##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-K
  þ

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

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.For the fiscal year ended
    December 31, 2006   Commission file
    number 001-13790
   HCC Insurance Holdings,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

76-0336636(State or other jurisdiction
    of
    incorporation or organization)

(IRS Employer
    Identification No.)13403 Northwest Freeway,
    Houston, Texas(Address of principal
    executive offices)

77040-6094(Zip Code)   (713) 690-7300
 (Registrants telephone
    number, including area code)
  Securities
    registered pursuant to Section 12(b) of the
    Act:
  Title of each class:

Name of each exchange on which registered:Common Stock, $1.00 par Value

New York Stock Exchange   Securities registered pursuant to Section 12(g) of
    the Act: NONE
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  þ o o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE:
  Form 10-K




---



##### 



HCC
    INSURANCE HOLDINGS, INC.
  TABLE OF
    CONTENTS
  PagePART I.ITEM 1.


Business


3ITEM 1A.


Risk
    Factors


26ITEM 1B.


Unresolved Staff
    Comments


33ITEM 2.


Properties


34ITEM 3.


Legal
    Proceedings


34ITEM 4.


Submission of
    Matters to a Vote of Security Holders


35PART II.ITEM 5.


Market for the
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


36ITEM 6.


Selected Financial
    Data


38ITEM 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


39ITEM 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


66ITEM 8.


Financial
    Statements and Supplementary Data


67ITEM 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosures


67ITEM 9A.


Controls and
    Procedures


67ITEM 9B.


Other
    Information


69PART III.ITEM 10.


Directors,
    Executive Officers and Corporate Governance


69ITEM 11.


Executive
    Compensation


70ITEM 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


70ITEM 13.


Certain
    Relationships and Related Transactions and Director
    Independence


70ITEM 14.


Principal
    Accounting Fees and Services


71PART IV.ITEM 15.


Exhibits and
    Financial Statement Schedules


71SIGNATURES


72Amendment No. 1 to Consulting Agreement and ResignationStatement re Computation of RatiosSubsidiariesConsent of PricewaterhouseCoopers LLPPowers of AttorneyCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification to Annual Report    FORWARD-LOOKING
    STATEMENTS
  This report on
    Form 10-K
    contains certain forward-looking statements within
    the meaning of Section 27A of the Securities Act of 1933
    and Section 21E of the Securities Exchange Act of 1934,
    which are intended to be covered by the safe harbors created by
    those laws. We have based these forward-looking statements on
    our current expectations and projections about future events.
    These forward-looking statements include information about
    possible or assumed future results of our operations. All
    statements, other than statements of historical facts, included
    or incorporated by reference in this Report that address
    activities, events or developments that we expect or anticipate
    may occur in the future, including such things as future capital
    expenditures, business strategy, competitive strengths, goals,
    growth of our business and operations, plans and references to
    future successes may be considered forward-looking statements.
    Also, when we use words such as anticipate,
    believe, estimate, expect,
    intend, plan, probably or
    similar expressions, we are making forward-looking
    statements.
  Many risks and uncertainties may impact the matters addressed
    in these forward-looking statements, which could affect our
    future financial results and performance, including, among other
    things:
  
    the effects of catastrophic losses;
    the cyclical nature of the insurance business;
    inherent uncertainties in the loss estimation process, which
    can adversely impact the adequacy of loss reserves; 1




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##### Table of Contents




    the effects of emerging claim and coverage issues;
    the effects of extensive governmental regulation of the
    insurance industry;
    potential credit risk with brokers;
    our assessment of underwriting risk;
    our increased retention of risk, which could expose us to
    greater potential losses;
    the adequacy of reinsurance protection;
    the ability or willingness of reinsurers to pay balances due
    us;
    the occurrence of terrorist activities;
    our ability to maintain our competitive position;
    changes in our assigned financial strength ratings;
    our ability to raise capital in the future;
    attraction and retention of qualified employees;
    fluctuations in the fixed income securities market, which may
    reduce the value of our investment assets;
    our ability to successfully expand our business through the
    acquisition of insurance-related companies;
    our ability to receive dividends from our insurance company
    subsidiaries in needed amounts;
    fluctuations in foreign exchange rates;
    failures of our information technology systems, which could
    adversely affect our business;
    impairment of goodwill;
    developments in the SECs informal inquiry related to
    our stock option granting procedures;
    litigation related to our stock option investigation;
    the loss of our Founder as a Director, Chairman of the Board
    and Chief Executive Officer; and
    change of control.  We describe these risks and uncertainties in greater detail
    in Item 1A, Risk Factors.
  These events or factors could cause our results or
    performance to differ materially from those we express in our
    forward-looking statements. Although we believe that the
    assumptions underlying our forward-looking statements are
    reasonable, any of these assumptions, and, therefore, also the
    forward-looking statements based on these assumptions, could
    themselves prove to be inaccurate. In light of the significant
    uncertainties inherent in the forward-looking statements which
    are included in this Report, our inclusion of this information
    is not a representation by us or any other person that our
    objectives and plans will be achieved.
  Our forward-looking statements speak only at the date made,
    and we will not update these forward-looking statements unless
    the securities laws require us to do so. In light of these
    risks, uncertainties and assumptions, any forward-looking events
    discussed in this Report may not occur.
 2




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##### Table of Contents



PART I  Item 1.
    Business  Business
    Overview
  (713) 690-7300. www.hcc.com. Form 10-K Form 10-Q Form 8-K
        and/or
  
    Diversified financial products
    Group life, accident and health
    Aviation
    London market account
    Other specialty lines   3




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##### Table of Contents



Our
    Strategy
         4




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##### Table of Contents




    emphasize the underwriting of lines of business where there is
    an anticipation of underwriting profits based on various factors
    including premium rates, the availability and cost of
    reinsurance, policy terms and conditions, and market conditions;
    limit our insurance companies aggregate net loss exposure
    from a catastrophic loss through the use of reinsurance for
    those lines of business exposed to such losses and
    diversification into lines of business not exposed to such
    losses; and
    consider the potential acquisition of specialty insurance
    operations and other strategic investments.  Industry
    Segment and Geographic Information
    Recent
    Acquisitions
       5




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##### Table of Contents



6




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##### Table of Contents



Insurance
    Company Operations
  Lines
    of Business
    2006


2005


2004Diversified financial products

$
956,057



43
%

$
908,526



45
%

$
857,299



43
%Group life, accident and health


621,639



28



593,382



29



584,747



30Aviation


216,208



10



210,530



10



204,963



10London market account


234,868



10



144,425



7



178,950



9Other specialty lines


205,651



9



176,139



9



133,964



7Discontinued lines of business


1,225







5,284







15,230



1Total gross written
    premium

$
2,235,648



100
%

$
2,038,286



100
%

$
1,975,153



100
%     2006


2005


2004Diversified financial products

$
794,232



44
%

$
675,942



45
%

$
404,870



37
%Group life, accident and health


590,811



33



502,805



34



343,996



31Aviation


166,258



9



130,743



9



144,687



13London market account


127,748



7



78,809



5



107,509



10Other specialty lines


133,481



7



109,106



7



83,980



7Discontinued lines of business


22







3,819







20,477



2Total net written
    premium

$
1,812,552



100
%

$
1,501,224



100
%

$
1,105,519



100
%     2006


2005


2004Diversified financial products


83
%


74
%


47
%Group life, accident and health


95



85



59Aviation


77



62



71London market account


54



55



60Other specialty lines


65



62



63Continuing lines of business
    percentage retained


81
%


74
%


55
%   Underwriting
   7




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##### Table of Contents



Diversified
    Financial Products
    
    directors and officers liability
    employment practices liability
    mortgage guaranty
    professional indemnity
    residual value insurance
    surety and credit
    other financial products        Group
    Life, Accident and Health
       8




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##### Table of Contents



Aviation
    
    antique and vintage military aircraft
    cargo operators
    commuter airlines
    corporate aircraft
    fixed base operations
    military and law enforcement aircraft
    private aircraft owners
    rotor wing aircraft      London
    Market Account
  non-U.S. based
  2006


2005


2004Marine

$
26,664


$
23,799


$
19,537Energy


57,619



15,621



26,258Property


18,049



18,379



19,613Accident and health


25,416



21,010



42,101Total London market account net
    written premium

$
127,748


$
78,809


$
107,509       
    drilling rigs
    gas production and gathering platforms
    natural gas facilities
    petrochemical plants
    pipelines
    refineries   9




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##### Table of Contents




    factories
    hotels
    industrial plants
    office buildings
    retail locations
    utilities        Other
    Specialty Lines
    Insurance
    Companies
  Houston
    Casualty Company
    Houston
    Casualty Company-London
   10




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##### Table of Contents



HCC
    International Insurance Company
  non-United
  U.S. Specialty
    Insurance Company
    HCC
    Life Insurance Company
    Avemco
    Insurance Company
    American
    Contractors Indemnity Company
    HCC
    Europe
    HCC
    Reinsurance Company
   11




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##### Table of Contents



HCC
    Specialty Insurance Company
    United
    States Surety Company
    Perico
    Life Insurance Company
    HCC
    Insurance Company
    Underwriting
    Agency Operations
    Professional
    Indemnity Agency
    HCC
    Specialty Underwriters
   12




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##### Table of Contents



HCC
    Global Financial Products
    Covenant
    Underwriters
    HCC
    Indemnity Guaranty Agency
    Illium
    Insurance Group
    Reinsurance
    and Insurance Broker Operations
    Rattner
    Mackenzie
    Continental
    Underwriters
    HCC
    Risk Management
   13




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##### Table of Contents



Other
    Operations
    Operating
    Ratios
  Premium
    to Surplus Ratio
    2006


2005


2004


2003


2002Gross written premium

$
2,243,843


$
2,049,116


$
1,992,361


$
1,746,413


$
1,163,397Net written premium


1,812,896



1,495,931



1,121,343



867,795



545,475Policyholders
    surplus


1,342,054



1,110,268



844,851



591,889



523,807Gross written premium ratio


167.2
%


184.6
%


235.8
%


295.1
%


222.1
%Gross written premium industry
    average(1)


*



192.7
%


201.6
%


219.3
%


244.4
%Net written premium ratio


135.1
%


134.7
%


132.7
%


146.6
%


104.1
%Net written premium industry
    average(1)


*



99.8
%


108.5
%


117.4
%


130.3
%          14




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##### Table of Contents



Combined
    Ratio  GAAP
    2006


2005


2004


2003


2002Loss ratio


59.2
%


67.1
%


63.8
%


66.1
%


60.8
%Expense ratio


25.0



26.1



26.7



24.6



25.5Combined ratio 
    GAAP


84.2
%


93.2
%


90.5
%


90.7
%


86.3
%   Combined
    Ratio  Statutory
    2006


2005


2004


2003


2002Loss ratio


60.0
%


67.1
%


64.3
%


66.8
%


62.0
%Expense ratio


24.0



25.5



26.7



23.0



23.9Combined ratio 
    Statutory


84.0
%


92.6
%


91.0
%


89.8
%


85.9
%Industry average


*



100.7
%


98.3
%


100.1
%


107.5
%         Reserves
     15




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##### Table of Contents



16




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##### Table of Contents



2006


2005


2004


2003


2002


2001


2000


1999


1998


1997


1996Balance sheet reserves

$
3,097,051


$
2,813,720


$
2,089,199


$
1,525,313


$
1,158,915


$
1,132,258


$
944,117


$
871,104


$
460,511


$
275,008


$
229,049Reserve adjustments from
    acquisition and disposition of subsidiaries


















5,587







(66,571
)


(32,437
)


(136
)






Adjusted reserves


3,097,051



2,813,720



2,089,199



1,525,313



1,164,502



1,132,258



877,546



838,667



460,375



275,008



229,049Cumulative paid at:One year later






689,126



511,766



396,077



418,809



390,232



400,279



424,379



229,746



160,324



119,453Two years later










780,130



587,349



548,941



612,129



537,354



561,246



367,512



209,724



179,117Three years later














772,095



659,568



726,805



667,326



611,239



419,209



241,523



193,872Four years later


















823,760



803,152



720,656



686,730



435,625



259,067



212,097Five years later






















921,920



758,126



721,011



453,691



262,838



223,701Six years later


























835,994



725,639



462,565



267,038



225,595Seven years later






























752,733



462,126



270,362



227,177Eight years later


































464,748



268,939



228,621Nine years later






































269,751



230,745Ten years later










































232,169Re-estimated liability at:End of year


3,097,051



2,813,720



2,089,199



1,525,313



1,164,502



1,132,258



877,546



838,667



460,375



275,008



229,049One year later






2,810,419



2,118,471



1,641,426



1,287,003



1,109,098



922,080



836,775



550,409



308,501



252,236Two years later










2,112,303



1,666,931



1,393,143



1,241,261



925,922



868,438



545,955



316,250



249,013Three years later














1,690,729



1,464,448



1,384,608



1,099,657



854,987



547,179



304,281



250,817Four years later


















1,506,360



1,455,046



1,102,636



900,604



537,968



305,022



247,245Five years later






















1,480,193



1,135,143



887,272



522,183



295,975



249,853Six years later


























1,137,652



894,307



521,399



296,816



243,015Seven years later






























899,212



513,918



292,544



242,655Eight years later


































511,323



291,164



241,904Nine years later






































287,021



244,687Ten years later










































242,651Cumulative redundancy
    (deficiency)





$
3,301


$
(23,104
)

$
(165,416
)

$
(341,858
)

$
(347,935
)

$
(260,106
)

$
(60,545
)

$
(50,948
)

$
(12,013
)

$
(13,602
)   17




---



##### Table of Contents




    During 2005 and 2004, we recorded $49.8 million and
    $127.7 million, respectively, in gross losses related to
    the 2001 and 2000 accident years on certain run-off assumed
    accident and health reinsurance business reported in our
    discontinued lines of business, due to our processing of
    additional information received and our continuing evaluation of
    reserves on this business. The recording of these losses also
    affected the 2003 and 2002 years in the above table.
    During 2005, we reduced our gross reserves on the 2004
    hurricanes by $13.4 million to reflect current estimates of
    our remaining liabilities, which partially offset the 2005
    adverse development discussed above.
    During 2003, we recorded $132.9 million in gross losses
    related to 1999 and 2000 accident years on certain run-off
    assumed accident and health reinsurance business reported in our
    discontinued lines of business, due to our processing of
    additional information received and our continuing evaluation of
    reserves on this business. The recording of these losses also
    affected the 2002 and 2001 years in the above table.
    The 2000 and 1999 years in the table were also negatively
    affected by late reporting loss information received during 2001
    for certain discontinued business.        
    We had development of large claims on individual policies which
    were either reported late or for which reserves were increased
    as subsequent information became available. As these policies
    were substantially reinsured, there was no material effect on
    our net earnings.
    During 1999, in connection with the insolvency of one of the
    insurance companies that we reinsured and the commutation of all
    liabilities with another, we re-evaluated all loss reserves and
    incurred but not reported loss reserves related to business
    placed with these reinsurers to determine the ultimate losses we
    might conservatively expect. These reserves were then used as
    the basis for the determination of the provision for reinsurance
    recorded in 1999. 18




---



##### Table of Contents



2006


2005


2004Reserves for loss and loss
    adjustment expense payable at beginning of year

$
2,813,720


$
2,089,199


$
1,525,313Reserve additions from acquired
    businesses


146,811



19,236



15,537Incurred loss and loss adjustment
    expense:Provision for loss and loss
    adjustment expense for claims occurring in current year


1,222,139



1,567,501



1,173,042Increase (decrease) in estimated
    loss and loss adjustment expense for claims occurring in prior
    years*


(3,301
)


29,272



116,113Incurred loss and loss adjustment
    expense


1,218,838



1,596,773



1,289,155Loss and loss adjustment expense
    payments for claims occurring during:Current year


393,192



379,722



344,729Prior years


689,126



511,766



396,077Loss and loss adjustment expense
    payments


1,082,318



891,488



740,806Reserves for loss and loss
    adjustment expense payable at end of year

$
3,097,051


$
2,813,720


$
2,089,199     *
    
    Changes in loss and loss adjustment expense reserves for losses
    occurring in prior years reflect the gross effect of the
    resolution of losses for other than the reserve value and the
    subsequent adjustments of loss reserves. 19




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##### Table of Contents



2006


2005


2004


2003


2002


2001


2000


1999


1998


1997


1996Reserves, net of reinsurance

$
2,108,961


$
1,533,433


$
1,059,283


$
705,200


$
458,702


$
313,097


$
249,872


$
273,606


$
118,912


$
119,634


$
117,283Reserve adjustments from
    acquisition (disposition) of subsidiaries


















5,587







(6,048
)


(3,343
)


(410
)






Effect on loss reserves of 1999
    write off of reinsurance recoverables


































63,851



15,008



2,636Adjusted reserves, net of
    reinsurance


2,108,961



1,533,433



1,059,283



705,200



464,289



313,097



243,824



270,263



182,353



134,642



119,919Cumulative paid, net of
    reinsurance, at:One year later






222,336



172,224



141,677



115,669



126,019



102,244



145,993



56,052



48,775



47,874Two years later










195,663



135,623



152,674



131,244



139,659



174,534



103,580



64,213



66,030Three years later














124,522



115,214



163,808



118,894



185,744



113,762



80,227



72,863Four years later


















88,998



93,405



138,773



180,714



121,293



81,845



81,620Five years later






















59,936



158,935



197,416



120,452



84,986



81,968Six years later


























137,561



200,833



127,254



87,626



82,681Seven years later






























188,901



131,631



89,194



84,108Eight years later


































132,614



88,061



84,847Nine years later






































88,229



84,770Ten years later










































85,253Re-estimated liability, net of
    reinsurance, at:End of year


2,108,961



1,533,433



1,059,283



705,200



464,289



313,097



243,824



270,263



182,353



134,642



119,919One year later






1,526,907



1,084,677



735,678



487,403



306,318



233,111



260,678



186,967



120,049



116,145Two years later










1,083,955



770,497



500,897



338,194



222,330



254,373



175,339



116,745



101,595Three years later














792,099



571,403



366,819



259,160



244,650



171,165



110,673



97,353Four years later


















585,741



418,781



267,651



258,122



163,349



107,138



95,118Five years later






















453,537



296,396



254,579



155,931



103,243



93,528Six years later


























305,841



271,563



157,316



101,538



91,413Seven years later






























277,841



156,376



99,872



90,951Eight years later


































155,016



97,965



90,534Nine years later






































96,205



90,011Ten years later










































89,235Cumulative redundancy
    (deficiency)





$
6,526


$
(24,672
)

$
(86,899
)

$
(121,452
)

$
(140,440
)

$
(62,017
)

$
(7,578
)

$
27,337


$
38,437


$
30,684  20




---



##### Table of Contents



2006


2005


2004Net reserves for loss and loss
    adjustment expense payable at beginning of year

$
1,533,433


$
1,059,283


$
705,200Net reserve additions from
    acquired businesses


146,811



12,491



11,647Incurred loss and loss adjustment
    expense:Provision for loss and loss
    adjustment expense for claims occurring in current year


1,018,382



894,303



614,752Increase (decrease) in estimated
    loss and loss adjustment expense for claims occurring in prior
    years *


(6,526
)


25,394



30,478Incurred loss and loss adjustment
    expense


1,011,856



919,697



645,230Loss and loss adjustment expense
    payments for claims occurring during:Current year


360,803



285,814



161,117Prior years


222,336



172,224



141,677Loss and loss adjustment expense
    payments


583,139



458,038



302,794Net reserves for loss and loss
    adjustment expense payable at end of year

$
2,108,961


$
1,533,433


$
1,059,283     *
    Changes in loss and loss adjustment expense reserves for losses
    occurring in prior years reflect the net effect of the
    resolution of losses for other than the reserve value and the
    subsequent adjustments of loss reserves.      Enterprise
    Risk Management
   21




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##### Table of Contents



Regulation
      Insurance
    Companies
    
    approval of policy forms and premium rates;
    licensing of insurers and their agents;
    periodic examinations of our operations and finances;
    prescribing the form and content of records of financial
    condition required to be filed;
    requiring deposits for the benefit of policyholders;
    requiring certain methods of accounting;
    requiring reserves for unearned premium, losses and other
    purposes;
    restrictions on the ability of our insurance companies to pay
    dividends;
    restrictions on the nature, quality and concentration of
    investments;
    restrictions on transactions between insurance companies and
    their affiliates;
    restrictions on the size of risks insurable under a single
    policy; and
    standards of solvency, including risk-based capital measurement
    (which is a measure developed by the National Association of
    Insurance Commissioners and used by state insurance regulators
    to identify insurance companies that potentially are
    inadequately capitalized).   22




---



##### Table of Contents



Underwriting
    Agencies and Reinsurance and Insurance Brokers
    
    advertising and business practice rules;
    contractual requirements;
    financial security;
    licensing as agents, brokers, reinsurance brokers, managing
    general agents or third party administrators;
    limitations on authority; and
    recordkeeping requirements.  Statutory
    Accounting Principles
    
    a liability is recorded for certain reinsurance recoverables
    under statutory accounting principles whereas, under generally
    accepted accounting principles, there is no such provision
    unless the recoverables are deemed to be doubtful of collection;
    certain assets that are considered non-admitted
    assets are eliminated from a balance sheet prepared in
    accordance with statutory accounting principles but are included
    in a balance sheet prepared in accordance with generally
    accepted accounting principles;
    only some of the deferred tax asset is recognized under
    statutory accounting principles; 23




---



##### Table of Contents




    fixed income investments classified as available for sale are
    recorded at market value for generally accepted accounting
    principles and at amortized cost under statutory accounting
    principles;
    outstanding losses and unearned premium are reported on a gross
    basis under generally accepted accounting principles and on a
    net basis under statutory accounting principles; and
    under statutory accounting principles, policy acquisition costs
    are expensed as incurred and, under generally accepted
    accounting principles, such costs are deferred and amortized to
    expense as the related premium is earned.    Insurance
    Holding Company Acts
    Assessments
    Insurance
    Regulations Concerning Change of Control
   24




---



##### Table of Contents



Risk-Based
    Capital
    Insurance
    Regulatory Information System
    Terrorism
    Risk Insurance Act
      Legislative
    Initiatives
     25




---



##### Table of Contents



Employees
   Item 1A.  Risk
    Factors  Risks
    Relating to our Industry
  Because
    we are a property and casualty insurer, our business may suffer
    as a result of unforeseen catastrophic losses.
   26




---



##### Table of Contents



The
    insurance and reinsurance business is historically cyclical, and
    we expect to experience periods with excess underwriting
    capacity and unfavorable premium rates, which could cause our
    results to fluctuate.
    Our
    loss reserves are based on an estimate of our future liability,
    which may prove to be inadequate.
    The
    effects of emerging claim and coverage issues on our business
    are uncertain.
    We are
    subject to extensive governmental regulation, which could
    adversely affect our business.
   27




---



##### Table of Contents



Our
    reliance on brokers subjects us to their credit
    risk.
    Risks
    Relating to our Business
  Our
    inability to accurately assess underwriting risk could reduce
    our net income.
    Our
    increased retentions in various lines of business expose us to a
    greater portion of potential losses.
   28




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##### Table of Contents



If we
    are unable to purchase adequate reinsurance protection for some
    of the risks we have underwritten, we will be exposed to any
    resulting losses.
    If the
    companies that provide our reinsurance do not pay all of our
    claims, we could incur severe losses.
    As a
    primary insurer, we may have significant exposure for terrorist
    acts.
    We may
    be unsuccessful in competing against larger or more well
    established business rivals.
   29




---



##### Table of Contents



If
    rating agencies downgrade our financial strength ratings, our
    business and competitive position in the industry may
    suffer.
    We may
    require additional capital in the future, which may not be
    available or may only be available on unfavorable
    terms.
    Form 10-Q Form S-3 Form S-1
    We may
    be unable to attract and retain qualified
    employees.
    We
    invest a significant amount of our assets in fixed income
    securities that have experienced market fluctuations, which may
    greatly reduce the value of our investment
    portfolio.
   30




---



##### Table of Contents



and/or
  Our
    strategy of acquiring other companies for growth may not
    succeed.
  and/or Form S-3
  We are
    an insurance holding company and, therefore, may not be able to
    receive dividends in needed amounts from our
    subsidiaries.
    Because
    we operate internationally, fluctuations in currency exchange
    rates may affect our receivable and payable balances and our
    reserves.
   31




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##### Table of Contents



Our
    information technology systems may fail or suffer a loss of
    security, which could adversely affect our
    business.
      We are
    exposed to goodwill impairment risk as part of our business
    acquisition strategy.
    The
    SECs informal inquiry related to our stock option granting
    procedures is ongoing, and the scope and outcome could have a
    negative impact on the price of our securities and on our
    business.
    The
    matters relating to the Special Committee of the Board of
    Directors investigation of our historical stock option
    granting practices and the restatement of our consolidated
    financial statements have resulted in our being named as a party
    in two derivative legal actions and may result in future
    litigation, which could harm our business and financial
    condition.
   32




---



##### Table of Contents



Form 10-K/A Form 10-Q/A
  The
    loss of our Founder, Stephen L. Way, as a Director, Chairman of
    the Board and Chief Executive Officer could weaken our strategic
    leadership and may have a material adverse effect on our
    business and development.
    We may
    not be able to delay or prevent an inadequate or coercive offer
    for change in control and regulatory rules and required
    approvals might delay or deter a favorable change of
    control.
      Item 1B.
    Unresolved
    Staff Comments   33




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##### Table of Contents



Item 2.
    Properties      Subsidiary

Location

Sq. Ft.


Termination Date of LeaseHouston Casualty Company

Houston, Texas


77,000


OwnedHCC and Houston Casualty Company

Houston, Texas


51,000


OwnedProfessional Indemnity Agency

Mount Kisco, New York


38,000


OwnedHCC Life Insurance Company

Atlanta, Georgia


31,000


December 31, 2011U.S. Specialty Insurance
    Company Aviation Division

Dallas, Texas


28,000


August 31, 2013HCC Specialty Underwriters

Wakefield, Massachusetts


28,000


December 31, 2010G. B. Kenrick &
    Associates, Inc.

Auburn Hills, Michigan


27,000


May 31, 2012HCC Surety Group

Los Angeles, California


26,000


May 31, 2009Health Products Division

Minneapolis, Minnesota


25,000


September 30, 2012HCC International and
    Rattner MacKenzie

London, England


17,000


December 24, 2015   Form 10-K.
  Item 3.
    Legal
    Proceedings       34




---



##### Table of Contents



Civil Action
    No. 07-456;
    Bacas, derivatively on behalf of HCC Insurance Holdings, Inc.
    (HCC) v. Way et al.; In the United States District
    Court for the Southern District of Texas, Houston
    Division.
  Civil Action
    No. 07-550;
    International Brotherhood of Electrical Workers Local 98
    Pension Fund, derivatively on behalf of nominal defendant HCC
    Insurance Holdings, Inc. v. Way et al.; In the United
    States District Court for the Southern District of Texas,
    Houston Division.
  Item 4.
    Submission
    of Matters to a Vote of Security Holders   35




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##### Table of Contents



PART II  Item 5.
    Market
    For The Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities  Price
    Range of Common Stock
    intra-day
  2006


2005


2004High


Low


High


Low


High


LowFirst quarter

$
34.89


$
29.25


$
26.17


$
21.31


$
23.17


$
20.01Second quarter


34.92



28.51



26.96



23.05



22.93



20.30Third quarter


33.99



28.82



28.89



25.11



22.39



19.23Fourth quarter


35.15



28.81



32.95



26.91



22.83



18.35     Shareholders
    Dividend
    Policy
   2006


2005


2004First quarter

$
.075


$
.057


$
.050Second quarter


.100



.075



.050Third quarter


.100



.075



.057Fourth quarter


.100



.075



.057     Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Number ofNumber of





common sharescommon shares


Weighted


available forto be issued


average


future issuanceupon exercise


exercise price


under equityof outstanding


of outstanding


compensationPlan Category

stock options


stock options


plansEquity compensation plans approved
    by shareholders


7,181


$
22.23



4,412  36




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##### Table of Contents



Performance
    Graph
    COMPARISON
    OF CUMULATIVE FIVE YEAR TOTAL RETURN
  
  Total
    Return to Shareholders
    (Includes reinvestment of dividends)
  Company/Index


2001


2002


2003


2004


2005


2006HCC Insurance Holdings, Inc.


$
100.00



$
90.18



$
117.71



$
123.82



$
168.59



$
184.42S&P 1500 Super Composite Index



100.00




78.69




101.97




113.98




120.43




138.90S&P Midcap 400 Index



100.00




85.49




115.94




135.05




152.00




167.69  37




---



##### Table of Contents



Item 6.
    Selected
    Financial Data    Years Ended December 31,2006


2005


2004


2003


2002(in thousands, except per share data) (1)Statement of earnings
    data:RevenueNet earned premium

$
1,709,189


$
1,369,988


$
1,010,692


$
738,272


$
505,521Fee and commission income


137,131



132,628



183,802



142,615



116,090Net investment income


152,804



98,851



64,885



47,335



37,755Net realized investment gain (loss)


(841
)


1,448



5,822



527



453Other operating income


77,012



39,773



19,406



13,215



6,985Total revenue


2,075,295



1,642,688



1,284,607



941,964



666,804ExpenseLoss and loss adjustment expense,
    net


1,011,856



919,697



645,230



488,000



307,143Policy acquisition costs, net


319,885



261,708



222,323



137,212



99,521Other operating expense


222,324



180,990



168,045



144,574



101,513Interest expense


11,396



7,684



8,374



7,453



8,301Total expense


1,565,461



1,370,079



1,043,972



777,239



516,478Earnings from continuing
    operations before income tax expense


509,834



272,609



240,635



164,725



150,326Income tax expense on continuing
    operations


167,549



84,177



81,940



59,382



52,372Earnings from continuing operations


342,285



188,432



158,695



105,343



97,954Earnings from discontinued
    operations, net of income taxes(2)






2,760



4,004



36,684



6,365Net earnings

$
342,285


$
191,192


$
162,699


$
142,027


$
104,319Basic earnings per share
    data:Earnings from continuing operations

$
3.08


$
1.78


$
1.63


$
1.11


$
1.05Earnings from discontinued
    operations(2)






0.03



0.04



0.39



0.07Net earnings

$
3.08


$
1.81


$
1.67


$
1.50


$
1.12Weighted average shares outstanding


111,309



105,463



97,257



94,919



93,338Diluted earnings per share
    data:Earnings from continuing operations

$
2.93


$
1.72


$
1.61


$
1.09


$
1.04Earnings from discontinued
    operations(2)






0.03



0.04



0.38



0.07Net earnings

$
2.93


$
1.75


$
1.65


$
1.47


$
1.11Weighted average shares outstanding


116,736



109,437



98,826



96,576



94,406Cash dividends declared, per share

$
0.375


$
0.282


$
0.213


$
0.187


$
0.170   38




---



##### Table of Contents



December 31,2006


2005


2004


2003


2002(in thousands, except per share data) (1)Balance sheet data:Total investments

$
3,927,995


$
3,257,428


$
2,468,491


$
1,707,300


$
1,177,775Premium, claims and other
    receivables


864,705



884,654



891,360



934,252



789,226Reinsurance recoverables


1,169,934



1,361,983



1,104,026



900,775



797,195Ceded unearned premium


226,125



239,416



311,973



291,591



164,224Goodwill


742,677



532,947



444,031



388,023



335,288Total assets


7,630,132



7,028,800



5,900,568



4,883,345



3,738,963Loss and loss adjustment expense
    payable


3,097,051



2,813,720



2,089,199



1,525,313



1,158,915Unearned premium


920,350



807,109



741,706



592,311



331,050Premium and claims payable


646,224



753,859



766,765



784,038



759,910Notes payable


308,887



309,543



311,277



310,404



230,027Shareholders
    equity


2,042,803



1,690,435



1,325,498



1,046,405



884,671Book value per share(3)

$
18.28


$
15.26


$
12.99


$
10.91


$
9.45     (1)
    
    Certain amounts in the
    2002-2005
    selected consolidated financial data have been reclassified to
    conform to the 2006 presentation. Such reclassifications had no
    effect on our consolidated net earnings, shareholders
    equity or cash flows.(2)
    
    We sold our retail brokerage operation, HCC Employee Benefits,
    Inc., in 2003. The net earnings of HCC Employee Benefits, the
    2003 gain on sale and the subsequent gains in 2004 and 2005 from
    a contractual earnout are classified as discontinued operations.
    Consistent with this presentation, all pre-sale revenue and
    expense of HCC Employee Benefits was reclassified to
    discontinued operations.(3)
    
    Book value per share is calculated by dividing the sum of
    outstanding shares plus contractually issuable shares into total
    shareholders equity.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations    Overview
     39




---



##### Table of Contents



Company

Segment

Effective Date AcquiredAmerican Contractors Indemnity
    Company

Insurance company

January 31, 2004RA&MCO Insurance Services

Agency

October 1, 2004United States Surety Company

Insurance company

March 1, 2005HCC International Insurance Company

Insurance company

July 1, 2005Perico Life Insurance Company

Insurance company

November 30, 2005Perico Ltd.

Agency

December 1, 2005Illium Insurance Group

Agency

December 31, 2005Novia Underwriters, Inc.

Agency

June 30, 2006G.B. Kenrick &
    Associates, Inc.

Agency

July 1, 2006Health Products Division

Insurance company

October 2, 2006     Results
    of Operations
   40




---



##### Table of Contents



Effect of Commutations and Hurricanes2006


2005


2004


2006


2005


2004Gross incurred loss and loss
    adjustment expense

$
1,218,838


$
1,596,773


$
1,289,155


$



$
394,625


$
89,795Net incurred loss and loss
    adjustment expense


1,011,856



919,697



645,230



20,199



99,226



23,335Ceded earned premium


439,246



617,402



849,610







16,533



9,806Net earnings (loss)


342,285



191,192



162,699



(13,129
)


(75,171
)


(21,464
)Diluted earnings (loss) per share


2.93



1.75



1.65



(0.11
)


(0.69
)


(0.22
)  41




---



##### Table of Contents



2006


2005


2004Ratios:Net loss ratio


59.2
%


67.1
%


63.8
%Expense ratio


25.0



26.1



26.7Combined ratio


84.2
%


93.2
%


90.5
%Effect of hurricanes and
    commutations:Net loss ratio


1.2
%


7.9
%


2.9
%Expense ratio






0.3



0.3Combined ratio


1.2
%


8.2
%


3.2
%     2006


2005


2004Net earned premium


82.3
%


83.4
%


78.7
%Fee and commission income


6.6



8.1



14.3Net investment income


7.4



6.0



5.1Net realized investment gain






0.1



0.4Other operating income


3.7



2.4



1.5Total revenue


100.0



100.0



100.0Loss and loss adjustment expense,
    net


48.8



56.0



50.2Policy acquisition costs, net


15.4



15.9



17.3Other operating expense


10.7



11.0



13.1Interest expense


0.5



0.5



0.7Earnings from continuing
    operations before income tax expense


24.6



16.6



18.7Income tax expense


8.1



5.1



6.3Earnings from continuing
    operations


16.5
%


11.5
%


12.4
%       2006


2005


2004Gross written premium

$
2,235,648


$
2,038,286


$
1,975,153Net written premium


1,812,552



1,501,224



1,105,519Net earned premium


1,709,189



1,369,988



1,010,692  42




---



##### Table of Contents



2006


2005


2004Agencies

$
92,566


$
94,972


$
127,453Insurance companies


44,565



37,656



56,349Fee and commission
    income

$
137,131


$
132,628


$
183,802       2006


2005


2004Fixed income securities

$
112,878


$
77,842


$
55,929Short-term investments


30,921



21,208



9,735Other investments


14,178



3,615



1,366Total investment income


157,977



102,665



67,030Investment expense


(5,173
)


(3,814
)


(2,145
)Net investment income

$
152,804


$
98,851


$
64,885        43




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##### Table of Contents



2006


2005


2004Strategic investments

$
43,627


$
10,241


$
5,103Trading securities


24,100



16,619



2,604Financial instruments


4,772



3,898



4,297Sale of non-operating assets






4,271



1,531Other


4,513



4,744



5,871Other operating
    income

$
77,012


$
39,773


$
19,406       Share-Based Payment, Accounting for Stock Issued to
    Employees
     44




---



##### Table of Contents



Segments
    Insurance
    Company Segment
    Premium
      2006


2005


2004Amount


%


Amount


%


Amount


%Primary

$
1,867,908



84
%

$
1,768,284



87
%

$
1,674,075



85
%Reinsurance assumed


367,740



16



270,002



13



301,078



15Gross written premium


2,235,648



100



2,038,286



100



1,975,153



100Reinsurance ceded


(423,096
)


(19
)


(537,062
)


(26
)


(869,634
)


(44
)Net written premium


1,812,552



81



1,501,224



74



1,105,519



56Change in unearned premium


(103,363
)


(5
)


(131,236
)


(7
)


(94,827
)


(5
)Net earned premium

$
1,709,189



76
%

$
1,369,988



67
%

$
1,010,692



51
%  45




---



##### Table of Contents



Gross





NWPWritten


Net Written


as % of


Net EarnedPremium


Premium


GWP


PremiumYear ended December 31,
    2006Diversified financial products

$
956,057


$
794,232



83
%

$
728,861Group life, accident and health


621,639



590,811



95



591,070Aviation


216,208



166,258



77



152,886London market account


234,868



127,748



54



112,362Other specialty lines


205,651



133,481



65



123,981Discontinued lines


1,225



22



nm



29Totals

$
2,235,648


$
1,812,552



81
%

$
1,709,189Year ended December 31,
    2005Diversified financial products

$
908,526


$
675,942



74
%

$
531,136Group life, accident and health


593,382



502,805



85



504,382Aviation


210,530



130,743



62



136,197London market account


144,425



78,809



55



93,017Other specialty lines


176,139



109,106



62



97,721Discontinued lines


5,284



3,819



nm



7,535Totals

$
2,038,286


$
1,501,224



74
%

$
1,369,988Year ended December 31,
    2004Diversified financial products

$
857,299


$
404,870



47
%

$
310,809Group life, accident and health


584,747



343,996



59



343,913Aviation


204,963



144,687



71



127,248London market account


178,950



107,509



60



111,341Other specialty lines


133,964



83,980



63



69,089Discontinued lines


15,230



20,477



nm



48,292Totals

$
1,975,153


$
1,105,519



56
%

$
1,010,692     nm 
    
    Not meaningful comparison    
    Diversified financial products  The growth in our
    gross written premium in 2006 resulted principally from organic
    growth in our surety, credit and special financial products
    businesses, where pricing is good and competition is reasonable.
    Premium volume in the other major products was stable and the
    pricing for these products is down slightly. In response to some
    increased competition and a reduction in available reinsurance
    at an acceptable cost, we scaled back our writing of
    directors and officers liability business in 2005.
    Our professional indemnity and surety business increased in 2005
    due to organic growth and acquisitions. The growth in net
    written and net earned premium in both years was due to
    increased retentions resulting from a reduction in proportional
    reinsurance, some of which has been replaced by excess of loss
    reinsurance.
    Group life, accident and health  Gross written, net
    written and net earned premium of our medical stop-loss product
    increased $75.3 million in 2006 as a result of our
    acquisition of the Health Products Division on October 2,
    2006. The increase in gross written premium was partially offset
    by a decrease in premium due to our non-renewing a book of
    business which was 100% reinsured and, thus, did not impact net
    written premium. Our retention of our medical stop-loss business
    increased in 2006 and 2005 as we chose to reinsure less of this
    non-volatile business, which has very little catastrophe 46




---



##### Table of Contents



exposure. Profit margins remain at acceptable levels despite
    increased competition from the fully insured market.  
    Aviation  The growth in net written premium and
    net earned premium in 2006 is due to the effect of recapture of
    ceded unearned premium from a transfer of in force business.
    Retention also increased as a result of a reduction in
    proportional reinsurance. Retention levels are consistent
    between 2005 and 2004 after removing the effect of a similar
    recapture in 2004. The international aviation component of this
    line is very competitive with downward pressure on pricing, but
    margins on decreased premium volume are still acceptable. Our
    domestic business is very stable.
    London market account  Gross written premium
    increased in 2006 due to the substantial increase in rates in
    the energy sector as a result of the 2005 hurricane losses. Net
    written premium increased for the same reason and will be
    reflected in increases in our net earned premium into 2007. In
    2006, to increase our capacity and spread our risk in the energy
    sector, we entered into a new quota share reinsurance agreement
    which was renewed in 2007. Although the cost of our 2006 excess
    of loss reinsurance increased, our potential profitability is
    greater on the increased gross written premium. Our aggregate
    exposure in Florida and the Gulf of Mexico was lower in 2006
    than in 2005, and we are maintaining the reduced exposure in
    2007. The decrease in premium writings in 2005 was due to more
    selective underwriting in response to reduced premium rates from
    increased competition. Retention percentages can vary due to the
    effect of reinstatement premiums and the amount of earned
    premium in relation to substantial, relatively fixed excess of
    loss premiums. Premium rates in this line are stable.
    Other specialty lines  We experienced organic growth
    in our other specialty lines of business from increased writings
    in several products. The changing mix of products will affect
    the retention percentages. Rates in this line have been
    relatively stable.  Reinsurance
       47




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##### Table of Contents



Losses
    and Loss Adjustment Expenses
    2006


2005


2004Amount


Loss Ratio


Amount


Loss Ratio


Amount


Loss Ratio2005 hurricanes

$
12,670



0.6
%

$
394,625



19.9
%

$





%2004 hurricanes


(2,984
)


(0.2
)


(13,423
)


(0.7
)


89,795



4.8Other reserve redundancies


(28,041
)


(1.3
)


(7,080
)


(0.4
)


(11,594
)


(0.6
)Discontinued line of business
    adjustments


15,054



0.7



49,775



2.5



127,707



6.9All other gross incurred loss and
    loss adjustment expense


1,222,139



56.9



1,172,876



59.0



1,083,247



58.2Gross incurred loss and loss
    expense adjustment

$
1,218,838



56.7
%

$
1,596,773



80.3
%

$
1,289,155



69.3
%      48




---



##### Table of Contents



2006


2005


2004Amount


Loss Ratio


Amount


Loss Ratio


Amount


Loss Ratio2005 hurricanes

$
(15,215
)


(0.9
)%

$
73,185



5.3
%

$





%2004 hurricanes


(2,483
)


(0.2
)


(7,167
)


(0.5
)


23,335



2.3Discontinued line of business
    commutations


20,199



1.2



26,041



1.9







Discontinued line of business
    adjustments


4,898



0.3



8,929



0.7



27,326



2.7Other reserve deficiencies
    (redundancies)


(13,925
)


(0.8
)


(2,409
)


(0.2
)


3,152



0.3All other net incurred loss and
    loss adjustment expense


1,018,382



59.6



821,118



59.9



591,417



58.5Net incurred loss and loss
    adjustment expense

$
1,011,856



59.2
%

$
919,697



67.1
%

$
645,230



63.8
%    49




---



##### Table of Contents



2006


2005


2004Net


Net


Net


Net


Net


NetEarned


Loss


Earned


Loss


Earned


LossPremium


Ratio


Premium


Ratio


Premium


RatioDiversified financial products

$
728,861



48.2
%

$
531,136



48.1
%

$
310,809



47.6
%Group life, accident and health


591,070



73.1



504,382



71.6



343,913



66.7Aviation


152,886



53.8



136,197



67.3



127,248



63.2London market account


112,362



43.0



93,017



106.0



111,341



65.9Other specialty lines


123,981



56.0



97,721



72.6



69,089



63.5Discontinued lines


29



nm



7,535



nm



48,292



nmTotals

$
1,709,189



59.2
%

$
1,369,988



67.1
%

$
1,010,692



63.8
%Expense ratio






25.0







26.1







26.7Combined ratio






84.2
%






93.2
%






90.5
%         
    Group life, accident and health  Rate pressure from
    competition as well as medical cost inflation have resulted in
    increasing loss ratios in this line of business. Additionally,
    in 2006 the loss ratio for the business acquired in the Health
    Products Division acquisition were higher than the loss ratios
    for our existing business, increasing our overall loss ratio.
    Over time, we expect that the loss ratios for the acquired
    business will be brought into line with the rest of our book.
    Overall, our underwriting margins for this line of business
    remain satisfactory.
    Aviation  The 2005 hurricanes increased the net loss
    ratio by 5.0 percentage points in 2005 and the 2004 hurricanes
    increased the net loss ratio by 6.5 percentage points. The
    2005 net loss ratio also includes the positive impact from
    the release of redundant reserves related to the 2004
    hurricanes. Excluding the impact of the hurricanes, 2005 had
    worse than expected underwriting experience due to some
    unusually large international losses while 2006 underwriting
    results were better than expected, due in part to the release of
    redundant reserves on the 2004 and 2005 accident years.
    London market account  The adjustment of hurricane
    reserves reduced the 2006 net loss ratio by
    9.1 percentage points. The 2005 hurricanes increased the
    net loss ratio by 63.2 percentage points and the 2004 hurricanes
    increased the net loss ratio by 14.1 percentage points. The 2006
    loss ratio was also adversely affected by higher than expected
    attritional losses for energy business and poor underwriting
    results for marine business. The London market account line of
    business can have relatively high
    year-to-year
    volatility due to catastrophe exposure.
    Other specialty lines  The release of redundant
    hurricane reserves reduced the 2006 net loss ratio by
    3.9 percentage points. The 2005 hurricanes increased the
    net loss ratio by 14.0 percentage points and the 2004 hurricanes
    increased the net loss ratio by 6.5 percentage points.
    Discontinued lines  The commutation losses in 2006
    and 2005 affected the net losses for those years. In addition,
    the 2006, 2005 and 2004 net losses were impacted by loss
    reserve strengthening of $4.9 million, $8.9 million
    and $27.3 million, respectively, on certain run-off assumed
    accident and health reinsurance business.   50




---



##### Table of Contents



Policy
    Acquisition Costs
      Statutory
    Agency
    Segment
    Other
    Operations Segment
    Liquidity
    and Capital Resources
  Cash
    Flow
   51




---



##### Table of Contents



2006


2005


2004Net earnings

$
342,285


$
191,192


$
162,699Change in premium, claims and
    other receivables, net of reinsurance, other payables and
    restricted cash


(139,906
)


(59,717
)


237Change in unearned premium, net


122,571



121,242



104,895Change in loss and loss adjustment
    expense payable, net of reinsurance recoverables


328,569



454,859



349,813Gain on sale of subsidiary






(8,717
)


(6,317
)Change in trading portfolio


(19,919
)


(66,809
)


25,673Other, net


19,788



(8,060
)


31,703Cash provided by operating
    activities

$
653,388


$
623,990


$
668,703     Investments
       52




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##### Table of Contents



2006


2005


2004Average investments, at cost

$
3,529,671


$
2,822,686


$
2,054,620Net investment income *


152,804



98,851



64,885Average short-term yield *


4.5%



2.7%



1.7%Average long-term yield *


4.4%



4.0%



3.9%Average long-term tax equivalent
    yield *


5.2%



4.9%



4.8%Weighted average combined tax
    equivalent yield *


5.0%



4.1%



3.8%Weighted average maturity


6.9 years



7.6 years



6.6 yearsWeighted average duration


4.6 years



4.9 years



4.6 yearsAverage S&P rating


AAA



AAA



AAA     *
    
    Excluding realized and unrealized investment gains and losses.    Amount


%Short-term investments

$
714,685



18
%U.S. government


121,580



3States, municipalities and
    political subdivisions


413,422



11Special revenue fixed income
    securities


948,280



24Corporate fixed income securities


330,565



9Asset-backed and mortgage-backed
    securities


786,042



20Foreign securities


407,304



10Other investments


206,117



5Total investments

$
3,927,995



100
%     Amount


%AAA

$
2,358,078



78
%AA


322,717



11A


301,143



10BBB


24,646



1BB and below


609



Total fixed income
    securities

$
3,007,193



100
%  53




---



##### Table of Contents



Amount


%One year or less

$
149,192



5
%One year to five years


657,305



22Five years to ten years


593,783



20Ten years to fifteen years


408,301



13More than fifteen years


412,570



14Securities with fixed maturities


2,221,151



74Asset-backed and mortgage-backed
    securities


786,042



26Total fixed income
    securities

$
3,007,193



100
%             Maturities/Estimated Payment DatesTotal


2007


2008-2009


2010-2011


ThereafterCash and investment maturities of
    insurance companies

$
3,696,611


$
880,754


$
662,770


$
632,797


$
1,520,290Estimated loss and loss adjustment
    expense payments, net of reinsurance


2,108,961



748,517



704,248



369,517



286,679Estimated available cash
    flow

$
1,587,650


$
132,237


$
(41,478
)

$
263,280


$
1,233,611    54




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##### Table of Contents



Contractual
    Obligations
    Estimated Payment DatesTotal


2007


2008-2009


2010-2011


ThereafterGross loss and loss adjustment
    expense payable(1)Diversified financial products

$
1,290,310


$
306,240


$
522,171


$
303,908


$
157,991Group life, accident and health


333,013



280,913



43,820



6,859



1,421Aviation


172,311



87,246



57,470



19,315



8,280London market account


454,220



210,048



189,102



48,758



6,312Other specialty lines


233,564



79,748



95,130



39,682



19,004Discontinued lines


613,633



96,145



178,473



123,875



215,140Total loss and loss adjustment
    expense payable


3,097,051



1,060,340



1,086,166



542,397



408,148Life and annuity policy benefits


70,923



1,995



3,822



3,607



61,4991.30% Convertible Notes(2)(3)


125,789



125,789











2.00% Convertible Exchange
    Notes(2)(3)


173,896



173,896











Other notes payable(3)


12,896



993



11,014



508



381$300.0 million Revolving
    Loan Facility


















Operating leases


85,143



9,202



21,067



18,119



36,755Earnout liabilities


47,685



43,180



4,505







Indemnifications


16,897



4,295



3,240



5,843



3,519Total obligations

$
3,630,280


$
1,419,690


$
1,129,814


$
570,474


$
510,302     (1)
    The estimated loss and loss adjustment expense payments for
    future periods assume that the percentage of ultimate losses
    paid from one period to the next will be relatively consistent
    over time. Actual payments will be influenced by many factors
    and could vary from the estimated amounts above.(2)
    The 1.30% Convertible Notes mature in 2023 and the
    2.00% Convertible Exchange Notes mature in 2021, but are
    shown in the 2007 column since they may be surrendered for cash
    at the option of the holders in the first quarter of 2007
    because our stock traded at specified price levels in the fourth
    quarter of 2006. Both convertible notes have various put and
    redemption dates as disclosed in Note 6 to the Consolidated
    Financial Statements.(3)
    Amounts include interest payable in respective periods.    55




---



##### Table of Contents



Subsidiary
    Dividends
     56




---



##### Table of Contents



Lines
    of Credit
        Other
      Form 10-Q Form S-3 Form S-1
   57




---



##### Table of Contents



Form 10-K/A Form 10-Q/A
      Impact of
    Inflation
     58




---



##### Table of Contents



Foreign
    Exchange Rate Fluctuations
    Critical
    Accounting Policies
    Loss
    and Loss Adjustment Expense
         59




---



##### Table of Contents



Recorded


Actuarial


Low End of


High End ofNet Reserves


Point Estimate


Actuarial Range


Actuarial RangeTotal net reserves

$
2,108,961


$
2,064,336


$
1,931,642


$
2,261,589Individual lines of business:Diversified financial products

$
848,636


$
843,742


$
729,862


$
997,876Group life, accident and health


317,176



312,099



287,772



342,642Aviation


104,213



101,127



93,923



110,146London market account


205,684



194,894



185,149



220,027Other specialty lines


151,928



144,208



136,440



162,655Discontinued lines


481,324



468,266



409,577



568,096Total net reserves

$
2,108,961          60




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##### Table of Contents



ClaimsCharacteristicsSpeed ofLoss

Reserve

Major ActuarialLine of Business

Products

Underwriting

Duration

Reporting

Volatility

AssumptionsDiversified financial products

Directors and
    officers liability

Primary

Medium to
    Long

Moderate

Medium to
    High

Historical and industry
    loss reporting patternsProfessional
    indemnity

Primary

Medium

Moderate

Medium

Historical loss reporting
    patternsSurety

Primary

Medium

Fast

Low

Historical loss payment
    and reporting patternsGroup life, accident and health

Medical stop-loss

Primary

Short

Fast

Low

Medical cost and
    utilization trendsHistorical loss payment
    and reporting patternsRate changesAviation

Aviation

Primary and
    subscription

Medium

Fast

Medium

Historical loss payment
    and reporting patternsLondon market account

Accident and health

Primary 
    and assumed

Medium to
    Long

Slow

High

Historical loss payment 
    and reporting patternsEnergy*

Subscription

Medium

Moderate

Medium

Historical loss payment 
    and reporting patternsProperty*

Subscription

Medium

Moderate

Medium

Historical loss payment 
    and reporting patternsHistorical large loss experienceMarine

Subscription

Medium

Moderate

Medium

Historical loss payment 
    and reporting patternsHistorical large loss experienceOther specialty

Liability

Primary and assumed

Medium

Moderate

Medium

Historical loss payment 
    and reporting patternsProperty

Primary and assumed

Short

Fast

Low

Historical loss payment 
    and reporting patternsDiscontinued

Accident
    and health reinsurance

Assumed

Long

Slow

High

Historical and industry
    loss payment and reporting patterns     *
    Includes catastrophe losses     61




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##### Table of Contents



12-18 months.
 62




---



##### Table of Contents



% NetIBNR toNet TotalGross


Ceded


Net


ReservesAt December 31,
    2006Reported loss reserves:Diversified financial products

$
507,739


$
177,274


$
330,465Group life, accident and health


156,058



1,627



154,431Aviation


108,851



39,506



69,345London market account


311,862



206,344



105,518Other specialty lines


83,105



30,231



52,874Subtotal reported reserves


1,167,615



454,982



712,633Incurred but not reported reserves:Diversified financial products


782,571



264,400



518,171



61
%Group life, accident and health


176,955



14,210



162,745



51Aviation


63,460



28,592



34,868



33London market account


142,358



42,192



100,166



49Other specialty lines


150,459



51,405



99,054



65Subtotal incurred but not reported
    reserves


1,315,803



400,799



915,004



56Discontinued lines reported
    reserves


398,193



74,580



323,613Discontinued lines incurred but
    not reported reserves


215,440



57,729



157,711



33Total loss and loss adjustment
    expense payable

$
3,097,051


$
988,090


$
2,108,961



51
%At December 31,
    2005Reported loss reserves:Diversified financial products

$
319,000


$
126,665


$
192,335Group life, accident and health


129,601



6,366



123,235Aviation


118,122



55,602



62,520London market account


345,605



260,473



85,132Other specialty lines


51,634



27,590



24,044Subtotal reported reserves


963,962



476,696



487,266Incurred but not reported reserves:Diversified financial products


634,131



275,116



359,015



65
%Group life, accident and health


74,499



35,658



38,841



24Aviation


75,120



32,913



42,207



40London market account


232,648



120,638



112,010



57Other specialty lines


144,284



63,308



80,976



77Subtotal incurred but not reported
    reserves


1,160,682



527,633



633,049



57Discontinued lines reported
    reserves


437,681



159,529



278,152Discontinued lines incurred but
    not reported reserves


251,395



116,429



134,966



33Total loss and loss adjustment
    expense payable

$
2,813,720


$
1,280,287


$
1,533,433



50
%  63




---



##### Table of Contents




    Diversified financial products  Total net reserves in
    our diversified financial products line of business increased
    $297.3 million from 2005 to 2006 as this relatively new
    line of business continues to grow. The incurred but not
    reported portion of the total reserves for this line of business
    is higher than in most of our other lines, since these losses
    report slower and have a longer duration. The percentage will
    decrease as the claims start to mature.
    Group life, accident and health  Net reserves and the
    percentage of incurred but not reported reserves increased due
    to the acquisition of the Health Products Division in 2006. The
    reserves associated with the acquired business did not include a
    large case basis factor as do our other medical stop-loss
    reserves. We expect the percentage will decrease as we integrate
    those reserves into our normal reserving practices.
    London market account  The percentage decreased in
    2006 due to the maturity and settlement of 2005 hurricane claims.
    Other specialty lines  Total net reserves increased
    $46.9 million and the percentage of incurred but not
    reported reserves decreased in 2006 due to the maturing of
    claims related to a relatively new product in this line.
    Discontinued lines  Total net reserves for our
    discontinued lines increased $68.2 million in 2006
    primarily as a result of a large commutation, partially offset
    by claim payments.     64




---



##### Table of Contents



Reinsurance
    Recoverables
      Deferred
    Taxes
  likely-than-not
  Valuation
    of Goodwill
  Using
    Cash Flow Information and Present Values in Accounting
    Measurements.
  Other-Than-Temporary
    Impairments on Investments
  other-than-temporary
 65




---



##### Table of Contents



other-than-temporary.
  Recent
    Accounting Pronouncements
  Considering the
    Effects of Prior Year Misstatements when Quantifying
    Misstatements in Current Year Financial Statements,
  Accounting for
    Uncertainty in Income Taxes
  Fair Value
    Measurements The Fair Value Option for Financial Assets and
    Liabilities.
  Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk      Interest
    Rate Risk
   66




---



##### Table of Contents



Foreign
    Exchange Risk
    December 31,2006


2005Hypothetical





HypotheticalU.S. Dollar


10% Change


U.S. Dollar


10% ChangeEquivalent


in Fair Value


Equivalent


in Fair ValueBritish pound sterling

$
37,701


$
3,770


$
15,781


$
1,578Euro


1,942



194



2,291



229Canadian dollar


816



82



522



52     Item 8.
    Financial
    Statements and Supplementary Data    Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosures    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
   67




---



##### Table of Contents



Managements
    Report on Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
    Internal Control  Integrated
    Framework
      Remediation
    of Material Weakness
  Form 10-K/A,
   68




---



##### Table of Contents




    Our Board of Directors accepted the resignations of our former
    CEO, General Counsel and Chairman of our Compensation Committee
    in November 2006. Our Board of Directors appointed a new CEO and
    Chairman of the Compensation Committee who, together with our
    Directors and members of our senior management, are committed to
    achieving transparency through effective corporate governance, a
    strong control environment, application of business standards
    reflected in our Code of Business Conduct and Ethics, and
    completeness and integrity of our financial reporting and
    disclosure.
    Effective in December 2006, our Board of Directors adopted new
    option granting approval policies and procedures, such that the
    Compensation Committee must approve all new option grants on the
    day of each Compensation Committee meeting preceding the
    regularly scheduled quarterly Board of Directors meeting. All
    grants must be appropriately approved and documented in minutes
    of the Compensation Committee meeting, taken contemporaneously
    with the meeting. All grants must be priced at the market
    closing price on the day of each such Compensation Committee
    meeting.
    We established processes and procedures to increase the level of
    communication between the Compensation Committee, senior
    management and our financial reporting and accounting personnel
    regarding stock option grants.    Changes
    in Internal Control Over Financial Reporting
    Item 9B.
    Other
    Information  Form 8-K Form 8-K.
 PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance  Code of
    Business Conduct and Ethics
  www.hcc.com
   69




---



##### Table of Contents



Section 303A-12(a) Form 10-K Form 10-K/A
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions and Director
    Independence       70




---



##### Table of Contents



Item 14.
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Financial Statement Schedules
    Exhibits
   71




---



##### Table of Contents



SIGNATURES    HCC Insurance Holdings,
    Inc.
   Dated: February 28, 2007

By:/s/  Frank J.
    Bramanti(Frank J.
    Bramanti)Chief Executive Officer     Name

Title

Date/s/  Frank
    J.
    Bramanti(Frank
    J. Bramanti)

Director, Chief Executive Officer
    and Principal Executive Officer

February 28, 2007/s/  Patrick
    B. Collins*(Patrick
    B. Collins)

Director

February 28, 2007/s/  James
    R. Crane*(James
    R. Crane)

Director

February 28, 2007/s/  J.
    Robert
    Dickerson*(J.
    Robert Dickerson)

Director

February 28, 2007/s/  Walter
    M. Duer*(Walter
    M. Duer)

Director

February 28, 2007/s/  Edward
    H.
    Ellis, Jr.(Edward
    H. Ellis, Jr.)

Director, Executive Vice President
    and Chief Financial Officer (Chief Accounting Officer)

February 28, 2007/s/  James
    C.
    Flagg, Ph.D.*(James
    C. Flagg, Ph.D.)

Director

February 28, 2007/s/  Allan
    W.
    Fulkerson*(Allan
    W. Fulkerson)

Director

February 28, 2007/s/  John
    N.
    Molbeck, Jr.*(John
    N. Molbeck, Jr.)

Director, President and 
    Chief Operating Officer

February 28, 2007/s/  Michael
    A. F. Roberts*(Michael
    A. F. Roberts)

Director

February 28, 2007*By:

/s/  Edward
    H. Ellis, Jr.Edward
    H. Ellis, Jr.,Attorney-in-fact  72




---



##### Table of Contents



INDEX TO
    EXHIBITS
  (Items denoted by a letter are incorporated by reference to
    other documents previously filed with the Securities and
    Exchange Commission as set forth at the end of this index. Items
    not denoted by a letter are being filed herewith.)
  ExhibitNumberA3
.1



Restated Certificate of
    Incorporation and Amendment of Certificate of Incorporation of
    HCC Insurance Holdings, Inc., filed with the Delaware Secretary
    of State on July 23, 1996 and May 21, 1998,
    respectively.B3
.2



Bylaws of HCC Insurance Holdings,
    Inc., as amended.B4
.1



Specimen of Common Stock
    Certificate, $1.00 par value, of HCC Insurance Holdings,
    Inc.C4
.2



Indenture dated August 23,
    2001 between HCC Insurance Holdings, Inc. and First Union
    National Bank related to Debt Securities (Senior Debt).C4
.3



First Supplemental Indenture dated
    August 23, 2001 between HCC Insurance Holdings, Inc. and
    First Union National Bank related to 2.00% Convertible
    Notes Due 2021.D4
.4



Second Supplemental Indenture
    dated March 28, 2003 between HCC Insurance Holdings, Inc.
    and Wachovia Bank, National Association (as successor to First
    Union National Bank) related to 1.30% Convertible Notes Due
    2023.E4
.5



First Amendment to Second
    Supplemental Indenture dated December 22, 2004 between HCC
    Insurance Holdings, Inc. and Wachovia Bank, National Association
    related to 1.30% Convertible Notes Due 2023.F4
.6



Third Supplemental Indenture dated
    November 23, 2004 between HCC Insurance Holdings, Inc. and
    Wachovia Bank, National Association related to
    2.00% Convertible Notes Due 2021.G10
.1



Loan Agreement ($200,000,000
    Revolving Loan Facility) dated November 24, 2004 among
    HCC Insurance Holdings, Inc.; Wells Fargo Bank, National
    Association; Southwest Bank of Texas, N.A.; Citibank, N.A.;
    Royal Bank of Scotland and Bank of New York.H10
.2



First Amendment to Loan Agreement
    dated as of December 19, 2006 by and among HCC Insurance
    Holdings, Inc. and Wells Fargo Bank, National Association,
    Citibank, N.A., Wachovia Bank, National Association, Royal Bank
    of Scotland, Amegy Bank National Association and Bank of New
    York.I10
.3



Master Agreement dated
    August 3, 2006 by and among Allianz Life Insurance Company
    of North America, Allianz Life Insurance Company of New York and
    HCC Life Insurance Company.J10
.4



HCC Insurance Holdings, Inc. 1995
    Flexible Incentive Plan, as amended and restated.J10
.5



HCC Insurance Holdings, Inc. 1997
    Flexible Incentive Plan, as amended and restated.J10
.6



HCC Insurance Holdings, Inc. 1996
    Nonemployee Director Stock Option Plan, as amended and restated.K10
.7



HCC Insurance Holdings, Inc. 2001
    Flexible Incentive Plan, as amended and restated.L10
.8



Form of Incentive Stock Option
    Agreement under the HCC Insurance Holdings, Inc. 2001 Flexible
    Incentive Plan.M10
.9



HCC Insurance Holdings, Inc. 2004
    Flexible Incentive Plan.F10
.10



Form of Incentive Stock Option
    Agreement under the HCC Insurance Holdings, Inc. 2004 Incentive
    Plan.F10
.11



Amended and Restated Employment
    Agreement effective at November 10, 2004, between HCC
    Insurance Holdings, Inc. and Stephen L. Way.N10
.12



HCC Insurance Holdings, Inc.
    nonqualified deferred compensation plan for Stephen L. Way
    effective January 1, 2003.I10
.13



Employment Agreement effective
    March 23, 2006 between HCC Insurance Holdings, Inc. and
    John N. Molbeck, Jr.O10
.14



Employment Agreement effective at
    March 1, 2005, between HCC Insurance Holdings, Inc. and
    Craig J. Kelbel.L10
.15



Employment Agreement effective at
    June 3, 2002, between HCC Insurance Holdings, Inc. and
    Michael J. Schell. 73




---



##### Table of Contents



ExhibitNumberP10
.16



Employment Agreement effective at
    January 1, 2002, between HCC Insurance Holdings, Inc. and
    Edward H. Ellis, Jr.Q10
.17



First Amendment to Employment
    Agreement effective as of April 15, 2006 between HCC
    Insurance Holdings, Inc. and Edward H. Ellis, Jr.I10
.18



Employment Agreement effective as
    of April 1, 2006 between HCC Insurance Holdings, Inc. and
    Christopher L. Martin.R10
.19



Consulting Agreement and
    Resignation effective as of November 17, 2006 by and
    between HCC Insurance Holdings, Inc. and Stephen L. Way.10
.20



Amendment No. 1 to Consulting
    Agreement and Resignation effective as of February 21, 2007
    by and between HCC Insurance Holdings, Inc. and Stephen L. Way.S10
.21



Separation Agreement and Release
    effective as of November 17, 2006 by and between HCC
    Insurance Holdings, Inc. and Christopher L. Martin.12




Statement Regarding Computation of
    Ratios.21




Subsidiaries of HCC Insurance
    Holdings, Inc.23




Consent of Independent Registered
    Public Accounting Firm  PricewaterhouseCoopers LLP
    dated February 28, 2007.24




Powers of Attorney.31
.1



Certification by Chief Executive
    Officer.31
.2



Certification by Chief Financial
    Officer.32
.1



Certification with respect to
    Annual Report of HCC Insurance Holdings, Inc.     A
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Registration Statement on
    Form S-8
    (Registration
    No. 333-61687)
    filed August 17, 1998.B
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Registration Statement on
    Form S-1
    (Registration
    No. 33-48737)
    filed October 27, 1992.C
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated August 19, 2001.D
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated March 25, 2003.E
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated December 22, 2004.F
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K
    for the year ended December 31, 2004.G
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated December 1, 2004.H
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated December 19, 2006.I
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-Q
    for the quarter ended June 30, 2006.J
    
    Incorporated by reference to Exhibits to HCC Insurance Holdings,
    Inc.s
    Form 10-K
    for the year ended December 31, 1999.K
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Definitive Proxy Statement for the
    May 22, 2002 Annual Meeting of Shareholders filed
    April 26, 2002.L
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K
    for the year ended December 31, 2002. 74




---



##### Table of Contents



M
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Definitive Proxy Statement for the
    May 13, 2004 Annual Meeting of Shareholders filed
    April 16, 2004.N
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K
    for the year ended December 31, 2003.O
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-Q
    for the quarter ended March 31, 2005.P
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K
    for the year ended December 31, 2001.Q
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated April 10, 2006.R
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated November 17, 2006.S
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated November 28, 2006. 75




---



##### Table of Contents



INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
  Report of
    Independent Registered Public Accounting Firm


F-1Consolidated
    Balance Sheets at December 31, 2006 and 2005


F-3Consolidated
    Statements of Earnings for the three years ended
    December 31, 2006


F-4Consolidated
    Statements of Comprehensive Income for the three years ended
    December 31, 2006


F-5Consolidated
    Statements of Changes in Shareholders Equity for the three
    years ended December 31, 2006


F-6Consolidated
    Statements of Cash Flows for the three years ended
    December 31, 2006


F-7Notes to
    Consolidated Financial Statements


F-8Schedules:Schedule
    1  Summary of Investments other than Investments in
    Related Parties


S-1Schedule
    2  Condensed Financial Information of
    Registrant


S-2Schedule
    3  Supplementary Insurance Information


S-7Schedule
    4  Reinsurance


S-8Schedule
    5  Valuation and Qualifying Accounts


S-9    76




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM       Consolidated
    financial statements and financial statement schedules
      Internal
    control over financial reporting
  Internal Control  Integrated Framework Internal Control 
    Integrated Framework
   F-1




---



##### Table of Contents



PricewaterhouseCoopers
    LLP
    F-2




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share data)
  December 31,2006


2005ASSETSInvestments:Fixed income securities, at fair
    value (amortized cost: 2006  $3,008,818;
    2005  $2,277,139)

$
3,007,193


$
2,268,624Short-term investments, at cost,
    which approximates fair value


714,685



839,581Other investments, at fair value
    (cost: 2006  $183,450; 2005  $144,897)


206,117



149,223Total investments


3,927,995



3,257,428Cash


48,290



73,935Restricted cash and cash
    investments


176,424



170,978Premium, claims and other
    receivables


864,705



884,654Reinsurance recoverables


1,169,934



1,361,983Ceded unearned premium


226,125



239,416Ceded life and annuity benefits


70,923



73,415Deferred policy acquisition costs


182,410



156,253Goodwill


742,677



532,947Other assets


220,649



277,791Total assets

$
7,630,132


$
7,028,800LIABILITIESLoss and loss adjustment expense
    payable

$
3,097,051


$
2,813,720Life and annuity policy benefits


70,923



73,415Reinsurance balances payable


122,805



176,954Unearned premium


920,350



807,109Deferred ceding commissions


64,949



67,886Premium and claims payable


646,224



753,859Notes payable


308,887



309,543Accounts payable and accrued
    liabilities


356,140



335,879Total liabilities


5,587,329



5,338,365SHAREHOLDERS
    EQUITYCommon stock, $1.00 par
    value; 250.0 million shares authorized (shares issued and
    outstanding: 2006  111,731; 2005  110,803)


111,731



110,803Additional paid-in capital


798,213



762,170Retained earnings


1,098,887



798,388Accumulated other comprehensive
    income


33,972



19,074Total shareholders
    equity


2,042,803



1,690,435Total liabilities and
    shareholders equity

$
7,630,132


$
7,028,800    F-3




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF EARNINGS
 (in thousands, except per share data)
  Years Ended December 31,2006


2005


2004REVENUENet earned premium

$
1,709,189


$
1,369,988


$
1,010,692Fee and commission income


137,131



132,628



183,802Net investment income


152,804



98,851



64,885Net realized investment gain (loss)


(841
)


1,448



5,822Other operating income


77,012



39,773



19,406Total revenue


2,075,295



1,642,688



1,284,607EXPENSELoss and loss adjustment expense,
    net


1,011,856



919,697



645,230Policy acquisition costs, net


319,885



261,708



222,323Other operating expense


222,324



180,990



168,045Interest expense


11,396



7,684



8,374Total expense


1,565,461



1,370,079



1,043,972Earnings from continuing
    operations before income tax expense


509,834



272,609



240,635Income tax expense on continuing
    operations


167,549



84,177



81,940Earnings from continuing operations


342,285



188,432



158,695Earnings from discontinued
    operations, net of income taxes of $1,686 in 2005 and $2,313 in
    2004






2,760



4,004Net earnings

$
342,285


$
191,192


$
162,699Basic earnings per share
    data:Earnings from continuing operations

$
3.08


$
1.78


$
1.63Earnings from discontinued
    operations






0.03



0.04Net earnings

$
3.08


$
1.81


$
1.67Weighted average shares outstanding


111,309



105,463



97,257Diluted earnings per share
    data:Earnings from continuing operations

$
2.93


$
1.72


$
1.61Earnings from discontinued
    operations






0.03



0.04Net earnings

$
2.93


$
1.75


$
1.65Weighted average shares outstanding


116,736



109,437



98,826    F-4




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF COMPREHENSIVE
    INCOME
 (in thousands)
  Years Ended December 31,2006


2005


2004Net earnings

$
342,285


$
191,192


$
162,699Other comprehensive income (loss):Investment gains (losses):Investment gains (losses) during
    the year, net of income tax charge (benefit) of $14,212 in 2006,
    $(2,946) in 2005 and $6,091 in 2004


26,142



(4,257
)


10,955Less reclassification adjustment
    for gains included in net earnings, net of income tax charge of
    $13,484 in 2006, $2,479 in 2005 and $2,433 in 2004


(25,043
)


(4,605
)


(4,518
)Foreign currency translation
    adjustment


13,799



(9,699
)


6,287Other comprehensive income (loss)


14,898



(18,561
)


12,724Comprehensive income

$
357,183


$
172,631


$
175,423    F-5




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 Years ended December 31, 2006, 2005 and 2004
 (in thousands, except per share data)
  AccumulatedAdditional





Other


TotalCommon


Paid-In


Retained


Comprehensive


ShareholdersStock


Capital


Earnings


Income


EquityBalance at December 31,
    2003

$
63,964


$
462,002


$
495,528


$
24,911


$
1,046,405Net earnings










162,699







162,699Other comprehensive income














12,724



12,724Issuance of 4,500 shares in
    public offering, net of costs


3,000



93,668











96,668Issuance of 1,485 shares for
    exercise of options, including tax benefit of $2,969


990



22,087











23,077Issuance of 126 shares for
    purchased company and strategic investment


84



2,576











2,660Stock-based compensation






2,233











2,233Cash dividends declared,
    $0.213 per share










(20,968
)






(20,968
)Balance at December 31,
    2004


68,038



582,566



637,259



37,635



1,325,498Net earnings










191,192







191,192Other comprehensive loss














(18,561
)


(18,561
)Issuance of 4,688 shares in
    public offering, net of costs


4,688



145,276











149,964Issuance of 2,439 shares for
    exercise of options, including tax benefit of $6,168


1,785



40,522











42,307Issuance of 1,624 shares for
    purchased companies and convertible debt


1,227



26,226











27,453Stock-based compensation






2,645











2,645Three-for-two
    stock split


35,065



(35,065
)










Cash dividends declared,
    $0.282 per share










(30,063
)






(30,063
)Balance at December 31,
    2005


110,803



762,170



798,388



19,074



1,690,435Net earnings










342,285







342,285Other comprehensive income














14,898



14,898Issuance of 928 shares for
    exercise of options, including tax benefit of $3,396


928



18,071











18,999Stock-based compensation






14,022











14,022Reimbursement, net of income taxes
    of $2,127






3,950











3,950Cash dividends declared,
    $0.375 per share










(41,786
)






(41,786
)Balance at December 31,
    2006

$
111,731


$
798,213


$
1,098,887


$
33,972


$
2,042,803    F-6




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
  Years Ended December 31,2006


2005


2004Cash flows from operating
    activities:Net earnings

$
342,285


$
191,192


$
162,699Adjustments to reconcile net
    earnings to net cash provided by operating activities:Change in premium, claims and
    other receivables


40,955



(6,094
)


70,411Change in reinsurance recoverables


192,049



(250,829
)


(198,536
)Change in ceded unearned premium


13,291



82,433



(17,422
)Change in loss and loss adjustment
    expense payable


136,520



705,688



548,349Change in reinsurance balances
    payable


(54,834
)


(49,772
)


(72,009
)Change in unearned premium


109,280



38,809



122,317Change in premium and claims
    payable, net of restricted cash


(126,027
)


(3,851
)


1,835Gain on sale of subsidiaries






(8,717
)


(6,317
)Change in trading portfolio


(19,919
)


(66,809
)


25,673Depreciation and amortization
    expense


14,980



14,647



16,139Stock-based compensation expense


13,126



2,645



2,233Other, net


(8,318
)


(25,352
)


13,331Cash provided by operating
    activities


653,388



623,990



668,703Cash flows from investing
    activities:Sales of fixed income securities


338,927



237,480



253,398Maturity or call of fixed income
    securities


247,072



186,075



154,357Cost of securities acquired


(1,389,984
)


(1,054,529
)


(935,053
)Change in short-term investments


129,919



(72,703
)


(160,229
)Sale of strategic investments


63,285



14,146



5,163Payments for purchase of
    subsidiaries, net of cash received


(45,722
)


(94,056
)


(93,543
)Sale of subsidiaries






21,116



Other, net


(11,971
)


(10,509
)


(4,895
)Cash used by investing
    activities


(668,474
)


(772,980
)


(780,802
)Cash flows from financing
    activities:Issuance of notes payable, net of
    costs


140,000



46,528



29,000Payments on notes payable


(140,616
)


(48,181
)


(40,176
)Sale of common stock, net of costs


18,999



186,103



116,776Dividends paid


(38,923
)


(27,644
)


(19,984
)Other


9,981



(3,814
)


Cash provided by (used by)
    financing activities


(10,559
)


152,992



85,616Net increase (decrease) in cash


(25,645
)


4,002



(26,483
)Cash at beginning of year


73,935



69,933



96,416Cash at end of year

$
48,290


$
73,935


$
69,933    F-7




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (tables in thousands, except per share data)
  (1)
    General
    Information and Significant Accounting and Reporting
    Policies          Basis
    of Presentation
     F-8




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    Investments
        other-than-temporary, other-than-temporary other-than-temporary. other-than-temporary.
  Derivative
    Financial Instruments
    Net
    Earned Premium, Policy Acquisition Costs and Ceding
    Commissions
   F-9




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
       Fee
    and Commission Income
      Strategic
    Investments and Other Operating Income
    Premium,
    Claims and Other Receivables
   F-10




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    Loss
    and Loss Adjustment Expense Payable
    Reinsurance
    Goodwill
    and Intangible Assets
    Using Cash Flow Information and Present
    Value in Accounting Measurements.
    Cash
    and Short-term Investments
     F-11




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
      Restricted
    Cash and Cash Investments
    Foreign
    Currency
      Income
    Taxes
    Earnings
    Per Share
   F-12




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    Stock-Based
    Compensation
  Share-Based Payment Accounting for Stock Issued
    to Employees.
    Accounting for Stock Appreciation Rights and
    Other Variable Stock Option or Award Plans.
  Accounting for Certain Transactions
    involving Stock Compensation. and/or
  Accounting for Stock-Based Compensation, No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services.
 F-13




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    Large
    Loss Events
        Effect of Commutationsand Hurricanes2006


2005


2004


2006


2005


2004Gross incurred loss and
    loss adjustment expense

$
1,218,838


$
1,596,773


$
1,289,155


$



$
394,625


$
89,795Net incurred loss and loss
    adjustment expense


1,011,856



919,697



645,230



20,199



99,226



23,335Ceded earned premium


439,246



617,402



849,610







16,533



9,806Net earnings (loss)


342,285



191,192



162,699



(13,129
)


(75,171
)


(21,464
)   Stock
    Option Investigation
   F-14




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
       Recent
    Accounting Pronouncements
  Considering the
    Effects of Prior Year Misstatements when Quantifying
    Misstatements in Current Year Financial Statements,
  Accounting for
    Uncertainty in Income Taxes
  Fair Value
    Measurements The Fair Value Option for Financial Assets and
    Liabilities
 F-15




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    (2)  Acquisitions,
    Goodwill and Disposition
  Acquisitions
    Initial


Goodwill


DeductibleEffective Date


Consideration


Recognized


GoodwillAmerican Contractors Indemnity
    Company


January 31, 2004


$
46.8


$
10.5



NoRA&MCO Insurance Services


October 1, 2004



8.5



7.7



NoUnited States Surety Company


March 1, 2005



19.4



12.6



NoHCC International Insurance Company


July 1, 2005



24.6



17.4



NoPerico Life Insurance Company


November 30, 2005



20.0







YesPerico Ltd.


December 1, 2005



33.4



31.9



YesIllium Insurance Group


December 31, 2005



3.0



2.1



NoNovia Underwriters, Inc.


June 30, 2006



5.5



5.2



NoG.B. Kenrick &
    Associates, Inc.


July 1, 2006



18.0



16.7



NoAllianz Life Insurance Company
    Health Products Division


October 2, 2006



140.0



137.2



Yes        F-16




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
     Initial


Earnout through


Goodwill recognizedAcquisition date


consideration


December 31, 2006


at December 31, 2006HCC Global Financial Products, LLC


October 1, 2002


$
6.9


$
131.9


$
131.9Covenant Underwriters, Ltd. and
    Continental Underwriters Ltd. (CUL)


July 1, 2003



19.9



15.0



27.3     InsuranceCompany


Agency


Corporate


TotalBalance at December 31,
    2004

$
215,350


$
228,681


$



$
444,031Additions:Acquisitions


59,881



1,628







61,509Earnouts


24,162



7,922







32,084Transfer on reorganization


45,353



(45,353
)






Reduction for tax adjustment


(4,677
)










(4,677
)Balance at December 31,
    2005


340,069



192,878







532,947Additions:Acquisitions


151,717



7,005



3,323



162,045Earnouts


41,034



6,651







47,685Balance at December 31,
    2006

$
532,820


$
206,534


$
3,323


$
742,677   Disposition
   F-17




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    (3)
    Investments    Cost or


Gross


Gross


EstimatedAmortized


Unrealized


Unrealized


FairCost


Gain


Loss


ValueDecember 31,
    2006U.S. government

$
121,641


$
689


$
(750
)

$
121,580States, municipalities and
    political subdivisions


1,350,509



16,008



(4,815
)


1,361,702Corporate fixed income securities


334,750



765



(4,950
)


330,565Asset-backed and mortgage-backed
    securities


787,838



4,989



(6,785
)


786,042Foreign securities


414,080



214



(6,990
)


407,304Total fixed income
    securities

$
3,008,818


$
22,665


$
(24,290
)

$
3,007,193December 31,
    2005U.S. government

$
90,404


$
167


$
(847
)

$
89,724States, municipalities and
    political subdivisions


1,138,499



10,109



(6,634
)


1,141,974Corporate fixed income securities


381,917



340



(6,675
)


375,582Asset-backed and mortgage-backed
    securities


361,456



562



(6,646
)


355,372Foreign securities


304,863



2,412



(1,303
)


305,972Total fixed income
    securities

$
2,277,139


$
13,590


$
(22,105
)

$
2,268,624  F-18




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
     Less than 12 Months


12 Months or More


TotalUnrealized





Unrealized





UnrealizedFair Value


Losses


Fair Value


Losses


Fair Value


LossesDecember 31,
    2006U.S. government

$
6,892


$
(19
)

$
49,922


$
(731
)

$
56,814


$
(750
)States, municipalities and
    political subdivisions


188,704



(801
)


239,299



(4,014
)


428,003



(4,815
)Corporate fixed income securities


60,037



(236
)


194,020



(4,714
)


254,057



(4,950
)Asset-backed and mortgage-backed
    securities


207,133



(909
)


263,886



(5,876
)


471,019



(6,785
)Foreign securities


272,668



(4,340
)


92,152



(2,650
)


364,820



(6,990
)Total fixed income
    securities

$
735,434


$
(6,305
)

$
839,279


$
(17,985
)

$
1,574,713


$
(24,290
)December 31,
    2005U.S. government

$
50,108


$
(449
)

$
28,585


$
(398
)

$
78,693


$
(847
)States, municipalities and
    political subdivisions


464,533



(4,614
)


95,327



(2,020
)


559,860



(6,634
)Corporate fixed income securities


119,762



(2,175
)


194,057



(4,500
)


313,819



(6,675
)Asset-backed and mortgage-backed
    securities


162,251



(2,078
)


147,552



(4,568
)


309,803



(6,646
)Foreign securities


72,365



(832
)


43,465



(471
)


115,830



(1,303
)Total fixed income
    securities

$
869,019


$
(10,148
)

$
508,986


$
(11,957
)

$
1,378,005


$
(22,105
)   other-than-temporary
 F-19




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
      Amortized


EstimatedCost


Fair ValueDue in 1 year or less

$
150,222


$
149,192Due after 1 year through
    5 years


664,840



657,305Due after 5 years through
    10 years


595,230



593,783Due after 10 years through
    15 years


404,504



408,301Due after 15 years


406,184



412,570Securities with fixed maturities


2,220,980



2,221,151Asset-backed and mortgage-backed
    securities


787,838



786,042Total fixed income
    securities

$
3,008,818


$
3,007,193       2006


2005


2004Fixed income securities

$
112,878


$
77,842


$
55,929Short-term investments


30,921



21,208



9,735Other investments


14,178



3,615



1,366Total investment income


157,977



102,665



67,030Investment expense


(5,173
)


(3,814
)


(2,145
)Net investment income

$
152,804


$
98,851


$
64,885     Gains


Losses


NetYear ended December 31,
    2006Fixed income securities

$
886


$
(1,771
)

$
(885
)Other investments


93



(49
)


44Realized gain (loss)

$
979


$
(1,820
)

$
(841
)Year ended December 31,
    2005Fixed income securities

$
3,562


$
(1,475
)

$
2,087Other investments


156



(795
)


(639
)Realized gain (loss)

$
3,718


$
(2,270
)

$
1,448 F-20




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
   Gains


Losses


NetYear ended December 31,
    2004Fixed income securities

$
7,035


$
(1,088
)

$
5,947Other investments


64



(189
)


(125
)Realized gain (loss)

$
7,099


$
(1,277
)

$
5,822     2006


2005


2004Fixed income securities

$
6,890


$
(29,265
)

$
(9,288
)Strategic and other investments


(5,063
)


14,978



19,383Net unrealized investment gains
    (losses)

$
1,827


$
(14,287
)

$
10,095   (4)
    Reinsurance    Loss and LossWritten


Earned


AdjustmentPremium


Premium


ExpenseYear ended December 31,
    2006Primary business

$
1,867,908


$
1,790,636


$
990,800Reinsurance assumed


367,740



357,799



228,038Reinsurance ceded


(423,096
)


(439,246
)


(206,982
)Net amounts

$
1,812,552


$
1,709,189


$
1,011,856Year ended December 31,
    2005Primary business

$
1,768,284


$
1,694,446


$
1,329,931Reinsurance assumed


270,002



292,944



266,842Reinsurance ceded


(537,062
)


(617,402
)


(677,076
)Net amounts

$
1,501,224


$
1,369,988


$
919,697Year ended December 31,
    2004Primary business

$
1,674,075


$
1,557,806


$
966,163Reinsurance assumed


301,078



302,496



322,992Reinsurance ceded


(869,634
)


(849,610
)


(643,925
)Net amounts

$
1,105,519


$
1,010,692


$
645,230    F-21




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
      2006


2005Commutation receivable

$
100,000


$
Reinsurance recoverable on paid
    losses


96,727



93,837Reinsurance recoverable on
    outstanding losses


529,562



636,225Reinsurance recoverable on
    incurred but not reported losses


458,528



644,062Reserve for uncollectible
    reinsurance


(14,883
)


(12,141
)Total reinsurance
    recoverables

$
1,169,934


$
1,361,983     2006


2005Payables to reinsurers

$
268,079


$
291,826Letters of credit


326,204



350,135Cash deposits


61,002



64,150Total credits

$
655,285


$
706,111     2006


2005Loss and loss adjustment expense
    payable

$
3,097,051


$
2,813,720Reinsurance recoverable on
    outstanding losses


(529,562
)


(636,225
)Reinsurance recoverable on
    incurred but not reported losses


(458,528
)


(644,062
)Net reserves

$
2,108,961


$
1,533,433Unearned premium

$
920,350


$
807,109Ceded unearned premium


(226,125
)


(239,416
)Net unearned premium

$
694,225


$
567,693Deferred policy acquisition costs

$
182,410


$
156,253Deferred ceding commissions


(64,949
)


(67,886
)Net deferred policy acquisition
    costs

$
117,461


$
88,367  F-22




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
     Total


Total


NetReinsurer

Rating

Location

Recoverables


Credits


RecoverablesDecember 31,
    2006Hannover Rueckversicherungs AG

A

Germany

$
114,715


$
24,833


$
89,882Arch Reinsurance Ltd.

A

Bermuda


55,909



12,771



43,138Harco National Insurance Company

A−

Illinois


47,540



6,461



41,079Swiss Reinsurance America
    Corp.

A+

New York


46,828



6,580



40,248ACE Property & Casualty
    Insurance Co.

A+

Pennsylvania


42,289



3,885



38,404Everest Reinsurance Company

A+

Delaware


51,256



14,833



36,423Odyssey America Reinsurance
    Corp.

A

Connecticut


31,948



869



31,079Platinum Underwriters Reinsurance
    Co.

A

Maryland


31,313



681



30,632December 31,
    2005Hannover Rueckversicherungs AG

A

Germany

$
147,589


$
28,232


$
119,357Lloyds Syndicate Number 0033

A−

United Kingdom


43,756



681



43,075Arch Reinsurance Ltd.

A−

Bermuda


52,226



11,544



40,682Everest Reinsurance Company

A+

Delaware


53,344



13,741



39,603Odyssey America Reinsurance
    Corp.

A

Connecticut


39,973



3,474



36,499Swiss Reinsurance America
    Corp.

A+

New York


43,470



7,749



35,721Platinum Underwriters Reinsurance
    Co.

A

Maryland


38,159



4,422



33,737ACE Property & Casualty
    Insurance Co.

A+

Pennsylvania


31,139



2,036



29,103Harco National Insurance Company

A−

Illinois


29,873



3,657



26,216Transatlantic Reinsurance Company

A+

New York


26,661



1,331



25,330Lloyds Syndicate Number 0958

B

United Kingdom


26,332



1,091



25,241      F-23




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
       (5)
    Liability
    for Unpaid Loss and Loss Adjustment Expense    2006


2005


2004Reserves for loss and loss
    adjustment expense payable at beginning of year

$
2,813,720


$
2,089,199


$
1,525,313Less reinsurance recoverables


1,280,287



1,029,916



820,113Net reserves at beginning of year


1,533,433



1,059,283



705,200Net reserve addition from acquired
    businesses


146,811



12,491



11,647Incurred loss and loss adjustment
    expense:Provision for loss and loss
    adjustment expense for claims occurring in current year


1,018,382



894,303



614,752Increase (decrease) in estimated
    loss and loss adjustment expense for claims occurring in prior
    years


(6,526
)


25,394



30,478Incurred loss and loss adjustment
    expense


1,011,856



919,697



645,230Loss and loss adjustment expense
    payments for claims occurring during:Current year


360,803



285,814



161,117Prior years


222,336



172,224



141,677Loss and loss adjustment expense
    payments


583,139



458,038



302,794Net reserves at end of year


2,108,961



1,533,433



1,059,283Plus reinsurance recoverables


988,090



1,280,287



1,029,916Reserves for loss and loss
    adjustment expense at end of year

$
3,097,051


$
2,813,720


$
2,089,199    F-24




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
       (6)
    Notes Payable    2006


20051.30% Convertible Notes

$
124,977


$
125,0002.00% Convertible Exchange
    Notes


172,174



172,400$300.0 million Revolving
    Loan Facility






Other debt


11,736



12,143Total notes payable

$
308,887


$
309,543      F-25




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
          F-26




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    (7)
    Income
    Taxes      2006


2005


2004Statutory tax rate


35
%


35
%


35
%Federal tax on continuing
    operations at statutory rate

$
178,442


$
95,413


$
84,223Nontaxable municipal bond interest
    and dividends received deduction


(15,291
)


(12,267
)


(7,076
)Non-deductible compensation






969



775Other non deductible expenses


781



816



394State income taxes, net of federal
    tax benefit


3,820



3,591



2,962Foreign income taxes


22,548



15,024



12,639Foreign tax credit


(22,405
)


(14,981
)


(12,456
)Dividends received deduction on
    repatriated foreign earnings






(2,784
)


Other, net


(346
)


(1,604
)


479Income tax expense from
    continuing operations

$
167,549


$
84,177


$
81,940Effective tax rate, continuing
    operations


32.9
%


30.9
%


34.1
%Federal tax on discontinued
    operations at statutory rate

$



$
1,556


$
2,211State income taxes, net of federal
    tax benefit, and other






130



102Income tax expense on discontinued
    operations

$



$
1,686


$
2,313Effective tax rate, discontinued
    operations



%


37.9
%


36.6
%Total income tax
    expense

$
167,549


$
85,863


$
84,253Total effective tax
    rate


32.9
%


31.0
%


34.1
%  F-27




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
     2006


2005


2004Federal current

$
128,167


$
69,113


$
82,856Federal deferred


10,957



(5,485
)


(18,112
)Total federal


139,124



63,628



64,744State current


3,842



4,266



7,065State deferred


2,035



1,259



(2,508
)Total state


5,877



5,525



4,557Foreign current


24,665



15,155



11,462Foreign deferred


(2,117
)


(131
)


1,177Total foreign


22,548



15,024



12,639Income tax expense from
    continuing operations

$
167,549


$
84,177


$
81,940Federal current

$



$
3,528


$
1,898Federal deferred






(2,042
)


271Total federal






1,486



2,169State current






475



110State deferred






(275
)


34Total state






200



144Income tax expense from
    discontinued operations

$



$
1,686


$
2,313Total income tax
    expense

$
167,549


$
85,863


$
84,253  F-28




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
     2006


2005Excess of financial unearned
    premium over tax

$
34,638


$
32,932Effect of loss reserve discounting
    and salvage and subrogation accrual for tax


48,758



34,903Excess of financial accrued
    expenses over tax


9,621



21,501Allowance for bad debts, not
    deductible for tax


15,047



7,047Stock option compensation under
    SFAS 123(R) in excess of deduction for tax


4,375



1,063Federal tax net operating loss
    carryforwards


1,087



1,581State tax net operating loss
    carryforwards


3,227



3,910Foreign branch net operating loss
    carryforwards


388



3,244Valuation allowance


(7,822
)


(10,293
)Total deferred tax
    assets


109,319



95,888Unrealized gain on increase in
    value of securities available for sale (shareholders
    equity)


20,129



9,927Deferred policy acquisition costs,
    net of ceding commissions, deductible for tax


11,432



11,087Amortizable goodwill for tax


27,676



18,953Book basis in net assets of
    foreign subsidiaries in excess of tax


17,527



8,032Property and equipment
    depreciation and other items


8,421



6,519Disgorgement receivable


2,127



Total deferred tax
    liabilities


87,312



54,518Net deferred tax
    asset

$
22,007


$
41,370     2006


2005


2004Balance at beginning of year

$
10,293


$
17,358


$
17,444Increase due to acquisitions










611Reduction related to 2002
    acquisition






(5,511
)


Other


(2,471
)


(1,554
)


(697
)Balance at end of
    year

$
7,822


$
10,293


$
17,358    F-29




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
     (8)
    Shareholders
    Equity      AccumulatedUnrealized


Foreign


OtherInvestment


Currency


ComprehensiveGain (Loss)


Translation


IncomeBalance at December 31, 2003

$
19,344


$
5,567


$
24,911Net change for year


6,437



6,287



12,724Balance at December 31, 2004


25,781



11,854



37,635Net change for year


(8,862
)


(9,699
)


(18,561
)Balance at December 31, 2005


16,919



2,155



19,074Net change for year


1,099



13,799



14,898Balance at December 31,
    2006

$
18,018


$
15,954


$
33,972    F-30




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    (9)
    Earnings
    Per Share    2006


2005


2004Net earnings

$
342,285


$
191,192


$
162,699Weighted average common shares
    outstanding


111,309



105,463



97,257Dilutive effect of outstanding
    options (determined using the treasury stock method)


1,177



1,659



1,569Dilutive effect of convertible
    debt (determined using the treasury stock method)


4,250



2,315



Weighted average common shares
    and potential common shares outstanding


116,736



109,437



98,826Anti-dilutive stock options not
    included in treasury stock method computation


1,588



118



6   (10)
    Stock-Based
    Compensation        2006


2005


2004Fair value of options granted

$
7.20


$
8.90


$
6.19Risk free interest rate


4.7
%


4.0
%


3.4
%Expected volatility


22.0
%


32.0
%


32.0
%Expected dividend yield


1.1
%


1.1
%


1.0
%Expected option life


3.8 years



4.8 years



4.5 years  F-31




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
     Weighted-


Weighted-Average


Average


AggregateNumber


Exercise


Contractual


Intrinsicof Shares


Price


Life


ValueOutstanding, beginning of year


8,219


$
20.90Granted


867



31.99Exercised


(927
)


16.88Forfeited and expired


(978
)


24.78Outstanding, end of
    period


7,181



22.23



3.6 years


$
70,778Vested or expected to vest, end
    of period


6,796



22.11



3.6 years



67,854Exercisable, end of
    period


2,471



19.20



2.8 years



31,841        F-32




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    Accounting for Stock-Based
    Compensation
  2005


2004Reported net earnings

$
191,192


$
162,699Stock-based compensation included
    in reported net earnings, net of income taxes


2,114



1,920Stock-based compensation using
    fair value method, net of income taxes


(8,258
)


(6,140
)Pro forma net earnings

$
185,048


$
158,479Reported basic earnings per share

$
1.81


$
1.67Fair value stock-based compensation


(0.06
)


(0.04
)Pro forma basic earnings per share

$
1.75


$
1.63Reported diluted earnings per share

$
1.75


$
1.65Fair value stock-based compensation


(0.06
)


(0.05
)Pro forma diluted earnings per
    share

$
1.69


$
1.60   (11)
    Segment
    and Geographic Data   F-33




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
      Insurance





OtherCompany


Agency


Operations


Corporate


TotalYear ended December 31,
    2006Revenue:Domestic

$
1,536,675


$
65,866


$
75,077


$
6,198


$
1,683,816Foreign


357,092



34,387











391,479Inter-segment


25



79,795











79,820Total segment revenue

$
1,893,792


$
180,048


$
75,077


$
6,198



2,155,115Inter-segment eliminations


















(79,820
)Consolidated total
    revenue

















$
2,075,295Net earnings (loss):Domestic

$
205,024


$
32,281


$
48,844


$
(20,900
)

$
265,249Foreign


66,991



10,038











77,029Total segment net earnings
    (loss)

$
272,015


$
42,319


$
48,844


$
(20,900
)


342,278Inter-segment eliminations


















7Consolidated net
    earnings

















$
342,285Other items:Net investment income

$
137,896


$
9,484


$
2,610


$
2,814


$
152,804Depreciation and amortization


4,603



7,593



509



2,275



14,980Interest expense (benefit)


1,887



11,552



517



(2,560
)


11,396Capital expenditures


4,199



2,317



757



5,731



13,004Income tax expense (benefit)


129,857



25,483



23,645



(11,262
)


167,723Inter-segment eliminations


















(174
)Consolidated income tax expense on
    continuing operations

















$
167,549     F-34




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
   Insurance





OtherCompany


Agency


Operations


Corporate


TotalYear ended December 31,
    2005Revenue:Domestic

$
1,216,894


$
62,111


$
35,324


$
6,784


$
1,321,113Foreign


281,697



39,878











321,575Inter-segment


158



86,877











87,035Total segment revenue

$
1,498,749


$
188,866


$
35,324


$
6,784



1,729,723Inter-segment eliminations


















(87,035
)Consolidated total
    revenue

















$
1,642,688Net earnings:Domestic

$
119,634


$
31,158


$
22,605


$
352


$
173,749Foreign


6,488



7,294











13,782Total segment net
    earnings

$
126,122


$
38,452


$
22,605


$
352



187,531Inter-segment eliminations


















901Earnings from discontinued
    operations, net of income taxes


















2,760Consolidated net
    earnings

















$
191,192Other items:Net investment income

$
88,397


$
7,437


$
794


$
2,223


$
98,851Depreciation and amortization


4,825



7,381



459



1,982



14,647Interest expense (benefit)


445



9,173



699



(2,633
)


7,684Capital expenditures


2,134



3,046



716



4,937



10,833Income tax expense (benefit)


49,327



26,174



10,282



(2,034
)


83,749Inter-segment eliminations


















428Consolidated income tax expense on
    continuing operations

















$
84,177     F-35




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
   Insurance





OtherCompany


Agency


Operations


Corporate


TotalYear ended December 31,
    2004Revenue:Domestic

$
884,857


$
86,806


$
13,020


$
4,721


$
989,404Foreign


250,718



44,485











295,203Inter-segment


553



95,475











96,028Total segment revenue

$
1,136,128


$
226,766


$
13,020


$
4,721



1,380,635Inter-segment eliminations


















(96,028
)Consolidated total
    revenue

















$
1,284,607Net earnings (loss):Domestic

$
84,522


$
37,438


$
7,871


$
(4,243
)

$
125,588Foreign


24,764



16,208











40,972Total segment net earnings
    (loss)

$
109,286


$
53,646


$
7,871


$
(4,243
)

$
166,560Inter-segment eliminations


















(7,865
)Earnings from discontinued
    operations, net of income taxes


















4,004Consolidated net
    earnings

















$
162,699Other items:Net investment income

$
59,073


$
3,559


$
1,236


$
1,017


$
64,885Depreciation and amortization


4,568



9,729



531



1,311



16,139Interest expense (benefit)


856



8,491



768



(1,741
)


8,374Capital expenditures


3,451



1,984



16



2,885



8,336Income tax expense


51,404



31,440



2,964



1,625



87,433Inter-segment eliminations


















(5,493
)Consolidated income tax expense on
    continuing operations

















$
81,940    F-36




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
      2006


2005


2004Diversified financial products

$
728,861


$
531,136


$
310,809Group life, accident and health


591,070



504,382



343,913Aviation


152,886



136,197



127,248London market account


112,362



93,017



111,341Other specialty lines


123,981



97,721



69,089Discontinued lines


29



7,535



48,292Net earned premium

$
1,709,189


$
1,369,988


$
1,010,692Property and casualty

$
114,400


$
113,725


$
127,502Accident and health


22,731



18,903



56,300Fee and commission
    income

$
137,131


$
132,628


$
183,802     Insurance





OtherCompany


Agency


Operations


Corporate


TotalDecember 31,
    2006Domestic

$
4,598,206


$
499,871


$
135,391


$
220,665


$
5,454,133Foreign


1,624,625



551,374











2,175,999Total assets

$
6,222,831


$
1,051,245


$
135,391


$
220,665


$
7,630,132December 31,
    2005Domestic

$
3,981,574


$
634,263


$
170,620


$
152,652


$
4,939,109Foreign


1,464,306



625,385











2,089,691Total assets

$
5,445,880


$
1,259,648


$
170,620


$
152,652


$
7,028,800   (12)
    Commitments
    and Contingencies  Litigation
     F-37




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
         Civil Action
    No. 07-456;
    Bacas, derivatively on behalf of HCC Insurance Holdings, Inc.
    (HCC) v. Way et al.; In the United States District
    Court for the Southern District of Texas, Houston
    Division.
  Civil Action
    No. 07-550;
    International Brotherhood of Electrical Workers Local 98 Pension
    Fund, derivatively on behalf of nominal defendant HCC Insurance
    Holdings, Inc. v. Way et al.; In the United States
    District Court for the Southern District of Texas, Houston
    Division.
  Catastrophe
    Exposure
   F-38




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
    Indemnifications
      by-laws, by-laws,
  Terrorist
    Exposure
    Leases
   F-39




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
      Years ended December 31,2007

$
9,2022008


10,9542009


10,1132010


9,7202011


8,399Thereafter


36,755Total future minimum rental
    payments

$
85,143   (13)
    Related
    Party Transactions        (14)
    Statutory
    Information      2006


2005


2004Statutory policyholders
    surplus

$
1,342,054


$
1,110,268


$
844,851Statutory net income


303,758



112,231



85,843  F-40




---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (continued, tables in thousands, except per share data)
     (15)
    Supplemental
    Information    2006


2005


2004Cash received from commutations

$
12,750


$
180,789


$
79,462Income taxes paid


167,086



78,309



112,392Interest paid


9,387



6,168



7,219Dividends declared but not paid at
    year end


11,173



8,310



5,783     (16)
    Quarterly
    Financial Data (Unaudited)  Fourth Quarter


Third Quarter


Second Quarter


First Quarter2006


2005


2006


2005


2006


2005


2006


2005Total revenue

$
599,108


$
447,595


$
516,697


$
412,031


$
493,217


$
404,837


$
466,273


$
378,225Net earnings

$
80,742


$
65,036


$
93,257


$
7,412


$
89,144


$
63,356


$
79,142


$
55,388Basic earnings per share
    data:Earnings per share

$
0.72


$
0.60


$
0.84


$
0.07


$
0.80


$
0.60


$
0.71


$
0.54Weighted average shares outstanding


111,635



107,970



111,359



105,623



111,218



104,962



111,014



103,241Diluted earnings per share
    data:Earnings per share

$
0.69


$
0.57


$
0.80


$
0.07


$
0.76


$
0.59


$
0.68


$
0.52Weighted average shares outstanding


117,115



113,566



117,003



109,818



116,860



108,269



116,896



105,734      F-41




---



##### Table of Contents



SCHEDULE 1  HCC
    INSURANCE HOLDINGS, INC.SUMMARY OF INVESTMENTS
    OTHER THAN INVESTMENTS IN RELATED PARTIES(in thousands)
  December 31, 2006Column A

Column B


Column C


Column DAmount at WhichShown in theType of Investment

Cost


Value


Balance SheetFixed maturities:Bonds  United States
    government and government agencies and authorities

$
121,641


$
121,580


$
121,580Bonds  states,
    municipalities and political subdivisions


410,688



413,422



413,422Bonds  special revenue


939,821



948,280



948,280Bonds  corporate


334,750



330,565



330,565Asset-backed and mortgage-backed
    securities


787,838



786,042



786,042Bonds  foreign


414,080



407,304



407,304Total fixed maturities


3,008,818



3,007,193



3,007,193Equity securities:Common stocks  banks,
    trusts and insurance companies


63,367


$
71,161



71,161Total equity securities


63,367


$
71,161



71,161Short-term investments


714,685







714,685Other investments


120,083







134,956Total investments

$
3,906,953






$
3,927,995  S-1




---



##### Table of Contents



SCHEDULE 2
  HCC
    INSURANCE HOLDINGS, INC.CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    BALANCE SHEETS(in thousands)
  December 31,2006


2005ASSETSFixed income securities, at fair
    value (amortized cost: 2005  $31,023)

$



$
30,622Cash


167



3,610Short-term investments


19,892



38,182Investment in subsidiaries


2,187,461



1,790,774Intercompany loans to subsidiaries
    for acquisitions


208,008



184,706Receivable from subsidiaries


38,384



37,364Other assets


31,088



14,056Total assets

$
2,485,000


$
2,099,314LIABILITIES AND
    SHAREHOLDERS EQUITYPayable to subsidiaries

$
89,428


$
85,821Notes payable


297,151



297,400Deferred Federal income tax


21,205



13,548Accounts payable and accrued
    liabilities


34,413



12,110Total liabilities


442,197



408,879Total shareholders
    equity


2,042,803



1,690,435Total liabilities and
    shareholders equity

$
2,485,000


$
2,099,314   S-2




---



##### Table of Contents



SCHEDULE 2
  HCC
    INSURANCE HOLDINGS, INC.CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    STATEMENTS OF EARNINGS(in thousands)
  Years Ended December 31,2006


2005


2004Equity in earnings of subsidiaries

$
351,657


$
188,202


$
165,712Interest income from subsidiaries


8,196



6,799



6,531Net investment income


2,698



2,082



994Other operating income


1,130



525



Total revenue


363,681



197,608



173,237Interest expense


9,199



6,552



6,733Other operating expense


16,172



3,404



2,858Total expense


25,371



9,956



9,591Earnings before income tax expense


338,310



187,652



163,646Income tax expense (benefit)


(3,975
)


(3,540
)


947Net earnings

$
342,285


$
191,192


$
162,699   S-3




---



##### Table of Contents



SCHEDULE 2
  HCC
    INSURANCE HOLDINGS, INC.
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    STATEMENTS OF COMPREHENSIVE INCOME
    (in thousands)
  Years Ended December 31,2006


2005


2004Net earnings

$
342,285


$
191,192


$
162,699Other comprehensive income (loss):Investment gains (losses):Gains (losses) during the year,
    net of income tax charge (benefit) of $1,373 in 2006, $(129) in
    2005 and $12 in 2004


2,623



(239
)


21Less reclassification adjustment
    for losses included in net earnings, net of income tax benefit
    of $163 in 2006


303







Consolidated subsidiaries
    investment gains (losses) during the year, net of income tax
    charge (benefit) of $12,839 in 2006, $(2,817) in 2005 and $6,079
    in 2004


23,519



(4,018
)


10,934Less consolidated
    subsidiaries reclassification adjustment for gains
    included in net earnings, net of income tax charge of $13,647 in
    2006, $2,479 in 2005 and $2,433 in 2004


(25,346
)


(4,605
)


(4,518
)Foreign currency translation
    adjustment


13,799



(9,699
)


6,287Other comprehensive income (loss)


14,898



(18,561
)


12,724Comprehensive income

$
357,183


$
172,631


$
175,423   S-4




---



##### Table of Contents



SCHEDULE 2
  HCC
    INSURANCE HOLDINGS, INC.
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    STATEMENTS OF CASH FLOWS
    (in thousands)
  Years Ended December 31,2006


2005


2004Cash flows from operating
    activities:Net earnings

$
342,285


$
191,192


$
162,699Adjustments to reconcile net
    earnings to net cash provided by operating activities:Undistributed net income of
    subsidiaries


(272,409
)


(116,122
)


(133,916
)Change in accrued interest
    receivable added to intercompany loan balances


(7,788
)


(6,712
)


(6,544
)Change in accounts payable and
    accrued liabilities


5,788



(10,999
)


(660
)Tax benefit from exercise of stock
    options






6,168



2,969Other, net


(2,396
)


(4,754
)


4,680Cash provided by operating
    activities


65,480



58,773



29,228Cash flows from investing
    activities:Cash contributions to subsidiaries


(64,299
)


(162,872
)


(107,000
)Payments for purchase of
    subsidiaries, net of cash received


(23,455
)


(98,829
)


(48,975
)Change in short-term investments


18,290



(7,176
)


29,817Sales and maturities of fixed
    income securities


30,587



6,200



Cost of securities acquired


(10,626
)


(3,400
)


(33,679
)Change in receivable/payable from
    subsidiaries






33,303



43,295Intercompany loans to subsidiaries
    for acquisitions


(32,708
)


(39,685
)


(62,523
)Payments on intercompany loans to
    subsidiaries


33,461



56,610



54,694Cash used by investing
    activities


(48,750
)


(215,849
)


(124,371
)Cash flows from financing
    activities:Proceeds from notes payable


140,000



36,000



29,000Payments on notes payable


(140,249
)


(36,015
)


(29,009
)Sale of common stock, net of costs


18,999



186,103



116,776Dividends paid


(38,923
)


(27,644
)


(19,984
)Cash provided by (used by)
    financing activities


(20,173
)


158,444



96,783Net increase (decrease) in cash


(3,443
)


1,368



1,640Cash at beginning of year


3,610



2,242



602Cash at end of year

$
167


$
3,610


$
2,242   S-5




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC.
  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
 NOTES TO
    CONDENSED FINANCIAL INFORMATION
  (1)
    The accompanying condensed financial information should be read
    in conjunction with the consolidated financial statements and
    the related notes thereto of HCC Insurance Holdings, Inc. and
    Subsidiaries. Investments in subsidiaries are accounted for
    using the equity method. Certain amounts in the 2005 and 2004
    condensed financial information have been reclassified to
    conform with the 2006 presentation. Such reclassifications had
    no effect on shareholders equity, net earnings or cash
    flows.(2)
    Intercompany loans to subsidiaries are demand notes issued
    primarily to fund the cash portion of acquisitions. They bear
    interest at a rate set by management, which approximates the
    interest rate charged for similar debt. At December 31,
    2006, the interest rate on intercompany loans was 6.75%.(3)
    Other operating expense includes $12.0 million related to the
    stock option investigation discussed in Note 1 in the
    consolidated financial statements.(4)
    Dividends received from subsidiaries were $79.2 million,
    $72.1 million and $31.8 million in 2006, 2005 and
    2004, respectively. S-6




---



##### Table of Contents



SCHEDULE 3
  HCC
    INSURANCE HOLDINGS, INC.
  SUPPLEMENTARY
    INSURANCE INFORMATION
 (in
    thousands)
  Column A

Column B


Column C


Column D


Column F


Column G


Column H


Column I


Column J


Column K(1)


(1)





(2)








(3)December 31,


Years ended December 31,Deferred


Future Policy











Benefits, Claims,Policy


Benefits, Losses,











Losses and


Amortization of


OtherAcquisition


Claims and Loss


Unearned


Premium


Net Investment


Settlement


Deferred Policy


Operating


PremiumSegments

Costs


Expenses


Premiums


Revenue


Income


Expenses


Acquisition Costs


Expenses


Written2006Insurance Company

$
117,461


$
3,167,974


$
920,350


$
1,709,189


$
137,896


$
1,011,856


$
319,885


$
110,438


$
1,812,552Agency


















9,484











70,151Other Operations


















2,610











1,839Corporate


















2,814











39,896Total

$
117,461


$
3,167,974


$
920,350


$
1,709,189


$
152,804


$
1,011,856


$
319,885


$
222,324


$
1,812,5522005Insurance Company

$
88,367


$
2,887,135


$
807,109


$
1,369,988


$
88,397


$
919,697


$
261,708


$
84,838


$
1,501,224Agency


















7,437











84,107Other Operations


















794











1,732Corporate


















2,223











10,313Total

$
88,367


$
2,887,135


$
807,109


$
1,369,988


$
98,851


$
919,697


$
261,708


$
180,990


$
1,501,2242004Insurance Company

$
45,719


$
2,163,826


$
741,706


$
1,010,692


$
59,073


$
645,230


$
222,323


$
67,138


$
1,105,519Agency


















3,559











91,617Other Operations


















1,236











1,416Corporate


















1,017











7,874Total

$
45,719


$
2,163,826


$
741,706


$
1,010,692


$
64,885


$
645,230


$
222,323


$
168,045


$
1,105,519     (1)
    
    Columns C and D are shown ignoring the effects of reinsurance.(2)
    
    Net investment income was allocated to the subsidiary, and
    therefore the segment, on which the related investment asset was
    recorded.(3)
    
    Other operating expenses is after all corporate expense
    allocations have been charged or credited to the individual
    segments.   S-7




---



##### Table of Contents



SCHEDULE 4
  HCC
    INSURANCE HOLDINGS, INC.
  REINSURANCE
 (in
    thousands)
  Column A

Column B


Column C


Column D


Column E


Column FAssumed from





Percent ofCeded to Other


Other





AmountPrimary Amount


Companies


Companies


Net Amount


Assumed to NetYear ended December 31,
    2006Life insurance in force

$
1,371,637


$
374,753


$



$
996,884




%Earned premium:Property and liability insurance

$
1,246,650


$
408,632


$
255,303


$
1,093,321



23
%Accident and health insurance


543,986



30,614



102,496



615,868



17
%Total

$
1,790,636


$
439,246


$
357,799


$
1,709,189



21
%Year ended December 31,
    2005Life insurance in force

$
1,359,529


$
404,228


$



$
955,301




%Earned premium:Property and liability insurance

$
1,116,713


$
546,275


$
266,651


$
837,089



32
%Accident and health insurance


577,733



71,127



26,293



532,899



5
%Total

$
1,694,446


$
617,402


$
292,944


$
1,369,988



21
%Year ended December 31,
    2004Life insurance in force

$
1,498,559


$
435,808


$



$
1,062,751




%Earned premium:Property and liability insurance

$
968,444


$
615,780


$
274,124


$
626,788



44
%Accident and health insurance


589,362



233,830



28,372



383,904



7
%Total

$
1,557,806


$
849,610


$
302,496


$
1,010,692



30
%  S-8




---



##### Table of Contents



SCHEDULE 5
  HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  VALUATION
    AND QUALIFYING ACCOUNTS
 (in
    thousands)
  2006


2005


2004Reserve for uncollectible
    reinsurance:Balance at beginning of year

$
12,141


$
20,425


$
14,991Provision charged to expense


5,649



5,750



6,616Reclassification to
    indemnification liability






(9,000
)


Amounts written off


(2,907
)


(5,034
)


(1,182
)Balance at end of
    year

$
14,883


$
12,141


$
20,425Allowance for doubtful accounts:Balance at beginning of year

$
7,394


$
4,911


$
2,549Acquisition of subsidiaries










1,931Provision charged to expense


576



1,917



546Amounts (written off) recovered
    and other


(1,456
)


566



(115
)Balance at end of
    year

$
6,514


$
7,394


$
4,911  S-9




---



##### Table of Contents



INDEX TO
    EXHIBITS
  (Items denoted by a letter are incorporated by reference to
    other documents previously filed with the Securities and
    Exchange Commission as set forth at the end of this index. Items
    not denoted by a letter are being filed herewith.)
  ExhibitNumberA3
.1



Restated Certificate of
    Incorporation and Amendment of Certificate of Incorporation of
    HCC Insurance Holdings, Inc., filed with the Delaware Secretary
    of State on July 23, 1996 and May 21, 1998,
    respectively.B3
.2



Bylaws of HCC Insurance Holdings,
    Inc., as amended.B4
.1



Specimen of Common Stock
    Certificate, $1.00 par value, of HCC Insurance Holdings,
    Inc.C4
.2



Indenture dated August 23,
    2001 between HCC Insurance Holdings, Inc. and First Union
    National Bank related to Debt Securities (Senior Debt).C4
.3



First Supplemental Indenture dated
    August 23, 2001 between HCC Insurance Holdings, Inc. and
    First Union National Bank related to 2.00% Convertible
    Notes Due 2021.D4
.4



Second Supplemental Indenture
    dated March 28, 2003 between HCC Insurance Holdings, Inc.
    and Wachovia Bank, National Association (as successor to First
    Union National Bank) related to 1.30% Convertible Notes Due
    2023.E4
.5



First Amendment to Second
    Supplemental Indenture dated December 22, 2004 between HCC
    Insurance Holdings, Inc. and Wachovia Bank, National Association
    related to 1.30% Convertible Notes Due 2023.F4
.6



Third Supplemental Indenture dated
    November 23, 2004 between HCC Insurance Holdings, Inc. and
    Wachovia Bank, National Association related to
    2.00% Convertible Notes Due 2021.G10
.1



Loan Agreement ($200,000,000
    Revolving Loan Facility) dated November 24, 2004 among
    HCC Insurance Holdings, Inc.; Wells Fargo Bank, National
    Association; Southwest Bank of Texas, N.A.; Citibank, N.A.;
    Royal Bank of Scotland and Bank of New York.H10
.2



First Amendment to Loan Agreement
    dated as of December 19, 2006 by and among HCC Insurance
    Holdings, Inc. and Wells Fargo Bank, National Association,
    Citibank, N.A., Wachovia Bank, National Association, Royal Bank
    of Scotland, Amegy Bank National Association and Bank of New
    York.I10
.3



Master Agreement dated
    August 3, 2006 by and among Allianz Life Insurance Company
    of North America, Allianz Life Insurance Company of New York and
    HCC Life Insurance Company.J10
.4



HCC Insurance Holdings, Inc. 1995
    Flexible Incentive Plan, as amended and restated.J10
.5



HCC Insurance Holdings, Inc. 1997
    Flexible Incentive Plan, as amended and restated.J10
.6



HCC Insurance Holdings, Inc. 1996
    Nonemployee Director Stock Option Plan, as amended and restated.K10
.7



HCC Insurance Holdings, Inc. 2001
    Flexible Incentive Plan, as amended and restated.L10
.8



Form of Incentive Stock Option
    Agreement under the HCC Insurance Holdings, Inc. 2001 Flexible
    Incentive Plan.M10
.9



HCC Insurance Holdings, Inc. 2004
    Flexible Incentive Plan.F10
.10



Form of Incentive Stock Option
    Agreement under the HCC Insurance Holdings, Inc. 2004 Incentive
    Plan.F10
.11



Amended and Restated Employment
    Agreement effective at November 10, 2004, between HCC
    Insurance Holdings, Inc. and Stephen L. Way.N10
.12



HCC Insurance Holdings, Inc.
    nonqualified deferred compensation plan for Stephen L. Way
    effective January 1, 2003.I10
.13



Employment Agreement effective
    March 23, 2006 between HCC Insurance Holdings, Inc. and
    John N. Molbeck, Jr.O10
.14



Employment Agreement effective at
    March 1, 2005, between HCC Insurance Holdings, Inc. and
    Craig J. Kelbel.L10
.15



Employment Agreement effective at
    June 3, 2002, between HCC Insurance Holdings, Inc. and
    Michael J. Schell.P10
.16



Employment Agreement effective at
    January 1, 2002, between HCC Insurance Holdings, Inc. and
    Edward H. Ellis, Jr.




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##### Table of Contents



ExhibitNumberQ10
.17



First Amendment to Employment
    Agreement effective as of April 15, 2006 between HCC
    Insurance Holdings, Inc. and Edward H. Ellis, Jr.I10
.18



Employment Agreement effective as
    of April 1, 2006 between HCC Insurance Holdings, Inc. and
    Christopher L. Martin.R10
.19



Consulting Agreement and
    Resignation effective as of November 17, 2006 by and
    between HCC Insurance Holdings, Inc. and Stephen L. Way.10
.20



Amendment No. 1 to Consulting
    Agreement and Resignation effective as of February 21, 2007
    by and between HCC Insurance Holdings, Inc. and Stephen L. Way.S10
.21



Separation Agreement and Release
    effective as of November 17, 2006 by and between HCC
    Insurance Holdings, Inc. and Christopher L. Martin.12




Statement Regarding Computation of
    Ratios.21




Subsidiaries of HCC Insurance
    Holdings, Inc.23




Consent of Independent Registered
    Public Accounting Firm  PricewaterhouseCoopers LLP
    dated February 28, 2007.24




Powers of Attorney.31
.1



Certification by Chief Executive
    Officer.31
.2



Certification by Chief Financial
    Officer.32
.1



Certification with respect to
    Annual Report of HCC Insurance Holdings, Inc.     A
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Registration Statement on
    Form S-8
    (Registration
    No. 333-61687)
    filed August 17, 1998.B
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Registration Statement on
    Form S-1
    (Registration
    No. 33-48737)
    filed October 27, 1992.C
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated August 19, 2001.D
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated March 25, 2003.E
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated December 22, 2004.F
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K
    for the year ended December 31, 2004.G
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    filed December 1, 2004.H
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated December 19, 2006.I
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-Q
    for the quarter ended June 30, 2006.J
    
    Incorporated by reference to Exhibits to HCC Insurance Holdings,
    Inc.s
    Form 10-K
    for the year ended December 31, 1999.K
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Definitive Proxy Statement for the
    May 22, 2002 Annual Meeting of Shareholders filed
    April 26, 2002.L
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K
    for the year ended December 31, 2002.M
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Definitive Proxy Statement for the
    May 13, 2004 Annual Meeting of Shareholders filed
    April 16, 2004.N
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K
    for the year ended December 31, 2003.




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##### Table of Contents



O
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-Q
    for the quarter ended March 31, 2005.P
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K
    for the year ended December 31, 2001.Q
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated April 10, 2006.R
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated November 17, 2006.S
    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated November 28, 2006.