INTERCARGO CORP, DEFS14A, 1999-03-31

INTERCARGO CORP
DEFS14A, 1999-03-31
FIRE, MARINE & CASUALTY INSURANCE

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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [x]

Filed by a party other than the Registrant [ ]

<TABLE>
<S> <C>
Check the appropriate box:
[ ] Preliminary Proxy Statement
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
</TABLE>

INTERCARGO CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of filing fee (Check the appropriate box):

[ ] No fee required

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.

(i) Title of each class of securities to which transaction applies:

(ii) Aggregate number of securities to which transactions applies:

(iii) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

(iv) Proposed maximum aggregate value of transaction:

(v) Total fee paid:

[x] Fee previously paid with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(i) Amount Previously Paid:

(ii) Form, Schedule or Registration Statement No.:

(iii) Filing Party:

(iv) Date Filed:
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INTERCARGO
INTERCARGO CORPORATION
1450 AMERICAN LANE, 20TH FLOOR
SCHAUMBURG, ILLINOIS
March 31, 1999

Dear Stockholder:

I am pleased to invite you to attend a special meeting of stockholders of
Intercargo Corporation ("Intercargo") on:
April 29, 1999
9:00 a.m. (local time)
at
Rudnick & Wolfe
203 North LaSalle Street, Suite 1800
Chicago, Illinois
THIS IS A VERY IMPORTANT MEETING THAT AFFECTS YOUR INVESTMENT IN INTERCARGO.

At this meeting you will be asked to vote on a proposal to approve a merger
between Intercargo and ICAR Acquisition Corporation ("ICAR"), a newly formed
Delaware corporation and wholly-owned indirect subsidiary of XL Capital Ltd.
(formerly EXEL Limited) ("XL Capital"), a Cayman Islands company with insurance,
reinsurance and financial risk protection operations worldwide. In the merger,
ICAR will pay Intercargo stockholders $12.00 in cash for each share of
Intercargo common stock that such stockholders own and, as a result of the
merger, Intercargo will become a subsidiary of XL Capital.

Your Board of Directors has unanimously approved the merger, believes it is
fair to and in the best interests of Intercargo stockholders and recommends that
you vote to approve the merger. In addition, your Board of Directors has
received a written opinion from Fox-Pitt, Kelton Inc. to the effect that the
merger consideration of $12.00 per share to be paid to Intercargo stockholders
is fair from a financial point of view. Orion Capital Corporation, which owns
approximately 26% of the outstanding shares of Intercargo common stock, has
agreed to vote to approve the merger.

The merger cannot be completed unless stockholders holding a majority of
Intercargo common stock approve it. Your participation in the special meeting,
in person or by proxy, is especially important. Whether or not you plan to
attend the meeting in person, we urge you to mark, sign and return the enclosed
proxy card promptly in the enclosed postage-paid envelope to ensure that your
shares of Intercargo common stock will be represented at the special meeting. If
you do attend, you will, of course, be able to vote your shares in person. If
you do not attend the special meeting or do not return your proxy card, the
effect will be the same as a vote against the merger.

If the merger is completed, we will notify you as to how you should proceed
to exchange your Intercargo stock certificates for cash. DO NOT SEND IN YOUR
CERTIFICATES UNTIL YOU RECEIVE SUCH NOTIFICATION.

The Board of Directors unanimously recommends that the shareholders of
Intercargo vote "For" approval of the merger.
Very truly yours,
GALANSKI
Stanley A. Galanski
President and Chief Executive Officer
Intercargo Corporation
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INTERCARGO CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO THE STOCKHOLDERS OF
INTERCARGO CORPORATION:

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Intercargo
Corporation, a Delaware corporation ("Intercargo"), will be held at Rudnick &
Wolfe, 203 North LaSalle Street, Suite 1800, Chicago, Illinois on April 29, 1999
at 9:00 a.m., local time, for the following purpose:

to consider and vote upon the adoption of an Agreement and
Plan of Merger dated December 1, 1998, as amended and restated
March 26, 1999, by and between Intercargo and X.L. America,
Inc., a Delaware corporation ("X.L.") and a wholly-owned
indirect subsidiary of XL Capital Ltd., a Cayman Islands
corporation ("XL Capital") providing for the merger of X.L. or
a wholly-owned subsidiary of X.L. with and into Intercargo.

Only stockholders of record at the close of business on March 30, 1999 are
entitled to notice of and to vote at the special meeting.

Under Delaware law, appraisal rights will be available to holders of common
stock of Intercargo. In order for stockholders to exercise such appraisal
rights, they must follow the procedures prescribed by Delaware law, which are
summarized under the heading "Appraisal Rights" in the accompanying Proxy
Statement.
By Order of the Board of Directors,
RYBAK
Michael L. Rybak
Secretary
Schaumburg, Illinois
March 31, 1999

WE INVITE YOU TO ATTEND THE SPECIAL MEETING BECAUSE IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED AT THE MEETING. PLEASE MARK, SIGN, DATE AND RETURN
THE ENCLOSED PROXY CARD IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE. IF YOU ATTEND
THE MEETING, YOU MAY PERSONALLY VOTE, WHICH WILL REVOKE YOUR SIGNED PROXY. YOU
MAY ALSO REVOKE YOUR PROXY AT ANY TIME BEFORE THE MEETING EITHER IN WRITING OR
BY PERSONAL NOTIFICATION.
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INTERCARGO CORPORATION
PROXY STATEMENT

The Boards of Directors of Intercargo and X.L. America, Inc. have agreed to
merge a wholly-owned indirect subsidiary of XL Capital with and into Intercargo.
You will be paid $12.00 in cash for each share of Intercargo common stock that
you own.

The merger cannot be completed unless Intercargo stockholders holding a
majority of Intercargo common stock approve the merger. The Board of Directors
of Intercargo has scheduled a special meeting for Intercargo stockholders to
vote on the merger as follows:
April 29, 1999
9:00 a.m. (local time)
at
Rudnick & Wolfe
203 North LaSalle Street, Suite 1800
Chicago, Illinois

This Proxy Statement and proxy card are being mailed to stockholders of
Intercargo beginning on or about March 31, 1999.

THE DATE OF THIS PROXY STATEMENT IS MARCH 31, 1999.
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TABLE OF CONTENTS

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PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 3
The Companies.......................................... 3
Reasons for the Merger; Factors Considered by
Intercargo's Board of Directors....................... 4
Interests of Certain Persons in the Merger............. 4
Opinion of Intercargo's Financial Advisor.............. 5
Our Recommendation to Stockholders..................... 5
The Merger............................................. 5
INTERCARGO SPECIAL MEETING.................................. 7
Purpose of the Special Meeting......................... 7
Record Date............................................ 7
Shares Outstanding and Entitled to Vote; Quorum........ 7
Vote Required.......................................... 8
Voting of Proxies...................................... 8
Revocability of Proxies................................ 8
Adjournment............................................ 8
Solicitation of Proxies and Expenses................... 8
THE MERGER -- FACTORS TO CONSIDER........................... 9
General................................................ 9
Background of the Merger............................... 9
Reasons for the Merger................................. 11
Board Recommendation................................... 12
Interests of Certain Persons........................... 13
Anticipated Accounting Treatment....................... 13
Regulatory Approvals................................... 14
Stockholder Litigation................................. 14
OPINION OF FINANCIAL ADVISOR................................ 14
THE MERGER AGREEMENT........................................ 18
Structure; Effective Time.............................. 18
Merger Consideration................................... 18
Conversion of Shares................................... 18
No Solicitation by the Company......................... 19
Covenants.............................................. 19
Representations and Warranties......................... 20
Conditions to the Merger............................... 20
Termination of the Merger Agreement.................... 21
Payment of Fees and Expenses Upon Termination.......... 22
Amendments; Waivers.................................... 23
Consequences of the Merger............................. 23
THE STOCKHOLDER AGREEMENT................................... 23
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER............... 23
APPRAISAL RIGHTS............................................ 24
PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY............ 25
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS.................................................... 25
AUDITORS.................................................... 26
SUBMISSION OF STOCKHOLDER PROPOSALS......................... 27
WHERE YOU CAN FIND MORE INFORMATION......................... 27
Appendix A Agreement and Plan of Merger
Appendix B Opinion of Fox-Pitt, Kelton Inc.
Appendix C Stockholder Agreement
Appendix D Certain Provisions of Delaware Law
Appendix E Intercargo Annual Report on Form 10-K for the
fiscal year ended December 31, 1998
</TABLE>

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QUESTIONS AND ANSWERS ABOUT THE MERGER

Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?

A: XL Capital wishes to acquire Intercargo in order to expand XL Capital's
operations in the United States. Intercargo has produced inconsistent
earnings over the past five years, resulting in an inability to increase
shareholder value. At the same time, insurance industry consolidations and
increased competition have negatively impacted results and may continue to
do so in the future.

Q: WHY SHOULD STOCKHOLDERS VOTE IN FAVOR OF THE MERGER?

A: After assessing alternative strategies to build shareholder value, the
Intercargo Board of Directors has unanimously approved the merger, believes
XL Capital's offer of $12.00 in cash per share of Intercargo common stock
is fair to and in the best interests of Intercargo stockholders and
recommends that you vote to approve the merger. In addition, the Intercargo
Board of Directors has received a written opinion from Fox-Pitt, Kelton
Inc. to the effect that the merger consideration of $12.00 per share to be
paid to Intercargo stockholders is fair from a financial point of view.
Orion Capital Corporation, which owns approximately 26% of the outstanding
shares of Intercargo common stock, has agreed to vote to approve the
merger.

Q: WHAT WILL HOLDERS OF INTERCARGO STOCK RECEIVE IN THE MERGER?

A: In the merger, you will receive $12.00 in cash for each share of Intercargo
common stock that you own.

Q: WHAT DO I NEED TO DO NOW?

A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the special meeting.
The special meeting will take place on April 29, 1999. The Board of
Directors of Intercargo unanimously approved the merger and recommends that
you vote your shares in favor of the merger.

Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

A: No. If the merger is completed, you will receive written instructions for
exchanging your stock certificates.

Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?

A: We are working towards completing the merger as quickly as possible. In
addition to stockholder approval, we must also obtain certain U.S.
regulatory approvals. We hope to complete the merger shortly after its
approval by the stockholders of Intercargo and the relevant regulatory
bodies.

Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS?

A: You will be taxed for federal income tax purposes on your receipt of the
merger consideration to the extent that the amount you receive exceeds your
tax basis in your Intercargo common stock. Because determining the tax
consequences of the merger can be complicated, especially in light of
recent changes to the federal tax laws governing capital gains, and because
state and local tax laws may apply as well, you should consult your tax
advisor in order to understand fully how the merger will affect you. See
page 23 for more information.

Q: AM I ENTITLED TO APPRAISAL RIGHTS?

A: Yes. If (1) you file a written objection to the merger prior to the special
meeting, (2) you do not vote in favor of the merger and (3) you meet
certain other legal requirements described herein, you will have the right
to seek an appraisal and payment of the fair value of your Intercargo
shares. The requirements for
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seeking appraisal are summarized on page 24, and the provisions of Delaware
law that govern appraisal rights in the merger are attached as Appendix D
to the Proxy Statement. If you wish to seek appraisal of your shares, you
should read and follow those provisions carefully. You should be aware that
an appraisal may result in a price for your shares that has more value or
less value than the $12.00 per share being offered in the merger.

Q: WHAT IF I WANT TO CHANGE MY VOTE?

A: Just return a later-dated, signed proxy card before the special meeting,
send a written revocation to the Secretary of the Company or attend the
special meeting in person and vote. See page 8 for further information.

Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?

A: Your broker will vote your shares ONLY if you instruct your broker how to
vote. Your broker should mail information to you that will explain how to
give instructions to your broker. If you do not instruct your broker how to
vote, your shares will not be voted, which will have the effect of a vote
against the merger.

WHO CAN HELP ANSWER YOUR QUESTIONS?

If you have more questions about the merger you should contact:

Intercargo Investor Relations
Attn: Michael L. Rybak
1450 American Lane, 20th Floor
Schaumburg, Illinois 60173
Telephone: (800) 394-3909

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in the Summary, under the captions "The Merger --
Factors to Consider-Reasons for the Merger, Board Recommendation" and "Opinion
of Financial Advisor" and elsewhere in this Proxy Statement constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Intercargo or
XL Capital or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.

SUMMARY

This summary highlights selected information from this document and may not
contain all of the information that is important to you. To fully understand the
merger and for a more complete description of the legal terms of the merger, you
should read carefully this entire document and the documents we refer you to.
See "Where You Can Find More Information" on page 27 of this Proxy Statement.
The actual terms of the merger are contained in the merger agreement, which is
included in this Proxy Statement as Appendix A.

THE COMPANIES

INTERCARGO. Intercargo, through its subsidiaries, is engaged in the
business of underwriting specialized insurance coverages for companies engaged
in international trade, transportation and other commerce. Products underwritten
include marine cargo insurance, U.S. Customs bonds, professional liability
insurance, property and casualty insurance and surety. Intercargo operates from
its headquarters in Schaumburg, Illinois, as well as through offices in Woodland
Hills, California; Tampa, Florida; New York, New York; London and Hong Kong.
Intercargo's insurance products are distributed through independent agents. A
material portion of risks underwritten by Intercargo are reinsured with various
reinsurance companies. As of December 31, 1998, Intercargo and its subsidiaries
had total assets of over $162 million. The principal executive offices of
Intercargo are located at 1450 American Lane, 20th Floor, Schaumburg, Illinois
60173, and its telephone number is (800) 394-3909. All references herein to
"Intercargo" or the "Company" refer to Intercargo and its subsidiaries, unless
the context otherwise requires.

XL CAPITAL. XL Capital (formerly EXEL Limited), a Cayman Islands
corporation, is a holding company whose principal source of income is dividends
from its wholly-owned subsidiaries. XL Capital, through its operating
subsidiaries, including X.L. Insurance Company, Ltd., X.L. Mid Ocean Reinsurance
Company, Ltd., The Brockbank Group, plc, X.L. Financial Assurances Ltd. and
others, provides insurance, reinsurance and financial risk protection on a
world-wide basis. XL Capital's ordinary shares are listed on the New York Stock
Exchange under the symbol "XL" and, as of December 18, 1998, XL Capital had a
market capitalization in excess of $8.1 billion. The principal executive offices
of XL Capital are located at Cumberland House, 9th Floor, One Victoria Street,
Hamilton HM 11, Bermuda, and its telephone number is (441) 292-8515. All
references herein to "XL Capital" refer to XL Capital and its subsidiaries,
unless the context otherwise requires.

X.L. X.L., a Delaware corporation, is a wholly-owned indirect subsidiary
of XL Capital. X.L. was formed to serve as the holding company for U.S.
subsidiaries of XL Capital. X.L.'s principal operating subsidiaries are X.L.
Insurance Company of America, a New York domiciled insurance company, and X.L.
Risk Solutions, Inc., a Connecticut domiciled insurance company.

ICAR. ICAR, a Delaware corporation, is a wholly-owned subsidiary of X.L.
formed solely for the purpose of effecting the merger.

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REASONS FOR THE MERGER; FACTORS CONSIDERED BY INTERCARGO'S BOARD OF DIRECTORS
(SEE PAGE 11)

The Intercargo board reached a unanimous decision to recommend the merger
based upon its assessment of the operations, financial condition, earnings and
prospects of Intercargo, as well as the following factors, among others:

- Inconsistent earnings performance by Intercargo over the past five
years;

- Intense price competition within the domestic and global insurance
industry, which makes it very difficult to achieve profitable
underwriting results;

- Consolidation within the global insurance industry that has resulted in
increased competition from large multinational insurers who operate with
a significant expense advantage compared to Intercargo, due to economies
of scale;

- The inability of Intercargo to locate suitable acquisition
opportunities;

- Current and prospective economic and market conditions, which make it
difficult for Intercargo to operate on a stand-alone basis;

- The analyses, presentation and opinion of Intercargo's financial
advisor, Fox-Pitt, Kelton, Inc. ("FPK"); and

- The fact that XL Capital's offer represents a 18.5% premium over the
market price of Intercargo common stock as of the last trading day prior
to the public announcement of the merger.

The Intercargo Board also considered potentially negative factors in its
deliberations concerning the merger, including, among others:

- that, while the merger agreement gives Intercargo the right to terminate
such agreement if a superior proposal is made with respect to
Intercargo, the termination fee provisions of the merger agreement could
have the effect of discouraging any such proposal;

- the possibility that the merger may not be consummated and the possible
effects of the public announcement of the merger on Intercargo's
operating results and ability to attract and maintain key personnel; and

- the significant costs involved in connection with consummating the
merger, including the substantial management time and effort required to
effectuate the merger.

INTERESTS OF CERTAIN PERSONS IN THE MERGER (SEE PAGE 13)

Certain executive officers and Directors of Intercargo have interests in
the merger that are in addition to their interests as Intercargo stockholders
generally. The Intercargo Board of Directors was aware of these interests and
considered them, among other matters, in approving and recommending the merger.
These interests are set forth below:

- Stanley A. Galanski, President and Chief Executive Officer of
Intercargo, and Robert M. Lynyak, a Senior Vice President of Intercargo,
have entered into employment agreements with X.L. that will become
effective upon consummation of the merger. XL Capital required Messrs.
Galanski and Lynyak to execute these employment agreements as a
condition to its offer;

- Michael L. Rybak, a Vice President and Chief Financial Officer of
Intercargo, and five additional employees of Intercargo are entitled to
payments of $50,000 each within six months of a change of control of
Intercargo, which would include the merger;

- all options to purchase shares of Intercargo common stock (granted to
employees and directors of Intercargo pursuant to the 1987 Non-Qualified
and Incentive Stock Option Plan of Intercargo) shall be cancelled as of
the effectiveness of the merger, and in consideration for such
cancellation, the holders of such options with an exercise price less
than $12.00 per share will be entitled to receive an amount in cash
equal to the difference between the exercise price of such option and
$12.00 for each share of Intercargo common stock subject to such option;

- Robert B. Sanborn serves as a Director of Intercargo at the request of
Orion Capital Corporation, which owns approximately 26% of the
outstanding common stock of Intercargo. Subject to the terms of a
Stockholder Agreement entered into between an affiliate of Orion and
X.L., Orion has agreed to
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vote all of its shares of Intercargo common stock in favor of the merger. As a
designee of Orion, Mr. Sanborn's investment aims may differ from those of some
stockholders;

- The Intercargo Board of Directors has approved a year-end bonus for 1998
for Mr. Galanski of $125,000, which includes recognition for his efforts
in pursuing the strategic alternatives available to Intercargo;

- Michael L. Sklar, a director of Intercargo, is also a partner of Rudnick
& Wolfe, a law firm which is retained by Intercargo as outside counsel
and is providing legal services to Intercargo in connection with the
merger; and

- the merger agreement provides for continued indemnification of the
executive officers and directors of Intercargo.

OPINION OF INTERCARGO'S FINANCIAL ADVISOR (SEE PAGE 14)

Intercargo retained FPK to act as its financial advisor in connection with
the merger and related matters based upon FPK's qualifications, expertise and
reputation. On December 1, 1998, FPK delivered its oral opinion (subsequently
confirmed in writing) to the Intercargo Board of Directors to the effect that
upon and subject to various considerations set forth in such opinion, as of
December 1, 1998, the consideration offered by XL Capital to the Intercargo
stockholders pursuant to the merger agreement was fair, from a financial point
of view, to the Intercargo stockholders. Intercargo did not impose any
limitations with respect to the investigations made or procedures followed by
FPK in rendering its opinion.

The full text of the written opinion of FPK dated December 1, 1998, which
sets forth, among other things, the assumptions made, matters considered, and
limits on the review taken, is attached as Appendix B to this Proxy Statement.
Intercargo stockholders are urged to read this opinion carefully and in its
entirety. FPK'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT
OF VIEW, OF THE CONSIDERATION OFFERED PURSUANT TO THE MERGER AGREEMENT, HAS BEEN
PROVIDED TO THE INTERCARGO BOARD OF DIRECTORS IN CONNECTION WITH ITS EVALUATION
OF THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY INTERCARGO
STOCKHOLDER AS TO HOW SUCH INTERCARGO STOCKHOLDER SHOULD VOTE.

OUR RECOMMENDATION TO STOCKHOLDERS

THE INTERCARGO BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND THE MERGER AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MERGER
AGREEMENT AND THE MERGER. THE INTERCARGO BOARD OF DIRECTORS BELIEVES THAT THE
MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, INTERCARGO'S STOCKHOLDERS.

THE MERGER

The merger agreement is attached as Appendix A to this Proxy Statement. We
encourage you to read the merger agreement carefully and in its entirety, as it
is the legal document that governs the merger.

THE MERGER CONSIDERATION (SEE PAGE 18). If the merger is completed and you
do not exercise your statutory appraisal rights, you will receive $12.00 per
share in cash for each share of Intercargo common stock that you own. The total
amount to be paid to all holders of Intercargo common stock (assuming no
stockholders exercise their statutory appraisal rights) will be approximately
$88 million.

You should not send in your stock certificates until instructed to do so.

CONDITIONS TO THE MERGER (SEE PAGE 20). The obligations of Intercargo and
X.L. to complete the merger are subject to a number of conditions. If these
conditions are not satisfied or waived, the merger will not be completed. Some
of these conditions are as follows:

- the approval of the merger agreement by the holders of a majority of the
outstanding shares of common stock of Intercargo;

- the absence of any temporary restraining order, preliminary or permanent
injunction or other legal restraint or prohibition that prevents
completion of the merger;

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<PAGE> 11

- the receipt of all material governmental and regulatory consents by
Intercargo and/or X.L., as the case may be, as summarized under the
heading "The Merger -- Factors to Consider -- Regulatory Approvals";

- the absence of any action, suit, investigation or other proceeding by
any governmental body seeking to restrain, enjoin or otherwise prevent
the merger;

- the accuracy of the representations and warranties made by Intercargo
and by X.L. as of the date the merger agreement was signed and as of the
closing of the merger, including the representation and warranty that
there has been no material adverse change in the business of Intercargo;

- compliance with all covenants, in all material respects; and

- compliance with all obligations, in all material respects.

TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 21). Intercargo and X.L. can
mutually agree to terminate the merger agreement without completing the merger,
and either company can terminate the merger agreement if any of the following
occurs:

- a court issues a final order permanently prohibiting the merger;

- the merger is not completed by June 30, 1999 or, in certain
circumstances, September 30, 1999;

- the holders of a majority of the outstanding shares of common stock of
Intercargo do not approve the merger;

- the Intercargo Board of Directors, upon advice of counsel, believes that
it would likely be a violation of its fiduciary duties not to accept a
financially superior proposal and, as a result, under certain
circumstances, withdraws its approval or recommendation of the merger or
approves and recommends an offer from a third party to acquire
Intercargo;

- the other party materially breaches any of its covenants in the merger
agreement; or

- the other party's representations and warranties in the merger agreement
are materially inaccurate as of the date the merger agreement was signed
or as of the date of the proposed closing of the merger.

TERMINATION FEES (SEE PAGE 22). Intercargo will be required to pay X.L. a
termination fee of $3.1 million plus reasonable expenses incurred if the merger
agreement is terminated:

- by Intercargo or X.L. due to the failure to receive the required
Intercargo shareholder approval;

- by X.L. if, prior to the shareholders meeting, the Intercargo Board of
Directors fails to give, withdraws, materially modifies or takes a
public position materially inconsistent with its recommendation of the
merger; OR

- by Intercargo or X.L. if, prior to the shareholders meeting, the
Intercargo Board of Directors decides to enter into an agreement with
respect to a financially superior acquisition proposal from a third
party;

AND, at the time of such termination, Intercargo:

- has received an acquisition proposal from a third party and consummates
or enters into any agreement with respect to an acquisition proposal
from a third party within 360 days of such termination; OR

- consummates or enters into any agreement with respect to a financially
superior acquisition proposal from a third party within 90 days of such
termination.

VOTE REQUIRED (SEE PAGE 8). At the special meeting, you will vote on a
proposal to approve the merger. Each share of Intercargo common stock is
entitled to one vote. The close of business on March 30, 1999, is the record
date for determining the stockholders entitled to vote at the special meeting.
On the record date, there were approximately 7,293,580 shares of Intercargo
common stock outstanding and entitled to vote which were held by approximately
80 stockholders of record.

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<PAGE> 12

In order to be approved, a majority of the outstanding shares of Intercargo
common stock must be voted in favor of the merger. Therefore, the affirmative
vote of the holders of approximately 3,646,791 shares of Intercargo common stock
is required to approve the merger.

REGULATORY APPROVALS (SEE PAGE 14). The Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, prohibits Intercargo and X.L. from
completing the merger until after the companies have furnished certain
information and materials to the Antitrust Division of the Department of Justice
and the Federal Trade Commission and a required waiting period has ended. In
addition, certain insurance regulations must also be complied with prior to
completion of the merger. We cannot predict whether these or other governmental
authorities may prevent the merger or impose conditions that would be
detrimental to either company or the combined company.

STOCKHOLDER AGREEMENT (SEE PAGE 23). An affiliate of Orion Capital
Corporation has executed a Stockholder Agreement with X.L. with respect to all
of the Intercargo common stock beneficially owned by Orion, which constitutes
approximately 26% of the outstanding shares of Intercargo common stock. Under
this Stockholder Agreement, Orion has agreed to vote all of its shares in favor
of the merger, subject to the right to accept a superior offer from a third
party, if, in the opinion of Orion's counsel and using the same criteria
applicable to the Intercargo Board of Directors in similar circumstances,
Orion's Board of Directors believes it would be breaching its fiduciary duties
by declining such offer. The Stockholder Agreement is attached as Appendix C to
this Proxy Statement.

ACCOUNTING TREATMENT (SEE PAGE 13). The merger will be treated as a
purchase by XL Capital for accounting purposes.

INTERCARGO SPECIAL MEETING

The special meeting of the stockholders of Intercargo will be held on April
29, 1999 at 9:00 a.m., local time, at Rudnick & Wolfe, 203 North LaSalle Street,
Suite 1800, Chicago, Illinois (the "Special Meeting").

PURPOSE OF THE SPECIAL MEETING

At the Special Meeting, stockholders of record of the Company as of the
close of business on March 30, 1999 (the "Record Date") will be asked to
consider and vote upon the adoption of an Agreement and Plan of Merger dated
December 1, 1998, as amended and restated March 26, 1999, by and between
Intercargo and X.L., a wholly-owned indirect subsidiary of XL Capital (the
"Merger Agreement"), providing for the merger of X.L. or a wholly-owned
subsidiary of X.L. with and into Intercargo (the "Merger"). Pursuant to
Intercargo's Amended and Restated By-laws, the business that may be conducted at
the Special Meeting is limited to the purpose referenced in the Notice of
Special Meeting of Stockholders that accompanies this Proxy Statement.

RECORD DATE

Only holders of record of the Company's common stock (the "Common Stock")
at the close of business on the Record Date are entitled to notice of and to
vote at the Special Meeting.

SHARES OUTSTANDING AND ENTITLED TO VOTE; QUORUM

As of the close of business on the Record Date, there were approximately
7,293,580 shares of Common Stock outstanding and entitled to vote, held of
record by approximately 80 stockholders. A majority, or approximately 3,646,791
of these shares, present in person or represented by proxy, will constitute a
quorum for the transaction of business. Each stockholder is entitled to one vote
for each share of Common Stock held by such stockholder as of the Record Date.
Abstentions and broker non-votes will be counted for the purposes of
establishing a quorum at the Special Meeting.

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<PAGE> 13

VOTE REQUIRED

Pursuant to the Delaware General Corporation Law ("DGCL") and the Company's
Certificate of Incorporation, approval and adoption of the Merger requires the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock entitled to vote. Therefore, the affirmative vote of the holders of
approximately 3,646,791 shares of Common Stock are required to approve the
Merger. Abstentions and non-votes will have the same effect as votes against the
Merger.

As of the Record Date, stockholders who are not affiliates of the Company
owned approximately 6,899,000, or 94.6%, of the outstanding shares of the
Company' s Common Stock. The directors and executive officers of the Company and
their affiliates beneficially owned approximately 5.4% of the outstanding shares
of Common Stock. An affiliate of Orion Capital Corporation ("Orion") has entered
into a Stockholder Agreement with X.L. (the "Stockholder Agreement"), pursuant
to which Orion has agreed to vote all of its shares of Common Stock
(constituting approximately 26% of the outstanding Common Stock) in favor of the
Merger. The Stockholder Agreement is attached as Appendix C to this Proxy
Statement.

VOTING OF PROXIES

The proxy accompanying this Proxy Statement is solicited on behalf of the
Intercargo Board of Directors (the "Intercargo Board") for use at the Special
Meeting. You are requested to complete, date and sign the accompanying proxy and
promptly return it in the accompanying envelope or otherwise mail it to the
Company. All proxies that are properly executed and received by the Company in
time to be voted at the Special Meeting, and that are not revoked, will cause
the shares of Common Stock represented thereby to be voted at the Special
Meeting in accordance with the instructions indicated on the proxies or, if no
direction is indicated, for approval of the Merger.

REVOCABILITY OF PROXIES

Any stockholder who has given a proxy may revoke it at any time before it
is exercised at the Special Meeting, by (1) delivering (by any means, including
facsimile) a written notice, bearing a date later than the earlier proxy,
stating that the proxy is revoked, addressed to Intercargo Corporation,
attention: Michael L. Rybak, 1450 American Lane, 20th Floor, Schaumburg,
Illinois 60173, facsimile number (847) 517-2996, (2) signing and delivering a
proxy relating to the same shares and bearing a later date than the earlier
proxy prior to the vote at the Special Meeting or (3) attending the Special
Meeting and voting in person (although attendance at the Special Meeting will
not, by itself, revoke a proxy).

ADJOURNMENT

If a quorum is not obtained or if fewer shares of Common Stock than the
number required therefor are voted in favor of approval of the Merger, it is
expected that the Special Meeting will be postponed or adjourned in order to
permit additional time for soliciting and obtaining additional proxies or votes,
and at any subsequent reconvening of the Special Meeting, all proxies will be
voted in the same manner as such proxies would have been voted at the original
Special Meeting, except for any proxies which have theretofore effectively been
revoked or withdrawn.

SOLICITATION OF PROXIES AND EXPENSES

The Company will bear the cost of the solicitation of proxies in connection
with the Special Meeting. In addition to solicitation by mail, the directors,
officers and employees of the Company may solicit proxies from stockholders by
telephone, telegram, letter, facsimile or in person. Following the original
mailing of the proxies and other soliciting materials, the Company will request
brokers, custodians, nominees and other record holders to forward copies of the
proxy and other soliciting materials to persons for whom they hold shares of
Common Stock and to request authority for the exercise of proxies. In such
cases, the Company, upon the request of the record holders, will reimburse such
holders for their reasonable expenses. The Company has engaged the services of
Georgeson & Company, Inc. to assist in the solicitation of proxies. The fee of
such firm is estimated to be $10,000.
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<PAGE> 14

THE MERGER -- FACTORS TO CONSIDER

GENERAL

The Merger Agreement provides for the merger of X.L. (or a subsidiary
thereof), a wholly-owned indirect subsidiary of XL Capital, with and into the
Company, which will be the surviving corporation in the Merger (the "Surviving
Corporation"). ICAR has been formed to be the X.L. subsidiary which will,
subject to Intercargo stockholder approval, be merged with and into the Company.
If the requisite approval of the stockholders of the Company is received at the
Special Meeting, the Merger is expected to be consummated as soon as practicable
after the satisfaction or waiver of each of the conditions to the consummation
of the Merger. Upon the consummation of the Merger, each outstanding share of
Common Stock (other than shares owned directly or indirectly by the Company, XL
Capital and stockholders demanding appraisal rights -- see "Appraisal Rights")
will be converted into the right to receive $12.00 in cash, without interest
(the "Merger Consideration").

BACKGROUND OF THE MERGER

In the fall of 1997, the Intercargo Board addressed its and management's
concern about competitive pressures, the Company's relatively small size and
lack of infrastructure, personnel, branch offices and capital necessary to
compete effectively in a global market. Given these concerns, the Intercargo
Board adopted a proposal to supplement the Company's internal growth plans with
an acquisition strategy funded by the proceeds from the sale of the Company's
partially-owned Canadian subsidiary. This strategy proposed that Intercargo
pursue the acquisition of a small to medium sized surety, marine or specialty
casualty insurer or book of business and identified a number of potential
targets. Management initiated efforts to pursue an acquisition by making direct
contact with senior executives at several of the targeted prospects as well as
through meetings coordinated by reinsurance intermediaries and other third
parties. By mid-January 1998, while several companies had entered into
discussions with Intercargo, and one written bid was made, there were no
imminent transactions.

On January 21, 1998, the Intercargo Board concluded that while management
should continue to pursue internal operating improvements and the previously
endorsed acquisition strategy, given the difficulty experienced by the Company
in implementing its acquisition strategy, its lower than anticipated operating
results for 1997 and the potential impact of the recent resignation of a group
of key sales employees from the Company's owned agency subsidiary, who left to
form a competing organization, it was also appropriate to simultaneously
evaluate other strategic alternatives, including the possible merger or sale of
the Company. On February 4, 1998, the Intercargo Board approved the retention of
FPK to serve as financial advisor to the Company in connection with the pursuit
of such strategic alternatives.

At a meeting held on February 26, 1998, FPK provided the Intercargo Board
with an overview of the financial performance, operating results and valuations
of several specialty property and casualty insurers and outlined possible
strategic options for the Intercargo Board to consider, including growth through
acquisitions and the sale of the Company. As a result of their presentation and
the discussions generated thereby, the Intercargo Board decided to further
explore a potential sale or merger of the Company while continuing to pursue its
acquisition strategy and authorized management to work with FPK to (1) prepare
background information on the Company, and (2) determine the level of interest
of Orion, Intercargo's largest shareholder, in any potential transaction.

On May 14, 1998, FPK was advised by Orion's financial advisor that Orion
was not interested in making an offer to acquire the Company.

In the spring and summer of 1998, FPK evaluated twenty-seven prospective
purchasers of the Company, and the Company entered into confidentiality
agreements with eleven prospective purchasers. All of these entities received
confidential information about the Company, and several conducted due diligence.

During this time, Intercargo management continued to pursue its acquisition
strategy. Management conducted meetings with several specialty insurance
companies and managing general agencies and also pursued internal growth through
the opening of regional offices in Los Angeles, Tampa and New York.

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<PAGE> 15

On July 23, 1998, XL Capital submitted a non-binding preliminary indication
of interest to FPK of $14.00 per share of Common Stock. In its indication of
interest, XL Capital suggested that $30 million of the consideration would be
funded by a Company dividend and the balance in XL Capital stock. The Intercargo
Board, at its quarterly meeting on August 10, 1998, concluded that the Company
should pursue this expression of interest and enter into preliminary discussions
with XL Capital. Representatives of XL Capital conducted due diligence at the
Company's offices on August 10 and 11, 1998. XL Capital also informed
representatives of the Company that XL Capital was reviewing other strategic
acquisition alternatives that might preclude a transaction with the Company.
Representatives of the Company indicated to XL Capital a preference for
receiving all or a majority of any consideration for the Company in the form of
XL Capital stock.

On September 24, 1998, XL Capital contacted FPK and reaffirmed its
indication of interest in acquiring Intercargo. Since the time that XL Capital
submitted its initial non-binding preliminary indication of interest to FPK on
July 23, 1998, volatility in the capital markets had resulted in a general
decline in valuations of insurance companies, including both Intercargo and XL
Capital. XL Capital took this factor into account in reaffirming its interest,
but at a reduced purchase price of $12.00 in cash per share of Common Stock,
subject to completion of due diligence and drafting satisfactory documentation.

On September 25, 1998, a telephonic special meeting of the Intercargo Board
was held to discuss the status of XL Capital's indication of interest. Present
at the meeting were all the directors of the Company, Mr. Rybak and
representatives of FPK. Mr. Sanborn excused himself from the meeting upon the
commencement of the discussion regarding the Company's strategic alternatives.
FPK advised the Intercargo Board that XL Capital had the financial resources to
complete the transaction and that the indicated purchase price appeared to be
fair, from a financial point of view, to the stockholders of the Company. FPK
then responded to detailed questions by the Intercargo Board with respect to XL
Capital, as well as FPK's progress in locating other possible acquirers. It was
the consensus of the Intercargo Board that management should attempt to persuade
XL Capital to improve its offer and to include XL Capital stock in any proposed
transaction. FPK informed XL Capital of the position of the Intercargo Board
later on September 25, but received no response from XL Capital.

On October 14, 1998, XL Capital responded verbally to FPK that it had
carefully considered the factors identified by FPK, but would not improve upon
its all cash offer of $12.00 per share of Common Stock. However, XL Capital
indicated, in response to the request of the Company, that it was willing to
provide up to half of the consideration in XL Capital stock; provided, however,
that the Common Stock exchanged for XL Capital stock would be valued at $11.50
rather than $12.00 per share. FPK informed Intercargo of this development on
October 15, 1998.

On October 19, 1998, a telephonic meeting of the Intercargo Board was
convened to discuss the XL Capital response. Again, the consensus of the
Intercargo Board was that an additional effort should be made to improve XL
Capital's indication of interest, and Messrs. Galanski and Sklar were authorized
to meet with XL Capital within the next week for that purpose.

On October 23, 1998, the representatives of the Company, including John
Hompe of FPK, met with representatives of XL Capital in Hamilton, Bermuda. After
listening to the Company's position, XL Capital responded that they were
unwilling to increase their all cash per share price offer above $12.00.

On October 26, 1998, Messrs. Galanski, Sklar and Hompe reported to the
Intercargo Board with respect to the October 23 meeting. Mr. Hompe reported on
the status of FPK's efforts to attract other prospective purchasers. After an
extensive discussion, the Intercargo Board authorized management and FPK to
initiate negotiations of a merger agreement with XL Capital based upon all-cash
consideration of $12.00 per share of Common Stock, reserving approval of such a
transaction until satisfactory completion of such negotiations and the receipt
of an opinion from FPK as to the fairness of such consideration, from a
financial point of view, to the stockholders of Intercargo.

On October 30, 1998, the Company received an indication from another party
that it was interested in acquiring Intercargo for $13.25 in cash per share of
Common Stock and would like to perform initial due diligence. Despite concerns
of the Company and FPK about the ability of such party to consummate

10
<PAGE> 16

a transaction, the Company pursued the proposal. On November 3, 1998, the
potential acquirer performed initial due diligence. Following completion of this
initial due diligence, the potential acquirer reiterated its interest in
acquiring Intercargo, but at the reduced price of $12.75 in cash per share of
Common Stock, subject to its ability to arrange the necessary financing.

Throughout November 1998, representatives of XL Capital conducted due
diligence of the Company.

On November 9 and November 10, 1998, a regular meeting of the Intercargo
Board was held. During the second day of the board meeting, representatives of
FPK, Rudnick & Wolfe and LeBoeuf, Lamb, Greene & MacRae, L.L.P., special
co-counsel of the Company to assist in negotiation of a strategic transaction,
participated in the meeting. FPK presented information to the Intercargo Board
regarding the discussions with XL Capital and with the other potential acquirer
and the Company's legal counsel outlined the duties of the Intercargo Board. FPK
and the Company's legal counsel answered a number of detailed questions from
members of the Intercargo Board. At the conclusion of the presentations and
discussion, the Intercargo Board directed management and the outside advisors to
continue negotiations with both XL Capital and the other party and to continue
to evaluate whether the other party was capable of consummating a transaction
with the Company. On November 16, 1998, the other party advised FPK that it was
unable to arrange financing on acceptable terms and therefore was withdrawing
its indication of interest.

On November 18, 1998, a draft of the Merger Agreement, together with a
summary of its key terms, was distributed to the Intercargo Board for its
review. Discussions of the terms of the proposed transaction continued between
representatives of the Company and XL Capital. On November 25, 1998, a revised
draft Merger Agreement was provided to the Intercargo Board, together with a
revised summary of its key terms, in advance of the scheduled special board
meeting on November 29, 1998.

On November 29, 1998, the Intercargo Board held a special telephonic
meeting to further consider the XL Capital offer. FPK made a detailed
presentation regarding the financial terms of the proposed merger with XL
Capital. The Company's legal counsel then provided an update on the Merger
Agreement negotiations and the remaining open issues. Counsel also reported that
certain conditions to the signing of the Merger Agreement had not yet been
fulfilled, notably the execution of the stockholder agreement with Orion and the
execution of employment agreements with Messrs. Galanski and Lynyak. Following
extensive discussion, the Intercargo Board indicated its support for the XL
Capital transaction and directed management and the professional advisors to
proceed to attempt to resolve the remaining issues as soon as possible.

On December 1, 1998, the Intercargo Board held another special telephonic
meeting. The Company's legal counsel summarized the resolution of the issues
that had been outstanding at the time of the prior telephonic board meeting. FPK
then delivered its oral opinion (subsequently confirmed in writing) to the
effect that, based upon and subject to the various considerations set forth
therein, the Merger Consideration was fair, from a financial point of view, to
the Intercargo stockholders. See "Opinion of Financial Advisor." After several
questions from members of the Intercargo Board, the Intercargo Board unanimously
approved the Merger and the Merger Agreement. Following the execution of the
Orion stockholder agreement and the two employment agreements, the Merger
Agreement was executed on December 1, 1998.

On March 26, 1999, the Merger Agreement was amended and restated solely to
provide for Intercargo to be the surviving corporation in the Merger.

REASONS FOR THE MERGER

The Intercargo Board has carefully considered the terms and conditions of
the proposed Merger and has determined that the Merger is fair to, and in the
best interests of, the Company's stockholders and has unanimously approved the
Merger Agreement and the Merger.

11
<PAGE> 17

In reaching its unanimous determination that the Merger is fair to, and in
the best interests of, the Company's stockholders, the Intercargo Board
considered a number of factors, which, taken together, support such
determination, including, without limitation, the following:

- The Intercargo Board's assessment of the operations, financial
condition, earnings and prospects of Intercargo;

- Inconsistent earnings performance by Intercargo over the past five
years;

- Intense price competition within the domestic and global insurance
industry, which makes it very difficult to achieve profitable
underwriting results;

- The inability of Intercargo to locate suitable acquisition
opportunities;

- Current and prospective economic and market conditions, which make it
difficult for Intercargo to operate on a stand-alone basis;

- The analyses, presentation and opinion of Intercargo's financial
adviser, FPK;

- The fact that XL Capital's offer represents a 18.5% premium over the
market price of Intercargo Common Stock as of the last trading day prior
to the public announcement of the merger.

The Intercargo Board also considered potentially negative factors in its
deliberations concerning the merger, including, among others:

- that, while the Merger Agreement gives Intercargo the right to terminate
such agreement if a superior proposal is made with respect to
Intercargo, the termination fee provisions of the Merger Agreement could
have the effect of discouraging any such proposal;

- the possibility that the Merger may not be consummated and the possible
effects of the public announcement of the Merger on Intercargo's
operating results and ability to attract and maintain key personnel; and

- the significant costs involved in connection with consummating the
Merger, including the substantial management time and effort required to
effectuate the Merger.

The foregoing discussion of the information and factors considered by the
Intercargo Board addresses the material factors considered by the Intercargo
Board in its consideration of the Merger. While the Intercargo Board gave
predominate weight to the per share cash price offered by XL Capital, it did not
quantify or attach any particular weight to the various factors that it
considered in reaching its decision to approve the Merger Agreement and the
Merger and recommend approval of the Merger Agreement and Merger to the
Company's stockholders. In addition, individual members of the Intercargo Board
may have given different weights to different factors. Moreover, after due
consideration of its fiduciary obligations, in the unanimous view of the
Intercargo Board, the potentially negative factors considered by it were not
sufficient, either individually or collectively, to outweigh the positive
factors considered by it in its deliberations relating to the Merger.

BOARD RECOMMENDATION

THE INTERCARGO BOARD HAS CAREFULLY CONSIDERED THE TERMS AND CONDITIONS OF
THE MERGER AGREEMENT AND MERGER AND HAS DETERMINED THAT THE MERGER AGREEMENT AND
MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY'S STOCKHOLDERS.
THE INTERCARGO BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND MERGER
AND RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY APPROVE THE MERGER AGREEMENT
AND MERGER.

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<PAGE> 18

INTERESTS OF CERTAIN PERSONS

In considering the recommendation of the Intercargo Board with respect to
the Merger, you should be aware that the executive officers and directors of the
Company have interests that may present them with potential conflicts of
interest. These potential conflicts are listed below:

- Messrs. Galanski and Lynyak have entered into employment agreements with
X.L. (the "Employment Agreements") that will become effective upon
consummation of the Merger. XL Capital required Messrs. Galanski and
Lynyak to execute such Employment Agreements as a condition of its
offer. Pursuant to the Employment Agreements, which each have initial
terms of two years, Messrs. Galanski and Lynyak will receive annual base
salaries of $275,000 and $225,000, respectively. Pursuant to the
Employment Agreements, each of Messrs. Galanski and Lynyak also have
agreed to serve as directors of Intercargo Insurance Company.

- Mr. Rybak and five other employees of Intercargo have entered into
letter agreements pursuant to which, upon a "change in control" of the
Company (which would include the Merger), they are each entitled to
receive a payment of $50,000 upon the earlier to occur of (i) 180 days
following the change in control or (ii) their involuntary termination
(other than for cause).

- All options to purchase shares of Common Stock outstanding immediately
prior to the Merger will automatically be cancelled, and in
consideration for such cancellation, the holders of each of those
options with an exercise price below $12.00 will receive a cash payment
in an amount equal to $12.00 less the exercise price of the option
multiplied by the number of shares of Common Stock into which such
option was previously exercisable. Based upon the number of shares of
Common Stock subject to such options and the exercise price of such
options, the executive officers of Intercargo will receive the following
cash payments in connection with their options to purchase shares of
Common Stock: $20,000 for Mr. Galanski, $0 for Mr. Lynyak, $11,500 for
Mr. Rybak and $85,795 for 12 other officers, managers and directors (as
a group).

- Orion, which beneficially owns approximately 26% of the Company's
outstanding Common Stock, has the right to designate one director of the
Intercargo Board. Robert B. Sanborn is Orion's current designee on the
Intercargo Board, and as such, his investment aims may be different than
those of some stockholders. Subject to the terms of the Stockholder
Agreement, Orion has agreed to vote all of its shares of Common Stock in
favor of the Merger.

- The Intercargo Board has approved a year-end bonus for 1998 for Mr.
Galanski of $125,000, which includes recognition for his efforts in
pursuing the strategic alternatives available to Intercargo.

- Michael L. Sklar, a director of the Company, is a partner of the law
firm of Rudnick & Wolfe, which is retained as outside counsel by the
Company and is providing legal services to the Company in connection
with the Merger. In connection with its representation of the Company,
Rudnick & Wolfe will receive legal fees for legal services rendered.

- The Merger Agreement provides that all rights to indemnification in
favor of any present or former director or officer of the Company as
currently provided by the Company, including directors and officers
liability insurance, shall continue in full force and effect for a
period of six years after the Merger with respect to matters occurring
at or prior to the consummation of the Merger. See "The Merger Agreement
-- Covenants".

ANTICIPATED ACCOUNTING TREATMENT

The Merger will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Purchase accounting for a merger is the same as
the accounting treatment used for the acquisition of any group of assets. The
fair value of the consideration given by XL Capital in the Merger will be used
as the valuation basis of the combination. The assets acquired and the
liabilities assumed by XL Capital will be recorded at their relative fair values
as of the consummation of the Merger.

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<PAGE> 19

REGULATORY APPROVALS

The Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act") prohibits Intercargo and X.L. from completing the Merger until after
the companies have furnished certain information and materials to the Antitrust
Division of the Department of Justice and the Federal Trade Commission and a
required waiting period has been terminated. The required waiting period under
the HSR Act terminated February 18, 1999. In addition, the Merger is subject to
the approval of the Illinois Insurance Department on the basis of a "Form A"
filing required to be filed with such department pursuant to Section 131 of the
Illinois Insurance Code, as respects a change of control of Intercargo Insurance
Company. Certain other forms are also required to be filed with Illinois and
various other jurisdictions, including possibly a Form E in Illinois and
Kentucky relating to competitive impact, and forms analogous to the Form A in
the United Kingdom, where certain of Intercargo's insurance subsidiaries hold
licenses. Generally, the applicable insurance regulatory authority seeks to
determine whether the proposed new ultimate holding company of the relevant
insurance company will be a fit and proper person to control such company, as
respects the interests and protection of policyholders, the insurance buying
public and security holders who reside within such authority's jurisdiction.
Should there be a negative determination by any such authority, it is possible
that the Merger could be prevented. We cannot predict whether these or other
governmental authorities may seek to prevent the Merger or impose conditions
that would not be detrimental to either company or the combined company.

STOCKHOLDER LITIGATION

On February 17, 1999, certain purported stockholders of Intercargo filed a
lawsuit in the Court of Chancery in New Castle County, Delaware against
Intercargo and Intercargo's directors, seeking class action status and claiming,
among other things, that Intercargo's directors breached their fiduciary duties
to Intercargo's stockholders in approving the Merger, and that they failed to
adequately explore alternative transactions and maximize shareholder value. The
lawsuit requests, among other things, injunctive relief and payment of damages
to the class members. Intercargo believes that the lawsuit is without merit and
intends to contest the lawsuit vigorously.

OPINION OF FINANCIAL ADVISOR

FPK has acted as financial advisor to Intercargo in connection with the
Merger. In connection with such engagement, at the December 1, 1998 meeting of
the Intercargo Board, FPK delivered its oral opinion to the Intercargo Board
(subsequently confirmed in writing), to the effect that, based upon and subject
to the various considerations set forth in such opinion, as of December 1, 1998,
the Merger Consideration was fair, from a financial point of view, to the
Intercargo stockholders. No limitations were imposed by the Intercargo Board
upon FPK with respect to investigations made or the procedures followed by FPK
in rendering its opinion.

THE FULL TEXT OF THE WRITTEN OPINION OF FPK DATED DECEMBER 1, 1998, WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
TAKEN, IS ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT. INTERCARGO
STOCKHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY AND IN ITS ENTIRETY. FPK'S
OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION TO THE
INTERCARGO STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW, HAS BEEN PROVIDED TO THE
INTERCARGO BOARD IN CONNECTION WITH ITS EVALUATION OF THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY INTERCARGO STOCKHOLDER AS TO HOW SUCH
INTERCARGO STOCKHOLDER SHOULD VOTE. FPK HAS CONSENTED TO THE INCLUSION OF ITS
OPINION IN THIS PROXY STATEMENT AND THE SUMMARY OF THE OPINION OF FPK SET FORTH
IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.

In arriving at its opinion, FPK, among other things,

- reviewed and analyzed certain publicly available financial statements
for Intercargo and XL Capital and financial information made available
to FPK by the management of Intercargo;

- analyzed certain internal financial statements, including financial
projections and other financial and operating data prepared by the
management of Intercargo;

14
<PAGE> 20

- discussed the past, present and future operations, financial condition
and prospects of Intercargo with the management of Intercargo;

- compared the financial performance and condition of Intercargo with that
of certain other comparable publicly traded companies;

- reviewed the financial terms, to the extent publicly available, of
certain merger and acquisition transactions comparable, in whole or in
part, to the Merger;

- reviewed and discussed with the management of Intercargo and XL Capital
the strategic objectives of the Merger and certain other benefits of the
Merger;

- reviewed the Merger Agreement; and

- performed such other analyses as FPK deemed appropriate.

In rendering its opinion, FPK assumed and relied upon, without independent
verification, the accuracy and completeness of all of the financial and other
information reviewed by FPK for the purposes of providing its opinion, and did
not assume any responsibility for independent verification of such information.
FPK did not assume any responsibility for independent valuation or appraisal of
the assets and liabilities of Intercargo nor was it furnished with any such
valuation or appraisal. With respect to financial projections, FPK assumed that
they were reasonably prepared by the management of Intercargo on bases
reflecting the best currently available estimates and judgments of the future
financial performance of Intercargo. FPK expresses no view as to the validity of
such projections or the assumptions on which they were based. FPK assumed that
the Merger described in the Merger Agreement will be consummated on the terms
set forth therein without material waiver or modification. FPK's opinion is
based upon economic, market and other conditions as they existed and could be
evaluated on December 1, 1998.

The forecasts or projections furnished to FPK were prepared by Intercargo.
As a matter of policy, Intercargo does not publicly disclose internal management
forecasts, projections or estimates of the type furnished to FPK in connection
with its analysis of the Merger, and such forecasts, projections and estimates
were not prepared with a view towards public disclosure. These forecasts,
projections and estimates were based on numerous variables and assumptions which
are inherently uncertain and which may not be within the control of management,
including, without limitation, factors related to general economic, regulatory
and competitive conditions. Accordingly, actual results could vary materially
from those set forth in such forecasts, projections and estimates. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING INFORMATION".

The following is a summary of the material analyses presented by FPK to the
Intercargo Board at its meetings held on November 29, 1998 and December 1, 1998,
in connection with the delivery of FPK's opinion to the Intercargo Board.

Comparable Public Company Analysis. FPK reviewed and compared certain
financial, operating and stock market performance data of Intercargo with
certain publicly available financial, operating and stock market performance
data of six publicly traded property and casualty insurance companies with
operations similar to Intercargo and with market capitalizations of less than
$250 million (the "Peer Companies"). For the purpose of its analysis, the
following companies comprised the Peer Companies:

- Capital Transamerica Corp.

- NYMagic, Inc.

- The Navigators Group, Inc.

- Penn-America Group, Inc.

- American Safety Insurance Group, Ltd.

- Amwest Insurance Group, Inc.

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<PAGE> 21

FPK analyzed the relative performance and value of Intercargo by comparing
certain publicly available financial data of Intercargo with the Peer Companies,
including, among other things, ratios of combined losses and expenses to net
premiums earned and equity to assets, each as of June 30, 1998, and multiples of
market price to earnings per share as of the twelve months ended September 30,
1998, market price to estimated earnings per share as of the twelve months ended
December 31, 1998 and December 31, 1999 and market price to book value as of
September 30, 1998. This analysis yielded the following medians for the Peer
Companies and Intercargo, respectively: (1) combined losses and expenses to net
premiums earned ratios of 100.6% and 118.2%; (2) equity to assets ratios of
37.0% and 50.2%; (3) market price to earnings per share multiples for the twelve
months ended September 30, 1998 of 9.1x and 82.0x; (4) market price to estimated
earnings per share multiples for the twelve months ended December 31, 1998 of
11.5x and 16.1x; (5) market price to estimated earnings per share multiples for
the twelve months ended December 31, 1999 of 10.5x and 14.5x; and (6) market
price to book value multiples of 0.95x and 0.91x.

Comparable Transaction Analysis. FPK reviewed, on both a Generally
Accepted Accounting Principles ("GAAP") and statutory basis, the consideration
paid or proposed to be paid in other merger and acquisition transactions, with
values ranging from $25 million to $250 million, announced since September 1,
1998, involving property and casualty insurance companies with operations or
financial characteristics similar to Intercargo (the "Comparable Transactions").
In reviewing the Comparable Transactions, FPK examined the ratios or multiples
of the purchase price relative to equity or policyholders' surplus, pre-tax
operating income and net income for the target company in each such transaction.
This analysis yielded the following medians for the Comparable Transactions: (1)
price to equity multiple of 1.1x (on a GAAP basis) and price to policyholders'
surplus multiple of 1.4x (on a statutory basis); (2) price to pre-tax operating
income multiples of 25.6x (on a GAAP basis) and 14.1x (on a statutory basis);
and (3) price to net income multiples of 16.1x (on a GAAP basis) and 12.1x (on a
statutory basis). FPK applied the median multiples calculated in respect of the
Comparable Transactions to relevant financial data of Intercargo as of or for
the twelve months ended September 30, 1998 to arrive at a reference range of
values for Intercargo of $15.3 million to $90.5 million ($2.00 to $11.84 per
share of Common Stock) using GAAP data and a range of $13.5 million to $96.5
million ($1.76 to $12.53 per share of Common Stock) using statutory data.

Review of Takeover Premiums. FPK reviewed the premiums paid in selected
property and casualty insurance company takeover transactions of less than $500
million from January 1, 1997 to December 1, 1998. The median premium for the
selected takeover transactions reviewed was 22.4% calculated based on the market
price per share of the seller's common stock ten days preceding the announcement
of the applicable transaction.

Stock Trading History. FPK reviewed the stock price performance and
trading volume of the Common Stock during the period from January 1993 to
November 1998 on a monthly basis and from January 1, 1998 to December 1, 1998 on
a daily basis. FPK compared the stock price performance and trading volume of
the Common Stock to the Standard & Poors Property/Casualty Insurance Index for
such periods.

Dividend Discount Analysis. FPK performed a dividend discount analysis to
determine a range of present values per share of Common Stock assuming
Intercargo continued to operate as a stand-alone entity. The range was
determined by adding: (1) the present value of the estimated future dividend
stream that Intercargo could generate between January 1999 and December 2001;
and (2) the present value of the terminal value of Intercargo, which was
calculated both (a) as a multiple of net income for the year 2001 and (b) as a
multiple of GAAP book value as of December 31, 2001. To calculate these present
values, FPK formulated two scenarios: (1) a base case scenario with net premiums
earned growth of 23.2% in 1999 and 15% in each of 2000 and 2001; and (2) a
growth case scenario with net premiums earned growth of 30.5% in 1999, 22.9% in
2000 and 22.4% in 2001. Under both scenarios, FPK assumed an annual dividend of
$0.18 per share of Common Stock for each of the years 1999, 2000 and 2001.

The terminal values were based upon a range of price to earnings multiples
that were applied to projected net income for the year 2001 and a range of price
to book value multiples that were applied to projected book value as of December
31, 2001 for the two scenarios. Under both scenarios, FPK applied
price-to-earnings

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<PAGE> 22

multiples of 10.0x to 13.0x and price-to-book value multiples of 1.0x to 1.3x,
which are consistent with trading multiples for comparable small capitalization
property and casualty insurance companies.

Under the base case scenario, the present values of the dividend stream and
terminal values were calculated using discount rates ranging from 11% to 14%.
Under the growth case scenario, the present values of the dividend stream and
terminal values were calculated using discount rates ranging from 14% to 17%. In
each case, the range of discount rates applied are consistent with the range of
discount rates currently utilized by purchasers of property and casualty
insurance companies. Applying the foregoing multiples, discount rates and
assumptions, FPK determined that the present value of Intercargo ranges from
$57.4 million to $103.7 million or $7.86 to $14.21 per share of Common Stock.

In arriving at its opinion, FPK performed a variety of financial analyses,
the material portions of which are summarized above. The summary set forth above
does not purport to be a complete description of the analyses performed by FPK
or of FPK's presentations to the Intercargo Board. The preparation of a fairness
opinion is a complex analytical process involving various determinations as to
the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore,
such an opinion is not necessarily susceptible to partial analysis or summary
description. In arriving at its opinion, FPK did not give any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, FPK believes that its analyses must be considered as a whole and
that selecting portions of such analyses and the factors considered by it,
without considering all such analyses and factors, could create an incomplete
view of the process underlying the analyses set forth in its opinion. With
regard to the comparable public company analysis and the comparable transactions
analysis summarized above, FPK selected comparable public companies and
transactions on the basis of various factors; however no public company or
transaction utilized as a comparison is identical to Intercargo or the Merger.
Accordingly, an analysis of the foregoing is not mathematical; rather it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the Peer Companies and other factors
that could affect the acquisition or public trading value of the Peer Companies
and Comparable Transactions to which Intercargo and the Merger are being
compared.

FPK's opinion does not address Intercargo's underlying business decision to
effect the Merger. In performing its analyses, FPK made numerous assumptions
with respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
Intercargo and XL Capital. Any estimates contained in such analyses are not
necessarily indicative of actual past or future results or values, which may be
significantly more or less than such estimates. Actual values will depend upon
several factors, including changes in interest rates, dividend rates, market
conditions, general economic conditions and other factors that generally
influence the price of securities. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
INFORMATION".

FPK is an internationally recognized investment banking firm and was
selected by Intercargo based on FPK's experience and expertise. FPK regularly
engages in the evaluation of insurance company securities in connection with
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for various other
purposes. In the ordinary course of its business, FPK may effect transactions,
for its own account and for the account of customers, and hold at any time a
long or a short position in securities of Intercargo or XL Capital.

Pursuant to a letter agreement dated February 6, 1998, between Intercargo
and FPK, FPK agreed to act as financial advisor to Intercargo in connection with
the Merger. Intercargo paid FPK $100,000 upon the execution of such letter
agreement and $150,000 upon the execution of the Merger Agreement. Intercargo
also has agreed to pay FPK a fee of 1% of the aggregate consideration paid or
payable to Intercargo or the Intercargo stockholders (subject to a minimum
$1,000,000) upon the consummation of the Merger. The $100,000 paid upon
execution of such letter agreement and the $150,000 due upon execution of the
Merger Agreement are fully creditable against the fee of 1% of the aggregate
consideration. Intercargo has agreed to reimburse FPK for its reasonable
out-of-pocket expenses, including travel, outside legal fees and related
charges, and to indemnify FPK and related persons against certain liabilities,
including certain liabilities under the federal securities laws, relating to or
arising out of FPK's engagement.

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<PAGE> 23

THE MERGER AGREEMENT

This section of the Proxy Statement describes some aspects of the proposed
Merger, including some of the provisions of the Merger Agreement. The
description of the Merger Agreement contained in this Proxy Statement is not
complete and is qualified in its entirety by reference to the Merger Agreement,
a copy of which is attached to this Proxy Statement as Appendix A and which is
incorporated by reference. You are urged to read the Merger Agreement carefully
and in its entirety.

STRUCTURE; EFFECTIVE TIME

The Merger Agreement provides for the merger of X.L., a wholly-owned
indirect subsidiary of XL Capital (or a wholly-owned subsidiary of X.L.), with
and into the Company. The closing of the Merger will take place at 10:00 a.m.
(Chicago time) on the second business day after the satisfaction and/or waiver
of the conditions set forth in the Merger Agreement, at the offices of Cahill
Gordon & Reindel, 80 Pine Street, New York, New York 10005, unless another date,
time or place is agreed to. The date of the closing is referred to herein as the
"Closing Date." The Merger will become effective at the time a Certificate of
Merger is filed with the Secretary of State of the State of Delaware (or a later
time if specified in the Certificate of Merger). The time that the Merger
becomes effective is referred to herein as the "Effective Time." If the Merger
is approved by the requisite vote of the Company's stockholders at the Special
Meeting, the Effective Time is expected to occur as promptly as practicable
following the satisfaction or waiver of all the conditions to the Merger. XL
Capital has guaranteed the obligations of X.L. under the Merger Agreement.

MERGER CONSIDERATION

The Merger Agreement provides that each share of Common Stock outstanding
immediately prior to the Effective Time (other than shares owned by either X.L.
or the Company) will, at the Effective Time, be converted into the right to
receive the Merger Consideration. All shares of Common Stock that are owned
directly or indirectly by X.L. or the Company will, at the Effective Time, be
cancelled and no payment will be made for such shares. The Merger Consideration
will be paid as promptly as practicable after the Effective Time and after the
exchange agent appointed by X.L. receives stock certificates and appropriate
documentation from the stockholders. You will be given instructions after the
Effective Time explaining how to send your stock certificates and other required
documents to the exchange agent.

The aggregate Merger Consideration, including amounts necessary to cash out
outstanding options issued by the Company, is estimated to be approximately $88
million.

CONVERSION OF SHARES

X.L. will appoint an exchange agent who will make payment of the Merger
Consideration in exchange for certificates representing shares of Common Stock
and who will distribute the consideration owed with respect to options to
purchase Common Stock outstanding at the Effective Time. X.L. will deposit cash
with the exchange agent in order to permit the exchange agent to pay such
amounts. Promptly after the Effective Time, the exchange agent will send you a
letter of transmittal and instructions explaining how to send your certificates
to the exchange agent. If you send your stock certificates to the exchange
agent, together with a properly completed letter of transmittal, a check for the
Merger Consideration will be mailed to you (subject to any withholding required
by law) as promptly as practicable after the exchange agent receives and
processes your documents.

Until surrendered, each certificate representing Common Stock will be
deemed at any time after the Effective Time to represent only the right to
receive the Merger Consideration upon the surrender of such certificate (unless
appraisal rights have been perfected with respect to such shares -- see
"Appraisal Rights"). No interest will be paid or will accrue on any cash payable
to holders of Common Stock.

Any portion of the cash deposited with the exchange agent which remains
undistributed six months after the Effective Time will be delivered to the
Surviving Corporation, upon demand, and any holders of the

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<PAGE> 24

Common Stock who have not theretofore complied with the exchange provisions of
the Merger Agreement may thereafter look only to the Surviving Corporation for
payment of their claim for Merger Consideration.

NO SOLICITATION BY THE COMPANY

Pursuant to the Merger Agreement, the Company has agreed that it shall not,
directly or indirectly, solicit or encourage the initiation or submission of any
direct or indirect inquiries, proposals or offers regarding any acquisition,
merger, takeover bid or sale of assets (other than in the ordinary course of
business consistent with past practice); provided, however, that nothing
contained in the Merger Agreement shall prevent the Intercargo Board from
considering or negotiating an unsolicited bona fide acquisition proposal. If the
Intercargo Board, after duly considering written advice of outside counsel and
financial advisors to the Company, determines in good faith that it would likely
be a violation of its fiduciary responsibilities to not approve or recommend
(and in connection therewith withdraw or modify its approval or recommendation
of the Merger) a Superior Proposal (as defined below), then, notwithstanding any
such approval or recommendation (1) the Company shall not enter into any
agreement with respect to the Superior Proposal and (2) any other obligation of
the Company under the Merger Agreement shall not be affected, unless the Merger
Agreement is terminated and the Company pays X.L. the termination fee described
in "Payment of Fees and Expenses upon Termination." As used herein, the term
"Superior Proposal" means an unsolicited bona fide proposal made by a third
party to acquire the Company pursuant to a tender or exchange offer, a merger, a
sale of all or any significant portion of its assets or otherwise that the
Intercargo Board determines in its good faith judgment to be a proposal which,
if accepted, would be reasonably likely to be consummated, taking into account,
without limitation, all legal, financial, and regulatory aspects of such
proposal and person or persons making such proposal and, if consummated, would
be more favorable to the holders of Common Stock than the transactions
contemplated by the Merger Agreement (after considering the written advice of
the Company's professional advisors).

COVENANTS

INTERIM OPERATIONS OF THE COMPANY. Until the Effective Time, the Company
and its subsidiaries are required to comply with a number of covenants
concerning the operation of their businesses. In general, the Company has agreed
to carry on its business in the ordinary course in substantially the same manner
as previously conducted and, to the extent consistent therewith, use all
reasonable efforts to preserve intact its current business organizations, keep
available the services of its current officers and employees and preserve its
relationships with customers, licensees and others having business dealings with
it. The Company also has agreed to obtain X.L.'s consent prior to taking certain
actions such as granting options to purchase Common Stock, amending its
Certificate of Incorporation or Bylaws, incurring any indebtedness, making any
capital expenditures in excess of $50,000, granting any increases in
compensation or benefits not in the ordinary course of business, acquiring any
business or material assets, disposing of any material assets, or taking any
action that is reasonably likely to result in any of the Company's
representations and warranties contained in the Merger Agreement to be untrue in
any material respect or in any of the Company's covenants contained therein or
the conditions to the Merger not being satisfied.

SPECIAL MEETING; PROXY MATERIAL. The Company has agreed to prepare and
mail this Proxy Statement to each holder of Common Stock as of the Record Date
and to call and hold the Special Meeting. Subject to the rights of the Company
described under the heading "No Solicitation by the Company" above, the Company
also has agreed to use all reasonable efforts to obtain stockholder approval of
the Merger Agreement.

INDEMNIFICATION AND INSURANCE OF THE COMPANY DIRECTORS AND OFFICERS. The
Merger Agreement provides that the Company shall, until the Effective Time, and
after the Effective Time the Surviving Corporation shall, indemnify, for a
period of six years following the Effective Time, each officer or director of
the Company against all losses resulting from and based in whole or in part out
of the fact that such person is or was an officer or director of the Company.
This indemnification obligation is subject to any limitation imposed under
applicable law. The Merger Agreement also provides that for a period of six
years from and after the Effective Time, the Surviving Corporation will cause to
be maintained in effect liability insurance for directors and

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<PAGE> 25

officers, offering protection and coverage with respect to matters occurring at
or prior to the consummation of the Merger equal to or greater than that offered
by the insurance policies most recently maintained by the Company.

ADDITIONAL COVENANTS. The Merger Agreement contains additional covenants
of X.L. and the Company. These include covenants relating to public
announcements, notification of certain matters, access to information,
cooperation in connection with governmental filings and in obtaining consents
and approvals, authorizations, and a "comfort letter" from the Company's
accountants (if possible), fees and expenses, and confidential treatment of
non-public information.

REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains a number of representations and warranties by
both parties. The representations and warranties terminate at the Effective
Time. The Company and X.L. have made reciprocal representations and warranties
which include matters such as corporate organization, authorization,
authorization of the Merger and governmental approvals. The Company also has
made representations and warranties to X.L. regarding a number of other matters
relating to, among other things, the Company's corporate structure, SEC filings,
business operations, financial statements, assets and liabilities, environmental
matters and litigation. X.L. also has made representations and warranties to the
Company regarding, among other things, its ability to finance the Merger.

CONDITIONS TO THE MERGER

CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of X.L. and the
Company to consummate the Merger are subject to the satisfaction or waiver (to
the extent permitted) of the following conditions:

- The Merger must be approved and adopted by the requisite vote of the
stockholders of the Company.

- There must not be any temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger; provided, however, that each of X.L. and the
Company shall use their reasonable best efforts to have any such decree,
ruling, injunction or order vacated.

- All required governmental and regulatory actions, consents, approvals,
filings and notices must have been taken, obtained or made, as
summarized under the heading "The Merger -- Factors to Consider --
Regulatory Approvals."

- The waiting period applicable to the consummation of the Merger under
the HSR Act must have expired or been terminated.

- There must not be any action, suit, investigation or other proceeding
pending or threatened by any governmental body seeking to restrain,
enjoin or otherwise prevent any of the transactions contemplated by the
Merger Agreement.

CONDITIONS TO THE OBLIGATIONS OF X.L. The obligations of X.L. to
consummate the Merger are further subject to the satisfaction or waiver (to the
extent permitted) of the following additional conditions:

- The representations and warranties of the Company must be true and
correct, in each case as of the date of the Merger Agreement and (except
to the extent such representations and warranties speak as of a
particular date) as of the Closing Date. However, this condition shall
be deemed satisfied if the failure of one or more representations or
warranties to be true and correct, individually or in the aggregate,
either (1) would not result in a Material Adverse Effect (as defined
below) on the Company or (2) results from any event, occurrence,
development or state of circumstances or facts affecting the property
and casualty insurance industry as a whole, any catastrophe or any
change in general economic conditions.

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<PAGE> 26

- The Company must have performed and complied with, in all material
respects, all agreements and covenants required to be performed and
complied with by the Company under the Merger Agreement at or prior to
the Closing Date.

- There must not have occurred or arisen after September 30, 1998 and
prior to the Effective Time, any change, event, condition or state of
facts with respect to the Company or any of its Subsidiaries which would
constitute a Material Adverse Effect on the Company.

- As of the Closing Date, there must be no more than a $10,000,000
decrease in the shareholder equity of the Company since September 30,
1998.

- The Employment Agreements and the consent of the Roanoke Companies, Inc.
must be in full force and effect.

- The Company must have at least $24,000,000 in cash.

- The Company must have taken all actions required to amend the options to
purchase Common Stock, as provided in the Merger Agreement.

- X.L. must have received the audited financial statements of the Company
for the fiscal year ended December 31, 1998, together with the Company's
auditor's report thereon, and a balance sheet of the Company as of
December 31, 1998, prepared in accordance with GAAP.

- The Company must have delivered to X.L. evidence reasonably satisfactory
to X.L. that all requisite action on the part of the Company necessary
for the due authorization of the Merger Agreement and the performance
and consummation of the transactions contemplated thereby has been
taken.

CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the Company to
effect the Merger is further subject to the satisfaction or waiver of the
following conditions:

- The representations and warranties of X.L. must be true and correct, in
each case as of the date of the Merger Agreement and (except to the
extent such representations and warranties speak as of a particular
date) as of the Closing Date, except where the failure of one or more
representations or warranties to be true and correct, individually or in
the aggregate, would not result in a Material Adverse Effect on X.L.

- X.L. shall have performed and complied with, in all material respects,
all agreements and covenants required to be performed and complied with
by X.L. under the Merger Agreement at or prior to the Closing Date.

The Merger Agreement defines "Material Adverse Effect" as, with respect to
any specified person, any event, change, condition, fact or effect which has or
could reasonably be expected to have a material adverse effect on (1) the
business, results of operations, or financial condition of such party and its
subsidiaries taken as a whole or (2) the ability of such party to consummate the
transactions contemplated by the Merger Agreement.

TERMINATION OF THE MERGER AGREEMENT

The Merger Agreement may be terminated at any time prior to the Effective
Time as follows:

- by mutual written consent of the Company and X.L.;

- by either the Company or X.L., if any permanent injunction or other
order of a court or other competent authority preventing the
consummation of the Merger shall have become final and non-appealable;

- by either the Company or X.L., if the Merger shall not have been
consummated on or before June 30, 1999; provided, however, that if the
conditions to the Merger have not been satisfied as of such date, the
Merger Agreement may not be terminated until September 30, 1999, if it
can reasonably be anticipated that such conditions can be satisfied by
September 30, 1999; and provided further that the

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<PAGE> 27

right to terminate the Merger Agreement under such provision shall not be
available to any party whose failure to fulfill any obligation under the
Merger Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date;

- by either X.L. or the Company, if at the Special Meeting the holders of
at least a majority of the outstanding shares of Common Stock do not
approve the Merger;

- by X.L., if prior to the Special Meeting, the Intercargo Board shall
have failed to give or shall have withdrawn or adversely modified in any
material respect, or taken a public position materially inconsistent
with, its approval or recommendation of the Merger;

- by either X.L. or the Company if, prior to the Special Meeting, the
Intercargo Board shall have determined to enter into an agreement with
respect to a Superior Proposal;

- by X.L., upon a material breach of any material representation or
warranty of the Company, or in the event the Company fails to comply in
any respect with any of its material covenants and agreements, or if any
material representation or warranty of the Company shall be or become
untrue, in each case, where such breach, failure to so comply or untruth
(either individually or in the aggregate with all other such breaches,
failures to comply or untruths) would cause one or more of the closing
conditions relating to representations, warranties or covenants to be
incapable of being satisfied as of a date within thirty (30) days after
the occurrence thereof, provided that a willful breach by the Company
shall be deemed to cause such conditions to be incapable of being
satisfied by such date; or

- by the Company, upon a breach of any representation or warranty of X.L.,
or in the event X.L. fails to comply in any respect with any of its
covenants or agreements, or if any representation or warranty of X.L.
shall be or become untrue, in each case, where such breach, failure to
so comply or untruth (either individually or in the aggregate with all
other such breaches, failures to comply or untruths) would cause one or
more of the closing conditions relating to representations, warranties
or covenants to be incapable of being satisfied as of a date within
thirty (30) days after the occurrence thereof, provided that a willful
breach by X.L. shall be deemed to cause such conditions to be incapable
of being satisfied by such date.

PAYMENT OF FEES AND EXPENSES UPON TERMINATION

TERMINATION FEE. Intercargo will be required to pay X.L. a termination fee
of $3.1 million plus reasonable expenses incurred if the merger agreement is
terminated:

- by Intercargo or X.L. due to the failure to receive the required
Intercargo shareholder approval;

- by X.L. if, prior to the shareholders meeting, the Intercargo Board
fails to give, withdraws, materially modifies or takes a public position
materially inconsistent with its recommendation of the merger; OR

- by Intercargo or X.L. if, prior to the shareholders meeting, the
Intercargo Board decides to enter into an agreement with respect to a
financially superior acquisition proposal from a third party;

AND, at the time of such termination, Intercargo:

- consummates or enters into any agreement with respect to a financially
superior acquisition proposal from a third party within 90 days of such
termination.

EXPENSES. Pursuant to the Merger Agreement, Intercargo or X.L. is entitled
to terminate the Merger Agreement if the other party materially breaches any
material representation or warranty, fails to comply with any of its material
covenants or agreements or any material representation or warranty shall become
untrue, so that such breach, failure or untruth shall cause the closing
conditions relating to representations, warranties or covenants to be incapable
of being satisfied within 30 days after the occurrence thereof (the materiality
qualifications apply only to X.L.'s right to terminate). If the Merger Agreement
is terminated by Intercargo

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or X.L. pursuant to these provisions, the non-terminating party must pay the
terminating party's documented, third-party expenses incurred in connection with
the transactions contemplated by the Merger Agreement.

AMENDMENTS; WAIVERS

The provisions of the Merger Agreement (including the conditions to
closing) may be amended or waived only if such amendment or waiver is in writing
and signed. However, after the adoption of the Merger Agreement by the Company's
stockholders, no amendment or waiver may, without the further approval of the
Company's stockholders, alter or change the Merger Consideration, or any of the
other terms or conditions of the Merger Agreement if such alteration or change
would adversely affect the Company's stockholders.

CONSEQUENCES OF THE MERGER

Upon consummation of the Merger, all shares of Common Stock issued and
outstanding immediately prior to the Effective Time will cease to be outstanding
and will automatically be cancelled and retired. Each certificate previously
evidencing such shares, excluding shares with respect to which appraisal rights
shall have been perfected (see "Appraisal Rights"), will thereafter represent
only the right to receive the Merger Consideration. From and after the Effective
Time, the holders of certificates evidencing shares of Common Stock outstanding
immediately prior to the Effective Time will cease to have any rights with
respect to the Common Stock except as otherwise provided by the Merger Agreement
or as required by law. The Common Stock will be deregistered under the federal
securities laws and will no longer be listed for trading on the Nasdaq National
Market or any other exchange.

THE STOCKHOLDER AGREEMENT

In connection with the Merger Agreement, an affiliate of Orion, which
beneficially owns approximately 26% of the outstanding stock of Intercargo,
entered into the Stockholder Agreement with X.L. under the terms of which Orion
granted X.L. a proxy to vote its shares in favor of the Merger at the Special
Meeting and agreed to surrender its stock in connection with the Merger for the
Merger Consideration. Orion may be relieved of its obligations and terminate its
agreement with X.L. only if presented with an offer that is superior (as defined
in the agreement) to the Merger Consideration and the Board of Directors of
Orion, upon advice of its legal counsel, determines that it likely would be a
breach of its fiduciary duties not to accept such superior offer, provided that
in reaching such conclusion Orion' Board of Directors and its legal counsel must
apply the same standards as are required of the Intercargo Board and its legal
counsel in determining to accept a Superior Proposal. The Stockholder Agreement
is attached as Appendix C to this Proxy Statement.

FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

For federal income tax purposes, your receipt of cash in exchange for your
Common Stock in the Merger will be taxable. You will recognize gain or loss for
federal income tax purposes at the Effective Time. Gain or loss will be measured
by the difference between the Merger Consideration received for your shares and
your adjusted basis in the shares. If the shares constitute a capital asset in
your hands, the rate at which any gain is taxed for federal income tax purposes
will depend on how long you have held the shares on the date of the Merger.
Under recently enacted changes to the federal tax laws, the holding period
necessary to receive the benefit of the lowest capital gains rate has been
decreased from eighteen months to more than one year.

If you are a nonresident alien individual, a foreign corporation, a
nonresident alien fiduciary of a foreign estate or trust, or a foreign
partnership with certain types of partners, you may not be subject to federal
income tax with respect to any gain or loss on the Common Stock. However, this
exemption is subject to a number of complex limitations that depend on your
particular circumstances.

In general, if you hold employee or director stock options, you will be
required to report as ordinary taxable income any cash you receive in
cancellation of the options. In addition, any cash payable to you will be
reduced by the amount of any taxes required to be withheld on such ordinary
income.

23
<PAGE> 29

THIS SUMMARY DESCRIBES THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER. IT DOES NOT DISCUSS ALL POTENTIALLY RELEVANT FEDERAL INCOME TAX MATTERS
OR THE CONSEQUENCES TO ANY STOCKHOLDERS OR OPTION HOLDERS SUBJECT TO SPECIAL TAX
TREATMENT. IT DOES NOT DISCUSS ANY STATE OR LOCAL TAX CONSEQUENCES OF THE
MERGER. YOUR TAX CONSEQUENCES WILL DEPEND ON YOUR PARTICULAR CIRCUMSTANCES. FOR
THIS REASON, AND PARTICULARLY IN LIGHT OF THE RECENT CHANGES TO THE FEDERAL TAX
LAWS REGARDING CAPITAL GAINS, YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR
CONCERNING THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF THE MERGER.

APPRAISAL RIGHTS

If you hold Common Stock and you do not wish to accept the Merger
Consideration, then Section 262 of the DGCL provides that you may elect to have
the fair value of your shares of Common Stock (exclusive of any element of value
arising from the accomplishment or expectation of the Merger) determined by the
Delaware Chancery Court. This amount would then be paid in cash, together with a
fair rate of interest. Section 262 is set forth in its entirety in Appendix D to
this Proxy Statement.

If you wish to exercise your appraisal right or to preserve the right to do
so, you should carefully review Appendix D. If you fail to comply with the
procedures specified in Section 262 in a timely manner you may lose your
appraisal right. Because of the complexity of these procedures, you should seek
the advice of counsel if you are considering exercising your appraisal rights.
If you wish to exercise the right to demand appraisal under Section 262, you
must satisfy each of the following conditions:

- You must not vote in favor of the Merger.

- You must deliver to the Company a written demand for appraisal of your
Common Stock before the vote on the Merger at the Special Meeting. This
written demand for appraisal must be in addition to and separate from
any proxy or vote against the Merger. Merely voting against, or
abstaining from voting, or failing to vote in favor of adoption of the
Merger will not constitute a demand for appraisal within the meaning of
Section 262.

- You must continuously hold your Common Stock from the date you make your
demand through the Effective Time. If you transfer your Common Stock
before the Effective Time, you will lose your right to appraisal.

- You must file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of your Common Stock within 120 days
after the Effective Time.

Demands for appraisal must be made in writing and must be mailed or
delivered to: Intercargo Corporation, 1450 American Lane, 20th Floor,
Schaumburg, Illinois 60173.

IF YOU ARE CONSIDERING SEEKING APPRAISAL, YOU SHOULD BE AWARE THAT THE FAIR
VALUE OF YOUR SHARES OF COMMON STOCK AS DETERMINED UNDER SECTION 262 COULD BE
GREATER THAN, THE SAME AS, OR LESS THAN THE MERGER CONSIDERATION. THE FPK
OPINION IS NOT AN OPINION AS TO FAIR VALUE UNDER SECTION 262.

If you demand appraisal of your Common Stock under Section 262 and you fail
to perfect, or withdraw or lose, your right to appraisal, your Common Stock will
be converted into the Merger Consideration. You may withdraw a demand for
appraisal by delivering to the Company a written withdrawal of the demand and
acceptance of the Merger Consideration, except that if you try to withdraw more
than 60 days after the Effective Time, the Company must give its consent.

The foregoing is a summary of the provisions of Section 262 of the DGCL and
is qualified in its entirety by reference to the full text of such Section,
which is included as Appendix D.

24
<PAGE> 30

PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY

The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "ICAR." The following table sets forth, for the periods indicated,
the range of high and low closing sales Prices for the Company's Common Stock.

<TABLE>
<CAPTION>
QUARTER HIGH LOW
- ------- ------ -------
<S> <C> <C>
1st 1999
(through March 26, 1999)........................ $11.75 $11.375
4th 1998........................................ 12 9.38
3rd 1998........................................ 11.88 9.13
2nd 1998........................................ 13.00 11.34
1st 1998........................................ 13.50 11.38
4th 1997........................................ 14.13 12.88
3rd 1997........................................ 14.25 10.38
2nd 1997........................................ 12.00 9.13
1st 1997........................................ 10.13 8.50
</TABLE>

There were 78 security holders of record as of March 26, 1999. On December
1, 1998, the last trading day prior to the public announcement of the Merger,
the closing sale price of the Common Stock was $10.125 per share. On March 26,
1999, the latest practicable trading day prior to the mailing of this Proxy
Statement, the closing sale price of Common Stock was $11.375 per share. You are
advised to obtain current market quotations for your shares.

The Company paid dividends of $0.18 per share in 1998, 1997 and 1996. Any
future dividends will depend upon the earnings and financial position of the
Company as well as legal and contractual restrictions, including under the
Merger Agreement.

SECURITY OWNERSHIP OF MANAGEMENT AND
CERTAIN BENEFICIAL OWNERS

The following table shows with respect to (i) each person who is known to
be the beneficial owner of more than 5% of the Common Stock; (ii) each director
of the Company; (iii) the Chief Executive Officer and the four most highly
compensated executive officers of the Company during fiscal 1998 and (iv) all
present executive officers and directors as a group: (a) the amount of shares of
Common Stock beneficially owned as of December 31, 1998; and (b) the percent of
the class so owned as of the same date:

<TABLE>
<CAPTION>
AMOUNT OF SHARES(1)
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE
- ------------------------------------ --------------------- ----------
<S> <C> <C>
Orion Capital Corporation(2)................................ 1,899,223 26.04
600 Fifth Avenue
New York, New York 10020
Fenimore Asset Management, Inc.(3).......................... 522,850 7.17
118 North Grand Street
Post Office Box 310
Cobleskill, New York 12043
Dimensional Fund Advisors, Inc.(4).......................... 366,200 5.02
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
AIC Limited(5).............................................. 370,549 5.08
1375 Kerns Road
Burlington, Ontario
Canada
Stanley A. Galanski(6)...................................... 4,500 *
Arthur J. Fritz, Jr.(6)(7).................................. 250,250 3.43
</TABLE>

25
<PAGE> 31

<TABLE>
<CAPTION>
AMOUNT OF SHARES(1)
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE
- ------------------------------------ --------------------- ----------
<S> <C> <C>
Kenneth A. Bodenstein(6)(8)................................. 20,250 *
Arthur L. Litman(6)......................................... 42,916 *
Albert J. Gallegos(6)(9).................................... 3,150 *
Robert S. Kielbas(6)(10).................................... 63,181 *
Robert B. Sanborn(6)........................................ 250 *
Michael L. Sklar(6)......................................... 3,250 *
George Weise(6)............................................. 0 0
Michael Rybak(6)............................................ 3,250 *
Robert M. Lynyak(6)......................................... 4,000 *
All Directors and Executive Officers as a group (11 394,997 5.40
persons)(11)..............................................
</TABLE>

- ------------------------
* Less than 1% of common stock outstanding.

(1) Calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934.
Unless otherwise stated herein, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person,
but are not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed. As of December 31, 1998, the
total number of the Company's outstanding shares was 7,293,581.

(2) As reported in Orion Capital Corporation's Schedule 13D, as amended through
December 2, 1998. These shares are held by Security Insurance Company of
Hartford, a Connecticut corporation, wholly-owned by Orion Capital
Corporation. These shares are deemed to be beneficially owned by Robert B.
Sanborn, a director of the Company, who as Senior Executive Consultant and
a director of Orion Capital Corporation, may be deemed to have shared power
to vote and dispose of these shares. Pursuant to the Stockholder Agreement,
Orion has agreed to vote all of its shares of Common Stock in favor of the
Merger. See "The Stockholder Agreement."

(3) As reported in Fenimore Asset Management Inc.'s Schedule 13G, dated
February 5, 1999.

(4) As reported in Dimensional Fund Advisors, Inc.'s Schedule 13G, dated
February 11, 1999.

(5) As reported in AIC Limited's Schedule 13G, dated March 23, 1999.

(6) Messrs. Galanski, Kielbas, Rybak, Gallegos, Litman, Bodenstein, Fritz,
Sklar, Sanborn, Weise and Lynyak are directors and/or executive officers of
the Company.

(7) Includes 12,000 shares held by a family limited partnership in which Mr.
Fritz is one of the general partners.

(8) Includes 6,000 shares held by a charitable foundation as to which Mr.
Bodenstein exercises voting power.

(9) Held in the name of Mr. Gallegos' wife.

(10) Includes 74 shares of Common Stock held in the name of Mr. Kielbas' wife.

(11) See footnote (1) and footnotes (6) - (10) above.

AUDITORS

Representatives of Ernst & Young LLP, the auditors of the Company, are
expected to be present at the Special Meeting and will have an opportunity to
make a statement to the stockholders of the Company if they desire. In addition,
representatives from Ernst & Young LLP will be available to respond to questions
from the stockholders of the Company.

26
<PAGE> 32

SUBMISSION OF STOCKHOLDER PROPOSALS

Assuming that the Merger is approved and completed, there will be no 1999
Annual Meeting of Stockholders of Intercargo. If the Merger is not approved and
completed by such date, a proposal by a stockholder intended to be presented at
the 1999 Annual Meeting of Stockholders must be received by the Company at its
principal executive offices by December 31, 1999 to be included in the Proxy
Statement for such Annual Meeting, and all other conditions for such inclusion
must be satisfied.

WHERE YOU CAN FIND MORE INFORMATION

As required by law, the Company files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
These reports, proxy statements and other information contain additional
information about the Company. You can inspect and copy these materials at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York, New
York 10048. For further information concerning the Commission's public reference
rooms, you may call the Commission at 1-800-SEC-0330. Some of this information
may also be accessed on the World Wide Web through the Commission's Internet
address at "HTTP://WWW.SEC.GOV."

The Commission allows the Company to "incorporate by reference" information
into this Proxy Statement, which means that the Company can disclose important
information by referring you to another document filed separately with the
Commission. Information incorporated by reference is considered part of this
proxy statement, except to the extent that the information is superseded by
information in this Proxy Statement. This Proxy Statement incorporates by
reference the information contained in the following documents previously filed
by the Company with the Commission (Commission file number 0-16748):

(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998; and

(b) The Company's Current Report on Form 8-K dated February 17, 1999.

The Company also incorporates by reference the information contained in all
other documents the Company files with the Commission after the date of this
Proxy Statement and before the Special Meeting. The information contained in any
such document will be considered part of this Proxy Statement from the date the
document is filed.

If you are a stockholder of the Company and would like to receive without
charge a copy of any document incorporated by reference into this Proxy
Statement (which will not include any of the exhibits to the document other than
those exhibits that are themselves specifically incorporated by reference into
this Proxy Statement), you should call or write to Intercargo Corporation, 1450
American Lane, 20th Floor, Schaumburg, Illinois 60173, attention: Michael L.
Rybak, telephone: (800) 394-3909. In order to ensure timely delivery of the
documents you request, you should make your request by April 7, 1999.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN (OR INCORPORATED BY
REFERENCE INTO) THIS PROXY STATEMENT. THE COMPANY HAS NOT AUTHORIZED ANYONE TO
GIVE ANY INFORMATION DIFFERENT FROM THE INFORMATION CONTAINED IN (OR
INCORPORATED BY REFERENCE INTO) THIS PROXY STATEMENT. THIS PROXY STATEMENT IS
DATED MARCH 31, 1999. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT IS ACCURATE AS OF ANY LATER DATE, AND THE MAILING OF THIS
PROXY STATEMENT TO STOCKHOLDERS SHALL NOT CREATE ANY IMPLICATION TO THE
CONTRARY.

27
<PAGE> 33

APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER

AGREEMENT AND
PLAN OF MERGER
BY AND AMONG
X.L. AMERICA, INC.
AND INTERCARGO CORPORATION
DATED AS OF DECEMBER 1, 1998
AND
AMENDED AND RESTATED
AS OF MARCH 26, 1999
<PAGE> 34

TABLE OF CONTENTS

<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C> <C>
ARTICLE I THE MERGER................................................ 1
1.1. The Merger.................................................. 1
1.2. Closing..................................................... 1
1.3. Effective Time.............................................. 1
1.4. Effects of the Merger....................................... 2
1.5. Filing of Certificate of Merger............................. 2
1.6. Further Assurances.......................................... 2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; MERGER CONSIDERATION; EXCHANGE
OF CERTIFICATES; OPTIONS................................. 2
2.1. Conversion of Shares........................................ 2
2.2. Stock Options............................................... 3
2.3. Dissenting Shares........................................... 3
2.4. Payment for Shares.......................................... 3
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY........... 4
3.1. Organization, Standing and Power............................ 4
3.2. Capital Structure........................................... 5
3.3. Subsidiaries, Investments................................... 5
3.4. No Violations; Consents and Approvals....................... 6
3.5. Government Filings; Financial Statements.................... 7
3.6. Information Supplied........................................ 7
3.7. Compliance With Laws........................................ 8
3.8. Insurance Issued............................................ 9
3.9. Rating Agencies............................................. 10
3.10. Absence of Certain Changes or Events........................ 10
3.11. Absence of Undisclosed Liabilities.......................... 11
3.12. Litigation.................................................. 12
3.13. Taxes....................................................... 12
3.14. Employee Benefit Plans; ERISA............................... 13
3.15. Labor Matters............................................... 15
3.16. Environmental Matters....................................... 15
3.17. Real and Personal Property.................................. 16
3.18. Material Contracts.......................................... 17
3.19. Related Party Transactions.................................. 18
3.20. Liens....................................................... 18
3.21. Operations Insurance........................................ 18
3.22. Opinion of Financial Advisor................................ 18
3.23. Board of Directors Recommendation........................... 18
3.24. Stockholder Vote Required................................... 19
3.25. Brokers..................................................... 19
3.26. Bank Accounts............................................... 19
3.27. Premium Balances Receivable................................. 19
3.28. Investment Portfolio and Other Assets....................... 19
3.29. Payments.................................................... 19
3.30. Reinsurance Agreements...................................... 19
3.31. State Antitakeover Statutes................................. 20
3.32. Certain Other Agreements.................................... 20
3.33. Company Cash and Cash Equivalents........................... 20
3.34. Year 2000................................................... 20
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF EMERALD................ 21
4.1. Organization, Standing and Power............................ 21
4.2. Authority; Consent and Approvals............................ 21
4.3. Information Supplied........................................ 21
</TABLE>

i
<PAGE> 35

<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C> <C>
4.4. Financing................................................... 21
4.5. Brokers..................................................... 21
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS................. 22
5.1. Conduct of Business by the Company Prior to the Closing
Date........................................................ 22
5.2. Company Cash................................................ 24
5.3. Additional Company Authorizations........................... 24
5.4. No Solicitations............................................ 24
ARTICLE VI ADDITIONAL AGREEMENTS.................................... 25
6.1. Preparation of Proxy Statement; Stockholder Meeting; Comfort
Letters..................................................... 25
6.2. Contract and Regulatory Approvals........................... 26
6.3. HSR Filing.................................................. 26
6.4. Access to Information; Confidentiality...................... 26
6.5. Fees and Expenses........................................... 27
6.6. Indemnification............................................. 27
6.7. Reasonable Best Efforts..................................... 28
6.8. Public Announcements........................................ 28
6.9. Cooperation................................................. 29
6.10. Parent Guarantee............................................ 29
ARTICLE VII CONDITIONS PRECEDENT.................................... 29
7.1. Conditions to Each Party's Obligation to Effect the
Merger...................................................... 29
7.2. Conditions to Obligations of Emerald........................ 29
7.3. Conditions to Obligations of the Company.................... 30
ARTICLE VIII TERMINATION AND AMENDMENT.............................. 31
8.1. Termination................................................. 31
8.2. Effect of Termination....................................... 31
8.3. Amendment................................................... 32
8.4. Extension; Waiver........................................... 32
ARTICLE IX GENERAL PROVISIONS....................................... 32
9.1. Nonsurvival of Representations, Warranties and Agreements... 32
9.2. Notices..................................................... 32
9.3. Interpretation.............................................. 33
9.4. Counterparts................................................ 33
9.5. Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership................................................... 33
9.6. Governing Law............................................... 33
9.7. Assignment.................................................. 33
EXHIBITS:
Exhibit 1 Stockholders Agreement
Exhibit 2 Stanley A. Galanski
Exhibit 3 Robert M. Lynyak
Exhibit 4 Roanoke Consent
</TABLE>

ii
<PAGE> 36

INDEX OF DEFINED TERMS

<TABLE>
<CAPTION>
DEFINED TERM SECTION
- ------------ -------
<S> <C>
Acquisition Proposal.............. 5.4(a)
Actions........................... 3.8(g)
Agreement......................... Preamble
Audits............................ 3.13(e)
Bylaws............................ 1.4(b)
CERCLA............................ 3.16(a)(i)
Certificate of Merger............. 1.3
Certificates...................... 2.5(b)
Closing........................... 1.2
Closing Date...................... 1.2
Code.............................. 3.13(i)
Company........................... Preamble
Company Annual Statement.......... 3.7(c)
Company Balance Sheet............. 3.5
Company Benefit Plans............. 3.14(a)
Company Bylaws.................... 3.1
Company Cash...................... 3.33
Company Certificate............... 2.1(d)
Company Certificate of
Incorporation................... 3.1
Company Common Stock.............. Recitals
Company Confidentiality
Agreement....................... 6.4(c)
Company Consolidated Financial
Statements...................... 3.5
Company Employee Arrangements..... 3.14(a)
Company Intangible Property....... 3.17(d)
Company Licenses.................. 3.7(b)(iii)
Company Material Contracts........ 3.18
Company Quarterly Statement....... 3 7(c)
Company Stock Option.............. 2.2
Company Stock Option Plan......... 2.2
Company Stockholder Approval...... Recitals
Company Stockholders' Meeting..... 6.1(c)
Company Voting Debt............... 3.2
Constituent Corporations.......... 1.1
Contract.......................... 3.18
DGCL.............................. 1.1
Disclosure Schedule............... Article III
Dissenting Shares................. 2.4
Effective Time.................... 1.3
Emerald........................... Preamble
Emerald Bylaws.................... 4.1
Emerald Certificate of
Incorporation................... 4.1
Emerald Common Stock.............. Recitals
Emerald Confidentiality
Agreement....................... 6.4(c)
Employment Agreements............. 3.32
Environmental Law................. 3.16(a)(i)
</TABLE>

<TABLE>
<CAPTION>
DEFINED TERM SECTION
- ------------ -------
<S> <C>
Exchange Act...................... 3.5
Exchange Agent.................... 2.5(a)
Exchange Fund..................... 2.5(a)
Filed Company SEC Documents....... 3.5
Financial Advisor................. 6.1(a)
FPK Opinion....................... 3.22
Future SEC Documents.............. 3.5
GAAP.............................. 3.5
Galanski Employment Agreement..... 3.32
Governmental Entity............... 3.4(c)
Hazardous Material................ 3.16(a)(ii)
HSR Act........................... 3.4(c)
Indemnified Liabilities........... 6.6(a)
Indemnified Parties............... 6.6(a)
Key Employee...................... 3.18
Liens............................. 3.20
Loss Reserves..................... 3.7(d)
Lynyak Employment Agreement....... 3.32
Material Adverse Effect........... 3.1
Merger............................ Recitals
Merger Consideration.............. 2.1(a)
OSHA.............................. 3.16(a)(i)
Parent............................ Recitals
Producer Agreements............... 3.18(b)
Proxy Statement................... 6.1(a)
Real Property Leases.............. 3.17(b)
Reinsurance Agreement............. 3.30
Related Party..................... 3.19
Release........................... 3.16(a)(iii)
Remedial Action................... 3.16(a)(iv)
Roanoke Consent................... 3.32
SAP............................... 3.7(c)
SEC............................... 6.1(a)
Securities Act.................... 3.5
Share............................. 2.1(a)
Stockholders Agreement............ 3.32
Subsidiary........................ 3.3
Superior Proposal................. 5.4(a)
Surviving Corporation............. 1.1
Tax Return........................ 3.13
Taxes............................. 3.13
Termination Date.................. 8.1(c)
Termination Fee................... 6.5(b)
Trigger Event..................... 8.1(e)
Violation......................... 3.4(b)
WARN Act.......................... 3.15(d)
</TABLE>

iii
<PAGE> 37

AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER

THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
December 1, 1998 and as amended and restated as of March 26, 1999 (the
"Agreement"), is made and entered into by and among X.L. America, Inc., a
Delaware corporation ("Emerald"), and Intercargo Corporation, a Delaware
corporation (the "Company").

RECITALS:

WHEREAS, the respective Boards of Directors of the Company and Emerald have
determined that the merger of the Company with and into Emerald (the "Merger"),
upon the terms and subject to the conditions set forth in this Agreement, would
be fair to and in the best interests of their respective stockholders, and such
Boards of Directors have approved the Merger, pursuant to which each share of
common stock, par value $1.00 per share, of the Company (the "Company Common
Stock") issued and outstanding immediately prior to the Effective Time (as
defined in Section 1.3) (other than shares of Company Common Stock owned,
directly or indirectly, by the Company, any Subsidiary (as defined in Section
3.3) of the Company, Emerald or any Subsidiary of Emerald) will be converted
into, subject to the terms hereof, the right to receive the Merger Consideration
(as defined in Section 2.1 (c));

WHEREAS, the Merger requires, for the approval thereof, the affirmative
vote of a majority of the outstanding shares of the Company Common Stock (the
"Company Stockholder Approval"); and

WHEREAS, Emerald and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger;

WHEREAS, EXEL Limited, a Cayman Islands corporation ("Parent"), desires to
make the agreement provided in Section 6.10 of this Agreement;

WHEREAS, Emerald and the Company elected to amend and restate the Agreement
as of March 26, 1999;

NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties hereto,
intending to be legally bound, hereby agree as follows:

ARTICLE I
THE MERGER

1.1. THE MERGER. Upon the terms and subject to the conditions set forth
in this Agreement, and in accordance with the Delaware General Corporation Law
("DGCL"), Emerald shall be merged with and into the Company at the Effective
Time. At the Effective Time, the separate corporate existence of Emerald shall
cease and the Company shall continue as the surviving corporation (Emerald and
the Company are sometimes hereinafter referred to as "Constituent Corporations"
and, as the context requires, the Company is sometimes hereinafter referred to
as the "Surviving Corporation"). At the election of Emerald, any direct
wholly-owned subsidiary of Emerald incorporated under the laws of the State of
Delaware may be substituted for Emerald as a Constituent Corporation in the
Merger. Any such election by Emerald shall not relieve Emerald of its
obligations under this Agreement.

1.2. CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
8.1, and subject to the satisfaction or waiver of the conditions set forth in
Article VII, the closing of the Merger (the "Closing") shall take place at 10:00
a.m., Chicago, Illinois time, on the second business day after satisfaction
and/or waiver of all of the conditions set forth in Article VII (the "Closing
Date"), at the offices of Cahill Gordon & Reindel, 80 Pine Street, New York, New
York 10005, unless another date, time or place is agreed to in writing by the
parties hereto.

1.3. EFFECTIVE TIME. Subject to the provisions of this Agreement, the
parties hereto shall cause the Merger to be consummated by filing a certificate
of merger (the "Certificate of Merger") with the Secretary of State of the State
of Delaware, as provided in the DGCL, as soon as practicable on or after the
Closing Date. The Merger shall become effective upon the acceptance for record
of such filing or at such time thereafter as is provided in the Certificate of
Merger (the "Effective Time").

A-1
<PAGE> 38

1.4. EFFECTS OF THE MERGER. The Merger shall have the effects as set
forth in the applicable provisions of the DGCL:

(a) The Certificate of Incorporation of the Company shall be the
Certificate of Incorporation of the Surviving Corporation until duly
amended in accordance with the terms thereof and the DGCL.

(b) The Bylaws of the Company (the "Bylaws") shall be the Bylaws of
the Surviving Corporation until thereafter amended as provided by
applicable law, the Surviving Corporation's Certificate of Incorporation or
the Bylaws.

(c) The directors of Emerald immediately prior to the Effective Time
shall be the directors of the Surviving Corporation until their successors
have been duly elected or appointed and qualified or until their earlier
death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and Bylaws.

(d) The officers of the Company at the Effective Time shall, from and
after the Effective Time, be the officers of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and Bylaws.

1.5. FILING OF CERTIFICATE OF MERGER. At the Closing, Emerald and the
Company shall cause a Certificate of Merger to be executed and filed with the
Secretary of State of the State of Delaware as provided in sec.251 of the DGCL,
and shall take any and all other lawful actions and do any and all other lawful
things to cause the Merger to become effective.

1.6. FURTHER ASSURANCES. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in the Surviving
Corporation its right, title or interest in, to or any of the rights, properties
or assets of either of the Constituent Corporations acquired or to be acquired
by the Surviving Corporation as a result of, or in connection with, the Merger
or otherwise to carry out this Agreement, the officers and directors of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of each of the Constituent Corporations or otherwise, all such
deeds, bills of sale, assignments and assurances and to take and do, in the name
and on behalf of each of the Constituent Corporations or otherwise, all such
other actions and things as may be necessary or desirable to vest, perfect or
confirm any and all right, title and interest in, to and under such rights,
properties or assets in the Surviving Corporation or otherwise to carry out this
Agreement.

ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS; MERGER
CONSIDERATION; EXCHANGE OF CERTIFICATES; OPTIONS

2.1. CONVERSION OF SHARES. (a) Each share (a "Share") of Company Common
Stock issued and outstanding immediately prior to the Effective Time (other than
(i) Shares held in the Company's treasury, (ii) Shares held by Emerald or any
other subsidiary of Emerald and (iii) Dissenting Shares (as defined in Section
2.4 hereof)) shall, at the Effective Time, by virtue of the Merger and without
any action on the part of Emerald, the Company or the holder thereof, be
cancelled and extinguished and be converted into the right to receive, pursuant
to Section 2.5, $12.00 per Share in cash (the "Merger Consideration"), payable
to the holder thereof, without interest thereon, upon the surrender of the
certificate formerly representing such Share, less any required withholding of
taxes. At the Effective Time, each outstanding share of Emerald Common Stock
shall be converted into a share of common stock of the Surviving Corporation.

(b) Each Share held in the treasury of the Company and each Share
held by Emerald or any subsidiary of Emerald, or the Company or any
Subsidiary of the Company immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of Emerald, the
Company or the holder thereof, be cancelled, retired and cease to exist and
no payment shall be made with respect thereto.

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2.2. STOCK OPTIONS. (a) Prior to the consummation of the Merger, the
Board of Directors of the Company shall use its best efforts to cause the terms
of all outstanding stock options and any related stock appreciation right
heretofore granted under any stock option plan of the Company (collectively, the
"Company Stock Option Plans") which would become exercisable by the persons
listed on Schedule 2.2(a) on or before the Effective Time by its terms to be
amended to provide that, at the Effective Time, each stock option ("Company
Stock Option") outstanding immediately prior to the consummation of the Merger
held by the persons listed on Schedule 2.2(a) shall be cancelled and the holder
thereof shall be entitled to receive at the Effective Time from the Company in
consideration for such cancellation a cash payment of an amount equal to (i) the
excess, if any, of (A) the Merger Consideration over (B) the exercise price per
share of Company Common Stock subject to such stock option, multiplied by (ii)
the number of shares of Company Common Stock into which such stock option was
theretofore exercisable.

(b) All amounts payable pursuant to Section 2.2(a) shall be subject
to any required withholding of taxes and shall be paid without interest.

(c) Prior to the consummation of the Merger, the Board of Directors
of the Company (or, if appropriate, any committee administering the Company
Stock Option Plans) shall adopt such resolutions or take such actions as
are commercially reasonable, subject, if necessary, to obtaining consents
of the holders thereof, to carry out the terms of this Section 2.2.

2.3. DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary, Shares outstanding immediately prior to the Effective Time and held by
a holder who has not voted in favor of the Merger or consented thereto in
writing and who has demanded appraisal for such Shares in accordance with
Section 262 of the Delaware Act ("Dissenting Shares") shall not be converted
into a right to receive the Merger Consideration, unless such holder fails to
perfect or withdraws or loses his right to appraisal, in which case such Shares
shall be treated as if they had been converted as of the Effective Time into a
right to receive the Merger Consideration, without interest thereon. The Company
shall give Emerald prompt notice of any demands received by the Company for
appraisal of Shares and, prior to the Effective Time, Emerald shall have the
right to direct all negotiations and proceedings with respect to such demands.
Prior to the Effective Time, the Company shall not, except with the prior
written consent of Emerald, make any payment with respect to, or settle or offer
to settle, any such demands.

2.4. PAYMENT FOR SHARES. (a) Prior to the Effective Time, Emerald shall
designate a bank or trust company reasonably acceptable to the Company to act as
exchange agent in connection with the Merger (the "Exchange Agent") pursuant to
an exchange agreement in form and substance reasonably satisfactory to the
Company. Prior to the Effective Time, Emerald will provide the Exchange Agent
with cash necessary to make cash payments contemplated by Section 2.1(a) hereof
(the "Exchange Fund"). Such funds shall be invested by the Exchange Agent as
directed (i) prior to the Effective Time, by Emerald or, (ii) after the
Effective Time, by the Surviving Corporation, provided that such investments
shall be in obligations of or guaranteed by the United States of America, in
commercial paper obligations rated A-1 or P-1 or better by Moody's Investors
Service, Inc. or Standard & Poor's Corporation, respectively, or in certificates
of deposit, bank repurchase agreements or banker's acceptances of commercial
banks with capital exceeding $500 million. Any net profit resulting from, or
interest or income produced by, such investments will be payable to the
Surviving Corporation or Emerald, as Emerald directs.

(b) Promptly after the Effective Time, the Exchange Agent shall mail
to each record holder, as of the Effective Time, of an outstanding
certificate or certificates which immediately prior to the Effective Time
represented Shares (the "Certificates") a form letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting
the surrender of the Certificates for payment therefor. Upon surrender to
the Exchange Agent of a Certificate, together with a duly executed letter
of transmittal and any other required documents, the holder of such
Certificate shall receive in exchange therefor (as promptly as practicable)
the Merger Consideration, without any interest thereon, less any required
withholding of taxes, and such Certificate shall forthwith be cancelled. If
payment is to be made to a person other than the person in whose name a
Certificate so surrendered is registered, it shall be a condition of
payment that the Certificate so surrendered shall be properly

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endorsed or otherwise in proper form for transfer, that the signatures on
the Certificate or any related stock power shall be properly guaranteed and
that the person requesting such payment shall either pay any transfer or
other taxes required by reason of the payment to a person other than the
registered holder of the Certificate so surrendered or establish to the
satisfaction of the Surviving Corporation that such tax has been paid or is
not applicable. Until surrendered in accordance with the provisions of this
Section 2.5(b), each Certificate (other than Certificates representing
Shares held in the Company's treasury or by Emerald or the Company, or by
any Subsidiary of Emerald or the Company, and other than Certificates
representing Dissenting Shares) shall represent for all purposes only the
right to receive for each Share represented thereby the Merger
Consideration.

(c) After the Effective Time, there shall be no transfers on the
stock transfer books of the Surviving Corporation of the Shares which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation,
they shall be cancelled and exchanged for the consideration provided for,
and in accordance with the procedures set forth, in this Article II.

(d) From and after the Effective Time, the holders of Certificates
evidencing ownership of Shares outstanding immediately prior to the
Effective Time shall cease to have any rights with respect to such Shares
except as otherwise provided herein or by applicable law. Such holders
shall have no rights, after the Effective Time, with respect to such Shares
except to surrender such Certificates in exchange for cash pursuant to this
Agreement or to perfect any rights of appraisal as holders of Dissenting
Shares that such holders may have pursuant to Section 262 of the Delaware
Act.

(e) Any portion of the Exchange Fund (including the proceeds of any
investment thereof) that remains unclaimed by the stockholders of the
Company for six months after the Effective Time shall be repaid to the
Surviving Corporation. Any stockholders of the Company who have not
theretofore complied with this Article II shall thereafter look only to the
Surviving Corporation (subject to abandoned property, escheat or other
similar laws) only as general creditors for payment of their claims for the
Merger Consideration for each Share such stockholders hold, without any
interest.

(f) Notwithstanding anything to the contrary in this Section 2.5,
none of the Exchange Agent, Emerald or the Surviving Corporation shall be
liable to a holder of a Certificate formerly representing Shares for any
amount properly delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Except as disclosed in the disclosure schedule (the "Disclosure Schedule")
delivered at or prior to the date of this Agreement, the Company represents and
warrants to Emerald and EAC as follows:

3.1. ORGANIZATION, STANDING AND POWER. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated, has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted and is duly qualified or licensed to do business as a
foreign corporation and in good standing to conduct business in each
jurisdiction in which the business it is conducting, or the operation, ownership
or leasing of its properties, makes such qualification or license necessary,
other than such jurisdictions where the failure so to qualify or become so
licensed would not individually or in the aggregate adversely affect the Company
and its Subsidiaries taken as a whole in any material respect. The Company has
heretofore made available to Emerald complete and correct copies of its
Certificate of Incorporation, as amended and currently in effect as of the date
of this Agreement (the "Company Certificate of Incorporation"), and the
Company's Amended and Restated Bylaws (the "Company Bylaws"). As used in this
Agreement, a "Material Adverse Effect" shall mean, with respect to any specified
party to this Agreement, any event, charge, condition, fact or effect which has
or could reasonably be expected to have a material adverse effect on (i) the
business, results of operations, or financial condition of such party and its
Subsidiaries taken as a whole or (ii) the ability of such party to consummate
the transactions contemplated by this Agreement.

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3.2. CAPITAL STRUCTURE. As of the date of this Agreement, the authorized
capital stock of the Company consists of 20,000,000 shares, all of which are
shares of Company Common Stock. At the close of business on November 20, 1998:
(i) 7,699,981 shares of Company Common Stock were issued and outstanding; (ii)
600,000 shares of Company Common Stock were reserved for issuance in connection
with the Company Stock Option Plan, of which 227,150 shares are available for
the exercise of currently outstanding Company Stock Options; Company Stock
Options are vested and presently exercisable for an aggregate of 76,850 Shares;
(iii) 406,400 shares of Company Common Stock were held in treasury; and (iv) no
bonds, debentures, notes or other instruments or evidence of indebtedness having
the right to vote (or convertible into, or exercisable or exchangeable for
securities having the right to vote) on any matters on which the Company
stockholders may vote ("Company Voting Debt") were issued or outstanding. All
outstanding shares of Company Common Stock are validly issued, fully paid and
nonassessable and are not subject to preemptive or other similar rights. Except
as set forth in Section 3.2 of the Disclosure Schedule: (i) no securities of the
Company are convertible into or exchangeable or exercisable for shares of
capital stock, Company Voting Debt or other voting securities of the Company;
and (ii) no stock awards, options, warrants, calls, rights (including stock
purchase or preemptive rights), commitments or agreements to which the Company
is a party or by which it is bound, in any case obligate the Company to issue,
deliver, sell, purchase, redeemed or acquire, or cause to be issued, delivered,
sold, purchased, redeemed or acquired, additional shares of its capital stock,
any Company Voting Debt or other voting securities or securities convertible
into or exchangeable or exercisable for voting securities of the Company, or
obligate the Company to grant, extend or enter into any such option, warrant,
call, right, commitment or agreement. Except as set forth in Section 3.2 of the
Disclosure Schedule there are not, as of the date of this Agreement, and there
will not be on the date of the Company Stockholders' Meeting, any stockholder
agreements, voting trusts or other agreements or understandings to which the
Company is a party or by which it is bound relating to the voting of any shares
of the capital stock of the Company which will limit in any way the solicitation
of proxies by or on behalf of the Company from, or the casting of votes by, the
stockholders of the Company with respect to the Merger.

3.3. SUBSIDIARIES, INVESTMENTS. Section 3.3 of the Disclosure Schedule
sets forth the name of each Subsidiary of the Company, the jurisdiction of its
incorporation or organization and whether it is an insurance company. Each
Subsidiary is an entity duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or organization and has
the power and authority and all necessary government approvals to own, lease and
operate its properties and to carry on its business as now being conducted. Each
Subsidiary of the Company is duly qualified or licensed and in good standing to
do business in each jurisdiction in which the property owned, leased or operated
by it or the nature of the business conducted by it makes such qualification or
licensing necessary. The Company has heretofore made available to Emerald
complete and correct copies of the certificate of incorporation (or other
organizational documents) and bylaws of each of its Subsidiaries. Section 3.3 of
the Disclosure Schedule sets forth, as to each Subsidiary of the Company, its
authorized capital stock and the number of issued and outstanding shares of
capital stock (or similar information with respect to any Subsidiary not
organized as a corporate entity). All outstanding shares of the capital stock of
the Subsidiaries of the Company are validly issued, fully paid and nonassessable
and are not subject to preemptive or other similar rights; neither the Company
nor any Subsidiary of the Company has any call obligations or similar
liabilities with respect to partnerships or other Subsidiaries not organized as
corporate entities. Except as set forth in Section 3.3 of the Disclosure
Schedule, the Company is, directly or indirectly, the record and beneficial
owner of all of the outstanding shares of capital stock (or other interests,
with respect to Subsidiaries not organized as corporate entities) of each of its
Subsidiaries, free and clear of all Liens and other restrictions with respect to
the transferability or assignability thereof (other than restrictions on
transfer imposed by federal or state securities laws) and no capital stock (or
other interests, with respect to Subsidiaries not organized as corporate
entities) of any of its Subsidiaries is or may become required to be issued by
reason of any options, warrants, rights to subscribe to, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into
or exchangeable or exercisable for, shares of capital stock (or other interests,
with respect to Subsidiaries not organized as corporate entities) of any of its
Subsidiaries and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may be bound
to issue, redeem, purchase or sell shares of Subsidiary

A-5
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capital stock (or other interests, with respect to Subsidiaries not organized as
corporate entities) or securities convertible into or exchangeable or
exercisable for any such shares or interests. Except for the ownership interests
set forth in Section 3.3 of the Disclosure Schedule, neither the Company nor any
of its Subsidiaries owns, directly or indirectly, any capital stock or other
ownership interest in any corporation, partnership, business association, joint
venture or other entity, except for portfolio investments made in the ordinary
course of business. As used in this Agreement, the word "Subsidiary," with
respect to any party to this Agreement, means any corporation, partnership,
limited liability company, joint venture or other organization, whether
incorporated or unincorporated, of which: (i) such party or any other Subsidiary
of such party is a general partner; (ii) voting power to elect a majority of the
Board of Directors or others performing similar functions with respect to such
corporation, partnership, limited liability company, joint venture or other
organization is held by such party or by any one or more of its Subsidiaries, or
by such party and any one or more of its Subsidiaries; or (iii) at least 10% of
the equity, other securities or other interests is, directly or indirectly,
owned or controlled by such party or by any one or more of its Subsidiaries or
by such party and any one or more of its Subsidiaries.

3.4. NO VIOLATIONS; CONSENTS AND APPROVALS. (a) The Company has all
requisite corporate power and authority to enter into this Agreement and,
subject to the Company Stockholder Approval, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company, subject, in the
case of the Merger, to the Company Stockholder Approval. This Agreement has been
duly executed and delivered by the Company and, subject, in the case of the
Merger, to the Company Stockholder Approval, and assuming that this Agreement
constitutes the valid and binding agreement of Emerald, constitutes a valid and
binding obligation of the Company enforceable in accordance with its terms and
conditions except that the enforcement hereof may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws now or hereafter in effect relating to creditors rights
generally and (ii) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity) and (iii) any
ruling or action of any Governmental Entity as set forth in Section 3.4(c).

(b) The execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby by the Company will not conflict
with, or result in any violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration (including pursuant to any put right) of any
obligation or the loss of a material benefit under, or the creation of a
Lien on assets or property, or right of first refusal with respect to any
asset or property (any such conflict, violation, default, right of
termination, cancellation or acceleration, loss, creation or right of first
refusal, or change, a "Violation"), pursuant to, (i) any provision of the
Company Certificate of Incorporation or Company Bylaws or the comparable
documents of any of its Subsidiaries or (ii) except as to which requisite
waivers or consents have been obtained and specifically identified in
Section 3.4 of the Disclosure Schedule and assuming the consents,
approvals, authorizations or permits and filings or notifications referred
to in paragraph (c)) of this Section 3.4 are duly and timely obtained or
made and, in the case of the Merger, the Company Stockholder Approval has
been obtained, any loan or credit agreement, note, mortgage, deed of trust,
indenture, lease, Company License (as defined in Section 3.7), Company
Benefit Plan (as defined in Section 3.14), Company Material Contract (as
defined in Section 3.18), or any other agreement, obligation, instrument,
concession or license or any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company, any of its
Subsidiaries or any of their respective properties or assets except for
such Violations which would not individually or in the aggregate adversely
affect the Company and its Subsidiaries taken as a whole in any material
respect.

(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, notice to, or permit from any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign (a "Governmental Entity"), is required
by or with respect to the Company or any of its Subsidiaries in connection
with the execution and delivery of this Agreement by the Company or the
consummation by the Company of the transactions contemplated hereby, except
for: (i) any actions and approval that may be required under the insurance
laws and regulations of the
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jurisdictions in which the Subsidiaries of the Company that are insurance
companies are domiciled or licensed, each of which is listed in Section
3.4(c)(i) of the Disclosure Schedule; (ii) the filing of a pre-merger
notification and report form by the Company under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), and the
expiration or termination of the applicable waiting period thereunder;
(iii) the filing with the SEC of a proxy statement in definitive form
relating to the approval by the holders of Company Common Stock of the
Merger (such proxy statement as amended or supplemented from time to time
being hereinafter referred to as the "Proxy Statement"); (iv) the filing of
the Certificate of Merger with the Secretary of State of the State of
Delaware; (v) such filings and approvals as may be required by any
applicable state securities, "blue sky" or takeover laws; (vi) the Company
Stockholder Approval; and (vii) where the failure to obtain consent,
approval, order, or authorization of, or registration, declaration or
filing with, notice to, or permit from a Government Entity would not
adversely affect the Company and its Subsidiaries taken as a whole in any
material respect.

3.5. GOVERNMENT FILINGS; FINANCIAL STATEMENTS. The Company has made
available to Emerald a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by the Company with
the SEC since December 31, 1994 and prior to the date of this Agreement (the
"Filed Company SEC Documents"), which are all the documents (other than
preliminary material) that the Company was required to file with the SEC since
such date. The Company will promptly make available to Emerald a true and
complete copy of each report, schedule, registration statement (if any) and
definitive proxy statement (the "Future SEC Documents") filed by the Company
after the date of this Agreement. As of their respective dates, the Filed
Company SEC Documents complied, and the Future SEC Documents will comply, in all
material respects with the requirements of the Securities Act of 1933), as
amended (the "Securities Act"), or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as the case may be, and the rules and regulations
of the SEC promulgated thereunder applicable to such Filed Company SEC Documents
or Future SEC Documents, as the case may be, and none of the Filed Company SEC
Documents contained, and none of the Future SEC Documents will contain, any
untrue statement of a material fact or omitted, or will omit, to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The consolidated financial statements of the Company (the "Company
Consolidated Financial Statements") included in the Filed Company SEC Documents
or Future SEC Documents comply, or will comply, as to form in all material
respects with the published rules and regulations of the SEC with respect
thereto, have been, or will be, prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Rule 10-01 of Regulation S-X of the SEC)
and fairly present, or will present, in accordance with applicable requirements
of GAAP the consolidated financial position of the Company and its consolidated
subsidiaries as of the dates therein and the consolidated results of their
operations and cash flows for the periods presented therein (subject, in the
case of unaudited interim financial statements, to normal recurring adjustments
none of which are material). Section 3.5 of the Disclosure Schedule lists with
respect to the Company Common Stock for the period since December 31, 1997 and
prior to the date of this Agreement each (i) Schedule 13D filed with the SEC and
(ii) application for change in control filed under the insurance holding company
laws of any state or other jurisdiction.

3.6. INFORMATION SUPPLIED. The Proxy Statement, on the date it is first
mailed to the holders of the Company Common Stock or at the time of the Company
Stockholders' Meeting, will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. The Proxy Statement will comply as to form in all
material respects with the requirements of the Exchange Act and the rules and
regulations promulgated thereunder, except that no representation is made by the
Company with respect to statements made or incorporated by reference therein
based on information supplied in writing by Emerald specifically for inclusion
therein. If, at any time prior to the Company Stockholders' Meeting, any event
with respect to the Company, or with respect to other information supplied by
the Company for inclusion in the Proxy Statement, shall occur which is required
to be described in an amendment of, or a supplement to, any of such documents,
such event shall be so described, and such

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amendment or supplement shall be promptly filed with the SEC and, as required by
law, disseminated to the stockholders of the Company.

3.7. COMPLIANCE WITH LAWS. (a) Except as disclosed in Section 3.7(a) of
the Disclosure Schedule, the business of the Company and each of its
Subsidiaries is being, in all material respects, conducted in compliance with
all applicable laws, including, without limitation, all insurance laws,
ordinances, rules and regulations, decrees and orders of any Governmental
Entity, and all notices, reports, documents and other information required to be
filed thereunder within the last three years were properly filed and were in
compliance in all material respects with such laws.

(b) INSURANCE AND OTHER LICENSES.

(i) Section 3.7(b)(i)(A) of the Disclosure Schedule contains a
true and complete list of all jurisdictions in which each of the
Subsidiaries of the Company is licensed to transact insurance business.
Except as disclosed in Section 3.7(b)(i)(B) of the Disclosure Schedule,
each of the Subsidiaries of the Company has all the licenses necessary
to conduct the lines of insurance business which such Subsidiary is
currently conducting in each of the states set forth in Section
3.7(b)(i)(A) of the Disclosure Schedule, which are all of the states in
which the Company is currently conducting business or in the process of
commencing conducting business. The Subsidiaries of the Company own or
validly hold the 'insurance licenses referred to in Section 3.7(b)(1)(A)
of the Disclosure Schedule, all of which licenses are valid and in full
force and effect. Except as set forth in Section 3.7(b)(1)(A) of the
Disclosure Schedule, there is no proceeding or investigation pending or,
to the knowledge (as defined below) of the Company, threatened which
would reasonably be expected to lead to the revocation, amendment,
failure to renew, limitation, suspension or restriction of any such
license to transact insurance business. As used in this Agreement,
"knowledge" means the actual knowledge, after reasonable inquiry, of, in
the case of the Company, the officers of the Company, and, in the case
of Emerald, the officers of Emerald and the Parent.

(ii) The Company and each of its Subsidiaries owns or validly
holds all licenses, franchises, permits, approvals, authorizations,
exemptions, classifications, registrations, rights and similar documents
(other than licenses to transact insurance business) which are necessary
for it to own, lease or operate its properties and assets and to conduct
its business as now conducted, except for such licenses the failure to
hold which would not individually or in the aggregate adversely affect
the Company and its Subsidiaries taken as a whole in any material
respect. The business of the Company, any and each of its Subsidiaries
has been and is being conducted in compliance in all material respects
with all such licenses. All such licenses are in full force and effect,
and there is no proceeding or investigation pending or, to the knowledge
of the Company, threatened which would reasonably be expected to lead to
the revocation, amendment, failure to renew, limitation, suspension or
restriction of any such license.

(iii) The licenses referred to in subparagraphs (i) and (ii) are
collectively referred to herein as the "Company Licenses."

(c) INSURANCE STATEMENTS. Each Subsidiary of the Company that is an
insurance company has filed during the three years ended December 31, 1997,
all annual and quarterly statements, together with all exhibits and
schedules thereto, required to be filed with or submitted to the
appropriate regulatory authorities of the jurisdiction in which it is
domiciled and to any other jurisdiction where required on forms prescribed
or permitted by such authority. Each Annual Statement filed by any
Subsidiary of the Company that is an insurance company with the insurance
regulator in its state of domicile for the three years ended December 31,
1997 (each a "Company Annual Statement"), together with all exhibits and
schedules thereto, financial statements relating thereto and any actuarial
opinion, affirmation or certification filed in connection therewith and
each Quarterly Statement so filed for the quarterly periods ended after
January 1, 1998 (each a "Company Quarterly Statement") were prepared in
conformity with the statutory accounting practices prescribed or permitted
by the insurance regulatory authorities of the applicable state of domicile
applied on a consistent basis ("SAP"), present fairly, in all material
respects, to the extent required by and in conformity with SAP, the
statutory financial condition of such Subsidiary at their respective dates
and the results of operations, changes in capital and surplus and cash flow
of such
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<PAGE> 45

Subsidiary for each of the periods then ended. No deficiencies or
violations have been asserted in writing by any insurance regulator with
respect to the foregoing financial statements which have not been cured or
otherwise resolved to the satisfaction of such insurance regulator.

(d) LOSS RESERVES. All statutory reserves as established or
reflected in the Company Annual Statements and Company Quarterly Statements
were determined in accordance with SAP and generally accepted actuarial
assumptions and met the requirements of the insurance laws of each
applicable jurisdiction as of the respective dates of such statements in
all material respects. The statutory reserves set forth in the Company
Annual Statement and Company Quarterly Statements reflect a reasonable
provision for unpaid policy losses and loss adjustment expenses as of such
date. The reserves of the Subsidiaries of the Company including, but not
limited to, the reserves for incurred losses, incurred loss adjustment
expenses, incurred but not reported losses and loss adjustment expenses for
incurred but not reported losses (the "Loss Reserves") as set forth in the
audited consolidated financial statements and unaudited interim financial
statements of such Subsidiaries included in the Filed Company SEC Documents
were determined in good faith by the Company and such Subsidiaries in
accordance with GAAP and were believed by the Company and such Subsidiaries
to be reasonable when made. The Loss Reserves established or reflected in
the Company Annual Statements and the Company Quarterly Statements were
determined in accordance with generally accepted actuarial standards
consistently applied and are in compliance in all material respects with
the insurance laws, rules and regulations of their respective states of
domicile as well as those of any other applicable jurisdictions.

(e) NO DIVIDENDS PAID. Except as set forth in Section 3.7(e) of the
Disclosure Schedule, from September 30, 1998, none of the Company's
Subsidiaries have paid any dividend or made any other distribution in
respect of its capital stock.

3.8. INSURANCE ISSUED. Except (i) as set forth in Section 3.8 of the
Disclosure Schedule and (ii) where noncompliance would not individually or in
the aggregate adversely affect the Company and its Subsidiaries taken as a whole
in any material respect, with respect to all insurance issued:

(a) All insurance policies issued, reinsured or underwritten by the
Subsidiaries of the Company are, to the extent required by applicable law,
and in all material respects on forms approved by the insurance regulatory
authority of the jurisdiction where issued or delivered or have been filed
with and not objected to by such authority within the period prescribed for
such objection, and utilize premium rates which if required to be filed
with or approved by insurance regulatory authorities have been so filed or
approved and the premiums charged conform thereto.

(b) All insurance policy benefits payable by any Subsidiary of the
Company and, to the knowledge of the Company, by any other person that is a
party to or bound by any reinsurance, coinsurance or other similar
agreement with any Subsidiary of the Company, have in all material respects
been paid or are in the course of settlement in accordance with the terms
and within the limits of the insurance policies and other contracts under
which they arose, except for such benefits for which there is a reasonable
basis to contest payment and which are being or have been contested by
appropriate proceedings and in accordance with applicable law.

(c) The Company has not received any written notice that the
financial condition of any other party to any reinsurance, coinsurance or
other similar agreement with any of its Subsidiaries is so impaired as to
result in a default thereunder.

(d) All advertising, promotional, sales and solicitation materials
and product illustrations used by any Subsidiaries of the Company or any
agent of any of its Subsidiaries have complied and are in compliance, in
all material respects, with all applicable laws.

(e) To the knowledge of the Company, each insurance agent, at the
time such agent wrote, sold or produced business for any Subsidiary of the
Company since January 1, 1993 was duly licensed as an insurance agent (for
the type of business written, sold or produced by such insurance agent) in
the particular jurisdiction in which such agent wrote, sold or produced
such business and was properly appointed by such Subsidiary. All written
contracts and agreements between any such agent, on the one hand, and the
Company or any of its Subsidiaries, on the other hand, are in material
compliance with all

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<PAGE> 46

applicable laws and regulations. To the knowledge of the Company and its
Subsidiaries, no such agent is the subject of, or party to, any
disciplinary action or proceeding under applicable law. As of the date
hereof, to the Company's knowledge, the Company has not been advised that
any insurance agent intends to terminate or materially change its
relationship with the Company or its Subsidiaries as a result of the Merger
or the contemplated operations of the Company and its Subsidiaries after
the Merger is consummated.

(f) Except as set forth in Section 3.8(f) of the Disclosure Schedule,
neither the Company nor any of its Subsidiaries is a party to any fronting
agreement or places or sells coinsurance whether for its own account or for
any reinsurance company.

(g) There are to the knowledge of the Company (i) no claims asserted,
(ii) no actions, suits, investigations or proceedings by or before any
court or other Governmental Entity and (iii) no investigations by or on
behalf of any of the Company or its Subsidiaries ((i), (ii) and (iii) being
collectively referred to as "Actions") pending or threatened, against or
involving any of the Company or its Subsidiaries, that include allegations
that any of the Company or its Subsidiaries were in violation of or failed
to comply with any law, statute, ordinance, rule, regulation, code, writ,
judgment, injunction, decree, determination or award applicable to the
Company or its Subsidiaries in the respective jurisdictions in which their
products have been sold.

3.9. RATING AGENCIES. Except as disclosed in Section 3.9 of the
Disclosure Schedule, since December 31, 1997, no rating agency has imposed
conditions (financial or otherwise) on retaining any currently held rating
assigned to any Subsidiary of the Company that is an insurance company or
indicated to the Company that it is considering the downgrade of any rating
assigned to any Subsidiary of the Company that is an insurance company. As of
the date of this Agreement, each Subsidiary of the Company that is an insurance
company has the A.M. Best rating set forth in Section 3.9 of the Disclosure
Schedule. Notwithstanding anything to the contrary, the imposition of conditions
(financial or otherwise) on retaining any currently held rating assigned to any
Subsidiary of the Company that is an insurance company or downgrade of any
rating assigned to any Subsidiary of the Company that is an insurance company
primarily as a result of the transactions contemplated by this Agreement shall
not be a breach of this representation and warranty.

3.10. ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1997,
there has not been, occurred, or arisen any change, event (including, without
limitation, any damage, destruction, or loss whether or not covered by
insurance), condition or state of facts of any character with respect to the
business or financial condition of the Company or any of its Subsidiaries,
except (i) as disclosed in Section 3.10 of the Disclosure Schedule or in the
Filed Company SEC Documents, (ii) the imposition of conditions (financial or
otherwise) on retaining any currently held rating assigned to any Subsidiary of
the Company that is an insurance company or downgrade of any rating assigned to
any Subsidiary of the Company that is an insurance company primarily as a result
of the transactions contemplated by this Agreement, and (iii) for events in the
ordinary course of business consistent with past practice that would not,
individually or in the aggregate, result in a Material Adverse Effect on the
Company. Except as disclosed in Section 3.10 of the Disclosure Schedule or in
the Filed Company SEC Documents, since December 31, 1997, the Company and each
of its Subsidiaries has operated only in the ordinary course of business
consistent with past practice and (without limiting the generality of the
foregoing) there has not been, occurred, or arisen:

(a) any declaration, setting aside or payment of any dividend or
other distribution in respect of the capital stock of the Company or any
direct or (other than any retirement of any Company Stock Options
contemplated pursuant to this Agreement) indirect redemption, purchase or
other acquisition by the Company of any such stock or of any interest in or
right to acquire any such stock;

(b) any split, combination or reclassification of any of its
outstanding capital stock or any issuance or the authorization of any
issuance of any other securities in respect of, in lieu of or in
substitution for shares of the Company's or any of its Subsidiary's
outstanding capital stock;

(c) (i) any granting by the Company or any of its Subsidiaries to any
director, officer or other employee of the Company or any of its
Subsidiaries of any increase in compensation (including perquisites),
except, with respect to employees other than Key Employees (as defined
below), grants in

A-10
<PAGE> 47

the ordinary course of business consistent with prior practice, (ii) any
granting by the Company or any of its Subsidiaries to any such director,
officer or other employee of any increase in severance or termination pay,
(iii) any entry into, modification, amendment, waiver or consent by the
Company or any of its Subsidiaries with respect to any employment,
severance, change of control, termination or similar agreement, arrangement
or plan (oral or otherwise) with any officer, director or other employee or
(iv) any granting by the Company or any of its Subsidiaries of any Company
Stock Option or the change or amendment of any existing Company Stock
Option or Company Stock Option Plan;

(d) any change in the method of accounting or policy used by the
Company or any of its Subsidiaries other than as disclosed in the financial
statements included in the Filed Company SEC Documents, the Company Annual
Statement or the Company Quarterly Statement most recently filed and
publicly available prior to the date hereof or which were required by GAAP
or SAP;

(e) made any material amendment to the insurance policies in force of
any Subsidiary of the Company or made any change in the methodology used in
the determination of the reserve liabilities of the Subsidiaries of the
Company or any reserves contained in the financial statements included in
the Filed Company SEC Documents, the Company Annual Statement or the
Company Quarterly Statements;

(f) any termination, amendment or entrance into as ceding or assuming
insurer any reinsurance, coinsurance or other similar agreement or any
trust agreement or security agreement relating thereto, other than (i)
facultative reinsurance contracts related to the Company's public entity
business only that have been entered into in the ordinary course of
business consistent with past practice and (ii) renewals for periods of one
year or less on substantially the same terms, in the ordinary course of
business;

(g) any introduction of any insurance policy or any changes made in
its customary marketing, pricing, underwriting, investing or actuarial
practices and policies, except in the ordinary course of business
consistent with past practice;

(h) any Lien created or assumed on any of the assets or properties of
the Company or any of its Subsidiaries;

(i) any liability involving the borrowing of money by the Company or
any of its Subsidiaries or the incurrence by the Company or any of its
Subsidiaries of any deferred purchase price obligation (other than trade
credit incurred in the ordinary course of business and consistent with past
practice);

(j) any cancellation of any liability owed to the Company or any of
its Subsidiaries by any other person or entity other than immaterial
amounts owed by a person or entity who is not a Related Party (as defined
in Section 3.19);

(k) any write-off or write-down of, or any determination to write-off
or writedown, the assets or properties (other than any statutory write-down
of investment assets which is not related to a permanent impairment of
value) of the Company of any of its Subsidiaries or any portion thereof;

(l) any expenditure or commitment for additions to property, plant,
equipment, or other tangible or intangible capital assets or properties of
the Company or any of its Subsidiaries which exceeds $75,000 individually
or in the aggregate;

(m) any material change in any marketing relationship between the
Company or any of its Subsidiaries and any person or entity through which
the Company sells insurance Contracts; or

(n) any Contract to take any of the actions prohibited in this
Section 3.10.

3.11. ABSENCE OF UNDISCLOSED LIABILITIES. Except as reflected in Section
3.11 of the Disclosure Schedule, as of December 31, 1997, neither the Company
nor any of its Subsidiaries had any liabilities, absolute, accrued, contingent
or otherwise, whether due or to become due, which were not shown or provided for
in the audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. Since December 31, 1997, neither
the Company nor any of its Subsidiaries has incurred any liabilities, absolute,
accrued, contingent or otherwise, whether due or to become due except: (i)
liabilities arising in the ordinary course of business consistent with past
practice, which would not individually or in the aggregate cause a Material
Adverse Effect on the Company and its Subsidiaries taken as
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<PAGE> 48

a whole; (ii) as specifically and individually reflected in Section 3.11 of the
Disclosure Schedule or Filed Company SEC Documents or (iii) other liabilities
which, individually or in the aggregate, together with those liabilities
referenced in subparagraphs (i) and (ii) would not adversely affect the Company
and its Subsidiaries taken as a whole in any material respect. Except for
regular periodic assessments in the ordinary course of business, no claim or
assessment is pending or, to the knowledge of the Company, threatened, against
the Company or any of its Subsidiaries by any state insurance guaranty
association in correction with such association's fund relating to insolvent
insurers.

3.12. LITIGATION. Except as set forth in Section 3.12 of the Disclosure
Schedule and except for claims arising under insurance policies in (a) an amount
no greater than the limits set forth in such policies and/or (b) not involving
punitive, extra-contractual or extraordinary damages, (i) there is no material
suit, action, investigation, arbitration or proceeding pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its Subsidiaries, at law or in equity, before any person and (ii) there is no
writ, judgment, decree, injunction, rule or similar order of any Governmental
Entity or arbitrator outstanding against the Company or any of its Subsidiaries.

3.13. TAXES. Except as set forth in Section 3.13 of the Disclosure
Schedule:

(a) The Company and its Subsidiaries have (i) duly and timely filed
(or there have been filed on their behalf) with the appropriate taxing
authorities all Tax Returns (as defined below) required to be filed by
them, and all such Tax Returns are true, correct and complete in all
material respects and (ii) timely paid or there have been paid on their
behalf all material Taxes (as defined below) due or claimed to be due from
them by any taxing authority.

(b) The Company and its Subsidiaries have complied in all respects
with all applicable laws, rules and regulations relating to the payment and
withholding of Taxes and have, within the time and manner prescribed by
law, withheld and paid over to the proper governmental authorities all
amounts required to be withheld and paid over under all applicable laws.

(c) There are no liens for material Taxes upon the assets or
properties of the Company or any of its Subsidiaries except for statutory
liens for current Taxes not yet due.

(d) Neither the Company nor any of its Subsidiaries has requested any
extension of time within which to file any material Tax Return in respect
of any taxable year which has not since been filed.

(e) To the Company's knowledge, no federal, state, local or foreign
audits or other administrative proceedings or court proceedings ("Audits")
exist with regard to any material Taxes or material Tax Returns of the
Company or any of its Subsidiaries and there has not been received any
written notice that such an Audit is pending or threatened with respect to
any material Taxes due from or with respect to the Company or any of its
Subsidiaries or any material Tax Return filed by or with respect to the
Company or any of its Subsidiaries.

(f) Neither the Company nor any of its Subsidiaries has requested or
received a ruling from any taxing authority or signed a closing or other
agreement with any taxing authority which would materially affect any
taxable period after the Closing Date.

(g) The federal and state income Tax Returns of the Company and its
Subsidiaries have been examined by the appropriate taxing authorities (or
the applicable statute of limitations for the assessment of Taxes for such
periods have expired) for all periods through December 31, 1993, and a list
of all Audits commenced or completed with respect to the Company and its
Subsidiaries for all taxable periods not yet closed by the statute of
limitations is set forth in Section 3.13 of the Disclosure Schedule.

(h) All material Tax deficiencies which have been claimed, proposed
or asserted in writing against the Company or any of its Subsidiaries have
been fully paid, finally settled or adequately reserved, and no issue has
been raised in writing in any examination which, by application of similar
principles, could be expected to result in the proposal or assertion of a
material Tax deficiency for any other year not so examined.

(i) Neither the Company nor any of its Subsidiaries is required to
include in income any adjustment pursuant to Section 481(a) of the Internal
Revenue Code of 1986, as amended (the

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<PAGE> 49

"Code"), for any period after the Closing Date, by reason of any voluntary
or involuntary change in accounting method (nor has any taxing authority
proposed in writing any such adjustment or change of accounting method).

(j) Neither the Company nor any of its Subsidiaries is a party to, is
bound by, nor has any obligation under, any Tax sharing agreement, Tax
indemnification agreement or similar contract or arrangement.

(k) No power of attorney has been granted by or with respect to the
Company or any of its Subsidiaries with respect to any matter relating to
Taxes, which is currently effective.

(l) Neither the Company nor any of its Subsidiaries has filed a
consent pursuant to Section 341(f) of the Code (or any predecessor
provision) or agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code) owned by the Company or any of its Subsidiaries.

(m) Since December 31, 1997, neither the Company nor any of its
Subsidiaries has incurred any liability for Taxes other than in the
ordinary course of business or as have been fully and adequately reserved
for in the Company Consolidated Financial Statements.

(n) Neither the Company nor any of its Subsidiaries has or could have
any liability for any material Taxes of any person other than itself or the
Company or any of its Subsidiaries under Treasury Regulation Section
1.1502-6 (or any similar provision of state, local or foreign law).

(o) Neither the Company nor any of its Subsidiaries has any
intercompany items or corresponding items that have not been taken into
account under Treasury Regulation Section 1. 1502-13 (or any similar
provision under state, local or foreign law).

(p) Neither the Company nor any of its Subsidiaries has made any tax
election that would result in deferring any material income or gain from a
tax period ending on or before the Closing Date to a tax period ending
after the Closing Date without a corresponding receipt of cash and/or
property or would result in accelerating any material loss or deduction
from a tax period ending after the Closing Date to a tax period ending on
or before the Closing Date.

(q) Neither the Company nor any of its Subsidiaries is a party to any
contract, agreement or other arrangement(s) which could result in the
payment of amounts that could be nondeductible by reason of Section 28OG or
162(m) of the Code.

For purposes of this Agreement, (i) "Taxes" (including,, with correlative
meaning, the term "Tax") shall mean all taxes, charges, fees, levies, penalties
or other assessments imposed by any federal, state, local or foreign taxing
authority, including, but not limited to, income, gross receipts, excise,
property, sales, transfer, franchise, payroll, withholding social security and
other taxes, and shall include any interest, penalties or additions attributable
thereto and (ii) "Tax Return" shall mean any return, report, information return
or other document (including any related or supporting information) required to
be prepared with respect to Taxes.

3.14. EMPLOYEE BENEFIT PLANS; ERISA. (a) Section 3.14(a) of the
Disclosure Schedule sets forth a complete and correct list of (i) all "employee
benefit plans," as defined in Sec tion 3(3) of ERISA, which Company or any of
its Subsidiaries maintains or has any obligation or liability, contingent or
otherwise ("Company Benefit Plans") and (ii) all employment or consulting
agreements and all bonus or other incentive compensation, stock bonus, stock
option, restricted stock, stock appreciation right, stock purchase, bonus,
deferred compensation, salary continuation, severance, perquisites or other
special or fringe benefit agreements (including mortgage financings and tuition
reimbursements), which the Company or any of its Subsidiaries maintains or has
any obligation or liability (contingent or otherwise) in each case, with respect
to any current or former officer, director or employee of the Company or any of
its Subsidiaries (the "Company Employee Arrangements").

(b) With respect to each Company Benefit Plan, a complete and correct
copy of each of the following documents (if applicable) has been provided
or made available to Emerald: (i) the most recent plan and related trust
documents, and all amendments thereto; (ii) the most recent summary plan
description, and all related summaries of material modifications thereto;
(iii) the most recent Form 5500

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<PAGE> 50

(including schedules and attachments); (iv) the most recent IRS
determination letter or request therefor; and (v) the most recent actuarial
reports (including for purposes of Financial Accounting Standards Board
Report Nos. 87,106 and 112), if any. A complete and correct copy of each
Company Employee Arrangement has been provided or made available to
Emerald.

(c) Any Company Benefit Plans intended to qualify under Section 401
of the Code have been determined by the Internal Revenue Service to be so
qualified and no event has occurred and no condition exists with respect to
the form or operation of such Company Benefit Plans that would cause the
loss of such qualification.

(d) Except as set forth in Section 3.14(d) of the Disclosure
Schedule, all contributions or other payments required to have been made by
the Company or any of its Subsidiaries to or under any Company Benefit Plan
or Company Employee Arrangement by applicable law or the terms of such
Company Benefit Plan or Company Employee Arrangement (or any agreement
relating thereto) have been timely and properly made.

(e) Except as set forth in Section 3.14(e) of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries maintains or has
an obligation to contribute to retiree life or retiree health plans which
provide for continuing benefits or coverage for current or former officers,
directors or employees of the Company or any of its Subsidiaries except as
may be required under Part 6 of Title I of ERISA and at the sole expense of
the participant or the participant's beneficiary.

(f) Except as disclosed in Section 3.14(f) of the Disclosure
Schedule, none of the assets of any Company Benefit Plan is stock of the
Company or any of its affiliates, or property leased to or jointly owned by
the Company or any of its affiliates.

(g) Except as disclosed in Section 3.14(g) of the Disclosure Schedule
and as otherwise provided in Section 2.3, neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will (i) result in any payment becoming due to any
employee (current, former or retired) of the Company, (ii) increase any
benefits under any Company Benefit Plan or Company Employee Arrangement, or
(iii) result in the acceleration of the time of payment of, vesting of or
other rights with respect to any such benefits.

(h) No prohibited transaction under Section 406 of ERISA or Section
4975 of the Code has occurred with respect to a Company Benefit Plan.

(i) Each Company Benefit Plan (including without limitation, a
Company Benefit Plan covering retirees or the beneficiaries of such
retirees) may be terminated or amended by the plan sponsor at any time
without the consent of any person covered thereunder, and may be terminated
without liability for benefits accruing after the date of such termination.

(j) There are (i) no investigations pending by any governmental
entity (including the Pension Benefit Guaranty Corporation ("PBGC"))
involving the Company Benefit Plans and (ii) no pending or threatened
claims (other than routine claims for benefits), suits or proceedings
against any Company Benefit Plan, against the assets of any of the trusts
under any Company Benefit Plan or against any fiduciary of any Company
Benefit Plan with respect to the operation of such plan or asserting any
rights or claims to benefits under any Company Benefit Plan or against the
assets of any trust under such plan.

(k) Neither the Company nor any of its Subsidiaries maintains or
contributes to, nor have they ever maintained or contributed to, any
pension plan subject to Title IV of ERISA or Sections 412 of the Code or
302 of ERISA.

(l) Except as disclosed in Section 3.14(l) of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries has incurred, or
reasonably expects to incur, any liability under Title IV or ERISA (other
than for the payment of PBGC insurance premiums or plan benefits which have
been paid when due).

(m) Except as disclosed in Section 3.14(m) of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries has any liability
(including any contingent liability under Section 4204 of ERISA) with
respect to any "multiemployer plan" (within the meaning of Section 3(37) of
ERISA).

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<PAGE> 51

3.15. LABOR MATTERS (a) Neither the Company nor any of its Subsidiaries
is a party to any labor or collective bargaining agreement and no employees of
the Company or any of its Subsidiaries are represented by any labor
organization.

(b) There are no strikes, work stoppages, slowdowns, lockouts,
material arbitrations or material grievances or other material labor
disputes pending or, to the knowledge of the Company, threatened in writing
against or involving the Company or any of its Subsidiaries. There are no
unfair labor practice charges, grievances or complaints pending or, to the
knowledge of the Company, threatened in writing by or on behalf of any
employee or group of employees of the Company or any of its Subsidiaries.

(c) Except as set forth in Section 3.15 of the Disclosure Schedule,
there are no complaints, charges or claims against the Company or any of
its Subsidiaries pending or, to the knowledge of the Company, threatened to
be brought or filed with any governmental authority, arbitrator or court
based on, arising out of, in connection with, or otherwise relating to the
employment or termination of employment of any individual by the Company or
any of its Subsidiaries.

(d) Since December 31, 1993, there has been no "mass layoff' or
"plant closing" (as deemed by the WARN Act) with respect to the Company or
any of its Subsidiaries.

3.16. ENVIRONMENTAL MATTERS. (a) For purposes of this Agreement:

(i) "Environmental Law" means any applicable law regulating or
prohibiting Releases of Hazardous Materials into any part of the natural
environment, or pertaining to the protection of natural resources, the
environment, and public and employee health and safety from Hazardous
Materials including, without limitation, the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") (42 U.S.C. Section
9601 ET SEQ.), the Hazardous Materials Transportation Act (49 U.S.C.
Section 1801 ET SEQ.), the Resource Conservation and Recovery Act (42
U.S.C. Section 6901 ET SEQ.), the Clean Water Act (33 U.S.C. Section 1251
ET SEQ.), the Clean Air Act (33 U.S.C. Section 7401 ET SEQ.), the Toxic
Substances Control Act (15 U.S.C. Section 7401 ET SEQ.), the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 ET SEQ.),
and the Occupational Safety and Health Act (29 U.S.C. Section 651 ET SEQ.)
("OSHA") (to the extent OSHA regulates occupational exposure to Hazardous
Materials) and the regulations promulgated pursuant thereto, and any such
applicable state or local statutes, and the regulations promulgated
pursuant thereto, as such laws have been and may be amended or supplemented
through the Closing Date;

(ii) "Hazardous Material" means any substance, material or waste
which is regulated as hazardous or toxic by any public or governmental
authority in the jurisdictions in which the applicable party or its
Subsidiaries conducts business, or the United States, including, without
limitation, any material or substance which is defined as a "hazardous
waste," "hazardous material," "hazardous substance," "extremely hazardous
waste" or "restricted hazardous waste," "contaminant," "toxic waste" or
"toxic substance" under any provision of Environmental Law and shall also
include, without limitation, petroleum, petroleum products, asbestos,
polychlorinated biphenyls and radioactive materials;

(iii) "Release" means any release, spill, effluence, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal,
leaching, or migration of Hazardous Material into the environment; and

(iv) "Remedial Action" means all actions, including, without
limitation, those involving any capital expenditures, required by a
governmental entity or required under any Environmental Law, or voluntarily
undertaken to: (A) clean up, remove, treat, or in any other way mitigate
the adverse effects of any Hazardous Materials Released in the environment;
(B) prevent the Release or threat of Release, or minimize the further
Release of any Hazardous Material so it does not endanger or threaten to
endanger the public health or welfare or the environment; (C) perform
preremedial studies and investigations or postremedial monitoring and care
pertaining or relating to a Release or threat of Release; or (z) bring the
applicable party into compliance with any Environmental Law.

(b) Except as set forth in Section 3.16 of the Disclosure Schedule:

(i) The operations of the Company and each of its Subsidiaries
have been and, as of the Closing Date, will be, in compliance with all
Environmental Laws, except for such noncompliance

A-15
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which would not individually or in the aggregate adversely affect the
Company and its Subsidiaries taken as a whole in any material respect;

(ii) The Company and each of its Subsidiaries have obtained and
will, as of the Closing Date, maintain all permits required under
applicable Environmental Laws for the continued operations of their
respective businesses, except where the failure to so obtain or maintain
would not individually or in the aggregate adversely affect the Company
and its Subsidiaries taken as a whole in any material respect;

(iii) Neither the Company nor any of its Subsidiaries is subject
to any outstanding orders from, or agreements with, any Governmental
Entity or other person respecting (A) Environmental Laws, (B) Remedial
Action or (C) any Release or threatened Release of a Hazardous Material;

(iv) Neither the Company nor any of its Subsidiaries has received
any written communication alleging, with respect to any such party, the
violation of or potential liability under any Environmental Law;

(v) Neither the operations of the Company nor any of its
Subsidiaries involve the generation, transportation, treatment, storage
or disposal of hazardous waste as defined and regulated under 40 C.F.R.
Parts 260-270 (in effect as of the date of this Agreement) or any state
equivalent;

(vi) No judicial or administrative proceedings or governmental
investigations are pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries alleging the
violation of or seeking to impose liability pursuant to any
Environmental Law;

(vii) No environmental approvals, clearances or consents are
required under applicable law from any governmental entity or authority
in order to consummate the reactions contemplated herein; and

(c) This Section 3.16 sets forth the sole representations and
warranties of the Company with respect to Environmental Laws.

3.17. REAL AND PERSONAL PROPERTY. (a) There is no real property owned in
fee by the Company or any of its Subsidiaries.

(b) Each lease, sublease or other agreement (collectively, the "Real
Property Leases") under which the Company or any of its Subsidiaries uses
or occupies or has the right to use or occupy, now or in the future, any
real property is valid, binding and in full force and effect, all rent and
other sums and charges payable by the Company or any of its Subsidiaries as
a tenant thereunder are current, and no termination event or condition or
uncured default of a material nature on the part of the Company or any of
its Subsidiaries or, to the Company's knowledge, the landlord, exists under
any Real Property Lease. The Company and its Subsidiaries have a good and
valid leasehold interest in each parcel of real property leased by them,
free and clear of all Liens, except those reflected or reserved against in
the consolidated balance sheet of the Company dated as of December 31,
1997, and Liens imposed upon the leased real property by or on account of
the landlords thereof.

(c) Except as set forth in Section 3.17(c) of the Disclosure
Schedule, the Company and its Subsidiaries own good and indefeasible title
to, or have a valid leasehold interest in or a valid right under contract
to use, all tangible personal property that is used in the conduct of their
business, free and clear of any Liens, except for any mechanics or similar
statutory liens arising in the ordinary course of business. All such
tangible personal property is in good operating condition and repair
(normal wear and tear excepted) and is suitable for its current uses.

(d) Except as set forth in Section 3.17(d) of the Disclosure
Schedule, the Company and its Subsidiaries own or have a right to use each
trademark, trade name, patent, service mark, brand mark, brand name,
database, copyright and other intellectual property owned or used in
connection with the operation of the business of the Company and its
Subsidiaries, including any registrations thereof, and each license or
other contract relating thereto (collectively, the "Company Intangible
Property"), free and clear of any and all Liens. Section 3.17(d) of the
Disclosure Schedule sets forth a complete list of the Company Intangible
Property. To the knowledge of the Company, the use of the Company
Intangible

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Property by the Company and its Subsidiaries does not conflict with,
infringe upon, violate or interfere with any right, title or interest of
any other person. Except as set forth in Section 3.17(d) of the Disclosure
Schedule, the Company and its Subsidiaries own or have valid and
enforceable licenses or other rights to use, free and clear of any and all
Liens, all software used in connection with the operation of the business
of the Company and its Subsidiaries, the use of such software by the
Company and its Subsidiaries does not infringe on or otherwise violate the
rights of any person, and, to the knowledge of the Company, no person is
challenging, infringing on or otherwise violating, the right of the Company
or any Subsidiary with respect to any such software used by the Company and
its Subsidiaries.

3.18. MATERIAL CONTRACTS. Section 3.18 of the Disclosure Schedule
contains a true and complete list of each of the following Company Material
Contracts (as defined in this Section 3.18) in effect as of the date of this
Agreement (true and complete copies of which have been made available to
Emerald) to which the Company or any of its Subsidiaries is a party or by which
any of their respective assets or properties is or may be bound:

(a) all employment, agency (other than insurance agency), consulting,
or representation contracts or other contracts of any type (including,
without limitation, loans or advances) with any present officer or
director, agent (other than an insurance agent), consultant, or other
similar representative of the Company or any of its Subsidiaries (or former
officer, director, Key Employee, agent (other than an insurance agent),
consultant or similar representative of the Company or any of its
Subsidiaries if there exists any present or future liability with respect
to such contract);

(b) a specimen form insurance agent contract (the "Producer
Agreements") and any insurance agent contract having terms different in any
material respect than the terms contained in the specimen form agent
contract;

(c) all contracts with any person or entity containing any provision
or covenant limiting the ability of the Company to (A) sell any products or
services, (B) engage in any line of business or (C) compete with or obtain
products or services from any person or entity or (ii) limiting the ability
of any person or entity to compete with or to provide products or services
to the Company;

(d) all contracts relating to the borrowing of money by the Company,
relating to the deferred purchase price for property or services, or
relating to the direct or indirect guarantee by the Company or any of its
Subsidiaries of any liability;

(e) all contracts (other than contracts of insurance or reinsurance
entered into in the ordinary course of business) pursuant to which the
Company or any of its Subsidiaries has agreed to indemnify or hold harmless
any person or entity (other than indemnifications or hold harmless
covenants in the ordinary course of business and consistent with past
practice);

(f) all leases or subleases of real property used in the business,
operations, or affairs of the Company or any of its Subsidiaries;

(g) all contracts or arrangements (including, without limitation,
those relating to allocations of expenses, personnel, services, or
facilities) between the Company and any of its Subsidiaries or among the
Subsidiaries of the Company;

(h) all leases of automobiles used in the business, operations or
affairs of the Company or any of its Subsidiaries;

(i) all reinsurance (whether as assuming or ceding insurer or
otherwise), coinsurance or other similar contracts;

(j) all other contracts (other than insurance contracts issued,
reinsured or underwritten by the Company) that involve the payment or
potential payment, pursuant to the terms of such contracts, by or to the
Company of more than $75,000 or that are otherwise material to the business
or condition of the Company; and

(k) any commitments or other obligations to enter into any of the
foregoing.

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Each Company Material Contract disclosed or required to be disclosed in
Section 3.18 of the Disclosure Schedule is in full force and effect and
constitutes a legal, valid and binding obligation of the Company or any of its
Subsidiaries to the extent any such entity is a party thereto and, to the
knowledge of Company, each other party thereto. Neither the Company nor any of
its Subsidiaries has received from any other party to such Company Material
Contract any written notice of termination or intention to terminate or not to
honor the terms of such Contract. Except as set forth in Section 3.18 of the
Disclosure Schedule, neither the Company nor any of its Subsidiaries nor, to the
knowledge of the Company, any other party to such Company Material Contract is
in violation or breach of or default under any such Company Material Contract
(or with or without notice or lapse of time or both, would be in violation or
breach of or default under any such Contract), which violations, breach or
default would individually or in the aggregate adversely affect the Company and
its Subsidiaries taken as a whole in any material respect. As used in this
Agreement, the term "Company Material Contract" shall mean any agreement,
arrangement, undertaking, lease, sublease, license, sublicense, promissory note,
evidence of indebtedness or other binding contract, in each case, reduced to
writing having a value of $100,000 or more per year. As used in this Agreement
"Key Employee" shall mean employees of the Company having a salary of $90,000 or
more per year.

3.19. RELATED PARTY TRANSACTIONS. Except as set forth in Section 3.19 of
the Disclosure Schedule, no director, officer, "affiliate" or "associate" (as
such terms are defined in Rule 12b-2 under the Exchange Act) of the Company
(each a "Related Party"): (i) has borrowed any monies from or has outstanding
any indebtedness, liabilities or other similar obligations to the Company or any
of its Subsidiaries; (ii) owns any direct or indirect interest of any kind in,
or is a director, officer, employee, partner, affiliate or associate of, or
consultant or lender to, or borrower from, or has the right to participate in
the management, operations or profits of, any person or entity which is (A) a
competitor, supplier customer, distributor, lessor, tenant, creditor or debtor
of the Company or any of its Subsidiaries, (B) engaged in a business related to
the business of the Company or any of its Subsidiaries or (C) participating in
any transaction to which the Company or any of its Subsidiaries is a party; or
(iii) is otherwise a party to any contract, arrangement or understanding, with
the Company or any of its Subsidiaries.

3.20. LIENS. Except as set forth in Section 3.20 of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries has granted, created
or suffered to exist with respect to any of its assets, any mortgage, pledge,
charge, hypothecation, collateral assignment, lien (statutory or otherwise),
encumbrance or security agreement of any kind or nature whatsoever
(collectively, the "Liens").

3.21. OPERATIONS INSURANCE. Section 3.21 of the Disclosure Schedule
contains a true and complete list and description of all liability, property,
workers compensation, directors and officers liability, and other similar
insurance policies or agreements that insure the business, operations, or
affairs of the Company and its Subsidiaries or affect or relate to the
ownership, use, or operations of any of the assets or properties of the Company
and its Subsidiaries. Excluding insurance policies that have expired and been
replaced in the ordinary course of business, no insurance policy has been
canceled within the last year except as disclosed in Section 3.21 of the
Disclosure Schedule, and, to the knowledge of the Company or its Subsidiaries,
no threat has been made to cancel any insurance policy of any of the Company or
its Subsidiaries during such period. Except as disclosed in Section 3.21 of the
Disclosure Schedule, all such insurance will remain in full force and effect
with respect to periods before the Closing without the payment of additional
premiums. No event has occurred, including, without limitation, the failure by
any of the Company or its Subsidiaries to give any notice or information or any
of the Company or its Subsidiaries giving any inaccurate or erroneous notice or
information, which limits or impairs the rights of such Company or Subsidiary
under any such insurance policies.

3.22. OPINION OF FINANCIAL ADVISOR. The Company has received the opinion
of the Financial Advisor dated December 1, 1998 (the "FPK Opinion"), to the
effect that, as of the date thereof, the Merger Consideration to be received by
the holders of Company Common Stock in the Merger is fair from a financial point
of view to such holders. A signed, true and complete copy of the FPK Opinion has
been delivered to Emerald, and the FPK Opinion has not been withdrawn or
modified.

3.23. BOARD OF DIRECTORS RECOMMENDATION. The Board of Directors of the
Company, at a meeting duly called and held, has by the unanimous vote of those
directors present and voting (who constituted all of

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the directors then in office) (i) approved and adopted this Agreement, the
Merger and the other transactions contemplated hereby, (ii) determined that the
consideration to be received by the holders of shares of Company Common Stock
pursuant to the Merger is fair to the holders of such shares, (iii) resolved to
recommend, subject to Sections 5.4 and 6.1 of this Agreement, that the holders
of the shares of Company Common Stock approve this Agreement and the
transactions contemplated herein and (iv) resolved to call a special meeting of
the stockholders of the Company to approve the Merger.

3.24. STOCKHOLDER VOTE REQUIRED. The affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock is the only vote of
the holders of any class or series of the Company's capital stock necessary
(under applicable law or otherwise) to approve the Merger and the transactions
contemplated hereby.

3.25. BROKERS. The Company represents that no agent, broker, investment
broker, financial advisor or other firm or person is or will be entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement, except for the
Financial Advisor, whose fees and expenses shall be paid by the Company in
accordance with the Company's agreements with such firm dated as of February 6,
1998, a true and correct copy of which has been furnished to Emerald prior to
the date hereof.

3.26. BANK ACCOUNTS. Section 3.26 of the Disclosure Schedule contains (i)
a true and complete list of the names and locations of all banks, trust
companies, securities brokers, and other financial institutions at which the
Company and each of its Subsidiaries has an account or safe deposit box, (ii) a
true and complete list and description of each such account, box, and
relationship, and (iii) a list of all signatories for each such account and box.

3.27. PREMIUM BALANCES RECEIVABLE. The premium balances receivable of the
Company and its Subsidiaries as reflected in the Company's financial statements
for the quarter ended September 30, 1998, to the extent uncollected on the date
hereof, and the premium balances receivable reflected on the books of the
Company and its Subsidiaries as of the date hereof, are valid and existing and
represent monies due, and the Company and its Subsidiaries have made reserves
reasonably considered adequate for receivables not collectible in the ordinary
course of business, and (subject to the aforesaid reserves) are subject to no
refunds or other adjustments and to no defenses, rights of setoff, assignments,
restrictions, encumbrances or conditions enforceable by third parties or
affecting any material amount thereof.

3.28. INVESTMENT PORTFOLIO AND OTHER ASSETS. The Company and its
Subsidiaries own an investment portfolio acquired in the ordinary course of
business, and a true and complete list of the securities and other investments
in such investment portfolio, as of September 30, 1998 with respect to mortgage
loans and September 30, 1998, if any, with respect to debt and equity securities
and other investments, with true and correct information included thereon as to
the cost of each such investment and the market value thereof as of such date,
is listed in Section 3.28 of the Disclosure Schedule. Except as otherwise set
forth in Section 3.28 of the Disclosure Schedule, (i) none of the investments
included in such investment portfolio is in default in the payment of principal
or interest or dividends or impaired to any extent, (ii) all investments
included in such investment portfolio comply (x) with all insurance laws and
regulations of each of the states to which the Company and its Subsidiaries is
subject relating thereto and (y) to the Company's knowledge, with all federal
and state securities laws and (iii) such investments constitute all of the
investments or holdings (including loans to agencies) of the Company and its
Subsidiaries other than any disclosed in Sections 3.3, 3.17(a) or 3.17(c) of the
Disclosure Schedule.

3.29. PAYMENTS. To the knowledge of the Company, neither the Company nor
any of its Subsidiaries nor any director, officer, agent, employee or other
person associated with or acting on behalf of the Company or any Subsidiary has
used any corporate funds for unlawful contributions, gifts, entertainment or
other unlawful expenses relating to political activity, or made any direct or
indirect unlawful payments to government officials or employees or agents from
corporate funds, or established or maintained any unlawful or unrecorded funds.

3.30. REINSURANCE AGREEMENTS. Section 3.30 of the Disclosure Schedule
contains a true and complete list of all reinsurance treaties and contracts
applicable to the Company (whether as ceding insurer or assuming

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reinsurer) or the Subsidiaries (individually, a "Reinsurance Agreement" and
collectively, the "Reinsurance Agreements"), copies of which have been delivered
or made available to Emerald. Each of the Reinsurance Agreements is valid and
binding in all material respects in accordance with its terms and is in full
force and effect. No other party to any Reinsurance Agreement has given notice
to the Company or any of its Subsidiaries that intends to terminate or cancel
any such Reinsurance Agreement as a result of the Merger or the contemplated
operations of the Company or its Subsidiaries after the Merger is consummated,
which termination or change would have a Material Adverse Effect on the Company.
Any Subsidiary of the Company that has ceded reinsurance pursuant to any such
Reinsurance Agreement is entitled to take full credit in its financial
statements for all amounts recoverable (net of any reserve for collectibility
under such Reinsurance Agreement) with such credit accounted for (i) pursuant to
SAP, as a reduction of such Company's loss reserves and (ii) pursuant to GAAP,
as a reinsurance recoverable asset. The Company has no unrecoverable reinsurance
balances, other than as fully reserved on the Company's consolidated balance
sheet dated September 30, 1998 and delivered to Emerald prior to the date of
execution hereof or specified on Section 3.30(b) of the Disclosure Schedule.

3.31. STATE ANTITAKEOVER STATUTES. The Company has granted all approvals
and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of Section
203 of the DGCL and any other state antitakeover statute or regulation such that
none of the provisions of such Section 203 or any other "business combination,"
"moratorium," "control share" or other state antitakeover statute or regulation
(x) prohibits or restricts the Company's ability to perform its obligations
under this Agreement or its ability to consummate the Merger and the other
transactions contemplated hereby, (y) would have the effect of invalidating or
voiding this Agreement, or (z) would subject Parent or Newco to any material
impediment or condition in connection with the exercise of any of their
respective rights under this Agreement.

3.32. CERTAIN OTHER AGREEMENTS. Security Insurance Company of Hartford
has entered into the Stockholders Agreement (the "Stockholders Agreement") set
forth as Exhibit 1 hereto. Stanley A. Galanski has entered into the Employment
Agreement (the "Galanski Employment Agreement") set forth as Exhibit 2 hereto.
Robert M. Lynyak has entered into the Employment Agreement (the "Lynyak
Employment Agreement" and, together with the Galanski Employment Agreement, the
"Employment Agreements") set forth as Exhibit 3 hereto. The Roanoke Consent (the
"Roanoke Consent"), substantially in the form of Exhibit 4 hereto, has been
entered into by The Roanoke Companies.

3.33. COMPANY CASH AND CASH EQUIVALENTS. The Company has cash and cash
equivalents (the "Company Cash") of at least $24,000,000. There are no
restrictions, liens, security interests or similar encumbrances on the Company
Cash. There exist no restrictions whatsoever, by operation of law or contract or
regulation or otherwise, other than as set forth in this Agreement, that could
prevent the Company from distributing the Company Cash to its shareholders.

3.34. YEAR 2000. The Company is in the process of reviewing its and its
Subsidiaries' software and hardware systems which perform critical or important
accounting, data processing, data storage, data transmission and report writing
functions for the purposes of evaluating the readiness of these systems to
function without material interruption on the occurrence of the year 2000 ("Y2K
Readiness"). In connection with this process the Company has retained the
services of Y2K Readiness consultants to assist the Company in these efforts and
has undertaken to obtain assurances from its principal software suppliers and
service firms as to the Y2K Readiness of certain mission critical or important
systems obtained from these outside sources or utilized by them in providing
critical services to the Company. The Company reasonably believes that all
software, hardware and equipment (including microprocessors) that are owned or
utilized by the Company or any of its Subsidiaries in the operations of its or
their respective business will be capable, by December 31, 1999, of accounting
for all calculations using a century and date sensitive algorithm for the year
2000 and the fact the year 2000 is a leap year and to otherwise continue to
function without any interruption caused by the occurrence of the year 2000.

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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF EMERALD

Emerald represents and warrants to the Company as follows:

4.1. ORGANIZATION, STANDING AND POWER. Emerald is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated or organized, has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted and is duly qualified or licensed
to do business as a foreign corporation and in good standing to conduct business
in each jurisdiction in which the business it is conducting, or the operation,
ownership or leasing of its properties, makes such qualification or license
necessary, other than such jurisdictions where the failure so to qualify or
become so licensed would not, individually or in the aggregate, adversely affect
Emerald and its Subsidiaries taken as a whole in any material respect.

4.2. AUTHORITY; CONSENT AND APPROVALS. (a) Emerald has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Emerald, including
the affirmative vote of a majority of the outstanding shares of Emerald's common
stock. This Agreement has been duly executed and delivered by Emerald and,
assuming that this Agreement constitutes the valid and binding agreement of the
Company, constitutes a valid and binding obligation of Emerald enforceable in
accordance with its terms and conditions except that the enforcement hereof may
be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect relating
to creditors' rights generally, (ii) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in equity) and
(iii) any ruling or action of any Governmental Entity as set forth in Section
4.2(b).

(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, notice to, or permit from a Governmental Entity
is required by or with respect to Emerald or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by Emerald or
the consummation by Emerald of the transactions contemplated hereby, except
for: (i) any actions, consents, approvals, filings and/or notices that may
be required under the insurance laws and regulations of the jurisdictions
in which the Subsidiaries of Emerald that are insurance companies are
domiciled or licensed, each of which is listed in Section 4.2(b)(i) of the
Disclosure Schedule; (ii) the filing of a premerger notification and report
form by Emerald under the HSR Act, and the expiration or termination of the
applicable waiting period thereunder; (iii) the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware; and (iv)
such filings and approvals as may be required by any applicable state
securities, "blue sky" or takeover laws.

4.3. INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Emerald for inclusion or incorporation by reference in the Proxy
Statement will, on the date it is first mailed to the holders of Company Common
Stock or at the time of the Company Stockholders' Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.

4.4. FINANCING. Emerald has readily available all of the funds necessary
to consummate the Merger and, at the Effective Time, Emerald shall have readily
available all of the funds necessary for the acquisition of all shares of
Company Common Stock pursuant to the Merger, and to perform its obligations
under this Agreement.

4.5. BROKERS. Emerald represents, as to itself and its affiliates, that
no agent, broker, investment broker, financial advisor or other firm or person
is or will be entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement, except for Lehman Brothers Inc., whose fees and expenses shall
be paid by Emerald.

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ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS

5.1. CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. During
the period from the date of this Agreement to the Effective Time, each of the
Company and its Subsidiaries shall use its commercially reasonable efforts to
preserve, in all material respects, the goodwill of employees, suppliers,
customers, landlords, contractors, bankers, and others having business relations
with it and to do nothing knowingly to impair its ability to keep and preserve
its business as it exists on the date of this Agreement. Without limiting the
generality of the foregoing, during the period from the date of this Agreement
to the Effective Time of the Merger each of the Company and its Subsidiaries
shall not, without the prior written consent of Emerald:

(a) conduct its business outside of the ordinary course consistent
with past practice;

(b) adopt a plan of complete or partial liquidation or declare, set
aside, increase or pay any dividend (including any stock dividends), or
declare or make any distribution on, or directly or indirectly combine,
redeem, reclassify, purchase, or otherwise acquire, any shares of its
capital stock or authorize the creation or issuance of, or issue, deliver
or sell any additional shares of its capital stock or any securities or
obligations convertible into or exchangeable for its capital stock or
effect any stock split or reverse stock split or other recapitalization,
except (i) the issuance of any shares upon the exercise of any the Company
Stock Options outstanding on the date of this Agreement; (ii) the
acceptance by the Company of any shares of the Company Common Stock in
consideration of the exercise of the Company Stock Options or in
satisfaction of any tax or tax withholding obligations of the holders of
the Company Stock Options or (iii) the payment of the regular semi-annual
dividend not in excess of $0.09 per share on each of approximately March 15
and September 15, 1999; provided, however, that the declaration of, and
record date for, any such dividend shall be the minimum period prior to the
payment date of such semi-annual dividend as required by law or securities
exchange; and provided, further, that no such semi-annual dividend shall be
paid if the Closing hereunder has occurred prior to the payment date;

(c) amend its certificate or articles of incorporation or by-laws (or
similar organizational documents), or adopt or amend any resolution or
agreement concerning indemnification of its directors, officers, employees
or agents;

(d) pledge or otherwise encumber any shares of its capital stock, any
other voting securities or any securities convertible into, or any rights,
warrants or options to acquire, any such shares or any other voting
securities or convertible securities;

(e) commit or omit to do any act which act or omission would cause a
breach of any covenant contained in this Agreement or would cause any
representation or warranty contained in this Agreement to become untrue, as
if each such representation and warranty were continuously made from and
after the date hereof;

(f) violate any applicable law, statute, rule, governmental
regulation or order that would have a Material Adverse Effect on such
party;

(g) fail to maintain its books, accounts and records in the usual
manner on a basis consistent with that heretofore employed or change any
accounting method, policy, practice or application previously employed;

(h) release or reverse any existing reserves, other than for
resolution of claims for which such reserve was established or, in the
aggregate, any reserves for claims which are incurred but not reported, or
recognize any unrecognized gain;

(i) fail to pay, or to make adequate provision in all material
respects for the payment of, all Taxes, interest payments and penalties due
and payable (for all periods up to the Effective Time, including that
portion of its fiscal year to and including the Effective Time) to any
city, parish, state, the United States, foreign or any other taxing
authority, except those being contested in good faith by appropriate
proceedings and for which sufficient reserves have been established, or
make any elections with respect to Taxes;

(j) make any material tax election that is inconsistent with any
corresponding election made on a prior return or settle or compromise any
income tax liability for an amount materially in excess of the

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liability therefor that is reflected on the Company consolidated financial
statements or Emerald consolidated financial statements, as the case may
be;

(k) except for normal compensation increases, hirings and promotions
in the ordinary course of business consistent with past practice, enter
into or modify any written or oral employment, severance or similar
agreement or arrangement with any director, executive officer or employee
or grant any increase in the rate of wages, salaries, bonuses or other
compensation or benefits of any such person;

(l) acquire or agree to acquire (i) by merging or consolidating with,
or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, joint venture,
association or other business organization or division thereof or (ii) any
assets that are material, individually or in the aggregate, to the Company,
except purchases of investments and other assets in the ordinary course of
business consistent with past practice and for a fair and adequate
consideration;

(m) except as set forth in Section 5.1(m) of the Disclosure Schedule,
other than in the ordinary course of business consistent with past
practice, and for a fair and adequate consideration, sell, lease, license,
mortgage or otherwise encumber or subject to any Lien or otherwise dispose
of any of its other properties or assets;

(n) other than in the ordinary course of business consistent with
past practice, and for a fair and adequate consideration, incur any
indebtedness for borrowed money, or guarantee any such indebtedness of
another party, issue or sell any debt securities or warrants or other
rights to acquire any debt securities of such party or any of its
subsidiaries, guarantee any debt securities of another party, enter into
any "keep well" or other agreement to maintain any financial condition of
another party or enter into any arrangement having the economic effect of
any of the foregoing, or make any loans, advances or capital contributions
to, or investments in, any other party, or alter any credit terms;

(o) except as set forth on Section 5.1(o) of the Disclosure Schedule,
make or agree to make any new capital expenditures other than those made in
the ordinary course of business and consistent with past practice and which
amount to less than $50,000 individually;

(p) other than in the ordinary course of business consistent with
past practice, and for a fair and adequate consideration, place or suffer
to exist on any of its assets or properties any Lien, other than Liens
listed on the Company Disclosure Schedule, or forgive any material
indebtedness owing to it or any claims which it may have possessed, or
waive any right of substantial value or discharge or satisfy any material
noncurrent liability;

(q) (i) adopt, amend or change any Company Stock Option Plan or any
other benefit or stock option or stock or similar plan or arrangement,
except as otherwise contemplated by Section 2.2; or (ii) grant or pay to
any salaried employee or former salaried employee, officer or director of
any of the Company or its Subsidiaries any award under any Company
discretionary or other bonus plans or under any Company Stock Option Plans,
except with the consent of Emerald;

(r) fail to maintain in all material respects all licenses,
certificates of authority, qualifications and Governmental Authorizations
to do business in which it is so licensed, qualified or authorized;

(s) other than in the ordinary course of business consistent with
past practice, fail to maintain in full force and effect, other than those
that expire in accordance with their terms, all material contracts,
including all reinsurance, coinsurance and similar agreements of each of
the Subsidiaries of the Company, and not permit or effect any material
amendment thereof without the prior written consent of Emerald;

(t) fail to cause each of the Company's Subsidiaries to properly
prepare and timely file all financial statements, reports and Tax Returns
required to be filed by such Subsidiary with any Governmental Authorities
with respect to the business, operations or affairs of such Subsidiary, and
pay duly and fully all Taxes indicated as due on such Tax Returns, and all
required filing fees;

(u) fail to cause all reserves with respect to insurance contracts
issued by each of the Company's Subsidiaries to be established or reflected
on the books and records of such Subsidiary on a basis consistent with
those reserves and reserving methods followed by the Company's Subsidiaries
at December 31, 1997,

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and to continue to own investment assets that qualify under state insurance
laws and regulations as admitted assets in an amount at least equal to all
of the required reserves of such Subsidiaries, established in accordance
with generally accept actuarial principles and practices consistently
applied; or

(v) authorize any of, or agree or commit to do any of, the foregoing
actions.

5.2. COMPANY CASH. The Company will maintain the Company Cash in (i)
securities issued or directly and fully guaranteed by the United States
Government, or (ii) commercial paper rated at least P-1 by Moody's Investors
Service, Inc. ("Moody's") and at least A-1 by Standard and Poor's Ratings Group
("S&P") or (iii) senior indebtedness issued by persons with a rating of at least
AA by S&P and Aa by Moody's, in each case with a maturity of no more than 60
days from the date of acquisition. The Company Cash will at all times remain the
sole property of the Company, and the Company will not grant, or suffer to
exist, any interest whatsoever of any other person or entity in the Company
Cash.

5.3. ADDITIONAL COMPANY AUTHORIZATIONS. The Company will use its
reasonable efforts, in cooperation and at the direction of Emerald, to obtain
additional authority in each jurisdiction in which the Company is currently
licensed (as well as in the states of New Hampshire and Vermont) for property,
casualty and surety lines of insurance, to the extent that the Company does not
already possess such authorities or licenses; provided, however, that Emerald
will pay all reasonable pre-approved third party fees and expenses related to
the foregoing; and provided, further, that Emerald and the Company acknowledge
that the failure, after the use of reasonable efforts by the Company in
accordance with the terms hereof, to obtain any such additional authorities or
licenses will not constitute a breach of this Agreement.

5.4. NO SOLICITATIONS. (a) The Company shall not, directly or indirectly,
through any officer, director, employee, representative, agent or other person,
solicit or encourage the initiation or submission of any direct or indirect
inquiries, proposals or offers regarding any acquisition, merger, takeover bid
or sale of all or any of the assets (other than in the ordinary course of
business consistent with past practice) or any shares of capital stock of the
Company (other than pursuant to exercise, in accordance with the terms thereof,
by the persons listed on Schedule 2.2(a) of options outstanding under Company
Stock Option Plans as in effect on the date hereof), whether or not in writing
and whether or not delivered to the stockholders of the Company generally
(including, without limitation, by way of a tender offer) by any party other
than Emerald or its affiliates (any of the foregoing inquiries or proposals
being referred to herein as an "Acquisition Proposal"); provided, however, that
nothing contained in this Agreement shall prevent the Board of Directors of the
Company from referring any third party to this Section 5.4. Nothing contained in
this Section 5.4 or any other provision of this Agreement shall prevent the
Board of Directors of the Company from considering or negotiating an unsolicited
bona fide Acquisition Proposal. If the Board of Directors of the Company, after
duly considering written advice of outside counsel and financial advisors to the
Company, determines in good faith that it would likely be a violation of its
fiduciary responsibilities to not approve or recommend (and in connection
therewith withdraw or modify its approval or recommendation of this Agreement,
and the transactions contemplated hereby) a Superior Proposal (as defined
below), then, notwithstanding any such approval or recommendation (i) the
Company shall not enter into any agreement with respect to the Superior Proposal
and (ii) any other obligation of the Company under this Agreement shall not be
affected, unless this Agreement is terminated pursuant to Section 8.1(e) hereof
prior to or simultaneously with the grant of such approval or the making of such
recommendation and the Company, at the time of such termination resulting from
such Superior Proposal, pays Emerald the Termination Fee. As used herein the
term "Superior Proposal" means an unsolicited bona fide proposal made by a third
party to acquire the Company pursuant to a tender or exchange offer, a merger, a
sale of all or any significant portion of its assets or otherwise that the
Company Board of Directors determines in its good faith judgment to be a
proposal which, if accepted, (x) is reasonably likely to be consummated, taking
into account, without limitation, all legal, financial and regulatory aspects of
such proposal and person or persons making such proposal and (y) would, if
consummated, result in a more favorable transaction to the holders of the
Company Common Stock than the transactions contemplated by this Agreement (after
considering the written advice of the Company's professional advisors).

(b) The Company shall immediately notify Emerald after receipt of any
Acquisition Proposal (and shall furnish Emerald a copy of any written
proposal and shall keep Emerald appropriately and timely informed as to the
status of any negotiations with the party furnishing any such proposal as
well as

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the material terms and conditions of any proposal, inquiry or contact) or
any request for nonpublic information relating to the Company in connection
with an Acquisition Proposal or for access to the properties, books or
records of the Company that informs the Board of Directors of the Company
or any officer, director, employee, representative or agent of the Company
that some other Person is considering making, or has made, an Acquisition
Proposal.

(c) If the Company has determined to terminate this Agreement
pursuant to subparagraph (a) above, prior to the time the Company gives
such notice to Emerald of such termination, the Company shall give written
notice to Emerald of its intent to terminate and thereafter Emerald shall
have five (5) days in which to propose additional terms to this Agreement.

(d) If the Board of Directors of the Company receives a request for
material nonpublic information about the business of the Company by a party
who makes or who states in writing that it intends, subject to satisfactory
review of such nonpublic information, to make a bona fide Acquisition
Proposal, the Company may, subject to the execution of a confidentiality
agreement substantially similar to that then in effect between the Company
and Emerald, provide such party with access to information about the
business of the Company.

(e) Nothing contained in this Section 5.4 shall prevent the Company
from complying with Rule 14e2(a) or Rule l4d-9 promulgated under the
Exchange Act, if applicable, with regard to an Acquisition Proposal made in
the form of a tender offer by a third party.

ARTICLE VI
ADDITIONAL AGREEMENTS

6.1. PREPARATION OF PROXY STATEMENT; STOCKHOLDER MEETING; COMFORT
LETTERS. (a) Promptly following the date of this Agreement, the Company shall
prepare the Proxy Statement (the "Proxy Statement") required to be distributed
to holders of Company Common Stock in connection with the Merger and include
therein the recommendation of the Board that the stockholders of the Company
vote in favor of the approval and adoption of this Agreement and include therein
the written opinion of Fox-Pitt, Kelton Inc. (the "Financial Adviser") that the
cash consideration to be received by the stockholders of the Company pursuant to
the Merger is fair, from a financial point of view, to such stockholders;
provided, however, that the Board of Directors of the Company may fail to make
or may withdraw or modify such recommendation, if, in accordance with Section
5.4, the Board of Directors of the Company recommends a Superior Proposal. The
Company shall use its reasonable best efforts to obtain and furnish the
information required to be included by it in the Proxy Statement and, after
consultation with Emerald, respond promptly to any comments made by the
Securities and Exchange Commission (the "SEC") with respect to the Proxy
Statement and any preliminary version thereof. Emerald will cooperate with the
Company in connection with the preparation of the Proxy Statement including, but
not limited to, furnishing to the Company any and all information regarding
Emerald as may be required to be disclosed therein. The Company will use
reasonable best efforts to cause the Proxy Statement to be mailed to the
Company's stockholders as promptly as practicable.

(b) All filings with the SEC and all mailings to the Company's
stockholders in connection with the Merger, including the Proxy Statement,
shall be subject to the prior review, comment and approval of Emerald (such
approval not to be unreasonably withheld or delayed).

(c) The Company will, as promptly as practicable following the date
of this Agreement and in consultation with Emerald, duly call and give
notice of, and, provided that this Agreement has not been terminated,
convene and hold, the Company Stockholders' Meeting for the purpose of
approving this Agreement and the transactions contemplated by this
Agreement to the extent required by the DGCL (the "Company Stockholders'
Meeting"). The Company will use reasonable best efforts to hold such
meeting as soon as practicable after the date hereof.

(d) Upon the request of Emerald, the Company shall use reasonable
best efforts to cause to be delivered to the Company and Emerald a letter
of Ernst & Young LLP, the Company's independent public accountants, dated a
date within two (2) business days before the date of mailing the Proxy
Statement to the stockholders of the Company and a letter of Ernst & Young
LLP dated a date within two (2) business days before the Company
Stockholders' Meeting, addressed to the Company, in each
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case customary in scope and substance for letters delivered by independent
public accountants in connection with proxy statements similar to the Proxy
Statement; provided, however, that such letters shall only be delivered to
the extent permitted under accounting principles and pronouncements
applicable to the U.S. accounting profession.

6.2. CONTRACT AND REGULATORY APPROVALS. Emerald and the Company will use
(and will cause each of its Subsidiaries to use) reasonable best efforts to
obtain as promptly as practicable (a) all approvals and consents required of any
person or entity under all Contracts to which the Company or any of its
Subsidiaries is a party to consummate the transactions contemplated hereby, and
(b) all approvals, authorizations and clearances of Governmental Entities
required of the Company and each of its Subsidiaries to consummate the
transactions contemplated hereby. The Company will, and will cause each of its
Subsidiaries to, (i) provide such other information and communications to such
Governmental Entities as Emerald or such authorities may reasonably request, and
(ii) cooperate with Emerald in obtaining, as promptly as practicable, all
approvals, authorizations and clearances of governmental or regulatory
authorities and other persons or entities required of Emerald to consummate the
transactions contemplated hereby. Emerald will (i) provide such information and
communications to such Governmental Entities as the Company or such authorities
may reasonably request, and (ii) cooperate with the Company in obtaining, as
promptly as practicable, all approvals, authorizations, and clearances of
governmental or regulatory authorities and other persons or entities required of
the Company to consummate the transactions contemplated hereby. Emerald shall
use its reasonable best efforts to take or cause to be taken all actions
necessary, proper or advisable to obtain any consent, waiver, approval or
authorization relating to any federal, state or local statutes, rules,
regulations, orders, decrees, administrative and judicial doctrines and other
laws that are designed or in tended to prohibit, restrict or regulate actions
having the purpose or effect of monopolization, lessening of competition or
restraint of trade and includes the HSR Act that is required for consummation of
the transactions contemplated by this Agreement; provided, however, that the
foregoing shall not obligate Emerald to agree to take any action which would
have a material adverse effect on the expected benefits to Emerald of the
transactions contemplated hereby.

6.3. HSR FILING. The Company and Emerald will (a) take all actions
necessary to make the filings required of it or its affiliates under the HSR Act
with respect to the transactions contemplated by this Agreement, (b) comply with
any request for additional information received by the Company or its affiliates
from the Federal Trade Commission or Antitrust Division of the Department of
Justice pursuant to the HSR Act, (c) cooperate with each other in connection
with filings under the HSR Act and (d) request early termination of the
applicable waiting period.

6.4. ACCESS TO INFORMATION; CONFIDENTIALITY. (a) The Company shall (and
shall cause each of its Subsidiaries to) afford to the officers, employees,
accountants, counsel and other representatives of Emerald or EAC, access, during
normal business hours during the period prior to the Effective Time, to all its
properties, books, contracts, commitments, employees, auditors, agents,
representatives and records and, during such period, the Company shall (and
shall cause each of its Subsidiaries to) furnish promptly to Emerald: (i) each
SAP Annual Statement and SAP Quarterly Statement filed by the Company's
Subsidiaries during such period pursuant to the requirements of any applicable
law; (ii) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to SEC
requirements; (iii) all correspondence or written communication with A.M. Best
and Company or any of its Subsidiaries, Standard & Poor's Corporation, Moody's
Investors Service, Inc., and with any Governmental Entity or insurance
regulatory authorities which relates to the transactions contemplated hereby or
which is otherwise material to the financial condition or operation of the
Company and its Subsidiaries taken as a whole; and (iv) all other information
concerning its business, properties and personnel as the other party may
reasonably request.

(b) The Confidentiality Agreement dated June 19, 1998 (the
"Confidentiality Agreement"), between Brockbank Group plc, a subsidiary of
Parent, and the Company shall apply to Emerald and the Company with respect
to information furnished thereunder or hereunder and any other activities
contemplated thereby.

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6.5. FEES AND EXPENSES. (a) Except as otherwise provided in this Section
6.5 and except with respect to claims for damages incurred as a result of the
breach of this Agreement (it being understood that such claims by Emerald or its
affiliates shall be precluded under Section 6.5(d) by the payment of the amount
set forth in Section 6.5(b) when Section 6.5(b) is applicable), all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense.

(b) The Company agrees to pay Emerald a fee in immediately available
funds equal to $3,100,000 plus all reasonable documented, third party
expenses incurred in connection with the transactions contemplated by this
Agreement (the "Termination Fee") if: this Agreement is terminated pursuant
to Section 8.1(d) or 8.1(e) hereof if, (A) at the time of termination, the
Company has received an Acquisition Proposal and, within 360 days of such
termination, the Company consummates an Acquisition Proposal or enters into
an agreement (including without limitation any agreement in principle or
any oral agreement) with respect to an Acquisition Proposal or (B) within
90 days of such termination, the Company consummates a Superior Proposal or
enters into an agreement (including without limitation any agreement in
principle or any oral agreement) with respect to a Superior Proposal. The
Termination Fee shall be paid immediately prior to the earlier of the
consummation of an Acquisition Proposal or the entry into an agreement with
respect to an Acquisition Proposal.

(c) Any amounts due under this Section 6.5 that are not paid when due
shall bear interest at the rate of six percent (6%) per annum from the date
due through and including the date paid.

(d) Upon the payment of the Termination Fee pursuant to Section
6.5(b) above (regardless of whether a transaction pursuant to an
Acquisition Proposal is consummated), such fee shall be the exclusive
remedy of Emerald and its affiliates relating to this Agreement or the
transactions contemplated thereunder, and upon payment of any such fee,
Emerald and its affiliates shall have no rights, in tort, contract or
otherwise, arising under or relating to this Agreement or the transactions
contemplated thereunder, except for rights under the second sentence of
Section 5.4 hereof.

(e) The Termination Fee shall be payable solely under the
circumstances set forth in Section 6.5(b) and shall not be payable under
any other circumstances.

(f) In the event that this Agreement is terminated by Emerald
pursuant to Section 8.1(f) or by the Company pursuant to Section 8.1(g),
the non-terminating party shall pay the terminating party its documented,
third-party expenses incurred in connection with the transactions
contemplated by this Agreement, such payment to be made within 5 business
days of receipt of a statement therefor.

6.6. INDEMNIFICATION. (a) The Company shall, and from and after the
Effective Time the Surviving Corporation shall, indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, an officer or director of the
Company and/or its Subsidiaries (the "Indemnified Parties") against all losses,
claims, damages, costs, expenses (including attorneys' fees and expenses),
liabilities or judgments or amounts that are paid in settlement with the
approval of the indemnifying party (which approval shall not be unreasonably
withheld) of or in connection with any threatened or actual claim, action, suit,
proceeding or investigation based in whole or in part on or arising in whole or
in part out of the fact that such person is or was a director or officer of the
Company whether pertaining to any matter existing or occurring at or prior to
the Effective Time and whether asserted or claimed prior to, or at or after, the
Effective Time ("Indemnified Liabilities"), including all Indemnified
Liabilities based in whole or in part on, or arising in whole or in part out of,
or pertaining to this Agreement or the transactions contemplated hereby, in each
case to the full extent a corporation is permitted under applicable law to
indemnify its own directors or officers as the case may be (and the Company and
the Surviving Corporation, as the case may be, will pay expenses in advance of
the final disposition of any such action or proceeding to each Indemnified Party
to the full extent permitted by law). Without limiting the foregoing, in the
event any such claim, action, suit, proceeding or investigation is brought
against any Indemnified Parties (whether arising before or after the Effective)
Time, (i) the Indemnified Parties may retain counsel satisfactory to them and
the Company (or them and the Surviving Corporation after the Effective Time) and
the Company (or after the Effective Time, the Surviving Corporation) shall pay
all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received and (ii) the Company (or after the
Effective Time, the Surviving Corporation) will use reasonable best efforts to
assist in
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the defense of any such matter, provided that neither the Company nor the
Surviving Corporation shall be liable for any settlement effected without its
prior written consent which consent shall not unreasonably be withheld. The
Indemnified Party wishing to claim indemnification under this Section 6.6, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify the Company (or after the Effective Time, the Surviving Corporation) (but
the failure so to notify shall not relieve a party from any liability which it
may have under this Section 6.6 except to the extent such failure materially
prejudices such party). The Indemnified Parties as a group may retain only one
law firm to represent them with respect to each such matter unless there is,
under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties.
The Company and Emerald agree that the foregoing rights to indemnification,
including provisions relating to advances of expenses incurred in defense of any
action or suit, existing in favor of the Indemnified Parties with respect to
matters occurring through the Effective Time, shall survive the Merger and shall
continue in full force and effect for a period of not less than six (6) years
from the Effective Time; provided, however, that all rights to indemnification
in respect of any Indemnified Liabilities asserted or made within such period
shall continue until the disposition of such Indemnified Liabilities.
Furthermore, the provisions with respect to indemnification set forth in the
articles of incorporation or bylaws of the Surviving Corporation shall not be
amended for a period of six years following the Effective Time if such amendment
would materially and adversely affect the rights thereunder of individuals who
at any time prior to the Effective Time were directors or officers of the
Company in respect of actions or omissions occurring at or prior to the
Effective Time.

(b) For a period of six (6) years after the Effective Time, the
Surviving Corporation shall cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by the
Company (provided that Emerald may substitute therefor (i) policies of at
least the same coverage and amounts containing terms and conditions which
are no less advantageous in any material respect to the Indemnified Parties
and (ii) coverage under Emerald's directors' and officers' liability
insurance coverage if such substitution is approved by those persons, in
their sole discretion, who at the Effective Time constitute or constituted
a majority of the Company's Board of Directors) with respect to matters
arising before the Effective Time.

(c) The provisions of this Section 6.6 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his heirs
and his personal representatives and shall be binding on all successors and
assigns of the Company and the Surviving Corporation.

(d) In the event that the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other person
and shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers or conveys all or substantially
all of its properties and assets to any person, then, and in each case, to
the extent necessary to effectuate the purpose of this Section 6.6, proper
provision shall be made so that the successors and assigns of the Surviving
Corporation shall succeed to the obligations set forth in this Section 6.6
and none of the actions described in clauses (i) or (ii) shall be taken
until such provision is made.

6.7. REASONABLE BEST EFFORTS. Subject to the terms and conditions of this
Agreement, except as otherwise expressly contemplated hereby, each of the
parties hereto agrees to use all reasonable best efforts to take, or cause to be
taken, all action and to do, or cause to be done as promptly as practicable, all
things necessary, proper or advisable, under applicable laws and regulations or
otherwise, to consummate and make effective the Merger and the other
transactions contemplated by this Agreement, subject, as applicable, to the
Company Stockholder Approval.

6.8. PUBLIC ANNOUNCEMENTS. The parties hereto will consult with each
other regarding any press release or public announcement pertaining to the
Merger and shall not issue any such press release or make any such public
announcement prior to such consultation, except as may be required by applicable
law, court process or obligations pursuant to any listing agreement with any
national securities exchange, in which case the party proposing to issue such
press release or make such public announcement shall use reasonable efforts to
consult in good faith with the other party before issuing any such press release
or making any such public announcement. The parties hereto shall also consult
with each other before engaging in any communications with any rating agency
with respect to this Agreement or the transactions contemplated hereby.

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6.9. COOPERATION. From the date hereof until the Effective Time, the
parties agree to work together to coordinate all aspects of transition planning
and the integration of the businesses of Emerald and its Subsidiaries with the
businesses of the Company and its Subsidiaries from and after the Effective
Time. In this regard, the parties agree, among other things, (i) to create a
dedicated transition team, including consultation between the parties to
identify the appropriate officers and employees of each of the Company and
Emerald who will be members of such team, to plan and prepare for the
integration of the business and other matters following the Merger and preparing
for the execution of any such plans, (ii) to jointly develop any employee,
agent, policyholder or other communications relating to such plans and the
Merger, (iii) to discuss and consult with respect to investment management
activities, (iv) to jointly consider information processing systems updates and
technology integration issues and to plan and prepare for an agreed-upon
resolution of such issues following the Merger and (v) to take such actions as
are necessary or appropriate to promote and implement the integration plan,
subject to applicable law.

6.10. PARENT GUARANTEE. Emerald agrees to cause Parent to, and Parent
hereby agrees to, guarantee the performance by Emerald of Emerald's obligations
under this Agreement.

ARTICLE VII
CONDITIONS PRECEDENT

7.1. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:

(a) COMPANY STOCKHOLDER APPROVAL. The Merger shall have been
approved and adopted by the affirmative vote or written consent of the
holders of majority of the outstanding shares of Company Common Stock
entitled to vote thereon.

(b) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger shall be in effect; provided, however, that
prior to invoking this condition, each party shall use reasonable best
efforts to have any such decree, ruling, injunction or order vacated.

(c) GOVERNMENTAL AND REGULATORY CONSENTS. All actions, consents,
approvals, filings and notices listed in Section 3.4(c)(i) of the
Disclosure Schedule shall have been taken, made or obtained; provided,
however, that such consents or approvals shall be in full force and effect
at the Effective Time and shall not obligate Emerald to agree to take any
action which would have a material adverse effect on the expected benefits
to Emerald of the transactions contemplated hereby.

(d) HSR ACT. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or
shall have expired, and no restrictive order or other requirements shall
have been placed on the Company, Emerald or the Surviving Corporation in
connection therewith which would have a material adverse effect on the
expected benefits to Emerald of the transactions contemplated hereby.

(e) NO LITIGATION. There shall not be pending or, to the Company's
or Emerald's knowledge, threatened, any action, suit, investigation, or
other proceeding by any Governmental Entity to restrain, enjoin, or
otherwise prevent consummation of any of the transactions contemplated by
this Agreement.

7.2. CONDITIONS TO OBLIGATIONS OF EMERALD. The obligations of Emerald to
effect the Merger are further subject to the satisfaction or waiver following
conditions:

(a) REPRESENTATIONS AND WARRANTIES. (i) The representations and
warranties of the Company set forth in this Agreement shall be true and
correct, in each case as of the date of this Agreement and (except to the
extent such representations and warranties speak as of a particular date)
as of the Closing Date as though made on and as of the Closing Date;
provided, that this Section 7.2(a)(i) shall be deemed satisfied if the
failure of one or more representations or warranties to be true and correct
(without giving effect to any materiality or any similar qualifications),
individually or in the aggregate, either (x) would not result in a Material
Adverse Effect on the Company or (y) results from any event,

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occurrence, development or state of circumstances or facts affecting the
property and casualty insurance industry as a whole, any catastrophe or any
change in general economic conditions (including but not limited to a
change in interest rates); and (ii) Emerald shall have received
certificates signed on behalf of the Company by the chief executive officer
and chief financial officer of the Company to the effect set forth in
Section 7.2(a)(i), (b), (c), (d) and (f).

(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall
have performed and complied with, in all material respects, all agreements
and covenants required to be performed and complied with by the Company
under this Agreement at or prior to the Closing Date.

(c) NO MATERIAL ADVERSE CHANGE. There shall not have occurred or
arisen after September 30, 1998, and prior to the Effective Time any
change, event (including without limitation any damage, destruction or
loss, whether or not covered by insurance), condition (financial or
otherwise), or state of facts with respect to the Company or any of its
Subsidiaries which would constitute a Material Adverse Effect on the
Company (other than a change, event or state of facts disclosed on the
Disclosure Schedule).

(d) SHAREHOLDER EQUITY. As of the Closing Date, there shall be no
more than a $10 million decrease in the shareholder equity of the Company
from that set forth in the consolidated financial statements of the Company
dated September 30, 1998 and delivered to Emerald prior to executing this
Agreement, as set forth in a consolidated balance sheet of the Company as
of the last day of the month next preceding the Closing.

(e) CERTAIN AGREEMENTS. The Employment Agreements and the Roanoke
Consent shall be in full force and effect.

(f) COMPANY CASH. The Company Cash shall be at least $24,000,000.

(g) OPTION AGREEMENTS. The Company shall have taken all actions
required to enable the consummation of the transactions contemplated by
Section 2.2.

(h) FINANCIAL STATEMENTS. Emerald shall have received the audited
consolidated financial statements of the Company for the fiscal year ended
December 31, 1998, together with the Company's auditor's report thereon,
and a balance sheet of the Company (unconsolidated) as of December 31,
1998, prepared in accordance with GAAP.

(i) AUTHORIZATION. The Company shall have delivered to Emerald
evidence reasonably satisfactory to Emerald that all requisite action on
the part of the Company necessary for the due authorization of this
Agreement and the performance and consummation of the transactions
contemplated hereby has been taken.

7.3. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to effect the Merger is further subject to the satisfaction or waiver of
the following conditions:

(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Emerald set forth in this Agreement shall be true and
correct, in each case as of the date of this Agreement and (except to the
extent such representations and warranties speak as of a particular date)
as of the Closing Date as though made on and as of the Closing Date, except
where the failure of one or more representations or warranties to be true
and correct, individually or in the aggregate, would not result in a
Material Adverse Effect on Emerald. The Company shall have received
certificates signed on behalf of Emerald by the chief executive officer and
chief financial officer of Emerald to the effect set forth in this
paragraph and Section 7.3(b).

(b) PERFORMANCE OF OBLIGATIONS OF EMERALD. Emerald shall have
performed and complied with, in all material respects, all agreements and
covenants required to be performed and complied with by Emerald under this
Agreement at or prior to the Closing Date.

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ARTICLE VIII
TERMINATION AND AMENDMENT

8.1. TERMINATION. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after
approval of the matters presented in connection with the Merger by the
stockholders of the Company or Emerald:

(a) by mutual written consent of the Company and Emerald;

(b) by either the Company or Emerald, if any permanent injunction or
other order of a court or other competent authority preventing the
consummation of the Merger shall have become final and non-appealable;

(c) by either the Company or Emerald, if the Merger shall not have
been consummated on or before June 30, 1999; provided, however, that if the
conditions set forth in Article VII have not been satisfied as of such
date, this Agreement may not be terminated until September 30, 1999, if it
can reasonably be anticipated that such conditions can be satisfied by
September 30, 1999 (such June 30, 1999 or September 30, 1999, being
referred to herein as the "Termination Date"); and provided further that
the right to terminate this Agreement under this Section 8.1(c) shall not
be available to any party whose failure to fulfill any obligation under
this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date;

(d) by either Emerald or the Company, if at the duly held meeting of
the stockholders of the Company (including any adjournment thereof) held
for the purpose of voting on the Merger, this Agreement and the
consummation of the transactions contemplated hereby, the holders of at
least a majority of the outstanding shares of Company Common Stock shall
not have approved the Merger, this Agreement and the consummation of the
transactions contemplated hereby;

(e) (i) by Emerald, if, prior to the company Stockholder Meeting, the
Board of Directors of the Company shall have failed to give or shall have
withdrawn or adversely modified in any material respect, or taken a public
position materially inconsistent with, its approval of the Merger or this
Agreement or (ii) by Emerald or the Company, if, prior to the Company
Stockholder Meeting the Board of Directors, in compliance with Section 5.4
hereof, shall have determined to enter in to an agreement with respect to,
or recommend, a Superior Proposal;

(f) by Emerald, upon a material breach of any material representation
or warranty of the Company, or in the event the Company fails to comply in
any respect with any of its material covenants and agreements, or if any
material representation or warranty of the Company shall be or become
untrue, in each case, where such breach, failure to so comply or untruth
(either individually or in the aggregate with all other such breaches,
failures to comply or untruths) would cause one or more of the conditions
set forth in Sections 7.1(a), 7.2(a) or 7.2(b) to be incapable of being
satisfied as of a date within thirty (30) days after the occurrence
thereof, provided that a willful breach by the Company shall be deemed to
cause such conditions to be incapable of being satisfied by such date; or

(g) by the Company, upon a breach of any representation or warranty
of Emerald, or in the event Emerald fails to comply in any respect with any
of its covenants or agreements, or if any representation or warranty of
Emerald shall be or become untrue, in each case, where such breach, failure
to so comply or untruth (either individually or in the aggregate with all
other such breaches, failures to comply or untruths) would cause one or
more of the conditions set forth in Sections 7.3(a) or 7.3(b) to be
incapable of being satisfied as of a date within thirty (30) days after the
occurrence thereof, provided that a willful breach by Emerald shall be
deemed to cause such conditions to be incapable of being satisfied by such
date.

8.2. EFFECT OF TERMINATION. If this Agreement is validly terminated by
either the Company or Emerald pursuant to Section 8.1, this Agreement will
forthwith become null and void and there will be no liability or obligation on
the part of either the Company or Emerald (or any of their respective
Subsidiaries or affiliates), except that (i) the provisions of Section 6.4(b),
Section 6.5, Section 6.10 and this Section 8.2 will continue to apply following
any such termination, (ii) such termination shall not in any case affect the
obligations of the Company and Emerald under the Confidentiality Agreement and
(iii) nothing contained herein shall relieve
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any party hereto, including Parent, from liability for willful breach of its
representations, warranties, covenants or agreements contained in this
Agreement. The effectiveness of any termination under this Agreement shall be
subject to the payments required to be made pursuant to Section 6.5 being so
made, if applicable.

8.3. AMENDMENT. Subject to applicable law, this Agreement may be amended,
modified or supplemented only by written agreement of Emerald and the Company at
any time prior to the Effective Time of the Merger with respect to any of the
terms contained herein; provided, however, that, after this Agreement is
approved by the Company's stockholders, no such amendment or modification shall
(a) reduce the amount or change the form of consideration to be delivered to the
holders of shares of Company Common Stock, (b) change the date by which the
Merger is required to be effected or (c) change the amounts payable in respect
of the Company Stock Options.

8.4. EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed: (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto; and (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party. The failure of
any party hereto to assert any of its rights hereunder shall not constitute a
waiver of such rights.

ARTICLE IX
GENERAL PROVISIONS

9.1. NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of
the representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time; provided, however, that Article II, Section 6.6, Section 6.10 and the
Confidentiality Agreement (with respect to directors, officers, advisors and
representatives of Emerald and the Company) shall survive the Effective Time.

9.2. NOTICES. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally, telegraphed or telecopied
or sent by certified or registered mail, postage prepaid, and shall be deemed to
be given, dated and received upon receipt. Any such notice or communication
shall be provided to the following address or telecopy number, or to such other
address or addresses as such person may subsequently designate by notice given
hereunder:

(a) if to Emerald or Parent, to:

Emerald
Cumberland House, 9th Floor
One Victoria Street
Hamilton HM JX Bermuda
Attn: Paul S. Giordano, Esq.
Telephone: (441) 292-8515
Telecopy: (441) 292-5280
with a copy to:

Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attn: Immanuel Kohn, Esq.
Telephone: (212) 701-3000
Telecopy: (212) 269-5420

(b) if to the Company, to:

Diamond
1450 East American Lane, 20th Floor

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Schaumburg, IL 60173
Attn: Stanley A. Galanski
Telephone: (847) 517-2510
Telecopy: (847) 706-1267

with a copy to:

LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-5389
Attn: William S. Lamb, Esq.
Telephone: (212) 424-8000
Telecopy: (212) 424-8500

and

Rudnick & Wolfe
203 N. LaSalle Street
Chicago, Illinois 60601
Attn: John H. Heuberger
Telephone: (312) 368-4000
Telecopy: (312) 236-7516

9.3. INTERPRETATION. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents, glossary of defined terms and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning, or interpretation of this Agreement. Whenever
the word "include," "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation". The phrase
"made available" in this Agreement shall mean that the information referred to
has been made available if requested by the party to whom such information is to
be made available.

9.4. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.

9.5. ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP. This Agreement together with the Confidentiality Agreement (and any
other documents and instruments referred to herein) constitutes the entire
agreement and supersedes all prior agreements and understandings both written
and oral, among the parties with respect to the subject matter hereof and,
except as provided in Article II and Section 6.6, is not intended to confer upon
any person other than the parties hereto any rights or remedies hereunder.

9.6. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of New York, without giving effect to the
principles of conflicts of law thereof. Each of the parties hereto irrevocably
and unconditionally consents to submit to the exclusive jurisdiction of the
courts of the State of Delaware and of the United States of America located in
the State of Delaware (the "Delaware Courts") for any litigation arising out of
or relating to this Agreement and the transactions contemplated hereby (and
agrees not to commence any litigation relating thereto except in such courts),
waives any objection to the laying of venue of any such litigation in the
Delaware Courts and agrees not to plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum. Each of
the parties hereto hereby agrees to service of process in any litigation arising
out of or relating to this Agreement and the transactions contemplated hereby by
certified mail, return receipt requested, postage prepaid to it at its address
for notice specified in Section 9.2. The Parent hereby irrevocably appoints
Emerald to serve as its agent for service of process in respect of any such
action or proceeding.

9.7. ASSIGNMENT. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties, such consent not to be unreasonably withheld and any such assignment

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that is not consented to shall be null and void, other than the election by
Emerald pursuant to Section 1.1 hereof to substitute for Emerald a wholly owned
subsidiary of Emerald incorporated in Delaware. This Agreement will be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.

[The remainder of this page intentionally left blank]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement, as
amended and restated on March 26, 1999, to be signed by their respective
officers, hereunto duly authorized.

X.L. AMERICA, INC.

By: /s/ MICHAEL SIESE
Its: Senior Vice President

INTERCARGO CORPORATION

By: /s/ STANLEY A. GALANSKI
Its: President and Chief Executive
Officer

As provided in Section 6.10 of this
Agreement,
Parent hereby guarantees the
performance by
Emerald of its obligations hereunder.

EXEL LIMITED

By: /s/ ROBERT LUSARDI
Its: Executive Vice President and Chief Financial Officer

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APPENDIX B

OPINION OF FPK
FOX-PITT, KELTON INC.
380 MADISON AVENUE
NEW YORK, NEW YORK 10017-2513
CORPORATE FINANCE DEPARTMENT TELEPHONE: 212-687-1105
FAX: 212-682-0779
TELEX: 645217

STRICTLY CONFIDENTIAL

December 1, 1998
The Board of Directors
Intercargo Corporation
1450 East American Lane
20th Floor
Schaumburg, Illinois 60173
Gentlemen:

Fox-Pitt, Kelton Inc. ("Fox-Pitt, Kelton") understands that Intercargo
Corporation ("Intercargo") and X.L. America, Inc. ("EXEL"), a wholly-owned
subsidiary of EXEL Limited, propose to enter into an agreement and plan of
merger dated as of December 1, 1998 (the "Merger Agreement"). Pursuant to the
Merger Agreement and subject to certain exceptions set forth therein, Intercargo
will merge with and into EXEL (the "Merger") pursuant to which each outstanding
share of common stock, par value $1.00 per share, of Intercargo ("Intercargo
Common Stock") (other than shares owned, directly or indirectly, by Intercargo,
EXEL or any subsidiary thereof) will be canceled and extinguished and converted
into the right to receive $12.00 in cash (the "Consideration"). The terms and
conditions of the Merger are more fully set forth in the Merger Agreement.

You have asked for Fox-Pitt, Kelton's opinion as to whether the Consideration is
fair, from a financial point of view, to the holders of Intercargo Common Stock.

In arriving at the opinion set forth below, Fox-Pitt, Kelton has, among other
things:

a) reviewed and analyzed certain publicly available financial statements for
Intercargo and EXEL and financial information made available to us by the
management of Intercargo;

b) analyzed certain internal financial statements, including financial
projections, and other financial and operating data prepared by the
management of Intercargo;

c) discussed the past, present and future operations, financial condition and
prospects of Intercargo with the management of Intercargo;

d) compared the financial performance and condition of Intercargo with that of
certain other comparable publicly traded companies;

e) reviewed the financial terms, to the extent publicly available, of certain
merger and acquisition transactions comparable, in whole or in part, to the
Merger;

f) reviewed and discussed with the management of Intercargo and EXEL the
strategic objectives of the Merger and certain other benefits of the Merger;

g) reviewed the Merger Agreement; and

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h) performed such other analyses as we have deemed appropriate.

Fox-Pitt, Kelton has assumed and relied upon, without independent verification,
the accuracy and completeness of all of the financial and other information it
has reviewed for the purposes of providing this opinion, and we have not assumed
any responsibility for independent verification of such information. Fox-Pitt,
Kelton has not assumed any responsibility for any independent valuation or
appraisal of the assets and liabilities of Intercargo nor have we been furnished
with any such valuation or appraisal. With respect to the financial projections,
Fox-Pitt, Kelton has assumed that they have been reasonably prepared by the
management of Intercargo on bases reflecting the best currently available
estimates and judgments of the future financial performance of Intercargo. We
express no view as to such projections or the assumptions on which they are
based. We have assumed that the Merger described in the Merger Agreement will be
consummated on the terms set forth therein without material waiver or
modification. Fox-Pitt, Kelton's opinion is necessarily based upon economic,
market and other conditions as they exist and can be evaluated on December 1,
1998.

In the normal course of its investment banking business, Fox-Pitt, Kelton is
regularly engaged in the valuation of insurance company securities in connection
with acquisitions, negotiated underwritings, secondary distributions of listed
and unlisted securities, private placements and valuations for various other
purposes. As specialists in the securities of insurance companies, Fox-Pitt,
Kelton has experience in, and knowledge of, the valuation of such enterprises.

In the normal course of its business, Fox-Pitt, Kelton may trade equity
securities of Intercargo and EXEL for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. We have acted as financial advisor to Intercargo in connection
with the Merger, have received a fee in connection with our engagement and will
receive an additional fee upon the closing of the Merger.

It is understood that this letter is for the information of the Board of
Directors of Intercargo and is not intended to confer any rights or remedies
upon any other entity or persons, and may not be used for any other purpose
without our prior written consent.

Based upon and subject to the foregoing, Fox-Pitt, Kelton is of the opinion
that, on the date hereof, the Consideration is fair, from a financial point of
view, to the holders of Intercargo Common Stock.

Very truly yours,
/s/ FOX-PITT, KELTON INC.

FOX-PITT, KELTON INC.

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APPENDIX C

STOCKHOLDER AGREEMENT

STOCKHOLDER AGREEMENT dated as of December 1, 1998 between X.L. America,
Inc. ("Emerald"), and the undersigned holder of shares of common stock, par
value $1.00 per share (the "Common Stock"), of Intercargo Corporation, a
Delaware corporation (the "Company") for and on behalf of itself and each of its
affiliates which is a holder of Common Stock (the undersigned holder, the
"Stockholder" and, where the content requires, all such holders, the
"Stockholders" or each A "Stockholder").

WHEREAS, Emerald and the Company propose to enter into an Agreement and
Plan of Merger dated as of the date hereof (as the same may be amended or
supplemented, the "Merger Agreement"; capitalized terms used but not defined
herein shall have the meanings set forth in the Merger Agreement) providing for
the merger of the Company with and into Emerald (the "Merger"), upon the terms
and subject to the conditions set forth in the Merger Agreement;

WHEREAS, each Stockholder owns the number of shares of Common Stock set
forth opposite its name on the signature page of this Agreement (such shares of
Common Stock, the "Existing Shares" and, together with any other shares of
capital stock of the Company acquired by such Stockholder after the date hereof
and during the term of this Agreement, being collectively referred to herein as
the "Subject Shares"); and

WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, Emerald has requested that Stockholder enter into this Agreement;

NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements contained herein, the parties agree as follows:

1. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. Stockholder hereby
represents and warrants to Emerald as of the date hereof as follows:

(a) Stockholder has all requisite legal capacity, power and authority
to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Stockholder and constitutes a valid and binding obligation
of the Stockholder enforceable in accordance with its terms. The execution
and delivery of this Agreement do not, and the consummation of the
transactions contemplated hereby and compliance with the terms hereof will
not, conflict with, or result in any breach or violation of, or default
(with or without notice or lapse of time or both) under any provision of,
any Stockholder's charter or by-laws. The Existing Shares are not subject
to any lien, pledge or encumbrance of any kind other than the Stockholder's
Agreement with the Company with respect to the Existing Shares.

(b) Stockholder is the record holder or beneficial owner of the
number of the Existing Shares as is set forth on the signature page hereto.
On the date hereof, the Existing Shares set forth on the signature page
hereto constitute all of the outstanding shares of Common Stock owned of
record or beneficially by Stockholder. Stockholder does not have record or
beneficial ownership of any shares of Common Stock not set forth on the
signature page hereto. Stockholders have, collectively, sole power of
disposition with respect to all of the Existing Shares set forth on the
signature page hereto and sole voting power with respect to the matters set
forth in Section 3 hereof and sole power to demand dissenter's or appraisal
rights, in each case with respect to all of the Existing Shares set forth
on the signature page hereto, with no restrictions on such rights, subject
to applicable insurance laws and regulations in the case of Subject Shares
owned of record by an insurance subsidiary stockholder and to the terms of
this Agreement.

(c) Stockholder's Shares and the certificates representing such
Subject Shares are now and at all times during the term hereof will be held
by Stockholder, or by a nominee or custodian for the benefit of
Stockholder, free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements,
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understandings or arrangements or any other encumbrances whatsoever, except
for any such encumbrances or proxies arising hereunder.

2. REPRESENTATIONS AND WARRANTIES OF EMERALD. Emerald hereby represents
and warrants to Stockholder that Emerald has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Emerald,
and the consummation of the transactions contemplated hereby, have been duly
authorized by all necessary corporation action on the part of Emerald. This
Agreement has been duly executed and delivered by Emerald and constitutes a
valid and binding obligation of Emerald enforceable in accordance with its
terms.

3. COVENANTS OF STOCKHOLDER. From and after the date hereof and until the
termination of this Agreement in accordance with Section 6, Stockholder agrees
as follows:

(a) At any meeting of stockholders of the Company called to vote upon
the Merger or the Merger Agreement or any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval with
respect to the Merger or the Merger Agreement is sought, Stockholder shall
vote (or cause to be voted) the Subject Shares in favor of the Merger, the
adoption by the Company of the Merger Agreement and the approval of the
terms thereof.

(b) At any meeting of stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which the
Stockholder's vote, consent or other approval is sought, the Stockholder
shall vote (or cause to be voted) the Subject Shares against (i) any merger
agreement or merger (other than the Merger Agreement and the Merger),
consolidation, combination, sale of assets, reorganization,
recapitalization, dissolution, liquidation or winding-up of or by the
Company or any other takeover proposal (collectively, "Takeover Proposal"),
(ii) any action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of the
Company under the Merger Agreement or this Agreement or (iii) (x) any
material amendment of the Company's certificate of incorporation or
by-laws, (y) any change in a majority of the persons who constitute the
Board of Directors of the Company or (z) any other proposal or transaction
involving the Company, which is intended by Stockholder to, or which
Emerald notifies Stockholder that Emerald reasonably believes will, impede,
frustrate, prevent, delay or nullify (A) the ability of the Company to
consummate the Merger or (B) any of the transactions contemplated by this
Agreement or the Merger Agreement.

(c) Stockholder agrees not to (i) offer to sell, sell, transfer,
encumber, pledge, assign or otherwise dispose of (including by gift)
(collectively, "Transfer"), or enter into any contract, option or other
arrangement with respect to or consent to the Transfer of, the Subject
Shares or any interest therein to any person other than pursuant to the
terms of the Merger, (ii) except as contemplated hereby, grant any proxies
or powers of attorney with respect to the Subject Shares, deposit any
Subject Shares into a voting trust or enter into any voting arrangement
with respect to the Subject Shares, or any interest in the foregoing,
except with Emerald, (iii) take any action that would make any
representation or warranty of Stockholder contained herein untrue or
incorrect to have the effect of preventing or disabling the Stockholder
from performing Stockholder's obligations under this Agreement or (iv)
commit or agree to take any of the foregoing actions; provided, however,
that, for a period equal to the shorter of (A) 360 days after Stockholder
elects to terminate this Agreement pursuant to Section 3(f) or (B) the
payment by the Company to Emerald of the Termination Fee, Stockholder may
transfer the Subject Shares to the proponent of a Superior Proposal upon
the same terms and conditions and at the same time as available to all
other shareholders of the Company.

(d) Stockholder hereby irrevocably waives any rights of appraisal or
rights to dissent from the Merger that the Stockholder may have.

(e) Stockholder agrees with, and covenants to, Emerald that the
Stockholder shall not request that the Company register the transfer
(book-entry or otherwise) of any certificate or uncertificated interest
representing any of the Subject Shares, unless such transfer is made in
compliance with this Agreement.

(f) Stockholder will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to the sale, voting or other disposition of the
Existing Shares or a business combination transaction involving the
Company.

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Stockholder shall not directly or indirectly, through any officer,
director, employee, representative, agent or other person, solicit or
encourage the initiation or submission of any direct or indirect inquiries,
proposals or offers regarding any acquisition, merger, takeover bid or sale
of all or any of the assets or any shares of capital stock of the Company,
whether or not in writing and whether or not delivered to the Company or to
the stockholders of the Company generally (including, without limitation,
by way of a tender offer) by any party other than Emerald or its affiliates
(any of the foregoing inquiries or proposals being referred to herein as an
"Acquisition Proposal") provided, however, that nothing contained in this
Agreement shall prevent the Board of Directors of Stockholder from
referring any third party to this Section 3(f). Nothing contained in this
Section 3(f) or any other provision of this Agreement shall prevent the
Board of Directors of Stockholder from considering or negotiating an
unsolicited bona fide Acquisition Proposal. If the Board of Directors of
Stockholders, after duly considering written advice of counsel to
Stockholder, determines in good faith that it would be likely to be a
violation of its fiduciary responsibilities (assuming such fiduciary
responsibilities of Stockholder's Board of Directors vis-a-vis the
shareholders of Stockholder are those of the Board of Directors of the
Company vis-a-vis the shareholders of the Company) to not participate in a
Superior Proposal (as defined below), then (i) the Stockholder shall not
enter into any agreement with respect to the Superior Proposal and (ii) any
other obligation of Stockholder under this Agreement shall not be affected,
unless this Agreement is terminated pursuant to Section 6 hereof prior to
or simultaneously with the decision of Stockholder's Board of Directors to
participate in such Superior Proposal. As used herein the term "Superior
Proposal" means an unsolicited bona fide proposal publicly made by a third
party to acquire the Company pursuant to a tender or exchange offer, a
merger, a sale of all or any significant portion of its assets or otherwise
that the Stockholder's Board of Directors determines in its good faith
judgment to be a proposal which, if accepted (x) is reasonably likely to be
consummated, taking into account, without limitation, all legal, financial
and regulatory aspects of such proposal and person or persons making such
proposal and (y) would, if consummated, result in a more favorable
transaction to the holders of the Common Stock than the transaction
contemplated by the Merger Agreement. Stockholder will immediately notify
Emerald, orally and in writing, of any direct or indirect contact related
in any way to an Acquisition Proposal, including the identity of the person
involved in such contact, or on whose behalf such contact is made, and the
terms and conditions of any proposal made.

(g) Stockholder agrees that, until this Agreement is terminated,
neither Stockholder nor any of its affiliates will, without the prior
written consent of Emerald: (i) acquire, offer to acquire, or agree to
acquire, directly or indirectly, by purchase or otherwise, any voting
securities or direct or indirect rights to acquire any voting securities of
the Company or any subsidiary thereof, or of any successor to or person in
control of the Company, or any assets of the Company or any subsidiary or
division thereof or of any such successor or controlling person; (ii) other
than as contemplated hereby, make, directly or indirectly, any
"solicitation" of "proxies" (as such terms are used in the rules of the
Securities and Exchange Commission) to vote, or seek to advise or influence
any person or entity with respect to the voting of, any voting securities
of the Company; (iii) make any public announcement with respect to, or
submit a proposal for, or offer of (with or without conditions) any
extraordinary transaction involving the Company or its securities or
assets; and (iv) form, join or in any way participate in a "group" (as
defined in Section 13 (d)(3) of the Securities Exchange Act of 1934, as
amended) in connection with any of the foregoing.

(h) THE STOCKHOLDER HEREBY GRANTS TO, AND APPOINTS EMERALD AND ANY
DESIGNEE OF EMERALD, EACH OF THEM INDIVIDUALLY, STOCKHOLDER'S IRREVOCABLE
(UNTIL THE TERMINATION OF THIS AGREEMENT) PROXY AND ATTORNEY-IN-FACT WITH
FULL POWER OF SUBSTITUTION TO VOTE THE SUBJECT SHARES OF STOCKHOLDER AS
INDICATED IN SECTION 3(A) AND 3(B) ABOVE. THE STOCKHOLDER INTENDS THIS
PROXY TO BE IRREVOCABLE (UNTIL THE TERMINATION OF THIS AGREEMENT) AND
COUPLED WITH AN INTEREST AND WILL TAKE SUCH FURTHER ACTION TO REVOKE AND
HEREBY REVOKES ANY PROXY PREVIOUSLY GRANTED BY STOCKHOLDER WITH RESPECT TO
SUCH STOCKHOLDER'S SUBJECT SHARES.

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4. FURTHER ASSURANCES. The Stockholder will, from time to time, execute
and deliver, or cause to be executed and delivered, such additional or further
consents, documents and other instruments as Emerald may reasonably request for
the purpose of effectively carrying out the transactions contemplated by this
Agreement.

5. ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties without the prior
written consent of the other parties, except that any Stockholder may assign, in
its sole discretion, any or all of its rights, interests and obligations
hereunder to any direct or indirect wholly owned subsidiary of such Stockholder;
provided that both such transferor and transferee shall continue to be bound by
all the provisions hereof. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successor and assigns.

6. TERMINATION. This Agreement shall terminate, and no party shall have
any rights or obligations hereunder and this Agreement shall become null and
void and have no further effect upon the earlier of (a) the Effective Time, (b)
the date on which the Merger Agreement is terminated pursuant to Section 8.1
thereof and (c) five (5) business days after Emerald's receipt of a written
notice form Stockholder declaring its intention to terminate this Agreement in
order to participate in a Superior Proposal and a certificate signed by
Stockholder's Chairman of the Board attesting that the requirements for
termination specified in Section 3(f) have been satisfied; provided, however,
that a termination pursuant to this clause (c) shall not, for a period equal to
the shorter of (A) 360 days following such termination or (B) the payment by the
Company to Emerald of the Termination Fee, relieve Stockholder of the duty to
sell only in the manner set forth in the concluding proviso of Section
3(c).Nothing in this Section 6 shall relieve any party of liability for breach
of this Agreement.

7. COSTS AND EXPENSES. All costs and expenses incurred in connection with
this agreement and the consummation of the transactions contemplated hereby
shall be paid by the party incurring such expenses.

8. GENERAL PROVISIONS.

(a) AMENDMENTS. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.

(b) NOTICE. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or sent by
overnight courier (providing proof of delivery) to Emerald in accordance
with Section 9.2 of the Merger Agreement and to Stockholder at its address
set forth on the signature page of this Agreement (or at such other address
for a party as shall be specified by like notice).

(c) INTERPRETATION. When a reference is made in this Agreement to
Sections, such reference shall be to a Section to this Agreement unless
otherwise indicated. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Wherever the words "include", "includes"
or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation".

(d) SEVERABILITY. If any term or other provision of this Agreement
is invalid illegal or incapable of being enforced by any rule of law, or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or
legal substance of the transactions contemplated hereby is not affected in
any manner materially adverse to any party. Upon such determination that
any term or other provision is invalid, illegal or incapable of being
enforced, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in a mutually acceptable manner in order that the transactions
contemplated hereby may be consummated as originally contemplated to the
fullest extent possible.

(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more of the counterparts have been
signed by each of the parties and delivered to the one party, it being
understood that each party need not sign the same counterpart.

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(f) ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement
(including the documents and instruments referred to herein) (i)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to
the subject matter hereof and (ii) is not intended to confer upon any
Person other than the parties hereto any rights or remedies hereunder.

(g) GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware regardless
of the laws that might otherwise govern under applicable principles of
conflicts of law thereof.

9. ENFORCEMENT. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of Delaware or in a Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity. In
addition, each of the parties hereto (i) consents to submit such party to the
personal jurisdiction of any Federal court located in the State of Delaware or
any Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated hereby, (ii) agrees that such party will
not attempt to deny or defeat such personal jurisdiction by motion or other
request for leave from any such court; (iii) agrees that such party will not
bring any action relating to this Agreement or the transactions contemplated
hereby in any court other than a Federal court sitting in the state of Delaware
or a Delaware state court and (iv) waives any right to trial by jury with
respect to any claim or proceeding related to or arising out of this Agreement
or any of the transactions contemplated hereby. All rights, powers and remedies
provided under this Agreement or otherwise available in respect hereof at law or
in equity shall be cumulative and not alternative, and the exercise of any
thereof by any party shall not preclude the simultaneous or later exercise of
any other such right, power or remedy by such party.

IN WITNESS WHEREOF, Emerald has caused this Agreement to be signed by its
officer thereunto duly authorized and Stockholder has caused this Agreement to
be signed by its officer thereunto duly authorized, all as of the date first
written above.

X.L. AMERICA, INC.

By: /s/ PAUL S. GIORDANO
------------------------------------
Name: Paul S. Giordano
Title: Senior Vice President
and General Counsel

Number of Subject Shares: 1,899,223

SECURITY INSURANCE
COMPANY OF HARTFORD

By: /s/ JOHN J. MCCANN
------------------------------------
Name: John J. McCann
Title: Executive Vice President
Address: 9 Farm Springs Road
Farmington, CT 06032

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APPENDIX D
CERTAIN PROVISIONS OF DELAWARE LAW

TITLE 8. CORPORATIONS

CHAPTER 1. GENERAL CORPORATION LAW

SUBCHAPTER IX. MERGER OF CONSOLIDATION

8. DEL. C SEC. 262(1998)

SEC 262. APPRAISAL RIGHTS

(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.

(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec.251(g) of this title, sec.252, sec.254, sec.257, sec.258, sec.263 or sec.264
of this title:

(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec.251 of this title.

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:

a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;

b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;

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c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or

d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.

(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.

(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.

(d) Appraisal rights shall be perfected as follows:

(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or

(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded
D-2
<PAGE> 81

appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent
of the corporation that is required to give either notice that such notice
has been given shall, in the absence of fraud, be prima facie evidence of
the facts stated therein. For purposes of determining the stockholders
entitled to receive either notice, each constituent corporation may fix, in
advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after
the effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.

(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.

(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.

(g)At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.

(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the

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stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not entitled
to appraisal rights under this section.

(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.

(j) The costs of the proceeding may de determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded such stockholder's appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
such stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court , and such approval may be conditioned upon such terms as
the Court deems just.

(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted has they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.

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APPENDIX E

INTERCARGO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

COMMISSION FILE NUMBER 0-16748

INTERCARGO CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 36-3414667
(State or other jurisdiction (I.R.S. employer
of incorporation) identification no.)
</TABLE>

1450 AMERICAN LANE
20TH FLOOR
SCHAUMBURG, ILLINOIS 60173
(Address of principal executive office and zip code)

Registrant's telephone number, including area code: 847-517-2990

Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:

TITLE OF CLASS
Common Stock, $1.00 Par Value

Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Aggregate Market Value of Voting Stock held by nonaffiliates as of March
10, 1999: $82,964,484

Number of Shares of Common Stock outstanding as of March 10, 1999:
7,293,581

DOCUMENTS INCORPORATED BY REFERENCE

None
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

E-1
<PAGE> 84

PART I

Statements made in this document that present information that is not
historic, including among other things, anticipated financial performance,
sources and extent of liquidity and capital, anticipated business activities,
impact of Year 2000 issues, business prospects, new products and markets, and
business relationships are "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements can be
identified by the use of forward-looking terminology such as "may", "will",
"expect", "anticipate", "estimate", or "continue" or the negative thereof or
other variations thereon, or comparable terminology. There are numerous risks
and uncertainties that could cause actual results to differ materially from
those in the forward-looking statements.

ITEM 1. BUSINESS.

On December 1, 1998 the Company and X.L. America, Inc., ("XL") a
wholly-owned subsidiary of XL Capital Ltd ("XL Capital"), entered into an
Agreement and Plan of Merger pursuant to which the Company will be acquired by
XL Capital through the merger of XL (or a wholly owned subsidiary of XL) with
and into the Company ("the Merger"). Pursuant to the Merger the shares of common
stock of Intercargo issued and outstanding immediately prior to the Merger will
be converted into $12.00 in cash. Consummation of the Merger is subject to
regulatory and shareholder approvals and to specified closing conditions.
Further information is contained in the Company's definitive Proxy Statement for
the Special Meeting of Stockholders relating to the Merger.

The Company, through Intercargo Insurance Company ("IIC"), its U.S.
insurance company subsidiary, and Intercargo Insurance Company H.K. Limited, a
subsidiary of IIC, is engaged in the business of underwriting specialized
insurance coverages for international trade. This includes U.S. Customs bonds,
commercial surety, cargo insurance, general liability, workers compensation,
truck liability, professional liability and property and casualty insurance.
U.S. Customs bonds guarantee payment of duties on imported goods and cargo
insurance protects shippers from loss or damage to goods in transit.

Appointed independent insurance agents market the Company's products to
customs brokers, freight forwarders, logistics providers, intermodal carriers,
importers and exporters. Contract surety is marketed to contractors and building
tradesmen through independent agents. Prior to the sale on April 30, 1998 of
seven subsidiaries of International Advisory Services, Inc. ("IAS"), which
remains a wholly-owned subsidiary, IIC's products were distributed primarily
through IAS and these subsidiaries under the trade name of Trade Insurance
Services, Inc.

IIC opened a branch office in London in April, 1994. This office
underwrites marine cargo insurance through independent insurance brokers. In
October, 1995, the Company acquired Eastern Insurance Limited, a Hong Kong
licensed insurer and renamed the company Intercargo Insurance Company H.K.
Limited, and commenced operations in May, 1996. The Hong Kong subsidiary
underwrites marine cargo and professional liability insurance through
independent brokers.

In December, 1995 the Company participated in an initial public offering by
the Company's Canadian subsidiary, Kingsway Financial Services, Inc.
("Kingsway") and as a result of this and the underwriters' overallotment
exercised in January 1996, the Company's ownership interest in Kingsway was
reduced from 100% to 47%. In October 1996 Kingsway completed a secondary public
offering in which the Company also participated. As a result of this, the
ownership interest was further reduced to 31.5%. In August 1997 the Company sold
4,018,180 of its remaining total holdings in Kingsway of 4,180,000 shares,
thereby reducing its ownership interest to less than 1%. The Company no longer
considers Kingsway to be a subsidiary.

Unless the context otherwise requires, the term the "Company" shall mean
Intercargo Corporation and/or its subsidiaries.

U.S. CUSTOMS BONDS

U.S. Customs bonds guarantee that the importer will pay all attendant
duties and taxes at the time of entry of merchandise, pay any supplemental
duties assessed and observe the laws governing imports. U.S.
E-2
<PAGE> 85

Customs bonds are a form of security required by the U.S. Customs Service
("Customs") from virtually all importers of merchandise into the United States.
U.S. Customs bonds facilitate the flow of goods by permitting importers to take
possession of such goods prior to final determination of Customs duties and of
related regulatory issues.

U.S. Customs bonds are of two types, either continuous or single
transaction. The required bond amounts are set by Customs directives. Continuous
bond amounts are set on an annual basis at 10% of the duties, taxes and fees
paid by the importer to Customs in the previous calendar year. Single
transaction bond amounts are determined based on specific transactions or
entries to be secured. Most often, single transaction bonds are set at an amount
equal to the entered value plus estimated duties, taxes and fees.

The average duty payment required on an import shipment, which is payable
by the importer within ten business days of entry, is approximately 4% to 5% of
the value of the shipment. However, if Customs disagrees with the importer's
classification or valuation of the shipment, the importer will be required to
pay additional duty. Customs also is authorized to assess fines and damages
against importers which fail to comply with certain import laws and regulations.
These laws and regulations include import quota restrictions, labeling laws,
Food and Drug Administration regulations and the regulations of other government
agencies. Although the importer remains liable for these adjustments, fines and
damages, Customs makes demand for payment upon the insurance company that issued
the bond in the event of a default by the importer.

The Company carefully evaluates the information available from its database
and operating experience in establishing its underwriting parameters. All U.S.
Customs bond risks must meet these parameters or be specifically approved by
designated underwriters. This evaluation is based on a number of factors
including the size of the U.S. Customs bond, the financial strength of the
importer, the type of transaction, the type of commodity, the commodity's
country of origin and the importer's loss history. The Company has developed a
database which integrates information received from production sources with
detailed information received from Customs on a weekly basis. The Company uses
this database extensively as it provides enhanced capabilities for underwriting
control and claims handling. The Company also enhances its underwriting
selectivity by declining business written through subproducers which have
historically failed to file complete documentation with Customs in a timely
manner and through its understanding of the laws and regulations which affect
imported cargo.

MARINE CARGO INSURANCE

A marine cargo policy issued by the Company insures the shipper or
consignee against physical loss or damage to cargo while in transit. The
Company's marine cargo policies provide coverage for general commercial and
industrial goods of all types, but exclude among other things, oil shipments and
bulk commodities (such as grain shipments). A small portion of the Company's
marine business also consists of overland carrier and warehouseman's cargo
liability insurance. Marine risks are underwritten based on a number of factors,
including type of commodity to be insured (susceptibility to theft and damage),
adequacy of packaging, country of origin and destination, extent and type of
coverage required, method of transportation and shipping practices and loss
experience of the shipper and consignee. The Company issues marine cargo
policies primarily for shipments from the U.S. to foreign ports, from foreign
ports to the U.S. and, to a limited extent, from one foreign port to another.
The Company, however, endeavors to avoid coverage for troubled parts of the
world.

Marine cargo policies are issued by the Company for an indefinite period of
time. The policy insures individual shipments for amounts up to the policy
limits at premium rates determined by the Company based upon the factors
mentioned above. Premium written on individual shipments is considered to be
earned when reported to the Company.

PROFESSIONAL LIABILITY INSURANCE

The Company provides professional liability coverage for customs brokers,
freight forwarders and other service firms engaged in the international movement
of cargo. Professional liability insurance policies protect these firms against
certain claims arising from the unintentional errors or omissions of their
operations that
E-3
<PAGE> 86

result in financial injury to their clients. These policies exclude coverage for
punitive damages and are issued on a "claims made" basis, which means that
claims involving alleged negligent acts must be reported during the stated
policy term. The Company's professional liability program has been endorsed by
the National Customs Brokers and Forwarders Association of America since 1989.

The Company introduced a modified version of its professional liability
coverage in 1993. This coverage, referred to as international transit liability
(ITL) insurance, includes marine legal liability insurance in addition to
professional liability. IIC is the first U.S. based insurance company to offer
this type of coverage. The program was developed to compete in new international
markets. Unlike the traditional professional liability policy, this policy is
issued on an "occurrence" basis, which means the covered proximate cause of loss
must occur during the policy period.

OTHER PROPERTY AND CASUALTY INSURANCE

The Company markets commercial property and casualty products to customs
brokers, freight forwarders and other service firms engaged in the international
movement of cargo. The Company is authorized to write these coverages in 48
states. The product is designed to meet the specific requirements of the
broker/forwarder industry.

The Company markets property and casualty products, miscellaneous trucking
bonds and cargo insurance to meet the needs of the trucking industry. These
products are sold through independent insurance agents.

SURETY

The Company sells bid, performance and payment bonds for construction and
other types of contracts. The Company also underwrites license and permit bonds,
miscellaneous financial guarantees, court bonds and specialty fidelity bonds.
The Company has developed what it believes is an industry leading data
processing system that enhances the quality of underwriting while reducing the
costs and time of processing business.

FOREIGN OPERATIONS

See Note 14 of Notes to Consolidated Financial Statements for information
relating to revenues, operating income and identifiable assets related to the
Company's operations in the United Kingdom and Hong Kong, which information is
found in Item 8.

MARKETING AND DISTRIBUTION

On April 30, 1998, IAS transferred to The Roanoke Companies, Inc.
("Roanoke") all of the insurance brokerage agency business of IAS. The
transaction was effected through the sale of the capital stock of seven
subsidiaries of IAS. These subsidiaries had operated under the trade name of
Trade Insurance Services. As a result of this, Roanoke generated approximately
29.5% of the Company's gross written premium in 1998. Roanoke has also agreed
for a period lasting at least until November 5, 2001, to continue to place with
the Company all U.S. Customs bonds, marine and other coverages generated from
the IAS customers existing at the time of the sale. The Company uses other
independent agents to produce additional business.

REINSURANCE

The Company follows the industry practice of reinsuring a portion of its
insured risks, paying to the reinsurer a portion of the premiums received on all
policies. Insurance is ceded principally to reduce the net liability on
individual risks and to protect against catastrophic losses. The Company
endeavors to place reinsurance with reinsurance companies which have been
approved by the U.S. Treasury (in the case of U.S. Customs bonds) and which have
been rated "A" or better by A.M. Best Company.

Excess of loss reinsurance on the Company's Customs bond business is
provided through contracts with four reinsurance companies: American
Re-Insurance Company ("American Re"), First Excess and Reinsurance Corporation
("First Excess"), Employers Reinsurance Corporation ("Employers Re") and
Transatlantic Reinsurance Company ("Transatlantic"). Excess of loss reinsurance
is a form of reinsurance which
E-4
<PAGE> 87

indemnifies the ceding insurer up to an agreed amount against all or a portion
of the amount of loss in excess of a specified retention. The Company now
retains risks up to $500,000 per bond or per principal. Under the contracts, the
reinsurers automatically assume the risk of losses on the Company's bonds
between $500,000 and $3,700,000 on any one principal. Bonds written for amounts
greater than $3,700,000 must be submitted to the reinsurers for acceptance on a
case-by-case basis and the Company may not fully reinsure all exposures above
$3,700,000.

Excess of loss reinsurance on the Company's marine cargo insurance consists
of two reinsurance treaties. Under the first treaty, NAC Reinsurance
Corporation, Transatlantic, St. Paul Fire & Marine Insurance Company and
Employers Re assume the risk of losses between $200,000 and $5 million on any
occurrence. Under the second treaty, losses in excess of $5 million up to $25
million are assumed by ten Lloyd's of London syndicates, Commercial Union
Assurance Company Plc ("Commercial Union"), XL Mid Ocean Reinsurance Company
Ltd, ERC Frankona Reinsurance Limited, Mapfre Re Compania de Reaseguros S.A. and
Reliance National Insurance Company (Europe) Limited. These same excess of loss
reinsurance treaties also cover property losses arising from the Company's other
property insurance coverages.

The reinsurance on the Company's professional liability program is placed
with Kemper Reinsurance Company ("Kemper Re") and Transatlantic. The reinsurers
provide reinsurance of $800,000 in excess of the first $200,000 and also provide
$2,000,000 additional capacity as needed. Air cargo legal liability reinsurance
includes quota share coverage wherein the Company retains 35% of the first $2
million of loss per sending or $4 million per occurrence. Reinsurance is
provided through Commercial Union, Terra Nova Insurance Company Limited ("Terra
Nova"), Zurich Reinsurance (London) Limited and several Lloyd's of London
syndicates.

Reinsurance on the Company's other property and casualty insurance, in
addition to the previously discussed excess of loss coverage on property
insurance, consists of quota share and casualty excess of loss. Under the quota
share coverage for umbrella liability policies the Company retains 5% of losses
up to $5 million. The reinsurance is provided by Kemper Re and CNA Reinsurance
Company. Under the casualty excess of loss reinsurance, the Company retains up
to $200,000 of losses for each occurrence and Employers Re assumes additional
risk up to $5 million.

Reinsurance on the Company's base trucking program consists of excess of
loss coverage where the Company cedes losses in excess of $200,000 to a limit of
$1 million. This reinsurance is provided by Continental Casualty Company
("Continental Casualty"), First Excess, Folksamerica Reinsurance Company,
Hartford Fire Insurance Company ("Hartford"), Kemper Re and Trenwick America
Reinsurance Corporation. Under the Company's long haul trucking program
reinsurance consists of both quota share and excess of loss. Under the quota
share reinsurance the Company retains 15% of the first $150,000 of losses for
physical damage and 15% of the first $100,000 of losses for liability. Under the
excess of loss coverage the Company retains 15% of the liability losses in
excess of $100,000 per occurrence to a limit of $1 million. Reinsurance is
provided by Continental Casualty, Kemper Re, Transatlantic, Lloyd's Syndicate
Number 1141, CNA Reinsurance Company Limited, Hannover
Ruckversicherungs-Aktiengesellschaft, Terra Nova and Zurich Reinsurance (London)
Limited.

Reinsurance on the Company's contract and miscellaneous surety products
consists of excess of loss reinsurance for losses in excess of $250,000 to a
limit of $10 million. Reinsurers providing this coverage include Hartford,
Kemper Re, Republic Western Insurance Company, Risk Capital Reinsurance and
Transatlantic. The Company also has a quota share agreement with Monroe Guaranty
Insurance Company ("Monroe Guaranty") where the Company retains 50% of the
surety business produced by agents recruited by Monroe Guaranty.

The ceding of reinsurance does not discharge the original insurer from its
primary liability to the policyholder. The ceding company is required to pay
losses even if the reinsurer fails to meet its obligations under the reinsurance
agreement. The Company also remains liable for losses which exceed the limits of
coverage afforded by its reinsurance agreements. In addition to the per
occurrence limits set forth above, the annual aggregate limit on the Company's
Customs bond reinsurance contract is $6.4 million and the annual aggregate limit
on the marine cargo reinsurance contract is $25.0 million.
E-5
<PAGE> 88

LOSSES AND LOSS RESERVES

Claims on the Company's marine, professional liability, and contract bond
lines are adjusted by Company personnel. Claims on property and casualty
business are processed by a third party. Adjustment procedures include
verification of the coverage, investigation of the loss, evaluation of the
exposure and final settlement of the claim. The Company's general policy is to
adjust and settle claims as quickly as possible. For marine cargo claims,
salvage and subrogation are important factors in minimizing loss experience.

Substantially all U.S. Customs bond losses are paid to Customs as the party
indemnified by the bond. The Company receives periodic notices of importer
defaults from Customs in the normal course of business. Because of the nature of
the U.S. Customs bond business, the majority of claim notices received from
Customs typically do not result in actual claim payments by the Company because
of payment by the principal, adequate defenses of the principal or the Company
with respect to the claim or the correction of a non-compliance situation.

The two major types of bond claims received from Customs are assessment of
additional duty and liquidated damages. The Company's claim adjustment
procedures for additional duty assessments include identifying the bond related
to the claim, obtaining supporting Customs' entry documentation, reviewing
Customs' assessment of higher duty and contacting the importer of record in an
attempt to secure payment. Claims for liquidated damages are more complex and
require the implementation of several claim adjustment procedures. By working
with the Customs broker that filed the import entry and produced the bond, the
Company seeks to correct the non-compliance situation. If compliance is not
achieved, the Company performs final adjustment procedures or makes payment. The
principal remains liable for all claims paid by the Company. The Company's
policy is to aggressively pursue the principal under rights of subrogation on
any bond that results in a claim payment.

The Company maintains reserves for the payment of losses and loss
adjustment expenses ("LAE") for all lines of business, on an undiscounted basis.
The determination of reserves for losses and LAE is dependent on receipt of
information regarding claims and the historical loss experience of the business.
Generally, there is a lag between the time losses are incurred and the time they
are reported to the Company.

The liability for losses and LAE is an estimate of the ultimate unpaid net
cost of all losses incurred through December 31 of each year. Since the
provision is necessarily based on estimates, the ultimate liability may be more
or less than such provision. These estimates include the anticipated recovery of
salvage and subrogation based on historical patterns. Case reserves for
individual claims are generally not established for the U.S. Customs bond
business because of the historical problems of attempting to establish case
reserves for small losses coupled with: (i) frequent errors in Customs claims,
(ii) lack of or erroneous documentation furnished to the Company by Customs, and
(iii) the experience of the Company that in excess of 90% of all claims
initially reported by Customs are either canceled or settled by the principal.
When there is sufficient evidence to document the validity of a claim, it is
promptly paid by the Company. As a result, the Company estimates its ultimate
losses on U.S. Customs bonds by projecting from its paid claim data. The
combination of paid loss projections and the length of time to ultimate
settlement adds a high degree of judgment to the reserving process. The reserves
established for bond losses are regularly evaluated and adjusted when conditions
in loss patterns indicate an adjustment is required. The reserves established
for marine losses and professional liability losses are evaluated against cases
reported, and adjustments to the reserves, including a provision for claims
incurred but not yet reported ("IBNR"), are recorded as deemed appropriate.
Reserves for the Company's automobile and commercial and property and casualty
lines are established on a case-by-case basis and include a provision for IBNR.
The individual case reserves are reviewed periodically and

E-6
<PAGE> 89

adjusted as deemed necessary. The following table presents Company reserve
balances for the periods indicated (net of ceded reinsurance):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Unpaid Losses and LAE at beginning of year, net of
reinsurance recoverables of $11,970, $9,980, and
$3,138.......................................... $ 43,385 $37,057 $33,155
Provision for Losses and LAE for claims occurring
during:
Current year.................................... 31,680 34,260 31,876
Prior years..................................... 988 585 431
-------- ------- -------
Total............................................. 32,668 34,845 32,307
-------- ------- -------
Less Loss and LAE payments for claims occurring
during:
Current year.................................... (10,646) (10,896) (10,798)
Prior years..................................... (20,873) (17,621) (17,607)
-------- ------- -------
Total............................................. (31,519) (28,517) (28,405)
-------- ------- -------
Unpaid Losses and LAE at end of year, net of
reinsurance recoverables of $11,980 $11,970 and
$9,980.......................................... $ 44,534 $43,385 $37,057
======== ======= =======
</TABLE>

- -------------------------
Any adjustments to reserves are reflected in operating results for the period in
which they are made.

The following table presents development of total Company reserves and
liability paid for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and LAE..................... $11,459 $12,584 $14,133 $25,867 $23,940 $26,289 $35,006 $33,155
Cumulative amount of
liability paid through:
One Year Later.............. 6,019 5,216 6,039 12,611 12,531 14,244 20,205 17,608
Two Years Later............. 8,826 8,748 10,893 18,471 17,711 22,819 25,890 23,825
Three Years Later........... 11,396 12,106 13,079 21,521 24,280 26,934 28,244 27,415
Four Years Later............ 14,375 13,525 13,782 28,746 25,908 28,254 30,099
Five Years Later............ 15,224 13,906 21,892 29,131 26,694 29,116
Six Years Later............. 15,488 14,179 22,223 29,599 27,219
Seven Years Later........... 15,766 14,432 22,382 29,775
Eight Years Later........... 15,830 14,590 22,473
Nine Years Later............ 15,937 14,599
Ten Years Later............. 15,916
Liability re-estimated as of:
One Year Later.............. 11,629 13,592 13,367 26,551 25,728 28,426 41,110 33,586
Two Years Later............. 14,011 13,301 16,666 25,974 24,667 29,851 41,491 34,193
Three Years Later........... 14,502 16,273 15,613 25,060 23,289 31,883 41,286 33,895
Four Years Later............ 17,499 15,351 14,966 24,192 24,208 31,394 41,472
Five Years Later............ 16,656 14,790 14,765 24,536 23,542 31,429
Six Years Later............. 16,038 14,209 15,225 23,947 23,607
Seven Years Later........... 15,774 14,613 14,644 23,932
Eight Years Later........... 16,010 14,302 14,606
Nine Years Later............ 15,829 14,248
Ten Years later............. 15,797

<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Liability for unpaid losses
and LAE..................... $37,057 $43,385 $44,534
Cumulative amount of
liability paid through:
One Year Later.............. 17,622 20,873
Two Years Later............. 25,633
Three Years Later...........
Four Years Later............
Five Years Later............
Six Years Later.............
Seven Years Later...........
Eight Years Later...........
Nine Years Later............
Ten Years Later.............
Liability re-estimated as of:
One Year Later.............. 37,642 44,373
Two Years Later............. 38,663
Three Years Later...........
Four Years Later............
Five Years Later............
Six Years Later.............
Seven Years Later...........
Eight Years Later...........
Nine Years Later............
Ten Years later.............
</TABLE>

E-7
<PAGE> 90
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative deficiencies
(Redundancies).............. $ 4,338 $ 1,664 $ 473 $(1,935) $ (333) $ 5,140 $ 6,466 $ 740
======= ======= ======= ======= ======= ======= ======= =======

<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cumulative deficiencies
(Redundancies).............. $ 1,606 $ 988
======= ======= =======
</TABLE>

Generally accepted accounting principles (GAAP) require insurance
liabilities on the balance sheet be reported without reduction for anticipated
recoverables under reinsurance contracts. Statutory accounting practices
continue to permit reporting on a net basis. The following table sets forth the
reconciliation of GAAP reported reserves to reserves net of reinsurance as shown
above.

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gross loss and loss adjustment expense reserves.... $56,514 $55,355 $47,037
Ceded to other insurance companies(1).............. 11,980 11,970 9,980
------- ------- -------
Net liability as stated above...................... $44,534 $43,385 $37,057
======= ======= =======
</TABLE>

- -------------------------
(1) Before reduction for funds held from reinsurers

As indicated in the above tables, the Company has experienced adverse loss
development for policy years other than 1991 and 1992. Reserve deficiencies for
1990 and prior have developed primarily in the U.S. Customs bond line of
business. Historical reserve deficiencies resulted from several causes,
including modifications in the administrative procedures utilized by Customs in
the claims assessment and collection area; the previously described
computerization of the claims administration process by Customs; certain court
decisions regarding claims administration procedures that were decided favorably
to Customs and certain extraordinary losses experienced by the Company. The
extraordinary losses were related to a discontinued line of bond business for
environmental and safety requirements for imported automobiles, a discontinued
program for travel agents and a Customs determination on certain steel
importations involving countervailing duty and anti-dumping issues. (In
accordance with Customs procedures operative at the time, these risks were
primarily secured by many single entry bonds.) The aggregate cumulative losses
on these items is approximately $5,500,000, net of reinsurance ceded. The
Customs regulations have been modified to restrict such aggregation of liability
in the future. Moreover, the database now permits the Company to track and
control such aggregations on a more timely basis.

As prior period reserve inadequacies became apparent, the Company took
several actions to strengthen its reserve posture by increasing its premium
rate, adjusting its current reserve practices and affecting lump sum increases
to the reserves.

During 1995, it became apparent that the estimated unpaid claims for
liabilities established at December 31, 1994 on Kingsway's business lines would
exceed initial expectations and loss reserves were increased accordingly by $4.0
million. In addition, the reserves reported to Kingsway by the Canadian Facility
Association Risk Sharing Pool as at December 31, 1994 increased substantially
during 1995. The Risk Sharing Pool was created by legislation in Ontario to
ensure the availability of automobile insurance to every motorist in Ontario.
Every insurer writing automobile insurance is required to share in these losses
in proportion to their business in the Province.

Also, during 1995, loss experience related to U.S. operations for 1994 and
prior suggested reserve increases amounting to $5.2 million were required for
the marine cargo, contract surety and other property and casualty lines. These
increases were offset by savings of $3.1 million on 1994 and prior U.S. Customs
bonds reserve estimates.

During 1996, further adverse development for prior years emerged. Increases
totaling $2.4 million were made in the contract surety, marine and professional
liability product lines. These increases were partially

E-8
<PAGE> 91

offset by reductions totaling $814,000 to U.S. Customs bonds and other property
and casualty reserve estimates.

During 1997, $3.0 million was added to loss and loss adjustment expense
reserves across several lines. Loss and loss adjustment expense reserves are
estimated using a range of values. The overall reserves carried by the Company
have been within such ranges. Management nevertheless considered it prudent to
further strengthen these reserves so as to provide greater margins in the event
of adverse development arising from unanticipated events.

During 1998, $4.2 million was added to reserves in the marine, professional
liability and other property and casualty segments. This addition was done to
reflect emerging experience as well as to provide for additional margin. Loss
and LAE reserves are estimated using a range of values and include a select
point which represents the level of reserves deemed most likely to ultimately
develop. The Company has consistently carried the overall level of reserves
within the estimated ranges. The actions in 1998 served to move the overall
level of reserves to approximately the select point.

Claims experience tends to be dependent upon the frequency of claims and
the severity of individual claims. Severity exposures are the subject of certain
excess of loss reinsurance treaties as described above. Until recent Customs'
automation, obtaining reliable information on the frequency of claims was
difficult and was further compounded by the historically long delays in Customs'
claims assessment and processing. Currently, Customs forwards a computer tape of
outstanding bills for additional duty and liquidated damages to the Company on a
weekly basis. This data is input to the Company's computer and used to initiate
claims handling procedures.

The Company's bond and marine cargo losses are generally tied to the value
of the goods as of the date of shipment and generally are not adversely affected
by inflation; however, LAE is subject to the effects of inflation. LAE is
composed primarily of hourly fee costs for attorneys, adjusters and survey
firms. Such professional services typically are subject to rate increases at the
discretion of the provider. While the Company makes every effort to control the
rates and hours of service, it is imperative to retain qualified personnel
familiar with the business of the Company and the insurance industry.

COMPETITION

The insurance industry is highly competitive. The Company faces competition
from bond underwriters, marine and non-marine insurers and numerous other
insurance companies. These insurers vary in terms of size, quality, operating
histories and financial, marketing and management resources. Many of these
competitors are larger, have more agents and have substantially greater
financial resources than the Company.

The U.S. Customs bond business is highly specialized and requires
significant technical knowledge in order to properly underwrite and respond to
claims. Additionally, the automated processing systems which the U.S. Customs
Service has installed for its own use necessitate that surety companies also be
automated for claims. In addition to the ability to use the data tapes, and data
base information, the time frames available for collection and payment have been
shortened, requiring sureties to respond on a daily basis.

There are over 300 companies in the United States Department of the
Treasury's approved list of companies acceptable as sureties and reinsurers of
federal bonds including U.S. Customs bonds. While there is no reliable data
available from which to determine the amount or volume of U.S. Customs bonds
written by these companies, the Company believes that it and one of its
competitors, Washington International Insurance Company, are the dominant
underwriters for U.S. Customs bonds.

Many major insurance companies, agents and brokers compete for marine cargo
insurance business. The Company believes that its ability to compete in this
market is enhanced by its relationships with customs brokers and freight
forwarders.

In past years the Company had few competitors in the U.S. for its
professional liability product. Recently more competitors have emerged with a
similar product. Outside of the U.S., alternative coverages are marketed by
competitors in conjunction with a broad form marine and liability policy. The
Company

E-9
<PAGE> 92

developed a new form, the International Transit Liability Policy ("ITL"), to be
more compatible to these market expectations. The Company believes that its
ability to provide prompt, efficient service to customs brokers and freight
forwarders, as well as its expertise and understanding of the risks involved in
those industries, provide a competitive advantage over other carriers in both
its professional liability lines and its property and casualty lines.

REGULATION

U.S. Federal Regulation. U.S. Customs bonds are sold pursuant to federal
regulations requiring virtually every importer of goods into the United States
to post a bond. IIC currently maintains a Certificate of Authority as a surety
company qualified to write U.S. Customs bonds pursuant to federal law and
applicable regulations promulgated by the U.S. Department of Treasury (the
"Treasury"). The Treasury determines the maximum amount of risk retention per
bond for each qualified insurance company. IIC is qualified to write U.S.
Customs bonds and retain an aggregate liability up to $2,939,000 on any one
bond.

Although no specific statutory requirements exist, the Treasury generally
recommends no greater than a three to one ratio of net premiums written to
statutory surplus for sureties licensed to write U.S. Customs bonds. The Company
continues to meet this guideline.

Insurance companies issuing U.S. Customs bonds and customs brokers selling
such bonds are extensively regulated by the Treasury, including an annual review
of their financial statements. As a result of extensive federal regulation, the
Company believes that under the McCarran Ferguson Act, its U.S. Customs bonds
business is exempt from state regulation. No state has taken any action to
require the Company's compliance with its licensure requirements with respect to
its U.S. Customs bond business.

State Regulation. The Company and its U.S. insurance subsidiary are subject
to regulation under the various state insurance laws where the subsidiary is
licensed, including each particular state's insurance holding company law
("Holding Company Law"). Such regulation is designed generally 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 financial and market conduct examinations by
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 Company's insurance subsidiary must file rates for insurance
directly underwritten with the insurance department of each state in which it
operates. Further, state insurance statutes typically place limitations on the
amount of dividends or other distributions payable by domiciled insurance
companies in order to protect their solvency.

Holding Company Laws impose standards on certain transactions between
registered insurers and their affiliates, which include, among other things,
that the terms of the transactions be fair and reasonable and that the books,
accounts and records of each party be maintained so as to clearly and accurately
disclose the precise nature and details of the transactions. Holding Company
Laws also generally require that any person or entity desiring to acquire more
than a specified percentage (commonly 10%) of the Company's outstanding voting
securities is required first to obtain approval of the applicable state
insurance regulators.

The National Association of Insurance Commissioners (NAIC) facilitates the
regulation of multi-state companies through uniform reporting requirements,
standardized procedures for financial examinations, and uniform regulatory
procedures embodied in model acts and regulations. Certain of these regulations
address the reporting and regulation of the adequacy of capital and surplus. At
December 31, 1998, IIC's required risk-based capital was $7,194,000, and
reported capital and surplus was $32,615,000.

Foreign Regulation. In the U.K. the Company is subject to regulation by the
Insurance Division, Department of Trade and Industry. In Hong Kong, the Company
is subject to regulation by the Office of the Commissioner of Insurance under
the Insurance Companies Ordinance and related amendments. Violations of the
provisions under which these foreign locations operate can lead to various
regulatory actions, up to and including the loss of the ability to operate.

E-10
<PAGE> 93

INVESTMENT POLICY

The Company's investment policy requires that fixed income invested assets
be comprised of investment grade securities of short to medium term. The Company
does not invest in real estate or real estate securities, "high yield" bonds or
derivatives. The Company's philosophy is to hold its investments to maturity
when feasible, but will redeploy assets when market conditions dictate.
Substantially all of the Company's investment portfolio is comprised of
investment grade securities issued by the U.S. Treasury, various federal
agencies, various state and local governments and major U.S. corporations.

EMPLOYEES

At December 31, 1998, the Company had 134 U.S. employees. Except for 6
part-time employees, all such persons are employed on a full-time basis. The
Company has 5 employees in its U.K. operations and 10 employees in Hong Kong.
The Company believes that it enjoys favorable relations with its employees.

ITEM 2. PROPERTIES

The Company occupies leased space in Schaumburg, Illinois where its
principal executive offices are located. IIC leases space in London where a
branch office is maintained. IIC also leases space for regional offices in New
York City, Tampa, Florida and Woodland Hills, California. Intercargo Insurance
Company H.K. Ltd. leases office space in Hong Kong.

ITEM 3. LITIGATION

During the month of January 1998, the president of IAS resigned and with
several other employees formed Avalon Risk Management, Inc. Avalon's announced
purpose is to compete with IAS in the marketing and distribution of
transportation related insurance and surety products. The Company has filed suit
in the Chancery Division of the Circuit Court of Cook County, Illinois against
the ex-president alleging breach of fiduciary duty, theft of confidential
information and other unlawful activities, and seeking injunctive relief and
damages. The action is pending and its outcome at this point is not certain.

In February 1999, certain purported shareholders of the Company filed a
lawsuit against the Company and its directors, seeking class action status and
claiming, among other things, the directors breached their fiduciary duties to
the Company's shareholders in approving the definitive agreement to merge
between the Company and a subsidiary of XL Capital and that they failed to
adequately explore alternative transactions and maximize shareholder value. The
lawsuit requests, among other things, injunctive relief and payment of damages
to the class members. The Company believes that the lawsuit is without merit and
intends to contest it vigorously.

There are no other pending material legal proceedings to which the Company
or its subsidiaries is a party or of which any of the properties of the Company
or its subsidiaries is subject, except for claims arising in the ordinary course
of business. In the ordinary course of business, the Company is involved in
certain litigation. In the opinion of management, the ultimate resolution of
such litigation will not have a material effect on the financial condition of
the Company.

ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

None.

E-11
<PAGE> 94

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock, par value $1.00, is traded on the NASDAQ
National Market under the symbol ICAR. The table shown below contains the range
of high and low closing sale prices of the common stock of the Company as
reported by NASDAQ for each calendar quarter for the last two fiscal years.

<TABLE>
<CAPTION>
QUARTER HIGH LOW
- ------- ---- ---
<S> <C> <C>
4th 1998.................................................... 12.00 9.38
3rd 1998.................................................... 11.88 9.13
2nd 1998.................................................... 13.00 11.34
1st 1998.................................................... 13.50 11.38
4th 1997.................................................... 14.13 12.88
3rd 1997.................................................... 14.25 10.38
2nd 1997.................................................... 12.00 9.13
1st 1997.................................................... 10.13 8.50
</TABLE>

The number of holders of record of Company common stock on March 8, 1999,
was 79. Certain information made available to the Company from Automatic Data
Processing (ADP) and broker dealers holding securities in street name indicates
there are approximately 738 beneficial owners of the Company's common stock.

The Company paid dividends of $0.18 per share, or $1.4 million in 1998,
1997 and 1996. Any future dividends will depend upon the earnings and financial
position of the Company and its principal operating subsidiary, IIC, as well as
legal and contractual restrictions. In addition, the insurance laws of Illinois,
the domicile of IIC, require that dividends from IIC to the Company be paid only
out of earned surplus, and are limited to the greater of (i) 10% of the prior
year's statutory surplus or (ii) statutory net income, as defined. The Agreement
and Plan of Merger limits the payment of any regular semi-annual dividend to
$0.09 per share unless consent thereto is granted by XL Capital.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31:
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues(1).............................. $ 61,297 $112,159 $ 68,241 $ 94,186 $ 80,885
Operating income (loss)(1)............... $ (5,421) $ 46,141 $ 3,705 $ 4,050 $ 7,359
Net income (loss)........................ $ (3,372) $ 31,788 $ 6,404 $ 2,139 $ 4,981
Total assets............................. $163,400 $165,412 $133,710 $116,166 $128,423
Total stockholders' equity............... $ 72,975 $ 82,201 $ 48,012 $ 43,621 $ 39,921
Per Share Amounts
Net income (loss) from continuing
operations............................. $(0.44) $4.14 $0.84 $0.28 $0.65
Dividends................................ $ 0.18 $0.18 $0.18 $0.18 $0.18
Combined ratio(2)........................ 117.9% 112.9% 103.9% 103.6% 97.5%
</TABLE>

- -------------------------
(1) 1997 amounts reflect revenues from the Company's sale of its investment in
Kingsway Financial Services, Inc. (See Note 1 of the Notes to Consolidated
Financial Statements).

(2) Combined ratios have been computed for all years on a GAAP basis (see Item
7 -- Management's Discussion and Analysis).

E-12
<PAGE> 95

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

The Company, through its subsidiaries, is engaged in the business of
underwriting specialty insurance coverages for international trade. This
includes U.S. Customs bonds, marine cargo insurance, professional liability
insurance, and property and casualty insurance. The Company has a subsidiary in
Hong Kong and a branch office in the United Kingdom. Until December 18, 1995,
the Company was the sole parent company of Kingsway Financial Services, Inc.
("Kingsway"), an underwriter of automobile, and property and casualty insurance
in Canada. On December 18, 1995 Kingsway sold 1.8 million shares of its common
stock in an initial public offering. The Company participated in that
transaction as a selling shareholder, reducing its equity interest in Kingsway
from 100% to 50%. In January, 1996, as a result of the exercise of the
underwriters' over allotment option, the Company's equity in Kingsway was
reduced to 47.0%. In October, 1996, Kingsway conducted a secondary offering in
which the Company participated. As a result of this, the Company's equity in
Kingsway was further reduced to 31.5%. In August, 1997 Kingsway conducted
another secondary offering in which the Company participated. As a result of
this, the Company's equity in Kingsway was reduced to less then 1%. During all
of 1996 and 1997 until August 25, 1997 this investment had been accounted for by
the equity method.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

1998 resulted in a net loss of $3.4 million or $0.44 per share as compared
to net income of $31.8 million or $4.14 per share in 1997 and $6.4 million or
$0.84 per share in 1996. During 1998 the Company faced many challenges. The
insurance market in the U.S. remains highly capitalized which continues to
foster soft market conditions for product pricing and intense competition for
premiums. In January of 1998 the president of IAS resigned and with several
other employees formed an operation whose announced purpose is to compete with
IAS in the marketing and distribution of transportation related insurance and
surety products. Litigation costs related to this added to the overall operating
costs. The departure of these employees presented the Company with the
opportunity to re-evaluate its focus. To this end the Company determined that it
should concentrate its focus on underwriting and that its primary distribution
method should be the use of independent brokers and agents. This led to the
decision to sell all of the domestic insurance brokerage agency business of IAS
in consideration for cash, convertible preferred stock and a secured installment
note, totaling approximately $7.9 million. The transaction was effected through
the sale of the capital stock of seven subsidiaries of IAS. The purchase price,
which is equivalent to approximately one times the commission revenue of the
transferred agencies, is subject to adjustment based on the commission revenue
of the transferred agencies for the twelve month period ending June 30, 1999.

In order to provide the necessary level of service to independent agents
and brokers and to enhance the ability to expand the number of independent
producers, the Company opened four regional offices. The immediate impact of
these openings was an increase to underwriting costs. The Company believes,
however, that the regional offices are a necessary factor to increase premium
writings and to provide enhanced customer service.

During the course of 1998 the Company was involved in an extensive review
of strategic alternatives. This review included among other things potential
acquisitions by the Company, as well as strategic alliances and mergers with
other entities. These efforts culminated with the Company entering into an
Agreement and Plan of Merger with XL noted in Item 1 of this Statement.
Additional information is contained in the Registrant's definitive Proxy
Statement for the Special Meeting of Shareholders relating to the Merger. As
part of this review the Company incurred costs for financial consulting and
legal services which impacted underwriting expenses.

E-13
<PAGE> 96

REVENUES

Insurance Premium Income

Net premiums written by segment are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Surety............................................. $18,768 $16,688 $23,177
Marine............................................. 27,594 28,247 27,470
Professional liability............................. 2,834 3,196 2,212
Other Property and Casualty........................ 6,325 9,061 5,594
------- ------- -------
Total......................................... $55,521 $57,192 $58,453
======= ======= =======
</TABLE>

Surety (U.S. Customs bonds, contract and miscellaneous surety bonds) net
premium written increased 12.5% in 1998. Contract and miscellaneous surety net
premium written increased $3.2 million or 116.1% due to an increase of $845
thousand or 13.3% in gross premium written and to the discontinuance of a 50%
quota share reinsurance treaty under which the Company had ceded business prior
to 1998. U.S. Customs bonds net premium written declined $1.2 million or 8.4%
due to competitive pressures. Such pressures are expected to continue for both
U.S. Customs bonds and contract surety bonds. In 1997, surety net premium
written declined 28.0%. Gross premiums written for U.S. Customs bonds were $3.1
million or 17.4% lower in 1997 than 1996. This was due to the move to rates
which are net of brokers' commissions, and to competitive pressures on overall
price structures. Gross premiums written for contract and miscellaneous surety
bonds were $2.4 million or 27.7% lower in 1997 than 1996. During the first half
of 1997 the Company was reviewing the strategic position of the contract and
miscellaneous surety line. During that period of evaluation marketing and sales
efforts remained static, and some sales momentum was lost. The Company
subsequently determined that these products can be viable and should remain a
part of the overall product portfolio. Sales and marketing efforts were then
reinvigorated, resulting in the increased premium volume shown in 1998. Marine
net written premium declined 2.4% in 1998, while it had increased only 2.8% in
1997. These results reflect the market pressures on price levels. It is expected
that the marine cargo insurance line will continue to experience such pressures
in the foreseeable future. Professional liability net written premium decreased
11.3% in 1998 after having increased 44.5% in 1997. The decline in 1998 is due
primarily to the continuing efforts to re-underwrite this line of business. At
the time of renewal unprofitable accounts are being given appropriate rate
increases or are being cancelled. The increase in 1997 was attributable to
significant rate actions taken late in 1996 and extending into 1997 as well as
the circumstance that 1996 net written premiums were negatively impacted by $1.4
million in retrospective reinsurance premiums applicable to the development of
prior period coverages. Other property and casualty net premium written
decreased 30.2% in 1998 as compared to an increase of 62.8% in 1997. The
decrease in 1998 is due to a decrease of $4.5 million in net premium written
related to a program providing liability coverage on cranes. This same program
was the primary factor affecting the increase in net premiums written in 1997.
Absent the effects of this crane liability program, other property and casualty
net premiums written would have increased $1.8 million or 42.8% in 1998 due
primarily to increased volume in truck liability and physical damage coverages.

Insurance premium income, or earned premium, decreased $4.9 million or 8.6%
in 1998 to $52.5 million. In 1997, earned premium declined $3.6 million or 6.0%
to $57.4 million from $61.0 million in 1996. Premiums are earned over the
effective period of policy coverages and reflect the recognition of income from
the changing levels of net premium written.

INVESTMENT INCOME AND REALIZED GAINS

Net investment income was $6.1 million in 1998 as compared to $4.9 million
in 1997 and $4.0 million in 1996. The increase in 1998 was attributable to
earnings on the cash equivalents portion of the investment portfolio. In August
of 1997 the Company sold 4,018,000 of its shares in Kingsway Financial Services.
The 1998 results benefited from a full year of investment of the resultant
proceeds, as compared to approximately

E-14
<PAGE> 97

four months in 1997. Yields in 1998 on the long-term portion of the portfolio
were down slightly versus 1997. Net investment income was $4.9 million in 1997
as compared to $4.0 million in 1996, an increase of $900 thousand. The increase
is attributable to the increase in the fixed income portion of the investment
portfolio and to investment income on the proceeds from the Kingsway sale,
offset somewhat by a decline in average yield due to the general decline in
interest rates. Realized investment gains in 1998 were $2.1 million as compared
to $48.9 million in 1997 and $2.4 million in 1996. In 1997, the Company sold
4,018,000 of its shares in Kingsway giving rise to a gain net of related
expenses of $49.4 million. The 1998 and 1996 realized gains include $900
thousand and $2.4 million, respectively, in gains related to sales of Kingsway
shares. Also included in the 1998 amount is $1.1 million in gain from the sale
of certain IAS subsidiaries.

EXPENSES AND OTHER

Loss and Loss Adjustment Expenses

The following chart depicts loss and loss adjustment expenses ("LAE") by
segment.

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
OTHER
PROFESSIONAL PROPERTY &
SURETY MARINE LIABILITY CASUALTY TOTAL
---------------- ---------------- ---------------- ---------------- ----------------
LOSS LOSS LOSS LOSS LOSS
LOSSES RATIO LOSSES RATIO LOSSES RATIO LOSSES RATIO LOSSES RATIO
YEAR INCURRED (%) INCURRED (%) INCURRED (%) INCURRED (%) INCURRED (%)
- ---- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $4,124 23.7 $19,832 76.9 $3,490 130.5 $5,222 79.1 $32,668 62.3
1997 $5,087 28.3 $19,482 69.8 $3,752 117.0 $6,524 78.1 $34,845 60.7
1996 $7,455 28.8 $17,759 65.9 $2,714 102.7 $4,379 77.8 $32,307 52.9
</TABLE>

In 1998 loss and LAE decreased 6.3% following an increase of 7.9% in 1997.
While the dollar level of loss and LAE declined in 1998, the overall loss ratio
increased to 62.3% from 60.7% in 1997. During 1998 overall loss and LAE reserves
were increased by $4.2 million. Reserves for certain lines were adjusted to
reflect developing experience. Reserves were also increased to provide for
additional margin. Loss and LAE reserves are estimated using a range of values
and include a select point which represents the level of reserves deemed most
likely to ultimately develop. The Company has consistently carried the overall
level of reserves within such ranges. The actions taken in 1998 served to move
the overall level of reserves to approximately the select point. Reserves in the
surety segment were reduced $1.8 million reflecting ongoing development of U.S.
Customs bonds claims. Marine loss reserves were increased $3.4 million to
reflect emerging poor development primarily on current year business.
Professional liability loss and LAE reserves were increased approximately $1.6
million to reflect emerging prior years' losses as well as to move the reserve
level to a higher point in the range. Other property and casualty reserves were
increased approximately $1.0 million. Workers' compensation reserves were
decreased $631 thousand to reflect continuing favorable development. Reserves
for the discontinued crane liability program were increased approximately $1.7
million to reflect adverse development. In 1997, loss and LAE increased $2.5
million or 7.9% as compared to 1996. During 1997, $3.0 million was added to loss
and LAE reserves across several lines. This was done in response to the
development of losses as well as to provide additional margins for adverse
development. The loss ratio for the surety segment has shown improvement
reflecting positive development for U.S. Customs bonds as well as the enhanced
underwriting plus premium growth in contract and miscellaneous surety. The
marine segment loss ratio deterioration is a reflection of the intense
competitive pressures on pricing. The loss ratio in the professional liability
segment in 1998 was negatively impacted by the increase in loss and LAE reserves
noted previously. The Company continues to seek more appropriate pricing for
covered risks under the professional liability program as it continues the
efforts to improve the performance of this segment. The loss ratio for the other
property and casualty segment of 79.1% for 1998 includes the previously
mentioned reserve increase related to the crane liability program. Had this not
been necessary the loss ratio for 1998 would have been 53.9%. This improvement
reflects the continued positive development in the loss and LAE reserves in the
workers' compensation line.

E-15
<PAGE> 98

POLICY ACQUISITION COSTS

Policy acquisition and other issue costs were $16.1 million, $14.3 million
and $17.4 million for 1998, 1997 and 1996 respectively. These costs as a
percentage of earned premiums were 30.8%, 24.8% and 28.5% in 1998, 1997 and
1996, respectively. The rise in the percentage for 1998 is the result of two
major factors. Prior to their April 30, 1998 sale, the Trade Insurance Services
("TIS") subsidiaries had produced a significant portion of the Company's
premiums, accounting for 69% of the 1997 volume. Intercompany commission income
of TIS was eliminated in consolidation against the commission expense of IIC.
After the sale of TIS, such commissions are now paid to unrelated entities and,
therefore, are no longer eliminated in consolidation. The other major factor
changing in 1998 was the discontinuance of a quota share reinsurance agreement
on contract surety business. Under that agreement, the Company received ceding
allowances which served to offset a portion of acquisition expenses. Excluding
these two items, the 1998 acquisition expenses would have been approximately
23.5% of earned premiums. The reduction in the percentage relationship of
acquisition costs to earned premiums in 1997 was attributable to the change in
the commission structure as pricing for certain products moved to a rate
structure net of brokers' commissions.

OTHER UNDERWRITING EXPENSES

Other underwriting expenses increased approximately $1.5 million, or 9.0%
in 1998 to $17.9 million from $16.4 million in 1997. During 1998 the company was
in the process of reviewing strategic alternatives, as described previously
herein. Costs associated with this endeavor were approximately $1.25 million.
Litigation and investigation costs relating to the departure of certain IAS
employees and the resultant litigation were approximately $800 thousand. Costs
associated with the development of regional offices were approximately $689
thousand. In addition, as the Company refocused on underwriting, the decision
was made to discontinue an agency operation, TRM Insurance Services("TRM"). TRM
has been sold effective February 28, 1999. Included in the assets of TRM was the
value of an agreement with the former owner to not engage in a similar business
nor solicit TRM's customer base for a stated period should this person leave
TRM. With the discontinuance of agency operations the contract no longer had a
basis for the value. Accordingly, the remaining carrying value of $390 thousand
was written off. This charge was included in other underwriting expenses.
Offsetting these costs somewhat was a reduction in other underwriting expenses
of $805 thousand as a result of the sale of certain IAS subsidiaries. In
addition, expense initiatives undertaken during the course of the year have
reduced headcount by 9.6% in addition to employee reduction resulting from the
sale of IAS subsidiaries. The Company is continuing its expense initiative in
the current year. Other underwriting expenses increased $2.3 million or 16.3% in
1997 to $16.4 million from $14.1 million in 1996. Insurance company operations
in 1997 showed an increase of $3.2 million. This was due to an increase in
insurance company bad debt expense in 1997 over 1996 of $2.0 million as the
result of the financial failure of certain producers. The Company generally
anticipates such failures when establishing allowances for bad debts. These
particular failures were unusual in magnitude and such occurrences in the future
are expected to be minimal. Also, salary and related benefits increased $972
thousand due in part to approximately $450 thousand associated with changes in
management during 1997. Agency operations expenses decreased approximately $909
thousand. Bad debt expense in the agency operations for 1997 was $504 thousand
less than 1996 as collection efforts were enhanced. Salary expense for the
agency operations in 1997 was down $261 thousand from 1996 due to staffing
changes.

E-16
<PAGE> 99

RESULTS BY SEGMENT

Operating income by segment is shown in the chart below. Additional
information on business segments is included in Note 20 of the Notes to
Consolidated Financial Statements which are included in this document.

Operating Income (Loss)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Surety............................................. $ 2,265 $ 1,081 $ 4,214
Marine............................................. (6,422) (3,599) (3,363)
Professional liability............................. (3,005) (2,379) (1,315)
Other property and casualty........................ (2,240) (2,518) (1,903)
Investment and other............................... 3,981 53,556 6,072
------- ------- -------
Operating income (loss).......................... $(5,421) $46,141 $ 3,705
======= ======= =======
</TABLE>

A significant factor in evaluating insurance company performance is the
combined ratio. The combined ratio is a comparison of claims costs plus other
expenses as a percentage of premiums earned.

SEGMENTS
<TABLE>
<CAPTION>

SURETY MARINE PROFESSIONAL LIABILITY
------------------- ------------------- -----------------------
PREMIUM COMBINED PREMIUM COMBINED PREMIUM COMBINED
YEAR EARNED RATIO (%) EARNED RATIO (%) EARNED RATIO (%)
- ---- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1998................. $17,398 87.0 $25,791 124.9 $2,674 212.4
1997................. 17,947 94.0 27,906 112.9 3,206 174.2
1996................. 25,846 83.7 26,932 112.5 2,644 149.7

<CAPTION>
OTHER PROPERTY &
CASUALTY TOTAL
------------------- -------------------
PREMIUM COMBINED PREMIUM COMBINED
YEAR EARNED RATIO (%) EARNED RATIO (%)
- ---- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1998................. $6,601 133.9 $52,464 117.9
1997................. 8,351 130.2 57,410 112.9
1996................. 5,631 133.8 61,053 103.9
</TABLE>

Combined ratios on a GAAP basis are presented here as the Company feels
this provides a conservative and consistent representation of the operational
performance as a whole. A combined ratio of less than 100% generally indicates
an underwriting profit. It's not uncommon in the property and casualty industry
to have combined ratios well in excess of 100%. No assurance is made that loss
and loss adjustment expense accruals upon which the Company's combined ratios
are based may not prove to vary significantly from the ultimate results.

IMPACT OF YEAR 2000

The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices,
calculate earned premiums or engage in similar normal business activities.

STATE OF READINESS

The Company began evaluating its readiness for the year 2000 in 1997 with a
review of the operating and application software. The Company uses software that
has been developed internally as well as software developed by third party
vendors. During 1998 the Company received written certification from its primary
third party vendors that their software is compliant with year 2000. The Company
established a Year 2000 Steering Committee, chaired by the Vice President of
Operations, which includes internal managers as well as external consultants. A
project plan has been developed which consists of four phases. These phases
include

E-17
<PAGE> 100

(a) an inventory to identify software applications, technology platforms and
interfaces, and business partners, and rating each on their potential business
impact; (b) an initial assessment of the approach to be used in determining year
2000 compliance; (c) remediation where non-compliant items are reprogrammed or
replaced; and (d) testing and certification of code modifications and new
inventory with other associated systems, including date testing and quality
assurance testing to ensure functioning in the post-1999 time frame. These
phases are overlapping with one another and portions may be done simultaneously.

The various hardware, software and embedded chip inventories will be
completed by the end of the first quarter of 1999, along with an initial
assessment of the approaches to be taken in determining compliance with year
2000. Remediation, testing and certification is targeted for completion by the
end of the third quarter of 1999. The Company believes that its year 2000
project is generally on schedule.

EXTERNAL RELATIONSHIPS

The Company also faces the risk that various customers or suppliers
("external relationships") will not be able to interact with the Company due to
the third party's inability to resolve circumstances arising from year 2000
issues they may have failed to address. The Company has completed an inventory
of business partners and risk rated the potential business impact. These include
significant producers as well as suppliers of such services as
telecommunications and banking. The Company is attempting to determine the
overall year 2000 readiness of these external relationships.

The Company has initiated a program to inform its customers of the
potential impact that year 2000 issues may have on their operations. Should
customer operations insured by the Company be unable to adequately perform their
services due to circumstances arising from year 2000 issues they may have failed
to address, the Company may be adversely impacted. This may include, but not be
limited to, such items as inability or failure of customers to remit premiums,
and additional incurred claims under various insurance policies issued by the
Company. While the Company may seek to limit its exposure to such claims, there
is uncertainty as to the acceptance of these limitations by regulators and the
legal system. The economic impact of these uncertainties cannot be determined at
this time.

The Company does not have sufficient information at this time to predict
whether its external relationships will be year 2000 compliant. There can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse affect on the
Company's systems.

COSTS TO ADDRESS YEAR 2000 ISSUES

The Company incurred expenses of approximately $155,000 (before tax) in
1998 related to year 2000 initiatives. Such costs for 1999 are currently
estimated to range from $265,000 to $664,000 depending upon the extent of
remediation or replacement necessary. The Company expects to fund these costs
through operating cash flows.

CONTINGENCY PLANNING

The Company is attempting to limit the potential impact of year 2000 issues
by monitoring the progress of its own year 2000 project and those of its
critical external relationships by developing contingency and recovery plans.
The Company is addressing such areas as revenue collection, claims processing,
financial reporting and outside service suppliers. In some instances manual
processes can be used. The Company is expecting to have contingency plans in
place by the end of the third quarter of 1999.

RISKS AND OTHER FACTORS REGARDING YEAR 2000

The costs of the year 2000 project and the date on which the Company
believes it will complete the year 2000 modifications are based on management's
best estimates, which were derived using numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans, and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results

E-18
<PAGE> 101

could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.

The Company cannot guarantee that it will be able to resolve all of its
year 2000 issues. Any critical year 2000 issues at the Company or its external
relationships could have material adverse effect on the Company's results of
operations, liquidity or financial condition.

INFLATION AND OTHER FACTORS

Periods of inflation have varying effects on the Company and other
companies in the insurance industry. Because premium rates for the Company's
U.S. Customs bond and marine cargo insurance products are usually tied to the
value of cargo being imported or exported, an increase in price levels may
result in revenue increases. In periods of inflation, the property and casualty
industry generally experiences higher losses, loss adjustment expenses and
operating costs. In contrast, the Company's U.S. Customs bond and marine cargo
premiums and losses are tied to the value of goods as of the date of shipment
and generally are not adversely affected by inflation.

The value of the dollar relative to other world currencies also affects the
Company's U.S. Customs bond and marine cargo business. When the dollar is strong
relative to other world currencies, imports generally increase and U.S. Customs
bond volume increases. When the dollar is weak relative to other world
currencies, exports generally increase and marine cargo insurance volume
increases. The company's foreign operations expose the Company to changes in the
relative value of the U.S. dollar to the local currencies. (Refer to Foreign
Operations in Notes to the Consolidated Financial Statements.)

FEDERAL INCOME TAXES

The Company's effective tax rates for the years 1998, 1997 and 1996 were
37.8%, 38.4% and 20.4% respectively. The effective tax rate differs from the
U.S. federal corporate tax rate due to the Company's investments in tax exempt
securities, changes in the valuation allowance related to deferred tax assets,
and the differential in book and tax bases of assets disposed (including the
disposal of Kingsway) (see accompanying Notes to Consolidated Financial
Statements).

LIQUIDITY AND CAPITAL RESOURCES

The capacity of an insurance company to underwrite insurance is based upon
maintaining liquidity and capital resources sufficient to pay claims and
expenses as they become due. The Company has historically generated adequate
capital resources to support its current operations. This position is further
enhanced by its investment policy which emphasizes high quality, short to medium
term investments. The primary sources of the Company's liquidity are funds
generated from insurance premiums, investment income, and proceeds from
investment maturities. The principal application of such funds are payments of
losses and loss adjustment expenses, investments, reinsurance, and operating
expenses.

Operations in 1998, in a departure from recent years, used cash of
approximately $7.9 million. In 1997 and 1996, cash flow from operations amounted
to $575 thousand and $6.3 million, respectively. The use of cash in 1998 was due
to factors including a net loss for the year as well as to increases in the
level of premiums receivable, due to a temporary change in remittance terms, and
in taxes recoverable. The decrease in the level of cash provided from operating
activities in 1997 as compared to 1996 was due to higher levels of reinsurance
balances recoverable and to decreases in various liabilities including accounts
payable.

In 1998 the Company repurchased 406,400 of its own shares for treasury at
an average price of $9.95 per share, utilizing approximately $4.04 million of
cash. Despite the net use of cash in 1998, the Company's level of cash and cash
equivalents remains significantly higher than the historical norm. This high
level of cash and cash equivalents is primarily the result of gross proceeds
from the sale of Kingsway common stock amounting to $67.7 million in 1997. A
portion of these proceeds were used to extinguish debt, increase the statutory
capital and surplus of Intercargo Insurance Company, finance short term
investment and general corporate

E-19
<PAGE> 102

purposes, including payment of related income taxes of $18.5 million on the gain
from sale. Proceeds from the sale of Kingsway common stock in 1996 were used to
increase the statutory capital and surplus of IIC and for general corporate
purpose.

The Company has discontinued its $15.0 million line of credit in light of
its current high level of available funds.

The Company does not have any material commitments for capital
expenditures. However, under terms of its Agreement and Plan of Merger with XL
Capital, the Company is required to have at least $24 million in cash and cash
equivalents at the consummation of the subject merger.

FINANCIAL INSTRUMENTS AND MARKET RISK

A financial instrument is cash or a contract that imposes or conveys a
contractual obligation or right to deliver or receive cash or another financial
instrument. Included at Note 17 of the Notes to Consolidated Financial
Statements is information summarizing the Company's financial instruments and
their estimated fair values. As indicated in the Note, the fair values of the
Company's financial instruments approximate their carrying values.

The Company is subject to market risk exposures of varying correlations and
volatilities, including foreign exchange rate risk, interest rate risk and
equity price risk. The following disclosure reflects estimates of future
performance and economic conditions. Actual results may differ.

The Company is subject to foreign exchange rate risk associated with
translating financial statements of its foreign subsidiaries and branches into
U.S. dollars. The Company's primary exposures are associated with the British
Pound and the Hong Kong dollar. The Company does not use hedging transactions in
managing these risks due to the relatively low level of exposure. Revenues from
foreign operations of $5.8 million in 1998 and $4.9 million in 1997 represented
10.4% and 4.6% of total revenues, respectively, in those years. Identifiable
foreign assets of $10.5 million at December 31, 1998 and $10.0 million at
December 31, 1997 represented 6.9% and 6.4%, respectively, of total consolidated
assets at those dates. A decrease of 10% in the foreign exchange rates would
have increased net income by $14,000 in 1998 and $65,000 in 1997 due to net
losses in foreign operations in those years. Such a decrease in foreign exchange
rates would have reduced equity by $284,000 and $304,000 at year-end 1998 and
1997, respectively.

The valuation of the Company's fixed maturity portfolio is subject to
long-term interest rate risk. In order to reduce the impact of changes in
long-term interest rates on the market value of its portfolio, the Company
invests in medium term obligations and endeavors to spread the maturity dates
over its investment horizon. A hypothetical increase of 100 basis points in
interest rates over the yield curve spectrum would decrease the market value of
the fixed maturity portfolio at December 31, 1998 by approximately $345,000.

The valuation of the Company's equity portfolio is subject to market risk.
At December 31, 1998 the equity portfolio had a fair value of $4.9 million,
which was 3.0% of total assets. Of this amount, $2.5 million represented a
private placement issue with limited market risk exposure. The Company has not
entered into any transactions to hedge the price risk on the equity portfolio
due to the relatively low level of exposure when compared to total assets.

E-20
<PAGE> 103

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Intercargo Corporation

We have audited the accompanying consolidated balance sheets of Intercargo
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. Our audits also included the financial statement schedules
listed in the index at Item 14(a). These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules 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
Intercargo Corporation and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles. Also, in our
opinion, the related 1998 and 1997 financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 19, 1999

E-21
<PAGE> 104

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of
Intercargo Corporation:

We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Intercargo Corporation and subsidiaries
for the year ended December 31, 1996. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated supplementary financial statement schedules as listed in the
accompanying index for 1996. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the cash
flows of Intercargo Corporation and subsidiaries for the year ended December 31,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, the aforementioned supplementary financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Chicago, Illinois
February 21, 1997

E-22
<PAGE> 105

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INTERCARGO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
INVESTMENTS
Fixed maturities at fair value (amortized cost $57,990 in
1998 and $59,814 in 1997).............................. $ 59,584 $ 60,676
Equity securities at fair value (amortized cost $3,761 in
1998 and $1,833 in 1997)............................... 4,856 4,234
-------- --------
Total investments................................. 64,440 64,910
Cash and cash equivalents................................... 39,087 49,400
Premiums receivable......................................... 19,306 15,677
Accrued investment income................................... 1,195 1,023
Deferred policy acquisition costs........................... 4,140 2,939
Reinsurance recoverable on losses and loss adjustment
expenses:
Paid claims............................................... 4,115 1,137
Unpaid claims............................................. 11,980 11,970
Prepaid reinsurance premiums................................ 4,344 5,119
Notes receivable............................................ 3,587 99
Income tax recoverable...................................... 895 1,365
Deferred income tax......................................... 4,530 2,226
Equipment, at cost, less accumulated depreciation........... 1,324 1,933
Goodwill.................................................... 393 1,991
Other assets................................................ 4,064 5,623
-------- --------
Total assets...................................... $163,400 $165,412
======== ========
LIABILITIES
Losses and loss adjustment expenses......................... $ 56,514 $ 55,355
Unearned premiums........................................... 20,241 17,948
Funds held by Company....................................... 422 372
Supplemental duty deposits.................................. 1,703 2,016
Accrued expenses and other liabilities...................... 11,545 7,520
-------- --------
Total liabilities................................. 90,425 83,211
-------- --------
Commitments and Contingencies............................... -- --
STOCKHOLDERS' EQUITY
Common stock -- $1 par value; authorized 20,000,000 shares;
issued 7,699,981 shares; outstanding 7,293,581 shares in
1998 and 7,699,981 shares in 1997......................... 7,700 7,700
Additional paid-in capital.................................. 24,400 24,400
Treasury stock, at cost; 406,400............................ (4,044) --
Accumulated other comprehensive income...................... 1,752 2,176
Retained earnings........................................... 43,167 47,925
-------- --------
Total stockholders' equity........................ 72,975 82,201
-------- --------
Total liabilities and stockholders' equity........ $163,400 $165,412
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.
E-23
<PAGE> 106

INTERCARGO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Insurance premium income.................................... $52,464 $ 57,410 $61,053
Net investment income....................................... 6,122 4,911 3,985
Realized investment gains................................... 2,139 48,871 2,379
Commission income........................................... 435 675 686
Other income................................................ 137 292 138
------- -------- -------
Total.................................................. 61,297 112,159 68,241
------- -------- -------
LOSSES AND EXPENSES
Losses and loss adjustment expenses......................... 32,668 34,845 32,307
Policy acquisition and other issue costs.................... 16,149 14,258 17,410
Other underwriting expenses................................. 17,901 16,427 14,051
Interest expense............................................ -- 488 768
------- -------- -------
Total.................................................. 66,718 66,018 64,536
------- -------- -------
Operating income (loss)..................................... (5,421) 46,141 3,705
Income tax expense (benefit)................................ (2,049) 17,710 755
------- -------- -------
Net income (loss) before equity in net income of investee... (3,372) 28,431 2,950
Equity in net income of investee............................ -- 3,357 3,454
------- -------- -------
Net income (loss)........................................... $(3,372) $ 31,788 $ 6,404
======= ======== =======
Net income (loss) per share -- basic and diluted............ $ (0.44) $ 4.14 $ 0.84
======= ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.
E-24
<PAGE> 107

INTERCARGO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
NUMBER COMMON PAID-IN TREASURY COMPREHENSIVE RETAINED STOCKHOLDERS'
OF SHARES STOCK CAPITAL STOCK INCOME (LOSS) EARNINGS EQUITY
--------- ------ ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.......... 7,641 $7,641 $24,104 $ -- $ (612) $12,488 $43,621
Net income............................ 6,404 6,404
Change in foreign currency
translation......................... 201 201
Change in unrealized gain (loss) on
investments......................... (933) (933)
-------
Comprehensive income.................. 5,672
-------
Dividends paid to stockholders ($0.18
per share).......................... (1,376) (1,376)
Employee stock options exercised...... 19 19 76 95
----- ------ ------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1996.......... 7,660 7,660 24,180 -- (1,344) 17,516 48,012
Net income............................ 31,788 31,788
Change in foreign currency
translation......................... 1,001 1,001
Change in unrealized gain (loss) on
investments......................... 2,519 2,519
-------
Comprehensive income.................. 35,308
-------
Dividends paid to stockholders ($0.18
per share).......................... (1,379) (1,379)
Employee stock options exercised...... 40 40 220 260
----- ------ ------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1997.......... 7,700 7,700 24,400 -- 2,176 47,925 82,201
Net loss.............................. (3,372) (3,372)
Change in foreign currency
translation......................... (45) (45)
Change in unrealized gain (loss) on
investments......................... (379) (379)
-------
Comprehensive loss.................... (3,796)
-------
Dividends paid to stockholders ($0.18
per share).......................... (1,386) (1,386)
Purchase of treasury stock............ (406) (4,044) (4,044)
----- ------ ------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1998.......... 7,294 $7,700 $24,400 $(4,044) $ 1,752 $43,167 $72,975
===== ====== ======= ======= ======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.
E-25
<PAGE> 108

INTERCARGO CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $(3,372) $ 31,788 $ 6,404
Adjustments to reconcile net income (loss) to net cash
provided from (used in) operating activities:
Realized gains............................................ (2,139) (48,871) (2,379)
Depreciation and amortization............................. 1,474 1,521 1,546
Amortization of premiums on investments................... 122 48 102
Write-off of intangible asset............................. 390 -- --
Undistributed income of affiliate......................... -- (3,357) (3,454)
Increase in premiums receivable........................... (3,629) (52) (1,311)
Decrease (increase) in deferred policy acquisition
costs................................................... (1,201) 946 1,014
Increase in reinsurance balances.......................... (2,213) (3,602) (8,380)
Decrease (increase) in notes receivable................... 10 116 (323)
Change in income tax accounts............................. (1,639) 15,390 20
Decrease (increase) in other assets....................... 306 (793) (56)
Increase in liability for losses and loss adjustment
expenses................................................ 1,159 8,318 10,744
Increase (decrease) in unearned premiums.................. 2,293 332 (74)
Increase (decrease) in funds held......................... 50 (120) (257)
Decrease in supplemental duty deposits.................... (313) (342) (311)
Increase (decrease) in accrued expenses and other
liabilities............................................. 1,062 (519) 3,051
Other, net................................................ (236) (228) (16)
------- -------- --------
Net cash provided from (used in) operating
activities......................................... (7,876) 575 6,320
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturities:
Purchases................................................. (23,139) (30,380) (27,314)
Sales..................................................... 8,192 18,908 13,332
Maturities and calls...................................... 16,755 3,478 5,370
Equity securities:
Purchases................................................. (460) (498) (502)
Sales..................................................... 1,875 822 2,140
Calls..................................................... 152 188 185
Net sales (purchases) of short-term investments............. -- (1) 510
Sale of subsidiaries........................................ (165) -- --
Purchase of subsidiary, net of cash acquired................ -- (237) --
Sale of Kingsway common stock (net of taxes of $18,500 in
1997)..................................................... -- 49,140 4,573
Purchase of property and equipment, net..................... (217) (233) (1,319)
------- -------- --------
Net cash provided from (used in) investing
activities......................................... 2,993 41,187 (3,025)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of notes payable.................................... -- (9,735) --
Proceeds from the exercise of stock options................. -- 260 95
Purchase of treasury stock.................................. (4,044) -- --
Dividends paid to stockholders.............................. (1,386) (1,379) (1,376)
------- -------- --------
Net cash used in financing activities................ (5,430) (10,854) (1,281)
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (10,313) 30,908 2,014
Cash and cash equivalents:
Beginning of the year..................................... 49,400 18,492 16,478
------- -------- --------
End of the year........................................... $39,087 $ 49,400 $ 18,492
======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.
E-26
<PAGE> 109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) ORGANIZATION

Intercargo Corporation ("the Company") is an insurance holding company
incorporated in the State of Delaware whose wholly owned subsidiaries at
December 31, 1998 consist of Intercargo Insurance Company ("IIC"), International
Advisory Services, Inc. ("IAS"), and Intercargo International Limited ("IIL").

IIC is a property and casualty insurer based in the United States, which
primarily writes U.S. Customs bonds, commercial surety, marine cargo,
professional liability and other property and casualty insurance. IIC conducts
business in the United Kingdom through a branch office operation. Its products
are sold to importers and exporters through customs brokers, freight forwarders,
and other service firms engaged in the international and domestic movement of
cargo. IIC also conducts business in Hong Kong through its wholly-owned
subsidiary, Intercargo Insurance Company H.K. Limited ("IIC -- H.K.").
IIC -- H.K. is a Hong Kong licensed insurer that underwrites marine cargo and
professional liability insurance.

In January 1996, the Company sold 60 thousand shares of its fifty percent
investment in Kingsway Financial Services, Inc. ("Kingsway") stock. This reduced
the Company's ownership percentage to approximately 47%. In October 1996, the
Company participated in a secondary offering of Kingsway stock by selling 250
thousand shares, which along with the new shares issued by Kingsway, reduced its
equity interest in Kingsway to approximately 31%.

In August 1997 a two-for-one stock split increased the Company's shares of
Kingsway to 4.2 million. The Company then sold 4.0 million shares reducing its
ownership interest to less than 1%. Prior to August 1997, the Company recorded
its share of Kingsway's operating results as equity in net income of investee.

On April 30, 1998, IAS transferred to the Roanoke Companies, Inc.
("Roanoke") all of the insurance brokerage agency business of IAS in
consideration for cash, convertible preferred stock and a secured installment
note totaling approximately $7.9 million. The transaction was effected through
the sale of the capital stock of seven subsidiaries of IAS. The purchase price,
which is equivalent to approximately one times the commission revenue of the
transferred agencies, is subject to adjustment based on commission revenue of
the transferred agencies for the 12 month period ending June 30, 1999. The
subject commission revenue since the date of sale has been less than
anticipated. Market factors may continue to impact this commission revenue.
Based on these factors the Company estimates that the initial purchase price may
be ultimately reduced by 35% to 40%. Accordingly, $3.0 million of the estimated
gain on the sale has been deferred until determination of the final purchase
price.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. All significant
intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

(b) Investment Valuations

All fixed maturities and equity securities are classified as
available-for-sale and reported at fair value. Unrealized gains and losses are
excluded from earnings and reported directly in stockholders' equity net of
deferred income taxes.

Gains and losses on sales of investments are computed on the specific
identification method and are reflected in net income. Fair values are based
upon quoted market prices or values obtained from independent pricing sources.

E-27
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company does not recognize into income its equity share of changes in
an investee's reported net assets resulting from an investee's issuance of
stock. Unconsolidated investees between 20% and 50% owned are accounted for
under the equity method of accounting.

(d) Cash and Cash Equivalents

Cash equivalents consist of investments with an original or remaining
maturity of three months or less at purchase.

(e) Premium Trust Funds

Premiums collected from insureds but not yet remitted to insurance carriers
are restricted as to use by laws in certain states in which IAS operates. The
amount of cash and cash equivalents so restricted was $1.2 million and $5.4
million at December 31, 1998, and 1997, respectively.

(f) Premiums Receivable

Premiums receivable are stated net of allowances for uncollectible accounts
of approximately $1.4 million and $1.0 million at December 31, 1998 and 1997,
respectively.

(g) Policy Acquisition Costs

Policy acquisition costs are costs such as commissions and certain other
underwriting and agency expenses which vary with and are directly related to the
production of business. Such costs are deferred to the extent recoverable from
future earned premiums and are amortized ratably over the terms of the related
policies. Costs deferred and amortized over the past three years are summarized
as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred policy acquisition costs, beginning of year........ $ 2,939 $ 3,884 $ 4,898
Deferred:
Direct commissions........................................ 12,668 8,007 11,415
Premium taxes............................................. 1,115 887 883
Other direct underwriting expenses........................ 1,328 5,229 5,604
Ceding commissions........................................ (807) (1,709) (1,617)
-------- -------- --------
Net deferred................................................ 14,304 12,414 16,285
Amortized................................................... (13,103) (13,359) (17,299)
-------- -------- --------
Deferred policy acquisition costs, end of year.............. $ 4,140 $ 2,939 $ 3,884
======== ======== ========
</TABLE>

(h) Federal Income Tax

Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
bases of assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period in which the change is enacted.

E-28
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(i) Goodwill and Other Intangible Assets

Goodwill is the excess of the fair value of consideration paid for
companies acquired over the fair value of the related net assets acquired.
Goodwill is amortized using the straight-line method over periods not exceeding
20 years.

Intangible assets relate to the acquisition of licenses, customer lists,
non-compete agreements, and employment agreements and are amortized using the
straight-line method over periods not exceeding 20 years.

(j) Liability for Losses and Loss Adjustment Expenses

The liability for losses and loss adjustment expenses represents estimates
of the ultimate unpaid cost of all claims incurred through December 31,
including claims incurred but not yet reported. These estimates are based upon
historical experience of the business written by the Company and other direct
writers reinsured by the Company, adjusted for current trends. Management
believes that the provision for losses and loss adjustment expenses is adequate
to cover the ultimate liability; however, such estimates may be more or less
than the amount ultimately paid when the claims are settled. Reinsurance
recoverables on unpaid losses and ceded unearned premiums are reported as assets
instead of netting these against related reserves (see note 4).

(k) Premium Recognition

Insurance premiums are recognized as revenue ratably over the terms of the
policies. Unearned premiums are computed on the daily pro rata basis.
Prospective reinsurance premiums, losses and loss adjustment expenses are
accounted for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts.

(l) Foreign Exchange

Assets and liabilities relating to foreign operations are translated to
U.S. dollars using current exchange rates. Revenues and expenses are translated
to U.S. dollars using the average exchange rate as determined on a yearly basis.
Translation adjustments for financial reporting in U.S. dollars are reported
directly in stockholders' equity.

(m) Commission Income

The Company recognizes commission income when the premiums are billed to
the customer, or the effective date of the policy, whichever is later.

(n) Stock-Based Compensation

The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 ("APB No. 25") and related Interpretations in
accounting for its stock-based compensation plans. Accordingly, no compensation
cost has been recognized as the exercise prices of the options equaled the
market prices at the grant dates. The effect of recording compensation cost for
the Company's stock-based compensation plans based on the fair value method in
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") results in net income and earnings
per share that are not materially different from amounts reported.

(o) Earnings Per Share

Basic earnings per share are computed based upon the weighted average
number of shares of common stock outstanding each year. Diluted earnings per
share are computed based upon the weighted average number of shares of common
stock and common stock equivalents (to the extent dilutive) outstanding each
year. Common stock equivalents consist of shares issuable under the Company's
stock option plan.

E-29
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1998, as a result of the net loss, the incremental shares from assumed
conversions at average market price are antidilutive and are therefore excluded
from diluted earnings per share.

The computations of basic and diluted earnings per share are presented
below (in thousands for net income):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Basic earnings per share:
Net income (loss)......................................... $ (3,372) $ 31,788 $ 6,404
Average common shares outstanding......................... 7,609,773 7,670,759 7,645,578
--------- --------- ---------
Per common share amount................................... $ (0.44) $ 4.14 $ 0.84
========= ========= =========
Diluted earnings per share:
Net income (loss)......................................... $ (3,372) $ 31,788 $ 6,404
Average common shares outstanding......................... 7,609,773 7,670,759 7,645,578
Incremental shares from assumed conversions at average
market price........................................... -- 6,702 11,011
--------- --------- ---------
7,609,773 7,677,461 7,656,589
--------- --------- ---------
Per common share amount................................... $ (0.44) $ 4.14 $ 0.84
========= ========= =========
</TABLE>

(p) Comprehensive Income

The Company adopted SFAS No. 130 "Reporting Comprehensive Income" ("SFAS
No. 130") in 1998. SFAS No. 130 requires net unrealized gains or losses on
investments and net foreign exchange translation adjustments, which previously
were reported directly in stockholders' equity, to be included in accumulated
other comprehensive income in the consolidated balance sheets and in the
disclosure of comprehensive income. The totals of other comprehensive income
items and comprehensive income (which includes net income), are displayed
separately in the consolidated statements of stockholders' equity. The adoption
of SFAS No. 130 had no effect on net income (loss) or stockholders' equity. The
components of other comprehensive income (loss), and the related tax effects are
as follows (in thousands):

<TABLE>
<CAPTION>
AMOUNT INCOME TAX AMOUNT
BEFORE (EXPENSE) NET OF
YEAR ENDED DECEMBER 31, 1998 TAXES BENEFIT TAXES
---------------------------- ------ ---------- ------
<S> <C> <C> <C>
Unrealized holdings gains arising during the
year............................................. $ 467 $(159) $ 308
Less: Reclassification adjustment.................. 1,041 (354) 687
------ ----- -----
Net unrealized investment loss..................... (574) 195 (379)
Foreign currency translation adjustment............ (68) 23 (45)
------ ----- -----
Total other comprehensive loss..................... $ (642) $ 218 $(424)
====== ===== =====
</TABLE>

<TABLE>
<CAPTION>
AMOUNT INCOME TAX AMOUNT
BEFORE (EXPENSE) NET OF
YEAR ENDED DECEMBER 31, 1997 TAXES BENEFIT TAXES
---------------------------- ------ ---------- ------
<S> <C> <C> <C>
Unrealized holdings gains arising during the
year............................................. $3,700 $(1,258) $2,442
Less: Reclassification adjustment.................. (116) 39 (77)
------ ------- ------
Net unrealized investment gain..................... 3,816 (1,297) 2,519
Foreign currency translation adjustment............ 1,517 (516) 1,001
------ ------- ------
Total other comprehensive income................... $5,333 $(1,813) $3,520
====== ======= ======
</TABLE>

E-30
<PAGE> 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
AMOUNT INCOME TAX AMOUNT
BEFORE (EXPENSE) NET OF
YEAR ENDED DECEMBER 31, 1996 TAXES BENEFIT TAXES
---------------------------- ------ ---------- ------
<S> <C> <C> <C>
Unrealized holdings losses arising during the
year............................................ $(1,297) $ 441 $(856)
Less: Reclassification adjustment................. 117 (40) 77
------- ----- -----
Net unrealized investment loss.................... (1,414) 481 (933)
Foreign currency translation adjustment........... 305 (104) 201
------- ----- -----
Total other comprehensive loss.................... $(1,109) $ 377 $(732)
======= ===== =====
</TABLE>

Components of accumulated other comprehensive income at December 31, 1998,
1997 and 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net unrealized gain (loss) on foreign currency
translation........................................ $ (22) $ 23 $ (978)
Net unrealized gain (loss) on securities............. 1,774 2,153 (366)
------ ------ -------
Accumulated other comprehensive income (loss)........ $1,752 $2,176 $(1,344)
====== ====== =======
</TABLE>

(q) Segment Reporting

The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131") in 1998. SFAS No. 131
supersedes SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position, but did affect the disclosure of segment
information (see note 20).

(r) Impact of New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
which is required to be adopted in years beginning after June 15, 1999. SFAS No.
133 permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new statement effective January 1,
2000. The Company does not anticipate that the adoption of SFAS No. 133 will
have a significant effect on its results of operations or financial position, as
it currently does not use derivative instruments.

(s) Reclassifications

Certain reclassifications have been made to the prior years' financial
statements to conform with the current presentation.

E-31
<PAGE> 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) INVESTMENTS

Amortized cost, unrealized gains and losses, and estimated fair value of
investments as of December 31, 1998 and 1997, are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and Agency obligations............. $19,668 $ 342 $(27) $19,983
State, municipal, and other tax advantaged
securities...................................... 19,262 698 (2) 19,958
Corporate securities............................... 18,762 597 (24) 19,335
Other.............................................. 298 10 -- 308
------- ------ ---- -------
Total fixed maturities............................... 57,990 1,647 (53) 59,584
Equity securities.................................... 3,761 1,098 (3) 4,856
------- ------ ---- -------
Total................................................ $61,751 $2,745 $(56) $64,440
======= ====== ==== =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and Agency obligations............. $23,139 $ 137 $ (81) $23,195
State, municipal, and other tax advantaged
securities...................................... 20,774 538 (15) 21,297
Corporate securities............................... 14,649 257 (22) 14,884
Other.............................................. 1,252 48 1,300
------- ------ ----- -------
Total fixed maturities............................... 59,814 980 (118) 60,676
Equity securities.................................... 1,833 2,428 (27) 4,234
------- ------ ----- -------
Total................................................ $61,647 $3,408 $(145) $64,910
======= ====== ===== =======
</TABLE>

Amortized cost and estimated fair value for fixed maturities held as of
December 31, 1998, summarized by maturity, are as follows (in thousands):

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less.................................... $ 1,835 $ 1,855
Due after one year through five years...................... 24,104 24,477
Due after five years through ten years..................... 29,516 30,531
Due after ten years........................................ 2,535 2,721
------- -------
$57,990 $59,584
======= =======
</TABLE>

Actual maturities may differ from contractual maturities because certain
borrowers may have the right to call or to prepay obligations with or without
call or prepayment penalties. Investment securities carried at $9.9 million and
$9.4 million at December 31, 1998 and 1997, respectively, were on deposit or
pledged to governmental authorities as required by law.

E-32
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The sources of net investment income are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturities in excess of one year................ $3,646 $3,470 $3,001
Short-term investments and cash equivalents........... 2,493 1,611 976
Equity securities..................................... 182 141 169
Investment expenses................................... (199) (311) (161)
------ ------ ------
Net investment income................................. $6,122 $4,911 $3,985
====== ====== ======
</TABLE>

The sources of net realized gains are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Gain on sale of Kingsway common stock................ $ 892 $49,443 $2,394
Gain on sale of subsidiaries......................... 1,102 -- --
Fixed maturities:
Gross gains........................................ 117 94 228
Gross losses....................................... (8) (178) (46)
Equity securities:
Gross gains........................................ 41 -- 10
Gross losses....................................... (1) (32) (75)
Other................................................ (4) (456) (132)
------ ------- ------
Realized investment gains............................ $2,139 $48,871 $2,379
====== ======= ======
</TABLE>

At December 31, 1998 and 1997, the net unrealized gains on
available-for-sale securities were net of deferred tax liabilities of $915
thousand and $1.1 million, respectively. At December 31, 1996, the net
unrealized loss on available-for-sale securities was net of a deferred tax
benefit of $189 thousand.

(4) REINSURANCE

In the normal course of business, the Company assumes and cedes reinsurance
with other insurers. Reinsurance is ceded primarily to limit losses from large
exposures and to permit recovery of a portion of direct losses; however, such a
transfer does not relieve the originating insurance company of contingent
liability.

The majority of the Company's ceded reinsurance is placed with a limited
number of reinsurers; however, the Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk to minimize its
exposure to significant losses from insolvencies. A contingent liability exists
to the extent that the Company's reinsurers are unable to meet their contractual
obligations. Management makes provision for uncollectible reinsurance when
warranted and is of the opinion that no additional liability will accrue to the
Company with respect to this contingency. The effects of reinsurance on premiums
written, premiums earned,

E-33
<PAGE> 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and loss and loss adjustment expenses incurred for the three years ended
December 31, 1998, 1997, and 1996, are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 DIRECT CEDED ASSUMED NET
---------------------------- ------ ----- ------- ---
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Premiums written......................................... $66,778 $12,894 $1,637 $55,521
Premiums earned.......................................... 62,868 12,902 2,498 52,464
Loss and loss adjustment expenses incurred............... 42,369 11,330 1,629 32,668
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------
<S> <C> <C> <C> <C>
Premiums written......................................... 67,602 14,909 4,499 57,192
Premiums earned.......................................... 67,802 14,548 4,156 57,410
Loss and loss adjustment expenses incurred............... 42,641 8,730 934 34,845
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------
<S> <C> <C> <C> <C>
Premiums written......................................... 67,933 12,514 3,034 58,453
Premiums earned.......................................... 68,206 10,163 3,010 61,053
Loss and loss adjustment expenses incurred............... 45,500 14,910 1,717 32,307
</TABLE>

(5) INCOME TAX

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current............................................ $ -- $18,859 $ 1,827
Deferred........................................... (2,049) (1,149) (1,072)
------- ------- -------
$(2,049) $17,710 $ 755
======= ======= =======
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the Company's net deferred tax asset at December 31, 1998 and 1997,
are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Loss reserves............................................. $1,736 $ 1,701
Unearned premium reserves................................. 1,064 865
Future benefit of net operating losses.................... 2,173 968
Deferred gain on sale of subsidiaries..................... 1,007 --
Foreign tax credit........................................ 1,235 1,235
Other..................................................... 326 233
Less: valuation allowance................................. (617) (617)
------ -------
Deferred tax assets.................................... 6,924 4,385
------ -------
Deferred tax liabilities:
Deferred policy acquisition costs......................... (1,351) (919)
Unrealized investment gain................................ (915) (1,109)
Depreciation.............................................. (128) (128)
Other..................................................... -- (3)
------ -------
Deferred tax liabilities............................... (2,394) (2,159)
------ -------
Net deferred tax asset................................. $4,530 $ 2,226
====== =======
</TABLE>

E-34
<PAGE> 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The valuation allowance of approximately $617 thousand at December 31, 1998
and 1997 pertains to foreign tax credits. The valuation allowance has been
established to reduce the deferred tax asset related to foreign tax credits to
the amount that, based upon available evidence, is, in management's judgment,
more likely than not to be realized. The foreign tax credit carryforwards begin
expiring in the year 2001.

Net operating losses of IAS ($2.4 million and $2.9 million at December 31,
1998 and 1997, respectively) are considered to have arisen in separate return
limitation years (SRLY) and under Federal tax law can only be utilized against
future taxable income generated by IAS. The Company also has net operating
losses of $4.0 million for the year ended December 31, 1998 that will be carried
forward and utilized against future taxable income of the Company. The net
operating losses of IAS begin expiring in 2004 and the net operating loss of the
Company will expire in 2020.

Income taxes paid (net of taxes recovered) were $201 thousand, $20.6
million, and ($88) thousand in 1998, 1997, and 1996, respectively. The actual
income tax expense for 1998, 1997, and 1996 differed from the "expected" tax
expense for those years as described below (in thousands). "Expected" tax
expense is computed by applying the U.S. Federal corporate tax rate of 35% in
1997 and 34% in 1998 and 1996 to operating income.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed expected tax (benefit)..................... $(1,843) $16,149 $1,260
State taxes......................................... -- 662 57
Difference between book and tax bases of Kingsway
investment........................................ -- 6,313 --
Foreign tax rate differential....................... -- 176 131
Tax exempt interest and dividend received
deduction......................................... (340) (329) (323)
Foreign source income............................... 111 288 207
Deferred tax valuation allowance.................... -- (121) (738)
Tax credits......................................... -- (5,618) --
Other............................................... 23 190 161
------- ------- ------
$(2,049) $17,710 $ 755
======= ======= ======
</TABLE>

The Company and its U.S. subsidiaries file a consolidated tax return.
Federal income tax expenses are calculated on an entity basis and are allocated
accordingly.

(6) RELATED PARTY TRANSACTIONS

Certain of the Company's reinsurers are affiliated insurance companies. The
Company ceded to these affiliates premiums written of $15 thousand, $414
thousand, and $649 thousand in 1998, 1997, and 1996, respectively.

(7) COMMITMENTS AND CONTINGENCIES

During the month of January 1998, the president of IAS resigned and with
several other employees formed Avalon Risk Management, Inc. Avalon's announced
purpose is to compete with IAS in the marketing and distribution of
transportation related insurance and surety products. The Company has filed suit
in the Chancery Division of the Circuit Court of Cook County, Illinois against
the ex-president, Avalon and certain of the defecting employees alleging breach
of fiduciary duty, theft of confidential information and other unlawful
activities, and seeking injunctive relief and damages. The action is pending,
and its outcome at this point is not certain.

E-35
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

fiduciary duties to the Company's shareholders in approving the definitive
agreement to merge between the Company and a subsidiary of XL Capital and that
they failed to adequately explore alternative transactions and maximize
shareholder value. The lawsuit requests, among other things, injunctive relief
and payment of damages to the class members. The Company believes that the
lawsuit is without merit and intends to contest it vigorously.

There are no other significant pending material legal proceedings to which
the Company or its subsidiaries is a party or of which any of the properties of
the Company or its subsidiaries is subject, except for claims arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such litigation will not have a material effect on the financial
condition of the Company.

(8) RECONCILIATIONS TO STATUTORY ACCOUNTING

The Company's insurance subsidiaries are required to file statutory
financial statements with insurance regulatory authorities. Accounting
principles used to prepare these statutory financial statements differ from
financial statements prepared on the basis of generally accepted accounting
principles.

Reconciliations of combined net income (loss) and statutory capital and
surplus as determined using statutory accounting principles to the amounts
included in the accompanying financial statements are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory net income (loss) of insurance
subsidiaries..................................... $(2,979) $(1,312) $ 2,645
Increases (decreases):
Net income (loss) from non-insurance
operations.................................... (4,012) 32,512 3,323
Deferred policy acquisition costs................ 1,212 (933) (1,034)
Deferred income taxes............................ 2,109 1,149 1,072
Provision for uncollectible balances............. 400 4 139
Consolidating eliminations and other adjustments,
net........................................... (102) 368 259
------- ------- -------
Consolidated net income (loss) as reported
herein........................................... $(3,372) $31,788 $ 6,404
======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Statutory capital and surplus of insurance subsidiaries.... $32,615 $34,357
Increases (decreases):
Non-insurance net assets................................. 27,723 35,578
Non-admitted assets and other statutory adjustments,
net................................................... 1,335 1,888
Deferred policy acquisition costs........................ 4,140 2,939
Costs in excess of net assets of purchased businesses.... 393 1,991
Deferred income taxes.................................... 4,530 2,226
Unrealized gain (loss) on foreign currency translation... (22) 23
Adjustment to GAAP fair values of investments............ 2,665 3,249
Consolidating eliminations and other adjustments......... (404) (50)
------- -------
Stockholders' equity as reported herein.................... $72,975 $82,201
======= =======
</TABLE>

The statutory capital and surplus of the Company's U.S. insurance
subsidiary is sufficient to satisfy current regulatory requirements. Dividend
payments to the Company from its insurance subsidiary are restricted by
insurance laws as to the amount that may be paid without prior approval of
insurance regulatory authorities. Under the insurance regulations of Illinois,
IIC's state of domicile, ordinary dividends are limited to the greater of (i)
10% of statutory surplus or (ii) statutory net income, as defined, for the prior
twelve

E-36
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

month period. The estimated dividend distribution which can be made to the
Company by its subsidiary in 1999 based on these regulatory guidelines is
approximately $3.3 million.

The Company's U.S. insurance subsidiary, IIC, is required to file annual
statements with insurance regulatory authorities which are prepared on an
accounting basis prescribed or permitted by such authorities. Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices differ from state to state, may differ from company to company within
a state, and may change in the future. IIC does not currently use permitted
statutory accounting practices in its statutory financial statements.
Furthermore, the NAIC has completed a project to codify statutory accounting
practices ("Codification"), the result of which will constitute the only source
of "prescribed" statutory accounting practices after December 31, 2000. Upon
adoption by the State of Illinois, Codification will change the definition of
what comprises prescribed versus permitted statutory accounting practices, and
will result in changes to the accounting policies that insurance enterprises use
to prepare their statutory financial statements.

(9) UNAUDITED INTERIM FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Revenues........................................... $13,496 $16,065 $15,397 $16,338
------- ------- ------- -------
Net income (loss).................................. 369 1,331 (771) (4,301)
======= ======= ======= =======
Net income (loss) per share, basic and diluted..... $ 0.05 $ 0.17 $ (0.10) $ (0.59)
======= ======= ======= =======
1997
Revenues........................................... $14,981 $15,140 $63,220 $18,817
------- ------- ------- -------
Net income from operations......................... $ 828 $ 608 $26,978 $ 17
Net income from investee........................... 967 1,436 954 --
------- ------- ------- -------
Net income......................................... $ 1,795 $ 2,044 $27,932 $ 17
======= ======= ======= =======
Net income per share, basic and diluted............ $ 0.23 $ 0.27 $ 3.64 $ 0.00
======= ======= ======= =======
</TABLE>

During the fourth quarter of 1998 the Company increased its loss reserves
by $4.2 million on a pre-tax basis for emerging development on marine, other
property and casualty, and professional liability lines of business. The Company
incurred $1.0 million of pre-tax expenses related to the merger agreement with a
subsidiary of XL Capital Ltd. The Company also increased its bad debt reserves
by $761 thousand and wrote off certain intangible assets of $390 thousand
related to its agency business. The Company realized a pre-tax gain of $504
thousand on sales of Kingsway shares.

(10) STOCK OPTIONS

On July 28, 1987, the Company's stockholders approved the Company's 1987
Non-Qualified and Incentive Stock Option Plan ("Option Plan"). The Option Plan
has been extended through May 15, 2007. A total of 600 thousand shares of common
stock have been authorized for issuance under the Option Plan.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumption used for grants in 1998, 1997 and 1996, respectively: dividend yields
of 1.9 percent, 1.9 percent and 2.1 percent; risk free interest rates of 5.5
percent,

E-37
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5.5 percent and 6.2 percent; expected volatility of 40 percent, 43 percent and
38 percent; and expected lives of 2.5 years, 4.5 years and 4.5 years.

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss)................................. $(3,464) $31,762 $6,379
Pro forma net income (loss) per share, basic and diluted.... $ (0.46) $ 4.14 $ 0.83
</TABLE>

Activity related to stock options is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at the beginning of
the year............................. 99,650 $11.62 155,000 $11.51 183,000 $10.93
Options granted........................ 116,500 12.08 44,650 10.74 6,000 8.33
Options exercised...................... -- -- (40,000) 6.50 (19,000) 5.00
Options forfeited...................... 20,250 12.34 (60,000) 14.08 (15,000) 11.50
------- ------ ------- ------ ------- ------
Options outstanding at the end of the
year................................. 195,900 $11.82 99,650 $11.62 155,000 $11.51
======= ====== ======= ====== ======= ======
Options exercisable at the end of the
year................................. 42,913 27,000 94,000
======= ======= =======
Weighted average fair value of options
granted during the year.............. $ 3.32 $ 3.93 $ 2.87
====== ====== ======
</TABLE>

Options outstanding and options exercisable at December 31, 1998 are as
follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$8.00 -- 14.50.................. 195,900 8.1 years $11.82 42,913 $12.54
</TABLE>

(11) COMMITMENTS

The Company has obligations under long-term operating leases for its office
premises in the United States, Hong Kong, and the United Kingdom. The future
minimum lease payments are as follows (in thousands):

<TABLE>
<S> <C>
1999........................................................ $1,221
2000........................................................ 1,192
2001........................................................ 1,006
2002........................................................ 144
2003........................................................ 74
Thereafter.................................................. --
------
$3,637
======
</TABLE>

E-38
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Included in other underwriting expenses is rental expense of $1.4 million,
$1.7 million, and $1.5 million for 1998, 1997, and 1996, respectively.

(12) CAPITALIZATION

At December 31, 1996, the Company had a $15.0 million revolving bank line
of credit. The outstanding balance on the line of credit amounted to
approximately $9.7 million. In August 1997, this balance was extinguished using
a portion of the proceeds from the Company's sale of a significant part of its
holdings in Kingsway. The revolving line of credit has been discontinued.

The Company paid interest of $0, $489 thousand and $768 thousand in 1998,
1997 and 1996, respectively.

(13) SUPPLEMENTAL DUTY DEPOSITS

Supplemental duty deposits are security deposits held by IAS until the
insured bond principal (Depositor) has settled duty charges imposed by U.S.
Customs. Under the terms of the agreement with the Depositor, the Depositor is
not entitled to a refund of its deposit until it has provided competent written
legal evidence that the conditions of each and every bond connected with the
deposit have been fully satisfied.

(14) DOMESTIC AND FOREIGN OPERATIONS

Revenues, operating income, and identifiable assets included in the
accompanying consolidated financial statements related to U.S. and foreign
operations as of and for the years ended December 31, 1998, 1997, and 1996, were
as follows (in thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
U.S. FOREIGN U.S. FOREIGN U.S. FOREIGN
---- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 55,501 $ 5,796 $107,227 $4,932 $ 64,365 $3,876
Operating income (loss).............. (5,095) (326) 46,827 (686) 3,782 (77)
Identifiable assets.................. 152,896 10,504 155,443 9,969 124,199 9,511
</TABLE>

(15) LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Loss and loss adjustment expense reserves are based on long-range
projections which are subject to uncertainty. Uncertainty regarding reserves of
a given accident year is gradually reduced as new information emerges each
succeeding year, allowing more reliable reevaluations of such reserves. While
management believes that reserves as of December 31, 1998 are adequate,
uncertainties in the reserving process could cause such reserves to develop
favorably or unfavorably as new or additional information emerges. Any
adjustments to reserves are reflected in the operating results of the periods in
which they are made. Movements in reserves which are small relative to the
amount of such reserves could significantly impact future reported earnings of
the Company.

E-39
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Activity related to unpaid loss and loss adjustment expenses (LAE) follows
(in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unpaid losses and LAE at beginning
of year, net of reinsurance recoverables of $11,970,
$9,980, and $3,138........................................ $ 43,385 $ 37,057 $ 33,155
Provision for losses and LAE for claims occurring during:
Current year.............................................. 31,680 34,260 31,876
Prior years............................................... 988 585 431
-------- -------- --------
Total.................................................. 32,668 34,845 32,307
-------- -------- --------
Less loss and LAE payments for claims occurring during:
Current year.............................................. (10,646) (10,896) (10,798)
Prior years............................................... (20,873) (17,621) (17,607)
-------- -------- --------
Total.................................................. (31,519) (28,517) (28,405)
-------- -------- --------
Unpaid losses and LAE at end of year, net of reinsurance
recoverables of $11,980, $11,970 and $9,980............... $ 44,534 $ 43,385 $ 37,057
======== ======== ========
</TABLE>

(16) EMPLOYEE BENEFIT PLAN

The Company sponsors a defined contribution plan covering substantially all
employees. The plan provides for Company contributions at the discretion of the
board of directors. For 1998, the Company contributed $1.00 for each $1.00
contributed by the participants up to 2.5% of employee base compensation. For
1997 and 1996, the Company contributed $0.50 for each $1.00 contributed by the
participants up to 5% of employee base compensation. The Company's cost of this
plan was $201 thousand, $139 thousand, and $116 thousand in 1998, 1997 and 1996,
respectively.

(17) FINANCIAL INSTRUMENTS

In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. As a number of the Company's significant assets and
liabilities are not considered financial instruments, the disclosures that
follow do not reflect the fair value of the Company as a whole.

The estimated fair values of the Company's financial instruments at
December 31, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- -----
<S> <C> <C>
Assets:
Fixed maturities......................................... $59,584 $59,584
Equity securities........................................ 4,856 4,856
Cash and cash equivalents................................ 39,087 39,087
Premiums receivable...................................... 19,306 19,306
Reinsurance recoverable on paid claims................... 4,115 4,115
Notes receivable......................................... 3,587 3,587
Income tax recoverable................................... 895 895
Liabilities:
Funds held by Company.................................... 422 422
Supplemental duty deposits............................... 1,703 1,703
</TABLE>

E-40
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The estimated fair values of the Company's financial instruments at
December 31, 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- -----
<S> <C> <C>
Assets:
Fixed maturities......................................... $60,676 $60,676
Equity securities........................................ 4,234 4,234
Cash and cash equivalents................................ 49,400 49,400
Premiums receivable...................................... 15,677 15,677
Reinsurance recoverable on paid claims................... 1,137 1,137
Notes receivable......................................... 99 99
Income tax recoverable................................... 1,365 1,365
Liabilities:
Funds held by Company.................................... 372 372
Supplemental duty deposits............................... 2,016 2,016
</TABLE>

Fixed maturities and equity securities are valued at quoted market prices,
where available, or from independent pricing sources. Cash and cash equivalents,
premiums receivable, reinsurance recoverable on paid claims, funds held, income
tax recoverable and supplemental duty deposits are valued at their carrying
value due to their short-term nature. The carrying value of notes receivable
approximates fair value as the notes bear floating rates of interest or are at
current market rates.

(18) FOREIGN CURRENCY TRANSLATION

The net assets of the Company's foreign operations are translated into U.S.
dollars using exchange rates in effect at each year end. An analysis of the
foreign currency translation adjustment included in other comprehensive income
is as follows (amounts in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Beginning amount of cumulative translation
adjustments......................................... $ 23 $ (978) $(1,179)
Included in Kingsway's basis at sale.................. 18 1,045 189
Aggregate adjustment for the year resulting from
translation adjustments............................. (63) (44) 12
---- ------ -------
Net aggregate translation adjustment included in
stockholders' equity................................ (45) 1,001 201
---- ------ -------
Ending amount of cumulative translation adjustments... $(22) $ 23 $ (978)
==== ====== =======
</TABLE>

(19) INVESTMENT IN KINGSWAY

Kingsway is a property and casualty insurance holding company based in
Canada which primarily writes and assumes commercial and other automobile
insurance considered to be non-standard, and other specialty insurance for
commercial properties through its 100% owned subsidiaries, Kingsway General
Insurance Company and York Fire & Casualty Insurance Company.

E-41
<PAGE> 124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following presents summary financial data for Kingsway for the year
ended December 31, 1996 (in thousands).

<TABLE>
<S> <C>
Revenues:
Net premiums earned....................................... $78,972
Other revenues............................................ 8,103
-------
Total revenues.................................... 87,075
-------
Expenses:
Claims incurred........................................... 51,257
Other expenses............................................ 24,263
-------
Total expenses.................................... 75,520
-------
Income before income taxes.................................. 11,555
Income taxes................................................ 3,369
-------
Net income.................................................. $ 8,186
=======
</TABLE>

(20) BUSINESS SEGMENTS

DESCRIPTION OF THE TYPES OF PRODUCTS FROM WHICH EACH REPORTABLE SEGMENT DERIVES
ITS REVENUES

The Company has four operating segments based on the type of product and a
fifth nonoperating segment. The operating segments are: surety, marine,
professional liability and other property and casualty. The surety segment
provides various surety coverages, primarily U.S. Customs bonds, contract surety
and miscellaneous surety. The marine segment provides ocean and inland marine
cargo coverage and bill of lading liability coverage. The professional liability
segment provides professional liability coverage for customs brokers and freight
forwarders. The other property and casualty segment provides commercial property
and casualty products to customs brokers, freight forwarders and other service
firms engaged in the international movement of cargo. It also provides such
products to meet the needs of the trucking industry.

MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes.
Revenues are all from external customers. Indirect costs of support units are
allocated to segments. Investment income and realized investment gains are not
allocated to segments and such income is not a component used to evaluate
segments. Invested assets and cash are not allocated to segments.

E-42
<PAGE> 125
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FACTORS USED TO IDENTIFY THE ENTERPRISES REPORTABLE SEGMENTS

The Company's reportable segments are business units that each offer
different types of insurance coverage with different types of risk exposures.

<TABLE>
<CAPTION>
OTHER
PROFESSIONAL PROPERTY &
SURETY MARINE LIABILITY CASUALTY ALL OTHER TOTAL
------ ------ ------------ ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
1998
REVENUES:
Insurance Premium Income.............. $17,398 $25,791 $ 2,674 $ 6,601 $ 52,464
Investment Income & Realized Gains.... $ 8,261 $ 8,261
Other Revenues........................ 572 572
------- ------- ------- ------- -------- --------
Total Revenues........................ 17,398 25,791 2,674 6,601 8,833 61,297
Losses and LAE........................ 4,124 19,832 3,490 5,222 32,668
Amortization & Depreciation........... 458 487 118 171 630 1,864
Other Expenses........................ 10,551 11,894 2,071 3,448 4,222 32,186
------- ------- ------- ------- -------- --------
Operating Income (Loss)............... 2,265 (6,422) (3,005) (2,240) 3,981 (5,421)
Identifiable Assets................... $13,279 $16,295 $10,864 $ 8,168 $114,794 $163,400
------- ------- ------- ------- -------- --------
1997
REVENUES:
Insurance Premium Income.............. $17,947 $27,906 $ 3,206 $ 8,351 $ 57,410
Investment Income & Realized Gains.... $ 53,782 53,782
Other Revenues........................ 967 967
------- ------- ------- ------- -------- --------
Total Revenues........................ 17,947 27,906 3,206 8,351 54,749 112,159
Losses and LAE........................ 5,087 19,482 3,752 6,524 34,845
Amortization & Depreciation........... 568 522 259 172 1,521
Interest Expense...................... 488 488
Other Expenses........................ 11,211 11,501 1,574 4,173 705 29,164
------- ------- ------- ------- -------- --------
Operating Income (Loss)............... 1,081 (3,599) (2,379) (2,518) 53,556 46,141
Identifiable Assets................... $13,926 $14,719 $ 5,656 $ 9,124 $121,987 $165,412
------- ------- ------- ------- -------- --------
1996
REVENUES:
Insurance Premium Income.............. $25,846 $26,932 $ 2,644 $ 5,631 $ 61,053
Investment Income & Realized Gains.... $ 6,364 6,364
Other Revenues........................ 824 824
------- ------- ------- ------- -------- --------
Total Revenues........................ 25,846 26,932 2,644 5,631 7,188 68,241
Losses and LAE........................ 7,455 17,759 2,714 4,379 32,307
Amortization & Depreciation........... 616 706 58 166 1,546
Interest Expense...................... 768 768
Other Expenses........................ 13,561 11,830 1,187 2,989 348 29,915
------- ------- ------- ------- -------- --------
Operating Income (Loss)............... 4,214 (3,363) (1,315) (1,903) 6,072 3,705
Identifiable Assets................... $17,755 $12,876 $ 3,302 $ 7,525 $ 92,252 $133,710
------- ------- ------- ------- -------- --------
</TABLE>

E-43
<PAGE> 126
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On February 26, 1997, the Board, upon the advice of its Audit Committee,
elected to not retain KPMG LLP as its independent public accountant for fiscal
year 1997. The decision to change accountants was based upon a cost analysis of
services provided. There were no disagreements between management of the Company
and the former accountants on any matters of accounting principles or practices,
financial statement disclosures, or auditing scopes or procedures during fiscal
years 1996 and 1995 or any subsequent interim period preceding the dismissal.
The accountant's reports on the financial statements of the Company in the 1996
and 1995 fiscal years were unqualified, not modified as to uncertainty, audit
scope or accounting principles, and did not express any adverse opinion or
disclaimer of opinion. KPMG LLP issued a letter dated February 21, 1997 to the
Board of Directors of the Company describing a material weakness in internal
control as detail accounts receivable and intercompany receivables and payables
were not properly reconciled on a regular basis.

In addition, on February 26, 1997, the Audit Committee recommended, and the
Board of Directors approved, the appointment of Ernst & Young LLP as the
Company's new independent accountants, effective for fiscal 1997. This
appointment was ratified by stockholders on May 15, 1997. The selection of Ernst
& Young LLP was through a request for proposal process with no consideration
requested or made on the application of accounting principles, the type of audit
opinion that might be rendered on the financial statements, or any other factor
for reaching a decision as to accounting, auditing or financial reporting
issues.

E-44
<PAGE> 127

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table lists the directors of the Company.

<TABLE>
<CAPTION>
POSITION WITH COMPANY, BUSINESS
NAME AGE EXPERIENCE AND OTHER DIRECTORSHIPS
---- --- ----------------------------------
<S> <C> <C>
George J. Weise...................... 50 Director of the Company since October 1997. Mr. Weise
has been a partner in the firm of Washington Counsel,
P.C. since August 1997. From 1993 through August 2,
1997, Mr. Weise was a U.S. Customs Commissioner.
Michael L. Sklar..................... 60 Director of the Company since May 1995. Mr. Sklar has
practiced law in Chicago, Illinois for more than 25
years. Mr. Sklar is currently, and since 1996 has been,
a partner of the law firm of Rudnick & Wolfe. From 1989
through March 1996, Mr. Sklar was a partner in the law
firm of Keck, Mahin & Cate. In 1998, Rudnick & Wolfe
served as principal outside legal counsel to the
Company.
Robert B. Sanborn.................... 70 Director of the Company since February 1994. Mr.
Sanborn is, and since 1994 has been, Senior Executive
Consultant to Orion Capital Corporation ("Orion"), a
property and casualty insurance company. From 1987
through 1994, Mr. Sanborn served as the President and
Chief Operating Officer of Orion. Mr. Sanborn is also a
director of Orion, Guaranty National Corporation, Nobel
Insurance Limited, and HOG Lloyd's Investment Trust,
and is a member of many professional associations
within the insurance industry.
Arthur J. Fritz, Jr.................. 58 Director of the Company since December 1985. Mr. Fritz
is a former President of the National Customs Brokers &
Forwarders Association of America. Mr. Fritz is
currently the Chairman of Logicorp Inc., and is a
director of Arkansas Best Corporation and Landstar,
Inc.
Arthur L. Litman..................... 55 Director of the Company since December 1985. Mr. Litman
is currently Vice President for Regulatory Affairs and
Compliance Services for Tower Group International, Inc.
("Tower Group"), a position he has held since March
1996. From 1991 to March 1996 Mr. Litman was Vice
President for the Western Region for Tower Group. Mr.
Litman is a past President and senior counsel for the
board of the National Customs Brokers & Forwarders
Association of America.
Albert J. Gallegos................... 57 Director of the Company since January 1988. Since 1986,
Mr. Gallegos has been an independent consultant to the
insurance industry.
Kenneth A. Bodenstein................ 62 Director of the Company since September 1987. Mr.
Bodenstein has served as Senior Vice President and
Managing Director of Duff & Phelps Financial Consulting
Co., a financial services company, for more than the
past five years.
</TABLE>

E-45
<PAGE> 128

<TABLE>
<CAPTION>
POSITION WITH COMPANY, BUSINESS
NAME AGE EXPERIENCE AND OTHER DIRECTORSHIPS
---- --- ----------------------------------
<S> <C> <C>
Stanley A. Galanski.................. 40 Mr. Galanski was elected President and Chief Executive
Officer and appointed a director of the Company on July
7, 1997. From February 1995 to June 1997, Mr. Galanski
was President of New Hampshire Insurance Company, a
property and casualty insurer. From July 1980 to
January 1995 Mr. Galanski served in various capacities
with the Chubb Group of Insurance Companies.
</TABLE>

THE BOARD OF DIRECTORS AND ITS STANDING COMMITTEES

The Company's Board of Directors has the responsibility to review the
overall operations and proposed plans and business objectives of the Company.
The Board meets regularly four times each year, once each quarter. During 1998,
the Board met 4 times, and on 8 occasions there were telephonic special
meetings. All directors attended at least 75% of the aggregate of the total
number of meetings of the Board of Directors and meetings held by each committee
of the Board on which such directors served, except for Mr. Fritz, who
participated by telephone.

The Board has a standing Executive Committee, Audit Committee, Compensation
and Stock Option Committee and Investment Committee.

The Executive Committee was formed in December 1996, to review and monitor
ongoing activity as deemed appropriate between quarterly meetings of the Board
of Directors. The Executive Committee reports directly to the Board and is
comprised of Mr. Galanski and three non-employee directors, Messrs. Sanborn,
Bodenstein and Sklar. There were three meetings of the Executive Committee in
1998.

The Audit Committee recommends to the Board the appointment of the
independent certified public accountants for the following year. The Audit
Committee reviews with the auditors: (i) the scope of the Company's annual
audit, (ii) the annual financial statements of the Company and the auditors'
report with respect thereto, (iii) corporate and accounting practices and
policies, and (iv) overall accounting and financial controls. In addition, the
Audit Committee is available to the independent auditors during the year for
consultation purposes. The Committee, which reports directly to the Board, is
comprised of four non-employee directors, Messrs. Bodenstein, Gallegos, Weise
and Fritz. The Audit Committee met two times during 1998.

The Compensation and Stock Option Committee reviews recommendations
regarding overall salaries and compensation of Company officers and certain key
employees and is responsible for awarding stock options to those officers and
key employees under, and administering, the Company's 1987 Non-Qualified and
Incentive Stock Option Plan. This Committee also reviews the President's
performance pursuant to the Executive Incentive Compensation Plan. The
Compensation and Stock Option Committee reports directly to the Board and is
comprised of four non-employee directors, Messrs. Litman, Weise, Sanborn and
Fritz. The Compensation and Stock Option Committee met two times during 1998.

The Investment Committee develops investment policies for the Company and
reviews performance of the investment portfolio and management thereof. The
Investment Committee reports directly to the Board and is comprised of Mr.
Galanski and four non-employee directors, Messrs. Gallegos, Sklar, Bodenstein
and Litman. The Investment Committee met once during 1998.

All directors whose terms are not expiring serve as the ad hoc Nominating
Committee of the Board for the purpose of considering nominees to the Board of
Directors. The Company's by-laws set forth the required procedure for
considering nominees recommended by stockholders. Director nominations by
stockholders for the annual meeting must be delivered to the Company's Secretary
either by personal delivery or certified mail, postage prepaid, return receipt
requested, 90 days in advance of the annual meeting. Each such notice must set
forth: (a) the name and address of the stockholder who intends to make the
nomination; (b) the person or persons to be nominated; (c) a representation that
the stockholder is a holder of record of stock of the

E-46
<PAGE> 129

Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(d) a description of all arrangements or understandings between the stockholder
and each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (e) such other information regarding each nominee proposed by such
stockholder which would be required to be included in a proxy or information
statement filed with the Securities and Exchange Commission pursuant to the
proxy rules promulgated under the Securities Exchange Act of 1934, as amended,
or any successor statutes thereto, had the nominee been nominated or intended to
be nominated by the Board; and (f) the manually signed consent of each nominee
to serve as a Director of the Company if elected. The presiding officer of the
meeting of the Stockholders may refuse to acknowledge the nomination of any
person not made in compliance with the foregoing procedures.

DIRECTORS' COMPENSATION

The Company pays directors fees in the amount of $2,000 per meeting of the
Board and $750 for any committee meeting other than the Executive committee, for
which fees are $1,250 per meeting. During 1998, all committee meetings were held
in conjunction with Board meetings, except those of the Executive Committee.

Each director who is not an employee of the Company is entitled to receive
annually non-qualified options to purchase 1,000 shares of Common Stock on the
date of the Board meeting first following the date of the Annual Meeting of
Stockholders. The exercise price of such options is the fair market value of a
share of Common Stock on the date of grant of the option. Options granted under
this program vest in four equal annual installments beginning the third
anniversary of the date of grant. On August 10, 1998 each of Messrs. Sanborn,
Fritz, Litman, Gallegos, Bodenstein, Weise and Sklar were granted options under
this program.

E-47
<PAGE> 130

EXECUTIVE OFFICERS

The following table lists all current non-director executive officers of
the Company. Executive Officers are elected to serve until their successors are
duly elected and qualified.

<TABLE>
<CAPTION>
POSITION WITH COMPANY, BUSINESS
NAME AGE EXPERIENCE AND OTHER DIRECTORSHIPS
---- --- ----------------------------------
<S> <C> <C>
Robert S. Kielbas.................... 48 Mr. Kielbas is currently Senior Vice President
International Business Development. From April 1, 1996
to September 1, 1997 Mr. Kielbas was the Chief Executive
Officer of the Company's Hong King subsidiary. Since
1994, Mr. Kielbas has also served as Director of
International Operations for Intercargo Insurance
Company, the Company's primary U.S. subsidiary ("IIC"),
and until April 1, 1996 was the Managing Director for
the U.K. branch office. From 1987 to 1994 Mr. Kielbas
served as the Vice President-Marine of IIC with
responsibility for developing marine business with
direct shippers and alternative agency arrangements.
Robert M. Lynyak..................... 56 Mr. Lynyak was appointed Senior Vice President of the
Company on February 9, 1998. For over thirty three years
prior to joining the Company, he served in various
capacities at the Chubb Group of Insurance Companies,
most recently as Deputy Chief Underwriting Officer and
Managing Director of Chubb & Son, Inc.
Michael L. Rybak..................... 46 Mr. Rybak has served as Chief Financial Officer,
Secretary and Treasurer of the Company since August,
1996. From 1987 to 1996 Mr. Rybak was the Vice
President, Chief Financial Officer of United Chambers
Administrators.
</TABLE>

E-48
<PAGE> 131

ITEM 11. EXECUTIVE COMPENSATION

The Summary Compensation Table below includes, for each of the fiscal years
ended December 31, 1998, 1997 and 1996, individual compensation for services to
the Company and its subsidiaries paid to: (i) the Chief Executive Officer; and
(ii) the other former and continuing executive officers of the Company (the
"1998 Named Executives"). No other executive officer of the Company received
annual compensation in excess of $100,000 in fiscal 1998.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY(1) BONUS(1) OTHER OPTIONS/SARS COMPENSATION
------------------------- ---- --------- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stanley A. Galanski(4)............. 1998 $265,000(4) $ 25,000 (2) 20,000 $ 6,423(10)
Chief Executive Officer and 1997 $147,340 (2) 20,000
President
James R. Zuhlke.................... 1998 $ 79,891(12) -- (2) -- --
Former Chief Executive Officer 1997 $303,797 $ 31,500 (2) -- $69,384(3)
1996 $300,000 $ 31,500 (2) $21,680(3)
Robert S. Kielbas.................. 1998 $210,000 15,250 (2) 15,000 $ 1,788(6)
Senior Vice President 1997 $233,173 -- $70,968(5) -- $ 3,787(6)
1996 $202,000 -- $64,620(5) -- $ 1,394(6)
Gary J. Bhojwani................... 1998 $ 4,615(13) -- (2) -- $ 192(7)
Former President of IAS 1997 $200,000 $156,250 (2) -- $ 1,673(7)
1997 $200,000 $ 50,071(8) (2) -- $ 1,538(7)
Michael L. Rybak................... 1998 $132,000 $ 11,250 (2) 5,000 $ 3,137(9)
Vice President, Chief Financial 1997 $120,000 $ 3,000 (2) 4,000 $10,961(9)
Officer, Treasurer & Secretary 1996 $ 47,630 (2) -- --
Robert M. Lynyak................... 1998 $172,308 -- (2) 20,000 $ 3,077(11)
Senior Vice President
</TABLE>

- -------------------------
(1) See "Board Compensation Committee Report on Executive Compensation" for
more detailed information regarding the determination of compensation for
the Named Executives.

(2) The total amount of perquisites and other non-cash personal benefits did
not exceed the lesser of $50,000 or 10% of total annual salary and bonus
for any of the Named Executives for any year shown.

(3) Includes: Directors fees paid to Mr. Zuhlke of: $ 8,000 in 1997, and
$10,000 in 1996; director's fees paid to Mr. Zuhlke by Kingsway Financial
Services, Inc. of: $9,807 in 1997, and $11,680 in 1996; insurance premiums
of $3,410 and $48,167 of airline passes in 1997.

(4) Mr. Galanski was elected President and Chief Executive Officer of the
Company in July, 1997. The 1997 salary listed above is the amount of a
$260,000 annual salary payable to Mr. Galanski under his Employment
Agreement actually paid in 1997.

(5) Amounts shown for 1997 and 1996 include $61,968 and $55,620, respectively,
paid to Mr. Kielbas for cost of living and tax equalization adjustment in
connection with his overseas posting to the Company's Hong Kong operations
and a cash car allowance of $9,000 and $9,000, respectively.

(6) Amounts shown represent the Company's matching contribution for Mr. Kielbas
to the Company's 401(K) Savings Plan in the amount of $1,788 in 1998,
$1,669 in 1997, $1,394 in 1996 and officers life insurance premium of
$2,118 in 1997.

(7) Amount shown represents the Company's matching contribution for Mr.
Bhojwani to the Company's 401(k) Savings Plan in the amount of $192 in
1998, $1,673 in 1997 and $1,538 in 1996.

(8) Amount shown represents bonus related to 1995 performance and paid in 1996.

E-49
<PAGE> 132

(9) Amount shown represents Company's matching contribution for Mr. Rybak to
the Company's 401(k) Savings Plan of $3,137 and $1,154 for 1998 and 1997,
respectively, and Kingsway directors fees paid of $9,807 in 1997.

(10) Amount shown represents the Company's matching contribution for Mr.
Galanski to the Company's 401(k) Savings Plan.

(11) Amount shown represents the Company's matching contribution for Mr. Lynyak
to the Company's 401(k) Savings Plan.

(12) Amount shown represents payments made until discontinuance of Mr. Zuhlke's
severance payments.

(13) Amount represents salary through Mr. Bhojwani's date of resignation from
the Company.

STOCK OPTIONS

OPTION GRANTS IN FISCAL YEAR 1998

The following table sets forth information with respect to stock options
granted during the fiscal year ended December 31, 1998 held by the 1998 Named
Executives.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------
POTENTIAL REALIZABLE
$ VALUE ASSUMING
ANNUAL RATES OF
STOCK PRICE
NO. OF APPRECIATION FOR
SECURITIES % OF TOTAL OPTION TERM
UNDERLYING OPTIONS EXERCISE EXPIRATION --------------------
NAME GRANT GRANTED PRICE $/SH DATE 5% 10%
---- ---------- ---------- ---------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Mr. Galanski...................... 20,000 17.1% 11.375 07/06/08 143,074 362,576
Mr. Kielbas....................... 5,000 12.8% 12.25 02/05/08 42,895 101,992
10,000 11.50 11/05/08 73,573 184,530
Mr. Rybak......................... 5,000 4.3% 12.25 02/05/08 42,895 101,992
Mr. Lynyak........................ 20,000 17.1% 12.375 02/08/08 175,651 414,451
Mr. Zuhlke........................ 0
Mr. Bhojwani...................... 0
</TABLE>

E-50
<PAGE> 133

Shown below is information for the 1998 Named Executives with respect to
options and SARs exercised during fiscal year 1998 and unexercised options to
purchase the Company's Common Stock and SARs held at December 31, 1998.

AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
ACQUIRED ON VALUE OPTIONS/SARS AT 12/31/98 AT 12/31/98(1)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE(#) EXERCISABLE/UNEXERCISABLE($)
---- ----------- ----------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Mr. Galanski............ -- -- 4,000/36,000 --/--
Mr. Rybak............... -- -- 1,000/8,000 2,250/6,750
Mr. Lynyak.............. -- -- 0/20,000 --/--
Mr. Zuhlke.............. -- -- 0/0 --/--
Mr. Kielbas............. -- -- 13,250/16,250 --/--
Mr. Bhojwani............ -- -- 0/0 --/--
</TABLE>

- -------------------------
(1) Based on the closing sale price of $11.375 as quoted on the NASDAQ National
Market on December 31, 1998.

EMPLOYMENT CONTRACTS

On July 7, 1997 the Company entered into an employment agreement with its
President and Chief Executive Officer, Stanley A. Galanski. This employment
agreement was for a one year period and continues on a bi-weekly basis
thereafter unless otherwise terminated due to Mr. Galanski's death or disability
or by the Company for "cause", as defined in the employment agreement. If the
employment agreement is terminated other than for cause (including a change in
control) or due to death or disability, Mr. Galanski shall be entitled to his
annual salary for a period of 12 months after such termination. The employment
provides for a base salary of $260,000, subject to increase in the sole
discretion of the Board of Directors, a bonus for 1997 of $25,000, eligibility
for bonuses under the Executive Incentive Compensation Plan, an option to
acquire 20,000 shares of Intercargo common stock, certain benefits, vacation of
four weeks annually and "carry over" of up to two weeks of unused vacation days
to the following year. It also contains restrictive covenants and non-
competition provisions for the period of twelve months after termination.

Effective January 1, 1998 the Company entered into an agreement with Mr.
Kielbas to serve as President of Trade Insurance Services, Inc. and be
responsible for all aspects of the Company's agency and marketing operations as
well as other duties as may be assigned by the President of Intercargo. This
employment agreement was for a one year period and continues on a month-to-month
basis thereafter unless otherwise terminated with thirty days written notice. If
terminated by the Company without cause Mr. Kielbas shall be entitled to his
annual salary for a period of one year. The employment agreement provides for a
base salary of $215,000 annually subject to increase at the sole discretion of
the President of Intercargo, certain benefits, eligibility for bonuses under any
Executive Incentive Compensation Plan and an option to acquire 10,000 shares of
Intercargo common stock. It also contains restrictive covenants and
non-competition provisions for a period of twelve months after termination.

On August 12, 1996 the Company entered into an employment agreement (the
"Employment Agreement") with its Chief Financial Officer, Michael L. Rybak. The
Employment Agreement was for a one year period and continues on a month-to-month
basis thereafter unless otherwise terminated due to Mr. Rybak's death or
disability or by the Company for "cause", as defined in the Employment
Agreement. The Employment Agreement provides for a base salary of $120,000,
subject to increases during subsequent renewal terms, certain benefits,
eligibility for bonuses under the Executive Incentive Compensation Plan, and
entrance into the vacation entitlement schedule as if he were a five year
employee. It also contains restrictive covenants and non-competition provisions
for the period of two years after termination. On November 18, 1998 the Company
executed a letter agreement with Mr. Rybak entitling him to a payment of $50,000
upon

E-51
<PAGE> 134

the earlier of (i) 180 days following a change in control of the Company or (ii)
the involuntary termination of Mr. Rybak, other than for cause. This letter
agreement can be terminated by the Company if a change in control has not
occurred prior to June 30, 1999.

On February 9, 1998 the Company entered into an employment agreement with
Mr. Lynyak to serve as Senior Vice President. This employment agreement was for
a one year period and continues in effect thereafter unless terminated with
thirty days written notice. If terminated by the Company without cause Mr.
Lynyak shall be entitled to his annual salary for a period of one year. The
employment agreement provides for a base salary of $200,000 annually subject to
increase at the sole discretion of the President of Intercargo, certain
benefits, eligibility for bonuses under any Executive Incentive Compensation
Plan and an option to acquire 20,000 shares of Intercargo common stock. It also
contains restrictive covenants and non-competition provisions for a period of
twelve months after termination.

OFFICER LOANS

IAS has provided loans to certain of its officers which loans are evidenced
by promissory notes dated August 25, 1993 bearing interest at a rate equal to
the prime lending rate plus 1%, as determined from time to time. The only notes
issued by a 1997 Named Executive was made by James Zuhlke in the original
principal amount of $96,110. This note was paid in full in 1997.

TOTAL RETURN COMPARISON

The following graph sets forth a five-year comparison of cumulative total
returns for: (i) the Company; (ii) the Standard & Poor's Total Return Index for
the Nasdaq Stock Market (U.S. Companies); and (iii) a Peer Group selected by the
Company (the "Peer Group").
Performance Graph

<TABLE>
<CAPTION>
INTERCARGO CORPORATION SELECTED STOCK LIST NASDAQ MARKET INDEX
---------------------- ------------------- -------------------
<S> <C> <C> <C>
12/31/93 100.00 100.00 100.00
12/30/94 71.75 73.41 104.99
12/29/95 88.60 95.61 136.18
12/31/96 77.46 126.99 169.23
12/31/97 121.90 137.83 207.00
12/31/98 106.41 112.65 291.96
</TABLE>

All returns were calculated assuming dividend reinvestment. The returns of
each company in the Peer Group have been weighted according to market
capitalization.

The Peer Group consists of the following companies: AmWest Insurance Group,
Inc.; NYMAGIC, Inc.; HCC Insurance Holdings, Inc.; and Navigators Group, Inc.

E-52
<PAGE> 135

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee is comprised of four non-employee directors:
Messrs. Litman, Fritz, Sanborn and Weise. The 1998 compensation for the
executive officers is comprised of the following components:

- Base Salary;

- Annual incentive compensation (i.e. bonus) based on individual
performance and Company performance; and

- Long term incentive compensation in the form of stock options granted
pursuant to the 1987 Non-Qualified Incentive Stock Option Plan (the
"Option Plan").

Based on recommendations of Stanley Galanski, President, the Compensation
Committee set the 1998 base salaries of all officers (other than Mr. Galanski).
The Compensation Committee set the 1998 base salary of the President. Factors
considered in the setting of salaries include historical salary levels and
salary levels at comparable companies. After approval by the Compensation
Committee, salaries are approved by the Board of Directors.

With respect to Mr. Galanski, the Compensation Committee established a base
salary for 1998 at $265,000.

Bonuses for all officers are determined pursuant to the Incentive Plan,
which directly links executive compensation with Company performance. The
Incentive Plan creates a bonus fund based on a percentage of the aggregate base
salaries of all eligible employees. The percentage is determined pursuant to a
sliding scale based on the return on equity ("ROE") of the Company and is
measured against the equity at the beginning of the bonus year.

The Incentive Plan provides a formula for the determination of bonus
amounts which in all cases includes ROE as one measurement. Other measurements
include departmental goals (for underwriters and salespeople) and intangible or
qualitative objectives. The weight given to each measurement varies with the
position of the individual.

ROE is assigned a 70% weight factor for the President, a 30% weight factor
for insurance underwriters and salespeople, and a 50% weight factor for the
Chief Financial Officer. Intangibles are assigned a 30% weight factor for the
President, a 20% factor for insurance underwriters and salespeople, and a 50%
weight factor for the Chief Financial Officer. Departmental goals are assigned a
50% weight factor and only apply to insurance underwriters and salespeople. The
weight factors which apply to intangibles and departmental goals are further
multiplied by a performance factor which reflects the level of achievement of
pre-set goals. Intangible goals, as well as what constitutes their fulfillment,
are set each year by the President and the individual officer. Departmental
goals are set by the President. The goals of the President are set by the
Compensation Committee, and the Committee determines the degree to which the
President has fulfilled those goals.

The available bonus fund is allocated among the eligible employees
according to the attainment of specific performance goals and application of the
ROE factor. Each individual's bonus is subject to a limit equal to the
percentage of base salary established by the ROE factor. Accordingly, the total
bonus of each 1998 Named Executive, other than Mr. Galanski, is limited to his
base salary multiplied by the maximum bonus percentage established by the ROE.

Based on the parameters of the Incentive Plan and at the discretion of the
Committee, bonuses were awarded for 1998 performance pursuant to the Incentive
Plan to Mr. Kielbas $15,000 and Mr. Lynyak $15,000. A 1998 bonus for Mr.
Galanski of $125,000 was approved which includes recognition for his efforts in
pursuing the strategic alternatives available to the Company.

The 1987 Non-Qualified Incentive Stock Option Plan (the "Option Plan") also
links individual compensation to Company performance. Because the exercise price
of the options granted under the Option Plan may not be less than fair market
value at the date of the grant, the executives have incentive to enhance
E-53
<PAGE> 136

Company performance as measured by the price of the Company's Common Stock. In
granting options to executives, the Compensation Committee considers the
recommendations of the President as well as the number of options already held
by each person. Taking into consideration various factors including the number
of shares subject to option and/or SAR's previously granted, the Compensation
Committee determined to grant options to purchase 49,750 shares of Common Stock
to a total of 9 officers and 37 other employees of the Company during fiscal
year 1998 in addition to options granted pursuant to the employment agreements
of Messrs. Galanski, Kielbas and Lynyak.

Effective January 1, 1994, the allowable deduction for federal income tax
purposes of compensation paid by the Company to the 1998 Named Executives is
$1,000,000 per executive per year. This limitation does not apply to
compensation that is based upon the attainment of performance goals or paid
pursuant to a written contract that was in effect on February 17, 1993. These
limitations have not affected the Company's ability to deduct all taxable
compensation paid to its 1998 Named Executives and is not expected to affect
these deductions in the foreseeable future.

Respectfully submitted,

INTERCARGO CORPORATION
Compensation Committee

Arthur J. Fritz, Jr.
Arthur L. Litman
Robert Sanborn
George Weise

E-54
<PAGE> 137

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

The following table shows with respect to (i) each person who is known to
be the beneficial owner of more than 5% of the Common Stock; (ii) each director
of the Company; (iii) the Chief Executive Officer and the four most highly
compensated executive officers of the Company during fiscal year 1998 and (iv)
all present executive officers and directors as a group: (a) the amount of
shares of Common Stock beneficially owned as of March 8, 1999; and (b) the
percent of the class so owned as of the same date:

<TABLE>
<CAPTION>
AMOUNT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE(1)
------------------------------------ ------------------ -------------
<S> <C> <C>
Orion Capital Corporation(2)................................ 1,899,223 26.04%
600 Fifth Avenue New York, NY 10020
Fenimore Asset Management(3)................................ 522,850 7.17%
118 North Grand Street P.O. Box 310 Cobleskill, NY 12043
Dimensional Fund Advisors, Inc.(4).......................... 366,200 5.02%
1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401
AIC Limited(5).............................................. 370,549 5.08%
1375 Kerns Road Burlington, Ontario Canada
Stanley A. Galanski(6)...................................... 4,500 *
Arthur J. Fritz, Jr.(6)(7).................................. 250,250 3.43%
Kenneth A. Bodenstein(6)(8)................................. 20,250 *
Arthur L. Litman(6)......................................... 42,916 *
Albert J. Gallegos(6)(9).................................... 3,150 *
Robert S. Kielbas(6)(10).................................... 63,181 *
Robert B. Sanborn(6)........................................ 250 *
Michael L. Sklar(6)......................................... 3,250 *
George Weise(6)............................................. -- *
Michael L. Rybak(6)......................................... 3,250 *
Robert M. Lynyak(6)......................................... 4,000 *
All Directors and Executive Officers as a group (11
persons)(11).............................................. 394,997 5.40%
</TABLE>

- -------------------------
* Less than 1% of common stock outstanding

E-55
<PAGE> 138

Sanborn, a director of the Company, who as Senior Executive Consultant and
a director of Orion Capital Corporation, may be deemed to have shared power
to vote and dispose of these shares. Pursuant to the Stockholder Agreement,
Orion has agreed to vote all of its shares of Common Stock in favor of the
Merger. See "The Stockholder Agreement."

(3) As reported in Fenimore Asset Management Inc.'s Schedule 13G, dated
February 5, 1999.

(4) As reported in Dimensional Fund Advisors Inc.'s Schedule 13G, dated
February 11, 1999.

(5) As reported in AIC Limited's Schedule 13G, dated March 23, 1999.

(6) Messrs. Galanski, Kielbas, Rybak, Gallegos, Litman, Bodenstein, Fritz,
Sklar, Sanborn, Weise and Lynyak are directors and/or executive officers of
the Company.

(7) Includes 12,000 shares held by a family limited partnership in which Mr.
Fritz is one of the general partners.

(8) Includes 6,000 shares held by a charitable foundation as to which Mr.
Bodenstein exercises voting power.

(9) Held in the name of Mr. Gallegos' wife.

(10) Includes 74 shares of Common Stock held in the name of Mr. Kielbas' wife.

(11) See footnote (1) and Footnotes (6) -- (10) above.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Sklar, a director, is a partner of Rudnick & Wolfe, the principal law
firm engaged by the Company in 1998. Legal fees paid to Rudnick & Wolfe during
1998 totaled $848,865.

E-56
<PAGE> 139

INTERCARGO 10-K

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Consolidated Balance Sheets as of December 31, 1998 and 1997.

Consolidated Statements of Operations for the Years Ended December
31, 1998, 1997 and 1996.

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996.

Consolidated Statements of Cash Flows for the Years Ended December
31, 1998, 1997 and 1996.

Notes to Consolidated Financial Statements.

Report of Ernst & Young LLP, Independent Auditors.

Report of KPMG LLP, Independent Auditors

(a)(2) The following consolidated financial statement schedules of the
Company listed below are contained in the index to Financial
Statement Schedules on page FS-1 herein:
Schedule I Summary of investments -- other than investments in
related parties

Schedule II Condensed financial information of registrant

Schedule III Supplementary insurance information

Schedule IV Reinsurance

Schedule VI Supplemental information concerning property/casualty
operations

(b) Reports on Form 8-K

The Company filed a Form 8-K on December 4, 1998. The report
addressed the Company entering into an Agreement and Plan of Merger
("Merger") dated as of December 1, 1998 with X.L. America, Inc., a
wholly owned subsidiary of XL Capital Ltd. Pursuant to the Merger,
the shares of common stock of Intercargo issued and outstanding
prior to the Merger will be converted to $12.00 in cash. The Merger
is subject to standard approvals and conditions.

E-57
<PAGE> 140

INTERCARGO CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SCHEDULES
Summary of Investments -- Other than Investments in Related
Parties (Schedule I)...................................... FS-2
Condensed Financial Information of Registrant (Schedule
II)....................................................... FS-3
Supplementary Insurance Information (Schedule III).......... FS-6
Reinsurance (Schedule IV)................................... FS-7
Supplemental Information Concerning Property/Casualty
Insurance Operations (Schedule VI)........................ FS-8
</TABLE>

FS-1
<PAGE> 141

SCHEDULE I

INTERCARGO CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
AMOUNT AT WHICH
FAIR SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEETS
------------------ ------- ----- ---------------
<S> <C> <C> <C>
Fixed Maturities:
U.S. Government and Agency obligations................... $19,668 $19,983 $19,983
State, municipal, and other tax advantaged securities.... 19,262 19,958 19,958
Corporate securities..................................... 18,762 19,335 19,335
Other fixed maturity investments......................... 298 308 308
------- ------- -------
Total fixed maturities.............................. 57,990 59,584 59,584
Equity securities.......................................... 5,231 4,856 4,856
------- ------- -------
Total investments..................................... $63,221 $64,440 $64,440
======= ======= =======
</TABLE>

- -------------------------
(1) Investments in fixed maturities are reflected at cost, adjusted for
amortization of premium or accretion of discounts.

See notes to consolidated financial statements.
FS-2
<PAGE> 142

SCHEDULE II
INTERCARGO CORPORATION
CONDENSED BALANCE SHEETS (REGISTRANT ONLY)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Investment in equity securities............................. $ 1,445 $ 3,050
Cash and cash equivalents................................... 28,009 32,459
Equipment, at cost less accumulated depreciation............ 405 513
Investments in subsidiaries................................. 35,216 36,502
Notes receivable
Due from affiliates....................................... 8,260 8,260
Due from non-affiliates................................... 83 83
Federal income tax recoverable.............................. -- 275
Deferred income tax......................................... 998 --
Other assets................................................ 2,778 1,311
------- -------
Total assets........................................... $77,194 $82,453
======= =======
LIABILITIES
Accrued expenses and other liabilities...................... $ 3,136 $ 252
Federal income tax payable.................................. 1,083 --
------- -------
Total liabilities...................................... 4,219 252
------- -------
STOCKHOLDERS' EQUITY
Common stock -- $1 par value; authorized 20,000,000 shares;
issued 7,699,981 shares; outstanding 7,293,581 shares in
1998 and 7,699,981 shares in 1997......................... 7,700 7,700
Additional paid-in capital.................................. 24,400 24,400
Treasury stock, at cost; 406,400 shares..................... (4,044) --
Accumulated other comprehensive income...................... 1,752 2,176
Retained earnings........................................... 43,167 47,925
------- -------
Total stockholders' equity............................. 72,975 82,201
------- -------
Total liabilities and stockholders' equity............. $77,194 $82,453
======= =======
</TABLE>

See notes to consolidated financial statements.
FS-3
<PAGE> 143

SCHEDULE II -- CONTINUED

INTERCARGO CORPORATION

CONDENSED STATEMENTS OF OPERATIONS (REGISTRANT ONLY)
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Net investment and other income............................. $ 2,346 $ 1,349 $ 757
Realized investment gains................................... 892 48,987 2,394
Revenues from affiliates.................................... -- -- 12
------- -------- ------
Total.................................................. 3,238 50,336 3,163
------- -------- ------
EXPENSES
Interest expense............................................ -- 488 715
General and administrative expense.......................... 4,513 2,576 676
------- -------- ------
Total.................................................. 4,513 3,064 1,391
------- -------- ------
Operating gain (loss)....................................... (1,275) 47,272 1,772
Income tax benefit (expense)................................ 399 (18,972) (606)
Equity in the operating earnings (losses) of subsidiaries
and affiliate, net of income taxes........................ (2,496) 3,488 5,238
------- -------- ------
Net income (loss)........................................... $(3,372) $ 31,788 $6,404
======= ======== ======
</TABLE>

See notes to consolidated financial statements.
FS-4
<PAGE> 144

SCHEDULE II -- CONTINUED

INTERCARGO CORPORATION

CONDENSED STATEMENTS OF CASH FLOW (REGISTRANT ONLY)
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(3,372) $ 31,788 $ 6,404
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Realized gains......................................... (892) (48,987) (2,394)
Equity in operating (earnings) losses of subsidiaries
and affiliate, net of income tax..................... 2,496 (3,488) (5,238)
Depreciation and amortization.......................... 93 175 --
Change in income tax accounts.......................... (4) 18,826 682
Decrease in notes receivable........................... -- 25 101
Increase in accrued expenses and other liabilities..... 2,884 19 49
Other, net............................................. (1,451) (1,289) 197
------- -------- -------
Net cash used in operating activities................ (246) (2,931) (199)
------- -------- -------
Cash flows from investing activities:
Contribution of capital to subsidiaries................... -- (4,050) (3,000)
Sales of equity securities................................ 1,207 -- --
Sale of Kingsway common stock (net of taxes of $18,500 in
1997).................................................. -- 49,140 4,573
(Purchase) sale of equipment, net......................... 19 (81) (38)
------- -------- -------
Net cash provided from investing activities.......... 1,226 45,009 1,535
------- -------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options................... -- 260 95
Dividends paid to stockholders............................ (1,386) (1,379) (1,376)
Purchase of treasury stock................................ (4,044) -- --
Payment of loans.......................................... -- (9,735) --
------- -------- -------
Net cash used in financing activities................ (5,430) (10,854) (1,281)
------- -------- -------
Net increase (decrease) in cash and cash equivalents........ (4,450) 31,224 55
Cash and cash equivalents:
Beginning of the year..................................... 32,459 1,235 1,180
------- -------- -------
End of the year........................................... $28,009 $ 32,459 $ 1,235
======= ======== =======
</TABLE>

See notes to consolidated financial statements.
FS-5
<PAGE> 145

SCHEDULE III

INTERCARGO CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-------- ----------- --------- -------- ------------ -------- ---------- ---------- ------------
FUTURE
POLICY BENEFITS,
BENEFITS, CLAIMS, AMORTIZATION
DEFERRED LOSSES, LOSSES OF DEFERRED
POLICY CLAIMS OTHER NET AND POLICY
ACQUISITION AND LOSS UNEARNED POLICYHOLDER EARNED INVESTMENT SETTLEMENT ACQUISITION
COST EXPENSES PREMIUMS FUNDS PREMIUMS INCOME EXPENSES COSTS
----------- --------- -------- ------------ -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998
Surety................ $2,852 $17,132 $ 8,117 $-- $17,398 $ -- $ 4,124 $ 6,303
Marine................ 1,113 18,281 4,659 -- 25,791 -- 19,832 6,065
Professional
Liability........... -- 9,244 3,175 -- 2,674 -- 3,490 --
Other Property &
Casualty............ 175 11,857 4,290 -- 6,601 -- 5,222 735
All Other............. -- -- -- -- 6,122 -- -- 4,852
------ ------- ------- --- ------- ------ ------- -------
$4,140 $56,514 $20,241 $-- $52,464 $6,122 $32,668 $13,103
====== ======= ======= === ======= ====== ======= =======
December 31, 1997
Surety................ $1,930 $17,086 $ 7,854 $-- $17,947 $ -- $ 5,087 $ 6,437
Marine................ 634 19,853 2,970 -- 27,906 -- 19,482 5,835
Professional
Liability........... -- 6,577 3,510 -- 3,206 -- 3,752 --
Other Property &
Casualty............ 375 11,839 3,614 -- 8,351 -- 6,524 1,087
All Other............. -- -- -- -- -- 4,911 -- --
------ ------- ------- --- ------- ------ ------- -------
$2,939 $55,355 $17,948 $-- $57,410 $4,911 $34,845 $13,359
====== ======= ======= === ======= ====== ======= =======
December 31, 1996
Surety................ $3,160 $18,523 $ 9,481 $-- $25,846 $ -- $ 7,455 $ 9,518
Marine................ 597 13,658 2,599 -- 26,932 -- 17,759 6,972
Professional
Liability........... -- 5,996 2,570 -- 2,644 -- 2,714 --
Other Property &
Casualty............ 127 8,860 2,967 -- 5,631 -- 4,379 809
All Other............. -- -- -- -- -- 3,985 -- --
------ ------- ------- --- ------- ------ ------- -------
$3,884 $47,037 $17,617 $-- $61,053 $3,985 $32,307 $17,299
====== ======= ======= === ======= ====== ======= =======

<CAPTION>
COLUMN A COLUMN J COLUMN K
-------- --------- --------

OTHER
OPERATING PREMIUMS
EXPENSES WRITTEN
--------- --------
<S> <C> <C>
December 31, 1998
Surety................ $ 4,706 $18,768
Marine................ 6,316 27,594
Professional
Liability........... 2,189 2,834
Other Property &
Casualty............ 2,884 6,325
All Other............. --
------- -------
$20,947 $55,521
======= =======
December 31, 1997
Surety................ $ 5,342 $16,688
Marine................ 6,188 28,247
Professional
Liability........... 1,833 3,196
Other Property &
Casualty............ 3,258 9,061
All Other............. 1,193 --
------- -------
$17,814 $57,192
======= =======
December 31, 1996
Surety................ $ 4,659 $23,177
Marine................ 5,564 27,470
Professional
Liability........... 1,245 2,212
Other Property &
Casualty............ 2,346 5,594
All Other............. 1,116 --
------- -------
$14,930 $58,453
======= =======
</TABLE>

FS-6
<PAGE> 146

SCHEDULE IV

INTERCARGO CORPORATION AND SUBSIDIARIES
REINSURANCE
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------------------------------------------------- -------- --------- ---------- -------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Year ended:
December 31, 1998................................. $62,868 $12,902 $2,498 $52,464 4.76%
December 31, 1997................................. $67,802 14,548 4,156 57,410 7.24%
December 31, 1996................................. $68,206 10,163 3,010 61,053 4.93%
</TABLE>

FS-7
<PAGE> 147

SCHEDULE VI

INTERCARGO CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
(IN THOUSANDS)

[CAPTION]
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
-------- ----------- -------- -------- -------- -------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CLAIMS AND
CLAIM
RESERVES ADJUSTMENT
FOR EXPENSES
UNPAID INCURRED
CLAIMS DISCOUNT, RELATED TO AMORTIZATION
DEFERRED AND IF ANY, --------------- OF DEFERRED
POLICY CLAIM DEDUCTED NET (1) (2) POLICY
AFFILIATION WITH ACQUISITION ADJUSTMENT IN UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME YEAR YEAR COSTS
- --------------------- ----------- -------- -------- -------- -------- -------- ------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated
property-casualty
entities
Year ended:
December 31, 1998.... $4,140 $56,514 $-- $20,241 $52,464 $6,122 $31,680 $988 $13,103
December 31, 1997.... $2,939 55,355 -- 17,948 57,410 4,911 34,260 585 $13,359
December 31, 1996.... $3,884 47,037 -- 17,617 61,053 3,985 31,876 431 $17,299

<CAPTION>
PAID
CLAIMS AND
CLAIM
AFFILIATION WITH ADJUSTMENT PREMIUMS
REGISTRANT EXPENSES WRITTEN
- --------------------- ---------- --------
<S> <C> <C>
Consolidated
property-casualty
entities
Year ended:
December 31, 1998.... $31,519 $55,521
December 31, 1997.... 28,517 57,192
December 31, 1996.... 28,405 58,453
</TABLE>

FS-8
<PAGE> 148

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: March 30, 1999 INTERCARGO CORPORATION

By: /s/ STANLEY A. GALANSKI

------------------------------------
Stanley A. Galanski, President and
Chief Executive Officer

<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<S> <C>

/s/ STANLEY A. GALANSKI March 30, 1999
- -----------------------------------------------------
Stanley A. Galanski
President, Chief Executive Officer and a Director
(Principal Executive Officer)

/s/ MICHAEL L. SKLAR March 30, 1999
- -----------------------------------------------------
Michael L. Sklar
Director

/s/ ARTHUR J. FRITZ, JR. March 30, 1999
- -----------------------------------------------------
Arthur J. Fritz, Jr.
Director

/s/ ARTHUR L. LITMAN March 30, 1999
- -----------------------------------------------------
Arthur L. Litman
Director

/s/ KENNETH A. BODENSTEIN March 30, 1999
- -----------------------------------------------------
Kenneth A. Bodenstein
Director

/s/ ALBERT J. GALLEGOS March 30, 1999
- -----------------------------------------------------
Albert J. Gallegos
Director

/s/ ROBERT B. SANBORN March 30, 1999
- -----------------------------------------------------
Robert B. Sanborn
Director

/s/ GEORGE J. WEISE March 30, 1999
- -----------------------------------------------------
George J. Weise
Director

/s/ MICHAEL L. RYBAK March 30, 1999
- -----------------------------------------------------
Michael L. Rybak
Chief Financial Officer, Vice President
(Principal Financial and Accounting Officer)
</TABLE>
<PAGE> 149

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1 Certificate of Incorporation of the Company, including
amendments thereto.(1)
3.2 Bylaws of the Company, including amendments thereto.(1)
4 Specimen Certificate of Common Stock.(2)
10.1 Form of Company's 1987 Non-Qualified and Incentive Stock
Option Plan.(1)
*10.2 Executive Incentive Compensation Plan.(3)
10.3 [Intentionally Blank]
10.4 [Intentionally Blank]
10.5 [Intentionally Blank]
*10.6 Indemnification Agreements between the Company and the
following directors: Kenneth A. Bodenstein, Arthur L.
Litman, Arthur J. Fritz, Jr., Albert J. Gallegos and James
R. Zuhlke.(3)
10.7 [Intentionally Blank]
10.8 [Intentionally Blank]
*10.9 Employment Agreement dated August 12, 1996 between the
Company and Michael L. Rybak.(5)
*10.10 Supplemental Life Insurance Policy for Robert S. Kielbas.(4)
*10.11 Indemnification Agreement dated February 18, 1994 between
the Company and Robert B. Sanborn.(4)
*10.12 Indemnification Agreement dated August 12, 1996 between the
Company and Michael L. Rybak.(5)
*10.13 Employment Agreement as of January 1, 1998 between the
Company and Robert S. Kielbas (filed herewith).
*10.14 Employment Agreement dated February 9, 1998 between the
Company and Robert M. Lynyak (filed herewith).
*10.15 Employment agreement dated July 7, 1997 between Company and
Stanley A. Galanski. (6)
*10.16 Letter agreement as of November 18, 1998 between Company and
Michael L. Rybak (filed herewith)
11 Statement regarding Computation of Per Share Earnings.
(filed herewith)
12 Statement regarding Computation of Ratios. (filed herewith)
13 Key Financial Information. (filed herewith)
21 Subsidiaries of the Company. (filed herewith)
23.1 Consent of Ernst & Young LLP, Independent Auditors (filed
herewith)
23.2 Consent of KPMG LLP, Independent Auditors (filed herewith)
27 Financial Data Schedule. (filed herewith)
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(1) Filed with the Company's Registration Statement on Form S-18, Registration
No. 33-21270C and incorporated herein by reference.
(2) Filed with Amendment No. 1 to the Company's Registration Statement on Form
S-18, Registration No. 33-21270C and incorporated herein by reference.
(3) Filed with the Company's Registration Statement on Form S-2, Registration
No. 33-45658 and incorporated herein by reference.
(4) Filed with the Company's Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference.
(5) Filed with the Company's Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
(6) Filed with the Company's Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.
* Management contract or compensatory plan required to be filed as an exhibit
to this Annual Report on Form 10-K pursuant to Item 14(c) of Form 10-K.
<PAGE> 150

INTERCARGO CORPORATION

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS ON
APRIL 29, 1999

The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders to be held on April 29, 1999 and hereby appoints Stanley
A. Galanski and Michael L. Rybak, or either of them (with power of substitution
in each) the proxy or proxies of the undersigned to vote as designated below,
all shares of Intercargo Corporation Common Stock held of record by the
undersigned on March 30, 1999 at the special meeting to be held at Rudnick &
Wolfe, 203 North LaSalle Street, Chicago, Illinois on April 29, 1999 at 9:00
a.m. Chicago, Illinois time, or at any adjournment thereof.

This proxy shall be voted in accordance with the instructions given and in
the absence of such instructions shall be voted for approval of the Merger
Agreement described in Proposal 1.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL

PLEASE MARK, SIGN, DATE AND MAIL THE
PROXY CARE PROMPTLY USING THE ENCLOSED ENVELOPE

(Continued and to be signed on reverse side.)

<PAGE> 151

This proxy, when properly executed, will be voted in the manner indicated below.
If no direction is made, this proxy will be voted "FOR" Proposal 1.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1

1. Adoption of an Agreement and Plan For Against Abstain
of Merger dated December 1, 1998, ----- ------- -------
as amended and restated March 26,
1999, by and between Intercargo
Corporation, a Delaware corporation
("Intercargo"), and X.L. America,
Inc., a Delaware corporation
("X.L.") and a wholly-owned
indirect subsidiary of XL Capital
Ltd., a Cayman Islands corporation,
providing for the merger of X.L. or a
wholly-owned subsidiary of X.L.
with and into Intercargo.

2. Upon any other matter which may
properly come before the meeting.

Dated: _________________________ , 1999

Signature(s)_____________________________

_________________________________________
IMPORTANT: Please sign exactly as your
name(s) appears hereon. Joint owners
should each sign personally. If signing
in fiduciary or representative capacity,
give full title as such. If a corporation,
please sign in full corporate name by
president or other authorized officer. If
a partnership, please sign in partnership
name by authorized person.

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