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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, 2004                                                  
|  
|or
|  
|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 o






DOCUMENTS INCORPORATED BY REFERENCE:













---










HCC INSURANCE HOLDINGS, INC.


TABLE OF CONTENTS


|                                              |  |                                                                                                                          |    |      |    | 
|--------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                                              |  |                                                                                                                          |    | Page |   
|                                              |  |                                                                                                                          |    |      |   
|PART I.                                      
|Item 1.                                       |  | Business                                                                                                                 |    |      | 3  | 
|Item 2.                                       |  | Properties                                                                                                               |    |      | 34 | 
|Item 3.                                       |  | Legal Proceedings                                                                                                        |    |      | 35 | 
|Item 4.                                       |  | Submission of Matters to a Vote of
    Security Holders                                                                  |    |      | 35 | 
|PART II.                                     
|Item 5.                                       |  | Market for the Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |    |      | 36 | 
|Item 6.                                       |  | Selected Financial Data                                                                                                  |    |      | 37 | 
|Item 7.                                       |  | Managements Discussion and
    Analysis of Financial Condition and Results of Operations                                |    |      | 39 | 
|Item 7A.                                      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                           |    |      | 60 | 
|Item 8.                                       |  | Financial Statements and
    Supplementary Data                                                                          |    |      | 61 | 
|Item 9.                                       |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosures                                |    |      | 61 | 
|Item 9A.                                      |  | Controls and Procedures                                                                                                  |    |      | 61 | 
|Item 9B.                                      |  | Other Information                                                                                                        |    |      | 62 | 
|PART III.                                    
|Item 10.                                      |  | Directors and Executive Officers of the
    Registrant                                                                   |    |      | 62 | 
|Item 11.                                      |  | Executive Compensation                                                                                                   |    |      | 62 | 
|Item 12.                                      |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Shareholder Matters                       |    |      | 62 | 
|Item 13.                                      |  | Certain Relationships and Related
    Transactions                                                                       |    |      | 62 | 
|Item 14.                                      |  | Principal Accountant Fees and
    Services                                                                               |    |      | 62 | 
|PART IV.                                     
|Item 15.                                      |  | Financial Statement Schedules and
    Exhibits                                                                           |    |      | 63 | 
|SIGNATURES                                    |  |                                                                                                                          | 64 |     
|Amended Employment Agreement - Stephen L. Way
|Form of Incentive Stock Option Agreement     
|Third Supplemental Indenture                 
|Statement of Ratios                          
|Form of Code of Ethics                       
|Subsidiaries of the Company                  
|Consent of PricewaterhouseCoopers LLP        
|Powers of Attorney                           
|Certification of CEO                         
|Certification of CFO                         
|Certification With Respect to Annual Report  



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.


Many possible events or factors could affect our future
financial results and performance, including, among other
things:




| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the occurrence of additional terrorist activities;                                                                                                                                                                                                                                           
|
| |  | changing legal and social trends and inherent uncertainties
    (including but not limited to those uncertainties associated
    with our reserves) in the loss estimation process can adversely
    impact the adequacy of loss reserves and the allowance for
    reinsurance recoverables;
|
| |  | industry, economic conditions and catastrophic events can
    affect the ability and/or willingness of reinsurers to pay
    balances due and our ability to obtain adequate reinsurance;                                                                                                    

1



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| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | catastrophic losses, including hurricanes, windstorms,
    earthquakes, hailstorms, explosions, severe winter weather,
    fires and man-made events;                                                                               
|
| |  | state, federal and foreign regulations can impede our ability
    to charge adequate rates and efficiently allocate capital;                                                                                                        
|
| |  | economic conditions, interest rates, and foreign exchange
    rate volatility can have a significant impact on the market
    value of fixed maturity investments as well as the carrying
    value of other assets and liabilities;
|
| |  | market value of fixed income securities may reduce the value
    of our investment portfolio;                                                                                                                                       
|
| |  | assessments by states for high risk or otherwise uninsured
    individuals;                                                                                                                                                         
|
| |  | changes in our assigned financial strength;                                                                                                                                                                                         
|
| |  | our ability to receive dividends from our insurance companies
    to meet our cash flow, debt, dividend and other corporate
    expense obligations;                                                                                
|
| |  | our ability to effectively integrate acquired operations and
    to continue to expand our business through the acquisition of
    insurance industry related companies;                                                            
|
| |  | our ability to maintain adequate internal controls and
    procedures; and                                                                                                                                                          
|
| |  | the effects of state and other regulatory investigations into
    the practices and procedures of the insurance industry.                                                                                                           

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

Terminology


www.hcch.com.




Risk Factors


The following factors as well as other information contained
in this report should be considered.




| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we choose not to or are unable to purchase reinsurance
    protection for the risks we have underwritten, we will be
    exposed to any resulting losses, which could adversely affect
    our financial condition, results of operations and cash
    flow.





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| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | If the companies that provide our reinsurance do not pay
    all of our claims, we could incur severe losses.







| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unsuccessful in competing against larger or more
    well established business rivals, our results of operations and
    financial condition could be adversely affected.







| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we are a property and casualty insurer, unforeseen
    catastrophic losses may adversely affect our results of
    operations, liquidity and financial condition.



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| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we operate internationally, fluctuations in
    currency exchange rates may affect our receivable and payable
    balances and our reserves, which may adversely affect our
    results of operations and financial condition.





| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to comply with extensive state, federal and
    foreign regulations, we will be subject to penalties, which may
    include fines and suspension and which may adversely affect our
    results of operations and financial condition.





| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approval of policy forms and premium rates;                                                                                                                                                                                                                                                
|
| |  | 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);
|
| |  | licensing of insurers and their agents;                                                                                                                                                                                                                                                    
|
| |  | restrictions on the nature, quality and concentration of
    investments;                                                                                                                                                                                                                  
|
| |  | restrictions on the ability of our insurance companies to pay
    dividends to us;                                                                                                                                                                                                         
|
| |  | restrictions on transactions between insurance companies and
    their affiliates;                                                                                                                                                                                                         
|
| |  | restrictions on the size of risks insurable under a single
    policy;                                                                                                                                                                                                                     
|
| |  | requiring deposits for the benefit of policyholders;                                                                                                                                                                                                                                       
|
| |  | requiring certain methods of accounting;                                                                                                                                                                                                                                                   
|
| |  | periodic examinations of our operations and finances;                                                                                                                                                                                                                                      
|
| |  | prescribing the form and content of records of financial
    condition required to be filed; and                                                                                                                                                                                           
|
| |  | requiring reserves for unearned premium, losses and other
    purposes.                                                                                                                                                                                                                    



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| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the rating agencies downgrade our company or our
    insurance companies, our results of operations and competitive
    position in the industry may suffer.





| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our loss reserves are based on an estimate of our future
    liability. If actual claims prove to be greater than our
    reserves, our results of operations and financial condition may
    be adversely affected.



6



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| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We invest a significant amount of our assets in fixed
    income securities that have experienced market fluctuations.
    Fluctuations in the fair market value of fixed income securities
    may greatly reduce the value of our investment portfolio and, as
    a result, our financial condition may suffer.





| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If states drastically increase the assessment our
    insurance companies are required to pay, our results of
    operations and financial condition will suffer.





| |                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to obtain dividends in needed amounts
    from our insurance companies as a result of regulatory
    restrictions and the cash flow from our non-insurance operations
    is not sufficient, we may not be able to meet our debt, dividend
    and expense obligations.



7



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| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our strategy of acquiring other related insurance industry
    companies for growth may not succeed and may adversely affect
    our consolidated financial condition and results of
    operations.





| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the diversion of our managements attention;                                                                                                        
|
| |  | our ability to assimilate the operations and personnel of the
    acquired companies;                                                               
|
| |  | the contingent and latent risks associated with the past
    operations of, and other unanticipated problems arising in, the
    acquired companies;
|
| |  | the need to expand management, administration, and operational
    systems; and                                                                     
|
| |  | increased competition for acquisition opportunities and
    qualified employees.                                                                    





| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | we will be able to acquire additional insurance related
    companies on terms favorable to us;                     
|
| |  | we will be able to successfully integrate the operations of any
    new insurance related company into our business;
|
| |  | we will realize any anticipated benefits of completed
    acquisitions; or                                          
|
| |  | there will be substantial unanticipated costs associated with
    new acquisitions.                                 





| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | potentially dilutive issuances of our equity securities;                            
|
| |  | the incurrence of additional debt; and                                              
|
| |  | the recognition of potential impairment of goodwill and other
    intangible assets.

Business Overview








8



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









Our Strategy




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10



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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 aggregate net loss exposure to our insurance companies
    from a catastrophic loss through the use of reinsurance for
    those lines of business which are exposed to such losses and
    diversification into lines of business which are not exposed to
    such losses; and
|
| |  | review the potential acquisition of specialty insurance
    operations and other strategic investments.                                                                                                                                                                                   

Industry Segment Information




Recent Acquisitions
















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Recent Disposition




Insurance Company Operations




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



|                                |                             |      |           |           |      |  |    |      |   |   |           |           |  |  |    |     |   |   |           |           |  |  |    |     |  
|------------------------------- | --------------------------- | ---- | --------- | --------- | ---- |  | -- | ---- | - | - | --------- | --------- |  |  | -- | --- | - | - | --------- | --------- |  |  | -- | --- | -
|                                |                             | 2004 |           |           | 2003 |  |    | 2002 |  
|                                |                             |      |           |           |      |  |    |      |  
|Group life, accident and health |                             | $    | 584,747   |           |      |  | 30 | %    |   | $ | 565,494   |           |  |  | 33 | %   |   | $ | 503,263   |           |  |  | 44 | %  
|Diversified financial products  |                             |      | 857,299   |           |      |  | 43 |      |   |   | 553,501   |           |  |  | 32 |     |   |   | 178,653   |           |  |  | 16 |    
|London market account           |                             |      | 178,950   |           |      |  | 9  |      |   |   | 223,149   |           |  |  | 13 |     |   |   | 199,816   |           |  |  | 17 |    
|Aviation                        |                             |      | 204,963   |           |      |  | 10 |      |   |   | 214,718   |           |  |  | 12 |     |   |   | 212,518   |           |  |  | 18 |    
|Other specialty lines           |                             |      | 133,964   |           |      |  | 7  |      |   |   | 73,475    |           |  |  | 4  |     |   |   | 3,595     |           |  |  |   |    
|                                |                             |      |           |           |      |  |    |      |   |   |           |           |  |  |    |     |   |  
|                                |                             |      | 1,959,923 |           |      |  | 99 |      |   |   | 1,630,337 |           |  |  | 94 |     |   |   | 1,097,845 |           |  |  | 95 |    
|Discontinued lines of business  |                             |      | 15,230    |           |      |  | 1  |      |   |   | 109,557   |           |  |  | 6  |     |   |   | 61,404    |           |  |  | 5  |    
|                                |                             |      |           |           |      |  |    |      |   |   |           |           |  |  |    |     |   |  
|                                | Total gross written premium |      | $         | 1,975,153 |      |  |    | 100  | % |   | $         | 1,739,894 |  |  |    | 100 | % |   | $         | 1,159,249 |  |  |    | 100 | %
|                                |                             |      |           |           |      |  |    |      |   |   |           |           |  |  |    |     |   |  



|                                |                           |      |           |           |      |  |    |      |   |   |         |         |  |  |    |     |   |   |         |         |  |  |    |     |  
|------------------------------- | ------------------------- | ---- | --------- | --------- | ---- |  | -- | ---- | - | - | ------- | ------- |  |  | -- | --- | - | - | ------- | ------- |  |  | -- | --- | -
|                                |                           | 2004 |           |           | 2003 |  |    | 2002 |  
|                                |                           |      |           |           |      |  |    |      |  
|Group life, accident and health |                           | $    | 343,996   |           |      |  | 31 | %    |   | $ | 299,913 |         |  |  | 35 | %   |   | $ | 244,554 |         |  |  | 45 | %  
|Diversified financial products  |                           |      | 404,870   |           |      |  | 37 |      |   |   | 183,560 |         |  |  | 21 |     |   |   | 43,731  |         |  |  | 8  |    
|London market account           |                           |      | 107,509   |           |      |  | 10 |      |   |   | 155,987 |         |  |  | 18 |     |   |   | 113,925 |         |  |  | 21 |    
|Aviation                        |                           |      | 144,687   |           |      |  | 13 |      |   |   | 99,447  |         |  |  | 12 |     |   |   | 99,826  |         |  |  | 18 |    
|Other specialty lines           |                           |      | 83,980    |           |      |  | 7  |      |   |   | 36,837  |         |  |  | 4  |     |   |   | 21      |         |  |  |   |    
|                                |                           |      |           |           |      |  |    |      |   |   |         |         |  |  |    |     |   |  
|                                |                           |      | 1,085,042 |           |      |  | 98 |      |   |   | 775,744 |         |  |  | 90 |     |   |   | 502,057 |         |  |  | 92 |    
|Discontinued lines of business  |                           |      | 20,477    |           |      |  | 2  |      |   |   | 89,758  |         |  |  | 10 |     |   |   | 43,854  |         |  |  | 8  |    
|                                |                           |      |           |           |      |  |    |      |   |   |         |         |  |  |    |     |   |  
|                                | Total net written premium |      | $         | 1,105,519 |      |  |    | 100  | % |   | $       | 865,502 |  |  |    | 100 | % |   | $       | 545,911 |  |  |    | 100 | %
|                                |                           |      |           |           |      |  |    |      |   |   |         |         |  |  |    |     |   |  

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|                                |                                                  |      |    |    |      |  |    |      |   |  |    |    |  
|------------------------------- | ------------------------------------------------ | ---- | -- | -- | ---- |  | -- | ---- | - |  | -- | -- | -
|                                |                                                  | 2004 |    |    | 2003 |  |    | 2002 |  
|                                |                                                  |      |    |    |      |  |    |      |  
|Group life, accident and health |                                                  |      | 59 | %  |      |  | 53 | %    |   |  | 49 | % 
|Diversified financial products  |                                                  |      | 47 |    |      |  | 33 |      |   |  | 24 |   
|London market account           |                                                  |      | 60 |    |      |  | 70 |      |   |  | 57 |   
|Aviation                        |                                                  |      | 71 |    |      |  | 46 |      |   |  | 47 |   
|Other specialty lines           |                                                  |      | 63 |    |      |  | 50 |      |   |  | 1  |   
|                                |                                                  |      |    |    |      |  |    |      |  
|                                | Continuing lines of business percentage retained |      |    | 55 | %    |  |    | 48   | % |  |    | 46 | %
|                                |                                                  |      |    |    |      |  |    |      |  



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





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









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





| |   |                                                         
| | - | --------------------------------------------------------
| |  | directors and officers liability                      
|
| |  | employment practices liability                          
|
| |  | errors and omissions liability or professional indemnity
|
| |  | surety                                                  

13



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| |   |                                        
| | - | ---------------------------------------
| |  | mortgage guaranty and title reinsurance
|
| |  | residual value insurance               



|                                                       |                                                          |      |         |         |      |   |        |         |  |   |        |        | 
|------------------------------------------------------ | -------------------------------------------------------- | ---- | ------- | ------- | ---- | - | ------ | ------- |  | - | ------ | ------ | 
|                                                       |                                                          | 2004 |         |         | 2003 |   |        | 2002    | 
|                                                       |                                                          |      |         |         |      |   |        |         | 
|Directors and officers liability 
    U.S.          |                                                          | $    | 121,201 |         |      | $ | 75,912 |         |  | $ | 22,628 |       
|Directors and officers liability 
    International |                                                          |      | 49,060  |         |      |   | 28,196 |         |  |   | 3,830  |       
|Professional Liability (E&O)                           |                                                          |      | 150,821 |         |      |   | 55,966 |         |  |   | 14,003 |       
|Surety                                                 |                                                          |      | 63,663  |         |      |   | 6,967  |         |  |   |       |       
|Other                                                  |                                                          |      | 20,125  |         |      |   | 16,519 |         |  |   | 3,270  |       
|                                                       |                                                          |      |         |         |      |   |        |         | 
|                                                       | Total diversified financial products net written premium |      | $       | 404,870 |      |   | $      | 183,560 |  |   | $      | 43,731 | 
|                                                       |                                                          |      |         |         |      |   |        |         | 









| |                      
| | ---------------------
| | London Market Account



14



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|                    |                                                 |      |        |         |      |   |        |         |  |   |        |         | 
|------------------- | ----------------------------------------------- | ---- | ------ | ------- | ---- | - | ------ | ------- |  | - | ------ | ------- | 
|                    |                                                 | 2004 |        |         | 2003 |   |        | 2002    | 
|                    |                                                 |      |        |         |      |   |        |         | 
|Marine              |                                                 | $    | 19,537 |         |      | $ | 14,552 |         |  | $ | 6,321  |        
|Energy              |                                                 |      | 26,258 |         |      |   | 40,065 |         |  |   | 40,813 |        
|Property            |                                                 |      | 19,613 |         |      |   | 24,857 |         |  |   | 17,655 |        
|Accident and health |                                                 |      | 42,101 |         |      |   | 76,513 |         |  |   | 49,136 |        
|                    |                                                 |      |        |         |      |   |        |         | 
|                    | Total London market account net written premium |      | $      | 107,509 |      |   | $      | 155,987 |  |   | $      | 113,925 | 
|                    |                                                 |      |        |         |      |   |        |         | 







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







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







15



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| |         
| | --------
| | Aviation





| |   |                                      
| | - | -------------------------------------
| |  | antique and vintage military aircraft
|
| |  | cargo operations                     
|
| |  | commuter airlines                    
|
| |  | corporate aircraft                   
|
| |  | fixed base operations                
|
| |  | military and law enforcement aircraft
|
| |  | private aircraft owners and pilots   
|
| |  | rotor wing aircraft                  









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





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





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



16



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





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





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





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





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





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





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



17



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





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



Underwriting Agency Operations






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





| |                  
| | -----------------
| | ASU International





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



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





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





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



Reinsurance and Insurance Broker Operations






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





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





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



Other Operations




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Reinsurance Ceded










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Operating Ratios




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



|                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |         |  
|----------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | ------- | -
|                                          |  | 2004 |           |   | 2003 |   |           | 2002 |  |   | 2001      |   |  | 2000 |          
|                                          |  |      |           |   |      |   |           |      |  |   |           |   |  |      |          
|Gross written premium                     |  | $    | 1,992,361 |   |      | $ | 1,746,413 |      |  | $ | 1,163,397 |   |  | $    | 1,014,833 |   |  | $ | 972,154 |  
|Net written premium                       |  |      | 1,121,343 |   |      |   | 867,795   |      |  |   | 545,475   |   |  |      | 371,409   |   |  |   | 283,947 |  
|Policyholders surplus                    |  |      | 844,851   |   |      |   | 591,889   |      |  |   | 523,807   |   |  |      | 401,393   |   |  |   | 326,249 |  
|Gross written premium ratio               |  |      | 235.8     | % |      |   | 295.1     | %    |  |   | 222.1     | % |  |      | 252.8     | % |  |   | 298.0   | %
|Gross written premium industry average(1) |  |      | *         |   |      |   | 219.3     | %    |  |   | 244.4     | % |  |      | 210.8     | % |  |   | 174.1   | %
|Net written premium ratio                 |  |      | 132.7     | % |      |   | 146.6     | %    |  |   | 104.1     | % |  |      | 92.5      | % |  |   | 87.0    | %
|Net written premium industry average(1)   |  |      | *         |   |      |   | 117.4     | %    |  |   | 130.3     | % |  |      | 112.0     | % |  |   | 94.4    | %



|    |                                
|--- | -------------------------------
|(1) | Source: A.M. Best Company, Inc.



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





| |                                                                                 
| | --------------------------------------------------------------------------------
| | Combined Ratio  In Accordance With Generally
    Accepted Accounting Principles



|               |  |      |      |   |      |  |      |      |  |  |      |   |  |      |       |   |  |  |      |  
|-------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | - |  | ---- | ----- | - |  |  | ---- | -
|               |  | 2004 |      |   | 2003 |  |      | 2002 |  |  | 2001 |   |  | 2000 |      
|               |  |      |      |   |      |  |      |      |  |  |      |   |  |      |      
|Loss ratio     |  |      | 63.8 | % |      |  | 66.2 | %    |  |  | 60.6 | % |  |      | 78.0  | % |  |  | 74.2 | %
|Expense ratio  |  |      | 26.9 |   |      |  | 24.8 |      |  |  | 25.4 |   |  |      | 25.7  |   |  |  | 21.0 |  
|               |  |      |      |   |      |  |      |      |  |  |      |   |  |      |      
|Combined ratio |  |      | 90.7 | % |      |  | 91.0 | %    |  |  | 86.0 | % |  |      | 103.7 | % |  |  | 95.2 | %
|               |  |      |      |   |      |  |      |      |  |  |      |   |  |      |      



| |                                                                        
| | -----------------------------------------------------------------------
| | Combined Ratio  In Accordance with Statutory
    Accounting Principles



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|                 |  |      |      |   |      |  |       |      |  |  |       |   |  |      |       |   |  |  |       |  
|---------------- |  | ---- | ---- | - | ---- |  | ----- | ---- |  |  | ----- | - |  | ---- | ----- | - |  |  | ----- | -
|                 |  | 2004 |      |   | 2003 |  |       | 2002 |  |  | 2001  |   |  | 2000 |      
|                 |  |      |      |   |      |  |       |      |  |  |       |   |  |      |      
|Loss ratio       |  |      | 64.3 | % |      |  | 66.8  | %    |  |  | 62.0  | % |  |      | 78.0  | % |  |  | 71.1  | %
|Expense ratio    |  |      | 26.7 |   |      |  | 23.0  |      |  |  | 23.9  |   |  |      | 23.8  |   |  |  | 27.0  |  
|                 |  |      |      |   |      |  |       |      |  |  |       |   |  |      |      
|Combined ratio   |  |      | 91.0 | % |      |  | 89.8  | %    |  |  | 85.9  | % |  |      | 101.8 | % |  |  | 98.1  | %
|                 |  |      |      |   |      |  |       |      |  |  |       |   |  |      |      
|Industry average |  |      | *    |   |      |  | 100.1 | %    |  |  | 107.5 | % |  |      | 115.9 | % |  |  | 110.1 | %



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



Reserves










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|                                                                         |                   |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         | 
|------------------------------------------------------------------------ | ----------------- | ----------------- | --------- | --------- | --------- | - | --------- | --------- | --------- | - | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | -------- | --------- | ------- | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                         |                   | 2004              |           |           | 2003      |   |           | 2002      |           |   | 2001      |           |           | 2000 |           |           | 1999      |   |          | 1998      |         |   | 1997    |         |         | 1996 |         |         | 1995    |   |         | 1994    |        
|                                                                         |                   |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |        
|Balance sheet reserves                                                   |                   | $                 | 2,089,199 |           |           | $ | 1,535,288 |           |           | $ | 1,155,290 |           |           | $    | 1,130,748 |           |           | $ | 944,117  |           |         | $ | 871,104 |         |         | $    | 460,511 |         |         | $ | 275,008 |         |         | $ | 229,049 |         |         | $ | 200,756 |         |         | $ | 170,957 |        
|Reserve adjustments from acquisition and disposition of
    subsidiaries |                   |                   |          |           |           |   |          |           |           |   | 5,587     |           |           |      |          |           |           |   | (66,571  | )         |         |   | (32,437 | )       |         |      | (136    | )       |         |   |        |         |         |   |        |         |         |   |        |         |         |   |        |        
|                                                                         |                   |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |        
|                                                                         |                   | Adjusted reserves |           |           | 2,089,199 |   |           |           | 1,535,288 |   |           |           | 1,160,877 |      |           |           | 1,130,748 |   |          |           | 877,546 |   |         |         | 838,667 |      |         |         | 460,375 |   |         |         | 275,008 |   |         |         | 229,049 |   |         |         | 200,756 |   |         |         | 170,957 | 
|Cumulative paid at:                                                      |                   |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |        
|                                                                         | One year later    |                   |           |           |           |   |           | 406,052   |           |   |           | 438,802   |           |      |           | 388,722   |           |   |          | 400,279   |         |   |         | 424,379 |         |      |         | 229,746 |         |   |         | 160,324 |         |   |         | 119,453 |         |   |         | 118,656 |         |   |         | 97,580  |        
|                                                                         | Two years later   |                   |           |           |           |   |           |           |           |   |           | 568,942   |           |      |           | 610,619   |           |   |          | 537,354   |         |   |         | 561,246 |         |      |         | 367,512 |         |   |         | 209,724 |         |   |         | 179,117 |         |   |         | 167,459 |         |   |         | 143,114 |        
|                                                                         | Three years later |                   |           |           |           |   |           |           |           |   |           |           |           |      |           | 725,295   |           |   |          | 667,326   |         |   |         | 611,239 |         |      |         | 419,209 |         |   |         | 241,523 |         |   |         | 193,872 |         |   |         | 207,191 |         |   |         | 166,541 |        
|                                                                         | Four years later  |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          | 720,656   |         |   |         | 686,730 |         |      |         | 435,625 |         |   |         | 259,067 |         |   |         | 212,097 |         |   |         | 214,046 |         |   |         | 192,540 |        
|                                                                         | Five years later  |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         | 721,011 |         |      |         | 453,691 |         |   |         | 262,838 |         |   |         | 223,701 |         |   |         | 226,762 |         |   |         | 195,930 |        
|                                                                         | Six years later   |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         | 462,565 |         |   |         | 267,038 |         |   |         | 225,595 |         |   |         | 233,831 |         |   |         | 202,844 |        
|                                                                         | Seven years later |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         | 270,362 |         |   |         | 227,177 |         |   |         | 235,236 |         |   |         | 208,112 |        
|                                                                         | Eight years later |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         | 228,621 |         |   |         | 235,950 |         |   |         | 209,056 |        
|                                                                         | Nine years later  |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         | 236,726 |         |   |         | 209,351 |        
|                                                                         | Ten years later   |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         | 210,318 |        
|Re-estimated liability at:                                               |                   |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         |        
|                                                                         | End of year       |                   |           | 2,089,199 |           |   |           | 1,535,288 |           |   |           | 1,160,877 |           |      |           | 1,130,748 |           |   |          | 877,546   |         |   |         | 838,667 |         |      |         | 460,375 |         |   |         | 275,008 |         |   |         | 229,049 |         |   |         | 200,756 |         |   |         | 170,957 |        
|                                                                         | One year later    |                   |           |           |           |   |           | 1,651,401 |           |   |           | 1,284,030 |           |      |           | 1,107,588 |           |   |          | 922,080   |         |   |         | 836,775 |         |      |         | 550,409 |         |   |         | 308,501 |         |   |         | 252,236 |         |   |         | 243,259 |         |   |         | 186,898 |        
|                                                                         | Two years later   |                   |           |           |           |   |           |           |           |   |           | 1,390,170 |           |      |           | 1,239,751 |           |   |          | 925,922   |         |   |         | 868,438 |         |      |         | 545,955 |         |   |         | 316,250 |         |   |         | 249,013 |         |   |         | 248,372 |         |   |         | 207,511 |        
|                                                                         | Three years later |                   |           |           |           |   |           |           |           |   |           |           |           |      |           | 1,383,098 |           |   |          | 1,099,657 |         |   |         | 854,987 |         |      |         | 547,179 |         |   |         | 304,281 |         |   |         | 250,817 |         |   |         | 247,053 |         |   |         | 214,738 |        
|                                                                         | Four years later  |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          | 1,102,636 |         |   |         | 900,604 |         |      |         | 537,968 |         |   |         | 305,022 |         |   |         | 247,245 |         |   |         | 248,687 |         |   |         | 220,695 |        
|                                                                         | Five years later  |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         | 887,272 |         |      |         | 522,183 |         |   |         | 295,975 |         |   |         | 249,853 |         |   |         | 248,559 |         |   |         | 217,892 |        
|                                                                         | Six years later   |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         | 521,399 |         |   |         | 296,816 |         |   |         | 243,015 |         |   |         | 250,176 |         |   |         | 219,196 |        
|                                                                         | Seven years later |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         | 292,544 |         |   |         | 242,655 |         |   |         | 246,661 |         |   |         | 219,002 |        
|                                                                         | Eight years later |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         | 241,904 |         |   |         | 246,159 |         |   |         | 219,478 |        
|                                                                         | Nine years later  |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         | 245,408 |         |   |         | 219,024 |        
|                                                                         | Ten years later   |                   |           |           |           |   |           |           |           |   |           |           |           |      |           |           |           |   |          |           |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         |   |         |         |         |   |         | 218,622 |        
|Cumulative redundancy (deficiency)                                       |                   |                   |           |           |           | $ | (116,113  | )         |           | $ | (229,293  | )         |           | $    | (252,350  | )         |           | $ | (225,090 | )         |         | $ | (48,605 | )       |         | $    | (61,024 | )       |         | $ | (17,536 | )       |         | $ | (12,855 | )       |         | $ | (44,652 | )       |         | $ | (47,665 | )      

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| |   |                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During 2004, we recorded $127.7 million in gross losses
    related primarily to the 2001 accident year 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 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 are also negatively
    affected by late reporting loss information received during 2001
    for certain discontinued business.                                                                                                                                                                                 









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The development of large claims on individual policies which
    were either reported late or for which reserves were increased
    as subsequent information became available. However, 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 our
    reinsurers 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.           
|
| |  | For the years prior to 1997, the runoff of the retrocessional
    excess of loss business, which we underwrote between 1988 and
    1991, experienced gross development. This development was due
    primarily to the delay in reporting of losses by the London
    insurance market, coupled with the unprecedented number of
    catastrophe losses during that period. This business was
    substantially reinsured and there was no material effect on our
    net earnings.

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|                                                                               |                                                                                                            |                                                                          |           |           |           |   |           |         |           |   |           |         |           | 
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------- | --------- | --------- | - | --------- | ------- | --------- | - | --------- | ------- | --------- | 
|                                                                               |                                                                                                            | 2004                                                                     |           |           | 2003      |   |           | 2002    |          
|                                                                               |                                                                                                            |                                                                          |           |           |           |   |           |         |          
|Reserves for loss and loss adjustment expense payable at
    beginning of year |                                                                                                            | $                                                                        | 1,535,288 |           |           | $ | 1,155,290 |         |           | $ | 1,130,748 |        
|Reserve adjustments from acquisition and disposition of
    subsidiaries       |                                                                                                            |                                                                          | 15,537    |           |           |   | 5,587     |         |           |   | 82,289    |        
|Incurred loss and loss adjustment expense:                                     |                                                                                                            |                                                                          |           |           |           |   |           |         |           |   |           |        
|                                                                               | Provision for loss and loss adjustment expense for claims
    occurring in current year                    |                                                                          |           | 1,173,042 |           |   |           | 922,838 |           |   |           | 627,412 |          
|                                                                               | Increase (decrease) in estimated loss and loss adjustment
    expense for claims occurring in prior years* |                                                                          |           | 116,113   |           |   |           | 123,153 |           |   |           | (23,160 | )        
|                                                                               |                                                                                                            |                                                                          |           |           |           |   |           |         |          
|                                                                               |                                                                                                            | Incurred loss and loss adjustment expense                                |           |           | 1,289,155 |   |           |         | 1,045,991 |   |           |         | 604,252   | 
|                                                                               |                                                                                                            |                                                                          |           |           |           |   |           |         |          
|Loss and loss adjustment expense payments for claims occurring
    during:     |                                                                                                            |                                                                          |           |           |           |   |           |         |           |   |           |        
|                                                                               | Current year                                                                                               |                                                                          |           | 344,729   |           |   |           | 232,778 |           |   |           | 273,277 |          
|                                                                               | Prior years                                                                                                |                                                                          |           | 406,052   |           |   |           | 438,802 |           |   |           | 388,722 |          
|                                                                               |                                                                                                            |                                                                          |           |           |           |   |           |         |          
|                                                                               |                                                                                                            | Loss and loss adjustment expense payments                                |           |           | 750,781   |   |           |         | 671,580   |   |           |         | 661,999   | 
|                                                                               |                                                                                                            |                                                                          |           |           |           |   |           |         |          
|                                                                               |                                                                                                            | Reserves for loss and loss adjustment expense payable at end
    of year |           | $         | 2,089,199 |   |           | $       | 1,535,288 |   |           | $       | 1,155,290 | 
|                                                                               |                                                                                                            |                                                                          |           |           |           |   |           |         |          



|  |                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Changes in loss and loss adjustment expense reserves (on the
    basis of generally accepted accounting principles) 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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|                                                                          |                   |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |   |         |         |  |   |        |        | 
|------------------------------------------------------------------------- | ----------------- | ---- | --------- | --------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | ------ | ------ | 
|                                                                          |                   | 2004 |           |           | 2003 |   |         | 2002    |  |   | 2001    |         |  | 2000 |         |         | 1999 |   |         | 1998    |  |   | 1997    |         |  | 1996 |         |         | 1995 |   |         | 1994    | 
|                                                                          |                   |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         | 
|Reserves, net of reinsurance                                              |                   | $    | 1,059,283 |           |      | $ | 705,200 |         |  | $ | 457,318 |         |  | $    | 313,097 |         |      | $ | 249,872 |         |  | $ | 273,606 |         |  | $    | 118,912 |         |      | $ | 119,634 |         |  | $ | 117,283 |         |  | $ | 99,259  |         |  | $ | 75,678 |       
|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   |         |  |   | 51     |       
|                                                                          |                   |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         | 
|Adjusted reserves, net of reinsurance                                     |                   |      | 1,059,283 |           |      |   | 705,200 |         |  |   | 462,905 |         |  |      | 313,097 |         |      |   | 243,824 |         |  |   | 270,263 |         |  |      | 182,353 |         |      |   | 134,642 |         |  |   | 119,919 |         |  |   | 100,701 |         |  |   | 75,729 |       
|Cumulative paid, net of reinsurance, at:                                  |                   |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |   |         |         |  |   |        |       
|                                                                          | One year later    |      |           |           |      |   |         | 141,677 |  |   |         | 135,829 |  |      |         | 126,019 |      |   |         | 102,244 |  |   |         | 145,993 |  |      |         | 56,052  |      |   |         | 48,775  |  |   |         | 47,874  |  |   |         | 41,947  |  |   |        | 36,500 | 
|                                                                          | Two years later   |      |           |           |      |   |         |         |  |   |         | 172,834 |  |      |         | 131,244 |      |   |         | 139,659 |  |   |         | 174,534 |  |      |         | 103,580 |      |   |         | 64,213  |  |   |         | 66,030  |  |   |         | 56,803  |  |   |        | 49,283 | 
|                                                                          | Three years later |      |           |           |      |   |         |         |  |   |         |         |  |      |         | 163,808 |      |   |         | 118,894 |  |   |         | 185,744 |  |      |         | 113,762 |      |   |         | 80,227  |  |   |         | 72,863  |  |   |         | 64,798  |  |   |        | 56,919 | 
|                                                                          | Four years later  |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         | 138,773 |  |   |         | 180,714 |  |      |         | 121,293 |      |   |         | 81,845  |  |   |         | 81,620  |  |   |         | 67,355  |  |   |        | 60,441 | 
|                                                                          | Five years later  |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         | 197,416 |  |      |         | 120,452 |      |   |         | 84,986  |  |   |         | 81,968  |  |   |         | 72,627  |  |   |        | 61,781 | 
|                                                                          | Six years later   |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         | 127,254 |      |   |         | 87,626  |  |   |         | 82,681  |  |   |         | 73,501  |  |   |        | 66,591 | 
|                                                                          | Seven years later |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         | 89,194  |  |   |         | 84,108  |  |   |         | 73,792  |  |   |        | 66,410 | 
|                                                                          | Eight years later |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         | 84,847  |  |   |         | 74,836  |  |   |        | 66,749 | 
|                                                                          | Nine years later  |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |   |         | 75,216  |  |   |        | 66,804 | 
|                                                                          | Ten years later   |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |   |         |         |  |   |        | 67,138 | 
|Re-estimated liability, net of reinsurance, at:                           |                   |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |   |         |         |  |   |        |       
|                                                                          | End of year       |      |           | 1,059,283 |      |   |         | 705,200 |  |   |         | 462,905 |  |      |         | 313,097 |      |   |         | 243,824 |  |   |         | 270,263 |  |      |         | 182,353 |      |   |         | 134,642 |  |   |         | 119,919 |  |   |         | 100,701 |  |   |        | 75,729 | 
|                                                                          | One year later    |      |           |           |      |   |         | 735,678 |  |   |         | 486,671 |  |      |         | 306,318 |      |   |         | 233,111 |  |   |         | 260,678 |  |      |         | 186,967 |      |   |         | 120,049 |  |   |         | 116,145 |  |   |         | 95,764  |  |   |        | 72,963 | 
|                                                                          | Two years later   |      |           |           |      |   |         |         |  |   |         | 500,165 |  |      |         | 338,194 |      |   |         | 222,330 |  |   |         | 254,373 |  |      |         | 175,339 |      |   |         | 116,745 |  |   |         | 101,595 |  |   |         | 94,992  |  |   |        | 74,887 | 
|                                                                          | Three years later |      |           |           |      |   |         |         |  |   |         |         |  |      |         | 366,819 |      |   |         | 259,160 |  |   |         | 244,650 |  |      |         | 171,165 |      |   |         | 110,673 |  |   |         | 97,353  |  |   |         | 85,484  |  |   |        | 76,474 | 
|                                                                          | Four years later  |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         | 267,651 |  |   |         | 258,122 |  |      |         | 163,349 |      |   |         | 107,138 |  |   |         | 95,118  |  |   |         | 80,890  |  |   |        | 73,660 | 
|                                                                          | Five years later  |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         | 254,579 |  |      |         | 155,931 |      |   |         | 103,243 |  |   |         | 93,528  |  |   |         | 79,626  |  |   |        | 69,528 | 
|                                                                          | Six years later   |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         | 157,316 |      |   |         | 101,538 |  |   |         | 91,413  |  |   |         | 79,968  |  |   |        | 70,642 | 
|                                                                          | Seven years later |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         | 99,872  |  |   |         | 90,951  |  |   |         | 78,614  |  |   |        | 70,278 | 
|                                                                          | Eight years later |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         | 90,534  |  |   |         | 78,810  |  |   |        | 70,060 | 
|                                                                          | Nine years later  |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |   |         | 78,499  |  |   |        | 69,965 | 
|                                                                          | Ten years later   |      |           |           |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |      |         |         |      |   |         |         |  |   |         |         |  |   |         |         |  |   |        | 69,731 | 
|Cumulative redundancy (deficiency)                                        |                   |      |           |           |      | $ | (30,478 | )       |  | $ | (37,260 | )       |  | $    | (53,722 | )       |      | $ | (23,827 | )       |  | $ | 15,684  |         |  | $    | 25,037  |         |      | $ | 34,770  |         |  | $ | 29,385  |         |  | $ | 22,202  |         |  | $ | 5,998  |       

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|                                                                                   |                                                                                                            |                                                                              |         |         |           |   |         |         |         |   |         |         |         | 
|---------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------- | ------- | --------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                   |                                                                                                            | 2004                                                                         |         |         | 2003      |   |         | 2002    |        
|                                                                                   |                                                                                                            |                                                                              |         |         |           |   |         |         |        
|Net reserves for loss and loss adjustment expense payable at
    beginning of year |                                                                                                            | $                                                                            | 705,200 |         |           | $ | 457,318 |         |         | $ | 313,097 |        
|Net reserve adjustments from acquisition and disposition of
    subsidiaries       |                                                                                                            |                                                                              | 11,647  |         |           |   | 5,587   |         |         |   | 79,558  |        
|Incurred loss and loss adjustment expense:                                         |                                                                                                            |                                                                              |         |         |           |   |         |         |         |   |         |        
|                                                                                   | Provision for loss and loss adjustment expense for claims
    occurring in current year                    |                                                                              |         | 614,752 |           |   |         | 464,886 |         |   |         | 313,270 |        
|                                                                                   | Increase (decrease) in estimated loss and loss adjustment
    expense for claims occurring in prior years* |                                                                              |         | 30,478  |           |   |         | 23,766  |         |   |         | (6,779  | )      
|                                                                                   |                                                                                                            |                                                                              |         |         |           |   |         |         |        
|                                                                                   |                                                                                                            | Incurred loss and loss adjustment expense                                    |         |         | 645,230   |   |         |         | 488,652 |   |         |         | 306,491 | 
|                                                                                   |                                                                                                            |                                                                              |         |         |           |   |         |         |        
|Loss and loss adjustment expense payments for claims occurring
    during:         |                                                                                                            |                                                                              |         |         |           |   |         |         |         |   |         |        
|                                                                                   | Current year                                                                                               |                                                                              |         | 161,117 |           |   |         | 110,528 |         |   |         | 115,809 |        
|                                                                                   | Prior years                                                                                                |                                                                              |         | 141,677 |           |   |         | 135,829 |         |   |         | 126,019 |        
|                                                                                   |                                                                                                            |                                                                              |         |         |           |   |         |         |        
|                                                                                   |                                                                                                            | Loss and loss adjustment expense payments                                    |         |         | 302,794   |   |         |         | 246,357 |   |         |         | 241,828 | 
|                                                                                   |                                                                                                            |                                                                              |         |         |           |   |         |         |        
|                                                                                   |                                                                                                            | Net reserves for loss and loss adjustment expense payable at
    end of year |         | $       | 1,059,283 |   |         | $       | 705,200 |   |         | $       | 457,318 | 
|                                                                                   |                                                                                                            |                                                                              |         |         |           |   |         |         |        



|  |                                                                                                                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Changes in loss and loss adjustment expense reserves (on the
    basis of generally accepted accounting principles) 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.



Investments




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|                                                |  |      |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                |  | 2004 |           |   | 2003 |   |           | 2002 | 
|                                                |  |      |           |   |      |   |           |      | 
|Average investments, at cost                    |  | $    | 2,054,620 |   |      | $ | 1,403,690 |      |  | $ | 1,005,541 |  
|Net investment income*                          |  |      | 64,885    |   |      |   | 47,335    |      |  |   | 37,755    |  
|Average short-term yield*                       |  |      | 1.7       | % |      |   | 1.8       | %    |  |   | 2.2       | %
|Average long-term yield*                        |  |      | 3.9       | % |      |   | 4.2       | %    |  |   | 4.8       | %
|Average long-term tax equivalent yield*         |  |      | 4.8       | % |      |   | 5.0       | %    |  |   | 5.4       | %
|Weighted average combined tax equivalent yield* |  |      | 3.8       | % |      |   | 3.8       | %    |  |   | 4.6       | %



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



|                                                                 |                   |        |         |           |                  |  |    |     |  
|---------------------------------------------------------------- | ----------------- | ------ | ------- | --------- | ---------------- |  | -- | --- | -
|                                                                 |                   | Amount |         |           | Percent of Total | 
|                                                                 |                   |        |         |           |                  | 
|Short-term investments                                           |                   | $      | 729,985 |           |                  |  | 30 | %  
|U.S. Treasury securities                                         |                   |        | 88,126  |           |                  |  | 4  |    
|Obligations of states, municipalities and political subdivisions |                   |        | 291,332 |           |                  |  | 12 |    
|Special revenue fixed income securities                          |                   |        | 450,018 |           |                  |  | 18 |    
|Corporate fixed income securities                                |                   |        | 377,336 |           |                  |  | 15 |    
|Asset-backed and mortgage-backed securities                      |                   |        | 248,703 |           |                  |  | 10 |    
|Foreign securities                                               |                   |        | 247,656 |           |                  |  | 10 |    
|Other investments                                                |                   |        | 35,335  |           |                  |  | 1  |    
|                                                                 |                   |        |         |           |                  | 
|                                                                 | Total investments |        | $       | 2,468,491 |                  |  |    | 100 | %
|                                                                 |                   |        |         |           |                  | 

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|             |                               |        |           |           |                  |  |    |     |  
|------------ | ----------------------------- | ------ | --------- | --------- | ---------------- |  | -- | --- | -
|             |                               | Amount |           |           | Percent of Total | 
|             |                               |        |           |           |                  | 
|AAA          |                               | $      | 1,169,662 |           |                  |  | 69 | %  
|AA           |                               |        | 280,810   |           |                  |  | 16 |    
|A            |                               |        | 233,705   |           |                  |  | 14 |    
|BBB          |                               |        | 18,316    |           |                  |  | 1  |    
|BB and below |                               |        | 678       |           |                  |  |   |    
|             |                               |        |           |           |                  | 
|             | Total fixed income securities |        | $         | 1,703,171 |                  |  |    | 100 | %
|             |                               |        |           |           |                  | 



|                                            |                                  |        |         |           |                  |  |    |     |  
|------------------------------------------- | -------------------------------- | ------ | ------- | --------- | ---------------- |  | -- | --- | -
|                                            |                                  | Amount |         |           | Percent of Total | 
|                                            |                                  |        |         |           |                  | 
|One year or less                            |                                  | $      | 91,590  |           |                  |  | 5  | %  
|One year to five years                      |                                  |        | 610,471 |           |                  |  | 36 |    
|Five years to ten years                     |                                  |        | 289,978 |           |                  |  | 17 |    
|Ten years to fifteen years                  |                                  |        | 273,643 |           |                  |  | 16 |    
|More than fifteen years                     |                                  |        | 188,786 |           |                  |  | 11 |    
|                                            |                                  |        |         |           |                  | 
|                                            | Securities with fixed maturities |        |         | 1,454,468 |                  |  |    | 85  |  
|Asset-backed and mortgage-backed securities |                                  |        | 248,703 |           |                  |  | 15 |    
|                                            |                                  |        |         |           |                  | 
|                                            | Total fixed income securities    |        | $       | 1,703,171 |                  |  |    | 100 | %
|                                            |                                  |        |         |           |                  | 



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 to us;                                                                                                                                                                                                         
|
| |  | 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 collectibility;             
|
| |  | 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 assets are 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





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





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





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







| |                                
| | -------------------------------
| | Pending or Proposed Legislation



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Employees









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





|                                                   |  |          |                       |  |         |  |        |                           |  |  |                 | 
|-------------------------------------------------- |  | -------- | --------------------- |  | ------- |  | ------ | ------------------------- |  |  | --------------- | 
|Subsidiary                                         |  | Location |                       |  | Sq. Ft. |  |        | Termination Date of Lease | 
|                                                   |  |          |                       |  |         |  |        |                           | 
|HCC and Houston Casualty Company                   |  |          | Houston, Texas        |  |         |  | 51,000 |                           |  |  | Owned           | 
|Houston Casualty Company                           |  |          | Houston, Texas        |  |         |  | 77,000 |                           |  |  | Owned           | 
|U.S. Specialty Insurance Company Aviation Division |  |          | Dallas, Texas         |  |         |  | 40,000 |                           |  |  | August 31, 2013 | 
|Professional Indemnity Agency                      |  |          | Mount Kisco, New York |  |         |  | 38,000 |                           |  |  | Owned           | 

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






|               |  |      |       |  |      |   |       |      |  |   |       |  |  |      |       |  |     |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- |  |  | ---- | ----- |  | --- | - | ----- |  |  | - | ----- | 
|               |  | 2004 |       |  | 2003 |   |       | 2002 | 
|               |  |      |       |  |      |   |       |      | 
|               |  | High |       |  | Low  |   |       | High |  |   | Low   |  |  | High |       |  | Low |  
|               |  |      |       |  |      |   |       |      |  |   |       |  |  |      |       |  |     |  
|First quarter  |  | $    | 34.75 |  |      | $ | 30.02 |      |  | $ | 26.46 |  |  | $    | 22.30 |  |     | $ | 28.95 |  |  | $ | 24.90 | 
|Second quarter |  |      | 34.40 |  |      |   | 30.45 |      |  |   | 30.19 |  |  |      | 25.65 |  |     |   | 28.30 |  |  |   | 24.70 | 
|Third quarter  |  |      | 33.59 |  |      |   | 28.84 |      |  |   | 31.26 |  |  |      | 28.70 |  |     |   | 26.60 |  |  |   | 19.11 | 
|Fourth quarter |  |      | 34.25 |  |      |   | 27.53 |      |  |   | 32.09 |  |  |      | 28.10 |  |     |   | 25.70 |  |  |   | 22.37 | 



Shareholders




Dividend Policy




|               |  |      |      |  |      |   |      |      |  |   |       | 
|-------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ----- | 
|               |  | 2004 |      |  | 2003 |   |      | 2002 | 
|               |  |      |      |  |      |   |      |      | 
|First quarter  |  | $    | .075 |  |      | $ | .065 |      |  | $ | .0625 | 
|Second quarter |  |      | .075 |  |      |   | .065 |      |  |   | .0625 | 
|Third quarter  |  |      | .085 |  |      |   | .075 |      |  |   | .065  | 
|Fourth quarter |  |      | .085 |  |      |   | .075 |      |  |   | .065  | 



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



|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |        |         |        |         |        |         |        |         | 
|------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------- | ----------------------- | --------- | ------- | --------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                                                              |                                                              | Years Ended December 31,                 |                        
|                                                              |                                                              |                                          |                        
|                                                              |                                                              | 2004                                     |                         |           | 2003    |           |         | 2002    |         |         | 2001    |         |        | 2000    |       
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|                                                              |                                                              | (in thousands, except per share data)(1) |                        
|Statement of earnings data:                                   |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |        |         |        |         |        |        
|Revenue                                                       |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |        |         |        |         |        |        
|                                                              | Net earned premium                                           |                                          | $                       | 1,010,692 |         |           | $       | 738,272 |         |         | $       | 505,521 |        |         | $      | 342,787 |        |         | $      | 267,647 |       
|                                                              | Fee and commission income                                    |                                          |                         | 182,349   |         |           |         | 142,615 |         |         |         | 115,919 |        |         |        | 111,016 |        |         |        | 146,999 |       
|                                                              | Net investment income                                        |                                          |                         | 64,885    |         |           |         | 47,335  |         |         |         | 37,755  |        |         |        | 39,562  |        |         |        | 39,804  |       
|                                                              | Net realized investment gain (loss)                          |                                          |                         | 5,822     |         |           |         | 527     |         |         |         | 453     |        |         |        | 393     |        |         |        | (5,321  | )     
|                                                              | Other operating income                                       |                                          |                         | 19,406    |         |           |         | 13,215  |         |         |         | 6,985   |        |         |        | 17,451  |        |         |        | 25,499  |       
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|                                                              |                                                              |                                          | Total revenue           |           |         | 1,283,154 |         |         |         | 941,964 |         |         |        | 666,633 |        |         |        | 511,209 |        |         |        | 474,628 | 
|Expense                                                       |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |        |         |        |         |        |        
|                                                              | Loss and loss adjustment expense, net                        |                                          |                         | 645,230   |         |           |         | 488,652 |         |         |         | 306,491 |        |         |        | 267,390 |        |         |        | 198,470 |       
|                                                              | Operating expense:                                           |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |        |         |        |         |        |         |       
|                                                              |                                                              | Policy acquisition costs, net            |                         |           | 224,323 |           |         |         | 138,212 |         |         |         | 99,521 |         |        |         | 66,313 |         |        |         | 57,934 |        
|                                                              |                                                              | Compensation expense                     |                         |           | 88,570  |           |         |         | 82,947  |         |         |         | 58,567 |         |        |         | 50,806 |         |        |         | 62,275 |        
|                                                              |                                                              | Other operating expense                  |                         |           | 75,904  |           |         |         | 57,966  |         |         |         | 41,357 |         |        |         | 63,000 |         |        |         | 47,712 |        
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|                                                              |                                                              |                                          | Total operating expense |           |         | 388,797   |         |         |         | 279,125 |         |         |        | 199,445 |        |         |        | 180,119 |        |         |        | 167,921 | 
|                                                              |                                                              |                                          | Interest expense        |           |         | 8,374     |         |         |         | 7,453   |         |         |        | 8,301   |        |         |        | 8,875   |        |         |        | 20,249  | 
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|                                                              |                                                              |                                          | Total expense           |           |         | 1,042,401 |         |         |         | 775,230 |         |         |        | 514,237 |        |         |        | 456,384 |        |         |        | 386,640 | 
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|Earnings from continuing operations before income tax expense |                                                              |                                          | 240,753                 |           |         |           | 166,734 |         |         |         | 152,396 |         |        |         | 54,825 |         |        |         | 87,988 |        
|Income tax expense from continuing operations                 |                                                              |                                          | 81,732                  |           |         |           | 59,857  |         |         |         | 52,933  |         |        |         | 27,764 |         |        |         | 34,400 |        
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|                                                              | Earnings from continuing operations before accounting change |                                          |                         | 159,021   |         |           |         | 106,877 |         |         |         | 99,463  |        |         |        | 27,061  |        |         |        | 53,588  |       
|                                                              | Earnings from discontinued operations, net of tax(5)         |                                          |                         | 4,004     |         |           |         | 36,684  |         |         |         | 6,365   |        |         |        | 3,136   |        |         |        | 3,893   |       
|                                                              | Cumulative effect of accounting change(2)                    |                                          |                         |          |         |           |         |        |         |         |         |        |        |         |        |        |        |         |        | (2,013  | )     
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|                                                              | Net earnings                                                 |                                          | $                       | 163,025   |         |           | $       | 143,561 |         |         | $       | 105,828 |        |         | $      | 30,197  |        |         | $      | 55,468  |       
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|Basic earnings per share data:                                |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |        |         |        |         |        |        
|                                                              | Earnings from continuing operations before accounting change |                                          | $                       | 2.45      |         |           | $       | 1.69    |         |         | $       | 1.60    |        |         | $      | 0.47    |        |         | $      | 1.05    |       
|                                                              | Earnings from discontinued operations(5)                     |                                          |                         | 0.06      |         |           |         | 0.58    |         |         |         | 0.10    |        |         |        | 0.05    |        |         |        | 0.08    |       
|                                                              | Cumulative effect of accounting change(2)                    |                                          |                         |          |         |           |         |        |         |         |         |        |        |         |        |        |        |         |        | (0.04   | )     
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|                                                              | Net earnings                                                 |                                          | $                       | 2.51      |         |           | $       | 2.27    |         |         | $       | 1.70    |        |         | $      | 0.52    |        |         | $      | 1.09    |       
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       
|                                                              | Weighted average shares outstanding                          |                                          |                         | 64,838    |         |           |         | 63,279  |         |         |         | 62,225  |        |         |        | 58,321  |        |         |        | 50,742  |       
|                                                              |                                                              |                                          |                         |           |         |           |         |         |         |         |         |         |        |         |       

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|                                    |                                                              |                                          |      |        |      |   |      |        |  |   |       |        |  |      |       |        |  |   |      |        |  
|----------------------------------- | ------------------------------------------------------------ | ---------------------------------------- | ---- | ------ | ---- | - | ---- | ------ |  | - | ----- | ------ |  | ---- | ----- | ------ |  | - | ---- | ------ | -
|                                    |                                                              | Years Ended December 31,                 |     
|                                    |                                                              |                                          |     
|                                    |                                                              | 2004                                     |      |        | 2003 |   |      | 2002   |  |   | 2001  |        |  | 2000 |      
|                                    |                                                              |                                          |      |        |      |   |      |        |  |   |       |        |  |      |      
|                                    |                                                              | (in thousands, except per share data)(1) |     
|Diluted earnings per share data(6): |                                                              |                                          |      |        |      |   |      |        |  |   |       |        |  |      |       |        |  |   |      |       
|                                    | Earnings from continuing operations before accounting change |                                          | $    | 2.41   |      |   | $    | 1.66   |  |   | $     | 1.58   |  |      | $     | 0.46   |  |   | $    | 1.04   |  
|                                    | Earnings from discontinued operations(5)                     |                                          |      | 0.06   |      |   |      | 0.57   |  |   |       | 0.10   |  |      |       | 0.05   |  |   |      | 0.07   |  
|                                    | Cumulative effect of accounting change(2)                    |                                          |      |       |      |   |      |       |  |   |       |       |  |      |       |       |  |   |      | (0.04  | )
|                                    |                                                              |                                          |      |        |      |   |      |        |  |   |       |        |  |      |      
|                                    | Net earnings                                                 |                                          | $    | 2.47   |      |   | $    | 2.23   |  |   | $     | 1.68   |  |      | $     | 0.51   |  |   | $    | 1.07   |  
|                                    |                                                              |                                          |      |        |      |   |      |        |  |   |       |        |  |      |      
|                                    | Weighted average shares outstanding                          |                                          |      | 65,884 |      |   |      | 64,384 |  |   |       | 62,937 |  |      |       | 59,619 |  |   |      | 51,619 |  
|                                    |                                                              |                                          |      |        |      |   |      |        |  |   |       |        |  |      |      
|Cash dividends declared, per share  |                                                              | $                                        | 0.32 |        |      | $ | 0.28 |        |  | $ | 0.255 |        |  | $    | 0.245 |        |  | $ | 0.22 |       
|                                    |                                                              |                                          |      |        |      |   |      |        |  |   |       |        |  |      |      

|                                                          |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |   |        |  |  |   |        | 
|--------------------------------------------------------- | ----------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  |  | - | ------ |  |  | - | ------ | 
|Amounts adjusted for the non-amortization of goodwill(3): |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |   |        |  |  |   |       
|                                                          | Adjusted net earnings               |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 41,584 |  |  | $ | 67,302 | 
|                                                          |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  
|                                                          | Adjusted basic earnings per share   |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 0.71   |  |  | $ | 1.33   | 
|                                                          |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  
|                                                          | Adjusted diluted earnings per share |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 0.70   |  |  | $ | 1.30   | 
|                                                          |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  

|                                         |  |                                          |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           | 
|---------------------------------------- |  | ---------------------------------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- |  |  | ---- | --------- |  |  | - | --------- | 
|                                         |  | December 31,                             |          
|                                         |  |                                          |          
|                                         |  | 2004                                     |           |  | 2003 |   |           | 2002 |  |   | 2001      |  |  | 2000 |          
|                                         |  |                                          |           |  |      |   |           |      |  |   |           |  |  |      |          
|                                         |  | (In thousands, except per share data)(1) |          
|Balance sheet data:                      |  |                                          |           |  |      |   |           |      |  |   |           |  |  |      |           |  |  |   |           | 
|Total investments                        |  | $                                        | 2,468,491 |  |      | $ | 1,707,300 |      |  | $ | 1,177,775 |  |  | $    | 885,659   |  |  | $ | 711,113   | 
|Premium, claims and other receivables    |  |                                          | 923,638   |  |      |   | 909,941   |      |  |   | 753,527   |  |  |      | 665,965   |  |  |   | 609,716   | 
|Reinsurance recoverables                 |  |                                          | 1,098,999 |  |      |   | 916,190   |      |  |   | 798,934   |  |  |      | 899,128   |  |  |   | 789,412   | 
|Ceded unearned premium                   |  |                                          | 317,055   |  |      |   | 291,591   |      |  |   | 164,224   |  |  |      | 71,140    |  |  |   | 114,469   | 
|Goodwill and intangible assets           |  |                                          | 464,363   |  |      |   | 406,000   |      |  |   | 349,286   |  |  |      | 328,815   |  |  |   | 266,015   | 
|Total assets                             |  |                                          | 5,933,437 |  |      |   | 4,875,206 |      |  |   | 3,704,151 |  |  |      | 3,219,120 |  |  |   | 2,790,755 | 
|                                        
|Loss and loss adjustment expense payable |  |                                          | 2,089,199 |  |      |   | 1,535,288 |      |  |   | 1,155,290 |  |  |      | 1,130,748 |  |  |   | 944,117   | 
|Unearned premium                         |  |                                          | 741,706   |  |      |   | 592,311   |      |  |   | 331,050   |  |  |      | 179,530   |  |  |   | 190,550   | 
|Notes payable                            |  |                                          | 311,277   |  |      |   | 310,404   |      |  |   | 230,027   |  |  |      | 181,928   |  |  |   | 212,133   | 
|Shareholders equity                     |  |                                          | 1,323,665 |  |      |   | 1,046,920 |      |  |   | 882,907   |  |  |      | 763,453   |  |  |   | 530,930   | 
|                                        
|Book value per share(4)                  |  | $                                        | 19.45     |  |      | $ | 16.37     |      |  | $ | 14.15     |  |  | $    | 12.40     |  |  | $ | 10.29     | 



|    |                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain amounts in the 2003, 2002, 2001 and 2000 selected
    consolidated financial data have been reclassified to conform to
    the 2004 presentation. Such reclassifications had no effect on
    our net earnings, shareholders equity or cash flows.                                                                                                           
|   
|(2) | During 2000, we changed certain of our revenue recognition
    methods for our underwriting agencies and reinsurance brokers to
    agree to guidance contained in the Securities and Exchange
    Commissions Staff Accounting Bulletin Number 101,
    Revenue Recognition in Financial Statements.                                                                
|   
|(3) | 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 presented are amounts that we would have
    reported had we adopted SFAS No. 142 on
    January 1, 2000.
|   
|(4) | Book value per share is calculated by dividing the sum of
    outstanding shares plus contractually issuable shares into total
    shareholders equity.                                                                                                                                                                                                              

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | We sold our retail brokerage operation, HCC Employee Benefits,
    in December 2003. The net earnings of HCC Employee Benefits, the
    2003 gain on its sale and the subsequent gain in 2004 from a
    contractual earnout have been classified as discontinued
    operations in our consolidated statements of earnings.
    Consistent with this presentation, all revenue and expense of
    HCC Employee Benefits have been reclassified to discontinued
    operations in our consolidated statement of earnings.
|   
|(6) | In accordance with Emerging Issues Task Force Issue
    No. 04-8, The Effect of Contingently Convertible Debt on
    Diluted Earnings per Share, we retroactively changed our
    calculation of diluted earnings per share in the fourth quarter
    of 2004. This standard had no impact on diluted earnings per
    share and an immaterial impact on weighted average shares
    outstanding.                                                                                                                        






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

Overview










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|                                                   |  |                   |  |                         |                   | 
|-------------------------------------------------- |  | ----------------- |  | ----------------------- | ----------------- | 
|Company                                            |  | Segment           |  | Effective Date Acquired |                  
|                                                   |  |                   |  |                         |                  
|HCC Global Financial Products                      |  | Agency            |  |                         | October 1, 2002   | 
|HCC Diversified Financial Products                 |  | Agency            |  |                         | December 24, 2002 | 
|HCC Europe                                         |  | Insurance company |  |                         | December 31, 2002 | 
|Covenant Underwriters and Continental Underwriters |  | Agency            |  |                         | July 1, 2003      | 
|Surety Associates Holding Company                  |  | Insurance company |  |                         | January 31, 2004  | 
|RA&MCO Insurance Services                          |  | Agency            |  |                         | October 1, 2004   | 



Results of Operations








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|                                      |                                                               |      |      |       |      |  |      |       |   |  |      |       |  
|------------------------------------- | ------------------------------------------------------------- | ---- | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                                      |                                                               | 2004 |      |       | 2003 |  |      | 2002  |  
|                                      |                                                               |      |      |       |      |  |      |       |  
|Net earned premium                    |                                                               |      | 78.8 | %     |      |  | 78.4 | %     |   |  | 75.8 | %    
|Fee and commission income             |                                                               |      | 14.2 |       |      |  | 15.1 |       |   |  | 17.4 |      
|Net investment income                 |                                                               |      | 5.1  |       |      |  | 5.6  |       |   |  | 6.2  |      
|Net realized investment gain          |                                                               |      | 0.4  |       |      |  | 0.1  |       |   |  | 0.1  |      
|Other operating income                |                                                               |      | 1.5  |       |      |  | 0.8  |       |   |  | 0.5  |      
|                                      |                                                               |      |      |       |      |  |      |       |  
|                                      | Total revenue                                                 |      |      | 100.0 |      |  |      | 100.0 |   |  |      | 100.0 |  
|Loss and loss adjustment expense, net |                                                               |      | 50.3 |       |      |  | 51.9 |       |   |  | 46.0 |      
|Total operating expense               |                                                               |      | 30.3 |       |      |  | 29.6 |       |   |  | 29.9 |      
|Interest expense                      |                                                               |      | 0.6  |       |      |  | 0.8  |       |   |  | 1.2  |      
|                                      |                                                               |      |      |       |      |  |      |       |  
|                                      | Earnings from continuing operations before income tax expense |      |      | 18.8  |      |  |      | 17.7  |   |  |      | 22.9  |  
|Income tax expense                    |                                                               |      | 6.4  |       |      |  | 6.4  |       |   |  | 8.0  |      
|                                      |                                                               |      |      |       |      |  |      |       |  
|                                      | Earnings from continuing operations                           |      |      | 12.4  | %    |  |      | 11.3  | % |  |      | 14.9  | %
|                                      |                                                               |      |      |       |      |  |      |       |  





|                      |  |      |           |  |      |   |           |      |  |   |           | 
|--------------------- |  | ---- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                      |  | 2004 |           |  | 2003 |   |           | 2002 | 
|                      |  |      |           |  |      |   |           |      | 
|Gross written premium |  | $    | 1,975,153 |  |      | $ | 1,739,894 |      |  | $ | 1,159,249 | 
|Net written premium   |  |      | 1,105,519 |  |      |   | 865,502   |      |  |   | 545,911   | 
|Net earned premium    |  |      | 1,010,692 |  |      |   | 738,272   |      |  |   | 505,521   | 



|                    |                           |      |         |         |      |   |         |         |  |   |        |         | 
|------------------- | ------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------- | 
|                    |                           | 2004 |         |         | 2003 |   |         | 2002    | 
|                    |                           |      |         |         |      |   |         |         | 
|Agencies            |                           | $    | 126,971 |         |      | $ | 105,899 |         |  | $ | 86,974 |        
|Insurance companies |                           |      | 55,378  |         |      |   | 43,244  |         |  |   | 28,945 |        
|Other               |                           |      |        |         |      |   | (6,528  | )       |  |   |       |        
|                    |                           |      |         |         |      |   |         |         | 
|                    | Fee and commission income |      | $       | 182,349 |      |   | $       | 142,615 |  |   | $      | 115,919 | 
|                    |                           |      |         |         |      |   |         |         | 



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|                        |                         |      |        |        |      |   |        |        |  |   |        |        | 
|----------------------- | ----------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                        |                         | 2004 |        |        | 2003 |   |        | 2002   | 
|                        |                         |      |        |        |      |   |        |        | 
|Fixed income securities |                         | $    | 55,929 |        |      | $ | 40,927 |        |  | $ | 31,773 |       
|Short-term investments  |                         |      | 9,735  |        |      |   | 7,422  |        |  |   | 6,787  |       
|Other investments       |                         |      | 1,366  |        |      |   | 488    |        |  |   | 222    |       
|                        |                         |      |        |        |      |   |        |        | 
|                        | Total investment income |      |        | 67,030 |      |   |        | 48,837 |  |   |        | 38,782 | 
|Investment expense      |                         |      | (2,145 | )      |      |   | (1,502 | )      |  |   | (1,027 | )     
|                        |                         |      |        |        |      |   |        |        | 
|                        | Net investment income   |      | $      | 64,885 |      |   | $      | 47,335 |  |   | $      | 37,755 | 
|                        |                         |      |        |        |      |   |        |        | 













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Segments




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





|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |   |          |           |  |  |     |     |  
|-------------------------- | --------------------- | ------ | --------- | --------- | ---- |  | --- | ------ | - | - | --------- | --------- |  | ------ | --- | --- | - | - | -------- | --------- |  |  | --- | --- | -
|                           |                       | 2004   |           |           | 2003 |  |     | 2002   |  
|                           |                       |        |           |           |      |  |     |        |  
|                           |                       | Amount |           |           | %    |  |     | Amount |   |   | %         |           |  | Amount |     |     | % |  
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  
|Direct                     |                       | $      | 1,674,075 |           |      |  | 85  | %      |   | $ | 1,377,999 |           |  |        | 79  | %   |   | $ | 904,737  |           |  |  | 78  | %  
|Reinsurance assumed        |                       |        | 301,078   |           |      |  | 15  |        |   |   | 361,895   |           |  |        | 21  |     |   |   | 254,512  |           |  |  | 22  |    
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  
|                           | Gross written premium |        |           | 1,975,153 |      |  |     | 100    |   |   |           | 1,739,894 |  |        |     | 100 |   |   |          | 1,159,249 |  |  |     | 100 |  
|Reinsurance ceded          |                       |        | (869,634  | )         |      |  | (44 | )      |   |   | (874,392  | )         |  |        | (50 | )   |   |   | (613,338 | )         |  |  | (53 | )  
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  
|                           | Net written premium   |        |           | 1,105,519 |      |  |     | 56     |   |   |           | 865,502   |  |        |     | 50  |   |   |          | 545,911   |  |  |     | 47  |  
|Change in unearned premium |                       |        | (94,827   | )         |      |  | (5  | )      |   |   | (127,230  | )         |  |        | (8  | )   |   |   | (40,390  | )         |  |  | (3  | )  
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  
|                           | Net earned premium    |        | $         | 1,010,692 |      |  |     | 51     | % |   | $         | 738,272   |  |        |     | 42  | % |   | $        | 505,521   |  |  |     | 44  | %
|                           |                       |        |           |           |      |  |     |        |   |   |           |           |  |        |     |     |   |  

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|                                |        |         |           |           |             |   |           |           |  |  |            |    |   |   |         |           | 
|------------------------------- | ------ | ------- | --------- | --------- | ----------- | - | --------- | --------- |  |  | ---------- | -- | - | - | ------- | --------- | 
|                                |        | Gross   |           |           |             |   |           |           | 
|                                |        | Written |           |           | Net Written |   |           | %         |  |  | Net Earned |   
|                                |        | Premium |           |           | Premium     |   |           | Retained  |  |  | Premium    |   
|                                |        |         |           |           |             |   |           |           |  |  |            |   
|Year ended December 31, 2004    |        |         |           |           |             |   |           |           |  |  |            |    |   |   |         |          
|Group life, accident and health |        | $       | 584,747   |           |             | $ | 343,996   |           |  |  | 59         | %  |   | $ | 343,913 |          
|Diversified financial products  |        |         | 857,299   |           |             |   | 404,870   |           |  |  | 47         |    |   |   | 310,809 |          
|London market account           |        |         | 178,950   |           |             |   | 107,509   |           |  |  | 60         |    |   |   | 111,341 |          
|Aviation                        |        |         | 204,963   |           |             |   | 144,687   |           |  |  | 71         |    |   |   | 127,248 |          
|Other specialty lines           |        |         | 133,964   |           |             |   | 83,980    |           |  |  | 63         |    |   |   | 69,089  |          
|                                |        |         |           |           |             |   |           |           |  |  |            |   
|                                |        |         | 1,959,923 |           |             |   | 1,085,042 |           |  |  | 55         |    |   |   | 962,400 |          
|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    |        |         |           |           |             |   |           |           |  |  |            |    |   |   |         |          
|Group life, accident and health |        | $       | 565,494   |           |             | $ | 299,913   |           |  |  | 53         | %  |   | $ | 290,009 |          
|Diversified financial products  |        |         | 553,501   |           |             |   | 183,560   |           |  |  | 33         |    |   |   | 123,562 |          
|London market account           |        |         | 223,149   |           |             |   | 155,987   |           |  |  | 70         |    |   |   | 137,572 |          
|Aviation                        |        |         | 214,718   |           |             |   | 99,447    |           |  |  | 46         |    |   |   | 97,536  |          
|Other specialty lines           |        |         | 73,475    |           |             |   | 36,837    |           |  |  | 50         |    |   |   | 12,443  |          
|                                |        |         |           |           |             |   |           |           |  |  |            |   
|                                |        |         | 1,630,337 |           |             |   | 775,744   |           |  |  | 48         |    |   |   | 661,122 |          
|Discontinued lines              |        |         | 109,557   |           |             |   | 89,758    |           |  |  | nm         |    |   |   | 77,150  |          
|                                |        |         |           |           |             |   |           |           |  |  |            |   
|                                | Totals |         | $         | 1,739,894 |             |   | $         | 865,502   |  |  |            | 50 | % |   | $       | 738,272   | 
|                                |        |         |           |           |             |   |           |           |  |  |            |   
|Year ended December 31, 2002    |        |         |           |           |             |   |           |           |  |  |            |    |   |   |         |          
|Group life, accident and health |        | $       | 503,263   |           |             | $ | 244,554   |           |  |  | 49         | %  |   | $ | 240,070 |          
|Diversified financial products  |        |         | 178,653   |           |             |   | 43,731    |           |  |  | 24         |    |   |   | 23,102  |          
|London market account           |        |         | 199,816   |           |             |   | 113,925   |           |  |  | 57         |    |   |   | 89,260  |          
|Aviation                        |        |         | 212,518   |           |             |   | 99,826    |           |  |  | 47         |    |   |   | 100,960 |          
|Other specialty lines           |        |         | 3,595     |           |             |   | 21        |           |  |  | 1          |    |   |   |        |          
|                                |        |         |           |           |             |   |           |           |  |  |            |   
|                                |        |         | 1,097,845 |           |             |   | 502,057   |           |  |  | 46         |    |   |   | 453,392 |          
|Discontinued lines              |        |         | 61,404    |           |             |   | 43,854    |           |  |  | nm         |    |   |   | 52,129  |          
|                                |        |         |           |           |             |   |           |           |  |  |            |   
|                                | Totals |         | $         | 1,159,249 |             |   | $         | 545,911   |  |  |            | 47 | % |   | $       | 505,521   | 
|                                |        |         |           |           |             |   |           |           |  |  |            |   







| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The largest premium growth, both gross and net, was in our
    diversified financial products line of business. We experienced
    organic growth in our directors and officers
    businesses, as well as

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | increases in our professional indemnity and surety business due
    to organic growth and acquisitions. In 2004, there was
    increasing competition in the insurance industry and to a lesser
    degree in our specialty lines, but we believe that our business
    will remain very profitable, at least through 2005. We expect
    much slower growth in gross written premium in 2005 as we become
    more selective, although net written premium will continue to
    grow from higher retentions. Our increased retentions resulted
    from a reduction of proportional reinsurance, some of which has
    been replaced by excess of loss reinsurance.                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Our other specialty line of business increased significantly due
    to the marine business written by an underwriting agency we
    acquired in 2003, our quota share participation on the surplus
    lines business written by Argonaut Group, Inc. beginning in
    2003, and our participation in a specialty Lloyds
    syndicate beginning in 2004. Growth in both gross and net
    premiums will slow down in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | We reduced our London market account premium writings due to
    more selective underwriting in response to reduced premium rates
    from increased competition. Net written premium was also lower
    in 2004 than in 2003, due to the impact of reinstatement
    premiums under our catastrophe reinsurance programs as a result
    of the hurricane activity in the third quarter of 2004. Net
    written premium was reduced by $15.3 million for
    reinstatement premiums, compared to only $2.5 million in
    2003. Risk retention in this line of business usually is lower
    than most of our other active lines of business, since the
    majority of the London market risks have catastrophe exposure;
    but retained premium is higher because reinsurance is
    predominantly on an excess of loss basis. Although the immediate
    effect of the hurricanes was to slow the softening of premium
    rates for property and energy business, at least temporarily, we
    cannot anticipate what impact the hurricanes will have on
    pricing in 2005.
|
| |  | While competition continues to result in some premium rate
    reductions in our aviation and group life, accident and health
    lines of business, profit margins are very acceptable and the
    markets are relatively stable. We increased our retentions in
    both lines in 2004 and again in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Overall, our retentions increased on most non-catastrophe
    business as underwriting profitability stayed predictable. We
    consider our overall market to be relatively stable, although
    premium rates are still softening, but as long as our margins
    remain well above an acceptable level, we will continue to
    retain more of the risk. We are very disciplined underwriters
    and will not hesitate to reduce our business if market
    conditions deteriorate below our projected level.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



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|                                                        |                                               |        |         |         |            |  |      |        |   |   |            |         |  |        |      |      |            |   |         |         |  |  |      |      |  
|------------------------------------------------------- | --------------------------------------------- | ------ | ------- | ------- | ---------- |  | ---- | ------ | - | - | ---------- | ------- |  | ------ | ---- | ---- | ---------- | - | ------- | ------- |  |  | ---- | ---- | -
|                                                        |                                               | 2004   |         |         | 2003       |  |      | 2002   |  
|                                                        |                                               |        |         |         |            |  |      |        |  
|                                                        |                                               | Amount |         |         | Loss Ratio |  |      | Amount |   |   | Loss Ratio |         |  | Amount |      |      | Loss Ratio |  
|                                                        |                                               |        |         |         |            |  |      |        |   |   |            |         |  |        |      |      |            |  
|Hurricanes                                              |                                               | $      | 23,335  |         |            |  | 2.3  | %      |   | $ |           |         |  |        |     | %    |            | $ |        |         |  |  |     | %   
|Discontinued line of business adjustments               |                                               |        | 27,326  |         |            |  | 2.7  |        |   |   |           |         |  |        |     |      |            |   |        |         |  |  |     |     
|Effect of commutations                                  |                                               |        |        |         |            |  |     |        |   |   | 28,751     |         |  |        | 3.9  |      |            |   |        |         |  |  |     |     
|2002 third quarter charge                               |                                               |        |        |         |            |  |     |        |   |   |           |         |  |        |     |      |            |   | 7,674   |         |  |  | 1.5  |     
|Other reserve development                               |                                               |        | 3,152   |         |            |  | 0.3  |        |   |   | (4,985     | )       |  |        | (0.7 | )    |            |   | (14,453 | )       |  |  | (2.9 | )   
|All other net incurred loss and loss adjustment expense |                                               |        | 591,417 |         |            |  | 58.5 |        |   |   | 464,886    |         |  |        | 63.0 |      |            |   | 313,270 |         |  |  | 62.0 |     
|                                                        |                                               |        |         |         |            |  |      |        |   |   |            |         |  |        |      |      |            |  
|                                                        | Net incurred loss and loss adjustment expense |        | $       | 645,230 |            |  |      | 63.8   | % |   | $          | 488,652 |  |        |      | 66.2 | %          |   | $       | 306,491 |  |  |      | 60.6 | %
|                                                        |                                               |        |         |         |            |  |      |        |   |   |            |         |  |        |      |      |            |  





|                                                          |                                                 |        |           |           |            |  |      |        |   |   |            |           |  |        |      |      |            |   |         |         |  |  |      |      |  
|--------------------------------------------------------- | ----------------------------------------------- | ------ | --------- | --------- | ---------- |  | ---- | ------ | - | - | ---------- | --------- |  | ------ | ---- | ---- | ---------- | - | ------- | ------- |  |  | ---- | ---- | -
|                                                          |                                                 | 2004   |           |           | 2003       |  |      | 2002   |  
|                                                          |                                                 |        |           |           |            |  |      |        |  
|                                                          |                                                 | Amount |           |           | Loss Ratio |  |      | Amount |   |   | Loss Ratio |           |  | Amount |      |      | Loss Ratio |  
|                                                          |                                                 |        |           |           |            |  |      |        |   |   |            |           |  |        |      |      |            |  
|Hurricanes                                                |                                                 | $      | 89,795    |           |            |  | 4.8  | %      |   | $ |           |           |  |        |     | %    |            | $ |        |         |  |  |     | %   
|Discontinued line of business adjustments                 |                                                 |        | 127,707   |           |            |  | 6.9  |        |   |   | 118,592    |           |  |        | 8.0  |      |            |   | 36,170  |         |  |  | 3.5  |     
|Large warehouse fire                                      |                                                 |        |          |           |            |  |     |        |   |   | 30,000     |           |  |        | 2.0  |      |            |   |        |         |  |  |     |     
|September 11 terrorist attack                             |                                                 |        |          |           |            |  |     |        |   |   |           |           |  |        |     |      |            |   | (21,500 | )       |  |  | (2.1 | )   
|Total Oil Company loss                                    |                                                 |        |          |           |            |  |     |        |   |   |           |           |  |        |     |      |            |   | (14,000 | )       |  |  | (1.4 | )   
|2002 third quarter charge                                 |                                                 |        |          |           |            |  |     |        |   |   |           |           |  |        |     |      |            |   | 7,674   |         |  |  | 0.8  |     
|Reduced incurred but not reported losses                  |                                                 |        | (17,300   | )         |            |  | (0.9 | )      |   |   |           |           |  |        |     |      |            |   |        |         |  |  |     |     
|Other reserve development                                 |                                                 |        | 5,706     |           |            |  | 0.3  |        |   |   | 4,561      |           |  |        | 0.3  |      |            |   | (31,504 | )       |  |  | (3.1 | )   
|All other gross incurred loss and loss adjustment expense |                                                 |        | 1,083,247 |           |            |  | 58.2 |        |   |   | 892,838    |           |  |        | 60.0 |      |            |   | 627,412 |         |  |  | 60.9 |     
|                                                          |                                                 |        |           |           |            |  |      |        |   |   |            |           |  |        |      |      |            |  
|                                                          | Gross incurred loss and loss adjustment expense |        | $         | 1,289,155 |            |  |      | 69.3   | % |   | $          | 1,045,991 |  |        |      | 70.3 | %          |   | $       | 604,252 |  |  |      | 58.6 | %
|                                                          |                                                 |        |           |           |            |  |      |        |   |   |            |           |  |        |      |      |            |  



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|                                |        |         |         |           |       |  |       |         |   |   |         |         |  |         |       |      |       |   |         |         |  |  |       |      |  
|------------------------------- | ------ | ------- | ------- | --------- | ----- |  | ----- | ------- | - | - | ------- | ------- |  | ------- | ----- | ---- | ----- | - | ------- | ------- |  |  | ----- | ---- | -
|                                |        | 2004    |         |           | 2003  |  |       | 2002    |  
|                                |        |         |         |           |       |  |       |         |  
|                                |        | Net     |         |           | Net   |  |       | Net     |   |   | Net     |         |  | Net     |       |      | Net   |  
|                                |        | Earned  |         |           | Loss  |  |       | Earned  |   |   | Loss    |         |  | Earned  |       |      | Loss  |  
|                                |        | Premium |         |           | Ratio |  |       | Premium |   |   | Ratio   |         |  | Premium |       |      | Ratio |  
|                                |        |         |         |           |       |  |       |         |   |   |         |         |  |         |       |      |       |  
|Group life, accident and health |        | $       | 343,913 |           |       |  | 66.7  | %       |   | $ | 290,009 |         |  |         | 61.6  | %    |       | $ | 240,070 |         |  |  | 62.2  | %   
|Diversified financial products  |        |         | 310,809 |           |       |  | 47.6  |         |   |   | 123,562 |         |  |         | 47.8  |      |       |   | 23,102  |         |  |  | 46.4  |     
|London market account           |        |         | 111,341 |           |       |  | 65.9  |         |   |   | 137,572 |         |  |         | 53.2  |      |       |   | 89,260  |         |  |  | 51.5  |     
|Aviation                        |        |         | 127,248 |           |       |  | 63.2  |         |   |   | 97,536  |         |  |         | 61.5  |      |       |   | 100,960 |         |  |  | 46.3  |     
|Other specialty lines           |        |         | 69,089  |           |       |  | 63.5  |         |   |   | 12,443  |         |  |         | 62.1  |      |       |   |        |         |  |  |      |     
|                                |        |         |         |           |       |  |       |         |   |   |         |         |  |         |       |      |       |  
|                                |        |         | 962,400 |           |       |  | 59.8  |         |   |   | 661,122 |         |  |         | 57.3  |      |       |   | 453,392 |         |  |  | 55.7  |     
|Discontinued lines              |        |         | 48,292  |           |       |  | 145.2 |         |   |   | 77,150  |         |  |         | 142.6 |      |       |   | 52,129  |         |  |  | 103.3 |     
|                                |        |         |         |           |       |  |       |         |   |   |         |         |  |         |       |      |       |  
|                                | Totals |         | $       | 1,010,692 |       |  |       | 63.8    | % |   | $       | 738,272 |  |         |       | 66.2 | %     |   | $       | 505,521 |  |  |       | 60.6 | %
|                                |        |         |         |           |       |  |       |         |   |   |         |         |  |         |       |      |       |  
|Expense ratio                   |        |         |         |           |       |  | 26.9  |         |   |   |         |         |  |         | 24.8  |      |       |   |         |         |  |  | 25.4  |     
|                                |        |         |         |           |       |  |       |         |   |   |         |         |  |         |       |      |       |  
|Combined ratio                  |        |         |         |           |       |  | 90.7  | %       |   |   |         |         |  |         | 91.0  | %    |       |   |         |         |  |  | 86.0  | %   
|                                |        |         |         |           |       |  |       |         |   |   |         |         |  |         |       |      |       |  





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Group life, accident and health  The 2004 net
    loss ratio was higher than 2003 due to the increase in premium
    rates on recent business written being slightly lower than the
    trend in medical costs, as a result of increased pricing
    competition. However, underwriting margins in this line of
    business remain very acceptable.                                                                        
|
| |  | Diversified financial products  The surety business
    of American Contractors Indemnity Company, acquired in January
    2004, has a significantly lower loss ratio compared to our other
    products in this line. As surety business increases, it will
    have more impact on the diversified financial products net loss
    ratio. Loss ratios on the other business written in this line
    remained very stable.
|
| |  | London market account  In 2004, the hurricanes
    increased the loss ratio 14.1%. Otherwise, loss ratios improved
    in 2004 because we have been more selective in our underwriting
    and have moved to higher layer excess of loss business where
    there is less loss frequency.                                                                                                                                   
|
| |  | Aviation  The hurricanes increased the loss ratio
    6.5% for 2004. Otherwise, underwriting results have generally
    been better in 2004 than in 2003. The low loss ratio in 2002 was
    due to unusually good loss experience in that year.                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Other specialty lines  The non-catastrophe loss ratio
    was as expected for new business activities commenced during the
    past year. The hurricanes increased the net loss ratio 6.5% for
    2004.                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Discontinued lines  All periods have been affected by
    reserve additions resulting from our ongoing review of
    outstanding claims and additional information received. The 2004
    loss ratio was impacted by losses of $27.3 million on
    certain accident and health business. As a result of adverse
    development in our discontinued line of business, we
    strengthened our reserves on this line to bring them above our
    actuarial point estimate. The 2003 loss ratio was impacted by
    the $28.8 million commutation loss, and the 2002 loss ratio
    was increased due to a $7.7 million reserve charge.







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



Liquidity and Capital Resources






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|                                                                                                            |                                       |      |         |         |      |   |         |         |  |   |         |         | 
|----------------------------------------------------------------------------------------------------------- | ------------------------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                                                            |                                       | 2004 |         |         | 2003 |   |         | 2002    | 
|                                                                                                            |                                       |      |         |         |      |   |         |         | 
|Net earnings                                                                                                |                                       | $    | 163,025 |         |      | $ | 143,561 |         |  | $ | 105,828 |        
|Change in premium, claims and other receivables, net of
    reinsurance, other payables and restricted cash |                                       |      | 2,390   |         |      |   | (26,118 | )       |  |   | (46,697 | )      
|Change in unearned premium, net                                                                             |                                       |      | 99,813  |         |      |   | 133,894 |         |  |   | 33,871  |        
|Change in loss and loss adjustment expense payable, net of
    reinsurance recoverables                     |                                       |      | 360,280 |         |      |   | 262,742 |         |  |   | 46,123  |        
|Gain on sale of subsidiary                                                                                  |                                       |      | (6,317  | )       |      |   | (52,681 | )       |  |   |        |        
|Other, net                                                                                                  |                                       |      | 49,512  |         |      |   | 66,700  |         |  |   | 35,997  |        
|                                                                                                            |                                       |      |         |         |      |   |         |         | 
|                                                                                                            | Cash provided by operating activities |      | $       | 668,703 |      |   | $       | 528,098 |  |   | $       | 175,122 | 
|                                                                                                            |                                       |      |         |         |      |   |         |         | 







|                             |  |           |  |           |  |          
|---------------------------- |  | --------- |  | --------- |  | ---------
|                             |  | 2004      |  | 2003      |  | 2002     
|                             |  |           |  |           |  |          
|Average yield                |  | 3.9%      |  | 4.2%      |  | 4.8%     
|Average tax equivalent yield |  | 4.8%      |  | 5.0%      |  | 5.4%     
|Weighted average maturity    |  | 6.6 years |  | 4.5 years |  | 4.2 years
|Weighted average duration    |  | 4.6 years |  | 3.7 years |  | 3.5 years
|Average S&P rating           |  | AAA       |  | AA+       |  | AA+      

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|                                                                            |                               |       |           |                                     |      |   |         |           |  |   |           |        |  |            |         |        |  |   |           |         | 
|--------------------------------------------------------------------------- | ----------------------------- | ----- | --------- | ----------------------------------- | ---- | - | ------- | --------- |  | - | --------- | ------ |  | ---------- | ------- | ------ |  | - | --------- | ------- | 
|                                                                            |                               |       |           | Maturities/ Estimated Payment Dates |     
|                                                                            |                               |       |           |                                     |     
|                                                                            |                               | Total |           |                                     | 2005 |   |         | 2006-2007 |  |   | 2008-2009 |        |  | Thereafter |        
|                                                                            |                               |       |           |                                     |      |   |         |           |  |   |           |        |  |            |        
|Cash and investment maturities of insurance companies                       |                               | $     | 2,127,272 |                                     |      | $ | 510,234 |           |  | $ | 350,450   |        |  | $          | 257,341 |        |  | $ | 1,009,247 |        
|Estimated loss and loss adjustment expense payments, net of
    reinsurance |                               |       | 1,059,283 |                                     |      |   | 420,539 |           |  |   | 338,338   |        |  |            | 184,511 |        |  |   | 115,895   |        
|                                                                            |                               |       |           |                                     |      |   |         |           |  |   |           |        |  |            |        
|                                                                            | Estimated available cash flow |       | $         | 1,067,989                           |      |   | $       | 89,695    |  |   | $         | 12,112 |  |            | $       | 72,830 |  |   | $         | 893,352 | 
|                                                                            |                               |       |           |                                     |      |   |         |           |  |   |           |        |  |            |        







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|                                                  |                                 |                                                |         |                         |           |  |        |           |         |  |           |         |         |            |         |         |         |  |        |         |         | 
|------------------------------------------------- | ------------------------------- | ---------------------------------------------- | ------- | ----------------------- | --------- |  | ------ | --------- | ------- |  | --------- | ------- | ------- | ---------- | ------- | ------- | ------- |  | ------ | ------- | ------- | 
|                                                  |                                 |                                                |         | Estimated Payment Dates |          
|                                                  |                                 |                                                |         |                         |          
|                                                  |                                 | Total                                          |         |                         | 2005      |  |        | 2006-2007 |         |  | 2008-2009 |         |         | Thereafter |        
|                                                  |                                 |                                                |         |                         |           |  |        |           |         |  |           |         |         |            |        
|Gross loss and loss adjustment expense payable(1) |                                 |                                                |         |                         |           |  |        |           |         |  |           |         |         |            |         |         |         |  |        |        
|                                                  | Group life, accident and health |                                                | $       | 219,369                 |           |  | $      | 189,795   |         |  | $         | 19,427  |         |            | $       | 5,187   |         |  | $      | 4,960   |        
|                                                  | Diversified financial products  |                                                |         | 612,243                 |           |  |        | 109,225   |         |  |           | 232,292 |         |            |         | 175,294 |         |  |        | 95,432  |        
|                                                  | London market account           |                                                |         | 281,115                 |           |  |        | 152,964   |         |  |           | 116,517 |         |            |         | 10,324  |         |  |        | 1,310   |        
|                                                  | Aviation                        |                                                |         | 163,446                 |           |  |        | 87,612    |         |  |           | 58,550  |         |            |         | 14,583  |         |  |        | 2,701   |        
|                                                  | Other specialty lines           |                                                |         | 88,923                  |           |  |        | 38,082    |         |  |           | 38,091  |         |            |         | 9,688   |         |  |        | 3,062   |        
|                                                  | Discontinued lines              |                                                |         | 724,103                 |           |  |        | 150,261   |         |  |           | 213,777 |         |            |         | 190,740 |         |  |        | 169,325 |        
|                                                  |                                 |                                                |         |                         |           |  |        |           |         |  |           |         |         |            |        
|                                                  |                                 | Total loss and loss adjustment expense payable |         |                         | 2,089,199 |  |        |           | 727,939 |  |           |         | 678,654 |            |         |         | 405,816 |  |        |         | 276,790 | 
|Life and annuity policy benefits                  |                                 |                                                | 74,627  |                         |           |  | 2,764  |           |         |  | 5,224     |         |         |            | 4,843   |         |         |  | 61,796 |        
|1.30% Convertible Notes(2)(3)                     |                                 |                                                | 132,313 |                         |           |  | 1,625  |           |         |  | 3,250     |         |         |            | 127,438 |         |         |  |       |        
|2.00% Convertible Exchange Notes(2)(3)            |                                 |                                                | 182,789 |                         |           |  | 3,449  |           |         |  | 179,340   |         |         |            |        |         |         |  |       |        
|Other notes payable(2)                            |                                 |                                                | 15,946  |                         |           |  | 12,821 |           |         |  | 488       |         |         |            | 488     |         |         |  | 2,149  |        
|$200.0 million Revolving Loan Facility            |                                 |                                                |        |                         |           |  |       |           |         |  |          |         |         |            |        |         |         |  |       |        
|Operating leases                                  |                                 |                                                | 36,860  |                         |           |  | 8,822  |           |         |  | 14,176    |         |         |            | 8,977   |         |         |  | 4,885  |        
|                                                  |                                 |                                                |         |                         |           |  |        |           |         |  |           |         |         |            |        
|                                                  |                                 | Total obligations                              |         | $                       | 2,531,734 |  |        | $         | 757,420 |  |           | $       | 881,132 |            |         | $       | 547,562 |  |        | $       | 345,620 | 
|                                                  |                                 |                                                |         |                         |           |  |        |           |         |  |           |         |         |            |        



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 period will be relatively
    consistent over time. The actual payments will be influenced by
    many factors and could vary from the estimated amounts above.                                                                                                                                                                                     
|   
|(2) | Amounts include interest payable in respective periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(3) | The 1.30% Convertible Notes mature in 2023, but are shown
    in the 2008-2009 column because of a put option on April 1,
    2009. The 2.00% Convertible Exchange Notes mature in 2021,
    but are shown in the 2006-2007 column because of a put option on
    September 1, 2007. Both convertible notes have various put
    and redemption dates as disclosed in Note 5 to the
    Consolidated Financial Statements. In this table, we have
    included interest on these notes until the respective put dates.





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Impact of Inflation




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Foreign Exchange Rate Fluctuations




Critical Accounting Policies






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







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|                                |  |                                    |  |                         |  |                        |        |          |           |  |          |            |  |  |                             |  |  |                                                             
|------------------------------- |  | ---------------------------------- |  | ----------------------- |  | ---------------------- | ------ | -------- | --------- |  | -------- | ---------- |  |  | --------------------------- |  |  | ------------------------------------------------------------
|                                |  |                                    |  |                         |  | Claims Characteristics |        |          |           |  |         
|                                |  |                                    |  |                         |  |                        |        |          |           |  |         
|                                |  |                                    |  |                         |  |                        |        | Speed of |           |  |          |            | 
|                                |  |                                    |  |                         |  |                        |        | Loss     |           |  | Reserve  |            |  | 
|Line of Business                |  | Products                           |  | Underwriting            |  | Duration               |        |          | Reporting |  |          | Volatility |  |  | Major Actuarial Assumptions
|                                |  |                                    |  |                         |  |                        |        |          |           |  |          |            |  |  |                            
|Group life, accident and health |  | Medical stop-loss                  |  | Direct                  |  |                        | Short  |          |           |  | Fast     |            |  |  | Low                         |  |  | Medical cost and utilization trends.                        
|                               
|                                |  |                                    |  |                         |  |                        |        |          |           |  |          |            |  |  |                             |  |  | Historical loss payment and reporting patterns.             
|                               
|                                |  |                                    |  |                         |  |                        |        |          |           |  |          |            |  |  |                             |  |  | Rate changes.                                               
|                               
|Diversified financial products  |  | Directors and officers liability |  | Direct                  |  |                        | Medium |          |           |  | Moderate |            |  |  | Medium                      |  |  | Industry loss reporting patterns.                           
|                               
|                                |  | Errors and omissions               |  | Direct                  |  |                        | Medium |          |           |  | Moderate |            |  |  | Low                         |  |  | Historical loss reporting patterns.                         
|                               
|                                |  | Surety                             |  | Direct                  |  |                        | Medium |          |           |  | Fast     |            |  |  | Low                         |  |  | Historical loss payment and reporting patterns.             
|                               
|London market account           |  | Accident and health                |  | Direct and assumed      |  |                        | Medium |          |           |  | 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.                           
|                               
|Aviation                        |  | Aviation                           |  | Direct and subscription |  |                        | Medium |          |           |  | Fast     |            |  |  | Medium                      |  |  | Historical loss payment and reporting patterns.             
|                               
|                                |  |                                    |  |                         |  |                        |        |          |           |  |          |            |  |  |                             |  |  | Rate changes.                                               
|                               
|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.





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|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |         |  |   |           |         |  | 
|----------------------------- | ------------------------------- | ------------------ | --------- | ------- | -------------- | - | --------- | --------------- |  | - | --------------- | ------- |  | - | --------- | ------- |  | 
|                              |                                 | Recorded           |           |         | Actuarial      |   |           | Low End of      |  |   | High End of     |        
|                              |                                 | Net Reserves       |           |         | Point Estimate |   |           | Actuarial Range |  |   | Actuarial Range |        
|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |        
|Total net reserves            |                                 | $                  | 1,059,283 |         |                | $ | 1,027,826 |                 |  | $ | 972,991         |         |  | $ | 1,114,280 |        
|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |        
|Individual lines of business: |                                 |                    |           |         |                |   |           |                 |  |   |                 |         |  |   |           |        
|                              | Group life, accident and health |                    | $         | 158,003 |                |   | $         | 159,248         |  |   | $               | 144,830 |  |   | $         | 175,113 | 
|                              | Diversified financial products  |                    |           | 289,538 |                |   |           | 286,654         |  |   |                 | 251,841 |  |   |           | 334,711 | 
|                              | London market account           |                    |           | 143,776 |                |   |           | 135,067         |  |   |                 | 128,182 |  |   |           | 154,798 | 
|                              | Aviation                        |                    |           | 91,028  |                |   |           | 86,008          |  |   |                 | 79,857  |  |   |           | 93,825  | 
|                              | Other specialty lines           |                    |           | 45,644  |                |   |           | 43,807          |  |   |                 | 41,616  |  |   |           | 48,443  | 
|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |        
|                              |                                 |                    | 727,989   |         |                |   |           |                 |  |   |                 |         |  |   |           |        
|                              | Discontinued lines              |                    |           | 331,294 |                |   |           | 317,042         |  |   |                 | 284,304 |  |   |           | 374,242 | 
|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |        
|                              |                                 | Total net reserves |           | $       | 1,059,283      |   |           |                 |  |   |                 |         |  |   |           |         |  | 
|                              |                                 |                    |           |         |                |   |           |                 |  |   |                 |        





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|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |    |    |  
|----------------------------------- | ----------------------------------------------------- | ---------------------------------------------- | - | ------- | --------- |  | - | --------- | --------- |  | -------- | ------- | --------- |  |  | -- | -- | -
|                                    |                                                       |                                                |   |         |           |  |   | % Net     |          
|                                    |                                                       |                                                |   |         |           |  |   | IBNR to   |          
|                                    |                                                       |                                                |   |         |           |  |   | Net Total |          
|                                    |                                                       | Gross                                          |   |         | Ceded     |  |   | Net       |           |  | Reserves |        
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|At December 31, 2004                |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|Reported loss reserves:             |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|                                    | Group life, accident and health                       |                                                | $ | 128,973 |           |  | $ | 31,235    |           |  | $        | 97,738  |           |  |  |    |   
|                                    | Diversified financial products                        |                                                |   | 149,448 |           |  |   | 64,852    |           |  |          | 84,596  |           |  |  |    |   
|                                    | London market account                                 |                                                |   | 182,585 |           |  |   | 106,249   |           |  |          | 76,336  |           |  |  |    |   
|                                    | Aviation                                              |                                                |   | 108,277 |           |  |   | 48,301    |           |  |          | 59,976  |           |  |  |    |   
|                                    | Other specialty lines                                 |                                                |   | 26,717  |           |  |   | 14,349    |           |  |          | 12,368  |           |  |  |    |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Subtotal reported reserves                     |   |         | 596,000   |  |   |           | 264,986   |  |          |         | 331,014   |  |  |    |    |  
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|Incurred but not reported reserves: |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|                                    | Group life, accident and health                       |                                                |   | 90,396  |           |  |   | 30,131    |           |  |          | 60,265  |           |  |  | 38 | % 
|                                    | Diversified financial products                        |                                                |   | 462,795 |           |  |   | 257,853   |           |  |          | 204,942 |           |  |  | 71 |   
|                                    | London market account                                 |                                                |   | 98,530  |           |  |   | 31,090    |           |  |          | 67,440  |           |  |  | 47 |   
|                                    | Aviation                                              |                                                |   | 55,169  |           |  |   | 24,117    |           |  |          | 31,052  |           |  |  | 34 |   
|                                    | 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 | %
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|At December 31, 2003                |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|Reported loss reserves:             |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|                                    | Group life, accident and health                       |                                                | $ | 131,245 |           |  | $ | 64,935    |           |  | $        | 66,310  |           |  |  |    |   
|                                    | Diversified financial products                        |                                                |   | 31,088  |           |  |   | 20,537    |           |  |          | 10,551  |           |  |  |    |   
|                                    | London market account                                 |                                                |   | 148,631 |           |  |   | 95,797    |           |  |          | 52,834  |           |  |  |    |   
|                                    | Aviation                                              |                                                |   | 111,397 |           |  |   | 54,939    |           |  |          | 56,458  |           |  |  |    |   
|                                    | Other specialty lines                                 |                                                |   | 6,129   |           |  |   | 5,069     |           |  |          | 1,060   |           |  |  |    |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Subtotal reported reserves                     |   |         | 428,490   |  |   |           | 241,277   |  |          |         | 187,213   |  |  |    |    |  
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|Incurred but not reported reserves: |                                                       |                                                |   |         |           |  |   |           |           |  |          |         |           |  |  |   
|                                    | Group life, accident and health                       |                                                |   | 81,408  |           |  |   | 41,674    |           |  |          | 39,734  |           |  |  | 37 | % 
|                                    | Diversified financial products                        |                                                |   | 216,840 |           |  |   | 135,023   |           |  |          | 81,817  |           |  |  | 89 |   
|                                    | London market account                                 |                                                |   | 107,721 |           |  |   | 41,026    |           |  |          | 66,695  |           |  |  | 56 |   
|                                    | Aviation                                              |                                                |   | 47,734  |           |  |   | 24,047    |           |  |          | 23,687  |           |  |  | 30 |   
|                                    | Other specialty lines                                 |                                                |   | 12,752  |           |  |   | 6,585     |           |  |          | 6,167   |           |  |  | 85 |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Subtotal incurred but not reported reserves    |   |         | 466,455   |  |   |           | 248,355   |  |          |         | 218,100   |  |  |    | 54 |  
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    | Discontinued lines reported reserves                  |                                                |   | 293,489 |           |  |   | 184,332   |           |  |          | 109,157 |           |  |  |    |   
|                                    | Discontinued lines incurred but not reported reserves |                                                |   | 346,854 |           |  |   | 156,124   |           |  |          | 190,730 |           |  |  | 64 |   
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        
|                                    |                                                       | Total loss and loss adjustment expense payable |   | $       | 1,535,288 |  |   | $         | 830,088   |  |          | $       | 705,200   |  |  |    | 58 | %
|                                    |                                                       |                                                |   |         |           |  |   |           |           |  |          |        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Total reserves in our diversified financial products line of
    business increased $197.2 million from 2003 to 2004 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 are higher than in most of our other lines, since these
    losses report slower and have a longer duration.                                                                                               
|
| |  | Total reserves in our London market account increased
    $24.0 million and the percentage of incurred but not
    reported reserves declined from 2003 to 2004, due to reported
    claims for the hurricanes.                                                                                                                                                                                                                                                                              
|
| |  | Total net reserves for our discontinued lines, which primarily
    include accident and health business, increased
    $31.4 million in 2004. The percentage of net incurred but
    not reported reserves to total reserves for discontinued lines
    decreased to 36% as claims continued to be reported. As a result
    of adverse development in our discontinued line of business, we
    strengthened our reserves on this line to bring them above our
    actuarial point estimate.



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







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



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

Using Cash Flow
Information And Present Values In Accounting Measurements.




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





|                                                                 |                               |                     |         |         |                   |   |        |        |   |   |            |        |  |       |      |        |            |   |         |         |  |   |        |        |  
|---------------------------------------------------------------- | ----------------------------- | ------------------- | ------- | ------- | ----------------- | - | ------ | ------ | - | - | ---------- | ------ |  | ----- | ---- | ------ | ---------- | - | ------- | ------- |  | - | ------ | ------ | -
|                                                                 |                               | Less than 12 Months |         |         | 12 Months or More |   |        | Total  |  
|                                                                 |                               |                     |         |         |                   |   |        |        |  
|                                                                 |                               | Fair                |         |         | Unrealized        |   |        | Fair   |   |   | Unrealized |        |  | Fair  |      |        | Unrealized |  
|                                                                 |                               | Value               |         |         | Losses            |   |        | Value  |   |   | Losses     |        |  | Value |      |        | Losses     |  
|                                                                 |                               |                     |         |         |                   |   |        |        |   |   |            |        |  |       |      |        |            |  
|U.S. Treasury securities                                         |                               | $                   | 52,473  |         |                   | $ | (197   | )      |   | $ | 489        |        |  | $     | (17  | )      |            | $ | 52,962  |         |  | $ | (214   | )     
|Obligations of 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 fixed income securities |                     | $       | 554,193 |                   |   | $      | (3,767 | ) |   | $          | 65,053 |  |       | $    | (1,364 | )          |   | $       | 619,246 |  |   | $      | (5,131 | )
|                                                                 |                               |                     |         |         |                   |   |        |        |   |   |            |        |  |       |      |        |            |  

Recent Accounting Pronouncements


Share-Based Payment


The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments. Accounting
for Certain Investments in Debt and Equity Securities


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







| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | amounts and balances on which the estimates are based are likely
    to change over time;
|
| |  | assumptions used in the models may prove to be inaccurate;                               
|
| |  | market changes could be different from market changes assumed
    below; and             
|
| |  | not all factors and balances are taken into account.                                     



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





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



|                       |  |             |       |              |               |   |     |             |              |   |               |  |  |   |     | 
|---------------------- |  | ----------- | ----- | ------------ | ------------- | - | --- | ----------- | ------------ | - | ------------- |  |  | - | --- | 
|                       |  | December 31 |      
|                       |  |             |      
|                       |  | 2004        |       |              | 2003          |  
|                       |  |             |       |              |               |  
|                       |  |             |       | Hypothetical |               |   |     |             | Hypothetical |  
|                       |  | U.S. Dollar |       |              | 10% Change in |   |     | U.S. Dollar |              |   | 10% Change in | 
|                       |  | Equivalent  |       |              | Fair Value    |   |     | Equivalent  |              |   | Fair Value    | 
|                       |  |             |       |              |               |   |     |             |              |   |               | 
|British pound sterling |  | $           | 6,163 |              |               | $ | 616 |             |              | $ | 182           |  |  | $ | 18  | 
|Canadian dollar        |  |             | 2,537 |              |               |   | 254 |             |              |   | 1,778         |  |  |   | 178 | 
|Euro                   |  |             | 2,117 |              |               |   | 212 |             |              |   | 5,580         |  |  |   | 558 | 








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




Managements Report on Internal Control over
Financial Reporting.




Changes in Internal Control over Financial
Reporting.




61



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##### Table of Contents








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






PART III







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

Code of Business Conduct and Ethics


www.hcch.com









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



62



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##### Table of Contents






PART IV







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



| |     |                              
| | --- | -----------------------------
| | (a) | Financial Statement Schedules





| |     |         
| | --- | --------
| | (b) | Exhibits



63



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##### Table of Contents






SIGNATURES






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

|                      |  |                                                                                                    
|--------------------- |  | ---------------------------------------------------------------------------------------------------
|Dated: March 15, 2005 |  | By: /s/ Stephen L.
    Way(Stephen
    L. Way)Chairman of the Board
    and Chief Executive Officer



|                                                          |  |                                                                                                                 |  |                |  |               
|--------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | -------------- |  | --------------
|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, 2005
|                                                         
|/s/ Frank J. Bramanti*(Frank
    J. Bramanti)             |  | Director                                                                                                        |  | March 15, 2005
|                                                         
|/s/ Patrick B. Collins*(Patrick
    B. Collins)           |  | Director                                                                                                        |  | March 15, 2005
|                                                         
|/s/ James R. Crane*(James
    R. Crane)                   |  | Director                                                                                                        |  | March 15, 2005
|                                                         
|/s/ J. Robert
    Dickerson*(J.
    Robert Dickerson)     |  | Director                                                                                                        |  | March 15, 2005
|                                                         
|/s/ Walter M. Duer*(Walter
    M. Duer)                   |  | Director                                                                                                        |  | March 15, 2005
|                                                         
|/s/ Edward H. Ellis,
    Jr.(Edward
    H. Ellis, Jr.)    |  | Director, Executive Vice President and Chief Financial
    Officer
    (Chief Accounting Officer)               |  | March 15, 2005
|                                                         
|/s/ James C. Flagg,
    Ph.D.*(James
    C. Flagg, Ph.D.) |  | Director                                                                                                        |  | March 15, 2005
|                                                         
|/s/ Allan W. Fulkerson*(Allan
    W. Fulkerson)           |  | Director                                                                                                        |  | March 15, 2005
|                                                         
|/s/ Walter J. Lack*(Walter
    J. Lack)                   |  | Director                                                                                                        |  | March 15, 2005
|                                                         
|/s/ Michael A. F.
    Roberts*(Michael
    A. F. Roberts) |  | Director                                                                                                        |  | March 15, 2005
|                                                         
|*By:                                                      |  | /s/ Stephen L. WayStephen
    L. Way,Attorney-in-fact                                                           |  |                |  | March 15, 2005

64



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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  |  |  |  | Bylaws of HCC Insurance Holdings, Inc., as amended.                                                                                                                                                                                                                     
|        | B3  | .2  |  |  |  | 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.                                            
|        | A4  | .1  |  |  |  | Specimen of Common Stock Certificate, $1.00 par value, of
    HCC Insurance Holdings, Inc.                                                                                                                                                                              
|        | C10 | .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.
|        | F10 | .2  |  |  |  | HCC Insurance Holdings, Inc. 1994 Nonemployee Director Stock
    Option Plan.                                                                                                                                                                                           
|        | G10 | .3  |  |  |  | HCC Insurance Holdings, Inc. 1992 Incentive Stock Option Plan,
    as amended and restated.                                                                                                                                                                             
|        | G10 | .4  |  |  |  | HCC Insurance Holdings, Inc. 1995 Flexible Incentive Plan, as
    amended and restated.                                                                                                                                                                                 
|        | G10 | .5  |  |  |  | HCC Insurance Holdings, Inc. 1997 Flexible Incentive Plan, as
    amended and restated.                                                                                                                                                                                 
|        | G10 | .6  |  |  |  | HCC Insurance Holdings, Inc. 1996 Nonemployee Director Stock
    Option Plan, as amended and restated.                                                                                                                                                                  
|        | H10 | .7  |  |  |  | HCC Insurance Holdings, Inc. 2001 Flexible Incentive Plan, as
    amended and restated.                                                                                                                                                                                 
|        | E10 | .8  |  |  |  | Form of Incentive Stock Option Agreement under the HCC Insurance
    Holdings, Inc. 2001 Flexible Incentive Plan.                                                                                                                                                       
|        | 10  | .9  |  |  |  | Amended and Restated Employment Agreement effective at
    November 10, 2004, between HCC Insurance Holdings, Inc. and
    Stephen L. Way.                                                                                                                              
|        | I10 | .10 |  |  |  | HCC Insurance Holdings, Inc. nonqualified deferred compensation
    plan for Stephen L. Way effective January 1, 2003.                                                                                                                                                  
|        | E10 | .11 |  |  |  | Employment Agreement effective at January 10, 2002, between
    HCC Insurance Holdings, Inc. and Craig J. Kelbel.                                                                                                                                                       
|        | E10 | .12 |  |  |  | Employment Agreement effective at June 3, 2002, between HCC
    Insurance Holdings, Inc. and Michael J. Schell.                                                                                                                                                         
|        | D10 | .13 |  |  |  | Employment Agreement effective at January 1, 2002, between
    HCC Insurance Holdings, Inc. and Edward H. Ellis, Jr.                                                                                                                                                    
|        | E10 | .14 |  |  |  | Employment Agreement effective at January 1, 2003 between
    HCC Insurance Holdings, Inc. and Christopher L. Martin.                                                                                                                                                   
|        | J10 | .15 |  |  |  | HCC Insurance Holdings, Inc. 2004 Flexible Incentive Plan.                                                                                                                                                                                                              
|        | 10  | .16 |  |  |  | Form of Incentive Stock Option Agreement under the HCC Insurance
    Holdings, Inc. 2004 Incentive Plan.                                                                                                                                                                
|        | K10 | .17 |  |  |  | Indenture dated August 23, 2001 between HCC Insurance
    Holdings, Inc. and First Union National Bank related to Debt
    Securities (Senior Debt).                                                                                                                    
|        | K10 | .18 |  |  |  | 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.                                                                                              
|        | L10 | .19 |  |  |  | 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.                                    
|        | M10 | .19 |  |  |  | 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.                                                          

65



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##### Table of Contents



|        |    |     |  |   |  |                                                                                                                                                                                       
|------- | -- | --- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |   | 
|Number  |    |     |  |   | 
|        |    |     |  |   | 
|        | 10 | .20 |  |  |  | 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.
|        | 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.                                                                                                                                          
|        | 23 |     |  |  |  | Consent of Independent Registered Public Accounting
    Firm  PricewaterhouseCoopers LLP dated March 15,
    2005.                                                                   
|        | 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-1
    (Registration No. 33-48737) filed October 27, 1992.                  
| 
|B |  | 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.                  
| 
|C |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 8-K filed December 1, 2004.                                                                            
| 
|D |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 10-K for the fiscal year ended
    December 31, 2001.                                                  
| 
|E |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 10-K for the fiscal year ended
    December 31, 2002.                                                  
| 
|F |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Registration Statement on Form S-8
    (Registration No. 33-94472) filed July 11, 1995.                     
| 
|G |  | Incorporated by reference to Exhibits to HCC Insurance Holdings,
    Inc.s Form 10-K for the fiscal year ended
    December 31, 1999.                                                      
| 
|H |  | 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.
| 
|I |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 10-K for the fiscal year ended
    December 31, 2003.                                                  
| 
|J |  | 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.
| 
|K |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 8-K dated August 19, 2001.                                                                             
| 
|L |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 8-K dated March 25, 2003.                                                                              
| 
|M |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 8-K dated December 22, 2004.                                                                           

66



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##### Table of Contents



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, 2004 and 2003                                                  |  |  | F-5  | 
|Consolidated Statements of Earnings for the
    three years ended December 31, 2004                            |  |  | F-6  | 
|Consolidated Statements of Comprehensive
    Income for the three years ended December 31, 2004                |  |  | F-7  | 
|Consolidated Statements of Changes in
    Shareholders Equity for the three years ended
    December 31, 2004 |  |  | F-8  | 
|Consolidated Statements of Cash Flows for
    the three years ended December 31, 2004                          |  |  | 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  | 



67



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##### Table of Contents






REPORT OF MANAGEMENT


Managements Responsibility for Financial Reporting




Managements Report on Internal Control over Financial
Reporting






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



F-2



---



##### 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



---



##### Table of Contents











| |                                   
| | ----------------------------------
| | /s/ PricewaterhouseCoopers
    LLP





F-4



---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(in thousands, except per share data)


|                                                                                                                                     |                                                                                     |                                            |           |           |           |   |           |           |           | 
|------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------- | ------------------------------------------ | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                                                                                                                     |                                                                                     | December 31,                               |          
|                                                                                                                                     |                                                                                     |                                            |          
|                                                                                                                                     |                                                                                     | 2004                                       |           |           | 2003      |  
|                                                                                                                                     |                                                                                     |                                            |           |           |           |  
|ASSETS                                                                                                                              
|Investments:                                                                                                                         |                                                                                     |                                            |           |           |           |   |           |          
|                                                                                                                                     | Fixed income securities, at market (cost: 2004 
    $1,682,421; 2003  $1,134,128) |                                            | $         | 1,703,171 |           |   | $         | 1,164,166 |          
|                                                                                                                                     | Short-term investments, at cost, which approximates market                          |                                            |           | 729,985   |           |   |           | 518,482   |          
|                                                                                                                                     | Other investments, at market (cost: 2004  $34,137;
    2003  $24,535)             |                                            |           | 35,335    |           |   |           | 24,652    |          
|                                                                                                                                     |                                                                                     |                                            |           |           |           |  
|                                                                                                                                     |                                                                                     | Total investments                          |           |           | 2,468,491 |   |           |           | 1,707,300 | 
|Cash                                                                                                                                 |                                                                                     |                                            | 69,933    |           |           |   | 96,416    |          
|Restricted cash and cash investments                                                                                                 |                                                                                     |                                            | 188,510   |           |           |   | 210,301   |          
|Premium, claims and other receivables                                                                                                |                                                                                     |                                            | 923,638   |           |           |   | 909,941   |          
|Reinsurance recoverables                                                                                                             |                                                                                     |                                            | 1,098,999 |           |           |   | 916,190   |          
|Ceded unearned premium                                                                                                               |                                                                                     |                                            | 317,055   |           |           |   | 291,591   |          
|Ceded life and annuity benefits                                                                                                      |                                                                                     |                                            | 74,627    |           |           |   | 77,548    |          
|Deferred policy acquisition costs                                                                                                    |                                                                                     |                                            | 139,199   |           |           |   | 106,943   |          
|Goodwill                                                                                                                             |                                                                                     |                                            | 444,031   |           |           |   | 386,507   |          
|Other assets                                                                                                                         |                                                                                     |                                            | 208,954   |           |           |   | 172,469   |          
|                                                                                                                                     |                                                                                     |                                            |           |           |           |  
|                                                                                                                                     |                                                                                     | Total assets                               |           | $         | 5,933,437 |   |           | $         | 4,875,206 | 
|                                                                                                                                     |                                                                                     |                                            |           |           |           |  
|LIABILITIES                                                                                                                         
|Loss and loss adjustment expense payable                                                                                             |                                                                                     | $                                          | 2,089,199 |           |           | $ | 1,535,288 |          
|Life and annuity policy benefits                                                                                                     |                                                                                     |                                            | 74,627    |           |           |   | 77,548    |          
|Reinsurance balances payable                                                                                                         |                                                                                     |                                            | 228,998   |           |           |   | 296,916   |          
|Unearned premium                                                                                                                     |                                                                                     |                                            | 741,706   |           |           |   | 592,311   |          
|Deferred ceding commissions                                                                                                          |                                                                                     |                                            | 94,896    |           |           |   | 88,129    |          
|Premium and claims payable                                                                                                           |                                                                                     |                                            | 795,576   |           |           |   | 756,469   |          
|Notes payable                                                                                                                        |                                                                                     |                                            | 311,277   |           |           |   | 310,404   |          
|Accounts payable and accrued liabilities                                                                                             |                                                                                     |                                            | 273,493   |           |           |   | 171,221   |          
|                                                                                                                                     |                                                                                     |                                            |           |           |           |  
|                                                                                                                                     |                                                                                     | Total liabilities                          |           |           | 4,609,772 |   |           |           | 3,828,286 | 
|SHAREHOLDERS EQUITY                                                                                                                
|Common stock, $1.00 par value; 250.0 million shares
    authorized (shares issued and outstanding: 2004 
    68,038; 2003  63,964) |                                                                                     |                                            | 68,038    |           |           |   | 63,964    |          
|Additional paid-in capital                                                                                                           |                                                                                     |                                            | 566,776   |           |           |   | 447,671   |          
|Retained earnings                                                                                                                    |                                                                                     |                                            | 651,216   |           |           |   | 509,159   |          
|Accumulated other comprehensive income                                                                                               |                                                                                     |                                            | 37,635    |           |           |   | 26,126    |          
|                                                                                                                                     |                                                                                     |                                            |           |           |           |  
|                                                                                                                                     |                                                                                     | Total shareholders equity                 |           |           | 1,323,665 |   |           |           | 1,046,920 | 
|                                                                                                                                     |                                                                                     |                                            |           |           |           |  
|                                                                                                                                     |                                                                                     | Total liabilities and shareholders equity |           | $         | 5,933,437 |   |           | $         | 4,875,206 | 
|                                                                                                                                     |                                                                                     |                                            |           |           |           |  



F-5



---



##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF EARNINGS


(in thousands, except per share data)


|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |         |   |         |         |         | 
|--------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | --------- | ------- | --------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                              |                                                                                                                      | Years Ended December 31,                                      |          
|                                              |                                                                                                                      |                                                               |          
|                                              |                                                                                                                      | 2004                                                          |           |         | 2003      |   |         | 2002    |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|REVENUE                                       |                                                                                                                      |                                                               |           |         |           |   |         |         |         |   |         |        
|Net earned premium                            |                                                                                                                      | $                                                             | 1,010,692 |         |           | $ | 738,272 |         |         | $ | 505,521 |        
|Fee and commission income                     |                                                                                                                      |                                                               | 182,349   |         |           |   | 142,615 |         |         |   | 115,919 |        
|Net investment income                         |                                                                                                                      |                                                               | 64,885    |         |           |   | 47,335  |         |         |   | 37,755  |        
|Net realized investment gain                  |                                                                                                                      |                                                               | 5,822     |         |           |   | 527     |         |         |   | 453     |        
|Other operating income                        |                                                                                                                      |                                                               | 19,406    |         |           |   | 13,215  |         |         |   | 6,985   |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|                                              |                                                                                                                      | Total revenue                                                 |           |         | 1,283,154 |   |         |         | 941,964 |   |         |         | 666,633 | 
|EXPENSE                                       |                                                                                                                      |                                                               |           |         |           |   |         |         |         |   |         |        
|Loss and loss adjustment expense, net         |                                                                                                                      |                                                               | 645,230   |         |           |   | 488,652 |         |         |   | 306,491 |        
|Operating expense:                            |                                                                                                                      |                                                               |           |         |           |   |         |         |         |   |         |        
|                                              | Policy acquisition costs, net                                                                                        |                                                               |           | 224,323 |           |   |         | 138,212 |         |   |         | 99,521  |        
|                                              | Compensation expense                                                                                                 |                                                               |           | 88,570  |           |   |         | 82,947  |         |   |         | 58,567  |        
|                                              | Other operating expense                                                                                              |                                                               |           | 75,904  |           |   |         | 57,966  |         |   |         | 41,357  |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|                                              |                                                                                                                      | Total operating expense                                       |           |         | 388,797   |   |         |         | 279,125 |   |         |         | 199,445 | 
|                                              | Interest expense                                                                                                     |                                                               |           | 8,374   |           |   |         | 7,453   |         |   |         | 8,301   |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|                                              |                                                                                                                      | Total expense                                                 |           |         | 1,042,401 |   |         |         | 775,230 |   |         |         | 514,237 | 
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|                                              |                                                                                                                      | Earnings from continuing operations before income tax expense |           |         | 240,753   |   |         |         | 166,734 |   |         |         | 152,396 | 
|Income tax expense from continuing operations |                                                                                                                      |                                                               | 81,732    |         |           |   | 59,857  |         |         |   | 52,933  |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|Earnings from continuing operations           |                                                                                                                      |                                                               | 159,021   |         |           |   | 106,877 |         |         |   | 99,463  |        
|                                              | Earnings from discontinued operations, net of income taxes of
    $2,313 in 2004, $26,289 in 2003 and $4,418 in 2002 |                                                               |           | 4,004   |           |   |         | 36,684  |         |   |         | 6,365   |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|                                              | Net earnings                                                                                                         |                                                               | $         | 163,025 |           |   | $       | 143,561 |         |   | $       | 105,828 |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|Basic earnings per share data:                |                                                                                                                      |                                                               |           |         |           |   |         |         |         |   |         |        
|                                              | Earnings from continuing operations                                                                                  |                                                               | $         | 2.45    |           |   | $       | 1.69    |         |   | $       | 1.60    |        
|                                              | Earnings from discontinued operations                                                                                |                                                               |           | 0.06    |           |   |         | 0.58    |         |   |         | 0.10    |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|                                              | Net earnings                                                                                                         |                                                               | $         | 2.51    |           |   | $       | 2.27    |         |   | $       | 1.70    |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|                                              | Weighted average shares outstanding                                                                                  |                                                               |           | 64,838  |           |   |         | 63,279  |         |   |         | 62,225  |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|Diluted earnings per share data:              |                                                                                                                      |                                                               |           |         |           |   |         |         |         |   |         |        
|                                              | Earnings from continuing operations                                                                                  |                                                               | $         | 2.41    |           |   | $       | 1.66    |         |   | $       | 1.58    |        
|                                              | Earnings from discontinued operations                                                                                |                                                               |           | 0.06    |           |   |         | 0.57    |         |   |         | 0.10    |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|                                              | Net earnings                                                                                                         |                                                               | $         | 2.47    |           |   | $       | 2.23    |         |   | $       | 1.68    |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        
|                                              | Weighted average shares outstanding                                                                                  |                                                               |           | 65,884  |           |   |         | 64,384  |         |   |         | 62,937  |        
|                                              |                                                                                                                      |                                                               |           |         |           |   |         |         |        



F-6



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(in thousands, except per share data)


|                                        |                                                                                                 |                                                                                                                                                        |         |        |         |   |         |       |         |   |         |        |         |  
|--------------------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ------- | ------ | ------- | - | ------- | ----- | ------- | - | ------- | ------ | ------- | -
|                                        |                                                                                                 | Years Ended December 31,                                                                                                                               |        
|                                        |                                                                                                 |                                                                                                                                                        |        
|                                        |                                                                                                 | 2004                                                                                                                                                   |         |        | 2003    |   |         | 2002  |        
|                                        |                                                                                                 |                                                                                                                                                        |         |        |         |   |         |       |        
|Net earnings                            |                                                                                                 | $                                                                                                                                                      | 163,025 |        |         | $ | 143,561 |       |         | $ | 105,828 |       
|Other comprehensive income, net of tax: |                                                                                                 |                                                                                                                                                        |         |        |         |   |         |       |         |   |         |       
|                                        | Foreign currency translation adjustment                                                         |                                                                                                                                                        |         | 4,660  |         |   |         | 8,149 |         |   |         | 50     |        
|                                        | Investment gains (losses):                                                                      |                                                                                                                                                        |         |        |         |   |         |       |         |   |         |        |        
|                                        |                                                                                                 | Investment gains (losses) during the year, net of income tax
    charge (benefit) of $6,091 in 2004, $(1,048) in 2003 and $8,040
    in 2002           |         |        | 10,955  |   |         |       | (1,962  | ) |         |        | 14,533  |  
|                                        |                                                                                                 | Less reclassification adjustment for gains included in net
    earnings, net of income tax charge of $2,433 in 2004, $184 in
    2003 and $159 in 2002 |         |        | (4,518  | ) |         |       | (343    | ) |         |        | (294    | )
|                                        | Other, net of income tax charge (benefit) of $222 in 2004,
    $(260) in 2003 and $(13) in 2002 |                                                                                                                                                        |         | 412    |         |   |         | (483  | )       |   |         | (24    | )      
|                                        |                                                                                                 |                                                                                                                                                        |         |        |         |   |         |       |        
|                                        | Other comprehensive income                                                                      |                                                                                                                                                        |         | 11,509 |         |   |         | 5,361 |         |   |         | 14,265 |        
|                                        |                                                                                                 |                                                                                                                                                        |         |        |         |   |         |       |        
|                                        |                                                                                                 | Comprehensive income                                                                                                                                   |         | $      | 174,534 |   |         | $     | 148,922 |   |         | $      | 120,093 |  
|                                        |                                                                                                 |                                                                                                                                                        |         |        |         |   |         |       |        



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, 2004, 2003 and 2002


(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, 2001 |        | $     | 61,438     |         |  | $      | 402,089     |       |  | $             | 293,426 |  |               | $      | 6,500  |  |  | $       | 763,453   | 
|Net earnings                                                                          |                              |        |      |            |         |  |       |             |       |  | 105,828       |         |  |               |       |        |  |  | 105,828 |          
|Other comprehensive income                                                            |                              |        |      |            |         |  |       |             |       |  |              |         |  |               | 14,265 |        |  |  | 14,265  |          
|Issuance of 817 shares for exercise of options, including
    tax benefit of $4,030   |                              |        | 817   |            |         |  | 14,420 |             |       |  |              |         |  |               |       |        |  |  | 15,237  |          
|Issuance of 103 shares of contractually issuable stock                                |                              |        | 103   |            |         |  | (103   | )           |       |  |              |         |  |               |       |        |  |  |        |          
|Cash dividends declared, $0.255 per share                                             |                              |        |      |            |         |  |       |             |       |  | (15,876       | )       |  |               |       |        |  |  | (15,876 | )        
|                                                                                      |                              |        |       |            |         |  |        |             |       |  |               |         |  |               |       
|                                                                                      | 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 1,240 shares for exercise of options, including
    tax benefit of $4,320 |                              |        | 1,240 |            |         |  | 23,359 |             |       |  |              |         |  |               |       |        |  |  | 24,599  |          
|Issuance of 52 shares of contractually issuable stock                                 |                              |        | 52    |            |         |  | (52    | )           |       |  |              |         |  |               |       |        |  |  |        |          
|Issuance of 314 shares for purchased company                                          |                              |        | 314   |            |         |  | 7,958  |             |       |  |              |         |  |               |       |        |  |  | 8,272   |          
|Cash dividends declared, $0.28 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 3,000 shares in public offering, net of costs                             |                              |        | 3,000 |            |         |  | 93,668 |             |       |  |              |         |  |               |       |        |  |  | 96,668  |          
|Issuance of 990 shares for exercise of options, including
    tax benefit of $3,743   |                              |        | 990   |            |         |  | 22,861 |             |       |  |              |         |  |               |       |        |  |  | 23,851  |          
|Issuance of 84 shares for purchased company and strategic
    investment              |                              |        | 84    |            |         |  | 2,576  |             |       |  |              |         |  |               |       |        |  |  | 2,660   |          
|Cash dividends declared, $0.32 per share                                              |                              |        |      |            |         |  |       |             |       |  | (20,968       | )       |  |               |       |        |  |  | (20,968 | )        
|                                                                                      |                              |        |       |            |         |  |        |             |       |  |               |         |  |               |       
|                                                                                      | Balance at December 31, 2004 |        | $     | 68,038     |         |  | $      | 566,776     |       |  | $             | 651,216 |  |               | $      | 37,635 |  |  | $       | 1,323,665 | 
|                                                                                      |                              |        |       |            |         |  |        |             |       |  |               |         |  |               |       



F-8



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##### Table of Contents



HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands, except per share data)


|                                      |                                                                                         |                                                              |                                       |          |          |          |        |          |          |          |        |          |         |          |  
|------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------- | -------- | -------- | -------- | ------ | -------- | -------- | -------- | ------ | -------- | ------- | -------- | -
|                                      |                                                                                         | Years Ended December 31,                                     |                                      
|                                      |                                                                                         |                                                              |                                      
|                                      |                                                                                         | 2004                                                         |                                       |          | 2003     |          |        | 2002     |         
|                                      |                                                                                         |                                                              |                                       |          |          |          |        |          |         
|Cash flows from operating activities: |                                                                                         |                                                              |                                       |          |          |          |        |          |          |          |        |         
|                                      | Net earnings                                                                            |                                                              | $                                     | 163,025  |          |          | $      | 143,561  |          |          | $      | 105,828  |        
|                                      | Adjustments to reconcile net earnings to net cash provided by
    operating activities: |                                                              |                                       |          |          |          |        |          |          |          |        |          |        
|                                      |                                                                                         | Change in premium, claims and other receivables              |                                       |          | 13,822   |          |        |          | (130,881 | )        |        |          | (41,330 | )       
|                                      |                                                                                         | Change in reinsurance recoverables                           |                                       |          | (178,094 | )        |        |          | (117,256 | )        |        |          | 103,870 |         
|                                      |                                                                                         | Change in ceded unearned premium                             |                                       |          | (22,504  | )        |        |          | (127,367 | )        |        |          | (88,940 | )       
|                                      |                                                                                         | Change in loss and loss adjustment expense payable           |                                       |          | 538,374  |          |        |          | 379,998  |          |        |          | (57,747 | )       
|                                      |                                                                                         | Change in reinsurance balances payable                       |                                       |          | (69,647  | )        |        |          | 130,257  |          |        |          | 70,672  |         
|                                      |                                                                                         | Change in unearned premium                                   |                                       |          | 122,317  |          |        |          | 261,261  |          |        |          | 122,811 |         
|                                      |                                                                                         | Change in premium and claims payable, net of restricted cash |                                       |          | 58,215   |          |        |          | (25,494  | )        |        |          | (76,039 | )       
|                                      |                                                                                         | Gain on sale of subsidiary                                   |                                       |          | (6,317   | )        |        |          | (52,681  | )        |        |          |        |         
|                                      |                                                                                         | Depreciation and amortization expense                        |                                       |          | 16,139   |          |        |          | 12,828   |          |        |          | 10,808  |         
|                                      |                                                                                         | Other, net                                                   |                                       |          | 33,373   |          |        |          | 53,872   |          |        |          | 25,189  |         
|                                      |                                                                                         |                                                              |                                       |          |          |          |        |          |         
|                                      |                                                                                         |                                                              | Cash provided by operating activities |          |          | 668,703  |        |          |          | 528,098  |        |          |         | 175,122  |  
|Cash flows from investing activities: |                                                                                         |                                                              |                                       |          |          |          |        |          |          |          |        |         
|                                      | Sales of fixed income securities                                                        |                                                              |                                       | 253,398  |          |          |        | 167,357  |          |          |        | 217,370  |        
|                                      | Maturity or call of fixed income securities                                             |                                                              |                                       | 154,357  |          |          |        | 142,652  |          |          |        | 53,918   |        
|                                      | Sale of subsidiary and other operating investments                                      |                                                              |                                       |         |          |          |        | 82,618   |          |          |        |         |        
|                                      | Cost of securities acquired                                                             |                                                              |                                       | (935,053 | )        |          |        | (694,211 | )        |          |        | (505,099 | )      
|                                      | Change in short-term investments                                                        |                                                              |                                       | (160,229 | )        |          |        | (202,904 | )        |          |        | 84,799   |        
|                                      | Payments for purchase of subsidiaries, net of cash received                             |                                                              |                                       | (93,543  | )        |          |        | (16,680  | )        |          |        | (39,227  | )      
|                                      | Other, net                                                                              |                                                              |                                       | 268      |          |          |        | (17,655  | )        |          |        | (1,824   | )      
|                                      |                                                                                         |                                                              |                                       |          |          |          |        |          |         
|                                      |                                                                                         |                                                              | Cash used by investing activities     |          |          | (780,802 | )      |          |          | (538,823 | )      |          |         | (190,063 | )
|Cash flows from financing activities: |                                                                                         |                                                              |                                       |          |          |          |        |          |          |          |        |         
|                                      | Issuance of notes payable, net of costs                                                 |                                                              |                                       | 29,000   |          |          |        | 174,845  |          |          |        | 76,000   |        
|                                      | Sale of common stock, net of costs                                                      |                                                              |                                       | 116,776  |          |          |        | 20,279   |          |          |        | 11,207   |        
|                                      | Payments on notes payable                                                               |                                                              |                                       | (40,176  | )        |          |        | (108,813 | )        |          |        | (31,969  | )      
|                                      | Dividends paid and other, net                                                           |                                                              |                                       | (19,984  | )        |          |        | (19,476  | )        |          |        | (16,882  | )      
|                                      |                                                                                         |                                                              |                                       |          |          |          |        |          |         
|                                      |                                                                                         |                                                              | Cash provided by financing activities |          |          | 85,616   |        |          |          | 66,835   |        |          |         | 38,356   |  
|                                      |                                                                                         |                                                              |                                       |          |          |          |        |          |         
|Net increase (decrease) in cash       |                                                                                         |                                                              | (26,483                               | )        |          |          | 56,110 |          |          |          | 23,415 |         
|Cash at beginning of year             |                                                                                         |                                                              | 96,416                                |          |          |          | 40,306 |          |          |          | 16,891 |         
|                                      |                                                                                         |                                                              |                                       |          |          |          |        |          |         
|                                      |                                                                                         |                                                              | Cash at end of year                   |          | $        | 69,933   |        |          | $        | 96,416   |        |          | $       | 40,306   |  
|                                      |                                                                                         |                                                              |                                       |          |          |          |        |          |         



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





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



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)






| |            
| | -----------
| | 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 Tax







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

Share-Based Payment,


Accounting for Stock Issued to
Employees. Accounting for Stock-Based
Compensation.


|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                          |  | 2004 |         |   | 2003 |   |         | 2002 | 
|                                                                          |  |      |         |   |      |   |         |      | 
|Reported net earnings                                                     |  | $    | 163,025 |   |      | $ | 143,561 |      |  | $ | 105,828 |  
|Stock-based compensation using fair value method, net of income
    taxes |  |      | (4,883  | ) |      |   | (7,705  | )    |  |   | (6,159  | )
|                                                                          |  |      |         |   |      |   |         |      | 
|Pro forma net earnings                                                    |  | $    | 158,142 |   |      | $ | 135,856 |      |  | $ | 99,669  |  
|                                                                          |  |      |         |   |      |   |         |      | 
|Reported basic earnings per share                                         |  | $    | 2.51    |   |      | $ | 2.27    |      |  | $ | 1.70    |  
|Fair value stock-based compensation                                       |  |      | (0.07   | ) |      |   | (0.12   | )    |  |   | (0.10   | )
|                                                                          |  |      |         |   |      |   |         |      | 
|Pro forma basic earnings per share                                        |  | $    | 2.44    |   |      | $ | 2.15    |      |  | $ | 1.60    |  
|                                                                          |  |      |         |   |      |   |         |      | 
|Reported diluted earnings per share                                       |  | $    | 2.47    |   |      | $ | 2.23    |      |  | $ | 1.68    |  
|Fair value stock-based compensation                                       |  |      | (0.07   | ) |      |   | (0.12   | )    |  |   | (0.10   | )
|                                                                          |  |      |         |   |      |   |         |      | 
|Pro forma diluted earnings per share                                      |  | $    | 2.40    |   |      | $ | 2.11    |      |  | $ | 1.58    |  
|                                                                          |  |      |         |   |      |   |         |      | 



|                                      |  |      |            |   |      |  |            |      |  |  |            |  
|------------------------------------- |  | ---- | ---------- | - | ---- |  | ---------- | ---- |  |  | ---------- | -
|                                      |  | 2004 |            |   | 2003 |  |            | 2002 | 
|                                      |  |      |            |   |      |  |            |      | 
|Average fair value of options granted |  |      | $8.78      |   |      |  | $6.67      |      |  |  | $7.05      |  
|Risk free interest rate               |  |      | 3.4        | % |      |  | 2.8        | %    |  |  | 3.5        | %
|Expected volatility factor            |  |      | 32         | % |      |  | 32         | %    |  |  | 32         | %
|Dividend yield                        |  |      | 1.02       | % |      |  | 1.07       | %    |  |  | 1.14       | %
|Expected option life                  |  |      | 4.5  years |   |      |  | 4.4  years |      |  |  | 5.5  years |  



| |                                     
| | ------------------------------------
| | Guarantee Fund and Other Assessments



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)






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







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

The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments. Accounting for Certain Investments in Debt and Equity
Securities,




|    |                                       
|--- | --------------------------------------
|(2) | Acquisitions, Goodwill and Disposition



| |             
| | ------------
| | Acquisitions



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)




|                                                                 |  |                   |  |               |      |         |         |   |      |            |  |   |            |  |  |  |       | 
|---------------------------------------------------------------- |  | ----------------- |  | ------------- | ---- | ------- | ------- | - | ---- | ---------- |  | - | ---------- |  |  |  | ----- | 
|                                                                 |  |                   |  |               |      | Earnout |         |   |      |            | 
|                                                                 |  |                   |  | Initial       |      |         | Through |   |      | Goodwill   |  |   | Deductible | 
|                                                                 |  | Effective Date    |  | Consideration |      |         | 2004    |   |      | Recognized |  |   | Goodwill   | 
|                                                                 |  |                   |  |               |      |         |         |   |      |            |  |   |            | 
|HCC Global Financial Products, LLC                               |  | October 1, 2002   |  | $             | 6.9  |         |         | $ | 64.9 |            |  | $ | 65.3       |  |  |  | Split | 
|HCC Diversified Financial Products Limited                       |  | December 24, 2002 |  |               | 17.0 |         |         |   | 12.3 |            |  |   | 21.8       |  |  |  | No    | 
|HCC Europe                                                       |  | December 31, 2002 |  |               | 8.1  |         |         |   |     |            |  |   | 4.7        |  |  |  | No    | 
|Covenant Underwriters Ltd. and Continental Underwriters
    Ltd. |  | July 1, 2003      |  |               | 19.9 |         |         |   | 2.1  |            |  |   | 14.4       |  |  |  | Yes   | 
|Surety Associates Holding Co., Inc.                              |  | January 31, 2004  |  |               | 46.8 |         |         |   |     |            |  |   | 10.5       |  |  |  | No    | 
|RA&MCO Insurance Services                                        |  | October 1, 2004   |  |               | 8.5  |         |         |   |     |            |  |   | 7.4        |  |  |  | No    | 







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)




|                             |                  |           |         |        |        |   |              |            |  |   |        |   |  |   |         |        | 
|---------------------------- | ---------------- | --------- | ------- | ------ | ------ | - | ------------ | ---------- |  | - | ------ | - |  | - | ------- | ------ | 
|                             |                  | Insurance |         |        |        |   | Discontinued |            |  |  
|                             |                  | Company   |         |        | Agency |   |              | Operations |  |   | Total  |  
|                             |                  |           |         |        |        |   |              |            |  |   |        |  
|Balance at December 31, 2002 |                  | $         | 144,204 |        |        | $ | 182,810      |            |  | $ | 8,274  |   |  | $ | 335,288 |       
|Additions:                   |                  |           |         |        |        |   |              |            |  |   |        |   |  |   |         |       
|                             | New acquisitions |           |         | (5,616 | )      |   |              | 13,793     |  |   |        |  |  |   |         | 8,177  | 
|                             | Earnouts         |           |         | 25,130 |        |   |              | 26,186     |  |   |        |  |  |   |         | 51,316 | 
|Disposition                  |                  |           |        |        |        |   |             |            |  |   | (8,274 | ) |  |   | (8,274  | )     
|                             |                  |           |         |        |        |   |              |            |  |   |        |  
|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 |       
|                             |                  |           |         |        |        |   |              |            |  |   |        |  



| |                 
| | ----------------
| | 2004 Acquisition



|                                         |                                                  |   |        |         | 
|---------------------------------------- | ------------------------------------------------ | - | ------ | ------- | 
|Total investments                        |                                                  | $ | 87,873 |        
|Premium, claims and other receivables    |                                                  |   | 5,665  |        
|Reinsurance recoverables                 |                                                  |   | 4,715  |        
|Other policy related assets              |                                                  |   | 15,118 |        
|Goodwill and intangible assets           |                                                  |   | 17,935 |        
|Other assets                             |                                                  |   | 6,183  |        
|                                         |                                                  |   |       
|                                         | Total assets acquired                            |   |        | 137,489 | 
|Loss and loss adjustment expense payable |                                                  |   | 15,537 |        
|Unearned premium                         |                                                  |   | 27,078 |        
|Other policy related liabilities         |                                                  |   | 1,729  |        
|Other liabilities                        |                                                  |   | 46,380 |        
|                                         |                                                  |   |       
|                                         | Total liabilities assumed                        |   |        | 90,724  | 
|                                         |                                                  |   |       
|                                         | Assets acquired in excess of liabilities assumed |   | $      | 46,765  | 
|                                         |                                                  |   |       



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)




|                                |  |      |           |  |      |   |         | 
|------------------------------- |  | ---- | --------- |  | ---- | - | ------- | 
|Unaudited Pro forma Information |  | 2004 |           |  | 2003 |  
|                                |  |      |           |  |      |  
|Revenue                         |  | $    | 1,287,001 |  |      | $ | 988,598 | 
|Net earnings                    |  |      | 162,049   |  |      |   | 142,807 | 
|Basic earnings per share        |  | $    | 2.50      |  |      | $ | 2.26    | 
|Diluted earnings per share      |  |      | 2.46      |  |      |   | 2.22    | 



| |                       
| | ----------------------
| | Subsequent Acquisition





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



|                                   |  |      |        |  |      |   |        | 
|---------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                   |  | 2003 |        |  | 2002 |  
|                                   |  |      |        |  |      |  
|Revenue                            |  | $    | 22,926 |  |      | $ | 21,930 | 
|Earnings before income tax expense |  |      | 10,292 |  |      |   | 10,783 | 



|    |                  
|--- | -----------------
|(3) | Intangible Assets



|                                                                                         |                                               |      |         |        |      |   |        |        | 
|---------------------------------------------------------------------------------------- | --------------------------------------------- | ---- | ------- | ------ | ---- | - | ------ | ------ | 
|                                                                                         |                                               | 2004 |         |        | 2003 |  
|                                                                                         |                                               |      |         |        |      |  
|Intangible assets not subject to amortization 
    insurance company and other licenses |                                               | $    | 8,412   |        |      | $ | 5,992  |       
|                                                                                         |                                               |      |         |        |      |  
|Intangible assets subject to amortization                                                |                                               | $    | 24,436  |        |      | $ | 20,414 |       
|Less accumulated amortization                                                            |                                               |      | (12,516 | )      |      |   | (6,913 | )     
|                                                                                         |                                               |      |         |        |      |  
|                                                                                         | Net intangible assets subject to amortization |      | $       | 11,920 |      |   | $      | 13,501 | 
|                                                                                         |                                               |      |         |        |      |  

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)




|           |                              |   |       |        | 
|---------- | ---------------------------- | - | ----- | ------ | 
|2005       |                              | $ | 4,168 |       
|2006       |                              |   | 3,390 |       
|2007       |                              |   | 2,035 |       
|2008       |                              |   | 1,141 |       
|2009       |                              |   | 407   |       
|Thereafter |                              |   | 779   |       
|           |                              |   |      
|           | Total estimated amortization |   | $     | 11,920 | 
|           |                              |   |      



|    |            
|--- | -----------
|(4) | Investments



|                                                                 |                               |           |         |           |            |   |        |            |  |   |           |        |   |   |         |           | 
|---------------------------------------------------------------- | ----------------------------- | --------- | ------- | --------- | ---------- | - | ------ | ---------- |  | - | --------- | ------ | - | - | ------- | --------- | 
|                                                                 |                               | Cost or   |         |           | Gross      |   |        | Gross      |  |   | Estimated |       
|                                                                 |                               | Amortized |         |           | Unrealized |   |        | Unrealized |  |   | Market    |       
|                                                                 |                               | Cost      |         |           | Gain       |   |        | Loss       |  |   | Value     |       
|                                                                 |                               |           |         |           |            |   |        |            |  |   |           |       
|December 31, 2004                                                |                               |           |         |           |            |   |        |            |  |   |           |        |   |   |         |          
|U.S. Treasury securities                                         |                               | $         | 87,652  |           |            | $ | 688    |            |  | $ | (214      | )      |   | $ | 88,126  |          
|Obligations of 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 | 
|                                                                 |                               |           |         |           |            |   |        |            |  |   |           |       
|December 31, 2003                                                |                               |           |         |           |            |   |        |            |  |   |           |        |   |   |         |          
|U.S. Treasury securities                                         |                               | $         | 67,125  |           |            | $ | 2,040  |            |  | $ | (25       | )      |   | $ | 69,140  |          
|Obligations of states, municipalities and political subdivisions |                               |           | 392,595 |           |            |   | 15,853 |            |  |   | (1,099    | )      |   |   | 407,349 |          
|Corporate fixed income securities                                |                               |           | 324,914 |           |            |   | 10,841 |            |  |   | (930      | )      |   |   | 334,825 |          
|Asset-backed and mortgage-backed securities                      |                               |           | 149,612 |           |            |   | 3,914  |            |  |   | (767      | )      |   |   | 152,759 |          
|Foreign securities                                               |                               |           | 199,882 |           |            |   | 1,117  |            |  |   | (906      | )      |   |   | 200,093 |          
|                                                                 |                               |           |         |           |            |   |        |            |  |   |           |       
|                                                                 | Total fixed income securities |           | $       | 1,134,128 |            |   | $      | 33,765     |  |   | $         | (3,727 | ) |   | $       | 1,164,166 | 
|                                                                 |                               |           |         |           |            |   |        |            |  |   |           |       



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 |  
|                                                                 |                  |                     |         |            |                   |   |        |            |            |   |        |        |  |            |      |        |        |  
|U.S. Treasury securities                                         |                  | $                   | 52,473  |            |                   | $ | (197   | )          |            | $ | 489    |        |  | $          | (17  | )      |        | $ | 52,962  |         |  | $ | (214   | )     
|Obligations of 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 | )
|                                                                 |                  |                     |         |            |                   |   |        |            |            |   |        |        |  |            |      |        |        |  



|                                            |                                  |                               |         |           |           |   |         |           |           | 
|------------------------------------------- | -------------------------------- | ----------------------------- | ------- | --------- | --------- | - | ------- | --------- | --------- | 
|                                            |                                  |                               |         | Estimated |          
|                                            |                                  | Amortized                     |         |           | Market    |  
|                                            |                                  | Cost                          |         |           | Value     |  
|                                            |                                  |                               |         |           |           |  
|Due in 1 year or less                       |                                  | $                             | 90,697  |           |           | $ | 91,590  |          
|Due after 1 year through 5 years            |                                  |                               | 605,867 |           |           |   | 610,471 |          
|Due after 5 years through 10 years          |                                  |                               | 283,172 |           |           |   | 289,978 |          
|Due after 10 years through 15 years         |                                  |                               | 267,149 |           |           |   | 273,643 |          
|Due after 15 years                          |                                  |                               | 187,087 |           |           |   | 188,786 |          
|                                            |                                  |                               |         |           |           |  
|                                            | Securities with fixed maturities |                               |         | 1,433,972 |           |   |         | 1,454,468 |          
|Asset-backed and mortgage-backed securities |                                  |                               | 248,449 |           |           |   | 248,703 |          
|                                            |                                  |                               |         |           |           |  
|                                            |                                  | Total fixed income securities |         | $         | 1,682,421 |   |         | $         | 1,703,171 | 
|                                            |                                  |                               |         |           |           |  





|                        |                         |      |        |        |      |   |        |        |  |   |        |        | 
|----------------------- | ----------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                        |                         | 2004 |        |        | 2003 |   |        | 2002   | 
|                        |                         |      |        |        |      |   |        |        | 
|Fixed income securities |                         | $    | 55,929 |        |      | $ | 40,927 |        |  | $ | 31,773 |       
|Short-term investments  |                         |      | 9,735  |        |      |   | 7,422  |        |  |   | 6,787  |       
|Other investments       |                         |      | 1,366  |        |      |   | 488    |        |  |   | 222    |       
|                        |                         |      |        |        |      |   |        |        | 
|                        | Total investment income |      |        | 67,030 |      |   |        | 48,837 |  |   |        | 38,782 | 
|Investment expense      |                         |      | (2,145 | )      |      |   | (1,502 | )      |  |   | (1,027 | )     
|                        |                         |      |        |        |      |   |        |        | 
|                        | Net investment income   |      | $      | 64,885 |      |   | $      | 47,335 |  |   | $      | 37,755 | 
|                        |                         |      |        |        |      |   |        |        | 

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)




|                             |                      |       |       |       |        |   |        |        |   |   |        |       | 
|---------------------------- | -------------------- | ----- | ----- | ----- | ------ | - | ------ | ------ | - | - | ------ | ----- | 
|                             |                      | Gains |       |       | Losses |   |        | Net    |  
|                             |                      |       |       |       |        |   |        |        |  
|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   | 
|                             |                      |       |       |       |        |   |        |        |  
|Year ended December 31, 2002 |                      |       |       |       |        |   |        |        |   |   |        |      
|Fixed income securities      |                      | $     | 3,027 |       |        | $ | (1,621 | )      |   | $ | 1,406  |      
|Other investments            |                      |       | 542   |       |        |   | (1,495 | )      |   |   | (953   | )    
|                             |                      |       |       |       |        |   |        |        |  
|                             | Realized gain (loss) |       | $     | 3,569 |        |   | $      | (3,116 | ) |   | $      | 453   | 
|                             |                      |       |       |       |        |   |        |        |  



|                                |                                          |      |        |        |      |   |        |        |   |   |        |        | 
|------------------------------- | ---------------------------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | 
|                                |                                          | 2004 |        |        | 2003 |   |        | 2002   |  
|                                |                                          |      |        |        |      |   |        |        |  
|Fixed income securities         |                                          | $    | (9,288 | )      |      | $ | (3,738 | )      |   | $ | 22,022 |       
|Strategic and other investments |                                          |      | 19,383 |        |      |   | 201    |        |   |   | 98     |       
|                                |                                          |      |        |        |      |   |        |        |  
|                                | Net unrealized investment gains (losses) |      | $      | 10,095 |      |   | $      | (3,537 | ) |   | $      | 22,120 | 
|                                |                                          |      |        |        |      |   |        |        |  



|    |              
|--- | -------------
|(5) | Notes Payable



|                                       |                     |      |         |         |      |   |         |         | 
|-------------------------------------- | ------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                                       |                     | 2004 |         |         | 2003 |  
|                                       |                     |      |         |         |      |  
|1.30% Convertible Notes                |                     | $    | 125,000 |         |      | $ | 125,000 |        
|2.00% Convertible Exchange Notes       |                     |      | 172,409 |         |      |   |        |        
|2.00% Convertible Notes                |                     |      | 33      |         |      |   | 172,451 |        
|$200.0 million Revolving Loan Facility |                     |      |        |         |      |   |        |        
|Other debt                             |                     |      | 13,835  |         |      |   | 12,953  |        
|                                       |                     |      |         |         |      |  
|                                       | Total notes payable |      | $       | 311,277 |      |   | $       | 310,404 | 
|                                       |                     |      |         |         |      |  



F-22



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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)










F-23



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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)




|    |             
|--- | ------------
|(6) | Income Taxes





|                                                                        |                                               |      |         |        |      |   |         |        |   |   |        |        |  
|----------------------------------------------------------------------- | --------------------------------------------- | ---- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ | -
|                                                                        |                                               | 2004 |         |        | 2003 |   |         | 2002   |  
|                                                                        |                                               |      |         |        |      |   |         |        |  
|Statutory tax rate                                                      |                                               |      | 35      | %      |      |   | 35      | %      |   |   | 35     | %     
|                                                                        |                                               |      |         |        |      |   |         |        |  
|Federal tax on continuing operations at statutory rate                  |                                               | $    | 84,264  |        |      | $ | 58,356  |        |   | $ | 53,338 |       
|Nontaxable municipal bond interest and dividends received
    deduction |                                               |      | (7,076  | )      |      |   | (4,126  | )      |   |   | (3,391 | )     
|Other non deductible expenses                                           |                                               |      | 923     |        |      |   | 1,979   |        |   |   | 236    |       
|State income taxes, net of federal tax benefit                          |                                               |      | 2,962   |        |      |   | 3,164   |        |   |   | 2,134  |       
|Foreign income taxes                                                    |                                               |      | 11,380  |        |      |   | 15,272  |        |   |   | 2,921  |       
|Foreign tax credit                                                      |                                               |      | (11,197 | )      |      |   | (14,795 | )      |   |   | (2,597 | )     
|Other, net                                                              |                                               |      | 476     |        |      |   | 7       |        |   |   | 292    |       
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Income tax expense from continuing operations |      | $       | 81,732 |      |   | $       | 59,857 |   |   | $      | 52,933 |  
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Effective tax rate, continuing operations     |      |         | 33.9   | %    |   |         | 35.9   | % |   |        | 34.7   | %
|                                                                        |                                               |      |         |        |      |   |         |        |  
|Federal tax on discontinued operations at statutory rate                |                                               | $    | 2,211   |        |      | $ | 22,041  |        |   | $ | 3,774  |       
|Book over tax basis in stock of subsidiary                              |                                               |      |        |        |      |   | 2,896   |        |   |   |       |       
|Non deductible expenses                                                 |                                               |      |        |        |      |   | 41      |        |   |   | 207    |       
|State income taxes                                                      |                                               |      | 94      |        |      |   | 1,343   |        |   |   | 293    |       
|Other, net                                                              |                                               |      | 8       |        |      |   | (32     | )      |   |   | 144    |       
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Income tax expense on discontinued operations |      | $       | 2,313  |      |   | $       | 26,289 |   |   | $      | 4,418  |  
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Effective tax rate, discontinued operations   |      |         | 36.6   | %    |   |         | 41.7   | % |   |        | 41.0   | %
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Total income tax expense                      |      | $       | 84,045 |      |   | $       | 86,146 |   |   | $      | 57,351 |  
|                                                                        |                                               |      |         |        |      |   |         |        |  
|                                                                        | Total effective tax rate                      |      |         | 34.0   | %    |   |         | 37.5   | % |   |        | 35.1   | %
|                                                                        |                                               |      |         |        |      |   |         |        |  

F-24



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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)




|                 |               |                                                 |         |        |        |   |         |        |        |   |        |        |        | 
|---------------- | ------------- | ----------------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                 |               | 2004                                            |         |        | 2003   |   |         | 2002   |       
|                 |               |                                                 |         |        |        |   |         |        |       
|Federal current  |               | $                                               | 82,995  |        |        | $ | 58,020  |        |        | $ | 35,110 |       
|Federal deferred |               |                                                 | (17,200 | )      |        |   | (15,747 | )      |        |   | 9,024  |       
|                 |               |                                                 |         |        |        |   |         |        |       
|                 | Total federal |                                                 |         | 65,795 |        |   |         | 42,273 |        |   |        | 44,134 |       
|State current    |               |                                                 | 7,065   |        |        |   | 7,167   |        |        |   | 3,770  |       
|State deferred   |               |                                                 | (2,508  | )      |        |   | (1,356  | )      |        |   | 188    |       
|                 |               |                                                 |         |        |        |   |         |        |       
|                 | Total state   |                                                 |         | 4,557  |        |   |         | 5,811  |        |   |        | 3,958  |       
|Foreign current  |               |                                                 | 11,376  |        |        |   | 11,285  |        |        |   | 4,920  |       
|Foreign deferred |               |                                                 | 4       |        |        |   | 488     |        |        |   | (79    | )     
|                 |               |                                                 |         |        |        |   |         |        |       
|                 | Total foreign |                                                 |         | 11,380 |        |   |         | 11,773 |        |   |        | 4,841  |       
|                 |               |                                                 |         |        |        |   |         |        |       
|                 |               | Income tax expense from continuing operations   |         | $      | 81,732 |   |         | $      | 59,857 |   |        | $      | 52,933 | 
|                 |               |                                                 |         |        |        |   |         |        |       
|Federal current  |               | $                                               | 1,898   |        |        | $ | 25,038  |        |        | $ | 4,122  |       
|Federal deferred |               |                                                 | 271     |        |        |   | (815    | )      |        |   | (71    | )     
|                 |               |                                                 |         |        |        |   |         |        |       
|                 | Total federal |                                                 |         | 2,169  |        |   |         | 24,223 |        |   |        | 4,051  |       
|State current    |               |                                                 | 110     |        |        |   | 1,792   |        |        |   | 189    |       
|State deferred   |               |                                                 | 34      |        |        |   | 274     |        |        |   | 178    |       
|                 |               |                                                 |         |        |        |   |         |        |       
|                 | Total state   |                                                 |         | 144    |        |   |         | 2,066  |        |   |        | 367    |       
|                 |               |                                                 |         |        |        |   |         |        |       
|                 |               | Income tax expense from discontinued operations |         | $      | 2,313  |   |         | $      | 26,289 |   |        | $      | 4,418  | 
|                 |               |                                                 |         |        |        |   |         |        |       
|                 |               | Total income tax expense                        |         | $      | 84,045 |   |         | $      | 86,146 |   |        | $      | 57,351 | 
|                 |               |                                                 |         |        |        |   |         |        |       

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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)




|                                                                                                 |                                |      |         |        |      |   |         |        | 
|------------------------------------------------------------------------------------------------ | ------------------------------ | ---- | ------- | ------ | ---- | - | ------- | ------ | 
|                                                                                                 |                                | 2004 |         |        | 2003 |  
|                                                                                                 |                                |      |         |        |      |  
|Federal tax net operating loss carryforwards                                                     |                                | $    | 2,354   |        |      | $ | 2,729   |       
|State tax net operating loss carryforwards                                                       |                                |      | 4,278   |        |      |   | 5,183   |       
|Excess of financial unearned premium over tax                                                    |                                |      | 27,238  |        |      |   | 19,401  |       
|Effect of loss reserve discounting and salvage and subrogation
    accrual for tax               |                                |      | 21,341  |        |      |   | 16,231  |       
|Excess of financial accrued expenses over tax                                                    |                                |      | 19,228  |        |      |   | 8,529   |       
|Deferred policy acquisition costs, net of ceding commissions,
    deductible for tax             |                                |      |        |        |      |   | 546     |       
|Allowance for bad debts, not deductible for tax                                                  |                                |      | 7,925   |        |      |   | 6,308   |       
|Foreign branch net operating loss carryforwards                                                  |                                |      | 1,194   |        |      |   | 2,371   |       
|Valuation allowance                                                                              |                                |      | (17,533 | )      |      |   | (17,613 | )     
|                                                                                                 |                                |      |         |        |      |  
|                                                                                                 | Total deferred tax assets      |      |         | 66,025 |      |   |         | 43,685 | 
|Unrealized gain on increase in value of securities available for
    sale (shareholders equity) |                                |      | 14,086  |        |      |   | 10,552  |       
|Deferred policy acquisition costs, net of ceding commissions,
    deductible for tax             |                                |      | 7,415   |        |      |   |        |       
|Amortizable goodwill for tax                                                                     |                                |      | 13,012  |        |      |   | 11,603  |       
|Book basis in net assets of foreign subsidiaries in excess of tax                                |                                |      | 701     |        |      |   | 5,291   |       
|Property and equipment depreciation and other items                                              |                                |      | 5,771   |        |      |   | 7,530   |       
|                                                                                                 |                                |      |         |        |      |  
|                                                                                                 | Total deferred tax liabilities |      |         | 40,985 |      |   |         | 34,976 | 
|                                                                                                 |                                |      |         |        |      |  
|                                                                                                 | Net deferred tax asset         |      | $       | 25,040 |      |   | $       | 8,709  | 
|                                                                                                 |                                |      |         |        |      |  



|                             |                        |      |        |        |      |   |        |        |  |   |        |        | 
|---------------------------- | ---------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                             |                        | 2004 |        |        | 2003 |   |        | 2002   | 
|                             |                        |      |        |        |      |   |        |        | 
|Balance at beginning of year |                        | $    | 17,613 |        |      | $ | 11,547 |        |  | $ | 10,435 |       
|Increase due to acquisitions |                        |      | 611    |        |      |   | 4,900  |        |  |   |       |       
|Other                        |                        |      | (691   | )      |      |   | 1,166  |        |  |   | 1,112  |       
|                             |                        |      |        |        |      |   |        |        | 
|                             | Balance at end of year |      | $      | 17,533 |      |   | $      | 17,613 |  |   | $      | 11,547 | 
|                             |                        |      |        |        |      |   |        |        | 



F-26



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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)






|    |                            
|--- | ---------------------------
|(7) | Segment and Geographic Data







F-27



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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 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 from continuing operations |   |         |           |  |       |            |         |  |           |        |        |       |   |        |        |   |   | $       | 81,732    | 
|                             |                                                     |                                                            |   |         |           |  |       |            |         |  |           |        |        |       |  



F-28



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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 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 from continuing operations |   |         |         |  |       |            |         |  |           |        |        |       |   |        |        |   |   | $       | 59,857    | 
|                             |                                                     |                                                            |   |         |         |  |       |            |         |  |           |        |        |       |  



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



F-29



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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, 2002 |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   |        
|Revenue:                     |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   |        
|                             | Domestic                                            |                                                            | $                          | 478,279                   |        |         | $     | 69,058     |   |         | $         | 4,874 |   |       | $ | 616    |   |       | $ | 552,827 |       
|                             | Foreign                                             |                                                            |                            | 91,853                    |        |         |       | 21,953     |   |         |           |      |   |       |   |       |   |       |   | 113,806 |       
|                             | Inter-segment                                       |                                                            |                            |                          |        |         |       | 42,493     |   |         |           |      |   |       |   |       |   |       |   | 42,493  |       
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  
|                             |                                                     |                                                            | Total segment revenue      |                           | $      | 570,132 |       |            | $ | 133,504 |           |       | $ | 4,874 |   |        | $ | 616   |   |         |        | 709,126 |        
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  
|                             | Inter-segment eliminations                          |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   | (42,493 | )     
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  
|                             |                                                     |                                                            | Consolidated total revenue |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   |         | $      | 666,633 |        
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  
|Net earnings:                |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   |        
|                             | Domestic                                            |                                                            | $                          | 62,190                    |        |         | $     | 23,113     |   |         | $         | 3,052 |   |       | $ | 2,922  |   |       | $ | 91,277  |       
|                             | Foreign                                             |                                                            |                            | 6,040                     |        |         |       | 4,466      |   |         |           |      |   |       |   |       |   |       |   | 10,506  |       
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  
|                             |                                                     |                                                            | Total segment net earnings |                           | $      | 68,230  |       |            | $ | 27,579  |           |       | $ | 3,052 |   |        | $ | 2,922 |   |         |        | 101,783 |        
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  
|                             | Inter-segment eliminations                          |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   | (2,320  | )     
|                             | Earnings from discontinued operations, net of taxes |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   | 6,365   |       
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  
|                             |                                                     |                                                            |                            | Consolidated net earnings |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   |         |        | $       | 105,828 | 
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  
|Other items:                 |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   |        
|                             | Net investment income *                             |                                                            | $                          | 33,587                    |        |         | $     | 3,933      |   |         | $         | 41    |   |       | $ | 194    |   |       | $ | 37,755  |       
|                             | Depreciation and amortization *                     |                                                            |                            | 3,153                     |        |         |       | 6,371      |   |         |           | 82    |   |       |   | 1,033  |   |       |   | 10,639  |       
|                             | Interest expense (benefit)                          |                                                            |                            | (113                      | )      |         |       | 10,342     |   |         |           |      |   |       |   | (1,928 | ) |       |   | 8,301   |       
|                             | Capital expenditures *                              |                                                            |                            | 2,803                     |        |         |       | 2,587      |   |         |           |      |   |       |   | 280    |   |       |   | 5,670   |       
|                             | Income tax expense                                  |                                                            |                            | 33,074                    |        |         |       | 18,313     |   |         |           | 1,566 |   |       |   | 1,368  |   |       |   | 54,321  |       
|                             | Inter-segment eliminations                          |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   | (1,388  | )     
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  
|                             |                                                     | Consolidated income tax expense from continuing operations |                            |                           |        |         |       |            |   |         |           |       |   |       |   |        |   |       |   | $       | 52,933 |        
|                             |                                                     |                                                            |                            |                           |        |         |       |            |   |         |           |       |   |       |  



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



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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




|                                |                           |      |         |           |      |   |         |         |  |   |         |         | 
|------------------------------- | ------------------------- | ---- | ------- | --------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                |                           | 2004 |         |           | 2003 |   |         | 2002    | 
|                                |                           |      |         |           |      |   |         |         | 
|Group life, accident and health |                           | $    | 343,913 |           |      | $ | 290,009 |         |  | $ | 240,070 |        
|Diversified financial products  |                           |      | 310,809 |           |      |   | 123,562 |         |  |   | 23,102  |        
|London market account           |                           |      | 111,341 |           |      |   | 137,572 |         |  |   | 89,260  |        
|Aviation                        |                           |      | 127,248 |           |      |   | 97,536  |         |  |   | 100,960 |        
|Other specialty lines           |                           |      | 69,089  |           |      |   | 12,443  |         |  |   |        |        
|                                |                           |      |         |           |      |   |         |         | 
|                                |                           |      | 962,400 |           |      |   | 661,122 |         |  |   | 453,392 |        
|Discontinued lines              |                           |      | 48,292  |           |      |   | 77,150  |         |  |   | 52,129  |        
|                                |                           |      |         |           |      |   |         |         | 
|                                | Net earned premium        |      | $       | 1,010,692 |      |   | $       | 738,272 |  |   | $       | 505,521 | 
|                                |                           |      |         |           |      |   |         |         | 
|Property and casualty           |                           | $    | 126,049 |           |      | $ | 85,244  |         |  | $ | 49,753  |        
|Life, accident and health       |                           |      | 56,300  |           |      |   | 57,371  |         |  |   | 66,166  |        
|                                |                           |      |         |           |      |   |         |         | 
|                                | Fee and commission income |      | $       | 182,349   |      |   | $       | 142,615 |  |   | $       | 115,919 | 
|                                |                           |      |         |           |      |   |         |         | 



|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |         |         |  |   |           |           | 
|----------------- | ------------ | --------- | --------- | --------- | ------ | - | ------- | ---------- |  | - | --------- | ------- |  | ----- | ------- | ------- |  | - | --------- | --------- | 
|                  |              | Insurance |           |           |        |   | Other   |            |  |   |           |        
|                  |              | Company   |           |           | Agency |   |         | Operations |  |   | Corporate |         |  | Total |        
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        
|December 31, 2004 |              |           |           |           |        |   |         |            |  |   |           |         |  |       |         |         |  |   |           |          
|Domestic          |              | $         | 3,263,509 |           |        | $ | 695,313 |            |  | $ | 109,642   |         |  | $     | 116,293 |         |  | $ | 4,184,757 |          
|Foreign           |              |           | 1,086,348 |           |        |   | 662,332 |            |  |   |          |         |  |       |        |         |  |   | 1,748,680 |          
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        
|                  | Total assets |           | $         | 4,349,857 |        |   | $       | 1,357,645  |  |   | $         | 109,642 |  |       | $       | 116,293 |  |   | $         | 5,933,437 | 
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        
|December 31, 2003 |              |           |           |           |        |   |         |            |  |   |           |         |  |       |         |         |  |   |           |          
|Domestic          |              | $         | 2,543,329 |           |        | $ | 820,443 |            |  | $ | 78,349    |         |  | $     | 94,983  |         |  | $ | 3,537,104 |          
|Foreign           |              |           | 744,280   |           |        |   | 593,822 |            |  |   |          |         |  |       |        |         |  |   | 1,338,102 |          
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        
|                  | Total assets |           | $         | 3,287,609 |        |   | $       | 1,414,265  |  |   | $         | 78,349  |  |       | $       | 94,983  |  |   | $         | 4,875,206 | 
|                  |              |           |           |           |        |   |         |            |  |   |           |         |  |       |        



|    |            
|--- | -----------
|(8) | Reinsurance



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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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




|                             |             |         |           |           |         |               |           |            |  |   |          |         | 
|---------------------------- | ----------- | ------- | --------- | --------- | ------- | ------------- | --------- | ---------- |  | - | -------- | ------- | 
|                             |             |         |           |           |         | Loss and Loss |          
|                             |             | Written |           |           | Earned  |               |           | Adjustment | 
|                             |             | Premium |           |           | Premium |               |           | Expense    | 
|                             |             |         |           |           |         |               |           |            | 
|Year ended December 31, 2004 |             |         |           |           |         |               |           |            |  |   |          |        
|Direct 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 |             |         |           |           |         |               |           |            |  |   |          |        
|Direct 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 | 
|                             |             |         |           |           |         |               |           |            | 
|Year ended December 31, 2002 |             |         |           |           |         |               |           |            |  |   |          |        
|Direct business              |             | $       | 904,737   |           |         | $             | 801,851   |            |  | $ | 504,815  |        
|Reinsurance assumed          |             |         | 254,512   |           |         |               | 229,287   |            |  |   | 99,437   |        
|Reinsurance ceded            |             |         | (613,338  | )         |         |               | (525,617  | )          |  |   | (297,761 | )      
|                             |             |         |           |           |         |               |           |            | 
|                             | Net amounts |         | $         | 545,911   |         |               | $         | 505,521    |  |   | $        | 306,491 | 
|                             |             |         |           |           |         |               |           |            | 





|                                                            |                                |      |         |           |      |   |         |         | 
|----------------------------------------------------------- | ------------------------------ | ---- | ------- | --------- | ---- | - | ------- | ------- | 
|                                                            |                                | 2004 |         |           | 2003 |  
|                                                            |                                |      |         |           |      |  
|Reinsurance recoverable on paid losses                      |                                | $    | 89,508  |           |      | $ | 101,013 |        
|Reinsurance recoverable on outstanding losses               |                                |      | 509,512 |           |      |   | 425,609 |        
|Reinsurance recoverable on incurred but not reported losses |                                |      | 520,404 |           |      |   | 404,479 |        
|Reserve for uncollectible reinsurance                       |                                |      | (20,425 | )         |      |   | (14,911 | )      
|                                                            |                                |      |         |           |      |  
|                                                            | Total reinsurance recoverables |      | $       | 1,098,999 |      |   | $       | 916,190 | 
|                                                            |                                |      |         |           |      |  



|                       |               |      |         |         |      |   |         |         | 
|---------------------- | ------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                       |               | 2004 |         |         | 2003 |  
|                       |               |      |         |         |      |  
|Payables to reinsurers |               | $    | 350,514 |         |      | $ | 393,214 |        
|Letters of credit      |               |      | 265,152 |         |      |   | 195,329 |        
|Cash deposits          |               |      | 68,307  |         |      |   | 11,195  |        
|                       |               |      |         |         |      |  
|                       | Total credits |      | $       | 683,973 |      |   | $       | 599,738 | 
|                       |               |      |         |         |      |  

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)




|                                                            |                                       |      |           |           |      |   |           |         | 
|----------------------------------------------------------- | ------------------------------------- | ---- | --------- | --------- | ---- | - | --------- | ------- | 
|                                                            |                                       | 2004 |           |           | 2003 |  
|                                                            |                                       |      |           |           |      |  
|Loss and loss adjustment expense payable                    |                                       | $    | 2,089,199 |           |      | $ | 1,535,288 |        
|Reinsurance recoverable on outstanding losses               |                                       |      | (509,512  | )         |      |   | (425,609  | )      
|Reinsurance recoverable on incurred but not reported losses |                                       |      | (520,404  | )         |      |   | (404,479  | )      
|                                                            |                                       |      |           |           |      |  
|                                                            | Net reserves                          |      | $         | 1,059,283 |      |   | $         | 705,200 | 
|                                                            |                                       |      |           |           |      |  
|Unearned premium                                            |                                       | $    | 741,706   |           |      | $ | 592,311   |        
|Ceded unearned premium                                      |                                       |      | (317,055  | )         |      |   | (291,591  | )      
|                                                            |                                       |      |           |           |      |  
|                                                            | Net unearned premium                  |      | $         | 424,651   |      |   | $         | 300,720 | 
|                                                            |                                       |      |           |           |      |  
|Deferred policy acquisition costs                           |                                       | $    | 139,199   |           |      | $ | 106,943   |        
|Deferred ceding commissions                                 |                                       |      | (94,896   | )         |      |   | (88,129   | )      
|                                                            |                                       |      |           |           |      |  
|                                                            | Net deferred policy acquisition costs |      | $         | 44,303    |      |   | $         | 18,814  | 
|                                                            |                                       |      |           |           |      |  



|                                      |  |        |    |  |          |                |              |       |         |  |     |              |        |  |  |   |        | 
|------------------------------------- |  | ------ | -- |  | -------- | -------------- | ------------ | ----- | ------- |  | --- | ------------ | ------ |  |  | - | ------ | 
|                                      |  |        |    |  |          | Total          |              | Total |         |  | Net |             
|Reinsurer                             |  | Rating |    |  | Location |                | Recoverables |       | Credits |  |     | Recoverables |       
|                                      |  |        |    |  |          |                |              |       |         |  |     |              |       
|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 | 
|December 31, 2003                     |  |        |    |  |          |                |              |       |         |  |     |              |        |  |  |   |        | 
|Lloyds Syndicate Number 2488         |  |        | A- |  |          | United Kingdom |              | $     | 34,824  |  |     | $            | 6,631  |  |  | $ | 28,193 | 
|Arch Reinsurance Company              |  |        | A- |  |          | Nebraska       |              |       | 36,481  |  |     |              | 8,345  |  |  |   | 28,136 | 
|Hannover Rueckversicherungs AG        |  |        | A  |  |          | Germany        |              |       | 44,095  |  |     |              | 17,159 |  |  |   | 26,936 | 
|Lloyds Syndicate Number 1206         |  |        | C+ |  |          | United Kingdom |              |       | 26,567  |  |     |              | 18     |  |  |   | 26,549 | 
|Lloyds Syndicate Number 0033         |  |        | A- |  |          | United Kingdom |              |       | 26,346  |  |     |              | 271    |  |  |   | 26,075 | 
|Harco National Insurance Company      |  |        | A- |  |          | Illinois       |              |       | 33,072  |  |     |              | 7,971  |  |  |   | 25,101 | 

F-33



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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)












|    |                              
|--- | -----------------------------
|(9) | Commitments and Contingencies



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





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)










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





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





|                         |                                                 |            |       |        | 
|------------------------ | ----------------------------------------------- | ---------- | ----- | ------ | 
|Years Ended December 31, |                                                 | Amount Due |      
|                         |                                                 |            |      
|2005                     |                                                 | $          | 8,822 |       
|2006                     |                                                 |            | 7,563 |       
|2007                     |                                                 |            | 6,613 |       
|2008                     |                                                 |            | 5,455 |       
|2009                     |                                                 |            | 3,522 |       
|Thereafter               |                                                 |            | 4,885 |       
|                         |                                                 |            |      
|                         | Total future minimum annual rental payments due |            | $     | 36,860 | 
|                         |                                                 |            |      



| |                
| | ---------------
| | Indemnification



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)










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





|     |                           
|---- | --------------------------
|(10) | Related Party Transactions







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)










|     |                     
|---- | --------------------
|(11) | Shareholders Equity







|                             |  |             |        |            |            |   |        |       |             |               |        |   |  |   |        | 
|---------------------------- |  | ----------- | ------ | ---------- | ---------- | - | ------ | ----- | ----------- | ------------- | ------ | - |  | - | ------ | 
|                             |  |             |        | Unrealized |            |   |        |       | Accumulated |              
|                             |  | Foreign     |        |            | Investment |   |        |       |             | Other         |       
|                             |  | Currency    |        |            | Gain       |   |        |       |             | Comprehensive |       
|                             |  | Translation |        |            | (Loss)     |   |        | Other |             |               | Income |  
|                             |  |             |        |            |            |   |        |       |             |               |        |  
|Balance at December 31, 2001 |  | $           | (934   | )          |            | $ | 7,410  |       |             | $             | 24     |   |  | $ | 6,500  | 
|Net change for year          |  |             | 50     |            |            |   | 14,239 |       |             |               | (24    | ) |  |   | 14,265 | 
|                             |  |             |        |            |            |   |        |       |             |               |        |  
|Balance at December 31, 2002 |  |             | (884   | )          |            |   | 21,649 |       |             |               |       |   |  |   | 20,765 | 
|Net change for year          |  |             | 8,149  |            |            |   | (2,305 | )     |             |               | (483   | ) |  |   | 5,361  | 
|                             |  |             |        |            |            |   |        |       |             |               |        |  
|Balance at December 31, 2003 |  |             | 7,265  |            |            |   | 19,344 |       |             |               | (483   | ) |  |   | 26,126 | 
|Net change for year          |  |             | 4,660  |            |            |   | 6,437  |       |             |               | 412    |   |  |   | 11,509 | 
|                             |  |             |        |            |            |   |        |       |             |               |        |  
|Balance at December 31, 2004 |  | $           | 11,925 |            |            | $ | 25,781 |       |             | $             | (71    | ) |  | $ | 37,635 | 
|                             |  |             |        |            |            |   |        |       |             |               |        |  

F-37



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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)




|                                       |  |          |               | 
|-------------------------------------- |  | -------- | ------------- | 
|                                       |  | Maximum  |              
|                                       |  | Dividend |              
|                                       |  |          |              
|Houston Casualty Company               |  | $        | 60.4  million | 
|Avemco Insurance Company               |  |          |              | 
|American Contractors Indemnity Company |  |          | 4.0 million   | 





|     |              
|---- | -------------
|(12) | Stock Options





|                               |  |           |       |         |          |   |       |           |         |  |          |   |  |           |       |  |          |  |       |   |  |   |       | 
|------------------------------ |  | --------- | ----- | ------- | -------- | - | ----- | --------- | ------- |  | -------- | - |  | --------- | ----- |  | -------- |  | ----- | - |  | - | ----- | 
|                               |  | 2004      |       |         | 2003     |   |       | 2002      |        
|                               |  |           |       |         |          |   |       |           |        
|                               |  |           |       | Average |          |   |       |           | Average |  |          |   |  | Average   |      
|                               |  | Number    |       |         | Exercise |   |       | Number    |         |  | Exercise |   |  | Number    |       |  | Exercise | 
|                               |  | of Shares |       |         | Price    |   |       | of Shares |         |  | Price    |   |  | of Shares |       |  | Price    | 
|                               |  |           |       |         |          |   |       |           |         |  |          |   |  |           |       |  |          | 
|Outstanding, beginning of year |  |           | 5,527 |         |          | $ | 22.49 |           |         |  | 6,371    |   |  | $         | 20.99 |  |          |  | 3,305 |   |  | $ | 17.39 | 
|Granted at market value        |  |           | 696   |         |          |   | 30.40 |           |         |  | 475      |   |  |           | 24.42 |  |          |  | 4,116 |   |  |   | 22.45 | 
|Exercised                      |  |           | (996  | )       |          |   | 20.66 |           |         |  | (1,259   | ) |  |           | 15.69 |  |          |  | (831  | ) |  |   | 14.01 | 
|Forfeited and expired          |  |           | (442  | )       |          |   | 23.88 |           |         |  | (60      | ) |  |           | 21.52 |  |          |  | (219  | ) |  |   | 19.84 | 
|                               |  |           |       |         |          |   |       |           |         |  |          |   |  |           |       |  |          | 
|Outstanding, end of year       |  |           | 4,785 |         |          | $ | 23.98 |           |         |  | 5,527    |   |  | $         | 22.49 |  |          |  | 6,371 |   |  | $ | 20.99 | 
|                               |  |           |       |         |          |   |       |           |         |  |          |   |  |           |       |  |          | 
|Exercisable, end of year       |  |           | 1,946 |         |          | $ | 22.89 |           |         |  | 1,871    |   |  | $         | 21.61 |  |          |  | 1,437 |   |  | $ | 17.81 | 
|                               |  |           |       |         |          |   |       |           |         |  |          |   |  |           |       |  |          | 



|                         |               |                     |       |         |                     |  |           |           |  |   |           |         |  |          |     |       |  |   |       |       | 
|------------------------ | ------------- | ------------------- | ----- | ------- | ------------------- |  | --------- | --------- |  | - | --------- | ------- |  | -------- | --- | ----- |  | - | ----- | ----- | 
|                         |               | 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 $20.50             |               |                     | 1,246 |         |                     |  | 3.9 years |           |  | $ | 20.14     |         |  |          | 700 |       |  | $ | 19.97 |      
|$20.50 - $24.50          |               |                     | 1,325 |         |                     |  | 4.2 years |           |  |   | 22.43     |         |  |          | 467 |       |  |   | 22.29 |      
|$24.51 - $27.00          |               |                     | 1,245 |         |                     |  | 4.1 years |           |  |   | 25.03     |         |  |          | 594 |       |  |   | 25.12 |      
|Over $27.00              |               |                     | 969   |         |                     |  | 4.4 years |           |  |   | 29.69     |         |  |          | 185 |       |  |   | 28.26 |      
|                         |               |                     |       |         |                     |  |           |           |  |   |           |         |  |          |    
|                         | Total options |                     |       | 4,785   |                     |  |           | 4.1 years |  |   | $         | 23.98   |  |          |     | 1,946 |  |   | $     | 22.89 | 
|                         |               |                     |       |         |                     |  |           |           |  |   |           |         |  |          |    

F-38



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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)




|     |                   
|---- | ------------------
|(13) | Earnings Per Share



|                                                                                    |                                                                            |      |         |        |      |   |         |        |  |   |         |        | 
|----------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ---- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                                                                    |                                                                            | 2004 |         |        | 2003 |   |         | 2002   | 
|                                                                                    |                                                                            |      |         |        |      |   |         |        | 
|Net earnings                                                                        |                                                                            | $    | 163,025 |        |      | $ | 143,561 |        |  | $ | 105,828 |       
|                                                                                    |                                                                            |      |         |        |      |   |         |        | 
|Average common shares outstanding                                                   |                                                                            |      | 64,838  |        |      |   | 63,279  |        |  |   | 62,173  |       
|Common shares contractually issuable in the future                                  |                                                                            |      |        |        |      |   |        |        |  |   | 52      |       
|                                                                                    |                                                                            |      |         |        |      |   |         |        | 
|                                                                                    | Weighted average common shares outstanding                                 |      |         | 64,838 |      |   |         | 63,279 |  |   |         | 62,225 | 
|Dilutive effect of outstanding options (determined using
    treasury stock method) |                                                                            |      | 1,046   |        |      |   | 1,105   |        |  |   | 712     |       
|                                                                                    |                                                                            |      |         |        |      |   |         |        | 
|                                                                                    | Weighted average common shares and potential common shares
    outstanding |      |         | 65,884 |      |   |         | 64,384 |  |   |         | 62,937 | 
|                                                                                    |                                                                            |      |         |        |      |   |         |        | 
|Anti-dilutive stock options not included in treasury stock
    method computation   |                                                                            |      | 4       |        |      |   | 204     |        |  |   | 1,105   |       
|                                                                                    |                                                                            |      |         |        |      |   |         |        | 

The Effect of Contingently Convertible Debt on
Diluted Earnings per Share,




F-39



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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) | Liability for Unpaid Loss and Loss Adjustment Expense



|                                                                               |                                                                                                           |                                           |                                                                  |         |           |           |           |         |         |           |           |         |         |           | 
|------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------------------- | ------- | --------- | --------- | --------- | ------- | ------- | --------- | --------- | ------- | ------- | --------- | 
|                                                                               |                                                                                                           | 2004                                      |                                                                  |         | 2003      |           |           | 2002    |        
|                                                                               |                                                                                                           |                                           |                                                                  |         |           |           |           |         |        
|Reserves for loss and loss adjustment expense payable at
    beginning of year |                                                                                                           | $                                         | 1,535,288                                                        |         |           | $         | 1,155,290 |         |         | $         | 1,130,748 |        
|Less reinsurance recoverables                                                  |                                                                                                           |                                           | 830,088                                                          |         |           |           | 697,972   |         |         |           | 817,651   |        
|                                                                               |                                                                                                           |                                           |                                                                  |         |           |           |           |         |        
|                                                                               |                                                                                                           |                                           | Net reserves at beginning of year                                |         |           | 705,200   |           |         |         | 457,318   |           |         |         | 313,097   | 
|Net reserve adjustments from acquisition and disposition of
    subsidiaries   |                                                                                                           |                                           | 11,647                                                           |         |           |           | 5,587     |         |         |           | 79,558    |        
|                                                                              
|Incurred loss and loss adjustment expense:                                     |                                                                                                           |                                           |                                                                  |         |           |           |           |         |         |           |           |        
|                                                                               | Provision for loss and loss adjustment expense for claims
    occurring in current year                   |                                           |                                                                  | 614,752 |           |           |           | 464,886 |         |           |           | 313,270 |        
|                                                                               | Increase (decrease) in estimated loss and loss adjustment
    expense for claims occurring in prior years |                                           |                                                                  | 30,478  |           |           |           | 23,766  |         |           |           | (6,779  | )      
|                                                                               |                                                                                                           |                                           |                                                                  |         |           |           |           |         |        
|                                                                               |                                                                                                           | Incurred loss and loss adjustment expense |                                                                  |         | 645,230   |           |           |         | 488,652 |           |           |         | 306,491 |          
|                                                                               |                                                                                                           |                                           |                                                                  |         |           |           |           |         |        
|Loss and loss adjustment expense payments for claims occurring
    during:     |                                                                                                           |                                           |                                                                  |         |           |           |           |         |         |           |           |        
|                                                                               | Current year                                                                                              |                                           |                                                                  | 161,117 |           |           |           | 110,528 |         |           |           | 115,809 |        
|                                                                               | Prior years                                                                                               |                                           |                                                                  | 141,677 |           |           |           | 135,829 |         |           |           | 126,019 |        
|                                                                               |                                                                                                           |                                           |                                                                  |         |           |           |           |         |        
|                                                                               |                                                                                                           | Loss and loss adjustment expense payments |                                                                  |         | 302,794   |           |           |         | 246,357 |           |           |         | 241,828 |          
|                                                                               |                                                                                                           |                                           |                                                                  |         |           |           |           |         |        
|                                                                               |                                                                                                           |                                           | Net reserves at end of year                                      |         |           | 1,059,283 |           |         |         | 705,200   |           |         |         | 457,318   | 
|                                                                               |                                                                                                           | Plus reinsurance recoverables             |                                                                  |         | 1,029,916 |           |           |         | 830,088 |           |           |         | 697,972 |          
|                                                                               |                                                                                                           |                                           |                                                                  |         |           |           |           |         |        
|                                                                               |                                                                                                           |                                           | Reserves for loss and loss adjustment expense at end of
    year |         | $         | 2,089,199 |           |         | $       | 1,535,288 |           |         | $       | 1,155,290 | 
|                                                                               |                                                                                                           |                                           |                                                                  |         |           |           |           |         |        





F-40



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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)






|     |                      
|---- | ---------------------
|(15) | Statutory Information





|                                 |  |      |         |  |      |   |         |      |  |   |         | 
|-------------------------------- |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                                 |  | 2004 |         |  | 2003 |   |         | 2002 | 
|                                 |  |      |         |  |      |   |         |      | 
|Statutory policyholders surplus |  | $    | 844,851 |  |      | $ | 591,889 |      |  | $ | 523,807 | 
|Statutory net income             |  |      | 85,843  |  |      |   | 54,784  |      |  |   | 68,462  | 









|     |                         
|---- | ------------------------
|(16) | Supplemental Information



|                                            |  |      |         |  |      |   |        |      |  |   |        | 
|------------------------------------------- |  | ---- | ------- |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                            |  | 2004 |         |  | 2003 |   |        | 2002 | 
|                                            |  |      |         |  |      |   |        |      | 
|Interest paid                               |  | $    | 7,219   |  |      | $ | 6,174  |      |  | $ | 4,900  | 
|Income taxes paid                           |  |      | 112,392 |  |      |   | 70,573 |      |  |   | 22,642 | 
|Dividends declared but not paid at year end |  |      | 5,783   |  |      |   | 4,800  |      |  |   | 4,061  | 



F-41



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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)




|     |                                     
|---- | ------------------------------------
|(17) | Quarterly Financial Data (Unaudited)

|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|----------------------------------- |  | -------------- | ------- |  | ------------- | - | ------- | -------------- |  | - | ------------- |  |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                    |  | Fourth Quarter |         |  | Third Quarter |   |         | Second Quarter |  |   | First Quarter | 
|                                    |  |                |         |  |               |   |         |                |  |   |               | 
|                                    |  | 2004           |         |  | 2003          |   |         | 2004           |  |   | 2003          |  |  | 2004 |         |  | 2003 |   |         | 2004 |  |   | 2003    | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Total revenue                       |  | $              | 365,669 |  |               | $ | 257,839 |                |  | $ | 322,197       |  |  | $    | 246,313 |  |      | $ | 317,270 |      |  | $ | 237,868 |  |  | $ | 278,018 |  |  | $ | 199,944 | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Net earnings                        |  | $              | 56,239  |  |               | $ | 50,460  |                |  | $ | 15,803        |  |  | $    | 36,366  |  |      | $ | 46,415  |      |  | $ | 32,968  |  |  | $ | 44,568  |  |  | $ | 23,767  | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Basic earnings per share data:      |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|Earnings per share                  |  | $              | 0.85    |  |               | $ | 0.79    |                |  | $ | 0.24          |  |  | $    | 0.57    |  |      | $ | 0.72    |      |  | $ | 0.52    |  |  | $ | 0.69    |  |  | $ | 0.38    | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Weighted average shares outstanding |  |                | 65,866  |  |               |   | 63,875  |                |  |   | 64,679        |  |  |      | 63,717  |  |      |   | 64,538  |      |  |   | 62,867  |  |  |   | 64,249  |  |  |   | 62,637  | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Diluted earnings per share data:    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         |  |  |   |         |  |  |   |         | 
|Earnings per share                  |  | $              | 0.84    |  |               | $ | 0.77    |                |  | $ | 0.24          |  |  | $    | 0.56    |  |      | $ | 0.71    |      |  | $ | 0.52    |  |  | $ | 0.68    |  |  | $ | 0.38    | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 
|Weighted average shares outstanding |  |                | 66,836  |  |               |   | 65,111  |                |  |   | 65,606        |  |  |      | 64,886  |  |      |   | 65,793  |      |  |   | 63,991  |  |  |   | 65,417  |  |  |   | 63,336  | 
|                                    |  |                |         |  |               |   |         |                |  |   |               |  |  |      |         |  |      |   |         |      |  |   |         | 







F-42



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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, 2004      |                                                                             
|                       |                                                                             
|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 |                         | $       | 87,652  |           |                | $ | 88,126   |           |  | $       | 88,126  |          
|                       | Bonds  states, municipalities and political
    subdivisions                |                         |         | 285,508 |           |                |   | 291,332  |           |  |         | 291,332 |          
|                       | Bonds  special revenue                                                      |                         |         | 441,929 |           |                |   | 450,018  |           |  |         | 450,018 |          
|                       | Bonds  corporate                                                            |                         |         | 374,130 |           |                |   | 377,336  |           |  |         | 377,336 |          
|                       | Asset-backed and mortgage-backed securities                                  |                         |         | 248,449 |           |                |   | 248,703  |           |  |         | 248,703 |          
|                       | Bonds  foreign                                                              |                         |         | 244,753 |           |                |   | 247,656  |           |  |         | 247,656 |          
|                       |                                                                              |                         |         |         |           |                |   |          |          
|                       |                                                                              | Total fixed maturities  |         |         | 1,682,421 |                |   | $        | 1,703,171 |  |         |         | 1,703,171 | 
|                       |                                                                              |                         |         |         |           |                |   |          |          
|Equity securities:     |                                                                              |                         |         |         |           |                |   |          |           |  |         |        
|                       | Common stocks  banks, trusts and insurance companies                        |                         |         | 12,602  |           |                | $ | 13,172   |           |  |         | 13,172  |          
|                       | Common stocks  industrial, miscellaneous and all other                      |                         |         | 2,834   |           |                |   | 2,979    |           |  |         | 2,979   |          
|                       | Non-redeemable preferred stocks                                              |                         |         | 1,033   |           |                |   | 1,038    |           |  |         | 1,038   |          
|                       |                                                                              |                         |         |         |           |                |   |          |          
|                       |                                                                              | Total equity securities |         |         | 16,469    |                |   | $        | 17,189    |  |         |         | 17,189    | 
|                       |                                                                              |                         |         |         |           |                |   |          |          
|Short-term investments |                                                                              |                         | 729,985 |         |           |                |   |          |           |  | 729,985 |        
|Other investments      |                                                                              |                         | 17,668  |         |           |                |   |          |           |  | 18,146  |        
|                       |                                                                              |                         |         |         |           |                |   |          |          
|                       |                                                                              | Total investments       |         | $       | 2,446,543 |                |   |          |           |  |         | $       | 2,468,491 | 
|                       |                                                                              |                         |         |         |           |                |   |          |          

S-1



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##### Table of Contents



SCHEDULE 2





HCC INSURANCE HOLDINGS, INC.


CONDENSED FINANCIAL INFORMATION OF REGISTRANT


BALANCE SHEETS


(in thousands)


|                                                              |                                            |              |           |           |      |   |           |           | 
|------------------------------------------------------------- | ------------------------------------------ | ------------ | --------- | --------- | ---- | - | --------- | --------- | 
|                                                              |                                            | December 31, |          
|                                                              |                                            |              |          
|                                                              |                                            | 2004         |           |           | 2003 |  
|                                                              |                                            |              |           |           |      |  
|ASSETS                                                       
|Fixed income securities, at market (cost:
    2004  $33,749) |                                            | $            | 33,716    |           |      | $ |          |          
|Cash                                                          |                                            |              | 2,242     |           |      |   | 602       |          
|Short-term investments                                        |                                            |              | 31,006    |           |      |   | 60,823    |          
|Investment in subsidiaries                                    |                                            |              | 1,389,582 |           |      |   | 1,098,192 |          
|Receivable from subsidiaries                                  |                                            |              |          |           |      |   | 28,141    |          
|Intercompany loans to subsidiaries for acquisitions           |                                            |              | 194,919   |           |      |   | 180,546   |          
|Other assets                                                  |                                            |              | 11,867    |           |      |   | 3,827     |          
|                                                              |                                            |              |           |           |      |  
|                                                              | Total assets                               |              | $         | 1,663,332 |      |   | $         | 1,372,131 | 
|                                                              |                                            |              |           |           |      |  
|LIABILITIES AND SHAREHOLDERS EQUITY                         
|Payable to subsidiaries                                       |                                            | $            | 15,154    |           |      | $ |          |          
|Notes payable                                                 |                                            |              | 297,442   |           |      |   | 297,451   |          
|Deferred Federal income tax                                   |                                            |              | 6,468     |           |      |   | 7,480     |          
|Accounts payable and accrued liabilities                      |                                            |              | 20,603    |           |      |   | 20,280    |          
|                                                              |                                            |              |           |           |      |  
|                                                              | Total liabilities                          |              |           | 339,667   |      |   |           | 325,211   | 
|                                                              | Total shareholders equity                 |              |           | 1,323,665 |      |   |           | 1,046,920 | 
|                                                              |                                            |              |           |           |      |  
|                                                              | Total liabilities and shareholders equity |              | $         | 1,663,332 |      |   | $         | 1,372,131 | 
|                                                              |                                            |              |           |           |      |  



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, |        
|                                   |                                      |                          |        
|                                   |                                      | 2004                     |         |         | 2003 |   |         | 2002    | 
|                                   |                                      |                          |         |         |      |   |         |         | 
|Equity in earnings of subsidiaries |                                      | $                        | 166,038 |         |      | $ | 142,853 |         |  | $ | 108,833 |        
|Interest income from subsidiaries  |                                      |                          | 6,531   |         |      |   | 6,827   |         |  |   | 7,277   |        
|Net investment income              |                                      |                          | 994     |         |      |   | 953     |         |  |   | 171     |        
|Other income                       |                                      |                          |        |         |      |   | 2,481   |         |  |   | 10      |        
|                                   |                                      |                          |         |         |      |   |         |         | 
|                                   | Total revenue                        |                          |         | 173,563 |      |   |         | 153,114 |  |   |         | 116,291 | 
|Interest expense                   |                                      |                          | 6,733   |         |      |   | 6,296   |         |  |   | 7,880   |        
|Other operating expense            |                                      |                          | 2,858   |         |      |   | 1,781   |         |  |   | 2,290   |        
|                                   |                                      |                          |         |         |      |   |         |         | 
|                                   | Total expense                        |                          |         | 9,591   |      |   |         | 8,077   |  |   |         | 10,170  | 
|                                   |                                      |                          |         |         |      |   |         |         | 
|                                   | Earnings before income tax provision |                          |         | 163,972 |      |   |         | 145,037 |  |   |         | 106,121 | 
|Income tax provision               |                                      |                          | 947     |         |      |   | 1,476   |         |  |   | 293     |        
|                                   |                                      |                          |         |         |      |   |         |         | 
|                                   | Net earnings                         |                          | $       | 163,025 |      |   | $       | 143,561 |  |   | $       | 105,828 | 
|                                   |                                      |                          |         |         |      |   |         |         | 



S-3



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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, |        
|                                                                                                |                                                                                                                                                                                   |                          |        
|                                                                                                |                                                                                                                                                                                   | 2004                     |         |         | 2003 |   |         | 2002    |  
|                                                                                                |                                                                                                                                                                                   |                          |         |         |      |   |         |         |  
|Net earnings                                                                                    |                                                                                                                                                                                   | $                        | 163,025 |         |      | $ | 143,561 |         |   | $ | 105,828 |        
|Other comprehensive income, net of tax:                                                         |                                                                                                                                                                                   |                          |         |         |      |   |         |         |   |   |         |        
|Foreign currency translation adjustment                                                         |                                                                                                                                                                                   |                          | 4,660   |         |      |   | 8,149   |         |   |   | 50      |        
|Investment gains (losses):                                                                      |                                                                                                                                                                                   |                          |         |         |      |   |         |         |   |   |         |        
|                                                                                                | Gains during the year, net of income tax charge of $12                                                                                                                            |                          |         | 21      |      |   |         |        |   |   |         |        |  
|                                                                                                | Consolidated subsidiaries investment gains (losses) during
    the year, net of income tax charge (benefit) of $6,079 in 2004,
    $(1,048) in 2003 and $8,040 in 2002           |                          |         | 10,934  |      |   |         | (1,962  | ) |   |         | 14,533  |  
|                                                                                                | Less consolidated subsidiaries reclassification adjustment
    for gains included in net earnings, net of income tax charge of
    $2,433 in 2004, $184 in 2003 and $159 in 2002 |                          |         | (4,518  | )    |   |         | (343    | ) |   |         | (294    | )
|Other, net of income tax charge (benefit) of $222 in 2004,
    $(260) in 2003 and $(13) in 2002 |                                                                                                                                                                                   |                          | 412     |         |      |   | (483    | )       |   |   | (24     | )      
|                                                                                                |                                                                                                                                                                                   |                          |         |         |      |   |         |         |  
|Other comprehensive income                                                                      |                                                                                                                                                                                   |                          | 11,509  |         |      |   | 5,361   |         |   |   | 14,265  |        
|                                                                                                |                                                                                                                                                                                   |                          |         |         |      |   |         |         |  
|                                                                                                | Comprehensive income                                                                                                                                                              |                          | $       | 174,534 |      |   | $       | 148,922 |   |   | $       | 120,093 |  
|                                                                                                |                                                                                                                                                                                   |                          |         |         |      |   |         |         |  



S-4



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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,              |  
|                                      |                                                                                        |                                       |  
|                                      |                                                                                        | 2004                                  |   |          | 2003     |   |   | 2002     |         
|                                      |                                                                                        |                                       |   |          |          |   |   |          |         
|Cash flows from operating activities: |                                                                                        |                                       |   |          |          |   |   |          |          |   |   |        
|                                      | Net earnings                                                                           |                                       | $ | 163,025  |          |   | $ | 143,561  |          |   | $ | 105,828 |        
|                                      | Adjustment to reconcile net earnings to net cash provided by
    operating activities: |                                       |   |          |          |   |   |          |          |   |   |         |        
|                                      | Undistributed net income of subsidiaries                                               |                                       |   | (134,242 | )        |   |   | (120,953 | )        |   |   | (74,864 | )      
|                                      | Depreciation and amortization expense                                                  |                                       |   | 1,205    |          |   |   | 841      |          |   |   | 3,279   |        
|                                      | Increase in accrued interest receivable added to intercompany
    loan balances        |                                       |   | (6,544   | )        |   |   | (6,317   | )        |   |   | (7,277  | )      
|                                      | Change in accounts payable and accrued liabilities                                     |                                       |   | (660     | )        |   |   | 10,022   |          |   |   | (2,663  | )      
|                                      | Tax benefit from exercise of stock options                                             |                                       |   | 3,743    |          |   |   | 4,320    |          |   |   | 4,030   |        
|                                      | Other, net                                                                             |                                       |   | 2,701    |          |   |   | (19      | )        |   |   | 2,088   |        
|                                      |                                                                                        |                                       |   |          |          |   |   |          |         
|                                      |                                                                                        | Cash provided by operating activities |   |          | 29,228   |   |   |          | 31,455   |   |   |         | 30,421  |  
|Cash flows from investing activities: |                                                                                        |                                       |   |          |          |   |   |          |          |   |   |        
|                                      | Cash contributions to subsidiaries                                                     |                                       |   | (107,000 | )        |   |   | (51,364  | )        |   |   | (69,007 | )      
|                                      | Purchase of subsidiaries                                                               |                                       |   | (48,975  | )        |   |   | (11,624  | )        |   |   | (24,593 | )      
|                                      | Change in short-term investments                                                       |                                       |   | 29,817   |          |   |   | (55,986  | )        |   |   | (3,340  | )      
|                                      | Cost of securities acquired                                                            |                                       |   | (33,679  | )        |   |   |         |          |   |   |        |        
|                                      | Change in receivable from subsidiaries                                                 |                                       |   | 43,295   |          |   |   | (14,008  | )        |   |   | (1,379  | )      
|                                      | Intercompany loans to subsidiaries for acquisitions                                    |                                       |   | (62,523  | )        |   |   | (26,838  | )        |   |   | (16,806 | )      
|                                      | Payments on intercompany loans to subsidiaries                                         |                                       |   | 54,694   |          |   |   | 54,674   |          |   |   | 31,964  |        
|                                      |                                                                                        |                                       |   |          |          |   |   |          |         
|                                      |                                                                                        | Cash used by investing activities     |   |          | (124,371 | ) |   |          | (105,146 | ) |   |         | (83,161 | )
|Cash flows from financing activities: |                                                                                        |                                       |   |          |          |   |   |          |          |   |   |        
|                                      | Proceeds from note payable, net of costs                                               |                                       |   | 29,000   |          |   |   | 178,000  |          |   |   | 76,000  |        
|                                      | Payments on notes payable                                                              |                                       |   | (29,009  | )        |   |   | (107,003 | )        |   |   | (27,467 | )      
|                                      | Sale of common stock                                                                   |                                       |   | 116,776  |          |   |   | 20,279   |          |   |   | 11,207  |        
|                                      | Dividends paid                                                                         |                                       |   | (19,984  | )        |   |   | (17,039  | )        |   |   | (15,663 | )      
|                                      |                                                                                        |                                       |   |          |          |   |   |          |         
|                                      |                                                                                        | Cash provided by financing activities |   |          | 96,783   |   |   |          | 74,237   |   |   |         | 44,077  |  
|                                      |                                                                                        |                                       |   |          |          |   |   |          |         
|                                      |                                                                                        | Net change in cash                    |   |          | 1,640    |   |   |          | 546      |   |   |         | (8,663  | )
|                                      |                                                                                        | Cash at beginning of year             |   |          | 602      |   |   |          | 56       |   |   |         | 8,719   |  
|                                      |                                                                                        |                                       |   |          |          |   |   |          |         
|                                      |                                                                                        | Cash at end of year                   |   | $        | 2,242    |   |   | $        | 602      |   |   | $       | 56      |  
|                                      |                                                                                        |                                       |   |          |          |   |   |          |         



S-5



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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 2003 and 2002
    condensed financial information have been reclassified to
    conform with the 2004 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,
    2004, 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 our strategic
    investment in Argonaut Group, Inc.                                                                                                                                                                                                                                                                                                               

S-6



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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  |        
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        
|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   | 
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        
|2002              |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |         |         |  |   |        |         |  |   |           |          
|Insurance Company |       | $            | 18,883 |        |                          | $ | 1,234,241 |           |  | $ | 331,050  |                   |  | $          | 505,521    |           |            | $               | 33,587 |                   |       | $ | 306,491   |         |  | $        | 99,521  |         |  | $ | 40,008 |         |  | $ | 545,911   |          
|Agency            |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 3,933  |                   |       |   |           |         |  |          |         |         |  |   | 62,092 |         |  |   |           |          
|Other Operations  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 41     |                   |       |   |           |         |  |          |         |         |  |   | 256    |         |  |   |           |          
|Corporate         |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 | 194    |                   |       |   |           |         |  |          |         |         |  |   | (2,432 | )       |  |   |           |          
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        
|                  | Total |              | $      | 18,883 |                          |   | $         | 1,234,241 |  |   | $        | 331,050           |  |            | $          | 505,521   |            |                 | $      | 37,755            |       |   | $         | 306,491 |  |          | $       | 99,521  |  |   | $      | 99,924  |  |   | $         | 545,911   | 
|                  |       |              |        |        |                          |   |           |           |  |   |          |                   |  |            |            |           |            |                 |        |                   |       |   |           |         |  |          |        



|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 and amortization of goodwill 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 |        
|                                 |       |               |           | Ceded to Other |           |              | Other   |           |  |   |            | Amount  | 
|                                 |       | Direct Amount |           |                | Companies |              |         | Companies |  |   | Net Amount |         |  | Assumed to Net |          
|                                 |       |               |           |                |           |              |         |           |  |   |            |         |  |                |          
|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 | %
|                                 |       |               |           |                |           |              |         |           |  |   |            |         |  |                |          
|Year ended December 31, 2002     |       |               |           |                |           |              |         |           |  |   |            |         |  |                |           |           |  |  |    |   
|                                
|Life insurance in force          |       | $             | 1,021,600 |                |           | $            | 529,874 |           |  | $ |           |         |  | $              | 491,726   |           |  |  |   | % 
|                                 |       |               |           |                |           |              |         |           |  |   |            |         |  |                |          
|Earned premium:                  |       |               |           |                |           |              |         |           |  |   |            |         |  |                |           |           |  |  |    |   
|Property and liability insurance |       | $             | 293,614   |                |           | $            | 222,906 |           |  | $ | 133,736    |         |  | $              | 204,444   |           |  |  | 65 | % 
|Accident and health insurance    |       |               | 508,237   |                |           |              | 302,711 |           |  |   | 95,551     |         |  |                | 301,077   |           |  |  | 32 | % 
|                                 |       |               |           |                |           |              |         |           |  |   |            |         |  |                |          
|                                 | Total |               | $         | 801,851        |           |              | $       | 525,617   |  |   | $          | 229,287 |  |                | $         | 505,521   |  |  |    | 45 | %
|                                 |       |               |           |                |           |              |         |           |  |   |            |         |  |                |          

S-8



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##### Table of Contents






SCHEDULE 5


HCC INSURANCE HOLDINGS, INC.


VALUATION AND QUALIFYING ACCOUNTS


(in thousands)


|                                       |                                 |                        |   |        |        |  |   |       |        |  |   |        |       | 
|-------------------------------------- | ------------------------------- | ---------------------- | - | ------ | ------ |  | - | ----- | ------ |  | - | ------ | ----- | 
|                                       |                                 | 2004                   |   |        | 2003   |  |   | 2002  |       
|                                       |                                 |                        |   |        |        |  |   |       |       
|Reserve for uncollectible reinsurance: |                                 |                        |   |        |        |  |   |       |        |  |   |       
|                                       | Balance at beginning of year    |                        | $ | 14,991 |        |  | $ | 7,142 |        |  | $ | 5,176  |      
|                                       | Provision charged to expense    |                        |   | 6,616  |        |  |   | 7,671 |        |  |   | 5,530  |      
|                                       | Amounts (written off) recovered |                        |   | (1,182 | )      |  |   | 178   |        |  |   | (3,564 | )    
|                                       |                                 |                        |   |        |        |  |   |       |       
|                                       |                                 | Balance at end of year |   | $      | 20,425 |  |   | $     | 14,991 |  |   | $      | 7,142 | 
|                                       |                                 |                        |   |        |        |  |   |       |       
|Allowance for doubtful accounts:       |                                 |                        |   |        |        |  |   |       |        |  |   |       
|                                       | Balance at beginning of year    |                        | $ | 2,549  |        |  | $ | 2,279 |        |  | $ | 2,779  |      
|                                       | Acquisitions of subsidiaries    |                        |   |       |        |  |   | 13    |        |  |   | 455    |      
|                                       | Provision charged to expense    |                        |   | 546    |        |  |   | 167   |        |  |   | 487    |      
|                                       | Amounts (written off) recovered |                        |   | (115   | )      |  |   | 90    |        |  |   | (1,442 | )    
|                                       |                                 |                        |   |        |        |  |   |       |       
|                                       |                                 | Balance at end of year |   | $      | 2,980  |  |   | $     | 2,549  |  |   | $      | 2,279 | 
|                                       |                                 |                        |   |        |        |  |   |       |       

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  |  |  |  | Bylaws of HCC Insurance Holdings, Inc., as amended.                                                                                                                                                                                                                     
|        | B3  | .2  |  |  |  | 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.                                            
|        | A4  | .1  |  |  |  | Specimen of Common Stock Certificate, $1.00 par value, of
    HCC Insurance Holdings, Inc.                                                                                                                                                                              
|        | C10 | .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.
|        | F10 | .2  |  |  |  | HCC Insurance Holdings, Inc. 1994 Nonemployee Director Stock
    Option Plan.                                                                                                                                                                                           
|        | G10 | .3  |  |  |  | HCC Insurance Holdings, Inc. 1992 Incentive Stock Option Plan,
    as amended and restated.                                                                                                                                                                             
|        | G10 | .4  |  |  |  | HCC Insurance Holdings, Inc. 1995 Flexible Incentive Plan, as
    amended and restated.                                                                                                                                                                                 
|        | G10 | .5  |  |  |  | HCC Insurance Holdings, Inc. 1997 Flexible Incentive Plan, as
    amended and restated.                                                                                                                                                                                 
|        | G10 | .6  |  |  |  | HCC Insurance Holdings, Inc. 1996 Nonemployee Director Stock
    Option Plan, as amended and restated.                                                                                                                                                                  
|        | H10 | .7  |  |  |  | HCC Insurance Holdings, Inc. 2001 Flexible Incentive Plan, as
    amended and restated.                                                                                                                                                                                 
|        | E10 | .8  |  |  |  | Form of Incentive Stock Option Agreement under the HCC Insurance
    Holdings, Inc. 2001 Flexible Incentive Plan.                                                                                                                                                       
|        | 10  | .9  |  |  |  | Amended and Restated Employment Agreement effective at
    November 10, 2004, between HCC Insurance Holdings, Inc. and
    Stephen L. Way.                                                                                                                              
|        | I10 | .10 |  |  |  | HCC Insurance Holdings, Inc. nonqualified deferred compensation
    plan for Stephen L. Way effective January 1, 2003.                                                                                                                                                  
|        | E10 | .11 |  |  |  | Employment Agreement effective at January 10, 2002, between
    HCC Insurance Holdings, Inc. and Craig J. Kelbel.                                                                                                                                                       
|        | E10 | .12 |  |  |  | Employment Agreement effective at June 3, 2002, between HCC
    Insurance Holdings, Inc. and Michael J. Schell.                                                                                                                                                         
|        | D10 | .13 |  |  |  | Employment Agreement effective at January 1, 2002, between
    HCC Insurance Holdings, Inc. and Edward H. Ellis, Jr.                                                                                                                                                    
|        | E10 | .14 |  |  |  | Employment Agreement effective at January 1, 2003 between
    HCC Insurance Holdings, Inc. and Christopher L. Martin.                                                                                                                                                   
|        | J10 | .15 |  |  |  | HCC Insurance Holdings, Inc. 2004 Flexible Incentive Plan.                                                                                                                                                                                                              
|        | 10  | .16 |  |  |  | Form of Incentive Stock Option Agreement under the HCC Insurance
    Holdings, Inc. 2004 Incentive Plan.                                                                                                                                                                
|        | K10 | .17 |  |  |  | Indenture dated August 23, 2001 between HCC Insurance
    Holdings, Inc. and First Union National Bank related to Debt
    Securities (Senior Debt).                                                                                                                    
|        | K10 | .18 |  |  |  | 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.                                                                                              
|        | L10 | .19 |  |  |  | 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.                                    
|        | M10 | .19 |  |  |  | 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.                                                          
|        | 10  | .20 |  |  |  | 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.                                                                                  
|        | 12  |     |  |  |  | Statement Regarding Computation of Ratios.                                                                                                                                                                                                                              



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##### Table of Contents



|        |    |    |  |   |  |                                                                                                                            
|------- | -- | -- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |   | 
|Number  |    |    |  |   | 
|        |    |    |  |   | 
|        | 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.                                                                               
|        | 23 |    |  |  |  | Consent of Independent Registered Public Accounting
    Firm  PricewaterhouseCoopers LLP dated March 15,
    2005.        
|        | 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-1
    (Registration No. 33-48737) filed October 27, 1992.                  
| 
|B |  | 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.                  
| 
|C |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 8-K filed December 1, 2004.                                                                            
| 
|D |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 10-K for the fiscal year ended
    December 31, 2001.                                                  
| 
|E |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 10-K for the fiscal year ended
    December 31, 2002.                                                  
| 
|F |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Registration Statement on Form S-8
    (Registration No. 33-94472) filed July 11, 1995.                     
| 
|G |  | Incorporated by reference to Exhibits to HCC Insurance Holdings,
    Inc.s Form 10-K for the fiscal year ended
    December 31, 1999.                                                      
| 
|H |  | 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.
| 
|I |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 10-K for the fiscal year ended
    December 31, 2003.                                                  
| 
|J |  | 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.
| 
|K |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 8-K dated August 19, 2001.                                                                             
| 
|L |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 8-K dated March 25, 2003.                                                                              
| 
|M |  | Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Form 8-K dated December 22, 2004.