FRONTIER INSURANCE GROUP INC, S-3/A, 1997-07-21

FRONTIER INSURANCE GROUP INC
S-3/A, 1997-07-21
SURETY INSURANCE

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1997.

Registration No. 333-31365

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1
TO

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

FRONTIER INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 14-1681606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>

195 LAKE LOUISE MARIE ROAD

ROCK HILL, NEW YORK 12775-8000

(914) 796-2100

(Address, including zip code, and telephone number, including

area code, of Registrant's principal executive offices)

SIDNEY TODRES, ESQ.

EPSTEIN BECKER & GREEN, P.C.

250 PARK AVENUE

NEW YORK, NEW YORK 10177

(212) 351-4735

(Name, address, including zip code, and telephone number, including

area code, of agent for service)
------------------------

COPY TO:

PETER J. GORDON, ESQ.

SIMPSON THACHER & BARTLETT

425 LEXINGTON AVE.

NEW YORK, NEW YORK 10017-3909

(212)455-2605

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

APPROXIMATE DATE OF PROPOSED COMMENCEMENT OF SALE TO THE PUBLIC:

AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------

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. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the 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. / /
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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 THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 21, 1997

PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
<PAGE>
4,000,000 SHARES

[LOGO]
FRONTIER INSURANCE GROUP, INC.

COMMON STOCK
------------
All of the 4,000,000 shares of common stock, $.01 par value (the "Common
Stock"), of Frontier Insurance Group, Inc. (the "Company") offered hereby (the
"Offering") are being sold by the Company.

The Common Stock is traded on the New York Stock Exchange ("NYSE") under the
symbol "FTR." On July 18, 1997, the last reported sale price of the Common Stock
on the NYSE was $30.63 per share. See "Price Range of Common Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.

---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total (3)................................................ $ $ $
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $600,000.

(3) The Company has granted the several Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an additional 600,000
shares to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."

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

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of shares of Common Stock will be made in New York, New York on or
about , 1997.
----------------

MERRILL LYNCH & CO.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

OPPENHEIMER & CO., INC.

SMITH BARNEY INC.

STEPHENS INC.
----------------

The date of this Prospectus is , 1997.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus and the documents incorporated herein by reference contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act") which are not historical facts and involve
risks and uncertainties that could cause actual results to differ materially
from those expected and projected. Such risks and uncertainties include, but are
not limited to, the following: (i) general economic conditions; (ii) conditions
specific to the property and casualty insurance industry, including its cyclical
nature, regulatory changes, rating agency policies and practices, competitive
factors and claims development and the impact thereof on loss reserves, the
Company's reserving policies and the adequacy of the Company's reinsurance
programs; (iii) developments in the securities markets and the impact thereof on
the Company's investment portfolio; (iv) the success of the Company's
acquisition program; (v) changes in generally accepted accounting principles;
and (vi) the risk factors set forth in this Prospectus. Accordingly, there can
be no assurance that the actual results will conform to the forward-looking
statements in this Prospectus or in the documents incorporated herein by
reference. The words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements.

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

NOTICE TO INVESTORS

THE COMPANY OWNS, DIRECTLY OR INDIRECTLY, ALL OF THE SHARES OF STOCK OF FIVE
PROPERTY AND CASUALTY INSURANCE COMPANIES WHICH ARE DOMICILED IN THE STATES OF
NEW YORK, CALIFORNIA, WISCONSIN, NORTH CAROLINA AND MISSOURI, TWO LIFE INSURANCE
COMPANIES WHICH ARE DOMICILED IN LOUISIANA AND ARIZONA, AND ONE-THIRD OF THE
VOTING SECURITIES OF A TITLE INSURANCE COMPANY DOMICILED IN THE STATE OF
LOUISIANA. THE INSURANCE LAWS OF SUCH STATES REQUIRE PRIOR APPROVAL BY THE
STATES' RESPECTIVE INSURANCE DEPARTMENT OF ANY ACQUISITION OF CONTROL OF A
DOMESTIC INSURANCE COMPANY OR OF ANY COMPANY WHICH CONTROLS A DOMESTIC INSURANCE
COMPANY. "CONTROL" IS PRESUMED TO EXIST THROUGH THE OWNERSHIP OF 10% OR MORE OF
THE VOTING SECURITIES OF A DOMESTIC INSURANCE COMPANY OR OF ANY COMPANY WHICH
CONTROLS A DOMESTIC INSURANCE COMPANY. THEREFORE, ANY PURCHASER OF 10% OR MORE
OF THE OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK WILL BE PRESUMED TO HAVE
ACQUIRED CONTROL OF THE COMPANY'S INSURANCE SUBSIDIARIES AND THE LOUISIANA TITLE
INSURANCE COMPANY UNLESS THE INSURANCE DEPARTMENTS OF NEW YORK, CALIFORNIA,
WISCONSIN, NORTH CAROLINA, MISSOURI, LOUISIANA AND ARIZONA, FOLLOWING
APPLICATION BY SUCH PURCHASER IN EACH OF SUCH STATES, DETERMINE OTHERWISE.
ACCORDINGLY, ANY PURCHASE OF 10% OR MORE OF THE OUTSTANDING SHARES OF THE
COMPANY'S COMMON STOCK WOULD REQUIRE PRIOR ACTION BY THE INSURANCE DEPARTMENTS
OF NEW YORK, CALIFORNIA, WISCONSIN, NORTH CAROLINA, MISSOURI, LOUISIANA AND
ARIZONA.

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

NOTICE TO NORTH CAROLINA RESIDENTS

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER
OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF
INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF THIS DOCUMENT.
------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABLILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF SHARES OF COMMON
STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>
AVAILABLE INFORMATION

The Company is subject to the information requirements of the Exchange Act
and, in accordance therewith, files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
material can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street (Suite 1400) Chicago, Illinois 60661.
Copies of all or part of such materials may also be obtained at prescribed rates
from the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549. Such materials
can also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005. The Commission maintains a Web site that
contains reports, proxy and information statements and other information of
registrants that file electronically with the Commission pursuant to the EDGAR
system. The address of the Commission's Web site is http://www.sec.gov.

The Company has filed with the Commission a Registration Statement (which
term shall encompass any amendments thereto) on Form S-3 under the Securities
Act with respect to the Common Stock offered by this Prospectus (the
"Registration Statement"). This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered by this Prospectus, reference is made to the Registration
Statement, including the exhibits thereto, and the financial statements and
notes thereto filed or incorporated by reference as a part thereof, which are on
file at the offices of the Commission. Statements made in this Prospectus
concerning the contents of any document referred to herein are not necessarily
complete and, in each instance, are qualified in all respects by reference to
the applicable documents filed with the Commission. The Registration Statement
and the exhibits thereto filed by the Company with the Commission may be
inspected and copied at the locations described above.

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

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Company's (i) Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, (ii) Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, (iii) Definitive Proxy Statement for the May 22, 1997 Annual
Meeting of Stockholders, and (iv) Current Report on Form 8-K for an event which
occurred on June 3, 1997 (as amended on July 16, 1997), heretofore filed with
the Commission, are incorporated in this Prospectus by reference. All reports
and proxy statements filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this Offering shall likewise be
deemed to be incorporated in this Prospectus by reference from the respective
dates of filing of such documents.

Any statements contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

Upon oral or written request, the Company will provide without charge a copy
of any document incorporated in this Prospectus, exclusive of exhibits, to each
person to whom this Prospectus is delivered. Requests for such documents should
be directed to the Investor Relations Department at the corporate headquarters
of the Company, 195 Lake Louise Marie Road, Rock Hill, New York 12775 (telephone
no. 914-796-2100).

3
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL DATA APPEARING
ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE. EXCEPT AS
OTHERWISE INDICATED, THE FINANCIAL STATEMENTS, RATIOS AND STATISTICAL DATA ARE
PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP").
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO THE "COMPANY" REFER TO
FRONTIER INSURANCE GROUP, INC. AND ITS SUBSIDIARIES (AND, EXCEPT AS OTHERWISE
INDICATED, EXCLUDE LYNDON PROPERTY INSURANCE COMPANY AND ITS SUBSIDIARIES). ALL
INFORMATION PRESENTED HAS BEEN ADJUSTED TO GIVE EFFECT TO A TWO-FOR-ONE STOCK
SPLIT EFFECTED AS A 100% STOCK DIVIDEND PAYABLE ON JULY 21, 1997 TO STOCKHOLDERS
OF RECORD AS OF THE CLOSE OF BUSINESS ON JUNE 30, 1997, AND ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.

THE COMPANY

Frontier Insurance Group, Inc. is an insurance holding company which,
through its subsidiaries, conducts business on an admitted and non-admitted
basis as a specialty property and casualty insurer. The Company's business
strategy is to achieve an underwriting profit by identifying niche markets and
specialty insurance programs which it believes afford favorable opportunities
for profitability due to (i) limited potential competition and (ii) the
Company's innovative underwriting and value added services, including coverage
enhancements, risk management, loss control and specialized claims management.

The Company currently underwrites in excess of 130 specialty insurance
programs, including (i) malpractice insurance for physicians, dentists,
psychiatrists and chiropractors, (ii) general liability, (iii) surety
(performance bonds, bail bonds, customs bonds and license and permit bonds),
(iv) commercial earthquake, (v) workers' compensation and (vi) other
miscellaneous lines. The Company's alternative risk division underwrites excess
workers' compensation and excess medical stop loss coverages, and provides
custom designed insurance programs through captive and rent-a-captive facilities
for both the Company's workers' compensation and other insurance lines. See
"Business."

On June 3, 1997, the Company completed the acquisition of Lyndon Property
Insurance Company and its subsidiaries (collectively, "Lyndon") for $92.0
million in cash. Lyndon underwrites credit-related and other specialty insurance
products for financial institutions and specialty insurance markets. See
"Business--Acquisition of Lyndon."

The following table sets forth the Company's net premiums written by
principal lines of insurance and the related percentages of the total net
premiums written represented thereby for the three months ended March 31, 1997
and the year ended December 31, 1996:

<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER
MARCH 31, 1997 31, 1996
-------------------- ---------------------
<S> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Medical malpractice (including
dental malpractice and
social services)........................ $ 22,516 28.4% $ 119,653 38.4%
General liability......................... 32,329 40.8 93,980 30.1
Surety.................................... 12,098 15.3 56,632 18.2
Commercial earthquake..................... 2,085 2.6 11,904 3.8
Workers' compensation..................... 1,743 2.2 6,253 2.0
Other..................................... 8,542 10.7 23,441 7.5
--------- --------- ---------- ---------
Total............................... $ 79,313 100.0% $ 311,863 100.0%
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>

4
<PAGE>
The Company relies on multiple distribution channels to market its insurance
products. Malpractice insurance and license and permit bonds are marketed both
directly through Company-owned agencies and by independent brokers and agents.
Bail bonds are marketed through a nationwide network of bail bondsmen by a
50%-owned subsidiary of the Company. Sales of the Company's other lines of
business are generated primarily by independent insurance agencies and insurance
brokerage firms. See "Business-- Marketing."

For the five years ended December 31, 1996, the Company's net premiums
written and its net income increased at compounded annual rates of 28.0% and
20.6%, respectively, during which period it realized an average statutory
combined ratio of 94.2%, as compared to the property and casualty insurance
industry average of 108.7%. The Company has realized a statutory combined ratio
of less than 100% in every year since its formation in 1986. See "Selected
Consolidated Financial Data."

At March 31, 1997, after giving pro forma effect to the Company's
acquisition of Lyndon as if such acquisition had occurred as of that date, the
Company's total assets were $1.6 billion, its total investments were $1.0
billion and its total shareholders' equity was $271.2 million. See "Unaudited
Pro Forma Consolidated Balance Sheet."

The Company's insurance company subsidiaries consist of Frontier Insurance
Company ("Frontier Insurance"), which is licensed as a property and casualty
insurer in 50 states, the District of Columbia, Puerto Rico and the Virgin
Islands, Frontier Pacific Insurance Company ("Frontier Pacific"), United Capitol
Insurance Company ("United Capitol"), Regency Insurance Company ("Regency"), and
Lyndon Property Insurance Company ("Lyndon Property") and its two active life
insurance subsidiaries (collectively, the "Insurance Subsidiaries"). Frontier
Insurance, Frontier Pacific, United Capitol and Regency currently are rated A-
(Excellent) by A.M. Best Company, Inc. ("A.M. Best"), and Standard & Poor's
Insurance Rating Services ("S&P") has given Frontier Insurance and Frontier
Pacific an Insurer Claims-Paying Ability Rating of A+ (Good). Lyndon Property
and its two active life insurance subsidiaries currently are rated B++ (Very
Good) by A.M. Best. See "Business--Ratings."

GROWTH STRATEGY

The Company's growth strategy includes (i) the acquisition of profitable
specialty insurance operations which are non-dilutive to earnings, (ii) the
addition of new specialty insurance programs and (iii) the expansion of existing
business through enhanced products, additional coverages and geographic
expansion.

Since April 1994, the Company has completed seven strategic acquisitions for
an aggregate consideration to the sellers of approximately $138.5 million, the
most recent of which were:

AN UNDERWRITER OF CREDIT-RELATED INSURANCE. On June 3, 1997, the Company
acquired Lyndon for $92.0 million in cash. Lyndon underwrites credit-related
and other specialty insurance products for financial institutions and
specialty insurance markets.

A NON-STANDARD AUTOMOBILE INSURANCE COMPANY AND A PREMIUM FINANCE
COMPANY. In September 1996, the Company acquired Regency, which writes
non-standard automobile insurance policies in North Carolina, and Emrol
Installment Premium Discount, Inc. ("Emrol"), which provides premium
financing to insureds of the policies written by Regency.

A SPECIALTY EXCESS AND SURPLUS LINES INSURANCE COMPANY. United Capitol,
whose parent was acquired by the Company for $30.9 million in May 1996, is a
specialty excess and surplus lines underwriter which writes asbestos
abatement, product and general liability, commercial property, directors'
and officers' liability and various classes of errors and omissions
insurance policies.

5
<PAGE>
Previously, the Company had acquired (i) a 33% ownership interest in a title
insurance company licensed in 29 states, (ii) a realtors' errors and omissions
line of business, (iii) a 50% interest in a surety bail bond and immigration
bond agency and (iv) a surety bond agency which places and services license and
permit bonds in California and other western states.

Since 1994, the Company has added an average of ten specialty insurance
programs per annum (net of programs discontinued) to its lines of insurance,
including marine and energy programs, manufactured housing written on a surplus
lines basis, and errors and omissions for title insurance agents and architects
and engineers. The Company also expanded its existing business during such
period by, among other things, offering a lead abatement liability program to
complement its asbestos abatement liability program, expanding its pest control
program into North Carolina and expanding its social service programs into
California. See "Business--General."

ACQUISITION OF LYNDON

On June 3, 1997, the Company acquired Lyndon from Mercury Finance Company
("Mercury") for $92.0 million in cash, which amount was $30.9 million (net of
tax) less than Lyndon's total shareholders' equity on such date. Lyndon, based
in St. Louis, Missouri, provides credit-related and specialty insurance products
for financial institutions and specialty insurance markets through a variety of
distribution channels, including other insurance companies, general agents,
third-party administrators, and joint venture relationships, with the particular
channel designed to fit the specific product. Credit-related products include
collateral protection, credit property, involuntary unemployment insurance, auto
physical damage, credit life, and credit accident and health coverages.
Specialty insurance products include residual value, non-standard auto and
mechanical breakdown.

Lyndon was formed in 1978 by ITT Financial Corporation ("ITT") primarily to
insure credit-related exposures in ITT's consumer and commercial finance
businesses. In October 1995, Mercury acquired Lyndon from ITT to offer
credit-related insurance products in conjunction with Mercury's sub-prime auto
lending business.

For the year ended December 31, 1996, Lyndon's revenues were $96.8 million
and its net income was $27.0 million. During 1996, its operating results were
beneficially impacted by run-off business from ITT, which business will be
inconsequential in subsequent years, and from a collateral protection coverage
program marketed through Mercury, which was discontinued prior to the Company's
purchase of Lyndon. Accordingly, such results are not indicative of future
operating results. For the three months ended March 31, 1997, Lyndon had
revenues of $26.4 million and net income of $4.5 million, compared to revenues
of $19.2 million and net income of $7.3 million for the three months ended March
31, 1996. At March 31, 1997, Lyndon's total assets were $395.8 million and its
total investments were $214.8 million. See "Unaudited Pro Forma Consolidated
Financial Information" and "Business--Acquisition of Lyndon."

6
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Shares Offered by the Company................ 4,000,000 shares of Common Stock

Shares Outstanding after the Offering (1).... 33,471,924 shares of Common Stock

Use of Proceeds.............................. Approximately $62.0 million to repay bank
indebtedness and the balance of approximately
$ million for general corporate
purposes, including possible strategic
acquisitions and support of the Company's
continued internal growth.

NYSE Symbol.................................. FTR
</TABLE>

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

(1) Does not include 7,358,038 shares issuable upon conversion of the Company's
6 1/4% Convertible Subordinated Debentures and 1,605,426 shares issuable
upon exercise of outstanding stock options as of June 30, 1997.

RISK FACTORS

See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers.

7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------

<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:

Revenues:
Gross premiums written................. $ 105,812 $ 74,860 $ 402,799 $ 264,314 $ 198,892 $ 148,750 $ 149,504
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net premiums written................... $ 79,313 $ 61,729 $ 311,863 $ 220,757 $ 187,288 $ 118,819 $ 116,248
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net premiums earned.................... $ 77,807 $ 58,294 $ 265,989 $ 196,220 $ 156,755 $ 116,372 $ 105,171
Net investment income.................. 11,893 7,786 37,226 30,035 24,453 22,523 19,875
Realized capital gains (losses)........ 721 691 1,707 20 (1,478) (152) 333
Gross claims adjusting income.......... 15 25 55 130 255 424 1,356
--------- --------- --------- --------- --------- --------- ---------
Total revenues..................... 90,436 66,796 304,977 226,405 179,985 139,167 126,735

Expenses:
Losses and loss adjustment expenses.... 45,674 35,443 155,991 119,255 110,918 77,581 74,933
Amortization of policy acquisition
costs, underwriting, and other
expenses............................. 25,182 18,172 88,080 62,975 47,737 31,293 26,604
Minority interest in income of
consolidated subsidiary trust........ 2,732 -- 2,277 -- -- -- --
Interest expense....................... -- 441 1,970 895 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total expenses..................... 73,588 54,056 248,318 183,125 158,655 108,874 101,537
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting
principle.............................. 16,848 12,740 56,659 43,280 21,330 30,293 25,198
Income taxes............................. 4,944 3,476 16,592 12,069 4,350 7,130 6,236
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle......... 11,904 9,264 40,067 31,211 16,980 23,163 18,962
Cumulative effect of change in
accounting for income taxes............ -- -- -- -- -- 708 --
--------- --------- --------- --------- --------- --------- ---------
Net income......................... $ 11,904 $ 9,264 $ 40,067 $ 31,211 $ 16,980 $ 23,871 $ 18,962
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------

SUPPLEMENTAL PER SHARE DATA:

Operating income (fully diluted) (1)..... $ .36 $ .31 $ 1.33 $ 1.08 $ .62 $ .92 $ .77
Net income (fully diluted)............... .38 .32 1.37 1.08 .59 .94 .79
Book value (at end of period)............ 9.25 8.10 9.17 8.02 6.66 6.52 4.50
Cash dividends........................... .07 .06 .25 .24 .23 .20 .20

BALANCE SHEET DATA (AT END OF PERIOD):

Total investments........................ $ 833,115 $ 564,703 $ 838,320 $ 552,714 $ 407,618 $ 343,591 $ 262,010
Total assets............................. 1,275,920 798,649 1,246,407 773,348 599,117 527,657 406,149
Reserves for gross unpaid losses
and loss adjustment expenses........... 569,147 383,231 539,073 367,436 312,637 274,035 238,942
Total liabilities........................ 837,743 566,513 810,880 543,615 408,853 341,963 299,400
Guaranteed preferred beneficial interest
in the 6 1/4% Convertible Subordinated
Debentures............................. 166,979 -- 166,953 -- -- -- --
Total shareholders' equity............... 271,198 232,136 268,574 229,733 190,264 185,694 106,749

COMBINED STATUTORY DATA:(2)

Statutory net income..................... $ 11,092 $ 9,605 $ 28,874 $ 26,407 $ 6,623 $ 17,713 $ 12,803
Policyholders' surplus (at end of
period)................................ 276,181 181,014 268,004 171,362 104,871 101,418 76,438
Available for dividends from the
insurance subsidiaries (3)............. 27,618 18,101 26,800 17,136 10,487 10,142 7,644
Ratio of net premiums to surplus (4)..... 1.2x 1.3x 1.2x 1.3x 1.8x 1.2x 1.5x
</TABLE>

(CONTINUED ON FOLLOWING PAGE)

8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992
--------------- --------------- --------- --------- --------- --------- ---------

<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>

SELECTED RATIOS:

GAAP combined ratio...................... 91.1% 92.0% 91.8% 92.7% 101.0% 93.2% 95.4%
Statutory combined ratio................. 93.9 91.3 90.9 91.1 98.1 94.2 96.8
Industry statutory combined ratio (5).... N/A 106.8 105.9 106.4 108.4 106.9 115.7

Ratio of earnings to combined fixed
charges
and preferred stock dividends (6)...... 6.8x 24.9x 13.2x 39.1x -- -- --
</TABLE>

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

(1) Represents net income excluding the effect of net realized capital gains and
losses and cumulative effect of a change in accounting principle.

(2) Compiled from the Annual Statements of Frontier Insurance, Frontier Pacific,
United Capitol and Regency as filed with the insurance departments of New
York, California, Wisconsin and North Carolina, respectively.

(3) State insurance statutes typically place limitations on the amount of
dividends or other distributions payable by insurance companies in order to
protect their solvency. See "Business--Regulation--Restrictions on Dividends
and Distributions."

(4) Represents the ratio of statutory net premiums written during the period to
statutory policyholders' surplus at the end of such period. The ratios as of
March 31, 1997 and 1996 were calculated using statutory net premiums written
during the four quarters which precede the interim date.

(5) Compiled by A.M. Best.

(6) For the purposes of the ratio of earnings to combined fixed charges and
preferred stock dividends, earnings were calculated by adding interest
expense and amortization of debt issuance costs to income before income
taxes and cumulative effect of change in accounting principle. Combined
fixed charges consist of interest expense payable on the 6 1/4% Convertible
Subordinated Debentures and bank debt.

9
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated balance sheet at
March 31, 1997 gives effect to the Company's acquisition of Lyndon as if the
acquisition and the related borrowing of $62.0 million under a revolving loan
credit facility had occurred at March 31, 1997, and the unaudited pro forma
condensed consolidated income statements for the three months ended March 31,
1997 and for the year ended December 31, 1996 give effect to such acquisition
and borrowing and the Company's 1996 acquisitions of Regency, Emrol and United
Capitol Holding Company ("United Capitol Holding") as if all such events had
occurred at January 1, 1996. Unaudited pro forma financial data do not purport
to be indicative of either the results of future operations or the results of
operations that would have occurred if the transactions had been consummated on
the dates indicated. Moreover, for the reasons discussed under
"Business--Acquisition of Lyndon," among others, the historical operating
results of Lyndon are not indicative of its future operating results.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA NOTE
COMPANY LYNDON ADJUSTMENTS CONSOLIDATED REFERENCE
---------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Total investments............................... $ 833,115 $ 214,815 $ (29,832) $1,018,098 1
Cash............................................ 15,688 3,868 19,556
Agents' balances and premiums receivable........ 78,283 29,979 108,262
Net reinsurance recoverables.................... 209,569 98,353 307,922
Deferred policy acquisition costs............... 36,834 43,503 (43,503) 36,834 2
Deferred federal income tax asset............... 29,540 -- 9,336 38,876 3
Present value of future profits................. -- -- 5,768 5,768 4
Intangible assets, less accumulated
amortization.................................. 11,311 -- 11,311
Other assets.................................... 61,580 5,326 (2,890) 64,016 5
---------- ----------- ----------- ------------
Total assets.................................. $1,275,920 $ 395,844 $ (61,121) $1,610,643
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------

LIABILITIES AND SHAREHOLDERS' EQUITY:
Unpaid losses and LAE........................... $ 569,147 $ 49,344 $ 618,491
Unearned premiums............................... 180,891 178,106 358,997
Revolving loan credit facility.................. -- -- $ 62,000 62,000 6
Funds withheld under reinsurance contracts...... 72,112 -- 72,112
Other liabilities............................... 15,593 49,663 (4,390) 60,866 4
---------- ----------- ----------- ------------
Total liabilities............................. 837,743 277,113 57,610 1,172,466
Guaranteed preferred beneficial interest in the
6 1/4% Convertible Subordinated Debentures.... 166,979 -- 166,979
Total shareholders' equity...................... 271,198 118,731 (118,731) 271,198
---------- ----------- ----------- ------------
Total liabilities and shareholders' equity.... $1,275,920 $ 395,844 $ (61,121) $1,610,643
---------- ----------- ----------- ------------
---------- ----------- ----------- ------------
</TABLE>

See notes to unaudited pro forma condensed consolidated information.

10
<PAGE>

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA NOTE
COMPANY LYNDON ADJUSTMENTS CONSOLIDATED REFERENCE
----------- ----------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums written.............................. $ 79,313 $ 13,634 $ 92,947
----------- ----------- ------------
----------- ----------- ------------
Net premiums earned............................... $ 77,807 $ 23,220 $ 101,027
Net investment income............................. 11,893 3,023 $ (491) 14,425 7
Realized capital gains............................ 721 29 750
Other income...................................... 15 100 115
----------- ----------- ------------- ------------
Total revenues.................................. 90,436 26,372 (491) 116,317
EXPENSES:
Losses and LAE.................................... 45,674 11,434 57,108
Amortization of policy acquisition costs.......... 15,951 3,053 19,004
Amortization of present value of future profits... -- 2,229 (1,632) 597 8
Underwriting and other expenses................... 9,231 2,911 12,142
Minority interest in income of consolidated
subsidiary trust................................ 2,732 -- 2,732
Interest expense.................................. -- -- 964 964 9
----------- ----------- ------------- ------------
Total expenses.................................. 73,588 19,627 (668) 92,547
----------- ----------- ------------- ------------
Income before income taxes........................ 16,848 6,745 177 23,770
Income taxes...................................... 4,944 2,219 62 7,225 10
----------- ----------- ------------- ------------
Net income........................................ $ 11,904 $ 4,526 $ 115 $ 16,545
----------- ----------- ------------- ------------
----------- ----------- ------------- ------------
Fully diluted earnings per share.................. $ .38 $ .50
----------- ------------
----------- ------------
</TABLE>

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL 1996 HISTORICAL PRO FORMA NOTE
COMPANY ACQUISITIONS LYNDON ADJUSTMENTS CONSOLIDATED REFERENCE
----------- --------------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Net premiums written............. $ 311,863 $ 6,043 $ 96,614 $ 414,520
----------- ------- ----------- ------------
----------- ------- ----------- ------------
Net premiums earned.............. $ 265,989 $ 5,463 $ 83,277 $ 354,729
Net investment income............ 37,226 3,911 12,082 $ (4,262) 48,957 11
Realized capital gains........... 1,707 647 606 2,960
Other income..................... 55 -- 833 888
----------- ------- ----------- ----------- ------------
Total revenues................. 304,977 10,021 96,798 (4,262) 407,534

EXPENSES:
Losses and LAE................... 155,991 2,972 27,553 186,516
Amortization of policy
acquisition costs............. 57,540 (292) 10,999 (4,039) 64,208 8
Amortization of present value of
future profits................ -- -- 11,080 (7,500) 3,580 8
Underwriting and other expenses.. 30,540 1,653 7,172 422 39,787 12
Minority interest in income of
consolidated subsidiary
trust......................... 2,277 -- -- 2,277
Interest expense................. 1,970 -- -- 3,856 5,826 9
----------- ------- ----------- ----------- ------------
Total expenses................. 248,318 4,333 56,804 (7,261) 302,194
----------- ------- ----------- ----------- ------------
Income before income taxes....... 56,659 5,688 39,994 2,999 105,340
Income taxes..................... 16,592 2,018 13,012 1,155 32,777 10
----------- ------- ----------- ----------- ------------
Net income....................... $ 40,067 $ 3,670 $ 26,982 $ 1,844 $ 72,563
----------- ------- ----------- ----------- ------------
----------- ------- ----------- ----------- ------------
Fully diluted earnings per
share......................... $ 1.37 $ 2.42
----------- ------------
----------- ------------
</TABLE>

See notes to unaudited pro forma condensed consolidated financial information.

11
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

(1) Total investments decreased primarily due to the sale of $30.0
million of investments, the proceeds of which, together with $62.0
million drawn down under the revolving loan credit facility, were
used to acquire Lyndon.

(2) Deferred policy acquisition costs of $43.5 million have been
eliminated as the result of a purchase accounting adjustment.

(3) The net increase in deferred federal income tax asset was the result
of the purchase accounting adjustments related to deferred taxes
associated with deferred policy acquisition costs, the excess of net
assets acquired over the purchase price, reclassification of
deferred tax liabilities, and the present value of future profits
("PVFP").

(4) PVFP was the result of a purchase accounting adjustment establishing
$47.7 million of estimated future profits less the $41.9 million
excess of the net assets acquired over the purchase price.

(5) The net decrease in other assets was the result of the reduction of
certain assets to their estimated fair value at the date of
acquisition.

(6) The $62.0 million represents the amount drawn down under the
revolving loan credit facility used to acquire Lyndon.

(7) Net investment income has been decreased to reflect the reduction in
investment income from the sale of $30.0 million of investments to
fund the acquisition of Lyndon, assuming a pre-tax yield of 6.5%.

(8) Amortization of policy acquisition costs and PVFP have been adjusted
to reflect estimated amortization expense based on a valuation of
business in force as of the purchase date. PVFP was offset by the
excess of net assets acquired over the purchase price and is being
amortized in relation to the earned premiums.

(9) Interest expense has been increased to reflect the $62.0 million
drawn down under the revolving loan credit facility, assuming an
interest rate of 6.04%.

(10) Federal income taxes have been increased to reflect the net tax
effect of the pro forma adjustments.

(11) Net investment income has been decreased to reflect the sale of
investments to fund the acquisitions of Lyndon and United Capitol
Holding and to pay dividends to their previous parent companies,
assuming pre-tax yields ranging from 6.4% to 6.9%.

(12) Underwriting and other expenses have been increased to reflect the
amortization of the excess cost over net assets acquired arising
from the acquisitions of United Capitol Holding, Regency and Emrol.

12
<PAGE>
RISK FACTORS

Prospective purchasers should consider carefully the following risk factors
in addition to the information set forth or incorporated by reference in this
Prospectus prior to making an investment in the Common Stock being offered
hereby.

COMPETITION

The property and casualty insurance business is highly competitive with
respect to a number of factors, including overall financial strength of the
insurer, ratings by rating agencies, premium rates, policy terms and conditions,
services offered, reputation and broker compensation. Although the Company's
business strategy is to achieve an underwriting profit by identifying niche
markets and specialty programs which it believes afford favorable opportunities
for profitability due to limited potential competition, it nevertheless
encounters competition from carriers engaged in insuring risks in the broader
lines of business which encompass the Company's niche markets and specialty
programs, and such competition is expected to increase as the Company expands
its operations. See "Business--Competition."

ADEQUACY OF LOSS RESERVES

The liabilities for unpaid losses and loss adjustment expenses ("LAE") are
estimated by management utilizing methods and procedures which they believe are
reasonable and in compliance with regulatory requirements. These liabilities are
necessarily subject to the impact of loss development and changes in claims
severity, as well as numerous other factors, such as judicial and legislative
trends and actions, economic factors and estimates of future trends in claims
frequency. Most or all of these factors are not directly quantifiable,
particularly on a prospective basis. Although management believes that the
estimated liabilities for losses and LAE are reasonable, because of the extended
period of time over which such losses are reported and settled, the subsequent
development of these liabilities may not conform to the assumptions inherent in
their determination and, accordingly, may vary significantly from the estimated
amounts included in the accompanying financial statements. To the extent that
the actual emerging loss experience varies from the assumptions used in
determining these liabilities, the liabilities are adjusted to reflect actual
experience. Such adjustments, to the extent they occur, are reported in the
period recognized. In 1994, the Company's prior years' reserves for unpaid
losses and LAE, net of related reinsurance recoverables, were increased by
approximately $13.9 million. In 1995, a net $7.5 million decrease in the
Company's prior years' reserves included an increase in such reserves of
approximately $19.0 million, offset by subrogation recoverables of $19.0 million
recognized in connection with a favorable court ruling related to litigation
between the Company and the State of New York. In 1996, the Company's prior
years' reserves for unpaid losses and LAE decreased by approximately $4.5
million, which included an approximately $13.0 million increase in prior years'
reserves which was offset by subrogation recoverables of $13.0 million related
to the New York State litigation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations,"
"--Litigation with the State of New York," "Business--Loss and LAE Reserves" and
Note C of the notes to the consolidated financial statements included elsewhere
in this Prospectus.

RATINGS

Increased public and regulatory concerns with the financial stability of
insurers have resulted in greater emphasis by policyholders upon insurance
company ratings, with a resultant potential competitive advantage for carriers
with higher ratings. Frontier Insurance, Frontier Pacific, United Capitol and
Regency currently are rated A- (Excellent) by A.M. Best. In addition, S&P has
given Frontier Insurance and Frontier Pacific an Insurer Claims-Paying Ability
Rating of A+ (Good). Lyndon Property and its two active life insurance
subsidiaries currently are rated B++ (Very Good) by A.M. Best. There can be no
assurance, however, that the Insurance Subsidiaries will maintain their ratings;
any downgrade could materially adversely affect their respective operations.
A.M. Best's and S&P's ratings are based on an analysis of the financial
condition and operations of an insurance company as they relate to the industry
in general, are not designed for the protection of investors and do not
constitute recommendations to buy, sell or hold any security. See
"Business--Ratings."

13
<PAGE>
DEPENDENCE UPON MANAGEMENT

The Company's business involves the selection, development and innovative
underwriting of insurance coverage for niche markets and the continuing
evaluation of the programs insured; the Company is dependent upon its executive
management to perform such services. See "Management."

FLUCTUATIONS IN INDUSTRY RESULTS

The financial results of property and casualty insurers historically have
been subject to significant fluctuations. Profitability is affected
significantly by volatile and unpredictable developments (including
catastrophes), changes in loss reserves resulting from changing legal
environments as different types of claims arise and judicial interpretations
develop relating to the scope of insurers' liability, 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.
Further, underwriting results have been cyclical in the property and casualty
insurance industry, with protracted periods of overcapacity adversely impacting
premium rates, resulting in higher combined ratios, followed by periods of
undercapacity and escalating premium rates, resulting in lower combined ratios.

REINSURANCE

To moderate the impact of unusually severe or frequent losses, the Insurance
Subsidiaries cede (i.e., transfer) a portion of their gross premiums to
reinsurers in exchange for the reinsurers' agreements to share covered losses
with the subsidiaries. Although reinsurance makes the assuming reinsurer liable
to the extent of the risk ceded, the ceding insurance company is not relieved of
its primary liability to its insureds and therefore bears a credit risk with
respect to its reinsurers. Although the Insurance Subsidiaries place reinsurance
only with reinsurers they believe to be financially sound, there can be no
assurance that such reinsurers will pay all reinsurance claims on a timely
basis, if at all. At March 31, 1997, the Company had net reinsurance
recoverables of $209.6 million. Further, although the Company has reinsurance it
believes to be adequate, there can be no assurance it will continue to be able
to obtain such reinsurance on satisfactory terms. See "Business--Reinsurance."

DEPENDENCE ON INVESTMENT INCOME

The Company, similar to other property and casualty insurance companies,
depends on income from its investment portfolio for a substantial portion of its
earnings. A significant decline in investment yields could have a material
adverse effect on the Company's financial results. See "Business--Investments."

LIMITATIONS ON CHANGE IN CONTROL

Mr. Walter A. Rhulen, the Company's founder, Chairman of the Board,
President and Chief Executive Officer, members of Mr. Rhulen's family and
directors and officers of the Company who are not family members of Mr. Rhulen
collectively will own approximately 21.9% of the outstanding shares of Common
Stock following the Offering. As a result, such persons are in a position to
influence the management and affairs of the Company and, collectively, may be
able to prevent a proposed change in control of the Company. See "Principal
Stockholders."

14
<PAGE>
REGULATION

The Company is subject to regulation under applicable insurance statutes,
including insurance holding company statutes, of the various states in which the
Insurance Subsidiaries write insurance. Insurance regulation is intended to
provide safeguards for policyholders rather than to protect shareholders of
insurance companies or their holding companies. Regulators oversee matters
relating to trade practices, policy forms, claims practices, mandated
participation in shared markets, types and amounts of investments, reserve
adequacy, insurer solvency, minimum amounts of capital and surplus, transactions
with related parties, changes in control and payment of dividends. The rates
that the Insurance Subsidiaries can charge for certain lines of business are
also subject to regulation and, therefore, may not keep pace with inflation. Any
changes in these laws and regulations could materially adversely affect the
Company's operations. See "Business--Regulation."

HOLDING COMPANY STRUCTURE

Because the Company is a holding company, its ability to pay dividends on
the Common Stock will be dependent, to a significant degree, on the ability of
the Company's subsidiaries to pay dividends to the Company. The jurisdictions of
incorporation of the Insurance Subsidiaries place limitations on the amount of
dividends or other distributions payable by insurance companies in order to
protect their solvency. At March 31, 1997, $27.6 million was available from the
Insurance Subsidiaries for payment of dividends. However, the Company's current
policy is for its Insurance Subsidiaries to retain their capital for growth and
not to pay any dividends. See "Business--Regulation" for restrictions on the
payment of dividends by the Insurance Subsidiaries.

15
<PAGE>
USE OF PROCEEDS

The net proceeds from the sale of the Common Stock offered hereby are
estimated at $ million. Approximately $62.0 million of the net proceeds will
be used to repay bank indebtedness, bearing interest at an average interest rate
of 6.04% per annum, which was incurred in June 1997 to finance the acquisition
of Lyndon. The balance will be added to working capital for general corporate
purposes, including possible strategic acquisitions and support of the Company's
continued internal growth.

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on the NYSE under the symbol FTR. The following
table sets forth the high and low closing sales prices for the Common Stock, as
reported by the NYSE, for each calendar quarter during the periods indicated, as
adjusted to reflect stock dividends and stock splits:

1995:

First Quarter......................................................... $ 10.97 $ 9.32
Second Quarter........................................................ 12.22 10.85
Third Quarter......................................................... 14.55 11.53
Fourth Quarter........................................................ 15.06 12.56

1996:

First Quarter......................................................... $ 15.00 $ 13.01
Second Quarter........................................................ 17.44 13.87
Third Quarter......................................................... 20.37 16.32
Fourth Quarter........................................................ 19.94 18.44

1997:

First Quarter......................................................... $ 22.13 $ 18.50
Second Quarter........................................................ 32.75 21.69
Third Quarter (through July 18, 1997)................................. 32.91 29.19
</TABLE>

On July 18, 1997, the last reported closing sale price of the Common Stock
on the NYSE was $30.63 per share.

DIVIDEND POLICY

Holders of Common Stock are entitled to receive cash dividends as may be
declared from time to time by the Company's Board of Directors. The Company has
paid quarterly cash dividends on the Common Stock since April 1992. Currently,
the Company's quarterly cash dividend is $.07 per share. The timing and amount
of future dividends will depend upon the Company's earnings and cash
requirements and other factors deemed relevant by the Board of Directors.
Additionally, the agreement establishing the Company's revolving loan credit
facility limits (i) the payment of cash dividends in any year to 5.0% of the
Company's consolidated net worth and (ii) prohibits the payment of cash
dividends in the event the Company is in default thereunder. As a holding
company, the Company is dependent upon, among other things, dividends from its
subsidiaries to pay such dividends. See "Business--Regulation" for restrictions
on the payment of dividends by the Insurance Subsidiaries.

16
<PAGE>
CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at March 31, 1997: (i) actual, (ii) pro forma to give effect to the
acquisition of Lyndon on June 3, 1997 and the related borrowing by the Company
of $62.0 million on such date under a revolving loan credit facility and (iii)
pro forma and as adjusted to give effect to the issuance of the Common Stock
being offered hereby, the receipt by the Company of the estimated net proceeds
of approximately $ million therefrom and the application of the estimated net
proceeds. See "Use of Proceeds," the consolidated financial statements,
including the notes thereto, and the unaudited pro forma consolidated financial
statements included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AT MARCH 31, 1997
-------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ------------ -----------

<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revolving loan credit facility (1).......................... $ -- $ 62,000 $ --
Guaranteed preferred beneficial interest in the 6 1/4%
Convertible Subordinated Debentures....................... 166,979 166,979 166,979
Shareholders' equity:
Preferred stock, par value $.01 per share;
1,000,000 shares authorized; none outstanding........... -- -- --
Common stock, par value $.01 per share;
50,000,000 shares authorized;
29,407,936 shares outstanding (2)....................... 294 294
Additional paid-in capital................................ 222,142 222,142
Net unrealized losses..................................... (2,873) (2,873) (2,873)
Retained earnings......................................... 52,423 52,423 54,423
Less treasury stock--at cost (91,080 shares).............. 788 788 788
---------- ------------ -----------
Total shareholders' equity.............................. 271,198 271,198
---------- ------------ -----------
Total capitalization.................................. $ 438,177 $ 500,177 $
---------- ------------ -----------
---------- ------------ -----------
</TABLE>

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

(1) On June 3, 1997, the Company obtained a five-year $100.0 million revolving
loan credit facility from Deutsche Bank AG under which the Company drew down
$62.0 million on such date.

(2) Since March 31, 1997, the Company has issued 63,988 shares of Common Stock
upon exercise of stock options.

17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Except as noted below, the following selected consolidated financial data
are derived from the Company's consolidated financial statements. The unaudited
financial data for the three months ended March 31, 1997 and 1996 include all
adjustments, consisting of normal recurring accruals, which in the opinion of
management are necessary for a fair presentation of the Company's consolidated
financial position and the consolidated results of operations for these periods.
Operating results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. The data should be read in conjunction with the consolidated financial
statements, related notes and other financial information included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
INCOME STATEMENT DATA:

Revenues:
Gross premiums written..... $ 105,812 $ 74,860 $ 402,799 $ 264,314 $ 198,892 $ 148,750 $ 149,504
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net premiums written....... $ 79,313 $ 61,729 $ 311,863 $ 220,757 $ 187,288 $ 118,819 $ 116,248
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net premiums earned........ $ 77,807 $ 58,294 $ 265,989 $ 196,220 $ 156,755 $ 116,372 $ 105,171
Net investment income...... 11,893 7,786 37,226 30,035 24,453 22,523 19,875
Realized capital gains
(losses)................. 721 691 1,707 20 (1,478) (152) 333
Gross claims adjusting
income................... 15 25 55 130 255 424 1,356
--------- --------- --------- --------- --------- --------- ---------
Total revenues......... 90,436 66,796 304,977 226,405 179,985 139,167 126,735
Expenses:
Losses and LAE............. 45,674 35,443 155,991 119,255 110,918 77,581 74,933
Amortization of policy
acquisition costs,
underwriting, and
other expenses........... 25,182 18,172 88,080 62,975 47,737 31,293 26,604
Minority interest in income
of
consolidated subsidiary
trust.................... 2,732 -- 2,277 -- -- -- --
Interest expense........... -- 441 1,970 895 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total expenses......... 73,588 54,056 248,318 183,125 158,655 108,874 101,537
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes
and cumulative effect of
change in accounting
principle.................. 16,848 12,740 56,659 43,280 21,330 30,293 25,198
Income taxes................. 4,944 3,476 16,592 12,069 4,350 7,130 6,236
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative
effect of change in
accounting principle....... 11,904 9,264 40,067 31,211 16,980 23,163 18,962
Cumulative effect of change
in accounting for income
taxes...................... -- -- -- -- -- 708 --
--------- --------- --------- --------- --------- --------- ---------
Net income............. $ 11,904 $ 9,264 $ 40,067 $ 31,211 $ 16,980 $ 23,871 $ 18,962
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
SUPPLEMENTAL PER SHARE DATA:

Operating income (fully
diluted)(1)................ $ .36 $ .31 $ 1.33 $ 1.08 $ .62 $ .92 $ .77
Net income (fully diluted)... .38 .32 1.37 1.08 .59 .94 .79
Book value (at end of
period).................... 9.25 8.10 9.17 8.02 6.66 6.52 4.50
Cash dividends............... .07 .06 .25 .24 .23 .20 .20
</TABLE>

(CONTINUED ON FOLLOWING PAGE)

18
<PAGE>

Total investments............ $ 833,115 $ 564,703 $ 838,320 $ 552,714 $ 407,618 $ 343,591 $ 262,010
Total assets................. 1,275,920 798,649 1,246,407 773,348 599,117 527,657 406,149
Reserves for gross unpaid
losses and LAE............. 569,147 383,231 539,073 367,436 312,637 274,035 238,942
Total liabilities............ 837,743 566,513 810,880 543,615 408,853 341,963 299,400
Guaranteed preferred
beneficial interest in the
6 1/4% Convertible
Subordinated Debentures.... 166,979 -- 166,953 -- -- -- --
Total shareholders' equity... 271,198 232,136 268,574 229,733 190,264 185,694 106,749

COMBINED STATUTORY DATA: (2)
Statutory net income......... $ 11,092 $ 9,605 $ 28,874 $ 26,407 $ 6,623 $ 17,713 $ 12,803
Policyholders' surplus....... 276,181 181,014 268,004 171,362 104,871 101,418 76,438
Available for dividends from
the
insurance subsidiaries
(3)........................ 27,618 18,101 26,800 17,136 10,487 10,142 7,644
Ratio of net premiums
to surplus (4)............. 1.2x 1.3x 1.2x 1.3x 1.8x 1.2x 1.5x

SELECTED RATIOS:

GAAP combined ratio.......... 91.1% 92.0% 91.8% 92.7% 101.0% 93.2% 95.4%
Statutory combined ratio..... 93.9 91.3 90.9 91.1 98.1 94.2 96.8
Industry statutory combined
ratio (5).................. N/A 106.8 105.9 106.4 108.4 106.9 115.7
Ratio of earnings to combined
fixed charges and preferred
stock dividends (6)........ 6.8x 24.9x 13.2x 39.1x -- -- --
</TABLE>

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

(1) Represents net income excluding the effect of net realized capital gains and
losses and cumulative effect of a change in accounting principle.

(5) Compiled by A.M. Best.

19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated balance sheet at March 31,
1997 gives effect to the Company's acquisition of Lyndon as if the acquisition
and the related borrowing of $62.0 million under a revolving loan credit
facility had occurred at March 31, 1997, and the unaudited pro forma
consolidated income statements for the three months ended March 31, 1997 and for
the year ended December 31, 1996 give effect to such acquisition and borrowing
and the Company's 1996 acquisitions of Regency, Emrol and United Capitol Holding
as if all such events had occurred at January 1, 1996. Unaudited pro forma
financial data do not purport to be indicative of either the results of future
operations or the results of operations that would have occurred if the
transactions had been consummated on the dates indicated. Moreover, for the
reasons discussed under "Business--Acquisition of Lyndon," among others, the
historical operating results of Lyndon are not indicative of its future
operating results.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT MARCH 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA NOTE
COMPANY LYNDON ADJUSTMENTS CONSOLIDATED REFERENCE
----------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Fixed maturities, available for sale............ $ 707,199 $ 192,936 $ 8,215 $ 908,350
Fixed maturities, held to maturity.............. -- 8,047 (8,047) --
Equity securities............................... 20,351 -- 20,351
Short-term investments.......................... 102,547 13,832 (30,000) 86,379
Investment in limited liability corporation..... 3,018 -- 3,018
----------- ----------- ----------- ------------
Total investments............................. 833,115 214,815 (29,832) 1,018,098 1
Cash............................................ 15,688 3,868 19,556
Agents' balances due, less allowances
for doubtful accounts......................... 50,794 29,979 80,773
Premium receivable from insureds, less
allowances for doubtful accounts.............. 27,489 -- 27,489
Net reinsurance recoverables, less
allowances for doubtful accounts.............. 209,569 98,353 307,922
Accrued investment income....................... 9,778 3,322 13,100
Federal income taxes recoverable................ 1,165 -- 1,165
Deferred policy acquisition costs............... 36,834 43,503 (43,503) 36,834 2
Deferred federal income tax asset............... 29,540 -- 9,336 38,876 3
Present value of future profits................. -- -- 5,768 5,768 4
Home office building, property and
equipment--less accumulated depreciation and
amortization.................................. 40,130 -- 40,130
Intangible assets, less accumulated
amortization.................................. 11,311 -- 11,311
Other assets.................................... 10,507 2,004 (2,890) 9,621 5
----------- ----------- ----------- ------------
Total assets.................................. $ 1,275,920 $ 395,844 $ (61,121) $1,610,643
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------

LIABILITIES AND SHAREHOLDERS' EQUITY:
Unpaid losses and LAE........................... $ 569,147 $ 49,344 $ 618,491
Unearned premiums............................... 180,891 178,106 358,997
----------- ----------- ------------
Total policy liabilities...................... 750,038 227,450 977,488
Federal income taxes payable.................... -- 2,184 2,184
Deferred federal income tax liability........... -- 4,390 $ (4,390) --
Revolving loan credit facility.................. -- -- 62,000 62,000 6
Funds withheld under reinsurance contracts...... 72,112 -- 72,112
Other liabilities............................... 15,593 43,089 58,682
----------- ----------- ----------- ------------
Total liabilities............................. 837,743 277,113 57,610 1,172,466
Guaranteed preferred beneficial interest in the
6 1/4% Convertible Subordinated Debentures.... 166,979 -- 166,979
Total shareholders' equity.................... 271,198 118,731 (118,731) 271,198
----------- ----------- ----------- ------------
Total liabilities and shareholders' equity.... $ 1,275,920 $ 395,844 $ (61,121) $1,610,643
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>

See notes to unaudited pro forma consolidated financial information.

20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA NOTE
COMPANY LYNDON ADJUSTMENTS CONSOLIDATED REFERENCE
----------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums written.............................. $ 79,313 $ 13,634 $ 92,947
----------- ----------- ------------
----------- ----------- ------------
Net premiums earned............................... $ 77,807 $ 23,220 $ 101,027
Net investment income............................. 11,893 3,023 $ (491) 14,425 7
Realized capital gains............................ 721 29 750
Other income...................................... 15 100 115
----------- ----------- ----------- ------------
Total revenues.................................. 90,436 26,372 (491) 116,317

EXPENSES:
Losses and LAE.................................... 45,674 11,434 57,108
Amortization of policy acquisition costs.......... 15,951 3,053 19,004
Amortization of present value of future profits... -- 2,229 (1,632) 597 8
Underwriting and other expenses................... 9,231 2,911 12,142
Minority interest in income of
consolidated subsidiary trust................... 2,732 -- 2,732
Interest expense.................................. -- -- 964 964 9
----------- ----------- ----------- ------------
Total expenses.................................. 73,588 19,627 (668) 92,547
----------- ----------- ----------- ------------
Income before income taxes........................ 16,848 6,745 177 23,770
Income taxes...................................... 4,944 2,219 62 7,225 10
----------- ----------- ----------- ------------
Net income........................................ $ 11,904 $ 4,526 $ 115 $ 16,545
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Fully diluted earnings per share.................. $ .38 $ .50
----------- ------------
----------- ------------
</TABLE>

UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

EXPENSES:
Losses and LAE................... 155,991 2,972 27,553 186,516
Amortization of policy
acquisition costs.............. 57,540 (292) 10,999 (4,039) 64,208 8
Amortization of present value
of future profits.............. -- -- 11,080 (7,500) 3,580 8
Underwriting and other
expenses....................... 30,540 1,653 7,172 422 39,787 12
Minority interest in income of
consolidated subsidiary trust.. 2,277 -- -- 2,277
Interest expense................. 1,970 -- -- 3,856 5,826 9
----------- ------- ----------- ----------- ------------
Total expenses................. 248,318 4,333 56,804 (7,261) 302,194
----------- ------- ----------- ----------- ------------
Income before income taxes....... 56,659 5,688 39,994 2,999 105,340
Income taxes..................... 16,592 2,018 13,012 1,155 32,777 10
----------- ------- ----------- ----------- ------------
Net income....................... $ 40,067 $ 3,670 $ 26,982 $ 1,844 $ 72,563
----------- ------- ----------- ----------- ------------
----------- ------- ----------- ----------- ------------
Fully diluted earnings per
share.......................... $ 1.37 $ 2.42
----------- ------------
----------- ------------
</TABLE>

See notes to unaudited pro forma consolidated financial information.

21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

(2) Deferred policy acquisition costs of $43.5 million have been
eliminated as a result of a purchase accounting adjustment.

(4) PVFP was the result of a purchase accounting adjustment establishing
$47.7 million of estimated future profits less the $41.9 million
excess of the net assets acquired over the purchase price.

(5) The net decrease in other assets was the result of the reduction of
certain assets to their estimated fair value at the date of
acquisition.

(6) The $62.0 million represents the amount drawn down under the
revolving loan credit facility used to acquire Lyndon.

(9) Interest expense has been increased to reflect the $62.0 million
drawn down under the revolving loan credit facility, assuming an
interest rate of 6.04%.

(10) Federal income taxes have been increased to reflect the net tax
effect of the pro forma adjustments.

22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.

RESULTS OF OPERATIONS

The following table sets forth the Company's net premiums earned by
principal lines of insurance for the periods indicated and percentage of change
therein from period to period:

<TABLE>
<CAPTION>
PERCENTAGE INCREASE (DECREASE)
-----------------------------------
THREE MONTHS ENDED THREE YEAR
MARCH 31, YEAR ENDED DECEMBER 31, MONTHS ----------------------
------------------------ ------------------------------- 1996 TO 1995 TO 1994 TO
1997 1996 1996 1995 1994 1997 1996 1995
----------- ----------- --------- --------- --------- ----------- --------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Medical malpractice
(including dental
malpractice and
social services).......... $ 27,907 $ 24,098 $ 105,217 $ 88,295 $ 74,877 15.8% 19.2% 17.9%
General liability........... 28,010 16,910 78,641 50,026 28,631 65.6 57.2 74.7
Surety...................... 12,720 11,648 51,369 39,756 30,344 9.2 29.2 31.0
Commercial earthquake....... 1,744 512 8,257 249 -- 240.6 N/M N/A
Workers' compensation....... 808 3,049 7,025 10,320 16,671 (73.5) (31.9) (38.1)
Other....................... 6,618 2,077 15,480 7,574 6,232 218.6 104.4 21.5
----------- ----------- --------- --------- --------- ----- --------- -----
Total................... $ 77,807 $ 58,294 $ 265,989 $ 196,220 $ 156,755 33.5% 35.6% 25.2%
----------- ----------- --------- --------- --------- ----- --------- -----
----------- ----------- --------- --------- --------- ----- --------- -----
</TABLE>

The following table sets forth the components of the Company's combined
ratio calculated as a percentage of net premiums earned on the basis of
generally accepted accounting principles ("GAAP Combined Ratio") for the periods
indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994
----------- ----------- --------- --------- ---------
Losses................................. 40.0% 45.5% 36.5% 45.6% 54.1%
LAE.................................... 18.7 15.3 22.2 15.2 16.7
--- --- --- --- ---------
Losses and LAE......................... 58.7 60.8 58.7 60.8 70.8
Policy acquisition, underwriting,
interest and other expenses.......... 32.4 31.2 33.1 31.9 30.2
--- --- --- --- ---------
GAAP Combined Ratio.................... 91.1% 92.0% 91.8% 92.7% 101.0%
--- --- --- --- ---------
--- --- --- --- ---------
</TABLE>

THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996

A variety of factors accounted for the 33.5% growth in net premiums earned,
the principal factors being increases in the Company's core and new program
business and the acquisition of United Capitol and Regency in the second and
third quarter of 1996, respectively. This increase was partially offset by (i) a
decrease in workers' compensation, particularly the cotton gin program that the
Company discontinued during 1996, (ii) a decrease in the workers' compensation
component of social services programs due to price competition, and (iii) an
increase in reinsurance costs associated with the aggregate excess of loss
reinsurance contract.

The increase in medical malpractice net premiums earned was primarily
attributable to an increase in the number of physicians insured in the programs
for psychiatrists and alternative risks, geographical expansion in Ohio, Texas,
Michigan and Illinois, and growth in the dental program endorsed by the Academy
of General Dentistry, partially offset by the reclassification of certain net
premiums written in the social services programs to the general liability line
of business.

23
<PAGE>
Net premiums earned for the general liability line increased primarily
because of increases in various programs, including continued growth in the
social services, alarms and guards, demolition contractors and excess employers'
liability programs, and as a result of the acquisition of United Capitol in May
1996. These increases were partially offset by a decrease in net premiums earned
in the umbrella and crane liability programs.

Growth in surety net premiums earned continued in 1997, primarily
attributable to expanded writings of license and permit bonds, small contractors
bonds and miscellaneous bonds.

Net premiums earned for the workers' compensation line decreased primarily
as a result of decreases in the specialty niche programs for cotton gins and
feed lots, decreases in social services programs due to price competition, and
lesser required participation in the National Workers' Compensation Reinsurance
Pools. The decrease was partially offset by increases in workers' compensation
premiums written in the alternative risk program which the Company initiated in
1996.

Net premiums earned for the commercial earthquake program increased
primarily due to the growth in the number of policies written in 1996, which are
earned pro rata in 1997, partially offset by the planned 1997 decrease in net
written premiums in this line of business.

Net premiums earned for the other lines of business increased primarily due
to increased volume in commercial package policies in the social services
programs, and increased volume in the mobile homeowners' and auto physical
damage programs as a result of the acquisition of Regency in September 1996.
These increases were partially offset by decreases in other miscellaneous small
programs.

Net investment income before realized capital gains and losses increased
52.7% due principally to increases in invested assets resulting from the
proceeds of the issuance of Convertible Trust Originated Preferred Securities
("Convertible TOPrS") in October 1996, cash inflow from regular operations, and
the contribution to net investment income by United Capitol and Regency,
partially offset by the interest charge on funds held by the Company for the
benefit of the reinsurer of the Company's aggregate excess of loss reinsurance
contract. Total net investment income increased 48.8% due to the aforementioned
increase in net investment income and a significantly lower increase in realized
capital gains of 4.3%. The average annual pre-tax yield on investments,
excluding the charge for funds held under the aggregate excess loss of
reinsurance contract and realized capital gains and losses, was 6.5%, unchanged
from the previous year. The average annual after-tax yield on investments,
excluding the charge for funds held under the aggregate excess of loss
reinsurance contract and realized capital gains and losses, was 5.1%.

Gross claims adjusting income decreased 40.0% primarily as a result of a
decrease in claim services provided to outside companies, partially offset by an
increase in the rates charged for certain services.

Total revenues increased 35.4% as a result of the above.

Total expenses increased by 36.1% compared to the 33.5% increase in net
premiums earned. Losses and LAE increased at a 28.9% rate as a result of a 17.4%
increase in losses and a 63.0% increase in LAE. The increase in losses and LAE
was disproportionate to that of net premiums earned due to the aggregate excess
of loss reinsurance contract which provides coverage for losses and LAE in
excess of 64.0% and 65.0% for the 1997 and 1996 accident years, respectively,
which resulted in a loss and LAE component of the GAAP Combined Ratio 2.1
percentage points lower than in the comparable 1996 period. The 63.0% increase
in LAE resulted from a change in the lines of business mix to those having a
higher percentage relationship of LAE to losses. The 38.6% increase in the
amortization of policy acquisition costs, underwriting and other expenses was
attributable primarily to an increase in direct commission expense resulting
from growth in programs with higher commission rates, increased staffing and
marketing expenses related to expansion, salary increases and the expenses
associated with the acquisition of United Capitol and Regency in 1996. The
$441,000 decrease in interest expense was primarily the result of the repayment
and termination of the line of credit in the fourth quarter of 1996. The Company
also incurred approximately $2.7 million of expenses in 1997 associated with the
Convertible TOPrS. As the non-claim related component of the GAAP Combined Ratio
increased at a greater rate than premiums earned, the non-claim component was
1.2 percentage points higher than in the comparable 1996 period. The total GAAP
Combined Ratio decreased by 0.9 percentage points to 91.1% as a result of the
above.

24
<PAGE>
The foregoing changes resulted in income before taxes of $16.8 million for
the 1997 quarter, a 32.2% increase from the comparable 1996 quarter. Net income
for the period increased by $2.6 million, or 28.5%, over the comparable 1996
quarter.

CALENDAR YEAR 1996 COMPARED TO CALENDAR YEAR 1995

A variety of factors accounted for the 35.6% growth in net premiums earned,
the principal factors being increases in the majority of the Company's core and
new program business, partially offset by a decrease in workers' compensation,
particularly the cotton gin program, and by the increased ceding of net premiums
earned under the Company's aggregate excess of loss reinsurance contract
effective January 1, 1995, pursuant to which 13.5% and 14.0% of net premiums
earned in 1996 and 1995, respectively, were ceded for all lines of business,
except certain classes of surety bonds, realtors' errors and omissions and all
of the net premiums earned by United Capitol and Regency.

The increase in medical malpractice net premiums earned was primarily
attributable to an increase in the number of physicians insured, principally
those associated with mental health, home care and other social service
organizations, growth in the programs for psychiatrists and alternative risks,
geographical expansion in Ohio, Texas, Michigan and Illinois, growth in the
dental program endorsed by the Academy of General Dentistry, and rate increases
in Florida.

Net premiums earned for the general liability line increased primarily
because of increases in various programs, including social services, alarms and
guards, demolition contractors, pest control, and excess employers' liability
programs, and as a result of the acquisition of United Capitol in May 1996.
These increases were partially offset by a decrease in net premiums earned in
the umbrella and crane operator liability programs.

Growth in the surety net premiums earned continued in 1996, primarily
attributable to expanded writings of license and permit bonds, small contractors
bonds, miscellaneous bonds, custom bonds and bail bonds.

Net premiums earned for the workers' compensation line decreased primarily
as a result of decreases in the specialty niche program for cotton gins and feed
lots, decreases in the social services programs due to price competition, and a
lesser required participation in the National Workers' Compensation Reinsurance
Pools. These decreases were partially offset by increases in workers'
compensation from the alternative risk program which the Company initiated in
1996.

Net premiums earned for the commercial earthquake program increased
primarily due to the growth in the number of policies written in 1996 over the
comparable period in 1995, when the program was initiated.

Net investment income before realized capital gains and losses increased
23.9% due principally to increases in invested assets resulting from the
proceeds of the issuance of Convertible TOPrS in October 1996, cash inflow from
regular operations, and the contribution to net investment income by United
Capitol and Regency, partially offset by the interest charge on funds held by
the Company for the benefit of the reinsurer of the Company's aggregate excess
of loss reinsurance contract. Total net investment income increased 29.5% due to
the aforementioned increase in net investment income and an increase in realized
capital gains. The average annual pre-tax yield on investments, excluding the
charge for funds held under the aggregate excess of loss reinsurance contract
and realized capital gains and losses, was 6.4%, unchanged from the previous
year. The average annual after-tax yield on investments, excluding the charge
for funds held under the aggregate excess of loss reinsurance contract and
realized capital gains and losses, was 4.8%.

25
<PAGE>
Gross claims adjusting income decreased 57.7% primarily as a result of a
decrease in claim services provided to outside companies, principally Markel
Corporation.

Total revenues increased 34.7% as a result of the above.

Total expenses increased by 35.6%, similar to the 35.6% increase in net
premiums earned. Losses and LAE increased by 30.8% which included a 8.5%
increase in losses and a 97.5% increase in LAE. The increase in losses was
substantially lower than for net premiums earned as a result of a one-time
reallocation of loss reserves to LAE reserves, favorable reserve development in
accident years prior to 1996 for general liability and workers' compensation and
recoveries under the aggregate excess of loss reinsurance contract which
provides coverage for certain losses and LAE in excess of 65.0% of the net
premiums earned for the 1996 accident year, partially offset by higher loss and
LAE ratios for business written in 1996. The Company also increased prior years'
reserves by approximately $13.0 million, which was entirely offset by an
increase in the same amount of the subrogation recoverable recognized in
conjunction with the favorable December 1995 ruling in the New York Court of
Appeals, described in Note C of the notes to consolidated financial statements.
Such increase in the subrogation recoverable resulted from further documentation
and verification in the second quarter of 1996 of claims already paid by the
Company and reserves held by the Company that the Company believes are
reimbursable by the State of New York. The 97.5% increase in LAE resulted from,
a one-time reallocation of loss reserves to LAE reserves, partially offset by a
change in the lines of business mix to those having a lower percentage
relationship of LAE to losses and the allocation of recoveries under the
aggregate excess of loss contract. Due to the disproportionate relationship of
losses and LAE to net premiums earned, the loss and LAE component of the GAAP
Combined Ratio was 2.1 percentage points lower than in the comparable 1995
period. The 40.0% increase in the amortization of policy acquisition costs,
underwriting and other expenses was attributable primarily to an increase in
direct commission expense resulting from growth in programs with higher
commission rates, a decrease in reinsurance contingent commissions, increased
staffing and marketing expenses related to expansion, a reduction in assessment
recoveries from the Texas Workers' Compensation Insurance Facility, and salary
increases. The 120.1% increase in interest expense was primarily the result of
increased interest expense associated with the borrowing under the line of
credit. The Company also incurred approximately $2.3 million of expenses in 1996
associated with the Convertible TOPrS. See Note M of the notes to the
consolidated financial statements included elsewhere in this Prospectus. As the
non-claim related component of the GAAP Combined Ratio increased at a greater
rate than premiums earned, the non-claim component was 1.2 percentage points
higher than in the comparable 1995 period. The total GAAP Combined Ratio
decreased by 0.9 percentage points to 91.8% as a result of the above.

The foregoing changes resulted in income before income taxes of $56.7
million for the year ended 1996, a 30.9% increase from the comparable 1995
period. Net income for the year increased by $8.9 million, or 28.4%.

CALENDAR YEAR 1995 COMPARED TO CALENDAR YEAR 1994

A variety of factors accounted for the 25.2% growth in net premiums earned,
the principal factor being increases in the majority of the Company's core and
new program business, partially offset by a decrease in workers' compensation,
particularly the cotton gin program, and by the increased ceding of earned
premiums under the Company's aggregate excess of loss reinsurance contract
effective January 1, 1995, pursuant to which 14.0% of earned premium for all
lines of business, except bail, customs, license and permit, and miscellaneous
surety bonds is ceded.

The increase in medical malpractice net premiums earned was primarily
attributable to an increase in the number of physicians insured, principally
those associated with mental health, home care, and other social service
organizations, growth in the program for psychiatrists, greater penetration of
the Ohio physician market, growth in the dental program endorsed by the Academy
of General Dentistry, and rate increases in Florida and other geographic areas.

26
<PAGE>
Net premiums earned for the general liability line increased primarily
because of increases in various programs, including social services, alarms and
guards, pest control and excess employer's liability. These increases were
partially offset by a decrease in net written premiums earned in the umbrella
and in the crane operator liability programs.

Growth in the surety net premiums earned continued in 1995, primarily
attributable to expanded writings of license and permit bonds, with bonds for
small contractors, miscellaneous bonds, and bail bonds also showing substantial
percentage increases. The increase in license and permit bonds was primarily
attributable to the Company's acquisition in April 1994 of the license and
permit bond business of a California insurance agency.

Net premiums earned for the workers' compensation line decreased primarily
as a result of decreases in the specialty niche program for cotton gins caused
by a weather-related reduction in the cotton crop, and decreases in other
smaller programs due to the Company's decision not to renew accounts deemed
unprofitable, and decreased required participation in the National Workers'
Compensation Reinsurance Pools. These decreases were partially offset by
increases in workers' compensation premiums written in the social services
programs.

Net premiums earned for the other lines of business increased primarily due
to increased volume in commercial package policies in the social services
programs, and the recent start-up of an earthquake program. These increases were
partially offset by decreases in other miscellaneous small programs.

Net investment income before realized capital gains and losses increased
22.8% due principally to increases in invested assets resulting from the
proceeds of the $25.0 million borrowing under a line of credit facility, the
January 1995 commutation of certain medical malpractice reinsurance treaties,
and cash inflow from regular operations, partially offset by the interest charge
on funds held by the Company for the benefit of the reinsurer of the Company's
aggregate excess of loss reinsurance contract. Total net investment income
increased 30.8% due to the aforementioned increase in net investment income and
a decrease in realized capital losses. The average annual pre-tax yield on
investments, excluding the charge for funds held under the aggregate excess of
loss reinsurance contract and realized capital gains and losses, decreased to
6.4% from 6.6%. This decrease is primarily the result of generally lower
interest rates available for funds invested in 1994 and 1995, and a decrease in
the Company's holdings of higher yielding investments, as a result of maturities
and calls for redemption. The average annual after-tax yield on investments,
excluding the charge for funds held under the aggregate excess of loss
reinsurance contract and realized capital gains and losses, decreased to 4.9%
from 5.4%, primarily for the reasons described above.

Gross claims adjusting income decreased 49.0% primarily as a result of a
decrease in claim services provided to outside companies, principally Markel
Corporation.

Total revenues increased 25.8% as a result of the above.

Total expenses increased by 15.4% compared to the 25.2% increase in net
premiums earned. Losses and LAE increased by 7.5% as a result of a 5.5% increase
in losses and a 14.1% increase in LAE. The increase in losses and LAE was
substantially lower than that for net premiums earned as a result of the
one-time addition of $17.5 million to the 1994 loss reserves applicable to the
Company's medical malpractice business in Florida, subrogation recoveries in the
surety line of business in excess of expectations, favorable reserve development
in accident years prior to 1995 for general liability and workers' compensation
and recoveries under the aggregate excess of loss reinsurance contract which
provides coverage for certain losses and LAE in excess of 66.0% of the net
earned premium for the 1995 accident year. These decreases were partially offset
by carrying higher loss and LAE ratios to premiums earned for 1995 business. The
Company also increased prior years' reserves by approximately $19.0 million,
offset by subrogation recoverables of like amount, recognized in conjunction
with the favorable ruling in the New York Court of Appeals as more fully
described in Note C of the notes to consolidated financial statements. The 14.1%
increase in LAE resulted from the increase in loss and LAE ratios,

27
<PAGE>

partially offset by a change in the lines of business mix to those having a
lower percentage relationship of LAE to losses and the allocation of recoveries
under the aggregate excess of loss contract and the favorable court ruling
mentioned above. Due to the disproportionate relationship of losses and LAE to
earned premium, the loss and LAE component of the GAAP Combined Ratio was 10.0
percentage points lower than in the comparable 1994 period. The 38.7% increase
in the amortization of policy acquisition costs was attributable primarily to an
increase in direct commission expense resulting from growth in programs with
higher commission rates, a decrease in reinsurance contingent commissions,
increased staffing and marketing expenses related to expansion, and salary
increases, partially offset by a decrease in assumed commission expense
resulting from the continued decrease in assumed written premiums. The 25.1%
increase in underwriting, other expenses and interest expense was primarily the
result of the interest expense associated with the borrowing under the line of
credit facility, an increase in the additions to allowance for bad debts,
increased staffing, increased facilities, equipment and materials expense
necessitated by the Company's growth, a reduction in assessment recoveries from
the Texas Workers' Compensation Insurance Facility, and salary increases,
partially offset by a decrease in policyholder dividends. As the non-claim
related component of the GAAP Combined Ratio increased at a greater rate than
premiums earned, the non-claim component was 1.7 percentage points higher than
in the comparable 1994 period. The total GAAP Combined Ratio decreased by 8.3
percentage points to 92.7% as a result of the above.

The foregoing changes resulted in income before income taxes of $43.3
million for the year ended 1995, a 102.9% increase from the comparable 1994
period. Net income for the year increased by $14.2 million, or 83.8%. The
comparative results were significantly impacted by the $17.5 million addition to
loss reserves in the third quarter of 1994 reflected above, which resulted in a
disproportionately lower net income for the 1994 period.

ASSET PORTFOLIO REVIEW

At March 31, 1997, the Company's total assets of $1.3 billion consisted of
the following: cash and investments, 66.5%; reinsurance recoverables, 16.4%;
premiums receivable and agents balances, 6.1%; deferred expenses (policy
acquisition costs and deferred federal income taxes), 5.2%; home office
building, property and equipment, 3.1%; and other assets, 2.7%.

The Company generally invests in securities with fixed maturities with the
objective of providing reasonable returns while limiting liquidity and credit
risk. As a result, its investment portfolio consists primarily of government and
governmental agency securities and high-quality marketable corporate securities
which are rated at investment grade levels. At March 31, 1997, the Company held
rated, or better-than-investment grade, fixed income debt securities with a
carrying amount of $707.2 million, constituting 100.0% of the Company's fixed
maturity investments.

At March 31, 1997 and 1996, the Company's fixed maturity securities included
mortgage-backed bonds of $280.5 million and $201.2 million, respectively, which
are subject to risks associated with variable prepayments of the underlying
mortgage loans. Prepayments cause those securities to have different actual
maturities than expected at the time of purchase. Securities that have an
amortized cost greater than par that are backed by mortgages that prepay faster
than expected will incur a reduction in yield or loss, while securities that
have an amortized cost less than par that are backed by mortgages that prepay
faster than expected will generate an increase in yield or gain. The degree to
which a security is susceptible to either gains or losses is influenced by the
difference between its amortized cost and par, the relative sensitivity of the
underlying mortgages backing the assets to prepayments in a changing interest
rate environment and the repayment priority of the securities in the overall
securitization structure.

The Company limits the extent of its credit risk by purchasing securities
that are backed by stable collateral and by concentrating on securities with
enhanced priority in the securitization structure. Such securities with reduced
risk typically have a lower yield (but higher liquidity) than higher-risk
mortgage-backed bonds (i.e., mortgage-backed bonds structured to share in
residual cash flows or which cover interest only payments). At selected times,
higher-risk securities may be purchased if they do not

28
<PAGE>
compromise the safety of the Company's general portfolio. There are negligible
default risks in the Company's mortgage-backed bond portfolio as the vast
majority of these bonds are either guaranteed by U.S. government-sponsored
entities or are supported in the securitization structure by junior securities
resulting in the bonds having high investment grade status.

The following table provides a profile of the Company's fixed maturities
investment portfolio by rating at March 31, 1997:

<TABLE>
<CAPTION>
AMOUNT
MARKET REFLECTED ON PERCENT
S&P'S/MOODY'S RATING(1) VALUE BALANCE SHEET OF TOTAL
- --------------------------------------------------------- ---------- ------------- -----------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
AAA/Aaa (including U.S. Treasuries of $22,339)........... $ 409,984 $ 409,984 58.0%
AA/Aa.................................................... 111,734 111,734 15.8
A/A...................................................... 138,207 138,207 19.5
BBB/Baa.................................................. 47,250 47,250 6.7
All other................................................ 24 24 --
---------- ------------- -----
Total............................................ $ 707,199 $ 707,199 100.0%
---------- ------------- -----
---------- ------------- -----
</TABLE>

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

(1) Ratings are assigned by S&P or, if no S&P rating is available, by Moody's
Investors Service Inc.

Prior to January 1, 1994, the Company classified fixed maturity securities
in accordance with the then existing accounting standards and, accordingly,
those fixed maturity securities that were not intended to be held-to-maturity
were designated as actively managed and were carried at fair value, with
unrealized holding gains and losses reported in a separate caption in
shareholders' equity. Other fixed maturity securities were carried at amortized
cost since the Company had both the ability and intent to hold those securities
until maturity.

As of January 1, 1994, the Company adopted FASB Statement 115 and
reclassified a portion of its fixed maturity securities portfolio as
"available-for-sale," with the remainder being classified as "held-to-maturity."
Under the reclassification, the fixed maturity securities classified as
"available-for-sale" are carried at fair value and changes in fair values, net
of applicable income taxes, are charged or credited directly to shareholders'
equity. "Held-to-maturity" securities are reported at amortized cost. The
adoption of Statement 115 increased shareholders' equity by $3.7 million at
January 1, 1994.

In December 1995, the Company reclassified all of its previously held
securities classified as held-to-maturity to available-for-sale as permitted by
FASB's Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITIES--QUESTIONS AND ANSWERS. The
reclassification increased shareholders' equity by $2.8 million at December 31,
1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company is a holding company, receiving cash principally through sales
of equities, borrowings, and dividends from its subsidiaries, certain of which
are subject to dividend restrictions described in Note I of the notes to the
consolidated financial statements. The ability of insurance and reinsurance
companies to underwrite insurance and reinsurance is based on maintaining
liquidity and capital resources sufficient to pay claims and expenses as they
become due. The primary sources of liquidity for the Company's subsidiaries are
funds generated from insurance and reinsurance premiums, investment income,
commission and fee income, capital contributions from the Company and proceeds
from sales and maturities of portfolio investments. The principal expenditures
are for payment of losses and LAE, underwriting and other operating expenses,
commissions, and dividends to shareholders and policyholders.

The Company's subsidiaries maintain liquid operating positions and follow
investment guidelines that are intended to provide for an acceptable return on
investment while preserving capital, maintaining sufficient liquidity to meet
their obligations and, as to the Insurance Subsidiaries, maintaining a
sufficient margin of capital and surplus to ensure their unimpaired ability to
write insurance and assume reinsurance.

29
<PAGE>
Cash flow generated from operations for the three months ended March 31,
1997 and 1996 and for the years ended December 31, 1996, 1995 and 1994 was $18.9
million, $15.8 million, $116.5 million, $105.0 million and $81.9 million,
respectively, amounts adequate to meet all of the Company's obligations.

In January 1994 and 1995, investment funds were increased by $9.0 million
and $3.9 million, respectively, from the commutation of the 1990 and 1991 treaty
years under the medical malpractice reinsurance treaties, resulting in the
receipt of $6.1 million and $3.9 million, respectively, in cash and a
concomitant increase in reserves for unpaid losses and LAE, with the balance
received from the collection of contingent commissions earned by the Company for
the 1994 treaty year.

In April 1994, the Company completed the acquisition of SDIA, Inc. ("SDIA"),
a California license and permit bond insurance agency, for $3.2 million and
entered into a five-year consulting agreement with the owner/principal of the
agency. Personnel of the agency involved in placing and servicing the acquired
business have become employees of the Company, operating from their respective
locations in Phoenix, Arizona; Reno and Las Vegas, Nevada; and San Jose, Orange
County and La Jolla, California. All new and renewal policies with respect to
the approximately $5.0 million to $6.0 million of license and permit bond
business acquired are issued by the Company.

On November 10, 1994, the Company authorized a stock repurchase program to
purchase up to 1.0 million shares of its Common Stock, in compliance with SEC
Rule 10b-18, at the discretion of the Chairman of the Board. There is no
commitment or obligation on the part of the Company to purchase any particular
number of shares and the program may be suspended at any time at the Company's
discretion. The Company has not purchased any shares since 1995. In 1995 and
1994, the Company purchased the present equivalent of 13,200 and 77,880 shares
of its Common Stock at a cost of $134,000 and $654,000, respectively.

In May 1995, the Company and R. Spencer Douglas III ("Douglass") formed a
California limited liability corporation, Douglass/Frontier, LLC
("Douglass/Frontier"), a bail bond insurance agency to which the Company
contributed $2.4 million in cash and Douglass contributed the assets of his
wholly-owned existing bail bond agency. The Company and Douglass share equally
in the ownership of Douglass/ Frontier.

On June 29, 1995, the Company obtained a 4 1/2 year, $35.0 million line of
credit facility from The Bank of New York, under which it borrowed $25.0 million
at an interest rate of 6.87% per annum, payable quarterly. In June and September
1996, the Company borrowed an additional $4.2 million and $2.9 million from The
Bank of New York (outside of the line of credit) at annual interest rates of
6.13% and 6.31%, respectively, payable quarterly, due October 1996. In the
fourth quarter, the Company repaid all borrowings and terminated the facility.

As a result of a review by A.M. Best of Frontier Insurance's A- (Excellent)
rating, the Company agreed with A.M. Best to make a $45.0 million capital
infusion to Frontier Insurance by June 30, 1995 in order to fund its projected
growth and retain its A- (Excellent) rating. At June 30, 1995, the Company had
completed the $45.0 million capital infusion, utilizing a combination of funds
previously held by the Company and loan proceeds from The Bank of New York
credit facility.

In November 1995, the Company acquired the realtors' errors and omissions
book of business from Bankers Multiple Line Insurance Company ("BMLIC") for
$400,000. The personnel of BMLIC involved in placing and servicing the acquired
business have become employees of the Company, operating from their location in
Louisville, Kentucky.

In May 1996, the Company completed the acquisition of United Capitol
Holding, the direct or indirect parent of United Capitol, United Capitol
Managers, Inc. (renamed Olympic Underwriting Managers, Inc.) and Fischer
Underwriting Group, Inc., for $31.0 million. United Capitol Holding, through its
subsidiaries, underwrites specialty risks, such as asbestos abatement, product
and general liability, environmental liability and directors' and officers'
liability.

30
<PAGE>
In September 1996, the Company completed the acquisition of Regency and
Emrol in exchange for 476,174 shares of Common Stock. Regency underwrites
non-standard automobile insurance, principally in North Carolina, and Emrol
finances premiums primarily for policyholders of Regency.

In October 1996, the Company completed a $172.5 million offering of
Convertible TOPrS, issued through Frontier Financing Trust, a Delaware business
trust formed by the Company for the purpose of the transaction. The Convertible
TOPrS have a dividend rate of 6 1/4% and are convertible into 2.1328 shares of
Common Stock, equivalent to a conversion price of $23.44 per share. See Note M
of the notes to the consolidated financial statements included elsewhere in this
Prospectus. Net proceeds to the Company from this offering were $166.9 million,
of which $32.1 million was applied to repay bank debt, $60.0 million was
contributed to the surplus of Frontier Insurance, $30.0 million was utilized to
fund, in part, the acquisition of Lyndon and the balance was available for
general corporate purposes, including dividend payments.

Through March 31, 1997, the Company expended $2.8 million in connection with
the construction of an addition to its home office building. The Company expects
to expend an additional $8.5 million to complete the addition, which it plans to
occupy in the fourth quarter of 1997.

Cash dividends declared in the three months ended March 31, 1997 and 1996
and the years ended December 31, 1996, 1995 and 1994 were $1.9 million, $1.6
million, $7.3 million, $6.2 million and $6.0 million, respectively.

On June 3, 1997, the Company completed the acquisition of 100.0% of the
stock of Lyndon Property and its six subsidiaries, Lyndon Life Insurance
Company, Twin Mercury Life Insurance Company, Gulfco Life Insurance Company,
Lyndon Southern Insurance Company, Lyndon--DFS Warranty Services, Inc. and
Lyndon General Agency of Texas, Inc., at a purchase price of $92.0 million in
cash.

On June 3, 1997, the Company obtained a five-year $100.0 million revolving
loan credit facility from Deutsche Bank AG pursuant to which it borrowed $62.0
million at an initial floating interest rate of 6.04%, based upon Eurodollar
interest rates, payable quarterly, to fund a portion of the Lyndon purchase
price.

REINSURANCE

Effective January 1, 1995, the Company entered into a stop loss reinsurance
contract with Centre Reinsurance Company of New York ("Centre Re") for accident
years 1995, 1996 and 1997. Under the agreement, Centre Re provides reinsurance
protection within certain accident year and contract aggregate dollar limits for
losses and LAE in excess of a predetermined ratio of these expenses to net
premiums earned for a given accident year for all lines of business, except
selected programs and certain classes of surety bonds, and net premiums earned
from Lyndon, United Capitol and Regency. The loss and LAE ratio above which the
reinsurance provides coverage is 66.0%, 65.0% and 64.0% for accident years 1995,
1996 and 1997, respectively. The amount recoverable is subject to a single
accident year limit of 175.0% of the premium paid for such accident year and an
aggregate limit equal to the lesser of (i) 175.0% of the premium paid for all
three accident years or (ii) $162.5 million. The Centre Re stop loss reinsurance
contract expires December 31, 1997. The Company is evaluating whether to
negotiate a renewal of the contract or explore other reinsurance alternatives.
See "Business--Reinsurance."

LITIGATION WITH THE STATE OF NEW YORK

31
<PAGE>
from indemnification by the State with respect to malpractice claims arising out
of such activity, retroactive to July 1, 1991. In an opinion filed on September
3, 1993 the Court of Claims of the State of New York held, INTER ALIA, that the
July 1992 legislation by the State of New York eliminating SUNY medical school
faculty members engaged in the clinical practice of medicine, as part of their
employment by SUNY, from indemnification by the State with respect to
malpractice claims arising out of such activity was not to be applied
retroactively. This decision was affirmed by the New York State Appellate
Division in April 1994. Subsequently, in February 1995, the Appellate Division
granted leave to the Company and the State of New York to have the issues of the
Company's entitlement to recover its costs of defense and its costs of
settlement ruled on by the State's highest Court, the New York Court of Appeals.
In December 1995, the New York Court of Appeals ruled on this issue and
concluded that the Company was entitled to recoveries from the State for such
medical malpractice claims. As a result of this decision, the Company believes
that it will benefit economically by not being ultimately responsible for
certain claims against SUNY physicians for whom it presently carries reserves
and by being entitled to reimbursement of certain claims previously paid;
accordingly, effective June 30, 1996 and December 31, 1995, the Company recorded
subrogation recoverables of approximately $13.0 million and $19.0 million,
respectively, representing the amount of claims already paid and the reserves
currently held by the Company on open cases that management believes are
reimbursable by the State of New York. In January 1997, the New York Court of
Claims rendered a decision granting summary judgment to the Company on three
SUNY cases that were previously paid by the Company. This decision has been
appealed by the State of New York. To the extent that the amount of the actual
recovery varies from the recorded recoverable, such difference will be reported
in the period recognized. The Company is continuing to defend all SUNY faculty
members against malpractice claims that have been asserted and is maintaining
reserves therefor adjusted for the anticipated recoveries.

REGULATION

In its ongoing effort to improve solvency regulation, the National
Association of Insurance Commissioners ("NAIC") and individual states have
enacted certain laws and financial statement changes. The NAIC has adopted
Risk-Based Capital ("RBC") requirements for property/casualty insurance
companies to evaluate the adequacy of statutory capital and surplus in relation
to investment and insurance risks such as asset quality, mortality and
morbidity, asset and liability matching, benefit and loss reserve adequacy, and
other business factors. The RBC formula is used by state insurance regulators as
an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized. In
addition, the formula defines new minimum capital standards that supplement the
current system of low fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Companies below specific
trigger points or ratios are classified within certain levels, each of which
requires specific corrective action. The levels and ratios are as follows:

<TABLE>
<CAPTION>
RATIO OF TOTAL ADJUSTED CAPITAL TO
AUTHORIZED CONTROL LEVEL RBC
REGULATORY EVENT (LESS THAN OR EQUAL TO)
- -------------------------------------------------------------- -----------------------------------
<S> <C>
Company action level.......................................... 2.0*
Regulatory action level....................................... 1.5
Authorized control level...................................... 1.0
Mandatory control level....................................... 0.7
</TABLE>

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

*Or, 2.5 with negative trend.

The ratios of total adjusted capital to authorized control level RBC for the
Insurance Subsidiaries were all in excess of 3:1 at December 31, 1996, 1995 and
1994.

32
<PAGE>

The NAIC currently is in the process of codifying statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1998, will likely change, to some extent, prescribed
statutory accounting practices, and may result in changes in the statutory
surplus of the Insurance Subsidiaries.

The thrust of these regulatory efforts at all levels is to improve the
solvency of insurers. These regulatory initiatives, and the overall focus on
solvency, may intensify the restructuring and consolidation of the insurance
industry. While the impact of these regulatory efforts on the Company's
operations cannot be quantified until enacted, the Company believes it will be
adequately positioned to compete in an environment of more stringent regulation.

See "Business--Regulation" for other regulatory matters applicable to the
Company.

IMPACT OF INFLATION

Property and casualty insurance premiums are established before the amount
of losses and LAE, or the extent to which inflation may affect such expenses,
are known. Consequently, the Company attempts, in establishing its premiums, to
anticipate the potential impact of inflation. However, for competitive and
regulatory reasons, the Company may be limited in raising its premiums
commensurate with anticipated inflation, in which event the Company, rather than
its insureds, would absorb inflation costs. Inflation also affects the rate of
investment return on the Company's investment portfolio with a corresponding
effect on the Company's investment income.

ENVIRONMENTAL ISSUES

The Company, through its subsidiary, United Capitol, in the ordinary course
of business, writes insurance on accounts which have hazardous, unique or
unusual risk characteristics. Since United Capitol's organization in 1986, its
liability policies have included an absolute pollution coverage exclusion,
except for policies expressly providing such coverage. In addition, United
Capitol's product liability and other primary general liability policies contain
exclusions for coverage of claims for bodily injury or property damage caused by
exposure to asbestos, except for policies expressly providing such coverage.

Although the Company believes that such policies, together with the
Company's general, professional and other liability policies, do not subject it
to material exposure for environmental pollution claims, there can be no
assurance of the Company's continued protection in view of the expansion of
liability for environmental claims in recent litigation in the insurance
industry.

SHAREHOLDER LITIGATION

The Company is a defendant in a class action alleging violations of federal
securities laws by the Company and certain of its officers and directors. The
complaint relates to the Company's November 5, 1994 announcement of its third
quarter financial results and alleges that the Company previously had omitted
and/or misrepresented material facts with respect to its earnings and profits.
The Company believes the suit is without merit and has retained special legal
counsel to contest the suit vigorously and believes that the Company's exposure
to liability under such lawsuit, if any, would not have a material adverse
effect on the Company's financial condition.

33
<PAGE>
BUSINESS

GENERAL

The Company is an insurance holding company which, through its subsidiaries,
conducts business on an admitted and non-admitted basis as a specialty property
and casualty insurer.

The following chart sets forth the organizational structure of the Company's
subsidiaries:

[CHART]

Frontier Insurance, the Company's principal Insurance Subsidiary, commenced
business in August 1966, and was acquired by the Company in April 1986. Med Pro,
which underwrites the majority of the Company's medical and dental malpractice
programs, commenced business in July 1986 and was acquired by the Company in
June 1987. Pioneer, which performs claims adjusting and claims management
services for the Company's insurance lines, was organized and commenced business
in October 1989 as the successor to a claims adjusting company. Frontier
Pacific, the Company's California Insurance Subsidiary, commenced business in
December 1982, was acquired by Frontier Insurance in October 1991, and changed
its name from Contractors' Surety Company in September 1993. SDIA was acquired
by the Company in April 1994 and is involved in placing and servicing license
and permit bonds in California and other western states. Douglass/Frontier is a
joint venture formed in May 1995 and is involved in placing and servicing bail
bonds. United Capitol Holding was acquired by Frontier Insurance in May 1996,
together with its subsidiaries, United Capitol, a specialty excess and surplus
lines insurer, Olympic, an underwriting management company, and Fischer, an
underwriter of directors' and officers' liability and various classes

34
<PAGE>
of errors and omissions. Regency Financial Corp. was organized by the Company in
June 1996 for the purpose of acquiring Regency, a non-standard automobile
insurer, and Emrol, a premium finance company, which were acquired by the
Company in September 1996. In February 1996, the Company acquired a 33.3%
ownership interest in Townsquare Title Insurance Services, which owns United
General Title Insurance Company ("United General"). In June 1997, the Company
acquired Lyndon Property and its subsidiaries which underwrite programs for
credit-related, residual value, and collateral protection coverage.

Frontier Insurance is licensed as a property and casualty writer in 50
states, the District of Columbia, Puerto Rico and the Virgin Islands; Frontier
Pacific is licensed as a property and casualty writer in California, Nevada and
New York; United Capitol is licensed as a property and casualty writer in
Arizona, Illinois and Wisconsin and is an approved excess and surplus lines
insurer in 46 states; Regency is licensed as a property and casualty writer in
North Carolina and South Carolina; United General is licensed as a title insurer
in 29 states; and Lyndon Property is licensed as a property and casualty writer
in 47 states.

ACQUISITION OF LYNDON

On June 3, 1997, the Company acquired all of the issued and outstanding
capital stock of Lyndon from Mercury for $92.0 million in cash, which amount was
$30.9 million (net of tax) less than Lyndon's total shareholders' equity on such
date. Lyndon, based in St. Louis, Missouri, provides credit-related and
specialty insurance products for financial institutions and specialty insurance
markets through a variety of distribution channels, including other insurance
companies, general agents, third-party administrators, and joint venture
relationships, with the particular channel designed to fit the specific product.
Credit-related products include collateral protection, credit property,
involuntary unemployment insurance, auto physical damage, credit life, and
credit accident and health coverages. Specialty insurance products include
residual value, non-standard auto and mechanical breakdown.

Lyndon's products are designed to protect lenders and borrowers against
financial losses relating to death, disability, involuntary unemployment,
mechanical breakdown (extended service contracts), failure by the borrower to
maintain adequate insurance or, at the end of a lease, the loss of value beyond
normal wear and tear. Individual claims associated with credit insurance are
typically limited to the amount of the associated loan and the loss ratio is
generally lower than that of many other insurance product lines.

Lyndon's strategy is to produce superior underwriting results by focusing on
selected niche, low loss ratio credit-related products sold through financial
institutions and maintaining a flexible low cost infrastructure by utilizing
joint ventures and partnerships to assist in the distribution of its products.
Similar to the Company's business strategy, Lyndon focuses on products and
market opportunities where it believes there is less competition due to a
perception that the business is difficult to write profitably.

As a result of its acquisition by the Company, Lyndon is cross-marketing its
products in conjunction with the Company by utilizing the Company's multiple
distribution channels. In addition, Lyndon is seeking to acquire profitable,
complementary blocks of business or companies where consolidation savings and
other synergies may exist.

35
<PAGE>
The following table represents Lyndon's net premiums written by line of
business for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Auto physical damage..................................... $ 6,992 $ 12,737 $ 58,008 $ 13,407 $ 915
Warranty................................................. 3,766 1,067 11,531 292 --
Credit property.......................................... 1,576 1,573 6,411 2,638 199
Private passenger automobile............................. 588 -- 1,311 -- --
Credit accident and health............................... 563 4,544 12,341 58,538 (18,061)
Credit life.............................................. (315) 2,423 5,939 34,129 10,835
Auto residual value...................................... 251 290 1,891 1,886 137
Involuntary unemployment................................. 212 201 1,193 3,476 (2,068)
Fire..................................................... 1 (1,493) (2,011) 2,665 (254)
Ordinary life............................................ -- -- -- 20,296 24,846
--------- --------- --------- ---------- ----------
Total............................................ $ 13,634 $ 21,342 $ 96,614 $ 137,327 $ 16,549
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
</TABLE>

The following table sets forth the components of Lyndon's GAAP Combined
Ratio calculated as a percentage of net premiums earned for the periods
indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Losses............................... 47.1% 25.7% 30.1% 52.0% 35.3%
LAE.................................. 2.1 2.3 3.0 .4 .2
--------- --------- --------- --------- ---------
Losses and LAE....................... 49.2 28.0 33.1 52.4 35.5
Policy acquisition, underwriting,
and other expenses................. 35.3 24.3 35.1 65.9 47.6
--------- --------- --------- --------- ---------
GAAP Combined Ratio.................. 84.5% 52.3% 68.2% 118.3% 83.1%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

Lyndon was formed in 1978 by ITT primarily to insure credit-related
exposures in ITT's consumer and commercial finance businesses. In October 1995,
Mercury acquired Lyndon from ITT to offer credit-related insurance products in
conjunction with Mercury's sub-prime auto lending business.

For the three months ended March 31, 1997, Lyndon had revenues of $26.4
million and net income of $4.5 million, compared to revenues of $19.2 million
and net income of $7.3 million for the three months ended March 31, 1996. At
March 31, 1997, Lyndon's total assets were $395.8 million and its total
investments were $214.8 million.

36
<PAGE>
INSURANCE LINES

The following table sets forth the gross and net premiums by principal lines
of insurance written by the Company and the related percentages of the total of
such premiums written represented thereby for the three months ended March 31,
1997 and the year ended December 31, 1996:

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------------------ ------------------------------------------
GROSS PREMIUMS NET PREMIUMS WRITTEN GROSS PREMIUMS NET PREMIUMS WRITTEN
WRITTEN WRITTEN
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Medical malpractice (including dental
malpractice and social services)..... $ 27,156 25.7% $ 22,516 28.4% $ 139,233 34.6% $ 119,653 38.4%
General liability...................... 39,045 36.9 32,329 40.8 113,423 28.2 93,980 30.1
Surety................................. 14,587 13.8 12,098 15.3 65,381 16.2 56,632 18.2
Commercial earthquake.................. 3,465 3.3 2,085 2.6 16,541 4.1 11,904 3.8
Workers' compensation.................. 5,564 5.2 1,743 2.2 25,429 6.3 6,253 2.0
Other.................................. 15,995 15.1 8,542 10.7 42,792 10.6 23,441 7.5
--------- --------- --------- --------- --------- --------- --------- ---------
Total............................ $ 105,812 100.0% $ 79,313 100.0% $ 402,799 100.0% $ 311,863 100.0%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>

The Company's business strategy is to achieve an underwriting profit by
identifying niche markets and specialty programs which it believes afford
favorable opportunities for profitability due to (i) limited potential
competition, and (ii) the Company's innovative underwriting and value added
services, including coverage enhancements, risk management, loss control and
specialized claims management. The Company currently underwrites in excess of
130 specialty insurance programs, including (i) malpractice insurance for
physicians, dentists, psychiatrists and chiropractors, (ii) general liability,
(iii) surety (performance bonds, bail bonds, customs bonds and license and
permit bonds), (iv) commercial earthquake, (v) workers' compensation and (vi)
other miscellaneous lines. The Company's alternative risk division underwrites
excess workers' compensation and excess medical stop loss coverages, and
provides custom designed insurance programs through captive and rent-a-captive
facilities for both the Company's workers' compensation and other insurance
lines.

On June 3, 1997, the Company completed the acquisition of Lyndon for $92.0
million in cash. Lyndon underwrites credit-related and other specialty insurance
for financial institutions and specialty insurance markets.

37
<PAGE>
The following chart provides examples of typical niche market/specialty
programs underwritten by the Company for specific types of customers:

<TABLE>
<CAPTION>
COVERAGE/LINE OF
CUSTOMER TYPE BUSINESS ILLUSTRATIVE CLAIM
<S> <C> <C>

Doctors and dentists professional liability malpractice
- ----------------------------------------------------------------------------
Day care providers general liability child injured on
premises
- ----------------------------------------------------------------------------
White water raft general liability rafter injured through
operators operator's negligence
- ----------------------------------------------------------------------------
Social service agencies professional liability, client sues agency or
general liability, professional
fire
- ----------------------------------------------------------------------------
Crane operators general liability crane damages a third
party's property
- ----------------------------------------------------------------------------
Alarm installers general liability house is burglarized
through faulty alarm
installation
- ----------------------------------------------------------------------------
Small-construction surety bonds electrician or plumber
contractors fails to complete job
- ----------------------------------------------------------------------------
Self-insured employers general liability workers' compensation
loss exceeds
employers'
self-insured retention
- ----------------------------------------------------------------------------
Importers customs bonds importer fails to pay
duty
- ----------------------------------------------------------------------------
Commercial property earthquake (difference earthquake damage to
owners in conditions) building and contents
- ----------------------------------------------------------------------------
Financial institutions collateral protection automobile damage where
borrower's insurance
has lapsed
</TABLE>

MEDICAL MALPRACTICE

Frontier Insurance commenced underwriting medical malpractice insurance in
1981 under programs developed for physicians with varied practices, which
currently include part-time physicians, internists, physicians and other health
care professionals providing medical services to clients of social service
agencies (mental health, home care, etc.), family practitioners, psychiatrists,
chiropractors, dermatologists and other specialists. Physicians covered under
the Company's programs generally must be members of a national, state, or county
society for their particular specialty and must limit their practice to such
specialty, be employed by a social services agency, or be in practice or
employed on a part-time basis. The Company has implemented strict underwriting
guidelines in an attempt to screen out undesirable risks and reduce its
exposure. The Company's medical malpractice insurance is written on both an
occurrence and a claims made basis, predominantly in New York, Florida,
Illinois, Ohio, Texas and Michigan. Additionally, the Company markets a
specialty program for physicians unable to obtain traditional malpractice
coverage as a result of excessive malpractice claims, professional disciplinary
proceedings and/or drug or alcohol abuse. Coverage under this program is written
on a claims made basis with a deductible and is priced substantially higher than
the Company's standard medical malpractice programs.

38
<PAGE>
At March 31, 1997, approximately 18,400 physicians were insured by the
Company, of whom 650, or 3.5%, were employed as faculty members at medical
schools of SUNY, 13,900, or 75.6%, were physicians who were members of 19
medical associations which endorsed or approved the Company's medical
malpractice insurance program, and 3,850, or 20.9%, were physicians and other
health care professionals providing medical services covered by the Company's
social services insurance program. Since December 31, 1990, the number of SUNY
physicians insured by the Company has decreased by approximately 380,
attributable to increased competition and other factors, including a 1990
decision by the New York State Court of Claims relating to SUNY physicians in
favor of the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Litigation with the State of New York."

In August 1987, the Company commenced underwriting dental malpractice
insurance for dentists viewed by the Company as preferred risks. Dentists who
practice oral surgery or who utilize anesthesia to render their patients
unconscious are, among others, not viewed as preferred risks and, accordingly,
are not eligible for coverage. As with medical malpractice, the endorsement of
related professional organizations is a key element in marketing, and the
Company has benefitted significantly from the 1994 endorsement by the Academy of
General Dentistry. Dental malpractice is written by the Company predominantly in
New York, Florida and Ohio. At March 31, 1997, approximately 4,900 dentists were
insured by the Company under its dental malpractice program.

GENERAL LIABILITY

The Company underwrites general liability coverages for day care centers,
crane operators, white water raft operators, health and social services
agencies, pest control operators, fire protection equipment dealers and
installers, security guards, excess workers' compensation/employers' liability
for self-insured employers, and a variety of other programs. The Company also
underwrites umbrella coverage up to $5.0 million over an underlying $1.0 million
Company general liability coverage. The Company's specialty insurance programs
include environmental policies covering enumerated hazards with stated policy
limits. Although the Company believes that such policies, together with the
Company's general, professional and other liability policies, do not subject the
Company to material exposure for environmental pollution claims, there can be no
such assurance in view of the expansion of liability for environmental claims in
recent litigation.

SURETY

The Company underwrites surety bonds for small contractors, customs bonds,
contractor license bonds, bail bonds, license and permit bonds and self-insured
workers' compensation bonds. According to the Surety Association of America, the
Company was the 13th largest writer of surety bonds in the United States during
1996 based on net premiums written.

COMMERCIAL EARTHQUAKE

In July 1995, the Company commenced underwriting difference in conditions
("DIC") commercial earthquake policies under an agreement with Associated
International Intermediaries, Inc., a subsidiary of Associated International
Insurance Company ("Associated"). Pursuant to the agreement, the Company and
Associated underwrite DIC commercial earthquake policies through a companion
carrier facility with combined limits of $7.5 million, with two-thirds of new
and renewal policies being underwritten by Associated and one-third by the
Company. The agreement may be terminated by either party upon 90 days' notice.
The agreement expires December 31, 1997 and the Company is evaluating its
various alternatives.

39
<PAGE>
WORKERS' COMPENSATION

The Company underwrites workers' compensation coverage for jockeys, feed
lots and other specialty niches. Additionally, the Company assumes workers'
compensation business as a result of its required participation in the National
Workers' Compensation Reinsurance Pool and other residual market mechanisms. Due
to adverse underwriting results, the Company substantially reduced its workers'
compensation business in 1993, except for its feed lot programs in Texas, its
New Jersey jockey program, its social services program, and its excess workers'
compensation lines which are classified under general liability.

OTHER

The Company underwrites other lines of insurance, including commercial
multi-peril, inland marine, property, specialty homeowners, non-standard auto,
and excess of loss group accident and health. In 1996, the Company also began
writing, on a direct basis, marine, energy and commercial property insurance.

ALTERNATIVE RISKS

In 1995, the Company established an alternative risk division to write
excess workers' compensation insurance and excess medical stop loss coverages.
In the fall of 1996, the division's activities were expanded to provide custom
designed insurance programs through captive and rent-a-captive facilities for
new and existing clients in the Company's workers' compensation and other
insurance lines. The business offers the opportunity to generate both risk
sharing and fee income.

REINSURANCE

REINSURANCE ASSUMED

The Company assumes reinsurance under reinsurance treaties and through
mandatory participation in various states' residual market pools and reinsurance
facilities. As part of its acquisition of BMLIC's realtors' errors and omissions
business, the Company will reinsure related policies issued by BMLIC until such
time as the Company's realtors' errors and omissions program is approved and can
be written directly by the Company. In 1996, the Company began to assume, on a
quota share basis, mobile homes and homeowners' business underwritten by Omega
Insurance Company. In January 1997, the Company entered into a series of
reinsurance treaties with Vesta Insurance Group and some of its subsidiaries to
assume certain property and liability business on a quota share basis. In August
1995, the Company assumed a quota share portion of a pool of environmental
liability policies from Underwriters Reinsurance Company, which were produced by
URC Environmental Specialty Underwriters on behalf of Commercial Underwriters
Insurance Company and the Company (the "URC Environmental Policies"). The
related treaty currently is in run-off.

REINSURANCE CEDED

Effective January 1, 1995, the Company entered into a coinsured aggregate
excess of loss reinsurance agreement with Centre Re covering accident years
1995, 1996 and 1997. Under the terms of the agreement, Centre Re provides
reinsurance protection, after all applicable underlying reinsurance has been
exhausted, for losses and allocated LAE in excess of a predetermined ratio of
these expenses to net premiums earned for a given accident year. The agreement
reinsures all lines of business except those for which the Company has
determined that its exposure to loss is insufficient in relation to the added
cost of inclusion in the reinsurance agreement. The following policies and
insurance types are excluded from the reinsurance agreement: bail, customs,
license and permit and miscellaneous surety bonds effective prior to January 1,
1997, mobile home and homeowners' policies effective on or after July 1, 1996,
the URC Environmental Policies, medical, dental and social service medical
malpractice insurance policies in excess of $1.0 million, realtors' errors and
omissions insurance policies, commercial earthquake policies effective on or
after January 1, 1996, and insurance policies written by Lyndon, United Capitol
and Regency. The loss and allocated LAE ratio above which the reinsurance
provides coverage is 66.0%, 65.0% and 64.0% for accident years 1995, 1996 and
1997, respectively.

40
<PAGE>
Effective July 15, 1995, the Company implemented a reinsurance program for
its DIC commercial earthquake program. The program is reinsured through a per
risk excess of loss agreement and four layers of catastrophe reinsurance. The
Company retains $50,000 per risk and $2.5 million per occurrence. The
catastrophe layers attach at $2.5 million per occurrence and allow one full
reinstatement per year after the limits have been exhausted. The program
provides for a maximum ceded loss of $37.5 million per occurrence. Effective
January 1, 1997, an additional $10.0 million of catastrophic coverage was added,
providing for a maximum ceded loss of $47.5 million.

Effective January 1, 1996, the Company entered into a reinsurance agreement
(including clash coverage) with Medical Assurance, Inc., The Doctors' Insurance
Company, and Reliance Insurance Company, with respect to its medical malpractice
business. Under the terms of the agreement, reinsurance is provided for
occurrences involving multiple physicians for $3.0 million in excess of $2.0
million per occurrence, subject to an aggregate of $6.0 million.

Effective July 1, 1996, the Company entered into a catastrophe excess
reinsurance program with respect to its mobile home and homeowners' business.
The program currently is reinsured for $28.5 million in excess of $1.5 million
per occurrence.

The Company reinsures selected classes of its surety bond business with NAC
Reinsurance Corporation and Transatlantic Reinsurance Company through two excess
of loss agreements providing coverage for losses per principal of up to $10.0
million. The Company has a retention of $1.0 million per principal with
coinsurance percentages in all excess layers.

Effective April 1, 1997, the Company entered into a 30.0% quota share
reinsurance treaty, on a funds withheld basis, to cede to Alpine Insurance
Company business produced by an Alpine affiliate.

The Company reinsures its marine, energy and commercial property insurance
under multiple layers of excess reinsurance. Coverage is provided up to $9.95
million excess of $50,000 per occurrence, excess of an aggregate retention of
$200,000 of loss occurrences in excess of $50,000.

The following table is a summary of net reinsurance recoverables and funds
withheld and other offsets relating to the Company's reinsurers at March 31,
1997:

<TABLE>
<CAPTION>
NET REINSURANCE FUNDS WITHHELD/ A.M. BEST
REINSURER RECOVERABLES OTHER OFFSETS RATING
- --------------------------------------------- --------------- --------------- ---------------------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Centre Reinsurance Company of New York....... $ 92,505 $ 70,037 A (Excellent)
Munich American Reinsurance Company.......... 21,346 0 A+ (Superior)
Generali, U.S. Branch........................ 16,630 0 A (Excellent)
Swiss Reinsurance America Incorporated....... 14,349 0 A (Excellent)
Commercial Risk Re-insurance Company......... 11,300 11,707 A (Excellent)
John Hancock Group........................... 8,734 0 A++ (Superior)
Markel Insurance Company..................... 6,266 232 A (Excellent)
Everest Reinsurance Company.................. 5,305 0 A (Excellent)
Transatlantic Reinsurance Company............ 4,687 0 A+ (Superior)
All other reinsurers......................... 28,447 1,843 N/A
--------------- -------
Total.................................. $ 209,569 $ 83,819
--------------- -------
--------------- -------
</TABLE>

41
<PAGE>
The following table is a summary of the maximum amount of loss typically
retained and ceded by Frontier Insurance, Frontier Pacific and United Capitol
(exclusive of facultative reinsurance and the Centre Re aggregate excess of loss
reinsurance agreement):

<TABLE>
<CAPTION>
MAXIMUM RETAINED LOSS MAXIMUM CEDED LOSS
PER OCCURRENCE/ PER OCCURRENCE/
RISK/PRINCIPAL (1) RISK/PRINCIPAL (1)
---------------------- --------------------
<S> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Property lines................................. $ 500 $ 9,500
Mobile home and homeowners'.................... 1,500 28,500
Casualty lines (excluding medical malpractice,
health specialties
and social services)......................... 1,000 4,000
Medical malpractice, health specialties and
social services.............................. 1,000(2) 1,000
Workers' compensation.......................... 1,000 49,000
Surety......................................... 1,000(3) 4,000(3)
Customs bonds.................................. 3,000(4) N/A
Umbrella liability............................. 1,000 4,000
Group accident and health...................... 250 750
Excess workers' compensation
and employers' liability..................... 1,000 9,000
Commercial earthquake.......................... 2,500 47,500
Marine, energy and commercial property......... 250 9,950
</TABLE>

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

(1) Amounts presented represent those amounts which are generally the maximum
retained or ceded by the Company, but which are occasionally exceeded.

(2) The maximum retained loss amount of $1.0 million relates only to losses on
policies effective during 1994 and reinsurance ceded treaty years 1985
through 1991 which have been commuted. For all other years, the maximum
retained loss per occurrence is $500,000 except, on a limited basis, where
the maximum retained loss per occurrence is $2.0 million.

(3) Effective December 31, 1995, a layer of excess reinsurance was added on a
limited basis for a maximum limit of $10.0 million per principal on a direct
basis, $2.1 million on a net basis.

(4) Amount indicated is the maximum face amount (limit) on the bond issued,
which represents the value of goods being imported that are subject to U.S.
Customs duty. The actual exposure to the Company is the amount of any unpaid
duty on the goods imported, which is generally approximately 15.0% of the
face value of the goods, and any penalties associated with late payment of
the duty.

MARKETING

The Company relies on multiple distribution channels to market its insurance
products. Malpractice insurance is marketed both directly by Med Pro and by
independent brokers and agents. License and permit bonds are marketed directly
by SDIA and by independent brokers and agents. Bail bonds are marketed by
Douglass/Frontier through a nationwide network of bail bondsmen.

The Company relies primarily on independent insurance agencies and insurance
brokerage firms to generate sales of its remaining lines of business. General
liability, workers' compensation, multi-peril and property policies are produced
on a brokerage basis through general agents, principally in California, Florida,
New Jersey, New York, Pennsylvania and Texas, and selected small agencies in New
York. Surety bonds for small contractors are produced through independent
insurance agents acting as retail brokers, and general agents and several small
insurance companies which also act as reinsurers on the business they produce.
Customs bonds are produced through a specialty agency in New York which derives
the business from a nationwide network of customs brokers located in the various
ports of entry.

42
<PAGE>
Approximately 21.6% of the Company's net premiums written for the three
months ended March 31, 1997 were generated directly by the Company. No outside
producer accounted for in excess of five percent of the gross or net premiums
written by the Company during such period and the years ended December 31, 1996,
1995 and 1994.

OPERATING RATIOS

STATUTORY COMBINED RATIO

The statutory combined ratio is the traditional measure of underwriting
experience for insurance companies. Generally, if the statutory combined ratio
is below 100.0%, an insurance company has an underwriting profit and if it is
above 100.0%, the insurer has an underwriting loss.

The following table reflects the consolidated statutory loss ratios, expense
ratios and combined ratios of Frontier Insurance, Frontier Pacific, United
Capitol and Regency, determined in accordance with statutory accounting
practices, together with the property and casualty industry-wide statutory
combined ratios after policyholders' dividends compiled by A.M. Best, for the
periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -----------------------------------------------------
MARCH 31, 1997 1996 1995 1994 1993 1992
--------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loss ratio........................... 58.7% 58.7% 60.0% 69.9% 66.4% 71.9%
Expense ratio........................ 35.2 32.2 31.1 28.2 27.8 24.9
----- --------- --------- --------- --------- ---------
Combined ratio....................... 93.9% 90.9% 91.1% 98.1% 94.2% 96.8%
----- --------- --------- --------- --------- ---------
----- --------- --------- --------- --------- ---------
Industry combined ratio
after policyholders' dividends..... N/A 105.9% 106.4% 108.4% 106.9% 115.7%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

PREMIUM-TO-SURPLUS RATIO

The following table sets forth the ratio of net premiums written during the
year to policyholders' surplus at the end of the year for Frontier Insurance,
Frontier Pacific, United Capitol and Regency for the years indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
FRONTIER INSURANCE:
Net premiums written during the year............... $ 255,446 $ 205,614 $ 179,058 $ 115,028 $ 113,508
Policyholders' surplus at end of year.............. $ 262,899 $ 171,362 $ 104,871 $ 101,418 $ 76,438
Ratio.............................................. .97/1 1.20/1 1.71/1 1.13/1 1.48/1
FRONTIER PACIFIC:
Net premiums written during the year............... $ 32,040 $ 15,143 $ 8,230 $ 3,791 $ 2,740
Policyholders' surplus at end of year.............. $ 25,985 $ 17,155 $ 16,127 $ 15,108 $ 6,522
Ratio.............................................. 1.23/1 .88/1 .51/1 .25/1 .42/1
UNITED CAPITOL:
Net premiums written during the year............... $ 25,930 $ 10,981 $ 17,051 $ 17,708 $ 17,640
Policyholders' surplus at end of year.............. $ 53,355 $ 68,026 $ 61,750 $ 65,676 $ 62,387
Ratio.............................................. .49/1 .16/1 .28/1 .27/1 .28/1
REGENCY:
Net premiums written during the year............... $ 4,489 $ 4,441 $ 4,804 $ 5,587 $ 6,047
Policyholders' surplus at end of year.............. $ 5,105 $ 4,667 $ 4,521 $ 4,308 $ 4,070
Ratio.............................................. .88/1 .95/1 1.06/1 1.30/1 1.49/1
</TABLE>

43
<PAGE>
LOSS AND LAE RESERVES

Significant periods of time, ranging up to several years, may elapse between
the occurrence of an insured loss, the reporting of the loss to the Company and
its payment of such loss. Medical malpractice and general liability lines
usually have a much longer period of time between occurrence of a loss and
payment than property lines. To recognize liabilities for unpaid losses, the
Company establishes reserves, which are balance sheet liabilities representing
estimates of amounts needed to pay claims and related expenses with respect to
insured events which have occurred, including those not yet reported ("IBNR").

The reserves for losses and LAE are estimated using loss evaluations and
actuarial projections, and represent estimates of the ultimate net cost of all
unpaid losses and LAE incurred through the end of each period. These estimates
are subject to the impact of loss development and changes in claims severity, as
well as numerous other factors, such as judicial and legislative trends and
actions, economic factors and estimates of future trends in claims frequency. As
part of this process, historical data are reviewed and consideration is given to
the anticipated impact of various factors, such as legal developments, changes
in social attitudes, economic conditions, including the effects of inflation,
and anticipated subrogation recoveries with respect to the surety line of
business. As experience develops and other data become available, these
estimates are revised, as required, resulting in increases or decreases in
reserves for insured events of prior periods. Future adjustments, if any, will
be reflected in the results of operations in the period in which recognized.

When a claim is reported, the Company's claims adjusting personnel establish
a formula case reserve, which is based on historical average claim costs, for
the estimated amount to be paid. As more pertinent information becomes available
on a claim, adjusting personnel change the reserve from a formula reserve to a
case basis reserve. This case basis reserve is an estimate of the amount of
ultimate payment, which reflects the informed judgment of such personnel, based
on the Company's reserving practices and the experience and knowledge of such
personnel regarding the nature and value of the specific type of claim.
Additionally, reserves are established by the Company on an aggregate basis to
provide for IBNR losses and to maintain the overall adequacy of reserves. The
Company also establishes a related LAE reserve on an aggregate basis
representing the estimated expense of settling claims, including legal and other
fees and general expenses of administering the claims adjustment process with
respect to reported and unreported losses. Virtually all of the Company's LAE is
classified as allocated LAE as a result of its method of handling claims through
Pioneer. The Company does not discount its reserves either on the basis of GAAP
or statutory accounting practices.

44
<PAGE>
The following table sets forth a reconciliation of the beginning and ending
loss and LAE reserve balances, net of reinsurance ceded, for each of the three
years in the period ended December 31, 1996:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Net reserves for losses and LAE,
beginning of year...................................... $ 294,393 $ 263,202 $ 216,486
Total acquired reserves.................................. 53,008 5,500 --
Incurred losses and LAE for claims related to:
Current year........................................... 160,470 126,769 97,044
Prior years............................................ (4,479) (7,514) 13,874
---------- ---------- ----------
Total incurred losses and LAE............................ 155,991 119,255 110,918
---------- ---------- ----------
Loss and LAE payments for claims relating to:
Current year........................................... 27,626 13,057 7,216
Prior years............................................ 102,160 80,507 56,986
---------- ---------- ----------
Total payments........................................... 129,786 93,564 64,202
---------- ---------- ----------
Net reserves for losses and LAE, end of year............. 373,606 294,393 263,202
Total reinsurance recoverable on
unpaid losses and LAE.................................. 165,467 73,043 49,435
---------- ---------- ----------
Gross reserves for losses and LAE, end of year........... $ 539,073 $ 367,436 $ 312,637
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The Company's reserves for unpaid losses and LAE, net of related reinsurance
recoverable, at December 31, 1995 and 1994 were decreased in the following year
by approximately $4.5 million and $7.5 million, respectively, and at December
31, 1993 were increased in the following year by approximately $13.9 million,
for claims that had occurred on or prior to the balance sheet dates. No premiums
have been accrued as a result of the changes to prior years' loss and LAE
reserves.

The net $4.5 million decrease in prior years' reserves in 1996 was the
result of favorable claims development on the workers' compensation line of
business. Included in the net development was an increase in prior years'
reserves of approximately $13.0 million which was entirely offset by subrogation
recoverables recognized in connection with a favorable court ruling in 1995. The
significant increase in the reinsurance recoverables in 1996 resulted primarily
from the acquisitions of United Capitol and Regency in 1996.

The net $7.5 million decrease in the prior years' reserves in 1995 was the
result of favorable claims development on the general liability and workers'
compensation lines and to subrogation recoveries in the surety line of business
in excess of expectations. Included in the net development was an increase in
prior years' reserves of approximately $19.0 million which was entirely offset
by subrogation recoverables recognized in connection with the favorable court
ruling in 1995. The significant increase in the reinsurance recoverable in 1995
was due to the addition of an aggregate claim excess of loss reinsurance treaty
for the majority of the Company's lines of business. See "--Reinsurance."

The $13.9 million net increase in prior years' reserves in 1994 resulted
from a $17.5 million increase in the reserves attributable to adverse medical
malpractice claims development in Florida as a result of higher than anticipated
dollar settlements partially offset by redundancies in other lines.

45
<PAGE>
The following table reflects the Company's loss and LAE reserves
development, net of estimated subrogation recoverable, from 1986 through
December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 1987 1988 1989 1990 1991 1992 1993 1994
--------- --------- --------- --------- --------- --------- --------- --------- ---------

<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid
losses & LAE........... $ 27,271 $ 43,813 $ 64,971 $ 92,384 $ 120,096 $ 161,263 $ 185,074 $ 216,486 $ 263,202
Reserves reestimated at
December 31:
1 year later......... 28,495 46,385 67,486 93,419 119,875 162,121 188,387 230,360 255,689
2 years later........ 29,587 49,495 68,793 91,457 120,550 158,746 196,005 229,334 252,678
3 years later........ 31,906 50,890 66,532 91,527 115,310 163,537 191,401 214,712 --
4 years later........ 33,425 49,694 66,656 86,508 114,790 154,217 172,654 -- --
5 years later........ 32,730 49,895 64,254 87,795 107,907 133,768 -- -- --
6 years later........ 32,740 49,492 64,700 79,459 88,803 -- -- -- --
7 years later........ 33,563 48,749 55,300 63,667 -- -- -- -- --
8 years later........ 32,357 43,099 42,687 -- -- -- -- -- --
9 years later........ 30,720 32,391 -- -- -- -- -- -- --
10 years later....... 23,375 -- -- -- -- -- -- -- --
Cumulative redundancy.... 3,896 11,422 22,284 29,717 31,293 27,495 12,420 1,774 10,524
Cumulative amount of
liability paid through
December 31:
1 year later......... 3,760 6,208 9,611 16,823 8,129 41,486 38,300 56,986 80,507
2 years later........ 7,477 12,946 20,006 13,230 35,864 62,175 74,113 113,471 148,513
3 years later........ 11,953 20,339 11,196 32,987 45,973 80,888 112,017 154,548 --
4 years later........ 16,605 14,902 24,825 39,166 58,043 104,672 139,333 -- --
5 years later........ 12,916 24,426 30,919 50,406 74,659 122,863 -- -- --
6 years later........ 18,466 27,766 39,664 61,276 86,405 -- -- -- --
7 years later........ 20,999 32,372 47,784 67,429 -- -- -- -- --
8 years later........ 23,259 38,271 50,119 -- -- -- -- -- --
9 years later........ 27,412 39,567 -- -- -- -- -- -- --
10 years later....... 27,820 -- -- -- -- -- -- -- --
Net reserve --
December 31........ 263,202
Reinsurance
recoverables....... 49,435
---------
Gross reserve........ $ 312,637
---------
---------

<S> <C> <C>
1995 1996
--------- ---------

<S> <C> <C>
Reserves for unpaid
losses & LAE........... $ 294,393 $ 373,606
Reserves reestimated at
December 31:
1 year later......... 289,914
2 years later........ --
3 years later........ --
4 years later........ --
5 years later........ --
6 years later........ --
7 years later........ --
8 years later........ --
9 years later........ --
10 years later....... --
Cumulative redundancy.... 4,479
Cumulative amount of
liability paid through
December 31:
1 year later......... 102,160
2 years later........ --
3 years later........ --
4 years later........ --
5 years later........ --
6 years later........ --
7 years later........ --
8 years later........ --
9 years later........ --
10 years later....... --
Net reserve --
December 31........ 294,393 373,606
Reinsurance
recoverables....... 73,043 165,467
--------- ---------
Gross reserve........ $ 367,436 $ 539,073
--------- ---------
--------- ---------
</TABLE>

The loss and LAE reserves of Frontier Insurance, Frontier Pacific, United
Capitol and Regency as reported in their Annual Statements prepared in
accordance with statutory accounting practices and filed with state insurance
departments are identical with those reflected in the Company's financial
statements prepared in accordance with GAAP included herein, before elimination
of inter-company transactions and except for a change resulting from the
rescission by Frontier Insurance in April 1986 of an offer to assume reinsurance
under a proposed treaty with another insurer which has been given retroactive
effect herein but was not reflected in the statutory filing with the New York
Insurance Department until the March 31, 1986 quarterly statement, thereby
reducing the GAAP reserves at December 31, 1985, by $861,000 from the statutory
reserves at such date. Further, at December 31, 1986, Frontier Insurance's loss
and LAE reserves under GAAP were lower by $138,000 than its 1986 statutory
reserves as a result of the revision of certain estimates with respect to liquor
law liability claims.

CLAIMS MANAGEMENT

The Company's philosophy is that claims management, from the initial stage
of reported claims through adjudication and/or settlement, is a critical
component for controlling underwriting losses and LAE. The Company investigates,
supervises and adjusts all claims through Pioneer. When a claim is reported, the
Company's claims adjusting personnel establish a formula case reserve, based on
historical average claim costs and expenses, and continually review and modify
such reserve as additional information with respect to such claim becomes
available.

46
<PAGE>
Pioneer personnel work closely with the Company's in-house legal staff of
over 40 attorneys, assigned exclusively to managing and adjusting claims, to
supervise, adjudicate and settle insurance claims. The Company's in-house
attorneys are located in offices in Rock Hill, Garden City and White Plains, New
York, and in Orlando and Fort Lauderdale, Florida. The Company intends to open
additional offices for its in-house attorneys in Ohio and Texas. The Company
also retains outside counsel when required under the particular circumstances of
a claim.

The Company maintains specific controls with respect to its claims
management process. Such controls include the requirements that claims can
remain on formula reserve only for a specified period of time; that any claim
payment in excess of $50,000 must be approved by an officer of the Company; and
that any claim in excess of $300,000 must be supervised by a committee comprised
of the Company's claims, underwriting and legal personnel.

INVESTMENTS

Funds, including reserve funds, are invested until required for the
Company's operations, subject to restrictions on permissible investments
established by applicable state insurance codes. The Company's investment
strategy is to maximize after-tax income while generally limiting investments to
investment grade securities with high liquidity. Prior to 1996, the Company's
investment portfolio was managed by Asset Allocation and Management Company
("Asset Allocation") and General Re New England Asset Management, Inc. ("New
England"), registered investment advisors which specialize in insurance company
portfolio management, pursuant to guidelines established by the Company. In
1996, the Company hired a Chief Investment Officer and the core fixed income
portfolio is now managed internally. Asset Allocation and New England provide
investment advisory and related services to the Company in asset classes such as
mortgage-backed securities, sinking fund preferred stocks and other special
classes of securities.

The following table contains information concerning the Company's investment
portfolio at March 31, 1997:

<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------------
MARKET AMOUNT REFLECTED PERCENT
COST (1) VALUE ON BALANCE SHEET OF TOTAL
---------- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
AVAILABLE-FOR-SALE SECURITIES:
Fixed maturity securities:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies........... $ 37,862 $ 37,210 $ 37,210 5.1%
Obligations of states and political
subdivisions........................ 199,839 199,432 199,432 27.4
Corporate securities.................. 191,718 190,098 190,098 26.1
Mortgage-backed securities............ 283,046 280,459 280,459 38.6
---------- ---------- -------- -----
Total fixed maturity securities..... 712,465 707,199 707,199 97.2
Equity securities....................... 19,505 20,351 20,351 2.8
---------- ---------- -------- -----
Total available-for-sale-
securities........................ $ 731,970 $ 727,550 $ 727,550 100.0%
---------- ---------- -------- -----
---------- ---------- -------- -----
</TABLE>

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

(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.

47
<PAGE>
The following table sets forth a profile of the Company's fixed maturity
investment portfolio by rating at March 31, 1997:

<TABLE>
<CAPTION>
MARKET AMOUNT REFLECTED PERCENT
S&P/MOODY'S RATING (1) VALUE ON BALANCE SHEET OF TOTAL
- ------------------------------------------------------ ---------- ---------------- -----------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
AAA/Aaa (including U.S. Treasuries of $22,339)........ $ 409,984 $ 409,984 58.0%
AA/Aa................................................. 111,734 111,734 15.8
A/A................................................... 138,207 138,207 19.5
BBB/Bbb............................................... 47,250 47,250 6.7
All other............................................. 24 24 --
---------- -------- -----
Total........................................... $ 707,199 $ 707,199 100.0%
---------- -------- -----
---------- -------- -----
</TABLE>

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

(1) Ratings are assigned by S&P or, if no S&P rating is available, by Moody's
Investors Service Inc.

The following table sets forth the maturity profile of the Company's
portfolio of fixed maturity investments at March 31, 1997:

<TABLE>
<CAPTION>
MARKET AMOUNT REFLECTED PERCENT
MATURITY VALUE ON BALANCE SHEET OF TOTAL
- ------------------------------------------------------ ---------- ---------------- -----------
<S> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Due in one year or less............................... $ 3,415 $ 3,415 .5%
Due after one year to 5 years......................... 102,478 102,478 14.5
Due after five years to 10 years...................... 109,687 109,687 15.5
Due after 10 years.................................... 211,160 211,160 29.9
Mortgage-backed securities............................ 280,459 280,459 39.6
---------- -------- -----
Total........................................... $ 707,199 $ 707,199 100.0%
---------- -------- -----
---------- -------- -----
</TABLE>

The following table summarizes the Company's investment results for the
three months ended March 31, 1997 and the five years ended December 31, 1996,
calculated on the mean of total investments as of the first and last day of each
calendar quarter:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -----------------------------------------------------
MARCH 31, 1997 1996 1995 1994 1993 1992
------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Total net investment
income.................. $ 12,614 $ 38,933 $ 30,055 $ 22,975 $ 22,371 $ 20,208
Average annual pre-tax
yield................... 6.5% 6.4% 6.4% 6.6% 7.8% 7.9%
Average annual after-tax
yield................... 5.1% 4.8% 4.9% 5.4% 6.3% 6.2%
Effective federal income
tax rate on total net
investment income....... 24.8% 24.8% 23.7% 19.8% 19.3% 21.2%
</TABLE>

48
<PAGE>
RATINGS

Insurance companies are rated by rating agencies to provide insurers and
consumers meaningful information with respect to specific insurance companies.
Frontier Insurance, Frontier Pacific, United Capitol and Regency currently are
rated A- (Excellent) by A.M. Best, the fourth highest of A.M. Best's fifteen
ratings designations. Lyndon Property and its two active life insurance
subsidiaries are rated B++ (Very Good) by A.M. Best. In assigning a rating to an
insurance company, A.M. Best performs both quantitative and qualitative
evaluations. The quantitative component measures profitability, leverage/
capitalization and liquidity. The qualitative component measures spread of risk,
quality and appropriateness of reinsurance, quality and diversification of
assets, adequacy of loss reserves, adequacy of surplus, capital
structure/holding company, management experience and objectives and market
presence. Insurance companies assigned an "A" or "A-" rating by A.M. Best are
companies which, in A.M. Best's opinion, have demonstrated excellent overall
performance when compared to the standards established by A.M. Best and have a
strong ability to meet their obligations to policyholders over a long period of
time. Insurance companies assigned a "B++" or "B+" rating by A.M. Best are
companies which, in A.M. Best's opinion, have demonstrated very good overall
performance when compared to the standards established by A.M. Best and have a
good ability to meet their obligations to policyholders over a long period of
time.

In addition to their A.M. Best ratings, Frontier Insurance and Frontier
Pacific have been given an A+ (Good) claims-paying ability rating by S&P. The
"A" range (A+, A and A-) is the second highest of four ratings ranges within
what S&P considers the "secure" category. An S&P claims-paying ability rating is
S&P's opinion of an insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms.
Claims-paying ability ratings are assigned at the request of the insurance
company. Ratings are based on current information furnished by the insurance
company or obtained by S&P from other sources it considers reliable and on
extensive quantitative and qualitative analysis, including consideration of
ownership and support factors if applicable. Insurance companies assigned a
claims-paying ability rating in the "A" range are believed by S&P to provide
good financial security, but their capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.

REGULATION

GENERAL

The Insurance Subsidiaries are subject to varying degrees of regulation and
supervision in the jurisdictions in which they transact business under statutes
which delegate regulatory, supervisory and administrative powers to state
insurance commissioners. Such regulation generally is designed to protect
policyholders rather than investors and relates to such matters as the standards
of solvency which must be met and maintained; the licensing of insurers and
their agents; the nature of and examination of the affairs of insurance
companies, which includes periodic market conduct examinations by the regulatory
authorities; annual and other reports, prepared on a statutory accounting basis,
required to be filed on the financial condition of insurers or for other
purposes; establishment and maintenance of reserves for unearned premiums and
losses; and requirements regarding numerous other matters. In general, the
Insurance Subsidiaries must file all rates for insurance directly underwritten
with the insurance department of each state in which they operate on an admitted
basis; reinsurance generally is not subject to rate regulation.

49
<PAGE>
RESTRICTIONS ON DIVIDENDS AND DISTRIBUTIONS

State insurance statutes typically place limitations on the amount of
dividends or other distributions payable by insurance companies in order to
protect their solvency. New York, the jurisdiction of incorporation of Frontier
Insurance, requires that dividends be paid only out of earned surplus and limits
the annual amount payable without the prior approval of the New York Department
of Insurance to the lesser of 10.0% of policyholders' surplus or 100.0% of
adjusted net investment income. California, the jurisdiction of incorporation of
Frontier Pacific, currently limits the annual amount of dividends payable
without the prior approval of the California Insurance Department to the greater
of 10.0% of policyholders' surplus at the end of the previous calendar year or
100.0% of net income for the previous calendar year. Wisconsin, North Carolina
and Missouri, the jurisdictions of United Capitol, Regency and Lyndon Property,
respectively, also have statutory restrictions on the payments of dividends. In
addition, in connection with the Company's acquisition of United Capitol, the
Office of the Commissioner of Insurance in Wisconsin has issued an order
requiring United Capitol to seek regulatory approval of any dividend payment to
shareholders.

At March 31, 1997, $27.6 million was available for payment of dividends by
the Insurance Subsidiaries. However, the Company's current policy is for its
Insurance Subsidiaries to retain their capital for growth and not to pay any
dividends.

HOLDING COMPANY REGULATIONS

The Company is subject to statutes governing insurance holding companies in
various jurisdictions. Typically, such statutes require the Company to file
information periodically with the state insurance regulatory authorities,
including information concerning its capital structure, ownership, financial
condition and general business operations. Under the terms of applicable state
statutes, any person or entity desiring to purchase more than a specified
percentage (commonly 10.0%) of the Company's outstanding voting securities is
required to obtain regulatory approval for the purchase. Article 15 of the New
York Insurance Law relating to holding companies, to which the Company is
subject, requires, INTER ALIA, disclosure of transactions between Frontier
Insurance and the Company or any of its subsidiaries, that such transactions
satisfy certain standards, including that they be fair, equitable and reasonable
and that certain material transactions be specifically non-disapproved by the
New York Department of Insurance. Further, prior approval by such Department is
required for affiliated sales, purchases, exchanges, loans or extensions of
credit, or investments, which involve 5.0% or more of Frontier Insurance's
admitted assets as of the preceding December 31st. The laws of California,
Wisconsin, North Carolina and Missouri, applicable to Frontier Pacific, United
Capitol, Regency and Lyndon Property, respectively, are substantially equivalent
to the laws of New York with respect to insurance holding companies. Further,
under the laws of Louisiana, any person acquiring 10.0% of the voting securities
of the Company would be deemed to be in control of United General, the title
insurance company in which the Company has a 33.3% equity interest and,
accordingly, such acquisition would require approval from the Louisiana
Commissioner of Insurance.

NAIC OVERSIGHT OF INSURANCE COMPANIES

The NAIC has established twelve financial ratios to assist state insurance
departments in their oversight of the financial condition of insurance companies
operating in their respective states. The NAIC calculates these ratios based on
information submitted by insurers on an annual basis and shares the information
with the applicable state insurance departments. The ratios relate to leverage,
profitability, liquidity and loss reserve development. Frontier Insurance's
percentage increase in surplus exceeded the acceptable range during 1995 and
1996 due to capital infusions by the Company of $45.0 million and $64.2 million,
respectively, to fund projected growth and to retain Frontier Insurance's A-
(Excellent) rating. In 1995, Frontier Insurance's estimated reserve deficiency
to surplus ratio exceeded the acceptable range primarily as a result of reserve
strengthening; in 1996, the estimated reserve deficiency to surplus ratio was
within the acceptable range. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

50
<PAGE>
In their ongoing effort to improve solvency regulation, the NAIC and
individual states have enacted certain laws and statutory financial statement
reporting requirements. For example, NAIC rules require audit certification of
statutory financial statements as well as actuarial certification of loss and
LAE reserves therein. Other activities are focused on greater disclosure of an
insurer's reliance on reinsurance and changes in its reinsurance programs, and
tighter rules on accounting for certain overdue reinsurance.

In 1994, the NAIC implemented a risk-based capital measurement formula to be
applied to all property-casualty insurance companies, which calculates a minimum
required statutory net worth, based on the underwriting, investment, credit loss
reserve and other business risks applicable to the insurance company's
operations. An insurance company that does not meet threshold risk-based capital
measurement standards could be required to reduce the scope of its operations
and ultimately could become subject to statutory receivership proceedings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Regulation."

STATUTORY SURPLUS AND CAPITAL

In connection with the licensing of insurance companies, insurance
regulators may limit or prohibit the writing of new business by an insurance
company within its jurisdiction when, in the regulator's judgment, the insurance
company is not maintaining adequate statutory surplus and capital. The Company
currently does not anticipate that any regulator would limit the amount of new
business that its Insurance Subsidiaries may write as a result of their current
levels of statutory surplus and capital.

INVESTMENT REGULATION

The Insurance Subsidiaries are subject to state laws and regulations that
require diversification of investment portfolios and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as non-
admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of March 31, 1997, the investments of
the Insurance Subsidiaries complied with such laws and regulations in all
material respects.

GUARANTY FUNDS

All fifty states have separate insurance guaranty fund laws requiring
property and casualty insurance companies doing business within their respective
jurisdictions to be members of their guaranty associations. These associations
are organized to pay covered claims (as defined and limited by the various
guaranty association statutes) under insurance policies issued by insolvent
insurance companies. Such guaranty association laws, except in New York, create
post-assessment associations which make assessments against member insurers to
obtain funds to pay association covered claims after an insurer insolvency
occurs. These associations levy assessments (up to prescribed limits) on all
member insurers in the covered lines of business in that state. Maximum
assessments required by law in any one year generally vary between 1% and 2% of
annual premiums written by a member in that state. New York has a pre-assessment
guaranty fund which makes assessments prior to an insolvency occurring. New
Jersey, North Carolina and Pennsylvania have created, by statute, a separate
guaranty association for workers' compensation business lines. Some states
permit member insurers to recover assessments paid through surcharges on
policyholders or through full or partial premium tax offsets, while other states
permit recovery of assessments through the rate filing process.

The property and casualty guaranty association assessments paid by Frontier
Insurance, Frontier Pacific, United Capitol and Regency in the aggregate for the
three months ended March 31, 1997 and 1996, and for the years ended December 31,
1996, 1995 and 1994 were $159,000, $142,000, $949,000, $477,000, and $1.3
million, respectively.

51
<PAGE>
The Insurance Subsidiaries record guaranty assessments when such assessments
are billed by the respective guaranty funds. In addition, each Insurance
Subsidiary's policy is to accrue for any significant insolvencies when the loss
is probable and the assessment amount can be reasonably estimated. In the case
of most insurance insolvencies, the ability of each Insurance Subsidiary to
reasonably estimate the insolvent insurer's liabilities or develop a meaningful
range of the insolvent's liabilities is significantly impaired by inadequate
financial data with respect to the estate of the insolvent company as supplied
by the guaranty funds.

Although the amount of any assessments applicable to guaranty funds cannot
be predicted with certainty, the Company believes that future guaranty
association assessments for insurer insolvencies will not have a material
adverse effect on the liquidity or capital resources of the Insurance
Subsidiaries.

SHARED MARKETS

As a condition of their respective licenses to do business, each of the
Insurance Subsidiaries is required to participate in mandatory property and
casualty shared market mechanisms or pooling arrangements which provide various
insurance coverages to individuals or other entities that are otherwise unable
to purchase such coverage in the commercial insurance marketplace. Each
Insurance Subsidiary's participation in such shared markets or pooling
mechanisms is generally proportionate to the amount of that Insurance
Subsidiary's direct writings for the type of coverage written by the specific
pooling mechanism in the applicable state.

Commercial automobile insurance and workers' compensation lines have
mandatory pooling arrangements on a state-by-state basis for segments of the
market that have difficulty finding coverage from insurers. The shared market
mechanisms for providing commercial automobile coverages are generally assigned
risk plans, reinsurance facilities and joint underwriting facilities. For
workers' compensation, the pooling in each state is generally in the form of a
reinsurance type arrangement with servicing carriers providing the policy
services and claims handling services. The National Council of Compensation
Insurance provides services for calculating member pooling of losses and
expenses in 32 states, with the remainder of the states having their own
independent servicing plans. Certain of the Insurance Subsidiaries participate
in the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe
reinsurance fund. Commercial properties are also subject to pooled insurance on
a small scale through the various Fair Access to Insurance Requirements Plans
which exist in most states. To date, participation by the Insurance Subsidiaries
in such mandatory pools and underwriting associations has not materially
affected the Company's results of operations.

The amount of future losses or assessments from the shared market mechanisms
and pooling arrangements described above cannot be predicted with certainty.
Although it is possible that future losses or assessments from such mechanisms
and pooling arrangements could have a material adverse effect on results of
operations, the Company does not expect future losses or assessments to have a
material adverse effect on liquidity or capital resources of the Insurance
Subsidiaries.

POSSIBLE LEGISLATIVE AND REGULATORY CHANGES

Several committees of Congress have made inquiries and conducted hearings as
part of a broad study of the regulation of insurance companies and legislation
has been introduced from time to time in Congress which, if enacted, could
result in the federal government assuming some role in the regulation of the
insurance industry.

Although the federal government does not regulate the business of insurance
directly, federal initiatives often affect the insurance business in a variety
of ways. Current and proposed federal measures which may significantly affect
the insurance business include changes in environmental laws and tort reform.

It is not possible to predict the outcome of any of the foregoing
legislative or administrative activities or the potential effects thereof on the
Company or its Insurance Subsidiaries. See "Risk Factors-- Regulation."

52
<PAGE>
COMPETITION

The property and casualty insurance business is highly competitive with
respect to a number of factors, including overall financial strength of the
insurer, ratings by rating agencies, premiums charged, policy terms and
conditions, services offered, reputation and broker compensation. Although the
Company's underwriting strategy is to achieve an underwriting profit by
identifying niche markets and specialty insurance programs which it believes
afford favorable opportunities for profitability due to limited potential
competition, it nevertheless encounters competition from carriers engaged in
insuring risks in the broader lines of business which encompass the niche
markets or specialty programs, and such competition is expected to increase as
the Company expands its operations. See "Risk Factors--Competition."

EMPLOYEES

At June 30, 1997, the Company (including Lyndon) had approximately 920
full-time employees, 16 of whom are executive management, and approximately 50
part-time employees. The Company is not a party to any collective bargaining
agreement and believes its relationship with its employees to be good.

PROPERTIES

The Company owns a three-story office building at 195 Lake Louise Marie
Road, Rock Hill, New York, in which its executive offices and insurance
operations are located. A 50,000 square foot addition is under construction and
is anticipated to be completed in September 1997. The Company also owns a one-
story building in Rock Hill, New York, which it uses for storage and a portion
of which is rented, and an airplane for which it leases facilities at a local
airport.

The Company leases office space at twelve locations in seven states at an
aggregate monthly rental of approximately $133,000. In addition, Lyndon leases
office space at five locations in four states at an aggregate monthly rental of
approximately $35,000.

The Company believes that upon completion of the addition at Rock Hill, New
York, it will have adequate space for expansion of its existing operations.

53
<PAGE>
MANAGEMENT

The following table lists each director and each executive officer of the
Company, together with his age and office(s) held:

<TABLE>
<CAPTION>
NAME AGE OFFICE
- ----------------------------------------- ----------- -----------------------------------------
<S> <C> <C>
Walter A. Rhulen......................... 65 Chairman of the Board, President and
Chief Executive Officer
Harry W. Rhulen.......................... 33 Executive Vice President, Chief Operating
Officer and Director
Peter H. Foley........................... 50 Executive Vice President
Thomas J. Dietz.......................... 55 Vice President
James E. Kroh............................ 53 Vice President--Human Resources
Mark H. Mishler.......................... 38 Vice President--Treasurer and Chief
Financial Officer
Richard F. Seyffarth..................... 49 Vice President--Chief Investment Officer
Peter L. Rhulen.......................... 58 Director
Lawrence E. O'Brien...................... 56 Director
Douglas C. Moat.......................... 65 Director
Alan Gerry............................... 68 Director
</TABLE>

WALTER A. RHULEN has been the Chairman of the Board, President and Chief
Executive Officer of the Company since commencement of its operations in July
1986 and the President of Frontier Insurance since 1976. Mr. Rhulen was also the
President of Rhulen Agency, a position he held for more than 22 years, which
office he resigned in 1986. Mr. Rhulen has more than 40 years experience in the
insurance business.

HARRY W. RHULEN was elected Executive Vice President of the Company in
October 1996, and Chief Operating Officer and a director in May 1997. Prior
thereto, Mr. Rhulen had been a Vice President of the Company since June 1990 and
an employee of the Company since June 1989.

PETER H. FOLEY was elected Executive Vice President of the Company in
October 1996, and prior thereto had been a Vice President of the Company since
May 1995. Prior to joining the Company, Mr. Foley served as Vice President of
Aegis Security Insurance Company from September 1993 to June 1995, Executive
Vice President and co-founder of Connecticut Surety Insurance Company from May
1993 to September 1993, and Senior Vice President of E.W. Blanch, Inc. from
November 1991 to May 1993. Mr. Foley has served in various executive officer
positions in the insurance industry for more than 22 years, and has served as
principal of his own consulting firm.

THOMAS J. DIETZ has been a Vice President of the Company since July 1990 and
President of Med Pro since its inception in 1986. For more than five years prior
thereto, Mr. Dietz was a Vice President of Medical Quadrangle, Inc., an
insurance agency which acted as a broker to the Company through February 1987.
Mr. Dietz, has more than 28 years of experience in the insurance business.

JAMES E. KROH was elected Vice President--Human Resources of the Company in
May 1996, and joined the Company as an employee in 1995. Prior to joining the
Company, Mr. Kroh served in excess of five years as Vice President for PHICO
Insurance Company.

54
<PAGE>

MARK H. MISHLER was elected Vice President--Treasurer and Chief Financial
Officer of the Company in May 1997. Prior thereto, Mr. Mishler had been Vice
President--Finance and Treasurer of the Company since October 1996, having
joined the Company in 1987. Mr. Mishler has more than 15 years experience in the
insurance business.

RICHARD F. SEYFFARTH was elected Vice President and Chief Investment Officer
in May 1997, having joined the Company in 1996. Prior thereto, Mr. Seyffarth
served as Vice President of Home Insurance Company for over seven years.

PETER L. RHULEN has been a director of the Company since commencement of its
operations in August 1986 and a member of the Audit Commitee since May 1997. Mr.
Rhulen was formerly Vice Chairman of Markel/Rhulen, a position he held from
October 1989 to September 1992, and now acts as an independent insurance
consultant. Mr. Rhulen is also Vice Chairman of the Board and President of RAI
Partners, Inc. (formerly Rhulen Agency), a firm of which he had been an
executive officer for more than 25 years.

LAWRENCE E. O'BRIEN has been a director of the Company and a member of the
Audit Committee since June 1990. Mr. O'Brien, a CPCU, is the President of
O'Brien Management Company, Inc., an insurance consulting firm, a position he
has held since January 1988, and co-founder and a director of Underwriter
Management Associates, a managing general insurance agency with which he had
been associated since its inception in 1983 until its sale in September 1990.
From 1976 to 1987, Mr. O'Brien was Executive Vice President of Associated Risk
Managers, a New York statewide affiliation of independent insurance agents
marketing specialized insurance programs.

DOUGLAS C. MOAT has been a director of the Company and a member of the Audit
Committee since August 1994. Mr. Moat is Chairman of the Manhattan Group, Inc.,
an insurance and financial services firm. Mr. Moat has over 40 years' experience
in insurance and financial services sales and management, including 13 years as
a private consultant. During his career, he has held positions as Executive Vice
President, The Home Group; Director--Financial Services Corporate Staff, ITT
Corp.; Vice President, USLIFE Corp., and President of USLIFE's mutual fund
subsidiary; and Vice President, The Glens Falls Group and the National Life
Assurance Company of Canada. Mr. Moat is a member of the New York Bar
Association, serves on several insurance and banking committees, and writes and
speaks extensively on insurance topics, often acting as an expert witness.

ALAN GERRY was elected a director of the Company in March 1996. Mr. Gerry is
the founder of Cablevision Industries Corporation, the eighth largest multiple
cable system operator in the United States and was its Chairman of the Board and
Chief Executive Officer until its merger with Time Warner Entertainment in
January 1996. Mr. Gerry is a member of the Board of Directors of Time Warner
Entertainment, the National Cable Television Association, and C-SPAN. He was a
founding member of the Board of the Cable Alliance for Education and is a past
President of the New York State Cable Television Association.

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

Messrs. Walter A. Rhulen and Peter L. Rhulen are brothers and Mr. Harry W.
Rhulen is the son of Mr. Walter A. Rhulen.

All directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified. Officers are elected annually
and serve at the pleasure of the Board of Directors, subject to rights, if any,
under contracts of employment.

55
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has appointed an Audit Committee, a Compensation
Committee and an Incentive and Non-Incentive Stock Option Committee. The Audit
Committee, comprised of three independent directors, Messrs. Lawrence E.
O'Brien, Douglas C. Moat and Peter L. Rhulen, meets with the Company's
independent auditors to review the scope of their annual audit, the adequacy of
the Company's system of internal controls, and the sufficiency of its financial
reporting. The Compensation Committee, comprised of three independent directors,
Messrs. O'Brien, Moat and Gerry, establishes the compensation program for Mr.
Walter A. Rhulen, who is the Company's President, Chief Executive Officer and
Chairman of the Board, and recommends to the Board of Directors, in consultation
with Mr. Walter A. Rhulen, a general compensation program for all officers. The
Incentive and Non-Incentive Stock Option Committee selects optionees and option
terms in accordance with the Company's stock option plans. The Company does not
have a standing nominating committee.

COMPENSATION OF DIRECTORS

The Company pays each director, other than executive officers, an annual
retainer of $24,000, plus reimbursement of expenses, and each director who
serves as a member of the Audit Committee an additional retainer of $2,000, plus
reimbursement of expenses.

EMPLOYMENT AGREEMENTS

Mr. Walter A. Rhulen is employed under an agreement with the Company
effective January 1, 1993 and expiring December 31, 1997, which provides for
annual base compensation of $500,000 plus an annual bonus in the event the
Company's earnings per share before extraordinary items ("EPS") exceeds its
highest EPS during the five preceding years by at least 10.0%. In such event,
Mr. Rhulen's bonus shall be $50,000, plus a multiple of $30,000 for each
percentage point or fraction thereof by which the Company's EPS for the year
exceeds the 10.0% threshold.

In addition, in 1993, Mr. Walter A. Rhulen was granted an option to purchase
the present equivalent of 825,000 shares of Common Stock at the present
equivalent of $22.73 per share. On the date the option was granted, the closing
price of the Common Stock on the NYSE was the present equivalent of $13.58.

The Company is the beneficiary of a $5.0 million "keyman" life insurance
policy on the life of Mr. Walter A. Rhulen.

56
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth as of June 30, 1997 the beneficial ownership
of the Common Stock by (i) each person known by the Company to own beneficially
five percent or more of such shares, (ii) each director, (iii) certain executive
officers of the Company (Messrs. Walter A. Rhulen, Thomas J. Dietz, Harry W.
Rhulen, Peter H. Foley, and Mark H. Mishler), and (iv) all directors and
executive officers as a group, together with their respective percentage
ownership of the outstanding shares:

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
----------------------------------------------
<S> <C> <C> <C>
CURRENTLY ACQUIRABLE PERCENT OF
NAME AND ADDRESS OWNED WITHIN 60 DAYS(1) OUTSTANDING
- ----------------------------------------------------------- ---------- ----------------- ---------------
Walter A. Rhulen (2)....................................... 2,154,998(3) -- 7.3%
Peter L. Rhulen (2)........................................ 1,813,500(4) -- 6.2%
Lawrence E. O'Brien........................................ 68,784 2,750 *
Douglas C. Moat............................................ 8,526 2,750 *
Alan Gerry................................................. -- 2,750 *
Thomas J. Dietz............................................ 135,258 148,500 1.0%
Harry W. Rhulen............................................ 177,104(5) 214,446(6) 1.3%
Peter H. Foley............................................. 1,970 6,576 *
Mark H. Mishler............................................ -- 6,380 *
Estate of Jesse M. Farrow (2).............................. 1,694,902 -- 5.8%
Denver Investment Advisors, LLC............................ 2,437,452(7) -- 8.3%
1225--17th Street, 26th Floor
Denver, CO 80202
Wellington Management Company.............................. 2,278,142(8) -- 7.7%
75 State Street
Boston, MA 02109
All directors and executive officers....................... 4,360,140 384,152 16.1%
as a group (9 persons)
</TABLE>

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

* Less than 1.0%

(1) Reflects number of shares of Common Stock acquirable upon exercise of
options.

(2) Address is 195 Lake Louise Marie Road, Rock Hill, NY 12775-8000.

(3) Does not include 9,222 shares of Common Stock owned by the wife of Mr.
Walter A. Rhulen, the beneficial ownership of which Mr. Rhulen disclaims.

(4) Does not include 490,782 shares, 26,432 shares, 22,810 shares and 25,300
shares, respectively, of Common Stock owned by two children of Mr. Peter L.
Rhulen, Mr. Rhulen's spouse, The Eileen and Peter Rhulen Foundation, Inc.
for which Mr. Rhulen acts as President, and a charitable foundation for
which Mr. Rhulen acts as trustee. Mr. Rhulen disclaims beneficial ownership
of such shares.

(5) Includes 8,076 and 1,054 shares owned by a daughter and son of Mr. Harry W.
Rhulen, respectively, for whom he acts as custodian under the Uniform Gifts
to Minors Act. Does not include 14,220 shares of Common Stock owned by Mr.
Rhulen's wife, as to which Mr. Rhulen disclaims beneficial ownership.

(6) Includes 206,250 shares purchasable at $22.73 per share upon exercise of
options granted to Mr. Walter A. Rhulen, his father, and given to Mr. Harry
W. Rhulen by his father.

(7) Information is from Schedule 13G, dated February 10, 1997, filed by Denver
Investment Advisors, LLC, which reflects shared dispositive power with
respect to 2,437,452 shares.

(8) Information is from a Schedule 13G, dated January 24, 1997, filed by
Wellington Management Company, which reflects shared dispositive power with
respect to 2,278,142 shares.

57
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock and 1,000,000 shares of preferred stock, $.01 par value.

COMMON STOCK

Holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders generally, including the election
of directors. Subject to the rights of holders of preferred stock, the holders
of the Common Stock are entitled to receive such dividends as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of the liquidation, dissolution or winding up of the
Company, holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities of the Company, subject to the rights of
holders of preferred stock. The holders of the Common Stock have no preemptive
or conversion rights and are not subject to further calls or assessments by the
Company.

PREFERRED STOCK

The Company's Certificate of Incorporation, as amended, authorizes the Board
of Directors of the Company (without stockholder approval) to, among other
things, issue shares of preferred stock from time to time in one or more series,
each series to have such designations, preferences, relative, participating,
optional and other special rights, and qualifications, limitations or
restrictions (which may differ with respect to each series), as the Board of
Directors may fix by resolution.

LIMITATION ON DIRECTORS' LIABILITY

The Company's Certificate of Incorporation provides that no director of the
Company shall be personally liable to the Company's stockholders for monetary
damages for the breach of any fiduciary duty as a director, except (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, as amended from time to time, or (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of these provisions is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from grossly negligent behavior), except
in the situations described above. These provisions do not limit the liability
of directors under the federal securities laws.

TRANSFER AGENT AND REGISTRAR

American Stock Transfer & Trust Company, New York, New York is the transfer
agent and registrar for the Common Stock.

58
<PAGE>
UNDERWRITING

Subject to the terms and conditions set forth in the purchase agreement (the
"Purchase Agreement") among the Company and each of the underwriters named below
(the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters has severally agreed to purchase, the
aggregate number of shares of Common Stock set forth opposite its name below.

<TABLE>
<S> <C>
UNDERWRITERS NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................................................
Donaldson, Lufkin & Jenrette Securities Corporation............................................
Oppenheimer & Co., Inc.........................................................................
Smith Barney Inc...............................................................................
Stephens Inc...................................................................................
-----------------
Total................................................................................ 4,000,000
-----------------
-----------------
</TABLE>

Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Donaldson, Lufkin & Jenrette Securities Corporation, Oppenheimer & Co., Inc.,
Smith Barney Inc. and Stephens Inc. are acting as representatives (the
"Representatives") of the several Underwriters.

In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Common Stock
being sold pursuant to such Agreement if any of the Common Stock being sold
pursuant to such Agreement are purchased. The Purchase Agreement provides that
in the event of a default by an Underwriter, the purchase commitments of
non-defaulting Underwriters may in certain circumstances be increased.

The Underwriters propose initially to offer the Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers (who may include the Underwriters) at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may re-allow, a discount not in excess of $ per share to
certain other dealers. After the Offering, the public offering price, concession
and discount may be changed.

The Company has granted to the Underwriters an option to purchase up to an
aggregate of 600,000 additional shares of Common Stock exercisable for 30 days
after the date hereof, to cover over-allotments, if any, at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. To the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of such Common Stock that the number
of shares of Common Stock to be purchased by it shown in the foregoing table
bears to the total number of shares of Common Stock initially offered to the
Underwriters hereby.

The Company and certain officers and directors of the Company have agreed
not to sell or otherwise dispose of any shares of Common Stock for a period of
90 days after the date of this Prospectus without the prior written consent of
Merrill Lynch. Upon the consummation of the Offering, it is expected that such
lock-up agreements will cover an aggregate of approximately shares of
Common Stock. There are no known formal or informal plans, arrangements,
agreements or understandings regarding any intention to seek the consent of
Merrill Lynch to release any of the foregoing restrictions at this time. It is
generally the policy of Merrill Lynch to review any such requested consent on a
case by case basis in light of the applicable circumstances.

The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.

59
<PAGE>
The Underwriters do not intend to confirm sales of the shares of Common
Stock offered hereby to any accounts over which they exercise discretionary
authority.

Until the distribution of the Common Stock to be sold in the Offering is
completed, rules of the Securities and Exchange Commission may limit the ability
of the Underwriters to bid for and purchase the shares of Common Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the initial resale of the Shares to be sold in the Offering,
i.e., if they sell more shares of Common Stock than are set forth on the cover
page of this Prospectus, the Underwriters may reduce such short position by
purchasing shares of Common Stock in the open market. The Underwriters may also
elect to reduce any short position by exercising all or part of the
over-allotment option described above.

The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who initially resold such shares.

In general, purchases of a security for the purpose of stabilization to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.

This Offering is being made pursuant to the provisions of Section 2710(c)(8)
of the Conduct Rules of the National Association of Securities Dealers, Inc.

Neither the Company nor any Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that any transaction
described above may have on the price of the Common Stock. In addition, neither
the Company nor any Underwriter makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Epstein Becker & Green, P.C., New York, New York.
Members of Epstein Becker & Green, P.C., own an aggregate of 68,000 shares of
Common Stock. Certain legal matters will be passed upon for the Underwriters by
Simpson Thacher & Bartlett (a partnership which includes professional
corporations), New York, New York.

EXPERTS

The consolidated financial statements (including schedules incorporated by
reference) of the Company at December 31, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996, appearing or incorporated by
reference in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein or incorporated by reference in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

The consolidated financial statements of Lyndon at December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996,
incorporated by reference in this Prospectus and Registration Statement have
been audited by Arthur Andersen LLP, independent auditors, as set forth in their
report thereon incorporated by reference in this Registration Statement, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.

60
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Consolidated Balance Sheets--December 31, 1996 and 1995.................................................... F-3
Consolidated Statements of Income--Years Ended December 31, 1996, 1995 and 1994............................ F-5
Consolidated Statements of Shareholders' Equity--Years Ended December 31, 1996, 1995 and 1994.............. F-6
Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994........................ F-7
Notes to Consolidated Financial Statements................................................................. F-8
Supplemental Data--Quarterly Results of Operations (Unaudited)............................................. F-30
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets (Unaudited)--March 31, 1997 and December 31, 1996.............................. F-31
Consolidated Statements of Income (Unaudited)--Three Months Ended March 31, 1997 and 1996.................. F-33
Consolidated Statements of Cash Flows (Unaudited)--Three Months Ended March 31, 1997 and 1996.............. F-34
Notes to Consolidated Financial Statements (Unaudited)..................................................... F-35
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Frontier Insurance Group, Inc.

We have audited the accompanying consolidated balance sheets of Frontier
Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Frontier Insurance Group, Inc. and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

As described in Note B to the consolidated financial statements, effective
January 1, 1994, the Company adopted Financial Accounting Standards Board
Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities."

/S/ Ernst & Young LLP

New York, New York
July 14, 1997

F-2
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
DECEMBER 31
--------------------

<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Investments--Note H:
Securities, available for sale--at fair value:
Fixed maturities (amortized cost: 1996--$680,281; 1995--$510,056)... $ 685,277 $ 521,402
Equity securities (cost: 1996--$13,871; 1995--$20,132).............. 16,271 21,024
Short-term investments................................................ 133,835 7,353
Investment in limited liability corporation........................... 2,937 2,935
--------- ---------
TOTAL INVESTMENTS............................................... 838,320 552,714

Cash.................................................................. 8,332 5,115
Agents' balances due, less allowances for doubtful accounts
(1996--$2,225; 1995--$3,346)........................................ 50,558 25,779
Premiums receivable from insureds, less allowances for doubtful
accounts (1996--$60; 1995--$45)..................................... 26,225 24,177
Net reinsurance recoverables, less allowances for possible
uncollectible amounts (1996--$517; 1995--$115)--Notes D and N....... 192,569 76,955
Accrued investment income............................................. 9,364 7,458
Federal income taxes recoverable...................................... 3,987 217
Deferred policy acquisition costs..................................... 32,871 18,797
Deferred federal income tax asset--Note E............................. 27,620 23,627
Home office building, property and equipment--at cost, less
accumulated depreciation and amortization (1996--$11,184;
1995--$7,679)....................................................... 37,167 29,668
Intangible assets, less accumulated amortization (1996--$3,808;
1995--$2,370)....................................................... 11,738 3,082
Other assets.......................................................... 7,656 5,759
--------- ---------
TOTAL ASSETS.................................................... $1,246,407 $ 773,348
--------- ---------
--------- ---------
</TABLE>

See notes to the consolidated financial statements.

F-3
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
DECEMBER 31
--------------------

<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
LIABILITIES
Policy liabilities--Notes C and D:
Unpaid losses..................................................... $ 429,506 $ 309,164
Unpaid loss adjustment expenses................................... 109,567 58,272
Unearned premiums................................................. 185,728 107,282
--------- ---------
TOTAL POLICY LIABILITIES........................................ 724,801 474,718

Funds withheld under reinsurance contracts--Note N.................... 64,065 28,226
Cash dividend payable to shareholders................................. 1,904 1,568
Note payable--Note F.................................................. 25,000
Other liabilities..................................................... 20,110 14,103
--------- ---------
TOTAL LIABILITIES............................................... 810,880 543,615

COMMITMENTS AND CONTINGENCIES--Notes L and O

GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S CONVERTIBLE
SUBORDINATED DEBENTURES--Note M..................................... 166,953

SHAREHOLDERS' EQUITY--Notes A, G, I, J, and O
Preferred stock, par value $.01 per share; authorized and unissued--
1,000,000 shares
Common stock, par value $.01 per share; (shares authorized: 1996--
50,000,000; 1995--20,000,000, shares issued: 1996--29,379,104;
1995-- 26,125,002)................................................ 294 260
Additional paid-in capital.......................................... 221,837 167,457
Net unrealized gains--Note H........................................ 4,807 7,955
Retained earnings................................................... 42,424 54,849
--------- ---------
SUBTOTAL........................................................ 269,362 230,521

Less treasury stock--at cost (1996--91,080 shares; 1995--82,800
shares)............................................................. 788 788
--------- ---------
TOTAL SHAREHOLDERS' EQUITY...................................... 268,574 229,733
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $1,246,407 $ 773,348
--------- ---------
--------- ---------
</TABLE>

See notes to the consolidated financial statements.

F-4
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
REVENUES--Note D
Premiums written.............................................................. $ 402,799 $ 264,314 $ 198,892
Premiums ceded................................................................ (90,936) (43,557) (11,604)
---------- ---------- ----------
NET PREMIUMS WRITTEN...................................................... 311,863 220,757 187,288
Increase in net unearned premiums............................................. (45,874) (24,537) (30,533)
---------- ---------- ----------
NET PREMIUMS EARNED....................................................... 265,989 196,220 156,755
Net investment income......................................................... 37,226 30,035 24,453
Realized capital gains (losses)............................................... 1,707 20 (1,478)
---------- ---------- ----------
TOTAL NET INVESTMENT INCOME--Note H....................................... 38,933 30,055 22,975
Gross claims adjusting income--Note B......................................... 55 130 255
---------- ---------- ----------
TOTAL REVENUES............................................................ 304,977 226,405 179,985
EXPENSES
Losses--Notes C and D......................................................... 97,058 89,422 84,777
Loss adjustment expenses--Notes C and D....................................... 58,933 29,833 26,141
Amortization of policy acquisition costs--Note B.............................. 57,540 42,258 30,463
Underwriting and other expenses............................................... 30,540 20,717 17,274
Minority interest in income of consolidated subsidiary trust--Note M.......... 2,277
Interest expense--Note F...................................................... 1,970 895
---------- ---------- ----------
TOTAL EXPENSES............................................................ 248,318 183,125 158,655
---------- ---------- ----------
INCOME BEFORE INCOME TAXES...................................................... 56,659 43,280 21,330
Income taxes--Note E
State......................................................................... 723 1,173 554
Federal....................................................................... 15,869 10,896 3,796
---------- ---------- ----------
TOTAL INCOME TAXES........................................................ 16,592 12,069 4,350
---------- ---------- ----------
NET INCOME.............................................................. $ 40,067 $ 31,211 $ 16,980
---------- ---------- ----------
---------- ---------- ----------
PER SHARE DATA--Notes B and O
Primary earnings per common share............................................. $ 1.39 $ 1.09 $ .60
---------- ---------- ----------
---------- ---------- ----------
Fully diluted earnings per common share....................................... $ 1.37 $ 1.08 $ .59
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(in thousands):
Primary....................................................................... 28,906 28,626 28,582
Fully diluted................................................................. 30,438 28,810 28,802
</TABLE>

See notes to the consolidated financial statements.

F-5
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

THREE YEARS ENDED DECEMBER 31, 1996

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL GAINS(LOSSES)
COMMON PAID-IN ON SECURITIES RETAINED TREASURY TOTAL
STOCK CAPITAL AVAILABLE-FOR-SALE EARNINGS STOCK SHAREHOLDERS'
----------- ----------- ---------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994.................... $ 172 $ 166,577 $ 55 $ 18,890 $ 185,694
Add (deduct):
Net income................................... 16,980 16,980
Expenses associated with 1993 issuance of
2,816,000 shares of common stock........... (47) (47)
Common stock split (3 for 2)................. 86 (86)
Purchase of 70,800 shares as treasury
stock...................................... $ (654) (654)
Stock options exercised...................... 2 635 637
Cumulative effect of change in accounting
principle--Note B.......................... 3,651 3,651
Net unrealized losses on securities
available-for-sale (net of tax)............ (10,013) (10,013)
Cash dividends paid and accrued ($.23 per
share)..................................... (5,984) (5,984)
----------- ----------- -------- ---------- ---------- -------------
Balances at December 31, 1994.................. 260 167,079 (6,307) 29,886 (654) 190,264
----------- ----------- -------- ---------- ---------- -------------
Add (deduct):
Net income................................... 31,211 31,211
Purchase of 12,000 shares as treasury
stock...................................... (134) (134)
Stock options exercised...................... 378 378
Transfer of securities to available-for-sale
(net of tax)--Note B....................... 2,753 2,753
Net unrealized gains on securities
available-for-sale (net of tax)............ 11,509 11,509
Cash dividends paid and accrued ($.24 per
share)..................................... (6,248) (6,248)
----------- ----------- -------- ---------- ---------- -------------
Balances at December 31, 1995.................. 260 167,457 7,955 54,849 (788) 229,733
----------- ----------- -------- ---------- ---------- -------------
Add (deduct):
Net income................................... 40,067 40,067
Common stock dividend (10%).................. 28 45,208 (45,236)
Stock options exercised...................... 2 1,101 1,103
Issuance of 476,174 shares of common stock... 4 8,071 8,075
Net unrealized losses on securities
available-for-sale (net of tax)............ (3,148) (3,148)
Cash dividends paid and accrued ($.25 per
share)..................................... (7,256) (7,256)
----------- ----------- -------- ---------- ---------- -------------
Balances at December 31, 1996.................. $ 294 $ 221,837 $ 4,807 $ 42,424 $ (788) $ 268,574
----------- ----------- -------- ---------- ---------- -------------
----------- ----------- -------- ---------- ---------- -------------
</TABLE>

See notes to the consolidated financial statements.

F-6
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
<S> <C> <C> <C>
1996 1995 1994
----------- ----------- -----------
OPERATING ACTIVITIES
Net income............................................................... $ 40,067 $ 31,211 $ 16,980
Adjustments to reconcile net
income to net cash provided
by operating activities:
Increase in policy liabilities....................................... 145,636 80,857 63,274
Decrease (increase) in reinsurance balances.......................... (35,473) 5,403 15,619
Increase in agents' balances and premiums receivable................. (21,402) (8,825) (6,950)
Increase in deferred policy acquisition costs........................ (14,366) (5,584) (6,393)
Increase in accrued investment income................................ (1,369) (2,380) (161)
Deferred income tax expense (benefit)................................ 2,279 (175) (5,162)
Depreciation and amortization........................................ 3,687 2,384 305
Realized capital losses (gains)...................................... (1,707) (20) 1,478
Other................................................................ (895) 2,110 2,871
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES............................................. 116,457 104,981 81,861
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities available-for-sale............... 129,523 46,650 26,245
Proceeds from sales of fixed maturities held-to-maturity................. 12,534
Proceeds from calls, paydowns and maturities of fixed maturities
available-for-sale..................................................... 191,888 77,999 25,250
Proceeds from calls, paydowns and maturities of fixed maturities
held-to-maturity....................................................... 33,783 19,175
Proceeds from sales of equity securities................................. 15,256 36,465 63,200
Purchases of fixed maturities available-for-sale......................... (430,713) (294,379) (35,994)
Purchases of fixed maturities held-to-maturity........................... (33,327) (109,127)
Purchases of equity securities........................................... (5,533) (4,559) (68,783)
Purchases of wholly-owned subsidiaries, net of cash acquired............. (28,996)
Net (purchases) sales of short-term investments.......................... (108,889) 5,534 4,001
Additions to home office building........................................ (1,178) (2,568) (2,191)
Purchases of property and equipment...................................... (9,431) (328) (996)
Proceeds from sales of property and equipment............................ 438
Purchase of renewal rights............................................... (8) (633) (3,427)
Investment in limited liability corporation.............................. (2) (2,400)
----------- ----------- -----------
NET CASH USED IN
INVESTING ACTIVITIES............................................. (247,645) (125,229) (82,647)
FINANCING ACTIVITIES
Proceeds from guaranteed preferred beneficial interest in Company's
convertible subordinated debentures.................................... 166,914
Proceeds from borrowings................................................. 7,100 25,000
Repayment of borrowings.................................................. (33,792)
Issuance of common stock................................................. 1,103 378 590
Cash dividends paid...................................................... (6,920) (6,243) (5,717)
Purchase of treasury stock............................................... (134) (654)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES............................................. 134,405 19,001 (5,781)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH........................................ 3,217 (1,247) (6,567)
Cash at beginning of year........................................ 5,115 6,362 12,929
----------- ----------- -----------
CASH AT END OF YEAR................................................ $ 8,332 $ 5,115 $ 6,362
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

See notes to the consolidated financial statements.

F-7
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE A--OPERATIONS AND ACQUISITIONS

Frontier Insurance Group, Inc., and its subsidiaries (the "Company"), is
principally a specialty property and casualty insurer operating in 50 states.
The Company's principal lines of business are medical malpractice, general
liability, surety, and commercial earthquake accounting for approximately 34.6%,
28.2%, 16.2% and 4.1% of gross premiums written in 1996, respectively. The
medical malpractice programs are marketed principally through the Company's
wholly-owned subsidiary, Medical Professional Liability Agency, Ltd ("Med Pro").
The Company also has a bail bond program, which is marketed through
Douglass/Frontier LLC, a fifty percent owned entity (see below). The Company's
remaining lines of business are marketed primarily through independent agents.

In April 1994, the Company completed the acquisition of certain assets of
SDIA, Inc. ("SDIA") constituting that company's California license and permit
bond insurance agency business for $3,200,000 and entered into a five-year
consulting agreement with the owner/principal. This acquisition was accounted
for as a purchase. The purchase price of $3,200,000 exceeded by the same amount
the net book value of the business acquired.

In May 1995, the Company and R. Spencer Douglas III ("Douglass") formed a
California limited liability corporation, Douglass/Frontier LLC
("Douglass/Frontier"), a bail bond insurance agency. The Company made an initial
cash investment of $2,400,000, and Douglass contributed the assets and
liabilities of his wholly owned existing bail bond agency. The Company and
Douglass share equally in the ownership of Douglass/Frontier. All of the
Company's bail bond business is written through Douglass/Frontier and for the
years ended December 31, 1996 and 1995, was approximately $7,608,000 and
$4,800,000, respectively. At December 31, 1996 and 1995, Douglass/Frontier had
premium balances due the Company in the normal course of business of $2,358,000
and $1,271,000, and notes payable to the Company of $3,291,000 and $212,000,
respectively. At December 31, 1996, the Company had an interest of $537,000 in
the undistributed earnings of Douglass/Frontier.

In December 1995, the Company purchased certain assets from Bankers Multiple
Line Insurance Company ("BMLIC") constituting BMLIC's realtors' errors and
omissions ("Realtors' E & O") business for $400,000. The purchase agreement
provides that, if certain conditions cease to exist in future years, the
purchase price may be reduced. In addition, the Company was paid approximately
$8,000,000 to assume BMLIC's obligations under its existing Realtors' E & O
policies consisting of $2,287,000 of unearned premium reserves and $5,713,000 of
undiscounted loss and loss adjustment expense ("LAE") reserves at the
acquisition date. The Company's maximum liability relative to its assumption of
the loss and LAE reserves is $7,141,000 with BMLIC retaining the liability for
any losses in excess of this amount. During 1996, the Company earned the
previously assumed unearned premiums and paid $3,948,000 in losses and LAE, and
at December 31, 1996 holds related reserves of $1,765,000.

In May 1996, the Company completed the acquisition of United Capitol Holding
Company ("United Capitol Holding") and its wholly-owned subsidiaries, United
Capitol Insurance Company ("United Capitol"), United Capitol Managers, Inc.
(renamed Olympic Underwriting Managers, Inc.) and Fischer Underwriting Group,
Inc., for $31,020,000, which exceeded the fair value of the net assets acquired
by approximately $7,700,000. From its headquarters in Atlanta, Georgia, these
entities underwrite specialty risks such as asbestos abatement, environmental
liability and directors' and officers' liability. This acquisition was accounted
for as a purchase.

In September 1996, the Company completed the acquisition of Regency
Insurance Company ("Regency") and Emrol Installment Premium Discount, Inc.
("Emrol") in exchange for 476,174 shares of

F-8
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A--OPERATIONS AND ACQUISITIONS (CONTINUED)
the Company's Common Stock, which had a market value per share of $16.96 on June
11, 1996, the effective date of the agreement. The purchase price, which is
inclusive of $221,000 of capitalized acquisition costs, exceeded the fair value
of the net assets acquired by approximately $2,400,000. Regency, an underwriter
of non-standard automobile insurance is located in Charlotte, North Carolina.
Emrol finances premiums primarily for policyholders of Regency. This acquisition
was accounted for as a purchase.

The assets acquired, liabilities assumed and the related goodwill of the
companies purchased in 1996, are summarized in the following table (in
thousands):

<TABLE>
<CAPTION>
UNITED
CAPITOL REGENCY AND
HOLDING EMROL TOTAL
------------- ----------- ----------
<S> <C> <C> <C>
Purchase Price...................................... $ 31,020 $ 8,296 $ 39,316
Assets acquired:
Invested assets................................... 74,966 4,168 79,134
Other assets...................................... 49,797 11,833 61,630
------------- ----------- ----------
Total assets acquired............................... 124,763 16,001 140,764
Liabilities assumed:
Unpaid losses and LAE............................. 84,823 4,163 88,986
Other liabilities................................. 16,604 5,944 22,548
------------- ----------- ----------
Total liabilities assumed........................... 101,427 10,107 111,534
------------- ----------- ----------
Net assets acquired................................. 23,336 5,894 29,230
------------- ----------- ----------
Excess of purchase price over net assets acquired... $ 7,684 $ 2,402 $ 10,086
------------- ----------- ----------
------------- ----------- ----------
</TABLE>

F-9
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE A--OPERATIONS AND ACQUISITIONS (CONTINUED)
The following schedule summarizes the Company's pro forma unaudited results
of operations for the years ended December 31, 1996 and 1995, assuming the
purchase of United Capitol Holding, Regency and Emrol had been consummated as of
January 1, 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
<S> <C> <C>
1996 1995
---------- ----------

<CAPTION>
(UNAUDITED)
<S> <C> <C>
Net premiums earned................................................ $ 271,452 $ 214,347
Net investment income (including net capital gains and losses)..... 41,385 33,831
Other revenues..................................................... 55 130
---------- ----------
Total revenues................................................. 312,892 248,308
Losses and LAE..................................................... 158,963 130,068
Amortization of policy acquisition costs........................... 57,248 43,489
Underwriting and other expenses.................................... 32,615 25,991
Minority interest in income of consolidated subsidiary trust....... 2,277
Interest expense................................................... 1,970 895
---------- ----------
Total expenses................................................. 253,073 200,443
---------- ----------
Income before income taxes......................................... 59,819 47,865
Income tax expense................................................. 17,831 13,317
---------- ----------
Net income..................................................... $ 41,988 $ 34,548
---------- ----------
---------- ----------
Per share data:
Primary earnings per common share................................ $ 1.44 $ 1.19
---------- ----------
---------- ----------
Fully diluted earnings per common share.......................... $ 1.41 $ 1.18
---------- ----------
---------- ----------
</TABLE>

The foregoing pro forma financial information has been prepared for
informational purposes only and includes certain adjustments relating to
investment income, amortization of goodwill, and also for 1995, loss and other
expenses, together with the related income tax effects. The pro forma financial
information is not necessarily indicative of the results of operations as they
would have been had the transactions been consummated on the assumed dates.

The Company's Preferred Stock may be issued from time to time by the Board
of Directors in one or more series and classes and with such dividend rights,
conversion rights, voting rights, redemption provisions, liquidation
preferences, and other rights and restrictions as the Board of Directors may
determine.

On December 31, 1996, the Company held a Special Meeting of Stockholders and
voted to adopt an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of the Company's Common Stock from
20,000,000 to 50,000,000.

F-10
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies followed by the Company are summarized
below.

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION: The accompanying
financial statements have been prepared in accordance with generally accepted
accounting principles ("GAAP"), which, as to insurance companies, differ from
the statutory accounting practices prescribed or permitted by regulatory
authorities. The consolidated financial statements include the accounts and
operations of Frontier Insurance Group, Inc. and all subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

USE OF ESTIMATES: The preparation of financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.

RECOGNITION OF PREMIUM REVENUES: Direct, assumed, and ceded reinsurance
premiums written are recognized as earned pro rata over the terms of the related
insurance policies.

INVESTMENTS: Effective January 1, 1994, the Company adopted Financial
Accounting Standards Board ("FASB") Statement 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES ("FASB 115"). Under FASB 115,
investments in fixed maturities are classified in three categories:
held-to-maturity, trading and available-for-sale; investments in equity
securities are classified as either available-for-sale or trading.
Held-to-maturity securities are reported at cost, adjusted for amortization of
premium or discount; trading securities are reported at fair value, with
unrealized gains and losses included in earnings; and available-for-sale
securities are reported at fair value with unrealized gains and losses excluded
from earnings and reported in a separate component of shareholders' equity, net
of applicable income taxes. This change in accounting had no effect on net
income; however, the accounting change increased shareholders' equity at January
1, 1994 by $3,651,000, net of applicable income taxes, representing the amount
of unrealized gains on fixed-maturity investments classified as
available-for-sale. Under the former rules, debt securities (principally bonds,
notes and redeemable preferred stocks) were carried at cost, adjusted for the
amortization of premium or discount and other-than-temporary market value
declines. Unrealized gains and losses were excluded from both earnings and
shareholders' equity.

In December 1995, the Company reclassified all of its securities classified
as held-to-maturity to the available-for-sale category as permitted by the
FASB's Special Report, A GUIDE TO IMPLEMENTATION OF STATEMENT 115 ON ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES--QUESTIONS AND ANSWERS.
The securities reclassified had a carrying value of $190,474,000 and a market
value of $194,709,000 at the date of transfer. This reclassification resulted in
a $2,753,000 increase, net of applicable income taxes, in shareholders' equity.

Fixed maturities available-for-sale (principally bonds and notes) are
carried at fair value. Fair values for available-for-sale fixed maturity
securities are based on quoted market prices, where available.

For fixed maturity securities not actively traded, fair values are estimated
using values obtained from independent pricing services. For mortgage backed
securities, the Company considers estimates of future principal prepayments in
the calculation of the constant effective yield necessary to apply the interest
method. If a difference arises between the prepayments anticipated and actual
prepayments received, the Company recalculates the effective yield to reflect
the actual payments received and the anticipated future

F-11
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
payments. Equity securities (principally common and nonredeemable preferred
stocks) are carried at fair value, based on quoted market prices. Short-term
investments are carried at their principal balances, which approximates their
fair value. Realized gains and losses from the sales or liquidation of
investments are determined using the specific identification basis. Changes in
the fair value of available-for-sale securities are reflected as unrealized
gains or losses directly in shareholders' equity net of federal income tax.

The investment in Douglass/Frontier is accounted for under the equity method
based on Douglas/ Frontier's GAAP results of operations.

HOME OFFICE BUILDING, PROPERTY AND EQUIPMENT: Home office building is
stated at cost, net of accumulated depreciation computed, for both financial
reporting and federal income tax purposes, on the straight-line basis over an
estimated useful life of 31.5 years. Property and equipment is stated at cost
net of accumulated depreciation and amortization computed, for financial
reporting purposes, on the straight-line basis over estimated useful lives
between three to ten years and, for federal income tax purposes, using
accelerated methods and guideline lives ranging from three to seven years.
During 1996, 1995, and 1994, depreciation and amortization expense was
$3,413,000, $2,440,000, and $1,939,000, respectively.

In April 1993 and in July 1996, the Company put into service and began to
occupy its new home office facility and purchased a corporate jet, respectively.
The cost of the facility's construction and purchase of the jet was financed
internally by the Company. However, to receive favorable tax status, title to
the facility and jet resides with the County of Sullivan Industrial Development
Agency ("IDA") which, in turn, issued to the Company its twenty-year bonds with
a face value equal to the total cost of the facility and jet. Under the
provisions of related agreements, title to the facility and jet reverts to the
Company on maturity of the bonds, or sooner for a nominal fee, should the
Company so desire. Accordingly, as a result of these agreements, the home office
facility and corporate jet are reported in the accompanying financial statements
as, "Home office building, property and equipment." As of December 31, 1996, the
outstanding, par value of the IDA bonds was $24,574,000; which approximates the
carrying values of such assets.

DEFERRED POLICY ACQUISITION COSTS: Recoverable policy acquisition costs
that vary with and are directly related to the production of business, such as
commissions and premium taxes, net of reinsurance allowances, are deferred and
amortized to income as the related premiums are earned. Anticipated losses, LAE,
and policy maintenance expenses, based on historical and current experience, are
considered in determining the recoverability of such deferred policy acquisition
costs. When the anticipated losses, LAE, acquisition and policy maintenance
expenses exceed the related unearned premiums, without considering anticipated
investment income, a provision for the indicated deficiency is recorded.

INTANGIBLE ASSETS: Intangible assets are stated at cost, net of accumulated
amortization computed on a straight-line basis over estimated useful lives
ranging from two to seven years for insurance renewal rights and five to fifteen
years for other intangible assets, including goodwill. The Company assesses the
recoverability of intangible assets by determining whether the amortization of
the balance over its remaining life can be recovered through the undiscounted
future operating cash flows of the acquired operations.

UNPAID LOSSES AND LAE: The liabilities for unpaid losses and LAE represent
the estimated liabilities for reported claims, claims incurred but not yet
reported ("IBNR"), and the related LAE. The liabilities for unpaid losses and
LAE are determined using case-basis evaluations and actuarial analyses and
represent estimates of the ultimate expected cost of all losses and LAE unpaid
at the balance sheet dates.

F-12
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The liabilities for unpaid losses and LAE have been reduced by estimated
salvage and subrogation recoverable and have not been reduced from their
ultimate values by the effects of discounting estimated ultimate payments to
their present value.

REINSURANCE: Assumed reinsurance premiums written, commissions, and unpaid
losses are accounted for based principally on the reports received from the
ceding insurance companies and in a manner consistent with the terms of the
related reinsurance agreements. Liabilities for unpaid losses, LAE and unearned
premiums are stated gross of ceded reinsurance recoverables. Deferred policy
acquisition costs are stated net of the amounts of reinsurance ceded, as are
premiums written and earned, losses and LAE incurred, and amortized acquisition
costs.

CONTINGENT REINSURANCE COMMISSIONS: Contingent reinsurance commissions are
accounted for on an earned basis and are accrued, in accordance with the terms
of the applicable reinsurance agreement, based on the estimated level of
profitability relating to such reinsured business. Accordingly, the
profitability of the reinsured business is continually reviewed and as
adjustments become necessary, such adjustments are reflected in current
operations. Contingent reinsurance commissions are included in other assets and
other liabilities.

INCOME TAXES: Income tax provisions are based on income reported for
financial statement purposes, adjusted for permanent differences between
financial and taxable income. Deferred federal income taxes are recognized using
the liability method, whereby tax rates are applied to the temporary differences
between the financial reporting and tax bases of assets and liabilities.
Deferred tax assets and liabilities are adjusted for changes in tax rates or
laws, and the adjustment is reflected in income during the period in which such
change is enacted.

EARNINGS PER SHARE: Primary earnings per common share are computed by
dividing net income by the weighted average common shares outstanding during the
period. The weighted average shares outstanding have been adjusted retroactively
to reflect the effects of stock splits and stock dividends. The effect of common
stock equivalents (stock options) is excluded from the calculations because
their effect is not material. Fully diluted earnings per common share assume the
conversion of all securities whose contingent issuance would have a dilutive
effect on earnings.

GROSS CLAIMS ADJUSTING INCOME: Claims adjusting income is accounted for on
an accrual basis, gross of related expenses. During 1996, 1995, and 1994,
operating expenses included with underwriting and other expenses associated with
claims adjusting income amounted to $637,000, $203,000, and $331,000,
respectively.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1996, the Financial
Accounting Standards Board issued Statement 125, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, which provides
accounting and reporting standards for sales, securitizations, and servicing of
receivables and other financial assets, secured borrowing and collateral
transactions, and the extinguishments of liabilities. The Statement is to be
applied to transactions occurring after December 31, 1996 including transfers of
assets pursuant to securitization structures that previously were entered into.
However, the FASB has issued a proposed amendment that would delay until 1998
the effective date of certain of the statement's provisions that deal with
securities lending, repurchase and dollar repurchase agreements and the
recognition of collateral. The Company will adopt Statement 125 in the first
quarter

F-13
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1997, excluding the provisions that deal with securities lending, repurchase and
dollar repurchase agreements, and the recognition of collateral, which will be
adopted in 1998 pursuant to the proposed amendment. The Company does not believe
the effect of the adoption will be material to its financial position or results
of operations.

RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the 1996 presentation.

NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

The liabilities for unpaid losses and LAE are estimated by management
utilizing methods and procedures which they believe are reasonable. These
liabilities are necessarily subject to the impact of future changes in claim
severity and frequency, as well as numerous other factors. Although management
believes that the estimated liabilities for unpaid losses and LAE are
reasonable, because of the extended period of time over which such losses are
reported and settled, the subsequent development of these liabilities may not
conform to the assumptions inherent in their determination and, accordingly, may
vary from the estimated amounts included in the accompanying financial
statements. To the extent that the actual emerging loss experience varies from
the assumptions used in the determination of these liabilities, they are
adjusted to reflect actual experience. Such adjustments, to the extent they
occur, are reported in the period recognized.

The anticipated effect of inflation is implicitly considered when estimating
reserves for losses and LAE.

Although anticipated price increases due to inflation are considered in
estimating the ultimate claim costs, the increase in average severities of
claims is caused by a number of factors that vary with the types of policies
written. Average severities are projected based on historical trends adjusted
for implemented changes in underwriting standards, policy provisions, and
general economic trends. Those anticipated trends are monitored based on actual
development and are adjusted as necessary. The effects of such adjustments are
reported in the period recognized.

In December 1990, the New York State Court of Claims rendered a decision in
favor of the Company holding that a State University of New York ("SUNY")
medical school faculty member engaged in the clinical practice of medicine at a
SUNY medical facility, corollary to such physician's faculty activities, was
within the scope of such physician's employment by SUNY and was protected
against malpractice claims arising out of such activity by the State of New York
and not under the Company's medical malpractice policy. The decision was
affirmed on appeal by the New York State Appellate Division in November 1991 and
not appealed by the State. In July 1992, the State of New York enacted
legislation eliminating medical school faculty members of SUNY engaged in the
clinical practice of medicine at a SUNY medical facility from indemnification by
the State with respect to malpractice claims arising out of such activity,
retroactive to July 1, 1991. In an opinion filed on September 3, 1993 the Court
of Claims of the State of New York held, inter alia, that the July 1992
legislation by the State of New York eliminating SUNY medical school faculty
members engaged in the clinical practice of medicine, as part of their
employment by SUNY, from indemnification by the State with respect to
malpractice claims arising out of such activity was not to be applied
retroactively. This decision was affirmed by the New York State Appellate
Division in April 1994. Subsequently, in February 1995, the Appellate Division
granted leave to the Company and the State of

F-14
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
New York to have the issues of the Company's entitlement to recover its costs of
defense and its costs of settlement ruled on by the State's highest Court, the
New York Court of Appeals. In December 1995, the New York Court of Appeals ruled
on this issue and concluded that the Company was entitled to recoveries from the
State for such medical malpractice claims. As a result of this decision, the
Company believes that it will benefit economically by not being ultimately
responsible for certain claims against SUNY physicians for whom it presently
carries reserves and be entitled to reimbursement for certain claims previously
paid; accordingly, in 1996 and 1995, the Company recorded subrogation
recoverables of approximately $13,000,000 and $19,000,000, respectively,
representing the amount of claims already paid and the reserves currently held
by the Company on the cases that management believes are reimbursable by the
State of New York. In January 1997, the New York Court of Claims rendered a
decision granting summary judgement to the Company on three SUNY cases that were
previously paid by the Company. This decision has been appealed by the State of
New York. To the extent the amount of the actual recovery varies, such
difference will be reported in the period recognized. The Company is continuing
to defend all SUNY faculty members against malpractice claims that have been
asserted and is maintaining reserves therefor adjusted for the anticipated
recoveries.

The following table sets forth a reconciliation of the beginning and ending
loss and LAE reserve balances, net of reinsurance ceded, for each of the three
years in the period ended December 31, 1996 (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Net reserves for losses and LAE, beginning of year........................... $ 294,393 $ 263,202 $ 216,486
Total acquired reserves...................................................... 53,008 5,500
Incurred losses and LAE for claims relating to:
Current year............................................................... 160,470 126,769 97,044
Prior years................................................................ (4,479) (7,514) 13,874
---------- ---------- ----------
Total incurred losses and LAE................................................ 155,991 119,255 110,918
---------- ---------- ----------
Loss and LAE payments for claims relating to:
Current year............................................................... 27,626 13,057 7,216
Prior years................................................................ 102,160 80,507 56,986
---------- ---------- ----------
Total payments............................................................... 129,786 93,564 64,202
---------- ---------- ----------
Net reserves for losses and LAE, end of year................................. 373,606 294,393 263,202
Total reinsurance recoverable on unpaid losses and LAE....................... 165,467 73,043 49,435
---------- ---------- ----------
Gross reserves for losses and LAE, end of year............................... $ 539,073 $ 367,436 $ 312,637
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

The Company's reserves for unpaid losses and LAE, net of related reinsurance
recoverable, at December 31, 1995 and 1994 were decreased in the following year
by approximately $4,479,000 and $7,514,000, respectively, and at December 31,
1993 the reserves were increased in the following year by approximately
$13,900,000, for claims that had occurred prior to the balance sheet dates. No
premiums have been accrued as a result of the changes to prior year loss and LAE
reserves.

The $4,479,000 decrease in prior years' reserves in 1996 was the result of
favorable claims development on the workers' compensation line of business.
Included in the net development is an increase in

F-15
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
prior years' reserves of approximately $13,000,000 which was entirely offset by
subrogation recoverables recognized in connection with a favorable court ruling
in 1995. The significant increase in the reinsurance recoverable in 1996 was due
to the contribution to the recoverable by United Capitol and Regency, which were
acquired in 1996, and the change in the type of reinsurance from an aggregate
claim excess of loss, to a stop loss for the majority of the Company's losses.

The $7,514,000 decrease in the prior years' reserves in 1995 was the result
of favorable claims development on the general liability and worker's
compensation lines and to subrogation recoveries in the surety line of business
in excess of expectations. Included in the net development, was an increase in
prior years' reserves of approximately $19,000,000, which was entirely offset by
additional subrogation recoverables recognized in connection with the favorable
court ruling in 1995. The significant increase in the reinsurance recoverable in
1995 was due to the change in the type of reinsurance from an aggregate claim
excess of loss, to a stop loss for the majority of the Company's losses.

The $13,874,000 increase in prior years' reserves in 1994 resulted from a
$17,500,000 increase in the reserves attributable to adverse medical malpractice
claims development in Florida from higher than anticipated dollar settlements
and from redundancies in other lines.

Because of the adverse development experienced in 1994, the Company has
significantly restructured the manner in which it adjudicates its claims. The
change in process included, among other things, placing more reliance on
internal claim examiners and in-house attorneys than on third parties,
especially for the Company's medical malpractice claims in Florida. Management
believes that the revised process will result in better control over the
ultimate costs to adjudicate its claims and the related indemnity costs enabling
management to settle such claims for amounts reflected in the accompanying
financial statements. However, management recognizes that many factors could
impact the successful implementation of its revised process, and to the extent,
future claim costs are not reduced from current levels as anticipated in the
implementation plan, actual ultimate claim costs could vary, perhaps
significantly, from those included in the accompanying financial statements.

NOTE D--REINSURANCE

The Company maintains reinsurance with various unrelated insurance
companies, principally for its direct business written, whereby amounts written
in excess of certain retention limits are ceded to those companies generally
under reinsurance treaty arrangements. Beginning in 1995, the Company entered
into a three-year stop loss reinsurance contract with Centre Reinsurance Company
of New York ("Centre Re"). Under the terms of the agreement, Centre Re provides
reinsurance protection within certain accident year and contract aggregate
dollar limits for losses and LAE in excess of a predetermined ratio of these
expenses to earned premiums for a given accident year for all lines of business
except bail, customs, license and permit, and miscellaneous surety bonds. The
loss and LAE ratio above which the reinsurance provides coverage is 66%, 65%,
and 64% for accident years 1995 through 1997, respectively.

Although the reinsurance companies are liable to the Company for the amounts
reinsured, the Company remains liable to its insureds for the full amount of the
policies written whether or not the reinsurance companies meet their
obligations. Consequently, allowances are established for amounts deemed
uncollectible. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentration of credit risk from similar geographic regions,
activities or economic characteristics of the reinsurers. At December 31, 1996,

F-16
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D--REINSURANCE (CONTINUED)
the Company has outstanding gross reinsurance recoverables of $74,002,000 from
its largest reinsurer, Centre Re; however, under the terms of the reinsurance
arrangements, the Company is withholding $63,766,000 of funds due Centre Re.
Accordingly, the net outstanding recoverable from Centre Re is $10,236,000. Of
the remaining net reinsurance recoverables balance, approximately 43% is due
from three reinsurers; one rated A+ (Superior) and two rated A (Excellent) by
A.M. Best Company, Inc.

The following is a summary of the maximum amount of loss retained and ceded
by the Company for new and renewal policies as of December 31, 1996, 1995, and
1994 (exclusive of facultative reinsurance and the Centre Re stop loss contract)
(in thousands):

<TABLE>
<CAPTION>
MAXIMUM RETAINED LOSS MAXIMUM CEDED LOSS
PER OCCURRENCE/ PER OCCURRENCE/
RISK/PRINCIPAL RISK/PRINCIPAL
------------------------------- -------------------------------
DECEMBER 31 DECEMBER 31
------------------------------- -------------------------------
1996 1995 1994 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Property lines............................. $ 500 $ 200 $ 200 $ 9,500 $ 800 $ 800
Casualty lines (excluding medical
malpractice, health specialties and
social services)......................... 1,000 1,000 1,000 4,000 1,000 1,000
Medical malpractice, health specialties and
social services.......................... 1,000(1) 1,000(1) 1,000(1) 1,000 1,000 1,000
Workers' compensation...................... 1,000 1,000 1,000 2,000 2,000 2,000
Surety..................................... 1,000(5) 1,000(5) 1,000 4,000(5) 4,000(5) 500
Custom bonds............................... 3,000(3) 3,000(3) 650(3) N/A N/A N/A
Umbrella liability......................... 1,000 1,000 400 4,000 4,000 4,800
Group accident and health.................. 250 250 250 750 750 750
Excess workers' compensation/ employers'
liability................................ 1,000(4) 1,000(4) 1,000(4) 9,000(4) 9,000(4) 9,000(4)
Earthquake................................. 2,500(2) 2,500 47,500(2) 7,500
Homeowners................................. 1,000(6) 14,000(6)
Ocean marine............................... 250 9,750
Directors' and officers' liability......... 1,000 4,000
</TABLE>

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

(1) For certain risks and policy years, the maximum retained loss per occurrence
is $500,000. On a very limited basis, the maximum retained loss per
occurrence is $2,000,000.

(2) Amounts relate to the contract effective January 1, 1997, which catastrophe
layers in excess of $2,500,000 are subject to 5% coinsurance.

(3) Amount indicated is the maximum face amount (limit) on the bond issued,
which represents the value of goods being imported that are subject to U.S.
Customs duty. The actual exposure to the Company is the amount of any unpaid
duty on the goods imported, which is generally approximately 15% of the face
value of the goods, and any penalties associated with the late payment of
the duty.

(4) Subject to a catastrophe retention of $3,000,000 per occurrence and a
maximum ceded loss of $40,000,000 per occurrence.

(5) Effective December 1, 1995, two layers of excess reinsurance were added for
a maximum limit of $10,000,000 per principal on a direct basis, $2,100,000
on a net basis.

(6) Excludes the effect of the Company's 5% retention of $14,000,000 in losses
in excess of $1,000,000.

F-17
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D--REINSURANCE (CONTINUED)
Prior to 1994, the Company assumed reinsurance under various reinsurance
treaty arrangements and through mandatory participation in various states'
residual market pools and reinsurance facilities. The amount of risk assumed by
the Company varies in amount by treaty and does not exceed $500,000 per
occurrence/risk/surety bond principal after retrocessions. As part of its
acquisition of BMLIC's realtors errors and omissions business, the Company is
reinsuring policies issued by BMLIC until such time as the program is filed and
can be underwritten on the Company's policies. In 1996, the Company began to
assume, on a quota share basis, homeowners business underwritten by Omega
Insurance Company.

The Company also reinsured ocean marine business written by its subsidiary,
United Capitol. The Company retained the first $250,000 per occurrence and ceded
up to $9,750,000 excess of $250,000 per occurrence. The reinsurance program was
led by underwriters at Lloyds on a losses occurring basis. Effective January 1,
1997, this program was replaced by a similar program written on a risks
attaching basis by Munich American Reinsurance Company and Munich Reinsurance
Company, U.S. branch.

On July 1, 1996, the Company implemented a catastrophe reinsurance program
for its homeowners business written in the state of Florida. The program
provides coverage in the amount of $14,000,000 excess of a $1,000,000 retention.

In 1996, the Company began assuming and writing on a direct basis ocean
marine business. The Company reinsures its ocean marine and international risks
under multiple layers of excess reinsurance. Coverage is provided up to
$9,950,000 excess of $50,000 per occurrence, excess of an aggregate retention of
$200,000 of loss occurrences in excess of $50,000.

The Company cedes 100% of its environmental liability business to
Underwriters Reinsurance Company. The Company reassumes 10% of this business,
along with 10% of environmental liability business underwritten by Commercial
Underwriters Insurance Company and Underwriters Reinsurance Company.

In 1995 and 1994, the Company's medical malpractice reinsurers agreed to a
commutation for treaty years 1991 and 1990, respectively. As a result of their
commutation, the Company recaptured its liability for ceded unpaid losses and
LAE of approximately $3,900,000 and $6,100,000 for treaty years 1991 and 1990,
respectively, and received cash of an equal amount, resulting in no gain or
loss. After the commutation, there was no change in the net incurred losses or
loss ratios as a result of these transactions.

In 1996, 1995, and 1994, the Company recognized and accrued (reduced)
reinsurance contingent profit commissions earned of $773,000, ($783,000), and
($337,000), respectively.

The components of the net reinsurance recoverable balances included in the
accompanying balance sheets are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
---------------------
<S> <C> <C>
1996 1995
---------- ---------
Ceded paid losses & LAE recoverable................................. $ 7,519 $ 2,639
Ceded unpaid losses and LAE......................................... 165,467 73,043
Ceded unearned premiums............................................. 32,403 5,541
Ceded reinsurance payable........................................... (12,820) (4,268)
---------- ---------
TOTAL............................................................... $ 192,569 $ 76,955
---------- ---------
---------- ---------
</TABLE>

F-18
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D--REINSURANCE (CONTINUED)

The reinsurance ceded components of the amounts reflected in the
accompanying statements of income are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Ceded premiums earned........................................ $ 73,643 $ 42,086 $ 17,562
Ceded incurred losses........................................ 56,597 25,557 14,114
Ceded incurred LAE........................................... 18,240 11,700 3,664
</TABLE>

The effect of reinsurance on premiums written and earned in 1996, 1995 and
1994 was as follows (in thousands):

<TABLE>
<CAPTION>
1996 1995 1994
PREMIUMS PREMIUMS PREMIUMS
---------------------- ---------------------- ----------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Direct........................................... $ 394,057 $ 332,345 $ 259,222 $ 235,696 $ 195,614 $ 169,893
Assumed.......................................... 8,742 7,287 5,092 2,610 3,278 4,424
Ceded............................................ (90,936) (73,643) (43,557) (42,086) (11,604) (17,562)
---------- ---------- ---------- ---------- ---------- ----------
Net premiums..................................... $ 311,863 $ 265,989 $ 220,757 $ 196,220 $ 187,288 $ 156,755
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>

NOTE E--INCOME TAXES

State income taxes represent the amount of current state income taxes
incurred.

The Company files a consolidated federal income tax return, which includes
the income and expenses of its subsidiaries from the dates of their acquisition.

The components of federal income tax expense are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Federal income tax expense (benefit):
Current.................................................... $ 13,590 $ 11,071 $ 8,958
Deferred................................................... 2,279 (175) (5,162)
--------- --------- ---------
TOTAL FEDERAL INCOME TAX EXPENSE............................. $ 15,869 $ 10,896 $ 3,796
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-19
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE E--INCOME TAXES (CONTINUED)
A reconciliation of federal income tax, based on the prevailing corporate
income tax rate of 35%, to the federal income tax expense reflected in the
accompanying financial statements is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Tax rate applied to pre-tax income........................... $ 19,831 $ 15,148 $ 7,465
Add (deduct) tax effect of:
Tax-exempt interest income................................. (3,026) (2,754) (2,726)
Dividend received deduction................................ (752) (634) (805)
State income taxes......................................... (253) (410) (194)
Other...................................................... 69 (454) 56
--------- --------- ---------
FEDERAL INCOME TAX EXPENSE................................. $ 15,869 $ 10,896 $ 3,796
--------- --------- ---------
--------- --------- ---------
</TABLE>

Significant components of the Company's deferred tax assets and liabilities
at December 31, 1996, 1995 and 1994 are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Reserve discounting, including salvage and subrogation..... $ 30,515 $ 26,466 $ 26,341
Unearned premium reserve................................... 10,732 7,121 5,404
Net unrealized losses on available-for-sale securities..... 3,396
Other...................................................... 2,624 1,879 437
--------- --------- ---------
Total deferred tax assets.................................... 43,871 35,466 35,578
Deferred tax liabilities:
Deferred policy acquisition costs.......................... 11,504 6,579 4,625
Net unrealized gains on available-for-sale securities...... 2,588 4,284
Other...................................................... 2,159 976 186
--------- --------- ---------
Total deferred tax liabilities............................... 16,251 11,839 4,811
--------- --------- ---------
Net deferred tax assets...................................... $ 27,620 $ 23,627 $ 30,767
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-20
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE E--INCOME TAXES (CONTINUED)
Deferred federal income taxes result from timing differences in the
recognition of certain income and expenses for tax and financial statement
purposes and are summarized as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Reserve discounting, including salvage and subrogation........ $ 119 $ (125) $ (4,997)
Unearned premium reserve...................................... (3,211) (1,718) (2,137)
Deferred policy acquisition costs............................. 4,666 1,954 2,258
Excess depreciation expense................................... 120 220 64
Bad debt expense (credit)..................................... 279 (404) (354)
Other......................................................... 306 (102) 4
--------- --------- ---------
TOTAL DEFERRED FEDERAL INCOME TAX EXPENSE (BENEFIT)....... $ 2,279 $ (175) $ (5,162)
--------- --------- ---------
--------- --------- ---------
</TABLE>

The Company made income tax payments of $17,021,000, $12,829,000 and
$9,330,000, in 1996, 1995, and 1994, respectively.

NOTE F--CREDIT FACILITY AND OTHER DEBT

In 1995, the Company obtained a variable rate line of credit for $35,000,000
with the Bank of New York. Under this arrangement, the Company borrowed
$7,100,000 and $25,000,000 in 1996 and 1995, respectively. The credit facility
agreement was terminated in 1996.

The Company also extinguished approximately $1,700,000 of long-term debt in
1996, which was assumed in conjunction with the acquisition of Emrol.

Interest incurred during 1996 and 1995 is as follows (in thousands):

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Bank credit facility......................................................... $ 1,892 $ 895
Other long-term debt......................................................... 78
--------- ---------
TOTAL........................................................................ $ 1,970 $ 895
--------- ---------
--------- ---------
</TABLE>

F-21
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE G--STATUTORY FINANCIAL INFORMATION

A reconciliation of the consolidated amounts of insurance subsidiaries'
policyholders' surplus as of December 31, 1996 and 1995, and net income for each
of the years ended December 31, 1996, 1995 and 1994, on a statutory accounting
basis ("SAP") as reported to insurance regulatory authorities, to the GAAP
shareholders' equity and net income included in the accompanying consolidated
financial statements, is as follows (in thousands):

<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------- ---------
NET NET NET
SURPLUS/EQUITY INCOME SURPLUS/EQUITY INCOME INCOME
-------------- --------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Insurance subsidiaries' consolidated SAP
amounts........................................ $ 268,004 $ 28,874 $ 171,362 $ 26,407 $ 6,623
Add (deduct):
Deferred policy acquisition costs.............. 32,871 14,365 18,797 5,585 8,139
Nonadmitted assets and unauthorized
reinsurance.................................. 14,738 15,667
Investment valuation........................... 4,296 48 11,440 (24)
Allowance for doubtful accounts................ (2,768) 875 (3,506) (1,154) (1,011)
Intangible assets.............................. 3,255 (188) 495 (147)
Deferred federal income taxes.................. 28,157 (2,062) 23,805 352 4,551
Other than temporary market decline............ (715) (225) (490) (490)
Other additions (deductions)................... (864) (588) 394 393
-------------- --------- -------------- --------- ---------
INSURANCE SUBSIDIARIES' CONSOLIDATED GAAP
AMOUNTS........................................ 346,974 41,099 237,469 31,564 18,155
Shareholders' equity and net loss arising from
activities of the parent company and its
non-insurance subsidiaries................... (78,400) (1,032) (7,736) (353) (1,175)
-------------- --------- -------------- --------- ---------
CONSOLIDATED AMOUNTS--GAAP BASIS................. $ 268,574 $ 40,067 $ 229,733 $ 31,211 $ 16,980
-------------- --------- -------------- --------- ---------
-------------- --------- -------------- --------- ---------
</TABLE>

F-22
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE H--INVESTMENTS

The major categories of total net investment income are summarized as
follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Interest and dividends:
Fixed maturities............................................................... $ 37,623 $ 28,338 $ 20,942
Equity securities.............................................................. 1,190 1,745 3,774
Short-term and other investments............................................... 3,830 2,529 695
Interest expense on funds held................................................... (4,307) (2,174)
Limited liability corporation.................................................... 2 535
--------- --------- ---------
Investment income before expenses.............................................. 38,338 30,973 25,411
Less investment expenses......................................................... 1,112 938 958
--------- --------- ---------
Net investment income.......................................................... 37,226 30,035 24,453
--------- --------- ---------
Realized capital gains (losses):
Securities available-for-sale:
Fixed maturities............................................................... 1,245 1,265 325
Equity securities.............................................................. 463 (1,920) (1,743)
Short-term investments........................................................... (1) (1)
Fixed maturities held-to-maturity................................................ 675 (59)
--------- --------- ---------
Total realized capital gains (losses).......................................... 1,707 20 (1,478)
--------- --------- ---------
TOTAL NET INVESTMENT INCOME...................................................... $ 38,933 $ 30,055 $ 22,975
--------- --------- ---------
--------- --------- ---------
</TABLE>

Gross realized capital gains on available-for-sale securities in 1996, 1995
and 1994 were $3,882,000, $2,509,000, and $987,000, respectively. Gross realized
capital losses on available-for-sale securities in 1996, 1995 and 1994 were
$2,175,000, $3,164,000, and $2,604,000, respectively. Also, gross realized
capital gains in 1995 and 1994 on held-to-maturity securities were $675,000 and
$27,000, respectively, and gross realized capital losses were $86,000 in 1994.

The change in net unrealized gains/(losses) on fixed-maturity securities was
$(6,350,000), $28,490,000 and $(25,177,000) in 1996, 1995 and 1994,
respectively; the corresponding amounts for equity securities were $1,508,000,
$4,704,000 and $(3,896,000).

At December 31, 1996, bonds and notes with an amortized cost of $25,911,000
were on deposit with various regulatory authorities to meet statutory
requirements.

F-23
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE H--INVESTMENTS (CONTINUED)
Investments in available-for-sale securities are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
At December 31, 1996:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 29,708 $ 409 $ 157 $ 29,960
Obligations of states and political subdivisions............. 191,311 2,485 741 193,055
Foreign governments.......................................... 30 6 24
Corporate securities......................................... 162,336 3,299 1,237 164,398
Mortgage-backed securities................................... 296,896 3,483 2,539 297,840
---------- ----------- ----------- ----------
Total fixed maturity securities.................................. 680,281 9,676 4,680 685,277
Equity securities................................................ 13,871 2,702 302 16,271
---------- ----------- ----------- ----------
TOTAL............................................................ $ 694,152 $ 12,378 $ 4,982 $ 701,548
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------

At December 31, 1995:
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 29,602 $ 1,519 $ 3 $ 31,118
Obligations of states and political subdivisions............. 189,363 4,154 611 192,906
Foreign governments.......................................... 20 20
Corporate securities......................................... 102,667 3,992 1,395 105,264
Mortgage-backed securities................................... 188,404 5,080 1,390 192,094
---------- ----------- ----------- ----------
Total fixed maturity securities.................................. 510,056 14,745 3,399 521,402
Equity securities................................................ 20,132 1,191 299 21,024
---------- ----------- ----------- ----------
TOTAL............................................................ $ 530,188 $ 15,936 $ 3,698 $ 542,426
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>

At December 31, 1996, the amortized cost and estimated market value of debt
securities, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................................... $ 2,656 $ 2,656
Due after one year to five years...................................... 80,741 81,800
Due after five years to ten years..................................... 117,429 119,248
Due after ten years................................................... 182,559 183,732
Mortgage backed securities............................................ 296,896 297,841
---------- ----------
TOTAL............................................................. $ 680,281 $ 685,277
---------- ----------
---------- ----------
</TABLE>

F-24
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I--DIVIDEND AND CAPITAL RESTRICTIONS

The Company's insurance subsidiaries are subject to certain regulatory
supervision by their respective domiciliary states. Such regulation is generally
designed to protect policyholders and includes such matters as maintenance of
minimum statutory surplus and restrictions on the payments of dividends. At
December 31, 1996, the maximum dividend that may be paid to the Company in 1997
without regulatory approval is approximately $27,000,000.

Additionally, the insurance subsidiaries are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under those requirements,
the amount of capital and surplus maintained by the insurance companies is to be
determined based on the various risk factors related to it. At December 31,
1996, the Company met the RBC requirements.

NOTE J--STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

The Company has adopted stock option plans (the "Plans") under which
1,600,102 shares of common stock are reserved for issuance upon exercise of
options granted pursuant to the Plans. Under the Plans, incentive stock options
may be granted to employees and nonqualified stock options may be granted to
employees, directors, and such other persons as the Board of Directors (or a
committee appointed by the Board) determines will assist the Company's business
endeavors, at exercise prices equal to at least 100% of the fair market value of
the common stock on the date of grant. Incentive stock options granted under the
Plans are not exercisable until one year after grant and expire five years after
the date of grant. In addition to selecting the optionees, the Board (or such
committee) determines the number of shares subject to each option, the
expiration date and vesting periods of nonqualified stock options and otherwise
administers the Plans. Certain of the Company's officers are ineligible to
participate in the Plans. Incentive stock options have been granted at various
times and for varying amounts.

During 1993, the Company granted the President and Chairman of the Board,
and a Vice President, separate stock options outside of the Plans to purchase
825,000 and 148,500 shares, respectively, of the Company's Common Stock at
$22.73 per share at any time through December 31, 1999, which options were
outstanding at December 31, 1996.

Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.20%
and 7.05%; a dividend yield of 1.25%; volatility factors of the expected market
price of the Company's Common Stock of .25 and .25; and a weighted-average
expected life of the option of 5 years.

F-25
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J--STOCK OPTIONS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except per share data):

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Pro forma net income.................................................... $ 39,813 $ 31,053
--------- ---------
--------- ---------
Pro forma primary earnings per common share............................. $1.38 $1.09
--------- ---------
--------- ---------
Pro forma fully diluted earnings per common share....................... $1.36 $1.08
--------- ---------
--------- ---------
</TABLE>

For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period and does not
include grants prior to January 1, 1995. As such, the pro forma net income and
earnings per share are not indications of future years.

A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ------------------------------ ---------
OPTIONS WEIGHTED- AVERAGE OPTIONS WEIGHTED- AVERAGE OPTIONS
(000) EXERCISE PRICE (000) EXERCISE PRICE (000)
--------- ----------------- ----- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding-beginning of year......................... 698 $ 10 500 $ 9 678
Granted............................................... 138 17 350 10 4
Exercised............................................. (166) 7 (92) 4 (162)
Canceled.............................................. (20) 11 (60) 12 (20)
--- --- ---
Outstanding-end of year............................... 650 12 698 10 500
--- --- ---
--- --- ---
Exercisable at end of year............................ 216 12 244 9 236

WEIGHTED- AVERAGE
EXERCISE PRICE
-----------------
<S> <C>
Outstanding-beginning of year......................... $ 8
Granted............................................... 14
Exercised............................................. 4
Canceled.............................................. 12

Outstanding-end of year............................... 9

Exercisable at end of year............................ 7
</TABLE>

The weighted average fair value of options granted during 1996 and 1995 were
$5.13 and $3.08, respectively. Exercise prices for options outstanding as of
December 31, 1996 ranged from $9.43 to $19.88. The weighted-average contractual
life of those options is 3.8 years.

NOTE K--EMPLOYEE BENEFIT PLANS

The Company sponsors an employee savings plan (401(k)) whereby the Company
contributes a base of 2% of the salary of all full-time employees and matches
50% of the employee's personal contribution up to 2% of the employee's salary.
The maximum Company contribution, base and match, is 4% of an employee's salary.
In addition, the Company has a noncontributory profit sharing plan. At the
discretion of

F-26
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K--EMPLOYEE BENEFIT PLANS (CONTINUED)
the Board of Directors, the Company may contribute up to 4% of the eligible
salaries of full-time employees who have completed one year of service.

The Company's total expense related to employee benefit plan contributions
for 1996, 1995 and 1994 was $1,691,000, $1,221,000 and $1,030,000, respectively.

NOTE L--COMMITMENTS AND CONTINGENCIES

At December 31, 1996, the future minimum rental commitment for operating
leases was as follows: 1997--$1,600,000; 1998--$1,356,000; 1999--$1,298,000;
2000--$857,000; 2001--$563,000, and 2002 and thereafter--$328,000. These leases
are for the rental of office space, the initial terms of which run five years,
with a negotiated renewal option at the end of the term. Total rental expense
for 1996, 1995, and 1994 amounted to $1,112,000, $720,000 and $479,000,
respectively.

In 1996, the Company entered into certain contractual agreements with
several contractors and vendors in connection with the construction of an
addition to its home office building and the purchase of office equipment. The
remaining commitments that will be paid in 1997 total approximately $11,300,000.

The Company has been served with several purported class actions alleging
violations of federal securities laws by the Company and, in some cases, by
certain of its officers and directors; certain other actions also allege
violations of the common law. The complaints relate to the Company's
announcement of its third quarter, 1994 financial results and allege that the
Company previously had omitted and/or misrepresented material facts with respect
to its earnings and profits.

The amount of potential loss is not possible to estimate as of the present
due to the fact that these actions allege differing class periods, and until an
actual class is certified in the consolidation action, the number of shares
impacted by the claims cannot be ascertained. The Company believes the suits are
without merit and has retained special legal counsel to contest them vigorously.
The Company is involved in other unrelated litigation which is considered
incidental to its business. The ultimate outcome of all litigation is not
expected to be material in relation to the Company's financial position and
results of operations.

The insurance subsidiaries record guaranty fund assessments when such
assessments are billed by the respective guaranty funds. In addition, each
insurance subsidiary's policy is to accrue for any significant insolvencies when
the loss is probable and the assessment amount can be reasonably estimated. In
the case of most insurance insolvencies, the ability of each insurance
subsidiary to reasonably estimate the insolvent insurer's liabilities or develop
a meaningful range of the insolvent's liabilities is significantly impaired by
inadequate financial data with respect to the state of the insolvent company as
supplied by the guaranty funds.

On November 10, 1994, the Company authorized a stock repurchase program to
purchase up to 1,000,000 shares of its Common Stock at such times and prices the
Company deems advantageous in compliance with SEC Rule 10b-18 at the discretion
of the Chairman of the Board. There is no commitment or obligation on the part
of the Company to purchase any particular number of shares, and the program may
be suspended at any time at the Company's discretion. In 1995 and 1994, in
conjunction with this repurchase program, the Company acquired 13,200 and 77,880
shares at a cost of $134,000 and $654,000, respectively.

F-27
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE M--GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S CONVERTIBLE
SUBORDINATED DEBENTURES

In October 1996, the Company completed a $172,500,000 offering of 3,450,000
shares of 6 1/4% Convertible Trust Originated Preferred Securities ("TOPrS")
through its wholly-owned consolidated subsidiary, Frontier Financing Trust, a
statutory business trust formed by the Company for the sole purpose of issuing
the TOPrS and investing the proceeds thereof in an equivalent amount of 6 1/4%
Convertible Subordinated Debentures (the "Debentures") of the Company which
mature on October 16, 2026. The initial purchasers' discount of $4,744,000 was
deducted from the proceeds of the offering. The Company also incurred $842,000
of additional offering costs in connection with this transaction, resulting in
net proceeds of $166,914,000 to the Company. The total offering costs have been
capitalized and are being amortized on a straight-line basis over a 30 year
period, in conjunction with the maturity date of the Debentures. The TOPrS are
carried on the balance sheet net of the unamortized offering costs, which at
December 31, 1996 amounted to approximately $5,500,000.

The TOPrS are mandatorily redeemable under certain conditions and amounts
due to holders are fully and unconditionally guaranteed by the Company. The
Debentures (the sole assets of the trust) are subordinate to all Company debt
and to the claims of creditors and policyholders of the Company's subsidiaries.
The TOPrS are convertible into shares of the Company's Common Stock at an
initial conversion rate of 2.1328 shares of Company Common Stock for each
preferred share which is equivalent to a conversion price of $23.44 per common
share (or 7,358,038 shares of Common Stock in total). Holders of the TOPrS have
no voting rights.

The Debentures are redeemable by the Company, at its option, in whole or in
part at a redemption price on or after October 16, 1999, provided the closing
price of the Company's Common Stock is at least 150% of the per share conversion
price, for a minimum of 20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to the notice of redemption
or anytime on or after October 16, 2000. The Company has the right to defer
interest payments on the Debentures at any time by extending the interest
payment date for up to 20 consecutive quarters, but not beyond the maturity date
of the Debentures.

Holders of the TOPrS are entitled to receive cumulative cash distributions
at an annual rate of 6 1/4% of the liquidation amount of $50 per share, accruing
from the date of original issuance and payable quarterly in arrears. Such
distributions are made from interest received on the Debentures, which have
terms that parallel the terms of the TOPrS. During 1996, the Company accrued
$2,246,000 payable to holders of the TOPrS and amortized a portion of the
capitalized offering costs. The corresponding expenses are reported as "Minority
interest in income of consolidated subsidiary trust" in the accompanying
consolidated statement of income.

NOTE N--CONCENTRATIONS

The Company, which is licensed to conduct business in 50 states, attempts to
diversify its exposures geographically, as well as across various types of
risks. However, its medical malpractice business in the Florida marketplace
comprises 7.2% of the Company's gross premiums written and its surety and bond
business, which is focused primarily in the California marketplace, accounts for
16.2% of its gross premiums written in 1996. Also, the Company relies primarily
on a small number of reinsurers. At December 31, 1996, the Company has
outstanding gross reinsurance recoverables of $74,002,000 from its largest
reinsurer, Centre Re; however, under the terms of the reinsurance arrangements,
Frontier is

F-28
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE N--CONCENTRATIONS (CONTINUED)
withholding $63,766,000 of funds due Centre Re. Accordingly, the net outstanding
recoverable from Centre Re is $10,236,000.

NOTE O--SUBSEQUENT EVENTS

On March 31, 1997, the Company announced that it executed a definitive
agreement to acquire 100% of the stock of Lyndon Property Insurance Company and
its six subsidiaries, Lyndon Life Insurance Company, Twin Mercury Life Insurance
Company, Gulfco Life Insurance Company, Lyndon Southern Insurance Company,
Lyndon--DFS Warranty Services,Inc. and Lyndon General Agency of Texas, Inc.
(collectively "Lyndon"), subject to certain closing conditions and regulatory
approvals, at a purchase price of approximately $92,000,000.

On May 22, 1997, the Company declared a two-for-one stock split in the form
of a 100% stock dividend payable on July 21, 1997 to shareholders of record at
the close of business on June 30, 1997. Accordingly, all the related Common
Stock and per share data included in the accompanying financial statements have
been restated to give effect to this split.

On June 3, 1997, the Company obtained a five year $100,000,000 revolving
credit facility from Deutsche Bank AG, pursuant to which the Company borrowed
$62,000,000 at an initial floating interest rate of 6.04% based upon Eurodollar
interest rates, payable quarterly, to fund a portion of the Lyndon purchase
price relating to its acquisition of Lyndon also on June 3, 1997.

The Company intends to file a Registration Statement (Form S-3) with the
Securities and Exchange Commission on July 15, 1997 to register 4,600,000
additional shares of its Common Stock.

F-29
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

SUPPLEMENTAL DATA

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of unaudited quarterly results of operations for
1996 and 1995 (in thousands, except per share data):

<TABLE>
<CAPTION>
1996 1995
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
--------- --------- --------- --------- --------- --------- --------- ---------
Net premiums earned.................. $ 58,294 $ 66,148 $ 70,327 $ 71,220 $ 45,754 $ 46,440 $ 49,873 $ 54,153
Total net investment income.......... 8,477 9,202 9,429 11,825 5,981 7,434 8,168 8,472
Net income........................... 9,264 9,769 9,513 11,521 6,886 7,785 8,245 8,295

Per share data:
Primary earnings per common share.... .33 .34 .33 .40 .24 .28 .29 .29
Fully diluted earnings per common
share.............................. .33 .34 .33 .37 .24 .28 .29 .29
</TABLE>

Earnings per share information is based on the weighted average number of
shares outstanding for the period and have been adjusted to reflect the effects
of stock dividends and stock splits.

Due to changes in the number of average common stock and equivalent shares
outstanding, quarterly earnings per share may not add to the totals for the
years.

In the second quarter of 1996 and the fourth quarter 1995, the Company
increased reserves related to prior years' by approximately $13,000,000 and
$19,000,000, respectively, which was entirely offset by subrogation recoverable
recognized in connection with the favorable Court of Appeals decision.

F-30
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
Investments:
Securities, available for sale--at fair value:
Fixed maturities (amortized cost: 1997--$712,465; 1996--$680,281).................. $ 707,199 $ 685,277
Equity securities (cost: 1997--$19,505; 1996--$13,871)............................. 20,351 16,271
Short-term investments............................................................... 102,547 133,835
Investment in limited liability corporation.......................................... 3,018 2,937
------------ ------------
TOTAL INVESTMENTS.............................................................. 833,115 838,320

Cash................................................................................. 15,688 8,332
Agents' balances due, less allowances for doubtful accounts (1997--$2,226;
1996--$2,225)...................................................................... 50,794 50,558
Premiums receivable from insureds, less allowances for doubtful accounts (1997--$55;
1996--$60)......................................................................... 27,489 26,225
Net reinsurance recoverables less allowances for possible uncollectible amounts
(1997--$561; 1996--$517)........................................................... 209,569 192,569
Accrued investment income............................................................ 9,778 9,364
Federal income taxes recoverable..................................................... 1,165 3,987
Deferred policy acquisition costs.................................................... 36,834 32,871
Deferred federal income tax asset.................................................... 29,540 27,620
Home office building, property and equipment--at cost, less accumulated depreciation
and amortization (1997--$12,158; 1996--$11,184).................................... 40,130 37,167
Intangible assets, less accumulated amortization (1997--$4,235; 1996-- $3,808)....... 11,311 11,738
Other assets......................................................................... 10,507 7,656
------------ ------------
TOTAL ASSETS................................................................... $ 1,275,920 $1,246,407
------------ ------------
------------ ------------
</TABLE>

See notes to consolidated financial statements (unaudited).

F-31
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS--CONTINUED

LIABILITIES AND SHAREHOLDERS' EQUITY

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
LIABILITIES
Policy liabilities:
Unpaid losses.................................................................... $ 452,669 $ 429,506
Unpaid loss adjustment expenses.................................................. 116,478 109,567
Unearned premiums................................................................ 180,891 185,728
------------ ------------
TOTAL POLICY LIABILITIES....................................................... 750,038 724,801
Funds withheld under reinsurance contracts......................................... 72,112 64,065
Cash dividend payable to shareholders.............................................. 1,905 1,904
Other liabilities.................................................................. 13,688 20,110
------------ ------------
TOTAL LIABILITIES................................................................ 837,743 810,880

COMMITMENTS AND CONTINGENCIES

GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S CONVERTIBLE SUBORDINATED
DEBENTURES......................................................................... 166,979 166,953

SHAREHOLDERS' EQUITY--
Preferred stock, par value $.01 per share; authorized and unissued-- 1,000,000
shares
Common stock, par value $.01 per share (shares authorized: 50,000,000, shares
issued: 1997--29,407,936; 1996--29,379,104)...................................... 294 294
Additional paid-in capital......................................................... 222,142 221,837
Net unrealized (losses) gains...................................................... (2,873) 4,807
Retained earnings.................................................................. 52,423 42,424
------------ ------------
SUBTOTAL......................................................................... 271,986 269,362
Less treasury stock--at cost (91,080 shares)....................................... 788 788
------------ ------------
TOTAL SHAREHOLDERS' EQUITY..................................................... 271,198 268,574
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................................... $ 1,275,920 $1,246,407
------------ ------------
------------ ------------
Book value per share................................................................. $ 9.25 $ 9.17
------------ ------------
------------ ------------
</TABLE>

See notes to consolidated financial statements (unaudited).

F-32
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------
<S> <C> <C>
1997 1996
---------- ---------
REVENUES
Premiums written...................................................................... $ 105,812 $ 74,860
Premiums ceded........................................................................ (26,499) ( 13,131)
---------- ---------
NET PREMIUMS WRITTEN.............................................................. 79,313 61,729
Increase in net unearned premiums..................................................... (1,506) (3,435)
---------- ---------
NET PREMIUMS EARNED............................................................... 77,807 58,294
Net investment income................................................................. 11,893 7,786
Realized capital gains................................................................ 721 691
---------- ---------
TOTAL NET INVESTMENT INCOME....................................................... 12,614 8,477
Gross claims adjusting income......................................................... 15 25
---------- ---------
TOTAL REVENUES.................................................................... 90,436 66,796

EXPENSES
Losses................................................................................ 31,116 26,512
Loss adjustment expenses.............................................................. 14,558 8,931
Amortization of policy acquisition costs.............................................. 15,951 12,381
Underwriting and other expenses....................................................... 9,231 5,791
Minority interest in income of consolidated subsidiary trust.......................... 2,732
Interest expense...................................................................... 441
---------- ---------
TOTAL EXPENSES.......................................................................... 73,588 54,056
---------- ---------

INCOME BEFORE INCOME TAXES.............................................................. 16,848 12,740

INCOME TAXES
State................................................................................. 103 115
Federal............................................................................... 4,841 3,361
---------- ---------
TOTAL INCOME TAXES................................................................ 4,944 3,476
---------- ---------
NET INCOME........................................................................ $ 11,904 $ 9,264
---------- ---------
---------- ---------

PER SHARE DATA:
Primary earnings per common share..................................................... $ .41 $ .32
---------- ---------
---------- ---------
Fully diluted earnings per common share............................................... $ .38 $ .32
---------- ---------
---------- ---------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (in thousands):.............................................................
Primary............................................................................... 29,390 28,704
Fully diluted......................................................................... 36,758 28,704
</TABLE>

See notes to consolidated financial statements (unaudited).

F-33
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
OPERATING ACTIVITIES
Net income................................................................................ $ 11,904 $ 9,264
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in policy liabilities.......................................................... 25,237 18,754
Increase in reinsurance balances........................................................ (8,953) (8,217)
Increase in agents' balances and premiums receivable.................................... (1,500) (82)
Increase in deferred policy acquisition costs........................................... (3,963) (2,358)
(Increase) decrease in accrued investment income........................................ (414) 634
Deferred income tax expense............................................................. 2,220 278
Depreciation and amortization........................................................... 1,551 938
Realized capital gains.................................................................. (721) (691)
Other................................................................................... (6,455) (2,675)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................. 18,906 15,845

INVESTING ACTIVITIES
Proceeds from sales of fixed maturities available-for-sale................................ 14,116 17,217
Proceeds from calls, paydowns and maturities of fixed maturities available-for-sale....... 22,918 21,825
Proceeds from sales of equity securities.................................................. 1,636 5,534
Purchases of securities................................................................... (75,891) (59,512)
Net sales (purchases) of short-term investments........................................... 31,288 (2,193)
Additions and improvement to home office building......................................... (1,682) (160)
Purchase of property and equipment........................................................ (2,257) (75)
Proceeds from sales of property and equipment............................................. 2
Investment in limited liability corporation............................................... (81)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (9,951) (17,364)

FINANCING ACTIVITIES
Cash dividends paid....................................................................... (1,904) (1,568)
Issuance of common stock.................................................................. 305 504
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES................................................. (1,599) (1,064)
--------- ---------
INCREASE (DECREASE) IN CASH........................................................... 7,356 (2,583)
CASH AT BEGINNING OF YEAR............................................................. 8,332 5,115
--------- ---------
CASH AT END OF PERIOD................................................................. $ 15,688 $ 2,532
--------- ---------
--------- ---------
</TABLE>

See notes to consolidated financial statements (unaudited).

F-34
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X and, accordingly, do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996. In the opinion of management,
all adjustments (consisting of only normal, recurring accruals) considered
necessary for a fair presentation have been included. Certain amounts in the
1996 financial statements have been reclassified to conform to the 1997
presentation. All share and per share information presented in the accompanying
financial statements and these notes thereto have been adjusted to give effect
to stock dividends and stock splits. Operating results for the three-month
period ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997.

2. Earnings per share information is presented on the basis of weighted
average shares outstanding for the period.

3. Dividends have been declared by the Board of Directors and paid by the
Company during the periods presented in the accompanying financial statements,
as follows:

<TABLE>
<CAPTION>
DECLARATION RECORD PAYMENT TYPE OF CASH NUMBER OF
DATE DATE DATE DIVIDEND PAID SHARES ISSUED
------------ --------- --------- ------------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(IN
THOUSANDS)
11/16/95........................ 12/29/95 01/18/96 $.06 per share cash $ 1,562 N/A
03/28/96........................ 04/08/96 04/30/96 $.06 per share cash $ 1,568 N/A
05/23/96........................ 06/28/96 07/19/96 10% stock $ 11(1) 2,622,356
05/23/96........................ 06/28/96 07/19/96 $.065 per share cash $ 1,870 N/A
08/15/96........................ 09/30/96 10/18/96 $.065 per share cash $ 1,903 N/A
11/21/96........................ 12/27/96 01/14/97 $.065 per share cash $ 1,904 N/A
02/27/97........................ 03/24/97 04/18/97 $.065 per share cash $ 1,905 N/A
</TABLE>

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

(1) Cash in lieu of fractional shares.

4. At March 31, 1997, options to purchase 642,882 shares of common stock, at
per share exercise prices ranging from $9.43 to $19.88 were outstanding,
compared to options to purchase 549,392 shares of common stock, at per share
exercise prices ranging from $3.58 to $13.78, outstanding at March 31, 1996
under the Company's stock option plans (the "Plans"). Options to purchase
261,380 and 193,152 shares of common stock were exercisable at March 31, 1997
and March 31, 1996, respectively, under the Plans.

During 1993, the Company granted the President and Chairman of the Board,
and a Vice President, separate stock options outside of the Plans to purchase
825,000 and 148,500 shares, respectively, of the Company's common stock at
$22.73 per share at any time through December 31, 1999, which options were
outstanding at March 31, 1997.

The number of shares subject to options and the per share option prices have
been adjusted to reflect stock dividends. Exercisable options are nondilutive to
earnings per share presented in the accompanying financial statements.

5. Contingent reinsurance commissions are accounted for on an earned basis
and are accrued, in accordance with the terms of the applicable reinsurance
agreement, based on the estimated level of profitability relating to such
reinsured business. During the three months ended March 31, 1997 and 1996,

F-35
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

such earned commissions accrued were $574,000 and $92,000, respectively. The
estimated profitability of the reinsured business is continually reviewed and as
adjustments become necessary, such adjustments are reflected in current
operations.

6. Claims adjusting income is accounted for on an accrual basis, before
deducting the related expenses. During the three months ended March 31, 1997 and
1996, claims adjusting expenses included with underwriting and other expenses
amounted to $15,000 and $25,000, respectively.

7. The components of the net reinsurance recoverables balances in the
accompanying balance sheets were as follows:

<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
(IN THOUSANDS)
Ceded paid losses recoverable............................. $ 8,527 $ 7,519
Ceded unpaid losses and LAE............................... 189,042 165,467
Ceded unearned premiums................................... 26,059 32,403
Ceded reinsurance payable................................. (14,059) (12,820)
-------------- --------
TOTAL................................................. $ 209,569 $ 192,569
-------------- --------
-------------- --------
</TABLE>

The reinsurance ceded components of the amounts relating to the accompanying
income statements were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
<S> <C> <C>
1997 1996
--------- ---------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Ceded premiums earned............................................. $ 32,842 $ 12,292
Ceded incurred losses............................................. 27,685 9,647
Ceded incurred LAE................................................ 4,705 3,218
</TABLE>

The effect of reinsurance on premiums written and earned at March 31, 1997
and 1996 was as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1997 1996
PREMIUMS PREMIUMS
---------------------- --------------------
WRITTEN EARNED WRITTEN EARNED
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Direct......................................... $ 104,244 $ 108,553 $ 73,395 $ 68,140
Assumed........................................ 1,568 2,096 1,465 2,446
Ceded.......................................... (26,499) (32,842) (13,131) (12,292)
---------- ---------- --------- ---------
Net............................................ $ 79,313 $ 77,807 $ 61,729 $ 58,294
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>

8. In the first quarter of 1997, the Company adopted Financial Accounting
Standards Board Statement 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("FASB 125"), which provides
accounting and reporting standards for sales, securitizations, and servicing of
receivables and other financial assets, secured borrowing and collateral
transactions, and the extinguishments of liabilities. The adoption excluded the
provisions that deal with securities lending, repurchase and dollar repurchase
agreements, and the recognition of collateral, which will be adopted in 1998
pursuant to

F-36
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

the proposed amendment. The adoption of FASB 125 did not have a material impact
to the Company's financial position or results of operations.

In February 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings per Share," which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in no change in
primary earnings per share in either of the quarters ended March 31, 1997 or
1996. The impact on the calculation of fully diluted earnings per share for
these quarters is not expected to be material.

9. On March 31, 1997, the Company announced that it executed a definitive
agreement to acquire 100% of the stock of Lyndon Property Insurance Company and
its six subsidiaries, Lyndon Life Insurance Company, Twin Mercury Life Insurance
Company, Gulfco Life Insurance Company, Lyndon Southern Insurance Company,
Lyndon--DFS Warranty Services,Inc. and Lyndon General Agency of Texas, Inc.
(collectively "Lyndon"), subject to certain closing conditions and regulatory
approvals, at a purchase price of approximately $92,000,000.

The Company intends to file a Registration Statement (Form S-3) with the
Securities and Exchange Commission on July 15, 1997 to register 4,600,000
additional shares of its Common Stock.

F-37
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... 3
Incorporation of Certain Documents by
Reference.................................... 3
Prospectus Summary............................. 4
Risk Factors................................... 13
Use of Proceeds................................ 16
Price Range of Common Stock.................... 16
Dividend Policy................................ 16
Capitalization................................. 17
Selected Consolidated Financial Data........... 18
Unaudited Pro Forma Consolidated Financial
Information.................................. 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Business....................................... 34
Management..................................... 54
Principal Stockholders......................... 57
Description of Capital Stock................... 58
Underwriting................................... 59
Legal Matters.................................. 60
Experts........................................ 60
Index to Consolidated Financial Statements..... F-1
</TABLE>

4,000,000 SHARES

[LOGO]

COMMON STOCK

----------------
PROSPECTUS
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MERRILL LYNCH & CO.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

OPPENHEIMER & CO., INC.

SMITH BARNEY INC.

STEPHENS INC.

, 1997

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<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
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 the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Rock Hill, State of New York, on the 18th day of
July, 1997.

FRONTIER INSURANCE GROUP, INC.

By: * WALTER A. RHULEN
-----------------------------------------
Walter A. Rhulen
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.

NAME TITLE DATE
----------------- -------------- -------

Chairman Of the Board,
* WALTER A. RHULEN President and Chief
------------------------------ Executive Officer July 18, 1997
Walter A. Rhulen (Principal Executive
Officer)
Vice President--Treasurer
* MARK H. MISHLER and Chief Financial
------------------------------ Officer (Principal July 18, 1997
Mark H. Mishler Financial
and Accounting Officer)

Executive Vice President,
* HARRY W. RHULEN Chief
------------------------------ Operating Officer and July 18, 1997
Harry W. Rhulen Director

------------------------------ Director July , 1997
Peter L. Rhulen

* LAWRENCE E. O'BRIEN
------------------------------ Director July 18, 1997
Lawrence E. O'Brien

* DOUGLAS C. MOAT
------------------------------ Director July 18, 1997
Douglas C. Moat

------------------------------ Director July , 1997
Alan Gerry

/s/ WALTER A. RHULEN
------------------------------
Walter A. Rhulen
Attorney-in-fact
*By:

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