<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                For the fiscal year ended Commission file number
                            December 31, 1998 1-7801

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

           Delaware                                        95-6069054
(State or other jurisdiction of                         (I.R.S. Employer
 incorporation or organization)                         Identification Number)

 9 Farm Springs Road, Farmington, Connecticut                          06032
   (Address of principal executive offices)                         (Zip Code)

        Registrant's telephone number, including area code: 860-674-6600

           Securities registered pursuant to Section 12(b)of the Act:

                                                         Name of each exchange
    Title of each class                                   on which registered
 Common Stock, $1 par value                             New York Stock Exchange

           Securities registered pursuant to Section 12(g) of the Act:
                                (Title of Class)
                      9.125% Senior Notes due September 1, 2002 
                    7.25% Senior Notes due July 15, 2005

          8.73% Trust Preferred Capital Securities due January 1, 2037
          7.701% Trust Preferred Capital Securities due April 15, 2028
                (issued by wholly-owned Trusts of the Registrant)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

             Yes  X                                        No ___

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

     The aggregate  market value of the voting stock of the  registrant  held by
non-affiliates was $910.5 million as of March 1, 1999.

     As of March 1, 1999, 27,231,000 Shares of Common Stock, $1.00 par value, of
registrant  were  outstanding  exclusive  of shares held by  registrant  and its
subsidiaries.


                                       1
<PAGE>

                                      


                       DOCUMENTS INCORPORATED BY REFERENCE

     The  information  required by Part III is  incorporated  by reference  from
registrant's definitive proxy statement for its Annual Meeting to be held on May
25, 1999.  Registrant  intends to file the proxy  material,  which  involves the
election  of  directors,  not later  than 120 days after the close of its fiscal
year.

Table of Contents                                                          Page

Part I
Item 1:    Business                                                           3
               General                                                        3
               Workers Compensation                                           8
               Nonstandard Automobile                                         9
               Specialty Commercial                                          11
               Insurance Industry Characteristics                            15
Item 2:    Properties                                                        27
Item 3:    Legal Proceedings                                                 28
Item 4:    Submission of Matters to a Vote of Security Holders               28
               Information concerning Executive Officers of the Company      28
Part II
Item 5:    Market for Registrant's Common Equity and Related
               Stockholder Matters                                           30
Item 6:    Selected Financial Data                                           31
Item 7:    Management's Discussion and Analysis of Financial
               Condition and Results of Operations                           32
Item 7A:   Quantitative and Qualitative Disclosures About Market Risk        49
Item 8:    Financial Statements and Supplementary Data                       50
Item 9:    Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure                           85
Part III
Item 10:   Directors and Executive Officers of the Company                   85
Item 11:   Executive Compensation                                            85
Item 12:   Security Ownership of Certain Beneficial Owners
               and Management                                                85
Item 13:   Certain Relationships and Related Transactions                    85

Part IV
Item 14:   Exhibits, Financial Statement Schedules
               and Reports on Form 8-K                                       85

Signatures                                                                   91
Exhibit Index                                                                93



                                       2
<PAGE>






                           Forward-Looking Statements

     All statements  made in this Annual Report on Form 10-K that do not reflect
historical  information are  "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 the actual  results,  performance  or  achievements  of Orion  Capital
Corporation and its  consolidated  subsidiaries to be materially  different from
any future  results,  performance or  achievements,  expressed or implied by the
forward-looking statements. Such risks, uncertainties and other factors include,
among other things, (i) general economic and business conditions;  (ii) interest
rate  and  financial  market  changes;  (iii)  competition  and  the  regulatory
environment in which we operate;  (iv) claims  frequency;  (v) claims  severity;
(vi) medical cost  inflation;  (vii)  increases in the cost of property  repair;
(viii) the number of new and renewal policy  applications  submitted to us; (ix)
Year 2000  problems;  and (x) other factors over which the Company has little or
no control. The Company's  expectation is that its plan for Year 2000 Compliance
will be completed  on schedule  depends,  in large part,  on the  Company's  own
efforts and expenditures on hardware, software and systems, which is on schedule
as to those exposures which the Company has been able to identify. However, Year
2000 problems could also arise because of  unanticipated  non-compliance  on the
part  of  vendors,   agents,   customers  and  other  third  parties   including
governmental  entities.  Significant  Year 2000 problems  could  materially  and
adversely  affect  future  performance  and results of  operations.  The Company
disclaims  any  obligation  to update or to publicly  announce the impact of the
above  risks,   uncertainties   and  other  factors  or  any  revisions  to  any
forward-looking statements to reflect future events or developments.

                                     PART I
ITEM 1.  BUSINESS
                                     GENERAL

    
Our Operations

     Orion Capital  Corporation  ("Orion") is an insurance  holding company.  We
have the ability,  through our nineteen wholly-owned insurance subsidiaries,  to
write  almost  all types of  property  and  casualty  insurance  nationwide  and
throughout Canada. However, our operations are highly specialized.  We currently
only underwrite and sell  specialized  insurance  products and services  through
three  segments: Workers Compensation, Nonstandard Automobile  and   Specialty  
Commercial. 

     Over the past two years,  Orion has been  reshaping  its  business to focus
resources  in high  potential  lines of  business.  Business in Orion's  workers
compensation  segment  is  conducted  through EBI  Companies,  Inc., a specialty
monoline  workers  compensation  operation.  Orion has been reshaping EBI from a
regional to a national monoline workers compensation specialist.

     In Orion's nonstandard  personal  automobile  segment,  Orion increased its
ownership in Guaranty National Corporation  ("Guaranty National") to 81% in July
1996 and to 100 % in December  1997. In January 1998,  we  transformed  Guaranty
National into a focused personal nonstandard  automobile company by shifting the
commercial  lines business of Guaranty  National to a newly-formed  unit,  Orion
Specialty Group,  Inc. At that same time, we also shifted the Company's  program
business from  Connecticut  Specialty  Insurance  Group,  Inc., to the new Orion
Specialty unit and began integrating and refocusing the two operations. Guaranty
National was recently renamed OrionAuto,  Inc. We added scale to our nonstandard
automobile  operation by acquiring two businesses,  Unisun Insurance  Company in
December 1997 and portions of Strickland Insurance Group in April 1998 expanding
our geographic focus to 35 states.

     During the third  quarter of 1998,  we  accelerated  the  reshaping  in our
specialty  commercial  segment.  This segment  includes  DPIC  Companies,  Inc.,
Orion's  professional  liability business,  Wm. H. McGee & Co., Inc., the marine
business,  and Orion  Specialty,  which includes  ARTIS,  our  alternative  risk
business  formed  in  June  1997,  Orion  Financial  (formerly  Intercon),   our
collateral  protection  business and the commercial lines business from Guaranty
National and Connecticut Specialty. In July 1998, we added a specialty insurance
company  serving the grocery and food  services  industry  with the  purchase of
Grocers  Insurance Group. We sold a unit of Orion Specialty,  Colorado  Casualty
Insurance  Company,  in September 1998.   Additionally,  we took steps to exit a
block  of  commercial  automobile  and  transportation  business,   representing
approximately $100 million in net written premiums,  that is highly price-driven
and  performing  poorly.  Orion will  continue its  reshaping of this segment in
1999. As part of that effort, we will exit the marine segment by selling our 26%
interest in Intercargo Corporation and Wm. H. McGee & Co., Inc.

                                       3
<PAGE>

     In November 1996, we exited the assumed  reinsurance  business when we sold
the ongoing operations of our subsidiary, SecurityRe Companies, Inc. As a result
of the sale,  SecurityRe ceased actively writing business and became an inactive
company. The capacity we have developed to handle the run-off of SecurityRe will
support our  administration of run-off business which results from the reshaping
of our specialty commercial segment.

     We own insurance  companies,  as well as brokerage  companies and insurance
management  and service  companies.  Those  companies  have licenses to transact
business nationwide and in all Canadian provinces. In general we do not sell our
insurance  products directly to our policyholders.  We obtain  substantially all
our  business  through  independent   insurance  agents  and  brokers.  We  have
approximately  4,100 employees.  Substantially  all of our employees work in our
insurance  or  insurance-related  operations.  The Company is not a party to any
collective   bargaining  agreements  and  believes  its  relationship  with  its
employees is good.

     Orion  Capital  Corporation  was  incorporated  in the State of Delaware in
1960, and its wholly-owned insurance subsidiaries are incorporated in the States
of California,  Connecticut,  Colorado, North Carolina,  Oklahoma, Oregon, South
Carolina,  Texas and Wisconsin. Our principal executive offices are located at 9
Farm Springs Road,  Farmington,  Connecticut 06032 and the telephone numbers are
(860) 674-6600 and (800) 243-7060.  Information  about Orion is available on the
Internet at www.orioncapital.com.

     In the  following  pages  of this  report,  Orion  Capital  Corporation  is
referred  to as  "Orion"  or the  "parent  corporation,"  while  Orion  and  its
consolidated subsidiaries are collectively referred to as the "Company."

ORION CAPITAL CORPORATION - CAPITAL STRUCTURE

     In July 1997, to increase the trading  liquidity and  affordability  of our
common  stock,  we declared a 2-for-1  stock  split.  At  December  31, 1998 the
securities that Orion (or its wholly-owned Trusts) had outstanding were:

  - 27,170,000 shares of Common Stock;

  - $110 million face amount of 9.125% Senior Notes, due September 1, 2002;

  - $100 million face amount of 7.25% Senior Notes, due July 15, 2005;

  - $125 million of 8.73% Trust Preferred Capital Securities, due January 1,
    2037; and

  - $125 million of 7.701% Trust  Preferred  Capital  Securities due April
    15, 2028.

     On January 13, 1997, Orion issued $125 million of 8.73% Junior Subordinated
Deferrable  Interest  Debentures,  due January 1, 2037, to Orion Capital Trust I
("Trust I"), a Delaware  statutory  business  trust we  sponsored.  Trust I then
simultaneously sold, in a private placement, $125 million of the Trust I's 8.73%
Preferred  Capital  Securities,  which have  substantially the same terms as the
8.73%  Debentures.  The proceeds from the sale of the  securities  were used, in
part,  to purchase  Guaranty  National in December  1997.  The  securities  were
registered with the Securities and Exchange Commission in April 1997.

                                       4
<PAGE>

     On  February  2,  1998,  similar  to the  prior  year's  issuance  of trust
preferred  securities,  Orion issued $125 million of 7.701% Junior  Subordinated
Deferrable  Interest  Debentures,  due April 15, 2028, to Orion Capital Trust II
("Trust II"), a Delaware  statutory  business trust we sponsored.  Trust II then
simultaneously  sold $125  million of the Trust II's  7.701%  Preferred  Capital
Securities,  which have  substantially the same terms as the 7.701%  Debentures.
Approximately $100 million of the net proceeds from the sale were used to retire
the bank indebtedness of Guaranty National.  The securities were registered with
the Securities and Exchange Commission in June 1998.

     While the two trust  preferred  issues have  complicated  structures,  they
offer us advantages  of preferred  stock with the tax  deductibility  feature of
debt. The securities  provide a low after-tax cost of financing for our business
growth. See Note 9 to the Company's consolidated financial statements.

     On July 8, 1998 Orion  entered  into a five year  credit  agreement  with a
group of banks which  provides for unsecured  borrowings up to $150 million.  We
intend to use the  credit  facility  for  general  corporate  purposes  that may
include acquisitions.  Borrowings  outstanding under the credit agreement are $8
million at 1998 year end and accrue  interest  equal to LIBOR (London  Interbank
Offered  Rate)  plus a margin  based  upon  Orion's  credit  rating.  The credit
agreement requires the Company to maintain certain covenants including financial
ratios.

SEGMENT REPORTING

     The Securities and Exchange  Commission  requires  registered  companies to
report their results in segments by type of business, geographic distribution or
other meaningful breakdown.  During the fourth quarter of 1998, we adopted a new
accounting  standard on segment  reporting.  The standard  requires  that public
companies  disclose segment  information  based on how management  organizes the
segments of the enterprise to make operating  decisions and assess  performance.
Our insurance operations are divided into three segments.  See Notes 1 and 17 to
the Company's consolidated financial statements. Our segments are as follows:

     - Workers  Compensation  - this segment  includes the workers  compensation
     insurance products and services sold by EBI Companies, Inc.

     - Nonstandard Automobile - this segment specializes in personal nonstandard
     automobile insurance sold by OrionAuto (formerly named Guaranty National).

     - Specialty  Commercial - as of 1998 year end, this segment markets various
     specialty commercial products and services including professional liability
     insurance through DPIC Companies,  Inc.; client-focused specialty insurance
     programs through Orion Specialty;  underwriting  management specializing in
     ocean marine,  inland marine and commercial  property insurance through Wm.
     H.  McGee  & Co,  Inc.;  insurance  for  international  trade  through  the
     Company's  26% interest in  Intercargo  Corporation;  and also includes the
     run-off operations of our assumed reinsurance business,  SecurityRe,  which
     was sold in late  1996.  The  Company  expects  to close its sale of Wm. H.
     McGee and its 26%  interest in  Intercargo  Corporation  ("Intercargo")  in
     1999.

     

                                       5
<PAGE>

     For purposes herein,  historical statements and transactions related to the
former Guaranty  National (the commercial lines and personal lines company) will
be referred to as "Guaranty  National"  whereas the presently  existing personal
lines only company will be referred to as "OrionAuto."

Net Earnings

Our net  earnings  and per  share  amounts  for the past  three  years,  were as
follows:

(In millions, except per share amounts)     1998      1997     1996
--------------------------------------------------------------------

Net earnings                             $  102.8  $  115.8  $  86.6
Net earnings per basic share             $   3.78  $   4.24  $  3.16
Net earning per diluted share            $   3.69  $   4.15  $  3.12
Weighted average shares outstanding          27.2      27.3     27.4
Weighted average shares and diluted
   equivalent outstanding                    27.8      27.9     27.8


     Earnings per share has been calculated based upon a new accounting standard
adopted in 1997.  Additionally,  the 1996 shares and per share amounts have been
restated for the 2-for-1 stock split issued on July 7, 1997.

     The  following  tables  present  condensed  financial  information  showing
revenues,  pre-tax  earnings and other financial data and ratios of our segments
for each of the three years in the period ended December 31, 1998.  Identifiable
assets,  by  segment,  are  included  in Note 17 to the  Company's  consolidated
financial statements.


(In millions)                                      1998       1997       1996
-----------------------------------------------------------------------------
REVENUES:
   Workers Compensation ....................  $   484.7  $   418.0  $   402.0
   Specialty Commercial ....................      782.9      812.1      804.8
   Nonstandard Automobile ..................      441.5      349.7      283.5
   Other ...................................        7.6       10.8        3.2
                                              ---------  ---------  ---------
     Consolidated .........................   $ 1,716.7  $ 1,590.6  $ 1,493.5
                                              =========  =========  =========   
EARNINGS:
   Workers Compensation ....................  $    86.2  $    86.8  $    68.4
   Specialty Commercial ....................       54.2       65.3       56.5
   Nonstandard Automobile ..................       37.1       40.7       23.3
                                              ---------  ---------  ---------   
Total property and casualty operations            177.5      192.8      148.2
   Other ...................................      (20.8)     (16.6)     (20.9)
                                              ---------  ---------  ---------   
                                                  156.7      176.2      127.3
   Federal income taxes ....................      (41.1)     (46.5)     (32.0)
   Minority interest expense ...............      (12.8)     (13.9)      (8.7)
                                              ---------  ---------  ---------   
Net earnings ...............................  $   102.8  $   115.8  $    86.6
                                              =========  =========  =========
                                                                                
                                             6
<PAGE>






The following table sets forth certain insurance ratios for the past three years
for the Company:

                                                1998     1997     1996
----------------------------------------------------------------------
Loss and loss adjustment expenses
   to premiums earned                           67.9%    66.7%    67.9%
Policy acquisition and other insurance
   expenses to premiums earned                  31.0%    31.2%    30.1%
                                               -----    -----    -----
      Total before policyholders' dividends     98.9%    97.9%    98.0%
Policyholders' dividends to premiums
   earned                                        1.6%     1.8%     1.8%
                                               -----    -----    -----
      Combined ratio                           100.5%    99.7%    99.8%
                                               =====    =====    =====

     One or more of Orion's  insurance  subsidiaries  are  licensed  to transact
business  in each  of the 50  states  of the  United  States,  the  District  of
Columbia,  Puerto Rico and all provinces of Canada. In 1998, approximately 13.9%
of  the  Company's   consolidated  direct  premiums  written  was  generated  in
California, 6.7% in South Carolina, 6.4% in both Pennsylvania and Texas, 5.5% in
North Carolina and 5.4% in New York. California premiums are primarily generated
from  nonstandard  personal  automobile  coverages  written by  OrionAuto.  Also
significant  in California is architects  and engineers  professional  liability
insurance  issued by DPIC  Companies.  The increases in South Carolina and North
Carolina  premiums are from the  acquisitions in December 1997 and April 1998 of
two nonstandard personal automobile businesses.  The primary line of business in
Pennsylvania and Texas is workers compensation.  New York's primary line in 1998
was the ocean and inland marine business written by Wm. H. McGee.

     The following table shows the geographical  distribution of direct premiums
written by the Company for the years ended December 31:

<TABLE>
<CAPTION>
                              Geographical distribution of Direct Premiums Written
                              --------------------------------------------------------------
(In millions, except for %)        1998      %           1997      %           1996     %
--------------------------------------------------------------------------------------------
States
<S>                          <C>           <C>     <C>           <C>     <C>           <C>  
California ...               $    259.1    13.9%   $    226.0    14.8%   $    172.0    12.0%
South Carolina                    125.6     6.7%         13.5     0.9%         12.7     0.9%
Pennsylvania .                    119.3     6.4%        116.7     7.7%        130.8     9.1%
Texas ........                    118.4     6.4%         85.3     5.6%         84.9     5.9%
North Carolina                    102.0     5.5%         25.7     1.7%         21.7     1.5%
New York .....                    101.0     5.4%         96.8     6.4%        106.1     7.4%
All Others (1)                  1,036.6    55.7%        957.3    62.9%        903.2    63.2%
                             ----------   -----    ----------   -----    ----------   ----- 
                             $  1,862.0   100.0%   $  1,521.3   100.0%   $  1,431.4   100.0%
                             ==========   =====    ==========   =====    ==========   ===== 
</TABLE>
                                                                              

(1) In 1998,  no other  single state or country,  other than the United  States,
accounted for more than 5% of total direct premiums written.

     For 1998,  29.5% of the  Company's  net  premiums  written was derived from
nonstandard personal automobile insurance;  28.9% came from workers compensation
insurance; 16.5% related to liability insurance other than automobile, primarily
professional   liability  insurance;   9.2%  came  from  commercial   automobile
insurance,  6.9% was from marine  insurance  coverages  and 5.1% for  commercial
multiple  peril  insurance.  No other line of business  contributed in excess of
5.0% to the 1998 net premiums written.


                                       7
<PAGE>

<TABLE>
<CAPTION>
     The  following  table shows the Company's  net premiums  written,  by major
statutory lines of business, for the years ended December 31:

                                                            Net Premiums Written
                                      -----------------------------------------------------------
(In millions, except for %)             1998      %           1997      %           1996      %
-------------------------------------------------------------------------------------------------

<S>                               <C>           <C>     <C>           <C>     <C>           <C>  
Nonstandard personal automobile   $    452.4    29.5%   $    373.1    27.3%   $    307.5    23.0%
Workers compensation ..........        444.3    28.9%        380.8    27.8%        383.6    28.8%
Liability other than automobile        252.4    16.5%        250.0    18.3%        249.4    18.7%
Commercial automobile .........        140.7     9.2%        155.7    11.4%        147.3    11.0%
Marine ........................        105.3     6.9%         69.1     5.1%         67.6     5.1%
Commercial multiple peril .....         78.8     5.1%         65.8     4.8%         46.4     3.5%
All Others ....................         59.7     3.9%         72.6     5.3%        132.3     9.9%
                                  ----------   -----    ----------   -----    ----------   ----- 
                                  $  1,533.6   100.0%   $  1,367.1   100.0%   $  1,334.1   100.0%
                                  ==========   =====    ==========   =====    ==========   ===== 
</TABLE>
                                                                                
                              WORKERS COMPENSATION

     The Workers Compensation segment is comprised of the EBI Companies ("EBI"),
which provides workers compensation insurance,  and accident prevention and cost
containment services.

     A specialist in workers  compensation on a regional and national basis, EBI
continues to expand its market presence by bringing its distinctive  value-added
approach to new states and through a new customer focus in multi-state accounts.
EBI  operates on a  nationwide  basis  through 46 offices  located in 27 states.
Through the addition of alternative products and pricing approaches,  entry into
new states and  continued  emphasis  on its  value-added  services,  EBI expects
further to expand its  presence in the  workers  compensation  market.  It ranks
among the 15 largest  writers of workers  compensation  insurance  in the United
States  based on net  premiums  written  and has one of the  lowest  three  year
average loss ratios within this group. Its headquarters are in Itasca, Illinois,
a suburb of  Chicago.  Information  about EBI is  available  on the  Internet at
http://www.ebico.com.

     EBI's  competitive  edge  stems  from its  service-oriented  approach.  EBI
offices  are  staffed  with  underwriters,   marketing  representatives,   claim
representatives,   accident  prevention   consultants,   lawyers,   medical  and
rehabilitation experts and other technical and administrative personnel who work
in a  multidisciplinary  team  environment.  The team  approach  starts with the
underwriting process. EBI's method of underwriting is not merely to evaluate the
risk,  but also to assess the  likelihood of reducing  injury  through  accident
prevention  services.  Accident prevention and claims management  personnel,  as
well  as  underwriters,   have  direct  responsibility  for  account  selection,
underwriting and servicing each client.

     EBI teams work  directly  with the client and its employees to identify the
factors that affect their insurance costs,  and to provide services  designed to
reduce the  frequency  and  severity  of  injuries.  EBI's  approach to accident
prevention   requires  insureds  to  establish  and  maintain  a  Zero  Accident
Culture(R)  (ZAC(R)),  designed to keep the work  environment free of accidents.
EBI manages worker injuries through claims personnel and  rehabilitation  nurses
to minimize the employee's disability and related medical costs.

     With a desire to influence the work place  environment to reduce losses and
long-term   insurance  costs,  EBI's  marketing  targets  businesses  where  its
ZAC(R)philosophy and service-oriented approach can have the greatest impact. EBI
concentrates  its  efforts  on  businesses  in  selected  industries,  including
manufacturing, healthcare, hospitality, school districts and service industries.
EBI's  geographic  expansion  and  growth  in  recent  years has given it a much
broader base of  operations.  Today,  EBI is  recognized  as a national  workers
compensation niche insurance carrier.

                                       8
<PAGE>

     As EBI  has  continued  to  grow,  it  has  refined  its  agency  force  by
strengthening  relationships with large,  regional and national insurance agents
and brokers.  Approximately 1,100 independent agents and brokers produced all of
the direct  business  written in 1998 by EBI.  These agents and brokers  receive
commissions  on the sale of  insurance.  No single  independent  agent or broker
contributed more than 10% of this segment's net written premiums.

     EBI has recorded  profitable  underwriting  results for the past five years
which has led it to  continue  its plan of  geographic  expansion.  In 1998,  it
expanded  into  three  new  states.  Expansion  opportunities  now also  include
multi-state clients. EBI has been able to gain a strong reputation for service.

     Among the alternative  products EBI offers is workers  compensation  excess
coverage  and  an  accompanying  self-insured   administration  program  and  an
integrated employee benefit program. These products and services are designed to
capitalize on EBI's expertise in traditional workers  compensation.  EBI applies
those skills to writing  workers  compensation  for larger  accounts and clients
desiring large deductibles.

     Description  of  Workers  Compensation  Insurance:  A workers  compensation
policy obligates an insurance  company to pay all disability,  medical and other
benefits for injured  workers as may be required by applicable  state laws.  The
insurance  policies  currently  written  by  EBI  provide  workers  compensation
coverage  with  limits  of  liability  set by the  provisions  of state  workers
compensation  laws. The benefits provided by these laws vary with the nature and
severity of the injury or disease,  as well as with the wage level,  occupation,
and age of the  employee.  Employers'  liability  coverage  is also  provided to
employers  who  may be  subject  to  claims  for  damages  (other  than  workers
compensation benefits) due to an injury to a worker.

     The amount of workers  compensation  premiums earned is directly  dependent
upon wage levels,  the number of  employees on the payroll of each  policyholder
and the job  classifications  of those  employees.  Premium  rates  are  revised
annually  in most  states  in which  EBI does  business.  EBI uses the rates and
rating  plans  filed  in the  states  where  it  does  business.  See  "Industry
Characteristics - Rates."

                             NONSTANDARD AUTOMOBILE

     The nonstandard  automobile segment consists of OrionAuto,  which is one of
the leading national writers of nonstandard  personal automobile  insurance.  In
December 1997, the Company purchased the remaining interest in Guaranty National
that it did not  already  own, in part to provide a more  appropriate  ownership
structure  to continue  the  Company's  expansion  in the  nonstandard  personal
automobile  insurance business.  Immediately  following the purchase of Guaranty
National,   in  January  1998,  the  Company  consolidated  Guaranty  National's
commercial insurance operations to its newly-formed unit, Orion Specialty.  This
action  transformed  Guaranty  National  into  a  focused  nonstandard  personal
automobile insurance company.  Guaranty National was recently renamed OrionAuto,
Inc.

                                       9
<PAGE>

     In December 1997, the Company purchased Unisun Insurance Company ("Unisun")
from  Michigan  Mutual  Insurance  Company for $26.2  million in cash  including
acquisition  expenses.  Unisun is the  largest  servicing  carrier for the state
automobile  insurance  facility  in  South  Carolina  and also  writes  personal
automobile insurance in the States of Alabama, Georgia and North Carolina. Total
net  premiums  written  by  Unisun  for 1997  were  approximately  $20  million.
Effective  March 1,  1999  the  State of South  Carolina  will  transition  to a
voluntary market  environment that will provide  OrionAuto with further business
opportunities in this market.

     In April 1998, the Company  acquired the  nonstandard  personal  automobile
insurance   business  of  North   Carolina-based   Strickland   Insurance  Group
("Strickland")  for  $44.1  million  in  cash  including  acquisition  expenses.
Strickland is the second largest  automobile  insurance writer in North Carolina
and also writes personal automobile  insurance in Florida.  In 1997,  Strickland
reported approximately $99 million of personal automobile gross premiums written
and $46 million of net premiums written.

     OrionAuto  focuses its operations on the nonstandard  markets.  Nonstandard
personal  automobile  insurance  represents  insurance  (i) for drivers  usually
unacceptable  to other  insurers for, among other  reasons,  adverse  driving or
accident history, age or vehicle type, or (ii) for customers who can only afford
a low down payment or are transitioning  from an uninsured to an insured status.
Nonstandard  risks  generally  involve a potential  for poor  claims  experience
because of increased risk exposure and require specialized underwriting,  claims
management and other skills and experience. OrionAuto's loss exposure is limited
by the fact that its insureds typically purchase low liability limits,  often at
a  state's  statutory  minimum.  The  nonstandard  insurance  industry  is  also
characterized by the insurer's  ability to minimize its exposure to unprofitable
business  by  effecting  timely  changes  in premium  rates and policy  terms in
response to changing loss and other experiences. This insurance coverage is sold
primarily in the State of California,  the Rocky Mountain and Pacific  Northwest
regions,  and the  Southeastern  United  States.  OrionAuto  sells its insurance
through approximately 12,000 independent agents located in 35 states.

     Overall,  OrionAuto  seeks to  distinguish  itself from its  competitors by
providing a superior,  highly  automated and responsive  level of service to its
agents and insureds.  In addition to high quality  service,  OrionAuto  provides
ease of payment for insureds through low monthly installments.

     In underwriting  nonstandard automobile risks, OrionAuto sets premium rates
which are substantially  higher than standard rates. Policy coverage periods are
generally  one or six months on personal  automobile  policies.  The business of
OrionAuto  is not  materially  dependent  upon  any  single  customer,  group of
customers, or group of agents.

     Customer  service and policy  processing  operations are a critical part of
OrionAuto. Offices are currently located in Phoenix Arizona; Irvine, California;
Pleasant Hill, California;  Englewood,  Colorado; Freeport, Illinois; Goldsboro,
North Carolina;  High Point, North Carolina;  Salem, Oregon;  Charleston,  South
Carolina;  Salt Lake City; Utah and Madison,  Wisconsin.  Multiple  locations in
multiple time zones  contribute  to efficient  volume  routing.  In the customer
service area, use of the Interactive  Voice Response  system permits  efficient,
automated answering of routine agent and customer questions.

                                       10
<PAGE>
                              SPECIALTY COMMERCIAL

     The  Company's   Specialty   Commercial  segment   concentrates  in  highly
specialized,  client-focused  lines of business  in the  property  and  casualty
insurance field. As of 1998 year end, the Specialty  Commercial segment marketed
various  specialty  commercial  products  and  services  including  professional
liability insurance through DPIC Companies;  client-focused  specialty insurance
programs through Orion Specialty;  underwriting management specializing in ocean
marine,  inland marine and commercial  property  insurance through Wm. H. McGee;
insurance  for  international  trade  through  the  Company's  26%  interest  in
Intercargo  Corporation;  and  also  includes  the  run-off  operations  of  the
Company's assumed reinsurance business, SecurityRe, which was sold in late 1996.
In December 1998, Intercargo announced an agreement of merger pursuant to which,
when  consummated,  the  Company  would  receive  $22.8  million in cash for its
interest in Intercargo. On March 11, 1999 the Company announced the signing of a
definitive  agreement  to sell Wm.  H.  McGee & Co.,  Inc.  Both the sale of our
interest in Intercargo and of McGee are a part of Orion's  continued  sharpening
of the Company's focus on profitable lines of business.

                                       11
<PAGE>

DPIC

     DPIC  Companies,  Inc.  ("DPIC"  or  the  "DPIC  Companies"),  through  the
Company's insurance company affiliates,  writes professional liability insurance
for  its  niche  markets:  architects,  engineers,   environmental  consultants,
accountants and lawyers.  It is the largest  underwriter of architect,  engineer
and  environmental  consultants  in North  America.  DPIC  operates  in  offices
throughout  the United  States and  Canada.  It is  headquartered  in  Monterey,
California.   Information   about  DPIC  can  be  found  on  the   Internet   at
http://www.dpic.com.

     DPIC's  operations  are  organized to be directly  aligned with its various
client  markets,  both  geographically  and by profession.  Since its inception,
DPIC's claims operations have been set up in strategic  geographical  locations.
In July 1997, DPIC's underwriting operations were decentralized, linking up with
its major regional  claims  offices to serve clients and agency  representatives
more  efficiently  and  effectively.  DPIC  underwriting/claims  offices  are in
Newport Beach,  California;  San  Francisco,  California;  Englewood,  Colorado;
Norcross,  Georgia; Itasca,  Illinois;  Clifton, New Jersey; New York, New York;
and Toronto,  Ontario;  DPIC claims  offices can also be found in and  Montreal,
Quebec.  Satellite  claims  offices are located in Calgary,  Alberta and Dallas,
Texas.

     Professional  liability  insurance covers liability  arising out of alleged
negligent  performance  of  professional   services.   Underwriting  and  claims
management  require a high  level of  knowledge  and  expertise.  To limit  risk
exposure,  DPIC's specialized  underwriters  evaluate a great number of factors,
including the experience of an applicant firm's professional personnel, the loss
history of the firm, the employees  covered,  the type of work performed and the
firm's utilization of loss prevention measures. DPIC actively rewards firms that
participate in loss prevention education,  risk management and business practice
improvement  programs.  It  offers  a  series  of  client-focused   professional
liability  education  programs and provides  financial  incentives for resolving
disputes through mediation.

     The professional  liability  coverage offered by DPIC is on a "claims-made"
policy form,  a form that  generally  insures only those claims  reported by the
insured during the policy term. With some exceptions in Canada,  DPIC's policies
cap defense  costs,  primarily  legal fees,  within the insureds  stated  policy
limits. This has resulted in a favorable impact in controlling legal costs.

     DPIC's  specialized claims staff stresses early intervention in disputes to
avoid litigation.  DPIC has pioneered the use of alternative  dispute resolution
("ADR"),  mediation in  particular,  to resolve  disputes  promptly.  Because of
mediation's  proven  success in  reducing  the costs of claims in terms of time,
money,  and  relationships - over 25% of DPIC's claim files are resolved through
this  technique.  These  initiatives  have  had a  favorable  impact  on  DPIC's
operating results.

     DPIC  markets its products  through 65  specialized  agencies,  each highly
knowledgeable  about loss  prevention and risk  management  for the  professions
served.  The agents are active in continuing  education  programs,  sponsored by
DPIC,  and in their  professional  association,  Professional  Liability  Agents
Network, and participate  extensively in their clients' professional  societies.
Exclusive  territory  assignments  and  extensive  support  from  DPIC lead to a
focused  commitment  to meet  the  insurance  and loss  prevention  needs of the
professions served.

Orion Specialty

     Upon  completion  of the December  1997 merger of Guaranty  National into a
wholly-owned  subsidiary of the Company,  the Company formed a new business unit
in January 1998,  Orion  Specialty  Group,  Inc.  Orion  Specialty  consolidates
Connecticut  Specialty  Insurance  Group,  Inc., the Company's  program business
unit,  and the  commercial  lines  business  of  Guaranty  National.  With  this
consolidation,  Orion  Specialty  began  refocusing  its  business mix to fewer,
narrower  customer segments  targeting  distinct client groups in the commercial
service,  trade and financial  services  industries,  as well in the alternative
risk sector.  Orion Specialty uses three  underwriting and  distribution  models
that enable it to deliver a spectrum of insurance  products and services to meet
the particular needs of these targeted groups.

                                       12
<PAGE>

     Segments  of the  business  initially  combined  under the Orion  Specialty
umbrella were heavily  exposed to commodity  pricing  pressures,  especially the
commercial  automobile and transportation area. Orion Specialty had been writing
nearly 30 classes of such  business  and, as a part of its  refocusing  efforts,
actively  worked to reduce the amount of this business.  In the third quarter of
1998, the Company  accelerated  this  realignment,  resulting in the decision to
exit unprofitable business totaling approximately $100 million in annualized net
written  premiums.  The third  quarter  action  also  included  a  reduction  of
approximately  90 employees  whose  duties were  related to the  business  being
exited. At the same time, the Company sold Colorado Casualty  Insurance Company,
which while  profitable  wrote  approximately  $55 million in annual net premium
consisting  largely  of  standard  commercial  business  that  did  not  fit the
Company's  specialization  strategy. The Company will continue in 1999 to assess
Orion Specialty's remaining programs.

The three  underwriting  and  distribution  models  used by Orion  Specialty  to
deliver a spectrum of insurance products are as follows:

     - Property & Casualty  Division ("P&C  Division")  with offices  located in
     Farmington,   Connecticut,   Englewood,   Colorado  and  Portland,  Oregon;
     -Alternative  Risk  Transfer  Insurance  Strategies  ("ARTIS")  located  in
     Windsor,  Connecticut; and 
     - Financial Services Division located in Dallas, Texas.

P&C DIVISION

     Orion  Specialty's P&C Division tailors  coverage  packages to the needs of
specific  classes of insureds.  By  structuring  programs to group insureds with
common  exposures (e.g.,  hairdressers,  travel agents,  etc.),  Orion Specialty
delivers  effective and efficient  risk transfer and  management to its targeted
client groups.  It operates  through general agents and program  administrators.
The Division  administers the operation of approximately 15 specialized programs
with emphasis in professional services and trade industries.

     In addition,  the P&C Division  provides  agents with binding  authority in
selected  "Premier  Product"  lines.  These products appeal to a broader base of
customers  and are  generally  offered  on a  mono-line  basis.  These  lines of
business include general liability, property, professional liability, commercial
auto, and umbrella coverages.

     A key aspect to the business of the P&C Division is the strategic alliances
it has formed with what it believes are  knowledgeable and well respected agents
in the  specialty  insurance  field.  Each of its  general  agents has  superior
knowledge of its markets and has earned  customer  loyalty by providing  quality
services and support.

     In July 1998, the Company  purchased Grocers Insurance Group ("Grocers") an
Oregon-based  specialty  insurance  holding company serving the grocery and food
service  industry.  The  purchase  price was  $36.7  million  in cash  including
acquisition expenses. In 1997, Grocers reported approximately $23 million of net
premiums  written,   principally   general   liability,   property  and  workers
compensation  with the majority of its volume  concentrated in the  Northwestern
states.  Grocers is  headquartered  in Portland,  Oregon and operates offices in
Woodland, California;  Medford, Oregon; Brentwood, Tennessee; and North Richland
Hills,  Texas.  Approximately  14  independent  agents  and 17  contract  agents
produced the direct business written by Grocers in 1998.

                                       13
<PAGE>

ARTIS

     ARTIS,  offers an unbundled  alternative market approach to allow insureds,
producers  and  sponsoring   associations  and  groups  to  participate  in  the
underwriting  and risk  assumption  of their  insurance  programs.  ARTIS custom
designs  its  alternative  risk  programs  for  groups  and  individual  clients
utilizing  traditional captives,  agency-owned-captives,  member-owned-captives,
rent-a-captives,    joint-owned-captives,    self-insured   retentions,    large
deductibles,   portfolio  transfers  and  finite   reinsurance.   While  workers
compensation  is the  largest  component  of its  business,  ARTIS  also  offers
coverage in general liability,  automobile liability,  property,  inland marine,
surety and professional liability lines of business.

FINANCIAL SERVICES DIVISION

     Orion Specialty's Financial Services Division offers products and coverages
to credit unions,  banks, leasing companies,  finance companies,  and automobile
and equipment  dealerships  strictly through general agents.  Insurance programs
offered by the Financial Services Division are collateral  protection,  mortgage
security, lenders' comprehensive single interest,  creditors' installment sales,
inland marine, credit fire, guaranteed auto protection and flood. The largest of
the  products  offered,  collateral  protection  insurance,   primarily  insures
automobiles  pledged  as  security  for loans for  which  the  borrower  has not
produced  evidence of physical  damage  coverage as required by the lender.  The
Financial  Services Division  currently  markets its products in 50 states,  the
District  of Columbia  and  Commonwealth  of Puerto Rico  through 60 general and
retail agents.

McGee

     Wm. H. McGee & Co., Inc. ("McGee") is a leading ocean cargo,  inland marine
and related commercial  property insurance  underwriter and has been in business
for over 110 years.  Security  Insurance  Company of  Hartford  ("Security"),  a
subsidiary  of the  Company,  has been  represented  by McGee since 1894.  McGee
provides all related services in connection with this business, including policy
issuance,  claim  settlement,  accounting and placement of reinsurance.  McGee's
operations are conducted in the United States,  through its  headquarters in New
York City and 20 branch offices  throughout  the country.  Activities in Canada,
Bermuda  and Puerto Rico are  managed by McGee's  subsidiaries  located in those
jurisdictions and they each perform substantially similar services.

     In the United  States,  McGee ranks among the top 10 writers of ocean cargo
insurance  and among the 20 largest  writers of inland marine  insurance.  Ocean
cargo  insurance  covers  cargo  against  the  perils of the sea and is  usually
broadened  to include  loss or damage to the goods  while in transit  until they
arrive at the  destination  specified  in the policy.  Inland  marine  insurance
covers  property  while  being  transported,  property  of a movable  nature and
property  instrumental to transportation or communication.  Some common examples
of property covered by inland marine insurance are cargo being shipped by train,
truck or airplane;  mobile equipment;  bridges and tunnels; radio and television
transmitting  equipment;  personal jewelry and furs; art collections;  livestock
and medical equipment.

     Each insurer  represented by McGee participates in either the United States
or  Canadian  Inter-Office  Reinsurance  Agreement  (the "McGee  Pools").  It is
through  these  underwriting  pooling  agreements  that  premiums  and  risk are
allocated among the various participating  insurers.  The insurers participating
in the McGee Pools and the percentage  allocated to each insurer is reviewed and
revised  annually.  Security is a member and clearing company in both the United
States and Canadian pools. For 1998, McGee underwrote approximately $198 million
of gross  premiums on behalf of the insurers  participating  in the McGee Pools.
The Company's  participation in the United States pool was 71.5% in 1998, 52% in
1997, and 37% in 1996.  Participation  in the Canadian pool was 72% in 1998, 61%
in 1997, and 49% in 1996.

                                       14
<PAGE>

     McGee, as an underwriting  manager, does not directly solicit business from
insureds  but instead  relies on a  production  force  consisting  of  insurance
brokers and agents appointed to represent the portion of the insurers'  business
which McGee manages.  McGee is  compensated  for its services by the insurers it
represents  based upon a combination  of factors,  including a percentage of the
premiums  written,  the profitability of the business written and the management
services provided.

     On March 11,  1999,  the  Company  announced  the  signing of a  definitive
agreement  to sell McGee.  The  transaction  is expected to be complete by April
1999, subject to regulatory approvals and other closing conditions.

INTERCARGO CORPORATION

     The Specialty  Commercial  segment also includes the Company's 26% interest
in Intercargo,  a publicly traded insurance  holding company whose  subsidiaries
specialize in international  trade and transportation  coverages.  Its principal
product lines are United States customs bonds and marine cargo insurance sold to
importers and exporters  through customs brokers and other service firms engaged
in the international  shipment of goods.  Intercargo  operates as an independent
entity and a pro rata share of any profit or loss is reflected in the  Company's
consolidated  financial  statements,  based on the Company's  equity interest in
Intercargo.  In December  1998,  the Company  agreed to sell its  investment  in
Intercargo  for $22.8  million  in cash  pursuant  to terms of a merger  between
Intercargo  and X. L. America,  Inc., a subsidiary of EXEL Limited.  The sale is
expected to be complete late in the first quarter or early in the second quarter
of 1999, subject to regulatory approval.

SECURITYRE

     In November 1996, the Company exited the assumed  reinsurance  business and
sold for cash the ongoing  business of its  subsidiary,  SecurityRe.  SecurityRe
primarily  underwrote a diverse  book of casualty  business,  using  reinsurance
intermediaries,  with exposures  largely  concentrated  in the domestic  market.
SecurityRe's  premiums had been  principally  concentrated in the treaty segment
reinsuring  small-to-medium-sized  regional and  specialty  companies in various
lines of business (primarily automobile and commercial  coverages).  Facultative
coverage  was  provided  on an excess of loss basis for  casualty  and  property
exposures.   Generally,  the  largest  net  amount  insured  by  SecurityRe  was
approximately  $1  million.  As a result  of the sale,  SecurityRe  discontinued
writing business.  The Company kept the reserves with respect to the outstanding
business and will  continue to manage the  settlement  of claims  arising out of
that business.

                             

                       INSURANCE INDUSTRY CHARACTERISTICS

LOSS RESERVES

     The Company establishes  reserve liabilities for reported losses,  incurred
but not  reported  ("IBNR")  losses,  and claim  settlement  and  administration
expenses.  Reserves  for  reported  losses  and  loss  adjustment  expenses  are
estimates  of the  ultimate  costs of claims  reported  to the  Company  but not
settled.  IBNR loss  reserves  are  estimates  for both  unreported  claims  and
additional development of previously reported claims.  Reserves are based on the
circumstances  surrounding each claim, the Company's historical  experience with
losses arising from claims both reported and not yet reported and the particular
experience  associated  with the  line of  business  and type of risk  involved.
Consideration is also given to expected  changes in costs for property,  repairs
to property,  benefit changes for injured workers,  medical care, and litigation
and other legal costs.  Reserve estimates are regularly reviewed and adjusted to
consider all pertinent information,  as it becomes available.  Such reevaluation
is a normal,  recurring activity that is inherent in the process of loss reserve
estimation.

     Several  methods are used for reviewing loss  reserves,  including paid and
incurred loss  development,  and incurred  claim counts and average claim costs.
These methods can be subject to  variability  in loss reserve  estimation  for a
number of reasons,  including improved claims department  operating  procedures,
accelerated  claims settlement due to the use of alternate  dispute  resolution,
and expedited  resolution of civil suits in  litigation.  Other factors that are
analyzed and are considered in the determination of loss reserves  include:  (i)
claim emergence and settlement  patterns and changes in these patterns from year
to year, (ii) trends in the frequency and severity of paid and incurred  losses,
(iii)  changes in policy  limits  and  changes in  reinsurance  coverages,  (iv)
changes in the mix and classes of business,  and (v) changes in claims  handling
procedures.

     Management  revises its loss reserve  estimates as appropriate and believes
that the loss and loss adjustment  expense  reserves of the Company's  insurance
subsidiaries  make reasonable and sufficient  provision for the ultimate cost of
all losses and claims incurred. However, no assurances can be given that adverse
reserve development will not occur in the future.

ACCIDENT YEAR LOSS AND LOSS ADJUSTMENT EXPENSE ANALYSIS

     Accident year is a period of exposure.  It is used to  accumulate  loss and
loss  adjustment  experience  by the year in which an incident  giving rise to a
claim  occurs.  Accident  year  information  is used for loss  reserving  and in
establishing  premium  rates.  Each accident year loss  experience is updated in
subsequent  years until all losses and loss adjustment  expenses related to that
given  accident year have been settled.  Accident year loss ratio relates losses
associated with incidents giving rise to claims occuring during a given calendar
year to the premiums  earned during the same calendar year.  Presented below are
loss  reserve  development  tables for the five years  ended  December  31, 1998
prepared in an accident year format.


                                       15
<PAGE>


     For each accident year, the following table presents  premiums earned,  and
the provision for loss and loss adjustment  expenses as a percentage of premiums
earned (the "loss ratios") as  established in the initial  accident year and the
cumulative figures as of December 31, 1998:

                                                Loss and Loss Adjustment
                           Accident  Premiums      Expense Development
                                               ---------------------------
(In millions, except for %)  Year     Earned       Initial  Cumulative
--------------------------------------------------------------------------

                             1994  $    691.2      69.6 %     69.0%
                             1995       749.0      66.8 %     66.8%
                             1996     1,300.8      67.2 %     68.1%
                             1997     1,357.7      66.0 %     67.9%
                             1998     1,503.0      65.6 %        -


     The table set forth below indicates  premiums  earned,  the cumulative loss
ratio for each accident  year, the ratio of policy  acquisition  costs and other
insurance  expenses  to  premiums  earned (the  "expense  ratio"),  the ratio of
policyholders'  dividends  to  premiums  earned  (the  "policyholders'  dividend
ratio") and the total of the ratios (the "combined ratio") at December 31, 1998:

 Accident   Premiums     Loss     Expense   Policyholders'  Combined
   Year      Earned     Ratio      Ratio    Dividend Ratio    Ratio
--------------------------------------------------------------------------
(In millions, except for %)

1994       $    691.2     69.0%       27.0%       2.1%       98.1%
1995            749.0     66.8%       29.0%       2.9%       98.7%
1996          1,300.8     68.1%       30.1%       1.8%      100.0%
1997          1,357.7     67.9%       31.2%       1.8%      100.9%
1998          1,503.0     65.6%       31.0%       1.6%       98.2%


                                       16
<PAGE>


Calendar Year Loss Reserve Analysis

     An analysis of the Company's calendar year loss and loss adjustment expense
reserves, net of reinsurance,  for the most recent three years ended December 31
is presented in the following  table.  The 1996 current year provision  includes
favorable  loss  development  for  Guaranty  National  of $1.0  million and 1996
current year payments  include $144.8 million  attributable  to periods prior to
the  consolidation  of Guaranty  National's  results in the Company's  financial
statements.  The 1998  provision - prior year and payments - prior year includes
amounts related to Colorado Casualty Insurance Company,  which was sold in 1998,
of $1.1 million and $ 6.9 million, respectivley.

(In millions)                                1998          1997         1996
----------------------------------------------------------------------------

Beginning of year ..............       $  1,390.7    $  1,368.4   $    994.0
Effect of acquisitions and other             16.9           8.9        286.3
                                       ----------    ----------   ----------
                                          1,407.6       1,377.3      1,280.3
                                       ----------    ----------   ----------
Provision:
   Current year ................            986.6         896.3        874.1
   Prior year ..................             33.9           9.2          8.9
                                       ----------    ----------   ----------    
                                          1,020.5         905.5        883.0
                                       ----------    ----------   ----------    
Payments:
   Current year ................            450.3         370.9        499.2
   Prior year ..................            559.4         521.2        295.7
                                       ----------    ----------   ----------    
                                          1,009.7         892.1        794.9
                                       ----------    ----------   ----------    
End of year ....................       $  1,418.4    $  1,390.7   $  1,368.4
                                       ==========    ==========   ========== 
<TABLE>
<CAPTION>
     Cumulative  reserve  development for the Company's  wholly-owned  insurance
subsidiaries (including acquisitions from date of purchase and excluding amounts
related to a divestiture for all periods  presented) as of December 31, 1998 for
the calendar  years then ended from 1992 through 1998 is shown in the table that
follows:

(In millions)             1992       1993        1994         1995         1996         1997         1998
----------------------------------------------------------------------------------------------------------

<S>                  <C>        <C>         <C>         <C>          <C>          <C>          <C>       
Gross liability ..   $ 1,081.4  $ 1,140.4   $ 1,181.3   $  1,275.0   $  1,772.9   $  1,864.8   $  2,017.7
Reinsurance
   recoverable ...       335.1      309.6       289.8        281.0        415.2        491.0        599.3
                     ---------  ---------   ---------   ----------   ----------   ----------   ----------         
Net liability ....   $   746.3  $   830.8   $   891.5   $    994.0   $  1,357.7   $  1,373.8   $  1,418.4
                     =========  =========   =========   ==========   ==========   ==========   ==========
                                                                                            
Gross re-estimated
   liability .....   $ 1,177.1  $ 1,171.5   $ 1,219.5   $  1,302.0   $  1,816.0   $  1,905.9   $        -
Re-estimated                                                                                            
   recoverable ...       346.1      308.6       309.7        295.7        444.5        499.3            -
                     ---------  ---------   ---------   ----------   ----------   ----------   ----------   
Net re-estimated                                                                                        
   liability .....   $   831.0  $   862.9   $   909.8   $  1,006.3   $  1,371.5   $  1,406.6            -
                     =========  =========   =========   ==========   ==========   ==========   ==========  
Gross (deficiency)   $   (95.7) $   (31.1)   $  (38.2)  $    (27.0)    $  (43.1)  $     (41.1) $        -
  redundancy         =========  =========   =========   ==========   ==========   ==========   ==========  

</TABLE>

                                       17
<PAGE>


<TABLE>
<CAPTION>
Cumulative  reserve   development,   net  of  reinsurance,   for  the  Company's
wholly-owned  insurance  subsidiaries   (including  acquisitions  from  date  of
purchase  and  excluding   amounts  related  to a divestiture  for  all  periods
presented)  as of December 31, 1998 for the calendar  years 1988 through 1998 is
shown in the table that follows:

                                                                      December 31,
                           --------------------------------------------------------------------------------------------------------
(In millions)                   1988     1989     1990     1991     1992     1993     1994      1995     1996      1997      1998
-----------------------------------------------------------------------------------------------------------------------------------

Net liability for unpaid
   loss and loss
<S>                         <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>       <C>       <C>      
   adjustment expenses ...  $  520.3 $  602.5 $  595.5 $  668.5 $  746.3 $  830.8 $  891.5 $   994.0 $ 1,357.7 $ 1,373.8 $ 1,418.4

Paid (cumulative) as of:
   One year later ........     236.7    281.2    261.5    240.3    249.6    303.3    263.3     295.7     516.7     552.5        --
   Two years later .......     403.1    438.3    408.6    378.5    429.5    445.4    434.7     495.6     800.9        --        --
   Three years later .....     488.4    526.2    493.2    484.3    514.2    543.7    553.4     607.7        --        --        --
   Four years later ......     544.4    581.9    567.1    540.3    577.5    625.7    622.2        --        --        --        --
   Five years later ......     582.5    633.4    605.0    580.1    634.2    668.5       --        --        --        --        --
   Six years later .......     624.4    660.6    629.7    625.0    663.2       --        --       --        --        --        --
   Seven years later .....     643.4    676.9    666.5    648.5       --       --        --       --        --        --        --
   Eight years later .....     653.8    706.7    690.9       --       --       --        --       --        --        --        --
   Nine years later ......     680.6    727.7       --       --       --       --        --       --        --        --        --
   Ten years later .......     698.6       --       --       --       --       --        --       --        --        --        --
                                                    
Net liability re-estimated
   as of:
   One year later ........     573.6    647.6    657.1    694.9    770.6    848.1    903.3   1,002.8   1,364.0   1,406.6        --
   Two years later .......     624.3    695.2    685.7    715.0    782.3    855.0    903.0   1,003.2   1,371.5       --         --
   Three years later .....     658.0    722.6    705.5    732.0    786.0    855.3    903.1   1,006.3        --       --         --
   Four years later ......     687.8    741.8    741.1    744.3    801.2    856.0    909.8        --        --       --         --
   Five years later ......     705.5    770.4    756.5    763.7    822.6    862.9       --        --        --       --         --
   Six years later .......     733.8    788.3    786.6    782.5    831.0       --       --        --        --       --         --
   Seven years later .....     747.5    812.4    802.7    793.4       --       --       --        --        --       --         --
   Eight years later .....     771.4    831.5    817.8       --       --       --       --        --        --       --         --
   Nine years later ......     794.7    843.5       --       --       --       --       --        --        --       --         --
   Ten years later .......     804.6       --       --       --       --       --       --        --        --       --         --
                                                                                                                                  
Net deficiency ...........    (284.3)  (241.0)  (222.3)  (124.9)   (84.7)   (32.1)   (18.3)     (12.3)   (13.8)    (32.8)       --  

</TABLE>



                                       18
<PAGE>


     The  preceding  loss reserve  development  tables  indicate  the  aggregate
year-end  liability for loss and loss adjustment  expenses,  net of reinsurance,
the cumulative  amounts paid attributable to those reserves through December 31,
1998,  the  re-estimate  of the  aggregate  liability  as of December 31 of each
subsequent  year  and the  cumulative  development  of  prior  years'  reserves.
Information is also provided on a gross basis for 1992 through 1998.  Consistent
with  industry  practice,  certain  claims  for long-  term  disability  workers
compensation benefits are carried at discounted values. At December 31, 1998 and
1997, long-term disability workers compensation loss reserves are carried in the
Company's  consolidated financial statements at $46.0 million and $52.9 million,
respectively, at net present value using a statutory interest rate of 3.5%.

     The Company's IBNR loss and loss adjustment expense reserves and other bulk
reserves for losses and loss adjustment  expenses for which claim files have not
been established,  net of reinsurance,  were $616.2 million,  $686.4 million and
$690.6 million as of December 31, 1998, 1997 and 1996, respectively.

     During  1998  and  1997,  the  Company   strengthened   loss  reserves  and
experienced  adverse  development for prior years' business of $33.9 million and
$9.2  million,   respectively.   For  1998,  adverse   development  for  reserve
strengthening  in  connection  with the  Orion  Specialty  realignment  of $17.0
million, various pools and associations of $6.9 million (other than from McGee),
the assumed reinsurance  business of $3.1 million,  and workers  compensation of
$8.7  million was partly  offset by  favorable  development  from other lines of
business of $1.8 million.  For 1997,  adverse  development for various pools and
associations  (other than McGee) of $11.4 million,  for the assumed  reinsurance
exited in 1996 of $12.2 million and certain  cancelled program business of $20.9
million was partly offset by favorable  development from workers compensation of
$34.3 million and other lines of business of $0.8 million.  In the third quarter
of 1998, the Company  completed an actuarial  study of the business being exited
in connection with Orion  Specialty's  realignment and strengthened  reserves by
$27.8 million  including $17.0 million related to 1997 and prior accident years.
Adverse development relating to the Company's pools and associations business is
based on their  experience,  which is generally  recorded as the  information is
reported to the Company and relates  primarily to  environmental  reserves.  The
adverse development from workers  compensation in 1998 primarily reflects upward
adjustments to 1997 and prior year initial  reserve  estimates based upon higher
current case reserves.  The adverse  development from cancelled programs in 1997
is  largely  due to an  ocean  marine  program  cancelled  in  that  year  which
experienced  high claim frequency and severity.  The favorable  development from
the workers  compensation  and other lines of business in 1997 was the result of
improvement from the application of loss prevention and loss control procedures.

     Loss reserve estimates are based on forecasts of the ultimate settlement of
claims and are  subject to  uncertainty  with  respect  to future  events.  Loss
reserve  amounts are based on  management's  informed  estimates and  judgments,
using data currently  available.  Reserve  amounts and the underlying  actuarial
factors and  assumptions  are  regularly  analyzed  and  adjusted to reflect new
information. Current operations are more focused on underwriting risks where the
Company has  specialized  knowledge and can provide  enhanced  service to reduce
loss  costs.  This  concentration,  and the  specialized  knowledge  and growing
experience in its selected  lines of business  arising from such  concentration,
have enabled the Company to implement  improvements in its claims administration
and underwriting procedures which have enhanced the Company's ability to analyze
data and project reserve trends.



                                       19
<PAGE>




     The  following  table  presents  the  differences  between  loss  and  loss
adjustment expense reserves reported in the consolidated financial statements in
accordance with generally accepted  accounting  principles  ("GAAP"),  and those
reported in the combined annual statement filed with state insurance departments
in accordance with statutory  accounting  practices  ("SAP") for the years ended
December 31:

(In millions)                                              1998          1997
-------------------------------------------------------------------------------

Liability on SAP basis                             $    1,405.7  $    1,380.6
Estimated salvage and subrogation
   recoveries recorded on a cash basis for
   SAP and on an accrual basis for
   GAAP (related to acquisition of Unisun)                    -          (1.2)
Foreign subsidiary reserves                                12.7          11.3
                                                   ------------  ------------
Liability on GAAP basis, net of reinsurance             1,418.4       1,390.7
Reinsurance recoverables on GAAP reserves                 599.3         481.0
                                                   ------------  ------------

Liability on GAAP basis                            $    2,017.7  $    1,871.7
                                                   ============  ============


Investments

     The Company derives a significant  part of its income from its investments.
The investment  portfolio of the Company's  insurance  subsidiaries  must comply
with applicable insurance laws and regulations of the respective states in which
such  companies  are  domiciled  and other  jurisdictions  in which they conduct
business. Neither Orion nor any of its non-insurance subsidiaries is constrained
by investment restrictions set forth in state insurance laws.

     The Company maintains a diversified portfolio representing a broad spectrum
of  industries  and  types  of  securities.   The  Company   manages  its  total
investments,  so that at all times there are fixed  income  securities  that are
adequate  in  amount  and  duration  to meet the cash  requirements  of  current
operations and longer term liabilities,  as well as to meet insurance regulatory
requirements with respect to investments under specific state insurance laws. To
the  extent  that  there  are  funds  available  for  investment   beyond  these
requirements,  the  investment  objective  for such funds are to maximize  total
return within a prudent level of risk,  taking into account the potential impact
on the  volatility  of reported  earnings  and  reserves.  The  Company  adjusts
investment  risk to  offset  or  complement  insurance  risk  based  upon  total
corporate risk tolerance. The Company has investment guidelines for fixed income
and equity portfolios covering portfolio characteristics, permitted investments,
diversification and performance benchmarks.

     Approximately 59% of the Company's fixed maturity  portfolio is invested in
tax-advantaged  securities  at December  31,  1998.  Except for  investments  in
securities of the United  States  Government  and its agencies,  the Company had
investments in only one issuer (AAA rated fixed income securities totaling $26.7
million) that exceeded $25 million at December 31, 1998.

     The Company has the ability to hold its fixed maturity  investments to term
since its operating cash flow and its short-term  investment  portfolio  provide
the Company with  substantial  liquidity.  Fixed maturity  investments  that the
Company has the  positive  intent to hold to maturity  are recorded at amortized
cost. Fixed maturity  investments  which may be sold in response to, among other
things,  changes in interest rates,  prepayment risk, income tax strategies,  or
liquidity needs are classified as  available-for-sale  and are carried at market
value,  with  unrealized  gains and losses  reflected in  stockholders'  equity.
Equity  securities are stated at market value. Both the fixed maturities and the
equity  investments  consist  primarily of readily  marketable  securities.  See
"Market Risk of Financial Instruments" on page 47.

                                       20
<PAGE>

<TABLE>
<CAPTION>
     The following  table shows the  composition of the investment  portfolio of
the Company as of December  31, 1998 and 1997,  and the quality  ratings for the
Company's fixed maturity investments.  The investments shown below are listed at
their amortized cost, market and financial statement (book) values.

1998:                                              Market              Book 
(In millions, except for %)     Cost        %      Value       %       Value         %
----------------------------------------------------------------------------------------

Fixed Maturities:
<S>                          <C>          <C>    <C>          <C>   <C>            <C>  
   AAA ....................  $    697.1   29.0%  $    724.4   29.0% $      716.8   28.8%
   AA .....................       339.3   14.1%       361.1   14.5%        357.7   14.4%
   A ......................       215.6    9.0%       226.0    9.0%        224.1    9.0%
   BBB ....................       100.5    4.2%       102.4    4.1%        103.1    4.2%
   BB .....................        59.3    2.5%        60.6    2.4%         60.6    2.4%
   B and Below ............       120.5    5.0%       108.7    4.3%        108.8    4.4%
   Not Rated ..............        33.8    1.4%        39.4    1.6%         39.4    1.6%
                             ----------  -----   ----------  -----  ------------  -----                                            
      Sub-total ...........     1,566.1   65.2%     1,622.6   64.9%      1,610.5   64.8%
Equity Securities .........       469.4   19.6%       510.9   20.4%        510.9   20.5%
Other Long-Term Investments       116.2    4.8%       116.2    4.7%        116.2    4.7%
Short-Term Investments ....       248.7   10.4%       248.7   10.0%        248.7   10.0%
                             ----------  -----   ----------  -----  ------------  -----    
                             $  2,400.4  100.0%  $  2,498.4  100.0% $    2,486.3  100.0%
                             ==========  =====   ==========  =====  ============  ===== 
</TABLE>

<TABLE>
<CAPTION>                          
                                                                                    

1997:                                              Market              Book                    
(In millions, except for %)     Cost        %      Value       %       Value         %         
----------------------------------------------------------------------------------------

Fixed Maturities:
<S>                          <C>          <C>    <C>          <C>   <C>            <C>  
   AAA ....................  $    700.8   29.5%  $    730.6   28.7% $      725.6   28.7%
   AA .....................       417.0   17.5%       441.2   17.3%        437.6   17.3%
   A ......................       198.9    8.4%       212.2    8.3%        211.8    8.3%
   BBB ....................       147.4    6.2%       151.4    5.9%        150.9    5.9%
   BB .....................        73.4    3.1%        76.9    3.0%         76.8    3.0%
   B and Below ............       137.6    5.8%       145.7    5.7%        145.7    5.7%
   Not Rated ..............        33.1    1.3%        34.2    1.3%         34.2    1.3%
                             ----------  -----   ----------  -----  ------------  -----                                            
      Sub-total ...........     1,708.2   71.8%     1,792.2   70.2%      1,782.6   70.2%
Equity Securities .........       346.6   14.6%       438.5   17.2%        438.5   17.2%
Other Long-Term Investments        94.3    4.0%        94.3    3.7%         94.3    3.7%
Short-Term Investments ....       228.3    9.6%       228.3    8.9%        228.3    8.9%
                             ----------  -----   ----------  -----  ------------  -----                                             
                             $  2,377.4  100.0%  $  2,553.3  100.0% $    2,543.7  100.0%
                             ==========  =====   ==========  =====  ============  ===== 
</TABLE>

Investment  yields on the Company's average  investment  portfolio for the years
ended December 31 are as follows:
 
                                       1998           1997
-----------------------------------------------------------
Yields on average investments:
   Pre-tax                              6.0%           7.0%
                                        ===            ===
   After-tax                            4.7%           5.3%
                                        ===            ===

                                       21
<PAGE>

     Included  in  Other  Long-Term   Investments  at  December  31,  1998  were
investments in limited  partnerships  carried at $111.1  million.  The assets of
these partnerships are managed by outside entities.  Individual partnerships may
invest in a variety of  investment  vehicles,  including but not limited to U.S.
and foreign bonds and equities,  both public and private,  and real estate.  The
Company  accounts for its  investments in limited  partnership  using the equity
method of accounting. Such partnerships are carried at the Company's interest in
the underlying  net assets of the limited  partnerships.  Net investment  income
from these  partnerships  was $2.6 million,  $17.1 million and $16.0 million for
1998, 1997 and 1996, respectively.

     The  Company  strives to enhance  the average  return of its  portfolio  by
investing  a  small  percentage  of the  portfolio  in a  diversified  group  of
non-investment  grade fixed  maturity  securities,  or  securities  that are not
rated.  In the  non-investment  grade segment of the investment  portfolio,  the
Company  maintains a high degree of diversity,  with an average  investment  per
issuer of approximately $1.7 million at December 31, 1998.

     The  Company  closely  monitors  the  financial  stability  of  issuers  of
securities  that it owns. When  conditions are deemed  appropriate,  the Company
ceases to accrete discount, or accrue interest and dividends. In cases where the
value of  investments  are deemed to be other  than  temporarily  impaired,  the
Company  recognizes  losses.  During 1998,  provisions for such losses were $1.1
million for equity  securities and $3.2 million for fixed maturity  investments.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations, Investment Performance."

REINSURANCE

     In the ordinary course of business,  the Company's  insurance  subsidiaries
enter into  reinsurance  contracts  with other  insurers  which serve to provide
greater diversification of business and to limit the Company's maximum loss from
catastrophes,  large risks or  unusually  hazardous  risks.  Ceding  reinsurance
reduces an insurer's operating leverage ratio.  Operating leverage is defined as
net premiums written as a multiple of policyholders' surplus.

     A large  portion of the  Company's  reinsurance  protection  is provided by
reinsurance  contracts  or  treaties  under which all risks  meeting  prescribed
criteria are automatically covered. In other instances,  reinsurance is obtained
by negotiation for individual risks, or facultative  reinsurance.  The Company's
insurance subsidiaries have certain excess-of-loss and catastrophe treaties with
unaffiliated insurers or reinsurers which provide protection against a specified
part or all of certain types of losses over  stipulated  dollar amounts  arising
from one or more occurrences.  The amount of each risk retained by an insurer is
subject to maximum  limits  which vary by line of business and type of coverage.
Retention  limits are  periodically  revised as the  capacity  of the  Company's
insurance  subsidiaries to retain risk varies and as reinsurance  prices change.
Reinsurance  contracts  do not  relieve  the  Company of its  obligation  to the
policyholders.  The  collectibility of reinsurance is subject to the solvency of
the  reinsurers.  The Company is very  selective as to its  reinsurers,  placing
reinsurance  with only  those  reinsurers  considered  to be in sound  financial
condition and having satisfactory  underwriting  ability.  Many of the Company's
reinsurance agreements are subject to annual renewal as to coverage,  limits and
price.  The  Company   continually   monitors  the  financial  strength  of  its
reinsurers.  The Company's insurance subsidiaries,  to their knowledge,  have no
material exposure to potential unrecognized losses due to reinsurers that are in
known financial difficulties.

     EBI has  reinsurance  protection  for losses in excess of $1.5  million per
occurrence  up to $200  million  and for  losses in excess of $5.0  million  per
person  up to  $20  million  subject  to  annual  aggregate  limitations.  EBI's
reinsurance   includes   aggregate  stop  loss  coverage  providing  loss  ratio
protection with aggregate limits. EBI also has excess of loss protection and 15%
quota share reinsurance  agreements covering lower layers of losses. The Company
is  evaluating  alternatives  in response to a recent  regulatory  action  taken
related to a reinsurance  arrangement in which EBI  participates.  Although this
regulatory  action is pending further  clarification,  the Company believes that
the  resolution  of this  matter  will not  materially  effect  its  results  of
operations or financial position.

                                       22
<PAGE>

     DPIC has a 50% quota share reinsurance  agreement on the first $1.0 million
of coverage  for the  lawyers  and  accountants  classes of  business.  DPIC has
reinsurance  for  losses in excess of $1.0  million up to $5.0  million.  Policy
limits  greater than $5.0 million up to $20 million for DPIC are  reinsured by a
facultative agreement.

     Guaranty  National  Insurance Company  ("GNIC"),  an affiliated  company of
Guaranty National has reinsurance  coverage in excess of $0.5 million up to $6.0
million for property and  casualty  losses,  and in excess of $0.5 million up to
$25  million  for excess and  umbrella  losses  with an  aggregate  limit of $25
million.  GNIC's reinsurance includes a $6.0 million annual aggregate deductible
for all coverages and protection  for  catastrophic  losses for each  occurrence
exceeding $1 million.

     Orion  Specialty  (primarily  program  business)  is protected by per event
coverage  for losses in excess of $0.5  million up to $10 million with an annual
aggregate  limit of $15 million except for property  related losses which is $10
million.  Grocers has reinsurance protection in excess of $0.2 million up to $20
million  per  occurrence  for workers  compensation,  up to $4 million of treaty
protection with facultative above that amount for property losses,  and up to $5
million of treaty protection for general/auto liability.

     McGee's  business is  reinsured  for losses in excess of $1.5 million up to
$150  million,  with  retention  buydowns to excess of $0.5 million on Canadian,
cargo/hull and armored car classes of business.

     The  Company  has  corporate-wide  aggregate  stop  loss  reinsurance  that
protects it from extraordinary losses.

GOVERNMENT REGULATION

     Similar to other insurance companies,  the Company's insurance subsidiaries
are subject to comprehensive regulation by insurance authorities. In particular,
the Company is subject to regulation by the insurance  departments of the states
of incorporation of all of the Company's  insurance  subsidiaries.  These states
include California,  Connecticut,  Colorado, North Carolina,  Oklahoma,  Oregon,
South Carolina,  Texas, and Wisconsin.  All insurance companies must file annual
statements and other reports with state  regulatory  agencies and are subject to
regular  and  special   examinations   by  those  agencies.   Regular   periodic
examinations of the Company's insurance subsidiaries,  covering their operations
and statutory financial statements are conducted on a regular basis by the state
of domicile of each  insurance  company and may include other states,  insurance
departments in which they are licensed.  The last periodic  examinations  of the
Company's insurance subsidiaries were completed for periods ending from December
31, 1993 to December 31, 1996.  No  significant  adjustments  resulted  from the
examinations  of any of the  Company's  insurance  subsidiaries.  The  State  of
Connecticut   recently   commenced  their  periodic   examination  of  insurance
subsidiaries  domiciled  in  Connecticut  for  periods  from  January 1, 1995 to
December 31, 1998.

     Each of the Company's insurance  subsidiaries is also subject to regulation
by other  jurisdictions  in which it sells  insurance,  including  Puerto  Rico,
certain Canadian  provinces and Bermuda.  States regulate the insurance business
through supervisory  agencies that have broad administrative  powers,  including
powers relating to, among other things:

                                       23
<PAGE>

     - the standards of solvency which must be met and maintained;

     - the licensing of insurers and their agents;

     - restrictions  on the amount of risk which may be insured  under a single
        policy;

     - the approval of premium rates;

     - the form and content of the insurance policy and sales literature;

     - the form and content of financial statements;

     - reserve requirements;

     - the imposition of monetary penalties for rules violation; and

     - the nature of and limitations on permitted investments.

In general, such regulations are for the protection of policyholders rather than
stockholders.

     In some instances,  particularly  in connection  with workers  compensation
insurance,   various  states  routinely  require  deposits  of  assets  for  the
protection  of  policyholders  and their  employee  claimants  located  in those
states. As of December 31, 1998 and 1997, securities representing  approximately
10%  and  9%,  respectively,  of the  book  value  of the  Company's  investment
portfolio  were on deposit with various state  treasurers or custodians for such
purpose.  These  deposits  consist of  securities  of the types that comply with
standards established by each state.

     The  Company is also  subject to state laws  regulating  insurance  holding
company systems. Most states have enacted legislation and adopted administrative
regulations affecting insurance holding companies and the acquisition of control
of insurance companies,  as well as transactions between insurance companies and
their  affiliates.  The nature and extent of such  legislation  and  regulations
currently  in effect  vary from state to state.  Most states  currently  require
administrative  approval of the  acquisition  of 10% or more of the  outstanding
shares of an insurance  company  incorporated in the state or the acquisition of
10% or more of an  insurance  holding  company  whose  insurance  subsidiary  is
incorporated in the state. The acquisition of 10% of such shares is deemed to be
the  acquisition of "control" for the purpose of most holding  company  statutes
and requires the filing of detailed information concerning the acquiring parties
and  the  plan  of  acquisition  and  administrative   approval  prior  to  such
acquisition.  Material  transactions  between insurance companies and affiliated
members of the holding  company  system are  generally  required to be "fair and
reasonable" and in some cases are subject to administrative approval.

     Other states, in addition to an insurance company's state of domicile,  may
regulate  affiliated  transactions  and the  acquisition  of control of licensed
insurers.  The  State of  California,  for  example,  presently  treats  certain
insurance  subsidiaries of the Company, which are not domiciled in California as
though they were domestic insurers for insurance holding company purposes.  Such
subsidiaries  are required to comply with the holding company  provisions of the
California  Insurance Code,  certain of which provisions may be more restrictive
than the comparable laws of the insurance company's state of domicile.

     All state  jurisdictions  in which the  Company is  authorized  to transact
business  require  participation  in  guaranty  funds.  Insurers  authorized  to
transact  business in those  jurisdictions  can be assessed by a state  guaranty
fund a percentage  (usually  from 1% to 2%) of direct  premiums  written in that
jurisdiction  each  year to pay  claims on behalf  of  insolvent  insurers.  The
likelihood and amount of any future  assessment  cannot be estimated until after
an insolvency  has occurred.  For the years ended December 31, 1998 and 1997 the
Company's  insurance  subsidiaries were assessed  approximately $1.5 million and
$0.7 million,  respectively (net of estimated future  recoveries) as a result of
known insolvencies.  Insurance companies are required by certain states in which
they do  business  to  participate  in  automobile  insurance  plans and workers
compensation  plans. These plans provide insurance on risks that are not written
in  the  voluntary  market.  Participation  in  these  plans  has  usually  been
unprofitable for the Company.

                                       24
<PAGE>

     A number of state  legislatures  and the United  States  Congress  have for
years been considering,  or have now enacted, some type of legislative proposals
which alter the rules for tort claims and  increase  the  states'  authority  to
regulate  insurance  companies.   These  initiatives  have  expanded,   in  some
instances,  the states'  regulation over rates (see "Rates" below) and also have
increased  data  reporting  requirements.  In recent  years the state  insurance
regulatory  framework  has  come  under  federal  scrutiny,  and  certain  state
legislatures  have  considered  or enacted  laws that  alter,  and in many cases
increase,  state authority to regulate insurance companies and insurance holding
company systems.

     The  National  Association  of Insurance  Commissioners  ("NAIC") and state
regulators  are  re-examining  existing  laws and  regulations  relating  to the
solvency  of  insurers.   The  NAIC  has  adopted  Risk  Based  Capital  ("RBC")
requirements for property and casualty insurers. RBC refers to the determination
of the amount of statutory  capital  required for an insurer  based on the risks
assumed by the insurer (including,  for example,  investment risks, credit risks
relating to reinsurance  recoverables and  underwriting  risks) rather than just
the  amount of net  premiums  written by the  insurer.  A formula  that  applies
prescribed factors to the various risk elements in an insurer's business is used
to determine the minimum  statutory  capital  requirement  for the insurer.  The
statutory  capital of each of the Company's  active  insurance  subsidiaries  at
December 31, 1998 exceeds the RBC requirements.

     In March 1998, the NAIC adopted the  Codification  of Statutory  Accounting
Principles  ("Codification").  Codification,  which is intended  to  standardize
regulatory  accounting and reporting for the insurance industry,  is proposed to
be effective  January 1, 2001.  However,  statutory  accounting  principles will
continue to be established by individual state laws and permitted  practices and
it is  uncertain  when,  or if, the  Company's  domiciling  states will  require
adoption of  Codification  for the  preparation  of  statutory  based  financial
statements.  The Company has not finalized the  quantification of the effects of
Codification on its statutory based financial statements.

     Although the federal  government  generally does not directly  regulate the
business of insurance,  federal initiatives often have an impact on the business
in a variety of ways.  There are various  current,  proposed and tabled  federal
measures  that  may  significantly  affect  the  Company's  insurance  business,
including, among other proposals:

     - Superfund reform;
        
     - tort  liability  reform,  including  limitation  on punitive  damages and
     "loser pays"  litigation  expense  costs;  - regulatory  reform  concerning
     financial services modernization;

     - revocation of the antitrust  exemption provided by the  McCarran-Ferguson
     Act and the ensuing federal regulation of the business of insurance; and

     - suggested  changes of the nation's  health care system that,  if enacted,
     might negatively affect the Company's  workers  compensation and automobile
     liability businesses.

     The economic and competitive effects of any such proposals upon the Company
would  depend upon the final form such  legislation  might take.  The Company is
unable to predict what regulatory  proposals may be adopted in the future or the
effect any such proposals might have on the Company's businesses if adopted.


                                       25
<PAGE>


LIMITATIONS ON PAYMENTS FROM INSURANCE SUBSIDIARIES

     The  principal   sources  of  cash   available  to  Orion  are   dividends,
reimbursement  of various  administrative  charges,  repayment of principal  and
interest  on  loans  due  from  its  subsidiaries;  and tax  payments  from  its
subsidiaries. The payment of dividends to Orion by its insurance subsidiaries is
subject to state regulation. No state restricts dividend payments by the Company
to its stockholders.

     The ability of the Company's insurance subsidiaries to declare dividends is
governed  primarily  by the  insurance  laws  of  such  subsidiaries'  state  of
domicile.  Generally, such laws currently provide that, unless prior approval is
obtained,  dividends  of a  property  and  casualty  insurance  company  in  any
consecutive  12-month period shall not exceed the greater of its net income,  as
adjusted for individual state  regulations,  for the preceding  calendar year or
10% of its policyholders' surplus as of the preceding December 31, determined on
a statutory  accounting  basis.  Dividends  and  distributions  by the Company's
insurance  subsidiaries  are  also  subject  to  a  requirement  that  statutory
policyholders' surplus be reasonable in relation to outstanding  liabilities and
adequate to meet the companies' financial needs following the declaration of any
dividends or  distributions.  State insurance  regulators,  however,  have broad
discretionary  authority  with respect to approving  the payment of dividends by
insurance companies. Under current regulations,  the maximum dividends permitted
at December 31, 1998 for the ensuing  twelve  months,  without  prior  approval,
aggregated  $135.5  million.  Orion  received  $55.2 million in the aggregate in
dividends from its subsidiaries in 1998. Since it is difficult to predict future
levels of statutory  policyholders' surplus or earnings, the amount of dividends
that could be paid in the future without prior approval  cannot be determined at
this time.

RATES

     The Company's insurance subsidiaries are generally subject to regulation as
to rates.  Most states have  insurance  laws  requiring  that rate schedules and
other  information  be filed with or made  available  to the state's  regulatory
authority,  either  directly  or  through a rating  organization  with which the
insurer is affiliated.  The regulatory authority may, in most states, disapprove
of a rate  filing  if it finds  that the  rates  are  inadequate,  excessive  or
unfairly  discriminatory.  Rates,  which  are not  necessarily  uniform  for all
insurers, vary by class of business, hazard assumed and size of risk. Subject to
regulatory requirements,  the Company's management determines the prices charged
for its  policies  based on a variety of  factors  including  recent  historical
claims experience,  inflation,  competition,  tax law and anticipated changes in
the legal  environment,  both judicial and legislative.  Methods for arriving at
rates vary by type of business,  exposure assumed and size of risk. Underwriting
profitability  is  affected  by  the  accuracy  of  these  assumptions,  by  the
willingness of insurance regulators to approve changes in those rates which they
control  and by such  other  matters as  underwriting  selectivity  and  expense
control.

     Some states have  adopted  open  rating  systems for workers  compensation,
which  permit  insurers to set  premium  rates  independently  without the prior
approval  of the  insurance  commissioners.  A  number  of other  states  permit
insurers to deviate from standard rates for workers compensation insurance after
receiving prior approval.  In insuring  professional  liability  risks,  DPIC is
generally  not  limited  to the  standard  rates  of a rating  organization  but
establishes  its own rates  because  of the  unique  nature  of the risks  being
underwritten.  Nonstandard and special risks,  including nonstandard  automobile
insurance  rates,  are generally  not limited to the standard  rates of national
rating bureaus.  Nonstandard  automobile insurance rates are usually higher than
those charged for standard  risks,  reflecting  the higher  probability of loss.
Several states have recently adopted laws or their  legislatures are considering
proposed  laws  which,  among  other  things,  limit the  ability  of  insurance
companies to effect rate  increases and to cancel,  reduce or not renew coverage
with respect to existing policies, particularly personal auto insurance.

                                       26
<PAGE>

COMPETITION

     The  insurance  industry is highly  competitive.  Over 3,000  property  and
casualty insurance  companies write business in the United States, but about 900
companies  write most of the business.  No single company or group has more than
10%  of  the  overall  market.  The  Company's  insurance  subsidiaries  are  in
competition  with  numerous  stock and mutual  property and  casualty  insurance
companies,  as well as state-run workers  compensation  insurance funds, many of
which are substantially larger and have significantly greater resources than the
Company.   Competition  might  also  come  from  service  organizations,   which
administer self-insured workers compensation programs.

     The impact of competition may take the form of lower premiums,  specialized
products,  more complete and complex product lines, greater pricing flexibility,
superior service,  different  marketing methods,  higher  policyholder  dividend
rates or higher agent  compensation.  Superior service and marketing methods are
of particular importance in workers compensation.

     The  Company  relies  on  multiple  distribution  channels  to  market  its
insurance products.  The Company's  insurance  subsidiaries sell their insurance
principally  through  independent  agents,   brokers  and  general  agents,  who
typically  also represent one or more competing  insurance  companies.  They are
paid  commissions  based on premiums  collected from insureds.  Commission rates
vary  according to the type and amount of insurance  sold.  Some  competitors in
certain  lines obtain  their  business at a lower direct cost through the use of
salaried personnel rather than independent agents and brokers.

RATING

     A.M.   Best  Company  rates  the  Company's   insurance   subsidiaries   "A
(Excellent),"  excluding Viking Insurance Company of Wisconsin and its affiliate
and Grocers Insurance Company which are rated "A- (Excellent)." In general, A.M.
Best Company's  ratings are based on an analysis of the financial  condition and
operation of an insurance  company as it relates to the industry.  These ratings
are not primarily  designed for investors and do not constitute  recommendations
to buy, sell or hold any security

     Management  believes  that a  significant  change in its A.M.  Best ratings
could  affect  the  business  of the  subsidiary  where  ratings  were  altered,
including its relationship with its independent agents,  positive in the case of
an upgrade or negative in the case of a downgrade.

ITEM 2. PROPERTIES

     The  Company's  executive  office  is  located  at  9  Farm  Springs  Road,
Farmington, Connecticut, 06032. The Company's executive office facility consists
of  approximately  140,000  square  feet and is leased  at an  annual  rental of
approximately  $3.2 million.  DPIC owns its office  building,  which consists of
approximately  42,000  square feet,  in  Monterey,  California.  OrionAuto  owns
facilities  in Englewood,  Colorado;  Salem,  Oregon;  Freeport,  Illinois;  and
Goldsboro,  North  Carolina.  Those  facilities  consist,  in the aggregate,  of
approximately  254,000  square  feet.  Grocers owns its office  building,  which
consists of 43,500 square feet, in Portland, Oregon.

     All of the other  insurance  operations of the Company are  conducted  from
leased  premises in or adjacent to major  urban  centers  throughout  the United
States,  Puerto Rico, Canada and Bermuda.  These  operations,  in the aggregate,
occupy approximately 1,070,000 square feet, at an annual rental of approximately
$12.0 million. The Company believes that its current facilities are suitable and
adequate for their present use and anticipated requirements.

                                       27
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

     The  Company  is  routinely   engaged  in  litigation   incidental  to  its
businesses.  In  the  judgment  of  the  Company's  management,   there  are  no
significant legal proceedings pending against the Company which, net of reserves
established  therefor,  are likely to result in  judgments  for amounts that are
material to the financial condition, liquidity or results of operations of Orion
and its consolidated subsidiaries, taken as a whole.

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

     None.

            INFORMATION CONCERNING EXECUTIVE OFFICERS OF THE COMPANY

     The  following is a summary of certain  information  regarding  the current
executive officers of Orion. All officers of Orion and its subsidiaries serve at
the pleasure of their respective Boards of Directors.

     W. Marston  Becker,  Chairman of the Board and Chief  Executive  Officer of
Orion since January 1997; Vice Chairman of the Board from March 1996 to December
1996;  President and Chief Executive  Officer of the DPIC from July 1994 to June
1996; and Senior Vice President of Orion and the Orion Capital  Companies,  Inc.
("OC  Companies")  from July 1994 to March 1996;  President and Chief  Executive
Officer of McDonough Caperton Insurance Group, an insurance brokerage firm, from
March 1987 to July 1994; age 47.

     Raymond W. Jacobsen, Executive Vice President of Orion since December 1997;
Senior Vice President of Orion from July 1994 to December  1997;  Vice President
of Orion  from  March  1990 to July  1994;  Chairman  of EBI  since  July  1996;
President and Chief Executive Officer of EBI from June 1993 to July 1996; Acting
President and Chief Executive Officer of Connecticut Specialty from October 1995
to November  1996;  Executive  Vice  President of EBI from  December 1989 to May
1993; Senior Vice President of the OC Companies since March 1990; age 46.

     John J. McCann,  Executive  Vice President and Secretary of Orion since May
1998;  Partner of Donovan  Leisure  Newton & Irvine from  September  1995 to May
1998; and Partner of Hall, Dicklery,  Kent, Friedman & Wood from January 1994 to
September 1995; age 62.

     James R. Pouliot,  Executive  Vice  President of Orion since December 1997;
President and Chief Executive  Officer of Guaranty  National  Corporation  since
December 1996; President and Chief Executive Officer of Viking Insurance Company
from October 1992 to December 1996; age 45.

     Claudia F. Lindsey,  Senior Vice  President of Orion since  December  1997;
Vice  President of Orion from January 1997 to December  1997;  Vice  President -
Business  Development of the OC Companies  since  September  1996;  President of
Strategic Marketing & Research, Inc. and Vice President of Anthem Financial from
1994 to  1996;  Director,  Managing  Partner  and  Chief  Financial  Officer  of
McDonough Caperton Insurance Group from 1985 to 1994; age 43.

     William G. McGovern, Senior Vice President and Chief Actuary of Orion since
December  1997;  Vice  President  and Chief  Actuary of Orion from March 1990 to
December  1997;  Senior Vice  President and Chief Actuary of OC Companies  since
October 1989; age 46.

                                       28
<PAGE>

     Stephen M.  Mulready,  Senior Vice  President of Orion since December 1997;
Vice President of Orion from January 1997 to December  1997;  President of Orion
Specialty,  previously  known as  Connecticut  Specialty,  since  November 1996;
Senior Vice  President  - Strategic  Underwriting  and  Product  Development  of
Travelers/Aetna  Property  Casualty  Corporation  from  January 1996 to November
1996;  Senior  Vice  President  - National  Commercial  Accounts of Aetna Life &
Casualty  from  1994 to  1996;  Vice  President,  Field  Operations  -  National
Commercial Accounts of Aetna Life & Casualty from 1991 to 1994; age 49.

     Thomas M. Okarma,  Senior Vice President of Orion since December 1997; Vice
President  of Orion from  January  1997 to December  1997;  President  and Chief
Executive  Officer of DPIC since July 1996;  Chief  Claims  Officer of DPIC from
December 1995 to June 1996; President of Professional  Concepts Insurance Agency
and Executive Vice President of AVA Insurance  Agency Inc. from February 1989 to
September 1994; age 49.

     Michael L. Pautler,  Senior Vice President and Chief  Financial  Officer of
Orion since January 1999; Vice President of Corporate  Development of Orion from
December 1997 to December 1998; Senior Vice  President-Finance  and Treasurer of
Guaranty National Corporation from September 1988 to February 1998; age 44.

     David B. Semeraro, Senior Vice President of Orion since December 1997; Vice
President of Orion from January 1997 to December 1997;  Vice President and Chief
Information  Officer of OC Companies since April 1996; Vice President - Business
&  Technology  Solutions  of  Connecticut  Mutual Life  Insurance  Company  from
November 1990 to April 1996; age 51.

     Susan B.  Sweeney,  Senior  Vice  President-Finance  and  Chief  Investment
Officer of Orion  since  January  1999;  Vice  President - Finance of Orion from
March  1998 to  December  1998;  Independent  Consultant  from  October  1997 to
February 1998;  Vice President  Planning and Analysis of Travelers  Property and
Casualty  Corporation,  from April 1996 to September  1997;  Managing  Director,
Strategic  Planning  Property/Casualty  Finance of Aetna Life & Casualty Company
from 1994 to April 1996;  Director of Corporate Finance of Aetna Life & Casualty
Company from 1991 to 1994; age 46.

     Jeanne S. Hotchkiss,  Vice President-Investors  Relations since March 1999;
Assistant Vice President,  Corporate Communications from May 1994 to March 1999;
Director, Corporate Communications from 1983 to May 1994; age 46.

     Craig A. Nyman,  Vice  President and Treasurer of Orion since January 1997;
Assistant  Vice  President  and Assistant  Treasurer  from June 1988 to December
1996; Treasurer of OC Companies since March 1996; Vice President of OC Companies
since January 1991;  Assistant Vice  President of OC Companies  since March 1987
and; Assistant Treasurer since March 1985; age 43.

     Peter M. Vinci, Vice President,  Chief Accounting Officer and Controller of
Orion since December 1997;  Vice President and Controller of OC Companies  since
January 1997; Vice President of OC Companies from July 1988 to January 1997; age
46.


                                       29
<PAGE>


                                     PART II


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

(a)  Principal  Market.  The principal  market on which Orion's  Common Stock is
traded is the New York Stock Exchange.

(b) Stock Price and Dividend Information.  The table below presents the high and
low market prices and dividend information for Orion's Common Stock for 1998 and
1997.

                                                                    Cash 
                                            Stock Prices          Dividends
                                         High          Low         Declared
1998:

Quarter Ended December 31             $  39.813   $  28.000     $     0.18
Quarter Ended September 30               59.250      34.563           0.18
Quarter Ended June 30                    57.750      52.000           0.18
Quarter Ended March 31                   55.688      43.063           0.16
                                                               -----------
      Total                                                    $      0.70
                                                               ===========

1997:

Quarter Ended December 31            $   51.000   $  42.375    $     0.16
Quarter Ended September 30               45.750      36.720          0.16
Quarter Ended June 30                    37.625      30.813          0.16
Quarter Ended March 31                   33.875      30.000          0.14
                                                               ----------
      Total                                                    $     0.62
                                                               ==========


     Stock prices and cash dividends declared are restated for the 2-for-1 stock
split of the Company's  common stock issued on July 7, 1997. Cash dividends have
been paid on Orion's  Common stock in every quarter since the fourth  quarter of
1978, when dividends were first commenced.

(c)  Approximate  Number of  Holders of Common  Stock.  The number of holders of
record of Orion's Common Stock as of March 1, 1999 was approximately 2,000.


                                       30
<PAGE>



ITEM 6.                        SELECTED FINANCIAL DATA

     The following table  summarizes  information with respect to the operations
and  financial  condition  of Orion and its  subsidiaries.  Common stock and per
common share data have been  restated to give effect to the 2-for-1  stock split
issued on July 7, 1997.  The Company  owned  slightly  less than 50% of Guaranty
National  Corporation  until the Company  increased its ownership to 81% in July
1996 and 100% in December 1997. Guaranty National Corporation is included in the
financial statements of the Company on a consolidated basis beginning on January
1, 1996 with  recognition  of  minority  interest  expense  for the  portion  of
Guaranty National Corporation's earnings attributable to shares not owned by the
Company  until it  became a  wholly-owned  subsidiary.  For 1994 and  1995,  the
Company's  investment in Guaranty  National  Corporation was accounted for using
the  equity  method.  The  Company's  acquisitions  have  been  included  in its
financial  statements  from  date of  purchase  and up to the  date of sale  for
divestitures.

<TABLE>
<CAPTION>
(In millions, except for % and per share amounts)      1998       1997       1996       1995        1994
--------------------------------------------------------------------------------------------------------
Year Ended December 31:
<S>                                               <C>        <C>        <C>        <C>         <C>      
Total revenues .....................              $ 1,716.7  $ 1,590.6  $ 1,493.5  $   874.3   $   780.9
                                                  =========  =========  =========  =========   =========
                                                                                            

Operating earnings .................              $    68.6  $    85.7  $    72.9  $    59.9   $    52.8
After-tax investment gains .........                   34.2       30.1       13.7        7.7         2.4
                                                  ---------  ---------  ---------  ---------   ---------          
Net earnings .......................              $   102.8  $   115.8  $    86.6  $    67.6   $    55.2
                                                  =========  =========  =========  =========   =========
                                                                                              

Combined ratios (GAAP) .............                  100.5%      99.7%      99.8%     100.3%      101.2%
                                                  =========  =========  =========  =========   =========      
Per basic common share:
   Operating earnings ..............              $    2.52  $    3.14  $    2.66  $    2.13   $    1.85
   After-tax investment gains ......                   1.26       1.10       0.50       0.28        0.09
                                                  ---------  ---------  ---------  ---------   ---------      
      Net earnings .................              $    3.78  $    4.24  $    3.16  $    2.41   $    1.94
                                                  =========  =========  =========  =========   =========    
Per diluted common share:
   Operating earnings ..............              $    2.46  $    3.07  $    2.63  $    2.11   $    1.84
   After-tax investment gains ......                   1.23       1.08       0.49       0.27        0.09
                                                  ---------  ---------  ---------  ---------   ---------  
      Net earnings .................              $    3.69  $    4.15  $    3.12  $    2.38   $    1.93
                                                  =========  =========  =========  =========   =========   

Dividends declared per common share               $    0.70  $    0.62  $    0.51  $    0.43   $    0.38
                                                  =========  =========  =========  =========   =========    
Weighted average shares outstanding:
   Basic ...........................                   27.2       27.3       27.4       28.1        28.5
   Diluted .........................                   27.8       27.9       27.8       28.4        28.7
At December 31:
Total cash and investments .........              $ 2,504.3  $ 2,553.0  $ 2,321.4  $ 1,606.4   $ 1,325.2
Total assets .......................                4,164.4    3,884.1    3,464.4    2,473.6     2,112.8
Total policy liabilities ...........                2,599.6    2,443.8    2,304.4    1,596.0     1,450.8
Notes payable ......................                  217.4      310.2      310.9      209.1       152.4
Minority interest ..................                     --         --       45.2         --          --
Trust preferred securities .........                  250.0      125.0         --         --          --
Stockholders' equity ...............                  727.3      723.1      576.7      490.9       365.1

Common shares outstanding ..........                   27.2       27.6       27.5       27.9        28.1
Book value per common share ........              $   26.77  $   26.19  $   20.94  $   17.59   $    13.0
Statutory policyholders' surplus ...                  732.1      789.0      670.6      521.5       458.7

</TABLE>

                                       31
<PAGE>


ITEM 7.             ORION CAPITAL CORPORATION AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                                     GENERAL

     Orion  Capital  Corporation  ("Orion")  and its  wholly-owned  subsidiaries
(collectively  the "Company")  operate  principally in the property and casualty
insurance  business.  The Company  reports  its  insurance  operations  in three
segments as of December 31, 1998 as follows:

Workers  Compensation - this segment includes the workers compensation insurance
         products and services sold by the EBI Companies ("EBI").

Specialty Commercial - as  of  1998  year  end,  this  segment  markets  various
         specialty  commercial  products and services and includes  professional
         liability  insurance  through DPIC Companies  ("DPIC");  client-focused
         specialty  insurance  programs  through Orion  Specialty;  underwriting
         management  specializing in ocean marine,  inland marine and commercial
         property  insurance  through  Wm.  H.  McGee  &  Co.,  Inc.  ("McGee");
         insurance for international trade through the Company's 26% interest in
         Intercargo  Corporation (" Intercargo");  and also includes the run-off
         operations of the Company's assumed reinsurance  business,  SecurityRe,
         which was sold in late 1996.  McGee and  Intercargo  are expected to be
         sold in 1999 (see below).

Nonstandard  Automobile  - this  segment  specializes  in  nonstandard  personal
         automobile  insurance  sold by OrionAuto,  formerly  known as Guaranty 
         National Corporation.

RECENT ACTIVITIES

The Company increased its ownership of Guaranty National Corporation  ("Guaranty
National") to 100% in December 1997. Beginning in 1998, the commercial insurance
operations of Guaranty National were consolidated with Connecticut  Specialty to
form  a new  company  named  Orion  Specialty.  Since  the  formation  of  Orion
Specialty,   OrionAuto's  only  business  is  nonstandard   personal  automobile
insurance.

On December 16, 1997 the Company purchased Unisun Insurance  Company  ("Unisun")
from  Michigan  Mutual  Insurance  Company for $26.2  million in cash  including
acquisition  expenses.  Unisun  is the  largest  automobile  insurance  facility
carrier in South Carolina and also writes personal  automobile  insurance in the
States of Alabama,  Georgia and North Carolina.  Unisun has been included in the
Company's consolidated financial statements from the date of acquisition.  Total
net premiums written by Unisun for 1997 are approximately $20 million. The total
consideration   exceeded   the  fair  value  of  the   acquired  net  assets  by
approximately $5.3 million and is being amortized over 25 years.

On April 30, 1998 the  Company  acquired  the  nonstandard  personal  automobile
insurance  business of North  Carolina-based  Strickland  Insurance Group,  Inc.
("Strickland").  The  acquisition  included two insurance  companies,  a premium
finance company,  a claim adjusting company and a general agency in Florida.  In
1997, Strickland reported approximately $99 million of personal automobile gross
premiums written and $46 million of net premiums written. The purchase price was
$44.1 million including acquisition expenses.  The acquisition was accounted for
as a purchase and  accordingly,  the acquired  business has been included in the
Company's  consolidated  financial statements from the date of acquisition.  The
total  consideration  exceeded  the fair  value of the  acquired  net  assets by
approximately $28.7 million and is being amortized over 25 years.

                                       32
<PAGE>

On July 9, 1998 the Company completed the acquisition of Grocers Insurance Group
("Grocers")  from  United  Grocers,  Inc.  for $36.7  million in cash  including
acquisition  expenses.  Grocers,  an Oregon-based  specialty  insurance  holding
company, is a recognized leader in providing  specialized  insurance programs to
the grocery and food service industry.  In 1997, Grocers wrote approximately $23
million of net premiums,  principally  general  liability,  property and workers
compensation  with the majority of its volume  concentrated in the  Northwestern
states.  The  acquisition  was  accounted  for as a purchase  and,  accordingly,
Grocers has been included in the  Company's  consolidated  financial  statements
from the date of acquisition. The total consideration exceeded the fair value of
the net assets  acquired by  approximately  $8.1 million and is being  amortized
over 25 years.

In the third quarter of 1998, the Company  announced an accelerated  realignment
of its Orion  Specialty  unit to address  lines  that had not met the  Company's
growth  and  profitability   expectations.   The  realignment   continued  Orion
Specialty's shift away from commodity  business,  primarily  commercial auto and
transportation,  to  a  smaller  number  of  more  client-focused  programs  and
specialty niches. The realignment involved exiting approximately $100 million in
annualized net written premiums of unprofitable  commodity and marginal lines of
business,  the  reduction of  approximately  90 employees  related to the exited
business, and the sale of its Colorado Casualty unit. Colorado Casualty produced
approximately  $55 million in annual net premiums,  which  consisted  largely of
business that did not fit the Company's specialization strategy.

On September 29, 1998, the Company sold Colorado Casualty resulting in a pre-tax
gain of approximately $24.2 million.  The Company recorded severance and program
termination  expenses of $7.0  million  and asset  write  downs of $1.9  million
related to the exited business in the third quarter of 1998.  Subsequently,  the
Company  recorded  $1.9  million of charges  against the  severance  and program
termination liability for incurred costs during 1998.

In  connection  with the third  quarter  realignment,  the Company  performed an
actuarial  analysis for the business to be exited  resulting in a provision  for
losses and loss  adjustment  expenses of $27.8  million in the third  quarter of
1998,  including  reserve  strengthening  of $10.8  million  related to the 1998
accident  year.  The Company will  continue in 1999 to assess Orion  Specialty's
remaining programs.

In December  1998,  the Company  agreed to sell its investment in Intercargo for
$22.8 million or $12 per share,  in cash  pursuant to the terms of  Intercargo's
merger  with X. L.  America,  Inc, a  subsidiary  of EXEL  Limited.  The Company
reduced the carrying  value of its  investment  in  Intercargo  to $22.8 million
resulting in $7.0 million pre-tax realized investment loss during December 1998.
The sale of  Intercargo  is expected to be complete late in the first quarter or
early in the second quarter of 1999, subject to regulatory approval.

Also a part of the  Company's  reshaping to focus  resources  on high  potential
lines of  business,  on March 11,  1999 the Company  announced  the signing of a
definitive  agreement to sell McGee.  The transaction is expected to be complete
by April 1999, subject to regulatory approvals and other closing conditions.


                                       33
<PAGE>


                              RESULTS OF OPERATIONS

OVERVIEW

Earnings by segment before federal  income taxes and minority  interest  expense
are summarized as follows:

                                                          % Change
                                                       --------------
(In millions, except for %)  1998     1997      1996    98/97   97/96
---------------------------------------------------------------------

Workers Compensation .   $   86.2  $   86.8  $   68.4   -0.8%   27.0%
Specialty Commercial .       54.2      65.3      56.5  -16.9%   15.5%
Nonstandard Automobile       37.1      40.7      23.3   -8.7%   74.8%
                         --------  --------  --------    ---    ----            
                            177.5     192.8     148.2   -7.9%   30.1%
Other ................      (20.8)    (16.6)    (20.9) -25.6%   20.3%
                         --------  --------  --------    ---    ----            
                         $  156.7  $  176.2  $  127.3  -11.1%   38.3%
                         ========  ========  ========   ====    ==== 
                                                                   
During the fourth quarter of 1998, the Company  adopted FAS No.131,  "Disclosure
about Segments of an Enterprise and Related  Information."  FAS 131  establishes
new standards for reporting  information  about operating  segments and requires
that the  segments  be based on the  internal  structure  and  reporting  of the
Company's operations.  See footnote 17 to the consolidated  financial statements
for the Company's segment disclosure.

Miscellaneous   income   and   expenses   (primarily   interest,   general   and
administrative  expenses  and other  consolidating  elimination  entries) of the
parent company are reported as "Other" in the above table.

Operating  earnings,  after-tax realized  investment gains, net earnings and per
diluted  common share amounts for the years ended  December 31 are summarized as
follows:

<TABLE>
<CAPTION>
                                                                                % Change
                                                                             --------------
(In millions, except for per share amounts and %) 1998       1997      1996   98/97  97/96
-------------------------------------------------------------------------------------------

<S>                                          <C>        <C>        <C>         <C>    <C>  
Operating earnings .......                   $    68.6  $    85.7  $   72.9   -19.9%  17.5%
After-tax investment gains                        34.2       30.1      13.7    13.5% 120.0%
                                             ---------  ---------  --------    ----   ----                                 
   Net earnings ..........                   $   102.8  $   115.8  $   86.6   -11.2%  33.7%
                                             =========  =========  ========    ====   ==== 
                                                                             

Per diluted common share:
Operating earnings .......                   $    2.46  $    3.07  $   2.63   -19.8%  16.7%
After-tax investment gains                        1.23       1.08      0.49    13.7% 120.4%
                                             ---------  ---------  --------    ----   ----                                  
   Net earnings ..........                   $    3.69  $    4.15  $   3.12   -11.0%  33.0%
                                             =========  =========  ========    ====   ==== 
                                                                             
</TABLE>


Operating  earnings  represents  earnings  after taxes,  excluding  net realized
investment  gains.  For 1998,  operating  earnings of $68.6  million  reflects a
realignment  of Orion  Specialty  and  third-quarter  losses from the  Company's
limited  partnership  investments.  In the third  quarter of 1998,  the  Company
recorded $12.5 million of net pre-tax charges,  or $0.35 per diluted share on an
after-tax basis, in connection with a realignment of Orion Specialty and related
reserve  strengthening  for exited  business.  In the third quarter of 1998, the
Company  reported  pre-tax  investment  losses  of $14.1  million,  or $0.33 per
diluted  share on an  after-tax  basis,  related to declines in the value of the
Company's limited  partnership  investments which are accounted for on an equity
basis.  These  charges  and losses  have  obscured  continued  strong  operating
performance from the Company's insurance operations, in particular EBI, DPIC and
OrionAuto.  That performance  is combined  with an  increase  in  after-tax
investment  gains to arrive at net  earnings.  For the five  year  period  ended
December  31,  1998,  the  Company's  return on  equity  from net  earnings  and
operating earnings has averaged 15.7% and 12.9% per year, respectively.

                                       34
<PAGE>

Weighted  average  common  shares  and  diluted  equivalents   outstanding  were
27,842,000, 27,900,000 and 27,788,000 for 1998, 1997 and 1996, respectively. The
1996 common stock and per common share data  presented in this document has been
restated to give  effect to the  2-for-1  split of the  Company's  common  stock
issued on July 7, 1997. 

REVENUES
<TABLE>
<CAPTION>

Revenues for the years ended December 31 are summarized as follows:
                                                                    % Change
                                                               -----------------
(In millions, except for %)     1998        1997        1996     98/97    97/96
--------------------------------------------------------------------------------

<S>                        <C>         <C>         <C>           <C>        <C> 
Net premiums written ....  $ 1,533.6   $ 1,367.1   $ 1,334.1     12.2%      2.5%
                           =========   =========   =========    =====     ===== 
                                                                               
Net premiums earned .....  $ 1,503.0   $ 1,357.7   $ 1,300.8     10.7%      4.4%
Net investment income ...      143.2       164.9       145.4    -13.1%     13.4%
Realized investment gains       52.5        47.8        24.2      9.9%     97.6%
Other income ............       18.0        20.2        23.1    -11.0%    -12.8%
                           ---------   ---------   ---------    -----     -----                                                     
   Total revenues .......  $ 1,716.7   $ 1,590.6   $ 1,493.5      7.9%      6.5%
                           =========   =========   =========    =====     ===== 
</TABLE>
<TABLE>
<CAPTION>
                                                                                   
PREMIUMS WRITTEN

The  Company's net premiums  written by segment for the years ended  December 31
are as follows:
                                                                     % Change
                                                                ------------------
(In millions, except for %)      1998         1997         1996     98/97   97/96
----------------------------------------------------------------------------------

<S>                        <C>          <C>          <C>            <C>       <C> 
Workers Compensation .     $    439.5   $    365.1   $    353.0     20.4%     3.4%
Specialty Commercial .          665.1        669.2        725.8     -0.6%    -7.8%
Nonstandard Automobile          429.0        332.8        255.3     28.9%    30.3%
                           ----------   ----------   ----------     ----     ----                                                  
                           $  1,533.6   $  1,367.1   $  1,334.1     12.2%     2.5%
                           ==========   ==========   ==========     ====     ==== 
 </TABLE>
                                                                                
In November  1996,  the Company sold the renewal book of business of its assumed
reinsurance  operation to  concentrate  on  businesses  where the Company  could
better  service its  specialized  niche  markets.  Excluding  premiums from this
operation,  the  Company's net premiums  written  increased by 13.1% in 1998 and
8.1% in 1997 compared to prior year periods.

WORKERS COMPENSATION

Net  premiums  written for Workers  Compensation  increased by 20.4% in 1998 and
3.4% in 1997 compared to prior year periods largely due to new business  written
through EBI's  multi-state  accounts  program  established in 1997 and continued
geographic expansion and penetration.  The increases in net premiums written are
mitigated, in part, by the effects of legislative reforms in certain states that
have led to an increasingly  competitive workers  compensation  marketplace with
lower  premium  rates  as well as a  reduction  in  losses.  Additionally,  1998
reflects  lower premium  retention from a change in EBI's  reinsurance  programs
effective October 1998.

                                       35
<PAGE>

SPECIALTY COMMERCIAL

Net premiums  written from Specialty  Commercial for the years ended December 31
are as follows:

                                                                 % Change
                                                            ------------------
(In millions, except  for %)  1998        1997       1996     98/97    97/96
------------------------------------------------------------------------------
Orion Specialty ...       $  376.2    $  402.8   $  409.6     -6.6%    -1.7%
DPIC ..............          185.0       198.7      195.6     -6.9%     1.7%
McGee .............          104.4        57.1       41.6     82.8%    37.4%
                          --------    --------   --------     ----     ----  
                             665.6       658.6      646.8      1.1%     1.8%
Assumed reinsurance           (0.5)       10.6       79.0      (a)      (a)
                          --------    --------   --------     ----     ----    
                          $  665.1    $  669.2   $  725.8     -0.6%    -7.8%
                          ========    ========   ========     ====     ==== 
                                                                      
 (a) - not meaningful

Net premiums written by DPIC for professional  liability  insurance decreased by
6.9% in 1998 compared to 1997  primarily due to rate  reductions  resulting from
the competitive  professional  liability insurance market and growth in its more
heavily  reinsured  products  areas,  partly offset by continual  high levels of
policy  renewals  and  growth in project  policies.  The 1.7%  increase  in 1997
compared to 1996 is primarily  attributable to the DPIC's  continued high levels
of policy  renewals  and new  business  offset in part by rate  reductions  in a
competitive professional liability insurance market.

Orion  Specialty's  net premiums  written  decreased by 6.6% in 1998 compared to
1997 primarily due to its exit of unprofitable  commodity  program  business and
marginal  lines of  business  related  to a  realignment  of this  unit.  Exited
programs during the past two years with the largest year-over-year impact on net
premiums  written  were  truck  liability,  marine,  coal  mine and  nonstandard
automobile  personal injury protection.  Net premiums written also reflect lower
premiums from Orion Specialty's collateral protection business and from Colorado
Casualty,  which was sold on  September  29,  1998 as part of  realigning  Orion
Specialty.  These  decreases  were  partly  offset by higher  premiums  from the
acquisition of Grocers on July 9, 1998.

In 1997 compared to 1996, Orion  Specialty's net premiums  written  decreased by
1.7% primarily due to the  cancellation of marine programs and lower premiums of
the commercial  nonstandard  business of Guaranty National  resulting from agent
and program  cancellations,  increased  competition and lower production.  These
decreases  were  partly  offset  by  higher  premiums   written  by  the  former
Connecticut  Specialty  unit  from  transportation  programs  and  low  exposure
professional liability programs, higher retentions after a change in reinsurance
effective May 1996, and premium volume growth for Orion  Specialty's  collateral
protection business.

McGee's net premiums written  increased by 82.8% in 1998 compared to 1997 due to
the Company's greater  participation in the underwriting  pools managed by McGee
and  increased  premium  retention  reflecting  a change in McGee's  reinsurance
programs  effective  July 1998.  The Company's  participation  in McGee's United
States  pool was 71.5% in 1998,  52% in 1997 and 37% in 1996.  Participation  in
McGee's Canadian pool was 72% in 1998, 61% in 1997 and 49% in 1996.

The  assumed  reinsurance  business  was  sold in  late  1996  resulting  in the
continued decline in net premiums written.

                                       36
<PAGE>

NONSTANDARD AUTOMOBILE

The net premiums  written  growth of 28.9% for  Nonstandard  Automobile  in 1998
compared to 1997 is primarily due to the  acquisitions of Strickland and Unisun,
premium  growth  in  the  monthly   product   business  in  California  and  the
northwestern  United  States  ,  offset  in  part by  rate  reductions  due to a
competitive  market.  Premium  growth in California  is primarily  attributed to
enacted  legislation   requiring  all  drivers  to  maintain  minimum  liability
insurance.

The net premiums  written  growth of 30.3% for  Nonstandard  Automobile  in 1997
compared to 1996 is due to newly-enacted  legislation in the state of California
which requires all drivers to maintain  minimum  liability  insurance  effective
January 1997.  This change in  California  law resulted in a 75% increase in the
Nonstandard  Automobile's  one-month  product  business  to  approximately  $155
million in 1997.

PREMIUMS EARNED

The Company's  premiums earned increased  10.7%, or $145.3 million,  to $1,503.0
million in 1998 and increased  4.4%, or $56.9  million,  to $1,357.7  million in
1997 from $1,300.8  million in 1996.  Premiums earned reflect the recognition of
income from the changing levels of net premium writings.

                             INVESTMENT PERFORMANCE

<TABLE>
<CAPTION>
The pre-tax performance of the Company's  investments,  including net investment
income,   net  realized   gains   (losses)  and  net   unrealized   appreciation
(depreciation) is as follows:

(In millions, except for %)                                   1998         1997         1996
--------------------------------------------------------------------------------------------
Year ended December 31:
<S>                                                     <C>          <C>          <C>       
Net investment income ................................. $    143.2   $    164.9   $    145.4
                                                        ----------   ----------   ----------                                       
Net realized gains:
   Fixed maturities ...................................       12.5          4.0          2.1
   Equity securities ..................................       40.0         43.8         22.1
                                                        ----------   ----------   ----------                                       
      Total realized gains ............................       52.5         47.8         24.2
                                                        ----------   ----------   ----------                                       
Net unrealized appreciation (depreciation) recorded in 
   stockholders' equity:
   Fixed maturities - available for sale ..............      (30.0)        38.9        (11.1)
   Equity securities ..................................      (50.4)        18.4         18.4
Net unrealized appreciation (depreciation) for
   fixed maturities - held to maturity ................        2.5          1.7         (5.3)
                                                        ----------   ----------   ----------
      Total unrealized appreciation (depreciation) ....      (77.9)        59.0          2.0
                                                        ----------   ----------   ----------                                       
                                                        $    117.8   $    271.7   $    171.6
                                                        ==========   ==========   ==========                                       
Investment yields on average portfolio:
   Pre-tax ............................................        6.0%         7.0%         6.9%
                                                        ==========   ==========   ==========                                    
   After-tax ..........................................        4.7%         5.3%         5.4%
                                                        ==========   ==========   ==========                                       
Carrying value at December 31:
   Fixed maturities and short-term investments ........ $  1,859.2   $  2,010.9   $  1,858.0
   Equity securities ..................................      510.9        438.5        361.7
   Other long-term investments ........................      116.2         94.3         90.1
                                                        ----------   ----------   ----------          
                                                        $  2,486.3   $  2,543.7   $  2,309.8
                                                        ==========   ==========   ==========
</TABLE>


                                       37
<PAGE>

                                                                             
NET INVESTMENT INCOME

Pre-tax net  investment  income  decreased by $21.7  million in 1998 compared to
1997  primarily  due  to  lower  earnings  on  limited  partnership  investments
accounted  for on an equity  basis,  the  continued  shift in the  fixed  income
portfolio from taxable to  tax-advantaged  securities,  which generally  provide
lower income yields than taxable fixed income  securities,  and lower investment
yields.  Additionally,  investment  yields declined from the reinvestment of the
proceeds of matured and called  securities  at declining  rates during the year.
Net investment income was favorably affected by positive operating cash flow.

Net  investment  income  increased  by $19.5  million in 1997  compared  to 1996
primarily  due to a higher  investment  base and a slight  increase  in  pre-tax
investment  yields.  The higher  investment  base for 1997 reflects the proceeds
from the issuance of $125 million of trust preferred  securities in January 1997
and the effects of  positive  operating  cash flow.  These  increases  have been
offset in part by the July 1996 cash outlay of  approximately  $88.2 million for
the purchase of Guaranty National common shares.

Net investment income reflects limited partnership investment equity earnings of
$2.6  million  in 1998,  $17.1  million in 1997 and $16.0  million in 1996.  The
decrease  in limited  partnership  earnings  in 1998 as  compared to 1997 is due
primarily  to a $14.1  million  pre-tax  investment  loss  recorded in the third
quarter of 1998.  This loss was  attributed  to  volatility  and declines in the
financial  markets  during the third  quarter of 1998  resulting in  significant
declines  in  value  of  three  of  the  Company's  larger  limited  partnership
investments.  The increase in limited partnership  earnings for 1997 as compared
to 1996 is primarily attributable to favorable performance for a majority of the
limited  partnership  investments.  Earnings  (losses) from limited  partnership
investments can vary considerably  from  year-to-year.  The Company's  long-term
experience  with  limited  partnership  investments  has been  quite  favorable;
however,  they represented  only 4.5% and 3.6% of total  investments at December
31, 1998 and 1997, respectively.  The Company currently plans to modestly reduce
its limited partnership investments in 1999.

Fixed maturity  investments,  which the Company has both the positive intent and
the ability to hold-to-maturity,  are recorded at amortized cost. Fixed maturity
investments,  which may be sold in response to, among other  things,  changes in
interest rates,  prepayment  risk,  income tax strategies or liquidity needs are
classified as  available-for-sale  and are carried at market value.  At December
31, 1998 and 1997 fixed  maturities and short-term  investments  comprised 74.2%
and 78.8%,  respectively,  of the Company's cash and investments.  The effective
duration of the  Company's  fixed income  investment  portfolio was 5.0 years at
December 31, 1998.

The Company  invests  primarily in investment  grade  securities  and strives to
enhance the average  return of its  portfolio  through  limited  investment in a
diversified  group  of  non-investment   grade  fixed  maturity   securities  or
securities  that are not rated.  The risk of loss due to  default  is  generally
considered greater for non-investment grade securities than for investment grade
securities  because the former,  among other things,  are often  subordinated to
other  indebtedness  of the  issuer  and are often  issued  by highly  leveraged
companies.   At  December  31,  1998  and  1997,  the  Company's  investment  in
non-investment  grade and non-rated  fixed maturity  securities  were carried at
$208.7 million and $256.7 million, respectively. These investments represented a
total of 8.3%  and  10.1%  of cash  and  investments  and 5.0% and 6.6% of total
assets at December 31, 1998 and 1997, respectively.

                                       38
<PAGE>

The Company  monitors the financial  condition of the issuers of securities that
it owns. When conditions are deemed  appropriate,  the Company ceases to accrete
discounts,  or accrue  interest and  dividends  and, in cases where the value of
such  investments is deemed to be other than  temporarily  impaired,  recognizes
losses. The Company's  non-investment  grade securities are highly  diversified,
with an average  investment per issuer of approximately $1.7 million at December
31, 1998.  The largest  non-investment  grade  security had a carrying  value of
$12.0 million at December 31, 1998.

REALIZED AND UNREALIZED INVESTMENT RESULTS

Net realized investment gains are $52.5 million, $47.8 million and $24.2 million
for 1998, 1997 and 1996,  respectively.  Realized investment gains (losses) vary
from period to period,  depending on market conditions relative to the Company's
investment holdings, the timing of investment sales generating gains and losses,
the occurrence of events which give rise to  other-than-temporary  impairment of
investments,  and  other  factors.  Approximately  25% of the 1998 net  realized
investment  gains  resulted from the sale of two  investments  in entities which
were acquired or taken public during the first quarter. In the fourth quarter of
1998, the Company  recorded a $7.0 million  realized loss in connection with the
pending  sale  of  its  investment  in  Intercargo.   Excluding  provisions  for
other-than-temporary impairment, sales of equity securities have resulted in net
gains of $41.1  million,  $44.2  million  and $22.4  million  and sales of fixed
maturity  investments have resulted in net gains of $15.7 million,  $6.0 million
and $3.2 million in 1998, 1997 and 1996, respectively. Realized investment gains
may  be  reduced  by  provisions   for  losses  on   securities   deemed  to  be
other-than-temporarily  impaired.  Impairment  provisions of $1.1 million,  $0.4
million and $0.3 million for equity  securities  and $3.2 million,  $2.0 million
and $1.1 million for fixed maturity  investments  were  recognized in 1998, 1997
and 1996, respectively.  Any such provision is based on available information at
the time and is made in consideration of the decline in the financial  condition
of the issuers of such securities.

Net unrealized investment appreciation  (depreciation) for equity securities and
fixed maturities classified as available-for-sale  are recorded in stockholders'
equity, net of federal taxes. Unrealized investment appreciation  (depreciation)
can vary significantly depending upon fluctuations in interest rates, changes in
credit  spreads and in equity  prices.  For 1998,  equity  securities  and fixed
maturities recorded in stockholders' equity had unrealized depreciation of $50.4
million and $30.0 million, respectively,  after taking $52.5 million of realized
net  gains.  For 1997,  equity  securities  and  fixed  maturities  recorded  in
stockholders'  equity had  unrealized  appreciation  of $18.4  million and $38.9
million,  respectively,  after taking $47.8  million of realized net gains.  See
section titled "Market Risk of Financial Instruments" on pages 47-48.


                                       39
<PAGE>


                               EXPENSES AND OTHER

OPERATING RATIOS

The following table sets forth certain ratios of insurance operating expenses to
premiums earned for the years ended December 31:
      
                                                        1998     1997     1996
                                                       -----    -----    ----- 
Loss and loss adjustment expenses                      67.9%    66.7%    67.9%
Policy acquisition costs and other
   insurance expenses                                  31.0%    31.2%    30.1%
                                                      -----     ----     ----  
     Total before policyholders' dividends             98.9%    97.9%    98.0%
Policyholders' dividends                                1.6%     1.8%     1.8%
                                                      -----     ----     ----  
     Combined ratio                                   100.5%    99.7%    99.8%
                                                      =====     ====     ==== 
                                                       
Loss and loss adjustment expenses ratio by segment:
     Workers Compensation                              57.5%    53.7%    58.8%
     Specialty Commercial                              74.0%    72.1%    71.3%
     Nonstandard Automobile                            69.1%    70.0%    71.3%


The loss ratio for Workers  Compensation  increased in 1998 compared to 1997 due
to the effects of competitive  pricing pressure and a change in loss development
reflecting  upward  adjustments  to initial  reserve  estimates for the 1997 and
prior accidents years. The benefit of EBI's service-oriented  approach,  working
with its  customers  to prevent  losses and reduce claim  costs,  has  partially
offset this impact.  The loss ratio for Workers  Compensation  decreased in 1997
compared to 1996 due to favorable loss development and loss experience  achieved
by EBI through its service-oriented approach.

The loss ratio for  Specialty  Commercial  increased  in 1998  compared  to 1997
primarily  due to $27.8 million of loss reserve  strengthening  recorded in 1998
related  to  business  being  exited  in  connection  with  an  Orion  Specialty
realignment.  Excluding these charges,  the loss ratio for Specialty  Commercial
would  have been  69.7% in 1998.  Additionally,  the loss  ratio  for  Specialty
Commercial   reflects  reserve   strengthening   for  the  Company's  pools  and
associations,  and for the  assumed  reinsurance  business  exited in late 1996.
These  increases were partly offset by an improvement in DPIC's and McGee's loss
ratios in 1998 as compared to 1997.

The loss ratio for  Specialty  Commercial  increased  in 1997  compared  to 1996
primarily  due to losses from certain  programs  cancelled  by Orion  Specialty,
reserve  strengthening  for the Company's pools and associations and reinsurance
business,  and higher estimates for losses and loss adjustment  expenses for the
commercial  automobile line of business written by Guaranty  National.  The 1997
loss ratio  increase has been partly offset by the favorable  effect of a change
in this  segment's mix of business,  particularly  the lower premiums and losses
from the assumed reinsurance business that the Company exited in November 1996.

The loss ratio for  Nonstandard  Automobile  improved  in 1998  compared to 1997
primarily due to a decline in claims frequency and claims severity partly offset
by higher loss expenses.  The  improvement in the  Nonstandard  Automobile  loss
ratio for 1997 compared to 1996 is primarily due to lower claims frequency. This
improvement  has been partly offset by costs  incurred to improve claim handling
and reduce insurance fraud.

                                       40
<PAGE>

The ratios of policy  acquisition costs and other insurance expenses to premiums
earned  (the  "expense  ratio") are 31.0% in 1998,  31.2% in 1997,  and 30.1% in
1996.  Policy  acquisition  costs  include  direct costs,  such as  commissions,
premium  taxes,  and salaries that relate to and vary with the production of new
and renewal  business.  These costs are  deferred  and  amortized as the related
premiums are earned, subject to a periodic test for recoverability. The increase
in the  expense  ratio  in 1997 as  compared  to  1996  is  attributable  to the
Company's continued investment in building its loss prevention  competencies and
the  costs  of  expanding  in  new  territories  and  changing  the  EBI  office
operations.  Additionally, the 1997 increase is the result of higher commissions
at EBI and Orion  Specialty  including a change in  reinsurance  in 1996,  which
provides for lower ceding commissions.  The ratio of policyholders' dividends to
premiums  earned (the  "dividend  ratio") was 1.6% in 1998 and 1.8% in both 1997
and 1996.  The decrease in the  dividend  ratio for 1998 as compared to 1997 was
due to a  change  in  business  mix at  Orion  Specialty  resulting  in a  lower
percentage of policies paying dividends to policyholders.

Provisions for losses and loss adjustment  expenses include  development of loss
and loss adjustment  expense  reserves  relating to prior accident years,  which
increased the calendar year combined ratio by 2.3 percentage  points in 1998 and
0.7  percentage  points in both 1997 and 1996.  During 1998,  the Company's loss
ratio was unfavorably  affected by loss  development in exited programs at Orion
Specialty,  the assumed  reinsurance  business  discontinued in 1996,  pools and
associations (other than from McGee), and workers compensation line of business.
In the third  quarter  of 1998,  the  Company  recorded  $17.0  million  of loss
reserves  pertaining  to prior  accident  years  for  business  being  exited in
connection with the Orion Specialty realignment.  Excluding this charge, adverse
development of prior  accident years  increased the calendar year combined ratio
by 1.1  percentage  points in 1998.  During 1997,  the Company's  loss ratio was
unfavorably affected by loss development in the pools and associations,  assumed
reinsurance business discontinued in 1996 and cancelled program business, partly
reduced by favorable  development in the workers compensation  insurance line of
business.

The Company's  environmental claims principally relate to asbestos and hazardous
waste,  arising from certain liability business written prior to the mid 1980's,
which  business  was  never  a  major  element  of  the  Company's   operations.
Environmental claims are also received from certain pools and associations where
reserves are  established  based on  information  reported to the Company by the
managers  of  those  pools  and  associations.   The  Company  discontinued  its
participation in these reinsurance pools and associations in the mid 1980's.

Establishing   reserve  liabilities  for  environmental  claims  is  subject  to
significant  uncertainties  that make  reserve  estimation  difficult.  Judicial
decisions  have  tended to expand  insurance  coverage  beyond the intent of the
policies.  The  disposition  of such claims  often  requires  lengthy and costly
litigation.  Uncertainties as to required  clean-up remedies and difficulties in
identifying  the  responsible  parties add further to the  complexity of reserve
estimation for these claims.  In recent years,  the Company has  intensified its
efforts  to settle  and close  environmental  claims.  In  recognition  of these
efforts,  reserves have also been  increased to provide for the costs related to
settling  claims.  To help  minimize the cost of losses and claims,  the Company
maintains  a  dedicated   environmental  claims  staff,  which  administers  and
continually  evaluates each claim and its defense and settlement  possibilities.
In 1998,  1997 and 1996,  the Company paid $7.5  million,  $6.8 million and $4.8
million,  respectively,  for the costs of defending  and  settling  such claims.
Claim counts have been  aggregated by year of coverage for each  occurrence  for
which policyholders are being defended, and often include numerous claimants.

As of December 31, 1998 and 1997, the Company has  environmental  claims-related
loss and loss adjustment expense reserves, net of reinsurance  recoverables,  of
$65.7 million and $67.9 million,  respectively.  Claim counts are 515 and 551 at
December 31, 1998 and 1997,  respectively,  for direct  business  written by the
Company that  excludes  pools and  associations.  Following  industry  practice,
counts for asbestos  claims are generally  established for each insured for each
policy.  Counts for environmental claims are based upon each site. In estimating
liabilities  for   environmental-related   claims,  the  Company  considers  all
pertinent   information,   as  it  becomes   available.   The  net  reserve  for
environmental  claims and IBNR increased  $10.9 million in 1997 primarily due to
higher  claims  reported  to  the  Company  by  certain  reinsurance  pools  and
associations,  which is the basis of establishing such reserve,  and higher loss
reserve estimates.

                                       41
<PAGE>

Management  believes  that the Company's  reserves for loss and loss  adjustment
expenses make  reasonable and sufficient  provision for the ultimate cost of all
losses on claims  incurred.  However,  there can be no assurance that changes in
loss trends will not result in additional  development of prior years'  reserves
in the future.  Variability in claim emergence and settlement patterns and other
trends in loss experience can result in future  development  patterns  different
than expected.  The Company  believes that any such development will continue at
the low levels experienced in recent years,  considering  actions that have been
taken to increase reserving levels, improve underwriting standards and emphasize
loss  prevention  and  control.  The  Company's  loss  ratios in  recent  years,
including  development of prior years' losses, have compared favorably with loss
ratios experienced by the industry.

The  Company  limits both  current  losses and future  development  of losses by
ceding business to reinsurers.  The Company  continually  monitors the financial
strength of its  reinsurers  and, to the  Company's  knowledge,  has no material
exposure with regard to potential  unrecognized  losses due to reinsurers having
known financial difficulties.

INTEREST EXPENSE

Interest  expense was $19.4  million in 1998 and $24.7 million for both 1997 and
1996,  decreasing  21.6% in 1998 compared to 1997.  Interest expense declined in
1998 as a result of the  repayment  of the $100  million  bank  indebtedness  of
Guaranty  National  in  February  1998 with  proceeds  from the  issuance of the
Company's 7.701% Trust Preferred Securities.

OTHER EXPENSES

Other expenses were $44.0 million, $45.0 million and $43.0 million in 1998, 1997
and 1996,  respectively.  During the fourth  quarter of 1998, the Company closed
its corporate  office in New York City and integrated  the  investment  function
into the corporate  office  located in  Farmington,  Connecticut.  These actions
resulted in a $2.3  million  pre-tax  charge for  severance  and office  closure
expenses.

EQUITY IN EARNINGS (LOSSES) OF AFFILIATE

Equity in earnings (losses) of affiliate  represents  earnings (losses) from the
Company's  26%  investment in Intercargo  and was $(0.7)  million in 1998,  $8.6
million in 1997 and $(0.4)  million in 1996.  The Company has agreed to sell its
investment in  Intercargo,  which is expected to close late in the first quarter
or early in the second quarter of 1999 pursuant to  Intercargo's  merger with X.
L. America,  Inc., a subsidiary of EXEL Limited.  The Company recorded its share
of  Intercargo's  results in the  subsequent  quarter as Intercargo  reports its
quarterly  earnings after the Company reports its earnings.  In 1997,  equity in
earnings  of   affiliates   reflected  a  pre-tax  gain  of  $7.0  million  from
Intercargo's sale of Kingsway Financial Services.

FEDERAL INCOME TAXES

Federal income taxes,  including tax benefits from trust  preferred  securities,
and the related  effective tax rates are $34.3 million  (25.0%) for 1998,  $42.8
million  (25.8%)  for 1997 and $32.0  million  (25.2%) for 1996.  The  Company's
effective  tax  rates  are less  than the  statutory  tax rate of 35%  primarily
because of income derived from tax-advantaged securities.

                                       42
<PAGE>

In October 1996 the Internal Revenue Service ("IRS") completed an examination of
the Company's federal income tax returns through 1992. Certain tax benefits from
tax attributes existing at the date of the Company's reorganization in 1976 were
not  recognized  pending  completion of the IRS  examination.  Accordingly,  the
Company  recorded a credit to capital  surplus in 1996 for tax benefits of $11.9
million with respect to the 1976  reorganization.  The  recording of this credit
had no impact on the Company's earnings.

MINORITY INTEREST EXPENSE

Minority  interest  expense in trust preferred  securities was $12.8 million for
1998 and $6.9 million for 1997.  Minority  interest  expense in trust  preferred
securities  represents the financing cost, after the federal income tax benefit,
on Orion's 8.73% and 7.701% Trust Preferred Securities. The increase in 1998 and
1997 reflects  minority  interest  expense  associated  with the issuance of the
7.701% and 8.73% Trust  Preferred  Securities in February 1998 and January 1997,
respectively.

Minority interest expense in subsidiary net earnings of $7.0 million in 1997 and
$8.7  million  in 1996  was  recorded  for the  after-tax  portion  of  Guaranty
National's earnings attributable to stockholders of Guaranty National other than
the Company.  Guaranty National became a wholly-owned  subsidiary of the Company
in December 1997.

                         LIQUIDITY AND CAPITAL RESOURCES

The Company's cash flows for the years ended December 31 was as follows:

(In millions)                       1998        1997        1996
-----------------------------------------------------------------
Cash flows:
Operating activities .......     $   29.9   $  100.0    $  167.7
Investing activities .......         11.3     (207.4)     (132.4)
Financing activities .......        (32.5)     105.1       (27.3)
                                 --------   --------    --------                
                                 $    8.7   $   (2.3)   $    8.0
                                 ========   ========    ========
                                                        
The decrease in operating cash flow for 1998 and 1997 is primarily the result of
higher payments for losses,  policy acquisition costs,  federal income taxes (in
1998) and minority  interest from trust  preferred  securities.  The higher loss
payments  reflect  both  an  acceleration  of  claims  settlement  in two of our
operations  during 1998 and loss  payments  related to the  assumed  reinsurance
business exited by the Company.  Higher payments for policy  acquisition  costs,
are related to the Company's current rate of growth. Federal income tax payments
for 1998  include  $8.5  million of federal tax  payments  related to 1997 and a
$20.0  million  federal tax refund that was received by the Company in the first
quarter of 1999.  Partially  offsetting these increased cash outflows are higher
premiums collected,  reflective of the Company's current rate of growth, as well
as higher investment income collected.

Cash is used in or provided by investment  activities primarily for purchases or
from sales and maturities of investments,  for acquisition  activities,  and for
purchases  of  property  and  equipment.  Investment  purchases  are  funded  by
maturities and sales of  investments,  as well as by the net cash from operating
cash flows after cash provided by or used in financing activities. Cash used for
acquisitions totaled $80.1 million in 1998 and $132.6 million in 1997 (excluding
acquired cash of $17.5  million in 1998 and $1.7 million in 1997).  Cash used in
acquisition  activities (excluding cash acquired) in 1998 included $39.7 million
for purchase of Strickland's nonstandard personal automobile insurance business,
$32.4  million for purchase of Grocers,  $5.1 million  related to  settlement of
purchase  price  contingency  for  Guaranty  National's  acquisition  of  Viking
Insurance Company of Wisconsin in 1995, and $2.9 million to tender the remaining
shares of Guaranty National related to the December 1997 purchase.  In September
1998,  the Company  sold  Colorado  Casualty  providing  cash  proceeds of $13.1
million (net of cash sold with Colorado Casualty and before taxes). Cash used in
acquisition activities (excluding cash acquired) in 1997 included $104.4 million
for the  purchase of  Guaranty  National  common  stock,  $26.2  million for the
purchase  of  Unisun,  and  a  $2.0  million  purchase  price  deposit  for  the
acquisition of Strickland.

                                       43
<PAGE>

Cash used in  financing  activities  included  repayment  of $100  million  bank
indebtedness  of  Guaranty  National  from  net  proceeds  of the  7.701%  Trust
Preferred  Securities  issued in February 1998. The issuance of trust  preferred
securities by the Company  provided $121.9 million and $123.0 million of cash in
1998 and 1997,  respectively.  During  1998,  the Company used $8.0 million from
unsecured  borrowings  under its bank  credit  facility to fund uses of cash and
repaid  $9.4  million  of  assumed  bank  debt  related  to the  acquisition  of
Strickland.  Cash used in financing  activities also includes dividend payments,
scheduled  debt  repayments and payments  related to the Company's  common stock
repurchase  program.  Orion increased the quarterly  dividend rate on its common
stock by 12.5% and 14.3% in the second quarters of 1998 and 1997, respectively.

Orion's uses of cash consist of debt  service,  dividends  to  stockholders  and
overhead  expenses.  These cash uses are funded from  existing  available  cash,
financing  transactions  and  receipt of  dividends,  reimbursement  of overhead
expenses,  debt service costs from loans due from  subsidiaries,  and amounts in
lieu of federal  income taxes from  Orion's  insurance  subsidiaries.  Orion has
received  $55.2  million,  $42.8 million and $35.3  million in  dividends,  $8.3
million,  $8.1 million and $7.4  million for  overhead  expenses and federal tax
payments of $20.8  million,  $9.5 million and $7.5  million  from its  insurance
subsidiaries  in 1998,  1997 and 1996,  respectively.  Payments of  dividends by
Orion's insurance subsidiaries must comply with insurance regulatory limitations
concerning   stockholders'  dividends  and  capital  adequacy.  State  insurance
regulators have broad discretionary authority with respect to limitations on the
payment  of  dividends  by  insurance   companies.   Limitations  under  current
regulations are well in excess of Orion's cash requirements.

Orion's insurance subsidiaries maintain liquidity in their investment portfolios
substantially  in  excess of that  required  to pay  claims  and  expenses.  The
insurance  subsidiaries  held cash and short-term  investments of $242.4 million
and $160.4 million at December 31, 1998 and 1997, respectively. The consolidated
policyholders'  surplus of Orion's insurance subsidiaries was $732.1 million and
$789.0  million at  December  31,  1998 and 1997,  respectively.  The  Company's
statutory  operating  leverage  ratios of trailing  twelve  months net  premiums
written to  policyholders'  surplus was 2.1:1 at December  31, 1998 and 1.8:1 at
December 31, 1997.

On July 8, 1998 the Company  entered  into a five year credit  agreement  with a
group of banks which  provides for unsecured  borrowings up to $150 million,  of
which $8.0 million was  outstanding at December 31, 1998. The Company intends to
use the credit  facility  for  general  corporate  purposes,  which may  include
acquisitions.  Borrowings  under the credit  agreement  bear  interest  at LIBOR
(London  Interbank  Offered Rate) plus a margin based upon the Company's  credit
ratings.  The credit agreement  requires the Company to maintain certain defined
financial covenants including a maximum debt to total capitalization ratio and a
minimum  combined  statutory  surplus.  Also,  the credit  agreement  limits the
Company's   ability  to  incur  secured   indebtedness  or  certain   contingent
obligations except for indebtedness  secured by liens specifically  permitted by
the credit agreement and additional secured indebtedness with a principal amount
not exceeding a defined percentage of the Company's  consolidated net worth. The
Company is in  compliance  with the terms of this credit  agreement.  Management
does not believe that the credit  agreement's  covenants or  limitations  unduly
restrict the Company's operations or limit Orion's ability to acquire additional
indebtedness.

                                       44
<PAGE>

The terms of Orion's  indentures  for its $100 million of 7.25% Senior Notes due
2005 and its $110  million of 9.125%  Senior  Notes due 2002 limit the amount of
liens  and   guarantees  by  the  Company  and  its  ability  to  incur  secured
indebtedness  without equally and ratably  securing the senior notes. The senior
notes are  non-callable  to  maturity.  Management  does not believe  that these
limitations unduly restrict the Company's operations or limit Orion's ability to
pay  dividends on its stock.  At December 31, 1998 the Company is in  compliance
with the terms of its  senior  note  indentures.  Management  believes  that the
Company continues to have substantial  sources of capital and liquidity from the
capital markets and bank borrowings.

On January  13,  1997 Orion  issued $125  million of 8.73%  Junior  Subordinated
Deferrable  Interest  Debentures due January 1, 2037 (the "8.73% Debentures") to
Orion Capital Trust I ("Trust I"), a Delaware statutory business trust sponsored
by Orion.  Trust I simultaneously  sold $125 million of 8.73% capital securities
(the "8.73% Trust Preferred Securities") which have substantially the same terms
as the 8.73%  Debentures.  The net  proceeds  from the sale of the  8.73%  Trust
Preferred  Securities were used in part for the acquisition of Guaranty National
common  stock in December  1997.  The 8.73% Trust  Preferred  Securities  may be
redeemed without premium on or after January 1, 2007.

On February  2, 1998 Orion  issued $125  million of 7.701%  Junior  Subordinated
Deferrable Interest  Debentures due April 15, 2028 (the "7.701%  Debentures") to
Orion  Capital  Trust II ("Trust  II"),  a  Delaware  statutory  business  trust
sponsored by Orion. Trust II then sold $125 million of 7.701% capital securities
(the "7.701% Trust Preferred  Securities"),  which have  substantially  the same
terms as the 7.701% Debentures.  Approximately $100 million of net proceeds from
the sale of the  7.701%  Trust  Preferred  Securities  were  used to repay  bank
indebtedness  of Guaranty  National in February 1998. The 7.701% Trust Preferred
Securities are non-callable to maturity.

The  8.73%  and  7.701%  Trust  Preferred  Securities  are  subordinated  to all
liabilities  of the Company.  The Company may defer  interest  distributions  on
these  capital  securities;  however,  during  any period  when such  cumulative
distributions have been deferred,  Orion may not declare or pay any dividends or
distributions on its common stock.

The  Company  issued a  2-for-1  split of its  common  stock on July 7,  1997 to
shareholders  of record on June 23, 1997.  The Company has  repurchased  836,100
shares,  42,916  shares and 482,228  shares of its common  stock at an aggregate
cost of $35.6 million,  $1.5 million and $11.2 million under the Company's stock
repurchase program in 1998, 1997 and 1996, respectively.  The Company's Board of
Directors  increased  authorization  for  purchases  of its  common  stock by an
additional $75 million in 1998. The remaining stock purchase  authorization  was
$42.5 million at March 1, 1999.

                                LEGAL PROCEEDINGS

Orion and its  subsidiaries  are routinely  engaged in litigation  incidental to
their  businesses.  Management  believes  that  there are no  significant  legal
proceedings  pending  against the  Company  which,  net of reserves  established
therefore,  are likely to result in  judgments  for amounts that are material to
the  financial  condition,  liquidity or results of  operations of Orion and its
consolidated subsidiaries, taken as a whole.


                                       45
<PAGE>

                              YEAR 2000 COMPLIANCE

The "Year 2000 problem"  exists because many computer  programs which  companies
use rely on only the last two digits to refer to a particular year. As a result,
these  computer  programs may interpret the Year 2000 as 1900. If not corrected,
computer software may fail or create erroneous results.  The potential impact of
the  Year  2000  problem  on  business,   financial  and  governmental  entities
throughout  the world is not known and,  if not timely  corrected,  may  broadly
affect the national economy in which we operate.

The Company concluded that as an extensive user of technology, it has a material
exposure to the Year 2000 problem and has taken steps to assess and address that
exposure.  In response to this issue,  the Company has inventoried and assessed,
for all its operations and locations, its insurance policy issuance, billing and
collection,  claims  paying,  and  other  operational  systems,  along  with the
hardware and software used in its computing  facilities,  embedded chips used in
its physical structures,  third party  data-exchanges,  and reliance on external
business  relations.  This  work has been  carried  out by the  Company  through
central coordination  supported by dedicated teams working at each Company site.
Progress has been reviewed regularly by senior management.  The process by which
the  Company  is  managing  its Year  2000  efforts  has also been  reviewed  by
independent consultants.

The Company  began  addressing  its computer  programs in 1996 at the  locations
where  its  most  significant  technology  concentration  exists.  Similar  work
commenced shortly thereafter at other locations.

As of December  31, 1998,  the Company had  completed  approximately  95% of its
scheduled  remediation of critical  production  systems for processing Year 2000
dates.  This places the  Company on or ahead of its plan for  meeting  Year 2000
processing needs.  Non-critical systems will be tested and critical systems will
be  re-tested  during  1999.  The total costs to test or modify  these  existing
systems,  which  include both  internal and external  costs of  programming  and
testing,  is estimated to be approximately $19.4 million, of which $15.8 million
has been expensed ($2.4 million through 1997 and $13.4 million in 1998).

With a timely start on correcting  the Year 2000  problem,  the Company has been
able to  address  this  potential  exposure.  This has  allowed  the  Company to
continue  replacement of outdated  systems with newer versions  offering greater
functionality  and  cost  efficiencies.  The  Company  completed  replacing  its
financial,  personnel,  and  payroll  systems  in 1998 and began  phasing in new
integrated  processing  systems for certain of its operations in 1999. The total
cost  for  these  major  technology   improvement   projects  are  estimated  at
approximately  $13.1 million of which $11.7 million had been capitalized through
December 31, 1998.  Additional  technology projects are planned for 1999 as Year
2000  projects  wind down.  All costs are being funded  through  operating  cash
flows.

In addition to addressing its own hardware,  software and  processing  exposure,
the  Company  has been  engaged  since  1996 in a  process  of  identifying  and
prioritizing critical suppliers and customers at the direct interface level, and
communicating  with them about their plans and progress in  addressing  the Year
2000 problem.

The Company has mailed letters to significant  vendors and service providers and
has verbally  communicated with many strategic customers to determine the extent
to which  interfaces with such entities are vulnerable to Year 2000 problems and
whether the products and services  purchased  from or by such  entities are Year
2000 compliant. As of December 31, 1998, the Company had received responses from
approximately  65% of the third  parties of whom it has  inquired and 90% of the
companies that have responded have provided written  assurances that they expect
to address all their significant Year 2000 problems on a timely basis.

                                       46
<PAGE>

Evaluations  of the most  critical  third  parties  have been  initiated.  These
evaluations will be followed by the development of contingency plans, which have
been prepared for third  parties  having near term Year 2000 impact or are being
developed for other third parties,  with completion  during the first quarter of
1999.  The  Company  believes  that this  aspect of its Year 2000  effort was on
schedule at December 31, 1998.

A follow-up  mailing to significant  vendors and service  providers that did not
initially respond, or whose responses were deemed unsatisfactory by the Company,
is expected to be completed by March 31, 1999.  The Company will also expand its
survey to vendors and service  providers who do not directly  interface with the
Company's systems.

The  Company  presently  believes  that the  Year  2000  problems  will not pose
significant  operational  problems  for the Company.  However,  if all Year 2000
problems are not properly identified, or assessment, remediation and testing are
not effected  timely with  respect to Year 2000  problems  that are  identified,
there can be no assurance that the Year 2000 issue will not materially adversely
impact the Company's  results of  operations  or adversely  affect the Company's
relationships with customers, vendors, or others.

The Company is unable to  determine  at this time  whether the  consequences  of
counter-parties  Year 2000 failures will have a material impact on the Company's
results of operations,  liquidity or financial condition. The possibility exists
that a portion of its third-party  distribution  channels may not be ready, that
communications with its agents could be disrupted,  that underwriting data, such
as motor vehicle reports, could be unobtainable, that the claim settling process
could be delayed or that the  frequency  and severity of losses may increase due
to  external  factors.  Where  concern  appears  justified  about an  aspect  of
readiness, contingency plans have been prepared or are being developed. However,
there can be no assurance that  unanticipated Year 2000 issues of other entities
will not have a material  adverse impact on the Company's  systems or results of
operations.

This is a Year 2000 Readiness Disclosure  statement.  Readers are cautioned that
forward-looking statements contained in "Year 2000 Compliance" should be read in
conjunction with the Company's  disclosures under the heading:  "Forward-Looking
Statements."

                      MARKET RISK OF FINANCIAL INSTRUMENTS

The Company is subject to market risk arising from the  potential  change in the
value  of  its  various  financial  instruments.  These  changes  may  be due to
fluctuations  in interest  rates,  and  changes in credit  spreads and in equity
prices.  The  level  of  market  risk is  influenced  by many  factors,  such as
volatility, correlation and liquidity. Potential gains or losses from changes in
market  conditions can be estimated through  statistical  models that attempt to
predict  within a  specified  confidence  level  the " value  at risk"  based on
historical  price  and  volatility   movements.   For  example,   if  historical
probabilities  indicate that the change in the value of a fixed income  security
would not be expected to exceed $1 million with a 95 percent  probability within
a given  time  period,  then  the  security's  value  at  risk  at a 95  percent
confidence level for that period is $1 million.

The major  components of market risk affecting the Company are interest rate and
equity risk. The Company has a fixed income investment portfolio, which includes
non-redeemable preferred stocks and short term investments,  with a market value
of $2,139.8 million at December 31, 1998 that is subject to changes in value due
to changes in market interest rates. Within the fixed income portfolio,  certain
mortgage-backed and asset-backed securities ($145.0 million of value at December
31,  1998) are  exposed  to  accelerated  prepayment  risk  generally  caused by
interest rate  movements.  Should interest rates decline,  mortgage  holders are
more likely to refinance  existing  mortgages at lower  rates.  Acceleration  of
repayments could unfavorably affect future investment income, if reinvestment of
the  cash  received   from   repayments   is  in  lower   yielding   securities.
Statistically,  the Company's  estimated  prepayment risk was not significant at
December 31, 1998.

                                       47
<PAGE>

In addition to interest  rate risk,  the Company's  common  equity  portfolio of
$242.4  million at  December  31,  1998 is subject to changes in value  based on
changes in equity prices in United States markets.  The Company's  common equity
portfolio  is highly  correlated  with the S&P 500 and Russell  2000  indices in
equal amounts.

The Company's  portfolio includes  investments in limited  partnerships  ($111.1
million at December 31, 1998) that generally provide higher investment  returns,
but also carries  higher  volatility  and market risk  compared to the Company's
other  investments.   Changes  in  the  market  value  of  limited   partnership
investments can vary  considerably  from  year-to-year.  However,  the long-term
performance of the Company's limited partnership investments has been favorable.
The effect of limited  partnership  investments  is not included in the value at
risk disclosure shown below.

The Company's  exposure to foreign  exchange  risk arising from the  possibility
that  changes  in  foreign  currency  exchange  rate  will  impact  the value of
financial instruments is not significant.

The Company manages its total investments, so that at all times, there are fixed
income  securities  that are  adequate  in amount and  duration to meet the cash
requirements of current  operations and longer term  liabilities,  as well as to
meet  insurance  regulatory  requirements  with  respect  to  investments  under
specific state  insurance laws. To the extent that there are funds available for
investment beyond these requirements, the investment objective for such funds is
to maximize total return within a prudent level of risk, taking into account the
potential  impact on the  volatility  of reported  earnings  and  reserves.  The
Company  shall adjust  investment  risk to offset or complement  insurance  risk
based upon total corporate risk tolerance. The Company has investment guidelines
for fixed  income  and equity  portfolios  covering  portfolio  characteristics,
permitted investments, diversification and performance benchmarks.

Value at risk  estimates  are  presented  in the table below and  represent  the
potential after-tax change in value of the Company's invested assets,  which, to
the extent  unrealized,  would generally be included  directly in  stockholders'
equity.  Caution should be used in evaluating the Company's  overall market risk
from the information below, since actual results could differ materially because
the  information  was developed  using estimates and assumptions as described in
this  section.   These  estimates  exclude  any  potentially  offsetting  effect
resulting  from  movements in the economic  value of the Company's  liabilities,
most importantly,  loss reserves and reinsurance  recoverables on unpaid losses.
The estimates  shown in the table were calculated  using Monte Carlo  simulation
involving 5,000  stochastic  paths with a 95 percent  confidence  level based on
weekly  correlation's  and  volatilities  based upon observed  values for 1991 -
1998. Mean  assumptions  included no change in weekly interest rates and an 8.0%
annual  appreciation for the common equity portfolio.  The Company's total value
at risk includes a diversification  benefit since interest rate and equity risks
are only partially correlated.

         The overall  after-tax  value at risk for the  Company at December  31,
1998 was as follows:

(In millions)
---------------------------------------------
Interest rate risk                  $    19.5
Equity risk                               6.0
Diversification benefit                  (9.8)
                                    ---------
Total                               $    15.7
                                    =========

                                       48
<PAGE>

                     ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

In June 1998,  the  Financial  Accounting  Standards  Board  issued FAS No. 133,
Accounting  for Derivative  Instruments  and Hedging  Activities.  This standard
requires  companies  to record all  derivatives  on the balance  sheet as either
assets or liabilities and measure those instruments at fair value. The manner in
which  companies  are to record  gains or losses  resulting  from changes in the
values of those derivatives  depends on the use of the derivative and whether it
qualifies  for hedge  accounting.  This  standard is effective for the Company's
financial  statements  beginning January 1, 2000, with early adoption permitted.
The Company is currently evaluating the impact of the adoption of this statement
and the potential effect on its financial position or results of operations.

In March 1998,  the AICPA issued SOP 98-1,  Accounting for the Costs of Computer
Software  Developed  or Obtained  for  Internal  Use.  This  statement  provides
guidance on accounting for costs of computer software  developed or obtained for
internal  use  including  when  incurred  costs  are and are  not  eligible  for
capitalization.  This statement is effective for 1999 financial  statements with
early adoption permitted.  The Company is currently evaluating the impact of the
adoption of this  statement and the potential  effect on its financial  position
and result of operations.

                           FORWARD-LOOKING STATEMENTS

All  statements  made in this  annual  report  that  do not  reflect  historical
information  are  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
the actual results,  performance or achievements of the Company to be materially
different  from any future  results,  performance or  achievements  expressed or
implied by the  forward-looking  statements.  Such factors include,  among other
things,  (i) general  economic  and  business  conditions;  (ii)  interest  rate
changes;  (iii)  competition  and  regulatory  environment  in which the Company
operates;  (iv)  claims  frequency;  (v)  claims  severity;  (vi)  medical  cost
inflation;  (vii) increases in the cost of property repair; (viii) the number of
new and renewal  policy  applications  submitted to the Company;  (ix) Year 2000
problems and (x) other  factors over which the Company has little or no control.
The  Company's  expectation  that  its plan for  Year  2000  Compliance  will be
completed on schedule  depends,  in large part, on the Company's own efforts and
expenditures on hardware, software and systems, which is on schedule as to those
exposures  which the  Company  has been  able to  identify.  However,  Year 2000
problems could also arise because of unanticipated non-compliance on the part of
vendors,  agents,  customers  and other  third  parties  including  governmental
entities.  Significant  Year 2000 problems could materially and adversely affect
future  performance  and  results  of  operations.  The  Company  disclaims  any
obligation  to update or to publicly  announce the impact of any such factors or
any  revisions to any  forward-looking  statements  to reflect  future events or
developments.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   See section "Market Risk of Financial Instruments" on pages 47- 48.


                                       49
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              REPORT OF MANAGEMENT

     The  management  of  Orion  Capital  Corporation  is  responsible  for  the
consolidated  financial  statements and the information  included  therein.  The
consolidated financial statements are fairly presented and have been prepared in
accordance  with generally  accepted  accounting  principles  appropriate in the
circumstances,  and,  where  necessary,  include  amounts based on  management's
informed estimates and judgments.

     The  Company has a system of internal  control  which it believes  provides
reasonable  assurance that assets are safeguarded from loss or unauthorized use,
that transactions are recorded in accordance with management's policies and that
the  financial  records are reliable for  preparing  financial  statements.  The
system of internal  control  includes  written  policies and procedures that are
communicated to all appropriate personnel and updated as necessary.

     Compliance with the system of internal  control is continuously  maintained
and monitored by management.  The internal audit staff of the Company  evaluates
and reports on the  adequacy of and  adherence to these  controls,  policies and
procedures.  In  addition,  as part of its audit of the  consolidated  financial
statements,  Deloitte & Touche LLP,  the  independent  auditors for the Company,
perform an  evaluation  of the  system of  internal  control to the extent  they
consider  necessary  to  express  an  opinion  on  the  consolidated   financial
statements.  Both the  internal  auditors  and  Deloitte  & Touche  LLP  provide
recommendations  concerning the system of internal control, and management takes
actions,   which   are   believed   to  be   appropriate   responses   to  these
recommendations.

     The Audit and Information  Services  Committee of the Board of Directors is
comprised of independent directors, and has general responsibility for oversight
of financial  controls and audit activities of the Company and its subsidiaries.
The Audit and  Information  Services  Committee,  which  reports  to the  Board,
annually  reviews  the  qualifications  of the  independent  auditors  and meets
periodically with them, the internal auditors and management to review the plans
and results of the audits.  Both  internal and  independent  auditors  have free
access to the Audit and  Information  Services  Committee,  without  members  of
management  present,  to discuss the adequacy of the system of internal  control
and any other matters  which they believe  should be brought to the attention of
the Committee.



W. Marston Becker                                       Michael L. Pautler
Chairman & Chief Executive Officer                      Senior Vice President &
                                                        Chief Financial Officer


                                       50
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Orion Capital Corporation
Farmington, Connecticut

     We have  audited  the  accompanying  consolidated  balance  sheets of Orion
Capital  Corporation and  subsidiaries as of December 31, 1998 and 1997, and the
related  consolidated  statements of earnings,  stockholders'  equity,  and cash
flows for each of the three years in the period ended  December  31,  1998.  Our
audits also included the financial  statement  schedules  listed in the Index at
Item 14(a)2.  These financial  statements and financial  statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial  statements and financial  statement schedules based
on our audits.

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

     In our opinion,  such consolidated  financial statements present fairly, in
all material respects,  the financial position of Orion Capital  Corporation and
subsidiaries  as of  December  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted  accounting  principles.
Also, in our opinion,  such financial  statement  schedules,  when considered in
relation  to the  basic  consolidated  financial  statements  taken  as a whole,
present fairly in all material respects the information set forth therein.


DELOITTE & TOUCHE LLP


Hartford, Connecticut
February 22, 1999
(except for Note 20, as to
which the date is March 11, 1999)

                                       51
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                     ASSETS

                                                               December 31,
                                                         ----------------------
(In millions)                                                 1998       1997
-------------------------------------------------------------------------------
Assets:
Investments: -
Fixed maturities, at amortized cost
   (market $272.7 - 1998 and $322.4 - 1997) ..........   $    260.6 $    312.8
Fixed maturities, at market (amortized cost
   $1,305.5 - 1998 and $1,395.4 - 1997) ..............      1,349.9    1,469.8
Common stocks, at market (cost $200.3 -
   1998 and $163.0 - 1997) ...........................        242.4      245.4
Non-redeemable preferred stocks, at market
   (cost $269.1 - 1998 and $183.6 - 1997) ............        268.5      193.1
Other long-term investments ..........................        116.2       94.3
Short-term investments ...............................        248.7      228.3
                                                         ---------- ---------- 
      Total investments ..............................      2,486.3    2,543.7

Cash .................................................         18.0        9.3
Accrued investment income ............................         27.0       29.6
Investment in affiliate ..............................         22.8       31.3
Accounts and notes receivable ( less allowance for
   doubtful accounts $3.4 - 1998 and $4.1 - 1997) ....        217.2      189.3
Reinsurance recoverables and prepaid reinsurance .....        801.5      622.2
Deferred policy acquisition costs ....................        155.6      147.1
Property and equipment ( less accumulated depreciation
   $49.0 - 1998 and $35.9 - 1997) ....................         95.4       70.8
Excess of cost over fair value of net assets acquired
   ( less accumulated amortization $33.6 - 1998
   $27.4 - 1997) .....................................        167.7      140.0
Deferred federal income taxes ........................         26.7        1.0
Other assets .........................................        146.2       99.8
                                                         ---------- ----------
      Total assets ...................................   $  4,164.4 $  3,884.1
                                                         ========== ==========
[FN]
                                                         
                 See Notes to Consolidated Financial Statements
</FN>
                                       52
<PAGE>                                   

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                              December 31,
                                                         ----------------------
(In millions, except for share amounts)                       1998      1997
-------------------------------------------------------------------------------
Liabilities:
Policy liabilities: -
  Losses ................................................$ 1,602.1  $ 1,476.4
  Loss adjustment expenses ..............................    415.6      395.3
  Unearned premiums .....................................    564.0      551.6
  Policyholders' dividends ..............................     17.9       20.5
                                                         ---------  ---------
Total policy liabilities ................................  2,599.6    2,443.8
Notes payable ...........................................    217.4      310.2
Other liabilities .......................................    370.1      282.0
                                                         ---------  ---------
Total liabilities .......................................  3,187.1    3,036.0
                                                         ---------  --------- 
Commitments and Contingencies (Notes 13 and 14)

Company-obligated mandatorily redeemable preferred
   capital securities of subsidiary trusts holding solely
   the junior subordinated debentures of the Company ....    250.0      125.0

Stockholders' equity:
Preferred stock, authorized 5,000,000 shares; issued
   and outstanding - none
Common stock, $1 par value; authorized 50,000,000
   shares; issued 30,675,300 shares .....................     30.7       30.7
Capital surplus .........................................    149.6      152.1
Retained earnings .......................................    553.2      469.5
Accumulated other comprehensive income ..................     58.5      109.2
Treasury stock, at cost (3,505,091 shares -
  1998 and 3,069,756 shares - 1997)......................    (57.8)     (34.3)
Deferred compensation on restricted stock ...............     (6.9)      (4.1)
                                                         ---------  ---------
    Total stockholders' equity ..........................    727.3      723.1
                                                         ---------  ---------
    Total liabilities and stockholders' equity ..........$ 4,164.4  $ 3,884.1
                                                         =========  =========
[FN]
                                                        
                 See Notes to Consolidated Financial Statements
</FN>
                                       53
<PAGE>                                 


<TABLE>
<CAPTION>
                    ORION CAPITAL CORPORATON AND SUBSIDIARIES
                       CONSOLIDATED STATEMENT OF EARNINGS

                                                      Year Ended December 31,
                                                    ---------------------------
(In millions, except for per share amounts)              1998      1997      1996
----------------------------------------------------------------------------------
Revenues:
<S>                                                 <C>        <C>       <C>      
Premiums earned .................................   $ 1,503.0  $ 1,357.7 $ 1,300.8
Net investment income ...........................       143.2      164.9     145.4
Realized investment gains .......................        52.5       47.8      24.2
Other income ....................................        18.0       20.2      23.1
                                                    ---------  --------- ---------
 Total revenues .................................     1,716.7    1,590.6   1,493.5
                                                    ---------  --------- ---------
Expenses:
Losses incurred .................................       800.6      701.3     694.5
Loss adjustment expenses ........................       219.9      204.2     188.5
Amortization of deferred policy acquisition costs       417.9      387.2     363.6
Other insurance expenses ........................        48.0       36.6      27.9
Dividends to policyholders ......................        24.8       24.0      23.6
Interest expense ................................        19.4       24.7      24.7
Other expenses ..................................        44.0       45.0      43.0
Restructuring expenses and other (Note 3) .......       (15.3)        --        --
                                                    ---------  --------- ---------
 Total expenses .................................     1,559.3    1,423.0   1,365.8
                                                    ---------  --------- ---------
Earnings before equity in earnings (loss) of          
  affiliate, federal income taxes and minority
  interest expense ..............................       157.4      167.6     127.7
Equity in earnings (loss) of affiliate ..........        (0.7)       8.6      (0.4)
Earnings before federal income taxes and            ---------  --------- ---------
  minority interest expense .....................       156.7      176.2     127.3
Federal income taxes ............................        41.1       46.5      32.0
Minority interest expense:
  Subsidiary trust preferred securities, net
    of federal income taxes .....................        12.8        6.9        --
  Subsidiary net earnings .......................          --        7.0       8.7
                                                    ---------  --------- ---------
 Net earnings ...................................   $   102.8  $   115.8 $    86.6
                                                    =========  ========= =========
 Net earnings per common share:
    Basic .......................................   $    3.78  $    4.24 $    3.16
                                                    =========  ========= =========
    Diluted .....................................   $    3.69  $    4.15 $    3.12
                                                    =========  ========= =========
</TABLE>
[FN]
                                                  
                 See Notes to Consolidated Financial Statements
</FN>
                                       54
<PAGE>                                  


<TABLE>
<CAPTION>
                    ORION CAPITAL CORPORATON AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                                            Year Ended December 31,
                                        --------------------------------------------------------------
(In millions)                                   1998                 1997                  1996
------------------------------------------------------------------------------------------------------
Common Stock:
<S>                                     <C>        <C>        <C>        <C>        <C>        <C>
Balance, beginning of period            $  30.7               $  15.3               $  15.3
Stock issued in 2-for-1
common stock split                            -                  15.4                     -
                                        -------               -------               ------- 
Balance, end of period                  $  30.7               $  30.7               $  15.3
                                        =======               =======               =======
Capital Surplus:
Balance, beginning of period            $ 152.1               $ 158.6               $ 146.7
Exercise of stock options and net
issuance of restricted stock               (2.5)                  0.5                     -
Acquisition of Guaranty National              -                   8.4                     -
Recognition of pre-reorganization
   federal income tax benefits                -                     -                  11.9
Stock issued in 2-for-1
common stock split                            -                 (15.4)                    -
                                        -------               -------               ------- 
Balance, end of period                  $ 149.6               $ 152.1               $ 158.6
                                        =======               =======               =======
Retained Earnings:
Balance, beginning of period            $ 469.5               $ 370.8               $ 298.5
Net earnings                              102.8    $ 102.8      115.8    $ 115.8       86.6    $  86.6
                                                   -------               -------               -------
Dividends declared                        (19.1)                (17.1)                (14.3)
                                        -------               -------               ------- 
Balance, end of period                  $ 553.2               $ 469.5               $ 370.8
                                        =======               =======               =======
Accumulated Other
Comprehensive Income:
Balance, beginning of period            $ 109.2               $  70.1               $  59.3
Unrealized investment
gains (losses), net of taxes                         (52.4)                 41.3                   9.0
Unrealized foreign exchange
translation gains (losses), net of taxes               1.7                  (2.2)                  1.8
                                                   -------               -------               -------     
Other comprehensive income (loss)         (50.7)     (50.7)      39.1       39.1       10.8       10.8
                                        -------    -------    -------    -------    -------    ------- 
Comprehensive income                               $  52.1               $ 154.9               $  97.4
                                                   =======               =======               =======
Balance, end of period                  $  58.5               $ 109.2               $  70.1
                                        =======               =======               =======
Treasury Stock:
Balance, beginning of period            $ (34.3)              $ (35.0)              $ (26.5)
Exercise of stock options and net
issuance of restricted stock               13.4                   3.2                   2.7
Common stock issued pursuant to
employee stock purchase plan                1.1                     -                     -
Acquisition of treasury stock             (38.0)                 (2.5)                (11.2)
                                        -------               -------               ------- 
Balance, end of period                  $ (57.8)              $ (34.3)              $ (35.0)
                                        =======               =======               ======= 
Deferred Compensation on
Restricted Stock:
Balance, beginning of period            $  (4.1)              $  (3.1)              $  (2.3)
Net issuance of restricted stock           (4.3)                 (1.9)                 (1.8)
Amortization of deferred
compensation on restricted stock            1.5                   0.9                   1.0
                                        -------               -------               ------- 
Balance, end of period                  $  (6.9)              $  (4.1)              $  (3.1)                                 
                                        =======               =======               =======                                  
                                                                         
</TABLE>
[FN]

                 See Notes to Consolidated Financial Statements
</FN>
                                       55
<PAGE>                             


<TABLE>
<CAPTION>
                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS

                                                                Year Ended December 31,
                                                         -----------------------------------
(In millions)                                                 1998         1997        1996
--------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S>                                                      <C>         <C>         <C>       
Premiums collected ..................................... $  1,521.9  $  1,364.5  $  1,330.3
Net investment income collected ........................      145.7       140.1       127.1
Losses and loss adjustment expenses paid ...............   (1,009.7)     (892.1)     (794.9)
Policy acquisition costs paid ..........................     (456.5)     (401.1)     (387.7)
Federal income tax payments ............................      (57.1)      (28.4)      (30.3)
Dividends paid to policyholders ........................      (27.5)      (26.0)      (20.1)
Interest paid ..........................................      (20.5)      (23.8)      (24.1)
Payments on trust preferred securities .................      (17.6)       (5.1)         --
Other payments .........................................      (48.8)      (28.1)      (32.6)
                                                         ----------  ----------  ----------
Net cash provided by operating activities ..............       29.9       100.0       167.7
                                                         ----------  ----------  ----------
Cash flows from investing activities:
Sales of fixed maturities available-for-sale ...........    1,014.5       308.3       250.9
Sales of equity securities .............................      447.9       199.7       153.2
Maturities of fixed maturity investments
   available-for-sale ..................................      144.5       100.4       144.2
Maturities of fixed maturity investments
   held-to-maturity ....................................       60.5        20.1        34.6
Investments in fixed maturities
   available-for-sale ..................................   (1,005.0)     (595.9)     (449.5)
Investments in equity securities .......................     (533.1)     (204.1)      (83.4)
Investments in fixed maturities
   held-to-maturity ....................................         --       (14.3)       (8.6)
Net sales (purchases) of short-term investments ........      (18.5)      108.5       (78.1)
Acquisition of businesses, net of cash acquired ........      (62.6)     (130.9)      (81.8)
Sale of business, net of cash sold .....................       13.1          --          --
Purchases of property and equipment, net ...............      (30.5)      (18.5)      (14.9)
Other receipts (payments) ..............................      (19.5)       19.3         1.0
                                                         ----------  ----------  ----------
Net cash provided by (used in) investing activities ....       11.3      (207.4)     (132.4)
                                                         ----------  ----------  ----------
Cash flows from financing activities:
Net proceeds from issuance of trust preferred securities      121.9       123.0          --
Proceeds from stock issued under employee benefit plans         2.3         0.6          --
Repayment of notes payable, net ........................     (102.0)       (0.8)       (1.3)
Purchases of common stock ..............................      (35.6)       (1.5)      (10.7)
Dividends paid to stockholders .........................      (18.5)      (18.0)      (15.3)
Other receipts (payments) ..............................       (0.6)        1.8          --
                                                         ----------  ----------  ----------
Net cash (used in) provided by financing activities ....      (32.5)      105.1       (27.3)
                                                         ----------  ----------  ----------
Net increase (decrease) in cash ........................        8.7        (2.3)        8.0
Cash balance, beginning of period ......................        9.3        11.6         3.6
                                                         ----------  ----------  ----------
Cash balance, end of period ............................ $     18.0  $      9.3  $     11.6
                                                         ==========  ==========  ==========
</TABLE>
[FN]
                                                        
                 See Notes to Consolidated Financial Statements
</FN>
                                       56
<PAGE>                             
 

<TABLE>
<CAPTION>
       
                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
               CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)

                                                                Year Ended December 31,
                                                         ----------------------------------
(In millions)                                                  1998        1997        1996
-------------------------------------------------------------------------------------------
Reconciliation of net earnings to net cash
   provided by operating activities:
<S>                                                      <C>         <C>         <C>       
Net earnings ..........................................  $    102.8  $    115.8  $     86.6
                                                         ----------  ----------  ----------
                                                            
Adjustments:
Depreciation and amortization .........................        15.9        13.4        12.1
Amortization of excess of cost over fair
   value of net assets acquired .......................         6.7         3.2         3.1
Deferred federal income taxes .........................         3.6         4.5        10.0
Equity in (earnings) loss of affiliates,
   net of dividends received ..........................         1.0        (8.2)        0.7
Realized investment gains .............................       (52.5)      (47.8)      (24.2)
Non-cash investment income ............................        (1.6)      (19.0)      (17.8)
Amortization (accretion) of fixed maturity investments         (1.5)       (2.5)        1.4
Restructuring expenses and other (Note 3) .............       (15.3)         --          --
Minority interest expense in subsidiary net earnings ..          --         7.0         8.7
Other .................................................         0.6         1.5         2.1

Changes in assets and liabilities, net of acquisitions,
   divestiture and restructuring:
Decrease (increase) in accrued investment income ......         2.0        (2.3)        1.2
(Increase) decrease in accounts and notes receivable ..       (28.8)        1.4         7.5
Increase in reinsurance recoverables
   and prepaid reinsurance ............................      (123.0)      (91.0)      (78.0)
Increase in deferred policy acquisition costs .........       (11.9)       (8.1)      (20.9)
Increase in other assets ..............................       (16.0)      (10.8)      (34.3)
Increase in losses ....................................        60.5        47.4       115.2
Increase in loss adjustment expenses ..................        20.0        29.6        32.4
Increase in unearned premiums .........................        38.4        45.6        58.9
Increase (decrease) in policyholders' dividends .......        (2.7)       (2.0)        3.5
Increase (decrease) in other liabilities ..............        31.7        22.3        (0.5)
                                                         ----------  ----------  ----------
 Total adjustments and changes ........................       (72.9)      (15.8)       81.1
                                                         ----------  ----------  ----------
Net cash provided by operating activities .............  $     29.9  $    100.0  $    167.7
                                                         ==========  ==========  ==========
</TABLE>
[FN]

                 See Notes to Consolidated Financial Statements
</FN>
                                       57
<PAGE>                            



                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  Years Ended December 31, 1998, 1997 and 1996

Note 1 - Significant Accounting Policies

     Basis of  Financial  Statement  Presentation  - Orion  Capital  Corporation
("Orion") and its wholly-owned subsidiaries (collectively the "Company") operate
principally in the property and casualty  insurance  business.  The consolidated
financial  statements  and  notes  thereto  are  presented  in  accordance  with
generally  accepted  accounting  principles  ("GAAP")  for property and casualty
insurance  companies  and  include the  accounts  of Orion and its  wholly-owned
subsidiaries.  The  Company's  investment  in its  unconsolidated  affiliate  is
accounted  for using the equity  method (See Note 4). All material  intercompany
balances and transactions have been eliminated. The preparation of the Company's
consolidated financial statements in conformity with GAAP requires the Company's
management to make estimates and assumptions that affect the amounts reported in
these consolidated  financial  statements and accompanying notes. Actual results
could differ from those estimates.

     Regulation  -  The  Company's   insurance   subsidiaries   are  subject  to
comprehensive  regulation  by  various  state  insurance  departments  including
regulations  limiting dividend payments to Orion and intercompany  transactions.
Under these  regulations,  the maximum dividends  permitted at December 31, 1998
for the  ensuing  twelve  months,  without  prior  approval,  aggregated  $135.5
million.  However, state insurance regulators have broad discretionary authority
with  respect to approving  the payment of  dividends  by  insurance  companies.
Policyholders'   surplus  of  Orion's  insurance   subsidiaries   determined  in
accordance with prescribed  statutory  accounting  practices  amounted to $732.1
million  and  $789.0  million  at  December  31,  1998 and  1997,  respectively.
Statutory  net income  amounted  to $151.5  million,  $146.1  million and $107.9
million for 1998, 1997 and 1996, respectively.

     Cash - For  purposes  of the  consolidated  statement  of cash  flows,  the
Company considers only demand deposit accounts to be cash.

     Investments - Fixed maturity  investments  include bonds,  preferred stocks
with mandatory redemption features, and certificates of deposit that mature more
than one year after the balance sheet date. Fixed maturity  investments that the
Company has both the  positive  intent and the  ability to hold to maturity  are
recorded at amortized  cost.  Fixed maturity  investments,  which may be sold in
response to, among other things,  changes in interest  rates,  prepayment  risk,
income tax strategies or liquidity  needs are  classified as  available-for-sale
and are carried at market  value.  Common  stocks and  non-redeemable  preferred
stocks are also  carried at market  value.  Fluctuations  in the market value of
these available-for-sale  securities are recorded as unrealized investment gains
or losses and  credited  or charged to  stockholders'  equity.  Other  long-term
investments   principally   include  equity   ownership   interests  in  limited
partnerships,  which  are  recorded  using  the  equity  method  of  accounting.
Short-term investments include certificates of deposit and commercial paper that
mature  within one year of the balance  sheet date,  money  market  accounts and
United States  Treasury  Bills.  Short-term  investments  are recorded at market
value,  which  approximates  cost.  Market values are generally  based on quoted
market prices or dealer quotes. Realized investment gains and losses,  including
provision for other than  temporary  impairment of  investment  securities,  are
recognized on the specific identification method.

     Deferred Policy  Acquisition Costs - Costs that vary with, and are directly
related  to,  the  production  of new and  renewal  business  are  deferred  and
amortized as the related  premiums are earned.  These costs  primarily  comprise
commissions,  premium taxes and salaries.  The test for  recoverability  of such
deferred  

                                       58
<PAGE>



                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

costs includes the consideration of net investment income.

     Excess of Cost Over Fair Value of Net  Assets  Acquired - The excess of the
cost of  acquiring  subsidiaries  over  the  fair  value  of  their  net  assets
("goodwill")  is  amortized  on a  straight-line  basis over periods of 25 to 40
years. The Company evaluates the recoverability of goodwill from expected future
cash flows,  and  impairments  would be  recognized  in  operating  results if a
permanent diminution in value were to occur.

     Revenue  Recognition  - Premiums  are earned on a daily pro rata basis over
the policy period.  A provision is made for  anticipated  retrospective  premium
adjustments  and audit  premiums.  Direct and assumed  premiums  are reduced for
reinsurance ceded to other insurers.

     Policy  Liabilities  and  Reinsurance  - Loss and loss  adjustment  expense
liabilities are established in  consideration  of individual  cases for reported
losses and past  experience for incurred but not yet reported  losses  ("IBNR").
Estimated reinsurance receivables are recognized in a manner consistent with the
liabilities relating to the underlying reinsured contracts. At December 31, 1998
and 1997, long-term disability workers compensation loss reserves are carried at
$46.0 million and $52.9 million,  respectively,  in the  consolidated  financial
statements  at net  present  value  using a  statutory  interest  rate of  3.5%.
Policyholders'  dividends  on  participating  policies  are accrued at estimated
payment  rates  as the  related  premiums  are  earned.  Participating  business
represented  19% and 18% of premiums  in-force  at  December  31, 1998 and 1997,
respectively.  As a percent of premiums earned,  participating business amounted
to 19% in 1998, 18% in 1997 and 16% in 1996.

     Federal Income Taxes - The Company  recognizes  taxes payable or refundable
for the current  year,  and deferred  taxes for the future tax  consequences  of
differences  between  the  financial  reporting  and tax  basis  of  assets  and
liabilities.  Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years the temporary differences
are expected to reverse.

     Earnings  Per Common  Share - In the fourth  quarter of 1997,  the  Company
adopted Statement of Financial  Accounting  Standards ("FAS") No. 128, "Earnings
per Share," for all periods presented. Basic earnings per share computations are
based on the average  number of shares of common  stock  outstanding  during the
year.  Diluted earnings per share reflect the assumed exercise and conversion of
all securities,  including stock options.  All common stock and per share common
stock data presented has been restated to give effect to the 2-for-1 stock split
of the Company's common stock issued on July 7, 1997.

     Comprehensive  Income - As of January 1, 1998 the  Company  adopted FAS No.
130, "Reporting  Comprehensive Income". This statement establishes standards for
the reporting and  presentation  of  comprehensive  income and its components in
financial   statements.   Comprehensive   income   encompasses  all  changes  in
shareholders'  equity (except those arising from transactions with shareholders)
and  includes  net  income,   net   unrealized   capital   gains  or  losses  on
available-for-sale securities and foreign currency translation adjustments. This
standard  requires  additional  disclosures  and does not affect  the  Company's
financial position or results of operations.

     Segment  disclosures  - During the  fourth  quarter  of 1998,  the  Company
adopted FAS No. 131,  "Disclosure  about  Segments of an Enterprise  and Related
Information." FAS 131 establishes new standards for reporting  information about
operating  segments  and  related   disclosures  about  products  and  services,
geographic areas and major customers.  It requires that the segments be based on
the

                                       59
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

internal  structure and reporting of the Company's  operations.  The adoption of
FAS 131 did not materially effect the Company's  primary  financial  statements,
but did affect the disclosure of segment information contained in Note 17 to the
consolidated  financial statement.  The segment disclosures for prior years have
been restated to conform to the current year presentation.

     Reclassifications  - The 1997 and 1996  consolidated  financial  statements
have been reclassified to conform to the 1998 presentation.

Note 2 - Acquisitions

     Grocers - On July 9, 1998 the Company  completed the acquisition of Grocers
Insurance Group ("Grocers") from United Grocers,  Inc ("United").  Grocers is an
Oregon-based  specialty  insurance  holding company serving the grocery and food
service  industry.  In 1997,  Grocers reported  approximately $23 million of net
premiums  written,   principally   general   liability,   property  and  workers
compensation  with the majority of its volume  concentrated in the  Northwestern
states.  The  purchase  price was $36.7  million in cash  including  acquisition
expenses of $ 0.4 million.  The Company made cash  payments of $32.4  million in
1998  related to the  purchase  of  Grocers.  At  December  31, 1998 the Company
retained $4.0 million of the purchase price due to United to secure  obligations
of United and Grocers. The Company used cash and short-term  investments to fund
the purchase.  The acquisition was accounted for as a purchase and  accordingly,
Grocers has been included in the  Company's  consolidated  financial  statements
from the date of acquisition. The total consideration exceeded the fair value of
the net assets  acquired by  approximately  $8.1 million and is being  amortized
over 25 years. The pro forma consolidated  results of the Company's  operations,
as if the Grocers  purchase had been made as of the beginning of the year, would
not be materially different than reported herein.

     Strickland - On April 30, 1998 the Company completed the acquisition of the
nonstandard  personal  automobile  insurance  business of North Carolina - based
Strickland  Insurance Group, Inc.  ("Strickland").  The acquisition included two
insurance companies, a premium finance company, a claims adjusting company and a
general  agency in  Florida.  In 1997,  Strickland  reported  approximately  $99
million of personal  automobile  gross  premiums  written and $46 million of net
premiums  written.  The  purchase  price was  $44.1  million  in cash  including
acquisition  expenses of $0.2  million.  The Company made cash payments of $39.7
million in 1998 and $2.0 million in 1997 related to the  Strickland  acquisition
with $2.4  million of the  purchase  price  including  interest  retained by the
Company  in part to secure  obligations  of  Strickland.  Simultaneous  with the
acquisition,  the  Company  repaid $9.4  million of  Strickland  bank debt.  The
acquisition  includes a purchase price contingency for loss development incurred
by the acquired business during the period from the acquisition date to December
31, 2000 relating to accident years prior to the  acquisition  date. The Company
used cash and short-term  investments to fund the  acquisition.  The acquisition
was accounted for as a purchase and accordingly,  the acquired business has been
included in the Company's  consolidated  financial  statements  from the date of
acquisition.  The total consideration  exceeded the fair value of the net assets
acquired by  approximately  $28.7 million and is being  amortized over 25 years.
The pro  forma  consolidated  results  of the  Company's  operations,  as if the
Strickland  purchase had been made as of the beginning of the year, would not be
materially different than reported herein.

     Unisun - On December  16,  1997,  the Company  purchased  Unisun  Insurance
Company  ("Unisun") from Michigan Mutual Insurance  Company for $26.2 million in
cash  including  acquisition  expenses  of $0.2  million.  Unisun is the largest
automobile  insurance  facility  carrier in South 

                                       60
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Carolina and also writes personal automobile insurance in the States of Alabama,
Georgia and North Carolina.  Total net premiums  written by Unisun for 1997 were
approximately  $20.0  million.   The  acquisition   includes  a  purchase  price
contingency for loss  development  incurred by Unisun during the period from the
acquisition  date to December 31, 2002  relating to accident  years prior to the
acquisition date. The acquisition of Unisun was accounted for as a purchase, and
accordingly, Unisun has been included in the Company's financial statements from
the date of  acquisition.  The total  consideration  exceeded the estimated fair
value of net assets of Unisun by $5.3 million,  which is being amortized over 25
years. The pro forma consolidated results of the Company's operations, as if the
Unisun  purchase  had been made as of the  beginning  of the year,  would not be
materially different than reported herein.

     Guaranty  National  Corporation  1997  purchase - The  Company  completed a
tender  offer that  increased  its  ownership of Guaranty  National  Corporation
("Guaranty  National") from  approximately 81% to 100% on December 10, 1997. The
Company  purchased the remaining or 2,970,000 shares of Guaranty National common
stock in 1997 that were held by minority interest shareholders for $36 per share
in cash ("1997 GNC  Purchase").  Immediately  following  the 1997 GNC  Purchase,
Guaranty  National was merged into a wholly owned  subsidiary of the Company and
delisted as a publicly traded company on the New York Stock Exchange. As part of
the merger,  450,238 outstanding stock options granted by Guaranty National were
converted into 358,090 stock options of the Company,  with  equivalent  terms as
the Guaranty National options except for the exercise price,  which was adjusted
to reflect the difference between the then current stock prices.

     The 1997 GNC Purchase was recorded as a step acquisition using the purchase
method of accounting. The aggregate purchase price was $116.1 million, including
stock  options  converted  of $8.4  million  and  acquisition  expenses  of $0.8
million.  The Company  recorded the excess of the cost over the  estimated  fair
value of the 19.7% interest in Guaranty  National's net assets  acquired  during
1997 of $59.5 million and eliminated the related minority  interest.  The excess
of the cost over  fair  value  will be  amortized  over 27  years,  which is the
remaining  amortization  period for goodwill recorded upon the Company's initial
investment in Guaranty National.

     Guaranty National  Corporation 1996 purchase - On July 2, 1996, the Company
completed a tender offer for 4,600,000 shares of Guaranty  National common stock
("1996  GNC  Purchase").  Together  with the  open-market  purchase  of  120,000
additional  shares on July 17,  1996,  the Company  increased  its  ownership of
Guaranty National from 49.5% to approximately  81%. The aggregate purchase price
of approximately $88.2 million, including expenses, was paid in cash.

     The 1996 GNC Purchase was recorded as a step acquisition using the purchase
method of accounting as of June 30, 1996. The assets and liabilities of Guaranty
National were  consolidated in the Company's  financial  statements and minority
interest for approximately 19% of Guaranty  National's  shareholders  equity was
recorded. Beginning in 1996, all revenues and expenses of Guaranty National have
been consolidated  with those of the Company,  and minority interest expense has
been  recorded  for  the  portion  of  Guaranty  National's  earnings  that  was
attributable  to the  shares  not  owned  by  the  Company  until  it  became  a
wholly-owned subsidiary.

     The  increase in the  Company's  ownership  in 1996 to over 80% of Guaranty
National  allowed the  inclusion  of Guaranty  National in Orion's  consolidated
federal  income tax return,  as well as the reversal of a deferred tax liability
previously  established  by the  Company  for  its  share  of the  undistributed
earnings 

                                       61
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

of Guaranty  National.  The excess of cost over the estimated  fair value of the
31.5% interest in Guaranty  National's net assets  acquired during 1996 was $9.1
million,  after the  reversal of $21.5  million of deferred  taxes,  and will be
amortized  over 28  years,  which  was the  remaining  amortization  period  for
goodwill recorded upon Orion's initial investment in Guaranty National.

Pro  forma  information,  as if  Guaranty  National  was  100%  owned  as of the
beginning of 1996, is as follows for the year ended December, 31:

(In millions, except for per share amounts)        1997       1996
--------------------------------------------------------------------------

Total revenues                               $   1,590.5  $   1,491.2
                                             ===========  ===========
Net earnings                                 $     116.9  $      93.8
                                             ===========  ===========
Net earnings per diluted share               $      4.16  $      3.35
                                             ===========  ===========

Note 3 - Orion Specialty Realignment

     In the  third  quarter  of  1998,  the  Company  announced  an  accelerated
realignment  of its Orion  Specialty  unit to address lines that had not met the
Company's growth and profitability expectations. The realignment continued Orion
Specialty's shift away from commodity  business,  primarily  commercial auto and
transportation,  to  a  smaller  number  of  more  client-focused  programs  and
specialty  niches.  The 1998  realignment  has included the  discontinuation  of
approximately  $100 million in annualized net written  premiums of  unprofitable
commodity  and marginal  lines of business,  the reduction of  approximately  90
employees  related to the exited  business,  and the sale of Colorado  Casualty.
Colorado  Casualty  produced  approximately  $55 million in annual net premiums,
which   consisted   largely  of  business   that  did  not  fit  the   Company's
specialization strategy.

     The Company  recorded  severance and program  termination  expenses of $7.0
million and asset write downs of $1.9 million  related to the exited business in
the third  quarter of 1998.  On September  29, 1998,  the Company sold  Colorado
Casualty resulting in a pre-tax gain of approximately $24.2 million. Charges for
severance and program  termination  expenses and asset write-offs,  and the gain
from the sale of Colorado  Casualty,  representing  a net pre-tax  gain of $15.3
million,  are reflected as  "Restructuring  expenses and other" in the Company's
Consolidated Statement of Earnings.

The restructuring  liability activity for the year ended December 31, 1998 is as
follows:

(In millions)
-------------------------------------------------------------------

Balance at December 31, 1997                            $        -
   Restructuring expenses                                      8.9
   Actions taken:
   Asset write-downs                                          (1.9)
   Severance and program termination costs                    (1.9)
                                                        ----------
Balance at December 31, 1998                            $      5.1
                                                        ==========

                                       62
<PAGE>



                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     In connection with the third quarter realignment,  the Company completed an
actuarial  analysis for the business to be exited  resulting in a provision  for
losses and loss  adjustment  expenses of $27.8  million in the third  quarter of
1998.  The Company will continue in 1999 to assess Orion  Specialty's  remaining
programs.

Note 4 - Investment in Affiliate

     As of  December  31,  1998,  the Company  owned 26% of the common  stock of
Intercargo  Corporation  ("Intercargo"),  a publicly held  company.  The Company
records its share of  Intercago's  operating  results on a quarterly  lag basis,
after  Intercargo  has reported its financial  results.  In December  1998,  the
Company agreed to sell its investment in Intercargo for $22.8 million or $12 per
share in cash  pursuant to  Intercargo's  merger  with X. L.  America,  Inc.,  a
subsidiary  of EXEL  Limited.  The  Company  reduced the  carrying  value of its
investment  in Intercargo  to $22.8  million  resulting in $7.0 million  pre-tax
realized  investment  loss  during  December  1998.  The sale of  Intercargo  is
expected  to be complete in the late first  quarter or early  second  quarter of
1999, subject to regulatory approval.

     The carrying  values of the Company's  investment in affiliates  were $22.8
million at  December  31,  1998 and $31.3  million at  December  31,  1997.  The
carrying  value  included $3.0 million and $10.5 million of goodwill at December
31, 1998 and 1997,  respectively.  In August 1997,  Intercargo recognized a gain
before  taxes   of  $49.4  million  from the  sale of  substantially  all of its
interest in Kingsway  Financial  Services.  The Company reflected its portion of
the Kingsway sale by recording a gain before taxes of $7.0 million in the fourth
quarter of 1997.

     Summarized  financial  information for the Company's affiliate is set forth
below:

(In millions)                               1998      1997      1996
---------------------------------------------------------------------
Year Ended December 31:
Revenues .............................   $  63.7   $ 117.8   $  74.5
Expenses .............................      62.6      65.2      74.8
                                         -------   -------   -------            
                                             1.1      52.6      (0.3)
Federal income (taxes) benefit .......      (2.3)    (15.9)      0.2
                                         -------   -------   -------         
Net earnings (loss) ..................   $  (1.2)  $  36.7   $  (0.1)
                                         =======   =======   =======            
Company's proportionate share,
   including goodwill amortization (a)   $  (0.7)  $   8.6   $  (0.4)
                                         =======   =======   ======= 
                                     
                                                                

(In millions)                                         1998      1997
----------------------------------------------------------------------
At December 31:
Cash and investments                               $ 109.6   $ 131.8
Other assets                                          55.6      54.0
                                                   -------   -------
                                                     165.2     185.8
Policy liabilities                                   (70.3)    (72.7)
Other liabilities                                    (13.8)    (29.2)
                                                   -------   -------

Stockholders' equity                               $  81.1   $  83.9
                                                   =======   =======

(a) 1998 excludes $7.0 million pre-tax realized investment loss.


                                       63
<PAGE>



                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
Note 5 - Investments

The  amortized  cost  and  estimated  market  values  of  investments  in  fixed
maturities,  equity securities and short-term  investments at December 31 are as
follows:

                                                            Gross      Gross   Estimated
                                               Amortized  Unrealized Unrealized  Market
(In millions)                                     Cost      Gains     Losses      Value
-----------------------------------------------------------------------------------------
1998:
Held-to-maturity securities:
   United States Government and
<S>                                             <C>       <C>       <C>        <C>      
      government agencies and authorities       $    81.4 $     3.2 $       -  $    84.6
   States, municipalities and
      political subdivisions                        156.1       8.4         -      164.5
   Corporate securities                              23.1       0.5         -       23.6
                                                --------- --------- ---------  ---------
                                                $   260.6 $    12.1 $       -  $   272.7
                                                ========= ========= =========  =========
Available-for-sale securities:
   United States Government and
      Government agencies and authorities       $    69.0 $     1.9 $    (0.3) $    70.6
   States, municipalities and
      political subdivisions                        684.1      41.1      (1.4)     723.8
   Foreign governments                                4.1       0.6         -        4.7
   Corporate securities                             447.6      20.7     (19.3)     449.0
   Mortgage-backed securities
      (exclusive of government agencies)            100.7       2.5      (1.4)     101.8
   Equity securities                                469.4      78.9     (37.4)     510.9
   Short-term investments                           248.7         -         -      248.7
                                                --------- --------- ---------  ---------
                                                $ 2,023.6 $   145.7 $   (59.8) $ 2,109.5
                                                ========= ========= =========  =========
1997:
Held-to-maturity securities:
   United States Government and
      government agencies and authorities       $   122.7 $     1.8 $    (0.5)     124.0
   States, municipalities and
      political subdivisions                        166.9       7.6         -      174.5
   Corporate securities                              23.2       0.7         -       23.9
                                                --------- --------- ---------  ---------
                                                $   312.8 $    10.1 $    (0.5) $   322.4
                                                ========= ========= =========  =========
Available-for-sale securities:
   United States Government and
     government agencies and authorities        $   381.7 $    22.5 $    (2.9) $   401.3
   States, municipalities and
      political subdivisions                        439.5      30.6      (0.2)     469.9
   Foreign governments                                4.6       0.5         -        5.1
   Corporate securities                             526.5      27.4      (4.5)     549.4
   Mortgage-backed securities
      (exclusive of government agencies)             43.1       1.0         -       44.1
   Equity securities                                346.6     101.4      (9.5)     438.5
   Short-term investments                           228.3         -         -      228.3
                                                --------- --------- ---------  ---------
                                                $ 1,970.3 $   183.4 $   (17.1) $ 2,136.6
                                                ========= ========= =========  =========
</TABLE>

                                       64
<PAGE>



                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net investment income for the years ended December 31 is as follows:

(In millions)                                  1998      1997      1996
------------------------------------------------------------------------

Net investment income:
Fixed maturities ............              $  109.2  $  115.8  $   98.2
Equity securities ...........                  19.4      18.4      19.9
Other long-term investments .                   2.6      17.4      16.1
Short-term investments ......                  10.8      16.3      13.2
Accounts and notes receivable                   0.7       0.5       0.3
Other .......................                   3.2       0.1       0.3
                                           --------  --------  --------        
Total investment income .....                 145.9     168.5     148.0
Less investment expenses ....                   2.7       3.6       2.6
                                           --------  --------  --------         
       Net investment income               $  143.2  $  164.9  $  145.4
                                           ========  ========  ========
                                 
                                                     

Certain information  concerning realized and unrealized gains (losses) for fixed
maturities and equity securities during the years ended December 31 is set forth
below:

(In millions)                                  1998      1997      1996
------------------------------------------------------------------------

Fixed maturities available-for-sale:
  Gross realized gains ....................$   31.1  $   12.0  $   10.3
  Gross realized losses ...................   (15.4)     (7.4)     (7.1)
  Provision for other than temporary
     Impairment ...........................    (3.2)     (2.0)     (1.1)
                                           --------  --------  --------        
                                           $   12.5  $    2.6  $    2.1
                                           ========  ========  ========
                                                                             
  Change in unrealized gains (losses)
     Recorded in stockholders' equity .....$  (30.0) $   38.9  $  (11.1)
                                           ========  ========  ========         
Equity securities:
  Gross realized gains ....................$   80.9 $    51.5  $   29.0
  Gross realized losses (a) ...............   (39.8)     (7.3)     (6.6)
  Provision for other than temporary
     Impairment ...........................    (1.1)     (0.4)     (0.3)
                                           --------  --------  --------         
                                           $   40.0 $    43.8  $   22.1
                                           ========  ========  ========         
  Change in unrealized gains (losses)
     Recorded in stockholders' equity .....$  (50.4) $   18.4  $   18.4
                                           ========  ========  ========
                                                                                

(a) 1998  includes  $7.0  million  realized  loss related to the planned sale of
Intercargo.

                                       65
<PAGE>


                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The  amortized  cost and  estimated  market  values of fixed  maturity  and
short-term investments at December 31, 1998, by contractual fiscal maturity, are
shown below. Expected maturities will differ from contractual maturities because
issuers of securities may have the right to call or prepay  obligations  with or
without call or prepayment penalties.

<TABLE>
<CAPTION>
                                            Fixed Maturities            Fixed Maturities
                                            Held-to-Maturity           Available-for-Sale
                                       ---------------------------  -----------------------
                                                      Estimated                 Estimated
                                           Amortized    Market      Amortized     Market
(In millions)                                 Cost       Value          Cost       Value
-------------------------------------------------------------------------------------------

<S>                                        <C>         <C>         <C>          <C>       
Due in one year or less ..............     $    8.7    $     8.8   $    264.7   $    264.9
Due after one year through five years         173.4        179.4        256.9        252.1
Due after five years through ten years         34.7         37.1        266.0        278.1
Due after ten years ..................         43.8         47.4        655.6        691.3
                                           --------   ----------   ----------   ----------                                     
                                              260.6        272.7      1,443.2      1,486.4
Mortgage-backed securities ...........           --           --        111.0        112.2
                                           --------   ----------   ----------   ----------                                     
                                           $  260.6   $    272.7   $  1,554.2   $  1,598.6
                                           ========   ==========   ==========   ==========
</TABLE>
                                         
                                                                              
     Other long-term investments had aggregate carrying values of $116.2 million
at December 31, 1998 and $94.3 million at December 31, 1997  including  mortgage
loans on real estate of $2.2 million and $2.3 million,  respectively.  Estimated
market  values of mortgage  loans and other  long-term  investments  approximate
their  carrying  values.  The carrying  value of the  Company's  investments  in
principal-only  securities and interest-only  securities  totaled  approximately
$1.5 million at December 31, 1998.

     The  carrying  value  of  securities  on  deposit  with  state   regulatory
authorities in accordance with statutory requirements totaled $242.4 million and
$223.4  million  at  December  31,  1998  and  1997,   respectively.   Excluding
investments in securities of the United States Government and its agencies,  the
Company had  investments  in only one issuer (AAA rated fixed income  securities
totaling  $26.7  million)  that  exceeded  $25.0  million.  The Company had $0.2
million of fixed maturity  investments  for which it was not accruing income for
both 1998 and 1997.

Note 6 - Reinsurance

     In the normal  course of business,  the  Company's  insurance  subsidiaries
reinsure certain risks,  generally on an  excess-of-loss or pro rata basis, with
other companies to limit exposure to losses.  Reinsurance does not discharge the
primary  liability  of the original  insurer.  As of December 31, 1998 and 1997,
recoverables for reinsurance ceded to the Company's two largest  reinsurers were
an aggregate of $71.7 million and $132.8 million,  respectively.  As of December
31,  recoverables  for  reinsurance  ceded to the two largest McGee pool members
other than the Company  aggregated $50.6 million for 1998, and $54.7 million for
1997, and the Company had ceded  balances  payable to these pool members of $6.3
million and $21.0 million, respectively.


                                       66
<PAGE>


                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The table below  illustrates the effect of reinsurance on premiums  written
and premiums earned for the years ended December 31:

(In millions, except for %)                   1998          1997          1996
-------------------------------------------------------------------------------
Direct premiums written ............... $  1,862.0    $  1,521.3    $  1,431.4
Reinsurance assumed ...................      117.8          72.0         174.7
                                        ----------    ----------    ----------  
Gross premiums written ................    1,979.8       1,593.3       1,606.1
Reinsurance ceded .....................     (446.2)       (226.2)       (272.0)
                                        ----------    ----------    ----------  
Net premiums written .................. $  1,533.6    $  1,367.1    $  1,334.1
                                        ==========    ==========    ==========
Percentage of amount assumed to net ...        7.7%          5.3%         13.1%
                                        ==========    ==========    ==========  
Direct premiums earned ................ $  1,810.6    $  1,500.8    $  1,388.9
Reinsurance assumed ...................      116.8         106.1         182.5
                                        ----------    ----------    ----------  
Gross premiums earned .................    1,927.4       1,606.9       1,571.4
Reinsurance ceded .....................     (424.4)       (249.2)       (270.6)
                                        ----------    ----------    ----------  
Net premiums earned ................... $  1,503.0    $  1,357.7    $  1,300.8
                                        ==========    ==========    ==========  
Loss and loss adjustment expenses
   incurred recoverable from reinsurers $    457.2    $    165.4    $    174.3
                                        ==========    ==========    ==========

     Reinsurance   recoverables   and  prepaid   reinsurance   includes  prepaid
reinsurance  of $129.8  million  at  December  31,  1998 and  $125.5  million at
December 31, 1997.


                                       67
<PAGE>


                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7- Loss and Loss Adjustment Expense Reserves

     An analysis of the  Company's  calendar  year net loss and loss  adjustment
expense  reserves for the three years ended  December 31, 1998 is  summarized in
the  following  table.  The 1996 current  year  provision  and payments  include
favorable loss development for Guaranty National of $1.0 million and payments of
$144.8 million  attributable to periods prior to the  consolidation  of Guaranty
National's results in the Company's financial statements.

(In millions)                              1998         1997         1996
--------------------------------------------------------------------------

Net balance, beginning of year .     $  1,390.7   $  1,368.4   $    994.0
Effect of acquisitions and other           16.9          8.9        286.3
                                     ----------   ----------   ----------      
                                        1,407.6      1,377.3      1,280.3
                                     ----------   ----------   ----------       
Provision:
   Current year ................          986.6        896.3        874.1
   Prior years .................           33.9          9.2          8.9
                                     ----------   ----------   ----------       
                                        1,020.5        905.5        883.0
                                     ----------   ----------   ----------       
Payments:
   Current year ................          450.3        370.9        499.2
   Prior years .................          559.4        521.2        295.7
                                     ----------   ----------   ----------       
                                        1,009.7        892.1        794.9
                                     ----------   ----------   ----------       
Net balance, end of year .......        1,418.4      1,390.7      1,368.4
   Add reinsurance recoverables           599.3        481.0        417.3
                                     ----------   ----------   ----------       
Balance, end of year ...........     $  2,017.7   $  1,871.7   $  1,785.7
                                     ==========   ==========   ==========
                                
                                                          
     Loss reserve estimates are based on forecasts of the ultimate settlement of
claims and are  subject to  uncertainty  with  respect  to future  events.  Loss
reserve  amounts are based on  management's  informed  estimates and  judgments,
using data currently  available.  Reserve  amounts and the underlying  actuarial
factors and  assumptions  are  regularly  analyzed  and  adjusted to reflect new
information. Such re-evaluation is a normal, recurring activity that is inherent
in the process of loss reserve  estimation and  therefore,  no assurances can be
given that reserve  development  will not occur in the future.  During the three
years ended  December  31, 1998 a  substantial  portion of the loss  development
experienced  by the  Company  resulted  from  pools  and  associations,  assumed
reinsurance,  and certain  discontinued  lines and program  business  (including
$17.0 million in 1998 related to Orion Specialty realignment), partly reduced by
favorable development in workers compensation.


                                       68
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     An analysis of the Company's loss and loss adjustment expense environmental
reserves  and claim  counts  for the three  years  ended  December  31,  1998 is
presented  below.  Claim counts  (excluding  pools and  associations)  have been
aggregated by year of coverage for each occurrence for which  policyholders  are
being defended, and often include numerous claimants.

<TABLE>
<CAPTION>
                                                1998             1997            1996
                                         ------------------ ---------------- --------------- 
                                                    Claim            Claim           Claim
(In millions, except for claims count)    Amount    Counts   Amount  Counts  Amount  Counts
----------------------------------------------------------- ---------------- ---------------  
<S>                                      <C>         <C>    <C>        <C>   <C>       <C>
Net balance, beginning of year           $  67.9     551    $  57.0    632   $  34.6   474

   Provision ..................              5.3               17.7             24.4
   Payments ...................             (7.5)              (6.8)            (4.8)
   Acquisitions ...............               --                 --              2.8    70
                                         -------            -------          -------                                  
Net balance, end of year ......             65.7     515       67.9    551      57.0   632
   Add reinsurance recoverables             13.0               12.3             12.5
                                         -------            -------          -------                                  
Balance, end of year ..........          $  78.7            $  80.2          $  69.5
                                         =======            =======          =======
</TABLE>
                                    
                                                                      

     The  Company's  environmental  claims  principally  relate to asbestos  and
hazardous waste,  arising from certain  liability  business written prior to the
mid  1980's,  which  business  was  never  a  major  element  of  the  Company's
operations.  Environmental  claims  are also  received  from  certain  pools and
associations where reserves are established based on information reported to the
Company by the managers of those pools and associations. In view of the lines of
insurance that the Company has traditionally written,  environmental claims have
not  represented,  and are not expected to  represent in the future,  a material
portion of the Company's total claims.

     Establishing  reserve  liabilities for  environmental  claims is subject to
significant   uncertainties  that  make  reserve  estimation  difficult.   Legal
decisions  have  tended to expand  insurance  coverage  beyond the intent of the
policies.  The Company does not use  discounting in determining its reserves for
environmental claims. IBNR of $45.6 million and $51.0 million is included in net
reserves for environmental  claims at December 31, 1998 and 1997,  respectively.
The net reserve for  environmental  claims and IBNR  increased in 1997 primarily
due to higher claims reported to the Company by certain pools and  associations,
which is the  basis of  establishing  such  reserve,  and  higher  loss  reserve
estimates.


                                       69
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8 - Notes Payable

     Notes  payable are recorded at face value less  unamortized  discount.  The
carrying  value and  estimated  market  value of notes  payable at  December  31
consist of the following:

                                                                  Estimated
                                            Carrying Value       Market Value
                                         ------------------ -------------------
(In millions)                             1998       1997       1998       1997
----------------------------------------------------------- -------------------

$110.0 face amount, 9.125% Senior
   Notes, due September 1, 2002 .     $  109.9   $  109.9   $  118.9   $  121.2
$100.0 face amount, 7.25% Senior
   Notes, due July 15, 2005 .....         99.5       99.4      102.9      103.2
Bank credit facility ............          8.0         --        8.0         --
Loan agreement with banks .......           --      100.0         --      100.0
Collateralized term loan ........           --        0.9         --        0.9
                                      --------   --------   --------   -------- 
                                      $  217.4   $  310.2   $  229.8   $  325.3
                                      ========   ========   ========   ========
                                      
                                                                      

     On July 8, 1998 the Company entered into a credit agreement with a group of
banks ("Bank Credit  Facility")  which  provides for unsecured  borrowings up to
$150 million.  The Bank Credit Facility expires on July 8, 2003 and provides for
two  one-year  extension  periods.  The  Company  intends to use the Bank Credit
Facility for general corporate  purposes,  which may include  acquisitions.  The
Bank Credit Facility carries an annual facility fee on the unused amounts of the
credit  facility.  Borrowings  under the Bank Credit  Facility  bear interest at
LIBOR  (London  Interbank  Offered  Rate) plus a margin based upon the Company's
credit  ratings.  The Bank  Credit  Facility  requires  the  Company to maintain
certain  financial  covenants  including a maximum debt to total  capitalization
ratio of 0.4 to 1.0, as defined,  and a minimum  combined  statutory  surplus of
$650 million plus 30% of the Company's  aggregate  combined annual statutory net
income.  The Bank Credit Facility limits the Company's  ability to incur secured
indebtedness or certain contingent  obligations except for indebtedness  secured
by liens  specifically  permitted  by the Bank Credit  Facility  and  additional
secured  indebtedness with a principal amount not exceeding 10% of the Company's
consolidated net worth, as defined.

     The indentures for the 7.25% Senior Notes and the 9.125% Senior Notes limit
the amount of liens and guarantees by the Company,  and the Company's ability to
incur  secured  indebtedness  without  equally and ratably  securing  the senior
notes.

     The $100  million  borrowings  under the loan  agreement  between  Guaranty
National and several banks  outstanding at December 31, 1997 was fully repaid by
the  Company in  February  1998 from  proceeds  of the sale of the 7.701%  Trust
Preferred Securities (See Note 9).

     As of December 31, 1998  maturities of the  Company's  notes payable are as
follows: 2002 - $110.0 million, 2003 - $8.0 million, and 2005 - $100.0 million.

                                       70
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 9 - Trust Preferred Securities

     Company-Obligated Mandatorily Redeemable Preferred Capital Securities
of Subsidiary  Trusts Holding Solely the Junior  Subordinated  Debentures of the
Company ("Trust Preferred Securities") at December 31 comprise the following:

                                                               Estimated
                                         Carrying Value      Market Value
                                       -----------------   ----------------
(In millions)                            1998      1997      1998      1997
---------------------------------------------------------------------------
8.73% Trust Preferred Securities
  due January 1, 2037                 $ 125.0   $ 125.0   $ 119.0   $ 137.5
7.701% Trust Preferred Securities                                
  due April 15, 2028                    125.0         -     112.0         -
                                      -------   -------   -------   -------
                                      $ 250.0   $ 125.0   $ 231.0   $ 137.5
                                      =======   =======   =======   =======

     On January 13, 1997 Orion issued $125 million of 8.73% Junior  Subordinated
Deferrable  Interest  Debentures due January 1, 2037 (the "8.73% Debentures") to
Orion Capital Trust I ("Trust I"), a Delaware statutory business trust sponsored
by Orion.  Trust I simultaneously  sold $125 million of 8.73% capital securities
(the "8.73% Trust Preferred Securities") which have substantially the same terms
as the 8.73%  Debentures.  The net  proceeds  from the sale of the  8.73%  Trust
Preferred  Securities were used in part for the acquisition of Guaranty National
common  stock in December  1997.  The 8.73% Trust  Preferred  Securities  may be
redeemed without premium on or after January 1, 2007.

     On February 2, 1998 Orion issued $125 million of 7.701% Junior Subordinated
Deferrable Interest  Debentures due April 15, 2028 (the "7.701%  Debentures") to
Orion  Capital  Trust II ("Trust  II"),  a  Delaware  statutory  business  trust
sponsored by Orion. Trust II then sold $125 million of 7.701% capital securities
(the "7.701% Trust Preferred  Securities"),  which have  substantially  the same
terms as the 7.701% Debentures.  Approximately $100 million of net proceeds from
the sale of the  7.701%  Trust  Preferred  Securities  were  used to repay  bank
indebtedness of Guaranty National in February 1998.

     The 8.73% and 7.701% Trust  Preferred  Securities  are  subordinate  to all
liabilities  of the Company.  The Company may defer  interest  distributions  on
these  Trust  Preferred  Securities;   however,  during  any  period  when  such
cumulative  distributions  have been deferred,  Orion may not declare or pay any
dividends or distributions on its common stock. The Company registered the Trust
Preferred   Securities  under  the  Securities  Act  of  1933.  The  Trusts  are
consolidated in the Company's financial statements because they are wholly-owned
by the  Company.  The sole  assets of the  Trusts are the  Debentures  issued by
Orion. Orion has given its partial guarantee, which when taken together with the
Company's  obligations  under the declaration of the Trust, the Debentures,  and
the  indenture  pursuant  to which the Trust  Preferred  Securities  are  issued
including its obligations to pay costs,  expenses,  debts and liabilities of the
Trusts (other than with respect to the Trust Preferred  Securities),  provides a
full  and  unconditional  guarantee  of  amounts  due  on  the  Trust  Preferred
Securities.

                                       71
<PAGE>
                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10 - Federal Income Taxes

     Orion and its wholly-owned  subsidiaries file a consolidated federal income
tax return,  including  Guaranty  National from July 2, 1996.  Substantially all
federal income taxes incurred by Orion and its  subsidiaries  relate to domestic
operations.

     In  October  1996  the  Internal  Revenue  Service  ("IRS")   completed  an
examination of the Company's  federal income tax returns  through 1992.  Certain
tax  benefits  from  tax  attributes  existing  at the  date  of  the  Company's
reorganization  in  1976  were  not  recognized  pending  completion  of the IRS
examination.  Accordingly,  the Company  recorded a credit to capital surplus in
1996 for tax benefits of $11.9 million with respect to the 1976  reorganization.
The recording of this credit had no impact on the Company's earnings.


     The  components  of the  provision  (benefit)  for federal  income taxes on
income from  operations and  allocations of taxes  (benefits) to other items for
the years ended December 31 are as follows:
<TABLE>
<CAPTION>

(In millions)                                                 1998      1997      1996
---------------------------------------------------------------------------------------

Taxes on income from operations before minority interest:
<S>                                                         <C>       <C>       <C>   
   Current .................................................$ 37.5    $ 42.0    $ 22.0
   Deferred ................................................   3.6       4.5      10.0
                                                            ------    ------    ------                              
                                                              41.1      46.5      32.0
Tax benefit from trust preferred securities ................  (6.8)     (3.7)       --
                                                            ------    ------    ------                             
   Total tax expense .......................................  34.3      42.8      32.0
Taxes allocated to stockholders' equity for:
   Unrealized appreciation (depreciation) of securities .... (28.0)     22.8       2.0
   Pre-reorganization income tax benefits ..................    --        --     (11.9)
   Other ...................................................  (1.5)     (2.0)      0.6
                                                            ------    ------    ------                              
                                                            $  4.8    $ 63.6    $ 22.7
                                                            ======    ======    ======
</TABLE>

                                       72
<PAGE>
                                                            
                                                                                

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The tax effects of the temporary  differences  comprising the Company's net
deferred tax asset at December 31 are as follows:

(In millions)                               1998      1997
-----------------------------------------------------------
Deferred tax assets:
   Loss reserve discounting ........     $  71.8   $  72.2
   Unearned premium reserves .......        32.6      30.1
   Policyholders' dividends ........         6.3       7.1
   Retiree medical benefits ........         5.4       4.6
   Deferred compensation ...........         5.0       7.8
   Other ...........................        20.9      19.8
                                         -------   -------                    
                                           142.0     141.6
                                         -------   -------                    
Deferred tax liabilities:
   Deferred policy acquisition costs        54.7      51.5
   Unrealized investment gains .....        30.2      58.4
   Investment income ...............        18.3      16.5
   Other ...........................        12.1      14.2
                                         -------   -------                    
                                           115.3     140.6
                                         -------   -------                    
      Net deferred tax asset .......     $  26.7   $   1.0
                                         =======   =======
                                       
                                                        
     A reconciliation of expected federal income tax expense on pre-tax earnings
at regular corporate rates to actual tax expense for the years ended December 31
is as follows:
<TABLE>
<CAPTION>


(In millions, except for %)           1998               1997               1996
----------------------------------------------------------------------------------------   
                                  Amount    Rate     Amount    Rate     Amount    Rate
<S>                              <C>        <C>     <C>        <C>     <C>        <C>  
Expected income tax expense      $  48.0    35.0%   $  58.0    35.0%   $  44.6    35.0%
Tax-exempt interest ........       (13.1)   -9.6%     (11.5)   -6.9%     (10.2)   -8.0%
Dividends-received deduction        (5.7)   -4.2%      (5.6)   -3.3%      (6.5)   -5.1%
Amortization of goodwill ...         4.2     3.1%       1.1     0.6%       1.0     0.8%
Other ......................         0.9     0.7%       0.8     0.4%       3.1     2.5%
                                 -------    ----    -------    ----    -------    ----                                            
Actual income tax expense ..     $  34.3    25.0%   $  42.8    25.8%   $  32.0    25.2%
                                 =======    ====    =======    ====    =======    ==== 
</TABLE>
                            
                                                                               
Note 11 - Employee Benefit Plans

     The  Company  maintains  401(k)  and  Profit  Sharing  Plan(s)   ("Plans"),
qualified under the Internal Revenue Code Section 401(a) for eligible  employees
of the Company. (These Plans include the Orion Capital 401(k) and Profit Sharing
Plan,  Orion Capital  Corporation  Retirement  Savings Plan for the Employees of
Guaranty National  Insurance Company and Wm. H. McGee & Co., Inc. Profit Sharing
Plan.) Employee and employer  matched  contributions to the Plans are limited to
the extent  allowable  under the Plans and in accordance  with Internal  Revenue
Code limits.  The Plans also provide a provision that allows the Company to make
annual  profit  sharing  contributions  to the  Plans  based  on  percentage  of
employee's compensation.  The profit sharing contribution is determined annually
by the Company.  Employees  vest in the Company's  contributions  on a graduated
scale over a six-year or  seven-year  period.  In addition to the active  plans,
Strickland,  acquired in April 1998, froze its 401(k) defined  contribution plan
for all its eligible  employees.  The Company has adopted  supplemental  benefit
plans to provide


                                       73
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

accrual of benefits for those eligible  employees who receive less than the full
employer  contributions  to the  Company's  qualified  plans as a result  of the
Internal Revenue Code limitations.

     During 1998,  the  Company's  shareholders  approved the  Employees'  Stock
Purchase Plan to allow eligible employees of the Company and its subsidiaries to
purchase, through payroll deductions, shares of the Company's common stock at 90
percent of the fair market value at specified  dates.  In May 1998,  the Company
reserved  300,000  shares of its common stock for issuance  under the Employees'
Stock Purchase Plan. The initial purchase period began on July 1, 1998 and ended
December 31, 1998,  resulting in 29,851 shares  issued at an aggregate  purchase
price of $1.1  million.  At  December  31,  1998  approximately  24% of eligible
employees  participated  in the plan and 270,149  shares are reserved for future
issuance under the plan.

     The Company maintains incentive plans for key employees, including the 1982
Long-Term Performance Incentive Plan and the Equity Incentive Plan (together the
"Incentive Plans"). Orion has awarded both stock options and restricted stock to
members of the Company's management under the Incentive Plans. All stock options
are granted by Orion with exercise prices at fair market value at date of grant,
and are intended to qualify to the maximum  extent  possible as incentive  stock
options.  Stock  options  become  exercisable  from  the  first  through  fourth
anniversaries  of the date of grant,  and  expire  ten  years  after the date of
grant. Restricted stock is considered issued and outstanding when awarded. There
are restrictions as to its transferability,  which restrictions  generally lapse
in 25%  increments  over four or five year periods  from the date of grant.  For
certain employees,  the restrictions fully lapse after three years from the date
of grant if the participant  remains  employed with the Company.  As of December
31, 1998, the number of shares of stock  reserved  under the Incentive  Plans is
1,693,152,  of which 1,611,442 are for outstanding  stock options and 81,710 are
available for future awards under the Incentive Plans.  Included in 1997 granted
options  of  696,600  were  358,090  of  stock  options  relating  to  the  1997
acquisition of Guaranty National.


                                       74
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

<TABLE>
<CAPTION>
     A summary of the status of Orion's  stock option plans at December 31, 1998
and for the three years then ended is presented below:

(Shares in thousands)             1998                1997               1996
--------------------------------------------------------------------------------------
                                      Weighted            Weighted           Weighted
                                      Average             Average            Average
                                      Exercise            Exercise           Exercise
                             Options   Price      Options  Price      Options  Price

<S>                          <C>      <C>          <C>    <C>          <C>    <C>    
Beginning of year ........   1,452.4  $ 25.16      893.7  $ 18.07      588.3  $ 12.40
                             
   Granted ...............     538.9    37.39      696.6    32.39      374.1    25.68
   Cancelled .............     (75.8)   31.37      (33.1)   29.42      (13.9)   17.14
   Exercised .............    (304.1)   13.47     (104.8)   11.41      (54.8)    9.47
                             -------             -------               -----   
End of year ..............   1,611.4    31.10    1,452.4    25.16      893.7    18.07
                             =======  =======    =======  =======      =====  =======                                         
                                                                     
Exercisable at end of year     594.4  $ 23.59      646.1  $ 16.95      402.0  $ 11.48
                             =======  =======    =======  =======      =====  =======                                       
</TABLE>


(Shares in thousands)                  December 31, 1998
-------------------------------------------------------------------------------
                                   Weighted   Weighted                Weighted
      Range of                      Average    Average                Average
      Exercise           Options   Exercise   Remaining    Options    Exercise
       Prices          Outstanding   Price      Years    Exercisable    Price

 $  10.01  - $ 17.50      167.3   $  15.12      5.1        167.3     $   15.12
    17.51  -   25.00      310.5      21.48      6.9        210.3         21.44
    25.01  -   40.00      791.2      32.32      9.0        140.4         25.89
    40.01  -   46.00      305.4      43.87      8.8         76.4         43.87
    46.01  -   57.00       37.0      52.95      9.3            -             -
                        -------                        --------- 
    10.01  -   57.00    1,611.4      31.10      8.1        594.4         23.59
                        =======   ========      ===    =========     =========


     The Company applies Accounting  Principles Board Opinion No. 25 and related
interpretations  in  accounting  for stock  options  granted under the Incentive
Plans and the Employees' Stock Purchase Plan. Accordingly,  no compensation cost
has been recognized for activities related to these plans. Had compensation cost
for these plans been recognized  pursuant to FAS 123 "Accounting for Stock-Based
Compensation,"  the  Company's  net earnings and earnings per diluted share on a
proforma basis for the years ended  December 31, 1998,  1997 and 1996 would have
been approximately  $100.8 million or $3.62 per diluted share, $114.9 million or
$4.12  per  diluted  share,  and  $86.5  million  or $3.11  per  diluted  share,
respectively.

     The weighted average fair value of options granted was $10.62 per share for
1998, $14.08 per share for 1997 and $14.58 per share for 1996. The fair value of
options  granted  was  estimated  on  the  date  of  grant  using  the  binomial
option-pricing model with the following weighted-average  assumptions:  dividend
yield of 1.9% - 1998 and 1996,  and 1.5% - 1997;  expected  volatility  of 22% -
1998, 23% - 1997 and 19% - 1996;  risk free interest rate of 5.4% - 1998, 5.5% -
1997 and 6.0% - 1996;  and expected  life 7.0 years - both 1998 and 1997 and 7.1
years in 1996.

                                       75
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     During  1998 and 1997  Orion  granted  26,000  and  69,000  stock  options,
respectively,  to directors at fair market value,  which become  exercisable one
year from the date of grant and expire in ten years.

     Orion granted 130,263 shares of restricted stock at a weighted average fair
value of $40.91 per share during 1998,  57,202 shares at $43.95 per share during
1997 and 92,636  shares at $25.61 per share for 1996.  As of December  31, 1998,
the restrictions have not lapsed on 224,013 shares of restricted stock. The fair
market value of restricted  stock on the date of issuance is amortized  over the
vesting period during which the restrictions lapse.

     The total expense for 1998, 1997 and 1996 for the above savings, retirement
and employee benefit plans,  excluding  amortization of deferred compensation on
restricted   stock,   was  $10.1  million,   $10.9  million  and  $9.5  million,
respectively.

Note 12 - Postretirement Medical Benefits and Defined Benefit Pension Plans

     During the fourth quarter of 1998, the Company  adopted FAS 132 "Employers'
Disclosures  about Pensions and Other  Postretirement  Benefits," which modifies
the Company's disclosure of such benefits.

     The Company and subsidiaries  provide  postretirement  benefits to eligible
employees,  who have  attained age 55 and have 10 years of  consecutive  service
immediately  prior to  retirement.  The  Company  premium  subsidy  provided  to
eligible participants electing continuation of medical Plan benefits coverage is
a service formula based on years of service up to a maximum of 25 years.

     McGee has a  noncontributory  defined benefit  retirement plan covering all
eligible  employees.  Unisun,  which was  acquired in December  1997,  froze its
defined benefit pension plan for all of its eligible employees.

                                       76
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     The Company's benefit obligation, plan assets and recorded balances for the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
                                                                              Postretirement
                                                        Pension Benefits         Benefits
                                                      --------------------   -------------------
(In millions, except for %)                             1998        1997       1998       1997
--------------------------------------------------------------------------   -------------------
Change in benefit obligation:
<S>                                                   <C>        <C>         <C>        <C>   
Benefit obligation, beginning of year ..............  $  30.6    $  23.0     $  6.2     $  9.8
   Service cost ....................................      0.9        0.8        0.5        1.0
   Interest cost ...................................      2.1        1.6        0.5        0.7
   Actuarial losses (gains) and amendments .........      1.7        1.1        0.7       (4.9)
   Acquisitions ....................................       --        5.8        0.5         --
   Benefit paid, net of participants' contributions      (2.1)      (1.7)      (0.5)      (0.4)
                                                      -------    -------     -------    ------                                     
Benefit obligation, end of year ....................     33.2       30.6        7.9        6.2
                                                      -------    -------     -------    ------                                     
Change in plan assets:
Fair value of plan assets, beginning of year .......     27.9       19.4         --         --
   Return on plan assets ...........................      4.0        2.6   
   Acquisitions ....................................       --        7.1         --         --
   Employer contributions ..........................      0.9        0.5        0.5        0.4
   Benefits paid, net of participants' contributions     (2.1)      (1.7)      (0.5)      (0.4)
                                                      -------    -------     -------    ------                                     
Fair value of plan assets, end of year .............     30.7       27.9         --         --
                                                      -------    -------     -------    ------                                     
Funded status ......................................     (2.5)      (2.7)      (7.9)      (6.2)
Unrecognized net gains .............................     (1.4)      (1.2)      (7.1)      (8.9)
                                                      -------    -------     -------    ------                                     
   Accrued benefit cost ............................  $  (3.9)   $  (3.9)    $ (15.0)   $(15.1)
                                                      =======    =======     =======    ====== 
                                                  
                                                                                              
Weighted-average assumptions as
   of December 31:
Discount rate ......................................     6.75%       7.0%      6.75%      7.0%
Rate of compensation increase ......................      5.0%       5.0%
Expected return on plan assets .....................   8.0%-9.0%  8.0%-9.0%

</TABLE>

<TABLE>
<CAPTION>
     The  components of net periodic  benefit costs for the years ended December
31 are as follows:
                                                                                         Postretirement
                                                   Pension Benefits                         Benefits
                                         ---------------------------------    ----------------------------------
(In millions)                                 1998        1997        1996         1998         1997        1996
--------------------------------------------------------------------------    ----------------------------------
Components of net periodic benefit cost:

<S>                                      <C>         <C>         <C>          <C>          <C>         <C>      
Service cost                             $     0.9   $     0.8   $     0.8    $     0.5    $     1.0   $     1.1
Interest cost                                  2.1         1.6         1.6          0.5          0.7         0.7
Return on plan assets                         (2.1)       (1.5)       (1.5)           -            -           -
Recognized net gains                             -           -           -         (1.2)        (0.5)       (0.5)
                                         ---------   ---------   ---------    ---------    ---------   ---------
Net periodic benefit cost                $     0.9   $     0.9   $     0.9    $    (0.2)   $     1.2   $     1.3
                                         =========   =========   =========    =========    =========   ========= 

</TABLE>

                                       77
<PAGE>


                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The  expected   health  care  cost  trend  rates  used  to  calculate   the
postretirement  benefits  obligation  were  15.0%  for 1998  and 8.5% for  1999,
decreasing  linearly  each year until it  reaches 5% for 2006 and future  years.
Assumed  health care cost trend rates have a  significant  effect on the amounts
reported for the  postretirement  medical benefit plans. A one  percentage-point
change in assumed health care cost trend rates would have the following effects:

(In millions)                              1-Percentage Point Change
---------------------------------------------------------------------
                                                1998       1997
                                              --------   --------
Effect on total of service and interest
   cost components                            $    0.1   $    0.3
Effect on postretirement benefit obligation   $    0.8   $    0.6


     Orion  maintained  a  non-qualified  defined  benefit  retirement  plan for
members of the Board of Directors who are not  employees.  On December 31, 1997,
the Company  terminated this plan resulting in $0.3 million of benefits payments
in January 1998 with the remaining  accrued  benefits of $0.4 million to be paid
with  interest in future  periods.  Benefits  were based on years of service and
director fee levels at retirement or termination date of the plan.

Note 13 - Commitments

     Minimum lease  commitments at December 31, 1998,  with the majority  having
initial lease periods from one to twenty-five years, are as follows:

(In millions)
------------------------------------------
1999                           $      22.6
2000                                  20.2
2001                                  15.7
2002                                  12.5
2003                                  10.0
2004 and thereafter                   37.8
                               -----------
   Minimum lease commitments   $     118.8
                               ===========


     Rent expense amounted to $20.2 million, $23.1 million and $19.8 million for
1998, 1997 and 1996, respectively. Substantially all leases are for office space
and equipment.  A number of lease  commitments  contain  renewal options ranging
from one to thirty years.

Note 14 - Contingencies

     Orion and its subsidiaries are routinely  engaged in litigation  incidental
to their  businesses.  Management  believes that there are no significant  legal
proceedings  pending  against the  Company  which,  net of reserves  established
therefore,  are likely to result in  judgments  for amounts that are material to
the  financial  condition,  liquidity or results of  operations of Orion and its
consolidated subsidiaries, taken as a whole.


                                       78
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 15 - Stockholders' Equity and Earnings Per Common Share

     During 1998, the Company  repurchased 836,100 shares of its common stock at
an aggregate cost of $35.6 million under the stock repurchase program authorized
by the Board of Directors and repurchased  45,615 shares at an aggregate cost of
$2.4 million  related to its employee  benefit  plans.  The Company  repurchased
42,916  shares for $1.5 million in 1997 and 482,228  shares for $11.2 million in
1996 under the stock repurchase program.

     Orion  declared  dividends  on its  common  stock of $19.1  million,  $17.1
million and $14.3 million, or $0.70, $0.62 and $0.51 per share in 1998, 1997 and
1996, respectively.

     A  reconciliation  of basic and diluted  earnings per share ("EPS") for the
years ended December 31 is as follows:
     
                                                  Net     Average    Per Share
(In millions, except for per share amounts)    Earnings   Shares       Amount
-------------------------------------------------------------------------------
1998 -
Basic EPS:
Net earnings available to
   common stockholders                       $   102.8        27.2  $     3.78
                                                                    ==========
Stock options and awards                             -         0.6
                                             ---------   ---------
Diluted EPS:
Net earnings available to common
   stockholders with assumed exercises       $   102.8        27.8  $     3.69
                                             =========   =========  ==========
1997 -
Basic EPS:
Net earnings available to
   common stockholders                       $   115.8        27.3  $     4.24
                                                                    ==========
Stock options and awards                             -         0.6
                                             ---------   ---------
Diluted EPS:
Net earnings available to common
   stockholders with assumed exercises       $   115.8        27.9  $     4.15
                                             =========   =========  ==========
1996 -
Basic EPS: 
Net earnings available to
   common stockholders                       $    86.6        27.4  $     3.16
                                                                    ==========
Stock options and awards                             -         0.4
                                             ---------   ---------
Diluted EPS:
Net earnings available to common
   stockholders with assumed exercises       $    86.6        27.8   $    3.12
                                             =========   =========   =========

     Effective as of  September  11, 1996,  Orion  redeemed its old  stockholder
rights plan and adopted a new Stockholder Rights Plan ("Rights Plan"). Under the
Rights Plan each outstanding  share of common stock includes one preferred stock
purchase right ("Right"). The Rights Plan is designed to assure

                                       79
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

stockholders  that  they  will  receive  equitable  treatment  in the event of a
proposed takeover.  Under the Rights Plan, each holder of a Right is entitled to
buy two-hundredth of a share of Series B Junior  Participating  Preferred Stock.
The  Rights  become  exercisable  (i) if an  acquiror  gains  a 15%  or  greater
beneficial ownership interest in Orion's outstanding common stock, on other than
fair and favorable terms to all  stockholders or (ii) following the commencement
of a tender offer or exchange offer that would result in an acquiror  owning 15%
or more of  Orion's  outstanding  common  stock.  Each  Right  not owned by such
acquiror  will enable the holder to purchase,  at an initial  purchase  price of
$100,  common  stock  having a value of twice the  Right's  purchase  price.  In
addition,  under  certain  circumstances  if Orion is  involved in a merger each
Right will entitle its holder to purchase,  at the Right's then current purchase
price,  common shares of such other company  having a value of twice the Right's
purchase  price.  Until 1998,  the Rights Plan provided  that, in the event of a
change in control for a period of 180 days,  Rights  could be  redeemed  only by
action of the continuing Directors. That restriction was removed in 1998.

Note 16 - Accumulated Other Comprehensive Income

Accumulated  other  comprehensive  income balances,  net of taxes, for the years
ended December 31 are as follows:

                              Unrealized    Unrealized Foreign   Accumulated
                              Unrealized        Exchange       Accumulated Other
                           Investment Gains   Translation        Comprehensive
(In millions)                  (Losses)      Gains (Losses)      Income (Loss)
--------------------------------------------------------------------------------
1998:
Balance, beginning of year       $  113.6        $   (4.4)         $  109.2
Current year change                 (52.4)            1.7             (50.7)
                                 --------        --------          --------   
Balance, end of year             $   61.2        $   (2.7)         $   58.5
                                 ========        ========          ========
                                 
1997:
Balance, beginning of year       $   72.3        $   (2.2)         $   70.1
Current year change                  41.3            (2.2)             39.1
                                 --------        --------          --------
Balance, end of year             $  113.6        $   (4.4)         $  109.2
                                 ========        ========          ========
1996:
Balance, beginning of year       $   63.3        $   (4.0)         $   59.3
Current year change                   9.0             1.8              10.8
                                 --------        --------          --------   
Balance, end of year             $   72.3        $   (2.2)         $   70.1
                                 ========        ========          ========

     The pre-tax  unrealized  investment  gains  (losses) were $(80.4)  million,
$62.9 million and $14.0 million for the year ended  December 31, 1998,  1997 and
1996,  respectively.  The pre-tax unrealized foreign exchange  translation gains
(losses) were $2.6 million,  $(3.4)  million and $2.8 million for the year ended
December 31, 1998, 1997 and 1996, respectively.


                                       80
<PAGE>
                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The components of change in accumulated other comprehensive  income related
to changes in unrealized investment gains (losses) for 1998 are as follows:

(In millions)
--------------------------------------------------------------
Unrealized investment holding gains (losses)
   arising during the period, net of taxes         $      2.6
Reclassification adjustment for gains (losses)
   Included in net earnings, net of taxes               (55.0)
Net investment gains (losses) recognized in        ----------
   other comprehensive income                      $    (52.4)
                                                   ==========

     Pre-tax  unrealized  investment  holding gains (losses) arising during 1998
was $4.4 million. Pre-tax reclassification  adjustment for gains included in net
earnings was $84.7 million.

Note 17 - Segment Information

The Company  reports its insurance  operations in three segments at December 31,
1998. These  reportable  segments  comprise  operating units of the Company that
have different  insurance  products and services,  market focus and  operational
structure. The Company reportable segments comprise:

Workers  Compensation - this segment  provides  workers  compensation  insurance
         products and services sold by the EBI Companies.

Specialty  Commercial  -  this  segment  markets  various  specialty  commercial
     products and services and includes professional liability insurance through
     DPIC Companies;  client-focused  specialty insurance programs through Orion
     Specialty;  underwriting  management  specializing in ocean marine,  inland
     marine and commercial  property  insurance through Wm. H. McGee;  insurance
     for  international  trade  through the Company's 26% interest in Intercargo
     Corporation;  and also  includes  the run-off  operations  of the  Company'
     assumed  reinsurance  business,  SecurityRe,  which was sold in late  1996.
     McGee and  Intercargo are expected to be sold in 1999 as discussed in Notes
     20 and 4.

Nonstandard   Automobile  -  specializes  in  nonstandard   personal  automobile
     insurance sold by OrionAuto.

                                       81
<PAGE>
                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     Financial  information  for the  Company's  segments  for the  years  ended
December 31 is shown below:

(In millions)                                     1998         1997        1996
-------------------------------------------------------------------------------
Net Premiums Written:
   Workers Compensation ..................  $    439.5   $    365.1  $    353.0
   Specialty Commercial ..................       665.1        669.2       725.8
   Nonstandard Automobile ................       429.0        332.8       255.3
                                            ----------   ----------  ---------- 
      Consolidated .......................  $  1,533.6   $  1,367.1  $  1,334.1
                                            ==========   ==========  ==========
                                                                                
Revenues:
Workers Compensation -
   Premiums earned .......................  $    429.8   $    362.1  $    356.8
   Net investment income .................        35.2         41.8        38.2
   Realized investment gains .............        19.1         13.8         6.8
   Other income ..........................         0.6          0.3         0.2
                                            ----------   ----------  ---------- 
      Total Workers Compensation .........       484.7        418.0       402.0
                                            ----------   ----------  ---------- 
Specialty Commercial -
   Premiums earned .......................       656.0        673.2       686.5
   Net investment income .................        82.9         90.5        82.4
   Realized investment gains .............        30.0         28.7        13.2
   Other income ..........................        14.0         19.7        22.7
                                            ----------   ----------  ---------- 
      Total Specialty Commercial .........       782.9        812.1       804.8
                                            ----------   ----------  ---------- 
Nonstandard Automobile -
   Premiums earned .......................       417.2        322.4       257.5
   Net investment income .................        21.2         21.8        19.7
   Realized investment gains .............         3.1          5.5         6.3
                                            ----------   ----------  ---------- 
      Total Nonstandard Automobile .......       441.5        349.7       283.5
                                            ----------   ----------  ---------- 
Other ....................................         7.6         10.8         3.2
                                            ----------   ----------  ---------- 
      Consolidated .......................  $  1,716.7   $  1,590.6  $  1,493.5
                                            ==========   ==========  ========== 
Pre-tax Earnings before Minority Interest:
   Workers Compensation ..................  $     86.2   $     86.8  $     68.4
   Specialty Commercial ..................        54.2         65.3        56.5
   Nonstandard Automobile ................        37.1         40.7        23.3
   Other .................................       (20.8)       (16.6)      (20.9)
                                            ----------   ----------  ---------- 
      Consolidated .......................  $    156.7   $    176.2  $    127.3
                                            ==========   ==========  ==========
                                                                                
Identifiable Assets at December 31:
   Workers Compensation ..................  $    989.7   $    936.2
   Specialty Commercial ..................     2,240.5      2,066.2
   Nonstandard Automobile ................       883.3        811.4
   Other .................................        50.9         70.3
                                            ----------   ----------             
      Consolidated .......................  $  4,164.4   $  3,884.1
                                            ==========   ==========

                                       82
<PAGE>
                                                                      

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

     The  miscellaneous  income and expenses  (primarily  interest,  general and
administrative  expenses  and other  consolidating  elimination  entries) of the
parent company are reported as "Other" in the above table.

     The accounting  policies of the segments are the same as those described in
Note 1 to the consolidated  financial  statements included herein.  Investments,
net  investment  income and  realized  investment  gains are  allocated  to each
segment  based on the cash flows of these  segments.  Earnings  for the segments
represents  earnings  (loss) before federal  income taxes and minority  interest
expense,  and  includes  an  allocation  of payroll,  office and other  expenses
incurred  by the parent  company  to support  the  operations  of the  Company's
segments.  Earnings for Specialty  Commercial  include equity earnings (loss) of
affiliate of $(0.7) million in 1998,  $8.6 million in 1997 and $(0.4) million in
1996.  Additionally,   identifiable  assets  for  Specialty  Commercial  include
investment  in  affiliate,  Intercargo,  of $22.8  million and $31.3  million at
December 31, 1998 and 1997, respectively.

     Less than 2% of the  Company's  premiums are derived from  operating  units
located outside the United States. Substantially all of the Company's long-lived
assets are located in the United States.  No one single customer  represents 10%
or more of the Company's revenue for 1998, 1997 and 1996.

Note 18 - Selected Quarterly Financial Data (Unaudited)

     Quarterly  results of operations and earnings per common share for 1998 and
1997 are summarized as follows:

<TABLE>
<CAPTION>            
                                              First     Second        Third       Fourth
(In millions, except for per share amounts)  Quarter    Quarter      Quarter      Quarter
-------------------------------------------------------------------------------------------
<S>                                         <C>         <C>          <C>          <C>      
Premiums earned .....................       $  348.8    $  370.4     $  396.5     $   387.3
Net investment income ...............           41.4        42.5         22.3          37.0
Realized investment gains ...........           29.0        22.7          0.4           0.4
Other income ........................            5.6         7.0          2.1           3.3
                                            --------    --------     --------     ---------                                     
   Total revenues ...................       $  424.8    $  442.6     $  421.3     $   428.0
                                            ========    ========     ========     =========                                        
   Net earnings .....................       $   42.2    $   38.2     $    2.3     $    20.1
                                            ========    ========     ========     =========                                        
Net earnings per basic common share .       $   1.54    $   1.39     $   0.08     $    0.75
                                            ========    ========     ========     =========                                       
Net earnings per diluted common share       $   1.50    $   1.36     $   0.08     $    0.74
                                            ========    ========     ========     =========
                                                                                   

1997:
Premiums earned .....................       $  324.0    $  335.2     $  347.4     $   351.0
Net investment income ...............           40.2        41.3         40.8          42.6
Realized investment gains ...........           15.8         8.4          5.2          18.5
Other income ........................            4.9         5.2          5.0           5.1
                                            --------    --------     --------     ---------                                    
   Total revenues ...................       $  384.9    $  390.1     $  398.4     $   417.2
                                            ========    ========     ========     =========                                        
   Net earnings .....................       $   29.5    $   25.4     $   24.5     $    36.4
                                            ========    ========     ========     =========                                    
Net earnings per basic common share .       $   1.08    $   0.93     $   0.90     $    1.33
                                            ========    ========     ========     =========                                    
Net earnings per diluted common share       $   1.06    $   0.91     $   0.88     $    1.30
                                            ========    ========     ========     =========
                                                                                     
</TABLE>

Earnings  per share  are  computed  independently  for the  quarters  presented.
Therefore,  the sum of the quarterly  earnings per share may not equal the total
computed for the year.

                                       83
<PAGE>

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 19 - Accounting Standards Not Yet Adopted

     In June 1998, the Financial  Accounting Standards Board issued FAS No. 133,
Accounting  for Derivative  Instruments  and Hedging  Activities.  This Standard
requires  companies  to record all  derivatives  on the balance  sheet as either
assets or liabilities and measure those instruments at fair value. The manner in
which  companies  are to record  gains or losses  resulting  from changes in the
values of those derivatives  depends on the use of the derivative and whether it
qualifies  for hedge  accounting.  This  Standard is effective for the Company's
financial  statements  beginning January 1, 2000, with early adoption permitted.
The Company is currently evaluating the impact of the adoption of this statement
and the potential effect on its financial position or results of operations.

     In March  1998,  the AICPA  issued  SOP 98-1,  Accounting  for the Costs of
Computer  Software  Developed  or Obtained  for  Internal  Use.  This  Statement
provides  guidance on  accounting  for costs of computer  software  developed or
obtained for internal use including when incurred costs are and are not eligible
for  capitalization.  This Statement is effective for 1999 financial  statements
with early adoption permitted. The Company is currently evaluating the impact of
the  adoption  of this  Statement  and the  potential  effect  on its  financial
position and results of operations.

Note 20 - Subsequent Event

     As a part of the Company's  reshaping to focus  resources on high potential
lines of business,  on March 11, 1999,  the Company  announced  the signing of a
definitive  agreement to sell McGee.  The transaction is expected to be complete
by April 1999, subject to regulatory approvals and other closing conditions.



                                       84
<PAGE>



ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

          None.
                                    PART III

     Pursuant to General Instruction G(3) to this form, the information required
by Part III (Items 10, 11, 12 and 13) hereof is  incorporated  by reference from
the Company's  definitive  proxy  statement for its Annual Meeting to be held on
May 25, 1999. The Company intends to file the proxy material, which involves the
election of directors,  not later than 120 days after the close of the Company's
fiscal year.

                                    PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)1   Financial Statements:

The following financial statements are included in Part II, Item 8.
                                                                          Page

Report of Management                                                        50

Independent Auditors' Report                                                51

Orion Capital Corporation and Subsidiaries:
     December 31, 1998 and 1997 Consolidated Balance Sheet               52-53

     For the years ended December 31, 1998, 1997 and 1996:-
        Consolidated Statement of Earnings                                  54
        Consolidated Statement of Stockholders' Equity                      55
        Consolidated Statement of Cash Flows                             56-57

     Notes to the Consolidated Financial Statements                      58-84

(a)2.   Financial Statement Schedules:

     Selected Quarterly  Financial Data - for the years ended           
     December 31, 1998, and 1997 - Included in Part II, Item 8.

     Schedule  I Consolidated Summary of Investments - Other than
                 Investments in Related Parties - December 31, 1998.       S-1

              II Condensed Financial Information of Registrant -
                 December 31, 1998, 1997 and 1996              S-2 through S-8

             III Supplementary Insurance Information -
                 December 31, 1998, 1997 and 1996                          S-9

                                       85
<PAGE>

               V Valuation and Qualifying Accounts -
                 December 31, 1998, 1997 and 1996                         S-10

              VI Supplemental Information For Property - Casualty Insurance
                 Underwriters - December 31, 1998, 1997 and 1996          S-11

     Schedules  other than those  listed  above are  omitted for the reason that
they are not  required or are not  applicable,  or the required  information  is
shown in the Financial Statements or notes thereto.

     (a)3.   Exhibits:

Exhibit 2(i) Agreement and Plan of Merger dated as of October 31, 1997,  between
Guaranty  National  Corporation  and  Orion;  filed  as  Exhibit  (c)(1)  to the
Company's Tender Offer Statement on Schedule 14D-1; filed on November 5, 1997.

Exhibit 3(i) Restated  Certificate of Incorporation of Orion, as amended on June
5, 1997;  filed as Exhibit 3(i) to the Company's  Annual Report on Form 10-K for
1997.

Exhibit  3(ii)  By-Laws of Orion,  as amended on September  11,  1996;  filed as
Exhibit 3(ii) to the Company's Annual Report on Form 10-K for 1996.

Exhibit 4(i)  Certificate  of  Designation,  Preferences  and Rights of Series B
Junior  Participating  Preferred Stock of Orion, dated September 17, 1996; filed
as Exhibit 4(i) to the Company's Annual Report on Form 10-K for 1996.

Exhibit 4(ii) Specimen  certificate  representing shares of Orion's Common Stock
(proof of March 27,  1989);  filed as  Exhibit  4(xii) to the  Company's  Annual
Report on Form 10-K for 1988.

Exhibit 4(iii) Indenture,  dated as of September 8, 1992,  between Orion and the
Connecticut  National  Bank  (now  known as  Fleet  Bank  Connecticut,  National
Association),  as Trustee of Orion's 9 1/8% Senior Notes due  September 1, 2002;
filed as Exhibit 4(v) to the Company's Annual Report on Form 10-K for 1992.

Exhibit 4(iv)  Specimen  certificate  representing  Orion's 9 1/8% Senior Notes;
filed as Exhibit 4(vi) to the Company's Annual Report on Form 10-K for 1992.

Exhibit 4(v) Senior Debt Indenture, dated as of July 17, 1995, between Orion and
the State Street Bank and Trust Company of Connecticut, National Association, as
Trustee of Orion's 7 1/4% Senior Notes due July 15,  2005;  filed as Exhibit 4.9
to the Company's Current Report on Form 8-K, filed on July 14, 1995.

Exhibit 4(vi) First Supplemental  Indenture to the Senior Debt Indenture;  filed
as Exhibit 4.9(a) to the Company's Current Report on Form 8-K, filed on July 14,
1995.

Exhibit 4(vii) Specimen  Certificate  representing  Orion's 7 1/4% Senior Notes;
filed as Exhibit  4.9(b) to the Company's  Current  Report on Form 8-K, filed on
July 14, 1995.

                                       86
<PAGE>

Exhibit 4(viii)  Indenture,  dated as of February 5, 1998, between Orion and the
Bank of New York, as Trustee of Orion's  7.701% Junior  Subordinated  Deferrable
Interest Debentures;  filed as Exhibit 4(viii) to the Company's Annual Report on
Form 10-K for 1997.

Exhibit  4(ix)  Indenture,  dated as of January 13, 1997,  between Orion and the
Bank of New York,  as Trustee of Orion's  8.73% Junior  Subordinated  Deferrable
Interest  Debentures;  filed  as  Exhibit  4.1  to  the  Company's  Registration
Statement on Form 4 (No. 333- 21205).

Exhibit 4(x) Form of Exchange Debenture  Certificate  representing Orion's 8.73%
Junior Subordinated Deferrable Interest Debentures;  filed as Exhibit 4.2 to the
Company's Registration Statement on Form S-4 (No. 333-21205),  filed on February
5, 1997.

Exhibit  4(xi)  Certificate  of Trust of Orion  Capital  Trust  II,  dated as of
February 2, 1998;  filed as Exhibit 4(xi) to the Company's Annual Report on Form
10-K for 1997.

Exhibit  4(xii)  Certificate  of  Trust of Orion  Capital  Trust I,  dated as of
January 3, 1997; filed as Exhibit 4.3 to the Company's Registration Statement on
Form S-4 (No. 333- 21205), filed on February 5, 1997.

Exhibit  4(xiii)  Declaration  of Trust of Orion  Capital  Trust II, dated as of
February 2, 1998;  filed as Exhibit  4(xiii) to the  Company's  Annual Report on
Form 10-K for 1997.

Exhibit  4(xiv)  Declaration  of  Trust of Orion  Capital  Trust I,  dated as of
January 3, 1997; filed as Exhibit 4.4 to the Company's Registration Statement on
Form S-4 (No. 333-21205), filed on February 5, 1997.

Exhibit 4(xv) Amended and Restated  Declaration  of Trust of Orion Capital Trust
II, dated as of February 5, 1998; filed as Exhibit 4(xv) to the Company's Annual
Report on Form 10-K for 1997.

Exhibit 4(xvi) Amended and Restated  Declaration of Trust of Orion Capital Trust
I,  dated  as of  January  13,  1997;  filed  as  Exhibit  4.5 to the  Company's
Registration Statement on Form S-4 (No. 333-21205), filed on February 5, 1997.

Exhibit 4(xvii) Form of Certificate evidencing 8.73% Exchange Capital Securities
of Orion  Capital  Trust I; filed as Exhibit 4.6 to the  Company's  Registration
Statement on Form S-4 (No. 333-21205).

Exhibit 4(xviii) Capital Securities Guarantee Agreement, dated as of January 13,
1997, delivered by Orion as Guarantor and relating to the 8.73% Exchange Capital
Securities; filed as Exhibit 4.7 to the Company's Registration Statement on Form
S-4 (No. 333-21205).

Exhibit 4(xix) Capital Securities Guarantee  Agreement,  dated as of February 5,
1998,  delivered  by Orion as  Guarantor,  and  relating  to the 7.701%  Capital
Securities of Orion  Capital Trust II; filed as Exhibit  4(xix) to the Company's
Annual Report on Form 10-K for 1997.

                                       87
<PAGE>

Exhibit 4(xx) Form of Certificate  evidencing 7.701% Capital Securities of Orion
Capital  Trust II included as part of Exhibit  4(xv);  filed as Exhibit 4(xx) to
the Company's Annual Report on Form 10-K for 1997.

Exhibit   4(xxi)  Form  of  Certificate   representing   Orion's  7.701%  Junior
Subordinated  Deferrable  Interest  Debentures  (filed as  Exhibit A to  Exhibit
4(viii).

Exhibit 4(xxii) Credit Agreement, dated as of July 8, 1998, between the Company,
the lenders named therein,  First Union National Bank, as Administrative  Agent,
Bank if America National Trust and Savings Association,  as Documentation Agent,
and  Fleet  National  Bank,  as  Syndication  Agent;  filed as  Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for June 30, 1998.

Exhibit 10(xx)  Amendment,  dated February 14, 1995, to the Letter  Agreement by
and between Orion  Capital  Corporation  and  Intercargo  Corporation;  filed as
Exhibit 10(xxiii) to the Company's Annual Report on Form 10-K for 1994.

Exhibit 10(xxi) Second Amendment, dated August 12, 1997, to the Letter Agreement
by and between Orion Capital Corporation and Intercargo  Corporation);  filed as
Exhibit 10(xxi) to the Company's Annual Report on Form 10-K for 1997.

Exhibit 10(i)* Orion's Deferred Compensation Plan, as amended;  filed as Exhibit
10(i) to the Company's Annual Report on Form 10-K for 1991.

Exhibit 10(ii)* Orion's 1982 Long-Term  Performance  Incentive Plan, as amended;
filed as Exhibit 10(ii) to the Company's Annual Report on Form 10-K for 1996.

Exhibit  10(iii)*  Orion's  1994 Stock Option Plan for  Non-Employee  Directors;
filed as Exhibit 10(iii) to the Company's Annual Report on Form 10-K for 1994.

Exhibit 10(iv)*  Employment  Agreement between Raymond W. Jacobsen and Orion, as
amended  and  restated as of  December 6 1995;  filed as Exhibit  10(vii) to the
Company's Annual Report on Form 10-K for 1995.

Exhibit 10(v)* Employment  Agreement between W. Marston Becker and Orion,  dated
as of October 31, 1995; filed as Exhibit 10(viii) to the Company's Annual Report
on Form 10-K for 1995.

Exhibit 10(vi)* Amendment to Employment  Agreement between W. Marston Becker and
Orion,  dated as of  January 1, 1997;  filed as Exhibit  10(x) to the  Company's
Annual Report on Form 10-K for 1996.

Exhibit 10(vii) Lease Agreement  between  Connecticut UTF, Inc., as lessor,  and
Security  Insurance  Company of Hartford  ("Security"),  as lessee,  dated as of
December 19, 1984; filed as Exhibit 10(xxxiii) to the Company's Annual Report on
Form 10-K for l984.


*Management contract or compensatory plan or arrangement.

                                       88
<PAGE>


Exhibit 10(viii) Second  Assignment of Lease and Agreement from Connecticut UTF,
Inc. to Security,  dated as of December 19, 1984; filed as Exhibit  10(xxxiv) to
the Company's Annual Report on Form 10-K for 1984.

Exhibit 10(ix)  Purchase Money Second  Mortgage from  Connecticut  UTF, Inc., as
mortgagor,  to Security,  as mortgagee,  dated as of December 19, 1984; filed as
Exhibit 10(xxxvi) to the Company's Annual Report on Form 10-K for 1984.

Exhibit  10(x)  Purchase  Money  Note,  in the face amount of  $2,800,000,  from
Connecticut  UTF, Inc. to Security,  dated  December 19, 1984;  filed as Exhibit
10(xxxvi) to the Company's Annual Report on Form 10-K for l984.

Exhibit  10(xi)  Guarantee  from Orion to  Connecticut  UTF,  Inc.,  dated as of
December 19, 1984, guaranteeing the performance of Security under its lease with
Connecticut  UTF,  Inc.;  filed as Exhibit  10(xxxvii) to the  Company's  Annual
Report on Form 10-K for 1984.

Exhibit  10(xii) Form of  Indemnification  Agreement,  dated as of June 3, 1987,
between Orion and each of its Directors and Executive Officers; filed as Exhibit
10(xi) to the Company's Annual Report on Form 10-K for 1987.

Exhibit 10(xiii) Rights Agreement, dated as of September 11, 1996, between Orion
and First Chicago Trust Company of New York, as Successor  Rights Agent to Chase
Mellon;  filed as Exhibit 10(v) to the Company's  Annual Report on Form 10-K for
1998.

Exhibit 10(xiv)* Orion  Supplemental  Benefits Plan, filed as Exhibit 10(xxv) to
the Company's Annual Report on Form 10-K for 1991.

Exhibit 10(xv) Orion's Equity Incentive Plan, dated September 11, 1996; filed as
Exhibit 10(xx) to the Company's Annual Report on Form 10-K for 1996.

Exhibit 10(xvi) Letter Agreement, dated September 13, 1993, by and between Orion
and Intercargo  Corporation;  filed as Exhibit  10(xxii) to the Company's Annual
Report on Form 10-K for 1993.

Exhibit  10(xvii)  Purchase  Agreement by and between Sun Alliance USA, Inc. and
Orion,  dated as of June 30,  1995;  filed as Exhibit  10(xxv) to the  Company's
Annual Report on Form 10-K for 1995.

Exhibit 10(xviii)* Amended and Restated Employment  Agreement between W. Marston
Becker and Orion,  dated July,  1998;  filed as Exhibit  10(i) to the  Company's
Annual Report on Form 10-K for 1998.

Exhibit 10(xix)* Amended and Restated  Employment  Agreement  between W. Marston
Becker and Orion,  dated as of January 30, 1999;  filed as Exhibit 10(ii) to the
Company's Annual Report on Form 10-K for 1998.

*Management contract or compensatory plan or arrangement.

                                       89
<PAGE>

Exhibit  10(xx)*  Form of  Employment  Agreement  between  Orion and each of its
Senior  Executive  Officers dated February 1999; filed as Exhibit 10(iii) to the
Company's Annual Report on Form 10-K for 1998.

Exhibit 10(xxi) Letter  Agreement dated December 1, 1998,  between Orion Capital
Corporation  and XL  America,  Inc.,  a Delaware  Corporation;  filed as Exhibit
10(iv) to the Company's Annual Report on Form 10-K for 1998.

*Management contract or compensatory plan or arrangement

     Copies of exhibits  may be obtained  upon  payment of a $0.50 per page fee.
Such requests should be made in writing to: Corporate  Secretary,  Orion Capital
Corporation, 9 Farm Springs Road, Farmington, CT 06032.

     (b)  Reports on Form 8-K:
          None.

     (c)  Filed exhibits:

          See Exhibit Index.


                                       90
<PAGE>



                                   SIGNATURES


     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                            ORION CAPITAL CORPORATION



By: /s/ W. Marston Becker                             March 25, 1999
-------------------------

W. Marston Becker
   Chairman of the Board
   and Chief Executive Officer


By: /s/ Michael L. Pautler                            March 25, 1999
--------------------------

      Michael L. Pautler
      Senior Vice President and
      Chief Financial Officer



                                       91
<PAGE>

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following  persons  (including a majority of
the members of the Board of Directors of the  Registrant)  in the capacities and
on the dates indicated:

Signature and Title                                        Date

/s/ W. Marston Becker                                 March 25, 1999
---------------------
    W. Marston Becker
     Chairman of the Board

/s/ Gordon F. Cheesbrough                             March 25, 1999
-------------------------
    Gordon F. Cheesbrough
     Director

/s/ John C. Colman                                    March 25, 1999
------------------
    John C. Colman
     Director

/s/ David H. Elliott                                  March 25, 1999
--------------------
    David H. Elliott
     Director

/s/ Victoria R. Fash                                  March 25, 1999
--------------------
    Victoria R. Fash
     Director

/s/ Robert H. Jeffrey                                 March 25, 1999
--------------------
    Robert H. Jeffrey
     Director

/s/ Gordon W. Kreh                                    March 25, 1999
------------------
    Gordon W. Kreh
     Director

/s/ Warren R. Lyons                                   March 25, 1999
-------------------
    Warren R. Lyons
     Director

/s/ James K. McWilliams                               March 25, 1999
-----------------------
    James K. McWilliams
     Director

/s/ Ronald W. Moore                                   March 25, 1999
-------------------
    Ronald W. Moore
     Director

/s/ William B. Weaver                                 March 25, 1999
---------------------
    William B. Weaver
     Director


                                       92
<PAGE>

                                  EXHIBIT INDEX

Exhibit  10(i)  Amended and  Restated  Employment  Agreement  between W. Marston
Becker and Orion, dated July 1998.

Exhibit  10(ii)  Amended and Restated  Employment  Agreement  between W. Marston
Becker and Orion, dated as of January 30, 1999.

Exhibit  10(iii)  Form of  Employment  Agreement  between  Orion and each of its
Senior Executive Officers dated February 1999.

Exhibit 10(iv) Letter  Agreement  dated December 1, 1998,  between Orion Capital
Corporation and XL America, Inc., a Delaware Corporation.

Exhibit 10(v) Rights  Agreement,  dated as of September 11, 1996,  between Orion
Capital  Corporation  and First  Chicago Trust Company of New York, as Successor
Rights Agent to Chase Mellon.

Exhibit 11 Statement re: computation of earnings per common share.

Exhibit 21 Subsidiaries of Orion.

Exhibit 23 Consent of Deloitte & Touche, LLP.

Exhibit 27 Financial Data Schedules.




                                       93
<PAGE>
                                                                    SCHEDULE I

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED SUMMARY OF INVESTMENTS-OTHER THAN
                         INVESTMENTS IN RELATED PARTIES
                                December 31, 1998
(In millions)
-------------------------------------------------------------------------------
          Column A                       Column B     Column C       Column D
                                                                  Amount Shown
                                                       Market       on Balance
     Type of Investment                    Cost        Value          Sheet
-------------------------------------------------------------------------------

Fixed maturities held-to-maturity:
   Bonds -
      United States Government and
         government agencies and
         Authorities ...............     $     81.4   $    84.6   $    81.4
      States, municipalities and
         political subdivisions ....          156.1       164.5       156.1
      All other corporate bonds ....           23.1        23.6        23.1
                                         ----------   ---------   ---------     
                                             260.6       272.7       260.6
                                         ----------   ---------   ---------     
Fixed maturities available-for-sale:
   Bonds -
      United States Government and
         government agencies and
         authorities ...............           69.0        70.6        70.6
      States, municipalities and
         political subdivisions ....          684.1       723.8       723.8
      Foreign governments ..........            4.1         4.7         4.7
      All other corporate bonds ....          447.6       449.0       449.0
   Redeemable preferred stocks .....          100.7       101.8       101.8
                                         ----------   ---------   ---------     
                                            1,305.5     1,349.9     1,349.9
                                         ----------   ---------   ---------     
Equity securities:
   Common stocks -
      Public utilities .............            1.6         1.7         1.7
      Banks, trusts and insurance
         Companies .................           15.1        39.2        39.2
      Industrial, miscellaneous and
         all other .................          183.6       201.5       201.5
   Non-redeemable preferred stocks .          269.1       268.5       268.5
                                         ----------   ---------   ---------     
                                              469.4       510.9       510.9
                                         ----------   ---------   ---------     
Mortgage loans on real estate ......            2.2         2.2         2.2
Other long-term investments ........          114.0       114.0       114.0
Short-term investments .............          248.7       248.7       248.7
                                         ----------   ---------   ---------     
         Total investments .........     $  2,400.4   $ 2,498.4   $ 2,486.3
                                         ==========   =========   =========

                                       S-1
<PAGE>
                                         
                                                                              
                                                
                                                                   SCHEDULE II

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            ORION CAPITAL CORPORATION
                                  BALANCE SHEET



                                     ASSETS

                                                                 December 31,
                                                           --------------------
(In millions)                                                   1998       1997
-------------------------------------------------------------------------------

Fixed maturities, at market (cost $0.3) ................... $    0.2   $    0.2
Non-redeemable preferred stocks, at market (cost $27.8) ...     27.8         --
Short-term investments ....................................      4.3       68.7
Cash ......................................................      0.2        0.4
Notes receivable and other assets .........................      8.6        5.3
Deferred federal income taxes .............................     27.4        9.4
Investment in subsidiaries ................................  1,035.5      947.1
Loans receivable due from affiliates ......................     99.0         --
Due from affiliates .......................................      3.5         --
Excess of cost over fair value of net assets acquired .....     43.4       98.9
                                                            --------   -------- 
   Total assets ........................................... $1,249.9   $1,130.0
                                                            ========   ========
                                                                                
                      LIABILITIES AND STOCKHOLDERS' EQUITY


Other liabilities ......................................... $   55.2   $   55.8
Due to affiliates .........................................       --       16.8
Notes payable .............................................    217.4      209.3
                                                            --------   -------- 
   Total liabilities ......................................    272.6      281.9
Company-obligated mandatorily redeemable preferred
   capital securities of subsidiary trusts holding solely
   the junior subordinated debentures of the Company ......    250.0      125.0
Stockholders' equity ......................................    727.3      723.1
                                                            --------   -------- 
   Total liabilities and stockholders' equity ............. $1,249.9   $1,130.0
                                                            ========   ========
[FN]
                                                            
                                                                                
           See Notes to Condensed Financial Statements of Registrant

</FN>

                                       S-2
<PAGE>
                                      
                                                                   SCHEDULE II


                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            ORION CAPITAL CORPORATION
                             STATEMENT OF EARNINGS



                                                     Year Ended December 31,
                                                 -----------------------------
(In millions)                                       1998       1997      1996
------------------------------------------------------------------------------

Revenues:
   Net investment income .....................   $    1.7  $    8.4   $   1.9
   Interest income on affiliate loans ........        6.1        --        --
   Other income ..............................        0.8       0.6       0.4
                                                 --------  -------- ---------   
                                                      8.6       9.0       2.3
                                                 --------  -------- ---------   
Expenses:
   Interest ..................................       18.4      18.4      17.8
   General and administrative ................       10.0       6.2       3.7
   Amortization of excess of cost over fair
      value of net assets acquired ...........        1.9       2.0       1.9
                                                 --------  -------- ---------   
                                                     30.3      26.6      23.4
                                                 --------  -------- ---------   
Loss before federal income taxes, equity in
   net earnings of subsidiaries and minority
   interest expense ..........................      (21.7)    (17.6)    (21.1)
Federal income taxes .........................       41.1      45.0      30.1
                                                 --------  -------- ---------   

Loss before equity in net earnings of
   subsidiaries and minority interest expense       (62.8)    (62.6)    (51.2)
Equity in net earnings of subsidiaries .......      178.4     185.3     137.8
Minority interest expense in subsidiary trusts
   preferred securities, net of federal income
   taxes .....................................       12.8       6.9        --
                                                 --------  -------- --------- 
      Net earnings ...........................      102.8     115.8      86.6
Other comprehensive income, net of tax:          --------  -------- --------- 
   Unrealized investment gains (losses) ......      (52.4)     41.3       9.0
   Unrealized foreign exchange translation
      gains (losses) .........................        1.7      (2.2)      1.8
                                                 --------  -------- ---------
      Other comprehensive income .............      (50.7)     39.1      10.8
                                                 --------  -------- --------- 
         Comprehensive income ................   $   52.1  $  154.9 $    97.4
                                                 ========  ======== =========
[FN]
                                                 
                                                         
            See Notes to Condensed Financial Statements of Registrant

</FN>


                                   S-3  
<PAGE>


                                                        
                                                                  SCHEDULE II


                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            ORION CAPITAL CORPORATION
                            STATEMENT OF CASH FLOWS



                                                      Year Ended December 31,
                                                    ---------------------------
(In millions)                                         1998     1997    1996
-------------------------------------------------------------------------------

Cash flows from operating activities:
   Dividends received from subsidiaries ..........   $ 55.2  $  42.8  $ 35.3
   Net investment income collected ...............      4.6      8.0     1.9
   Interest income received from affiliates ......      7.0       --      --
   Interest paid .................................    (20.4)   (17.3)  (17.3)
   Payments on trust preferred securities ........    (17.6)    (5.1)     --
   Other receipts (payments) .....................    (11.6)     7.9     6.4
                                                     ------  -------  ------    
      Net cash provided by operating activities ..     17.2     36.3    26.3
                                                     ------  -------  ------    
Cash flows from investing activities:
   Sales (purchases) of equity securities ........    (27.0)     0.2      --
   Net sales (purchases) of short-term investments     64.4    (36.0)   22.8
   Purchases of Guaranty National common stock ...     (2.9)  (104.4)  (20.7)
   Issuance of loans to affiliates, net ..........    (99.0)      --      --
   Purchase of Grocers Insurance Group ...........    (32.4)      --      --
   Other payments ................................      1.4     (0.2)   (2.6)
                                                     ------  -------  ------    
      Net cash used in investing activities ......    (95.5)  (140.4)   (0.5)
                                                     ------  -------  ------    

Cash flows from financing activities:
   Net proceeds from issuance of trust preferred
      securities .................................    121.9    123.0      --
   Proceeds from loan with banks, net ............      8.0       --      --
   Proceeds from exercise of stock options .......      2.3      0.6      --
   Dividends paid to stockholders ................    (18.5)   (18.0)  (14.9)
   Purchases of common stock .....................    (35.6)    (1.5)  (10.5)
   Other receipts (payments) .....................       --      0.1      --
                                                     ------  -------  ------    
      Net cash provided by (used in) financing
         activities ..............................     78.1    104.2   (25.4)
                                                     ------  -------  ------    
      Net (decrease) increase in cash ............     (0.2)     0.1     0.3
   Cash balance, beginning of year ...............      0.4      0.3      --
                                                     ------  -------  ------    
   Cash balance, end of year .....................   $  0.2  $   0.4  $  0.3
                                                     ======  =======  ======
[FN]
                                                    
                                                                            
            See Notes to Condensed Financial Statements of Registrant

</FN>

                                       S-4
<PAGE>


                                                                   SCHEDULE II

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            ORION CAPITAL CORPORATION
                     STATEMENT OF CASH FLOWS - (Continued)



                                                  Year Ended December 31,
                                                ---------------------------
(In millions)                                       1998     1997     1996
---------------------------------------------------------------------------

Reconciliation of net earnings to net cash
  provided by operating activities:
Net earnings .................................   $ 102.8  $ 115.8  $  86.6
                                                 -------  -------  -------
                                                                           
Adjustments:
   Equity in net earnings of subsidiaries ....    (178.4)  (185.3)  (137.8)
   Consolidating elimination of subsidiaries
      income taxes ...........................      51.1     40.1     35.5
   Dividends received from subsidiaries ......      55.2     42.8     35.3
   Depreciation and amortization .............       3.8      3.0      3.0
   Deferred federal income taxes .............       3.6      3.1     10.0
   Other .....................................        --      0.1      0.4

Change in assets and liabilities, net:
   Decrease (increase) in notes receivable and
      other ..................................      (1.3)     1.1     (2.2)
   Increase (decrease) in other liabilities ..       0.7     11.6     (3.7)
   Change in amounts due to/from affiliates ..     (20.3)     4.0     (0.8)
                                                 -------  -------  -------      
      Total adjustments and changes ..........     (85.6)   (79.5)   (60.3)
                                                 -------  -------  -------      
   Net cash provided by operating activities .   $  17.2  $  36.3  $  26.3
                                                 =======  =======  =======
                                                                            
[FN]

            See Notes to Condensed Financial Statements of Registrant
</FN>

                                       S-5
<PAGE>


                                                                   SCHEDULE II

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                  Years Ended December 31, 1998, 1997, and 1996

Note 1 - Expense Reimbursement, Management Fees and Dividends from Subsidiaries

     During 1996 through 1998 the Registrant was reimbursed for payroll,  office
rental and other  expenses  incurred  by it to  support  the  operations  of its
insurance  subsidiaries.  This  reimbursement of $8.3 million,  $8.1 million and
$7.4  million  in 1998,  1997 and  1996,  respectively,  is  accounted  for as a
reduction of general and administrative  expenses.  The Registrant also received
an annual investment  management fee from Guaranty National  Corporation of $0.6
million in 1998,  1997 and 1996.  The  Registrant was reimbursed for federal tax
expenses pursuant to tax sharing agreements with its subsidiaries.

     The Registrant has received $55.2 million,  $42.8 million and $35.3 million
in  dividends  from  its  insurance   subsidiaries   in  1998,  1997  and  1996,
respectively.  Payments of dividends by the Registrant's  insurance subsidiaries
must comply  with  insurance  regulatory  limitations  concerning  stockholders'
dividends  and  capital   adequacy.   State  insurance   regulators  have  broad
discretionary  authority with respect to limitations on the payment of dividends
by  insurance  companies.   Under  current  regulation,  the  maximum  dividends
permitted from the Registrant's  insurance subsidiaries at December 31, 1998 for
the ensuing twelve months, without prior approval, aggregated $135.5 million.

Note 2 - Notes Payable

     Notes payable at December 31 consist of the following:

(In millions)                                    1998        1997
-----------------------------------------------------------------

$110,000,000 face amount, 9.125% Senior
   Notes, due September 1, 2002               $  109.9  $   109.9
$100,000,000 face amount, 7.25% Senior
   Notes, due July 15, 2005                       99.5       99.4
Loan agreement with banks                          8.0          -
                                              --------- ---------
                                              $  217.4  $   209.3
                                              ========= =========

     On July 8, 1998 the Company entered into a credit agreement with a group of
banks ("Bank Credit  Facility")  which  provides for unsecured  borrowings up to
$150.0 million.  The Bank Credit  Facility  expires on July 8, 2003 and provides
for two one-year extension  periods.  The Company intends to use the Bank Credit
Facility for general corporate  purposes,  which may include  acquisitions.  The
Bank Credit Facility carries an annual facility fee on the unused amounts of the
credit  facility.  Borrowings  under the Bank Credit  Facility  bear interest at
LIBOR  (London  Interbank  Offered  Rate) plus a margin based upon the Company's
credit  ratings.  The Bank  Credit  Facility  requires  the  Company to maintain
certain  financial  covenants  including a maximum debt to total  capitalization
ratio of 0.4 to 1.0, as defined,  and a minimum  combined  statutory  surplus of
$650.0 million plus 30% of the Company's aggregate combined annual statutory net
income.  The Bank Credit Facility limits the Company's  ability to incur secured
indebtedness or certain contingent  obligations except for indebtedness  secured
by liens specifically



                                       S-6
<PAGE>

                                       
                                                                   SCHEDULE II

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                  Years Ended December 31, 1998, 1997, and 1996

permitted by the Bank Credit Facility and additional secured indebtedness with a
principal  amount not exceeding 10% of the Company's  consolidated net worth, as
defined.

     The  indentures  for the 7.25% Senior Notes and for Orion's  9.125%  Senior
Notes limit the amount of liens and guarantees by the Company, and the Company's
ability to incur secured  indebtedness  without equally and ratably securing the
senior notes.

     As of December 31, 1998  maturities of the  Company's  notes payable are as
follows: 2002 - $110.0 million; 2003 - $8.0 million; and 2005 - $100.0 million.

Note 3 - Trust Preferred Securities

     Company-Obligated  Mandatorily  Redeemable  Preferred Capital Securities of
Subsidiary  Trusts  Holding  Solely the Junior  Subordinated  Debentures  of the
Company ("Trust Preferred Securities") comprise the following at December 31:

(In millions)                                1998      1997
------------------------------------------------------------
8.73% Trust Preferred Securities
  due January 1, 2037                   $   125.0 $   125.0
7.701% Trust Preferred Securities
  due April 15, 2028                        125.0         -
                                        --------- ---------
                                        $   250.0 $   125.0
                                        ========= =========

     On January 13, 1997 the  Registrant  issued  $125  million of 8.73%  Junior
Subordinated  Deferrable  Interest  Debentures  due  January 1, 2037 (the "8.73%
Debentures") to Orion Capital Trust I ("Trust I"), a Delaware statutory business
trust sponsored by the Registrant.  Trust I simultaneously  sold $125 million of
8.73% capital  securities  (the "8.73% Trust Preferred  Securities")  which have
substantially the same terms as the 8.73% Debentures.  The 8.73% Trust Preferred
Securities may be redeemed without premium on or after January 1, 2007.

     On February 2, 1998 the  Registrant  issued $125  million of 7.701%  Junior
Subordinated  Deferrable  Interest  Debentures  due April 15, 2028 (the  "7.701%
Debentures")  to Orion  Capital  Trust II ("Trust  II"),  a  Delaware  statutory
business trust sponsored by the  Registrant.  Trust II then sold $125 million of
7.701% capital securities (the "7.701% Trust Preferred Securities"),  which have
substantially the same terms as the 7.701% Debentures.

     The 8.73% and 7.701% Trust  Preferred  Securities  are  subordinate  to all
liabilities  of the Company.  The Company may defer  interest  distributions  on
these  Trust  Preferred  Securities;   however,  during  any  period  when  such
cumulative  distributions have been deferred,  the Registrant may not declare or
pay any dividends or  distributions  on its common stock. The sole assets of the
Trusts are the Debentures issued by the Registrant. 



                                      S-7
<PAGE>


                                                                   SCHEDULE II

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                  Years Ended December 31, 1998, 1997, and 1996

     The Registrant has given its partial  guarantee,  which when taken together
with  the  Company's  obligations  under  the  declaration  of  the  Trust,  the
Debentures,  and the indenture pursuant to which the Trust Preferred  Securities
are  issued  including  its  obligations  to  pay  costs,  expenses,  debts  and
liabilities  of the  Trusts  (other  than with  respect  to the Trust  Preferred
Securities),  provides a full and unconditional  guarantee of amounts due on the
Trust Preferred Securities.

Note 4 - Loan Receivable Due from Affiliates

     In February  1998, the  Registrant  entered into a ten-year  $100.0 million
senior  unsecured  revolving  loan with Guaranty  National  Corporation of which
$89.6 million was outstanding at December 31, 1998. Interest accrues at 6.5% per
annum for the first two-year  period of this loan and then will reprice over the
remaining loan period. This loan was funded from the proceeds of the sale of the
7.701% Trust Preferred  Securities (see Note 3). Guaranty  National  Corporation
used the loan proceeds to repay its bank indebtedness.

     In April 1998, the Registrant entered into a $10.0 million revolving credit
loan with a subsidiary  acquired in the  Strickland  purchase.  The  outstanding
balance  under  this loan  ($9.4  million at  December  31,  1998) is secured by
eligible  receivables of the subsidiary  borrower and accrues  interest at prime
rate plus a margin (8.5% at December 31, 1998).

Note 5 - Comprehensive Income

     As of  January  1, 1998 the  Registrant  adopted  FAS No.  130,  "Reporting
Comprehensive  Income".  This statement  establishes standards for the reporting
and  presentation  of  comprehensive  income  and its  components  in  financial
statements. Comprehensive income encompasses all changes in shareholders' equity
(except  those  arising from  transaction  with  shareholders)  and includes net
income,  net  unrealized   investment  gains  or  losses  and  foreign  currency
translation adjustments.  This standard requires additional disclosures and does
not affect the  Registrant's  financial  position or results of operations.  For
Registrant financial  statements only,  comprehensive income is displayed on the
Statements of Earnings.

     Stockholders'  equity includes  accumulated other  comprehensive  income of
$58.5  million and $109.2  million at December 31, 1998 and 1997,  respectively,
primarily comprising unrealized investment gains.

Note 6 - Subsequent Event

     As a part of the Company's  reshaping to focus  resources on high potential
lines of business, on March 11, 1999, the Registrant announced  the signing of a
definitive  agreement to sell McGee.  The transaction is expected to be complete
by April 1999, subject to regulatory approvals and other closing conditions.



                                         S-8
<PAGE>

                                                       
                                                                                
SCHEDULE III

<TABLE>
<CAPTION>
                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                       SUPPLEMENTARY INSURANCE INFORMATION
                                  (In millions)
----------------------------------------------------------------------------------------------------------------------------------

  Column A       Column B    Column C  Column D Column E  Column F  Column G   Column H   Column I    Column J   Column K  Column L
                              Reserve
                           For Unpaid           Dividends                               Amortization
                  Deferred    Losses              Payable                        Losses  of Deferred               Policy-
                  Policy    and Loss               to                 Net      and Loss    Policy       Other    holders'
               Acquisition Adjustment Unearned  Policy-  Premiums Investment Adjustment Acquisition  Insurance  Dividend  Premiums
  Segment          Costs    Expenses   Premiums  Holders   Earned    Income    Expenses     Costs     Expenses   Expenses  Written
                                                                  (a)
--------------------------------------------------------------------------------------------------------------------------------
1998:
Workers
<S>                 <C>     <C>       <C>      <C>     <C>      <C>         <C>         <C>        <C>        <C>         <C>     
  Compensation...   $  48.5 $   440.3 $   95.7 $  17.4 $  429.8 $   35.2    $  247.1    $  110.9   $  15.1    $  24.7     $  439.5
Specialty
  Commercial ....      89.2   1,326.7    390.7     0.5    656.0     82.9       485.1       210.9      23.2        0.1        665.1
Nonstandard
  Automobile ....      17.9     250.7     77.6      --    417.2     21.2       288.3        96.1       9.7         --        429.0
Other ...........        --        --      --       --       --      3.9          --          --        --         --           --
                    ------- --------- -------- ------- -------- --------    --------    --------   -------    -------     -------- 
                    $ 155.6 $ 2,017.7 $  564.0 $  17.9 $1,503.0 $  143.2    $1,020.5    $  417.9   $  48.0    $  24.8     $1,533.6
                    ======= ========= ======== ======= ======== ========    ========    ========   =======    =======     ======== 
1997 (b):
Workers
  Compensation...   $  41.4 $   447.7 $   86.0 $  19.9 $  362.1 $   41.8    $  194.4    $  101.8   $  13.2    $  20.6     $  365.1
Specialty
  Commercial ....      91.7   1,212.6    405.0     0.6    673.2     90.5       485.5       217.4      14.8        3.4        669.2
Nonstandard
  Automobile ....      14.0     211.4     60.6      --    322.4     21.8       225.6        68.0       8.6         --        332.8
Other ...........        --        --       --      --       --     10.8          --          --        --         --           --
                    ------- --------- -------- ------- -------- --------    --------    --------   --------   -------
                    $ 147.1 $ 1,871.7 $  551.6 $  20.5 $1,357.7 $  164.9    $  905.5    $  387.2   $  36.6    $  24.0     $1,367.1
                    ======= ========= ======== ======= ======== ========    ========    ========   =======    =======     ======== 
1996 (c):
Regional
   Operations....   $  33.2 $   466.0 $   83.9 $  20.5 $  356.8 $   38.2    $  209.7    $   92.0   $  11.2    $  18.5     $  353.0
Special
   Programs .....      58.6     955.7    258.1     2.0    462.3     62.7       335.5       137.6       6.3        5.1        489.9
Guaranty
   National .....      44.4     364.0    154.2      --    481.7     39.4       337.8       134.0      10.4         --        491.2
Other ...........        --        --       --      --       --      5.1          --          --        --         --           --
                    ------- --------- -------- ------- -------- --------    --------    --------   -------    -------     -------- 
                    $ 136.2 $ 1,785.7 $  496.2 $  22.5 $1,300.8 $  145.4    $  883.0    $  363.6   $  27.9    $  23.6     $1,334.1
                    ======= ========= ======== ======= ======== ========    ========    ========   =======    =======     ========
</TABLE>
                       
                                                                                
(a) Net investment income is generally  allocated on the basis of cash flow. 
(b) 1997 restated to conform with 1998 basis of presentation.
(c) 1996  represents FAS 14 Segment  Presentation  including  Guaranty  National
    Corporation, which comprises both commercial and personal lines of business.


                                      S-9
<PAGE>



<TABLE>
<CAPTION>                                                                       
                                                                           SCHEDULE V

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS


(In millions)
------------------------------------------------------------------------------------------------

   Column A                      Column B           Column C            Column D   Column E
   --------
                                                    Additions


                                                    (1)          (2)
                                  Balance at   Charged to  Charged to              Balance at
                                 Beginning of  Costs and      Other    Deductions    End of
  Description                        Year       Expenses    Accounts       (a)        Year
------------------------------------------------------------------------------------------------

1998:
<S>                                <C>          <C>        <C>            <C>           <C>  
Allowance for doubtful accounts-
   Accounts and notes receivable ...$  4.1
   Effects of acquisition ..........   0.7
                                    ------      -------     ----            ------        ------ 
                                    $  4.8      $   3.0     $ --            $  4.4        $  3.4
                                    ======      =======     ====            ======        ======
                                                                                           
1997:
Allowance for doubtful accounts-
   Accounts and notes receivable ...$  3.7
   Effects of acquisition ..........   0.3
                                    ------      -------     ----            ------        ------                                   
                                    $  4.0      $   1.3     $ --            $  1.2        $  4.1
                                    ======      =======     ====            ======        ======                                   
1996:
Allowance for doubtful accounts-
   Accounts and notes receivable ...$  3.2
   Effects of acquisition ..........   0.4
                                    ------      -------     ----            ------        ------               
                                    $  3.6      $   1.5     $ --            $  1.4        $  3.7
                                    ======      =======     ====            ======        ======
                                                                                           

(a)  Accounts written off

</TABLE>

                                      S-10
<PAGE>


<TABLE>
<CAPTION>
                                     
                                                                   SCHEDULE VI

                   ORION CAPITAL CORPORATION AND SUBSIDIARIES
      SUPPLEMENTAL INFORMATION FOR PROPERTY-CASUALTY INSURANCE UNDERWRITES
                                  (In millions)
------------------------------------------------------------------------------------------------------------------------------------
  Column A         Column B    Column C   Column D   Column E Column F Column G       Column H       Column I     Column J  Column K
                                Reserve                                              Losses and
                              For                                             Loss Adjustment
                            Unpaid                                          Expenses Incurred Amortization    Paid
Affiliation   Deferred      Losses    Discount                                  Related to     of Deferred   Losses
   With        Policy       And loss   Deducted                       Net      (1)      (2)       Policy      and Loss
Registrant   Acquisition  Adjustment in column Unearned Premiums Investment Currrent  Prior   Acquisition  Adjustment  Premiums
    (a)      Costs         Expenses     (b)     Premiums  Earned    Income     Year    Year      Costs      Expenses    Written

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


 
<S>        <C>          <C>         <C>        <C>      <C>       <C>      <C>       <C>        <C>        <C>         <C>     
1998       $  155.6     $  2,017.7  $   10.1   $  564.0 $ 1,503.0 $  139.3 $  986.6  $  33.9    $  417.9   $1,009.7    $1,533.6
           ====================================================================================================================



1997       $  147.1     $  1,871.7  $    4.1   $  551.6 $ 1,357.7 $  154.1 $  896.2  $   9.2    $  387.2   $  892.1    $1,367.1
           ====================================================================================================================



1996       $  136.2     $  1,785.7  $    4.1   $  496.2 $ 1,300.8 $  140.3 $  874.1  $   8.9    $  363.6   $  794.9    $1,334.1
           ====================================================================================================================

(a) Consolidated Property and Casualty entities.
(b) Discount deducted in Column C is  computed  using a  statutory  interest  
    rate of 3.5% for  certain workers compensation losses.

</TABLE>

                                      S-11
<PAGE>