##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.  For the fiscal year ended December 31, 2008
  Commission file number
    001-13790
      HCC Insurance Holdings,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

76-0336636(State or other jurisdiction
    of

(IRS Employerincorporation or
    organization)

Identification No.)13403 Northwest Freeway,

77040-6094Houston, Texas

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

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

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

Accelerated filer
    oNon-accelerated filer
    o
    (Do not check if a smaller reporting company)

Smaller reporting company
    o   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE:
  Form 10-K




---



##### 





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

Business


5ITEM 1A.

Risk Factors


28ITEM 1B.

Unresolved Staff Comments


35ITEM 2.

Properties


36ITEM 3.

Legal Proceedings


36ITEM 4.

Submission of Matters to a Vote of Security
    Holders


36PART II.ITEM 5.

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


37ITEM 6.

Selected Financial Data


40ITEM 7.

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


42ITEM 7A.

Quantitative and Qualitative Disclosures About
    Market Risk


77ITEM 8.

Financial Statements and Supplementary Data


78ITEM 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosures


78ITEM 9A.

Controls and Procedures


78ITEM 9B.

Other Information


79PART III.ITEM 10.

Directors, Executive Officers and Corporate
    Governance


79ITEM 11.

Executive Compensation


80ITEM 12.

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


80ITEM 13.

Certain Relationships and Related Transactions
    and Director Independence


80ITEM 14.

Principal Accountant Fees and Services


80PART IV.ITEM 15.

Exhibits and Financial Statement Schedules


80SIGNATURES


81EX-10.18EX-12EX-21EX-23EX-24EX-31.1EX-31.2EX-32.1   2




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##### Table of Contents



FORWARD-LOOKING
    STATEMENTS
  This report on
    Form 10-K
    contains certain forward-looking statements within
    the meaning of Section 27A of the Securities Act of 1933
    and Section 21E of the Securities Exchange Act of 1934,
    which are intended to be covered by the safe harbors created by
    those laws. We have based these forward-looking statements on
    our current expectations and projections about future events.
    These forward-looking statements include information about
    possible or assumed future results of our operations. All
    statements, other than statements of historical facts, included
    or incorporated by reference in this report that address
    activities, events or developments that we expect or anticipate
    may occur in the future, including such things as growth of our
    business and operations, business strategy, competitive
    strengths, goals, plans, future capital expenditures and
    references to future successes may be considered forward-looking
    statements. Also, when we use words such as
    anticipate, believe,
    estimate, expect, intend,
    plan, probably or similar expressions,
    we are making forward-looking statements.
  Many risks and uncertainties may impact the matters addressed
    in these forward-looking statements, which could affect our
    future financial results and performance, including, among other
    things:
  
    the effects of catastrophic losses;
    the cyclical nature of the insurance business;
    inherent uncertainties in the loss estimation process, which
    can adversely impact the adequacy of loss reserves;
    the effects of emerging claim and coverage issues;
    the effects of extensive governmental regulation of the
    insurance industry;
    potential credit risk with brokers;
    our assessment of underwriting risk;
    our retention of risk, which could expose us to potential
    losses;
    the adequacy of reinsurance protection;
    the ability or willingness of reinsurers to pay balances due
    us;
    the occurrence of terrorist activities;
    our ability to maintain our competitive position;
    changes in our assigned financial strength ratings;
    our ability to raise capital and funds for liquidity in the
    future;
    attraction and retention of qualified employees;
    fluctuations in securities markets, which may reduce the
    value of our investment assets, reduce investment income or
    generate realized investment losses;
    our ability to successfully expand our business through the
    acquisition of insurance-related companies;
    impairment of goodwill;
    the ability of our insurance company subsidiaries to pay
    dividends in needed amounts;
    fluctuations in foreign exchange rates;
    failures of our information technology systems
    potential changes to the countrys health care delivery
    system; and
    change of control.  We describe these risks and uncertainties in greater detail
    in Item 1A, Risk Factors.
 3




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##### Table of Contents



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 that
    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.
 4




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##### Table of Contents



PART I
  Item 1.
    Business  Business
    Overview
  (713) 690-7300. www.hcc.com. Form 10-K Form 10-Q Form 8-K
        and/or
  
    Diversified financial products
    Group life, accident and health
    Aviation
    London market account
    Other specialty lines   5




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##### Table of Contents



Our
    Strategy
       6




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##### Table of Contents




    emphasize the underwriting of lines of business in which there
    is an anticipation of underwriting profits based on various
    factors including premium rates, the availability and cost of
    reinsurance, policy terms and conditions, and market conditions,
    limit our insurance companies aggregate net loss exposure
    from a catastrophic loss through the use of reinsurance for
    those lines of business exposed to such losses and
    diversification into lines of business not exposed to such
    losses, and
    consider the potential acquisition of specialty insurance
    operations and other strategic investments.  Industry
    Segment and Geographic Information
   7




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##### Table of Contents



Acquisitions
                Insurance
    Company Operations
  Lines
    of Business
    2008


2007


2006Diversified financial products

$
1,051,722



42
%

$
963,355



39
%

$
956,057



43
%Group life, accident and health


829,903



33



798,684



33



621,639



28Aviation


185,786



8



195,809



8



216,208



10London market account


175,561



7



213,716



9



234,868



10Other specialty lines


251,021



10



280,040



11



205,651



9Discontinued lines of business


4,770







(425
)






1,225



Total gross written premium

$
2,498,763



100
%

$
2,451,179



100
%

$
2,235,648



100
%  8




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##### Table of Contents



2008


2007


2006Diversified financial products

$
872,007



42
%

$
771,648



39
%

$
794,232



44
%Group life, accident and health


789,479



38



759,207



38



590,811



33Aviation


136,019



7



145,761



7



166,258



9London market account


107,234



5



118,241



6



127,748



7Other specialty lines


151,120



8



191,151



10



133,481



7Discontinued lines of business


4,759







(399
)






22



Total net written premium

$
2,060,618



100
%

$
1,985,609



100
%

$
1,812,552



100
%     2008


2007


2006Diversified financial products


83
%


80
%


83
%Group life, accident and health


95



95



95Aviation


73



74



77London market account


61



55



54Other specialty lines


60



68



65Consolidated percentage retained


82
%


81
%


81
%   Underwriting
    Diversified
    Financial Products
       directors and officers
    liability

   surety and credit   employment practices liability

   fidelity   professional indemnity

   various financial products      9




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##### Table of Contents



Group
    Life, Accident and Health
            Aviation
       antique and vintage military aircraft

   fixed base operations   cargo operators

   military law enforcement aircraft   commuter airlines

   private aircraft owners   corporate aircraft

   rotor wing aircraft      10




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##### Table of Contents



London
    Market Account
  non-U.S. based
  2008


2007


2006Marine

$
14,413


$
30,685


$
26,664Energy


44,554



45,962



57,619Property


28,827



19,856



18,049Accident and health


19,440



21,738



25,416Total London market account net written premium

$
107,234


$
118,241


$
127,748          drilling rigs

   petrochemical plants   gas production and gathering platforms

   pipelines   natural gas facilities

   refineries          factories

   office buildings   hotels

   retail locations   industrial plants

   utilities    11




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##### Table of Contents



Other
    Specialty Lines
    Insurance
    Companies
  Houston
    Casualty Company
    Houston
    Casualty Company-London
    HCC
    International Insurance Company
  non-United
  U.S.
    Specialty Insurance Company
   12




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##### Table of Contents



HCC
    Life Insurance Company
    Avemco
    Insurance Company
    American
    Contractors Indemnity Company
    HCC
    Europe
    HCC
    Reinsurance Company
    HCC
    Specialty Insurance Company
    United
    States Surety Company
    Perico
    Life Insurance Company
   13




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##### Table of Contents



HCC
    Insurance Company
    Lloyds
    of London Syndicates
    Pioneer
    General Insurance Company
    Underwriting
    Agency Operations
      Professional
    Indemnity Agency
   14




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##### Table of Contents



HCC
    Specialty Underwriters
    HCC
    Global Financial Products
    Covenant
    Underwriters
    HCC
    Indemnity Guaranty Agency
    HCC
    Underwriting Agency, Ltd. (UK)
    MultiNational
    Underwriters, LLC
    Reinsurance
    and Insurance Broker Operations
   15




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##### Table of Contents



Rattner
    Mackenzie
    Continental
    Underwriters
    Other
    Operations
    
    equity in the earnings of mainly insurance-related companies in
    which we invest,
    dividends and interest from certain other insurance-related
    strategic investments and gains or losses from the disposition
    of these investments,
    income related to two mortgage impairment insurance contracts
    which, while written as insurance policies, receive accounting
    treatment as derivative financial instruments,
    income related to a mortgage guaranty reinsurance contract which
    is accounted for utilizing deposit accounting,
    the profit or loss from a portfolio of trading
    securities, and
    other miscellaneous income.      Operating
    Ratios
  Premium
    to Surplus Ratio
    2008


2007


2006


2005


2004Gross written premium

$
2,510,612


$
2,460,498


$
2,243,843


$
2,049,116


$
1,992,361Net written premium


2,064,091



1,985,641



1,812,896



1,495,931



1,121,343Policyholders surplus


1,852,684



1,744,889



1,342,054



1,110,268



844,851Gross written premium ratio


135.5
%


141.0
%


167.2
%


184.6
%


235.8
%Gross written premium industry average(1)



*


160.7
%


171.0
%


192.7
%


201.6
%Net written premium ratio


111.4
%


113.8
%


135.1
%


134.7
%


132.7
%Net written premium industry average(1)


90.0
%**


84.2
%


90.4
%


99.8
%


108.5
%     (1)
    
    Source: A.M. Best Company, Inc.*
    
    Not available**
    
    Estimated by A.M. Best Company, Inc. 16




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##### Table of Contents



Combined
    Ratio  GAAP
    2008


2007


2006


2005


2004Loss ratio


60.4
%


59.6
%


59.2
%


67.1
%


63.8
%Expense ratio


25.0



23.8



25.0



26.1



26.7Combined ratio  GAAP


85.4
%


83.4
%


84.2
%


93.2
%


90.5
%   Combined
    Ratio  Statutory
    2008


2007


2006


2005


2004Loss ratio


60.8
%


60.6
%


60.0
%


67.1
%


64.3
%Expense ratio


24.3



23.9



24.0



25.5



26.7Combined ratio  Statutory


85.1
%


84.5
%


84.0
%


92.6
%


91.0
%Industry average


104.7
*


95.7



92.5
%


100.7
%


98.3
%     *
    
    Estimated by A. M. Best Company, Inc.    Reserves
   17




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##### Table of Contents




    information used to price the applicable policies,
    historical loss information where available,
    any public industry data for that line or similar lines of
    business,
    an assessment of current market conditions, and
    a claim-by-claim review by management, where actuarial
    homogenous data is unavailable.             18




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##### Table of Contents



2008


2007


2006


2005


2004


2003


2002


2001


2000


1999


1998Balance sheet reserves

$
3,415,230


$
3,227,080


$
3,097,051


$
2,813,720


$
2,089,199


$
1,525,313


$
1,158,915


$
1,132,258


$
944,117


$
871,104


$
460,511Reserve adjustments from acquisition and disposition of
    subsidiaries






32,131



28,348



15,427



3,368







5,587







(66,571
)


(32,437
)


(136
)Adjusted reserves


3,415,230



3,259,211



3,125,399



2,829,147



2,092,567



1,525,313



1,164,502



1,132,258



877,546



838,667



460,375Cumulative paid at:One year later






902,352



797,217



689,126



511,766



396,077



418,809



390,232



400,279



424,379



229,746Two years later










1,260,672



1,077,954



780,130



587,349



548,941



612,129



537,354



561,246



367,512Three years later














1,385,011



993,655



772,095



659,568



726,805



667,326



611,239



419,209Four years later


















1,144,350



866,025



823,760



803,152



720,656



686,730



435,625Five years later






















1,002,058



886,458



921,920



758,126



721,011



453,691Six years later


























1,003,780



1,009,049



835,994



725,639



462,565Seven years later






























1,101,393



924,803



752,733



462,126Eight years later


































964,763



817,615



464,748Nine years later






































844,300



474,358Ten years later










































475,970Re-estimated liability at:End of year


3,415,230



3,259,211



3,125,399



2,829,147



2,092,567



1,525,313



1,164,502



1,132,258



877,546



838,667



460,375One year later






3,187,167



3,034,778



2,825,846



2,121,839



1,641,426



1,287,003



1,109,098



922,080



836,775



550,409Two years later










2,918,269



2,714,374



2,115,671



1,666,931



1,393,143



1,241,261



925,922



868,438



545,955Three years later














2,631,477



2,028,501



1,690,729



1,464,448



1,384,608



1,099,657



854,987



547,179Four years later


















2,002,477



1,619,744



1,506,360



1,455,046



1,102,636



900,604



537,968Five years later






















1,639,621



1,453,674



1,480,193



1,135,143



887,272



522,183Six years later


























1,467,540



1,433,630



1,137,652



894,307



521,399Seven years later






























1,462,481



1,079,353



899,212



513,918Eight years later


































1,113,971



879,805



511,323Nine years later






































881,947



497,774Ten years later










































493,167Cumulative redundancy (deficiency)





$
72,044


$
207,130


$
197,670


$
90,090


$
(114,308
)

$
(303,038
)

$
(330,223
)

$
(236,425
)

$
(43,280
)

$
(32,792
)     
    Excluding certain runoff business described below, during 2008,
    we recorded favorable development of $106.2 million. Most
    of this was from our diversified financial products line of
    business on the 2005 and prior underwriting years, our London
    market account for the 2005 and prior accident years, and an 19




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##### Table of Contents



assumed quota share program reported in our other specialty
    lines for the 2005 and prior accident years. These changes
    primarily affected the 2003 through 2006 accident years.  
    Excluding certain runoff business described below, during 2007,
    we recorded favorable development of $44.1 million. Most of
    this was from the 2003 and 2004 underwriting years in our
    diversified financial products line of business, which affected
    2003 through 2005 accident years.
    During 2008, we recorded adverse development of
    $34.1 million on certain run-off assumed accident and
    health reinsurance business reported in our discontinued lines
    of business due to our continuing evaluation of reserves,
    primarily on the 2000 accident year. During 2007, we recorded
    favorable development of $46.5 million on the same run-off
    accident and health business. The combined effect of these
    entries was favorable development of $12.4 million.    
    During 2005, 2004 and 2003, we recorded $49.8 million,
    $127.7 million and $132.9 million, respectively, in
    gross losses on certain run-off assumed accident and health
    reinsurance business reported in our discontinued lines of
    business, due to our processing of additional information
    received and our continuing evaluation of reserves on this
    business. Collectively, these transactions primarily affected
    the 1999, 2000 and 2001 accident years.
    The 2000 and 1999 years in the table were also adversely
    affected by late reporting loss information received during 2001
    for certain other discontinued business.   20




---



##### Table of Contents



2008


2007


2006Gross reserves for loss and loss adjustment expense payable at
    beginning of year

$
3,227,080


$
3,097,051


$
2,813,720Gross reserve additions from acquired businesses


32,131



826



146,811Foreign currency adjustment


(102,777
)


34,202



46,422Incurred loss and loss adjustment expense:Provision for loss and loss adjustment expense for claims
    occurring in current year


1,707,538



1,443,031



1,222,139Increase (decrease) in estimated loss and loss adjustment
    expense for claims occurring in prior years*


(72,044
)


(90,621
)


(3,301
)Incurred loss and loss adjustment expense


1,635,494



1,352,410



1,218,838Loss and loss adjustment expense payments for claims occurring
    during:Current year


474,346



460,192



439,614Prior years


902,352



797,217



689,126Loss and loss adjustment expense payments


1,376,698



1,257,409



1,128,740Gross reserves for loss and loss adjustment expense payable
    at end of year

$
3,415,230


$
3,227,080


$
3,097,051     *
    
    Changes in loss and loss adjustment expense reserves for losses
    occurring in prior years reflect the gross effect of the
    resolution of losses for other than the reserve value and the
    subsequent adjustments of loss reserves.   21




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##### Table of Contents



2008


2007


2006


2005


2004


2003


2002


2001


2000


1999


1998Reserves, net of reinsurance

$
2,416,271


$
2,342,800


$
2,108,961


$
1,533,433


$
1,059,283


$
705,200


$
458,702


$
313,097


$
249,872


$
273,606


$
118,912Reserve adjustments from acquisition (disposition) of
    subsidiaries






29,053



25,730



14,218



3,168







5,587







(6,048
)


(3,343
)


(410
)Effect on loss reserves of 1999 write off of reinsurance
    recoverables










































63,851Adjusted reserves, net of reinsurance


2,416,271



2,371,853



2,134,691



1,547,651



1,062,451



705,200



464,289



313,097



243,824



270,263



182,353Cumulative paid, net of reinsurance, at:One year later






687,675



556,096



222,336



172,224



141,677



115,669



126,019



102,244



145,993



56,052Two years later










858,586



420,816



195,663



135,623



152,674



131,244



139,659



174,534



103,580Three years later














588,659



337,330



124,522



115,214



163,808



118,894



185,744



113,762Four years later


















424,308



217,827



88,998



93,405



138,773



180,714



121,293Five years later






















313,315



155,708



59,936



158,935



197,416



120,452Six years later


























242,904



125,311



137,561



200,833



127,254Seven years later






























186,224



194,517



188,901



131,631Eight years later


































240,590



244,069



132,614Nine years later






































251,180



142,815Ten years later










































142,975Re-estimated liability, net of reinsurance, at:End of year


2,416,271



2,371,853



2,134,691



1,547,651



1,062,451



705,200



464,289



313,097



243,824



270,263



182,353One year later






2,289,482



2,108,294



1,541,125



1,087,845



735,678



487,403



306,318



233,111



260,678



186,967Two years later










1,997,867



1,514,632



1,087,123



770,497



500,897



338,194



222,330



254,373



175,339Three years later














1,426,548



1,081,140



792,099



571,403



366,819



259,160



244,650



171,165Four years later


















1,040,333



808,261



585,741



418,781



267,651



258,122



163,349Five years later






















794,740



613,406



453,537



296,396



254,579



155,931Six years later


























597,666



462,157



305,841



271,563



157,316Seven years later






























455,279



311,344



277,841



156,376Eight years later


































307,262



279,412



155,016Nine years later






































274,668



159,514Ten years later










































151,261Cumulative redundancy (deficiency)





$
82,371


$
136,824


$
121,103


$
22,118


$
(89,540
)

$
(133,377
)

$
(142,182
)

$
(63,438
)

$
(4,405
)

$
31,092     
    Reserve reductions in 2008 from our diversified financial
    products line of business on the 2005 and prior underwriting
    years, our London market account for the 2005 and prior accident
    years, and an assumed quota share program reported in our other
    specialty lines for the 2005 and prior accident years. These
    changes primarily affected the 2003 through 2006 accident years.
    Reserve reductions in 2007 from the 2003 and 2004 underwriting
    years in our diversified financial products line of business,
    which primarily affected the 2003 through 2005 accident years.
    Reserve reductions in 2006 on prior year hurricanes and
    aviation, affecting primarily the 2004 and 2005 accident years.    
    Commutation charges of $20.2 million, $26.0 million
    and $28.8 million recorded in 2006, 2005 and 2003,
    respectively. 22




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##### Table of Contents




    Reserve strengthening of $27.3 million in 2004 to bring net
    reserves above our actuarial point estimate.
    Collectively, these transactions primarily affected the 1999,
    2000 and 2001 accident years.    2008


2007


2006Net reserves for loss and loss adjustment expense payable at
    beginning of year

$
2,342,800


$
2,108,961


$
1,533,433Net reserve additions from acquired businesses


29,053



742



146,811Foreign currency adjustment


(82,677
)


27,304



36,957Incurred loss and loss adjustment expense:Provision for loss and loss adjustment expense for claims
    occurring in current year


1,294,244



1,210,344



1,018,382Increase (decrease) in estimated loss and loss adjustment
    expense for claims occurring in prior years*


(82,371
)


(26,397
)


(6,526
)Incurred loss and loss adjustment expense


1,211,873



1,183,947



1,011,856Loss and loss adjustment expense payments for claims occurring
    during:Current year


397,103



422,058



397,760Prior years


687,675



556,096



222,336Loss and loss adjustment expense payments


1,084,778



978,154



620,096Net reserves for loss and loss adjustment expense payable at
    end of year

$
2,416,271


$
2,342,800


$
2,108,961     *
    
    Changes in loss and loss adjustment expense reserves for losses
    occurring in prior years reflect the net effect of the
    resolution of losses for other than the reserve value and the
    subsequent adjustments of loss reserves.         23




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##### Table of Contents



Enterprise
    Risk Management
    Regulation
      Insurance
    Companies
    
    approval of policy forms and premium rates,
    licensing of insurers and their agents,
    periodic examinations of our operations and finances,
    prescription of the form and content of records of financial
    condition to be filed with the regulatory authority,
    required levels of deposits for the benefit of policyholders,
    requiring certain methods of accounting,
    requiring reserves for unearned premium, losses and other
    purposes,
    restrictions on the ability of our insurance companies to pay
    dividends,
    restrictions on the nature, quality and concentration of
    investments,
    restrictions on transactions between insurance companies and
    their affiliates,
    restrictions on the size of risks insurable under a single
    policy, and
    standards of solvency, including risk-based capital measurement
    (which is a measure developed by the National Association of
    Insurance Commissioners and used by state insurance regulators
    to identify insurance companies that potentially are
    inadequately capitalized).   24




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##### Table of Contents



Underwriting
    Agencies and Reinsurance and Insurance Brokers
    
    advertising and business practice rules,
    contractual requirements,
    financial security,
    licensing as agents, brokers, reinsurance brokers, managing
    general agents or third party administrators,
    limitations on authority, and
    recordkeeping requirements.  Statutory
    Accounting Principles
    
    a liability is recorded for certain reinsurance recoverables
    under statutory accounting principles whereas, under generally
    accepted accounting principles, there is no such provision
    unless the recoverables are deemed to be doubtful of collection, 25




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##### Table of Contents




    certain assets that are considered non-admitted
    assets are eliminated from a balance sheet prepared in
    accordance with statutory accounting principles, but are
    included in a balance sheet prepared in accordance with
    generally accepted accounting principles,
    only some of the deferred tax asset is recognized under
    statutory accounting principles,
    fixed income investments classified as available for sale are
    recorded at market value for generally accepted accounting
    principles and at amortized cost under statutory accounting
    principles,
    outstanding losses and unearned premium are reported on a gross
    basis under generally accepted accounting principles and on a
    net basis under statutory accounting principles, and
    under statutory accounting principles, policy acquisition costs
    are expensed as incurred and, under generally accepted
    accounting principles, such costs are deferred and amortized to
    expense as the related premium is earned.    Insurance
    Holding Company Acts
    Assessments
    Insurance
    Regulations Concerning Change of Control
   26




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##### Table of Contents



Risk-Based
    Capital
    Insurance
    Regulatory Information System
    Terrorism
    Risk Insurance Act
      Legislative
    Initiatives
     27




---



##### Table of Contents



Employees
    Item 1A.
    Risk
    Factors  Risks
    Relating to our Industry
  Because
    we are a property and casualty insurer, our business may suffer
    as a result of unforeseen catastrophic losses.
    The
    insurance and reinsurance business is historically cyclical, and
    we expect to experience periods with excess underwriting
    capacity and unfavorable premium rates, which could cause our
    results to fluctuate.
   28




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##### Table of Contents



Our
    loss reserves are based on an estimate of our future liability,
    which may prove to be inadequate.
    We may
    be impacted by claims relating to the recent credit market
    downturn and subprime insurance exposures.
    The
    effects of emerging claim and coverage issues on our business
    are uncertain.
   29




---



##### Table of Contents



We are
    subject to extensive governmental regulation.
    Our
    reliance on brokers subjects us to their credit
    risk.
    Risks
    Relating to our Business
  Our
    inability to accurately assess underwriting risk could reduce
    our net earnings.
   30




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##### Table of Contents



Retentions
    in various lines of business expose us to potential
    losses.
    If we
    are unable to purchase adequate reinsurance protection for some
    of the risks we have underwritten, we will be exposed to any
    resulting unreinsured losses.
    If the
    companies that provide our reinsurance do not pay all of our
    claims, we could incur severe losses.
    As a
    direct insurer, we may have significant exposure for terrorist
    acts.
   31




---



##### Table of Contents



We may
    be unsuccessful in competing against larger or more
    well-established business rivals.
    If
    rating agencies downgrade our financial strength ratings, our
    business and competitive position in the industry may
    suffer.
    We may
    require additional capital or funds for liquidity in the future,
    which may not be available or may only be available on
    unfavorable terms.
   32




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##### Table of Contents



We may
    be unable to attract and retain qualified
    employees.
    We
    invest a significant amount of our assets in securities that
    have experienced market fluctuations, which may greatly reduce
    the value of our investment portfolio, reduce investment income
    or generate realized investment losses.
  and/or
     33




---



##### Table of Contents



Our
    strategy of acquiring other companies for growth may not
    succeed.
    
    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 suitable acquisition opportunities and
    qualified employees.  and/or
  We are
    exposed to goodwill impairment risk as part of our business
    acquisition strategy.
    We are
    an insurance holding company and, therefore, may not be able to
    receive dividends in needed amounts from our
    subsidiaries.
    Because
    we operate internationally, fluctuations in currency exchange
    rates may affect our receivable and payable balances and our
    reserves.
   34




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##### Table of Contents



Our
    information technology systems may fail or suffer a loss of
    security, which could adversely affect our
    business.
      The
    new administration in Washington, D.C. is a proponent of
    potential changes in the countrys health care delivery
    system.
    We may
    not be able to delay or prevent an inadequate or coercive offer
    for change in control and regulatory rules and required
    approvals might delay or deter a favorable change of
    control.
      Item 1B.
    Unresolved
    Staff Comments   35




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##### Table of Contents



Item 2.
    Properties      Subsidiary

Segment

Location

Sq. Ft.

Termination Date of LeaseHCC and Houston Casualty Company

Insurance Company and Corporate

Houston, Texas


51,000


OwnedHouston Casualty Company

Insurance Company

Houston, Texas


77,000


OwnedProfessional Indemnity Agency

Agency

Mount Kisco, New York


38,000


OwnedHCC Life Insurance Company

Insurance Company

Atlanta, Georgia


29,000


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

Insurance Company

Dallas, Texas


28,000


August 31, 2013HCC Specialty Underwriters

Agency

Wakefield, Massachusetts


28,000


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

Agency

Auburn Hills, Michigan


27,000


May 31, 2012HCC Surety Group

Insurance Company

Los Angeles, California


40,000


May 31, 2017Health Products Division

Insurance Company

Minneapolis, Minnesota


25,000


September 30, 2012HCC International and Rattner Mackenzie

Insurance Company and Agency

London, England


30,000


December 24, 2015   Form 10-K.
  Item 3.
    Legal
    Proceedings  Litigation
    Item 4.
    Submission
    of Matters to a Vote of Security Holders   36




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##### Table of Contents



PART II
  Item 5.
    Market
    for the Registrants Common Equity, Related Stockholder
    Matters and Issuer Purchases of Equity Securities  Price
    Range of Common Stock
    intra-day
  2008


2007High


Low


High


LowFirst quarter

$
29.03


$
21.26


$
32.89


$
29.39Second quarter


25.99



20.48



34.45



30.43Third quarter


30.00



19.12



34.21



25.12Fourth quarter


26.95



14.17



31.64



27.99     Shareholders
    Dividend
    Policy
    2008


2007First quarter

$
.110


$
.100Second quarter


.110



.100Third quarter


.125



.110Fourth quarter


.125



.110    37




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##### Table of Contents



Issuer
    Purchases of Equity Securities
    Approximate DollarTotal





Total Number of Shares


Value of SharesNumber of


Average


Purchased as Part


that May Yet BeShares


Price Paid


of Publicly Announced


Purchased Under thePeriod

Purchased


Per Share


Plans or Programs


Plans or ProgramsOctober 1  October 31, 2008


550,142


$
22.30



550,142


$
65,860,594November 1  November 30, 2008


1,326,614


$
20.75



1,326,614


$
38,329,778December 1  December 31, 2008


76,900


$
21.65



76,900


$
36,664,593   Rule 10b-18
 38




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##### Table of Contents



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

2003


2004


2005


2006


2007


2008HCC Insurance Holdings, Inc.

$
100.00


$
105.19


$
143.22


$
156.67


$
141.98


$
135.01S&P Composite 1500 Index


100.00



111.78



118.10



136.21



143.66



90.91S&P Midcap 400 Index


100.00



116.48



131.11



144.64



156.18



99.59    39




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##### Table of Contents



Item 6.
    Selected
    Financial Data    Years Ended December 31,2008


2007


2006


2005


2004(In thousands, except per share data)Statement of earnings data:RevenueNet earned premium

$
2,007,774


$
1,985,086


$
1,709,189


$
1,369,988


$
1,010,692Fee and commission income


125,201



140,092



137,131



132,628



183,802Net investment income


164,751



206,462



152,804



98,851



64,885Net realized investment gain (loss)


(27,941
)


13,188



(841
)


1,448



5,822Other operating income


9,638



43,545



77,012



39,773



19,406Total revenue


2,279,423



2,388,373



2,075,295



1,642,688



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


1,211,873



1,183,947



1,011,856



919,697



645,230Policy acquisition costs, net


381,441



366,610



319,885



261,708



222,323Other operating expense


233,509



241,642



222,324



180,990



168,045Interest expense


16,288



10,304



11,396



7,684



8,374Total expense


1,843,111



1,802,503



1,565,461



1,370,079



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


436,312



585,870



509,834



272,609



240,635Income tax expense on continuing operations


131,544



190,441



167,549



84,177



81,940Earnings from continuing operations


304,768



395,429



342,285



188,432



158,695Earnings from discontinued operations, net of income taxes(1)














2,760



4,004Net earnings

$
304,768


$
395,429


$
342,285


$
191,192


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

$
2.65


$
3.50


$
3.08


$
1.78


$
1.63Earnings from discontinued operations(1)














0.03



0.04Net earnings

$
2.65


$
3.50


$
3.08


$
1.81


$
1.67Weighted average shares outstanding


114,848



112,873



111,309



105,463



97,257 40




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##### Table of Contents



Years Ended December 31,2008


2007


2006


2005


2004(In thousands, except per share data)Diluted earnings per share data:Earnings from continuing operations

$
2.64


$
3.38


$
2.93


$
1.72


$
1.61Earnings from discontinued operations(1)














0.03



0.04Net earnings

$
2.64


$
3.38


$
2.93


$
1.75


$
1.65Weighted average shares outstanding


115,474



116,997



116,736



109,437



98,826Cash dividends declared, per share

$
0.470


$
0.420


$
0.375


$
0.282


$
0.213   December 31,2008


2007


2006


2005


2004(In thousands, except per share data)Balance sheet data:Total investments

$
4,804,283


$
4,672,277


$
3,927,995


$
3,257,428


$
2,468,491Premium, claims and other receivables


770,823



763,401



864,705



884,654



891,360Reinsurance recoverables


1,054,950



956,665



1,169,934



1,361,983



1,104,026Ceded unearned premium


234,375



244,684



226,125



239,416



311,973Goodwill


858,849



776,046



742,677



532,947



444,031Total assets


8,332,383



8,074,645



7,630,132



7,028,800



5,900,568Loss and loss adjustment expense payable


3,415,230



3,227,080



3,097,051



2,813,720



2,089,199Unearned premium


977,426



943,946



920,350



807,109



741,706Premium and claims payable


405,287



497,974



646,224



753,859



766,765Notes payable


344,714



324,714



308,887



309,543



311,277Shareholders equity


2,639,341



2,440,365



2,042,803



1,690,435



1,325,498Book value per share(2)

$
23.27


$
21.21


$
18.28


$
15.26


$
12.99     (1)
    
    Discontinued operations in 2005 and 2004 represent gains from a
    contractual earnout related to the 2003 sale of our retail
    brokerage operation, HCC Employee Benefits, Inc.(2)
    
    Book value per share is calculated by dividing outstanding
    shares into total shareholders equity. 41




---



##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations    Overview
            
    risk-bearing earned premium produced by our insurance
    companies operations,
    non-risk-bearing fee and commission income received by our
    underwriting agencies and brokers,
    ceding commissions in excess of policy acquisition costs earned
    by our insurance companies,
    investment income earned by all of our operations, 42




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##### Table of Contents




    realized investment gains and losses related to our fixed income
    securities portfolio, and
    other operating income and losses, mainly from strategic
    investments.        Results
    of Operations
      2008


2007


2006Pretax earnings (loss) from:2008 hurricanes (including reinsurance reinstatement premium)

$
(22,304
)

$



$
Prior years reserve development, net of increases in
    current year loss ratios


24,893



13,132



11,915Alternative investments


(30,766
)


23,930



14,161Net realized investment loss (excluding 2007 foreign currency
    gain)


(16,808
)


(209
)


(841
)Other-than-temporary impairments


(11,133
)






Trading securities


(11,698
)


3,881



24,100Strategic investments


9,158



21,618



39,368   
    We incurred gross losses of $98.2 million resulting from
    Hurricanes Gustav and Ike (referred to herein as the 2008
    hurricanes). Our pretax loss after reinsurance in 2008 was
    $22.3 million, which included $19.4 million of losses
    reported in loss and loss adjustment expense and
    $2.9 million of premiums to reinstate our excess of loss
    reinsurance protection, which reduced net earned premium.
    In 2008, we had favorable development of our prior years
    net loss reserves of $82.4 million, which was offset by
    $57.5 million of loss expense for increases in ultimate
    loss ratios in accident year 2008 above those set at the
    beginning of the year for business written in 2007 and 2008. In
    2007, we had favorable development of prior years loss
    reserves of $26.4 million, which was offset by
    $13.3 million of loss expense for increases in ultimate
    loss ratios in accident year 2007 for business written in 2006
    and 2007. 43




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##### Table of Contents




    Our alternative investments generated $30.8 million of
    market-related losses in 2008, compared to $23.9 million of
    income in 2007. The related income or loss is included in net
    investment income. We gave notice to redeem all of the
    alternative investments in the third quarter of 2008. We
    received $48.6 million of cash through February 2009, which
    we reinvested in fixed income securities. We had
    $46.0 million of alternative investments at year-end 2008,
    for which we will receive the funds in 2009.
    In 2008, to manage credit-related risk in our investment
    portfolio, we sold all of our investments in preferred stock and
    certain bonds of entities that were experiencing financial
    difficulty. We recorded a realized investment loss of
    $23.4 million related to these sales. The total net
    realized investment loss on the sale of all securities was
    $16.8 million in 2008, compared to a net realized
    investment gain of $13.2 million in 2007. The 2007 gain
    included $13.4 million of embedded currency conversion
    gains on certain available for sale fixed income securities that
    we sold in 2007, which was offset by a $13.4 million foreign
    currency loss recorded in other operating expense.
    We recognized other-than-temporary impairments on securities in
    our available for sale securities portfolio of
    $11.1 million in 2008, which we recorded in net realized
    investment loss. There were no such impairments recorded in 2007.
    Our trading portfolio had losses of $11.7 million in 2008,
    compared to gains of $3.9 million in 2007. These gains and
    losses are reported in other operating income. We discontinued
    the active trading of securities in late 2006 and sold the
    remaining two positions in 2008.
    We sold strategic investments in 2008 and 2007 and realized
    gains of $9.2 million and $21.6 million, respectively.
    These gains are reported within other operating income.   44




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##### Table of Contents



2008


2007


2006Net earned premium


88.1
%


83.1
%


82.3
%Fee and commission income


5.5



5.9



6.6Net investment income


7.2



8.6



7.4Net realized investment gain (loss)


(1.2
)


0.6



Other operating income


0.4



1.8



3.7Total revenue


100.0



100.0



100.0Loss and loss adjustment expense, net


53.2



49.6



48.8Policy acquisition costs, net


16.7



15.4



15.4Other operating expense


10.2



10.1



10.7Interest expense


0.7



0.4



0.5Earnings before income tax expense


19.1



24.5



24.6Income tax expense


5.8



7.9



8.1Net earnings


13.4
%


16.6
%


16.5
%       2008


2007


2006Gross written premium

$
2,498,763


$
2,451,179


$
2,235,648Net written premium


2,060,618



1,985,609



1,812,552Net earned premium


2,007,774



1,985,086



1,709,189     2008


2007


2006Agencies

$
81,521


$
92,230


$
92,566Insurance companies


43,680



47,862



44,565Fee and commission income

$
125,201


$
140,092


$
137,131  45




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##### Table of Contents



2008


2007


2006Fixed income securitiesTaxable

$
98,538


$
88,550


$
61,386Exempt from U.S. income taxes


76,172



62,044



51,492Total fixed income securities


174,710



150,594



112,878Short-term investments


24,173



37,764



30,921Alternative investments


(30,766
)


23,930



14,161Other investments


575







17Total investment income


168,692



212,288



157,977Investment expense


(3,941
)


(5,826
)


(5,173
)Net investment income

$
164,751


$
206,462


$
152,804            46




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##### Table of Contents



2008


2007


2006Strategic investments

$
12,218


$
27,627


$
43,627Trading securities


(11,698
)


3,881



24,100Financial instruments


(608
)


5,572



4,772Contract using deposit accounting


2,013







Sale of non-operating assets


2,972



2,051



Other


4,741



4,414



4,513Other operating income

$
9,638


$
43,545


$
77,012      47




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##### Table of Contents



Segments
    Insurance
    Company Segment
    Premium
   48




---



##### Table of Contents



2008


2007


2006Amount


%


Amount


%


Amount


%Direct

$
2,156,613



86
%

$
2,000,552



82
%

$
1,867,908



84
%Reinsurance assumed


342,150



14



450,627



18



367,740



16Gross written premium


2,498,763



100



2,451,179



100



2,235,648



100Reinsurance ceded


(438,145
)


(18
)


(465,570
)


(19
)


(423,096
)


(19
)Net written premium


2,060,618



82



1,985,609



81



1,812,552



81Change in unearned premium


(52,844
)


(2
)


(523
)






(103,363
)


(5
)Net earned premium

$
2,007,774



80
%

$
1,985,086



81
%

$
1,709,189



76
%     Gross





NWPWritten


Net Written


as% of


Net EarnedPremium


Premium


GWP


PremiumYear Ended December 31, 2008Diversified financial products

$
1,051,722


$
872,007



83
%

$
805,604Group life, accident and health


829,903



789,479



95



777,268Aviation


185,786



136,019



73



139,838London market account


175,561



107,234



61



106,857Other specialty lines


251,021



151,120



60



173,449Discontinued lines


4,770



4,759



nm



4,758Totals

$
2,498,763


$
2,060,618



82
%

$
2,007,774Year ended December 31, 2007Diversified financial products

$
963,355


$
771,648



80
%

$
777,414Group life, accident and health


798,684



759,207



95



758,516Aviation


195,809



145,761



74



153,121London market account


213,716



118,241



55



124,609Other specialty lines


280,040



191,151



68



171,824Discontinued lines


(425
)


(399
)


nm



(398
)Totals

$
2,451,179


$
1,985,609



81
%

$
1,985,086Year ended December 31, 2006Diversified financial products

$
956,057


$
794,232



83
%

$
728,861Group life, accident and health


621,639



590,811



95



591,070Aviation


216,208



166,258



77



152,886London market account


234,868



127,748



54



112,362Other specialty lines


205,651



133,481



65



123,981Discontinued lines


1,225



22



nm



29Totals

$
2,235,648


$
1,812,552



81
%

$
1,709,189      49




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##### Table of Contents




    Diversified financial products  Written premium
    increased in 2008 due to higher policy count and price increases
    in our directors and officers liability and domestic
    professional indemnity lines, particularly for financial
    institution accounts, and in our credit business. The increases
    in these lines in 2008 increased our net written premium.
    Increases in quota share retentions on employment practices
    liability businesses and some parts of our
    U.S. professional indemnity liability business in 2008
    increased net written premium and the retention rate. Premium
    volume of our other major products was stable, although pricing
    for certain products is down. During 2007, competition in our
    directors and officers liability business resulted
    in less gross written premium compared to 2006. Net written
    premium also declined in 2007 due to additional quota share
    reinsurance purchased for our international directors and
    officers liability business. Our surety business grew in
    both years because pricing had been stable and competition was
    reasonable, but it began to be affected by the economic downturn
    late in 2008.
    Group life, accident and health  The 2008 increase in
    premium is from our current-year acquisition of MultiNational
    Underwriters, for which we use one of our managed Lloyds
    syndicates as the issuing carrier. The 2007 increase was from
    our 2006 acquisition of the Health Products Division, which
    writes medical stop-loss and medical excess products. We retain
    all of our medical stop-loss and medical excess business because
    the business is non-volatile and has very little catastrophe
    exposure.
    Aviation  Our domestic aviation written premium
    volume is down over the three-year period due to competition and
    lack of growth in the general aviation industry. Underwriting
    margins continue to be good. Our international aviation premium
    increased in late 2008 as rates are beginning to rise for the
    first time in several years, allowing us to write more
    profitable business.
    London market account  Net written premium decreased
    in 2008 and 2007 due to increased competition in this line of
    business. This followed a large increase in energy writings in
    2006 that resulted from significantly increased rates after the
    2005 hurricanes. Our aggregate property exposure in
    hurricane-exposed areas was reduced in 2006, and we have
    maintained that reduced exposure in 2007 and 2008. Also, in
    2008, we discontinued writing our marine excess of loss book of
    business due to unacceptable rates. The net impact of these
    changes was moderated by reduced reinsurance spending, which
    increased the 2008 retention rate. As we enter 2009, pricing on
    many of these products appears to be increasing again,
    particularly in catastrophe exposed areas.
    Other specialty lines  We experienced growth in 2008
    and 2007 from an increase in our Lloyds syndicate
    participation, a 2006 acquisition and increased writings in
    several lines. This growth was offset by the expiration of an
    assumed quota share contract in 2008 and discontinuance of a
    motor line written through one of our Lloyds syndicates,
    which caused the large reduction in premium in 2008. Markets for
    these products are competitive and rates are down slightly. The
    changes in average retention are due to the change in mix of
    business in this line.  Reinsurance
   50




---



##### Table of Contents



non-U.S. reinsurers.
           51




---



##### Table of Contents



Losses
    and Loss Adjustment Expenses
    2008


2007


2006Amount


Loss Ratio


Amount


Loss Ratio


Amount


Loss Ratio(Redundant) adverse development:Discontinued accident and health adjustments

$
34,148



1.4
%

$
(46,531
)


(1.9
)%

$
15,054



0.7
%Discontinued international medical malpractice adjustments


(536
)






11,568



0.5



2,353



0.1Other reserve redundancies


(105,656
)


(4.3
)


(55,658
)


(2.3
)


(20,708
)


(1.0
)Total (redundant) adverse development


(72,044
)


(2.9
)


(90,621
)


(3.7
)


(3,301
)


(0.2
)2008 hurricanes


98,200



4.0















All other net incurred loss and loss adjustment expense


1,609,338



65.5



1,443,031



59.2



1,222,139



56.9Gross incurred loss and loss adjustment expense

$
1,635,494



66.6
%

$
1,352,410



55.5
%

$
1,218,838



56.7
%        52




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##### Table of Contents



2008


2007


2006Amount


Loss Ratio


Amount


Loss Ratio


Amount


Loss Ratio(Redundant) adverse development:Discontinued accident and health commutations

$





%

$
2,616



0.1
%

$
20,199



1.2
%Discontinued accident and health adjustments


3,429



0.2



376







4,898



0.3Discontinued international medical malpractice adjustments


(526
)






11,568



0.6



2,738



0.2Other reserve redundancies


(85,264
)


(4.2
)


(40,957
)


(2.1
)


(34,361
)


(2.1
)Total (redundant) adverse development


(82,361
)


(4.0
)


(26,397
)


(1.4
)


(6,526
)


(0.4
)2008 hurricanes


19,379



1.1















All other net incurred loss and loss adjustment expense


1,274,855



63.3



1,210,344



61.0



1,018,382



59.6Net incurred loss and loss adjustment expense

$
1,211,873



60.4
%

$
1,183,947



59.6
%

$
1,011,856



59.2
%      53




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##### Table of Contents



2008


2007


2006Net


Net


Net


Net


Net


NetEarned


Loss


Earned


Loss


Earned


LossPremium


Ratio


Premium


Ratio


Premium


RatioDiversified financial products

$
805,604



48.1
%

$
777,414



40.6
%

$
728,861



48.2
%Group life, accident and health


777,268



73.1



758,516



76.4



591,070



73.1Aviation


139,838



62.6



153,121



58.6



152,886



53.8London market account


106,857



46.4



124,609



55.2



112,362



43.0Other specialty lines


173,449



67.2



171,824



67.4



123,981



56.0Discontinued lines


4,758



nm



(398
)


nm



29



nmTotals

$
2,007,774



60.4
%

$
1,985,086



59.6
%

$
1,709,189



59.2
%Expense ratio






25.0







23.8







25.0Combined ratio






85.4
%






83.4
%






84.2
%     nm 
    Not meaningful comparison since ratios relate to discontinued
    lines of business.    
    Diversified financial products  There was redundant
    reserve development of $43.8 million in 2008 compared to
    $51.9 million in 2007. The 2008 redundancy primarily
    related to our directors and officers liability and
    international professional indemnity product lines for 2005 and
    prior underwriting years, whereas the 2007 redundancy primarily
    related to 2004 and prior underwriting years for those product
    lines. Offsetting the redundant reserve development in 2008 was
    an increase of $50.1 million in our loss estimates on the
    2008 accident year affecting business written in the 2007 and
    2008 underwriting years, primarily for our directors and
    officers liability and credit businesses. Our
    U.S. surety business also had favorable loss development in
    2008 and 2007.
    Group life, accident and health  The net loss ratio
    was higher in 2007 on business acquired in the Health Products
    Division acquisition in late 2006. As the business has been
    re-underwritten, the loss ratio has declined. In addition, 2007
    included some adverse development from prior years losses,
    while 2008 included some redundant development.
    Aviation  The 2008 hurricanes increased losses by
    $1.4 million and increased the 2008 loss ratio by
    1.0 percentage point. Underwriting results in 2006 were
    better than expected, due in part to the release of redundant
    reserves on the 2004 and 2005 accident years.
    London market account  The 2008 hurricanes increased
    losses by $12.1 million and increased the 2008 loss ratio
    by 11.3 percentage points. There was also
    $21.4 million of redundant reserve development in 2008,
    mostly from our property and energy businesses, which included a
    $5.4 million reduction of the 2005 hurricane losses. The
    loss ratio in 2007 was slightly higher than expected due to
    adverse development in our London accident and health and energy
    businesses. The reduction of 2005 hurricane losses lowered the
    2006 net loss ratio by 9.1 percentage points. The
    London market account line of business can have relatively high
    year-to-year volatility due to catastrophe exposure.
    Other specialty lines  The 2008 hurricanes increased
    losses by $5.9 million and increased the 2008 loss ratio by
    3.4 percentage points. There was also $8.7 million of
    redundant reserve development in 2008, primarily from an assumed
    quota share program, compared to $4.4 million of redundant
    development in 2007 and a $4.7 million reduction in the
    2005 hurricane losses in 2006. The increase in the 2007 net
    loss ratio compared to 2006 related to losses in our marine and
    United Kingdom liability lines of business. 54




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##### Table of Contents




    Discontinued lines  These were adversely affected by
    the commutations and net loss reserve adjustments discussed
    previously. In addition, loss reserves on our international
    medical malpractice business, in run-off since we acquired the
    subsidiary that wrote this business in 2002, were strengthened
    in 2007 in response to a deteriorating legal and settlement
    environment.    
    a higher percentage of medical stop-loss business, which has a
    higher paid loss ratio than other lines,
    earlier payment of claims in 2008 due to shortening the required
    reporting period, bringing claims processing in-house, and
    responding to faster reporting of claims by insureds on certain
    lines of business,
    growth in lines of business with shorter duration,
    commutations of assumed accident and health business in our
    London market account,
    payment of claims related to the Health Products Division
    business acquired in 2006, and
    payments in 2006 were reduced $100.0 million
    (5.9 percentage points) due to the discontinued accident
    and health commutation.  Policy
    Acquisition Costs
    Statutory
    Agency
    Segment
   55




---



##### Table of Contents



Other
    Operations Segment
    Liquidity
    and Capital Resources
    
    We held $524.8 million of cash and liquid short-term
    investments at December 31, 2008. We have generated an
    annual average $588.2 million in cash from our operating
    activities, excluding cash from commutations, in the three-year
    period ended December 31, 2008.
    Our available for sale bond portfolio had a fair value of
    $4.1 billion at December 31, 2008 and has an average
    rating of AA+. We have the intent and ability to hold these
    securities until their maturity; however, should we have to sell
    certain securities in the portfolio earlier to generate cash,
    given the current credit market volatility, it is possible we
    might not recoup the full year-end fair value of the securities
    sold.
    As shown in the Contractual Obligations section, we project that
    our insurance companies will pay approximately $1.2 billion
    of claims in 2009 based on historical payment patterns and
    claims history. After projected collections on their reinsurance
    programs, our insurance companies estimate that net claims
    payable in 2009 will be approximately $831.1 million. These
    subsidiaries have a total $1.0 billion of cash, short-term
    investments, maturing bonds, and principal payments from
    asset-backed and mortgage-backed securities in 2009 that will be
    available to pay these expected claims, before consideration of
    expected cash flow from the insurance companies 2009
    operations. We project that there will be $211.1 million of
    available cash flow to fund any additional claims payments, if
    needed.
    We have a committed line of credit, led by Wells Fargo, through
    a syndicate group of large domestic banks and one large foreign
    bank. Our Revolving Loan Facility provides borrowing capacity to
    $575.0 million through December 2011. At February 20,
    2009, we had $340.0 million of unused capacity, which we
    can draw against at any time at our request. We believe that the
    banks will be able and willing to perform on their commitments
    to us.  
    Our 1.3% Convertible Notes are subject to redemption
    anytime after April 4, 2009, or holders may require us to
    repurchase the Notes on April 1, 2009. Our available
    capacity on the Revolving Loan Facility is sufficient to cover
    the $124.7 million of Notes outstanding at
    December 31, 2008. If the notes are not put to us by the
    holders, we can select a date for redemption in 2009 at our
    choosing or elect not to redeem the notes. The next put date by
    the holders would be April 1, 2014.
    Our domestic insurance subsidiaries have the ability to pay
    $199.2 million in dividends in 2009 to our holding company
    without obtaining special permission from state regulatory
    authorities. Our 56




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##### Table of Contents



underwriting agencies have no restrictions on the amount of
    dividends that can be paid to our holding company. The holding
    company can utilize these dividends to pay down debt, pay
    dividends to shareholders, fund acquisitions, repurchase common
    stock and pay operating expenses. Cash flow available to the
    holding company in 2009 is expected to be more than ample to
    cover the holding companys required cash disbursements.  
    Our debt to total capital ratio was 11.6% at December 31,
    2008 and 11.7% at December 31, 2007. We have a
    Universal Shelf registration that provides for the
    issuance of an aggregate of $1.0 billion of securities.
    These securities may be debt securities, equity securities,
    trust preferred securities, or a combination thereof. Although
    due to pricing we may not wish to issue securities in the
    current financial market, the shelf registration provides us the
    means to access the debt and equity markets. Our shelf
    registration expires in May 2009, and we plan to file for a new
    shelf registration prior to that date. We do not anticipate a
    problem obtaining a new Universal Shelf
    registration, and we do not anticipate using either the current
    or the new shelf registration in the near future.  Cash
    Flow
      
    our net earnings,
    growth in net written premium and net loss reserves due to
    organic growth and increased retentions,
    expansion of our diversified financial products line of
    business, where we retain premium for a longer duration and pay
    claims later than for our short-tailed businesses, and
    commutations of selected reinsurance agreements.    2008


2007


2006Net earnings

$
304,768


$
395,429



$342,285Change in premium, claims and other receivables, net of
    reinsurance, other payables and restricted cash


(41,248
)


(60,671
)


(139,906
)Change in unearned premium, net


43,835



3,062



122,571Change in loss and loss adjustment expense payable, net of
    reinsurance recoverables


89,910



342,556



328,569Change in trading portfolio


49,091



9,362



(19,919
)(Gain) loss on investments


49,549



(58,736
)


(52,688
)Other, net


10,063



95,434



72,476Cash provided by operating activities

$
505,968


$
726,436



$653,388    57




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##### Table of Contents



Investments
          Amount


%Short-term investments

$
497,477



10
%U.S. government and government guaranteed fixed income securities


227,607



5Fixed income securities of states, municipalities and political
    subdivisions


808,697



17Special revenue fixed income securities of states,
    municipalities and political subdivisions


1,182,838



25Corporate fixed income securities


511,638



10Asset-backed and mortgage-backed securities


1,040,866



22Foreign fixed income securities


485,072



10Other investments


50,088



1Total investments

$
4,804,283



100
%    58




---



##### Table of Contents




    amount by which the securitys fair value is less than its
    cost;
    length of time the security has been impaired,
    the securitys credit rating and any recent downgrades,
    stress testing of expected cash flows under various scenarios,
    whether the impairment is due to an issuer-specific event,
    credit issues or change in market interest rates, and
    our ability and intent to hold the security for a period of time
    sufficient to allow full recovery or until maturity.         59




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##### Table of Contents



2008


2007


2006Average investments, at cost

$
4,681,954


$
4,214,798


$
3,529,671Net investment income*


164,751



206,462



152,804Average short-term yield*


3.8
%


5.2
%


4.5
%Average long-term yield*


4.4
%


4.5
%


4.4
%Average long-term tax equivalent yield*


5.2
%


5.4
%


5.2
%Weighted-average combined tax equivalent yield*


4.2
%


5.6
%


5.0
%Weighted-average maturity


6.0 years



7.0 years



6.9 yearsWeighted-average duration


4.8 years



4.9 years



4.6 yearsAverage rating


AA+



AAA



AAA     *
    
    Excluding realized and unrealized investment gains and losses.    Available for Sale


Held to MaturityFair Value


Amortized CostAmount


%


Amount


%AAA

$
2,101,752



51
%

$
123,553



100
%AA


1,327,871



32







A


582,594



14







BBB


112,856



3







BB and below


8,092











Total fixed income securities

$
4,133,165



100
%

$
123,553



100
%     Available


Asset-backed and


Held to


Totalfor Sale


Mortgage-backed


Maturity


Fixed IncomeAmortized Cost


Amortized Cost


Amortized Cost


SecuritiesAmount


%


Amount


%


Amount


%


Amount


%One year or less

$
137,466



4
%

$
431,542



41
%

$
87,262



71
%

$
656,270



15
%One year to five years


1,130,926



37



617,105



59



29,937



24



1,777,968



42Five years to ten years


683,961



22











6,354



5



690,315



16Ten years to fifteen years


487,950



16



















487,950



12More than fifteen years


629,589



20



















629,589



15Total fixed income securities

$
3,069,892



100
%

$
1,048,647



100
%

$
123,553



100
%

$
4,242,092



100
%      60




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##### Table of Contents



and/or
  Fair
    Value Measurements
  Fair
    Value Measurements
  FAS 157-3, Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active FAS 157-3). FAS 157-3 FAS 157-3
    
    Level 1  Inputs are based on quoted prices in
    active markets for identical instruments. 61




---



##### Table of Contents




    Level 2  Inputs are based on observable market
    data (other than quoted prices), or are derived from or
    corroborated by observable market data.
    Level 3  Inputs are unobservable and not
    corroborated by market data.      FAS 157-3,
        Level 1


Level 2


Level 3


TotalFixed income securities

$
87,678


$
4,038,972


$
6,515


$
4,133,165Other investments


16











16Other assets






1,125



16,100



17,225Total assets measured at fair value

$
87,694


$
4,040,697


$
22,615


$
4,150,406Accounts payable and accrued liabilities

$



$
(8,031
)

$



$
(8,031
)Total liabilities measured at fair value

$



$
(8,031
)

$



$
(8,031
)    62




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##### Table of Contents



Fixedincome


Other


Othersecurities


investments


assets


TotalBalance at January 1, 2008

$
7,623


$
5,492


$
16,804


$
29,919Net redemptions


(242
)


(5,261
)






(5,503
)Losses  realized






(299
)






(299
)Other-than-temporary impairment losses  realized


(2,575
)










(2,575
)Gains and (losses)  unrealized


(566
)


68



(704
)


(1,202
)Net transfers in/out of Level 3


2,275











2,275Balance at December 31, 2008

$
6,515


$



$
16,100


$
22,615      63




---



##### Table of Contents



Contractual
    Obligations
    Estimated Payment DatesTotal


2009


2010-2011


2012-2013


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

$
1,666,343


$
481,962


$
684,688


$
336,874


$
162,819Group life, accident and health


305,225



251,974



42,751



8,413



2,087Aviation


161,634



75,645



53,208



21,413



11,368London market account


404,548



181,845



159,208



43,050



20,445Other specialty lines


407,691



135,041



164,550



67,360



40,740Discontinued lines


469,789



53,462



84,238



86,505



245,584Total loss and loss adjustment expense payable


3,415,230



1,179,929



1,188,643



563,615



483,043Life and annuity policy benefits


64,235



2,306



4,362



4,049



53,5181.30% Convertible Notes(2)


125,525



125,525











$575.0 million Revolving Loan Facility(3)


234,036



8,883



225,153







Operating leases


72,539



12,361



23,006



14,818



22,354Earnout liabilities


24,458



23,026



1,432







Indemnifications


18,692



4,077



6,226



5,786



2,603Total obligations

$
3,954,715


$
1,356,107


$
1,448,822


$
588,268


$
561,518     In preparing the previous table, we made the following estimates
    and assumptions.(1)
    
    The estimated loss and loss adjustment expense payments for
    future periods assume that the percentage of ultimate losses
    paid from one period to the next will be relatively consistent
    over time. Actual payments will be influenced by many factors
    and could vary from the estimated amounts.(2)
    
    While the 1.30% Convertible Notes mature in 2023, they are
    shown in the 2009 column since the holders may require us to
    repurchase the Notes on April 1, 2009. The Notes have
    various put and redemption dates as disclosed in Note 7 to
    the Consolidated Financial Statements. Amounts include interest
    payable in respective periods.(3)
    
    The $575.0 million Revolving Loan Facility expires on
    December 19, 2011. Interest on $200.0 million of the
    facility is included at an effective fixed rate of 4.60% through
    November 2009 and interest on $105.0 million of the
    facility is included at an effective interest rate of 2.94% from
    December 2009 through November 2010 due to interest rate swaps.
    Interest on the remaining facility is included at
    30-day LIBOR
    plus 25 basis points (0.69% at December 31, 2008). 64




---



##### Table of Contents



Claims
    Payments
    Maturities/Estimated Payment DatesTotal


2009


2010-2011


2012-2013


ThereafterCash and investment maturities of insurance companies

$
4,633,132


$
1,042,209


$
1,183,945


$
605,477


$
1,801,501Estimated loss and loss adjustment expense payments, net of
    reinsurance


2,416,271



831,123



798,877



409,338



376,933Estimated available cash flow

$
2,216,861


$
211,086


$
385,068


$
196,139


$
1,424,568       Convertible
    Notes
    Revolving
    Loan Facility
   65




---



##### Table of Contents



LIBOR


Commitment FeesDebt Rating

Basis Points


Basis PointsA+ or higher


15.0



7.5A to A+


25.0



10.0A- to A


30.0



12.5BBB+ to A-


40.5



12.5BBB or lower


50.0



15.0   30-day
  30-day
  Standby
    Letter of Credit Facility
    Subsidiary
    Lines of Credit
    Earnouts
   66




---



##### Table of Contents



Indemnifications
    Subsidiary
    Dividends
      Other
       67




---



##### Table of Contents



Impact of
    Inflation
        Foreign
    Exchange Rate Fluctuations
    Critical
    Accounting Policies
    Loss
    and Loss Adjustment Expense
   68




---



##### Table of Contents



claim-by-claim
      Recorded


Actuarial


Low End of


High End ofNet Reserves


Point Estimate


Actuarial Range


Actuarial RangeTotal net reserves

$
2,416,271


$
2,313,524


$
2,150,619


$
2,548,285Individual lines of business:Diversified financial products

$
1,205,244


$
1,141,230


$
982,767


$
1,355,613Group life, accident and health


279,622



276,896



251,672



304,201Aviation


100,259



94,963



87,713



103,676London market account


178,447



177,534



168,657



199,024Other specialty lines


265,756



250,215



237,090



282,261Discontinued lines


386,943



372,687



327,340



450,215Total net reserves

$
2,416,271      69




---



##### Table of Contents



ClaimsCharacteristicsSpeed ofClaim

Reserve

Major ActuarialLine of Business

Products

Underwriting

Duration

Reporting

Volatility

AssumptionsDiversified financial products

Directors and officers

Direct and subscription

Medium to long

Moderate

Medium to high

Historical and industry loss reporting patternsliability









Loss trendsRate changesProfessional indemnity

Direct

Medium

Moderate

Medium

Historical loss reporting patternsSurety

Direct

Medium

Fast

Low

Historical loss payment and reporting patternsGroup life, accident and health

Medical stop-loss

Direct

Short

Fast

Low

Medical cost and utilization trendsHistorical loss payment and reporting patternsRate changesMedical excess

Direct and assumed

Short

Fast

Low to medium

Historical loss payment and reporting patternsLoss trendsRate changesAviation

Aviation

Direct and
    subscription

Medium

Fast

Medium

Historical loss
    payment and
    reporting patterns 70




---



##### Table of Contents



ClaimsCharacteristicsSpeed ofClaim

Reserve

Major ActuarialLine of Business

Products

Underwriting

Duration

Reporting

Volatility

AssumptionsLondon market account

Accident and health

Direct and assumed

Medium to long

Slow

High

Historical loss payment and reporting patternsEnergy*

Subscription

Medium

Moderate

Medium

Historical and industry loss payment and reporting patternsHistorical large loss experienceProperty*

Subscription

Medium

Moderate

Medium

Historical loss payment and reporting patternsHistorical large loss experienceMarine

Subscription

Medium

Moderate

Medium

Historical loss payment and reporting patternsHistorical large loss experienceOther specialty

Liability

Direct and assumed

Medium

Moderate

Medium

Historical loss payment and reporting patternsProperty

Direct and assumed

Short

Fast

Low

Historical loss payment and reporting  patternsDiscontinued

Accident and health insurance

Assumed

Long

Slow

High

Historical and industry loss payment and reporting patternsMedical malpractice

Direct

Medium to long

Moderate

Medium to high

Historical loss payment and reporting patterns   *
    
    Includes catastrophe losses       71




---



##### Table of Contents



% NetIBNR toNet TotalAt December 31, 2008

Gross


Ceded


Net


ReservesReported loss reserves:Diversified financial products

$
682,446


$
207,750


$
474,696Group life, accident and health


171,326



8,550



162,776Aviation


101,720



35,894



65,826London market account


272,795



165,468



107,327Other specialty lines


167,703



59,087



108,616Subtotal reported reserves


1,395,990



476,749



919,241Incurred but not reported reserves:Diversified financial products


983,897



253,349



730,548



61
%Group life, accident and health


133,899



17,204



116,695



42Aviation


59,914



25,481



34,433



34London market account


131,753



60,482



71,271



40Other specialty lines


239,988



82,848



157,140



59Subtotal incurred but not reported reserves


1,549,451



439,364



1,110,087



55Discontinued lines reported reserves


326,314



58,814



267,500Discontinued lines incurred but not reported reserves


143,475



24,032



119,443



31Total loss and loss adjustment expense payable

$
3,415,230


$
998,959


$
2,416,271



51
%  72




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##### Table of Contents



% NetIBNR toNet TotalAt December 31, 2007

Gross


Ceded


Net


ReservesReported loss reserves:Diversified financial products

$
593,378


$
187,256


$
406,122Group life, accident and health


194,670



2,244



192,426Aviation


116,983



44,219



72,764London market account


242,918



134,658



108,260Other specialty lines


131,012



45,672



85,340Subtotal reported reserves


1,278,961



414,049



864,912Incurred but not reported reserves:Diversified financial products


892,669



260,347



632,322



61
%Group life, accident and health


157,213



19,036



138,177



42Aviation


52,771



20,650



32,121



31London market account


134,398



32,773



101,625



48Other specialty lines


211,798



70,469



141,329



62Subtotal incurred but not reported reserves


1,448,849



403,275



1,045,574



55Discontinued lines reported reserves


335,177



44,141



291,036Discontinued lines incurred but not reported reserves


164,093



22,815



141,278



33Total loss and loss adjustment expense payable

$
3,227,080


$
884,280


$
2,342,800



51
%         
    Diversified financial products  Total net reserves
    increased $166.8 million from 2007 to 2008 as this
    relatively new line of business continues to grow. The incurred
    but not reported portion of the total reserves for this line of
    business is higher than in most of our other lines, since these
    losses report slower and have a longer duration. This line
    includes our directors and officers liability,
    professional indemnity and fiduciary liability coverages, which
    have experienced increased notices of claims, primarily from
    financial institutions, due to current market and credit-related
    issues. As a result, we increased our ultimate loss ratios for
    the 2007 and 2008 accident years in these lines. Although the
    percentage of incurred but not reported reserves will decrease
    as the claims start to mature, the 73




---



##### Table of Contents



percentage is consistent year-over-year due to the higher level
    of incurred but not reported reserves on the 2007 and 2008
    accident years at December 31, 2008.  
    Group life, accident and health  Total net reserves
    decreased year-over-year due to the lower incurred loss ratio on
    this short-duration line of business. In addition, the length of
    time to pay claims decreased in 2008 due to shorter required
    reporting periods and more efficient claims processing.
    London market account  Total net reserves and the
    percentage of incurred but not reported reserves both decreased
    due to the continued payment of long-tailed claims related to
    the 2005 hurricanes. In addition, redundant development more
    than offset the effect of the 2008 hurricanes.
    Other specialty lines  Total net reserves increased
    due to our increased participation in one of our Lloyds of
    London syndicates, as well as growth in new lines of business.
    Discontinued lines  Total net reserves for our
    discontinued lines decreased $45.4 million in 2008 as a
    result of claims payments.        Reinsurance
    Recoverables
   74




---



##### Table of Contents



Deferred
    Taxes
    Valuation
    of Goodwill
      Other-Than-Temporary
    Impairments on Investments
    
    amount by which the securitys fair value is less than its
    cost,
    length of time the security has been impaired,
    the securitys credit rating and any recent downgrades,
    stress testing of expected cash flows under various scenarios,
    whether the impairment is due to an issuer-specific event,
    credit issues or change in market interest rates, and
    our ability and intent to hold the security for a period of time
    sufficient to allow full recovery or until maturity. 75




---



##### Table of Contents



Recent
    Accounting Pronouncements
  FAS 157-2, Effective Date of FASB Statement No. 157, FSP 157-2
  The Fair Value Option for Financial
    Assets and Financial Liabilities,
  Business Combinations, and
    SFAS No. 160, Noncontrolling Interests in Consolidated
    Financial Statements, an amendment of Accounting Research
    Bulletin No. 51.
  Disclosures about
    Derivative Instruments and Hedging Activities  an
    amendment of FASB Statement No. 133,
  The Hierarchy of
    Generally Accepted Accounting Principles The Meaning of Present Fairly in Conformity with
    Generally Accepted Accounting Principles.
  14-1, Accounting for Convertible Debt Instruments That May Be
    Settled in Cash Upon Conversion (Including Partial Cash
    Settlement). 14-1
 76




---



##### Table of Contents



14-1
  EITF 03-6-1, Determining Whether Instruments Granted in Share-Based
    Payment Transactions Are Participating Securities. EITF 03-6-1 Earnings per Share. EITF 03-6-1 EITF 03-6-1
  Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Interest
    Rate Risk
           77




---



##### Table of Contents



Foreign
    Exchange Risk
    December 31,2008


2007Hypothetical





HypotheticalU.S. Dollar


10% Change


U.S. Dollar


10% ChangeEquivalent


in Fair Value


Equivalent


in Fair ValueBritish pound sterling

$
13,074


$
1,307


$
42,340


$
4,234Canadian dollar


750



75



1,355



135Euro


649



65



1,041



104     Item 8.
    Financial
    Statements and Supplementary Data    Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosures    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
    Managements
    Report on Internal Control Over Financial Reporting
  Rules 13a-15(f) 15d-15(f)
 78




---



##### Table of Contents



Internal Control  Integrated
    Framework
      Changes
    in Internal Control Over Financial Reporting
    Item 9B.
    Other
    Information  Form 8-K Form 8-K.
  PART III
  Item 10.
    Directors,
    Executive Officers and Corporate Governance  Code of
    Business Conduct and Ethics
       79




---



##### Table of Contents



Section 303A-12(a) Form 10-K
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services    PART IV
  Item 15.
    Exhibits
    and Financial Statement Schedules  (a)
    Financial
    Statement Schedules    (b)
    Exhibits   80




---



##### Table of Contents



SIGNATURES    
   By:
    /s/  Frank
    J. Bramanti       Name

Title

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

Director and Chief Executive Officer (Principal Executive
    Officer)

March 2, 2009/s/  Patrick
    B. Collins*(Patrick
    B. Collins)

Director

March 2, 2009/s/  J.
    Robert Dickerson*(J.
    Robert Dickerson)

Director

March 2, 2009/s/  Walter
    M. Duer*(Walter
    M. Duer)

Director

March 2, 2009/s/  Edward
    H. Ellis, Jr.(Edward
    H. Ellis, Jr.)

Director, Executive Vice President and Chief Financial Officer

March 2, 2009/s/  James
    C. Flagg, Ph.D.*(James
    C. Flagg, Ph.D.)

Director

March 2, 2009/s/  Allan
    W. Fulkerson*(Allan
    W. Fulkerson)

Director

March 2, 2009/s/  Thomas
    M. Hamilton*(Thomas
    M. Hamilton)

Director

March 2, 2009/s/  John
    N. Molbeck, Jr.*(John
    N. Molbeck, Jr.)

Director, President and Chief Operating Officer

March 2, 2009/s/  James
    E. Oesterreicher*(James
    E. Oesterreicher)

Director

March 2, 2009/s/  Michael
    A. F. Roberts*(Michael
    A. F. Roberts)

Director

March 2, 2009 81




---



##### Table of Contents



Name

Title

Date/s/  Robert
    A. Rosholt*(Robert
    A. Rosholt)

Director

March 2, 2009/s/  Christopher
    J. B. Williams*(Christopher
    J. B. Williams)

Director and Chairman of the Board

March 2, 2009/s/  Scott
    W. Wise*(Scott
    W. Wise)

Director

March 2, 2009/s/  Pamela
    J. Penny(Pamela
    J. Penny)

Executive Vice President and Chief Accounting Officer

March 2, 2009By:

/s/  Pamela
    J. PennyPamela
    J. Penny,Attorney-in-fact  82




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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.
  ExhibitNumber(A)3
.1



Restated Certificate of Incorporation and Amendment of
    Certificate of Incorporation of HCC Insurance Holdings, Inc.,
    filed with the Delaware Secretary of State on July 23, 1996
    and May 21, 1998, respectively.(B)3
.2



Amended & Restated Bylaws of HCC Insurance Holdings, Inc.(C)4
.1



Specimen of Common Stock Certificate, $1.00 par value, of
    HCC Insurance Holdings, Inc.(D)4
.2



Indenture dated August 23, 2001 between HCC Insurance
    Holdings, Inc. and First Union National Bank related to Debt
    Securities (Senior Debt).(E)4
.3



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.(F)4
.4



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.(G)10
.1



Loan Agreement ($300,000,000 Revolving Loan Facility) dated as
    of April 4, 2007 among HCC Insurance Holdings, Inc.; Wells
    Fargo Bank, National Association; Citibank, N.A.; Wachovia Bank,
    National Association; Royal Bank of Scotland; Amegy Bank,
    National Association and The Bank of New York.(H)10
.2



First Amendment to Loan Agreement dated as of October 23,
    2007 by and among HCC Insurance Holdings, Inc. and Wells Fargo
    Bank, National Association; Citibank, N.A.; Wachovia Bank,
    National Association; Royal Bank of Scotland; Amegy Bank,
    National Association; The Bank of New York; Key Bank National
    Association; Bank of America, N.A.; and Deutsche Bank AG New
    York Branch(I)10
.4



HCC Insurance Holdings, Inc. 2008 Flexible Incentive Plan.(J)10
.5



Form of Restricted Stock Unit Award Agreement under the HCC
    Insurance Holdings, Inc. 2008 Flexible Incentive Plan.(J)10
.6



Form of Nonqualified Stock Option Agreement under the HCC
    Insurance Holdings, Inc. 2008 Flexible Incentive Plan.(J)10
.7



Form of Restricted Stock Award Agreement under the HCC Insurance
    Holdings, Inc. 2008 Flexible Incentive Plan.(K)10
.8



HCC Insurance Holdings, Inc. 2007 Incentive Compensation Plan.(L)10
.9



Amended and Restated Employment Agreement effective
    January 1, 2007, between HCC Insurance Holdings, Inc. and
    Frank J. Bramanti.(M)10
.10



Employment Agreement effective March 1, 2007, between HCC
    Insurance Holdings, Inc. and John N. Molbeck, Jr.(M)10
.11



Employment Agreement effective March 1, 2007, between HCC
    Insurance Holdings, Inc. and Craig J. Kelbel.(M)10
.12



Employment Agreement effective June 1, 2007, between HCC
    Insurance Holdings, Inc. and Michael J. Schell.(M)10
.13



Employment Agreement effective March 1, 2007, between HCC
    Insurance Holdings, Inc. and Edward H. Ellis, Jr.(M)10
.14



First Amendment to Employment Agreement effective as of
    June 1, 2007 between HCC Insurance Holdings, Inc. and
    Michael J. Schell.(N)10
.15



Service Agreement effective as of January 1, 2006, between
    HCC Service Company Limited (UK) Branch and Barry J. Cook.(O)10
.16



HCC Insurance Holdings, Inc. Nonqualified Deferred Compensation
    Plan for Frank J. Bramanti. 83




---



##### Table of Contents



ExhibitNumber(O)10
.17



HCC Insurance Holdings, Inc. Nonqualified Deferred Compensation
    Plan for John N. Molbeck, Jr.10
.18



Employment Agreement effective September 1, 2008, between
    HCC Insurance Holdings, Inc. and Cory L. Moulton.12




Statement Regarding Computation of Ratios.21




Subsidiaries of HCC Insurance Holdings, Inc.23




Consent of Independent Registered Public Accounting
    Firm  PricewaterhouseCoopers LLP dated March 2,
    2009.24




Powers of Attorney.31
.1



Certification by Chief Executive Officer.31
.2



Certification by Chief Financial Officer.32
.1



Certification with respect to Annual Report of HCC Insurance
    Holdings, Inc.     (A)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Registration Statement on
    Form S-8
    (Registration
    No. 333-61687)
    filed August 17, 1998.(B)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated March 30, 2008.(C)

    
    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.(D)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated August 19, 2001.(E)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated March 25, 2003.(F)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated December 22, 2004.(G)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated April 4, 2007.(H)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated October 24, 2007.(I)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Registration Statement on
    Form S-8
    (Registration
    No. 33-152897)
    filed August 8, 2008.(J)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-Q
    for the Quarter Ended September 30, 2008.(K)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s Definitive Proxy Statement for the
    May 10, 2007 Annual Meeting of Shareholders filed
    April 13, 2007.(L)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated April 12, 2007.(M)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated August 10, 2007.(N)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 10-Q
    for the quarter ended March 31, 2007.(O)

    
    Incorporated by reference to the Exhibits to HCC Insurance
    Holdings, Inc.s
    Form 8-K
    dated August 30, 2007. 84




---



##### 



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


F-1Consolidated Balance Sheets at December 31,
    2008 and 2007


F-2Consolidated Statements of Earnings for the three
    years ended December 31, 2008


F-3Consolidated Statements of Comprehensive Income
    for the three years ended December 31, 2008


F-4Consolidated Statements of Changes in
    Shareholders Equity for the three years ended
    December 31, 2008


F-5Consolidated Statements of Cash Flows for the
    three years ended December 31, 2008


F-6Notes to Consolidated Financial Statements


F-7Schedules:Schedule 1  Summary of
    Investments other than Investments in Related Parties


S-1Schedule 2  Condensed Financial
    Information of Registrant


S-2Schedule 3  Supplementary
    Insurance Information


S-6Schedule 4  Reinsurance


S-7Schedule 5  Valuation and
    Qualifying Accounts


S-8     85




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     Internal Control 
    Integrated Framework
        PricewaterhouseCoopers
    LLP
    F-1




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES



CONSOLIDATED
    BALANCE SHEETS

(In
    thousands, except per share data)  December 31,2008


2007ASSETSInvestments:Fixed income securities  available for sale, at fair
    value (amortized cost: 2008  $4,118,539;
    2007  $3,641,667)

$
4,133,165


$
3,666,705Fixed income securities  held to maturity, at
    amortized cost (fair value: $125,561)


123,553



Short-term investments, at cost, which approximates fair value


497,477



783,650Other investments


50,088



221,922Total investments


4,804,283



4,672,277Cash


27,347



39,135Restricted cash and cash investments


174,905



193,151Premium, claims and other receivables


770,823



763,401Reinsurance recoverables


1,054,950



956,665Ceded unearned premium


234,375



244,684Ceded life and annuity benefits


64,235



66,199Deferred policy acquisition costs


188,652



192,773Goodwill


858,849



776,046Other assets


153,964



170,314Total assets

$
8,332,383


$
8,074,645LIABILITIESLoss and loss adjustment expense payable

$
3,415,230


$
3,227,080Life and annuity policy benefits


64,235



66,199Reinsurance balances payable


122,189



129,838Unearned premium


977,426



943,946Deferred ceding commissions


63,123



68,968Premium and claims payable


405,287



497,974Notes payable


344,714



324,714Accounts payable and accrued liabilities


300,838



375,561Total liabilities


5,693,042



5,634,280SHAREHOLDERS EQUITYCommon stock, $1.00 par value; 250,000 shares
    authorized (shares issued: 2008  116,457 and
    2007  115,069; outstanding: 2008  113,444
    and 2007  115,069)


116,457



115,069Additional paid-in capital


861,867



831,419Retained earnings


1,696,816



1,445,995Accumulated other comprehensive income


27,536



47,882Treasury stock, at cost (shares: 3,013)


(63,335
)


Total shareholders equity


2,639,341



2,440,365Total liabilities and shareholders equity

$
8,332,383


$
8,074,645    F-2




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES



CONSOLIDATED
    STATEMENTS OF EARNINGS

(In
    thousands, except per share data)  Years Ended December 31,2008


2007


2006REVENUENet earned premium

$
2,007,774


$
1,985,086


$
1,709,189Fee and commission income


125,201



140,092



137,131Net investment income


164,751



206,462



152,804Net realized investment gain (loss)


(27,941
)


13,188



(841
)Other operating income


9,638



43,545



77,012Total revenue


2,279,423



2,388,373



2,075,295EXPENSELoss and loss adjustment expense, net


1,211,873



1,183,947



1,011,856Policy acquisition costs, net


381,441



366,610



319,885Other operating expense


233,509



241,642



222,324Interest expense


16,288



10,304



11,396Total expense


1,843,111



1,802,503



1,565,461Earnings before income tax expense


436,312



585,870



509,834Income tax expense


131,544



190,441



167,549Net earnings

$
304,768


$
395,429


$
342,285Earnings per common share:Basic

$
2.65


$
3.50


$
3.08Diluted

$
2.64


$
3.38


$
2.93Weighted-average shares outstanding:Basic


114,848



112,873



111,309Diluted


115,474



116,997



116,736    F-3




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES



CONSOLIDATED
    STATEMENTS OF COMPREHENSIVE INCOME

(In
    thousands)  Years Ended December 31,2008


2007


2006Net earnings

$
304,768


$
395,429


$
342,285Other comprehensive income (loss):Investment gains (losses):Investment gains (losses) during year


(37,290
)


41,880



40,354Income tax charge (benefit)


(14,985
)


14,416



14,212Investment gains (losses), net of tax


(22,305
)


27,464



26,142Less reclassification adjustments for:Gains (losses) included in net earnings


(19,828
)


37,461



38,527Income tax charge (benefit)


(6,940
)


13,111



13,484Gains (losses) included in net earnings, net of tax


(12,888
)


24,350



25,043Net investment gains (losses)


(9,417
)


3,114



1,099Cash flow hedge loss


(5,543
)


(2,488
)


Income tax benefit


(1,940
)


(871
)


Cash flow hedge loss, net of tax


(3,603
)


(1,617
)


Foreign currency translation adjustment


(10,425
)


13,276



17,048Income tax charge (benefit)


(3,099
)


863



3,249Foreign currency translation adjustment, net of tax


(7,326
)


12,413



13,799Other comprehensive income (loss)


(20,346
)


13,910



14,898Comprehensive income

$
284,422


$
409,339


$
357,183    F-4




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
    EQUITY
    Years ended December 31, 2008, 2007 and 2006
    (In thousands, except per share data)  AccumulatedAdditional





Other





TotalCommon


Paid-In


Retained


Comprehensive


Treasury


ShareholdersStock


Capital


Earnings


Income


Stock


EquityBalance at December 31, 2005

$
110,803


$
762,170


$
798,388


$
19,074


$



$
1,690,435Net earnings










342,285











342,285Other comprehensive income














14,898







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


928



18,071















18,999Stock-based compensation






14,022















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






3,950















3,950Cash dividends declared, $0.375 per share










(41,786
)










(41,786
)Balance at December 31, 2006


111,731



798,213



1,098,887



33,972







2,042,803Cumulative effect of accounting change (adoption of FIN 48)










(678
)










(678
)Net earnings










395,429











395,429Other comprehensive income














13,910







13,910Issuance of 1,101 shares for exercise of options, including
    tax benefit of $3,352


1,101



23,432















24,533Issuance of 2,215 shares for debt conversions


2,215



(2,215
)














Stock-based compensation


22



11,989















12,011Cash dividends declared, $0.42 per share










(47,643
)










(47,643
)Balance at December 31, 2007


115,069



831,419



1,445,995



47,882







2,440,365Net earnings










304,768











304,768Other comprehensive loss














(20,346
)






(20,346
)Issuance of 1,011 shares for exercise of options, including
    tax benefit of $1,283


1,011



17,187















18,198Purchase of 3,013 common shares


















(63,335
)


(63,335
)Stock-based compensation


377



13,261















13,638Cash dividends declared, $0.47 per share










(53,947
)










(53,947
)Balance at December 31, 2008

$
116,457


$
861,867


$
1,696,816


$
27,536


$
(63,335
)

$
2,639,341    F-5




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES



CONSOLIDATED
    STATEMENTS OF CASH FLOWS

(In
    thousands)  Years Ended December 31,2008


2007


2006Operating activities:Net earnings

$
304,768


$
395,429


$
342,285Adjustments to reconcile net earnings to cash provided by
    operating activities:Change in premium, claims and other receivables


46,985



97,304



40,955Change in reinsurance recoverables


(98,354
)


213,353



192,049Change in ceded unearned premium


10,309



(18,436
)


13,291Change in loss and loss adjustment expense payable


188,264



129,203



136,520Change in reinsurance balances payable


(8,014
)


7,002



(54,834
)Change in unearned premium


33,526



21,498



109,280Change in premium and claims payable, net of restricted cash


(80,219
)


(164,977
)


(126,027
)Change in trading portfolio


49,091



9,362



(19,919
)Stock-based compensation expense


13,638



12,011



13,126Depreciation and amortization expense


14,308



15,982



14,980(Gain) loss on investments


49,549



(58,736
)


(52,688
)Other, net


(17,883
)


67,441



44,370Cash provided by operating activities


505,968



726,436



653,388Investing activities:Sales of fixed income securities


583,211



438,057



338,927Maturity or call of fixed income securities


323,998



302,876



247,072Cost of securities acquired


(1,609,007
)


(1,377,750
)


(1,389,984
)Change in short-term investments


294,248



(72,279
)


129,919Proceeds from sales of strategic and other investments


77,097



46,612



63,285Payments for purchase of businesses, net of cash received


(103,153
)


(65,112
)


(45,722
)Other, net


(7,996
)


(9,741
)


(11,971
)Cash used by investing activities


(441,602
)


(737,337
)


(668,474
)Financing activities:Advances on line of credit


181,000



232,000



140,000Payments on line of credit and notes payable


(161,000
)


(205,763
)


(140,616
)Sale of common stock


18,198



24,533



18,999Purchase of common stock


(63,335
)






Dividends paid


(52,453
)


(46,158
)


(38,923
)Other, net


1,436



(2,866
)


9,981Cash provided (used) by financing activities


(76,154
)


1,746



(10,559
)Net decrease in cash


(11,788
)


(9,155
)


(25,645
)Cash at beginning of year


39,135



48,290



73,935Cash at end of year

$
27,347


$
39,135


$
48,290    F-6




---



##### 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-7




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
  Net
    Earned Premium, Policy Acquisition Costs and Ceding
    Commissions
      Fee
    and Commission Income
      Premium,
    Claims and Other Receivables
    Loss
    and Loss Adjustment Expense Payable
   F-8




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    Reinsurance
      Cash
    and Short-term Investments
      Restricted
    Cash and Cash Investments
    Investments
   F-9




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
          other-than-temporary
  
    amount by which the securitys fair value is less than its
    cost,
    length of time the security has been impaired,
    the securitys credit rating and any recent downgrades,
    stress testing of expected cash flows under various scenarios,
    whether the impairment is due to an issuer-specific event,
    credit issues or change in market interest rates, and
    Our ability and intent to hold the security for a period of time
    sufficient to allow full recovery or until maturity  other-than-temporary,
 F-10




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    Derivative
    Financial Instruments
      Strategic
    Investments and Other Operating Income
    Goodwill
    and Intangible Assets
       F-11




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    Foreign
    Currency
      Income
    Taxes
    Accounting for
    Uncertainty in Income Taxes
  Stock-Based
    Compensation
  Share-Based Payment
 F-12




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    Earnings
    Per Share
    Recent
    Accounting Pronouncements
  FAS 157-2, Effective Date of FASB Statement No. 157, Fair Value
    Measurements FSP 157-2
  The Fair Value Option for Financial
    Assets and Financial Liabilities
  Business Combinations, , Noncontrolling Interests in
    Consolidated Financial Statements, an amendment of Accounting
    Research Bulletin No. 51.
  Disclosures about
    Derivative Instruments and Hedging Activities  an
    amendment of FASB Statement No. 133
  The Hierarchy of
    Generally Accepted Accounting Principles. The Meaning of Present Fairly in
 F-13




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
  Conformity with Generally Accepted Accounting Principles.
  14-1, Accounting for Convertible Debt Instruments That May Be
    Settled in Cash Upon Conversion (Including Partial Cash
    Settlement). 14-1 14-1
  EITF 03-6-1, Determining Whether Instruments Granted in Share-Based
    Payment Transactions Are Participating Securities. EITF 03-6-1 Earnings per Share EITF 03-6-1 EITF 03-6-1
  (2)
    Fair
    Value Measurements  Fair Value Measurements
  FAS 157-3, Determining the Fair Value of a Financial Asset When the
    Market for That Asset Is Not Active FAS 157-3). FAS 157-3 FAS 157-3
    
    Level 1  Inputs are based on quoted prices in
    active markets for identical instruments.
    Level 2  Inputs are based on observable market
    data (other than quoted prices), or are derived from or
    corroborated by observable market data.
    Level 3  Inputs are unobservable and not
    corroborated by market data. F-14




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
       FAS 157-3,
        Level 1


Level 2


Level 3


TotalFixed income securities

$
87,678


$
4,038,972


$
6,515


$
4,133,165Other investments


16











16Other assets






1,125



16,100



17,225Total assets measured at fair value

$
87,694


$
4,040,097


$
22,615


$
4,150,406Accounts payable and accrued liabilities

$



$
(8,031
)

$



$
(8,031
)Total liabilities measured at fair value

$



$
(8,031
)

$



$
(8,031
)  F-15




---



##### Table of Contents



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


Other


OtherSecurities


Investments


Assets


TotalBalance at January 1, 2008

$
7,623


$
5,492


$
16,804


$
29,919Net redemptions


(242
)


(5,261
)






(5,503
)Losses  realized






(299
)






(299
)Other-than-temporary
    impairment losses  realized


(2,575
)










(2,575
)Gains and (losses)  unrealized


(566
)


68



(704
)


(1,202
)Net transfers in/out of Level 3


2,275











2,275Balance at December 31, 2008

$
6,515


$



$
16,100


$
22,615     (3)
    Investments    Cost or


Gross


GrossAmortized


Unrealized


Unrealized


FairCost


Gain


Loss


ValueDecember 31, 2008U.S. government

$
196,856


$
9,447


$
(15
)

$
206,288States, municipalities and political subdivisions


1,982,321



40,197



(30,983
)


1,991,535Corporate fixed income securities


517,794



5,308



(11,464
)


511,638Asset-backed and mortgage-backed securities


1,048,647



40,349



(48,130
)


1,040,866Foreign securities


372,921



10,576



(659
)


382,838Total available for sale fixed income securities

$
4,118,539


$
105,877


$
(91,251
)

$
4,133,165December 31, 2007U.S. government

$
159,147


$
4,445


$
(9
)

$
163,583States, municipalities and political subdivisions


1,802,417



22,494



(2,630
)


1,822,281Corporate fixed income securities


299,288



2,778



(4,498
)


297,568Asset-backed and mortgage-backed securities


1,001,423



12,692



(4,423
)


1,009,692Foreign securities


379,392



956



(6,767
)


373,581Total available for sale fixed income securities

$
3,641,667


$
43,365


$
(18,327
)

$
3,666,705  F-16




---



##### Table of Contents



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


FairCost


ValueDecember 31, 2008U.S. government

$
21,319


$
21,823Foreign securities


102,234



103,738Total held to maturity fixed income securities

$
123,553


$
125,561     Less than 12 Months


12 Months or More


TotalUnrealized





Unrealized





UnrealizedFair Value


Losses


Fair Value


Losses


Fair Value


LossesDecember 31, 2008U.S. government

$
13,240


$
(10
)

$
590


$
(5
)

$
13,830


$
(15
)States, municipalities and political subdivisions


584,091



(16,874
)


197,425



(14,109
)


781,516



(30,983
)Corporate fixed income securities


298,464



(7,217
)


18,753



(4,247
)


317,217



(11,464
)Asset-backed and mortgage-backed securities


195,690



(22,895
)


96,452



(25,235
)


292,142



(48,130
)Foreign securities


20,620



(211
)


31,994



(448
)


52,614



(659
)Total

$
1,112,105


$
(47,207
)

$
345,214


$
(44,044
)

$
1,457,319


$
(91,251
)December 31, 2007U.S. government

$
671


$
(2
)

$
2,234


$
(7
)

$
2,905


$
(9
)States, municipalities and political subdivisions


236,494



(1,535
)


149,584



(1,095
)


386,078



(2,630
)Corporate fixed income securities


34,577



(2,316
)


107,084



(2,182
)


141,661



(4,498
)Asset-backed and mortgage-backed securities


89,112



(1,205
)


220,651



(3,218
)


309,763



(4,423
)Foreign securities


82,971



(861
)


217,555



(5,906
)


300,526



(6,767
)Total

$
443,825


$
(5,919
)

$
697,108


$
(12,408
)

$
1,140,933


$
(18,327
)   other-than-temporary other-than-temporary
 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)
      Available for SaleCost





Held to MaturityAmortized





AmortizedCost


Fair Value


Cost


Fair ValueDue in 1 year or less

$
137,466


$
138,021


$
87,262


$
88,414Due after 1 year through 5 years


1,130,926



1,152,376



29,937



30,676Due after 5 years through 10 years


683,961



702,388



6,354



6,471Due after 10 years through 15 years


487,950



486,262







Due after 15 years


629,589



613,252







Securities with fixed maturities


3,069,892



3,092,299



123,553



125,561Asset-backed and mortgage-backed securities


1,048,647



1,040,866







Total fixed income securities

$
4,118,539


$
4,133,165


$
123,553


$
125,561       2008


2007


2006Fixed income securities

$
174,710


$
150,594


$
112,878Short-term investments


24,173



37,764



30,921Other investments


(30,191
)


23,930



14,178Total investment income


168,692



212,288



157,977Investment expense


(3,941
)


(5,826
)


(5,173
)Net investment income

$
164,751


$
206,462


$
152,804   other-than-temporary
  Gains


Losses


NetYear ended December 31, 2008Fixed income securities

$
12,088


$
(20,127
)

$
(8,039
)Other investments


663



(9,433
)


(8,770
)Realized gain (loss)

$
12,751


$
(29,560
)

$
(16,809
) F-18




---



##### Table of Contents



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


Losses


NetYear ended December 31, 2007Fixed income securities

$
14,728


$
(1,266
)

$
13,462Other investments


305



(579
)


(274
)Realized gain (loss)

$
15,033


$
(1,845
)

$
13,188Year ended December 31, 2006Fixed income securities

$
886


$
(1,771
)

$
(885
)Other investments


93



(49
)


44Realized gain (loss)

$
979


$
(1,820
)

$
(841
)       2008


2007


2006Available for sale fixed income securities

$
(10,412
)

$
26,663


$
6,890Strategic and other investments


(7,050
)


(22,244
)


(5,063
)Net unrealized investment gains (losses)

$
(17,462
)

$
4,419


$
1,827   (4)
    Acquisitions
    and Goodwill  Acquisitions
   F-19




---



##### Table of Contents



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


GoodwillConsideration Paid


Recognized throughNumber of

through December 31,


December 31,


Tax DeductibleAcquisitions

2008


2008


Goodwill2008

Five

$
72.6


$
62.6


$
51.42007

Two


16.3



4.8



2006

Three


163.5



158.3



136.2   Business
    Combinations.
      Goodwill
   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)
    Insurance





OtherCompany


Agency


Operations


Corporate


TotalBalance at December 31, 2006

$
532,820


$
206,534


$



$
3,323


$
742,677Additions:Acquisitions


3,503















3,503Earnouts


27,984



5,205











33,189Transfer and other


(323
)






323



(3,323
)


(3,323
)Balance at December 31, 2007


563,984



211,739



323







776,046Additions:Acquisitions


36,207



22,243











58,450Earnouts


20,225



5,336











25,561Transfer and other


26,111



(27,319
)










(1,208
)Balance at December 31, 2008

$
646,527


$
211,999


$
323


$



$
858,849   (5)
    Reinsurance    Loss and LossWritten


Earned


AdjustmentPremium


Premium


ExpenseYear ended December 31, 2008Direct business

$
2,156,613


$
2,091,212


$
1,327,932Reinsurance assumed


342,150



363,389



307,562Reinsurance ceded


(438,145
)


(446,827
)


(423,621
)Net amounts

$
2,060,618


$
2,007,774


$
1,211,873Year ended December 31, 2007Direct business

$
2,000,552


$
2,001,329


$
1,119,384Reinsurance assumed


450,627



433,951



233,026Reinsurance ceded


(465,570
)


(450,194
)


(168,463
)Net amounts

$
1,985,609


$
1,985,086


$
1,183,947Year ended December 31, 2006Direct business

$
1,867,908


$
1,790,636


$
990,800Reinsurance assumed


367,740



357,799



228,038Reinsurance ceded


(423,096
)


(439,246
)


(206,982
)Net amounts

$
1,812,552


$
1,709,189


$
1,011,856  F-21




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
      2008


2007Reinsurance recoverable on paid losses

$
64,419


$
80,915Reinsurance recoverable on outstanding losses


535,563



458,190Reinsurance recoverable on incurred but not reported losses


463,396



426,090Reserve for uncollectible reinsurance


(8,428
)


(8,530
)Total reinsurance recoverables

$
1,054,950


$
956,665     2008


2007Payables to reinsurers

$
252,198


$
246,745Letters of credit


184,314



188,400Cash deposits


110,153



114,549Total credits

$
546,665


$
549,694     2008


2007Loss and loss adjustment expense payable

$
3,415,230


$
3,227,080Reinsurance recoverable on outstanding losses


(535,563
)


(458,190
)Reinsurance recoverable on incurred but not reported losses


(463,396
)


(426,090
)Net reserves

$
2,416,271


$
2,342,800Unearned premium

$
977,426


$
943,946Ceded unearned premium


(234,375
)


(244,684
)Net unearned premium

$
743,051


$
699,262Deferred policy acquisition costs

$
188,652


$
192,773Deferred ceding commissions


(63,123
)


(68,968
)Net deferred policy acquisition costs

$
125,529


$
123,805  F-22




---



##### Table of Contents



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


Total


NetReinsurer

Rating


Location


Recoverables


Credits


RecoverablesDecember 31, 2008Hannover Rueckversicherungs AG


A



Germany


$
98,037


$
20,090


$
77,947Transatlantic Reinsurance Company


A



New York



88,549



21,122



67,427Swiss Reinsurance America Corporation


A+



New York



56,377



6,827



49,550Harco National Insurance Company


A−



Illinois



48,201



354



47,847ACE Property & Casualty Insurance Co.


A+



Pennsylvania



50,927



3,521



47,406Arch Reinsurance Company


A



Bermuda



42,354



4,919



37,435December 31, 2007Hannover Rueckversicherungs AG


A



Germany


$
97,224


$
26,195


$
71,029Swiss Reinsurance America Corporation


A+



New York



61,147



3,133



58,014Harco National Insurance Company


A−



Illinois



57,679



4,259



53,420Arch Reinsurance Company


A



Bermuda



45,283



2,816



42,467ACE Property & Casualty Insurance Co.


A+



Pennsylvania



45,450



6,385



39,065Transatlantic Reinsurance Company


A+



New York



44,175



9,061



35,114Everest Reinsurance Company


A+



Delaware



27,674



70



27,604Lloyds Syndicate Number 2791


A



United Kingdom



28,518



1,990



26,528        F-23




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
  (6)
    Liability
    for Unpaid Loss and Loss Adjustment Expense    2008


2007


2006Reserves for loss and loss adjustment expense payable at
    beginning of year

$
3,227,080


$
3,097,051


$
2,813,720Less reinsurance recoverables on reserves


884,280



988,090



1,280,287Net reserves at beginning of year


2,342,800



2,108,961



1,533,433Net reserve addition from acquired businesses


29,053



742



146,811Foreign currency adjustment


(82,677
)


27,304



36,957Incurred loss and loss adjustment expense:Provision for loss and loss adjustment expense for claims
    occurring in current year


1,294,244



1,210,344



1,018,382Decrease in estimated loss and loss adjustment expense for
    claims occurring in prior years


(82,371
)


(26,397
)


(6,526
)Incurred loss and loss adjustment expense


1,211,873



1,183,947



1,011,856Loss and loss adjustment expense payments for claims occurring
    during:Current year


397,103



422,058



397,760Prior years


687,675



556,096



222,336Loss and loss adjustment expense payments


1,084,778



978,154



620,096Net reserves at end of year


2,416,271



2,342,800



2,108,961Plus reinsurance recoverables on reserves


998,959



884,280



988,090Reserves for loss and loss adjustment expense at end of
    year

$
3,415,230


$
3,227,080


$
3,097,051     not-for-profit
 F-24




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
      (7)
    Notes
    Payable    2008


20071.30% Convertible Notes

$
124,714


$
124,714$575.0 million Revolving Loan Facility


220,000



200,000Total notes payable

$
344,714


$
324,714   Convertible
    Notes
    Revolving
    Loan Facility
   F-25




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    30-day
  Standby
    Letter of Credit Facility
    Subsidiary
    Lines of Credit
    (8)
    Income
    Taxes   F-26




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    2008


2007


2006Statutory tax rate


35
%


35
%


35
%Federal tax at statutory rate

$
152,709


$
205,054


$
178,442Nontaxable municipal bond interest and dividends received
    deduction


(22,614
)


(18,215
)


(15,291
)Non-deductible expenses


456



1,233



781State income taxes, net of federal tax benefit


1,553



3,855



3,820Foreign income taxes


31,036



37,406



22,548Foreign tax credit


(30,868
)


(37,396
)


(22,405
)Uncertain tax positions (net of federal tax benefit on state
    positions of $303 in 2008 and $232 in 2007)


(1,647
)


(1,561
)


Other, net


919



65



(346
)Income tax expense

$
131,544


$
190,441


$
167,549Effective tax rate


30.1
%


32.5
%


32.9
%     2008


2007


2006Federal current

$
107,193


$
113,950


$
128,167Federal deferred


(7,124
)


34,948



10,957Total federal


100,069



148,898



139,124State current


2,948



2,795



3,842State deferred


(559
)


3,135



2,035Total state


2,389



5,930



5,877Foreign current


30,556



38,043



24,665Foreign deferred


480



(637
)


(2,117
)Total foreign


31,036



37,406



22,548Uncertain tax positions


(1,950
)


(1,793
)


Income tax expense

$
131,544


$
190,441


$
167,549  F-27




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    2008


2007Excess of financial unearned premium over tax

$
18,705


$
24,801Discounting of loss reserves, net of salvage and subrogation


60,758



58,591Excess of financial accrued expenses over tax


15,187



8,896Allowance for bad debts, not deductible for tax


10,172



12,156Stock-based compensation under SFAS 123(R) in excess of
    deduction for tax


9,457



6,716Federal tax net operating loss carryforwards


214



650State tax net operating loss carryforwards


3,053



2,996Federal benefit of state uncertain tax positions


352



655Valuation allowance


(4,698
)


(6,521
)Total deferred tax assets


113,200



108,940Unrealized gain on increase in value of securities


13,811



22,340Deferred policy acquisition costs, net of ceding commissions,
    deductible for tax


21,073



23,025Amortizable goodwill for tax


50,184



37,281Book basis in net assets of foreign subsidiaries in excess of tax


10,499



15,148Property and equipment depreciation and other items


2,637



10,366Total deferred tax liabilities


98,204



108,160Net deferred tax asset

$
14,996


$
780     2008


2007


2006Balance at beginning of year

$
6,521


$
7,822


$
10,293State tax rates


(1,603
)






Acquisitions


(1,108
)






Net operating loss carryforwards


892



(1,240
)


(1,746
)Other


(4
)


(61
)


(725
)Balance at end of year

$
4,698


$
6,521


$
7,822    F-28




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    2008


2007Balance at beginning of year

$
7,622


$
9,869Gross increases:Tax positions of current year


597



953Tax positions of prior years


188



248Acquisitions






72Gross decreases:Statute expirations


(352
)


(1,468
)Settlements


(2,383
)


(1,327
)Tax positions of prior years


(670
)


(305
)Acquisitions






(183
)Other






(237
)Balance at end of year

$
5,002


$
7,622       (9)
    Shareholders
    Equity  Treasury
    Stock
  time-to-time.
 F-29




---



##### Table of Contents



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


Cash Flow


Foreign


OtherInvestment


Hedge


Currency


ComprehensiveGains


Loss


Translation


IncomeBalance at December 31, 2005

$
16,919


$



$
2,155


$
19,074Net change for year


1,099







13,799



14,898Balance at December 31, 2006


18,018







15,954



33,972Net change for year


3,114



(1,617
)


12,413



13,910Balance at December 31, 2007


21,132



(1,617
)


28,367



47,882Net change for year


(9,417
)


(3,603
)


(7,326
)


(20,346
)Balance at December 31, 2008

$
11,715


$
(5,220
)

$
21,041


$
27,536   Reimbursement
    Dividends
    (10)
    Earnings
    Per Share    2008


2007


2006Net earnings

$
304,768


$
395,429


$
342,285Weighted-average common shares outstanding


114,848



112,873



111,309Dilutive effect of unvested restricted stock and outstanding
    options (determined using treasury stock method)


344



760



1,177Dilutive effect of convertible debt (determined using treasury
    stock method)


282



3,364



4,250Weighted-average common shares and potential common shares
    outstanding


115,474



116,997



116,736Anti-dilutive stock options not included in treasury stock
    method computation


6,080



4,714



1,588  F-30




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
  (11)
    Stock-Based
    Compensation      Common
    Stock Grants to Directors
    Stock
    Options
    2008


2007


2006Fair value of options granted

$
4.15


$
6.59


$
7.20Risk free interest rate


2.6
%


4.4
%


4.7
%Expected volatility


24.9
%


21.0
%


22.0
%Expected dividend yield


1.9
%


1.3
%


1.1
%Expected option life


3.8 years



4.3 years



3.8 years  F-31




---



##### Table of Contents



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


Weighted-Average


Average


AggregateNumber


Exercise


Contractual


Intrinsicof Shares


Price


Life


ValueOutstanding, beginning of year


8,565


$
25.79Granted


938



22.20Exercised


(1,012
)


16.73Forfeited and expired


(242
)


28.52Outstanding, end of year


8,249



26.41



3.1 years


$
19,171Vested or expected to vest, end of year


7,725



26.33



3.1 years



18,365Exercisable, end of year


3,648



25.19



2.3 years



11,516       Restricted
    Stock
    Weighted-Number


Weighted-Average


Average


Aggregateof


Grant Date


Contractual


IntrinsicShares


Fair Value


Life


ValueRestricted Stock AwardsOutstanding, beginning of year


Awarded


344


$
23.48Outstanding, end of year


344



23.48



3.6 years


$
9,202Expected to vest, end of year


275



23.48



3.6 years



7,362Restricted Stock UnitsOutstanding, beginning of year


Awarded


133


$
23.74Outstanding, end of year


133



23.74



3.7 years


$
3,556Expected to vest, end of year


107



23.74



3.7 years



2,853  F-32




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
  (12)
    Segment
    and Geographic Data       F-33




---



##### Table of Contents



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





OtherCompany


Agency


Operations


Corporate


TotalYear ended December 31, 2008Revenue:Domestic

$
1,805,989


$
51,020


$
6,017


$
808


$
1,863,834Foreign


383,476



32,113











415,589Inter-segment






105,311



1,309







106,620Total segment revenue

$
2,189,465


$
188,444


$
7,326


$
808



2,386,043Inter-segment eliminations


















(106,620
)Consolidated total revenue

















$
2,279,423Net earnings (loss):Domestic

$
236,939


$
24,307


$
2,178


$
(21,852
)

$
241,572Foreign


64,782



4,062











68,844Total segment net earnings (loss)

$
301,721


$
28,369


$
2,178


$
(21,852
)


310,416Inter-segment eliminations


















(5,648
)Consolidated net earnings

















$
304,768Other items:Net investment income

$
159,452


$
4,529


$
55


$
715


$
164,751Depreciation and amortization


4,711



6,719



119



2,759



14,308Interest expense (benefit)


1,174



15,590



(103
)


(373
)


16,288Capital expenditures


2,652



6,978



127



2,903



12,660Income tax expense (benefit)


123,000



17,664



(310
)


(5,146
)


135,208Inter-segment eliminations


















(3,664
)Consolidated income tax expense

















$
131,544     F-34




---



##### Table of Contents



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





OtherCompany


Agency


Operations


Corporate


TotalYear ended December 31, 2007Revenue:Domestic

$
1,849,620


$
62,246


$
38,904


$
4,553


$
1,955,323Foreign


395,495



37,555











433,050Inter-segment






78,836











78,836Total segment revenue

$
2,245,115


$
178,637


$
38,904


$
4,553



2,467,209Inter-segment eliminations


















(78,836
)Consolidated total revenue

















$
2,388,373Net earnings (loss):Domestic

$
277,331


$
29,043


$
22,801


$
(20,168
)

$
309,007Foreign


80,502



4,810











85,312Total segment net earnings (loss)

$
357,833


$
33,853


$
22,801


$
(20,168
)


394,319Inter-segment eliminations


















1,110Consolidated net earnings

















$
395,429Other items:Net investment income

$
192,486


$
9,520


$
2,498


$
1,958


$
206,462Depreciation and amortization


4,921



8,030



219



2,812



15,982Interest expense (benefit)


1,579



11,606



(51
)


(2,830
)


10,304Capital expenditures


5,462



3,416



412



2,780



12,070Income tax expense (benefit)


162,058



25,853



13,211



(11,531
)


189,591Inter-segment eliminations


















850Consolidated income tax expense

















$
190,441     F-35




---



##### Table of Contents



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





OtherCompany


Agency


Operations


Corporate


TotalYear ended December 31, 2006Revenue:Domestic

$
1,536,675


$
65,866


$
75,077


$
6,198


$
1,683,816Foreign


357,092



34,387











391,479Inter-segment


25



79,795











79,820Total segment revenue

$
1,893,792


$
180,048


$
75,077


$
6,198



2,155,115Inter-segment eliminations


















(79,820
)Consolidated total revenue

















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

$
205,024


$
32,281


$
48,844


$
(20,900
)

$
265,249Foreign


66,991



10,038











77,029Total segment net earnings (loss)

$
272,015


$
42,319


$
48,844


$
(20,900
)


342,278Inter-segment eliminations


















7Consolidated net earnings

















$
342,285Other items:Net investment income

$
137,896


$
9,484


$
2,610


$
2,814


$
152,804Depreciation and amortization


4,603



7,593



509



2,275



14,980Interest expense (benefit)


1,887



11,552



517



(2,560
)


11,396Capital expenditures


4,199



2,317



757



5,731



13,004Income tax expense (benefit)


129,857



25,483



23,645



(11,262
)


167,723Inter-segment eliminations


















(174
)Consolidated income tax expense

















$
167,549    F-36




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    2008


2007


2006Diversified financial products

$
805,604


$
777,414


$
728,861Group life, accident and health


777,268



758,516



591,070Aviation


139,838



153,121



152,886London market account


106,857



124,609



112,362Other specialty lines


173,449



171,824



123,981Discontinued lines


4,758



(398
)


29Net earned premium

$
2,007,774


$
1,985,086


$
1,709,189Property and casualty

$
105,137


$
121,307


$
114,400Accident and health


20,064



18,785



22,731Fee and commission income

$
125,201


$
140,092


$
137,131     Insurance





OtherCompany


Agency


Operations


Corporate


TotalDecember 31, 2008Domestic

$
5,486,898


$
402,093


$
24,715


$
278,749


$
6,192,455Foreign


1,803,872



336,056











2,139,928Total assets

$
7,290,770


$
738,149


$
24,715


$
278,749


$
8,332,383December 31, 2007Domestic

$
5,131,724


$
438,779


$
78,527


$
298,157


$
5,947,187Foreign


1,730,569



396,889











2,127,458Total assets

$
6,862,293


$
835,668


$
78,527


$
298,157


$
8,074,645   (13)
    Commitments
    and Contingencies  Litigation
    Catastrophe
    Exposure
   F-37




---



##### Table of Contents



HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (continued,
    tables in thousands, except per share data)
    Indemnifications
    Terrorist
    Exposure
    Leases
      2009

$
12,3612010


12,1682011


10,8382012


8,3102013


6,508Thereafter


22,354Total future minimum rental payments

$
72,539   (14)
    Related
    Party Transactions   F-38




---



##### 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      2008

2007

2006Statutory policyholders surplus

$
1,852,684


$
1,744,889


$
1,342,054Statutory net income


308,717



365,308



303,758     (16)
    Supplemental
    Information    2008


2007


2006Cash received from commutations

$
7,500


$
101,040


$
12,750Income taxes paid


154,415



146,829



167,086Interest paid


14,611



8,618



9,387Dividends declared but not paid at year end


14,152



12,658



11,173     (17)
    Quarterly
    Financial Data (Unaudited)  Fourth Quarter


Third Quarter


Second Quarter


First Quarter2008


2007


2008


2007


2008


2007


2008


2007Total revenue

$
551,866


$
614,407


$
566,319


$
582,494


$
593,850


$
594,250


$
567,388


$
597,222Net earnings

$
72,277


$
99,642


$
59,053


$
97,925


$
92,337


$
101,172


$
81,101


$
96,690Earnings per share:Basic

$
0.63


$
0.87


$
0.51


$
0.87


$
0.80


$
0.90


$
0.70


$
0.86Diluted


0.63



0.85



0.51



0.84



0.80



0.86



0.70



0.83Weighted-average shares outstanding:Basic


113,895



114,641



114,812



112,652



115,492



112,273



115,234



111,959Diluted


114,111



117,085



115,418



116,323



116,075



117,728



116,372



117,009    F-39




---



##### Table of Contents



SCHEDULE 1  HCC
    INSURANCE HOLDINGS, INC.
    SUMMARY OF INVESTMENTS
    OTHER THAN INVESTMENTS IN RELATED PARTIES
    (In thousands)
  December 31, 2008Column A

Column B


Column C


Column DAmount at WhichShown in theType of Investment

Cost


Value


Balance SheetAvailable for sale fixed maturities:Bonds  United States government and government
    agencies and authorities

$
196,856


$
206,288


$
206,288Bonds  states, municipalities and political
    subdivisions


805,065



808,697



808,697Bonds  special revenue


1,177,256



1,182,838



1,182,838Bonds  corporate


517,794



511,638



511,638Asset-backed and mortgage-backed securities


1,048,647



1,040,866



1,040,866Bonds  foreign


372,921



382,838



382,838Total available for sale fixed maturities


4,118,539



4,133,165



4,133,165Held to maturity fixed maturities:Bonds  United States government and government
    agencies and authorities


21,319



21,823



21,319Bonds  foreign


102,234



103,738



102,234Total held to maturity fixed maturities


123,553



125,561



123,553Total fixed maturities


4,242,092


$
4,258,726



4,256,718Equity securities:Common stocks  industrial and miscellaneous


16



16



16Total equity securities


16


$
16



16Short-term investments


497,477







497,477Other investments


50,072







50,072Total investments

$
4,789,657






$
4,804,283  S-1




---



##### Table of Contents



SCHEDULE 2  HCC
    INSURANCE HOLDINGS, INC.
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    BALANCE SHEETS
    (In thousands)
  December 31,2008


2007ASSETSCash

$
101


$
440Short-term investments


12,164



36,479Investment in subsidiaries


2,734,112



2,596,741Intercompany loans to subsidiaries for acquisitions


297,735



217,041Receivable from subsidiaries


40,520



52,683Other assets


7,627



43,122Total assets

$
3,092,259


$
2,946,506LIABILITIES AND SHAREHOLDERS EQUITYPayable to subsidiaries

$
37,443


$
88,255Notes payable


344,714



324,714Deferred Federal income tax


17,973



19,059Accounts payable and accrued liabilities


52,788



74,113Total liabilities


452,918



506,141Total shareholders equity


2,639,341



2,440,365Total liabilities and shareholders equity

$
3,092,259


$
2,946,506    S-2




---



##### Table of Contents



SCHEDULE 2
  HCC
    INSURANCE HOLDINGS, INC.
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    STATEMENTS OF EARNINGS
    (In thousands)
  Years Ended December 31,2008


2007


2006Equity in earnings of subsidiaries

$
308,227


$
401,973


$
351,657Interest income from subsidiaries


13,328



9,345



8,196Net investment income


626



1,794



2,698Other operating income (loss)


10,006



(103
)


1,130Total revenue


332,187



413,009



363,681Interest expense


15,339



8,950



9,199Other operating expense


6,358



12,060



16,172Total expense


21,697



21,010



25,371Earnings before income tax expense


310,490



391,999



338,310Income tax expense (benefit)


5,722



(3,430
)


(3,975
)Net earnings

$
304,768


$
395,429


$
342,285    S-3




---



##### Table of Contents



SCHEDULE 2
  HCC
    INSURANCE HOLDINGS, INC.
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    STATEMENTS OF CASH FLOWS
    (In thousands)
  Years Ended December 31,2008


2007


2006Operating Activities:Net earnings

$
304,768


$
395,429


$
342,285Adjustments to reconcile net earnings to net cash provided by
    operating activities:Undistributed net income of subsidiaries


(168,834
)


(371,873
)


(272,409
)Change in accrued interest receivable added to intercompany loan
    balances


(13,328
)


(9,345
)


(7,788
)Change in accounts payable and accrued liabilities


(28,268
)


18,812



5,788Other, net


18,982



(9,254
)


(2,396
)Cash provided by operating activities


113,320



23,769



65,480Investing Activities:Cash contributions to subsidiaries






(227
)


(64,299
)Payments for purchase of businesses, net of cash received


(15,500
)


(12,021
)


(23,455
)Change in short-term investments


24,315



(16,587
)


18,290Sales and maturities of fixed income securities










30,587Cost of securities acquired






(912
)


(10,626
)Proceeds from sale of strategic investment


22,382







Change in receivable/payable from subsidiaries


(3,102
)






Intercompany loans to businesses for acquisitions


(88,409
)


(52,257
)


(32,708
)Payments on intercompany loans to subsidiaries


24,245



52,570



33,461Cash used by investing activities


(36,069
)


(29,434
)


(48,750
)Financing Activities:Advances on line of credit


181,000



232,000



140,000Payments on line of credit and notes payable


(161,000
)


(204,437
)


(140,249
)Sale of common stock, net of costs


18,198



24,533



18,999Purchase of common stock


(63,335
)






Dividends paid


(52,453
)


(46,158
)


(38,923
)Cash provided (used) by financing activities


(77,590
)


5,938



(20,173
)Net increase (decrease) in cash


(339
)


273



(3,443
)Cash at beginning of year


440



167



3,610Cash at end of year

$
101


$
440


$
167    S-4




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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.(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,
    2008, the interest rate on intercompany loans was 6.75%.(3)
    Other operating expense includes $5.8 million in 2007 and
    $12.0 million in 2006 related to the companys stock
    option investigation.(4)
    Dividends received from subsidiaries were $139.4 million,
    $30.1 million, and $79.2 million in 2008, 2007 and
    2006, respectively. S-5




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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,Benefits,


AmortizationDeferred


Future Policy











Claims,


of DeferredPolicy


Benefits, Losses,








Net


Losses and


Policy


OtherAcquisition


Claims and Loss


Unearned


Premium


Investment


Settlement


Acquisition


Operating


PremiumSegments

Costs


Expenses


Premiums


Revenue


Income


Expenses


Costs


Expenses


Written2008Insurance Company

$
125,529


$
3,479,465


$
977,426


$
2,007,774


$
159,452


$
1,211,873


$
381,441


$
115,737


$
2,060,618Agency


















4,529











85,286Other Operations


















55











5,161Corporate


















715











27,325Total

$
125,529


$
3,479,465


$
977,426


$
2,007,774


$
164,751


$
1,211,873


$
381,441


$
233,509


$
2,060,6182007Insurance Company

$
123,805


$
3,293,279


$
943,946


$
1,985,086


$
192,487


$
1,183,947


$
366,610


$
127,942


$
1,985,609Agency


















9,520











73,518Other Operations


















2,497











3,032Corporate


















1,958











37,150Total

$
123,805


$
3,293,279


$
943,946


$
1,985,086


$
206,462


$
1,183,947


$
366,610


$
241,642


$
1,985,6092006Insurance Company

$
117,461


$
3,167,974


$
920,350


$
1,709,189


$
137,896


$
1,011,856


$
319,885


$
110,438


$
1,812,552Agency


















9,484











70,151Other Operations


















2,610











1,839Corporate


















2,814











39,896Total

$
117,461


$
3,167,974


$
920,350


$
1,709,189


$
152,804


$
1,011,856


$
319,885


$
222,324


$
1,812,552     (1)
    
    Columns C and D are shown ignoring the effects of reinsurance.(2)
    
    Net investment income was allocated to the subsidiary, and
    therefore the segment, on which the related investment asset was
    recorded.(3)
    
    Other operating expenses is after all corporate expense
    allocations have been charged or credited to the individual
    segments.  Note:
 S-6




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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 FAssumed from





Percent ofCeded to Other


Other





AmountDirect Amount


Companies


Companies


Net Amount


Assumed to NetYear ended December 31, 2008Life insurance in force

$
1,348,357


$
370,205


$



$
978,152




%Earned premium:Property and liability insurance

$
1,344,569


$
405,049


$
271,433


$
1,210,953



22
%Accident and health insurance


746,643



41,778



91,956



796,821



12
%Total

$
2,091,212


$
446,827


$
363,389


$
2,007,774



18
%Year ended December 31, 2007Life insurance in force

$
1,267,547


$
417,479


$



$
850,068




%Earned premium:Property and liability insurance

$
1,329,889


$
415,699


$
291,592


$
1,205,782



24
%Accident and health insurance


671,440



34,495



142,359



779,304



18
%Total

$
2,001,329


$
450,194


$
433,951


$
1,985,086



22
%Year ended December 31, 2006Life insurance in force

$
1,371,637


$
374,753


$



$
996,884




%Earned premium:Property and liability insurance

$
1,246,650


$
408,632


$
255,303


$
1,093,321



23
%Accident and health insurance


543,986



30,614



102,496



615,868



17
%Total

$
1,790,636


$
439,246


$
357,799


$
1,709,189



21
%  S-7




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##### Table of Contents



SCHEDULE 5  HCC
    INSURANCE HOLDINGS, INC. AND SUBSIDIARIES
  VALUATION
    AND QUALIFYING ACCOUNTS
 (In
    thousands)
  2008


2007


2006Reserve for uncollectible reinsurance:Balance at beginning of year

$
8,530


$
14,883


$
12,141Provision charged to expense






2,231



5,649Amounts written off


(103
)


(8,584
)


(2,907
)Balance at end of year

$
8,427


$
8,530


$
14,883Allowance for doubtful accounts:Balance at beginning of year

$
6,387


$
6,514


$
7,394Provision charged to expense


770



1,124



576Amounts written off and other


(1,777
)


(1,251
)


(1,456
)Balance at end of year

$
5,380


$
6,387


$
6,514  S-8