AMERICAN EAGLE GROUP INC, PRER14A, 1997-07-09

AMERICAN EAGLE GROUP INC
PRER14A, 1997-07-09
FIRE, MARINE & CASUALTY INSURANCE

Previous: APRIA HEALTHCARE GROUP INC, 8-A12B/A, 1997-07-09

Next: FIRST MORTGAGE CORP /CA/, 4, 1997-07-09

<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[X] Preliminary Proxy Statement

[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))

[ ] Definitive Proxy Statement

[ ] Definitive Additional Materials

[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

AMERICAN EAGLE GROUP, INC.
(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.

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

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

N/A

(2) Aggregate number of securities to which transaction applies:

N/A

(3) 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):

N/A

(4) Proposed maximum aggregate value of transaction:

$11,000,000

(5) Total fee paid:

$2,200

[X] Fee paid previously 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.

(1) Amount previously paid:

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

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

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

(3) Filing Party:

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

(4) Date Filed:

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

<PAGE> 2
AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 30, 1997

TO THE STOCKHOLDERS OF AMERICAN EAGLE GROUP, INC.:

NOTICE IS HEREBY GIVEN that the 1997 annual meeting (the "Annual
Meeting") of stockholders of American Eagle Group, Inc., a Delaware corporation
(the "Company"), will be held on July 30, 1997, commencing at 9:00 a.m., local
time, at the AmeriSuites Hotel, 12411 North Central Expressway, Dallas, Texas
75243, to consider and act upon the following matters which are described in
more detail in the accompanying Proxy Statement:

1. To vote upon a proposal (the "Proposal") to approve (i) the
sale of the general aviation insurance business (the "Aviation
Division") of American Eagle Insurance Company, a wholly-owned
subsidiary of the Company ("AEIC"), to Great American Insurance
Company ("Purchaser"), for the consideration and upon the terms set
forth in the Purchase Agreement dated as of April 11, 1997 among the
Company, AEIC and Purchaser, and (ii) the amendment of the Company's
Restated Certificate of Incorporation to change the name of the
Company to "___________", effective upon consummation of such sale;

2. To elect two directors of the Company to serve until the
1999 and 2000 annual meeting, respectively, of stockholders or until
their successors are duly elected and qualified;

3. To ratify the appointment of Arthur Andersen LLP as the
independent auditors for the Company and its subsidiaries for the
fiscal year ending December 31, 1997; and

4. To consider and act upon such other business as may properly
be brought before the meeting or any adjournment or postponement
thereof.

Holders of record of shares of the Company's Common Stock and Series D
Preferred Stock at the close of business on June 30, 1997, the record date for
the Annual Meeting, are entitled to notice of, and to vote at, the Annual
Meeting and any adjournment or postponement thereof.

Under Delaware law, stockholders do not have appraisal rights in
connection with the Proposal.

Any stockholder giving a proxy has the right to revoke it at any time
before it is voted by filing, with the Secretary of the Company, either an
instrument revoking the proxy or a duly executed proxy bearing a later date.
Proxies also may be revoked by attending the meeting and voting in person.

<PAGE> 3

The accompanying Proxy Statement also constitutes the Company's Annual
Report to Stockholders for the year ended December 31, 1996 (the "Annual
Report").

By Order of the Board of Directors
AMERICAN EAGLE GROUP, INC.

M. PHILIP GUTHRIE
Chairman of the Board, Chief Executive
Officer and President

TO ASSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, PLEASE DATE THE
ENCLOSED PROXY CARD, WHICH IS SOLICITED BY THE BOARD OF DIRECTORS OF THE
COMPANY, SIGN EXACTLY AS YOUR NAME APPEARS THEREON AND RETURN IT IMMEDIATELY.

_____________, 1997

<PAGE> 4

AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243

__________ __, 1997

Dear Stockholder:

You are cordially invited to attend the 1997 annual meeting (the
"Annual Meeting") of the stockholders of American Eagle Group, Inc. (the
"Company") to be held on July 30, 1997 at 9:00 a.m. local time at the
AmeriSuites Hotel, 12411 North Central Expressway, Dallas, Texas 75243.

At the Annual Meeting, in addition to electing directors and ratifying
the appointment of the Company's independent auditors, you will be asked to
approve (i) the sale of the general aviation insurance business (the "Aviation
Division") of American Eagle Insurance Company, a wholly-owned subsidiary of
the Company ("AEIC"), to Great American Insurance Company ("Purchaser"), for
the consideration and upon the terms set forth in the Purchase Agreement dated
as of April 11, 1997 among the Company, AEIC and Purchaser, and (ii) the
amendment of the Company's Restated Certificate of Incorporation to change the
name of the Company to "___________", effective upon consummation of such sale.
The attached Proxy Statement describes the proposed sale in detail, and you are
urged to review the Proxy Statement carefully.

THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE
PROPOSED SALE AND HAS DETERMINED THAT IT IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE PROPOSED SALE AND RELATED AMENDMENT TO THE
COMPANY'S RESTATED CERTIFICATE OF INCORPORATION.

PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY
CARD. IF YOU ATTEND THE MEETING AND VOTE IN PERSON, YOUR VOTE WILL SUPERSEDE
YOUR PROXY.

Sincerely,

M. PHILIP GUTHRIE
Chairman of the Board, Chief Executive
Officer and President

<PAGE> 5

AMERICAN EAGLE GROUP, INC.
12801 N. CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75243

PROXY STATEMENT FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 30, 1997

ANNUAL REPORT TO STOCKHOLDERS FOR
YEAR ENDED DECEMBER 31, 1996

This Proxy Statement is being furnished to holders of Common Stock,
par value $.01 per share (the "Common Stock"), and to holders of Series D
Preferred Stock, par value $.01 per share (the "Series D Preferred Stock"), of
American Eagle Group, Inc., a Delaware corporation (the "Company"), in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at the 1997 annual meeting of stockholders of the Company (the
"Annual Meeting"), to be held at 9:00 a.m., local time, on July 30, 1997, at
the AmeriSuites Hotel, 12411 North Central Expressway, Dallas, Texas 75243, and
at any and all adjournments or postponements thereof.

At the Annual Meeting, holders of Common Stock and Series D Preferred
Stock will be asked:

2. To elect two directors of the Company to serve until the
1999 and 2000 annual meeting of stockholders, respectively, or until
their successors are duly elected and qualified;

3. To ratify the appointment of Arthur Andersen LLP as the
independent auditors for the Company and its subsidiaries for the
fiscal year ending December 31, 1997; and

4. To consider and act upon such other business as may
properly be brought before the meeting or any adjournment or
postponement thereof.

This Proxy Statement and the accompanying Notice of Annual Meeting of
Stockholders and Proxy were first mailed to stockholders on or about July __,
1997. This Proxy Statement also constitutes the Company's Annual Report to
Stockholders for the year ended December 31, 1996 (the "Annual Report"). See
"Annual Report to Stockholders."

<PAGE> 6
TABLE OF CONTENTS

<TABLE>
<S> <C>
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Company . . . . . . . . . . . . . . . . . . . . . 4
The Annual Meeting . . . . . . . . . . . . . . . . . . 4
Time and Place . . . . . . . . . . . . . . . . . . 4
Purpose . . . . . . . . . . . . . . . . . . . . . . 4
Voting; Votes Required for Approval . . . . . . . . 5
Aviation Division Sale . . . . . . . . . . . . . . . . 5
Terms of the Sale . . . . . . . . . . . . . . . . . 5
Reasons for the Aviation Division Sale . . . . . . 6
Opinion of Financial Advisor . . . . . . . . . . . 10
Plans for Future Operation of the Company . . . . . 10
Effect on Company if the Division Sales Are
Not Completed . . . . . . . . . . . . . . . . . . . 11
No Dissenters' Rights . . . . . . . . . . . . . . . 11
Certain Considerations . . . . . . . . . . . . . . 11
Certain Federal Income Tax Consequences . . . . . . 11
Interests of Certain Persons in the Transaction . . 11
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . 13
General . . . . . . . . . . . . . . . . . . . . . . . 13
Record Date . . . . . . . . . . . . . . . . . . . . . 13
Vote Required . . . . . . . . . . . . . . . . . . . . 13
Proxies . . . . . . . . . . . . . . . . . . . . . . . 14
Solicitation . . . . . . . . . . . . . . . . . . . . . 14
THE AVIATION DIVISION SALE . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . 15
Reasons for the Transaction . . . . . . . . . . . . . 15
Advice of Financial Advisor . . . . . . . . . . . . . 19
Name Change . . . . . . . . . . . . . . . . . . . . . 21
Regulatory Approvals . . . . . . . . . . . . . . . . . 21
Certain Federal Income Tax Consequences . . . . . . . 21
Accounting Treatment of the Aviation Division
Sale . . . . . . . . . . . . . . . . . . . . . . . . . 22
No Dissenters' Rights . . . . . . . . . . . . . . . . 22
Interests of Certain Persons in the Transaction . . . 22
CERTAIN CONSIDERATIONS . . . . . . . . . . . . . . . . . 23
Delisting of Common Stock . . . . . . . . . . . . . . 23
Loss of Margin Status . . . . . . . . . . . . . . . . 23
Investment Company Act Considerations . . . . . . . . 23
Potential Regulatory Action . . . . . . . . . . . . . 23
Plans for Operation of the Company after the
Aviation
Division Sale . . . . . . . . . . . . . . . . . . . . 24
Effect on Company if the Division Sales Are
Not Completed . . . . . . . . . . . . . . . . . . . . 24
FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . 25
THE PURCHASE AGREEMENT AND RELATED
AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . 26
Purchased Assets . . . . . . . . . . . . . . . . . . . . 26
Quota Share Reinsurance Agreement . . . . . . . . . . . . 26
Closing . . . . . . . . . . . . . . . . . . . . . . . . . 26
Purchase Price and Other Payments . . . . . . . . . . . . 27
Assumption of Liabilities . . . . . . . . . . . . . . . . 27
Change in Name . . . . . . . . . . . . . . . . . . . . . 27
Certain Representations, Warranties and
Covenants . . . . . . . . . . . . . . . . . . . . . . . . 28
Conditions to Closing . . . . . . . . . . . . . . . . . . 28
Termination of Strategic Alliance . . . . . . . . . . . . 29
Noncompete/No Solicitation and Other Actions . . . . . . 29
Termination . . . . . . . . . . . . . . . . . . . . . . . 30
Indemnification . . . . . . . . . . . . . . . . . . . . . 31
PLANS FOR FUTURE OPERATION OF THE COMPANY . . . . . . . . 32
Business . . . . . . . . . . . . . . . . . . . . . . . 32
Management . . . . . . . . . . . . . . . . . . . . . . 33
Employees . . . . . . . . . . . . . . . . . . . . . . 33
Offices . . . . . . . . . . . . . . . . . . . . . . . 33
UNAUDITED PRO FORMA FINANCIAL INFORMATION . . . . . . . . 34
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . 42
Three Months Ended March 31, 1997
Compared to Three Months Ended March 31, 1996 . . . . 43
Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995 . . . . . . . . . . . . . . . . . . 45
Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994 . . . . . . . . . . . . . . . . . . 47
Liquidity and Capital Resources . . . . . . . . . . . 50
MARKET PRICES AND DIVIDENDS . . . . . . . . . . . . . . . 52
Stockholders . . . . . . . . . . . . . . . . . . . . . 52
Dividends . . . . . . . . . . . . . . . . . . . . . . 52
INSURANCE REGULATION . . . . . . . . . . . . . . . . . . 53
HISTORICAL BUSINESS OF THE COMPANY . . . . . . . . . . . 56
General . . . . . . . . . . . . . . . . . . . . . . . 56
The Divisions . . . . . . . . . . . . . . . . . . . . 56
Disposition of P&C Division . . . . . . . . . . . . . 57
Disposition of Marine Division . . . . . . . . . . . . 57
Gross Premiums Produced . . . . . . . . . . . . . . . 58
Aviation Division Business . . . . . . . . . . . . . . 58
P&C Division Business . . . . . . . . . . . . . . . . 59
Marine Division Business . . . . . . . . . . . . . . . 60
</TABLE>

2
<PAGE> 7

<TABLE>
<S> <C>
Marketing . . . . . . . . . . . . . . . . . . . . . . 60
Underwriting . . . . . . . . . . . . . . . . . . . . . 60
Claims . . . . . . . . . . . . . . . . . . . . . . . . 61
Reserves . . . . . . . . . . . . . . . . . . . . . . . 62
Reinsurance . . . . . . . . . . . . . . . . . . . . . 67
Investments . . . . . . . . . . . . . . . . . . . . . 69
Competition . . . . . . . . . . . . . . . . . . . . . 72
Employees . . . . . . . . . . . . . . . . . . . . . . 72
Legal Proceedings . . . . . . . . . . . . . . . . . . 72
ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . 73
EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . 77
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 80
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 85
STOCK PERFORMANCE GRAPH . . . . . . . . . . . . . . . . . 88
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS, DIRECTORS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . 89
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . 91
RATIFICATION OF THE APPOINTMENT
OF AUDITORS . . . . . . . . . . . . . . . . . . . . . . . 94
STOCKHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . 95
ANNUAL REPORT TO STOCKHOLDERS . . . . . . . . . . . . . . 95
ANNUAL REPORT ON FORM 10-K . . . . . . . . . . . . . . . 95
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . 95
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . 95
</TABLE>

INDEX TO FINANCIAL STATEMENTS . . . . . . . . F-1

APPENDIX I CSFB Letter
APPENDIX II Purchase Agreement

3
<PAGE> 8
SUMMARY

The following is only a summary of certain information contained
elsewhere in this Proxy Statement and does not purport to be complete.
Reference is made to, and this Summary is qualified in its entirety by, the
more detailed information contained elsewhere in this Proxy Statement,
including the attached Appendices. Stockholders are urged to read this Proxy
Statement and the Appendices in their entirety.

THE COMPANY

American Eagle Group, Inc., a Delaware corporation (the "Company"), is
an insurance holding company that, through its subsidiaries, markets and
underwrites specialized property and casualty coverages in the general aviation
insurance marketplace. Historically, the Company's business has been organized
into three divisions. The Aviation Division, which is responsible for all
general aviation insurance business, generated $108.7 million of gross premiums
produced in 1996. The Company has recently sold the businesses of its Property
& Casualty Division (the "P&C Division") and Marine Division. The P&C
Division, which was responsible for the artisan contractor insurance business
and the run-off of two discontinued lines of insurance business, generated
$35.9 million of gross premiums produced in 1996. The Marine Division, which
was responsible for all yacht insurance business, generated $6.6 million of
gross premiums produced in 1996. The sale of the artisan contractor insurance
business of the P&C Division is referred to as the "Artisan Sale," and the sale
of the yacht insurance business is referred to as the "Marine Division Sale."

As discussed more fully below, at the Annual Meeting, stockholders
will be asked to approve the sale of the Aviation Division business pursuant to
the terms of a Purchase Agreement (the "Purchase Agreement") dated as of April
11, 1997, among the Company, its wholly-owned subsidiary, American Eagle
Insurance Company ("AEIC"), and Great American Insurance Company ("Purchaser"),
a subsidiary of American Financial Group, Inc. ("AFG").

Following the sale of the Company's three divisions, the Company
expects that it will no longer write new or renewal policies for the
foreseeable future. It will continue to handle claims on the Company's policies
that are not assumed by the purchasers as part of these transactions, and
maintain the related reserves and assets. Accordingly, the Company's revenues
and earnings capacity will be significantly lower in the future. The Company's
operational focus will be on attempting to create residual value for the
Company's stockholders from the remaining assets and operations and additional
ongoing operations. See "Plans for Future Operation of the Company."

THE ANNUAL MEETING

TIME AND PLACE

The Annual Meeting will be held at 9:00 a.m., local time, on July 30,
1997, at the AmeriSuites Hotel, 12411 North Central Expressway, Dallas, Texas
75243.

PURPOSE

At the Annual Meeting, holders of the Company's Common Stock and
Series D Preferred Stock will be asked to consider and vote on: (i) the
Proposal; (ii) the election of two directors of the Company to serve until the
1999 and 2000 annual meeting of stockholders, respectively, or until their
successors are duly elected and qualified; (iii) the ratification of the
appointment of Arthur Andersen LLP as the independent auditors for the Company
and its subsidiaries for the fiscal year ending December 31, 1997, and (iv)
such other matters as may properly come before the Annual Meeting or any
adjournment or postponement thereof.

4
<PAGE> 9
VOTING; VOTES REQUIRED FOR APPROVAL

The Board of Directors of the Company has established June 30, 1997 as
the record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the Annual Meeting. The Common Stock and
the Series D Preferred Stock are the only classes of outstanding securities of
the Company entitled to notice of and to vote at the Annual Meeting. As of the
Record Date, 7,047,098 shares of Common Stock and 357,875 shares of Series D
Preferred Stock were outstanding. Each share of Common Stock outstanding on the
Record Date shall be entitled to one vote, and each share of Series D Preferred
Stock outstanding on the Record Date shall be entitled to 4.92 votes upon each
matter to come before the Annual Meeting.

Section 271 of the Delaware General Corporation Law (the "DGCL")
requires that the sale of all or substantially all of the assets of a
corporation be approved by the holders of a majority of the outstanding stock
of the corporation entitled to vote thereon. Although the Aviation Division
assets being sold to Purchaser are owned by the Company's subsidiary, AEIC, on
a consolidated basis such assets constituted approximately 45.0% of the
Company's total assets as of March 31, 1997, and the Aviation Division
represented approximately 70.1% of earned premium for the year ended December
31, 1996. Accordingly, since Section 271 of the DGCL may be applicable to the
proposed sale, the affirmative vote of a majority of the total number of votes
entitled to be cast at the Annual Meeting has been established as a requirement
for approval of the Proposal.

A plurality of the votes cast at the Annual Meeting is required to
elect a director, and the affirmative vote of a majority of the votes cast at
the Annual Meeting is required to ratify the appointment of the Company's
independent auditors. The presence in person or by proxy at the Annual Meeting
of a majority of the number of votes entitled to be cast is necessary to
constitute a quorum.

Purchaser, which owned 357,875 shares of Series D Preferred Stock and
116,000 shares of Common Stock on the Record Date, representing approximately
21.3% of the total votes entitled to be cast at the Annual Meeting, has agreed
to vote all of such shares for approval of the Proposal. In addition, Mason
Best Company, L.P. ("Mason Best"), which owns 2,960,772 shares of Common Stock,
representing approximately 33.6% of the total votes entitled to be cast at the
Annual Meeting, has entered into an agreement with Purchaser (the "Mason Best
Voting Commitment") to vote all of such shares for approval of the Proposal.
Accordingly, stockholder approval of the Proposal is assured.

AVIATION DIVISION SALE

TERMS OF THE SALE

On April 11, 1997, the Company, AEIC and Purchaser entered into the
Purchase Agreement, which, subject to the terms and conditions thereof,
provides for the sale (the "Aviation Division Sale") by AEIC of the business
and a substantial portion of the assets comprising the Aviation Division to
Purchaser in exchange for (i) 30% of the unearned premiums to be transferred to
Purchaser, (ii) the net book value of all furniture, fixtures and equipment to
be transferred to Purchaser, (iii) all funds collected by Purchaser with
respect to agents' balances relating to the general aviation insurance business
and which are in excess of 90 days old as of the closing of the Aviation
Division Sale; (iv) commissions of 4%, 2% and 1% of the direct written premiums
on renewal policies relating to the general aviation insurance business during
the first, second, and third years, respectively,

5
<PAGE> 10
following the closing of the Aviation Division Sale; (v) the assumption of
certain liabilities, including all liabilities relating to general aviation
policies issued by the Company since 1993; and (vi) the transfer to the Company
of all of the Series D Preferred Stock issued by the Company to Purchaser in
December 1996. See "The Aviation Division Sale--General" and "The Purchase
Agreement and Related Agreements."

The Aviation Division Sale is conditioned upon, among other things,
approval of the Aviation Division Sale by the Company's stockholders and
receipt of regulatory approvals from the Insurance Commissioners of the States
of Texas and California. See "The Aviation Division Sale--Regulatory Approvals"
and "The Purchase Agreement and Related Agreements--Conditions to Closing."
There can be no assurance that the conditions to the Aviation Division Sale
will be satisfied or waived, or that the Aviation Division Sale will be
consummated. If the Aviation Division Sale is not consummated as contemplated
by this Proxy Statement, the Company expects to lose its current general
aviation insurance business to other insurers and would receive no
consideration for such business. See "Risk Factors - Effect on Company if the
Aviation Sale is Not Completed."

REASONS FOR THE AVIATION DIVISION SALE

Financial Condition. The Company has experienced substantial losses in
each of its last two fiscal years, and the Company's financial condition and
operating results have continued to deteriorate during 1997.

For the fiscal year ended December 31, 1995, the Company recorded a
loss before income tax benefit of approximately $20.4 million. Fiscal year 1995
results were particularly impacted by a special charge to earnings of $20.6
million (after tax) for certain discontinued lines and classes of business and
increased reserves for incurred but not reported losses ("IBNR") and unearned
premium. Based on the special charge, A.M. Best Company ("Best") lowered AEIC's
rating from "A- (Excellent)" to "B++ (Very Good)" on March 4, 1996. Subsequent
to Best's rating action, the Company announced that it was pursuing various
alternatives for increasing the capital and surplus of AEIC.

During 1996, the Company continued to incur losses. In May 1996, the
Company reported a net loss of $2.8 million for the first quarter of 1996, due
mainly to an increase in reported claims in the transportation line of business
and weather related claims, and a decrease in net book value to $7.01 per
common share at March 31, 1996. Due to the Company's first quarter financial
performance and the further deterioration of its capitalization, Best further
downgraded AEIC's rating to "B (Adequate)" on May 24, 1996. Best additionally
placed a negative outlook on the rating, pending the outcome of ongoing
capital-raising efforts of the Company. Best further stated that if the Company
was unsuccessful in raising capital or if operating results did not improve,
Best would likely downgrade the rating further.

In October 1996, the Company withdrew from the transportation line of
business in connection with a strategic refocusing by the Company on the
aviation, marine and artisan contractor product lines where, in the view of
management, historic profitability and the Company's competitive advantages
were the greatest. During 1996, the Company's transportation line of business
had been its primary source of unacceptable underwriting results. The Company
also discontinued the quarterly dividend on its Common Stock in order to
preserve capital. In the second and third quarters of 1996, the Company
reported net losses of $0.6 million and $1.2 million, respectively, decreasing
net book value to $6.68 per common share at September 30, 1996.

6
<PAGE> 11

transactions contemplated thereby on December 31, 1996. Pursuant to the terms
of such agreement, the Company sold 350,000 shares of the Series D Preferred
Stock to Purchaser, which is a wholly-owned subsidiary of AFG, for $35.0
million. Of the proceeds, the Company used $13.3 million to fully repay and
cancel its bank credit facility and contributed $17.0 million to the capital
and surplus of AEIC. The Series D Preferred Stock has a dividend rate of 9%,
payable quarterly, and the dividend may, at the Company's option, be paid in
additional shares of Series D Preferred Stock for the first five years. The
Securities Purchase Agreement also provided that AFG and the Company, through
their appropriate subsidiaries, would negotiate in good faith the terms of
agreements embodying a strategic alliance that was expected to allow the
Company to market and underwrite new and expanded aviation insurance product
lines and permit the Company to offer, when required by an insured, products
providing the financial security of an insurer rated "A (Excellent)" by Best.

The Securities Purchase Agreement also required the Company to record
a $15 million reserve addition in its financial results for the fourth quarter
of 1996. Based upon additional data, analyses and evaluations performed in
connection with closing the books for the 1996 fiscal year, including analysis
from its independent actuary, the Company increased the level of the reserve
addition to approximately $30.0 million. After the announcement of the
withdrawal from the transportation program for local- and intermediate-haul
truckers at the beginning of the fourth quarter of 1996, the Company ended the
quarter with higher transportation loss levels than anticipated, while premium
levels declined faster than originally anticipated. Losses from the auto dealer
program, which was discontinued in 1995, also continued at higher-than-
anticipated levels. The year-end actuarial analysis, taking these patterns into
account, resulted in significant reserve additions for IBNR losses and related
reinsurance costs for these lines of business. The remainder of the reserve
additions are predominantly increases in reserves for IBNR losses and related
reinsurance costs for the aviation lines of business. Of the total $30.0
million reserve addition, approximately $19.1 million resulted from increases
in IBNR losses, and the remainder resulted from increased levels of ceded
reinsurance premiums due to increased loss levels. As a result of these
factors, the Company recorded a loss before income tax benefit of $44.4 million
for 1996, and AEIC's statutory surplus declined to $20.4 million at December
31, 1996.

In light of these financial developments, the Board of Directors
believed it prudent that the Company strengthen its capital base to support its
core aviation business. The Company followed a strategy of simultaneously
pursuing multiple alternatives aimed at preserving the value of its business,
and thus stockholder value.

On March 9, 1997, at the request of AFG, representatives of AFG met
with representatives of the Company. AFG believed that the Company needed
additional capital in order to strengthen the capital and surplus of AEIC. AFG
proposed loaning $15 million to the Company, which would be repaid from the
proceeds of a rights offering to stockholders of the Company. AFG would give to
the Company a standby commitment to subscribe for all rights which were not
subscribed by the stockholders. As a standby commitment fee, AFG proposed
decreasing the conversion price of the Series D Preferred Stock. The pricing of
the rights offering and the proposed conversion price were preliminarily
proposed to be $3.00 per share.

On March 13, 1997, the Company's Board of Directors met. The Board
approved the engagement by the Company and AEIC of Credit Suisse First

7
<PAGE> 12

Boston ("CSFB") with respect to their review of strategic and capital planning
alternatives. These alternatives included, among other things, sale of the
Company or assets of the Company, a rights offering to stockholders, a sale of
securities and other alternatives to increase underwriting capacity. The Board
reviewed AFG's proposal. The Board instructed CSFB to approach AFG with
information that the Company would consider negotiating a transaction, and CSFB
should return to the Board with the best transaction that could be negotiated.

During February and March 1997, the Company discussed with AFG
quickening the pace of implementation of the portion of the strategic alliance
that would permit the Company to offer to its insureds policies of Purchaser,
which would provide such insureds with the security of policies issued by an
insurer rated "A" by Best. The Company proposed publication of a joint press
release announcing the implementation of this arrangement. On March 17, 1997,
AFG notified the Company by telephone that it had determined not to proceed
with the implementation of the previously announced agreement to provide the
Company's insureds with policies of Purchaser, and that AFG would not invest
additional capital in the Company. In a subsequent telephone call on the same
day, AFG proposed acquiring the Aviation Division in consideration for
transferring the Series D Preferred Stock to the Company. Representatives of
AFG met with representatives of the Company and CSFB from March 18 through
March 21 to negotiate the terms of the proposed sale. On several occasions the
Company or CSFB discussed the inadequacy of the proposed consideration, but AFG
would not agree to increase the proposed consideration. During these meetings,
the Board met on March 18, March 19 and March 21, 1997 to review the proposed
transaction and the status of the negotiations. On March 21, 1997, the Board
rejected the transaction because of the inadequacy of the proposed
consideration.

While CSFB continued to pursue other strategic alternatives, the
Company initiated discussions with certain of its reinsurers to expand existing
underwriting agreements to make available to the Company's insureds policies of
insurers rated "A" by Best for all of the Company's general aviation product
lines. Representatives of the Company met with representatives of Chartwell Re
Corporation ("Chartwell") on March 20, 1997, and with representatives of Zurich
Reinsurance Centre, Inc. ("ZRC") on March 21, 1997. ZRC agreed to expand the
agreements of it and its affiliates so that the Company would have authority to
issue policies of ZRC and/or certain of its affiliates for all of the general
aviation product lines. Under this arrangement, AEIC would assume, as
reinsurer, all liabilities of such insurers under the policies issued by them.
The Company began preparing formal documentation and regulatory filings to
implement this arrangement. Also, Chartwell and ZRC agreed to maintain the
Company's authority to attach to AEIC's policies assumption of liability
endorsements ("ALE's") issued by them or their affiliates, which were rated at
least "A-" by Best. The ALE's provided for the assumption of AEIC's liabilities
under such policies by the insurer issuing the ALE in the event of the
insolvency of AEIC.

As a result of the effect of the 1996 loss on the statutory surplus of
AEIC, on March 25, 1997, Best downgraded its rating of AEIC from "B" to "D
(Poor)." Best stated that the downgrade reflects its view that AEIC's weakened
financial condition makes it "extremely vulnerable" to unfavorable changes in
underwriting or economic conditions. Best also expressed concern over the
potential regulatory response to the position of AEIC, whose capitalization had
fallen below the mandatory control level of risk-based capital. Risk-based
capital is a method of establishing the minimum amount of capital appropriate
for an insurance company to support its overall business operations in
consideration of its size and risk profile. AEIC's total statutory surplus at
December 31, 1996 was $19,339,374 and its Authorized Control Level was
$16,533,474. There are four different Control Levels. The Company Action
Level is when the Company's surplus is in excess of 150% of the Authorized
Control Level but less than 200% of the Authorized Control Level. This Level
requires the Company to prepare and submit a Risk Based Capital Plan to the
Commissioner of the state of domicile for his review and approval. The second
level is the Regulatory Action Level which is when the Company's surplus is in
excess of the Authorized Control level but less than 150% of the Authorized
Control Level. This is the Level of AEIC's surplus at

8
<PAGE> 13

December 31, 1996. This Level requires AEIC to submit a Risk Based Capital
Plan to the Commissioner of the state of domicile, which is the State of Texas.
After the report is submitted, the Commissioner will issue an order specifying
the corrective actions to be taken. AEIC's Risk Based Capital plan is in
progress. The primary attribute of the plan is to sell its remaining
operations and stop writing new and renewal business. The third Level is the
Authorized Control Level which is when the Company's surplus equals the
Authorized Control Level and authorizes the Commissioner to take whatever
regulatory actions considered necessary to protect the best interests of the
policyholders and creditors and may include regulatory control which includes
rehabilitation of liquidation. The fourth level is the mandatory control level
which is when the Company's surplus is from 70% to 100% of the Authorized
Control Level and authorizes the Commissioner to take actions necessary to
place the company under regulatory control which includes rehabilitation or
liquidation.

Throughout March 1997, the Company's revenues were declining partially
because of marketplace uncertainties about the financial condition of AEIC.
After Best downgraded AEIC's rating to "D", the Company's agents became more
reluctant to place their business with the Company even when the policies were
issued with ALE's. After the downgrade in the Best rating, the reinsurers of
the Company who had authorized the Company to issue ALE's and the insurers and
reinsurers that had authorized the Company to issue their policies became
increasingly concerned about AEIC's financial condition and vulnerability to
regulatory action. As a result of the additional credit exposure, during the
last week of March Chartwell's affiliate limited the Company's authority to
issue ALE's on marine policies to requests for ALE's specifically approved by
Chartwell. During the second week of April ZRC suspended the Company's
authority to issue ALE's, a ZRC affiliate suspended the Company's authority to
issue airport liability policies, and Virginia Surety Company gave 30 days
notice to the Company of termination of the agreement providing limited
authority for the Company to issue Virginia Surety aviation and marine
policies. However, the Company proceeded to discuss with ZRC a potential
transaction in which the Company would transfer its general aviation business
to a newly formed managing general agency operation in return for an equity
interest in such agency. ZRC or its affiliates would provide policy issuing
capacity to such agency in return for the remaining equity interest. Chartwell
expressed interest only in potentially participating in a transaction led by
ZRC. In meetings on April 8 and 9, 1997, representatives of ZRC and the Company
reviewed the potential economic terms of such transaction, and the potential
profits of the agency operation did not appear likely to provide a financial
return to the Company sufficient to fund the Company's ongoing obligations.

While the Company pursued alternatives for providing its insureds with
the security of an insurer rated at least "A-" by Best, CSFB and the Company
also pursued other strategic alternatives. CSFB contacted 13 parties that it
believed could be interested in discussing a potential transaction with the
Company. The Company contacted its lead reinsurers, ZRC and Chartwell, and its
reinsurance broker regarding their own interest or the potential interest of
other insurers or reinsurers in discussing a potential transaction with the
Company. CSFB continued to discuss a potential transaction with AFG. During the
second week of April 1997, the Company entered into extensive discussions with
AFG regarding the Aviation Division Sale. Only one party other than AFG
submitted a proposal regarding the Company or the aviation business. The
proposal was to purchase the aviation insurance business for $5 million in cash
and a 5% to 7% commission on renewals for one year. The proposal did not
include assumption of any of AEIC's existing liabilities, and the Series D
Preferred Stock would have remained outstanding.

9
<PAGE> 14

transactions. The directors also on numerous occasions discussed these matters
informally with management and each other. The Company also consulted the Texas
Department of Insurance regarding regulatory views and issues, and the Company
and AFG met with the Texas Department on April 10, 1997. The Texas Department
strongly encouraged the Company and AFG to enter into the Purchase Agreement.
On April 11, 1997, the Board met to consider the potential transfer of the
general aviation business to a managing general agency and the two potential
proposals to acquire the aviation insurance business. Ultimately determining
that the Aviation Division Sale would offer stockholders the best opportunity
to achieve maximum value for the general aviation business, the Board
deliberated the Aviation Division Sale at length and determined that it was the
best available transaction.

Recommendation of the Board of Directors. The Board of Directors of
the Company has unanimously approved the Purchase Agreement and believes that
the Aviation Division Sale is in the best interests of the Company and its
stockholders.

The Board of Directors, in approving the Aviation Division Sale and
recommending stockholder approval of the Proposal, considered a number of
factors, including the following: (i) the existing assets, operations, earnings
and prospects of the Company in light of the economic and regulatory climate
and AEIC's Best rating; (ii) the terms of the Purchase Agreement; (iii) the
advice of CSFB, the financial advisor to the Company, described below; (iv) the
high probability of consummation of the Aviation Division Sale (including the
absence of a material adverse change condition to Purchaser's obligation to
close); (v) the potential adverse consequences of delaying a transaction while
searching for additional alternatives; (vi) the terms of all potential
alternative transactions of which the Board was aware, including quantification
of the potential purchase price or financial return to the Company of the
potential alternative transactions; (vii) the probability of obtaining required
regulatory approvals; (viii) the likelihood that the Company would lose its
aviation insurance business to other, higher rated insurers without receiving
any consideration unless agents and policyholders quickly received assurance
that a financially secure insurer would assume the Company's liabilities.

ADVICE OF FINANCIAL ADVISOR

CSFB, financial advisor to the Company, has delivered to the Board of
Directors of the Company a letter, dated April 11, 1997, to the effect that the
Aviation Division Sale would result in more value to the Company, from a
financial point of view, than any other alternative explored by the Company and
CSFB together. A copy of the letter is attached hereto as Appendix I and should
be read carefully in its entirety with respect to the matters considered. The
letter does not address any other aspect of the Aviation Division Sale and does
not constitute a recommendation to any stockholder as to how such stockholder
should vote on the Proposal. See "The Aviation Division Sale--Advice of
Financial Advisor."

PLANS FOR FUTURE OPERATION OF THE COMPANY

Following the sale of the Company's three divisions, the business and
operations of the Company will differ materially from the Company's past
activities. The Company expects that it will no longer write new or renewal
policies for the foreseeable future. It will continue to handle claims on the
Company's policies that are not assumed by the purchasers as part of these
transactions, and maintain the related reserves and assets. See "Plans for
Future Operation of the Company." Accordingly, the Company's revenues and
earnings capacity will be significantly lower in the future. See "Unaudited Pro
Forma Financial Information." The Company's operational focus will be on
attempting to create residual value for the Company's stockholders from the
remaining operations and assets and additional ongoing operations. The Company
will substantially reduce its workforce, and the current outside directors of
the Company have informed the Company that they intend to resign. The Company's
Board of Directors will be reduced to three members. Mr. M. Philip Guthrie,
who is the Chairman of the Board, Chief Executive Officer, President and a
current director, will remain on the Board. Mr. Richard M. Kurz, who is the
Senior Vice President/Chief Financial Officer of the Company, and Mr. Howard D.

10
<PAGE> 15
Putnam have been nominated for election to the Board. See "Election of
Directors." The Company's management will consist of Mr. Guthrie and Mr. Kurz,
who will remain as executive officers.

It is not currently possible to determine how much residual value, if
any, will inure to the Company's stockholders following the sale or other
disposition of the Company's divisions. In addition to any value generated from
the management of claims and the investment portfolio, the Company will also
have an estimated net operating loss carryforward ("NOL") of at least $5.0
million following the sale or disposition of its divisions. Although the
Company has no current specific plans concerning the utilization of the NOL,
the NOL may be available to offset future income, if any, of the Company.

The Company will in the future explore other ways to maximize
shareholder value, including by possibly entering into a new line of business,
acquiring another business or selling the Company. The Company does not expect
that AEIC would be able to conduct any new insurance business for the
foreseeable future, however, due to regulatory restrictions and AEIC's Best
rating. Two agency subsidiaries of the Company, however, do not have similar
restrictions on their ability to conduct business. See "Plans for Future
Operation of the Company."

EFFECT ON COMPANY IF THE AVIATION DIVISION SALE IS NOT COMPLETED

If the Company is not able to complete the Aviation Division Sale as
contemplated in this Proxy Statement, the Company expects to lose its current
general aviation insurance business to other, higher rated insurers. Therefore,
the Company would expect to discontinue the insurance underwriting activities
of the Aviation Division. Consequently, the principal effect of nonconsummation
of the Aviation Division Sale would be that the Company would not receive any
consideration for the existing business conducted by such division. See "Plans
for Future Operation of the Company."

NO DISSENTERS' RIGHTS

Under Delaware law, stockholders of the Company are not entitled to
dissenters' appraisal rights in connection with the Aviation Division Sale.

CERTAIN CONSIDERATIONS

Stockholders should refer to the information under "Certain
Considerations" for a discussion of certain matters that should be considered
in connection with an evaluation of the Aviation Division Sale.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The Aviation Division Sale will not result in United States federal
income tax consequences to the holders of Common Stock of the Company. The
Company expects that it will recognize a gain for federal income tax purposes
of approximately $21.0 million, which will be offset by NOL. The Company
anticipates, nevertheless, that an alternative minimum tax in the amount of
approximately $.5 million will be payable in connection with the Aviation
Division Sale. See "The Aviation Division Sale--Certain Federal Income Tax
Consequences."

INTERESTS OF CERTAIN PERSONS IN THE AVIATION DIVISION SALE

Certain officers, directors and stockholders of the Company have
interests or obligations with respect to the Proposal that are different from,
or in addition to, the interests of stockholders of the Company generally. See
"The Aviation Division Sale--Interests of Certain Persons in the Aviation
Division Sale."

11
<PAGE> 16
GENERAL INFORMATION

GENERAL

This Proxy Statement is being furnished to holders of Common Stock and
Series D Preferred Stock of the Company in connection with the solicitation of
proxies by the Company's Board of Directors for use at the Annual Meeting to be
held at 9:00 a.m., local time, on July 30, 1997, at the AmeriSuites Hotel,
12411 North Central Expressway, Dallas, Texas 75243, and any adjournments or
postponements thereof, to consider and vote on (i) the Proposal, (ii) the
election of two directors of the Company to serve until the 1999 and 2000
annual meetings of stockholders, respectively, or until their successors are
duly elected and qualified; (iii) the ratification of the appointment of Arthur
Andersen LLP as the independent auditors of the Company and its subsidiaries
for the fiscal year ending December 31, 1997; and (iv) such other matters as
may properly come before the Annual Meeting or any adjournment or postponement
thereof.

RECORD DATE

The Board of Directors has fixed the close of business on June 30,
1997 as the Record Date for the determination of stockholders entitled to
notice of and to vote at the Annual Meeting and at any adjournments or
postponements thereof. The Common Stock and the Series D Preferred Stock are
the only classes of outstanding securities of the Company entitled to notice of
and to vote at the Annual Meeting.

VOTE REQUIRED

As of the Record Date, 7,047,098 shares of Common Stock and 357,875
shares of Series D Preferred Stock were outstanding. Each share of Common Stock
outstanding on the Record Date shall be entitled to one vote, and each share of
Series D Preferred Stock outstanding on the Record Date shall be entitled to
4.92 votes upon each matter to come before the Annual Meeting. Pursuant to the
terms of the Securities Purchase Agreement, AFG is required to vote all votes
which it has in excess of 20% of the total votes eligible to be voted on a
matter in proportion to the actual votes of holders of all remaining votes
(including AFG's 20% vote).

The presence, either in person or by proxy, of a majority of the votes
entitled to be cast at the Annual Meeting is necessary to constitute a quorum
for the Annual Meeting.

Section 271 of the DGCL requires that the sale of all or substantially
all of the assets of a corporation be approved by the holders of a majority of
the outstanding stock of the corporation entitled to vote thereon. Although the
Aviation Division assets being sold to Purchaser are owned by the Company's
subsidiary, AEIC, on a consolidated basis such assets constituted approximately
45.0% of the Company's total assets as of March 31, 1997 and the Aviation
Division represented approximately 70.1% of earned premium for the year ended
December 31, 1996. Accordingly, since Section 271 of the DGCL may be applicable
to the Aviation Division Sale, the affirmative vote of a majority of the total
number of votes entitled to be cast at the Annual Meeting has been established
as a requirement for approval of the Proposal.

A plurality of the votes cast in person or by proxy at the Annual
Meeting is required to elect a director. There will be no cumulative voting for
directors. The affirmative vote of a majority of the votes cast is required to
ratify the appointment of Arthur Andersen LLP as the Company's independent
auditors.

Abstentions will be counted as present for purposes of determining
whether a quorum is present. With respect to the Proposal, abstentions will
have the same effect as a vote against the Proposal and, with respect to the
election of management's nominees for director, the withholding of authority
will have no effect on the

12
<PAGE> 17
election. Under the rules of the National Association of Securities Dealers,
Inc., brokers who hold shares in street name for customers will not have the
authority to vote on the Proposal unless they receive specific instructions
from beneficial owners. While such a broker non-vote will be counted as present
for purposes of a quorum, it will have the same effect as a vote against
approval of the Proposal.

Purchaser, which owned 357,875 shares of Series D Preferred Stock and
116,000 shares of Common Stock on the Record Date, representing approximately
20% of the total votes entitled to be cast at the Annual Meeting, has agreed to
vote all of such shares for approval of the Proposal. In addition, Mason Best,
which owns 2,960,772 shares of Common Stock, representing approximately 33.6%
of the total votes entitled to be cast at the Annual Meeting, has entered into
an agreement with Purchaser to vote all of such shares for approval of the
Proposal. Accordingly, stockholder approval of the Proposal is assured.

PROXIES

All shares of Common Stock and Series D Preferred Stock represented by
properly executed proxies will be voted at the Annual Meeting in accordance
with the directions indicated on the respective proxies unless the proxies have
been previously revoked. Unless contrary direction is given, all shares of
Common Stock and Series D Preferred Stock represented by proxies will be voted
FOR approval of the Proposal, the nominees for director set forth herein and
ratification of the appointment of the Company's independent auditors, and in
the proxy holder's discretion as to such other matters incident to the conduct
of the Annual Meeting. If any other matters are properly presented at the
Annual Meeting for action, including a question of adjourning the meeting from
time to time, the persons named in the proxies and acting thereunder will have
discretion to vote on those matters in accordance with their best judgment.

All holders of Common Stock and Series D Preferred Stock are requested
to complete, sign, date and promptly return the enclosed proxy card in the
postage paid envelope provided for this purpose in order to ensure that their
shares are voted. A stockholder executing and returning a proxy has the power
to revoke the proxy at any time before it is voted. A stockholder who wishes to
revoke a proxy can do so by executing a later-dated proxy relating to the same
shares and delivering it to the Secretary of the Company prior to the vote at
the Annual Meeting or by appearing in person at the Annual Meeting and voting
in person the shares to which the proxy relates. Any written notice revoking
the proxy should be sent to American Eagle Group, Inc., 12801 N. Central
Expressway, Suite 800, Dallas, Texas 75243, Attention: Secretary.

SOLICITATION

The Company will bear the expenses in connection with this
solicitation, including the cost of preparing and mailing this Proxy Statement.
In addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of the Company in person or by telephone,
telegram or other means of communication. Such directors, officers and
employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation.
Arrangements also will be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and the Company will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.

13
<PAGE> 18
THE AVIATION DIVISION SALE

GENERAL

On April 11, 1997, the Company, AEIC and Purchaser entered into the
Purchase Agreement, which, subject to the terms and conditions thereof,
provides for the sale by AEIC of the business and a substantial portion of the
assets constituting the Aviation Division to Purchaser in exchange for (i) 30%
of the unearned premiums to be transferred to Purchaser, (ii) the net book
value of all furniture, fixtures and equipment to be transferred to Purchaser,
(iii) all funds collected by Purchaser with respect to agents' balances
relating to the general aviation insurance business and which are in excess of
90 days old as of the closing of the Aviation Division Sale; (iv) commissions
of 4%, 2% and 1% of the direct written premiums on renewal policies relating to
the general aviation insurance business during the first, second, and third
years, respectively, following the closing of the Aviation Division Sale; (v)
the assumption of certain liabilities including all liabilities relating to
general aviation policies issued by the Company since January 1, 1993, but
excluding liabilities relating to non-aviation policies issued by the Company
and aviation policies issued prior to January 1, 1993; and (vi) the transfer to
the Company of all of the Series D Preferred Stock issued by the Company to
Purchaser in December 1996.

The Company estimates that the cash consideration to be received by
the Company at the closing of the Aviation Division Sale will be approximately
$8.0 million. This amount is calculated at 30% of the net unearned premiums
(gross unearned premium of $36.5 million less ceded unearned premiums of $9.9
million or $26.6 million). In addition, the Company will receive the estimated
$1.9 million net book value of the furniture, fixtures and equipment to be
transferred to Purchaser. The Company also estimates that it may receive an
additional amount of approximately $3.0 million during the three-year period
following the closing, consisting of the percentage of commissions payable to
the Company by Purchaser on renewal policies that are expected to be written by
Purchaser. The removal retention commission was based upon an estimated
renewal retention rate of 55% for year 1, 30% for year 2 and 20% for year 3 on
approximately $100 million of written premium. The Company's actual renewal
retention rate over the last 17 months has been approximately 10% higher than
the rates used in this calculation. The estimated amount of renewal premiums
written are based on historical averages of the Company over the latest 17
months. Actual amounts may differ as the Company's financial position has
changed, and such differences may be material. See "Unaudited Pro Forma
Financial Information."

REASONS FOR THE TRANSACTION

For the fiscal year ended December 31, 1995, the Company recorded a
loss before income tax benefit of approximately $20.4 million. Fiscal year 1995
results were particularly impacted by a special charge to earnings of $20.6
million (after tax) for certain discontinued lines and classes of business and
increased reserves for IBNR and unearned premium. Based on the special charge,
Best lowered AEIC's rating from "A- (Excellent)" to "B++ (Very Good)" on March
4, 1996. Subsequent to Best's rating action, the Company announced that it was
pursuing various alternatives for increasing the capital and surplus of AEIC.

14
<PAGE> 19
March 31, 1996. Due to the Company's first quarter financial performance and
the further deterioration of its capitalization, Best further downgraded AEIC's
rating to "B (Adequate)" on May 24, 1996. Best additionally placed a negative
outlook on the rating, pending the outcome of ongoing capital-raising efforts
of the Company. Best further stated that if the Company was unsuccessful in
raising capital or if operating results did not improve, Best would likely
downgrade the rating further.

During 1996, the Board of Directors of the Company undertook an in-
depth review of the Company's needs and explored various alternatives for
increasing capital. Ultimately determining that a properly structured strategic
alliance would offer stockholders the best opportunity to maximize stockholder
value, in November 1996, the Board of Directors authorized the Company to enter
into a binding agreement with AFG. On November 5, 1997, the Company and AFG
entered into the Securities Purchase Agreement. The stockholders of the Company
approved the Securities Purchase Agreement and the transactions contemplated
thereby on December 31, 1996. Pursuant to the terms of such agreement, the
Company sold 350,000 shares of the Series D Preferred Stock to Purchaser, which
is a wholly-owned subsidiary of AFG, for $35.0 million. Of the proceeds, the
Company used $13.3 million to fully repay and cancel its bank credit facility
and contributed $17.0 million to the capital and surplus of AEIC. The Series D
Preferred Stock has a dividend rate of 9%, payable quarterly, and the dividend
may, at the Company's option, be paid in additional shares of Series D
Preferred Stock for the first five years. The Securities Purchase Agreement
also provided that AFG and the Company, through their appropriate subsidiaries,
would negotiate in good faith the terms of agreements embodying a strategic
alliance that was expected to allow the Company to market and underwrite new
and expanded aviation insurance product lines and permit the Company to offer,
when required by an insured, products providing the financial security of an
insurer rated "A (Excellent)" by Best.

The Securities Purchase Agreement also required the Company to record
a $15 million reserve addition in its financial results for the fourth quarter
of 1996. Based upon additional data, analyses and evaluations performed in
connection with closing the books for the 1996 fiscal year, including analysis
from its independent actuary, the Company increased the level of the reserve
addition to approximately $30.0 million. After the announcement of the
withdrawal from the transportation program for local and intermediate-haul
truckers at the beginning of the fourth quarter of 1996, the Company ended the
quarter with higher transportation loss levels than anticipated, while premium
levels declined faster than originally anticipated. Losses from the auto dealer
program, which was discontinued in 1995, also continued at higher-than-
anticipated levels. The year-end actuarial analysis, taking these patterns into
account, resulted in significant reserve additions for IBNR losses and related
reinsurance costs for these lines of business. The remainder of the reserve
additions are predominantly increases in reserves for IBNR losses and related
reinsurance costs for the aviation lines of business. Of the total $30.0
million reserve addition, approximately $19.1 million resulted from increases
in IBNR losses, and the remainder resulted from increased levels of ceded
reinsurance premiums due to increased loss levels. As a result of these
factors, the Company recorded a loss before income tax benefit of $44.4 million
for 1996, and AEIC's statutory surplus declined to $20.4 million at December
31, 1996.

15
<PAGE> 20

On March 9, 1997, at the request of AFG, representatives of AFG met
with representatives of the Company. AFG believed that the Company needed
additional capital in order to strengthen the capital and surplus of AEIC. AFG
proposed loaning $15 million to the Company, which would be repaid from the
proceeds of a rights offering to stockholders of the Company. AFG would give
to the Company a standby commitment to subscribe for all rights which were not
subscribed by the stockholders. As a standby commitment fee, AFG proposed
decreasing the conversion price of the Series D Preferred Stock. The pricing
of the rights offering and the proposed conversion price were preliminarily
proposed to be $3.00 per share.

On March 13, 1997, the Company's Board of Directors met. The Board
approved the engagement by the Company and AEIC of CSFB with respect to their
review of strategic and financial planning alternatives. These alternatives
included, among other things, sale of the Company or assets of the Company, a
rights offering to stockholders, a sale of securities and other alternatives to
increase underwriting capacity. The Board reviewed AFG's proposal. The Board
instructed CSFB to approach AFG with information that the Company would
consider negotiating a transaction, and CSFB should return to the Board with
the best transaction that could be negotiated.

16
<PAGE> 21

their affiliates, which were rated at least "A-" by Best. The ALE's provided
for the assumption of AEIC's liabilities under such policies by the insurer
issuing the ALE in the event of the insolvency of AEIC.

Throughout March 1997, the Company's revenues were declining partially
because of marketplace uncertainties about the financial condition of AEIC.
After Best downgraded AEIC's rating to "D", the Company's agents became more
reluctant to place their business with the Company even when the policies were
issued with ALE's. After the downgrade in the Best rating, the reinsurers of
the Company who had authorized the Company to issue ALE's and the insurers and
reinsurers that had authorized the Company to issue their policies became
increasingly concerned about AEIC's financial condition and vulnerability to
regulatory action. As a result of the additional credit exposure, during the
last week of March Chartwell's affiliate limited the Company's authority to
issue ALE's on marine policies to requests for ALE's specifically approved by
Chartwell. During the second week of April ZRC suspended the Company's
authority to issue ALE's, a ZRC affiliate suspended the Company's authority to
issue airport liability policies, and Virginia Surety Company gave 30 days
notice to the Company of termination of the agreement providing limited
authority for the Company to issue Virginia Surety aviation and marine
policies. However, the Company proceeded to discuss with ZRC a potential
transaction in which the Company would transfer its general aviation business
to a newly formed managing general agency operation in return for an equity
interest in such agency. ZRC or its affiliates would provide policy issuing
capacity to such agency in return for the remaining equity interest. Chartwell
expressed interest only in potentially participating in a transaction led by
ZRC. In meetings on April 8 and 9, 1997, representatives of ZRC and the
Company reviewed the potential economic terms of such transaction, and the
potential profits of the agency operation did not appear likely to provide a
financial return to the Company sufficient to fund the Company's ongoing
obligations.

Throughout this process, the Board had met on five separate occasions
from March 13 through April 11, 1997 to review the status of the Company's
business and the status and proposed terms of various potential transactions.
The directors also on numerous occasions discussed these matters informally
with management and each other. The Company also consulted the Texas Department
of Insurance regarding regulatory views and

17
<PAGE> 22

issues, and the Company and AFG met with the Texas Department on April 10,
1997. The Texas Department strongly encouraged the Company and AFG to enter
into the Purchase Agreement. On April 11, 1997, the Board met to consider the
potential transfer of the general aviation business to a managing general
agency and the two potential proposals to acquire the aviation insurance
business. Ultimately determining that the Aviation Division Sale would offer
stockholders the best opportunity to achieve maximum value for the general
aviation business, the Board deliberated the Aviation Division Sale at length
and determined that it was the best available transaction.

The Board of Directors, in approving the Aviation Division Sale and
recommending stockholder approval of the Proposal, considered a number of
factors, including the following: (i) the existing assets, operations, earnings
and prospects of the Company in light of the economic and regulatory climate;
and AEIC's Best rating (ii) the terms of the Purchase Agreement; (iii) the
advice of CSFB, the financial advisor to the Company, described below; (iv) the
high probability of consummation of the Aviation Division Sale (including the
absence of a material adverse change condition to Purchaser's obligation to
close); (v) the potential adverse consequences of delaying a transaction while
searching for additional alternatives; (vi) the terms of all potential
alternative transactions of which the Board was aware, including quantification
of the potential purchase price or financial return to the Company of the
potential alternative transactions; (vii) the probability of obtaining required
regulatory approvals; (viii) the likelihood that the Company would lose its
aviation insurance business to other, higher rated insurers without receiving
any consideration unless agents and policyholders quickly received assurance
that a financially secure insurer would assume the Company's liabilities.

ADVICE OF FINANCIAL ADVISOR

On March 13, 1997, the Company and AEIC retained CSFB with respect to
their review of strategic and financial planning alternatives, including, among
other things, sale of the Company or assets of the Company, a rights offering
to stockholders, a sale of securities, and other alternatives to increase
underwriting capacity. CSFB was selected by the Company based on CSFB's
experience, expertise and familiarity with the Company and its business. CSFB
is an internationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate, estate and other
purposes.

At a meeting of the Board of Directors held on April 11, 1997, a
representative of CSFB discussed with the Board of Directors, among other
things, the Company's then-recent operating results (that is, that for 1996 the
Company reported a GAAP net loss of $44.4 million, including $30 million of
reserve additions, and that AEIC's surplus had dropped to $20.4 million as of
December 31, 1996), ratings downgrades (which are described in detail above,
see "-Reasons for the Transaction"), the write down by AFG (that is, that on
March 27, 1997 AFG announced "that it has written down its $35 million
investment in [the Company], effective December 31, 1996."), regulatory action
(that is, discussions between the Company, AEIC and their various regulators),
the Company's management's views as to the future prospects (that is, the fact
that the Company's management had advised CSFB that prospects for future
earnings performance were poor without additional capital and that the
Company's preliminary first quarter results were a net loss of $2.9 million),
and stock price performance (that is, that in May 1994 the Company sold its
common stock in an initial public offering of $10 per share; that the Company's
stock price closed as high as $12-1/8 and closed above $10 as late as February
1996; that following the Company's report of disappointing fourth quarter 1995
results, including a special charge, during the first quarter of 1996 the stock
price began to deteriorate steadily and traded in a range of $3 3/8 to $4 1/8
prior to the announcement of the sale of the Series D Preferred Stock to AFG;
and that following the

18
<PAGE> 23

announcement of the sale of the Series D Preferred Stock to AFG, the Company's
stock price traded as high as $5 1/2 but has dropped to $1 1/2 as of April
9). The representative of CSFB informed the Board that only one party other
than AFG had submitted a proposal with respect to either the Company or AEIC,
and that such proposal was less favorable to the Company than the AFG proposal
from a financial point of view. That proposal (the "Other Proposal") made by a
third party unaffiliated with the Company reinsurers, or AEG (the "Third
Party"), involved a purchase of renewal rights to AEIC's aviation business for
$5 million in cash plus a 5-7% commission on first year renewals. AEIC, under
the Other Proposal, would retain responsibility and economic risk for all of
its existing reserves. The CSFB representative stated that, given the
Company's financial condition and prospects and the fact that the solicitation
process failed to produce any proposals at that time (other than the AFG
proposal and the one other proposal referenced above), a sale of the aviation
business and certain other assets to AFG at that time, on terms and conditions
described to the Board of Directors at its meeting of April 11, 1997, would
result in more value to the Company, from a financial point of view, than any
other alternative which was explored together by the Company and CSFB. A
letter dated April 11, 1997 was subsequently delivered to the Company's Board
of Directors to the foregoing effect.

In CSFB's view, the Other Proposal was less favorable to the Company
than the AFG proposal from a financial point of view because CSFB believed,
based on conversations with the Third Party, that the Other Proposal was
subject to, among other things, due diligence and negotiation of definitive
documentation, thus making consummation of a transaction less probable.
Further, the Other Proposal was, in CSFB;s view, less favorable based upon the
cash consideration which the Company would receive pursuant to the Other
Proposal as opposed to the amount of cash estimated by Company management to be
payable by AFG and the value of the Series D Preferred Stock.

As part of the solicitation process conducted by CSFB, 13 companies
were solicited. Of these, only the Third Party made a proposal.

The preparation of the CSFB letter is not necessarily susceptible to
partial analysis or summary description. Selecting portions of the analysis or
of the summary set forth above, without considering the analyses as a whole,
could create an incomplete view of the process underlying the CSFB letter. In
arriving at its views, CSFB considered the results of such analyses taken as a
whole. CSFB made qualitative judgments as to the significance and relevance of
each analysis and factor.

The full text of the letter to the Board of Directors of the Company
dated April 11, 1997, which sets forth the matters considered, is attached as
Appendix I to this Proxy Statement and is incorporated herein by reference.
Stockholders of the Company are urged to read this letter carefully in its
entirety. CSFB's letter is directed only to the value of the Aviation Division
Sale from a financial point of view compared to any other alternative which was
explored together by the Company and CSFB, does not address any other aspect of
the Aviation Division Sale or any related transaction and does not constitute a
recommendation to any stockholder as to how such stockholder should vote at the
Annual Meeting. The summary of the letter of CSFB set forth in this Proxy
Statement is qualified in its entirety by reference to the full text of such
letter. CSFB has consented to the Company's inclusion of the full text of its
letter in this Proxy Statement.

Miscellaneous. Pursuant to the terms of CSFB's engagement, the Company
has agreed to pay CSFB for its services in connection with the Aviation
Division Sale an aggregate financial advisory fee equal to $500,000. The
Company also has agreed to reimburse CSFB for out-of-pocket expenses incurred
by CSFB in performing its services, including the reasonable fees and expenses
of legal counsel and any other advisor retained by CSFB, and to indemnify CSFB
and certain related persons and entities against certain liabilities, including
liabilities under the federal securities laws, arising out of CSFB's
engagement.

CSFB has in the past provided financial services to the Company, AFG
and Purchaser unrelated to the Aviation Division Sale, for which services CSFB
has received compensation. In connection with the sale of the Series D
Preferred Stock to Purchaser in December 1996, the Company paid CSFB a
financial advisory fee of

19
<PAGE> 24
$1.4 million and reimbursed CSFB for its out-of-pocket expenses and agreed to
indemnify CSFB and certain related persons and entities against certain
liabilities, including liabilities under the federal securities law, arising
out of CSFB's engagement. In the ordinary course of business, CSFB and its
affiliates may actively trade the equity securities of the Company and both the
debt and equity securities of AFG for their own account and for accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.

NAME CHANGE

Pursuant to the terms of the Purchase Agreement, the Company and AEIC
are required to change their names to names bearing no similarity to "American
Eagle." In voting on the Proposal, stockholders will also be voting on a
proposed amendment to the Company's Restated Certificate of Incorporation to
change the name of the Company to "________________."

REGULATORY APPROVALS

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules promulgated thereunder, certain
transactions may not be consummated unless certain information has been
furnished to the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Justice Department (the "Antitrust Division") and certain
waiting period requirements have been satisfied. Based on AFG's public
statements as to the value of the Aviation Division Sale, the Company believes
that no filing is required under the HSR Act.

AEIC may not consummate the Aviation Division Sale with Purchaser
without the prior approvals of the Texas and California Commissioners of
Insurance. AEIC has provided the Purchase Agreement to the Texas and California
Departments of Insurance and requested approval of the Aviation Division Sale.
See "Insurance Regulation."

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The Aviation Division Sale will not result in federal income tax
consequences to holders of the Company's Common Stock. The Aviation Division
Sale will result in a taxable disposition of the assets of the Company and AEIC
for federal income tax purposes. The Company will recognize gain measured by
the difference, if any, between the amount paid by Purchaser (including net
liabilities assumed by Purchaser) and the Company's or AEIC's adjusted tax
basis in such assets. The Company currently estimates the federal income tax
gain to be approximately $21.0 million, all of which will be offset by NOL. The
Company anticipates, nevertheless, that an alternative minimum tax in the
amount of $.5 will be payable in connection with the Aviation Division Sale.

This description of certain federal income tax consequences of the
Aviation Division Sale is based on the Internal Revenue Code of 1986, as
amended, applicable Treasury Regulations thereunder, and administrative rulings
and judicial authority as of the date hereof, all of which are subject to
change. Any such change could affect the continuing validity of these
conclusions. This description does not discuss all aspects of income taxation
that may be relevant, and it does not discuss any aspect of state, local,
foreign or other tax laws, or any federal tax other than federal income tax. No
ruling is being sought from the Internal Revenue Service as to the anticipated
federal income tax consequences of the Aviation Division Sale.

20
<PAGE> 25
ACCOUNTING TREATMENT

The Company estimates that a gain of approximately $11.7 million will
be realized in fiscal year 1997 as a result of the sales of the business of its
three divisions.

NO DISSENTERS' RIGHTS

Stockholders have no dissenters' appraisal rights under Delaware law
in connection with the Aviation Division Sale.

INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION

Certain officers, directors and stockholders of the Company have
certain interests or obligations with respect to the Aviation Division Sale
that are different from, or in addition to, the interests of stockholders of
the Company generally. Purchaser is the holder of 357,875 shares of Series D
Preferred Stock and 116,000 shares of Common Stock. For a description of the
interests and obligations of Purchaser with respect to the Aviation Division
Sale, see "The Purchase Agreement and Related Agreements." Certain officers of
the Company are parties to employment agreements with the Company whereby
certain provisions permitting the Company to terminate the employment of such
officers become inapplicable after a "change of control" of the Company.
Consummation of the Aviation Division Sale will constitute such a change of
control. Upon consummation of the sales of its three divisions, only two
officers will have employment contracts. See "Executive Compensation--Executive
Officer Agreements." In addition, the Company's 1994 Stock Incentive Plan and
1994 Director Stock Option Plan provide for the full vesting of options
outstanding for at least six months in the event there is a change in control
of the Company. Consummation of the Aviation Division Sale will constitute such
a change in control. Within 90 days after consummation of the Aviation Division
Sale, however, all outstanding stock options which become fully vested will
terminate, if not previously exercised, as a result of the termination of the
employment or resignation of the option holders upon the consummation of the
sale. See "Executive Compensation."

21
<PAGE> 26

CERTAIN CONSIDERATIONS

While the Board of Directors is of the opinion that the Aviation
Division Sale is fair to, and in the best interests of, the Company and its
stockholders, stockholders should consider the following possible effects in
evaluating the Proposal.

DELISTING OF COMMON STOCK

The New York Stock Exchange (the "NYSE") has informed the Company that
it will delist the Common Stock from the NYSE upon closing of the Aviation
Division Sale because the Company will no longer meet the continued listing
requirements of the NYSE. Such delisting is likely to adversely affect the
market for the Common Stock. If the Common Stock is delisted from the NYSE, the
Company may apply to have the Common Stock quoted on the Nasdaq Small Cap
Market. There can be no assurance that the Company will be able to meet the
listing requirements for quotation on the Nasdaq Small Cap Market. If the
Company does not meet such listing requirements, it is possible that the Common
Stock would continue to trade in the local over-the-counter market and that
price quotations would be reported by other sources. The extent of the public
market for the Common Stock and the availability of such quotations would,
however, depend upon the number of stockholders remaining at the time, the
interest in maintaining a market in the Common Stock on the part of securities
firms and other factors.

LOSS OF MARGIN STATUS

The Common Stock is currently a "margin security" under the
regulations of the Board of Governors of the Federal Reserve System, which has
the effect, among other things, of allowing brokers to extend credit on the
collateral of such securities. Depending upon factors similar to those
described above with respect to market quotations, it is possible that the
shares of Common Stock would no longer constitute "margin securities" for the
purposes of the margin regulations of the Board of Governors of the Federal
Reserve System and, therefore, could no longer be used as collateral for loans
made by brokers.

INVESTMENT COMPANY ACT CONSIDERATIONS

The Investment Company Act of 1940, as amended (the "1940 Act"),
requires the registration of, and imposes various substantive restrictions on,
certain companies that engage primarily, or propose to engage primarily, in the
business of investing, reinvesting, or trading in securities, or that fail
certain statistical tests regarding the composition of assets and sources of
income, and are not primarily engaged in businesses other than investing,
holding, owning or trading securities. The Company intends to engage in a
business or businesses other than investing, reinvesting, owning, holding or
trading in securities as soon as reasonably possible following the closing of
the Aviation Division Sale and the disposition of its other divisions, although
there can be no guarantee that the Company will be able to do so. If the
Company were required to register as an investment company under the 1940 Act,
it would become subject to substantial regulation with respect to its capital
structure, management, operations, transactions with affiliates, and other
matters.

POTENTIAL REGULATORY ACTION AND OTHER CONTINGENCIES

22
<PAGE> 27

which might be required for these matters in the pro forma financial statements
presented elsewhere in this Proxy Statement. Such estimate is $7.5 million,
the Company currently cannot predict what position the Texas Department will
ultimately take on the remaining matters. The Texas Department could require
additional adjustments that are material to the Company. If the adjustments, if
any, cause AEIC to become insolvent under statutory accounting principles, the
Department could appoint a conservator or receiver for AEIC and ultimately
liquidate AEIC. It cannot presently be predicted whether a liquidation under
such circumstances would result in any residual value available for
stockholders of the Company. See "Insurance Regulation."

Prior to the Company's acquisition of AEIC and Aviation Office of
America, Inc. ("AOA") from Talegen Group, Inc. ("Talegen"), AOA was the
aviation manager for certain of its affiliates, which were insurance company
subsidiaries of Talegen. AOA continued to act as aviation manager for these
companies after the acquisition. Included in the aviation business managed by
AOA before and after the acquisition were workers' compensation programs for
aviation-related businesses. International Insurance Company
("International"), a subsidiary of Talegen and successor in interest to the
Talegen subsidiaries whose aviation business was managed by AOA, is engaged in
arbitrations with certain reinsurers of the workers' compensation programs.
The issue being arbitrated involves the scope and coverage of the reinsurance
contracts in effect before, during and after the acquisition. The Company
cannot currently predict the outcome of the arbitrations. If International
loses the arbitrations, it may claim that the Company is responsible for losses
not covered by reinsurance on policies issued post-acquisition, an amount which
could potentially exceed the Company's capital. Although there can be no
guarantee of the outcome of any arbitration or litigation of such claim, the
Company believes that it has valid defenses to a claim, if one is made, by
International against the Company. The defenses involve matters such as the
scope of disclosures made to the Company at the time of the acquisition from
Talegen, interpretation of contractual language and adequacy of contractual
consideration.

PLANS FOR OPERATION OF THE COMPANY AFTER THE AVIATION DIVISION SALE

Following the sale of the Company's three divisions, the business and
operations of the Company will differ materially from the Company's past
business and operations. The Company expects that it will no longer write new
or renewal policies for the foreseeable future. It will continue to handle
claims on the Company's policies that are not assumed by the purchasers as part
of these transactions, and maintain the related reserves and assets.
Accordingly, the Company's revenues and earnings capacity will be significantly
lower in the future. The Company's operational focus will be on attempting to
create residual value for the Company's stockholders from the remaining
operations and assets and additional ongoing operations. In this connection,
the Company intends to engage in a business or businesses other than investing,
reinvesting, owning, holding or trading in securities as soon as reasonably
possible following the closing of the Aviation Division Sale and the
disposition of its other divisions, although there can be no guarantee that the
Company will be able to do so. It is not currently possible to determine how
much residual value, if any, will inure to the Company's stockholders following
the sale or other disposition of the Company's divisions. See "Plans for Future
Operation of the Company."

EFFECT ON COMPANY IF THE AVIATION DIVISION SALE IS NOT COMPLETED

23
<PAGE> 28
FORWARD LOOKING STATEMENTS

With the exception of historical information, the statements in this
Proxy Statement constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause actual performance and results of the Company to be materially
different from any future performance and results expressed or implied by such
forward-looking statements. Certain known factors are noted in this Proxy
Statement, including without limitation, those set forth under "The Purchase
Agreement and Related Agreements--Conditions to Closing," "Historical Business
of the Company--Disposition of P&C Division," "Historical Business of the
Company--Disposition of Marine Division," "Certain Considerations," "Plans for
Future Operation of the Company" and "Insurance Regulation." Other factors
include, without limitation, economic conditions, trends in the property and
casualty insurance industry, competitive products and pricing, possibility of
catastrophic losses, availability of adequate surplus and reinsurance capacity,
ability to settle claims at amounts no greater than established reserves, the
number and severity of losses reported in the future, any actions by regulatory
agencies due to the financial condition of AEIC and other risks indicated in
this filing and other filings made by the Company with the Securities and
Exchange Commission.

24
<PAGE> 29
THE PURCHASE AGREEMENT AND RELATED AGREEMENTS

The following is a summary of certain provisions of the Purchase
Agreement and certain related agreements. A copy of the Purchase Agreement is
attached hereto as Appendix II. Stockholders are urged to read the Purchase
Agreement and related agreements in their entirety. Capitalized terms not
defined herein shall have the meanings ascribed to them in the Purchase
Agreement. The Board of Directors reserves the right to terminate the Purchase
Agreement in accordance with its terms before or after stockholder approval of
the Proposal.

PURCHASED ASSETS

Pursuant to the Purchase Agreement, Purchaser will acquire all of
AEIC's right, title, interest and obligations in, to and under all aviation
insurance business which was written or assumed by AEIC during the period
commencing January 1, 1993 and ending March 31, 1997 (the "Aviation Business").
In addition to the Aviation Business, Purchaser will acquire (a) receivables,
investment securities and cash equal in value to the Company's reserves for
outstanding claims relating to general aviation policies issued by the Company
since January 1, 1993; (b) all right, title and interest of AEIC and the
Company in and to the computer equipment and software used in connection with
the Aviation Business and the Reinsured Business (as defined below); (c) all
right, title and interest in and to the office space leased by AEIC on the
eighth and ninth floors of the building located at 12801 North Central
Expressway, Dallas, Texas (the "Office Lease"); (d) all right, title and
interest of AEIC and the Company in and to the names "American Eagle Insurance
Company" and "American Eagle Group, Inc.," including all intellectual property
rights in connection therewith; (e) all right, title and interest of AEIC in
and to certain reinsurance contracts; (f) all right, title and interest of AEIC
and the Company in and to all furniture, fixtures and tangible personal
property used in connection with the Aviation Business or the Reinsured
Business; and (g) all right, title and interest of AEIC and the Company in and
to all other property relating to or used in connection with the Aviation
Business or the Reinsured Business. The foregoing shall collectively be
referred to as the "Assets."

QUOTA SHARE REINSURANCE AGREEMENT

Pursuant to the Purchase Agreement, AEIC and Purchaser have entered a
certain Quota Share Reinsurance Agreement effective as of March 31, 1997,
pursuant to which AEIC has ceded to Purchaser and Purchaser has agreed to
assume and reinsure all aviation business of AEIC in force as of March 31, 1997
and all aviation business written or renewed by AEIC after March 31, 1997 and
until such time as Purchaser is qualified to issue directly its own policies
(the "Reinsured Business"). Purchaser's reinsurance obligation pertains only to
that portion of such business that AEIC retains net for its own account. In
consideration for Purchaser's assumption of such business, Purchaser will
receive AEIC's net unearned premium as of March 31, 1997 for business in force
and AEIC's net written premium for business written thereafter. Purchaser will
pay AEIC a ceding commission of 30%.

CLOSING

The closing for the transactions contemplated by the Purchase
Agreement (the "Closing") shall take place within three business days of
satisfaction of all conditions to closing as set forth in the Purchase
Agreement, but not later than July 31, 1997, unless extended by mutual
agreement of AEIC, the Company and Purchaser. The date on which the Closing
occurs hereafter shall be referred to as the "Closing Date."

PURCHASE PRICE AND OTHER PAYMENTS

Effective as of the Closing Date, (a) AEIC shall deliver and convey to
Purchaser assets having a market value equal to all liabilities of the Aviation
Business and the Reinsured Business; (b) Purchaser shall pay to

25
<PAGE> 30
AEIC, as a commission, an amount equal to 30% of unearned premiums to be
transferred to Purchaser; (c) Purchaser shall pay to AEIC an amount equal to
the book value, adjusted for depreciation, of all furniture, fixtures and
equipment included in the Assets; and (d) Purchaser shall convey and deliver to
the Company, free and clear of all claims whatsoever, all shares of the Series
D Preferred Stock of the Company owned by Purchaser, together with undated
stock powers duly endorsed in blank.

In addition to all other amounts due to AEIC under the Purchase
Agreement, Purchaser is obligated to pay AEIC (a) an amount equal to all funds
collected by Purchaser with respect to agent's balances of the Aviation
Business which are in excess of 90 days old as of the Closing Date and (b)
commissions equal to 4%, 2% and 1% of renewal premiums relating to the Aviation
Business and Reinsured Business during the first, second and third years,
respectively, following the Closing Date.

In addition, within 20 days after the Closing, Purchaser shall prepare
a balance sheet for the Aviation Business as of the Closing Date (the "Closing
Date Balance Sheet"), and certain purchase price adjustments shall be made to
account for differences in the amounts of assets and liabilities, the payment
of claims and the receipt of premiums since March 31, 1997.

ASSUMPTION OF LIABILITIES

At the Closing, Purchaser will assume and agree to pay, discharge or
perform, as appropriate, the following liabilities and obligations of AEIC: (a)
all liabilities and obligations of AEIC in respect of the Aviation Business
existing as of March 31, 1997, but only if and to the extent that the same are
accrued or reserved for on the March 31, 1997 balance sheet of assets and
liabilities being transferred to Purchaser and remain unpaid and undischarged
on the Closing Date except loss and loss adjustment expense reserves; (b) all
unpaid losses and unpaid loss adjustment expenses of AEIC with respect to the
Aviation Business arising in the regular and ordinary course on or after
January 1, 1993; (c) the obligations of AEIC under the reinsurance contracts
and the other contracts identified in the Purchase Agreement; and (d) bad faith
liability claims arising under certain policies or in connection with
litigation described in the Purchase Agreement. The foregoing described
liabilities and the obligations of the Purchaser under the Quota Share
Reinsurance Agreement and the Reinsurance Agreement (pursuant to which the
Aviation Business will be transferred to Purchaser at Closing) are hereinafter
referred to as the "Assumed Liabilities."

Notwithstanding any provision in the Purchase Agreement to the
contrary, Purchaser will not assume or become liable in any manner for any
liability or obligation of AEIC or the Company, and AEIC and the Company will
remain solely responsible for any and all liabilities and obligations of AEIC
and the Company, other than the Assumed Liabilities.

CHANGE IN NAME

On the Closing Date, AEIC and the Company will deliver to Purchaser
all such executed documents as may be required to change AEIC's and the
Company's names to names bearing no similarity to American Eagle, including but
not limited to name change amendments with the Secretaries of State of Texas
and Delaware. Within 180 days after the Closing Date, the Company and AEIC will
file appropriate name change notices for each state where AEIC and the Company
are qualified to do business. Under the Purchase Agreement, AEIC and the
Company appoint Purchaser as their attorney-in-fact to file all such documents
on or after the Closing Date.

CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS

Pursuant to the Purchase Agreement, AEIC and the Company make certain
representations, warranties and covenants to Purchaser as to AEIC and the
Company, including (a) corporate existence and corporate power; (b)
enforceability of the various agreements entered into; (c) financial condition;
(d) the accounts receivable of AEIC arising from the Aviation Business and
Reinsured Business; (e) taxes; (f) the books, records

26
<PAGE> 31
and accounts of AEIC with respect to the Aviation Business and Reinsured
Business; (g) the existing condition of AEIC with respect to the Aviation
Business and Reinsured Business; (h) AEIC's title to properties that are
included in the Assets; (i) the condition of tangible Assets ; (j) employee
benefit plans and arrangements; (k) certain intellectual property matters; (l)
software of AEIC; (m) environmental matters; (n) the Assets; (o) the solvency
of AEIC and the Company after the transactions contemplated by the Purchase
Agreement; (p) the agents and brokers that have generated Aviation Business
that is currently in-force with AEIC; (q) the completeness of information
presented to Purchaser regarding the Aviation Business and the Reinsured
Business; (r) the absence of undisclosed legal actions; (s) the absence of
conflicts; (t) reinsurance contracts with respect to the Aviation Business and
the Reinsured Business; (u) absence of legal bar to the transactions
contemplated by the Purchase Agreement; (v) indemnification of the Purchaser
with respect to broker's or finder's fees or commissions; (w) the contracts to
be conveyed to Purchaser; (x) absence of nondisclosed liabilities; and other
matters.

Pursuant to the Purchase Agreement, Purchaser makes certain
representations, warranties and covenants to AEIC and the Company as to
Purchaser, including (a) corporate existence and corporate power; (b)
enforceability of the various agreements entered into; (c) absence of required
consents; (d) absence of participation of outside parties; and (e) voting by
Purchaser.

Pursuant to the Purchase Agreement, AEIC further covenants and agrees
with Purchaser that prior to consummation of the Aviation Division Sale (a)
AEIC will give Purchaser and its agents access to such information concerning
the Aviation Business and the Reinsured Business as Purchaser may reasonably
request and will consult in good faith with members of Purchaser's management
regarding the business operations and strategies of AEIC in connection with the
Aviation Business and the Reinsured Business; (b) AEIC will continue to operate
the Aviation Business and Reinsured Business in the ordinary course of business
without material changes or loss payments (except with the consent of
Purchaser); (c) AEIC will pay directly to each employee of the Aviation
Business that portion of all employee benefits due through the Closing Date,
except for certain benefits to be assumed by Purchaser at Closing; (d) AEIC
will deliver to Purchaser final schedules to the Purchase Agreement (and
related documentation) for approval by Purchaser; (e) AEIC will give detailed
written notice to Purchaser promptly upon the occurrence of any event that
would cause or constitute a material breach of the Purchase Agreement or would
have caused a material breach of the Purchase Agreement had such event occurred
or been known to AEIC prior to the date of the Purchase Agreement.

The representations, warranties, covenants and agreements of the
parties contained in the Purchase Agreement or in any document delivered
pursuant to the terms of the Purchase Agreement, will survive the Closing for a
period of one year.

CONDITIONS TO CLOSING

The obligations of Purchaser, on the one hand, and the Company and
AEIC, on the other hand, under the Purchase Agreement are subject to the
satisfaction, at or prior to the Closing Date, of the following conditions: (a)
all the terms, covenants and conditions of the Purchase Agreement to be
complied with and performed by the other party on or before the Closing Date
will have been complied with and performed; (b) except for changes between the
date of the Purchase Agreement and the Closing Date permitted by the terms of
the Purchase Agreement, the representations and warranties of the other party
in the Purchase Agreement or in any document or certificate delivered to such
party pursuant to the Purchase Agreement will be true and correct in all
material respects as of the Closing Date with the same force and effect as
though such representations and warranties had been made at and as of the
Closing Date; (c) on the Closing Date, no action or proceeding before any court
or governmental body will be pending or threatened wherein an unfavorable
judgment, decree or order would prevent the carrying out of the Purchase
Agreement or any of the transactions or events contemplated thereby, declare
unlawful the transactions or events contemplated by the Purchase Agreement or
cause such transactions to be rescinded; (d) the other parties will have
received the necessary regulatory and any other approval or approvals of the
transactions contemplated in the Purchase Agreement as may be required by
pertinent laws,

27
<PAGE> 32
regulations or agreements; (e) Purchaser and AEIC will have entered into (i)
the Quota Share Reinsurance Agreement ceding the Reinsured Business to
Purchaser and (ii) the Reinsurance Agreement transferring the Aviation Business
to Purchaser; (f) Purchaser and AEIC will have entered into a Claims Servicing
Agreement and a Computer System Use Agreement; (g) the parties will have
received opinions of each other's counsel in form and substance reasonably
satisfactory to the receiving party; (g) Purchaser and AEIC will have executed
a mutual release; and (h) Purchaser and AEIC will have received such other
certificates, documents and instruments as their respective counsel may
reasonably request.

In addition, the obligations of Purchaser under the Purchase Agreement
are, at the option of Purchaser, subject to the satisfaction, at or prior to
the Closing Date, of the following: (a) AEIC will have obtained the consent of
reinsurers with respect to at least 80% of the Aviation Business and the
Reinsured Business to the transfer to and reinsurance thereof by Purchaser and
to the assignment to Purchaser of AEIC's rights under the reinsurance treaties
and agreements currently in effect with respect to the Aviation Business and
the Reinsured Business; (b) AEIC will have obtained all consents required in
order to convey to Purchaser the Office Lease; and (c) AEIC will not have
entered into any contract or agreement after December 31, 1996 which would
adversely affect Purchaser's ability to acquire and conduct the Aviation
Business and the Reinsured Business.

In addition, the obligations of AEIC under the Purchase Agreement are
subject to receipt of, at or prior to the Closing Date, the consent of the
stockholders of AEIC and the Company to the terms of the Purchase Agreement and
the transactions contemplated therein.

TERMINATION OF STRATEGIC ALLIANCE

Pursuant to the Purchase Agreement and notwithstanding any subsequent
termination of the Purchase Agreement, Purchaser and the Company terminated
their respective obligations under Section 5.4 of the Securities Purchase
Agreement to form a strategic alliance.

NONCOMPETE/NO SOLICITATION AND OTHER ACTIONS

Pursuant to the Purchase Agreement, neither AEIC nor the Company, nor
anyone acting on behalf of either of them, may initiate discussions with any
person concerning a Competing Proposal (as defined below). AEIC and the Company
may (i) furnish information to, an offeror that seeks to engage in discussions
or negotiations, requests information or makes a proposal to acquire the
Aviation Business and the Reinsured Business pursuant to a Competing Proposal,
if AEIC's and the Company's directors determine in good faith that such action
is required for the discharge of their fiduciary obligations, after
consultation with independent legal and financial advisors, who may be AEIC's
and the Company's regularly engaged legal counsel and financial advisors (a
"Director Duty"); (ii) comply with Rule 14d-9 or Rule 14e-2 promulgated under
the Securities Exchange Act of 1934 (the "Exchange Act") with regard to a
tender or exchange offer; (iii) make any disclosure to AEIC's and the Company's
stockholders in accordance with a Director Duty; (iv) fail to make, modify or
amend its recommendations, consents or approvals referred to herein in
accordance with a Director Duty; (v) terminate the Purchase Agreement and enter
into an agreement providing for a Competing Proposal in accordance with a
Director Duty; or (vi) take any other action as may be appropriate in order for
AEIC's and the Company's Board of Directors to act in a manner that is
consistent with their fiduciary obligations under applicable law. In the event
that AEIC or the Company or any of their officers, directors, employees,
agents, advisors or other representatives participate in discussions or
negotiations with, or furnish information to an offeror that seeks to engage in
such discussions or negotiations, requests information or makes a Competing
Proposal, then, subject to any confidentiality requirements of an offeror, AEIC
and the Company will immediately disclose to Purchaser (i) the decision of
AEIC's and the Company's directors; (ii) the identity of the offeror; and (iii)
copies of all information or material not previously furnished to Purchaser
which AEIC or the Company, or their agents, provides or causes to be provided
to such offeror or any of its officers, directors, employees, agents, advisors
or representatives. For purposes of the Purchase Agreement, "Competing
Proposal" means a bona fide offer to AEIC, the Company, or the stockholders of
the Company from a Qualified Third

28
<PAGE> 33
Party (as defined below). "Qualified Third Party" means an entity directly or
indirectly having (i) the underwriting capacity of an insurance carrier rated
"A" by A. M. Best Company, (ii) policyholders surplus of $250 million; and
(iii) agreed to assume all of Purchaser's reinsurance obligations arising under
the Quota Share Reinsurance Agreement.

As of the Closing Date, Purchaser will offer employment to, and AEIC
will use its best efforts to assist Purchaser in employing as new employees of
Purchaser, all persons presently engaged in the Aviation Business except for
certain persons identified in the Purchase Agreement (the "Employees"). AEIC
will terminate effective as of the Closing Date all employment agreements it
has with any of the Employees, except for employment agreements of Nick Walton
and Bob Conrey, which agreements will be assumed by Purchaser. Until the third
anniversary of the Closing Date, (1) AEIC, the Company and any of their
affiliates will not directly or indirectly solicit or offer employment to any
Employee (i) who did not become an employee of Purchaser, (ii) who is then an
employee of Purchaser, or (iii) who has terminated such employment without the
consent of Purchaser within 180 days of such solicitation or offer, and (2)
Purchaser will not directly or indirectly solicit or offer employment to any
person who, after the Closing Date is then an employee of AEIC or who has
terminated such employment without the consent of AEIC within 180 days of such
solicitation or offer.

AEIC, the Company and each of their affiliates agrees that for a
period of three years after the Closing Date, neither AEIC, the Company or any
of their subsidiaries will, directly or indirectly, own, manage, operate, join,
control or participate in the ownership, management, operation or control of,
any business whether in corporate proprietorship or partnership form or
otherwise as more than a five percent 5% owner in such business where such
business is competitive with the Aviation Business.

As of the Closing Date, the Company, AEIC, AFG and Purchaser will
mutually release each other from all liabilities arising out of the execution
of the Securities Purchase Agreement and the purchase of the Series D Preferred
Stock.

Upon the execution of the Purchase Agreement and pursuant to the terms
of the Purchase Agreement, Purchaser received a written commitment from Mason
Best Company L.P. that, among other matters, it will vote its shares of the
common stock of the Company in favor of the transactions contemplated herein.

TERMINATION

Notwithstanding any other provision contained in the Purchase
Agreement, the Purchase Agreement may be terminated at any time prior to the
Closing Date: (a) by mutual written consent of the parties; (b) by any party,
upon written notice to the other parties, if the Closing will not have occurred
on or prior to the July 31, 1997, unless such failure of consummation will be
due to the failure of the party seeking such termination to perform or observe
in all material respects the covenants and agreement hereof to be performed or
observed by such party; (c) by any party, upon written notice to the other
parties, if a governmental authority of competent jurisdiction will have issued
an injunction, order or decree enjoining or otherwise prohibiting the
consummation of the transactions contemplated by the Purchase Agreement, and
such injunction, order or decree will have become final and non-appealable or
if a governmental authority has otherwise made a final determination that any
required regulatory consent would not be forthcoming; provided, however, that
the party seeking to terminate the Purchase Agreement pursuant to this clause
has used all commercially reasonable efforts to remove such injunction, order
or decree; (d) by AEIC or the Company if the Board of Directors of AEIC or the
Company determines in accordance with a Director Duty that such termination is
required by reason of a Competing Proposal; or (e) by any party if the Boards
of Directors of AEIC and the Company will have withdrawn or modified in a
manner materially adverse to Purchaser their approval of the adoption of the
Purchase Agreement, because the Boards of Directors have determined to
recommend to AEIC's and the Company's stockholders or approve a Competing
Proposal, in accordance with a Director Duty; provided, however, that any
communication that advises that AEIC or the Company has received a Competing
Proposal will in no event be deemed a withdrawal or modification adverse to
Purchaser of its approval of the Purchase Agreement. In the event that the

29
<PAGE> 34
Purchase Agreement is terminated pursuant to clause (d) or (e) of the preceding
sentence, then Purchaser will be entitled to a cash payment within five days of
the termination date from AEIC of $1.75 million.

INDEMNIFICATION

From and after the Closing, each of AEIC and the Company, jointly and
severally, will reimburse, indemnify and hold harmless Purchaser and its
successors and assigns (an "Indemnified Purchaser Party") against and in
respect of: (a) any and all damages, losses, deficiencies, liabilities, costs
and expenses incurred or suffered by any Indemnified Purchaser Party that
result from, relate to or arise out of (i) any and all liabilities and
obligations of AEIC of any nature whatsoever, except for the Assumed
Liabilities, or (ii) any misrepresentation, breach or warranty or
nonfulfillment of any agreement or covenant on the part of AEIC or the Company
under the Purchase Agreement, or from any misrepresentation in or omission from
any certificate, schedule, statement, document or instrument furnished to
Purchaser pursuant to the Purchase Agreement or in connection with the
negotiation, execution or performance of the Purchase Agreement; and (b) any
and all actions, suits, claims, proceedings, investigations, demands,
assessments, audits, fines, judgments, costs and other expenses (including,
without limitation, reasonable legal fees and expenses) incident to any of the
foregoing or to the enforcement of the indemnification rights of an Indemnified
Purchaser Party.

From and after the Closing, Purchaser will reimburse, indemnify and
hold harmless AEIC, the Company and their successors or assigns (an
"Indemnified AEIC Party") against and in respect of: (a) any and all damages,
losses, deficiencies, liabilities, costs and expenses incurred or suffered by
any Indemnified AEIC Party that result from, relate to or arise out of (i) the
Assumed Liabilities or (ii) any misrepresentation, breach of warranty or non-
fulfillment of any agreement or covenant on the part of Purchaser under the
Purchase Agreement, or from any misrepresentation in or omission from any
certificate, schedule, statement, document or instrument furnished to AEIC
pursuant to the Purchase Agreement or in connection with the negotiation,
execution or performance of the Purchase Agreement; and (b) any and all
actions, suits, claims, proceedings, investigations, demands, assessments,
audits, fines, judgments, costs and other expenses (including without
limitation, reasonable legal fees and expenses) incident to any of the
foregoing or to the enforcement of the indemnification rights of an Indemnified
AEIC Party.

AEIC and the Company will have no liability (for indemnification or
otherwise) with respect to indemnification of an Indemnified Purchaser Party
until the total of all damages actually paid or incurred by an Indemnified
Purchaser Party with respect to such matters exceeds $1.0 million, and then
only for the amount by which such damages actually paid or incurred by an
Indemnified Purchaser Party exceed $1.0 million. The maximum aggregate
obligation of AEIC and the Company with respect to all matters for which an
Indemnified Purchaser Party may seek indemnification for misrepresentation or
breach of warranty will not exceed $20.0 million.

The maximum aggregate obligation of Purchaser to AEIC and the Company
with respect to all matters for which the Company or AEIC may seek
indemnification for misrepresentation or breach of warranty will not exceed
$20.0 million.

30
<PAGE> 35
PLANS FOR FUTURE OPERATION OF THE COMPANY

Set forth below is a summary of management's plans for the operation
of the Company following the sale or other disposition of its three divisions.
If the Company is unable to sell all of its divisions as contemplated in this
Proxy Statement, the Company expects to lose its current insurance business to
other, higher rated insurers. Therefore, the Company would expect to
discontinue the insurance underwriting activities of any unsold division.
Consequently, the principal effect of nonconsummation of the sale of a division
would be that the Company would not receive any consideration for the existing
business conducted by such division.

BUSINESS

Following the sale of the Company's three divisions, the Company
expects that it will no longer write new or renewal policies for the
foreseeable future. It will continue to handle claims on the Company's policies
that are not assumed by the purchasers as part of these transactions and
maintain the related reserves and assets. Accordingly, the Company's revenues
and earnings capacity will be significantly lower in the future. The Company's
operational focus will be on attempting to create residual value for the
Company's stockholders from the remaining operations and assets and additional
ongoing operations. It is not currently possible to determine how much residual
value, if any, will inure to the Company's stockholders.

Following the sale or disposition of its divisions, the Company will
discontinue all insurance marketing and underwriting activities. The Company
intends to continue to manage claims as described under "Historical Business of
the Company--Claims." The Company will continue to be responsible for all
claims that are covered by Company auto dealer and trucking policies, claims
occurring before January 1, 1993 that are covered by aviation policies, claims
occurring before March 1, 1997 that are covered by artisan contractor policies,
and claims occurring before April 30, 1997 that are covered by marine policies.
The Company also intends to continue to manage its investment portfolio
substantially as described under "Historical Business of the Company--
Investments." In this connection, the Company intends to engage in a business
or businesses other than investing, reinvesting, owning, holding or trading in
securities as soon as reasonably possible following the closing of the Aviation
Division Sale and the disposition of its other divisions, although there can be
no guarantee that the Company will be able to do so. If the Company were
required to register as an investment company under the 1940 Act, it would
become subject to substantial regulation with respect to its capital structure,
management, operations, transactions with affiliates, and other matters.

In addition to any value generated from the management of claims and
the investment portfolio, the Company will also have an estimated net operating
loss carryforward ("NOL") of at least $5.0 million following the sale or other
disposition of its divisions. Although the Company has no current specific
plans concerning the utilization of the NOL, the NOL may be available to offset
future income, if any, of the Company.

The Company will in the future explore ways to maximize shareholder
value, including by possibly entering into a new line of business, acquiring
another business or selling the Company. The Company does not expect that AEIC
would be able to conduct any new insurance business for the foreseeable future,
however. As a result of AEIC's financial condition, Best rating downgrades and
sales of its businesses, the insurance regulatory agencies in the states of
California, Florida, Idaho, Illinois, Michigan, Minnesota, New York, North
Carolina and Washington have ordered or requested AEIC to limit or cease
writing insurance in their states. In addition, the Texas Department of
Insurance has ordered AEIC to cease writing insurance in any state after
completion of the sales of its divisions. The Company expects that additional
states may issue similar orders or make similar requests. See "Insurance
Regulation." While these orders or requests remain in effect, AEIC would not
have the ability to enter into any new insurance business. Also, AEIC's current
Best rating of "D" makes it unlikely that it could enter into any new insurance
business. On the other hand, two of the Company's subsidiaries that are
licensed agencies do not have similar restrictions on their ability to conduct
business. Aviation Office of America, Inc. is a licensed managing general
agency in

31
<PAGE> 36
Texas and a licensed agency in certain other states. AE Insurance Agency, Inc.
is a licensed agency in California and certain other states. While management
has no specific plans to start or acquire any insurance agency businesses,
these subsidiaries are available if an opportunity arises.

MANAGEMENT

Following the sale or other disposition of its divisions, the Company
expects Mr. Guthrie and Mr. Kurz to remain as executive officers with their
current titles. Mr. Kurz will assume the additional title of Secretary. The
Company's outside directors, Messrs. Joseph M. Grant, Keith W. Hughes, James E.
Maser and Elvis L. Mason, have informed the Company that they intend to resign
following consummation of the Aviation Division Sale. The Company's Board of
Directors will be reduced to three members following such resignations. Mr.
Guthrie will remain on the Board and Mr. Kurz and Howard D. Putnam have been
nominated for election to the Board. See "Election of Directors."

EMPLOYEES

Following the sale or other disposition of its divisions, the Company
expects to reduce its workforce from 199 full-time employees at May 30, 1997 to
no more than 15 full-time employees. These employees will continue to handle
accounting, claims, reinsurance billing and collection and administrative
functions for the Company.

OFFICES

The Company subleases approximately 5,000 square feet of office space
on the sixth floor of the building in Dallas, Texas in which it currently
maintains its executive and business offices. The Company will retain this
sublease after the Aviation Division Sale and will move all of its executive
and business offices into this space.

32
<PAGE> 37
UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following Unaudited Pro Forma Financial Statements have been
prepared to illustrate the estimated effects of the Aviation Division Sale, the
Artisan Sale and the Marine Division Sale (collectively, the Transactions). The
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the
year ended December 31, 1996 and the three months ended March 31, 1997 were
prepared as if the Transactions were consummated on January 1, 1996 and January
1, 1997, respectively. The Unaudited Pro Forma Condensed Consolidated Balance
Sheet was prepared as if the Transactions were consummated on March 31, 1997.
The Unaudited Pro Forma Financial Statements do not purport to represent what
the Companys financial position or results of operations would actually have
been if the Transactions had in fact occurred on such dates. The Unaudited Pro
Forma Financial Statements also do not purport to project the financial
position or results of operations of the Company as of any future date or for
any future period.

The Unaudited Pro Forma Financial Statements should be read in
conjunction with the Companys consolidated financial statements and the related
notes included elsewhere in this Proxy Statement.

The Artisan Sale and Marine Sale have been completed under terms
consistent with the presented pro forma data as of March 31, 1997.

33
<PAGE> 38

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
MARCH 31, 1997
(Unaudited)
(In Thousands Except Share Data)

<TABLE>
Pro Forma Aviation Auction Division Pro Forma
March 31, Other After Other Division Quota Share Other March 31,
ASSETS 1997 Sales(1) Sales (2) Sales(3) Reinsurance(4) Adjustments(5) 1997
---- -------- --------- -------- -------------- -------------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and investments $ 66,562 $ 815 $ 67,377 $ (7,632) $(18,591) $ (353) $ 40,801
Accounts receivable 55,625 (10,601) 45,024 (17,557) -- -- 27,467
Reinsurance recoverable, net 69,896 -- 69,896 (34,268) -- -- 35,628
Deferred policy acquisition costs 13,234 (1,977) 11,257 -- (11,257) -- --
Deferred reinsurance premiums 29,208 (606) 28,602 (8,922) (9,932) -- 9,748
Other assets 13,460 (1,776) 11,684 (1,946) -- (5,000) 4,738
-------- -------- -------- -------- -------- -------- --------
Total assets $247,985 $(14,145) $233,840 $(70,325) $ 39,780 $ (5,353) $118,382
======== ======== ======== ======== ======== ======== ========

LIABILITIES AND
STOCKHOLDER'S EQUITY
Liabilities:
Reserve for losses and loss
adjustment expenses $135,573 $ -- $135,573 $(67,366) $ -- $ -- $ 68,207
Unearned premiums 50,566 (14,075) 36,491 (36,491) -- --
Other policy liabilities 16,833 -- 16,833 (1,646) -- -- 15,187
Agency payables to insurance
companies (1,463) -- (1,463) (1,311) -- -- (2,774)
Accounts payable and other
liabilities 10,690 -- 10,690 -- -- 13,902 24,592
-------- -------- -------- -------- -------- -------- --------
Total liabilities 212,199 (14,075) 198,124 (70,323) (36,491) 13,902 105,212
-------- -------- -------- -------- -------- -------- --------
Commitments and contingent
liabilities:
Series B Cumulative Preferred
Stock,
$.01 par value, 162,857 shares
authorized, 142,857 shares
issued and outstanding 1,428 -- 1,428 -- -- -- 1,428
Series D Cumulative Convertible
Redeemable Preferred Stock,
$.01 par value, 546,200 shares
authorized, 357,875 shares
issued and outstanding at March
31, 1997 33,952 -- 33,952 (33,952) -- -- --
Stockholder's equity:
Common Stock, $.01 par value,
21,000,000 shares authorized,
7,047,098 shares issued 71 -- 71 -- -- -- 71
Additional paid-in-capital 45,600 -- 45,600 -- -- -- 45,600
Unrealized apprec(deprec) on
investment securities (467) -- (467) -- -- (353) (820)
Retained earnings (44,711) (70) (44,781) 33,950 (3,289) (18,902) (33,022)
Less - 73,882 shares of common
stock held in the treasury, at
cost (87) -- (87) -- -- -- (87)
-------- -------- ---------- -------- -------- -------- --------
</TABLE>

34
<PAGE> 39

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Total stockholders' equity 406 (70) 336 33,950 (3,289) (19,255) 11,742
-------- -------- ---------- -------- -------- -------- --------
Total liabilities and
stockholders' equity $247,985 $(14,145) $233,840 $(70,325) $ 39,780 $ (5,353) $118,382
======== ======== ======== ======== ======== ======== ========

</TABLE>

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

(1) The "Other Sales" column reflects the historical cost basis of the assets
and liabilities transferred to the purchasers of the Artisan and Marine
operations and the related net loss resulting from the two transactions.
(2) The "Pro Forma After Other Sales" column reflects the pro forma balance
sheet after the sale of the Artisan and Marine operations.
(3) The "Aviation Division Sale" column reflects the historical cost basis of
the assets and liabilities in pursuant to the Aviation Division Sale,
including the cancellation of the Series D Preferred Stock. The gain
results from cancellation of the Series D Preferred Stock of $33,952 . . .
. .
(4) The "Aviation Division Quota Share Reinsurance" column reflects the
impact of the Quota Share Reinsurance contract whereby the company ceded
100% of the net unearned premium as of March 31, 1997 and received a
ceding commission of 30% of the unearned premium or $7,968. The ceding
commission of $7,968 was less than the deferred policy acquisition costs
of $11,257 resulting in a loss of $3,289. The unearned premium of $36,491
less ceded unearned premiums of $9,932 and the ceding commission of $7,968
result in a payment to the reinsurer of $18,591.
(5) The "Other Adjustments" column reflects other adjustments required to
properly reflect the consolidated financial positions of American Eagle
Group, Inc. after the sales of its remaining operations. Such items are
not necessarily related to a specific sale. Such adjustments include the
write-off of intangible assets including unamortized goodwill, the
recording of all fixed income investments at market values where
previously a portion of the fixed income portfolio had been held to
maturity and carried at amortized cost, accruals related to the wind down
of the Company's operation and an estimate of adjustments which might be
required by regulators. Such wind down costs include the costs of
completing the transactions, costs associated with the exiting of the
business including the costs of administration and the settlement of all
remaining claims and the billing and collection of any reinsurance
recoverable. These estimated exit costs $5,902 are expected to total
approximately. The estimate of adjustments which might be required by
regulators is $7,500. This column also includes the estimated federal
income tax resulting from the pro forma adjustments of $500. These costs
will be included in the income statement and will be part of the
calculation of the gain on the sales of the various operations. No
amounts have been charged against the liability at the date of this Proxy.
See "Certain Considerations--Potential Regulatory Action and Other
Contingencies."

35
<PAGE> 40

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(In Thousands Except Share Data)

<TABLE>
<CAPTION>
Aviation Other Sales and Pro Forma
December 31, Division Terminated Other December 31,
1996 Sale(2) Lines (3) Adjustments(4) 1996
---- ------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues
Earned premiums, net of
reinsurance $ 107,217 $(75,145) $(32,072) $ -- $ --
Agency operations, net 424 (424) -- -- --
Investment income, net 4,470 -- -- (1,307) 3,163
Realized investment gains (losses),
net (74) -- -- -- (74)
--------- -------- -------- -------- ---------
Total revenues 112,037 (75,569) (32,072) (1,307) 3,089
--------- -------- -------- -------- ---------
Expenses
Losses and loss adjustment
expenses, net of reinsurance 107,473 (56,840) (50,633) -- --
Policy acquisition and other
underwriting expenses 47,848 -- -- (45,998) 1,850
Interest expense 1,132 -- -- (1,132) --
--------- -------- -------- -------- ---------
Total expenses 156,453 (56,840) (50,633) (47,130) 1,850
--------- -------- -------- -------- ---------
Income (loss) before income tax
expenses (44,416) (18,729) 18,561 45,823 1,239
Income tax expense (benefit)....... 0 0 0 0 0
--------- -------- -------- -------- ---------
Net income (loss).................. $ (44,416) $(18,729) $ 18,561 $ 45,823 $ 1,239
========= ======== ======== ======== =========
Preferred dividends $ 98 98
========= ==
=========
Net income (loss) available for
common stockholders (1) $ (44,514) $ 1,141
========= =========
Weighted average number of
common shares outstanding 7,048,898 7,048,898
========= =========
Net income (loss) per share of
common stock (1) $ (6.32) $ .16
========= =========
</TABLE>

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

(1) After deduction of preferred dividends of $98.
(2) The "Aviation Division Sale" column reflects the historical operating
results of the Aviation Division.
(3) The "Other Sales and Terminated Lines" column reflects the historical
operating results of the P&C Division and Marine Division. The
transportation and auto dealer lines of the business, which had previously
been terminated but which continued to have some run-off activity, have
been reflected as terminated lines for each applicable period. Since such
operations will not continue in the future, they have been eliminated in
the pro forma income statement.
(4) The "Other Adjustments" column reflects adjustments required as a result
of the sales and terminations which are not specifically attributable to a
specific sale or termination , primarily reductions in operating and
investment income. Interest expense was eliminated as the outstanding
indebtedness was repaid on December 31, 1996.

36
<PAGE> 41
AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Unaudited)
(In Thousands Except Share Data)

<TABLE>
<CAPTION>
Aviation Other Sales and Pro Forma
March 31, Division Discontinued Other March 31,
1997 Sale(2) Lines(3) Adjustments(4) 1996
--------- -------- --------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Earned premiums, net of
reinsurance $ 23,806 $(16,350) $(7,456) $ - $ -
Agency operations, net 326 (326) - - -
Investment income, net 1,278 - - (576) (702)
Realized investment gains
(losses), net (58) - - - (58)
--------- -------- ------- -------- ---------
Total revenues 25,352 (16,676) (7,456) (576) 644
--------- -------- ------- -------- ---------
Expenses
Losses and loss adjustment
expenses, net of reinsurance 19,953 (12,550) (7,403) - -
Policy acquisition and other
underwriting expenses 11,142 - - (10,680) 462
Interest expense - - - - -
--------- -------- ------- ------- ---------
Total expenses 31,095 (12,550) (7,403) (10,680) 462
--------- -------- ------- -------- ---------
Income (loss) before income tax
expenses (5,743) (4,126) (53) 10,104 182
Income tax expense (benefit) - - - - -
--------- -------- -------- ------- ---------
Net income (loss) $ (5,743) $ (4,126) $ (53) $10,104 182
========= ======== ======== ======= =========

Preferred dividends $ (809) $ (788) (21)
========= ======= =========

Net income (loss) available for
common stockholders (1) $ (6,552) $ 161
========= =========
Weighted average number of common
shares outstanding 7,048,898 7,048,898
========= =========
Net income (loss) per share of
common stock (1) $ (0.93) $ .02
========= ========
</TABLE>

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

(1) After deduction of preferred dividends of $809 at March 31, 1997 of which
$788 relates to the Series D Preferred Stock which is being canceled.
(2) The "Aviation Division Sale" column reflects the historical operating
results of the Aviation Division.
(3) The "Other Sales and Terminated Lines" column reflects the historical
operating results of the P&C Division and Marine Division. The
transportation and auto dealer lines of business, which had previously
been terminated but which continued to have some run-off activity, have
been reflected as terminated lines for the applicable period. Since such
operations will not continue in the future, they have been eliminated in
the pro forma income statement.
(4) The "Other Adjustments" column reflects adjustments required as a result
of the sales and terminations which are not specifically attributable to a
specific sale or termination, primarily reductions in operating expenses
and investment income. Interest expense was eliminated because the
outstanding indebtedness was repaid on December 31, 1996.

37
<PAGE> 42
SELECTED FINANCIAL INFORMATION
(Dollars in Thousands Except Per Share Amounts)

<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31,
------------------------------------------------------------------ ---------------------------
FOR THE PERIOD 1992 1993 1994 1995 1996 1996 1997
-------- ------- -------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums produced(1) $114,750 $139,847 $167,207 $181,561 $151,182 $42,366 $ 23,810
Net premiums written $ 51,250 $ 71,869 $ 95,997 $120,957 $ 96,229 $32,662 $ 14,988
Earned premiums $ 43,725 $ 66,091 $ 82,725 $102,447 $107,217 $32,834 $ 23,806
Net investment income $ 2,880 $ 2,918 $ 4,106 $ 5,497 $ 4,470 $ 1,403 $ 1,278
Realized investment gains
(losses) $ 1,622 $ 1,414 $ (33) $ 496 $ (74) $ 153 $ (58)
Interest expense $ 462 $ 708 $ 800 $ 987 $ 1,132 $ 250 $ 0
Operating income (loss) $ 3,145 $ 4,799 $ 7,164 $(13,394) $(44,342) $(2,853) $ (5,685)
Income (loss) before
extraordinary items and
cumulative effect of
change in accounting principle $ 4,199 $ 5,718 $ 7,143 $(13,076) $(44,416) $(2,752) $ (5,743)
Net income (loss) $ 6,079 $ 5,718 $ 7,143 $(13,076) $(44,416) $(2,752) $ (5,743)
Net income (loss)
available for common
stockholders(2) $ 4,781 $ 4,420 $ 6,588 $(13,174) $(44,514) $(2,776) $ (6,552)
Weighted average shares
outstanding 3,469,448 3,469,448 5,684,386 7,052,998 7,048,898 7,050,548 7,048,898

Loss and LAE Ratio 57.7% 62.3% 63.7% 88.8% 100.2% 83.8% 83.8%
Expense Ratio 38.2% 29.8% 28.6% 36.4% 44.6% 32.8% 46.8%
--------- --------- --------- --------- --------- --------- ---------
Combined Ratio 99.1% 92.1% 92.3% 125.2% 144.8% 116.6% 130.6%
========= ========= ========= ========= ========= ========= =========

PER COMMON SHARE
Operating income $ 0.91 $ 1.38 $ 1.26 $ (1.90) $ (6.29) $ (0.40) $ (0.81)
Operating income (loss) for
common stockholders (2) $ 0.53 $ 1.01 $ 1.16 $ (1.91) $ (6.30) $ (0.40) $ (0.92)
Net income (loss) $ 1.75 $ 1.65 $ 1.26 $ (1.85) $ (6.30) $ (0.39) $ (0.81)
Net income (loss) for
common stockholders (2) $ 1.38 $ 1.27 $ 1.16 $ (1.87) $ (6.32) $ (0.39) $ (0.93)
Stockholders' equity $ 7.00 $ 8.27 $ 9.12 $ 7.58 $ 1.06 $ 7.01 $ .06
Dividends declared $ 0.00 $ 0.00 $ 0.09 $ 0.13 $ 0.08 $ 0.04 --

AT PERIOD END
Total cash and investments $ 48,064 $ 87,262 $ 98,181 $106,792 $ 89,087 $ 87,880 $ 66,562
Total assets $219,028 $299,622 $337,103 $318,269 $261,959 $297,202 $247,985
Reserve for loss and loss
adjustment expenses $ 95,074 $122,342 $142,768 $136,528 $138,133 $139,892 $135,573
Note payable $ 10,000 $ 10,000 $ 9,250 $ 11,250 -- $ 11,250 --
Total liabilities $183,114 $259,285 $271,139 $263,174 $219,670 $246,169 $212,199
Redeemable preferred stock $ 11,629 $ 11,629 $ 1,629 $ 1,629 $ 34,793 $ 1,629 $ 35,380
Stockholders' equity $ 24,285 $ 28,708 $ 64,335 $ 53,466 $ 7,496 $ 49,404 $ 406

Total debt to equity 89.1% 75.3% 16.9% 24.1% 464.2% 26.1% 8,714.0%

SELECTED STATUTORY DATA
Policyholders' surplus $ 40,204 $ 44,752 $ 65,107 $ 50,465 $ 20,351 $ 47,013 $ 15,169
Net premiums written to
surplus 1.1x 1.6x 1.3x 2.3x 4.9x 2.8x 4.0x
Loss and LAE Ratio 57.9% 63.1% 64.2% 89.8% 100.2% 83.7% 83.4%
Expense Ratio 41.2% 30.0% 33.7% 34.9% 43.5% 35.5% 48.4%
--------- --------- --------- --------- --------- ---------- ---------
Combined Ratio 99.1% 93.2% 97.9% 124.7% 143.7% 119.2 131.8%
========= ========= ========= ========= ========= ========== =========
</TABLE>

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

(1) For a discussion of gross premiums produced, see "Management's Discussion
of Financial Condition and Results of Operations."
(2) After deduction of preferred dividends

38
<PAGE> 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the audited Consolidated
Financial Statements and Notes thereto of the Company included elsewhere in
this Proxy Statement.

SALES OF OPERATIONS

As discussed elsewhere in this Proxy Statement, the Company has entered
into an agreement to sell the business and a substantial portion of the assets
of its Aviation Division. The closing of the Aviation Division Sale is subject
to stockholder approval, regulatory approvals and other customary conditions.
See "The Aviation Division Sale." The Company has recently completed the sales
of the artisan contractor insurance business of its P&C Division, and the yacht
insurance business of its Marine Division.

Upon completion of these transactions, the Company expects that it will no
longer write new or renewal policies for the foreseeable future. It will
continue to handle claims on the Company's policies that are not assumed by the
purchasers as part of these transactions, and maintain the related reserves and
assets. Accordingly, the Company's revenues and earnings capacity will be
significantly lower in the future. See "Plans for Future Operation of the
Company" and "Unaudited Pro Forma Financial Information."

GROSS PREMIUMS PRODUCED

As used in this discussion, gross premiums produced means the gross
premiums written by AEIC and by other companies for which the Company has
authority to issue policies that are marketed, underwritten and serviced by the
Company.

The following table depicts the total amount of gross premiums produced by
the Company, the portion of the gross premiums produced that were gross
premiums written for other companies, and the amount of premiums which AEIC has
assumed from such other companies. Gross premiums written is the portion of the
gross premiums produced for AEIC together with the premiums AEIC assumes from
such other companies. AEIC cedes a portion of its gross premiums written to
reinsurers for reinsurance protection. The ceded premiums reduce the amount of
gross premiums written, resulting in the net premiums written by AEIC. The
gross premiums produced for other companies may generate commission income for
the Company but do not provide an opportunity to generate an underwriting
profit unless AEIC assumes premiums and related risk from the other companies.
The net premiums written by AEIC provide an opportunity to generate
underwriting profit but can result in underwriting losses.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Gross premiums produced $167,207 $181,561 $151,182 $ 42,366 $ 23,810
For other companies (15,332) (15,560) (20,985) (2,572) (3,893)
Assumed from other companies 7,268 6,235 12,622 1,562 3,300
-------- -------- -------- --------- ---------
Gross premiums written 159,143 172,236 142,819 41,356 23,218
Ceded premiums (63,146) (51,279) (46,590) (8,694) (8,230)
-------- -------- -------- --------- ---------
Net premiums written $ 95,997 $120,957 $ 96,229 $ 32,662 $ 14,988
======== ======== ======== ========= =========
</TABLE>

39
<PAGE> 44
The Company obtains reinsurance coverage primarily through excess-of-loss
treaty reinsurance. Under excess-of-loss reinsurance treaties, the reinsurer
assumes losses above specified amounts as stipulated in the reinsurance
contract for an agreed-upon premium. The agreed-upon premium may vary within
predetermined ranges based upon the level of losses experienced by the
reinsurer. AEIC's maximum net retention is $200,000 for liability loss and
$150,000 for hull loss in the Aviation Division subject to reinsurance
deductible amounts, $250,000 per occurrence in the P&C Division and $75,000 per
occurrence in the Marine Division.

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

Gross Premiums Produced

Gross premiums produced decreased 43.8% to $23.8 million for the first
quarter of 1997 from $42.4 million in the first quarter of 1996. Of this
decrease, 23.3% was produced by the Aviation Division, 21.2% was produced by
the P&C Division, and offset by a 0.6% increase produced by the Marine
Division. The decrease in the Aviation Division resulted primarily from
marketplace uncertainties about the financial condition of AEIC. During most of
the first quarter of 1996, AEIC was rated "A-" by Best. In March 1996, Best
downgraded AEIC's rating to a "B++." In May 1996, Best downgraded AEIC's rating
to a "B," where the rating remained through most of the first quarter of 1997.
In March 1997, Best downgraded AEIC's rating to "D." The decrease in the P&C
Division is due to the discontinued underwriting of the trucking insurance
business late in 1996 and also the decreases in the Best rating.

The gross premiums produced for other companies increased 51.3% to $3.9
million in the first quarter of 1997 from $2.6 million in the first quarter of
1996 as a result of writing more business for other companies due to the
decrease in the Best rating.

The gross premiums assumed from other companies increased 111.3% to $3.3
million in the first quarter of 1997 from $1.6 million in the first quarter of
1996.

Gross premiums written decreased 43.9% to $23.2 million in the first
quarter of 1997 from $41.4 million in the first quarter of 1996 as a result of
the decrease in gross premiums produced for the Company and its subsidiaries.

Ceded premiums decreased 5.3% to $8.2 million in the first quarter of
1997, compared to $8.7 million in the first quarter of 1996. This decrease is
primarily a result of a slight decrease in ceded losses on retrospectively
rated reinsurance contracts.

Net premiums written decreased 54.1% to $15.0 million in the first three
months of 1997, compared to $32.7 million in the first three months of 1996.

Revenues

Earned premiums, net of reinsurance, decreased 27.4% to $23.8 million in
the first quarter of 1997 from $32.8 million in the first quarter of 1996. Of
this decrease, 22.1% was related to the Aviation Division, 8.3% to the P&C
Division, with the Marine Division having an increase of 3.0%. Earned premiums,
net of reinsurance, declined at a lower rate in comparison to written premiums,
net of reinsurance, due to less of a decline in written premiums in earlier
quarters, which are now becoming earned premiums.

Agency operations, net, increase to a profit of $0.3 million in the first
quarter of 1997 from a minimal loss in the first quarter of 1996.

40
<PAGE> 45

Investment income, net, decreased 7.1% to $1.3 million in the first
quarter of 1997 from $1.4 million in the first quarter of 1996 The net
tax-effected investment yield on average invested assets for the first quarter
of 1997 increased to 7.5% from 5.9% in the comparable quarter of 1996. Average
invested assets decreased $23.1 million in the first quarter of 1997, compared
to the first quarter of 1996, primarily as a result of cash flow used in
operating activities, as discussed below.

Realized investment gains (losses), net, were insignificant in the first
quarter of 1997 and 1996.

Operating Expenses

Losses and loss adjustment expenses, net of reinsurance, were 83.8% of
earned premiums, net of reinsurance, in the first quarter of 1997 and 83.8% in
the first quarter of 1996. The Aviation Division loss ratio increased 5.5
percentage points to 76.8% in the first quarter 1997, from 71.3% in the first
quarter of 1996 as a result of higher levels of hull losses. The P&C Division
loss ratio decreased 8.2 percentage points to 112.1% in the first quarter of
1997 from 120.3% in the first quarter of 1996. The unacceptable P&C Division
loss ratio is a result of losses from the discontinued trucking line of
business, where premium levels have declined faster than loss levels. The
Marine Division loss ratio increased 1.4 percentage points to 50.5% in the
first quarter of 1997 from 49.1% in the first quarter of 1996.

Policy acquisition and other underwriting expenses increased 14.0
percentage points to 46.8% of earned premiums in the first quarter of 1997 from
32.8% of earned premiums in the first quarter of 1996. The decrease in written
premium and related unearned premiums and earned premiums resulted in a
decrease in the amount of deferrable acquisition costs, which increased the
expense level of the current quarter. In addition, current expense levels could
not be reduced further due to the pending sales of the ongoing operations.

The Company's combined ratio increased 14.0 percentage points to 130.6% in
the first quarter of 1997 from 116.6% in the first quarter of 1996 as a result
of the factors discussed above. A combined ratio below 100% generally indicates
profitable underwriting prior to the consideration of investment income.
Management believes that there has been a seasonality pattern in the loss
ratio. Losses have historically been higher in the first half of the year and
then declined in the second half. The Company believes that this pattern
results primarily from weather-related factors which contribute to a higher
loss frequency in the first two quarters of the year.

The Company had no interest expense in the first quarter of 1997 due to
the repayment on December 31, 1996 of the Company's note payable. Interest
expense was $0.25 million in the first quarter of 1996.

Income

The Company did not record an income tax benefit in the first quarter of
1997 as compared to a benefit of $1.4 million recorded in the first quarter of
1996.

The first quarter of 1997 net loss was $5.7 million, compared to net loss
of $2.8 million in the first quarter of 1996.

Net income (loss) available for common stockholders in the first quarter
of 1997 was a net loss of $6.6 million, or $0.93 per share, compared to net
loss of $2.8 million or $0.39 per share, in the first quarter of 1996. In the
first quarter of 1997, the Company paid in kind Series D Preferred Stock
dividends of $0.785 million. The Series D Preferred Stock was not outstanding
in the first quarter of 1996.

41
<PAGE> 46
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

In the fourth quarter of 1996 the Company announced a proposal to the
holders of Common Stock to approve the Securities Purchase Agreement with AFG.
The stockholders approved the agreement on December 31, 1996. The Securities
Purchase Agreement included, among other things, the sale and issuance for $35
million of 350,000 shares of the Company's Series D Preferred Stock, the
issuance of up to an additional 196,200 shares of Series D Preferred Stock if
the Company elected to issue additional Series D Preferred Stock for the first
five years in lieu of paying the quarterly cash dividends due on the Series D
Preferred Stock, and the issuance of up to 10,403,810 shares of Common Stock
upon conversion of the Series D Preferred Stock. The agreement, signed on
November 5, 1996, also required the Company to record a $15 million reserve
addition in its financial results for the fourth quarter of 1996. Based upon
additional data, analyses and evaluations, including analysis from its
independent actuary as of the end of the fourth quarter, the Company increased
the level of the reserve addition to approximately $30.0 million. Of the total
$30.0 million reserve addition, approximately $19.1 million resulted from
increases in IBNR losses, and the remainder resulted from increased levels of
ceded reinsurance premiums. After the announcement of the withdrawal from the
transportation program for local and intermediate-haul truckers at the
beginning of the fourth quarter of 1996, premium levels and the exposure base
of the program declined faster than originally anticipated. However, trucking
loss levels increased in the fourth quarter of 1996 compared to prior quarters.
Also, losses from the auto dealer program, which was discontinued in 1995, also
continued at higher-than-anticipated levels. The year-end actuarial analysis,
taking these fourth quarter 1996 patterns into account, resulted in significant
reserve additions of $15.1 million for incurred-but-not-reported ("IBNR")
losses and related reinsurance costs for these lines of business. The remainder
of the reserve additions are predominantly increases in reserves for IBNR
losses and related reinsurance costs for the aviation lines of business.

Gross Premiums Produced

Gross premiums produced decreased 16.7% to $151.2 million in 1996 from
$181.6 million in 1995. Of this decrease, 7.8% was produced by the P&C
Division, 10.7% was produced by the Aviation Division, which was partially
offset by a 1.8% increase produced by the Marine Division. The Aviation
Division's gross premiums produced decreased 15.1% to $108.7 million in 1996
from $128.1 million in 1995. This decline was due to a decrease in policies in
force resulting from underwriting actions taken by the Company in its
commercial aviation book of business and from business lost due to its decline
in credit rating. Gross premiums produced by the P&C Division decreased 28.3%
to $35.9 million in 1996 from $50.1 million in 1995. This decrease resulted
from a decision to discontinue the auto dealer program in the fourth quarter of
1995 and the transportation program in the fourth quarter of 1996, offset by
growth in the artisan program. On March 22, 1997 the Company announced that
AEIC had entered into a letter of intent to sell its artisan program and
complete its strategic plan for a complete withdrawal from the specialty
property and casualty lines of business. The sale, subject to definite
documentation, approvals of the boards of directors, regulatory approvals and
licenses, and other customary conditions would result in an immaterial gain.
The Marine Division's gross premiums produced increased 100.0% to $6.6 million
in 1996 from $3.3 million in 1995 as a result of more policies in force.

42
<PAGE> 47
which are retained by the other companies. Such amounts increased 34.6% to
$21.0 million in 1996 from $15.6 million in 1995 as a result of writing more
business on policies of companies rated at least "A-" by Best because of the
decline in the rating of the Company.

The gross premiums assumed from other companies increased 103.2% to $12.6
million in 1996 from $6.2 million in 1995 as a result of the increase in the
amount of gross premiums produced for other companies.

Gross premiums written decreased 17.1% to $142.8 million in 1996 from
$172.2 million in 1995 primarily as a result of the factors noted in the three
preceding paragraphs.

Ceded premiums decreased 9.2% to $46.6 million in 1996 from $51.3 million
in 1995. The ceded premiums in the Aviation Division decreased 30.6% to $29.0
million in 1996 from $41.8 million in 1995 as a result of improved ceded loss
experience. The ceded premiums in the P&C Division increased 79.2% to $16.3
million in 1996 from $9.1 million in 1995 as a result of deteriorating loss
experience. The ceded premiums in the Marine Division increased, generally,
consistently with the increase in gross premiums produced.

Net premiums written decreased 20.5% to $96.2 million in 1996 from $121.0
million in 1995 as a result of the matters described above.

Revenues

Earned premiums, net of reinsurance, increased 4.7% to $107.2 million in
1996 from $102.4 million in 1995. Of this increase, 8.6% was related to the
Aviation Division and 2.8% to the Marine Division, which was offset by a 6.7%
decrease in the P&C Division. The reasons for the changes in the components of
gross premiums produced resulted in the increase.

Investment income, net of related expenses, decreased 18.2% to $4.5
million in 1996 from $5.5 million in 1995. Average invested assets decreased
15.4% to $84.9 million in 1996 from $100.3 million in 1995. The decrease in
average invested assets was a result of cash flow used by operations, which
resulted primarily from reductions in unearned premiums and decreases in other
policy liabilities. The yield for the year increased to 5.6% from 5.5% in 1995.

Realized investment gains (losses), net, were $(0.1) million in 1996
compared to $0.5 million in 1995.

Agency operations is that portion of business not focused on
premium-generating insurance company underwriting operations. The operations
consisted of the generation of commission income offset by operating expense.
Agency operations, net, were approximately $0.4 million in 1996 and 1995.

Operating Expenses

Losses and loss adjustment expenses, net of reinsurance, were 100.2% of
earned premiums, net of reinsurance in 1996 as compared to 88.8% in 1995. The
ratio of losses and loss adjustment expenses to earned premiums, net of
reinsurance, is referred to as the loss ratio. The Aviation Division loss ratio
decreased to 75.6% in 1996 from 92.2% in 1995. The Aviation Division losses
include approximately $12.9 million of the $30.0 million reserve addition
previously discussed herein. Losses in the Aviation Division recorded in 1996
applicable to prior years were $7.5 million, with most of the amounts related
to the 1995 year. The P&C Division loss ratio increased to 169.4% in 1996 from
82.6% in 1995. These losses include approximately $16.6 of the $30.0 million
reserve addition previously described. Losses recorded in 1996 applicable to
prior years for the P&C Division were approximately $10.8 million and related
primarily to the commercial automobile liability coverages of the
transportation program. The Marine Division loss ratio decreased to 74.8% in
1996 from 80.0% in 1995. The improvement in the Aviation Division loss ratio in
1996 compared to 1995, is primarily attributable to the underwriting
enhancements made in late 1995 and early 1996 for the commercial aviation

43
<PAGE> 48

book of business. The P&C Division loss ratio increased in 1996 due to the
continued adverse results of the auto dealer program, which was discontinued
in the fourth quarter of 1995, and the adverse results in 1996 for the
transportation program, which was discontinued in the fourth quarter of 1996.

Policy acquisition and other underwriting expenses were 44.6% of earned
premiums, net of reinsurance, in 1996 and 36.4% of earned premiums, net of
reinsurance, in 1995. The ratio of policy acquisition and other underwriting
expenses, computed on a GAAP basis, to earned premiums, net of reinsurance, is
referred to as the

expense ratio. The increase in the expense ratio in 1996 compared to 1995 was
due to an increase in net commission expense and a reduction in new premium
production. In a period of declining premium production, as occurred between
1996 and 1995, not only are expenses incurred in the current period not
deferred to future periods because the book of business is decreasing, but
expenses deferred in prior periods when the book was growing are expensed in
the current period.

A measure of the Company's underwriting performance is its combined ratio,
which is the total of its loss ratio and expense ratio. A combined ratio below
100% generally indicates profitable underwriting prior to the consideration of
investment income. The Company's combined ratio increased to 144.8% in 1996
from 125.2% in 1995 as a result of the factors discussed above.

Interest expense increased 10.0% to $1.1 million in 1996 from $1.0 million
in 1995 due to an increase of $2.0 million in the outstanding note payable for
most of 1996. As of December 1996, the note payable balance was fully paid.

Loss

Loss before income tax benefit was $44.4 million in 1996 compared to $20.4
million in 1995 as a result of the factors described above.

The income tax benefit in 1995 resulted from the Company's ability to
carryback losses to prior years and recover previously paid taxes. In
accordance with the requirements of SFAS No. 109, the Company did not record an
income tax benefit relating to the net operating loss carryforward generated in
1996. At December 31, 1996 the Company had a net operating loss carryforward of
approximately $45.0 million available to offset future income. During 1996, the
Company underwent a change in ownership for purposes of Section 382 of the
Internal Revenue Code of 1986. As a result, the Company's net operating loss
carryforward will be limited to approximately $1.9 million per year through
2011. At the current statutory tax rate of 34%, the Company has an unrecorded
income tax benefit of approximately $14.1 million.

The Company recorded a net loss of $44.4 million in 1996 compared to a net
loss of $13.1 million in 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

1995 Special Charge to Earnings

During the fourth quarter of 1995, the Company recorded a special charge
to earnings of $20.6 million (after tax) for certain discontinued lines and
classes of business and increased reserves for IBNR losses and unearned
premiums.

Approximately $8.9 million of the special charge resulted from additional
case reserves and related costs for three segments of the Aviation Division in
which certain classes of coverage were discontinued. Approximately $.7 million
of the special charge resulted from additional case reserves and related costs
for the discontinued auto dealer program of the P&C Division. The remainder of
the special charge, approximately $11.0 million, resulted from an increase in
IBNR and unearned premium reserves, which included reserves for

44
<PAGE> 49

the discontinued lines and classes of business. Of the increase in IBNR and
unearned premium reserves, $7.1 million was attributed to the Aviation
Division, and $3.9 million to the P&C Division.

The Aviation Division discontinued writing coverages for the flying club
segment and certain classes in the instruction and rental and the charter
segments. The discontinued segment and classes, together, represented less than
10% of the Aviation Division's total 1995 book of business, but had significant
adverse impact on the overall underwriting results of the Division. In 1995,
the P&C Division discontinued its auto dealer program, which represented the
smallest of the three P&C Division segments. This segment had gross premiums
produced of $9.9 million in 1995, or 19.7% of total P&C Division gross premiums
produced.

Due to the significance of the special charge on the Company's 1995
financial results, the following discussion will present 1995 results including
and excluding the effect of the special charge, where applicable.

Gross Premiums Produced

Gross premiums produced increased 8.6% to $181.6 million in 1995 from
$167.2 million in 1994. Of this increase, 4.1% was produced by the P&C
Division, 2.5% was produced by the Aviation Division, and 2.0% was produced by
the Marine Division. The Aviation Division's gross premiums produced increased
3.4% to $128.1 million in 1995 from $123.9 million in 1994. This growth was due
to an increase in policies in force, rate increases and continued increases in
the value of private aircraft. Gross premiums produced by the P&C Division
increased 15.7% to $50.1 million in 1995 from $43.3 million in 1994. This
growth relates to increased policies in force and expansion into additional
states. The Marine Division, which began operations in 1995, produced gross
premiums of $3.3 million.

Gross premiums produced for other companies is comprised of premiums
written for other companies which are assumed by the Company and those premiums
written for other companies for higher coverage limits which are retained by
the other companies. Such amounts increased 1.5% to $15.6 million in 1995 from
$15.3 million in 1994 as a result of an increase in underwriting airport risks
in the Aviation Division. Due to the size of coverage limits involved in
airport liability policies, more of these risks are retained by the other
companies.

The gross premiums assumed from other companies decreased 14.2% to $6.2
million in 1995 from $7.3 million in 1994 as a result of more of the gross
premiums produced for other companies being retained by such companies.

Gross premiums written increased 8.2% to $172.2 million in 1995 from
$159.1 million in 1994 primarily as a result of the factors noted in the three
preceding paragraphs.

Ceded premiums decreased 18.8% to $51.3 million in 1995 from $63.1 million
in 1994. As part of the 1994 and 1995 aviation treaty renewals, a change was
made whereby the Company received less ceding commission and cedes less
premiums. The result of this change is to leave unaltered the agreed-upon net
cost of reinsurance, but it increases the expense ratio due to the reduction in
ceding commission income, and decreases the loss ratio due to having more
retained premium. The full financial impact of this change occurred in 1995.
Also, the P&C Division treaties were renewed at lower costs.

Net premiums written increased 26.0% to $121.0 million in 1995 from $96.0
million in 1994 as a result of the increase in gross premiums written and the
Company retaining more of the gross premiums written.

Revenues

Earned premiums, net of reinsurance, increased 23.8% to $102.4 million in
1995 from $82.7 million in 1994. Of this increase, 17.5% was related to the
Aviation Division, 5.1% to the P&C Division, and 1.2% to the

45
<PAGE> 50

Marine Division. The reasons for the changes in the components of gross
premiums produced resulted in the increase.

Investment income, net of related expenses, increased 33.9% to $5.5
million in 1995 from $4.1 million in 1994, while average invested assets
increased 22.3% to $100.3 million in 1995 from $82.0 million in 1994. A portion
of the increase in average invested assets was a result of having the proceeds
for the initial public offering for a full year in 1995. These proceeds
increased the Company's investment portfolio by approximately $20.1 million in
May 1994. The yield for the year increased to 5.5% from 5.0% as a result of
investing the proceeds of the initial public offering for a full year in 1995,
and significantly reducing the level of equity securities in September of 1994.
At the end of 1995, there were no equity investments.

Realized investment gains, net, were $0.5 million in 1995 compared to an
immaterial realized investment loss in 1994.

Agency operations is that portion of business not focused on premium-
generating insurance company underwriting operations. The operations consisted
of the generation of commission income offset by operating expense. Agency
operations, net, declined from $0.9 million in 1994 to a $0.4 million in 1995
primarily as a result of the charge-off of certain uncollectible balances.

Operating Expenses

Losses and loss adjustment expenses, net of reinsurance, were 88.8% (59.9%
excluding special charge) of earned premiums, net of reinsurance in 1995 as
compared to 63.7% in 1994. The ratio of losses and loss adjustment expenses to
earned premiums, net of reinsurance, is referred to as the loss ratio. The
Aviation Division loss ratio increased to 92.2% (58.2% excluding the special
charge) in 1995 from 57.7% in 1994, and the P&C Division loss ratio increased
to 82.6% (62.6% excluding the special charge) in 1995 from 73.9% in 1994. The
Marine Division loss ratio was 80.0% in 1995. The Aviation Division loss ratio,
excluding the special charge, was within normal operating ranges in both 1995
and 1994. The increase in the Aviation Division loss ratio in 1995 is primarily
attributed to the adverse results in the three classes of coverages, which were
discontinued in 1995, and a higher-than-expected number of severe liability
losses in the 1994 and prior accident years. The P&C Division loss ratio
increased due to the continued adverse results of the auto dealer program and a
longer than anticipated development period for the other liability coverages
line of business.

Policy acquisition and other underwriting expenses were 36.4% of earned
premiums, net of reinsurance in 1995 and 28.6% of earned premiums, net of
reinsurance, in 1994. The ratio of policy acquisition and other underwriting
expenses, computed on a GAAP basis, to earned premiums, net of reinsurance, is
referred to as the expense ratio. The increase in the expense ratio in 1995
compared to 1994 was due to an increase in ceded premiums and growth in policy
acquisition and other underwriting expense levels in 1995. Policy acquisition
and other underwriting expense levels in the P&C Division grew partially as a
result of increased commission expenses due to changes in the local and
intermediate haul transportation program's method of distribution.

A measure of the Company's underwriting performance is its combined ratio,
which is the total of its loss ratio and expense ratio. A combined ratio below
100% generally indicates profitable underwriting prior to the consideration of
investment income. The Company's combined ratio increased to 125.2% (94.9%
excluding the special charge) in 1995 from 92.3% in 1994 as a result of the
factors discussed above.

Interest expense increased 23.4% to $1.0 million in 1995 from $0.8 million
in 1994 due to an increase of $2.0 million in the outstanding note payable. As
of December 1995, the outstanding note payable balance was $11.3 million.

46
<PAGE> 51
Income (Loss)

Income (loss) before income tax provision (benefit) was a loss of $20.4
million in 1995 as compared to income of $10.5 million in 1994 as a result of
the factors described above.

Income tax provision (benefit) was a tax benefit of 35.8% of the loss
before income tax benefit in 1995 compared to income tax provision of 31.9% in
1994. The income tax benefit in 1995 resulted from the Company's ability to
carryback losses to prior years and recover previously paid taxes.

Net income (loss) was a net loss of $13.1 million in 1995 as compared to
net income of $7.1 million in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company is a holding company whose principal asset is AEIC. The
Company's cash flow depends primarily on dividends and tax allocation payments
from AEIC. The Company also retained approximately $2.9 million of the net
proceeds of the sale of the Series D Preferred Stock on December 31, 1996 for
general corporate purposes.

The ability of AEIC to pay dividends to its parent is subject to certain
regulatory restrictions. During 1996, AEIC paid no dividends to the Company.
Based on regulatory restrictions presently in effect, the Company does not
expect AEIC to have the ability to pay dividends to its parent for the
foreseeable future. See "Insurance Regulation." The Company believes that it
has adequate cash to meet its needs for the next twelve months.

AEIC's sources of funds are premiums collected, reinsurance recoveries,
investment income and proceeds from sales and maturities of investments. Funds
are applied primarily to the payments of claims and expenses and to the
purchase of investments. Premiums are typically received in advance of related
claim payments. Because the Company does not expect to write new or renewal
policies after the Transactions are consummated, premium revenues are expected
to decrease to zero by December 31, 1997.

AEIC has $33.8 million of cash and cash equivalents, short-term
investments and U.S. Treasury securities, and $32.8 million of other fixed
income, investment-grade securities at March 31, 1997 on a pro forma basis
after giving effect to the Transactions. AEIC believes that it has adequate
liquidity to meet all of its cash needs for the next twelve months.

AEIC is subject to periodic financial examinations by state insurance
regulatory bodies. In October 1996, the Texas Department of Insurance began a
triennial examination of AEIC. The examination is not complete, and no
examination report has been issued. The Company has recently been informed that
the examiners are considering whether certain assets currently recorded in the
books and records of AEIC are ineligible to be carried as admitted assets under
statutory accounting principles and whether additional reserves may be
required. Although the Company has reflected some of these matters in the pro
forma financial statements presented elsewhere in this Proxy Statement, the
Company currently cannot predict what position the Texas Department will
ultimately take on the remaining matters. The Texas Department could require
adjustments that are material to the Company. If the adjustments, if any, cause
AEIC to become insolvent under statutory accounting principles, the Department
could appoint a conservator or receiver for AEIC and ultimately liquidate AEIC.
It cannot presently be predicted whether a liquidation under such circumstances
would presently be predicted whether a liquidation under such circumstances
would result in any residual value available for stockholders of the Company.

The Company's consolidated cash flow used by operations was $22.4 million
in the first quarter of 1997, compared to cash flow used by operations of $16.8
million in the first quarter of 1996. The major uses of cash in the first
quarter of 1997 relate primarily to the decline in the volume of business
generated by the

47
<PAGE> 52

Company, resulting in declines in unearned premiums, reserves for losses and
losses and loss adjustment expenses and other liabilities, offset by an
increase in accounts receivable.

The Company's cash flow used in operations was $36.0 million in 1996. Cash
flow provided by operations was $4.0 million in 1995, and cash flow used in
operations was $4.1 million in 1994. Cash flow used in operations resulted
primarily from a reduction in unearned premiums of $19.5 million, as a result
of a decline in gross premiums written and the resultant decline in net
premiums written and a decrease of $20.0 million in other policy liabilities.
Other policy liabilities decreased as a result of decreases in claims drafts
payable and ceded reinsurance payable. Cash flow provided by operations in 1995
resulted primarily from settlement of balances with reinsurers, as well as
positive cash flow from increases in written premiums and premium collections.
Cash flow used by operations in 1994 resulted primarily from an increase in
reinsurance recoverable, as well as reinsurers' accelerating the payment for
premiums due them in the 1994 reinsurance renewal. Cash proceeds from the sales
and maturities of fixed income securities and sales of equity securities were
$41.6 million in 1996, $166.3 million in 1995, and $84.2 million in 1994.

In December 1996, the Company issued 350,000 shares of Series D Preferred
Stock for a total purchase price of $35 million, before expenses. Of the
proceeds, the Company used $13.3 million to fully repay and cancel its bank
credit facility, and $17.0 million was contributed to the capital and surplus
of AEIC. The Series D Preferred Stock has a dividend rate of 9%, payable
quarterly. At the option of the Company, during the first five years, the
quarterly dividend can be paid in additional shares of Series D Preferred
Stock. Upon consummation of the Aviation Division Sale, the Series D Preferred
Stock will be transferred back to the Company and canceled.

The Company's fixed-income securities are segregated into two categories
at March 31, 1997. Fixed-income securities expected to be held to maturity are
carried at amortized cost; the carrying value of such securities was $20.4
million, and the market value was $20.0 million, both at March 31, 1997 on a
pro forma basis after giving effect to the Transactions. The remaining
fixed-income securities are available for sale and were carried at a market
value of $29.2 million at December 31, 1996. In connection with the Aviation
Division Sale, the Company plans to convert all of its fixed income securities
to available for sale, which is not expected to result in a material gain or
loss.

The Company plans to spend an immaterial amount on capital expenditures
during the next 12 months, which will be funded out of operating cash flow.

48
<PAGE> 53

MARKET PRICES AND DIVIDENDS

The Common Stock is traded on the New York Stock Exchange under the symbol
"FLI." The following table shows the cash dividend declared and the high and
low sales prices per share of the Common Stock on the New York Stock Exchange
for each quarterly period set forth below.

<TABLE>
<CAPTION>
Quarter Ended High Low Dividend
- ------------- ---- --- --------
<S> <C> <C> <C>
March 31, 1995........... $10.625 $ 8.000 $.03
June 30, 1995............ $12.000 $ 9.000 $.03
September 30, 1995....... $12.000 $10.375 $.03
December 31, 1995........ $12.125 $ 9.250 $.04
March 31, 1996........... $11.000 $ 7.500 $.04
June 30, 1996............ $ 7.750 $ 4.250 $.04
September 30, 1996....... $ 5.000 $ 3.750 --
December 31, 1996........ $ 4.875 $ 3.375 --
March 31, 1997........... $ 5.500 $ 1.500 --
June 30, 1997 (through
May 30, 1997)............ $ 1.875 $ .469 --
</TABLE>

The NYSE has notified the Company that it will delist the Common Stock
upon closing of the Aviation Division Sale. See "Certain
Considerations--Delisting of Common Stock."

STOCKHOLDERS

The Company has three classes of authorized capital stock: 20,000,000
shares of Common Stock, $.01 par value per share, 1,000,000 shares of nonvoting
common stock, $.01 par value per share (the "Nonvoting Common Stock"), and
5,000,000 shares of preferred stock, $.01 par value per share, 162,857 of which
are designated Series B Cumulative Preferred Stock, $.01 par value per share
(the "Series B Preferred Stock"), and 546,200 of which are designated Series D
Preferred Stock, $.01 per value per share (the "Series D Preferred Stock"). As
of the Record Date, there were 7,047,098 shares of Common Stock outstanding
held by 184 stockholders of record, there were 142,857 shares of Series B
Preferred Stock outstanding held by two stockholders of record and there were
357,875 shares of Series D Preferred Stock outstanding held by one stockholder
of record.

DIVIDENDS

In September 1996, the Company announced that it would discontinue the
regular quarterly dividend on the Common Stock. Any determination to pay cash
dividends in the future will be at the discretion of the Board of Directors and
will be dependent upon the Company's results of operations, financial
condition, regulatory and contractual restrictions and other factors deemed
relevant. As an insurance holding company, the Company depends primarily on
dividends from AEIC to meet operating expenses and to fund cash dividends, if
any, to stockholders. See "Business of the Company--Regulation--Dividends" for
a description of the regulatory restrictions on the payment of dividends by
AEIC to the Company. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

49
<PAGE> 54

INSURANCE REGULATION

The Company's subsidiaries are subject to regulation by government
agencies in the states in which they do business. The nature and extent of such
regulation vary from jurisdiction to jurisdiction, but typically involve prior
approval of the acquisition of control of an insurance company or of any
company controlling an insurance company, regulation of certain transactions
entered into by an insurance company with any of its affiliates, approval of
premium rates and policy forms for many lines of insurance, standards of
solvency and minimum amounts of capital and surplus which must be maintained,
limitations on types and amounts of investments, restrictions on the size of
risks which may be insured by a single company, licensing of insurers and
agents, deposits of securities for the benefit of policyholders, methods of
accounting, establishing reserves for losses and loss adjustment expenses,
regulation of underwriting and marketing practices, regulation of reinsurance
and filing of annual and other reports with respect to financial condition and
other matters. These regulations may impede, or impose burdensome conditions
on, rate increases or other actions that the Company might want to take to
enhance its operating results. Such regulation is generally intended for the
protection of policyholders rather than security holders. In addition, state
regulatory examiners perform periodic examinations of insurance companies.

In addition to the regulatory supervision of the Company's insurance
subsidiaries, the Company is also subject to regulation under the Texas
Insurance Holding Company System Regulatory Act (the "Holding Company Act").
The Holding Company Act contains certain reporting requirements including those
requiring AEIC to register and annually file certain reports with the Texas
Insurance Commissioner (the "Texas Commissioner"). The annual registration
statements call for current information regarding the capital structure,
general financial condition, ownership and management of AEIC and persons
controlling it, and for the disclosure of the identity and relationship of
every member of its insurance holding company system. The registration
statement must also disclose certain agreements and transactions between AEIC
and its affiliates, which agreements and transactions must satisfy certain
standards set forth in the Texas Insurance Code.

Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided.

RISK-BASED CAPITAL. The Texas Department of Insurance has adopted a rule
substantially similar to the NAIC risk-based capital model act. The model act
sets regulatory levels with respect to minimum capital requirements for
property and casualty insurers based on the underwriting, investment and other
business risks inherent in an insurer's operations. Under the model act, any
insurance company that does not meet threshold risk-based capital levels
ultimately could be subject to regulatory intervention, mandatory
rehabilitation or liquidation proceedings. AEIC's capital is currently below
the risk based capital requirement, and AEIC has been ordered to prepare a
capital plan for review and approval of the Insurance Department of the State
of Texas.

DIVIDENDS. The payment of dividends by AEIC to the Company is regulated by
the Texas Insurance Code. These laws provide that a property and casualty
insurance company may not pay any dividends except from earned surplus arising
from its business. This provision is interpreted to mean accumulated, realized,
earned surplus, as distinguished from paid in surplus or unrealized earnings or
surplus. In addition, these laws also provide that the maximum amount of
dividends or other distributions that AEIC may declare or pay to the Company
within any 12-month period, without the permission of the Texas Commissioner,
is limited to the greater of 10% of policyholders' surplus (excluding
unrealized capital gains and losses) as of the end of the prior year or 100% of
net income for the prior year, both determined in accordance with statutory
accounting principles ("SAP"). If insurance regulators determine that payment
of a dividend or any other payments to an affiliate would, because of the
financial condition of AEIC or otherwise, be hazardous to its policyholders or
creditors, the regulators may prohibit payments that would otherwise be
permitted without prior approval.

50
<PAGE> 55

During 1996, AEIC paid no dividends to the Company. The amount of future
dividends may be limited by business and regulatory considerations. However,
based upon restrictions presently in effect, AEIC may not pay dividends without
first obtaining the prior approval of the Texas Commissioner. At March 31,
1997, AEIC had unassigned earned surplus (deficit) of $(4.2) million AEIC
received permission from the Department of Insurance of the State of Texas to
reset earned surplus to zero at December 31, 1996 by transferring from the paid
in capital account the amount necessary to bring the earned surplus account to
zero. The loss incurred in the first quarter of 1997 resulted in the earned
deficit.

TRANSACTIONS WITH AFFILIATES. Under the Texas Insurance Code, AEIC may not
enter into certain transactions, including sales, loans, investments,
reinsurance agreements and the systematic rendering of services, with members
of its insurance holding company system unless AEIC has notified the Texas
Commissioner of its intentions to enter into such transactions 30 days prior
thereto or such shorter period as the Texas Commissioner permits and the Texas
Commissioner has not disapproved of them within that period. Any such
transactions that in any twelve month period aggregate at least 5% of AEIC's
admitted assets or 25% of its policyholders' surplus are subject to prior
approval by the Texas Commissioner. Among other things, such transactions are
subject to the requirements that their terms be fair and equitable, charges or
fees for services performed be reasonable and AEIC's policyholders' surplus
following any dividends or distributions be reasonable in relation to its
outstanding liabilities and adequate to its financial needs.

MEMBERSHIP IN INSOLVENCY FUNDS AND ASSOCIATIONS; MANDATORY POOLS. Most
states require property and casualty insurers to become members of insolvency
funds or associations which generally protect policyholders against the
insolvency of an insurer writing insurance in the state. Members of the fund or
association must contribute to the payment of certain claims made against
insolvent insurers. Maximum contributions required by law in any one year vary
between 1% and 2% of annual premiums written. The Company's assessments from
guarantee funds were immaterial for 1994, 1995 and 1996. Most of these payments
are recoverable through future policy surcharges and premium tax reductions.

The Company is also required to participate in various mandatory insurance
facilities or in funding mandatory pools, which are generally designed to
provide insurance coverage for consumers who are unable to obtain insurance in
the voluntary insurance market. These pools typically require all companies
writing property insurance in the state for which the pool has been established
to fund deficiencies experienced by the pool based upon each company's relative
premium writings in that state, with any excess funding typically distributed
to the participating companies on the same basis. The financial impact of such
assessment has been immaterial in each of the years 1994, 1995 and 1996.

NAIC IRIS RATIOS. The NAIC's Insurance Regulatory System ("IRIS") was
developed by a committee of state insurance regulators and is intended to
assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies 12 industry ratios and specifies "usual
values" for each ratio. Departure from the usual values on four or more of the
ratios can lead to inquiries from individual state insurance commissioners as
to certain aspects of an insurer's business.

At December 31, 1996, AEIC was outside the "usual values" with respect to
eight ratios: Net Premium Written to Surplus; Two-year Overall Operating Ratio;
Change in Surplus; Liabilities to Liquid Assets; Agents' Balances to Surplus;
One-Year Reserve Development to Surplus; Two-Year Reserve Development to
Surplus; and Estimated Current Reserve Deficiency to Surplus. AEIC was outside
the usual values for each of these tests due to the reserve addition made in
1996.

51
<PAGE> 56

<TABLE>
<CAPTION>
Usual Values
Equal to or
Ratio Over Under Company Value
----- ------------ -------------
<S> <C> <C>
Net Premium Written to Surplus 300 - 430
Two-year Overall Operating Ratio 100 - 126
Change in Surplus 50 -10 -38
Liabilities to Liquid Assets 105 - 119
Agents' Balance to Surplus 40 - 83
One-Year Reserve Development to Surplus 20 - 38
Two-Year Reserve Development to Surplus 20 - 36
Estimated Current Reserve Deficiency to Surplus 25 - 71
</TABLE>

LEGISLATIVE AND REGULATORY PROPOSALS. From time to time, various
regulatory and legislative changes are proposed in the insurance industry. The
Company is unable to predict whether any of these proposed laws and regulations
will be adopted, the form in which any such laws and regulations would be
adopted, or the effect, if any, these developments would have on the operations
and financial condition of the Company.

52
<PAGE> 57

HISTORICAL BUSINESS OF THE COMPANY

GENERAL

The Company is an insurance holding company that, through its
subsidiaries, markets and underwrites specialized property and casualty
coverages in the general aviation insurance marketplace. Historically, the
Company has organized its business into three divisions. The Aviation Division,
which is responsible for all general aviation insurance business, generated
$108.7 million of gross premiums produced in 1996. The Property and Casualty
Division (the "P&C Division"), which was responsible for the artisan contractor
insurance business and the run-off of discontinued trucking and auto dealer
lines of insurance business, generated $35.9 million of gross premiums produced
in 1996. The Marine Division, which was responsible for all yacht insurance
business, generated $6.6 million of gross premiums produced in 1996.

As discussed more fully elsewhere in this Proxy Statement, the Company has
entered into the Purchase Agreement to sell the Aviation Division. In separate
transactions, the Company has recently completed the sales of the artisan
contractor portion of the P&C Division and the yacht insurance business of its
Marine Division. See "--Disposition of P&C Division" and "--Disposition of
Marine Division."

Regardless of whether the Company is able to complete the Aviation
Division Sale, the future business and operations of the Company will differ
materially from the Company's past activities. Following the sale of the
Company's three divisions, the Company expects that it will no longer write new
or renewal policies for the foreseeable future. It will continue to handle
claims on the Company's policies that are not assumed by the purchaser as part
of these transactions, and maintain the related reserves and assets. See
"Unaudited Pro Forma Financial Information." Accordingly, the Company's
revenues and earnings capacity will be significantly lower in the future. The
Company's operational focus will be on attempting to create residual value from
the remaining operations and assets and additional ongoing operations for the
Company's stockholders. See "Plans for Future Operation of the Company."
Therefore, the following discussion of the Company's historical business
activities has limited relevance to the Company's future operations.

THE DIVISIONS

During 1996, the Aviation Division was one of the largest providers of
general aviation insurance in the United States based on net premiums written.
The Company's general aviation insurance business consists primarily of
non-airline commercial aviation coverages, airport coverages and pleasure and
business aircraft coverages.

The P&C Division historically marketed and underwrote a commercial
insurance program for selected artisan contractors. During 1996, the P&C
Division marketed this product in three states, with a majority of this
business written in California. The P&C Division also managed the run-off of
the franchised auto dealer and local and intermediate-haul trucking lines of
business, from which the Company withdrew in November 1995 and October 1996,
respectively. See "--Disposition of P&C Division."

The Marine Division historically marketed and underwrote an insurance
program for private yachts navigating the inland and coastal waters of the
United States. The Marine Division targeted powerboats and sailboats valued
between $30,000 and $500,000. During 1996, the Marine Division marketed its
product nationwide through approximately 15 specialty independent producers.

53
<PAGE> 58

DISPOSITION OF P&C DIVISION

In the P&C Division, the Company's continued review in the third quarter
of 1996 of the trucking line of business resulted in the Company's withdrawal,
consistent with all regulatory and contractual obligations, from the line of
business in October 1996. The continuing unsatisfactory results, together with
the intense and prolonged price competition in this market, led the Company to
this decision.

On April 23, 1997, the Company entered into an agreement to sell the fixed
assets and continuing business of the P&C Division to a newly formed managing
general agency controlled by the executive management of the P&C Division. The
sale was completed effective June 30, 1997. Chartwell Re Holdings Corporation,
a subsidiary of Chartwell Re Corporation, holds an equity interest in the
managing general agency. The Insurance Corporation of New York ("INSCORP"), a
Chartwell subsidiary, provides the policy issuing capacity for the managing
general agency, and reinsured 100% of the Company's liability on the artisan
contractor insurance business in force on March 1, 1997 or written thereafter,
in consideration for the transfer by the Company to INSCORP of the unearned
premium reserve for such business at March 1, 1997. INSCORP paid the Company a
ceding commission of 27.35%.

The Company expects to recognize an immaterial gain on the transaction.
The Company also entered into a services agreement to purchase claims handling
and certain other run-off management services from the managing general agency
for a limited period of time.

DISPOSITION OF MARINE DIVISION

On June 19, 1997, the Company sold the assets and continuing business of
the Marine Division to American Yachts, Ltd., a newly formed agency.
Underwriters Insurance Company ("Underwriters") provides the policy issuing
capacity for the agency, and reinsured 100% of the Company's liability on the
marine insurance business in-force on April 30, 1997 or written thereafter, in
consideration for the transfer by the Company to Underwriters of the unearned
premium reserve for such business at April 30, 1997. Underwriters paid the
Company a ceding commission of 23% of the unearned premium reserve. The Company
expects to recognize an immaterial loss on the transaction.

54
<PAGE> 59

GROSS PREMIUMS PRODUCED

The table below sets forth the Company's gross premiums produced by the
Aviation Division, the P&C Division and the Marine Division for each of the
three years ended December 31, 1996.

<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1994 1995 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Aviation Division
Commercial $ 62,161 $ 63,408 $ 48,347
Pleasure and Business 34,861 35,066 38,431
Airport 19,968 23,610 17,487
Aviation Property -- -- 2,098
Other (1) 6,910 6,018 2,327
-------- -------- --------
Total $123,900 $128,102 $108,690
======== ======== ========

P&C Division
Local and intermediate-haul trucking $ 28,547 $ 25,292 $ 14,338
Automobile dealers 7,708 9,889 548
Artisan contractors 7,052 14,943 20,997
-------- -------- --------

Total $ 43,307 $ 50,124 $ 35,883
======== ======== ========

Marine Division(2) $ -- $ 3,335 $ 6,609
======== ======== ========
</TABLE>

- -----------------------
(1) Includes premiums for retrospectively rated workers' compensation and
airline hull and liability coverages, which the Company no longer
writes, and for property coverages for aviation-related businesses and
farm and ranch coverages on which the Company did not take any of the
underwriting risk.
(2) The Marine Division began operation in the first quarter of 1995.

AVIATION DIVISION BUSINESS

The Company's Aviation Division divides its general aviation insurance
into three major segments: commercial aviation, airports and personal pleasure
and business aircraft. Scheduled airline operations are not part of the general
aviation market segment.

Commercial. During 1996, commercial aviation was the largest market
segment for the Company, based on premium volume. The Company provides aircraft
insurance coverages for non-airline owners and operators of commercial,
corporate and municipal aircraft, as well as product liability coverage for
manufacturers of non-critical aircraft components. Aircraft coverages include
hull, liability and ancillary coverages. Such aircraft coverages protect the
insured against physical loss or damage to the covered aircraft and against
liability to third parties resulting from the ownership, maintenance or use of
the aircraft.

The commercial class of aircraft includes all general aviation aircraft,
including helicopters, owned or operated by non-airline commercial operators
for such purposes as carrying cargo and passengers for hire, charter, rental
and other commercial uses. The corporate and municipal classes of aircraft
include low to medium valued piston, turbo prop and jet engine general aviation
aircraft, including helicopters, used solely for business purposes by their
owners and flown by professionally qualified pilots. During 1996, the Company
insured

55
<PAGE> 60

approximately 6,000 commercial, corporate and municipal aircraft. The average
hull value for these aircraft insured by the Company was approximately
$250,000.

The Company defines non-critical aircraft components as those whose
failure is not expected to jeopardize the safety of flight of an aircraft.
Examples of components insured by the Company include chair release levers and
tray hinges. The Company no longer writes products liability coverage for
manufacturers of airframes, engines and critical engine/airframe components.

Airports. In 1996, the Company was one of the larger providers in the
United States of general liability insurance for owners and managers of
airports and aviation support businesses located on airport premises. The
Company's policies provide coverages such as premises liability, completed
operations/products liability, and hangarkeepers' liability. Insureds range
from selected large hub airports with scheduled airline service to small and
medium-sized, privately and publicly owned airports. At December 31, 1996, out
of an estimated 11,500 FAA certified airports and heliports in the United
States, the Company insured approximately one out of every eight, including one
out of every four large hub airports. These coverages were also marketed to
businesses located on airport premises that provide aviation support services
such as aircraft sales, maintenance, storage, charter, instruction, rental, and
cargo hauling. Coverages have not been provided to scheduled airlines. The
Company historically has not insured commercial operations of control tower
facilities; however, control tower exposure may be covered to the extent that
the airport owner is responsible for the operation of the control tower.

Pleasure and Business Aircraft. The Eagle Express Department of the
Aviation Division has provided aircraft insurance for owners and operators of
private aircraft used for personal business and pleasure. In this segment of
its business, the Company has provided coverage for single-engine and light to
medium multi-engine, fixed-wing aircraft and helicopters. The pilots are
trained and licensed but are not paid, full-time pilots. These policies provide
insurance coverage to owners of private aircraft similar in nature to the
coverage widely available to owners of personal automobiles. The Company's
policies protect the insured owner or operator against physical loss or damage
to the coverage aircraft and against liability to third parties resulting from
the ownership, maintenance or use of the aircraft. This class represents the
largest class of the active domestic general aviation fleet, comprising at
least 60% of the fleet of approximately 170,000 aircraft as estimated by the
General Aviation Manufacturer's Association. At year end 1996, the Company
insured approximately 24,600 pleasure and business aircraft.

Aviation Property. For over eight years the Company has been marketing a
program to provide property, commercial auto and inland marine coverages for
small and medium size airports and businesses providing aviation support
services on airport premises. Prior to 1996, American Eagle acted as agent in
producing this business for other insurers, but began underwriting these risks
for its own account in 1996. This business accounted for approximately $2.1
million of the $108.7 million of gross premiums produced by the Aviation
Division in 1996.

P&C DIVISION BUSINESS

The P&C Division historically provided commercial coverages for various
types of specialty artisan contractors, such as swimming pool, tile and
masonry, drywall, heating, ventilation and air conditioning, residential
painting, parking lot maintenance, landscaping, and rural and suburban land
improvement contractors specializing in small to mid-sized residential and
commercial projects. These policies provided auto, general liability, property,
inland marine, crime, and umbrella and excess coverages. The Company targeted a
preferred class of business consisting of businesses in each industry group
with an operating history of at least three years, an acceptable and verifiable
loss history over the previous three years, and a stable financial condition.

The Company targeted types of contractors that it believed generally were
not subject to the risk of catastrophic losses. These policies typically
generated gross premiums produced between $5,000 and $10,000

56
<PAGE> 61

per contractor. At December 31, 1996, the Company had approximately 2,500
artisan contractor policies in force with average gross premiums produced per
contractor of approximately $8,500. At December 31, 1996, this program was
marketed predominantly in California and was also marketed in Arizona and
Nevada.

MARINE DIVISION BUSINESS

In the first quarter of 1995, the Company established the Marine Division.
The Marine Division marketed and underwrote an insurance program for private
yachts navigating the inland and coastal waters of the United States. The
Marine Division targeted powerboats and sailboats valued between $30,000 and
$500,000. This program provided hull, liability and ancillary coverages for
owners and operators of yachts. During 1996, the Marine Division marketed its
products nationwide through approximately 15 specialty independent producers.
At December 31, 1996, the Company had over 5,500 yacht policies in force with
average gross premiums produced per yacht of approximately $1,200.

MARKETING

Aviation Division. During 1996, the Company marketed its aviation
insurance products through approximately 1,200 independent insurance producers.
The Company's top 100 independent producers accounted for over 76.4% of the
aviation gross premiums produced in 1996. Many of these producers specialize in
aviation insurance and provide technical knowledge of products, markets and
customers that creates marketing and underwriting opportunities. The Company
compensates producers based upon a percentage of gross premiums written and the
services performed. For the year ended December 31, 1996, no single producer
represented more than 7.4% of the Company's total aviation gross premiums
produced.

In addition to affinity group marketing through certain aviation
associations, the Company has also participated in trade shows and conventions
in the general aviation industry as a means of developing and retaining
customer relationships and name recognition.

P&C Division. During 1996, the P&C Division marketed its product for
artisan contractors through a combination of four employed producers and
independent producers. The Company also devoted a part of its marketing efforts
in the P&C Division to marketing to and through affinity groups such as local
trade groups and industry associations.

Marine Division. During 1996, the Company marketed its yacht product
nationwide, with emphasis on inland lakes and waterways, through established
independent, specialty marine insurance producers. At December 31, 1996, the
Marine Division had approximately 15 producers. The Company pays its
independent producers commissions and fees based on a percentage of gross
premiums produced of approximately 23%.

The Company's marine marketing efforts included participation at, and
sponsorship of, yachting events, including recognized regional boat shows.

UNDERWRITING

The Company's historical goal has been to achieve an underwriting profit,
as measured by a combined ratio of less than 100%. Each underwriter, other than
senior managers, has specialized in one of the Company's niche markets. The
Company believes that this specialization has allowed its underwriters to
develop experience and expertise in the industries and products they
underwrote, all of which have unique characteristics. In accepting risks,
underwriters were required to comply with risk parameters, retention limits and
rates established by the Company. Underwriting authority levels have been
established for the Company's underwriters based on the employee's ability and
level of experience.

57
<PAGE> 62

AVIATION AND P&C DIVISIONS. When an insurance quotation was issued, the
Company's underwriters performed a complete underwriting evaluation to
determine risk selection, premiums and coverage provisions. For smaller risks
that were quoted and issued in higher volumes, such as pleasure and business
aircraft and artisan contractors, underwriters have used a template
underwriting technique that permitted them to determine whether a risk met
underwriting guidelines in a highly controlled and efficient manner. If a risk
did not meet the template requirements, it was referred to a more senior
underwriter for review. For large and complex aviation risks, the Company
relied on on-site loss control surveys to gain knowledge of risks and assist
insureds with loss control procedures and policies. The Company's senior
underwriting officers monitored and analyzed underwriting results to determine
when adjustments to underwriting guidelines and pricing may be necessary.
Certain aviation agents had underwriting and binding authority within rigidly
defined guidelines and authority limits established for each producer.

To maintain compliance with underwriting guidelines, underwriting managers
routinely audited underwriters' files. These audits were also used to help
identify deficiencies and training needs for implementation of corrective
actions.

The Company has established aviation rates and coverage forms
independently. In many states, the rates for aircraft and certain other
aviation coverages are exempt from filing and approval requirements, which has
allowed the Company to more easily adjust rates in response to changing
conditions.

The Company has devoted significant resources to the development of
automated rating systems for much of its aviation business. At December 31,
1996, the systems provided rating standards for approximately 65% of the
Company's aviation business based on policy count.

The Company established premium rates for its P&C Division business in
most cases after considering advisory rates or prospective loss costs suggested
by the Insurance Services Office, Inc. ("ISO"), an industry advisory group. The
Company used a combination of ISO coverage forms and independently filed forms.

MARINE DIVISION. The Company established marine premium rates and forms
independently. In most states, the rates for marine coverages are exempt from
filing and approval requirements. The Company's independent producers were
experienced, knowledgeable specialty marine producers with underwriting and
binding authority within rigidly defined guidelines and authority limits
established for each producer.

Within strict template underwriting guidelines, the Company's select
marine producers performed a complete underwriting evaluation to determine risk
selection, premiums and appropriate coverage provisions when an insurance
quotation is issued. The producers referred to Company underwriters risks that
did not fall within these guidelines.

CLAIMS

The Company has historically maintained an active approach to claims
management. Accordingly, the Company's claims policy emphasizes timely
investigation of claims and prompt settlement of meritorious claims for
equitable amounts, maintenance of adequate reserves for claims, and control of
external claims adjustment and litigation expenses.

At May 30, 1997, the Company employed 13 adjusters in the Aviation and
Marine Divisions, and five adjusters in the P&C Division. Upon consummation of
the Transactions, the Company expects to employ one adjuster. The Company also
expects to enter into agreements with the purchasers of the aviation and
artisan contractor businesses to purchase claims handling services. The
purchasers will have very limited claims settlement authority. Upon receipt,
each claim will be reviewed and assigned to an adjuster based on the type and
severity of the claim. A claim file will be immediately opened and, if
appropriate, a reserve established based on

58
<PAGE> 63

current information and established guidelines. The reserve will be adjusted as
more current information becomes available, and at 30 and 90 day intervals.

RESERVES

The Company establishes loss and loss adjustment expenses ("LAE") reserves
to provide for the ultimate cost of administration and settlement of claims
under insurance and reinsurance policies issued by the Company, including
claims that have been reported to it by its insureds and claims for losses that
have occurred but have not yet been reported to the Company.

The reserves for losses and LAE established by the Company are estimates
of amounts needed to pay reported and unreported claims and related LAE
incurred as of the end of each accounting period, net of estimated related
salvage and subrogation claims and recoverable reinsurance. These reserves do
not represent an exact calculation of liability, but rather are estimates
involving actuarial and statistical projections at a given time to reflect the
Company's expectations of the ultimate costs of administration and settlement
of claims. Such estimates are based on facts and circumstances then known,
predictions of future events, estimates of future trends in claims reporting
frequency and severity and other variable factors. As a consequence, although
the Company believes that its reserves at December 31, 1996 are adequate to
meet its obligations under existing policies, actual losses and LAE may
deviate, perhaps substantially, from reserves reflected in the Company's
financial statements. To the extent reserves prove inadequate, the Company
increases such reserves and incurs a charge to earnings in the period in which
the reserves are increased, which could have a material adverse effect on the
financial results of the Company for such period. Because of the nature of the
business written by the Company, the Company does not believe that it has
material latent exposures related to toxic waste, asbestos and other
environmental claims that would have a material adverse effect on the Company's
financial condition or results of operations. To verify the adequacy of its
reserves, the Company engages independent actuarial consultants to perform
annual loss reserve analyses.

For reported claims, the Company first establishes case reserves pursuant
to the Company's guidelines when it receives notice of the claim and determines
that coverages may have been provided. The initial estimate is adjusted
periodically based upon the receipt of additional facts and documentation, the
informed judgment of personnel in the Company's claims department based on
general insurance reserving practices and the experience and knowledge of such
personnel regarding the nature and value of the specific type of claim,
jurisdiction of the occurrence, circumstances surrounding the claim, severity
of injury or damage, potential for ultimate exposure, the line of business and
policy provisions relating to the particular type of claim.

A variety of methods have been developed in the insurance industry for
determining reserves for incurred but not reported losses and liabilities. In
general, these methods involve the extrapolation of reported loss data to
estimate ultimate losses. The Company's loss calculation methods generally rely
upon a projection of ultimate losses based upon the Company's historical
patterns of reported loss development in aviation lines. The effects of
inflation are not specifically estimated by the Company in calculating its
reserves, but are reflected in the Company's historical pattern of loss
development.

The following table provides a reconciliation of beginning and ending loss
and LAE reserves established in accordance with generally accepted accounting
principles ("GAAP"), net of reinsurance recoverables, for the years ended
December 31, 1994, 1995 and 1996. The Company does not discount its reserves;
that is, it does not calculate them on a present value basis. Loss and LAE
reserves are stated on a net basis after deduction for losses recoverable from
reinsurers.

59
<PAGE> 64
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1995 1996
-------- ----------- -----------
<S> <C> <C> <C>
(Dollars in thousands)

Reserve for losses and LAE at beginning of year $40,855 $50,451 $ 57,852

Provision for losses and LAE for current year claims 48,567 72,072 88,885

Increase in estimated losses and LAE for
prior year claims 4,162 18,861 18,588
------- ------- --------
Total incurred losses and LAE 52,729 90,933 107,473

Losses and LAE payments for claims attributable to:
Current year 26,552 42,066 48,063
Prior years 16,581 41,466 43,111
------- ------- --------
Total payments 43,133 83,532 91,174

Reserve for losses and LAE at end of period $50,451 $57,852 $ 74,151
</TABLE>

The table below provides a reconciliation of the gross, ceded and net
"increase (decrease) in estimated losses and LAE for prior year claims" above
for the years ended December 31, 1994, 1995 and 1996.

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1994 1995 1996
-------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Gross increase in estimated losses and LAE for prior
year claims $2,303 $23,365 $18,936
Ceded (increase) decrease in estimated losses and
LAE recoverable from reinsurers for prior year
claims 1,859 (4,504) 348
------ ------- -------
Net increase in estimated losses and LAE for prior
year claims $4,162 $18,861 $18,588

</TABLE>

The table below reconciles reserves for losses and LAE, net of reinsurance
recoverable, at December 31, 1994, 1995 and 1996, to the Company's Consolidated
Balance Sheet.

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1994 1995 1996
-------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Reserve for losses and LAE $142,768 $136,528 $138,133
Reinsurance recoverable-loss reserves 92,317 78,676 63,982
-------- -------- --------
Reserve for losses and LAE, net of reinsurance
recoverable $ 50,451 $ 57,852 $ 74,151
</TABLE>

60
<PAGE> 65

Set forth below is a table showing the amount of losses and LAE for the
Company, excluding American Meridian Insurance Company, Limited, a wholly
owned subsidiary of AEIC domiciled in Bermuda ("American Meridian"), at
December 31, 1994, 1995 and 1996.

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1994 1995 1996
-------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Company's reserves for losses and LAE $50,451 $57,852 $74,151
American Meridian's reserves for losses and LAE 1,480 1,232 1,158
------- ------- -------
Reserve for losses and LAE, excluding American
Meridian $48,971 $56,620 $72,993
======= ======= =======

</TABLE>

The Aviation Division had an increase in estimated reserves for losses and
LAE (i.e., unfavorable loss development) for prior year claims of $7.5 million
in 1996 and $11.9 million in 1995, compared to favorable loss development of
$1.4 million in 1994 and $4.0 million in 1993. The P&C Division had unfavorable
loss development for prior year claims of $10.8 million in 1996, $7.0 million
in 1995, $5.6 million in 1994, and $0.4 million in 1993.

The unfavorable loss development in 1996 for the Aviation Division relates
primarily to the 1995 year. The unfavorable development results from a higher
than anticipated number of severe liability losses and hull losses reported in
1996 for 1995 occurrences. The unfavorable loss development in 1996 for the P&C
Division relates primarily to the commercial automobile liability line of
business and is related to accident years 1994 and 1995. The unfavorable loss
development for the commercial automobile liability was due primarily to a
higher than anticipated number of severe losses reported in 1996 for
occurrences and increased severity of 1994 losses.

The following table presents the development of the Company's GAAP
liability for losses and LAE for each of the fiscal years ended December 31,
1986 through 1996, excluding American Meridian. The top line of the table shows
the estimated amounts of losses and LAE for claims arising in that year and all
prior years that are unpaid at the balance sheet date, including losses
incurred but not yet reported to the Company. The upper portion of the table
shows the cumulative amounts subsequently paid as of successive years with
respect to the liability. The table also shows the reestimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimates change as more information becomes known about
the frequency and severity of claims for individual years. A redundancy exists
when the reestimated liability at each December 31 is less than the prior
liability estimate and a deficiency exists when such reestimated liability is
greater than the prior liability estimate. The cumulative redundancy or
deficiency depicted in the table, for any particular calendar year, represents
the aggregate change in the initial estimates over all subsequent calendar
years. Each amount in the table below includes the effects of all changes in
amounts for prior periods. The table does not present accident or policy year
development data.

61
<PAGE> 66

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1986 1987 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES)
Reserve for losses
and LAE,
as stated $21,094 $31,825 $39,573 $37,307 $31,124 $30,411 $35,153 $38,544 $48,971 $56,620 $72,993

Cumulative paid
as of:
1 year later $4,721 $7,615 $8,325 $9,751 $5,797 $7,183 $12,824 $16,116 $42,092 $43,035
2 years later 8,266 4,605 15,638 15,029 10,397 14,058 19,815 37,577 57,390
3 years later 9,966 9,319 19,153 18,701 15,799 17,179 27,514 42,848
4 years later 12,167 11,441 21,892 23,853 17,413 21,825 27,759
5 years later 13,401 13,191 23,533 24,996 20,709 21,930
6 years later 13,752 14,374 23,167 27,866 20,759
7 years later 14,339 14,678 24,912 27,880
8 years later 14,627 15,058 25,215
9 years later 14,887 13,551
10 years later 15,203

Reserve
re-estimated
as of:
1 year later $20,723 $24,926 $34,442 $34,270 $30,537 $26,653 $32,205 $43,072 $68,706 $75,206
2 years later 20,393 21,206 32,999 36,045 25,890 26,801 31,901 51,534 73,025
3 years later 20,701 18,108 34,420 31,635 25,760 27,007 35,315 52,171
4 years later 18,909 21,837 31,186 32,075 25,328 27,890 34,413
5 years later 19,463 20,064 29,827 30,886 25,465 27,030
6 years later 17,649 19,425 26,824 31,645 25,369
7 years later 17,799 16,392 27,160 32,000
8 years later 15,763 16,663 28,770
9 years later 15,887 15,860
10 years later 17,020

Initial reserve
in excess of
(less than)
re-estimated
reserve:
Amount $4,074 $15,965 $10,803 $5,307 $5,755 $3,381 $740 $(13,627) $(24,054) $(18,586)
Percent 19.3% 50.2% 27.3% 14.2% 18.5% 11.1% 2.1% -35.4% -49.1% -32.8%
</TABLE>

62
<PAGE> 67

The table below presents the gross development of the Company's GAAP
liability for loss and LAE for 1994, 1995 and 1996 excluding American Meridian.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1994 1995 1996
------------------------------------------
(Dollars in thousands, except percentages)
<S> <C> <C> <C>
Gross reserve for losses and LAE as stated: $138,131 $130,568 $132,515

Cumulative paid as of:
1 year later 73,064
2 years later 109,407 69,712

Gross reserve re-estimated as of:
1 year later
2 years later

Gross initial reserve in excess of (less than) 162,952
re-estimated reserve: 160,125 149,504
Amount (21,994) (18,936)
Percent -15.9% -14.5%
</TABLE>

The table below presents the ceded development of the Company's GAAP
liability for losses and LAE for 1994, 1995 and 1996 excluding American
Meridian. The ceded development represents the difference between the net
development and the gross development.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1994 1995 1996
------------------------------------------
(Dollars in thousands, except percentages)
<S> <C> <C> <C>
Ceded reserve for losses and LAE as stated: $89,160 $73,948 $59,522

Cumulative paid as of:
1 year later 30,972
2 years later 52,014 26,674

Ceded reserve re-estimated as of:
1 year later
2 years later

Ceded initial reserve in excess of (less than) 94,246
re-estimated reserve: 89,097 74,296
Amount 63 (348)
Percent -- -.4%
</TABLE>

Conditions and trends that have affected reserve development in the past
may not necessarily occur in the future. Accordingly, it is not appropriate to
extrapolate future redundancies or deficiencies based on the foregoing.

63
<PAGE> 68

REINSURANCE

The Company has followed the customary industry practice of reinsuring a
portion of the exposure under its policies and, as consideration, paying to its
reinsurers a portion of the premium received on its policies. Under certain
treaties, the agreed-upon premium may vary within predetermined ranges based
upon the level of losses experienced by the reinsurer and subject to
reinsurance deductible amounts. Insurance is ceded principally to reduce an
insurer's liability on individual risks and to protect against catastrophic
losses. Although reinsurance does not legally discharge an insurer from its
primary liability to policyholders for the full amount of coverage provided by
its policies, it does make the assuming reinsurer liable to the insurer to the
extent of the reinsurance ceded.

The Company structured separate reinsurance programs for the Aviation
Division, the P&C Division and the Marine Division. Under its current aviation
reinsurance protections, the Company has limited its net retained loss for any
one occurrence to a maximum of $200,000 for liability loss and $150,000 for
hull loss. Under its current property and casualty reinsurance protections, the
Company has limited its net retained loss to a maximum of $250,000 for any one
occurrence. Under its current marine reinsurance protections, the Company has
limited its net retained loss for any one occurrence to a maximum of $75,000.
In addition, the Company purchased catastrophe protection to limit its
retention to $250,000 for the Aviation Division, $500,000 for the P&C Division,
and $75,000 for the Marine Division in a single occurrence involving multiple
policyholders, such as a hurricane, flood or earthquake, up to $1,000,000.
Occurrences above $1,000,000 are protected by a combined catastrophe program
which reinsures 95% of a single occurrence above $1,000,000 up to $20,000,000.
The 1997 renewal of the catastrophe program extends the coverage up to
$30,000,000. The Company also reinsured on a facultative basis when it wrote a
risk with limits of liability exceeding the maximum limits of its treaties or
when it otherwise considered such action appropriate.

In formulating its reinsurance programs, the Company has been selective in
its choice of reinsurers and considered numerous factors, the most important of
which is the financial stability of the reinsurer. In an effort to minimize its
exposure to the insolvency of any reinsurer, the Company carefully evaluated
the acceptability of each reinsurer. As part of the Company's acquisition of
AEIC and AOA in 1986, the Company agreed that AEIC should assume the risk of
uncollectible reinsurance relating to reinsurance arranged by AOA for aviation
business AOA managed between June 30, 1986 and December 31, 1992 for its
formerly affiliated insurers. Since the acquisition, AEIC has not written off
any reinsurance recoverables; however, the Company has provided an allowance of
$1.4 million for uncollectible reinsurance.

64
<PAGE> 69

The following table sets forth certain information related to the
Company's 15 largest reinsurers based on ceded reinsurance premiums during
1996.

<TABLE>
<CAPTION>
CEDED NET 1996
REINSURANCE REINSURANCE BEST
REINSURERS PREMIUMS RECOVERABLE(1) RATING(2)
- ----------- -------------- -------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
Zurich Reinsurance Centre, Inc. $16,954 $22,185 A
Lloyds of London 7,603 9,257 (3)
Kemper Reinsurance Company 2,632 2,042 A-
Chartwell Reinsurance Company 2,541 3,312 A
Nac Reinsurance Corporation 1,317 18,779 A
St. Paul Fire & Marine Insurance Company 1,170 1,901 A+
TIG Reinsurance Company 789 1,498 A
Hanover Ruckversicherungs AG. 729 146 S&P AAA
Frankona Ruckversicherungs AG. 704 1,557 S&P AA+
American Reinsurance Company 660 2 A+
Transatlantic Reinsurance Company 636 1,552 A+
San Francisco Reinsurance Company 628 934 A-
North Star Reinsurance 569 1,296 A
Everest Reinsurance Company 464 828 A
Gerling Global Re (US) 341 447
---------- ---------

Top 15 reinsurers $37,737 $65,736
========== =========

All reinsurers $46,591 $69,242

Percentage of total represented
by top 15 reinsurers 81.0% 94.9%
</TABLE>

(1) Includes losses and LAE paid, outstanding losses and LAE, incurred but not
reported loss reserves and unearned premium reserves net of ceded
reinsurance premiums payable as of December 31, 1996.
(2) Except as otherwise indicated, A.M. Best Company rating assigned as of
December 31, 1996.
(3) See discussion of Lloyd's syndicates below.
(4) Insurance Solvency International ranking.

Lloyd's of London is a collection of underwriters, known as "names," who
generally group together annually to form syndicates. Lloyd's reported material
aggregate losses for its underwriting years of account prior to 1992. These
losses have had serious effects on Lloyd's in general, and on certain
syndicates in particular. On September 3, 1996, Lloyds of London obtained
approval from the UK Government to reinsure all 1992 and prior years
liabilities into Equitas Limited in order to obtain operating and investment
efficiencies and provide for future development of 1992 and prior liabilities.
The reinsurance of the 1992 and prior liabilities does not relieve the Lloyds
Syndicate of their responsibility for those liabilities but does place Equitas
Limited as the entity of first course. There has also been a substantial
decrease in the underwriting capacity of Lloyd's syndicates in recent years.
These and other adverse developments could affect the ability of certain
syndicates to continue to underwrite risk and the ability of insureds to
continue to place business with particular syndicates. It is not possible to
predict what effects the circumstance described above may have on Lloyd's and
the Company's contractual relationship with Lloyd's syndicates in the future.
However, the Company is not currently aware of

65
<PAGE> 70

any circumstances that would lead the Company to believe that the amounts
recoverable from any Lloyd's syndicate may be uncollectible.

S&P has published stability rankings for Lloyd's syndicates, which rate,
based on a five-tier system, a syndicate's financial characteristics over the
most recent four years of reported results. Under this system, a ranking of one
asterisk is assigned to syndicates that have demonstrated the least favorable
financial characteristics, a ranking of three asterisks is assigned to
syndicates that have demonstrated middle-range financial characteristics and a
ranking of five asterisks is assigned to syndicates that have demonstrated the
most favorable financial characteristics. No ranking is given for syndicates
that have not closed at least two underwriting years. In the most recent S&P
ranking, which is based on underwriting years up to and including 1995, all
ranked syndicates to which the Company cedes risk were ranked either ***, ****
or *****.

INVESTMENTS

The Company has a conservative investment philosophy with the object of
maximizing investment returns, consistent with appropriate safety,
diversification, tax and regulatory considerations, and providing sufficient
liquidity to enable the Company to meet its obligations on a timely basis. The
Company's portfolio is comprised of investment-grade fixed income securities.
The Company has no investments in real estate, mortgages, collateralized
mortgage obligations, non-investment-grade bonds, private placements or
derivative securities.

The Company's investment practices are governed by guidelines established
and approved by its Board of Directors and by the qualitative and quantitative
limits prescribed by the Texas Insurance Code and the Texas Insurance
Department. The Company has engaged Luther King Capital Management, Inc. and
Aon Advisors, Inc. to manage its investment portfolio, subject to the
investment guidelines adopted by the Board of Directors and regulatory
requirements. The Investment Committee of the Company's Board of Directors
meets periodically with management to set investment policy and review the
performance of the Company's investment managers. In addition, representatives
of the outside investment managers consult at least quarterly with management
regarding portfolio performance and characteristics.

The Company's management determines the appropriate classification of
securities at the time of purchase. If the Company's management has the intent
and the Company has the ability at the time of purchase to hold securities
until maturity, they are classified as held to maturity and carried at
amortized cost. Securities to be held for indefinite periods of time and not
specifically intended to be held to maturity are classified as available for
sale and carried at market value.

66
<PAGE> 71

The following table shows the Company's investments and cash and cash
equivalents as of December 31, 1996.

<TABLE>
<CAPTION>
Percent of
Carrying Value Market Value Market Value
-------------------------------------------------------
<S> <C> <C> <C>
Fixed income securities (Dollars in thousands)
Available for sale $29,167 $29,167 44.3%
Held to maturity 23,479 23,264 35.4%
------ ------ -----
Total fixed income securities $52,646 $52,431 79.7%
Short-term investments 13,347 13,347 20.3%
Total investments $65,993 $65,778 100.00%
======= ======= ======

Cash and cash equivalents $23,094 $23,094
======= =======
</TABLE>

The following table shows the composition of the Company's fixed income
investment portfolio by rating as of December 31, 1996. The Company did not
have at December 31, 1996, and does not currently have, any investments rated
below 2 by the National Association of Insurance Commissioners ("NAIC").

NAIC S&P's Equivalent Carrying Value Market Percent of
RATING (1) Description (Dollars in Thousands) Value Market Value
- ---------- ----------- -------------------- ----- ------------
<S> <C> <C> <C> <C>
1 AAA $22,430 $22,223 42.4%
1 AA 7,728 7,720 14.7
1 A 16,421 16,421 31.3
2 BBB 6,067 6,067 11.6
- ----- ----- ----
TOTAL $52,646 $52,431 100.0%
======= ======= =====
</TABLE>

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

(1) The Securities Valuation Office of the NAIC maintains a security valuation
system that assigns a numerical rating to each security. The numerical
ratings generally correspond to S&P's classifications, as indicated,
although S&P has not necessarily rated the securities as indicated. The
ratings assigned by the NAIC range from Class 1 to Class 6, with Class 1
as the highest quality rating.

The S&P rating system utilizes various symbols to indicate the relative
investment quality of a rated bond. "AAA" rated bonds are judged to be the best
quality and are considered to carry the smallest degree of investment risk.
"AA" rated bonds are judged to be of high quality by all standards. Together
with "AAA" bonds, these bonds comprise what are generally known as high grade
bonds. "A" rated bonds possess many favorable investment attributes and are
considered to be upper medium grade obligations. "BBB" rated bonds are
considered as medium grade obligations; they are neither highly protected nor
poorly secured.

67
<PAGE> 72

The following table sets forth contractual maturities for the Company's
fixed income investment portfolio at December 31, 1996. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
Percent of
Carrying Value Carrying Value
---------------------- --------------
(Dollars in thousands)
<S> <C> <C>
Maturity category
Less than one year $ 5,085 9.7%
One year to three years 12,183 23.1%
Over three years to five years 2,104 4.0%
Over five years to seven years 15,444 29.3%
Over seven years to ten years 8,333 15.9%
Over ten years 9,497 18.0%
------- -----

Total $52,646 100.0%
======= =====
</TABLE>

The Company's investment strategies are designed to take into account the
liability profiles of each division and provide for appropriate asset/liability
matching. At December 31, 1996, the Company's fixed income portfolio had a
weighted average life of 4.8 years and an average duration of 3.6 years.

68
<PAGE> 73

The following table reflects the Company's investment results for each
year in the five-year period ended December 31, 1996.

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1992 1993 1994 1995 1996
-----------------------------------------------
(Dollars in thousands, except percentages)
<S> <C> <C> <C> <C> <C>
Average invested asset $53,273 $55,984 $82,046 $100,261 $84,932

Net investment income 2,880 2,918 4,106 5,497 4,470

Realized gains (losses) on
investments 1,622 1,414 (33) 496 (74)

Net tax-adjusted yield on
average invested assets
(excluding realized gains
(losses) on investments) 5.4% 5.2% 5.2% 5.7% 5.8%
</TABLE>

COMPETITION

The property and casualty insurance industry is highly competitive. In its
aviation lines of business, the Company competes primarily with other aviation
specialty insurers and underwriting organizations, including aviation
underwriting pools composed of large national multi-line insurers. In its
marine line of business, the Company competes primarily with national and
regional insurers, some of which are specialty insurers in the Company's lines
of business. Many of these insurers and underwriting organizations are
substantially larger, have significantly greater financial resources and have
higher Best ratings than the Company.

EMPLOYEES

The Company employed 199 full-time employees at May 30, 1997. None of the
employees are represented by a labor union and management considers its
relationship with its employees to be generally excellent.

LEGAL PROCEEDINGS

The Company and its subsidiaries are routinely parties to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims, and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to other specified relief. The Company insures or
reinsures some, but not all, of its exposure to such damages. Based upon
information presently available, and in light of legal and other defenses
available to the Company, management does not consider liability from any
threatened or pending litigation to be material.

<PAGE> 74
ELECTION OF DIRECTORS

Two directors are to be elected at the Annual Meeting. The current outside
directors have informed the Company that they intend to resign, upon
consummation of the Aviation Division Sale, and the Company will reduce the
size of its Board of Directors to three. The Company's Restated Certificate of
Incorporation provides that the Board of Directors shall be divided into three
classes as nearly equal in number as possible. Thus, the Board of Directors is
divided into three classes, the terms of office of which are currently
scheduled to expire on the dates of the Company's annual meetings of
stockholders in 1997, 1998 and 1999. Richard M. Kurz and Howard D. Putnam have
been nominated to serve in the class which is currently under nomination and,
if elected, will serve until the Company's annual meeting of stockholders in
1999 and 2000, respectively, and until their respective successors shall have
been elected and qualified. A plurality of the votes cast in person or by proxy
by the holders of Common Stock and Series D Preferred Stock is required to
elect a director. Accordingly, assuming a quorum is present, abstentions and
"broker non-votes" would have no effect on the election of directors. A broker
non-vote occurs if a broker or other nominee does not have discretionary
authority and has not received instructions with respect to a particular item.
There will be no cumulative voting for members of the Board of Directors.

Unless otherwise instructed or unless authority to vote is withheld, the
enclosed proxy will be voted for the election of the nominees listed below.
Although the Board of Directors does not contemplate that any of the nominees
will be unable to serve, if such a situation arises prior to the Annual
Meeting, the persons named in the enclosed proxy will vote for the election of
such other person(s) as may be nominated by the Board of Directors.

Stated in the tables below and on the following pages are the names and
ages of the nominees and directors continuing in office, the principal
occupation of each during at least the last five years, the date on which each
individual became a director of the Company, and other directorships and civic
affiliations of such persons. The information set forth on the following pages
with respect to each nominee's and director's principal occupation, other
directorships and affiliations and beneficial ownership of Common Stock has
been furnished by the nominee or director.

NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS

<TABLE>
<CAPTION>
DIRECTOR'S
NAME AGE TERM ENDING
---- --- -----------
<S> <C> <C>
Richard M. Kurz 55 1999
Howard D. Putnam 59 2000

</TABLE>

RICHARD M. KURZ joined the Company in December 1993 as Senior Vice
President/Chief Financial Officer. He has been a director of the Company since
February 1995. From August 1991 until December 1992, Mr. Kurz was Chief
Financial Officer of BDP International, Inc., a Custom House broker and freight
forwarder, where he was responsible for finance and administration. From July
1989 to August 1991, Mr. Kurz held a number of senior financial positions in
CIGNA Corporation's Property and Casualty Group. From April 1986 to July 1989
Mr. Kurz was Chief Financial Officer of CIGNA Worldwide, Inc. ("CIGNA"), where
he was responsible for financial reporting, planning, mergers and acquisitions,
treasury, and international investment portfolio strategy. From January 1982 to
April 1986, Mr. Kurz was the Chief Accounting Officer of the Property and
Casualty Group of CIGNA where he was responsible for financial reporting and
controls. Mr. Kurz also served in various positions with Price Waterhouse for
11 years, including Senior Manager in the firm's insurance industry specialty
group providing accounting and consulting services to the insurance industry.
Mr. Kurz is a Certified Public Accountant.

70
<PAGE> 75

HOWARD D. PUTNAM has been self-employed as an author and consultant on
business management matters since 1989. Prior to that time, Mr. Putnam was an
airline executive and entrepreneur. Mr. Putnam's background in the airline
industry has spanned more than thirty-five years, with professional positions
including service as the Chief Executive Officer of Braniff International from
1981 to 1983, the Chief Executive Officer of Southwest Airlines from 1978 to
1981 and the Senior Vice President of United Air from 1976 to 1978. Mr. Putnam
is a graduate of the Harvard Advanced Management Program and holds a masters of
business administration from the University of Chicago.

MEMBER OF THE BOARD OF DIRECTORS
CONTINUING IN OFFICE

<TABLE>
<CAPTION>
DIRECTOR'S
NAME AGE TERM ENDING
---- --- -----------
<S> <C> <C>
M. Philip Guthrie 52 1998
</TABLE>

M. PHILIP GUTHRIE joined the Company as a director in May 1989, and his
term expires in 1998. Mr. Guthrie became Chairman of the Board and Chief
Executive Officer of the Company in December 1992 and President in September
1996. Mr. Guthrie was a managing director of Mason Best Company, L.P., a
merchant banking firm ("Mason Best"), from 1989 through 1996. Mr. Guthrie has
been a director of San Jacinto Holdings, Inc. ("SJH") and Safeguard Business
Systems, Inc. from 1989 through 1996. Mr. Guthrie was President and a General
Partner of Diamond Management Group, Inc., a Dallas-based private investment
company, from 1984 until 1989. From 1981 to 1984, Mr. Guthrie was the Executive
Vice President, Chief Financial Officer and a director of Braniff
International. From 1978 to 1981, Mr. Guthrie was Vice President, Chief
Financial Officer and Treasurer of Southwest Airlines Company. Mr. Guthrie is a
Certified Public Accountant.

MEMBERS OF THE BOARD OF DIRECTORS
NOT CONTINUING IN OFFICE

<TABLE>
<CAPTION>
DIRECTOR'S
NAME AGE TERM ENDING
---- --- -----------
<S> <C> <C>
Joseph M. Grant 58 1997
Keith W. Hughes 51 1999
James E. Maser 59 1998
Elvis L. Mason 64 1999
</TABLE>

JOSEPH M. GRANT has been a director of the Company since February 1994.
Mr. Grant has been Executive Vice President, Chief Financial Officer and a
director of Electronic Data Systems Corporation ("EDS") since December 1990.
Prior to joining EDS, Mr. Grant served as Executive Vice President and Chief
Systems Officer for Houston-based American General Corp., a holding company in
the life insurance, real estate and consumer finance businesses. From 1986 to
1989, Mr. Grant was Chairman of the Board and Chief Executive Officer of Fort
Worth-based Texas American Bancshares, Inc., a bank holding company. Mr. Grant
serves on the Board of Directors of Heritage Media Communication, a radio,
television and direct marketing firm, and Nor Am Energy Corp., an oil and gas
company.

71
<PAGE> 76

KEITH W. HUGHES has been a director of the Company since August 1995. Mr.
Hughes has been Chairman and Chief Executive Officer of Associates First
Capital Corporation (the "Associates"), a consumer and commercial finance
company, since February 1995. Mr. Hughes has been associated with the
Associates since 1981. Mr. Hughes serves on the Board of Directors of
Associates First Capital Corporation.

JAMES E. MASER has been a director of the Company since February 1995. Mr.
Maser has been Vice Chairman of Club Corporation International, a company which
owns and operates clubs, resorts, public fee golf courses and real estate
developments worldwide, since 1989. Mr. Maser has been associated with Club
Corporation International since 1965.

ELVIS L. MASON has served as a director of the Company since February 1992
and from 1986 through 1987. Mr. Mason has been the Managing Partner of Mason
Best, a merchant banking firm, since August 1984. Mason Best is a stockholder
of the Company. Since February 1992, Mr. Mason served as Chairman of the Board
of Safeguard Business Systems, Inc., a manufacturer and marketer of business
forms and services. From February 1992 until October 1996 Mr. Mason also served
as Chief Executive Officer of Safeguard Business Systems, Inc. Mr. Mason is
also a director of Tracor, Inc., a defense electronics firm, and United
Meridian Corporation, an oil and gas firm.

DIRECTORS' MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors held eight meetings during 1996. Joseph M. Grant
and Keith W. Hughes attended fewer than 75% of the aggregate of the total
number of meetings of the Board of Directors and the total number of meetings
held by all committees of the Board of Directors on which such director served.

The Board of Directors currently has the following standing committees:
the Audit Committee, the Compensation Committee and the Investment Committee.
The Board of Directors has no nominating committee or other committee which
performs similar functions.

The Audit Committee, which held one meeting during 1996, is charged with
overseeing the financial affairs of the Company. The Audit Committee recommends
an accounting firm to serve as the Company's independent auditors, reviews with
the independent auditors the scope and timing of audit and non-audit services,
and reviews the annual audit report of the Company with the independent
auditors. Currently, the members of the Audit Committee are Mr. Grant
(Chairman), Mr. Maser and Mr. Mason.

The Compensation Committee, which held one meeting during 1996, is charged
with the responsibility of overseeing the compensation policies of the Company.
The Compensation Committee reviews and approves or recommends to the Board of
Directors the types and amounts of compensation for the officers of the
Company, reviews and recommends to the Board of Directors such employee benefit
plans and other forms of remuneration as it deems appropriate, and acts as the
committee administering all of the stock option plans of the Company, with the
duties provided in such plans. Currently, the members of the Compensation
Committee are Mr. Mason (Chairman), Mr. Hughes and Mr. Maser.

The Investment Committee, which held one meeting during 1996, is charged
with overseeing the investment affairs of the Company. The Investment Committee
establishes investment policies for the Company, reviews investment results,
meets periodically with the Company's investment advisors and makes
recommendations to the Board of Directors for engaging and discharging the
investment advisors. Currently, the members of the Investment Committee are Mr.
Guthrie (Chairman), Mr. Grant and Mr. Hughes.

72
<PAGE> 77

DIRECTOR COMPENSATION

Directors who are compensated as employees of the Company receive no
additional compensation as directors. Non-employee directors receive annual
compensation of $15,000, plus $1,000 for each Board of Directors meeting
attended. Committee chairmen receive $1,000, and other committee members
receive $500, for each committee meeting attended. The Company has terminated
its deferred compensation plan that had been available to all non-employee
directors for the cash portion of the compensation.

The Company has adopted a stock option plan for non-employee directors
(the "Director Plan"), which authorizes 100,000 shares of Common Stock for
issuance pursuant to stock options granted to non-employee directors. Under the
Director Plan, (i) each newly appointed director is granted an option to
purchase shares of Common Stock on the date of the Company's first meeting of
the Board of Directors for which they served as a director equal to the lesser
of 10,000 shares or the number of shares equal to 100,000 divided by the fair
market value per share on the date of the grant; and (ii) each director is
granted additional options to purchase 2,500 shares of Common Stock on each of
the dates of the subsequent annual meetings of the Board of Directors.

AUDIT AND COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Decisions with respect to the compensation of the Company's executive
officers have been made by a Compensation Committee consisting of Mr. Hughes,
Mr. Maser and Mr. Mason, who were directors of the Company at that time. None
of Messrs. Hughes, Maser or Mason have ever been officers of the Company. Mr.
Mason is Chairman of the Board and Chief Executive Officer of Safeguard
Business Systems, Inc. Mr. Guthrie, Chairman of the Board, President and Chief
Executive Officer of the Company, is a member of the Compensation Committee of
Safeguard Business Systems, Inc.

73
<PAGE> 78

EXECUTIVE OFFICERS

The following table sets forth information regarding the current executive
officers of the Company and certain of its subsidiaries. Following the sale of
the Company's divisions, only Messrs. Guthrie and Kurz will remain as executive
officers of the Company. See "Plans for Future Operation of the Company."

<TABLE>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
M. Philip Guthrie....... 52 Chairman of the Board, Chief Executive Officer,
President and Director
Allen N. Walton III .... 57 President/Aviation Division
Frederick G. Anderson .. 46 Senior Vice President/General Counsel and Secretary
Helen F. Knight ........ 53 Senior Vice President of AEIC
Richard M. Kurz ........ 55 Senior Vice President/Chief Financial Officer
John P.S. Leigh ........ 49 Senior Vice President/Aviation Underwriting of AEIC
David A. Notestein ..... 44 Senior Vice President/Chief Underwriting Officer
Ronald D. Taylor ....... 51 Vice President/Information Systems
Michael G. Westover .... 38 Vice President and Treasurer
</TABLE>

The Executive Officers named above were elected by the Board of Directors
of the Company, or, in the case of Ms. Knight, Ms. Solomon and Messrs. Daniels,
Hill and Leigh, the Board of Directors of AEIC, to serve in such capacities
until the next annual meeting of such Boards of Directors, or until their
respective successors have been duly elected and have been qualified, or until
their earlier death, resignation, disqualification or removal from office. For
certain biographical information concerning Messrs. Guthrie and Kurz, see
"Election of Directors."

FREDERICK G. ANDERSON joined the Company as Vice President/General Counsel
and Secretary in March 1992. Mr. Anderson became Senior Vice President/General
Counsel and Secretary in February 1994. Prior to joining the Company, Mr.
Anderson practiced law for 12 years in the Dallas, Texas office of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., a large international law firm. Mr. Anderson was
a partner in the corporate/securities section of the firm for over five years,
during which time Mr. Anderson and the firm represented American Eagle in a
variety of corporate, regulatory, litigation and other matters.

HELEN F. KNIGHT joined AOA in 1977, following AOA's acquisition of
International Aviation Underwriters, where she had been employed as an aviation
underwriter in the Special Risk Department. She has been Senior Vice
President/Special Accounts of AEIC since September 1994, where she is
responsible for the major airport program and placement of facultative
reinsurance. Prior to this she held various positions in AEIC and AOA. Mrs.
Knight has over 27 years experience in the insurance industry.

JOHN P.S. LEIGH joined AOA in July 1983, following AOA's acquisition of
Duncanson & Holt/Aerospace Managers Agency, Inc., where he served as Vice
President, Underwriting. He has been Senior Vice President/Aviation
Underwriting of AEIC since July 1995, where he is responsible for all aspects
of aviation underwriting and aviation underwriting management. Prior to this he
held various positions at AEIC and AOA. Mr. Leigh has over 28 years experience
in the insurance industry.

74
<PAGE> 79

DAVID A. NOTESTEIN joined the Company in March 1997 as Senior Vice
President/Chief Underwriting Officer. Prior to joining the Company, Mr.
Notestein was Senior Vice President of Transport Insurance Company for over 10
years. During this period, he directed a product management group responsible
for establishing pricing, distribution and underwriting practices and standards
that returned a commercial auto insurance product to underwriting profitability
and subsequently was responsible for similar functions involving development of
a new non-standard auto product.

RONALD D. TAYLOR joined the Company as Vice President/Data Processing in
December 1990, and has served as Vice President/Information Systems since
January 1993. Prior to joining the Company, Mr. Taylor had been with Policy
Management Systems Corporation, an insurance systems software development and
sales and support company, since June 1988. Prior to that, Mr. Taylor was an
independent data processing consultant working with insurance and financial
organizations.

ALLEN N. WALTON III joined Aviation Adjustment Bureau, Inc. ("AAB"), a
subsidiary of the Company, in January 1974. He has been Senior Vice
President/Claims of AAB since January 1989. In November 1995, Mr. Walton became
President/Aviation Division of AEIC. In July 1993, Mr. Walton became Senior
Vice President/Claims of AEIC, and in February 1994 he became Senior Vice
President/Claims of the Company. Mr. Walton managed the P&C Division claims
operations since June 1993 and the Aviation Division claims operations since
December 1989. Prior to that, Mr. Walton was responsible for the investigation
and supervision of general aviation, airport, product and airline claims for
the Company.

MICHAEL G. WESTOVER joined AOA as reinsurance accounting manager/internal
auditor in May 1990. Mr. Westover became Vice President of AOA in October 1990,
and became Vice President and Treasurer of the Company in February 1992. From
September 1989 to May 1990, Mr. Westover served as Financial Director of
Combined Independent Agencies. Mr. Westover is a Certified Public Accountant.

75
<PAGE> 80

EXECUTIVE COMPENSATION

The following table sets forth compensation information with respect to
(i) the Chief Executive Officer, (ii) the four most highly compensated
executive officers of the Company at the end of the 1996 fiscal year other than
the Chief Executive Officer, and (iii) one individual who had been an executive
officer during 1996 but who was not serving as an executive officer at the end
of the year (each, a "Named Executive Officer"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
---------------------------------------------------- ----------------------------------------
Other Restricted Securities All Other
Name and Principal Annual Stock Underlying Compensation
Position Year Salary (1) Bonus (2) Compensation (3) Awards (4) Options (#) (5)
===================================================================================== ========================================
<S> <C> <C> <C> <C> <C> <C> <C>
M. Philip Guthrie,
Chairman of the Board 1996 $ 350,002 -- -- -- 230,714 $ 4,758
and Chief Executive 1995 350,002 -- -- -- -- 7,033
Officer 1994 338,462 $ 75,000 -- $ 1,075 120,142 7,835

George F. Cass (6) 1996 250,001 -- -- -- -- 6,258
1995 250,001 -- -- -- -- 7,033
1994 244,232 50,000 -- 1,075 81,560 6,566

Frederick G. Anderson, 1996 167,500 -- -- -- 72,695 6,258
Sr. Vice 1995 167,500 -- -- -- 15,000 7,033
President/General 1994 166,346 40,000 -- 1,075 20,000 6,740
Counsel and Secretary

Richard M. Kurz, Sr 1996 162,500 -- -- -- 66,334 6,258
Vice President/Chief 1995 158,269 -- -- -- 30,000 7,033
Financial Officer 1994 135,000 40,000 -- 1,075 20,000 3,488

Allen N. Walton III, 1996 162,500 -- -- -- 66,643 6,258
President/Aviation 1995 147,887 -- -- -- 5,000 7,033
Division 1994 141,636 10,000 -- 1,075 20,000 6,070

George C. Hill (7), Sr. 1996 160,002 -- -- -- 15,000 6,258
Vice President/AEIC 1995 159,233 -- -- -- -- 7,033
1994 154,424 7,000 -- 1,075 10,000 6,487

</TABLE>

(1) Salary and bonus levels are determined in accordance with the process
described in the "Compensation Committee Report on Executive
Compensation."
(2) Bonuses are generally earned in the year shown and paid in the following
year.
(3) No Named Executive Officer received perquisites or other personal
benefits in any of the Company's three most recent fiscal years which
exceeded the lesser of $50,000 or 10% of his combined annual salary and
bonus for such year.
(4) Each of Messrs. Guthrie, Cass, Anderson, Kurz, Walton and Hill held 100
shares of restricted stock having a value of $475 on December 31, 1996.
Each 100 share grant was made on May 18, 1994 as restricted stock subject
to certain vesting requirements pursuant to the terms of the Employee
Restricted Stock Plan ("ERSP"). On December 31, 1996, all shares of
restricted stock issued and outstanding under the ERSP

76
<PAGE> 81

became fully vested pursuant to the terms of the ERSP. Dividends were
paid on all restricted stock when earned.
(5) Amounts reflect contributions made by the Company to the Employee Profit
Sharing and Savings Plan account of the Named Executive Officer.
Discretionary contributions made by the Company are earned in the year
shown and paid in the following year.
(6) Mr. Cass resigned from the position of President and Chief Operating
Officer and a director of the Company in September 1996. He retired as an
employee of the Company on March 31, 1997.

(7) Mr. Hill resigned from his position as Senior Vice President effective
June 30, 1997 upon completion of the Artisan Sale.

STOCK OPTION GRANTS

The following table provides details regarding options granted to the
Named Executive Officers in 1996. In addition, in accordance with Securities
and Exchange Commission (the "SEC") rules there are shown the hypothetical
gains or "option spreads" that would exist for the respective options. The
gains are based on assumed rates of annual compound growth in stock price of 5%
and 10% from the date the options were granted over the full option term. The
actual value, if any, a Named Executive Officer may realize will depend on the
spread between the market price and the exercise price on the date the option
is exercised.

OPTION GRANTS IN LAST FISCAL YEAR

Individual Grants

<TABLE>
<CAPTION>
Number of Percent of Potential Realizable
Securities Total Options Assumed Annual Rates
Underlying Granted Exercise or of Share Price
Options Employees in Base Price Per Expiration Appreciation for
Name Granted(1) Fiscal 1996 Share Date Option(2)
--------------------
5% 10%
=============================================================================================================================
<C> <C> <C> <C> <C> <C> <C>
M. Philip Guthrie 110,572(3) 13.8% $4.525 12/31/2007 $398,621 $998,133
120,142(3) 5.0 4.75 12/31/2006 359,225 909,475

George F. Cass -- -- -- -- -- --

Frederick G. Anderson 20,945(3) 2.6 4.525 12/31/2007 75,507 189,071
51,750(3) 6.5 4.75 12/31/2006 154,733 391,748

Richard M. Kurz 9,584(3) 1.2 4.525 12/31/2007 34,550 86,515
56,750(3) 7.1 4.75 12/31/2006 169,683 429,598

Allen N. Walton III 14,603(3) 1.8 4.525 12/31/2007 52,644 131,821
48,040(3) 6.0 4.75 12/31/2006 143,640 363,663

George C. Hill 3,480(3) 0.4 4.525 12/31/2007 12,545 31,414
11,520(3) 1.4 4.75 12/31/2006 34,445 87,206
</TABLE>

- ---------

(1) The options noted are subject to a three-year vesting schedule with
33-1/3% becoming first exercisable on December 31, 1997 (the first annual
anniversary of the date of grant). An additional 33-1/3% becomes
exercisable on each of December 31, 1998 and December 31, 1999.

77
<PAGE> 82

(2) Potential gains are net of the exercise price, but before taxes
associated with the exercise. These amounts represent the assumed annual
rates of appreciation shown, based on SEC rules. Actual gains, if any, on
stock option exercises are dependent on the future performance of the
Common Stock, overall market conditions and the optionholders' continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved.
(3) Replacement stock options granted on December 31, 1996. See "Ten Year
Option Repricing" below.

STOCK OPTION EXERCISES AND HOLDINGS

The following table shows the number of shares covered by both exercisable
and non-exercisable stock options held by the Named Executive Officers at the
end of 1996. Also reported are the values for "in-the-money" options which
represent the positive spread between the exercise price of any such existing
stock options and the year-end price of the Company's Common Stock. There were
no options exercised by any Named Executive Officers in 1996.

AGGREGATED FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Name at December 31, 1996 at December 31, 1996
=============================================================================
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
M. Philip Guthrie -- 230,714 -- $24,878.80

George F. Cass -- -- -- --

Frederick G. Anderson -- 72,695 -- 4,712.63

Richard M. Kurz -- 66,334 -- 2,156.40

Allen N. Walton III -- 62,643 -- 3,285.68

George C. Hill 62,825 15,000 -- 783.00
</TABLE>

78
<PAGE> 83

TEN YEAR OPTION REPRICING

The following table provides the specified information concerning all
repricing of options to purchase the Company's stock held by the named
executive officers during the last ten years.

<TABLE>
<CAPTION>
Securities Exercise Length of original
Underlying price at time option term
number of Market price of of repricing remaining at date
options repriced stock at time of or New of repricing or
or amended repricing or amendment exercise amendment
Name Date (#)(1) amendment ($) ($) price (Months)
- -------------------- -------- ---------------- ---------------- ------------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
M. Philip Guthrie 12/31/96 104,038 $4.75 $11.52 $4.525 84
(Chairman, President 12/31/96 6,534 $4.75 $11.52 $4.525 96
and CEO) 12/31/96 120,142 $4.75 $10.00 $4.75 89

George F. Cass -- -- -- -- --

Frederick G. Anderson 12/31/96 16,985 $4.75 $11.52 $4.75 75
(Sr. Vice 12/31/96 355 $4.75 $11.52 $4.525 75
President/General 12/31/96 17,340 $4.75 $11.52 $4.525 87
Counsel) 12/31/96 3,015 $4.75 $11.52 $4.75 96
12/31/96 20,000 $4.75 $10.00 $4.75 89
12/31/96 11,750 $4.75 $9.875 $4.75 98
12/31/96 3,250 $4.75 $ 9.57 $4.525 110

Richard M. Kurz 12/31/96 16,334 $4.75 $11.52 $4.75 96
(Sr. Vice 12/31/96 20,000 $4.75 $10.00 $4.75 89
President/Chief 12/31/96 16,750 $4.75 $9.875 $4.75 98
Financial Officer) 12/31/96 9,584 $4.75 $ 9.57 $4.525 110
12/31/96 3,666 $4.75 $ 9.57 $4.75 110

Allen N. Walton III 12/31/96 17,340 $4.75 $11.52 $4.525 70
(President/Aviation 12/31/96 4,021 $4.75 $11.52 $4.525 87
Division) 12/31/96 6,282 $4.75 $11.52 $4.525 96
12/31/96 20,000 $4.75 $10.00 $4.75 89
12/31/96 5,000 $4.75 $9.075 $4.75 98
12/31/96 3,040 $4.75 $10.25 $4.75 110
12/31/96 6,960 $4.75 $ 9.94 $4.525 122

George C. Hill 12/31/96 10,000 $4.75 $10.00 $4.75 89
(Sr. Vice 12/31/96 1,520 $4.75 $10.25 $4.75 110
President/AEIC) 12/31/96 3,480 $4.75 $ 9.94 $4.525 122

</TABLE>

(1) The repriced options are subject to a three year vesting schedule with
33-1/3% becoming first exercisable on December 31, 1997 (the first annual
anniversary of the date of grant). An additional 33-1/3% becomes
exercisable on each of December 31, 1998 and December 31, 1999.

RECENT STOCK OPTION GRANTS

On May 30, 1997 the Board of Directors granted to Mr. Guthrie and Mr.
Kurz, who will continue as executive officers of the Company after consummation
of the Aviation Division Sale, options to purchase 110,000 and 55,000 shares of
Common Stock, respectively, at the exercise price of $.625 per share, the
closing price of the Common Stock on the NYSE on the date of grant. In
addition, the Board of Directors also granted Mr. Guthrie and Mr. Kurz options
to purchase 390,000 and 195,000 shares of Common Stock, respectively,

79
<PAGE> 84

which will become effective only when the following conditions are met: (i)
the Aviation Division Sale is consummated; (ii) sufficient shares of Common
Stock are available to be granted under the Company's stock option plans, and
(iii) Mr. Guthrie and Mr. Kurz agree to cancel all previously granted options.
The exercise price per share will be the fair market value per share on the
date such options become effective. All options granted to Mr. Guthrie and Mr.
Kurz are subject to a two year vesting schedule with 50% becoming exercisable
on the first anniversary of the date of grant and 50% becoming exercisable on
the second anniversary.

EXECUTIVE OFFICER AGREEMENTS

Effective December 31, 1994, the Company entered into employment
agreements with the following executive officers to serve in the positions
noted: M. Philip Guthrie, Chairman of the Board and Chief Executive Officer;
George F. Cass, President and Chief Operating Officer; Frederick G. Anderson,
Senior Vice President/General Counsel and Secretary; Richard M. Kurz, Senior
Vice President/Chief Financial Officer; and Allen N. Walton III,
President/Aviation Division. Effective December 31, 1994, AEIC entered into an
employment agreement with George C. Hill to serve as Senior Vice President of
AEIC. On September 27, 1996, Mr. Cass retired as President of the Company and
his employment agreement was terminated by mutual agreement. Each employment
agreement is for a term of three years from the date of the agreement;
provided, however, that on each anniversary of such agreement, the term of the
agreement is automatically extended for one additional year unless at least 60
days before any such anniversary either party provides the other party written
notice that the automatic extension shall be terminated. Pursuant to the
respective employment agreements, each of Messrs. Guthrie, Anderson, Hill, Kurz
and Walton received an annual salary as listed in the Summary Compensation
Table for 1996, which may be increased by the Board of Directors in its
discretion. Each is also entitled to receive such annual bonuses in amounts up
to 50% of his annual salary as the Board of Directors may approve in its
discretion. In the event of a Change of Control (as defined in the employment
agreements), and, thereafter, an officer's employment is terminated by the
Company, except for good reason (as defined in the employment agreements) or as
otherwise set forth therein, the Company would be required to continue payment
of his base salary for the remainder of the term. The sale by the Company of
the Series D Preferred Stock on December 31, 1996 constituted a Change of
Control as defined in the employment agreements, and the Aviation Division Sale
will constitute a Change of Control as defined in such agreements. Each
employment agreement contains confidentiality and non-solicitation provisions
effective during the term of employment and for three years after the
employment agreement is terminated.

Upon closing of the Artisan Sale, the employment agreements of Messrs.
Hill and Daniels were terminated. Upon closing of the Aviation Division Sale,
the employment agreement of Mr. Walton will be assigned to and assumed by
Purchaser, and notices will be given to Messrs. Guthrie and Kurz that their
agreements will no longer be automatically extended upon their anniversary
dates. The Company expects to enter into an agreement with Mr. Anderson
providing for termination of his employment agreement after closing of the
Aviation Division Sale, payment of six months salary to Mr. Anderson and the
engagement of Mr. Anderson as a consultant on a part time basis for up to one
year. Mr. Anderson would be paid a fee on an hourly basis for actual time
worked.

The Company's 1994 Stock Incentive Plan provides for full vesting of
options outstanding for at least six months in the event there is a change in
control of the Company. The Aviation Division Sale will constitute a change in
control of the Company for purposes for the 1994 Stock Incentive Plan. See "The
Aviation Division Sale - Interests of Certain Persons in the Aviation Division
Sale."

80
<PAGE> 85

COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION

OVERALL OBJECTIVES OF THE EXECUTIVE COMPENSATION PROGRAM

The Compensation Committee believes that management compensation should be
directly linked to changes in stockholder value and long-term financial and
operating performance. The Company's executive compensation program thus
includes significant long-term incentives, through equity-based awards, which
are tied to the long-term performance of the Company's Common Stock. The
Compensation Committee recognizes, however, that while stock prices may reflect
management performance over the long-term, other factors, such as general
economic conditions and varying investors' attitudes toward the stock market in
general, and specific industries in particular, may significantly affect stock
prices at any point in time. Accordingly, the salary component of compensation
emphasizes individual performance and the annual bonus component of
compensation emphasizes the realization of defined business objectives, both of
which are independent of short-range fluctuations in the stock price.

Executive compensation thus has been designed to align executive
compensation with both the Company's business goals and long-term stockholder
interests. The Compensation Committee believes that the program, as
implemented, is balanced and consistent with these objectives. The Compensation
Committee will continue to monitor the operation of the program and cause the
program to be adjusted and redefined, as necessary, to ensure that it continues
to support both corporate and stockholder goals.

The key details of the Company's total executive compensation program are
discussed below.

COMPETITIVE LEVELS OF COMPENSATION

The Company attempts to provide its executives with a total compensation
package that, at expected levels of performance, is competitive with those
provided to executives who hold comparable positions or have similar
qualifications. Total compensation is defined to include base salary, annual
incentives, and long-term incentives.

The Company determines competitive levels of compensation for executive
positions based on information drawn from compensation surveys, proxy
statements for comparative organizations and compensation consultants. The
proxy statement analysis on pay levels uses a peer group of companies similar
in size and/or business to the Company. The Compensation Committee reviews
compensation recommendations made by the Chief Executive Officer based upon his
assessment of each officer's past performance and expectations as to future
contributions. The Compensation Committee then formulates its own
recommendations, which are submitted for approval by the Board of Directors.

It should be noted that the value of any individual executive's
compensation package will vary significantly based on individual and company
performance. So while the expected value of an executive's compensation package
may be competitive, actual payments made to executives in a given year may be
higher or lower than competitive market rates because of performance.

BASE SALARY PROGRAM

The objective of the Company's base salary program is to provide salaries
that are near the market median for companies of comparable size and/or
business. The Company believes that it is crucial to provide competitive
salaries in order to attract and retain talented managers.

81
<PAGE> 86

Base salary levels are also based on each individual employee's
performance over time and each individual's role in the Company. Consequently,
employees with higher levels of sustained performance over time and/or
employees assuming greater responsibilities will be paid correspondingly higher
salaries.

Salaries for executives are reviewed annually based on a variety of
factors, including individual performance, general levels of market salary
increases and the Company's overall financial results. All salary increases are
granted within a pay-for-performance framework.

ANNUAL INCENTIVE COMPENSATION

The Compensation Committee may, in its discretion, recommend that an
annual cash bonus be paid to an individual executive in recognition of
outstanding individual performance. The Company's annual incentive
compensation program assists the Company in rewarding and motivating key
employees and provides cash compensation opportunities to executives.

No annual bonuses were paid to officers for 1996 because earnings per
share thresholds in the 1996 annual incentive bonus program were not met.

LONG-TERM INCENTIVE PLANS

The Company provides long-term equity based incentives through the 1994
Stock Incentive Plan, the 1991 Nonqualified Stock Option Plan, and the P&C
Stock Option Plan--Hill, and cash based incentives through the Employee Profit
Sharing and Savings Plan.

The Company's overall long-term incentive grant levels are established by
considering market data on grant levels and an appropriate overall level of
shares reserved for such plans in the market. Individual long-term incentive
grants are based on the level of each participant in the Company and individual
performance. Also, the Compensation Committee does consider the size of
existing stock option holdings by executives in determining the size of stock
option grants.

The compensation of executive officers is periodically reviewed to ensure
an appropriate mix of base salary, annual incentive, and long-term incentive
within the philosophy of providing competitive total direct compensation
opportunities consistent with the pay philosophy articulated above.

STOCK OPTION REPRICING

On November 5, 1996, the Company and AFG entered into the Securities
Purchase Agreement which provided for the sale and issuance by the Company of
350,000 shares of Series D Preferred Stock for an aggregate purchase price of
$35 million. As a condition to AFG's obligation to close, the Securities
Purchase Agreement required the Company to adjust the exercise price and
vesting period of existing stock options granted to the current officers and
directors of the Company or its subsidiaries pursuant to its 1991 Nonqualified
Stock Option Plan, 1994 Stock Incentive Plan and 1994 Directors Option Plan to
the market price on the date of closing and provided that all such options
shall have a vesting period of three years, with one-third of the options
vesting on each anniversary date of the date of adjustment.

In addition to the requirements in the Securities Purchase Agreement, the
Board of Directors reviewed certain options previously granted to employees of
the Company and the market price of the Company's Common Stock during the past
two years. The Board recognized that such options issued by the Company are
utilized as compensation and to provide incentives to improve Company
performance and thereby positively influence the market price for Company's
common stock for the benefit of all stockholders. The Board determined that the
market price had declined despite the Company's significant accomplishments,
that options previously granted under the 1994 Stock Incentive Plan and the
1991 Nonqualified Stock Option Plan were at exercise prices in

82
<PAGE> 87

excess of the current market prices of the Company's Common Stock, and that the
current outstanding stock options if left in place would not achieve the
underlying objectives. The Compensation Committee, which administers the 1994
Stock Incentive Plan and the 1991 Nonqualified Stock Option Plan, reviewed and
approved the Board of Director's analysis regarding the option reset.

Accordingly, on December 31, 1996 (the "Grant Date"), replacement stock
options were granted to replace previously issued stock options under such
plans. The replacement options did not involve the grant of any additional
shares. Pursuant to the requirements of the Securities Purchase Agreement, the
replacement options were granted and priced as of the December 31, 1996 closing
of the Securities Purchase Agreement. No other option repricing or exchange has
occurred in the past ten years.

1996 CHIEF EXECUTIVE OFFICER PAY

As described above, the Company manages its pay for all executives,
including the Chief Executive Officer, considering both a pay-for-performance
philosophy and market rates of compensation for each executive position.
Specific actions recommended by the Compensation Committee and taken by the
Board of Directors regarding Mr. Guthrie's compensation are summarized below.

Base Salary. Mr. Guthrie's base salary remained unchanged at $350,000
annually.

Annual Bonus and Long-Term Incentive Awards. Mr. Guthrie received no bonus
for 1996 performance and was granted no additional stock options in 1996. Mr.
Guthrie's existing stock options were repriced on December 31, 1996. See "Ten
Year Option Repricing" and "Stock Option Repricing" above. Mr. Guthrie's pro
rata share of the Company's contribution for 1996 to the profit sharing portion
of the Employee Profit Sharing and Savings Plan was $1,758.

DISCUSSION OF CORPORATE TAX DEDUCTION ON COMPENSATION IN EXCESS OF $1 MILLION A
YEAR

Internal Revenue Code Section 162(m), enacted in 1993, precludes a public
corporation from taking a deduction in 1994 or subsequent years for
compensation over $1 million for its chief executive officer or any of its four
highest-paid officers. Certain performance-based compensation, however, is
specifically exempt from the deduction limit.

In connection with the compensation of executive officers, the
Compensation Committee is aware of Section 162(m) as it relates to
deductibility of qualifying compensation paid to executive officers. The
Compensation Committee believes that compensation to be paid in 1997 will not
exceed the deductibility limitations on non-excluded compensation to any of the
Company's executives.

The Compensation Committee of the Board of Directors is:

Elvis L. Mason, Chairman
Keith W. Hughes
James E. Maser

83
<PAGE> 88

STOCK PERFORMANCE GRAPH

The performance graph shown below was prepared by Research Holdings, Ltd.
for use in this Proxy Statement. The graph sets forth the compounded return to
the Company's stockholders since the Company became a public company on May 11,
1994, compared on an indexed basis with the S&P 500 Stock Index and the
Company's Peer Group.

[GRAPH]

Research Date Group Total Return - Data Summary

FLI Begin: 05/11/94
End: 12/31/96
456BZFLI
- ------------------------------------------------------------------------------------------------------------------------------------
5/94 6/94 9/94 12/94 3/95 6/95 9/95 12/95 3/96 6/96 9/96 12/96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMERICAN EAGLE GROUP INC FLI 100 93 113 82 97 119 103 111 79 46 43 48

PEER GROUP PPEERO 100 104 107 103 115 115 133 145 142 144 164 177

S & P 500 1500 100 101 106 106 116 127 137 146 153 160 165 179

</TABLE>

13-Feb-97

ASSUMES $100 INVESTED ON MAY 11, 1994 AND REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
QUARTERLY: MAY 11, 1994 TO DECEMBER 31, 1996.

The Peer Group includes the following companies:

AVEMCO Corp., Frontier Insurance Group, Inc., GAINSCO Inc.,
Gryphon Holdings, Inc., Guaranty National Corp., HCC Insurance Holdings, Inc.,
Hartford Steam Boiler Inspection & Insurance Company, Markel Corp.,
Navigators Group, Inc., Progressive Corp. and WR Berkley Corp.

84
<PAGE> 89

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS, DIRECTORS AND MANAGEMENT

The Company has two classes of voting securities: the Common Stock and the
Series D Preferred Stock. The following table sets forth certain information,
with respect to the beneficial ownership of the Company's Common Stock, as of
April 30, 1997, by (i) all persons who are known by the Company to be
beneficial owners of five percent or more of such stock, (ii) each director and
director nominee of the Company, (iii) each Named Executive Officer and (iv)
all executive officers and directors of the Company as a group. Unless
otherwise noted, the persons named below have sole voting and investment power
with respect to such shares. No effect has been given to shares reserved for
issuance upon conversion of preferred stock or under outstanding stock options
except where otherwise indicated.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS (1)
==================================== ================ ====================
<C> <C> <C>
American Financial Group, Inc. (2) 6,782,667 49.5%
One East Fourth Street
Cincinnati, Ohio 45202

Mason Best Company, L.P. (3) 2,960,772 42.0
2121 San Jacinto, Ste. 1000
Dallas, Texas 75201

Wellington Management Company, LLP (4) 698,000 9.9
75 State Street
Boston, Massachusetts 02109

Heartland Advisors, Inc. (5) 559,500 7.9
790 North Milwaukee Street
Milwaukee, Wisconsin 53202

U.S. Bancorp (6) 473,400 6.7
111 S.W. Fifth Avenue
Portland, Oregon 97204

Dimensional Fund Advisors, Inc. (7) 401,200 5.7
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401

M. Philip Guthrie (8) 11,014 *

George F. Cass 6,317 *

Frederick G. Anderson (9) 2,813 *

George C. Hill III (10) 21,100 *

Richard M. Kurz 2,391 *

Allen N. Walton III 2,491 *

Joseph M. Grant -- *

Keith W. Hughes -- *

James E. Maser 2,000 *

Elvis L. Mason (11) 2,965,772 42.1

Howard D. Putnam 2,000 *

All directors and executive officers as a group
(19 persons including those listed above) 3,013,175 42.8
</TABLE>

85
<PAGE> 90

- ---------

* less than one percent

(1) Shares of Common Stock which are not outstanding but the beneficial
ownership of which can be acquired by a person upon exercise of an option
or warrant within sixty days of the date of this Proxy Statement are
deemed outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by such person. However, such shares
are not deemed to be outstanding for the purpose of computing the
percentage of outstanding shares beneficially owned by any other person.
(2) Based on a report on Schedule 13D dated January 3, 1997 and filed with
the Securities Exchange Commission. Includes 6,666,667 shares of Common
Stock that may be acquired upon conversion of 350,000 shares of Series D
Preferred Stock. The Series D Preferred Stock is entitled to certain
voting rights on the matters submitted to holders of Common Stock.
American Financial Group, Inc. and its affiliates are also subject to
certain voting agreements that limit their voting rights. See " Certain
Relationships and Related Transactions--Voting Rights and Agreements."
(3) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 9, 1995.
(4) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated January 24, 1997.
(5) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 12, 1997.
(6) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 11, 1997.
(7) Based on a report on Schedule 13G filed with the Securities and Exchange
Commission dated February 5, 1997.
(8) Includes 2,400 shares of Common Stock held by Mr. Guthrie's wife, and 200
shares of Common Stock held by Mr. Guthrie's son.
(9) Includes 300 shares of Common Stock held by Mr. Anderson's wife.
(10) Includes 21,000 shares of stock held by a trust for which Mr. Hill is the
trustee, and 62,825 shares of Common Stock which may be acquired upon the
exercise of options.
(11) Elvis L. Mason, the Managing Partner of Mason Best Company, L.P., may be
deemed to be the beneficial owner of all shares held by Mason Best
Company, L.P.

As of June 30, 1997, American Financial Group, Inc. was the beneficial
owner of all of the 357,875 outstanding shares of Series D Preferred Stock. Its
address is set forth in the table above.

86
<PAGE> 91

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

REGISTRATION RIGHTS AGREEMENTS

Pursuant to a registration rights agreement (the "AFG Agreement") by and
between AFG and the Company, AFG has the right on three occasions to demand
registration under the Securities Act of 1933, as amended (the "Securities
Act"), of the Series D Preferred Stock or the Common Stock into which it is
converted or the warrants that may be issued upon its redemption (the
"Registrable Securities"); provided, however, that the Company shall in no
event (including by reason of any assignment of rights by AFG or any other
holder of Registrable Securities) be subject to more than three demand
registrations under the AFG Agreement and shall not be obligated at any time to
register the lesser of (i) 25% of the total outstanding number of Registrable
Securities, or (ii) Registrable Securities with a market value (based on the
market value of the underlying shares of Common Stock) of less than $1.0
million pursuant to any such request. The AFG Agreement also provides that, in
the event the Company proposes to register any of its securities under the
Securities Act for its own account or for the account of any other person, AFG
will be entitled to include Registrable Shares in any such registration,
subject to the right of the managing underwriter of any such offering in
certain circumstances to exclude some or all of such Registrable Shares from
such registration. Upon closing of the Aviation Division Sale, the AFG
Agreement will terminate.

Pursuant to a registration rights agreement (the "MB Agreement") between
the Company and Mason Best, Mason Best has the right to have any or all of the
shares of Common Stock held by it included in a registration statement filed by
the Company under the Securities Act subject to certain limitations set forth
in the MB Agreement. Mason Best also has the right, subject to certain
conditions, to require American Eagle to file a registration statement under
the Securities Act with respect to the Common Stock held by Mason Best (a
"demand registration"). Mason Best is entitled to demand registrations only if
at the time it holds an aggregate of at least 20% of the outstanding Common
Stock of the Company and the demand is to register shares equal to at least 10%
of the outstanding shares but are not otherwise limited as to the number of
times they can require a demand registration. The Company is entitled to delay
a demand registration for up to 180 days if, at the time it receives a demand,
it notifies Mason Best that it intends to make a public offering of Common
Stock within 180 days of such demand pursuant to a firm underwriting. The
registration rights are assignable, provided the assignee beneficially owns
more than 5% of the outstanding shares of Common Stock.

In general, the Company will bear all of the registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company (with AFG
and Mason Best responsible for the fees and disbursements of their separate
counsel), "blue sky" fees and expenses and the expense of any special audits
incident to or required by a registration required by the AFG or MB Agreements;
provided, however, that all underwriting discounts and selling commissions
applicable to sales by AFG or Mason Best will be borne by the respective party.
If the offering is a secondary offering pursuant to a demand registration and
Mason Best is the only stockholder selling shares in such offering, then,
except with respect to the first such offering, Mason Best must pay its
pro-rata share of all the expenses directly attributable to the offering.

The Company and AFG, and the Company and Mason Best, have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act, in connection with the registration of Common Stock
pursuant to the AFG Agreement and the MB Agreement, respectively.

VOTING RIGHTS AND AGREEMENTS

Pursuant to the terms of the Certificate of Designation of the Series D
Preferred Stock (the "Certificate of Designation"), the holders of shares of
Series D Preferred Stock are entitled to the following voting rights for the
seven year period commencing on December 31, 1996. Thereafter, holders of
Series D Preferred Stock will have no voting rights except as set forth in
paragraphs (b) and (c) below or as otherwise provided by law:

87
<PAGE> 92

(a) With regard to any matter submitted to a vote of the holders of
Common Stock of the Company, the holders of the Series D Preferred
Stock shall be entitled collectively to cast 20% of the votes eligible
to be cast in such matters; provided, however, in the event that the
aggregate number of shares of Common Stock into which the Series D
Preferred Stock is convertible represents less than 20% of the
aggregate number of all shares of Common Stock outstanding (on a fully
diluted basis), then each holder of a share of Series D Preferred Stock
shall be entitled to cast one vote for each full share of Common Stock
into which such share is then convertible.

(b) Notwithstanding the foregoing, upon the occurrence and continuation
of an Event of Default (defined as a default in dividend payments for
at least two consecutive quarters or a default in any mandatory
redemption payment on the Series D Preferred Stock), each share of
Series D Preferred Stock shall be entitled to cast the number of votes
equal to the number of shares of Common Stock into which such share is
then convertible on any matter submitted for the consideration of the
stockholders of the Company, and the holders of the Series D Preferred
Stock, voting separately, as a class shall be entitled at the next
annual or special meeting of stockholders to elect such number of
directors which is a majority (rounded up) of the directors to be
elected. The term of office of directors elected under these
circumstances shall end upon the earlier of the termination of the
Event of Default and the next annual meeting of stockholders.

(c) Without the approval of holders of a majority of the outstanding
shares of Series D Preferred Stock voting separately as a class, the
Company will not, in any manner (including by merger or consolidation)
(i) amend, alter or repeal any provisions of the resolutions
establishing the Series D Preferred Stock so as to adversely affect the
powers, preferences or special rights of such Series D Preferred Stock,
or (ii) authorize the issuance of, or authorize any obligation or
security convertible into or evidencing the right to purchase shares
of, any additional class or series of stock ranking prior to the Series
D Preferred Stock in the payment of dividends or the preferential
distribution of assets. The foregoing shall not be interpreted to
require any vote or consent of the Series D Preferred Stock in
connection with the authorization or issuance of any series of
Preferred Stock ranking on a parity with or junior to the Series D
Preferred Stock as to dividends and/or the distribution of assets.

In addition, pursuant to the Securities Purchase Agreement, until AFG and
its affiliates no longer own Series D Preferred Stock, or shares of Common
Stock issued or issuable upon conversion of the Series D Preferred Stock or
exercise of warrants issued upon redemption of the Series D Preferred Stock
(the "Underlying Shares"), representing in the aggregate the ownership, or the
right to acquire ownership of 51% of the Underlying Shares, or until December
31, 2003, whichever is earlier, AFG shall be entitled to nominate for election
to the Company's Board of Directors the number of directors which represents
30% (rounded up to the next director) of the number of directors serving at any
one time, and, if elected, at least one of the directors representing AFG shall
serve on each of the standing committees of the Board of Directors.
Notwithstanding the foregoing, the number of directors that AFG shall be
entitled to nominate shall be reduced to the extent and by the number of
directors the holders of Series D Preferred Stock are entitled to elect as a
class under the terms of the Certificate of Designation. In the event AFG's
representatives fail to be elected as directors, AFG shall be entitled to have
an equal number of representatives in place of such directors attend each
meeting of the Board of Directors. Such representatives shall be entitled to
receive all materials and information provided to the Company's Board of
Directors and shall receive the same notices as are given to the Company's
Board of Directors.

In connection with the Securities Purchase Agreement, on November 8, 1996,
Mason Best and AFG entered into a letter agreement (the "Voting Agreement")
whereby Mason Best agreed to vote its stock in favor of the election to the
Company's Board of Directors of those individuals nominated by AFG in
accordance with the terms of the Securities Purchase Agreement. The Voting
Agreement shall continue until December 31, 2003.

88
<PAGE> 93

Pursuant to the Securities Purchase Agreement, until AFG and its
affiliates no longer own Series D Preferred Stock or Underlying Shares
representing in the aggregate the ownership or the right to acquire ownership
of 51% of the Underlying Shares, or until June 29, 2000, whichever is earlier,
if AFG and its affiliates hold Series D Preferred Stock and Common Stock that
represents the right to vote more than 20% of the total votes eligible to be
cast on any matter, then AFG and its affiliates will vote all shares of Series
D Preferred Stock and Common Stock owned by them in excess of such 20% in
proportion to the actual vote of holders of all remaining votes (including
AFG's 20% vote).

Upon closing of the Aviation Division Sale, all shares of Series D
Preferred Stock will be transferred to the Company and cancelled and the voting
rights and agreements described above will terminate.

89
<PAGE> 94

RATIFICATION OF THE APPOINTMENT OF AUDITORS

The Board of Directors has appointed the firm of Arthur Andersen LLP,
which has served as independent auditors of the Company since 1986, as
independent auditors of the Company and its subsidiaries for the fiscal year
ending December 31, 1997, and recommends ratification by the stockholders of
such appointment. Such ratification requires the affirmative vote of a majority
of the votes entitled to be cast at the Annual Meeting. An abstention would
have the same legal effect as a vote against this proposal, but a broker
non-vote would not be counted for purposes of determining whether a majority
had been achieved. The persons named in the accompanying proxy intend to vote
for ratification of such appointment unless instructed otherwise on the proxy.

The Board of Directors recommends a vote "FOR" this proposal.

In the event the appointment is not ratified, the Board of Directors will
consider the appointment of other independent auditors. The Board of Directors
may terminate the appointment of Arthur Andersen LLP as the Company's
independent auditors without the approval of the stockholders of the Company
whenever the Board of Directors deems such termination necessary or
appropriate. A representative of Arthur Andersen LLP is expected to attend the
Annual Meeting and will have the opportunity to make a statement, if such
representative desires to do so, and will be available to respond to
appropriate questions.

90
<PAGE> 95

STOCKHOLDER PROPOSALS

Any stockholder who wishes to submit a proposal for inclusion in the proxy
material and for presentation at the Company's 1998 Annual Meeting of
Stockholders must forward such proposal to the Secretary of the Company at the
address indicated on the second page of this proxy statement, so that the
Secretary receives it no later than April 2, 1998.

The Company's Bylaws also require that notice of nominations of persons
for election to the Board of Directors at the 1998 Annual Meeting of
Stockholders, other than those made by or at the direction of the Board of
Directors, must be received by the Secretary not later than the close of
business on the tenth day following the date on which the Company first makes
public disclosure of the date of the meeting; provided, however, that in the
event that the meeting is adjourned, and the Company is required by Delaware
law to give notice to stockholders of the adjourned meeting date, written
notice of such stockholder's intent to make such nomination at such adjourned
meeting must be delivered to or received by the Secretary of the Company no
later than the close of business on the fifth day following the earlier of: (i)
the date the Company makes public disclosure of the date of the adjourned
meeting; or (ii) the date on which notice of such adjourned meeting is first
given to stockholders. The notice must present certain information concerning
the nominees and the stockholder making the nominations, as set forth in the
Bylaws. The Secretary must receive a statement of any such nominee's consent to
serve if elected.

ANNUAL REPORT TO STOCKHOLDERS

The Proxy Statement constitutes the Company's Annual Report and contains
all of the information required by Rule 14a-3 promulgated under the Exchange
Act to be contained in an annual report to stockholders.

ANNUAL REPORT ON FORM 10-K

The Company will provide without charge a copy of its Annual Report on
form 10-K for the year ended December 31, 1996, including the financial
statements and financial statement schedules, as filed with the Securities and
Exchange Commission (without exhibits), upon the written request of any
Stockholder of record as of June 30, 1997. Copies of exhibits to the Annual
Report on Form 10-K will be furnished (upon payment of the Company's reasonable
expenses in furnishing such exhibits) upon request to Richard M. Kurz, Chief
Financial Officer, American Eagle Group, Inc., 12801 N. Central Expressway,
Suite 800, Dallas, Texas 75343.

OTHER MATTERS

The Board of Directors does not know of any other matters that are to be
presented for action at the Annual Meeting. However, if any other matters
properly come before the Annual Meeting or any adjournment(s) thereof, it is
intended that the enclosed proxy will be voted in accordance with the judgment
of the persons voting the proxy.

91
<PAGE> 96

AVAILABLE INFORMATION

The Company is subject to the informational reporting requirements of the
Exchange Act and in accordance therewith files reports and other information
with the SEC. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549; and at its regional offices
located at 7 World Trade Center, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may
also be obtained from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed
by the SEC. The SEC also maintains a site on the World Wide Web, the address of
which is http/www.sec.gov, that contains reports, proxy and information
statements and other information regarding reporting companies that file
electronically with the SEC. The Company's Common Stock is listed on the NYSE,
and, accordingly, reports, proxy statements and other information are available
for inspection at the offices of the NYSE at 20 Broad Street, New York, New
York 10005.

By Order of the Board of Directors

FREDERICK G. ANDERSON
Senior Vice President/General Counsel
and Secretary

92
<PAGE> 97
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants ....................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1996 and 1995 .................................. F-3
Consolidated Statements of Income - For the Years Ended December 31, 1996, 1995
and 1994 .............................................................................. F-4
Consolidated Statements of Stockholders' Equity - For the Years Ended December 31,
1996, 1995 and 1994 ................................................................... F-5
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1996,
1995 and 1994 ......................................................................... F-6
Notes to Consolidated Financial Statements ................................................ F-7
Unaudited Consolidated Financial Statements:
Condensed Consolidated Balance Sheet - March 31, 1997 ..................................... F-25
Condensed Consolidated Statements of Income - For the Three Months Ended March 31, 1997
and 1996 .............................................................................. F-26
Condensed Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1997 and 1996 ............................................................... F-27
Notes to Unaudited Condensed Consolidated Financial Statements - For the Three Months
Ended March 31, 1997 and 1996 ......................................................... F-28
</TABLE>

F-1
<PAGE> 98

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
American Eagle Group, Inc.:

We have audited the accompanying consolidated balance sheets of American Eagle
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As discussed in Note 1, the Company has entered into transactions to sell
substantially all of its insurance operations.

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

ARTHUR ANDERSEN LLP

Dallas, Texas,
March 26, 1997, except for the matters
described in paragraphs 4 and 5 of Note 1,
for which the date is April 23, 1997.

F-2
<PAGE> 99

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1996 AND 1995
(In Thousands Except Share Data)

<TABLE>
<CAPTION>
ASSETS 1996 1995
------ --------- ---------
<S> <C> <C>
Investments:
Fixed Income Securities
Available for Sale, at Fair Value (Cost $29,004 in 1996 and $55,136 in 1995) $ 29,167 $ 56,719
Held to Maturity, at Amortized Cost (Fair Value $23,264 in 1996
and $28,889 in 1995) 23,479 28,952
Short-Term Investments, at Cost (Which Approximates Fair Value) 13,347 18,199
--------- ---------
Total Investments 65,993 103,870
Cash and Cash Equivalents 23,094 2,922
Accrued Investment Income 1,171 1,606
Accounts Receivable:
Agents' Balances, Net 30,161 24,866
Deferred Premiums 18,052 31,393
Other, Net 501 631
--------- ---------
Total Accounts Receivable, net 48,714 56,890
Reinsurance Recoverable, Net:
Insurance Operations - Paid Losses 5,260 22,449
Insurance Operations - Loss Reserves 63,982 78,676
--------- ---------
Total Reinsurance Recoverable, Net 69,242 101,125
Deferred Policy Acquisition Costs 14,509 15,296
Deferred Reinsurance Premiums 26,706 28,264
Other Assets 12,530 16,731
--------- ---------
Total Assets $ 261,959 $ 326,704
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Liabilities:
Policy Liabilities and Accruals
Reserve for Losses and Loss Adjustment Expenses $ 138,133 $ 136,528
Unearned Premiums 60,065 79,605
Other Policy Liabilities 7,646 27,678
--------- ---------
Total Policy Liabilities and Accruals 205,844 243,811
Agency Payables to Insurance Companies, Net 1,094 4,601
Accounts Payable and Other Liabilities 12,732 11,947
Note Payable - 11,250
--------- ---------
Total Liabilities 219,670 271,609

Commitments and Contingent Liabilities -- --

Series B Cumulative Redeemable Preferred Stock, $.01 Par Value; 162,857 Shares
Authorized, Issued and Outstanding 1,629 1,629
Series D Cumulative Convertible Redeemable Preferred Stock, $0.01 Par Value
546,200 Shares Authorized, 350,000 Shares Issued and Outstanding in 1996 33,164 --

Stockholders' Equity:
Common Stock, $.01 Par Value; 21,000,000 Shares Authorized, 7,120,980 Shares
Issued and Outstanding in 1996 and 7,124,580 in 1995 71 71
Additional Paid-In Capital 45,563 45,532
Unrealized Appreciation on Securities Available for Sale, Net of Taxes 106 1,029
Retained Earnings (Deficit) (38,157) 6,921
Less - 73,882 Shares of Common Stock Held in Treasury, at Cost (87) (87)
--------- ---------
Total Stockholders' Equity 7,496 53,466
--------- ---------
Total Liabilities and Stockholders' Equity $ 261,959 $ 326,704
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-3
<PAGE> 100

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands Except Per Share Data)

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Earned Premiums, Net $ 107,217 $ 102,447 $ 82,725
Agency Operations, Net 424 396 919
Investment Income, Net 4,470 5,497 4,106
Realized Investment Gains (Losses), Net (74) 496 (33)
----------- ----------- -----------

Total Revenues 112,037 108,836 87,717
----------- ----------- -----------

Expenses:
Losses and Loss Adjustment Expenses, Net of Reinsurance 107,473 90,933 52,729
Policy Acquisition and Other Underwriting Expenses 47,848 37,292 23,694
Interest Expense 1,132 987 800
----------- ----------- -----------

Total Expenses 156,453 129,212 77,223
----------- ----------- -----------

Income (Loss) Before Income Tax Provision (Benefit) (44,416) (20,376) 10,494

Income Tax Provision (Benefit) -- (7,300) 3,351
----------- ----------- -----------

Net Income (Loss) $ (44,416) $ (13,076) $ 7,143
=========== =========== ===========

Net Income (Loss) Available for Common Stockholders $ (44,514) $ (13,174) $ 6,588
=========== =========== ===========

Net Income (Loss) Per Common Share (Primary and Fully Diluted) $ (6.32) $ (1.87) $ 1.16
=========== =========== ===========

Weighted Average Number of Common Shares Outstanding
(Primary and Fully Diluted) 7,048,898 7,052,998 5,684,386
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-4
<PAGE> 101

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands Except Share Data)

<TABLE>
<CAPTION>
Unrealized
Appreciation
on Securities
Additional Available for Retained Total
Common Paid-In Sale, Net Earnings Treasury Stockholders'
Stock Capital of Taxes (Deficit) Stock Equity
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 35 $ 13,465 $ 243 $ 15,052 $ (87) $ 28,708

Net Income -- -- -- 7,143 -- 7,143
Proceeds from Issuance of
3,563,750 shares of Common
Stock, Net of Issuance Costs 36 32,001 -- -- -- 32,037
Unrealized Loss on Investments,
Net -- -- (2,394) -- -- (2,394)
Dividends on Series B and C
Cumulative Preferred Stock -- -- -- (555) -- (555)
Amortization of Unearned
Compensation -- 31 -- -- -- 31
Common Stock Dividends -- -- -- (635) -- (635)
------------ ------------ ------------ ------------ ------------ ------------

Balance, December 31, 1994 71 45,497 (2,151) 21,005 (87) 64,335

Net Loss -- -- -- (13,076) -- (13,076)
Unrealized Gain on Investments,
Net -- -- 3,180 -- -- 3,180
Dividends on Series B
Cumulative Preferred Stock -- -- -- (91) -- (91)
Amortization of Unearned
Compensation -- 35 -- -- -- 35
Common Stock Dividends -- -- -- (917) -- (917)
------------ ------------ ------------ ------------ ------------ ------------

Balance, December 31, 1995 71 45,532 1,029 6,921 (87) 53,466

Net Loss -- -- -- (44,416) -- (44,416)
Unrealized Loss on Investments,
Net -- -- (923) -- -- (923)
Dividends on Series B
Cumulative Preferred Stock -- -- (98) -- (98)
Amortization of Unearned
Compensation -- 31 -- -- -- 31
Common Stock Dividends -- -- -- (564) -- (564)
------------ ------------ ------------ ------------ ------------ ------------

Balance, December 31, 1996 $ 71 $ 45,563 $ 106 $ (38,157) $ (87) $ 7,496
============ ============ ============ ============ ============ ============
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-5
<PAGE> 102

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In Thousands)

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash and Cash Equivalents Derived From:
Operating Activities-
Net Income (Loss) $ (44,416) $ (13,076) $ 7,143
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by
(Used in) Operating Activities-
Depreciation and Amortization 49,758 40,406 28,412
Provision for Doubtful Accounts 564 (711) 214
Realized Investment (Gains) Losses, Net 74 (495) 33
Amortization of Bond Discount and Premium, Net 269 261 374
Deferral of Policy Acquisition Costs (47,219) (40,848) (33,551)
Changes in assets and liabilities:
Accrued Investment Income 435 (2) (524)
Accounts Receivable, Net 8,176 1,398 (4,492)
Reinsurance Recoverable, Net 31,319 18,149 (20,425)
Deferred Reinsurance Premiums 1,558 14,371 (7,248)
Other Assets 4,201 (5,512) 1,968
Reserve for Losses and Loss Adjustment Expenses 1,605 (6,240) 20,426
Other Policy Liabilities (20,032) (11,617) 9,691
Unearned Premiums (19,540) 12,793 8,309
Agency Payables to Insurance Companies, Net (3,507) (5,600) (13,353)
Accounts Payable and Other Liabilities 785 699 (1,107)
--------- --------- ---------
Total Provided by (Used in) Operating Activities (35,970) 3,976 (4,130)
--------- --------- ---------

Investing Activities-
Proceeds (Purchases) of Short-Term Investments, net 4,852 (1,648) (12,258)
Purchases of Investment Securities:
Available for Sale (10,315) (165,684) (90,888)
Held to Maturity -- (1,012) (14,356)
Proceeds from Maturities of Investment Securities:
Available for Sale 1,610 3,166 5,235
Held to Maturity 5,275 1,250 4,266
Proceeds from Sales of Investment Securities:
Available for Sale 34,692 161,841 74,700
Purchases of Property and Equipment (942) (1,552) (1,170)
--------- --------- ---------
Total Provided by (Used in) Investing Activities 35,172 (3,639) (34,471)
--------- --------- ---------

Financing Activities-
Proceeds from Issuance of Series D Cumulative Convertible Redeemable
Preferred Stock, net of issuance costs 33,164 -- --
Proceeds (Repayment) of Note Payable, net (11,250) 2,000 (750)
Dividends Paid on Series B and C Cumulative Preferred Stock (98) (98) (555)
Proceeds from Issuance of Common Stock, net of issuance costs -- -- 32,037
Retirement of Series C Cumulative Preferred Stock -- -- (10,000)
Dividends Paid on Common Stock (846) (847) (423)
--------- --------- ---------
Total Provided by Financing Activities 20,970 1,055 20,309
--------- --------- ---------

Net Change in Cash and Cash Equivalents 20,172 1,392 (18,292)
Cash and Cash Equivalents, Beginning of Year 2,922 1,530 19,822
--------- --------- ---------
Cash and Cash Equivalents, End of Year $ 23,094 $ 2,922 $ 1,530
========= ========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-6
<PAGE> 103

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996 AND 1995
(In Thousands Except Share Data)

1. COMPANY OPERATIONS AND CURRENT OPERATING ENVIRONMENT:

American Eagle Group, Inc. (the "Company") is an insurance holding company
that, through its subsidiaries, markets and underwrites specialized property
and casualty insurance coverages in selected niche markets. The Company has
organized its business into three divisions: Aviation, Property & Casualty
("P&C") and Marine. The Aviation Division is one of the largest providers of
general aviation insurance in the United States based on net premiums written.
The Company's general aviation business consists primarily of nonairline
commercial aviation coverages, airport coverages and pleasure and business
aviation coverages. The P&C Division markets and underwrites commercial
insurance programs for selected artisan contractors ("Artisan") and local and
intermediate-haul truckers ("Transportation"). Transportation was discontinued
in December 1996. The Marine Division markets and underwrites an insurance
program for private yachts navigating the inland and coastal waters of the
United States.

In December 1996, the Company issued 350,000 shares of Series D Cumulative
Convertible Redeemable Preferred Stock ("Series D Preferred Stock") which
resulted in $33,164 of proceeds, net of issuance costs of $1,836. Of the net
proceeds, $13,250 was used to repay the Company's note payable to a bank,
$17,000 was contributed to the capital and surplus of American Eagle Insurance
Company ("AEIC"), the Company's significant subsidiary, and the remainder was
used for general corporate purposes.

For the years ended December 31, 1996 and 1995, the Company reported net losses
of $44.4 million and $13.1 million, respectively. The net losses were primarily
the result of reserve additions (including incurred-but-not-reported losses)
and reinsurance costs. As a result of the effect of the 1996 net loss on
statutory policyholders' surplus on AEIC, in March 1997, A.M. Best lowered its
rating of AEIC to "D." This reduction could have a material impact on AEIC's
ability to generate premium income. The loss in policyholders' surplus also
restricts the amount of premium income that AEIC can write. The Company expects
that the rating revision will increase the amount of business that the Company
assumes from other companies that provide "A" rated policies, and it will
substantially reduce the amount of business the Company directly writes for its
own account in the future.

As a result of a review of its capital and strategic alternatives in April,
1997, the Company entered into transactions to sell its aviation and artisan
contractor insurance operations. The closing of the aviation transaction will
require approval by AEG's stockholders, although stockholders owning a majority
of AEG's voting stock have agreed to vote in favor of the transaction. The
closing of the aviation transaction is also subject to regulatory approvals and
other customary conditions. The Company has also entered into a letter of
intent to sell its marine operations. The closing of the marine transaction is
subject to definitive documentation, Boards' of Directors approvals, required
regulatory approvals and licenses and other customary conditions. Historically,
the marine operations have not been material to the Company. The accompanying
statutory financial statements give no effect to these proposed transactions.

F-7
<PAGE> 104

Upon completion of these transactions, the Company expects that it will no
longer write new or renewal policies for the foreseeable future. It will
continue to handle claims on the Company's policies that are not assumed as
part of these transactions and maintain the related reserves and assets.
Accordingly, the Company's revenues and earnings capacity will be significantly
lower in the future. In addition, as a result of the decline in rating, the
Company and American Financial Group implemented an expanded underwriting
agreement to make available A.M.
Best "A" rated paper for all of the Company's general aviation product lines.

As a result of the Company's 1996 net loss and resulting declines in statutory
capital and A.M. Best rating, the Company has been requested by the Texas
Department of Insurance to submit a capital plan outlining the actions the
Company plans to take to improve overall statutory capital levels. The Texas
Department of Insurance is also in the process of completing its triennial
examination for the period ended December 31, 1996. The examination is not
complete and no examination report has been issued. The Company has been
informed that the examiners are considering whether certain assets currently
recorded by the Company are ineligible to be carried as admitted assets under
statutory accounting principles. The Company cannot predict what position the
Texas Department of Insurance will ultimately take on these matters. The
accompanying statutory financial statements do not include any adjustments
related to the capital plan or regulatory examination.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company
prepared in conformity with generally accepted accounting principles, which
differ in some respects from those followed in reports to insurance regulatory
authorities. All intercompany balances and transactions have been eliminated in
consolidation. The term insurance operations refers to the activities of AEIC
and its wholly owned insurance subsidiary American Meridian Insurance Company
Limited ("AMIC"). The term agency operations refers to the activities of
Aviation Office of America ("AOA").

Investments

The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No. 115"). SFAS No. 115 addresses the accounting and
reporting for investments in equity securities that have a readily determinable
fair value and for all investments in fixed income securities. Such investments
are classified in three categories and accounted for as follows:

o Held to maturity - Investments in fixed income securities that the
Company has the positive intent and ability to hold to maturity and
are carried at amortized cost.

o Available for sale - Investments in fixed income and equity securities
not classified as either held-to-maturity securities or trading
securities. These securities are purchased with the original intent to
hold for extended periods but may be available to be sold to maximize
the Company's investment yields and liquidity requirements in response
to market conditions or modifications in the Company's investment
policy. Available-for-sale securities are carried at fair value and
changes in unrealized gains and losses, net of deferred taxes, are
recorded as a direct increase or decrease to stockholders' equity.

o Trading securities - Investments in fixed-income and equity securities
that are bought and held principally for the purpose and objective of
selling them in the near term and generating profits on short-term
differences in price. Trading securities are carried at fair value and
changes in unrealized gains and losses are included in earnings. The
Company does not engage in securities trading activities.

F-8
<PAGE> 105

Gains or losses on maturities or sales of investments are determined using the
specific identification method. If a decline in fair value of an equity or
fixed income security is other than temporary, the security is written down to
estimated fair value with the write-down recognized as a reduction of net
investment income. No such reductions were required in 1996, 1995 or 1994.

At December 31, 1996, fixed income and short-term investments with a book value
of $5,864 were on deposit with or pledged to state regulatory authorities to
meet statutory requirements, and short-term investments of approximately $1,965
have been pledged under letter of credit arrangements to secure future payments
of losses. In addition, at December 31, 1996, short-term investments of $8,940
were held on deposit under the Company's reinsurance contracts.

Recognition of Revenue

Premiums due from agents and premiums payable to insurance companies, together
with applicable commission or fee income, are generally recorded as of the
effective date of the policies. Additional premiums, rate adjustments, policy
cancellations and contingent commissions are accrued as they become known and
estimable. Insurance premiums are earned on a pro rata basis, net of
reinsurance premiums, over the terms of the respective policies. Unearned
premiums represent the portion of net premiums written applicable to the
unexpired portion of the coverage period.

Deferred Policy Acquisition Costs

Costs of acquiring business for the insurance operations which vary with and
are directly related to the production of such business are deferred and
amortized ratably over the related policy period (generally one year). Policy
acquisition costs include commissions, brokerage fees and certain other policy
issuance expenses. Deferred policy acquisition costs are reviewed periodically
to determine that they do not exceed recoverable amounts after considering
anticipated investment income.

Property and Equipment

Expenditures for significant improvements or betterments are capitalized.
Maintenance and repair costs are expensed as incurred. Depreciation is provided
on a straight-line basis over the estimated useful lives of the assets (four to
ten years).

Property and equipment, net of accumulated depreciation, of $3,849 and $3,265
at December 31, 1996 and 1995, respectively, were recorded as a component of
Other Assets. Accumulated depreciation totaled approximately $3,610 and $3,247
at December 31, 1996 and 1995, respectively.

Intangible Assets

The excess of cost over the fair market value of net assets acquired of AEIC
and AOA is being amortized on a straight-line basis over 25 years. Intangible
assets, net of accumulated amortization, of $4,969 and $5,309 at December 31,
1996 and 1995, respectively, were recorded as a component of Other Assets.
Accumulated amortization totaled approximately $3,603 and $3,254 at December
31, 1996 and 1995, respectively.

F-9
<PAGE> 106

Impairment of Long-Lived Assets

SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Based on management
estimates, no impairment exists at December 31, 1996.

Reserve for Losses and Loss Adjustment Expenses

The reserve for losses and loss adjustment expenses includes estimates for
losses incurred but not reported as well as losses pending settlement. The
reserve is based upon management's best estimates, loss adjusters' evaluations,
and independent actuarial determinations. As a consequence, although the
Company believes that its reserves at December 31, 1996, are adequate, actual
losses may deviate, perhaps substantially, from reserves reflected in the
Company's consolidated financial statements. There are a number of factors that
could cause losses to deviate from estimates. Such factors could include
assumptions proving incorrect regarding the positive effect of recent changes
in underwriting and claims-handling improvements on future trends in claims
reporting, frequency and severity of losses, and increases in claims settlement
costs due to higher inflation or new theories of liability.

Future adjustments to the amounts recorded at December 31, 1996, resulting from
the continued review process as well as differences between estimates and
ultimate payments or recoveries, will be reflected in the Company's statements
of income in future periods when such adjustments become known. Such
adjustments could be material to the Company's financial position and results
of operation.

In the normal course of business, the Company reduces the loss that may arise
from catastrophes or other events that cause unfavorable underwriting results
through reinsurance arrangements. Losses recoverable from reinsurers are
estimated in a manner consistent with the associated claim.

Reinsurance

Reinsurance premiums (including reinstatement premiums), commissions, expense
reimbursements, and reserves related to reinsured business are accounted for on
bases consistent with those used in accounting for the original policies issued
and the terms of the reinsurance contracts. Expense allowances received in
connection with reinsurance ceded have been accounted for as a reduction of the
related policy acquisition costs.

Income Taxes

The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires an asset and liability approach for financial
accounting and reporting for income taxes.

Net Income (Loss) Per Common Share

Net income (loss) per common share has been computed by dividing income (loss),
after deducting preferred stock dividends, by the weighted average number of
common shares and equivalent shares outstanding each year.

F-10
<PAGE> 107
Stock Option Plans

SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of
fair value for stock-based compensation granted to employees. The statement
allows companies to adopt the provisions of the statement, or to disclose the
effects of the statement, and is effective beginning in 1996. The Company has
elected to continue accounting for stock-based compensation under APB Opinion
No. 25 and will elect to follow the disclosure-only provisions of SFAS No. 123.
(See Note 8.)

Statements of Cash Flows

The Company includes as cash equivalents in the statements of cash flows,
temporary cash investments which generally have original maturities of 90 days
or less.

Interest expense paid during 1996, 1995 and 1994 was approximately $1,132, $987
and $800, respectively. Income taxes paid during 1996, 1995 and 1994 were
approximately $0, $1,284 and $3,465, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and 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.

Reclassifications

The 1994 and 1995 consolidated financial statements differ from the
presentation previously reported as a result of certain reclassifications
between captions in the balance sheets and the statements of income to conform
to the 1996 presentation. These reclassifications had no effect on the
Company's stockholders' equity, net income or cash flows.

3. INSURANCE OPERATIONS:

Reinsurance Transactions

In the ordinary course of business, AEIC and AMIC purchase reinsurance for the
purpose of limiting their retained loss exposure and maintaining required
statutory surplus amounts.

Reinsurance does not relieve the Company from its liabilities under the
original policies to the extent that the reinsuring companies fail to meet
their obligations under reinsurance contracts. Management evaluates the
financial condition of its reinsurers and monitors concentrations of credit
risk arising from similar geographic regions, activities, or economic
characteristics of the reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies. Management believes that the allowances at
December 31, 1996, are adequate to cover known and anticipated losses. At
December 31, 1996 and 1995, the Company's consolidated balance sheets reflected
the following reinsurance recoverable balances and the related allowances for
doubtful accounts:

<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Reinsurance recoverable $ 70,622 $ 101,941
Allowance for doubtful accounts (1,380) (816)
--------- ---------
Reinsurance recoverable, net $ 69,242 $ 101,125
========= =========
</TABLE>

F-11
<PAGE> 108

The effect of reinsurance on premiums written and earned for the insurance
operations is as follows:

<TABLE>
<CAPTION>
Written Earned
--------- ---------
<S> <C> <C>
For the year ended December 31, 1996-
Direct premiums $ 130,198 $ 153,817
Reinsurance assumed 12,622 8,543
Reinsurance ceded (46,591) (55,143)
--------- ---------
Net premiums $ 96,229 $ 107,217
========= =========

Percentage assumed of net 13% 8%
========= =========
</TABLE>

<TABLE>
<CAPTION>
Written Earned
--------- ---------
<S> <C> <C>
For the year ended December 31, 1995-
Direct premiums $ 166,001 $ 152,579
Reinsurance assumed 6,235 7,164
Reinsurance ceded (51,279) (57,296)
--------- ---------
Net premiums $ 120,957 $ 102,447
========= =========

Percentage assumed of net 5% 7%
========= =========

For the year ended December 31, 1994-
Direct premiums $ 151,875 $ 136,445
Reinsurance assumed 7,268 5,040
Reinsurance ceded (63,146) (58,760)
--------- ---------
Net premiums $ 95,997 $ 82,725
========= =========

Percentage assumed of net 8% 6%
========= =========
</TABLE>

The Company makes quarterly deposits for reinsurance contracts in the normal
course of business. At December 31, 1996 and 1995, the Company had entered into
reinsurance contracts with future deposits totaling $17,550 and $ 32,064,
respectively. These deposits are generally payable in the first nine months of
the subsequent year.

Deferred Policy Acquisition Costs

Changes in deferred policy acquisition costs for the years ended December 31,
1996, 1995 and 1994, are summarized below:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 15,296 $ 15,048 $ 8,651
Underwriting and acquisition costs 47,219 40,848 33,551
Current period amortization (48,006) (40,600) (27,154)
-------- -------- --------

Balance, end of year $ 14,509 $ 15,296 $ 15,048
======== ======== ========
</TABLE>

F-12
<PAGE> 109

Reserve for Losses and Loss Adjustment Expenses

Changes in reserves for losses and loss adjustment expenses are summarized as
follows:

<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1 $ 136,528 $ 142,768 $ 122,342
Less reinsurance recoverables (78,676) (92,317) (81,487)
--------- --------- ---------

Net Balance at January 1 57,852 50,451 40,855
--------- --------- ---------

Incurred related to:
Current year 88,885 72,072 48,567
Prior years 18,588 18,861 4,162
--------- --------- ---------
Total incurred 107,473 90,933 52,729
Paid related to:
Current year 48,063 42,066 26,552
Prior years 43,111 41,466 16,581
--------- --------- ---------
Total paid 91,174 83,532 43,133
--------- --------- ---------

Net Balance at December 31 74,151 57,852 50,451
Plus reinsurance recoverables 63,982 78,676 92,317
--------- --------- ---------
Balance at December 31 $ 138,133 $ 136,528 $ 142,768
========= ========= =========
</TABLE>

4. INVESTMENTS:

Net investment income for the years ended December 31, 1996, 1995 and 1994,
comprised primarily of interest and dividends, was derived from the following
sources:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest and dividend income-
Fixed income securities $ 4,556 $ 5,567 $ 3,943
Equity securities -- 66 241
Short-term investments 177 172 339
------- ------- -------
Total interest and dividend income 4,733 5,805 4,523
Investment expenses (263) (308) (417)
------- ------- -------

Investment income, net $ 4,470 $ 5,497 $ 4,106
======= ======= =======
</TABLE>

There are no investments in fixed income securities that have been non-income
producing for the years ended December 31, 1996, 1995 and 1994. Investment
expenses include advisory fees paid to unrelated parties.

F-13
<PAGE> 110

Realized pretax gains (losses) on the sales of investments for the years ended
December 31, 1996, 1995 and 1994, are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Fixed income securities available for sale-
Gross realized gains $ 379 $ 643 $ 32
Gross realized losses (453) (50) (68)
----- ----- -----
Net gain (loss) (74) 593 (36)

Equity securities-
Gross realized gains -- 1 340
Gross realized losses -- (98) (337)
----- ----- -----
Net gain (loss) -- (97) 3
----- ----- -----
Realized investment gains (losses), net $ (74) $ 496 $ (33)
===== ===== =====
</TABLE>

Following is an analysis of the change in the unrealized appreciation
(depreciation) of investment securities available for sale, which is reported
as a component of stockholders' equity:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Change in unrealized appreciation (depreciation)
of equity securities $ -- $ 91 $ (246)
Change in unrealized appreciation (depreciation)
of fixed income securities available for sale (1,420) 4,806 (3,437)
Deferred income taxes 497 (1,717) 1,289
------- ------- -------

Net change during year (923) 3,180 (2,394)

Balance, beginning of year 1,029 (2,151) 243
------- ------- -------

Balance, end of year $ 106 $ 1,029 $(2,151)
======= ======= =======
</TABLE>

F-14
<PAGE> 111

The amortized cost and estimated fair values of investments in fixed income and
equity securities at December 31, 1996 and 1995, are as follows:

<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair Carrying
December 31, 1996 Cost (1) Gains Losses Value Value
- ----------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed income securities:
Available for sale -
Corporate debt securities $ 29,004 $ 418 $ (255) $ 29,167 $ 29,167
---------- ---------- ---------- ---------- ----------
Held to maturity -
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 17,203 -- (190) 17,013 17,203
Obligations of states and
political subdivisions 5,780 10 (30) 5,760 5,780
Corporate debt securities 496 -- (5) 491 496
---------- ---------- ---------- ---------- ----------

Total fixed income securities
held to maturity 23,479 10 (225) 23,264 23,479
---------- ---------- ---------- ---------- ----------

Total fixed income securities 52,483 428 (480) 52,431 52,646
---------- ---------- ---------- ---------- ----------

Short-term investments 13,347 -- -- 13,347 13,347
---------- ---------- ---------- ---------- ----------

Total investments $ 65,830 $ 428 $ (480) $ 65,778 $ 65,993
========== ========== ========== ========== ==========
</TABLE>

(1) Original cost of fixed income securities adjusted for amortization of
premiums and accretion of discounts.

F-15
<PAGE> 112
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair Carrying
December 31, 1995 Cost (1) Gains Losses Value Value
- ----------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed income securities:
Available for sale -
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 9,733 $ 139 $ (49) $ 9,823 $ 9,823
Obligations of states and
political subdivisions 3,117 138 - 3,255 3,255
Corporate debt securities 42,286 1,457 (102) 43,641 43,641
---------- ---------- ---------- ---------- ----------

Total fixed income securities
available for sale 55,136 1,734 (151) 56,719 56,719
---------- ---------- ---------- ---------- ----------

Held to maturity -
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies 22,527 45 (115) 22,457 22,527
Obligations of states and
political subdivisions 5,927 19 (25) 5,921 5,927
Corporate debt securities 498 16 (3) 511 498
---------- ---------- ---------- ---------- ----------

Total fixed income securities held
to maturity 28,952 80 (143) 28,889 28,952
---------- ---------- ---------- ---------- ----------

Total fixed income securities 84,088 1,814 (294) 85,608 85,671
---------- ---------- ---------- ---------- ----------

Short-term investments 18,199 - - 18,199 18,199
---------- ---------- ---------- ---------- ----------

Total investments $ 102,287 $ 1,814 $ (294) $ 103,807 $ 103,870
========== ========== ========== ========== ==========
</TABLE>

(1) Original cost of fixed income securities adjusted for amortization of
premiums and accretion of discounts.

The amortized cost and estimated fair value of fixed income securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Less than one year $ -- $ -- $ 5,085 $ 5,072
One year to three years -- -- 12,183 12,005
Over three years to five years -- -- 2,104 2,102
Over five years to seven years 12,788 12,888 2,556 2,534
Over seven years to ten years 7,270 7,308 1,025 1,019
Over ten years 8,946 8,971 526 531
--------- --------- --------- ---------

$ 29,004 $ 29,167 $ 23,479 $ 23,263
========= ========= ========= =========
</TABLE>

F-16
<PAGE> 113
5. NOTE PAYABLE:

Note payable at December 31, 1996 and 1995, was as follows:

<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Note payable to a bank, bearing interest at the bank's corporate
base rate (8.5% and 9.0% at December 31, 1996 and 1995,
respectively), interest payable quarterly $ -- $11,250
</TABLE>

Total interest expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $1,132, $987 and $800, respectively.

The note payable was a revolving credit facility with a total commitment
limited to $16 million. During 1996, an additional $2 million was borrowed
against the revolving credit facility. In December 1996, $13,250 of the
proceeds received from the issuance of the Series D Preferred Stock was used to
pay the revolving credit facility balance, and the revolving credit facility
was terminated by the Company.

6. INCOME TAXES:

The income tax provision (benefit) for the years ended December 31, 1996, 1995
and 1994, consisted of the following:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current $ -- $(7,100) $ 1,871
Deferred -- (200) 1,480
------- ------- -------

Total $ -- $(7,300) $ 3,351
======= ======= =======
</TABLE>

The income tax provision (benefit) differs from that computed at the federal
statutory corporate tax rate for the years ended December 31, 1996, 1995 and
1994, as follows:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before income tax provision (benefit) $(44,416) $(20,376) $ 10,494
Tax at 34% statutory rate (15,101) (6,928) 3,568
Tax effect of:
Amortization of goodwill 110 117 120
Tax exempt interest income (125) (245) (96)
Dividends received deduction -- (15) (52)
Discounting of "Fresh Start" adjustment (141) (35) (26)
Other, net 368 (194) (163)
Valuation allowance 14,889 -- --
-------- -------- --------

Total income tax provision (benefit) $ -- $ (7,300) $ 3,351
======== ======== ========
</TABLE>

F-17
<PAGE> 114

Certain income and expense items are recognized for financial reporting
purposes and for income tax purposes in different periods. Deferred taxes are
provided in the consolidated financial statements to account for these
"temporary" differences. The primary sources of the Company's temporary
differences are attributable to the discounting of reserves for losses and loss
adjustment expenses for income tax purposes, recognition of unearned policy
premium income, differences in depreciation methods, provisions for
uncollectible accounts and differences in the amortization period for deferred
acquisition costs. Except for the effects of the reversal of such net
deductible temporary differences, the Company is not currently aware of any
factors which would cause any significant differences between taxable income
and pre-tax book income in future years. However, there can be no assurances
that there will be no significant differences in the future between
consolidated taxable income and consolidated pre-tax book income if
circumstances change (such as, for example, changes in tax laws or the
Company's financial condition or performance).

The components of and changes in the net deferred tax asset (liability) during
the years ended December 31, 1996 and 1995, were as follows:

<TABLE>
<CAPTION>
Deferred Deferred
December 31, Benefit December 31, Benefit December 31,
1996 (Expense) 1995 (Expense) 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Discounting of insurance loss reserves $ 3,628 $ 354 $ 3,274 $ 290 $ 2,984
Unearned policy premium income 2,301 (160) 2,461 875 1,586
Reserve for uncollectible accounts (66) 326 (392) (165) (227)
Deferred policy acquisition costs (5,770) 264 (6,034) (1,613) (4,421)
Salvage and subrogation -- 282 (282) -- (282)
Other, net 326 334 (8) (352) 344
Net operating loss carryforward 15,705 14,540 1,165 1,165 --
------------ ------------ ------------ ------------ ------------
16,124 15,940 184 200 (16)
Valuation allowance (14,889)
Unrealized (appreciation)depreciation
on investment securities (55) N/A (554) N/A 1,163
------------ ------------ ------------ ------------ ------------

Total net deferred tax asset (liability) $ 1,180 $ (370) $ 1,147
============ ============ ============
</TABLE>

At December 31, 1996, the Company had a net operating loss carryforward for
financial reporting purposes of approximately $45.0 million. In connection with
the issuance of the Series D Preferred Stock, (see Note 8), the Company
underwent a change in ownership for purposes of Section 382 of the Internal
Revenue Code of 1986. As a result, the utilization of the Company's net
operating loss carryforward will be limited to approximately $1.9 million per
year through 2011.

No income, profit or capital gain taxes are levied in Bermuda and, accordingly,
no provision or benefit for such taxes has been recorded by AMIC. In the event
such taxes are levied, AMIC has an agreement with the Bermuda government
exempting it from all such taxes until March 2016.

7. STATUTORY INFORMATION:

Accounting Practices

Generally accepted accounting principles ("GAAP") differ in certain respects
from accounting practices prescribed or permitted by the domiciliary insurance
regulatory authorities of the State of Texas and Bermuda.

F-18
<PAGE> 115

AEIC and AMIC are required to report to certain regulatory agencies on the
basis of Statutory Accounting Practices ("SAP"). The principal differences
between SAP and GAAP are as follows:

o Under SAP, policy acquisition costs, such as commissions, premium
taxes, fees, and other costs of underwriting policies are charged to
current operations as incurred, whereas, the related written premium
is included in earnings on a pro-rata basis over the period covered by
the policy;

o Under SAP, certain assets, designated as "Nonadmitted Assets" (such as
prepaid expenses) are charged against surplus;

o Under SAP, federal income taxes are only provided on taxable income
for which income taxes are currently payable, while under GAAP,
deferred income taxes are provided with respect to temporary
differences;

o Under SAP, certain reserves are established in amounts which differ
from amounts which would be provided in conformity with GAAP.

Financial Information

The unaudited statutory capital and surplus of AEIC as of December 31, 1996 and
1995, was $20,351 and $50,465, respectively. Unaudited statutory net income
(loss) of AEIC for the years ended December 31, 1996, 1995 and 1994 was
$(45,629), $(15,735) and $2,943, respectively.

The unaudited statutory capital and surplus of AMIC as of December 31, 1996 and
1995, was $4,031 and $3,761, respectively. Unaudited statutory net income of
AMIC for the years ended December 31, 1996, 1995 and 1994, was $92, $1,143 and
$313, respectively.

Minimum Capital Requirements

The insurance subsidiaries must maintain a minimum amount of statutory capital
and surplus to satisfy regulatory requirements. At December 31, 1996, AEIC had
unaudited statutory capital and surplus of $20,351 with a minimum requirement
of $16,533 and AMIC had unaudited statutory capital and surplus of $4,031 with
a minimum requirement of $250. As a result of the Company's 1996 net loss and
resulting decline in statutory capital, the Company has been requested by the
Insurance Department of the State of Texas to submit a capital plan outlining
the actions the Company plans to take to improve overall statutory capital
levels.

Dividend Restrictions

The insurance subsidiaries are subject to various regulatory restrictions which
limit the maximum amount of annual dividends allowed to be paid. Generally,
dividends may only be paid from earned surplus arising from the business, and
then the maximum dividend that may be paid without prior regulatory approval is
limited to the greater of (i) 10% of statutory surplus or (ii) the lesser of
100% of net investment income, or net income, for the prior year. Dividends
exceeding these limitations can be made subject to approval by the domiciliary
insurance regulatory authorities. Based on regulatory restrictions presently in
effect, the maximum amount available for payment as dividends to the Company by
AEIC without the prior approval of regulatory authorities is $2.0 million, if
at the time of payment AEIC has earned surplus at least equal to the amount of
dividend. At December 31, 1996, AEIC earned surplus (deficit) was reset to
zero. AEIC received permission from the Department of Insurance of the State of
Texas to reset earned surplus to zero at December 31, 1996 by transferring from
the paid-in capital account the amount necessary to bring the earned surplus
account to zero. However, no dividend can be paid prior to January 1, 1998.

F-19
<PAGE> 116

8. REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OPTION PLANS:

Series B Cumulative Redeemable Preferred Stock

In June 1990, the Company issued 162,857 shares of Series B Cumulative
Redeemable Preferred Stock ("Series B Preferred Stock") in exchange for the
cancellation of the outstanding principal balance of the Company's acquisition
notes payable. Cash dividends of 6% are payable in quarterly installments. The
preferred shares are redeemable by the Company at any time at a price of $10
per share plus accrued and unpaid dividends, and are mandatorily redeemable at
$10 per share plus accrued and unpaid dividends as follows: 30,000 shares -
December 31, 1997 and all remaining shares on December 31, 1998. Pursuant to
the mandatory redemption provisions, 20,000 shares were redeemed on January 15,
1997.

Series D Preferred Stock

In December 1996, the Company issued 350,000 shares of Series D Preferred Stock
for a purchase price of $100 per share. The Series D Preferred Stock has a
liquidation value of $100 per share and ranks junior to the Series B Preferred
Stock with respect to payment of dividends and payments or distributions upon
liquidation.

The Series D Preferred Stock has an annual, cumulative dividend of 9% payable
quarterly. At the option of the Company, dividends during the first five years
may be paid either in cash or in shares of the Series D Preferred Stock.

Until December 31, 2003, the holders of Series D Preferred Stock collectively
are entitled to cast 20% of the votes eligible to be cast on any matter
submitted to a vote of the holders of capital stock of the Company; except if
the aggregate number of shares of Common Stock into which the Series D
Preferred Stock is then convertible is less than 20% of the outstanding shares
of Common Stock on a fully diluted basis, then the Series D Preferred Stock
will be entitled to cast one vote for each share of Common Stock into which it
is convertible.

The Series D Preferred Stock is convertible into Common Stock at any time at
the option of the holder at a conversion price of $5.25 per share (subject to
antidilution provisions). The Company has reserved 10,403,810 shares of Common
Stock for the conversion.

The Series D Preferred Stock may be redeemed for cash by the Company at any
time. If, however, redemption occurs on or before December 31, 2003, the
Company will pay the redemption price and issue warrants to purchase the number
of shares of Common Stock of the Company into which the redeemed Series D
Preferred Stock could have been converted. Such warrants would have an exercise
price of $5.25 per share (subject to antidilution provisions) and would expire
on December 31, 2003. The Company is required to redeem 10% of the outstanding
shares of Series D Preferred Stock on the first business day of January of each
year beginning 2008, with all remaining shares required to be redeemed on the
first business day of January 2017. The redemption price is $100 per share plus
accrued and unpaid dividends.

Common Stock

The common stock of the Company is issuable in either of two classes, Common
Stock or Nonvoting Common Stock. Other than the voting rights, the two classes
are identical in every respect. As of December 31, 1996 and 1995, 7,047,098 and
7,044,698 shares of Common Stock were outstanding, respectively. As of December
31, 1996, no shares of Nonvoting Common Stock were outstanding. At December 31,
1995, 6,000 shares of Nonvoting Common Stock were outstanding, all of which
were converted to Common Stock in January 1996. The Company declared cash
dividends of $0.08, $0.13 and $0.09 per common share in 1996, 1995 and 1994,
respectively.

F-20
<PAGE> 117

In May 1994, the Company issued 3,563,750 shares of Common Stock through an
initial public offering, which resulted in $32,037 of proceeds, net of issuance
costs of $3,601, to the Company. Of the net proceeds, $10,156 was used to
redeem all of the Company's Series C Cumulative Preferred Stock, including
accrued dividends, $20,100 was contributed to the capital and surplus of AEIC,
and the remainder was used for general corporate purposes.

Stock Option Plans

The Company has six stock option plans for officers, directors, and key
employees of the Company: the 1991 Non-Qualified Stock Option Plan, the three
Amended and Restated P&C Stock Option Plans, the 1994 Stock Incentive Plan, and
the 1994 Director Stock Option Plan. Under the plans, vesting periods are
established at the time of grant but typically range up to three years, and
exercise prices are at fair market value at the time of grant. In connection
with the issuance of the Series D Preferred Stock, certain stock options
outstanding were cancelled and new options granted at fair market value with
new vesting periods and expiration dates. Stock option expiration dates may
vary from 10 years to 15 years from the date of grant. Option prices per share
at December 31, 1996 ranged from $4.525 to $11.52, with a weighted average of
$5.89. There were no significant differences between the historical results of
operations and net income (loss) per common share and the pro-forma amounts
required under SFAS No. 123.

At December 31, 1996, the Company has 1,229,550 common shares reserved for
stock options. Option activity is as follows:

<TABLE>
<CAPTION>
Weighted Weighted
Average Price Average Price
1996 Per Share 1995 Per Share 1994
---------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,099,881 993,680 589,424

Granted 801,550 $5.27 173,779 $9.77 441,702

Canceled (980,257) $10.61 (67,578) $10.65 (37,446)
---------- ---------- ---------

Outstanding, end of year 921,174 1,099,881 993,680
========== ========== =========

Exercisable, end of year 163,345 655,438 422,644
========== ========== =========

Weighted average exercise price $ 5.84 $ 10.73 $ 10.84
========== ========== =========
</TABLE>

1994 Employee Restricted Stock Plan

In February 1994, the board of directors approved the 1994 Employee Restricted
Stock Plan ("Restricted Stock Plan"). Under the Restricted Stock Plan, all
employees on the date of closing of the initial public offering received a
grant of 100 shares of Common Stock, subject to forfeiture upon termination of
employment within five years after the date of closing of the initial public
offering for any reason other than retirement, death, or disability. As a
result of the issuance of the Series D Preferred Stock, in accordance with the
plan, the restrictions were eliminated, and the shares were distributed to the
plan participants.

F-21
<PAGE> 118

9. SAVINGS AND PENSION PLANS:

Employee Profit Sharing and Savings Plan

Effective December 1, 1993, the Company's Employee Savings Plan was amended and
restated as the Employee Profit Sharing and Savings Plan (the "Savings Plan").
Employees who have completed six months of service are eligible to participate
in the Savings Plan. Participants may make contributions to the Savings Plan
through payroll deductions of up to 15% of their base compensation on a
tax-deferred basis and up to 10% of their base compensation on an after-tax
basis. The Company matches 50% of each participant's tax deferred contributions
to the Savings Plan up to 6% of the participant's compensation. Participants
are 100% vested in their contributions and the Company's matching
contributions. Contributions made by the Company to participant accounts
totaled $228, $210 and $209 for the years ended December 31, 1996, 1995 and
1994, respectively.

The Company may make annual profit sharing contributions for all employees
eligible to participate in the Savings Plan. The amount of the contribution is
within the discretion of the Board of Directors. Profit sharing contributions
are allocated among participants in proportion to their compensation.
Participants vest in profit sharing contributions on a graduated vesting
schedule over three years. The Company's profit sharing contributions to the
Savings Plan totaled $100, $140 and $175 for the years ended December 31, 1996,
1995 and 1994, respectively.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS:

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
the Company to disclose the estimated fair value of its financial instrument
assets and liabilities. Approximately 33% of the Company's assets and 0% of its
liabilities are considered financial instruments as defined in Statement No.
107.

Estimated fair values have been determined using an estimation methodology
suitable for each category of financial instruments. The estimation
methodologies used, estimated fair values, and recorded book balances at
December 31, 1996 and 1995, were as follows:

o Financial instruments actively traded in a secondary market have
been valued using quoted available market prices.

<TABLE>
<CAPTION>
Estimated Recorded
Fair Book
Value Balance
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 23,094 $ 2,922 $ 23,094 $ 2,922
======== ======== ======== ========
Investments (Note 4) $ 65,778 $103,807 $ 65,993 $103,870
======== ======== ======== ========
</TABLE>

o Financial instrument liabilities with variable rates have an
estimated fair value equal to the recorded book balance.

F-22
<PAGE> 119

Changes in assumptions or estimation methodologies may have a material effect
on these estimated fair values. The Company's remaining assets and liabilities
which are not considered financial instruments have not been valued differently
than has been customary with historical cost accounting.

11. COMMITMENTS AND CONTINGENT LIABILITIES:

Litigation

In the ordinary course of business, the Company and its subsidiaries have been
named defendants in various lawsuits seeking both actual and punitive damages.
Although the ultimate outcome of these matters is uncertain, management, based
on consultation with outside legal counsel, is of the opinion that their
resolution will not have a material adverse effect on the Company's financial
position or results of operations.

Lease Commitments

The Company has entered into various noncancelable operating leases
(principally with respect to facilities and equipment) which call for future
minimum lease payments as follows:

<TABLE>
<S> <C>
1997 1,050
1998 782
1999 760
2000 760
Thereafter 760
</TABLE>

Total rent expense for the years ended December 31, 1996, 1995 and 1994, was
approximately $1,097, $1,035 and $852, respectively.

Directors and Officers Liability

The Company is required to indemnify officers and directors for liability and
defense costs associated with litigation which might arise in connection with
the fulfillment of their responsibilities to the Company.

Other Matters

Prior to the Company's acquisition of AEIC and Aviation Office of
America, Inc. ("AOA") from Talegen Group, Inc. ("Talegen"), AOA was the
aviation manager for certain of its affiliates, which were insurance company
subsidiaries of Talegen. AOA continued to act as aviation manager for these
companies after the acquisition. Included in the aviation business managed by
AOA before and after the acquisition were workers' compensation programs for
aviation-related businesses. International Insurance Company ("International"),
a subsidiary of Talegen and successor in interest to the Talegen subsidiaries
whose aviation business was managed by AOA, is engaged in arbitrations with
certain reinsurers of the workers' compensation programs. The issue being
arbitrated involves the scope and coverage of the reinsurance contracts in
effect before, during and after the acquisition. The Company cannot currently
predict the outcome of the arbitrations. If International loses the
arbitrations, it may claim that the Company is responsible for losses not
covered by reinsurance on policies issued post-acquisition, an amount which
could potentially exceed the Company's capital. The Company believes that it
has valid defenses to a claim, if one is made, by International against the
Company, although there can be no guarantee of the outcome of any arbitration
or litigation of such claim.

F-23
<PAGE> 120

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

12. QUARTERLY FINANCIAL DATA (UNAUDITED):

The table below sets forth the Company's operating results by quarter for 1996
and 1995.

<TABLE>
<CAPTION>
1996
-------------------------------------------------------------------
Mar. 31 June 30 Sept.30 Dec. 31 Total
------------- ------------- ------------- ------------- -------------
(Dollars in millions, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Revenues
Earned premiums, net of
reinsurance $ 32.8 $ 33.5 $ 27.6 $ 13.3 $ 107.2
Agency operations, net -- -- 0.2 0.2 0.4
Investment income, net 1.4 1.0 1.0 1.1 4.5
Realized investment gains
(losses), net 0.2 (0.1) -- (0.2) (0.1)
------------- ------------- ------------- ------------- -------------
Total revenues 34.4 34.4 28.8 14.4 112.0

Expenses
Losses and loss adjustment
expenses, net of reinsurance 27.5 21.1 17.6 41.1 107.3
Policy acquisition and other
underwriting expenses 10.8 13.7 12.4 11.0 47.9
Interest expense 0.3 0.3 0.3 0.3 1.2
------------- ------------- ------------- ------------- -------------
Total expenses 38.6 35.1 30.3 52.4 156.4
Income (loss) before income tax
provision (benefit) (4.2) (0.7) (1.5) (38.0) (44.4)
Income tax provision (benefit) (1.4) (0.1) (0.3) 1.8 --
------------- ------------- ------------- -------------

Net income (loss) $ (2.8) $ (0.6) $ (1.2) $ (39.8) $ (44.4)
============= ============= ============= =============

Net income (loss) per common share
$ (0.39) $ (0.08) $ (0.17) $ (5.67) $ (6.32)
============= ============= ============= =============
Weighted average number of
common shares outstanding
(primary and fully diluted) 7,050,548 7,049,898 7,048,498 7,047,298 7,048,898
GAAP ratios
Loss and LAE ratio 83.8% 63.1% 63.7% 311.0% 100.2%
Expense ratio 32.8 40.9 44.8 83.0 44.6
------------- ------------- ------------- ------------- -------------
Combined ratio 116.6% 104.0% 108.5% 394.0% 144.8%
============= ============= ============= ============= =============

<CAPTION>
1995
-----------------------------------------------------------------------------------
Mar. 31 June 30 Sept.30 Dec. 31 Total
------------- ------------- ------------- ------------- -------------
(Dollars in millions, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Revenues
Earned premiums, net of
reinsurance $ 20.6 $ 24.6 $ 27.2 $ 30.0 $ 102.4
Agency operations, net 0.3 -- 0.2 (0.1) 0.4
Investment income, net 1.3 1.5 1.4 1.3 5.5
Realized investment gains
(losses), net -- -- 0.4 0.1 0.5
------------- ------------- ------------- ------------- -------------
Total revenues 22.2 26.1 29.2 31.3 108.8

Expenses
Losses and loss adjustment
expenses, net of reinsurance 13.6 15.6 16.3 45.4 90.9
Policy acquisition and other
underwriting expenses 7.0 7.6 9.1 13.6 37.3
Interest expense 0.1 0.2 0.3 0.4 1.0
------------- ------------- ------------- ------------- -------------
Total expenses 20.7 23.4 25.7 59.4 129.2
Income (loss) before income tax
provision (benefit) 1.5 2.7 3.5 (28.1) (20.4)
Income tax provision (benefit) 0.5 0.8 1.1 (9.7) (7.3)
------------- ------------- ------------- ------------- -------------

Net income (loss) $ 1.0 $ 1.9 $ 2.4 $ (18.4) $ (13.1)
============= ============= ============= ============= =============

Net income (loss) per common share
$ 0.14 $ 0.26 $ 0.34 $ (2.60) $ (1.87)
============= ============= ============= ============= =============
Weighted average number of
common shares outstanding
(primary and fully diluted) 7,055,298 7,053,998 7,052,898 7,051,398 7,052,998
GAAP ratios
Loss and LAE ratio 65.9% 63.6% 60.2% 151.0% 88.8%
Expense ratio 33.7 30.7 33.5 45.5 36.4
------------- ------------- ------------- ------------- -------------
Combined ratio 99.6% 94.3% 93.7% 196.5% 125.2%
============= ============= ============= ============= =============
</TABLE>

The fourth quarter of 1996 includes a charge to operations of approximately
$30.0 million relating primarily to reserve additions (including
incurred-but-not-reported losses) and reinsurance costs.

F-24
<PAGE> 121

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET - MARCH 31, 1997
(In Thousands Except Share Data)

(Unaudited)

<TABLE>
<CAPTION>
March 31,
1997
---------
<S> <C>
ASSETS

Cash and Investments $ 66,562
Accounts Receivable 55,625
Reinsurance Recoverable, net 69,896
Deferred Policy Acquisition costs 13,234
Deferred Reinsurance Premiums 29,208
Other Assets 13,460
---------
Total Assets $ 247,985
=========

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
Reserve for losses and loss adjustment expenses $ 135,573
Unearned premiums 50,566
Other policy liabilities 16,833
Agency payables to insurance companies (1,463)
Accounts payable and other liabilities 10,690
---------
Total Liabilities 212,199

Commitment and Contingent Liabilities
Series B Cumulative Preferred Stock, $.01 par value; 162,857 shares
authorized, 142,857 shares issued and outstanding 1,428
Series D Cumulative Convertible Redeemable Preferred Stock, $0.01
par value; 546,200 shares authorized, 350,000 shares issued and
outstanding at December 31, 1996 and 357,875 at March 31, 1997 33,952
Stockholders' equity:
Common Stock, $.01 par value, 21,000,000 shares authorized,
7,047,098 shares issued 71
Additional Paid-In Capital 45,600
Unrealized Depreciation on Investment Securities, net (467)
Retained Earnings (Deficit) (44,711)
Less - 73,882 shares of Common Stock Held in Treasury, at cost (87)
---------
Total Stockholders' Equity 406
---------
Total Liabilities and Stockholders' Equity $ 247,985
=========
</TABLE>

The accompanying notes are an integral part of these
financial statements.

F-25
<PAGE> 122

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE PERIODS ENDED MARCH 31, 1997 AND 1996
(In Thousands Except Share Data)

(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Revenues:
Earned Premiums, Net $ 23,806 $ 32,834
Agency Operations, Net 326 (33)
Investment Income, Net 1,278 1,403
Realized Investment Gains (Losses), Net (58) 153
----------- -----------

Total Revenues 25,352 34,357
----------- -----------

Expenses:
Losses and Loss Adjustment Expenses, Net of
Reinsurance 19,953 27,519
Policy Acquisition and Other Underwriting Expenses 11,142 10,758
Interest Expense 250
----------- -----------
Total Expenses 31,095 38,527
----------- -----------

Income (Loss) before Income Tax Expense (5,743) (4,170)
Income Tax Expense (Benefit) - (1,418)
----------- -----------
Net Income (Loss) $ (5,743) $ (2,752)
=========== ===========

Net Income (Loss) Available for Common Stockholders(1) $ (6,552) (2,776)
=========== ===========

Weighted Average Number of Common Shares
Outstanding 7,048,898 7,050,548
=========== ===========

Net Income (Loss) Per Share of Common Stock(1) $ (0.93) $ (0.39)
=========== ===========
</TABLE>

(1) After deduction of preferred dividends

The accompanying notes are an integral part of these
financial statements.

F-26
<PAGE> 123

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(In Thousands)

(Unaudited)

<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
-------- --------
<S> <C> <C>
Cash and Cash Equivalents Derived From:

Total Provided by (Used in) Operating Activities $(22,358) $(16,795)
-------- --------

Investing Activities-
Net proceeds (purchases) of short-term investments (2,652) 24,730
Purchases of fixed income securities (15,583) (14,587)
Proceeds from sales of fixed income securities 15,428 6,119
Proceeds from maturities of fixed income securities 3,065 100
Purchases of property and equipment 1,054 (325)
-------- --------

Total Provided by (Used in) Investing Activities 1,312 16,037
-------- --------

Financing activities-
Dividends paid on Series B and D Cumulative Preferred Stock (806) (24)
Dividends paid on common stock - (282)
Proceeds from issuance of preferred stock 785 -
Redemption of Series B Cumulative Preferred Stock (201) -
Total Provided by (Used in) Financing Activities (222) (306)
-------- --------

Net Change in Cash and Cash Equivalents (21,268) (1,064)

Cash and Cash Equivalents, Beginning of Period 23,093 2,922
-------- --------

Cash and Cash Equivalents, End of Period $ 1,825 $ 1,858
======== ========
</TABLE>

F-27
<PAGE> 124

AMERICAN EAGLE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

1. BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements of the
American Eagle Group, Inc. (the "Company") and subsidiaries for the three
months ended March 31, 1997 and 1996 have been prepared in accordance with
generally accepted accounting principles and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.

In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation of the results
for the interim period have been included. Operating results for the three
months ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. These statements should
be read in conjunction with the financial statements and notes thereto for the
year ended December 31, 1996 included elsewhere in the Proxy Statement.

2. SALE OF OPERATIONS:

As previously announced, the Company has entered into transactions to sell its
aviation and artisan contractor insurance operations. The closing of the
aviation transaction will require approval by the Company's stockholders,
although stockholders owning a majority of the Company's voting stock have
agreed to vote in favor of the transaction. The closing of the aviation
transaction is also subject to regulatory approvals and other customary
conditions. The closing of the artisan transaction is subject to required
regulatory approvals and licenses and other customary conditions. The Company
has also entered into a letter of intent to sell its marine operations. The
closing of the marine transaction is subject to definitive documentation,
Boards' of Directors approvals, required regulatory approvals and licenses and
other customary conditions.

F-28
<PAGE> 125
APPENDIX I

[CREDIT SUISSE FIRST BOSTON CORPORATION LETTERHEAD]

April 11, 1997

Board of Directors
American Eagle Group, Inc.

Board of Directors
American Eagle Insurance Company
12801 North Central Expressway, Suite 800
Dallas,Texas 75243

Gentlemen:

This letter will confirm the advice given to you in connection with your
consideration of the proposed sale of the aviation business and certain other
assets ("Aviation") of American Eagle Group, Inc. (the "Company") to American
Financial Group, Inc. ("AFG") on the terms and conditions described to you at
a meeting held on April 11, 1997.

As noted at your meeting, Credit Suisse First Boston Corporation contacted 13
potential purchasers other than AFG. Also, the Company issued a press release
on March 22, 1997 that included the statement that "the Company has engaged
Credit Suisse First Boston to review and develop capital and strategic
alternatives to maximize shareholder value ... including, among other things,
sale of the Company or assets of the Company, a rights offering to
stockholders, a sale of securities, and other alternatives to increase
underwriting capacity." Only one party other than AFG submitted a proposal with
respect to either the Company or Aviation, and we believe this proposal was
less favorable to the Company than the AFG proposal from a financial point of
view.

We also discussed with you the financial condition and prospects of the
Company, including the distressed financial position of the Company and the
near-term liquidity needs of, and capital resources available to, the Company.
In particular, we noted the following with regard to the Company's current
situation:

o RECENT OPERATING RESULTS: The Company has experienced
deteriorating financial results due to high claims activity and
adverse reserve development in both its non-aviation lines of
business and its core aviation line of business. For 1996, the
Company reported a GAAP net loss of $44.4 million, including $30
million of reserve additions. American Eagle Insurance Company's
("AEIC") statutory surplus had dropped to $20.4 million as of
December 31, 1996.

o RATINGS DOWNGRADES: The Company's claims-paying ratings were
downgraded twice by A.M. Best during 1996, and again on March
25, 1997:

- March 4, 1996 A.M. Best downgraded the Company to B++ from
A- "reflecting the company's decreased capitalization and
operating profitability."

- May 24, 1996 A.M. Best downgraded the Company to B and
placed a negative outlook on the rating pending the outcome
of the Company's capital-raising efforts.

- March 25, 1997 A.M. Best downgraded the Company from B
("vulnerable") to D ("poor"). Best said the downgrade
"reflects its view that [the Company's] weakened financial
condition makes it 'extremely vulnerable' to unfavorable

<PAGE> 126

Board of Directors
American Eagle Group, Inc.
Board of Directors
American Eagle Insurance Company
April 11, 1997

Page 2

changes in underwriting or economic conditions. It said it was also
concerned over potential regulatory response to the position of [the
Company), whose capitalization, it said, had fallen below mandatory
control level of risk-based capital."

The Company has advised us that claims-paying ratings are important to the
Company's business and that agents tend to focus on ratings as a key
element in their decision to place insurance with a company and that many
insureds, including municipal airports (one of the Company's target
markets), require that their insurer have at least an "A" rating from A.M.
Best.

o AFG WRITE DOWN: On March 27, 1997, AFG announced "that it has written
down its $35 million investment in [the Company], effective as of December
31, 1996."

o REGULATORY ACTION: Discussions between the Company, AEIC and their various
regulators.

o FUTURE PROSPECTS: The Company's management has advised us that prospects
for future earnings performance are poor without additional capital and
that the Company's preliminary first quarter results are a net loss of
$2.9 million.

o STOCK PRICE PERFORMANCE: In May 1994, the Company sold its common stock
in an initial public offering at $10 per share. The Company's stock price
closed as high as $12 1/8 and closed above $10 as late as February 1996.
Following the Company's report of disappointing fourth quarter 1995
results, including a special charge, during the first quarter of 1996, the
stock price began to deteriorate steadily and traded in a range of $3 3/8
to $4 1/8 prior to the announcement of the sale of the Series D Preferred
Stock to AFG. Following the announcement of the sale of the Series D
Preferred Stock to AFG, the Company's stock price traded as high as $5 1/2
but has dropped to $1 1/2 as of April 9.

Given the Company's financial condition and prospects and the fact that the
solicitation process failed to produce any proposals at this time (other than
the AFG proposal and the one other proposal referenced above), we advised you
that a sale of Aviation to AFG at this time, on the terms and conditions
described to you at your meeting of April 11, would result in more value to
the Company, from a financial point of view, than any other which we together
explored.

Very truly yours,

/s/ JONATHAN PLUTZIK

Jonathan Plutzik
Managing Director
<PAGE> 127
APPENDIX II

PURCHASE AGREEMENT

AMONG

GREAT AMERICAN INSURANCE COMPANY

AND

AMERICAN EAGLE INSURANCE COMPANY

AND

AMERICAN EAGLE GROUP, INC.

DATED APRIL 11, 1997
<PAGE> 128
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. Purchase and Sale of Aviation Business . . . . . . . . . . . . 1

SECTION 2. Purchase of Other Assets . . . . . . . . . . . . . . . . . . . 1

SECTION 3. Reinsurance of Later Business . . . . . . . . . . . . . . . . 2

SECTION 4. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

SECTION 5. Purchase Price and Other Payments . . . . . . . . . . . . . . 3

Section 5.1 Purchase Price . . . . . . . . . . . . . . . . . . . . 3
Section 5.2 Additional Payments . . . . . . . . . . . . . . . . . . 5

SECTION 6. Assumption of Liabilities . . . . . . . . . . . . . . . . . . 6

SECTION 7. Change in Name . . . . . . . . . . . . . . . . . . . . . . . . 6

SECTION 8. Further Assurances . . . . . . . . . . . . . . . . . . . . . . 7

SECTION 9. Representations, Warranties and Covenants of Seller and AEGI . 7

SECTION 10. Representations, Warranties and Covenants of Purchaser . . . . 13

SECTION 11. Covenants of Seller . . . . . . . . . . . . . . . . . . . . . 14

SECTION 12. Conditions to Closing - Purchaser . . . . . . . . . . . . . . 16

SECTION 13. Conditions to Closing - Seller . . . . . . . . . . . . . . . . 17

SECTION 14. Shareholder Approval . . . . . . . . . . . . . . . . . . . . . 18

SECTION 15. Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . 18

SECTION 16. Certain Terminations . . . . . . . . . . . . . . . . . . . . . 18

SECTION 17. Noncompete/No Solicitation and Other Actions . . . . . . . . . 19

SECTION 18. Termination . . . . . . . . . . . . . . . . . . . . . . . . . 20

SECTION 19. Effect of Termination . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
<PAGE> 129
- ii -

<TABLE>
<S> <C>
SECTION 20. Indemnification . . . . . . . . . . . . . . . . . . . . . . 21

Section 20.1 General Indemnification Obligation of Seller and AEGI . 21
Section 20.2 General Indemnification Obligation of Purchaser . . . . 22
Section 20.3 Method of Asserting Claims, Etc. . . . . . . . . . . . 22
Section 20.4 Payment . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 20.5 Other Rights and Remedies Not Affected . . . . . . . . 24
Section 20.6 Limitations on Amount -- Seller and AEGI . . . . . . . 24
Section 20.7 Limitations on Amount - Purchaser . . . . . . . . . . . 24

SECTION 21. Compliance with Bulk Sales Laws . . . . . . . . . . . . . . 24

SECTION 22. Default under the Agreement . . . . . . . . . . . . . . . . 25

SECTION 23. Transition . . . . . . . . . . . . . . . . . . . . . . . . . 25

SECTION 24. Survival of Representations and Warranties . . . . . . . . . 25

SECTION 25. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 26

SECTION 26. Press Releases . . . . . . . . . . . . . . . . . . . . . . . 26

SECTION 27. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

SECTION 28. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 27

SCHEDULES

Schedule 1 Schedule of Aviation Business Assets
Schedule 2 Balance Sheet
Schedule 9(d) Uncollectible Accounts Receivable
Schedule 9(g) Existing Condition of Business
Schedule 9(i) Condition of Tangible Assets
Schedule 9(l) Ownership of Software
Schedule 9(p) Agents and Brokers
Schedule 9(r) Legal Actions
Schedule 9(t) Schedule of Reinsurance Contracts
Schedule 9(u) Consents and Authorizations
Schedule 9(w) Schedule of Material Contracts
Schedule 10(c) Consents Required of Purchaser
Schedule 17(b) Schedule of Excluded Employees
</TABLE>
<PAGE> 130
- iii -

<TABLE>
<S> <C>
EXHIBITS

Exhibit A Quota Share Reinsurance Agreement
Exhibit B Reinsurance Agreement
Exhibit C Claims Servicing Agreement
Exhibit D Computer System Use Agreement
Exhibit E Mutual Release
Exhibit F Commitment of Mason Best
</TABLE>

<PAGE> 131

PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT, dated as of April 11, 1997, is entered into
among GREAT AMERICAN INSURANCE COMPANY, an Ohio corporation (hereinafter called
the "Purchaser"), AMERICAN EAGLE INSURANCE COMPANY, a Texas corporation
(hereinafter called the "Seller") and AMERICAN EAGLE GROUP, INC., a Delaware
corporation (hereinafter called "AEGI").

RECITALS

WHEREAS, Purchaser desires to purchase from Seller and AEGI and Seller
and AEGI desire to sell to Purchaser certain aviation insurance business and
other rights and assets in connection therewith, all as more fully set forth
herein; and

NOW, THEREFORE, in consideration of the foregoing, the Purchase Price
(as hereinafter defined), the release of certain claims, the mutual agreements
and other consideration hereinafter set forth, Purchaser and Seller hereby
agree as follows:

SECTION 1. PURCHASE AND SALE OF AVIATION BUSINESS.

On the basis of the representations and warranties herein contained, for
the consideration and subject to the terms and conditions herein set forth,
Seller hereby agrees to convey, sell, assign, transfer and deliver to Purchaser
on the Closing Date (as defined in Section 4 below), and Purchaser agrees to
acquire, receive, assume and accept assignment, transfer and delivery from
Seller on the Closing Date, Seller's right, title, interest and obligations in,
to and under all aviation insurance business, as more fully described on
Schedule 1 attached hereto and incorporated herein by this reference, which was
written or assumed by Seller, during the period commencing January 1, 1993 and
ending March 31, 1997 (the "Aviation Business") which Aviation Business, when
and if renewed through the respective agents and brokers therefor, shall be
effected by the issuance of policies by Purchaser.

SECTION 2. PURCHASE OF OTHER ASSETS.

In addition to the Aviation Business, the following assets will be sold
and conveyed by Seller to Purchaser on the Closing Date (the Aviation Business
and the following assets, collectively referred to as the "Assets"):

(a) All assets and properties reflected on the March 31, 1997 ("Balance
Sheet Date") Balance Sheet, attached hereto as Schedule 2 (the "Balance
Sheet").
<PAGE> 132
- 2 -

(b) All right, title and interest of Seller and AEGI in and to the computer
equipment and software used in connection with the Aviation Business,
and the Reinsured Business (as hereinafter defined) including, without
limitation, any license agreement relating thereto;

(c) All right, title and interest of Seller and AEGI in and to the lease for
the eighth and ninth floors located in the building in which Seller's
offices at 12801 North Central Expressway, Dallas, Texas are located
(the "Office Lease");

(d) All right, title and interest of Seller and AEGI in and to the names
"American Eagle Insurance Company" and "American Eagle Group, Inc."
including, without limitation, any and all trademarks or trademark
applications pertaining thereto and all patents, trademarks, tradenames,
service marks, copyright, the Software (as hereinafter defined), trade
secrets or know-how used in the Aviation Business (the "Intellectual
Property");

(e) All right, title and interest of Seller in and to the Reinsurance
Contracts (as hereinafter defined);

(f) All right, title and interest of Seller and AEGI in and to all
furniture, fixtures and tangible personal property used in connection
with the Aviation Business or the Reinsured Business; and

(g) All right, title and interest of Seller and AEGI in and to all other
tangible and intangible property relating to or used in connection with
the Aviation Business or the Reinsured Business; provided, however, the
assets listed on the attached Schedule 2 shall not be included in the
definition of Assets hereunder.

SECTION 3. REINSURANCE OF LATER BUSINESS.

Seller and Purchaser will enter into a Quota Share Reinsurance Agreement
in the form attached hereto marked Exhibit A and incorporated herein by this
reference effective as of the date hereof pursuant to which Purchaser will
reinsure all aviation business of Seller in force as of April 1, 1997 and all
aviation business, written or renewed by Seller after March 31, 1997 and before
such time as Purchaser is qualified to issue directly its own policies as
contemplated by Section 23(a) (the "Reinsured Business").

SECTION 4. CLOSING.

The closing for the transactions contemplated by this Agreement shall take
place at the offices of Seller, or such other place as may be agreed to in
writing by Purchaser and Seller, within three (3) business days of the
satisfaction of the conditions of closing set forth in Sections 12 and 13 of
this Agreement, but not later than July 31, 1997 (the "Termination Date"),
unless extended by mutual
<PAGE> 133
- 3 -

consent in writing by the parties hereto. The date and time of the closing are
referred to herein as the "Closing Date" and the consummation of the
transactions to be consummated on the Closing Date is referred to herein as the
"Closing".

SECTION 5. PURCHASE PRICE AND OTHER PAYMENTS.

Section 5.1 Purchase Price. Subject to the terms and conditions
herein stated, the parties hereto agree that, effective as of the Closing Date:

(a) Seller shall deliver and convey to Purchaser assets having a market
value equal to all liabilities of the Aviation Business and the
Reinsured Business, including, without limitation, all loss and loss
adjustment expense reserves and reserves for incurred but not reported
losses, all as reflected on the Balance Sheet.

(b) In addition to the payment required by subsection 5.1(d) below,
Purchaser shall pay to Seller, as a commission, an amount equal to
thirty percent (30%) of unearned premiums to be transferred to
Purchaser.

(c) In addition to payments required by subsection 5.1(b) above and 5.1(d)
below, Purchaser shall pay to Seller an amount equal to the book value,
adjusted for depreciation (as determined by generally accepted
accounting principles) of all furniture, fixtures and equipment,
including electronic data processing equipment included within the
Assets.

(d) In consideration for conveyance of the Assets to Purchaser, Purchaser
shall convey and deliver to Seller all shares of the Series D Preferred
Stock of AEGI owned by Purchaser, together with undated stock powers
duly endorsed in blank. The shares of Series D Preferred Stock shall be
conveyed free and clear of any liens, mortgages, security interests or
other claims whatsoever.

(e) Within twenty (20) days after the Closing, Purchaser shall prepare a
balance sheet as of the Closing Date ("Closing Date Balance Sheet") for
the Aviation Business using the same format and methodology employed in
preparing the Balance Sheet. Using the amounts reflected on such
Closing Date Balance Sheet, the following adjustments shall be made to
the Investment Account (as hereinafter defined):

(i) If the total of the Assets reflected on the Closing Date
Balance Sheet other than Investments (collectively the "Other Assets")
is greater than the total amount of the Other Assets shown on the
Balance Sheet, the amount reflected on the Balance Sheet as Investments,
(hereafter, the "Investment Account") shall be reduced by such amount;
<PAGE> 134
- 4 -

(ii) If the total of the Other Assets reflected on the Closing
Date Balance Sheet is less than the total amount of the Other Assets
shown on the Balance Sheet, the Investment Account shall be increased by
such amount;

(iii) If the total of the Liabilities reflected on the Closing
Date Balance Sheet other than Loss and Loss Adjustment Expense Reserves
(which shall be the same as shown on the Balance Sheet) (collectively
the "Other Liabilities") is greater than the total amount of the Other
Liabilities shown on the Balance Sheet, the Investment Account shall be
increased by such amount;

(iv) If the total of the Other Liabilities reflected on the
Closing Date Balance Sheet is less than the total amount of the Other
Liabilities shown on the Balance Sheet, the Investment Account shall be
reduced by such amount;

(v) The Investment Account shall be reduced by all cash claims
paid after March 31, 1997 by the Seller with respect to the Aviation
Business and the Reinsured Business after deducting any amounts paid by
Purchaser under the Quota Share Reinsurance Agreement;

(vi) The Investment Account shall be increased by all
reinsurance premiums payable to the Purchaser (net of ceding commissions
due Seller) under the Quota Share Reinsurance Agreement; and

(vii) If the amount of the Investment Account as adjusted in
accordance with (i) through (vi) above increases, the amount of such
increase shall be paid to Purchaser by delivery of cash or readily
marketable securities. If the amount of the Investment Account
decreases, the amount of such decrease shall be paid to Seller by
delivery of cash or readily marketable securities. Any amounts payable
hereunder shall be due and payable within ten (10) days of the delivery
of the Closing Date Balance Sheet, if there shall not be any dispute
with respect thereto, or within five (5) days after the resolution of
any dispute relating thereto.

(f) Any dispute which may arise between Seller and Purchaser as to the
Closing Date Balance Sheet or the proper amount of the adjustment to
the Investment Account shall be resolved in the following manner:

(i) Seller, if it disputes the Closing Date Balance Sheet or
the amount of the adjustment to the Investment Account, shall notify
Purchaser in writing within ten (10) days after the issuance of the
Closing Date Balance Sheet pursuant hereto that Seller disputes the
Closing Date Balance Sheet or the amount of the adjustment to the
Investment Account; such notice shall specify in reasonable detail the
nature of the dispute;
<PAGE> 135
- 5 -

(ii) during the ten (10) day period following the date of such
notice, Seller and Purchaser shall attempt to resolve such dispute and
to determine the appropriateness of the Closing Date Balance Sheet or
the adjustment to Investment Account; and

(iii) if at the end of the ten (10) day period specified in
subsection (ii) above, Seller and Purchaser shall have failed to reach a
written agreement with respect to such dispute, the matter shall be
referred to Deloitte & Touche, independent certified public accountants
(the "Arbitrator"), which shall act as an arbitrator and shall issue its
report as to the Closing Date Balance Sheet or the adjustment to
Investment Account within sixty (60) days after such dispute is referred
to the Arbitrator. Each of the parties hereto shall bear all costs and
expenses incurred by it in connection with such arbitration, except that
the fees and expenses of the Arbitrator hereunder shall be borne equally
by Seller and Purchaser. This provision for arbitration shall be
specifically enforceable by the parties and the decision of the
Arbitrator in accordance with the provisions hereof shall be final and
binding and there shall be no right of appeal therefrom.

(g) Seller shall provide to Purchaser the files and records comprising the
underwriting, policy, producer and claims files and related daily report
files maintained by Seller in the operation of the Aviation Business
(the "Files").

(h) Purchaser and Seller shall each execute and deliver such instruments,
and take or cause to be taken such further action as may be reasonably
necessary or desirable in order to consummate the Closing hereunder.

Section 5.2 Additional Payments.

(a) Within 30 days after receipt by Purchaser, Purchaser shall remit to
Seller an amount equal to all funds collected by Purchaser with respect
to all Agent's Balances of the Aviation Business which are in excess of
90 days old as of the Closing Date.

(b) Purchaser shall pay to Seller a commission equal to Four Percent (4%) of
the Renewal Premiums (as hereinafter defined ) received by Purchaser
during the first year following the Closing Date on all Aviation
Business and Reinsured Business transferred to Purchaser.

(c) Purchaser shall pay to Seller a commission equal to Two Percent (2%) of
the Renewal Premiums (as hereinafter defined) received by Purchaser
during the second year following the Closing Date on all Aviation
Business and Reinsured Business transferred to Purchaser.

(d) Purchaser shall pay to Seller a commission equal to One Percent (1%) of
the Renewal Premiums (as hereinafter defined) received by Purchaser
during the third year following the Closing Date on all Aviation
Business and Reinsured Business transferred to Purchaser.
<PAGE> 136
- 6 -

For purposes of this Agreement, Renewal Premiums shall mean all direct
written premiums on policies renewed after the Closing Date less the sum of any
return premiums or cancellations . Amounts payable to Seller under Sections
5.2(b), (c) and (d) above shall be paid quarterly in arrears within thirty (30)
days after the end of each quarter.

SECTION 6. ASSUMPTION OF LIABILITIES.

At the Closing and except as otherwise specifically provided in this
Section 6, Purchaser shall assume and agree to pay, discharge or perform, as
appropriate, the following liabilities and obligations of Seller:

(a) All liabilities and obligations of Seller in respect of the Aviation
Business existing as of the Balance Sheet Date, but only if and to the
extent that the same are accrued or reserved for on the Balance Sheet
and remain unpaid and undischarged on the Closing Date except Loss and
Loss Adjustment Expense Reserves.

(b) All unpaid losses and unpaid loss adjustment expenses of Seller with
respect to the Aviation Business arising in the regular and ordinary
course on or after January 1, 1993.

(d) Bad faith liability claims arising under policies identified on Schedule
9(w) and other litigation listed on Schedule 9(r) hereof.

The foregoing described liabilities and the obligations of the Purchaser
under the Quota Share Reinsurance Agreement (Exhibit "A") and the Reinsurance
Agreement (Exhibit "B") are hereinafter referred to as the "Assumed
Liabilities."

NOTWITHSTANDING ANY PROVISION HEREIN TO THE CONTRARY, PURCHASER SHALL
NOT ASSUME OR BECOME LIABLE IN ANY MANNER FOR ANY LIABILITY OR OBLIGATION OF
SELLER OR AEGI, AND SELLER AND AEGI SHALL REMAIN SOLELY RESPONSIBLE FOR ANY AND
ALL LIABILITIES AND OBLIGATIONS OF SELLER AND AEGI, OTHER THAN THE ASSUMED
LIABILITIES.

SECTION 7. CHANGE IN NAME.

On the Closing Date, Seller and AEGI shall deliver to Purchaser all such
executed documents as may be required to change Seller's and AEGI's names on
that date to names bearing no similarity to American Eagle, including but not
limited to a name change amendments with the Secretaries of State of Texas and
Delaware. Within one hundred eighty days (180) after the Closing Date, AEGI
and Seller shall file appropriate name change notices for each state where
Seller and AEGI are
<PAGE> 137
- 7 -

qualified to do business. Seller and AEGI hereby appoint Purchaser as their
attorney-in-fact to file all such documents on or after the Closing Date.

SECTION 8. FURTHER ASSURANCES.

Seller and AEGI from time to time after the Closing, at Purchaser's
request, will, execute, acknowledge and deliver to Purchaser such other
instruments of conveyance and transfer and will take such other actions and
execute and deliver such other documents, certifications and further assurances
as Purchaser may reasonably require in order to vest more effectively in
Purchaser, or to put Purchaser more fully in possession of, any of the Assets,
or to better enable Purchaser to complete, perform or discharge any of the
Assumed Liabilities. Each of the parties hereto will cooperate with the other
and execute and deliver to the other parties hereto such other instruments and
documents and take such other actions as may be reasonably requested from time
to time by any other party hereto as necessary to carry out, evidence and
confirm the intended purposes of this Agreement.

SECTION 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER AND AEGI.

Seller and AEGI represent, warrant and covenant to Purchaser as follows:

(a) Corporate Existence, Corporate Power. Each of the Seller and AEGI is a
corporation, duly organized, validly existing and in good standing under
the laws of the state of its incorporation, and, subject to receipt of
requisite shareholder approval, each has the requisite corporate power
and authority to consummate the transactions contemplated and to perform
its respective obligations under this Agreement. The Board of Directors
of Seller and AEGI have approved the execution of this Agreement and
Seller and AEGI will have, prior to the Closing Date, taken all other
corporate action required by law, its respective certificate of
incorporation, by-laws or otherwise, to authorize the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby.

(b) Enforceability. This Agreement and the other transaction documents have
been, or on or prior to the Closing Date will be, duly executed and
delivered on behalf of the Seller and AEGI, and constitute, or will
constitute, the legal, valid and binding obligation of the Seller and
AEGI, enforceable against them in accordance with their terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the enforcement of
creditors' rights generally and by general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity
or at law).

(c) Balance Sheets. The Balance Sheet, including the related notes, fairly
present the financial position, assets and liabilities (whether accrued,
absolute, contingent or otherwise) of the Aviation Business as of the
Balance Sheet Date. The Balance Sheet specifically identifies
<PAGE> 138
- 8 -

the assets and liabilities which, if the Closing had been held on the
Balance Sheet Date, would have been transferred to or assumed by
Purchaser in accordance herewith.

(d) Accounts Receivable. The accounts receivable of Seller arising from the
Aviation Business and Reinsured Business as set forth on the Balance
Sheet are valid and genuine; have arisen solely out of bona fide sales
and deliveries of goods, performance of services and other business
transactions in the ordinary course of business consistent with past
practice; are not subject to valid defenses, set-offs or counterclaims;
and except as set forth on Schedule 9(d), to Seller's knowledge, are
collectible within ninety (90) days after billing at the full recorded
amount thereof less, in the case of accounts receivable appearing on the
Balance Sheet, the recorded allowance for collection losses on the
Balance Sheet.

(e) Tax and Other Returns and Reports. The Seller and AEGI have filed or
caused to be filed all tax returns which are required to be filed in
connection with the Aviation Business and the Reinsured Business and all
taxes shown to be due and payable on said returns or on any assessments
made against Seller or AEGI, any of their property, and all other taxes,
fees or other charges imposed on Seller or AEGI, or any of their
property by any governmental authority that are due and payable, have
been paid (other than any taxes, fees or other charges the amount or
validity of which are currently being contested in good faith by
appropriate proceedings and with respect to which adequate reserves in
conformity with GAAP have been provided on the books of the Seller or
AEGI); to the knowledge of Seller and AEGI, no tax lien has been filed
and no claim is being asserted, with respect to any such tax, fee or
other charge.

(f) Books of Account. The books, records and accounts of Seller have been
maintained accurately and fairly reflect, in reasonable detail, the
transactions and the assets and liabilities of Seller with respect to
the Aviation Business and Reinsured Business. Seller has not engaged in
any transaction with respect to the Aviation Business and Reinsured
Business, maintained any bank account for the Aviation Business and
Reinsured Business or used any of the funds of Seller in the conduct of
the Aviation Business and Reinsured Business except for transactions,
bank accounts and funds which have been and are reflected in the
normally maintained books and records of the business.

(g) Existing Condition. Except as set forth on Schedule 9(g), since the
Balance Sheet Date, Seller with respect to the Aviation Business and
Reinsured Business has not:

(i) incurred any liabilities, other than liabilities incurred in the
ordinary course of business consistent with past practice, or
discharged or satisfied any lien or encumbrance, or paid any
liabilities, other than in the ordinary course of business
consistent with past practice, or failed to pay or discharge when
due any liabilities of which the failure to pay or discharge has
caused or will cause any material damage or risk of material loss
to it or any of its assets or properties;
<PAGE> 139
- 9 -

(ii) sold, encumbered, assigned or transferred any assets or
properties, except for the sale of inventory in the ordinary
course of business consistent with past practice;

(iii) made or suffered any amendment or termination of any material
agreement, contract, commitment, lease or plan to which it is
party or by which it is bound, or cancelled, modified or waived
any substantial debts or claims held by it or waived any rights
of substantial value, whether or not in the ordinary course of
business; or

(iv) entered into any transaction other than in the ordinary course of
business consistent with past practice.

(h) Title to Properties. Seller has good and valid title to all of its
properties and assets, real, personal and mixed, which are included in
the Assets (except for inventory sold since the date thereof in the
ordinary course of business consistent with past practice), which Assets
shall be on the Closing Date free and clear of all mortgages, liens,
pledges, security interests, charges, claims, restrictions, other third
party interests, and other encumbrances and defects of title of any
nature whatsoever, except for liens for current real or personal
property taxes not yet due and payable.

(i) Condition of Tangible Assets. All buildings, structures, facilities,
equipment and other material items of tangible property and assets which
are included in the Assets are in good operating condition and repair,
subject only to normal wear and maintenance, are usable in the regular
and ordinary course of business and conform to all applicable laws,
ordinances, codes, rules and regulations, and authorizations relating to
their construction, use and operation. No person other than Seller owns
any equipment or other tangible assets or properties situated on the
premises of Seller or necessary to the operation of the Aviation
Business, except for leased items disclosed on Schedule 9(i).

(j) Employee Benefit Plans and Arrangements.

(i) For the purposes hereof, the term "employee benefit plan"
includes all plans, funds, programs, policies, arrangements,
practices, customs and understandings providing benefits of
economic value to any employee, former employee, or present or
former beneficiary, dependent or assignee of any such employee or
former employee other than regular salary, wages or commissions
paid substantially concurrently with the performance of the
services for which paid. Without limitation, the term "employee
benefit plan" includes all employee welfare benefit plans within
the meaning of section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), all employee pension
benefit plans within the meaning of section 3(2) of ERISA.
<PAGE> 140
- 10 -

(ii) Seller has not directly or indirectly acted in any manner or
incurred any obligation or liability, and will not directly or
indirectly act in any manner in the future or incur any
obligation or liability in the future with respect to any
employee benefit plan which has or could give rise to any liens
on any of the Assets, or which could result in any liability or
obligation to Purchaser, whether arising out of the
establishment, operation, administration or termination of such
benefit plan or the transactions contemplated by this Agreement.

(iii) Seller has timely provided or will timely provide all notices and
any continuation of health benefit coverage (including, without
limitation, medical and dental coverage) required to be provided
to employees, former employees or the beneficiaries or dependents
of such employees or former employees, under Part 6 of Subtitle B
of Title I of ERISA or, as applicable, COBRA to the extent such
notices and continuation of health benefit coverage are required
to be provided by reason of the events occurring prior to or on
the Closing Date or by reason of the transactions contemplated by
this Agreement. To the extent required by COBRA, Seller will
treat its employees (and their dependents and beneficiaries) as
of the Closing Date as having incurred a "qualifying event"
(within the meaning of ERISA Section 603 and, as applicable, Code
Section 4980B(f)(3)) on the Closing Date. Seller will continue
the health benefit coverage required by COBRA.

(k) Intellectual Property Matters. The Seller in the conduct of the
Aviation Business does not infringe upon or unlawfully or wrongfully use
any Intellectual Property owned or claimed by another.

(l) The Software.

(i) Performance. The computer software of Seller included in the
Intellectual Property (the "Software") contains all computer
programs, materials, tapes, know-how, object and source codes,
other written materials, know-how and processes used in
connection with the Aviation Business and the Reinsurance
Business. Seller has delivered to the Purchaser complete and
correct copies of all user and technical documentation related to
the Software.

(ii) Title. Except as set forth on Schedule 9(l), all right, title
and interest in and to the Airpack System and Eagle Express
System is owned by Seller, free and clear of all liens, claims,
charges or encumbrances, are fully transferable to the Purchaser,
and no party other than Seller has any interest in the Software,
including without limitation, any security interest, license,
contingent interest or otherwise. Seller's development, use,
sale or exploitation of the Software does not violate, any rights
of any other person or entity and Seller has not received any
communication alleging such a violation. Seller does not have
any obligation to compensate any person for the development, use,
sale or exploitation of the Software nor has Seller granted to
<PAGE> 141
- 11 -

any other person or entity any license, option or other rights to
develop, use, sell or exploit in any manner the Software, whether
requiring the payment of royalties or not.

(iii) Delivery of All Copies. All copies of the Software embodied in
physical form are being delivered to the Purchaser at or prior to
the Closing.

(m) Environmental Matters. Except for any violation which, individually or
in the aggregate, would not have a material adverse effect on the
Assets, the Aviation Business or Reinsurance Business, Seller is not in
violation of any laws, rules or regulations relating to pollution or
protection of the environment, including regulations relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or
wastes into the environment (including, without limitation, ambient air,
surface water, groundwater, or land), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, chemicals,
or industrial, toxic or hazardous substances or wastes.

(n) Assets. Except for licenses, permits and governmental authorizations
required to operate the Aviation Business and the Reinsurance Business
which are not transferable, the Assets include all rights and property
essential to the conduct of the Aviation Business by Purchaser in the
manner it is presently conducted by Seller and no property excluded from
the Assets constitutes property or rights material to the Aviation
Business.

(o) Solvency. After giving effect to the transactions contemplated by this
Agreement, each of the Seller and AEGI, individually and on a
consolidated basis, will be solvent, able to pay its debts as they
mature, have capital sufficient to carry on its business and all
businesses in which it is about to engage, and

(i) the assets of each of Seller and AEGI, individually and on a
consolidated basis, at a fair valuation, exceed the total
liabilities (including contingent, subordinated, unmatured and
unliquidated liabilities) of Seller and AEGI;

(ii) current projections which are based on underlying assumptions
which provide a reasonable basis for the projections and which
reflect Seller's judgment based on present circumstances, the
most likely set of conditions and Seller's most likely course of
action for the period projected, demonstrate that Seller and
AEGI, individually and on a consolidated basis, will have
sufficient cash flow to enable them to pay their debts as the
mature or the Seller is reasonably satisfied that it will be able
to refinance such debt at or prior to maturity on commercially
reasonable terms; and

(iii) Seller and AEGI do not have an unreasonably small capital base
with which to engage in its anticipated business.
<PAGE> 142
- 12 -

(p) Agents and Brokers. Schedule 9(p) is a true, complete and accurate list
of the agents and brokers which have generated Aviation Business and
Reinsured Business that is currently in-force with Seller.

(q) Information. The Files include the underwriting, policy, producer and
claims information and records normally generated and maintained by
Seller in the ordinary course of its operation of the Aviation Business
and the Reinsured Business.

(r) Legal Actions. As of the date hereof, except as set forth on Schedule
9(r), to the knowledge of Seller and AEGI, there are no legal actions,
arbitrations, suits or proceedings (other than claims pending for
benefits under insurance policies) in any court or before any
governmental agency or instrumentality pending against the Seller or
AEGI which could materially adversely effect the Aviation Business or
the Reinsured Business. As of the date hereof, to the knowledge of
Seller and AEGI, there are no legal actions, arbitrations, suits, or
proceedings pending in any court or before any governmental agency or
instrumentality against the Seller or AEGI which would prevent the
carrying out of this Agreement or any of the transactions contemplated
hereby or declare the same unlawful or cause the rescission thereof.
Except as disclosed on Schedule 9(r), the Seller has not been charged
with or, to its knowledge, been threatened with or is under any
investigation with respect to, any charge concerning any material
violation of any provision of any federal, state, local or foreign law,
regulation, ordinance, order or administrative ruling affecting the
Insurance Business or the Reinsured Business, and, except as disclosed
on Schedule 9(r), neither Seller nor AEGI is, to its knowledge, in
default with respect to any order, writ, injunction or decree of any
court, arbitration panel, agency or instrumentality affecting the
Aviation Business or the Reinsured Business.

(s) Absence of Conflicts. Assuming the receipt of all consents referred to
in Section 9(u), the execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby
will not (i) violate, or be in conflict with the charter or by-laws of
the Seller or AEGI, (ii) result in the creation of any security
interest, claim, lien, charge or encumbrance upon the Aviation Business
or the Reinsured Business, (iii) violate any provision of, or result in
the breach of any, applicable law, rule or regulation of any
governmental body or (iv) violate any order, judgment or decree
applicable to the Seller or AEGI, which would materially adversely
affect the Aviation Business or the Reinsured Business or the ability of
the Seller or AEGI to consummate the transactions contemplated by this
Agreement and to perform their obligations hereunder.

(t) Reinsurance Contract. Schedule 9(t) contains a list of all reinsurance
treaties and agreements currently in effect with respect to the Aviation
Business and the Reinsured Business (the "Reinsurance Contracts").

(u) No Legal Bar. Except as set forth on Schedule 9(u), no consent,
authorization, order or approval of, or notice, filing or registration
with, any governmental commission, board or
<PAGE> 143
- 13 -

other regulatory body or any private party is required for or in
connection with the execution and delivery of this Agreement by Seller
and AEGI and the consummation by Seller and AEGI of the transactions
contemplated hereby, except for those as to which the failure to obtain
or give would not materially adversely affect the consummation of the
transactions contemplated by this Agreement.

(v) Participation by Third Parties. Seller and AEGI shall indemnify and
hold the Purchaser harmless with respect to any claim for any broker's
or finder's fees or commissions with respect to the transactions
contemplated hereby by anyone found to have been acting on behalf of the
Seller or AEGI.

(w) Contracts. Schedule 9(w) sets forth all leases, subleases, license
agreements, assumption of liability agreements and fronting arrangements
(collectively the "Contracts") to be conveyed by Seller to Purchaser on
the Closing Date. Except as set forth on Schedule 9(w) all of the
Contracts are in full force, do not require consent, are enforceable in
accordance with their terms and there exists no default or event of
default, occurrence, condition or act, including, without limitation,
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, which constitutes or would constitute
(with notice or lapse of time or both) a default under any such
Contract.

(x) Disclosure. No representation or warranty made by Seller or AEGI in
this Agreement or in any other document furnished in connection herewith
contains any misrepresentation of a material fact or omits to state any
material fact necessary to make the statements herein or therein not
misleading.

SECTION 10. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER.

Purchaser represents, warrants and covenants to Seller and AEGI as
follows:

(a) Corporate Existence/Corporate Power. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Ohio, and has the requisite corporate power and authority to
consummate the transactions contemplated and perform its obligations
under this Agreement and has or will have, prior to the Closing Date,
taken all corporate action required by law, its certificate of
incorporation, by-laws or otherwise, to authorize the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby.

(b) Enforceability. The execution, delivery and performance of this
Agreement by Purchaser and the consummation of the transactions
contemplated hereby will not (i) violate or be in conflict with the
charter or by-laws of Purchaser, (ii) violate any provision of, or
result in the breach of any, applicable law, rule or regulation of any
governmental body or (iii) violate any order, judgment or decree
applicable to Purchaser, which would materially adversely affect
<PAGE> 144
- 14 -

the ability of Purchaser to consummate the transactions contemplated
hereby and to perform its obligations hereunder.

(c) Consents. No consent, license, authorization, appointment, order or
approval of, or filing or registration with, any governmental
commission, board or other regulatory body or any private party is
required for or in connection with the execution and delivery of this
Agreement by Purchaser and the consummation by Purchaser of the
transactions contemplated on its part hereby except as set forth on
Schedule 10(c) hereto.

(d) Participation. No outside parties have participated with respect to the
negotiation of this Agreement and the transactions contemplated hereby
on behalf of the Purchaser and the Purchaser shall indemnify and hold
the Seller harmless with respect to any claim for any broker's or
finder's fees or commissions with respect to the transactions
contemplated hereby by anyone found to have been acting on behalf of the
Purchaser.

(e) Voting by Purchaser. Purchaser shall vote all of its shares of common
and preferred stock of AEGI in favor of the transactions contemplated
hereby.

SECTION 11. COVENANTS OF SELLER.

Seller covenants and agrees with Purchaser as follows:

(a) Seller shall give Purchaser and its counsel, accountants and other
representatives access during normal business hours throughout the
period prior to the Closing Date to all of the properties, books,
contracts, commitments and records personnel and the other aspects of
the business of the Seller relating to the Aviation Business and the
Reinsured Business, and Seller will furnish and provide reasonable
assistance to Purchaser during such period with all such documents,
copies of documents and information concerning the Aviation Business and
the Reinsured Business as Purchaser may reasonably request. During the
period from the date of this Agreement through the Closing Date, Seller
and AEGI shall consult in good faith with members of Purchaser's
management: (i) with respect to significant developments, transactions
and decisions involving the operations of the Seller not prohibited
under this Agreement; and (ii) with respect to the development and
implementation of business strategies.

(b) Between the date of this Agreement and the Closing Date, except as
otherwise contemplated by this Agreement or permitted by the prior
consent of Purchaser, and to the extent it is commercially reasonable to
do so Seller (i) will conduct the Aviation Business and the Reinsured
Business in the ordinary course of business and perform its obligations
under all material agreements binding on the Seller relating to the
Aviation Business and the Reinsured Business; (ii) will enter into
agreements relating to the Aviation Business and the
<PAGE> 145
- 15 -

Reinsured Business only in the ordinary course of business; (iii) will
not make any material change in the operation of the Aviation Business
and the Reinsured Business; and (iv) will not make any loss payment
with respect to the Aviation Business and Reinsured Business in excess
of One Hundred Thousand and 00/100 Dollars ($100,000.00) without prior
notice to Purchaser.

(c) Seller shall pay directly to each employee of the Aviation Business that
portion of all benefits (including the arrangements, plans and programs
set forth in Schedule 9(j)) which has been accrued on behalf of that
employee (or is attributable to expenses properly incurred by that
employee) as of the Closing Date, except accrued vacation and sick days
which shall be assumed by Purchaser ("Accrued Vacation"). No portion of
the assets of any plan, fund, program or arrangement, written or
unwritten, heretofore sponsored or maintained by Seller or AEGI (and no
amount attributable to any such plan, fund, program or arrangement)
shall be transferred to Purchaser, and Purchaser shall not be required
to continue any such plan, fund, program or arrangement after the
Closing Date. The amounts payable on account of all benefit
arrangements (other than as specified in the following subsections)
shall be determined with reference to the date of the event by reason of
which such amounts become payable, without regard to conditions
subsequent, and Purchaser shall not be liable for any claim for
insurance, reimbursement or other benefits payable by reason of any
event which occurs prior to the Closing Date. All employees of Seller
who are employed by Purchaser on or after the Closing Date shall be new
employees of Purchaser; provided, however, that for purposes of vacation
eligibility which Purchaser may make available to its employees, such
employees shall be credited with their respective years of service with
Seller.

(d) Purchaser acknowledges that for business reasons, Seller has not been
able to compile Schedules referred to in Section 9 hereof (together with
copies of the documents referred to therein) and Exhibits contemplated
by this Agreement prior to the date of this Agreement. Seller covenants
that it shall deliver to Purchaser final Schedules (together with copies
of the documents referred to therein) and drafts of the Exhibits within
twenty (20) business days after the execution and delivery of this
Agreement. Purchaser shall have ten (10) business days to review these
Schedules and to determine in the good faith exercise of its business
judgment whether the items referenced therein are acceptable to
Purchaser and review and comment on the Exhibits. If Purchaser, after
reasonable consultation with Seller, determines in the good faith
exercise of its reasonable business judgment that the items referred to
in the Schedules are not acceptable or the parties are unable to
negotiate the terms of the Exhibits, Purchaser may terminate this
Agreement on five (5) business days written notice to Seller and neither
party shall have any further obligations to the other hereunder.

(e) Seller shall give detailed written notice to Purchaser promptly upon the
occurrence of any event that would cause or constitute a material breach
or would have caused a material breach had such event occurred or been
known to Seller prior to the date hereof, of any representations or
warranties of Seller contained in this Agreement or in any Schedule
referred to herein. Notwithstanding the foregoing, Seller shall have
the right from time to
<PAGE> 146
- 16 -

time after the date hereof to update the final versions of the Schedules
to reflect changes in the Assets or business condition as of the date
hereof until ten (10) days before the scheduled time of Closing.
Updated Schedules shall be promptly furnished to Purchaser, which shall
have five (5) business days to review these Schedules and to determine
in the good faith exercise of its reasonable business judgment that any
items referred to therein are acceptable to Purchaser. If any such
items are not acceptable to Purchaser, Purchaser may terminate this
Agreement on written notice thereof to Seller and, neither party shall
have any further obligations to the other hereunder.

SECTION 12. CONDITIONS TO CLOSING - PURCHASER.

The obligations of Purchaser under this Agreement are, at the option of
Purchaser, subject to the satisfaction, at or prior to the Closing Date, of the
following conditions:

(a) All the terms, covenants and conditions of this Agreement to be complied
with and performed by Seller on or before the Closing Date shall have
been complied with and performed.

(b) Except for changes between the date hereof and the Closing Date
permitted by the terms of this Agreement, the representations and
warranties of Seller in this Agreement or in any document or certificate
delivered to Purchaser pursuant hereto shall be true and correct in all
material respects as of the Closing Date with the same force and effect
as though such representations and warranties had been made at and as of
the Closing Date.

(c) On the Closing Date, no action or proceeding before any court or
governmental body shall be pending or threatened wherein an unfavorable
judgment, decree or order would prevent the carrying out of this
Agreement or any of the transactions or events contemplated hereby,
declare unlawful the transactions or events contemplated by this
Agreement or cause such transactions to be rescinded.

(d) Seller shall have received the necessary regulatory and any other
approval or approvals of the transactions contemplated herein as may be
required by pertinent laws, regulations or agreements.

(e) Seller shall have entered into (i) a Quota Share Reinsurance Agreement
in the form attached hereto marked Exhibit A ceding the Reinsured
Business to Purchaser and (ii) a Reinsurance Agreement in the form of
Exhibit B hereto transferring the Aviation Business to Purchaser.

(f) Seller shall have obtained the consent of reinsurers with respect to at
least eighty percent (80%) of the Aviation Business and the Reinsured
Business to the transfer to and reinsurance thereof by Purchaser and to
the assignment to Purchaser of Seller's rights under the Reinsurance
Contracts with such reinsurers.
<PAGE> 147
- 17 -

(g) Seller shall have obtained all consents required in order to convey to
Purchaser the Office Lease.

(h) Seller shall have entered into a Claims Servicing Agreement in the form
of Exhibit C and a Computer System Use Agreement in the form set forth
on Exhibit D.

(i) Purchaser shall have received an opinion of Seller's and AEGI's counsel,
in form and substance, reasonably satisfactory to Purchaser.

(j) Seller shall not have entered into any contract or agreement after
December 31, 1996 which would adversely affect Purchaser's ability to
acquire and conduct the Aviation Business and Reinsured Business as
contemplated hereby.

(k) Seller shall have executed the Mutual Release substantially in the form
of the attached Exhibit E.

(l) Purchaser shall have received such other certificates, documents and
instruments as counsel for Purchaser shall reasonably request.

SECTION 13. CONDITIONS TO CLOSING - SELLER.

The obligations of Seller and AEGI under this Agreement are, at the
option of Seller and AEGI, subject to the satisfaction, at or prior to the
Closing Date, of the following conditions:

(a) All the terms, covenants and conditions of this Agreement to be complied
with and performed by Purchaser on or before Closing Date shall have
been complied with and performed.

(b) Except for changes between the date hereof and the Closing Date
permitted by the terms of this Agreement, the representations and
warranties of Purchaser contained in this Agreement or in any document
or certificate delivered to Seller pursuant hereto shall be true and
correct in all material respects at and as of the Closing Date with the
same force and effect as though such representations and warranties had
been made as of the Closing Date.

(d) Purchaser shall have received the necessary regulatory and any other
approval or approvals of the transactions contemplated herein as may be
required by pertinent laws, regulations or agreements.
<PAGE> 148
- 18 -

(e) Purchaser shall have entered into (i) a Quota Share Reinsurance
Agreement in the form of Exhibit A hereto, and (ii) a Reinsurance
Agreement in the Form of Exhibit B hereto.

(f) Purchaser shall have entered into a Claims Servicing Agreement in the
form of Exhibit C hereto and a Computer System Use Agreement in the form
set forth on Exhibit D hereto.

(g) The shareholders of Seller and AEGI shall have approved the terms of
this Agreement and the transactions contemplated herein.

(h) Seller shall have received an opinion of Purchaser's counsel, in form
and substance, reasonably satisfactory to Seller.

(i) Purchaser and American Financial Group, Inc. shall have executed the
Mutual Release substantially in the form of the attached Exhibit E
hereto.

(j) Seller shall have received such other certificates, documents and
instruments as counsel for Seller shall reasonably request.

SECTION 14. SHAREHOLDER APPROVAL.

The Seller and AEGI shall take such action necessary to obtain
shareholder approval of the transactions contemplated herein as promptly as
practicable after the execution of this Agreement. As soon as practicable
following the date hereof, the Purchaser and AEGI shall cooperate to prepare
promptly and file with the SEC a Proxy or Information Statement with respect to
the transactions contemplated by this Agreement (the "Information Statement").
Promptly after the approval by the staff of the Commission of the Information
Statement, AEGI shall mail the Information Statement to all holders of AEGI's
voting securities. The Purchaser and AEGI shall cooperate with each other in
the preparation of the Information Statement and shall advise the other in
writing if, prior to the vote of the shareholders of AEGI, any such party shall
obtain knowledge of any facts that might make it necessary or appropriate to
amend or supplement the Information Statement in order to make the statements
contained or incorporated by reference therein not misleading or to comply with
applicable law. Notwithstanding the foregoing, each party shall be responsible
for the information and disclosures which it makes or incorporates by reference
in all regulatory filings and the Information Statement.

SECTION 15. REGULATORY APPROVALS.

Seller, AEGI and Purchaser shall promptly apply for and use their
commercially reasonable best efforts to obtain all applicable federal and state
regulatory approvals and other approvals required to effectuate the provisions
of this Agreement, including all filings under Hart-Scott-Rodino and with the
appropriate state insurance commissions.
<PAGE> 149
- 19 -

SECTION 16. CERTAIN TERMINATIONS.

Upon execution of this Agreement and notwithstanding any subsequent
termination of this Agreement, Purchaser and AEGI's respective obligations
pursuant to Section 5.4 of the Securities Purchase Agreement among the parties
dated November 5, 1996 shall be terminated.

SECTION 17. NONCOMPETE/NO SOLICITATION AND OTHER ACTIONS.

(a) After the execution of this Agreement, neither Seller nor AEGI, nor
anyone acting on behalf of either of them, shall initiate discussions
with any person, concerning a Competing Proposal (as hereinafter
defined). The Seller and AEGI may (i) furnish information to, an
offeror that seeks to engage in discussions or negotiations, requests
information or makes a proposal to acquire the Aviation Business and the
Reinsured Business pursuant to a Competing Proposal, if the Seller's and
AEGI's directors determine in good faith that such action is required
for the discharge of their fiduciary obligations, after consultation
with independent legal and financial advisors, who may be the Seller's
and AEGI's regularly engaged legal counsel and financial advisors (a
"Director Duty"); (ii) comply with Rule 14d-9 or Rule 14e-2 promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act") with
regard to a tender or exchange offer; (iii) make any disclosure to the
Seller's and AEGI's shareholders in accordance with a Director Duty;
(iv) fail to make, modify or amend its recommendations, consents or
approvals referred to herein in accordance with a Director Duty; (v)
terminate this Agreement and enter into an agreement providing for a
Competing Proposal in accordance with a Director Duty; or (vi) take any
other action as may be appropriate in order for the Seller's and AEGI's
Board of Directors to act in a manner that is consistent with their
fiduciary obligations under applicable law. In the event that the
Seller or AEGI or any of their officers, directors, employees, agents,
advisors or other representatives participate in discussions or
negotiations with, or furnish information to an offeror that seeks to
engage in such discussions or negotiations, requests information or
makes a Competing Proposal, then, subject to any confidentiality
requirements of an offeror (i) the Seller and AEGI shall immediately
disclose to the Purchaser the decision of the Seller's and AEGI's
directors; (ii) the identity of the offeror; and (iii) copies of all
information or material not previously furnished to Purchaser which the
Seller or AEGI, or their agents, provides or causes to be provided to
such offeror or any of its officers, directors, employees, agents,
advisors or representatives. For purposes of this Agreement, Competing
Proposal means a bona fide offer to the Seller, AEGI, or the
stockholders of AEGI from a Qualified Third Party (as hereinafter
defined). "Qualified Third Party" means an entity directly or
indirectly having (i) the underwriting capacity of an insurance carrier
rated "A" by A.M. Best Company, (ii) policyholders surplus of Two
Hundred Fifty Million and 00/100 Dollars ($250,000,000.00); and (iii)
agreed to assume all of Purchaser's reinsurance obligations arising
under Section 3 hereof.
<PAGE> 150
- 20 -

(b) As of the Closing Date, Purchaser shall offer employment to, and Seller
shall use its best efforts to assist Purchaser in employing as new
employees of Purchaser, all persons presently engaged in the Aviation
Business except those persons identified on Schedule 17(b) (the
"Employees"). Seller shall terminate effective as of the Closing Date
all employment agreements it has with any of the Employees, except for
employment agreements of Nick Walton and Bob Conrey, which agreements
shall be assumed by Purchaser. Until the third (3rd) anniversary of the
Closing Date, (1) Seller, AEGI and any of their Affiliates will not
directly or indirectly solicit or offer employment to any Employee (i)
who did not become an employee of Purchaser, (ii) who is then an
employee of Purchaser, or (iii) who has terminated such employment
without the consent of Purchaser within one hundred eighty (180) days of
such solicitation or offer, and (2) Purchaser will not directly or
indirectly solicit or offer employment to any person who, after the
Closing Date is then an employee of Seller or who has terminated such
employment without the consent of Seller within one hundred eighty (180)
days of such solicitation or offer. For purposes hereof, "Affiliate"
means any Person which directly or indirectly controls, or is controlled
by, or is under common control with, any Person. The term "control"
means the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
The term "Affiliate" does not include the Purchaser nor any of its
subsidiaries or affiliates. "Person" means an individual, partnership,
corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, limited liability company, governmental
authority or other entity of whatever nature.

(c) Seller, AEGI and each of their affiliates agrees that for a period of
three (3) years after the Closing Date, neither Seller, AEGI or any of
their subsidiaries will, directly or indirectly, own, manage, operate,
join, control or participate in the ownership, management, operation or
control of, any business whether in corporate proprietorship or
partnership form or otherwise as more than a five percent (5%) owner in
such business where such business is competitive with the Aviation
Business. The parties hereto specifically acknowledge and agree that
the remedy at law for any breach of the foregoing will be inadequate and
that the Purchaser, in addition to any other relief available to it,
shall be entitled to temporary and permanent injunctive relief without
the necessity of proving actual damage. In the event that the
provisions of this Section 17 should ever be deemed to exceed the non-
competition and non-disclosure restrictions provided by applicable law,
then the parties hereto agree that such provisions shall be reformed to
set forth the maximum limitations permitted.

(d) Upon the execution of this Agreement, the Purchaser shall have received
a written commitment from Mason Best Company L.P. substantially in the
form of the attached Exhibit F that, among other matters, it will vote
its shares of the common stock of AEGI in favor of the transactions
contemplated herein.

SECTION 18. TERMINATION.
<PAGE> 151
- 21 -

Notwithstanding any other provision contained herein, this Agreement may
be terminated at any time prior to the Closing Date:

(a) by mutual written consent of the Seller, AEGI and the Purchaser;

(b) by the Seller, AEGI or the Purchaser, upon written notice to the other
party, if the Closing shall not have occurred on or prior to the
Termination Date, unless such failure of consummation shall be due to
the failure of the party seeking such termination to perform or observe
in all material respects the covenants and agreements hereof to be
performed or observed by such party;

(c) by the Seller, AEGI or the Purchaser, upon written notice to the other
parties, if a governmental authority of competent jurisdiction shall
have issued an injunction, order or decree enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this
Agreement, and such injunction, order or decree shall have become final
and non-appealable or if a governmental authority has otherwise made a
final determination that any required regulatory consent would not be
forthcoming; provided, however, that the party seeking to terminate this
Agreement pursuant to this clause has used all commercially reasonable
efforts to remove such injunction, order or decree;

(d) by the Seller or AEGI if the Board of Directors of the Seller or AEGI
determines in accordance with a Director Duty that such termination is
required by reason of a Competing Proposal; or

(e) by the Seller, AEGI or the Purchaser if the Board of Directors of the
Seller and AEGI shall have withdrawn or modified in a manner materially
adverse to the Purchaser its approval of the adoption of this Agreement,
because the Boards of Directors have determined to recommend to the
Seller's and AEGI's shareholders or approve a Competing Proposal, in
accordance with a Director Duty; provided, however, that any
communication that advises that Seller or AEGI has received a Competing
Proposal shall in no event be deemed a withdrawal or modification
adverse to the Purchaser of its approval of this Agreement.

SECTION 19. EFFECT OF TERMINATION.

In the event that this Agreement is terminated pursuant to clause 18(d)
or 18(e) hereof, then the Purchaser shall be entitled to a cash payment within
five (5) days of the termination date from Seller of One Million Seven Hundred
Fifty Thousand and 00/100 Dollars ($1,750,000.00).
<PAGE> 152
- 22 -

SECTION 20. INDEMNIFICATION.

Section 20.1 General Indemnification Obligation of Seller and AEGI.
From and after the Closing, each of Seller and AEGI, jointly and severally,
will reimburse, indemnify and hold harmless Purchaser and its successors and
assigns (an "Indemnified Purchaser Party") against and in respect of:

(a) Any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Indemnified Purchaser Party that
result from, relate to or arise out of:

(i) any and all liabilities and obligations of Seller of any nature
whatsoever, except for the Assumed Liabilities; or

(ii) any misrepresentation, breach or warranty or nonfulfillment of
any agreement or covenant on the part of Seller or AEGI under
this Agreement, or from any misrepresentation in or omission from
any certificate, schedule, statement, document or instrument
furnished to Purchaser pursuant hereto or in connection with the
negotiation, execution or performance of this Agreement; and

(b) Any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of this Section
20.1.

Section 20.2 General Indemnification Obligation of Purchaser. From and
after the Closing, Purchaser will reimburse, indemnify and hold harmless
Seller, AEGI and their successors or assigns (an "Indemnified Seller Party")
against and in respect of:

(a) Any and all damages, losses, deficiencies, liabilities, costs and
expenses incurred or suffered by any Indemnified Seller Party that
result from, relate to or arise out of:

(i) the Assumed Liabilities; or

(ii) any misrepresentation, breach of warranty or non-fulfillment of
any agreement or covenant on the part of Purchaser under this
Agreement, or from any misrepresentation in or omission from any
certificate, schedule, statement, document or instrument
furnished to Seller pursuant hereto or in connection with the
negotiation, execution or performance of this Agreement; and

(b) any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of this Section
20.2.
<PAGE> 153
- 23 -

Section 20.3 Method of Asserting Claims, Etc. In the event that any
claim or demand for which Seller or AEGI would be liable to an Indemnified
Purchaser Party hereunder is asserted against or sought to be collected from
an Indemnified Purchaser Party by a third party, the Indemnified Purchaser
Party shall promptly notify Seller and AEGI of such claim or demand, specifying
the nature of such claim or demand and the amount or the estimated amount
thereof to the extent then feasible (which estimate shall not be conclusive of
the final amount of such claim and demand) (the "Claim Notice"). Seller and
AEGI shall have ten (10) days from the personal delivery or mailing of the
Claim Notice (the "Notice Period") to notify the Indemnified Purchaser Party,
(A) whether or not they dispute their liability to the Indemnified Purchaser
Party hereunder with respect to such claim or demand and (B) notwithstanding
any such dispute, whether or not they desire, at their sole cost and expense,
to defend the Indemnified Purchaser Party against such claims or demand.

(a) In the event that Seller or AEGI notifies the Indemnified Purchaser
Party within the Notice Period that they desire to defend the
Indemnified Purchaser Party against such claim or demand then, except as
hereinafter provided, Seller or AEGI, respectively, shall have the right
to defend the Indemnified Purchaser Party by appropriate proceedings,
which proceedings shall be promptly settled or prosecuted by them to a
final conclusion in such a manner as to avoid any risk of Indemnified
Purchaser Party becoming subject to liability for any other matter;
provided, however, Seller and AEGI shall not, without the prior written
consent of the Indemnified Purchaser Party, consent to the entry of any
judgment against the Indemnified Purchaser Party or enter into any
settlement or compromise which does not include, as an unconditional
term thereof, the giving of the claimant or plaintiff to the Indemnified
Purchaser Party of a release, in form and substance satisfactory to the
Indemnified Purchaser Party, as the case may be, from all liability in
respect of such claim or litigation. If any Indemnified Purchaser Party
desires to participate in, but not control, any such defense or
settlement, it may do so at its sole cost and expense.

(b) (i) If Seller or AEGI elects not to defend the Indemnified Purchaser
Party against such claim or demand, whether by not giving the
Indemnified Purchaser Party timely notice as provided above or
otherwise, then the amount of any such claim of demand, or if the
same be defended by Seller or AEGI or by the Indemnified
Purchaser Party (but no Indemnified Purchaser Party shall have
any obligation to defend any such claim or demand), then that
portion thereof as to which such defense is unsuccessful, in each
case shall be conclusively deemed to be a liability of Seller and
AEGI hereunder.

(ii) In the event an Indemnified Purchaser Party should have a claim
against Seller or AEGI hereunder that does not involve a claim or
demand being asserted against or sought to be collected from it
by a third party, the Indemnified Purchaser Party shall promptly
send a Claim Notice with respect to such claim to Seller and
AEGI. If Seller or AEGI does not notify the Indemnified
Purchaser Party within the Notice
<PAGE> 154
- 24 -

Period that it disputes such claim, the amount of such claim
shall be conclusively deemed a liability of Seller or AEGI,
respectively, hereunder.

(c) All claims for indemnification by an Indemnified Seller Party under this
Agreement shall be asserted and resolved under the procedures set forth
above substituting in the appropriate place "Indemnified Seller Party"
for "Indemnified Purchaser Party" and variations thereof and "Purchaser"
for "Seller and AEGI."

Section 20.4 Payment. Upon the determination of the liability under
Section 20.3 hereof, the appropriate party shall pay to the other, as the case
may be, within ten days after such determination, the amount of any claim for
indemnification made hereunder. In the event that the indemnified party is not
paid in full for any such claim pursuant to the foregoing provisions promptly
after the other party's obligation to indemnify has been determined in
accordance herewith, it shall have the right, notwithstanding any other rights
that it may have against any other person, firm or corporation, to setoff the
unpaid amount of any such claim against any amounts owed by it under any
agreements entered into pursuant to this Agreement or any of the documents
executed in connection herewith. Upon the payment in full of any claim, either
by setoff or otherwise, the entity making payment shall be subrogated to the
rights of the indemnified party against any person, firm or corporation with
respect to the subject matter of such claim.

Section 20.5 Other Rights and Remedies Not Affected. The
indemnification rights of the parties under this Section 20 are independent of
and in addition to such rights and remedies as the parties may have at law or
in equity or otherwise for any misrepresentation, breach of warranty or failure
to fulfill any agreement or covenant hereunder on the part of any party hereto,
including without limitation the right to seek specific performance, rescission
or restitution, none of which rights or remedies shall be affected or
diminished hereby.

Section 20.6 Limitations on Amount -- Seller and AEGI. Seller and AEGI
will have no liability (for indemnification or otherwise) with respect to the
matters described in Section 20.1 until the total of all damages actually paid
or incurred by an Indemnified Purchaser Party with respect to such matters
exceeds One Million and 00/100 Dollars ($1,000,000.00), and then only for the
amount by which such damages actually paid or incurred by an Indemnified
Purchaser Party exceed One Million and 00/100 Dollars ($1,000,000.00). The
maximum aggregate obligation of Seller and AEGI with respect to all matters for
which an Indemnified Purchaser Party may seek indemnification under Section
20.1(ii) of this Agreement for misrepresentation or breach of warranty shall
not exceed Twenty Million and 00/100 Dollars ($20,000,000.00).

Section 20.7 Limitations on Amount - Purchaser. The maximum aggregate
obligation of Purchaser to the Seller and AEGI with respect to all matters for
which AEGI or Seller may seek indemnification under Section 20.2(ii) of this
Agreement for misrepresentation or breach of warranty shall not exceed Twenty
Million and 00/100 Dollars ($20,000,000.00).
<PAGE> 155
- 25 -

Section 20.8 Applicable Definitions. For purposes of this Agreement, a
Person shall be deemed to have "Knowledge" or "knowledge" of a particular fact
or other matter if such individual is actually aware of such fact or other
matter, or an individual who is not negligent could be expected to discover or
otherwise become aware of such fact or other matter in the course of conducting
a reasonably comprehensive investigation of the books and records concerning
the existence of such fact or other matter. A Person (other than an
individual) will be deemed to have "Knowledge" of a particular fact or other
matter if any individual who is serving, as a director, officer, partner,
executor or trustee of such Person (or in any similar capacity) has, or at any
time had, Knowledge of such fact or other matter.

SECTION 21. COMPLIANCE WITH BULK SALES LAWS.

Purchaser and Seller hereby waive compliance by Purchaser and Seller
with the bulk sales law and any other similar laws in any applicable
jurisdiction in respect of the transactions contemplated by this Agreement.
Seller and AEGI shall indemnify Purchaser from, and hold it harmless against,
any liabilities, damages, costs and expenses resulting from or arising out of
(i) the parties' failure to comply with any of such laws in respect of the
transactions contemplated by this Agreement, or (ii) any action brought or levy
made as a result thereof, other than those liabilities which have been
expressly assumed, on such terms as expressly assumed, by Purchaser pursuant to
this Agreement.

SECTION 22. DEFAULT UNDER THE AGREEMENT.

If any party shall default in the performance of its obligations
hereunder, the non-defaulting parties shall retain all rights and remedies,
whether arising in equity or at law, including actions for specific performance
and damages, as a result of the default by the other party under this
Agreement, unless, the non-defaulting party, after receipt of written notice of
such default elects to consummate the transactions hereunder.

SECTION 23. TRANSITION.

(a) Purchaser shall use its best efforts to accomplish as soon as possible
all necessary operational, systems, contractual and legal requirements
on its part to issue where commercially desirable, policies of insurance
as the Aviation Business and the Reinsured Business renews. This
undertaking by Purchaser shall terminate, at Purchaser's option, upon
Purchaser's good faith belief that the Closing shall not occur by the
Termination Date.

(b) From and after the Closing Date, upon either party's request, the
parties shall cooperate with each other in all reasonable respects, and
execute and deliver such documents and take such other actions as are
necessary to effectuate the transfer of the Aviation Business and the
<PAGE> 156
- 26 -

Reinsured Business to Purchaser and Purchaser's continuation thereof as
contemplated by this Agreement. In this regard, Seller shall, if
requested by Purchaser, continue to renew policies of insurance included
in the Aviation Business and the Reinsured Business in a manner
consistent with Seller's prior practices and underwriting standards, to
the extent that, despite Purchaser's best efforts, Purchaser is not
operationally capable of issuing its own policy of insurance upon
renewal of such policies; provided, however, that no such policy shall
be issued by Seller with an effective date after July 31, 1997.

SECTION 24. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.

The representations, warranties, covenants and agreements of Seller,
AEGI and Purchaser contained in this Agreement or in any document delivered
pursuant to the terms of this Agreement, shall survive the Closing hereunder
for a period of one (1) year.

SECTION 25. FEES AND EXPENSES.

Each of the parties hereto shall be responsible for their own expenses
(including, but not limited to, legal and accounting expenses) incident to the
execution of this Agreement and the consummation of the transactions
contemplated hereby whether or not such transactions shall be consummated.

SECTION 26. PRESS RELEASES.

Neither party shall make any press release or public announcement
concerning this Agreement or the transactions contemplated hereby without the
consent of the other party.

SECTION 27. NOTICES.

All notices, requests, demands and other communications hereunder must
be in writing and shall be deemed to have been duly given (a) upon receipt if
delivered by hand, and (b) three days after mailing if mailed by first-class,
registered or certified mail, return receipt request, postage and registry fees
prepaid and addressed as follows:

If to Purchaser:

Great American Insurance Company
580 Walnut Street
Cincinnati, Ohio 45202
Attention: Gary J. Gruber
<PAGE> 157
- 27 -

If to Seller:

American Eagle Insurance Company
12801 N. Central Expressway, Suite 800
Dallas, Texas 75243
Attention: President

If to AEGI:

American Eagle Group, Inc.
12801 N. Central Expressway, Suite 800
Dallas, Texas 75243
Attention: President

Addresses may be changed by notice in writing signed by the addressee.

SECTION 28. MISCELLANEOUS.

This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. Neither this Agreement nor any
terms hereof may be changed, waived, discharged or terminated orally, but only
by an instrument in writing signed by the party against whom or which
enforcement of such change, waiver, discharge or termination is sought. In the
event a court of competent jurisdiction modifies any provision of this
Agreement, the remaining provisions of this Agreement shall remain in full
force and effect and the modified provision shall be abided by the parties as
so modified by the court. The invalidity or unenforceability of any term or
provision, or any clause, or portion thereof, of this Agreement shall in no way
impair or affect the validity or enforceability of any other term or provision
of this Agreement, which shall remain in full force and effect. This Agreement
and the Schedules attached hereto embody the entire agreement and understanding
between the parties hereto and supersede all prior agreements and
understandings relating to the subject matter hereof. No party hereto has made
any representation, warranty or covenant in connection with the matters set
forth herein except as expressly stated herein. All the terms of this
Agreement shall be binding upon the successors and assigns of the parties
hereto and shall inure to the benefit of and be enforceable by the parties
hereto, their successors and assigns; provided however, that this Agreement may
not be assigned by either party hereto without the prior written consent of the
other, which consent shall not be unreasonably withheld. Failure to insist
upon strict compliance with any terms, covenants or conditions hereof shall not
be deemed a waiver of such terms, covenants or conditions, nor shall any waiver
or relinquishment of such right at any other time or times be deemed a waiver
or relinquishment of such right at any other time or times. The headings of
this Agreement are for purposes of reference only and shall not limit or
otherwise affect the meaning thereof. This Agreement may be executed
simultaneously in several counterparts, each of which shall constitute one and
the same instrument. Schedules and Exhibits are made a part of this Agreement
as though set forth in full herein.
<PAGE> 158
- 28 -

[Remainder of page intentionally left blank. Signature Page follows.]
<PAGE> 159
- 29 -

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement on the
date first above written.

GREAT AMERICAN INSURANCE COMPANY

BY:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------

AMERICAN EAGLE INSURANCE COMPANY

BY:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------

AMERICAN EAGLE GROUP, INC.

BY:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------

<PAGE> 160
PROXY

AMERICAN EAGLE GROUP, INC.

12801 NORTH CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TEXAS 75243
SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON JULY 30, 1997

The undersigned hereby appoints M. Philip Guthrie and Frederick G.
Anderson, and each of them, his/her Proxies, with full power to appoint his
substitute, and hereby authorizes them to represent and to vote, as designated
hereon, all shares of capital stock of American Eagle Group, Inc. held of
record by the undersigned on _________, 1997, at the Annual Meeting of
Stockholders to be held on July 30, 1997, and any adjournments thereof, and
hereby further authorizes each of them, in their discretion, to vote upon any
other business that may properly come before the meeting.

(Change of address - Comments)

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

----------------------------------------
(If you have written in the above space,
please mark the corresponding box on
the reverse side of this card.)

You are encouraged to specify your choices by marking the appropriate boxes,
SEE REVERSE SIDE, but you need not mark any boxes with regard to a particular
proposal if you wish to vote FOR such proposal. The Proxies cannot vote your
shares unless you sign and return this card.

-----------
SEE REVERSE
SIDE
-----------

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

[X] Please mark your
votes as in this
example.

This proxy when properly executed will be voted in the manner directed herein.
If no direction is made, this proxy will be voted for the election of directors
and FOR proposals 1 and 3.

- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR both nominees listed and FOR
proposals 1 and 3.
- --------------------------------------------------------------------------------

1. To approve the Proposal for the sale FOR AGAINST ABSTAIN
of the general aviation insurance [ ] [ ] [ ]
business of American Eagle Insurance
Company and the change of the Company's
name as further described in the
accompanying proxy statement.

2. Election of Directors. FOR WITHHELD
Nominees: Richard M. Kurz and [ ] [ ]
Howard D. Putnam

[ ]
FOR, except vote withheld from the following nominee:

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

Comments/Address
Change [ ]

3. Approval of independent accountants. FOR AGAINST ABSTAIN
[ ] [ ] [ ]

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

SIGNATURE(S) DATE
------------------------------------------- --------------------
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.

The signer hereby revokes all proxies heretofore given by the signer to vote at
said meeting or any adjournments thereof.