##### 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.    
| 
|  |  | For the fiscal year ended December 31, 2005                                                  
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.

Commission file number 001-13790


HCC Insurance Holdings, Inc.


(Exact name of registrant as specified in its charter)


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


þ o


o þ


þ o


S-K 10-K 10-K. o


12b-2


þ o o


12b-2 o þ






DOCUMENTS INCORPORATED BY REFERENCE:


10-K










---



##### 










HCC INSURANCE HOLDINGS, INC.


TABLE OF CONTENTS


|                                             |  |                                                                                                                          |    |      |    | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                                             |  |                                                                                                                          |    | Page |   
|                                             |  |                                                                                                                          |    |      |   
|PART I.                                     
|Item 1.                                      |  | Business                                                                                                                 |    |      | 3  | 
|Item 1A.                                     |  | Risk Factors                                                                                                             |    |      | 26 | 
|Item 1B.                                     |  | Unresolved Staff Comments                                                                                                |    |      | 31 | 
|Item 2.                                      |  | Properties                                                                                                               |    |      | 32 | 
|Item 3.                                      |  | Legal Proceedings                                                                                                        |    |      | 32 | 
|Item 4.                                      |  | Submission of Matters to a Vote of Security
    Holders                                                                  |    |      | 32 | 
|PART II.                                    
|Item 5.                                      |  | Market for the Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities |    |      | 33 | 
|Item 6.                                      |  | Selected Financial Data                                                                                                  |    |      | 34 | 
|Item 7.                                      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                |    |      | 36 | 
|Item 7A.                                     |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                           |    |      | 61 | 
|Item 8.                                      |  | Financial Statements and Supplementary
    Data                                                                          |    |      | 62 | 
|Item 9.                                      |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosures                                |    |      | 62 | 
|Item 9A.                                     |  | Controls and Procedures                                                                                                  |    |      | 62 | 
|Item 9B.                                     |  | Other Information                                                                                                        |    |      | 62 | 
|PART III.                                   
|Item 10.                                     |  | Directors and Executive Officers of the
    Registrant                                                                   |    |      | 62 | 
|Item 11.                                     |  | Executive Compensation                                                                                                   |    |      | 63 | 
|Item 12.                                     |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters                       |    |      | 63 | 
|Item 13.                                     |  | Certain Relationships and Related
    Transactions                                                                       |    |      | 63 | 
|Item 14.                                     |  | Principal Accountant Fees and Services                                                                                   |    |      | 63 | 
|PART IV.                                    
|Item 15.                                     |  | Exhibits and Financial Statement
    Schedules                                                                           |    |      | 63 | 
|SIGNATURES                                   |  |                                                                                                                          | 64 |     
|Statement re Computation of Ratios          
|Form of Code of Ethics Statement            
|Subsidiaries of the Company                 
|Consent of PricewaterhouseCoopers LLP       
|Powers of Attorney                          
|Certification of CEO Pursuant to Section 302
|Certification of CFO Pursuant to Section 302
|Certification Pursuant to Section 906       



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;
|
| |  | the effects of emerging claim and coverage issues;                                                                  

1



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##### Table of Contents





| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | the effects of extensive governmental regulation of the
    insurance industry;                             
|
| |  | potential credit risk with brokers;                                                                         
|
| |  | 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; and                                                                 
|
| |  | failures of our information technology systems, which could
    adversely affect our business.              

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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PART I







|        |         
|------- | --------
|Item 1. | Business

Business Overview


690-7300. www.hcc.com. 10-K 10-Q 8-K












| |   |                                
| | - | -------------------------------
| |  | Diversified financial products 
| |  | Group life, accident and health
| |  | Aviation                       
| |  | London market account          
| |  | Other specialty lines          



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Our Strategy










4



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| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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






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Recent Disposition




Insurance Company Operations




| |                  
| | -----------------
| | Lines of Business



|                                |                             |      |         |           |      |  |    |      |   |   |         |           |  |  |    |     |   |   |         |           |  |  |    |     |  
|------------------------------- | --------------------------- | ---- | ------- | --------- | ---- |  | -- | ---- | - | - | ------- | --------- |  |  | -- | --- | - | - | ------- | --------- |  |  | -- | --- | -
|                                |                             | 2005 |         |           | 2004 |  |    | 2003 |  
|                                |                             |      |         |           |      |  |    |      |  
|Diversified financial products  |                             | $    | 908,526 |           |      |  | 45 | %    |   | $ | 857,299 |           |  |  | 43 | %   |   | $ | 553,501 |           |  |  | 32 | %  
|Group life, accident and health |                             |      | 593,382 |           |      |  | 29 |      |   |   | 584,747 |           |  |  | 30 |     |   |   | 565,494 |           |  |  | 33 |    
|Aviation                        |                             |      | 210,530 |           |      |  | 10 |      |   |   | 204,963 |           |  |  | 10 |     |   |   | 214,718 |           |  |  | 12 |    
|London market account           |                             |      | 144,425 |           |      |  | 7  |      |   |   | 178,950 |           |  |  | 9  |     |   |   | 223,149 |           |  |  | 13 |    
|Other specialty lines           |                             |      | 176,139 |           |      |  | 9  |      |   |   | 133,964 |           |  |  | 7  |     |   |   | 73,475  |           |  |  | 4  |    
|Discontinued lines of business  |                             |      | 5,284   |           |      |  |   |      |   |   | 15,230  |           |  |  | 1  |     |   |   | 109,557 |           |  |  | 6  |    
|                                |                             |      |         |           |      |  |    |      |   |   |         |           |  |  |    |     |   |  
|                                | Total gross written premium |      | $       | 2,038,286 |      |  |    | 100  | % |   | $       | 1,975,153 |  |  |    | 100 | % |   | $       | 1,739,894 |  |  |    | 100 | %
|                                |                             |      |         |           |      |  |    |      |   |   |         |           |  |  |    |     |   |  

6



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|                                |                           |      |         |           |      |  |    |      |   |   |         |           |  |  |    |     |   |   |         |         |  |  |    |     |  
|------------------------------- | ------------------------- | ---- | ------- | --------- | ---- |  | -- | ---- | - | - | ------- | --------- |  |  | -- | --- | - | - | ------- | ------- |  |  | -- | --- | -
|                                |                           | 2005 |         |           | 2004 |  |    | 2003 |  
|                                |                           |      |         |           |      |  |    |      |  
|Diversified financial products  |                           | $    | 675,942 |           |      |  | 45 | %    |   | $ | 404,870 |           |  |  | 37 | %   |   | $ | 183,560 |         |  |  | 21 | %  
|Group life, accident and health |                           |      | 502,805 |           |      |  | 34 |      |   |   | 343,996 |           |  |  | 31 |     |   |   | 299,913 |         |  |  | 35 |    
|Aviation                        |                           |      | 130,743 |           |      |  | 9  |      |   |   | 144,687 |           |  |  | 13 |     |   |   | 99,447  |         |  |  | 12 |    
|London market account           |                           |      | 78,809  |           |      |  | 5  |      |   |   | 107,509 |           |  |  | 10 |     |   |   | 155,987 |         |  |  | 18 |    
|Other specialty lines           |                           |      | 109,106 |           |      |  | 7  |      |   |   | 83,980  |           |  |  | 7  |     |   |   | 36,837  |         |  |  | 4  |    
|Discontinued lines of business  |                           |      | 3,819   |           |      |  |   |      |   |   | 20,477  |           |  |  | 2  |     |   |   | 89,758  |         |  |  | 10 |    
|                                |                           |      |         |           |      |  |    |      |   |   |         |           |  |  |    |     |   |  
|                                | Total net written premium |      | $       | 1,501,224 |      |  |    | 100  | % |   | $       | 1,105,519 |  |  |    | 100 | % |   | $       | 865,502 |  |  |    | 100 | %
|                                |                           |      |         |           |      |  |    |      |   |   |         |           |  |  |    |     |   |  



|                                |                                                  |      |    |    |      |  |    |      |   |  |    |    |  
|------------------------------- | ------------------------------------------------ | ---- | -- | -- | ---- |  | -- | ---- | - |  | -- | -- | -
|                                |                                                  | 2005 |    |    | 2004 |  |    | 2003 |  
|                                |                                                  |      |    |    |      |  |    |      |  
|Diversified financial products  |                                                  |      | 74 | %  |      |  | 47 | %    |   |  | 33 | % 
|Group life, accident and health |                                                  |      | 85 |    |      |  | 59 |      |   |  | 53 |   
|Aviation                        |                                                  |      | 62 |    |      |  | 71 |      |   |  | 46 |   
|London market account           |                                                  |      | 55 |    |      |  | 60 |      |   |  | 70 |   
|Other specialty lines           |                                                  |      | 62 |    |      |  | 63 |      |   |  | 50 |   
|                                |                                                  |      |    |    |      |  |    |      |  
|                                | Continuing lines of business percentage retained |      |    | 74 | %    |  |    | 55   | % |  |    | 48 | %
|                                |                                                  |      |    |    |      |  |    |      |  



| |             
| | ------------
| | Underwriting





| |                               
| | ------------------------------
| | Diversified Financial Products





| |   |                                   
| | - | ----------------------------------
| |  | directors and officers liability
| |  | employment practices liability    
| |  | mortgage guaranty                 
| |  | professional indemnity            
| |  | residual value insurance          
| |  | surety and credit                 
| |  | other financial products          



7



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| |                                
| | -------------------------------
| | Group Life, Accident and Health









| |         
| | --------
| | 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                  



8



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London Market Account


non-U.S.


|                    |                                                 |      |        |        |      |   |        |         |  |   |        |         | 
|------------------- | ----------------------------------------------- | ---- | ------ | ------ | ---- | - | ------ | ------- |  | - | ------ | ------- | 
|                    |                                                 | 2005 |        |        | 2004 |   |        | 2003    | 
|                    |                                                 |      |        |        |      |   |        |         | 
|Marine              |                                                 | $    | 23,799 |        |      | $ | 19,537 |         |  | $ | 14,552 |        
|Energy              |                                                 |      | 15,621 |        |      |   | 26,258 |         |  |   | 40,065 |        
|Property            |                                                 |      | 18,379 |        |      |   | 19,613 |         |  |   | 24,857 |        
|Accident and health |                                                 |      | 21,010 |        |      |   | 42,101 |         |  |   | 76,513 |        
|                    |                                                 |      |        |        |      |   |        |         | 
|                    | Total London market account net written premium |      | $      | 78,809 |      |   | $      | 107,509 |  |   | $      | 155,987 | 
|                    |                                                 |      |        |        |      |   |        |         | 







| |   |                                       
| | - | --------------------------------------
| |  | drilling rigs                         
|
| |  | gas production and gathering platforms
|
| |  | natural gas facilities                
|
| |  | petrochemical plants                  
|
| |  | pipelines                             
|
| |  | refineries                            







| |   |                  
| | - | -----------------
| |  | factories        
|
| |  | hotels           
|
| |  | industrial plants
|
| |  | office buildings 
|
| |  | retail locations 
|
| |  | utilities        



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| |                      
| | ---------------------
| | Other Specialty Lines





| |                              
| | -----------------------------
| | Principal Insurance Companies



| |                         
| | ------------------------
| | Houston Casualty Company





| |                                
| | -------------------------------
| | Houston Casualty Company-London





| |                                 
| | --------------------------------
| | U.S. Specialty Insurance Company





| |                           
| | --------------------------
| | HCC Life Insurance Company



10



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| |                         
| | ------------------------
| | Avemco Insurance Company





| |                                       
| | --------------------------------------
| | American Contractors Indemnity Company





| |           
| | ----------
| | HCC Europe





| |                        
| | -----------------------
| | HCC Reinsurance Company





| |                                
| | -------------------------------
| | HCC Specialty Insurance Company





| |                             
| | ----------------------------
| | United States Surety Company





| |                              
| | -----------------------------
| | Perico Life Insurance Company



11



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| |                                    
| | -----------------------------------
| | HCC International Insurance Company



Underwriting Agency Operations






| |                              
| | -----------------------------
| | Professional Indemnity Agency





| |                           
| | --------------------------
| | HCC Specialty Underwriters





| |                              
| | -----------------------------
| | HCC Global Financial Products





| |                                   
| | ----------------------------------
| | HCC Diversified Financial Products



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| |                      
| | ---------------------
| | Covenant Underwriters





| |                              
| | -----------------------------
| | HCC Indemnity Guaranty Agency





| |                       
| | ----------------------
| | Illium Insurance Group



Reinsurance and Insurance Broker Operations






| |                  
| | -----------------
| | Rattner Mackenzie





| |                         
| | ------------------------
| | Continental Underwriters





| |                    
| | -------------------
| | HCC Risk Management



Other Operations




13



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Operating Ratios




| |                         
| | ------------------------
| | Premium to Surplus Ratio



|                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                          |  | 2005 |           |   | 2004 |   |           | 2003 |  |   | 2002      |   |  | 2001 |          
|                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |          
|Gross written premium                     |  | $    | 2,049,116 |   |      | $ | 1,992,361 |      |  | $ | 1,746,413 |   |  | $    | 1,163,397 |   |  | $ | 1,014,833 |  
|Net written premium                       |  |      | 1,495,931 |   |      |   | 1,121,343 |      |  |   | 867,795   |   |  |      | 545,475   |   |  |   | 371,409   |  
|Policyholders surplus                    |  |      | 1,110,268 |   |      |   | 844,851   |      |  |   | 591,889   |   |  |      | 523,807   |   |  |   | 401,393   |  
|Gross written premium ratio               |  |      | 184.6     | % |      |   | 235.8     | %    |  |   | 295.1     | % |  |      | 222.1     | % |  |   | 252.8     | %
|Gross written premium industry average(1) |  |      | *         |   |      |   | 201.6     | %    |  |   | 219.3     | % |  |      | 244.4     | % |  |   | 210.8     | %
|Net written premium ratio                 |  |      | 134.7     | % |      |   | 132.7     | %    |  |   | 146.6     | % |  |      | 104.1     | % |  |   | 92.5      | %
|Net written premium industry average(1)   |  |      | *         |   |      |   | 108.5     | %    |  |   | 117.4     | % |  |      | 130.3     | % |  |   | 112.0     | %






|    |                                
|--- | -------------------------------
|(1) | Source: A.M. Best Company, Inc.
|   
|*   | Not available                  





| |                      
| | ---------------------
| | Combined Ratio  GAAP



|                      |  |      |      |   |      |  |      |      |  |  |      |   |  |      |      |   |  |  |       |  
|--------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | - |  | ---- | ---- | - |  |  | ----- | -
|                      |  | 2005 |      |   | 2004 |  |      | 2003 |  |  | 2002 |   |  | 2001 |     
|                      |  |      |      |   |      |  |      |      |  |  |      |   |  |      |     
|Loss ratio            |  |      | 67.2 | % |      |  | 63.8 | %    |  |  | 66.2 | % |  |      | 60.6 | % |  |  | 78.0  | %
|Expense ratio         |  |      | 25.9 |   |      |  | 26.9 |      |  |  | 24.8 |   |  |      | 25.4 |   |  |  | 25.7  |  
|                      |  |      |      |   |      |  |      |      |  |  |      |   |  |      |     
|Combined ratio  GAAP |  |      | 93.1 | % |      |  | 90.7 | %    |  |  | 91.0 | % |  |      | 86.0 | % |  |  | 103.7 | %
|                      |  |      |      |   |      |  |      |      |  |  |      |   |  |      |     

14



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| |                           
| | --------------------------
| | Combined Ratio  Statutory



|                           |  |      |      |   |      |  |      |      |  |  |       |   |  |      |       |   |  |  |       |  
|-------------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ----- | - |  | ---- | ----- | - |  |  | ----- | -
|                           |  | 2005 |      |   | 2004 |  |      | 2003 |  |  | 2002  |   |  | 2001 |      
|                           |  |      |      |   |      |  |      |      |  |  |       |   |  |      |      
|Loss ratio                 |  |      | 67.1 | % |      |  | 64.3 | %    |  |  | 66.8  | % |  |      | 62.0  | % |  |  | 78.0  | %
|Expense ratio              |  |      | 25.5 |   |      |  | 26.7 |      |  |  | 23.0  |   |  |      | 23.9  |   |  |  | 23.8  |  
|                           |  |      |      |   |      |  |      |      |  |  |       |   |  |      |      
|Combined ratio  Statutory |  |      | 92.6 | % |      |  | 91.0 | %    |  |  | 89.8  | % |  |      | 85.9  | % |  |  | 101.8 | %
|                           |  |      |      |   |      |  |      |      |  |  |       |   |  |      |      
|Industry average           |  |      | *    |   |      |  | 98.3 | %    |  |  | 100.1 | % |  |      | 107.5 | % |  |  | 115.9 | %




| |   |              
| | - | -------------
| | * | Not available



Reserves












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|                                                                         |                   |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         | 
|------------------------------------------------------------------------ | ----------------- | ----------------- |  | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | - | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | - | -------- | --------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                         |                   |                   |  | 2005 |           |           | 2004      |   |           | 2003      |           |   | 2002      |           |           | 2001 |           |           | 2000      |   |           | 1999      |           |   | 1998     |           |         | 1997 |         |         | 1996    |   |         | 1995    |        
|                                                                         |                   |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |        
|Balance sheet reserves                                                   |                   |                   |  | $    | 2,813,720 |           |           | $ | 2,089,199 |           |           | $ | 1,535,288 |           |           | $    | 1,155,290 |           |           | $ | 1,130,748 |           |           | $ | 944,117  |           |         | $    | 871,104 |         |         | $ | 460,511 |         |         | $ | 275,008 |         |         | $ | 229,049 |         |         | $ | 200,756 |        
|Reserve adjustments from acquisition and disposition of
    subsidiaries |                   |                   |  |      |          |           |           |   |          |           |           |   |          |           |           |      | 5,587     |           |           |   |          |           |           |   | (66,571  | )         |         |      | (32,437 | )       |         |   | (136    | )       |         |   |        |         |         |   |        |         |         |   |        |        
|                                                                         |                   |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |        
|                                                                         |                   | Adjusted reserves |  |      |           |           | 2,813,720 |   |           |           | 2,089,199 |   |           |           | 1,535,288 |      |           |           | 1,160,877 |   |           |           | 1,130,748 |   |          |           | 877,546 |      |         |         | 838,667 |   |         |         | 460,375 |   |         |         | 275,008 |   |         |         | 229,049 |   |         |         | 200,756 | 
|Cumulative paid at:                                                      |                   |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |        
|                                                                         | One year later    |                   |  |      |           |           |           |   |           | 511,766   |           |   |           | 406,052   |           |      |           | 438,802   |           |   |           | 388,722   |           |   |          | 400,279   |         |      |         | 424,379 |         |   |         | 229,746 |         |   |         | 160,324 |         |   |         | 119,453 |         |   |         | 118,656 |        
|                                                                         | Two years later   |                   |  |      |           |           |           |   |           |           |           |   |           | 597,324   |           |      |           | 568,934   |           |   |           | 610,619   |           |   |          | 537,354   |         |      |         | 561,246 |         |   |         | 367,512 |         |   |         | 209,724 |         |   |         | 179,117 |         |   |         | 167,459 |        
|                                                                         | Three years later |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           | 679,561   |           |   |           | 725,295   |           |   |          | 667,326   |         |      |         | 611,239 |         |   |         | 419,209 |         |   |         | 241,523 |         |   |         | 193,872 |         |   |         | 207,191 |        
|                                                                         | Four years later  |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           | 801,642   |           |   |          | 720,656   |         |      |         | 686,730 |         |   |         | 435,625 |         |   |         | 259,067 |         |   |         | 212,097 |         |   |         | 214,046 |        
|                                                                         | Five years later  |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          | 758,126   |         |      |         | 721,011 |         |   |         | 453,691 |         |   |         | 262,838 |         |   |         | 223,701 |         |   |         | 226,762 |        
|                                                                         | Six years later   |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         | 725,639 |         |   |         | 462,565 |         |   |         | 267,038 |         |   |         | 225,595 |         |   |         | 233,831 |        
|                                                                         | Seven years later |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         | 462,126 |         |   |         | 270,362 |         |   |         | 227,177 |         |   |         | 235,236 |        
|                                                                         | Eight years later |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |         |   |         | 268,939 |         |   |         | 228,621 |         |   |         | 235,950 |        
|                                                                         | Nine years later  |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         | 230,745 |         |   |         | 236,726 |        
|                                                                         | Ten years later   |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         | 236,996 |        
|Re-estimated liability at:                                               |                   |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |        
|                                                                         | End of year       |                   |  |      |           | 2,813,720 |           |   |           | 2,089,199 |           |   |           | 1,535,288 |           |      |           | 1,160,877 |           |   |           | 1,130,748 |           |   |          | 877,546   |         |      |         | 838,667 |         |   |         | 460,375 |         |   |         | 275,008 |         |   |         | 229,049 |         |   |         | 200,756 |        
|                                                                         | One year later    |                   |  |      |           |           |           |   |           | 2,118,471 |           |   |           | 1,651,401 |           |      |           | 1,284,030 |           |   |           | 1,107,588 |           |   |          | 922,080   |         |      |         | 836,775 |         |   |         | 550,409 |         |   |         | 308,501 |         |   |         | 252,236 |         |   |         | 243,259 |        
|                                                                         | Two years later   |                   |  |      |           |           |           |   |           |           |           |   |           | 1,676,906 |           |      |           | 1,390,170 |           |   |           | 1,239,751 |           |   |          | 925,922   |         |      |         | 868,438 |         |   |         | 545,955 |         |   |         | 316,250 |         |   |         | 249,013 |         |   |         | 248,372 |        
|                                                                         | Three years later |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           | 1,461,475 |           |   |           | 1,383,098 |           |   |          | 1,099,657 |         |      |         | 854,987 |         |   |         | 547,179 |         |   |         | 304,281 |         |   |         | 250,817 |         |   |         | 247,053 |        
|                                                                         | Four years later  |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           | 1,453,536 |           |   |          | 1,102,636 |         |      |         | 900,604 |         |   |         | 537,968 |         |   |         | 305,022 |         |   |         | 247,245 |         |   |         | 248,687 |        
|                                                                         | Five years later  |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          | 1,135,143 |         |      |         | 887,272 |         |   |         | 522,183 |         |   |         | 295,975 |         |   |         | 249,853 |         |   |         | 248,559 |        
|                                                                         | Six years later   |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         | 894,307 |         |   |         | 521,399 |         |   |         | 296,816 |         |   |         | 243,015 |         |   |         | 250,176 |        
|                                                                         | Seven years later |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         | 513,918 |         |   |         | 292,544 |         |   |         | 242,655 |         |   |         | 246,661 |        
|                                                                         | Eight years later |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |         |   |         | 291,164 |         |   |         | 241,904 |         |   |         | 246,159 |        
|                                                                         | Nine years later  |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         | 244,687 |         |   |         | 245,408 |        
|                                                                         | Ten years later   |                   |  |      |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |           |           |           |   |          |           |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         | 245,970 |        
|Cumulative redundancy (deficiency)                                       |                   |                   |  |      |           |           |           | $ | (29,272   | )         |           | $ | (141,618  | )         |           | $    | (300,598  | )         |           | $ | (322,788  | )         |           | $ | (257,597 | )         |         | $    | (55,640 | )       |         | $ | (53,543 | )       |         | $ | (16,156 | )       |         | $ | (15,638 | )       |         | $ | (45,214 | )      

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 assumed accident and
    health reinsurance contracts reported in discontinued lines of
    business, due to our processing of additional information
    received and our continuing evaluation of reserves on this
    business.
|
| |  | 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 assumed
    accident and health reinsurance contracts reported in
    discontinued lines of business, due to our processing of
    additional information received and our continuing evaluation of
    reserves on this business.                                                  
|
| |  | 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.

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|                                                                               |                                                                                                 |                                           |                                                                          |           |           |           |           |           |           |           |           |         |           |           | 
|------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------------------------ | --------- | --------- | --------- | --------- | --------- | --------- | --------- | --------- | ------- | --------- | --------- | 
|                                                                               |                                                                                                 | 2005                                      |                                                                          |           | 2004      |           |           | 2003      |          
|                                                                               |                                                                                                 |                                           |                                                                          |           |           |           |           |           |          
|Reserves for loss and loss adjustment expense payable at
    beginning of year |                                                                                                 | $                                         | 2,089,199                                                                |           |           | $         | 1,535,288 |           |           | $         | 1,155,290 |        
|Reserve additions from acquisition of subsidiaries                             |                                                                                                 |                                           | 19,236                                                                   |           |           |           | 15,537    |           |           |           | 5,587     |        
|Incurred loss and loss adjustment expense:                                     |                                                                                                 |                                           |                                                                          |           |           |           |           |           |           |           |           |        
|                                                                               | Provision for loss and loss adjustment expense for claims
    occurring in current year         |                                           |                                                                          | 1,567,501 |           |           |           | 1,173,042 |           |           |           | 922,838 |          
|                                                                               | Increase in estimated loss and loss adjustment expense for
    claims occurring in prior years* |                                           |                                                                          | 29,272    |           |           |           | 116,113   |           |           |           | 123,153 |          
|                                                                               |                                                                                                 |                                           |                                                                          |           |           |           |           |           |          
|                                                                               |                                                                                                 | Incurred loss and loss adjustment expense |                                                                          |           | 1,596,773 |           |           |           | 1,289,155 |           |           |         | 1,045,991 |          
|                                                                               |                                                                                                 |                                           |                                                                          |           |           |           |           |           |          
|Loss and loss adjustment expense payments for claims occurring
    during:     |                                                                                                 |                                           |                                                                          |           |           |           |           |           |           |           |           |        
|                                                                               | Current year                                                                                    |                                           |                                                                          | 379,722   |           |           |           | 344,729   |           |           |           | 232,778 |          
|                                                                               | Prior years                                                                                     |                                           |                                                                          | 511,766   |           |           |           | 406,052   |           |           |           | 438,802 |          
|                                                                               |                                                                                                 |                                           |                                                                          |           |           |           |           |           |          
|                                                                               |                                                                                                 | Loss and loss adjustment expense payments |                                                                          |           | 891,488   |           |           |           | 750,781   |           |           |         | 671,580   |          
|                                                                               |                                                                                                 |                                           |                                                                          |           |           |           |           |           |          
|                                                                               |                                                                                                 |                                           | Reserves for loss and loss adjustment expense payable at end
    of year |           | $         | 2,813,720 |           |           | $         | 2,089,199 |           |         | $         | 1,535,288 | 
|                                                                               |                                                                                                 |                                           |                                                                          |           |           |           |           |           |          




| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | 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.

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|                                                                          |                   |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        |         |         | 
|------------------------------------------------------------------------- | ----------------- | ------------------------------------- | --------- | --------- | --------- | - | --------- | --------- | --------- | - | ------- | ------- | ------- | ---- | -------- | ------- | ------- | - | -------- | ------- | ------- | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                          |                   | 2005                                  |           |           | 2004      |   |           | 2003      |           |   | 2002    |         |         | 2001 |          |         | 2000    |   |          | 1999    |         |   | 1998    |         |         | 1997 |         |         | 1996    |   |         | 1995    |        
|                                                                          |                   |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |        
|Reserves, net of reinsurance                                              |                   | $                                     | 1,534,933 |           |           | $ | 1,059,283 |           |           | $ | 705,200 |         |         | $    | 457,318  |         |         | $ | 313,097  |         |         | $ | 249,872 |         |         | $    | 273,606 |         |         | $ | 118,912 |         |         | $ | 119,634 |         |         | $ | 117,283 |         |         | $ | 99,259 |        
|Reserve adjustments from acquisition and 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  |         |         |   | 2,636   |         |         |   | 1,442  |        
|                                                                          |                   |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |        
|                                                                          |                   | Adjusted reserves, net of reinsurance |           |           | 1,534,933 |   |           |           | 1,059,283 |   |         |         | 705,200 |      |          |         | 462,905 |   |          |         | 313,097 |   |         |         | 243,824 |      |         |         | 270,263 |   |         |         | 182,353 |   |         |         | 134,642 |   |         |         | 119,919 |   |        |         | 100,701 | 
|Cumulative paid, net of reinsurance, at:                                  |                   |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        |        
|                                                                          | One year later    |                                       |           |           |           |   |           | 172,224   |           |   |         | 141,677 |         |      |          | 135,829 |         |   |          | 126,019 |         |   |         | 102,244 |         |      |         | 145,993 |         |   |         | 56,052  |         |   |         | 48,775  |         |   |         | 47,874  |         |   |        | 41,947  |        
|                                                                          | Two years later   |                                       |           |           |           |   |           |           |           |   |         | 135,623 |         |      |          | 172,834 |         |   |          | 131,244 |         |   |         | 139,659 |         |      |         | 174,534 |         |   |         | 103,580 |         |   |         | 64,213  |         |   |         | 66,030  |         |   |        | 56,803  |        
|                                                                          | Three years later |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          | 135,374 |         |   |          | 163,808 |         |   |         | 118,894 |         |      |         | 185,744 |         |   |         | 113,762 |         |   |         | 80,227  |         |   |         | 72,863  |         |   |        | 64,798  |        
|                                                                          | Four years later  |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          | 93,405  |         |   |         | 138,773 |         |      |         | 180,714 |         |   |         | 121,293 |         |   |         | 81,845  |         |   |         | 81,620  |         |   |        | 67,355  |        
|                                                                          | Five years later  |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         | 158,935 |         |      |         | 197,416 |         |   |         | 120,452 |         |   |         | 84,986  |         |   |         | 81,968  |         |   |        | 72,627  |        
|                                                                          | Six years later   |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         | 200,833 |         |   |         | 127,254 |         |   |         | 87,626  |         |   |         | 82,681  |         |   |        | 73,501  |        
|                                                                          | Seven years later |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         | 131,631 |         |   |         | 89,194  |         |   |         | 84,108  |         |   |        | 73,792  |        
|                                                                          | Eight years later |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         | 88,061  |         |   |         | 84,847  |         |   |        | 74,836  |        
|                                                                          | Nine years later  |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         | 84,770  |         |   |        | 75,216  |        
|                                                                          | Ten years later   |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        | 74,782  |        
|Re-estimated liability, net of reinsurance, at:                           |                   |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        |        
|                                                                          | End of year       |                                       |           | 1,534,933 |           |   |           | 1,059,283 |           |   |         | 705,200 |         |      |          | 462,905 |         |   |          | 313,097 |         |   |         | 243,824 |         |      |         | 270,263 |         |   |         | 182,353 |         |   |         | 134,642 |         |   |         | 119,919 |         |   |        | 100,701 |        
|                                                                          | One year later    |                                       |           |           |           |   |           | 1,084,677 |           |   |         | 735,678 |         |      |          | 486,671 |         |   |          | 306,318 |         |   |         | 233,111 |         |      |         | 260,678 |         |   |         | 186,967 |         |   |         | 120,049 |         |   |         | 116,145 |         |   |        | 95,764  |        
|                                                                          | Two years later   |                                       |           |           |           |   |           |           |           |   |         | 770,497 |         |      |          | 500,165 |         |   |          | 338,194 |         |   |         | 222,330 |         |      |         | 254,373 |         |   |         | 175,339 |         |   |         | 116,745 |         |   |         | 101,595 |         |   |        | 94,992  |        
|                                                                          | Three years later |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          | 570,671 |         |   |          | 366,819 |         |   |         | 259,160 |         |      |         | 244,650 |         |   |         | 171,165 |         |   |         | 110,673 |         |   |         | 97,353  |         |   |        | 85,484  |        
|                                                                          | Four years later  |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          | 418,781 |         |   |         | 267,651 |         |      |         | 258,122 |         |   |         | 163,349 |         |   |         | 107,138 |         |   |         | 95,118  |         |   |        | 80,890  |        
|                                                                          | Five years later  |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         | 296,396 |         |      |         | 254,579 |         |   |         | 155,931 |         |   |         | 103,243 |         |   |         | 93,528  |         |   |        | 79,626  |        
|                                                                          | Six years later   |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         | 271,563 |         |   |         | 157,316 |         |   |         | 101,538 |         |   |         | 91,413  |         |   |        | 79,968  |        
|                                                                          | Seven years later |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         | 156,376 |         |   |         | 99,872  |         |   |         | 90,951  |         |   |        | 78,614  |        
|                                                                          | Eight years later |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         | 97,965  |         |   |         | 90,534  |         |   |        | 78,810  |        
|                                                                          | Nine years later  |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         | 90,011  |         |   |        | 78,499  |        
|                                                                          | Ten years later   |                                       |           |           |           |   |           |           |           |   |         |         |         |      |          |         |         |   |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |        | 77,732  |        
|Cumulative redundancy (deficiency)                                        |                   |                                       |           |           |           | $ | (25,394   | )         |           | $ | (65,297 | )       |         | $    | (107,766 | )       |         | $ | (105,684 | )       |         | $ | (52,572 | )       |         | $    | (1,300  | )       |         | $ | 25,977  |         |         | $ | 36,677  |         |         | $ | 29,908  |         |         | $ | 22,969 |        

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|                                                                                   |                                                                                                 |                                                                              |                                           |         |           |         |         |         |           |         |         |         |         |         | 
|---------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------------------------- | ------- | --------- | ------- | ------- | ------- | --------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                   |                                                                                                 | 2005                                                                         |                                           |         | 2004      |         |         | 2003    |          
|                                                                                   |                                                                                                 |                                                                              |                                           |         |           |         |         |         |          
|Net reserves for loss and loss adjustment expense payable at
    beginning of year |                                                                                                 | $                                                                            | 1,059,283                                 |         |           | $       | 705,200 |         |           | $       | 457,318 |        
|Net reserve additions from acquisition of subsidiaries                             |                                                                                                 |                                                                              | 12,491                                    |         |           |         | 11,647  |         |           |         | 5,587   |        
|Incurred loss and loss adjustment expense:                                         |                                                                                                 |                                                                              |                                           |         |           |         |         |         |           |         |         |        
|                                                                                   | Provision for loss and loss adjustment expense for claims
    occurring in current year         |                                                                              |                                           | 895,803 |           |         |         | 614,752 |           |         |         | 464,886 |        
|                                                                                   | Increase in estimated loss and loss adjustment expense for
    claims occurring in prior years* |                                                                              |                                           | 25,394  |           |         |         | 30,478  |           |         |         | 23,766  |        
|                                                                                   |                                                                                                 |                                                                              |                                           |         |           |         |         |         |          
|                                                                                   |                                                                                                 |                                                                              | Incurred loss and loss adjustment expense |         |           | 921,197 |         |         |           | 645,230 |         |         |         | 488,652 | 
|                                                                                   |                                                                                                 |                                                                              |                                           |         |           |         |         |         |          
|Loss and loss adjustment expense payments for claims occurring
    during:         |                                                                                                 |                                                                              |                                           |         |           |         |         |         |           |         |         |        
|                                                                                   | Current year                                                                                    |                                                                              |                                           | 285,814 |           |         |         | 161,117 |           |         |         | 110,528 |        
|                                                                                   | Prior years                                                                                     |                                                                              |                                           | 172,224 |           |         |         | 141,677 |           |         |         | 135,829 |        
|                                                                                   |                                                                                                 |                                                                              |                                           |         |           |         |         |         |          
|                                                                                   |                                                                                                 | Loss and loss adjustment expense payments                                    |                                           |         | 458,038   |         |         |         | 302,794   |         |         |         | 246,357 |        
|                                                                                   |                                                                                                 |                                                                              |                                           |         |           |         |         |         |          
|                                                                                   |                                                                                                 | Net reserves for loss and loss adjustment expense payable at
    end of year |                                           | $       | 1,534,933 |         |         | $       | 1,059,283 |         |         | $       | 705,200 |        
|                                                                                   |                                                                                                 |                                                                              |                                           |         |           |         |         |         |          




|  |                                                                                                                                                                                                                                          
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.





Regulation




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| |                    
| | -------------------
| | 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).







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| |                                                                
| | ---------------------------------------------------------------
| | 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 which 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;                                                                                                                                                                                       
|
| |  | 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.                                       

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| |                               
| | ------------------------------
| | Insurance Holding Company Acts





| |            
| | -----------
| | Assessments





| |                                                   
| | --------------------------------------------------
| | Insurance Regulations Concerning Change of Control





| |                   
| | ------------------
| | Risk-Based Capital



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| |                                        
| | ---------------------------------------
| | Insurance Regulatory Information System





| |                             
| | ----------------------------
| | Terrorism Risk Insurance Act







| |                        
| | -----------------------
| | Legislative Initiatives





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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.





| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | 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.



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| |                                                              
| | -------------------------------------------------------------
| | Our reliance on brokers subjects us to their credit
    risk.



Risks Relating to our Business




| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Our increased retentions in various lines of business
    means that we are exposed to a greater portion of potential
    losses.





| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



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| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | If the rating agencies downgrade us, our business and
    competitive position in the industry may suffer.



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| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | We may require additional capital in the future, which may
    not be available or may only be available on unfavorable
    terms.





| |                                                                
| | ---------------------------------------------------------------
| | 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.





| |                                                                          
| | -------------------------------------------------------------------------
| | Our strategy of acquiring other companies for growth may
    not succeed.



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| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | 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.





| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Our information technology systems may fail or suffer a
    loss of security, which could adversely affect our
    business.










|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments



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|        |           
|------- | ----------
|Item 2. | Properties





|                                                   |  |          |                          |  |         |  |        |                           |  |                  
|-------------------------------------------------- |  | -------- | ------------------------ |  | ------- |  | ------ | ------------------------- |  | -----------------
|Subsidiary                                         |  | Location |                          |  | Sq. Ft. |  |        | Termination Date of Lease
|                                                   |  |          |                          |  |         |  |        |                          
|Houston Casualty Company                           |  |          | Houston, Texas           |  |         |  | 77,000 |                           |  | Owned            
|HCC and Houston Casualty Company                   |  |          | Houston, Texas           |  |         |  | 51,000 |                           |  | Owned            
|Professional Indemnity Agency                      |  |          | Mount Kisco, New York    |  |         |  | 38,000 |                           |  | Owned            
|U.S. Specialty Insurance Company Aviation Division |  |          | Dallas, Texas            |  |         |  | 28,000 |                           |  | August 31, 2013  
|HCC Specialty Underwriters                         |  |          | Wakefield, Massachusetts |  |         |  | 28,000 |                           |  | December 31, 2010
|HCC Life Insurance Company                         |  |          | Atlanta, Georgia         |  |         |  | 27,000 |                           |  | December 31, 2011






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings










|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



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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






|               |  |      |       |  |      |   |       |      |  |   |       |  |  |      |       |  |     |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ---- | ----- |  | --- | - | ----- |  |  | - | ----- | 
|               |  | 2005 |       |  | 2004 |   |       | 2003 | 
|               |  |      |       |  |      |   |       |      | 
|               |  | High |       |  | Low  |   |       | High |  |   | Low   |  |  | High |       |  | Low |  
|               |  |      |       |  |      |   |       |      |  |   |       |  |  |      |       |  |     |  
|First quarter  |  | $    | 26.17 |  |      | $ | 21.31 |      |  | $ | 23.17 |  |  | $    | 20.01 |  |     | $ | 17.64 |  |  | $ | 14.87 | 
|Second quarter |  |      | 26.96 |  |      |   | 23.05 |      |  |   | 22.93 |  |  |      | 20.30 |  |     |   | 20.13 |  |  |   | 17.10 | 
|Third quarter  |  |      | 28.89 |  |      |   | 25.11 |      |  |   | 22.39 |  |  |      | 19.23 |  |     |   | 20.84 |  |  |   | 19.13 | 
|Fourth quarter |  |      | 32.95 |  |      |   | 26.91 |      |  |   | 22.83 |  |  |      | 18.35 |  |     |   | 21.39 |  |  |   | 18.73 | 



Shareholders




Dividend Policy




|               |  |      |      |  |      |   |      |      |  |   |      | 
|-------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ---- | 
|               |  | 2005 |      |  | 2004 |   |      | 2003 | 
|               |  |      |      |  |      |   |      |      | 
|First quarter  |  | $    | .057 |  |      | $ | .050 |      |  | $ | .043 | 
|Second quarter |  |      | .075 |  |      |   | .050 |      |  |   | .043 | 
|Third quarter  |  |      | .075 |  |      |   | .057 |      |  |   | .050 | 
|Fourth quarter |  |      | .075 |  |      |   | .057 |      |  |   | .050 | 



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |         |         |         |   |        |         |         | 
|------------------------------------------------------------- | ---------------------------------------- | ------------------------------------------- | ------- | --------- | --------- | - | ------- | --------- | --------- | - | ------- | ------- | ------- | ------- | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                                              |                                          | Years Ended December 31,                    |        
|                                                              |                                          |                                             |        
|                                                              |                                          | 2005                                        |         |           | 2004      |   |         | 2003      |           |   | 2002    |         |         | 2001(4) |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|                                                              |                                          | (in thousands, except per share data)(1)(2) |        
|Statement of earnings data:                                   |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |         |         |         |   |        |        
|Revenue                                                       |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |         |         |         |   |        |        
|                                                              | Net earned premium                       |                                             | $       | 1,369,988 |           |   | $       | 1,010,692 |           |   | $       | 738,272 |         |         | $       | 505,521 |         |   | $      | 342,787 |        
|                                                              | Fee and commission income                |                                             |         | 134,282   |           |   |         | 182,349   |           |   |         | 142,615 |         |         |         | 115,919 |         |   |        | 111,016 |        
|                                                              | Net investment income                    |                                             |         | 98,851    |           |   |         | 64,885    |           |   |         | 47,335  |         |         |         | 37,755  |         |   |        | 39,562  |        
|                                                              | Net realized investment gain             |                                             |         | 1,448     |           |   |         | 5,822     |           |   |         | 527     |         |         |         | 453     |         |   |        | 393     |        
|                                                              | Other operating income                   |                                             |         | 39,773    |           |   |         | 19,406    |           |   |         | 13,215  |         |         |         | 6,985   |         |   |        | 17,451  |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|                                                              |                                          | Total revenue                               |         |           | 1,644,342 |   |         |           | 1,283,154 |   |         |         | 941,964 |         |         |         | 666,633 |   |        |         | 511,209 | 
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|Expense                                                       |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |         |         |         |   |        |        
|                                                              | Loss and loss adjustment expense, net    |                                             |         | 921,197   |           |   |         | 645,230   |           |   |         | 488,652 |         |         |         | 306,491 |         |   |        | 267,390 |        
|                                                              | Policy acquisition costs, net            |                                             |         | 257,725   |           |   |         | 224,323   |           |   |         | 138,212 |         |         |         | 99,521  |         |   |        | 66,313  |        
|                                                              | Other operating expense                  |                                             |         | 178,989   |           |   |         | 164,474   |           |   |         | 140,913 |         |         |         | 99,924  |         |   |        | 113,806 |        
|                                                              | Interest expense                         |                                             |         | 7,684     |           |   |         | 8,374     |           |   |         | 7,453   |         |         |         | 8,301   |         |   |        | 8,875   |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|                                                              |                                          | Total expense                               |         |           | 1,365,595 |   |         |           | 1,042,401 |   |         |         | 775,230 |         |         |         | 514,237 |   |        |         | 456,384 | 
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|Earnings from continuing operations before income tax expense |                                          |                                             | 278,747 |           |           |   | 240,753 |           |           |   | 166,734 |         |         |         | 152,396 |         |         |   | 54,825 |        
|Income tax expense on continuing operations                   |                                          |                                             | 85,647  |           |           |   | 81,732  |           |           |   | 59,857  |         |         |         | 52,933  |         |         |   | 27,764 |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|Earnings from continuing operations                           |                                          |                                             | 193,100 |           |           |   | 159,021 |           |           |   | 106,877 |         |         |         | 99,463  |         |         |   | 27,061 |        
|Earnings from discontinued operations, net of income taxes(3) |                                          |                                             | 2,760   |           |           |   | 4,004   |           |           |   | 36,684  |         |         |         | 6,365   |         |         |   | 3,136  |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|                                                              | Net earnings                             |                                             | $       | 195,860   |           |   | $       | 163,025   |           |   | $       | 143,561 |         |         | $       | 105,828 |         |   | $      | 30,197  |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|Basic earnings per share data:                                |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |         |         |         |   |        |        
|                                                              | Earnings from continuing operations      |                                             | $       | 1.83      |           |   | $       | 1.64      |           |   | $       | 1.12    |         |         | $       | 1.06    |         |   | $      | 0.31    |        
|                                                              | Earnings from discontinued operations(3) |                                             |         | 0.03      |           |   |         | 0.04      |           |   |         | 0.39    |         |         |         | 0.07    |         |   |        | 0.04    |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|                                                              | Net earnings                             |                                             | $       | 1.86      |           |   | $       | 1.68      |           |   | $       | 1.51    |         |         | $       | 1.13    |         |   | $      | 0.35    |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|                                                              | Weighted average shares outstanding      |                                             |         | 105,463   |           |   |         | 97,257    |           |   |         | 94,919  |         |         |         | 93,338  |         |   |        | 87,482  |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|Diluted earnings per share data:                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |         |         |         |   |        |        
|                                                              | Earnings from continuing operations      |                                             | $       | 1.76      |           |   | $       | 1.61      |           |   | $       | 1.11    |         |         | $       | 1.05    |         |   | $      | 0.30    |        
|                                                              | Earnings from discontinued operations(3) |                                             |         | 0.03      |           |   |         | 0.04      |           |   |         | 0.38    |         |         |         | 0.07    |         |   |        | 0.04    |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|                                                              | Net earnings                             |                                             | $       | 1.79      |           |   | $       | 1.65      |           |   | $       | 1.49    |         |         | $       | 1.12    |         |   | $      | 0.34    |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|                                                              | Weighted average shares outstanding      |                                             |         | 109,437   |           |   |         | 98,826    |           |   |         | 96,576  |         |         |         | 94,406  |         |   |        | 89,429  |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        
|Cash dividends declared, per share                            |                                          | $                                           | 0.282   |           |           | $ | 0.213   |           |           | $ | 0.187   |         |         | $       | 0.170   |         |         | $ | 0.163  |        
|                                                              |                                          |                                             |         |           |           |   |         |           |           |   |         |         |         |         |        

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|                                         |  |                                             |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           | 
|---------------------------------------- |  | ------------------------------------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- |  |  | ---- | --------- |  |  | - | --------- | 
|                                         |  | December 31,                                |          
|                                         |  |                                             |          
|                                         |  | 2005                                        |           |  | 2004 |   |           | 2003 |  |   | 2002      |  |  | 2001 |          
|                                         |  |                                             |           |  |      |   |           |      |  |   |           |  |  |      |          
|                                         |  | (in thousands, except per share data)(1)(2) |          
|Balance sheet data:                      |  |                                             |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           | 
|Total investments                        |  | $                                           | 3,257,428 |  |      | $ | 2,468,491 |      |  | $ | 1,707,300 |  |  | $    | 1,177,775 |  |  | $ | 885,659   | 
|Premium, claims and other receivables    |  |                                             | 884,654   |  |      |   | 889,800   |      |  |   | 932,417   |  |  |      | 772,772   |  |  |   | 665,965   | 
|Reinsurance recoverables                 |  |                                             | 1,360,483 |  |      |   | 1,104,026 |      |  |   | 916,190   |  |  |      | 798,934   |  |  |   | 899,128   | 
|Ceded unearned premium                   |  |                                             | 239,416   |  |      |   | 317,055   |      |  |   | 291,591   |  |  |      | 164,224   |  |  |   | 71,140    | 
|Goodwill                                 |  |                                             | 532,947   |  |      |   | 444,031   |      |  |   | 386,507   |  |  |      | 335,288   |  |  |   | 315,318   | 
|Total assets                             |  |                                             | 7,026,066 |  |      |   | 5,904,626 |      |  |   | 4,897,682 |  |  |      | 3,723,396 |  |  |   | 3,219,120 | 
|Loss and loss adjustment expense payable |  |                                             | 2,813,720 |  |      |   | 2,089,199 |      |  |   | 1,535,288 |  |  |      | 1,155,290 |  |  |   | 1,130,748 | 
|Unearned premium                         |  |                                             | 807,109   |  |      |   | 741,706   |      |  |   | 592,311   |  |  |      | 331,050   |  |  |   | 179,530   | 
|Premium and claims payable               |  |                                             | 753,859   |  |      |   | 766,765   |      |  |   | 768,035   |  |  |      | 750,046   |  |  |   | 717,159   | 
|Notes payable                            |  |                                             | 309,543   |  |      |   | 311,277   |      |  |   | 310,404   |  |  |      | 230,027   |  |  |   | 181,928   | 
|Shareholders equity                     |  |                                             | 1,693,696 |  |      |   | 1,323,665 |      |  |   | 1,046,920 |  |  |      | 882,907   |  |  |   | 763,453   | 
|Book value per share(5)                  |  | $                                           | 15.29     |  |      | $ | 12.97     |      |  | $ | 10.91     |  |  | $    | 9.43      |  |  | $ | 8.27      | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In 2005, the Board of Directors declared a three-for-two stock
    split in the form of a 50% stock dividend on our shares of
    $1.00 par value common stock. All shares outstanding and
    per share amounts have been restated to reflect the effect of
    the stock split for all periods presented.                                                                                                               
|   
|(2) | Certain amounts in the 2001-2004 selected consolidated financial
    data have been reclassified to conform to the 2005 presentation.
    The reclassifications included the elimination of certain
    intercompany premium receivable and premium payable balances.
    Such reclassifications had no effect on our consolidated net
    earnings, shareholders equity or cash flows.                                  
|   
|(3) | We sold our retail brokerage operation, HCC Employee Benefits,
    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.
|   
|(4) | During 2002, we adopted Statement of Financial Accounting
    Standards (SFAS) No. 142, Goodwill and Other Intangible
    Assets, which required that goodwill and indefinite-lived
    intangible assets no longer be amortized. The adjusted amounts
    that we would have reported in 2001 had we adopted SFAS 142
    on January 1, 2001 are as follows:                                                             

|                                    |  |   |        | 
|----------------------------------- |  | - | ------ | 
|Adjusted net earnings               |  | $ | 41,584 | 
|                                    |  |   |       
|Adjusted basic earnings per share   |  | $ | 0.48   | 
|                                    |  |   |       
|Adjusted diluted earnings per share |  | $ | 0.47   | 
|                                    |  |   |       



|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Book value per share is calculated by dividing the sum of
    outstanding shares plus contractually issuable shares into total
    shareholders equity.

35



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Overview












36



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|                                                                                 |  |                   |  |                         |                   | 
|-------------------------------------------------------------------------------- |  | ----------------- |  | ----------------------- | ----------------- | 
|Company                                                                          |  | Segment           |  | Effective date acquired |                  
|                                                                                 |  |                   |  |                         |                  
|Covenant Underwriters and Continental Underwriters                               |  | Agency            |  |                         | July 1, 2003      | 
|American Contractors Indemnity Company                                           |  | Insurance company |  |                         | January 31, 2004  | 
|RA&MCO Insurance Services                                                        |  | Agency            |  |                         | October 1, 2004   | 
|United States Surety Company                                                     |  | Insurance company |  |                         | March 1, 2005     | 
|HCC International Insurance Company (formerly De Montfort
    Insurance Company) |  | Insurance company |  |                         | July 1, 2005      | 
|Perico Life Insurance Company (formerly MIC Life Insurance
    Corporation)      |  | Insurance company |  |                         | November 30, 2005 | 
|Perico Ltd.                                                                      |  | Agency            |  |                         | December 1, 2005  | 
|Illium Insurance Group                                                           |  | Agency            |  |                         | December 31, 2005 | 



Results of Operations








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|                                                |  |      |           |  |      |   |           |                                       |  |   |           |  |  |      |         |   |      |   |         |   |  |   |         |  
|----------------------------------------------- |  | ---- | --------- |  | ---- | - | --------- | ------------------------------------- |  | - | --------- |  |  | ---- | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                                |  |      |           |  |      |   |           | Effect of hurricanes and commutations | 
|                                                |  |      |           |  |      |   |           |                                       | 
|                                                |  | 2005 |           |  | 2004 |   |           | 2003                                  |  |   | 2005      |  |  | 2004 |         |   | 2003 |  
|                                                |  |      |           |  |      |   |           |                                       |  |   |           |  |  |      |         |   |      |  
|Gross incurred loss and loss adjustment expense |  | $    | 1,596,773 |  |      | $ | 1,289,155 |                                       |  | $ | 1,045,991 |  |  | $    | 394,625 |   |      | $ | 89,795  |   |  | $ |        |  
|Net incurred loss and loss adjustment expense   |  |      | 921,197   |  |      |   | 645,230   |                                       |  |   | 488,652   |  |  |      | 99,226  |   |      |   | 23,335  |   |  |   | 28,751  |  
|Ceded earned premium                            |  |      | 617,402   |  |      |   | 849,610   |                                       |  |   | 748,799   |  |  |      | 16,533  |   |      |   | 9,806   |   |  |   |        |  
|Net earnings (loss)                             |  |      | 195,860   |  |      |   | 163,025   |                                       |  |   | 143,561   |  |  |      | (75,171 | ) |      |   | (21,464 | ) |  |   | (18,688 | )
|Diluted earnings (loss) per share               |  |      | 1.79      |  |      |   | 1.65      |                                       |  |   | 1.49      |  |  |      | (0.69   | ) |      |   | (0.22   | ) |  |   | (0.19   | )



|                                       |                |      |  |      |      |  |  |      |   |  |  |      |  
|-------------------------------------- | -------------- | ---- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                       |                | 2005 |  |      | 2004 |  |  | 2003 |  
|                                       |                |      |  |      |      |  |  |      |  
|Ratios:                                |                |      |  |      |      |  |  |      |   |  |  |     
|                                       | Net loss ratio |      |  | 67.2 | %    |  |  | 63.8 | % |  |  | 66.2 | %
|                                       | Expense ratio  |      |  | 25.9 |      |  |  | 26.9 |   |  |  | 24.8 |  
|                                       |                |      |  |      |      |  |  |      |  
|                                       | Combined ratio |      |  | 93.1 | %    |  |  | 90.7 | % |  |  | 91.0 | %
|                                       |                |      |  |      |      |  |  |      |  
|Effect of hurricanes and commutations: |                |      |  |      |      |  |  |      |   |  |  |     
|                                       | Net loss ratio |      |  | 7.9  | %    |  |  | 2.9  | % |  |  | 3.9  | %
|                                       | Expense ratio  |      |  | 0.3  |      |  |  | 0.3  |   |  |  |     |  
|                                       |                |      |  |      |      |  |  |      |  
|                                       | Combined ratio |      |  | 8.2  | %    |  |  | 3.2  | % |  |  | 3.9  | %
|                                       |                |      |  |      |      |  |  |      |  



|                                      |                                                               |      |      |       |      |  |      |       |   |  |      |       |  
|------------------------------------- | ------------------------------------------------------------- | ---- | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                                      |                                                               | 2005 |      |       | 2004 |  |      | 2003  |  
|                                      |                                                               |      |      |       |      |  |      |       |  
|Net earned premium                    |                                                               |      | 83.3 | %     |      |  | 78.8 | %     |   |  | 78.4 | %    
|Fee and commission income             |                                                               |      | 8.2  |       |      |  | 14.2 |       |   |  | 15.1 |      
|Net investment income                 |                                                               |      | 6.0  |       |      |  | 5.1  |       |   |  | 5.0  |      
|Net realized investment gain          |                                                               |      | 0.1  |       |      |  | 0.4  |       |   |  | 0.1  |      
|Other operating income                |                                                               |      | 2.4  |       |      |  | 1.5  |       |   |  | 1.4  |      
|                                      |                                                               |      |      |       |      |  |      |       |  
|                                      | Total revenue                                                 |      |      | 100.0 |      |  |      | 100.0 |   |  |      | 100.0 |  
|Loss and loss adjustment expense, net |                                                               |      | 56.0 |       |      |  | 50.3 |       |   |  | 51.9 |      
|Policy acquisition costs, net         |                                                               |      | 15.7 |       |      |  | 17.5 |       |   |  | 14.7 |      
|Other operating expense               |                                                               |      | 10.9 |       |      |  | 12.8 |       |   |  | 14.9 |      
|Interest expense                      |                                                               |      | 0.5  |       |      |  | 0.6  |       |   |  | 0.8  |      
|                                      |                                                               |      |      |       |      |  |      |       |  
|                                      | Earnings from continuing operations before income tax expense |      |      | 16.9  |      |  |      | 18.8  |   |  |      | 17.7  |  
|Income tax expense                    |                                                               |      | 5.2  |       |      |  | 6.4  |       |   |  | 6.4  |      
|                                      |                                                               |      |      |       |      |  |      |       |  
|                                      | Earnings from continuing operations                           |      |      | 11.7  | %    |  |      | 12.4  | % |  |      | 11.3  | %
|                                      |                                                               |      |      |       |      |  |      |       |  

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|                      |  |      |           |  |      |   |           |      |  |   |           | 
|--------------------- |  | ---- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                      |  | 2005 |           |  | 2004 |   |           | 2003 | 
|                      |  |      |           |  |      |   |           |      | 
|Gross written premium |  | $    | 2,038,286 |  |      | $ | 1,975,153 |      |  | $ | 1,739,894 | 
|Net written premium   |  |      | 1,501,224 |  |      |   | 1,105,519 |      |  |   | 865,502   | 
|Net earned premium    |  |      | 1,369,988 |  |      |   | 1,010,692 |      |  |   | 738,272   | 



|                    |                           |      |        |         |      |   |         |         |  |   |         |         | 
|------------------- | ------------------------- | ---- | ------ | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                    |                           | 2005 |        |         | 2004 |   |         | 2003    | 
|                    |                           |      |        |         |      |   |         |         | 
|Agencies            |                           | $    | 95,454 |         |      | $ | 126,971 |         |  | $ | 105,899 |        
|Insurance companies |                           |      | 38,828 |         |      |   | 55,378  |         |  |   | 43,244  |        
|Other               |                           |      |       |         |      |   |        |         |  |   | (6,528  | )      
|                    |                           |      |        |         |      |   |         |         | 
|                    | Fee and commission income |      | $      | 134,282 |      |   | $       | 182,349 |  |   | $       | 142,615 | 
|                    |                           |      |        |         |      |   |         |         | 





|                        |                         |      |        |         |      |   |        |        |  |   |        |        | 
|----------------------- | ----------------------- | ---- | ------ | ------- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                        |                         | 2005 |        |         | 2004 |   |        | 2003   | 
|                        |                         |      |        |         |      |   |        |        | 
|Fixed income securities |                         | $    | 77,842 |         |      | $ | 55,929 |        |  | $ | 40,927 |       
|Short-term investments  |                         |      | 21,208 |         |      |   | 9,735  |        |  |   | 7,422  |       
|Other investments       |                         |      | 3,615  |         |      |   | 1,366  |        |  |   | 488    |       
|                        |                         |      |        |         |      |   |        |        | 
|                        | Total investment income |      |        | 102,665 |      |   |        | 67,030 |  |   |        | 48,837 | 
|Investment expense      |                         |      | (3,814 | )       |      |   | (2,145 | )      |  |   | (1,502 | )     
|                        |                         |      |        |         |      |   |        |        | 
|                        | Net investment income   |      | $      | 98,851  |      |   | $      | 64,885 |  |   | $      | 47,335 | 
|                        |                         |      |        |         |      |   |        |        | 



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|                             |                        |      |        |        |      |   |       |        |  |   |       |        | 
|---------------------------- | ---------------------- | ---- | ------ | ------ | ---- | - | ----- | ------ |  | - | ----- | ------ | 
|                             |                        | 2005 |        |        | 2004 |   |       | 2003   | 
|                             |                        |      |        |        |      |   |       |        | 
|Trading securities           |                        | $    | 16,619 |        |      | $ | 2,604 |        |  | $ | 5,583 |       
|Strategic investments        |                        |      | 10,241 |        |      |   | 5,103 |        |  |   | 3,212 |       
|Sale of non-operating assets |                        |      | 4,271  |        |      |   | 1,531 |        |  |   |      |       
|Financial instruments        |                        |      | 3,898  |        |      |   | 4,297 |        |  |   |      |       
|Other                        |                        |      | 4,744  |        |      |   | 5,871 |        |  |   | 4,420 |       
|                             |                        |      |        |        |      |   |       |        | 
|                             | Other operating income |      | $      | 39,773 |      |   | $     | 19,406 |  |   | $     | 13,215 | 
|                             |                        |      |        |        |      |   |       |        | 









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Segments






| |                          
| | -------------------------
| | Insurance Company Segment





| |        
| | -------
| | Premium





|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |   |           |           |  |  |     |     |  
|-------------------------- | --------------------- | ------ | --------- | --------- | ---- |  | --- | ------ | - | - | --------- | --------- |  | ------ | --- | --- | - | - | --------- | --------- |  |  | --- | --- | -
|                           |                       | 2005   |           |           | 2004 |  |     | 2003   |  
|                           |                       |        |           |           |      |  |     |        |  
|                           |                       | Amount |           |           | %    |  |     | Amount |   |   | %         |           |  | Amount |     |     | % |  
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  
|Primary                    |                       | $      | 1,768,284 |           |      |  | 87  | %      |   | $ | 1,674,075 |           |  |        | 85  | %   |   | $ | 1,377,999 |           |  |  | 79  | %  
|Reinsurance assumed        |                       |        | 270,002   |           |      |  | 13  |        |   |   | 301,078   |           |  |        | 15  |     |   |   | 361,895   |           |  |  | 21  |    
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  
|                           | Gross written premium |        |           | 2,038,286 |      |  |     | 100    |   |   |           | 1,975,153 |  |        |     | 100 |   |   |           | 1,739,894 |  |  |     | 100 |  
|Reinsurance ceded          |                       |        | (537,062  | )         |      |  | (26 | )      |   |   | (869,634  | )         |  |        | (44 | )   |   |   | (874,392  | )         |  |  | (50 | )  
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  
|                           | Net written premium   |        |           | 1,501,224 |      |  |     | 74     |   |   |           | 1,105,519 |  |        |     | 56  |   |   |           | 865,502   |  |  |     | 50  |  
|Change in unearned premium |                       |        | (131,236  | )         |      |  | (7  | )      |   |   | (94,827   | )         |  |        | (5  | )   |   |   | (127,230  | )         |  |  | (8  | )  
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  
|                           | Net earned premium    |        | $         | 1,369,988 |      |  |     | 67     | % |   | $         | 1,010,692 |  |        |     | 51  | % |   | $         | 738,272   |  |  |     | 42  | %
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  

41



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|                                |        |         |         |           |             |   |         |           |  |  |            |    |   |   |         |           | 
|------------------------------- | ------ | ------- | ------- | --------- | ----------- | - | ------- | --------- |  |  | ---------- | -- | - | - | ------- | --------- | 
|                                |        | Gross   |         |           |             |   | NWP     |           |  | 
|                                |        | Written |         |           | Net Written |   |         | as % of   |  |  | Net Earned |   
|                                |        | Premium |         |           | Premium     |   |         | GWP       |  |  | Premium    |   
|                                |        |         |         |           |             |   |         |           |  |  |            |   
|Year ended December 31, 2005    |        |         |         |           |             |   |         |           |  |  |            |    |   |   |         |          
|Diversified financial products  |        | $       | 908,526 |           |             | $ | 675,942 |           |  |  | 74         | %  |   | $ | 531,136 |          
|Group life, accident and health |        |         | 593,382 |           |             |   | 502,805 |           |  |  | 85         |    |   |   | 504,382 |          
|Aviation                        |        |         | 210,530 |           |             |   | 130,743 |           |  |  | 62         |    |   |   | 136,197 |          
|London market account           |        |         | 144,425 |           |             |   | 78,809  |           |  |  | 55         |    |   |   | 93,017  |          
|Other specialty lines           |        |         | 176,139 |           |             |   | 109,106 |           |  |  | 62         |    |   |   | 97,721  |          
|Discontinued lines              |        |         | 5,284   |           |             |   | 3,819   |           |  |  | nm         |    |   |   | 7,535   |          
|                                |        |         |         |           |             |   |         |           |  |  |            |   
|                                | Totals |         | $       | 2,038,286 |             |   | $       | 1,501,224 |  |  |            | 74 | % |   | $       | 1,369,988 | 
|                                |        |         |         |           |             |   |         |           |  |  |            |   
|Year ended December 31, 2004    |        |         |         |           |             |   |         |           |  |  |            |    |   |   |         |          
|Diversified financial products  |        | $       | 857,299 |           |             | $ | 404,870 |           |  |  | 47         | %  |   | $ | 310,809 |          
|Group life, accident and health |        |         | 584,747 |           |             |   | 343,996 |           |  |  | 59         |    |   |   | 343,913 |          
|Aviation                        |        |         | 204,963 |           |             |   | 144,687 |           |  |  | 71         |    |   |   | 127,248 |          
|London market account           |        |         | 178,950 |           |             |   | 107,509 |           |  |  | 60         |    |   |   | 111,341 |          
|Other specialty lines           |        |         | 133,964 |           |             |   | 83,980  |           |  |  | 63         |    |   |   | 69,089  |          
|Discontinued lines              |        |         | 15,230  |           |             |   | 20,477  |           |  |  | nm         |    |   |   | 48,292  |          
|                                |        |         |         |           |             |   |         |           |  |  |            |   
|                                | Totals |         | $       | 1,975,153 |             |   | $       | 1,105,519 |  |  |            | 56 | % |   | $       | 1,010,692 | 
|                                |        |         |         |           |             |   |         |           |  |  |            |   
|Year ended December 31, 2003    |        |         |         |           |             |   |         |           |  |  |            |    |   |   |         |          
|Diversified financial products  |        | $       | 553,501 |           |             | $ | 183,560 |           |  |  | 33         | %  |   | $ | 123,562 |          
|Group life, accident and health |        |         | 565,494 |           |             |   | 299,913 |           |  |  | 53         |    |   |   | 290,009 |          
|Aviation                        |        |         | 214,718 |           |             |   | 99,447  |           |  |  | 46         |    |   |   | 97,536  |          
|London market account           |        |         | 223,149 |           |             |   | 155,987 |           |  |  | 70         |    |   |   | 137,572 |          
|Other specialty lines           |        |         | 73,475  |           |             |   | 36,837  |           |  |  | 50         |    |   |   | 12,443  |          
|Discontinued lines              |        |         | 109,557 |           |             |   | 89,758  |           |  |  | nm         |    |   |   | 77,150  |          
|                                |        |         |         |           |             |   |         |           |  |  |            |   
|                                | Totals |         | $       | 1,739,894 |             |   | $       | 865,502   |  |  |            | 50 | % |   | $       | 738,272   | 
|                                |        |         |         |           |             |   |         |           |  |  |            |   










| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Diversified financial products  The largest gross and
    net premium growth in 2005 and 2004 was in our diversified
    financial products line of business. We experienced significant
    growth in our directors and officers liability gross
    written premium in 2004. In response to some increased
    competition and a reduction in available reinsurance at an
    acceptable cost, we scaled back our writing of this business in
    2005. Rates for the other products in this line have been
    relatively stable with the exception of surety for which rates
    have been increasing. 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  Profit margins
    remain at acceptable levels despite increased competition from
    the fully insured market. We increased our retentions in 2005
    and 2004 as this line of business generally is not volatile and
    has very little catastrophe exposure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Aviation  Our aviation premium retention levels were
    mostly unchanged in 2005 after excluding the effects of a
    portfolio transfer that occurred in 2004. This 2004 portfolio
    transfer recaptured ceded unearned premium and increased net
    written premium, but not gross written premium, as a result of a
    reduction in ceded reinsurance. There has been increasing
    competition in the international aviation component of this
    line, but margins are still acceptable. Our domestic business is
    very stable.                                                                                                                                                                                                                                      
|
| |  | London market account  We reduced our London market
    account premium writings in 2004 and again in 2005, due to more
    selective underwriting in response to reduced premium rates from
    increased competition. Premium rates have generally increased in
    2006 as a result of the hurricane losses. Net written premium
    was reduced by $18.7 million in 2005 and $15.3 million
    in 2004 for additional excess of loss premium to reinstate
    catastrophe reinsurance coverage, which distorts the retention
    percentages. Because of the catastrophe exposure, we purchase
    excess of loss reinsurance at a significant cost. Since there
    generally is a fixed minimum cost, the retention percentage
    decreases as our written premium decreases.
|
| |  | Other specialty lines  We experienced organic growth
    in our other specialty lines of business from increased writings
    in several products. The mix of products will affect the
    retention percentages. Rates in this line have been relatively
    stable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |            
| | -----------
| | Reinsurance









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| |                                    
| | -----------------------------------
| | Losses and Loss Adjustment Expenses



|                                                          |                                                 |        |           |           |            |  |      |        |   |   |            |           |  |        |      |      |            |   |         |           |  |  |      |      |  
|--------------------------------------------------------- | ----------------------------------------------- | ------ | --------- | --------- | ---------- |  | ---- | ------ | - | - | ---------- | --------- |  | ------ | ---- | ---- | ---------- | - | ------- | --------- |  |  | ---- | ---- | -
|                                                          |                                                 | 2005   |           |           | 2004       |  |      | 2003   |  
|                                                          |                                                 |        |           |           |            |  |      |        |  
|                                                          |                                                 | Amount |           |           | Loss Ratio |  |      | Amount |   |   | Loss Ratio |           |  | Amount |      |      | Loss Ratio |  
|                                                          |                                                 |        |           |           |            |  |      |        |   |   |            |           |  |        |      |      |            |  
|2005 hurricanes                                           |                                                 | $      | 394,625   |           |            |  | 19.9 | %      |   | $ |           |           |  |        |     | %    |            | $ |        |           |  |  |     | %   
|2004 hurricanes                                           |                                                 |        | (13,423   | )         |            |  | (0.7 | )      |   |   | 89,795     |           |  |        | 4.8  |      |            |   |        |           |  |  |     |     
|Other reserve redundancies                                |                                                 |        | (7,080    | )         |            |  | (0.4 | )      |   |   | (11,594    | )         |  |        | (0.6 | )    |            |   | (9,771  | )         |  |  | (0.7 | )   
|Discontinued line of business adjustments                 |                                                 |        | 49,775    |           |            |  | 2.5  |        |   |   | 127,707    |           |  |        | 6.9  |      |            |   | 132,924 |           |  |  | 8.9  |     
|All other gross incurred loss and loss adjustment expense |                                                 |        | 1,172,876 |           |            |  | 59.0 |        |   |   | 1,083,247  |           |  |        | 58.2 |      |            |   | 922,838 |           |  |  | 62.1 |     
|                                                          |                                                 |        |           |           |            |  |      |        |   |   |            |           |  |        |      |      |            |  
|                                                          | Gross incurred loss and loss expense adjustment |        | $         | 1,596,773 |            |  |      | 80.3   | % |   | $          | 1,289,155 |  |        |      | 69.3 | %          |   | $       | 1,045,991 |  |  |      | 70.3 | %
|                                                          |                                                 |        |           |           |            |  |      |        |   |   |            |           |  |        |      |      |            |  





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|                                                        |                                               |        |         |         |            |  |      |        |   |   |            |         |  |        |      |      |            |   |         |         |  |  |      |      |  
|------------------------------------------------------- | --------------------------------------------- | ------ | ------- | ------- | ---------- |  | ---- | ------ | - | - | ---------- | ------- |  | ------ | ---- | ---- | ---------- | - | ------- | ------- |  |  | ---- | ---- | -
|                                                        |                                               | 2005   |         |         | 2004       |  |      | 2003   |  
|                                                        |                                               |        |         |         |            |  |      |        |  
|                                                        |                                               | Amount |         |         | Loss Ratio |  |      | Amount |   |   | Loss Ratio |         |  | Amount |      |      | Loss Ratio |  
|                                                        |                                               |        |         |         |            |  |      |        |   |   |            |         |  |        |      |      |            |  
|2005 hurricanes                                         |                                               | $      | 73,185  |         |            |  | 5.3  | %      |   | $ |           |         |  |        |     | %    |            | $ |        |         |  |  |     | %   
|2004 hurricanes                                         |                                               |        | (7,167  | )       |            |  | (0.5 | )      |   |   | 23,335     |         |  |        | 2.3  |      |            |   |        |         |  |  |     |     
|Commutations                                            |                                               |        | 26,041  |         |            |  | 1.9  |        |   |   |           |         |  |        |     |      |            |   | 28,751  |         |  |  | 3.9  |     
|Discontinued line of business adjustments               |                                               |        | 8,929   |         |            |  | 0.7  |        |   |   | 27,326     |         |  |        | 2.7  |      |            |   |        |         |  |  |     |     
|Other reserve deficiencies (redundancies)               |                                               |        | (2,409  | )       |            |  | (0.2 | )      |   |   | 3,152      |         |  |        | 0.3  |      |            |   | (4,985  | )       |  |  | (0.7 | )   
|All other net incurred loss and loss adjustment expense |                                               |        | 822,618 |         |            |  | 60.0 |        |   |   | 591,417    |         |  |        | 58.5 |      |            |   | 464,886 |         |  |  | 63.0 |     
|                                                        |                                               |        |         |         |            |  |      |        |   |   |            |         |  |        |      |      |            |  
|                                                        | Net incurred loss and loss adjustment expense |        | $       | 921,197 |            |  |      | 67.2   | % |   | $          | 645,230 |  |        |      | 63.8 | %          |   | $       | 488,652 |  |  |      | 66.2 | %
|                                                        |                                               |        |         |         |            |  |      |        |   |   |            |         |  |        |      |      |            |  





|                                |        |         |         |           |       |  |       |         |   |   |         |           |  |         |       |      |       |   |         |         |  |  |       |      |  
|------------------------------- | ------ | ------- | ------- | --------- | ----- |  | ----- | ------- | - | - | ------- | --------- |  | ------- | ----- | ---- | ----- | - | ------- | ------- |  |  | ----- | ---- | -
|                                |        | 2005    |         |           | 2004  |  |       | 2003    |  
|                                |        |         |         |           |       |  |       |         |  
|                                |        | Net     |         |           | Net   |  |       | Net     |   |   | Net     |           |  | Net     |       |      | Net   |  
|                                |        | Earned  |         |           | Loss  |  |       | Earned  |   |   | Loss    |           |  | Earned  |       |      | Loss  |  
|                                |        | Premium |         |           | Ratio |  |       | Premium |   |   | Ratio   |           |  | Premium |       |      | Ratio |  
|                                |        |         |         |           |       |  |       |         |   |   |         |           |  |         |       |      |       |  
|Diversified financial products  |        | $       | 531,136 |           |       |  | 48.1  | %       |   | $ | 310,809 |           |  |         | 47.6  | %    |       | $ | 123,562 |         |  |  | 47.8  | %   
|Group life, accident and health |        |         | 504,382 |           |       |  | 71.6  |         |   |   | 343,913 |           |  |         | 66.7  |      |       |   | 290,009 |         |  |  | 61.6  |     
|Aviation                        |        |         | 136,197 |           |       |  | 67.3  |         |   |   | 127,248 |           |  |         | 63.2  |      |       |   | 97,536  |         |  |  | 61.5  |     
|London market account           |        |         | 93,017  |           |       |  | 106.0 |         |   |   | 111,341 |           |  |         | 65.9  |      |       |   | 137,572 |         |  |  | 53.2  |     
|Other specialty lines           |        |         | 97,721  |           |       |  | 74.1  |         |   |   | 69,089  |           |  |         | 63.5  |      |       |   | 12,443  |         |  |  | 62.1  |     
|Discontinued lines              |        |         | 7,535   |           |       |  | 551.3 |         |   |   | 48,292  |           |  |         | 145.2 |      |       |   | 77,150  |         |  |  | 142.6 |     
|                                |        |         |         |           |       |  |       |         |   |   |         |           |  |         |       |      |       |  
|                                | Totals |         | $       | 1,369,988 |       |  |       | 67.2    | % |   | $       | 1,010,692 |  |         |       | 63.8 | %     |   | $       | 738,272 |  |  |       | 66.2 | %
|                                |        |         |         |           |       |  |       |         |   |   |         |           |  |         |       |      |       |  
|Expense ratio                   |        |         |         |           |       |  | 25.9  |         |   |   |         |           |  |         | 26.9  |      |       |   |         |         |  |  | 24.8  |     
|                                |        |         |         |           |       |  |       |         |   |   |         |           |  |         |       |      |       |  
|Combined ratio                  |        |         |         |           |       |  | 93.1  | %       |   |   |         |           |  |         | 90.7  | %    |       |   |         |         |  |  | 91.0  | %   
|                                |        |         |         |           |       |  |       |         |   |   |         |           |  |         |       |      |       |  

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, however our
    underwriting margins remain satisfactory.                                                                                                                                                                                             
|
| |  | Aviation  The 2005 hurricanes increased the net loss
    ratio 5.0% and the 2004 hurricanes increased the net loss ratio
    6.5%. 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.
|
| |  | London market account  The 2005 hurricanes increased
    the net loss ratio 63.2% and the 2004 hurricanes increased the
    net loss ratio 14.1%. The London market account line of business
    can have relatively high
    year-to-year volatility
    due to catastrophe exposure.                                                                                                                                            
|
| |  | Other specialty lines  The 2005 hurricanes increased
    the net loss ratio 14.0% and the 2004 hurricanes increased the
    net loss ratio 6.5%.                                                                                                                                                                                                                                                                                  
|
| |  | Discontinued lines  The commutation losses in 2005
    and 2003 affected the net loss ratios for those years. In
    addition, the 2005 and 2004 net loss ratios were impacted
    by loss reserve strengthening of $8.9 million and
    $27.3 million, respectively, on certain assumed accident
    and health reinsurance contracts.                                                                                           



| |                         
| | ------------------------
| | Policy Acquisition Costs





| |          
| | ---------
| | Statutory





| |               
| | --------------
| | Agency Segment



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Liquidity and Capital Resources




| |          
| | ---------
| | Cash Flow







|                                                                                                            |                                       |      |         |         |      |   |         |         |  |   |         |         | 
|----------------------------------------------------------------------------------------------------------- | ------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                                                            |                                       | 2005 |         |         | 2004 |   |         | 2003    | 
|                                                                                                            |                                       |      |         |         |      |   |         |         | 
|Net earnings                                                                                                |                                       | $    | 195,860 |         |      | $ | 163,025 |         |  | $ | 143,561 |        
|Change in premium, claims and other receivables, net of
    reinsurance, other payables and restricted cash |                                       |      | (72,337 | )       |      |   | 7,417   |         |  |   | (26,118 | )      
|Change in unearned premium, net                                                                             |                                       |      | 126,324 |         |      |   | 99,813  |         |  |   | 133,894 |        
|Change in loss and loss adjustment expense payable, net of
    reinsurance recoverables                     |                                       |      | 456,359 |         |      |   | 355,253 |         |  |   | 262,742 |        
|Gain on sale of subsidiaries                                                                                |                                       |      | (8,717  | )       |      |   | (6,317  | )       |  |   | (52,681 | )      
|Change in trading portfolio                                                                                 |                                       |      | (66,809 | )       |      |   | 25,673  |         |  |   | 12,741  |        
|Other, net                                                                                                  |                                       |      | (6,690  | )       |      |   | 23,839  |         |  |   | 53,959  |        
|                                                                                                            |                                       |      |         |         |      |   |         |         | 
|                                                                                                            | Cash provided by operating activities |      | $       | 623,990 |      |   | $       | 668,703 |  |   | $       | 528,098 | 
|                                                                                                            |                                       |      |         |         |      |   |         |         | 





| |            
| | -----------
| | Investments





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|                                                |  |            |  |            |  |           
|----------------------------------------------- |  | ---------- |  | ---------- |  | ----------
|                                                |  | 2005       |  | 2004       |  | 2003      
|                                                |  |            |  |            |  |           
|Average investments, at cost                    |  | $2,822,686 |  | $2,054,620 |  | $1,403,690
|Net investment income*                          |  | 98,851     |  | 64,885     |  | 47,335    
|Average short-term yield*                       |  | 2.7%       |  | 1.7%       |  | 1.8%      
|Average long-term yield*                        |  | 4.0%       |  | 3.9%       |  | 4.2%      
|Average long-term tax equivalent yield*         |  | 4.9%       |  | 4.8%       |  | 5.0%      
|Weighted average combined tax equivalent yield* |  | 4.1%       |  | 3.8%       |  | 3.8%      
|Weighted average maturity                       |  | 7.6 years  |  | 6.6 years  |  | 4.5 years 
|Weighted average duration                       |  | 4.9 years  |  | 4.6 years  |  | 3.7 years 
|Average S&P rating                              |  | AAA        |  | AAA        |  | AA+       




|  |                                                               
|- | --------------------------------------------------------------
|* | Excluding realized and unrealized investment gains and losses.



|                                                  |                   |        |         |           |   |  |    |     |  
|------------------------------------------------- | ----------------- | ------ | ------- | --------- | - |  | -- | --- | -
|                                                  |                   | Amount |         |           | % | 
|                                                  |                   |        |         |           |   | 
|Short-term investments                            |                   | $      | 839,581 |           |   |  | 26 | %  
|U.S. government                                   |                   |        | 89,724  |           |   |  | 3  |    
|States, municipalities and political subdivisions |                   |        | 418,873 |           |   |  | 13 |    
|Special revenue fixed income securities           |                   |        | 723,101 |           |   |  | 22 |    
|Corporate fixed income securities                 |                   |        | 375,582 |           |   |  | 11 |    
|Asset-backed and mortgage-backed securities       |                   |        | 355,372 |           |   |  | 11 |    
|Foreign securities                                |                   |        | 305,972 |           |   |  | 9  |    
|Other investments                                 |                   |        | 149,223 |           |   |  | 5  |    
|                                                  |                   |        |         |           |   | 
|                                                  | Total investments |        | $       | 3,257,428 |   |  |    | 100 | %
|                                                  |                   |        |         |           |   | 

48



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|             |                               |        |           |           |   |  |    |     |  
|------------ | ----------------------------- | ------ | --------- | --------- | - |  | -- | --- | -
|             |                               | Amount |           |           | % | 
|             |                               |        |           |           |   | 
|AAA          |                               | $      | 1,593,663 |           |   |  | 70 | %  
|AA           |                               |        | 273,714   |           |   |  | 12 |    
|A            |                               |        | 390,074   |           |   |  | 17 |    
|BBB          |                               |        | 10,526    |           |   |  | 1  |    
|BB and below |                               |        | 647       |           |   |  |   |    
|             |                               |        |           |           |   | 
|             | Total fixed income securities |        | $         | 2,268,624 |   |  |    | 100 | %
|             |                               |        |           |           |   | 



|                                            |                                  |        |         |           |   |  |    |     |  
|------------------------------------------- | -------------------------------- | ------ | ------- | --------- | - |  | -- | --- | -
|                                            |                                  | Amount |         |           | % | 
|                                            |                                  |        |         |           |   | 
|One year or less                            |                                  | $      | 146,924 |           |   |  | 6  | %  
|One year to five years                      |                                  |        | 561,240 |           |   |  | 25 |    
|Five years to ten years                     |                                  |        | 467,542 |           |   |  | 21 |    
|Ten years to fifteen years                  |                                  |        | 301,264 |           |   |  | 13 |    
|More than fifteen years                     |                                  |        | 436,282 |           |   |  | 19 |    
|                                            |                                  |        |         |           |   | 
|                                            | Securities with fixed maturities |        |         | 1,913,252 |   |  |    | 84  |  
|Asset-backed and mortgage-backed securities |                                  |        | 355,372 |           |   |  | 16 |    
|                                            |                                  |        |         |           |   | 
|                                            | Total fixed income securities    |        | $       | 2,268,624 |   |  |    | 100 | %
|                                            |                                  |        |         |           |   | 









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|                                                                            |                               |       |           |                                    |      |   |         |           |  |   |           |         |   |            |         |         |  |   |           |           | 
|--------------------------------------------------------------------------- | ----------------------------- | ----- | --------- | ---------------------------------- | ---- | - | ------- | --------- |  | - | --------- | ------- | - | ---------- | ------- | ------- |  | - | --------- | --------- | 
|                                                                            |                               |       |           | Maturities/Estimated Payment Dates |     
|                                                                            |                               |       |           |                                    |     
|                                                                            |                               | Total |           |                                    | 2006 |   |         | 2007-2008 |  |   | 2009-2010 |         |   | Thereafter |        
|                                                                            |                               |       |           |                                    |      |   |         |           |  |   |           |         |   |            |        
|Cash and investment maturities of insurance companies                       |                               | $     | 2,969,277 |                                    |      | $ | 897,421 |           |  | $ | 469,980   |         |   | $          | 380,460 |         |  | $ | 1,221,416 |          
|Estimated loss and loss adjustment expense payments, net of
    reinsurance |                               |       | 1,534,933 |                                    |      |   | 538,662 |           |  |   | 553,304   |         |   |            | 259,909 |         |  |   | 183,058   |          
|                                                                            |                               |       |           |                                    |      |   |         |           |  |   |           |         |   |            |        
|                                                                            | Estimated available cash flow |       | $         | 1,434,344                          |      |   | $       | 358,759   |  |   | $         | (83,324 | ) |            | $       | 120,551 |  |   | $         | 1,038,358 | 
|                                                                            |                               |       |           |                                    |      |   |         |           |  |   |           |         |   |            |        





| |                        
| | -----------------------
| | Contractual Obligations



|                                                  |                                 |                                                |         |                         |           |  |         |           |           |  |           |         |           |            |        |         |         |  |        |         |         | 
|------------------------------------------------- | ------------------------------- | ---------------------------------------------- | ------- | ----------------------- | --------- |  | ------- | --------- | --------- |  | --------- | ------- | --------- | ---------- | ------ | ------- | ------- |  | ------ | ------- | ------- | 
|                                                  |                                 |                                                |         | Estimated Payment Dates |          
|                                                  |                                 |                                                |         |                         |          
|                                                  |                                 | Total                                          |         |                         | 2006      |  |         | 2007-2008 |           |  | 2009-2010 |         |           | Thereafter |       
|                                                  |                                 |                                                |         |                         |           |  |         |           |           |  |           |         |           |            |       
|Gross loss and loss adjustment expense payable(1) |                                 |                                                |         |                         |           |  |         |           |           |  |           |         |           |            |        |         |         |  |        |        
|                                                  | Diversified financial products  |                                                | $       | 953,131                 |           |  | $       | 199,984   |           |  | $         | 388,204 |           |            | $      | 238,847 |         |  | $      | 126,096 |        
|                                                  | Group life, accident and health |                                                |         | 204,100                 |           |  |         | 169,698   |           |  |           | 26,734  |           |            |        | 6,077   |         |  |        | 1,591   |        
|                                                  | Aviation                        |                                                |         | 193,242                 |           |  |         | 95,036    |           |  |           | 65,946  |           |            |        | 21,309  |         |  |        | 10,951  |        
|                                                  | London market account           |                                                |         | 578,253                 |           |  |         | 239,558   |           |  |           | 284,154 |           |            |        | 48,084  |         |  |        | 6,457   |        
|                                                  | Other specialty lines           |                                                |         | 195,918                 |           |  |         | 93,245    |           |  |           | 75,064  |           |            |        | 22,276  |         |  |        | 5,333   |        
|                                                  | Discontinued lines              |                                                |         | 689,076                 |           |  |         | 146,469   |           |  |           | 222,988 |           |            |        | 122,863 |         |  |        | 196,756 |        
|                                                  |                                 |                                                |         |                         |           |  |         |           |           |  |           |         |           |            |       
|                                                  |                                 | Total loss and loss adjustment expense payable |         |                         | 2,813,720 |  |         |           | 943,990   |  |           |         | 1,063,090 |            |        |         | 459,456 |  |        |         | 347,184 | 
|Life and annuity policy benefits                  |                                 |                                                | 73,415  |                         |           |  | 1,859   |           |           |  | 3,577     |         |           |            | 3,397  |         |         |  | 64,582 |        
|1.30% Convertible Notes(2)(3)                     |                                 |                                                | 125,812 |                         |           |  | 125,812 |           |           |  |          |         |           |            |       |         |         |  |       |        
|2.00% Convertible Exchange Notes(2)(3)            |                                 |                                                | 174,120 |                         |           |  | 174,120 |           |           |  |          |         |           |            |       |         |         |  |       |        
|Other notes payable(3)                            |                                 |                                                | 13,899  |                         |           |  | 1,003   |           |           |  | 11,753    |         |           |            | 508    |         |         |  | 635    |        
|$200.0 million Revolving Loan Facility            |                                 |                                                |        |                         |           |  |        |           |           |  |          |         |           |            |       |         |         |  |       |        
|Operating leases                                  |                                 |                                                | 59,123  |                         |           |  | 10,582  |           |           |  | 18,936    |         |           |            | 12,150 |         |         |  | 17,455 |        
|Earnout liabilities                               |                                 |                                                | 32,318  |                         |           |  | 32,318  |           |           |  |          |         |           |            |       |         |         |  |       |        
|Indemnifications                                  |                                 |                                                | 20,748  |                         |           |  | 13,294  |           |           |  | 1,968     |         |           |            | 2,172  |         |         |  | 3,314  |        
|                                                  |                                 |                                                |         |                         |           |  |         |           |           |  |           |         |           |            |       
|                                                  |                                 | Total obligations                              |         | $                       | 3,313,155 |  |         | $         | 1,302,978 |  |           | $       | 1,099,324 |            |        | $       | 477,683 |  |        | $       | 433,170 | 
|                                                  |                                 |                                                |         |                         |           |  |         |           |           |  |           |         |           |            |       

50



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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 2006 column since they may be surrendered for cash
    at the option of the holders in the first quarter of 2006
    because our stock traded at specified price levels in 2005. 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.                                                                                                                                                                                                                                                                                                                                                                                                    









| |                     
| | --------------------
| | Subsidiary Dividends





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| |                
| | ---------------
| | Lines of Credit









| |      
| | -----
| | Other









Impact of Inflation




52



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Foreign Exchange Rate Fluctuations




Critical Accounting Policies






| |                                 
| | --------------------------------
| | Loss and Loss Adjustment Expense







53



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|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |         |  |   |           |         |  | 
|----------------------------- | ------------------------------- | ------------------ | --------- | ------- | -------------- | - | --------- | --------------- |  | - | --------------- | ------- |  | - | --------- | ------- |  | 
|                              |                                 | Recorded           |           |         | Actuarial      |   |           | Low End of      |  |   | High End of     |        
|                              |                                 | Net Reserves       |           |         | Point Estimate |   |           | Actuarial Range |  |   | Actuarial Range |        
|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |        
|Total net reserves            |                                 | $                  | 1,534,933 |         |                | $ | 1,510,649 |                 |  | $ | 1,419,599       |         |  | $ | 1,649,515 |        
|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |        
|Individual lines of business: |                                 |                    |           |         |                |   |           |                 |  |   |                 |         |  |   |           |        
|                              | Diversified financial products  |                    | $         | 551,350 |                |   | $         | 548,060         |  |   | $               | 477,296 |  |   | $         | 644,673 | 
|                              | Group life, accident and health |                    |           | 162,076 |                |   |           | 165,545         |  |   |                 | 151,301 |  |   |           | 181,882 | 
|                              | Aviation                        |                    |           | 104,727 |                |   |           | 97,998          |  |   |                 | 91,060  |  |   |           | 106,615 | 
|                              | London market account           |                    |           | 197,142 |                |   |           | 192,228         |  |   |                 | 182,571 |  |   |           | 217,638 | 
|                              | Other specialty lines           |                    |           | 106,520 |                |   |           | 99,612          |  |   |                 | 94,369  |  |   |           | 110,647 | 
|                              | Discontinued lines              |                    |           | 413,118 |                |   |           | 407,206         |  |   |                 | 358,389 |  |   |           | 490,719 | 
|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |        
|                              |                                 | Total net reserves |           | $       | 1,534,933      |   |           |                 |  |   |                 |         |  |   |           |         |  | 
|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |        







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|                                |  |                                    |  |                          |  |                        |        |          |           |  |          |            |      |  |                             |                                                |  |                                                            
|------------------------------- |  | ---------------------------------- |  | ------------------------ |  | ---------------------- | ------ | -------- | --------- |  | -------- | ---------- | ---- |  | --------------------------- | ---------------------------------------------- |  | -----------------------------------------------------------
|                                |  |                                    |  |                          |  | Claims Characteristics |        |          |           |  |         
|                                |  |                                    |  |                          |  |                        |        |          |           |  |         
|                                |  |                                    |  |                          |  |                        |        | Speed of |           |  |          |            |     
|                                |  |                                    |  |                          |  |                        |        | Loss     |           |  | Reserve  |            |      | 
|Line of Business                |  | Products                           |  | Underwriting             |  | Duration               |        |          | Reporting |  |          | Volatility |      |  | Major Actuarial Assumptions
|                                |  |                                    |  |                          |  |                        |        |          |           |  |          |            |      |  |                            
|Diversified financial products  |  | Directors and officers liability |  | Primary                  |  |                        | Medium |          |           |  | Moderate |            |      |  | Medium                      |                                                |  | Historical and industry loss reporting patterns            
|                               
|                                |  | Professional indemnity             |  | Primary                  |  |                        | Medium |          |           |  | Moderate |            |      |  | Low                         |                                                |  | Historical loss reporting patterns                         
|                               
|                                |  | Surety                             |  | Primary                  |  |                        | Medium |          |           |  | Fast     |            |      |  | Low                         |                                                |  | Historical loss payment and reporting patterns             
|                               
|Group life, accident and health |  | Medical stop-loss                  |  | Primary                  |  |                        | Short  |          |           |  | Fast     |            |      |  | Low                         |                                                |  | Medical cost and utilization trends                        
|                               
|                                |  |                                    |  |                          |  |                        |        |          |           |  |          |            |      |  |                             |                                                |  | Historical loss payment and reporting patterns             
|                               
|                                |  |                                    |  |                          |  |                        |        |          |           |  |          |            |      |  |                             |                                                |  | Rate changes                                               
|                               
|Aviation                        |  | Aviation                           |  | Primary and subscription |  |                        | Medium |          |           |  | Fast     |            |      |  | Medium                      |                                                |  | Historical loss payment and reporting patterns             
|                               
|                                |  |                                    |  |                          |  |                        |        |          |           |  |          |            |      |  |                             |                                                |  | Rate changes                                               
|                               
|London market account           |  | Accident and health                |  | Primary and assumed      |  | Medium to Long         |        |          | Slow      |  |          |            | High |  |                             | Historical loss payment and reporting patterns
|                               
|                                |  | Energy*                            |  | Subscription             |  |                        | Medium |          |           |  | Moderate |            |      |  | Medium                      |                                                |  | Historical loss payment and reporting patterns             
|                               
|                                |  |                                    |  |                          |  |                        |        |          |           |  |          |            |      |  |                             |                                                |  | Historical severity and frequency                          
|                               
|                                |  |                                    |  |                          |  |                        |        |          |           |  |          |            |      |  |                             |                                                |  | Historical large loss experience                           
|                               
|                                |  | Property*                          |  | Subscription             |  |                        | Medium |          |           |  | Moderate |            |      |  | Medium                      |                                                |  | Historical loss payment and reporting patterns             
|                               
|                                |  |                                    |  |                          |  |                        |        |          |           |  |          |            |      |  |                             |                                                |  | Historical severity and frequency                          
|                               
|                                |  |                                    |  |                          |  |                        |        |          |           |  |          |            |      |  |                             |                                                |  | Historical large loss experience                           
|                               
|Other specialty                 |  | Surplus lines business             |  | Assumed                  |  |                        | Medium |          |           |  | Moderate |            |      |  | Medium                      |                                                |  | Historical loss payment and reporting patterns             
|                               
|Discontinued                    |  | Accident and health reinsurance    |  | Assumed                  |  |                        | Long   |          |           |  | Slow     |            |      |  | High                        |                                                |  | Historical and industry loss payment and reporting patterns




|  |                            
|- | ---------------------------
|* | Includes catastrophe losses



55



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|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |    |    |  
|----------------------------------- | ----------------------------------------------------- | ---------------------------------------------- | - | ------- | --------- |  | - | --------- | --------- |  | -------- | ------- | --------- |  |  | -- | -- | -
|                                    |                                                       |                                                |   |         |           |  |   | % Net     |          
|                                    |                                                       |                                                |   |         |           |  |   | IBNR to   |          
|                                    |                                                       |                                                |   |         |           |  |   | Net Total |          
|                                    |                                                       | Gross                                          |   |         | Ceded     |  |   | Net       |           |  | Reserves |        
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|At December 31, 2005                |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|Reported loss reserves:             |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|                                    | Diversified financial products                        |                                                | $ | 319,000 |           |  | $ | 126,665   |           |  | $        | 192,335 |           |  |  |    |   
|                                    | Group life, accident and health                       |                                                |   | 129,601 |           |  |   | 6,366     |           |  |          | 123,235 |           |  |  |    |   
|                                    | Aviation                                              |                                                |   | 118,122 |           |  |   | 55,602    |           |  |          | 62,520  |           |  |  |    |   
|                                    | London market account                                 |                                                |   | 345,605 |           |  |   | 260,473   |           |  |          | 85,132  |           |  |  |    |   
|                                    | Other specialty lines                                 |                                                |   | 51,634  |           |  |   | 26,090    |           |  |          | 25,544  |           |  |  |    |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Subtotal reported reserves                     |   |         | 963,962   |  |   |           | 475,196   |  |          |         | 488,766   |  |  |    |    |  
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|Incurred 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  |           |  |  | 24 |   
|                                    | Aviation                                              |                                                |   | 75,120  |           |  |   | 32,913    |           |  |          | 42,207  |           |  |  | 40 |   
|                                    | London market account                                 |                                                |   | 232,648 |           |  |   | 120,638   |           |  |          | 112,010 |           |  |  | 57 |   
|                                    | Other specialty lines                                 |                                                |   | 144,284 |           |  |   | 63,308    |           |  |          | 80,976  |           |  |  | 76 |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Subtotal incurred but not reported reserves    |   |         | 1,160,682 |  |   |           | 527,633   |  |          |         | 633,049   |  |  |    | 56 |  
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    | Discontinued lines reported reserves                  |                                                |   | 437,681 |           |  |   | 159,529   |           |  |          | 278,152 |           |  |  |    |   
|                                    | Discontinued lines incurred but not reported reserves |                                                |   | 251,395 |           |  |   | 116,429   |           |  |          | 134,966 |           |  |  | 33 |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Total loss and loss adjustment expense payable |   | $       | 2,813,720 |  |   | $         | 1,278,787 |  |          | $       | 1,534,933 |  |  |    | 50 | %
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|At December 31, 2004                |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|Reported loss reserves:             |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|                                    | Diversified financial products                        |                                                | $ | 149,448 |           |  | $ | 64,852    |           |  | $        | 84,596  |           |  |  |    |   
|                                    | Group life, accident and health                       |                                                |   | 128,973 |           |  |   | 31,235    |           |  |          | 97,738  |           |  |  |    |   
|                                    | Aviation                                              |                                                |   | 108,277 |           |  |   | 48,301    |           |  |          | 59,976  |           |  |  |    |   
|                                    | London market account                                 |                                                |   | 182,585 |           |  |   | 106,249   |           |  |          | 76,336  |           |  |  |    |   
|                                    | Other specialty lines                                 |                                                |   | 26,717  |           |  |   | 14,349    |           |  |          | 12,368  |           |  |  |    |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Subtotal reported reserves                     |   |         | 596,000   |  |   |           | 264,986   |  |          |         | 331,014   |  |  |    |    |  
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|Incurred but not reported reserves: |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|                                    | Diversified financial products                        |                                                |   | 462,795 |           |  |   | 257,853   |           |  |          | 204,942 |           |  |  | 71 | % 
|                                    | Group life, accident and health                       |                                                |   | 90,396  |           |  |   | 30,131    |           |  |          | 60,265  |           |  |  | 38 |   
|                                    | Aviation                                              |                                                |   | 55,169  |           |  |   | 24,117    |           |  |          | 31,052  |           |  |  | 34 |   
|                                    | London market account                                 |                                                |   | 98,530  |           |  |   | 31,090    |           |  |          | 67,440  |           |  |  | 47 |   
|                                    | Other specialty lines                                 |                                                |   | 62,206  |           |  |   | 28,930    |           |  |          | 33,276  |           |  |  | 73 |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Subtotal incurred but not reported reserves    |   |         | 769,096   |  |   |           | 372,121   |  |          |         | 396,975   |  |  |    | 55 |  
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    | Discontinued lines reported reserves                  |                                                |   | 453,394 |           |  |   | 241,481   |           |  |          | 211,913 |           |  |  |    |   
|                                    | Discontinued lines incurred but not reported reserves |                                                |   | 270,709 |           |  |   | 151,328   |           |  |          | 119,381 |           |  |  | 36 |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Total loss and loss adjustment expense payable |   | $       | 2,089,199 |  |   | $         | 1,029,916 |  |          | $       | 1,059,283 |  |  |    | 49 | %
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Diversified financial products  Total net reserves in
    our diversified financial products line of business increased
    $261.8 million from 2004 to 2005 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.
|
| |  | Group life, accident and health  Incurred but not
    reported reserves have decreased and reported reserves have
    increased due to a speed up in the reporting of medical
    stop-loss claims.                                                                                                                                                                                                                                  
|
| |  | London market account  Total net reserves in our
    London market account increased $53.4 million and the
    percentage of incurred but not reported reserves increased in
    2005, due to estimated unreported claims for the 2005 hurricanes.                                                                                                                                                                                   
|
| |  | Discontinued lines  Total net reserves for our
    discontinued lines increased $81.8 million in 2005
    primarily as a result of a commutation. The percentage of net
    incurred but not reported reserves to total reserves for
    discontinued lines decreased to 33% as claims continued to be
    reported and reported reserves were reassessed.                                                                           





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| |                         
| | ------------------------
| | Reinsurance Recoverables









| |               
| | --------------
| | Deferred Taxes





| |                      
| | ---------------------
| | Valuation of Goodwill

Using Cash Flow
Information and Present Values in Accounting Measurements




| |                                                
| | -----------------------------------------------
| | Other-Than-Temporary Impairments on Investments



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Recent Accounting Pronouncements




| |                    
| | -------------------
| | Share-Based Payment

Share-Based Payment






| |                                 
| | --------------------------------
| | Other-Than-Temporary Impairments

The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments




| |                                   
| | ----------------------------------
| | Accounting Changes and Corrections

Accounting
Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim
Financial Statements


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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk







| |                   
| | ------------------
| | Interest Rate Risk









| |                      
| | ---------------------
| | Foreign Exchange Risk



|                       |  |              |        |              |               |   |       |             |              |   |               |  |  |   |     | 
|---------------------- |  | ------------ | ------ | ------------ | ------------- | - | ----- | ----------- | ------------ | - | ------------- |  |  | - | --- | 
|                       |  | December 31, |       
|                       |  |              |       
|                       |  | 2005         |        |              | 2004          |  
|                       |  |              |        |              |               |  
|                       |  |              |        | Hypothetical |               |   |       |             | Hypothetical |  
|                       |  | U.S. Dollar  |        |              | 10% Change    |   |       | U.S. Dollar |              |   | 10% Change in | 
|                       |  | Equivalent   |        |              | in Fair Value |   |       | Equivalent  |              |   | Fair Value    | 
|                       |  |              |        |              |               |   |       |             |              |   |               | 
|British pound sterling |  | $            | 11,590 |              |               | $ | 1,159 |             |              | $ | 6,163         |  |  | $ | 616 | 
|Euro                   |  |              | 2,291  |              |               |   | 229   |             |              |   | 2,117         |  |  |   | 212 | 
|Canadian dollar        |  |              | 522    |              |               |   | 52    |             |              |   | 2,537         |  |  |   | 254 | 



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|        |                                            
|------- | -------------------------------------------
|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

Disclosure Controls and Procedures


13a-15(e) 15d-15(e)


Managements Report on Internal Control over
Financial Reporting




Changes in Internal Control over Financial
Reporting









|         |                  
|-------- | -----------------
|Item 9B. | Other Information

8-K 8-K.





PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

Code of Business Conduct and Ethics


www.hcc.com


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303A-12(a) 10-K 10-K







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Shareholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statement Schedules




Exhibits




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SIGNATURES






| |                                                           
| | ----------------------------------------------------------
| | HCC Insurance Holdings,
    Inc.                          
| | _______________________________________ 
     (Registrant)

|                      |  |                                                                                                           
|--------------------- |  | ----------------------------------------------------------------------------------------------------------
|Dated: March 15, 2006 |  | By: /s/ Stephen L.
    Way(Stephen L. Way)Chairman of the Board,
    Chief Executive Officer and President



|                                                      |  |                                                                                                             |  |                |  | 
|----------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                                  |  | Title                                                                                                       |  | Date          
|                                                      |  |                                                                                                             |  |               
|                                                     
|/s/ Stephen L. Way(Stephen L. Way)                    |  | Chairman of the Board of Directors, Chief Executive Officer and
    President (Principal Executive Officer) |  | March 15, 2006
|                                                     
|/s/ Frank J. Bramanti*(Frank J. Bramanti)             |  | Director                                                                                                    |  | March 15, 2006
|                                                     
|/s/ Patrick B. Collins*(Patrick B. Collins)           |  | Director                                                                                                    |  | March 15, 2006
|                                                     
|/s/ James R. Crane*(James R. Crane)                   |  | Director                                                                                                    |  | March 15, 2006
|                                                     
|/s/ J. Robert
    Dickerson*(J. Robert Dickerson)     |  | Director                                                                                                    |  | March 15, 2006
|                                                     
|/s/ Walter M. Duer*(Walter M. Duer)                   |  | Director                                                                                                    |  | March 15, 2006
|                                                     
|/s/ Edward H. Ellis,
    Jr.(Edward H. Ellis, Jr.)    |  | Director, Executive Vice President and Chief Financial Officer
    (Chief Accounting Officer)               |  | March 15, 2006
|                                                     
|/s/ James C. Flagg,
    Ph.D.*(James C. Flagg, Ph.D.) |  | Director                                                                                                    |  | March 15, 2006
|                                                     
|/s/ Allan W. Fulkerson*(Allan W. Fulkerson)           |  | Director                                                                                                    |  | March 15, 2006
|                                                     
|/s/ Walter J. Lack*(Walter J. Lack)                   |  | Director                                                                                                    |  | March 15, 2006
|                                                     
|/s/ John N. Molbeck,
    Jr.*(John N. Molbeck, Jr.)   |  | Director                                                                                                    |  | March 15, 2006

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|                                                      |  |                                                   |  |                |  | 
|----------------------------------------------------- |  | ------------------------------------------------- |  | -------------- |  | 
|Name                                                  |  | Title                                             |  | Date          
|                                                      |  |                                                   |  |               
|                                                     
|/s/ Michael A. F.
    Roberts*(Michael A. F. Roberts) |  | Director                                          |  | March 15, 2006
|                                                     
|*By:                                                  |  | /s/ Stephen L. WayStephen L. Way,Attorney-in-fact |  |                |  | 

65



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##### 










INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES


|                                                                                                               |  |                                                                      |  |    
|-------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------- |  | ---
|Report of Management                                                                                           |  | F-1                                                                 
|Report of Independent Registered Public
    Accounting Firm                                                    |  | F-3                                                                 
|Consolidated Balance Sheets at
    December 31, 2005 and 2004                                                  |  | F-5                                                                 
|Consolidated Statements of Earnings for the
    three years ended December 31, 2005                            |  | F-6                                                                 
|Consolidated Statements of Comprehensive
    Income for the three years ended December 31, 2005                |  | F-7                                                                 
|Consolidated Statements of Changes in
    Shareholders Equity for the three years ended
    December 31, 2005 |  | F-8                                                                 
|Consolidated Statements of Cash Flows for
    the three years ended December 31, 2005                          |  | F-9                                                                 
|Notes to Consolidated Financial
    Statements                                                                 |  | F-10                                                                
|SCHEDULES:                                                                                                     |  |                                                                      |  |    
|Schedule 1                                                                                                     |  | Summary of Investments other than
    Investments in Related Parties |  | S-1
|Schedule 2                                                                                                     |  | Condensed Financial Information of
    Registrant                    |  | S-2
|Schedule 3                                                                                                     |  | Supplementary Insurance Information                                  |  | S-7
|Schedule 4                                                                                                     |  | Reinsurance                                                          |  | S-8
|Schedule 5                                                                                                     |  | Valuation and Qualifying Accounts                                    |  | S-9





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REPORT OF MANAGEMENT


Managements Responsibility for Financial Reporting


10-K,


Managements Report on Internal Control over Financial
Reporting


13a-15(f) 15d-15(f)




| |   |                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pertain to the maintenance of our records that in reasonable
    detail accurately and fairly reflect the Companys
    transactions and dispositions of our assets;                                                                                                                                                                                                        
|
| |  | provide reasonable assurance that we have recorded transactions
    as necessary to permit us to prepare financial statements in
    accordance with generally accepted accounting principles and
    that the Companys receipts and expenditures are being made
    only in accordance with authorizations of our management and the
    Companys board of directors; and
|
| |  | provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    Companys assets that could have a material effect on our
    consolidated financial statements.                                                                                                                                       



Internal Control  Integrated Framework




F-1



---



##### Table of Contents





|                                                                                                 |  |  |  |                                                                                                     
|------------------------------------------------------------------------------------------------ |  |  |  | ----------------------------------------------------------------------------------------------------
|/s/ Stephen L. WayStephen L. WayChairman of the Board,
    Chief Executive Officer and President |  |  |  | /s/ Edward H. Ellis, Jr.Edward H. Ellis, Jr.Executive Vice President
    and Chief Financial Officer



F-2



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##### 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-3



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##### Table of Contents









PricewaterhouseCoopers
LLP






F-4



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(in thousands, except per share data)


|                                                                                                                                       |                                                                                                   |                                            |           |           |           |   |           |           |           | 
|-------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                                                                                                                       |                                                                                                   | December 31,                               |          
|                                                                                                                                       |                                                                                                   |                                            |          
|                                                                                                                                       |                                                                                                   | 2005                                       |           |           | 2004      |  
|                                                                                                                                       |                                                                                                   |                                            |           |           |           |  
|ASSETS                                                                                                                                
|Investments:                                                                                                                           |                                                                                                   |                                            |           |           |           |   |           |          
|                                                                                                                                       | Fixed income securities, at fair value (amortized cost:
    2005  $2,277,139; 2004  $1,682,421) |                                            | $         | 2,268,624 |           |   | $         | 1,703,171 |          
|                                                                                                                                       | Short-term investments, at cost, which approximates fair value                                    |                                            |           | 839,581   |           |   |           | 729,985   |          
|                                                                                                                                       | Other investments, at fair value (cost: 2005 
    $144,897; 2004  $34,137)                      |                                            |           | 149,223   |           |   |           | 35,335    |          
|                                                                                                                                       |                                                                                                   |                                            |           |           |           |  
|                                                                                                                                       |                                                                                                   | Total investments                          |           |           | 3,257,428 |   |           |           | 2,468,491 | 
|Cash                                                                                                                                   |                                                                                                   |                                            | 73,935    |           |           |   | 69,933    |          
|Restricted cash and cash investments                                                                                                   |                                                                                                   |                                            | 170,978   |           |           |   | 188,510   |          
|Premium, claims and other receivables                                                                                                  |                                                                                                   |                                            | 884,654   |           |           |   | 889,800   |          
|Reinsurance recoverables                                                                                                               |                                                                                                   |                                            | 1,360,483 |           |           |   | 1,104,026 |          
|Ceded unearned premium                                                                                                                 |                                                                                                   |                                            | 239,416   |           |           |   | 317,055   |          
|Ceded life and annuity benefits                                                                                                        |                                                                                                   |                                            | 73,415    |           |           |   | 74,627    |          
|Deferred policy acquisition costs                                                                                                      |                                                                                                   |                                            | 156,253   |           |           |   | 139,199   |          
|Goodwill                                                                                                                               |                                                                                                   |                                            | 532,947   |           |           |   | 444,031   |          
|Other assets                                                                                                                           |                                                                                                   |                                            | 276,557   |           |           |   | 208,954   |          
|                                                                                                                                       |                                                                                                   |                                            |           |           |           |  
|                                                                                                                                       |                                                                                                   | Total assets                               |           | $         | 7,026,066 |   |           | $         | 5,904,626 | 
|                                                                                                                                       |                                                                                                   |                                            |           |           |           |  
|                                                                                                                                      
|LIABILITIES                                                                                                                           
|Loss and loss adjustment expense payable                                                                                               |                                                                                                   | $                                          | 2,813,720 |           |           | $ | 2,089,199 |          
|Life and annuity policy benefits                                                                                                       |                                                                                                   |                                            | 73,415    |           |           |   | 74,627    |          
|Reinsurance balances payable                                                                                                           |                                                                                                   |                                            | 176,954   |           |           |   | 228,998   |          
|Unearned premium                                                                                                                       |                                                                                                   |                                            | 807,109   |           |           |   | 741,706   |          
|Deferred ceding commissions                                                                                                            |                                                                                                   |                                            | 65,702    |           |           |   | 94,896    |          
|Premium and claims payable                                                                                                             |                                                                                                   |                                            | 753,859   |           |           |   | 766,765   |          
|Notes payable                                                                                                                          |                                                                                                   |                                            | 309,543   |           |           |   | 311,277   |          
|Accounts payable and accrued liabilities                                                                                               |                                                                                                   |                                            | 332,068   |           |           |   | 273,493   |          
|                                                                                                                                       |                                                                                                   |                                            |           |           |           |  
|                                                                                                                                       |                                                                                                   | Total liabilities                          |           |           | 5,332,370 |   |           |           | 4,580,961 | 
|SHAREHOLDERS EQUITY                                                                                                                  
|Common stock, $1.00 par value; 250.0 million shares
    authorized (shares issued and outstanding: 2005 
    110,803; 2004  102,057) |                                                                                                   |                                            | 110,803   |           |           |   | 68,038    |          
|Additional paid-in capital                                                                                                             |                                                                                                   |                                            | 747,568   |           |           |   | 566,776   |          
|Retained earnings                                                                                                                      |                                                                                                   |                                            | 817,013   |           |           |   | 651,216   |          
|Accumulated other comprehensive income                                                                                                 |                                                                                                   |                                            | 18,312    |           |           |   | 37,635    |          
|                                                                                                                                       |                                                                                                   |                                            |           |           |           |  
|                                                                                                                                       |                                                                                                   | Total shareholders equity                 |           |           | 1,693,696 |   |           |           | 1,323,665 | 
|                                                                                                                                       |                                                                                                   |                                            |           |           |           |  
|                                                                                                                                       |                                                                                                   | Total liabilities and shareholders equity |           | $         | 7,026,066 |   |           | $         | 5,904,626 | 
|                                                                                                                                       |                                                                                                   |                                            |           |           |           |  



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF EARNINGS


(in thousands, except per share data)


|                                                                                                                     |               |                          |           |           |      |   |           |           |  |   |         |         | 
|-------------------------------------------------------------------------------------------------------------------- | ------------- | ------------------------ | --------- | --------- | ---- | - | --------- | --------- |  | - | ------- | ------- | 
|                                                                                                                     |               | Years Ended December 31, |          
|                                                                                                                     |               |                          |          
|                                                                                                                     |               | 2005                     |           |           | 2004 |   |           | 2003      | 
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|REVENUE                                                                                                              |               |                          |           |           |      |   |           |           |  |   |         |        
|Net earned premium                                                                                                   |               | $                        | 1,369,988 |           |      | $ | 1,010,692 |           |  | $ | 738,272 |        
|Fee and commission income                                                                                            |               |                          | 134,282   |           |      |   | 182,349   |           |  |   | 142,615 |        
|Net investment income                                                                                                |               |                          | 98,851    |           |      |   | 64,885    |           |  |   | 47,335  |        
|Net realized investment gain                                                                                         |               |                          | 1,448     |           |      |   | 5,822     |           |  |   | 527     |        
|Other operating income                                                                                               |               |                          | 39,773    |           |      |   | 19,406    |           |  |   | 13,215  |        
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|                                                                                                                     | Total revenue |                          |           | 1,644,342 |      |   |           | 1,283,154 |  |   |         | 941,964 | 
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|EXPENSE                                                                                                              |               |                          |           |           |      |   |           |           |  |   |         |        
|Loss and loss adjustment expense, net                                                                                |               |                          | 921,197   |           |      |   | 645,230   |           |  |   | 488,652 |        
|Policy acquisition costs, net                                                                                        |               |                          | 257,725   |           |      |   | 224,323   |           |  |   | 138,212 |        
|Other operating expense                                                                                              |               |                          | 178,989   |           |      |   | 164,474   |           |  |   | 140,913 |        
|Interest expense                                                                                                     |               |                          | 7,684     |           |      |   | 8,374     |           |  |   | 7,453   |        
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|                                                                                                                     | Total expense |                          |           | 1,365,595 |      |   |           | 1,042,401 |  |   |         | 775,230 | 
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|Earnings from continuing operations before income tax expense                                                        |               |                          | 278,747   |           |      |   | 240,753   |           |  |   | 166,734 |        
|Income tax expense on continuing operations                                                                          |               |                          | 85,647    |           |      |   | 81,732    |           |  |   | 59,857  |        
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|Earnings from continuing operations                                                                                  |               |                          | 193,100   |           |      |   | 159,021   |           |  |   | 106,877 |        
|Earnings from discontinued operations, net of income taxes of
    $1,686 in 2005, $2,313 in 2004 and $26,289 in 2003 |               |                          | 2,760     |           |      |   | 4,004     |           |  |   | 36,684  |        
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|                                                                                                                     | Net earnings  |                          | $         | 195,860   |      |   | $         | 163,025   |  |   | $       | 143,561 | 
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|Basic earnings per share data:                                                                                       |               |                          |           |           |      |   |           |           |  |   |         |        
|Earnings from continuing operations                                                                                  |               | $                        | 1.83      |           |      | $ | 1.64      |           |  | $ | 1.12    |        
|Earnings from discontinued operations                                                                                |               |                          | 0.03      |           |      |   | 0.04      |           |  |   | 0.39    |        
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|                                                                                                                     | Net earnings  |                          | $         | 1.86      |      |   | $         | 1.68      |  |   | $       | 1.51    | 
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|Weighted average shares outstanding                                                                                  |               |                          | 105,463   |           |      |   | 97,257    |           |  |   | 94,919  |        
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|Diluted earnings per share data:                                                                                     |               |                          |           |           |      |   |           |           |  |   |         |        
|Earnings from continuing operations                                                                                  |               | $                        | 1.76      |           |      | $ | 1.61      |           |  | $ | 1.11    |        
|Earnings from discontinued operations                                                                                |               |                          | 0.03      |           |      |   | 0.04      |           |  |   | 0.38    |        
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|                                                                                                                     | Net earnings  |                          | $         | 1.79      |      |   | $         | 1.65      |  |   | $       | 1.49    | 
|                                                                                                                     |               |                          |           |           |      |   |           |           | 
|Weighted average shares outstanding                                                                                  |               |                          | 109,437   |           |      |   | 98,826    |           |  |   | 96,576  |        
|                                                                                                                     |               |                          |           |           |      |   |           |           | 



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(in thousands)


|                                   |                                         |                                                                                                                                                          |                      |         |         |         |         |       |        |         |         |       |        |         | 
|---------------------------------- | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ------- | ------- | ------- | ------- | ----- | ------ | ------- | ------- | ----- | ------ | ------- | 
|                                   |                                         | Years Ended December 31,                                                                                                                                 |                     
|                                   |                                         |                                                                                                                                                          |                     
|                                   |                                         | 2005                                                                                                                                                     |                      |         | 2004    |         |         | 2003  |       
|                                   |                                         |                                                                                                                                                          |                      |         |         |         |         |       |       
|Net earnings                       |                                         | $                                                                                                                                                        | 195,860              |         |         | $       | 163,025 |       |        | $       | 143,561 |      
|Other comprehensive income (loss): |                                         |                                                                                                                                                          |                      |         |         |         |         |       |        |         |         |      
|                                   | Investment gains (losses):              |                                                                                                                                                          |                      |         |         |         |         |       |        |         |         |       |       
|                                   |                                         | Investment gains (losses) during the year, net of income tax
    charge (benefit) of $(2,946) in 2005, $6,091 in 2004 and
    $(1,048) in 2003           |                      |         | (4,257  | )       |         |       | 10,955 |         |         |       | (1,962 | )      
|                                   |                                         | Less reclassification adjustment for gains included in net
    earnings, net of income tax charge of $2,479 in 2005, $2,433 in
    2004 and $184 in 2003 |                      |         | (4,605  | )       |         |       | (4,518 | )       |         |       | (343   | )      
|                                   | Foreign currency translation adjustment |                                                                                                                                                          |                      | (10,461 | )       |         |         | 5,072 |        |         |         | 7,666 |       
|                                   |                                         |                                                                                                                                                          |                      |         |         |         |         |       |       
|                                   |                                         | Other comprehensive income (loss)                                                                                                                        |                      |         | (19,323 | )       |         |       | 11,509 |         |         |       | 5,361  |        
|                                   |                                         |                                                                                                                                                          |                      |         |         |         |         |       |       
|                                   |                                         |                                                                                                                                                          | Comprehensive income |         | $       | 176,537 |         |       | $      | 174,534 |         |       | $      | 148,922 | 
|                                   |                                         |                                                                                                                                                          |                      |         |         |         |         |       |       



F-7



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY


Years ended December 31, 2005, 2004 and 2003


(in thousands, except per share data)


|                             |                                                                                        |        |         |            |         |   |         |             |       |   |               |         |   |               |        |         |   |   |           |         |  
|---------------------------- | -------------------------------------------------------------------------------------- | ------ | ------- | ---------- | ------- | - | ------- | ----------- | ----- | - | ------------- | ------- | - | ------------- | ------ | ------- | - | - | --------- | ------- | -
|                             |                                                                                        |        |         |            |         |   |         | Accumulated |       |   |              
|                             |                                                                                        |        |         | Additional |         |   |         |             | Other |   |               | Total   |  
|                             |                                                                                        | Common |         |            | Paid-In |   |         | Retained    |       |   | Comprehensive |         |   | Shareholders |       
|                             |                                                                                        | Stock  |         |            | Capital |   |         | Earnings    |       |   | Income        |         |   | Equity        |       
|                             |                                                                                        |        |         |            |         |   |         |             |       |   |               |         |   |               |       
|Balance at December 31, 2002 |                                                                                        | $      | 62,358  |            |         | $ | 416,406 |             |       | $ | 383,378       |         |   | $             | 20,765 |         |   | $ | 882,907   |        
|                             | Net earnings                                                                           |        |         |           |         |   |         |            |       |   |               | 143,561 |   |               |        |        |   |   |           | 143,561 |  
|                             | Other comprehensive income                                                             |        |         |           |         |   |         |            |       |   |               |        |   |               |        | 5,361   |   |   |           | 5,361   |  
|                             | Issuance of 1,860 shares for exercise of options, including
    tax benefit of $4,320  |        |         | 1,240      |         |   |         | 23,359      |       |   |               |        |   |               |        |        |   |   |           | 24,599  |  
|                             | Issuance of 78 shares of contractually issuable stock                                  |        |         | 52         |         |   |         | (52         | )     |   |               |        |   |               |        |        |   |   |           |        |  
|                             | Issuance of 472 shares for purchased company                                           |        |         | 314        |         |   |         | 7,958       |       |   |               |        |   |               |        |        |   |   |           | 8,272   |  
|                             | Cash dividends declared, $0.187 per share                                              |        |         |           |         |   |         |            |       |   |               | (17,780 | ) |               |        |        |   |   |           | (17,780 | )
|                             |                                                                                        |        |         |            |         |   |         |             |       |   |               |         |   |               |       
|Balance at December 31, 2003 |                                                                                        |        | 63,964  |            |         |   | 447,671 |             |       |   | 509,159       |         |   |               | 26,126 |         |   |   | 1,046,920 |        
|                             | Net earnings                                                                           |        |         |           |         |   |         |            |       |   |               | 163,025 |   |               |        |        |   |   |           | 163,025 |  
|                             | Other comprehensive income                                                             |        |         |           |         |   |         |            |       |   |               |        |   |               |        | 11,509  |   |   |           | 11,509  |  
|                             | Issuance of 4,500 shares in public offering, net of costs                              |        |         | 3,000      |         |   |         | 93,668      |       |   |               |        |   |               |        |        |   |   |           | 96,668  |  
|                             | Issuance of 1,485 shares for exercise of options, including
    tax benefit of $3,743  |        |         | 990        |         |   |         | 22,861      |       |   |               |        |   |               |        |        |   |   |           | 23,851  |  
|                             | Issuance of 126 shares for purchased company and strategic
    investment              |        |         | 84         |         |   |         | 2,576       |       |   |               |        |   |               |        |        |   |   |           | 2,660   |  
|                             | Cash dividends declared, $0.213 per share                                              |        |         |           |         |   |         |            |       |   |               | (20,968 | ) |               |        |        |   |   |           | (20,968 | )
|                             |                                                                                        |        |         |            |         |   |         |             |       |   |               |         |   |               |       
|Balance at December 31, 2004 |                                                                                        |        | 68,038  |            |         |   | 566,776 |             |       |   | 651,216       |         |   |               | 37,635 |         |   |   | 1,323,665 |        
|                             | Net earnings                                                                           |        |         |           |         |   |         |            |       |   |               | 195,860 |   |               |        |        |   |   |           | 195,860 |  
|                             | Other comprehensive loss                                                               |        |         |           |         |   |         |            |       |   |               |        |   |               |        | (19,323 | ) |   |           | (19,323 | )
|                             | Issuance of 4,688 shares in public offering, net of costs                              |        |         | 4,688      |         |   |         | 145,276     |       |   |               |        |   |               |        |        |   |   |           | 149,964 |  
|                             | Issuance of 2,439 shares for exercise of options, including
    tax benefit of $10,001 |        |         | 1,785      |         |   |         | 44,355      |       |   |               |        |   |               |        |        |   |   |           | 46,140  |  
|                             | Issuance of 1,624 shares for purchased companies and
    convertible debt              |        |         | 1,227      |         |   |         | 26,226      |       |   |               |        |   |               |        |        |   |   |           | 27,453  |  
|                             | Three-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 |            |         | $ | 747,568 |             |       | $ | 817,013       |         |   | $             | 18,312 |         |   | $ | 1,693,696 |        
|                             |                                                                                        |        |         |            |         |   |         |             |       |   |               |         |   |               |       



F-8



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |          |          |        |          |          |          |  
|------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------- | ---------- | -------- | -------- | ------- | -------- | -------- | -------- | ------ | -------- | -------- | -------- | -
|                                      |                                                                                         | Years Ended December 31,                                     |                                      
|                                      |                                                                                         |                                                              |                                      
|                                      |                                                                                         | 2005                                                         |                                       |            | 2004     |          |         | 2003     |         
|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |         
|Cash flows from operating activities: |                                                                                         |                                                              |                                       |            |          |          |         |          |          |          |        |         
|                                      | Net earnings                                                                            |                                                              | $                                     | 195,860    |          |          | $       | 163,025  |          |          | $      | 143,561  |         
|                                      | Adjustments to reconcile net earnings to net cash provided by
    operating activities: |                                                              |                                       |            |          |          |         |          |          |          |        |          |         
|                                      |                                                                                         | Change in premium, claims and other receivables              |                                       |            | (7,654   | )        |         |          | 70,136   |          |        |          | (134,112 | )       
|                                      |                                                                                         | Change in reinsurance recoverables                           |                                       |            | (249,329 | )        |         |          | (183,121 | )        |        |          | (117,256 | )       
|                                      |                                                                                         | Change in ceded unearned premium                             |                                       |            | 87,515   |          |         |          | (22,504  | )        |        |          | (127,367 | )       
|                                      |                                                                                         | Change in loss and loss adjustment expense payable           |                                       |            | 705,688  |          |         |          | 538,374  |          |        |          | 379,998  |         
|                                      |                                                                                         | Change in reinsurance balances payable                       |                                       |            | (60,832  | )        |         |          | (69,647  | )        |        |          | 130,257  |         
|                                      |                                                                                         | Change in unearned premium                                   |                                       |            | 38,809   |          |         |          | 122,317  |          |        |          | 261,261  |         
|                                      |                                                                                         | Change in premium and claims payable, net of restricted cash |                                       |            | (3,851   | )        |         |          | 6,928    |          |        |          | (22,263  | )       
|                                      |                                                                                         | Gain on sale of subsidiaries                                 |                                       |            | (8,717   | )        |         |          | (6,317   | )        |        |          | (52,681  | )       
|                                      |                                                                                         | Change in trading portfolio                                  |                                       |            | (66,809  | )        |         |          | 25,673   |          |        |          | 12,741   |         
|                                      |                                                                                         | Depreciation and amortization expense                        |                                       |            | 14,647   |          |         |          | 16,139   |          |        |          | 12,828   |         
|                                      |                                                                                         | Other, net                                                   |                                       |            | (21,337  | )        |         |          | 7,700    |          |        |          | 41,131   |         
|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |         
|                                      |                                                                                         |                                                              | Cash provided by operating activities |            |          | 623,990  |         |          |          | 668,703  |        |          |          | 528,098  |  
|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |         
|Cash flows from investing activities: |                                                                                         |                                                              |                                       |            |          |          |         |          |          |          |        |         
|                                      | Sales of fixed income securities                                                        |                                                              |                                       | 237,480    |          |          |         | 253,398  |          |          |        | 167,357  |         
|                                      | Maturity or call of fixed income securities                                             |                                                              |                                       | 186,075    |          |          |         | 154,357  |          |          |        | 142,652  |         
|                                      | Cost of securities acquired                                                             |                                                              |                                       | (1,054,529 | )        |          |         | (935,053 | )        |          |        | (694,211 | )       
|                                      | Change in short-term investments                                                        |                                                              |                                       | (72,703    | )        |          |         | (160,229 | )        |          |        | (202,904 | )       
|                                      | Payments for purchase of subsidiaries, net of cash received                             |                                                              |                                       | (94,056    | )        |          |         | (93,543  | )        |          |        | (16,680  | )       
|                                      | Sale of subsidiaries and other operating investments                                    |                                                              |                                       | 21,116     |          |          |         |         |          |          |        | 82,618   |         
|                                      | Other, net                                                                              |                                                              |                                       | 3,637      |          |          |         | 268      |          |          |        | (17,655  | )       
|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |         
|                                      |                                                                                         |                                                              | Cash used by investing activities     |            |          | (772,980 | )       |          |          | (780,802 | )      |          |          | (538,823 | )
|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |         
|Cash flows from financing activities: |                                                                                         |                                                              |                                       |            |          |          |         |          |          |          |        |         
|                                      | Issuance of notes payable, net of costs                                                 |                                                              |                                       | 46,528     |          |          |         | 29,000   |          |          |        | 174,845  |         
|                                      | Payments on notes payable                                                               |                                                              |                                       | (48,181    | )        |          |         | (40,176  | )        |          |        | (108,813 | )       
|                                      | Sale of common stock, net of costs                                                      |                                                              |                                       | 186,103    |          |          |         | 116,776  |          |          |        | 20,279   |         
|                                      | Dividends paid and other, net                                                           |                                                              |                                       | (31,458    | )        |          |         | (19,984  | )        |          |        | (19,476  | )       
|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |         
|                                      |                                                                                         |                                                              | Cash provided by financing activities |            |          | 152,992  |         |          |          | 85,616   |        |          |          | 66,835   |  
|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |         
|Net increase (decrease) in cash       |                                                                                         |                                                              | 4,002                                 |            |          |          | (26,483 | )        |          |          | 56,110 |         
|Cash at beginning of year             |                                                                                         |                                                              | 69,933                                |            |          |          | 96,416  |          |          |          | 40,306 |         
|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |         
|                                      |                                                                                         |                                                              | Cash at end of year                   |            | $        | 73,935   |         |          | $        | 69,933   |        |          | $        | 96,416   |  
|                                      |                                                                                         |                                                              |                                       |            |          |          |         |          |         



F-9



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##### 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-10



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)






| |            
| | -----------
| | Investments











| |                                 
| | --------------------------------
| | Derivative Financial Instruments





| |                                                                        
| | -----------------------------------------------------------------------
| | Net Earned Premium, Policy Acquisition Costs and Ceding
    Commissions



F-11



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##### 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-12



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##### 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-13



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##### 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-14



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




| |              
| | -------------
| | Stock Options

Accounting for Stock
Issued to Employees


Accounting for Stock-Based
Compensation


|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                          |  | 2005 |         |   | 2004 |   |         | 2003 | 
|                                                                          |  |      |         |   |      |   |         |      | 
|Reported net earnings                                                     |  | $    | 195,860 |   |      | $ | 163,025 |      |  | $ | 143,561 |  
|Stock-based compensation using fair value method, net of income
    taxes |  |      | (6,916  | ) |      |   | (4,883  | )    |  |   | (7,705  | )
|                                                                          |  |      |         |   |      |   |         |      | 
|Pro forma net earnings                                                    |  | $    | 188,944 |   |      | $ | 158,142 |      |  | $ | 135,856 |  
|                                                                          |  |      |         |   |      |   |         |      | 
|Reported basic earnings per share                                         |  | $    | 1.86    |   |      | $ | 1.68    |      |  | $ | 1.51    |  
|Fair value stock-based compensation                                       |  |      | (0.07   | ) |      |   | (0.05   | )    |  |   | (0.08   | )
|                                                                          |  |      |         |   |      |   |         |      | 
|Pro forma basic earnings per share                                        |  | $    | 1.79    |   |      | $ | 1.63    |      |  | $ | 1.43    |  
|                                                                          |  |      |         |   |      |   |         |      | 
|Reported diluted earnings per share                                       |  | $    | 1.79    |   |      | $ | 1.65    |      |  | $ | 1.49    |  
|Fair value stock-based compensation                                       |  |      | (0.06   | ) |      |   | (0.05   | )    |  |   | (0.08   | )
|                                                                          |  |      |         |   |      |   |         |      | 
|Pro forma diluted earnings per share                                      |  | $    | 1.73    |   |      | $ | 1.60    |      |  | $ | 1.41    |  
|                                                                          |  |      |         |   |      |   |         |      | 



|                                      |  |      |           |   |      |  |           |      |  |  |           |  
|------------------------------------- |  | ---- | --------- | - | ---- |  | --------- | ---- |  |  | --------- | -
|                                      |  | 2005 |           |   | 2004 |  |           | 2003 | 
|                                      |  |      |           |   |      |  |           |      | 
|Average fair value of options granted |  |      | $7.87     |   |      |  | $5.85     |      |  |  | $4.45     |  
|Risk free interest rate               |  |      | 4.0       | % |      |  | 3.4       | %    |  |  | 2.8       | %
|Expected volatility factor            |  |      | 32        | % |      |  | 32        | %    |  |  | 32        | %
|Dividend yield                        |  |      | 1.11      | % |      |  | 1.02      | %    |  |  | 1.07      | %
|Expected option life                  |  |      | 4.8 years |   |      |  | 4.5 years |      |  |  | 4.4 years |  

Share-Based Payment


F-15



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)






| |            
| | -----------
| | Stock Split





| |                  
| | -----------------
| | Large Loss Events





F-16



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|                                                |  |      |           |  |      |   |           |                          |  |   |           |  |  |      |         |   |      |   |         |   |  |   |         |  
|----------------------------------------------- |  | ---- | --------- |  | ---- | - | --------- | ------------------------ |  | - | --------- |  |  | ---- | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                                |  |      |           |  |      |   |           | Effect of Hurricanes and | 
|                                                |  |      |           |  |      |   |           | Commutations             | 
|                                                |  |      |           |  |      |   |           |                          | 
|                                                |  | 2005 |           |  | 2004 |   |           | 2003                     |  |   | 2005      |  |  | 2004 |         |   | 2003 |  
|                                                |  |      |           |  |      |   |           |                          |  |   |           |  |  |      |         |   |      |  
|Gross incurred loss and loss adjustment expense |  | $    | 1,596,773 |  |      | $ | 1,289,155 |                          |  | $ | 1,045,991 |  |  | $    | 394,625 |   |      | $ | 89,795  |   |  | $ |        |  
|Net incurred loss and loss adjustment expense   |  |      | 921,197   |  |      |   | 645,230   |                          |  |   | 488,652   |  |  |      | 99,226  |   |      |   | 23,335  |   |  |   | 28,751  |  
|Ceded earned premium                            |  |      | 617,402   |  |      |   | 849,610   |                          |  |   | 748,799   |  |  |      | 16,533  |   |      |   | 9,806   |   |  |   |        |  
|Net earnings (loss)                             |  |      | 195,860   |  |      |   | 163,025   |                          |  |   | 143,561   |  |  |      | (75,171 | ) |      |   | (21,464 | ) |  |   | (18,688 | )



| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments


Accounting
Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim
Financial Statements


F-17



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##### 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   |   |      | Deductible | 
|                                                                                 |  | Effective Date    |  | Consideration |      |  | Recognized |   |      | Goodwill   | 
|                                                                                 |  |                   |  |               |      |  |            |   |      |            | 
|Covenant Underwriters and
    Continental Underwriters                           |  | July 1, 2003      |  | $             | 19.9 |  |            | $ | 19.1 |            |  |  | Yes | 
|American Contractors Indemnity Company                                           |  | January 31, 2004  |  |               | 46.8 |  |            |   | 10.5 |            |  |  | No  | 
|RA&MCO Insurance Services                                                        |  | October 1, 2004   |  |               | 8.5  |  |            |   | 7.7  |            |  |  | No  | 
|United States Surety Company                                                     |  | March 1, 2005     |  |               | 19.4 |  |            |   | 12.6 |            |  |  | No  | 
|HCC International Insurance Company (formerly De Montfort
    Insurance Company) |  | July 1, 2005      |  |               | 24.6 |  |            |   | 15.8 |            |  |  | No  | 
|Perico Life Insurance Company (formerly MIC Life Insurance
    Corporation)      |  | November 30, 2005 |  |               | 20.0 |  |            |   |     |            |  |  | Yes | 
|Perico Ltd.                                                                      |  | December 1, 2005  |  |               | 33.4 |  |            |   | 31.8 |            |  |  | Yes | 
|Illium Insurance Group                                                           |  | December 31, 2005 |  |               | 3.0  |  |            |   | 1.5  |            |  |  | No  | 





F-18



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|                             |                  |           |         |        |        |   |         |        |  |   |         |        | 
|---------------------------- | ---------------- | --------- | ------- | ------ | ------ | - | ------- | ------ |  | - | ------- | ------ | 
|                             |                  | Insurance |         |        |        |   |        
|                             |                  | Company   |         |        | Agency |   |         | Total  | 
|                             |                  |           |         |        |        |   |         |        | 
|Balance at December 31, 2003 |                  | $         | 163,718 |        |        | $ | 222,789 |        |  | $ | 386,507 |       
|Additions:                   |                  |           |         |        |        |   |         |        |  |   |         |       
|                             | New acquisitions |           |         | 17,870 |        |   |         | 2,823  |  |   |         | 20,693 | 
|                             | Earnouts         |           |         | 26,697 |        |   |         | 15,716 |  |   |         | 42,413 | 
|Transfer on reorganization   |                  |           | 11,266  |        |        |   | (11,266 | )      |  |   |        |       
|Reduction for tax settlement |                  |           | (4,201  | )      |        |   | (1,381  | )      |  |   | (5,582  | )     
|                             |                  |           |         |        |        |   |         |        | 
|Balance at December 31, 2004 |                  |           | 215,350 |        |        |   | 228,681 |        |  |   | 444,031 |       
|Additions:                   |                  |           |         |        |        |   |         |        |  |   |         |       
|                             | New acquisitions |           |         | 59,881 |        |   |         | 1,628  |  |   |         | 61,509 | 
|                             | Earnouts         |           |         | 24,162 |        |   |         | 7,922  |  |   |         | 32,084 | 
|Transfer on reorganization   |                  |           | 45,353  |        |        |   | (45,353 | )      |  |   |        |       
|Reduction for tax adjustment |                  |           | (4,677  | )      |        |   |        |        |  |   | (4,677  | )     
|                             |                  |           |         |        |        |   |         |        | 
|Balance at December 31, 2005 |                  | $         | 340,069 |        |        | $ | 192,878 |        |  | $ | 532,947 |       
|                             |                  |           |         |        |        |   |         |        | 



| |            
| | -----------
| | Disposition



F-19



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##### 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      |  |   | Estimated |        
|                                                  |                               | Amortized |           |           | Unrealized |   |        | Unrealized |  |   | Fair      |        
|                                                  |                               | Cost      |           |           | Gain       |   |        | Loss       |  |   | Value     |        
|                                                  |                               |           |           |           |            |   |        |            |  |   |           |        
|December 31,
2005                                 |                               |           |           |           |            |   |        |            |  |   |           |         |   |   |           |          
|U.S. government                                   |                               | $         | 90,404    |           |            | $ | 167    |            |  | $ | (847      | )       |   | $ | 89,724    |          
|States, municipalities and political subdivisions |                               |           | 1,138,499 |           |            |   | 10,109 |            |  |   | (6,634    | )       |   |   | 1,141,974 |          
|Corporate fixed income securities                 |                               |           | 381,917   |           |            |   | 340    |            |  |   | (6,675    | )       |   |   | 375,582   |          
|Asset-backed and mortgage-backed securities       |                               |           | 361,456   |           |            |   | 562    |            |  |   | (6,646    | )       |   |   | 355,372   |          
|Foreign securities                                |                               |           | 304,863   |           |            |   | 2,412  |            |  |   | (1,303    | )       |   |   | 305,972   |          
|                                                  |                               |           |           |           |            |   |        |            |  |   |           |        
|                                                  | Total fixed income securities |           | $         | 2,277,139 |            |   | $      | 13,590     |  |   | $         | (22,105 | ) |   | $         | 2,268,624 | 
|                                                  |                               |           |           |           |            |   |        |            |  |   |           |        
|December 31, 2004                                 |                               |           |           |           |            |   |        |            |  |   |           |         |   |   |           |          
|U.S. government                                   |                               | $         | 87,652    |           |            | $ | 688    |            |  | $ | (214      | )       |   | $ | 88,126    |          
|States, municipalities and political subdivisions |                               |           | 727,437   |           |            |   | 15,609 |            |  |   | (1,696    | )       |   |   | 741,350   |          
|Corporate fixed income securities                 |                               |           | 374,130   |           |            |   | 4,644  |            |  |   | (1,438    | )       |   |   | 377,336   |          
|Asset-backed and mortgage-backed securities       |                               |           | 248,449   |           |            |   | 1,764  |            |  |   | (1,510    | )       |   |   | 248,703   |          
|Foreign securities                                |                               |           | 244,753   |           |            |   | 3,176  |            |  |   | (273      | )       |   |   | 247,656   |          
|                                                  |                               |           |           |           |            |   |        |            |  |   |           |        
|                                                  | Total fixed income securities |           | $         | 1,682,421 |            |   | $      | 25,881     |  |   | $         | (5,131  | ) |   | $         | 1,703,171 | 
|                                                  |                               |           |           |           |            |   |        |            |  |   |           |        

F-20



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##### 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 |   |        | Total      |           
|                                                  |                  |                     |         |            |                   |   |        |            |           
|                                                  |                  |                     |         | Unrealized |                   |   |        |            | Unrealized |   |         |         |  | Unrealized |       
|                                                  |                  | Fair Value          |         |            | Losses            |   |        | Fair Value |            |   | Losses  |         |  | Fair Value |        |         | Losses |  
|                                                  |                  |                     |         |            |                   |   |        |            |            |   |         |         |  |            |        |         |        |  
|December 31, 2005                                 |                  |                     |         |            |                   |   |        |            |            |   |         |         |  |            |        |         |        |   |         |           |  |   |        |        
|U.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 securities |                     | $       | 869,019    |                   |   | $      | (10,148    | )          |   | $       | 508,986 |  |            | $      | (11,957 | )      |   | $       | 1,378,005 |  |   | $      | (22,105 | )
|                                                  |                  |                     |         |            |                   |   |        |            |            |   |         |         |  |            |        |         |        |  
|December 31, 2004                                 |                  |                     |         |            |                   |   |        |            |            |   |         |         |  |            |        |         |        |   |         |           |  |   |        |        
|U.S. government                                   |                  | $                   | 52,473  |            |                   | $ | (197   | )          |            | $ | 489     |         |  | $          | (17    | )       |        | $ | 52,962  |           |  | $ | (214   | )      
|States, municipalities and political subdivisions |                  |                     | 170,352 |            |                   |   | (1,091 | )          |            |   | 27,500  |         |  |            | (605   | )       |        |   | 197,852 |           |  |   | (1,696 | )      
|Corporate fixed income securities                 |                  |                     | 143,057 |            |                   |   | (1,170 | )          |            |   | 14,419  |         |  |            | (268   | )       |        |   | 157,476 |           |  |   | (1,438 | )      
|Asset-backed and mortgage-backed securities       |                  |                     | 140,536 |            |                   |   | (1,057 | )          |            |   | 12,096  |         |  |            | (453   | )       |        |   | 152,632 |           |  |   | (1,510 | )      
|Foreign securities                                |                  |                     | 47,775  |            |                   |   | (252   | )          |            |   | 10,549  |         |  |            | (21    | )       |        |   | 58,324  |           |  |   | (273   | )      
|                                                  |                  |                     |         |            |                   |   |        |            |            |   |         |         |  |            |        |         |        |  
|                                                  | Total securities |                     | $       | 554,193    |                   |   | $      | (3,767     | )          |   | $       | 65,053  |  |            | $      | (1,364  | )      |   | $       | 619,246   |  |   | $      | (5,131  | )
|                                                  |                  |                     |         |            |                   |   |        |            |            |   |         |         |  |            |        |         |        |  



F-21



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|                                            |                                  |                               |         |           |            |   |         |           |           | 
|------------------------------------------- | -------------------------------- | ----------------------------- | ------- | --------- | ---------- | - | ------- | --------- | --------- | 
|                                            |                                  | Amortized                     |         |           | Estimated  |  
|                                            |                                  | Cost                          |         |           | Fair Value |  
|                                            |                                  |                               |         |           |            |  
|Due in 1 year or less                       |                                  | $                             | 147,717 |           |            | $ | 146,924 |          
|Due after 1 year through 5 years            |                                  |                               | 565,851 |           |            |   | 561,240 |          
|Due after 5 years through 10 years          |                                  |                               | 468,075 |           |            |   | 467,542 |          
|Due after 10 years through 15 years         |                                  |                               | 299,078 |           |            |   | 301,264 |          
|Due after 15 years                          |                                  |                               | 434,962 |           |            |   | 436,282 |          
|                                            |                                  |                               |         |           |            |  
|                                            | Securities with fixed maturities |                               |         | 1,915,683 |            |   |         | 1,913,252 |          
|Asset-backed and mortgage-backed securities |                                  |                               | 361,456 |           |            |   | 355,372 |          
|                                            |                                  |                               |         |           |            |  
|                                            |                                  | Total fixed income securities |         | $         | 2,277,139  |   |         | $         | 2,268,624 | 
|                                            |                                  |                               |         |           |            |  





|                        |                         |      |        |         |      |   |        |        |  |   |        |        | 
|----------------------- | ----------------------- | ---- | ------ | ------- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                        |                         | 2005 |        |         | 2004 |   |        | 2003   | 
|                        |                         |      |        |         |      |   |        |        | 
|Fixed income securities |                         | $    | 77,842 |         |      | $ | 55,929 |        |  | $ | 40,927 |       
|Short-term investments  |                         |      | 21,208 |         |      |   | 9,735  |        |  |   | 7,422  |       
|Other investments       |                         |      | 3,615  |         |      |   | 1,366  |        |  |   | 488    |       
|                        |                         |      |        |         |      |   |        |        | 
|                        | Total investment income |      |        | 102,665 |      |   |        | 67,030 |  |   |        | 48,837 | 
|Investment expense      |                         |      | (3,814 | )       |      |   | (2,145 | )      |  |   | (1,502 | )     
|                        |                         |      |        |         |      |   |        |        | 
|                        | Net investment income   |      | $      | 98,851  |      |   | $      | 64,885 |  |   | $      | 47,335 | 
|                        |                         |      |        |         |      |   |        |        | 

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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|                             |                      |       |       |       |        |   |        |        |   |   |        |       | 
|---------------------------- | -------------------- | ----- | ----- | ----- | ------ | - | ------ | ------ | - | - | ------ | ----- | 
|                             |                      | Gains |       |       | Losses |   |        | Net    |  
|                             |                      |       |       |       |        |   |        |        |  
|Year ended December 31, 2005 |                      |       |       |       |        |   |        |        |   |   |        |      
|Fixed income securities      |                      | $     | 3,562 |       |        | $ | (1,475 | )      |   | $ | 2,087  |      
|Other investments            |                      |       | 156   |       |        |   | (795   | )      |   |   | (639   | )    
|                             |                      |       |       |       |        |   |        |        |  
|                             | Realized gain (loss) |       | $     | 3,718 |        |   | $      | (2,270 | ) |   | $      | 1,448 | 
|                             |                      |       |       |       |        |   |        |        |  
|Year ended December 31, 2004 |                      |       |       |       |        |   |        |        |   |   |        |      
|Fixed income securities      |                      | $     | 7,035 |       |        | $ | (1,088 | )      |   | $ | 5,947  |      
|Other investments            |                      |       | 64    |       |        |   | (189   | )      |   |   | (125   | )    
|                             |                      |       |       |       |        |   |        |        |  
|                             | Realized gain (loss) |       | $     | 7,099 |        |   | $      | (1,277 | ) |   | $      | 5,822 | 
|                             |                      |       |       |       |        |   |        |        |  
|Year ended December 31, 2003 |                      |       |       |       |        |   |        |        |   |   |        |      
|Fixed income securities      |                      | $     | 3,113 |       |        | $ | (1,230 | )      |   | $ | 1,883  |      
|Other investments            |                      |       | 40    |       |        |   | (1,396 | )      |   |   | (1,356 | )    
|                             |                      |       |       |       |        |   |        |        |  
|                             | Realized gain (loss) |       | $     | 3,153 |        |   | $      | (2,626 | ) |   | $      | 527   | 
|                             |                      |       |       |       |        |   |        |        |  



|                                |                                          |      |         |         |      |   |        |        |  |   |        |        |  
|------------------------------- | ---------------------------------------- | ---- | ------- | ------- | ---- | - | ------ | ------ |  | - | ------ | ------ | -
|                                |                                          | 2005 |         |         | 2004 |   |        | 2003   | 
|                                |                                          |      |         |         |      |   |        |        | 
|Fixed income securities         |                                          | $    | (29,265 | )       |      | $ | (9,288 | )      |  | $ | (3,738 | )     
|Strategic and other investments |                                          |      | 14,978  |         |      |   | 19,383 |        |  |   | 201    |       
|                                |                                          |      |         |         |      |   |        |        | 
|                                | Net unrealized investment gains (losses) |      | $       | (14,287 | )    |   | $      | 10,095 |  |   | $      | (3,537 | )
|                                |                                          |      |         |         |      |   |        |        | 

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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|    |            
|--- | -----------
|(4) | Reinsurance



|                             |             |         |           |           |         |               |           |            |  |   |           |         | 
|---------------------------- | ----------- | ------- | --------- | --------- | ------- | ------------- | --------- | ---------- |  | - | --------- | ------- | 
|                             |             |         |           |           |         | Loss and Loss |          
|                             |             | Written |           |           | Earned  |               |           | Adjustment | 
|                             |             | Premium |           |           | Premium |               |           | Expense    | 
|                             |             |         |           |           |         |               |           |            | 
|Year ended December 31, 2005 |             |         |           |           |         |               |           |            |  |   |           |        
|Primary business             |             | $       | 1,768,284 |           |         | $             | 1,694,446 |            |  | $ | 1,329,931 |        
|Reinsurance assumed          |             |         | 270,002   |           |         |               | 292,944   |            |  |   | 266,842   |        
|Reinsurance ceded            |             |         | (537,062  | )         |         |               | (617,402  | )          |  |   | (675,576  | )      
|                             |             |         |           |           |         |               |           |            | 
|                             | Net amounts |         | $         | 1,501,224 |         |               | $         | 1,369,988  |  |   | $         | 921,197 | 
|                             |             |         |           |           |         |               |           |            | 
|Year ended December 31, 2004 |             |         |           |           |         |               |           |            |  |   |           |        
|Primary business             |             | $       | 1,674,075 |           |         | $             | 1,557,806 |            |  | $ | 966,163   |        
|Reinsurance assumed          |             |         | 301,078   |           |         |               | 302,496   |            |  |   | 322,992   |        
|Reinsurance ceded            |             |         | (869,634  | )         |         |               | (849,610  | )          |  |   | (643,925  | )      
|                             |             |         |           |           |         |               |           |            | 
|                             | Net amounts |         | $         | 1,105,519 |         |               | $         | 1,010,692  |  |   | $         | 645,230 | 
|                             |             |         |           |           |         |               |           |            | 
|Year ended December 31, 2003 |             |         |           |           |         |               |           |            |  |   |           |        
|Primary business             |             | $       | 1,377,999 |           |         | $             | 1,189,356 |            |  | $ | 694,205   |        
|Reinsurance assumed          |             |         | 361,895   |           |         |               | 297,715   |            |  |   | 351,786   |        
|Reinsurance ceded            |             |         | (874,392  | )         |         |               | (748,799  | )          |  |   | (557,339  | )      
|                             |             |         |           |           |         |               |           |            | 
|                             | Net amounts |         | $         | 865,502   |         |               | $         | 738,272    |  |   | $         | 488,652 | 
|                             |             |         |           |           |         |               |           |            | 





|                                                            |                                |      |         |           |      |   |         |           | 
|----------------------------------------------------------- | ------------------------------ | ---- | ------- | --------- | ---- | - | ------- | --------- | 
|                                                            |                                | 2005 |         |           | 2004 |  
|                                                            |                                |      |         |           |      |  
|Reinsurance recoverable on paid losses                      |                                | $    | 93,837  |           |      | $ | 94,535  |          
|Reinsurance recoverable on outstanding losses               |                                |      | 634,725 |           |      |   | 509,512 |          
|Reinsurance recoverable on incurred but not reported losses |                                |      | 644,062 |           |      |   | 520,404 |          
|Reserve for uncollectible reinsurance                       |                                |      | (12,141 | )         |      |   | (20,425 | )        
|                                                            |                                |      |         |           |      |  
|                                                            | Total reinsurance recoverables |      | $       | 1,360,483 |      |   | $       | 1,104,026 | 
|                                                            |                                |      |         |           |      |  

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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|                       |               |      |         |         |      |   |         |         | 
|---------------------- | ------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                       |               | 2005 |         |         | 2004 |  
|                       |               |      |         |         |      |  
|Payables to reinsurers |               | $    | 291,826 |         |      | $ | 350,514 |        
|Letters of credit      |               |      | 350,135 |         |      |   | 265,152 |        
|Cash deposits          |               |      | 64,150  |         |      |   | 68,307  |        
|                       |               |      |         |         |      |  
|                       | Total credits |      | $       | 706,111 |      |   | $       | 683,973 | 
|                       |               |      |         |         |      |  



|                                                            |                                       |      |           |           |      |   |           |           | 
|----------------------------------------------------------- | ------------------------------------- | ---- | --------- | --------- | ---- | - | --------- | --------- | 
|                                                            |                                       | 2005 |           |           | 2004 |  
|                                                            |                                       |      |           |           |      |  
|Loss and loss adjustment expense payable                    |                                       | $    | 2,813,720 |           |      | $ | 2,089,199 |          
|Reinsurance recoverable on outstanding losses               |                                       |      | (634,725  | )         |      |   | (509,512  | )        
|Reinsurance recoverable on incurred but not reported losses |                                       |      | (644,062  | )         |      |   | (520,404  | )        
|                                                            |                                       |      |           |           |      |  
|                                                            | Net reserves                          |      | $         | 1,534,933 |      |   | $         | 1,059,283 | 
|                                                            |                                       |      |           |           |      |  
|Unearned premium                                            |                                       | $    | 807,109   |           |      | $ | 741,706   |          
|Ceded unearned premium                                      |                                       |      | (239,416  | )         |      |   | (317,055  | )        
|                                                            |                                       |      |           |           |      |  
|                                                            | Net unearned premium                  |      | $         | 567,693   |      |   | $         | 424,651   | 
|                                                            |                                       |      |           |           |      |  
|Deferred policy acquisition costs                           |                                       | $    | 156,253   |           |      | $ | 139,199   |          
|Deferred ceding commissions                                 |                                       |      | (65,702   | )         |      |   | (94,896   | )        
|                                                            |                                       |      |           |           |      |  
|                                                            | Net deferred policy acquisition costs |      | $         | 90,551    |      |   | $         | 44,303    | 
|                                                            |                                       |      |           |           |      |  

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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|                                      |  |        |  |                |  |              |         |  |         |   |        |              |  |   |         | 
|------------------------------------- |  | ------ |  | -------------- |  | ------------ | ------- |  | ------- | - | ------ | ------------ |  | - | ------- | 
|                                      |  |        |  |                |  | Total        |         |  | Total   |   |        | Net          | 
|Reinsurer                             |  | Rating |  | Location       |  | Recoverables |         |  | Credits |   |        | Recoverables | 
|                                      |  |        |  |                |  |              |         |  |         |   |        |              | 
|December 31, 2005                     |  |        |  |                |  |              |         |  |         |   |        |              |  |   |         | 
|Hannover Rueckversicherungs AG        |  | A      |  | Germany        |  | $            | 147,589 |  |         | $ | 28,232 |              |  | $ | 119,357 | 
|Lloyds Syndicate Number 0033         |  | A-     |  | United Kingdom |  |              | 43,756  |  |         |   | 681    |              |  |   | 43,075  | 
|Arch Reinsurance Ltd.                 |  | A-     |  | Bermuda        |  |              | 52,226  |  |         |   | 11,544 |              |  |   | 40,682  | 
|Everest Reinsurance Company           |  | A+     |  | Delaware       |  |              | 53,344  |  |         |   | 13,741 |              |  |   | 39,603  | 
|Odyssey America Reinsurance Corp.     |  | A      |  | Connecticut    |  |              | 39,973  |  |         |   | 3,474  |              |  |   | 36,499  | 
|Swiss Reinsurance America Corp.       |  | A+     |  | New York       |  |              | 43,470  |  |         |   | 7,749  |              |  |   | 35,721  | 
|Platinum Underwriters Reinsurance Co. |  | A      |  | Maryland       |  |              | 38,159  |  |         |   | 4,422  |              |  |   | 33,737  | 
|ACE Property & Casualty Insurance Co. |  | A+     |  | Pennsylvania   |  |              | 31,139  |  |         |   | 2,036  |              |  |   | 29,103  | 
|Harco National Insurance Company      |  | A-     |  | Illinois       |  |              | 29,873  |  |         |   | 3,657  |              |  |   | 26,216  | 
|Transatlantic Reinsurance Company     |  | A+     |  | New York       |  |              | 26,661  |  |         |   | 1,331  |              |  |   | 25,330  | 
|Lloyds Syndicate Number 0958         |  | B      |  | United Kingdom |  |              | 26,332  |  |         |   | 1,091  |              |  |   | 25,241  | 
|December 31, 2004                     |  |        |  |                |  |              |         |  |         |   |        |              |  |   |         | 
|Hannover Rueckversicherungs AG        |  | A      |  | Germany        |  | $            | 66,961  |  |         | $ | 21,261 |              |  | $ | 45,700  | 
|Everest Reinsurance Company           |  | A+     |  | Delaware       |  |              | 55,443  |  |         |   | 12,139 |              |  |   | 43,304  | 
|Harco National Insurance Company      |  | A-     |  | Illinois       |  |              | 51,067  |  |         |   | 8,879  |              |  |   | 42,188  | 
|Lloyds Syndicate Number 2488         |  | A-     |  | United Kingdom |  |              | 41,460  |  |         |   | 2,941  |              |  |   | 38,519  | 
|Lloyds Syndicate Number 0033         |  | A-     |  | United Kingdom |  |              | 31,560  |  |         |   | 574    |              |  |   | 30,986  | 
|Lloyds Syndicate Number 1101         |  | B-     |  | United Kingdom |  |              | 31,663  |  |         |   | 774    |              |  |   | 30,889  | 
|Lloyds Syndicate Number 1206         |  | B-     |  | United Kingdom |  |              | 31,242  |  |         |   | 358    |              |  |   | 30,884  | 
|Odyssey America Reinsurance Corp.     |  | A      |  | Connecticut    |  |              | 29,551  |  |         |   | 2,637  |              |  |   | 26,914  | 
|Platinum Underwriters Reinsurance Co. |  | A      |  | Maryland       |  |              | 36,658  |  |         |   | 10,669 |              |  |   | 25,989  | 





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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



|                                                                               |                                                                                                |              |                                                                  |         |         |           |           |         |         |           |           |         |         |           | 
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------------ | ---------------------------------------------------------------- | ------- | ------- | --------- | --------- | ------- | ------- | --------- | --------- | ------- | ------- | --------- | 
|                                                                               |                                                                                                | 2005         |                                                                  |         | 2004    |           |           | 2003    |        
|                                                                               |                                                                                                |              |                                                                  |         |         |           |           |         |        
|Reserves for loss and loss adjustment expense payable at
    beginning of year |                                                                                                | $            | 2,089,199                                                        |         |         | $         | 1,535,288 |         |         | $         | 1,155,290 |        
|Less reinsurance recoverables                                                  |                                                                                                |              | 1,029,916                                                        |         |         |           | 830,088   |         |         |           | 697,972   |        
|                                                                               |                                                                                                |              |                                                                  |         |         |           |           |         |        
|                                                                               |                                                                                                |              | Net reserves at beginning of year                                |         |         | 1,059,283 |           |         |         | 705,200   |           |         |         | 457,318   | 
|Net reserve addition from acquisition of subsidiaries                          |                                                                                                |              | 12,491                                                           |         |         |           | 11,647    |         |         |           | 5,587     |        
|Incurred loss and loss adjustment expense:                                     |                                                                                                |              |                                                                  |         |         |           |           |         |         |           |           |        
|                                                                               | Provision for loss and loss adjustment expense for claims
    occurring in current year        |              |                                                                  | 895,803 |         |           |           | 614,752 |         |           |           | 464,886 |        
|                                                                               | Increase in estimated loss and loss adjustment expense for
    claims occurring in prior years |              |                                                                  | 25,394  |         |           |           | 30,478  |         |           |           | 23,766  |        
|                                                                               |                                                                                                |              |                                                                  |         |         |           |           |         |        
|                                                                               |                                                                                                |              | Incurred loss and loss adjustment expense                        |         |         | 921,197   |           |         |         | 645,230   |           |         |         | 488,652   | 
|                                                                               |                                                                                                |              |                                                                  |         |         |           |           |         |        
|Loss and loss adjustment expense payments for claims occurring
    during:     |                                                                                                |              |                                                                  |         |         |           |           |         |         |           |           |        
|                                                                               |                                                                                                | Current year |                                                                  |         | 285,814 |           |           |         | 161,117 |           |           |         | 110,528 |          
|                                                                               |                                                                                                | Prior years  |                                                                  |         | 172,224 |           |           |         | 141,677 |           |           |         | 135,829 |          
|                                                                               |                                                                                                |              |                                                                  |         |         |           |           |         |        
|                                                                               |                                                                                                |              | Loss and loss adjustment expense payments                        |         |         | 458,038   |           |         |         | 302,794   |           |         |         | 246,357   | 
|                                                                               |                                                                                                |              |                                                                  |         |         |           |           |         |        
|Net reserves at end of year                                                    |                                                                                                |              | 1,534,933                                                        |         |         |           | 1,059,283 |         |         |           | 705,200   |        
|Plus reinsurance recoverables                                                  |                                                                                                |              | 1,278,787                                                        |         |         |           | 1,029,916 |         |         |           | 830,088   |        
|                                                                               |                                                                                                |              |                                                                  |         |         |           |           |         |        
|                                                                               |                                                                                                |              | Reserves for loss and loss adjustment expense at end of
    year |         | $       | 2,813,720 |           |         | $       | 2,089,199 |           |         | $       | 1,535,288 | 
|                                                                               |                                                                                                |              |                                                                  |         |         |           |           |         |        



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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)








|    |              
|--- | -------------
|(6) | Notes Payable



|                                       |                     |      |         |         |      |   |         |         | 
|-------------------------------------- | ------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                                       |                     | 2005 |         |         | 2004 |  
|                                       |                     |      |         |         |      |  
|1.30% Convertible Notes                |                     | $    | 125,000 |         |      | $ | 125,000 |        
|2.00% Convertible Exchange Notes       |                     |      | 172,400 |         |      |   | 172,442 |        
|$200.0 million Revolving Loan Facility |                     |      |        |         |      |   |        |        
|Other debt                             |                     |      | 12,143  |         |      |   | 13,835  |        
|                                       |                     |      |         |         |      |  
|                                       | Total notes payable |      | $       | 309,543 |      |   | $       | 311,277 | 
|                                       |                     |      |         |         |      |  





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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)










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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|    |             
|--- | ------------
|(7) | Income Taxes





|                                                                        |                                               |      |         |        |      |   |         |        |   |   |         |        |  
|----------------------------------------------------------------------- | --------------------------------------------- | ---- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                        |                                               | 2005 |         |        | 2004 |   |         | 2003   |  
|                                                                        |                                               |      |         |        |      |   |         |        |  
|Statutory tax rate                                                      |                                               |      | 35      | %      |      |   | 35      | %      |   |   | 35      | %     
|                                                                        |                                               |      |         |        |      |   |         |        |  
|Federal tax on continuing operations at statutory rate                  |                                               | $    | 97,561  |        |      | $ | 84,264  |        |   | $ | 58,356  |       
|Nontaxable municipal bond interest and dividends received
    deduction |                                               |      | (12,267 | )      |      |   | (7,076  | )      |   |   | (4,126  | )     
|Other non deductible expenses                                           |                                               |      | 1,620   |        |      |   | 923     |        |   |   | 1,979   |       
|State income taxes, net of federal tax benefit                          |                                               |      | 3,591   |        |      |   | 2,962   |        |   |   | 3,164   |       
|Foreign income taxes                                                    |                                               |      | 14,869  |        |      |   | 11,380  |        |   |   | 15,272  |       
|Foreign tax credit                                                      |                                               |      | (14,826 | )      |      |   | (11,197 | )      |   |   | (14,795 | )     
|Dividends received deduction on repatriated foreign earnings            |                                               |      | (2,784  | )      |      |   |        |        |   |   |        |       
|Other, net                                                              |                                               |      | (2,117  | )      |      |   | 476     |        |   |   | 7       |       
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Income tax expense from continuing operations |      | $       | 85,647 |      |   | $       | 81,732 |   |   | $       | 59,857 |  
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Effective tax rate, continuing operations     |      |         | 30.7   | %    |   |         | 33.9   | % |   |         | 35.9   | %
|                                                                        |                                               |      |         |        |      |   |         |        |  
|Federal tax on discontinued operations at statutory rate                |                                               | $    | 1,556   |        |      | $ | 2,211   |        |   | $ | 22,041  |       
|Book over tax basis in stock of subsidiary                              |                                               |      |        |        |      |   |        |        |   |   | 2,896   |       
|State income taxes, net of federal tax benefit, and other               |                                               |      | 130     |        |      |   | 102     |        |   |   | 1,352   |       
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Income tax expense on discontinued operations |      | $       | 1,686  |      |   | $       | 2,313  |   |   | $       | 26,289 |  
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Effective tax rate, discontinued operations   |      |         | 37.9   | %    |   |         | 36.6   | % |   |         | 41.7   | %
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Total income tax expense                      |      | $       | 87,333 |      |   | $       | 84,045 |   |   | $       | 86,146 |  
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Total effective tax rate                      |      |         | 30.8   | %    |   |         | 34.0   | % |   |         | 37.5   | %
|                                                                        |                                               |      |         |        |      |   |         |        |  

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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|                 |               |                                                 |        |        |        |   |         |        |        |   |         |        |        | 
|---------------- | ------------- | ----------------------------------------------- | ------ | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                 |               | 2005                                            |        |        | 2004   |   |         | 2003   |       
|                 |               |                                                 |        |        |        |   |         |        |       
|Federal current  |               | $                                               | 67,423 |        |        | $ | 82,995  |        |        | $ | 58,020  |       
|Federal deferred |               |                                                 | (2,170 | )      |        |   | (17,200 | )      |        |   | (15,747 | )     
|                 |               |                                                 |        |        |        |   |         |        |       
|                 | Total federal |                                                 |        | 65,253 |        |   |         | 65,795 |        |   |         | 42,273 |       
|                 |               |                                                 |        |        |        |   |         |        |       
|State current    |               |                                                 | 4,266  |        |        |   | 7,065   |        |        |   | 7,167   |       
|State deferred   |               |                                                 | 1,259  |        |        |   | (2,508  | )      |        |   | (1,356  | )     
|                 |               |                                                 |        |        |        |   |         |        |       
|                 | Total state   |                                                 |        | 5,525  |        |   |         | 4,557  |        |   |         | 5,811  |       
|                 |               |                                                 |        |        |        |   |         |        |       
|Foreign current  |               |                                                 | 15,155 |        |        |   | 11,376  |        |        |   | 11,285  |       
|Foreign deferred |               |                                                 | (286   | )      |        |   | 4       |        |        |   | 488     |       
|                 |               |                                                 |        |        |        |   |         |        |       
|                 | Total foreign |                                                 |        | 14,869 |        |   |         | 11,380 |        |   |         | 11,773 |       
|                 |               |                                                 |        |        |        |   |         |        |       
|                 |               | Income tax expense from continuing operations   |        | $      | 85,647 |   |         | $      | 81,732 |   |         | $      | 59,857 | 
|                 |               |                                                 |        |        |        |   |         |        |       
|Federal current  |               | $                                               | 3,528  |        |        | $ | 1,898   |        |        | $ | 25,038  |       
|Federal deferred |               |                                                 | (2,042 | )      |        |   | 271     |        |        |   | (815    | )     
|                 |               |                                                 |        |        |        |   |         |        |       
|                 | Total federal |                                                 |        | 1,486  |        |   |         | 2,169  |        |   |         | 24,223 |       
|                 |               |                                                 |        |        |        |   |         |        |       
|State current    |               |                                                 | 475    |        |        |   | 110     |        |        |   | 1,792   |       
|State deferred   |               |                                                 | (275   | )      |        |   | 34      |        |        |   | 274     |       
|                 |               |                                                 |        |        |        |   |         |        |       
|                 | Total state   |                                                 |        | 200    |        |   |         | 144    |        |   |         | 2,066  |       
|                 |               |                                                 |        |        |        |   |         |        |       
|                 |               | Income tax expense from discontinued operations |        | $      | 1,686  |   |         | $      | 2,313  |   |         | $      | 26,289 | 
|                 |               |                                                 |        |        |        |   |         |        |       
|                 |               | Total income tax expense                        |        | $      | 87,333 |   |         | $      | 84,045 |   |         | $      | 86,146 | 
|                 |               |                                                 |        |        |        |   |         |        |       

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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|                                                                                                 |                                |      |         |        |      |   |         |        | 
|------------------------------------------------------------------------------------------------ | ------------------------------ | ---- | ------- | ------ | ---- | - | ------- | ------ | 
|                                                                                                 |                                | 2005 |         |        | 2004 |  
|                                                                                                 |                                |      |         |        |      |  
|Excess of financial unearned premium over tax                                                    |                                | $    | 32,932  |        |      | $ | 27,238  |       
|Effect of loss reserve discounting and salvage and subrogation
    accrual for tax               |                                |      | 34,903  |        |      |   | 21,341  |       
|Excess of financial accrued expenses over tax                                                    |                                |      | 22,331  |        |      |   | 19,228  |       
|Allowance for bad debts, not deductible for tax                                                  |                                |      | 7,047   |        |      |   | 7,925   |       
|Federal tax net operating loss carryforwards                                                     |                                |      | 1,581   |        |      |   | 2,354   |       
|State tax net operating loss carryforwards                                                       |                                |      | 4,321   |        |      |   | 4,278   |       
|Foreign branch net operating loss carryforwards                                                  |                                |      | 3,244   |        |      |   | 1,194   |       
|Valuation allowance                                                                              |                                |      | (10,704 | )      |      |   | (17,533 | )     
|                                                                                                 |                                |      |         |        |      |  
|                                                                                                 | Total deferred tax assets      |      |         | 95,655 |      |   |         | 66,025 | 
|                                                                                                 |                                |      |         |        |      |  
|Unrealized gain on increase in value of securities available for
    sale (shareholders equity) |                                |      | 9,927   |        |      |   | 14,086  |       
|Deferred policy acquisition costs, net of ceding commissions,
    deductible for tax             |                                |      | 11,326  |        |      |   | 2,762   |       
|Amortizable goodwill for tax                                                                     |                                |      | 18,953  |        |      |   | 13,012  |       
|Book basis in net assets of foreign subsidiaries in excess of tax                                |                                |      | 8,794   |        |      |   | 5,354   |       
|Property and equipment depreciation and other items                                              |                                |      | 6,519   |        |      |   | 5,771   |       
|                                                                                                 |                                |      |         |        |      |  
|                                                                                                 | Total deferred tax liabilities |      |         | 55,519 |      |   |         | 40,985 | 
|                                                                                                 |                                |      |         |        |      |  
|                                                                                                 | Net deferred tax asset         |      | $       | 40,136 |      |   | $       | 25,040 | 
|                                                                                                 |                                |      |         |        |      |  



|                                      |                        |      |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------- | ---------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |                        | 2005 |        |        | 2004 |   |        | 2003   | 
|                                      |                        |      |        |        |      |   |        |        | 
|Balance at beginning of year          |                        | $    | 17,533 |        |      | $ | 17,613 |        |  | $ | 11,547 |       
|Increase due to acquisitions          |                        |      |       |        |      |   | 611    |        |  |   | 4,900  |       
|Reduction related to 2002 acquisition |                        |      | (5,511 | )      |      |   |       |        |  |   |       |       
|Other                                 |                        |      | (1,318 | )      |      |   | (691   | )      |  |   | 1,166  |       
|                                      |                        |      |        |        |      |   |        |        | 
|                                      | Balance at end of year |      | $      | 10,704 |      |   | $      | 17,533 |  |   | $      | 17,613 | 
|                                      |                        |      |        |        |      |   |        |        | 



F-32



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004.




|    |                     
|--- | --------------------
|(8) | Shareholders Equity







|                             |  |             |        |   |             |             |         |               |  |   |         |  
|---------------------------- |  | ----------- | ------ | - | ----------- | ----------- | ------- | ------------- |  | - | ------- | -
|                             |  |             |        |   |             | Accumulated |        
|                             |  | Unrealized  |        |   | Foreign     |             |         | Other         | 
|                             |  | Investment  |        |   | Currency    |             |         | Comprehensive | 
|                             |  | Gain (Loss) |        |   | Translation |             |         | Income        | 
|                             |  |             |        |   |             |             |         |               | 
|Balance at December 31, 2002 |  | $           | 21,649 |   |             | $           | (884    | )             |  | $ | 20,765  |  
|Net change for year          |  |             | (2,305 | ) |             |             | 7,666   |               |  |   | 5,361   |  
|                             |  |             |        |   |             |             |         |               | 
|Balance at December 31, 2003 |  |             | 19,344 |   |             |             | 6,782   |               |  |   | 26,126  |  
|Net change for year          |  |             | 6,437  |   |             |             | 5,072   |               |  |   | 11,509  |  
|                             |  |             |        |   |             |             |         |               | 
|Balance at December 31, 2004 |  |             | 25,781 |   |             |             | 11,854  |               |  |   | 37,635  |  
|Net change for year          |  |             | (8,862 | ) |             |             | (10,461 | )             |  |   | (19,323 | )
|                             |  |             |        |   |             |             |         |               | 
|Balance at December 31, 2005 |  | $           | 16,919 |   |             | $           | 1,393   |               |  | $ | 18,312  |  
|                             |  |             |        |   |             |             |         |               | 



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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|    |                   
|--- | ------------------
|(9) | Earnings Per Share



|                                                                                        |                                                                            |      |         |         |      |   |         |        |  |   |         |        | 
|--------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                                                                        |                                                                            | 2005 |         |         | 2004 |   |         | 2003   | 
|                                                                                        |                                                                            |      |         |         |      |   |         |        | 
|Net earnings                                                                            |                                                                            | $    | 195,860 |         |      | $ | 163,025 |        |  | $ | 143,561 |       
|                                                                                        |                                                                            |      |         |         |      |   |         |        | 
|Weighted average common shares outstanding                                              |                                                                            |      | 105,463 |         |      |   | 97,257  |        |  |   | 94,919  |       
|Dilutive effect of outstanding options (determined using the
    treasury stock method) |                                                                            |      | 1,659   |         |      |   | 1,569   |        |  |   | 1,657   |       
|Dilutive effect of convertible debt (determined using the
    treasury stock method)    |                                                                            |      | 2,315   |         |      |   |        |        |  |   |        |       
|                                                                                        |                                                                            |      |         |         |      |   |         |        | 
|                                                                                        | Weighted average common shares and potential common shares
    outstanding |      |         | 109,437 |      |   |         | 98,826 |  |   |         | 96,576 | 
|                                                                                        |                                                                            |      |         |         |      |   |         |        | 
|Anti-dilutive stock options not included in treasury stock
    method computation       |                                                                            |      | 118     |         |      |   | 6       |        |  |   | 306     |       
|                                                                                        |                                                                            |      |         |         |      |   |         |        | 



|     |              
|---- | -------------
|(10) | Stock Options





|                               |  |           |        |         |          |   |       |           |         |  |          |   |  |           |       |  |          |  |        |   |  |   |       | 
|------------------------------ |  | --------- | ------ | ------- | -------- | - | ----- | --------- | ------- |  | -------- | - |  | --------- | ----- |  | -------- |  | ------ | - |  | - | ----- | 
|                               |  | 2005      |        |         | 2004     |   |       | 2003      |        
|                               |  |           |        |         |          |   |       |           |        
|                               |  |           |        | Average |          |   |       |           | Average |  |          |   |  | Average   |      
|                               |  | Number    |        |         | Exercise |   |       | Number    |         |  | Exercise |   |  | Number    |       |  | Exercise | 
|                               |  | of Shares |        |         | Price    |   |       | of Shares |         |  | Price    |   |  | of Shares |       |  | Price    | 
|                               |  |           |        |         |          |   |       |           |         |  |          |   |  |           |       |  |          | 
|Outstanding, beginning of year |  |           | 7,178  |         |          | $ | 15.99 |           |         |  | 8,291    |   |  | $         | 14.99 |  |          |  | 9,557  |   |  | $ | 13.99 | 
|Granted at market value        |  |           | 3,814  |         |          |   | 25.63 |           |         |  | 1,044    |   |  |           | 20.27 |  |          |  | 713    |   |  |   | 16.28 | 
|Exercised                      |  |           | (2,459 | )       |          |   | 14.91 |           |         |  | (1,494   | ) |  |           | 13.77 |  |          |  | (1,889 | ) |  |   | 10.46 | 
|Forfeited and expired          |  |           | (314   | )       |          |   | 17.97 |           |         |  | (663     | ) |  |           | 15.92 |  |          |  | (90    | ) |  |   | 14.35 | 
|                               |  |           |        |         |          |   |       |           |         |  |          |   |  |           |       |  |          | 
|Outstanding, end of year       |  |           | 8,219  |         |          |   | 20.71 |           |         |  | 7,178    |   |  |           | 15.99 |  |          |  | 8,291  |   |  |   | 14.99 | 
|                               |  |           |        |         |          |   |       |           |         |  |          |   |  |           |       |  |          | 
|Exercisable, end of year       |  |           | 1,766  |         |          |   | 16.90 |           |         |  | 2,919    |   |  |           | 15.26 |  |          |  | 2,807  |   |  |   | 14.41 | 
|                               |  |           |        |         |          |   |       |           |         |  |          |   |  |           |       |  |          | 



|                         |               |                     |       |         |                     |  |           |           |  |   |           |         |  |          |       |       |  |   |       |       | 
|------------------------ | ------------- | ------------------- | ----- | ------- | ------------------- |  | --------- | --------- |  | - | --------- | ------- |  | -------- | ----- | ----- |  | - | ----- | ----- | 
|                         |               | Options Outstanding |       |         | Options Exercisable | 
|                         |               |                     |       |         |                     | 
|                         |               |                     |       | Average |                     |  | Average   |           |  |   |           | Average | 
|                         |               | Number of           |       |         | Remaining           |  |           | Exercise  |  |   | Number of |         |  | Exercise |      
|Range of Exercise Prices |               | Shares              |       |         | Contractual Life    |  |           | Price     |  |   | Shares    |         |  | Price    |      
|                         |               |                     |       |         |                     |  |           |           |  |   |           |         |  |          |      
|Under $16.36             |               |                     | 1,963 |         |                     |  | 3.5 years |           |  | $ | 14.50     |         |  |          | 562   |       |  | $ | 14.54 |      
|$16.36 - $20.05          |               |                     | 2,115 |         |                     |  | 3.4 years |           |  |   | 17.64     |         |  |          | 1,000 |       |  |   | 17.34 |      
|$20.06 - $25.50          |               |                     | 1,156 |         |                     |  | 4.8 years |           |  |   | 22.80     |         |  |          | 204   |       |  |   | 21.22 |      
|Over $25.50              |               |                     | 2,985 |         |                     |  | 5.6 years |           |  |   | 26.17     |         |  |          |      |       |  |   |      |      
|                         |               |                     |       |         |                     |  |           |           |  |   |           |         |  |          |      
|                         | Total options |                     |       | 8,219   |                     |  |           | 4.4 years |  |   |           | 20.71   |  |          |       | 1,766 |  |   |       | 16.90 | 
|                         |               |                     |       |         |                     |  |           |           |  |   |           |         |  |          |      

F-34



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|     |                            
|---- | ---------------------------
|(11) | Segment and Geographic Data





F-35



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)


|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   |           |        |           | 
|---------------------------- | ---------------------------------------------------------- | -------------------------------------------------------- | -------------------------- | --------- | ------ | --------- | ----- | ---------- | - | ------- | --------- | ------ | - | ------ | - | ------ | - | ----- | - | --------- | ------ | --------- | 
|                             |                                                            | Insurance                                                |                            |           |        |           | Other |            |   |         |           |       
|                             |                                                            | Company                                                  |                            |           | Agency |           |       | Operations |   |         | Corporate |        |   | Total  |  
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|Year ended December 31, 2005 |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   |          
|Revenue:                     |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   |          
|                             | Domestic                                                   |                                                          | $                          | 1,218,066 |        |           | $     | 62,111     |   |         | $         | 35,324 |   |        | $ | 6,784  |   |       | $ | 1,322,285 |       
|                             | Foreign                                                    |                                                          |                            | 281,697   |        |           |       | 40,360     |   |         |           |       |   |        |   |       |   |       |   | 322,057   |       
|                             | Inter-segment                                              |                                                          |                            | 158       |        |           |       | 86,877     |   |         |           |       |   |        |   |       |   |       |   | 87,035    |       
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Total segment revenue      |           | $      | 1,499,921 |       |            | $ | 189,348 |           |        | $ | 35,324 |   |        | $ | 6,784 |   |           |        | 1,731,377 | 
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|                             | Inter-segment eliminations                                 |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   | (87,035   | )     
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Consolidated total revenue |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   |           | $      | 1,644,342 | 
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|Net earnings:                |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   |          
|                             | Domestic                                                   |                                                          | $                          | 122,010   |        |           | $     | 31,158     |   |         | $         | 22,605 |   |        | $ | 2,981  |   |       | $ | 178,754   |       
|                             | Foreign                                                    |                                                          |                            | 6,488     |        |           |       | 6,957      |   |         |           |       |   |        |   |       |   |       |   | 13,445    |       
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Total segment net earnings |           | $      | 128,498   |       |            | $ | 38,115  |           |        | $ | 22,605 |   |        | $ | 2,981 |   |           |        | 192,199   | 
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|                             | Inter-segment eliminations                                 |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   | 901       |       
|                             | Earnings from discontinued operations, net of income taxes |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   | 2,760     |       
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Consolidated net earnings  |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   |           | $      | 195,860   | 
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|Other items:                 |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   |          
|                             | Net investment income                                      |                                                          | $                          | 88,397    |        |           | $     | 7,437      |   |         | $         | 794    |   |        | $ | 2,223  |   |       | $ | 98,851    |       
|                             | Depreciation and amortization                              |                                                          |                            | 4,825     |        |           |       | 7,381      |   |         |           | 459    |   |        |   | 1,982  |   |       |   | 14,647    |       
|                             | Interest expense (benefit)                                 |                                                          |                            | 445       |        |           |       | 9,173      |   |         |           | 699    |   |        |   | (2,633 | ) |       |   | 7,684     |       
|                             | Capital expenditures                                       |                                                          |                            | 2,134     |        |           |       | 3,046      |   |         |           | 716    |   |        |   | 4,937  |   |       |   | 10,833    |       
|                            
|                             | Income tax expense (benefit)                               |                                                          |                            | 50,606    |        |           |       | 25,993     |   |         |           | 10,282 |   |        |   | (1,662 | ) |       |   | 85,219    |       
|                             | Inter-segment eliminations                                 |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   | 428       |       
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            | Consolidated income tax expense on continuing operations |                            |           |        |           |       |            |   |         |           |        |   |        |   |        |   |       |   | $         | 85,647 |          
|                             |                                                            |                                                          |                            |           |        |           |       |            |   |         |           |        |   |        |  



F-36



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)


|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   |         |        |           | 
|---------------------------- | ---------------------------------------------------------- | -------------------------------------------------------- | --------------------------------- | ------- | ------ | --------- | ----- | ---------- | - | ------- | --------- | ------ | - | ------ | - | ------ | - | ------ | - | ------- | ------ | --------- | 
|                             |                                                            | Insurance                                                |                                   |         |        |           | Other |            |   |         |           |       
|                             |                                                            | Company                                                  |                                   |         | Agency |           |       | Operations |   |         | Corporate |        |   | Total  |  
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|Year ended December 31, 2004 |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   |        
|Revenue:                     |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   |        
|                             | Domestic                                                   |                                                          | $                                 | 883,886 |        |           | $     | 86,806     |   |         | $         | 13,020 |   |        | $ | 4,721  |   |        | $ | 988,433 |       
|                             | Foreign                                                    |                                                          |                                   | 250,718 |        |           |       | 44,003     |   |         |           |       |   |        |   |       |   |        |   | 294,721 |       
|                             | Inter-segment                                              |                                                          |                                   | 553     |        |           |       | 95,475     |   |         |           |       |   |        |   |       |   |        |   | 96,028  |       
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Total segment revenue             |         | $      | 1,135,157 |       |            | $ | 226,284 |           |        | $ | 13,020 |   |        | $ | 4,721  |   |         |        | 1,379,182 | 
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|                             | Inter-segment eliminations                                 |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   | (96,028 | )     
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Consolidated total revenue        |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   |         | $      | 1,283,154 | 
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|Net earnings (loss):         |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   |        
|                             | Domestic                                                   |                                                          | $                                 | 82,591  |        |           | $     | 37,438     |   |         | $         | 7,871  |   |        | $ | (2,323 | ) |        | $ | 125,577 |       
|                             | Foreign                                                    |                                                          |                                   | 24,764  |        |           |       | 16,545     |   |         |           |       |   |        |   |       |   |        |   | 41,309  |       
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Total segment net earnings (loss) |         | $      | 107,355   |       |            | $ | 53,983  |           |        | $ | 7,871  |   |        | $ | (2,323 | ) |         |        | 166,886   | 
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|                             | Inter-segment eliminations                                 |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   | (7,865  | )     
|                             | Earnings from discontinued operations, net of income taxes |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   | 4,004   |       
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Consolidated net earnings         |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   |         | $      | 163,025   | 
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|Other items:                 |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   |        
|                             | Net investment income                                      |                                                          | $                                 | 59,073  |        |           | $     | 3,559      |   |         | $         | 1,236  |   |        | $ | 1,017  |   |        | $ | 64,885  |       
|                             | Depreciation and amortization                              |                                                          |                                   | 4,568   |        |           |       | 9,729      |   |         |           | 531    |   |        |   | 1,311  |   |        |   | 16,139  |       
|                             | Interest expense (benefit)                                 |                                                          |                                   | 856     |        |           |       | 8,491      |   |         |           | 768    |   |        |   | (1,741 | ) |        |   | 8,374   |       
|                             | Capital expenditures                                       |                                                          |                                   | 3,451   |        |           |       | 1,984      |   |         |           | 16     |   |        |   | 2,885  |   |        |   | 8,336   |       
|                            
|                             | Income tax expense                                         |                                                          |                                   | 50,364  |        |           |       | 31,621     |   |         |           | 2,964  |   |        |   | 2,276  |   |        |   | 87,225  |       
|                             | Inter-segment eliminations                                 |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   | (5,493  | )     
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  
|                             |                                                            | Consolidated income tax expense on continuing operations |                                   |         |        |           |       |            |   |         |           |        |   |        |   |        |   |        |   | $       | 81,732 |          
|                             |                                                            |                                                          |                                   |         |        |           |       |            |   |         |           |        |   |        |  



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)


|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   |         |        |           | 
|---------------------------- | ---------------------------------------------------------- | -------------------------------------------------------- | --------------------------------- | ------- | ------ | ------- | ----- | ---------- | - | ------- | --------- | ------ | - | ------ | - | ------ | - | ------ | - | ------- | ------ | --------- | 
|                             |                                                            | Insurance                                                |                                   |         |        |         | Other |            |   |         |           |       
|                             |                                                            | Company                                                  |                                   |         | Agency |         |       | Operations |   |         | Corporate |        |   | Total  |  
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|Year ended December 31, 2003 |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   |        
|Revenue:                     |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   |        
|                             | Domestic                                                   |                                                          | $                                 | 606,469 |        |         | $     | 65,484     |   |         | $         | 11,725 |   |        | $ | 790    |   |        | $ | 684,468 |       
|                             | Foreign                                                    |                                                          |                                   | 219,578 |        |         |       | 37,918     |   |         |           |       |   |        |   |       |   |        |   | 257,496 |       
|                             | Inter-segment                                              |                                                          |                                   |        |        |         |       | 96,869     |   |         |           |       |   |        |   |       |   |        |   | 96,869  |       
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Total segment revenue             |         | $      | 826,047 |       |            | $ | 200,271 |           |        | $ | 11,725 |   |        | $ | 790    |   |         |        | 1,038,833 | 
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|                             | Inter-segment eliminations                                 |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   | (96,869 | )     
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Consolidated total revenue        |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   |         | $      | 941,964   | 
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|Net earnings (loss):         |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   |        
|                             | Domestic                                                   |                                                          | $                                 | 56,534  |        |         | $     | 37,663     |   |         | $         | 6,014  |   |        | $ | (5,428 | ) |        | $ | 94,783  |       
|                             | Foreign                                                    |                                                          |                                   | 17,911  |        |         |       | 12,065     |   |         |           |       |   |        |   |       |   |        |   | 29,976  |       
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Total segment net earnings (loss) |         | $      | 74,445  |       |            | $ | 49,728  |           |        | $ | 6,014  |   |        | $ | (5,428 | ) |         |        | 124,759   | 
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|                             | Inter-segment eliminations                                 |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   | (17,882 | )     
|                             | Earnings from discontinued operations, net of income taxes |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   | 36,684  |       
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|                             |                                                            |                                                          | Consolidated net earnings         |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   |         | $      | 143,561   | 
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|Other items:                 |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   |        
|                             | Net investment income *                                    |                                                          | $                                 | 42,345  |        |         | $     | 3,796      |   |         | $         | 224    |   |        | $ | 970    |   |        | $ | 47,335  |       
|                             | Depreciation and amortization *                            |                                                          |                                   | 3,271   |        |         |       | 6,283      |   |         |           | 664    |   |        |   | 2,435  |   |        |   | 12,653  |       
|                             | Interest expense (benefit)                                 |                                                          |                                   | 62      |        |         |       | 7,877      |   |         |           | 770    |   |        |   | (1,256 | ) |        |   | 7,453   |       
|                             | Capital expenditures *                                     |                                                          |                                   | 2,618   |        |         |       | 2,997      |   |         |           |       |   |        |   | 16,047 |   |        |   | 21,662  |       
|                            
|                             | Income tax expense                                         |                                                          |                                   | 35,033  |        |         |       | 33,075     |   |         |           | 2,699  |   |        |   | (73    | ) |        |   | 70,734  |       
|                             | Inter-segment eliminations                                 |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   | (10,877 | )     
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  
|                             |                                                            | Consolidated income tax expense on continuing operations |                                   |         |        |         |       |            |   |         |           |        |   |        |   |        |   |        |   | $       | 59,857 |          
|                             |                                                            |                                                          |                                   |         |        |         |       |            |   |         |           |        |   |        |  






|  |                                                                
|- | ---------------------------------------------------------------
|* | Excludes immaterial amounts related to discontinued operations.



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|                                |                           |      |         |           |      |   |         |           |  |   |         |         | 
|------------------------------- | ------------------------- | ---- | ------- | --------- | ---- | - | ------- | --------- |  | - | ------- | ------- | 
|                                |                           | 2005 |         |           | 2004 |   |         | 2003      | 
|                                |                           |      |         |           |      |   |         |           | 
|Diversified financial products  |                           | $    | 531,136 |           |      | $ | 310,809 |           |  | $ | 123,562 |        
|Group life, accident and health |                           |      | 504,382 |           |      |   | 343,913 |           |  |   | 290,009 |        
|Aviation                        |                           |      | 136,197 |           |      |   | 127,248 |           |  |   | 97,536  |        
|London market account           |                           |      | 93,017  |           |      |   | 111,341 |           |  |   | 137,572 |        
|Other specialty lines           |                           |      | 97,721  |           |      |   | 69,089  |           |  |   | 12,443  |        
|Discontinued lines              |                           |      | 7,535   |           |      |   | 48,292  |           |  |   | 77,150  |        
|                                |                           |      |         |           |      |   |         |           | 
|                                | Net earned premium        |      | $       | 1,369,988 |      |   | $       | 1,010,692 |  |   | $       | 738,272 | 
|                                |                           |      |         |           |      |   |         |           | 
|Property and casualty           |                           | $    | 115,379 |           |      | $ | 126,049 |           |  | $ | 85,244  |        
|Accident and health             |                           |      | 18,903  |           |      |   | 56,300  |           |  |   | 57,371  |        
|                                |                           |      |         |           |      |   |         |           | 
|                                | Fee and commission income |      | $       | 134,282   |      |   | $       | 182,349   |  |   | $       | 142,615 | 
|                                |                           |      |         |           |      |   |         |           | 



|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |         |         |  |   |           |           | 
|----------------- | ------------ | --------- | --------- | --------- | ------ | - | ------- | ---------- |  | - | --------- | ------- |  | ----- | ------- | ------- |  | - | --------- | --------- | 
|                  |              | Insurance |           |           |        |   | Other   |            |  |   |           |        
|                  |              | Company   |           |           | Agency |   |         | Operations |  |   | Corporate |         |  | Total |        
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        
|December 31, 2005 |              |           |           |           |        |   |         |            |  |   |           |         |  |       |         |         |  |   |           |          
|Domestic          |              | $         | 3,980,535 |           |        | $ | 634,263 |            |  | $ | 170,620   |         |  | $     | 150,957 |         |  | $ | 4,936,375 |          
|Foreign           |              |           | 1,464,306 |           |        |   | 625,385 |            |  |   |          |         |  |       |        |         |  |   | 2,089,691 |          
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        
|                  | Total assets |           | $         | 5,444,841 |        |   | $       | 1,259,648  |  |   | $         | 170,620 |  |       | $       | 150,957 |  |   | $         | 7,026,066 | 
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        
|December 31, 2004 |              |           |           |           |        |   |         |            |  |   |           |         |  |       |         |         |  |   |           |          
|Domestic          |              | $         | 3,275,186 |           |        | $ | 710,386 |            |  | $ | 109,642   |         |  | $     | 116,293 |         |  | $ | 4,211,507 |          
|Foreign           |              |           | 1,030,787 |           |        |   | 662,332 |            |  |   |          |         |  |       |        |         |  |   | 1,693,119 |          
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        
|                  | Total assets |           | $         | 4,305,973 |        |   | $       | 1,372,718  |  |   | $         | 109,642 |  |       | $       | 116,293 |  |   | $         | 5,904,626 | 
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        



|     |                              
|---- | -----------------------------
|(12) | Commitments and Contingencies



| |           
| | ----------
| | Litigation





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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)






| |                     
| | --------------------
| | Catastrophe Exposure





| |                 
| | ----------------
| | Indemnifications







| |                   
| | ------------------
| | Terrorist Exposure





| |       
| | ------
| | Leases



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)


non-cancelable


|                         |            |                                      |   |        |        | 
|------------------------ | ---------- | ------------------------------------ | - | ------ | ------ | 
|Years Ended December 31, |            |                                      |   |       
|                         | 2006       |                                      | $ | 10,582 |       
|                         | 2007       |                                      |   | 10,139 |       
|                         | 2008       |                                      |   | 8,797  |       
|                         | 2009       |                                      |   | 6,461  |       
|                         | 2010       |                                      |   | 5,689  |       
|                         | Thereafter |                                      |   | 17,455 |       
|                         |            |                                      |  
|                         |            | Total future minimum rental payments |   | $      | 59,123 | 
|                         |            |                                      |  



|     |                           
|---- | --------------------------
|(13) | Related Party Transactions









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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|     |                      
|---- | ---------------------
|(14) | Statutory Information





|                                 |  |      |           |  |      |   |         |      |  |   |         | 
|-------------------------------- |  | ---- | --------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                                 |  | 2005 |           |  | 2004 |   |         | 2003 | 
|                                 |  |      |           |  |      |   |         |      | 
|Statutory policyholders surplus |  | $    | 1,110,268 |  |      | $ | 844,851 |      |  | $ | 591,889 | 
|Statutory net income             |  |      | 112,231   |  |      |   | 85,843  |      |  |   | 54,784  | 







|     |                         
|---- | ------------------------
|(15) | Supplemental Information



|                                            |  |      |         |  |      |   |         |      |  |   |        | 
|------------------------------------------- |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------ | 
|                                            |  | 2005 |         |  | 2004 |   |         | 2003 | 
|                                            |  |      |         |  |      |   |         |      | 
|Cash received from commutations             |  | $    | 180,789 |  |      | $ | 79,462  |      |  | $ | 48,983 | 
|Income taxes paid                           |  |      | 78,309  |  |      |   | 112,392 |      |  |   | 70,573 | 
|Interest paid                               |  |      | 6,168   |  |      |   | 7,219   |      |  |   | 6,174  | 
|Dividends declared but not paid at year end |  |      | 8,310   |  |      |   | 5,783   |      |  |   | 4,800  | 

non-cash


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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(continued, tables in thousands, except per share data)




|     |                                     
|---- | ------------------------------------
|(16) | Quarterly Financial Data (Unaudited)

|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|----------------------------------- |  | -------------- | ------- |  | ------------- | - | ------- | -------------- |  | - | ------------- |  |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                    |  | Fourth Quarter |         |  | Third Quarter |   |         | Second Quarter |  |   | First Quarter | 
|                                    |  |                |         |  |               |   |         |                |  |   |               | 
|                                    |  | 2005           |         |  | 2004          |   |         | 2005           |  |   | 2004          |  |  | 2005 |         |  | 2004 |   |         | 2005 |  |   | 2004    | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Total revenue                       |  | $              | 447,796 |  |               | $ | 365,669 |                |  | $ | 412,031       |  |  | $    | 322,197 |  |      | $ | 404,837 |      |  | $ | 317,270 |  |  | $ | 379,678 |  |  | $ | 278,018 | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Net earnings                        |  | $              | 66,534  |  |               | $ | 56,239  |                |  | $ | 7,950         |  |  | $    | 15,803  |  |      | $ | 64,058  |      |  | $ | 46,415  |  |  | $ | 57,318  |  |  | $ | 44,568  | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Basic earnings per share data:      |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|Earnings per share                  |  | $              | 0.62    |  |               | $ | 0.57    |                |  | $ | 0.08          |  |  | $    | 0.16    |  |      | $ | 0.61    |      |  | $ | 0.48    |  |  | $ | 0.56    |  |  | $ | 0.46    | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Weighted average shares outstanding |  |                | 107,970 |  |               |   | 98,799  |                |  |   | 105,623       |  |  |      | 97,019  |  |      |   | 104,962 |      |  |   | 96,807  |  |  |   | 103,241 |  |  |   | 96,374  | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Diluted earnings per share data:    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|Earnings per share                  |  | $              | 0.59    |  |               | $ | 0.56    |                |  | $ | 0.07          |  |  | $    | 0.16    |  |      | $ | 0.59    |      |  | $ | 0.47    |  |  | $ | 0.54    |  |  | $ | 0.45    | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Weighted average shares outstanding |  |                | 113,566 |  |               |   | 100,254 |                |  |   | 109,818       |  |  |      | 98,409  |  |      |   | 108,269 |      |  |   | 98,690  |  |  |   | 105,734 |  |  |   | 98,126  | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 





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##### Table of Contents






SCHEDULE 1


HCC INSURANCE HOLDINGS, INC.


SUMMARY OF INVESTMENTS


OTHER THAN INVESTMENTS IN RELATED PARTIES


(in thousands)


|                       |                                                                              |                         |         |         |           |                |   |          |           |  |         |         |           | 
|---------------------- | ---------------------------------------------------------------------------- | ----------------------- | ------- | ------- | --------- | -------------- | - | -------- | --------- |  | ------- | ------- | --------- | 
|December 31, 2005      |                                                                             
|                       |                                                                             
|Column A               |                                                                              | Column B                |         |         | Column C  |                |   | Column D |          
|                       |                                                                              |                         |         |         |           |                |   |          |          
|                       |                                                                              |                         |         |         |           | Amount at      |  
|                       |                                                                              |                         |         |         |           | Which Shown in |  
|                       |                                                                              |                         |         |         |           | the Balance    |  
|Type of Investment     |                                                                              | Cost                    |         |         | Value     |                |   | Sheet    |          
|                       |                                                                              |                         |         |         |           |                |   |          |          
|Fixed maturities:      |                                                                              |                         |         |         |           |                |   |          |           |  |         |        
|                       | Bonds  United States government and government
    agencies and authorities |                         | $       | 90,404  |           |                | $ | 89,724   |           |  | $       | 89,724  |          
|                       | Bonds  states, municipalities and political
    subdivisions                |                         |         | 418,179 |           |                |   | 418,873  |           |  |         | 418,873 |          
|                       | Bonds  special revenue                                                      |                         |         | 720,320 |           |                |   | 723,101  |           |  |         | 723,101 |          
|                       | Bonds  corporate                                                            |                         |         | 381,917 |           |                |   | 375,582  |           |  |         | 375,582 |          
|                       | Asset-backed and mortgage-backed securities                                  |                         |         | 361,456 |           |                |   | 355,372  |           |  |         | 355,372 |          
|                       | Bonds  foreign                                                              |                         |         | 304,863 |           |                |   | 305,972  |           |  |         | 305,972 |          
|                       |                                                                              |                         |         |         |           |                |   |          |          
|                       |                                                                              | Total fixed maturities  |         |         | 2,277,139 |                |   |          | 2,268,624 |  |         |         | 2,268,624 | 
|                       |                                                                              |                         |         |         |           |                |   |          |          
|Equity securities:     |                                                                              |                         |         |         |           |                |   |          |           |  |         |        
|                       | Common stocks  banks, trusts and insurance companies                        |                         |         | 28,766  |           |                | $ | 36,926   |           |  |         | 36,926  |          
|                       | Common stocks  industrial, miscellaneous and all other                      |                         |         | 40,764  |           |                |   | 36,095   |           |  |         | 36,095  |          
|                       | Non-redeemable preferred stocks                                              |                         |         | 1,033   |           |                |   | 1,013    |           |  |         | 1,013   |          
|                       |                                                                              |                         |         |         |           |                |   |          |          
|                       |                                                                              | Total equity securities |         |         | 70,563    |                |   | $        | 74,034    |  |         |         | 74,034    | 
|                       |                                                                              |                         |         |         |           |                |   |          |          
|Short-term investments |                                                                              |                         | 839,581 |         |           |                |   |          |           |  | 839,581 |        
|Other investments      |                                                                              |                         | 74,334  |         |           |                |   |          |           |  | 75,189  |        
|                       |                                                                              |                         |         |         |           |                |   |          |          
|                       |                                                                              | Total investments       |         | $       | 3,261,617 |                |   |          |           |  |         | $       | 3,257,428 | 
|                       |                                                                              |                         |         |         |           |                |   |          |          

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##### Table of Contents






SCHEDULE 2


HCC INSURANCE HOLDINGS, INC.


CONDENSED FINANCIAL INFORMATION OF REGISTRANT


BALANCE SHEETS


(in thousands)


|                                                                                            |                                            |              |           |           |      |   |           |           | 
|------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------ | --------- | --------- | ---- | - | --------- | --------- | 
|                                                                                            |                                            | December 31, |          
|                                                                                            |                                            |              |          
|                                                                                            |                                            | 2005         |           |           | 2004 |  
|                                                                                            |                                            |              |           |           |      |  
|ASSETS                                                                                     
|Fixed income securities, at fair value (amortized cost:
    2005  $31,023; 2004  $33,749) |                                            | $            | 30,622    |           |      | $ | 33,716    |          
|Cash                                                                                        |                                            |              | 3,610     |           |      |   | 2,242     |          
|Short-term investments                                                                      |                                            |              | 38,182    |           |      |   | 31,006    |          
|Investment in subsidiaries                                                                  |                                            |              | 1,794,797 |           |      |   | 1,389,582 |          
|Intercompany loans to subsidiaries for acquisitions                                         |                                            |              | 184,706   |           |      |   | 194,919   |          
|Receivable from subsidiaries                                                                |                                            |              | 37,364    |           |      |   | 39,997    |          
|Other assets                                                                                |                                            |              | 14,056    |           |      |   | 11,867    |          
|                                                                                            |                                            |              |           |           |      |  
|                                                                                            | Total assets                               |              | $         | 2,103,337 |      |   | $         | 1,703,329 | 
|                                                                                            |                                            |              |           |           |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                       
|Payable to subsidiaries                                                                     |                                            | $            | 85,821    |           |      | $ | 55,151    |          
|Notes payable                                                                               |                                            |              | 297,400   |           |      |   | 297,442   |          
|Deferred Federal income tax                                                                 |                                            |              | 14,310    |           |      |   | 6,468     |          
|Accounts payable and accrued liabilities                                                    |                                            |              | 12,110    |           |      |   | 20,603    |          
|                                                                                            |                                            |              |           |           |      |  
|                                                                                            | Total liabilities                          |              |           | 409,641   |      |   |           | 379,664   | 
|                                                                                            | Total shareholders equity                 |              |           | 1,693,696 |      |   |           | 1,323,665 | 
|                                                                                            |                                            |              |           |           |      |  
|                                                                                            | Total liabilities and shareholders equity |              | $         | 2,103,337 |      |   | $         | 1,703,329 | 
|                                                                                            |                                            |              |           |           |      |  



S-2



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##### Table of Contents






SCHEDULE 2


HCC INSURANCE HOLDINGS, INC.


CONDENSED FINANCIAL INFORMATION OF REGISTRANT


STATEMENTS OF EARNINGS


(in thousands)


|                                   |               |                          |         |         |      |   |         |         |  |   |         |         | 
|---------------------------------- | ------------- | ------------------------ | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                   |               | Years Ended December 31, |        
|                                   |               |                          |        
|                                   |               | 2005                     |         |         | 2004 |   |         | 2003    | 
|                                   |               |                          |         |         |      |   |         |         | 
|Equity in earnings of subsidiaries |               | $                        | 192,870 |         |      | $ | 166,038 |         |  | $ | 142,853 |        
|Interest income from subsidiaries  |               |                          | 6,799   |         |      |   | 6,531   |         |  |   | 6,827   |        
|Net investment income              |               |                          | 2,082   |         |      |   | 994     |         |  |   | 953     |        
|Other operating income             |               |                          | 525     |         |      |   |        |         |  |   | 2,481   |        
|                                   |               |                          |         |         |      |   |         |         | 
|                                   | Total revenue |                          |         | 202,276 |      |   |         | 173,563 |  |   |         | 153,114 | 
|                                   |               |                          |         |         |      |   |         |         | 
|Interest expense                   |               |                          | 6,552   |         |      |   | 6,733   |         |  |   | 6,296   |        
|Other operating expense            |               |                          | 3,404   |         |      |   | 2,858   |         |  |   | 1,781   |        
|                                   |               |                          |         |         |      |   |         |         | 
|                                   | Total expense |                          |         | 9,956   |      |   |         | 9,591   |  |   |         | 8,077   | 
|                                   |               |                          |         |         |      |   |         |         | 
|Earnings before income tax expense |               |                          | 192,320 |         |      |   | 163,972 |         |  |   | 145,037 |        
|Income tax expense (benefit)       |               |                          | (3,540  | )       |      |   | 947     |         |  |   | 1,476   |        
|                                   |               |                          |         |         |      |   |         |         | 
|                                   | Net earnings  |                          | $       | 195,860 |      |   | $       | 163,025 |  |   | $       | 143,561 | 
|                                   |               |                          |         |         |      |   |         |         | 



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##### Table of Contents



SCHEDULE 2


HCC INSURANCE HOLDINGS, INC.


CONDENSED FINANCIAL INFORMATION OF REGISTRANT


STATEMENTS OF COMPREHENSIVE INCOME


(in thousands)


|                                        |                                                                                                                                                                                     |                          |         |         |         |   |         |        |         |   |         |        |         | 
|--------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ------- | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                        |                                                                                                                                                                                     | Years Ended December 31, |        
|                                        |                                                                                                                                                                                     |                          |        
|                                        |                                                                                                                                                                                     | 2005                     |         |         | 2004    |   |         | 2003   |        
|                                        |                                                                                                                                                                                     |                          |         |         |         |   |         |        |        
|Net earnings                            |                                                                                                                                                                                     | $                        | 195,860 |         |         | $ | 163,025 |        |         | $ | 143,561 |       
|Other comprehensive income (loss):      |                                                                                                                                                                                     |                          |         |         |         |   |         |        |         |   |         |       
|Investment gains (losses):              |                                                                                                                                                                                     |                          |         |         |         |   |         |        |         |   |         |       
|                                        | Gains (losses) during the year, net of income tax charge
    (benefit) of $(129) in 2005 and $12 in 2004                                                                            |                          |         | (239    | )       |   |         | 21     |         |   |         |       |        
|                                        | Consolidated subsidiaries investment gains (losses) during
    the year, net of income tax charge (benefit) of $(2,817) in
    2005, $6,079 in 2004 and $(1,048) in 2003           |                          |         | (4,018  | )       |   |         | 10,934 |         |   |         | (1,962 | )      
|                                        | Less consolidated subsidiaries reclassification adjustment
    for gains included in net earnings, net of income tax charge of
    $2,479 in 2005, $2,433 in 2004 and $184 in 2003 |                          |         | (4,605  | )       |   |         | (4,518 | )       |   |         | (343   | )      
|Foreign currency translation adjustment |                                                                                                                                                                                     |                          | (10,461 | )       |         |   | 5,072   |        |         |   | 7,666   |       
|                                        |                                                                                                                                                                                     |                          |         |         |         |   |         |        |        
|                                        | Other comprehensive income (loss)                                                                                                                                                   |                          |         | (19,323 | )       |   |         | 11,509 |         |   |         | 5,361  |        
|                                        |                                                                                                                                                                                     |                          |         |         |         |   |         |        |        
|                                        |                                                                                                                                                                                     | Comprehensive income     |         | $       | 176,537 |   |         | $      | 174,534 |   |         | $      | 148,922 | 
|                                        |                                                                                                                                                                                     |                          |         |         |         |   |         |        |        



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##### Table of Contents



SCHEDULE 2


HCC INSURANCE HOLDINGS, INC.


CONDENSED FINANCIAL INFORMATION OF REGISTRANT


STATEMENTS OF CASH FLOWS


(in thousands)


|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |          |          |     |          |          |          |  
|------------------------------------- | ----------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------- | -------- | -------- | -------- | ----- | -------- | -------- | -------- | --- | -------- | -------- | -------- | -
|                                      |                                                             | Years Ended December 31,                                                                |                                      
|                                      |                                                             |                                                                                         |                                      
|                                      |                                                             | 2005                                                                                    |                                       |          | 2004     |          |       | 2003     |         
|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |         
|Cash flows from operating activities: |                                                             |                                                                                         |                                       |          |          |          |       |          |          |          |     |         
|                                      | Net earnings                                                |                                                                                         | $                                     | 195,860  |          |          | $     | 163,025  |          |          | $   | 143,561  |         
|                                      |                                                             | Adjustments to reconcile net earnings to net cash provided by
    operating activities: |                                       |          |          |          |       |          |          |          |     |          |          |         
|                                      |                                                             | Undistributed net income of subsidiaries                                                |                                       |          | (120,790 | )        |       |          | (134,242 | )        |     |          | (120,953 | )       
|                                      |                                                             | Change in accrued interest receivable added to intercompany loan
    balances           |                                       |          | (6,712   | )        |       |          | (6,544   | )        |     |          | (6,317   | )       
|                                      |                                                             | Change in accounts payable and accrued liabilities                                      |                                       |          | (10,999  | )        |       |          | (660     | )        |     |          | 10,022   |         
|                                      |                                                             | Tax benefit from exercise of stock options                                              |                                       |          | 10,001   |          |       |          | 3,743    |          |     |          | 4,320    |         
|                                      |                                                             | Other, net                                                                              |                                       |          | (8,587   | )        |       |          | 3,906    |          |     |          | 822      |         
|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |         
|                                      |                                                             |                                                                                         | Cash provided by operating activities |          |          | 58,773   |       |          |          | 29,228   |     |          |          | 31,455   |  
|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |         
|Cash flows from investing activities: |                                                             |                                                                                         |                                       |          |          |          |       |          |          |          |     |         
|                                      | Cash contributions to subsidiaries                          |                                                                                         |                                       | (162,872 | )        |          |       | (107,000 | )        |          |     | (51,364  | )       
|                                      | Payments for purchase of subsidiaries, net of cash received |                                                                                         |                                       | (98,829  | )        |          |       | (48,975  | )        |          |     | (11,624  | )       
|                                      | Change in short-term investments                            |                                                                                         |                                       | (7,176   | )        |          |       | 29,817   |          |          |     | (55,986  | )       
|                                      | Sales and maturities of fixed income securities             |                                                                                         |                                       | 6,200    |          |          |       |         |          |          |     |         |         
|                                      | Cost of securities acquired                                 |                                                                                         |                                       | (3,400   | )        |          |       | (33,679  | )        |          |     |         |         
|                                      | Change in receivable/payable from subsidiaries              |                                                                                         |                                       | 33,303   |          |          |       | 43,295   |          |          |     | (14,008  | )       
|                                      | Intercompany loans to subsidiaries for acquisitions         |                                                                                         |                                       | (39,685  | )        |          |       | (62,523  | )        |          |     | (26,838  | )       
|                                      | Payments on intercompany loans to subsidiaries              |                                                                                         |                                       | 56,610   |          |          |       | 54,694   |          |          |     | 54,674   |         
|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |         
|                                      |                                                             |                                                                                         | Cash used by investing activities     |          |          | (215,849 | )     |          |          | (124,371 | )   |          |          | (105,146 | )
|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |         
|Cash flows from financing activities: |                                                             |                                                                                         |                                       |          |          |          |       |          |          |          |     |         
|                                      | Proceeds from note payable, net of costs                    |                                                                                         |                                       | 36,000   |          |          |       | 29,000   |          |          |     | 178,000  |         
|                                      | Payments on notes payable                                   |                                                                                         |                                       | (36,015  | )        |          |       | (29,009  | )        |          |     | (107,003 | )       
|                                      | Sale of common stock, net of costs                          |                                                                                         |                                       | 186,103  |          |          |       | 116,776  |          |          |     | 20,279   |         
|                                      | Dividends paid                                              |                                                                                         |                                       | (27,644  | )        |          |       | (19,984  | )        |          |     | (17,039  | )       
|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |         
|                                      |                                                             |                                                                                         | Cash provided by financing activities |          |          | 158,444  |       |          |          | 96,783   |     |          |          | 74,237   |  
|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |         
|Net increase in cash                  |                                                             |                                                                                         | 1,368                                 |          |          |          | 1,640 |          |          |          | 546 |         
|Cash at beginning of year             |                                                             |                                                                                         | 2,242                                 |          |          |          | 602   |          |          |          | 56  |         
|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |         
|                                      |                                                             |                                                                                         | Cash at end of year                   |          | $        | 3,610    |       |          | $        | 2,242    |     |          | $        | 602      |  
|                                      |                                                             |                                                                                         |                                       |          |          |          |       |          |         



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##### 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 2004 and 2003
    condensed financial information have been reclassified to
    conform with the 2005 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,
    2005, the interest rate on intercompany loans was 6.0%.                                                                                                                                                                                                                        
|   
|(3) | Other income for 2003 includes a one-time foreign currency
    transaction gain of $1.3 million in settlement of an
    advance to an unaffiliated entity and income from a strategic
    investment.                                                                                                                                                                                                                                                                                                                                        

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##### 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,        |   |           |           |  |   |          | Net               |  |            | Losses and |           |            | Amortization of |        |                   | Other |   |           |        
|                  |       | Acquisition  |        |        | Claims and               |   |           | Unearned  |  |   | Premium  |                   |  | Investment |            |           | Settlement |                 |        | Deferred Policy   |       |   | Operating |         |  | Premium  |        
|Segments          |       | Costs        |        |        | Loss Expenses            |   |           | Premiums  |  |   | Revenue  |                   |  | Income     |            |           | Expenses   |                 |        | Acquisition Costs |       |   | Expenses  |         |  | Written  |        
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        
|2005              |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |         |         |  |   |        |         |  |   |           |          
|Insurance Company |       | $            | 90,551 |        |                          | $ | 2,887,135 |           |  | $ | 807,109  |                   |  | $          | 1,369,988  |           |            | $               | 88,397 |                   |       | $ | 921,197   |         |  | $        | 257,725 |         |  | $ | 84,838 |         |  | $ | 1,501,224 |          
|Agency            |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 7,437  |                   |       |   |           |         |  |          |         |         |  |   | 85,107 |         |  |   |           |          
|Other Operations  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 794    |                   |       |   |           |         |  |          |         |         |  |   | 1,732  |         |  |   |           |          
|Corporate         |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 2,223  |                   |       |   |           |         |  |          |         |         |  |   | 7,312  |         |  |   |           |          
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        
|                  | Total |              | $      | 90,551 |                          |   | $         | 2,887,135 |  |   | $        | 807,109           |  |            | $          | 1,369,988 |            |                 | $      | 98,851            |       |   | $         | 921,197 |  |          | $       | 257,725 |  |   | $      | 178,989 |  |   | $         | 1,501,224 | 
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        
|2004              |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |         |         |  |   |        |         |  |   |           |          
|Insurance Company |       | $            | 44,303 |        |                          | $ | 2,163,826 |           |  | $ | 741,706  |                   |  | $          | 1,010,692  |           |            | $               | 59,073 |                   |       | $ | 645,230   |         |  | $        | 224,323 |         |  | $ | 67,138 |         |  | $ | 1,105,519 |          
|Agency            |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 3,559  |                   |       |   |           |         |  |          |         |         |  |   | 90,617 |         |  |   |           |          
|Other Operations  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 1,236  |                   |       |   |           |         |  |          |         |         |  |   | 1,416  |         |  |   |           |          
|Corporate         |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 1,017  |                   |       |   |           |         |  |          |         |         |  |   | 5,303  |         |  |   |           |          
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        
|                  | Total |              | $      | 44,303 |                          |   | $         | 2,163,826 |  |   | $        | 741,706           |  |            | $          | 1,010,692 |            |                 | $      | 64,885            |       |   | $         | 645,230 |  |          | $       | 224,323 |  |   | $      | 164,474 |  |   | $         | 1,105,519 | 
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        
|2003              |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |         |         |  |   |        |         |  |   |           |          
|Insurance Company |       | $            | 18,814 |        |                          | $ | 1,612,836 |           |  | $ | 592,311  |                   |  | $          | 738,272    |           |            | $               | 42,345 |                   |       | $ | 488,652   |         |  | $        | 138,212 |         |  | $ | 55,432 |         |  | $ | 865,502   |          
|Agency            |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 3,796  |                   |       |   |           |         |  |          |         |         |  |   | 75,691 |         |  |   |           |          
|Other Operations  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 224    |                   |       |   |           |         |  |          |         |         |  |   | 2,242  |         |  |   |           |          
|Corporate         |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 970    |                   |       |   |           |         |  |          |         |         |  |   | 7,548  |         |  |   |           |          
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        
|                  | Total |              | $      | 18,814 |                          |   | $         | 1,612,836 |  |   | $        | 592,311           |  |            | $          | 738,272   |            |                 | $      | 47,335            |       |   | $         | 488,652 |  |          | $       | 138,212 |  |   | $      | 140,913 |  |   | $         | 865,502   | 
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        






|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(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



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##### Table of Contents






SCHEDULE 4


HCC INSURANCE HOLDINGS, INC.


REINSURANCE


(in thousands)


|                                 |       |          |           |           |                |              |         |           |  |   |            |         |        |                |           |           |  |  |    |    |  
|-------------------------------- | ----- | -------- | --------- | --------- | -------------- | ------------ | ------- | --------- |  | - | ---------- | ------- | ------ | -------------- | --------- | --------- |  |  | -- | -- | -
|Column A                         |       | Column B |           |           | Column C       |              |         | Column D  |  |   | Column E   |         |        | Column F       |          
|                                 |       |          |           |           |                |              |         |           |  |   |            |         |        |                |          
|                                 |       |          |           |           |                | Assumed from |         |           |  |   | Percent of |        
|                                 |       | Primary  |           |           | Ceded to Other |              |         | Other     |  |   |            |         | Amount |               
|                                 |       | Amount   |           |           | Companies      |              |         | Companies |  |   | Net Amount |         |        | Assumed to Net |          
|                                 |       |          |           |           |                |              |         |           |  |   |            |         |        |                |          
|Year Ended December 31, 2005     |       |          |           |           |                |              |         |           |  |   |            |         |        |                |           |           |  |  |    |   
|                                
|Life 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, 2004     |       |          |           |           |                |              |         |           |  |   |            |         |        |                |           |           |  |  |    |   
|                                
|Life 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 | %
|                                 |       |          |           |           |                |              |         |           |  |   |            |         |        |                |          
|Year ended December 31, 2003     |       |          |           |           |                |              |         |           |  |   |            |         |        |                |           |           |  |  |    |   
|                                
|Life insurance in force          |       | $        | 1,443,611 |           |                | $            | 481,870 |           |  | $ |           |         |        | $              | 961,741   |           |  |  |   | % 
|                                 |       |          |           |           |                |              |         |           |  |   |            |         |        |                |          
|Earned premium:                  |       |          |           |           |                |              |         |           |  |   |            |         |        |                |           |           |  |  |    |   
|Property and liability insurance |       | $        | 651,893   |           |                | $            | 454,294 |           |  | $ | 205,165    |         |        | $              | 402,764   |           |  |  | 51 | % 
|Accident and health insurance    |       |          | 537,463   |           |                |              | 294,505 |           |  |   | 92,550     |         |        |                | 335,508   |           |  |  | 28 | % 
|                                 |       |          |           |           |                |              |         |           |  |   |            |         |        |                |          
|                                 | Total |          | $         | 1,189,356 |                |              | $       | 748,799   |  |   | $          | 297,715 |        |                | $         | 738,272   |  |  |    | 40 | %
|                                 |       |          |           |           |                |              |         |           |  |   |            |         |        |                |          

S-8



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##### Table of Contents






SCHEDULE 5


HCC INSURANCE HOLDINGS, INC.


VALUATION AND QUALIFYING ACCOUNTS


(in thousands)


|                                       |                                               |                        |   |        |        |  |   |        |        |  |   |       |        | 
|-------------------------------------- | --------------------------------------------- | ---------------------- | - | ------ | ------ |  | - | ------ | ------ |  | - | ----- | ------ | 
|                                       |                                               | 2005                   |   |        | 2004   |  |   | 2003   |       
|                                       |                                               |                        |   |        |        |  |   |        |       
|Reserve for uncollectible reinsurance: |                                               |                        |   |        |        |  |   |        |        |  |   |      
|                                       | Balance at beginning of year                  |                        | $ | 20,425 |        |  | $ | 14,991 |        |  | $ | 7,142 |       
|                                       | Provision charged to expense                  |                        |   | 5,750  |        |  |   | 6,616  |        |  |   | 7,671 |       
|                                       | Reclassification to indemnification liability |                        |   | (9,000 | )      |  |   |       |        |  |   |      |       
|                                       | Amounts (written off) recovered               |                        |   | (5,034 | )      |  |   | (1,182 | )      |  |   | 178   |       
|                                       |                                               |                        |   |        |        |  |   |        |       
|                                       |                                               | Balance at end of year |   | $      | 12,141 |  |   | $      | 20,425 |  |   | $     | 14,991 | 
|                                       |                                               |                        |   |        |        |  |   |        |       
|Allowance for doubtful accounts:       |                                               |                        |   |        |        |  |   |        |        |  |   |      
|                                       | Balance at beginning of year                  |                        | $ | 4,911  |        |  | $ | 2,549  |        |  | $ | 2,279 |       
|                                       | Acquisition of subsidiaries                   |                        |   |       |        |  |   | 1,931  |        |  |   | 13    |       
|                                       | Provision charged to expense                  |                        |   | 1,917  |        |  |   | 546    |        |  |   | 167   |       
|                                       | Amounts (written off) recovered and other     |                        |   | 566    |        |  |   | (115   | )      |  |   | 90    |       
|                                       |                                               |                        |   |        |        |  |   |        |       
|                                       |                                               | Balance at end of year |   | $      | 7,394  |  |   | $      | 4,911  |  |   | $     | 2,549  | 
|                                       |                                               |                        |   |        |        |  |   |        |       

S-9



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##### 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.)


|        |     |     |  |   |  |                                                                                                                                                                                                                                                                         
|------- | --- | --- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |     |  |  
|Number  |     |     |  |  
|        |     |     |  |  
|        | A3  | .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
    at 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  |  |  |  | HCC Insurance Holdings, Inc. 1995 Flexible Incentive Plan, as
    amended and restated.                                                                                                                                                                                 
|        | H10 | .3  |  |  |  | HCC Insurance Holdings, Inc. 1997 Flexible Incentive Plan, as
    amended and restated.                                                                                                                                                                                 
|        | H10 | .4  |  |  |  | HCC Insurance Holdings, Inc. 1996 Nonemployee Director Stock
    Option Plan, as amended and restated.                                                                                                                                                                  
|        | I10 | .5  |  |  |  | HCC Insurance Holdings, Inc. 2001 Flexible Incentive Plan, as
    amended and restated.                                                                                                                                                                                 
|        | J10 | .6  |  |  |  | Form of Incentive Stock Option Agreement under the HCC Insurance
    Holdings, Inc. 2001 Flexible Incentive Plan.                                                                                                                                                       
|        | K10 | .7  |  |  |  | HCC Insurance Holdings, Inc. 2004 Flexible Incentive Plan.                                                                                                                                                                                                              
|        | F10 | .8  |  |  |  | Form of Incentive Stock Option Agreement under the HCC Insurance
    Holdings, Inc. 2004 Incentive Plan.                                                                                                                                                                
|        | F10 | .9  |  |  |  | Amended and Restated Employment Agreement effective at
    November 10, 2004, between HCC Insurance Holdings, Inc. and
    Stephen L. Way.                                                                                                                              
|        | L10 | .10 |  |  |  | HCC Insurance Holdings, Inc. nonqualified deferred compensation
    plan for Stephen L. Way effective January 1, 2003.                                                                                                                                                  
|        | M10 | .11 |  |  |  | Employment Agreement effective at March 1, 2005, between
    HCC Insurance Holdings, Inc. and Craig J. Kelbel.                                                                                                                                                          
|        | J10 | .12 |  |  |  | Employment Agreement effective at June 3, 2002, between HCC
    Insurance Holdings, Inc. and Michael J. Schell.                                                                                                                                                         
|        | N10 | .13 |  |  |  | Employment Agreement effective at January 1, 2002, between
    HCC Insurance Holdings, Inc. and Edward H. Ellis, Jr.                                                                                                                                                    
|        | 12  |     |  |  |  | Statement Regarding Computation of Ratios.                                                                                                                                                                                                                              
|        | 14  |     |  |  |  | Form of HCC Insurance Holdings, Inc. Code of Ethics Statement by
    Chief Executive Officer and Senior Financial Officers.                                                                                                                                             
|        | 21  |     |  |  |  | Subsidiaries of HCC Insurance Holdings, Inc.                                                                                                                                                                                                                            



---



##### Table of Contents



|        |    |    |  |   |  |                                                                                                                    
|------- | -- | -- |  | - |  | -------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |  
|Number  |    |    |  |  
|        |    |    |  |  
|        | 23 |    |  |  |  | Consent of Independent Registered Public Accounting
    Firm  PricewaterhouseCoopers LLP dated March 15,
    2006.
|        | 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 Exhibits to HCC Insurance Holdings,
    Inc.s
    Form 10-K for the
    year ended December 31, 1999.                                                         
| 
|I |  | 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.
| 
|J |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K for the
    year ended December 31, 2002.                                                     
| 
|K |  | 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.
| 
|L |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K for the
    year ended December 31, 2003.                                                     
| 
|M |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-Q for the
    quarter ended March 31, 2005.                                                     
| 
|N |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-K for the
    year ended December 31, 2001.