SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K


[x]      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001
                                       OR
[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the transition period from ___to___

                                  Commission file number 1-7411

                            ALLCITY INSURANCE COMPANY
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             (Exact name of registrant as specified in its charter)

          New York                                    13-2530665
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   (State of incorporation)              (I.R.S. Employer Identification Number)

45 Main Street, Brooklyn, N.Y                           11201-3731
--------------------------------------------------------------------------------
(Address of principal executive offices)                (Zip Code)

Registrant's telephone number, including area code 718-422-4000
                                                   ------------

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

                                                     Name of each exchange on
Title of each class                                       which registered
-------------------                                       ----------------
                                      None
--------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:

                                      None
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                                (Title of Class)

        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
amendment to this Form 10-K. [x]

        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
    ---    ---

         The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 14, 2002 was $192,143.

         The number of shares outstanding of each of the registrant's classes of
common shares, as of March 14, 2002, was 7,078,625.

                                DOCUMENTS INCORPORATED BY REFERENCE:

Certain  portions of the  registrant's  definitive  proxy statement  pursuant to
Regulation  14A of the  Securities  Exchange Act of 1934 in connection  with the
2002 annual  meeting of  shareholders  of the  registrant  are  incorporated  by
reference into Part III of this Report.

         Exhibit Index on Page 23.                   Total number of pages 53.


<PAGE>


TABLE OF CONTENTS


                                PART I
                                                                            PAGE
                                                                            ----

Item 1-  Business....................................................          1

Item 2-  Properties..................................................         10

Item 3-  Legal Proceedings...........................................         10


                   PART II

Item 5-  Market for the Registrant's Common Equity and Related
              Stockholder Matters....................................         11

Item 6-  Selected Financial Data.....................................         12

Item 7-  Management's Discussion and Analysis of Financial
              Condition and Results of Operations....................         13

Item 7A- Quantitative and Qualitative Disclosures about Market Risk..         19

Item 8-  Financial Statements and Supplementary Data.................         20

Item 9-  Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure....................         20


                             PART III

Item 10- Directors and Executive Officers of the Registrant..........         20

Item 11- Executive Compensation......................................         20

Item 12- Security Ownership of Certain Beneficial Owners and
               Management............................................         20


Item 13- Certain Relationships and Related Transactions..............         20


                              PART IV

Item 14- Exhibits, Financial Statement Schedules, and Reports on Form 8-K     21

Signatures...........................................................         22



                                       -i-
<PAGE>

                                     PART I
ITEM 1.  BUSINESS
------   --------

GENERAL

Allcity  Insurance Company (the  "Registrant",  "Allcity" or the "Company") is a
property and casualty insurer.  Empire Insurance Company ("Empire"),  a property
and casualty insurer,  owns approximately 84.6% of the outstanding common shares
of the Company.  Empire's common shares are 100% owned and  controlled,  through
subsidiaries,  by  Leucadia  National  Corporation  ("Leucadia").  Additionally,
Leucadia  indirectly owns an additional 6.7% of the outstanding common shares of
the  Company.  The Company  and Empire are  sometimes  hereinafter  collectively
referred to as the Group.  Prior to December 31, 2001,  the Group also  included
Empire's   wholly-owned   insurance   subsidiary   Centurion  Insurance  Company
("Centurion"), which was merged into Empire effective December 31, 2001.

Historically,  the Group  specialized  in commercial  and personal  property and
casualty  insurance  business  primarily in the New York metropolitan  area. The
Group  offered  insurance  products  for  vehicles   (including   medallion  and
radio-controlled livery vehicles), general liability coverage, property coverage
(including  mercantile and  multi-family  residential  real estate) and workers'
compensation  to  commercial  accounts  and  private  passenger  automobile  and
homeowners products to individuals.

During the past several years, the Group experienced poor  underwriting  results
and adverse  reserve  development in all of its lines of business.  During 2001,
the Group explored its options for developing a new business model and strategy.
After evaluating these options, the Group announced in December 2001 that it had
determined  that  it  was  in  the  best  interest  of  its   shareholders   and
policyholders to commence an orderly  liquidation of all of its operations.  The
Group will only accept  business  that it is  obligated to accept by contract or
New York  insurance  law;  it will not engage in any other  business  activities
except  for its claims  runoff  operations.  The  voluntary  liquidation  of its
operations is expected to be  substantially  complete by 2005. Given the Group's
and the Company's current financial condition, the expected costs to be incurred
during the claims  runoff  period,  and the inherent  uncertainty  over ultimate
claim  settlement   values,  no  assurance  can  be  given  that  the  Company's
shareholders  will  be  able to  receive  any  value  at the  conclusion  of the
voluntary liquidation of its operations.

As of March 8,  2002,  the Group was rated  "F" (in  liquidation)  by A.M.  Best
Company  ("Best")  and rated "BB-"  (marginal)  by  Standards & Poors  Insurance
Rating  Services  ("S&P").  Given the  Group's  decision  to commence an orderly
liquidation of all of its operations,  the Best and S&P ratings are not expected
to have any impact on the Company's  operations.  As with all ratings,  Best and
S&P ratings are subject to change at any time.

In March 2001, the Group had announced that, effective immediately,  it would no
longer issue any new (as compared to renewal) insurance policies in any lines of
business  and that it had filed  plans of orderly  withdrawal  with the New York
Insurance  Department (the "Department") as required.  Commercial lines policies
are being  non-renewed or canceled in accordance  with New York insurance law or
replaced  by  Tower  Insurance  Company  of New York or  Tower  Risk  Management
(collectively,  "Tower")  under the 2001  agreement  for the sale of the Group's
renewal rights (the "Tower Agreement").  Starting in the second quarter of 2001,
Tower  purchased  the  renewal  rights  for  substantially  all of  the  Group's
remaining  lines  of  business,   excluding  private  passenger  automobile  and
commercial  automobile/garage,  for a fee based on the  direct  written  premium
actually renewed by Tower. The amount of the fee is expected to be approximately
$0.9  million,  of which the  Company's  share would be $0.3  million.  Existing
policies  of  private  passenger  automobile  insurance  will  be  either  sold,
non-renewed  or  cancelled in  accordance  with New York  insurance  law. If the
private  passenger  automobile book of business is not sold, it is expected that
the Group will continue to issue renewal policies over the next several years as
required by applicable  insurance law. The Group will continue to be responsible
for the remaining term of its existing policies and all claims incurred prior to
the  expiration  of  these  policies.  After  the  expiration  of  its  existing
commercial lines policies, the Group will thereafter have no renewal obligations
for those  policies.  Under New York  insurance  law,  the Group is obligated to
offer renewals of homeowners,  dwelling fire,  personal  insurance  coverage and
personal umbrella for a three-year policy period;  however,  the Tower Agreement
obligates  Tower to offer  their own  policies as  replacements  for the Group's
policies.  Excluding  the  remaining  terms of existing  policies that the Group
intends to either  non-renew,  cancel or that will be replaced  by Tower,  as of
December 31, 2001, the Group's in force premium volume totaled $11.1 million. As
indicated  above,  these  policies are primarily  personal  lines policies whose
volume will continue to decline as the Group  exercises its  non-renewal  rights
under New York insurance law.

                                     - 1 -
<PAGE>

For the years ended December 31, 2001, 2000 and 1999 net earned premiums for the
Company  were $18.3  million,  $30.9  million and $42.4  million,  respectively.
Substantially all of the Group's policies are written in New York for a one-year
period,  except for its Massachusetts  assigned risk servicing carrier business.
The Group is licensed in New York to write most lines of  insurance  that may be
written by a property and  casualty  insurer.  Empire is also  licensed to write
insurance in Connecticut, Massachusetts, Missouri, New Hampshire and New Jersey.

On a quarterly  basis, the Group reviews and adjusts its estimated loss reserves
for any changes in trends and actual loss experience.  Included in the Company's
results  for 2001 was  approximately  $18.7  million  related to losses and loss
adjustment  expenses  ("LAE") from prior accident years. The Group will continue
to evaluate the adequacy of its loss reserves and record future  adjustments  to
its loss reserves as appropriate.

POOLING AGREEMENT

All insurance  business written by the Company is subject to a pooling agreement
with  Empire  under  which the  Company  and Empire  effectively  operate as one
company.  The pooling  agreement and subsequent  amendments were approved by the
New York  Insurance  Department.  The Company  operates  under the same  general
management  as  Empire  and has  full  use of  Empire's  personnel,  information
technology  systems and  facilities.  As of December  31,  2001,  Empire and its
subsidiaries  had 157  full  and  part-time  employees.  Currently,  and for all
periods presented, all premiums, losses, LAE and other underwriting expenses are
shared on the basis of 70% to Empire and 30% to the Company.

Pursuant to the pooling agreement, the Company has a net reinsurance recoverable
from Empire. As of December 31, 2001, the Company's reinsurance recoverable from
Empire is $130.6 million,  representing 43% of the Company's total assets. While
this  liability  is  reflected  on  Empire's  stand-alone   statutory  financial
statements, Empire's statutory surplus (after deducting this liability) is $11.1
million  as of  December  31,  2001,  which is $7.8  million  above the  minimum
required under New York insurance  regulations.  The Company currently  believes
that its  reinsurance  recoverable  from Empire is fully  collectible;  however,
further  significant  deterioration  in Empire's  surplus could impair  Empire's
ability  to pay  the  full  amount  due to the  Company.  Further,  any  adverse
regulatory  action  taken  against  Empire in the future  could also  impair the
Company's ability to fully collect its reinsurance recoverable.

FINANCIAL INFORMATION RELATING TO BUSINESS SEGMENTS

The Group was  previously  organized  into three  divisions:  the Small Business
Division, the Personal Lines Division and the Mid-Market Division. Each of these
divisions  had  separate  management  teams  responsible  for  all  underwriting
decisions. As a result of the Group's actions outlined above and a consolidation
of the Group's  internal  management  organization  in 2001, the Company's prior
business segments have been eliminated.  Accordingly,  the separate  disclosures
for these prior business segments have been eliminated.

COMBINED RATIOS

Set forth below is certain  statistical  information for the Company prepared in
accordance with generally accepted accounting  principles ("GAAP") and statutory
accounting  principles ("SAP"), for the three years ended December 31, 2001. The
Loss Ratio is the ratio of net incurred  losses and LAE to net premiums  earned.
The Expense  Ratio is the ratio of  underwriting  expenses  (policy  acquisition
costs, commissions, and a portion of administrative,  general and other expenses
attributable to underwriting  operations) to net premiums written, if determined
in accordance with SAP, or to net premiums  earned,  if determined in accordance
with GAAP. A Combined  Ratio below 100% indicates an  underwriting  profit and a
Combined  Ratio above 100%  indicates an  underwriting  loss. The Combined Ratio
does not include the effect of investment income. For additional  information on
the Company's combined ratios, see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," included elsewhere herein.


                                     - 2 -
<PAGE>

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                               2001             2000              1999
                                          ---------------- ----------------  ----------------
<S>                                              <C>              <C>               <C>
         Loss Ratio: (a)
               GAAP                              199.9%           141.9%            100.2%
               SAP                               199.9%           141.9%            100.2%
               Industry (SAP) (b)                   N/A            81.2%             78.6%

         Expense Ratio:
               GAAP                               61.8%            51.2%             39.7%
               SAP                               104.5%            50.4%             45.0%
               Industry (SAP) (b)                   N/A            28.9%             29.2%

         Combined Ratio:
               GAAP                              261.7%           193.1%            139.9%
               SAP                               304.4%           192.3%            145.2%
               Industry (SAP) (b)                   N/A           110.1%            107.8%

<FN>
(a)  Includes Loss and Loss Adjustment Expenses.
(b)  Source:  Best's  Aggregates & Averages,  Property/Casualty,  2001  Edition.
     Industry  Combined Ratios may not be fully comparable as a result of, among
     other things,  differences in geographical  concentration and in the mix of
     property and casualty insurance products.
</FN>
</TABLE>

REINSURANCE

The Group's  maximum  retained  limit for all lines of business was $0.3 million
per  occurrence  for all three  years.  Additionally,  the Group  entered into a
property  catastrophe  excess of loss treaty to protect  against certain losses.
Its  retention of lower level losses in this treaty was $7.5 million for each of
the three years. Due to the runoff of the Group's business and resulting reduced
loss  exposure,  the Group  terminated its property  catastrophe  excess of loss
coverage  effective  January 1,  2002.  In  November  2001,  the Group  received
notification of cancellation of its multiple line reinsurance contract effective
January 1, 2002. The  cancellation  affects only personal lines policies renewed
on or after  January 1,  2002,  and would  impact  the Group for losses  only on
policies that provided  coverage in excess of its retained  reinsurance limit of
$0.3  million.  Currently,  the Group has  approximately  300  policies in force
(which may include multiple insureds and vehicles) that provide such coverage up
to a maximum loss of $0.5 million per occurrence.  Under the pooling  agreement,
70% of such  losses  would be assumed by Empire and 30% would be retained by the
Company. After reviewing its options of finding comparable reinsurance coverage,
the Group has decided not to replace this coverage.

Effective  January  1,  1997,  Empire  entered  into a quota  share  reinsurance
agreement with its subsidiary,  Centurion. Under this agreement,  Empire assumed
50% of the effective  period premiums and losses of Centurion up to July 1, 1997
and 75% thereafter and granted Centurion a ceding commission.  Under the pooling
agreement, 70% of such business assumed was retained by Empire and 30% was ceded
to the Company.  This quota share reinsurance agreement was terminated effective
December 31, 2001 following the merger of Empire and Centurion.

Although  reinsurance  does not legally  discharge  an insurer  from its primary
liability for the full amount of the policy liability, it does make the assuming
reinsurer  liable to the  insurer to the extent of the  reinsurance  ceded.  The
Company's  reinsurance,  excluding the pooling agreement with Empire,  generally
has been placed with  certain of the largest  reinsurance  companies,  including
(with their respective Best ratings) General  Reinsurance  Corporation (A++) and
Zurich  Reinsurance  (NA), Inc. (A+). The Company  believes its reinsurers to be
financially  capable of meeting their respective  obligations.  However,  to the
extent  that any  reinsuring  company  is  unable to meet its  obligations,  the
Company would be liable for the  reinsured  risks.  The Company has  established
reserves,  which the  Company  believes  are  adequate,  for any  nonrecoverable
reinsurance.

                                     - 3 -
<PAGE>

INVESTMENTS

Investment  activities  represent  a  significant  part of the  Company's  total
income.  Investments are managed by the Company's  investment advisors under the
direction of, and upon consultation  with, the Company's  investment  committee.
The Company has a diversified investment portfolio of securities, 95.0% of which
is rated  "investment  grade" by established  bond rating  agencies or issued or
guaranteed by the U.S.  Treasury or by  governmental  agencies.  At December 31,
2001,  2000 and 1999,  the average  yield of the  Company's  bond  portfolio was
approximately 2.4%, 6.4% and 6.5%, respectively, and the average maturity of the
Company's bond portfolio at December 31, 2001,  2000 and 1999 was  approximately
0.3 years, 2.2 years and 2.6 years, respectively.

TAX SHARING AGREEMENT

The Company has been included in the consolidated  federal income tax returns of
Leucadia  since  1993.  Under the  terms of the tax  sharing  agreement  between
Leucadia and the Company,  the Company  computes its tax provision on a separate
return  basis and is either  charged its share of federal  income tax  resulting
from its  taxable  income or is credited  for tax  benefits  resulting  from its
losses to the extent it could use the losses on a separate return basis.

GOVERNMENT REGULATION

Insurance  companies are subject to detailed  regulation and  supervision in the
states in which they transact business. Such regulation pertains to matters such
as approving  policy forms and various premium rates,  minimum reserves and loss
ratio  requirements,  the type and amount of  investments,  minimum  capital and
surplus  requirements,  granting  and  revoking  licenses to transact  business,
levels of operations and regulating  trade  practices.  Insurance  companies are
required to file detailed annual reports with the  supervising  agencies in each
of the states in which they do business,  and are subject to examination by such
agencies at any time.  Increased  regulation of insurance companies at the state
level and new regulation at the federal level is possible,  although the Company
cannot  predict  the nature or extent of any such  regulation  or what impact it
would have on the Company's operations.

During the third quarter of 2001, the Department informed the Company and Empire
of its examination  findings concerning the three-year period ended December 31,
1999. The triennial report was subsequently  filed by the Department in November
2001.  Among other matters,  the  Department's  report  indicated a loss and LAE
reserve  deficiency for the Company and Empire. The Company and Empire responded
to the Department's  examination findings and concluded that based on subsequent
adverse development  recorded by the Company, the Department's reserve estimates
were  within  a  reasonable  actuarial  range  of  acceptable  estimates.  As of
September 30, 2001, the Company's and Empire's reserve levels for losses and LAE
prior to December 31, 1999 were consistent with the Department's findings.

In  addition,  the  triennial  report  noted  that  the  Group's  organizational
structure  causes  Empire's  stand-alone  statutory  surplus  to be reduced by a
statutory  limitation on the carrying value of its investment in the Company and
Centurion.  Empire  submitted  to  the  Department  a  plan  for  remedying  its
stand-alone surplus  deficiency,  including the merger of Centurion into Empire,
which  was  approved  by  the  Department  and  consummated  in  2001.  Empire's
stand-alone  surplus at December 31, 2001 exceeded the minimum statutory surplus
requirement of $3.3 million by $7.8 million.  In the event Empire's  stand-alone
statutory  surplus declines below the minimum in the future, no assurance can be
given that material adverse  regulatory  action will not be taken against Empire
or the Company.

The National Association of Insurance  Commissioners  ("NAIC") has adopted model
laws incorporating the concept of a "risk based capital" ("RBC") requirement for
insurance  companies.  Generally,  the RBC  formula is  designed  to measure the
adequacy of an insurer's  statutory capital in relation to the risks inherent in
its business.  The RBC formula is used by the states as an early warning tool to
identify weakly capitalized  companies for the purpose of initiating  regulatory
action.  Although  New York  State  has not  adopted  the RBC  requirements  for
property and casualty insurance  companies,  New York does require that property
and casualty  insurers file the RBC information  with the  Department.  The NAIC
also has adopted  various ratios for insurance  companies  which, in addition to
the RBC ratio,  are  designed to serve as a tool to assist state  regulators  in
screening and analyzing the financial condition of insurance companies operating
in their  respective  states.  The Company  and Empire had  certain  NAIC ratios
outside of the acceptable range of results for the year ended December 31, 2001.

The Group is a member of state insurance funds, which provide certain protection
to  policyholders of insolvent  insurers doing business in those states.  Due to
insolvencies of certain  insurers,  the Group has been assessed  certain amounts
which have not been material and are likely to be assessed additional amounts by
state  insurance  funds.  The  Company  believes  that it has  provided  for all
anticipated  assessments  and that any  additional  assessments  will not have a
material  adverse  effect on the  Company's  financial  condition  or results of
operations.

                                     - 4 -
<PAGE>

LOSS AND LOSS ADJUSTMENT EXPENSES

Liabilities  for unpaid  losses,  which are not  discounted  (except for certain
workers'  compensation  liabilities),  and LAE are determined  using  case-basis
evaluations,  statistical  analyses and  estimates  for salvage and  subrogation
recoverable  and represent  estimates of the ultimate  claim costs of all unpaid
losses and LAE.  Liabilities  include a provision  for losses that have occurred
but have not yet been  reported.  These  estimates  are subject to the effect of
trends in future claim  severity and frequency  experience.  Adjustments to such
estimates  are made from time to time due to changes  in such  trends as well as
changes in actual loss  experience.  These  adjustments are reflected in current
earnings.

The Company relies upon standard actuarial  ultimate loss projection  techniques
to obtain estimates of liabilities for losses and LAE. These projections include
the extrapolation of both losses paid and incurred by business line and accident
year and  implicitly  consider  the impact of  inflation  and claims  settlement
patterns upon ultimate claim costs based upon historical patterns.  In addition,
methods based upon average loss costs,  reported  claim counts and pure premiums
are  reviewed  in order to obtain a range of  estimates  for setting the reserve
levels.  For further input,  changes in operations in pertinent  areas including
underwriting  standards,  product mix,  claims  management and legal climate are
periodically reviewed.

In the following  table,  the  liability  for losses and LAE of the Company,  is
reconciled for each of the three years ended December 31, 2001. Included therein
are current year data and prior year development.

<TABLE>
<CAPTION>
                       RECONCILIATION OF LIABILITY FOR LOSSES AND LAE

                                                    2001             2000             1999
                                                    ----             ----             ----
                                                                 (IN THOUSANDS)

<S>                                             <C>             <C>               <C>
       Net SAP liability for losses and LAE,
          at beginning of the year              $      95,587   $       113,602   $     139,771
                                                --------------- ----------------- ----------------

       Provision for losses and LAE for
         claims occurring in the current year          17,747            27,880          36,524
       Increase in estimated losses and LAE
         for claims occurring in prior years           18,747            15,927           6,014
                                                --------------- ----------------- ----------------
       Total incurred losses and LAE                   36,494            43,807          42,538
                                                --------------- ----------------- ----------------

       Losses and LAE payments for claims
       occurring during:
         Current year                                   5,703             8,920          12,382
         Prior years                                   42,207            52,902          56,325
                                                --------------- ----------------- ----------------
                                                       47,910            61,822          68,707
                                                --------------- ----------------- ----------------

       Net SAP liability for losses and LAE,
         at end of year                                84,171            95,587         113,602

       Reinsurance recoverable                        159,120           172,919         228,334

                                                --------------- ----------------- ----------------
       Liability for losses and LAE at the
         end of year as reported in the
         financial statements (GAAP)            $     243,291   $      268,506    $     341,936
                                                =============== ================= ================
</TABLE>

The following  table presents the  development of balance sheet  liabilities for
1991 through 2001 for the Company.  The  liability  line at the top of the table
indicates  the  estimated  liability  for unpaid  losses and LAE recorded at the
balance sheet date for each of the indicated  years.  The middle  section of the
table shows the re-estimated  amount of the previously  recorded liability based
on experience as of the end of each succeeding year. As more information becomes
available and claims are settled, the estimated  liabilities are adjusted upward
or downward with the effect of  decreasing or increasing  net income at the time
of adjustment.  The lower section of the table shows the cumulative  amount paid
with  respect  to  the  previously  recorded  liability  as of the  end of  each
succeeding year.

                                     - 5 -
<PAGE>

The  "cumulative  deficiency"  represents the aggregate  change in the estimates
over all prior years. For example, the initial 1991 liability estimate indicated
on the table of  $84,178,000  has been  re-estimated  during  the  course of the
succeeding ten years, resulting in a re-estimated liability at December 31, 2001
of $102,493,000 or a deficiency of $18,315,000.  If the  re-estimated  liability
were less than the  liability  initially  established,  a cumulative  redundancy
would be indicated.

In  evaluating  this  information  it should be noted that each amount shown for
"cumulative deficiency" includes the effects of all changes in amounts for prior
periods.  For example, the amount of the deficiency related to losses settled in
1995, but incurred in 1991, will be included in the cumulative deficiency amount
for  1991,  1992,  1993 and 1994.  This  table is not  intended  to and does not
present  accident or policy year loss and LAE development  data.  Conditions and
trends  that have  affected  development  of the  liability  in the past may not
necessarily  occur in the future.  Accordingly,  it would not be  appropriate to
extrapolate future redundancies or deficiencies based on this table.

                                     - 6 -
<PAGE>
<TABLE>
<CAPTION>

Analysis of Loss and Loss Adjustment Expenses Development
(In thousands)
                                                                                              Year ended December 31,
                                                ----------------------------------------------------------------------------
                                                  1991      1992      1993       1994        1995       1996       1997

<S>                                             <C>       <C>        <C>       <C>         <C>         <C>        <C>
Liability for Unpaid Losses and
  Loss Adjustment Expense                       $ 84,178  $ 96,712   $106,115  $ 121,923   $ 142,718   $143,494   $145,260

Liability Re-estimated as of:
   One year later                               $ 83,987  $ 96,516   $103,181  $ 132,189   $ 150,852   $151,798   $158,152
   Two years later                                83,341    97,208    112,176    140,620     160,686    163,378    163,609
   Three years later                              85,197   103,592    118,127    150,434     172,650    179,200    176,825
   Four years later                               88,928   108,430    124,375    160,542     182,318    184,693    188,951
   Five years later                               92,035   112,988    132,606    167,164     183,482    193,992
   Six years later                                95,273   118,446    137,669    166,893     190,009
   Seven years later                              99,467   121,715    137,462    171,364
   Eight years later                             101,505   121,383    139,982
   Nine years later                              101,276   122,922
   Ten years later                               102,493
Cumulative Deficiency                           $ (18,315)$ (26,210) $(33,867) $ (49,441)  $ (47,291)  $(50,498) $ (43,691)
                                                ========= ========= ========== ========== =========== ========== ===========

Cumulative Amount of Liability Paid Through:
   One year later                               $ 26,852  $ 33,903   $ 35,048   $ 45,789    $ 60,382   $ 56,475   $ 55,875
   Two years later                                44,989    54,615     59,701     80,911      95,190     94,062     93,714
   Three years later                              59,336    71,653     81,680    105,977     121,900    122,811    126,295
   Four years later                               69,955    85,689     97,917    124,645     141,259    146,697    148,482
   Five years later                               77,965    95,938    109,083    136,791     156,006    162,875
   Six years later                                83,886   102,416    116,929    146,283     166,814
   Seven years later                              88,139   107,246    123,022    153,239
   Eight years later                              91,364   111,097    127,419
   Nine years later                               93,862   114,205
   Ten years later                                96,055

Net Liability - End of year                                          $106,115  $ 121,923   $ 142,718   $143,494   $145,260
Reinsurance                                                           184,718    219,676     257,161    262,593    272,266
                                                                    ---------- ---------- ----------- ---------- -----------
Gross Liability - End of year as shown above                         $290,833  $ 341,599   $ 399,879   $406,087   $417,526
                                                                    ========== ========== =========== ========== ===========

Net Re-Estimated Liability - Latest                                  $139,982  $ 171,364   $ 190,009   $193,992   $188,951
Re-estimated Reinsurance -  Latest                                    277,352    331,866     359,604    370,212    348,402
                                                                    ---------- ---------- ----------- ---------- -----------
Gross Re-estimated Liability - Latest                                $417,334  $ 503,230   $ 549,613   $564,204   $537,353
                                                                    ========== ========== =========== ========== ===========
Gross Cumulative  Deficiency                                        $(126,501) $(161,631)  $(149,734) $(158,117) $ (119,827)
                                                                    ========== ========== =========== ========== ===========
</TABLE>




<TABLE>
<CAPTION>

Analysis of Loss and Loss Adjustment Expenses Development
(In thousands)
(Continued)

                                                ---------------------------------------
                                                 1998        1999       2000      2001

<S>                                             <C>        <C>         <C>       <C>
Liability for Unpaid Losses and
  Loss Adjustment Expense                       $139,771   $ 113,602   $95,587   $ 84,171

Liability Re-estimated as of:
   One year later                               $145,785   $ 129,529  $114,334        $ -
   Two years later                               162,692     149,102
   Three years later                             179,172
   Four years later
   Five years later
   Six years later
   Seven years later
   Eight years later
   Nine years later
   Ten years later
Cumulative Deficiency                           $(39,401)  $ (35,500) $ (18,747) $       -
                                                ========= =========== ========= ==========

Cumulative Amount of Liability Paid Through:
   One year later                               $ 56,325    $ 52,902   $42,207        $ -
   Two years later                                97,887      87,448
   Three years later                             127,198
   Four years later
   Five years later
   Six years later
   Seven years later
   Eight years later
   Nine years later
   Ten years later

Net Liability - End of year                     $139,771   $ 113,602   $95,587   $ 84,171
Reinsurance                                      294,461     228,334   172,919    159,120
                                                --------- ----------- --------- ----------
Gross Liability - End of year as shown above    $434,232   $ 341,936  $268,506   $243,291
                                                ========= =========== ========= ==========

Net Re-Estimated Liability - Latest             $179,172   $ 149,102  $114,334
Re-estimated Reinsurance -  Latest               328,782     248,894   170,732
                                                --------- ----------- ---------
Gross Re-estimated Liability - Latest           $507,954   $ 397,996  $285,066
                                                ========= =========== =========
Gross Cumulative  Deficiency                    $(73,722)  $ (56,060) $ (16,560)
                                                ========= =========== =========
</TABLE>


                                     - 7 -
<PAGE>

As reflected in the above table, the Company's reported loss and LAE reserves as
of the end of each calendar year were  subsequently  determined to be deficient.
This adverse  development  first became  apparent to the Company during the 1995
calendar  year,  when an increase to prior years'  reserves was recorded for the
first time. In each subsequent calendar year, the Company's recalculation of the
reserve  balances  for prior  periods  continued  to  result  in higher  reserve
estimates. These higher reserve estimates were reflected in the Company's annual
financial statements upon determination.

During the period from 1992 through 2001, the Company recorded in its Statements
of  Operations  total net  adverse  reserve  development  of $77.0  million,  as
disclosed in the  Reconciliation  of Liability for Losses and LAE table for such
years.  This adverse  development  was experienced in  substantially  all of the
Company's lines of insurance;  however,  the amount of reserve increases and the
periods in which the reserves  were  recorded were not the same for all lines of
insurance. On a calendar year basis, the aggregate $77.0 million adverse reserve
development was recorded, as set forth in the table below:

                                                       Redundancy/
                                                      (Deficiency)
Calendar year recorded                               (in thousands)
----------------------------                         --------------

         1992                                          $      191
         1993                                                 196
         1994                                               2,934
         1995                                             (10,266)
         1996                                              (8,134)
         1997                                              (8,304)
         1998                                             (12,891)
         1999                                              (6,014)
         2000                                             (15,927)
         2001                                             (18,747)
                                                        ----------

Prior year reserve development recorded 1992 to 2001     $(76,962)

This reserve  development is reflected in the ten-year Analysis of Loss and Loss
Adjustment Expense Development table above; however, because the deficiency line
in the table is  calculated on a cumulative  basis,  the $77.0 million of actual
adverse  reserve   development   experienced  by  the  Company  is  reported  as
deficiencies  in multiple years in the table. An examination of the adverse loss
reserve development recorded during 2001 will illustrate this point. During 2001
the Company recorded $18.7 million of adverse loss reserve  development  related
to claims  incurred in years prior to 2001. This amount is reflected in the 2000
column of the table as a cumulative deficiency. However, since this adverse loss
reserve  development  related to claims  incurred and whose  settlement cost was
originally estimated in various periods prior to 2001, the cumulative deficiency
line in years prior to 2001  includes this adverse loss reserve  development  as
follows:  2000: $18.7 million;  1999: $19.6 million;  1998: $16.5 million; 1997:
$12.1 million; 1996: $9.3 million; 1995: $6.5 million; 1994: $4.5 million; 1993:
$2.5 million; 1992: $1.5 million; and 1991: $1.2 million. Because the cumulative
deficiencies  reflected  in the  ten-year  Analysis of Loss and Loss  Adjustment
Expense  Development table above add up to a much greater number than the actual
adverse  development  recorded by the Company, an understanding of the Company's
reserve  deficiencies  during 1991 to 2000 can only be obtained from an analysis
of the  adverse  reserve  development  actually  recorded  by the Company in its
financial  statements  in each year in the period,  beginning in 1995 (the first
year in which adverse reserve development was recorded).

The information  below  identifies  certain of the more  significant  trends and
events  that the Company  has  experienced  in recent  years,  resulting  in the
Company's  recognition of the adverse loss reserve  development in 1995 and each
subsequent calendar year. As described below, the reserve  development  recorded
by the  Company  was  caused  by many  factors,  including  initial  loss  ratio
estimates  used by the Company that were  subsequently  found to be too low as a
result of actual  loss  experience,  as well as factors  external to the Company
that were not known at the time  business  was written.  In  addition,  the long
period of time it takes to settle  third-party  liability claims in the New York
City marketplace further complicates the reserve estimation process. Frequently,
these claims are not received  immediately  after the  accident  occurs,  and in
fact,  a claimant  can wait until just before the  expiration  of the statute of
limitations  (three years from the date of the  accident) to make a claim.  Once
received,  a claim  may  take  several  years  until  the  claim  reaches  final
resolution in the New York City courts.

                                     - 8 -
<PAGE>

1995
----
In 1995,  of the $10.3 million of adverse loss reserve  development  recorded by
the  Company,  $6.9  million was in the  private  passenger  automobile  line of
insurance.  In 1994, the Company acquired a large block of assigned risk private
passenger  automobile business that nearly doubled the volume previously written
by the Company.  In 1995, losses began to develop in this line of insurance that
indicated  a higher  ultimate  loss ratio than the Company  had  experienced  on
similar blocks of assigned risk business from earlier periods,  which experience
formed the basis of the  Company's  original  loss  estimate.  As a result,  the
Company  increased its estimate for loss reserves for the assigned risk business
acquired in 1994 and earlier years.

1996, 1997 and 1998
-------------------
For the years ended  December 31, 1996,  1997,  and 1998,  the Company  recorded
adverse  loss  reserve  development  of $ 8.1  million,  $8.3  million and $12.9
million,  respectively.  For 1996,  1997 and 1998,  these amounts  included $6.0
million,  $2.1  million  and  $4.2  million,  respectively,  in  the  commercial
automobile  liability  line,  and $2.4  million,  $3.3 million and $4.2 million,
respectively,  in the commercial package liability line.  Beginning in 1992, the
Company  entered into new market segments of the voluntary  commercial  business
for automobile and general  liability lines,  including  specialty  programs for
sanitation trucks, gas stations, fuel oil deliveries and limousines.  Initially,
the Company's loss ratio  estimate for these new market  segments was based upon
its experience  with similar lines of business and standard  actuarial  ultimate
loss projection techniques, which consider expected loss ratios.

During 1996, claims began to develop unfavorably and the Company used such claim
development to revise the assumptions that had formed the basis of its actuarial
studies; as a consequence reserves were increased. The increase in ultimate loss
estimates  did not  become  apparent  prior to 1996,  primarily  due to the long
period of time it takes to settle claims in these new sub-lines of business. The
Company  further  increased its loss estimates and increased  reserves for these
market segments in 1997 and 1998 as well.  Except for the three-year period from
1996 to 1998,  there has been no other  material  development  for these  market
segments first entered into in 1992.

In addition, during 1998 the Company's claim examiners began recording increases
in the  expected  settlement  costs  for  1997  accident  year  claims  in other
sub-lines of the commercial  automobile line of insurance in larger amounts than
previously  expected.  As a result,  the 1997  accident  year loss ratio for the
commercial  automobile line is now currently  estimated to be 130%,  which is 30
points higher than the current estimate for the 1996 accident year and 50 points
higher than the current estimate for the 1995 accident year. Such a large change
in the loss  experience for this book of business from prior  experience was not
expected.

1999 and 2000
-------------
In 1999 and 2000, the Company recorded adverse loss reserve  development of $6.0
million and $15.9 million, respectively, of which $5.1 million and $6.1 million,
respectively,  related to Personal Injury Protection  ("PIP") coverage in all of
its automobile lines of insurance. The majority of the 1999 development resulted
from  increased  claim cost  estimates for the 1998 accident year. It was during
1999 that the Company  first began to  experience  greater  severity (the amount
paid to a claimant) in  automobile  liability  claims,  which were  subsequently
determined to be PIP related.  Also during 1999, the Company  started to see the
lengthening  of the time  from the  date of loss to the date a claim  was  first
reported. This change in loss development patterns resulted in more claims being
reported at later dates,  which further  increased the Company's loss estimates.
In 1999, the Company  incorporated  this developing trend into its ultimate loss
estimate for PIP related claims and increased its loss reserves accordingly.

During the latter  half of 2000,  and in  particular,  the fourth  quarter,  the
Company  experienced  further  unfavorable   development  in  PIP  claims.  This
development  occurred in all accident years from 1996 through 1999, with further
deterioration  in the 1998 accident year being the most  significant  component.
The Company  observed  this  unfavorable  development  with  respect to both the
frequency and severity of claims.  The Company  incorporated the results of this
activity with that of developing  industry  trends into its actuarial  valuation
for its PIP coverage and increased its loss reserve estimate.

In the past, the Company has written  various  commercial  package and homeowner
policies that offer  liability  protection  to the insured,  and has exposure to
third party  liability  claims in these lines of  insurance.  During  2000,  the
Company  experienced newly reported and reopened liability claims with increased
severity for accident years 1998 and prior. As a result,  the Company recognized
$4.5 million of loss reserve  development for those accident  years.  One of the
primary  reasons for the reopened  claims was that the increase in severity made
certain types of liability  claims that previously had lower  settlement  values
more attractive litigation candidates for plaintiff's attorneys.

                                     - 9 -
<PAGE>


Throughout  2000,  the Company  outsourced  a  significant  portion of its claim
handling responsibilities to outside third party claim administrators. While the
Company  anticipates  that  these  administrators  will be able to settle  these
claims for  smaller  amounts  than the Company  was  achieving,  the LAE reserve
needed to be  increased to recognize  the fees due to the  administrators.  Such
fees are higher on a per claim basis than the  Company's  cost to handle  claims
in-house.  Accordingly, in 2000 the adverse loss reserve development recorded by
the Company included an increase to the LAE reserve of $3.3 million. The Company
has not recognized any reserve  reduction for the potentially  lower  settlement
amounts that may be achieved by the third party administrators.

2001
----
For the year ended December 31, 2001, the Company  recorded adverse loss reserve
development  of $18.7 million.  During 2001,  the Company  increased its reserve
estimates for its commercial  package policies lines of business,  primarily due
to increases in severity of liability  claims for accident years 1998 and prior.
The Company has exposure for third party  liability  claims in many of its lines
of insurance. During 2001, there were several settlements and court decisions on
third party  liability cases for amounts that are greater than the industry's or
the Company's  historical  experience for similar  claims,  which had formed the
basis for the Company's  estimated loss reserves.  While many of these decisions
are  being  appealed,  these  results  may  signal  a  change  in  the  judicial
environment in the Company's marketplace. Accordingly, the Company has increased
its loss  reserve  estimate  by $6.9  million  due to an  estimated  increase in
severity for these exposures.

Reserve increases in 2001 also resulted from unfavorable development principally
in  automobile  lines of business  for the 1998  through  2000  accident  years,
primarily  relating to PIP coverage and in its  workers'  compensation  lines of
insurance.  The Company  believes that the increased  loss estimates for PIP are
consistent  with recent trends in the industry,  and has increased loss reserves
for all automobile lines by $3.3 million for 2001. In addition, the Company also
increased  its reserve for LAE by $7.0  million as a result of the  increases to
its loss  reserves  and an  increase  in future  overhead  costs  which  will be
allocated to settle claims currently incurred.

For additional information, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere herein.


ITEM 2.  PROPERTIES
------   ----------

The Group has entered into a four year lease expiring in 2005 for  approximately
16,000 square feet in an office  building  located at 45 Main Street,  Brooklyn,
New York.  Under this lease, an additional 9,000 square feet has been leased for
a two year period expiring in 2003.

The Group also leases  office  space  located in  Mineola,  New York and Boston,
Massachusetts  under lease expiring in 2007 and 2003,  respectively.  The rental
charged to the Company for these  facilities is prorated in accordance  with the
pooling agreement described in "Pooling Agreement" under Item 1, herein.

ITEM 3.  LEGAL PROCEEDINGS
------   -----------------

The  Company  is party to legal  proceedings  that are  considered  to be either
ordinary,  routine litigation or incidental to its business. Based on discussion
with  counsel,  the Company  does not believe that such  litigation  will have a
material effect on its financial position, results of operations or cash flows.

                                     - 10 -
<PAGE>

ITEM 10.   EXECUTIVE OFFICERS OF REGISTRANT
-------    --------------------------------

All  executive  officers of the Company are elected at a meeting of the Board of
Directors of the Company and serve at the pleasure of the Board of Directors. As
of March 14,  2002,  the  executive  officers of the  Company,  their ages,  the
positions  held by them and the  periods  during  which they have served in such
positions were as follows:

<TABLE>
<CAPTION>

         Name                       Age     Position with Company               Office Held Since
         ----                       ---     ---------------------               -----------------

<S>                                 <C>     <C>                                           <C>
H.E. Scruggs, Jr.                   45      President and Chief                 September 2000
                                            Executive Officer

Rocco J. Nittoli                    43      Chief Operating Officer             February 2001

Edward A. Hayes                     50      Senior Vice President               November 1999

Christopher J. Gruttemeyer          36      Vice President                      December 2000
</TABLE>


                                     PART II

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

(A) MARKET INFORMATION
Effective  February 25, 2002, the Company's common shares were delisted from the
Nasdaq Stock Market,  Inc.  ("Nasdaq")  National  Market  System  because of the
Company's  failure  to hold  an  annual  shareholders'  meeting  in 2001  and to
otherwise  meet Nasdaq's  proxy  solicitation  requirements  for the fiscal year
ended December 31, 2001, as required by Nasdaq's  Marketplace  Rules 4350(e) and
4350(g), respectively. The Company was also advised by Nasdaq that it had failed
to meet the minimum  market  value of  publicly  held shares and the minimum bid
price per  share as  required  by  Nasdaq's  Marketplace  Rules  4450(a)(2)  and
4450(a)(5).  The  Company's  common  shares began  trading  over-the-counter  on
February 25, 2002 under the same symbol, "ALCI." The following table sets forth,
for the calendar  quarters  indicated,  the high and low closing trade price per
common  share as  reported by the  Bloomberg  Professional  Service  provided by
Bloomberg  L.P.  (for  2002) and as  reported  by the  National  Association  of
Securities Dealers, Inc (for 2001 and 2000).

                                                    High            Low
                                                   ------         ------
         1st Quarter 2002                          $0.890         $0.310
         (through March 14, 2002)

         1st Quarter 2001                           7.625          4.875
         2nd  "        "                            4.950          1.800
         3rd  "        "                            2.000          1.000
         4th  "        "                            1.500          0.200


         1st Quarter 2000                           9.750          5.875
         2nd  "        "                            9.250          6.875
         3rd  "        "                            11.500         8.000
         4th  "        "                            8.000          6.000

(B) HOLDERS
The number of  shareholders  of record of common shares at December 31, 2001 was
458.

(C) DIVIDENDS
The Company has paid no dividends on its common shares since 1975.  The New York
Insurance Law prohibits New York domiciled  property and casualty companies from
paying  dividends  except out of earned  surplus.  Without  the  approval of the
Department,  no New York  domestic  property/  casualty  insurer  may declare or
distribute  any dividend to  shareholders  which,  together  with any  dividends
declared or  distributed by it during the preceding  twelve months,  exceeds the
lesser of (1) 10% of  statutory  surplus to  policyholders  as shown in its last
statutory annual statement or (2) 100% of adjusted net investment  income during
such period. Based on the above criteria, at December 31, 2001, $2.2 million was
available for distribution of dividends.

                                     - 11 -
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

The following  selected  financial data have been  summarized from the Company's
consolidated  financial  statements  and are  qualified  in  their  entirety  by
reference  to,  and  should  be  read in  conjunction  with,  such  consolidated
financial  statements  and Item 7,  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations" of this Report:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                2001           2000           1999         1998          1997
                                                ----           ----           ----         ----          ----
                                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S>                                          <C>            <C>             <C>         <C>           <C>
Total Revenues                               $ 29,728       $ 42,303        $55,662     $  92,070     $102,624

Net (Loss)/Income (a)                        $(18,048)      $(30,800)       $(3,731)    $     504     $    (83)

Basic and Diluted (Loss)/Earnings
Per share:
(Loss)/Income(a)                             $  (2.55)      $  (4.35)       $ (0.53)    $    0.07     $  (0.01)
</TABLE>

a) Net (loss) income  includes net securities  gains/(losses)  net of applicable
tax, as follows (in thousands, except per share amounts):

                                      GAINS/(LOSSES)     PER SHARE
                                      --------------     ---------

                   2001             $    1,870           $    0.26
                   2000                   (213)              (0.03)
                   1999                 (1,084)               0.15
                   1998                  3,951                0.56
                   1997                  (125)               (0.02)


<TABLE>
<CAPTION>
                                                                  AT DECEMBER31,
                                  -------------------------------------------------------------------------
                                       2001             2000          1999             1998            1997
                                       ----             ----          ----             ----            ----
                                                                 (IN THOUSANDS)

<S>                               <C>               <C>           <C>              <C>             <C>
    Total assets                  $ 302,240         $372,284      $490,520         $605,704        $640,249
    Invested assets                 129,639          163,873       205,246          234,039         271,736

    Surplus note:
     Face value                       7,000            7,000         7,000            7,000           7,000
     Accrued interest (a)               114            9,486         8,851            8,300           7,710
    Common shareholders'
      equity (b)                     25,904           43,791        71,716           78,200          78,164



                                                        FOR THE YEARS ENDED DECEMBER 31,
                                  -------------------------------------------------------------------------
                                       2001             2000          1999             1998            1997
                                       ----             ----          ----             ----            ----

GAAP Combined Ratio(c)                261.7%           193.1%        139.9%           129.4%          119.3%
SAP Combined Ratio (c)                304.4%           192.3%        145.2%           134.4%          118.6%
Industry SAP Combined
  Ratio (d)                             N/A            110.1%        107.8%           106.0%          101.6%
Premium to Surplus
  Ratio (e)                            0.3x             0.5x          0.5x             0.8x            1.1x

<FN>
(a)  Effective  January 1, 1980,  the Company issued a surplus note to Empire in
     the principal amount of $7.0 million. During 2001, with the approval of the
     Superintendent   of   Insurance   of   the   State   of   New   York   (the
     "Superintendent"),  the Company paid Empire $9.9  million of interest  that
     had been  accrued on the surplus  note  through  September  30,  2001.  For
     further  information  on  the  surplus  note,  see  Item  7.  "Management's
     Discussion  and Analysis of Financial  Condition and Results of Operations,
     Liquidity and Capital Resources" elsewhere in this Report.

(b)  Includes  unrealized  appreciation of  approximately  $0.7 million in 2001,
     $0.6  million in 2000,  $0.5  million in 1998 and $0.9  million in 1997 and
     unrealized  depreciation of approximately  $2.3 million in 1999, all net of
     tax, on investments classified as available for sale.

(c)  For all years presented, the difference between the GAAP Combined Ratio and
     the SAP Combined  Ratio is affected by the  accounting  for certain  costs,
     which are treated  differently under SAP and GAAP. In 2001, this difference
     was more pronounced to the decline in the Company's net premiums written at
     a rate faster than the decline in earned premiums. For 1998, the difference
     in the accounting  treatment for curtailment  gains relating to the defined
     benefit pension plans was the principal  reason for the difference  between
     the GAAP Combined Ratio and the SAP Combined Ratio. For further information
     about the Company's Combined Ratios,  see Item 7, "Management's  Discussion
     and Analysis of Financial Condition and Results of Operations" elsewhere in
     this Report.

(d)  Source:  Best's  Aggregates & Averages,  Property/Casualty,  2001  Edition.
     Industry  Combined Ratios may not be fully comparable as a result of, among
     other things,  differences in geographical  concentration and in the mix of
     property and casualty insurance products.

(e)  Premium to Surplus Ratio was  calculated by dividing  annual  statutory net
     premiums written by statutory surplus at the end of the year.
</FN>
</TABLE>

                                     - 12 -
<PAGE>

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

The purpose of this  section is to discuss and analyze the  Company's  financial
condition,  liquidity  and capital  resources  and results of  operations.  This
analysis should be read in conjunction with the financial statements and related
notes which appear elsewhere in this Report.

VOLUNTARY LIQUIDATION (RUN-OFF OF COMPANY'S OPERATIONS)

During the past several years, the Group experienced poor  underwriting  results
and adverse  reserve  development in all of its lines of business.  During 2001,
the Group explored its options for developing a new business model and strategy.
After evaluating these options, the Group announced in December 2001 that it had
determined  that  it  was  in  the  best  interest  of  its   shareholders   and
policyholders to commence an orderly  liquidation of all of its operations.  The
Group will only accept  business  that it is  obligated to accept by contract or
New York  insurance  law;  it will not engage in any other  business  activities
except  for its claims  runoff  operations.  The  voluntary  liquidation  of its
operations is expected to be  substantially  complete by 2005. Given the Group's
and the Company's current financial condition, the expected costs to be incurred
during the claims  runoff  period,  and the inherent  uncertainty  over ultimate
claim  settlement   values,  no  assurance  can  be  given  that  the  Company's
shareholders  will  be  able to  receive  any  value  at the  conclusion  of the
voluntary liquidation of its operations.

Pursuant to the pooling agreement, the Company has a net reinsurance recoverable
from Empire. As of December 31, 2001, the Company's reinsurance recoverable from
Empire is $130.6 million,  representing 43% of the Company's total assets. While
this  liability  is  reflected  on  Empire's  stand-alone   statutory  financial
statements, Empire's statutory surplus (after deducting this liability) is $11.1
million  as of  December  31,  2001,  which is $7.8  million  above the  minimum
required under New York insurance  regulations.  The Company currently  believes
that its  reinsurance  recoverable  from Empire is fully  collectible;  however,
further  significant  deterioration  in Empire's  surplus could impair  Empire's
ability  to pay  the  full  amount  due to the  Company.  Further,  any  adverse
regulatory  action  taken  against  Empire in the future  could also  impair the
Company's ability to fully collect its reinsurance recoverable.

As of March 8,  2002,  the Group was rated  "F" (in  liquidation)  by A.M.  Best
Company  ("Best")  and rated "BB-"  (marginal)  by  Standards & Poors  Insurance
Rating  Services  ("S&P").  Given the  Group's  decision  to commence an orderly
liquidation of all of its operations,  the Best and S&P ratings are not expected
to have any impact on the Company's  operations.  As with all ratings,  Best and
S&P ratings are subject to change at any time.

LIQUIDITY AND CAPITAL RESOURCES

In 2001 and 2000,  net cash was used for operations as a result of a decrease in
premiums written and the payment of claims and operating  expenses.  As a result
of its decision to conduct an orderly liquidation of all of its operations,  the
Company expects to report a net use of cash from operations  resulting primarily
from the payment of claims and other  expenses  in excess of revenues  generated
for the  foreseeable  future.  During 2001,  the Company  replaced a significant
portion  of  its  fixed  maturities   investment   portfolio  with  shorter-term
investments in order to shorten its duration to match its cash needs.

                                     - 13 -
<PAGE>

At  December  31, 2001 and 2000,  the yield of the  Company's  fixed  maturities
portfolio was 2.4% and 6.4%, respectively, with an average maturity of 0.3 years
and  2.2  years,  respectively.  Additionally,  the  Company  has a  diversified
investment  portfolio of securities,  95.0% of which is rated "investment grade"
by established bond rating agencies or issued or guaranteed by the U.S. Treasury
or by  governmental  agencies.  During  2001,  $34.5  million  of the  Company's
investment  in a limited  partnership  was  liquidated  and  distributed  to the
Company.   The  distribution   proceeds  were  reinvested  in  short-term  fixed
maturities.  The  Company's  remaining  balance in the  limited  partnership  at
December 31, 2001 of $6.1 million  consisted of short-term  investments and cash
equivalents.

The Company  maintains cash,  short-term and readily  marketable  securities and
anticipates that the cash flow from investment  income,  maturities and sales of
short-term  investments  and fixed  maturities will be sufficient to satisfy its
anticipated cash needs.  During 2001, the Company realized capital gains of $1.9
million primarily due to the sale of fixed maturities to shorten the duration of
the portfolio.  During 2000, the Company realized capital losses of $0.2 million
principally due to the sale of fixed maturities to satisfy operating cash needs.
The Company  will  continue  to sell its  investment  portfolio  and collect its
reinsurance receivables to generate the cash that will be required to settle its
loss and LAE reserves. At December 31, 2001, these assets totaled $291.0 million
as compared  to the  Company's  loss and LAE  reserves  of $243.0  million.  The
Company expects to settle approximately 80% of these liabilities within the next
three years. Additionally,  the Company has not experienced any material default
in the payment of reinsurance claims due from its reinsurance providers.

At  December  31,  2001,  the Group's  contractual  cash  obligations  under its
operating  leases total $4.0 million of which $1.0 million is due in less than 1
year,  $1.8 million is due in 1 to 3 years,  $1.0 million is due in 4 to 5 years
and $0.2 million is due after 5 years.

Effective  January 1, 1980,  the Company  issued a surplus note to Empire in the
principal amount of $7.0 million. The surplus note provides, among other things,
for interest to be accrued on the  principal of the note based on a bank's prime
rate at the end of the current calendar quarter. Neither the principal amount of
the surplus  note nor the  accrued  interest  may be paid,  in whole or in part,
without the  consent of the  Superintendent  and must be repaid,  in whole or in
part, when so ordered by the  Superintendent.  During 2001, with the approval of
the  Superintendent,  the Company paid Empire $9.9 million of interest  that had
been accrued on the surplus note through September 30, 2001.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's  discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in  accordance  with  generally  accepted  accounting  principles.  The
preparation of these financial statements requires the Company to make estimates
and assumptions that affect the reported amounts in the financial statements and
disclosures of contingent  assets and  liabilities.  On an on-going  basis,  the
Company  evaluates all of these estimates and assumptions.  Actual results could
differ from those estimates.

Liabilities  for unpaid  losses,  which are not  discounted  (except for certain
workers'  compensation  liabilities),  and LAE are determined  using  case-basis
evaluations,  statistical  analyses  for losses  incurred  but not  reported and
estimates for salvage and subrogation recoverable and represent estimates of the
ultimate  claim  costs of all  unpaid  losses  and LAE.  Liabilities  include  a
provision  for losses that have occurred but have not yet been  reported.  These
estimates  are  subject to the  effect of trends in future  claim  severity  and
frequency  experience.  The Company relies upon standard actuarial ultimate loss
projection  techniques to obtain  estimates of  liabilities  for losses and LAE.
These projections  include the extrapolation of both losses paid and incurred by
business line and accident year and implicitly  consider the impact of inflation
and claims  settlement  patterns upon ultimate claim costs based upon historical
patterns.  In addition,  methods based upon average loss costs,  reported  claim
counts and pure  premiums  are  reviewed in order to obtain a range of estimates
for setting the reserve  levels.  For further  input,  changes in  operations in
pertinent areas including underwriting standards, product mix, claims management
and legal climate are periodically  reviewed.  Adjustments to such estimates are
made from time to time due to  changes  in such  trends  as well as  changes  in
actual loss experience. These adjustments are reflected in current earnings. The
liability  for losses and LAE are based on  estimates  and  assumptions  and the
ultimate loss may differ.

                                     - 14 -
<PAGE>

The Company uses the liability  method in providing for income taxes.  Under the
liability  method,  deferred  income taxes are provided at the enacted tax rates
for differences  between the financial  statement carrying amounts and tax bases
of assets and liabilities and for net operating loss carryforwards.  The Company
records a valuation allowance to reduce its deferred taxes to the amount that is
more likely than not to be realized.  If the Company  were to determine  that it
would be able to realize its  deferred tax assets in the future in excess of its
net  recorded  amount,  an  adjustment  would  increase  income in such  period.
Similarly, if the Company were to determine that it would not be able to realize
all or part of its net  deferred  taxes in the future,  an  adjustment  would be
charged to income in such period.

RESULTS OF OPERATIONS

The Company's pre-tax loss was $18.0 million, $17.9 million and $6.3 million for
the years ended December 31, 2001,  2000 and 1999,  respectively.  These amounts
were negatively impacted by adverse reserve development of prior years' reserves
of $18.7  million,  $15.9  million  and $6.0  million  for 2001,  2000 and 1999,
respectively.  The more  significant  trends and  events  that the  Company  has
experienced in recent years,  which  resulted in the  recognition of the adverse
reserve  development,  are  identified  below  following the Company's  combined
ratios.

Net earned premium revenues of the Company were $18.3 million, $30.9 million and
$42.4  million  for  the  years  ended   December  31,  2001,   2000  and  1999,
respectively.  The Company's  earned premiums  declined in all lines of business
during  2001 as a result of  actions  announced  during  late 2000 and the first
quarter of 2001.  During the fourth quarter of 2000, the Group announced that it
would no longer accept any new private passenger automobile  policies.  Existing
policies  of  private  passenger  automobile  insurance  will  be  either  sold,
non-renewed  or  cancelled in  accordance  with New York  insurance  law. If the
private  passenger  automobile book of business is not sold, it is expected that
the Group will continue to issue renewal policies over the next several years as
required by applicable  insurance law. In March 2001, the Group  announced that,
effective immediately, it would no longer issue any new (as compared to renewal)
insurance  policies and that it had filed plans of orderly  withdrawal  with the
New York  Insurance  Department as required.  Commercial  lines policies will be
non-renewed or canceled in accordance with New York insurance law or replaced by
Tower under the 2001 Tower Agreement for the sale of the Group's renewal rights.
Starting in the second quarter of 2001,  Tower  purchased the renewal rights for
substantially all of the Group's remaining lines of business,  excluding private
passenger  automobile and commercial  automobile/garage,  for a fee based on the
direct  written  premium  actually  renewed  by Tower.  The amount of the fee is
expected to be approximately  $0.9 million of which the Company's share would be
$0.3 million.  Existing policies of private passenger  automobile insurance will
be either sold,  non-renewed or cancelled in accordance  with New York insurance
law. If the private  passenger  automobile  book of business is not sold,  it is
expected that the Group will  continue to issue  renewal  policies over the next
several years as required by applicable  insurance  law. The Group will continue
to be responsible for the remaining term of its existing policies and all claims
incurred prior to the expiration of these policies.  After the expiration of its
existing  commercial  lines policies,  the Group will thereafter have no renewal
obligations  for those  policies.  Under New York  insurance  law,  the Group is
obligated to offer renewals of homeowners,  dwelling  fire,  personal  insurance
coverage and personal  umbrella for a three-year  policy  period;  however,  the
Tower Agreement  obligated Tower to offer their own policies as replacements for
the Group's  policies.  Excluding the remaining terms of existing  policies that
the Group intends to either non-renew, cancel or that will be replaced by Tower,
as of December 31,  2001,  the Group's in force  premium  volume  totaled  $11.1
million.  As indicated  above,  these  policies  are  primarily  personal  lines
policies  whose  volume  will  continue  to decline as the Group  exercises  its
non-renewal rights under New York insurance law.

While  earned  premiums  declined  in  almost  all lines of  business,  the most
significant  reductions  in earned  premiums  during 2000 were in assigned  risk
automobile  ($4.4  million) and voluntary  private  passenger  automobile  ($4.4
million). Effective January 1, 2000, all policy renewal obligations for assigned
risk contracts were assigned to another insurance company.  However, the Company
remains  liable for the claim  settlement  costs for  assigned  risk claims that
occurred  during the policy  term.  The decline in voluntary  private  passenger
automobile resulted from tighter underwriting  standards,  increased competition
and the  Company's  decision in 1999 to no longer accept new policies from those
agents  who  historically  have had poor  underwriting  results.  The  Company's
termination  of certain  unprofitable  agents also  adversely  affected  premium
volume in other lines of business.

During  the  remaining  term of the  Company's  policies  that are being sold or
non-renewed  at the  expiration of the policy term, and for other policies which
may have to be renewed under New York insurance  law, the Company's  estimate of
losses for those policies will be based on its  accumulated  loss  experience in
those lines of insurance  as well as industry  trends.  The Company  anticipates
that its accident year loss ratios for certain of these policies,  in particular
private  passenger  automobile,  will  remain  high  reflecting  the  poor  loss
experience  that the Company and the insurance  industry has  experienced in the
past.

                                     - 15 -
<PAGE>

The NAIC has  adopted  model laws  incorporating  the  concept of a "risk  based
capital" ("RBC") requirement for insurance companies. Generally, the RBC formula
is  designed  to measure  the  adequacy  of an  insurer's  statutory  capital in
relation to the risks  inherent in its business.  The RBC formula is used by the
states as an early warning tool to identify weakly capitalized companies for the
purpose of initiating regulatory action. Although New York State has not adopted
the RBC requirements  for property and casualty  insurance  companies,  New York
does require that property and casualty  insurers file the RBC information  with
the Department. The NAIC also has adopted various ratios for insurance companies
which,  in addition to the RBC ratio,  are designed to serve as a tool to assist
state regulators in screening and analyzing the financial condition of insurance
companies  operating  in their  respective  states.  The  Company and Empire had
certain  NAIC  ratios  outside of the  acceptable  range of results for the year
ended December 31, 2001.

During the third quarter of 2001, the Department informed the Company and Empire
of its examination  findings concerning the three-year period ended December 31,
1999. The triennial report was subsequently  filed by the Department in November
2001.  Among other matters,  the  Department's  report  indicated a loss and LAE
reserve  deficiency for the Company and Empire. The Company and Empire responded
to the Department's  examination findings and concluded that based on subsequent
adverse development  recorded by the Company, the Department's reserve estimates
were  within  a  reasonable  actuarial  range  of  acceptable  estimates.  As of
September 30, 2001, the Company's and Empire's reserve levels for losses and LAE
prior to December 31, 1999 were consistent with the Department's findings.

In  addition,  the  triennial  report  noted  that  the  Group's  organizational
structure  causes  Empire's  stand-alone  statutory  surplus  to be reduced by a
statutory  limitation on the carrying value of its investment in the Company and
Centurion.  Empire  submitted  to  the  Department  a  plan  for  remedying  its
stand-alone surplus  deficiency,  including the merger of Centurion into Empire,
which  was  approved  by  the  Department  and  consummated  in  2001.  Empire's
stand-alone  surplus at December 31, 2001 exceeded the minimum statutory surplus
requirement of $3.3 million, by $7.8 million. In the event Empire's  stand-alone
statutory  surplus declines below the minimum in the future, no assurance can be
given that material adverse  regulatory  action will not be taken against Empire
or the Company.

The Company's combined ratios as determined under GAAP and SAP were as follows:

                                            YEARS ENDED DECEMBER 31,
                                            ------------------------
                                       2001            2000              1999
                                       ----            ----              ----
         GAAP                        261.7%          193.1%            139.9%
         SAP                         304.4%          192.3%            145.2%

The Company's  combined ratios  increased in 2001 primarily due to lower premium
volume coupled with  unfavorable  loss development from prior accident years and
an  increase in the  reserve  for LAE as a result of the  increases  to its loss
reserves  and an increase in future  overhead  costs that will be  allocated  to
settle claims  currently  incurred.  The Company's  combined ratios increased in
2000 primarily due to unfavorable  loss reserve  development from prior accident
years, increased LAE for newly outsourced claims and adverse development in LAE.
In addition,  these ratios  increased due to reduced  service fees,  higher 2000
accident  year loss ratios,  higher  severance  costs and overhead  costs which,
although lower, had not declined commensurate with the reduced premium volume.

During 2001,  the Company  recorded  adverse loss reserve  development  of $18.7
million.  During  2001,  the Company  increased  its reserve  estimates  for its
commercial  package  policies  lines of business,  primarily due to increases in
severity of liability  claims for accident years 1998 and prior. The Company has
exposure  for third party  liability  claims in many of its lines of  insurance.
During 2001,  there were several  settlements and court decisions on third party
liability  cases  for  amounts  that  are  greater  than the  industry's  or the
Company's  historical  experience for similar claims, which had formed the basis
for the Company's  estimated  loss reserves.  While many of these  decisions are
being appealed, these results may signal a change in the judicial environment in
the  Company's  marketplace.  Accordingly,  the Company has  increased  its loss
reserve  estimate by $6.9 million due to an  estimated  increase in severity for
these exposures.

Reserve increases in 2001 also resulted from unfavorable development principally
in  automobile  lines of business  for the 1998  through  2000  accident  years,
primarily  relating to PIP coverage and in its  workers'  compensation  lines of
insurance.  The Company  believes that the increased  loss estimates for PIP are
consistent  with recent trends in the industry,  and has increased loss reserves
for all automobile lines by $3.3 million for 2001. In addition, the Company also
increased  its reserve for LAE by $7.0  million as a result of the  increases to
its loss  reserves  and an  increase  in future  overhead  costs  which  will be
allocated to settle claims currently incurred.

                                     - 16 -
<PAGE>

As a result of the  terrorist  attacks on September  11, 2001 at the World Trade
Center,  the Company recorded estimated incurred losses and LAE of $0.8 million,
primarily  relating to business  interruption  coverage.  Due to the recency and
nature of this event, the loss estimate is likely to be revised.

During 2000,  the Company  recorded  adverse loss reserve  development  of $15.9
million,  principally in the 1996 through 1999 accident years.  This development
was attributable to an increase in the severity of PIP claims and an increase in
the frequency of liability claims in the private passenger automobile line ($2.8
million),  an increase in the  frequency of liability  claims in the  commercial
automobile line ($1.9 million), an increase in the frequency and severity of PIP
claims in the assigned risk  automobile  line ($1.4  million) and an increase in
the severity of certain  liability  claims in the  commercial  package  policies
lines of business  ($4.5  million).  The  increases in severity and frequency of
claims in automobile lines of business, particularly with respect to PIP claims,
are consistent with emerging  industry trends in the New York City  marketplace.
In  addition,  the Company  increased  its estimate for LAE by $3.3 million as a
result of the  decision to  outsource  a  significant  amount of claim  handling
functions in 2000. Claim files for workers'  compensation,  automobile  no-fault
and automobile and other liability claims were outsourced at a cost greater than
the reserves previously recorded to handle the claims internally.  The Group had
outsourced  almost  two-thirds of its claims.  The Group was primarily  handling
complex claims,  first party claims and certain automobile liability and general
liability claims internally. Complex claims generally consist of those that have
potentially  large  settlement  exposure and are not expected to settle quickly.
The  Company  had  also  increased  its  reserve  estimate  for  claims  handled
internally.

During  1999,  the Company  recorded  adverse  loss  reserve  development  of $6
million, principally due to an increase in severity of 1998 accident year losses
in the assigned risk  automobile  and  voluntary  private  passenger  automobile
lines,  and 1996  accident  year  losses in certain  classes  of the  commercial
automobile line. As a result, the Company increased its reserves by $2.2 million
for assigned  risk  automobile,  $1.5 million for  voluntary  private  passenger
automobile and $1.4 million for commercial automobile lines.

During the period  between  1984 and 1995,  the  Company  entered  into  certain
retrospectively rated reinsurance contracts covering  substantially all lines of
business, except worker's compensation.  Under these contracts, the Company paid
the  reinsurer  provisional  premiums  that are subject to  adjustment  based on
subsequent loss development. Ceded premiums accrued under these contracts reduce
both net  written  and earned  premiums  during  the  period  the  retrospective
reinsurance  premiums are accrued.  If additional  unfavorable  loss development
emerges in future  periods,  the Company  may be  required to accrue  additional
retrospective  reinsurance  premiums. As a consequence of its reserve increases,
the Company reduced  premiums and pre-tax profits by $2.4 million,  $1.4 million
and $1.4  million  for the  years  ended  December  31,  2001,  2000  and  1999,
respectively,  to  recognize  reinsurance  premiums due for 1995 and prior years
under retrospectively rated reinsurance agreements.

For all lines of property and casualty insurance business, the Company employs a
variety of standard actuarial ultimate loss projection  techniques,  statistical
analyses and case-basis evaluations to estimate its liability for unpaid losses.
The  actuarial  projections  include an  extrapolation  of both  losses paid and
incurred by business line and accident year and  implicitly  consider the impact
of inflation and claims settlement patterns upon ultimate claim costs based upon
historical  patterns.  These estimates are performed  quarterly and consider any
changes  in trends and  actual  loss  experience.  Any  resulting  change in the
estimate of the liability for unpaid losses, including those discussed above, is
reflected in current year earnings  during the quarter the change in estimate is
identified.

The reserving  process relies on the basic assumption that past experience is an
appropriate basis for predicting future events.  The probable effects of current
developments,  trends and other relevant matters are also considered.  Since the
establishment  of loss reserves is affected by many  factors,  some of which are
outside the Company's  control or are affected by future  conditions,  reserving
for property and casualty  claims is a complex and uncertain  process  requiring
the use of informed estimates and judgments.  As additional experience and other
data become  available and are reviewed,  the Company's  estimates and judgments
may be revised.  Any negative  changes in estimates  could be material to future
results of  operations  and result in the surplus of the Company or Empire being
below the minimum required level.

In management's judgment, information currently available has been appropriately
considered in estimating the Company's loss reserves.  The Company will continue
to  evaluate  the  adequacy  of  its  loss   reserves  on  a  quarterly   basis,
incorporating  any future  changes in trends and  actual  loss  experience,  and
record adjustments to its loss reserves as appropriate.

                                     - 17 -
<PAGE>

Net  investment  income  for 2001 was  lower  than  2000 due to a  reduction  in
investments  held as a result of a decrease in premiums  written and the payment
of claims and  operating  expenses as well as a reduction in  investment  yields
resulting from lower  interest  rates and the Company's  decision to shorten the
duration of its investment  portfolio.  The reduction in 2000 was primarily as a
result of lower invested assets due to claim payments and a decrease in premiums
written.  During 2001,  the Company had realized  capital  gains of $1.9 million
primarily  due to the sale of fixed  maturities  to shorten the  duration of the
portfolio.  During 2000, the Company had realized capital losses of $0.2 million
principally due to the sale of fixed maturities to satisfy operating cash needs.

The combination of other underwriting  expenses incurred and the amortization of
deferred policy  acquisition costs reflected a decrease of $5.1 million or 32.0%
in 2001 and  approximately  $3.1 million or 16.4% in 2000.  The decrease in both
2001 and 2000 primarily related to the decline in premium revenue coupled with a
reduction in operating expenses. In addition,  during 2001, the Company expensed
$2.6 million of deferred policy acquisition costs as their  recoverability  from
premiums and related investment income was no longer anticipated.

Due to the uncertainty of future taxable income necessary for realization of the
deferred tax asset,  a valuation  allowance has been provided as of December 31,
2001 and 2000 on the total  amount of the  deferred  tax asset.  Current  income
taxes for 2000 reflect a benefit of $0.4  million for a change in the  Company's
estimated prior year's federal tax liability.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
which is effective for all business  combinations after June 30, 2001, Statement
of  Financial  Accounting  Standards  No. 142,  "Goodwill  and Other  Intangible
Assets"  ("SFAS  142"),  which is  effective  for fiscal years  beginning  after
December 15, 2001,  and  Statement of Financial  Accounting  Standards  No. 143,
"Accounting for Asset Retirement  Obligations"  ("SFAS 143"), which is effective
for fiscal years  beginning after June 15, 2002. In August 2001, the FASB issued
Statement  of  Financial  Accounting  Standards  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets"  ("SFAS 144"),  which is effective
for fiscal years  beginning  after  December 15,  2001.  SFAS 141 requires  that
companies use the purchase  method of accounting  for all business  combinations
initiated  after  June 30,  2001  and  addresses  the  initial  recognition  and
measurement  of  goodwill  and other  intangible  assets  acquired in a business
combination.  SFAS 142  addresses the initial  recognition  and  measurement  of
intangible  assets acquired  outside a business  combination and the recognition
and  measurement  of  goodwill  and  other  intangible   assets   subsequent  to
acquisition.  SFAS 143  requires  recognition  of the fair value of  liabilities
associated with the retirement of long-lived  assets when a legal  obligation to
incur  such  costs  arises  as  a  result  of  the  acquisition,   construction,
development  and/or the normal operation of a long-lived asset. Upon recognition
of the liability,  a corresponding  asset is recorded and  depreciated  over the
remaining  life of the long-lived  asset.  SFAS 144 requires that one accounting
model be used for the  long-lived  assets  to be  disposed  of by sale,  whether
previously  held and used or newly  acquired,  and broadens the  presentation of
discontinued  operations  to include  more  disposal  transactions  and resolves
implementation issues. The Company has reviewed the impact of the implementation
of these  pronouncements,  and does not expect them to have a material effect on
the Company's financial position or results of operations.

IMPACT OF INFLATION

The Company, as well as the property and casualty insurance industry in general,
is affected by inflation.  With respect to losses,  the Company's claim severity
is affected by the impact of inflation on the cost of  automobile  repair parts,
medical  costs  and  lost  wages.  The  costs  of  adjusting  claims  and  other
underwriting  expenses  have also been  affected by  inflationary  pressures  on
salaries and employee  benefits.  The Company  receives rate increases  based in
part upon its  experience  as well as the  industry's  experience.  Accordingly,
premium increases generally follow the rate of inflation.

                                     - 18 -
<PAGE>

CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION

Statements  included  in this  Report  may  contain  forward-looking  statements
pursuant to the  safe-harbor  provisions  of the Private  Securities  Litigation
Reform Act of 1995.  Such  forward-looking  statements  may relate,  but are not
limited,  to  projections  of revenues,  income or loss,  capital  expenditures,
fluctuations  in  insurance  reserves,  plans for growth and future  operations,
competition  and  regulation as well as  assumptions  relating to the foregoing.
Forward-looking  statements are inherently  subject to risks and  uncertainties,
many of which cannot be predicted or quantified.  When used in this Report,  the
words "estimates", "expects", "anticipates",  "believes", "plans", "intends" and
variations  of such words and  similar  expressions  are  intended  to  identify
forward-looking  statements that involve risks and uncertainties.  Future events
and actual results could differ materially from those set forth in, contemplated
by or underlying the  forward-looking  statements.  The factors that could cause
actual results to differ  materially from those suggested by any such statements
include, but are not limited to, those discussed or identified from time to time
in  the  Company's  public  filings,   including  general  economic  and  market
conditions,  changes  in  domestic  laws,  regulations  and  taxes,  changes  in
competition  and  pricing  environments,  regional  or general  changes in asset
valuation,  the occurrence of significant  natural  disasters,  the inability to
reinsure  certain  risks  economically,  the adequacy of loss and LAE  reserves,
prevailing interest rate levels,  weather related conditions that may affect the
Company's  operations,  effectiveness  of the Tower  agreement,  the  ability to
attract and retain key  personnel,  adverse  selection  through  renewals of the
Group's  policies,  regulatory  approval  of the  Group's  proposed  actions  in
response to the findings of the Department,  adverse  regulatory  action against
the  Group,  developments  in  claims  handling,  including  adverse  litigation
developments, that could adversely affect the liquidation plan of the Group, the
Group's ability to manage the claims runoff,  increased loss adjustment expenses
resulting from an extended claims run-off period,  and changes in composition of
the Company's assets and liabilities through acquisitions or divestitures. Undue
reliance  should not be placed on these  forward-looking  statements,  which are
applicable only as of the date hereof.  The Company  undertakes no obligation to
revise  or  update  these  forward-looking   statements  to  reflect  events  or
circumstances  that  arise  after  the date of this  Report  or to  reflect  the
occurrence of unanticipated events.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------    ----------------------------------------------------------

The  following  includes  "forward-looking  statements"  that involve  risks and
uncertainties.  Actual results could differ  materially  from those projected in
the forward-looking statements.

The Company's market risk arises  principally from interest rate risk related to
its investment  portfolio.  The Company does not enter into material  derivative
financial instrument transactions.

The  Company's  investment  portfolio is primarily  classified  as available for
sale,  and  consequently,  is recorded  on the balance  sheet at fair value with
unrealized gains and losses reflected in shareholders'  equity.  Included in the
Company's  investment  portfolio are fixed income  securities,  which  comprised
approximately 95.0% of the Company's total investment  portfolio at December 31,
2001. These fixed income  securities are primarily rated  "investment  grade" or
are U.S. governmental agency issued or guaranteed obligations,  although limited
investments in "non-rated" or rated less than investment  grade  securities have
been made from time to time. The estimated  weighted  average  remaining life of
these fixed income  securities was approximately 0.3 years at December 31, 2001.
The Company's fixed income securities,  like all fixed income  instruments,  are
subject to interest  rate risk and will fall in value if market  interest  rates
increase. At December 31, 2000, fixed income securities comprised  approximately
77.1%  of the  Company's  investment  portfolio  and had an  estimated  weighted
average  remaining  life of 2.2 years.  Expected  maturities  will  differ  from
contractual  maturities  because  the  borrowers  may have the  right to call or
prepay  obligations  with or without call or prepayment  penalties.  The Company
currently  manages the investment  portfolio to maintain  liquidity,  maintain a
high level of quality, comply with applicable insurance industry regulations and
achieve an acceptable rate of return.

                                     - 19 -
<PAGE>

The  following  table  provides  information  about the  Company's  fixed income
securities. The table presents principal cash flows by expected maturity dates.

<TABLE>
<CAPTION>
                                                              EXPECTED MATURITY DATE
                                                              ----------------------

                                            2002     2003      2004      2005      2006      THEREAFTER      TOTAL      FAIR VALUE
                                            ----     ----      ----      ----      ----      ----------      -----      ----------
                                                                   (DOLLARS IN THOUSANDS)

<S>                                      <C>       <C>       <C>        <C>           <C>        <C>        <C>   <C>     <C>
Rate Sensitive Assets:
Available for Sale Fixed
  Income Securities:
U.S. Government                          $94,961   $6,199    $6,192         -         -          $4,495     $111, 847     $111,847
Weighted Average Interest Rate              2.65%    4.94%     4.94%        -         -            7.07%            -            -
Other Fixed Maturities:
Rated Investment Grade                    $5,287   $3,895       $50       $25         -          $1,538     $  10,795     $ 10,795
    Weighted Average Interest Rate          7.20%    7.75%     5.50%     5.50%        -            7.13%            -            -
Held to Maturity Fixed Income
  Securities:
U.S. Government                             $480        -         -         -         -               -          $480         $489
 Weighted Average Interest Rate             6.38%       -         -         -         -               -             -            -
</TABLE>



ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------    -------------------------------------------

Financial  Statements  and  supplementary  data  required by this Item 8 are set
forth at the pages indicated in Item 14(a) below.

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

None.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------  --------------------------------------------------

The  information  to be included  under the caption  "Nominees  for  Election as
Directors"  in the  Company's  definitive  proxy  statement to be filed with the
Commission pursuant to Regulation 14 of the 1934 Act in connection with the 2002
Annual  Meeting of  Shareholders  of the  Company  (the  "Proxy  Statement")  is
incorporated herein by reference.  In addition,  reference is made to Item 10 in
Part I of this Report.

ITEM 11. EXECUTIVE COMPENSATION
-------- ----------------------

The information to be included under the caption "Executive Compensation" in the
Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------- --------------------------------------------------------------

The information to be included under the caption "Security  Ownership of certain
Beneficial Owners" in the Proxy Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------

The  information to be included  under the caption  "Certain  Relationships  and
Related   Transactions"  in  the  Proxy  Statement  is  incorporated  herein  by
reference.

                                     - 20 -
<PAGE>

                                     PART IV

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

(A) FINANCIAL STATEMENTS AND SCHEDULE.

1.   The  following  Financial  Statements  of  Allcity  Insurance  Company  are
     included in Item 8:

     Report  of  Independent  Accountants ................................    F2
     Financial Statements:
     Consolidated Balance Sheets as of December 31, 2001 and 2000 ........    F3
     Consolidated Statements of Operations for the years ended
        December 31, 2001, 2000 and 1999 .................................    F4
     Consolidated Statements of Changes in Shareholders' Equity
        for the years ended December 31, 2001, 2000 and 1999 .............    F5
     Consolidated Statements of Cash Flows for the years ended
        December 31, 2001, 2000 and 1999 .................................    F6
     Notes to Consolidated Financial Statements ..........................    F7
     Financial Statement Schedule:
     Schedule VI - Supplemental Information Concerning
        Property/Casualty Insurance Operations ...........................   F27

2.   The  information for Schedules I, IV and V required to be filed pursuant to
     Regulation  S-X,  Article  7 is  contained  in the  Notes  to  Consolidated
     Financial  Statements  and,  therefore,  these schedules have been omitted.
     Schedule  VI  -  Supplemental   Information  Concerning   Property/Casualty
     Insurance Operations has been included herein. All other required schedules
     are not applicable.


(B) REPORTS ON FORM 8-K.

The Company filed  current  reports on Form 8-K dated March 1, 2001 and December
28, 2001 which set forth  information  under Item 5. "Other  Events" and Item 7.
"Financial Statements and Exhibits."

(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.

    See attached Exhibit Index.

(D) FINANCIAL STATEMENTS REQUIRED BY REGULATION S-X.

    See Item 14(a).


                                     - 21 -
<PAGE>

SIGNATURES
----------

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

                                  ALLCITY INSURANCE COMPANY

April 1, 2002                By:  /s/ Rocco J. Nittoli
                                  -----------------------------------
                                  Rocco J. Nittoli
                                  Director, Chief Operating Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities indicated and on the date set forth above.

/s/ H. E. Scruggs, Jr.                      /s/ Rocco J. Nittoli
------------------------------              ----------------------------------
H. E. Scruggs, Jr.                          Rocco J. Nittoli
Director, President and Chief               Director, Chief Operating Officer
Executive Officer

/s/ Joseph S. Steinberg                     /s/ Martin B. Bernstein
------------------------------              ----------------------------------
Joseph S. Steinberg                         Martin B. Bernstein
Director, Chairman of the Board             Director


/s/ Louis V. Siracusano                     /s/ Harry H. Wise
------------------------------              ----------------------------------
Louis V. Siracusano                         Harry H. Wise
Director                                    Director



/s/ Daniel G. Stewart                       /s/ Thomas E. Mara
------------------------------              ----------------------------------
Daniel G. Stewart                           Thomas E. Mara
Director                                    Director



/s/ Ian M. Cumming                          /s/ James E. Jordan
------------------------------              ----------------------------------
Ian M. Cumming                              James E. Jordan
Director                                    Director



/s/ Lucius Theus                            /s/ Christopher J. Gruttemeyer
------------------------------              ----------------------------------
Lucius Theus                                Christopher J. Gruttemeyer
Director                                    Director, Vice President



/s/ Joseph A. Orlando
------------------------------
Joseph A. Orlando
Director


                                     - 22 -
<PAGE>

EXHIBIT INDEX
-------------


     The following  designated  exhibits,  as indicated  below, are either filed
herewith (if  indicated by an asterisk) or have  heretofore  been filed with the
Securities  and  Exchange  Commission  under the  Securities  Act of 1933 or the
Securities Exchange Act of 1934 and are incorporated herein by reference to such
filings.

   Exhibit Number      Description of Document
   --------------      -----------------------


          3         Corporate charter,  as amended,  and by-laws, as amended, of
                    the Company  (incorporated  by reference to Exhibit 3 of the
                    Company's  Annual  Report  on Form  10-K for the year  ended
                    December 31, 1994).

          10(a)     Pooling Agreement, as amended through March 31, 1992 between
                    Empire and the Company (incorporated by reference to Exhibit
                    10(a)-20  of the  Company's  Form 8  Amendment  No. 1 of its
                    Annual  Report on Form 10-K for the year ended  December 31,
                    1981).

          10(b)     Centurion Agreement, made effective as of August 21, 1987 by
                    and  between   Empire  and  the   Company,   and   Centurion
                    (incorporated by reference to Exhibit 10(e) of the Company's
                    Annual  Report on Form 10-K for the year ended  December 31,
                    1987).



                                     - 23 -
<PAGE>

   Exhibit Number      Description of Document
   --------------      -----------------------


          10(c)     Tax Allocation  Agreement  dated February 28, 1989 among the
                    Company,  PHLCORP,  Inc., Empire,  Centurion,  Empire Livery
                    Services, Inc., Executroll Services Corporation,  and Empall
                    Agency  Incorporated  (incorporated  by reference to Exhibit
                    10(m) of the  Company's  Annual  Report on Form 10-K for the
                    year ended December 31, 1988).


          10(d)     Quota Share  Reinsurance  Agreement between Empire Insurance
                    Company and Centurion  Insurance  Company  (incorporated  by
                    reference to Exhibit 10(i) of the Company's Annual Report on
                    Form 10-K for the year ended December 31, 1997).

          10(e)     Lease agreement dated June 27, 1996 between Empire Insurance
                    Company and Brooklyn  Renaissance Plaza L.L.C., as Landlord,
                    BRPII L.L.C as  sub-landlord  (incorporated  by reference to
                    Exhibit 10(a) of the Company's quarterly report on Form 10-Q
                    for the quarter ended March 31, 1997).

          10(f)     Sublease  agreement  dated  November 9, 2000 between  Empire
                    Insurance Company and The New York City School  Construction
                    Authority (incorporated by reference to Exhibit 10(i) of the
                    Company's  Annual  Report  on Form  10-K for the year  ended
                    December 31, 2000).

          10(g)     Transfer  Agreement  dated  February 28, 2001 between Empire
                    Insurance  Company,  Allcity  Insurance  Company,  Centurion
                    Insurance Company and Tower Risk Management  Corporation and
                    Tower  Insurance  Company  of  New  York   (incorporated  by
                    reference to Exhibit 10(j) of the Company's Annual Report on
                    Form 10-K for the year ended December 31, 2000).

          10(h)     Lease   agreement  dated  October  3,  2001  between  Empire
                    Insurance Company and the Washington Group, LLC.*

          10(i)     Merger  agreement  dated  October  5,  2001  between  Empire
                    Insurance Company and Centurion Insurance Company.*


                                     - 24 -
<PAGE>


ITEM 8.  Financial Statements and Supplementary Data
------   --------------------------------------------
                                                                            PAGE
                                                                            ----
The following financial information is submitted herein:

Report of Independent Accountants                                             F2
Consolidated Balance Sheets as of December 31, 2001 and 2000                  F3
Consolidated Statements of Operations for the years
         ended December 31, 2001, 2000 and 1999                               F4
Consolidated Statements of Changes in Shareholders' Equity
         for the years ended December 31, 2001, 2000 and 1999                 F5
Consolidated Statements of Cash Flows for the years ended
         December 31, 2001, 2000 and 1999                                     F6
Notes to Consolidated Financial Statements                                    F7

Financial Statement Schedule:

Schedule VI- Supplemental  Insurance  Information  Concerning
         Property/Casualty Insurance  Operations for the years
         ended  December 31, 2001,  2000 and 1999                            F27



                                      -F1-
<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders
of Allcity Insurance Company:

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under item 14(a)(1) of this Form 10-K present fairly,  in all material
respects, the financial position of Allcity Insurance Company and its subsidiary
(a substantially  owned subsidiary of Empire Insurance Company which is a wholly
owned  subsidiary  of Leucadia  National  Corporation)  at December 31, 2001 and
2000,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity  with accounting
principles  generally accepted in the United States of America. In addition,  in
our opinion,  the financial  statement  schedule  listed in the index  appearing
under Item 14(a)(1) of this Form 10-K presents fairly, in all material respects,
the  information  set forth  therein when read in  conjunction  with the related
consolidated financial statements.  These financial statements and the financial
statement  schedule are the  responsibility  of the  Company's  management;  our
responsibility  is to express an opinion on these  financial  statements and the
financial  statement  schedule  based on our audits.  We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United  States of America  which  require  that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the financial  statements,  the Company has decided to
limit its operations to paying existing  obligations and accepting only business
that it is  obligated to accept by contract or New York  insurance  law. As also
discussed in Note 1, the Company's  majority  shareholder and primary  reinsurer
through a Pooling  Arrangement,  Empire Insurance Company,  has reported limited
statutory  surplus in its December 31, 2001 statutory  financial  statements and
further  decreases  in its  statutory  surplus may allow the New York  Insurance
Department  the ability to take  material  adverse  regulatory  actions  against
Empire and the Company.


PricewaterhouseCoopers LLP
New York, New York
March 1, 2002



                                      -F2-
<PAGE>
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)

                                                                  DECEMBER 31,
                                                            --------------------
 ASSETS                                                         2001       2000
                                                            --------    -------
  Investments:
   Fixed maturities
        Available for sale (amortized cost of
     $23,872 in 2001 and $118,833 in 2000)                  $ 24,175   $119,029
     Held to maturity (fair value
     of $489 in 2001 and $483 in 2000)                           480        486
   Equity securities available for sale                          429        375
   Short-term                                                 98,467      6,834
   Other invested assets                                       6,088     37,149
                                                            --------    -------
                                        TOTAL INVESTMENTS    129,639    163,873

  Cash                                                            36         77
  Agents' balances, less allowance for
    doubtful accounts ($837 in 2001 and
    $1,770 in 2000)                                            2,873      5,773
  Accrued investment income                                      464      2,329
  Reinsurance balances receivable                            160,713    174,629
  Prepaid reinsurance premiums                                 3,785     17,748
  Deferred policy acquisition costs                             --        3,035
  Other assets                                                 4,730      4,820
                                                            --------    -------
                                       TOTAL ASSETS         $302,240   $372,284
                                                            ========    =======
LIABILITIES
  Unpaid losses                                             $211,254   $239,051
  Unpaid loss adjustment expenses                             32,037     29,455
  Unearned premiums                                            7,215     32,622
  Due to affiliates                                            9,713        649
  Reinsurance balances payable                                   949      1,505
  Other liabilities                                            8,054      8,725
  Surplus note                                                 7,114     16,486
                                                            --------    -------
                                       TOTAL LIABILITIES     276,336    328,493
                                                            --------    -------
SHAREHOLDERS' EQUITY
  Common stock, $1 par value: 7,368,420
    shares authorized; 7,078,625 shares issued
    and outstanding in 2001 and 2000                           7,079      7,079
  Additional paid-in capital                                   9,331      9,331
  Accumulated other comprehensive income                         732        571
  Retained earnings                                            8,762     26,810
                                                            --------    -------
                    TOTAL SHAREHOLDERS' EQUITY                25,904     43,791
                                                            --------    -------
        TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $302,240   $372,284
                                                            ========    =======

See Notes to Consolidated Financial Statements.

                                      -F3-
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except shareand per share amounts)

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                    ---------------------------------------
                                                          2001          2000          1999
                                                    -----------   -----------   -----------

<S>                                                 <C>           <C>           <C>
REVENUES
   Premiums earned                                  $   18,258    $   30,855    $   42,448
   Net investment income                                 9,159        11,443        12,466
   Service fee income                                     --            --           2,032
   Net securities gains/(losses)                         1,870          (213)       (1,668)
   Other income                                            441           218           384
                                                    -----------   -----------   -----------
                                                        29,728        42,303        55,662
                                                    -----------   -----------   -----------
LOSSES AND EXPENSES
   Losses                                               24,575        31,760        33,597
   Loss adjustment expenses                             11,919        12,047         8,941
   Other underwriting expenses, less
     deferrals of $1,783 in 2001, $7,413
     in 2000 and $7,398 in 1999                          5,925         8,009         9,547
   Amortization of deferred policy
     acquisition costs                                   4,818         7,793         9,348
   Interest on surplus note                                538           634           551
                                                    -----------   -----------   -----------
                                                        47,775        60,243        61,984
                                                    -----------   -----------   -----------

LOSS BEFORE FEDERAL INCOME TAXES                       (18,047)      (17,940)       (6,322)

FEDERAL INCOME TAXES
    Current expense/(benefit)                                1          (338)          (49)
    Deferred expense /(benefit)                           --          13,198        (2,542)
                                                    -----------   -----------   -----------
                                                             1        12,860        (2,591)
                                                    -----------   -----------   -----------

             NET LOSS                                 $(18,048)     $(30,800)   $   (3,731)
                                                    ===========   ===========   ===========
Per share data, based on 7,078,625
   average shares outstanding in 2001,
   2000 and 1999

BASIC AND DILUTED LOSS PER SHARE                    $    (2.55)   $    (4.35)   $    (0.53)
                                                    ===========   ===========   ===========
</TABLE>


See Notes to Consolidated Financial Statements.


                                      -F4-
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands)

                                                           SHAREHOLDERS'EQUITY
--------------------------------------------------------------------------------------------------------
                                                                                        ACCUMULATED                TOTAL
                                                                         ADDITIONAL       OTHER                    SHARE-
                                                       COMMON STOCK       PAID-IN      COMPREHENSIVE  RETAINED     HOLDERS'
                                                      SHARES    AMOUNT    CAPITAL      INCOME/(LOSS)  EARNINGS     EQUITY
                                                      ------    ------    -------      -------------  --------     ------
<S>                                                   <C>       <C>        <C>              <C>        <C>        <C>
Balance as of January 1, 1999                         7,079     $7,079     $9,331           $449       $61,341    $78,200
                                                                                                                  --------
Comprehensive Loss:
  Net loss for the year                                                                                 (3,731)    (3,731)
  Unrealized holding losses arising during
  the period (net of deferred tax benefit
     of $1,803)                                                                           (3,349)                  (3,349)
  Less reclassification of net securities
    losses included in net loss (net of
  deferred tax benefit of $321)                                                              596                      596
                                                                                                                  --------
    Comprehensive Loss                                                                                             (6,484)
                                                      ------    ------    -------      -------------  --------     ------
Balance as of December 31, 1999                       7,079      7,079      9,331         (2,304)       57,610     71,716
                                                                                                                  --------
Comprehensive Loss:
  Net loss for the year                                                                                (30,800)   (30,800)
  Unrealized holding gains arising during
  the period (net of deferred tax expense
    of $1,240)                                                                             1,776                    1,776
  Less reclassification of net securities
  losses included in net loss (net of
  deferred tax of $0)                                                                      1,099                    1,099
                                                                                                                  --------
    Comprehensive Loss                                                                                            (27,925)
                                                      ------    ------    -------      -------------  --------     ------
Balance as of December 31, 2000                       7,079      7,079      9,331            571        26,810     43,791
Comprehensive Loss:

  Net loss for the year                                                                                (18,048)   (18,048)
  Unrealized holding gains arising during
  the period (net of deferred tax
  of $0)                                                                                     272                      272
  Less reclassification of net securities
  gains included in net loss (net of
  deferred tax of $0)                                                                       (111)                    (111)
                                                                                                                  --------
    Comprehensive Loss                                                                                            (17,887)
                                                      ------    ------    -------      -------------  --------     ------
  Balance as of December 31, 2001                     7,079     $7,079     $9,331          $ 732        $8,762    $25,904
                                                      ======    ======    =======      =============  ========    =======
</TABLE>

See Notes to Consolidated Financial Statements


                                      -F5-
<PAGE>


<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
                                                            YEARS  ENDED DECEMBER 31,
                                               --------------------------------------------
                                                     2001        2000                1999

<S>                                            <C>          <C>                  <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                       $ (18,048)   $ (30,800)           $  (3,731)
 Adjustments to reconcile net loss
   to net cash used for operating
   activities:
     Provision for deferred tax expense
        (benefit)                                   --         13,198               (2,542)
     Amortization of deferred policy
      acquisition costs                            4,818        7,793                9,348
     Provision for doubtful accounts                (933)         (42)                  (5)
     Net securities (gains)/losses                (1,870)         213                1,668
     Policy acquisition costs incurred
       and deferred                               (1,783)      (7,413)              (7,398)
     Net change in:
       Agents' balances                            3,833          384                3,905
       Reinsurance balances receivable            13,916       55,564               65,801
       Prepaid reinsurance premiums               13,963        4,534               15,409
       Unpaid losses and loss adjustment
         expenses                                (25,215)     (73,430)             (92,296)
       Unearned premiums                         (25,407)      (6,305)             (25,045)
       Due to(from)affiliates                      9,064      (11,327)              15,674
       Reinsurance balances payable                 (556)         788                 (168)
       Other, net                                  2,028        1,755               (2,000)
                                               ----------   -----------         -----------
NET CASH USED FOR OPERATING ACTIVITIES           (26,190)     (45,088)             (21,380)
                                               ----------   -----------         -----------

NET CASH FLOWS FROM INVESTING ACTIVITIES
     Acquisition of fixed maturities             (28,380)     (23,245)            (186,831)
     Net change in other invested assets          31,061       (3,274)              (2,429)
     Proceeds from sale of fixed maturities       33,256       67,560              181,863
     Proceeds from maturities of fixed
       maturities                                 91,755        3,185               15,974
     Net change in short-term investments        (91,633)         295               13,057
                                               ----------   -----------         -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES         36,059       44,521               21,634
                                               ----------   -----------         -----------

NET CASH FLOWS FROM FINANCING ACTIVITIES
      Interest on Surplus Note                    (9,910)        --                    --
                                               ----------   -----------         -----------
NET CASH USED FOR FINANCING ACTIVITIES            (9,910)        --                    --
                                               ----------   -----------         -----------

        NET (DECREASE)/INCREASE IN CASH              (41)        (567)                 254
             Cash at beginning of year                77          644                  390
                                               ----------   -----------         -----------
                     Cash at the end of year    $     36    $      77           $      644
                                               ----------   -----------         -----------

    Cash paid for federal income taxes          $    -      $   1,583           $    2,872
                                               ----------   -----------         -----------
</TABLE>


See Notes to Consolidated Financial Statements.

                                      -F6-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 1-ORGANIZATION

Allcity  Insurance  Company  ("Allcity"  or the  "Company")  is a  property  and
casualty insurer and includes the results of its subsidiary, Empall Agency, Inc.
("Empall"). Empire Insurance Company ("Empire"), a property and casualty insurer
owns approximately 84.6% of the outstanding common shares of the Company. Empire
also owned 100% of the common shares of Centurion Insurance Company which merged
with Empire,  effective December 31, 2001. Empire's common shares are 100% owned
and  controlled,   through   subsidiaries,   by  Leucadia  National  Corporation
("Leucadia").  Additionally,  Leucadia indirectly owns an additional 6.7% of the
outstanding  common shares of the Company.  The Company and Empire are sometimes
hereinafter collectively referred to as the Group.

The property and casualty  insurance  business  written by Empire and Allcity is
subject to a pooling  agreement  under which premiums,  losses,  loss adjustment
expenses and other underwriting expenses, net of reinsurance,  are shared on the
basis of 70% to Empire and 30% to  Allcity.  The pooling  percentages  have been
changed  from time to time and may be changed in the future  subject to New York
Insurance  Department  approval.  Allcity has no  employees  of its own.  Empire
provides  administrative  services and 30% of the related expenses are allocated
to Allcity.

Historically,  the Group  specialized  in commercial  and personal  property and
casualty  insurance  business  primarily in the New York metropolitan  area. The
Group  offered  insurance  products  for  vehicles   (including   medallion  and
radio-controlled livery vehicles), general liability coverage, property coverage
(including  mercantile and  multi-family  residential  real estate) and workers'
compensation  to  commercial  accounts  and  private  passenger  automobile  and
homeowners products to individuals.

During the past several years, the Group experienced poor  underwriting  results
and adverse  reserve  development in all of its lines of business.  During 2001,
the Group explored its options for developing a new business model and strategy.
After evaluating these options, the Group announced in December 2001 that it had
determined  that  it  was  in  the  best  interest  of  its   shareholders   and
policyholders to commence an orderly  liquidation of all of its operations.  The
Group will only accept  business  that it is  obligated to accept by contract or
New York  insurance  law;  it will not engage in any other  business  activities
except  for its claims  runoff  operations.  The  voluntary  liquidation  of its
operations is expected to be substantially complete by 2005.

During the third quarter of 2001, the Department informed the Company and Empire
of its examination  findings concerning the three-year period ended December 31,
1999. The triennial report was subsequently  filed by the Department in November
2001.  Among other matters,  the  Department's  report indicated a loss and loss
adjustment  expenses ("LAE") reserve  deficiency for the Company and Empire. The
Company  and Empire  responded  to the  Department's  examination  findings  and
concluded that based on subsequent adverse development  recorded by the Company,
the Department's  reserve estimates were within a reasonable  actuarial range of
acceptable  estimates.  As of September  30, 2001,  the  Company's  and Empire's
reserve  levels for losses and LAE prior to December  31,  1999 were  consistent
with the Department's findings.

                                      -F7-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 1-ORGANIZATION--CONTINUED

In  addition,  the  triennial  report  noted  that  the  Group's  organizational
structure  causes  Empire's  stand-alone  statutory  surplus  to be reduced by a
statutory  limitation on the carrying value of its investment in the Company and
Centurion.   Empire  submitted  to  the  New  York  Insurance   Department  (the
"Department") a plan for remedying its stand-alone surplus deficiency, including
the merger of Centurion  into Empire,  which was approved by the  Department and
consummated in 2001. Empire's  stand-alone surplus at December 31, 2001 exceeded
the minimum  statutory surplus  requirement of $3,300,000 by $7,771,000.  In the
event Empire's  stand-alone  statutory surplus declines below the minimum in the
future,  no assurance can be given that material adverse  regulatory action will
not be taken against Empire or the Company.

In March 2001, the Group had announced that, effective immediately,  it would no
longer issue any new (as compared to renewal) insurance policies in any lines of
business and that it had filed plans of orderly  withdrawal  with the Department
as required.  Commercial  lines  policies are being  non-renewed  or canceled in
accordance with New York insurance law or replaced by Tower Insurance Company of
New  York or  Tower  Risk  Management  (collectively,  "Tower")  under  the 2001
agreement for the sale of the Group's  renewal  rights (the "Tower  Agreement").
Starting in the second quarter of 2001,  Tower  purchased the renewal rights for
substantially all of the Group's remaining lines of business,  excluding private
passenger  automobile and commercial  automobile/garage,  for a fee based on the
direct  written  premiusm  actually  renewed by Tower.  The amount of the fee is
expected to be  approximately  $900,000,  of which the Company's  share would be
$270,000.  Existing policies of private passenger  automobile  insurance will be
either sold, non-renewed or cancelled in accordance with New York insurance law.
If the private passenger automobile book of business is not sold, it is expected
that the Group will  continue to issue  renewal  policies  over the next several
years as required by  applicable  insurance  law. The Group will  continue to be
responsible  for the  remaining  term of its  existing  policies  and all claims
incurred prior to the expiration of these policies.  After the expiration of its
existing  commercial  lines policies,  the Group will thereafter have no renewal
obligations  for those  policies.  Under New York  insurance  law,  the Group is
obligated to offer renewals of homeowners,  dwelling  fire,  personal  insurance
coverage and personal  umbrella for a three-year  policy  period;  however,  the
Tower Agreement  obligates Tower to offer their own policies as replacements for
the Group's  policies.  Excluding the remaining terms of existing  policies that
the Group intends to either non-renew, cancel or that will be replaced by Tower,
as  of  December  31,  2001,   the  Group's  in  force  premium  volume  totaled
$11,100,000.  As indicated  above,  these policies are primarily  personal lines
policies  whose  volume  will  continue  to decline as the Group  exercises  its
non-renewal rights under New York insurance law.

                                      -F8-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 1-ORGANIZATION--CONTINUED

The National Association of Insurance  Commissioners  ("NAIC") has adopted model
laws incorporating the concept of a "risk based capital" ("RBC") requirement for
insurance  companies.  Generally,  the RBC  formula is  designed  to measure the
adequacy of an insurer's  statutory capital in relation to the risks inherent in
its business.  The RBC formula is used by the states as an early warning tool to
identify weakly capitalized  companies for the purpose of initiating  regulatory
action.  Although  New York  State  has not  adopted  the RBC  requirements  for
property and casualty insurance  companies,  New York does require that property
and casualty  insurers file the RBC information  with the  Department.  The NAIC
also has adopted  various ratios for insurance  companies  which, in addition to
the RBC ratio,  are  designed to serve as a tool to assist state  regulators  in
screening and analyzing the financial condition of insurance companies operating
in their  respective  states.  The Company  and Empire had  certain  NAIC ratios
outside of the acceptable range of results for the year ended December 31, 2001.

The Company and Empire are  licensed to transact  insurance  in the State of New
York with Empire  being  additionally  licensed in  Connecticut,  Massachusetts,
Missouri, New Hampshire and New Jersey.

The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned subsidiary, Empall.

NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Critical  Accounting  Policies  and  Estimates:  The  preparation  of  financial
----------------------------------------------
statements in conformity with generally accepted accounting  principles ("GAAP")
requires the Company to make estimates and assumptions  that affect the reported
amounts in the financial  statements and  disclosures  of contingent  assets and
liabilities.  On an ongoing basis, the Company  evaluates all of these estimates
and assumptions. Actual results could differ from those estimates.

Liabilities  for unpaid  losses,  which are not  discounted  (except for certain
workers'  compensation  liabilities),  and LAE are determined  using  case-basis
evaluations,  statistical  analyses  for losses  incurred  but not  reported and
estimates for salvage and subrogation recoverable and represent estimates of the
ultimate  claim  costs of all  unpaid  losses  and LAE.  Liabilities  include  a
provision  for losses that have occurred but have not yet been  reported.  These
estimates  are  subject to the  effect of trends in future  claim  severity  and
frequency  experience.  The Company relies upon standard actuarial ultimate loss
projection  techniques to obtain  estimates of  liabilities  for losses and LAE.
These projections  include the extrapolation of both losses paid and incurred by
business line and accident year and implicitly  consider the impact of inflation
and claims  settlement  patterns upon ultimate claim costs based upon historical
patterns.  In addition,  methods based upon average loss costs,  reported  claim
counts and pure  premiums  are  reviewed in order to obtain a range of estimates
for setting the reserve  levels.  For further  input,  changes in  operations in
pertinent areas including underwriting standards, product mix, claims management
and legal climate are periodically  reviewed.  Adjustments to such estimates are
made from time to time due to  changes  in such  trends  as well as  changes  in
actual loss experience. These adjustments are reflected in current earnings. The
liability  for losses and LAE are based on  estimates  and  assumptions  and the
ultimate loss may differ.

                                      -F9-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED

The Company uses the liability  method in providing for income taxes.  Under the
liability  method,  deferred  income taxes are provided at the enacted tax rates
for differences  between the financial  statement carrying amounts and tax bases
of assets and liabilities and for net operating loss carryforwards.  The Company
records a valuation allowance to reduce its deferred taxes to the amount that is
more likely than not to be realized.  If the Company  were to determine  that it
would be able to realize its  deferred tax assets in the future in excess of its
net  recorded  amount,  an  adjustment  would  increase  income in such  period.
Similarly, if the Company were to determine that it would not be able to realize
all or part of its net  deferred  taxes in the future,  an  adjustment  would be
charged to income in such period.

Investments:   At  acquisition,   marketable  debt  and  equity  securities  are
-----------
designated as either (i) "held to maturity" and carried at amortized  cost, (ii)
"trading" and carried at estimated fair value with differences  between cost and
estimated fair value reflected in results of operations or (iii)  "available for
sale" and carried at estimated  fair value,  with  differences  between cost and
estimated fair value being  reflected as a separate  component of  shareholders'
equity,  net of taxes.  Other invested  assets,  which are designated as trading
securities,  represent an investment  in a limited  partnership  which  invested
principally  in  convertible   preferred  stocks,   convertible  long-term  debt
securities, limited partnerships, and common stocks sold, but not yet purchased.
At December  31,  2001,  all of the  underlying  securities  held by the limited
partnership  were  liquidated  and a  substantial  portion of the proceeds  were
distributed to the Company and reinvested in short-term fixed income securities.
The undistributed  proceeds held by the limited partnership at December 31, 2001
were  invested  in  short-term  investments  and  cash  equivalents.  Short-term
investments are carried at cost which  approximates  fair value.  Estimated fair
values are principally based on quoted market prices.

At December 31, 2001 and 2000,  investments in fixed  maturities on deposit with
the  Department,  which  the  Company  has the  intent  and  ability  to hold to
maturity, are classified as "Investments held to maturity".

Investment income is reported when earned. Net securities gains or losses on the
sales  of  investments  are  determined  on  a  specific  identification  basis.
Investments  with an impairment in value  considered to be other than  temporary
are written down to estimated net realizable values.

Unearned Premiums:  Unearned premiums have been calculated  predominantly  using
-----------------
the daily pro rata method.

Reinsurance: Unpaid losses, unpaid LAE and unearned premiums are stated gross of
-----------
reinsurance  ceded.  Premiums  written  and  earned,  losses  and LAE  paid  and
incurred, and other underwriting expenses are stated net of reinsurance ceded.

Pension Cost:  Empire funds  actuarially  determined  pension costs as currently
------------
accrued; 30% of such pension costs are allocated to the Company.

                                     -F10-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED

Policy  Acquisition   Costs:   Policy  acquisition  costs,  which  consisted  of
---------------------------
commissions,  premium  taxes and certain  other  underwriting  expenses  (net of
reinsurance  allowances),  were deferred and amortized ratably over the terms of
the related  policies.  Deferred policy  acquisition costs were limited to their
net realizable  value after  consideration  of investment  income on the related
premium.  If  recoverability  of such costs from  future  premiums  and  related
investment  income was not anticipated,  the amounts not considered  recoverable
were charged to  operations.  During 2001,  the Company  expensed  $2,600,000 of
deferred  policy  acquisition  costs as their  recoverability  from premiums and
related investment income was no longer anticipated.

Participating  Policies:  Participating  business on workers' compensation lines
-----------------------
constitutes  approximately  1.4% of the Company's  net premiums  written for the
year  ended  December  31,  2001.  Amounts   transferred  to  the  participating
policyholders'  funds are determined by means of specific  identification  based
upon premium volume and loss  experience.  The amount of dividends to be paid to
participating policyholders is approved quarterly by the Board of Directors. The
amount of policyholders'  dividends paid on participating  policies was $35,000,
$59,000 and $133,000 in 2001, 2000 and 1999  respectively.  Unpaid  dividends to
participating  policyholders  are  included as a liability  in the  consolidated
balance sheets.

Servicing Arrangements:  Service fee income from assigned risk business acquired
----------------------
through  contractual  arrangements with other insurance companies was recognized
as  revenue  and  earned  over the life of the  covered  policies  on a  monthly
pro-rata method.

Service  fee income for the  administrative  services,  including  underwriting,
policy issuance,  premium  collection and claims  services,  provided to the New
York  Public  Auto Pool (the  "NYPAP")  was  recorded  as a  reduction  to other
underwriting  and loss  adjustment  expenses and was earned over the life of the
policies  issued.  The premiums and losses processed by the Company on behalf of
the NYPAP, which are not reflected in the consolidated  financial statements for
the years ended December 31, are as follows (in thousands):

                                       2001       2000        1999
                                     -------    -------    --------
Premiums Earned                      $    -     $    -     $     -
Losses Incurred                      (1,127)       231     (12,972)
Unpaid Losses                        13,534     21,781      32,250

The premiums, losses and expenses of the business for which the Company provides
administrative  services are  reflected  on the  financial  statements  of those
insurance companies, including the Company, in New York State which are required
to participate in the NYPAP. In its role as a servicing carrier,  the Company is
liable  only for the LAE which are  incurred  to adjust  and  settle  the claims
processed on behalf of the NYPAP.  Liabilities for this LAE are determined using
case basis evaluations and statistical analyses.

Earnings Per Share: Earnings per share ("EPS") are based on the weighted average
------------------
number of common  shares  outstanding.  There were no  outstanding  common stock
equivalents during 2001, 2000 and 1999 and therefore,  basic and diluted EPS are
the same.

                                     -F11-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED


New  Pronouncements:  In June 2001,  the Financial  Accounting  Standards  Board
-------------------
("FASB") issued Statement of Financial  Accounting  Standards No. 141, "Business
Combinations"  ("SFAS 141"),  which is effective  for all business  combinations
after June 30,  2001,  Statement  of  Financial  Accounting  Standards  No. 142,
"Goodwill and Other  Intangible  Assets"  ("SFAS  142"),  which is effective for
fiscal years  beginning  after  December 15,  2001,  and  Statement of Financial
Accounting  Standards No. 143,  "Accounting  for Asset  Retirement  Obligations"
("SFAS 143"), which is effective for fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued Statement of Financial  Accounting Standards No.
144,  "Accounting  for the  Impairment or Disposal of Long-Lived  Assets" ("SFAS
144"),  which is effective for fiscal years  beginning  after December 15, 2001.
SFAS 141 requires that  companies use the purchase  method of accounting for all
business  combinations  initiated  after June 30, 2001 and addresses the initial
recognition and measurement of goodwill and other intangible  assets acquired in
a  business  combination.   SFAS  142  addresses  the  initial  recognition  and
measurement of intangible assets acquired outside a business combination and the
recognition and measurement of goodwill and other intangible  assets  subsequent
to acquisition.  SFAS 143 requires  recognition of the fair value of liabilities
associated  with the retirement of long lived assets when a legal  obligation to
incur  such  costs  arises  as  a  result  of  the  acquisition,   construction,
development  and/or the normal operation of a long-lived asset. Upon recognition
of the liability,  a corresponding  asset is recorded and  depreciated  over the
remaining  life of the long-lived  asset.  SFAS 144 requires that one accounting
model be used for the  long-lived  assets  to be  disposed  of by sale,  whether
previously  held and used or newly  acquired,  and broadens the  presentation of
discontinued  operations  to include  more  disposal  transactions  and resolves
implementation issues. The Company has reviewed the impact of the implementation
of these  pronouncements,  and does not expect them to have a material effect on
the Company's financial position or results of operations.


NOTE 3-SURPLUS NOTE

Effective  January 1, 1980,  the Company  issued a surplus note to Empire in the
principal  amount of  $7,000,000.  Accrued but unpaid  interest of $114,000  and
$9,486,000  as of December 31, 2001 and 2000,  respectively,  is included in the
balance  due under the surplus  note.  The surplus  note  provides,  among other
things,  for  interest  to be  accrued on the  principal  of the note based on a
bank's  prime  rate at the end of the  current  calendar  quarter.  Neither  the
principal  amount of the surplus note nor the accrued  interest may be paid,  in
whole or in part,  without the consent of the Superintendent of Insurance of the
State of New York  ("Superintendent")  and must be repaid,  in whole or in part,
when so ordered by the  Superintendent.  During  2001,  with the approval of the
Superintendent,  the Company paid Empire  $9,910,000  of interest  that had been
accrued on the surplus note through September 30, 2001.

                                     -F12-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS---CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 4-INVESTMENTS


Investment income by source is summarized as follows:

                                           YEARS ENDED DECEMBER 31,
                                         --------------------------
                                           2001      2000     1999
                                           ----      ----     ----
                                               (In thousands)
Investment income:
    Fixed maturities                     $3,666   $ 8,077  $ 9,214
    Other invested assets                 3,440     3,273    2,430
    Short-term investments                2,255       329    1,025
                                         -------  -------- --------
                                          9,361    11,679   12,669
         Less: Investment expenses          202       236      203
                                         -------  -------- --------
                  NET INVESTMENT INCOME  $9,159   $11,443  $12,466
                                         =======  ======== ========

Investments at December 31, 2001 are summarized as follows:

                                                  GROSS UNREALIZED  ESTIMATED
                                                  ----------------
                                         AMORTIZED  APPRE-  DEPRE-     FAIR
                                          COST    CIATION CIATION     VALUE
                                       ---------   ------   ------  ---------
                                                   (In thousands)
Available for sale:
U.S. Treasury securities
  and obligations of U.S.
  government agencies                   $12,349   $   41 $     -   $  12,390
Mortgage-backed
  securities                              4,338      157       -       4,495
Foreign governments                          75        -       -          75
All other corporate bonds                 7,110      105       -       7,215
                                       ---------   ------   ------  ---------
Total fixed maturities                   23,872      303       -      24,175
                                       ---------   ------   ------  ---------
Equity securities                          -         429       -         429
                                       ---------   ------   ------  ---------
      TOTAL INVESTMENTS
      AVAILABLE FOR SALE                 23,872      732       -      24,604
                                       ---------   ------   ------  ---------
Held to maturity:
U.S. Treasury securities                    480        9       -         489
                                       ---------   ------   ------  ---------
      TOTAL INVESTMENTS
      HELD TO MATURITY                      480        9       -         489
                                       ---------   ------   ------  ---------
Short-term                               98,467      -         -      98,467
Other invested assets                     6,088      -         -       6,088
                                       ---------   ------   ------  ---------
      TOTAL INVESTMENTS                $128,907    $ 741    $  -    $129,648
                                       =========   ======   ======  =========



                                     -F13-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 4-INVESTMENTS-CONTINUED


Investments at December 31, 2000 are summarized as follows:
                                                  GROSS UNREALIZED  ESTIMATED
                                                  ----------------
                                         AMORTIZED  APPRE-  DEPRE-     FAIR
                                          COST    CIATION  CIATION    VALUE
                                       ---------   ------   ------  ---------
                                                   (In thousands)
Available for sale:
U.S. Treasury securities
  and obligations of U.S.
  government agencies                   $69,432    $ 142   $ 268    $ 69,306
Mortgage-backed
  securities                              9,310       66       3       9,373
Foreign governments                       3,696       66      -        3,762
All other corporate bonds                36,395      370     177      36,588
                                       ---------   ------   ------  ---------
Total fixed maturities                  118,833      644     448     119,029
                                       ---------   ------   ------  ---------
Equity securities                          -         375      -          375
                                       ---------   ------   ------  ---------
      TOTAL INVESTMENTS
      AVAILABLE FOR SALE                118,833    1,019     448     119,404
                                       ---------   ------   ------  ---------
Held to maturity:
U.S. Treasury securities                    486      -        3          483
                                       ---------   ------   ------  ---------
      TOTAL INVESTMENTS
      HELD TO MATURITY                      486      -        3          483
                                       ---------   ------   ------  ---------
Short-term                                6,834      -        -        6,834
Other invested assets                    37,149      -        -       37,149
                                       ---------   ------   ------  ---------
      TOTAL INVESTMENTS                $163,302   $1,019    $451   $163,870
                                       =========   ======   ======  =========


The amortized  cost and  estimated  fair values of fixed  maturities  (including
short-term securities) at December 31, 2001 are shown as follows (in thousands):

                                          AMORTIZED      FAIR
                                             COST        VALUE
                                          ---------    ---------
Investments available for sale:
Due in one year or less                   $100,236     $100,248
Due after one year through five years       16,245       16,361
Due after five years through ten years          -            -
Thereafter                                   1,520        1,538
                                          ---------    ---------
              Sub total                    118,001      118,147
Mortgage-backed securities                   4,338        4,495
                                          ---------    ---------
              Sub total                    122,339      122,642
Investments held to maturity:
Due after one year through five years          480          489
                                          ---------    ---------
                               TOTAL      $122,819     $123,131
                                          =========    =========


Expected  maturities will differ from contractual  maturities  because borrowers
may have  the  right  to call or  prepay  obligations  with or  without  call or
prepayment penalties.

The Company sold  certain  fixed  maturities  classified  as available  for sale
during  2001,  2000  and  1999  and  realized  gross  pre-tax  capital  gains of
$1,891,000,  $661,000 and  $148,000,  respectively,  and gross  pre-tax  capital
losses of $21,000, $874,000 and $1,820,000, respectively.

                                     -F14-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 4-INVESTMENTS-CONTINUED

The changes in unrealized  appreciation/(depreciation)  on investments available
for sale were $161,000 and $4,115,000  before taxes for the years ended December
31, 2001 and 2000, respectively.

As of  December  31,  2001  and  2000,  a  security  with an  amortized  cost of
approximately  $480,000  and  $486,000  respectively,  was on  deposit  with the
Department.

NOTE 5-STATUTORY INFORMATION

The  following  is a  reconciliation  of net loss and  surplus as  reported on a
statutory  basis ("SAP") to net loss and  shareholders'  equity as determined in
conformity with GAAP (in thousands):

                                                    YEARS ENDED DECEMBER 31,
                                                 -----------------------------
                                                   2001       2000      1999
                                                --------   --------   -------
Statutory net loss                             $(25,171)  $(16,694)  $(4,174)
Add (deduct):
  Change in deferred policy acquisition
    costs                                        (3,035)      (380)   (1,950)
  Change in allowances for doubtful
    accounts                                      1,200         42         5
  Policyholders' dividends                           30         36       234
  Sublease real estate commission                   487        416         -
  Capitalized systems development costs          (1,100)      (696)      582
  Other postretirement benefits                     (46)       (41)      253
  Current tax benefit (expense)                      (1)       338      (688)
  Deferred tax (expense) benefit                     -     (13,198)    2,542
  Interest on surplus note                        9,372       (634)     (551)
  Other                                             216         11        16
                                                --------   --------   -------
                           GAAP                $(18,048)  $(30,800)  $(3,731)
                                                ========   ========   =======



                                                             DECEMBER 31,
                                                     --------------------------
                                                        2001             2000
                                                       ------           ------
Statutory Shareholders' Equity and Surplus           $ 29,013          $53,707
 Add (deduct):
  Deferred policy acquisition costs                        -             3,035
  Non-admitted premiums receiavble,
    less allowance for doubtful accounts                  588              250
  Sublease real estate commission                         903              416
  Capitalized systems development costs                   825            1,926
  Provision for unauthorized reinsurance                  110              110
  Policyholders' dividends                                 -               (30)
  Other postretirement benefits                           (91)             (45)
  Net unrealized appreciation on investments              303              196
  Surplus note                                         (7,114)         (16,486)
  Other non-admitted assets                             1,367              712
                                                       ------           ------
                           GAAP                       $25,904          $43,791
                                                       ======           ======


                                     -F15-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 5-STATUTORY INFORMATION--CONTINUED

The Company has paid no dividends on its common shares since 1975.  The New York
Insurance Law prohibits New York domiciled  property and casualty companies from
paying  dividends  except out of earned  surplus.  Without  the  approval of the
Department,  no New York  domestic  property/casualty  insurer  may  declare  or
distribute  any dividend to  shareholders  which,  together  with any  dividends
declared or  distributed by it during the preceding  twelve months,  exceeds the
lesser of (1) 10% of  statutory  surplus to  policyholders  as shown in its last
statutory annual statement or (2) 100% of adjusted net investment  income during
such period. Based on the above criteria,  at December 31, 2001,  $2,201,000 was
available for distribution of dividends.

In 1998 the NAIC adopted the  Codification  of Statutory  Accounting  Principles
("Codification"), which replaces the current Accounting Practices and Procedures
manual as the NAIC's primary  guidance on statutory  accounting as of January 1,
2001. The Codification  provides  guidance for areas where statutory  accounting
has been silent and changes  current  statutory  accounting  in some areas.  The
Department adopted the Codification guidance (Regulation 172), effective January
1, 2001, but did not adopt several key  provisions of the guidance.  The Company
recorded a reduction to surplus of $267,000  representing the cumulative  effect
of adoption of the Codification  guidance in its statutory financial  statements
for the quarter ended March 31, 2001 filed with the Department.

The NAIC has  adopted  model laws  incorporating  the  concept of a "risk  based
capital" ("RBC") requirement for insurance companies. Generally, the RBC formula
is  designed  to measure  the  adequacy  of an  insurer's  statutory  capital in
relation to the risks  inherent in its business.  The RBC formula is used by the
states as an early warning tool to identify weakly capitalized companies for the
purpose of initiating regulatory action. Although New York State has not adopted
the RBC requirements  for property and casualty  insurance  companies,  New York
does require that property and casualty  insurers file the RBC information  with
the Department. The NAIC also has adopted various ratios for insurance companies
which,  in addition to the RBC ratio,  are designed to serve as a tool to assist
state regulators in screening and analyzing the financial condition of insurance
companies  operating  in their  respective  states.  The  Company and Empire had
certain  NAIC  ratios  outside of the  acceptable  range of results for the year
ended December 31, 2001.

For additional  information  on the  Department's  triennial  examination of the
Company's statutory-basis financial statements as of December 31, 1999, See Note
1.

                                     -F16-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 6-AGENTS' BALANCES

Activity  affecting  the allowance for  uncollectible  agents'  balances for the
years  ended  December  31,  2001,  2000 and 1999 is  summarized  as follows (in
thousands):


           Balance at January 1, 1999                 $1,817
           Provision                                   1,130
           Charge-offs, net of recoveries             (1,135)
                                                       -----
           Balance at December 31, 1999                1,812
           Provision                                     386
           Charge-offs, net of recoveries               (428)
                                                       -----
           Balance at December 31, 2000                1,770
              Provision                                 (516)
              Charge-offs, net of recoveries            (417)
                                                       -----
              Balance at December 31, 2001            $  837
                                                       =====


NOTE 7-UNPAID LOSSES AND LAE


In the following  table, the liability for losses and LAE are reconciled for the
three years ended December 31, 2001, 2000 and 1999. Included therein are current
year data and prior year development.

              RECONCILIATION OF LIABILITY FOR LOSSES AND LAE
                                             2001        2000        1999
                                          -------     -------     -------
                                                   (In thousands)
Net SAP liability for losses and LAE,
 net of reinsurance, at beginning of year $95,587    $113,602    $139,771

Provision for losses and LAE for claims
 occurring in the current year             17,747      27,880      36,524
Increase in estimated losses and LAE
 for claims occurring in prior years       18,747      15,927       6,014
                                          -------     -------     -------
Total incurred losses and LAE              36,494      43,807      42,538
                                          -------     -------     -------
Loss and LAE payments for claims
  occurring during:
    Current year                            5,703       8,920      12,382
    Prior years                            42,207      52,902      56,325
                                          -------     -------     -------
                                           47,910      61,822      68,707
                                          -------     -------     -------

Net SAP liability for losses and LAE,
 at end of year                            84,171      95,587     113,602

Reinsurance recoverable                   159,120     172,919     228,334
                                          -------     -------     -------
Liability for losses and LAE
  at end of year as reported in
  financial statements (GAAP)            $243,291    $268,506    $341,936
                                          =======     =======     =======


                                     -F17-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 7-UNPAID LOSSES AND LAE-CONTINUED

During  2001,  the  Company  recorded   adverse  loss  reserve   development  of
$18,747,000.  During 2001, the Company  increased its reserve  estimates for its
commercial  package  policies  lines of business,  primarily due to increases in
severity of liability  claims for accident years 1998 and prior. The Company has
exposure  for third party  liability  claims in many of its lines of  insurance.
During 2001,  there were several  settlements and court decisions on third party
liability  cases  for  amounts  that  are  greater  than the  industry's  or the
Company's  historical  experience for similar claims, which had formed the basis
for the Company's  estimated  loss reserves.  While many of these  decisions are
being appealed, these results may signal a change in the judicial environment in
the  Company's  marketplace.  Accordingly,  the Company has  increased  its loss
reserve  estimate by  $6,900,000  due to an  estimated  increase in severity for
these exposures.

Reserve increases in 2001 also resulted from unfavorable development principally
in  automobile  lines of business  for the 1998  through  2000  accident  years,
primarily  relating to personal injury  protection  coverage  ("PIP") and in its
workers'  compensation  lines  of  insurance.  The  Company  believes  that  the
increased  loss  estimates  for PIP are  consistent  with  recent  trends in the
industry, and has increased loss reserves for all automobile lines by $3,300,000
for 2001.  In  addition,  the  Company  also  increased  its  reserve for LAE by
$7,000,000  as a result of the increases to its loss reserves and an increase in
future  overhead  costs  which  will be  allocated  to settle  claims  currently
incurred.

As a result of the  terrorist  attacks on September  11, 2001 at the World Trade
Center,  the Company  recorded  estimated  incurred  losses and LAE of $800,000,
primarily  relating to business  interruption  coverage.  Due to the recency and
nature of this event, the loss estimate is likely to be revised.

During  2000,  the  Company  recorded   adverse  loss  reserve   development  of
$15,927,000,   principally  in  the  1996  through  1999  accident  years.  This
development was attributable to an increase in the severity of PIP claims and an
increase  in  the  frequency  of  liability  claims  in  the  private  passenger
automobile line  ($2,800,000),  an increase in the frequency of liability claims
in the commercial automobile line ($1,900,000), an increase in the frequency and
severity of PIP claims in the assigned risk automobile line  ($1,400,000) and an
increase in the severity of certain  liability claims in the commercial  package
policies lines of business ($4,500,000). The increases in severity and frequency
of claims in  automobile  lines of  business,  particularly  with respect to PIP
claims,  are  consistent  with  emerging  industry  trends  in the New York City
marketplace.  In  addition,  the  Company  increased  its  estimate  for  LAE by
$3,300,000  as a result of the  decision to  outsource a  significant  amount of
claim  handling  functions  in 2000.  Claim  files  for  workers'  compensation,
automobile no-fault and automobile and other liability claims were outsourced at
a cost  greater  than the  reserves  previously  recorded  to handle  the claims
internally.  The Group had outsourced almost two-thirds of its claims. The Group
was primarily handling complex claims, first party claims and certain automobile
liability and general  liability  claims  internally.  Complex claims  generally
consist of those that have  potentially  large  settlement  exposure and are not
expected to settle quickly.  The Company had also increased its reserve estimate
for claims handled internally.

                                     -F18-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 7-UNPAID LOSSES AND LAE-CONTINUED

During  1999,  the  Company  recorded   adverse  loss  reserve   development  of
$6,014,000,  principally  due to an increase in severity of 1998  accident  year
losses  in  the  assigned  risk  automobile  and  voluntary   private  passenger
automobile  lines,  and 1996  accident  year  losses in  certain  classes of the
commercial  automobile line. As a result,  the Company increased its reserves by
$2,200,000  for assigned  risk  automobile,  $1,500,000  for  voluntary  private
passenger automobile and $1,400,000 for commercial automobile lines.

The Company has purchased  annuities with various life insurance companies for a
number of settled claims. The claimants have been designated as payees; however,
the  Company  has a  contingent  liability  of  approximately  $6,800,000  which
represents the aggregate amount of settlements with the claimants,  in the event
of the failure of the various life insurance companies to perform.

NOTE 8-REINSURANCE

The Group has obtained  reinsurance  coverage to reduce its risk of and exposure
to large insurance  claims and  catastrophes.  For all three years,  the Group's
maximum  retained  limit for all lines of business was $300,000 per  occurrence.
Additionally,  the Group  entered  into a  property  catastrophe  excess of loss
treaty to protect against  certain  losses.  Its retention of lower level losses
under  this  treaty  was  $7,500,000  for each of the  three  years.  Due to the
geographic  concentration  of  its  business,  the  Group  believes  hurricanes,
windstorms  and  civil  disturbances  are  its  most  significant  exposures  to
catastrophic   losses.   Computer  modeling  programs  provided  by  independent
consultants are used to estimate  exposure to such losses.  Due to the runoff of
the Group's business and resulting  reduced loss exposure,  the Group terminated
its property  catastrophe  excess of loss coverage effective January 1, 2002. In
November 2001, the Group received  notification  of cancellation of its multiple
line reinsurance  contract  effective January 1, 2002. The cancellation  affects
only personal  lines  policies  renewed on or after  January 1, 2002,  and would
impact the Group for losses only on policies that provided coverage in excess of
its  retained   reinsurance  limit  of  $300,000.   Currently,   the  Group  has
approximately  300  policies in force (which may include  multiple  insureds and
vehicles)  that  provide  such  coverage up to a maximum  loss of  $500,000  per
occurrence.  Under the pooling agreement, 70% of such losses would be assumed by
Empire and 30% would be retained by the Company.  After reviewing its options of
finding comparable  reinsurance  coverage,  the Group has decided not to replace
this coverage.

Although  reinsurance  does not legally  discharge  an insurer  from its primary
liability for the full amount of the policy liability, it does make the assuming
reinsurer  liable to the  insurer to the extent of the  reinsurance  ceded.  The
Company's  reinsurance,  excluding the pooling agreement with Empire,  generally
has been placed with  certain of the largest  reinsurance  companies,  including
(with their respective A.M Best & Co. ratings) General  Reinsurance  Corporation
(A++)  and  Zurich  Reinsurance  (NA),  Inc.  (A+).  The  Company  believes  its
reinsurers to be financially  capable of meeting their  respective  obligations.
However,  to the  extent  that any  reinsuring  company  is  unable  to meet its
obligations,  the Company would be liable for the reinsured  risks.  The Company
has  established  reserves,  which the Company  believes are  adequate,  for any
nonrecoverable reinsurance.

                                     -F19-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 8-REINSURANCE-CONTINUED

Effective  January  1,  1997  Empire  entered  into a  quota  share  reinsurance
agreement with its subsidiary,  Centurion. Under this agreement,  Empire assumed
50% up to July 1, 1997 and 75% thereafter of the effective  period  premiums and
losses of Centurion and granted Centurion a ceding commission. Under the pooling
agreement, 70% of such business assumed was retained by Empire and 30% was ceded
to the Company.  This quota share reinsurance agreement was terminated effective
December 31, 2001 following the merger of Empire and Centurion.

Pursuant to the pooling agreement, the Company has a net reinsurance recoverable
from Empire. As of December 31, 2001, the Company's reinsurance recoverable from
Empire was $130,631,000,  representing 43% of the Company's total assets.  While
that  liability  is  reflected  on  Empire's  stand-alone   statutory  financial
statements,  Empire's  statutory  surplus (after  deducting  this  liability) is
$11,071,000  as of December  31,  2001,  which is  $7,771,000  above the minimum
required under New York insurance  regulations.  The Company currently  believes
that its  reinsurance  recoverable  from Empire is fully  collectible;  however,
further  significant  deterioration  in Empire's  surplus could impair  Empire's
ability  to pay  the  full  amount  due to the  Company.  Further,  any  adverse
regulatory  action  taken  against  Empire in the future  could also  impair the
Company's ability to fully collect its reinsurance recoverable.


Reinsurance  receivable  balances  at  December  31,  2001 and  2000  (including
$130,631,000 and $167,699,000,  respectively,  of reinsured amounts arising from
the intercompany pooling agreement with Empire) are as follows (in thousands):

                                                    CEDED TO
                                       ------------------------------
                                         EMPIRE     OTHERS     TOTAL
                                         ------     ------     -----
As of December 31, 2001
Prepaid reinsurance premiums           $  3,752    $    33  $  3,785
Reinsurance balances receivable
on:
  Paid losses                                -       1,593     1,593
  Unpaid losses                         108,033     32,241   140,274
  Unpaid loss adjustment expenses        18,846        -      18,846


                                                    CEDED TO
                                       ------------------------------
                                         EMPIRE     OTHERS     TOTAL
                                         ------     ------     -----
As of December 31, 2000
Prepaid reinsurance premiums           $ 17,452    $   296  $ 17,748
Reinsurance balances receivable
on:
  Paid losses                                -       1,710     1,710
  Unpaid losses                         132,143     22,672   154,815
  Unpaid loss adjustment expenses        18,104        -      18,104



                                     -F20-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 8-REINSURANCE-CONTINUED

An analysis of reinsurance  premiums,  losses, LAE and commissions for the years
ended December 31, 2001, 2000 and 1999 are summarized as follows (in thousands):

                      DIRECT       ASSUMED           CEDED            NET
                    --------  ----------------  ----------------  -------
                                EMPIRE OTHERS    EMPIRE   OTHERS
                                ------ ------    ------   ------
2001
----
Premiums earned     $ 38,593  $ 18,258   $305  $ 36,156   $2,742  $18,258
Losses incurred       61,224    24,575   275    45,547   15,952   24,575
LAE incurred          12,774    11,918     64    12,380      457   11,919
Commissions incurred   2,986     1,332     25     2,369      642    1,332

Premiums written      18,709     6,813    356    16,586    2,479    6,813
Losses paid           85,860    37,831    512    79,989    6,383   37,831
LAE Paid              11,714    10,076     67    11,321      457   10,079

Unearned premiums(a)   5,323     3,429     71     5,361       32    3,430
Unpaid losses (a)    186,191    70,980    383   154,333   32,241   70,980
Unpaid LAE (a)        26,922    13,192     -     26,923      -     13,191

2000
----
Premiums earned     $ 56,407  $ 30,855   $(13) $ 52,868   $3,526  $30,855
Losses incurred       46,825    31,760   (303)   48,238   (1,716)  31,760
LAE incurred           9,453    12,047    (83)   13,296   (3,926)  12,047
Commissions incurred   8,317     5,175     (3)    7,512      802    5,175

Premiums written      49,893    29,084    (13)   46,268    3,612   29,084
Losses paid          112,872    49,604     80   102,405   10,547   49,604
LAE Paid              14,959    12,218     34    14,590      403   12,218

Unearned premiums(a)  25,207    14,874     20    24,931      296   14,874
Unpaid losses (a)    210,828    84,236    620   188,776   22,672   84,236
Unpaid LAE (a)        25,863    11,351     -     25,863      -     11,351

1999
----
Premiums earned     $ 87,793  $ 42,448   $485  $ 81,528  $ 6,750  $42,448
Losses incurred       58,022    33,597    659    56,088    2,593   33,597
LAE incurred          (6,302)    8,941    223    (6,316)     237    8,941
Commissions incurred  10,111     5,051     34     9,300      845    5,051

Premiums written      65,794    32,812    473    59,520    6,747   32,812
Losses paid          130,845    56,034    958   124,513    7,290   56,034
LAE Paid              13,289    12,673    107    12,853      543   12,673

(a) Amounts as reflected in the  consolidated  balance  sheets can be derived by
adding together amounts for direct and assumed and subtracting from this sum 30%
of the amount ceded to Empire.  The Company remains primarily liable for amounts
ceded to reinsurers for unpaid losses,  LAE and unearned  premiums to the extent
that the assuming reinsuring companies are unable to meet their obligations.

                                     -F21-
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 8-REINSURANCE-CONTINUED


                                                                   PERCENTAGE
                                      ASSUMED   CEDED              OF AMOUNT
                           DIRECT      FROM       TO        NET     ASSUMED
                           AMOUNT    EMPIRE(a) EMPIRE(b)   AMOUNT    TO NET
                          --------  ---------- ---------  --------  --------
Premiums written:
2001                       $18,709    $ 7,169    $19,065   $ 6,813    105.2%
2000                       $49,893    $29,071    $49,880   $29,084    100.0%
1999                       $65,794    $33,285    $66,267   $32,812    101.4%

(a)        Includes $356,  $(13) and $473 assumed from  non-affiliates  in 2001,
           2000 and  1999,  respectively,  before  the  effects  of the  pooling
           agreement described in Note 1.

(b)        Includes $2,479,  $3,612 and $6,747 ceded to  non-affiliates in 2001,
           2000 and  1999,  respectively,  before  the  effects  of the  pooling
           agreement described in Note 1.

NOTE 9-FEDERAL INCOME TAXES

The Company has been included in the consolidated  federal income tax returns of
Leucadia  since  1993.  Under the  terms of the tax  sharing  agreement  between
Leucadia and the Company,  the Company  computes its tax provision on a separate
return  basis and is either  charged its share of federal  income tax  resulting
from its  taxable  income or is credited  for tax  benefits  resulting  from its
losses to the extent it could use the losses on a separate return basis.

The  principal  components  of the deferred tax benefit at December 31, 2001 and
2000 were as follows (in thousands):

                                                  2001       2000
                                                  ----       ----
  Unpaid loss and loss adjustment
   expense reserves                             $4,537     $4,014
  Unearned premiums                                240      1,041
  Employee benefits and compensation               584        574
  Interest accrued on surplus note                  40      3,320
  Allowance for doubtful accounts                  200        620
  Deferred policy acquisition costs                 -      (1,062)
  Sublease real estate commission                 (316)      (146)
  Pension plan curtailment gain                   (368)      (344)
  Unrealized appreciation on investments          (256)      (200)
  Investment in a limited partnership               -         476
  Unamortized deferred income                      637        681
  Capitalized systems development costs           (289)      (674)
  Tax loss carryforwards                        20,282     10,068
  Other, net                                      (155)      (183)
  Deferred tax benefit                          25,136     18,185
  Valuation allowance                          (25,136)   (18,185)
                   Total                       $  -       $   -
                                                ------     ------

                                     -F22-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 9-FEDERAL INCOME TAXES-CONTINUED
Due to the Company's  uncertainty as to having future  taxable income  necessary
for  realization  of the  deferred  tax asset,  a valuation  allowance  has been
provided as of December  31, 2001 and 2000 for the total  amount of the deferred
tax asset.

For the years  2001,  2000 and  1999,  the  difference  between  the  "expected"
statutory federal income tax and the actual income tax expense is as follows (in
thousands):

                                                    2001       2000     1999

Expected federal income tax (benefit)/expense     $(6,316)  $(6,279)  $(2,213)
Establishment of deferred tax valuation allowance   6,951    18,185         -
Other                                                (634)      954      (378)
                                                   -------   -------   -------
Actual federal income tax expense /(benefit)      $     1   $12,860   $(2,591)
                                                   =======   =======   =======

NOTE 10-PENSION PLAN AND POSTRETIREMENT BENEFITS

Effective January 1, 1999 Empire adopted a non-contributory defined contribution
plan. The  contributions,  ranging from 2% - 16% of employees'  current  pension
eligible compensation,  are based on age and service life of the employee. These
contributions accumulate for participants on a tax-deferred basis.  Participants
direct the investment of the contributions to their accounts. In accordance with
the pooling  agreement,  the Company shared 30% of the amount contributed by the
Group to the Plan ($624,000 and $682,000 in 2001 and 2000, respectively).

Empire  provides  certain  health care and life  insurance  benefits for retired
employees. During 1996, Empire amended the eligibility requirement to only those
employees  who had at least ten years of  service  and were at least 50 years of
age as of  October  1,  1996.  Prior  to this  amendment,  substantially  all of
Empire's  employees  were eligible for such  benefits if they reached  normal or
early  retirement  age  while  still  working  for  Empire.  As a result of this
amendment,  the  accumulated  postretirement  benefit  obligation was reduced by
approximately  $7,602,000  which has been  amortized  over  three  years.  Those
benefits are provided  through an insurance  company whose premiums are based on
the cost of benefits paid during the year.

                                     -F23-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 10-PENSION PLAN AND POSTRETIREMENT BENEFITS-CONTINUED

The following  table sets forth certain  information,  before the effects of the
pooling  arrangement,   relating  to  Empire's  unfunded  substantive  plan  for
postretirement benefits (in thousands):

                                                           2001          2000
                                                           ----          ----
Accumulated postretirement obligation
  at beginning of year                                   $4,934        $4,606
Service cost                                                 35            33
Interest cost                                               351           355
Actuarial loss                                              104           239
Participant contributions                                   183           161
Benefits paid                                              (479)         (460)
                                                          -----         -----
Accumulated postretirement obligation at
  end of year                                             5,128         4,934
Unrecognized net gain from past
  experience different from that assumed
  and effects of changes in assumptions                     433           541
                                                          -----         -----
    ACCRUED POSTRETIREMENT BENEFITS COST                 $5,561        $5,475
                                                          =====         =====

COMPONENTS OF NET POSTRETIREMENT BENEFITS
                                                   2001     2000    1999
                                                  -----    -----  ------
Service cost--benefits earned during the period  $   35   $   33   $  32
Interest cost on projected benefit obligation       351      355     363
Amortization of curtailment gain                      -       -   (1,900)
Net amortization and deferral                        (4)     (19)     -
                                                  -----    -----  ------
 PERIODIC POSTRETIREMENT BENEFITS COST/(INCOME)  $  382   $  369 $(1,505)
                                                  =====    =====  ======

In  accordance  with the  pooling  agreement,  the  Company's  share of  accrued
postretirement  benefit cost and net periodic  postretirement  benefit income is
30% of the amounts  reflected  above and is included  in other  liabilities.  In
determining the accumulated  postretirement  benefit  obligation at December 31,
2001 and 2000,  Empire utilized  discount rates of 7.0% and 7.5%,  respectively.
The  assumed  health  care cost trend rates used in  measuring  the  accumulated
postretirement  benefit  obligation  were 9.5% for 2001 declining to an ultimate
rate of 5% by 2010.  If the health care cost trend rates were  increased  by 1%,
the accumulated  postretirement benefit obligation as of December 31, 2001 would
have  increased  by  approximately  $459,000  before the  effects of the pooling
agreement.  If the  health  care cost  trend  rates  were  decreased  by 1%, the
accumulated postretirement benefit obligation as of December 31, 2001 would have
decreased by approximately $397,000 before the effects of the pooling agreement.
The effect of a 1% increase or decrease on the  estimated  aggregate  of service
and interest cost for 2001, 2000 and 1999 would be immaterial.

Empire  sponsors an Employees'  Savings Plan (the "Savings  Plan"),  under which
each eligible employee may defer a portion of their annual compensation, subject
to certain limits.  Empire matches  contributions equal to 50% of the employee's
contributions up to a maximum of 3% of the employee's  salary. A participant may
also contribute,  from after-tax dollars, an amount, not to exceed 10% of annual
compensation. Empire's contributions to the Savings Plan were $299,000, $294,000
and $452,000 in 2001, 2000 and 1999, respectively.  Under the pooling agreement,
the Company is obligated to provide 30% of Empire's contributions to the Savings
Plan.

                                     -F24-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 11-LEASES

The Group has entered into a four year lease expiring in 2005 for  approximately
16,000 square feet in an office  building  located at 45 Main Street,  Brooklyn,
New York.  Under this lease, an additional 9,000 square feet has been leased for
a two year period  expiring in 2003.  The Group also leases office space located
in Mineola, New York and Boston, Massachusetts under leases expiring in 2007 and
2003, respectively.

Future  minimum  rentals for the Group,  which exclude  escalation  amounts,  on
non-cancelable  leases  in the  aggregate  for each of the next  five  years and
thereafter  are as follows (in  thousands).  The amounts  below  exclude  future
minimum rentals and sublease amounts from the former  corporate  headquarters of
the Group.  The Company is not an obligor  under that lease  agreement and it is
not  subject to the pooling  agreement  as it is not an  operating  asset of the
Group commencing January 1, 2002.


                2002    $   968
                2003        995
                2004        847
                2005        873
                2006        196
              Thereafter    163
                         ------
              Total     $ 4,042
                         ======

Rental expense for the Group for the years 2001, 2000 and 1999, (net of sublease
income), was $1,500,000, $3,800,000 and $3,300,000, respectively. The Company is
obligated  to pay 30% of these  rental  charges in  accordance  with the pooling
agreement.

NOTE 12-BUSINESS SEGMENTS

As a result of the  Company's  underwriting  actions  described  in Note 1 and a
consolidation  of Empire Group's internal  management  organization in 2001, the
Company's  prior  business  segments  of  Small  Business  Division,  Mid-Market
Division and Personal  Lines  Division have been  eliminated.  Accordingly,  the
disclosures for these prior business segments have been eliminated.

NOTE 13-FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's only material financial  instruments are investments for which the
fair  values  are  disclosed  in  Note 4 and the  surplus  note  and  short-term
investments, for which the carrying amounts approximate fair value.

NOTE 14-LITIGATION

The Company is a party to legal  proceedings  that are  considered  to be either
ordinary, routine litigation or incidental to its business. Based on discussions
with  counsel,  the Company  does not believe that such  litigation  will have a
material effect on its financial position, results of operations or cash flows.

                                     -F25-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY

NOTE 15-RELATED PARTIES

See Notes 1, 2, 3, 8, 9, 10 and 11 regarding  Allcity's  relationships  with the
Group and Leucadia.


NOTE 16-SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS

The following is a summary of unaudited quarterly results of operations for 2001
and 2000 (in thousands, except per share amounts):

                                              2001
                               ------------------------------------
                                1ST       2ND        3RD      4TH
                               ------   ------     ------    ------
Total Revenues                $10,314  $ 7,715    $ 5,625   $ 6,074
Net (Loss)/Income             (14,277)    (780)    (3,856)      865
Basic and Diluted Earnings/
  (Loss)/Gain Per Share         (2.02)   (0.11)     (0.54)     0.12

                                              2000
                               ------------------------------------
                                1ST       2ND        3RD      4TH
                               ------   ------     ------    ------
Total Revenues                $11,299  $10,907   $ 10,925  $  9,172
Net Income/(Loss)                 287     (564)    (3,120)  (27,403)
Basic and Diluted Earnings/
  Gain/(Loss) Per Share          0.04    (0.08)     (0.44)    (3.87)


See Notes 1, 7 and 9 for certain  additional  information  concerning results of
operations for 2001 and 2000.

                                     -F26-
<PAGE>
<TABLE>
<CAPTION>
ALLCITY INSURANCE COMPANY
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION
CONCERNING PROPERTY/ CASUALTY INSURANCE OPERATIONS
(Thousands of dollars)

---------------------------------------------------------------------------------------------------------------
     COL. A          COL. B     COL. C       COL. D      COL. E     COL. F     COL. G              COL. H
---------------------------------------------------------------------------------------------------------------
                                RESERVES                                                    CLAIMS AND CLAIM
                               FOR UNPAID                                                 ADJUSTMENT EXPENSES
                     DEFERRED   CLAIMS      DISCOUNT                                      INCURRED RELATED TO
                     POLICY    AND CLAIM    IF ANY                              NET        (1)         (2)
                   ACQUISITION ADJUSTMENT  DEDUCTED IN   UNEARNED   EARNED    INVESTMENT  CURRENT      PRIOR
                      COSTS    EXPENSES    COLUMN C (a)  PREMIUMS   PREMIUMS   INCOME       YEAR       YEARS
---------------------------------------------------------------------------------------------------------------



<S>                     <C>    <C>               <C>      <C>       <C>         <C>        <C>        <C>
Year ended 12/31/01       $ -  $ 243,291         $ 621    $ 7,215   $ 18,258    $ 9,159    $ 17,747   $ 18,747

Year ended 12/31/00     3,035    268,506           239     32,622     30,855     11,443      27,880     15,927

Year ended 12/31/99     3,415    341,936           250     38,927     42,448     12,466      36,524      6,014
</TABLE>



<TABLE>
<CAPTION>
ALLCITY INSURANCE COMPANY
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION
CONCERNING PROPERTY/ CASUALTY INSURANCE OPERATIONS
(Thousands of dollars)
(Continued)

--------------------------------------------------------------------
     COL. A          COL. I       COL. J      COL. K       COL. L
--------------------------------------------------------------------

                  AMORTIZATION                              PAID
                   OF DEFERRED                             CLAIMS
                    POLICY       OTHER                   AND CLAIM
                   ACQUISITION   OPERATING     PREMIUMS   ADJUSTMENT
                     COSTS      EXPENSES (b)  WRITTEN     EXPENSES
--------------------------------------------------------------------



<S>                   <C>          <C>         <C>          <C>
Year ended 12/31/01   $ 4,818      $ 5,925     $ 6,813      $47,910

Year ended 12/31/00     7,793        8,009      29,084       61,822

Year ended 12/31/99     9,348        7,515      32,812       68,707
<FN>
(a)  Liabilities  for losses for certain long - term  disability  payments under
     workers'  compensation  insurance  are  discounted  at a maximum of 6%. The
     liabilities  discounted are deemed insignificant and do not have a material
     effect on reported income.

(b)  Other  Operating  Expenses  are  reflected  net of  service  fee income and
     exclude other income and interest on surplus note.
</FN>
</TABLE>





                                     -F27-
<PAGE>