<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
FINANCIAL STATEMENTS AND
SUPPLEMENTAL SCHEDULE
DECEMBER 31, 1999 AND 1998
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
INDEX
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<TABLE>
<CAPTION>
PAGE
<S> <C>
Financial Statements:
Report of Independent Accountants............................................. 1
Statement of Net Assets Available for Benefits................................ 2
Statement of Changes in Net Assets Available for Benefits..................... 3
Notes to Financial Statements................................................. 4-11
Supplemental Schedule:
Schedule I - Schedule of Assets Held for Investment Purposes at End of Year... 12
</TABLE>
<PAGE>
PRICEWATERHOUSECOOPERS LLP
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
100 Pearl Street
Hartford CT 06103-4508
Telephone (860) 241 7000
Facsimile (860) 241 7590
REPORT OF INDEPENDENT ACCOUNTANTS
To the Participants and Administrator
of the HCC Insurance Holdings 401(k) Plan
In our opinion, the accompanying statements of net assets available for
benefits and the related statements of changes in net assets available for
benefits present fairly, in all material respects, the net assets available
for benefits of the HCC Insurance Holdings 401(k) Plan (the "Plan") at
December 31, 1999 and 1998, and the changes in net assets available for
benefits for the years then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Plan'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.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of assets
held for investment purposes is presented for the purpose of additional
analysis and is not a required part of the basic financial statements but is
supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. This supplemental schedule is the responsibility of the
Plan's management. The supplemental schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
As discussed in Note 9, during 1999, the AMIG Savings and Investment Plan and
the Crawley Warren (USA) Inc. Employee Savings Plan for Continental Aviation
Writers, Inc. were merged into the Plan.
As discussed in Note 11, during March 2000, the LDG Management Company
Incorporated Cash or Deferred Profit Sharing Plan merged into the Plan.
/s/ PricewaterhouseCoopers LLP
May 12, 2000
1
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
ASSETS
Investments, at fair value.................... $18,794,538 $12,927,389
Receivables:
Participant notes........................... 146,733 46,617
----------- -----------
Net assets available for benefits............. $18,941,271 $12,974,006
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1999 1998
<S> <C> <C>
ADDITIONS TO NET ASSETS ATTRIBUTED TO:
Investment income:
Interest............................................. $ 210,751 $ 261,363
Dividends............................................ 12,520 22,996
Net appreciation in fair value of investments........ 1,640,536 464,963
----------- -----------
1,863,807 749,322
----------- -----------
Contributions:
Employer............................................. 1,957,473 1,581,145
Employee............................................. 4,212,219 3,397,172
----------- -----------
6,169,692 4,978,317
Other additions........................................ - 28,193
----------- -----------
Total additions.......................................... 8,033,499 5,755,832
DEDUCTIONS FROM NET ASSETS ATTRIBUTED TO:
Benefit payments..................................... 2,461,289 8,872,239
Transaction charge................................... 5,129 13,663
Participant notes receivable terminated
due to withdrawal of participant.................. 20,943 -
----------- -----------
Total deductions......................................... 2,487,361 8,885,902
Change in forfeiture reserve, net........................ (58,967) (22,833)
----------- -----------
Net increase (decrease) prior to plan merger............. 5,487,171 (3,152,903)
Transfer of assets due to plan merger.................... 480,094 13,917,010
----------- -----------
Net increase............................................. 5,967,265 10,764,107
Net assets available for benefits at beginning of year... 12,974,006 2,209,899
----------- -----------
Net assets available for benefits at end of year......... $18,941,271 $12,974,006
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. DESCRIPTION OF PLAN
The following description of the HCC Insurance Holdings ("HCC") 401(k)
Plan (the "Plan") provides only general information. As a result of the
merger of several other qualified plans of acquired companies into the Plan
during 1997 and 1998 the Plan has been amended to include certain specific
provisions applicable only to merged participants. Participants should refer
to the Plan agreement for a more complete description of the Plan's
provisions.
GENERAL
The Plan is a defined contribution plan established effective January 1,
1992 and most recently amended and restated May 17, 1999, retroactively
effective January 1, 1999. Non-union employees of HCC Insurance Holdings,
Inc. (the "Company") generally become eligible to participate upon attaining
the age of 21. Full time employees must also complete one year of service to
become eligible. The Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA").
Effective December 20, 1999, the Company acquired The Centris Group, Inc.
Effective January 1, 2000 employees of the acquired subsidiary became
eligible to participate in the Plan subject to the provisions of the Plan
agreement.
CONTRIBUTIONS
Participants may contribute an amount equal to not less than 2 percent nor
more than 15 percent of their compensation for the contribution period.
Participants direct the investment of their contributions into various
investment options offered by the Plan. The Plan currently offers 2 general
accounts, 9 pooled separate accounts and a Company stock as investment
options for participants. Employee contributions are recorded in the period
during which the Company makes payroll deductions from the participant's
earnings.
The Company may make a matching contribution in a discretionary amount for
each $1.00 contributed by a participant, up to a maximum of 6 percent of the
participant's compensation. The Company may also make discretionary
non-elective contributions. Matching Company contributions are recorded
monthly. Discretionary non-elective contributions, if any, are recorded at
the end of the plan year.
PARTICIPANT ACCOUNTS
Each participant's account is credited with the participant's contribution
and allocation of the Company's contribution and plan earnings. Allocations
are based on participant earnings or account balances, as defined. The
benefit to which a participant is entitled is the benefit that can be
provided from the participant's vested account.
4
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
VESTING
Participants are immediately vested in their voluntary contributions plus
actual earnings thereon. The balance vesting in the participant's accounts
is based on years of service. A participant becomes 20 percent vested after
two years of service, 40 percent vested after three years of service, 60
percent vested after four years of service, 80 percent vested after five
years of service and 100 percent vested after six years of service. However,
if an active participant dies prior to attaining the normal retirement age,
the participant's account becomes 100 percent vested.
PAYMENT OF BENEFITS
On termination of service, a participant may elect to receive either a
lump-sum amount equal to the value of the vested portion of his or her
account, a distribution in the form of an annuity, or a combination of both.
Distributions are subject to the applicable provisions of the Plan agreement.
Benefit claims are recorded as expenses when they have been approved for
payment and paid by the Plan.
PARTICIPANT NOTES RECEIVABLE
Participants may borrow up to a maximum of $50,000 or 50 percent of the
vested portion of his or her account balance, whichever is less. Loans are
treated as a transfer to/from the investment fund from/to Participant Notes
Receivable. A loan is secured by the balance in the participant's account and
bears interest at a rate commensurate with market rates for similar loans,
as defined (7.75% to 10.00% and 8.00% to 10.00% for the years ended
December 31, 1999 and 1998, respectively).
5
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
2. SUMMARY OF ACCOUNTING POLICIES
METHOD OF ACCOUNTING
The Plan's financial statements are prepared on the accrual basis of
accounting. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and changes therein. Actual results could differ from those
estimates.
Amounts shown by investment fund option on the statement of net assets
available for benefits as of December 31, 1998 and the statement of
changes in net assets available for benefits for the year ended
December 31, 1998 have been reclassified to be shown in total to conform
to the current year presentation in order to adopt AICPA Statement of
Position 99-3, "ACCOUNTING FOR AND REPORTING OF CERTAIN DEFINED
CONTRIBUTION PLAN INVESTMENTS AND OTHER DISCLOSURE MATTERS."
INVESTMENT VALUATION
Investments in pooled separate accounts are recorded at fair value, as
determined by the unit value reported by Connecticut General Life
Insurance Company ("CG Life"). Investments in the general accounts are
non-fully benefit responsive and are recorded at fair value. Participant
notes receivable are valued at cost which approximates fair value. The
Company stock is valued at its quoted market price.
6
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. INVESTMENTS
Investments that represent 5 percent or more of the Plan's net assets
are separately identified below.
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
<S> <C> <C>
CIGNA Charter Guaranteed Long-Term Account............... $3,435,321 $1,590,656
interest rates, 5.65%; 5.65%
CIGNA Charter Guaranteed Government Securities Account... 2,266,057 2,510,951
interest rates, 3.60%; 3.89%
CIGNA Charter Large Company Stock Index Fund............. 4,573,363 2,509,145
units, 58,067; 40,634
CIGNA Fidelity Advisor Growth Opportunities Fund......... 4,177,977 2,940,369
units, 51,669; 38,386
CIGNA Fidelity Advisor Balanced Fund..................... - 805,180
units, -; 25,432
CIGNA Janus Worldwide Fund............................... 1,397,638 N/A
units, 15,620; N/A
HCC Common Stock......................................... N/A 1,374,587
shares, N/A; 78,548
</TABLE>
7
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
INVESTMENT PERFORMANCE
During 1999 and 1998, the Plan's investments (including gains and losses
on investments bought and sold, as well as held during the year)
appreciated in value by $1,863,807 and $749,322, respectively, as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1999 1998
<S> <C> <C>
General Accounts:
CIGNA Charter Guaranteed Long-Term Account..... $ 122,072 $ 31,004
CIGNA Charter Guaranteed Government
Securities Account........................... 82,357 228,716
----------- ------------
204,429 259,720
Pooled Separate Accounts:
CIGNA Charter Foreign Stock III Fund........... 88,765 25,197
CIGNA Charter Corporate Bond Fund.............. (1,982) 93
CIGNA Charter Large Company Stock Index Fund... 690,852 323,530
CIGNA Fidelity Advisor Growth
Opportunities Fund........................... 152,542 451,765
CIGNA Fidelity Advisor Balanced Fund........... 27,005 (22,490)
CIGNA Warburg Pincus Advisor Emerging
Growth Fund.................................. 44,539 1,217
CIGNA INVESCO Dynamics Fund.................... 224,982 1,687
CIGNA Founders Balanced Fund................... (7,590) 2,202
CIGNA Founders Growth Fund..................... 127,643 3,240
CIGNA Janus Worldwide Fund..................... 488,746 4,877
CIGNA Templeton Foreign Fund................... 11,171 (19)
----------- ------------
1,846,673 791,299
Company Stock:
HCC Common Stock............................... (193,617) (303,340)
Participant Notes Receivable..................... 6,322 1,643
----------- ------------
Net increase................................. $ 1,863,807 $ 749,322
=========== ============
</TABLE>
8
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
4. INVESTMENT CONTRACTS WITH INSURANCE COMPANY
The Plan participates in contracts with CG Life via investments in the
CIGNA Charter Guaranteed Long-Term Account with the CIGNA Charter
Guaranteed Government Securities Account. CG Life commingles the assets
of the CIGNA Charter Guaranteed Long-Term Account with other assets. For
the Plan's investment in the CIGNA Charter Guaranteed Long-Term Account,
the Plan is credited with interest at the rate specified in the contract
which was 5.65% for the years ended December 31, 1999 and 1998, net of
asset charges. CG Life prospectively guaranteed the interest rates credited
for the CIGNA Charter Guaranteed Long-Term Account for six months. For the
Plan's investment in the CIGNA Charter Guaranteed Government Securities
Account, the Plan is credited with interest at a yield which averaged
3.60% and 3.89% for the years ended December 31, 1999 and 1998,
respectively, net of asset charges. As discussed in Note 2, the CIGNA
Charter Guaranteed Long-Term Account and the CIGNA Charter Guaranteed
Government Securities Account are included in the financial statements
at fair value which, principally because of the periodic rate reset
process, approximates contract value.
5. RELATED-PARTY TRANSACTIONS
Plan assets include investments in funds managed by CG Life, a wholly
owned division of CIGNA. CIGNA is the Plan's trustee and as such,
transactions with the trustee qualify as party-in-interest transactions.
Personnel and facilities of the Company have been used to perform
administrative functions for the Plan at no charge to the Plan.
6. PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the
right under the Plan to discontinue its contributions at any time and to
terminate the Plan subject to the provisions of ERISA. In the event of
Plan termination, participants will become 100 percent vested in their
accounts.
7. TAX STATUS
The Internal Revenue Service has determined and informed the Company by a
letter dated September 27, 1999, that the Plan and related trust are
designed in accordance with applicable sections of the Internal Revenue
Code ("IRC"). The Plan's administrator and tax counsel believe that the
Plan is designed and is currently being operated in compliance with the
applicable requirements of the IRC. Therefore, no provision for income
taxes has been included in the Plan's financial statements.
9
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. RECONCILIATION OF PLAN FINANCIAL STATEMENTS TO THE FORM 5500
Certain balances included on Schedule H (Part I and II) of the Annual
Return/Report of Employee Benefit Plan (the "Form 5500") have been
reclassified for purposes of presentation in these financial statements
to provide additional disclosure.
9. PLAN MERGERS
During March 1998, assets of the AVEMCO Corporation Profit Sharing
Plan and the NASRA 401(k) and Profit Sharing Plan were merged into the
Plan and participants became eligible to participate in the Plan
subject to the provisions of the Plan agreement.
During 1999, assets of the AMIG Savings and Investment Plan and the
Crawley Warren (USA) Inc. Employee Savings Plan for Continental Aviation
Writers, Inc. were merged into the Plan. Participants became eligible to
participate in the Plan subject to the provisions of the Plan agreement.
10. FORFEITURES
The net change in forfeiture reserve represents the net change in
the available forfeiture reserve balance from the prior year plus the
current year forfeitures generated. Forfeitures result from nonvested
benefit payments remaining in the Plan for all terminated employees.
Upon reaching the break-in-service requirement, as defined in the Plan
agreement, forfeitures generated are added to the forfeiture reserve
balance. The forfeiture reserve of $102,294 and $52,132 at December 31,
1999 and 1998, respectively, is included in the CIGNA Charter Guaranteed
Long-Term Account and is available to offset contributions or pay Plan
expenses, which would be otherwise payable by the Company, in accordance
with the Plan agreement.
10
<PAGE>
HCC INSURANCE HOLDINGS
401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS
Effective January 3, 2000, the CIGNA Charter Large Company Stock -
Value I Fund, the CIGNA Charter Small Company Stock - Value I Fund and
the CIGNA Charter Small Company Stock - Growth Fund were added to the
Plan's investment options.
Effective January 3, 2000, the CIGNA Charter Guaranteed Government
Securities Account and the CIGNA Warburg Pincus Advisor Emerging Growth
Fund were frozen for a period of 90 days. Effective April 3, 2000, the
CIGNA Charter Guaranteed Government Securities Account and the CIGNA
Warburg Pincus Advisor Emerging Growth Fund were eliminated as
investment options. Any remaining asset balances in the above investment
funds were transferred into the CIGNA Charter Guaranteed Long-Term
Account.
During March 2000, assets of the LDG Management Company Incorporated
Cash or Deferred Profit Sharing Plan were merged into the Plan and
participants became eligible to participate in the Plan subject to the
provisions of the Plan agreement.
11
<PAGE>
HCC INSURANCE HOLDINGS SUPPLEMENTAL SCHEDULE
401(k) PLAN SCHEDULE I
SCHEDULE H (PART IV) FORM 5500 - SCHEDULE OF
ASSETS HELD FOR INVESTMENT PURPOSES AT END OF YEAR
DECEMBER 31, 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(c)
(b) DESCRIPTION OF INVESTMENT INCLUDING (e)
IDENTIFY OF ISSUE, BORROWER, MATURITY DATE, RATE OF INTEREST, (d) CURRENT
(a) LESSOR, OR SIMILAR PARTY COLLATERAL, PAR OR MATURITY VALUE COST VALUE
<S> <C> <C> <C> <C>
* Connecticut General Life CIGNA Charter Guaranteed Long-Term N/A** $ 3,435,321
Insurance Company Account
* Connecticut General Life CIGNA Charter Guaranteed N/A** 2,266,057
Insurance Company Government Securities Account
* Connecticut General Life CIGNA Charter Corporate Bond Fund N/A** 142,929
Insurance Company
* Connecticut General Life CIGNA Charter Large Company Stock N/A** 4,573,363
Insurance Company Index Fund
* Connecticut General Life CIGNA Fidelity Advisor Growth N/A** 4,177,977
Insurance Company Opportunities Fund
* Connecticut General Life CIGNA Warburg Pincus Advisor N/A** 146,681
Insurance Company Emerging Growth Fund
* Connecticut General Life CIGNA INVESCO Dynamics Fund N/A** 754,717
Insurance Company
* Connecticut General Life CIGNA Founders Balanced Fund N/A** 304,601
Insurance Company
* Connecticut General Life CIGNA Founders Growth Fund N/A** 625,332
Insurance Company
* Connecticut General Life CIGNA Janus Worldwide Fund N/A** 1,397,638
Insurance Company
* Connecticut General Life CIGNA Templeton Foreign Fund N/A** 89,225
Insurance Company
* Fidelity Investments HCC Common Stock N/A** 880,697
* Plan Participants Participant Notes Receivable N/A** 146,733
</TABLE>
* Indicates an identified person known to be a party-in-interest to the Plan.
** Cost information has been omitted for participant directed investments.
12
