<PAGE>
 
                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-Q
                                        
                                   (Mark One)

  [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934
 
            FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
 
                                      OR
 
[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
             For the transition period from _________ to __________
 
 
                        Commission File number  1-13832
 
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                        
              BERMUDA                                            N/A
              -------                                            ---
   (State or other jurisdiction of                         (I.R.S. EMPLOYER
   incorporation or organisation)                          IDENTIFICATION NO)

                                    RICHMOND HOUSE
                                 12 PAR LA VILLE ROAD
                                     HAMILTON HM08
                                        BERMUDA
                      -------------------------------------------- 
                       (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                      (Zip code)

                                TELEPHONE: (441) 292 7731
                   ---------------------------------------------------
                   (Registrants telephone number, including area code)
                                        
                                      N/A
  (Former name, former address and former fiscal year, if changed since last 
                                    report)
                                        
                                        
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                YES    X          NO
                                     -------         --------

The number of registrant's ordinary shares ($5.80 par value) outstanding as of
November 16, 1998, was 25,366,734.
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

                               INDEX TO FORM 10-Q
                                        

PART I - FINANCIAL INFORMATION
------------------------------


<TABLE>
<CAPTION>
                                                                                   Page No.
                                                                                   --------
<S>        <C>                                                                    <C>
Item 1.       Financial Statements:                                                  
                                                                                     
              Consolidated Balance Sheets                                            
              September 30, 1998 (Unaudited) and December 31, 1997                    1
                                                                                     
              Consolidated Statements of Operations (Unaudited)                      
                 Three Months Ended September 30, 1998 and 1997                      
                 Nine Months Ended September 30, 1998 and 1997                        2
                                                                                     
              Consolidated Statements of Comprehensive Income (Unaudited)            
                 Three Months Ended September 30, 1998 and 1997                      
                 Nine Months Ended September 30, 1998 and 1997                        3
                                                                                     
              Consolidated Statements of Shareholders' Equity (Unaudited)            
                 Nine Months Ended September 30, 1998 and 1997                        4
                                                                                     
              Consolidated Statements of Cash Flows (Unaudited)                      
                 Nine Months Ended September 30, 1998 and 1997                        5
                                                                                     
              Notes to the Interim Consolidated Financial Statements                  6
              (Unaudited)                                                            
                                                                                     
                                                                                     
Item 2.       Management's Discussion and Analysis of Financial Condition            
              and Results of Operations                                              10
                                                                                     
PART II - OTHER INFORMATION                                                          
---------------------------                                                          
                                                                                     
Item 6.       Exhibits and Reports on Form 8-K                                       19
                                                                                     
Signatures                                                                           20
</TABLE>
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES
                           Consolidated Balance Sheets
                             (dollars in thousands)

<TABLE>
<CAPTION>

                                                                               At September 30,        At December 31,
                                                                                      1998                  1997
                                                                                ---------------        ---------------
                                                                                  (Unaudited)              
<S>                                                                             <C>                    <C>  
                                ASSETS                                                   
Investments available for sale and cash and cash equivalents, at fair value:                                                 
       Fixed maturities:                                                                                
              Bonds (amortized cost $1,299,972 and $1,219,799, respectively)       $1,389,829               $1,261,458
       Common stocks (cost $60,563 and $69,781, respectively)                          75,694                  104,234
       Cash and cash equivalents                                                       60,127                  109,864
                                                                                 -------------          ---------------
              Total investments and cash and cash equivalents                       1,525,650                1,475,556
                                                                                                        
Accrued investment income                                                              31,748                   28,076
Insurance balances receivable                                                          95,957                   74,774
Reinsurance recoverable on paid losses                                                 52,695                   39,402
Reinsurance recoverable on unpaid losses                                              242,447                  246,728
Accrued premium income                                                                280,819                  188,055
Prepaid reinsurance premiums                                                           54,156                   26,853
Deferred acquisition costs                                                            119,654                   76,380
Goodwill                                                                               26,223                   26,918
Other assets                                                                           52,728                   37,392
                                                                                 -------------          ---------------
              Total assets                                                         $2,482,077               $2,220,134
                                                                                 =============          ===============
                                                                                                        
                                LIABILITIES                                                 
Unpaid losses and loss adjustment expenses                                         $1,160,026               $1,157,724
Unearned premiums                                                                     430,381                  274,934
Insurance balances payable                                                             47,272                   33,833
Income taxes payable                                                                   21,723                   10,274
Deferred income taxes                                                                   9,606                   15,244
Long-term debt                                                                        175,000                  175,000
Net liabilities of Aviation business in run-off                                        26,607                   28,235
Other liabilities                                                                      52,616                   43,002
                                                                                 -------------          ---------------
              Total liabilities                                                    $1,923,231               $1,738,246
                                                                                 -------------          ---------------
                                                                                                        
                     SHAREHOLDERS' EQUITY                                            
Common shares                                                                         150,602                  150,142
Stock held in Trust                                                                    (9,500)                  (9,500)
Deferred equity compensation                                                            6,350                    3,275
Additional capital                                                                    111,726                  111,568
Retained earnings                                                                     218,590                  169,861
Accumulated other comprehensive income                                                 81,078                   56,542
                                                                                 -------------          ---------------
              Total shareholders' equity                                             $558,846                 $481,888
                                                                                 -------------          --------------- 
                                                                                 -------------          --------------- 
              Total liabilities and shareholders' equity                           $2,482,077               $2,220,134
                                                                                 =============          ===============
</TABLE>

See accompanying notes to the interim consolidated financial statements.


                                       1
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                               AND SUBSIDIARIES
                     Consolidated Statements of Operations
    For the Three Months and Nine Months Ended September 30, 1998 and 1997
                                  (Unaudited)
                  (dollars in thousands except share amounts)


<TABLE> 
<CAPTION> 
                                                                             Three Months Ended       Nine Months Ended
                                                                               September 30,             September 30,
                                                                        ------------------------- ---------------------------
                                                                             1998         1997          1998           1997
                                                                        ------------   ---------- -------------    ----------
<S>                                                                    <C>            <C>         <C>            <C> 
Revenues
                 Net written premiums                                      $115,879      $90,458      $506,828      $368,778
                 Decrease (increase) in unearned premiums                    13,518       11,399      (128,139)      (92,537)
                                                                        ------------   ---------- -------------    ----------
                 Net earned premiums                                        129,397      101,857       378,689       276,241
                 Net investment income                                       23,250       21,461        69,513        62,524
                 Realized net capital gains on sales of investments           1,374        4,221        15,932        11,733
                 Foreign exchange gains (losses)                                (62)        (585)          244           210
                 Agency income                                                4,620        3,455        15,104        10,019
                                                                        ------------   ---------- -------------    ----------
                                  Total revenues                            158,579      130,409       479,482       360,727
                                                                        ------------   ---------- -------------    ----------
Expenses
                 Losses and loss adjustment expenses, net                    80,743       61,875       242,865       178,147
                 Acquisition costs                                           42,295       34,104       117,460        83,868
                 Other operating expenses                                     3,757        3,500        12,883        10,714
                 Interest expense                                             3,100        3,297        10,597         8,672
                 Agency expense                                               3,507        2,805        11,972         8,044
                 Other expenses                                               1,232        1,441         4,455         4,195
                                                                        ------------   ---------- -------------    ----------
                                  Total expenses                            134,634      107,022       400,232       293,640
                                                                        ------------   ---------- -------------    ----------

Income before income taxes and extraordinary charge                          23,945       23,387        79,250        67,087

Income tax expense                                                            4,174        4,378        14,456        13,430
                                                                        ------------   ---------- -------------    ----------
Net income before extraordinary charge                                      $19,771      $19,009       $64,794       $53,657
                                                                        ============   ========== =============    ==========

Extraordinary charge after tax                                                    -            -        11,641             -
                                                                        ------------   ---------- -------------    ----------
Net income                                                                  $19,771      $19,009       $53,153       $53,657
                                                                        ============   ========== =============    ==========

Basic earnings per common share
                 Net income before extraordinary charge                       $0.78        $0.75         $2.55         $2.09
                 Extraordinary charge                                             -            -          0.46             -
                                                                        ------------   ---------- -------------    ----------
                 Net income                                                   $0.78        $0.75         $2.09         $2.09
                                                                        ============   ========== =============    ==========
Diluted earnings per common share
                 Net income before extraordinary charge                       $0.75        $0.74         $2.48         $2.06
                 Extraordinary charge                                             -            -          0.45             -
                                                                        ------------   ---------- -------------    ----------
                 Net income                                                   $0.75        $0.74         $2.03         $2.06
                                                                        ============   ========== =============    ==========
</TABLE> 

See accompanying notes to the interim consolidated financial statements.

                                       2
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES
                 Consolidated Statements of Comprehensive Income
     For the Three Months and Nine Months Ended September 30, 1998 and 1997
                                   (Unaudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                          Three Months Ended               Nine Months Ended
                                                                             September 30,                    September 30,
                                                                  ----------------------------------    ----------------------------
                                                                      1998                1997              1998             1997
                                                                  ------------     -----------------    -----------      -----------
<S>                                                               <C>              <C>               <C>              <C>    
   Net income                                                         $19,771               $19,009        $53,153          $53,657
                                                                  ------------     -----------------    -----------      -----------
   Other comprehensive income net of tax:
             Unrealized appreciation of investments before tax         26,777                23,689         28,875           21,589
             Tax expense                                               (4,777)               (5,062)        (4,515)          (4,434)
                                                                  ------------     -----------------    -----------      -----------
             Unrealized appreciation of investments after tax          22,000                18,627         24,360           17,155

             Currency translation adjustments                             111                   (88)           176             (132)

                                                                  ------------     -----------------    -----------      -----------
   Other comprehensive income                                          22,111                18,539         24,536           17,023
                                                                  ------------     -----------------    -----------      -----------
                                                                  ------------     -----------------    -----------      -----------
   Comprehensive income                                               $41,882               $37,548        $77,689          $70,680
                                                                  ============     =================    ===========      ===========
</TABLE>

See accompanying notes to the interim consolidated financial statements.

                                       3
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES
                 Consolidated Statements of Shareholders' Equity
              For the Nine Months Ended September 30, 1998 and 1997
                                   (Unaudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                       Nine Months Ended
                                                                                         September 30,
                                                                           ------------------------------------------
                                                                                1998                      1997
                                                                           ----------------         -----------------
<S>                                                                        <C>                       <C>     
Common shares:
                  Balance, beginning of period                                    $150,142                  $149,933
                  Issued during the period                                             460                       181
                                                                           ----------------         -----------------
                                   Balance, end of period                         $150,602                  $150,114
                                                                           ================         =================

Stock held in Trust:
                  Balance, beginning of period                                     $(9,500)                       $-
                  Purchased during the period                                            -                   (10,020)
                  Options exercised during the period                                    -                       520
                                                                           ----------------         -----------------
                                   Balance, end of period                          $(9,500)                  $(9,500)
                                                                           ================         =================

Deferred equity compensation:
                  Balance, beginning of period                                      $3,275                        $-
                  Stock option compensation expense                                  3,075                     2,833
                  Options exercised during the period                                    -                      (369)
                                                                           ----------------         -----------------
                                   Balance, end of period                           $6,350                    $2,464
                                                                           ================         =================


Additional capital:
                  Balance, beginning of period                                    $111,568                  $111,544
                  Options exercised during the period                                  158                        24
                                                                           ----------------         -----------------
                                   Balance, end of period                         $111,726                  $111,568
                                                                           ================         =================


Retained earnings:
                  Balance, beginning of period                                    $169,861                  $100,821
                  Net income                                                        53,153                    53,657
                  Dividends payable on ordinary shares                              (4,424)                   (3,076)
                                                                           ----------------         -----------------
                                   Balance, end of period                         $218,590                  $151,402
                                                                           ================         =================


Accumulated other comprehensive income:
                  Balance, beginning of period                                     $56,542                   $36,461
                  Unrealized appreciation of investments, net of tax                24,360                    17,155
                  Currency translation adjustments                                     176                      (132)
                                                                           ----------------         -----------------
                                   Balance, end of period                          $81,078                   $53,484
                                                                           ================         =================

                                                                           ----------------         -----------------
                                   Total shareholders' equity                     $558,846                  $459,532
                                                                           ================         =================

</TABLE>

See accompanying notes to the interim consolidated financial statements.

                                       4
<PAGE>
                      TERRA NOVA (BERMUDA) HOLDINGS LTD. 
                                AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
              For the Nine Months Ended September 30, 1998 and 1997
                                   (Unaudited)
                             (dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                     Nine Months Ended
                                                                                                        September 30,
                                                                                         --------------------------------------
                                                                                             1998                    1997
                                                                                         -------------          ---------------
<S>                                                                                       <C>                      <C>    
Cash flows from operating activities:
                   Net income                                                                 $53,153                  $53,657

Adjustments to reconcile net income to net cash
                   provided by operating activities:
                   Amortization of goodwill                                                       695                      854
                   Extraordinary charge                                                        16,871                        -
                   Stock option compensation expense                                            3,075                    2,403
                   Realized capital gains                                                     (15,932)                 (11,733)
                   Change in unpaid losses and loss adjustment expenses                         1,717                  (33,809)
                   Change in unearned premiums and prepaid reinsurance                        128,144                   95,769
                   Change in insurance balances payable                                        13,439                  (20,686)
                   Change in insurance balances receivable, accrued premium income and
                                    reinsurance recoverable on paid and unpaid losses        (123,615)                 (41,495)
                   Change in deferred acquisition costs                                       (43,275)                 (35,771)
                   Change in accrued investment income                                         (3,673)                  (2,064)
                   Change in current and deferred income taxes                                  2,125                    9,747
                   Change in other assets and liabilities, net                                (19,413)                   8,631
                   Change in net liabilities of Aviation business in run-off                   (1,628)                     215
                                                                                         -------------          ---------------
                                    Total adjustments                                         (41,470)                 (27,939)
                                                                                         -------------          ---------------
                                    Net cash provided by operating activities                  11,683                   25,718
                                                                                         -------------          ---------------
Cash flows from investing activities:
                   Proceeds of fixed maturities matured                                        37,057                   50,582
                   Proceeds of fixed maturities sold                                          339,000                  311,423
                   Proceeds of equity securities sold                                         114,041                  132,966
                   Purchase of fixed maturities                                              (439,698)                (361,341)
                   Purchase of equity securities                                              (94,612)                (138,159)
                   Payment consideration for Corifrance                                             -                  (42,225)
                   Acquisition expenses                                                             -                     (203)
                                                                                         -------------          ---------------
                                    Net cash used in investing activities                     (44,212)                 (46,957)
                                                                                         -------------          ---------------
Cash flows from financing activities:
                   Ordinary dividend paid                                                      (4,412)                  (3,076)
                   Redemption of public debt                                                 (113,053)                       -
                   Proceeds from public debt offering                                          99,899                   74,866
                   Payment of fees for financing public debt offering                            (913)                    (538)
                   Repurchase of common shares                                                      -                  (10,020)
                   Stock options exercised                                                        618                      356
                                                                                         -------------          ---------------
                         Net cash (used in) provided by financing activities                  (17,861)                  61,588
                                                                                         -------------          ---------------
Change in cash and cash equivalents                                                           (50,390)                  40,349
Exchange on foreign currency cash balances                                                        653                     (656)
Cash and cash equivalents at beginning of period                                              109,864                   50,544
                                                                                         -------------          ---------------
Cash and cash equivalents at end of period                                                    $60,127                  $90,237
                                                                                         =============          ===============
Supplemental disclosure of cash flow information
                   Income taxes paid                                                           $4,389                     $324
                                                                                         =============          ===============
                   Interest paid                                                              $14,638                  $10,750
                                                                                         =============          ===============
</TABLE> 

See accompanying notes to the interim consolidated financial statements.

                                       5
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

             NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                        
1. BASIS OF PRESENTATION

The accompanying interim consolidated financial statements ("Statements")
present information about Terra Nova (Bermuda) Holdings Ltd. (the "Company") and
have been prepared on the basis of accounting principles generally accepted in
the United States of America. All intercompany accounts and transactions among
the companies included in the Statements have been eliminated. In the opinion of
management, these unaudited Statements reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the financial
position, results of operations and cash flows of the Company. The results of
operations for interim periods do not necessarily indicate the results to be
expected for the full year.

These Statements should be read in conjunction with the audited consolidated
financial statements as of December 31, 1997.

2. CONTINGENCIES

The Company is regularly involved, directly or indirectly, in litigation in the
ordinary course of conducting its insurance and reinsurance business.  In a
number of cases, plaintiffs seek to establish coverage for liability under
environmental protection laws.  While the nature and extent of insurance and
reinsurance coverage for environmental liability has widened since 1980, in the
judgement of management, none of these cases, individually or collectively, is
likely to result in judgements for amounts which, net of losses and loss
adjustment expense liabilities previously established and reinsurance
recoverables which management believes are probable of realization, would have a
material effect on the financial position of the Company.  However, there is no
assurance that such losses will not materially affect the Company's results of
operations for any period.

3. REINSURANCE CEDED

In the ordinary course of business, Terra Nova Insurance Company Limited ("Terra
Nova"), Terra Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"),
Compagnie de Reassurance d'Ile de France ("Corifrance") and Terra Nova Capital
Limited ("Terra Nova Capital") cede reinsurance to other insurance companies.
Ceded reinsurance arrangements limit the net loss potential arising from large
risks.  Reinsurance is effected under reinsurance treaties and by negotiation on
individual risks.

Terra Nova, Terra Nova (Bermuda) and Terra Nova Capital cede reinsurance to and
assume reinsurance from Lloyd's of London ("Lloyd's") syndicates.  As of
September 30, 1998, the aggregate exposure from reinsurance ceded to Lloyd's
syndicates in respect of continuing operations, including estimated reinsurance
recoveries on losses incurred but not reported, was approximately $84 million.
The majority of this was ceded into Equitas with effect from September 4, 1996.

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

<TABLE> 
                                                                Nine Months Ended
                                                                   September 30,
                                                            ----------------------------
                                                                 1998          1997
                                                            ------------    ------------
                                                               (dollars in thousands)
<S>                                                         <C>             <C>         
Direct business                                             $    296,426    $    209,573
Reinsurance assumed                                              296,945         222,552
Reinsurance ceded                                                (86,543)        (63,347)
                                                            ============    ============
Net written premiums                                        $    506,828    $    368,778
                                                            ============    ============
</TABLE> 

                                       6
<PAGE>
 
                      TERRA NOVA (BERMUDA) HOLDINGS LTD.
                               AND SUBSIDIARIES

            NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

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

<TABLE> 
<CAPTION> 
                                                                          Nine Months Ended
                                                                            September 30,
                                                                    ----------------------------
                                                                        1998            1997
                                                                    ------------    ------------
                                                                        (dollars in thousands)
<S>                                                                <C>           <C> 
Direct business                                                     $    205,347    $    123,218
Reinsurance assumed                                                      232,416         192,637
Reinsurance ceded                                                        (59,074)        (39,614)
                                                                    ------------    ------------
Net earned premiums                                                 $    378,689    $    276,241
                                                                    ============    ============
<CAPTION> 

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

                                                                           Nine Months Ended
                                                                            September 30,
                                                                    ----------------------------
                                                                         1998            1997
                                                                    ------------    ------------
                                                                        (dollars in thousands)
<S>                                                                <C>            <C> 
Losses and loss adjustment expenses                                 $    298,046    $    200,817
Reinsurance ceded                                                        (55,181)        (22,670)
                                                                    ------------    ------------
Losses and loss adjustment expenses, net                            $    242,865    $    178,147
                                                                    ============    ============
</TABLE> 

4.  Earnings per common share and common share equivalent

Earnings per share ("EPS") are computed in accordance with SFAS No.128, which is
effective for financial statements for periods ending after December 15, 1997.
All prior period EPS data presented is restated to conform with the provisions
of SFAS No.128.

Basic EPS are computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding during the period.
Diluted EPS considers all dilutive potential common shares that were outstanding
during the period.

The following EPS have been computed using SFAS No.128:


<TABLE> 
<CAPTION> 
                                                                        Nine Months Ended
                                                                           September 30,
                                                                   ----------------------------
                                                                        1998            1997
                                                                   ------------    ------------
                                                           (dollars in thousands except share amounts)                        
<S>                                                                <C>             <C> 
Income available to common stockholders                            $     53,153    $     53,657
                                                                   ------------    ------------
                                                                   
Shares outstanding for basic EPS calculation                         25,473,657      25,644,355
                                                                   ------------    ------------
                                                                   
Basic EPS                                                          $       2.09    $       2.09
                                                                   ============    ============
Shares added for diluted EPS                                       
    calculation to reflect the effect of:                          
    Stock options                                                       727,601         415,295
                                                                   ------------    ------------
Shares outstanding for diluted EPS calculation                       26,201,258      26,059,650
                                                                   ------------    ------------
Diluted EPS                                                        $       2.03    $       2.06
                                                                   ============    ============
</TABLE>

                                       7
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

       NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
                                  (Unaudited)
                                        
5. SUMMARIZED FINANCIAL INFORMATION FOR TERRA NOVA INSURANCE (UK) HOLDINGS PLC
   ("UK HOLDINGS")

Summarized consolidated balance sheet information as at September 30, 1998 and
December 31, 1997 and summarized consolidated statement of operations
information for the nine months ended September 30, 1998 and 1997 relating to UK
Holdings is set out below.  Separate financial statements of UK Holdings are not
presented because they would not be material to holders of UK Holdings 7.2%
Senior Notes due 2007 or to holders of UK Holdings 7.0% Senior Notes due 2008.
 
<TABLE>
<CAPTION>
                                                                   September 30,     December 31,
                                                                       1998             1997
                                                                  --------------   --------------
                                                                      (dollars in thousands)
<S>                                                                 <C>          <C>       
<CAPTION>                                                       
Investments and cash                                                $  959,150      $  960,191
Reinsurance recoverable on unpaid losses                               391,194         407,560
Accrued premium income                                                 258,256         170,006
Other assets                                                           400,760         288,077
                                                                  --------------   --------------
                  Total assets                                      $2,009,360      $1,825,834
                                                                  ==============   ==============
                                                                
Unpaid losses and loss adjustment expenses                          $1,068,199      $1,077,327
Unearned premiums                                                      400,481         254,833
Net liabilities of Aviation business in run-off                         20,425          21,985
Long-term debt                                                         175,000         175,000
Other liabilities                                                      139,650         119,971
                                                                  --------------   --------------
                  Total liabilities                                  1,803,755       1,649,116
                                                                  --------------   --------------
                  Total shareholders' equity                           205,605         176,718
                                                                  --------------   --------------
                  Total liabilities and shareholders' equity        $2,009,360      $1,825,834
                                                                  ==============   ==============
                                                                
                                                                  Nine Months Ended September 30,
                                                                      1998              1997
                                                                  --------------   --------------
                                                                      (dollars in thousands)
Net earned premiums                                                 $  327,165      $  239,724
Net investment income                                                   43,188          41,214
Realized investment gains                                               11,074          11,350
Foreign exchange gains                                                     194             300
Agency income                                                           15,104          10,019
                                                                  --------------   --------------
Total revenues                                                         396,725         302,607
                                                                  --------------   --------------
Underwriting costs and expenses                                        340,077         252,520
Agency expenses                                                         11,972           8,044
                                                                  --------------   --------------
Income before income taxes and extraordinary charge                     44,676          42,043
                                                                  --------------   --------------
Net income before extraordinary charge                              $   30,220      $   28,612
                                                                  ==============   ==============
Extraordinary charge after tax                                          11,641              --
                                                                  --------------   --------------
Net income                                                          $   18,579      $   28,612
                                                                  ==============   ==============
</TABLE>

6.    EXTRAORDINARY CHARGE ARISING ON EXTINGUISHMENT OF DEBT

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

The Senior Notes were extinguished as follows:

                                       8
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

       NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
                                  (UNAUDITED)
                                        
(a)  On April 1, 1998, UK Holdings repurchased $4.5 million of the Senior Notes
     for consideration of $5.2 million, including accrued interest.

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

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

7.    STOCK REPURCHASES

In October 1998, the Company repurchased 128,200 shares at a total cost of
$3,259,013, excluding commissions.

As of November 16, 1998, the Company had repurchased a total of 628,200 shares
at a total cost of $13,279,013, leaving a further $6,720,987 available for
future repurchases in accordance with the Board of Directors' authorization,
dated May 5, 1997.

                                       9
<PAGE>

                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

The Company

The following discussion addresses the principal factors affecting the earnings
and financial condition of the Company. All references herein to the "Company"
are to Terra Nova (Bermuda) Holdings Ltd. ("Bermuda Holdings") and all of its
direct and indirect subsidiaries, including Terra Nova Insurance (UK) Holdings
plc ("UK Holdings"), Terra Nova Insurance Company Limited ("Terra Nova"), Terra
Nova (Bermuda) Insurance Company Ltd. ("Terra Nova (Bermuda)"), Compagnie de
Reassurance d'Ile de France ("Corifrance"), Octavian Syndicate Management
Limited ("Octavian") and Terra Nova Capital Limited ("Terra Nova Capital"). This
discussion should be read in conjunction with the audited consolidated financial
statements of Bermuda Holdings as of December 31, 1997.

Mix of Business

The Company's mix of business and combined ratios for the three and nine months
ended September 30, 1998, and 1997 are set forth in the following table:

 
<TABLE> 
<CAPTION> 
                                                     Three Months Ended September 30,          Nine Months Ended September 30,
                                               -----------------------------------------   -------------------------------------- 
                                                         1998               1997                 1998                 1997
                                                    Amount   Percent  Amount    Percent    Amount    Percent     Amount   Percent
                                               ------------ --------  --------- --------   -------- --------     -------  -------
                                                            (Dollars in thousands)                   (Dollars in thousands)
<S>                                          <C>            <C>       <C>       <C>      <C>          <C>     <C>        <C> 
Gross Written Premiums
         Non-marine property                        $57,673     45.9%  $ 44,846     44.7%  $283,014      47.7%  $198,996    46.0%
         Non-marine casualty                         23,385     18.6     22,148     22.1    148,450      25.0     97,028    22.5
         Marine & Aviation                           44,519     35.5     33,372     33.2    161,907      27.3    136,101    31.5
                                               ------------   ------   --------   ------   --------   -------   --------   ------ 
                          Total                $    125,577    100.0%  $100,366    100.0%  $593,371     100.0%  $432,125   100.0%
                                               ============   ======   ========   ======   ========   =======   ========   ======
Net Written Premiums
         Non-marine property                   $     53,598     46.2%  $ 38,214     42.2%  $255,833      50.5%  $174,702    47.4%
         Non-marine casualty                         26,277     22.7     20,542     22.8    140,409      27.7     88,120    23.9
         Marine & Aviation                           36,004     31.1     31,702     35.0    110,586      21.8    105,956    28.7
                                               ------------   ------   --------   ------   --------   -------   --------   ------ 
                          Total                $    115,879    100.0%  $ 90,458    100.0%  $506,828     100.0%  $368,778   100.0%
                                               ============   ======   ========   ======   ========   =======   ========   ======
Net Earned Premiums
         Non-marine property                   $     67,098     51.9%  $ 47,737     46.9%  $174,282      46.0%  $130,690    47.3%
         Non-marine casualty                         27,584     21.3     24,308     23.8    104,626      27.6     65,805    23.8
         Marine & Aviation                           34,715     26.8     29,812     29.3     99,781      26.4     79,746    28.9
                                               ------------   ------   --------   ------   --------   -------   --------   ------ 
                          Total                $    129,397    100.0%  $101,857    100.0%  $378,689     100.0%  $276,241   100.0%
                                               ============   ======   ========   ======   ========   =======   ========   ======

Losses and Loss Adjustment Expense Ratios
         Non-marine property                                    65.2                61.3                 65.7               63.3
         Non-marine casualty                                    56.0                63.6                 70.9               75.3
         Marine & Aviation                                      62.0                57.5                 54.3               57.5
                                                              ------               ------               ------             ------ 
                          Total                                 62.4%               60.7%                64.1%              64.5%
                                                              ======               ======               ======             ======  
Underwriting Expense Ratios                                                                                               
         Non-marine property                                    32.0                35.3                 34.0               33.4
         Non-marine casualty                                    33.7                38.6                 27.1               29.6
         Marine & Aviation                                      44.1                38.2                 42.9               39.5
                                                              ------               ------               ------             ------ 
                          Total                                 35.6%               36.9%                34.4%              34.2%
                                                              ======               ======               ======             ======  
Combined Ratios                                                                                                           
         Non-marine property                                    97.2                96.6                 99.7               96.7
         Non-marine casualty                                    89.7               102.2                 98.0              104.9
         Marine & Aviation                                     106.1                95.7                 97.2               97.0
                                                              ------               ------               ------             ------
                          Total                                 98.0%               97.6%                98.5%              98.7%
                                                              ======               ======               ======             ======

</TABLE> 

                                       10
<PAGE>
 

                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
                                        
RESULTS OF  OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997

  Gross Written Premiums; Net Written Premiums; Net Earned Premiums.  Gross
written premiums increased 25.1%, to $125.6 million in 1998 from $100.4
million in 1997.   The overall increase in gross written premiums of $25.2
million was mainly a consequence of Terra Nova Capital increasing its
participation on syndicates managed by Octavian from 47% in 1997 to
approximately 60% in 1998.  The majority of the business written by Terra Nova
Capital is UK property, UK casualty, marine and aviation business.

  The increases in premium volumes have been partially offset by the effect of
premium rates which have declined since 1997 as a result of competition in the
markets in which the Company operates.

  Reinsurance ceded remained relatively flat at $9.7 million in 1998, compared
to $9.9 million in 1997.

  Net written premiums increased by 28.1%, to $115.9 million in 1998 from $90.5
million in 1997, as a consequence of the increase in gross written premiums.
Net earned premiums increased 27.0%, to $129.4 million in 1998 from $101.9
million in 1997.

  Net Investment Income.  Net investment income increased by 8.3%, to $23.3
million in 1998 from $21.5 million in 1997. The increase resulted from growth in
average invested assets and the Company's reduced proportion of equities held,
the investment in lower grade fixed income securities and investment income from
orphan syndicate business written in the last quarter of 1997 and first quarter
of 1998. The average investment yield before realized gains and losses was 6.2%
and 6.3% in 1998 and 1997, respectively. The average duration of fixed maturity
investments was 4.8 years and 4.7 years at September 30, 1998 and 1997,
respectively.

  Realized Net Capital Gains on Sales of Investments.  Realized net capital
gains on sales of investments decreased $2.8 million to $1.4 million in 1998
from $4.2 million in 1997.  Net capital gains included $2.2 million of gains on
the sale of fixed maturities and $0.8 million of losses on the sale of equities
during the period.

   Agency income.  This income consists of fees and profit commissions earned by
Octavian for managing certain Lloyd's syndicates.

   Losses and Loss Adjustment Expenses.  Losses and LAE increased 30.5%, to
$80.7 million in 1998 from $61.9 million in 1997. As a percentage of net earned
premiums, losses and LAE increased 1.7 points, to 62.4% in 1998 from 60.7% in
1997. The increase reflects the greater catastrophe activity in the third
quarter of 1998 compared to 1997, with the Company experiencing $7.5 million
in losses from Hurricane Georges. The Company experienced deterioration in the
third quarter of 1998 on Octavians's auto and aviation business, offset by
improvements on the casualty account.

  Acquisition Costs.  Acquisition costs, consisting of commissions and other
underwriting expenses, increased 24.0%, to $42.3 million in 1998 from $34.1
million in 1997.  Acquisition costs as a percentage of net earned premiums
decreased 0.8%, to 32.7% in 1998 from 33.5% in 1997.

  Other Operating Expenses.  Other operating expenses increased 7.3%, to $3.8
million in 1998 from $3.5 million in 1997.  Other operating expenses as a
percentage of net earned premiums decreased to 2.9% in 1998 from 3.4% in 1997.

  Combined Ratios.  The Company's combined ratios were 98.0% for 1998 and 97.6%
for 1997.
 
  Net Interest Expense.  Net interest expense in the third quarter of 1998 
relates to interest on the $75 million 7.2% Senior Notes issued on August 26,
1997, and interest on the $100 million 7.0% Senior Notes issued on May 18, 1998.
The interest expense in the third quarter of 1997 related to the $75 million 
7.2% issue and to the $100 million 10.75% Senior Notes

                                       11
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

issued on June 30, 1995 and extinguished in the second quarter of 1998.

  Agency expenses.  These expenses are incurred by Octavian in managing certain
Lloyd's syndicates.

  Income before Income Taxes and Extraordinary Charge.  Income before income
taxes and extraordinary charge increased 2.4%, to $23.9 million in 1998 from
$23.4 million in 1997.  This increase was mainly due to the increase in
investment income, offset by a reduction in the level of realized gains on
disposal of equities in 1998.

  Income Tax Expense.  Income tax expense decreased 4.6%, to $4.2 million in
1998 from $4.4 million in 1997, as a consequence of the marginal decrease in
operating income of the UK subsidiaries.

  Net Income.  Net income increased $0.8 million to $19.8 million in 1998 from
$19.0 million in 1997 as a result of the factors described above.


NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997

  Gross Written Premiums; Net Written Premiums; Net Earned Premiums.  Gross
written premiums increased 37.3%, to $593.4 million in 1998 from $432.1 million
in 1997.   The overall increase in gross written premiums of $161.3 million was
mainly a consequence of:

  (a) The increased participation by Terra Nova Capital in the business of the
Octavian syndicates from 47% to 60%, an increase of $116.2 million. The majority
of the business written by Terra Nova Capital is UK property, UK casualty,
marine and aviation business;

  (b) $27.9 million of casualty premiums related to reinsurance to close of
orphan Lloyd's syndicates from the 1993 year of account compared to $12.1
million in 1997;  and

  (c) $21.5 million of premiums from Corifrance, which was acquired in September
1997, and which writes primarily property business on a reinsurance basis.

  These increases in premium volume have been partially offset by the impact of
rate declines since 1997 resulting from competition in the markets in which the
Company operates.

  Reinsurance ceded increased by 36.6%, to $86.5 million in 1998 from $63.3
million in 1997.  The increase reflects the increase in gross written premiums
at Octavian.  As a consequence, reinsurance ceded as a percentage of gross
written premiums (excluding the orphan syndicate business which has no
reinsurance) was 15.3% in 1998 compared to 14.7% in 1997.

  Net written premiums increased by 37.4%, to $506.8 million in 1998 from $368.8
million in 1997, as a consequence of the increase in gross written premiums
referred to above largely offset by the increase in reinsurance ceded.  Net
earned premiums increased 37.1%, to $378.7 million in 1998 from $276.2 million
in 1997.

  Net Investment Income.  Net investment income increased by 11.2%, to $69.5
million in 1998 from $62.5 million in 1997 as a result of an increase of 10.6%
in average invested assets, the Company's reducing the proportion of equities it
holds, the Company's investing in lower grade fixed income securities and
investment income from orphan syndicate business.  The average investment yield
before realized gains and losses was 6.2% in both 1998 and 1997.  The average
duration of fixed maturity investments was 4.8 years and 4.9 years at September
30, 1998 and 1997, respectively.

  Realized Net Capital Gains on Sales of Investments.  Realized net capital
gains on sales of investments

                                       12
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

increased $4.2 million to $15.9 million in 1998 from $11.7 million in 1997.  Of
the total gains in 1998, $9.7 million arose from equity securities sold during
the period and $6.2 million from fixed maturities.

   Foreign exchange gains.  Foreign exchange gains of $0.2 million arose in both
1998 and 1997 from foreign currency exchange during the period together with the
translation of foreign currency assets and liabilities into U.S. dollars, the
Company's functional currency.

   Agency income.  This income consists of fees and profit commissions earned by
Octavian for managing certain Lloyd's syndicates.

   Losses and Loss Adjustment Expenses.  Losses and LAE increased 36.3%, to
$242.9 million in 1998 from $178.1 million in 1997.  As a percentage of net
earned premiums, losses and LAE decreased 0.4%, to 64.1% in 1998 from 64.5% in
1997.  The ratios reflect the Company's changed mix of business resulting from
its greater participation in the Octavian syndicates. Management estimates that
the Company's losses from Hurricane Georges will be $7.5 million.

   Acquisition Costs.  Acquisition costs, consisting of commissions and other
underwriting expenses, increased 40.1%, to $117.5 million in 1998 from $83.9
million in 1997.  Acquisition costs as a percentage of net earned premiums
increased 0.6%, to 31.0% in 1998 from 30.4% in 1997.  The increase over 1997
reflects the Company's increased participation in Octavian business which
carries a higher expense ratio due to a higher level of reinsurance ceded and
Lloyd's charges, partially offset by the effect of the orphan syndicate business
which has very low acquisition costs.

  Other Operating Expenses.  Other operating expenses increased 20.2%, to $12.9
million in 1998 from $10.7 million in 1997.  Other operating expenses as a
percentage of net earned premiums decreased to 3.4% in 1998 from 3.9% in 1997.

  Combined Ratios.  The Company's combined ratios were 98.5% for 1998 and 98.7%
for 1997.

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

  Agency expenses.  These expenses were incurred by Octavian in managing certain
Lloyd's syndicates.

  Income before Income Taxes and Extraordinary Charge.  Income before income
taxes and extraordinary charge increased 18.1%, to $79.3 million in 1998 from
$67.1 million in 1997.  This increase was mainly due to a higher level of
realized gains in 1998 and to an increase in investment income.

  Income Tax Expense.  Income tax expense increased 7.6%, to $14.5 million in
1998 from $13.4 million in 1997, as a consequence of the increase in operating
income of the UK subsidiaries, partially offset by a reduction in the rate of UK
Corporation Tax from 33% to 31% from April 1997.

  Net Income before Extraordinary Charge.  Net income before extraordinary
charge increased $11.1 million to $64.8 million in 1998 from $53.7 million in
1997 as a result of the factors described above.

  Extraordinary Charge.  An extraordinary charge of $11.6 million arose during
the second quarter as a result of UK Holdings extinguishing all of its $100
million 10.75% Senior Notes due 2005.

                                       13
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
                                        
LIQUIDITY AND CAPITAL RESOURCES

  The Company's assets consist primarily of the capital stock of UK Holdings and
Terra Nova (Bermuda), and UK Holdings' assets consist primarily of the capital
stock of Terra Nova, Terra Nova Capital, Octavian and, through Terra Nova, Terra
Nova SAS (the holding company for Corifrance).  The ability of the Company to
pay dividends on its capital stock and to pay its obligations depends primarily
on dividends or other payments from Terra Nova, Terra Nova (Bermuda), Terra Nova
Capital, Octavian and Corifrance.  The payment of dividends and other payments
by Terra Nova, Terra Nova Capital and Octavian are subject to restrictions under
UK law; Terra Nova (Bermuda), Bermuda law and Corifrance, French law.

  The sources of funds for the Company's subsidiaries consist primarily of net
premiums, investment income and proceeds from sales and redemptions of
investments.  The funds are used to pay claims and operating expenses and for
the purchase of investments, largely fixed income securities.

  The shareholders' equity of Terra Nova at September 30, 1998, was $284.7
million.  The increase of $16.2 million in the first nine months to September
30, 1998 was due largely to $6.9 million of retained earnings for the period,
after recognizing $22.5 million of dividends to UK Holdings, and $9.3 million of
unrealized appreciation on investments, reflecting the strong increase in fixed
maturity valuations during the third quarter.  The shareholders' equity of Terra
Nova (Bermuda) at September 30, 1998, was $318.0 million.  The increase of $47.8
million during 1998 was due to $34.6 million of retained earnings for the period
and unrealized gains on investments of $14.1 million.

  For the nine months ended September 30, 1998, the cash flow provided by
operating activities of the Company was $11.7 million compared to $25.7 million
in 1997.  The decrease of $14.0 million was mainly a consequence of the Company
having lower insurance cash flows primarily at Terra Nova due to a change in its
mix of business, the prepayment of taxes in 1998 and higher interest payments in
1998, partially offset by the effect of Terra Nova Capital and Terra Nova
(Bermuda) receiving cash from orphan syndicate business written both in the last
quarter of 1997 and the first half of 1998.  The net cash used in financing
activities in respect of the debt refinancing in 1998 was $13.2 million.

  Total investments and cash were $1,525.7 million at September 30, 1998.  At
September 30, 1998, 91%, 5% and 4% of total investments and cash were held in
fixed maturities, common stocks and cash and cash equivalents, respectively.  At
September 30, 1998, approximately 90.4% of the Company's fixed income
investments were rated "A" or better by Moody's or S&P.  The Company's
investment portfolio earned interest and dividend income, net of investment
management fees, of 6.2% and 6.2% in the nine months ended September 30, 1998,
and 1997, respectively.  The Company had realized investment gains of $15.9
million and $11.7 million in the nine months ended September 30, 1998, and 1997,
respectively.

  On October 9, 1998, the Company announced that Octavian had established new
operating entities in Australia and Hong Kong.

  On October 12, 1998, the Company announced that Terra Nova Capital's
participation in the Lloyd's Capacity Auctions for the 1999 underwriting year
resulted in the acquisition of $107.5 million ((Pounds)64.0 million) of new 
capacity. Nigel Rogers, the Company's President and Chief Executive Officer,
said that these purchases in the auction, along with additional unsold capacity
which may come to the Company at no cost, will bring the Company's share of
aggregate capacity on the eight syndicates managed by Octavian to approximately
77% for the 1999 underwriting year up from approximately 60% for the 1998
underwriting year. This newly acquired capacity continues the Company's strategy
of acquiring capacity when warranted by market conditions and price.

  Certain information contained herein is based on management's estimates,
assumptions and projections.  Important factors that could cause actual results
to differ materially from those estimated by management include, among other
things, an unexpected increase in competition, unfavorable government
regulation, the pricing environment and other industry developments.

                                       14
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
                                        
FOREIGN CURRENCY

  The Company's assets, liabilities, revenues and expenses, except for the
portion of corporate overhead paid in British pounds, are predominantly
denominated in U.S. dollars. Accordingly, the Company's functional currency is
the U.S. dollar. Other net currency translation adjustments are shown in the
financial statements as a separate component of accumulated other comprehensive
income.

THE EURO

  On January 1, 1999, Economic and Monetary Union (EMU) and a new currency, the
"euro", will be adopted by eleven of the fifteen member states of the European
Union (EU).  Other member states, including the United Kingdom, may join in the
years to come. Corifrance and the Brussels branch of Terra Nova are the
Company's only operations currently situated within countries adopting EMU.

  The participating EMU countries are scheduled to adopt the euro as their home 
currency on January 1, 1999.  The European Central Bank (ECB) will establish a
fixed conversion rate between each participant's existing currency and the euro.
The euro will then trade on currency exchanges and be available for non-cash
transactions through the transition period which ends on December 31, 2001. On
January 1, 2002, the ECB will begin to issue euro-denominated bills and coins
for use in cash transactions.

  The Company has identified significant issues and has established a strategy
to deal with each phase of the euro's implementation. The Company will develop
and complete the necessary changes in its information technology and other
systems in order to administer and settle transactions in the euro.

  The competitive impact of the introduction of the euro is not expected to be
significant because less than 10% of the Company's business is conducted within
EU member states. Management believes that the cost of modifying information
systems software will not be material to the Company's results, operations,
financial condition or liquidity, and are being expensed as incurred.

YEAR 2000

GENERAL

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

  The Year 2000 date change problem is widely recognized as the biggest single
issue to have faced the information technology ("IT") industry.  Its impact is
likely to extend into all areas of business and commerce.  Accordingly, the
Company is addressing Year 2000 as both an IT issue and a business issue. The
Company has established a Year 2000 Project team composed of representatives
from all IT and business areas in order to ensure a co-ordinated approach. The
Project team reports directly to senior management who, in turn, report
regularly to the Board of Directors on the status of the Company's Year 2000
compliance.

THE COMPANY'S STATE OF READINESS

  The Company has divided the Year 2000 Project into three major areas of 
focus - IT, underwriting and third parties. Each section addresses unique risks,
but shares a common approach to the Project, which include five

                                       15
<PAGE>

                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

phases: (1) assessing the nature and scope of the Company's exposure to the Year
2000 issue; (2) identifying the business critical areas of exposure; (3)
developing solutions for Year 2000-related problems; (4) testing the solutions;
and (5) implementing the solutions.

  The Company initiated the IT section of the Year 2000 Project in March 1997
with the objective of bringing all business critical systems into Year 2000
compliance by September 30, 1998 and all other significant systems into
compliance by December 31, 1998. Business critical systems were defined as those
that are likely to have a material impact on the financial condition and results
of operations of the Company should they malfunction or fail. The assessment
phase for the IT section of Project, which consists of an inventory and high
level analysis of all hardware, software and embedded systems, was completed by
September 30, 1998. ("Embedded systems" include "non-IT items" such as facsimile
machines, elevators and telephones.) As a result of the assessment phase, the
Company identified five business critical systems.

  On September 30, 1998, the solution phase of the IT section of the Project was
still in progress. Four of the five business critical systems had been deemed
compliant by September 30, and the remaining business critical system was
expected to be deemed compliant in the fourth quarter of 1998 following
completion of testing and implementation work. For other software that was not
identified as business critical, solution work had been completed on September
30, 1998, ninety-five percent of testing had been done, and implementation had
been fifty percent completed.

  The remediation of non-business critical software with embedded chips has been
challenging. Developers of old software have been reluctant to reply to
questions concerning their Year 2000 compliance status, or are no longer
trading. After assessing this area of the Project for criticality, the Project
team determined that only a few systems were at risk. Twenty percent of the
remediation work on those systems has been completed.

  While the Company plans to have completed the testing and implementation
phases of the Project for business critical systems by December 31, 1998,
testing of other non business critical systems will continue into the first half
of 1999.

  As part of the IT section of the Project, a contingency plan is being
developed to ensure that fully workable alternatives, covering all aspects of
IT, are available in the event of the failures of any business critical systems.
Completion of the contingency plan is targeted for December 31, 1998.

  The Underwriting section of the Project is managed by a committee comprised of
senior representatives from the Company's major underwriting units, covering a
broad spectrum of business classes, and is chaired by the Company's Deputy
Chairman. The committee will: (1) co-ordinate and review the evaluation of the
Company's current and ongoing underwriting exposure to the Year 2000 and other
date-related issues; (2) develop and produce relevant Company underwriting
guidelines and monitoring procedures, where practicable; (3) identify business
opportunities; and (4) communicate and raise awareness of date-related
underwriting issues within the Company.  Among its responsibilities, the 
committee discusses and disseminates information, research and policy language 
relating to the Year 2000 issue. A central database for this information has
been established and made accessible by all Company employees. When regulations
or customers require assessment of the Company's Year 2000 compliance, responses
are cleared through the committee.

  By September 30, 1998, the Company had substantially completed an initial 
assessment of risks already written.  This initial assessment forms the basis 
for more detailed ongoing reviews.  At Terra Nova, the inforce portfolio of 
insurance and reinsurance contracts was broken down into those risks that 
currently provide no cover beyond December 31, 1999, those that might provide 
cover beyond December 31, 1999 (by virtue of run-off provisions or extended 
reporting clauses) and those risks that run beyond the millennium.  A matrix 
coding system was developed to numerically quantify the class exposure and 
effect of the underwriting action taken at the insurance or reinsurance level.  
The matrix is applied on a risk by risk basis.  The matrix multiplies a "class 
exposure" coding by an "underwriting action" coding to give a geometric
                                       16
<PAGE>

                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
weighting. This geometric weighting, combined with the potential in-force
analysis, and overlaid by "likelihood of loss factors", enables a calculation to
be made of Terra Nova's probable maximum loss ("PML"). To support the matrix, a
detailed commentary was prepared by each class underwriter of the potential
exposure on a class by class basis, together with the current underwriting
approach, based on individual judgement and experience. This work was reviewed
by the underwriting committee and the senior underwriter of each underwriting
unit for commonality of approach. The described underwriting approach will be
monitored and re-evaluated with reference to external factors and market
position. Equally, the method of calculating the PML, the weightings applied for
the individual factors and likelihood of loss factors will be subject to review
and revision, as necessary. A similar approach has been adopted by the Company's
other underwriting subsidiaries, with all reports coming back to the
underwriting committee.

  It is difficult to estimate the degree of completeness of the underwriting 
section of the Project, just as it is difficult to estimate the frequency and 
severity of Year 2000 related claims, notifications and associated costs.  
However, management believes that reliance on the combined experience of the 
Company's underwriters who contribute to the ongoing assessment will enable the 
Company to make prudent judgments about exposures and to react accordingly.

  The Third Parties section of the Year 2000 Project includes the process of
identifying critical suppliers, customers and trading partners who deal directly
with the Company and ascertaining their plans and progress in addressing Year
2000 issues. The Company receives the majority of its underwriting data from
bureaus. Market testing, with an expected completion date of December 31, 1998,
is being performed to insure continuous and reliable connectivity to, and the
ongoing provision of effective services from, these organizations.

  The Company provides IT services to third party customers.  The related IT 
systems have been assessed, remedied, tested and re-implemented.

  Material trading partners at all business levels have been contacted and asked
to respond with an assessment of the Year 2000 compliance status of their own
businesses. The target for completion of this work is December 31, 1998.
Following completion of the third party compliance phase, a contingency plan
will be developed covering critical business areas considered to be at risk in
the event to the failure of third parties to provide effective ongoing essential
services and supplies.
                                       
COSTS

  The total cost of the Year 2000 project is not expected to be material to the
Company's financial position. The estimated total cost of analyzing and
implementing the required modifications to bring the Company to Year 2000
compliance is $3.0 million, which is being funded from operating cash flows. The
Company primarily has used internal human resources for all work on the Year
2000 Project. The total amount expended on the Project through September 30,
1998, was $2.3 million, of which approximately $2.2 million related to the cost
to repair or replace software and related hardware problems and approximately
$0.1 million related to the cost of identifying and communicating with third
parties. The estimated future cost of completing the Year 2000 project is $0.7
million.

RISKS

  From an IT perspective, the Year 2000 risks have been reduced significantly by
bringing business critical systems into compliance and therefore should not
restrict the ability of the Company to trade through the Year 2000. However, the
Company's reliance on outside suppliers and trading partners can only be
addressed through questionnaires and compliance statements. Even with apparently
thorough third parties' responses, the Company cannot guarantee their Year 2000
readiness. The inability of such parties to complete their Year 2000 resolution
process could materially affect the Company.

  From an underwriting perspective, management anticipates an increase in the
frequency of certain kinds of claims as a result of software malfunction causing
or otherwise contributing to losses relating to normally insured perils, such as
fire and theft. The Company is taking steps to make its own reinsurance and
retrocession programs as responsive as possible to such circumstances.

  Given the breadth and ambiguity of the Year 2000 issues resulting, for the 
Company, largely from uncertainty about the Year 2000 readiness of third party 
suppliers, customers and trading partners, the Company is unable to determine at
this time whether the consequences of Year 2000 failures will have a material 
impact on its future results of operations, liquidity or financial condition.  
The Company considers that with the benefits of the work already done on its 
internal systems and the continuing assessment and remediation in other areas, 
the possible impact of the Year 2000 should be significantly reduced.

                                       17
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

  The declaration and payment of dividends is at the discretion of the Board of
Directors of the Company and will depend upon the Company's results of
operations, the financial position and capital requirements of the Company's
operating subsidiaries, general business conditions, legal, tax and regulatory
restrictions on the payment of dividends and other factors the Board of
Directors of the Company deems relevant.  While the Company is not itself
subject to any contractual restrictions or significant legal prohibitions on
dividend payments, the Company's subsidiaries are subject to regulatory and
legal constraints on their respective abilities to pay dividends.  Accordingly,
there is no assurance that dividends will be declared or paid in the future.

                                       18
<PAGE>
 
                       TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

                                        
PART II - OTHER INFORMATION
---------------------------

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a)  EXHIBITS    27 - Financial Data Schedule

b)  FORM 8-K    None

                                       19
<PAGE>
 
                        TERRA NOVA (BERMUDA) HOLDINGS LTD.
                                AND SUBSIDIARIES

                                   SIGNATURES
                                   ----------
                                        
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.


Date:      November 16, 1998      By: /s/ JOHN J. DWYER
           -----------------          ----------------
                                      John J. Dwyer
                                      Chairman


Date:      November 16, 1998      By: /s/ WILLIAM J. WEDLAKE
           -----------------          ---------------------
                                      William J. Wedlake
                                      Chief Financial Officer, 
                                      Senior Vice President and
                                      Principal Accounting Officer

                                       20