AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 2000

REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

HCC INSURANCE HOLDINGS, INC. HCC CAPITAL TRUST I
(Exact name of Registrant as specified in its charter) HCC CAPITAL TRUST II
DELAWARE (Exact name of each Registrant as specified in its
(State or other jurisdiction of incorporation or charter)
organization) DELAWARE
76-0336636 (State or other jurisdiction of incorporation or
(I.R.S. Employer Identification No.) organization)
13403 NORTHWEST FREEWAY 76-6494416
HOUSTON, TEXAS 77040-6094 76-6494417
(713) 690-7300 (I.R.S. Employer Identification No.)
(Address, including zip code, and telephone number,
including 13403 NORTHWEST FREEWAY
area code, of Registrant's principal executive offices) HOUSTON, TEXAS 77040-6094
(713) 690-7300
(Address, including zip code, and telephone number,
including
area code, of each Registrant's principal executive
offices)

STEPHEN L. WAY
13403 NORTHWEST FREEWAY
HOUSTON, TEXAS 77040-6094
(713) 690-7300
(Name, address including zip code, and telephone number, including area code, of
agent for service)

Copies to:

ARTHUR S. BERNER, ESQ. CHRISTOPHER L. MARTIN, ESQ.
HAYNES AND BOONE, LLP VICE PRESIDENT AND GENERAL COUNSEL
1000 LOUISIANA STREET, SUITE 4300 HCC INSURANCE HOLDINGS, INC.
HOUSTON, TEXAS 77002-5012 13403 NORTHWEST FREEWAY
(713) 547-2526 HOUSTON, TEXAS 77040-6094
(713) 690-7300

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the Registration Statement becomes effective, as determined by the
applicable Registrant.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE(2) REGISTRATION FEE
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Common Stock of HCC Insurance Holdings, Inc. (par value
$1.00 per share)........................................
Senior Debt Securities of HCC Insurance Holdings, Inc. ...
Subordinated Debt Securities of HCC Insurance Holdings,
Inc. ...................................................
Warrants of HCC Insurance Holdings, Inc. .................
Junior Subordinated Debt Securities of HCC Insurance
Holdings, Inc. .........................................
Capital Securities of HCC Capital Trust I and HCC Capital
Trust II................................................
Guaranties of HCC Insurance Holdings, Inc. with respect to
Capital Securities(3)...................................
Total............................................... $300,000,000 $300,000,000 $79,200
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(1) An indeterminate number of shares of common stock and warrants of HCC
Insurance Holdings, Inc., and an indeterminate principal amount of senior
and subordinated debt securities of HCC Insurance Holdings, Inc. and junior
subordinated debt securities of HCC Insurance Holdings, Inc. and an
indeterminate number of capital securities of HCC Capital Trust I and HCC
Capital Trust II as may from time to time be issued at indeterminate prices,
with an aggregate offering price not to exceed $300,000,000. Junior
subordinated debt securities may be issued and sold to HCC Capital Trust I
and HCC Capital Trust II, in which event the junior subordinated debt
securities may later be distributed to the holders of capital securities.
(2) Estimated solely for the purpose of calculating the registration fee, which
is calculated in accordance with Rule 457(o) of the rules and regulations
under the Securities Act of 1933. Rule 457(o) permits the registration fee
to be calculated on the basis of the maximum offering price of all of the
securities listed and, therefore, the table does not specify by each class
information as to the amount to be registered, the proposed maximum offering
price per unit or the proposed maximum aggregate offering price.
(3) Includes the rights of holders of the capital securities under the
applicable guarantee of capital securities, the obligations of HCC Insurance
Holdings, Inc. under the applicable trust agreement of each of HCC Capital
Trust I and HCC Capital Trust II and the obligations of HCC Insurance
Holdings, Inc. under the indenture for the junior subordinated debt
securities and any related supplemental indenture, all of which are
described in this Registration Statement. No separate consideration will be
received for any of such guarantee or obligations.

THE REGISTRANTS HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

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EXPLANATORY NOTE

This Registration Statement contains two forms of prospectuses to be used in
connection with offerings of the following securities:

(1) common stock, warrants to purchase common stock, and debt
securities (both senior and subordinated) of HCC Insurance Holdings, Inc.;
and

(2) capital securities of HCC Capital Trust I and II, junior
subordinated debt securities of HCC Insurance Holdings, Inc. and guarantees
by HCC Insurance Holdings, Inc. of capital securities issued by HCC Capital
Trust I and II.

(3) the financial statements will be included in both forms of
prospectus and are located at the end of the second prospectus.

Each offering of securities made under this Registration Statement will be made
pursuant to one of these prospectuses, with the specifications of the securities
offered thereby set forth in an accompanying prospectus supplement.

The complete prospectus for the offering of the common stock, warrants to
purchase common stock, and debt securities (both senior and subordinated) of HCC
Insurance Holdings, Inc. follows immediately after this Explanatory Note, which
prospectus is then immediately followed by the complete prospectus for the
offering of the capital securities of the HCC Capital Trusts I and II, the
junior subordinated debt securities of HCC Insurance Holdings, Inc. and the
guarantees by HCC Insurance Holdings, Inc. of capital securities issued by HCC
Capital Trusts I and II.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION DATED SEPTEMBER 22, 2000

PROSPECTUS [HCC LOGO]

HCC INSURANCE HOLDINGS, INC.

COMMON STOCK
SENIOR DEBT SECURITIES
SUBORDINATED DEBT SECURITIES
WARRANTS

By this prospectus, we may offer from time to time up to $300,000,000 of any
combination of the securities described in this prospectus.

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We will provide the specific terms of these securities in one or more
supplements to this prospectus. You should read this prospectus and any
prospectus supplement carefully before you invest in our securities.

The applicable prospectus supplement will contain information as to any listing
on the New York Stock Exchange or any securities exchange of the securities
covered by the prospectus supplement.

The securities may be sold directly by us to investors, through agents
designated from time to time or to or through underwriters or dealers. If any
underwriters are involved in the sale of any securities in respect of which this
prospectus is being delivered, the names of such underwriters and any applicable
commissions or discounts will be set forth in a prospectus supplement. For
additional information on the methods of sale, you should refer to the section
entitled "Plan of Distribution."

The net proceeds we expect to receive from any sale also will be set forth in a
prospectus supplement. This prospectus may not be used to offer or sell any
securities unless accompanied by a prospectus supplement.

Our common stock is listed on the NYSE under the Symbol "HCC." The last reported
sale price of our common stock on September 21, 2000 was $21.38 per share.

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INVESTMENT IN OUR SECURITIES INVOLVES RISK. SEE THE RISK FACTORS SECTION
BEGINNING ON PAGE 4.

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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.

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The date of this prospectus is , 2000.
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TABLE OF CONTENTS

PAGE
----

About Forward-Looking Statements............................ i
About This Prospectus....................................... 1
Where You Can Find More Information......................... 1
The Company................................................. 3
Risk Factors................................................ 4
Use of Proceeds............................................. 8
Selected Financial Data..................................... 9
Business.................................................... 11
Principal Shareholders...................................... 34
Management.................................................. 36
Ratio of Earnings to Fixed Charges.......................... 39
Description of Common Stock................................. 40
Description of Debt Securities.............................. 42
Description of Warrants..................................... 47
Plan of Distribution........................................ 49
Certain Legal Matters....................................... 50
Experts..................................................... 50
Financial Statements........................................ F-1

ABOUT FORWARD-LOOKING STATEMENTS

This prospectus 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. 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 prospectus that address activities, events or developments that we
expect or anticipate may occur in the future, including, such things as future
capital expenditures, business strategy, competitive strengths, goals, growth of
our business and operations, plans, and references to future success may be
considered forward-looking statements. Also, when we use words such as
"anticipate", "believe", "estimate", "expect", "intend", "plan", "probably" or
similar expressions, we are making forward-looking statements.

Many risks and uncertainties may impact the matters addressed in these
forward-looking statements. Many possible events or factors could affect our
future financial results and performance. These 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 included in this prospectus, our
inclusion of this information is not a representation by us or any other person
that our objectives and plans will be achieved. You should consider these risks
and those we set out in the Risk Factors section of this prospectus before you
purchase our securities.

Our forward-looking statements speak only as of 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, the
forward-looking events discussed in this prospectus may not occur.

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ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we have filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
the shelf registration process, we may offer any combination of the securities
described in this prospectus in one or more offerings with a total offering
price of up to $300,000,000. This prospectus provides you with a general
description of securities we may offer. Each time we use this prospectus to
offer securities, we will provide a prospectus supplement that will contain
specific information about the terms of that offering. The prospectus supplement
may also add, update or change information contained in this prospectus. Please
carefully read this prospectus, any prospectus supplement and the documents
incorporated by reference in this prospectus together with the additional
information described under "Where You Can Find More Information" and "Risk
Factors" before you make an investment decision.

You should rely only on the information contained in this prospectus and the
applicable prospectus supplement. We have not authorized any other person to
provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell the securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus,
together with the information we previously filed with the SEC and incorporate
by reference, is accurate only as of the date on the front cover of this
prospectus. The information included in any prospectus supplement is accurate
only as of the date of that prospectus supplement. Our business, financial
condition, results of operations and prospects may change after that date.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other
information with the SEC. The SEC maintains an internet site http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers (including HCC) that file documents with the SEC
electronically. Our SEC filings may be obtained from that web site. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference
facilities. You may also read and copy any document we file with the SEC at the
following SEC public reference facilities:

Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511

You may also obtain copies of the documents at prescribed rates by writing to
the Public Reference Room of the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549.

The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and later information that we file with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we make with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until we terminate the offering.

- Our Annual Report on Form 10-K for the year ended December 31, 1999;

- Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
and

- Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
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Any person, including any beneficial owner, may request a copy of these filings,
at no cost, by writing or telephoning us at the following address:

Investor Relations
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, TX 77040
713-690-7300

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THE COMPANY

We provide specialized property and casualty, and accident and health insurance
coverages, underwriting agency and intermediary services and other insurance
related services both to commercial customers and individuals. We operate
primarily in the United States and the United Kingdom, although some of our
operations have a broader international scope. Since 1996, we have acquired a
number of insurers, underwriting agencies and intermediaries in order to
diversify our operations and enhance our ability to anticipate and capitalize on
changing market conditions. We underwrite insurance on both a direct basis,
where we insure a risk in exchange for a premium, and on a reinsurance basis,
where we insure all or a portion of another insurance company's risk in exchange
for all or a portion of the premium. We market our products directly and through
a network of independent and affiliated agents and brokers.

Our insurance companies are risk-bearing and focus their underwriting activities
on providing insurance and reinsurance in the following areas:

- accident and health;

- aviation;

- marine and offshore energy;

- medical stop-loss;

- property; and

- workers' compensation.

In the United States, certain of these subsidiaries operate on a licensed, or
admitted, basis. Certain other subsidiaries operate on a surplus lines basis as
a non-admitted, or unlicensed, insurer offering insurance coverage not otherwise
available from an admitted, or licensed, insurer in the relevant state.

Our underwriting agencies are non-risk bearing and underwrite on behalf of our
insurance companies and other insurance companies. Our underwriting agencies
specialize in:

- aviation insurance;

- medical stop-loss insurance;

- occupational accident insurance;

- workers' compensation insurance; and

- a variety of accident and health related insurance and reinsurance
products.

Our intermediary subsidiaries are non-risk bearing and provide insurance and
reinsurance brokerage services for our insurance company subsidiaries and our
clients. These operations consist of:

- marketing;

- placing;

- consulting on; and

- servicing risks.

Our intermediary operations specialize in developing and marketing employee
benefit plans on a retail basis and placing reinsurance for both accident and
health and property and casualty lines of business.

We are a Delaware corporation. Our address is 13403 Northwest Freeway, Houston,
Texas 77040 and our telephone number is (713) 690-7300. Our website is located
at www.hcch.com. Information on our website is not incorporated by reference in
this prospectus.

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RISK FACTORS

Investing in our securities will provide you with an interest in or obligation
of our Company. As an investor, you will be subject to risks inherent in our
businesses. The performance of your investment in our Company will reflect the
performance of our businesses relative to, among other things, general economic
and industry conditions, market conditions and competition. The value of your
investment may increase or it may decline and could result in a loss. You should
carefully consider the following factors as well as other information contained
in this prospectus before deciding to make any investment in our Company.

OUR RESULTS MAY FLUCTUATE AS A RESULT OF MANY FACTORS.

The results of companies in the insurance industry historically have been
subject to significant fluctuations and uncertainties. The industry's
profitability can be affected significantly by

- volatile and unpredictable developments (including catastrophes);

- changes in reserves resulting from the general claims and legal
environments as different types of claims arise and judicial
interpretations relating to the scope of insurers' liability develop;

- fluctuations in interest rates and other changes in the investment
environment, which affect returns on invested capital; and

- inflationary pressures that affect the size of losses.

The demand for property and casualty insurance can also vary significantly,
generally rising as the overall level of economic activity increases and falling
as such activity decreases. The property and casualty insurance industry
historically has been cyclical, and the commercial lines business has been in a
soft market since the late 1980s, primarily due to premium rate competition,
which has resulted in lower underwriting profitability. These fluctuations could
have a material adverse effect on our results of operations, liquidity and
financial condition.

OUR LEVEL OF BUSINESS AND PROFITABILITY IS AFFECTED BY THE AVAILABILITY OF
REINSURANCE TO REINSURE OUR RISKS.

We purchase reinsurance for significant amounts of risk underwritten by our
insurance company subsidiaries, especially catastrophe risks. We also purchase
reinsurance on risks underwritten by others which we reinsure (a retrocession).
Market conditions beyond our control determine the availability and cost of the
reinsurance protection we purchase, which may affect the level of our business
and profitability. Our reinsurance facilities are generally subject to annual
renewal. We cannot assure you that we can maintain our current reinsurance
facilities or that we can obtain other reinsurance facilities in adequate
amounts and at favorable rates. If we are unable to renew our expiring
facilities or to obtain new reinsurance facilities, either our net exposures
would increase or, if we are unwilling to bear an increase in net exposures, we
would have to reduce the level of our underwriting commitments, especially
catastrophe exposed risks. Either of these potential developments could have a
material adverse effect on our business. The lack of available reinsurance may
also adversely affect our ability to generate fee and commission income in our
reinsurance intermediary operations.

WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION, IF AT ALL.

We purchase reinsurance by transferring part of the risk we have assumed (known
as ceding) to a reinsurance company in exchange for part of the premium we
receive in connection with the risk. Although reinsurance makes the reinsurer
liable to us to the extent the risk is transferred or ceded to the reinsurer, it
does not relieve us (the reinsured) of our liability to our policyholders or in
cases where we are a reinsurer, to our reinsureds. Accordingly, we bear credit
risk with respect to our reinsurers. We cannot assure you that our reinsurers
will pay all of our reinsurance claims, or that they will pay our claims on a
timely basis. In 1999, we recorded charges against our earnings to account for
the insolvency of one of our significant reinsurers and for the settlement of
another reinsurer's liabilities with us.

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In addition, we are party to a number of disputes relating to reinsurance
transactions. Most of these disputes relate to the collection of outstanding
amounts due to us under reinsurance contracts. We cannot assure you that these
disputes will result in our recovering all of the amounts due to us, and our
inability to do so may have a material adverse effect upon our results of
operations, liquidity and financial condition.

WE FACE SIGNIFICANT COMPETITIVE PRESSURES IN OUR BUSINESSES.

We compete with a large number of other companies in our selected lines of
business. We face competition both from specialty insurance companies,
underwriting agencies and intermediaries as well as from diversified financial
services companies that are significantly larger than we are and that have
significantly greater financial, marketing, management and other resources than
we do. Some of these competitors also have significantly greater experience and
market recognition than we do. In addition to competition in the operation of
our business, we face competition from a variety of sources in attracting and
retaining qualified employees.

We cannot assure you that we will maintain our current competitive position in
the markets in which we operate, or that we will be able to expand our
operations into new markets. If we fail to do so, our business could be
materially adversely affected.

AS A PROPERTY AND CASUALTY INSURER, WE FACE LOSSES FROM CATASTROPHES.

Property and casualty insurers are subject to claims arising out of catastrophes
that may have a significant effect on their results of operations, liquidity and
financial condition. Catastrophe losses have had a significant impact on our
results. Catastrophes can be caused by various events, including hurricanes,
windstorms, earthquakes, hailstorms, explosions, severe winter weather and
fires. The incidence and severity of catastrophes are inherently unpredictable.
The extent of losses from a catastrophe is a function of both the total amount
of insured exposure in the area affected by the event and the severity of the
event. Most catastrophes are restricted to small geographic areas; however,
hurricanes and earthquakes may produce significant damage in large, heavily
populated areas. Catastrophes can cause losses in a variety of our property and
casualty lines, and most of our past catastrophe-related claims have resulted
from hurricanes and earthquakes. Insurance companies are not permitted to
reserve for a catastrophe until it has occurred. It is therefore possible that a
catastrophic event or multiple catastrophic events could have a material adverse
effect upon our results of operations, liquidity and financial condition.

OUR INTERNATIONAL OPERATIONS EXPOSE US TO EXCHANGE RATE RISKS.

We underwrite insurance coverages which are denominated in a number of foreign
currencies and we establish and maintain our loss reserves with respect to these
policies in their respective currencies. Our net earnings could be adversely
impacted by exchange rate fluctuations affecting receivable and payable balances
and reserves. Our principal area of exposure relates to fluctuations in exchange
rates between the major European currencies (particularly the British pound
sterling) and the U.S. dollar. Consequently, a change in the exchange rate
between the U.S. dollar and the British pound sterling could have an adverse
effect on our net earnings.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION.

We are subject to extensive governmental regulation and supervision. Most
insurance regulations are designed to protect the interests of policyholders
rather than shareholders and other investors. This system of regulation,
generally administered by a department of insurance in each state in which we do
business, relates to, among other things:

- approval of policy forms and premium rates;

- standards of solvency, including risk-based capital measurements;

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- licensing of insurers and their agents;

- restrictions on the nature, quality and concentration of investments;

- restrictions on the ability of our insurance company subsidiaries to pay
dividends to us;

- restrictions on transactions between insurance company subsidiaries and
their affiliates;

- restrictions on the size of risks insurable under a single policy;

- requiring deposits for the benefit of policyholders;

- requiring certain methods of accounting;

- periodic examinations of our operations and finances;

- prescribing the form and content of records of financial condition
required to be filed; and

- requiring reserves for unearned premium, losses and other purposes.

State insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies, holding company issues and
other matters.

Recently adopted federal financial services modernization legislation is
expected to lead to additional federal regulation of the insurance industry in
the coming years. Also, foreign governments regulate our international
operations. Our business depends on compliance with applicable laws and
regulations and our ability to maintain valid licenses and approvals for our
operations.

We cannot assure you that we have or can maintain all required licenses and
approvals or that our business fully complies with the wide variety of
applicable laws and regulations or the relevant authority's interpretation of
the laws and regulations. Also, some regulatory authorities have relatively
broad discretion to grant, renew, or revoke licenses and approvals. Regulatory
authorities may deny or revoke licenses for various reasons, including the
violation of regulations. In some instances, we follow practices based on our
interpretations of regulations, or those that we believe may be generally
followed by the industry, which may be different from the requirements or
interpretations of regulatory authorities. If we do not have the requisite
licenses and approvals or do not comply with applicable regulatory requirements,
the insurance regulatory authorities could preclude or temporarily suspend us
from carrying on some or all of our activities or monetarily penalize us. That
type of action could have a material adverse effect on our business. Also,
changes in the level of regulation of the insurance industry (whether federal,
state or foreign), or changes in laws or regulations themselves or
interpretations by regulatory authorities, could have a material adverse effect
on our business.

WE ARE RATED BY A.M. BEST AND STANDARD & POOR'S, AND A DECLINE IN THESE RATINGS
COULD ADVERSELY AFFECT OUR OPERATIONS.

Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. Our insurance company subsidiaries
are rated by A.M. Best Company and Standard & Poor's Corporation. A.M. Best and
Standard & Poor's ratings reflect their opinions of an insurance company's
financial strength, operating performance, strategic position, and ability to
meet its obligations to policyholders, and are not evaluations directed to
investors. Our ratings are subject to periodic review by A.M. Best and Standard
& Poor's and the continued retention of those ratings cannot be assured. If our
ratings are reduced from their current levels by A.M. Best and/or Standard &
Poor's, our results of operations could be adversely affected.

OUR ACTUAL CLAIMS LOSSES MAY EXCEED OUR RESERVES FOR CLAIMS.

We maintain loss reserves to cover our estimated liability for unpaid losses and
loss adjustment expenses, including legal and other fees as well as a portion of
our general expenses, for reported and unreported

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claims incurred as of the end of each accounting period. Reserves do not
represent an exact calculation of liability. Rather, reserves represent an
estimate of what we expect the ultimate settlement and administration of claims
will cost. These estimates, which generally involve actuarial projections, are
based on our assessment of facts and circumstances then known, as well as
estimates of future trends in claims severity, frequency, judicial theories of
liability and other factors. These variables are affected by both internal and
external events, such as changes in claims handling procedures, inflation,
judicial trends and legislative changes. Many of these items are not directly
quantifiable in advance. Additionally, there may be a significant delay between
the occurrence of the insured event and the time it is reported to us. The
inherent uncertainties of estimating reserves are greater for certain types of
liabilities, where the various considerations affecting these types of claims
are subject to change and long periods of time may elapse before a definitive
determination of liability is made. Reserve estimates are continually refined in
a regular and ongoing process as experience develops and further claims are
reported and settled. Adjustments to reserves are reflected in the results of
the periods in which such estimates are changed. Because setting reserves is
inherently uncertain, there can be no assurance that our current reserves will
prove adequate in light of subsequent events.

A SIGNIFICANT AMOUNT OF OUR ASSETS ARE INVESTED IN FIXED INCOME SECURITIES AND
ARE SUBJECT TO MARKET FLUCTUATIONS.

Our investment portfolio consists substantially of fixed income securities. The
fair market value of these assets and the investment income from these assets
fluctuate depending on general economic and market conditions. With respect to
our investments in fixed income securities, the fair market value of these
investments generally increases or decreases in an inverse relationship with
fluctuations in interest rates, while net investment income realized by us from
future investments in fixed income securities will generally increase or
decrease with interest rates. In addition, actual net investment income and/or
cash flows from investments that carry prepayment risk (such as mortgage-backed
and other asset-backed securities) may differ from those anticipated at the time
of investment as a result of interest rate fluctuations. Because all of our
fixed income securities are classified as available for sale, changes in the
market value of our securities are reflected in our balance sheet. Similar
treatment is not available for liabilities. Therefore, interest rate
fluctuations could adversely affect our generally accepted accounting
principles, or GAAP, shareholders' equity, total comprehensive income and/or
cash flows.

MOST STATES ASSESS OUR INSURANCE COMPANY SUBSIDIARIES TO PROVIDE FUNDS FOR
FAILING INSURANCE COMPANIES AND THESE ASSESSMENTS COULD BECOME MATERIAL.

Our insurance company subsidiaries are subject to assessments in most states
where we are licensed for the provision of funds necessary for the settlement of
covered claims under certain policies provided by impaired, insolvent or failed
insurance companies. Maximum contributions required by law in any one year vary
by state, and have historically been between 1% and 2% of annual premiums
written. We cannot predict with certainty the amount of future assessments.
Significant assessments could have a material adverse effect on our financial
condition and results of operations.

IF WE DO NOT SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES, OUR FINANCIAL RESULTS
MAY BE ADVERSELY AFFECTED.

We have acquired a number of other companies during the past several years, and
will continue to consider possible acquisitions. The process of integrating
acquired companies may have a material adverse effect on our revenue and results
of operations. Such acquisitions could divert our attention away from current
operations. We may also have to adjust the loss reserves and other operating
policies of acquired companies in order to bring them into line with those of
our operations, and these adjustments could adversely affect our financial
condition. In addition, these acquisitions could cause us to incur certain
restructuring charges as these operations are integrated with ours. They could
also have a material adverse effect on employee morale and on the ability of the
combined companies to retain key management and customers.

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WE ARE AN INSURANCE HOLDING COMPANY AND, THEREFORE, MAY NOT BE ABLE TO RECEIVE
DIVIDENDS IN NEEDED AMOUNTS.

Our principal assets are the shares of capital stock of our insurance company
subsidiaries. We may have to rely on dividends from our insurance company
subsidiaries to meet our obligations for paying principal and interest on
outstanding debt obligations, dividends to shareholders and corporate expenses.
The payment of dividends by our insurance company subsidiaries is subject to
regulatory restrictions and will depend on the surplus and future earnings of
these subsidiaries, as well as the regulatory restrictions. As a result, we may
not be able to receive dividends from these subsidiaries at times and in amounts
necessary to meet our obligations.

USE OF PROCEEDS

Except as otherwise described in the applicable prospectus supplement, we intend
to use the net proceeds from the sale of our securities for general corporate
purposes, including, but not limited to, the following purposes:

- contribute capital to insurance company subsidiaries;

- make acquisitions;

- make capital expenditures;

- provide working capital;

- purchase equity or fixed income investments;

- repay or refinance debt or other corporate obligations; or

- repurchase and redeem securities.

Pending any specific application, we may initially invest funds in short-term
marketable securities or apply them to the reduction of short-term indebtedness.

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SELECTED FINANCIAL DATA

The selected financial data set forth below has been derived from the Company's
audited consolidated financial statements. All information contained herein
should be read in conjunction with the consolidated financial statements, the
related notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this prospectus or
incorporated by reference (amounts in thousands except per share data).

FOR THE YEARS ENDED DECEMBER 31,(1)
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------

STATEMENT OF EARNINGS DATA:
Revenue
Net earned premium.................... $141,362 $143,100 $162,571 $170,068 $158,632
Management fees....................... 90,713 74,045 51,039 28,651 25,373
Commission income..................... 54,552 38,441 24,209 21,477 21,053
Net investment income................. 30,933 29,335 27,587 23,593 21,757
Net realized investment gain (loss)... (4,164) 845 (328) 8,341 1,636
Other operating income................ 28,475 22,268 15,239 18,656 10,371
-------- -------- -------- -------- --------
Total revenue................. 341,871 308,034 280,317 270,786 238,822
Expense
Loss and loss adjustment expenses..... 109,650 91,302 96,514 114,464 105,374
Operating expense
Policy acquisition costs........... 8,177 10,978 13,580 8,218 10,634
Compensation expense............... 77,488 56,077 51,458 42,102 48,162
Provision for reinsurance.......... 43,462 -- -- -- --
Restructuring expense.............. 5,489 -- -- -- --
Other operating expense............ 47,247 36,063 31,628 26,382 26,540
Merger expense..................... -- 107 8,069 26,160 --
-------- -------- -------- -------- --------
Total operating expense....... 181,863 103,225 104,735 102,862 85,336
Interest expense........................ 12,964 6,021 6,004 4,993 6,471
-------- -------- -------- -------- --------
Total expense................. 304,477 200,548 207,253 222,319 197,181
-------- -------- -------- -------- --------
Earnings before income tax provision.... 37,394 107,486 73,064 48,467 41,641
Income tax provision.................... 12,271 35,208 23,305 9,885 9,896
-------- -------- -------- -------- --------
Net earnings.................. $ 25,123 $ 72,278 $ 49,759 $ 38,582 $ 31,745
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE DATA:
Earnings per share(2)................. $ 0.51 $ 1.51 $ 1.06 $ 0.86 $ 0.75
======== ======== ======== ======== ========
Weighted average shares
outstanding(2)..................... 49,061 47,920 46,995 44,795 42,577
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE DATA:
Earnings per share(2)................. $ 0.51 $ 1.48 $ 1.03 $ 0.84 $ 0.74
======== ======== ======== ======== ========
Weighted average shares
outstanding(2)..................... 49,649 48,936 48,209 46,043 43,113
======== ======== ======== ======== ========
Cash dividends declared, per share.... $ 0.20 $ 0.16 $ 0.12 $ 0.06
======== ======== ======== ========

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FOR THE YEARS ENDED DECEMBER 31,(1)
-------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----

STATUTORY OPERATING RATIOS:(3)
Gross written premium to policyholders' surplus...... 182.6% 135.6% 104.3% 117.8% 134.9%
Net written premium to policyholders' surplus........ 47.6 33.4 43.1 65.4 73.3
Loss ratio........................................... 107.1 67.2 61.6 64.4 66.4
Expense ratio........................................ 22.8 15.7 17.2 19.2 18.1
----- ----- ----- ----- -----
Combined ratio....................................... 129.9% 82.9% 78.8% 83.6% 84.5%
===== ===== ===== ===== =====
Combined ratio excluding the effects of the provision
for reinsurance in 1999........................... 104.1%
=====
Industry average combined ratio...................... 107.8% 105.6% 101.6% 105.8% 106.4%

DECEMBER 31,(1)
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------

BALANCE SHEET DATA:
Total investments................. $ 581,322 $ 525,646 $ 518,772 $468,725 $454,831
Premium, claims and other
receivables.................... 622,087 382,630 252,618 168,300 155,164
Reinsurance recoverables.......... 736,485 372,672 176,965 132,328 117,700
Ceded unearned premium............ 133,657 149,568 84,610 71,758 78,460
Total assets...................... 2,664,724 1,709,069 1,198,132 965,793 896,476
Loss and loss adjustment expenses
payable........................ 871,104 460,511 275,008 229,049 200,756
Unearned premium.................. 188,524 201,050 152,094 156,268 151,976
Total debt........................ 242,546 121,600 80,750 72,917 71,628
Total shareholders' equity........ 457,428 439,863 365,601 296,524 255,484
Net tangible book value per
share(2)(4).................... 3.93 7.29 6.93 6.20 5.39
Book value per share(2)(4)........ $ 9.29 $ 9.12 $ 7.66 $ 6.49 $ 5.70

- ---------------

(1) Certain amounts in the 1998, 1997, 1996 and 1995 selected financial data
have been reclassified to conform to the 1999 presentation. Such
reclassifications had no effect on our net earnings, shareholders' equity or
cash flows.

(2) These amounts have been adjusted to reflect the effects of the five-for-two
stock split payable as a 150% stock dividend to shareholders of record April
30, 1996.

(3) The statutory accounting principles, or SAP, basis ratio data is not
intended to be a substitute for results of operations on the basis of
generally accepted accounting principles, or GAAP. The differences between
SAP and GAAP are described in Note (15) of our consolidated financial
statements. Including this information on a SAP basis is meaningful and
useful to allow a comparison of our operating results with those of other
companies in the insurance industry. The source of the industry average data
is A.M. Best. A.M. Best reports on insurer performance on a SAP basis to
provide for more standardized comparisons among individual companies, as
well as overall industry performance.

(4) Book value per share is calculated by dividing shares outstanding plus
contractually issuable shares into total shareholders' equity. Net tangible
book value per share uses total shareholders' equity less goodwill as the
numerator.

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15

BUSINESS

OVERVIEW

Our insurance companies provide accident and health reinsurance, aviation, group
health, marine and offshore energy, medical stop-loss, property and workers'
compensation insurance. In the United States, we operate on both a licensed, or
admitted, basis and on a surplus lines, or non-admitted, basis. Our insurance
company operations are risk bearing.

Our underwriting agencies underwrite on behalf of our insurance companies and
other insurance companies. Our underwriting agencies specialize in aviation,
medical stop-loss, occupational accident and workers' compensation insurance and
a variety of accident and health related insurance and reinsurance products. Our
underwriting agency operations are non-risk bearing.

Our intermediary subsidiaries perform our insurance and reinsurance brokerage
operations. These operations consist of marketing, placing, consulting on and
servicing insurance and reinsurance risks for our insurance company subsidiaries
and our clients. In this area, we specialize in employee benefits on a retail
basis and reinsurance for both accident and health, and property and casualty
lines of business. Our intermediary operations are non-risk bearing.

We also operate insurance claims adjusting and other service operations which
support our operations as well as provide services for other clients. In
addition, we make strategic investments, usually in businesses that complement
our operations. Our revenues from these investments are comprised of dividends
from, or equity in earnings of, the company in which we invested and gains or
losses on the sale of such investments.

MAJOR ACQUISITIONS

Since 1996, we have made a series of strategic acquisitions that have furthered
our overall business strategy. The following describes a few of our larger
transactions:

On May 24, 1996, we issued 6,250,000 shares of common stock to acquire LDG
Reinsurance Corporation. LDG Re acts on behalf of insurance and reinsurance
companies as a reinsurance underwriting manager in the accident and health
special risks, workers' compensation and alternative workers' compensation lines
of business.

On June 17, 1997, we issued 8,511,625 shares of common stock and 604,575 options
to purchase common stock to acquire the publicly traded Avemco Corporation, the
parent corporation of a group of insurance companies, underwriting agencies and
insurance related services companies. Avemco Corporation, through its
subsidiaries, provided property and casualty insurance principally in the
general aviation line of business. Avemco Corporation's primary insurance
company subsidiaries were Avemco Insurance Company and U.S. Specialty Insurance
Company.

On January 31, 1999, we acquired PEPYS Holdings Limited. PEPYS is a holding
company for Rattner MacKenzie Limited of London, England. The total initial
consideration was $54.8 million in cash and deferred payments of $8.3 million in
cash and 414,207 shares of our common stock. We may pay additional amounts in
the future based upon the attainment of certain earnings benchmarks over the
ensuing four years. Rattner MacKenzie provides intermediary services for
reinsurance business placed by our insurance company subsidiaries as well as
other insurance and reinsurance companies and underwriting agencies, primarily
in the accident and health area.

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On December 20, 1999, we acquired all of the outstanding shares of the publicly
traded The Centris Group, Inc. following a tender offer at a price of $12.50 per
share in cash. We paid a total of $149.5 million for the Centris acquisition.
Centris was the parent corporation of a group of insurance companies and
underwriting agencies principally operating in the medical stop-loss line of
business. Centris' primary insurance company subsidiary was the entity now known
as HCC Life Insurance Company. HCC Life's operations were relocated to Houston,
and it has become a subsidiary of Houston Casualty. The medical stop-loss
underwriting agency operations of Centris have been combined with HCC Benefits'
operations.

We continue to evaluate possible acquisition candidates and we may complete
additional acquisitions during 2000. Any future acquisitions will be designed to
expand and strengthen our existing lines of business and perhaps provide access
to additional specialty sectors, which we expect to contribute to our growth.

DISPOSITIONS

In January, 1999, we sold our 21% interest in Underwriters Indemnity Holdings,
Inc., the parent of Underwriters Indemnity Company.

In March, 2000, we sold Trafalgar Insurance Company, an Oklahoma domiciled
surplus lines insurance company subsidiary, for a price which approximated its
GAAP shareholders' equity.

In September, 2000, we sold a substantial portion of the assets of The Wheatley
Group, Ltd., a subsidiary of Avemco Corporation.

None of these operations were material to our financial condition, results of
operations or liquidity.

INSURANCE COMPANY OPERATIONS

Lines of Business

This table shows our insurance company subsidiaries' total premium received,
otherwise known as gross written premium, by line of business and the percentage
of each line to total gross written premium for the periods indicated (dollars
in thousands):

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------

Accident and health reinsurance.... $157,719 28% $114,787 23% $ 39,845 12%
Aviation........................... 210,029 37 203,573 41 164,519 47
Marine and offshore energy......... 18,694 3 34,941 7 30,316 9
Medical stop-loss.................. 69,258 12 7,046 1 3,388 1
Property........................... 63,309 11 106,515 21 85,379 24
Workers' compensation.............. 27,747 5 8,958 2 -- --
Other.............................. 21,575 4 22,456 5 22,952 7
-------- --- -------- --- -------- ---
Total gross written
premium................ $568,331 100% $498,276 100% $346,399 100%
======== === ======== === ======== ===

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This table shows our insurance company subsidiaries' actual premium retained,
otherwise known as the net written premium, by line of business and the
percentage of each line to total net written premium for the periods indicated
(dollars in thousands):

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------

Accident and health reinsurance.... $ 37,725 27% $ 39,949 33% $ 24,777 17%
Aviation........................... 68,513 49 53,030 43 75,280 53
Marine and offshore energy......... 6,616 5 7,978 6 18,687 13
Medical stop-loss.................. 20,332 15 3,415 3 3,388 2
Property........................... 2,945 2 8,356 7 8,636 6
Workers' compensation.............. 673 -- 1,059 1 -- --
Other.............................. 3,120 2 8,096 7 12,085 9
-------- --- -------- --- -------- ---
Total net written
premium................ $139,924 100% $121,883 100% $142,853 100%
======== === ======== === ======== ===

Underwriting

Direct

We underwrite direct business produced through independent agents and brokers,
affiliated intermediaries, and by direct marketing efforts. Our direct
underwriting is primarily general aviation, medical stop-loss and workers'
compensation business.

Reinsurance

Our insurance company subsidiaries participate in various insurance and
reinsurance underwriting pools managed by our underwriting agency subsidiaries,
primarily in the accident and health lines of business. Our insurance company
subsidiaries also write facultative, or individual account, reinsurance,
particularly in the aviation, marine and offshore energy, and property lines of
business. Our facultative underwriting is typically on international business in
order to comply with local licensing requirements or as reinsurance of captive
insurance companies controlled by others, and can be considered direct business
for most purposes, since we maintain underwriting and claims control. However,
we record all of this business under the caption of "Reinsurance Assumed" in our
financial statements.

Aviation

Aviation underwriting was our largest overall line of business in 1999 and in
recent years we have grown into a market leader in the aviation insurance
industry. We insure general aviation risks, both domestically and
internationally, including:

- antique and vintage military aircraft;

- cargo operations;

- commuter airlines;

- corporate aircraft;

- fixed base operations;

- military and law enforcement aircraft;

- private aircraft owners and pilots; and

- rotor wing aircraft.

We offer coverages that include hulls, engines, avionics and other systems,
liabilities, war, cargo and other ancillary coverages. At this time, we do not
generally insure major airlines, major manufacturers or

13
18

satellites. Insurance claims related to general aviation business tend to be
seasonal, with the majority of the claims being incurred during the spring and
summer months.

Through Houston Casualty Company, our largest and most important insurance
company subsidiary, we have been underwriting aviation risks since 1981. Avemco
Insurance, which we acquired in 1997, has been insuring aviation risks since
1959. Our gross written premium has risen consistently since 1997, increasing
from $164.5 million to $210.0 million in 1999. We have achieved this growth
through the expansion of our existing businesses, as well as through
acquisitions. Although, due to market conditions, domestic risks had not been
our focus since the early 1990s, Houston Casualty increased its writing of
domestic general aviation risks late in 1996 and, with the acquisition of Avemco
Insurance and U.S. Specialty Insurance Company in mid-1997, we have become a
major participant in the domestic general aviation insurance market. Our
aviation underwriting agency subsidiary, HCC Aviation Insurance Group, Inc.,
further enhances our position. In 1997 and 1998, we experienced a decline in net
written premium due to the implementation of HCC's reinsurance program at Avemco
Insurance following Avemco's acquisition in 1997. Our aviation net written
premium increased during 1999 because we increased our retentions, i.e., the
portion of risk that we retain for our own account.

We maintain reinsurance on both a proportional basis, where we share a
proportional part of the original premium and losses with reinsurers, and an
excess of loss basis, where we transfer liability, premium and loss on a
non-proportional basis above our net retention of risk to reinsurers, to protect
us against severe losses on individual risks and catastrophe exposures. We
believe that the aviation risks we underwrite carry a relatively low level of
catastrophe exposures.

Marine and Offshore Energy

We underwrite marine risks for ocean going vessels as well as inland, coastal
trading and fishing vessels. In this area we write hull and machinery,
liabilities, including protection and indemnity, marine cargo and various
ancillary coverages.

We have underwritten marine risks since 1984, primarily in Houston Casualty.
Competition has created downward pressure on premium rates since 1996, causing a
reduction in our gross written premium since 1997 and a corresponding decrease
in net written premium.

We maintain marine reinsurance on both a proportional and an excess of loss
basis. We believe that the marine risks we underwrite carry a relatively low
level of catastrophe exposure.

We have been underwriting offshore energy risks since 1988, primarily in Houston
Casualty. Offshore energy risks include drilling rigs, production and gathering
platforms, and pipelines. We underwrite physical damage, liabilities, business
interruption and various ancillary coverages.

Rates have declined significantly during the past few years to levels where
underwriting profitability is difficult to obtain. As a result, we have
underwritten offshore energy risks on a very selective basis, striving for
quality rather than quantity.

We maintain offshore energy reinsurance on both a proportional basis and an
excess of loss basis to protect us against severe losses on individual risks and
the catastrophic exposure that exists, for example, from a hurricane in the Gulf
of Mexico or a major platform explosion in the North Sea.

Property

We specialize in writing risks of large, often multinational, corporations,
covering such commercial risks as hotels, office buildings, retail locations,
factories, industrial plants, utilities, refineries, natural gas facilities and
petrochemical plants. The insurance we offer includes business interruption,
physical damage and catastrophe risks including flood and earthquake.

We have written property business since 1986, primarily through Houston
Casualty. Gross written premium increased to $118.2 million in 1996 as premium
rates increased following the Northridge earthquake in 1994. During 1996,
premium rates began to soften and this trend has continued through
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19

1999 due in a large part to excess capacity and the absence of significant
catastrophe losses. Gross written premium declined from $85.4 million in 1997 to
$63.3 million in 1999. Net written premium also declined from $8.6 million to
$2.9 million in the same period. By design, our property gross written premium
exceeds our net written premium by a substantial amount due to the amount of
facultative reinsurance, which is the separately negotiated reinsurance of all
or part of the coverage provided by a single policy, and other reinsurance
purchased in order to protect us from catastrophe losses.

We maintain reinsurance on both a proportional basis and an excess of loss basis
to ensure adequate reinsurance protection, particularly against catastrophic
exposures. As an example, through December 31, 1999 we had gross losses of $60.8
million with respect to Hurricanes Georges and Mitch, both of which occurred
during 1998. However, we incurred an after-tax net loss, after reinsurance, with
respect to these hurricanes of only $4.3 million. We estimate our aggregate
exposure in any individual catastrophe zone and maintain catastrophe reinsurance
to cover our exposure to any one occurrence.

Accident and Health Reinsurance

We began underwriting accident and health reinsurance risks through Houston
Casualty during 1996. LDG Re, the underwriting agency we acquired that year, is
the primary producer of this business. We underwrite reinsurance in the accident
and health special risks, workers' compensation and alternative workers'
compensation areas and occupational accident insurance for self-employed
truckers. Our gross written premium increased from $39.8 million in 1997 to
$157.7 million in 1999. This growth reflects Houston Casualty's increased
participation in, and the growth of, the business written by LDG Re. Net written
premium in this area has not increased as dramatically because Houston Casualty
does not retain a large percentage of this premium.

Medical Stop-loss

We write medical stop-loss business for employer sponsored self-insured health
plans. Our underwriting agency subsidiary, HCC Benefits, produces this business.
We first began writing this business in 1985 and gross written premium and net
written premium have increased as a result of greater participation by our
insurance company subsidiaries, primarily HCC Life and Avemco Insurance, in the
business underwritten by HCC Benefits and the growth of HCC Benefits' business
internally and through acquisitions, most notably of Centris. The 1999 gross
written premium underwritten in our insurance company subsidiaries was $69.3
million and is expected to exceed $360.0 million in 2000. When measured on a
gross written premium basis, medical stop-loss is expected to be our largest
single line of business in 2000. We maintain reinsurance on a proportional basis
and believe that these risks carry a relatively low level of catastrophe
exposure.

Workers' Compensation

We began writing statutory workers' compensation business in 1998, primarily
through U.S. Specialty, and expect to expand these writings through HCC Employer
Services, Inc. It is our intent to grow this line of business in the future,
both internally and through acquisition. We expect that gross written premium
and net written premium will increase although we will continue to purchase a
substantial amount of reinsurance. Losses in this line of business generally
take longer to develop than in our other lines of business.

We maintain reinsurance on both a proportional and excess of loss basis. There
is a relatively low level of catastrophe exposure in our workers' compensation
line of business because we do not write significant amounts of business in
states with high potential claim concentrations such as California.

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20

Insurance Company Subsidiaries

Houston Casualty Company

Houston Casualty is our principal insurance company subsidiary. It is rated "A+
(Superior), VIII" by A.M. Best and "AA" by Standard & Poor's, two independent
agencies whose ratings are intended to provide an independent opinion of an
insurer's ability to meet its obligations to policyholders. Houston Casualty
operates worldwide in most of our lines of business. Houston Casualty receives
business through independent agents and brokers, our underwriting agency and
intermediary subsidiaries, and other insurance and reinsurance companies
worldwide. Houston Casualty has a highly experienced staff of underwriters
trained to deal with the high value, complicated exposures prevailing in many of
the lines of business in which we specialize. As of December 31, 1999, Houston
Casualty had statutory policyholders' surplus, which is its total admitted
assets less total liabilities determined in accordance with SAP, of $250.2
million.

Houston Casualty Company-London

Houston Casualty was authorized by Her Majesty's Treasury in 1998 to operate a
full branch office in the United Kingdom. Houston Casualty established its
London branch operation in order to more closely align its underwriting
operations with the London market, a historical focal point for much of the
business that Houston Casualty underwrites. To this end, we have transferred
most of the underwriting responsibility for the lines of business Houston
Casualty writes, except aviation and, to some extent, accident and health
reinsurance, to this branch.

HCC Life Insurance Company

HCC Life is an Indiana domiciled life insurance company which became a direct
subsidiary of Houston Casualty in December, 1999 following the Centris
acquisition. HCC Life is rated "A- (Excellent), VII" by A.M. Best and operates
as an accident, health and life insurer on an admitted basis in 41 states and
the District of Columbia. We expect to expand HCC Life's operations through its
utilization as an insurer of medical stop-loss and related life insurance
products underwritten by HCC Benefits. At December 31, 1999, HCC Life had
statutory policyholders' surplus of $70.5 million.

U.S. Specialty Insurance Company

U.S. Specialty is a Texas domiciled property and casualty insurance company. It
is a direct subsidiary of Houston Casualty. U.S. Specialty is rated "A+
(Superior), VIII" by A.M. Best and "AA" by Standard & Poor's. U.S. Specialty
operates on an admitted basis throughout the United States, primarily writing
general aviation, workers' compensation and alternative workers' compensation
insurance produced by our underwriting agency subsidiaries. As of December 31,
1999, U.S. Specialty had statutory policyholders' surplus of $104.4 million.

Avemco Insurance Company

Avemco Insurance was organized in 1959 and became our subsidiary in June, 1997.
Avemco Insurance is a Maryland domiciled property and casualty insurer, is rated
"A+ (Superior), VII" by A.M. Best and "AA" by Standard & Poor's and is operating
as a direct market underwriter of general aviation business on an admitted basis
throughout the United States and Canada (except Quebec). In addition, Avemco
Insurance has become the primary insurer of medical stop-loss products
underwritten by HCC Benefits. At December 31, 1999, Avemco Insurance had
statutory policyholders' surplus of $62.5 million.

UNDERWRITING AGENCY OPERATIONS

16
21

revenues based entirely on management fees and profit commissions. These
subsidiaries are in a position to direct and control business that they produce.
Our insurance company subsidiaries serve as policy issuing companies for most of
the business written by our underwriting agencies. Our insurance company
subsidiaries may retain a portion of the risk and reinsure the remainder with
unaffiliated insurance companies or reinsure all of the risk. In instances where
our insurance companies are not the policy issuing company, our insurance
companies may reinsure the business written by the underwriting agencies.
Management fees generated by underwriting agency subsidiaries in 1999 amounted
to $90.7 million.

Lines of Business

This table shows our underwriting agency subsidiaries' written premium by lines
of business for the periods indicated (dollars in thousands):

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------

Accident and health
reinsurance................... $452,017 53% $356,530 50% $258,716 55%
Aviation........................ 91,156 11 92,668 13 49,581 10
Medical stop-loss............... 184,302 22 182,528 26 93,435 20
Occupational accident........... 54,000 6 48,100 7 46,909 10
Workers' compensation........... 52,758 6 4,429 1 -- --
Other........................... 13,883 2 21,932 3 24,798 5
-------- --- -------- --- -------- ---
Total written
premium............. $848,116 100% $706,187 100% $473,439 100%
======== === ======== === ======== ===

Underwriting Agency Subsidiaries

LDG Reinsurance Corporation

LDG Re, with operations in Wakefield, Massachusetts and New York, New York, acts
as an underwriting manager writing accident and health special risks, workers'
compensation and alternative workers' compensation reinsurance. LDG Re generated
approximately $360.2 million of written premium in 1999, the majority of which
was written on behalf of non-affiliated insurance companies.

LDG Re (London), Ltd.

LDG Re (London), located in London, England, is an underwriting manager writing
accident and health reinsurance business. LDG Re (London) generated
approximately $90.1 million of written premium in 1999. LDG Re (London)
underwrites primarily on behalf of Houston Casualty-London.

HCC Benefits Corporation

HCC Benefits, with its home office in Atlanta, Georgia and regional offices in
Costa Mesa, California; Wakefield, Massachusetts; Minneapolis, Minnesota; and
Dallas, Texas, acts as an underwriting manager writing medical stop-loss and
excess medical insurance products for employer sponsored self-insured health
plans. In 1999, HCC Benefits generated approximately $184.3 million of medical
stop-loss written premium and $6.7 million of other written premium, the
majority of which was underwritten on behalf of non-affiliated insurance
companies. In 1999, the agencies acquired from Centris in December of that year
and now included in HCC Benefits generated approximately $214.2 million of
written premium. We expect that a substantial part of the 2000 estimated written
premium for HCC Benefits of $425.0 million will be issued through Avemco
Insurance and HCC Life.

HCC Aviation Insurance Group, Inc.

HCC Aviation, with offices in Dallas, Texas and Glendale, California, along with
our insurance company subsidiary Avemco Insurance, provides the base for our
substantial presence in the domestic general aviation market. HCC Aviation acts
as an underwriting manager on behalf of U.S. Specialty in the areas of private
and corporate aircraft, commercial agricultural aircraft, antique and vintage
military aircraft,
17
22

small to medium sized airports, and commercial operators. HCC Aviation generated
approximately $91.1 million of written premium in 1999.

HCC Employer Services, Inc.

HCC Employer Services, with operations in Northbrook, Illinois; Montgomery,
Alabama; and Dallas, Texas, acts as an underwriting manager on behalf of our
insurance company subsidiaries and other unaffiliated insurance companies,
providing workers' compensation insurance to small and medium size businesses
and occupational accident and health insurance to self-employed truckers. HCC
Employer Services generated approximately $101.6 million in written premium in
1999.

COMBINED INSURANCE COMPANY AND UNDERWRITING AGENCY OPERATIONS

Our combined gross written premium in 1999 was over $1.1 billion, after
intercompany eliminations. Our insurance company operations wrote $568.3 million
of gross written premium and our underwriting agencies wrote $848.1 million of
written premium, before intercompany eliminations.

INTERMEDIARY OPERATIONS

Our intermediary subsidiaries provide a variety of services, including
marketing, placing, consulting on and servicing insurance risks for their
clients, which include medium to large corporations, insurance and reinsurance
companies and other risk taking entities. The intermediary subsidiaries earn
commission income and to a lesser extent fees for certain services, generally
paid by the underwriters with whom the business is placed. Some of these risks
may be initially underwritten by the Company's insurance company subsidiaries,
which may retain a portion of the risk. Commission income generated by our
intermediary subsidiaries in 1999 amounted to $54.6 million.

HCC Employee Benefits, Inc.

HCC Employee Benefits, based in Houston, Texas, is a retail insurance agency and
consulting firm specializing in life, accident and health insurance for employee
benefit plans of medium and large commercial customers throughout the United
States. We expect to increase this business through acquisition.

HCC Intermediaries, Inc.

HCC Intermediaries, based in Houston, Texas, is an intermediary specializing in
marketing and servicing large, complicated insurance and reinsurance programs
placed on behalf of multinational clients operating in our lines of business.
This business is placed with domestic and international insurance companies,
including our insurance companies, on a direct basis and through other
intermediaries. In addition, HCC Intermediaries acts as a reinsurance
intermediary on behalf of affiliated and non-affiliated insurance companies.

Rattner MacKenzie Limited

Rattner MacKenzie is an intermediary based in London, England. Rattner MacKenzie
is a Lloyd's broker specializing in accident and health reinsurance and some
specialty property and casualty lines of business. Rattner MacKenzie is
considered a market leader in its core businesses. Rattner MacKenzie serves as
an intermediary for reinsurance business placed by unaffiliated insurance and
reinsurance companies and underwriting agencies as well as our insurance company
subsidiaries.

OTHER OPERATIONS

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23

sales price of products sold. The subsidiaries currently operating in this
segment provide insurance claims adjusting services. Additionally, other
operations include the returns received from our insurance related strategic
investments which we make from time to time. These returns may be in the form of
equity in the earnings of the company in which we invested, dividends or gains
from the disposition of these investments. Other operating income was $28.5
million in 1999.

REINSURANCE CEDED

We purchase reinsurance to reduce our net liability on individual risks, to
protect against catastrophic losses and to achieve a desired ratio of net
written premium to policyholders' surplus. We purchase reinsurance on both a
proportional and an excess of loss basis. We believe that we reinsure our risks
to a greater extent than most of our competitors and most other insurance
companies. We use this strategy to protect our shareholders' equity. Under our
current reinsurance protections, we have limited our net retained loss, or the
amount we keep for our own account, across any single line of business to a
maximum of approximately $2.0 million for any one risk, but significantly less
on most risks.

The type, cost and limits of reinsurance we purchase can vary from year to year
based upon our desired retention levels and the availability of quality
reinsurance at a reasonable price. Our reinsurance programs renew throughout the
year. Our excess of loss programs that expired in 1999 have been renewed with
some increase in reinsurance costs. Additionally, we retained higher percentages
of our business in connection with certain lines of business which are reinsured
on a proportional basis. We plan to continue to increase our retentions as
underwriting conditions in various lines of business improve.

We consider the maintenance of reinsurance protection to be an important part of
our business plan, protecting shareholders' equity from catastrophe losses and
fluctuations in the insurance market cycles of the insurance industry. We have
built important relationships over the years with many core reinsurers. We
intend to continue to share our business with these partners as underwriting
profitability returns in an improving market in order to build even stronger
relationships for the future. We believe that increased retentions during
profitable periods are made possible not at the sacrifice of core reinsurers but
through reduction of facultative reinsurance and the natural attrition of
certain reinsurers who exit lines of business or curtail their writings for
other reasons. This reduction in reinsurance market capacity causes rates to
rise but the increased rates historically have been passed on to the original
insureds.

We structure a specific reinsurance program for each line of business we
underwrite. We place this reinsurance in order to protect our insurance
companies from exposure to foreseeable events. We place reinsurance
proportionally to cover loss frequency and catastrophe exposure. We obtain
additional reinsurance on an excess of loss basis to cover individual risk
severity of loss and on a catastrophe basis to cover exposure from occurrences
involving multiple risks, such as those resulting from a hurricane or an
earthquake. Additionally, we may also obtain facultative reinsurance protection
on an excess of loss or proportionate basis on any single risk. We do not intend
to expose our assets to any net loss in excess of our reinsurance protection.

We write business in areas exposed to catastrophic losses and have exposures to
this type of loss in California, the United States Atlantic Coast, certain
United States Gulf Coast states, particularly Florida and Texas, the Caribbean,
Mexico and the North Sea. We carefully assess our overall exposure to a single
catastrophic event and apply procedures that are more conservative than are
typically used by the industry to ascertain our probable maximum loss from any
single event. We maintain reinsurance protection which we believe is sufficient
to cover any foreseeable event.

In general, we receive an overriding (ceding) commission on the premium ceded to
reinsurers. This compensates our insurance company for the direct costs
associated with the production of the business, the servicing of the business
during the term of the policies ceded and the costs associated with the
placement of the related reinsurance. In addition, certain of our reinsurance
treaties allow us to share with the reinsurers in any net profits generated
under such treaties.

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24

Various intermediaries, including HCC Intermediaries and Rattner MacKenzie,
arrange for the placement of this reinsurance coverage on our behalf and are
compensated, directly or indirectly, by the reinsurers.

The ceding of reinsurance does not discharge our insurance companies from
liability to their policyholders. Our insurers are required to pay losses even
if the reinsurer fails to meet its obligations under the reinsurance contract.
To minimize our exposure to reinsurance credit risk, we place our reinsurance
with a diverse group of financially sound reinsurers. Our current treaty
reinsurance programs, which provide reinsurance of a specified category of risks
defined in a reinsurance contract, or "treaty," between the primary insurer and
reinsurer, were placed with more than 92 domestic and foreign reinsurers. As of
December 31, 1999, the total amount recoverable from reinsurers was
approximately $736.5 million, of which $91.3 million represents paid losses
recoverable (in the ordinary course of business), $53.2 million represents a
balance due from a commutation (which is a contractual arrangement between a
primary insurer and its reinsurer that settles all outstanding and future
liabilities between the companies) and $597.5 million represents outstanding
losses and estimated incurred but not reported, or losses that have occurred but
have not yet been reported to the insurer, which are also known as IBNR, loss
recoverables, less a $5.5 million reserve for potentially uncollectible
reinsurance. In addition, ceded unearned premium was $133.7 million. Of the
$736.5 million, $122.8 million was added as a result of the Centris acquisition
in December, 1999. As of December 31, 1999, we held $154.1 million of
irrevocable letters of credit and $19.9 million in cash to collateralize a
portion of the total amount recoverable and had other payable balances due to
our reinsurers of $213.0 million as potential offsets against reinsurance
recoverables. The estimated duration for our outstanding losses is two years, as
the majority of our business has historically had shorter lead times between the
occurrence of an insured event and the final settlement.

The table below shows property and casualty reinsurance balances relating to the
reinsurers with net recoverable balances greater than $10.0 million as of
December 31, 1999. The total recoverables column includes paid loss recoverable,
outstanding loss recoverable, IBNR recoverables and ceded unearned premium
(dollars in thousands).

A.M. LETTERS OF CREDIT,
BEST TOTAL CASH DEPOSITS AND
REINSURER RATING LOCATION RECOVERABLES OTHER PAYABLES NET
- --------- ------ -------------- ------------ ------------------ --------

Underwriters at Lloyd's...... A United Kingdom $156,650 $22,805 $133,845
Underwriters Indemnity
Company(1)................. A- Texas 50,451 4,201 46,250
SCOR Reinsurance Company..... A+ New York 41,137 1,740 39,397
AXA Reinsurance Company...... A+ Delaware 37,690 5,013 32,677
NAC Reinsurance Company(2)... A+ New York 23,153 6,105 17,048
Transamerica Occidental Life
Ins. Co.................... A+ California 22,481 6,102 16,379
St. Paul Fire and Marine
Insurance Co............... A+ Minnesota 17,577 1,721 15,856
Odyssey America Reinsurance
Corp....................... A Connecticut 19,114 5,891 13,223
Sun Life Assurance Company of
Canada..................... A++ Canada 17,996 4,786 13,210
GE Reinsurance............... A++ Illinois 16,535 4,869 11,666
Chartwell Reinsurance
Company(3)................. A Minnesota 12,736 2,074 10,662

- ---------------

(1) Underwriters Indemnity Company was acquired by RLI Corporation in January,
1999.

(2) NAC Reinsurance Corporation was acquired by XL Capital, Ltd. in June, 1999.

(3) Chartwell Reinsurance Company was acquired by Trenwick Group, Inc. in
October, 1999.

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25

reinsurers have claimed they are not liable for payment to us, and, in one or
more cases have sought arbitration of these matters. We are currently in
negotiations with most of these parties. If such negotiations do not result in a
satisfactory resolution of the matters in question, we will seek a judicial or
arbitral determination of these matters.

Prior to our acquisition of Centris, its life insurance company subsidiary, now
HCC Life, sold its entire block of life insurance and annuity business to Life
Reassurance Corporation of America in the form of an indemnity reinsurance
contract. Ceded life and annuity benefits amounted to $95.8 million as of
December 31, 1999.

In 1999, our insurance company subsidiaries recorded a $43.5 million provision
for reinsurance to reflect an estimated $29.5 million pre-tax loss for the
insolvency of a reinsurer and an estimated $14.0 million pre-tax loss, the
majority of which represents the discount on ceded reserves, related to the
commutation of all liabilities with another reinsurer discussed above. In
connection with the commutation, we received cash and other amounts totaling
$56.5 million.

OPERATING RATIOS

Premium to Surplus Ratio

This table shows, for the periods indicated, the ratio of statutory gross
written premium and net written premium to statutory policyholders' surplus, or
the total admitted assets less total liabilities, for our property and casualty
insurance company subsidiaries (dollars in thousands):

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------

Gross written premium................... $576,184 $500,962 $346,094 $340,367 $338,753
Net written premium..................... 150,261 123,315 143,068 189,022 184,028
Policyholders' surplus.................. 315,474 369,401 331,922 288,863 251,125
Gross written premium ratio............. 182.6% 135.6% 104.3% 117.8% 134.9%
Gross written premium industry
average(1)............................ 154.1% 147.9% 154.7% 179.9% 194.0%
Net written premium ratio............... 47.6% 33.4% 43.1% 65.4% 73.3%
Net written premium industry
average(1)............................ 85.5% 84.3% 89.7% 105.2% 113.0%

- ---------------

(1) Source: A.M. Best.

While there is no statutory requirement regarding a permissible premium to
policyholders' surplus ratio, guidelines established by the National Association
of Insurance Commissioners, or NAIC, provide that a property and casualty
insurer's annual statutory gross written premium should not exceed 900% and net
written premium should not exceed 300% of its policyholders' surplus. However,
industry standards and rating agency criteria place these ratios at 300% and
200%, respectively. In keeping with our philosophy of protecting our
shareholders' equity and limiting our aggregate loss exposure, we maintain
premium to surplus ratios significantly lower than the NAIC's guidelines and
well below industry norms. We expect to increase these ratios, however, as our
insurance company subsidiaries continue to increase their participation as
policy issuers for business written by our underwriting agency subsidiaries and
their retention of that business.

Combined Ratio

The underwriting experience of a property and casualty insurance company is
indicated by its combined ratio, which is a combination of the loss ratio, or
the ratio of insured losses and loss adjustment expenses to net earned premium,
and the expense ratio, which is the ratio of policy acquisition costs and other
underwriting expenses, net of ceding commissions, to net written premium. Our
insurance subsidiaries' loss

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26

ratio, expense ratio and combined ratio, determined on the basis of SAP, are
shown in the following table for the periods indicated:

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----

Loss ratio..................................... 107.1% 67.2% 61.6% 64.4% 66.4%
Expense ratio.................................. 22.8 15.7 17.2 19.2 18.1
----- ----- ----- ----- -----
Combined ratio................................. 129.9% 82.9% 78.8% 83.6% 84.5%
===== ===== ===== ===== =====
Combined ratio excluding the effects of the
provision for reinsurance in 1999............ 104.1%
=====
Industry average combined ratio................ 107.8% 105.6% 101.6% 105.8% 106.4%

The SAP basis ratio data is not intended to be a substitute for results of
operations on the basis of GAAP. The differences between SAP and GAAP are
described in Note (15) of our consolidated financial statements included in this
prospectus. Including this information on a SAP basis is meaningful and useful
to allow a comparison of our operating results with those of other companies in
the insurance industry. The source of the industry average is A.M. Best. A.M.
Best reports on insurer performance on a SAP basis to provide for more
standardized comparisons among individual companies, as well as overall industry
performance.

RESERVES

Applicable insurance laws require us to maintain reserves to cover our estimated
ultimate liability for reported and incurred but not reported losses under
insurance and reinsurance policies that we wrote and for loss adjustment
expenses relating to the investigation and settlement of policy claims. In most
cases, we estimate such losses and claims costs through an evaluation of
individual claims. However, for some types of claims, we use an average
reserving method until more information becomes available to permit an
evaluation of individual claims.

We establish loss reserves for individual claims by evaluating reported claims
on the basis of:

- the type of loss;

- jurisdiction of the occurrence;

- our knowledge of the circumstances surrounding the claim;

- the severity of injury or damage;

- the potential for ultimate exposure;

- the information and reports received from ceding insurance companies
where applicable; and

- our experience with the insured and the line of business and policy
provisions relating to the particular type of claim.

We establish loss reserves for incurred but not reported losses based in part on
statistical information and in part on industry experience with respect to the
probable number and nature of claims arising from occurrences that have not been
reported. We also establish our reserves based on predictions of future events,
our estimates of future trends in claims severity, and other subjective factors.
The net GAAP and SAP reserves of each of our insurance company subsidiaries are
established in conjunction with and reviewed by our in-house actuarial staff,
and our SAP reserves are certified annually by our independent actuaries. In
1999, PricewaterhouseCoopers LLP certified the SAP reserves of our insurance
company subsidiaries with the exception of certain of the insurance company
subsidiaries acquired with the Centris Group. These Centris subsidiaries' SAP
reserves were certified by the independent actuaries of Centris.

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27

With respect to some classes of risks, the period of time between the occurrence
of an insured event and the final settlement of a claim may be many years, and
during this period it often becomes necessary to adjust the claim estimates
either upward or downward. Certain classes of marine and offshore energy and
workers' compensation insurance underwritten by our insurance companies have
historically had longer lead times between the occurrence of an insured event,
reporting of the claim, and final settlement. In such cases, we are forced to
estimate reserves over long periods of time with the possibility of several
adjustments to reserves. Other classes of insurance that we underwrite, such as
most aviation, property and medical stop-loss, historically have shorter lead
times between the occurrence of an insured event, reporting of the claim and
final settlement. The reserves with respect to these classes are, therefore,
less likely to be adjusted. The majority of the risks currently underwritten by
our insurance companies tend to have shorter lead times.

The reserving process is intended to reflect the impact of inflation and other
factors affecting loss payments by taking into account changes in historical
payment patterns and perceived trends. However, there is no precise method for
the subsequent evaluation of the adequacy of the consideration given to
inflation, or to any other specific factor, or to the way one factor may impact
another.

We underwrite, directly and through reinsurance, risks which are denominated in
a number of foreign currencies, and therefore maintain loss reserves with
respect to these policies in the respective currencies. These reserves are
subject to exchange rate fluctuations, which may have an effect on our earnings.
We may attempt to limit our exposure to future currency fluctuations through the
use of foreign currency forward contracts.

The loss development triangles below show changes in our GAAP reserves in
subsequent years from the prior loss estimates based on experience as of the end
of each succeeding year on the basis of generally accepted accounting
principles. The estimate is increased or decreased as more information becomes
known about the frequency and severity of losses for individual years. A
redundancy means the original estimate was higher than the current estimate; a
deficiency means that the current estimate is higher than the original estimate.

The first line of each loss development triangle presents, for the years
indicated, the gross or net reserve liability including the reserve for incurred
but not reported losses. The first section of each table shows, by year, the
cumulative amounts of loss and loss adjustment expense paid as of the end of
each succeeding year. The second section sets forth the re-estimates in later
years of incurred losses, including payments, for the years indicated. The
"cumulative redundancy (deficiency)" represents, as of the date indicated, the
difference between the latest re-estimated liability and the reserves as
originally estimated.

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28

This loss development triangle shows development in loss reserves on a gross
basis (dollars in thousands):

1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- ---------

Balance sheet gross reserves:........ $871,104 $460,511 $275,008 $229,049 $200,756 $170,957 $144,178 $ 129,503
Cumulative paid as of:
One year later..................... 229,746 160,324 119,453 118,656 97,580 82,538 83,574
Two years later.................... 209,724 179,117 167,459 143,114 126,290 130,379
Three years later.................. 193,872 207,191 166,541 157,509 158,973
Four years later................... 214,046 192,540 176,472 182,193
Five years later................... 195,930 195,269 192,512
Six years later.................... 197,147 213,052
Seven years later.................. 215,280
Re-estimated liability as of:
End of year........................ 871,104 460,511 275,008 229,049 200,756 170,957 144,178 129,503
One year later..................... 550,545 308,501 252,236 243,259 186,898 163,967 162,827
Two years later.................... 316,250 249,013 248,372 207,511 183,015 176,817
Three years later.................. 250,817 247,053 214,738 203,137 194,419
Four years later................... 248,687 220,695 211,546 215,531
Five years later................... 217,892 218,182 222,746
Six years later.................... 214,498 234,115
Seven years later.................. 231,269
Cumulative gross redundancy
(deficiency)....................... $(90,034) $(41,242) $(21,768) $(47,931) $(46,935) $(70,320) $(101,766)

The gross deficiencies reflected in the table result from three principal
conditions:

- The development of large claims on individual policies which were either
reported late by or for which reserves were increased as subsequent
information became available from the insurance companies that are
responsible for adjusting the claims. However, as these policies were
substantially reinsured by our insurers, there was no material effect to
our net earnings.

- During 1999, in connection with the insolvency of one of our reinsurers
and the commutation of all liabilities with another, we re-evaluated all
reserves and incurred but not reported reserves related to business
placed with these reinsurers to determine the ultimate losses we might
conservatively expect. These reserves were then used as the basis for the
determination of the provision for reinsurance recorded in 1999.

- For the years prior to 1997, the runoff of the retrocessional excess of
loss business, which we underwrote between 1988 and 1991, experienced
gross development. This development was due primarily to the delay in
reporting of losses by the London insurance market, coupled with the
unprecedented number of catastrophe losses during that period. This
business is substantially reinsured; therefore, the related losses we
experienced did not have a material adverse effect on our net earnings.

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29

This loss development triangle shows development in loss reserves on a net basis
(dollars in thousands):

1999 1998 1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- -------- -------- --------

Gross reserves for loss
and loss adjustment
expense................. $871,104 $460,511 $275,008 $229,049 $200,756 $170,957 $144,178 $129,503 $123,248
Less reinsurance
recoverables............ 597,498 341,599 155,374 111,766 101,497 95,279 82,289 81,075 83,727
-------- -------- -------- -------- -------- -------- -------- -------- --------
Reserves for loss and
loss adjustment expense,
net of reinsurance...... 273,606 118,912 119,634 117,283 99,259 75,678 61,889 48,428 39,521
Effect on loss reserves
of 1999 write off of
ceded outstanding and
IBNR reinsurance
recoverables............ -- 63,851 15,008 2,636 1,442 51 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Reserves for loss and
loss adjustment expense
net of reinsurance and
adjusted for write
off..................... 273,606 182,763 134,642 119,919 100,701 75,729 61,889 48,428 39,521
Cumulative paid, net of
reinsurance, as of:
One year later.......... 56,052 48,775 47,874 41,947 36,500 29,258 18,978 18,416
Two years later......... 64,213 66,030 56,803 49,283 41,207 32,733 23,057
Three years later....... 72,863 64,798 56,919 46,576 36,536 31,903
Four years later........ 67,355 60,441 51,536 38,480 33,875
Five years later........ 61,781 53,110 40,327 34,970
Six years later......... 53,879 40,550 36,203
Seven years later....... 41,133 35,413
Eight years later....... 35,960
Nine years later........
Ten years later.........
Re-estimated liability,
net of reinsurance, as
of:
End of year............. 273,606 182,763 134,642 119,919 100,701 75,729 61,889 48,428 39,521
One year later.......... 187,377 120,049 116,145 95,764 72,963 59,659 45,812 38,575
Two years later......... 116,745 101,595 94,992 74,887 60,079 44,964 38,656
Three years later....... 97,353 85,484 76,474 62,224 46,129 39,176
Four years later........ 80,890 73,660 64,377 48,993 40,407
Five years later........ 69,528 64,103 50,785 43,418
Six years later......... 59,408 50,585 45,142
Seven years later....... 46,071 43,924
Eight years later....... 39,858
Nine years later........
Ten years later.........
Cumulative net redundancy
(deficiency)............ $ (4,614) $ 17,897 $ 22,566 $ 19,811 $ 6,201 $ 2,481 $ 2,357 $ (337)

1990 1989
-------- -------

Gross reserves for loss
and loss adjustment
expense................. $108,027 $96,477
Less reinsurance
recoverables............ 60,194 45,160
-------- -------
Reserves for loss and
loss adjustment expense,
net of reinsurance...... 47,833 51,317
Effect on loss reserves
of 1999 write off of
ceded outstanding and
IBNR reinsurance
recoverables............ -- --
-------- -------
Reserves for loss and
loss adjustment expense
net of reinsurance and
adjusted for write
off..................... 47,833 51,317
Cumulative paid, net of
reinsurance, as of:
One year later.......... 23,450 22,660
Two years later......... 33,815 34,300
Three years later....... 35,912 40,806
Four years later........ 42,465 41,878
Five years later........ 43,422 46,734
Six years later......... 43,690 47,164
Seven years later....... 44,611 47,229
Eight years later....... 43,715 47,928
Nine years later........ 44,203 46,308
Ten years later......... 46,646
Re-estimated liability,
net of reinsurance, as
of:
End of year............. 47,833 51,317
One year later.......... 44,887 49,475
Two years later......... 45,435 47,313
Three years later....... 44,689 48,085
Four years later........ 45,507 47,884
Five years later........ 46,805 47,933
Six years later......... 48,932 48,086
Seven years later....... 50,190 49,392
Eight years later....... 49,732 50,324
Nine years later........ 47,422 50,101
Ten years later......... 48,479
Cumulative net redundancy
(deficiency)............ $ 411 $ 2,838

We believe that our loss reserves are adequate to provide for all material net
incurred losses.

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This table provides a reconciliation of the gross liability of loss and loss
adjustment expense on a GAAP basis for the periods indicated (dollars in
thousands):

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------

Reserves for loss and loss adjustment expenses at beginning
of year................................................... $460,511 $275,008 $229,049
Reserves acquired with purchase of subsidiaries............. 146,233 3,877 1,919
Provision for loss and loss adjustment expense for claims
occurring in the current year............................. 595,425 461,429 269,505
Increase in estimated loss and loss adjustment expense for
claims occurring in the prior years(1).................... 90,034 33,493 23,187
-------- -------- --------
Incurred loss and loss adjustment expense................... 685,459 494,922 292,692
-------- -------- --------
Loss and loss adjustment expense payments for claims
occurring during:
Current year.............................................. 191,353 152,972 129,199
Prior years............................................... 229,746 160,324 119,453
-------- -------- --------
Loss and loss adjustment expense payments................... 421,099 313,296 248,652
-------- -------- --------
Reserves for loss and loss adjustment expense at the of the
year...................................................... $871,104 $460,511 $275,008
======== ======== ========

- ---------------

(1) Changes in loss and loss adjustment expense reserves on a GAAP basis, 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.

This table provides a reconciliation of the liability for loss and loss
adjustment expense, net of reinsurance ceded, on a GAAP basis for the periods
indicated (dollars in thousands):

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------

Reserves for loss and loss adjustment expense at beginning
of year................................................... $118,912 $119,634 $117,283
Reserves acquired with purchase of subsidiaries............. 55,523 3,877 1,919
Effect on loss reserves of write off of ceded outstanding
and incurred but not reported reinsurance recoverables.... 82,343 -- --
Provision for loss and loss adjustment expense for claims
occurring in the current year............................. 105,036 105,895 100,288
Increase (decrease) in estimated loss and loss adjustment
expense for claims occurring in prior years(1)............ 4,614 (14,593) (3,774)
-------- -------- --------
Incurred loss and loss adjustment expense................... 109,650 91,302 96,514
-------- -------- --------
Loss and loss adjustment expense payments for claims
occurring during:
Current year.............................................. 36,770 47,126 48,208
Prior years............................................... 56,052 48,775 47,874
-------- -------- --------
Loss and loss adjustment expense payments................... 92,822 95,901 96,082
-------- -------- --------
Reserves for loss and loss adjustment expense at end of the
year...................................................... $273,606 $118,912 $119,634
======== ======== ========

- ---------------

(1) Changes in loss and loss adjustment expense reserves on a GAAP basis, 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.

Although we experienced a gross loss deficiency during the three years ended
December 31, 1999, because the business is substantially reinsured in the lines
where adverse development has occurred, there was no material adverse effect to
our insurance companies on a net loss basis.

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31

During 1999, we had net loss and loss adjustment expense deficiency of $4.6
million relating to prior year losses compared to redundancies of $14.6 million
in 1998 and $3.8 million in 1997. The deficiency and redundancies in the net
reserves result from our actuaries' continued review of loss reserves and the
increase or reduction of reserves as losses are finally settled and claims
exposures are reduced. We believe we have provided for all material net incurred
losses.

Avemco Insurance, which we acquired in June, 1997, recorded a $10.0 million
increase in loss and loss adjustment expense reserves during December, 1997,
predominately related to 1995 and 1996 claims incurred prior to HCC's
acquisition of Avemco. This deficiency is included in the net redundancy
recorded for 1997. This increase in reserves was made in an effort to make
Avemco Insurance's reserving practices consistent with the more conservative
method used by HCC's other insurance company operations. We expect the increase
in loss reserves to be adequate to cover any subsequent adverse development of
Avemco Insurance's losses prior to our acquisition.

We have no material exposure to environmental pollution losses, because Houston
Casualty only began writing business in 1981 and its policies normally contain
pollution exclusion clauses which limit pollution coverage to "sudden and
accidental" losses only, thus excluding intentional (dumping) and seepage
claims. Policies issued by HCC Life, Avemco Insurance and U.S. Specialty,
because of the types of risks insured, are not considered to have significant
environmental exposures. We do not expect to experience any material development
in reserves for environmental pollution claims.

INVESTMENTS

Insurance company investments must comply with applicable regulations which
prescribe the type, quality and concentration of investments. These regulations
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
and preferred and common equity securities. As of December 31, 1999, we had
$581.3 million of investment assets. The majority of our investment assets are
held by our insurance company subsidiaries. All of our securities are classified
as available for sale and are recorded at market value.

Our investment policy is determined by our Board of Directors and our Investment
Committee and is reviewed on a regular basis. In January, 2000, we engaged a
nationally prominent investment advisor, New England Asset Management, a
subsidiary of Berkshire Hathaway, Inc., to oversee our investments and to make
recommendations to our Board's Investment Committee. Under our investment
policy, we concentrate our investments in obligations of states, municipalities
and political subdivisions. The interest income from these investments is
predominantly exempt from federal income tax. Although we generally intend to
hold these securities to maturity, we regularly re-evaluate our position based
upon market conditions. Beginning in the second quarter of 2000, our purchases
have been focused on taxable fixed income investments. These purchases have had
no significant effect on the average credit rating of our investments, but have
shortened the duration of our investment portfolio. As of June 30, 2000, our
fixed income securities have a weighted average maturity of five years and a
weighted average duration of four years.

Our financial statements reflect an unrealized loss on fixed income securities
available for sale as of December 31, 1999, of $893,000.

We have maintained a substantial level of cash and liquid short-term instruments
in our insurance company subsidiaries in order to maintain the ability to fund
losses of our insureds. Our underwriting agencies and intermediaries typically
have short-term investments, which are fiduciary funds held on behalf of others.
As of December 31, 1999, we had cash and short-term investments of approximately
$242.2 million, of which $167.4 million were in our agency and intermediary
subsidiaries.

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This table shows a profile of our investments. The table shows the average
amount of investments, income earned, and the yield thereon for the periods
indicated (dollars in thousands):

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------

Average investments.................................. $552,654 $522,209 $496,010
Net investment income................................ 30,933 29,335 27,587
Average yield(1)..................................... 5.6% 5.6% 5.6%
Average tax equivalent yield(1)...................... 7.1% 7.3% 7.3%

- ---------------

(1) Excluding realized and unrealized capital gains and losses.

This table summarizes, by type, our investments as of December 31, 1999 (dollars
in thousands):

PERCENT
AMOUNT OF TOTAL
-------- --------

Short-term investments...................................... $215,694 37%
U.S. Treasury securities.................................... 57,505 10
Obligations of states, municipalities and political
subdivisions.............................................. 99,459 17
Special revenue bonds....................................... 163,644 28
Corporate and other fixed income securities................. 21,504 4
Mortgage backed securities.................................. 529 --
Marketable equity securities................................ 19,970 3
Other investments........................................... 3,017 1
-------- ---
Total investments................................. $581,322 100%
======== ===

This table summarizes, by rating, the market value of our investments in fixed
income securities as of December 31, 1999 (dollars in thousands):

PERCENT
RATING AMOUNT OF TOTAL
- ------ -------- --------

AAA......................................................... $205,203 60%
AA.......................................................... 97,466 28
A........................................................... 37,073 11
BBB......................................................... 2,899 1
-------- ---
Total fixed income securities..................... $342,641 100%
======== ===

This table indicates the expected maturity distribution of our fixed income
securities as of December 31, 1999 (dollars in thousands):

PERCENT
AMOUNT OF TOTAL
-------- --------

One year or less............................................ $ 37,052 11%
One year to five years...................................... 107,647 32
Five years to ten years..................................... 97,250 28
Ten years to fifteen years.................................. 68,695 20
More than fifteen years..................................... 31,997 9
-------- ---
Total fixed income securities..................... $342,641 100%
======== ===

The value of our portfolio of fixed income securities is inversely correlated to
changes in market interest rates. In addition, some of our fixed income
securities have call or prepayment options. This could subject us to a
reinvestment risk should interest rates fall or issuers call their securities
and we are forced to invest

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the proceeds at lower interest rates. We mitigate this risk by investing in
securities with varied maturity dates, so that only a portion of the portfolio
will mature at any point in time.

REGULATION

The business of insurance is extensively regulated by the government. At this
time, the insurance business in the United States is regulated primarily by the
states. However, a form of federal financial services modernization legislation
enacted in 1999 is expected to result in additional federal regulation of the
insurance industry. In addition, some insurance industry trade groups are
actively lobbying for legislation that would allow an option for a separate
federal charter for insurance companies. The full extent to which the federal
government will determine to directly regulate the business of insurance has not
been determined by lawmakers. Also, various foreign governments regulate our
international operations.

Our business depends on our compliance with applicable laws and regulations and
our ability to maintain valid licenses and approvals for our operations. We
devote a significant effort toward obtaining and maintaining our licenses and
compliance with a diverse and complex regulatory structure. In all
jurisdictions, the applicable laws and regulations are subject to amendment or
interpretation by regulatory authorities. Generally, regulatory authorities are
vested with broad discretion to grant, renew and revoke licenses and approvals
and to implement regulations governing the business and operations of insurers
and insurance agents.

Insurance Company Subsidiaries

Our insurance company subsidiaries, in common with other insurers, are subject
to regulation and supervision by the states and by other jurisdictions in which
they do business. Regulation by the states varies, but generally involves
regulatory and supervisory powers of a state insurance official. The regulation
and supervision of our insurance operations relates primarily to:

- approval of policy forms and premium rates;

- standards of solvency, including risk-based capital measurements;

- licensing of insurers and their agents;

- restrictions on the nature, quality and concentration of investments;

- restrictions on the ability of our insurance company subsidiaries to pay
dividends to us;

- restrictions on transactions between insurance company subsidiaries and
their affiliates;

- restrictions on the size of risks insurable under a single policy;

- requiring deposits for the benefit of policyholders;

- requiring certain methods of accounting;

- periodic examinations of our operations and finances;

- prescribing the form and content of records of financial condition
required to be filed; and

- requiring reserves for unearned premium, losses and other purposes.

In general, state insurance regulations are intended primarily for the
protection of policyholders rather than shareholders. The state insurance
departments monitor compliance with regulations through periodic reporting
procedures and examinations. The quarterly and annual financial reports to the
state insurance regulators utilize accounting principles which are different
from the generally accepted accounting principles we use in our reports to
shareholders. Statutory accounting principles, in keeping with the intent to
assure the protection of policyholders, are generally based on a liquidation
concept while generally accepted accounting principles are based on a
going-concern concept.

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Houston Casualty is domiciled in Texas. It operates on an admitted basis in
Texas and may write reinsurance on all lines of business that it may write on a
direct basis. Houston Casualty is an accredited reinsurer in 35 states and an
approved surplus lines insurer or is otherwise permitted to write surplus lines
insurance in 46 states, three United States territories and the District of
Columbia. When a reinsurer obtains accreditation from a particular state,
insurers within that state are permitted to obtain statutory credit for risks
ceded to the reinsurer. Surplus lines insurance is offered by non-admitted
companies on risks which are not insured by admitted companies. All surplus
lines insurance is required to be written through licensed surplus lines
insurance brokers, who are required to be knowledgeable of and follow specific
state laws prior to placing a risk with a surplus lines insurer.

Houston Casualty operates a branch office in London, England which is subject to
regulation by regulatory authorities in the United Kingdom. Avemco Insurance is
domiciled in Maryland and operates as a licensed admitted insurer in all states,
the District of Columbia, and all Canadian provinces except Quebec. U.S.
Specialty is domiciled in Texas and operates as a licensed admitted insurer in
all states and the District of Columbia. HCC Life is domiciled in Indiana, and
operates as a licensed admitted insurer in 41 states and the District of
Columbia.

State insurance regulations also affect the payment of dividends and other
distributions by insurance companies to their shareholders. Generally, insurance
companies are limited by these regulations to the payment of dividends above a
specified level. Dividends in excess of those thresholds are "extraordinary
dividends" and subject to prior regulatory approval.

Underwriting Agency and Intermediary Subsidiaries

In addition to the regulation of insurance companies, the states impose
licensing and other requirements on the insurance agency and service operations
of our other subsidiaries. These regulations relate primarily to:

- licensing as agents, brokers, intermediaries, managing general agents or
third party administrators;

- contractual requirements;

- recordkeeping requirements;

- limitations on authority;

- advertising and business practice rules; and

- financial security.

The manner of operating our underwriting agency and intermediary activities in
particular states may vary according to the licensing requirements of the
particular state, which may require, among other things, that we operate in the
state through a local corporation. In a few states, licenses are issued only to
individual residents or locally-owned business entities. In such cases, we may
have arrangements with residents or business entities licensed to act in the
state.

Statutory Accounting Principles

The principal differences between statutory accounting principles, also referred
to as SAP, and generally accepted accounting principles, also referred to as
GAAP, the method by which we report our financial results to our shareholders in
accordance with SEC requirements, are:

- fixed-income investments classified as available for sale are recorded at
market value for GAAP and at amortized cost under SAP;

- under SAP, policy acquisition costs are expensed as incurred and under
GAAP such costs are deferred and amortized to expense as the related
premium is earned;

- deferred taxes are not provided under SAP;

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35

- certain assets which are considered "non-admitted assets" are eliminated
from a balance sheet prepared in accordance with SAP and included in a
balance sheet prepared in accordance with GAAP;

- certain reserves are recognized under SAP but not under GAAP; and

- reinsurance balances are recorded on a gross basis under GAAP and on a
net basis under SAP.

The NAIC adopted Statements of Statutory Accounting Principles in March, 1998 as
a product of its attempt to codify statutory accounting principles. Although
subject to adoption by the individual states, an effective date of January 1,
2001 was established for implementation of the statements. Prior to the
codification project, a comprehensive guide to statutory accounting principles
did not exist. The codification is new and will evolve over time. We are in the
process of reviewing the statutory accounting principles as currently published
to determine the effect their adoption may have on the statutory policyholders'
surplus and net income of our insurance company subsidiaries.

Insurance Holding Company Acts

Because we are an insurance holding company, we are subject to the insurance
holding company system regulatory requirements of the states of California,
Indiana, Maryland, Missouri, Pennsylvania and Texas. Under these regulations, we
are required to report information regarding our capital structure, financial
condition and management. We are also required to provide prior notice to, or
seek the prior approval of insurance regulatory authorities of certain
agreements and transactions between our affiliated companies. These agreements
and transactions must satisfy certain regulatory requirements.

Risk-Based Capital

The NAIC has developed a formula for analyzing insurance companies called
risk-based capital. The risk-based capital formula is intended to establish
"minimum" capital thresholds that vary with the size and mix of a company's
business and assets. It is designed to identify companies with the capital
levels that may require regulatory attention. As of December 31, 1999, each of
our domestic insurance company subsidiaries' total adjusted capital is
significantly in excess of the NAIC authorized control level risk-based capital.

Insurance Regulatory Information System

The NAIC has also developed a rating system, the Insurance Regulatory
Information System, primarily intended to assist state insurance departments in
overseeing the financial condition of all insurance companies operating within
their respective states. The Insurance Regulatory Information System consists of
eleven key financial ratios that address various aspects of each insurer's
financial condition and stability. Our insurance company subsidiaries Insurance
Regulatory Information System ratios generally fall within the usual prescribed
ranges except in satisfactorily explainable circumstances such as when there is
a large reinsurance transaction, capital change, merger or planned growth.

Pending or Proposed Legislation

In recent years, state legislatures have considered or enacted laws that modify
and, in many cases, increase state authority to regulate insurance companies and
insurance holding company systems. State insurance regulators are members of the
NAIC, which seeks to promote uniformity of, and to enhance the state regulation
of, insurance. In addition, the NAIC and state insurance regulators, as part of
the NAIC's state insurance department accreditation program and in response to
new federal laws, have re-examined existing state laws and regulations,
specifically focusing on insurance company investments, issues relating to the
solvency of insurance companies, licensing and market conduct issues,
streamlining agent licensing

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and policy form approvals, adoption of privacy rules for handling policyholder
information, interpretations of existing laws, the development of new laws, and
the definition of extraordinary dividends.

In recent years, a variety of measures have been proposed at the federal level
to reform the current process of federal and state regulation of the financial
services industries in the United States, which include the banking, insurance
and securities industries. These measures, which are often referred to as
financial services modernization, have as a principal objective the elimination
or modification of current regulatory barriers to cross-industry combinations
involving banks, securities firms and insurance companies. A form of financial
services modernization legislation was enacted at the federal level in 1999
through the Gramm-Leach-Bliley Act. That federal legislation will have
significant implications on the banking, insurance and securities industries and
could result in more cross-industry consolidations among banks, insurance
companies and securities firms and increased competition in many of the areas of
our operations. It also mandated the adoption of laws allowing reciprocity among
the states in the licensing of agents and the adoption of laws and regulations
dealing with the protection of the privacy of policyholder information. Also,
the federal government has conducted investigations of the current condition of
the insurance industry in the United States to determine whether to impose
overall federal regulation of insurers. In the past several years there have
been a number of recommendations that the industry's anti-trust exemption be
removed and the industry placed under federal regulation. If so, we believe
state regulation of the insurance business would likely continue. This could
result in an additional layer of federal regulation.

We do not know at this time the full extent to which these federal or state
legislative or regulatory initiatives will or may affect our operations, and no
assurance can be given that they would not, if adopted, have a material adverse
effect on our business or its results of operations.

EMPLOYEES

As of June 30, 2000, we had 1,080 employees. The employees include 5 executive
officers, 23 senior management, 113 management and 939 other personnel. Of this
number, 175 are employed by our insurance company subsidiaries, 577 are employed
by our underwriting agency subsidiaries, 122 are employed by our intermediary
subsidiaries, 120 are employed by our insurance services subsidiaries and 86 are
employed at the corporate headquarters and elsewhere. We are not a party to any
collective bargaining agreement and have not experienced work stoppages or
strikes as a result of labor disputes. We consider our employee relations to be
very good.

PROPERTIES

Our principal and executive offices are located in Houston, Texas, in an
approximately 51,000 square foot building owned by Houston Casualty. Houston
Casualty also owns a 77,000 square foot building, acquired in 1998, adjacent to
its home office building. We also maintain offices in over 40 locations
elsewhere in the United States and England. The majority of these additional
locations are in leased facilities.

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Besides our home office, our principal office facilities are as follows:

SQUARE
SUBSIDIARY LOCATION FOOTAGE LEASE TERMINATION DATE
- ---------- -------- ------- ----------------------

Avemco Insurance..................... Frederick, Maryland 40,000 Owned
HCC Aviation......................... Dallas, Texas 40,000 March 31, 2004
HCC Benefits......................... Costa Mesa, California 22,000 March 31, 2007
Atlanta, Georgia 21,000 January 31, 2006
HCC Employee Benefits................ Houston, Texas 27,000 August 31, 2001 and
October 31, 2002
HCC Employer Services................ Northbrook, Illinois 19,000 April 1, 2005
Montgomery, Alabama 21,000 January 1, 2006
LDG Re............................... Wakefield, Massachusetts 34,000 October 31, 2001
Rattner MacKenzie.................... London, England 15,000 September 29, 2003

LEGAL PROCEEDINGS

We are party to numerous claims and lawsuits that arise in the normal course of
our business. Many of such claims or lawsuits involve claims under policies that
we underwrite as an insurer or reinsurer. We believe the resolution of these
lawsuits or claims will not have a material adverse effect on our financial
condition, results of operations or cash flows.

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PRINCIPAL SHAREHOLDERS

This following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 21, 2000, by

- each person who is known by us to be the beneficial owner of more than 5%
of our common stock;

- each of our executive officers;

- each director; and

- all of our directors and executive officers as a group.

AMOUNT AND PERCENT OF
NATURE OF COMMON
BENEFICIAL STOCK
NAME OWNERSHIP(1)(2) OUTSTANDING
- ---- --------------- -----------

Ariel Capital Management, Inc. ............................. 5,007,175(3) 10.1%
307 North Michigan Avenue
Chicago, Illinois 60601
Stephen L. Way.............................................. 4,972,431 9.8%
13403 Northwest Freeway
Houston, Texas 77040-6094
Capital Research & Management Company....................... 3,055,600(4) 6.2%
333 South Hope Street
Los Angeles, California 90071
Beck, Mack & Oliver LLC..................................... 2,789,292(5) 5.6%
330 Madison Avenue
New York, New York 10017
Stephen J. Lockwood......................................... 2,564,835 5.2%
27 Congress Street, Suite 108
Salem, Massachusetts, 01970
Frank J. Bramanti........................................... 847,912(6) 1.7%
Allan W. Fulkerson.......................................... 207,500(7) *
John N. Molbeck, Jr......................................... 180,000 *
Walter J. Lack.............................................. 145,000 *
James R. Crane.............................................. 122,500 *
J. Robert Dickerson......................................... 78,000 *
Edward H. Ellis, Jr. ....................................... 69,334 *
James M. Berry.............................................. 56,750 *
Edwin H. Frank, III......................................... 53,150(8) *
Patrick B. Collins.......................................... 45,000 *
Marvin P. Bush.............................................. 44,500(9) *
Benjamin D. Wilcox.......................................... 22,000 *
All directors and executive officers as a group (14
persons).................................................. 9,408,912 18.2%

- ---------------

* Less than 1%.

(1) Directors and executive officers have sole voting and investment powers of
the shares shown unless otherwise indicated.

(2) Includes shares which directors and executive officers have the right to
acquire upon the exercise of options within 60 days from September 21, 2000,
including the following: Stephen L. Way -- 892,300 shares; Frank J.
Bramanti -- 640,180 shares; John N. Molbeck, Jr. -- 71,875 shares, Edward H.
Ellis, Jr. -- 68,334 shares; Allan W. Fulkerson -- 47,500 shares; James M.
Berry, J. Robert Dickerson and Edwin H. Frank, III, -- 42,500 shares each;
Patrick B. Collins -- 40,000 shares; Walter J. Lack -- 27,500 shares; James
R. Crane and Marvin P. Bush -- 22,500 shares

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each; Benjamin D. Wilcox -- 20,000 shares; Stephen J. Lockwood -- 5,000
shares; and all directors and executive officers as a group -- 1,985,189
shares.

(3) Ariel Capital Management, Inc. reported that it is an investment advisor
deemed to be the beneficial owner of a total of 5,007,175 shares of our
common stock. This information was obtained from a Schedule 13G dated
February 10, 2000, filed with the SEC.

(4) Capital Research and Management Company reports that it is an investment
advisor deemed to be the beneficial owner of 3,055,600 shares of our common
stock. This information was obtained from a Schedule 13G dated February 11,
2000, filed with the SEC.

(5) Beck, Mack & Oliver LLC reported that it is an investment advisor with
shared dispositive power over 2,789,292 shares of our common stock held by
its investment advisory clients. This information was obtained from a
Schedule 13G dated January 28, 2000, filed with the SEC.

(6) Includes 750 shares owned of record by Mr. Bramanti's wife in trust for his
children and 2,250 shares owned of record by his children. Mr. Bramanti
disclaims beneficial ownership of such shares.

(7) Mr. Fulkerson is a director, shareholder and President of Century Capital
Management, Inc., a registered investment advisor, which exercises both
voting and investment power with respect to 150,000 shares owned of record
by Century Capital Partners, L.P. Although Mr. Fulkerson may be deemed to
beneficially own the 150,000 shares owned of record by Century Capital
Partners, L.P., he disclaims beneficial ownership of such shares, except to
the extent of his actual pecuniary interest therein.

(8) Includes 1,200 shares owned of record by Mr. Frank's children. Mr. Frank
disclaims beneficial ownership of such shares.

(9) Includes 2,500 shares owned of record by Winston Holdings, LLC, a limited
liability company in which Mr. Bush has an ownership interest. Mr. Bush
disclaims beneficial ownership of such shares, except to the extent of his
actual pecuniary interest therein.

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MANAGEMENT

MEMBERS OF THE BOARD OF DIRECTORS

The following summaries present information concerning the members of our Board
of Directors and executive officers who are not members of our Board of
Directors, including current membership on committees of the Board of Directors,
principal occupation or affiliations during the last five years and certain
directorships held.

SERVED
PRINCIPAL OCCUPATION HCC
NAME DURING THE PAST FIVE YEARS AGE SINCE
- ---- -------------------------- --- ------

Stephen L. Way.......... Mr. Way founded HCC in 1974 and has served as a 51 1974
Director, Chairman of the Board of Directors and
Chief Executive Officer of HCC since its
organization. He served as President of HCC from
its founding until May, 1996. Mr. Way is the
Chairman of the Executive Management Committee
and the Strategic Planning Committee. Mr. Way is
also a member of the Investment Committee and the
Senior Management Committee and a Director and
officer of various of our subsidiaries. Mr. Way
is a Director of Fresh Del Monte Produce, Inc.
(NYSE symbol: FDP) and a Director of Bradstock
Group plc. (London Stock Exchange symbol: BDK).
James M. Berry.......... Mr. Berry is the retired Vice Chairman of 70 1992
NationsBank of Texas, N.A., a subsidiary of
NationsBank N.A. (now BankAmerica Corp. (NYSE
symbol: BAC)) having served in that capacity from
August, 1988 until December, 1992. In June, 2000,
Mr. Berry retired as the Executive Vice
President, Finance of Belk Stores Services, Inc.,
a position he held since May, 1995. Mr. Berry has
served as an HCC Director since March, 1992 and
is also a member of the Audit Committee and the
Investment Committee. Mr. Berry is a Director of
Williams-Sonoma, Inc. (Nasdaq symbol: WSGC).
Frank J. Bramanti....... Mr. Bramanti is a Director and Executive Vice 44 1980
President of HCC and since 1982, has served in
various capacities, including Director,
Secretary, Chief Financial Officer and from June,
1997 to November, 1997, interim President. Mr.
Bramanti is a member of the Executive Management
Committee, the Strategic Planning Committee, the
Senior Management Committee and the Investment
Committee. Mr. Bramanti is also a Director and
officer of various of the Company's subsidiaries.
Marvin P. Bush.......... Mr. Bush is the President of Winston Capital 43 1999
Management, LLC, a registered investment adviser
which specializes in hedge fund investments, and
the founder and a Managing Director of Winston
Partners, L.P. Mr. Bush was first elected as an
HCC Director in 1999 and is also a member of the
Investment Committee. Mr. Bush is a Director of
Fresh Del Monte Produce, Inc. (NYSE symbol: FDP).
He is a member of the Board of Trustees for the
George Bush Presidential Library.

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SERVED
PRINCIPAL OCCUPATION HCC
NAME DURING THE PAST FIVE YEARS AGE SINCE
- ---- -------------------------- --- ------

Patrick B. Collins...... Mr. Collins is a retired partner of the 71 1993
international accounting firm of
PricewaterhouseCoopers LLP, where he held that
position from 1967 through 1991. Mr. Collins has
served as an HCC Director since December, 1993
and is a member of the Audit Committee. Mr.
Collins is a Director of Transcoastal Marine
Services, Inc. (Nasdaq symbol: TCMS).
James R. Crane.......... Mr. Crane is the Chairman of the Board of 46 1999
Directors and Chief Executive Officer of EGL Inc.
(Nasdaq symbol: EAGL), the company he founded in
1984. Mr. Crane was first elected as an HCC
Director in 1999 and is also a member of the
Compensation Committee.
J. Robert Dickerson..... Mr. Dickerson is an attorney and has served as an 58 1981
HCC Director since 1981. Mr. Dickerson is also
the Chairman of the Audit Committee.
Edwin H. Frank, III..... Mr. Frank is a co-founder and the Chairman of 51 1993
FileControl.Com Incorporated. Prior to 1999, Mr.
Frank was the President of Underwriters Indemnity
Holdings, Inc., a subsidiary of RLI Corporation
(NYSE symbol: RLI), and its former controlling
shareholder, having served in such capacity since
1985. Mr. Frank has served as an HCC Director
since May, 1993 and is also a member of the
Compensation Committee.
Allan W. Fulkerson...... Mr. Fulkerson is the President and a Director of 67 1997
Century Capital Management, Inc., a registered
investment advisor which specializes in the
financial services industry, and President and a
Director of Massachusetts Fiduciary Advisors,
Inc., also a registered investment advisor. In
addition, since 1976, he has served as Chairman
and Trustee of Century Shares Trust, a mutual
fund established in 1928, which invests primarily
in insurance companies and banks. Mr. Fulkerson
has served as an HCC Director since May, 1997 and
is the Chairman of the Investment Committee. Mr.
Fulkerson is a Director of Mutual Risk
Management, Ltd. (NYSE symbol: MM) and Wellington
Underwriting plc. (London Stock Exchange symbol:
WUN).
Walter J. Lack.......... Mr. Lack is an attorney and a shareholder in the 52 1981
law firm of Engstrom, Lipscomb & Lack, A
Professional Corporation in Los Angeles,
California. Mr. Lack has served as an HCC
Director since 1981 and is also the Chairman of
the Compensation Committee. Mr. Lack is a
director of Microvision, Inc. (Nasdaq symbol:
MVIS) and SuperGen Inc. (Nasdaq symbol: SUPG).

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SERVED
PRINCIPAL OCCUPATION HCC
NAME DURING THE PAST FIVE YEARS AGE SINCE
- ---- -------------------------- --- ------

Stephen J. Lockwood..... Mr. Lockwood is Chief Executive Officer of 53 1981
Stephen J. Lockwood & Co., the Vice-Chairman of
the Board of Directors and until his retirement
in December, 1999, was the Chief Executive
Officer of LDG Re since 1988. Mr. Lockwood has
served as an HCC Director since 1981. Mr.
Lockwood is a Director of four mutual funds
managed by The Dreyfus Corporation, a subsidiary
of Mellon Bank Corporation (NYSE symbol: MEL) and
a director of Affiliated Managers Group, Inc.
(NYSE symbol: AMG).
John N. Molbeck, Jr. ... Mr. Molbeck is a Director, and the President and 53 1997
Chief Operating Officer of HCC, having served in
those capacities since November, 1997. Prior to
joining HCC, Mr. Molbeck was the Managing
Director of Aon Natural Resources Group, a
subsidiary of Aon Corporation (NYSE symbol: AOC)
which specializes in energy related insurance and
reinsurance. Mr. Molbeck is a member of HCC's
Executive Management Committee, the Strategic
Planning Committee and the Investment Committee
and is the Chairman of the Senior Management
Committee. He is also a Director and officer of
various of our subsidiaries.

OTHER HCC EXECUTIVE OFFICERS WHO ARE NOT MEMBERS OF THE HCC BOARD OF DIRECTORS

SERVED
PRINCIPAL OCCUPATION HCC
NAME DURING THE PAST FIVE YEARS AGE SINCE
- ---- -------------------------- --- ------

Edward H. Ellis, Jr. ... Mr. Ellis is a Senior Vice President and the 57 1997
Chief Financial Officer of HCC. Prior to joining
HCC in October, 1997, Mr. Ellis served as a
partner with the international accounting firm of
Pricewaterhouse-Coopers LLP from November, 1988
to September, 1997 specializing in the insurance
industry. Mr. Ellis is a Certified Public
Accountant with over 34 years of public
accounting experience. Mr. Ellis is a member of
HCC's Executive Management Committee, the Senior
Management Committee, the Strategic Planning
Committee and the Investment Committee. Mr. Ellis
is also a Director and officer of various of our
subsidiaries.
Benjamin D. Wilcox...... Mr. Wilcox is a Senior Vice President of HCC and 56 1998
the President and Chief Executive Officer of
Houston Casualty and its subsidiaries, U.S.
Specialty and HCC Life. Mr. Wilcox is also the
Chairman of the Board of Directors of Avemco
Insurance. Prior to joining HCC in December,
1998, Mr. Wilcox served as a Senior Vice
President of Aon Risk Services, Inc., a
subsidiary of Aon Corporation which specializes
in marine and energy insurance and reinsurance.
Mr. Wilcox is a member of HCC's Executive
Management Committee, the Senior Management
Committee and the Strategic Planning Committee
and is also a Director and officer of various of
our other subsidiaries.

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RATIO OF EARNINGS TO FIXED CHARGES

The ratio of our earnings to our fixed charges for the periods indicated are as
follows:

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997 1996 1995
---- ----- ----- ---- -----

Ratio of earnings to fixed charges................... 3.49 15.42 11.10 9.32 6.83

For these ratios, earnings consist of income before interest expense, estimated
interest factor (33.3%) of rental expense and income taxes. Fixed charges
consist of interest expense, including amounts capitalized and estimated
interest factor (33.3%) of rental expense.

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DESCRIPTION OF COMMON STOCK

Selected provisions of HCC's organizational documents are summarized below. This
summary is not complete. You should read the organizational documents, which are
filed as exhibits to the registration statement, for other provisions that may
be important to you. In addition, you should be aware that the summary below
does not give full effect to the terms of the provisions of statutory or common
law which may affect your rights as a shareholder.

Pursuant to our Certificate of Incorporation, we have the authority to issue an
aggregate of 250,000,000 shares of common stock, par value $1.00 per share. As
of September 21, 2000, 49,619,280 shares of common stock were outstanding. As of
September 21, 2000, 6,876,734 shares of our common stock were reserved for
issuance under our various stock option plans.

COMMON STOCK

Voting rights. Each share of common stock is entitled to one vote in the
election of directors and on all other matters submitted to a vote of our
shareholders. Our shareholders do not have the right to cumulate their votes in
the election of directors.

Dividends, distributions and stock splits. Holders of our common stock are
entitled to receive dividends if, as and when such dividends are declared by our
Board of Directors out of assets legally available therefor.

Liquidation. In the event of any dissolution, liquidation, or winding up of our
affairs, whether voluntary or involuntary, after payment of our debts and other
liabilities, our remaining assets will be distributed ratably among the holders
of common stock.

Fully Paid. All shares of common stock outstanding are fully paid and
nonassessable, and all the shares of common stock to be outstanding upon
completion of this offering will be fully paid and nonassessable.

Other Rights. Holders of our common stock have no redemption or conversion
rights and no preemptive or other rights to subscribe for our securities.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS

HCC is a Delaware corporation. The Delaware General Corporation Law contains
certain provisions that could discourage potential takeover attempts and make it
more difficult for our shareholders to change management or receive a premium
for their shares.

Delaware Law

We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly-held Delaware
corporation from engaging in a business combination with an "interested
shareholder" for a period of three years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner that includes approval by at
least 66.7% of the outstanding stock not owned by the interested shareholder. A
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the shareholder. For purposes of Section
203, an "interested shareholder" is defined to include any person that is:

- the owner of 15% or more of the outstanding voting stock of the
corporation;

- an affiliate or associate of the corporation and was the owner of 15% or
more of the voting stock outstanding of the corporation, at any time
within three years immediately prior to the relevant date; and

- an affiliate or associate of the persons described in the foregoing
bullet points.

Shareholders may, by adopting an amendment to the corporation's Certificate of
Incorporation or Bylaws, elect for the corporation not to be governed by Section
203, effective 12 months after adoption. Neither our Certificate of
Incorporation nor our Bylaws exempt us from the restrictions imposed under
Section 203. It is anticipated that the provisions of Section 203 may encourage
companies interested in
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acquiring us to negotiate in advance with our Board of Directors because
shareholder approval of the transaction, as discussed above, would be
unnecessary.

Charter and Bylaw Provisions

Our Certificate of Incorporation and Bylaws provide that any action required or
permitted to be taken by our shareholders may be effected either at a duly
called annual or special meeting of the shareholders or by written consent of
the shareholders. Special meetings of shareholders may be called by the
President, the Board of Directors or by a majority of the shareholders entitled
to vote at the special meeting.

Our Certificate of Incorporation does not provide for the division of our Board
of Directors into classes. Each year at the annual meeting of shareholders, all
directors are elected to hold office until the next succeeding annual meeting of
shareholders. The number of directors is fixed by resolution of the Board, but
is required under the Bylaws to be at least seven and not more than fifteen. The
size of the board is currently fixed at twelve members.

Directors may be removed with the approval of the holders of a majority of the
shares entitled to vote at a meeting of shareholders. Directors may be removed
by shareholders with or without cause. Vacancies and newly-created directorships
resulting from any increase in the number of directors may be filled by a
majority of the directors then in office, a sole remaining director, or the
holders of a majority of the shares entitled to vote at a meeting of
shareholders.

LIMITATION OF LIABILITY; INDEMNIFICATION

Our Certificate of Incorporation contains certain provisions permitted under the
Delaware General Corporation Law relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except that a director will be
personally liable:

- for any breach of the director's duty of loyalty to us or our
shareholders;

- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- under Section 174 of the Delaware General Corporation Law relating to
unlawful stock repurchases or dividends; or

- for any transaction from which the director derives an improper personal
benefit.

These provisions do not limit or eliminate our rights or those of any
shareholder to seek non-monetary relief, such as an injunction or rescission, in
the event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws.

Our Bylaws also contain provisions indemnifying our directors and officers to
the fullest extent permitted by the Delaware General Corporation Law. We have
entered into separate indemnification agreements with our directors and officers
that may, in some cases, be broader than the specific indemnification provisions
contained in our Certificate of Incorporation, Bylaws or the Delaware General
Corporation Law. The indemnification agreements may require us, among other
things, to indemnify the officers and directors against certain liabilities,
other than liabilities arising from willful misconduct, that may arise by reason
of their status or service as directors or officers. These agreements also may
require us to advance the expenses incurred by the officers and directors as a
result of any proceeding against them as to which they could be indemnified. We
believe that these indemnification arrangements are necessary to attract and
retain qualified individuals to serve as directors and officers.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the common stock is First Union National
Bank.

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DESCRIPTION OF DEBT SECURITIES

GENERAL

The debt securities will be HCC's general unsecured obligation and will be
issued as either senior notes and debentures ("Senior Debt Securities"),
subordinated notes and debentures ("Subordinated Debt Securities"), or both. We
would issue our debt securities under one or more separate indentures, in each
case between the Company, the subsidiary guarantors (as defined later) and the
Trustee (as defined later), and in substantially the form that has been filed as
an exhibit to the registration statement of which this prospectus is a part, but
subject to any future amendments or supplements. We will issue Senior Debt
Securities under a Senior Indenture and Subordinated Debt Securities under a
Subordinated Indenture. We refer to the Senior Indenture and the Subordinated
Indenture below singularly as the Indenture or together as the Indentures. We
refer to the Senior Trustee and the Subordinated Trustee below individually as a
Trustee and together as the Trustees.

We have summarized selected provisions of the Indentures below. This summary is
not complete. The particular terms of the debt securities we might offer and the
extent to which these general provisions apply will be described in a prospectus
supplement relating to the offered debt securities. We have included the forms
of the Indentures under which the offered debt securities will be issued as
exhibits to the registration statement, and you should read the Indentures for
provisions that may be important to you.

The payment obligations of the Company under any debt securities may, if
specified in any prospectus supplement, be fully and unconditionally guaranteed
by one or more of our subsidiaries as Subsidiary Guarantors. If any series of
debt securities is guaranteed by one of our subsidiaries, the applicable
prospectus supplement will identify each Subsidiary Guarantor and describe such
subsidiary guarantee, including the circumstances in which it may be released.
Unless specified otherwise in any prospectus supplement, any guarantee of debt
securities by one or more of our subsidiaries will be on a full and
unconditional basis.

Unless we provide otherwise in any prospectus supplement, the Indentures do not
limit the aggregate principal amount of debt securities that we can issue. We
may issue debt securities in one or more series and in differing aggregate
principal amounts. We may issue debt securities in any currency or currency unit
that we may designate. We may issue debt securities in registered or global
form. The rights of holders of debt securities will be limited to our assets and
the articles of any Subsidiary Guarantors.

Except in the case of any debt securities that are guaranteed by our
subsidiaries, the debt securities will not be obligations of any of our
subsidiaries. Except as may be described in any prospectus supplement, the
Indentures do not limit the ability of the Company's subsidiaries to incur debt
in the future. The right of the Company to participate in the assets of any
subsidiary (and thus the ability of holders of the debt securities to benefit
indirectly from such assets) is generally subject to the prior claims of
creditors, including trade creditors, of that subsidiary, except to the extent
that the Company is recognized as a creditor of such subsidiary, in which case
the Company's claims would still be subject to any security interest of other
creditors of such subsidiary. Unless the debt securities are guaranteed by the
Company's subsidiaries, the debt securities will be structurally subordinated to
creditors, including trade creditors, of our subsidiaries with respect to the
assets of the subsidiaries against which such creditors have a more direct
claim.

The Senior Debt Securities will rank equally with all of our other senior debt,
if any. The Subordinated Debt Securities will have a junior position to all of
our senior debt, if any. Other than as may be described in a prospectus
supplement, neither Indenture will contain any covenant or provision that
affords debt holders protection in the event that we enter into a highly
leveraged transaction. These same holders would not have any right to require us
to repurchase the debt securities, in the event that the credit rating of any
debt securities declined as a result of our involvement in a takeover,
recapitalization, similar restructuring or otherwise.

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A prospectus supplement including the Indentures, filed as an exhibit, relating
to any series of debt securities which we may offer will include specific terms
relating to the offering. These terms will include some or all of the following:

- the title and type of debt securities being offered, which may include
medium term notes;

- the total principal amount of debt securities being offered and the price
at which they are being offered;

- whether the debt securities will be issued in one or more forms of global
securities and whether such global securities are to be issuable in
temporary global form or permanent global form;

- whether the debt securities will be guaranteed by any of the subsidiaries
of the Company;

- the dates on which the principal of, and premium, if any, on the offered
debt securities is payable;

- the interest rate or the method of determining the interest rate;

- the date from which interest will accrue;

- the interest payment dates;

- the place where the principal, premium and interest is payable;

- any optional redemption periods;

- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;

- whether the debt securities will be convertible into shares of common
stock or exchangeable for other of our securities, and if so, the terms
of conversion or exchange;

- the currency or currencies, if other than U.S. dollars, in which
principal payments or other payments will be payable;

- events causing acceleration of maturity;

- any provisions granting special rights to holders when a specified event
occurs;

- any changes to or additional events of default or covenants;

- any material United States federal income tax consequences and any
special tax implications of ownership and disposition of the debt
securities; and

- any other terms of the debt securities.

The debt securities will be issued in registered form. There will be no service
charge for any registration, transfer or exchange of debt securities. We may,
however, require payment of an amount that would be sufficient to cover any tax
or other governmental charge we may incur. We may sell debt securities at a
discount or premium (which may be substantial) below or above their stated
principal amount, either bearing no interest or bearing interest at a rate that
may be below the market rate at the time we issue the debt securities.

We will describe any material United States federal income tax consequences and
other special considerations applicable to discounted debt securities in the
prospectus supplement. If we sell any of the offered debt securities for any
foreign currency or currency unit, or if any of the principal, premium or
interest, if any, is payable on any of the offered debt securities, the
restrictions, elections, tax consequences, specific terms and other information
pertaining to the offered debt securities and such foreign currency or foreign
currency unit will be set forth in the prospectus supplement describing such
offered debt securities.

DENOMINATIONS

We will issue the debt securities in registered form of $1,000 each or integral
multiples thereof.

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SUBORDINATION

Under the Subordinated Indenture, payment of the principal, interest and any
premium on the Subordinated Debt Securities generally will be subordinated and
junior in right of payment to the prior payment in full of all Senior
Indebtedness. The Subordinated Indenture defines Senior Indebtedness to include
all notes or other unsecured evidences of indebtedness, including guarantees of
the Company for money borrowed by the Company, not expressed to be subordinate
or junior in right of payment to any other indebtedness of the Company and all
extensions of such indebtedness. The Subordinated Indenture provides that no
payment of principal, interest and any premium on the Subordinated Debt
Securities may be made in the event:

- of any insolvency, bankruptcy or similar proceeding involving the Company
or our property;

- we fail to pay the principal, interest, any premium or any other amounts
on any Senior Indebtedness when due;

- of a default (other than a payment default with respect to the Senior
Indebtedness) that imposes a payment blockage on the Subordinated Debt
Securities for a maximum of 179 days at any one time, unless the Event of
Default has been cured or waived or shall no longer exist; or

- the principal and any accrued interest on any series of Subordinated Debt
Securities has been declared due and payable upon an Event of Default
described in the Subordinated Debt Indenture and such declaration has not
been rescinded.

In the event of any voluntary or involuntary bankruptcy, insolvency,
reorganization or other similar proceeding relating to us, all of our
obligations to holders of Senior Indebtedness will be entitled to be paid in
full before any payment shall be made on account of the principal of, or
premium, if any, or interest, if any, on the Subordinated Debt Securities of any
series. In the event of any such bankruptcy, insolvency, reorganization or other
similar proceeding, holders of the Subordinated Debt Securities of any series,
together with holders of indebtedness ranking equally with the Subordinated Debt
Securities, shall be entitled, ratably, to be paid amounts that are due to them,
but only from assets remaining after we pay in full the amounts that we owe on
our Senior Indebtedness. We will make these payments before we make any payment
or other distribution on account of any indebtedness that ranks junior to the
Subordinated Debt Securities. However, if we have paid in full all of the sums
that we owe with respect to our Senior Indebtedness and creditors in respect of
our obligations associated with such derivative products have not received
payment in full of amounts due to them, then the available remaining assets
shall be applied to payment in full of those obligations before any payment is
made on the Subordinated Debt Securities. If we are in default on any of our
Senior Indebtedness or if any such default would occur as a result of certain
payments, then we may not make any payments on the Subordinated Debt Securities
or effect any exchange or retirement of any of the Subordinated Debt Securities
unless and until such default has been cured or waived or otherwise ceases to
exist.

No provision contained in the Subordinated Indenture or the Subordinated Debt
Securities affects the absolute and unconditional obligation of the Company to
pay when due, principal of, premium, if any, and interest on the Subordinated
Debt Securities and neither the Subordinated Indenture nor the Subordinated Debt
Securities prevent the occurrence of any default or Event of Default under the
Subordinated Indenture or limit the rights of the Subordinated Trustee or any
holder of Subordinated Debt Securities, subject to the three preceding
paragraphs, to pursue any other rights or remedies with respect to the
Subordinated Debt Securities. As a result of these subordination provisions, in
the event of the liquidation, bankruptcy, reorganization, insolvency,
receivership or similar proceeding or an assignment for the benefit of our
creditors or any of our subsidiaries or a marshaling of assets or liabilities of
the Company and its subsidiaries, holders of Subordinated Debt Securities may
receive ratably less than other creditors.

If this prospectus is being delivered in connection with a series of
Subordinated Debt Securities, the accompanying prospectus supplement or the
information incorporated herein by reference will set forth the approximate
amount of Senior Indebtedness outstanding as of the end of the most recent
fiscal quarter.

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EVENTS OF DEFAULT; REMEDIES

The following are defined as Events of Default under each Indenture:

- our failure to pay principal or any premium on any debt security when
due;

- our failure to pay any interest on any debt security when due, continued
for 30 days;

- our failure to deposit any mandatory sinking fund payment when due,
continued for 30 days;

- our failure to perform any other covenant or warranty in the Indenture
that continues for 90 days after written notice;

- our certain events of bankruptcy, insolvency or reorganization; and

- any other Event of Default as may be specified with respect to debt
securities of such series.

An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities. The Trustee may withhold notice to the holders of debt securities of
any default (except in the payment of principal or interest) if the Trustee
considers withholding of notice to be in the best interest of the holders. If an
Event of Default occurs, either the Trustee or the holders of at least 25% of
the principal amount of the outstanding debt securities may declare the
principal amount of the debt securities of the applicable series to be due and
payable immediately. If this happens, subject to certain conditions, the holders
of a majority of the principal amount of the outstanding debt securities of such
series can void the declaration. These conditions include the requirement that
we have paid or deposited with the Trustee a sum sufficient to pay all overdue
principal and interest payments on the series of debt securities subject to the
default. If an Event of Default occurs due to certain events of bankruptcy,
insolvency or reorganization, the principal amount of the outstanding debt
securities of all series will become immediately due and payable without any
declaration or other act on the part of either Trustee or any holder.

Depending on the terms of our indebtedness, an Event of Default under an
Indenture may cause a cross default on our other indebtedness. Other than its
duties in the case of default, a Trustee is not obligated to exercise any of its
rights or powers under any Indenture at the request, order or direction of any
holder or group of holders unless the holders offer the Trustee reasonable
indemnity. If the holders provide reasonable indemnification, the holders of a
majority of the principal amount of any series of debt securities may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any power conferred upon the Trustee for any series
of debt securities. The holders of a majority of the principal amount
outstanding of any series of debt securities may, on behalf of all holders of
such series, waive any past default under the Indenture, except in the case of a
payment of principal or interest default. We are required to provide to each
Trustee an annual statement of the Company's performance of our obligations
under the Indenture and any statement of default, if applicable.

COVENANTS

Under the Indentures, we will:

- pay the principal, interest and any premium on the debt securities when
due;

- maintain a place of payment;

- deliver a report to the Trustee at the end of each fiscal year reviewing
the Company's obligations under the Indentures; and

- deposit sufficient funds with any payment agent on or before the due date
for any principal, interest or any premium.

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MODIFICATION OR AMENDMENT OF INDENTURES

Under each Indenture, all rights and obligations and the rights of the holders
may be modified or amended with the consent of the holders of a majority in
aggregate principal amount of the outstanding debt securities of each series
affected by the modification or amendment. No modification or amendment may,
however, be made without the consent of the holders of any debt securities if
the following provisions are affected:

- change in the stated maturity date of the principal payment or
installment of any principal payment;

- reduction in the principal amount or premium on, or interest on any of
the debt securities;

- reduction in the percentage required for modifications or amendment to be
effective against any holder of any debt securities.

CONSOLIDATION, MERGER AND SALE OF ASSETS

Each Indenture generally permits a consolidation or merger between us and
another corporation. Each Indenture also permits us to sell all or substantially
all of our property and assets. If this happens, the surviving or acquiring
company will assume all of our responsibilities and liabilities under the
Indentures, including the payment of all amounts due on the debt securities and
the performance of the covenants in the Indentures. We will only consolidate or
merge with or into any other company or sell all, or substantially all, of our
assets according to the terms and conditions of the Indentures. The surviving or
acquiring company will be substituted for us in the Indentures with the same
effect as if it had been an original party to the Indenture. Thereafter, the
successor company may exercise our rights and powers under any Indenture, in our
name or in its own name. Any act or proceeding our Board of Directors or any of
our officers are required or permitted to do may be done by the board of
directors or officers of the successor company. If we sell all or substantially
all of our assets, we shall be released from all our liabilities and obligations
under any Indenture and under the debt securities.

DISCHARGE AND DEFEASANCE

We will be discharged from our obligations under the debt securities of any
series at any time if we irrevocably deposit with the Trustee enough cash or
U.S. government securities to pay the principal, interest, any premium and any
other sums due through the stated maturity date or redemption date of the debt
securities of the series. In this event, the Company will be deemed to have paid
and discharged the entire indebtedness on all outstanding debt securities of the
series. Accordingly, our obligations under the applicable Indenture and the debt
securities of such series to pay any principal, premium, or interest, if any,
shall cease, terminate and be completely discharged. The holders of any debt
securities shall then only be entitled to payment out of the money or U.S.
government securities deposited with the Trustee and such holders of debt
securities of such series will not be entitled to the benefits of the Indenture
except as relate to the registration, transfer and exchange of debt securities
and the replacement of lost, stolen or mutilated debt securities.

PAYMENT AND PAYING AGENTS

We will pay the principal, interest and premium on fully registered securities
at designated places. We will pay by check mailed to the person in whose name
the debt securities are registered on the day specified in the Indentures or any
prospectus supplement. We will make debt securities payments in other forms at a
place we designate and specify in a prospectus supplement.

FORM, EXCHANGE, REGISTRATION AND TRANSFER

Fully registered debt securities may be transferred or exchanged at the
corporate trust office of the Trustee or at any other office or agency we
maintain for such purposes without the payment of any service charge except for
any tax or governmental charge. The registered securities must be duly endorsed
or
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accompanied by a written instrument of transfer, if required by us or the
security registrar. We will describe any procedures for the exchange of debt
securities for other debt securities of the same series in the prospectus
supplement for that offering.

GLOBAL SECURITIES

We may issue the debt securities of a series in whole or in part in the form of
one or more global certificates that will be deposited with a depositary we
identify in a prospectus supplement. We may issue global securities in
registered form and in either temporary or permanent form. Unless and until it
is exchanged in whole or part for the individual debt securities it represents,
the depositary or its nominee may not transfer a global security except as a
whole. The depositary for a global security and its nominee may only transfer
the global security between themselves or their successors. We will make
principal, premium and interest payments on global securities to the depositary
or the nominee it designates as the registered owner for such global securities.
The depositary or its nominee will be responsible for making payments to you and
other holders of interests in the global securities. We and the paying agents
will treat the persons in whose names the global securities are registered as
the owners of such global securities for all purposes. Neither we nor the paying
agents have any direct responsibility or liability for the payment of principal,
premium or interest to owners of beneficial interests in the global securities.

DESCRIPTION OF WARRANTS

We may issue warrants, including warrants to purchase common stock, debt
securities or other securities. We may issue warrants independently or together
with other securities that may be attached to or separate from the warrants. We
will issue each series of warrants under a separate warrant agreement that will
be entered into between us and a bank or trust company, as warrant agent, and
will be described in the prospectus supplement relating to the particular issue
of warrants. The warrant agent will act solely as an agent of the Company in
connection with the warrant of such series and will not assume any obligation or
relationship of agency for or with holders or beneficial owners of warrants. The
following describes certain general terms and provisions of the warrants we may
offer. We will set forth further terms of the warrants and the applicable
warrant agreement in the applicable prospectus supplement.

DEBT WARRANTS

The applicable prospectus supplement will describe the terms of any debt
warrants, including the following:

- the title of such debt warrants;

- the offering price for such debt warrants;

- the aggregate number of such debt warrants;

- the designation and terms of the debt securities purchasable upon
exercise of such debt warrants;

- if applicable, the designation and terms of the securities with which
such debt warrants are issued and the number of such debt warrants issued
with each security;

- if applicable, the date from and after which such debt warrants and any
securities issued therewith will be separately transferable;

- the principal amount of debt securities purchasable upon exercise of a
debt warrant and the price at which such principal amount of debt
securities may be purchased upon exercise;

- the date on which the right to exercise such debt warrants shall commence
and the date on which such right shall expire;

- if applicable, the minimum or maximum amount of such debt warrants which
may be exercised at any one time;

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- whether the debt warrants represented by the debt warrant certificates or
debt securities that may be issued upon exercise of the debt warrants
will be issued in registered form;

- information with respect to book-entry procedures, if any;

- the currency, currencies or currency units in which the offering price,
if any, and the exercise price are payable;

- if applicable, a discussion of certain United States federal income tax
considerations;

- the antidilution provisions of such debt warrants, if any;

- the redemption or call provisions, if any, applicable to such debt
warrant; and

- any additional terms of the debt warrants, including terms, procedures
and limitations relating to the exchange and exercise of such debt
warrants.

COMMON STOCK WARRANTS

The applicable prospectus supplement will describe the terms of any warrants
exchangeable for common stock, including:

- the title of such warrants;

- the offering price of such warrants;

- the aggregate number of such warrants;

- the designation and terms of the common stock issued by the Company
purchasable upon exercise of such warrants;

- if applicable, the designation and terms of the securities with which
such warrants are issued and the number of such warrants issued with each
such security;

- if applicable, the date from and after which such warrants and any
securities issued therewith will be separately transferable;

- the number of shares of common stock issued by the Company purchasable
upon exercise of the warrants and the price at which such shares may be
purchased upon exercise;

- the date on which the right to exercise such warrants shall commence and
the date on which such right shall expire;

- if applicable, the minimum or maximum amount of such warrants which may
be exercised at any one time;

- the currency, currencies or currency units in which the offering price,
if any, and the exercise price are payable;

- if applicable, a discussion of certain United States federal income tax
considerations;

- the antidilution provisions of the warrants, if any;

- the redemption or call provisions, if any, applicable to such common
stock warrant; and

- any additional terms of the common stock warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
warrants.

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PLAN OF DISTRIBUTION

We may distribute the securities described in this prospectus or any prospectus
supplement from time to time in one or more transactions at a fixed price or
prices (which may be changed from time to time), at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Each prospectus supplement will describe the method of
distribution of the securities offered under that prospectus supplement.

We may sell securities directly, through agents designated from time to time,
through underwriting syndicates led by one or more managing underwriters or
through one or more underwriters acting alone. Each prospectus supplement will
describe the terms of the securities to which the prospectus supplement relates,
the name or names of any underwriters or agents with whom we have entered into
arrangements with respect to the sale of such securities, the public offering or
purchase price of such securities and the net proceeds we will receive from such
sale.

In addition, each prospectus supplement will describe any underwriting discounts
and other items constituting underwriters' compensation, any discounts and
commissions allowed or paid to dealers, if any, any commissions allowed or paid
to agents, and the securities exchange or exchanges, if any, on which the
subject securities will be listed.

Dealer trading may take place in certain of the securities, including securities
not listed on any securities exchange. If so indicated in the applicable
prospectus supplement, we will authorize underwriters or agents to solicit
offers by certain institutions to purchase securities from us pursuant to
delayed delivery contracts providing for payment and delivery at a future date.
Institutions with which such contracts may be made include, among others:

- commercial and savings banks;

- insurance companies;

- pension funds;

- investment companies; and

- educational and charitable institutions.

In all cases, the purchasing institutions must be approved by us. Unless
otherwise set forth in the applicable prospectus supplement, the obligations of
any purchaser under any contract will not be subject to any conditions except
that (i) the purchase of the securities will not at the time of delivery be
prohibited under the laws of the jurisdiction to which such purchaser is subject
and (ii) if the securities are also being sold to underwriters acting as
principals for their own account, the underwriters will have purchased such
securities not sold for delayed delivery. The underwriters and such other
persons will not have any responsibility in respect of the validity or
performance of the contracts.

Any underwriter or agent participating in the distribution of the securities may
be deemed to be an underwriter, as that term is defined in the Securities Act,
of the offered securities and sold and any discounts or commissions received by
them, and any profit realized by them on the same or resale of the securities
may be deemed to be underwriting discounts and commissions under the Securities
Act. Certain of any such underwriters and agents, including their associates,
may be customers of, engage in transactions with and perform services for us and
our subsidiaries in the ordinary course of business.

Except as indicated in the applicable prospectus supplement, the securities are
not expected to be listed on a securities exchange, except for the common stock,
which is listed on the NYSE, and any underwriters or dealers will not be
obligated to make a market in securities. We cannot predict the activity or
liquidity of any trading in the securities.

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54

stabilize, maintain, or otherwise affect the price of those securities, such
intention and a description of such transactions will be described in the
prospectus supplement.

CERTAIN LEGAL MATTERS

Unless otherwise indicated in the applicable prospectus supplement, certain
legal matters in connection with the securities will be passed upon for HCC by
Haynes and Boone, LLP, HCC's legal counsel. Arthur S. Berner, a partner with
Haynes and Boone, LLP, has options to acquire 22,500 shares of HCC's common
stock at an average exercise price of $17.76.

EXPERTS

The financial statements included in this prospectus for the year ended December
31, 1999 have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

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55

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

[HCC LOGO]

HCC Insurance Holdings, Inc.

Common Stock
Senior Debt Securities
Subordinated Debt Securities
Warrants

PROSPECTUS

, 2000

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
56

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND
IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION DATED SEPTEMBER 22, 2000

PROSPECTUS [HCC LOGO]

$[ ]

HCC INSURANCE HOLDINGS, INC.
DEBT SECURITIES
---------------------

HCC CAPITAL TRUST I
HCC CAPITAL TRUST II

CAPITAL SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
HCC INSURANCE HOLDINGS, INC.

THE HCC TRUSTS:

- will issue and sell capital securities (representing undivided beneficial
interests in a trust) to the public;

- will issue and sell common securities to HCC; and

- will use the proceeds from these sales to buy a series of junior
subordinated debentures from HCC with terms that correspond to the
capital securities.

HCC:

- will pay principal and interest on the junior subordinated debentures,
subject to payment on its more senior debt;

- may choose to terminate a trust and distribute the junior subordinated
debentures pro rata to the holders of capital securities and common
securities;

- will fully and unconditionally guarantee the capital securities on a
junior subordinated level based on:

- its obligations to make payments on the corresponding junior
subordinated debentures;

- its obligations under the capital securities guarantee (its payment
obligations are subordinated to payment on all of its Senior Debt); and

- its obligations under the trust agreement; and

- may also issue and sell other debt securities to the public.
---------------------

INVESTMENT IN OUR SECURITIES INVOLVES RISK. SEE THE RISK FACTORS SECTION
BEGINNING ON PAGE 4.
---------------------

The date of this prospectus is , 2000.
57

TABLE OF CONTENTS

PAGE
----

About Forward-Looking Statements............................ i
About This Prospectus....................................... 1
Where You Can Find More Information......................... 1
The Company................................................. 3
Risk Factors................................................ 4
The HCC Trusts.............................................. 8
Use of Proceeds............................................. 10
Selected Financial Data..................................... 11
Business.................................................... 13
Ratio of Earnings to Fixed Charges.......................... 35
Description of Junior Subordinated Debt Securities.......... 36
Description of Capital Securities........................... 46
Description of Guarantees................................... 56
Relationship Among the Capital Securities................... 58
Book-Entry Issuance......................................... 60
Plan of Distribution........................................ 63
Certain Legal Matters....................................... 64
Experts..................................................... 64
Financial Statements........................................ F-1

ABOUT FORWARD-LOOKING STATEMENTS

i
58

ABOUT THIS PROSPECTUS

As used in this prospectus, unless otherwise required by the context, the terms
"we", "us", "our" and the "Company" refer to HCC Insurance Holdings, Inc. and
its consolidated subsidiaries, and the term "HCC" refers only to HCC Capital
Holdings, Inc. References to a "trust" or an "HCC Trust" refer to either HCC
Capital Trust I or HCC Capital Trust II, which are the Delaware statutory
business trusts that HCC has formed to issue the securities which may be issued
under this prospectus.

This prospectus is part of a registration statement that we have filed with the
Securities and Exchange Commission (the "SEC") using a "shelf" registration
process. Under the shelf registration process, we may offer any combination of
the securities described in this prospectus in one or more offerings with a
total offering price of up to $300,000,000. This prospectus provides you with a
general description of securities we may offer. Each time we use this prospectus
to offer securities, we will provide a prospectus supplement that will contain
specific information about the terms of that offering. The prospectus supplement
may also add, update or change information contained in this prospectus. Unless
we provide otherwise in the prospectus supplement, HCC may redeem its debt
securities for cash, or cause the trusts to liquidate and give investors HCC's
debt securities in place of the HCC Trusts' capital securities. Please carefully
read this prospectus, any prospectus supplement and the documents incorporated
by reference in this prospectus together with the additional information
described under "Where You Can Find More Information" and "Risk Factors" before
you make an investment decision.

WHERE YOU CAN FIND MORE INFORMATION

You may also obtain copies of the documents at prescribed rates by writing to
the Public Reference Room of the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549.

1
59

documents listed below and any future filings we make with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until
we terminate the offering.

- Our Annual Report on Form 10-K for the year ended December 31, 1999;

- Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
and

- Our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

Any person, including any beneficial owner, may request a copy of these filings,
at no cost, by writing or telephoning us at the following address:

Investor Relations
HCC Insurance Holdings, Inc.
13403 Northwest Freeway
Houston, TX 77040
713-690-7300

2
60

THE COMPANY

Our insurance companies are risk-bearing and focus their underwriting activities
on providing insurance and reinsurance in the following areas:

- accident and health;

- aviation;

- marine and offshore energy;

- medical stop-loss;

- property; and

- workers' compensation.

Our underwriting agencies are non-risk bearing and underwrite on behalf of our
insurance companies and other insurance companies. Our underwriting agencies
specialize in:

- aviation insurance;

- medical stop-loss insurance;

- occupational accident insurance;

- workers' compensation insurance; and

- a variety of accident and health related insurance and reinsurance
products.

Our intermediary subsidiaries are non-risk bearing and provide insurance and
reinsurance brokerage services for our insurance company subsidiaries and our
clients. These operations consist of:

- marketing;

- placing;

- consulting on; and

- servicing risks.

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61

RISK FACTORS

OUR RESULTS MAY FLUCTUATE AS A RESULT OF MANY FACTORS.

The results of companies in the insurance industry historically have been
subject to significant fluctuations and uncertainties. The industry's
profitability can be affected significantly by

- volatile and unpredictable developments (including catastrophes);

- changes in reserves resulting from the general claims and legal
environments as different types of claims arise and judicial
interpretations relating to the scope of insurers' liability develop;

- fluctuations in interest rates and other changes in the investment
environment, which affect returns on invested capital; and

- inflationary pressures that affect the size of losses.

OUR LEVEL OF BUSINESS AND PROFITABILITY IS AFFECTED BY THE AVAILABILITY OF
REINSURANCE TO REINSURE OUR RISKS.

WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION, IF AT ALL.

We purchase reinsurance by transferring part of the risk we have assumed (known
as ceding) to a reinsurance company in exchange for part of the premium we
receive in connection with the risk. Although reinsurance makes the reinsurer
liable to us to the extent the risk is transferred or ceded to the reinsurer, it
does not relieve us (the reinsured) of our liability to our policyholders, or in
cases where we are a reinsurer, to our reinsureds. Accordingly, we bear credit
risk with respect to our reinsurers. We cannot assure you that our reinsurers
will pay all of our reinsurance claims, or that they will pay our claims on a
timely basis. In 1999, we recorded charges against our earnings to account for
the insolvency of one of our significant reinsurers and for the settlement of
another reinsurer's liabilities with us.

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62

WE FACE SIGNIFICANT COMPETITIVE PRESSURES IN OUR BUSINESSES.

AS A PROPERTY AND CASUALTY INSURER, WE FACE LOSSES FROM CATASTROPHES.

OUR INTERNATIONAL OPERATIONS EXPOSE US TO EXCHANGE RATE RISKS.

WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION.

- approval of policy forms and premium rates;

- standards of solvency, including risk-based capital measurements;

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63

- licensing of insurers and their agents;

- restrictions on the nature, quality and concentration of investments;

- restrictions on the ability of our insurance company subsidiaries to pay
dividends to us;

- restrictions on transactions between insurance company subsidiaries and
their affiliates;

- restrictions on the size of risks insurable under a single policy;

- requiring deposits for the benefit of policyholders;

- requiring certain methods of accounting;

- periodic examinations of our operations and finances;

- prescribing the form and content of records of financial condition
required to be filed; and

- requiring reserves for unearned premium, losses and other purposes.

WE ARE RATED BY A.M. BEST AND STANDARD & POOR'S, AND A DECLINE IN THESE RATINGS
COULD ADVERSELY AFFECT OUR OPERATIONS.

OUR ACTUAL CLAIMS LOSSES MAY EXCEED OUR RESERVES FOR CLAIMS.

6
64

A SIGNIFICANT AMOUNT OF OUR ASSETS ARE INVESTED IN FIXED INCOME SECURITIES AND
ARE SUBJECT TO MARKET FLUCTUATIONS.

MOST STATES ASSESS OUR INSURANCE COMPANY SUBSIDIARIES TO PROVIDE FUNDS FOR
FAILING INSURANCE COMPANIES AND THESE ASSESSMENTS COULD BECOME MATERIAL.

IF WE DO NOT SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES, OUR FINANCIAL RESULTS
MAY BE ADVERSELY AFFECTED.

We have acquired a number of other companies during the past several years, and
will continue to consider possible acquisitions. The process of integrating
acquired companies may have a material adverse effect our revenue and results of
operations. Such acquisitions could divert our attention away from current
operations. We may also have to adjust the loss reserves and other operating
policies in order to bring them into line with those of our operations, and
these adjustments could adversely affect our financial condition. In addition,
these acquisitions could cause us to incur certain restructuring charges as
these operations are integrated with ours. They could also have a material
adverse effect on employee morale and on the ability of the combined companies
to retain key management and customers.

7
65

WE ARE AN INSURANCE HOLDING COMPANY AND, THEREFORE, MAY NOT BE ABLE TO RECEIVE
DIVIDENDS IN NEEDED AMOUNTS.

THE HCC TRUSTS

Each HCC Trust is a statutory business trust that we have formed under Delaware
law. For each trust there is a trust agreement signed by HCC as depositor, by
First Union National Bank, as property trustee, and by First Union Trust
Company, N.A., as Delaware trustee. For each trust there is also a certificate
of trust filed with the Delaware Secretary of State. When we are ready to issue
and sell securities through the trust, the trust agreement will be amended to
read substantially like the form of amended and restated trust agreement that is
filed with the SEC as an exhibit to the registration statement of which this
prospectus is a part. Each trust agreement will be qualified as an indenture
under the Trust Indenture Act of 1939.

THE ISSUANCE AND SALE OF THE CAPITAL SECURITIES AND COMMON SECURITIES

We have created each HCC Trust solely to:

- issue and sell its capital securities and common securities, which
represent proportionate beneficial ownership interests in that HCC Trust
and its assets;

- use the proceeds from the sale of the capital securities and common
securities to buy from HCC a series of HCC's junior subordinated debt
securities, which will be the only assets of that HCC Trust;

- maintain its status as a grantor trust for federal income tax purposes;
and

- engage in only those other activities necessary or convenient to
accomplish the purposes listed above.

Because the HCC Trusts' only assets will be junior subordinated debt securities
that we issue to them, our payments on the junior subordinated debt securities
will be the only source of funds to be paid to purchasers or owners of the
capital securities and common securities. Each of the HCC Trusts is a separate
legal entity, so the assets of one will not be available to satisfy the
obligations of the other trust or any other similar trust HCC may create.

We will acquire and own all of the common securities of each HCC Trust. The
common securities will have an aggregate liquidation amount of at least 3% of
the total capital of each HCC Trust. The remainder, representing up to 97% of
the ownership interests in the HCC Trust, will be capital securities of the HCC
Trust that may be sold to the public. The common securities and the capital
securities will have substantially the same terms, including the same priority
of payment and liquidation amount, and will receive proportionate payments from
the HCC Trust in respect of distributions and payments upon liquidation,
redemption or otherwise at the same times, with one exception: if we default on
the junior subordinated debt securities that we issue to that HCC Trust and do
not cure the default within the times specified in the indenture governing the
issuance of the junior subordinated debt securities, our rights to payments as
holder of the common securities will be subordinated to the rights of the
holders of the capital securities. See "Description of Capital
Securities -- Subordination of Common Securities."

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66

Unless we say otherwise in the applicable prospectus supplement, each HCC Trust
will have a term of approximately 50 years. However, an HCC Trust may terminate
earlier as provided in the applicable trust agreement and the prospectus
supplement.

Each HCC Trust's business and affairs will be conducted by its trustees, whom
we, as holder of the common securities, will appoint. Unless we say otherwise in
the applicable prospectus supplement, the trustees for each HCC Trust will be:

- First Union National Bank, as the property trustee; and

- First Union Trust Company, N.A., as the Delaware trustee.

We refer to the property trustee and the Delaware trustee together as the
"issuer trustees." First Union National Bank, as property trustee, will act as
sole indenture trustee under each trust agreement for purposes of compliance
with the Trust Indenture Act. Unless we say otherwise in the applicable
prospectus supplement, First Union National Bank will also act as trustee under
our guarantee agreement relating to the capital securities. See "Description of
Guarantees" and "Description of Debt Securities -- Certain Provisions Relating
to Junior Subordinated Debentures Issued to the HCC Trusts."

As the holder of the common securities of each HCC Trust, we will ordinarily
have the right to appoint, remove or replace either issuer trustee for each HCC
Trust. However, if we are in default with respect to the corresponding junior
subordinated debt securities issued to that HCC Trust (and we have not cured
that default within the time specified in the indenture), then the holders of a
majority in liquidation amount of that HCC Trust's outstanding capital
securities will be entitled to appoint, remove or replace either or both issuer
trustees. In no event will the holders of the capital securities have the right
to vote to appoint, remove or replace the administrators. We retain that right
exclusively as the holder of the common securities. The duties and obligations
of each issuer trustee are governed by the applicable trust agreement.

Pursuant to the indenture and the trust agreements, we promise to pay all fees
and expenses related to each HCC Trust and the offering of the capital
securities and will pay, directly or indirectly, all ongoing costs, expenses and
liabilities of each HCC Trust, except obligations under the capital securities
and the common securities.

The HCC Trusts have no separate financial statements. Separate financial
statements would not be material to holders of the capital securities because
the HCC Trusts have no independent operations. They exist solely for the limited
functions summarized above. We will guarantee the capital securities as
described later in this prospectus.

The principal executive office of each HCC Trust is 13403 Northwest Freeway,
Houston, Texas 77040, and its telephone number is (713) 690-7300.

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67

USE OF PROCEEDS

Each HCC Trust will use all of the proceeds it receives from the sale of its
capital securities and common stock to purchase from us the junior subordinated
debentures that will provide the funds for that HCC Trust's payments to
purchasers of its capital securities and common securities. Except as otherwise
described in the applicable prospectus supplement, we intend to use the net
proceeds from the sale of our securities (either to the HCC Trusts or directly
to the public) for general corporate purposes, including but not limited to, the
following purposes:

- contribute capital to insurance company subsidiaries;

- make acquisitions;

- make capital expenditures

- provide working capital;

- purchase equity or fixed income investments;

- repay or refinance debt or other corporate obligations

- repurchase and redeem securities

Pending any specific application, we may initially invest funds in short-term
marketable securities or apply them to the reduction of short-term indebtedness.

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SELECTED FINANCIAL DATA

FOR THE YEARS ENDED DECEMBER 31,(1)
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------

STATEMENT OF EARNINGS DATA:
Revenue
Net earned premium.................... $141,362 $143,100 $162,571 $170,068 $158,632
Management fees....................... 90,713 74,045 51,039 28,651 25,373
Commission income..................... 54,552 38,441 24,209 21,477 21,053
Net investment income................. 30,933 29,335 27,587 23,593 21,757
Net realized investment gain (loss)... (4,164) 845 (328) 8,341 1,636
Other operating income................ 28,475 22,268 15,239 18,656 10,371
-------- -------- -------- -------- --------
Total revenue................. 341,871 308,034 280,317 270,786 238,822
Expense
Loss and loss adjustment expenses..... 109,650 91,302 96,514 114,464 105,374
Operating expense
Policy acquisition costs........... 8,177 10,978 13,580 8,218 10,634
Compensation expense............... 77,488 56,077 51,458 42,102 48,162
Provision for reinsurance.......... 43,462 -- -- -- --
Restructuring expense.............. 5,489 -- -- -- --
Other operating expense............ 47,247 36,063 31,628 26,382 26,540
Merger expense..................... -- 107 8,069 26,160 --
-------- -------- -------- -------- --------
Total operating expense....... 181,863 103,225 104,735 102,862 85,336
Interest expense...................... 12,964 6,021 6,004 4,993 6,471
-------- -------- -------- -------- --------
Total expense................. 304,477 200,548 207,253 222,319 197,181
-------- -------- -------- -------- --------
Earnings before income tax
provision.......................... 37,394 107,486 73,064 48,467 41,641
Income tax provision.................. 12,271 35,208 23,305 9,885 9,896
-------- -------- -------- -------- --------
Net earnings.................. $ 25,123 $ 72,278 $ 49,759 $ 38,582 $ 31,745
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE DATA:
Earnings per share(2)................. $ 0.51 $ 1.51 $ 1.06 $ 0.86 $ 0.75
======== ======== ======== ======== ========
Weighted average shares
outstanding(2)..................... 49,061 47,920 46,995 44,795 42,577
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE DATA:
Earnings per share(2)................. $ 0.51 $ 1.48 $ 1.03 $ 0.84 $ 0.74
======== ======== ======== ======== ========
Weighted average shares
outstanding(2)..................... 49,649 48,936 48,209 46,043 43,113
======== ======== ======== ======== ========
Cash dividends declared, per share.... $ 0.20 $ 0.16 $ 0.12 $ 0.06
======== ======== ======== ========

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FOR THE YEARS ENDED DECEMBER 31,(1)
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------

STATUTORY OPERATING RATIOS: (3)
Gross written premium to policyholders'
surplus.................................... 182.6% 135.6% 104.3% 117.8% 134.9%
Net written premium to policyholders'
surplus.................................... 47.6 33.4 43.1 65.4 73.3
Loss ratio.................................... 107.1 67.2 61.6 64.4 66.4
Expense ratio................................. 22.8 15.7 17.2 19.2 18.1
------ ------ ------ ------ ------
Combined ratio................................ 129.9% 82.9% 78.8% 83.6% 84.5%
====== ====== ====== ====== ======
Combined ratio excluding the effects of the
provision for reinsurance in 1999.......... 104.1%
======
Industry average combined ratio............... 107.8% 105.6% 101.6% 105.8% 106.4%

DECEMBER 31,(1)
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------

- ---------------

(2) These amounts have been adjusted to reflect the effects of the five-for-two
stock split payable as a 150% stock dividend to shareholders of record April
30, 1996.

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BUSINESS

OVERVIEW

Our insurance companies provide accident and health reinsurance, aviation, group
health, marine and offshore energy, medical stop-loss, property and workers'
compensation insurance. In the United States, we operate on both a licensed, or
admitted basis, and on a surplus lines, or non-admitted, basis. Our insurance
company operations are risk bearing.

MAJOR ACQUISITIONS

Since 1996, we have made a series of strategic acquisitions that have furthered
our overall business strategy. The following describes a few of our larger
transactions:

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71

DISPOSITIONS

In January, 1999, we sold our 21% interest in Underwriters Indemnity Holdings,
Inc., the parent of Underwriters Indemnity Company.

In March, 2000, we sold Trafalgar Insurance Company, an Oklahoma domiciled
surplus lines insurance company subsidiary, for a price which approximated its
GAAP shareholders' equity.

In September, 2000, we sold a substantial portion of the assets of The Wheatley
Group, Ltd., a subsidiary of Avemco Corporation.

None of these operations were material to our financial condition, results of
operations or liquidity.

INSURANCE COMPANY OPERATIONS

Lines of Business

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------

Accident and health reinsurance.......... $157,719 28% $114,787 23% $ 39,845 12%
Aviation................................. 210,029 37 203,573 41 164,519 47
Marine and offshore energy............... 18,694 3 34,941 7 30,316 9
Medical stop-loss........................ 69,258 12 7,046 1 3,388 1
Property................................. 63,309 11 106,515 21 85,379 24
Workers' compensation.................... 27,747 5 8,958 2 -- --
Other.................................... 21,575 4 22,456 5 22,952 7
-------- --- -------- --- -------- ---
Total gross written premium.... $568,331 100% $498,276 100% $346,399 100%
======== === ======== === ======== ===

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FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------

Accident and health reinsurance.......... $ 37,725 27% $ 39,949 33% $ 24,777 17%
Aviation................................. 68,513 49 53,030 43 75,280 53
Marine and offshore energy............... 6,616 5 7,978 6 18,687 13
Medical stop-loss........................ 20,332 15 3,415 3 3,388 2
Property................................. 2,945 2 8,356 7 8,636 6
Workers' compensation.................... 673 -- 1,059 1 -- --
Other.................................... 3,120 2 8,096 7 12,085 9
-------- --- -------- --- -------- ---
Total net written premium...... $139,924 100% $121,883 100% $142,853 100%
======== === ======== === ======== ===

Underwriting

Direct

Reinsurance

Aviation

- antique and vintage military aircraft;

- cargo operations;

- commuter airlines;

- corporate aircraft;

- fixed base operations;

- military and law enforcement aircraft;

- private aircraft owners and pilots; and

- rotor wing aircraft.

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73

satellites. Insurance claims related to general aviation business tend to be
seasonal, with the majority of the claims being incurred during the spring and
summer months.

Through Houston Casualty Company, our largest and most important insurance
company subsidiary, we have been underwriting aviation risks since 1981. Avemco
Insurance, which we acquired in 1997, has been insuring aviation risks since
1959. Our gross written premium has risen consistently since 1997, increasing
from a combined $164.5 million to $210.0 million in 1999. We have achieved this
growth through the expansion of our existing businesses, as well as through
acquisitions. Although, due to market conditions, domestic risks had not been
our focus since the early 1990s, Houston Casualty increased its writing of
domestic general aviation risks late in 1996 and, with the acquisition of Avemco
Insurance and U.S. Specialty Insurance Company in mid-1997, we have become a
major participant in the domestic general aviation insurance market. Our
aviation underwriting agency subsidiary, HCC Aviation Insurance Group, Inc.,
further enhances our position. In 1997 and 1998, we experienced a decline in net
written premium due to the implementation of HCC's reinsurance program at Avemco
Insurance following Avemco's acquisition in 1997. Our aviation net written
premium increased during 1999 because we increased our retentions, i.e., the
portion of risk that we retain for our own account.

Marine and Offshore Energy

We maintain marine reinsurance on both a proportional and an excess of loss
basis. We believe that the marine risks we underwrite carry a relatively low
level of catastrophe exposure.

Property

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74

Accident and Health Reinsurance

Medical Stop-loss

We write medical stop-loss business for employer sponsored self-insured health
plans. Our underwriting agency subsidiary, HCC Benefits, produces this business.
We first began writing this business in 1985 and gross written premium and net
written premium have increased as a result of greater participation by our
insurance company subsidiaries, primarily HCC Life and Avemco Insurance, in the
business underwritten by HCC Benefits and the growth of HCC Benefits' business
internally and through the acquisition of Centris. The 1999 gross written
premium underwritten in our insurance company subsidiaries was $69.3 million and
is expected to exceed $360.0 million in 2000. When measured on a gross written
premium basis, medical stop-loss is expected to be our largest single line of
business in 2000. We maintain reinsurance on a proportional basis and believe
that these risks carry a relatively low level of catastrophe exposure.

Workers' Compensation

We began writing statutory workers' compensation business in 1998, primarily
through U.S. Specialty, and expect to expand these writings through HCC Employer
Services, Inc. It is our intent to grow this line of business in the future,
both internally and through acquisition. We expect that gross written premium
and net written premium will increase, although we will continue to purchase a
substantial amount of reinsurance. Losses in this line of business generally
take longer to develop than in our other lines of business.

Insurance Company Subsidiaries

Houston Casualty Company

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75

Casualty operates worldwide in most of our lines of business. Houston Casualty
receives business through independent agents and brokers, our underwriting
agency and intermediary subsidiaries, and other insurance and reinsurance
companies worldwide. Houston Casualty has a highly experienced staff of
underwriters trained to deal with the high value, complicated exposures
prevailing in many of the lines of business in which we specialize. As of
December 31, 1999, Houston Casualty had statutory policyholders' surplus, which
is its total admitted assets less total liabilities determined in accordance
with SAP, of $250.2 million.

Houston Casualty Company-London

HCC Life Insurance Company

U.S. Specialty Insurance Company

U.S. Specialty is a Texas domiciled property and casualty insurance company. It
is a direct subsidiary of Houston Casualty. U.S. Specialty is rated "A+
(Superior), VIII" by A.M. Best and "AA" by Standard & Poor's. U.S. Specialty
operates on an admitted basis throughout the United States primarily writing
general aviation, workers' compensation and alternative workers' compensation
insurance produced by our underwriting agency subsidiaries. As of December 31,
1999, U.S. Specialty had statutory policyholders' surplus of $104.4 million.

Avemco Insurance Company

UNDERWRITING AGENCY OPERATIONS

Our underwriting agency subsidiaries act on behalf of our insurance companies
and those of other firms, and provide insurance underwriting management and
claims administration services. The underwriting agency subsidiaries do not
assume any insurance or reinsurance risk themselves and generate revenues based
entirely on management fees and profit commissions. These subsidiaries are in a
position to direct and control business that they produce. Our insurance company
subsidiaries serve as policy issuing companies for most of the business written
by our underwriting agencies. Our insurance company subsidiaries may retain a
portion of the risk and reinsure the remainder with unaffiliated insurance
companies or reinsure all of the risk. In instances where our insurance
companies are not the policy issuing company, our insurance companies may
reinsure the business written by the underwriting agencies. Management fees
generated by underwriting agency subsidiaries in 1999 amounted to $90.7 million.

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Lines of Business

This table shows our underwriting agency subsidiaries' written premium by lines
of business for the periods indicated (dollars in thousands):

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------

Accident and health reinsurance..... $452,017 53% $356,530 50% $258,716 55%
Aviation............................ 91,156 11 92,668 13 49,581 10
Medical stop-loss................... 184,302 22 182,528 26 93,435 20
Occupational accident............... 54,000 6 48,100 7 46,909 10
Workers' compensation............... 52,758 6 4,429 1 -- --
Other............................... 13,883 2 21,932 3 24,798 5
-------- --- -------- --- -------- ---
Total written premium..... $848,116 100% $706,187 100% $473,439 100%
======== === ======== === ======== ===

Underwriting Agency Subsidiaries

LDG Reinsurance Corporation

LDG Re (London), Ltd.

HCC Benefits Corporation

HCC Aviation Insurance Group, Inc.

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HCC Employer Services, Inc.

HCC Employer Services, with operations in Northbrook, Illinois; Montgomery,
Alabama; and Dallas, Texas, acts as an underwriting manager on behalf of our
insurance company subsidiaries and other insurance companies, providing workers'
compensation insurance to small and medium size businesses and occupational
accident and health insurance to self-employed truckers. HCC Employer Services
generated approximately $101.6 million in written premium in 1999.

COMBINED INSURANCE COMPANY AND UNDERWRITING AGENCY OPERATIONS

INTERMEDIARY OPERATIONS

HCC Employee Benefits, Inc.

HCC Intermediaries, Inc.

Rattner MacKenzie Limited

OTHER OPERATIONS

Our other operations consist of subsidiaries that are not insurance companies,
underwriting agencies or intermediaries. These operations provide insurance
related services to our subsidiaries, our reinsurers and unaffiliated entities.
The revenue earned from these services primarily consists of fees, commissions
or the sales price of products sold. The subsidiaries currently operating in
this segment provide insurance claims adjusting services. Additionally, other
operations include the returns received from our insurance related strategic
investments which we make from time to time. These returns may be in the form of
equity in the earnings of the company in which we invested, dividends or gains
from the disposition of these investments. Other operating income was $28.5
million in 1999.

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REINSURANCE CEDED

We consider the maintenance of reinsurance protection to be an important part of
our business plan, protecting shareholders' equity from catastrophe losses and
fluctuations in the insurance market cycles of the insurance industry. We have
built important relationships over the years with many core reinsurers. We
intend to continue to share our business with these partners as underwriting
profitability returns in an improving market in order to build even stronger
relationships in the future. We believe that increased retentions during
profitable periods are made possible not at the sacrifice of core reinsurers but
through reduction of facultative reinsurance and the natural attrition of
certain reinsurers who exit lines of business or curtail their writings for
other reasons. This reduction in reinsurance market capacity causes rates to
rise but the increased rates historically have been passed on to the original
insureds.

primary insurer and reinsurer, were placed with more than 92 domestic and
foreign reinsurers. As of December 31, 1999, the total amount recoverable from
reinsurers was approximately $736.5 million, of which $91.3 million represents
paid losses recoverable (in the ordinary course of business), $53.2 million
represents a balance due from a commutation (which is a contractual arrangement
between a primary insurer and its reinsurer that settles all outstanding and
future liabilities between the companies) and $597.5 million represents
outstanding losses and estimated incurred but not reported, or losses that have
occurred but have not yet been reported to the insurer, otherwise known as IBNR,
loss recoverables, less a $5.5 million reserve for potentially uncollectible
reinsurance. In addition, ceded unearned premium was $133.7 million. Of the
$736.5 million, $122.8 million was added as a result of the Centris acquisition
in December, 1999. As of December 31, 1999, we held $154.1 million of
irrevocable letters of credit and $19.9 million in cash to collateralize a
portion of the total amount recoverable and had other payable balances due to
our reinsurers of $213.0 million as potential offsets against reinsurance
recoverables. The estimated duration for our outstanding losses is two years, as
the majority of our business has historically had shorter lead times between the
occurrence of an insured event and the final settlement.

LETTERS OF
CREDIT,
A.M. CASH DEPOSITS
BEST TOTAL AND OTHER
REINSURER RATING LOCATION RECOVERABLES PAYABLES NET
- --------- ------ -------------- ------------ ------------- --------

Underwriters at Lloyd's.......... A United Kingdom $156,650 $22,805 $133,845
Underwriters Indemnity
Company(1)..................... A- Texas 50,451 4,201 46,250
SCOR Reinsurance Company......... A+ New York 41,137 1,740 39,397
AXA Reinsurance Company.......... A+ Delaware 37,690 5,013 32,677
NAC Reinsurance Company(2)....... A+ New York 23,153 6,105 17,048
Transamerica Occidental Life Ins.
Co............................. A+ California 22,481 6,102 16,379
St. Paul Fire and Marine
Insurance Co................... A+ Minnesota 17,577 1,721 15,856
Odyssey America Reinsurance
Corp........................... A Connecticut 19,114 5,891 13,223
Sun Life Assurance Company of
Canada......................... A++ Canada 17,996 4,786 13,210
GE Reinsurance................... A++ Illinois 16,535 4,869 11,666
Chartwell Reinsurance
Company(3)..................... A Minnesota 12,736 2,074 10,662

- ---------------

(1) Underwriters Indemnity Company was acquired by RLI Corporation in January,
1999.

(2) NAC Reinsurance Corporation was acquired by XL Capital, Ltd. in June, 1999.

(3) Chartwell Reinsurance Company was acquired by Trenwick Group, Inc. in
October, 1999.

Since 1999, a number of reinsurers have delayed or suspended the payment of
amounts recoverable under reinsurance contracts to which we are a party. Such
delays have affected, though not materially to date, the liquidity and
investment income of our insurance company subsidiaries. In addition, a number
of reinsurers have claimed they are not liable for payment to us, and, in one or
more cases have sought arbitration of these matters. We are currently in
negotiations with most of these parties. If such negotiations do not result in a
satisfactory resolution of the matters in question, we will seek a judicial or
arbitral determination of these matters.

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In 1999, our insurance company subsidiaries recorded a $43.5 million provision
for reinsurance to reflect an estimated $29.5 million pre-tax loss for the
insolvency of a reinsurer and an estimated $14.0 million pre-tax loss, the
majority of which represents the discount on ceded reserves, related to the
commutation (which is a contractual arrangement between a primary insurer and
its reinsurer that settles all outstanding and future liabilities between the
companies) of all liabilities with another reinsurer discussed above. In
connection with the commutation, we received cash and other amounts totaling
$56.5 million.

OPERATING RATIOS

Premium to Surplus Ratio

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------

- ---------------

(1) Source: A.M. Best.

Combined Ratio

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subsidiaries' loss ratio, expense ratio and combined ratio, determined on the
basis of SAP, are shown in the following table for the periods indicated:

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----

Loss ratio............................................. 107.1% 67.2% 61.6% 64.4% 66.4%
Expense ratio.......................................... 22.8 15.7 17.2 19.2 18.1
----- ----- ----- ----- -----
Combined ratio......................................... 129.9% 82.9% 78.8% 83.6% 84.5%
===== ===== ===== ===== =====
Combined ratio excluding the effects of the provision
for reinsurance in 1999.............................. 104.1%
=====
Industry average combined ratio........................ 107.8% 105.6% 101.6% 105.8% 106.4%

RESERVES

We establish loss reserves for individual claims by evaluating reported claims
on the basis of:

- the type of loss;

- jurisdiction of the occurrence;

- our knowledge of the circumstances surrounding the claim;

- the severity of injury or damage;

- the potential for ultimate exposure;

- the information and reports received from ceding insurance companies
where applicable; and

- our experience with the insured and the line of business and policy
provisions relating to the particular type of claim.

We establish loss reserves for incurred but not reported losses based in part on
statistical information and in part on industry experience with respect to the
probable number and nature of claims arising from occurrences that have not been
reported. We also establish our reserves based on predictions of future events,
our estimates of future trends in claims severity, and other subjective factors.
The net GAAP and SAP reserves of each of our insurance company subsidiaries are
established in conjunction with and reviewed by our in-house actuarial staff,
and our SAP reserves are certified annually by our independent actuaries. In
1999, PricewaterhouseCoopers LLP certified the SAP reserves of our insurance
company subsidiaries with the exception of certain of the insurance company
subsidiaries of the Centris Group. These Centris subsidiaries' SAP reserves were
certified by the independent actuaries of Centris.

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83

This loss development triangle shows development in loss reserves on a gross
basis (dollars in thousands):

1999 1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- -------- ---------

Balance sheet gross
reserves:................... $871,104 $460,511 $275,008 $229,049 $200,756 $170,957 $144,178 $ 129,503
Cumulative paid as of:
One year later.............. 229,746 160,324 119,453 118,656 97,580 82,538 83,574
Two years later............. 209,724 179,117 167,459 143,114 126,290 130,379
Three years later........... 193,872 207,191 166,541 157,509 158,973
Four years later............ 214,046 192,540 176,472 182,193
Five years later............ 195,930 195,269 192,512
Six years later............. 197,147 213,052
Seven years later........... 215,280
Re-estimated liability as of:
End of year................. 871,104 460,511 275,008 229,049 200,756 170,957 144,178 129,503
One year later.............. 550,545 308,501 252,236 243,259 186,898 163,967 162,827
Two years later............. 316,250 249,013 248,372 207,511 183,015 176,817
Three years later........... 250,817 247,053 214,738 203,137 194,419
Four years later............ 248,687 220,695 211,546 215,531
Five years later............ 217,892 218,182 222,746
Six years later............. 214,498 234,115
Seven years later........... 231,269
Cumulative gross redundancy
(deficiency)................ $(90,034) $(41,242) $(21,768) $(47,931) $(46,935) $(70,320) $(101,766)

The gross deficiencies reflected in the table result from three principal
conditions:

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This loss development triangle shows development in loss reserves on a net basis
(dollars in thousands):

1999 1998 1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- -------- -------- --------

Gross reserves for loss and
loss adjustment expense...... $871,104 $460,511 $275,008 $229,049 $200,756 $170,957 $144,178 $129,503 $123,248
Less reinsurance
recoverables................. 597,498 341,599 155,374 111,766 101,497 95,279 82,289 81,075 83,727
-------- -------- -------- -------- -------- -------- -------- -------- --------
Reserves for loss and loss
adjustment expense, net of
reinsurance.................. 273,606 118,912 119,634 117,283 99,259 75,678 61,889 48,428 39,521
Effect on loss reserves of
1999 write off of ceded
outstanding and IBNR
reinsurance recoverables..... -- 63,851 15,008 2,636 1,442 51 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Reserves for loss and loss
adjustment expense net of
reinsurance and adjusted for
write off.................... 273,606 182,763 134,642 119,919 100,701 75,729 61,889 48,428 39,521
Cumulative paid, net of
reinsurance, as of:
One year later............... 56,052 48,775 47,874 41,947 36,500 29,258 18,978 18,416
Two years later.............. 64,213 66,030 56,803 49,283 41,207 32,733 23,057
Three years later............ 72,863 64,798 56,919 46,576 36,536 31,903
Four years later............. 67,355 60,441 51,536 38,480 33,875
Five years later............. 61,781 53,110 40,327 34,970
Six years later.............. 53,879 40,550 36,203
Seven years later............ 41,133 35,413
Eight years later............ 35,960
Nine years later.............
Ten years later..............
Re-estimated liability, net of
reinsurance, as of:
End of year.................. 273,606 182,763 134,642 119,919 100,701 75,729 61,889 48,428 39,521
One year later............... 187,377 120,049 116,145 95,764 72,963 59,659 45,812 38,575
Two years later.............. 116,745 101,595 94,992 74,887 60,079 44,964 38,656
Three years later............ 97,353 85,484 76,474 62,224 46,129 39,176
Four years later............. 80,890 73,660 64,377 48,993 40,407
Five years later............. 69,528 64,103 50,785 43,418
Six years later.............. 59,408 50,585 45,142
Seven years later............ 46,071 43,924
Eight years later............ 39,858
Nine years later.............
Ten years later..............
Cumulative net redundancy
(deficiency)................. $ (4,614) $ 17,897 $ 22,566 $ 19,811 $ 6,201 $ 2,481 $ 2,357 $ (337)

1990 1989
--------- -------

Gross reserves for loss and
loss adjustment expense...... $108, 027 $96,477
Less reinsurance
recoverables................. 60,194 45,160
--------- -------
Reserves for loss and loss
adjustment expense, net of
reinsurance.................. 47,833 51,317
Effect on loss reserves of
1999 write off of ceded
outstanding and IBNR
reinsurance recoverables..... -- --
--------- -------
Reserves for loss and loss
adjustment expense net of
reinsurance and adjusted for
write off.................... 47,833 51,317
Cumulative paid, net of
reinsurance, as of:
One year later............... 23,450 22,660
Two years later.............. 33,815 34,300
Three years later............ 35,912 40,806
Four years later............. 42,465 41,878
Five years later............. 43,422 46,734
Six years later.............. 43,690 47,164
Seven years later............ 44,611 47,229
Eight years later............ 43,715 47,928
Nine years later............. 44,203 46,308
Ten years later.............. 46,646
Re-estimated liability, net of
reinsurance, as of:
End of year.................. 47,833 51,317
One year later............... 44,887 49,475
Two years later.............. 45,435 47,313
Three years later............ 44,689 48,085
Four years later............. 45,507 47,884
Five years later............. 46,805 47,933
Six years later.............. 48,932 48,086
Seven years later............ 50,190 49,392
Eight years later............ 49,732 50,324
Nine years later............. 47,422 50,101
Ten years later.............. 48,479
Cumulative net redundancy
(deficiency)................. $ 411 $ 2,838

We believe that our loss reserves are adequate to provide for all material net
incurred losses.

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This table provides a reconciliation of the gross liability of loss and loss
adjustment expense on a GAAP basis for the periods indicated (dollars in
thousands):

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------

- ---------------

This table provides a reconciliation of the liability for loss and loss
adjustment expense, net of reinsurance ceded, on a GAAP basis for the periods
indicated (dollars in thousands):

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------

- ---------------

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redundancies in the net reserves result from our actuaries' continued review of
loss reserves and the increase or reduction of reserves as losses are finally
settled and claims exposures are reduced. We believe we have provided for all
material net incurred losses.

INVESTMENTS

Our investment policy is determined by our Board of Directors and our Investment
Committee and is reviewed on a regular basis. In January, 2000, we engaged a
nationally prominent investment advisor, New England Asset Management, a
subsidiary of Berkshire Hathaway, Inc., to oversee our investments and to make
recommendations to our Board's Investment Committee. Under our investment
policy, we concentrate our investments in obligations of states, municipalities
and political subdivisions. The interest income from these investments is
predominantly exempt from federal income tax. Although we generally intend to
hold these securities to maturity, we regularly re-evaluate our position based
upon market conditions. Beginning in the second quarter of 2000, our purchases
have been focused on taxable fixed income investments. These purchases have had
no significant effect on the average credit rating of our investments but have
shortened the duration of our investment portfolio. As of June 30, 2000, our
fixed income securities have a weighted average maturity of five years and a
weighted average duration of four years.

Our financial statements reflect an unrealized loss on fixed income securities
available for sale as of December 31, 1999, of $893,000.

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This table shows a profile of our investments. The table shows the average
amount of investments, income earned, and the yield thereon for the periods
indicated (dollars in thousands):

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------

- ---------------

(1) Excluding realized and unrealized capital gains and losses.

This table summarizes, by type, our investments as of December 31, 1999 (dollars
in thousands):

PERCENT
AMOUNT OF TOTAL
-------- --------

This table summarizes, by rating, the market value of our fixed income
investments as of December 31, 1999 (dollars in thousands):

PERCENT
RATING AMOUNT OF TOTAL
- ------ -------- --------

This table indicates the expected maturity distribution of our fixed income
securities as of December 31, 1999 (dollars in thousands):

PERCENT
AMOUNT OF TOTAL
-------- --------

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the proceeds at lower interest rates. We mitigate this risk by investing in
securities with varied maturity dates, so that only a portion of the portfolio
will mature at any point in time.

REGULATION

Insurance Company Subsidiaries

- approval of policy forms and premium rates;

- standards of solvency, including risk-based capital measurements;

- licensing of insurers and their agents;

- restrictions on the nature, quality and concentration of investments;

- restrictions on the ability of our insurance company subsidiaries to pay
dividends to us;

- restrictions on transactions between insurance company subsidiaries and
their affiliates

- restrictions on the size of risks insurable under a single policy;

- requiring deposits for the benefit of policyholders;

- requiring certain methods of accounting;

- periodic examinations of our operations and finances;

- prescribing the form and content of records of financial condition
required to be filed; and

- requiring reserves for unearned premium, losses and other purposes.

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89

Underwriting Agency and Intermediary Subsidiaries

- licensing as agents, brokers, intermediaries, managing general agents or
third party administrators;

- contractual requirements;

- recordkeeping requirements;

- limitations on authority;

- advertising and business practice rules; and

- financial security.

Statutory Accounting Principles

- fixed-income investments classified as available for sale are recorded at
market value for GAAP and at amortized cost under SAP;

- under SAP, policy acquisition costs are expensed as incurred and under
GAAP such costs are deferred and amortized to expense as the related
premium is earned;

- deferred taxes are not provided under SAP;

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- certain assets which are considered "non-admitted assets" are eliminated
from a balance sheet prepared in accordance with SAP and included in a
balance sheet prepared in accordance with generally GAAP;

- certain reserves are recognized under SAP but not under GAAP; and

- reinsurance balances are recorded on a gross basis under GAAP and on a
net basis under SAP.

Insurance Holding Company Acts

Risk-Based Capital

Insurance Regulatory Information System

Pending or Proposed Legislation

services modernization, have as a principal objective the elimination or
modification of current regulatory barriers to cross-industry combinations
involving banks, securities firms and insurance companies. A form of financial
services modernization legislation was enacted at the federal level in 1999
through the Gramm-Leach-Bliley Act. That federal legislation will have
significant implications on the banking, insurance and securities industries and
could result in more cross-industry consolidations among banks, insurance
companies and securities firms and increased competition in many of the areas of
our operations. It also mandated the adoption of laws allowing reciprocity among
the states in the licensing of agents and the adoption of laws and regulations
dealing with the protection of the privacy of policyholder information. Also,
the federal government has conducted investigations of the current condition of
the insurance industry in the United States to determine whether to impose
overall federal regulation of insurers. In the past several years there have
been a number of recommendations that the industry's anti-trust exemption be
removed and the industry placed under federal regulation. If so, we believe
state regulation of the insurance business would likely continue. This could
result in an additional layer of federal regulation.

EMPLOYEES

PROPERTIES

Besides our home office, our principal office facilities are as follows:

SUBSIDIARY LOCATION SQUARE FOOTAGE LEASE TERMINATION DATE
- ---------- -------- -------------- ----------------------

Avemco Insurance.................. Frederick, Maryland 40,000 Owned
HCC Aviation...................... Dallas, Texas 40,000 March 31, 2004
HCC Benefits...................... Costa Mesa, California 22,000 March 31, 2007
Atlanta, Georgia 21,000 January 31, 2006
HCC Employee Benefits............. Houston, Texas 27,000 August 31, 2001 and
October 31, 2002
HCC Employer Services............. Northbrook, Illinois 19,000 April 1, 2005
Montgomery, Alabama 21,000 January 1, 2006
LDG Re............................ Wakefield, Massachusetts 34,000 October 31, 2001
Rattner MacKenzie................. London, England 15,000 September 29, 2003

LEGAL PROCEEDINGS

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RATIO OF EARNINGS TO FIXED CHARGES

The ratio of our earnings to our fixed charges for the periods indicated are as
follows:

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997 1996 1995
---- ----- ----- ----- -----

Ratio of earnings to fixed charges.................. 3.49 15.42 11.10 9.32 6.83

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93

DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES

The junior subordinated debentures that we issue to an HCC Trust will be our
direct unsecured general obligations. Only junior subordinated debt securities
will be issued to the HCC Trusts. The debt securities will be issued in one or
more series under the indenture between HCC and First Union National Bank, as
trustee and under our resolution authorizing the particular series.

Selected provisions of the indenture are summarized below. This summary is not
complete. The form of the indenture and a form of amended and restated trust
agreement are filed as exhibits to the registration statement of which this
prospectus is a part. The amended and restated trust agreement for each series
also has been or will be filed or incorporated by reference as an exhibit to the
registration statement. You should read the indenture and the applicable amended
and restated trust agreement for provisions that may be important to you. The
summary includes references to section numbers in the indenture so that you can
easily find those provisions. The particular terms of any debt securities we
offer will be described in the related prospectus supplement, along with any
applicable modifications of or additions to the general terms of the debt
securities described below and in the indenture. For a description of the terms
of any series of debt securities, you should also review both the prospectus
supplement relating to that series and the description of the debt securities
set forth in this prospectus before making an investment decision.

GENERAL

The indenture does not significantly limit our operations. In particular, it
does not:

- limit the amount of debt securities that we can issue under the
indenture;

- limit the number of series of debt securities that we can issue from time
to time;

- restrict the total amount of debt that we or our subsidiaries may incur;
or

- contain any covenant or other provision that is specifically intended to
afford any holder of the debt securities special protection in the event
of highly leveraged transactions or any other transactions resulting in a
decline in our ratings or credit quality.

As of the date of this prospectus, there are no debt securities outstanding
under the indenture. The ranking of a series of debt securities with respect to
all of our indebtedness will be established by the securities resolution
creating the series.

Although the indenture permits the issuance of debt securities in other forms or
currencies, the debt securities covered by this prospectus will only be
denominated in U.S. dollars in registered form without coupons, unless otherwise
indicated in the applicable prospectus supplement.

TERMS

A prospectus supplement and a securities resolution relating to the offering of
any series of debt securities will include specific terms relating to the
offering. The terms will include some or all of the following:

- the designation, aggregate principal amount, currency or composite
currency (if other than U.S. dollars) and denominations of the debt
securities;

- the price at which the debt securities will be issued and, if an index,
formula or other method is used, the method for determining amounts of
principal or interest;

- the maturity date and other dates, if any, on which the principal of the
debt securities will be payable;

- the interest rate or rates, if any, or method of calculating the interest
rate or rates which the debt securities will bear;

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94

- the date or dates from which interest will accrue and on which interest
will be payable, and the record dates for the payment of interest; the
manner of paying principal and interest on the debt securities; the place
or places where principal and interest will be payable;

- the terms of any mandatory or optional redemption of the debt securities
by us, including any sinking fund, the terms of any conversion or
exchange right; the terms of any redemption of debt securities at the
option of holders; any tax indemnity provisions;

- the portion of principal payable upon acceleration of the maturity date
of any debt security;

- whether and upon what terms debt securities may be defeased (which means
that we would be discharged from its obligations by depositing sufficient
cash or government securities to pay the principal, interest, any
premiums and other sums due to the stated maturity date or a redemption
date of the debt securities of the series);

- whether any events of default or covenants in addition to or instead of
those set forth in the indenture apply; provisions for electronic
issuance of debt securities or for debt securities in uncertificated
form;

- any provisions relating to extending or shortening the date on which the
principal and premium, if any, of the debt securities of the series is
payable;

- any provisions relating to the deferral of payment of any interest;

- the terms of any right to convert or exchange the debt securities into
any other of our securities or property;

- if the series of debt securities is to be issued to an HCC Trust, the
forms of the related trust agreement and guarantee agreement;

- the additions or changes, if any, to the indenture with respect to that
series of debt securities to permit or facilitate the issuance of that
series of debt securities to an HCC Trust; and

- any other terms not inconsistent with the provisions of the indenture,
including any covenants or other terms that may be required or advisable
under United States or other applicable laws or regulations, or advisable
in connection with the marketing of the debt securities. (Section 3.1).

We may issue debt securities of any series in such form and in such
denominations as we specify in the securities resolution and prospectus
supplement for the series. (Section 2.1).

A holder of registered debt securities may request registration of a transfer
upon surrender of the debt security being transferred at any agency or office
that we maintain for that purpose and upon fulfillment of all other requirements
of the agent.

CERTAIN COVENANTS

Any restrictive covenants that may apply to a particular series of debt
securities will be described in the related prospectus supplement.

SUBORDINATION

The indenture provides that the debt securities will be subordinated and junior
in right of payment to all of our Senior Debt (as defined below). This means
that no payment of principal, including redemption payments, premium, if any, or
interest on the debt securities may be made if:

- any of our Senior Debt has not been paid when due and any applicable
grace period relating to such default has ended and such default has not
been cured or waived or ceased to exist; or

- the maturity of any of our Senior Debt has been accelerated because of a
default.

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95

Upon any distribution of our assets to creditors upon any termination,
winding-up, liquidation or reorganization, whether voluntary or involuntary, or
in bankruptcy, insolvency, receivership or other proceedings, all principal,
premium, if any, and interest due or to become due on all of our Senior Debt
must be paid in full before the holders of debt securities are entitled to
receive or retain any payment. Upon satisfaction of all claims related to all of
our Senior Debt then outstanding, the rights of the holders of the debt
securities will be subrogated to the rights of the holders of our Senior Debt to
receive payments or distributions applicable to Senior Debt until all amounts
owing on the debt securities are paid in full.

The term "Senior Debt" means:

(1) the principal, premium, if any, and interest in respect of (a)
indebtedness for money borrowed and (b) indebtedness evidenced by
securities, notes, debentures, bonds or other similar instruments issued by
us;

(2) all capital lease obligations of ours;

(3) all obligations of ours issued or assumed as the deferred purchase
price of property, all conditional sale obligations of ours and all
obligations of ours under any conditional sale or title retention
agreement, but excluding trade accounts payable and accrued liabilities
arising in the ordinary course of business;

(4) all obligations, contingent or otherwise, of ours in respect of
any letters of credit, banker's acceptance, security purchase facilities or
similar credit transactions;

(5) all obligations in respect of interest rate swap, cap, floor,
collar or other agreements, interest rate future or option contracts,
currency swap agreements, currency future or option contracts and other
similar agreements;

(6) any indebtedness between or among us and our affiliates, except as
provided in 8(b) below;

(7) all obligations of the type referred to in clauses (1) through (6)
above of other persons for the payment of which we are responsible or
liable as obligor, guarantor or otherwise; and

(8) all obligations of the type referred to in clauses (1) through (7)
above of other persons secured by any lien on any property or asset of
ours, whether or not such obligation is assumed by such obligor, except for

(a) any such indebtedness that by its terms ranks equally with, or
junior to, the debt securities; and

(b) any indebtedness between or among us or our affiliates relating
to other debt securities and guarantees in respect of those debt
securities, issued to (i) any HCC Trust or a trustee of such HCC Trust
or (ii) any other trust, or a trustee of such trust, partnership or
other entity affiliated with HCC that is a financing vehicle of ours in
connection with the issuance by such financing vehicle of preferred
securities or other securities guaranteed by us pursuant to an
instrument that ranks equally with, or junior to, the guarantee.

Such Senior Debt shall continue to be Senior Debt and be entitled to the
benefits of the subordination provisions irrespective of any amendment,
modification or waiver of any term of such Senior Debt.

SUCCESSOR OBLIGOR

The indenture provides that, unless otherwise specified in the securities
resolution establishing a series of debt securities, we will not consolidate
with or merge into, or transfer all or substantially all of our assets to,
another company, unless:

- that company is organized under the laws of the United States or any
state or the District of Columbia;

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- that company assumes by supplemental indenture all of our obligations
under the indenture and the debt securities;

- all required approvals of any regulatory body having jurisdiction over
the transaction shall have been obtained; and

- immediately after the transaction no default exists under the indenture.
(Section 8.1).

The successor shall be substituted for us as if it had been an original party to
the indenture, the trust agreements and the debt securities. Thereafter the
successor may exercise our rights and powers under the indenture, the trust
agreements and the debt securities, and all of our obligations under those
documents will terminate. (Section 8.2)

EXCHANGE OF DEBT SECURITIES

Registered debt securities may be exchanged for an equal principal amount of
registered debt securities of the same series and date of maturity in authorized
denominations requested by the holders upon surrender of the registered debt
securities at an office or agency HCC maintains for that purpose and upon
fulfillment of all other requirements set forth in the indenture. (Section 3.6)

DEFAULTS

Unless the securities resolution establishing the series provides for different
events of default, in which event the prospectus supplement will describe the
change, an event of default with respect to a series of debt securities will
occur if:

- We default in any payment of interest on any debt securities of that
series when the payment becomes due and payable and the default continues
for a period of 30 days;

- We default in the payment of the principal and premium, if any, of any
debt securities of the series when those payments become due and payable
at maturity or upon redemption, acceleration or otherwise;

- We default in the payment or satisfaction of any sinking fund obligation
with respect to any debt securities of the series as required by the
securities resolution establishing the series and the default continues
for a period of 30 days;

- We default in the performance of any of our other agreements applicable
to the series and the default continues for 90 days after the notice
specified below;

- We file for bankruptcy or other specified events in bankruptcy,
insolvency, receivership or reorganization occur; or

- any other event of default specified in the prospectus supplement occurs.
(See Section 5.1)

A default under the indenture means any event which is, or after notice or
passage of time would be, an event of default under the indenture. A default
under the fourth bullet point above is not an event of default until the trustee
or the holders of at least 25% in principal amount of the debt securities of a
series notify us of the default and we do not cure the default within the time
specified after receipt of the notice. (Section 5.1)

REMEDIES

If an event of default occurs under the indenture with respect to any series of
debt securities and is continuing, the trustee by notice to us or (except as
provided in the next sentence) the holders of at least 25% in principal amount
of the series by notice both to us and to the trustee, may declare the principal
of and accrued interest on all the debt securities of the series to be due and
payable immediately. In the case of a series of junior subordinated debentures
issued to an HCC Trust, if, upon an event of default, the

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trustee or the other holders, if any, together holding not less than 25% in
aggregate principal amount of that series, fail to declare the principal of all
the debt securities of that series to be immediately due and payable, then the
holders of 25% in aggregate liquidation amount of the capital securities issued
by the HCC Trust then outstanding shall have the right to do so by notice to us
and to the trustee.

Except as provided in the next sentence, the holders of a majority in principal
amount of a series of debt securities, by notice to the trustee, may rescind an
acceleration and its consequences if certain conditions are met, including:

- We pay or deposit with the indenture trustee a sum sufficient to pay:

- all overdue interest,

- the principal of and any premium which have become due other than by the
declaration of acceleration and overdue interest on those amounts,

- any overdue sinking fund payments and overdue interest on such payments,

- interest on overdue interest to the extent lawful, and

- all amounts otherwise due to the indenture trustee under the indenture;

- the rescission would not conflict with any judgment or decree;

- all existing events of default on the series have been cured or waived
except nonpayment of principal or interest that has become due solely
because of the acceleration.

In the case of a series of junior subordinated debentures issued to an HCC
Trust, the holders of a majority in aggregate liquidation amount of the capital
securities issued by that HCC Trust then outstanding shall also have the right
to rescind the acceleration and its consequences with respect to such series,
subject to the same conditions set forth above. (Section 5.2)

If an event of default occurs and is continuing on a series, the trustee may
pursue any available remedy to collect principal or interest then due on the
series, to enforce the performance of any provision applicable to the series, or
otherwise to protect the rights of the trustee and holders of the series.
(Section 5.3)

In the case of a series of junior subordinated debentures issued to an HCC
Trust, any holder of the outstanding capital securities issued by that HCC Trust
shall have the right, upon the occurrence and continuance of an event of default
with respect to that series following HCC's failure to pay timely interest,
principal or premium as described above, to sue us directly. In that lawsuit the
holder of the capital securities can force us to pay to the holder (instead of
the HCC Trust) the principal of, and premium, if any, and interest on, junior
subordinated debentures held by the HCC Trust having a principal amount equal to
the aggregate principal amount of the capital securities held by that holder.
(Section 5.8)

The trustee may require an indemnity satisfactory to it before it performs any
duty or exercises any right or power under the indenture or the debt securities
which if reasonably believes may expose it to any risk of loss or liability.
(Section 6.1) With some limitations, holders of a majority in principal amount
of the debt securities of a series may direct the trustee in its exercise of any
trust or power with respect to that series. (Section 5.12) Except in the case of
default in payment on a series, the trustee may withhold notice of any
continuing default with respect to the debt securities of that series if it
determines that withholding the notice is in the interest of holders of the
series. (Section 6.2) HCC is required to furnish the trustee annually a brief
certificate as to our compliance with all terms and conditions of the indenture.
(Section 10.4)

The events of default specified in the indenture do not include a cross-default
provision. Thus, except to the extent provided in the securities resolution
establishing a series, a default by us on any other debt, including any other
series of debt securities, would not constitute an event of default under the
indenture (or in the case of an event of default as to any series, an event of
default as to any other series

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outstanding under the indenture). If a securities resolution provides for a
cross-default provision, the prospectus supplement will describe the terms of
that provision.

AMENDMENTS

Without the consent of any debt security holder, subject to certain limitations,
we may amend the indenture by entering into one or more supplemental indentures
of any of the following purposes:

- to cure any ambiguity, omission, defect or inconsistency;

- to provide for the assumption of our obligations to debt security holders
by the surviving company in the event of a merger or consolidation
requiring such assumption as described above under "-- Successor
Obligor";

- to provide that specific provisions of the indenture shall not apply to a
series of debt securities not previously issued;

- to create a series of debt securities and establish its terms;

- to provide for a separate trustee for one or more series of debt
securities; or

- to make any change that does not materially adversely affect the rights
of any debt security holder. (Section 9.1)

Unless the securities resolution provides otherwise, in which event the
prospectus supplement will describe the revised provision, we and the trustee
may amend the indenture by entering into one or more supplemental indentures
with the written consent of the holders of a majority in principal amount of the
debt securities of all series affected voting as one class. However, without the
consent of each debt security holder affected, no amendment may:

- reduce the principal amount of debt securities whose holders must consent
to an amendment or waiver;

- reduce the interest on or change the time for payment of interest on any
debt security (but this does not affect our right to elect to defer one
or more payments of interest as described below under "-- Certain
Provisions Relating to Junior Subordinated Debentures Issued to the HCC
Trusts -- Option to Defer Interest Payment Date");

- change the stated maturity of any debt security (subject to any right we
may have retained in the securities resolution and described in the
prospectus supplement);

- reduce the principal of any debt security or, if less than the principal
amount thereof, reduce the amount that would be due on acceleration of
any debt security thereof;

- change the currency in which the principal or interest on a debt security
is payable;

- make any change that materially adversely affects the right to convert or
exchange any debt security; or

- waive any default in payment of interest on or principal of a debt
security. (Section 9.2)

In the case of a series of junior subordinated debentures issued to an HCC
Trust, we are not permitted to amend the indenture if such amendment adversely
affects the holders of the capital securities of that HCC Trust in any material
respect, and no termination of the indenture shall occur, without the prior
consent of the holders of not less than a majority in aggregate liquidation
amount of the capital securities then outstanding unless and until the principal
(and premium, if any) of the junior subordinated debentures of that series and
all accrued and unpaid interest thereon have been paid in full. Furthermore, in
the case of a series issued to an HCC Trust, no amendment can be made to the
provisions of the indenture allowing holders of capital securities of that HCC
Trust to sue directly following our failure to make timely payments on the
junior subordinated debentures as described above without the prior consent
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of the holder of each capital security then outstanding unless and until the
principal (and premium, if any) of the junior subordinated debentures of that
series and all accrued and unpaid interest thereon have been paid in full.
(Section 9.2)

LEGAL DEFEASANCE AND COVENANT DEFEASANCE

Debt securities of a series may be defeased at any time in accordance with their
terms and as set forth in the indenture and described briefly below, unless the
securities resolution establishing the terms of the series provides otherwise.
Any defeasance may terminate all of our obligations (with limited exceptions)
with respect to a series of debt securities and the indenture ("legal
defeasance"), or it may terminate only our obligations under any restrictive
covenants which may be applicable to a particular series ("covenant
defeasance").

We may exercise our legal defeasance option even though we have also exercised
our covenant defeasance option. If we exercise the legal defeasance option with
respect to a series of debt securities, that series may not be accelerated
because of an event of default. (Section 4.2) If we exercise the covenant
defeasance option, that series of debt securities may not be accelerated by
reference to any restrictive covenants which may be applicable to that
particular series. (Section 4.3)

To exercise either defeasance option as to a series of debt securities, we must:

- irrevocably deposit in trust (the "defeasance trust") with the trustee or
another trustee money or U.S. government obligations;

- deliver a certificate from a nationally recognized firm of independent
accountants expressing their opinion that the payments of principal and
interest when due on the deposited U.S. government obligations, without
reinvestment, plus any deposited money without investment, will provide
cash at the times and in the amounts necessary to pay the principal and
interest when due on all debt securities of the series to maturity or
redemption, as the case may be; and

- comply with certain other conditions. In particular, we must obtain an
opinion of tax counsel that the defeasance will not result in recognition
of any gain or loss to holders for federal income tax purposes.

U.S. government obligations are direct obligations of (a) the United States or
(b) an agency or instrumentality of the United States, the payment of which is
unconditionally guaranteed by the United States, which, in either case (a) or
(b), have the full faith and credit of the United States of America pledged for
payment and which are not callable at the issuer's option. It also includes
certificates representing an ownership interest in such obligations. (Section
4.4)

CERTAIN PROVISIONS RELATING TO JUNIOR SUBORDINATED DEBENTURES ISSUED TO THE HCC
TRUSTS

General. The junior subordinated debentures that we issue to an HCC Trust may be
issued in one or more series under the indenture with terms corresponding to the
terms of a series of capital securities issued by that HCC Trust. The principal
amount of the junior subordinated debentures that we issue to an HCC Trust will
be equal to the aggregate stated liquidation amount of the capital securities
and common securities of that HCC Trust. Concurrently with the issuance of each
HCC Trust's capital securities, each HCC Trust will invest the proceeds from the
sale of the capital securities and the consideration HCC pays for the common
securities in a series of corresponding junior subordinated debentures that we
will issue to that HCC Trust.

The prospectus supplement will describe specific terms relating to the offering
of each series of junior subordinated debentures. See "Description Of Debt
Securities -- Terms."

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Unless otherwise specified in the applicable securities resolution, we will
covenant, as to each series of junior subordinated debentures:

- to maintain, directly or indirectly, 100% ownership of the common
securities of the HCC Trust to which the corresponding junior
subordinated debentures have been issued (provided that certain
successors which are permitted pursuant to the indenture may succeed to
our ownership of the common securities);

- not to voluntarily terminate, wind-up or liquidate any HCC Trust, except:

- in connection with a distribution of the junior subordinated debentures
to the holders of the capital securities in liquidation of the HCC
Trust; or

- in connection with certain mergers, consolidations or amalgamations
permitted by the related trust agreement; and

- to use our reasonable efforts, consistent with the terms and provisions
of the related trust agreement, to cause such HCC Trust to remain
classified as a grantor trust and not as an association taxable as a
corporation for United States federal income tax purposes.

For additional covenants relating to payment of expenses of the HCC Trusts, see
"Description of Capital Securities -- Payment of Expenses."

Option to Defer Interest Payment Date. Unless otherwise stated in the applicable
prospectus supplement, we will have the right at any time and from time to time
during the term of any series of junior subordinated debentures issued to an HCC
Trust to defer payments of interest by extending the interest payment period for
a specified number of consecutive periods. No deferral period may extend beyond
the maturity date of that series of junior subordinated debentures. We may pay
at any time all or any portion of the interest accrued to that point during a
deferral period. At the end of the deferral period or at a redemption date, we
will be obligated to pay all interest accrued and unpaid (together with interest
on the unpaid interest to the extent permitted by applicable law). United States
federal income tax consequences and special considerations applicable to any
junior subordinated debentures issued to an HCC Trust for which a deferral
period has been elected will be described in the applicable prospectus
supplement. During any deferral period, or while we are in default, we will be
restricted in our ability to make payments or incur obligations related to its
capital stock or debt securities ranking equal to or below the junior
subordinated debentures. See "-- Restrictions on Certain Payments."

Prior to the termination of any deferral period, we may extend the interest
payment period, and, after the termination of any deferral period and the
payment of all amounts due, we may decide to begin a new deferral period.
However, the deferral period may not extend beyond the maturity date of the
junior subordinated debentures.

If the trustee is the sole holder of the series of junior subordinated
debentures held by the HCC Trust, we will give the trustee and the issuer
trustees of the HCC Trust notice of our selection of any deferral period one
business day prior to the earlier of:

- the next date distributions on the capital securities are payable; or

- the date the HCC Trust is required to give notice to the New York Stock
Exchange (or other applicable self-regulatory organization) or to holders
of its capital securities of the record date or the date any distribution
on the capital securities is payable.

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If the property trustee is not the sole holder of the series of junior
subordinated debentures, we will give the holders of the junior subordinated
debentures notice of our selection of any deferral period ten business days
prior to the earliest of:

- the next interest payment date; or

- the date upon which we are required to give notice to the NYSE (or other
applicable self-regulatory organization) or to holders of the junior
subordinated debentures of the record or payment date of any related
interest payment.

Redemption. The junior subordinated debentures and the applicable securities
resolution will provide the terms upon which we can redeem the junior
subordinated debentures at our option, and will specify a date prior to which we
will not be allowed to redeem the junior subordinated debentures, and after
which we will have the right to redeem the junior subordinated debentures, in
whole or in part, upon not less than 30 days nor more than 60 days notice to the
holder of the junior subordinated debentures at a redemption price or prices
stated in the applicable prospectus supplement.

If the junior subordinated debentures are redeemed only in part, they will be
redeemed pro rata or by lot or by any other method selected by the trustee. If a
partial redemption of the junior subordinated debentures would result in
delisting from any national securities exchange or other self-regulatory
organization on which the capital securities of the HCC Trust holding the junior
subordinated debentures are then listed, we will not be permitted to effect a
partial redemption and may only redeem the junior subordinated debentures as a
whole.

Except as otherwise specified in the applicable prospectus supplement and
subject to the provisions of the applicable securities resolution, if a Tax
Event (as defined below) or an Investment Company Event (as defined below) in
respect of an HCC Trust occurs and is continuing, HCC has the option to redeem
the junior subordinated debentures held by that HCC Trust, in whole, but not in
part, at any time within 90 days thereafter. If the applicable HCC Trust is the
holder of all outstanding junior subordinated debentures, the proceeds of the
redemption will be used by the HCC Trust to redeem its capital securities and
common securities in accordance with their terms.

However, in the case of an occurrence of a Tax Event or an Investment Company,
if we can eliminate, within the 90 day period, such event by taking some action,
such as filing a form or making an election, or pursuing some other similar
reasonable measure which has no adverse effect on us, the relevant HCC Trust or
the holders of the capital securities or the common securities, we will pursue
that action instead of redemption. We will have no right to redeem the junior
subordinated debentures while such HCC Trust or the property trustee is pursuing
any similar action based on its obligations under the trust agreement.

"Tax Event" means that the applicable HCC Trust will have received an opinion of
counsel (which may be counsel to HCC or an affiliate) experienced in such
matters to the effect that, as a result of any

- amendment to, or change (including any announced proposed change) in the
laws or any regulations under the laws of the United States or any
political subdivision or taxing authority, or

- official administrative pronouncement or judicial decision interpreting
or applying the laws or regulations stated above whether or not the
pronouncement or decision is issued to or in connection with a proceeding
involving us or the HCC Trust,

in each case which amendment or change is effective or which proposed change,
pronouncement, action or decision is announced on or after the date of issuance
of the applicable series of junior subordinated debentures pursuant to the
applicable securities resolution, there is more than an insubstantial risk that:

- the HCC Trust is, or will be within 90 days of the date of the opinion of
counsel, subject to United States Federal income tax with respect to
income received or accrued on the junior subordinated debentures;

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- interest we pay on the corresponding junior subordinated debentures is
not, or will not be within 90 days of the date of the opinion of counsel,
deductible, in whole or in part, for United States Federal income tax
purposes; or

- the HCC Trust is, or will be within 90 days of the date of the opinion of
counsel, subject to more than a de minimis amount of other taxes, duties
or other governmental charges.

"Investment Company Event" means that the applicable HCC Trust will have
received an opinion of counsel experienced in such matters to the effect that,
as a result of the occurrence of a change in law or regulation or a change in
interpretation or application of law or regulation by any legislative body,
courts, governmental agency or regulatory authority on or after the date of
original issuance of the capital securities by the HCC Trust, the HCC Trust is
or will be considered an "investment company" that is required to be registered
under the Investment Company Act of 1940, as amended.

Restrictions on Certain Payments. Unless otherwise provided in the applicable
prospectus supplement, we will promise, as to each series of junior subordinated
debentures issued to an HCC Trust, that it will not:

- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of its
capital stock;

- make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any of its debt securities (including other junior
subordinated debentures) that rank equally with or junior in interest to
the junior subordinated debentures; or

- make any guarantee payments with respect to any of the debt securities of
any of its subsidiaries if the guarantee ranks equally with or junior in
interest to the junior subordinated debentures;

other than:

- dividends or distributions payable in its common stock;

- payments under any guarantee relating to the capital securities of an HCC
Trust;

- purchases of common stock related to the issuance of common stock under
any employment agreement or benefit plan for its directors, officers or
employees; and

- obligations under any dividend reinvestment plan or stock purchase plan.

These restrictions apply only if:

- at that time an event has occurred that (a) with the giving of notice or
the lapse of time, or both, would constitute an event of default under
the indenture with respect to the junior subordinated debentures of that
series and (b) HCC shall not have taken reasonable steps to cure the
event;

- the junior subordinated debentures are held by an HCC Trust and we are in
default with respect to payment of any obligations under the guarantee
relating to the capital securities of that HCC Trust; or

- we shall have given notice of its intention to begin an interest deferral
period and have not rescinded the notice, or any deferral period is
continuing.

REGARDING THE TRUSTEE

First Union National Bank will act as trustee and registrar for registration and
transfer of debt securities issued under the indenture. (Section 3.6) The
trustee, in its individual or any other capacity, may make loans to, accept
deposits from, and perform services for us or our affiliates, and may otherwise
deal with us or our affiliates, as if it were not the trustee.

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DESCRIPTION OF CAPITAL SECURITIES

The following section describes the general terms and provisions of the capital
securities to which any prospectus supplement may relate. The particular terms
of the capital securities offered by any HCC Trust and the extent to which any
of these general provisions do not apply to its capital securities will be
described in the prospectus supplement relating to that HCC Trust and its
capital securities.

The capital securities will represent undivided beneficial ownership interests
in the assets of an HCC Trust. The holders of the capital securities of an HCC
Trust will be entitled to a preference over holders of the common securities of
such HCC Trust in certain circumstances with respect to distributions and
amounts payable on redemption or liquidation. Holders of capital securities will
also have certain other benefits as described in the corresponding trust
agreement.

HCC has summarized selected provisions of the capital securities and each trust
agreement below. This summary is not complete. The form of trust agreement has
been filed as an exhibit to the registration statement of which this prospectus
forms a part. You should read the form of trust agreement for provisions that
may be important to you. You should also consider applicable provisions of the
Trust Indenture Act. Each of the HCC Trusts is a legally separate entity, and
the assets of one are not available to satisfy the obligations of the other.

GENERAL

The capital securities of an HCC Trust will rank equally, and payments on the
capital securities will be made pro rata, with the common securities of that HCC
Trust except as described under "-- Subordination of Common Securities." Legal
title to the junior subordinated debentures issued to an HCC Trust will be held
by the property trustee in trust for the benefit of the holders of the capital
securities of that HCC Trust and for HCC as holder of the common securities of
that HCC Trust. Each guarantee agreement HCC executes for the benefit of the
holders of an HCC Trust's capital securities will be a guarantee on a junior
subordinated basis with, but will not guarantee payment of distributions or
amounts payable on redemption or liquidation of, such capital securities if the
HCC Trust does not have funds available to make such payments. See "Description
of Guarantees."

DISTRIBUTIONS

Distributions on the capital securities will be cumulative, will accumulate from
the date of original issuance and will be payable on the dates specified in the
applicable prospectus supplement. Except as specified in the applicable
prospectus supplement, in the event that any date on which distributions are
payable on the capital securities is not a business day, payment of the
distribution will be made on the next succeeding day that is a business day
(without any interest or other payment in respect of the delay), with the same
force and effect as if made on the originally specified date. However, if the
next business day is in the next calendar year, payment of distributions will be
made on the preceding business day. Each date on which distributions are payable
is referred to in this prospectus as a distribution date.

An HCC Trust's capital securities represent undivided beneficial ownership
interests in the assets of that HCC Trust. The distributions on each capital
security will be payable at a rate specified in the prospectus supplement for
that capital security. The amount of distributions payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months unless
otherwise specified in the applicable prospectus supplement. Distributions to
which holders of capital securities are entitled will accumulate interest at the
rate per annum specified in the applicable prospectus supplement. Distributions
on capital securities as used in this prospectus includes these additional
distributions unless otherwise stated.

The revenue of each HCC Trust available for distribution to holders of its
capital securities will be limited to payments it receives from us under the
junior subordinated debentures it owns. Each HCC Trust will invest the proceeds
from the issuance and sale of its common securities and capital securities in
the corresponding junior subordinated debentures, and it will have no other
assets. See "Description of Debt Securities -- Certain Provisions Relating to
Junior Subordinated Debentures Issued to the HCC Trusts."

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If we do not make interest payments on the junior subordinated debentures held
by an HCC Trust, the property trustee will not have funds available to pay
distributions on the capital securities of that HCC Trust. We have guaranteed
the payment of distributions (if and to the extent the HCC Trust has funds
legally available for the payment of distributions and cash sufficient to make
the payments) on a limited basis as set forth herein under "Description of
Guarantees."

We may defer interest on any series of junior subordinated debentures for a
specified number of consecutive interest payment periods. See "Description of
Debt Securities -- Certain Provisions Relating to Junior Subordinated Debentures
Issued to the HCC Trustee -- Option to Defer Interest Payment Date." If HCC
defers interest payments on the corresponding junior subordinated debentures
held by an HCC Trust, the HCC Trust will defer payments on its capital
securities.

Distributions on the capital securities will be payable to the holders as they
appear on the register of the HCC Trust on the relevant record dates, which, as
long as the capital securities remain in book-entry form, will be one business
day prior to the relevant distribution date. Subject to any applicable laws and
regulations and to the provisions of the applicable trust agreement, each
distribution payment will be made as described under "Book-Entry Issuance." In
the event any capital securities are not in book-entry form, the relevant record
date for such capital securities shall be a date at least 15 days prior to the
relevant distribution date, as specified in the applicable prospectus
supplement.

PAYMENT OF EXPENSES

Pursuant to the indenture, we have agreed to pay all debts and obligations
(other than distributions on the common securities and capital securities) and
all costs and expenses of the HCC Trusts and to pay any and all taxes, duties,
assessments or other governmental charges (other than United States withholding
taxes) imposed by the United States or any other taxing authority. This
includes, but is not limited to, all costs and expenses relating to the
organization of the HCC Trusts, the fees and expenses of the property trustee,
the Delaware trustee and the administrators and all costs and expenses relating
to the operation of the HCC Trusts. As a result, the net amounts received and
retained by an HCC Trust after paying these fees, expenses, debts and
obligations will be equal to the amounts the HCC Trust would have received and
retained had no fees, expenses, debts and obligations been incurred by or
imposed on it. Our promise to pay these obligations is for the benefit of, and
shall be enforceable by, any creditor to whom the fees, expenses, debts and
obligations are owed, whether or not the creditor has received notice of the
promise. Any creditor may enforce these obligations directly against us, and we
have agreed to irrevocably waive any right or remedy that would otherwise
require that any creditor take any action against the HCC Trust or any other
person before proceeding against us. We will execute such additional agreements
as may be necessary to give full effect to these promises.

REDEMPTION OR EXCHANGE

If we repay or redeem, in whole or in part, any junior subordinated debentures
that have been issued to an HCC Trust, whether at maturity or earlier, the
proceeds from the repayment or redemption shall be applied by the property
trustee to redeem a like amount of the capital securities and the common
securities of that HCC Trust. The property trustee will give you at least 30 but
no more than 60 days notice, and the redemption price will be equal to the sum
of:

- the aggregate liquidation amount of the capital securities and common
securities being redeemed; plus

- accumulated but unpaid distributions on to the redeemed capital
securities and common securities to the date of redemption; plus

- the related amount of the premium, if any, that we pay upon the
concurrent redemption of corresponding junior subordinated debentures.

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See "Description of Debt Securities -- Certain Provisions Relating to Junior
Subordinated Debentures Issued to the HCC Trusts -- Redemption."

If we are repaying or redeeming less than all of any series of junior
subordinated debentures held by an HCC Trust on a redemption date, then the
proceeds from the repayment or redemption shall be allocated to redeem the
capital securities and common securities issued by that HCC Trust, pro rata. The
amount of premium, if any, that HCC pays to redeem all or any part of any series
of junior subordinated debentures held by an HCC Trust will also be allocated
pro rata to the redemption of the capital securities and common securities
issued by that HCC Trust.

We will have the right to redeem any series of junior subordinated debentures:

- subject to the conditions described under "Description Of Debt
Securities -- Certain Provisions Relating to Junior Subordinated
Debentures Issued to the HCC Trusts -- Redemption"; or

- as may be otherwise specified in the applicable prospectus supplement.

We have the right to terminate an HCC Trust at any time and, after satisfaction
of any liabilities to creditors of that HCC Trust as provided by applicable law,
to cause the junior subordinated debentures owned by that HCC Trust to be
distributed to the holders of the capital securities and common securities in
liquidation of that HCC Trust.

If provided in the applicable prospectus supplement, we will have the right to
extend or shorten the maturity of any series of junior subordinated debentures
at the time that we exercise our right to elect to terminate an HCC Trust and
cause the junior subordinated debentures held by that HCC Trust to be
distributed to the holders of the capital securities and common securities in
liquidation of that HCC Trust. However, we can extend the maturity only if the
conditions specified in the applicable prospectus supplement are met at the time
the election is made and at the time of the extension.

After the liquidation date fixed for any distribution of junior subordinated
debentures to the holders of any series of capital securities:

- that series of capital securities will no longer be deemed to be
outstanding;

- The Depository Trust Company ("DTC") or its nominee, as the record holder
of the capital securities, will receive a registered global certificate
or certificates representing the junior subordinated debentures to be
delivered in the distribution;

- We shall use our reasonable efforts to list the junior subordinated
debentures on the NYSE or on such other exchange, interdealer quotation
system or self-regulatory organization as such capital securities are
then listed; and

- any certificates representing that series of capital securities not held
by DTC or its nominee will be deemed to represent the junior subordinated
debentures having a principal amount equal to the stated liquidation
amount of that series of capital securities, bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid distributions on
that series of capital securities until the certificates are presented to
the administrators or their agent for transfer or reissuance.

We cannot predict the market prices for the capital securities or the junior
subordinated debentures that may be distributed in exchange for capital
securities. As a result, the capital securities that an investor may purchase,
or the junior subordinated debentures that an investor may receive on
termination and liquidation of an HCC Trust, may trade at a lower price than the
investor paid to purchase the capital securities.

REDEMPTION AND EXCHANGE PROCEDURES

Any capital securities that are redeemed on any redemption date will be redeemed
with the proceeds received by the HCC Trust from the contemporaneous redemption
of the junior subordinated debentures held by that HCC Trust. Redemptions of the
capital securities will be made and the redemption price will
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be payable on each redemption date only to the extent that the related HCC Trust
has cash on hand available for the payment of such redemption price. See
"-- Subordination of Common Securities."

If an HCC Trust gives a notice of redemption in respect of its capital
securities, then, by 12:00 noon, New York City time, on the redemption date, the
property trustee will deposit irrevocably with DTC funds sufficient to pay the
applicable redemption price to the extent funds are available. The property
trustee will give DTC irrevocable instructions and authority to pay the
redemption price to the holders of such capital securities. See "Book-Entry
Issuance." If the capital securities are no longer in book-entry form, the
property trustee, to the extent funds are available, will irrevocably deposit
with the paying agent for the capital securities funds sufficient to pay the
applicable redemption price and will give the paying agent irrevocable
instructions and authority to pay the redemption price to the holders of the
capital securities upon surrender of the certificates evidencing their capital
securities.

Except as specified in the applicable prospectus supplement, in the event that
any date fixed for redemption of capital securities is not a business day, then
payment of the redemption price payable on such date will be made on the next
succeeding day which is a business day (and without any interest or other
payment in respect of any delay). However, if the next business day is in the
next calendar year, the redemption price will be payable on the preceding
business day. In the event that payment of the redemption price in respect of
capital securities called for redemption is improperly withheld or refused and
not paid either by the HCC Trust or by HCC pursuant to the guarantee as
described under "Description of Guarantees," then:

- distributions on those capital securities will continue to accrue at the
then applicable rate from the redemption date originally established by
the HCC Trust for those capital securities to the date the redemption
price is actually paid; and

- the actual payment date will be the date fixed for redemption for
purposes of calculating the redemption price.

Payment of the redemption price on the capital securities and any distribution
of corresponding junior subordinated debentures to holders of capital securities
will be made to the applicable record holders thereof as they appear on the
register for the capital securities on the relevant record date. The record date
will be one business day prior to the relevant redemption date or liquidation
date, as applicable, except that if any capital securities are not in book-entry
form, the relevant record date for those capital securities shall be a date at
least 15 days prior to the redemption date or liquidation date, as applicable,
as specified in the applicable prospectus supplement.

If an HCC Trust redeems less than all of its capital securities and common
securities, then the aggregate liquidation amount of capital securities and
common securities to be redeemed will be allocated pro rata between the capital
securities and the common securities based upon their respective aggregate
liquidation amounts. Within 60 days of the redemption date, the property trustee
will select the capital securities to be redeemed from among the outstanding
capital securities not previously called for redemption. The property trustee
may use any method of selection it deems to be fair and reasonable.

Notice of any redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of capital securities or common
securities to be redeemed at the holder's registered address.

Unless we default in payment of the redemption price on the junior subordinated
debentures, on and after the redemption date, interest ceases to accrue on the
junior subordinated debentures or portions thereof (and distributions cease to
accrue on the capital securities or portions thereof issued by the HCC Trust
that holds such junior subordinated debentures) called for redemption.

If notice of redemption has been given and funds deposited as required, then
upon the date of such deposit all rights of the holders of the capital
securities called for redemption will cease, except the right to receive the
redemption price, but without interest on the redemption price, and the capital
securities will cease to be outstanding.
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SUBORDINATION OF COMMON SECURITIES

Payment of distributions on, and the redemption price of, each HCC Trust's
capital securities and common securities, as applicable, generally shall be made
pro rata based upon their respective aggregate liquidation amounts. However, if
on any distribution date or redemption date an event of default with respect to
any junior subordinated debenture held by an HCC Trust has occurred and is
continuing, then:

- We shall not pay any distribution on, or redemption price of, any of the
HCC Trust's common securities, and we can not make any other payment on
account of the redemption, liquidation or other acquisition of such
common securities, unless

- all accumulated and unpaid distributions on all of the HCC Trust's
outstanding capital securities are paid in full in cash for all
distribution periods terminating on or prior to any payment on the
common securities,

- in the case of a payment of the redemption price, the full amount of the
redemption price on all of the HCC Trust's outstanding capital
securities then called for redemption shall have been paid or provided
for, and

- all funds available to the property trustee shall first be applied to
the payment in full in cash of all distributions on, or redemption price
of, the HCC Trust's capital securities then due and payable.

In the case of any event of default with respect to any junior subordinated
debentures held by an HCC Trust, HCC (as holder of the HCC Trust's common
securities) will be deemed to have waived any right to act with respect to the
event of default under the applicable trust agreement until the effect of all
events of default with respect to such capital securities has been cured, waived
or otherwise eliminated. Until any events of default under the applicable trust
agreement with respect to the capital securities have been cured, waived or
otherwise eliminated, the property trustee is required to act solely on behalf
of the holders of the capital securities and not on our behalf as holder of the
HCC Trust's common securities, and only the holders of such capital securities
will have the right to direct the property trustee to act on their behalf.

LIQUIDATION DISTRIBUTION UPON TERMINATION

Pursuant to each trust agreement, each HCC Trust will automatically terminate
upon the expiration of its term or on the first to occur of:

- specified events relating to our bankruptcy, dissolution or liquidation;

- our written direction to the property trustee, as depositor, to dissolve
the HCC Trust and distribute the corresponding junior subordinated
debentures to the holders of the capital securities in exchange for the
capital securities (which direction is optional and wholly within our
discretion as depositor);

- the redemption of all of the HCC Trust's capital securities and common
securities; and

- the entry of an order for the dissolution of the HCC Trust by a court of
competent jurisdiction.

If an early termination occurs for any reason other than the redemption of all
of the capital securities and common securities, the HCC Trust will be
liquidated by the property trustee as expeditiously as the issuer trustees
determine to be possible. Except as provided in the next sentence, the issuer
trustees will distribute (after satisfaction of any liabilities to creditors of
such HCC Trust as provided by applicable law) to the holders of such capital
securities and common securities a like amount of the corresponding junior
subordinated debentures. However, if such a distribution is determined by the
property trustee not to be practical, the holders of the capital securities will
be entitled to receive out of the assets of the HCC Trust available for
distribution to holders (after satisfaction of any liabilities to creditors of
the HCC Trust as provided by applicable law) a liquidation distribution in an
amount equal to the aggregate of the liquidation amount plus accrued and unpaid
distributions thereon to the date of payment. If the liquidation
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distribution can be paid only in part because the HCC Trust has insufficient
assets available to pay in full the aggregate liquidation distribution, then the
amounts payable directly by the HCC Trust on its capital securities will be paid
on a pro rata basis.

As the holder of the HCC Trust's common securities, we will be entitled to
receive distributions upon any liquidation pro rata with the holders of its
capital securities. However, if an event of default relating to the junior
subordinated debentures held by an HCC Trust has occurred and is continuing,
that HCC Trust's capital securities will have a priority over its common
securities.

ADDITIONAL AMOUNTS

If at any time an HCC Trust is required to pay any taxes, duties, assessments or
governmental charges of whatever nature, other than withholding taxes, imposed
by the United States, or any other taxing authority, then HCC will be required
to pay additional amounts on the junior subordinated debt securities. The
additional amounts will be sufficient so that the net amounts received and
retained by the HCC Trust after paying any such taxes, duties, assessments or
other governmental charges will be not less than the amounts the HCC Trust would
have received had no such taxes, duties, assessments or other governmental
charges been imposed. This means that the HCC Trust will be in the same position
it would have been if it did not have to pay such taxes, duties, assessments or
other charges.

EVENTS OF DEFAULT; NOTICE

Any one of the following events constitutes a "trust event of default" under
each trust agreement with respect to the capital securities issued by an HCC
Trust thereunder (whatever the reason for the trust event of default):

- an event of default with respect to the junior subordinated debentures
issued under the indenture to the HCC Trust occurs (see "Description of
Debt Securities -- Defaults");

- the property trustee does not pay any distribution within 30 days of its
due date, provided that no deferral period is continuing;

- the property trustee does not pay any redemption price of any trust
security when it becomes due and payable;

- the default by an issuer trustee in the performance, or breach, in any
material respect, of any covenant or warranty of the issuer trustees in
the trust agreement (other than a default in the payment of any
distribution or any redemption price as provided above), and continuation
of that default or breach for a period of 90 days after there has been
given, by registered or certified mail, to the defaulting issuer trustee
by the holders of at least 25% in aggregate liquidation preference of the
outstanding capital securities of the applicable HCC Trust, a written
notice specifying the default or breach and requiring it to be remedied
and stating that the notice is a "notice of default" under the trust
agreement.

Within 90 days after learning of the occurrence of any trust event of default,
the property trustee is required to transmit notice of the trust event of
default to the holders of the HCC Trust's capital securities, to the
administrators and to HCC, as depositor, unless the trust event of default has
been cured or waived.

If an event of default with respect to a corresponding junior subordinated
debenture has occurred and is continuing, the capital securities shall have a
preference over the common securities upon termination of the HCC Trust as
described above. See "-- Liquidation Distribution upon Termination." The
existence of a trust event of default with respect to an HCC Trust does not
entitle the holders of capital securities issued by that HCC Trust to cause the
redemption of the capital securities.

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REMOVAL OF ISSUER TRUSTEES

We as the holder of the common securities of an HCC Trust may remove either
issuer trustee at any time, unless an event of default with respect to junior
subordinated debentures held by that HCC Trust has occurred and is continuing.
If a trust event of default resulting from an event of default with respect to
junior subordinated debentures held by that HCC Trust has occurred and is
continuing, the property trustee and the Delaware trustee may be removed by the
holders of a majority in liquidation amount of the outstanding capital
securities of that HCC Trust. In no event will the holders of the capital
securities have the right to vote to appoint, remove or replace the
administrators: that right belongs exclusively to us as the holder of the common
securities. No resignation or removal of an issuer trustee and no appointment of
a successor trustee will be effective until the successor trustee accepts its
appointment in accordance with the provisions of the applicable trust agreement.

MERGER OR CONSOLIDATION OF ISSUER TRUSTEES

Any corporation into which the property trustee or the Delaware trustee that is
not a natural person may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which such trustee shall be a party, or any corporation
succeeding to all or substantially all the corporate trust business of such
trustee, shall be the successor of such trustee under each trust agreement,
provided such corporation shall be otherwise qualified and eligible.

MERGERS, CONSOLIDATIONS, CONVERSIONS, AMALGAMATIONS OR REPLACEMENTS OF THE HCC
TRUSTS

An HCC Trust may not merge or consolidate with or into, convert into, amalgamate
or be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other person, except as
described below, as described in "-- Liquidation Distribution upon Termination"
or as described in the prospectus supplement with respect to the capital
securities. An HCC Trust may, at HCC's request, with the consent the holders of
a majority of its capital securities, merge or consolidate with or into, convert
into, amalgamate or be replaced by or convey, transfer or lease its properties
and assets substantially as an entirety to a trust organized as such under the
laws of any state; provided, that:

- the successor entity either (a) expressly assumes all of the obligations
of the HCC Trust with respect to its capital securities or (b)
substitutes for the capital securities other successor securities having
substantially the same terms as the capital securities so long as the
successor securities rank the same as the capital securities rank in
priority with respect to distributions and payments upon liquidation,
redemption and otherwise;

- We expressly appoint a trustee of such successor entity possessing the
same powers and duties as the property trustee as the holder of the
corresponding junior subordinated debentures;

- the successor securities are listed, or any successor securities will be
listed upon notification of issuance, on any national securities exchange
or other organization on which the capital securities are then listed, if
any;

- the merger, consolidation, conversion, amalgamation, replacement,
conveyance, transfer or lease does not cause the capital securities
(including any successor securities) to be downgraded by a nationally
recognized statistical rating organization;

- the merger, consolidation, conversion, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the capital securities
(including any successor securities) in any material respect;

- the successor entity has a purpose substantially similar to that of the
HCC Trust;

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- prior to the merger, consolidation, conversion, amalgamation,
replacement, conveyance, transfer or lease, the property trustee has
received an opinion from independent counsel to the HCC Trust experienced
in such matters to the effect that:

- following the merger, consolidation, conversion, amalgamation,
replacement, conveyance, transfer or lease, neither the HCC Trust nor
such successor entity will be required to register as an investment
company under the Investment Company Act; and

- We or any permitted successor or assignee own all of the common
securities of the successor entity and guarantees the obligations of the
successor entity under the successor securities at least to the extent
provided by the guarantee.

Notwithstanding the general provisions described above, an HCC Trust shall not,
except with the consent of holders of 100% in liquidation amount of the capital
securities, merge with or into, consolidate, convert into, amalgamate, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such merger, consolidation,
conversion, amalgamation, replacement, conveyance, transfer or lease would cause
the HCC Trust or the successor entity to be classified as other than a grantor
trust for United States federal income tax purposes.

VOTING RIGHTS; AMENDMENT OF EACH TRUST AGREEMENT

The holders of the capital securities will have only the voting rights described
below and under "Description of Guarantees -- Amendments and Assignment," plus
any voting rights required by law.

Each trust agreement may be amended from time to time by us and the property
trustee, without the consent of the holders of the capital securities:

- to cure any ambiguity, correct or supplement any provisions in the trust
agreement that may be inconsistent with any other provision, or to
address matters or questions arising under the trust agreement in a way
which is consistent with the other provisions of the trust agreement; or

- to modify, eliminate or add to any provisions of the trust agreement if
necessary to ensure that the HCC Trust will be classified for United
States federal income tax purposes as a grantor trust or to ensure that
the HCC Trust will not be required to register as an "investment company"
under the Investment Company Act.

However, in the case of the first clause, the action must not adversely affect
in any material respect the interests of any holder of capital securities and
common securities. Any amendment of the trust agreement becomes effective when
HCC gives notice of the amendment to the holders of the capital securities and
common securities.

Each trust agreement may be amended by us and the property trustee with:

- the consent of holders representing not less than a majority (based upon
liquidation amounts) of the outstanding capital securities and common
securities; and

- receipt by the property trustee of an opinion of counsel experienced in
such matters to the effect that the amendment or the exercise of any
power granted to the issuer trustees in accordance with the amendment
will not affect the HCC Trust's status as a grantor trust for United
States federal income tax purposes or the HCC Trust's exemption from
status as an "investment company" under the Investment Company Act.

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However, without the consent of each holder of capital securities and common
securities, no amendment may:

- change the amount or timing of any distribution on the capital securities
and common securities or otherwise adversely affect the amount of any
distribution required to be made in respect of the capital securities and
common securities as of a specified date; or

- restrict the right of a holder of capital securities and common
securities to sue for the enforcement of any distribution payment.

The property trustee is required to notify each holder of capital securities
whenever the property trustee is notified of a default with respect to the
corresponding junior subordinated debentures. Furthermore, so long as any junior
subordinated debentures are held by the property trustee, the issuer trustees
are not permitted to:

- direct the time, method and place of conducting any proceeding for any
remedy available to the trustee under the indenture, or execute any trust
or power conferred on the property trustee with respect to the junior
subordinated debentures;

- waive any past default that is waivable under the indenture governing the
junior subordinated debentures;

- exercise any right to rescind or annul a declaration that the principal
of all the junior subordinated debentures shall be due and payable; or

- give a required consent to any amendment, modification or termination of
the indenture, the applicable securities resolution or the junior
subordinated debentures

unless, in each case, they first obtain the approval of the holders of a
majority in aggregate liquidation amount of all outstanding capital securities.
However, where the indenture requires the consent of each affected holder of
junior subordinated debentures, the property trustee cannot give the consent
without first obtaining the consent of each holder of the capital securities.
The property trustee cannot revoke any action previously authorized or approved
by a vote of the holders of the capital securities except by subsequent vote of
the holders of the capital securities.

In addition to obtaining approval of the holders of the capital securities as
described above, the issuer trustees are required to obtain an opinion of
counsel to the effect that the proposed action will not cause the HCC Trust to
be classified as a corporation for United States federal income tax purposes.

Any required approval of holders of capital securities may be given either at a
meeting of holders of capital securities or pursuant to a written consent. The
property trustee must notify record holders of capital securities of any meeting
in the manner set forth in each trust agreement.

No vote or consent of the holders of capital securities will be required for an
HCC Trust to redeem and cancel its capital securities in accordance with the
applicable trust agreement.

Whenever holders of capital securities are entitled to vote or consent under any
of the circumstances described above, neither HCC nor the issuer trustees will
be permitted to vote. For purposes of any vote or consent, any of the capital
securities that HCC owns (or that are owned by the issuer trustees or our
affiliates) will be treated as if they were not outstanding.

PAYMENT AND PAYING AGENCY

The depositary for the capital securities will make payments in respect of the
capital securities by crediting the relevant accounts at the depositary on the
applicable distribution dates. If any capital securities of an HCC Trust are not
held by the depositary, then the paying agent will mail checks to registered
holders of the capital securities as their addresses appear on its register.
Unless otherwise specified in the applicable prospectus supplement, the paying
agent shall initially be the property trustee and any co-paying agent

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chosen by the property trustee and acceptable to the administrators and to us.
The paying agent can resign upon 30 days' written notice to the property trustee
and to us. If the property trustee resigns as paying agent, the property trustee
will appoint a bank or trust company acceptable to the administrators to act as
paying agent.

REGISTRAR AND TRANSFER AGENT

Unless otherwise specified in the applicable prospectus supplement, the property
trustee will act as registrar and transfer agent for the capital securities.

Each HCC Trust will register transfers of its capital securities without charge,
but will require payment of any tax or other governmental charges that may be
imposed in connection with any transfer or exchange. The HCC Trusts will not
register transfers of their capital securities after the relevant capital
securities are called for redemption.

INFORMATION CONCERNING THE PROPERTY TRUSTEE

The property trustee undertakes to perform only the duties that are specifically
set forth in each trust agreement, other than during the continuance of a trust
event of default. After a trust event of default, the property trustee is
required to exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the property trustee has no obligation to exercise any of its powers
under the applicable trust agreement at the request of any holder of capital
securities unless it is offered reasonable indemnity against the costs, expenses
and liabilities that it might incur by doing so. If no trust event of default
has occurred and is continuing and the property trustee is required to decide
between alternative courses of action, construe ambiguous provisions in the
applicable trust agreement or is unsure of the application of any provision of
the applicable trust agreement, then we will have the right to tell the property
trustee which action to take unless the matter is one on which holders of
capital securities are entitled to vote. If HCC doesn't give any directions, the
property trustee will take whatever action it deems advisable and in the best
interests of the holders of the capital securities and common securities. The
property trustee will have no liability except for its own bad faith, negligence
or willful misconduct.

MISCELLANEOUS

The property trustee and the administrators are authorized and directed to
operate the HCC Trusts in such a way that:

- no HCC Trust will be:

- deemed to be an "investment company" required to be registered under the
Investment Company Act or

- classified as an association taxable as a corporation for United States
federal income tax purposes; and

- the junior subordinated debentures will be treated as HCC's indebtedness
for United State federal income tax purposes.

Holders of the capital securities have no preemptive or similar rights.

No HCC Trust may borrow money or issue debt or mortgage or pledge any of its
assets.

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DESCRIPTION OF GUARANTEES

When the capital securities and common securities of any series are issued by an
HCC Trust, HCC will execute and deliver a guarantee agreement for the benefit of
the holders of the capital securities of that series. The guarantee agreement
will be qualified as an indenture under the Trust Indenture Act. First Union
National Bank will act as guarantee trustee under each guarantee for the
purposes of compliance with the Trust Indenture Act, and will hold the guarantee
for the benefit of the holders of the related HCC Trust's capital securities.

We have summarized certain provisions of the guarantees below. This summary is
not complete. The form of the guarantee agreement has been filed as an exhibit
to the registration statement of which this prospectus forms a part, and you
should read the guarantee agreement for provisions that may be important to you.
Reference in this summary to capital securities means that HCC Trust's capital
securities to which a guarantee relates.

GENERAL

We will promise to pay the guarantee payments to the holders of the capital
securities, as and when due, regardless of any defense, right of set-off or
counterclaim that the HCC Trust may have or assert other than the defense of
payment. Our obligations under the guarantee will rank equal to the
corresponding junior subordinated debentures and will be junior and subordinated
to the Senior Debt. The guarantee payments include the following, to the extent
not paid by or on behalf of the related HCC Trust:

- any accumulated and unpaid distributions required to be paid on the
capital securities, but only if and to the extent that the applicable HCC
Trust has funds on hand available for the distributions at that time;

- the redemption price with respect to any capital securities called for
redemption, if and to the extent that the applicable HCC Trust has funds
on hand available to pay the redemption price at that time; or

- upon a voluntary or involuntary termination, winding up or liquidation of
an HCC Trust (unless the corresponding junior subordinated debentures are
distributed to the holders of the capital securities), the lesser of:

- the liquidation distribution; and

- the amount of assets of the applicable HCC Trust remaining available for
distribution to holders of capital securities.

Our obligation to make a guarantee payment may be satisfied either by our direct
payment of the required amounts to the holders of the applicable capital
securities or by causing the HCC Trust to pay them.

Each guarantee will be an irrevocable guarantee on a junior subordinated basis
of the related HCC Trust's obligations in respect of the capital securities, but
will apply only to the extent that the related HCC Trust has funds sufficient to
make the required payments. If we do not make interest payments on the junior
subordinated debentures held by an HCC Trust, the HCC Trust will not be able to
pay distributions on its capital securities.

We may also agree to guarantee the obligations of the HCC Trusts with respect to
the common securities to the same extent as the guarantee to holders of the
capital securities. However, if there is an event of default with respect to a
corresponding junior subordinated debenture, holders of capital securities
issued by that HCC Trust will have priority over holders of common securities
issued by that HCC Trust.

STATUS OF THE GUARANTEES

Each guarantee will constitute our unsecured obligation and will rank
subordinate and junior in right of payment to all of HCC's Senior Debt.

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Each guarantee will rank equally with all other guarantees HCC issues relating
to capital securities issued by the HCC Trusts. Each guarantee will constitute a
guarantee of payment and not of collection (i.e., the guaranteed party may
institute a legal proceeding directly against HCC as the guarantor to enforce
its rights under the guarantee without first suing anyone else). Each guarantee
will be held for the benefit of the holders of the related capital securities.
Each guarantee will be discharged only by payment of the guarantee payments in
full (to the extent not paid by the HCC Trust) or by distribution of the
corresponding junior subordinated debentures to the holders of the capital
securities. None of the guarantees places a limitation on the amount of
additional Senior Debt or subordinated debt that we may incur. We expect from
time to time to incur additional indebtedness constituting Senior Debt.

AMENDMENTS AND ASSIGNMENT

Except with respect to any changes which do not adversely affect the rights of
holders of the related capital securities in any material respect (in which case
no vote will be required), no guarantee may be amended without the prior
approval of the holders of not less than a majority of the aggregate liquidation
amount of the related outstanding capital securities. The manner of obtaining
any required approval will be as set forth under "Description of Capital
Securities -- Voting Rights; Amendment of Each Trust Agreement." All guarantees
and agreements contained in each guarantee agreement will bind HCC's successors,
assigns, receivers, trustees and representatives and will benefit the holders of
the related capital securities then outstanding.

EVENTS OF DEFAULT

We will be in default under any guarantee agreement if (a) we do not make
required payments or (b) HCC is notified that HCC has not performed some other
obligation and have not cured that failure within 90 days.

The holders of a majority in aggregate liquidation amount of the related capital
securities have the right:

- to direct the time, method and place of conducting any proceeding for any
remedy available to the guarantee trustee in respect of the guarantee
agreement; or

- to direct the exercise of any power conferred upon the guarantee trustee
under the guarantee agreement.

Holders of a majority in aggregate liquidation amount of the related capital
securities also have the right to waive any past event of default and its
consequences.

Any holder of the capital securities may institute a legal proceeding directly
against us to enforce the HCC Trust's rights under the guarantee agreement
without first instituting a legal proceeding against the HCC Trust, the
guarantee trustee or anyone else.

As guarantor, we are required to file annually with the guarantee trustee a
certificate stating whether or not HCC is in compliance with all the conditions
and covenants applicable to us under the guarantee agreement.

INFORMATION CONCERNING THE GUARANTEE TRUSTEE

The guarantee trustee will perform only the duties that are specifically set
forth in each guarantee agreement, other than during the occurrence and
continuance of a default by us in performance of any guarantee. After we default
and while the default continues, the guarantee trustee must exercise the same
degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision and so long as no
default under the applicable guarantee agreement has occurred and is continuing,
the guarantee trustee is under no obligation to exercise any of the powers
vested in it by any guarantee agreement at the request of any holder of any
capital securities unless it is offered reasonable indemnity against the costs,
expenses and liabilities that it might incur by doing so.

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TERMINATION OF THE GUARANTEES

Each guarantee will terminate upon full payment of the redemption price of the
related capital securities, upon full payment of the amounts payable upon
liquidation of the related HCC Trust or upon distribution of corresponding
junior subordinated debentures to the holders of the related capital securities.
Each guarantee will continue to be effective or will be reinstated, as the case
may be, if at any time any holder of the related capital securities must restore
payment of any sums paid under the capital securities or the guarantee.

RELATIONSHIP AMONG THE CAPITAL SECURITIES,
THE CORRESPONDING JUNIOR SUBORDINATED SECURITIES
AND THE GUARANTEES

FULL AND UNCONDITIONAL GUARANTEE

We irrevocably guarantee payments of distributions and other amounts due on the
capital securities (to the extent the applicable HCC Trust has funds available
for the payment of the distributions) as and to the extent set forth under
"Description of Guarantees." Taken together, our obligations under each series
of junior subordinated debentures, the related securities resolution, the
indenture, the related trust agreement and the related guarantee agreement
provide, in the aggregate, a full, irrevocable and unconditional guarantee of
payments of distributions and other amounts due on the related series of capital
securities. No single document standing alone or operating in conjunction with
fewer than all of the other documents constitutes the full guarantee. It is only
the combined operation of these documents that has the effect of providing a
full, irrevocable and unconditional guarantee of the HCC Trust's obligations
under the capital securities. See "The HCC Trusts," "Description of Capital
Securities," and "Description of Debt Securities -- Certain Provisions Relating
to Junior Subordinated Debentures Issued to the HCC Trusts."

If and to the extent that we do not make payments on any series of corresponding
junior subordinated debentures, the HCC Trust will not pay distributions or
other amounts due on its capital securities. The guarantees do not cover payment
of distributions when the related HCC Trust does not have sufficient funds to
pay the distributions. In that event, the remedy for a holder of the capital
securities issued by that trust is to institute a legal proceeding directly
against us for enforcement of payment of the distributions to such holder. Our
obligations under each guarantee are subordinate and junior in right of payment
to all of our Senior Debt.

SUFFICIENCY OF PAYMENTS

As long as we make payments when due on each series of junior subordinated
debentures, those payments will be sufficient to cover distributions and other
payments due on the related capital securities. This is primarily because:

- the aggregate principal amount of each series of junior subordinated
debentures will be equal to the sum of the aggregate stated liquidation
amount of the related capital securities and related common securities;

- the interest rate and interest and other payment dates on each series of
junior subordinated debentures will match the distribution rate and
distribution and other payment dates for the related capital securities;

- we, as issuer of the junior subordinated debentures, have promised to pay
any and all costs, expenses and liabilities of each HCC Trust except the
HCC Trust's obligations under its capital securities; and

- each trust agreement provides that the HCC Trust will not engage in any
activity that is not consistent with the limited purposes of the HCC
Trust.

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We have the right to set-off any payment HCC is otherwise required to make under
the indenture if and to the extent we have already made, or are concurrently
making, a payment under the related guarantee agreement.

ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES

A holder of any capital security may institute a legal proceeding directly
against HCC to enforce its rights under the related guarantee agreement without
first instituting a legal proceeding against the guarantee trustee, the related
HCC Trust or anyone else.

Our default or event of default under any other senior or subordinated
indebtedness would not necessarily constitute a trust event of default. However,
in the event of payment defaults under, or acceleration of, HCC's Senior Debt,
the subordination provisions of the applicable securities resolution will
provide that no payments may be made in respect of the corresponding junior
subordinated debentures until the Senior Debt has been paid in full or any
payment default thereunder has been cured or waived. Our failure to make
required payments on any series of corresponding junior subordinated debentures
would constitute a trust event of default.

LIMITED PURPOSE OF HCC TRUSTS

Each HCC Trust's capital securities evidence undivided beneficial ownership
interests in the assets of that HCC Trust, and each HCC Trust exists for the
sole purposes of issuing its capital securities and common securities, investing
the proceeds in junior subordinated debentures and engaging in only those other
activities necessary, convenient or incidental to those purposes. A principal
difference between the rights of a holder of a capital security and a holder of
a corresponding junior subordinated debenture is that the holder of a junior
subordinated debenture is entitled to receive from us the principal amount of
and interest accrued on the junior subordinated debenture held, while the holder
of a capital security is entitled to receive distributions from the HCC Trust
(or from us under the applicable guarantee agreement) if and to the extent the
HCC Trust has funds available for the payment of the distributions.

RIGHTS UPON TERMINATION

Upon any voluntary or involuntary termination of any HCC Trust involving the
liquidation of the junior subordinated debentures held by that HCC Trust, the
holders of the related capital securities will be entitled to receive the
liquidation distribution in cash, out of assets of the HCC Trust (and after
satisfaction of creditors of the HCC Trust as provided by applicable law). See
"Description of Capital Securities -- Liquidation Distribution upon
Termination." If we become subject to any voluntary or involuntary liquidation
or bankruptcy, the property trustee, as holder of the corresponding junior
subordinated debentures, would be one of our junior subordinated creditors. The
property trustee would be subordinated in right of payment to all of HCC's
Senior Debt, but it would be entitled to receive payment in full of principal
and interest before our stockholders receive payments or distributions. We are
the guarantor under each guarantee agreement and pursuant to the indenture, as
borrower, has agreed to pay all costs, expenses and liabilities of each HCC
Trust (other than the HCC Trust's obligations to the holders of its capital
securities). Accordingly, in the event of our liquidation or bankruptcy the
positions of a holder of capital securities and of a holder of corresponding
junior subordinated debentures are expected to be substantially the same
relative to our other creditors and to our shareholders.

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BOOK-ENTRY ISSUANCE

"STREET NAME" AND OTHER INDIRECT HOLDERS

Investors who hold capital securities in accounts at banks or brokers will
generally not be recognized as legal holders of capital securities. This is
called holding in "Street Name." Instead, the applicable HCC Trust would
recognize only the bank or broker that directly holds, or the financial
institution the bank or broker uses to hold, its capital securities. These
intermediary banks, brokers and other financial institutions pass along
distributions and other payments on the capital securities, either because they
agree to do so in their customer agreements or because they are legally required
to. If you hold capital securities in "Street Name," you should check with your
own institution to find out:

- how it handles securities payments and notices,

- whether it imposes fees or charges,

- how it would handle voting if ever required,

- whether and how you can instruct it to send you capital securities
registered in your own name so you can be a direct holder as described
below, and

- how it would pursue rights under the capital securities if there were a
default or other event triggering the need for holders to act to protect
their interests.

DIRECT HOLDERS

An HCC Trust's obligations, as well as the obligations of HCC, the trustees and
those of any third parties employed by an HCC Trust, or the issuer trustees, run
only to individuals, corporations or other entities who are registered as
holders of capital securities. As noted above, an HCC Trust does not have
obligations to a holder of capital securities who holds in "Street Name" or
other indirect means, either because the holder chooses to hold capital
securities in that manner or because the capital securities are issued in the
form of global securities as described below. For example, once an HCC Trust
makes payment to the registered holder, the HCC Trust has no further
responsibility for the payment even if that holder is legally required to pass
the payment along to a holder as a "Street Name" customer but does not do so.

GLOBAL SECURITIES

The capital securities will be issued in the form of global securities, and,
therefore, the ultimate beneficial owners can only be indirect holders. The
global securities will be registered in the name of DTC or its nominee and the
capital securities included in the global security may not be transferred in the
name of any other direct holder unless the special circumstances described below
occur. Any person wishing to own capital securities must be so indirectly by
virtue of an account with a broker, bank or other financial institution that in
turn has an account with DTC.

Special Investor Considerations for Global Securities. As an indirect holder, an
investor's rights relating to a global security will be governed by the account
rules of the investor's financial institution and of DTC, as well as the general
laws relating to securities transfers. An investor should be aware that because
the capital securities are issued only in the form of global securities:

- the investor will not be able to get the capital securities registered in
his or her own name,

- the investor will not be able to receive physical certificates for his or
her interest in the capital securities,

- the investor will be a "Street Name" holder and must look to his or her
own bank or broker for payments on the capital securities and protection
of his or her legal rights relating to the capital securities (see
"-- 'Street Name' and Other Indirect Holders" above),

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118

- the investor may not be able to sell interests in the capital securities
to some insurance companies and other institutions that are required by
law to own their securities in the form of physical certificates,

- DTC's policies will govern payments, transfers, exchange and other
matters relating to the investor's interest in the global security (see
"-- The DTC System" below; HCC, the HCC Trusts and the issuer trustees
have no responsibility for any aspect of DTC's actions or for its records
of ownership interests in the global security, nor do they supervise DTC
in any way), and

- payment for purchases and sales in the market for corporate bonds and
notes is generally made in next-day funds. In contrast, DTC will usually
require that interests in a global security be purchased or sold within
its system using same-day funds. This difference could have some effect
on how global security interests trade, but neither HCC nor any HCC Trust
knows what the effect will be.

Special Situations When Global Security Will Be Terminated. In a few special
situations, the global security will terminate and interests in it will be
exchanged for physical certificates representing capital securities. After the
exchange, the choice of whether to hold capital securities directly or in
"Street Name" will be up to the investor. Investors must consult their own bank
or brokers to find out how to have their interests in capital securities
transferred to their own name, so that they will be direct holders. The rights
of "Street Name" investors and direct holders in the capital securities are
described above under "-- 'Street Name' and Other Indirect Holders" and
"-- Direct Holders."

The special situations for termination of a global security are:

- DTC notifies us or an HCC Trust that it is unwilling, unable or no longer
qualified to continue as the depositary for the capital securities;

- we in our sole discretion determines that the global security will be
exchangeable for certificated capital securities; or

- an event of default under the trust agreement has occurred and has not
been cured and the holders of a majority in liquidation amount of the
outstanding capital securities determine that the global security will be
exchangeable for certificated capital securities.

When a global security terminates, DTC (and not us or the issuer trustees) is
responsible for deciding the names of the institutions that will be the initial
direct holders.

THE DTC SYSTEM

DTC has advised us that it is a limited-purpose trust company created to hold
securities for its participating organizations (the "Participants"). DTC also
facilitates the clearance and settlement between Participants in transactions of
securities deposited with DTC through changes in the account records of its
Participants. The Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. The
Underwriters are Participants in the DTC System. Access to DTC's system is also
available to other entities such as securities brokers and dealers, banks and
trust companies that work through a Participant (the "Indirect Participants").

When you purchase capital securities through the DTC system, the purchases must
be made by or through a Participant, who will receive credit for the capital
securities on DTC's records. Since you actually own the capital securities, you
are the beneficial owner and your ownership interest will only be recorded on
the Participants' or Indirect Participants' records. DTC has no knowledge of
your individual ownership of the capital securities. DTC's records only show the
identity of the Participants and the amount of the capital securities held by or
through them. You will not receive a written confirmation of your purchase or
sale or any periodic statement directly from DTC. You will receive these from
your Participant or Indirect Participant. Thus the Participants or Indirect
Participants are responsible for keeping accurate account of the holdings of
their customers like you.
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119

Any redemption notices will be sent by HCC and the applicable HCC Trust directly
to DTC, who will in turn inform the Participants, who will then contact you as a
beneficial holder. If less than all of the capital securities are being
redeemed, DTC's current practice is to choose by lot the amount of the interest
of each Participant to be redeemed. The Participant will then use an appropriate
method to allocate the redemption price among its beneficial holders like you.

It is DTC's current practice, upon receipt of any payment of distributions or
liquidation amount, to credit Participants' accounts on the payment date based
on their holdings of beneficial interests in the global securities as shown on
DTC's records. In addition, it is DTC's current practice to assign any
consenting or voting rights to Participants whose accounts are credited with
capital securities on a record date by using an omnibus proxy. Payments by
Participants to owners of beneficial interests in the global securities, and
voting by Participants, will be based on the customary practices between the
Participants and owners of beneficial interests, as is the case with the capital
securities held for the account of customers registered in "Street Name."
However, payments will be the responsibility of the Participants and not of DTC,
the issuer trustees, the HCC Trusts or HCC.

We have obtained the information concerning DTC and DTC's book-entry system from
sources that HCC believes to be accurate, but we are not responsibility for the
accuracy of this information. In addition, we are not responsible for the
performance by DTC, its Participants or any Indirect Participants of any of
their obligations.

REGISTRATION OF JUNIOR SUBORDINATED DEBENTURES

The junior subordinated debentures initially will be issued in certificated form
and registered in the name of the property trustee. If in the future the junior
subordinated debentures are distributed to the holders of capital securities in
exchange for the capital securities and at that time the capital securities are
represented by a global security, the junior subordinated debentures would also
be represented by a global security. In this event, we expect that the
book-entry arrangements applicable to the capital securities would be similar to
those applicable to the junior subordinated debentures.

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120

PLAN OF DISTRIBUTION

The distribution of the securities may be effected from time to time in one or
more transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale. Each prospectus
supplement will describe the method of distribution of the debt securities
offered therein.

We or an HCC Trust may sell the securities in any one or more of the following
ways from time to time:

- to or through underwriters or dealers;

- directly to one or more purchasers; or

- through agents otherwise indicated in the prospectus supplement acting on
a best efforts basis for the period of its appointment.

Each prospectus supplement will set forth the terms of the offering of the
securities being offered thereby, including the name or names of any
underwriters or agents with whom we or an HCC Trust has entered into
arrangements for the sale of the securities, the public offering or purchase
price of those securities, the proceeds to us or a HCC Trust from such sale, any
underwriting discounts and other items constituting underwriters' compensation,
any discounts or concessions allowed or reallowed or paid to dealers, any
commissions allowed or paid to agents, and the name of any securities exchange
on which those securities may be listed. Only underwriters so named in the
applicable prospectus supplement are deemed to be underwriters in connection
with the securities offered thereby.

The obligations of the underwriters to purchase those securities will be subject
to certain conditions precedent, and the underwriters will be obligated to
purchase all the securities of the series offered by either of us and described
in the applicable prospectus supplement if they purchase any of those
securities. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.

Securities may also be offered and sold, if so indicated in the prospectus
supplement, in connection with a remarketing upon their purchase, in accordance
with a redemption or repayment pursuant to their terms, by one or more firms
("remarketing firms") acting as principals for their own accounts or as agents
for either of us. Any remarketing firm will be identified and the terms of its
agreement, if any, with us and its compensation will be described in the
prospectus supplement. Remarketing firms may be deemed to be underwriters in
connection with the securities remarketed thereby.

If so indicated in the prospectus supplement, we or an HCC Trust will authorize
agents, underwriters or dealers to solicit offers by certain institutions to
purchase securities pursuant to delayed delivery contracts providing for payment
and delivery on a future date. There may be limitations on the minimum amount
which may be purchased by any such institutions or on the amount of the
securities which may be sold pursuant to such contracts. Institutions with which
such contracts may be made include:

- commercial and savings banks,

- insurance companies,

- pension funds,

- investment companies and

- educational and charitable institutions.

In each case, such institutions must be approved by us and/or an HCC Trust. The
obligations of any such purchasers pursuant to such delayed delivery contracts
will not be subject to any conditions except (a) the purchase by an institution
of the particular securities shall not at the time of delivery be prohibited
under the laws of any jurisdiction in the United States to which such
institution is subject, and (b) if the particular securities are being sold to
underwriters, we shall have sold to such underwriters all of those

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121

securities other than the securities covered by such arrangements. Underwriters
will not have any responsibility in respect of the validity or performance of
such contracts.

If any underwriter or any selling group member intends to engage in stabilizing,
syndicate short covering transactions, penalty bids or any other transaction in
connection with the offering of securities that may stabilize, maintain, or
otherwise affect the price of those securities, such intention and a description
of such transactions will be described in the prospectus supplement.

Agents and underwriters may be entitled under agreements entered into with us
and/or the applicable HCC Trust to indemnification by us against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof. Certain of any such agents and
underwriters, including their associates, may be customers of, engage in
transactions with, or perform services for, us and our subsidiaries in the
ordinary course of business.

CERTAIN LEGAL MATTERS

Unless otherwise indicated in the applicable prospectus supplements, certain
legal matters in connection with the securities will be passed upon (a) for us
by Haynes and Boone, LLP, our legal counsel and (b) for the HCC Trusts (with
respect to the validity of the capital securities under Delaware law) by
Richards, Layton & Finger, P.A., Wilmington, Delaware, special Delaware counsel
to us and the HCC Trusts. Arthur S. Berner, a partner with Haynes and Boone,
LLP, has options to acquire 22,500 shares of HCC's common stock at an average
exercise price of $17.76.

EXPERTS

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122

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Report of Independent Accountants........................... F-1
Consolidated Balance Sheets at December 31, 1999 and 1998... F-2
Consolidated Statements of Earnings for the three years
ended December 31, 1999................................... F-3
Consolidated Statements of Comprehensive Income for the
three years ended December 31, 1999....................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 1999............... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1999................................... F-8
Notes to Consolidated Financial Statements.................. F-9

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
HCC Insurance Holdings, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of comprehensive income, of changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of HCC Insurance Holdings, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP

Houston, Texas
March 30, 2000

F-1
124

HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-------------------------------
1999 1998
-------------- --------------

ASSETS

Investments:
Fixed income securities, at market (cost: 1999
$343,534,000; 1998 $375,107,000)....................... $ 342,641,000 $ 393,238,000
Marketable equity securities, at market (cost: 1999
$22,493,000; 1998 $1,750,000).......................... 19,970,000 2,252,000
Short-term investments, at cost, which approximates
market................................................. 215,694,000 129,084,000
Other investments, at cost, which approximates fair
value.................................................. 3,017,000 1,072,000
-------------- --------------
Total investments................................. 581,322,000 525,646,000
Cash........................................................ 26,533,000 16,018,000
Restricted cash and cash investments........................ 84,112,000 84,276,000
Premium, claims and other receivables....................... 622,087,000 382,630,000
Reinsurance recoverables.................................... 736,485,000 372,672,000
Ceded unearned premium...................................... 133,657,000 149,568,000
Ceded life and annuity benefits............................. 95,760,000 --
Deferred policy acquisition costs........................... 40,450,000 27,227,000
Property and equipment, net................................. 37,804,000 32,983,000
Goodwill.................................................... 263,687,000 88,043,000
Other assets................................................ 42,827,000 30,006,000
-------------- --------------
TOTAL ASSETS...................................... $2,664,724,000 $1,709,069,000
============== ==============
LIABILITIES
Loss and loss adjustment expense payable.................... $ 871,104,000 $ 460,511,000
Life and annuity policy benefits............................ 95,760,000 --
Reinsurance balances payable................................ 113,373,000 90,983,000
Unearned premium............................................ 188,524,000 201,050,000
Deferred ceding commissions................................. 39,792,000 30,842,000
Premium and claims payable.................................. 598,638,000 337,909,000
Notes payable............................................... 242,546,000 121,600,000
Accounts payable and accrued liabilities.................... 57,559,000 26,311,000
-------------- --------------
Total liabilities................................. 2,207,296,000 1,269,206,000

SHAREHOLDERS' EQUITY

Common Stock, $1.00 par value; 250,000,000 shares
authorized; (issued: 1999 48,839,027 shares; 1998
48,252,478 shares)........................................ 48,839,000 48,252,000
Additional paid-in capital.................................. 176,359,000 162,102,000
Retained earnings........................................... 234,922,000 219,804,000
Accumulated other comprehensive income (loss)............... (2,692,000) 9,705,000
-------------- --------------
Total shareholders' equity........................ 457,428,000 439,863,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $2,664,724,000 $1,709,069,000
============== ==============

See Notes to Consolidated Financial Statements.

F-2
125

HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------

REVENUE
Net earned premium................................. $141,362,000 $143,100,000 $162,571,000
Management fees.................................... 90,713,000 74,045,000 51,039,000
Commission income.................................. 54,552,000 38,441,000 24,209,000
Net investment income.............................. 30,933,000 29,335,000 27,587,000
Net realized investment gain (loss)................ (4,164,000) 845,000 (328,000)
Other operating income............................. 28,475,000 22,268,000 15,239,000
------------ ------------ ------------
Total revenue............................ 341,871,000 308,034,000 280,317,000
EXPENSE
Loss and loss adjustment expense................... 109,650,000 91,302,000 96,514,000
Operating expense:
Policy acquisition costs, net.................... 8,177,000 10,978,000 13,580,000
Compensation expense............................. 77,488,000 56,077,000 51,458,000
Provision for reinsurance........................ 43,462,000 -- --
Restructuring expense............................ 5,489,000 -- --
Other operating expense.......................... 47,247,000 36,063,000 31,628,000
Merger expense................................... -- 107,000 8,069,000
------------ ------------ ------------
Total operating expense.................. 181,863,000 103,225,000 104,735,000
Interest expense................................... 12,964,000 6,021,000 6,004,000
------------ ------------ ------------
Total expense............................ 304,477,000 200,548,000 207,253,000
------------ ------------ ------------
Earnings before income tax provision..... 37,394,000 107,486,000 73,064,000
Income tax provision............................... 12,271,000 35,208,000 23,305,000
------------ ------------ ------------
NET EARNINGS............................. $ 25,123,000 $ 72,278,000 $ 49,759,000
============ ============ ============
BASIC EARNINGS PER SHARE DATA:
Earnings per share............................... $ 0.51 $ 1.51 $ 1.06
============ ============ ============
Weighted average shares outstanding.............. 49,061,000 47,920,000 46,995,000
============ ============ ============
DILUTED EARNINGS PER SHARE DATA:
Earnings per share............................... $ 0.51 $ 1.48 $ 1.03
============ ============ ============
Weighted average shares outstanding.............. 49,649,000 48,936,000 48,209,000
============ ============ ============

See Notes to Consolidated Financial Statements

F-3
126

HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------------ ----------- -----------

Net earnings......................................... $ 25,123,000 $72,278,000 $49,759,000
Other comprehensive income net of tax:
Foreign currency translation adjustment............ 167,000 (344,000) (215,000)
Investment gains (losses):
Investment gains (losses) during the year, net
of deferred tax charge (benefit) of
($8,042,000) in 1999, $1,283,000 in 1998 and
$2,373,000 in 1997............................ (15,271,000) 2,598,000 4,470,000
Less reclassification adjustment for (gains)
losses included in net earnings, net of
deferred tax (charge) benefit of $1,457,000 in
1999, ($296,000) in 1998 and $115,000 in
1997.......................................... 2,707,000 (549,000) 213,000
------------ ----------- -----------
Other comprehensive income (loss)............... (12,397,000) 1,705,000 4,468,000
------------ ----------- -----------
COMPREHENSIVE INCOME............................ $ 12,726,000 $73,983,000 $54,227,000
============ =========== ===========

See Notes to Consolidated Financial Statements.

F-4
127

HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED INCOME TREASURY SHAREHOLDERS'
STOCK CAPITAL EARNINGS (LOSS) STOCK EQUITY
----------- ------------ ------------ ------------- ------------ -------------

BALANCE AS OF DECEMBER 31, 1996.... $49,017,000 $138,515,000 $162,132,000 $3,532,000 $(56,670,000) $296,526,000
Net earnings....................... -- -- 49,759,000 -- -- 49,759,000
Other comprehensive income......... -- -- -- 4,468,000 -- 4,468,000
726,898 shares of Common Stock
issued for exercise of options,
including tax benefit of
$1,725,000....................... 727,000 9,743,000 -- -- -- 10,470,000
1,332,024 shares of Common Stock
issued for acquisitions.......... 1,332,000 9,805,000 (1,507,000) -- -- 9,630,000
Cash dividends declared, $0.12 per
share............................ -- -- (5,219,000) -- -- (5,219,000)
Repurchase of 14,895 shares of
common stock by pooled company
prior to merger.................. -- -- -- -- (324,000) (324,000)
Retirement of 3,316,636 shares of
treasury stock................... (3,317,000) (3,430,000) (50,247,000) -- 56,994,000 --
Other.............................. -- -- 291,000 -- -- 291,000
----------- ------------ ------------ ---------- ------------ ------------
BALANCE AS OF DECEMBER 31,
1997........................... $47,759,000 $154,633,000 $155,209,000 $8,000,000 $ -- $365,601,000
=========== ============ ============ ========== ============ ============

See Notes to Consolidated Financial Statements.

F-5
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED INCOME SHAREHOLDERS'
STOCK CAPITAL EARNINGS (LOSS) EQUITY
----------- ------------ ------------ ------------- -------------

BALANCE AS OF DECEMBER 31, 1997............ $47,759,000 $154,633,000 $155,209,000 $8,000,000 $365,601,000
Net earnings............................... -- -- 72,278,000 -- 72,278,000
Other comprehensive income................. -- -- -- 1,705,000 1,705,000
206,504 shares of Common Stock issued for
exercise of options, including tax
benefit of $925,000...................... 206,000 1,997,000 -- -- 2,203,000
287,025 shares of Common Stock issued for
purchased companies...................... 287,000 5,472,000 -- -- 5,759,000
Cash dividends declared, $0.16 per share... -- -- (7,683,000) -- (7,683,000)
----------- ------------ ------------ ---------- ------------
BALANCE AS OF DECEMBER 31, 1998.......... $48,252,000 $162,102,000 $219,804,000 $9,705,000 $439,863,000
=========== ============ ============ ========== ============

See Notes to Consolidated Financial Statements.

F-6
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE TOTAL
COMMON PAID-IN RETAINED INCOME SHAREHOLDERS'
STOCK CAPITAL EARNINGS (LOSS) EQUITY
----------- ------------ ------------ ------------- -------------

BALANCE AS OF DECEMBER 31, 1998............ $48,252,000 $162,102,000 $219,804,000 $ 9,705,000 $439,863,000
Net earnings............................... -- -- 25,123,000 -- 25,123,000
Other comprehensive income (loss).......... -- -- -- (12,397,000) (12,397,000)
505,555 shares of Common Stock issued for
exercise of options, including tax
benefit of $1,156,000.................... 506,000 4,277,000 -- -- 4,783,000
101,330 shares of Common Stock issued for
purchased companies...................... 101,000 1,899,000 -- -- 2,000,000
414,207 shares of Common Stock
contractually issuable in the future..... -- 8,271,000 -- -- 8,271,000
Cash dividends declared, $0.20 per share... -- -- (9,733,000) -- (9,733,000)
Other...................................... (20,000) (190,000) (272,000) -- (482,000)
----------- ------------ ------------ ------------ ------------
BALANCE AS OF DECEMBER 31, 1999.......... $48,839,000 $176,359,000 $234,922,000 $ (2,692,000) $457,428,000
=========== ============ ============ ============ ============

See Notes to Consolidated Financial Statements.

F-7
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------- ------------- ------------

Cash flows from operating activities:
Net earnings...................................... $ 25,123,000 $ 72,278,000 $ 49,759,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Change in premium, claims and other
receivables.................................. (92,206,000) (102,804,000) (84,309,000)
Change in reinsurance recoverables.............. (284,504,000) (195,707,000) (70,972,000)
Change in ceded unearned premium................ 31,408,000 (64,958,000) (12,852,000)
Change in deferred policy acquisition costs,
net.......................................... (4,659,000) 5,666,000 5,857,000
Change in other assets.......................... (12,081,000) 410,000 (4,501,000)
Change in loss and loss adjustment expense
payable...................................... 264,360,000 181,626,000 45,959,000
Change in reinsurance balances payable.......... (15,098,000) 47,069,000 24,800,000
Change in unearned premium...................... (31,138,000) 46,074,000 (4,174,000)
Change in premium and claims payable, net of
restricted cash.............................. 102,114,000 64,364,000 98,952,000
Change in accounts payable and accrued
liabilities.................................. 4,707,000 (9,205,000) (2,794,000)
Net realized investment (gain) loss............. 4,164,000 (845,000) 328,000
Gains on sales of strategic investments......... (5,523,000) (4,694,000) --
Provision for reinsurance....................... 43,462,000 -- --
Depreciation and amortization expense........... 13,398,000 7,388,000 5,189,000
Other, net...................................... (2,630,000) 3,382,000 2,875,000
------------- ------------- ------------
Cash provided by operating activities...... 40,897,000 50,044,000 54,117,000
Cash flows from investing activities:
Sales of fixed income securities.................. 131,485,000 18,212,000 27,090,000
Maturity or call of fixed income securities....... 17,050,000 30,202,000 19,173,000
Sales of equity securities........................ 2,886,000 4,160,000 17,656,000
Sales of strategic investments.................... 15,905,000 3,324,000 --
Change in short-term investments.................. (14,935,000) (24,667,000) (26,562,000)
Cash paid for companies acquired, net of cash
received........................................ (186,923,000) (33,011,000) (12,948,000)
Cost of investments acquired...................... (70,736,000) (43,968,000) (87,084,000)
Purchase of property and equipment and other...... (9,076,000) (15,320,000) (6,718,000)
------------- ------------- ------------
Cash used by investing activities.......... (114,344,000) (61,068,000) (69,393,000)
Cash flows from financing activities:
Proceeds from notes payable....................... 547,000,000 74,200,000 97,500,000
Sale of Common Stock.............................. 4,783,000 2,203,000 10,470,000
Payments on notes payable......................... (458,600,000) (49,950,000) (89,667,000)
Dividends paid.................................... (9,221,000) (7,139,000) (4,550,000)
Repurchase of common stock........................ -- -- (324,000)
------------- ------------- ------------
Cash provided by financing activities...... 83,962,000 19,314,000 13,429,000
------------- ------------- ------------
Net change in cash......................... 10,515,000 8,290,000 (1,847,000)
Cash as of beginning of year............... 16,018,000 7,728,000 9,575,000
------------- ------------- ------------
CASH AS OF END OF YEAR..................... $ 26,533,000 $ 16,018,000 $ 7,728,000
============= ============= ============

See Notes to Consolidated Financial Statements

F-8
131

HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

HCC Insurance Holdings, Inc. ("the Company" or "HCC"), and its subsidiaries
include domestic and foreign property and casualty and life insurance companies,
underwriting agencies, intermediaries and service companies. HCC, through its
subsidiaries, provides specialized property and casualty and life and health
insurance to commercial customers in the areas of accident and health
reinsurance, aviation, marine, property, offshore energy, workers' compensation,
group health and medical stop-loss insurance. The principal insurance company
subsidiaries are Houston Casualty Company ("HC") in Houston, Texas, and London,
England; HCC Life Insurance Company ("HCCL") in Houston, Texas; U.S. Specialty
Insurance Company ("USSIC") in Houston, Texas; and Avemco Insurance Company
("AIC") in Frederick, Maryland. The underwriting agency subsidiaries provide
underwriting management and claims servicing for insurance and reinsurance
companies, specializing in aviation, medical stop-loss, occupational accident
and workers' compensation insurance and a variety of accident and health related
reinsurance products. The principal agency subsidiaries are LDG Reinsurance
Corporation ("LDG Re") in Wakefield, Massachusetts and New York City, New York;
LDG Re (London), Ltd. ("LDG Re-London") in London, England; HCC Aviation
Insurance Group, Inc. ("HCCA") in Dallas, Texas and Glendale, California; HCC
Employer Services, Inc. ("HCCES") in Northbrook, Illinois, Montgomery, Alabama
and Dallas, Texas; and HCC Benefits Corporation ("HCCB") in Atlanta, Georgia,
Costa Mesa, California, Wakefield, Massachusetts, Minneapolis, Minnesota and
Dallas, Texas. The intermediary subsidiaries provide brokerage, consulting and
other intermediary services to insurance and reinsurance companies, commercial
customers and individuals in the same lines of business as the insurance
companies operate. The Company's principal intermediary subsidiaries are HCC
Intermediaries, Inc. ("HCCI") in Houston, Texas; HCC Employee Benefits, Inc.
("HCCEB") in Houston, Texas; and Rattner Mackenzie Limited ("RML") in London,
England. The service company subsidiaries perform various insurance related
services for insurance companies.

The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions. This affects amounts reported in the financial statements and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.

A description of the significant accounting and reporting policies utilized by
the Company in preparing the consolidated financial statements is as follows:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Investments

Fixed income securities and marketable equity securities are classified as
available for sale and are carried at quoted market value, if readily
marketable, or at management's estimated fair value, if not readily marketable.
The change in unrealized gain or loss with respect to these securities is
recorded as a component of other comprehensive income, net of the related
deferred income tax effects, if any. Fixed income securities available for sale
are purchased with the original intent to hold to maturity, but they may be
available for sale if market conditions warrant, or if the Company's investment
policies dictate, in order to maximize the Company's investment yield.
Short-term investments and restricted short-term investments are carried at
cost, which approximates market value.

The realized gain or loss on investment transactions is determined on an average
cost basis and included in earnings on the trade date. When impairment of the
value of an investment is considered other than

F-9
132
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

temporary, the decrease in value is reported in earnings as a realized
investment loss and a new cost basis is established.

Property and Equipment

Property and equipment are carried at cost, net of accumulated depreciation.
Depreciation expense is provided using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is provided using the straight-line method over the shorter of the
estimated useful life or the term of the respective lease. Upon disposal of
assets, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in earnings.

Costs incurred in developing or purchasing management information systems are
capitalized and included in property and equipment. These costs are amortized
over their estimated useful lives from the dates the systems are placed in
service.

Earned Premium, Deferred Policy Acquisition Costs and Ceding Commissions of
Insurance Company
Subsidiaries

Written premium, net of reinsurance, is primarily included in earnings on a pro
rata basis over the lives of the related policies. However, for certain types of
business, it is recognized over the period of risk in proportion to the amount
of insurance risk provided. Policy acquisition costs, including commissions,
taxes, fees and other direct costs of underwriting policies, less ceding
commissions allowed by reinsurers, including expense allowances, are deferred
and charged or credited to earnings proportionate to the premium earned.
Historical and current loss and loss adjustment expense experience and
anticipated investment income are considered in determining the recoverability
of deferred policy acquisition costs.

Management Fees and Commission Income

Management fees and commission income are recognized on the revenue recognition
date, which is the later of the effective date of the policy, the date when the
premium can be reasonably estimated, or the date when substantially all required
services relating to the insurance placement have been rendered to the client.
Management fees and commission income relating to additional or return premiums
or other policy adjustments are recognized when the events occur and the amounts
become known or can be estimated.

Premium and Other Receivables

The Company has adopted the gross method for reporting receivables and payables
on brokered transactions. Management reviews the collectibility of its
receivables on a current basis and provides an allowance for doubtful accounts
if it deems that there are accounts which are doubtful of collection. The amount
of the allowance at December 31, 1999 and 1998 is not material.

Loss and Loss Adjustment Expense Payable of Insurance Company Subsidiaries

Loss and loss adjustment expense payable is based on undiscounted estimates of
payments to be made for reported and incurred but not reported ("IBNR") losses
and anticipated salvage and subrogation receipts. Estimates for reported losses
are based on all available information, including reports received from ceding
companies on assumed business. Estimates for IBNR are based both on the
Company's and the industry's experience. While management believes that amounts
included in the accompanying financial statements are adequate, such estimates
may be more or less than the amounts ultimately paid when the claims are
settled. The estimates are continually reviewed and any changes are reflected in
current operations.

F-10
133
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Reinsurance

The Company records all reinsurance recoverables and ceded unearned premiums as
assets and deferred ceding commissions as a liability. All such amounts are
estimated and recorded in a manner consistent with the underlying reinsured
contracts. Management has also recorded a reserve for uncollectible reinsurance
based on current estimates of collectibility. These estimates could change and
affect the level of the reserve needed.

Goodwill

In connection with the Company's acquisitions of subsidiaries accounted for as
purchases, the excess of cost over fair value of net assets acquired is being
amortized using the straight-line method over twenty years for acquired agency
operations which operate in existing lines of business and in the same country.
Goodwill related to acquired agency operations which represent the Company's
initial entry into new lines of business or new countries is amortized over
thirty years. Goodwill related to acquired insurance company operations is
amortized over forty years. Managements of the acquired businesses have
successfully operated in their markets for a number of years and, with the
additional capital provided by the Company, will be positioned to take advantage
of increased opportunities. Accumulated amortization of goodwill as of December
31, 1999 and 1998, was $11.5 million and $5.2 million, respectively.

The Company's accounting policy regarding the assessment of the recoverability
of the carrying value of long-lived assets, including goodwill and other
intangibles and property, plant and equipment, is to review the carrying value
of the assets if the facts and circumstances suggest that they may be impaired.
If this review indicates that the carrying value will not be recoverable, as
determined based on the projected undiscounted future cash flows, the carrying
value is reduced to its estimated fair value. Amortization of goodwill charged
to income for the years ended December 31, 1999, 1998 and 1997 was $6.7 million,
$3.0 million and $1.6 million, respectively.

Cash and Short-term Investments

Cash consists of cash in banks, generally in operating accounts. The Company
classifies certificates of deposit, corporate demand notes receivable,
commercial paper and money market funds as short-term investments. Short-term
investments are classified as investments in the consolidated balance sheets as
they relate principally to the Company's investment activities.

As of December 31, 1999 and 1998 the Company included $138.5 million and $80.1
million, respectively, of certain fiduciary funds in short-term investments.
These are funds held by underwriting agency or intermediary subsidiaries for the
benefit of insurance or reinsurance clients. The Company earns the interest on
these funds.

The Company generally maintains its cash deposits in major banks and invests its
short-term investments with major banks and in investment grade commercial paper
and repurchase agreements. These securities typically mature within 90 days and,
therefore, bear minimal risk. The Company has not experienced any losses on its
cash deposits or its short-term investments.

Restricted Cash and Cash Investments

In conjunction with the management of reinsurance pools, the Company's agency
subsidiaries withhold premium funds for the payment of claims. These funds are
shown as restricted cash and cash investments in the consolidated balance
sheets. The corresponding liability is included within premium and claims
payable in the consolidated balance sheets. These amounts are considered
fiduciary funds, and interest earned on these funds accrues to the benefit of
the members of the reinsurance pools. Therefore, the Company does not include
these amounts as cash in the consolidated statements of cash flows.
F-11
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Foreign Currency

The functional currency of most foreign subsidiaries and branches is the United
States Dollar. Assets and liabilities recorded in foreign currencies are
translated into United States Dollars at exchange rates in effect at the balance
sheet date. Transactions in foreign currencies are translated at the rates of
exchange in effect on the date the transaction occurs. Translation gains and
losses are recorded in earnings and included in other operating expenses. The
Company's foreign currency transactions are principally denominated in British
Pound Sterling ("GBP") and other European currencies. For the years ended
December 31, 1999, 1998 and 1997, the gain (loss) from currency conversion was
$442,000, $219,000 and ($884,000), respectively.

Some foreign subsidiaries or branches have a functional currency of either the
GBP or the Canadian Dollar ("CAD"). The cumulative translation adjustment,
representing the effect of translating these subsidiaries' or branches' assets
and liabilities into United States Dollars, is included in the foreign currency
translation adjustment within accumulated other comprehensive income.

On a very limited basis in the past, the Company has entered into foreign
currency forward contracts as a hedge against foreign currency fluctuations.
RML, purchased by the Company during January, 1999, has a revenue stream in US
Dollars but incurs expenses in GBP. To mitigate the foreign exchange risk, the
Company entered into foreign currency forward contracts expiring at staggered
times through December, 2000. The foreign currency forward contracts are used to
convert currency at a known rate in an amount which approximates average monthly
expenses. Thus, the effect of these transactions is to limit the foreign
currency exchange risk of the recurring monthly expenses. In the future, the
Company may continue to limit its exposure to currency fluctuations through the
use of foreign currency forward contracts. The Company utilizes these foreign
currency forward contracts strictly as a hedge against existing exposure to
foreign currency fluctuations rather than as a form of speculative or trading
investment.

To the extent the fair value of the foreign exchange forward contracts qualify
for hedge accounting treatment the gain ($41,000 at December 31, 1999), or loss
due to changes in fair value is not recognized in the financial statements until
realized, at which time the gain or loss is recognized along with the offsetting
loss or gain on the hedged item. To the extent the fair value of the foreign
currency forward contracts do not qualify for hedge accounting treatment, the
gain or loss due to changes in fair value is recognized in the consolidated
statements of earnings, but is generally offset by changes in value of the
underlying exposure.

Computer Products and Services

Revenue from software contracts is recognized when delivery has occurred, other
remaining vendor obligations are no longer significant and collectibility is
probable or in accordance with contract accounting rules when material
modification or customization is required. Revenue from the sale of computer
hardware is recognized when delivery has occurred. Maintenance support is
recognized pro rata over the term of the maintenance agreement. Revenue from
such products and services is included in other operating income.

Software production costs are capitalized when the technological feasibility of
a new product has been established. The capitalized costs are amortized based
upon current and estimated future revenue for each product with a minimum of
straight-line amortization over the remaining estimated economic life of the
product. All other software development costs are expenses as incurred.

F-12
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income Tax

The companies file a consolidated Federal income tax return and include the
foreign subsidiaries' income to the extent required by law. Deferred income tax
is accounted for using the liability method, which reflects the tax impact of
temporary differences between the bases of assets and liabilities for financial
reporting purposes and such bases as measured by tax laws and regulations.

Earnings Per Share

Basic earnings per share is based on the weighted average number of common
shares outstanding during the year divided into net earnings. Diluted earnings
per share is based on the weighted average number of common shares outstanding
plus the potential common shares outstanding during the year divided into net
earnings. Outstanding common stock options, when dilutive, are considered to be
potential common stock for the purpose of the diluted calculation. The treasury
stock method is used to calculate potential common stock outstanding due to
options. Contingent shares to be issued are included in the earnings per share
computation when the underlying conditions for issuance have been met.

Effects of Recent Accounting Pronouncements

Statement of Financial Accounting Standards ("SFAS") No. 133 entitled
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June, 1998 and is now effective for all fiscal quarters of fiscal years
beginning after June 15, 2000, with early adoption permitted. The Company has
utilized derivatives or hedging strategies only infrequently in the past and in
immaterial amounts, although it is currently using derivatives and hedging
strategies to a greater extent as it expands its foreign operations. The effects
of SFAS No. 133, as well as the timing of its adoption, are currently being
reviewed by management.

During December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 entitled "Revenue Recognition in Financial
Statements" which becomes effective for the Company during the second quarter of
2000. The Company does not expect the adoption of SAB No. 101 to have a material
effect on the Company's financial position, results of operations or
shareholders' equity.

Reclassifications

Certain amounts in the 1998 and 1997 consolidated financial statements have been
reclassified to conform with the 1999 presentation. Such reclassifications had
no effect on the Company's shareholders' equity, net earnings or cash flows.

F-13
136
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) ACQUISITIONS AND DISPOSITIONS

Acquisitions

In 1999 and 1998, the Company acquired certain businesses in transactions
accounted for using the purchase method of accounting, as shown in the chart
below. The Company is still in the process of finalizing the purchase accounting
for The Centris Group, Inc. ("Centris") and the purchase price allocation may
change by amounts which are expected to be immaterial.

CONSIDERATION
------------------------
SHARES OF GOODWILL
COMPANY'S AMORTIZATION
EFFECTIVE COMMON GOODWILL PERIOD IN
DATE STOCK CASH RECOGNIZED YEARS
--------- --------- ------------ ------------ ------------

1999
RML................................ 01/01/99 414,207 $ 64,600,000 $ 70,800,000 30
Midwest Stop Loss Underwriting..... 01/28/99 110,330 3,000,000 4,800,000 20
Centris............................ 12/31/99 -- 149,500,000 101,900,000 20
1998
Guarantee Insurance Resources...... 03/01/98 29,029 $ 21,400,000 $ 20,900,000 20
J.E. Stone and Associates, Inc. ... 10/01/98 257,496 5,200,000 9,700,000 20
Sun Employer Services, Inc.
("Sun")......................... 11/01/98 500 17,600,000 21,300,000 30
North American Insurance Management
Corporation's occupational
accident operations............. 11/24/98 -- 4,000,000 4,000,000 20

On a combined basis, the fair value of assets acquired was $549.5 million in
1999 and $44.9 million in 1998. The fair value of liabilities assumed was $499.8
million in 1999 and $46.2 million in 1998. The total consideration was $227.4
million in 1999 and $50.0 million in 1998. The results of operations of the
businesses acquired in transactions accounted for using the purchase method of
accounting have been included in the consolidated financial statements beginning
on the effective date of each transaction.

In connection with the Sun acquisition, the Company may also issue up to 378,000
shares of its common stock on a contingent basis assuming certain future
financial benchmarks are met. Contingent shares issued will be recorded as
additional consideration at the current fair value if and when the financial
benchmarks are met and the shares are issued. Of these shares, 49,000 are
issuable in 2000 because the contingency had been partially met as of December
31, 1999.

F-14
137
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following unaudited pro forma summary presents information as if the 1999
purchase acquisitions had occurred at the beginning of each year after giving
effect to certain adjustments including amortization of goodwill, increased
interest expense from debt issued to fund the acquisitions and Federal income
taxes. The pro forma summary is for information purposes only, does not
necessarily reflect the actual results that would have occurred, nor is it
necessarily indicative of future results of the combined companies. Centris,
whose results of operations are included in the pro forma financial information
below, in 1999 experienced both a loss from discontinued operations of $13.2
million and significant underwriting losses.

FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------------- --------------

UNAUDITED PROFORMA INFORMATION
Revenue.................................................. $447,239,000 $493,551,000
Earnings (loss) from continuing operations............... (2,062,000) 69,905,000
Net earnings (loss)...................................... (15,293,000) 46,637,000
Basic earnings (loss) per share from continuing
operations............................................. (0.04) 1.46
Diluted earnings (loss) per share from continuing
operations............................................. (0.04) 1.43
Basic earnings (loss) per share.......................... (0.31) 0.97
Diluted earnings (loss) per share........................ (0.31) 0.95

In connection with the Centris acquisition, a plan was formulated, approved and
implemented prior to December 31, 1999 to eliminate Centris' corporate staff,
combine the Centris medical stop-loss operations with those of HCCB and combine
certain Centris and HCCB production and underwriting facilities. In accordance
with the plan, certain Centris employees were terminated with severance benefits
to be paid in accordance with Centris' employment contracts for executives or
the HCC severance plan for Centris employees who did not have employment
contracts. These severance obligations were accrued as of the acquisition date,
included in the purchase price allocation and will not be included in expense in
the Company's statements of earnings. Additionally, accruals of $848,000 were
made at that date for future lease costs of office space made redundant by the
plan. The following table provides a detailed analysis of the accruals:

ACCRUED AT ACCRUED AT
PURCHASE PAID IN DECEMBER 31,
DATE 1999 1999
---------- -------- ------------

Contractual executive severance accruals.......... $6,744,000 $878,000 $5,866,000
Other severance accruals.......................... 397,000 -- 397,000
Lease obligation accruals......................... 848,000 -- 848,000
---------- -------- ----------
Total................................... $7,989,000 $878,000 $7,111,000
========== ======== ==========

It is expected that the significant portion of the severance accruals will be
paid prior to April 30, 2000 in accordance with the contractual terms of the
severance agreements. Management is still evaluating what additional actions, if
any, are necessary to finalize the integration of the Centris operations. Any
additional accruals will be recorded as an adjustment to the purchase price
allocation.

Dispositions

In January, 1999, the Company sold its 21% interest in Underwriters Indemnity
Holdings, the parent of Underwriters Indemnity Company, to RLI Corporation for
$8.2 million. The Company realized a pre-tax gain of $4.9 million, included in
other operating income, in connection with the sale. The Company's investment in
Underwriters Indemnity Holdings, which was accounted for by the equity method,
was not material to the Company's financial position and results of operations.

F-15
138
HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) INVESTMENTS

Substantially all of the Company's fixed income securities are investment grade;
most are A rated or better. No high-yield corporate bonds are owned or
contemplated. The cost or amortized cost, gross unrealized gain or loss and
estimated market value of investments in fixed income and marketable equity
securities, all of which are classified as available for sale, are as follows:

GROSS GROSS
COST OR UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAIN LOSS MARKET VALUE
-------------- ----------- ----------- ------------

December 31, 1999:
Marketable equity securities......... $ 22,493,000 $ 8,000 $(2,531,000) $ 19,970,000
US Treasury securities............... 57,941,000 96,000 (532,000) 57,505,000
Obligations of states, municipalities
and political subdivisions........ 263,395,000 2,548,000 (2,839,000) 263,104,000
Other fixed income securities........ 22,198,000 24,000 (190,000) 22,032,000
------------ ----------- ----------- ------------
Total securities............. $366,027,000 $ 2,676,000 $(6,092,000) $362,611,000
============ =========== =========== ============
December 31, 1998:
Marketable equity securities......... $ 1,750,000 $ 502,000 $ -- $ 2,252,000
Strategic operational investments.... 18,842,000 -- (2,900,000) 15,942,000
US Treasury securities............... 19,183,000 627,000 (37,000) 19,773,000
Obligations of states, municipalities
and political subdivisions........ 354,663,000 18,257,000 (767,000) 372,153,000
Other fixed income securities........ 1,261,000 51,000 -- 1,312,000
------------ ----------- ----------- ------------
Total securities............. $395,699,000 $19,437,000 $(3,704,000) $411,432,000
============ =========== =========== ============

The amortized cost and estimated market value of fixed income securities at
December 31, 1999, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

ESTIMATED
AMORTIZED COST MARKET VALUE
-------------- ------------

Due in 1 year or less.................................... $ 36,885,000 $ 37,052,000
Due after 1 year through 5 years......................... 107,135,000 107,647,000
Due after 5 years through 10 years....................... 97,527,000 97,250,000
Due after 10 years through 15 years...................... 69,372,000 68,695,000
Due after 15 years....................................... 32,615,000 31,997,000
------------ ------------
Total fixed income securities.................. $343,534,000 $342,641,000
============ ============

As of December 31, 1999, the Company's insurance company subsidiaries had
deposited fixed income securities with an amortized cost of approximately $40.0
million (market: $40.1 million) to meet the deposit requirements of various
insurance departments.

F-16
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

All investments in fixed income securities and other investments were income
producing for the twelve months preceding December 31, 1999. The sources of net
investment income for the three years ended December 31, 1999, are detailed
below:

1999 1998 1997
----------- ----------- -----------

Fixed income securities....................... $20,098,000 $20,711,000 $20,937,000
Short-term investments........................ 10,915,000 8,079,000 5,680,000
Equity securities............................. 36,000 35,000 572,000
Other......................................... -- 607,000 445,000
----------- ----------- -----------
Total investment income............. 31,049,000 29,432,000 27,634,000
Investment expense............................ (116,000) (97,000) (47,000)
----------- ----------- -----------
Net investment income............... $30,933,000 $29,335,000 $27,587,000
=========== =========== ===========

Realized pre-tax gain (loss) on the sale of investments is as follows:

GAIN LOSS NET
---------- ----------- -----------

For the year ended December 31, 1999:
Fixed income securities...................... $1,226,000 $(1,390,000) $ (164,000)
Marketable equity securities................. 450,000 (4,391,000) (3,941,000)
Other investments............................ 120,000 (179,000) (59,000)
---------- ----------- -----------
Realized gain (loss)................. $1,796,000 $(5,960,000) $(4,164,000)
========== =========== ===========
For the year ended December 31, 1998:
Fixed income securities...................... $1,132,000 $ (121,000) $ 1,011,000
Marketable equity securities................. 245,000 (411,000) (166,000)
---------- ----------- -----------
Realized gain (loss)................. $1,377,000 $ (532,000) $ 845,000
========== =========== ===========
For the year ended December 31, 1997:
Fixed income securities...................... $ 68,000 $ (242,000) $ (174,000)
Marketable equity securities................. 113,000 (267,000) (154,000)
---------- ----------- -----------
Realized gain (loss)................. $ 181,000 $ (509,000) $ (328,000)
========== =========== ===========

Unrealized pre-tax net investment gains (losses) on investments for three years
ended December 31, 1999 is as follows:

1999 1998 1997
------------ ----------- -----------

Fixed income securities...................... $(19,024,000) $ 3,551,000 $ 8,869,000
Marketable equity securities................. (3,025,000) 888,000 (201,000)
Strategic operational investments............ 2,900,000 (1,403,000) (1,497,000)
------------ ----------- -----------
Net unrealized investment gain
(loss)........................... $(19,149,000) $ 3,036,000 $ 7,171,000
============ =========== ===========

F-17
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) PROPERTY AND EQUIPMENT

The following table summarizes property and equipment at December 31, 1999 and
1998:

ESTIMATED
1999 1998 USEFUL LIFE
------------ ------------ --------------

Buildings and improvements................ $ 20,001,000 $ 18,995,000 30 to 45 years
Furniture, fixtures and equipment......... 16,580,000 13,752,000 3 to 10 years
Management information systems............ 27,769,000 20,615,000 3 to 7 years
------------ ------------
Total property and equipment.... 64,350,000 53,362,000
Less accumulated depreciation and
amortization............................ (26,546,000) (20,379,000)
------------ ------------
Property and equipment, net..... $ 37,804,000 $ 32,983,000
============ ============

Depreciation and amortization expense on property and equipment was
approximately $6.7 million, $4.4 million, and $3.5 million for the years ended
December 31, 1999, 1998 and 1997, respectively.

(5) NOTES PAYABLE

Notes payable as of December 31, 1999 and 1998 are shown in the table below. The
estimated fair value of the notes payable is based on current rates offered to
the Company for debt with similar terms and approximates the carrying value at
the balance sheet dates.

1999 1998
------------ ------------

Acquisition notes........................................ $ 7,546,000 $ 16,600,000
Facility................................................. 235,000,000 105,000,000
------------ ------------
Total notes payable............................ $242,546,000 $121,600,000
============ ============

Effective December 30, 1997, the Company executed a $120.0 million revolving
credit facility ("Previous Facility") with a group of banks. Borrowing under the
Previous Facility could be made by the Company until December 30, 1999, at which
time all principal was due. Outstanding advances under the Previous Facility
carried interest at the Company's option of either the prime rate or at the then
current London Interbank Offering Rate ("LIBOR") plus 1%.

On March 8, 1999, the Company entered into a Loan Agreement (the "Old Facility")
with a group of banks. The Old Facility included a $150.0 million Revolving Loan
Facility and $100.0 million Short Term Revolving Loan Facility. Borrowings under
the Old Facility could be made from time to time by the Company for general
corporate purposes through the Short Term Revolving Loan Facility until it
expired on March 7, 2000 and through the Revolving Loan Facility until it
expired on February 28, 2002. Outstanding loans under the Old Facility bore
interest at agreed upon rates.

On December 17, 1999, the Company entered into a Loan Agreement (the "Facility")
with a group of banks. The Facility includes a $300.0 million Revolving Loan
Facility. Borrowing under the Facility may be made from time to time by the
Company for general corporate purposes until the Facility's expiration on
December 18, 2004. Outstanding advances under the Facility bear interest at
agreed upon rates. The Facility is collateralized in part by the pledge of the
stock of HC, HCCL, AIC and USSIC and by the pledge of stock and guarantees
entered into by the Company's principal underwriting agency and intermediary
subsidiaries. The Facility agreement contains certain restrictive covenants,
including, without limitation, minimum net worth requirements for the Company
and certain subsidiaries, restrictions on certain extraordinary corporate
actions, notice requirements for certain material occurrences, and required

F-18
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

maintenance of specified financial ratios. Management believes that the
restrictive covenants and other obligations of the Company which are contained
in the Facility agreement are typical for financing arrangements comparable to
the Facility. The initial funding available under the Facility was used, among
other things, to refinance existing indebtedness under the Old Facility, and to
partially fund the Centris acquisition. As of December 31, 1999, total debt
outstanding under the Facility was $235.0 million and the weighted average
interest rate was 8.04%.

The acquisition note at December 31, 1998 was a note payable to the former owner
of Sun. The note carried interest at 6.4% and was due and paid January 5, 1999.
The acquisition notes at December 31, 1999 are payable to former owners of RML.
The notes are payable in decreasing amounts in four annual installments
beginning January 31, 2000. The notes carry no stated interest, but were
discounted at 6.25% for financial reporting purposes when the acquisition of RML
was recorded. The interest rate used was based on current rates offered to the
Company as of RML's acquisition date.

At December 31, 1999, several of the Company's subsidiaries maintained revolving
lines of credit with a bank in the combined maximum amount of $40.0 million
available through December 31, 2000. Advances under the lines of credit are
limited to amounts required to fund draws, if any, on letters of credit issued
by the bank on behalf of the subsidiaries and short-term direct cash advances.
The lines of credit are collateralized by securities having an aggregate market
value of up to $50.0 million, the actual amount of collateral at any one time
being 125% of the aggregate amount outstanding. Interest on the lines is payable
at the bank's prime rate of interest (8.5% at December 31, 1999). At December
31, 1999, letters of credit totaling $17.2 million had been issued to insurance
companies by the bank on behalf of the subsidiaries, with total securities of
$21.5 million collateralizing the line.

(6) INCOME TAX

As of December 31, 1999 and 1998, the Company had income taxes receivable of
$16.2 million and $2.9 million, respectively, included in other assets in the
consolidated balance sheets. In connection with the acquisition of Centris, the
Company acquired approximately $35.0 million in net operating loss carryforwards
for Federal income tax purposes which expire in varying amount through the year
2020. Future use of the net operating losses is subject to material statutory
limitations due to changes of ownership and entity. Therefore, a valuation
allowance was established to reduce the net deferred tax asset associated with
the carryforwards to zero. Any future tax benefit realized from the use of the
carryforwards will not be credited to future income but will reduce goodwill
recorded in connection with the purchase transaction. The components of the
income tax provision for the three years ended December 31, 1999, are as
follows:

1999 1998 1997
----------- ----------- -----------

Current....................................... $12,963,000 $32,498,000 $19,375,000
Deferred:
Change in net deferred tax at current
enacted tax rate......................... (1,145,000) 2,758,000 4,074,000
Change in deferred tax valuation
allowance................................ 453,000 (48,000) (144,000)
----------- ----------- -----------
Total deferred provision
(benefit)......................... (692,000) 2,710,000 3,930,000
----------- ----------- -----------
Total income tax provision.......... $12,271,000 $35,208,000 $23,305,000
=========== =========== ===========

F-19
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The net deferred tax asset is included in other assets in the consolidated
balance sheets. The composition of deferred tax assets and liabilities as of
December 31, 1999 and 1998, is as follows:

1999 1998
------------ -----------

Tax net operating loss carryforwards...................... $ 12,155,000 $ 1,381,000
Excess of financial unearned premium over tax............. 2,512,000 4,408,000
Effect of loss reserve discounting and salvage and
subrogation accrual for tax............................. 9,585,000 5,187,000
Unrealizable loss on decrease in value of securities
available for sale (shareholders' equity)............... 1,611,000 --
Bad debt and accrued expenses, deducted for financial over
tax..................................................... 12,443,000 3,783,000
Valuation allowance....................................... (12,091,000) (50,000)
------------ -----------
Total assets.................................... 26,215,000 14,709,000
Unrealized gain on increase in value of securities
available for sale (shareholders' equity)............... -- 5,522,000
Deferred policy acquisition costs, net of ceding
commissions, deductible for tax......................... 1,634,000 1,074,000
Amortizable goodwill...................................... 2,346,000 1,011,000
Property and equipment depreciation and other items....... 3,984,000 3,779,000
------------ -----------
Total liabilities............................... 7,964,000 11,386,000
------------ -----------
Net deferred tax asset.......................... $ 18,251,000 $ 3,323,000
============ ===========

Changes in the valuation allowance account applicable to the net deferred tax
asset for the three years ended December 31, 1999 are as follows:

1999 1998 1997
----------- -------- ---------

Balance, beginning of year........................ $ 50,000 $ 98,000 $ 54,000
Increase (decrease) charged (credited) to
income.......................................... 453,000 (48,000) (144,000)
Valuation allowance acquired, which in 1999
relates to net operating loss carryforwards..... 11,588,000 -- 188,000
----------- -------- ---------
Balance, end of year.................... $12,091,000 $ 50,000 $ 98,000
=========== ======== =========

The following table summarizes the differences between the Company's effective
tax rate for financial statement purposes and the Federal statutory rate for the
three years ended December 31, 1999:

1999 1998 1997
----------- ----------- -----------

Statutory tax rate........................ 35.0% 35.0% 35.0%
Federal tax at statutory rate............. $13,088,000 $37,620,000 $25,572,000
Nontaxable municipal bond interest and
dividends received deduction............ (5,460,000) (5,753,000) (6,065,000)
Non deductible expenses................... 1,097,000 450,000 2,198,000
State income taxes........................ 3,011,000 3,521,000 2,242,000
Foreign income taxes...................... 4,793,000 440,000 475,000
Foreign tax credit........................ (4,354,000) (440,000) (475,000)
Other, net................................ 96,000 (630,000) (642,000)
----------- ----------- -----------
Income tax provision............ $12,271,000 $35,208,000 $23,305,000
=========== =========== ===========
Effective tax rate.............. 32.8% 32.8% 31.9%
=========== =========== ===========

F-20
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) SEGMENT AND GEOGRAPHIC DATA

The Company classifies its activities into four operating business segments
based upon services provided: 1) insurance company operations, 2) underwriting
agency operations, 3) intermediary operations, and 4) other operations. See Note
1 for a description of the services provided by and the principal subsidiaries
included in the insurance company, underwriting agency and intermediary
segments. The other operations perform various insurance related services for
insurance company subsidiaries and unaffiliated insurance companies. The
subsidiaries currently operating in this segment provide insurance claims
adjusting services and the development and sale of insurance industry related
software. Also included in other operations is income from strategic operational
investments. Corporate includes general corporate operations, and those minor
operations not included in an operating segment. Inter-segment revenue consists
primarily of management fees of the underwriting agency segment, commission
income of the intermediary segment and service revenue of the other operations
charged to the insurance company segment on business retained by the Company's
insurance company subsidiaries. Inter-segment pricing (either flat rate fees or
as a percentage premium) approximates what is charged to unrelated parties for
similar services.

The performance of each segment is evaluated by management based upon net
earnings. Net earnings is calculated after tax and after all corporate expense
allocations, amortization of goodwill, interest expense on debt incurred at the
purchase date and intercompany eliminations have been charged or credited to the
individual segments.

The following tables show information by business segment and geographic
location. Geographic location is determined by physical location of the
Company's offices and does not represent the location of insureds or reinsureds
from whom the business was generated.

INSURANCE UNDERWRITING OTHER
COMPANY AGENCY INTERMEDIARY OPERATIONS CORPORATE TOTAL
------------ ------------ ------------ ----------- ----------- ------------

For the year ended December 31, 1999:
Revenue:
Domestic..................... $151,044,000 $91,385,000 $31,778,000 $27,364,000 $ 681,000 $302,252,000
Foreign...................... 10,676,000 3,699,000 25,244,000 -- -- 39,619,000
Inter-segment................ -- 3,170,000 594,000 1,133,000 -- 4,897,000
------------ ----------- ----------- ----------- ----------- ------------
TOTAL SEGMENT REVENUE.... $161,720,000 $98,254,000 $57,616,000 $28,497,000 $ 681,000 346,768,000
============ =========== =========== =========== ===========
Inter-segment revenue........ (4,897,000)
------------
CONSOLIDATED TOTAL
REVENUE................ $341,871,000
============
Net earnings (loss):
Domestic..................... $ (8,631,000) $17,129,000 $ 9,042,000 $ 7,643,000 $(2,279,000) $ 22,904,000
Foreign...................... (2,078,000) 21,000 4,575,000 -- -- 2,518,000
------------ ----------- ----------- ----------- ----------- ------------
Total segment net
earnings (loss)........ $(10,709,000) $17,150,000 $13,617,000 $ 7,643,000 $(2,279,000) 25,422,000
============ =========== =========== =========== ===========
Inter-segment eliminations... (299,000)
------------
CONSOLIDATED NET
EARNINGS............... $ 25,123,000
============
Other items:
Net investment income.......... $ 23,400,000 $ 4,186,000 $ 2,491,000 $ 424,000 $ 432,000 $ 30,933,000
Depreciation and
amortization................. 2,880,000 5,898,000 3,776,000 264,000 580,000 13,398,000
Interest expense............... 19,000 3,809,000 4,640,000 -- 4,496,000 12,964,000
Restructuring expense.......... 687,000 3,278,000 1,453,000 -- 71,000 5,489,000
Capital expenditures........... 2,405,000 5,339,000 110,000 585,000 637,000 9,076,000
Income tax provision
(benefit).................... (13,324,000) 13,969,000 8,608,000 4,454,000 (1,242,000) 12,465,000
Inter-segment eliminations..... (194,000)
------------
Consolidated income tax
provision.................. $ 12,271,000
============

F-21
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The insurance company segment incurred a provision for reinsurance totaling
$28.3 million, net of income tax, during 1999. Also during 1999, earnings before
income taxes was $32.3 million for domestic subsidiaries and $5.1 million for
foreign subsidiaries.

INSURANCE UNDERWRITING OTHER
COMPANY AGENCY INTERMEDIARY OPERATIONS CORPORATE TOTAL
------------ ------------ ------------ ----------- ------------ ------------

For the year ended December 31, 1998:
Revenue:
Domestic.......................... $156,715,000 $79,367,000 $33,086,000 $21,168,000 $ 2,121,000 $292,457,000
Foreign........................... 11,049,000 3,438,000 991,000 99,000 -- 15,577,000
Inter-segment..................... -- 1,975,000 1,876,000 1,252,000 -- 5,103,000
------------ ----------- ----------- ----------- ------------ ------------
TOTAL SEGMENT REVENUE......... $167,764,000 $84,780,000 $35,953,000 $22,519,000 $ 2,121,000 313,137,000
============ =========== =========== =========== ============
Inter-segment revenue............... (5,103,000)
------------
CONSOLIDATED TOTAL REVENUE.... $308,034,000
============
Net earnings (loss):
Domestic.......................... $ 32,909,000 $19,283,000 $16,263,000 $ 5,210,000 $ (2,676,000) $ 70,989,000
Foreign........................... 926,000 105,000 657,000 (399,000) -- 1,289,000
------------ ----------- ----------- ----------- ------------ ------------
NET EARNINGS (LOSS)........... $ 33,835,000 $19,388,000 $16,920,000 $ 4,811,000 $ (2,676,000) $ 72,278,000
============ =========== =========== =========== ============ ============
Other items:
Net investment income............. $ 22,995,000 $ 3,949,000 $ 362,000 $ 536,000 $ 1,493,000 $ 29,335,000
Depreciation and amortization..... 2,011,000 4,094,000 406,000 422,000 455,000 7,388,000
Interest expense.................. (58,000) 1,963,000 91,000 -- 4,025,000 6,021,000
Capital expenditures.............. 10,405,000 2,685,000 660,000 205,000 1,365,000 15,320,000
Income tax provision (benefit).... 9,485,000 13,025,000 10,702,000 2,885,000 (889,000) 35,208,000
For the year ended December 31, 1997:
Revenue:
Domestic.......................... $170,943,000 $55,838,000 $18,335,000 $15,343,000 $ 1,188,000 $261,647,000
Foreign........................... 14,967,000 2,590,000 967,000 146,000 -- 18,670,000
Inter-segment..................... -- 3,067,000 1,213,000 1,812,000 1,271,000 7,363,000
------------ ----------- ----------- ----------- ------------ ------------
Total segment revenue......... $185,910,000 $61,495,000 $20,515,000 $17,301,000 $ 2,459,000 287,680,000
============ =========== =========== =========== ============
Inter-segment revenue............... (7,363,000)
------------
CONSOLIDATED TOTAL REVENUE.... $280,317,000
============
Net earnings (loss):
Domestic.......................... $ 34,274,000 $13,186,000 $ 6,104,000 $ 1,755,000 $(12,299,000) $ 43,020,000
Foreign........................... 6,333,000 90,000 987,000 (671,000) -- 6,739,000
------------ ----------- ----------- ----------- ------------ ------------
NET EARNINGS (LOSS)........... $ 40,607,000 $13,276,000 $ 7,091,000 $ 1,084,000 $(12,299,000) $ 49,759,000
============ =========== =========== =========== ============ ============
Other items:
Net investment income............. $ 23,379,000 $ 2,620,000 $ 322,000 $ 128,000 $ 1,138,000 $ 27,587,000
Depreciation and amortization..... 1,453,000 2,490,000 173,000 492,000 581,000 5,189,000
Interest expense.................. 3,000 33,000 -- -- 5,968,000 6,004,000
Capital expenditures.............. 2,838,000 3,416,000 76,000 168,000 296,000 6,794,000
Income tax provision (benefit).... 13,172,000 9,818,000 4,128,000 436,000 (4,249,000) 23,305,000

The corporate net loss in 1997 included an after-tax charge of $7.2 million with
respect to merger expenses.

F-22
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Assets by business segment and geographic location are shown in the following
table:

INSURANCE UNDERWRITING OTHER
COMPANY AGENCY INTERMEDIARY OPERATIONS CORPORATE TOTAL
-------------- ------------ ------------ ----------- ----------- --------------

December 31, 1999:
Domestic............. $1,567,855,000 $520,122,000 $114,818,000 $16,984,000 $28,001,000 $2,247,780,000
Foreign.............. 83,882,000 28,756,000 290,205,000 -- -- 402,843,000
-------------- ------------ ------------ ----------- ----------- --------------
Total
assets...... $1,651,737,000 $548,878,000 $405,023,000 $16,984,000 $28,001,000 $2,650,623,000
============== ============ ============ =========== =========== ==============
December 31, 1998:
Domestic............. $1,074,738,000 $431,619,000 $ 52,940,000 $30,519,000 $25,823,000 $1,615,639,000
Foreign.............. 60,702,000 27,084,000 5,644,000 -- -- 93,430,000
-------------- ------------ ------------ ----------- ----------- --------------
Total
assets...... $1,135,440,000 $458,703,000 $ 58,584,000 $30,519,000 $25,823,000 $1,709,069,000
============== ============ ============ =========== =========== ==============

During the years ended December 31, 1998 and 1997, one broker in London,
England, produced gross written premium ("GWP") to the Company of approximately
$46.1 million and $42.8 million, respectively. This represents 10%, and 12% of
the Company's total GWP for those years. During 1999, no customer produced in
excess of 10% of the Company's total GWP.

(8) REINSURANCE

In the normal course of business the Company's insurance company subsidiaries
cede a substantial portion of their premium to non-affiliated domestic and
foreign reinsurers through quota share, surplus, excess of loss and facultative
reinsurance agreements. Although the ceding of reinsurance does not discharge
the primary insurer from liability to its policyholder, the subsidiaries
participate in such agreements for the purpose of limiting their loss exposure,
protect against catastrophic loss and diversifying their business. Substantially
all of the reinsurance assumed by the Company's insurance company subsidiaries
was underwritten directly by the Company but issued by other non-affiliated
companies in order to satisfy local licensing or other requirements. The
following table represents the effect of such reinsurance transactions on net
premium and loss and loss adjustment expense:

LOSS AND LOSS
WRITTEN EARNED ADJUSTMENT
PREMIUM PREMIUM EXPENSE
------------- ------------- -------------

For the year ended December 31, 1999:
Direct business........................ $ 291,513,000 $ 294,130,000 $ 261,696,000
Reinsurance assumed.................... 276,818,000 294,103,000 423,763,000
Reinsurance ceded...................... (428,407,000) (446,871,000) (575,809,000)
------------- ------------- -------------
Net amounts.................... $ 139,924,000 $ 141,362,000 $ 109,650,000
============= ============= =============
For the year ended December 31, 1998:
Direct business........................ $ 228,629,000 $ 192,536,000 $ 202,858,000
Reinsurance assumed.................... 269,647,000 260,539,000 292,064,000
Reinsurance ceded...................... (376,393,000) (309,975,000) (403,620,000)
------------- ------------- -------------
Net amounts.................... $ 121,883,000 $ 143,100,000 $ 91,302,000
============= ============= =============
For the year ended December 31, 1997:
Direct business........................ $ 177,728,000 $ 174,533,000 $ 126,861,000
Reinsurance assumed.................... 168,671,000 180,339,000 165,831,000
Reinsurance ceded...................... (203,546,000) (192,301,000) (196,178,000)
------------- ------------- -------------
Net amounts.................... $ 142,853,000 $ 162,571,000 $ 96,514,000
============= ============= =============

F-23
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Ceding commissions netted with policy acquisition costs in the consolidated
statements of earnings are $117.0 million, $59.1 million and $45.5 million for
the years ended December 31, 1999, 1998 and 1997, respectively.

The table below represents the composition of reinsurance recoverables in the
accompanying consolidated balance sheets:

1999 1998
------------ ------------

Reinsurance recoverable on paid losses................... $ 91,318,000 $ 33,572,000
Commuted receivable...................................... 53,210,000 --
Reinsurance recoverable on outstanding losses............ 382,565,000 279,086,000
Reinsurance recoverable on IBNR.......................... 214,933,000 62,513,000
Reserve for uncollectible reinsurance.................... (5,541,000) (2,499,000)
------------ ------------
Total reinsurance recoverables................. $736,485,000 $372,672,000
============ ============

The insurance company subsidiaries require reinsurers not authorized by the
subsidiaries' respective states of domicile to collateralize their reinsurance
obligations to the Company. The table below shows amounts held by the Company as
collateral plus other credits available for potential offset as of December 31,
1999 and 1998:

1999 1998
------------ ------------

Payables to reinsurers.................................. $212,962,000 $227,613,000
Letters of credit....................................... 154,111,000 166,494,000
Cash deposits........................................... 19,882,000 8,077,000
------------ ------------
Total credits................................. $386,955,000 $402,184,000
============ ============

In order to minimize its exposure to reinsurance credit risk, the Company
evaluates the financial condition of its reinsurers and places its reinsurance
with a diverse group of financially sound companies. The following table shows
reinsurance balances relating to the reinsurers with a net recoverable balance
greater than $10.0 million as of December 31, 1999 and 1998. The total
recoverables column included paid loss recoverable, outstanding loss
recoverable, IBNR recoverable and ceded unearned premium.

LETTERS OF
CREDIT, CASH
A.M. BEST TOTAL DEPOSITS AND
REINSURER RATING LOCATION RECOVERABLES OTHER PAYABLES NET
- --------- --------- -------------- ------------ -------------- ------------

December 31, 1999:
Underwriters at Lloyd's.......... A United Kingdom $156,650,000 $22,805,000 $133,845,000
Underwriters Indemnity
Company*....................... A- Texas 50,451,000 4,201,000 46,250,000
SCOR Reinsurance Company......... A+ New York 41,137,000 1,740,000 39,397,000
AXA Reinsurance Company.......... A+ Delaware 37,690,000 5,013,000 32,677,000
NAC Reinsurance Company**........ A+ New York 23,153,000 6,105,000 17,048,000
Transamerica Occidental Life Ins.
Co............................. A+ California 22,481,000 6,102,000 16,379,000
St. Paul Fire and Marine
Insurance Co................... A+ Minnesota 17,577,000 1,721,000 15,856,000
Odyssey America Reinsurance
Corp........................... A Connecticut 19,114,000 5,891,000 13,223,000
Sun Life Assurance Company of
Canada......................... A++ Canada 17,996,000 4,786,000 13,210,000
GE Reinsurance................... A++ Illinois 16,535,000 4,869,000 11,666,000
Chartwell Reinsurance
Company***..................... A Minnesota 12,736,000 2,074,000 10,662,000
December 31, 1998:
Underwriters at Lloyd's.......... A United Kingdom $ 93,280,000 $37,040,000 $ 56,240,000
Underwriters Indemnity
Company*....................... A- Texas 51,576,000 11,039,000 40,537,000
SCOR Reinsurance Company......... A+ New York 38,703,000 11,402,000 27,301,000
AXA Reinsurance Company.......... A+ Delaware 28,667,000 10,513,000 18,154,000

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- ---------------

* Underwriters Indemnity Company was acquired by RLI Corporation in January,
1999.

** NAC Reinsurance Corporation was acquired by XL Capital, Ltd. in June, 1999.

*** Chartwell Reinsurance Company was acquired by Trenwick Group, Inc. in
October, 1999.

Prior to the acquisition of Centris, its life insurance subsidiary, now HCCL,
sold its entire block of life insurance and annuity business to Life Reassurance
Corporation of America in the form of an indemnity reinsurance contract. Ceded
life and annuity benefits amounted to $95.8 million as of December 31, 1999.

In 1999, the Company recorded a $43.5 million provision for reinsurance to
reflect an estimated $29.5 million pre-tax loss for the insolvency of one of the
Company's reinsurers and an estimated $14.0 million pre-tax loss, the majority
of which represents the discount on ceded reserves, related to the commutation
of all liabilities with another reinsurer. This commutation, made at the
Company's request, was finalized and settled in February, 2000. In connection
with the commutation, the Company received cash and other amounts totaling $56.5
million. Additionally, as of December 31, 1999 the Company has established a
reserve of $5.5 million which management believes is sufficient to absorb any
potential losses related to its reinsurance recoverables. However, the adverse
economic environment in the worldwide insurance industry has placed great
pressure on reinsurers and the results of their operations and these conditions
could, ultimately, affect reinsurers' solvency. Historically, there have been
insolvencies following a period of competitive pricing in the industry, such as
the marketplace has experienced for the last several years. Therefore, while
management believes that the reserve is adequate based upon current available
information, conditions may change or additional information might be obtained
that would affect management's estimate of the adequacy of the level of the
reserve and which may result in a future increase or decrease in the reserve.
Management continually reviews the Company's financial exposure to the
reinsurance market and will continue to take actions to protect shareholders'
equity.

(9) COMMITMENTS AND CONTINGENCIES

Litigation

The Company is a party to numerous claims and lawsuits which arise in the normal
course of its business. Many of such claims or lawsuits involve claims under
policies underwritten or reinsured by the Company, the liabilities for which
management believes have been adequately included in its established loss
reserves. The Company believes the resolution of these lawsuits or claims will
not have a material adverse effect on its financial condition, results of
operations or cash flows.

Foreign Currency Forward Contracts

On a very limited basis in the past, the Company has entered into foreign
currency forward contracts as a hedge against foreign currency fluctuations.
There were no open foreign currency forward contracts at December 31, 1998. RML,
purchased by the Company during January, 1999, has a revenue stream in US
Dollars but incurs expenses in GBP. To mitigate the foreign exchange risk, the
Company entered into foreign currency forward contracts expiring at staggered
times through December, 2000. As of December 31, 1999, the Company had forward
contracts to sell US $12.0 million for GBP at an average rate of 1.00 GBP equals
US $1.60. The foreign currency forward contracts are used to convert currency at
a known rate in an amount which approximates average monthly expenses. Thus, the
effect of these transactions is to limit the foreign currency exchange risk of
the recurring monthly expenses. In the future, the Company may continue to limit
its exposure to currency fluctuations through the use of foreign currency
forward contracts. The Company utilizes these foreign currency forward contracts
strictly as a hedge against existing exposure to foreign currency fluctuations
rather than as a form of speculative or trading investment. The fair value of
foreign currency forward contracts December 31, 1999 was $164,000.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Leases

The Company leases administrative office facilities under long-term
non-cancelable operating lease agreements expiring at various dates through
September, 2007. In addition to rent, the agreements generally require the
payment of utilities, real estate taxes, insurance and repairs. The Company has
recognized rent expense on a straight-line basis over the terms of these leases.
In addition, the Company leases computer equipment and automobiles under
operating leases expiring at various dates through the year 2004. Rent expense
under operating leases amounted to $5.7 million, $4.3 million, and $3.7 million
for the years ended December 31, 1999, 1998 and 1997, respectively.

At December 31, 1999, future minimum annual rental payments required under
long-term, non-cancelable operating leases, excluding certain expenses payable
by the Company, are as follows:

FOR THE YEARS ENDED DECEMBER 31, AMOUNT DUE
-------------------------------- -----------

2000........................................................ $ 6,739,000
2001........................................................ 6,056,000
2002........................................................ 4,549,000
2003........................................................ 4,203,000
2004........................................................ 2,932,000
Thereafter.................................................. 3,031,000
-----------
Total future minimum annual rental payments due... $27,510,000
===========

Catastrophe Exposure

The Company writes business in areas exposed to catastrophic losses and has
significant exposures to this type of loss in California, the Atlantic Coast of
United States, certain United States Gulf Coast states, particularly Florida and
Texas, the Caribbean and Mexico. The Company assesses its overall exposures to a
single catastrophic event and applies procedures that it believes are more
conservative than are typically used by the industry to ascertain the Company's
probable maximum loss ("PML") from any single event. The Company maintains
reinsurance protection which it believes is sufficient to cover any foreseeable
event.

Loan Guarantee

During 1999, the Company guaranteed the construction financing debt of a
partnership in which the company is a limited partner. The total amount of the
loan commitment is $11.5 million, of which $8.7 million was funded as of
December 31, 1999.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(10) RELATED PARTY TRANSACTIONS

Certain of the Company's Directors are officers, directors or owners of business
entities with which the Company transacts business. Balances with these business
entities and other related parties included in the accompanying consolidated
balance sheets are as follows:

1999 1998
---------- -----------

Marketable equity securities................................ $5,051,000 $ --
Other investments........................................... 3,017,000 1,072,000
Reinsurance recoverables.................................... -- 42,974,000
Premiums, claims and other receivables...................... 3,347,000 4,986,000
Ceded unearned premium...................................... -- 8,601,000
Strategic investments, included in other assets............. -- 11,453,000
Loss and loss adjustment expense payable.................... -- 3,863,000
Reinsurance balances payable................................ -- 6,337,000
Premium payable............................................. -- 560,000
Notes payable............................................... 7,546,000 16,600,000
Accounts payable and accrued liabilities.................... -- 159,000

Transactions with these business entities and other related parties included in
the accompanying consolidated statements of earnings are as follows:

1999 1998 1997
----------- ----------- -----------

Gross earned premium.......................... $ -- $ 1,716,000 $ 672,000
Ceded earned premium.......................... -- 14,543,000 16,041,000
Commission income............................. -- 1,544,000 1,267,000
Investment income............................. 206,000 64,000 397,000
Net realized investment gain (loss)........... (4,521,000) -- --
Other operating income........................ 5,221,000 968,000 8,000
Gross loss and loss adjustment expense........ -- 3,282,000 671,000
Ceded loss and loss adjustment expense........ -- 37,107,000 17,868,000
Other operating expense....................... 578,000 840,000 807,000
Interest expense.............................. 418,000 177,000 14,000

Substantially all of the insurance related amounts shown on the above tables are
due to balances and transactions with Underwriters Indemnity Company. Its parent
was majority owned by a Director and was 21% owned by the Company. Its parent
was sold to an unrelated party (RLI Corporation) in January, 1999.

During 1997, the Company committed to invest $5.0 million in an investment
partnership managed by a related party. At December 31, 1999, $2.3 million had
been invested under this commitment. In 1998, HC bought an office building to be
occupied by the Company from a partnership in which an officer and Director was
a partner. The purchase price of $6.0 million was based upon independent
appraisal.

(11) EMPLOYEE BENEFIT PLANS

The Company had various defined contribution retirement plans under Section
401(k) of the Internal Revenue Code which covered substantially all of the
employees residing in the United States who met specified service requirements.
All of these plans were combined into one plan during 1998. The contributions
are discretionary and are determined by management as of the beginning of each
calendar year. The Company currently matches each employee's contribution to the
401(k) plan up to 6% of the

F-27
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employee's salary. Employees of the Company who reside outside the United States
receive comparable benefits under different plans. The Company contributed $3.1
million, $1.7 million and $858,000 to the plans for the years ended December 31,
1999, 1998 and 1997, respectively, which is included in compensation expense in
the accompanying consolidated statements of earnings.

(12) SHAREHOLDERS' EQUITY

Under the Texas Insurance Code, HC and USSIC must each maintain minimum
statutory capital of $1.0 million and minimum statutory surplus of $1.0 million,
and can only pay dividends out of statutory surplus funds. In addition, they are
limited in the amount of dividends which they may pay in any twelve month
period, without prior regulatory approval, to the greater of statutory net
income for the prior calendar year or ten percent (10%) of statutory capital and
surplus as of the prior calendar year end. During 2000, HC and USSIC's ordinary
dividend capacities is approximately $25.0 million and $10.4 million,
respectively.

AIC is limited by the State of Maryland in the amount of dividends which it may
pay in any twelve month period, without prior regulatory approval, to the
greater of statutory net income (under certain conditions) for the prior
calendar year or ten percent (10%) of statutory capital and surplus as of the
prior year end. Because AIC paid an extraordinary dividend of $45.0 million
during December, 1999, any dividends paid by AIC during 2000 will require prior
regulatory approval. No dividends from AIC are anticipated during 2000.

HCCL is limited by the State of Indiana in the amount of dividends it may pay in
any twelve month period, without prior regulatory approval, to the greater of
net gain from operations for the prior calendar year or ten percent (10%) of
statutory capital and surplus as of the prior year end. During 2000, HCCL's
ordinary dividend capacity will be approximately $7.0 million.

As of December 31, 1999, all of the domestic insurance company subsidiaries
total adjusted capital is significantly in excess of the NAIC authorized control
level risk-based capital.

The components of accumulated other comprehensive income (loss) are as follows:

ACCUMULATED
UNREALIZED OTHER
FOREIGN CURRENCY INVESTMENT COMPREHENSIVE
TRANSLATION GAIN (LOSS) INCOME (LOSS)
---------------- ------------ -------------

Balance December 31, 1996................. $ (91,000) $ 3,623,000 $ 3,532,000
Net change for year....................... (215,000) 4,683,000 4,468,000
--------- ------------ ------------
Balance December 31, 1997................. (306,000) 8,306,000 8,000,000
Net change for year....................... (344,000) 2,049,000 1,705,000
--------- ------------ ------------
Balance December 31, 1998................. (650,000) 10,355,000 9,705,000
Net change for year....................... 167,000 (12,564,000) (12,397,000)
--------- ------------ ------------
Balance December 31, 1999................. $(483,000) $ (2,209,000) $ (2,692,000)
========= ============ ============

(13) STOCK OPTIONS

The Company has five option plans, the 1994 Non-employee Director Stock Option
Plan, the 1996 Non-employee Director Stock Option Plan, the 1992 Incentive Stock
Option Plan, the 1995 Flexible Incentive Plan, and the 1997 Flexible Incentive
Plan. All plans are administered by the Compensation Committee of the Board of
Directors. Each option may be used to purchase one share of Common Stock of the
Company. As of December 31, 1999, 7,487,054 shares of Common Stock were reserved
for the exercise of

F-28
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HCC INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

options, of which 5,470,008 shares were reserved for options previously granted
and 2,017,046 shares were reserved for future issuances of options.

Options vest over a zero to five year period and expire four to ten years after
grant date. All options have been granted at fixed exercise prices, generally at
the market price of the Company's Common Stock on the grant date. Any excess of
the market price on the grant date over the exercise price is recognized as
compensation expense in the accompanying consolidated financial statements. If
the fair value method of valuing compensation related to options would have been
used, pro forma net earnings and pro forma diluted earnings per share would have
been $20.7 million, or $0.42 per share, for the year ended December 31, 1999;
$65.4 million, or $1.34 per share, for the year ended December 31, 1998; and
$43.8 million, or $0.91 per share, for the year ended December 31, 1997. The
fair value of each option grant was estimated on the grant date using the
Black-Scholes single option pricing model with the following weighted average
assumptions: a) risk free interest rate of 5.7% for 1999, 5.3% for 1998 and 6.2%
for 1997, b) expected volatility factor of .3, c) dividend yield of 1.52% for
1999, .91% for 1998 and .56% for 1997, and d) expected option life of four years
for 1999 and five years for 1998 and 1997.

The following table provides an analysis of stock option activity during the
three years ended December 31, 1999:

1999 1998 1997
------------------------------- ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE FAIR NUMBER OF EXERCISE FAIR NUMBER OF EXERCISE FAIR
SHARES PRICE VALUE SHARES PRICE VALUE SHARES PRICE VALUE
---------- -------- ------- --------- -------- ------- --------- -------- -------

Outstanding,
beginning of
year............... 5,459,766 $16.73 3,508,226 $16.22 3,124,793 $13.03
Granted at market
value.............. 1,869,600 13.48 $4.16 2,779,500 17.01 $5.23 1,301,500 22.88 $7.98
Cancelled............ (1,327,243) 18.36 (192,462) 21.48 (125,075) 24.28
Exercised............ (532,115) 7.88 (635,498) 14.05 (792,992) 13.86
---------- ------ --------- ------ --------- ------
Outstanding, end of
year............... 5,470,008 $16.08 5,459,766 $16.73 3,508,226 $16.22
========== ====== ========= ====== ========= ======
Exercisable, end of
year............... 2,982,872 $16.84 2,792,707 $15.92 1,230,145 $11.60
========== ====== ========= ====== ========= ======

Options outstanding and exercisable as of December 31, 1999 are shown on the
following schedule:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- --------------------
AVERAGE AVERAGE AVERAGE
NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- ------------------------ --------- ---------------- -------- --------- --------

Under $16.50........................... 2,712,041 5.08 years $12.36 1,184,515 $12.14
$16.50................................. 1,063,000 4.06 16.50 607,849 16.50
$16.51 - $22.25........................ 675,600 5.23 19.42 406,348 18.91
Over $22.25............................ 1,019,367 6.87 23.35 784,160 23.15
--------- ---------- ------ --------- ------
Total options................ 5,470,008 5.23 years $16.08 2,982,872 $16.84
========= ========== ====== ========= ======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) EARNINGS PER SHARE

The following table provides reconciliation of the denominators used in the
earnings per share calculations for the three years ended December 31, 1999:

1999 1998 1997
----------- ----------- -----------

Net earnings.......................................... $25,123,000 $72,278,000 $49,759,000
=========== =========== ===========
Reconciliation of number of shares outstanding:
Shares of Common Stock outstanding at year end........ 48,839,000 48,252,000 47,759,000
Changes in Common Stock due to issuance............... (241,000) (332,000) (764,000)
Contingent shares to be issued........................ 49,000 -- --
Common Stock contractually issuable in the future..... 414,000 -- --
----------- ----------- -----------
Weighted average Common Stock outstanding........... 49,061,000 47,920,000 46,995,000
Additional dilutive effect of outstanding options (as
determined by the application of the treasury stock
method)............................................. 588,000 1,016,000 1,214,000
----------- ----------- -----------
Weighted average Common Stock and potential common
stock outstanding................................ 49,649,000 48,936,000 48,209,000
=========== =========== ===========

As of December 31, 1999, there were approximately 2.0 million options that were
not included in the computation of diluted earnings per share because to do so
would have been antidilutive. As part of the Sun purchase agreement (See Note
2), up to 378,000 shares of the Company's Common Stock are to be issued if
certain conditions are met as of December 31, 1999 or in subsequent years. Of
these shares, 49,000 are included in the 1999 computation because the
contingency had been partially met. The remainder of the contingent shares were
not included in the earnings per share computation because the conditions for
issuance of the remaining shares have not yet been met.

(15) STATUTORY INFORMATION

The Company's insurance company subsidiaries file financial statements prepared
in accordance with statutory accounting practices prescribed or permitted by
domestic or foreign insurance regulatory authorities. The differences between
statutory financial statements and financial statements prepared in accordance
with GAAP vary between domestic and foreign jurisdictions. The principal
differences are that for statutory financial statements deferred policy
acquisition costs are not recognized, deferred income taxes are not recorded,
bonds are generally carried at amortized cost and insurance assets and
liabilities are presented net of reinsurance. The Company's use of permitted
statutory accounting practices does not have a significant impact on statutory
surplus. Statutory policyholders' surplus as of December 31, 1999, 1998, and
1997, and net income for the three years ended December 31, 1999, of the
Company's insurance company subsidiaries included in those companies' respective
filings with regulatory authorities are as follows:

1999 1998 1997
------------ ------------ ------------

Statutory policyholders' surplus........... $315,474,000 $369,401,000 $331,922,000
Statutory net income (loss)................ (8,707,000) 53,162,000 56,626,000

Statutory policyholders' surplus was adversely affected by adjustments for
reinsurance recoverables, which, although required statutorily, have no effect
on net earnings or shareholders' equity. Statutory net loss for 1999 includes a
$25.5 million loss, net of income tax, from the provision for reinsurance.

F-30
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The National Association of Insurance Commissioners adopted Statements of
Statutory Accounting Principles ("SSAPs") in March, 1998 as a product of its
attempt to codify statutory accounting principles. While subject to adoption by
the individual states, the NAIC has established an effective date of January 1,
2001 for the SSAPs. Prior to the codification project, a comprehensive guide to
statutory accounting principles did not exist. Codification is new and will
evolve over time. Based upon the SSAPs as currently published, the Company does
not expect their adoption to have a material effect on the policyholders'
surplus of its individual insurance company subsidiaries. The only material
effect on statutory net income is that the statutory net income for HC will be
decreased or increased by a change in the method of recording equity in earnings
or losses of subsidiaries. Currently HC records the equity in earnings or losses
of its subsidiaries as a component of statutory net income. When codification
becomes effective, the equity in earnings or losses of subsidiaries will be
recorded as an unrealized gain or loss, which is a direct increase or decrease
to policyholders' surplus. Income will not be recognized until such time (if
any) that dividends are received from the subsidiaries and recorded in statutory
net income.

(16) OTHER INFORMATION

Supplemental Cash Flow Information

Supplemental cash flow information for the three years ended December 31, 1999,
is summarized below:

1999 1998 1997
----------- ----------- -----------

Interest paid................................. $13,694,000 $ 5,409,000 $ 6,712,000
Income tax paid............................... 23,116,000 30,662,000 24,132,000
Dividends declared but not paid at year end... 2,442,000 1,930,000 1,386,000

The unrealized gain or loss on securities available for sale, deferred taxes
related thereto, and the issuance of the Company's Common Stock for the purchase
of subsidiaries are non-cash transactions which have been included as direct
increases or decreases in shareholders' equity.

Restructuring

The Company recorded a restructuring charge and associated expenses of $5.5
million during the fourth quarter of 1999. Since its initial public offering in
1992, the Company has completed more than fifteen acquisitions for a total value
exceeding $750.0 million. During that time, total employees have grown from less
than 100 to more than 1,000. As a result of this rapid growth, management
believes certain operating inefficiencies occurred. At the beginning of the
fourth quarter of 1999, management made a review of its operations and
determined that they could be made more efficient, principally by reducing the
employee count in certain of its operations. The terminations that generated the
compensation savings took place in the fourth quarter.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A total of 92 employees were terminated in the fourth quarter as a result of the
Company's restructuring which affected all segments. The Company accrued
severance payments for 27 of these terminated employees at December 31, 1999,
substantially all of which was paid in January, 2000. The restructuring charge
also includes accruals of $911,000 related to future lease costs of office space
made redundant as a result of the restructuring plan and a write down of
$647,000, principally of leasehold improvements and other assets related to the
redundant space. The following table provides a detailed analysis of the charge:

ACCRUED AT
PAID IN DECEMBER 31, EXPENSED IN
1999 1999 1999
-------- ----------------- -----------

Severance..................................... $691,000 $3,115,000 $3,806,000
Other......................................... 125,000 911,000 1,036,000
-------- ---------- ----------
$816,000 $4,026,000 4,842,000
======== ==========
Write down of assets................ 647,000
----------
Total restructuring expense......... $5,489,000
==========

(17) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSE

The following table provides a reconciliation of the liability of loss and loss
adjustment expense ("LAE"), for the three years ended December 31, 1999:

1999 1998 1997
------------ ------------ ------------

Reserves for loss and LAE at beginning of the
year............................................. $460,511,000 $275,008,000 $229,049,000
Less reinsurance recoverables...................... 341,599,000 155,374,000 111,766,000
------------ ------------ ------------
Net reserves at beginning of the year.............. 118,912,000 119,634,000 117,283,000
Net reserves acquired with purchase of
subsidiaries..................................... 55,523,000 3,877,000 1,919,000
Effect on loss reserves of write off of ceded
outstanding and IBNR reinsurance recoverables.... 82,343,000 -- --
Provision for loss and LAE for claims occurring in
the current year................................. 105,036,000 105,895,000 100,288,000
Increase (decrease) in estimated loss and LAE for
claims occurring in prior years.................. 4,614,000 (14,593,000) (3,774,000)
------------ ------------ ------------
Incurred loss and LAE, net of reinsurance..... 109,650,000 91,302,000 96,514,000
------------ ------------ ------------
Loss and LAE payments for claims occurring during:
Current year..................................... 36,770,000 47,126,000 48,208,000
Prior years...................................... 56,052,000 48,775,000 47,874,000
------------ ------------ ------------
Loss and LAE payments, net of reinsurance.......... 92,822,000 95,901,000 96,082,000
------------ ------------ ------------
Net reserves at end of the year.................... 273,606,000 118,912,000 119,634,000
Plus reinsurance recoverables...................... 597,498,000 341,599,000 155,374,000
------------ ------------ ------------
Reserves for loss and LAE at end of the
year........................................ $871,104,000 $460,511,000 $275,008,000
============ ============ ============

During 1999, the Company had net loss and LAE deficiency of $4.6 million
relating to prior year losses compared to redundancies of $14.6 million in 1998
and $3.7 million in 1997. The deficiencies and redundancies in the net reserves
result from the Company's and its actuaries' continued review of its loss
reserves and the increase or reduction of such reserves as losses are finally
settled and claims exposures are reduced. The Company believes it has provided
for all material net incurred losses.

The Company has no material exposure to environmental pollution losses, as HC
only began writing business in 1981 and policies issued by HC normally contain
pollution exclusion clauses which limit

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

pollution coverage to "sudden and accidental" losses only, thus excluding
intentional (dumping) and seepage claims. Policies issued by AIC and USSIC,
because of the types of risks incurred, principally general aviation, are not
considered to have significant environmental exposures. Therefore, the Company
should not experience any material development in reserves from environmental
pollution claims.

(18) QUARTERLY FINANCIAL DATA (UNAUDITED; AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)

FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
----------------- ----------------- ----------------- -----------------
1999 1998 1999 1998 1999 1998 1999 1998
------- ------- ------- ------- ------- ------- ------- -------

Total revenue.............. $84,308 $84,170 $83,093 $76,536 $82,483 $79,342 $91,987 $67,986
Net earnings (loss)........ (4,991) 15,482 9,118 22,075 287 17,634 20,709 17,087
Basic earnings (loss) per
share data:
Earnings (loss) per
share.................... $ (0.10) $ 0.32 $ 0.19 $ 0.46 $ 0.01 $ 0.37 $ 0.42 $ 0.36
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding.............. 49,193 48,159 49,130 47,870 48,951 47,853 48,764 47,794
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss) per
share data:
Earnings (loss) per
share.................... $ (0.10) $ 0.32 $ 0.18 $ 0.45 $ 0.01 $ 0.36 $ 0.42 $ 0.35
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding.............. 49,193 48,970 49,866 48,919 49,971 49,015 49,544 48,809
======= ======= ======= ======= ======= ======= ======= =======

During 1999, pre-tax provisions for reinsurance of $29.5 million and $14.0
million were recorded in the second quarter and fourth quarter, respectively.
Also, during the fourth quarter of 1999, the Company recorded a pre-tax
restructuring expense of $5.5 million and a $4.3 million writedown of one equity
investment to its estimated fair market value. The fourth quarter of 1998
includes a charge of $5.8 million (pre-tax) for catastrophe losses related to
hurricanes Georges and Mitch. The sum of the quarters earnings (loss) per share
may not equal the annual amounts due to rounding.

F-33
156

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

[ ] TRUST PREFERRED SECURITIES (TruPS(R))

HCC CAPITAL TRUST I

HCC CAPITAL TRUST II

[ ]% TRUST PREFERRED SECURITIES (TruPS(R))

$ LIQUIDATION AMOUNT

FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY

HCC INSURANCE HOLDINGS, INC.

[HCC LOGO]

---------------------

PROSPECTUS

[ ], 2000
(Including prospectus dated September , 2000)

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
157

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

SEC Registration Fee..................................... $ 79,200
National Association of Securities Dealers, Inc. Filing
Fee.................................................... 35,000*
Printing................................................. 125,000
Accounting Fees and Expenses............................. 100,000*
Legal Fees and Expenses.................................. 125,000*
Transfer Agent Fees and Expenses......................... 5,000*
Trustees Fees and Expenses............................... 30,000*
Rating Agency Fees....................................... 100,000*
Blue Sky Fees and Expenses............................... 10,000*
Miscellaneous............................................ 10,800*
--------
Total.......................................... $620,000*
========

- ---------------

* Estimated.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company is incorporated under the laws of the State of Delaware. Subsection
(b)(7) of Section 102 of the Delaware General Corporation Law (the "DGCL"),
enables a corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions) or (iv) for any transaction from which the director derived an
improper personal benefit.

Section 145 of the General Corporation Law of the state of Delaware ("Section
145") provides that a Delaware corporation may indemnify any persons who are, or
are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. A Delaware corporation may indemnify any persons who were
or are parties, or are threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation by reason of
the fact that such person is or was a director, officer, employee or agent of
such corporation, or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interest except that no indemnification is
permitted without judicial approval if the officer is adjudged to be liable to
the corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director has actually
and reasonably incurred.

II-1
158

Article 11 of the Company's certificate of incorporation, as amended, requires
the Company to indemnify the Company's directors and officers to the extent
permitted under Section 145.

Article VIII of the Company's bylaws provides that the Company shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding whether civil,
criminal, administrative, or investigative (other than an action by or in the
right of the Company), by reason of the fact that he is or was a director or
officer of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
determination of whether an incumbent or former director or officer is entitled
to indemnification because has met the applicable standards of conduct set forth
above is to be made, unless ordered by a court: (i) by a majority vote of a
quorum consisting of directors who at the time of the vote are not parties to
the proceeding; (ii) if such quorum cannot be obtained, or even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion; or (iii) by a vote of Shareholders of the Company. The bylaws
further provide that the expenses (including attorney's fees) incurred in any
such action by a director or officer of the Company may be paid or reimbursed by
the Company in advance of the final disposition of such action, suit or
proceeding upon receipt of a written undertaking by or on behalf of the director
or officer to repay the amount paid or reimbursed if it is ultimately determined
that he is not entitled to be indemnified by the Company as authorized therein.

The Company's bylaws also provide that the Company may indemnify to the extent
of the provisions set forth therein, any person, other than an officer or
director, who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative, by reason of the fact that he is or
was an employee or agent of the Company, or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise, if such person makes
written application for such indemnification to the Board of Directors and the
Board of Directors so determines that indemnification is appropriate and the
extent thereof.

The Company's bylaws further provide that the indemnification described therein
is not exclusive, and shall not exclude any other rights to which those seeking
to be indemnified may be entitled under statute, any bylaw, agreement, vote of
Shareholders or disinterested directors, or otherwise, both as to action in his
official capacity and to his action in another capacity while holding such
office.

The Amended and Restated Trust Agreement for each of the Trusts will provide for
the indemnification by HCC to the fullest extent permitted by applicable law of
a Trustee, an Administrator, a Paying Agent, any affiliate of any of such
parties, any officer, director, shareholder, member, partner, employee,
representative or agent of a Trustee, or any employee or agent of the Trusts or
their affiliates. HCC will also be obligated to advance expenses, including
legal expenses, from time-to-time upon the indemnified party's written
affirmation that such party believes in good faith to have met the standard of
conduct set forth in the Trust Agreement and an undertaking to repay any amounts
advanced if such party is not entitled to indemnification.

II-2
159

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) 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 table. Items not denoted by a letter but denoted with an * are being
filed herewith. Items designated with ** are to be filed by amendment.

EXHIBIT
NUMBER DESCRIPTION
------- -----------

**1.1 -- Form of Underwriting Agreement (Common Stock HCC
Insurance Holdings, Inc.).
**1.2 -- Form of Underwriting Agreement (Senior Debt Securities
and Junior Subordinated Debt Securities of HCC Insurance
Holdings, Inc.).
**1.3 -- Form of Underwriting Agreement (Capital Securities).
**1.4 -- Form of Underwriting Agreement (Warrants of HCC Insurance
Holdings, Inc.).
(a)3.4 -- Bylaws of HCC Insurance Holdings, Inc., as amended
(b)3.7 -- Restated Certificate of Incorporation of HCC Insurance
Holdings, Inc
*3.3 -- Certificate of Trust of HCC Capital Trust I.
*3.4 -- Certificate of Trust of HCC Capital Trust II.
*4.1 -- Form of Indenture for Senior Debt Securities issued by
HCC Insurance Holdings, Inc.
*4.2 -- Form of Subordinated Indenture for Junior Subordinated
Debt Securities issued by HCC Insurance Holdings, Inc.
*4.3 -- Form of Subordinated Indenture for Junior Subordinated
Debt Securities issued by HCC Insurance Holdings, Inc. to
HCC Capital Trust I or HCC Capital Trust II.
**4.4 -- Forms of Senior Debt Security issued by HCC Insurance
Holdings, Inc.
**4.5 -- Form of Junior Subordinated Debt Security issued by HCC
Insurance Holdings, Inc.
**4.6 -- Form of Junior Subordinated Debt Security issued by HCC
Insurance Holdings, Inc. to HCC Capital Trust I or HCC
Capital Trust II.
*4.7 -- Trust Agreement of HCC Capital Trust I.
*4.8 -- Trust Agreement of HCC Capital Trust II.
*4.9 -- Form of Amended and Restated Trust Agreement of HCC
Capital Trust I and HCC Capital Trust II.
**4.10 -- Form of Capital Security.
*4.11 -- Form of Capital Securities Guarantee of HCC with respect
to the capital securities issued by HCC Capital Trust I
and HCC Capital Trust II.
(a)4.12 -- Specimen of Common Stock certificate, $1.00 par value, of
HCC Insurance Holdings, Inc.
*5.1 -- Opinion of Haynes and Boone, LLP, counsel for HCC
Insurance Holdings, Inc.
*5.2 -- Opinion of Richards, Layton & Finger, P.A., counsel to
HCC Capital Trust I and HCC Capital Trust II.
*12.1 -- Statement of Ratios of Earnings to Fixed Charges.
*23.1 -- Consent of PricewaterhouseCoopers LLP.
*23.2 -- Consent of Haynes and Boone, LLP (included in Exhibit
5.1).
*23.3 -- Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.2).
*24.1 -- Power of Attorney of James M. Berry.
*24.2 -- Power of Attorney of Marvin P. Bush.

II-3
160

EXHIBIT
NUMBER DESCRIPTION
------- -----------

*24.3 -- Power of Attorney of Frank J. Bramanti.
*24.4 -- Power of Attorney of Patrick B. Collins.
*24.5 -- Power of Attorney of James R. Crane.
*24.6 -- Power of Attorney of J. Robert Dickerson.
*24.7 -- Power of Attorney of Edwin H. Frank, III.
*24.8 -- Power of Attorney of Alan W. Fulkerson.
*24.9 -- Power of Attorney of Walter J. Lack.
*24.10 -- Power of Attorney of Stephen J. Lockwood.
*25.1 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Trustee under the Indenture (Senior Debt Securities
issued by HCC Insurance Holdings, Inc.).
*25.2 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Trustee under the Subordinated Indenture (Junior
Subordinated Debt Securities issued by HCC Insurance
Holdings, Inc.).
*25.3 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Trustee under the Subordinated Indenture (Junior
Subordinated Debt Securities issued by HCC to HCC Capital
Trust I or HCC Capital Trust II).
*25.4 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Property Trustee for the Amended and Restated Trust
Agreement of HCC Capital Trust I.
*25.5 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Property Trustee for the Amended and Restated Trust
Agreement of HCC Capital Trust II.
*25.6 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Guarantee Trustee under the Guarantee of HCC for the
benefit of the holders of Capital Securities of HCC
Capital Trust I.
*25.7 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Guarantee Trustee under the Guarantee of HCC for the
benefit of the holders of Capital Securities of HCC
Capital Trust II.

- ---------------

(a) Incorporated by reference to the Exhibits to HCC Insurance Holdings, Inc.'s
Registration Statement (Registration No. 33-48737) filed October 27, 1992.

(b) Incorporated by reference to the Exhibits to HCC Insurance Holdings, Inc.'s
Registration Statement on Form S-8 (Registration No. 333-14499) filed on
October 18, 1996.

ITEM 17. UNDERTAKINGS

The undersigned registrants hereby undertake:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-4
161

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and therefore is unenforceable. In the
event that a claim for indemnification against such liabilities, other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act of
1934, and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act of 1934, that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

II-5
162

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
Texas, on the 21st day of September, 2000.

HCC INSURANCE HOLDINGS, INC.

By: /s/ STEPHEN L. WAY
----------------------------------
Stephen L. Way
Chairman of the Board
and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ STEPHEN L. WAY Chairman of the Board of ---|
- ----------------------------------------------------- Directors and Chief |
Stephen L. Way Executive Officer |
(Principal Executive |
Officer) |
|
/s/ JAMES M. BERRY* Director |
- ----------------------------------------------------- |
James M. Berry |
|
/s/ MARVIN P. BUSH* Director |
- ----------------------------------------------------- |
Marvin P. Bush |
|
/s/ FRANK J. BRAMANTI* Director and Executive Vice |
- ----------------------------------------------------- President |
Frank J. Bramanti |-- September 21, 2000
|
/s/ PATRICK B. COLLINS* Director |
- ----------------------------------------------------- |
Patrick B. Collins |
|
/s/ JAMES R. CRANE* Director |
- ----------------------------------------------------- |
James R. Crane |
|
/s/ J. ROBERT DICKERSON* Director |
- ----------------------------------------------------- |
J. Robert Dickerson |
|
/s/ EDWARD H. ELLIS, JR. Senior Vice President and |
- ----------------------------------------------------- Chief Financial Officer |
Edward H. Ellis, Jr. (Chief Accounting Officer) |
|
/s/ EDWIN H. FRANK, III* Director |
- ----------------------------------------------------- |
Edwin H. Frank, III ---

II-6
163

SIGNATURE TITLE DATE
--------- ----- ----

/s/ ALAN W. FULKERSON* Director ---|
- ----------------------------------------------------- |
Alan W. Fulkerson |
|
/s/ WALTER J. LACK* Director |
- ----------------------------------------------------- |
Walter J. Lack |
|
/s/ STEPHEN J. LOCKWOOD* Director and Vice Chairman |
- ----------------------------------------------------- |-- September 21, 2000
Stephen J. Lockwood |
|
/s/ JOHN N. MOLBECK, JR. Director, President and |
- ----------------------------------------------------- Chief Operating Officer |
John N. Molbeck, Jr. |
|
* By: /s/ CHRISTOPHER L. MARTIN |
----------------------------------------------- |
Christopher L. Martin, |
Attorney-in-fact ---|

Pursuant to the requirements of the Securities Act of 1933, HCC Capital Trust I
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Houston, Texas, on the 21st day of September, 2000.

HCC CAPITAL TRUST I
By: HCC INSURANCE HOLDINGS, INC.,
as Depositor

By: /s/ STEPHEN L. WAY
---------------------------------
Stephen L. Way
Chairman of the Board and
Chief Executive Officer

HCC CAPITAL TRUST II
By: HCC INSURANCE HOLDINGS, INC.,
as Depositor

By: /s/ STEPHEN L. WAY
---------------------------------
Stephen L. Way
Chairman of the Board and
Chief Executive Officer

II-7
164

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- -----------

**1.1 -- Form of Underwriting Agreement (Common Stock HCC
Insurance Holdings, Inc.).
**1.2 -- Form of Underwriting Agreement (Senior Debt Securities
and Junior Subordinated Debt Securities of HCC Insurance
Holdings, Inc.).
**1.3 -- Form of Underwriting Agreement (Capital Securities).
**1.4 -- Form of Underwriting Agreement (Warrants of HCC Insurance
Holdings, Inc.).
(a)3.4 -- Bylaws of HCC Insurance Holdings, Inc., as amended
(b)3.7 -- Restated Certificate of Incorporation of HCC Insurance
Holdings, Inc
*3.3 -- Certificate of Trust of HCC Capital Trust I.
*3.4 -- Certificate of Trust of HCC Capital Trust II.
*4.1 -- Form of Indenture for Senior Debt Securities issued by
HCC Insurance Holdings, Inc.
*4.2 -- Form of Subordinated Indenture for Junior Subordinated
Debt Securities issued by HCC Insurance Holdings, Inc.
*4.3 -- Form of Subordinated Indenture for Junior Subordinated
Debt Securities issued by HCC Insurance Holdings, Inc. to
HCC Capital Trust I or HCC Capital Trust II.
**4.4 -- Forms of Senior Debt Security issued by HCC Insurance
Holdings, Inc.
**4.5 -- Form of Junior Subordinated Debt Security issued by HCC
Insurance Holdings, Inc.
**4.6 -- Form of Junior Subordinated Debt Security issued by HCC
Insurance Holdings, Inc. to HCC Capital Trust I or HCC
Capital Trust II.
*4.7 -- Trust Agreement of HCC Capital Trust I.
*4.8 -- Trust Agreement of HCC Capital Trust II.
*4.9 -- Form of Amended and Restated Trust Agreement of HCC
Capital Trust I and HCC Capital Trust II.
**4.10 -- Form of Capital Security.
*4.11 -- Form of Capital Securities Guarantee of HCC with respect
to the capital securities issued by HCC Capital Trust I
and HCC Capital Trust II.
(a)4.12 -- Specimen of Common Stock certificate, $1.00 par value, of
HCC Insurance Holdings, Inc.
*5.1 -- Opinion of Haynes and Boone, LLP, counsel for HCC
Insurance Holdings, Inc.
*5.2 -- Opinion of Richards, Layton & Finger, P.A., counsel to
HCC Capital Trust I and HCC Capital Trust II.
*12.1 -- Statement of Ratios of Earnings to Fixed Charges.
*23.1 -- Consent of PricewaterhouseCoopers LLP.
*23.2 -- Consent of Haynes and Boone, LLP (included in Exhibit
5.1).
*23.3 -- Consent of Richards, Layton & Finger, P.A. (included in
Exhibit 5.2).
*24.1 -- Powers of Attorney of James M. Berry.
*24.2 -- Powers of Attorney of Marvin P. Bush.
*24.3 -- Powers of Attorney of Frank J. Bramanti.

165

EXHIBIT
NUMBER DESCRIPTION
------- -----------

*24.4 -- Power of Attorney of Patrick B. Collins.
*24.5 -- Power of Attorney of James R. Crane.
*24.6 -- Power of Attorney of J. Robert Dickerson.
*24.7 -- Power of Attorney of Edwin H. Frank, III.
*24.8 -- Power of Attorney of Alan W. Fulkerson.
*24.9 -- Power of Attorney of Walter J. Lack.
*24.10 -- Power of Attorney of Stephen J. Lockwood.
*25.1 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Trustee under the Indenture (Senior Debt Securities
issued by HCC Insurance Holdings, Inc.).
*25.2 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Trustee under the Subordinated Indenture (Junior
Subordinated Debt Securities issued by HCC Insurance
Holdings, Inc.).
*25.3 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Trustee under the Subordinated Indenture (Junior
Subordinated Debt Securities issued by HCC to HCC Capital
Trust I or HCC Capital Trust II).
*25.4 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Property Trustee for the Amended and Restated Trust
Agreement of HCC Capital Trust I.
*25.5 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Property Trustee for the Amended and Restated Trust
Agreement of HCC Capital Trust II.
*25.6 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Guarantee Trustee under the Guarantee of HCC for the
benefit of the holders of Capital Securities of HCC
Capital Trust I.
*25.7 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of First Union National Bank, as
Guarantee Trustee under the Guarantee of HCC for the
benefit of the holders of Capital Securities of HCC
Capital Trust II.

- ---------------

(a) Incorporated by reference to the Exhibits to HCC Insurance Holdings, Inc.'s
Registration Statement (Registration No. 33-48737) filed October 27, 1992.

(b) Incorporated by reference to the Exhibits to HCC Insurance Holdings, Inc.'s
Registration Statement on Form S-8 (Registration No. 333-14499) filed on
October 18, 1996.