acquired in 1999.	54	1999

Brad T. Irick	Mr. Irick has served as our Executive Vice President since May 2010 and our Chief Financial Officer since August 2010. Prior to joining HCC, Mr. Irick worked in public accounting for 21 years, including 18 years with PricewaterhouseCoopers LLC (PwC), where he served as audit and advisory partner for several multinational public insurance company clients. While at PwC, Mr. Irick served as the audit partner for HCC between 2004 and the first half of 2007. Mr. Irick is a Certified Public Accountant.	48	2010


Name	Principal occupation during past five years	Age	Served HCC since

Pamela J. Penny	Ms. Penny has served as our Executive Vice President and Chief Accounting Officer since 2008. She previously served as Senior Vice President – Finance from 2004 to November 2008. Prior to joining HCC, Ms. Penny served in several financial management positions, including Senior Vice President & Controller of American General Corporation (acquired by American International Group, Inc.), and a partner in the international accounting firm KPMG LLP. Ms. Penny is a Certified Public Accountant.	60	2004

Randy D. Rinicella	Mr. Rinicella has served as our Senior Vice President, General Counsel and Secretary since 2007. Prior to joining HCC, Mr. Rinicella was Vice President, General Counsel and Secretary of Dresser-Rand Group, Inc., a publicly-traded equipment supplier to the worldwide oil, gas, petrochemical and process industries, from 2005 until 2007. Mr. Rinicella was a shareholder at the national law firm of Buchanan Ingersoll PC from 2004 until 2005, where he was a member of the firm’s corporate finance & technology practice group.	57	2007

Michael J. Schell	Mr. Schell has served as our Executive Vice President since 2002. Prior to joining HCC, Mr. Schell was with the St. Paul Companies for 25 years, most recently as President and Chief Operating Officer of St. Paul Re.	64	2002

Christopher J.B. Williams	Mr. Williams has served as our Chief Executive Officer since December 2012 and as a member of our Board of Directors since May 2007, including as Chairman of the Board from August 2008 to May 2011. He previously served as our President from May 2011 to December 2012. Before joining HCC, Mr. Williams was Chairman of Wattle Creek Winery from 2005 to May 2011. Prior to his retirement in 2005, he served as the National Director for Life, Accident & Health of Willis Re. Mr. Williams currently serves as a member of the Investment and Finance Committee and the Enterprise Risk Oversight Committee of our Board.	58	2011

Employees

At December 31, 2014, we had 1,983 employees. We added 489 employees in January 2015 in connection with our acquisition of ProAg. We are not a party to any collective bargaining agreement and have not experienced work stoppages or strikes as a result of labor disputes. We consider our employee relations to be good.

Available Information

The public may read and copy any materials that we file with the Securities and Exchange Commission (SEC) at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains financial reports, proxy statements and other information that we file electronically with the SEC.

We maintain an Internet website at www.hcc.com. The reference to our Internet website address in this Report does not constitute the incorporation by reference of the information contained at the website in this Report. We will make available, free of charge through publication on our Internet website, a copy of our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K or amendments to those reports, filed with or furnished to the SEC.

Item 1A. Risk Factors

Risks Relating to our Industry

Because we are a property and casualty insurer, our business may suffer as a result of unforeseen catastrophe losses.

Property and casualty insurers are subject to claims arising from catastrophes. Catastrophic losses have had a significant impact on our historical results. Catastrophes can be caused by various events, including hurricanes, tsunamis, tornados, windstorms, earthquakes, hailstorms, explosions, flooding, severe winter weather and fires and may include man-made events, such as terrorist attacks and systemic risks. Droughts and other perils can also have a significant adverse effect on the results of our crop insurance business. The incidence, frequency and severity of catastrophes are inherently unpredictable. Some scientists believe that in recent years, changing climate conditions have added to the unpredictability and frequency of natural disasters.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. Catastrophes can cause losses in a variety of our property and casualty lines, and most of our past catastrophe-related claims have resulted from hurricanes and earthquakes; however, we experienced significant losses from the 2001 terrorist attack in the U.S. and the 2011 tsunami in Japan. A large part of our exposure to catastrophes comes from our International segment, particularly related to our property, property treaty and energy businesses.

Although we typically purchase reinsurance protection for risks we believe bear a significant level of catastrophe exposure, the nature or magnitude of losses attributed to a catastrophic event or events may result in losses that exceed our reinsurance protection. It is therefore possible that a catastrophic event or multiple catastrophic events could have a material adverse effect on our financial position, results of operations and liquidity.

Volatility in crop prices and crop yields could adversely affect our financial results.

Weather conditions and the level of crop prices in the commodities market heavily impact our crop insurance business. A significant portion of our crop insurance business provides revenue protection to insureds for their expected crop revenues, which can be affected by changes in crop prices. We face the risk that significant losses could be incurred in the event of a decline in the applicable commodity prices prior to harvest. Our crop results also could be negatively impacted by climate conditions, weather events, disease and pests. These factors are inherently unpredictable and could have a material adverse effect on our financial position, results of operations and cash flows, and result in significant volatility in our crop results from one year to the next.

The insurance and reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates, which could cause our results to fluctuate.

The insurance and reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity, as well as periods when shortages of capacity permitted an increase in pricing and, thus, more favorable premium levels. An increase in premium levels is often, over time, offset by an increasing supply of insurance and reinsurance capacity, either from capital provided by new entrants or by additional capital committed by existing insurers or reinsurers, which may cause prices to decrease. In addition, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance and reinsurance business significantly.

Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms and fewer opportunities to underwrite insurance risks, which could have a material adverse effect on our results of operations and cash flows. These factors may also cause the price of our common stock to be volatile.

Our loss reserves are based on an estimate of our future liability, which may prove to be inadequate.

We maintain loss reserves to cover our estimated liability for unpaid losses and loss adjustment expenses, including legal and other fees, for reported and unreported claims incurred at the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates are based on our assessment of facts and circumstances then known, as well as estimates of future trends in severity of claims, frequency of claims, judicial theories of liability and other factors. These variables are affected by both internal and external events that could increase our exposure to losses, including changes in actuarial projections, claims handling procedures, inflation, climate change, economic and judicial trends, and legislative changes.

Volatility in the financial markets, economic events, legal/regulatory changes and other external factors may result in an increase in the number of claims and the severity of the claims reported, particularly in lines of business such as directors’ and officers’ liability, errors and omissions liability and trade credit insurance. Many of these items are not directly quantifiable in advance. Additionally, there may be a significant reporting delay between the occurrence of the insured event and the time it is reported to us.

The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in a regular and ongoing process as experience develops and further claims are reported and settled. Adjustments to our loss and loss adjustment expenses are reflected in our results of operations in the periods in which such estimates are changed. Because setting reserves is inherently uncertain, there can be no assurance that current reserves will prove adequate in light of subsequent events. If actual claims prove to be greater than our reserves, our financial position, results of operations and liquidity may be materially adversely affected.

We may be impacted by claims relating to economic or credit market downturns.

We write corporate directors’ and officers’ liability, errors and omissions liability and other insurance coverages for financial institutions and financial services companies. We also write trade credit business for policyholders who have credit and political risk, as well as policies in certain countries that have had adverse economic conditions. The volatility in the economy and the financial markets in the past several years has impacted this part of the industry. As a result, this part of the industry has been the subject of heightened scrutiny and, in some cases, investigations by regulators with respect to the industry’s actions. These events may give rise to increased claims litigation, including class action suits, which may involve our insureds. To the extent that the frequency or severity of claims relating to these events exceeds our current estimates used for establishing reserves, it could increase our exposure to losses from such claims and could have a material adverse effect on our financial position and results of operations.

The effects of emerging claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended liability for claims and coverage may emerge. These changing conditions may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued, and our financial position, results of operations and cash flows may be materially adversely affected.

We are subject to extensive governmental regulation.

We are subject to extensive governmental regulation and supervision. For complete information regarding the regulations to which we are subject, see Item 1, Business — Regulation. Our business depends on compliance with applicable laws and regulations and our ability to maintain valid licenses and approvals for our operations. Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors. In the United States, this regulation is generally administered by departments of insurance in each state in which we do business and includes a comprehensive framework of oversight of our operations and review of our financial position. U.S. Federal legislation may lead to additional federal regulation of the insurance industry in the coming years. Also, foreign governments regulate our international operations. Each foreign jurisdiction has its own unique regulatory framework that applies to our operations in that jurisdiction.

Regulatory authorities have broad discretion to grant, renew or revoke licenses and approvals. Regulatory authorities may deny or revoke licenses for various reasons, including the violation of regulations. In some instances, we follow practices based on our interpretations of regulations, or those we believe to be generally followed by the industry, which ultimately may be different from the requirements or interpretations of regulatory authorities. If we do not have the requisite licenses and approvals and do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us. That type of action could have a material adverse effect on our results of operations. Also, changes in the level of regulation of the insurance industry (whether federal, state or foreign), or changes in laws or regulations themselves or interpretations by regulatory authorities, could have a material adverse effect on our business.

Virtually all states require insurers licensed to do business in that state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies or to bear a portion of the cost of insurance for high-risk or uninsured individuals. Depending on state law, insurers can be assessed up to 2% of premium written for the relevant line of insurance in that state. In addition, states have from time to time passed legislation that has the effect of limiting the ability of insurers to manage catastrophe risk, such as legislation limiting insurers’ ability to increase rates and prohibiting insurers from withdrawing from catastrophe-exposed areas. The effect of these arrangements could materially adversely affect our results of operations.

The Dodd-Frank Act expands the U.S. Federal government’s presence in insurance oversight, streamlines state-based regulation of reinsurance and non-admitted insurance and establishes a new Federal Insurance Office with powers over most lines of insurance other than health insurance. The Federal Insurance Office is authorized to gather data and information to monitor aspects of the insurance industry, identify issues in the regulation of insurers about insurance matters, and preempt state insurance measures under certain circumstances. As the Dodd-Frank Act calls for numerous studies and contemplates further regulation, its future impact on our results of operations or financial position cannot be determined at this time.

The European Union (EU) is phasing in a new regulatory regime for the regulation of financial services known as “Solvency II,” which is built on a risk-based approach to setting capital requirements for insurers and reinsurers. Solvency II is currently expected to be implemented on January 1, 2016. The impact on us from our implementation of Solvency II will depend on the costs associated with implementation by each EU country, any increased capital requirements applicable to us, and any costs associated with adjustments to our operations. In addition, the overall impact will depend on whether the U.S. regulatory regime is deemed equivalent to Solvency II, thereby reducing the costs of implementation. As such, we are currently not able to predict the impact of Solvency II on our financial position and results of operations.

The operations of certain of our subsidiaries are subject to laws and regulations, including the USA PATRIOT Act of 2001, which requires companies to know certain information about their clients and to monitor their transactions for suspicious activities. In addition, the Department of the Treasury’s Office of Foreign Assets Control administers regulations requiring U.S. persons to refrain from doing business, or allowing their clients to do business through them, with certain organizations or individuals on a prohibited list maintained by the U.S. government or with certain countries. The United Kingdom, the European Union and other jurisdictions maintain similar laws and regulations. Although we have instituted compliance programs to address these requirements, our participation in the global market could expose us to penalties under these laws.

We participate in the Lloyd’s of London market through 100% participation in Lloyd’s Syndicate 4141. The Lloyd’s Franchise Board requires annual approval of Syndicate 4141’s business plan, including maximum underwriting capacity, and may require changes to our business plan or additional capital to support our underwriting. Lloyd’s also imposes various charges and assessments on its member companies. If Lloyd’s were to require material changes in our business plans, or if charges and assessments payable by us to Lloyd’s were to increase significantly, these events could have an adverse effect on our operations and financial results. In addition, no assurances can be given as to how much business Lloyd’s will permit us to underwrite in the future. The financial security of the Lloyd’s market is regularly assessed by three independent rating agencies. A satisfactory credit rating issued by an accredited rating agency is necessary for Lloyd’s syndicates to be able to trade in certain classes of business at current levels. We would be adversely affected if Lloyd’s current ratings were downgraded.

Recent federal health care reform legislation may lead to additional changes in the country’s health care delivery system.

The Patient Protection and Affordable Care Act and the related amendments in the Health Care and Education Reconciliation Act (collectively, the Legislation), enacted in 2010, has led to changes in the U.S. health care delivery system. As a result of the Legislation, there have been and may continue to be numerous changes in the health care industry, including an increasing percentage of the population that is covered for health care costs. Currently, we do not believe the Legislation will have a material adverse effect on our business. However, as further regulation is contemplated under the Legislation, we are unable to assess with certainty the full impact the Legislation may have on our business.

We cannot predict the effect, if any, climate change may have on the risks we insure.

Various scientists, environmentalists, international organizations and regulators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, tornados, freezes, droughts, other storms and fires) in certain parts of the world. In response to this belief, a number of legal and regulatory measures as well as social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions, which may be chief contributors to global climate change. We cannot predict the impact that changing climate conditions, if any, will have on our results of operations or financial condition. Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business. To the extent climate change does increase the unpredictability, frequency or severity of natural disasters, we may face increased claims, which could have a material adverse effect on our financial position, results of operations and cash flows.

Our reliance on agents and brokers subjects us to risk.

In many cases, we market our insurance (and reinsurance) through insurance (and reinsurance) agents and brokers. Some of these agents and brokers provide a significant portion of our gross written premium for a particular line of business. As a result, some of these agents and brokers could demand higher payments that could put us at a competitive disadvantage and affect the way we price our products. The deterioration of our relationship with, or loss of all or a substantial portion of the business provided by, one or more agents and brokers could have a material adverse effect on our financial position, results of operations and cash flows.

In accordance with industry practice, we generally pay amounts owed on claims under our insurance and reinsurance contracts to agents and brokers, and these agents and brokers, in turn, pay these amounts to the clients that have purchased insurance or reinsurance from us. Although the law is unsettled and depends upon the facts and circumstances of the particular case, in some jurisdictions, if an agent or broker fails to make such a payment, we may remain liable to the insured or ceding insurer for the deficiency. Conversely, in certain jurisdictions, when the insured or ceding insurer pays premiums for these policies to agents and brokers, these premiums might be considered to have been paid and the insured or ceding insurer will no longer be liable to us for those amounts, whether or not we have actually received the premiums from the agent or broker. Consequently, we assume a degree of credit risk associated with agents and brokers with whom we transact business. However, due to the unsettled and fact-specific nature of the law, we are unable to quantify our exposure to this risk.

Consolidation in the insurance industry could adversely impact us.

Insurance industry participants may seek to consolidate through mergers and acquisitions. Continued consolidation within the insurance industry will further enhance the already competitive underwriting environment as we would likely experience more robust competition from larger competitors. These consolidated entities may use their enhanced market power and broader capital base to take business from us or to drive down pricing, which could adversely affect the results of our operations.

Risks Relating to our Business

Our inability to accurately assess underwriting risk could reduce our net earnings.

Our underwriting success is dependent on our ability to accurately assess the risks associated with the business on which the risk is retained. We rely on the experience of our underwriting staff in assessing these risks. If we fail to accurately assess the risks we retain, we may fail to establish appropriate premium rates and our reserves may be inadequate to cover our losses, which could reduce our net earnings. The underwriting process is further complicated by our exposure to unpredictable developments, including earthquakes, weather-related events and other natural catastrophes, as well as war and acts of terrorism and those that may result from volatility in the financial markets, the economic downturn and systemic risks.

Retentions in various lines of business expose us to potential losses.

We retain risk for our own account on business underwritten by our insurance companies. The determination to not purchase reinsurance, or to reduce the amount of reinsurance we purchase, for a particular risk or line of business is based on a variety of factors including market conditions, pricing, availability of reinsurance, the level of our capital and our loss history. Such determinations have the effect of increasing our financial exposure to losses associated with such risks or in such lines of business and, in the event of significant losses associated with such risks or lines of business, could have a material adverse effect on our financial position, results of operations and cash flows.

If we are unable to purchase adequate reinsurance protection for some of the risks we have underwritten, we will be exposed to any resulting unreinsured losses.

We purchase reinsurance for a portion of the risks underwritten by our insurance companies, especially volatile and catastrophe-exposed risks. Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase. In addition, the historical results of reinsurance programs and the availability of capital also affect the availability of reinsurance. Our reinsurance facilities are generally subject to annual renewal. We cannot assure that we can maintain our current reinsurance facilities or that we can obtain other reinsurance facilities in adequate amounts and at favorable rates. Further, we cannot determine what effect catastrophic losses will have on the reinsurance market and on our ability to obtain adequate reinsurance at favorable rates. If we are unable to renew or to obtain new reinsurance facilities on acceptable terms, either our net exposures would increase or, if we are unwilling to bear such an increase in exposure, we would have to reduce the level of our underwriting commitments, especially in catastrophe-exposed risks. Either of these potential developments could have a material adverse effect on our financial position, results of operations and cash flows.

If the companies that provide our reinsurance do not pay all of our claims, we could incur severe losses.

We purchase reinsurance by transferring, or ceding, all or part of the risk we have assumed as a direct insurer to a reinsurance company in exchange for all or part of the premium we receive in connection with the risk. Through reinsurance, we have the contractual right to collect the amount reinsured from our reinsurers. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us of our full liability to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers.

We cannot assure that our reinsurers will pay all of our reinsurance claims, or that they will pay our claims on a timely basis. Additionally, catastrophic losses from multiple direct insurers may accumulate within the more concentrated reinsurance market and result in claims that adversely impact the financial condition of such reinsurers and thus their ability to pay such claims. Further, additional adverse developments in the capital markets could affect our reinsurers’ ability to meet their obligations to us. If we become liable for risks we have ceded to reinsurers or if our reinsurers cease to meet their obligations to us, because they are in a weakened financial position as a result of incurred losses or otherwise, our financial position, results of operations and cash flows could be materially adversely affected.

As a direct insurer, we may have significant exposure for terrorist acts.

To the extent that reinsurers have excluded coverage for terrorist acts or have priced such coverage at rates that we believe are not practical, we, in our capacity as a direct insurer, do not have reinsurance protection and are exposed for potential losses as a result of any terrorist acts. To the extent an act of terrorism is certified by authorized personnel of the U.S. government, we may be covered under the Terrorism Risk Insurance Program Reauthorization Act of 2015 for up to 85% of our losses in 2015, up to the maximum amount set out in the Reauthorization Act. However, any such coverage would be subject to a mandatory deductible of approximately $151.2 million in 2015. In some jurisdictions outside of the United States, where we also have exposure to a loss from an act of terrorism, we have limited access to other government programs that may mitigate our exposure.

Interpretation of this law is untested and there may be uncertainty as to how it will be applied to specific circumstances. If we become liable for risks that are not covered under the Reauthorization Act, our financial position, results of operations and cash flows could be materially adversely affected.

We may be unsuccessful in competing against larger or more well-established business rivals.

We face competition from other specialty insurance companies, standard insurance companies and underwriting agencies, as well as from diversified financial services companies that are larger than we are and that have greater financial, marketing and other resources than we do. Some of these competitors also have longer experience and more market recognition than we do in certain lines of business. In addition, it may be difficult or prohibitively expensive for us to implement technology systems and processes that are competitive with the systems and processes of these larger companies. We cannot assure that we will maintain our current competitive position in the markets in which we operate, or that we will be able to expand our operations into new markets. If we fail to do so, our results of operations and cash flows could be materially adversely affected.

We invest a significant amount of our assets in securities that have experienced market fluctuations, which may reduce the value of our investment portfolio, reduce investment income or generate realized investment losses.

At December 31, 2014, approximately 92% of our investment portfolio was invested in fixed maturity securities. The fair value of these fixed maturity securities and the related investment income fluctuate depending on general economic and market conditions, including volatility in the financial markets and the economy as a whole. For our fixed maturity securities, the fair value generally increases or decreases in an inverse relationship with fluctuations in interest rates and credit spreads, while net investment income realized by us from future investments in fixed maturity securities will generally increase or decrease with interest rates. Mortgage-backed and asset-backed securities may have different net investment income and/or cash flows from those anticipated at the time of investment. These securities have prepayment risk because the timing of cash flows that result from the repayment of principal might occur earlier than anticipated, due to declining interest rates, or extension risk when cash flows may be received later than anticipated because of rising interest rates.

Although 98% of our portfolio is investment grade, all of our fixed maturity securities are subject to credit risk. For mortgage-backed securities, credit risk exists if mortgagors default on the underlying mortgages. During an economic downturn, our state, municipal and non-U.S. sovereign bond portfolios could be subject to a higher risk of default or impairments due to declining tax bases and revenue, notwithstanding the relatively low historical rates of default on these types of obligations. If any of the issuers of our fixed maturity securities suffer financial setbacks, the ratings on the fixed maturity securities could fall (with a concurrent fall in fair value) and, in a worst case scenario, the issuer could default on its financial obligations. If the issuer defaults, we could have realized losses associated with the impairment of the securities.

The impact of fluctuations in the market prices of securities affects our financial statements. Because all of our fixed maturity and equity securities are classified as available for sale, changes in the fair value of these securities are reflected in net unrealized investment gain or loss within our other comprehensive income. Similar treatment is not available for liabilities. Therefore, an increase in market interest rates could cause a decrease in our shareholders’ equity and financial position.

Since 2008, the financial markets and the economy have been severely affected by various events. This has impacted interest rates and has caused large writedowns in other companies’ financial instruments either due to the market fluctuations or the impact of the events on the debtors’ financial condition. Turmoil in the financial markets and the economy, particularly related to potential future ratings downgrade and/or impairment of debt securities of sovereign issuers, could adversely affect the valuation of our investments and cause us to have to record other-than-temporary impairment credit losses on our investments, which could have a material adverse effect on our financial position and results of operations.

If rating agencies downgrade our financial strength ratings, our business and competitive position in the industry may suffer.

Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Our insurance companies are rated by Standard & Poor’s Financial Services LLC (S&P), Fitch Ratings (Fitch), Moody’s Investors Service, Inc. (Moody’s) and/or A.M. Best Company, Inc. (A.M. Best). The financial strength ratings reflect the rating agencies’ opinions of an insurance company’s and insurance holding company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders and are not evaluations directed to investors. Our ratings are subject to periodic review by those entities, and the continuation of those ratings at current levels cannot be assured. If our ratings are reduced from their current levels, it could affect our ability to compete for high quality business and, thus, our financial position and results of operations could be adversely affected.

We may require additional capital or funds for liquidity in the future, which may not be available or may only be available on unfavorable terms.

Our future capital and liquidity requirements depend on many factors, including our ability to write new business successfully, to establish premium rates and reserves at levels sufficient to cover losses, and to maintain our current line of credit. We may need to raise additional funds through financings or curtail our growth and reduce our assets. Any equity or debt financing, if available at all in periods of stress and volatility in the financial markets, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result and, in any case, such securities may have rights, preferences and privileges that are senior to those of our common stock. If we cannot obtain adequate capital or funds for liquidity on favorable terms or at all, our business, results of operations and liquidity could be adversely affected. We may also be pre-empted from making acquisitions.

S&P, Fitch, Moody’s and A.M. Best rate our credit strength. If our credit ratings are reduced, it might significantly impede our ability to raise capital and borrow money, which could materially affect our business, results of operations and liquidity.

We may be unable to attract and retain qualified employees.

We depend on our ability to attract, retain and provide for the succession of skilled and experienced underwriting talent and other key employees (including our CEO, President/COO, CFO, senior executive officers and executives at our operating companies) who are knowledgeable about our business. Certain of our senior underwriters and other key employees have employment agreements that are for definite terms, and there is no assurance we will retain these employees beyond the current terms of their agreements. If the quality of our underwriting team and other key personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate and be unable to expand our operations into new markets, which could materially adversely affect our business.

Our strategy of acquiring other companies and underwriting teams for growth may not succeed.

Our strategy for growth includes growing through acquisitions of insurance industry related companies. This strategy presents risks that could have a material adverse effect on our business and financial performance, including: 1) the diversion of our management’s attention, 2) our ability to assimilate the operations and personnel of the acquired companies, 3) the contingent and latent risks associated with the past operations of, and other unanticipated problems arising in, the acquired companies, 4) the need to expand management, administration and information technology systems and 5) increased competition for suitable acquisition opportunities and qualified employees.

We cannot predict whether we will be able to find suitable acquisition targets, nor can we predict whether we would be able to acquire these additional companies on terms favorable to us or if we will be able to successfully integrate the acquired operations into our business. We do not know if we will realize any anticipated benefits of completed acquisitions or if there will be substantial unanticipated costs associated with new acquisitions. In addition, future acquisitions by us may result in potentially dilutive issuances of our equity securities, the incurrence of additional debt, and/or the recognition of potential impairment of goodwill and other intangible assets. Each of these factors could materially adversely affect our financial position and results of operations.

More recently, our growth has come through hiring underwriting teams focused on new lines of business. While more limited, many of the same risks above apply. Most notably, the diversion of management attention, the assimilation of new personnel and the need to expand management, administration and information technology systems are present. Also, because these are new lines of business for which we have limited experience, the results of these new lines could materially adversely affect our financial position and results of operations.

We are exposed to goodwill impairment risk as part of our business acquisition strategy.

We have recorded goodwill in connection with the majority of our business acquisitions. We are required to perform goodwill impairment tests at least annually and whenever events or circumstances indicate that the carrying value of our goodwill may not be recoverable from estimated future cash flows. As a result of our annual and other periodic evaluations, we may determine that a portion of our goodwill needs to be written down to fair value, which could materially adversely affect our financial position and results of operations.

We are an insurance holding company and, therefore, may not be able to receive dividends in needed amounts from our insurance company subsidiaries.

We have relied on, and in the future we may rely on, dividends from our insurance companies to meet our corporate cash flow requirements for paying principal and interest on outstanding debt obligations, dividends to shareholders and corporate expenses. The payment of dividends by our insurance companies is subject to regulatory restrictions and will depend on the surplus and future earnings of these subsidiaries, as well as the regulatory restrictions. As a result, we may not be able to receive dividends from our insurance companies at times and in amounts necessary to meet our obligations, which could materially adversely affect our financial position and liquidity.

Because we operate internationally, fluctuations in currency exchange rates may affect our assets and liabilities.

We underwrite insurance coverages that are denominated in a number of foreign currencies, and we establish and maintain our loss reserves for these policies in their respective currencies. Our principal area of exposure relates to fluctuations in exchange rates between the British pound sterling, the Euro and the U.S. dollar. Consequently, a change in the exchange rate between the U.S. dollar and the British pound sterling or the Euro could have a material adverse effect on our financial position, results of operations and cash flows. We hold assets, primarily available for sale fixed maturity securities, denominated in comparable foreign currencies that are intended to economically hedge the foreign currency risk related to these reserves denominated in foreign currencies but there can be no assurances that we will be successful in these efforts.

Our information technology systems or third-party systems that we utilize or access may fail or suffer a loss of security, which could adversely affect our business.

Our business is highly dependent upon the successful and uninterrupted functioning of our computer systems. We rely on these systems to perform actuarial and other modeling functions necessary for writing business, to process our premiums and policies, to process and make claims payments, to establish our loss reserves, and to prepare our management and external financial statements and information. The failure of these systems could interrupt our operations. In addition, in the event of a disaster such as a natural catastrophe, a blackout, a computer virus or hacking incident, a terrorist attack or war, our systems may be inaccessible for an extended period of time. These systems failures or disruptions could result in a material adverse effect on our business results. We also utilize and/or rely on computer systems developed and maintained by outsourcing relationships and key vendors. Their systems could experience the same risks, which could result in a material adverse effect on our business results.

A security breach of our computer systems could damage our reputation or result in liability. We retain confidential information regarding our business dealings in our computer systems. We may be required to spend significant capital and other resources to protect against security breaches or to alleviate problems caused by such breaches. Despite the implementation of security measures, the infrastructure supporting our computer systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, we could be subject to liability if hackers were able to penetrate our network security or otherwise misappropriate confidential information. Furthermore, certain of our businesses are subject to compliance with laws and regulations enacted by U.S. federal and state governments, the European Union or other jurisdictions or enacted by various regulatory organizations or exchanges relating to the privacy and security of the information of clients, employees or others. The compromise of personal, confidential or proprietary information could result in remediation costs, legal liability, regulatory action and reputational harm, which could have a material adverse effect on our results of operations or financial condition.

If we experience difficulties with outsourcing relationships, our ability to conduct our business might be negatively impacted.

We outsource certain business and administrative functions to third parties and may do so increasingly in the future. If we fail to develop and implement our outsourcing strategies or our third party providers fail to perform as anticipated, we may experience operational difficulties, increased costs and a loss of business that may have a material adverse effect on our results of operations or financial position. By outsourcing certain business and administrative functions to third parties, we may be exposed to enhanced risk of data security breaches. Any breach of data security could damage our reputation and/or result in monetary damages, which could have a material adverse effect on our results of operations or financial condition.

We may not be able to delay or prevent an inadequate or coercive offer for change in control, and regulatory rules and required approvals might delay or deter a favorable change of control.

Our certificate of incorporation and bylaws do not have provisions that could make it more difficult for a third party to acquire a majority of our outstanding common stock. As a result, we may be more susceptible to an inadequate or coercive offer that could result in a change in control than a company whose charter documents have provisions that could delay or prevent a change in control.

Many state insurance regulatory laws contain provisions that require advance approval by state agencies of any change of control of an insurance company that is domiciled or, in some cases, has substantial business in that state. “Control” is generally presumed to exist through the ownership of 10% or more of the voting securities of a domestic insurance company or of any company that controls a domestic insurance company. We own, directly or indirectly, all of the shares of stock of insurance companies domiciled in a number of states. Any purchaser of shares of common stock representing 10% or more of the voting power of our common stock will be presumed to have acquired control of our domestic insurance subsidiaries unless, following application by that purchaser, the relevant state insurance regulators determine otherwise. Any transactions that would constitute a change in control of any of our individual insurance subsidiaries would generally require prior approval by the insurance departments of the states in which the insurance subsidiary is domiciled.

We have insurance subsidiaries domiciled in the United Kingdom and Bermuda. Insurers in those countries are also subject to change of control restrictions under their individual regulatory frameworks. These requirements may deter or delay possible significant transactions in our common stock or the disposition of our insurance companies to third parties, including transactions that could be beneficial to our shareholders.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal and executive offices are located in Houston, Texas, in buildings owned by Houston Casualty Company. We also maintain offices in approximately 60 locations elsewhere in the United States, the United Kingdom, Spain and Ireland. The majority of these additional locations are in leased facilities.

Our major office facilities, with more than 25,000 square feet, are as follows:


Segment	Location	Square feet	Termination date of lease

U.S. Property & Casualty and Corporate headquarters	Houston, Texas	77,000	Owned
	Houston, Texas	51,000	Owned
U.S. Property & Casualty	Mount Kisco, New York	38,000	Owned
	Wakefield, Massachusetts	34,000	February 28, 2017
	Auburn Hills, Michigan	27,000	May 31, 2017
	Dallas, Texas	26,000	May 31, 2019
Accident & Health	Atlanta, Georgia	46,000	June 30, 2019
U.S. Surety & Credit	Los Angeles, California	41,000	October 31, 2016
International	London, England	30,000	December 24, 2015

Item 3. Legal Proceedings

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.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our common stock trades on the New York Stock Exchange under the ticker symbol “HCC”. The intra-day high and low sales prices for quarterly periods in the last three years, as reported by the New York Stock Exchange, were as follows:


	2014				2013				2012
	High		Low		High		Low		High		Low

First quarter	$	46.14	$	41.19	$	42.11	$	37.37	$	31.71	$	26.62
Second quarter		48.97		44.17		43.69		40.81		32.69		29.91
Third quarter		50.76		46.51		46.14		41.85		34.46		30.06
Fourth quarter		54.96		47.11		46.38		42.57		37.65		33.74

On February 13, 2015, the last reported sales price of our common stock as reported by the New York Stock Exchange was $55.48 per share.

Shareholders

We have one class of authorized capital stock. On February 13, 2015, there were 126.5 million shares of common stock issued and 96.3 million shares of common stock outstanding held by 717 shareholders of record; however, we estimate there are approximately 64,000 beneficial owners.

Dividend Policy

Cash dividends declared on a quarterly basis were as follows:


	2014		2013		2012

First quarter	$	0.225	$	0.165	$	0.155
Second quarter		0.225		0.165		0.155
Third quarter		0.295		0.225		0.165
Fourth quarter		0.295		0.225		0.165

Beginning in June 1996, we announced a planned quarterly program of paying cash dividends to shareholders. Our Board of Directors may review our dividend policy from time to time, and any determination with respect to future dividends will be made in light of regulatory and other conditions at that time, including our earnings, financial condition, capital requirements, loan covenants and other related factors. Under the terms of our bank loan facility, we are prohibited from paying dividends in excess of an agreed upon maximum amount in any year. That limitation does not affect our ability to pay dividends in a manner consistent with our past practice and current expectations. During 2014, we increased our regular quarterly dividend by $0.07 per share, marking the largest increase in the quarterly cash dividend in our history. We presently intend to continue paying quarterly dividends.

Performance Graph

The following graph shows a comparison of cumulative total returns for an investment of $100.00 made on December 31, 2009 in the common stock of HCC Insurance Holdings, Inc., the Standard & Poor’s 500 Index, and the Standard & Poor’s 500 Property and Casualty Insurance Index.

LOGO

Total Return to Shareholders

(includes reinvestment of dividends)


Company/Index	2009		2010		2011		2012		2013		2014

HCC Insurance Holdings, Inc.	$	100.00	$	105.65	$	102.48	$	141.34	$	178.40	$	211.35
S&P 500 Index		100.00		115.06		117.49		136.30		180.44		205.14
S&P 500 P&C Insurance Index		100.00		108.94		108.67		130.52		180.50		208.91

This performance graph shall not be deemed to be incorporated by reference into our Securities and Exchange Commission filings and should not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

Issuer Purchases of Equity Securities

In 2012, the Board approved the purchase of up to $300.0 million of our common stock. On August 20, 2014, the Board approved a new authorization for $500.0 million (the Plan) and cancelled $130.9 million remaining under the previous authorization. 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, 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. Our purchases in the fourth quarter of 2014 were 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
October		1,351,242	$	48.51		1,351,242	$	372,532,739
November		107,009	$	52.75		107,009	$	366,888,011
December		284,444	$	52.62		284,444	$	351,921,289

Total		1,742,695				1,742,695

Item 6. Selected Financial Data

The selected consolidated financial data shown below has been derived from the Consolidated Financial Statements. All information contained herein should be read in conjunction with the Consolidated Financial Statements and related Notes, the Schedules, Exhibit 12 and Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Report. In the tables below, we revised loss and loss adjustment expense and other operating expense in 2010 – 2013 to correctly classify internal claims department costs. There was no impact on net earnings or total shareholders’ equity in any period. See Note 1, “General Information and Significant Accounting and Reporting Policies — Revision of Financial Statement Presentation” to the Consolidated Financial Statements for additional information.


	Years ended December 31,
	2014		2013		2012		2011		2010
	(in thousands, except per share data)
REVENUE

Net earned premium	$	2,323,627	$	2,239,240	$	2,242,625	$	2,127,170	$	2,041,924
Net investment income		221,620		220,182		222,634		212,271		203,819
Other operating income		40,932		35,452		30,448		35,590		44,832
Net realized investment gain		66,370		42,030		31,148		3,653		12,104
Other-than-temporary impairment credit losses		-		-		(1,028)		(4,679)		(425)

Total revenue		2,652,549		2,536,904		2,525,827		2,374,005		2,302,254

EXPENSE

Loss and loss adjustment expense, net		1,326,835		1,322,454		1,338,074		1,429,370		1,241,976
Policy acquisition costs, net		294,670		279,439		281,201		266,125		255,136
Other operating expense		341,083		336,091		326,497		300,434		293,967
Interest expense		28,125		26,210		25,628		23,070		21,348

Total expense		1,990,713		1,964,194		1,971,400		2,018,999		1,812,427

Earnings before income tax expense		661,836		572,710		554,427		355,006		489,827
Income tax expense		203,493		165,513		163,187		99,763		144,731

Net earnings	$	458,343	$	407,197	$	391,240	$	255,243	$	345,096

Net earnings attributable to unvested restricted stock		(7,497)		(6,638)		(6,982)		(3,864)		(3,926)

Net earnings available to common stock	$	450,846	$	400,559	$	384,258	$	251,379	$	341,170


Earnings per common share
Basic	$	4.62	$	4.05	$	3.84	$	2.31	$	3.00

Diluted	$	4.61	$	4.04	$	3.83	$	2.30	$	2.99

Weighted average shares outstanding
Basic		97,591		98,853		100,176		109,051		113,863

Diluted		97,851		99,113		100,456		109,240		114,077


Cash dividends declared, per share	$	1.04	$	0.78	$	0.64	$	0.60	$	0.56


	Years ended December 31,
	2014			2013			2012			2011			2010
	(in thousands, except ratios)
Statistical data

Gross written premium	$	3,001,618		$	2,880,249		$	2,784,073		$	2,649,126		$	2,578,908
Net written premium		2,373,245			2,255,323			2,253,396			2,182,158			2,026,197

Net loss ratio (1)		55.5	%		57.6	%		58.2	%		65.8	%		59.4	%
Expense ratio (2)		26.6			25.8			25.4			25.3			25.6

Combined ratio		82.1	%		83.4	%		83.6	%		91.1	%		85.0	%


	December 31,
	2014			2013			2012			2011			2010
	(in thousands, except per share data)
Balance sheet data

Total investments	$	7,164,906		$	6,718,692		$	6,950,398		$	6,049,750		$	5,687,095
Premium, claims and other receivables		553,027			580,107			549,725			688,732			635,867
Reinsurance recoverables		1,168,900			1,277,257			1,071,222			1,056,068			1,006,855
Ceded unearned premium		316,715			305,438			256,988			222,300			278,663
Goodwill		905,636			895,200			885,860			872,814			821,648

Total assets	$	10,714,346		$	10,344,520		$	10,267,807		$	9,597,278		$	9,036,107


Loss and loss adjustment expense payable	$	3,728,085		$	3,902,132		$	3,767,850		$	3,658,317		$	3,471,858
Reinsurance, premium and claims payable		301,476			332,985			294,621			366,499			345,730
Unearned premium		1,198,930			1,134,849			1,069,956			1,031,034			1,045,877
Notes payable		824,251			654,098			583,944			478,790			298,637

Total shareholders’ equity	$	3,903,351		$	3,674,430		$	3,542,612		$	3,273,982		$	3,278,400


Book value per share (3)	$	40.44		$	36.62		$	35.10		$	31.45		$	28.52


Shares outstanding		96,521			100,336			100,928			104,101			114,968

(1)	Calculated by dividing net loss and loss adjustment expense less internal claims department costs by net earned premium.

(2)	Calculated by dividing segment underwriting expense, which includes internal claims department costs, by segment revenue.

(3)	Calculated by dividing total shareholders’ equity by shares outstanding.

Item 7. 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 Selected Financial Data and the Consolidated Financial Statements and related Notes.

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 $55.48 on February 13, 2015, resulting in market capitalization of $5.3 billion.

We underwrite and manage a variety of largely non-correlated specialty insurance products through five insurance underwriting segments: U.S. Property & Casualty, Professional Liability, Accident & Health, U.S. Surety & Credit and International. We market our insurance products through a network of independent agents and brokers, through managing general agents owned by the company, and directly to consumers. In addition, we assume insurance written by other insurance companies.

Our organization is focused on generating consistent, industry-leading combined ratios. We concentrate our insurance writings in selected specialty lines of business in which we believe we can achieve meaningful underwriting profit. We rely on experienced underwriting personnel working within defined and monitored limits, as well as our access to and expertise in the reinsurance marketplace, to limit or reduce risk. By focusing on underwriting profitability, we are able to accomplish our primary objectives of maximizing net earnings and growing book value per share.

Key facts about our consolidated group as of and for the year ended December 31, 2014 are as follows:

•

We had consolidated shareholders’ equity of $3.9 billion, with book value per share of $40.44.

•

We generated net earnings of $458.3 million, or $4.61 per diluted share.

•

We produced total revenue of $2.7 billion, of which 88% related to net earned premium and 8% related to net investment income.

•

Our net loss ratio was 55.5% and our combined ratio was 82.1%.

•

Our debt to capital ratio was 17.4%.

•

We purchased $224.7 million of our common stock at an average cost of $47.70 per share. At year-end, we had $351.9 million remaining under our current $500 million share buyback authorization.

•

We increased our regular quarterly cash dividend to $0.295 per share, marking the 18^th consecutive year of increases and the largest increase in the quarterly cash dividend in our history. We declared dividends of $1.04 per share and paid $96.5 million, which was $24.6 million more than we paid in 2013.

Effective January 1, 2015, we completed the acquisition of all of the capital stock of Producers Ag Insurance Group, Inc. (ProAg) from CUNA Mutual Group for $104.5 million cash. ProAg writes multi-peril crop, crop hail, named peril and livestock insurance. ProAg’s operations will be included in our consolidated results of operations, financial position and cash flows beginning in 2015.

The following sections discuss our key operating results. The reason for any significant variances between 2013 and 2012 are the same as those discussed for variances between 2014 and 2013, unless otherwise noted. 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 past three years were as follows:


	2014			2013			2012

Net earnings	$	458,343		$	407,197		$	391,240

Earnings per diluted share	$	4.61		$	4.04		$	3.83


Net loss ratio		55.5	%		57.6	%		58.2	%
Expense ratio		26.6			25.8			25.4

Combined ratio		82.1	%		83.4	%		83.6	%

In 2014, we recognized no losses for major catastrophic events. During the prior two years, we recognized the following pretax net losses, including reinstatement premium, for major catastrophic events: 1) 2013 – European floods ($15.0 million) and German hail storms ($13.0 million) and 2) 2012 – Superstorm Sandy ($30.8 million). In all years, the remaining catastrophes, which we refer to as “small catastrophes” and that primarily impacted our property treaty line of business, were not individually significant events to us. 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 accident year catastrophe losses, as well as the impact on key metrics.


	2014			2013			2012

Gross losses	$	28,762		$	56,639		$	84,751


Net losses, after reinsurance	$	28,683		$	55,939		$	52,390
Reinstatement premium, net		(2,247)			(3,932)			401

Total net catastrophe losses	$	26,436		$	52,007		$	52,791

Impact of net catastrophe losses on:
Net earnings per diluted share	$	(0.18)		$	(0.34)		$	(0.34)
Net loss ratio (percentage points)		1.1	%		2.4	%		2.3	%
Combined ratio (percentage points)		1.1	%		2.3	%		2.4	%

We recognized net favorable loss development of $56.4 million in 2014, $73.7 million in 2013 and $70.0 million in 2012, which included, in the respective periods, $5.9 million, $7.3 million and $21.4 million of net favorable development related to prior year catastrophes. The total net favorable development also included adverse development of $43.5 million in 2014, $70.3 million in 2013 and $48.9 million in 2012 related to a specific class of Spanish surety bonds. See the “Loss and Loss Adjustment Expense” and “Segment Operations” sections below for discussion of our loss activity and the “Critical Accounting Policies” section below for discussion of our policies and procedures related to establishing and reviewing loss reserves.

Revenue

We generate our revenue from five primary sources:

•

risk-bearing earned premium produced by our insurance underwriting segments,

•

investment income earned on our consolidated investment portfolio by our Investing segment,

•

fee and commission income received from third party insurers for premium produced for them by our underwriting agencies,

•

transaction-based revenues, primarily related to residual value and mortgage reinsurance products in our U.S. Property & Casualty segment, and

•

realized investment gains and losses related to our investment portfolio.

Total revenue increased $115.6 million in 2014, compared to 2013, due to an $84.4 million increase in net earned premium and higher net realized investment gains. The $11.1 million increase in total revenue in 2013, compared to 2012, related to higher net realized investment gains.

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


	2014		2013		2012

U.S. Property & Casualty	$	676,103	$	670,764	$	614,694
Professional Liability		517,152		536,085		539,383
Accident & Health		998,387		883,055		835,796
U.S. Surety & Credit		231,965		228,930		221,468
International		577,637		548,499		531,167
Exited Lines		374		12,916		41,565

Total gross written premium	$	3,001,618	$	2,880,249	$	2,784,073


U.S. Property & Casualty	$	380,299	$	385,355	$	383,938
Professional Liability		346,720		359,509		378,138
Accident & Health		992,034		881,368		835,008
U.S. Surety & Credit		204,767		199,121		195,904
International		448,949		417,039		419,155
Exited Lines		476		12,931		41,253

Total net written premium	$	2,373,245	$	2,255,323	$	2,253,396


U.S. Property & Casualty	$	363,998	$	367,135	$	354,050
Professional Liability		351,690		368,167		394,687
Accident & Health		981,219		883,515		831,827
U.S. Surety & Credit		199,764		194,286		207,955
International		426,480		413,206		412,853
Exited Lines		476		12,931		41,253

Total net earned premium	$	2,323,627	$	2,239,240	$	2,242,625

The 2014 and 2013 growth in gross written premium from our insurance underwriting segments occurred primarily in: 1) the Accident & Health segment, from the growth of our medical stop-loss and short-term medical products, 2) the International segment, from increased writings in our surety & credit and liability lines of business and 3) the U.S. Property & Casualty segment, from our growing casualty line of business. Our net written premium increased in 2014, compared to 2013, due to growth in the Accident & Health segment and was flat in 2013, compared to 2012, due to increased reinsurance in 2013, primarily in the U.S. Property & Casualty segment. Net earned premium increased in 2014 as the medical stop-loss and short-term medical products were earned in less than twelve months. See the “Segment Operations” section below for further discussion of the relationship and changes in premium revenue within each insurance segment.

Net investment income, which is included in our Investing segment, was essentially flat in 2014 and 2013 as declining income from reduced reinvestment yields on fixed maturity securities was offset by increasing dividend income from equity securities. Our investment expense increased in 2013 and decreased in 2014 due to changes in the mix of the portfolio. We recognized $66.4 million of net realized investment gains in 2014, compared to $42.0 million in 2013 and $31.1 million in 2012. The 2014 net realized investment gains were principally due to the sale of equity securities.

Loss and Loss Adjustment Expense

We incur expenses for insurance claims paid or payable to policyholders, as well as the potential liability for incurred but not reported claims, and the expense to adjust and settle all claims (collectively referred to as loss and loss adjustment expense).

In 2014, we revised the presentation of our 2013 and 2012 consolidated statements of earnings to correctly classify internal claims department costs as loss and loss adjustment expense. Previously these costs were included in other operating expense. See Note 1, “General Information and Significant Accounting and Reporting Policies — Revision of Financial Statement Presentation” to the Consolidated Financial Statements for additional information.

Our net loss ratio is the percentage of our loss and loss adjustment expense excluding internal claims department costs divided by our net earned premium in each year. In evaluating our businesses, we consider internal claims department costs to be operating expenses and, thus, exclude them from the calculation of our net loss ratios and include them in the calculation of our expense ratios. The reclassification discussed in the previous paragraph had no impact on our segment reporting, which reflects the way in which our management viewed and evaluated our segment results.

Loss development represents an increase or decrease in estimates of ultimate losses related to business written in prior accident years. We record such increases or decreases as loss and loss adjustment expense in the current reporting year. Favorable development means our original ultimate loss estimate was higher than the current estimate. Adverse development means the current ultimate loss estimate is higher than our original estimate. Loss development occurs as we review our loss exposure with our actuaries, increasing or decreasing estimates of our ultimate losses as a result of such reviews and as losses are finally settled or claims exposure changes.

The tables below detail our net loss and loss adjustment expense and our net loss ratios on a consolidated basis and for our segments.


	2014		2013		2012

U.S. Property & Casualty	$	154,200	$	175,190	$	209,286
Professional Liability		206,690		195,429		229,873
Accident & Health		696,288		630,210		601,076
U.S. Surety & Credit		42,273		24,143		38,535
International		196,134		249,199		189,410
Corporate & Other		31,250		48,283		69,894

Net loss and loss adjustment expense	$	1,326,835	$	1,322,454	$	1,338,074


	2014			2013			2012
Net (favorable) adverse loss development
U.S. Property & Casualty	$	(41,560)		$	(39,363)		$	2,321
Professional Liability		973			(26,346)			(25,897)
Accident & Health		(13,086)			(18,027)			(10,511)
U.S. Surety & Credit		(22,629)			(37,898)			(25,377)
International		25,050			43,805			(10,084)
Exited Lines		(5,105)			4,087			(463)

Total net favorable loss development		(56,357)			(73,742)			(70,011)
Accident year catastrophe losses		28,683			55,939			52,390
All other net loss and loss adjustment expense		1,354,509			1,340,257			1,355,695

Net loss and loss adjustment expense	$	1,326,835		$	1,322,454		$	1,338,074


U.S. Property & Casualty		42.4	%		47.7	%		59.1	%
Professional Liability		58.8			53.1			58.2
Accident & Health		71.0			71.3			72.3
U.S. Surety & Credit		21.2			12.4			18.5
International		46.0			60.3			45.9

Consolidated net loss ratio		55.5	%		57.6	%		58.2	%

Consolidated accident year net loss ratio		57.8	%		60.9	%		61.5	%

Loss and loss adjustment expense increased $4.4 million in 2014 and decreased $15.6 million in 2013, compared to the respective prior year. The 2014 increase was primarily due to growth in the business and lower net favorable development in 2014, partially offset by lower catastrophe losses in 2014. The 2013 decrease was primarily due to a lower accident year net loss ratio in 2013 and flat net earned premium year-over-year. Excluding catastrophes, our accident year net loss ratio was 56.7% for 2014, 58.5% for 2013 and 59.1% for 2012. See the “Segment Operations” section below for additional discussion of the changes in net loss development and net loss ratios for each segment.

Our net paid loss ratio is the percentage of losses paid, net of reinsurance, divided by net earned premium for the year. Our net paid loss ratio was 58.7% in 2014, 56.5% in 2013 and 56.7% in 2012. The amount of claims paid fluctuates year-over-year due to the timing of claims settlement, the occurrence of catastrophic events and commutations, and the mix of our business. Our net paid loss ratio increased in 2014 primarily due to higher payments to settle claims related to Spanish surety bonds. In 2014 and 2013, we paid $243.3 million and $153.9 million, respectively, to settle these claims, of which approximately 60% was reinsured.

Policy Acquisition Costs

Policy acquisition costs relate to direct costs we incur to issue insurance policies, including commissions, premium taxes and compensation of our underwriters. The percentage of policy acquisition costs to net earned premium was 12.7% in 2014 and 12.5% in both 2013 and 2012. We record profit commissions due from reinsurers as an offset to policy acquisition costs. The higher percentage in 2014 related to lower profit commissions from reinsurers in 2014 and commissions on our growing short-term medical business.

Other Operating Expense

Other operating expense increased 1% in 2014 and 3% in 2013. In 2014, higher employee compensation and benefit costs were offset by the year-over-year fluctuation in foreign currency benefit/expense. We recognized a foreign currency benefit of $23.2 million in 2014, compared to expense of $5.3 million and $6.2 million in 2013 and 2012. The foreign currency benefit/expense related to changes in the value of the British pound sterling and the Euro relative to the U.S. dollar. In 2013, higher employee compensation and benefit costs, compared to 2012, were partially offset by a $5.1 million benefit related to an indemnification liability. We reduced the indemnification liability, which related to a 2001 subsidiary sale, due to favorable claims activity and successful subrogation recoveries.

Excluding the foreign currency benefit/expense and indemnification benefits, other operating expense increased 9% in 2014 and 5% in 2013 mainly due to increased employee compensation and benefits costs. Our employee count grew to 1,983 at December 31, 2014 from 1,900 at December 31, 2013, mainly due to the addition of new underwriting teams. In addition, our bonus expense increased in 2014 and 2013 due to higher pretax earnings.

Other operating expense included $25.1 million, $16.2 million and $13.2 million of stock-based compensation expense in the respective three years. Stock-based compensation expense was higher in 2014 due to accelerated expense for certain unvested restricted stock awards for which the performance criteria were achieved in 2014, as well as higher grant prices due to the increase in our stock price. In 2014, we granted $17.4 million of restricted stock awards and units, with a weighted-average life of 2.9 years. At December 31, 2014, there was approximately $29.3 million of total unrecognized compensation expense related to unvested restricted stock awards and units, options and our employee stock purchase plan, which is expected to be recognized over a weighted-average period of 1.6 years. In 2015, we expect to recognize $15.9 million of expense for all stock-based awards outstanding at year-end 2014.

Interest Expense

Interest expense was $28.1 million, $26.2 million and $25.6 million in 2014, 2013 and 2012, respectively, and included $19.3 million per year for our Senior Notes. Our interest expense has increased due to a higher amount of outstanding borrowings on our $825.0 million Revolving Loan Facility, mainly to fund purchases of our common stock.

Income Tax Expense

Our income taxes are due to U.S. Federal, state, local and foreign jurisdictions. Our effective income tax rate was 30.7% for 2014, compared to 28.9% for 2013 and 29.4% for 2012. Fluctuations in our effective tax rate are due to the relationship of pretax income and tax-exempt investment income. In 2014, our pretax income was substantially higher and our tax-exempt investment income was flat compared to 2013. The lower effective rate in 2013 related to an increased benefit from tax-exempt investment income in that year.

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. Certain segments also write facultative or individual account reinsurance, as well as treaty reinsurance business. In some cases, we purchase reinsurance to limit our losses from both individual policy losses and multiple policy losses from catastrophic occurrences and from aggregate losses in a year. Our segments maintain disciplined expense management and a streamlined management structure, which results in favorable expense ratios. The following provides operational information about our insurance underwriting segments, Investing segment and Corporate & Other category.

U.S. Property & Casualty Segment

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


	2014			2013			2012

Net earned premium	$	363,998		$	367,135		$	354,050
Other revenue		20,822			24,266			18,865

Segment revenue		384,820			391,401			372,915

Loss and loss adjustment expense, net		154,200			175,190			209,286
Other expense		116,553			117,910			116,398

Segment expense		270,753			293,100			325,684

Segment pretax earnings	$	114,067		$	98,301		$	47,231


Net loss ratio		42.4	%		47.7	%		59.1	%
Expense ratio		30.3			30.1			31.2

Combined ratio		72.7	%		77.8	%		90.3	%


Aviation	$	109,497		$	112,597		$	116,236
Liability		113,252			100,956			97,232
Sports & Entertainment		26,616			26,083			18,926
Public Risk		47,060			63,791			65,281
Other		67,573			63,708			56,375

Total net earned premium	$	363,998		$	367,135		$	354,050


Aviation		56.0	%		55.0	%		56.2	%
Liability		43.7			54.8			71.4
Sports & Entertainment		58.0			58.9			48.4
Public Risk		50.5			76.1			94.1
Other		6.1			(9.5)			7.1

Total net loss ratio		42.4	%		47.7	%		59.1	%


Aviation	$	134,388		$	139,673		$	144,621
Liability		190,085			153,770			129,183
Sports & Entertainment		132,763			144,416			103,807
Public Risk		69,800			70,665			85,857
Other		149,067			162,240			151,226

Total gross written premium	$	676,103		$	670,764		$	614,694


Aviation	$	113,336		$	111,446		$	112,712
Liability		145,480			111,398			104,523
Sports & Entertainment		23,028			28,518			21,258
Public Risk		41,261			55,666			69,081
Other		57,194			78,327			76,364

Total net written premium	$	380,299		$	385,355		$	383,938

Our U.S. Property & Casualty segment pretax earnings increased 16% in 2014, compared to 2013, primarily due to a lower net loss ratio in 2014. Pretax earnings increased $51.1 million in 2013, compared to 2012, primarily due to: 1) net favorable loss development of $39.4 million in 2013, compared to net adverse loss development of $2.3 million in 2012 and 2) net catastrophe losses of $2.0 million in 2013, compared to $11.3 million in 2012.

Gross written premium was essentially flat in 2014 due to increased writings of our expanding casualty business (included in Liability), offset by cyclical reductions in disability and contingency (included in Sports & Entertainment) and title and residual value insurance (included in Other). The growth in 2013, compared to 2012, was due to higher writings in excess casualty, primary casualty and technical property, as well as higher writings for disability, residual value and title reinsurance. Net written premium was flat in the three years due to continuing growth in Liability, offset by reduced premium due to changes in reinsurance for the Public Risk line of business.

Loss expense decreased in 2014 and 2013, primarily due to favorable loss development in both years. In addition, the 2014 accident year loss ratio decreased due to lower losses from the Public Risk line of business, which we began to reunderwrite in late 2012.

The net (favorable) adverse loss development recognized by line of business was as follows:


	2014		2013		2012

Aviation	$	(9,001)	$	(8,041)	$	(701)
Liability		(18,736)		(6,907)		9,069
Sports & Entertainment		(757)		(2,371)		(1,461)
Public Risk		(6,244)		(1,303)		8,142
Other		(6,822)		(20,741)		(12,728)

Total net (favorable) adverse loss development	$	(41,560)	$	(39,363)	$	2,321

The net loss development resulted from our annual review of reserves for this segment, which we conducted in the third quarter of each year. The majority of the lines of business in this segment provide primary coverage, and claims are reported and settled on a short to medium-term basis. Accordingly, changes to our ultimate losses for a given underwriting year typically result from revised actuarial expectations, as compared to the prior year reserve review, with respect to the settlement value of known claims.

In our Aviation line of business, we recognized favorable development in 2014 and 2013 based on recording these reserves in line with actuarially-indicated results since the respective prior year annual review.

In our Liability line of business, we experienced lower losses in 2014, compared to 2013, due to higher favorable development in the professional lines, which include our E&O and employment practices liability products. In 2014, we recognized favorable development in our professional lines based on better than expected actuarially-indicated results since our 2013 annual reserve review, primarily for underwriting years 2012 and prior. In 2013, we recognized favorable development for underwriting years 2010 – 2011 due to better than expected actuarially-indicated results. In 2012, we recognized adverse development related to underwriting years 2005 – 2010.

Our Public Risk line of business had a lower loss ratio in 2014, primarily due to our expectation of lower ultimate losses in 2014 following our re-underwriting of this business. In addition, we recognized higher favorable development in 2014 based on better than expected actuarially-indicated results since our 2013 annual reserve review. In 2012, we recognized adverse development due to deteriorating results related to underwriting years 2009 and 2010. In addition, Public Risk included catastrophe losses of: 1) 2013 – $2.0 million for Midwest tornadoes and 2) 2012 – $3.8 million for Superstorm Sandy and $3.2 million for United States spring storms.

The majority of the favorable loss development in Other relates to the run off of an assumed quota share contract for business that we wrote from 2003 – 2008. We recognized $5.0 million in 2014, $17.0 million in 2013 and $5.6 million in 2012, due to continued better than expected results since the prior annual review. This assumed quota share contract is no longer earning premium, resulting in low or negative loss ratios in total for the Other line.

Professional Liability Segment

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


	2014			2013			2012

Net earned premium	$	351,690		$	368,167		$	394,687
Other revenue		1,082			(7)			731

Segment revenue		352,772			368,160			395,418

Loss and loss adjustment expense, net		206,690			195,429			229,873
Other expense		67,692			66,391			66,721

Segment expense		274,382			261,820			296,594

Segment pretax earnings	$	78,390		$	106,340		$	98,824


Net loss ratio		58.8	%		53.1	%		58.2	%
Expense ratio		19.2			18.0			16.9

Combined ratio		78.0	%		71.1	%		75.1	%


Total gross written premium	$	517,152		$	536,085		$	539,383


Total net written premium	$	346,720		$	359,509		$	378,138

Our Professional Liability segment pretax earnings decreased $28.0 million in 2014, compared to 2013, primarily due to $26.3 million of favorable loss development in 2013. Pretax earnings increased $7.5 million in 2013, compared to 2012, due to an improved net loss ratio, primarily related to re-underwriting of our diversified financial products (DFP) line of business beginning in 2012. The segment’s premium decreased from 2012 to 2014, primarily due to lower writings of DFP from re-underwriting this business. Net written premium and net earned premium also reflect the impact of reinsurance during the past three years.

The segment had net favorable (adverse) loss development of ($1.0) million in 2014, $26.3 million in 2013 and $25.9 million in 2012. The development in each year resulted from our annual review of reserves for this segment, which we conducted in the third quarter of each year. The majority of the insurance coverage in this segment is provided through “claims made” policies, and the final settlement value of these claims is not expected to be determined for several years due to the underlying complex nature of the claims. Accordingly, changes to our ultimate losses for a given underwriting year typically result from management’s revised expectations, as compared to the prior year reserve review, with respect to the settlement value of known claims.

In 2014, we reduced reserves for our U.S. D&O product by $24.5 million related to underwriting years prior to 2007, due to better than expected loss experience compared to our 2013 annual reserve review. We also strengthened reserves for underwriting year 2007, due to indications of higher ultimate losses.

The 2013 net favorable development consisted of $15.5 million for our U.S. D&O product and $10.8 million for our International D&O product. Our 2013 reserve review indicated better than expected experience for underwriting years prior to 2007 as well as 2009 and 2010 (totaling $64.2 million), partially offset by reserve strengthening of $37.9 million in underwriting years 2007 and 2008, which were impacted by the worldwide financial crisis.

The 2012 net favorable development consisted of $9.0 million for our U.S. D&O product and $16.9 million for our International D&O product. Our 2012 reserve review indicated that incurred loss development, primarily for underwriting years 2005 and 2006, was lower than expected as compared to our 2011 reserve review, primarily due to actual outcomes on reported claims. This favorable development was partially offset by higher estimates of ultimate losses in the 2008 underwriting year.

The fluctuations in the expense ratio primarily related to reinsurance profit commissions of $2.8 million in 2014, $6.5 million in 2013 and $5.1 million in 2012, recognized in conjunction with the favorable development in those years. The profit commissions, which offset the segment’s other expense, reduced the expense ratio by 0.8 percentage points in 2014, 1.8 percentage points in 2013 and 1.3 percentage points in 2012. Excluding the impact of profit commissions, the expense ratio increased over the three year period due to declining net earned premium.

Accident & Health Segment

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


	2014			2013			2012

Net earned premium	$	981,219		$	883,515		$	831,827
Other revenue		9,663			4,932			4,918

Segment revenue		990,882			888,447			836,745

Loss and loss adjustment expense, net		696,288			630,210			601,076
Other expense		155,469			130,814			122,232

Segment expense		851,757			761,024			723,308

Segment pretax earnings	$	139,125		$	127,423		$	113,437


Net loss ratio		71.0	%		71.3	%		72.3	%
Expense ratio		15.7			14.7			14.6

Combined ratio		86.7	%		86.0	%		86.9	%


Medical Stop-loss	$	870,249		$	816,499		$	776,965
Other		110,970			67,016			54,862

Total net earned premium	$	981,219		$	883,515		$	831,827


Medical Stop-loss		73.6	%		72.7	%		73.7	%
Other		50.6			54.8			52.1

Total net loss ratio		71.0	%		71.3	%		72.3	%


Medical Stop-loss	$	876,540		$	817,943		$	777,351
Other		121,847			65,112			58,445

Total gross written premium	$	998,387		$	883,055		$	835,796


Medical Stop-loss	$	870,187		$	816,499		$	776,965
Other		121,847			64,869			58,043

Total net written premium	$	992,034		$	881,368		$	835,008

Our Accident & Health segment pretax earnings increased 9% in 2014 and 12% in 2013, compared to the prior year, due to growth in net earned premium. This increase was attributable to writing new medical stop-loss and short-term medical business, as well as rate increases on medical stop-loss renewals in 2014 and 2013. Our short-term medical product experienced significant growth in 2014 as individuals selected this product in lieu of coverage under the U.S. Affordable Care Act, which began enrollments in late 2013. The segment results included net favorable loss development of $13.1 million in 2014, $18.0 million in 2013 and $10.5 million in 2012. The segment’s expense ratio increased in 2014 due to higher commissions related to the short-term medical product, as well as higher compensation and benefits expense.

Our medical stop-loss business provides annual coverage for groups of employees, and claims are reported and settled within 12 to 15 months for each reporting year. Claims for our Other business, particularly the short-term medical product, are reported and settled quickly. We generally conducted our annual review of the segment’s reserves in the fourth quarter. Our reserve reviews indicated lower than expected claims activity related to our medical stop-loss product in: 1) 2014 – for underwriting years 2012 and 2013, 2) 2013 – for underwriting years 2011 and 2012 and 3) 2012 – for underwriting year 2011.

U.S. Surety & Credit Segment

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


	2014			2013			2012

Net earned premium	$	199,764		$	194,286		$	207,955
Other revenue		2,505			1,468			843

Segment revenue		202,269			195,754			208,798

Loss and loss adjustment expense, net		42,273			24,143			38,535
Other expense		112,232			109,550			113,619

Segment expense		154,505			133,693			152,154

Segment pretax earnings	$	47,764		$	62,061		$	56,644


Net loss ratio		21.2	%		12.4	%		18.5	%
Expense ratio		55.5			56.0			54.4

Combined ratio		76.7	%		68.4	%		72.9	%


Surety	$	146,347		$	147,041		$	158,711
Credit		53,417			47,245			49,244

Total net earned premium	$	199,764		$	194,286		$	207,955


Surety		14.3	%		11.8	%		16.6	%
Credit		40.0			14.3			24.9

Total net loss ratio		21.2	%		12.4	%		18.5	%


Surety	$	162,867		$	165,505		$	159,159
Credit		69,098			63,425			62,309

Total gross written premium	$	231,965		$	228,930		$	221,468


Surety	$	147,293		$	147,517		$	144,573
Credit		57,474			51,604			51,331

Total net written premium	$	204,767		$	199,121		$	195,904

Our U.S. Surety & Credit segment pretax earnings decreased $14.3 million in 2014, compared to 2013, primarily due to recognizing more net favorable loss development in 2013 than in 2014. The segment’s pretax earnings increased $5.4 million in 2013, compared to 2012, due to increased net favorable loss development in 2013. Premium in our credit line of business increased in 2014 due to writing new business. Premium in our surety line of business has remained relatively flat due to competition and economic conditions impacting the construction industry.

The segment had net favorable loss development of $22.6 million in 2014, $37.9 million in 2013 and $25.4 million in 2012. Each of our annual reserve reviews, which we conducted in the fourth quarter, indicated that actual loss experience was better than the actuarial expectations in the prior year reserve review. As a result, we recognized favorable loss development as follows: 1) 2014 – $20.3 million for surety and $2.3 million for credit, 2) 2013 – $20.6 million for surety and $17.3 million for credit and 3) 2012 – $18.0 million for surety and $7.4 million for credit.

International Segment

The following tables summarize the operations of the International segment.


	2014			2013			2012

Net earned premium	$	426,480		$	413,206		$	412,853
Other revenue		3,711			4,334			5,005

Segment revenue		430,191			417,540			417,858

Loss and loss adjustment expense, net		196,134			249,199			189,410
Other expense		175,158			158,869			146,807

Segment expense		371,292			408,068			336,217

Segment pretax earnings	$	58,899		$	9,472		$	81,641


Net loss ratio		46.0	%		60.3	%		45.9	%
Expense ratio		40.7			38.0			35.1

Combined ratio		86.7	%		98.3	%		81.0	%


Marine & Energy	$	97,277		$	97,143		$	100,716
Property Treaty		99,064			112,042			100,565
Surety & Credit		80,535			72,294			71,378
Liability		88,309			75,329			76,484
Other		61,295			56,398			63,710

Total net earned premium	$	426,480		$	413,206		$	412,853


Marine & Energy		42.9	%		39.9	%		32.9	%
Property Treaty		18.6			47.0			24.4
Surety & Credit		91.9			156.9			122.6
Liability		37.0			36.5			33.1
Other		47.6			30.0			29.7

Total net loss ratio		46.0	%		60.3	%		45.9	%


Marine & Energy	$	158,256		$	163,279		$	155,931
Property Treaty		133,755			139,056			138,065
Surety & Credit		105,144			90,584			84,288
Liability		98,857			82,380			75,466
Other		81,625			73,200			77,417

Total gross written premium	$	577,637		$	548,499		$	531,167


Marine & Energy	$	99,288		$	95,124		$	105,585
Property Treaty		106,326			111,334			105,442
Surety & Credit		89,233			77,857			74,977
Liability		91,565			77,097			69,546
Other		62,537			55,627			63,605

Total net written premium	$	448,949		$	417,039		$	419,155

Our International segment pretax earnings increased $49.4 million in 2014, compared to 2013, primarily due to the favorable impact of lower catastrophe losses and lower net adverse loss development in 2014. Segment earnings decreased $72.2 million in 2013, compared to 2012, primarily due to higher catastrophe losses in 2013 and net adverse loss development in 2013, compared to net favorable development in 2012.

The increase in premium in 2014 and 2013 was primarily due to increased writings in our Surety & Credit and Liability lines of business, as well as our accident and health and direct and facultative property lines of business (included in Other). The increase in 2014 was partially offset by decreased writings of Marine & Energy and Property Treaty business, due to reduced pricing and expanded competition in these lines.

The segment incurred lower net catastrophe losses in 2014 than in 2013 and 2012. We recognized no large catastrophe losses in 2014. In the prior years, we recognized pretax catastrophe losses, including reinstatement premium, for these major catastrophic events: 1) 2013 – European floods ($15.0 million) and German hail storms ($13.0 million) and 2) 2012 – Superstorm Sandy ($23.9 million). The remaining losses related to small catastrophes that impacted our property treaty business. The following table summarizes the segment’s accident year catastrophe losses, as well as the impact on key metrics:


	2014			2013			2012

Gross losses	$	28,762		$	54,639		$	61,893


Net losses, after reinsurance	$	28,683		$	53,939		$	41,063
Reinstatement premium, net		(2,247)			(3,932)			401

Total net catastrophe losses	$	26,436		$	50,007		$	41,464


Impact of net catastrophe losses (in percentage points) on:
Net loss ratio		6.5	%		12.6	%		10.0	%
Expense ratio		(0.2)			(0.4)			-

Combined ratio		6.3	%		12.2	%		10.0	%

The International segment recognized net adverse loss development of $25.1 million in 2014 and $43.8 million in 2013, compared to net favorable development of $10.1 million in 2012. The net (favorable) adverse loss development recognized by line of business was as follows:



	2014		2013		2012

Marine & Energy	$	(4,754)	$	(7,316)	$	(18,851)
Property Treaty		(8,478)		(1,303)		(1,116)
Surety & Credit		44,143		69,947		43,266
Liability		(9,459)		(14,618)		(20,525)
Other		3,598		(2,905)		(12,858)

Total net (favorable) adverse loss development	$	25,050	$	43,805	$	(10,084)

The totals in the above table include favorable development from prior years’ catastrophes of $5.4 million, $6.0 million and $18.9 million in 2014, 2013 and 2012, respectively, primarily related to these events: 1) 2014 – European floods, 2) 2013 – Superstorm Sandy and 3) 2012 – Hurricane Irene and the Japan earthquake and tsunami.

The lines of business in our International segment provide a variety of coverages, most of which are medium to long-tail lines with moderate timing for claims reporting and medium to high reserve volatility. This segment incurs most of our catastrophe losses. In Marine & Energy, we insure complex, worldwide energy production facilities, oil rigs and offshore platforms that are subject to expensive business interruption claims and replacement costs. Catastrophe-related claims for energy projects may take several years to settle and can involve significant reserve volatility for coverage on both a primary and excess basis. The Property Treaty and direct and facultative property lines are short-tail with relatively fast claims reporting and lower reserve volatility. Our Liability business, providing primarily U.K. professional liability coverage, has long-tail claims reporting and medium reserve volatility.

We generally conduct our annual review of the International segment’s reserves in the fourth quarter. However, we accelerated our 2014 and 2013 annual reserve reviews to the third quarter of each year due to the timing of issues related to certain Spanish surety bonds and a growing actuarially-indicated redundancy in several lines of business.

The net adverse loss development in the Surety & Credit line of business in all three years primarily related to strengthening our reserves on a specific class of Spanish surety bonds, the majority of which were written prior to 2006. We recorded $48.9 million of net reserves in 2012 based on management’s evaluation of the claims and the likelihood that we would ultimately be required to pay the claims, based on information available at year-end 2012. In 2013, we revised the estimates of our liability under these bonds in light of an adverse Spanish Supreme Court ruling against an unaffiliated insurance company with respect to a type of surety bond similar to ours. This resulted in $70.3 million of net adverse development in 2013. We paid claims related to these bonds throughout 2014 and settled a majority of the outstanding claims in the third quarter of 2014. In light of these settlements, we revised our estimates of our liability under these bonds and strengthened these reserves, which resulted in $43.5 million of net adverse development in 2014.

Our actual loss experience for Marine & Energy was better than the actuarial expectations in each year’s reserve review compared to the prior year review. We conducted a detailed review of outstanding claims during each annual reserve review to assist in determining these reserves. We recognized net favorable development in 2014 related to the 2012 and prior accident years, partially offset by $10.0 million of reserve strengthening for the 2013 accident year. The net favorable development recognized in 2013 related to the 2008 – 2010 and 2012 accident years, as well as the release of $3.4 million of prior years’ catastrophe reserves related to Superstorm Sandy. The net favorable development recognized in 2012 related to the 2010 and prior accident years, and included the release of $5.1 million of prior years’ catastrophe reserves primarily related to the Japan earthquake and tsunami.

In Property Treaty, the 2014 net favorable development included the release of $6.0 million of prior years’ catastrophe reserves related to the 2013 European floods, as well as $1.5 million of reserve strengthening for the 2011 Denmark storms. The remaining net favorable development related to better than expected results compared to the prior reserve review.

The net favorable development in Liability included favorable development related to our U.K. professional liability product as follows: 1) 2014 – $12.7 million (for 2013 and prior accident years), 2) 2013 – $16.1 million (for 2011 and prior accident years) and 3) 2012 – $12.8 million (for 2010 and prior accident years). In each year, the actual loss experience was better than our actuarial expectations in the prior year reserve review. In addition, there was net adverse development of $3.2 million in 2014 and $1.5 million in 2013, and net favorable development of $7.7 million in 2012, primarily related to other liability business for accident years 2011 and prior.

The net favorable development of $12.9 million in the Other category related to reserve reductions for various 2011 catastrophic events.

The previously discussed favorable and adverse development, as well as the lower accident year catastrophe losses in 2014, caused the significant variances in the segment and line of business net loss ratios year-over-year. The segment’s expense ratio increased in 2014 and 2013 due to higher compensation and benefits expense, as well as higher technology costs. In addition, the 2014 expense ratio increased due to the impact of the stronger British pound sterling relative to the U.S. dollar, compared to 2013, as most of the segment’s operating expenses are incurred in British pound sterling.

Investing Segment

Our 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. Our insurance segments generate the cash flow underlying these investments. We manage all investments and evaluate our investment results centrally and, thus, include them in a separate segment for reporting purposes.

We invest the majority of our funds in highly-rated fixed maturity securities, which are designated as available for sale securities. We held $6.6 billion of fixed maturity securities at December 31, 2014. Substantially all of our fixed maturity securities were investment grade and 73% were rated AAA or AA. In addition, we held $296.4 million of equity securities at December 31, 2014.

The following tables summarize the results and certain key metrics of our Investing segment.


	2014			2013			2012
Net investment income from:
Fixed maturity securities
Taxable	$	96,886		$	98,966		$	114,047
Exempt from U.S. income taxes		113,980			113,875			107,488

Total fixed maturity securities		210,866			212,841			221,535
Equity securities		16,555			14,537			3,959
Other		1,434			828			3,476

Total investment income		228,855			228,206			228,970
Investment expense		(7,235)			(8,024)			(6,336)

Total net investment income		221,620			220,182			222,634
Net realized investment gain		66,370			42,030			31,148
Other-than-temporary impairment credit losses		-			-			(1,028)

Segment pretax earnings	$	287,990		$	262,212		$	252,754

Fixed maturity securities:
Average yield *		3.5	%		3.6	%		3.9	%
Average tax equivalent yield *		4.3	%		4.5	%		4.7	%
Weighted-average life		8.1 years			8.2 years			8.2 years
Weighted-average duration		4.7 years			5.1 years			4.7 years
Weighted-average rating		AA			AA			AA

* Excluding realized and unrealized gains and losses.

In the past several years, the average yield on our fixed maturity securities has continued to decline due to lower reinvestment rates. Despite a persistent low interest rate environment, we have maintained a high quality investment portfolio by allocating funds to longer dated tax-exempt securities when the yield curve has been steep and relative value has been attractive. We have offset this duration extension by investing in securities with attractive yields and low duration, such as bank loans (classified as corporate securities), collateralized loan obligations (classified as asset-backed securities) and global publicly-traded equity securities. Our general policy has been to hold our available for sale securities through periods of fluctuating interest rates. We sell securities and recognize realized gains and losses from these sales if we can reinvest the proceeds to achieve our overall objectives of sufficient liquidity, enhanced income and long-term growth in book value.

The weighted average duration of our fixed maturity securities portfolio decreased to 4.7 years at December 31, 2014 (compared to 5.1 years at December 31, 2013), primarily due to the impact of the lower market interest rates on our municipal securities with call options and structured securities with prepayment options. Duration increased in 2013 due to increased prevailing interest rates and spreads based on investor concerns that the U.S. Federal government would tighten its fiscal policies. Rates on 10-year U.S. Treasury notes declined 86 basis points in 2014 and increased 126 basis points in 2013.

This table summarizes our investments by type, substantially all of which are reported at fair value, at December 31, 2014 and 2013. The methodologies used to determine the fair value of our investments are described in Note 3, “Fair Value Measurements” to the Consolidated Financial Statements.


	December 31, 2014					December 31, 2013
	Amount		%			Amount		%
Fixed maturity securities
U.S. government and government agency securities	$	70,969		1	%	$	92,709		1	%
Fixed maturity securities of states, municipalities and political subdivisions		954,708		13			986,486		15
Special purpose revenue bonds of states, municipalities and political subdivisions		2,389,012		33			2,265,195		34
Corporate securities		1,276,835		18			1,225,238		18
Residential mortgage-backed securities		821,694		11			618,119		9
Commercial mortgage-backed securities		611,631		9			504,888		7
Asset-backed securities		366,827		5			182,392		3
Foreign government securities		118,692		2			147,446		2
Equity securities		296,352		4			517,466		8
Short-term investments		258,186		4			178,753		3

Total investments	$	7,164,906		100	%	$	6,718,692		100	%


Our total investments increased $446.2 million in 2014, principally from newly generated cash flow and a $108.8 million increase in the pretax net unrealized gain. At December 31, 2014, the net unrealized gain on our investment portfolio was $262.9 million, compared to $154.1 million at December 31, 2013. The increase in the net unrealized gain was due to the decline in interest rates in 2014. During 2014, we sold equity securities with a book value of $374.8 million, and realized a net gain of $61.8 million, in order to reposition our overall investment portfolio.

The ratings of our individual securities within our fixed maturity securities portfolio at December 31, 2014 were as follows:
						Amount		%

AAA						$	1,082,778		16	%
AA							3,750,714		57
A							1,340,561		21
BBB							289,042		4
BB and below							147,273		2

Total fixed maturity securities						$	6,610,368		100	%

The table below indicates the contractual or expected maturity distribution of our fixed maturity securities at December 31, 2014. In the table, we allocated the maturities of our mortgage-backed and asset-backed securities based on the expected future principal payments. The weighted-average life of our mortgage-backed and asset-backed securities is approximately 5.3 years based on expected future cash flows.


	Non-structured					Mortgage-backed and
	securities at					asset-backed securities
	amortized cost					at amortized cost					Total
	Amount		%			Amount		%			Amount		%

One year or less	$	168,246		4	%	$	78,484		4	%	$	246,730		4	%
One year to five years		1,150,042		25			752,017		43			1,902,059		30
Five years to ten years		1,392,501		30			891,455		51			2,283,956		36
Ten years to fifteen years		875,679		19			43,015		2			918,694		14
More than fifteen years		997,752		22			3,546		-			1,001,298		16

Total fixed maturity securities	$	4,584,220		100	%	$	1,768,517		100	%	$	6,352,737		100	%

At December 31, 2014, we held $2.4 billion of special purpose revenue bonds, as well as $954.7 million of general obligation bonds, which are issued by states, municipalities and political subdivisions and collectively referred to as municipal bonds in the investment market. The overall rating of our municipal bonds was AA at December 31, 2014. Within our municipal bond portfolio, we held $474.7 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 December 31, 2014, the percentages of our special purpose revenue bond portfolio supported by these major revenue sources were as follows: 1) education – 24%, 2) transportation – 22%, 3) water and sewer – 19% and 4) electric – 12%.

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 thereafter. The underlying average credit rating of our special purpose revenue bond issuers, excluding any bond insurance, was AA at December 31, 2014. Although 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 December 31, 2014, we held a commercial mortgage-backed securities portfolio with a fair value of $611.6 million, an average rating of AA+ and an average loan-to-value ratio of 63%. We owned no collateralized debt obligations (CDOs) and we are not counterparty to any credit default swap transactions.

Some of our fixed maturity securities have call or prepayment options. In addition, mortgage-backed and certain asset-backed securities have prepayment, extension or other market-related credit risk. Calls and prepayments subject us to reinvestment risk should interest rates fall and issuers call their securities and we reinvest the proceeds at lower interest rates. Prepayment risk exists if cash flows from the repayment of principal occurs earlier than anticipated because of declining interest rates. Extension risk exists if cash flows from the repayment of principal occurs later than anticipated because of rising interest rates. Credit risk exists if mortgagees default on the underlying mortgages. Net investment income and/or cash flows from investments that have call or prepayment options and prepayment, extension or credit risk may differ from what was anticipated at the time of investment. We mitigate these risks by investing in investment grade securities with varied maturity dates so that only a portion of our portfolio will mature at any point in time. In 2015, we expect approximately 11% of our fixed maturity securities portfolio to mature, call or prepay. Assuming prevailing interest rates remain constant throughout 2015, reinvestment of these funds will be at tax-equivalent yields that are approximately 160 basis points lower than the year-end 2014 yields for these securities.

At December 31, 2014, we held corporate fixed securities issued by foreign corporations with an aggregate fair value of $478.3 million. In addition, we held securities issued by foreign governments, agencies or supranational entities with an aggregate fair value of $118.7 million. The following table details our holdings of foreign debt at December 31, 2014.


	Corporate debt
	Financial institutions				Non-financial institutions				Sovereign debt and agencies
	Cost or				Cost or				Cost or				Total
	amortized		Fair		amortized		Fair		amortized		Fair		fair
Country	cost		value		cost		value		cost		value		value

United Kingdom	$	70,361	$	72,994	$	78,160	$	79,185	$	18,644	$	18,646	$	170,825
Canada		27,121		27,107		33,368		33,491		20,524		20,469		81,067
The Netherlands		28,649		28,370		37,792		37,290		13,820		14,190		79,850
France		13,215		13,219		39,554		39,626		2,858		2,894		55,739
Germany		11,377		11,446		18,539		18,732		24,390		24,393		54,571
Switzerland		33,162		33,651		-		-		9,826		8,818		42,469
Norway		5,425		5,072		13,777		14,273		4,762		4,735		24,080
Sweden		12,965		12,915		6,738		6,218		4,193		4,164		23,297
Supranational (1)		-		-		-		-		19,344		19,338		19,338
Other (2)		11,592		11,275		32,587		33,402		1,118		1,045		45,722

Total foreign debt	$	213,867	$	216,049	$	260,515	$	262,217	$	119,479	$	118,692	$	596,958

(1)	Supranational represents investments in European Investment Bank, Inter-American Development Bank, International Bank for Reconstruction and Development, Asian Development Bank, and European System of Financial Supervisors.