<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                 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, 1999

                         Commission File Number 1-13832

                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
             (Exact name of registrant as specified in its charter)

                  Bermuda                                   N/A
      (State or other jurisdiction of                (I.R.S. Employer
      incorporation or organisation)                Identification No.)

          Richmond House, 12 Par-la-Ville Road, Hamilton HM08, Bermuda
              (Address of principal executive offices) (Zip code)

                           Telephone: (441) 292-7731
              (Registrants telephone number, including area code)

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

            Title of each class               Name of each exchange on which
    Common shares, par value $5.80 per                 registered
                 share                            New York Stock Exchange
        7.2% Senior Notes due 2007                New York Stock Exchange
        7.0% Senior Notes due 2008                New York Stock Exchange

       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 20, 2000 was 26,144,409 (includes 728,213 ordinary shares owned by
trusts on behalf of the Company).

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                       TERRA NOVA (BERMUDA) HOLDINGS LTD.

                               INDEX TO FORM 10-K

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                  ----
                                     PART I

 <S>      <C>                                                                                     <C>
 Item 1.  Business...............................................................................   3
 Item 2.  Properties.............................................................................  24
 Item 3.  Legal Proceedings......................................................................  24
 Item 4.  Submission of Matters to a Vote of Security Holders....................................  24

                                    PART II

 Item 5.  Market for the Registrant's Common Shares and Related Shareholder Matters..............  25
 Item 6.  Selected Financial Data for the five years ended December 31, 1999.....................  25
 Item 7.  Management's Discussion and Analysis of Results of Operations and Financial Condition..  26
 Item 7A. Quantitative and Qualitative Disclosure About Market Risk..............................  34
 Item 8.  Financial Statements...................................................................  36
 Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...  68

                                    PART III

 Item 10. Directors and Executive Officers of the Registrant.....................................  68
 Item 11. Executive Compensation.................................................................  70
 Item 12. Security Ownership of Certain Beneficial Owners and Management.........................  75
 Item 13. Certain Relationships and Related Transactions.........................................  76

                                    PART IV

 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................  78
          Index to Exhibits......................................................................  85
</TABLE>

                                       2
<PAGE>

                                     PART I

ITEM 1--BUSINESS

Safe Harbor Disclosure

   The Private Securities Litigation Reform Act of 1995 provides a statutory
"safe harbor" for forward-looking statements. Any written or oral statements
made by or on behalf of the Company reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to uncertainties and inherent risks that could cause
actual results to differ materially from those contained in any forward-looking
statement.

   The Company has identified certain factors that could cause actual plans or
results to differ substantially from those included in any forward-looking
statements. These risk factors include, but are not limited to, the following:
(i) uncertainties and changes in government policy and law (both statute and
case law) with respect to the Company, its brokers or customers (for example,
the Company is subjected to taxation in an additional jurisdiction, there is a
change in the way insurance contracts are interpreted by a court of law, etc.);
(ii) uncertainties and changes in regulatory policy and law (for example, the
Company is subjected to insurance regulation in an additional jurisdiction);
(iii) the occurrence of man-made or natural catastrophic events with a
frequency or severity exceeding the estimates of the Company; (iv) the
uncertainties of the reserving process; (v) loss of the services of any of the
Company's executive officers; (vi) the competitive environment in which the
Company operates and related pricing weaknesses in some lines of business;
(vii) changing rates of inflation and other economic conditions; (viii) losses
due to foreign currency exchange rate fluctuations; (ix) ability to collect
reinsurance recoverables; (x) changes in the availability, cost or quality of
reinsurance; (xi) developments in global financial markets that could affect
the Company's investment portfolio; (xii) risks associated with the
introduction of new products and services; (xiii) increased competition on the
basis of pricing, capacity, coverage terms or other factors; (xiv) changes in
the distribution or placement of risks due to increased consolidation of
insurance and reinsurance brokers; (xv) the impact of Year 2000 related issues
(for example, the impact on the Company's technology systems and underwriting
exposures); (xvi) the effects of mergers, acquisitions and divestitures; (xvii)
ineffectiveness or obsolescence of the Company's business strategy due to
changes in present or future market conditions; and (xviii) the legal
environment.

   The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future
events or otherwise. Readers are cautioned not to place undue reliance on any
forward-looking statements, which speak only as at their dates.

Overview of the Company

   The Company is the holding company for five wholly owned operating entities:
Terra Nova Insurance Company Limited ("Terra Nova") in the U.K., Terra Nova
(Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), Compagnie de
Reassurance D'Ile de France ("Corifrance") in Paris, Terra Nova Capital Limited
("Terra Nova Capital"), the Company's corporate capital provider at Lloyd's,
and Octavian Syndicate Management Limited ("Octavian"). Octavian manages the
Lloyd's syndicates in which the Company has a participation. Through these
subsidiaries, the Company writes a specialty property, casualty, marine and
aviation insurance and reinsurance business worldwide.

   Terra Nova and the Lloyd's syndicates managed by Octavian are based in the
London Market. The London Market is comprised of Lloyd's and companies with
underwriting offices close to Lloyd's. 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.

   Terra Nova (Bermuda) operates in the Bermuda Market which consists of both
captive and independent companies. In recent years, the Bermuda Market has
become one of the world's largest insurance and reinsurance markets for
international business.

                                       3
<PAGE>

   The Company entered into an Agreement and Plan of Merger and Scheme of
Arrangement, dated as of August 15, 1999, and amended on September 10, 1999,
and January 28, 2000, with Markel Corporation ("Markel"). The Agreement
provides for the merger of a wholly-owned subsidiary of Markel Holdings into
Markel and a scheme of arrangement between the Company and its shareholders.
After completion of the merger and the scheme of arrangement, each of the
Company and Markel will be a wholly-owned subsidiary of Markel Holdings, which
will change its name to "Markel Corporation." At the effective time of the
merger and scheme of arrangement each outstanding Class A ordinary share, other
than 2,069 shares held by Markel or its transferee, and each outstanding Class
B ordinary share of the Company will be cancelled and the holders thereof,
other than Markel, the Company or its subsidiaries, will be entitled to receive
$13.00 in cash, 0.07027 of a Markel Holdings common share and 0.07027 of a
Markel Holdings contingent value right per share. On March 16, 2000, the
Company's and Markel's shareholders approved the merger and scheme of
arrangement at special shareholder meetings called for the purpose. Subject to
approval by the Bermuda Supreme Court and completion or waiver of all closing
conditions, the merger and scheme of arrangement are expected to be completed
on March 24, 2000.

   The Company is organized as follows:

                  [Company Organizational Chart appears here]

   Gross written premiums and shareholders' equity of the operating
subsidiaries for 1999 were as follows:

<TABLE>
<CAPTION>
                                  Gross Written Shareholders'     AM Best  S&P
      (dollars in millions)         Premiums       Equity         Rating  Rating
      ---------------------       ------------- -------------     ------- ------
<S>                               <C>           <C>               <C>     <C>
The Company......................    $864.9        $444.0
Terra Nova.......................     246.2         203.0           A      A
Terra Nova (Bermuda).............      46.0         177.0           A      A
Terra Nova Capital...............     552.7         (67.3)(1)(2)    A(3)   A+(4)
Corifrance.......................      20.0          37.6           A-     A-
</TABLE>
--------
(1)  Backed by $251.5 million of letters of credit from a subsidiary of Terra
     Nova (Bermuda).
(2)  On February 12, 2000, $75.0 million of capital was invested in Terra Nova
     Capital.
(3)  Benefits from the Lloyd's global rating of "A".
(4)  Benefits from the Lloyd's global rating of "A+".

                                       4
<PAGE>

Business Segments

   The Company's principal lines 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. In 1997, 1998
and 1999, the Company received premiums related to reinsurance to close of
orphan Lloyd's syndicates.

   The Company's mix of business by operating entity and by class of business
is set out in the table below.

<TABLE>
<CAPTION>
                                              Year ended December 31,
                                       ----------------------------------------
                                           1999          1998          1997
                                       ------------  ------------  ------------
                                              % of          % of          % of
        Gross written premiums         Amount total  Amount total  Amount total
        ----------------------         ------ -----  ------ -----  ------ -----
<S>                                    <C>    <C>    <C>    <C>    <C>    <C>
Terra Nova............................ $246.2  28.5% $302.2  39.8% $288.7  52.5%
Terra Nova (Bermuda)..................   46.0   5.3    80.5  10.6    54.9  10.0
Terra Nova Capital....................  552.7  63.9   358.9  47.3   204.2  37.1
Corifrance............................   20.0   2.3    17.8   2.3     2.4   0.4
                                       ------ -----  ------ -----  ------ -----
  Total...............................  864.9 100.0   759.4 100.0   550.2 100.0
                                       ------ -----  ------ -----  ------ -----
Property..............................  405.1  46.8   329.1  43.3   226.7  41.2
Casualty..............................  202.5  23.4   158.1  20.8   115.1  20.9
Marine & aviation.....................  255.0  29.5   204.6  27.0   169.3  30.8
Orphan syndicate business.............    2.3   0.3    67.6   8.9    39.1   7.1
                                       ------ -----  ------ -----  ------ -----
  Total...............................  864.9 100.0   759.4 100.0   550.2 100.0
                                       ------ -----  ------ -----  ------ -----
Direct business.......................  601.4  69.5   407.8  53.7   269.6  49.0
Reinsurance assumed...................  263.5  30.5   351.6  46.3   280.6  51.0
                                       ------ -----  ------ -----  ------ -----
  Total for the Company............... $864.9 100.0% $759.4 100.0% $550.2 100.0%
                                       ------ -----  ------ -----  ------ -----
</TABLE>

 Terra Nova

   Since it began in 1970 as a reinsurance company, Terra Nova has expanded
into other fields of insurance. Although the largest segment of the business
continues to be reinsurance, growth in recent years has been in specialty
areas of primary insurance.

   Terra Nova is authorized in the United Kingdom to transact all classes of
insurance business and underwrites a significant volume of property, marine
and casualty treaty reinsurance. Terra Nova is approved to underwrite excess
and surplus lines insurance in almost every state of the United States and has
also gained accreditation in various states under statutes providing for
accreditation of non-U.S. reinsurers. As at March 20, 2000, Terra Nova was
accredited as a reinsurer in forty four jurisdictions of the United States and
had an application for approval pending in a further three. Terra Nova is also
licensed to transact non-marine reinsurance in Canada through its branch
office in Toronto. In December 1999, Terra Nova announced its decision to
close its branch office in Brussels.

   Marine insurance is transacted both on a direct and a reinsurance basis
through the International Underwriting Association of London. This segment
encompasses cargo, specie, protection and indemnity ("P&I") and liability.
Terra Nova's total marine writings were lower in 1999 than in 1998 due in
large part to its exit from marine hull and energy business in December 1998.

   In 1999, Terra Nova wrote $130.2 million of property business (representing
52.9% of total business), $58.3 million of casualty business (23.7%) and $57.7
million of marine business (23.4%).

                                       5
<PAGE>

   Terra Nova (Bermuda)

   Terra Nova (Bermuda) is a specialty property and casualty insurance and
reinsurance company operating in the Bermuda Market. The principal lines of
business are various classes of property and casualty coverage written on a
reinsurance basis. Writings originate worldwide.

   In 1999, Terra Nova (Bermuda) wrote $0.8 million of orphan syndicate
business compared to $36.0 million in 1998.

 Terra Nova Capital

   Through Terra Nova Capital, the Company participates on the Lloyd's
syndicates managed by Octavian. The syndicates' writings include mainly U.K.
property and liability, U.K. and overseas auto, marine and aviation lines.
Terra Nova Capital's average participation on the Octavian syndicates increased
to approximately 77% in 1999, from 60% in 1998 and 44% in 1997. This was the
main reason for the Company's overall increase in premium writings in 1999 over
prior years.

   For the 2000 underwriting year, Octavian has $543.2 million ((Pounds)339.5
million) of aggregate underwriting capacity, net of commission, of which $483.7
million ((Pounds)302.3 million), or approximately 90%, is provided by the
Company through Terra Nova Capital. Syndicates 554 and 959 both ceased writing
new business during 1999. Syndicate 959 has been merged into Syndicate 1009 for
the 2000 underwriting year. Syndicate 554 has ceased writing business
altogether.

   The Octavian syndicates for the 1999 underwriting year were as follows:

<TABLE>
<CAPTION>
                                        The Company's
 Syndicate      Active          1999      share of
  number      underwriter     Capacity  1999 capacity Products
 --------- ----------------   --------- ------------- --------
                              (dollars
                                 in
                              millions)       %

 <C>       <S>                <C>       <C>           <C>
           Jonathan L.
   329     Jones                $64.0        77.8%    Marine hull, war/political risks, cargo & specie, P&I, energy

           Malcolm H.
   554     Waterlow              39.2        97.4     U.K. auto

   702     Reg E. Brown         128.0        55.9     Professional indemnity, crime, legal expenses, property, personal
                                                      accident, employers' liability/public liability, bloodstock

   959     Ray J. Busbridge      72.4        88.3     Airlines, commercial/charter products, satellite, other aviation,
                                                      personal accident

  1009     David E. Hope         96.0        65.6     Energy, liability, hull, war, specie, cargo, excess of loss, onshore
                                                      property

  1227     J. Nick C.            52.8       100.0     Reinsurance of orphan syndicates, property direct & facultative,
           Wooldridge                                 financial institutions business, contingency, U.S. property/casualty
                                                      packages

  1228     Peter M.             123.8        84.7     Private auto, commercial auto, U.K. and overseas contracts auto,
           Routledge                                  household & commercial property

  1239     Malcolm E.            54.4        84.6     Property, financial institutions, casualty, personal accident, contingency
           Warrington
</TABLE>

 Corifrance

   Corifrance is a French reinsurance company based in Paris. Corifrance
transacts specialty treaty and facultative reinsurance business
internationally, mainly outside the U.S., on a direct and brokered basis.

                                       6
<PAGE>

Marketing

   The Company's writings originate worldwide and are accepted through
insurance brokers, principally Lloyd's brokers. By using broker distribution,
the Company maintains low fixed overhead costs. Brokers charge commissions
varying with the type and in proportion to the volume of business written. This
allows the Company flexibility to vary its volume and mix of business according
to perceived opportunities. The following table shows the percentage of gross
written premiums by the brokers placing more than five percent of the Company's
business for the year ended December 31, 1999:

   Percentage of Gross Written Premiums (/1/) by Broker (/2/) for year ended
                               December 31, 1999

<TABLE>
<CAPTION>
       Broker                                                         Percentage
       ------                                                         ----------

       <S>                                                            <C>
       J & H Marsh & McLennan, Incorporated..........................    15.1%
       Aon Corporation...............................................    10.5
       Willis Corroon................................................     7.3
</TABLE>
      --------
      (1) Based on premiums reported by each broker for the 1999
          underwriting year.
      (2) Affiliate companies are combined within each broking group.

Underwriting

   Underwriting of new and renewal business is conducted generally on a risk by
risk basis. Consideration is 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 exposure to 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 management's approval.

   The underwriting process includes an assessment of (i) the geographic
profile of the business underwritten, (ii) historical loss information for the
cedent or insured, and (iii) historical loss information for the segment of the
industry involved. Judgment about the quality and integrity of the cedent,
insured and/or agent is fundamental to the underwriting. Close attention is
paid to financial ratings of cedents. Complex risks are usually written only
after considerable research, often needing significant actuarial analysis, a
full underwriting survey by a qualified surveyor and/or a visit to the client.

   For property catastrophe reinsurance business, the underwriting guidelines
limit the aggregate exposure to any one cedent and in defined geographic zones.
In addition, the Company uses various commercially available software programs
and its own proprietary models to assess pricing adequacy and manage ongoing
loss exposure.

   The underwriting policy for casualty business emphasizes well-defined
exposures, for example, by profession and narrow geographic region. These allow
detailed analysis leading to informed pricing decisions. Diversification of
exposures is achieved by underwriting individual contracts in varying
geographic regions. Also, most 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).

   Marine hull underwriting involves detailed analysis of the loss record and
other rating features of individual vessels as well as the fleets of which they
may form a part. 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.

                                       7
<PAGE>

Loss and Loss Adjustment Expense Reserves

 General

   The loss and loss adjustment expense ("LAE") liabilities consist of case
reserves and incurred but not reported ("IBNR") reserves. Case reserves are
estimates of future loss payments for 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 paid and is not discounted or otherwise adjusted
for the time value of money. IBNR reserves are established actuarially. They
reflect an estimated ultimate loss amount for claims not yet notified and an
estimate of possible changes in the value of those claims which have already
been reported. The method of setting IBNR reserves depends on 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.

   Management believes the Company's reserves for losses and LAE are adequate.
However, 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. This could have a material
adverse effect on the Company's financial condition.

   The following table shows the development of net reserves for losses and LAE
for the calendar years 1989 to 1999 for all lines of business, except the
Company's aviation business in run-off. The favourable development is largely
attributable to redundancies experienced on the Company's casualty account on
the 1986 to 1993 accident years. These redundancies have been partially offset
by deteriorations due to LMX spiral losses in the marine account on the 1989
and 1993 accident years and asbestos related and environmental pollution losses
in both the marine and casualty accounts on the 1985 and prior accident years.

   The first line of the table presents the net liabilities, including IBNR, as
recorded in the Company's balance sheet for the indicated year and all unpaid
losses for prior years. The upper portion of the table shows the liability re-
estimated at the end of each of the succeeding years. The conditions that have
caused 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 later years. For example, an
adjustment to 1989 loss reserves in 1991 will show in the re-estimation of
reserves for the years 1989 through 1990. A redundancy (or deficiency) arises
when the re-estimation of reserves at the end of the year is less (or more)
than the estimate at the preceding year-end. The redundancy (or deficiency) is
recorded in the income statement of that year. The cumulative redundancy (or
deficiency) is the difference between the re-estimation of reserves as at the
end of 1999 and the original estimate as shown on the top line of the table.

                                       8
<PAGE>

   The lower portion of the table shows the cumulative amounts paid at the end
of each successive year for such claims.

               Analysis of Net Loss and LAE Reserve Development
                             (dollars in millions)

<TABLE>
<CAPTION>
                                                     Year ended December 31,
                          ----------------------------------------------------------------------------------------
                           1989    1990    1991    1992    1993    1994    1995    1996    1997    1998     1999
                          ------  ------  ------  ------  ------  ------  ------  ------  ------  ------  --------
<S>                       <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
Reserves for unpaid
 losses and LAE at
 December 31............  $637.1  $693.9  $724.9  $784.5  $775.6  $847.3  $814.2  $824.0  $911.0  $982.9  $1,063.5
Reserve re-estimated (1)
 as of:
 One year later.........   655.0   719.3   761.0   806.9   802.5   850.1   811.6   813.6   886.0   938.4
 Two years later........   671.1   736.5   773.7   821.5   810.5   850.1   793.0   793.0   800.7
 Three years later......   691.2   743.8   780.5   829.0   810.7   832.9   777.8   716.7
 Four years later.......   681.2   738.1   792.4   829.8   800.7   812.8   703.2
 Five years later.......   663.6   755.5   793.5   816.5   784.7   739.7
 Six years later........   674.1   756.5   776.6   800.5   719.3
 Seven years later......   674.0   741.2   760.2   738.2
 Eight years later......   667.2   724.7   699.3
 Nine years later.......   655.3   669.3
 Ten years later........   613.6
Cumulative redundancy...    23.5    24.6    25.6    46.3    56.3   107.6   111.0   107.3   110.3    44.5
As a percentage of
 unpaid losses and LAE..    3.69%   3.55%   3.53%   5.90%   7.26%  12.70%  13.63%  13.02%  12.10%   4.53%
Paid (cumulative) as of:
 One year later.........  $ 94.2  $115.3  $119.3  $143.8  $151.8  $168.8  $123.4  $145.7  $187.6   245.3
 Two years later........   174.6   201.3   228.2   268.3   259.0   253.6   227.6   241.6   303.7
 Three years later......   190.1   274.3   316.1   350.8   311.8   327.8   293.0   301.7
 Four years later.......   242.2   341.0   379.9   383.8   368.8   380.7   336.8
 Five years later.......   293.0   395.8   402.5   426.8   405.8   416.6
 Six years later........   330.2   407.8   438.3   457.7   433.7
 Seven years later......   336.6   435.5   464.0   483.1
 Eight years later......   353.5   456.8   487.9
 Nine years later.......   370.8   478.2
 Ten years later........   388.5
</TABLE>

   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
                             (dollars in millions)

<TABLE>
<CAPTION>
                                             Year ended December 31,
                          ----------------------------------------------------------------------
                            1993       1994       1995      1996      1997      1998      1999
                          --------   --------   --------  --------  --------  --------  --------
<S>                       <C>        <C>        <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  $1,209.0  $1,410.0
Reinsurance recoveries
 on unpaid losses and
 LAE....................     463.2      376.5      354.5     254.1     246.7     226.1     346.5
Gross reserves re-
 estimated (1) as of:
 One year later.........   1,332.8    1,310.2    1,174.8   1,067.0   1,142.5   1,207.1
 Two years later........   1,428.9    1,319.9    1,168.4   1,058.6   1,071.3
 Three years later......   1,428.0    1,311.2    1,150.6     989.1
 Four years later.......   1,431.3    1,291.4    1.081.4
 Five years later.......   1,428.4    1.223.9
 Six years later........   1.368.4
Reinsurance recoveries
 on unpaid losses and
 LAE re-estimated (2) as
 of:
 One year later.........     530.3      460.1      363.2     253.4     260.9     268.7
 Two years later........     618.4      469.9      370.1     264.1     270.6
 Three years later......     617.3      478.3      372.8     272.4
 Four years later.......     630.6      478.7      378.2
 Five years later.......     643.6      484.2
 Six years later........     649.1
Gross cumulative
 (deficiency)
 redundancy.............    (129.6)      (0.1)      87.3      89.1      86.4       1.9
 as a percentage of
  unpaid losses and
  LAE...................    (10.46%)    (0.01%)     7.47%     8.26%     7.46%     0.16%
Paid (cumulative) as of:
 One year later.........  $  303.9   $  290.6   $  229.7  $  179.6  $  246.3  $  251.8
 Two years later........     517.9      479.8      364.4     328.0     403.0
 Three years later......     679.3      576.4      477.2     418.7
 Four years later.......     752.5      672.3      550.2
 Five years later.......     829.2      730.9
 Six years later........     884.3
</TABLE>
-------
(1) "Reserves re-estimated" includes losses paid in current and prior years.
(2) "Reinsurance recoveries on unpaid losses" includes reinsurance recoveries
    received in current and prior years.

                                       9
<PAGE>

   The following table represents a reconciliation of reserve balances for the
years indicated:

<TABLE>
<CAPTION>
                                              1999        1998        1997
                                           ----------  ----------  ----------
                                                (dollars in thousands)
<S>                                        <C>         <C>         <C>
Reserves for unpaid losses and loss
 adjustment expenses, at beginning of
 year....................................  $1,209,003  $1,157,724  $1,078,108
  Less: reinsurance recoverables on
   unpaid losses.........................    (226,098)   (246,728)   (254,129)
                                           ----------  ----------  ----------
Net balance at beginning of year.........     982,905     910,996     823,979
                                           ----------  ----------  ----------
Net incurred losses and loss adjustment
 expenses related to:
  Current year...........................     535,753     384,531     292,876
  Prior year.............................     (44,510)    (24,964)    (10,396)
                                           ----------  ----------  ----------
Total net incurred losses and loss
 adjustment expenses.....................     491,243     359,567     282,480
                                           ----------  ----------  ----------
Net paid losses and loss adjustment
 expenses related to:
  Current year...........................    (179,844)   (138,918)    (69,685)
  Prior year.............................    (245,323)   (187,559)   (145,702)
                                           ----------  ----------  ----------
Total net paid losses and loss adjustment
 expenses................................    (425,167)   (326,477)   (215,387)
Foreign exchange adjustment..............     (18,753)     (5,169)    (10,967)
                                           ----------  ----------  ----------
Net balance at end of year...............   1,030,228     938,917     880,105
  Net reserves from reinsurance to
   close.................................      33,257      43,988         -- (1)
  Net reserves from Corifrance
   acquisition...........................         --          --       30,891
                                           ----------  ----------  ----------
Net reserves at end of year..............   1,063,485     982,905     910,996
Plus Reinsurance recoverables:
  The Company............................     346,483     226,098     236,847
  Reinsurance recoverables related to net
   reserves from Corifrance acquisition..         --          --        9,881
                                           ----------  ----------  ----------
Reinsurance recoverable by the Company...     346,483     226,098     246,728
                                           ----------  ----------  ----------
Reserves for unpaid losses and loss
 adjustment expenses, at end of year.....  $1,409,968  $1,209,003  $1,157,724
                                           ==========  ==========  ==========
</TABLE>
--------
(1)  The net reserves of $17,910,000 from the reinsurance to close of the 1995
     year of account have been included in net incurred losses and loss
     adjustment expenses for the year ended December 31, 1997. The premiums of
     $17,910,000 in respect of these losses were included in gross written and
     net earned premiums in 1997. The reinsurance to close reserves represent a
     retrospectively rated reinsurance contract in respect of an outstanding
     claims portfolio from the closing year of account of a Lloyd's syndicate.
     (The reinsurance to close occurs at the end of the third year of a Lloyd's
     underwriting year.)

   In the 1997 financial year, the reinsurance to close premium for the 1995
year of account of $17,910,000 and losses associated with this premium of
$17,910,000 were included in the revenue statement in accordance with the then
current recommended accounting practice in the London Market. In the 1999 and
1998 financial years, following further deliberation by management on the
appropriate U.S. GAAP accounting treatment, the reinsurance to close premium
for the 1997 and 1996 years of account of $33,257,000 and $43,988,000 was
included as an asset in the balance sheet. The liabilities of $33,257,000 and
$43,988,000 associated with this asset were included in unpaid losses in the
balance sheet. There was no impact to net income within 1999 and 1998 as a
consequence of this change in the Company's practice.

   Incurred claims relating to prior years are offset by decreases to prior
year net written and net earned premiums less related acquisition costs of
$27,300,000, $9,757,000 and $4,800,000 for 1999, 1998 and 1997, respectively.
When these revisions to prior written and earned premiums are considered, the
Company experienced net prior year improvements of $17,210,000, $15,207,000 and
$5,596,000 in 1999, 1998 and 1997, respectively. The majority of the movement
in unpaid losses and LAE attributable to prior years was in relation

                                       10
<PAGE>

to Terra Nova's casualty business. The casualty movements in the 1999 financial
year arose from the favorable settlements during these financial years in
respect of various casualty contracts. The favorable casualty movements in the
1999 financial year were partially offset by deficiencies on the Company's
property, motor and aviation classes as a result of claims experience being
worse than expected on certain contracts. The majority of these contracts were
in respect of the 1998 accident year.

   The Company believes that its reserves at December 31, 1999, are adequate.
Establishment of reserves, however, is a 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 right to extrapolate future
deficiencies or redundancies based on the results set out above.

 Asbestos-Related and Environmental Pollution Reserves

   Before 1974, the Company had little exposure to casualty business. Since the
mid-1980s, the Company's casualty business has been written increasingly on a
claims-made basis with the majority written on such a basis since 1986. From
the Company's inception through 1999, payments made by the Company for
asbestos-related and environmental pollution claims totaled $35.0 million.

   Included in the liability for loss reserves at December 31, 1999, are $90.3
million (net of recoverables from reinsurers) of loss reserves concerning
asbestos-related and environmental pollution claims. Included in this liability
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
determining that coverage exists and defining an occurrence, may cause the loss
development to display more variation than the rest of the Company's book of
business. Traditional reserving techniques cannot be used to estimate asbestos-
related and environmental pollution claims. 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 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 Reserve Outstanding (Net of
                       reinsurance) (dollars in millions)
<TABLE>
<CAPTION>
                                                                 Year ended
                                                                December 31,
                                                              -----------------
                                                              1999  1998  1997
                                                              ----- ----- -----
<S>                                                           <C>   <C>   <C>
Incurred losses.............................................. $ 1.9 $13.1 $ 1.6
Incurred LAE.................................................   1.7   4.6   1.2
                                                              ----- ----- -----
Incurred losses and LAE...................................... $ 3.6 $17.7 $ 2.8
                                                              ----- ----- -----
Net paid losses and LAE...................................... $ 4.4 $ 1.1 $ 2.5
                                                              ----- ----- -----
Losses and LAE case reserves................................. $29.6 $29.0 $28.3
Losses and LAE IBNR reserves.................................  44.9  46.3  30.5
                                                              ----- ----- -----
  Total reserves............................................. $74.5 $75.3 $58.8
                                                              ===== ===== =====
</TABLE>

                                       11
<PAGE>

Environmental Pollution Losses and LAE Incurred and Reserve Outstanding (Net of
                       reinsurance)(dollars in millions)
<TABLE>
<CAPTION>
                                                        Year ended December
                                                                31,
                                                        ----------------------
                                                         1999    1998    1997
                                                        ------  ------  ------
<S>                                                     <C>     <C>     <C>
Incurred losses........................................ $ (3.1) $ (6.7) $ (2.9)
Incurred LAE...........................................   (0.7)   (1.8)    0.9
                                                        ------  ------  ------
Incurred losses and LAE................................ $ (3.8) $ (8.5) $ (2.0)
                                                        ------  ------  ------
Net paid losses and LAE................................ $  1.0  $  1.3  $  1.5
                                                        ------  ------  ------
Losses and LAE case reserves........................... $  8.4  $  9.5  $  9.5
Losses and LAE IBNR reserves...........................    7.4    11.1    20.8
                                                        ------  ------  ------
  Total reserves....................................... $ 15.8  $ 20.6  $ 30.3
                                                        ======  ======  ======

   Reinsurance recoverables netted against the asbestos-related and
environmental pollution loss reserves for each of the years 1999, 1998 and
1997:

<CAPTION>
                                                        Year ended December
                                                                31,
                                                        ----------------------
                                                         1999    1998    1997
                                                        ------  ------  ------
                                                            (dollars in
                                                             millions)
<S>                                                     <C>     <C>     <C>
Gross reserves......................................... $128.2  $129.2  $111.8
Reinsurance recoverables...............................   37.9    33.3    22.7
                                                        ------  ------  ------
Net reserves........................................... $ 90.3  $ 95.9  $ 89.1
                                                        ======  ======  ======
</TABLE>


   Litigation expenses included in the asbestos-related and environmental
pollution loss reserves for each of the years 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                 Year ended
                                                                December 31,
                                                              -----------------
                                                              1999  1998  1997
                                                              ----- ----- -----
                                                                 (dollars in
                                                                  millions)

     <S>                                                      <C>   <C>   <C>
     Total reserves.......................................... $90.3 $95.9 $89.1
     Litigation expenses included............................  24.4  25.8  24.1
</TABLE>

   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. However, there is no
assurance that such losses will not materially affect the Company's results of
operations for any period.

Risk Management and Reinsurance Protection

   Following 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 the general practice of insurers to
regard the reinsured portion of the risks as the liability of the reinsuring
company.

   The Company buys reinsurance primarily to manage exposures in its insurance
and reinsurance business. Reinsurance serves to reduce 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. It also allows for large or "shock" losses to be managed over time.
Each decision to buy reinsurance coverage and the amounts, types and attachment
points of coverage bought is the result of careful evaluation. The Company
looks at the costs and benefits involved relative to the size of the Company's
aggregate exposures and the business outlook for the applicable line, among
other factors.

   Reinsurance placement standards are maintained by the Company's security
committee. Information on historical financial performance, current solvency
and business practices likely to influence future solvency is

                                       12
<PAGE>

assembled from various sources, with special attention given to new and small
companies. The current system is based on recognized rating agency reports.

   The reinsurance element of the Company's total gross exposure is reviewed
regularly for collectability issues, including solvency and disputes. As
needed, the Company sets up a bad debt reserve for reinsurance recoverables in
doubt. At December 31, 1999, this reserve stood at $46.5 million or 10.2% of
total reinsurance recoverables.

   The Company's recoverables from its reinsurers consist of amounts
recoverable for paid and outstanding claims and amounts recoverable related to
IBNR claims. The following table sets out net reinsurance recoverables from
continuing operations from December 31, 1997, to December 31, 1999:

                   Aggregate of Net Reinsurance Recoverables
                             (dollars in millions)

<TABLE>
<CAPTION>
                           At December 31,  At December 31,  At December 31,
                           ---------------- ---------------- ---------------
                            1999   Movement  1998   Movement      1997
                           ------  -------- ------  -------- ---------------

<S>                        <C>     <C>      <C>     <C>      <C>
Paid claims............... $ 79.7   $ 18.2  $ 61.5   $ 12.6      $ 48.9
Notified outstanding
 claims...................  293.8     73.7   220.1     (7.0)      227.1
IBNR......................   81.6     52.4    29.2     (9.8)       39.0
Bad Debt Provision........  (46.5)    (7.7)  (38.8)    (9.9)      (28.9)
                           ------   ------  ------   ------      ------
  Total................... $408.6   $136.6  $272.0   $(14.1)     $286.1
                           ======   ======  ======   ======      ======
</TABLE>

   The following table sets out the Company's net reinsurance recoverables on
its continuing operations (excluding marine LMX) and on its marine LMX
business, which is no longer written.

                    Analysis of Net Reinsurance Recoverables
                             (dollars in millions)

<TABLE>
<CAPTION>
                                                            Year ended December
                                                                    31,
                                                            --------------------
                                                             1999   1998   1997
                                                            ------ ------ ------

     <S>                                                    <C>    <C>    <C>
     Reinsurance recoverable:
       Continuing operations............................... $307.9 $180.8 $133.8
       Marine LMX business.................................  100.7   91.2  152.3
                                                            ------ ------ ------
         Total............................................. $408.6 $272.0 $286.1
                                                            ====== ====== ======
</TABLE>

   At December 31, 1999, syndicates at Lloyd's were the Company's principal
reinsurers, with reinsurance recoverables on paid and outstanding and IBNR
claims from continuing business of approximately $106.5 million.

<TABLE>
<CAPTION>
                                                            AM Best   Premium
      Reinsurer                                             Rating(1) Ceded(2)
      ---------                                             --------  --------
                                                                         %

      <S>                                                   <C>       <C>
      Lloyd's Syndicates...................................    A        7.9%
      Swiss Reinsurance Co./European General Reinsurance
       Co. ................................................    A+       3.1
      CNA Reinsurance Company Ltd..........................    A        3.0
      ERC Frankona Ruckversicherungs AG....................    A+       2.7
      Hannover Ruckversicherungs AG........................    A+       1.5
</TABLE>
     --------
     (1)  A rating from A.M. Best reflects the opinion of A.M. Best about
          an insurer's financial strength, operating performance and
          ability to meet its obligations to policyholders.
     (2)  Premium ceded for the 1999 underwriting year.

                                       13
<PAGE>

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. At the same time, the Company must
maintain sufficient liquidity to enable it to meet its obligations on a timely
basis.

   In May 1999, the Company transferred the management of its equity portfolio
to Wellington Management International, Boston. Blackrock Financial Management
Inc, New York, manages a portfolio of the Company's mortgage and asset backed
fixed interest securities.

   An in-house team at Terra Nova Asset Management Limited, headed by the Chief
Investment Officer, manages investments for Terra Nova and the Octavian
syndicates. Investment management for Terra Nova (Bermuda) is the
responsibility of its Vice President--Administration and Finance.

   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 carried out in
accordance with U.K. regulations which govern the admissibility and valuation
of individual investments within its portfolio for solvency calculation
purposes. Terra Nova (Bermuda)'s investments are made in accordance with
Bermuda regulations which 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 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 for both the
"technical funds" and the "capital funds" for its insurance businesses. 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 income securities and cash. The objectives of the investment strategy for
technical funds are to: (i) maintain diversified fixed income portfolios to
optimize investment income without undue risk; (ii) manage portfolio duration;
and (iii) maintain sufficient liquidity to meet its obligations on a timely
basis.

   The Company's investment strategy for 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 also maintains satisfactory levels of current income.

   The Company does not invest in real estate or high yield fixed income
securities. Nor does the Company engage 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 on 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 the
duration of 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. About 76% of the investment portfolio of the
Company is held in U.S. dollars.

   For more information about the investment portfolio, including breakdowns of
the sector and maturity distributions, see Note 4 to the consolidated financial
statements.

                                       14
<PAGE>

Competition

   The property and casualty insurance and reinsurance industry is very
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 are larger and
have greater financial resources than the Company. Also, other well-capitalized
insurers and reinsurers could start writing or increase their writing of the
classes of business in which the Company participates.

   Competition in the classes of business which the Company writes is based on
many factors. These include the overall financial strength of the insurer or
reinsurer, claims paying ability rating, premiums charged and other terms and
conditions, services provided, reputation and technical ability and experience
of staff. Management of the Company believes that its principal competitive
strengths are its management and flexibility, its expertise in risk assessment
and underwriting skills and its relationships with Lloyd's brokers, other
leading brokers and reinsurance intermediaries.

Ratings

   At March 20, 2000, the Company carried A, A and A+ claims paying ability
ratings 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 20, 2000, the Company's long
term senior debt rating was BBB, Baa2 and BBB+ at S&P, Moody's and Duff &
Phelps, respectively.

   Claims paying ability ratings are based on a review of publicly available
information and communications between rating agency analysts and an insurance
company's management. Such ratings are the opinion of the rating agency giving
the rating and are not directed toward protecting investors.

Aviation Business in Run-Off

   In February 1992, having suffered 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, Terra Nova
withdrew from the aviation primary and reinsurance market.

   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 related to other overheads considered
necessary to complete the run-off of the aviation business was treated as a
one-time charge ($2.1 million in 1992). Since the acquisition of Terra Nova by
the Company in 1994, any charges or credits resulting from changes in estimates
are recorded 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 underwriting
operations support. This separate group of claims personnel has a significant
amount of experience with Terra Nova's aviation business.

                                       15
<PAGE>

   The following table represents a reconciliation of reserve balances for the
years indicated:

                  Reconciliation of Aviation Reserve Balances
                             (dollars in millions)

<TABLE>
<CAPTION>
                                                              Year ended
                                                             December 31,
                                                          --------------------
                                                          1999   1998    1997
                                                          -----  -----  ------
<S>                                                       <C>    <C>    <C>
Reserve for unpaid losses and loss adjustment expenses,
 gross of reinsurance, at beginning of the year.........  $65.8  $75.8  $139.7
Less reinsurance recoverables...........................   39.2   42.8    91.1
                                                          -----  -----  ------
Net reserves at beginning of the year...................   26.6   33.0    48.6
                                                          -----  -----  ------
Incurred related to:
  Prior years...........................................   (1.4)  (1.4)    --
                                                          -----  -----  ------
Total incurred..........................................   (1.4)  (1.4)    --
                                                          -----  -----  ------
Paid related to:
  Prior years...........................................   (2.0)  (5.1)  (14.5)
                                                          -----  -----  ------
Total paid..............................................   (2.0)  (5.1)  (14.5)
Foreign exchange adjustment.............................   (0.2)   0.1    (1.1)
                                                          -----  -----  ------
Net reserves at end of year.............................   23.0   26.6    33.0
Reinsurance recoverables by the Company.................   36.2   39.2    42.8
                                                          -----  -----  ------
Reserves for unpaid losses and loss adjustment expenses,
 gross of reinsurance, at end of the year...............  $59.2  $65.8  $ 75.8
                                                          -----  -----  ------
</TABLE>

Employees

   At December 31, 1999, Terra Nova, Terra Nova Asset Management Limited and
Terra Nova (Bermuda) had 173 employees. At the same date, Corifrance had 30
employees. Octavian had 418 employees and is reimbursed by the Octavian
syndicates for costs relating to most of these employees. Terra Nova
Information Services Ltd., a subsidiary of Octavian, had 77 employees. The
Company believes that its relationship with employees is excellent.

Regulation of the Company

 United Kingdom

   Authorization to Transact Business. Subject to certain exceptions
(particularly in relation to European Union companies), no person may carry on
insurance business in the U.K. unless authorized by the H.M. Treasury
("Treasury") under the Insurance Companies Act 1982. Previously, supervision of
insurance companies was undertaken by the Department of Trade and Industry
("D.T.I."). The D.T.I.'s responsibilities have now been assumed by the
Treasury, Insurance Directorate, and are currently delegated to the Financial
Services Authority ("FSA") pending enactment of the Financial Services and
Markets Bill under which the regulation of all financial services business,
including insurance, will pass to the FSA. 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.


                                       16
<PAGE>

   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 insurance 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 the insurance company and any major
reinsurer; and (iv) the types of reinsurance cover purchased by the insurance
company.

   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% of gross claims).
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, 1999, Terra Nova's estimated minimum
statutory solvency margin was $39.2 million and the excess of its solvency
margin over its minimum solvency margin was $88.5 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, 1999, Terra Nova's solvency margin
was $88.5 million in excess of its estimated minimum solvency margin, and its
distributable profits under U.K. GAAP were $78.5 million.

   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

                                       17
<PAGE>

       (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%; 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) of such shareholder controller).

   In the case of the appointment of a managing director or a chief executive,
the obligation is on the insurance company to notify the Treasury. In each of
the other cases, the obligation is on the controller 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.

   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. This will change in the near future and Lloyd's will be regulated by
the new Finance Services Authority. The exact form of such regulation and the
degree to which Lloyd's will be left to regulate market participants is not yet
settled, though the preferred approach would involve the FSA exercising some
direct supervision and allowing Lloyd's to exercise other supervision under its
direction.

                                       18
<PAGE>

   For the purposes of the Lloyd's Act 1982, the Company is deemed a Lloyd's
"managing agent" by virtue of its being the parent company of the Lloyd's
managing agent, Octavian Syndicate Management Limited. 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 it owns any interest in a Lloyd's broker (except interests
representing not more than 5% in nominal amount of the Lloyd's brokers' 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 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). Similar
rules to those above apply in relation to partnerships and partners therein.

   These provisions prohibit a Lloyd's broker or any of the persons referred to
above from holding a direct interest in the Company. However, it is permitted
for a Lloyd's broker (or any of its 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 currently operates under a self-regulatory
regime and has the power to change the rules which govern the operation of the
Lloyd's market although this may change following enactment of the Financial
Services and Markets Bill. Lloyd's wide discretion in the application and
interpretation of the rules 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 its consent first
having been obtained. The tests are similar to those of the Treasury set out
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

                                       19
<PAGE>

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 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
written premiums (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

                                       20
<PAGE>

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.

   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. John J. Dwyer 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, 1999, the trust fund was valued at $21.0 million in order to
comply with the new trust fund requirement adopted by Louisiana, effective July
31, 1999 (please refer to the discussion regarding the Model Non-admitted
Insurance Act below). Terra Nova also complies with minimum capital and surplus
requirements in the United States. As of December 31, 1999, the highest such
requirement was $15.0 million. Terra Nova also files annually with the
International Insurers Department (the "IID") of the National Association of
Insurance Commissioners ("NAIC") and with regulatory authorities in many of the
U.S. jurisdictions in which Terra Nova is an approved or eligible surplus

                                       21
<PAGE>

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 Non-admitted Insurance Act. At its September 1998 meeting, the NAIC
agreed rules for calculating surplus lines liabilities for purposes of funding
the liabilities-based trust fund provisions for the NAIC Model Non-admitted
Insurance Model Act (the "Model Act") adopted by the NAIC at its December 1996
meeting and later adopted by Louisiana and New York. Under this new
liabilities-based trust fund standard, Terra Nova was required to increase its
surplus lines trust fund by July 31, 1999, in order to maintain its surplus
lines eligibility in Louisiana, to an amount equal to: $18 million plus either
(i) 30% of its gross surplus lines liabilities (case reserves plus IBNR)
attributable to U.S. surplus lines business written on or after January 1,
1998; or (ii) 30% of its direct non-admitted U.S. liabilities (case reserves
plus IBNR), excluding MAT exempt business and direct placements, attributable
to U.S. direct non-admitted business written on or after January 1, 1998,
subject to a cap of $60 million. New York adopted this standard, effective
January 1, 2000. Terra Nova is not aware that other states are considering
adopting this standard at present. Terra Nova 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.

   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. 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, which was valued at $124.3 million as at December
31, 1999. As of December 31, 1999, Terra Nova had received trusteed reinsurer
approval from the departments of insurance of 44 states and had applications
for trusteed reinsurer status pending in 3 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

                                       22
<PAGE>

Act. As of March 20, 2000, there would be no Bermuda withholding tax on
dividends paid by Terra Nova (Bermuda) to the Company.

 United Kingdom

   U.K. Holdings and its U.K. resident subsidiaries are chargeable to U.K.
corporation tax on their world-wide profits, currently at the rate of 30%,
reduced from 31% on April 1, 1999. Provided U.K. 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, U.K. Holdings, the Company and Terra Nova (Bermuda) must be
reported and should be made on an arm's length basis or will be subject to
adjustment, for tax purposes, as if they were 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.

 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

                                       23
<PAGE>

engaged in a U.S. trade or business, application of U.S. federal income tax,
and possibly 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 U.K. Holdings and Terra Nova will be
entitled to the benefits of the U.K. Treaty. Thus, even if U.K. 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 U.K.
Holdings or Terra Nova has, or will have, a permanent establishment in the
United States.

   While there can be no assurance that U.K. 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 U.K. 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 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 U.K. 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 are 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. However, 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

   No matters were submitted to a vote of security holders during the last
quarter of the fiscal year covered by this report.

                                       24
<PAGE>

                                    PART II

ITEM 5--MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED
    SHAREHOLDERS MATTERS

   (a) The Company's Class A common shares, par value $5.80 per share, began
trading on April 17, 1996, on the New York Stock Exchange ("NYSE") under the
symbol of TNA. The following table presents the high and low sales prices of
the Class A common shares in each fiscal quarter of 1999 and 1998, with cash
dividends paid:

<TABLE>
<S>       <C>         <C>        <C>         <C>         <C>         <C>
                       1999                               1998
          ---------------------------------  ----------------------------------
             Market Price        Dividend        Market Price        Dividend
Quarter     High        Low      Per Share     High         Low      Per Share
-------   ---------   --------   ---------   ---------   ---------   ---------
   1      $  26 3/4   $ 21 3/4   $    0.06   $  30 1/2   $23 13/16   $    0.05
   2      $  27 3/4   $ 21 1/2   $    0.06   $      33   $      29   $    0.06
   3      $ 32 7/16   $     23   $    0.06   $  34 1/2   $  25 7/8   $    0.06
   4      $31 13/16   $28 9/16   $    0.06   $29 15/16   $ 23 1/16   $    0.06

      Year end closing price: $30                          $25
</TABLE>

  (b)  The approximate number of holders of common shares, as at December 31,
     1999, was 1,500.

ITEM 6--SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1999

   The following table sets forth selected consolidated financial information
with respect to the Company for the periods indicated. This information should
be read in conjunction with the Consolidated Financial Statements of the
Company and related notes and "Management's Discussion and Analysis of Results
of Operations and Financial Conditions".

<TABLE>
<CAPTION>
                                      Five Year Financial Summary
                              ------------------------------------------------
                                1999      1998(1)   1997      1996      1995
                              --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>
                              (dollars in millions, except per share data)
Results of Operations
Gross written premiums......  $  864.9  $  759.4  $  550.2  $  361.0  $  302.7
Net written premiums........     618.4     646.2     483.5     311.2     247.0
Net earned premiums.........     585.3     546.9     419.1     278.8     251.9
Net investment income.......      93.8      93.3      85.1      78.1      74.5
Net (loss) income before
 extraordinary charge.......     (35.0)     84.0      73.4      63.9      43.3
Comprehensive (loss) income
 before extraordinary
 charge.....................    (122.9)    108.0      93.5      50.4      93.2
Net operating (losses)
 earnings (2)...............     (55.6)     70.9      62.9      57.2      39.3

Balance Sheet
Total assets................  $2,631.7  $2,479.4  $2,220.1  $1,867.3  $1,785.0
Long-term debt..............     175.0     175.0     175.0     100.0     100.0
Convertible redeemable
 preferred shares...........       --        --        --        --       33.4
Shareholders' equity........     444.0     570.9     481.9     398.8     197.0

Ratio Analysis
GAAP combined ratio.........     129.4%     98.8%     98.2%     97.2%    103.8%
Investment yield (3)........       6.1%      6.1%      6.2%      6.3%      6.7%
Total return (4)............       0.6%      9.1%      9.0%      5.7%     13.7%
Debt to total capital.......      28.3%     23.5%     26.6%     20.0%     33.7%

Per Share Data
Book value per share (5)....  $  17.50  $  22.51  $  18.96  $  15.43  $  12.80
Net income before
 extraordinary charge per
 share (6)..................  $  (1.38) $   3.22  $   2.82  $   2.68  $   2.59
Dividends per common share..  $   0.24  $   0.23  $   0.17  $   0.06       --
</TABLE>

                                       25
<PAGE>

--------
(1)  1998 net income, comprehensive income and net operating earnings and
     related per share figures are stated before the extraordinary charge of
     $11.6 million or $0.45 per share associated with the debt refinancing in
     May 1998.
(2)  Net operating (losses) earnings represents net (loss) income before
     extraordinary charges, discontinued operations, minority interests, and
     realized gains on investments after tax. Management believes this measure
     is relevant and useful to the investor as it shows income from core
     operations. It excludes non-recurring items and realized gains on
     investments which reflect management's decision to sell investments from
     time to time. The measure does not replace operating income or net income,
     computed in accordance with United States generally accepted accounting
     principles, as a measure of profitability.
(3)  Investment yield reflects net investment income as a percentage of average
     invested assets.
(4)  Total return includes net investment income, net realized investment gains
     and change in market value during the period as a percentage of average
     invested assets.
(5)  Book value per share is equal to shareholders' equity divided by the
     number of common shares outstanding at the end of the period.
(6)  Net (loss) income per share is 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".

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 to the
"Company" are to Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") and
all of its direct and indirect subsidiaries, including Terra Nova Insurance
(U.K.) Holdings plc ("U.K. 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").

Business Operations

   The Company writes specialty property, casualty, marine and aviation
insurance and reinsurance business through its subsidiaries on a worldwide
basis.

   The Company has changed its basis of segmentation from that used last year.
The four reportable segments are Terra Nova, Terra Nova (Bermuda), Terra Nova
Capital and Corifrance. The segments are strategic business units that operate
in different markets. Terra Nova and the Lloyd's syndicates in which Terra Nova
Capital participates are based in the London Market. The London Market is
comprised of Lloyd's and companies with underwriting offices close to Lloyd's.
Terra Nova (Bermuda) operates in the Bermuda Market which consists of both
captive and independent companies. Corifrance is a French reinsurer
specializing in property reinsurance in the European Market.


                                       26
<PAGE>

   The Company's premiums by segment for the years ended December 31, 1999,
1998 and 1997, and the combined ratio are set out in the following table:

<TABLE>
<CAPTION>
                                        Year ended December 31,
                           --------------------------------------------------
                                 1999             1998             1997
                           ---------------- ---------------- ----------------
                            Amount  Percent  Amount  Percent  Amount  Percent
                           -------- ------- -------- ------- -------- -------
                                         (dollars in thousands)
<S>                        <C>      <C>     <C>      <C>     <C>      <C>
Gross Written Premiums
Terra Nova................ $246,219   28.5% $302,240   39.8% $288,684   52.5%
 Terra Nova (Bermuda).....   45,978    5.3    80,480   10.6    54,834   10.0
 Terra Nova Capital.......  552,692   63.9   358,860   47.3   204,325   37.1
 Corifrance...............   20,044    2.3    17,808    2.3     2,400    0.4
                           --------  -----  --------  -----  --------  -----
  Total................... $864,933  100.0% $759,388  100.0% $550,243  100.0%
                           ========  =====  ========  =====  ========  =====
Net Written Premiums
Terra Nova................ $179,563   29.0% $282,046   43.6% $264,308   54.6%
 Terra Nova (Bermuda).....   34,584    5.6    79,842   12.4    48,657   10.1
 Terra Nova Capital.......  388,876   62.9   270,740   41.9   168,180   34.8
 Corifrance...............   15,153    2.5    13,569    2.1     2,400    0.5
                           --------  -----  --------  -----  --------  -----
  Total................... $618,446  100.0% $646,197  100.0% $483,545  100.0%
                           ========  =====  ========  =====  ========  =====
Net Earned Premiums
 Terra Nova............... $227,694   38.9% $252,714   46.2% $256,306   61.2%
 Terra Nova (Bermuda).....   39,494    6.8    78,061   14.3    42,985   10.2
 Terra Nova Capital.......  303,271   51.8   199,506   36.5   107,978   25.8
 Corifrance...............   14,822    2.5    16,627    3.0    11,800    2.8
                           --------  -----  --------  -----  --------  -----
  Total................... $585,281  100.0% $546,908  100.0% $419,069  100.0%
                           ========  =====  ========  =====  ========  =====
Combined Ratio
 Loss ratio (including
  LAE)....................            83.9%            65.8%            67.4%
 Expense ratio............            45.5             33.0             30.8
                                     -----            -----            -----
 Combined Ratio...........           129.4%            98.8%            98.2%
                                     =====            =====            =====
</TABLE>

Results of Operations

   The table above shows that gross written premiums increased to $864.9
million in 1999 from $759.4 million in 1998, consistent with the Company's
strategy of increasing its share of the business written by the Octavian
syndicates. In 1999, the Company's share of capacity increased to 77% from 60%
in 1998. For the 2000 underwriting year, the Company has approximately 90% of
Octavian's capacity.

   The Company's underwriting results in 1999 were affected by three main
factors. First, 1999 was the worst year for international catastrophe losses in
recent history. The Company's share of these catastrophes and large losses for
the year was $59 million, including $42 million of catastrophe losses in the
fourth quarter. Secondly, the Company was active in closing certain businesses,
such as the decisions to exit the London Company Market marine hull and energy
business at the beginning of the year and to exit high street motor business in
the second quarter, and in re-structuring and combining others, such as the
merger of aviation syndicate 959 into marine syndicate 1009. Underwriting
losses in 1999 from businesses the Company is not continuing in 2000, together
with associated closure costs and additional reinsurance costs incurred in
protecting the aviation and satellite business written by Syndicate 959,
totaled $122 million in the year. Finally, the Company experienced a
significant amount of late reported claims relating to certain property loss
events which occurred prior to December 31, 1998.

   As a result, the underwriting loss in 1999 was $172.2 million compared to a
profit of $6.6 million in 1998, reflecting an increase in the combined ratio to
129.4% for the year ended December 31, 1999, from 98.8% for the year ended
December 31, 1998.

                                       27
<PAGE>

 Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

   Gross written premiums increased 13.9% to $864.9 million in 1999, up from
$759.4 million in 1998.

   Terra Nova's gross written premiums totalled $246.2 million in 1999 compared
to $302.2 million in 1998. The decrease in premium writings reflects Terra
Nova's exit from marine hull and energy business in December 1998 and lower
premium rates on most classes of business in which it participates. Marine
writings were down $21.7 million on last year. Property and casualty writings
were down $34.3 million on last year due in part to management's decision to
write a portfolio of business through the Company's corporate syndicate at
Lloyd's.

   Terra Nova (Bermuda)'s gross written premiums were $46.0 million in 1999
compared to $80.5 million in 1998. The prior year figure includes $36.0 million
of orphan syndicate business compared to $0.8 million written in the current
year. Excluding orphan syndicate business, Terra Nova (Bermuda)'s gross written
premiums were in line with last year.

   Terra Nova Capital's gross written premiums increased by 54.0% to $552.7
million from $358.9 million in 1998. The growth is due to an increased
participation in the Octavian syndicates from approximately 60% of capacity in
1998 to approximately 77% in 1999. This increase also reflects higher writings
at syndicates 702 (benefiting from the newly opened Australian office and other
initiatives put in place last year), 1227 (expansion of property writings) and
1228 (more overseas auto business). These increases have been partly offset by
the impact of management's decision to close auto Syndicate 554 and cease
writing business from October 31, 1999. Management also decided to withdraw
from writing general aviation and personal accident business through Syndicate
959 and to concentrate on the airline and satellite accounts. As a result,
Syndicate 959 has been merged into Syndicate 1009 for the 2000 underwriting
year. The segment wrote $1.6 million of orphan syndicate business in the year
compared to $31.6 million last year.

   Corifrance wrote $20.0 million of premiums in 1999 compared to $17.8 million
in 1998. The segment's writings were impacted by lower premium rates in the
European property market.

   As noted above, premiums rates remain low in most of the classes of business
the Company writes. It is the Company's policy not to relax underwriting
standards in order to maintain premium volume. Management is cautious about
predicting any improvement in market conditions. However, there is evidence of
premium rates rising in the retrocessional market. While good news, because the
reinsurance markets historically are the first to move out of recession, and
31% of the Company's overall book is reinsurance, this will exert pressure on
the Company's direct insurance business as margins get squeezed. It is also
likely the heavy catastrophe loss experience in the fourth quarter of 1999 will
add to the pressure for rate increases.

   The Company arranges reinsurance protection in order to reduce its exposure
to any one policy or physical risk or to a catastrophic accumulation of loss in
one event. The Company's net retention of gross premium volume decreased to
71.5% in 1999, down from 85.1% in 1998. The primary reason for this decrease
was the Company's bigger participation on the Octavian syndicates in 1999. The
Octavian syndicates, particularly the marine and aviation syndicates, buy more
reinsurance than the Company's other operating segments. The second reason for
the Company buying more reinsurance was due to the perception that reinsurance
prices were relatively inexpensive in the very competitive conditions existing
in the market, particularly early in the year when most of the protection is
bought. The third reason is that the Company bought additional reinsurance to
protect its exposure to aviation and satellite business written by Syndicate
959.

   Net written premiums were $618.4 million in 1999 compared to $646.2 million
in 1998. The decrease in 1999 is a result of higher reinsurance costs more than
offsetting the increase in gross written premiums. Net earned premiums were
$585.3 million in 1999 compared to $546.9 million in 1998.

   Net investment income increased to $93.8 million in 1999 from $93.3 million
in 1998. The improvement in 1999 was the result of positive cash flows which
increased the size of the Company's investment portfolio, partially offset by
the impact of management's decision to increase the equity component of the
investment

                                       28
<PAGE>

portfolio, consistent with the longer term focus on growing book value of the
Company. Invested assets at fair value declined to $1.4 billion at December 31,
1999, from $1.5 billion at December 31, 1998. The average annualized investment
yield was 6.1% in both 1999 and 1998. The average duration of fixed maturity
investments at December 31, 1999 and 1998, was 4.2 years and 4.8 years,
respectively.

   Realized net capital gains on sales of investments increased $8.9 million to
$26.9 million in 1999 from $18.0 million in 1998. The net gains in 1999
comprise $32.9 million of gains on sales of equity securities and $6.0 million
of losses on sales of fixed maturities. The variability in realized gains is
largely a result of interest rate volatility which influences the market value
of the Company's investments. The Company's investment strategy is to focus on
maximizing long-term total investment returns.

   The net contribution from managing agency income was $0.1 million for 1999
compared to $3.3 million in 1998. The current year movement is due to lower
profit commission from the syndicates managed by Octavian and a change in the
stock option compensation expense estimate for the Octavian Stock Option Plan.
The Plan provides for the grant of options based on profit commissions received
by Octavian for the 1996 to 2000 Lloyd's underwriting years. The compensation
expense is calculated using APB No.25 and is dependent on both the share price
at the grant date for each underwriting year and the projected number of
options to be granted. Any change in these variables gives rise to a change in
the compensation expense. The current year charge consists of an accrual for
part of the estimated cost of options to be granted in respect of the 1997,
1998 and 1999 underwriting years.

   The Company's combined ratio was 129.4% in 1999 against 98.8% in 1998. The
combined ratio measures the relationship of losses and loss adjustment
expenses, policy acquisition costs and other operating expenses to net earned
premiums.

   The Company's loss ratio was 83.9% in 1999 against 65.8% in 1998. The
increase in the loss ratio is largely the result of a series of significant
loss events that occurred during the second half of 1999. In the final week of
the year, two intense windstorms caused severe damage to heavily industrialized
and populated areas of Western Europe. These storms, Lothar and Martin, have
been described as the worst in 400 years and are expected to generate heavy
losses for the insurance industry. Current estimates are in the range of $5
billion to $6 billion. The storms produced the most severe damage in France,
Switzerland and Germany, countries in which the Company has important client
relationships and provides related insurance and reinsurance coverage. At
December 31, 1999, the Company had provided for its estimated share of these
losses, approximating to $30 million. Earlier in December, another severe but
unrelated storm, Anatol, hit Denmark causing substantial property damage.
Management expects the Company's total incurred losses from catastrophes in
1999 including these European Storms, Hurricanes Floyd, Jose and Lenny in the
United States and the earthquakes in Turkey, to be $59 million. As well as
these losses from catastrophic events occurring in 1999, the Company has
experienced adverse development on claims relating to certain 1998 loss events.
A large part of this adverse development is due to deterioration on
proportional treaties and includes late reported losses, notably on Hurricane
Georges and Hurricane Mitch. Finally, the Company experienced significant
losses on its aviation, satellite, personal accident, motor and marine hull and
energy accounts. To address these losses, the Company restructured these
accounts during 1999.

   The Company's expense ratio was 45.5% in 1999 against 33.0% in 1998. The
increase in the expense ratio is primarily due to restructuring charges
associated with the Company's withdrawal from U.K. private passenger auto,
light aircraft and general aviation business during 1999. In addition, the
Company bought significantly more reinsurance in 1999 and therefore net written
premiums as a percentage of gross written premiums were lower in 1999 compared
to 1998, thereby increasing the expense ratio. Finally in 1998, the Company
wrote $67.6 million of premiums related to reinsurance to close of orphan
Lloyd's syndicates compared to $2.3 million in 1999. This business has very low
acquisition costs and therefore reduced the 1998 expense ratio.

                                       29
<PAGE>

   Interest expense in 1999 related to interest on the $100 million 7.0% Senior
Notes issued on May 18, 1998 and interest on the $75 million 7.2% Senior Notes
issued on August 26, 1997. The interest expense in 1998 related to the $100
million and $75 million Senior Notes issues and the $100 million 10.75% Senior
Notes extinguished in the second quarter of that year.

   Other expenses increased in 1999 because of a higher level of corporate
activity primarily arising from the Markel transaction.

 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

   Gross written premiums increased 38.0% to $759.4 million in 1998 from $550.2
million in 1997. The increase in gross written premiums of $209.2 million was
primarily due to:

     (a) Increased writings by Terra Nova Capital to $331.6 million
  (excluding orphan syndicate business and reinsurance to close premiums) in
  1998 from $162.8 million in 1997 due to the Company's increased
  participation in the Octavian syndicates from 44% in 1997 to approximately
  60% in 1998. The major lines of business written by Terra Nova Capital are
  marine, aviation, motor and UK liability;

     (b) $67.6 million of premiums related to reinsurance to close of orphan
  Lloyd's syndicates, compared to $39.1 million in 1997. In 1998, this
  business related to non-marine casualty risks compared to a mixture of non-
  marine casualty and marine risks in 1997; and

     (c) $17.8 million of premiums from Corifrance, which was acquired in
  September 1997. Corifrance writes specialty property business.

   The increases in premium volumes were partly offset by the effect of a fall
in premium rates since 1997 as a result of competition in the markets in which
the Company operates, with the exception of motor business which experienced
rate increases of approximately 15% in 1998.

   Reinsurance ceded increased 69.7% to $113.2 million in 1998 from $66.7
million in 1997. Reinsurance ceded as a percentage of gross written premiums,
increased to 14.9% in 1998 from 12.1% in 1997. The lower retention rate was
primarily due to:

     (a) The Company's increased participation on the Octavian syndicates in
  1998 compared to 1997. The Octavian syndicates, especially the marine and
  aviation syndicates, buy more reinsurance than Terra Nova and Terra Nova
  (Bermuda); and

     (b) The Company's buying more reinsurance, especially at the Octavian
  syndicates, due to the general perception that reinsurance prices were
  relatively inexpensive in the very competitive conditions that currently
  exist in the market place. This applied particularly in the marine and
  aviation lines of business.

   Net written premiums increased 33.7% to $646.2 million in 1998 from $483.5
million in 1997, as a result of the increase in gross written premiums,
partially offset by higher reinsurance costs. Net earned premiums increased
30.5%, to $546.9 million in 1998 from $419.1 million in 1997.

   Net investment income increased 9.6% to $93.3 million in 1998 from $85.1
million in 1997. The increase was due to average invested assets being 10.3%
higher in 1998 than 1997. The average investment yield before realized gains
and losses was 6.1% in 1998 and 6.2% in 1997. The investment yield was similar
to 1997, as the Company had a lower proportion of equities in 1998 and a larger
proportion of single A and BBB bonds in 1998 compared to 1997. The effect of
these factors was offset by the lower interest rates in 1998 compared to 1997.
The average duration of fixed maturity investments at December 31, 1998 and
1997, was 4.8 years and 4.9 years, respectively.

   Realized net capital gains on sales of investments increased $2.7 million to
$18.0 million in 1998 from $15.3 million in 1997. Of the gain in 1998, $8.9
million arose from sales of fixed maturities and $9.1 million from sales of
equity securities.

                                       30
<PAGE>

   The Company's combined ratio was 98.8% in 1998 against 98.2% in 1997.

   Losses and LAE increased 27.3% to $359.6 million in 1998 from $282.5 million
in 1997. As a percentage of net earned premiums, losses and LAE decreased 1.6
points to 65.8% in 1998 from 67.4% in 1997. Analyzing the movement on the loss
ratio by product:

     (a) The loss and LAE ratio for non-marine property business increased to
  66.9% in 1998 from 65.8% in 1997, following the catastrophe activity in the
  third quarter of 1998 and an increase in losses on the Company's motor
  business due to the competitive market conditions that exist in this class.
  The loss associated with Hurricane Georges was approximately $15 million,
  with Hurricane Mitch adding a further $2 million of losses.

     (b) The loss and LAE ratio for non-marine casualty business decreased to
  71.8% in 1998 from 74.9% in 1997. This decrease reflected the prior year
  reserve redundancies on casualty business written by Terra Nova in the
  period 1986--1993 and profits on the orphan syndicate business written in
  1997 and 1998.

     (c) The decrease in the marine loss and LAE ratio to 55.8% in 1998 from
  64.6% in 1997 was partly a result of Terra Nova (Bermuda) recognizing
  reserve redundancies on the business written prior to its acquisition by
  the Company and Terra Nova recognizing reserve redundancies on marine LMX
  business written prior to 1992. Terra Nova (Bermuda), formerly Underwriters
  Capital (Merrett) Ltd. ("UCM"), was organized in Bermuda in 1993 to provide
  reinsurance to certain Lloyd's syndicates. These decreases were partially
  offset by an increase in losses on the Company's aviation business due to
  weaker prices and higher losses in 1998 compared to 1997.

   Acquisition costs, which consist of commission expenses and other
underwriting expenses, increased 39.0% to $160.4 million in 1998 from $115.4
million in 1997. Acquisition costs as a percentage of net earned premiums
increased to 29.3% in 1998 from 27.5% in 1997. The increase in the ratio was
caused by a change in the Company's mix of business resulting from its greater
participation in the Octavian syndicates. Octavian business carries a higher
expense ratio due to a higher level of reinsurance ceded.

   Other operating expenses increased 48.2% to $20.3 million in 1998 from $13.7
million in 1997. As a percentage of net earned premiums, they increased to 3.7%
in 1998 from 3.3% in 1997, reflecting Lloyd's charges incurred by the Octavian
syndicates.

   Net interest expense in 1998 consisted of interest on the $100 million
10.75% Senior Notes issued on June 30, 1995 and redeemed on May 18, 1998,
interest on the $75 million 7.2% Senior Notes issued on August 26, 1997, and
interest on the $100 million 7.0% Senior Notes issued on May 18, 1998. The net
interest expense in 1997 related to interest on the $100 million 10.75% Senior
Notes and interest on the $75 million 7.2% Senior Notes.

   An extraordinary charge of $11.6 million arose during the second quarter of
1998 as a result of U.K. Holdings extinguishing all of its $100 million 10.75%
Senior Notes due 2005. The charge was net of a $5.2 million income tax benefit.

   Net income decreased $1.0 million, to $72.4 million in 1998 from $73.4
million in 1997, after the $11.6 million extraordinary charge recognized in the
second quarter of 1998.

Liquidity and Capital Resources

   The Company seeks to maintain prudent levels of liquidity in the interest of
protecting its policyholders, creditors and shareholders.

   The sources of funds for the Company's insurance subsidiaries consist mostly
of net premiums, investment income and proceeds from sales and redemptions of
investments. The funds are used to pay claims and operating expenses and to buy
both short-term and long-term investments, largely fixed income securities.
Short-term investments held by the Company's insurance subsidiaries provide
liquidity for projected claims,

                                       31
<PAGE>

reinsurance costs and operating expenses. Long-term investments are held to
meet longer-tail claims and to support statutory and other capital
requirements. The holding companies, U.K. Holdings and Bermuda Holdings,
receive cash from their subsidiaries as reimbursement for operating and other
administrative expenses they incur according to the terms of various management
agreements between the companies. U.K. Holdings has to maintain sufficient
liquidity to fund interest payments on its debt.

   For the year ended December 31, 1999, the cash flow provided by operating
activities of the Company was $20.1 million compared to $75.9 million in 1998.
The movement reflects the higher level of loss activity in 1999 compared to
1998 and costs incurred in 1999 in restructuring the Company's businesses. The
cash flow provided by investing activities of the Company was $21.2 million
compared to $122.8 million used in investing activities in 1998. The movement
reflects the investment of higher operating cash flows in 1998 compared to 1999
and the Company maintaining a high cash balance at the end of 1999 in
anticipation of the Markel transaction. The cash flow used in financing
activities of the Company was $6.9 million compared to $22.8 million provided
by financing activities in 1998. The movement primarily reflects the debt
refinancing in 1998.

   The Company's ability to pay dividends on its capital stock and to meet its
obligations depends on dividends or other payments from Terra Nova, Terra Nova
(Bermuda), Terra Nova Capital, Octavian and Corifrance. Dividend and other
payments by Terra Nova, Terra Nova Capital and Octavian are subject to
restrictions under U.K. law. Similarly, dividend and other payments by Terra
Nova (Bermuda) and Corifrance are subject to restrictions under Bermudian law
and French law, respectively.

   On December 23, 1999, Terra Nova (Bermuda) paid a dividend of $180 million
to Bermuda Holdings. The dividend was settled by transferring Terra Nova
(Bermuda)'s full equity portfolio, with the balance made up of cash and fixed
interest securities. Bermuda Holdings also received a dividend of $33 million
from U.K. Holdings in December 1999.

   At December 31, 1999, Terra Nova Capital had net liabilities of $67.3
million. The deficit is the result of underwriting losses incurred during the
year. As a further result of these underwriting losses, Terra Nova Capital was
carrying a deferred tax asset of $31.1 million, representing estimated taxes
recoverable on loss making underwriting years which had not closed at year end
1999. The Company is carrying the balance as tax recoverable on the basis that
management anticipates full relief against future taxable profits of the
Company's U.K. operating entities. In order to facilitate future profitable
underwriting, the Company invested in $75 million of new share capital in Terra
Nova Capital by U.K. Holdings. The transfer of capital was effected on February
12, 2000.

   Total assets were $2.6 billion at December 31, 1999 compared to $2.5 billion
at December 31, 1998.

   Shareholders' equity of the Company was $444.0 million at December 31, 1999,
compared to $570.9 million at year end 1998, reflecting an after-tax decline of
$63.6 million in the market value of the Company's investment portfolio and
$55.6 million of operating losses. Book value per share was $17.50 at December
31, 1999, compared to $22.51 at year end 1998.

   On August 16, 1999, Markel Corporation ("Markel") and the Company announced
that they had signed an agreement providing for Markel's acquisition of the
Company for cash and stock valued at $905 million, or $34.00 per share, based
on the closing price of Markel's stock on August 13, 1999. In addition, Markel
would assume $175 million of the Company's debt.

   On January 26, 2000, Markel and the Company announced that they had agreed
to revised terms for the merger and scheme of arrangement. Under the revised
agreement, the Company's shareholders would be entitled to receive for each
ordinary share, $13.00 in cash, 0.07027 of a common share in a new holding

                                       32
<PAGE>

company and 0.07027 of a contingent value right. The new agreement was reached
after preliminary information indicated that the Company would report a loss
for the fourth quarter and for the full year of 1999 and after taking into
account the decline in the market price of Markel shares since the merger
agreement was signed in August 1999. The transaction, which was approved by the
shareholders of both companies on March 16, 2000, is expected to be completed
on March 24, 2000, subject to approval by the Bermuda Supreme Court and
completion or waiver of all closing conditions.

   Terra Nova Capital's participation in the Lloyd's Capacity Auctions for the
2000 underwriting year resulted in the acquisition of additional capacity in
the syndicates managed by Octavian. This will bring the Company's share of
aggregate capacity on the Octavian syndicates to about 90% for the 2000
underwriting year, up from about 77% for the 1999 underwriting year.

   Certain information included here 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 most
corporate overheads which are paid in British pounds, are chiefly in U.S.
dollars. Therefore, the Company's principal functional currency is the U.S.
dollar. Certain other net translation adjustments are shown as a separate item
of accumulated other comprehensive income.

The Euro

   On January 1, 1999, the Economic and Monetary Union ("EMU") and a new
currency, the "euro", were adopted by eleven of the fifteen member states of
the European Union ("EU"). Other member states, including the United Kingdom,
currently remain outside the EMU, but may join in the future. Today, Corifrance
is the Company's only operation in EMU countries.

   When the eleven participating EMU countries adopted the euro as their
national currency, the European Central Bank (ECB) established a fixed
conversion rate between each participant's existing currency and the euro as
from that date. The euro is now traded on foreign currency exchanges and
fluctuates in value against currencies of non-participating countries. The euro
can be used for non-cash transactions throughout the three year transition
period which ends on December 31, 2001. On January 1, 2002, the ECB will begin
to issue bills and coins denominated in euro for use in cash transactions.

   The Company identified relevant issues and established a strategy to deal
with each phase of the euro's implementation. The Company has the capability to
process and account for current transactions in the euro, and as needs are
identified, will modify its information technology and other systems in
response to changing or expanding exposures to euro transactions.


   The competitive impact of the euro is not expected to be significant because
less than 10% of the Company's business is conducted within EMU member states.
Management believes that future costs of modifying information systems software
will not be material to the Company's results, operations, financial condition
or liquidity.

Year 2000

 General

   The Year 2000 issue arises from the fact that historically many computers
and computer programs used two digits rather than four to represent the year
portion of a date. The faulty interpretation or the misinterpretation of these
two digits could result in system failure or miscalculation causing disruption
to business processes.

   The Company has addressed Year 2000 as both an IT issue and a business
issue.

                                       33
<PAGE>

 Current Status

   At March 20, 2000, the Company had neither identified nor experienced any
Year 2000 related problems from its IT or embedded systems (including facsimile
machines, photocopiers and elevators), or from third parties with whom it does
business. Such third parties include critical suppliers, customers and trading
partners. The Company continues to monitor the performance of its systems and
third parties with specific reference to the Year 2000 issue.

   At March 20, 2000, the Company had received no claims in respect of Year
2000 related losses. The Company takes the position that Year 2000 exposures
are not fortuitous losses and thus are not covered under insurance policies
even without specific exclusions. However, in certain sectors of the Company
where there may be a perceived exposure to Year 2000 claims, the Company has
bought reinsurance to protect itself. For these reasons, the Company believes
that its exposure to Year 2000 claims will not be material. However, as was the
case with the environmental exposures, changing social and legal trends may
create unintended coverage for exposures by reinterpreting insurance contracts
and exclusions. It is impossible to predict what, if any, exposure insurance
companies may ultimately have for Year 2000 claims whether coverage for the
issue is specifically excluded or included.

 Costs

   The total cost of the Year 2000 project is not material to the Company's
financial position and is being funded from operating cash flows. The total
amount spent on the project through December 31, 1999, was $3.0 million.

 Risks

   While there remains a degree of uncertainty about Year 2000 problems that
might be inherited from third party suppliers, customers and trading partners,
and a potential exposure to changing legal interpretation of Year 2000 claims,
the Company believes it has taken all reasonable steps to ensure the
consequences of Year 2000 failure will not have a material impact on its future
results of operations, liquidity or financial condition.

Dividend Policy

   The Company declared and paid dividends according to the following table:

<TABLE>
<CAPTION>
      Dividend Per Share    Date Declared       Date paid       Date of Record
      ------------------  ----------------- ------------------ -----------------
     <S>                  <C>               <C>                <C>
     1999
       $0.06              February 10, 1999   March 26, 1999     March 5, 1999
       $0.06                 May 5, 1999      June 25, 1999      June 4, 1999
       $0.06               August 5, 1999   September 27, 1999 September 3, 1999
       $0.06              November 3, 1999  December 27, 1999  December 3, 1999
</TABLE>

ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market Sensitive Instruments and Risk Management

   The following discussion about the Company's risk management activities
includes forward-looking statements that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.

   This analysis presents the hypothetical loss in earnings, cash flows, or
fair value of the financial instruments held by the Company at December 31,
1999, which are sensitive to changes in interest rates, foreign exchange rates
and equity prices. Rather than use derivative instruments to manage the primary
market exposures associated with the underlying assets, liabilities and
anticipated transactions, the Company closely monitors interest rate movements
using sensitivity analysis. The Company manages foreign currency exposures by
matching assets to liabilities in individual currencies. These risk management
techniques are discussed in more detail below.

                                       34
<PAGE>

   In the normal course of business, the Company also faces risks that are
either non-financial or non-quantifiable. Such risks include political risk and
credit risk and are not included in the following analysis.

Interest Rate Risk Management

   The Company's major market risk exposure is changing interest rates,
primarily in the United States. A change in interest rates would affect the
fair value of the Company's investments and could cause fluctuations in
Accumulated Other Comprehensive Income in the balance sheet. The Company
manages this risk by limiting the portfolio duration.

<TABLE>
<CAPTION>
                                            Basis Point Movement
                                   -------------------------------------------
                                    (dollars in millions, unless stated)
                                    -200    -100
                                    pts     pts     Zero   +100 pts  + 200 pts
                                   ------  ------  ------  --------  ---------
<S>                                <C>     <C>     <C>     <C>       <C>
Movement in fair value of Fixed
 Maturity portfolio...............    7.6%    3.6%    0.0%    (3.4)%    (6.5)%
Movement after tax................ $ 89.0  $ 42.8  $  0.0   $(39.7)   $(76.7)
Adjusted Shareholders' Equity.....  533.0   486.8   444.0    404.3     367.3
Adjusted book value per share..... $21.01  $19.19  $17.50   $15.94    $14.48
Adjusted debt/debt plus equity....   24.7%   26.4%   28.3%    30.2%     32.3%
</TABLE>

   The matrix above shows the sensitivity of the Company's shareholders' equity
at December 31, 1999, to movements in fixed maturity valuations related to
changes in interest rates. The aggregate hypothetical reduction in net assets
that would have resulted from a hypothetical increase in yield of 100 basis
points is $39.7 million. As a consequence, shareholders' equity at December 31,
1999, would have been $404.3 million and book value per share, $15.94. The
ratio of debt to debt plus equity would have increased to 30.2% from 28.3%.

   The Company's long-term debt is all at fixed rates. At December 31, 1999,
the Company's total outstanding indebtedness was $175 million, comprised of $75
million 7.2% Senior Notes due 2007 and $100 million 7.0% Senior Notes due 2008.
The estimated fair value of the debt at December 31, 1999, was $162.8 million.

Foreign Exchange Risk Management

   The Company has foreign exchange risk on assets and liabilities and manages
this risk by matching assets to liabilities in each foreign currency as closely
as possible. The Company does not ordinarily use derivative instruments to
manage its exposure to foreign exchange movements.

   At December 31, 1999, 76% of the Company's investment portfolio was
denominated in U.S. Dollars. At that date, the largest foreign currency
exposure was U.K. Sterling. Hypothetically, if Sterling assets and liabilities
had been mismatched by 10% and the year end Sterling/U.S. Dollar exchange rate
had increased or decreased by 5%, the effect on after tax earnings would have
been approximately $0.9 million.

Equity Price Risk Management

   The Company does not ordinarily hedge its equity portfolio risk by
purchasing derivatives. An external fund manager has responsibility for
monitoring the equity portfolio. This responsibility involves considering the
asset allocation of the portfolio in order to minimize the risk associated with
particular markets or industry sectors, while continuing to follow the
Company's long-term objective of growing its book value.

   At December 31, 1999, the cost of the Company's equity security portfolio
was $98.3 million and the fair value was $109.9 million, compared to $56.9
million and $88.0 million, respectively, at December 31, 1998.

                                       35
<PAGE>

ITEM 8--FINANCIAL STATEMENTS

Index  Page
-----  ----
<TABLE>
<S>                                                                          <C>
  .  Report of Management's Responsibilities................................  37
  .  Report of Independent Accountants......................................  38
</TABLE>

Audited Consolidated Financial Statements:

<TABLE>
<S>                                                                         <C>
  .  Consolidated Balance Sheets as of December 31, 1999 and 1998..........  39
  .  Consolidated Statements of Operations for the years ended December 31,
     1999,
     1998 and 1997.........................................................  40
  .  Consolidated Statements of Comprehensive Income for the years ended
     December 31,
     1999, 1998 and 1997...................................................  41
  .  Consolidated Statements of Shareholders' Equity for the years ended
     December 31, 1999,
     1998 and 1997.........................................................  42
  .  Consolidated Statements of Cash Flows for the years ended December 31,
     1999,
     1998 and 1997.........................................................  43
  .  Notes to Consolidated Financial Statements--including summarized
     consolidated financial information of Terra Nova Insurance (U.K.)
     Holdings plc as of December 31, 1999 and 1998.........................  44
</TABLE>

                                       36
<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 and all
other financial information presented here. 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 PricewaterhouseCoopers,
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.

               J.J. Dwyer                        W.J. Wedlake
                Chairman          Senior Vice President and Chief Financial
                                                   Officer

                                       37
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of
Terra Nova (Bermuda) Holdings Ltd.

   In our opinion, the consolidated financial statements listed on page 36
present fairly, in all material respects, the financial position of Terra Nova
(Bermuda) Holdings Ltd. and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedules listed in the index appearing under
Item 14(a) on page 78 present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers
Chartered Accountants

Hamilton, Bermuda
March 10, 2000, except as
to note 23 which is as of
March 17, 2000

                                       38
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                                At December 31,
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                           1999        1998
                                                        ----------  ----------
<S>                                                     <C>         <C>
                        ASSETS
Investments available for sale, at fair value:
Fixed maturities
  Bonds (amortized cost $1,321,888 and $1,374,272,
   respectively)....................................... $1,306,110  $1,446,621
Common stocks (cost $98,335 and $56,924,
 respectively).........................................    109,900      88,022
                                                        ----------  ----------
    Total investments..................................  1,416,010   1,534,643
Cash and cash equivalents..............................     74,798      40,394
Accrued investment income..............................     27,607      30,015
Insurance balances receivable..........................    121,094      81,634
Reinsurance recoverable on paid losses.................     62,162      45,882
Reinsurance recoverable on unpaid losses...............    346,483     226,099
Accrued premium income.................................    238,230     283,383
Prepaid reinsurance premiums...........................     97,771      37,472
Deferred acquisition costs.............................     99,683     107,607
Income tax recoverable.................................      4,422         --
Deferred income taxes..................................     31,820         --
Other assets...........................................    111,620      92,243
                                                        ----------  ----------
    Total assets....................................... $2,631,700  $2,479,372
                                                        ==========  ==========
                      LIABILITIES
Unpaid losses and loss adjustment expenses............. $1,409,968  $1,209,003
Unearned premiums......................................    468,178     401,002
Insurance balances payable.............................     53,853      23,941
Income tax payable.....................................        --        4,228
Deferred income taxes..................................        --       27,450
Long term debt.........................................    175,000     175,000
Other liabilities......................................     80,691      67,886
                                                        ----------  ----------
    Total liabilities..................................  2,187,690   1,908,510
                                                        ----------  ----------
                 SHAREHOLDERS' EQUITY
Common shares
  "A" ordinary shares, 75,000,000 authorized, $5.80 par
  value
  (24,348,192 issued and outstanding; 1998:
  24,172,717)..........................................    141,219     140,202
  "B" ordinary shares, convertible, 10,000,000
   authorized, $5.80 par value
  (1,796,217 issued and outstanding; 1998: 1,796,217)..     10,418      10,418
Stock held in Trust, at cost...........................    (16,787)    (12,900)
Deferred equity compensation...........................      7,564       4,623
Additional capital.....................................    113,855     111,727
Retained earnings......................................    195,163     236,292
Accumulated other comprehensive (loss) income..........     (7,422)     80,500
                                                        ----------  ----------
    Total shareholders' equity.........................    444,010     570,862
                                                        ----------  ----------
    Total liabilities and shareholders' equity......... $2,631,700  $2,479,372
                                                        ==========  ==========
</TABLE>

        See accompanying notes to the consolidated financial statements

                                       39
<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>
                                                   1999      1998      1997
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Revenues
Net written premiums............................ $618,446  $646,197  $483,545
Increase in unearned premiums...................  (33,165)  (99,289)  (64,476)
                                                 --------  --------  --------
Net earned premiums.............................  585,281   546,908   419,069
Net investment income...........................   93,829    93,262    85,130
Realized net capital gains on sales of
 investments....................................   26,879    17,963    15,333
Foreign exchange gains (losses).................    3,016      (586)   (1,268)
Agency income...................................   14,245    17,057    15,571
                                                 --------  --------  --------
  Total revenues................................  723,250   674,604   533,835
                                                 ========  ========  ========
Expenses
Losses and loss adjustment expenses, net........  491,243   359,567   282,480
Policy acquisition costs........................  240,836   160,380   115,427
Other operating expenses........................   25,397    20,322    13,706
Interest expense................................   12,400    13,697    12,710
Agency expenses.................................   14,138    13,760    13,130
Other expenses..................................   11,838     5,617     5,333
                                                 --------  --------  --------
  Total expenses................................  795,852   573,343   442,786
                                                 --------  --------  --------
(Loss) income before income tax.................  (72,602)  101,261    91,049
Income tax (benefit) expense....................  (37,628)   17,221    17,639
                                                 --------  --------  --------
Net (loss) income before extraordinary charge...  (34,974)   84,040    73,410
Extraordinary charge after income tax...........      --     11,641       --
                                                 --------  --------  --------
Net (loss) income............................... $(34,974) $ 72,399  $ 73,410
                                                 ========  ========  ========
Basic earnings per common share
  Net (loss) income before extraordinary
   charge....................................... $  (1.38) $   3.30  $   2.87
  Extraordinary charge after income tax.........      --      (0.46)      --
                                                 --------  --------  --------
  Net (loss) income............................. $  (1.38) $   2.84  $   2.87
                                                 ========  ========  ========
Diluted earnings per common share
  Net (loss) income before extraordinary
   charge....................................... $  (1.38) $   3.22  $   2.82
  Extraordinary charge after income tax.........      --      (0.45)      --
                                                 --------  --------  --------
  Net (loss) income............................. $  (1.38) $   2.77  $   2.82
                                                 ========  ========  ========
</TABLE>

        See accompanying notes to the consolidated financial statements

                                       40
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

                Consolidated Statements of Comprehensive Income
                            Year Ended December 31,
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                     1999      1998     1997
                                                   ---------  -------  -------
<S>                                                <C>        <C>      <C>
Net (loss) income................................. $ (34,974) $72,399  $73,410
                                                   ---------  -------  -------
Other comprehensive (loss) income:
  Unrealized (depreciation) appreciation of
   investments before tax.........................   (80,781)  45,299   39,543
  Tax benefit (expense)...........................    17,150   (8,242)  (8,872)
                                                   ---------  -------  -------
  Unrealized (depreciation) appreciation of
   investments after tax..........................   (63,631)  37,057   30,671
                                                   ---------  -------  -------
Less: Reclassification adjustment for gains
 included in net income
 before tax.......................................   (26,879) (17,963) (15,333)
  Tax (benefit) expense...........................     6,219    4,818    4,821
                                                   ---------  -------  -------
  Reclassification adjustment for gains included
   in net income
   after tax......................................   (20,660) (13,145) (10,512)
                                                   ---------  -------  -------
Currency translation adjustment...................    (3,631)      46      (78)
                                                   ---------  -------  -------
Other comprehensive (loss) income.................   (87,922)  23,958   20,081
                                                   ---------  -------  -------
Comprehensive (loss) income....................... $(122,896) $96,357  $93,491
                                                   =========  =======  =======
</TABLE>


        See accompanying notes to the consolidated financial statements

                                       41
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

                Consolidated Statements of Shareholders' Equity
                            Year Ended December 31,

<TABLE>
<CAPTION>
                                                              Stock held                                 Unrealized
                    Common "A" Shares  Common "B" Shares       in Trust          Deferred              (Depreciation)
                   ------------------- ------------------  ------------------     Equity    Additional  Appreciation
                     Number    Value    Number     Value    Number    Value    Compensation  Capital   of Investments
                   ---------- -------- ---------  -------  --------  --------  ------------ ---------- --------------
                                                     (dollars in thousands except share numbers)
<S>                <C>        <C>      <C>        <C>      <C>       <C>       <C>          <C>        <C>
Balance, January
1, 1997..........  23,802,426 $138,054 2,048,140  $11,879       --   $    --      $  --      $111,544     $ 36,271
 Shares issued
 for exercise of
 share options...      35,986      209       --       --     26,000       520        --            24          --
 Shares
 repurchased
 during the
 year............         --       --        --       --   (500,000)  (10,020)       --           --           --
 Deferred
 compensation
 expense.........         --       --        --       --        --        --       3,644          --           --
 Deferred
 compensation
 expense released
 on exercise of
 share options...         --       --        --       --        --        --        (369)         --           --
 Conversion of
 "B" shares into
 "A" shares......     251,923    1,461  (251,923)  (1,461)      --        --         --           --           --
 Net
 appreciation....         --       --        --       --        --        --         --           --        24,210
 Income tax
 expense.........         --       --        --       --        --        --         --           --        (4,051)
 Change during
 the year........         --       --        --       --        --        --         --           --           --
 Net income......         --       --        --       --        --        --         --           --           --
 Dividends paid--
 $0.17 per
 ordinary share..         --       --        --       --        --        --         --           --           --
                   ---------- -------- ---------  -------  --------  --------     ------     --------     --------
Balance, December
31, 1997.........  24,090,335  139,724 1,796,217   10,418  (474,000)   (9,500)     3,275      111,568       56,430
 Shares issued
 for exercise of
 share options...      82,382      478       --       --        --        --         --           159          --
 Shares
 repurchased
 during the
 year............         --       --        --       --   (132,800)   (3,400)       --           --           --
 Deferred
 compensation
 expense.........         --       --        --       --        --        --       1,348          --           --
 Net
 appreciation....         --       --        --       --        --        --         --           --        27,336
 Income tax
 expense.........         --       --        --       --        --        --         --           --        (3,424)
 Change during
 the year........         --       --        --       --        --        --         --           --           --
 Net income......         --       --        --       --        --        --         --           --           --
 Dividends paid--
 $0.23 per
 ordinary share..         --       --        --       --        --        --         --           --           --
                   ---------- -------- ---------  -------  --------  --------     ------     --------     --------
Balance, December
31, 1998.........  24,172,717  140,202 1,796,217   10,418  (606,800)  (12,900)     4,623      111,727       80,342
 Shares issued
 for exercise of
 share options...     175,475    1,017       --       --        --        --         --         2,128          --
 Shares
 repurchased
 during the
 year............         --       --        --       --   (169,800)   (3,887)       --           --           --
 Deferred
 compensation
 expense.........         --       --        --       --        --        --       2,941          --           --
 Net
 depreciation....         --       --        --       --        --        --         --           --      (107,660)
 Income tax
 benefit.........         --       --        --       --        --        --         --           --        23,369
 Change during
 the year........         --       --        --       --        --        --         --           --           --
 Net income......         --       --        --       --        --        --         --           --           --
 Dividends paid--
 $0.24 per
 ordinary share..         --       --        --       --        --        --         --           --           --
                   ---------- -------- ---------  -------  --------  --------     ------     --------     --------
Balance, December
31, 1999.........  24,348,192 $141,219 1,796,217  $10,418  (776,600) $(16,787)    $7,564     $113,855     $ (3,949)
                   ========== ======== =========  =======  ========  ========     ======     ========     ========
<CAPTION>
                   Cumulative                Total
                   Translation Retained  Shareholders'
                   Adjustment  Earnings     Equity
                   ----------- --------- -------------
<S>                <C>         <C>       <C>
Balance, January
1, 1997..........    $   190   $100,821    $398,759
 Shares issued
 for exercise of
 share options...        --         --          753
 Shares
 repurchased
 during the
 year............        --         --      (10,020)
 Deferred
 compensation
 expense.........        --         --        3,644
 Deferred
 compensation
 expense released
 on exercise of
 share options...        --         --         (369)
 Conversion of
 "B" shares into
 "A" shares......        --         --          --
 Net
 appreciation....        --         --       24,210
 Income tax
 expense.........        --         --       (4,051)
 Change during
 the year........        (78)       --          (78)
 Net income......        --      73,410      73,410
 Dividends paid--
 $0.17 per
 ordinary share..        --      (4,370)     (4,370)
                   ----------- --------- -------------
Balance, December
31, 1997.........       1 12    169,861     481,888
 Shares issued
 for exercise of
 share options...        --         --          637
 Shares
 repurchased
 during the
 year............        --         --       (3,400)
 Deferred
 compensation
 expense.........        --         --        1,348
 Net
 appreciation....        --         --       27,336
 Income tax
 expense.........        --         --       (3,424)
 Change during
 the year........         46        --           46
 Net income......        --      72,399      72,399
 Dividends paid--
 $0.23 per
 ordinary share..        --      (5,968)     (5,968)
                   ----------- --------- -------------
Balance, December
31, 1998.........        158    236,292     570,862
 Shares issued
 for exercise of
 share options...        --         --        3,145
 Shares
 repurchased
 during the
 year............        --         --       (3,887)
 Deferred
 compensation
 expense.........        --         --        2,941
 Net
 depreciation....        --         --     (107,660)
 Income tax
 benefit.........        --         --       23,369
 Change during
 the year........     (3,631)       --       (3,631)
 Net income......        --     (34,974)    (34,974)
 Dividends paid--
 $0.24 per
 ordinary share..        --      (6,155)     (6,155)
                   ----------- --------- -------------
Balance, December
31, 1999.........    $(3,473)  $195,163    $444,010
                   =========== ========= =============
</TABLE>

        See accompanying notes to the consolidated financial statements

                                       42
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

                     Consolidated Statements of Cash Flows
                            Year Ended December 31,
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                1999       1998       1997
                                              ---------  ---------  ---------
<S>                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net (loss) income.......................... $ (34,974) $  72,399  $  73,410
Adjustments to reconcile net income to net
 cash and cash equivalents provided by
 operating activities:
  Amortization of goodwill...................     4,089        781        642
  Bad debt expenses..........................     7,974      9,464      1,238
  Realized net capital gains.................   (26,879)   (17,963)   (15,333)
  Stock option compensation expense..........     2,941      1,348      3,208
  Change in unpaid losses and loss adjustment
   expenses..................................   217,433     50,389     47,612
  Change in unearned premiums and prepaid
   reinsurance...............................     6,878    115,448     60,705
  Change in insurance balances payable.......    29,912     (9,892)     4,965
  Change in insurance balances receivable,
   accrued premium income and reinsurance
   recoverable on paid and unpaid losses.....  (138,292)   (97,303)   (58,960)
  Change in deferred acquisition costs.......     7,922    (31,227)   (26,475)
  Change in accrued investment income........     2,407     (1,939)    (1,510)
  Change in current and deferred income
   taxes.....................................   (46,201)       896     (7,407)
  Change in other assets and liabilities,
   net.......................................   (13,067)   (16,508)      (194)
                                              ---------  ---------  ---------
    Total adjustments........................    55,117      3,494      8,491
                                              ---------  ---------  ---------
    Net cash and cash equivalents provided by
     operating activities....................    20,143     75,893     81,901
                                              ---------  ---------  ---------
Cash flows from investing activities:
  Proceeds of fixed maturities matured.......     9,240     57,616     65,096
  Proceeds of fixed maturities sold..........   368,146    391,757    521,301
  Proceeds of equity securities sold.........   174,530    140,564    215,732
  Purchase of fixed maturities...............  (347,337)  (587,751)  (665,228)
  Purchase of equity securities..............  (177,057)  (119,341)  (175,307)
  Acquisition of capacity at Octavian........    (6,314)    (5,657)      (639)
  Payment consideration for Corifrance.......       --         --     (42,225)
  Acquisition expenses for Corifrance........       --         --        (461)
                                              ---------  ---------  ---------
    Net cash and cash equivalents provided by
     (used in) investing activities..........    21,208   (122,812)   (81,731)
                                              ---------  ---------  ---------
Cash flows from financing activities:
  Stock repurchases..........................    (3,887)    (3,400)   (10,020)
  Proceeds from public debt offerings........       --      99,899     74,866
  Payment of fees for financing public debt
   offerings.................................       --        (913)    (1,179)
  Redemption of public debt..................       --    (113,053)       --
  Proceeds from shares issued................     3,145        637        384
  Ordinary dividends paid to stockholders....    (6,155)    (5,968)    (4,370)
                                              ---------  ---------  ---------
    Net cash and cash equivalents (provided
     by) used in financing activities........    (6,897)   (22,798)    59,681
                                              ---------  ---------  ---------
Change in cash and cash equivalents..........    34,454    (69,717)    59,851
Exchange on foreign currency cash balances...       (50)       247       (531)
Cash and cash equivalents at beginning of
 year........................................    40,394    109,864     50,544
                                              ---------  ---------  ---------
Cash and cash equivalents at end of year..... $  74,798  $  40,394  $ 109,864
                                              =========  =========  =========
Supplemental disclosure of cash flow
 information
  Income taxes paid.......................... $   3,506  $  13,642  $  23,001
                                              ---------  ---------  ---------
  Interest paid.............................. $  12,400  $  14,638  $  10,750
                                              =========  =========  =========
</TABLE>

        See accompanying notes to the consolidated financial statements

                                       43
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

   Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") is incorporated in
Bermuda. All references here to the "Company" are to Bermuda Holdings and all
of its direct and indirect subsidiaries. These include Terra Nova Insurance
(U.K.) Holdings plc ("U.K. 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. It operates in the London market through its London
based subsidiary, Terra Nova, in the Continental European market through its
French subsidiary, Corifrance, 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. It writes
most insurance and reinsurance business through brokers authorized to place
business at Lloyd's. It also writes 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 of the rights to
manage certain Lloyd's syndicates (the "Octavian syndicates").

   A managing agent is permitted by the Council of Lloyd's to perform, on
behalf of an underwriting member of any one of the syndicates which it manages,
one or more of the following functions:

   (a) underwriting contracts of insurance at Lloyd's;

  (b) obtaining reinsurance for such contracts in whole or in part;

  (c) paying claims on such contracts.

   Members of Lloyd's underwrite insurance risk at Lloyd's by being a member of
one or more Lloyd's syndicates. A syndicate has no separate legal identity and
is "managed" by a managing agent.

   The standard Lloyd's contract between a managing agent and the members of a
syndicate managed by that agent, identifies the following services to be
provided by the managing agent on behalf of the members:

  (a) determine underwriting policy and determine policy and effect
     reinsurance;

  (b) appoint and supervise the underwriter and associate underwriting,
     claims, administrative and accounting staff;

  (c) accept underwriting risks and settle and pay claims on behalf of the
     syndicate;

  (d) manage the investment of the monies and other assets held in each
     syndicate;

  (e) prepare and distribute annual reports, personal accounts and other
    reports and documents as required by the Council of Lloyd's.

   A managing agent charges an annual fee which will be complimented, in
profitable years, by a profit commission. The managing agent employs management
and underwriting staff, recharging the costs of employment and resourcing the
syndicate's activities to the syndicate and retaining costs incurred in respect
of the management functions.

   The managing agent does not participate directly in the profit or loss on
underwriting of its syndicates. It is incentivized by earning a commission on
syndicate profits.

                                       44
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The managing agency manages but does not participate in its own syndicate
and has no liability under contracts of insurance. However, Terra Nova Capital,
a subsidiary of U.K. Holdings, is a corporate member of Lloyd's and a member of
each of the syndicates managed by Octavian. Terra Nova Capital therefore
participates in the underwriting results of the Octavian syndicates.

2. Basis of Preparation

   The accompanying consolidated financial statements have been prepared on the
basis of United States generally accepted accounting principles ("GAAP"). All
material intercompany transactions and balances have been eliminated.

3. Significant Accounting Policies

   (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 recorded in shareholders' equity. Realized gains
and losses are included in operations and determined by specific
identification. Investment income is recorded as earned.

   (b) Cash and cash equivalents: Cash and cash equivalents consist of cash and
various short-term investments which have maturities when bought of 90 days or
less. Cash equivalents are stated at fair value which approximates cost.

   (c) Premiums: Premiums are earned pro-rata over the term of the related
coverage. The balance of unearned premiums represents the portion of gross
written premiums relating to the unexpired terms of coverage.

   (d) Octavian income and expenses: The Company recognizes its share of the
premiums, losses and expenses associated with its participation in Lloyd's
syndicates consistent with the bases used in its insurance company operations
and in accordance with GAAP. Agency income is earned and agency expenses
charged as incurred from Octavian's role as managing agent.

   (e) Deferred acquisition costs: Acquisition costs, which represent net
commission and other expenses incurred in producing business, are deferred and
amortized over the period in which the related premiums are earned. Deferred
acquisition costs are limited to the amounts estimated as recoverable from the
applicable unearned premiums and the related expected investment income, after
giving effect to anticipated losses, loss adjustment expenses and expenses
necessary to maintain the contracts in force.

   (f) 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.

   (g) Income taxes: Deferred income taxes are recorded on temporary
differences between financial reporting and tax bases of assets and liabilities
in accordance with Statement of Financial Accounting Standard ("SFAS") No. 109.

   (h) Foreign currency translation: The U.S. dollar is the reporting currency
and principal functional currency, as most 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 historical 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 item of shareholders'
equity.

                                       45
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   (i) Accrued premium income: Accrued premium income represents the difference
between the estimated cumulative ultimate gross 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.

   (k) 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 estimates for reported losses, including
provisions for losses incurred but not reported ("IBNR"). The adequacy of these
estimates is assessed by reference to projections of the ultimate losses for
each accident year. The methods of determining such estimates and establishing
reserves are reviewed continually and updated. Resulting adjustments are
reflected in current operations.

   (l) 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 recognized 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, recorded as a component of shareholders' equity,
represents options the Company expects to settle in stock.

   (m) Risks and uncertainties: Information about risks and uncertainties
existing at the balance sheet date related to the following areas are included
in Notes 1, 3, 4, 7, 10, 11, 12, 13, 14 and 17:

   --Nature of operations;
   --Use of estimates in preparing financial statements;
   --Certain significant estimates;
   --Current vulnerability due to certain concentrations.

   The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions. These 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.

   (n) 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 on 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.

   (o) Goodwill: The goodwill in the Company's balance sheet has been
calculated using the purchase method of accounting and is amortized on a
straight line basis over periods not exceeding 40 years.

   (p) Reclassifications: Certain prior year amounts have been reclassified to
conform with the current year presentation.

                                       46
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


4. Investments and Cash

   (a) Deposits: Securities with a carrying value of $122,105,666 and
$103,731,433 at December 31, 1999 and 1998, respectively, were held in trust
for the benefit of the Company's U.S. cedents and to facilitate the Company's
accreditation as an alien reinsurer by certain States.

   Cash and securities with a carrying value of $20,994,932 and $21,100,926 at
December 31, 1999 and 1998, 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 $49,607,415 and $50,929,708 at
December 31, 1999 and 1998, respectively, were held in trust for the benefit
of the Company's Canadian cedents.

   The Company has contingent liabilities regarding undrawn letters of credit
supporting certain reinsurance business written by the Company in the U.S. of
$97,420,004 and $106,105,003 at December 31, 1999 and 1998, respectively. The
Company has deposited cash and investments with a carrying value of
$105,812,403 (including $812,403 of restricted cash) and $158,018,677
(including $1,018,677 of restricted cash) at December 31, 1999 and 1998,
respectively, as collateral against these amounts.

   The Company has contingent liabilities regarding irrevocable undrawn
letters of credit of $246,886,653 and $248,212,339 supporting the Company's
underwriting activities on the Octavian syndicates at December 31, 1999 and
1998, respectively. The Company has deposited cash and investments with a
carrying value of $251,527,716 at December 31, 1999 and $250,553,300 at
December 31, 1998, respectively, as collateral to support this commitment.
Cash and securities with a carrying value of $202,931,000 and $149,076,000 at
December 31, 1999 and 1998, respectively, were held in trust for the benefit
of the Octavian syndicates' policyholders.

   (b) Net investment income: An analysis of the net investment income of the
Company is as follows:

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                      -------------------------
                                                       1999     1998     1997
                                                      -------  -------  -------
<S>                                                   <C>      <C>      <C>
                                                      (dollars in thousands)
Fixed maturities..................................... $88,055  $86,899  $77,690
Equity securities....................................     608      463    1,538
Cash and cash equivalents............................   8,258    8,754    9,470
                                                      -------  -------  -------
Total investment income..............................  96,921   96,116   88,698
Investment expenses..................................  (3,092)  (2,854)  (3,568)
                                                      -------  -------  -------
  Net investment income.............................. $93,829  $93,262  $85,130
                                                      =======  =======  =======

</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,
                                                    ---------------------------
                                                      1999      1998     1997
                                                    ---------  -------  -------
<S>                                                 <C>        <C>      <C>
                                                     (dollars in thousands)
Realized net capital gains on sale of investments:
  Fixed maturities................................. $  (6,066) $ 8,854  $ 5,342
  Equity securities................................    32,945    9,109    9,991
                                                    ---------  -------  -------
Realized net capital gains.........................    26,879   17,963   15,333
                                                    ---------  -------  -------
Changes in net unrealized (depreciation)
 appreciation:
  Fixed maturities.................................   (88,127)  30,691   17,291
  Equity securities................................   (19,533)  (3,355)   6,919
                                                    ---------  -------  -------
Changes in net unrealized (depreciation)
 appreciation......................................  (107,660)  27,336   24,210
                                                    ---------  -------  -------
Realized net capital gains and change in net
 unrealized (depreciation) appreciation of
 investments....................................... $ (80,781) $45,299  $39,543
                                                    =========  =======  =======
</TABLE>


                                      47
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)



   Realized net capital gains on sale of fixed maturities for the years ended
December 31, 1999, 1998 and 1997, included gross capital gains of $5,754,000,
$9,420,000 and $9,600,000, and gross capital losses of $11,820,000, $566,000
and $4,258,000, respectively.

   Proceeds from sales of investments in equity securities during 1999, 1998
and 1997, were $174,530,000, $140,564,000 and $215,732,000, respectively.
Realized net capital gains on sale of equity securities for the years ended
December 31, 1999, 1998 and 1997, included gross capital gains of $42,403,000,
$24,567,000 and $29,613,000 and gross capital losses of $9,458,000, $15,458,000
and $19,622,000, respectively.

   Net unrealized appreciation of equities (before income tax) of the Company
at December 31, 1999, included gross unrealized appreciation of $12,894,000 and
gross unrealized depreciation of $1,329,000. Net unrealized appreciation of
equities of the Company at December 31, 1998, included gross unrealized
appreciation of $38,551,000 and gross unrealized depreciation of $7,453,000.

   (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>
                                              Gross        Gross     Estimated
                                Amortized   unrealized   unrealized     fair
                                   cost    appreciation depreciation   value
                                ---------- ------------ ------------ ----------
                                            (dollars in thousands)
     1999
<S>                             <C>        <C>          <C>          <C>
U.S. government and agencies... $  203,610   $ 2,501      $ (4,157)  $  201,954
Foreign governments and
 agencies......................    496,936    10,187        (9,703)     497,420
Mortgage backed and asset
 backed........................    108,093     1,053          (723)     108,423
Supranationals.................    106,521       933        (3,371)     104,083
Corporate......................    406,728     3,045       (15,543)     394,230
                                ----------   -------      --------   ----------
  Total fixed maturities....... $1,321,888   $17,719      $(33,497)  $1,306,110
                                ==========   =======      ========   ==========

<CAPTION>
                                              Gross        Gross     Estimated
                                Amortized   unrealized   unrealized     fair
                                   cost    appreciation depreciation   value
                                ---------- ------------ ------------ ----------
                                            (dollars in thousands)
     1998
<S>                             <C>        <C>          <C>          <C>
U.S. government and agencies... $  253,282   $18,920      $    (20)  $  272,182
Foreign governments and
 agencies......................    575,699    34,246          (220)     609,725
Mortgage backed and asset
 backed........................     50,945     1,558           (29)      52,474
Supranationals.................    121,945     7,142           --       129,087
Corporate......................    372,401    11,177          (425)     383,153
                                ----------   -------      --------   ----------
  Total fixed maturities....... $1,374,272   $73,043      $   (694)  $1,446,621
                                ==========   =======      ========   ==========
</TABLE>


                                       48
<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, 1999, 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 % of total
                                               ---------- ---------- ----------
                                                    (dollars in thousands)
<S>                                            <C>        <C>        <C>
Due in one year or less....................... $  116,121    115,592      9%
Due after one year through five years.........    611,434    607,165     46
Due after five years through ten years........    531,570    519,457     40
Due after ten years...........................     62,763     63,896      5
                                               ---------- ----------    ---
                                               $1,321,888 $1,306,110    100%
                                               ========== ==========    ===
</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, 1999, the Company's portfolio by rating category,
determined by recognized rating agencies, was:

<TABLE>
<CAPTION>
                                           Estimated fair value
                                          ----------------------
                                          (dollars in thousands)
         <S>                              <C>
         U.S. government and agencies....         $201,954
         U.K. government and agency......          115,665
         AAA.............................          472,009
         AA..............................          295,545
         A...............................          135,775
         BBB.............................           85,162
                                                ----------
                                                $1,306,110
                                                ==========

</TABLE>
   (f) At December 31, 1999, the estimated fair value of the following
investments exceeded 10% of shareholders' equity:
<TABLE>
<CAPTION>
                                           Estimated fair value
                                          ----------------------
                                          (dollars in thousands)
         <S>                              <C>
         United States Treasury..........        $201,954
         Government of Japan.............          84,089
         Canadian Treasury...............          96,574
         U.K. Treasury...................         115,665

</TABLE>
   (g) Equities available for sale: At December 31, 1999, the cost and
estimated fair value of investments in common stocks were as follows:
<TABLE>
<CAPTION>
                                                                       Estimated
                                                                         fair
                                                                Cost     value
                                                               ------- ---------
                                                                  (dollars in
                                                                  thousands)
      <S>                                                      <C>     <C>
      Public utilities........................................ $   374 $    408
      Banks, trust and insurance companies....................  13,198   14,694
      Industrial, miscellaneous and all other.................  84,763   94,798
                                                               ------- --------
        Total equity securities............................... $98,335 $109,900
                                                               ======= ========
</TABLE>


                                       49
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5. Income Taxes

   (a) The U.K. corporation tax rate applicable to ordinary income was reduced
to 31% from 33% on April 1, 1997, and to 30% from 31% on April 1, 1999. The
corporation tax rate in France was 41.67% for 1997 and 1998, and 40% for 1999.
The difference between the actual tax expense and the "expected" amount
calculated by applying the U.K. corporation tax rate is explained as follows:

<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                                     --------------------------
                                                       1999     1998     1997
                                                     --------  -------  -------
                                                      (dollars in thousands)
     <S>                                             <C>       <C>      <C>
     "Expected" tax (benefit) expense............... $(21,962) $31,391  $28,680
     Adjustments:
       Non-taxable income...........................  (16,878) (15,042) (10,004)
       Other........................................    1,212      872   (1,037)
                                                     --------  -------  -------
     Actual tax (benefit) expense................... $(37,628) $17,221  $17,639
                                                     ========  =======  =======

   (b) The components of income tax (benefit) expense attributable to
continuing operations are as follows:

<CAPTION>
                                                     Year ended December 31,
                                                     --------------------------
                                                      (dollars in thousands)
                                                       1999     1998     1997
                                                     --------  -------  -------
     <S>                                             <C>       <C>      <C>
     Current U.K. corporation tax................... $ (7,644) $ 2,789  $10,743
     Current French corporation tax.................     (160)   1,310      --
     Deferred tax...................................  (29,824)  13,122    6,896
                                                     --------  -------  -------
       Income tax................................... $(37,628) $17,221  $17,639
                                                     ========  =======  =======
</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.
Measurement of a deferred tax asset, if any, is subject to the expectation of
future realization. The components of net deferred tax asset (liability) of
the Company as at December 31, 1999 and 1998, were as follows:

<TABLE>
<CAPTION>
                                                              1999      1998
                                                             -------  --------
                                                               (dollars in
                                                                thousands)
     <S>                                                     <C>      <C>
     Deferred tax assets:
       Unrealized depreciation of investments............... $ 4,402  $    321
       Operating losses and other...........................  30,977       318
                                                             -------  --------
         Total deferred tax assets..........................  35,379       639
                                                             -------  --------
     Deferred tax liabilities:
       Unrealized appreciation of investments...............     (80)  (11,718)
       Other................................................  (3,479)  (16,371)
                                                             -------  --------
         Total deferred tax liabilities.....................  (3,559)  (28,089)
                                                             -------  --------
     Net deferred tax asset (liability)..................... $31,820  $(27,450)
                                                             =======  ========
</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 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.

                                      50
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   (e) The Company does not consider itself to be engaged in trade or business
in the U.S. and so does not expect to be subject to U.S. income taxation.

6. Deferred Acquisition Costs

   The following reflects the acquisition costs deferred for amortization
against future income and the amortization charged to income, including amounts
deferred and amortized in the same period:

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                     --------------------------
                                                       1999     1998     1997
                                                     -------- -------- --------
                                                       (dollars in thousands)
     <S>                                             <C>      <C>      <C>
     Balance at beginning of year..................  $107,607 $ 76,380 $ 45,279
                                                     -------- -------- --------
     Acquisition costs deferred
       Commissions.................................   161,737  151,371  119,610
       Other.......................................    71,175   40,236   26,918
                                                     -------- -------- --------
                                                      232,912  191,607  146,528
                                                     -------- -------- --------
     Amortization charged to income
       Commissions.................................   171,536  126,239   92,713
       Other.......................................    69,300   34,141   22,714
                                                     -------- -------- --------
                                                      240,836  160,380  115,427
                                                     -------- -------- --------
     Balance at end of year........................  $ 99,683 $107,607 $ 76,380
                                                     ======== ======== ========
</TABLE>

7. Employee Benefits

   Terra Nova operates a defined benefit pension plan ("Terra Nova Plan")
covering 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 according to 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.

   Mandatory employee contributions to the Terra Nova Plan ceased in 1988.
There are no present plans to reintroduce such contributions. Employees may
elect to make voluntary contributions to supplement their pension benefits when
payable.

   Terra Nova provides pension and related benefits for the employees of its
branch office in Canada and its former branch office in Belgium. 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 on 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.

   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.


                                       51
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   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. The annual contribution rate for managers is 5.66% of
pensionable salary and, for employees, is 1.43% of pensionable salary.

   The total cost of the Company's defined contribution plans for the year was
$3,121,304 (1998: $2,351,000).

   The following tables set out the funded status of all defined benefit plans
for the years ended December 31, 1999, 1998 and 1997, and the amounts
recognized in the accompanying consolidated balance sheets of the Company at
December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                         Year ended December
                                                                 31,
                                                        -----------------------
                                                         1999    1998    1997
                                                        ------  ------  -------
                                                             (dollars in
                                                             thousands)
     <S>                                                <C>     <C>     <C>
     Component of net periodic benefit costs:
       Service cost.................................... $3,209  $2,692  $ 2,612
       Interest cost...................................  2,429   2,973    3,153
       Expected return on plan assets.................. (4,234) (4,787)  (4,274)
       Amortization of transition obligation...........    (92)    (94)    (100)
       Recognized net actuarial gain...................    --     (192)     --
                                                        ------  ------  -------
         Net periodic benefit cost..................... $1,312  $  592  $ 1,391
                                                        ======  ======  =======
</TABLE>

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
                                                                 (dollars in
                                                                 thousands)
     <S>                                                       <C>      <C>
     Change in benefit obligation
       Benefit obligation at beginning of year................ $54,064  $40,386
       Service cost...........................................   3,209    2,692
       Interest cost..........................................   2,429    2,973
       Benefits paid..........................................    (727)    (587)
       Actuarial (gain) loss.................................. (10,720)   8,602
                                                               -------  -------
         Benefit obligation at end of year....................  48,255   54,066
                                                               -------  -------
     Change in plan assets
       Fair value of plan assets at beginning of year.........  59,057   50,161
       Actual return on plan assets...........................   8,365    7,490
       Employer contribution..................................   1,412    1,993
       Benefits paid..........................................    (727)    (587)
                                                               -------  -------
         Fair value of plan assets at end of year.............  68,107   59,057
                                                               -------  -------
     Funded status............................................  19,852    4,991
       Unrecognized net actuarial gain........................ (14,491)     --
       Unrecognized transition obligation.....................    (369)     --
                                                               -------  -------
         Prepaid benefit cost................................. $ 4,992  $ 4,991
                                                               =======  =======
     Weighted-average assumptions as of December 31
       Discount rate..........................................    6.25%    5.50%
       Expected return on plan assets.........................    8.00%    8.00%
       Rate of compensation increase..........................    5.00%    4.50%
</TABLE>

                                       52
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8. Earnings Per Share

   The following EPS have been calculated using SFAS No.128 "Earnings per
Share":

<TABLE>
<CAPTION>
                                                1999        1998       1997
                                             ----------  ---------- ----------
                                                  (dollars in thousands
                                                except per share amounts)
<S>                                          <C>         <C>        <C>
(Loss) income available to common
 shareholders............................... $  (34,974) $   72,399 $   73,410
                                             ----------  ---------- ----------
Weighted average number of shares
 outstanding
  Common shares............................. 25,306,576  25,449,091 25,586,648
                                             ----------  ---------- ----------
  Basic EPS................................. $    (1.38) $     2.84 $     2.87
                                             ==========  ========== ==========
(Loss) income available to common
 shareholders............................... $  (34,974) $   72,399 $   73,410
                                             ----------  ---------- ----------
Weighted average number of shares
 outstanding
  Common shares............................. 25,306,576  25,449,091 25,586,648
  Add: Dilutive effect of shares arising
   from options.............................        --      654,445    406,643
                                             ----------  ---------- ----------
Adjusted weighted average number of shares
 outstanding................................ 25,306,576  26,103,536 25,993,291
                                             ----------  ---------- ----------
  Diluted EPS............................... $    (1.38) $     2.77 $     2.82
                                             ==========  ========== ==========
</TABLE>

9. Share Capital

   The "A" ordinary shares and "B" ordinary shares rank pari passu in right to
receive dividends.

   Each "B" ordinary share at the Company is convertible at the choice of the
holder into an "A" ordinary share without payment or adjustment for accrued
dividends.

   During 1999, the Company issued 175,475 ordinary shares to satisfy options
exercised under the Company's stock option plan (see Note 10). Also during the
year, the Company repurchased 169,800 shares at a total cost of $3,880,226,
excluding commissions. As at December 31, 1999, the Company had purchased a
total of 802,600 shares at a total cost of $17,275,896, leaving a further
$2,724,104 available for future repurchases under the Board of Directors'
authorization, dated May 5, 1997. On May 5, 1999, the Board of Directors
authorized the repurchase of an additional $25,000,000 of the Company's common
stock. The shares are held in trust for the satisfaction of employees' and
directors' long-term compensation plans and any other corporate purposes.

10. Share Options and Awards

   At December 31, 1999, the Company had various stock-based compensation plans
which are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Compensation expense of $2,941,000
has been charged against income for 1999 (1998: $1,348,000).


                                       53
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The net income and earnings per share would have been reduced to the pro
forma amounts indicated below had compensation expense been determined using
the fair value methodology of SFAS No.123:

<TABLE>
<CAPTION>
                                                        1999     1998    1997
                                                      --------  ------- -------
                                                       (dollars in thousands
                                                          except per share
                                                              amounts)
     <S>                                              <C>       <C>     <C>
     Net (loss) income:
       As reported................................... $(34,974) $72,399 $73,410
                                                      --------  ------- -------
       Pro forma..................................... $(35,039) $70,417 $73,352
                                                      --------  ------- -------
     Basic (losses) earnings per share:
       As reported................................... $  (1.38) $  2.84 $  2.87
                                                      --------  ------- -------
       Pro forma..................................... $  (1.38) $  2.77 $  2.87
                                                      ========  ======= =======
</TABLE>

   The assumptions made in calculating the pro forma amounts for the three
years above were: risk free rate of return, 5.05%; volatility, 0.37; dividend
yield, 0.47%; and expected life, 4 years.

   On January 9, 1995, the Company adopted an Executive Share Option Plan (the
"Stock Option Plan"). Amendments to the Stock Option Plan were adopted by the
Company on May 4, 1998. The Stock Option Plan provides for the grant to
eligible employees of options to buy 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 15% of the aggregate
number of common shares of the Company outstanding. The options are only
exercisable on certain specified events occurring 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 decides which employees are granted
options.

   At December 31, 1999, there were 45,000 options outstanding under the
Executive Share Option Plan, all of which were only exercisable on the
achievement of certain performance objectives and therefore have been accounted
for as variable options under APB No. 25. The performance objectives were not
met and subsequently all 45,000 options lapsed. No compensation expense was
incurred in respect of the 45,000 options in 1999. The remaining 1,906,686
options have been accounted for as fixed options in accordance with paragraph
10(b) of APB No. 25 as the number of options and option price were known at the
date of grant.

   A summary of the Company's Stock Option Plan at December 31, 1999, and
changes during the three years then ended is presented below:

<TABLE>
<CAPTION>
                                                                    Weighted-
                                                                     average
                                                        Shares    exercise price
                                                       ---------  --------------
       <S>                                             <C>        <C>
       Fixed options
       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 January 1, 1998................. 1,792,610       17.47
         Granted......................................   188,900       25.75
         Exercised....................................   (82,382)       7.72
         Forfeited....................................   (22,824)      13.72
                                                       ---------      ------
       Outstanding at January 1, 1999................. 1,876,304       18.78
         Granted......................................   339,000       23.65
         Exercised....................................  (175,475)      17.93
         Forfeited....................................   (88,143)      20.30
                                                       ---------      ------
       Outstanding at December 31, 1999............... 1,951,686      $20.01
                                                       =========      ======
</TABLE>


                                       54
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   At December 31, 1999, the outstanding Option Shares under the Stock Option
Plan had exercise prices between $5.80 and $27.05 and a weighted-average
remaining contractual life of 6.00 years.

   Options outstanding and options exercisable at December 31, 1999, are
summarized as follows:

<TABLE>
<S>          <C>         <C>               <C>            <C>         <C>
                         Options outstanding                 Options exercisable
             -------------------------------------------- --------------------------
 Range of                    Weighted         Weighted                   Weighted
  exercise     Number    average remaining    average       Number       Average
   prices    outstanding contractual life  exercise price Exercisable Exercise price
-----------  ----------- ----------------- -------------- ----------- --------------
  $ 5.01-
   10.00         424,579       4.97            $ 6.45       421,579       $ 6.45
10.01-15.00       88,166       4.19            12.80           70,990     12.80
15.01-20.00      241,749       5.53            18.91           99,409     18.73
20.01-25.00      369,400       7.14            23.59           22,000     23.19
25.01-30.00      827,792       6.35            26.45          342,962     26.40
             -----------                                  -----------
               1,951,686                                      956,940
             ===========                                  ===========
  Options
exercisable
     at
  December
  31, 1998                                                    909,515
  Options
exercisable
     at
  December
  31, 1997                                                    581,986
</TABLE>


   The Company established the Octavian Stock Option Plan in 1996. It provides
for the grant of options to certain individual members of management of
Octavian based on profit commissions receivable 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 related underwriters' and
management bonuses 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 share 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 are to be issued on receiving 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 from the January next succeeding the date of grant, beginning
January 1, 2000, except that all options issued after January 1, 2002 become
immediately exercisable.

   The Octavian Plan is a variable plan for accounting purposes. The accounting
follows paragraphs 27 and 28 of APB Opinion No.25. Estimates of compensation
cost are recorded before the measurement date based on the quoted market price
of Terra Nova stock at intervening dates and Terra Nova's estimate as of such
dates of shares which will be issued under the plan.

   The compensation expense is recognized over the three year service period
which represents the period over which the profit commission for each year of
account is earned.

                                       55
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A summary of the Octavian Stock Option Plan at December 31, 1999, and
changes during the three years then ended is shown below:

<TABLE>
<CAPTION>
                                                                   Weighted-
                                                                    average
     Performance-based options                          Shares   exercise price
     -------------------------                          -------  --------------
     <S>                                                <C>      <C>
     Outstanding at January 1, 1997....................  29,849       0.00
       Reserved for grant..............................  66,648       0.00
       Exercised.......................................     --         --
       Forfeited.......................................     --         --
                                                        -------       ----
     Outstanding at January 1, 1998....................  96,497       0.00
       Reserved for grant.............................. 117,661       0.00
       Exercised.......................................     --         --
       Forfeited.......................................     --         --
                                                        -------       ----
     Outstanding at January 1, 1999.................... 214,158       0.00
       Reserved for grant..............................  50,123       0.00
       Exercised.......................................     --         --
       Forfeited.......................................  (1,215)      0.00
                                                        -------       ----
     Outstanding at December 31, 1999.................. 263,066       0.00
                                                        =======       ====
       Options exercisable at December 31, 1999........    Nil.
       Options exercisable at December 31, 1998 and
        1997...........................................    Nil.
</TABLE>

   At December 31, 1999, the 263,066 options outstanding under the Octavian
Stock Option Plan all had exercise prices of $nil and a weighted-average
remaining contractual life of 6.82 years.

   The weighted average fair value per share of options granted in the
Company's stock-based compensation plans during 1999 was $10.20 (1998: $13.32;
1997: $8.15).

11. 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 mainly consist 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
aviation and non-marine business. Availability of reinsurance at reasonable
cost and under favorable terms is one of the key determinants in the decision
about which categories of business to emphasize at any given time.

   A credit risk exists with 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; so allowances are established for amounts thought
uncollectible. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from its exposure to
individual reinsurers.

                                       56
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The Company cedes reinsurance to and assumes reinsurance from Lloyd's
syndicates. At December 31, 1999, the aggregate exposure in respect of
reinsurance ceded to Lloyd's syndicates in respect of continuing operations,
including estimated reinsurance recoveries for losses incurred but not
reported, was approximately $106,542,000. The majority was ceded into Equitas
with effect from September 4, 1996. Equitas is a company with limited liability
established by the Lloyd's syndicates. Therefore, ultimate recoveries under the
reinsurance contracts ceded into Equitas will be dependent on Equitas being
able to fulfil its commitment to the syndicates. No specific bad debt provision
has been established for amounts due from Lloyd's syndicates.

   (a) Net written premiums are comprised of the following:

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                                 ------------------------------
                                                   1999       1998       1997
                                                 ---------  ---------  --------
                                                    (dollars in thousands)
     <S>                                         <C>        <C>        <C>
     Direct business............................ $ 601,419  $ 407,841  $269,577
     Reinsurance assumed........................   263,514    351,547   280,666
     Reinsurance ceded..........................  (246,487)  (113,191)  (66,698)
                                                 ---------  ---------  --------
       Net written premiums..................... $ 618,446  $ 646,197  $483,545
                                                 =========  =========  ========
</TABLE>


   (b) Net earned premiums are comprised of the following:

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                                  -----------------------------
                                                    1999       1998      1997
                                                  ---------  --------  --------
                                                    (dollars in thousands)
     <S>                                          <C>        <C>       <C>
     Direct business............................. $ 495,339  $318,213  $209,414
     Reinsurance assumed.........................   310,384   317,499   260,603
     Reinsurance ceded...........................  (220,442)  (88,804)  (50,948)
                                                  ---------  --------  --------
       Net earned premiums....................... $ 585,281  $546,908  $419,069
                                                  =========  ========  ========
</TABLE>


   (c) Losses and loss adjustment expenses, net, are comprised of the
following:

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                                -----------------------------
                                                  1999       1998      1997
                                                ---------  --------  --------
                                                  (dollars in thousands)
     <S>                                        <C>        <C>       <C>
     Losses and loss adjustment expenses,
      gross.................................... $ 752,497  $448,066  $329,463
     Reinsurance ceded.........................  (261,256)  (88,499)  (46,983)
                                                ---------  --------  --------
       Losses and loss adjustment expenses,
        net.................................... $ 491,243  $359,567  $282,480
                                                =========  ========  ========
</TABLE>

12. Unpaid Losses and Loss Adjustment Expenses

   Management believes that its reserves for losses and loss adjustment
expenses are adequate. Significant delays occur in notifying certain claims and
a large 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.

                                       57
<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, 1999, 1998 and 1997, is summarized in the table below. Incurred
claims relating to prior years are offset by decreases to prior year net
written and net earned premiums less related acquisition costs of $27,300,000,
$9,757,000 and $4,800,000 for 1999, 1998 and 1997, respectively. When these
revisions to prior written and earned premiums are considered, the Company
experienced net prior year improvements of $17,210,000, $15,207,000 and
$5,596,000 in 1999, 1998 and 1997, respectively. The majority of the movement
in unpaid losses and loss adjustment expenses attributable to prior years was
in relation to Terra Nova's casualty business. The casualty movements arose
from the favorable settlements during these financial years in respect of
various casualty contracts. The favorable casualty movements in the 1999
financial year were partially offset by deficiencies on the Company's property,
motor and aviation classes as a result of claims experience being worse than
expected on certain contracts. The majority of these contracts were in respect
of the 1998 accident year.

<TABLE>
<CAPTION>
                                              1999        1998        1997
                                           ----------  ----------  ----------
                                                (dollars in thousands)
<S>                                        <C>         <C>         <C>
Reserves for unpaid losses and loss
 adjustment
 expenses, at beginning of year........... $1,209,003  $1,157,724  $1,078,108
  Less: reinsurance recoverables on unpaid
   losses.................................   (226,098)   (246,728)   (254,129)
                                           ----------  ----------  ----------
Net balance at beginning of year..........    982,905     910,996     823,979
                                           ----------  ----------  ----------
Net incurred losses and loss adjustment
 expenses related to:
  Current year............................    535,753     384,531     292,876
  Prior years.............................    (44,510)    (24,964)    (10,396)
                                           ----------  ----------  ----------
Total net incurred losses and loss
 adjustment expenses......................    491,243     359,567     282,480
                                           ----------  ----------  ----------
Net paid losses and loss adjustment
 expenses related to:
  Current year............................   (179,844)   (138,918)    (69,685)
  Prior years.............................   (245,323)   (187,559)   (145,702)
                                           ----------  ----------  ----------
Total net paid losses and loss adjustment
 expenses.................................   (425,167)   (326,477)   (215,387)
Foreign exchange adjustment...............    (18,753)     (5,169)    (10,967)
                                           ----------  ----------  ----------
Net balance at end of year................  1,030,228     938,917     880,105
  Net reserves from reinsurance to close..     33,257      43,988       -- (1)
  Net reserves from Corifrance
   acquisition............................        --          --       30,891
                                           ----------  ----------  ----------
Net reserves at end of year...............  1,063,485     982,905     910,996
Plus reinsurance recoverables:
  The Company.............................    346,483     226,098     236,847
  Reinsurance recoverables related to net
   reserves from
   Corifrance acquisition.................         --          --       9,881
                                           ----------  ----------  ----------
Reinsurance recoverable by the Company....    346,483     226,098     246,728
                                           ----------  ----------  ----------
Reserves for unpaid losses and loss
 adjustment
 expenses, at end of year................. $1,409,968  $1,209,003  $1,157,724
                                           ==========  ==========  ==========
</TABLE>
--------
(1) The net reserves from the reinsurance to close of the 1995 year, of
    $17,910,000, have been included in net incurred losses and loss adjustment
    expenses for the year ended December 31, 1997. The premiums of $17,910,000
    in respect of these losses were included in gross written and net earned
    premiums in 1997. The reinsurance to close reserves represent a
    retrospectively rated reinsurance contract in respect of an outstanding
    claims portfolio from the closing year of account of a Lloyd's syndicate.
    (The reinsurance to close occurs at the end of the third year of a Lloyd's
    underwriting year.)


                                       58
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   In the 1997 financial year, the reinsurance to close premium for the 1995
year of account of $17,910,000 and losses associated with this premium of
$17,910,000 were included in the revenue statement in accordance with the
current recommended accounting practice in the London Market. In the 1999 and
1998 financial years, following further deliberation by management on the
appropriate U.S. GAAP accounting treatment, the reinsurance to close premium
for the 1997 and 1996 years of account of $33,257,000 and $43,988,000 were
included as an asset in the balance sheet and the liabilities of $33,257,000
and $43,988,000 associated with this asset were included in unpaid losses in
the balance sheet. There was no impact to net income within 1999 and 1998 as a
consequence of this change in the Company's practice.

   Management has considered environmental and latent injury claims and claims
expenses in establishing the Company's reserve 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 affecting policies written in prior years. Coverage and claim settlement
issues, such as determining that coverage exists and defining an occurrence,
may cause the actual loss development to show more variation than the rest of
the Company's book of business. Traditional reserving techniques cannot be used
to estimate asbestos-related and environmental pollution claims and so the
uncertainty about 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 adverse effect on its
financial position. Still, there is no assurance that such losses will not
materially affect the Company's results of operations for any period.
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,
                                                   -------------------------
                                                    1999     1998     1997
                                                   -------  -------  -------
                                                   (dollars in thousands)
     <S>                                           <C>      <C>      <C>
     Reserves for unpaid losses and loss
      adjustment expenses, at beginning of year... $75,338  $58,755  $58,400
     Incurred losses and loss adjustment
      expenses....................................   3,622   17,721    2,808
     Paid losses and loss adjustment expenses.....  (4,469)  (1,138)  (2,453)
                                                   -------  -------  -------
     Reserves for unpaid losses and loss
      adjustment
      expenses, at end of year.................... $74,491  $75,338  $58,755
                                                   =======  =======  =======
</TABLE>

    Environmental Losses and Loss Adjustment Expenses Incurred and Reserves
                                  Outstanding
                              (net of reinsurance)

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                                   -------------------------
                                                    1999     1998     1997
                                                   -------  -------  -------
                                                   (dollars in thousands)
     <S>                                           <C>      <C>      <C>
     Reserves for unpaid losses and loss
      adjustment expenses, at beginning of year... $20,552  $30,342  $33,900
     Incurred losses and loss adjustment
      expenses....................................  (3,759)  (8,505)  (2,032)
     Paid losses and loss adjustment expenses.....  (1,007)  (1,285)  (1,526)
                                                   -------  -------  -------
     Reserves for unpaid losses and loss
      adjustment
      expenses, at end of year.................... $15,786  $20,552  $30,342
                                                   =======  =======  =======
</TABLE>

                                       59
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The reinsurance recoverables netted against the asbestos-related and
environmental pollution loss reserves for each of the years 1999, 1998 and
1997, are as follows:

<TABLE>
<CAPTION>
                                                    1999      1998      1997
                                                  --------  --------  --------
                                                    (dollars in thousands)
     <S>                                          <C>       <C>       <C>
     Gross reserves.............................. $128,192  $129,166  $111,805
     Reinsurance recoverables....................  (37,915)  (33,276)  (22,708)
                                                  --------  --------  --------
       Net reserves.............................. $ 90,277  $ 95,890  $ 89,097
                                                  ========  ========  ========
</TABLE>

   The incurred asbestos and pollution losses in 1999 reflect better than
expected loss development patterns during the year. In 1998, Terra Nova had
reallocated general IBNR specifically to cover asbestos-related claims.

13. 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 at
December 31, 1999 and 1998, of $46,440,000 and $38,823,000, respectively.
Doubtful accounts against which provisions of $880,000 had previously been made
were written off during 1999. The charge to doubtful accounts was $8,497,000,
$9,464,000 and $1,238,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. The charge in 1999 was primarily in connection with the Company
establishing a bad debt provision in respect of New Cap Reinsurance Corporation
and Reinsurance Australia Corporation which got into financial difficulties
during 1999. The charge in 1998 included $5,558,000 in respect of the provision
which had previously been included in unpaid losses and was transferred to the
bad debt provision during 1998 due to additional information received by the
Company in the year. The transfer of $5,558,000 concerned an insolvent
reinsurer. Prior to December 31, 1998, the liability of $5,558,000 was included
in unpaid losses while the reinsurance recovery of $5,558,000 was included in
reinsurance recoveries on unpaid losses as an asset. At December 31,1998, the
liability previously in unpaid losses was reclassified as a bad debt and
deducted from reinsurance recoveries on unpaid losses. This balance sheet
reclassification had no effect on net income.

14. Commitments and Contingent Liabilities

   (a) The Company is involved regularly, directly or indirectly, in litigation
in the ordinary course of conducting insurance and reinsurance business. In
some 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
management's opinion, 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. However, there is
no assurance that such losses will not materially affect the Company's results
of operations for any period.

   (b) Terra Nova is a shareholder of LUC Holdings Limited ("LUCH") (formerly
Market Building Limited). LUCH is a joint venture/consortium company formed to
establish and operate, through a subsidiary company, the London Underwriting
Centre ("LUC") as a trading center for companies operating in the London
Insurance Market. LUC provides a range of facilities to its tenants appropriate
to a trading center. All shareholders, including Terra Nova, have given
guarantees in favor of The Prudential Insurance Company Limited and the Royal
Bank of Scotland (Industrial Leasing) Limited for leases granted to Market
Building Limited in connection with the development of the LUC. The guarantee
is unlimited. The fire that occurred in August 1991, during fitting out the new
LUC resulted in a shortfall of annual rental income and the possibility

                                       60
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of further shortfalls in the future. Each year, Terra Nova 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. As well
as 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, 1999, under non-cancelable
operating leases are as follows:

<TABLE>
<CAPTION>
                                          (dollars in thousands)
                                          ----------------------
         <S>                              <C>
         2000............................        $ 3,784
         2001............................          2,100
         2002............................          1,164
         2003............................          1,001
         2004............................            751
         2005 and later years............          1,934
                                                 -------
                                                 $10,734
                                                 =======
</TABLE>


   Rental expense on property leases of $4,467,000, $4,246,000 and $4,102,000
was incurred for the periods to December 31, 1999, 1998 and 1997, respectively.

15. Extraordinary Charge Arising on Extinguishment of Debt

   An extraordinary charge of $11.6 million arose during the second quarter of
1998 as a result of U.K. Holdings extinguishing all of its $100 million 10.75%
Senior Notes due 2005 (the "Senior Notes"). The charge was net of a $5.2
million income tax benefit.

   The Senior Notes were extinguished as follows:

     (a) On April 1, 1998, U.K. Holdings repurchased $4.5 million of the
  Senior Notes for consideration of $5.2 million, including accrued interest.

     (b) On May 18, 1998, U.K. Holdings completed a cash tender for the
  remaining $95.5 million of the Senior Notes for consideration of $111.9
  million, including accrued interest.

   The extraordinary charge has been recognized in the period of extinguishment
under SFAS No.125 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities".

16. Long-Term Debt

   The Company's total outstanding consolidated indebtedness at December 31,
1999, was made up of $100 million of 7.0% Senior Notes due 2008, issued in
1998, and $75 million 7.2% Senior Notes due 2007, issued in 1997. The estimated
fair value of these Senior Notes at December 31, 1999, was $162.8 million,
comprising $92.0 million of 7.0% Senior Notes due 2008 and $70.8 million of
7.2% Senior Notes due 2007.

   The Senior Notes were issued by U.K. Holdings and are guaranteed fully and
unconditionally by Bermuda Holdings. The Senior Notes may be redeemed at any
time at the option of U.K. 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 purpose of the make-whole amount payment is to compensate the holder for
the lost interest payments that it would otherwise receive had the Senior Notes
not been redeemed. Thus, the make-whole amount is the

                                       61
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

difference between "x', the sum of the present values of the principal amount
of such Senior Notes together with scheduled interest payments, in each case
discounted at an adjusted treasury rate to the redemption date, and "y', the
principal amount of such Senior Notes to be redeemed.

   The indenture governing the Senior Notes contains various covenants. Under
certain circumstances, these covenants limit 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

   In 1992, Terra Nova's directors decided to cease writing aviation business.
Since the acquisition of Terra Nova by the Company in 1994, any charges or
credits arising from changes in estimates are recorded in continuing operations
of the Company. Included within other liabilities in the Company's balance
sheet is $20,497,000 (1998: $23,197,000) relating to net liabilities of
aviation business in run-off.

18. Ownership and Related Party Transactions

   Fees of $750,000, $838,750 and $487,500 were paid to Donaldson, Lufkin and
Jenrette, a related party, who is a significant shareholder, in 1999, 1998 and
1997, respectively. The fees related to the merger between the Company and
Markel Corporation in 1999 and the issue of the Senior Notes in 1998 and 1997.

19. Segment Information

   The Company's core operations are conducted through four reportable
segments: Terra Nova, Terra Nova (Bermuda), Terra Nova Capital and Corifrance.
The segments are strategic business units that operate in different markets.

   The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes and
extraordinary items. Inter-segment revenues are eliminated from segmental
reporting, such that the segmental revenues are consistent with the Company's
consolidated financial statements.

                                       62
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following tables summarize the operations and assets of the four
segments for the years ended December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                  1999
                         -------------------------------------------------------
                                     Terra Nova Terra Nova
                         Terra Nova  (Bermuda)   Capital   Corifrance   Total
                         ----------  ---------- ---------- ---------- ----------
                                         (dollars in thousands)
<S>                      <C>         <C>        <C>        <C>        <C>
Net earned premiums..... $  227,694   $ 39,494   $303,271   $ 14,822  $  585,281
                         ----------   --------   --------   --------  ----------
Segment (loss) profit...       (479)    68,869   (107,856)       733     (37,733)
                         ----------   --------   --------   --------  ----------
Segment assets..........  1,188,042    563,974    715,584     93,221   2,560,821
                         ----------   --------   --------   --------  ----------


<CAPTION>
                                                  1998
                         -------------------------------------------------------
                                     Terra Nova Terra Nova
                         Terra Nova  (Bermuda)   Capital   Corifrance   Total
                         ----------  ---------- ---------- ---------- ----------
                                         (dollars in thousands)
<S>                      <C>         <C>        <C>        <C>        <C>
Net earned premiums..... $  252,714   $ 78,061   $199,506   $ 16,627  $  546,908
                         ----------   --------   --------   --------  ----------
Segment profit (loss)...     61,304     49,304     (6,810)     6,625     110,423
                         ----------   --------   --------   --------  ----------
Segment assets..........  1,387,178    753,947    432,281     98,272   2,671,678
                         ----------   --------   --------   --------  ----------


<CAPTION>
                                                  1997
                         -------------------------------------------------------
                                     Terra Nova Terra Nova
                         Terra Nova  (Bermuda)   Capital   Corifrance   Total
                         ----------  ---------- ---------- ---------- ----------
                                         (dollars in thousands)
<S>                      <C>         <C>        <C>        <C>        <C>
Net earned premiums..... $  256,306   $ 42,985   $107,978   $ 11,800  $  419,069
                         ----------   --------   --------   --------  ----------
Segment profit (loss)...     64,722     34,566     (1,017)     2,706     100,977
                         ----------   --------   --------   --------  ----------
Segment assets..........  1,438,198    559,526    218,468    110,913   2,327,105
                         ----------   --------   --------   --------  ----------
</TABLE>

   The Company has changed its basis of segmentation from that used in the 1998
Annual Report on Form 10-K. Management believes the new basis of segmentation
most accurately reflects the Company's operating segments under the definition
provided by SFAS No.131. The four segments reported in the 1998 Form 10-K were:
(a) Marine & Aviation; (b) Non-Marine; (c) Agency; and (d) Corporate.

   A reconciliation of the total reportable segments' profit to the Company's
consolidated income from operations before tax and extraordinary charge is
provided below. The main components of the reconciling item are investment
income, foreign exchange losses and other expenses in the non-operating
companies, agency income in Octavian and debt interest paid on the Senior
Notes.

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                                  ----------------------------
                                                    1999      1998      1997
                                                  --------  --------  --------
                                                    (dollars in thousands)
     <S>                                          <C>       <C>       <C>
     Segment (loss) profit....................... $(37,733) $110,423  $100,977
     Reconciling item............................  (34,869)   (9,162)   (9,928)
                                                  --------  --------  --------
     (Loss) income from operations before income
      tax
      and extraordinary charge................... $(72,602) $101,261  $ 91,049
                                                  ========  ========  ========
</TABLE>

                                       63
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A reconciliation of the total reportable segments' assets to the Company's
consolidated total assets is provided below. The main components of the
reconciling item are investments in the non-operating companies and inter-
segment insurance balances eliminated on consolidation.

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                              ---------------------------------
                                                 1999       1998        1997
                                              ---------- ----------  ----------
                                                   (dollars in thousands)
     <S>                                      <C>        <C>         <C>
     Segment assets.......................... $2,560,821 $2,671,678  $2,327,105
     Reconciling item........................     70,879   (192,306)   (106,971)
                                              ---------- ----------  ----------
     Total assets............................ $2,631,700 $2,479,372  $2,220,134
                                              ========== ==========  ==========
</TABLE>

   The Company's principal products 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. In 1997, 1998 and
1999, the Company received premiums related to reinsurance to close of orphan
Lloyd's syndicates. Net earned premiums for the years ended December 31, 1999,
1998 and 1997, were as follows:

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                     --------------------------
                                                       1999     1998     1997
                                                     -------- -------- --------
                                                       (dollars in thousands)
     <S>                                             <C>      <C>      <C>
     Property....................................... $331,198 $256,844 $182,032
     Casualty.......................................  132,169   94,949   83,143
     Marine & aviation..............................  119,567  127,532  114,751
     Orphan syndicate business......................    2,347   67,583   39,143
                                                     -------- -------- --------
     Total net earned premiums...................... $585,281 $546,908 $419,069
                                                     ======== ======== ========
</TABLE>

   Because the Company conducts its business through worldwide market places
(including Lloyd's and the London market), it is not practicable to provide
geographic segment information.

20. Statutory Financial Data

   (a) Terra Nova files an annual audited return with the Financial Services
Authority (the "FSA"), in the U.K. The regulations require U.K. insurance
companies to comply with prescribed minimum solvency margins. Assets and
liabilities reported within the annual FSA Return are prepared subject to
specified rules concerning valuation and admissibility. Consequently, net
assets reported within the Return may vary from net assets as they appear in
Terra Nova's published financial statements. Technical provisions shown in
Terra Nova's annual FSA Return reflect the statutory requirement in the U.K.
for insurance companies to maintain equalization provisions. Equalization
provisions are established in accordance with specified rules and are in
addition to the provisions required to meet the anticipated ultimate cost of
settlement of outstanding claims at the balance sheet date. Such provisions are
not required under U.S. GAAP.

                                       64
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A reconciliation of total technical provisions (excluding provision for
unearned premiums) reported in Terra Nova's annual FSA Return, to Terra Nova's
reserve for unpaid losses and loss adjustment expenses under U.S. GAAP for the
years ended December 31, 1999, 1998 and 1997, is provided below:

<TABLE>
<CAPTION>
                                                Year ended December 31,
                                            --------------------------------
                                               1999       1998       1997
                                            ----------- --------  ----------
                                            (Unaudited)
                                                (dollars in thousands)
     <S>                                    <C>         <C>       <C>
     Technical provisions (excluding
      provision for unearned premiums).....  $896,181   $950,173  $1,041,460
     Equalization provision................       --     (20,180)    (14,250)
     Aviation business in run-off..........   (59,229)   (65,752)    (75,846)
                                             --------   --------  ----------
     Unpaid losses and loss adjustment
      expenses.............................  $836,952   $864,241  $  951,364
                                             ========   ========  ==========
</TABLE>

   Terra Nova's unaudited required minimum statutory solvency margin and
unaudited statutory solvency margin at December 31, 1999, were $39,248,000 and
$127,738,000, respectively. Terra Nova's unaudited and estimated FSA Return
policyholders' surplus and unaudited net income for the year ended December 31,
1999, and the audited FSA Return policyholders' surplus and net income as
reported in the annual returns to the FSA for the years ended December 31, 1998
and 1997, are as follows:
<TABLE>
<CAPTION>
                                                     1999       1998     1997
                                                  ----------- -------- --------
                                                  (Unaudited)
                                                      dollars in thousands
     <S>                                          <C>         <C>      <C>
     Policyholders' surplus......................  $166,986   $270,732 $233,936
     Net (loss) income before dividends..........   (27,774)    39,327   49,855
</TABLE>

   Terra Nova's ability to pay dividends is limited by a Notice of Requirements
issued by a predecessor of the FSA which requires Terra Nova to give 14 days'
advance notice to the FSA 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 to it 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 and net income for the years ended December 31,
1999, 1998 and 1997, respectively, were:

<TABLE>
<CAPTION>
                                                    1999       1998     1997
                                                 ----------- -------- --------
                                                 (Unaudited)
                                                     dollars in thousands
     <S>                                         <C>         <C>      <C>
     Statutory capital and surplus..............  $168,261   $324,580 $260,612
     Minimum required statutory capital and
      surplus...................................   100,000    100,862  100,000
     Net income before dividends................    69,681     49,570   29,025
</TABLE>

   Bermuda Holdings' and U.K. 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.

                                       65
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


21. Summarized Financial Information for U.K. Holdings

   U.K. Holdings was incorporated in the United Kingdom on November 7, 1994, to
acquire Terra Nova. U.K. 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.

   Summarized consolidated balance sheet information as at December 31, 1999,
and 1998, and summarized consolidated statements of operations information for
the years December 31, 1999, 1998 and 1997, about U.K. Holdings is set out
below:

<TABLE>
<CAPTION>
                                                              December 31,
                                                          ---------------------
                                                             1999       1998
                                                          ---------- ----------
                                                               (dollars in
                                                               thousands)
<S>                                                       <C>        <C>
Investments and cash..................................... $  803,070 $  900,442
Reinsurance recoverable on unpaid losses.................    530,102    459,497
Accrued premium income...................................    215,225    236,885
Other assets.............................................    485,555    364,172
                                                          ---------- ----------
  Total assets........................................... $2,033,952 $1,960,996
                                                          ========== ==========
Unpaid losses and loss adjustment expenses............... $1,291,312 $1,093,082
Unearned premiums........................................    446,224    375,574
Long-term debt...........................................    175,000    175,000
Other liabilities........................................     88,071    108,250
                                                          ---------- ----------
  Total liabilities......................................  2,000,607  1,751,906
                                                          ---------- ----------
  Total shareholders' equity.............................     33,345    209,090
                                                          ---------- ----------
  Total liabilities and shareholders equity.............. $2,033,952 $1,960,996
                                                          ---------- ----------
</TABLE>

<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                                 ----------------------------
                                                   1999      1998      1997
                                                 --------  --------  --------
                                                   (dollars in thousands)
<S>                                              <C>       <C>       <C>
Net earned premiums............................. $529,651  $453,406  $357,939
Net investment income...........................   56,034    56,858    55,698
Realized investment gains.......................   20,332    15,544    15,306
Foreign exchange gains (losses).................    2,945      (483)   (1,240)
Agency income...................................   12,369    17,057    15,571
                                                 --------  --------  --------
  Total revenues................................  621,331   542,382   443,274
                                                 --------  --------  --------
Underwriting costs and expenses.................  749,730   489,646   384,530
                                                 --------  --------  --------
(Loss) income from operations before income tax
 and extraordinary charge....................... (128,399)   52,736    58,744
                                                 --------  --------  --------
  Net (loss) income............................. $(90,771) $ 23,878  $ 41,105
                                                 ========  ========  ========
</TABLE>

                                       66
<PAGE>

            TERRA NOVA (BERMUDA) HOLDINGS LTD. AND ITS SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


22. Unaudited Selected Quarterly Financial Data

<TABLE>
<CAPTION>
                            Three months Three months Three months Three months
                               ended        ended        ended        ended
                              March 31     June 30    September 30 December 31
                            ------------ ------------ ------------ ------------
                              (dollars in thousands except per share amounts)
<S>                         <C>          <C>          <C>          <C>
1999
  Revenues.................   $172,823     $210,213     $187,692     $152,522
                              --------     --------     --------     --------
  Net income...............     21,061       13,239       11,968      (81,242)
                              --------     --------     --------     --------
  Basic earnings per
   share...................   $   0.83     $   0.53     $   0.47     $  (3.20)
                              --------     --------     --------     --------
  Diluted earnings per
   share...................   $   0.81     $   0.51     $   0.45     $  (3.20)
                              --------     --------     --------     --------
1998
  Revenues.................   $171,917     $148,986     $158,579     $195,122
                              --------     --------     --------     --------
  Extraordinary charge
   after income tax........        --        11,641          --           --
                              --------     --------     --------     --------
  Net income...............     24,423        8,959       19,771       19,246
                              --------     --------     --------     --------
  Basic earnings per
   share...................   $   0.96     $   0.35     $   0.78     $   0.75
                              --------     --------     --------     --------
  Diluted earnings per
   share...................   $   0.94     $   0.34     $   0.75     $   0.74
                              --------     --------     --------     --------
</TABLE>

   The Company's net income per share amounts are based on the weighted average
number of shares outstanding during the periods (see Note 8).

23. Subsequent Event

   The Company entered into an Agreement and Plan of Merger and Scheme of
Arrangement, dated as of August 15, 1999, and amended on September 10, 1999,
and January 28, 2000, with Markel Corporation ("Markel"). The Agreement
provides for the merger of a wholly-owned subsidiary of Markel Holdings into
Markel and a scheme of arrangement between the Company and its shareholders.
After completion of the merger and the scheme of arrangement, each of the
Company and Markel will be a wholly-owned subsidiary of Markel Holdings, which
will change its name to "Markel Corporation." At the effective time of the
merger and scheme of arrangement each outstanding Class A ordinary share, other
than 2,069 shares held by Markel or its transferee, and each outstanding Class
B ordinary share of the Company will be cancelled and the holders thereof,
other than Markel, the Company or its subsidiaries, will be entitled to receive
$13.00 in cash, 0.07027 of a Markel Holdings common share and 0.07027 of Markel
Holdings contingent value right per share. On March 16, 2000, the Company's and
Markel's shareholders approved the merger and scheme of arrangement at special
shareholder meetings called for the purpose. Subject to approval by the Bermuda
Supreme Court and completion or waiver of all closing conditions, the merger
and scheme of arrangement are expected to be completed on March 24, 2000.

                                       67
<PAGE>

ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

   None.

ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The following table provides biographical information regarding the
directors and executive officers of the Company.

<TABLE>
<CAPTION>
          Name           Age                            Title
          ----           --- ------------------------------------------------------------
<S>                      <C> <C>
John J. Dwyer...........  63 Chairman of the Board
                             Chairman and Chief Executive Officer of Terra Nova (Bermuda)
                             Director of U.K. Holdings
                             Director of Corifrance
Nigel H.J. Rogers.......  50 President and Chief Executive Officer
                             Chairman of U.K. Holdings
                             Director of Terra Nova
                             Managing Director of Octavian
                             Chairman of TN Capital
                             Director of Corifrance
William J. Wedlake......  43 Senior Vice-President and Chief Financial Officer
                             Director of U.K. Holdings
                             Director of Terra Nova
                             Director of TN Capital
                             Director of Corifrance
Jean M. Waggett.........  58 Senior Vice-President, General Counsel and Secretary
                             Director of Terra Nova (Bermuda)
                             Director of Corifrance
Ian L. Bowden...........  56 Chief Investment Officer
                             Director of Terra Nova
                             Director of Terra Nova Asset Management Limited ("TNAM")
John E. O'Neill.........  50 Group Chief Actuary
                             Director of Terra Nova
John J. Byrne...........  67 Director of the Company
Mark J. Byrne...........  38 Director of the Company
Robert S. Fleischer.....  57 Director of the Company
Steven J. Gilbert.......  52 Director of the Company
David L. Jaffe..........  41 Director of the Company
Hugh P. Lowenstein......  69 Director of the Company
Philip F. Petronis......  51 Director of the Company
Jerry S. Rosenbloom.....  60 Director of the Company
</TABLE>

                                       68
<PAGE>

   John J. Dwyer has been Chairman of the Board of the Company since May 1998,
having been Deputy Chairman since May 1995, and has been a director of Terra
Nova (Bermuda) since March 1995. He is a director of U.K. Holdings, TN SAS and
Corifrance, and was a director of Octavian and TN Capital from 1995 through
December 1997 and January 1998, respectively.

   Nigel H.J. Rogers has been President and Chief Executive Officer of the
Company since May 1998, having been Deputy Chairman since January 1996. Mr.
Rogers has served as Managing Director of Octavian since January 1996. He has
been a member of Lloyd's since the 1982 year of account. Mr. Rogers also serves
as a director of U.K. Holdings, Terra Nova, TN Capital, Corifrance and TNAM.

   William J. Wedlake has been the Senior Vice President and Chief Financial
Officer of the Company and a director and Chief Financial Officer of U.K.
Holdings and Terra Nova since September 1996. Mr. Wedlake has been a director
of Corifrance since September 1997 and of TN Capital since February 1998. From
1993 to 1996, Mr. Wedlake was Finance Director (U.K. & Ireland) of GRE.

   Jean M. Waggett has been the Senior Vice President, Secretary and General
Counsel of the Company since March 1996. Ms. Waggett has been a director of
Terra Nova (Bermuda) since November 1996, and Corifrance since September 1997.
From 1980 until February 1996, Ms. Waggett was employed in various positions
with Aetna, Inc. and Aetna International, Inc.

   Ian L. Bowden, Chief Investment Officer, transferred to TNAM in 1996, having
been Director of Fixed Interest Investment of Terra Nova since 1986. Mr. Bowden
serves as a director of Terra Nova and Managing Director of TNAM.

   John E. O'Neill is the Group Chief Actuary of the Company and previously was
the Chief Actuary of Terra Nova since 1994. Mr. O'Neill has been a director of
Terra Nova since September 1999.

   John J. Byrne has been a Director of the Company since May 1999. Mr. Byrne
served as a Director Emeritus of the Company from November, 1996 to May 1999,
and as a Director from December 1994 until November 1996. Since 1985, Mr. Byrne
has been Chairman of the Board of Fund American Enterprise Holdings, Inc., a
financial services holding company, and was its Chief Executive Officer and
President until October 1997. Mr. Byrne is also a director of Financial
Security Assurance Holdings Ltd. and White Mountains Holdings. Mr. Byrne is the
father of Mark J. Byrne, an incumbent Director of the Company.

   Mark J. Byrne has been a Director of the Company since November 1996. Mr.
Byrne is Chairman and President of West End Capital Management (Bermuda)
Limited. Mr. Byrne previously was the Managing Director, Global Fixed Income
Arbitrage, Credit Suisse First Boston. Mr. Byrne is the son of John J. Byrne,
an incumbent Director of the Company.

   Robert S. Fleischer has been a Director of the Company since December 1994.
Mr. Fleischer is currently a Managing Director of Donaldson, Lufkin & Jenrette
Securities Corporation Inc. ("DLJSC") and has been employed in various
positions by DLJSC since 1978.

   Steven J. Gilbert has been a Director of the Company since December 1994.
Mr. Gilbert is the Chairman of Gilbert Global Equity Partners (Bermuda) Ltd.,
and was the Managing General Partner of Soros Capital LP, the principal venture
capital and leveraged transaction entity of Quantum Group of Funds, from 1992
to 1996. He is the Managing Director of Commonwealth Capital Partners LP, a
private equity investment fund. He is also a director of NFO Worldwide Inc.,
Vertias Inc., Star City Casino Holdings, Ltd., LCC International Inc., and
One.Tel Ltd.

   David L. Jaffe has been a Director of the Company since December 1994. Mr.
Jaffe has been a Managing Director of DLJ Merchant Banking, Inc. ("DLJMB")
since January 1995 and has been employed in various positions by DLJMB or DLJSC
since 1984. He is also a director of OSF Holdings Inc. (Toronto Stock
Exchange), Brand Scaffold Services, Inc., Target Media Partners and Duane Reade
Inc.

                                       69
<PAGE>

   Hugh P. Lowenstein has been a Director of the Company since December 1994.
Mr. Lowenstein is the founder and owner of Shore Capital Limited, a Bermuda-
based consulting and investment firm ("Shore Capital"). Shore Capital currently
provides consulting services to DLJSC. He is also a director of Century
Business Services Inc.

   Philip F. Petronis has been a Director of the Company since December 1994.
Mr. Petronis has been an Executive Vice President with Guy Carpenter & Company
Inc. since April 1998. Formerly, Mr. Petronis was a Principal of Marsh &
McLennan Risk Capital Corporation and a Managing Director of Marsh & McLennan
Inc., having served in those positions since 1992 and 1984, respectively. He is
past Chairman of the National Association of Insurance Brokers.

   Jerry S. Rosenbloom has been a Director of the Company since May 1998. Dr.
Rosenbloom is Frederick H. Ecker Professor of Insurance and Risk Management at
The Wharton School of the University of Pennsylvania where he had been a member
of the faculty since 1974. He served as Chairman of the Department of Insurance
and Risk Management at the Wharton School from 1989 to 1994. Dr. Rosenbloom is
also a director of Annuity and Life Re (Holdings) Ltd., Harleysville Insurance
Group, and Mutual Risk Management.

ITEM 11--EXECUTIVE COMPENSATION

   The following table summarizes the compensation earned by John J. Dwyer, the
Company's Chairman and each of the Company's other four most highly compensated
executive officers (collectively, the "Named Executive Officers") for its 1997,
1998 and 1999 fiscal years.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                    Long-term
                                     Annual Compensation (1)       Compensation
                               -----------------------------------   Awards--
                                                      Other Annual  Securities
                                                      Compensation  Underlying
                                     Salary    Bonus      (2)        Options
 Name and Principal Position   Year     $        $         $            #
 ---------------------------   ---- --------- ------- ------------ ------------
<S>                            <C>  <C>       <C>     <C>          <C>
John J. Dwyer................. 1999 3,247,500 900,000   145,500       60,000
 Chairman (3)                  1998   383,333 475,000   138,000          --
                               1997   320,000 240,000   129,000      255,700
Nigel H.J. Rogers............. 1999   440,000 543,177    32,827       80,965
 President and Chief Executive
  Officer (4)                  1998   383,333 475,000    31,182          --
                               1997   320,000 240,000    29,656      256,400
William J. Wedlake............ 1999   310,040 100,000    23,947       17,500
 Senior Vice President and
  Chief Financial              1998   295,040 200,000    24,014          --
  Officer                      1997   280,000 150,000    24,244       67,100
Jean M. Waggett............... 1999 1,130,000 300,000    75,000       17,500
 Senior Vice President,
  Secretary and                1998   250,000 150,000    75,000          --
  General Counsel (5)          1997   230,000 115,000    75,000       65,500
Ian L. Bowden................. 1999   248,800  80,000    21,581        6,000
 Chief Investment Officer      1998   236,800  90,000    22,168          --
                               1997   236,800  96,000    24,907          --
</TABLE>
--------
(1) All salary and bonus amounts for the Named Executive Officers were
    calculated and granted in U.S. dollars and are shown in the table as
    granted. Compensation was paid to Mr. Dwyer and Ms. Waggett in U.S.
    dollars. Salary and bonus amounts for Messrs. Rogers, Wedlake and Bowden
    were translated into, and paid in, British pounds at the exchange rate of
    $1.60. Because the British pound and U.S. dollar relationship varies from
    day to day, the U.S. dollar equivalent of the compensation paid to Messrs.
    Rogers,

                                       70
<PAGE>

   Wedlake and Bowden in British pounds will fluctuate. For each of 1999, 1998
   and 1997, the payments to Messrs. Rogers, Wedlake and Bowden for "Other
   Annual Compensation" were made in British pounds and have been translated
   into U.S. dollars at the year-end exchange rate for each of 1999, 1998 and
   1997 of $1.6117, $1.6638 and $1.6418.
(2) This column includes the cost to the Company of personal health insurance
    and the value attributable for personal taxation purposes of car, fuel and
    private telephone expenses paid by the Company for the Named Executive
    Officer where appropriate. In the case of Mr. Dwyer and Ms. Waggett, the
    amounts include housing allowances as residents in Bermuda.
(3) Mr. Dwyer's salary amount includes $2,807,500 paid in lieu of severance in
    December 1999.
(4) Mr. Rogers also participates in the Octavian Stock Option Plan which
    provides for a grant of options in the years 1999 to 2003, based on profit
    commissions received by Octavian following the closing of each of the
    underwriting years of account 1996 to 2000. In December 1999, Mr. Rogers
    was granted 20,965 options on Terra Nova Class A shares under the Plan
    based on profit commissions received by Octavian on the closing of the
    1996 underwriting year of account. Included in Mr. Roger's bonus was an
    Octavian Syndicate Management bonus paid in 1999 for the 1996 underwriting
    year of account.
(5) Ms. Waggett's salary amount includes $865,000 paid in lieu of severance in
    December 1999.

Option Grants in 1999

   The following table sets forth information on grants of stock options,
exercisable for Class A Ordinary Shares awarded to the Company's Named
Executive Officers. No options were granted in 1999 to Directors who were not
executive officers.

<TABLE>
<CAPTION>
                         Number of   % of Total                     Potential Realized
                         Securities   Options                        Value of Assumed
                         Underlying  Granted to                       Annual Rates of
                          Options    Employees  Exercise                Stock Price
                          Granted    in Fiscal   Price   Expiration  Appreciation for
          Name               (#)        Year     ($/Sh)     Date      Option Term (1)
          ----           ----------  ---------- -------- ---------- -------------------
                                                                       5%        10%
                                                                    -------- ----------
<S>                      <C>         <C>        <C>      <C>        <C>      <C>
John J. Dwyer...........   15,000(2)    3.0%     $23.65   02/04/09  $223,100 $  565,380
                           45,000(3)    8.9%      23.65   02/04/09   669,301  1,696,140
Nigel H.J. Rogers.......   15,000(2)    3.0%      23.65   02/04/06   144,419    336,557
                           45,000(3)    8.9%      23.65   02/04/06   433,257  1,009,672
                           20,965(4)    4.1%    Nominal   12/20/06   256,046    596,696
William J. Wedlake......    7,500(2)    1.5%      23.65   02/04/06    72,209    168,279
                           10,000(3)    2.0%      23.65   02/04/06    96,279    224,372
Jean M. Waggett.........    7,500(2)    1.5%      23.65   02/04/09   111,550    282,690
                           10,000(3)    2.0%      23.65   02/04/09   148,734    376,920
Ian L. Bowden...........    6,000(3)    1.2%      23.65   02/04/06    57,768    134,623
</TABLE>
(1) Assumes market value of stock on date of grant equal to exercise price.
(2) Options lapsed in 2000 without becoming exercisable.
(3) Each option becomes exercisable with respect to 20% of the underlying
    shares on each of the first through fifth anniversaries of the date of
    grant.
(4) Options granted in terms of the Octavian Stock Option Plan with an
    exercise price of less than $l per share. The share price on date of issue
    is assumed as $30.

   No further grants of options have been made to Messrs. Dwyer, Rogers,
Wedlake, Waggett or Bowden since December 31, 1999.

                                      71
<PAGE>

Option Exercises in 1999 and Year End 1999 Option Values

   The following table presents information about the exercise of options to
purchase Class A Ordinary Shares during 1999 and the value realized on exercise
by each Named Executive Officer. The table also provides the number of
exercisable and unexercisable options and the value of the in-the-money options
as of December 31, 1999, for each Named Executive Officer. The Company has
never granted SAR's.

   The value of unexercised options has been calculated by subtracting the
exercise price from the market price of the Class A Ordinary Shares on December
31, 1999 ($30 per Share).

<TABLE>
<CAPTION>
                                                Number of Securities      Value of Unexercised
                                                 Underlying Options       In-the-Money Options
                          Number of             at December 31, 1999      at December 31, 1999
                           Shares             ------------------------- -------------------------
                          Acquired    Value               Unexercisable             Unexercisable
                         on Exercise Realized Exercisable      (1)      Exercisable      (1)
          Name           ----------- -------- ----------- ------------- ----------- -------------
<S>                      <C>         <C>      <C>         <C>           <C>         <C>
John J. Dwyer...........      --        --      164,507      204,820    $1,621,379   $  906,488
Nigel H. J. Rogers......      --        --      114,560      222,805       472,789    1,481,455
William J. Wedlake......      --        --       50,840       63,780       386,576      403,290
Jean M. Waggett.........      --        --       39,096       61,145       261,273      412,902
Ian L. Bowden...........      --        --       51,194       15,449     1,106,702      115,099
</TABLE>
--------
(1) The unexercisable options would become exercisable in the event of a change
    of control. The Terra Nova/Markel merger and scheme of arrangement, if
    consummated, would constitute such a change of control.

Pension Plans

   The following table presents the estimated maximum annual retirement
benefits payable to employees of Terra Nova and TNAM under the Terra Nova
Pension and Life Assurance Plan (1986) (the "Pension Plan") at the specified
average compensation and years of service classifications.

                               Pension Plan Table

<TABLE>
<CAPTION>
                                          Years of Service
                            --------------------------------------------
     Average Compensation      15       20       25       30       35
     --------------------   -------- -------- -------- -------- --------
     <S>                    <C>      <C>      <C>      <C>      <C>
     $125,000               $ 36,058 $ 48,077 $ 60,096 $ 72,115 $ 83,333
     $150,000                 43,269   57,692   72,115   86,538  100,000
     $175,000                 50,481   67,308   84,135  100,962  116,667
     $200,000                 57,692   76,923   96,154  115,385  133,333
     $225,000                 64,904   86,538  108,173  129,808  150,000
     $250,000                 72,115   96,154  120,192  144,231  166,667
     $300,000                 86,538  115,385  144,231  173,077  200,000
     $400,000                115,385  153,846  192,308  230,769  266,667
     $450,000                129,808  173,077  216,346  259,615  300,000
     $500,000                144,231  192,308  240,385  288,462  333,333
</TABLE>

   The Pension Plan qualifies Terra Nova and TNAM for an exemption from
compulsory participation in the State Earnings Related Pension Scheme
("SERPS"), a state-run pension plan to which non-exempted UK companies are
required to make annual contributions. Only permanent employees between the
ages of 20 and 61 are eligible to participate in the Pension Plan. Retirement
benefits are calculated by multiplying the number of years of covered service
by 1/52nd , multiplied by pensionable salary received in the calendar year
prior to normal retirement age (age 62) or the date of leaving service, if
earlier.

   The Pension Plan has a supplementary section which provides that certain
employees of Terra Nova and TNAM shall receive retirement benefits based on the
same formula as that for the ordinary plan member, except the multiple is a
maximum of 1/30th for each year of service.

                                       72
<PAGE>

   The maximum fraction for the purposes of computing retirement benefits is
2/3rds and, for employees joining the scheme after March 1987, the pensionable
salary is limited. The limit as of December 31, 1999, was $144,960 using a
British pound-to-U.S. dollar exchange rate of $1.60. Pensionable salary
excludes bonuses, commissions, overtime or any other discretionary or
fluctuating payments, except where a member is specifically advised to the
contrary. A member is fully vested in the Pension Plan after two years of
participation.

   The Pension Plan provides for the payment of reduced benefits on early
retirement between the ages of 50 and 62. On the death of a member before
retirement, the Pension Plan provides for a cash lump sum payment of four times
basic salary and a survivor annuity benefit to the member's spouse of 50% of
the member's prospective benefit. This benefit is payable from the date of the
death of the member. The same benefits are payable to minor children up to the
age of 18, or for such longer period as their education continues on a full-
time basis if there is no surviving spouse. Pension Plan participants may make
additional voluntary contributions up to 15% of annual salary to supplement
their Pension Plan benefits. Such voluntary contributions are not matched by
Terra Nova and TNAM.

   Terra Nova provides Mr. Wedlake and one other employee with a "Non-Approved"
Pension Plan which provides a money purchase fund and additional term life
assurance coverage targeted to raise total retirement and death benefits to a
level broadly equivalent to that enjoyed by employees who joined the Company
prior to June 1, 1989, the date on which the United Kingdom imposed limits on
pensionable earnings.

   The credit years of pensionable services for Messrs. Wedlake and Bowden at
December 31, 1999, were 6.4 years and 22.7 years, respectively.

   Mr. Dwyer, Ms. Waggett and employees of the Company who were based in
Bermuda, Canada and Belgium participate in money purchase pension plans which
are in line with local market terms and conditions of employment and generally
cost the Company 10% of the basic salary of each participating employee.

   Mr. Rogers participates in The Octavian Group Pension Scheme (the "OMP
Plan"), a defined contribution plan. Participation in the OMP Plan is at the
discretion of the Compensation Committee. For employees of Octavian, the
current annual contribution rate is 15% of annual pensionable salary, and for
underwriters and directors of Octavian, the current annual contribution rate is
25% of annual pensionable salary. Normal retirement age is 60.

   Octavian provides certain of its employees with one of two defined benefit
pension schemes, both run in conjunction with the Lloyd's Superannuation Scheme
(the "Abbey Plan" and the "Lloyd's Plan", respectively). The Abbey Plan
provides benefits which are similar to those in the Pension Plan, the principal
difference being that the multiple is 1/60th and retirement age is 60. The
Lloyd's Plan provides benefits which are in addition to those under SERPS as a
retirement age of 60. The formula for computing pensions is similar to that in
the Pension Plan, the principal difference being that the multiple is 1/100th.

Service Agreements

   The Company entered into employment agreements with Messrs. Dwyer and Rogers
and Ms. Waggett, that require them to maintain the confidentiality of
information concerning the Company's business and not to work for a competitor
of the Company for two years (one year for Ms. Waggett) after termination of
employment. The employment agreements provided for a period of employment of
three years (two for Ms. Waggett) which is automatically extended for
subsequent one-year periods. Under these agreements, if the employment of
Messrs. Dwyer or Rogers, or Ms. Waggett is involuntarily terminated other than
for cause (including termination for gross misconduct or dishonesty), or if the
executive terminates employment for a defined good reason or in the event of a
change of control of the Company, the following benefits will be paid: three
years of salary continuation (two years for Ms. Waggett), which includes annual
base pay in the year of termination and a bonus amount equal to the greater of
target bonus in the year of termination or the highest of the last three years,
and all Company benefits during the salary continuation period or until the
executive becomes eligible for comparable benefits under a similar plan with a
subsequent employer.

                                       73
<PAGE>

   The agreements with Mr. Dwyer and Ms. Waggett were terminated in December
1999, preserving the requirement to maintain confidentiality of information.
Terra Nova entered into settlement agreements with each of Mr. Dwyer and Ms.
Waggett for payments of $3,707,500 and $1,165,000, respectively, in settlement
of their rights under the employment agreements and bonuses in respect of 1999.
Mr. Dwyer will remain with the Company until the closing date of the Terra
Nova/Markel merger and scheme of arrangements and Ms. Waggett will remain until
the later of the closing date and April 30, 2000.

   The Company had previously entered into a service agreement with Nigel H.J.
Rogers that was superseded by the new employment agreement with respect to all
terms and conditions, except an annual bonus plan related to the performance of
the Lloyd's syndicates managed by Octavian Syndicate Management.

   In connection with the proposed Terra Nova/Markel merger and scheme of
arrangement, Markel Holdings anticipates a new employment arrangement with Mr.
Rogers which would provide for him to continue employment at annual
compensation levels comparable to those under his current agreement and to
receive a $5 million bonus payment in a combination of cash and Markel Holdings
common shares, one half of which would be paid immediately with the remainder
vesting in six-month increments over 30 months. The new employment arrangement
would supersede Mr. Rogers current Terra Nova employment arrangements at the
time of closing.

   The Company has entered into an employment arrangement with William J
Wedlake, which provides for a base salary subject to annual review, an annual
bonus, a cash allowance in lieu of the use of a company automobile, the right
to participate in the Company's health insurance plan and the right to
participate in Terra Nova's approved and funded non-approved pension plans and
to receive an additional year of pensionable past service credit for each
complete year of actual service with the Company up to an agreed maximum less
years of service vested in a previous employer's pension plans.

   The employment arrangement provides that Mr. Wedlake's employment may be
terminated by either party's giving 12 month's notice to the other. The Company
can also terminate Mr. Wedlake's employment at any time for cause.

Approved Executive Share Option Plans

   On January 9, 1995, the Board of Directors of the Company adopted The Terra
Nova Executive Share Option Schemes (the "Stock Option Plans") as amended on
March 13, 1996, August 4, 1996, May 5, 1998 and October 14, 1999.

   The Stock Option Plans provide for the grant of options to eligible
employees to purchase Shares (the "Option Shares"). The maximum number of
Option Shares for which Options may be granted is limited: the total number of
Option Shares for which options have not yet been granted, the number of
options outstanding, the Option Shares issued within the previous ten years
under the Stock Option Plans may not exceed 15% of the aggregate number of
Ordinary Shares of the Company outstanding on the date preceding any option
grant. Unexercised options will expire either seven or ten years after the date
granted, as provided in the respective Stock Option Plans, subject to certain
limited exceptions. The Stock Option Plans are administered by the Compensation
Committee, which determines those employees who will be granted any future
options.

Octavian Stock Option Plan

   In connection with the Octavian acquisition, the Company, on January 5,
1996, established the Octavian Stock Option Plan providing for the grant of
options to certain individual members of the management of Octavian, including
Mr. Rogers, 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 to the aggregate to (i) 90% of the profit commission received by Octavian
from the Octavian Syndicates (less related underwriters' and management bonuses
and corporate taxes) for each year of account, divided by (ii) the fully-
diluted net asset value (as defined in the Octavian Stock Option Plan) per
Ordinary Share of the Company as at the end of such year. The aggregate Profit

                                       74
<PAGE>

Commission Component for the 1996 to 2000 underwriting years of account is
subject to a maximum of (Pounds)10.0 million and no further options shall be
issued once such maximum has been reached. The options will be granted on
receipt of the profit commissions by Octavian on closure of each year of
account under applicable Lloyd's regulations, which currently are the years
1999 to 2003 with regard to each of the years 1996 to 2000, respectively. The
options have a nominal exercise price and become exercisable on or after the
January 1 next succeeding the date of grant, commencing January 1, 2000,
provided that all options granted after January 1, 2002, become immediately
exercisable. Options expire seven years after the date of grant. The Octavian
Stock Option Plan will be administered by the Compensation Committee with
respect to persons subject to the reporting requirements of Section 16(a) of
the Securities Exchange Act of 1934, as amended. In December 1999, 157,012
options were granted following receipt by Octavian of the profit commissions on
the 1996 year of account.

ITEM 12--BENEFICIAL OWNERSHIP OF ORDINARY SHARES

   The following table presents the beneficial ownership of Class A Ordinary
Shares ("Shares") by the Company's five most highly compensated executive
officers, the Company's Directors and all of the Directors and executive
officers of the Company as a group as of March 1, 2000. Unless otherwise
indicated, the named individual has sole voting and investment power over the
Ordinary Shares presented below.

<TABLE>
<CAPTION>
                                                                      Number of Class A
                               Shareholder                             Ordinary Shares  Percentage
                               -----------                            ----------------- ----------
      <S>                                                             <C>               <C>
      John J. Dwyer.................................................        30,862            *
      Nigel H.J. Rogers.............................................        10,000            *
      Ian Bowden....................................................        40,791            *
      William J. Wedlake............................................         4,500            *
      Jean M. Waggett...............................................         2,000            *
      John J. Byrne (1).............................................       484,787         1.99
      Mark J. Byrne.................................................         1,000            *
      Robert S. Fleischer (2).......................................         5,140            *
      Steven J. Gilbert (2) (3).....................................        14,900            *
      David L. Jaffe (2)............................................         6,140            *
      Hugh P. Lowenstein (2)........................................        40,140            *
      Philip F. Petronis (2) (4)....................................         3,940            *
      Jerry S. Rosenbloom (2).......................................         2,985            *
      All directors and executive officers as a group (14 persons)..       645,685         2.48
</TABLE>
--------
(1) The above table includes some shares in a private foundation and a family
    partnership over which Mrs. Byrne has voting control. The above table does
    not include an additional 892,691 shares held by partnership and
    corporation in which Mr. Byrne has an indirect economic interest but does
    not have investment control or voting power. Mr. Byrne disclaims direct
    beneficial ownership to these 892,691 shares.
(2) 1,162 of the Shares owned by Mr. J. Byrne, 3,140 of the Shares owned by
    each of Messrs. Fleischer, Jaffe, Lowenstein and Petronis, 2,921 of the
    Shares owned by Mr. Gilbert, and 1,985 of the Shares owned by Mr.
    Rosenbloom, represent shares as to which the Director has voting but not
    dispositive power.
(3) Mr. Gilbert is the indirect beneficial owner of 1,530 Shares held by
    various interests of which he is a trustee or director and has both voting
    and investment power with respect to such Shares.
(4) Includes 300 Shares owned by custodial accounts for Mr. Petronis' daughters
    of which he disclaims beneficial ownership.

                                       75
<PAGE>

Other Beneficial Owners

   The following table presents information with respect to beneficial
ownership of the Shares, as of March 1, 2000, by each person known to the
Company (including corporate groups) who beneficially owns more than five
percent of the Company's outstanding Ordinary Shares ("Shares"):

<TABLE>
<CAPTION>
                      Shareholder                  Number of Shares Percentage
                      -----------                  ---------------- ----------
      <S>                                          <C>              <C>
      Markel Corporation (1)......................    8,241,090       31.52%
      DLJ Entities (2)............................    4,924,799       18.84%
      Fidelity Mgt. & Res. (3)....................    1,797,000        7.38%
      Robert E. Torray & Co., Inc./The Torray
       Fund(4)....................................    1,261,000        5.18%
</TABLE>
--------
(1) Consists of 1,082,470 Class A Shares over which Markel Corporation has sole
    voting and dispositive power and 7,158,620 Class A and B Shares, which are
    the subject of a Shareholder Agreement, dated as of August 15, 1999 and
    confirmed on January 28, 2000 between Markel Corporation and the following
    shareholders of the Company: DLJ entities, John J. Byrne and related
    entities, and Marsh & McLennan Risk Capital Holdings, Ltd. and related
    entities. The Shareholder Voting Agreement gives Markel Corporation the
    right to vote the 7,158,620 Terra Nova Shares in favor of the proposed
    Terra Nova/Markel merger and scheme of arrangement.
(2) Consists of 3,128,582 Class A (voting) Shares and 1,796,217 Class B (non-
    voting) Shares, which are convertible into Class A Shares, held directly by
    the following related investors: DLJMB Funding, 929,990 Shares (567,905
    Class A and 362,085 Class B); DLJSC, 134,352 Shares (82,048 Class A and
    52,304 Class B); DLJMB Overseas Partners C.V. ("DLJMB Overseas"), 2,183,345
    Shares (1,121,517 Class A and 1,061,828 Class B); DLJ International
    Partners C.V. ("DLJIP"), 1,039,181 Shares (967,499 Class A and 71,682 Class
    B); DLJ Offshore Partners C.V. ("DLJOP"), 60,253 Shares (36,797 Class A and
    23,456 Class B); and DLJ First ESC, L.L.C. ("DLJ First"), 577,678 Shares
    (352,816 Class A and 224,862 Class B). As the parent of both DLJMB Funding
    and DLJSC, Donaldson, Lufkin & Jenrette, Inc. ("DLJ") may be deemed to
    beneficially own all of the shares held by such entities. As DLJMB is the
    general partner of each of DLJMB Overseas, DLJIP, DLJOP and DLJ First, DLJ
    may be deemed to beneficially own indirectly all of the shares held by such
    entities. DLJ is an indirect subsidiary of The Equitable Companies
    Incorporated. The address of DLJ is 277 Park Avenue, New York, New York
    10172.
(3) Consists of 1,797,000 Class A Shares owned by a number of mutual funds and
    other investment accounts managed by affiliates of FMR Corp. The percentage
    of Shares owned is calculated without giving effect to possible conversion
    of the Class B Shares owned by the DLJ Entities.
(4) Consists of 852,500 Class A Shares owned by Robert E. Torray & Co., Inc.
    and 408,500 Class A Shares owned by The Torray Fund over which the two
    entities hold shared voting and dispositive power. The percentage of Shares
    owned is calculated without giving effect to possible conversion of the
    Class B Shares owned by the DLJ Entities.

ITEM 13--CERTAIN BUSINESS RELATIONSHIPS

Registration Rights Agreement

   The Company and the existing shareholders of the Company as of April 1, 1996
(the "Shareholders"), entered into a Registration Rights Agreement, which
grants the Shareholders certain incidental and demand registration rights with
respect to Ordinary Shares held by them. Under this agreement, Shareholders
other than the DLJ Entities (individually or as a group) owning or having the
rights to acquire 30% or more of the Ordinary Shares outstanding and issuable
prior to the initial public offering of shares on April 17, 1996 ("Offering"),
or any subsequent offering have the right to require the Company on one
occasion, and one or more of the DLJ Entities have the right to require the
Company on two occasions, to register Shares under the Securities Act for sale
in the public market, provided that the total fair value of the Shares
requested to be registered in the exercise of any such right must be at least
$15 million. Any other Shareholder not making the request will have the right
to participate in such registration on a first-priority basis (pro rata
according to the respective Ordinary Shares requested for registration) subject
to a customary underwriter's reduction.

                                       76
<PAGE>

   In addition, if the Company proposes to file a registration statement
covering Ordinary Shares held by it or any other shareholder of the Company at
any time, each Shareholder will have the right to include Ordinary Shares held
by it in the registration, in each case on a first-priority basis with other
Shareholders and any other holders of Shares requesting registration, pro-rata
according to the respective Shares requested for registration, and on a second-
priority basis with the Company, in each case subject to a customary
underwriter's reduction.

   The Company has agreed to indemnify each Shareholder in respect of certain
liabilities, including civil liabilities under the Securities Act and to pay
certain expenses relating to such registration.

   Under the terms of the proposed Terra Nova/Markel merger and scheme of
arrangement, DLJ entities who are shareholders of the Company; John J. Byrne
and related entities who own shares of the Company over which he has voting or
dispositive control; and Marsh & McLennan Risk Capital Holdings, Ltd. and
related entities who own shares of the Company, each of whom would receive new
shares of Markel Holdings, will have the benefit of a new registration rights
agreement. The current Registration Rights Agreement will terminate on the
closing of the Terra Nova/Markel merger and scheme of arrangement. Mr. Byrne is
a director of the Company and Mr. Philip F. Petronis, a director of the
Company, is an executive officer of an affiliate of Marsh & McLennan.

Transactions with Five Percent Shareholders

   From time to time, in the ordinary course of its insurance business, the
Company may insure risks of 5% shareholders and, in addition, may cede risks to
insurance companies who are affiliates of 5% shareholders. The business may be
conducted through intermediaries, which may from time to time include
affiliates of 5% shareholders. As an investor, the Company may transact
business with counterparties and intermediaries which may be affiliated with
certain 5% shareholders. All transactions would be conducted on an arm's length
basis.

   DLJSC acted as the financial advisor to the Company during the negotiation
and approval of the proposed Terra Nova/Markel merger and scheme of arrangement
by the Board of Directors. DLJSC received $750,000 from the Company for the
fairness opinion issued by DLJSC to the Board in relation to the proposed
transaction and $26,588 for reasonable expenses incurred. Upon completion of
the proposed Terra Nova/Markel merger and scheme of arrangement, the Company
will pay to DLJSC an additional fee equal to 0.60% of the aggregate value of
the Company's ordinary shares, treating any shares issuable upon exercise of
options, warrants or other rights of conversion as outstanding, plus the amount
of any debt assumed, acquired, remaining outstanding, retired or defeased or
preferred shares redeemed or remaining outstanding in connection with the
proposed Terra Nova/Markel merger and scheme of arrangement, minus the sum of
$750,000, which has already been paid, and $250,000.

   The Company retained DLJSC as its investment banker and financial advisor on
an exclusive basis until December 21, 1999. The Company agreed to indemnify
DLJSC in connection with this.

   Messrs. Fleischer and Jaffe, both Directors of the Company, are managing
directors of DLJSC and DLJMB (an affiliate of DLJSC), respectively. Mr.
Lowenstein, who is also a Director of the Company, provides consulting services
to DLJSC through Shore Capital. Mr. Jaffe is Chairman of the Board's
Compensation Committee.

Section 16 Reporting

   Directors and certain executives of the Company are subject to the reporting
requirements of Section 16 of the Securities Exchange Act of 1934 as amended.
The Company is not aware of any Director or executive who failed to make a
required filing on a timely basis.

                                       77
<PAGE>

                                    PART IV

ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K

   (a) Index to Financial Statements. The financial statements filed as part of
this report are listed in the Index to Financial Statements on page 36.

Index to Financial Statement Schedules

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<S>             <C>                                                                              <C>
Schedule II(a)  -- Condensed Financial Information of Registrant (Parent Company)
                -- Condensed Balance Sheets.....................................................  79
Schedule II(b)  -- Condensed Financial Information of Registrant (Parent Company)
                -- Condensed Statements of Operations...........................................  80
Schedule II(c)  -- Condensed Financial Information of Registrant (Parent Company)
                -- Condensed Statements of Cash Flows...........................................  81
Schedule III    -- Supplementary Insurance Information..........................................  82
Schedule IV     -- Reinsurance..................................................................  83
Schedule VI     -- Supplementary Information Concerning Property/Casualty Insurance Operations..  84
</TABLE>

Schedules I and V have been omitted because the required information is
 included in theconsolidated financial statements or notes.

   (b) Reports on Form 8-K. Reports on Form 8-K filed since the third
quarter 1999 Form 10-Q filing:
<TABLE>
<CAPTION>

 <C>             <S>                            <C>
                 -- February 4, 2000
                 -- February 22, 2000
                 -- March 3, 2000 (Form 8-KA)
</TABLE>

   (c) Exhibits. The Index to Exhibits and the Exhibits filed as part        85
of this report..........................................................

                                       78
<PAGE>

                                                     Supplemental Schedule II(a)

              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES

                    PARENT COMPANY FINANCIAL INFORMATION (1)

                            CONDENSED BALANCE SHEETS
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1999      1998
                                                            --------  --------
<S>                                                         <C>       <C>
ASSETS
Investment in subsidiaries................................. $210,389  $542,948
Fixed maturities...........................................  119,627    22,039
Common stocks..............................................  108,025       --
                                                            --------  --------
  Total investments........................................  438,041   564,987
Other assets...............................................   13,281     7,292
                                                            --------  --------
  Total assets............................................. $451,322  $572,279
                                                            ========  ========


LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities.......................................... $  7,312  $  1,417
                                                            --------  --------
Total liabilities..........................................    7,312     1,417
                                                            --------  --------


Shareholders' equity:
  Common shares............................................  151,637   150,620
  Stock held in Trust......................................  (16,787)  (12,900)
  Deferred equity compensation.............................    7,564     4,623
  Additional capital.......................................  113,855   111,727
  Unrealized (depreciation) appreciation in investment of
   subsidiaries net of income tax..........................   (3,949) 80,342
  Cumulative translation adjustments.......................   (3,473)      158
  Retained earnings........................................  195,163   236,292
                                                            --------  --------
    Total shareholders' equity.............................  444,010   570,862
                                                            --------  --------
    Total liabilities and shareholders' equity............. $451,322  $572,279
                                                            ========  ========
</TABLE>
--------
(1) The parent company condensed financial information should be read in
    conjunction with the consolidated financial statements and notes

                                       79
<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>
                                                   Year Ended December 31,
                                                   --------------------------
                                                     1999     1998     1997
                                                   --------  -------  -------
<S>                                                <C>       <C>      <C>
Revenues:
  Net investment income........................... $  3,497  $ 3,618  $ 1,953
  Realized gains (losses) on sales of
   investments....................................      (29)     246      (25)
  Foreign exchange gains (losses).................      --        (1)       5
                                                   --------  -------  -------
    Total revenues................................    3,468    3,863    1,933
                                                   --------  -------  -------
Expenses:
  Deferred debt expenses..........................      665      664      664
  Salaries........................................    6,722    1,436    1,864
  Legal and professional expenses.................    1,824      842      639
  Other expenses..................................    1,111    1,007    1,065
                                                   --------  -------  -------
    Total expenses................................   10,322    3,949    4,232
                                                   --------  -------  -------
Loss from operations before equity in net income
 of consolidated subsidiaries.....................   (6,854)     (86)  (2,299)
Equity in net (loss) income of consolidated
 subsidiaries.....................................  (28,120)  72,485   75,709
                                                   --------  -------  -------
  Net (loss) income............................... $(34,974) $72,399  $73,410
                                                   ========  =======  =======
</TABLE>
--------
(1) The parent company condensed financial information should be read in
    conjunction with the consolidated financial statements and notes

                                       80
<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>
                                                   Year Ended December 31,
                                                  ----------------------------
                                                    1999      1998      1997
                                                  --------  --------  --------
<S>                                               <C>       <C>       <C>
Cash flows from operating activities:
  Net (loss) income.............................. $(34,974) $ 72,399  $ 73,410
Adjustments to reconcile net income to net cash
 provided by (used in) operating activities:
  Equity in net loss (income) of consolidated
   subsidiaries..................................   28,120   (72,485)  (75,709)
  Realized capital losses (gains)................       29      (246)       25
  Stock option compensation expense..............     (660)      --        804
  Change in accrued investment income............     (976)      201      (604)
  Change in other assets and liabilities, net....    4,235       950      (289)
                                                  --------  --------  --------
    Net cash provided by (used in) operating
     activities..................................   (4,226)      819    (2,363)
                                                  --------  --------  --------


Cash flows from investing activities:
  Proceeds of fixed maturities sold..............   11,774    19,291    46,181
  Purchase of fixed maturities...................  (34,211)  (12,045)  (74,808)
                                                  --------  --------  --------
    Net cash (used in) provided by investing
     activities..................................  (22,437)    7,246   (28,627)
                                                  --------  --------  --------


Cash flows from financing activities:
  Proceeds from shares issued....................    3,145       637       384
  Stock repurchases..............................   (3,887)   (3,400)  (10,020)
  Ordinary dividends received from subsidiary
   company(2)....................................   37,889       --     44,400
  Ordinary dividends paid to stockholders........   (6,155)   (5,968)   (4,370)
                                                  --------  --------  --------
    Net cash provided by (used in) financing
     activities..................................   30,992    (8,731)   30,394
                                                  --------  --------  --------


Change in cash and cash equivalents..............    4,329      (666)     (596)
Cash and cash equivalents at beginning of year...    1,480     2,146     2,742
                                                  --------  --------  --------
Cash and cash equivalents at end of year......... $  5,809  $  1,480  $  2,146
                                                  --------  --------  --------
</TABLE>
--------
(1)  The parent company condensed financial information should be read in
     conjunction with the consolidated financial statements and notes
(2)  Total dividends received from subsidiaries were $213,000 in 1999 and
     $44,400 in 1997.

                                       81
<PAGE>

                                                       Supplemental Schedule III

              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES

                      SUPPLEMENTARY INSURANCE INFORMATION
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                             Benefits,    Amortization
                  Deferred     Losses and                         Net      claims, losses of deferred    Other
                 acquisition loss adjustment Unearned  Earned  investment  and settlement acquisition  operating Written
    Segment         costs       expenses     premiums premiums   income       expenses       costs     expenses  premiums
---------------- ----------- --------------- -------- -------- ----------  -------------- ------------ --------- --------
<S>              <C>         <C>             <C>      <C>      <C>         <C>            <C>          <C>       <C>
Year ended
 December 31,
 1999
Terra Nova......   $38,887      $836,952     $123,901 $227,694 $64,618 (a)    $187,118      $85,446     $10,315  $179,563
Terra Nova
 (Bermuda)......     6,419       118,656       21,954   39,494  43,219 (a)      26,525       13,756         288    34,584
Terra Nova
 Capital........    53,213       418,399      313,937  303,271  11,686 (a)     263,936      138,362      12,436   388,876
Corifrance......     1,164        35,961        8,386   14,822   5,207 (a)      13,664        3,272       2,358    15,153
Year ended
 December 31,
 1998
Terra Nova......   $50,755      $864,241     $170,918 $252,714 $49,420 (a)    $141,971      $79,720     $ 9,228  $266,571
Terra Nova
 (Bermuda)......     8,044       115,920       25,428   78,061  37,375 (a)      68,017       13,807       1,115    95,317
Terra Nova
 Capital........    46,639       195,794      195,693  199,506   7,954 (a)     141,968       62,465       8,471   270,740
Corifrance......     2,169        33,048        8,963   16,627   3,525 (a)       7,611        4,388       1,508    13,569
Year ended
 December 31,
 1997
Terra Nova......   $41,741      $951,364     $147,228 $256,306 $63,690 (a)    $151,911      $77,268     $ 9,421  $249,927
Terra Nova
 (Bermuda)......     8,378        80,397       20,101   42,985  28,434 (a)      45,141        9,232       1,025    65,438
Terra Nova
 Capital........    23,744        82,658       97,558  107,978     277 (a)      78,528       25,227       2,860   165,780
Corifrance......     2,517        43,305       10,047   11,800   1,900 (a)       6,900        3,700         400     2,400
</TABLE>
-------
(a) Net investment income excludes investment income and realized gains of
    $(1,007,000), $12,364,000 and $4,892,000 for 1999, 1998 and 1997,
    respectively, which is attributed to the Parent and its other subsidiaries.

                                       82
<PAGE>

                                                        Supplemental Schedule IV

              TERRA NOVA (BERMUDA) HOLDINGS LTD. AND SUBSIDIARIES

                                  REINSURANCE

                            AS OF DECEMBER 31, 1999
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                    Percentage
                                      Ceded to   Assumed            of amount
                              Gross     other   from other   Net    assumed to
Written premiums              amount  companies companies   amount     net
----------------             -------- --------- ---------- -------- ----------
<S>                          <C>      <C>       <C>        <C>      <C>
Property--Casualty
Year ended December 31,
 1999....................... $601,419 $246,487   $263,514  $618,446   42.61%
Year ended December 31,
 1998....................... $407,841 $113,191   $351,547  $646,197   54.40%
Year ended December 31,
 1997....................... $269,577 $ 66,698   $280,666  $483,545   58.04%
</TABLE>

                                       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
                                                                        related to                      Paid
                             Losses and                              -----------------  Amortization losses and
                  Deferred      loss                         Net       (1)      (2)     of deferred     loss
                 acquisition adjustment Unearned  Earned  investment Current   Prior    acquisition  adjustment Written
    Segment         costs     expenses  premiums premiums   income     year     Year       costs      expenses  premiums
---------------- ----------- ---------- -------- -------- ---------- -------- --------  ------------ ---------- --------
<S>              <C>         <C>        <C>      <C>      <C>        <C>      <C>       <C>          <C>        <C>
Year ended
 December 31,
 1999
Continuing
 operations.....  $ 99,683   $1,409,968 $468,178 $585,281  $66,919   $546,253 $(55,010)   $240,836    $425,167  $618,446
Aviation
 business in
 run-off........       --        59,229      --        12      --         --    (1,388)        --        2,026        12
Year ended
 December 31,
 1998
Continuing
 operations.....   107,607    1,209,003  401,002  546,908   60,852    384,531  (24,964)    160,380     326,477   646,197
Aviation
 business in
 run-off........       --        65,752      --       304      --         --    (1,284)        --        5,100       304
Year ended
 December 31,
 1997
Continuing
 operations.....    76,380    1,157,724  274,934  419,069   57,999    292,876  (10,396)    115,427     215,387   483,545
Aviation
 business in
 run-off........       --        75,846      --     1,577      --         --        (6)        --       14,500     1,577
</TABLE>


                                       84
<PAGE>

Item 14--Exhibits

  (c) Exhibits

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <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 U.K. 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 U.K.
         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 U.K.
         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 U.K. 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 U.K.
         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 U.K.
         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>

                                       85
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number
 -------
 <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).
 10.16   Employment Agreement, dated July 1, 1998, between the Company and John
         J. Dwyer (incorporated by reference to 1998 Form 10-K filed on March
         15, 1999).
 10.17   Employment Agreement, dated July 1, 1998, between the Company and
         Nigel H.J.Rogers (incorporated by reference to 1998 Form 10-K filed on
         March 15, 1999).
 10.18   Employment Agreement, dated July 1, 1998, between the Company and Jean
         M. Waggett (incorporated by reference to 1998 Form 10-K filed on March
         15, 1999).
 10.19   Letter Agreement, dated November 26, 1998, between the Company and
         John Riddick (incorporated by reference to 1998 Form 10-K filed on
         March 15, 1999).
 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>

                                       86
<PAGE>

                                   SIGNATURES

   Under the requirements of the Securities Exchange Act of 1934, the
registrant has had this report signed on its behalf by the undersigned who are
so authorized.

                                            Terra Nova (Bermuda) Holdings Ltd

<TABLE>
<CAPTION>
                  Signature and Title                   Date
                  -------------------                   ----
      <S>                                         <C>
                   /s/ John J. Dwyer               March 20, 2000
      By ________________________________________
                     John J. Dwyer
                       Chairman

                 /s/ Nigel H.J. Rogers             March 20, 2000
      By ________________________________________
                   Nigel H.J. Rogers
         President and Chief Executive Officer

                /s/ William J. Wedlake             March 20, 2000
      By ________________________________________
                  William J. Wedlake
       Senior Vice President and Chief Financial
                        Officer

                /s/ Robert S. Fleischer            March 20, 2000
      By ________________________________________
                  Robert S. Fleischer
                       Director

                  /s/ David L. Jaffe               March 20, 2000
      By ________________________________________
                    David L. Jaffe
                       Director
</TABLE>



                                       87