<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                        COMMISSION FILE NUMBER 1-13832
 
                               ----------------
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                   BERMUDA                                          N/A
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
       INCORPORATION OR ORGANISATION)                        IDENTIFICATION NO.)
</TABLE>
 
         RICHMOND HOUSE, 12 PAR-LA-VILLE ROAD, HAMILTON, HM08, BERMUDA
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
 
                           TELEPHONE: (441) 292-7731
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                               ----------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<S>                                            <C>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
  Common shares, par value $5.80 per share                New York Stock Exchange
        10.75% Senior Notes due 2005                      New York Stock Exchange
         7.2% Senior Notes due 2007                       New York Stock Exchange
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
 
                                     NONE
 
                               ----------------
 
  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. [X]
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. [X]
 
  The number of registrant's ordinary shares ($5.80 par value) outstanding as
of March 16, 1998 was 25,932,204 (includes 474,000 ordinary shares owned by
trusts on behalf of the Company).
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Part III of this Form 10-K incorporates by reference information from the
registrant's Proxy Statement dated March 30, 1998.
 
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<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
 
                               INDEX TO FORM 10-K
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
                                     PART I
 
 <C>      <S>                                                              <C>
 Item 1.  Business                                                           3
 Item 2.  Properties                                                        34
 Item 3.  Legal Proceedings                                                 34
 Item 4.  Submission of Matters to a Vote of Security Holders               34
 
                                    PART II
 
          Market for the Registrant's Common Shares and Related
 Item 5.   Shareholder Matters                                              35
          Selected Financial Data for the five years ended December 31,
 Item 6.   1997                                                             36
 Item 7.  Management's Discussion and Analysis of Results of Operations
           and Financial Condition                                          37
 Item 8.  Financial Statements                                              43
 Item 9.  Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure                                         73
 
                                    PART III
 
 Item 10. Directors and Executive Officers of the Registrant                74
 Item 11. Executive Compensation                                            74
 Item 12. Security Ownership of Certain Beneficial Owners and Management    74
 Item 13. Certain Relationships and Related Transactions                    74
 
                                    PART IV
 
          Exhibits, Financial Statement Schedules and Reports on Form 8-
 Item 14.  K                                                                75
          Index to Exhibits                                                 86
</TABLE>
 
                                       2
<PAGE>
 
                                    PART I
 
ITEM 1--BUSINESS
 
  Unless the context requires otherwise and except as provided below, all
references in this Form 10-K to the "Company" refer to Terra Nova (Bermuda)
Holdings Ltd., ("Bermuda Holdings") a Bermuda holding corporation, and all of
its direct and indirect subsidiaries, including its principal subsidiaries,
Terra Nova Insurance Company Limited ("Terra Nova"), Terra Nova (Bermuda)
Insurance Company Ltd. ("Terra Nova (Bermuda)"), Compagnie de Reassurance
d'lle de France ("Corifrance"), Octavian Syndicate Management Limited
("Octavian") and Terra Nova Capital Limited ("Terra Nova Capital"), through
which it conducts substantially all of its operations.
 
OVERVIEW
 
  The Company is the holding company for five wholly owned operating
entities--Terra Nova in the U.K., Terra Nova (Bermuda), Corifrance in Paris,
Terra Nova Capital, the Company's corporate capital provider at Lloyd's and
Octavian, which manages the eight Lloyd's syndicates in which the Company has
a participation. Through these subsidiaries, the Company writes a diverse
property, casualty, marine and aviation insurance and reinsurance business on
a world-wide basis. The Company had gross premiums written of $550.2 million
in 1997 and shareholders' equity of $481.9 million at December 31, 1997.
 
  Terra Nova and the Lloyd's syndicates managed by Octavian are based in the
London Market, which is composed of Lloyd's and companies with underwriting
offices in proximity to Lloyd's ("London Market companies"). The London Market
is one of the world's largest insurance and reinsurance marketplaces and
attracts business from clients throughout the world who seek flexible and
innovative protection for a wide variety of risks.
 
  The Bermuda Market in which Terra Nova (Bermuda) operates is comprised of
both captive and independent companies, and in recent years has become one of
the world's largest insurance and reinsurance markets in which international
business is written.
 
BUSINESS, PROFITABILITY AND FINANCIAL STRENGTH
 
  The Company's principal lines of business consist of various classes of non-
marine property business, non-marine casualty business, and marine and
aviation business written on both an insurance and reinsurance basis,
accounting for approximately 43.2%, 23.3% and 33.5%, respectively, of the
Company's 1997 gross premiums written. Additionally, of the Company's gross
premiums written in 1997, approximately 51.0% consisted of reinsurance
business and approximately 34.5%, 33.5% and 32.0% were attributable to clients
from the U.S., Europe and the rest of the world, respectively.
 
  The average combined ratio and average operating ratio of the Company was
99.4% and 74.4%, respectively, for the three years ended December 31, 1997.
The Company's net operating earnings from continuing operations before
minority interests and realised gains on investments after tax was $62.9
million for 1997, up 10% from $57.2 million in 1996.
 
  At December 31, 1997, approximately 92.9% of the Company's $1.476 billion
investment portfolio consisted of fixed maturity debt securities and cash and
cash equivalents, with the balance consisting of equity securities. Of the
fixed maturity debt securities, 93.5% were rated "A" or better by Standard &
Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's").
The Company currently has no investments in high yield fixed income
securities, real estate or mortgages.
 
                                       3
<PAGE>
 
HISTORY
 
  On December 21, 1994, the Company, a holding company, acquired substantially
all of the capital stock of Terra Nova, its predecessor, and substantially all
of the capital stock of Underwriters Capital (Merrett) Ltd. ("UCM"), a Bermuda
insurance company, which was renamed "Terra Nova (Bermuda) Insurance Company
Ltd." Terra Nova was established in 1969 and is believed by management to be
one of the largest London Market companies. UCM was organised in Bermuda in
1993 to provide reinsurance to certain Lloyd's syndicates. These acquisitions
provided the Company with both additional capital and a presence in London and
the Bermuda Markets from which the Company has begun to grow and diversify its
book of business.
 
  On January 5, 1996, in continuation of its market diversification strategy,
the Company purchased the business and assets of Octavian, a Lloyd's Managing
agent. Octavian currently manages eight syndicates, whose writings include
primarily U.K. liability, U.K. motor, marine and aviation lines. Octavian has
$628.8 million of aggregate underwriting capacity, net of commission, for the
1998 year of account, of which $372.8 million, net of commission, is provided
by the Company through Terra Nova Capital.
 
  On April 17, 1996, the Company completed an initial public offering ("IPO")
of 7,275,000 shares at a price to the public of $17. The proceeds of the IPO
were $114 million after expenses. Of these net proceeds $16 million was used
to redeem a portion of the Company's non-voting convertible redeemable
preference shares, $75 million was contributed to Terra Nova (Bermuda) to
support its insurance operations, including increasing the capacity
potentially available to the Octavian Syndicates and $15 million was
contributed to Terra Nova, with the balance retained for general corporate
purposes.
 
  On August 26, 1997, Terra Nova Insurance (UK) Holdings plc ("UK Holdings")
completed an issue of $75 million 7.2% Senior Notes due 2007, guaranteed fully
and unconditionally by Bermuda Holdings. The net proceeds were used to finance
the acquisition of Corifrance on September 8, 1997, with the balance being
used for general corporate purposes.
 
  On September 8, 1997, the Company purchased all of the issued and
outstanding shares of Corifrance, a French reinsurance company, for a purchase
price of $42.2 million. The acquisition was made by a French subsidiary
holding company of Terra Nova. Corifrance transacts business internationally,
although mainly outside of the United States.
 
SHAREHOLDERS
 
  The current shareholders of the Company include DLJ Merchant Banking
Funding, Inc. ("DLJMB Funding") and certain related investors ("the DLJ
Entities"). The Company's Class A Ordinary shares are publicly traded on the
New York Stock Exchange under the symbol TNA.
 
                                       4
<PAGE>
 
MIX OF BUSINESS
 
  The Company's mix of business is as follows:
 
            BREAKDOWN OF GROSS PREMIUMS WRITTEN BY CLASS OF BUSINESS
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31,
                         --------------------------------------------------------
                               1997               1996               1995
                         ------------------ ------------------ ------------------
                                 PERCENT OF         PERCENT OF         PERCENT OF
   CLASS OF BUSINESS     AMOUNT    TOTAL    AMOUNT    TOTAL    AMOUNT    TOTAL
   -----------------     ------  ---------- ------  ---------- ------  ----------
<S>                      <C>     <C>        <C>     <C>        <C>     <C>
PROPERTY
  Catastrophe treaty--
   U.S.                   22.4       4.1 %   25.1       7.0 %   17.4       5.7 %
  Catastrophe treaty--
   all other              13.5       2.4     16.4       4.5     17.8       5.9
  Proportional treaty     60.3      11.0     58.1      16.1     42.7      14.1
  Risk excess of loss     22.1       4.0     19.5       5.4     19.4       6.4
  Other property         109.0      19.8     57.1      15.8     39.0      12.9
  Reinsurance to close     3.5       0.6      --        --       --        --
  Orphaned syndicate
   business               10.6       1.9      --        --       --        --
                         -----     -----    -----     -----    -----     -----
  Total before prior
   year revisions        241.4      43.8    176.2      48.8    136.3      45.0
  Prior year revisions    (4.1)     (0.7)     2.7       0.7      3.0       1.0
                         -----     -----    -----     -----    -----     -----
  Total                  237.3      43.1    178.9      49.5    139.3      46.0
CASUALTY
  Medical malpractice      9.8       1.8     11.3       3.1     14.5       4.8
  Professional indemnity  25.5       4.6     16.0       4.4      7.4       2.5
  Casualty clash and
   working layer           4.0       0.7     10.6       2.9     13.1       4.3
  Motor                   27.8       5.1      6.0       1.7      --        --
  Other casualty          37.1       6.7     20.7       5.8     19.9       6.6
  Reinsurance to close     7.4       1.3      --        --       --        --
  Orphaned syndicate
   business               13.3       2.4      --        --       --        --
                         -----     -----    -----     -----    -----     -----
  Total before prior
   year revisions        124.9      22.7     64.6      17.9     54.9      18.2
  Prior year revisions     3.6       0.7      3.5       1.0     (0.2)     (0.1)
                         -----     -----    -----     -----    -----     -----
  Total                  128.5      23.4     68.1      18.9     54.7      18.1
MARINE & AVIATION
  Marine hull             47.5       8.6     49.4      13.7     50.1      16.6
  Energy                  29.8       5.4     19.0       5.3     25.7       8.5
  Marine cargo            39.6       7.2     31.9       8.7     25.8       8.4
  Marine casualty         13.5       2.4      8.9       2.5      9.5       3.1
  Marine excess of loss    2.1       0.4      0.8       0.2      2.6       0.9
  Aviation hull           35.6       6.5      6.7       1.9      --        --
  Reinsurance to close     7.0       1.3      --        --       --        --
  Orphaned syndicate
   business               15.2       2.8      --        --       --        --
                         -----     -----    -----     -----    -----     -----
  Total before prior
   year revisions        190.3      34.6    116.7      32.3    113.7      37.5
  Prior year LMX
   reinstatement
   premiums                0.6       0.1      4.2       1.2      9.3       3.1
  Revisions of prior
   year premiums written
   for non-LMX business   (6.5)     (1.2)    (8.6)     (2.4)   (18.5)     (6.1)
                         -----     -----    -----     -----    -----     -----
  Total                  184.4      33.5    112.3      31.1    104.5      34.5
  Life                     --        --       1.7       0.5      4.2       1.4
                         -----     -----    -----     -----    -----     -----
  TOTAL FOR THE COMPANY  550.2     100.0 %  361.0     100.0 %  302.7     100.0 %
                         =====     =====    =====     =====    =====     =====
  Direct business        269.6      49.0 %  119.6      33.2 %   86.3      28.5 %
  Reinsurance assumed    280.6      51.0    241.4      66.8    216.4      71.5
                         -----     -----    -----     -----    -----     -----
  Total for the company  550.2     100.0 %  361.0     100.0 %  302.7     100.0 %
                         =====     =====    =====     =====    =====     =====
</TABLE>
 
                                       5
<PAGE>
 
NON-MARINE PROPERTY
 
 Property Catastrophe Treaty Reinsurance
 
  Property catastrophe excess of loss reinsurance provides coverage when total
losses and loss expenses from a single occurrence of a covered peril under a
portfolio of insurance and reinsurance contracts exceed the attachment point
specified in the reinsurance contract with the primary insurer. Some of the
Company's property catastrophe excess of loss policies limit coverage to one
occurrence in a policy year, but most policies provide for coverage of a
second occurrence after the payment of a reinstatement premium.
 
  In 1997, 66% and 34% of the Company's catastrophe treaty business was
written by Terra Nova and Terra Nova (Bermuda), respectively. In 1997, based
on gross premiums written, approximately 62%, 14% and 24% of the non-marine
property catastrophe reinsurance risks underwritten by the Company were
located in the U.S., Europe, and the rest of the world, respectively.
 
 Proportional Treaty Reinsurance and Risk Excess of Loss Reinsurance
 
  In proportional treaty reinsurance, the Company assumes a proportional part
of the original premiums and losses of the reinsured on non-catastrophe
reinsurance contracts. In proportional treaty reinsurance, the reinsurer
generally pays the ceding company a ceding commission. The ceding commission
generally is based on the ceding company's cost of acquiring the business
being reinsured (including commissions, premium taxes, assessments and
miscellaneous administrative expenses) and also may include a profit factor.
In 1997, 72% of proportional treaty risks underwritten by the Company were
located outside the U.S.. The Company's property risk excess of loss contracts
cover a cedent's loss on a single "risk" in excess of the cedent's attachment
point, rather than covering multiple risks as does property catastrophe
reinsurance. A "risk" in this context might mean the insurance coverage on one
building or a group of buildings or the insurance coverage under a single
policy, which the reinsured treats as a single risk. In 1997, 40% of risk
excess risks underwritten by the Company were located in the U.S.
 
 Other Property
 
  The balance of the non-marine property account consists of a number of minor
classes of primary insurance business covering risks such as crop, boiler and
machinery insurance and short-term trade credit insurance business. The
Company also writes U.S. "excess and surplus lines" property and automobile
physical damage risks largely through limited authorities which authorise
selected U.S. insurance brokers to bind certain risks on behalf of the
Company, subject to premium income, geographic locations, pricing, policy
terms and conditions and other contract restrictions. The Company writes motor
insurance through Terra Nova Capital's participation on motor syndicates 554
and 1228. In 1997, the property element of this business was $26.4 million
which accounts for a large proportion of the increase in other property
writings in 1997 compared to 1996 due to Syndicate 1228 being established in
1997 and Terra Nova Capital having a significantly lower participation on
Syndicate 554 in 1996 compared to 1997.
 
NON-MARINE CASUALTY
 
 Medical Malpractice
 
  The Company's medical malpractice book of business consists of medical
malpractice reinsurance for U.S. medical malpractice carriers, many of which
are mutual or reciprocal companies. Since 1990, there has been a deterioration
in both primary pricing and reinsurance terms for medical malpractice
business, which has led to a reduction of approximately one-half of the
Company's gross premiums written in respect of such business and a move toward
more hospital business and large groupings of health care providers. Despite
this reduction, the Company continues to write accounts that management
believes offer attractive rates and deductibles.
 
                                       6
<PAGE>
 
 Professional Indemnity
 
  In 1997, $16.9 million of the Company's professional indemnity business was
written by Octavian's Syndicate 702 which specializes in U.K. professional
indemnity insurance and directors and officers insurance. The remaining
professional indemnity business is written by Terra Nova on an excess of loss
basis and includes lawyers' groups, architects and engineers, insurance
agents, accountants and some miscellaneous errors and omissions coverages. The
majority of the business consists of smaller firms of professionals in these
categories.
 
 Casualty Clash and Working Layer
 
  Casualty clash business, involving exposure at levels well in excess of
individual underlying policy limits, is critical to the reinsurance programs
of many major U.S. primary companies and is generally placed in markets not
heavily involved in those companies' lower levels of exposure. The Company's
book of clash business, which includes a roster of leading U.S. insurers, has
experienced little turnover in reinsureds.
 
 Motor
 
  The Company through Terra Nova Capital's participation on Octavian's motor
Syndicates 554 and 1228 wrote U.K. motor business, the liability portion of
this business has been included in this category of business. In addition,
Terra Nova writes U.S. Motor reinsurance business on a proportional treaty and
excess of loss basis.
 
 Other Casualty Business
 
  Other non-marine casualty lines of business include excess of loss
reinsurance of fidelity and surety business, workers' compensation, crime,
bloodstock and personal accident business.
 
MARINE & AVIATION
 
  The Company's Marine & Aviation business is written by Terra Nova and by
Terra Nova Capital, through its participation on the two Octavian marine
Syndicates of 329 and 1009 and Octavian's aviation Syndicate 959.
 
 Marine Hull
 
  The risks written within this account are those associated with the world's
maritime fleet. Vessels such as oil supertankers, dry cargo ships, cruise
liners, tugs and barges are insured. Certain casualty risks such as ship
collision incidents are also insured within the portfolio.
 
  The Company's marine hull account consists of two distinct components, hull
risk and hull treaty business. The hull risk account consists of
participations in individual protections for ships of all types in all
geographical areas. Examples of the larger type of hull risks would be
passenger cruise ships. Hull treaty business, which is not a traditional core
business for most London Market marine underwriters, is a speciality of Terra
Nova. As a treaty reinsurer, the Company reinsures primary underwriters in
local markets, such as Japan, which are closed to foreign primary writers. In
this manner, the Company is able to access business which would otherwise not
be available to it, local expertise, local market knowledge and local survey
and claims skills.
 
 Energy
 
  The risks in this account relate to rigs and other equipment used in the
exploration and development of energy sources such as oil and natural gas. The
risks underwritten are located both onshore and offshore. The Company is
involved principally with the "upstream" activities of its insureds, such as
offshore and onshore drilling rigs, in both property damage and casualty
exposures.
 
                                       7
<PAGE>
 
 Marine Cargo
 
  The marine cargo account is involved in insuring the transportation of all
types of commodities, both dry and liquid, imports and exports world wide,
together with associated warehousing risks. The Company also underwrites in
this portfolio specie risks comprising, for example, gold, silver and bullion
in transit and contained within vaults and fine art.
 
 Marine Casualty
 
  Within the marine casualty account are such diverse risks as shipowners'
liabilities, port authority liabilities, marine terminal operators'
liabilities and other casualty risks such as pollution arising from the
operations of these activities. Pollution risks are restricted to "sudden and
accidental" incidents, generally with specific reporting requirements.
 
 Aviation
 
  The Company writes aviation business through Terra Nova Capital's
participation on Octavian's Syndicate 959. The business consists of airline
hull, personal accident and liability business written on a worldwide basis.
 
LIFE
 
  The Company ceased writing new life insurance business on March 1, 1996, and
the account went into run-off with effect from such date. The life insurance
business operation, comprising most of its staff, was transferred to another
U.K. insurance company.
 
REINSURANCE TO CLOSE
 
  In 1997 Terra Nova Capital wrote $17.9 million of premiums in respect of the
closure of the 1995 year of account into the 1996 year of account of which it
had an 11% share. These premiums include property, casualty, marine and
aviation risks. In 1998 Terra Nova Capital will receive premiums in respect of
the closure of the 1996 year of account into the 1997 year of account of which
it had a 40% share.
 
ORPHANED SYNDICATE BUSINESS
 
  In 1997 the Company wrote $39.1 million of premiums related to reinsurance
to close of "orphaned" Lloyd's syndicates from the 1993 year of account. In
1998 the Company is planning to write orphaned syndicate business, however,
due to the one off nature of this business the amount of premiums that will be
written is difficult to predict.
 
DISTRIBUTION SYSTEM
 
  The vast majority of insurance and reinsurance business that is written by
participants in the London Market is brought to both Lloyd's and London Market
company underwriters by brokers authorized to place business at Lloyd's
("Lloyd's brokers"). London Market companies (but as a general rule not
Lloyd's syndicates) may also deal directly with non-Lloyd's brokers and
individual ceding companies. Brokers are responsible for providing information
necessary to support the underwriting decision, such as details of the risks,
claims experience and changes in risks insured. The broker is regarded as the
agent of the insured or reinsured in placing the business.
 
                                       8
<PAGE>
 
  The Company's writings originate worldwide and are accepted through non-U.S.
insurance brokers, principally Lloyd's brokers. By using the broker
distribution system, the Company maintains low fixed overhead costs. Brokers
charge commissions varying in accordance with the type and in proportion to
the volume of business written, thus allowing the Company flexibility to vary
its volume and mix of business according to perceived opportunities. The
following table shows the percentage of gross premiums written by the ten
brokers writing the largest amount of gross premiums for the Company for the
year ended December 31, 1997:
 
    PERCENTAGE OF GROSS PREMIUMS WRITTEN, (1) BY BROKER, (2) FOR YEAR ENDED
                               DECEMBER 31, 1997
 
<TABLE>
<CAPTION>
        BROKER                     PERCENTAGE
        ------                     ----------
     <S>                           <C>
     J H Marsh & McLennan             19.5%
     AON                              10.3
     Willis Corroon                    8.3
     Sedgwick Group                    6.7
     Ballantyne McKean & Sullivan      3.5
     Jardine Thompson Graham           2.8
     C E Heath & Co.                   2.1
     Steel Burrill Jones               2.0
     Benfield Greig                    2.0
     Nelson Hurst                      2.0
</TABLE>
--------
(1) Based on premiums notified by each broker for the 1997 underwriting year.
 
(2) Affiliate companies are combined within each brokering group.
 
UNDERWRITING
 
 General
 
  Underwriting of new and renewal business is conducted on a risk by risk
basis, with consideration given to the general direction of rates and policy
terms and conditions of each class of business, the Company's acceptance
limits and exposure to accumulation of loss in catastrophe events.
 
  The mix of business for a given year is derived from both the historical
development of the business and analysis by the Company of current pricing and
other relevant trends. Underwriters are encouraged to research and develop new
areas of business subject to the approval of management.
 
  The underwriting process includes an assessment of (i) the geographic
profile of the business underwritten, (ii) historic loss information for the
cedent or insured and (iii) historic loss information for the segment of the
industry involved. Judgement as to the quality and integrity of the cedent,
insured and/or agent is paramount to the underwriting. Close attention is paid
to financial ratings of cedents. Complex risks are usually only written after
considerable research often requiring significant actuarial analysis, a full
underwriting survey by a qualified surveyor and/or a visit to the client.
 
 Property
 
  For property catastrophe reinsurance business, the underwriting guidelines
limit the aggregate exposure to any one cedent and in defined geographic
zones. The Company seeks to reinsure such business at attachment points which
produce a relatively low frequency of loss and also spreads its involvement
over a range of attachment points. In addition, the Company uses CATMAP(TM), a
commercially available software program developed by Applied Insurance Inc.,
and its own proprietary models to assess pricing adequacy and manage loss
exposure on an ongoing basis.
 
  Where the Company cannot allocate risks specifically to geographic areas, a
degree of experience and judgement is applied. Wherever possible, however,
aggregate exposure is calculated and recorded on all business judged to have
catastrophe exposure.
 
                                       9
<PAGE>
 
  Market share data on all multi-state U.S. cedents is recorded and potential
exposure in various loss scenarios is calculated. For U.K. exposures, postal
code aggregate exposures are requested and "Storm Path" estimated maximum
exposures are calculated. Exposure databases and computer-based analytical
tools are also used to monitor and control aggregates along with other
available data requested of cedents in order to control exposures.
 
 Casualty
 
  The underwriting policy for non-marine casualty business places emphasis
upon well defined exposures, for example by profession and narrow geographic
region, which permit detailed analysis leading to informed pricing decisions.
Diversification of exposures is achieved by underwriting individual contracts
in varying geographic regions. Additionally, the majority of non-marine
casualty business is underwritten on a claims-made basis, under which the
Company is liable only for those claims made during the contract period (and
generally subject to a limited discovery period). This permits a more timely
and accurate assessment of the Company's likely exposure to losses under each
contract than is the case under loss occurrence contracts where the insurer is
liable for losses occurring during or attributable to the contract period, no
matter when reported.
 
 Marine
 
  Marine hull underwriting involves detailed analysis of the loss record of
individual vessels as well as of the fleets of which they may form a part.
Ownership and management are taken into account and data relating to the
classification of the vessel is recorded and analyzed. Marine hull insurance
is not catastrophe-exposed to the same extent as fixed, land-based structures,
but accumulation potentials are monitored. Marine energy exposures for fixed
platforms and land-based structures are maintained and controlled with the aid
of computer-based analytical tools. Cargo and specie exposures are monitored
against catastrophe scenarios. The Company's marine liability account is
geographically diverse and does not have the catastrophe accumulation
potential of some other marine classes.
 
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
 
 General
 
  The loss and LAE liabilities consist of two components: case reserves and
IBNR reserves. Case reserves are estimates of future loss payments with
respect to insured events which have been reported to the insurer. These
reports may be made formally by the cedent or informally by other means, such
as evaluation of claims by attorneys. The Company determines case reserves on
a contract by contract basis. The amount reserved is the amount expected to be
ultimately paid and is not discounted or otherwise adjusted for the time value
of money. IBNR reserves are actuarially determined and reflect (i) the
estimated ultimate loss amount which will be paid by the insurer and (ii) an
estimate of possible changes in the value of those claims which have already
been reported to the insurer. The particular method of setting IBNR reserves
depends upon the class of business involved. The specific techniques involve
the use of projections and models based on the Company's or the relevant
market's experience and exposure. IBNR reserves reflect a margin for the
uncertainty involved as determined by sensitivity tests. While management
believes that the Company's reserves for losses and LAE are adequate, there
can be no assurances that the Company's ultimate losses and LAE will not
deviate, perhaps substantially, from the estimates reflected in its financial
statements. If the Company's reserves should prove to be inadequate, the
Company will be required to increase reserves, which could have a material
adverse effect on the Company's financial condition.
 
  In accordance with the procedures provided in the above paragraph, the
Company's reserving approach is to maintain an adequate level of undiscounted
reserves. The Company does not discount its reserves to account for the time
value of money, nor does it explicitly include an inflation adjustment, as the
methodologies employed reflect past information.
 
                                      10
<PAGE>
 
 By line of Business
 
  The following table breaks down the Company's reserve balances relating to
continuing operations by line of business. The reserve results include loss
reserves and allocated LAE reserves.
 
       BREAKDOWN OF RESERVE BALANCE RELATING TO CONTINUING OPERATIONS BY
                     LINE OF BUSINESS AT DECEMBER 31, 1997
 
<TABLE>
<CAPTION>
                            GROSS     REINSURANCE
                          RESERVES    RECOVERABLE  NET RESERVES
                        ------------- ------------ -------------
                         CASE   IBNR   CASE  IBNR   CASE   IBNR  TOTAL
                        ------ ------ ------ ----- ------ ------ ------
                                     (DOLLARS IN MILLIONS)
   <S>                  <C>    <C>    <C>    <C>   <C>    <C>    <C>
   Non-Marine Property  $125.2 $ 57.8 $ 19.3 $ 0.3 $105.9 $ 57.5 $163.4
   Non-Marine Casualty   238.5  300.0   43.5  11.6  195.0  288.4  483.4
   Marine and Aviation   287.2  130.7  155.2  16.8  132.0  113.9  245.9
   Unallocated LAE         2.6   15.7    0.0   0.0    2.6   15.7   18.3
                        ------ ------ ------ ----- ------ ------ ------
     Total              $653.5 $504.2 $218.0 $28.7 $435.5 $475.5 $911.0
                        ====== ====== ====== ===== ====== ====== ======
</TABLE>
 
  The following table shows the development of net reserves for losses and LAE
for the calendar years 1987 to 1997 for all lines of business, except the
Company's aviation business in run-off. The first line of the table presents
the net liabilities, including IBNR, as recorded in the Company's balance
sheet in respect of the indicated year and all unpaid losses for prior years.
The upper portion of the table shows the re-estimation of the liability at the
end of each of the succeeding years. The conditions that have given rise to
the deficiencies are referred to below and may not be indicative of future
developments.
 
  The re-estimated liabilities are increased or decreased as more information
becomes available about the severity and frequency of claims for individual
years. An adjustment to the carrying value of unpaid claims for a prior year
will also be reflected in the adjustments for subsequent years. For example,
an adjustment in 1990 in respect of 1987 loss reserves will be reflected in
the re-estimation of reserves for the years 1987 through 1989.
 
  A surplus (or deficiency) arises when the re-estimation of reserves at the
end of the year is less (or greater) than its estimation at the preceding
year-end, and would be reflected in the income statement of that year. The
cumulative deficiency is the difference between the re-estimation of reserves
as at the end of 1997 and the original estimation as shown on the top line of
the table.
 
  The lower portion of the table shows the cumulative amounts paid as of the
end of each successive year for such claims.
 
                                      11
<PAGE>
 
               ANALYSIS OF NET LOSS AND LAE RESERVE DEVELOPMENT
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                          ---------------------------------------------------------------------------------------------
                           1987     1988     1989     1990     1991     1992     1993     1994    1995    1996    1997
                          ------   ------   ------   ------   ------   ------   ------   ------  ------  ------  ------
<S>                       <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>     <C>     <C>     <C>
Reserves for unpaid
 losses and LAE at
 December 31              $527.0   $585.6   $637.1   $693.9   $724.9   $784.5   $775.6   $847.3  $814.2  $824.0  $911.0
Reserves re-estimated(1)
 as of:
 One year later            530.6    607.4    655.0    719.3    761.0    806.9    802.5    850.1   811.6   813.6
 Two years later           537.6    622.7    671.1    736.5    773.7    821.5    810.5    850.1   798.3
 Three years later         545.6    628.2    691.2    743.8    780.5    829.0    810.7    832.9
 Four years later          551.8    640.3    681.2    738.1    792.4    829.8    800.7
 Five years later          555.4    626.6    663.6    755.5    793.5    816.5
 Six years later           547.9    607.5    674.1    756.5    776.6
 Seven years later         537.9    617.5    674.0    741.2
 Eight years later         547.0    617.5    667.2
 Nine years later          547.9    618.8
 Ten years later           548.3
Cumulative redundancy
 (deficiency)              (21.3)   (33.2)   (30.1)   (47.3)   (51.7)   (32.0)   (25.1)    14.4    15.9    10.4
 As a percentage of
  unpaid losses and LAE    (4.03)%  (5.67)%  (4.73)%  (6.82)%  (7.13)%  (4.08)%  (3.23)%   1.70%   1.95%   1.26%
Paid (cumulative) as of:
 One year later           $ 83.7   $ 91.4   $ 94.2   $115.3   $119.3   $143.8   $151.8   $168.8  $123.4  $145.7
 Two years later           133.5    158.9    174.6    201.3    228.2    268.3    259.0    253.6   227.6
 Three years later         155.0    200.4    190.1    274.3    316.1    350.8    311.8    327.8
 Four years later          192.8    222.7    242.2    341.0    379.9    383.8    368.8
 Five years later          207.5    276.3    293.0    395.8    402.5    426.8
 Six years later           233.6    312.6    330.2    407.8    438.3
 Seven years later         254.6    338.3    336.6    435.5
 Eight years later         278.6    354.1    353.5
 Nine years later          296.4    360.9
 Ten years later           317.0
</TABLE>
--------
(1) "Reserves re-estimated" includes losses actually paid in current and prior
    years.
 
  The deterioration between 1987 and 1993 is primarily the result of LMX
Spiral losses in the marine account.
 
                                      12
<PAGE>
 
  The following table represents an analysis of gross loss and LAE reserve
development for the years indicated:
 
              ANALYSIS OF GROSS LOSS AND LAE RESERVE DEVELOPMENT
 
<TABLE>
<CAPTION>
                                         YEAR ENDED DECEMBER 31,
                               --------------------------------------------------
                                 1993       1994       1995      1996      1997
                               --------   --------   --------  --------  --------
                                          (DOLLARS IN MILLIONS)
<S>                            <C>        <C>        <C>       <C>       <C>
Gross reserves for unpaid
 losses and LAE                $1,238.8   $1,223.8   $1,168.7  $1,078.2  $1,157.7
Reinsurance recoveries on
 unpaid losses and LAE            463.2      376.5      354.5     254.1     246.7
Gross reserves re-estimated
 (1) as of:
  One year later                1,332.8    1,310.2    1,174.8   1,067.0
  Two years later               1,428.9    1,319.9    1,168.4
  Three years later             1,428.0    1,311.2
  Four years later              1,431.3
Reinsurance recoveries on
 unpaid losses and LAE
 re-estimated (2) as of:
  One year later                  530.3      460.1      363.2     253.4
  Two years later                 618.4      469.9      370.1
  Three years later               617.3      478.3
  Four years later                630.6
Gross cumulative redundancy
 (deficiency)                    (192.5)     (87.4)       0.3      11.2
  As expressed as a percentage
   of unpaid losses and LAE       (15.5)%     (7.1)%      0.0%      1.0%
Paid (cumulative) as of:
  One year later                  303.9      290.6      229.7     179.6
  Two years later                 517.9      479.8      364.4
  Three years later               679.3      576.4
  Four years later                752.5
</TABLE>
--------
(1) "Gross reserves re-estimated" includes losses actually paid in current and
    prior years.
 
(2) "Reinsurance recoveries on unpaid losses and LAE re-estimated" includes
    reinsurance recoveries actually received in current and prior years.
 
                                      13
<PAGE>
 
  The following table represents a reconciliation of reserve balances for the
years indicated.
 
                      RECONCILIATION OF RESERVE BALANCES
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                                ----------------------------
                                                  1997      1996      1995
                                                --------  --------  --------
                                                  (DOLLARS IN MILLIONS)
<S>                                             <C>       <C>       <C>
Reserves for unpaid losses and loss adjustment
 expenses, gross of reinsurances, at the
 beginning of the year                          $1,078.1  $1,168.7  $1,223.8
Less reinsurance recoverables                     (254.1)   (354.5)   (376.5)
                                                --------  --------  --------
Net balance at beginning of the year               824.0     814.2     847.3
                                                --------  --------  --------
Incurred related to:
  Current year                                     292.9     180.9     175.9
  Prior years                                      (10.4)     (2.6)      3.2
                                                --------  --------  --------
    Total incurred                                 282.5     178.3     179.1
                                                --------  --------  --------
Paid related to:
  Current year                                     (69.7)    (50.3)    (43.8)
  Prior years                                     (145.7)   (123.4)   (169.8)
                                                --------  --------  --------
    Total paid                                    (215.4)   (173.7)   (213.6)
Foreign exchange adjustment                        (11.0)      5.2       1.4
                                                --------  --------  --------
Net balance at end of year                         880.1     824.0     814.2
Net reserves from Corifrance acquisition            30.9       --        --
                                                --------  --------  --------
Net reserves at end of year                        911.0     824.0     814.2
Plus reinsurance recoverables:
  The Company                                      236.8     254.1     354.5
  Reinsurance recoverables related to net
   reserves from Corifrance acquisition              9.9       --        --
                                                --------  --------  --------
Reinsurance recoverable by the Company             246.7     254.1     354.5
Reserves for unpaid losses and loss adjustment
 expenses, gross of reinsurance at the end of
 the year                                       $1,157.7  $1,078.1  $1,168.7
                                                ========  ========  ========
</TABLE>
 
  Incurred claims relating to prior years are offset by decreases to prior
year net written and earned premiums less related acquisition costs of $4.8
million, $3.6 million and $6.4 million for 1997, 1996 and 1995 respectively.
When these revisions to prior year written and earned premiums are taken into
account, the Company experienced a net prior year improvement of $5.6 million
in 1997 and deteriorations of $1.0 million and $9.6 million for 1996 and 1995,
respectively.
 
  The Company believes that its reserves at December 31, 1997 are adequate.
The establishment of reserves, however, is an inherently subjective process,
and there can be no assurance that currently established reserves will prove
adequate in light of actual experience. Accordingly, it would not be
appropriate to extrapolate future deficiencies or redundancies based on the
results set forth above.
 
  Non-Marine Property Reserves. Several statistical methods are used to
estimate the ultimate loss position and to determine loss reserves for the
non-marine property account. The Company also compares results based on
separate large loss and attritional claim development. An analysis is
completed for each underwriting category and, within the categories, for each
major territory.
 
  Non-Marine Casualty Reserves. For the non-marine casualty account, which
includes a significant amount of "long-tail" exposures, reserves are
established using what management believes are prudent initial loss ratio
assumptions. Within the overall non-marine casualty reserving methodology,
significant risks such as major medical malpractice policies and other large
policies which may have unusual or adverse loss emergence patterns are
individually monitored and separately reserved. The reserves established for
long-tail asbestos-related and environmental pollution claims are reviewed
quarterly based on emerging loss reports.
 
                                      14
<PAGE>
 
  Marine Reserves. The impact of LMX Spiral losses dominates the process of
establishing reserves on the marine account for underwriting years prior to
1992. A substantial proportion of the gross total claim amount for these years
is composed of a small number of especially large losses which are heavily
reinsured. Each of these losses is analysed separately within the overall
methodology. As loss development has matured in the past few years, and as
reinsurers have achieved a better understanding of reserving issues, the
inherent uncertainty in estimating the ultimate position has been reduced
considerably.
 
  In other areas of the marine account, and for recent underwriting years,
traditional actuarial techniques are used for each class. These techniques
include the establishment of initial loss ratio assumptions in respect of the
most recent underwriting years. In addition, exceptional and unusual claims
are analysed separately as part of the Company's reserving procedures.
 
  Asbestos-Related and Environmental Pollution Reserves. Prior to 1974, the
Company had very little exposure to casualty business. Since the mid-1980s,
the Company's casualty business has been increasingly written on a claims-made
basis with the majority written on such a basis since 1986. From the Company's
inception through 1997, payments made by the Company for asbestos-related and
environmental pollution claims arising from business written by it totalled
approximately $27.2 million.
 
  Included in the liability for loss reserves at December 31, 1997 are $89.1
million (net of recoverables from reinsurers) of loss reserves pertaining to
asbestos-related and environmental pollution claims. Included in these
reserves are reserves for IBNR and reserves for LAE, which include litigation
expenses. The Company continues to be advised of claims asserting injuries
from hazardous materials and alleged damages to cover various clean-up costs
relating to policies written in prior years. Coverage and claim settlement
issues, such as the determination that coverage exists and the definition of
an occurrence, may cause the actual loss development to exhibit more variation
than the remainder of the Company's book of business. Traditional reserving
techniques cannot be used to estimate asbestos-related and environmental
pollution claims, and accordingly, the uncertainty in respect of the ultimate
cost of these types of claims is greater than the uncertainty relating to
standard lines of business. The Company believes it has made reasonable
provision for claims, although the ultimate liability may be more or less than
held reserves. The Company believes that future losses associated with these
claims will not have a material adverse effect on its financial position,
although there is no assurance that such losses will not materially affect the
Company's results of operations for any period.
 
  The following table presents selected data on asbestos-related and
environmental pollution losses and LAE incurred and reserves outstanding, net
of amounts recoverable from reinsurers.
 
       ASBESTOS-RELATED LOSSES AND LAE INCURRED AND RESERVES OUTSTANDING
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                             DECEMBER 31,
                                                           --------------------
                                                           1997  1996     1995
                                                           ----- -----    -----
                                                              (DOLLARS IN
                                                               MILLIONS)
<S>                                                        <C>   <C>      <C>
Incurred losses (net of reinsurance)                       $ 1.6 $(3.4)   $ 5.7
Incurred LAE                                                 1.2   3.5      2.3
                                                           ----- -----    -----
Incurred losses and LAE (net of reinsurance)               $ 2.8 $ 0.1    $ 8.0
                                                           ===== =====    =====
Net paid losses and LAE (net of reinsurance)               $ 2.5 $ 1.7    $ 0.9
                                                           ===== =====    =====
Reclassification of reserves previously identified as non
 asbestos-related losses                                     --  $12.1(1)   --
Losses and LAE case reserves (net of reinsurance)          $28.3 $26.2    $20.3
Losses and LAE IBNR reserves (net of reinsurance)           30.5  32.2     27.6
                                                           ----- -----    -----
Total reserves (net of reinsurance)                        $58.8 $58.4    $47.9
                                                           ===== =====    =====
</TABLE>
--------
(1) The reclassification of reserves previously identified as non asbestos-
    related losses relates to risks specific to one cedent. The reserves
    established in respect of these risks had previously been treated as non
    asbestos- related losses due to no information regarding the type of these
    losses being available.
 
                                      15
<PAGE>
 
   ENVIRONMENTAL POLLUTION LOSSES AND LAE INCURRED AND RESERVES OUTSTANDING
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER
                                                              31,
                                                      ----------------------
                                                       1997    1996    1995
                                                      ------  ------  ------
                                                          (DOLLARS IN
                                                           MILLIONS)
   <S>                                                <C>     <C>     <C>
   Incurred losses (net of reinsurance)               $ (2.9) $ (1.4) $  1.2
   Incurred LAE                                          0.9    (0.1)    0.5
                                                      ------  ------  ------
   Incurred losses and LAE (net of reinsurance)       $ (2.0) $ (1.5) $  1.7
                                                      ------  ------  ------
   Net paid losses and LAE (net of reinsurance)       $  1.5  $  3.0  $  0.9
                                                      ======  ======  ======
   Losses and LAE case reserves (net of reinsurance)  $  9.5  $  9.9  $  9.8
   Losses and LAE IBNR reserves (net of reinsurance)    20.8    24.0    28.6
                                                      ------  ------  ------
   Total reserves (net of reinsurance)                $ 30.3  $ 33.9  $ 38.4
                                                      ------  ------  ------
 
  The reinsurance recoverables netted against the loss reserves for each of the
years 1997, 1996 and 1995 are as follows:
 
<CAPTION>
                                                      YEAR ENDED DECEMBER
                                                              31,
                                                      ----------------------
                                                       1997    1996    1995
                                                      ------  ------  ------
                                                          (DOLLARS IN
                                                           MILLIONS)
   <S>                                                <C>     <C>     <C>
   Reserves (gross of reinsurance)                    $111.8  $111.9  $100.0
   Reinsurance recoverables                             22.7    19.6    13.7
                                                      ------  ------  ------
   Reserves (net of reinsurance)                      $ 89.1  $ 92.3  $ 86.3
                                                      ======  ======  ======
 
  The litigation expenses included in the loss reserves for each of the years
1997, 1996 and 1995 are as follows:
 
<CAPTION>
                                                      YEAR ENDED DECEMBER
                                                              31,
                                                      ----------------------
                                                       1997    1996    1995
                                                      ------  ------  ------
                                                          (DOLLARS IN
                                                           MILLIONS)
   <S>                                                <C>     <C>     <C>
   Total reserves                                     $ 89.1  $ 92.3  $ 86.3
   Litigation expenses included                         24.1    24.8    23.3
</TABLE>
 
RISK MANAGEMENT AND REINSURANCE PROTECTION
 
  In accordance with the general practice of insurance and reinsurance
companies and in the ordinary course of its business, the Company reinsures a
portion of the risks it underwrites. Although reinsurance does not discharge
the insurer from its liability to its policyholder, it is general practice of
insurers to regard the reinsured portion of the risks as the liability of the
reinsuring company.
 
  The Company purchases reinsurance primarily to manage exposures in its
insurance and reinsurance business. Reinsurance serves to reduce where
necessary the exposure to any one policy or physical risk, or to a
catastrophic accumulation of loss in one event, to a level judged to be
commensurate with the Company's financial resources, and to allow for large or
"shock" losses to be managed over time. Reinsurance is not used as a device to
pass on business that is unsatisfactorily rated, or to "arbitrage" an original
underwriting judgment. Each decision by the Company to purchase reinsurance
coverage, and the amounts, types and attachment points of coverage purchased,
is the result of careful evaluation by the Company of the costs and benefits
involved in light of the size of the Company's aggregate exposures and the
business outlook in the applicable line, among other factors.
 
  Reinsurance placement standards are maintained by the Company's security
committee, which until 1996 used a rating system developed by the Company's
financial staff. Information on historical financial performance, current
solvency and business practices likely to impact future solvency is assembled
from a variety of sources, with special attention given to new and small
companies. The current system is based upon recognized rating agency reports.
 
                                      16
<PAGE>
 
  Additionally, the reinsurance component of the Company's total gross
exposure is regularly reviewed for issues relating to collectability,
including solvency and credit disputes. As needed, the Company establishes a
bad debt reserve for reinsurance recoverables that are in doubt. At December
31, 1997, this reserve stood at $28.9 million or 9.2% of total reinsurance
recoverables.
 
  The Company's recoverables from its reinsurers are composed of (i) amounts
recoverable in respect of paid and outstanding claims and (ii) amounts
recoverable related to IBNR. The following table sets forth net reinsurance
recoverables from continuing operations from December 31, 1995 to December 31,
1997.
 
                   AGGREGATE OF NET REINSURANCE RECOVERABLES
 
<TABLE>
<CAPTION>
                           AT                    AT                    AT
                      DECEMBER 31,          DECEMBER 31,          DECEMBER 31,
                          1997     MOVEMENT     1996     MOVEMENT     1995
                      ------------ -------- ------------ -------- ------------
                                       (DOLLARS IN MILLIONS)
<S>                   <C>          <C>      <C>          <C>      <C>
Paid claims              $ 48.9     $ (6.4)    $ 55.3     $  6.9     $ 48.4
Notified outstanding
 claims                   227.1       17.2      209.9      (31.3)     241.2
IBNR                       39.0      (22.8)      61.8      (71.5)     133.3
Bad Debt provision        (28.9)       0.2      (29.1)       1.1      (30.2)
                         ------     ------     ------     ------     ------
  Total                  $286.1     $(11.8)    $297.9     $(94.8)    $392.7
                         ======     ======     ======     ======     ======
</TABLE>
 
  The following table sets forth the Company's net reinsurance recoverables on
its continuing operations (excluding marine LMX) and on its marine LMX
business, which is no longer written. For marine LMX business, reinsurance
recoverables have decreased by 7.6%, to $152.3 million in 1997 from $164.9
million in 1996, and by 24.0%, to $164.9 million in 1996 from $217.1 million
in 1995.
 
                   ANALYSIS OF NET REINSURANCE RECOVERABLES
 
<TABLE>
<CAPTION>
                            AT DECEMBER 31,
                          --------------------
                           1997   1996   1995
                          ------ ------ ------
                              (DOLLARS IN
                               MILLIONS)
<S>                       <C>    <C>    <C>
Reinsurance recoverable:
  Continuing operations   $133.8 $133.0 $175.6
  Marine LMX business      152.3  164.9  217.1
                          ------ ------ ------
    Total                 $286.1 $297.9 $392.7
                          ====== ====== ======
</TABLE>
 
  At December 31, 1997, syndicates at Lloyd's were the Company's principal
reinsurers, with reinsurance recoverables on notified outstanding claims and
IBNR from continuing business of approximately $87.6 million.
 
                                      17
<PAGE>
 
                     TEN LARGEST PROVIDERS OF REINSURANCE
                        FOR THE 1997 UNDERWRITING YEAR
 
<TABLE>
<CAPTION>
                                                     A.M. BEST PREMIUM
                      REINSURER                      RATING(1) CEDED(2)
                      ---------                      --------- --------
   <S>                                               <C>       <C>
   Lloyd's Syndicates                                    A       15.1%
   Continental Re                                        A-       8.1
   Swiss Re/European General Reinsurance Co.             A+       4.9
   ERC Frankona Ruckverscherungs--AG                     A        4.0
   PX Re (ex Pheonix Re)                                 A        3.9
   Zurich Insurance/Centre Re International--Dublin
    (Bermuda)                                            A+       3.2
   Hanover Ruckverscherungs--AG                          A+       3.1
   Underwriters Reinsurance Co. (Barbados)               A+       2.7
   Copenhagen Re (Denmark)                               A        2.7
   London & Edinburgh Gen. Ins. Co. Ltd.                (3)       2.7
</TABLE>
--------
(1) A rating from A.M. Best reflects the opinion of A.M. Best as to an
    insurer's financial strength, operating performance and ability to meet
    its obligations to policyholders.
 
(2) Premium ceded for the 1997 underwriting year.
 
(3) London & Edinburgh Gen. Ins. Co. Ltd. is rated "A" by S&P.
 
INVESTMENT PORTFOLIO
 
  The Company's investment objectives are to optimize current income and total
return on its investments consistent with high quality, safety,
diversification and tax and regulatory considerations and to maintain
sufficient liquidity to enable it to meet its obligations on a timely basis.
 
  An in-house team of seven people, headed by the Director of Investments and
the Director of Fixed Interest Investment, is responsible for Terra Nova's
investment management. The Vice President--Administration of Terra Nova
(Bermuda) is responsible for the investment management of Terra Nova
(Bermuda).
 
  The Company operates in several jurisdictions and must comply with local
insurance regulations which prescribe the type and amount of investments
permissible. In addition, Terra Nova's investment policy is implemented in
accordance with U.K. regulations, which regulations govern the admissibility
and valuation of individual investments within its portfolio for solvency
calculation purposes, and conformity with Terra Nova's Notice of Requirements.
Terra Nova (Bermuda)'s investments are made in accordance with Bermuda
regulations, which regulations govern the admissibility of individual assets
for solvency margin and liquidity ratio calculation purposes. Certain assets
are held in Canada and the U.S. in accordance with applicable local
regulations. Such assets are currently required to be denominated in local
currency and invested in domestic securities. Terra Nova Capital's investments
are made in accordance with Lloyd's regulations.
 
  The Company has specific investment policy guidelines with respect to both
its "technical funds" and its "capital funds" for its insurance business. The
"technical funds" support claims reserves; the "capital funds" represent
shareholders' funds, including solvency margins.
 
  The Company's "technical funds" are invested in readily marketable high
grade fixed interest securities and cash. The objectives of the investment
strategy for "technical funds" are to: (i) maintain diversified fixed income
portfolios in order to optimize investment income without undue risk; (ii)
manage portfolio maturities; and (iii) maintain sufficient liquidity to meet
its obligations on a timely basis.
 
  The Company's investment strategy with respect to "capital funds" is to
optimize total return after all taxes including, where applicable, withholding
tax and U.K. corporation tax. The objective is to provide for long-term growth
in market value through investment in a diversified portfolio which includes
listed common stocks but which is also geared to maintaining satisfactory
levels of current income.
 
                                      18
<PAGE>
 
  The Company does not invest in real estate, mortgages or high yield fixed
income securities. Nor does the Company participate in the derivatives markets
for trading or speculative purposes although such instruments may be used to a
limited extent to hedge against fluctuations in interest rates, foreign
exchange or equity security risk.
 
  The market value of the Company's investments varies depending upon economic
and market conditions. Absent other factors, the market values of fixed
maturity securities are likely to decline as interest rates rise and are
likely to increase as interest rates fall.
 
  The Company's policy is to match the duration of its assets with its
insurance liabilities and to manage the foreign currency exposure by matching
technical liabilities against assets of the same currency as far as is
considered practical. Approximately 78% of the investment portfolio of the
Company is maintained in U.S. dollars.
 
  The following table shows a breakdown of the Company's investment portfolio
by type of security:
 
                         BREAKDOWN BY TYPE OF SECURITY
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                             AT DECEMBER 31,
                               ----------------------------------------------
                                    1997            1996            1995
                               --------------  --------------  --------------
                               CARRYING % OF   CARRYING % OF   CARRYING % OF
                                AMOUNT  TOTAL   AMOUNT  TOTAL   AMOUNT  TOTAL
                               -------- -----  -------- -----  -------- -----
<S>                            <C>      <C>    <C>      <C>    <C>      <C>
Fixed maturities:
  U.S. Government and agencies $  312.7  21.2% $  421.7  32.6% $  389.2  33.3%
  Foreign governments and
   supranationals                 592.1  40.1     508.0  39.4     453.4  38.8
  Foreign regional government      41.4   2.8      20.3   1.6      20.5   1.7
  Corporate                       239.7  16.2      89.9   7.0      69.8   6.0
  Asset backed securities (1)      64.4   4.4      65.4   5.1      55.8   4.8
  Mortgage backed securities
   (2)                             11.2   0.8      14.2   1.1      10.2   0.9
                               -------- -----  -------- -----  -------- -----
  Total fixed maturities        1,261.5  85.5   1,119.5  86.8     998.9  85.5
                               -------- -----  -------- -----  -------- -----
Common stocks                     104.2   7.1     120.4   9.3      80.4   6.9
Cash and cash equivalents         109.9   7.4      50.6   3.9      88.7   7.6
                               -------- -----  -------- -----  -------- -----
  Total fixed maturities,
   common stocks and cash      $1,475.6 100.0% $1,290.5 100.0% $1,168.0 100.0%
                               ======== =====  ======== =====  ======== =====
</TABLE>
--------
(1) As at December 31, 1997, 100% of the asset backed securities were rated
    "AAA" by S&P or Moody's.
 
(2) As at December 31, 1997, 100% of the mortgage backed securities are issued
    or guaranteed by U.S. or Canadian federal agencies or government sponsored
    enterprises.
 
 
                                      19
<PAGE>
 
  The following tables breakdown the Company's portfolio of fixed maturity
securities by credit quality and maturity:
 
           BREAKDOWN OF FIXED MATURITY SECURITIES BY CREDIT QUALITY
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                            AT DECEMBER 31,
                              ----------------------------------------------
                                   1997            1996            1995
                              --------------  --------------  --------------
     TYPE OF RATING OF        CARRYING % OF   CARRYING % OF   CARRYING % OF
      INVESTMENTS (1)          AMOUNT  TOTAL   AMOUNT  TOTAL   AMOUNT  TOTAL
     -----------------        -------- -----  -------- -----  -------- -----
<S>                           <C>      <C>    <C>      <C>    <C>      <C>
U.S. Government and agencies  $  312.7  24.8% $  421.7  37.7%  $389.2   39.0%
U.K. Government and agencies      90.3   7.2      39.3   3.5     55.8    5.6
AAA                              475.9  37.7     417.2  37.3    264.8   26.5
AA                               206.7  16.4     166.2  14.8    188.6   18.9
A                                 93.4   7.4      27.8   2.5     40.3    4.0
                              -------- -----  -------- -----   ------  -----
  Total A or higher            1,179.0  93.5   1,072.2  95.8    938.7   94.0
BBB                               45.8   3.6       --    --       --     --
Not rated (2)                     36.7   2.9      47.3   4.2     60.2    6.0
                              -------- -----  -------- -----   ------  -----
  Total                       $1,261.5 100.0% $1,119.5 100.0%  $998.9  100.0%
                              ======== =====  ======== =====   ======  =====
</TABLE>
--------
(1) The ratings set forth above are assigned to the securities by S&P, except
    for securities which have not been assigned a rating by S&P, in which case
    the ratings assigned by Moody's were used.
 
(2) All of the securities not rated at December 31, 1997 by S&P or Moody's are
    issued by state or provincial governments located in countries other than
    the U.S. or the U.K., and are believed by management to be at least the
    equivalent in quality of "AA" rated investments.
 
                             BREAKDOWN BY MATURITY
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                           AT DECEMBER 31,
                             ----------------------------------------------
                                  1997            1996            1995
                             --------------  --------------  --------------
                             CARRYING % OF   CARRYING % OF   CARRYING % OF
         MATURITY             AMOUNT  TOTAL   AMOUNT  TOTAL   AMOUNT  TOTAL
         --------            -------- -----  -------- -----  -------- -----
<S>                          <C>      <C>    <C>      <C>    <C>      <C>
1 year or less               $   53.1   4.2% $   75.4   6.7%  $ 84.1    8.4%
Over 1 year up to 5 years       493.8  39.2     533.7  47.7    450.7   45.1
Over 5 years up to 10 years     646.4  51.2     457.4  40.9    410.4   41.1
Over 10 years                    68.2   5.4      53.0   4.7     53.7    5.4
                             -------- -----  -------- -----   ------  -----
  Total                      $1,261.5 100.0% $1,119.5 100.0%  $998.9  100.0%
                             ======== =====  ======== =====   ======  =====
Weighted average life(1)       6.6 years       5.8 years       5.9 years
</TABLE>
--------
(1) Weighted average life is calculated by reference to contractual
    maturities.
 
                                      20
<PAGE>
 
  The following table breaks down the Company's portfolio by currency:
 
                             BREAKDOWN BY CURRENCY
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                               AT DECEMBER 31,
                 ----------------------------------------------
                      1997            1996            1995
                 --------------  --------------  --------------
                 CARRYING % OF   CARRYING % OF   CARRYING % OF
                  AMOUNT  TOTAL   AMOUNT  TOTAL   AMOUNT  TOTAL
                 -------- -----  -------- -----  -------- -----
<S>              <C>      <C>    <C>      <C>    <C>      <C>
U.S. Dollar      $1,154.7  78.3% $1,069.0  82.8% $  951.1  81.4%
British Pound       195.4  13.2     113.6   8.8     114.6   9.8
Canadian Dollar      41.8   2.8      47.9   3.7      39.7   3.4
German Mark           8.4   0.6      14.6   1.1      17.3   1.5
Other                75.3   5.1      45.4   3.6      45.3   3.9
                 -------- -----  -------- -----  -------- -----
  Total          $1,475.6 100.0% $1,290.5 100.0% $1,168.0 100.0%
                 ======== =====  ======== =====  ======== =====
</TABLE>
 
  At December 31, 1997, 70% of the investments of the Company supported the
Company's loss reserves and 30% supported the Company's capital. As of such
date, 52% of the investments of the Company were investments of Terra Nova.
 
  The following table shows in summary form recent investment portfolio
results.
 
                       SUMMARY OF INVESTMENT STATISTICS
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                   YEAR ENDED DECEMBER 31,
                                  ----------------------------
                                    1997      1996      1995
                                  --------  --------  --------
     <S>                          <C>       <C>       <C>
     Average invested assets (1)  $1,383.0  $1,245.6  $1,113.2
     Net investment income (2)        85.1      78.1      74.5
     Net effective yield (3)           6.2%      6.3%      6.7%
     Realized investment gains    $   15.3  $   11.8  $    9.4
     Total effective return (4)        7.3%      7.2%      7.5%
</TABLE>
--------
(1) Average of beginning and ending amounts of cash and investments for the
    period at carrying value. The average invested assets have been adjusted
    to exclude the effects of the Offering in 1996.
 
(2) Investment income after investment expenses, excluding realized investment
    gains.
 
(3) Net investment income for the period divided by average invested assets
    for the same period, expressed on an annualized basis.
 
(4) Includes realized investment gains.
 
COMPETITION
 
  The property and casualty insurance and reinsurance industry is highly
competitive. The Company competes for its business in the United States and
internationally with other Lloyd's syndicates, other London Market companies,
other domestic Bermuda reinsurers, domestic United States insurers and
reinsurers and other international insurers and reinsurers, many of whom are
larger and have greater financial resources than the Company. Additionally,
other well-capitalized insurers and reinsurers could start writing, or
increase their writing of, the classes of business in which the Company is
primarily engaged.
 
  Competition in the classes of business which the Company writes is based on
many factors, including the perceived overall financial strength of the
insurer or reinsurer, claims paying ability rating, premiums charged and other
terms and conditions, services provided, reputation and perceived technical
ability and experience of staff. Management of the Company believes that its
principal competitive strengths are its management and
 
                                      21
<PAGE>
 
operational flexibility, its expertise in risk assessment and underwriting
skills and its relationships with Lloyd's brokers, other leading brokers and
reinsurance intermediaries.
 
RATINGS
 
  The Company at March 16, 1998 carried A, A- and A+ claims paying ability
rating by S&P, A.M. Best and Duff & Phelps, respectively. S&P and Duff &
Phelps ratings range from a high "AAA" to a low "CCC", while A.M. Best ratings
range from a high "A++" to a low "C-". At March 16, 1998 the rating of the
Company's long term senior debt was BBB-, Baa3 and BBB at S&P, Moody's and
Duff & Phelps, respectively.
 
  Claims paying ability ratings are based upon a review of publicly available
information and communications between rating agency analysts and the
insurance company's management. Such ratings are the opinion of the rating
agency giving the rating and are not directed toward the protection of
investors.
 
AVIATION BUSINESS IN RUN-OFF
 
  In February 1992, having sustained major losses in the aviation business in
the 1989, 1991 and 1992 underwriting years and believing that premium income
was inadequate to cover the likely levels of claims arising for the
foreseeable future, Terra Nova withdrew from the aviation primary and
reinsurance market. Historically, Terra Nova had recorded strong profitability
from writing aviation on predominately an excess of loss reinsurance basis.
 
  The cessation of aviation underwriting has been treated as a discontinued
operation in the financial statements of Terra Nova, the Company's
predecessor. Under this approach, the estimated cost relating to other
overhead deemed necessary to complete the run-off of the aviation business was
treated as a one-time charge ($2.1 million in 1992) and set up as a separate
provision in Terra Nova's GAAP financial statements.
 
                                      22
<PAGE>
 
  As a result of the Terra Nova Acquisition, charges or credits resulting from
changes in estimates after December 31, 1994 are reflected in continuing
operations of the Company. The run-off of aviation business is managed by a
separate claims staff with analytical support from the actuarial and finance
departments and management supervision by the technical department. This
separate group of claims personnel has a significant amount of experience with
the Company's aviation business.
 
  The following table shows the development of net reserves for losses and LAE
for the calendar years 1987 to 1997 for the aviation business in run-off:
 
           ANALYSIS OF AVIATION NET LOSS AND LAE RESERVE DEVELOPMENT
                             (DOLLARS IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                          --------------------------------------------------------------------------------------------
                          1987    1988     1989      1990     1991      1992     1993    1994    1995    1996    1997
                          -----  ------   -------   ------   -------   ------   ------   -----   -----   -----   -----
<S>                       <C>    <C>      <C>       <C>      <C>       <C>      <C>      <C>     <C>     <C>     <C>
Reserves for unpaid
 losses and LAE           $29.9  $ 36.1    $ 31.7   $ 47.5    $ 60.9   $ 97.9   $ 82.3   $90.6   $79.4   $48.6   $32.9
Reserves re-estimated(1)
 as of:
 One year later            30.9    33.5      35.0     36.6     108.2     98.1     90.6    95.1    80.2    48.7
 Two years later           29.5    34.4      22.8     71.3     108.6    106.4     95.2    95.9    80.2
 Three years later         29.1    23.9      69.5     67.7     117.1    111.0     95.9    95.8
 Four years later          23.1    28.1      70.4     77.0     122.1    111.7     95.8
 Five years later          23.8    26.3      78.8     86.6     122.9    111.6
 Six years later           23.3    35.2      71.3     86.6     123.7
 Seven years later         22.2    48.5      70.6     86.9
 Eight years later         24.4    46.8      70.6
 Nine years later          24.5    46.7
 Ten years later           24.3
Cumulative redundancy
 (deficiency)               5.6   (10.6)    (38.9)   (39.4)    (62.8)   (13.7)   (13.5)   (5.2)   (0.8)   (0.1)
 As a percentage of
  unpaid losses and LAE   18.70% (29.36)% (122.40)% (82.95)% (103.12)% (13.99)% (16.40)% (5.74)% (0.88)% (0.21)%
Paid (cumulative) as of:
 One year later           $ 2.9  $  0.8   $  (6.9)  $(22.1)   $ 18.6   $ 13.0   $ (1.0)  $15.0   $32.0   $14.6
 Two years later            8.2     1.9     (16.8)    (6.8)     20.9     11.9     13.8    47.1    46.4
 Three years later          8.4    (2.6)    (11.2)     9.6      19.4     26.0     45.6    61.6
 Four years later           8.4    (4.8)      4.1      8.2      35.2     57.9     60.0
 Five years later           9.2    (9.6)      2.5     24.5      68.2     72.4
 Six years later            9.3   (16.3)     17.1     57.4      83.1
 Seven years later          9.2    (0.7)     48.1     72.3
 Eight years later         11.3    10.5      68.6
 Nine years later          12.1    30.5
 Ten years later           12.5
</TABLE>
--------
(1) "Reserves re-estimated" includes losses actually paid in current and prior
    years.
 
                                      23
<PAGE>
 
  The following table represents an analysis of gross loss and LAE reserve
development for the years indicated for the aviation business in run-off:
 
              ANALYSIS OF GROSS LOSS AND LAE RESERVE DEVELOPMENT
 
<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                          ---------------------------------------
                                           1993    1994    1995     1996    1997
                                          ------  ------  ------   ------   -----
                                                (DOLLARS IN MILLIONS)
<S>                                       <C>     <C>     <C>      <C>      <C>
Gross reserves for unpaid losses and LAE  $315.1  $318.7  $164.9   $139.7   $75.8
Reinsurance recoveries on unpaid losses
 and LAE                                   232.8   228.1    85.5     91.1    42.8
Gross reserves re-estimated (1) as of:
  One year later                           373.6   214.0   170.1    140.6
  Two years later                          268.9   218.8   170.8
  Three years later                        273.7   219.5
  Four years later                         274.3
Reinsurance recoveries on unpaid losses
 and LAE re-estimated (2) as of:
  One year later                           283.0   118.9    89.9     91.9
  Two years later                          173.7   122.9    90.6
  Three years later                        177.8   123.7
  Four years later                         178.5
Gross cumulative redundancy (deficiency)    40.8    99.2    (5.9)    (0.9)
  As expressed as a percentage of unpaid
   losses and LAE                          12.94%  31.12%  (3.58)%  (0.64)%
Paid (cumulative) as of:
  One year later                            38.5    49.2    33.2     64.1
  Two years later                          104.0    83.3    96.3
  Three years later                        119.7   146.4
  Four years later                         182.2
</TABLE>
--------
(1) "Gross reserves re-estimated" includes losses actually paid in current and
    prior years.
 
(2) "Reinsurance recoveries on unpaid losses and LAE re-estimated" includes
    reinsurance recoveries actually received in current and prior years.
 
                                      24
<PAGE>
 
  The following table represents a reconciliation of reserve balances for the
years indicated:
 
                  RECONCILIATION OF AVIATION RESERVE BALANCES
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER
                                                              31,
                                                      ----------------------
                                                       1997    1996    1995
                                                      ------  ------  ------
                                                          (DOLLARS IN
                                                           MILLIONS)
   <S>                                                <C>     <C>     <C>
   Reserves for unpaid losses and loss adjustment
    expenses, gross of reinsurance, at the beginning
    of the year                                       $139.7  $164.9  $318.7
   Less reinsurance recoverables                        91.1    85.5   228.1
                                                      ------  ------  ------
   Net balance at beginning of the year                 48.6    79.4    90.6
                                                      ------  ------  ------
   Incurred related to:
     Prior years                                         --      0.8     4.6
                                                      ------  ------  ------
   Total incurred                                        --      0.8     4.6
                                                      ------  ------  ------
   Paid related to:
     Prior years                                       (14.5)  (32.0)  (15.0)
                                                      ------  ------  ------
   Total paid                                          (14.5)  (32.0)  (15.0)
   Foreign exchange adjustment                          (1.1)    0.4    (0.8)
                                                      ------  ------  ------
   Net reserves at end of year                          33.0    48.6    79.4
   Reinsurance recoverables by the Company              42.8    91.1    85.5
                                                      ------  ------  ------
   Reserves for unpaid losses and loss adjustment
    expenses, gross of reinsurance at the end of the
    year                                              $ 75.8  $139.7  $164.9
                                                      ======  ======  ======
</TABLE>
 
                         ANALYSIS OF AVIATION RUN-OFF
 
<TABLE>
<CAPTION>
                                    AT DECEMBER
                                        31,
                                    ------------
                                    1997   1996
                                    ----- ------
                                    (DOLLARS IN
                                     MILLIONS)
   <S>                              <C>   <C>
   Gross reserves:
     Claims outstanding             $45.6 $ 57.1
     IBNR                            30.2   82.6
                                    ----- ------
       Total                        $75.8 $139.7
                                    ===== ======
   Reinsurance recoverables as to:
     Claims outstanding             $41.1 $ 59.8
     IBNR                             1.7   31.3
                                    ----- ------
       Total                        $42.8 $ 91.1
                                    ===== ======
   Net Reserves:
     Claims outstanding             $ 4.5 $ (2.7)
     IBNR                            28.5   51.3
                                    ----- ------
       Total                        $33.0 $ 48.6
                                    ===== ======
</TABLE>
 
EMPLOYEES
 
  At December 31, 1997, Terra Nova and Terra Nova (Bermuda) had 206 employees,
none of which was represented by a labor union. The Company believes that its
relationship with its employees is excellent. At the same date, Corifrance had
33 employees. Octavian has 344 employees, and is reimbursed by the Octavian
Syndicates for costs relating to most of these employees.
 
                                      25
<PAGE>
 
REGULATION OF THE COMPANY
 
 UNITED KINGDOM
 
  Authorization to Transact Business. Subject to certain exceptions,
particularly in relation to EC companies, no person may carry on insurance
business in the U.K. unless authorized by the H.M. Treasury ("Treasury") to do
so. Previously supervision of insurance companies was undertaken by the
D.T.I., whose responsibilities have now been assumed by the Treasury,
Insurance Directorate. Insurance companies authorized to carry on insurance
business by the Treasury in the U.K. are required to file with the Treasury
independently audited financial statements (the "Treasury Returns") within six
months of the period to which such figures relate. A company which carries on
long-term business is also required to arrange an actuarial appraisal of such
business and to submit an abstract of the actuarial report to the Treasury
within six months of the period to which such figures relate. In addition,
companies incorporated in the U.K. must comply with certain provisions of the
Companies Act 1985 (the "Companies Act") requiring them to file and provide
their shareholders with audited financial statements and related reports by
their directors. Under the Companies Act, a company is required to produce an
annual financial statement reported on by an independent auditor and signed by
at least one director.
 
  The Treasury Returns. The contents of the Treasury Returns include: (i) a
balance sheet and profit and loss account; (ii) general business revenue
accounts and additional information regarding premiums, claims and risk
exposure; and (iii) directors' and auditors' certificates. The required
contents of such returns depend on the category of the company and the
business conducted. The Treasury Returns must also provide additional
information relating to the reinsurance of business written, including details
regarding: (i) the amount of business reinsured; (ii) the names of the major
reinsurers; (iii) the relationship between Terra Nova and any major reinsurer;
and (iv) the types of reinsurance cover purchased by Terra Nova.
 
  Minimum Solvency Margins. Companies authorized to transact non-life
insurance business in the U.K. are required to maintain a minimum solvency
margin; that is, their assets must exceed their liabilities by a minimum
specified amount, subject in each case to a minimum amount (the "minimum
guarantee fund"). Each non-life insurance company must calculate margins under
both a premium basis method and a claims basis method. There are regulations
in accordance with which assets and liabilities are valued. The higher (i.e.,
the more conservative) of the two results is the required solvency margin. In
calculating the solvency margin under each method, the level of gross claims
before reinsurance is used, and a subsequent credit is applied for reinsurance
recoverables (subject in each case to a maximum credit of 50%). Additional
solvency margins apply to companies also transacting life business. In
practice the Treasury like to see a solvency margin of at least twice the
statutory solvency margin. At December 31, 1997, Terra Nova's estimated
minimum solvency margin was $30.1 million and the excess of its solvency
margin over its minimum solvency margin was $171.5 million.
 
  Dividends. The ability of Terra Nova to declare and pay dividends is limited
by a Notice of Requirements issued by the DTI (now the Treasury) on May 22,
1995 (the "Notice"). The Notice provides that Terra Nova must give 14 days'
advance notice to the Treasury of its intention to declare and pay a dividend.
The Treasury may direct that no such declaration or payment be made. In
reviewing dividend proposals, the Treasury considers the adequacy of Terra
Nova's solvency margin, its recent operating performance and other factors
deemed appropriate by the Treasury. In addition, Terra Nova must comply with
the Companies Act, which provides that dividends may only be paid out of
distributable profits (i.e., its accumulated realized profits (so far as not
previously used by distribution or capitalization) less its accumulated
realized losses (so far as not previously written off in a reduction or
reorganization of capital)). At December 31, 1997, Terra Nova's solvency
margin was $201.6 million in excess of its estimated minimum solvency margin,
and its distributable profits under U.K. GAAP were $100.2 million.
 
                                      26
<PAGE>
 
  Supervision of Management and Control. No U.K. insurance company may appoint
any person as managing director or chief executive officer without the
Treasury's prior approval and no person may otherwise become a "controller" of
an insurance company without such approval. For these purposes, "controller"
of an insurance company means (in addition to a managing director or chief
executive officer of the insurance company):
 
    (i) a managing director of a company of which the insurance company is
      a subsidiary;
 
    (ii) the chief executive officer of an insurance company of which the
       insurance company is a subsidiary;
 
    (iii) a person in accordance with whose directions or instructions the
       directors of the insurance company or of a body corporate of which
       the insurance company is a subsidiary are accustomed to act;
 
    (iv) a person who either alone or with any associate(s) (as defined by
       section 96C of the Insurance Companies Act 1982 for these purposes):
 
      (a) holds 10% or more of the shares in the insurance company or
        another company of which the insurance company is a subsidiary; or
 
      (b) is able to exercise or control the exercise of 10% or more of
        the voting power at any general meeting of the insurance company
        or another company of which the insurance company is a
        subsidiary; or
 
      (c) is able to exercise a significant influence over the management
        of the insurance company or another company of which the insurance
        company is a subsidiary by virtue of a holding of shares or an
        entitlement to control the exercise of voting rights thereof.
 
  For the purposes of paragraphs (i) and (iv), "subsidiary" means "subsidiary
undertaking" as defined by Section 736 of the Companies Act 1985.
 
  Similar approvals are required to be obtained for a shareholder controller
to acquire a "notifiable holding" in a U.K. insurance company (i.e., a holding
of 10% or more but less than 20%; 20% or more but less than 33%; and 33% or
more but less than 50%; 50% exactly; or a shareholding which is such that the
insurance company becomes a subsidiary (as defined by U.K. statute for these
purposes) or such shareholder controller).
 
  In the case of the appointment of a managing director or a chief executive,
the obligation is on the Company to notify the Treasury. In each of the other
cases, the obligation is on the controller itself to notify the Treasury. The
Treasury is deemed to have approved the appointment or change of controller,
or the acquisition or increase in the level of a notifiable holding, if it
receives the prescribed notice and does not object within three months (or
extend such three-month period) to such appointment, change of control or
acquisition on the grounds that the person in question is either not a fit and
proper person or that if the person were to be appointed or become such a
controller or acquire a, or increase its, notifiable holding, the criteria of
sound and prudent management would not or might not continue to be fulfilled
in respect of the insurance company.
 
  An insurance company is also required to notify the Treasury of the identity
and business history of its directors and senior managers and any changes with
respect to such directors and managers.
 
  The business of an insurer is required by statute to be carried out with
integrity, due care and the professional skills appropriate to the nature and
scale of its activities. It must be directed and managed by a sufficient
number of persons who are fit and proper persons to hold their positions and
its business must be conducted in a sound and prudent manner.
 
  Upon a change of control (as defined by U.K. statute for these purposes),
the Treasury has the power to serve a Notice of Requirements on an insurance
company. Such a notice was served on Terra Nova as a result of the Terra Nova
Acquisition.
 
 
                                      27
<PAGE>
 
  In addition to the requirement regarding prior notification of intended
dividends, the Notice requires Terra Nova to, among other things:
 
    (a) notify the Treasury in respect of certain transactions with connected
  persons; and
 
    (b) restrict the range of permitted investment of assets to the extent of
        the value of the liabilities of Terra Nova.
 
  Management does not believe that compliance with the Notice has a material
effect on Terra Nova's business.
 
  The Treasury has further powers of intervention in the event that the
criteria of sound and prudent management are not fulfilled. These powers are
in addition to the Treasury's general power under Section 45 of the Insurance
Companies Act 1982 to impose individual requirements on companies for the
protection of policyholders.
 
  Lloyd's. Lloyd's is subject to a degree of overall regulation by the
Treasury to which it must supply a return each year demonstrating the solvency
of its members, both globally and on an individual basis. Lloyd's is, however,
primarily self-governing, through the Council and its Market Board and
Regulatory Board, to which the Council has delegated the majority of its
functions, although it is proposed that this will change in the near future
and that Lloyd's will be regulated by the new Finance Services Authority.
 
  For the purposes of the Lloyd's Act the Company is a Lloyd's "managing
agent". The Lloyd's Act prohibits any person from acting as a Lloyd's broker
if that person is a managing agent or is "associated" with a managing agent
and also prohibits any person from acting as a managing agent if that person
is a Lloyd's broker or is "associated" with a Lloyd's broker.
 
  The scope of these prohibitions is extremely broad. A person (which includes
an individual or company) is associated with a Lloyd's broker for these
purposes if:
 
  (a) it is:
 
    (i) a holding company, subsidiary or sister subsidiary of the Lloyd's
  broker;
 
    (ii) an individual or company which controls the Lloyd's broker. This is
        the case if the individual or company (either alone or with
        associates) is entitled to exercise or to control the exercise of a
        third or more of the voting power at any general meeting of the
        Lloyd's broker;
 
    (iii) an individual or company which is controlled by the Lloyd's broker;
 
    (iv) an individual or company which is controlled by a holding company,
        subsidiary or sister subsidiary of the Lloyd's broker;
 
    (v) a director of the Lloyd's broker;
 
    (vi) a director of any holding company, subsidiary or sister subsidiary
  of the Lloyd's broker; and
 
  (b) that person holds any interest in the Lloyd's broker (or supplies the
      services of an individual to the Lloyd's broker). The term "interest"
      includes any beneficial interest in any of the stock, shares or other
      securities of the Lloyd's broker.
 
  Similar rules to those above apply in relation to partnerships and partners
therein. In addition, the term "Lloyd's broker" is expressed to include not
only the Lloyd's broker itself but also a holding company (a company which is
entitled to exercise more than 50% of the voting power) of the Lloyd's broker
and any person or company which "controls" the Lloyd's broker (a person or
company which is entitled to exercise a third or more of the voting power).
 
  These provisions therefore prohibit a Lloyd's broker or any of the persons
listed in paragraph (a) above from holding a direct interest in the Company.
However, it is permitted for a Lloyd's broker (or any of its
 
                                      28
<PAGE>
 
associates) to acquire an interest in the Company provided such an interest
represents not more than 5% in nominal amount of the Company's stock, shares
or other securities, or any class thereof, which are authorized to be traded
on a stock exchange or in any over-the-counter market, and in either case are
so traded regularly or from time to time. In ascertaining in any case whether
any person would fall within this exemption it should be noted that the
Lloyd's Act requires not only the shareholding of the particular body
corporate, partnership or individual concerned to be taken into account but
also those of persons connected therewith (as widely defined in the Lloyd's
Act).
 
  The Lloyd's Bye-Laws also contain a number of further requirements and
restrictions relating to Lloyd's brokers having interests in managing agents
compliance with which would have to be ensured prior to any shareholding in
the Company being acquired. Subject to certain limited exceptions, the Bye-
Laws of the Company permit the directors or their designee to decline to
register the transfer of any shares of capital stock of the Company if they
have reason to believe that such transfer may expose the Company, any
subsidiary thereof or any shareholder to adverse tax, legal or regulatory
treatment or would be in breach of any applicable legal or regulatory
requirements, in each case in any jurisdiction, including the Lloyd's Act and
Bye-Laws and other laws and regulations governing Lloyd's and members of
Lloyd's.
 
  Any person who is or may fall within the definition "Lloyd's broker" or is
unsure whether or not this is the case should take independent legal advice
before acquiring any shareholding in the Company.
 
  Both Terra Nova Capital and Octavian are subject to regulation and
supervision by Lloyd's. Lloyd's prescribes, in respect of each business,
certain minimum standards relating to the management and control, solvency and
various other requirements. Lloyd's operates under a self-regulatory regime
and has the power to change the rules which govern the operation of the
Lloyd's market. Lloyd's has wide discretion in the application and
interpretation of the rules, which would, for example, permit Lloyd's to
rescind the membership of a member (such as Terra Nova Capital or Octavian) if
Lloyd's believes the member not to be "fit and proper." In addition Lloyd's
imposes similar restrictions against persons becoming controllers and major
shareholders of corporate members and managing agents without their consent
first having been obtained. The tests are similar to those set out in respect
of the Treasury above.
 
 BERMUDA
 
  The Insurance Act 1978 and Related Regulations. As a holding company, the
Company is not subject to Bermuda insurance regulation. However, Terra Nova
(Bermuda) is subject to regulation under The Insurance Act 1978, amendments
thereto and related regulations of Bermuda (the "Bermuda Act"), which provide
that no person may carry on insurance business in or from within Bermuda
unless registered as an insurer under the Bermuda Act by the Minister. In
deciding whether to grant registration, the Minister has broad discretion to
act as he thinks fit in the public interest. The Minister is required by the
Bermuda Act to determine whether the applicant is a fit and proper body to be
engaged in insurance business and, in particular, whether it has, or has
available to it, adequate knowledge and expertise. In connection with
registration, the Minister may impose conditions relating to the writing of
certain types of insurance business.
 
  The Bermuda Act imposes on Bermuda insurance companies solvency and
liquidity standards and auditing and reporting requirements and grants to the
Minister powers to supervise, investigate and intervene in the affairs of
insurance companies. Significant aspects of the Bermuda insurance regulatory
framework are set forth below.
 
  Cancellation of an Insurer's Registration. An insurer's registration may be
cancelled by the Minister on certain grounds specified in the Bermuda Act
including failure of the insurer to comply with its obligations under the
Bermuda Act or if, in the opinion of the Minister after consultation with the
Insurance Advisory Committee, the insurer has not been carrying on business in
accordance with sound insurance principles.
 
  Independent Approved Auditor; Statutory Financial Statements; Statutory
Financial Return. Every registered insurer must appoint an independent auditor
approved by the Minister who will annually audit and
 
                                      29
<PAGE>
 
report on the statutory financial statements and the statutory financial
return of the insurer, which are required to be filed annually with the
Registrar of Companies of Bermuda (the "Registrar"), who is the chief
administrative officer under the Bermuda Act. The approved auditor may be the
same person or firm that audits the insurer's financial statements and reports
for presentation to its shareholders.
 
  An insurer must prepare annual statutory financial statements. The statutory
financial statements are not prepared in accordance with GAAP and are distinct
from the financial statements prepared for presentation to the insurer's
shareholders under The Companies Act 1981. The insurer is required to submit
the annual statutory financial statements as part of the annual statutory
financial return.
 
  An insurer is required to file with the Registrar a statutory financial
return that includes, among other matters, a report of the approved
independent auditor on the statutory financial statements of the insurer, a
declaration of the statutory ratios and a related solvency certificate.
 
  Minimum Solvency Margin. The Bermuda Act provides that the statutory assets
of an insurer must exceed its statutory liabilities by an amount greater than
the prescribed minimum solvency margin.
 
  Pursuant to the Bermuda Act, Terra Nova (Bermuda) is registered as a Class 4
insurer and, as such, is: (i) required to maintain a minimum statutory capital
and surplus equal to the greatest of (a) $100 million, (b) 50% of its net
premiums written (with a maximum credit of 25% for reinsurance ceded) or (c)
15% of its loss and other insurance reserves; (ii) required to file annually,
within four months following the end of the relevant financial year, with the
Registrar, a statutory financial return together with a copy of its annual
statutory financial statements, an opinion of a loss reserve specialist in
respect of its loss and loss expense provisions and a schedule of reinsurance
ceded; (iii) prohibited from declaring or paying any dividends during any
financial year if it is in breach of its minimum solvency margin or minimum
liquidity ratio or if the declaration or payment of such dividends would cause
it to fail to meet such margin or ratio (if it has failed to meet its minimum
solvency margin or minimum liquidity ratio on the last day of any financial
year, Terra Nova (Bermuda) will be prohibited, without the approval of the
Minister, from declaring or paying any dividends during the next financial
year); (iv) prohibited from declaring or paying in any financial year
dividends of more than 25% of its total statutory capital and surplus (as
shown on its previous statutory balance sheet) unless it files with the
Registrar an affidavit stating that it will continue to meet the required
margins; (v) prohibited, without the approval of the Minister, from reducing
by 15% or more its total statutory capital, as set out in its previous year's
financial statements and any application for such approval must include an
affidavit stating that it will continue to meet required margins; and (vi)
required, at anytime it fails to meet its solvency margin, within 30 days (45
days where total statutory capital and surplus falls to $75 million or less)
after becoming aware of that failure or having reason to believe that such
failure has occurred, to file with the Minister a written report containing
certain information.
 
  Minimum Liquidity Ratio. The Bermuda Act provides a minimum liquidity ratio
for general business. An insurer engaged in general business is required to
maintain the value of its relevant assets at not less than 75% of the amount
of its relevant liabilities. Relevant assets include cash and time deposits,
quoted investments, unquoted bonds and debentures, first liens on real estate,
investment income due and accrued, accounts and premiums receivable and
reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the Minister, do not automatically qualify as
relevant assets, such as unquoted equity securities, investments in and
advances to affiliates, real estate and collateral loans. The relevant
liabilities are total general business insurance reserves and total other
liabilities less deferred income tax and sundry liabilities (by
interpretation, those not specifically defined).
 
  Supervision, Investigation and Intervention. The Minister may appoint an
inspector with extensive powers to investigate the affairs of an insurer if
the Minister believes that an investigation is required in the interest of the
insurer's policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to him, the Minister may
direct an insurer to produce documents or information relating to matters
connected with the insurer's business.
 
 
                                      30
<PAGE>
 
  If it appears to the Minister that there is a risk of the insurer becoming
insolvent, or that it is in breach of the Bermuda Act or any conditions
imposed on its registration the Minister may, among other things, direct the
insurer not to take on any new insurance business; not to vary any insurance
contract if the effect would be to increase the insurer's liabilities; not to
make certain investments; to realize certain investments; to maintain, or
transfer to the custody of a specified bank, certain assets; not to declare or
pay any dividends or other distributions or to restrict the making of such
payments; and/or to limit its premium income.
 
  An insurer is required to maintain a principal office in Bermuda and to
appoint and maintain a principal representative in Bermuda. For the purpose of
the Bermuda Act, the principal office of Terra Nova (Bermuda) is Richmond
House, 12 Par-la-Ville Road, Hamilton HM 08, Bermuda, and Mr. William O.
Bailey is the principal representative of Terra Nova (Bermuda). Without a
reason acceptable to the Minister, an insurer may not terminate the
appointment of its principal representative, and the principal representative
may not cease to act as such, unless 30 days' notice in writing to the
Minister is given of the intention to do so. It is the duty of the principal
representative, within 30 days of his reaching the view that there is a
likelihood of the insurer for which he acts becoming insolvent or its coming
to his knowledge, or his having reason to believe, that an "event" has
occurred, to make a report in writing to the Minister setting out all the
particulars of the case that are available to him. Examples of such an "event"
include failure by the insurer to comply substantially with a condition
imposed upon the insurer by the Minister relating to a solvency margin or a
liquidity or other ratio.
 
 UNITED STATES
 
  Excess and Surplus Lines Insurance. Terra Nova is an approved or eligible
excess and surplus lines insurer in 47 states, as well as in the District of
Columbia and the U.S. Virgin Islands. In order to maintain such approvals and
eligibilities, Terra Nova agreed to establish a U.S. trust fund, having a
value of at least $18.0 million for the benefit of U.S. surplus lines
policyholders. At December 31, 1997, the trust fund was valued at $19.0
million. Terra Nova's U.S. surplus lines trust fund exceeds California's
requirement of $5.4 million which, as of March 1, 1998, was the highest
minimum trust fund amount in any U.S. jurisdiction. Terra Nova also complies
with minimum capital and surplus requirements in the United States. As of
March 1, 1998, the highest such requirement was $15.0 million. Terra Nova also
files annually with the International Insurers Department (the "IID") of the
NAIC and with regulatory authorities in many of the U.S. jurisdictions in
which Terra Nova is an approved or eligible surplus lines insurer, its annual
financial statements, actuarial certifications as to the adequacy of its loss
reserves, descriptions of its outward reinsurance programs (including
premiums, recoveries and recoverables thereunder), and directors' and
officers' biographical affidavits and related information.
 
  Model Nonadmitted Insurance Act. At its December 1996 meeting, the NAIC
adopted amendments to the Nonadmitted Insurance Model Act (the "Model Act").
As individual U.S. jurisdictions adopt the Model Act Terra Nova's continued
surplus lines eligibility or approval will hinge upon maintenance of a U.S.
surplus lines trust fund in an amount equal to the greater of (a) $5.4 million
or (b) 30% of U.S. surplus lines gross liabilities (excluding aviation wet
marine and transportation insurance), subject to a cap of $60.0 million. The
Model Act provides a two-year phase-in for the new trust fund requirement.
Only Louisiana has adopted the Model Act's new trust fund standards. The
Company is not aware that any other state legislatures are considering Model
Act legislation. The Company also believes that the implementation of the
Model Act, whether by statute or regulation, will not have a material adverse
impact upon Terra Nova's business or financial position. Maintenance of a U.S.
surplus lines trust fund that exceeds the current level could provide
competitive advantages for Terra Nova vis-a-vis other non-U.S. surplus lines
insurers that maintain lower trust funds and U.S. domestic surplus lines
insurers that do not maintain such trust funds.
 
  The Model Law on Credit for Reinsurance (the "Reinsurance Model Law")
adopted in 1984 and subsequently amended on several occasions by the NAIC has
now been enacted or promulgated in nearly all U.S. jurisdictions. The
Reinsurance Model Law contains a provision that allows overseas-based
reinsurers to establish a single U.S. reinsurance trust fund equal in amount
to their prospective reinsurance liabilities in respect of U.S. cedents plus
$20.0 million for the purpose of securing business written in the United
States by U.S.
 
                                      31
<PAGE>
 
cedents and permitting such cedents to deduct ceded liabilities when preparing
statutory financial statements. Terra Nova has established such a U.S.
reinsurance trust fund. As of March 1, 1998, Terra Nova had received trusteed
reinsurer approval from the departments of insurance of 39 states and had
applications for trusteed reinsurer status pending in 6 additional states.
 
  Terra Nova provides U.S. cedents that are not domiciled in one of the states
in which it is approved as a trusteed reinsurer with letters of credit to
secure ceded liabilities. Such cedents are thus permitted to deduct such
liabilities when preparing statutory financial statements.
 
               CERTAIN U.K., U.S. AND BERMUDA TAX CONSIDERATIONS
 
TAXATION OF THE COMPANY AND ITS SUBSIDIARIES
 
BERMUDA
 
  Under current Bermuda law, there is no income or capital gains tax payable
by the Company or its Bermuda subsidiaries. The Company and its Bermuda
subsidiaries have received from the Minister assurances, under The Exempted
Undertakings Tax Protection Act 1966 of Bermuda, to the effect that in the
event of there being enacted in Bermuda any legislation imposing tax computed
on profits or income, or computed on any capital asset, gain or appreciation,
or any tax in the nature of estate duty or inheritance tax, then the
imposition of any such tax shall not be applicable to them or to any of their
respective operations or to their shares, debentures or other obligations
until March 28, 2016. These assurances are subject to the proviso that they
are not to be construed so as to prevent the application of any tax or duty to
such persons as are ordinarily resident in Bermuda or to prevent the
application of any tax payable in accordance with the provisions of The Land
Tax Act 1967 of Bermuda or otherwise payable in relation to any property
leased to the Company or its Bermuda subsidiaries.
 
  The Company and its Bermuda subsidiaries are required to pay certain annual
Bermuda government fees. In addition, Terra Nova (Bermuda) is required to pay
certain business fees as an insurer under the Bermuda Act. As of March 16,
1998, there would be no Bermuda withholding tax on dividends paid by Terra
Nova (Bermuda) to the Company.
 
UNITED KINGDOM
 
  UK Holdings and its U.K. resident subsidiaries are chargeable to U.K.
corporation tax on their worldwide profits, currently at the rate of 31%.
Provided UK Holdings and its U.K. resident subsidiaries are members of the
same group for purposes of the U.K. group relief provisions, losses of one
member will be available for surrender to the other members on a current year
basis, subject to satisfying the detailed conditions of the relevant
legislation.
 
  For the purpose of calculating U.K. corporation tax, all transactions
between Terra Nova, UK Holdings, the Company and Terra Nova (Bermuda) must be
deemed made on an arm's length basis.
 
  No U.K. withholding tax will be imposed on dividends paid to the Company by
U.K. Holdings and the Company will have no U.K. tax liability in respect of
such dividends. On paying a dividend to the Company, however, UK Holdings will
be required to account to the U.K. Inland Revenue for Advance Corporation Tax
("ACT"). The rate of ACT is currently set at 25% of the dividend. ACT may in
certain circumstances be offset by the paying company (or other members of the
U.K. group) against its (or their) U.K. corporation tax liability and may in
certain circumstances give rise to a repayment of corporation tax paid in
respect of prior years. The Company will not be entitled to any U.K. tax
credit corresponding to the ACT in respect of any dividends paid to it by UK
Holdings.
 
                                      32
<PAGE>
 
UNITED STATES
 
  In general, a foreign corporation is subject to U.S. federal income tax on
its taxable income that is treated as effectively connected with its conduct
of a trade or business within the United States and to the 30% U.S. branch
profits tax on its effectively connected earnings and profits (with certain
adjustments) deemed repatriated out of the United States unless the
corporation is entitled to relief under the provisions of a tax treaty into
which the United States has entered.
 
  The United States has entered into tax treaties with Bermuda (the "Bermuda
Treaty") and the U.K. (the "U.K. Treaty"). Pursuant to the U.K. Treaty,
business profits earned by residents of the U.K. may be taxed in the United
States only if such profits are attributable to the conduct of a trade or
business in the United States through a permanent establishment situated
therein. The U.K. Treaty also prevents the imposition of the branch profits
tax on qualified treaty residents of the U.K.. The Bermuda Treaty provides
that business profits derived from carrying on the business of insurance by a
Bermuda company that is an "enterprise of insurance" may only be taxed in the
United States if such profits are attributable to the conduct of a trade or
business in the United States through a permanent establishment situated
therein. However, a Bermuda company is entitled to the Bermuda Treaty benefits
described above only if (i) more than 50% of its shares are beneficially
owned, directly or indirectly, by individuals who are U.S. citizens or
residents or Bermuda residents and (ii) the company's income is not used in
substantial part, to make disproportionate distributions to, or to meet
certain liabilities to, persons who are not U.S. citizens or residents or
Bermuda residents. The Bermuda Treaty does not preclude the imposition of the
U.S. branch profits tax.
 
  The Company believes that the Company and its subsidiaries have been
operated and in the future, will continue to be operated, in a manner that
will not cause any of them to be treated as being engaged in a U.S. trade or
business. However, because the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations and court decisions do not identify
definitively activities that constitute being engaged in a U.S. trade or
business, and because of the factual nature of the determination, there can be
no assurance that the Internal Revenue Service (the "Service") will not
contend that the Company or one of its subsidiaries is engaged in a U.S. trade
or business. If the Company or any of its subsidiaries were considered to be
engaged in a U.S. trade or business, that entity would be subject to U.S.
federal income tax on income effectively connected with that trade or
business, and would be subject to the branch profits tax as well, unless it
was entitled to relief under the U.K. Treaty or the Bermuda Treaty.
 
  There can be no assurance that Terra Nova (Bermuda) is entitled, or in the
future will be entitled, to the benefits of the Bermuda Treaty. However, if
Terra Nova (Bermuda) were so entitled and were considered to be engaged in a
U.S. trade or business, application of U.S. federal income tax, but not the
U.S. branch profits tax, would be limited to business profits attributable to
a permanent establishment. As stated above, the Company believes that Terra
Nova (Bermuda) will not be engaged in a U.S. trade or business.
 
  Additionally, the Company believes that UK Holdings and Terra Nova will be
entitled to the benefits of the U.K. Treaty. Thus, even if UK Holdings or
Terra Nova were considered to be engaged in a U.S. trade or business, that
entity would not be subject to U.S. federal income tax, unless it were
considered to engage in a U.S. trade or business through a permanent
establishment, in which case such entity would be subject to U.S. federal
income tax only on taxable income attributable to its permanent establishment,
and would not be subject to the branch profits tax. Although there can be no
assurances, the Company believes that none of Terra Nova (Bermuda) or UK
Holdings or Terra Nova has, or will have, a permanent establishment in the
United States.
 
  While there can be no assurance that UK Holdings will be entitled to the
U.K. Treaty exemption from the branch profits tax, and although the Company
will not be entitled to relief under the Bermuda Treaty, as stated above, the
Company believes that neither it nor UK Holdings will be engaged in a U.S.
trade or business and that therefore they will not be subject to U.S. federal
income tax.
 
  Foreign corporations not engaged in a trade or business in the United States
(as well as foreign corporations engaged in the conduct of a trade or business
in the United States, but only with respect to their income that is
 
                                      33
<PAGE>
 
not effectively connected with such trade or business) are subject to U.S.
federal withholding tax on certain "fixed or determinable annual or
periodical" income (such as dividends and interest on certain investments)
derived from sources within the United States. Such tax is generally imposed
at a rate of 30% on the gross income subject to tax. Under the U.K. Treaty,
the rate applicable to interest and dividends paid to Terra Nova or UK
Holdings generally will be reduced to zero and 15%, respectively. The Bermuda
Treaty does not provide for a reduction.
 
  The United States also imposes an excise tax on insurance and reinsurance
premiums paid to foreign insurers or reinsurers with respect to risks located
in the United States. The rates of tax currently applicable are 4% of gross
casualty insurance premiums and 1% of gross reinsurance premiums. In general,
premiums paid to Terra Nova have been and, the Company believes, will continue
to be exempt from this excise tax under the U.K. Treaty. Similar relief will
not be available with respect to premiums paid to Terra Nova (Bermuda).
 
ITEM 2--PROPERTIES
 
  The principal offices of the Company are leased by the Company in Hamilton,
Bermuda. Terra Nova's London executive offices are leased by Terra Nova and
its underwriting and claims staff is located in space leased by Terra Nova in
the London Underwriting Centre and in the Institute of London Underwriters'
building. Octavian leases offices in London, Poole, Leeds and Chelmsford and
also leases space in the Lloyd's building. Corifrance leases offices in Paris,
France. Additionally, Terra Nova leases offices in Brussels and Toronto.
Management believes that its office space is adequate for the Company's
current needs.
 
ITEM 3--LEGAL PROCEEDINGS
 
  The Company, like the insurance industry in general, is subject to
litigation in the normal course of its business. Management does not believe
that any pending or threatened litigation or dispute will have a material
adverse effect on its financial position, although there can be no assurance
that losses resulting from any pending or threatened litigation or dispute
will not materially affect the Company's result of operations for any period.
 
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  Matters submitted to a vote of security holders during the year were:
 
    (a) those matters ordinarily dealt with at the Annual General Meeting
        of the Company in accordance with Bermudian law; and
 
    (b) changes to the capital structure, Bye-Laws and executive share
        option plans of the Company in connection with the Offerings.
 
                                      34
<PAGE>
 
                                    PART II
 
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDERS
       MATTERS
 
  (a) The Company's common shares, par value $5.80 per share, commenced
trading on April 17, 1996 on the New York Stock Exchange ("NYSE") under the
symbol of TNA. The following table sets forth the high and low sales prices of
the common shares in each of the fiscal quarters since such trading commenced,
together with cash dividends paid:
 
<TABLE>
<CAPTION>
                                     1997                      1996
                           ------------------------- -------------------------
                            MARKET PRICE              MARKET PRICE
                           ---------------           ---------------
                                           DIVIDEND                  DIVIDEND
   QUARTER                  HIGH     LOW   PER SHARE  HIGH     LOW   PER SHARE
   -------                 ------- ------- --------- ------- ------- ---------
   <S>                     <C>     <C>     <C>       <C>     <C>     <C>
    1                      $21 1/2 $18 3/4   $0.02     N/A     N/A      N/A
    2                      $22 1/8 $18       $0.05   $17 5/8 $14 1/8   $0.02
    3                      $27 1/4 $20 7/8   $0.05   $20 1/2 $15       $0.02
    4                      $29 5/8 $24 1/4   $0.05   $25     $19 7/8   $0.02
                           ------- -------   -----   ------- -------   -----
   Year end closing price          $26 1/4                   $20 1/2
</TABLE>
 
  (b) The approximate number of holders of common shares, as at December 31,
1997, was 1,700.
 
                                      35
<PAGE>
 
ITEM 6--SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
 
  The following table sets forth selected consolidated financial information
with respect to the Company and Terra Nova, its predecessor, for the periods
indicated. This information should be read in conjunction with the
Consolidated Financial Statements of the Company and Terra Nova and related
notes thereto and "Management's Discussion and Analysis of Results of
Operations and Financial Condition".
 
  In view of the short period between the date of the Terra Nova Acquisition
and year-end, December 31, 1994 has been considered the date of the Terra Nova
Acquisition for accounting purposes. As a result, the operations of the
Company, UK Holdings and Terra Nova (Bermuda) for the period December 21, 1994
to December 31, 1994, which were not material, have been included in the
results of operations of Terra Nova.
 
                          FIVE YEAR FINANCIAL SUMMARY
 
<TABLE>
<CAPTION>
                                           COMPANY              TERRA NOVA
                                  -------------------------- -----------------
                                    1997     1996     1995     1994     1993
                                  -------- -------- -------- -------- --------
                                  (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S>                               <C>      <C>      <C>      <C>      <C>
STATEMENT OF OPERATIONS DATA:
Gross premiums written               550.2    361.0    302.7    359.4    320.2
Net premiums written                 483.5    311.2    247.0    282.5    262.0
Net premiums earned                  419.1    278.8    251.9    250.4    229.5
Net investment income                 85.1     78.1     74.5     51.6     46.9
Income from continuing
 operations, before taxes and
 minority interests                   91.0     82.7     62.4     50.7     81.9
Net income                            73.4     63.9     43.3     27.4     51.6
Net operating earnings (1)            62.9     57.2     39.3     25.0     27.1
BALANCE SHEET DATA (AT END OF
 PERIOD):
Total assets                       2,220.1  1,867.3  1,785.0  1,751.8  1,641.6
Shareholders' equity                 481.9    398.8    197.0     59.1    163.7
Long-term debt                       175.0    100.0    100.0     85.0      --
Convertible redeemable preferred
 shares                                --       --      33.4     33.4      --
PER SHARE DATA:
Earnings per share (2)            $   2.82 $   2.69 $   2.63      --       --
Net operating earnings per share
 (2)                              $   2.42 $   2.37 $   2.24      --       --
Book value per share (3)          $  18.96 $  15.43 $  12.80 $   5.80      --
Dividends paid per common share   $   0.17 $   0.06      --       --       --
</TABLE>
--------
(1) Net operating earnings represents net income before discontinued
    operations, minority interests and realized gains on investments after
    tax.
 
(2) Earnings per share and net operating earnings per share are calculated on
    a diluted basis by using the weighted average number of common shares
    outstanding during the period. 1996 and 1995 disclosures have been
    restated in order to comply with SFAS No. 128--"Earnings per Share".
 
(3) Book value per share is equal to total shareholders' equity divided by the
    number of common shares outstanding at the end of the period.
 
                                      36
<PAGE>
 
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
       AND FINANCIAL CONDITION
 
THE COMPANY
 
  The following discussion addresses the principal factors affecting the
earnings and financial condition of the Company. All references herein to the
"Company" are to Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") and
all of its direct and indirect subsidiaries, including Terra Nova Insurance
(UK) Holdings plc ("UK Holdings"), Terra Nova Insurance Company Limited
("Terra Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova
(Bermuda)"), Compagnie de Reassurance d'Ile de France ("Corifrance"), Octavian
Syndicate Management Limited ("Octavian") and Terra Nova Capital Limited
("Terra Nova Capital").
 
 Mix of Business
 
  The Company's mix of business for the years ended December 31, 1997, 1996
and 1995 and the key ratios by major line of business are as set forth in the
following table:
<TABLE>
<CAPTION>
                                          YEAR ENDED DECEMBER 31,
                             --------------------------------------------------
                                   1997             1996             1995
                             ---------------- ---------------- ----------------
                              AMOUNT  PERCENT  AMOUNT  PERCENT  AMOUNT  PERCENT
                             -------- ------- -------- ------- -------- -------
                                           (DOLLARS IN THOUSANDS)
<S>                          <C>      <C>     <C>      <C>     <C>      <C>
Gross Premiums Written
  Non-marine property        $237,270   43.2% $180,561   50.0% $143,486   47.4%
  Non-marine casualty         128,472   23.3    68,107   18.9    54,716   18.1
  Marine & Aviation           184,501   33.5   112,342   31.1   104,456   34.5
                             --------  -----  --------  -----  --------  -----
    Total                    $550,243  100.0% $361,010  100.0% $302,658  100.0%
                             ========  =====  ========  =====  ========  =====
Net Premiums Written
  Non-marine property        $212,198   43.9% $157,737   50.7% $113,239   45.9%
  Non-marine casualty         119,194   24.6    62,244   20.0    48,118   19.5
  Marine & Aviation           152,153   31.5    91,185   29.3    85,628   34.6
                             --------  -----  --------  -----  --------  -----
    Total                    $483,545  100.0% $311,166  100.0% $246,985  100.0%
                             ========  =====  ========  =====  ========  =====
Net Premiums Earned
  Non-marine property        $192,607   46.0% $132,677   47.6% $110,572   43.9%
  Non-marine casualty          96,445   23.0    55,992   20.1    48,983   19.5
  Marine & Aviation           130,017   31.0    90,087   32.3    92,345   36.6
                             --------  -----  --------  -----  --------  -----
    Total                    $419,069  100.0% $278,756  100.0% $251,900  100.0%
                             ========  =====  ========  =====  ========  =====
Loss and Loss Adjustment
 Expense Ratios
  Non-marine property                   65.8%            61.6%            62.5%
  Non-marine casualty                   74.9             82.0            101.3
  Marine & Aviation                     64.6             55.9             63.9
                                       -----            -----            -----
    Total                               67.4%            64.0%            71.1%
                                       =====            =====            =====
Underwriting Expense Ratios
  Non-marine property                   31.6%            31.7%            33.5%
  Non-marine casualty                   26.1             28.8             27.4
  Marine & Aviation                     33.2             38.4             35.0
                                       -----            -----            -----
    Total                               30.8%            33.2%            32.7%
                                       =====            =====            =====
Combined Ratios
  Non-marine property                   97.4%            93.3%            96.0%
  Non-marine casualty                  101.0            110.8            128.7
  Marine & Aviation                     97.8             94.3             98.9
                                       -----            -----            -----
    Total                               98.2%            97.2%           103.8%
                                       =====            =====            =====
</TABLE>
 
                                      37
<PAGE>
 
RESULTS OF OPERATIONS
 
  The Company's functional currency is the U.S. dollar. The changes in line
item amounts from year to year as discussed below are all affected by the
movement in exchange rates, principally the dollar/sterling average rate which
varied from $1.64 for 1997, $1.57 for 1996 and $1.58 for 1995.
 
 Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
 
  Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written increased to $550.2 million in 1997 from $361.0 million in
1996. The increase in gross premiums written arises from:
 
  (a) Increased writings by Terra Nova Capital to $162.8 million (excluding
orphaned syndicate business and reinsurance to close premiums) in 1997 from
$36.8 million in 1996 due to the Company's increased participation in the
Octavian Syndicates from 11% in 1996 to approximately 47% in 1997;
 
  (b) $39.1 million of premiums related to reinsurance to close of "orphaned"
Lloyd's syndicates from the 1993 year of account; and
 
  (c) $17.9 million of premiums in respect of Terra Nova Capital's share of
the closure of the 1995 year of account into the 1996 year of account of which
it had an 11% share.
 
  Reinsurance ceded increased by 33.8% to $66.7 million in 1997 from $49.8
million in 1996. However, reinsurance ceded as a proportion of gross premiums
written decreased to 12.1% in 1997 from 13.8% in 1996. The decrease was due to
lower reinsurance costs at Terra Nova in 1997 due to structural changes on the
non- marine property program and rate reductions obtained on the non-marine
property, non-marine casualty and marine programs, partially offset by a
higher level of reinsurance purchased by Terra Nova Capital in 1997.
 
  Net premiums written increased by 55.4% to $483.5 million in 1997 from
$311.2 million in 1996, as a consequence of the increase in gross premiums
written referred to above and lower reinsurance costs. Net premiums earned
increased 50.3%, to $419.1 million in 1997 from $278.8 million in 1996.
 
  Net Investment Income. Net investment income increased 9.0%, to $85.1
million in 1997 from $78.1 million in 1996. The increase arose from an
increase of 11.0% in average invested assets, primarily attributable to the
higher operating cash flows in 1997 compared to 1996, $75 million debt issue
in August 1997 and the acquisition of Corifrance in the following month
partially offset by lower investment yields. The average investment yield
before realized gains and losses was 6.2% and 6.3% in 1997 and 1996,
respectively. The average duration of fixed maturity investments at December
31, 1997 and 1996 was 4.9 years and 4.2 years, respectively.
 
  Realized Net Capital Gains on Sales of Investments. Realized net capital
gains on sales of investments increased $3.5 million to $15.3 million in 1997
from $11.8 million in 1996 mainly due to equity securities sold in the year.
 
  Foreign Exchange (Losses) Gains. Foreign exchange losses of $1.3 million in
1997 and gains of $0.4 million in 1996 arose from foreign currency
transactions during the year together with the translation of foreign currency
assets and liabilities into U.S. dollars, the Company's functional currency.
The loss in 1997 was primarily a result of the dollar strengthening against
the majority of major currencies in 1997.
 
  Agency Income. This income consists of fees received by Octavian in respect
of the managing of certain Lloyd's syndicates.
 
  Losses and Loss Adjustment Expenses. Losses and LAE increased 58.5%, to
$282.5 million in 1997 from $178.3 million in 1996. As a percentage of net
premiums earned, losses and LAE increased 3.4 percentage points, to 67.4% in
1997 from 64.0% in 1996. The loss and LAE ratio for non-marine property
business increased
 
                                      38
<PAGE>
 
to 65.8% in 1997 from 61.6% in 1996, due to a movement away from property
catastrophe reinsurance towards less volatile, but lower margin, primary
business. The loss and LAE ratio for non-marine casualty business decreased to
74.9% in 1997 from 82.0% in 1996 as a result of stable results for prior years
in 1997. The increase in the marine loss and LAE ratio to 64.6% in 1997 from
55.9% in 1996 was a consequence of the competitive market conditions that
existed in 1997 compared to 1996.
 
  Acquisition Costs. Acquisition costs, which are comprised of commission
expenses and other underwriting expenses, increased 40.1% to $115.4 million in
1997 from $82.4 million in 1996. Acquisition costs as a percentage of net
premiums earned decreased to 27.5% in 1997 from 29.6% in 1996. The decrease
was largely a result of the earned premiums from the orphaned syndicate and
RITC business written during 1997, which have very low acquisition costs;
excluding this business, acquisition costs would have been 31.3% of premiums
earned.
 
  Other Operating Expenses. Other operating expenses increased 34.7% to $13.7
million in 1997 from $10.2 million in 1996. Other operating expenses as a
percentage of net premiums earned decreased to 3.3% in 1997 from 3.7% in 1996.
 
  Net Interest Expense. Net interest expense in 1997 relates to interest on
the $100 million 10.75% Senior Notes issued on June 30, 1995 and interest on
the $75 million 7.2% Senior Notes issued on August 26, 1997. The net interest
expense in 1996 relates to interest on the $100 million 10.75% Senior Notes.
 
  Agency Expenses. These expenses consist of costs incurred in managing
certain Lloyd's syndicates.
 
  Other Expenses. Other expenses remained constant at $5.3 million in both
1997 and 1996.
 
  Income from Continuing Operations before Income Taxes and Minority
Interests. Income from continuing operations before income taxes and minority
interests increased 10.1% to $91.0 million in 1997 from $82.7 million in 1996,
primarily due to the increase in investment income and realized gains on sales
of investments in 1997 compared to 1996.
 
  Income Tax Expense. Income tax expense marginally decreased $0.2 million, to
$17.6 million in 1997 from $17.8 million in 1996, as a consequence of a
reduction in the rate of U.K. Corporation Tax from 33% to 31% from April 1997.
 
  Income from Continuing Operations. Income from continuing operations
increased $8.5 million, to $73.4 million in 1997 from $64.9 million in 1996,
as a result of the factors described above.
 
  Combined Ratios. The Company's combined ratios were 98.2% for 1997 and 97.2%
for 1996 reflecting the absence of significant large loses and any adverse
development of prior year claims in both 1997 and 1996.
 
 Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
 
  Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written increased 19.3% to $361.0 million in 1996 from $302.7 million
in 1995. The overall increase in gross premiums written of $58.3 million was a
consequence of the increase in current year gross premiums written of
$50.2 million, together with an increase in prior year premiums of $8.1
million.
 
  The increase in gross premiums written on the current underwriting year
arises from:
 
  (a) increased writings by Terra Nova (Bermuda) to $33.3 million in 1996 from
$6.9 million in 1995 as a consequence of a full year of marketing prior to the
January renewals. At least 95% of the business written by Terra Nova (Bermuda)
is property business comprising catastrophe, proportional treaty and risk
excess business on a world-wide basis. The increases in the property writings
at Terra Nova (Bermuda) and increases in proportional treaty and direct
business written by Terra Nova have resulted in property gross premiums
written increasing to $178.9 million in 1996 from $139.3 million in 1995.
 
                                      39
<PAGE>
 
  (b) Terra Nova Capital writing gross premiums of $36.8 million in 1996.
Terra Nova Capital was established by the Company to participate in business
written by the Octavian Syndicates for the 1996 and subsequent years of
account. The majority of the business written by the Octavian Syndicates is
U.K. casualty, marine and aviation business.
 
  Reinsurance ceded decreased by 10.5% to $49.8 million in 1996 from $55.7
million in 1995. The decrease was due to lower reinsurance costs at Terra Nova
in 1996 as a result of an increase in the retention of the non-marine property
catastrophe reinsurance program and rate reductions obtained on the non-marine
property, non-marine casualty and marine programs, partially offset by
reinsurance costs of $8.2 million in Terra Nova Capital in 1996.
 
  Net premiums written increased by 26.0% to $311.2 million in 1996 from
$247.0 million in 1995, as a consequence of the increase in gross premiums
written referred to above and lower reinsurance costs. Net premiums earned
increased 10.7%, to $278.8 million in 1996 from $251.9 million in 1995.
 
  Net Investment Income. Net Investment income increased 4.9%, to $78.1
million in 1996 from $74.5 million in 1995. The increase arose from an
increase of 11.9% in average invested assets, primarily attributable to the
IPO in April 1996, partially offset by lower portfolio yields. The average
investment yield before realized gains and losses was 6.3% and 6.7% in 1996
and 1995, respectively. The average duration of fixed maturity investments at
December 31, 1996 and 1995 was 4.2 years and 4.1 years, respectively.
 
  Realized Net Capital Gains on Sales of Investments. Realized net capital
gains on sales of investments increased $2.4 million to $11.8 million in 1996
from $9.4 million in 1995 mainly due to equity securities sold in the year.
 
  Foreign Exchange Gains. Foreign exchange gains of $0.4 million in 1996 and
$1.1 million in 1995 arose from foreign currency transactions during the year
together with the translation of foreign currency assets and liabilities into
U.S. dollars, the Company's functional currency.
 
  Agency Income. This income consists of fees received by Octavian in respect
of the managing of certain Lloyd's syndicates.
 
  Losses and Loss Adjustment Expenses. Losses and LAE decreased 0.5%, to
$178.3 million in 1996 from $179.1 million in 1995. As a percentage of net
premiums earned, losses and LAE decreased 7.1 percentage points, to 64.0% in
1996 from 71.1% in 1995. The loss and LAE ratio for non-marine property
business marginally decreased to 61.6% in 1996 from 62.5% in 1995, due to
slightly more favorable loss experience in 1996 compared to 1995. The loss and
LAE ratio for non-marine casualty business decreased to 82.0% in 1996 from
101.3% in 1995 as a result of stable results for prior years in 1996. The
decrease in the marine loss and LAE ratio to 55.9% in 1996 from 63.9% in 1995
was a consequence of the lower reinsurance costs experienced in 1996 and a
decrease in adverse development of the 1992 and prior years on the marine LMX
business in 1996.
 
  Acquisition Costs. Acquisition costs, which are comprised of commission
expenses and other underwriting expenses, increased 13.9% to $82.4 million in
1996 from $72.3 million in 1995. Acquisition costs as a percentage of net
premiums earned increased to 29.6% in 1996 from 28.7% in 1995. The increase
was a result of changes made to Terra Nova's mix of business in order to
protect earnings from price weakness in certain lines of business, but this
has been offset by lower claims costs.
 
  Other Operating Expenses. Other operating expenses increased 1.1% to $10.2
million in 1996 from $10.1 million in 1995. Other operating expenses as a
percentage of net premiums earned decreased to 3.7% in 1996 from 4.0% in 1995.
 
  Net Interest Expense. Net interest expense in 1996 relates to interest on
the $100 million 10.75% Senior Notes issued on June 30, 1995. The net interest
expense in 1995 relates to interest on an $85 million Credit Agreement which
became effective on December 21, 1994 and which was repaid in full out of the
proceeds of the Senior Notes issued on June 30, 1995, as well as interest of
$5.4 million on the Senior Notes.
 
  Agency Expenses. These expenses consist of costs incurred in managing
certain Lloyd's syndicates.
 
 
                                      40
<PAGE>
 
  Other Expenses. Other expenses increased 48.9%, to $5.3 million in 1996 from
$3.5 million in 1995, due to an increased level of corporate activity in 1996.
 
  Income from Continuing Operations before Income Taxes and Minority
Interests. Income from continuing operations before income taxes and minority
interests increased 32.4% to $82.7 million in 1996 from $62.4 million in 1995,
primarily due to an increase in investment income and an improved underwriting
result in 1996.
 
  Income Tax Expense. Income tax expense increased $1.2 million, to $17.8
million in 1996 from $16.6 million in 1995, as a consequence of the increase
in operating income of the United Kingdom subsidiaries.
 
  Income from Continuing Operations. Income from continuing operations
increased $19.1 million, to $64.9 million in 1996 from $45.8 million in 1995,
as a result of the factors described above.
 
  Combined Ratios. The Company's combined ratios were 97.2% for 1996 and
103.8% for 1995. This reduction is primarily due to stable results for prior
years in 1996.
 
AVIATION BUSINESS IN RUN-OFF
 
  Pursuant to a decision by Terra Nova's directors in February 1992 to cease
writing aviation business ("Aviation"), Aviation has been accounted for as a
discontinued operation in the financial statements of Terra Nova, the
Company's predecessor. Insurance cover provided under Aviation policies issued
by Terra Nova ceased upon the expiration of the last policy on December 31,
1992. Accordingly, Terra Nova has not been subject to any new Aviation risks
since that date. However, Terra Nova may continue to receive payments from
policyholders pursuant to existing contracts and to make payments under ceded
reinsurance contracts. In addition, Terra Nova will continue to settle claims
and make recoveries from its reinsurers. These future receipts and payments,
together with the costs of running off the Aviation business, have been
considered as part of estimating the loss from abandonment of Aviation for
periods up to December 31, 1994. However, estimates of ultimate liabilities
for losses and loss adjustment expenses may vary as a result of subsequent
development.
 
  Following the Terra Nova Acquisition, charges or credits resulting from
changes in estimates after December 31, 1994 are reflected in continuing
operations of the Company. In 1997, 1996 and 1995, the aviation business in
run-off produced a break-even result.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's assets consist primarily of the capital stock of UK Holdings
and Terra Nova (Bermuda), and UK Holdings' assets consist primarily of the
capital stock of Terra Nova, Terra Nova Capital and Octavian. The ability of
the Company to pay dividends on its capital stock and to pay its obligations
depends primarily on dividends or other payments from Terra Nova, Terra Nova
(Bermuda), Terra Nova Capital, Octavian and Corifrance. The payment of
dividends and other payments by Terra Nova, Terra Nova Capital and Octavian
are subject to restrictions under U.K. law, Terra Nova (Bermuda), Bermuda law
and Corifrance, French law.
 
  The sources of funds for the Company's subsidiaries consist primarily of net
premiums, investment income and proceeds from sales and redemption of
investments. The funds are used primarily to pay claims and operating expenses
and for the purchase of investments, largely fixed income securities.
 
  For the years ended December 31, 1997 and 1996, the cashflow provided by
operating activities of the Company and available for investment was $81.3
million and $30.6 million, respectively. The increase in cash flows provided
by operating activities in 1997 was primarily due to:
 
  (a) Cashflows from Terra Nova Capital of $60.9 million in 1997 compared to
    $5.3 million in 1996 due to the Company's increased participation on
    syndicates managed by Octavian in 1997;
 
  (b) Improved insurance cash flows in Terra Nova and Terra Nova (Bermuda)
    due to favorable loss activity and increases in written premiums;
 
                                      41
<PAGE>
 
  (c) Corifrance providing $4.0 million of operating cash flow in 1997;
partially offset by
 
  (d) Higher income tax payments of $23.0 million in 1997 compared to $0.3
million in 1996 due to a tax refund of $12.0 million in 1996.
 
  Total investments and cash were $1,475.6 million at December 31, 1997. At
December 31, 1997, 85.5%, 7.1% and 7.4% of total investments and cash were
held in fixed maturities, common stocks and cash and cash equivalents,
respectively. At December 31, 1997, approximately 93.5% of the Company's fixed
income investments were rated "A" or better by Moody's or S&P. The Company's
investment portfolio earned interest and dividend income, net of investment
management fees, of 6.2% and 6.3% in 1997 and 1996, respectively. The Company
had realized investment gains of $15.3 million and $11.8 million in 1997 and
1996, respectively.
 
  On May 5, 1997, the Company announced its plans to buy back up to $20
million of its common stock on the open market at prevailing market prices or
in privately negotiated transactions.
 
  On May 7, 1997, S&P raised its claims-paying ability rating of the Terra
Nova Group to "A" from "A-" and the senior debt rating of UK Holdings to "BBB"
from "BBB-". The rating increases reflect the continued enhancement of the
Company's overall profile, including a stronger than expected operating
performance in 1996 and success in securing a significant participation in the
"new" Lloyd's market, while maintaining a strong degree of capitalization.
 
  On August 28, 1997, the Company filed a Form 8-K in respect of the issue of
$75 million 7.2% Senior Notes due 2007, fully and unconditionally guaranteed
by Bermuda Holdings.
 
  On September 8, 1997, the Company announced that it had purchased all of the
issued and outstanding shares of Corifrance, a French reinsurance company
which transacts business internationally.
 
  Certain information contained herein is based on management's estimates,
assumptions and projections. Important factors that could cause actual results
to differ materially from those estimated by management include, among other
things, an unexpected increase in competition, unfavorable government
regulation, the pricing environment and other industry developments.
 
FOREIGN CURRENCY
 
  The Company's assets, liabilities, revenues and expenses, except for the
majority of corporate overheads which are paid in British pounds, are
predominantly in U.S. dollars. Accordingly, the Company's functional currency
is the U.S. dollar. Certain other net translation adjustments are shown as a
separate component of shareholders' equity.
 
DIVIDEND POLICY
 
  The Company declared and paid dividends in accordance with the following
table:
 
<TABLE>
<CAPTION>
   DIVIDEND PER SHARE             DATE DECLARED   DATE PAID/PAYABLE   DATE OF RECORD
   ------------------             -------------   -----------------   --------------
   <S>                          <C>               <C>                <C>
   1997
     $0.02                      February 10, 1997 March 27, 1997     March 6, 1997
     $0.05                      May 5, 1997       June 27, 1997      June 6, 1997
     $0.05                      August 4, 1997    September 26, 1997 September 5, 1997
     $0.05                      November 4, 1997  December 29, 1997  December 5, 1997
   1998
     $0.05                      February 6, 1998  March 27, 1998     March 6, 1998
</TABLE>
 
                                      42
<PAGE>
 
ITEM 8--FINANCIAL STATEMENTS
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>                                                                      <C>
Report of Management's Responsibilities                                   44
Report of Independent Accountants                                         45
Audited Consolidated Financial Statements:
  Consolidated Balance Sheets as of December 31, 1997 and 1996            46
  Consolidated Statements of Operations for the years ended December 31,
   1997, 1996 and 1995                                                    47
  Consolidated Statements of Shareholders' Equity for the years ended
   December 31, 1997, 1996
   and 1995                                                               48
  Consolidated Statements of Cash Flows for the years ended December 31,
   1997, 1996 and 1995                                                    49
  Notes to Consolidated Financial Statements--including summarized
   consolidated financial information of Terra Nova Insurance (UK)
   Holdings plc as of December 31, 1997 and 1996                          50
</TABLE>
 
                                       43
<PAGE>
 
                    REPORT OF MANAGEMENT'S RESPONSIBILITIES
 
  The management of Bermuda Holdings is responsible for the integrity and fair
presentation of the consolidated financial statements, related notes thereto
and all other financial information presented herein. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and include amounts based on the best estimates and
judgments of management.
 
  Bermuda Holdings maintains an internal control structure designed to provide
reasonable assurance that assets are safeguarded from loss or unauthorized
use, that transactions are recorded in accordance with management's direction
and that the financial records are reliable for the purposes of preparing
financial statements and maintaining accountability of assets. The management
of Bermuda Holdings applied the concept of reasonable assurance by weighing
the cost of an internal control structure against the benefits to be derived.
The internal control structure is supported by the careful selection, training
and development of qualified personnel, an appropriate division of
responsibilities and the dissemination of written policies and procedures
throughout Bermuda Holdings. The internal control structure is continually
reviewed and evaluated by qualified personnel and periodically assessed by
Coopers & Lybrand, independent accountants, to the extent required under
generally accepted auditing standards in connection with their annual audit of
Bermuda Holdings financial statements.
 
  The Audit Committee of the Board of Directors is comprised solely of non
executive directors and meets regularly with management and the independent
accountants to review the scope and results of the audit work performed. The
independent accountants have unrestricted access to the Audit Committee,
without the presence of management, to discuss the results of their work and
views on the adequacy of the internal control structure, the quality of
financial reporting and any other matters they believe should be brought to
the attention of the Audit Committee.
 
<TABLE>
<S>                                              <C>
W.O. Bailey                                      W.J. Wedlake
Chairman, President and                          Senior Vice President and
Chief Executive Officer                          Chief Financial Officer
</TABLE>
 
                                      44
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Shareholders and Board of Directors of
Terra Nova (Bermuda) Holdings Ltd.
 
  We have audited the accompanying consolidated balance sheets of Terra Nova
(Bermuda) Holdings Ltd. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
 
  We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Terra Nova
(Bermuda) Holdings Ltd. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
accounting principles generally accepted in the United States of America.
 
Coopers & Lybrand
 
Hamilton, Bermuda
March 6, 1998
 
                                      45
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                              AND ITS SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                            YEAR ENDED DECEMBER 31,
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                       1997        1996
                                                    ----------  ----------
                      ASSETS
                      ------
<S>                                                 <C>         <C>
Investments available for sale and cash, at fair
 value:
  Fixed maturities:
    Bonds (amortized cost $1,219,799 and $1,095,126
     respectively)                                  $1,261,458  $1,119,531
  Common stocks (cost $69,781 and $92,877
   respectively)                                       104,234     120,411
  Cash and cash equivalents                            109,864      50,544
                                                    ----------  ----------
      Total investments and cash                     1,475,556   1,290,486
Accrued investment income                               28,076      24,351
Insurance balances receivable                           74,774      31,943
Reinsurance recoverable on paid losses                  39,402      43,745
Reinsurance recoverable on unpaid losses               246,728     254,129
Accrued premium income                                 188,055     121,900
Prepaid reinsurance premiums                            26,853       8,261
Deferred acquisition costs                              76,380      45,279
Other assets                                            64,310      47,253
                                                    ----------  ----------
      Total assets                                  $2,220,134  $1,867,347
                                                    ==========  ==========
<CAPTION>
                    LIABILITIES
                    -----------
<S>                                                 <C>         <C>
Unpaid losses and loss adjustment expenses          $1,157,724  $1,078,108
Unearned premiums                                      274,934     173,120
Insurance balances payable                              33,833      18,340
Income taxes payable                                    10,274      21,311
Deferred income taxes                                   15,244       8,720
Long-term debt                                         175,000     100,000
Net liabilities of Aviation business in run-off         28,235      43,286
Other liabilities                                       43,002      25,703
                                                    ----------  ----------
      Total liabilities                             $1,738,246  $1,468,588
                                                    ==========  ==========
<CAPTION>
               SHAREHOLDERS' EQUITY
               --------------------
<S>                                                 <C>         <C>
Common shares                                          150,142     149,933
Stock held in Trust                                     (9,500)        --
Deferred equity compensation                             3,275         --
Additional capital                                     111,568     111,544
Unrealized appreciation of investments, net of
 income tax                                             56,430      36,271
Cumulative translation adjustments                         112         190
Retained earnings                                      169,861     100,821
                                                    ----------  ----------
      Total shareholders' equity                       481,888     398,759
                                                    ==========  ==========
      Total liabilities and shareholders' equity    $2,220,134  $1,867,347
                                                    ==========  ==========
</TABLE>
 
        See accompanying notes to the consolidated financial statements.
 
                                       46
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                              AND ITS SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                            YEAR ENDED DECEMBER 31,
                (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                  1997      1996      1995
                                                --------  --------  --------
<S>                                             <C>       <C>       <C>
REVENUES
Net premiums written                            $483,545  $311,166  $246,985
(Increase) decrease in unearned premiums         (64,476)  (32,410)    4,915
                                                --------  --------  --------
Net premiums earned                              419,069   278,756   251,900
Net investment income                             85,130    78,130    74,478
Realized net capital gains on sales of
 investments                                      15,333    11,750     9,384
Foreign exchange (losses) gains                   (1,268)      425     1,110
Agency income                                     15,571     8,998       --
                                                --------  --------  --------
  Total revenues                                 533,835   378,059   336,872
                                                --------  --------  --------
EXPENSES
Losses and loss adjustment expenses, net         282,480   178,274   179,111
Acquisition costs                                115,427    82,394    72,314
Other operating expenses                          13,706    10,175    10,069
Interest expense                                  12,710    10,750     9,411
Agency expenses                                   13,130     8,537       --
Other expenses                                     5,333     5,261     3,534
                                                --------  --------  --------
  Total expenses                                 442,786   295,391   274,439
                                                --------  --------  --------
Income from operations before income taxes and
 minority interests                               91,049    82,668    62,433
Income tax expense                                17,639    17,777    16,630
Minority interests in income of consolidated
 subsidiaries                                        --        985     2,552
                                                --------  --------  --------
Income from continuing operations                 73,410    63,906    43,251
                                                --------  --------  --------
Net income                                      $ 73,410  $ 63,906  $ 43,251
                                                ========  ========  ========
Basic earnings per common share                 $   2.87  $   2.81  $   3.13
Diluted earnings per common share               $   2.82  $   2.69  $   2.63
</TABLE>
 
 
        See accompanying notes to the consolidated financial statements.
 
                                       47
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                              AND ITS SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
                            YEAR ENDED DECEMBER 31,
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                       UNREALIZED
                                    STOCK      DEFERRED               APPRECIATION  CUMULATIVE                TOTAL
                           COMMON  HELD IN      EQUITY    ADDITIONAL (DEPRECIATION) TRANSLATION RETAINED  SHAREHOLDERS'
                           SHARES   TRUST    COMPENSATION  CAPITAL   OF INVESTMENTS ADJUSTMENTS EARNINGS     EQUITY
                          -------- --------  ------------ ---------- -------------- ----------- --------  -------------
<S>                       <C>      <C>       <C>          <C>        <C>            <C>         <C>       <C>
Balance, January 1, 1995  $ 59,057 $    --      $  --      $    --      $    --        $ --     $    --     $ 59,057
Shares issued               30,225      --         --        18,203          --          --          --       48,428
Net appreciation               --       --         --           --        68,144         --          --       68,144
Income tax expense             --       --         --           --       (18,172)        --          --      (18,172)
Net income                     --       --         --           --           --          --       43,251      43,251
Dividends payable on
 convertible redeemable
 preferred shares              --       --         --           --           --          --       (3,700)     (3,700)
                          -------- --------     ------     --------     --------       ----     --------    --------
Balance, December 31,
 1995                       89,282      --         --        18,203       49,972         --       39,551     197,008
Shares issued in initial
 public offering            42,195      --         --        71,758          --          --          --      113,953
Shares issued in
 exchange for minority
 interests in
 subsidiaries               11,826      --         --         8,655          --          --          --       20,481
Shares issued for
 conversion of
 convertible redeemable
 preferred shares            5,740      --         --        12,108          --          --          --       17,848
Other shares issued
 during period                 890      --         --           820          --          --          --        1,710
Net depreciation               --       --         --           --       (18,430)        --          --      (18,430)
Income tax benefit             --       --         --           --         4,729         --          --        4,729
Changes during the year        --       --         --           --           --         190          --          190
Net income                     --       --         --           --           --          --       63,906      63,906
Dividends paid on
 ordinary shares--$0.06
 per share                     --       --         --           --           --          --       (1,548)     (1,548)
Dividends paid on
 convertible redeemable
 preferred shares              --       --         --           --           --          --       (1,088)     (1,088)
                          -------- --------     ------     --------     --------       ----     --------    --------
Balance, December 31,
 1996                      149,933      --         --       111,544       36,271        190      100,821     398,759
Shares issued for
 exercise of share
 options                       209      520        --            24          --          --          --          753
Shares repurchased
 during the year               --   (10,020)       --           --           --          --          --      (10,020)
Deferred compensation
 expense                       --       --       3,644          --           --          --          --        3,644
Deferred compensation
 expense released on
 exercise of share
 options                       --       --        (369)         --           --          --          --         (369)
Net appreciation               --       --         --           --        24,210         --          --       24,210
Income tax expense             --       --         --           --        (4,051)        --          --       (4,051)
Change during the year         --       --         --           --           --         (78)         --          (78)
Net income                     --       --         --           --           --          --       73,410      73,410
Dividends paid on
 ordinary shares--$0.17
 per share                     --       --         --           --           --          --       (4,370)     (4,370)
                          -------- --------     ------     --------     --------       ----     --------    --------
Balance, December 31,
 1997                     $150,142 $ (9,500)    $3,275     $111,568     $ 56,430       $112     $169,861    $481,888
                          ======== ========     ======     ========     ========       ====     ========    ========
</TABLE>
 
        See accompanying notes to the consolidated financial statements.
 
                                       48
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                              AND ITS SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                            YEAR ENDED DECEMBER 31,
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                1997       1996       1995
                                              ---------  ---------  ---------
<S>                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                    $  73,410  $  63,906  $  43,251
Adjustments to reconcile net income to net
 cash provided by operating activities:
  Amortization of goodwill                          642      1,105        --
  Bad debt (benefits) expenses                    1,238     (1,142)     3,000
  Realized net capital gains                    (15,333)   (11,750)    (9,384)
  Stock option compensation expense               3,208        --         --
  Change in unpaid losses and loss adjustment
   expenses                                      47,612    (95,658)   (57,366)
  Change in unearned premiums and prepaid
   reinsurance                                   60,705     28,809     (4,848)
  Change in insurance balances payable            4,965     (7,097)   (24,056)
  Change in insurance balances receivable,
   accrued premium income and reinsurance
   recoverable on paid and unpaid losses        (58,960)    68,751     78,648
  Change in deferred acquisition costs          (26,475)    (8,329)    (5,429)
  Change in accrued investment income            (1,510)      (606)    (4,803)
  Change in current and deferred income taxes    (7,407)    17,521     (6,612)
  Change in other assets and liabilities, net    14,218     (4,436)     6,601
  Change in net liabilities of discontinued
   operations                                   (15,051)   (20,486)    (9,576)
                                              ---------  ---------  ---------
   Total adjustments                              7,852    (33,318)   (33,825)
                                              ---------  ---------  ---------
   Net cash provided by operating activities     81,262     30,588      9,426
                                              ---------  ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds of fixed maturities matured             65,096     65,589    107,643
Proceeds of fixed maturities sold               521,301    291,803    207,581
Proceeds of equity securities sold              215,732    163,173    118,340
Purchase of fixed maturities                   (665,228)  (491,326)  (520,052)
Purchase of equity securities                  (175,307)  (183,492)  (132,451)
Payment consideration for Corifrance            (42,225)       --         --
Acquisition expenses for Corifrance                (461)       --         --
Payment consideration for Octavian                  --      (9,393)       --
Acquisition expenses for Octavian                   --        (644)       --
                                              ---------  ---------  ---------
   Net cash used in investing activities        (81,092)  (164,290)  (218,939)
                                              ---------  ---------  ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Stock repurchase                                (10,020)       --         --
Proceeds from public debt offerings              74,866        --     100,000
Repayment of long term bank debt                    --         --     (85,000)
Payment of fees to financing public debt
 offering                                        (1,179)       --      (5,346)
Net proceeds from initial public offering           --     113,953        --
Redemption of preferred shares                      --     (16,035)       --
Proceeds from shares issued                         384        158     46,383
Proceeds from minority shareholders                 --         --       4,229
Preference dividends paid to stockholders           --        (499)       --
Ordinary dividends paid to stockholders          (4,370)    (1,548)    (3,700)
                                              ---------  ---------  ---------
   Net cash provided by financing activities     59,681     96,029     56,566
                                              ---------  ---------  ---------
Changes in cash and cash equivalents             59,851    (37,673)  (152,947)
Exchange on foreign currency cash balances         (531)      (508)      (534)
Cash and cash equivalents at beginning of
 year                                            50,544     88,725    242,206
                                              ---------  ---------  ---------
Cash and cash equivalents at end of year      $ 109,864  $  50,544  $  88,725
                                              =========  =========  =========
Supplemental disclosure of cash flow
 information
  Income taxes paid                           $  23,001  $     303  $  14,512
                                              =========  =========  =========
  Interest paid                               $  10,750  $  10,750  $   4,227
                                              =========  =========  =========
</TABLE>
 
        See accompanying notes to the consolidated financial statements.
 
                                       49
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. ORGANIZATION
 
  Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") was incorporated in
Bermuda. All references herein to the "Company" are to Bermuda Holdings and
all of its direct and indirect subsidiaries, including Terra Nova Insurance
(UK) Holdings plc ("UK Holdings"), Terra Nova Insurance Company Limited
("Terra Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova
(Bermuda)"), Octavian Syndicate Management Limited ("Octavian"), Terra Nova
Capital Limited ("Terra Nova Capital") and Compagnie de Reassurance d'Ile de
France ("Corifrance").
 
  The Company is a specialty property, casualty, marine and aviation insurance
and reinsurance company operating in the London market through its London
based subsidiary, Terra Nova, in the Continental European Market through its
French subsidiary, Corifrance, purchased on September 8, 1997, in the Bermuda
market through its Bermuda based subsidiary, Terra Nova (Bermuda) and in the
Lloyd's market through its London based subsidiary, Terra Nova Capital.
Writings originate worldwide. The vast majority of insurance and reinsurance
business is written through brokers authorized to place business at Lloyd's.
Business is also written through non-Lloyd's brokers and with individual
ceding companies. The broker is regarded as the agent of the insured or
reinsured in placing the business. The Company also owns the business and
assets of Octavian, a Lloyd's managing agent, consisting primarily of the
rights to manage eight Lloyd's syndicates (the "Octavian syndicates"), for the
1998 year of account.
 
2. BASIS OF PREPARATION
 
  The accompanying consolidated financial statements have been prepared on the
basis of accounting principles generally accepted in the United States of
America. All material intercompany transactions and balances have been
eliminated.
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  The significant accounting policies of the Company are as follows:
 
  (a) Investments and related income: Investments in fixed maturities and
equity securities are classified as available for sale and held with the
intention of selling such investments from time to time, and are carried at
fair value. Unrealized gains and losses, net of related deferred income taxes
and minority interests, are reflected directly in shareholders' equity.
Realized gains and losses are reflected in operations and determined by
specific identification. Investment income is recorded as earned.
 
  (b) Cash and cash equivalents: Cash and cash equivalents are comprised of
cash and various short-term investments which have maturities when purchased
of 90 days or less. Cash equivalents are stated at fair value which
approximates cost.
 
  (c) Premiums: Premiums are earned on a pro-rata basis over the term of the
related coverage. The balance of unearned premiums represents the portion of
gross premiums written relating to the unexpired terms of coverage.
 
  (d) Deferred acquisition costs: Acquisition costs, which represent
commission and other expenses directly related to the production of business,
are deferred and amortized over the period in which the related premiums are
earned. Deferred acquisition costs are limited to the amounts estimated to be
recoverable from the applicable unearned premiums and the related anticipated
investment income after giving effect to anticipated losses, loss adjustment
expenses and expenses necessary to maintain the contracts in force.
 
                                      50
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  (e) Losses and loss adjustment expenses: Losses and loss adjustment expenses
are charged to income as incurred. The reserve for unpaid losses and loss
adjustment expenses represents the accumulation of estimates for reported
losses and includes provisions for losses incurred but not reported ("IBNR").
The adequacy of these estimates is assessed by reference to projections of the
ultimate losses in respect of each accident year. The methods of determining
such estimates and establishing reserves are continually reviewed and updated,
and resulting adjustments are reflected in current operations.
 
  (f) Income taxes: Deferred income taxes are recorded with respect to
temporary differences between financial reporting and tax bases of assets and
liabilities in accordance with Statement of Financial Accounting Standard
("SFAS") No. 109.
 
  (g) Foreign currency translation: The U.S. dollar is the functional and
reporting currency as a majority of the policies written are denominated in
U.S. dollars. Revenues and expenses in non-U.S. dollar currencies are
translated at the average rates of exchange. Monetary assets and liabilities
are translated at the rate of exchange in effect at the close of the period.
Non-monetary assets and liabilities, primarily deferred revenue and expenses,
are translated at historic rates of exchange. Gains or losses resulting from
non-U.S. dollar transactions are included in net income. Certain other net
translation adjustments are shown as a separate component of shareholders'
equity.
 
  (h) Insurance balances receivable and reinsurance recoverable on paid and
unpaid losses: Receivable balances are stated net of allowances for doubtful
accounts. Reinsurance recoverable on unpaid losses represents the estimated
portion of such liabilities that will be recovered from reinsurers, determined
in a manner consistent with the related liabilities.
 
  (i) Accrued premium income: Accrued premium income represents the difference
between the estimated cumulative ultimate written premiums and cumulative
billed premiums.
 
  (j) Prepaid reinsurance premiums: Prepaid reinsurance premiums represent the
portion of premiums ceded to reinsurers applicable to the unexpired terms of
reinsurance contracts. In respect of Terra Nova Capital reinsurance costs have
been charged against income on the basis of the benefits derived in order to
match the costs with the corresponding earned income.
 
  (k) Stock-based compensation: The Company has adopted SFAS No. 123
"Accounting for Stock-Based Compensation". As allowed under this standard, the
Company accounts for stock option grants in accordance with APB Opinion No. 25
"Accounting for Stock Issued to Employees".
 
  Compensation expense for stock option grants is recognised to the extent
that the fair value of the stock exceeds the exercise price of the option at
the measurement date. Any resulting compensation expense is accrued over the
shorter of the vesting or service period.
 
  Deferred compensation, which is recorded as shareholders' equity, represents
the options that the Company expects to settle in stock.
 
                                      51
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  (l) Risks and Uncertainties: Information about risks and uncertainties
existing at the balance sheet date related to the following areas:
 
  .  Nature of operations.
 
  .  Use of estimates in the preparation of financial statements.
 
  .  Certain significant estimates.
 
  .  Current vulnerability due to certain concentrations.
 
  These disclosures are included in Notes 1, 3, 5, 12, 13, 14, 15 and 17.
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  (m) Fair value of financial instruments: The following methods and
assumptions were used by the Company in estimating the fair value of the
financial instruments presented:
 
  Investments: Fair values were based upon quoted market prices. For
  securities for which market prices were not readily available, fair values
  were estimated using quoted market prices of comparable investments.
 
  Long term debt: Fair value is based on quoted market price.
 
  Other financial instruments: The carrying amounts approximate fair value.
 
  (n) Goodwill: The goodwill in the Company's balance sheet has been
calculated using the purchase method of accounting and is being amortized on a
straight line basis over periods not exceeding 40 years.
 
  (o) Reclassifications: Certain prior year amounts have been reclassified to
conform with the current year presentation.
 
  In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings per Share" ("EPS") effective for financial statements
issued for periods ending after December 15, 1997. SFAS No. 128 requires dual
presentation of basic and diluted EPS on the face of the income statements for
the current period and all comparative periods regardless of whether basic and
diluted EPS are the same; it also requires a reconciliation of the numerator
and denominator used in computing basic and diluted EPS. Full disclosure of
EPS under SFAS No. 128 is provided in Note 9 to the consolidated financial
statements.
 
  (p) Accounting pronouncements: In February 1997, the FASB issued SFAS No.
129 "Disclosure of Information about Capital Structure". SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 consolidates existing guidance in APB Opinion No. 10 "Omnibus
Opinion", Opinion No. 15 "Earnings per Share" and SFAS No. 47 "Disclosure of
Long-Lived Obligations", relating to a company's capital structure. Owing to
its quoted status, the Company is already bound by the requirements of SFAS
No. 129 and so no additional disclosures are required.
 
  In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income" and
SFAS 131 "Disclosures about Segments of an Enterprise and Related
Information". These statements are effective for financial statements issued
for periods beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
within a set of financial statements.
 
                                      52
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
SFAS No. 131 requires the Company to report financial and descriptive
information about its reportable operating segments. The Company is currently
reviewing the impact of SFAS No. 130 and SFAS No. 131 on its financial
reporting.
 
  In February 1998, FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits". SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. This statement significantly
changes current financial statement disclosure requirements from those that
were required under FAS 87, "Employers' Accounting for Pensions", FAS 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and FAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions". However, SFAS No.
132 does not change the existing measurement or recognition provisions of FASB
Statement Nos. 87, 88, or 106. The Company is currently reviewing the impact
of SFAS No. 132 on its financial reporting.
 
4. CORIFRANCE ACQUISITION
 
  On September 8, 1997, the Company purchased all of the issued and
outstanding shares of Corifrance, a French reinsurance company, for a purchase
price of $42.2 million. The acquisition was made by a French subsidiary of
Terra Nova, the Group's U.K. operating insurance company.
 
  Corifrance, which transacts business internationally, although mainly
outside of the United States, had a gross written premium volume of $24.2
million in 1997. The Company's share of Corifrance's gross written premiums
was $2.4 million. The goodwill in the Company's balance sheet includes the
goodwill arising on the acquisition of Corifrance, which has been calculated
using the purchase method of accounting and is being amortized on a straight
line basis. The impact on the Company's results from the date of the
acquisition included in the 1997 consolidated statements of operations
comprise the following:
 
<TABLE>
<CAPTION>
                                  YEAR ENDED
                                 DECEMBER 31,
                                     1997
                                 ------------
                                 (DOLLARS IN
                                  THOUSANDS)
       <S>                       <C>
       Net written premiums        $ 2,400
       Net earned premiums          11,800
       Underwriting profit             900
       Amortization of goodwill        299
       Net income before tax         1,600
</TABLE>
 
5. INVESTMENTS AND CASH
 
  (a) Deposits: Securities with a carrying value of $74,832,873 and
$48,741,933 at December 31, 1997 and 1996, respectively, were held in trust
for the benefit of the Company's U.S. cedents and to facilitate the Company
being accredited as an alien reinsurer by certain States.
 
  Cash and securities with a carrying value of $19,465,928 and $18,583,564 at
December 31, 1997 and 1996 respectively, were held in trust for the benefit of
the Company's U.S. surplus lines policyholders.
 
  Cash and securities with a carrying value of $53,350,644 and $41,487,658 at
December 31, 1997 and 1996 respectively, were held in trust for the benefit of
the Company's Canadian cedents.
 
  The Company has contingent liabilities in respect of undrawn letters of
credit supporting certain reinsurance business written by the Company in the
U.S. of $121,020,906 and $166,577,765 at December 31, 1997 and 1996,
 
                                      53
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
respectively. The Company has deposited cash and investments with a carrying
value of $175,213,503 and $261,542,735 at December 31, 1997 and 1996
respectively, as collateral against these amounts.
 
  The Company has contingent liabilities in respect of irrevocable undrawn
letters of credit of $199,334,500 and $156,327,255 supporting the Company's
underwriting activities on the Octavian syndicates for the 1997 and 1996 years
of account, respectively. The Company has deposited cash and investments with
a carrying value of $221,670,000 and $171,959,981 at December 31, 1997 and
1996, respectively, as collateral to support this commitment.
 
  (b) Net investment income: An analysis of the net investment income of the
Company is as follows:
 
<TABLE>
<CAPTION>
                              YEAR ENDED DECEMBER 31,
                              -------------------------
                               1997     1996     1995
                              -------  -------  -------
                              (DOLLARS IN THOUSANDS)
   <S>                        <C>      <C>      <C>
   Fixed maturities           $77,690  $71,365  $70,999
   Equity securities            1,538    1,373    1,273
   Cash and cash equivalents    9,470    7,539    4,066
                              -------  -------  -------
   Total investment income     88,698   80,277   76,338
   Investment expenses         (3,568)  (2,147)  (1,860)
                              -------  -------  -------
   Net investment income      $85,130  $78,130  $74,478
                              =======  =======  =======
</TABLE>
 
  (c) Investment gains and losses: The realized net capital gains and changes
in net unrealized appreciation or depreciation of investments are summarized
below:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                                 -------------------------
                                                  1997     1996     1995
                                                 ------- --------  -------
                                                  (DOLLARS IN THOUSANDS)
   <S>                                           <C>     <C>       <C>
   Realized net capital gains on sale of
    investments:
     Fixed maturities                            $ 5,342 $  1,509     $933
     Equity securities                             9,991   10,241    8,451
                                                 ------- --------  -------
   Realized net capital gains                     15,333   11,750    9,384
                                                 ------- --------  -------
   Changes in net unrealized (depreciation)
    appreciation of investments:
     Fixed maturities                             17,291  (34,358)  57,317
     Equity securities                             6,919   15,928   10,827
                                                 ------- --------  -------
   Changes in net unrealized (depreciation)
    appreciation of investments                   24,210  (18,430)  68,144
                                                 ------- --------  -------
   Realized net capital gains and change in net
    unrealized (depreciation) appreciation of
    investments                                  $39,543 $ (6,680) $77,528
                                                 ======= ========  =======
</TABLE>
 
  Proceeds from sales of investments in fixed maturity securities during 1997,
1996 and 1995, respectively, were $521,301,000, $291,803,000 and $207,581,000.
Realized net capital gains on sale of fixed maturities for the years ended
December 31, 1997, 1996 and 1995 included gross capital gains of $9,600,000,
$6,802,000 and $2,947,000 and gross capital losses of $4,258,000, $5,293,000
and $2,014,000, respectively.
 
  Proceeds from sales of investments in equity securities during 1997, 1996
and 1995, respectively, were $215,732,000, $163,173,000 and $118,340,000.
Realized net capital gains on sale of equity securities for the years ended
December 31, 1997, 1996 and 1995, included gross capital gains of $29,613,000,
$22,512,000 and $13,209,000 and gross capital losses of $19,622,000,
$12,271,000 and $4,758,000, respectively.
 
                                      54
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company's net unrealized appreciation of fixed maturities (before income
tax) at December 31, 1997 included gross unrealized appreciation of
$43,203,000 and gross unrealized depreciation of $1,544,000. The Company's net
unrealized appreciation of fixed maturities at December 31, 1996 included
gross unrealized appreciation of $28,682,000 and gross unrealized depreciation
of $4,277,000. The Company's net unrealized appreciation of fixed maturities
at December 31, 1995 included gross unrealized appreciation of $65,006,000 and
gross unrealized depreciation of $4,251,000. Net unrealized appreciation of
equities (before income tax) at December 31, 1997 of the Company included
gross unrealized appreciation of $38,111,000 and gross unrealized depreciation
of $3,658,000. Net unrealized appreciation of equities at December 31, 1996 of
the Company included gross unrealized appreciation of $34,047,000 and gross
unrealized depreciation of $6,513,000. Net unrealized appreciation of equities
at December 31, 1995 of the Company included gross unrealized appreciation of
$15,288,000 and gross unrealized depreciation of $4,078,000, and is stated net
of minority interests of $383,000.
 
  (d) Fixed maturities available for sale: At December 31, the amortized cost
and estimated fair value of investments in fixed maturities of the Company
were as follows:
 
<TABLE>
<CAPTION>
                                                    1997
                               -----------------------------------------------
                                             GROSS        GROSS
                               AMORTIZED   UNREALIZED   UNREALIZED     FAIR
                                  COST    APPRECIATION DEPRECIATION   VALUE
                               ---------- ------------ ------------ ----------
                                           (DOLLARS IN THOUSANDS)
   <S>                         <C>        <C>          <C>          <C>
   U.S. government and agency  $  298,618   $14,410       $  308    $  312,720
   Foreign governments and
    agencies                      429,811    18,015          650       447,176
   Foreign regional
    government                     40,130     1,287           33        41,384
   Mortgage backed                 10,880       357           16        11,221
   Asset backed                    63,648       902          195        64,355
   Supranationals                 140,801     4,208           83       144,926
   Corporate                      235,911     4,024          259       239,676
                               ----------   -------       ------    ----------
     Total fixed maturities    $1,219,799   $43,203       $1,544    $1,261,458
                               ==========   =======       ======    ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                    1996
                               -----------------------------------------------
                                             GROSS        GROSS
                               AMORTIZED   UNREALIZED   UNREALIZED     FAIR
                                  COST    APPRECIATION DEPRECIATION   VALUE
                               ---------- ------------ ------------ ----------
                                           (DOLLARS IN THOUSANDS)
   <S>                         <C>        <C>          <C>          <C>
   U.S. government and agency  $  416,383   $ 6,994       $1,717    $  421,660
   Foreign governments and
    agencies                      393,079    15,813        1,459       407,433
   Foreign regional
    government                     19,381       940          --         20,321
   Mortgage backed                 13,801       533           72        14,262
   Asset backed                    65,119       594          308        65,405
   Supranationals                  98,319     2,503          280       100,542
   Corporate                       89,044     1,305          441        89,908
                               ----------   -------       ------    ----------
     Total fixed maturities    $1,095,126   $28,682       $4,277    $1,119,531
                               ==========   =======       ======    ==========
</TABLE>
 
                                      55
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The amortized cost and estimated fair value of the Company's fixed
maturities at December 31, 1997, by contractual maturity date, are shown in
the following table. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or repay certain obligations with
or without call or prepayment penalties.
 
<TABLE>
<CAPTION>
                                             AMORTIZED
                                                COST    FAIR VALUE
                                             ---------- ----------
                                                  (DOLLARS IN
                                                  THOUSANDS)
     <S>                                     <C>        <C>
     Due in one year or less                 $   52,753 $   53,068
     Due after one year through five years      483,655    493,822
     Due after five years through ten years     621,099    646,379
     Due after ten years                         62,292     68,189
                                             ---------- ----------
                                             $1,219,799 $1,261,458
                                             ========== ==========
</TABLE>
 
  Mortgage and asset backed securities which are not due at a single maturity
date, have been allocated according to their expected final payment date as at
year-end.
 
  (e) At December 31, 1997, the Company's portfolio by rating category,
determined by recognized rating agencies, was:
 
<TABLE>
<CAPTION>
                                   (DOLLARS
                                 IN THOUSANDS)
     <S>                         <C>
     U.S. government and agency   $  312,720
     U.K. government and agency       90,296
     AAA                             475,857
     AA                              206,703
     A                                93,410
     BBB                              45,742
     Not Rated                        36,730
                                  ----------
                                  $1,261,458
                                  ==========
</TABLE>
 
  Not Rated securities consist primarily of securities issued by
municipalities located in countries other than the U.S. or the U.K. and are
generally considered by management to be at least the equivalent in quality of
AA rated investments.
 
  (f) At December 31, 1997, the fair value of the following investments
exceeded 10% of shareholders' equity:
 
<TABLE>
<CAPTION>
                               (DOLLARS
                             IN THOUSANDS)
     <S>                     <C>
     United States Treasury    $312,720
     Government of Japan         74,051
     Canadian Treasury           49,974
</TABLE>
 
                                      56
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. INCOME TAXES
 
  (a) The U.K. corporation tax rate applicable to ordinary income was 33% for
1995 and 1996. The tax rate was reduced to 31% from 33% on April 1, 1997. The
corporation tax rate in France was 41.67% for 1997. The difference between the
actual tax expense on income from continuing operations and the "expected"
amount computed by applying the U.K. corporation tax rate is explained as
follows:
 
<TABLE>
<CAPTION>
                           YEAR ENDED DECEMBER 31,
                           --------------------------
                             1997     1996     1995
                           --------  -------  -------
                            (DOLLARS IN THOUSANDS)
   <S>                     <C>       <C>      <C>
   "Expected" tax expense  $ 28,680  $27,280  $20,603
   Adjustments:
     Non-taxable income     (10,004)  (9,872)  (4,863)
     Other                   (1,037)     369      890
                           --------  -------  -------
   Actual tax expense      $ 17,639  $17,777  $16,630
                           ========  =======  =======
</TABLE>
 
  (b) The components of income tax expense attributable to continuing
operations are as follows:
 
<TABLE>
<CAPTION>
                                 YEAR ENDED DECEMBER 31,
                                 -----------------------
                                  1997    1996    1995
                                 ------- ------- -------
                                 (DOLLARS IN THOUSANDS)
   <S>                           <C>     <C>     <C>
   Current U.K. corporation tax  $10,743 $17,409 $14,172
   Deferred tax                    6,896     368   2,458
                                 ------- ------- -------
   Income tax expense            $17,639 $17,777 $16,630
                                 ======= ======= =======
</TABLE>
 
  (c) Deferred tax liabilities and assets are provided for expected future tax
consequences of events that have been recognized in the consolidated financial
statements or tax returns. The measurement of current and deferred tax
liabilities and assets is based on the difference between the financial
statements and tax bases of assets and liabilities using enacted rates in
effect for the years in which the differences are expected to reverse. The
measurement of a deferred tax asset, if any, is subject to the expectation of
future realization. The components of net deferred tax assets (liabilities) of
the Company as at December 31, 1997 and 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                            1997      1996
                                                          --------  --------
                                                             (DOLLARS IN
                                                             THOUSANDS)
   <S>                                                    <C>       <C>
   Deferred tax assets:
     Unrealized depreciation of investments               $    433  $    --
     Other                                                   1,039     3,798
                                                          --------  --------
       Total deferred tax assets                          $  1,472  $  3,798
                                                          --------  --------
   Deferred tax liabilities:
     Unrealized appreciation of investments                 (7,275)   (7,564)
     Temporary difference between U.S. GAAP and U.K. tax    (4,823)   (3,393)
     Other                                                  (4,618)   (1,561)
                                                          --------  --------
   Total deferred tax liabilities                          (16,716)  (12,518)
                                                          --------  --------
   Net deferred tax liabilities                           $(15,244) $ (8,720)
                                                          ========  ========
</TABLE>
 
  (d) Under current Bermuda law, Terra Nova (Bermuda) and Bermuda Holdings are
not required to pay any taxes in Bermuda on either income or capital gains.
Terra Nova (Bermuda) and Bermuda Holdings have received
 
                                      57
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
an undertaking from the Minister of Finance in Bermuda that in the event of
any such taxes being imposed, they will be exempted from such taxation until
the year 2016.
 
  (e) The Company does not consider itself to be engaged in trade or business
in the U.S. and accordingly does not expect to be subject to U.S. income
taxation.
 
7. DEFERRED ACQUISITION COSTS
 
  The following reflects the acquisition costs deferred for amortization
against future income and the amortization charged to income, excluding
certain amounts deferred and amortized in the same period:
 
<TABLE>
<CAPTION>
                                   YEAR ENDED DECEMBER 31,
                                   ------------------------
                                     1997    1996    1995
                                   -------- ------- -------
                                    (DOLLARS IN THOUSANDS)
   <S>                             <C>      <C>     <C>
   Balance at beginning of year    $ 45,279 $36,950 $31,521
                                   -------- ------- -------
   Acquisition costs deferred
     Commissions                    119,610  78,051  67,942
     Other                           26,918  12,672   9,801
                                   -------- ------- -------
                                    146,528  90,723  77,743
                                   -------- ------- -------
   Amortization charged to income
     Commissions                     92,713  71,759  62,278
     Other                           22,714  10,635  10,036
                                   -------- ------- -------
                                    115,427  82,394  72,314
                                   -------- ------- -------
   Balance at end of year          $ 76,380 $45,279 $36,950
                                   ======== ======= =======
</TABLE>
 
8. EMPLOYEE BENEFITS
 
  Terra Nova operates defined benefit pension plans ("Terra Nova Plan") which
cover all employees (except those in Canada and Belgium) over 20 years old who
meet the eligibility conditions set out in the plan document. The cost of
providing pensions for employees is charged to earnings over the average
working life of employees in accordance with the recommendations of qualified
actuaries. Annual funding requirements are determined based on the projected
unit credit cost method, which attributes a pro rata portion of the total
projected benefit payable at normal retirement to each year of credited
service. Final benefits are based on the employee's years of credited service
and the higher of pensionable compensation received in the calendar year
preceding retirement or the best average pensionable compensation received in
any three consecutive years in the ten years preceding retirement.
 
  Terra Nova provides pension and related benefits for the employees of its
branch offices in Belgium and Canada. Benefit plans are in line with local
market terms and conditions of employment and are generally costed to be
within 10% of basic salaries of the participating employees. Neither of the
plans is a defined benefit plan. The Company has adopted, for its Bermuda
employees, a similar policy regarding pension and related benefits and has
negotiated for a plan on the same cost basis.
 
  Terra Nova maintains a supplemental pension plan which provides pension
benefits for nominated employees above amounts allowed under tax qualified
plans, through a funded money purchase plan.
 
  Mandatory employee contributions to the Terra Nova Plan ceased in 1988 and
there are no present plans to reintroduce such contributions. Employees may
elect to make voluntary contributions to supplement their pension benefits
when payable.
 
 
                                      58
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Octavian provides certain of its employees with one of two defined benefit
pension schemes run in conjunction with the Lloyd's Superannuation Scheme
("Octavian Plan"). The Octavian Plan is similar in operation to the Terra Nova
Plan though the benefit structure differs.
 
  Octavian provides a defined contribution plan for nominated employees and
directors. The annual contribution rate for employees is 15% of annual
pensionable salary and, for directors and certain senior underwriters, is 25%
of annual pensionable salary.
 
  Corifrance provides two defined contribution plans for its managers and all
other employees, respectively. The annual contribution rate for managers is
5.66% of pensionable salary and, for employees, is 1.43% of pensionable
salary.
 
  The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation of
the Terra Nova Plan at December 31, 1997 and 1996 were 7.5% and 5.0%
respectively. These are considered appropriate given the U.K. interest rate
environment. The expected long-term rate of return on plan assets was 10.0%.
The fund assets are invested primarily in equity securities.
 
  The following table sets out the funded status of all defined benefit plans
and the amounts recognized in the accompanying consolidated balance sheets of
the Company at December 31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                            1997     1996
                                                           -------  -------
                                                             (DOLLARS IN
                                                             THOUSANDS)
   <S>                                                     <C>      <C>
   Plan assets at fair value                               $50,161  $44,414
   Actuarial present value of benefit obligations:
     Accumulated benefits earned prior to valuation date:
       Vested                                               36,806   33,364
       Non vested                                              707      744
     Additional benefits based on estimated future salary
      levels                                                 2,873    2,944
                                                           -------  -------
   Projected benefit obligation                             40,386   37,052
                                                           -------  -------
   Plan assets in excess of projected benefit obligation     9,775    7,362
     Unrecognized net (gain) loss                           (5,045)  (2,738)
                                                           -------  -------
   Prepaid pension amount included in other assets         $ 4,730  $ 4,624
                                                           =======  =======
</TABLE>
 
  Net pension expenses included the following components:
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                                -------------------------
                                                 1997     1996     1995
                                                -------  -------  -------
                                                (DOLLARS IN THOUSANDS)
   <S>                                          <C>      <C>      <C>
   Cost of benefits earned during the year      $ 2,612  $ 1,864  $ 1,468
   Interest costs on the projected benefit
    obligation                                    3,153    2,337    1,672
   Actual return on all retirement plan assets   (4,274)  (2,905)  (2,109)
   Amortization of (gain) loss                     (100)     --       --
                                                -------  -------  -------
   Net pension expense                          $ 1,391  $ 1,296  $ 1,031
                                                =======  =======  =======
</TABLE>
 
                                      59
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
9. EARNINGS PER COMMON SHARE AND COMMON SHARE EQUIVALENT
 
  In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings per Share". SFAS No. 128 prescribes the basis for computing
basic earnings per share ("EPS") and diluted EPS.
 
  Basic EPS are computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding during the period.
Diluted EPS considers all dilutive potential common shares that were
outstanding during the period.
 
  In accordance with the SEC Staff Accounting Bulletin Topic 4-D, for the
purposes of the earnings per share calculations for 1995, application of the
topic resulted in an approximately 1,909,766 share increase in the number of
shares outstanding utilized in the calculation of earnings per share as
presented in the accompanying statement of operations.
 
  The following EPS have been computed using SFAS No. 128:
 
<TABLE>
<CAPTION>
                                               1997       1996        1995
                                            ---------- ----------  ----------
   <S>                                      <C>        <C>         <C>
   Net income                               $   73,410 $   63,906  $   43,251
   Add: Minority interest                          --         985       2,552
   Less: Preference share dividends                --      (1,088)     (3,700)
                                            ---------- ----------  ----------
   Income available to common shareholders  $   73,410 $   63,803  $   42,103
                                            ---------- ----------  ----------
   Weighted average number of shares
    outstanding:
     Common shares                          25,586,648 22,677,879  13,441,816
                                            ---------- ----------  ----------
   Basic EPS                                $     2.87 $     2.81  $     3.13
                                            ========== ==========  ==========
   Net income                               $   73,410 $   63,906  $   43,251
   Add: Minority interest                          --         985       2,552
   Less: Preference share dividends                --        (499)     (1,831)
                                            ---------- ----------  ----------
   Income available to common shareholders  $   73,410 $   64,392  $   43,972
                                            ---------- ----------  ----------
   Weighted average number of shares
    outstanding:
     Common shares                          25,586,648 22,677,879  13,441,816
   Add: Incremental shares arising from:
     Rights offering                               --         --    1,826,181
     Preferred shares                              --     859,040     922,323
     Options                                   406,643    407,607     528,844
                                            ---------- ----------  ----------
   Adjusted weighted average number of
    shares outstanding                      25,993,291 23,944,526  16,719,164
                                            ---------- ----------  ----------
   Diluted EPS                              $     2.82 $     2.69  $     2.63
                                            ========== ==========  ==========
</TABLE>
 
10. SHARE CAPITAL
 
  (a) The following table provides the components of the common shares of the
Company at December 31, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                            1997     1996
                                                          -------- --------
                                                             (DOLLARS IN
                                                             THOUSANDS)
   <S>                                                    <C>      <C>
   "A" ordinary shares $5.80 par value 75,000,000
    authorized, 24,090,335 issued and outstanding (1996:
    23,802,426 issued and outstanding)                    $139,724 $138,054
   "B" ordinary shares $5.80 par value 10,000,000
    authorized, 1,796,217 issued and outstanding (1996:
    2,048,140 issued and outstanding)                       10,418   11,879
                                                          -------- --------
                                                          $150,142 $149,933
                                                          ======== ========
</TABLE>
 
  Each "B" ordinary share at the Company is convertible, at the option of the
holder into an "A" ordinary share without payment or adjustment for accrued
dividends.
 
                                      60
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  On May 5, 1997, the Company's Board of Directors authorized the repurchase
of up to $20 million of the Company's common shares. As at December 31, 1997
the Company had purchased 500,000 shares at a total cost of $10,020,000. The
shares are to be held in trust for the satisfaction of employees' and
directors' long term compensation plans and any other corporate purposes.
 
  During 1997, the Company issued 35,986 ordinary shares to satisfy options
exercised under the Company's fixed stock option plan (see Note 11). A further
26,000 options were exercised during the year, all of which were satisfied by
issuing shares from the trust as described above.
 
  In addition, the Company converted 251,923 "B" shares into "A" shares.
 
11. SHARE OPTIONS AND AWARDS
 
  At December 31, 1997 the Company has three stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, compensation cost of
$3,244,000 has been charged against income for 1997 (1996: $400,701). The
compensation expense for 1997 and 1996 determined using the fair value
methodology of SFAS No. 123 is not materially different from the expense
calculated in accordance with APB No. 25 and therefore pro forma net income
and earnings per share, as required by SFAS No. 123, are not shown.
 
  On January 9, 1995, the Company adopted two Executive Share Option Plans
(the "Stock Option Plan"). The Stock Option Plan provides for the grant to
eligible employees of options to purchase Class A ordinary shares of the
Company (the "Option Shares"). The aggregate number of Option Shares issued
and Option Shares for which an option may be granted is limited to 8% of the
aggregate number of common shares of the Company outstanding. The options are
only exercisable upon the occurrence of certain specified events and will
expire no later than 10 years after the date granted. The Stock Option Plan is
administered by the Board of Directors of the Company, which determines which
employees are granted options.
 
  A summary of the Company's fixed stock option plan as of December 31, 1997
and changes during the year then ended is presented below:
 
<TABLE>
<CAPTION>
                                                  WEIGHTED-
                                                   AVERAGE
        FIXED OPTIONS                 SHARES    EXERCISE PRICE
        -------------                ---------  --------------
   <S>                               <C>        <C>
   OUTSTANDING AT JANUARY 1, 1995          --       $  --
   Granted                             685,047        6.25
   Exercised                               --          --
   Forfeited                           (24,138)       5.80
                                     ---------      ------
   OUTSTANDING AT JANUARY 1, 1996      660,909      $ 6.26
   Granted                             182,893       13.64
   Exercised                           (27,258)       5.80
   Forfeited                               --          --
                                     ---------      ------
   OUTSTANDING AT JANUARY 1, 1997      816,544      $ 7.93
   Granted                           1,059,150       24.02
   Exercised                           (61,986)       6.19
   Forfeited                           (21,098)      10.31
                                     ---------      ------
   OUTSTANDING AT DECEMBER 31, 1997  1,792,610      $17.47
                                     =========      ======
</TABLE>
 
                                      61
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  As of December 31, 1997, the fixed options outstanding under the Plan have
exercise prices between $5.80 and $25.52 and a weighted-average remaining
contractual life of 6.99 years.
 
  Options outstanding and options exercisable at December 31, 1997 are
summarized as follows:
 
<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                           -------------------------------------------- --------------------------
                                           WEIGHTED-       WEIGHTED-                  WEIGHTED-
          RANGE OF           NUMBER    AVERAGE REMAINING    AVERAGE       NUMBER       AVERAGE
      EXERCISE PRICES      OUTSTANDING CONTRACTUAL LIFE  EXERCISE PRICE EXERCISABLE EXERCISE PRICE
      ---------------      ----------- ----------------- -------------- ----------- --------------
   <S>                     <C>         <C>               <C>            <C>         <C>
   $ 5.01 - 10.00             562,629        6.97            $ 6.30       464,745       $ 6.41
    10.01 - 15.00             134,581        6.04             12.80        17,241        12.80
    15.01 - 20.00             270,400        7.51             18.95           --           --
    20.01 - 25.00              55,000        7.88             23.19           --           --
    25.01 - 30.00             770,000        9.84             25.52       100,000        25.52
                            ---------                                     -------
                            1,792,610                                     581,986
                            =========                                     =======
   Options exercisable at
    December 31, 1996                                       391,198
   Options exercisable at
    December 31, 1995                                           --
</TABLE>
 
  In connection with the Octavian Acquisition in 1996, the Company established
the Octavian Stock Option Plan providing for the grant of options to certain
individual members of management of Octavian based on profit commissions
received by Octavian for the 1996 to 2000 years of account. Under the Octavian
Stock Option Plan, such members of management will receive annual option
grants to purchase a number of Shares equal in the aggregate to (i) 90% of the
profit commission received by Octavian from the Octavian Syndicates (less
underwriters' and management bonuses relating thereto and corporate taxes) for
each year of account (the "Profit Commission Component"), divided by (ii) the
fully diluted net asset value (as defined in the Octavian Stock Option Plan)
per ordinary shares of the Company as at the end of the applicable year of
account. The aggregate Profit Commission Component for the 1996 to 2000 years
of account is subject to a maximum of (Pounds)10 million ($16 million) and no
further options shall be issued once such maximum has been reached. The
options will be issued upon receipt of the profit commissions on closure of
each year of account under applicable Lloyd's regulations, which currently are
1999 to 2003 for each of the years 1996 to 2000, respectively. The options
have a nominal exercise price and become exercisable on or after the January,
next succeeding the date of grant, commencing January 1, 2000, provided that
all options issued after January 1, 2002 become immediately exercisable.
 
                                      62
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  A summary of the Company's performance-based stock option plan as of
December 31, 1997 and changes during the two years then ended is presented
below:
 
<TABLE>
<CAPTION>
                                                                 WEIGHTED-
                                                                  AVERAGE
       PERFORMANCE-BASED OPTIONS                        SHARES EXERCISE PRICE
       -------------------------                        ------ --------------
     <S>                                                <C>    <C>
     OUTSTANDING AT JANUARY 1, 1996                        --      $ --
     Granted                                            29,849      0.00
     Exercised                                             --        --
     Forfeited                                             --        --
                                                        ------     -----
     OUTSTANDING AT JANUARY 1, 1997                     29,849     $0.00
                                                        ======     =====
     Granted                                            66,648     $0.00
     Exercised                                             --        --
     Forfeited                                             --        --
                                                        ------     -----
     Outstanding at December 31, 1997                   96,497     $0.00
                                                        ======     =====
     Options exercisable at December 31, 1997 and 1996     Nil
</TABLE>
 
  As of December 31, 1997, the 96,497 performance options outstanding under
the Plan all have exercise prices of $nil and a weighted-average remaining
contractual life of 7.25 years.
 
12. REINSURANCE
 
  In the ordinary course of business, the Company cedes reinsurance to other
insurance companies. Ceded reinsurance arrangements provide greater
diversification of business and limit the net loss potential arising from
large risks. Certain of these arrangements consist of excess of loss contracts
which protect against losses over stipulated amounts. Reinsurance is effected
under reinsurance treaties and by negotiation on individual risks.
 
  The current reinsurance protections consists almost entirely of non-
proportional excess of loss reinsurance (with the balance being proportional
and facultative reinsurance). Specific excess of loss reinsurance is purchased
for marine and non-marine business. The availability of reinsurance at
reasonable cost and under favorable terms is one of the key determinants in
the decision as to which categories of business to emphasize at any given
time.
 
  A credit risk exists with respect to reinsurance ceded to the extent that
any reinsurer is unable to meet the obligations assumed under the reinsurance
arrangements. As is customary in the London Market, collateral is not
generally obtained from reinsurers. Reinsurance contracts do not relieve the
ceding company from its obligations to policyholders. Failure of reinsurers to
honor their obligations could result in losses; consequently allowances are
established for amounts deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of credit
risk arising from its exposure to individual reinsurers.
 
  The Company cedes reinsurance to and assumes reinsurance from Lloyd's
syndicates. As of December 31, 1997, the aggregate exposure in respect of
reinsurance ceded to Lloyd's syndicates in respect of continuing operations,
including estimated reinsurance recoveries in respect of losses incurred but
not reported, was approximately $87,583,000, the majority of which was ceded
into Equitas with effect from September 4, 1996. No specific bad debt
provision has been established for amounts due from Lloyd's syndicates.
 
                                      63
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  (a) Net premiums written are comprised of the following:
 
<TABLE>
<CAPTION>
                          YEAR ENDED DECEMBER 31,
                         ----------------------------
                           1997      1996      1995
                         --------  --------  --------
                           (DOLLARS IN THOUSANDS)
   <S>                   <C>       <C>       <C>
   Direct business       $269,577  $119,601  $ 86,296
   Reinsurance assumed    280,666   241,409   216,362
   Reinsurance ceded      (66,698)  (49,844)  (55,673)
                         --------  --------  --------
   Net premiums written  $483,545  $311,166  $246,985
                         ========  ========  ========
</TABLE>
 
  (b) Net premiums earned are comprised of the following:
 
<TABLE>
<CAPTION>
                         YEAR ENDED DECEMBER 31,
                        ----------------------------
                          1997      1996      1995
                        --------  --------  --------
                          (DOLLARS IN THOUSANDS)
   <S>                  <C>       <C>       <C>
   Direct business      $209,414  $100,309  $ 89,323
   Reinsurance assumed   260,603   227,574   221,151
   Reinsurance ceded     (50,948)  (49,127)  (58,574)
                        --------  --------  --------
   Net premiums earned  $419,069  $278,756  $251,900
                        ========  ========  ========
</TABLE>
 
  (c) Losses and loss adjustment expenses, net, are comprised of the
following:
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                               ----------------------------
                                                 1997      1996      1995
                                               --------  --------  --------
                                                 (DOLLARS IN THOUSANDS)
   <S>                                         <C>       <C>       <C>
   Losses and loss adjustment expenses, gross  $329,463  $213,872  $275,962
   Reinsurance ceded                            (46,983)  (35,598)  (96,851)
                                               --------  --------  --------
   Losses and loss adjustment expenses, net    $282,480  $178,274  $179,111
                                               ========  ========  ========
</TABLE>
 
13. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
 
  Management believes that its reserves for losses and loss adjustment
expenses are adequate. Significant delays occur in the notification of certain
claims and a substantial measure of experience and judgment is involved in
assessing outstanding liabilities, the ultimate cost of which cannot be known
with certainty at the balance sheet date. The reserve for unpaid losses and
loss adjustment expenses is determined on the basis of information currently
available; however, it is inherent in the nature of the business written that
the ultimate liabilities may vary as a result of subsequent development.
 
                                      64
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Movement in unpaid losses and loss adjustment expenses for the years ended
December 31, 1997, 1996 and 1995 is summarized as follows:
 
<TABLE>
<CAPTION>
                                               1997        1996        1995
                                            ----------  ----------  ----------
                                                 (DOLLARS IN THOUSANDS)
<S>                                         <C>         <C>         <C>
Reserves for unpaid losses and loss
 adjustment expenses, at beginning of year  $1,078,108  $1,168,652  $1,223,842
  Less reinsurance recoverables               (254,129)   (354,417)   (376,529)
                                            ----------  ----------  ----------
Net balance at beginning of year               823,979     814,235     847,313
                                            ----------  ----------  ----------
Incurred related to:
  Current year                                 292,876     180,874     175,852
  Prior years                                  (10,396)     (2,600)      3,259
                                            ----------  ----------  ----------
Total incurred                                 282,480     178,274     179,111
                                            ----------  ----------  ----------
Paid related to:
  Current year                                 (69,685)    (50,303)    (43,820)
  Prior years                                 (145,702)   (123,438)   (169,786)
                                            ----------  ----------  ----------
Total paid                                    (215,387)   (173,741)   (213,606)
Foreign exchange adjustment                    (10,967)      5,211       1,417
                                            ----------  ----------  ----------
Net balance at end of year                  $  880,105  $  823,979  $  814,235
  Net reserves from Corifrance Acquisition      30,891         --          --
                                            ----------  ----------  ----------
Net reserves at end of year                    910,996     823,979     814,235
Plus Reinsurance recoverables:
  The Company                                  236,847     254,129     354,417
  Reinsurance recoverables related to net
   reserves from Corifrance acquisition          9,881         --          --
                                            ----------  ----------  ----------
Reinsurance recoverable by the Company         246,728     254,129     354,417
                                            ----------  ----------  ----------
Reserves for unpaid losses and loss
 adjustment expenses, at end of year        $1,157,724  $1,078,108  $1,168,652
                                            ==========  ==========  ==========
</TABLE>
 
  Incurred claims relating to prior years are offset by decreases to prior
year net written and net earned premiums less related acquisition costs of
$4,800,000, $3,550,000 and $6,396,000 for 1997, 1996 and 1995 respectively.
When these revisions to prior written and earned premiums are taken into
account, the Company experienced net prior year improvement of $5,596,000 in
1997, and deteriorations of $950,000 and $9,655,000 for 1996 and 1995,
respectively.
 
  Management has considered environmental and latent injury claims and claims
expenses in establishing the liability for unpaid losses and loss adjustment
expenses. The Company continues to be advised of claims asserting injuries
from hazardous materials and alleged damages to cover various clean-up costs
relating to policies written in prior years. Coverage and claim settlement
issues, such as the determination that coverage exists and the definition of
an occurrence, may cause the actual loss development to show more variation
than the remainder of the Company's book of business. Traditional reserving
techniques cannot be used to estimate asbestos-related and environmental
pollution claims and, accordingly, the uncertainty in respect of the ultimate
cost of these types of claims is greater than the uncertainty relating to
standard lines of business. The Company believes it has made reasonable
provisions for claims, although the ultimate liability may be more or less
than held reserves. The Company believes that future losses associated with
these claims will not have a material
 
                                      65
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
adverse effect on its financial position, although there is no assurance that
such losses will not materially affect the Company's results of operations for
any period. However, management is not able to estimate the additional loss,
or range of loss, that is reasonably possible.
 
  The following table presents selected data on asbestos-related and
environmental pollution losses and loss adjustment expenses incurred and
reserves outstanding, net of amounts recoverable from reinsurers:
 
  ASBESTOS-RELATED LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED AND RESERVES
                                  OUTSTANDING
                             (NET OF REINSURANCE)
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                   -------------------------
                                                    1997     1996     1995
                                                   -------  -------  -------
                                                   (DOLLARS IN THOUSANDS)
   <S>                                             <C>      <C>      <C>
   Reserves for unpaid losses and loss adjustment
    expenses, at beginning of year                 $58,400  $47,900  $40,800
   Incurred losses and loss adjustment expenses      2,808       97    8,000
   Paid losses and loss adjustment expenses         (2,453)  (1,700)    (900)
                                                   -------  -------  -------
   Reserves for unpaid losses and loss adjustment
    expenses, at end of year prior to
    reclassification                               $58,755  $46,297  $47,900
   Reclassification of reserves previously
    identified as non-Asbestos-Related losses          --    12,103      --
                                                   -------  -------  -------
   Reserves for unpaid losses and loss adjustment
    expenses, at end of year                       $58,755  $58,400  $47,900
                                                   =======  =======  =======
</TABLE>
 
   ENVIRONMENTAL POLLUTION LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED AND
                             RESERVES OUTSTANDING
                             (NET OF REINSURANCE)
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                   -------------------------
                                                    1997     1996     1995
                                                   -------  -------  -------
                                                   (DOLLARS IN THOUSANDS)
   <S>                                             <C>      <C>      <C>
   Reserves for unpaid losses and loss adjustment
    expenses, at beginning of year                 $33,900  $38,400  $37,600
   Incurred losses and loss adjustment expenses     (2,032)  (1,500)   1,700
   Paid losses and loss adjustment expenses         (1,526)  (3,000)    (900)
                                                   -------  -------  -------
   Reserves for unpaid losses and loss adjustment
    expenses, at end of year                       $30,342  $33,900  $38,400
                                                   =======  =======  =======
</TABLE>
 
  The reinsurance recoverables netted against the loss reserves for each of
the years 1997, 1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                     YEAR ENDED DECEMBER 31,
                                    ----------------------------
                                      1997      1996      1995
                                    --------  --------  --------
                                      (DOLLARS IN THOUSANDS)
   <S>                              <C>       <C>       <C>
   Reserves (gross of reinsurance)  $111,805  $111,900  $100,000
   Reinsurance recoverables          (22,708)  (19,600)  (13,700)
                                    --------  --------  --------
   Reserves (net of reinsurance)    $ 89,097  $ 92,300  $ 86,300
                                    ========  ========  ========
</TABLE>
 
                                      66
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
14. ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
  Insurance balances receivable and reinsurance recoverable on paid and unpaid
losses are stated after deduction of an allowance for doubtful accounts as of
December 31, 1997 and 1996 of $28,904,000 and $29,149,000, respectively.
Doubtful accounts against which provisions of $841,000 had previously been
made were written off during 1997. The charge to doubtful accounts was
$1,238,000, for the year ended December 31, 1997, a release for doubtful
accounts of $1,142,000 was made for the year ended December 31, 1996 and a
charge to doubtful accounts of $3,000,000 was made for the year ended December
31, 1995.
 
15. COMMITMENTS AND CONTINGENT LIABILITIES
 
  (a) The Company is regularly involved, directly or indirectly, in litigation
in the ordinary course of conducting their insurance and reinsurance business.
In a number of cases, plaintiffs seek to establish coverage for liability
under environmental protection laws. While the nature and extent of insurance
and reinsurance coverage for environmental liability has widened since 1980,
there has been no final judgment which would result in the wholesale transfer
of environmental liability from insureds to insurers and reinsurers. In the
judgment of management, none of these cases, individually or collectively, is
likely to result in judgments for amounts which, net of loss and loss
adjustment expense liabilities previously established and reinsurance
recoverables which management believes are probable of realization, would have
a material effect on the financial position of the Company, although there is
no assurance that such losses will not materially effect the Company's results
of operations for any period.
 
  (b) Guarantees have been given by Terra Nova in favor of The Prudential
Insurance Company Limited and the Royal Bank of Scotland (Industrial Leasing)
Limited in respect of leases granted to Market Building Limited in connection
with the development of the London Underwriting Centre ("LUC"). The fire that
occurred in August 1991, during the course of fitting out the new LUC, gave
rise to the possibility of some shortfall of rental income in the future. Each
year, the Company, charges its share of the expense necessary to maintain the
LUC as a trading center.
 
  (c) The Company entered into various lease agreements for office space.
Certain leases have options permitting renewals for additional periods. In
addition to minimum fixed rentals, certain leases contain escalation clauses
related to the cost of living in future years. The future minimum aggregate
rental commitments for office space at December 31, 1997 under non-cancelable
operating leases are as follows:
 
<TABLE>
<CAPTION>
                               (DOLLARS
                YEAR              IN
                ----          THOUSANDS)
        <S>                   <C>
        1998                   $ 4,534
        1999                     3,464
        2000                     3,072
        2001                     1,634
        2002                       723
        2003 and later years     3,188
                               -------
                               $16,615
                               =======
</TABLE>
 
  Rental expense on property leases of $4,102,000, $3,802,000 and $2,257,000
was incurred for the periods to December 31, 1997, 1996 and 1995 respectively.
 
                                      67
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
16. LONG-TERM DEBT
 
  On August 26, 1997 UK Holdings completed an issue of $75 million 7.2% Senior
Notes due 2007, guaranteed fully and unconditionally by Bermuda Holdings. The
net proceeds were used to finance the acquisition of Corifrance on September
8, 1997 and for other corporate purposes.
 
  The Company's total outstanding consolidated indebtedness at December 31,
1997 was thus comprised of $175 million of the Senior Notes including the $100
million 10.75% Senior Notes due 2005, issued in 1995. The estimated fair value
of these Senior Notes at December 31, 1997 was $188.0 million, comprising
$76.5 million of 7.2% Senior Notes due 2007 and $111.5 million of 10.75%
Senior Notes due 2005.
 
  The 10.75% Senior Notes due 2005 may be redeemed at the option of UK
Holdings at any time on or after July 1, 2000, at a redemption price equal to
104.031%, 102.688%, 101.344% and 100.000%, for the years 2000, 2001, 2002 and
2003 and thereafter, respectively, of the aggregate principal amount thereof
plus accrued and unpaid interest thereon to the date of redemption. Subject to
certain limitations, UK Holdings may also redeem on or before the third
anniversary of the issuance of the Senior Notes up to 35% of the aggregate
principal amount of the Senior Notes originally issued with the net proceeds
of one or more offerings of capital stock (other than redeemable capital
stock) of Bermuda Holdings or UK Holdings at a redemption price of 109.75% of
the principal amount thereof plus accrued and unpaid interest thereon to the
date of redemption. In addition, the Senior Notes are subject to redemption at
the option of the holder thereof upon certain events constituting a change of
control of Bermuda Holdings or UK Holdings (provided that holders of 25% of
Senior Notes outstanding have tendered their Senior Notes for redemption), at
a redemption price equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest thereon to the date of redemption, and must
be redeemed upon certain tax-related events at a redemption price of 100% of
the principal amount thereof plus accrued and unpaid interest thereon to the
date of redemption.
 
  The 7.2% Senior Notes due 2007 may be redeemed at any time at the option of
UK Holdings at a redemption price equal to the sum of: (i) the principal
amount of the Senior Notes being redeemed plus accrued interest to the
redemption date and (ii) the make-whole amount, if any.
 
  The indenture governing the Senior Notes contains various covenants that
limit, under certain circumstances, among other things, mergers and asset
sales, indebtedness, dividends on and redemption of capital stock, the use of
proceeds from asset dispositions, liens, sales of capital stock of Bermuda
Holdings' principal insurance subsidiaries, encumbrances on the payment of
dividends and other payments by subsidiaries, transactions with affiliates,
issuance of preferred stock by subsidiaries, issuance of guarantees,
investments and certain business activities. The indenture also contains
customary events of default, including payment defaults, covenant defaults,
defaults in respect of other indebtedness, certain judgments and bankruptcy.
 
17. AVIATION BUSINESS IN RUN-OFF
 
  Pursuant to a decision by Terra Nova's directors in February 1992 to cease
writing aviation business ("Aviation"), Aviation has been accounted for as a
discontinued operation in the predecessor financial statements.
 
  Insurance cover provided under Aviation policies issued by Terra Nova ceased
upon the expiration of the last policy on December 31, 1992. However, Terra
Nova may continue to receive payments from policyholders pursuant to existing
contracts and to make payments under ceded reinsurance contracts. In addition,
Terra Nova will continue to settle claims and make recoveries from its
reinsurers. These future receipts and payments, together with the costs of
running off the Aviation business, have been considered as part of estimating
the loss
 
                                      68
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
from abandonment of Aviation business for periods up to December 31, 1994.
However, as explained in Note 13, estimates of ultimate liabilities for losses
and loss adjustment expenses may vary as a result of subsequent development.
Following the Acquisition charges or credits resulting from changes in
estimates after December 31, 1994 are reflected in continuing operations of
the Company. Terra Nova estimates that in excess of 90% of Aviation
liabilities will have been settled within three years after December 31, 1997.
 
  Details of the net liabilities of Aviation are as follows:
 
<TABLE>
<CAPTION>
                                                       AT DECEMBER 31,
                                                      -------------------
                                                        1997      1996
                                                      --------  ---------
                                                         (DOLLARS IN
                                                          THOUSANDS)
   <S>                                                <C>       <C>
   Reinsurance recoverable on paid losses             $ 10,201  $  11,595
   Reinsurance recoverable on unpaid losses             42,781     91,066
   Insurance balances receivable                            41        --
   Taxation recoverable                                    206        227
                                                      --------  ---------
     Total assets                                       53,229    102,888
                                                      --------  ---------
   Unpaid losses and loss adjustment expenses          (75,846)  (139,667)
   Insurance balances payable                           (4,955)    (5,818)
   Other liabilities                                      (663)      (689)
                                                      --------  ---------
     Total liabilities                                 (81,464)  (146,174)
                                                      --------  ---------
     Net liabilities of Aviation business in run-off  $(28,235) $ (43,286)
                                                      ========  =========
</TABLE>
 
  Details of the operating results of Aviation business in run-off are as
follows:
 
<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER
                                                     31,
                                             ---------------------
                                              1997    1996   1995
                                             ------  ------ ------
                                                 (DOLLARS IN
                                                  THOUSANDS)
   <S>                                       <C>     <C>    <C>
   Gross premiums written                    $1,468  $4,432 $9,009
   Net premiums earned                        1,577   1,624  4,668
   Losses and loss adjustment expenses, net      (6)    997  4,407
   Other expenses                             1,563     627    261
   Net loss                                     --      --     --
</TABLE>
 
  Reinsurance recoverable on paid and unpaid losses in relation to Aviation
are stated after deduction of an allowance for doubtful accounts as of
December 31, 1997, 1996 and 1995 of $4,715,000, $5,261,000 and $7,294,990,
respectively.
 
  As of December 31, 1997, Terra Nova's aggregate exposure in respect of
reinsurance ceded to Lloyd's syndicates in relation to Aviation, including
estimated reinsurance recoveries in respect of losses incurred but not
reported, was approximately $15,530,000, all of which was ceded into Equitas
with effect from September 4, 1996.
 
  In determining the net liabilities and net loss of Aviation, Terra Nova has
identified to Aviation all assets, liabilities, revenues and expenses directly
related to the Aviation operations. The net cumulative cash flow from Aviation
has been negative since the year ended December 31, 1990, and Terra Nova has
provided cash to Aviation out of corporate assets to enable Aviation to meet
its obligation on a cash basis. Because Aviation has been operating on a
negative cash flow basis and has not generated investment assets in the
periods presented in these financial statements, no investment income has been
allocated to Aviation. Income tax benefits have been
 
                                      69
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
allocated to Aviation by applying the relevant U.K. corporation tax rates to
the pre-tax loss on Aviation operations.
 
18. OWNERSHIP AND RELATED PARTY TRANSACTIONS
 
  Fees of $487,500, $3,216,004 and $2,500,000 were paid to a related party in
1997, 1996 and 1995 respectively, relating to the Offerings, the issue of the
Senior Notes, and the Acquisitions and the capitalization of the Company.
 
19. SEGMENT INFORMATION
 
  The Company's operations are conducted principally through four segments:
Marine & Aviation, Non-marine, Agency and the Corporate operations. The
Corporate segment holds the assets, principally investments not allocable to
the insurance underwriting and agency operations.
 
  Substantially all of the revenues are derived from business within the
London Market. Additional operations are conducted in Belgium, Bermuda, Canada
and France.
 
  The following table is a summary of the operations of the four segments for
the years ended December 31, 1997, 1996 and 1995:
 
<TABLE>
<CAPTION>
                                                     1997
                               ------------------------------------------------
                               MARINE &   NON-
                               AVIATION  MARINE  AGENCY  CORPORATE CONSOLIDATED
                               -------- -------- ------- --------- ------------
                                            (DOLLARS IN THOUSANDS)
<S>                            <C>      <C>      <C>     <C>       <C>
Revenues                       $146,947 $331,192 $15,571 $ 40,125   $  533,835
                               -------- -------- ------- --------   ----------
Income from operations before
 income taxes                    19,827   46,698   2,441   22,083       91,049
                               -------- -------- ------- --------   ----------
Identifiable assets             523,972  986,780  12,567  696,815    2,220,134
                               -------- -------- ------- --------   ----------
<CAPTION>
                                                     1996
                               ------------------------------------------------
                               MARINE &   NON-
                               AVIATION  MARINE  AGENCY  CORPORATE CONSOLIDATED
                               -------- -------- ------- --------- ------------
                                            (DOLLARS IN THOUSANDS)
<S>                            <C>      <C>      <C>     <C>       <C>
Revenues                       $105,558 $225,346 $ 8,998 $ 38,157   $  378,059
                               -------- -------- ------- --------   ----------
Income from operations before
 income taxes                    20,582   39,479     461   22,146       82,668
                               -------- -------- ------- --------   ----------
Identifiable assets             558,475  788,916   6,183  513,773    1,867,347
                               -------- -------- ------- --------   ----------
</TABLE>
 
<TABLE>
<CAPTION>
                                                        1995
                                      ----------------------------------------
                                      MARINE &   NON-
                                      AVIATION  MARINE  CORPORATE CONSOLIDATED
                                      -------- -------- --------- ------------
                                               (DOLLARS IN THOUSANDS)
<S>                                   <C>      <C>      <C>       <C>
Revenues                              $108,003 $197,521 $ 31,348   $  336,872
                                      -------- -------- --------   ----------
Income from operations before income
 taxes                                  16,710   27,320   18,403       62,433
                                      -------- -------- --------   ----------
Identifiable assets                    614,340  736,852  433,844    1,785,036
                                      -------- -------- --------   ----------
</TABLE>
 
                                      70
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
20. STATUTORY FINANCIAL DATA
 
  (a) Terra Nova files an annual audited return with the H.M. Treasury (the
"Treasury") in the U.K. The Treasury has assumed the responsibilities for
supervision of insurance companies previously undertaken by the D.T.I.. The
Treasury requires U.K. insurance companies to comply with prescribed minimum
solvency margins. Terra Nova's unaudited required minimum Treasury solvency
margin and unaudited solvency margin at December 31, 1997 were $30,117,000 and
$201,557,000, respectively. Terra Nova's unaudited and estimated Treasury
Return policyholders' surplus and unaudited net income for the year ended
December 31, 1997 and the audited Treasury Return policyholders' surplus and
net income as reported in the annual returns to the Treasury for the years
ended December 31, 1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                   1997       1996     1995
                                ----------- -------- --------
                                (UNAUDITED)
                                   (DOLLARS IN THOUSANDS)
   <S>                          <C>         <C>      <C>
   Policyholders' surplus        $231,674   $234,400 $212,480
   Net income before dividends     47,586     23,615   18,778
</TABLE>
 
  Terra Nova's ability to pay dividends is limited by a Notice of Requirements
issued by the Treasury, which requires Terra Nova to give 14 days' advance
notice to the Treasury of its intention to declare and pay a dividend. In
addition, Terra Nova must comply with the Companies Act 1985, which provides
that dividends may only be paid out of distributable profits.
 
  (b) Terra Nova (Bermuda)'s ability to pay dividends is subject to certain
regulatory restrictions. Under the Insurance Act of 1978, amendments thereto
and related regulations of Bermuda (the "Act"), Terra Nova (Bermuda) is
required to file in Bermuda statutory financial statements and a statutory
financial return. The Act also requires Terra Nova (Bermuda) to maintain
certain measures of solvency and liquidity during the year.
 
  Terra Nova (Bermuda)'s statutory capital and surplus and minimum required
statutory capital and surplus at December 31, 1997, 1996 and 1995 respectively
were:
 
<TABLE>
<CAPTION>
                                              1997       1996     1995
                                           ----------- -------- --------
                                           (UNAUDITED)
                                              (DOLLARS IN THOUSANDS)
   <S>                                     <C>         <C>      <C>
   Statutory capital and surplus            $260,612   $219,374 $121,970
   Minimum required statutory capital and
    surplus                                  100,000    100,000   31,577
</TABLE>
 
  Bermuda Holdings' and UK Holdings' ability to meet their expenses and debt
services requirements is dependent upon the ability of Terra Nova and Terra
Nova (Bermuda) to pay dividends as described above.
 
21. SUMMARIZED FINANCIAL INFORMATION FOR UK HOLDINGS
 
  UK Holdings was incorporated in the United Kingdom on November 7, 1994 for
the purposes of acquiring Terra Nova. UK Holdings is the issuer of Senior
Notes as described in Note 16. Bermuda Holdings is the guarantor of such
notes. The Guarantee is full and unconditional.
 
                                      71
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Summarized consolidated balance sheet information as at December 31, 1997
and 1996 and summarized consolidated statements of operations information for
the years December 31, 1997, 1996 and 1995 relating to UK Holdings is set out
below.
 
<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                                    ---------------------
                                                       1997       1996
                                                    ---------- ----------
                                                         (DOLLARS IN
                                                         THOUSANDS)
   <S>                                              <C>        <C>
   Investments and cash                             $  960,191 $  872,171
   Reinsurance recoverable on unpaid losses            407,560    387,733
   Accrued premium income                              170,006    108,012
   Other assets                                        288,077    193,212
                                                    ---------- ----------
     Total assets                                   $1,825,834 $1,561,128
                                                    ========== ==========
   Unpaid losses and loss adjustment expenses       $1,077,327 $1,011,015
   Unearned premiums                                   254,833    157,515
   Net liabilities of Aviation business in run-off      21,985     36,913
   Long-term debt                                      175,000    100,000
   Other liabilities                                   119,971     83,440
                                                    ---------- ----------
     Total liabilities                               1,649,116  1,388,883
                                                    ---------- ----------
     Total shareholders' equity                        176,718    172,245
                                                    ---------- ----------
     Total liabilities, minority interests and
      shareholders' equity                          $1,825,834 $1,561,128
                                                    ========== ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                   ---------------------------
                                                     1997      1996     1995
                                                   --------  -------- --------
                                                     (DOLLARS IN THOUSANDS)
   <S>                                             <C>       <C>      <C>
   Net premiums earned                             $357,939  $243,812 $186,292
   Net investment income                             55,698    52,102   57,374
   Realized investment gains                         15,306    12,217    8,735
   Foreign exchange (losses) gains                   (1,240)      213    1,575
   Agency income                                     15,571     8,998      --
                                                   --------  -------- --------
   Total revenues                                   443,274   317,342  253,976
                                                   --------  -------- --------
   Underwriting costs and expenses                  384,530   264,627  206,278
                                                   --------  -------- --------
   Income from operations before income taxes and
    minority interests                               58,744    52,715   47,698
                                                   --------  -------- --------
   Net income                                      $ 41,105  $ 34,430 $ 29,806
                                                   ========  ======== ========
</TABLE>
 
                                      72
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                             AND ITS SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
22. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                    1997
                             ---------------------------------------------------
                             THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
                                ENDED        ENDED        ENDED        ENDED
                               MARCH 31     JUNE 30    SEPTEMBER 30 DECEMBER 31
                             ------------ ------------ ------------ ------------
                                 (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
   <S>                       <C>          <C>          <C>          <C>
   Revenues                    $108,335     $122,524     $130,409     $173,108
                               ========     ========     ========     ========
   Net income                  $ 18,144     $ 16,504     $ 19,009     $ 19,753
                               ========     ========     ========     ========
   Basic earnings per share    $   0.70     $   0.64     $   0.75     $   0.78
                               ========     ========     ========     ========
   Diluted earnings per
    share                      $   0.69     $   0.63     $   0.74     $   0.76
                               ========     ========     ========     ========
<CAPTION>
                                                    1996
                             ---------------------------------------------------
                             THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
                                ENDED        ENDED        ENDED        ENDED
                               MARCH 31     JUNE 30    SEPTEMBER 30 DECEMBER 31
                             ------------ ------------ ------------ ------------
                                 (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
   <S>                       <C>          <C>          <C>          <C>
   Revenues                    $101,942     $ 94,919     $ 88,876     $ 92,322
                               ========     ========     ========     ========
   Net income                  $ 15,485     $ 18,644     $ 14,449     $ 15,328
                               ========     ========     ========     ========
   Basic earnings per share    $   1.01     $   0.77     $   0.56     $   0.59
                               ========     ========     ========     ========
   Diluted earnings per
    share                      $   0.85     $   0.77     $   0.55     $   0.58
                               ========     ========     ========     ========
</TABLE>
 
  The Company's net income per share amounts are based on the weighted average
number of shares outstanding during the periods (see Note 9). The quarterly
1997 and 1996 per share data shown above, do not agree to those previously
reported on form 10Q due to the adoption of SFAS No. 128 "Earnings per Share"
in the fourth quarter of 1997.
 
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  There have been no changes in nor any disagreements with accountants on
accounting and financial disclosure within the 36 months ended December 31,
1997.
 
                                      73
<PAGE>
 
                                    PART III
 
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  Information required by this Item is included in the 1997 Proxy Statement
dated March 30, 1998, and such information is incorporated herein by reference.
 
ITEM 11--EXECUTIVE COMPENSATION
 
  Information required by this Item is included in the 1997 Proxy Statement
dated March 30, 1998, and such information is incorporated herein by reference.
 
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  Information required by this Item is included in the 1997 Proxy Statement
dated March 30, 1998, and such information is incorporated herein by reference.
 
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  Information required by this Item is included in the 1997 Proxy Statement
dated March 30, 1998, and such information is incorporated herein by reference.
 
                                       74
<PAGE>
 
                                    PART IV
 
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
  (a) Index to Financial Statements. The financial statements filed as part of
this report are listed on the Index to Financial Statements on page 43 hereof.
 
                    INDEX TO FINANCIAL STATEMENT SCHEDULES
 
<TABLE>
<CAPTION>
                                                                      PAGE
                                                                      ----
 <C>            <S>                                                   <C>  <C>
 Report of Independent Accountants on Schedules                        76
                --Summary of Investments--Other than Investments in
 Schedule I     Related Parties                                        77
                --Condensed Financial Information of Registrant
 Schedule II(a) (Parent Company)(1)                                    78
                --Condensed Balance Sheet
                --Condensed Financial Information of Registrant
 Schedule II(b) (Parent Company)(1)                                    79
                --Condensed Statement of Operations
                --Condensed Financial Information of Registrant
 Schedule II(c) (Parent Company)(1)                                    80
                --Condensed Statement of Cash Flows
 Schedule III   --Supplementary Insurance Information                  81
 Schedule IV    --Reinsurance                                          82
 Schedule V     --Valuation and Qualifying Accounts                    83
 Schedule VI    --Supplementary Information Concerning
                   Property/Casualty Insurance Operations              84
   Other Schedules have been omitted as they are not applicable to
 the Company.
   (b) Reports on Form 8-K.
   The reports on Form 8-K have been filed during the last quarter
       of the period covered by this report                            85
   (c) Exhibits.
   The Index to Exhibits and the Exhibits filed as part of this
 report                                                                86
</TABLE>
 
                                      75
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Shareholders and Board of Directors of
Terra Nova (Bermuda) Holdings Ltd.
 
  In connection with our audits of the consolidated balance sheets of Terra
Nova (Bermuda) Holdings Ltd. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997, 1996 and 1995 which financial statements are included in the Form
10-K, we have also audited the financial statement schedules listed in Item 14
herein.
 
  In our opinion, the financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information required to be included therein.
 
Coopers & Lybrand
 
Hamilton, Bermuda
March 6, 1998
 
                                      76
<PAGE>
 
                                                         SUPPLEMENTAL SCHEDULE I
 
              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES
 
       SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
 
                            AS OF DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                    AMOUNT
                                                                   AT WHICH
                                                                   SHOWN IN
                                                         MARKET   THE BALANCE
            TYPE OF INVESTMENT                 COST      VALUE       SHEET
            ------------------              ---------- ---------- -----------
<S>                                         <C>        <C>        <C>
Fixed maturities:
  Bonds:
    United States Government and government
     agencies and authorities               $  298,618 $  312,720 $  312,720
    States, municipalities and political
     subdivisions                               40,130     41,384     41,384
    Foreign governments                        429,811    447,176    447,176
    Public utilities                               --         --         --
    Convertibles and other bonds with
     warrants attached                             --         --         --
    All other corporate bonds                  451,240    460,178    460,178
  Certificates of deposit                          --         --         --
  Redeemable preferred stocks                      --         --         --
                                            ---------- ---------- ----------
    Total fixed maturities                  $1,219,799 $1,261,458 $1,261,458
                                            ========== ========== ==========
Equity securities:
  Common stocks:
    Public utilities                        $      --  $      --  $      --
    Banks, trust and insurance companies        15,483     24,909     24,909
    Industrial, miscellaneous and all other     54,298     79,325     79,325
  Non redeemable preferred stocks                  --         --         --
                                            ---------- ---------- ----------
    Total equity securities                 $   69,781 $  104,234 $  104,234
                                            ========== ========== ==========
Mortgage loans on real estate               $      --  $      --  $      --
Real estate                                        --         --         --
Policy loans                                       --         --         --
Other long-term investment                         --         --         --
                                            ---------- ---------- ----------
    Total investments                       $1,289,580 $1,365,692 $1,365,692
                                            ========== ========== ==========
</TABLE>
 
                                       77
<PAGE>
 
                                                    SUPPLEMENTAL SCHEDULE II(A)
 
              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES
 
                    PARENT COMPANY FINANCIAL INFORMATION(1)
 
                            CONDENSED BALANCE SHEET
                            (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                          ------------------
                                                            1997      1996
                                                          --------  --------
<S>                                                       <C>       <C>
                         ASSETS
                         ------
Investments in subsidiaries, at cost                      $446,838  $395,549
Fixed Interest Securities                                   28,703       --
Cash                                                         2,146     2,742
                                                          --------  --------
    Total investments and cash                             477,687   398,291
Other assets                                                 5,619     2,812
                                                          --------  --------
    Total assets                                          $483,306  $401,103
                                                          ========  ========
          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------
Other liabilities                                         $  1,418  $  2,344
                                                          --------  --------
    Total liabilities                                        1,418     2,344
                                                          --------  --------
Shareholders' equity:
  Common shares                                            150,142   149,933
  Stock held in Trust                                       (9,500)      --
  Deferred equity compensation                               3,275       --
  Additional capital                                       111,568   111,544
  Unrealized appreciation in investments of subsidiaries,
   net of minority interests
   and income tax                                           56,430    36,271
  Retained earnings                                        169,973   101,011
                                                          --------  --------
    Total shareholders' equity                             481,888   398,759
                                                          --------  --------
    Total liabilities and shareholders' equity            $483,306  $401,103
                                                          ========  ========
</TABLE>
--------
(1) The parent company condensed financial information should be read in
    conjunction with the consolidated financial statements and notes thereto
    included elsewhere herein.
 
                                      78
<PAGE>
 
                                                    SUPPLEMENTAL SCHEDULE II(B)
 
              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES
 
                    PARENT COMPANY FINANCIAL INFORMATION(1)
 
                      CONDENSED STATEMENTS OF OPERATIONS
                            (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                            FOR THE YEAR
                                                           ENDED DECEMBER
                                                                 31,
                                                           ----------------
                                                            1997     1996
                                                           -------  -------
<S>                                                        <C>      <C>
Revenues:
  Net investment income                                    $ 1,953  $ 2,205
  Realizsed losses on sales of investments                     (25)     (39)
  Foreign exchange gains                                         5      --
  Dividend income                                           44,400      --
                                                           -------  -------
    Total revenues                                          46,333    2,166
                                                           -------  -------
Expenses:
  Deferred debt expenses                                       664      664
  Salaries                                                   1,864    1,592
  Legal and professional expenses                              639      463
  Other expenses                                             1,065    1,677
                                                           -------  -------
    Total expenses                                           4,232    4,396
                                                           -------  -------
Income (loss) from continuing operations before equity in
 net income of consolidated subsidiaries                    42,101   (2,230)
Equity in net income of consolidated subsidiaries           31,309   66,136
                                                           -------  -------
Net income                                                 $73,410  $63,906
                                                           =======  =======
</TABLE>
--------
(1) The parent company condensed financial information should be read in
    conjunction with the consolidated financial statements and notes thereto
    included elsewhere herein.
 
                                      79
<PAGE>
 
                                                    SUPPLEMENTAL SCHEDULE II(C)
 
              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES
 
                    PARENT COMPANY FINANCIAL INFORMATION(1)
 
                      CONDENSED STATEMENTS OF CASH FLOWS
                            (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                        FOR THE YEAR ENDED
                                                           DECEMBER 31,
                                                        -------------------
                                                          1997      1996
                                                        --------  ---------
<S>                                                     <C>       <C>
Cash flows from operating activities:
  Net loss                                              $ (2,299) $  (2,230)
                                                        --------  ---------
Adjustments to reconcile net income to net cash
 provided by operating activities:
  Realized capital losses                                     25         39
  Stock option compensation expense                          804        --
  Change in accrued investment income                       (604)       --
  Change in other assets and liabilities, net               (289)    (3,479)
                                                        --------  ---------
    Net cash used in operating activities                 (2,363)    (5,670)
                                                        --------  ---------
Cash flows from investing activities:
  Proceeds of fixed maturities sold                       46,181     80,196
  Purchase of fixed maturities                           (74,808)   (80,235)
                                                        --------  ---------
    Net cash used in investing activities                (28,627)       (39)
                                                        --------  ---------
Cash flows from financing activities:
  Investment in subsidiary company                           --    (101,001)
  Net proceeds from initial public offering                  --     113,953
  Proceeds from shares issued                                384        158
  Preference dividends paid to stockholders                  --        (499)
  Stock repurchase                                       (10,020)       --
  Ordinary dividends received from subsidiary company     44,400        --
  Ordinary dividends paid to stockholders                 (4,370)    (1,548)
  Redemption of preference shares                            --     (16,035)
                                                        --------  ---------
    Net cash provided by (used in) financing activities   30,394     (4,972)
                                                        --------  ---------
Change in cash and cash equivalents                         (596)   (10,681)
                                                        --------  ---------
Cash and cash equivalents at beginning of year             2,741     13,422
                                                        --------  ---------
Cash and cash equivalents at end of year                $  2,145  $   2,741
                                                        ========  =========
</TABLE>
--------
(1) The parent company condensed financial information should be read in
    conjunction with the consolidated financial statements and notes thereto
    included elsewhere herein.
 
                                      80
<PAGE>
 
                                                       SUPPLEMENTAL SCHEDULE III
 
              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES
 
                      SUPPLEMENTARY INSURANCE INFORMATION
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                               BENEFITS,
                                       LOSSES                                   CLAIMS,   AMORTIZATION
                          DEFERRED    AND LOSS                       NET       LOSSES AND OF DEFERRED    OTHER
                         ACQUISITION ADJUSTMENT UNEARNED PREMIUM  INVESTMENT   SETTLEMENT ACQUISITION  OPERATING PREMIUMS
        SEGMENT             COSTS     EXPENSES  PREMIUMS REVENUE    INCOME      EXPENSES     COSTS     EXPENSES   WRITTEN
        -------          ----------- ---------- -------- -------- ----------   ---------- ------------ --------- ---------
<S>                      <C>         <C>        <C>      <C>      <C>          <C>        <C>          <C>       <C>
Year ended December 31,
1997
  Non-marine               $36,705    $687,659  $126,141 $225,315  $41,215(a)   $149,352    $63,308     $6,073   $ 233,286
  Marine                    15,931     387,407    51,235   87,247   16,783(a)     54,600     26,892      3,587      84,479
  Octavian                  23,744      82,658    97,558  106,507    1,072(a)     78,528     25,227      4,046     165,780
Year ended December 31,
1996
  Non-marine               $25,031    $638,974  $ 98,360 $182,543  $36,582(a)   $123,615    $50,799     $5,464   $ 204,334
  Marine                    15,929     429,596    53,894   83,921   15,471(a)     46,967     28,139      4,084      78,169
  Octavian                   4,319       9,538    20,866   12,292       95(a)      7,692      3,456        627      28,663
Year ended December 31,
1995
  Non-marine               $18,584    $650,052  $ 78,112 $159,555  $37,966(a)   $120,105    $43,795     $6,301   $ 161,357
  Marine                    18,366     518,600    61,881   92,345   15,658(a)     59,006     28,519      3,768      85,628
  Octavian                     --          --        --       --       --            --         --         --          --
</TABLE>
----
(a) Net investment income excludes investment income and realized gains of
    $41,393,000, $37,732,000 and $30,238,000 for 1997, 1996 and 1995,
    respectively, which is attributed to the Parent as disclosed in note 19 to
    the Consolidated Financial Statements.
 
                                       81
<PAGE>
 
                                                        SUPPLEMENTAL SCHEDULE IV
 
              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES
 
                                  REINSURANCE
 
                            AS OF DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                      PERCENT
                                         CEDED    ASSUMED            OF AMOUNT
                               GROSS   TO OTHER  FROM OTHER   NET     ASSUMED
      PREMIUMS WRITTEN         AMOUNT  COMPANIES COMPANIES   AMOUNT   TO NET
      ----------------        -------- --------- ---------- -------- ---------
<S>                           <C>      <C>       <C>        <C>      <C>
PROPERTY-CASUALTY
Year Ended December 31, 1997  $269,577  $66,698   $280,666  $483,545   58.04%
Year Ended December 31, 1996   119,601   49,844    241,409   311,166   77.60%
Year Ended December 31, 1995    86,296   55,673    216,362   246,985   87.60%
</TABLE>
 
                                       82
<PAGE>
 
                                                         SUPPLEMENTAL SCHEDULE V
 
              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                   CHARGED TO
                           BALANCE      CHARGED      OTHER                   BALANCE
                         AT BEGINNING   TO COSTS   ACCOUNTS-- DEDUCTIONS--   AT END
      DESCRIPTION         OF PERIOD   AND EXPENSES  DESCRIBE    DESCRIBE    OF PERIOD
      -----------        ------------ ------------ ---------- ------------  ---------
<S>                      <C>          <C>          <C>        <C>           <C>
Year Ended December 31,
 1997
  Allowance for Doubtful
   Accounts                $29,149      $ 1,238      $ --        $1,483 (a)  $28,904
Year Ended December 31,
 1996
  Allowance for Doubtful
   Accounts                 30,165       (1,142)       --          (126)(a)   29,149
Year Ended December 31,
 1995
  Allowance for Doubtful
   Accounts                 29,076        3,000        --         1,911 (a)   30,165
</TABLE>
--------
(a) Amounts previously charged utilized against irrecoverable balances.
 
                                       83
<PAGE>
 
                                                        SUPPLEMENTAL SCHEDULE VI
 
              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES
 
                      SUPPLEMENTARY INSURANCE INFORMATION
               CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                  LOSSES AND
                                                                                LOSS ADJUSTMENT
                                                                               EXPENSES INCURRED
                              RESERVE                                             RELATED TO                      PAID
                             FOR LOSSES                                        -----------------  AMORTIZATION LOSSES AND
                  DEFERRED    AND LOSS  DISCOUNT,                      NET       (1)      (2)     OF DEFERRED     LOSS
                 ACQUISITION ADJUSTMENT  IF ANY,  UNEARNED  EARNED  INVESTMENT CURRENT   PRIOR    ACQUISITION  ADJUSTMENT PREMIUMS
    SEGMENT         COSTS     EXPENSES  DEDUCTED  PREMIUMS PREMIUMS   INCOME     YEAR    YEARS       COSTS      EXPENSES  WRITTEN
    -------      ----------- ---------- --------- -------- -------- ---------- -------- --------  ------------ ---------- --------
<S>              <C>         <C>        <C>       <C>      <C>      <C>        <C>      <C>       <C>          <C>        <C>
Year Ended
December 31,
1997
  Continuing
  operations       $76,380   $1,157,724   $ --    $274,934 $419,069  $57,998   $292,875 $(10,395)   $115,427    $215,387  $483,545
  Aviation
  business in
  run-off              --        75,846     --         --     1,577      --         --        (6)        --       14,500     1,577
Year Ended
December 31,
1996
  Continuing
  operations        45,279    1,078,108     --     173,120  278,756   52,053    180,874   (2,600)     82,394     173,741   311,166
  Aviation
  business in
  run-off              --       139,667     --         --     1,624      --         --       997         --       32,000     1,624
Year Ended
December 31,
1995
  Continuing
  operations        36,950    1,168,652     --     139,993  251,900   53,624    175,852    3,259      72,314     213,606   246,985
  Aviation
  business in
  run-off              --       164,898     --         --     4,668      --         --     4,574         --       15,025     4,668
</TABLE>
 
                                       84
<PAGE>
 
ITEM 14--EXHIBITS
 
  (b) Reports
 
  No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
 
                                       85
<PAGE>
 
ITEM 14--EXHIBITS
 
  (c) Exhibits
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                DESCRIPTION
 -------                               -----------
 <C>     <S>
  3.1    Certificate of Incorporation and Memorandum of Association of the
          Company (incorporated by reference to Exhibit 3.2 of the Company's
          Registration Statement on Form S-1, Registration No. 33-93358).
  3.2    Amended and Restated Bye-Laws of the Company (incorporated by
          reference to Exhibit 3.2 of the Company's Registration Statement on
          Form S-1, Registration No. 333-1726).
  4.1    Form of Share Certificate (incorporated by reference to Exhibit 4.1 of
          the Company's Registration Statement on Form S-1, Registration No.
          333-1726).
  4.2    Indenture, dated June 15, 1995, among UK Holdings, the Company and The
          Chase Manhattan Bank, N.A., as trustee (incorporated by reference to
          Exhibit 4.2 of the Company's Registration Statement Form S-1;
          Registration No. 333-1726).
  4.3    First Supplemental Indenture, dated October 12, 1995, among UK
          Holdings, the Company and the Chase Manhattan Bank, N.A., as trustee
          (incorporated by reference to Exhibit 4.3 of the Company's
          Registration Statement Form S-1; Registration No. 333-1726).
  4.4    Deposit and Custody Agreement, dated June 15, 1995, among UK Holdings,
          the Company, Chase Manhattan Bank Luxembourg, S.A., as Custodian, and
          The Chase Manhattan Bank, N.A., as Depository (incorporated by
          reference to Exhibit 4.4 of the Company's Registration Statement Form
          S-1; Registration No. 333-1726).
  4.5    Indenture, dated August 26, 1997, among UK Holdings, the Company and
          The Chase Manhattan Bank, as Trustee (incorporated by reference to
          Exhibit 4.1 of the Company's Registration Statement Form F-4 and S-4,
          Registration No. 333-38063,-01).
  4.6    Deposit and Custody Agreement, dated August 26, 1997, among UK
          Holdings, the Company, Chase Manhattan Bank Luxembourg S.A., as
          Custodian, and The Chase Manhattan Bank, as Trustee and as Depository
          (incorporated by reference to Exhibit 4.2 of the Company's
          Registration Statement Form F-4 and S-4, Registration No. 333-38063,-
          01).
 10.1    Exchange Agreement, dated December 20, 1994, among the Company, Aetna,
          CIGNA, Marsh & McLennan, Bowring and Nimrod Securities (incorporated
          by reference to Exhibit 10.1 of the Company's Registration Statement
          on Form S-1, Registration No. 33-93358).
 10.2    Share Purchase Agreement, dated December 21, 1994, among UK Holdings,
          Aetna, CIGNA, Marsh & McLennan, Bowring and Nimrod Securities
          (incorporated by reference to Exhibit 10.6 of the Company's
          Registration Statement on Form S-1, Registration No. 33-93358).
 10.3    Registration Rights Agreement dated as of March 25, 1996, among the
          Company and certain shareholders of the Company (incorporated by
          reference to Exhibit 10.13 of the Company's Registration Statement on
          Form S-1, Registration No. 333-1726).
 10.4    Exclusivity Agreement, between the Company and DLJSC (incorporated by
          reference to Exhibit 10.14 of the Company's Registration Statement on
          Form S-1, Registration No. 333-1726).
 10.5    Service Agreement, dated October 18, 1993, between Terra Nova and John
          Riddick (incorporated by reference to Exhibit 10.15 of the Company's
          Registration Statement on Form S-1, Registration No. 33-93358).
 10.6    Service Agreement, dated June 14, 1993, between Terra Nova and Richard
          J. Edmunds (incorporated by reference to Exhibit 10.17 of the
          Company's Registration Statement on Form S-1, Registration No. 33-
          93358).
</TABLE>
 
 
                                       86
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                DESCRIPTION
 -------                               -----------
 <C>     <S>
 10.7    Service Agreement, dated May 28, 1993, between Terra Nova and Ian L.
          Bowden (incorporated by reference to Exhibit 10.18 of the Company's
          Registration Statement on Form S-1, Registration No. 33-93358).
 10.8    Service Agreement, dated January 5, 1996, between Octavian (formerly
          Saffronplace Limited) and Nigel Harold John Rogers (incorporated by
          reference to Exhibit 10.19 of the Company's Registration Statement on
          Form S-1, Registration No. 333-1726).
 10.9    Letter Agreement, dated January 5, 1996, between the Company and John
          J. Dwyer (incorporated by reference to Exhibit 10.19 of the Company's
          Registration Statement on Form S-1, Registration No. 33-93358).
 10.10   Letter Agreement, dated March 20, 1995, between the Company and John
          J. Dwyer (incorporated by reference to Exhibit 10.20 of the Company's
          Registration Statement on Form S-1, Registration No. 33-93358).
 10.11   Approved Executive Share Option Plan (incorporated by reference to
          Exhibit 10.22 of the Company's Registration Statement on Form S-1,
          Registration No. 333-1726).
 10.12   Octavian 1996 Stock Option Scheme (incorporated by reference to
          Exhibit 10.23 of the Company's Registration Statement on Form S-1,
          Registration No. 333-1726).
 10.13   The Octavian Group Pension Scheme (incorporated by reference to
          Exhibit 10.24 of the Company's Registration Statement on Form S-1,
          Registration No. 333-1726).
 10.14   DTI Notice of Requirements (incorporated by reference to Exhibit 10.23
          of the Company's Registration Statement on Form S-1, Registration No.
          33-93358).
 10.15   Terra Nova Insurance Company Limited Non-Approved Funded Pension
          Scheme (incorporated by reference to Exhibit 10.28 of the Company's
          Registration Statement on Form S-1, Registration No. 333-1726).
 21.1    Subsidiaries of the Company (incorporated by reference to Exhibit 21.1
          of the Company's Registration Statement on Form S-1, Registration No.
          333-1726).
</TABLE>
 
                                       87
<PAGE>
 
                                                                    EXHIBIT 11.1
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES
 
                 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
 
<TABLE>
<S>                                        <C>       <C>         <C>
Common Stock outstanding entire year                 25,850,566
Add effect of:
  Options exercised during 1997              34,027
  Stock repurchased during 1997            (297,945)
                                           --------
                                                       (263,918)
                                                     ----------
Shares outstanding for Basic Per Share
 Calculation                                                      25,586,548
                                                                 ===========
Basic Net Income:
  Reported Net Income Available for Common
   Shareholders                                                  $73,410,123
                                                                 ===========
  Basic Net Income Per Share                                     $      2.87
                                                                 ===========
Shares added for Diluted Calculation to
 reflect the effect of:
  Stock Options                                         406,643
                                                     ----------
Shares outstanding for Diluted Per Share
 Calculation                                                      25,993,291
                                                                 ===========
Diluted Net Income:
  Reported Net Income Available for Common
   Shareholders                                                  $73,410,123
                                                                 ===========
  Diluted Net Income Per Share                                   $      2.82
                                                                 ===========
</TABLE>
 
                                       88
<PAGE>
 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
 
                                          TERRA NOVA (BERMUDA) HOLDINGS LTD.
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                  DATE
             ---------                           -----                  ----
 
<S>                                  <C>                           <C>
     /s/ William O. Bailey           Chairman, President and       March 16, 1998
____________________________________  Chief Executive Officer
         William O. Bailey
 
     /s/ William J. Wedlake          Senior Vice President and     March 16, 1998
____________________________________  Chief Financial Officer
         William J. Wedlake
 
       /s/ John J. Dwyer             Deputy Chairman               March 16, 1998
____________________________________
           John J. Dwyer
 
        /s/ John Riddick             Deputy Chairman               March 16, 1998
____________________________________
            John Riddick
 
     /s/ Nigel H.J. Rogers           Deputy Chairman               March 16, 1998
____________________________________
         Nigel H.J. Rogers
 
    /s/ Robert S. Fleischer          Director                      March 16, 1998
____________________________________
        Robert S. Fleischer
 
       /s/ David L. Jaffe            Director                      March 16, 1998
____________________________________
           David L. Jaffe
 
</TABLE>
 
                                       89