<PAGE>   1
 
                                                                    EXHIBIT 13.1
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
     The following is a discussion of the results of operations and financial
position of IPC Holdings, Ltd. (the "Company"). References to "IPC" mean the
Company together with its wholly-owned subsidiaries, IPCRe Limited ("IPCRe"),
and IPC Re Services Limited. This discussion should be read in conjunction with
the Company's Consolidated Financial Statements and notes thereto, for the year
ended December 31, 1998.
 
GENERAL
 
     IPC commenced operations in July 1993. Because of the volatile nature of
property catastrophe reinsurance, the financial data included herein are not
necessarily indicative of the financial condition or results of operations of
IPC in the future.
 
     Premiums written include new and renewal business, reinstatement premiums
and premium adjustments on current and prior year contracts. Renewal dates for
property catastrophe reinsurance policies are generally concentrated in the
first quarter of each calendar year. Generally, about 60% (by volume) of
premiums written by IPCRe each year are for contracts which have effective dates
in January, about 16% in April, about 17% in July, and the remainder at other
times throughout the year. Premiums are generally due in installments over the
contract term, with each installment generally received within 30 days after the
due date. Premiums are earned on a pro rata basis over the contract period,
which is generally twelve months.
 
     Historically, property catastrophe reinsurers have experienced significant
fluctuations in operating results due to competition, frequency of occurrence or
severity of catastrophic events, levels of capacity, general economic conditions
and other factors. Demand for reinsurance is influenced significantly by
underwriting results of primary property insurers and prevailing general
economic conditions. The supply of reinsurance is related to prevailing prices,
the levels of insured losses and level of industry surplus which, in turn, may
fluctuate in response to changes in rates of return on investments being earned
in the reinsurance industry. As a result, the property catastrophe reinsurance
business historically has been a cyclical industry characterized by periods of
intense price competition due to excessive underwriting capacity as well as
periods when shortages of capacity permitted favourable premium levels.
Increases in the frequency and severity of losses suffered by insurers can
significantly affect these cycles. Conversely, the absence of severe or frequent
catastrophe events could result in declining premium rates in the global market.
IPC can be expected to experience the effects of such cyclicality.
 
     The volatility of property catastrophe reinsurance has been clearly
demonstrated by events in 1997 and 1998. In 1997, there were very few events of
a catastrophic nature, resulting in few claims being made on IPCRe. Conversely,
1998 was a year of many catastrophic events in many parts of the world,
including Hurricane Georges, (estimated insured losses in excess of U.S.$ 4
billion), the tornadoes and hailstorm which struck Minnesota and five nearby
states ("Cat.#51" -- $1.4 billion) and Typhoon Vicki which struck Japan ($2.0
billion).
 
     Over the last few years, the supply of reinsurance in absence of major
catastrophe has resulted in downward pressure on pricing. For the following
January renewal cycles, premium rates declined by an average of 15% in 1997, 15%
in 1998 and 10% in 1999. If and while reinsurance capacity does not diminish,
the Company expects further downward pressure on rates for property catastrophe
reinsurance during the remainder of 1999.
 
RESULTS OF OPERATIONS
 
  Years Ended December 31, 1998, 1997 and 1996
 
     In the twelve months ended December 31, 1998, IPCRe wrote premiums of
$111.3 million, compared to $117.1 million and $111.6 million written in the
years ended December 31, 1997 and 1996, respectively. These
 
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<PAGE>   2
 
writings included reinstatement premiums of $6.3 million, $2.5 million and $4.9
million, respectively. In 1998, IPCRe had increased participation and additional
business from existing clients, and selectively wrote business for new clients.
Also in 1998, reinstatement premiums from increased claim activity helped boost
writings. These increases were more than offset by rate reductions in the
period, generally in the range of 15%, but as high as 20% in some cases, which
reflected general market conditions. In addition, IPCRe decided not to renew
some contracts, and premium writings were also affected by declining exchange
rates in Pacific Rim countries. In 1997, new business included $4.1 million of
written premiums from the California Earthquake Authority ("CEA") for a 24 month
non-cancellable policy.
 
     Premiums earned were $120.1 million, $112.5 million and $113.6 million in
the years ended December 31, 1998, 1997 and 1996, respectively, representing
changes of 6.8% and (0.1%). Earned premiums changed disproportionately to
written premiums, primarily because some programs were written in 1997 which had
policy periods greater than twelve months (including the CEA). Excluding
reinstatement premiums, which are fully earned when written, premiums earned
increased by 1.1% from $108.7 million in the year ended December 31, 1996 to
$110.0 million in the year ended December 31, 1997, and by a further 3.4% to
$113.8 million in 1998.
 
     Net investment income for 1998 increased by 0.6% from $29.9 million in the
year ended December 31, 1997 to $30.1 million. During 1997, net investment
income had increased 3.5% from $28.9 million from the year ended December 31,
1996, to $29.9 million. These amounts are net of investment expenses, primarily
investment management and custodial fees payable to subsidiaries of American
International Group, Inc. ("AIG"), the Company's original sponsor, and holder of
24.4% of the Company's Common Shares. (See Note 8 to the Consolidated Financial
Statements.) These fees totaled $1.4 million, $1.4 million and $1.3 million in
the years ended December 31, 1998, 1997 and 1996, respectively. The increases in
net investment income resulted from a higher average investment asset base,
which increased 10.0% from $473.7 million during 1996 to $521.3 million during
1997 and a further 9.2% to $569.4 million during 1998. These increases were
offset in part by lower average yields in the years ended December 31, 1998 and
1997, respectively of approximately 5.3% and 5.7%, compared to the average yield
of 6.2% in the year ended December 31, 1996. The reduction in average yields was
partially due to the effect of changes made to the structure of the Company's
investment portfolio in June, 1997. These changes have been employed to effect
the reduction of volatility in the value of the portfolio. At December 31, 1998
the portfolio consisted of high quality, fixed maturity investments, and shares
of stock in all the companies which comprise the S.& P. 500.
 
     Net realized gains and losses from the sale of investments were a $7.0
million gain for the year ended December 31, 1998, compared to a $3.6 million
loss and a $3.9 million gain for the years ended December 31, 1997 and 1996,
respectively. Net gains and losses generally fluctuate from period to period,
depending on the securities sold, as recommended by the Company's investment
advisor. Net unrealized gains on the Company's investment portfolio (see Note 3
to the Consolidated Financial Statements) were $30.9 million at December 31,
1998, compared to $9.5 million at December 31, 1997, and net unrealized losses
of $3.9 million at December 31, 1996. This increase in value was primarily the
result of the restructuring of the investment portfolio noted above, as well as
minor changes in intermediate term interest rates during 1997 and 1998.
 
     Losses and loss adjustment expenses incurred were $61.5 million, $14.7
million and $32.7 million in the years ended December 31, 1998, 1997 and 1996,
respectively. There was a significant increase in the level of catastrophic
events during 1998, compared to the low level of losses during 1997, where
catastrophe associated insured losses were the lowest for over ten years in the
United States. During 1998, there were icestorms in the U.S. and Canada in
January, floods in the U.K. in April, various windstorms in the U.S. in May and
June, including Cat.#51, Hurricanes Bonnie, Georges and Mitch, typhoons which
struck both Korea and Japan, a cyclone which struck India, and the failure of
two satellites. Of IPCRe's total incurred losses in 1998, $24.0 million related
to Hurricane Georges. Of the 1996 amount, $12.0 million related to Hurricane
Fran. Other losses for all three years came from various other natural and
man-made disasters, as well as development of claims for current and prior year
marine and aviation business. Loss payments during the years ended December 31,
1998, 1997 and 1996 were $37.4 million, $15.2 million and $28.9 million,
respectively. IPC's loss and loss expense ratio (the ratio of losses and loss
adjustment expenses incurred to premiums earned) for 1998 was 51.2%, compared to
13.1% in 1997 and 28.8% in 1996.
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<PAGE>   3
 
     Acquisition costs, which are typically a percentage of premiums written,
consist primarily of commissions and brokerage fees paid to intermediaries for
the production of premiums written, and excise taxes. Brokerage commissions on
property catastrophe excess of loss contracts typically range from 5% to 10% of
ceded premiums. Acquisition costs incurred were $17.0 million, $13.5 million and
$11.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively, after deferring those costs related to the unearned portion of
premiums written. These represent increases of 25.8% during 1998, and 13.8%
during 1997, respectively. The increase in 1998 is due, in part, to the increase
in earned premiums. In addition, certain contracts have been written with profit
commission clauses or "no claims" bonuses, which return a portion of the net
underwriting profits generated from those contracts as a commission to the
reinsureds. This has resulted in increases in the level of acquisition costs as
a percentage of premiums earned in both 1997 and 1998.
 
     General and administrative expenses were $10.7 million, $8.7 million and
$9.9 million for the years ended December 31, 1998, 1997 and 1996, respectively.
These figures include fees paid to subsidiaries of AIG for administrative
services, which are based on a percentage of premiums written, and were $3.0
million in 1998, and $2.8 million in each of 1997 and 1996. In 1998, general and
administrative expenses included the upfront cost and ongoing fees in respect of
IPCRe's $300.0 million standby credit facility, increased legal fees in respect
of a one-time project, and increased data processing costs relating to the
implementation of new computer software. In 1996, general and administrative
costs included $1.6 million in connection with the Company's unsuccessful bid to
purchase Tempest Reinsurance Company Limited, another Bermuda-based catastrophe
reinsurer, and $0.5 million additional expenses related to the Company's initial
public offering (included in the first quarter of 1996). The Company's expense
ratio (the ratio of acquisition costs plus general and administrative expenses,
to earned premiums) was 23.0%, 19.7% and 19.2% for the years ended December 31,
1998, 1997 and 1996, respectively.
 
     The following table summarizes the loss and loss expense ratio, expense
ratio and combined ratio (sum of loss and loss expense ratio plus expense ratio)
for the years ended December 31, 1998, 1997 and 1996, respectively:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                         -----------------------
                                                         1998     1997     1996
                                                         -----    -----    -----
<S>                                                      <C>      <C>      <C>
Loss and loss expense ratio............................  51.2%    13.1%    28.8%
Expense ratio..........................................  23.0%    19.7%    19.2%
Combined ratio.........................................  74.2%    32.8%    48.0%
</TABLE>
 
     Net income for the years ended December 31, 1998, 1997 and 1996 was $67.7
million, $100.3 million and $92.6 million, respectively. Excluding the effects
of realized gains and losses arising from the sale of investments, net operating
income was $60.7 million, $103.9 million and $88.7 million for the years ended
December 31, 1998, 1997 and 1996, respectively. Net operating income amounts are
equivalent to $2.29, $3.92 and $3.40 per Common Share, respectively, on a
diluted basis.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company is a holding company that conducts no reinsurance operations of
its own. During 1997, the Company incorporated a subsidiary in the United
Kingdom called IPC Re Services, Limited, which carries out a representative
function in Europe on behalf of IPCRe. During 1998, IPCRe incorporated a
subsidiary in Ireland called IPCRe Europe Limited, which will underwrite
selected reinsurance business in Europe. The Company's cash flows are limited to
distributions from IPCRe by way of loans or dividends. The dividends that IPCRe
may pay are limited under Bermuda legislation and IPCRe's revolving credit
facility. Under Bermuda law, IPCRe may not in any financial year pay any
dividends which would exceed 25% of its statutory capital and surplus at the
prior year end, unless it has filed with the Bermuda Registrar of Companies an
affidavit stating that the declaration of those dividends has not caused the
Company to fail to meet its solvency margin and minimum liquidity ratio. In
addition, IPCRe is prohibited from declaring or paying any dividend during any
financial year if it would cause IPCRe to fail to meet its solvency margin and
minimum liquidity ratio. The maximum dividend payable by IPCRe in accordance
with the foregoing restrictions as of January 1, 1999 was approximately $141
million.
 
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<PAGE>   4
 
     IPCRe has obtained a five-year, $300 million revolving credit facility with
a syndicate of lenders led by the First National Bank of Chicago. The credit
facility limits the amount of dividends that may be paid by IPCRe to the Company
to the lesser of i) IPCRe's aggregate positive net income from March 31, 1998 to
the end of the then-current fiscal quarter over the aggregate amount of all
dividends and distributions paid during the same period, and ii) IPCRe's
positive consolidated net income for the four fiscal quarters then ending over
the aggregate amount of all dividends and distributions paid during the same
period.
 
     IPC's sources of funds consist of premiums written, investment income and
proceeds from sales and redemptions of investments. Cash is used primarily to
pay losses and loss adjustment expenses, brokerage commissions, excise taxes,
general and administrative expenses and dividends. IPC generated cash flows from
operations of $84.8 million, $108.5 million and $90.1 million in the years ended
December 31, 1998, 1997 and 1996 respectively. These amounts represent the
excess of premiums collected and investment earnings realized, over losses, loss
adjustment expenses and underwriting and other expenses paid and investment
losses realized. Cash flows from operations differ, and may continue to differ,
substantially from net income. To date, all cash flows not required for
operating purposes or payment of dividends have been invested by IPC. The
potential for a large catastrophe means that unpredictable and substantial
payments may need to be made within relatively short periods of time. Hence,
future cash flows cannot be predicted with any certainty and may vary
significantly between periods. Loss payments during the years ended December 31,
1998 and 1997 were $37.4 million and $15.2 million, respectively.
 
     Under U.S. generally accepted accounting principles, IPC is not permitted
to establish loss reserves with respect to its property catastrophe reinsurance
until the occurrence of an event which may give rise to a claim. As a result,
only loss reserves applicable to losses incurred up to the reporting date may be
set aside, with no allowance for the provision of a contingency reserve to
account for expected future losses. Claims arising from future catastrophic
events can be expected to require the establishment of substantial reserves from
time to time.
 
     The establishment of appropriate reserves for catastrophes is an inherently
uncertain process. Loss reserves represent IPC's estimates, at a given point in
time, of ultimate settlement and administration costs of losses incurred
(including incurred but not reported losses) and these estimates are regularly
reviewed and updated, using the most current information available to
management. Consequently, the ultimate liability for a catastrophic loss is
likely to differ from the original estimate. Whenever IPCRe determines that any
existing loss reserves are inadequate, IPCRe is required to increase its loss
reserves with a corresponding reduction, which could be material, in IPC's
operating results in the period in which the deficiency is identified. The
establishment of new reserves, or the adjustment of reserves for reported
claims, could have a material adverse effect on IPC's financial condition or
results of operations in any particular period.
 
     With the exception of cash holdings, IPC's funds are primarily invested in
fixed maturity securities, the market value of which is subject to fluctuation
depending on changes in prevailing interest rates, and also equities comprising
the S&P 500. IPCRe does not hedge its investment portfolio against interest rate
risk. Accordingly, an increase in interest rates may result in losses, both
realized and unrealized, on IPCRe's investments (see "Market Risk Disclosure"
below).
 
     The Company has adopted Statement of Financial Accounting Standard No. 115
to account for its marketable securities. As of December 31, 1998 all of the
Company's investments were classified as "Available for Sale". Investments are
carried at fair market value and any unrealized gains or losses are reported as
a separate component of shareholders' equity. At December 31, 1998 and 1997,
shareholders' equity had increased to $566.0 million and $528.3 million,
respectively.
 
     At December 31, 1998, 90.0% of IPCRe's fixed maturity investment portfolio
consisted of cash, U.S. Treasuries or other government agency issues, and
investments with a AAA or AA rating. The primary rating source is Moody's
Investors Services Inc. At December 31, 1998 the portfolio had an average life
of 3.1 years and an average modified duration of 2.7 years.
 
     IPC's functional currency is the U.S. dollar. IPC's operating currency is
generally also the U.S. dollar. However, premiums receivable and losses payable
in respect of a significant portion of IPC's business are
 
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<PAGE>   5
 
denominated in currencies of other countries, principally industrial countries.
Consequently, IPC may, from time to time, experience currency exchange gains and
losses that could affect its financial position and results of operations. The
Company currently does not - and as a practical matter cannot - hedge its U.S.
dollar currency exposure with respect to potential claims until a loss payable
in a non-U.S. dollar currency occurs (after which it may match such liability
with assets denominated in the same currency, which it has done on one occasion,
or purchase a currency hedge, although to date it has not done so). Such
exposure could be substantial. IPC also has not hedged its non-U.S. dollar
currency exposure with respect to premiums receivable, which generally are
collected over the relevant contract term. IPC's practice is to exchange
non-U.S. dollar denominated premiums upon receipt. Foreign currency investments
are infrequently made, generally for the purpose of improving overall portfolio
yield. At December 31, 1998, IPC had no forward contract hedges outstanding.
 
     IPC's investment portfolio does not currently include options, warrants,
swaps, collars or similar derivative instruments. IPC's investment policy
guidelines provide that financial futures and options and foreign exchange
contracts may not be used in a speculative manner, but may be used, subject to
certain numerical limits, only as part of a defensive strategy to protect the
market value of the portfolio.
 
     IPCRe is not a licensed insurer in the United States and therefore, under
the terms of most of its contracts in the United States, must provide security
to reinsureds to cover unpaid liabilities in a form acceptable to state
insurance commissioners. Typically, such security takes the form of a letter of
credit issued by an acceptable bank, the establishment of a trust, or a cash
advance. Currently IPCRe obtains letters of credit through one commercial bank
pursuant to a $20 million facility. In turn, IPCRe provides the bank security by
giving the bank a lien over certain of IPCRe's investments in an amount not to
exceed the aggregate letters of credit outstanding to a maximum of $20 million.
At December 31, 1998, 1997 and 1996, there were outstanding letters of credit of
$12.4 million, $7.2 million and $11.5 million, respectively.
 
     To further enhance liquidity, in July 1998, IPCRe entered into the
revolving credit facility described above. The facility contains certain
financial covenants, including minimum net worth provisions, restrictions on the
amount of dividends that IPCRe may pay, and certain investment restrictions. No
amounts have been drawn under this facility. Management believes that this
facility, and the relatively high quality of its investment portfolio, provides
sufficient liquidity to meet IPC's cash demands.
 
     Neither the Company nor IPCRe or subsidiaries thereof have any material
commitment for capital expenditures.
 
MARKET RISK DISCLOSURE
 
     The investment portfolio of IPCRe is exposed to market risk. Market risk is
the risk of loss of fair value resulting from adverse fluctuations in interest
and foreign currency exchange rates and equity prices.
 
     Measuring potential losses in fair values has recently become the focus of
risk management efforts by many companies. Such measurements are performed
through the application of various statistical techniques. One such technique is
Value at Risk ("VaR"). VaR is a summary statistical measure that uses historical
interest and foreign currency exchange rates and equity prices and estimates of
the volatility and correlation of each of these rates and prices to calculate
the maximum loss that could occur within a given statistical confidence level
and time horizon.
 
     IPCRe believes that statistical models alone do not provide a reliable
method of monitoring and controlling market risk. While VaR models are
relatively sophisticated, the quantitative market risk information is limited by
the assumptions and parameters established in creating the related models.
Therefore, such models are tools and do not substitute for the experience or
judgement of senior management.
 
     IPCRe, through AIG Global Investment Corp. (Ireland) Limited, a subsidiary
of AIG, has commissioned a VaR analysis to estimate the maximum potential loss
of fair value for each segment of market risk, prepared by an independent
analyst. In this analysis, financial instrument assets include cash, bonds and
equities. The various sources of market risk addressed in the analysis were
interest rate or yield curve risk, equity or stock risk, and currency or
exchange risk.
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<PAGE>   6
 
     The independent analyst calculated the VaR with respect to the net fair
value of its financial instrument assets as of December 31, 1998. This
calculation used the variance-covariance (delta-normal) methodology. The
calculation used daily historical interest and foreign currency exchange rates
and equity prices in the two years ended December 31, 1998. The VaR model
estimated the volatility of each of these rates and equity prices and the
correlation among them. For interest rates, the yield curve was constructed
using eleven separate points on the curve to model possible curve movements.
Thus, the VaR measured the sensitivity of the asset portfolio to each of the
aforementioned market risk exposures. These sensitivities were then applied to a
database which contained both historical ranges of movements in all market
factors and the correlations among them. The results were aggregated to provide
a single amount that depicts the maximum potential loss in fair value at a
confidence level of 95 percent for a time period of one month. At December 31,
1998 the VaR of IPCRe's investment portfolio was approximately $12.5 million.
 
     The following table presents the VaR of each component of market risk of
IPCRe's investment portfolio at December 31, 1998:
 
<TABLE>
<S>                                                  <C>
MARKET RISK........................................  $  (000)
Currency...........................................        0
Interest Rate......................................    5,724
Equity.............................................   10,330
                                                     -------
Sum of Risk........................................   16,054
Diversification Benefit............................   (3,571)
                                                     -------
TOTAL NET RISK.....................................   12,483
                                                     =======
</TABLE>
 
     IPCRe's balances receivable from reinsurance contracts it has written, are
exposed to the risk of loss of fair value resulting from adverse fluctuations in
foreign currency exchange rates. Management does not believe that the amount of
such currency risk is material to IPCRe's financial position or results of
operations, at December 31, 1998.
 
YEAR 2000 READINESS DISCLOSURE STATEMENT
 
     Certain computer programs use only the last two digits to refer to a year.
Therefore, these computer programs do not properly recognize the century in
which a particular year occurs and may, for example, treat "00" as being the
year 1900, instead of the year 2000. These computer programs may be used in
software applications or may be embedded in microprocessors used to control the
operation of computer hardware and other devices. If not corrected, many
computer programs could fail or create erroneous results. This problem is
commonly known as the "Y2K", "Millennium Bug" and/or "Year 2000" issue and
systems and equipment which use computer programs and microprocessors that do
not have this problem are generally referred to as being "compliant".
 
  IPC's Critical Systems
 
     IPC believes that all of its critical systems, including its hardware and
software, are currently compliant. IPC's critical systems include those used in
assessing underwriting risk, recording policy details, processing related
premium and claims transactions and communicating with brokers who produce the
business. Following minor remedial work to some computer hardware and the
upgrading of some software, a test programme was undertaken on these systems and
the results were completed by September 30, 1998 and subjected to audit by
technology consultants provided through American International Group, Inc.
("AIG"). Accordingly, while there can be no assurance that these systems will be
free from failure, IPC believes that any failure will not result in material
adverse impact on IPC's results of operations or financial condition.
 
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<PAGE>   7
 
  Third Party Dependencies
 
     IPC's Y2K compliance programme also includes a review of third party
dependencies, which includes non-information technology areas, including office
equipment, power supply, telecommunications and building infrastructure.
 
  Administrative Services
 
     IPC's day-to-day administrative services, including the provision of
non-information technology, are performed by American International Company,
Limited ("AICL"), a wholly-owned subsidiary of AIG, pursuant to an
administrative services agreement (the "Administrative Services Agreement").
Services and facilities provided pursuant to the Administrative Services
Agreement include legal and accounting services, office space in Bermuda, the
use of office equipment, electronic data services and other services required by
IPC in the ordinary course of business. IPC and AICL have worked jointly to
ensure compliance of systems used in the processing of IPC's business and this
work was successfully completed by September 30, 1998.
 
     In addition, AICL is monitoring progress towards compliance by significant
third parties from whom IPC receives non-information technology services, such
as the suppliers of electric power and local and long-distance telephone
services. In the event that such third parties are unable to achieve compliance,
AICL has developed contingency plans, for example, independent power supply,
which are designed to mitigate the effects of a failure on the part of such
third parties to supply services.
 
     Accordingly, while there can be no assurance that these systems will be
free from failure, IPC believes that any failure will not result in material
adverse impact on IPC's results of operations or financial condition.
 
  Other Third Parties
 
     As of December 31, 1998, IPC has contacted other third parties, such as
brokers and depository institutions, with whom IPC currently has a relationship
which, in IPC's judgement, involves material Y2K compliance concerns, in order
to establish their degree of compliance and/or their plans to become compliant
prior to December 31, 1999. Among other things, IPC's brokers collect, and
maintain records of, premiums and claims and, as such, make payments into IPC's
depository institutions. Prior to June 30, 1999, IPC intends to develop
contingency plans to mitigate the effects of the failure of such third party
systems on IPC's business operations. There can be no assurance that the systems
of such third parties will be timely converted, that IPC will be able to develop
satisfactory contingency plans or that failure of such systems in any event
would not have a material adverse effect on IPC's results of operations or
financial condition.
 
  Costs
 
     The costs incurred by IPC up to December 31, 1998 in effecting Y2K
compliance of its own systems are nominal and it is not anticipated that the
future costs of IPC's Year 2000 evaluation and compliance implementation will be
material. In addition, AICL is responsible for the cost of compliance of the
administrative services it supplies to IPC. Therefore, assuming compliance has
been achieved as aforesaid, it is not anticipated that the total costs incurred
in relation to the Y2K issue will have a material adverse effect on IPC's
results of operations.
 
  Policy Risks
 
     The extent of worldwide property damage (whether insured or uninsured)
which could result from failure or malfunction of non-compliant systems is not
known. Many of the insurance markets around the world in which IPC's clients
operate have not established a clear position on whether to include or exclude
Y2K risk in policies available in those markets. Although Y2K exclusion clauses
have been produced by some individual companies and some insurance and
reinsurance industry associations, to date they have not been applied in a
uniform manner. The Y2K issue is unique. Therefore, notwithstanding the presence
or absence of an exclusion of the Y2K risk in insurance or reinsurance policies,
in the general absence of legal precedent, courts may
 
                                       41
<PAGE>   8
 
determine, on a case-by-case basis, that coverage exists for property damage
resulting from failure or malfunction of non-compliant systems.
 
     IPCRe is principally an excess of loss property catastrophe reinsurer.
Currently, IPCRe's reinsurance policies do not specifically include Y2K as a
covered event and IPCRe currently does not intend to provide specific coverage
for losses arising from Y2K events. However, in the future, it is possible that
market forces could oblige IPCRe to provide such coverage, or that certain of
IPCRe's policies could be held to cover such losses. IPC carefully monitors the
terms of policy renewals with respect to the extent that they oblige IPC to
provide such coverage and, with respect to the January 1, 1999 renewals,
declined certain business. If, regardless of IPCRe's intent not to provide
specific coverage for losses arising from Y2K events and IPCRe's actions to
avoid obligations to provide such coverage, if IPCRe is obliged to provide such
coverage or its policies are held to cover such losses, there can be no
assurance that such losses would not have a material adverse effect on IPCRe's
future results of operations or financial condition, commencing in the year
2000.
 
EFFECTS OF INFLATION
 
     IPCRe estimates the effect of inflation on its business and reflects these
estimates in the pricing of its reinsurance contracts. Because of the relatively
short claims settlement cycle associated with its reinsurance portfolio, IPCRe
generally does not take into account the effects of inflation when estimating
reserves. Levels of inflation also affect investment returns. The actual effects
of inflation on the results of IPCRe cannot be accurately known until claims are
ultimately settled.
 
                                       42
<PAGE>   9
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and shareholders of
IPC Holdings, Ltd.:
 
     We have audited the accompanying consolidated balance sheets of IPC
Holdings, Ltd. (a Bermuda Company) and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IPC
Holdings, Ltd. and subsidiaries as of December 31, 1998 and 1997 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States.
 
ARTHUR ANDERSEN & CO.
 
Hamilton, Bermuda
February 5, 1999
 
                                       43
<PAGE>   10
 
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1998 AND 1997
 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
ASSETS:
Fixed maturity investments:
  Available for sale, at fair market value (Amortized cost
     1998: $478,806; 1997: $439,517)........................  $484,863    $442,328
Equity investments, available for sale (Cost 1998: $69,268;
  1997: $80,020)............................................    94,152      86,685
Cash and cash equivalents...................................    20,966       9,746
Reinsurance balances receivable.............................    20,747      27,723
Funds held by reinsured companies...........................     2,434          12
Accrued investment income...................................    14,752      14,374
Deferred acquisition costs..................................     2,048       2,593
Prepaid expenses and other assets...........................     3,129       1,558
                                                              --------    --------
          Total assets......................................  $643,091    $585,019
                                                              ========    ========
LIABILITIES:
Reserve for losses and loss adjustment expenses.............  $ 52,226    $ 27,590
Unearned premiums...........................................    17,602      26,462
Accounts payable and accrued liabilities....................     7,311       2,674
                                                              --------    --------
          Total liabilities.................................    77,139      56,726
                                                              --------    --------
SHAREHOLDERS' EQUITY:
Share capital -- 1998: 25,033,902 shares outstanding, par
value $0.01
                 1997: 25,017,603 shares outstanding, par
value $0.01.................................................       250         250
Additional paid-in capital..................................   299,833     299,533
Retained earnings...........................................   234,928     219,034
Accumulated other comprehensive income......................    30,941       9,476
                                                              --------    --------
          Total shareholders' equity........................   565,952     528,293
                                                              --------    --------
          Total liabilities and shareholders' equity........  $643,091    $585,019
                                                              ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements
                                       44
<PAGE>   11
 
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
     FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1998
 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                            1998          1997          1996
                                                         ----------    ----------    ----------
<S>                                                      <C>           <C>           <C>
REVENUES:
Premiums written.......................................  $  111,265    $  117,050    $  111,569
Change in unearned premiums............................       8,860        (4,564)        2,073
                                                         ----------    ----------    ----------
Premiums earned........................................     120,125       112,486       113,642
Net investment income..................................      30,053        29,883        28,883
Realized gains (losses), net on investments............       7,014        (3,616)        3,871
                                                         ----------    ----------    ----------
          Total revenues...............................     157,192       138,753       146,396
                                                         ----------    ----------    ----------
EXPENSES:
Losses and loss adjustment expenses....................      61,459        14,708        32,732
Acquisition costs......................................      16,968        13,487        11,849
General and administrative expenses....................      10,680         8,676         9,934
Exchange loss (gain), net..............................         371         1,562          (684)
                                                         ----------    ----------    ----------
          Total expenses...............................      89,478        38,433        53,831
                                                         ----------    ----------    ----------
NET INCOME.............................................  $   67,714    $  100,320    $   92,565
                                                         ==========    ==========    ==========
 
Basic net income per common share......................       $2.71         $4.01         $3.70
Diluted net income per common share....................       $2.55         $3.79         $3.55
 
Weighted average number of common shares -- basic......  25,031,211    25,010,060    25,000,000
Weighted average number of common shares -- diluted....  26,547,062    26,492,401    26,080,744
</TABLE>
 
          See accompanying notes to consolidated financial statements
                                       45
<PAGE>   12
 
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
     FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1998
 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
COMMON SHARES PAR VALUE $0.01
  Balance, beginning of year...............................  $    250    $    250    $    200
  Effect of the Exchange: 1,000 shares to 25,000,000
     shares................................................        --          --          50
  Additional shares issued.................................        --          --          --
                                                             --------    --------    --------
  Balance, end of year.....................................  $    250    $    250    $    250
                                                             --------    --------    --------
 
ADDITIONAL PAID-IN CAPITAL:
  Balance, beginning of year...............................  $299,533    $299,267    $299,317
  Effect of the Exchange: 1,000 shares to 25,000,000
     shares................................................        --          --         (50)
  Additional paid-in capital on shares issued..............       300         266          --
                                                             --------    --------    --------
  Balance, end of year.....................................  $299,833    $299,533    $299,267
                                                             --------    --------    --------
 
RETAINED EARNINGS:
  Balance, beginning of year...............................  $219,034    $200,516    $130,264
  Net income...............................................    67,714     100,320      92,565
  Dividends paid...........................................   (51,820)    (81,802)    (22,313)
                                                             --------    --------    --------
  Balance, end of year.....................................  $234,928    $219,034    $200,516
                                                             --------    --------    --------
 
ACCUMULATED OTHER COMPREHENSIVE INCOME:
  Balance, beginning of year...............................  $  9,476    $ (3,898)   $  4,511
  Change in comprehensive income...........................    21,465      13,374      (8,409)
                                                             --------    --------    --------
  Balance, end of year.....................................  $ 30,941    $  9,476    $ (3,898)
                                                             ========    ========    ========
</TABLE>
 
          See accompanying notes to consolidated financial statements
                                       46
<PAGE>   13
 
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
     FOR EACH OF THE YEARS IN THE THREE YEAR PERIOD ENDED DECEMBER 31, 1998
               (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS)
 
<TABLE>
<CAPTION>
                                                            1998         1997         1996
                                                          ---------    ---------    ---------
<S>                                                       <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..............................................  $  67,714    $ 100,320    $  92,565
Adjustments to reconcile net income to cash provided by
  operating activities:
  Amortization of investment premium, net...............        542        1,787        3,485
  Realized (gains) losses, net on investments...........     (7,014)       3,616       (3,871)
  Changes in, net:
     Reinsurance balances receivable....................      6,976       (2,036)        (236)
     Funds held by reinsured companies..................     (2,422)         (12)          --
     Accrued investment income..........................       (378)         641       (2,663)
     Deferred acquisition costs.........................        545         (239)          87
     Prepaid expenses and other assets..................     (1,571)        (379)        (257)
     Reserve for losses and loss adjustment expenses....     24,636         (893)       3,766
     Unearned premiums..................................     (8,860)       4,564       (2,073)
     Accounts payable and accrued liabilities...........      4,637        1,109         (703)
                                                          ---------    ---------    ---------
                                                             84,805      108,478       90,100
                                                          ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equity investments.........................     (3,633)     (80,228)          --
Proceeds from sales of equity investments...............     17,804          239           --
Purchases of fixed maturity investments:
  Available for sale....................................   (335,087)    (372,612)    (350,757)
  Held to maturity......................................         --      (17,815)     (34,006)
Proceeds from sales of fixed maturity investments:
  Available for sale....................................    264,325      363,939      309,664
  Held to maturity......................................         --           --           --
Proceeds from maturities of fixed maturity investments:
  Available for sale....................................     34,526       41,734           --
  Held to maturity......................................         --       23,750       13,000
                                                          ---------    ---------    ---------
                                                            (22,065)     (40,993)     (62,099)
                                                          ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional share capital................................        300          266           --
Cash dividends paid to shareholders.....................    (51,820)     (81,802)     (22,313)
                                                          ---------    ---------    ---------
                                                            (51,520)     (81,536)     (22,313)
                                                          ---------    ---------    ---------
Net increase (decrease) in cash and cash equivalents....     11,220      (14,051)       5,688
Cash and cash equivalents, beginning of year............      9,746       23,797       18,109
                                                          ---------    ---------    ---------
Cash and cash equivalents, end of year..................  $  20,966    $   9,746    $  23,797
                                                          =========    =========    =========
</TABLE>
 
          See accompanying notes to consolidated financial statements
                                       47
<PAGE>   14
 
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER 31, 1998 AND DECEMBER 31, 1997
 (EXPRESSED IN THOUSANDS OF UNITED STATES DOLLARS EXCEPT FOR PER SHARE AMOUNTS)
 
1.  GENERAL:
 
     IPC Holdings, Ltd.  (the "Company") was incorporated in Bermuda on May 20,
1993 and through its wholly-owned subsidiary, IPCRe Limited (formerly known as
International Property Catastrophe Reinsurance Company, Ltd. ("IPCRe"), provides
reinsurance of property catastrophe risks worldwide, substantially all on an
excess-of-loss basis. Property catastrophe reinsurance covers unpredictable
events such as hurricanes, windstorms, hailstorms, earthquakes, volcanic
eruptions, fires, freezes, industrial explosions and other man-made or natural
disasters. IPCRe's loss experience will generally include infrequent events of
great severity. IPCRe's clients include many of the leading insurance companies
in the world. Approximately 46% of premiums written in 1998 related to U.S.
risks. The balance of IPCRe's covered risks are located principally in Europe,
Japan and Australia/New Zealand.
 
     On December 20, 1995, the Board of Directors of the Company approved a plan
to register shares for sale to the public. On December 20, 1995, the Board of
Directors of the Company also approved an exchange of the capital stock of the
Company whereby the existing voting and non-voting shares of the Company were
exchanged for Common Shares (the "Exchange"). The existing shareholders received
25,000 new Common Shares for each voting or non-voting share held at the time of
the offering. Share information presented in the consolidated financial
statements, including these notes, gives effect to the Exchange.
 
     On March 13, 1996, the Company completed an initial public offering in
which 13,521,739 common shares held by existing shareholders were sold. All of
the shares sold were sold by existing shareholders. Consequently, the Company
did not receive any of the proceeds of the offering. The Company paid certain
expenses related to the offering, including certain expenses on behalf of the
selling shareholders.
 
     On June 27, 1997 the Company incorporated a subsidiary in the United
Kingdom, named IPC Re Services Limited. This subsidiary's purpose is to perform
the same functions that were previously performed by the Company's
representative office in London.
 
     On September 10, 1998, IPCRe incorporated a subsidiary in Ireland, named
IPCRe Europe Limited. This company underwrites selected reinsurance business in
Europe.
 
2.  SIGNIFICANT ACCOUNTING POLICIES:
 
     The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The significant accounting
policies are as follows:
 
  a) Principles of consolidation:
 
     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, IPCRe, and IPC Re Services Limited (together
"IPC"). All significant intercompany transactions have been eliminated in
consolidation.
 
  b) Premiums and acquisition costs:
 
     Premiums written are recorded at the policy inception date and are based on
information received from ceding companies. Subsequent premium adjustments, if
any, are recorded in the period in which they are determined. Premiums are
earned on a pro-rata basis over the period for which reinsurance coverage is
 
                                       48
<PAGE>   15
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
provided. Unearned premiums represent the portion of premiums written which is
applicable to the unexpired terms of the policies in force.
 
     Acquisition costs, consisting primarily of commissions and brokerage
expenses incurred at policy issuance, are deferred and amortized to income over
the period in which the related premiums are earned. Deferred acquisition costs
are limited to estimated realizable value based on related unearned premium,
anticipated claims and expenses and investment income.
 
  c) Reserve for losses and loss adjustment expenses:
 
     The reserve for losses and loss adjustment expenses, which includes an
allowance for losses and loss adjustment expenses incurred but not reported, is
based on reports, individual case estimates received from ceding companies,
actuarial determinations and management's estimates. For certain catastrophic
events there is considerable uncertainty underlying the assumptions and
associated estimated reserves for losses and loss adjustment expenses. Reserves
are reviewed regularly and, as experience develops and new information becomes
known, the reserves are adjusted as necessary. Such adjustments, if any, are
reflected in results of operations in the period in which they become known.
 
  d) Investments:
 
     IPC adopted Statement of Financial Accounting Standard No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("Statement 115") as of
December 31, 1993. Upon adopting Statement 115, the Company classified its
entire portfolio of investments as "available for sale". In July, 1994 the
Company reclassified a portion of its investment portfolio as "held to
maturity". In June, 1997 the Company reclassified its entire portfolio of "held
to maturity" investments as "available for sale".
 
     Investments, available for sale
 
     All fixed maturity investments classified as "available for sale" have a
fixed maturity and are carried at market value. Such investments are available
to be sold in response to liquidity needs. In addition, all investments in
equity securities are classified as "available for sale" and are carried at
market value. Unrealized gains and losses are included as a separate component
of shareholders' equity.
 
     Investments are recorded on a trade date basis. Realized gains and losses
on sales of investments are determined on the basis of first-in, first-out.
Investment income is recognized when earned and includes the amortization of
premium and accretion of discount on investments.
 
  e) Translation of foreign currencies:
 
     Transactions in foreign currencies are translated into U.S. dollars at the
rate of exchange prevailing at the date of each transaction. Monetary assets and
liabilities denominated in foreign currencies are translated into U.S. dollars
at the exchange rates in effect on the balance sheet date. Foreign currency
revenues and expenses are translated at the average exchange rates prevailing
during the period. Exchange gains and losses, including those arising from
forward exchange contracts, are included in the determination of net income.
IPC's functional currency is the U.S. dollar, since it is the single largest
currency in which IPC transacts its business. The U.S. dollar is also the
currency in which IPC holds, and will continue to hold, most of its investments
and in which investment returns are measured.
 
  f) Cash and cash equivalents:
 
     Cash and cash equivalents include amounts held in banks and time deposits
with maturities of less than three months from the date of purchase.
 
                                       49
<PAGE>   16
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  g) Net income per common share:
 
     The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share", which requires dual presentation of basic and diluted
earnings per share. Diluted net income per common share is computed by dividing
net income by the weighted average number of shares of common stock and common
stock equivalents outstanding during the year. Stock options granted to a
shareholder of the Company were considered common stock equivalents and were
included in the number of weighted average shares outstanding using the treasury
stock method. Stock options granted to employees on February 15, 1996, July 25,
1996, January 2, 1997 and January 2, 1998, as discussed in Note 6, were also
considered common stock equivalents for the purpose of calculating diluted net
income per common share.
 
  h) Stock incentive compensation plan:
 
     The Company accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees", and, accordingly, recognizes
compensation expense for stock option grants to the extent that the fair value
of the stock exceeds the exercise price of the option at the measurement date.
 
  i) Comprehensive income:
 
     In June, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Comprehensive Income" ("SFAS 130"),
which is effective for financial statements issued for periods beginning after
December 15, 1997. SFAS 130 requires the disclosure of all components of
comprehensive income, including net income and other comprehensive income. For
the three years ended December 31, 1998, 1997, and 1996 respectively,
comprehensive income is calculated as follows:
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                               ------------------------------
                                                1998        1997       1996
                                               -------    --------    -------
<S>                                            <C>        <C>         <C>
Net income...................................  $67,714    $100,320    $92,565
Other comprehensive income
  Holding gains/(losses), net on investments
     during period...........................   28,479       9,758     (4,538)
  Reclassification adjustment for
     (gains)/losses included in net income...   (7,014)      3,616     (3,871)
                                               -------    --------    -------
                                                21,465      13,374     (8,409)
                                               -------    --------    -------
Comprehensive income.........................  $89,179    $113,694    $84,156
                                               =======    ========    =======
</TABLE>
 
  j) Accounting For Derivatives:
 
     The Financial Accounting Standards Board has also recently issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is effective for periods beginning
after June 15, 1999. Management does not expect the impact of the adoption of
SFAS 133 on the Company's financial position or results of operations to be
material.
 
  k) Deposit Accounting:
 
     In October, 1998 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-7, "Accounting for Insurance and
Reinsurance Contracts that do not Transfer Insurance Risk", which is effective
for fiscal years beginning after June 15, 1999. IPCRe does not currently write
or cede business which would be affected by this Statement.
 
                                       50
<PAGE>   17
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
3.  INVESTMENTS:
 
     a) The cost or amortized cost, gross unrealized gains, gross unrealized
losses and market value of investments available for sale by category as of
December 31, 1998 and December 31, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                           COST OR       GROSS         GROSS
                                          AMORTIZED    UNREALIZED    UNREALIZED     MARKET
                                            COST         GAINS         LOSSES       VALUE
                                          ---------    ----------    ----------    --------
<S>                                       <C>          <C>           <C>           <C>
DECEMBER 31, 1998
U.S. Government and government
  agencies..............................  $110,946      $   730       $  (466)     $111,210
Other governments.......................   123,446        1,851           (57)      125,240
Corporate...............................   197,316        3,328            --       200,644
Supranational entities..................    47,098          671            --        47,769
                                          --------      -------       -------      --------
                                          $478,806      $ 6,580       $  (523)     $484,863
                                          ========      =======       =======      ========
Equity investments......................  $ 69,268      $28,196       $(3,312)     $ 94,152
                                          ========      =======       =======      ========
DECEMBER 31, 1997
U.S. Government and government
  agencies..............................  $ 32,980      $   249       $    --      $ 33,229
Other governments.......................   125,037          939          (196)      125,780
Corporate...............................   227,395        1,549          (169)      228,775
Supranational entities..................    54,105          439            --        54,544
                                          --------      -------       -------      --------
                                          $439,517      $ 3,176       $  (365)     $442,328
                                          ========      =======       =======      ========
Equity investments......................  $ 80,020      $ 9,136       $(2,471)     $ 86,685
                                          ========      =======       =======      ========
</TABLE>
 
     b) The contractual maturity dates of fixed maturity investments available
for sale as of December 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                         AMORTIZED     MARKET
                                                           COST        VALUE
                                                         ---------    --------
<S>                                                      <C>          <C>
Due in one year or less................................  $ 79,022     $ 79,473
Due after one year through five years..................   339,320      344,160
Due after five years through ten years.................    60,464       61,230
                                                         --------     --------
                                                         $478,806     $484,863
                                                         ========     ========
</TABLE>
 
Expected maturities may differ from contractual maturities because borrowers may
have the right to prepay obligations with or without prepayment penalties.
 
     c) Pledged assets:
 
        In the normal course of business IPCRe provides security to reinsureds
        if requested. Such security takes the form of a letter of credit or a
        cash advance. Letters of credit are issued by a bank at the request of
        IPCRe.
 
        Under an agreement effective September 20, 1994, IPCRe provides the bank
        security by giving the bank a lien over certain of IPCRe's investments
        in an amount not to exceed the aggregate letters of credit outstanding
        to a maximum of $20,000. As of December 31, 1998 and 1997 the bank had
        outstanding letters of credit of $12,424 and $7,200, respectively.
 
                                       51
<PAGE>   18
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     d) Net investment income:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Interest on fixed maturity investments................  $30,256    $30,816    $32,216
Interest on cash and cash equivalents.................      781      1,860      1,409
Net amortization of premium on investments............     (542)    (1,787)    (3,485)
                                                        -------    -------    -------
                                                         30,495     30,889     30,140
Net dividend income from equities.....................      980        428         --
Less: investment expenses.............................   (1,422)    (1,434)    (1,257)
                                                        -------    -------    -------
Net investment income.................................  $30,053    $29,883    $28,883
                                                        =======    =======    =======
</TABLE>
 
     e) Proceeds from sales of available for sale securities for the years ended
December 31, 1998, 1997 and 1996 were $282,129, $364,178 and $309,664,
respectively. Components of realized gains and losses are summarized in the
following table:
 
<TABLE>
<CAPTION>
                                                               1998      1997       1996
                                                              ------    -------    -------
<S>                                                           <C>       <C>        <C>
Fixed maturity investments:
  Gross realized gains......................................  $4,002    $   277    $ 6,078
  Gross realized losses.....................................    (407)    (3,925)    (2,207)
                                                              ------    -------    -------
  Net realized gains/(losses)...............................   3,595     (3,648)     3,871
                                                              ------    -------    -------
Equity investments:
  Gross realized gains......................................   3,753         41         --
  Gross realized losses.....................................    (334)        (9)        --
                                                              ------    -------    -------
  Net realized gains/(losses)...............................   3,419         32         --
                                                              ------    -------    -------
Total net realized gains/(losses)...........................  $7,014    $(3,616)   $ 3,871
                                                              ======    =======    =======
</TABLE>
 
Changes in net unrealized gains (losses) were $21,465, $13,374, and $(8,409),
respectively, for the years ended December 31, 1998, 1997 and 1996.
 
     f) The following table summarizes the composition of the fair value of all
cash and fixed maturity investments by rating:
 
<TABLE>
<CAPTION>
                                                     DECEMBER 31,    DECEMBER 31,
                                                         1998            1997
                                                     ------------    ------------
<S>                                                  <C>             <C>
Cash and cash equivalents..........................       4.2%            2.2%
U.S. Government and government agencies............      22.0%            7.3%
AAA................................................      21.6%           44.6%
AA.................................................      42.2%           38.1%
A..................................................      10.0%            7.8%
                                                        -----           -----
                                                        100.0%          100.0%
                                                        =====           =====
</TABLE>
 
The primary rating source is Moody's Investors Services Inc. ("Moody's"). When
no Moody's rating is available, Standard & Poor's Corporation ("S & P") ratings
are used.
 
     g) In June 1997, the Company purchased shares of stock in all of the
companies which comprise the Standard & Poor's 500 Index ("S & P 500"). The
number of shares of stock purchased is such that their weighting within the
Company's portfolio matches the weighting of each stock within the index.
 
                                       52
<PAGE>   19
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     As of June 30, 1997, the Company reclassified its entire "held to maturity"
investment portfolio as "available for sale". The securities transferred had a
market value of $221,720, an amortized cost of $222,237, and an unrealized loss
of $517, on the date of transfer.
 
4. FAIR VALUE OF FINANCIAL INSTRUMENTS:
 
     The following table presents the carrying values and estimated fair values
of IPC's financial instruments as of December 31, 1998 and December 31, 1997:
 
<TABLE>
<CAPTION>
                                           DECEMBER 31, 1998       DECEMBER 31, 1997
                                          --------------------    --------------------
                                          CARRYING      FAIR      CARRYING      FAIR
                                           VALUE       VALUE       VALUE       VALUE
                                          --------    --------    --------    --------
<S>                                       <C>         <C>         <C>         <C>
Cash and cash equivalents...............  $ 20,966    $ 20,966    $  9,746    $  9,746
Fixed maturity investments..............   484,863     484,863     442,328     442,328
Equity investments......................    94,152      94,152      86,685      86,685
</TABLE>
 
     The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The fair values of
investments are disclosed in Note 3 and are based on quoted market prices
provided by either independent pricing services or when such prices are not
available, by reference to broker or underwriter bid indications.
 
5. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
 
     On June 29, 1993 shareholders contributed total funds of $300,000 through a
private placement offering of which $483 was used to pay placement costs.
 
     The authorized share capital of the Company as of December 31, 1998 and
December 31, 1997 consisted of the following:
 
<TABLE>
<CAPTION>
                                                                 SHARES                 ADDITIONAL
                                                 AUTHORIZED    ISSUED AND     SHARE      PAID-IN
                                                   SHARES      FULLY PAID    CAPITAL     CAPITAL
                                                 ----------    ----------    -------    ----------
<S>                                              <C>           <C>           <C>        <C>
DECEMBER 31, 1998
Voting common shares, par value U.S. $0.01
  each.........................................  75,000,000    25,033,932     $250       $299,833
Preferred shares, par value U.S. $0.01 each....  25,000,000            --       --             --
 
DECEMBER 31, 1997
Voting common shares, par value U.S. $0.01
  each.........................................  75,000,000    25,017,603     $250       $299,533
Preferred shares, par value U.S. $0.01 each....  25,000,000            --       --             --
</TABLE>
 
     There are various restrictions on the ability of certain shareholders to
dispose of their shares.
 
     In March, June, September and December 1998, respectively, the Company paid
quarterly dividends of $0.3175, $0.3175, $0.3175 and $0.3175, per share to
holders of its common shares. In addition, in March 1998, the Company paid a
special dividend of $0.80 per share to holders of its common shares.
 
     In March, June, September and December 1997, respectively, the Company paid
quarterly dividends of $0.3175, $0.3175, $0.3175 and $0.3175, per share to
holders of its common shares. In addition, in June and December, 1997,
respectively, the Company paid special dividends of $1.00 and $1.00 per share to
holders of its common shares.
 
     In June, September and December 1996, respectively, the Company paid
dividends of $0.2875, $0.2875 and $0.3175 per share to holders of its common
shares.
 
                                       53
<PAGE>   20
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. SHARE PURCHASE OPTIONS:
 
     In conjunction with the private placement offering discussed in Note 5, the
Company granted to American International Group, Inc. ("AIG") an option to
acquire up to 2,775,000 common shares at an exercise price of $12.7746 per share
(the "AIG Option"). The $12.7746 exercise price per share at the time of the
private placement was equal to the price paid per share by all of the Company's
shareholders, other than AIG (which paid $9.60 per share). Following
consummation of the offering referred to in Note 1, the AIG Option is
exercisable in certain circumstances, generally upon an offering of common stock
subsequent to the initial public offering referred to in Note 1, upon
amalgamation, merger, or sale of the assets of the Company or at certain dates
between June 29, 2001 and June 23, 2003 provided that the book value per share
on such dates is at least 175% of the exercise price.
 
     The Company also adopted a Stock Option Plan (the "Plan"), effective
February 15, 1996. Under the Plan, at the discretion of the Compensation
Committee of the Board of Directors (the "Committee"), the Company may grant to
certain employees up to 277,500 common shares, $0.01 par value. The exercise
price of the options granted under the Plan shall be as determined by the
Committee in its sole discretion, including, but not limited to, the book value
per share or the publicly traded market price per share.
 
     On February 15, 1996 and July 25, 1996, the Company granted options to
acquire 85,249 common shares to officers and management employees at an exercise
price of $16.54 per common share which equaled the book value per common share
as of December 31, 1995. On January 2, 1997 the Company granted options to
acquire 38,500 shares to officers and management employees at an exercise price
of $22.50 per common share which equaled the opening market price on that day.
On January 2, 1998 the Company granted options to acquire 51,500 shares to
officers and management employees at an exercise price of $32.1875 per common
share which equaled the opening market price on that day. Such options vest at a
rate of 25% annually and lapse on the tenth anniversary of issue.
 
     The effect on net income and net income per common share of recording
compensation expense under the provisions of SFAS 123, "Accounting for
Stock-based Compensation", versus compensation expense under the provisions of
APB Opinion No. 25 is not material for the years ended December 31, 1998, 1997
and 1996.
 
     A summary of the status of the Company's stock option plan as of December
31, 1998, 1997 and 1996 and changes during the years then ended is presented in
the table and narrative below:
 
<TABLE>
<CAPTION>
                                          1998                    1997                    1996
                                  ---------------------   ---------------------   ---------------------
                                  NUMBER OF    EXERCISE   NUMBER OF    EXERCISE   NUMBER OF    EXERCISE
                                   SHARES       PRICE      SHARES       PRICE      SHARES       PRICE
                                  ---------    --------   ---------    --------   ---------    --------
<S>                               <C>          <C>        <C>          <C>        <C>          <C>
Outstanding, beginning of
  year..........................    90,767     $  18.87     80,624      $16.54          --          --
Granted.........................    51,500     $32.1875     38,500      $22.50      85,249      $16.54
Exercised.......................    16,329     $  18.36     20,153      $16.54          --          --
Forfeited.......................        --                   8,204      $18.72       4,625      $16.54
Expired.........................        --                      --          --          --          --
Outstanding, end of year........   125,938     $  24.38     90,767      $18.87      80,624      $16.54
Exercisable, end of year........    10,969     $  18.65         --          --          --          --
Weighted average fair value of
  options granted (per share)...  $  11.73                 $  7.01                 $  7.16
</TABLE>
 
     The remaining weighted average contractual life of the options outstanding
as of December 31, 1998 is 8.11 years. The fair value of options granted on
January 2, 1998 was estimated using the Black-Scholes option pricing model,
using an assumed risk-free rate of interest of 5.63%; an expected dividend yield
of 3.945%; an expected life of 7 years; and an expected volatility of 45%.
 
                                       54
<PAGE>   21
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The fair value of options granted on January 2, 1997 was estimated using
the Black-Scholes option pricing model, using an assumed risk-free rate of
interest of 6.35%; an expected dividend yield of 5.64%; an expected life of 7
years; and an expected volatility of 45%.
 
     The fair value of options granted on February 15, 1996 and July 25, 1996
was estimated using the Black-Scholes option pricing model, using an assumed
risk-free rate of interest of 5.40%; an expected dividend yield of 5.67%; an
expected life of 7 years; and an expected volatility of 40%.
 
7.  NET INCOME PER COMMON SHARE:
 
     A reconciliation of the numerator and the denominator for basic and diluted
net income per common share ("EPS") is given in the following table:
 
<TABLE>
<CAPTION>
                              DECEMBER 31, 1998                   DECEMBER 31, 1997                  DECEMBER 31, 1996
                       --------------------------------   ---------------------------------   --------------------------------
                                               AMOUNT                              AMOUNT                             AMOUNT
                       INCOME      SHARES     PER SHARE    INCOME      SHARES     PER SHARE   INCOME      SHARES     PER SHARE
                       -------   ----------   ---------   --------   ----------   ---------   -------   ----------   ---------
<S>                    <C>       <C>          <C>         <C>        <C>          <C>         <C>       <C>          <C>
Basic EPS............  $67,714   25,031,211     $2.71     $100,320   25,010,060     $4.01     $92,565   25,000,000     $3.70
Effect of Dilutive
  Options............       --    1,515,851                     --    1,482,341                    --    1,080,744
Diluted EPS..........  $67,714   26,547,062     $2.55     $100,320   26,492,401     $3.79     $92,565   26,080,744     $3.55
</TABLE>
 
8.  RELATED PARTY TRANSACTIONS:
 
     In addition to the share purchase options discussed in Note 6, IPC has
entered into the following transactions and agreements with companies affiliated
with AIG:
 
  a) Administrative services:
 
     The Company and IPCRe are parties to an agreement with American
International Company, Limited ("AICL"), an affiliate of AIG, under which AICL
provides administrative services for a fee of 2.5% of the first $500,000 annual
gross written premiums (1.5% of the next $500,000 and 1% thereafter). These fees
are included in general and administrative expenses in the accompanying
consolidated statements of income. This administrative services agreement
terminates on June 30, 2003 and is automatically renewed thereafter for
successive three-year terms unless prior written notice to terminate is
delivered by or to AICL at least 180 days prior to the end of such three-year
term. In addition, IPCRe Europe Limited is party to an agreement with AIG
Insurance Management Services (Europe) Limited ("AIMS"), an affiliate of AIG,
under which AIMS provides administrative services for an annual fee of
approximately $38 per annum.
 
  b) Investment management services:
 
     IPCRe is party to an agreement with AIG Global Investment Corp. (Ireland)
Limited ("AIGGIC"), an affiliate of AIG, under which AIGGIC provides investment
advisory and management services. This agreement is subject to termination by
either party on 30 days' written notice. IPCRe has agreed to pay fees to AIGGIC
based on the month end market value of the total investment portfolio as
follows:
 
<TABLE>
<CAPTION>
                                                           ANNUAL FEE
PORTFOLIO BALANCE                                        IN BASIS POINTS
-----------------                                        ---------------
<S>                                                      <C>
Up to $100,000.........................................        35
Excess of $100,000 through $200,000....................        25
Excess of $200,000.....................................        15
</TABLE>
 
These fees are included in net investment income in the accompanying
consolidated statements of income.
 
                                       55
<PAGE>   22
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
  c) Investment custodian services:
 
     IPCRe is party to an agreement with AIG Trust Services Limited ("AIGTS"),
an affiliate of AIG, under which AIGTS provides investment custodian services.
IPCRe has agreed to pay fees of 0.04% per annum based on the month end market
value of investments held under custody, plus reimbursement of fees and out-
of-pocket expenses. These fees are included in net investment income in the
accompanying consolidated statements of income. This agreement may be terminated
by either party upon 90 days' written notice.
 
     The following amounts were incurred for services provided by affiliates of
AIG:
 
<TABLE>
<CAPTION>
                                                               INVESTMENT   INVESTMENT
                                              ADMINISTRATIVE   MANAGEMENT   CUSTODIAN
                                                 SERVICES       SERVICES     SERVICES
                                              --------------   ----------   ----------
<S>                                           <C>              <C>          <C>
Year ended December 31, 1998................      $3,012         $1,075        $347
Year ended December 31, 1997................       2,812          1,121         313
Year ended December 31, 1996................       2,816          1,017         240
</TABLE>
 
     The following amounts were payable as of the balance sheet date to
affiliates of AIG:
 
<TABLE>
<S>                                                   <C>
December 31, 1998...................................  $1,689
December 31, 1997...................................     758
</TABLE>
 
  d) Related Party Business:
 
     IPCRe assumed premiums from companies affiliated with two shareholders of
the Company. Premiums assumed were $9,858, $11,359 and $9,628, respectively, for
the years ended December 31, 1998, 1997 and 1996. IPCRe also assumed premiums
from its subsidiary, IPCRe Europe Limited following its incorporation in
September, 1998. Premiums assumed were $394 for the year ended December 31,
1998. In addition, IPCRe assumed premiums through brokers related to
shareholders of the Company totaling $6,080, $7,903 and $19,429, respectively,
for the years ended December 31, 1998, 1997 and 1996. Brokerage fees and
commissions incurred in respect of this business were approximately $601, $790
and $1,943, respectively, for the years ended December 31, 1998, 1997 and 1996.
All such transactions were undertaken on normal commercial terms. Reinsurance
premiums receivable due from related parties as of December 31, 1998 and
December 31, 1997 were $3,653 and $4,418, respectively.
 
  e)A director and executive officer of various AIG subsidiaries and affiliates
    serves as the Chairman of the Board of Directors of IPC. In addition, the
    managing director of AIMS serves as a director of IPCRe Europe Limited.
 
                                       56
<PAGE>   23
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
9.  RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:
 
     Activity in the reserve for losses and loss adjustment expenses is
summarized as follows:
 
<TABLE>
<CAPTION>
                                                 1998       1997       1996
                                                -------    -------    -------
<S>                                             <C>        <C>        <C>
Balance, beginning of year....................  $27,590    $28,483    $24,717
Losses incurred related to:
  Current year................................   55,815     15,368     32,192
  Prior years.................................    5,644       (660)       540
                                                -------    -------    -------
          Total incurred......................   61,459     14,708     32,732
                                                -------    -------    -------
Paid losses related to:
  Current year................................  (22,256)    (1,658)   (15,670)
  Prior years.................................  (15,100)   (13,531)   (13,274)
                                                -------    -------    -------
          Total paid losses...................  (37,356)   (15,189)   (28,944)
                                                -------    -------    -------
Effect of foreign exchange movements..........      533       (412)       (22)
                                                -------    -------    -------
Balance, end of year..........................  $52,226    $27,590    $28,483
                                                =======    =======    =======
</TABLE>
 
     Losses incurred in the year ended December 31, 1998 in respect of prior
years included late reported losses in respect of a number of per risk treaties,
including events in Brazil and Malaysia, claim development for Marine business,
offset by some reductions to previously reported claims from some per risk
treaties.
 
     Losses incurred in the year ended December 31, 1997 in respect of prior
years included increases related to the Northridge, California earthquake and a
per risk treaty loss, which were more than offset by reductions in incurred
losses for property catastrophe business, including Hurricanes Luis, Marilyn,
Opal and Fran, and a Korean per risk treaty loss.
 
     Losses incurred in the year ended December 31, 1996 in respect of prior
years included increases related to the Northridge, California earthquake,
together with increases in reserves for marine and aviation business. These
increases were offset by reductions in reserves for property catastrophe
business, in particular in respect of Hurricanes Luis, Opal and Marilyn.
 
     An independent firm of actuaries has reviewed the Company's loss reserves.
 
                                       57
<PAGE>   24
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. WRITTEN PREMIUM BY GEOGRAPHIC REGION:
 
     Financial information relating to reinsurance premiums written by
geographic region is as follows:
 
<TABLE>
<CAPTION>
                                   DECEMBER 31, 1998    DECEMBER 31, 1997    DECEMBER 31, 1996
                                   ------------------   ------------------   ------------------
                                   PREMIUMS             PREMIUMS             PREMIUMS
                                    WRITTEN      %       WRITTEN      %       WRITTEN      %
                                   ---------   ------   ---------   ------   ---------   ------
<S>                                <C>         <C>      <C>         <C>      <C>         <C>
Geographic Area(1)
  United States..................  $ 50,796     45.7%   $ 54,200     46.3%   $ 51,641     46.3%
  Worldwide(2)...................    14,050     12.6%     16,141     13.8%     20,044     18.0%
  Worldwide (excluding the
     U.S.)(3)....................     3,513      3.2%      2,497      2.1%      2,429      2.2%
  United Kingdom.................    13,533     12.2%     12,392     10.6%     11,403     10.2%
  Europe (excluding the U.K.)....    10,022      9.0%     11,232      9.6%      6,523      5.8%
  Japan..........................     4,139      3.7%      2,794      2.4%      5,088      4.6%
  Australia/New Zealand..........     8,589      7.7%      9,433      8.1%      6,308      5.6%
  Other..........................     6,623      5.9%      8,361      7.1%      8,133      7.3%
                                   --------    -----    --------    -----    --------    -----
                                   $111,265    100.0%   $117,050    100.0%   $111,569    100.0%
                                   ========    =====    ========    =====    ========    =====
</TABLE>
 
---------------
(1) Except as otherwise noted, each of these categories includes contracts that
    cover risks located primarily in the designated geographic area.
 
(2) Includes contracts that cover risks primarily in two or more countries,
    including the United States.
 
(3) Includes contracts that cover risks primarily in two or more countries,
    excluding the United States.
 
11. CONCENTRATION AND CREDIT RISK:
 
     As of December 31, 1998 and December 31, 1997, IPC held U.S. Treasury notes
which represented approximately 13% and 6%, respectively, of shareholders'
equity.
 
     Credit risk arises out of the failure of a counterparty to perform
according to the terms of the contract. IPC does not require collateral or other
security to support financial instruments with credit risk.
 
     A single broker accounted for approximately 25%, 22% and 19%, respectively,
of total premiums written for the years ended December 31, 1998, 1997 and 1996.
Five brokers accounted for approximately 71%, 68% and 48%, respectively, of
total premiums written for the years ended December 31, 1998, 1997 and 1996.
 
12. COMMITMENTS AND CONTINGENCIES:
 
     Since July 1995, IPCRe has entered into forward foreign exchange contracts
for purposes of hedging its investment portfolio. The fair value of forward
foreign exchange contracts represents the estimated cost to the Company as of
the balance sheet date of obtaining the specified currency to meet the
obligation of the contracts. Changes in the value of these contracts offset the
foreign exchange gains and losses in the foreign currency denominated assets
being hedged. Net gains resulting from such forward foreign exchange contracts
during the years ended December 31, 1998, 1997 and 1996 were $0, $849 and $597,
respectively, and are included in realized gains (losses), net in the
accompanying consolidated statements of income. As of December 31, 1998 IPCRe
had no forward foreign exchange contracts outstanding. IPCRe may also enter into
forward contracts to manage the exposures relating to known reinsurance losses
denominated in foreign currencies. No such contracts have been entered into to
date.
 
                                       58
<PAGE>   25
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13. CREDIT FACILITY:
 
     In July 1998, IPCRe entered into a five year, revolving credit agreement
with a syndicate of financial institutions in the amount of $300,000. The
proceeds of this facility can be used for general corporate purposes. This
facility has certain financial covenants, including minimum net worth
provisions, restrictions on the amount of dividends that IPCRe may pay to net
income of the previous twelve months, and certain investment restrictions. At
December 31, 1998 no amounts have been drawn under this facility, and IPCRe was
in compliance with all covenants under this facility
 
14. STATUTORY CAPITAL AND SURPLUS:
 
     IPCRe is registered under the Bermuda Insurance Act 1978 and Related
Regulations (the "Act") and is obliged to comply with various provisions of the
Act regarding solvency and liquidity. Under the Act, as amended in May, 1995,
IPCRe is required to maintain minimum statutory capital and surplus equal to the
greater of $100,000, 50% of net premiums written or 15% of the reserve for
losses and loss adjustment expenses. These provisions have been met as shown in
the following table:
 
<TABLE>
<CAPTION>
                                             DECEMBER 31, 1998    DECEMBER 31, 1997
                                             -----------------    -----------------
<S>                                          <C>                  <C>
Actual statutory capital and surplus.......      $563,122             $525,841
Minimum statutory capital and surplus......      $100,000             $100,000
</TABLE>
 
     IPCRe's statutory net income for the years ended December 31, 1998, 1997
and 1996, was $69,083, $101,504 and $95,828, respectively.
 
     The Act limits the maximum amount of annual dividends or distributions paid
by IPCRe to the Company without notification to the Registrar of such payment
(and in certain cases the prior approval of the Registrar). The maximum amount
of dividends which could be paid by IPCRe to the Company at January 1, 1999
without such notification is approximately $140,780.
 
15. PENSION PLAN:
 
     Effective December 1, 1995, IPC adopted a defined contribution retirement
plan for its officers and employees. Pursuant to the plan, each participant can
contribute 5% or more of their salary and IPC will contribute an amount equal to
5% of each participant's salary. In addition, IPC has entered into individual
pension arrangements with a number of specific employees. Pursuant to these
plans, IPC contributes an amount equal to 5% of each participant's salary. IPC's
contributions under the various plans are fully funded, and amounted to
approximately $98, $80 and $183 in 1998, 1997 and 1996, respectively.
 
16. TAXES:
 
     At the present time, no income, profit, capital or capital gains taxes are
levied in Bermuda. In the event that such taxes are levied, the Company and
IPCRe have received an undertaking from the Bermuda Government exempting them
from all such taxes until March 28, 2016.
 
     IPC does not consider itself to be engaged in a trade or business in the
United States and, accordingly, does not expect to be subject to United States
income taxes.
 
     IPC Re Services Limited is a tax-paying entity subject to the jurisdiction
of the Government of the United Kingdom. The amount of taxes incurred for 1998
and 1997 is not material to the consolidated financial statements.
 
     IPCRe Europe Limited, upon commencement of operations, is a tax-paying
entity subject to the jurisdiction of the Government of Ireland. The amount of
taxes incurred for 1998 is not material to the consolidated financial
statements.
 
                                       59
<PAGE>   26
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
17. EXCHANGE GAINS & LOSSES:
 
     The exchange gain or loss in the accompanying consolidated statements of
income comprises the net effect of realized and unrealized exchange gains and
losses. The unrealized component arises from the revaluation of certain foreign
currency assets and liabilities as of the balance sheet dates. The realized
component arises from the difference between amounts previously recorded for
foreign currency assets and liabilities and the actual amounts received or paid
during the year.
 
18. UNAUDITED QUARTERLY FINANCIAL DATA:
 
<TABLE>
<CAPTION>
                                                      QUARTER     QUARTER      QUARTER     QUARTER
                                                       ENDED       ENDED        ENDED       ENDED
                                                     MARCH 31,    JUNE 30,    SEPT. 30,    DEC. 31,
                                                       1998         1998        1998         1998
                                                     ---------    --------    ---------    --------
<S>                                                  <C>          <C>         <C>          <C>
Premiums written...................................   $72,173     $18,398      $15,671     $ 5,023
Premiums earned....................................    28,944      31,264       29,427      30,490
Net investment income..............................     7,262       7,450        7,726       7,615
Realized gains (losses), net.......................     2,604       1,084          342       2,984
Losses and loss adjustment expenses................     4,125      10,332       18,922      28,080
Net income.........................................    28,792      22,156       11,061       5,705
Net income per common share -- basic...............   $  1.15     $  0.89      $  0.44     $  0.23
Net income per common share -- diluted.............   $  1.08     $  0.83      $  0.42     $  0.22
</TABLE>
 
<TABLE>
<CAPTION>
                                                      QUARTER     QUARTER      QUARTER     QUARTER
                                                       ENDED       ENDED        ENDED       ENDED
                                                     MARCH 31,    JUNE 30,    SEPT. 30,    DEC. 31,
                                                       1997         1997        1997         1997
                                                     ---------    --------    ---------    --------
<S>                                                  <C>          <C>         <C>          <C>
Premiums written...................................   $71,415     $18,159      $21,721     $ 5,755
Premiums earned....................................    28,407      27,321       28,559      28,199
Net investment income..............................     7,602       8,001        7,091       7,189
Realized gains (losses), net.......................      (322)     (1,854)      (1,314)       (126)
Losses and loss adjustment expenses................     2,464       2,718        2,857       6,669
Net income.........................................    27,512      25,528       25,534      21,746
Net income per common share -- basic...............   $  1.10     $  1.02      $  1.02     $  0.87
Net income per common share -- diluted.............   $  1.05     $  0.97      $  0.96     $  0.82
</TABLE>
 
                                       60
<PAGE>   27
                      IPC HOLDINGS, LTD. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
19. SUBSIDIARY FINANCIAL DATA:
 
     Summarized consolidated financial data of the subsidiary, IPCRe, is as
follows:
 
<TABLE>
<CAPTION>
                                       YEAR ENDED           YEAR ENDED           YEAR ENDED
                                    DECEMBER 31, 1998    DECEMBER 31, 1997    DECEMBER 31, 1996
                                    -----------------    -----------------    -----------------
<S>                                 <C>                  <C>                  <C>
Written premiums..................      $111,265             $117,050             $111,569
Premiums earned...................       120,125              112,486              113,642
Investment income.................        30,038               29,858               28,833
Realized gain (loss), net.........         7,014               (3,616)               3,871
Incurred losses...................       (61,459)             (14,708)             (32,732)
Acquisition costs.................       (16,968)             (13,487)             (11,849)
General & admin. expenses and
  exchange gain (loss), net.......       (10,220)              (8,790)              (6,024)
                                        --------             --------             --------
Net Income........................      $ 68,530             $101,743             $ 95,741
                                        ========             ========             ========
Loss ratio........................          51.2%                13.1%                28.8%
Expense ratio (excluding exchange
  gain (loss), net)...............          22.3%                18.4%                16.3%
Combined ratio....................          73.5%                31.5%                45.1%
</TABLE>
 
<TABLE>
<CAPTION>
                                    DECEMBER 31, 1998    DECEMBER 31, 1997
                                    -----------------    -----------------
<S>                                 <C>                  <C>                  <C>
Cash & investments................      $599,872             $538,287
Reinsurance balances receivable...        20,746               27,723
Other assets......................        23,356               19,751
                                        --------             --------
Total Assets......................      $643,974             $585,761
                                        ========             ========
Unearned premiums.................      $ 17,602             $ 26,462
Reserves for losses...............        52,226               27,590
Other liabilities.................         7,438                2,546
                                        --------             --------
Total Liabilities.................        77,266               56,598
                                        --------             --------
Common stock......................       250,000              250,000
Additional paid-in capital........        49,500               49,500
Retained earnings.................       236,267              220,187
Accumulated other comprehensive
  income..........................        30,941                9,476
                                        --------             --------
Total Liabilities and
  Shareholder's Equity............      $643,974             $585,761
                                        ========             ========
</TABLE>
 
                                       61