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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                  FORM 10-K/A

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                       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 0-8636

                    AMERICAN INDEMNITY FINANCIAL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

              DELAWARE                                            510119643
   (STATE OR OTHER JURISDICTION OF                            (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)                           IDENTIFICATION NO.)

     ONE AMERICAN INDEMNITY PLAZA
           GALVESTON, TEXAS                                        77550
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                          (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (409) 766-4600
           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                  NAME OF EACH EXCHANGE
       TITLE OF EACH CLASS                        ON WHICH REGISTERED
       -------------------                        -------------------
             NONE                                        NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                       Common Stock ($3.33 1/3 par value)
                                (TITLE OF CLASS)

         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 [ ] No [X]

         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]

         The aggregate market value of the voting stock of the Registrant held
by non-affiliates as of March 25, 1999 was $16,602,215 based upon the closing
price as of such date.

         As of March 25, 1999, there were outstanding 1,962,410 shares of Common
Stock, $3.33 1/3 par value, of the Registrant.

         DOCUMENTS INCORPORATED BY REFERENCE:

         Annual Report to Stockholders for the fiscal year ended December 31,
1998 (portions of which are incorporated into Parts II and IV hereof).


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<PAGE>   2





                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                            PAGE
                                                                                                            ----
                                                       PART I
<S>     <C>                                                                                                 <C>
ITEM    1.      Business ...................................................................................  3
                General Development of Business ............................................................  3
                Distribution of Business ...................................................................  3
                Financial Information ......................................................................  4
                    Net Premiums Written ...................................................................  4
                    Underwriting Results ...................................................................  4
                    Loss and Loss Adjustment Expense Reserves ..............................................  5
                Narrative Description of Business ..........................................................  8
                    General ................................................................................  8
                    Reinsurance ............................................................................  8
                    Investments ............................................................................  9
                    Regulation and Other Restrictions ......................................................  9
ITEM    2.      Properties ................................................................................. 10
ITEM    3.      Legal Proceedings .......................................................................... 10
ITEM    4.      Submission of Matters to a Vote of Security Holders ........................................ 10

                                                       PART II

ITEM    5.      Market for the Registrant's Common Equity and Related Stockholder Matters .................. 11
ITEM    6.      Selected Financial Data .................................................................... 11
ITEM    7.      Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 11
ITEM    7A.     Quantitative and Qualitative Disclosures About Market Risk.................................. 11
ITEM    8.      Financial Statements and Supplementary Data ................................................ 11
ITEM    9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....... 11

                                                      PART III

ITEM   10.      Directors and Executive Officers of the Registrant ......................................... 11
ITEM   11.      Executive Compensation ..................................................................... 15
ITEM   12.      Security Ownership of Certain Beneficial Owners and Management ............................. 21
ITEM   13.      Certain Relationships and Related Transactions ............................................. 22

                                                       PART IV

ITEM   14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 23
SIGNATURES ................................................................................................. 25
INDEPENDENT AUDITORS' REPORT ............................................................................... 26
SCHEDULE I      Summary of Investments - Other than Investments in Related Parties, December 31, 1998....... S-1
SCHEDULE II     Condensed Financial Information of Registrant .............................................. S-2
SCHEDULE VIII   Valuation and Qualifying Accounts .......................................................... S-5
</TABLE>

                                       2
<PAGE>   3


                                     PART I

ITEM 1.  BUSINESS.

GENERAL DEVELOPMENT OF BUSINESS

         American Indemnity Financial Corporation (the "Company"), an insurance
holding company, was organized in June 1973 under the laws of Delaware for the
purpose of acquiring the outstanding shares of common stock of American
Indemnity Company. The Company currently owns 99.9% of the common stock of
American Indemnity Company, its principal operating subsidiary. American
Indemnity Company, incorporated in 1913, is the oldest Texas stock company
engaged in the general casualty insurance business in the state. The insurance
written by American Indemnity Company and its two wholly owned subsidiaries,
American Fire and Indemnity Company and Texas General Indemnity Company, and its
affiliate, American Indemnity Lloyds, includes automobile, homeowners multiple
peril, workers' compensation, fire and allied lines, commercial multiple peril
and general casualty lines.

         In this report, the term "American Indemnity" refers to American
Indemnity Company, its subsidiaries, and its affiliate, American Indemnity
Lloyds, unless the context indicates otherwise.

         The principal business of the Company is carried on through American
Indemnity; however, the Company does provide advice and services to American
Indemnity and coordinates its activities in the areas of accounting,
investments, public relations, business development, data processing and
automation, asset and liability management, budgetary planning, compliance with
governmental regulations and procedures, financing arrangements, and other such
matters. American Indemnity and each of its subsidiaries operate under the
day-to-day management of their own officers and directors.

         On March 4, 1999, the Company announced that it had signed a definitive
agreement with United Fire & Casualty Company providing for United Fire's
acquisition of the Company (the "Merger"). The acquisition is conditioned upon
approval by the Company's common shareholders, approvals from insurance
regulators in Texas, Colorado and Iowa, where the insurance companies are
domiciled, compliance with all applicable provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the expiration of all applicable waiting
periods thereunder and certain other customary conditions. It is anticipated
that the acquisition will be completed in the third quarter of 1999.

         United Fire & Casualty Company and its subsidiaries are engaged in the
business of writing property and casualty insurance and life insurance. United
Fire's headquarters are in Cedar Rapids, Iowa.

DISTRIBUTION OF BUSINESS

         The Company writes the majority of its business in Texas. In general,
American Indemnity has avoided writing business in those jurisdictions where
regulators are most reluctant to grant rate adjustments. The following table
shows the geographic distribution of gross premiums written.


<TABLE>
<CAPTION>
                                                                                                    YEARS ENDED DECEMBER 31,
                                                                                             ----------------------------------
                                                                                                 1998         1997         1996
                                                                                                ------       ------       -----
<S>                                                                                              <C>          <C>          <C>
         Texas ..........................................................................        62.4%        68.9%        71.9%
         Florida ........................................................................         8.6          7.8          6.6
         Louisiana ......................................................................         7.1          7.3          7.3
         Alabama ........................................................................         5.5          4.8          3.5
         Illinois........................................................................         4.6          0.1          0.1
         Mississippi ....................................................................         4.1          3.8          3.8
         Tennessee ......................................................................         2.8          2.7          2.5
         Kentucky .......................................................................         2.5          2.5          2.1
         All other ......................................................................         2.4          2.1          2.2
                                                                                              -----------  -----------  -------
         Total ..........................................................................       100.0%       100.0%       100.0%
</TABLE>


                                       3
<PAGE>   4



         The following table provides the distribution of the Company's business
on the basis of net premiums written between personal lines (primarily insurance
for private passenger automobiles and residential property) and commercial
lines.


<TABLE>
<CAPTION>
                                                                                                    YEARS ENDED DECEMBER 31,
                                                                                                -------------------------------
                                                                                                 1998         1997         1996
                                                                                                ------       ------       -----
<S>                                                                                                <C>          <C>          <C>
         Personal Lines .................................................................          39%          38%          37%
         Commercial Lines ...............................................................          61           62           63
                                                                                                -----        -----         ----
                  Total .................................................................         100%         100%         100%
</TABLE>


FINANCIAL INFORMATION

NET PREMIUMS WRITTEN

         The following table summarizes, by major classes of policies written,
the amounts and percentages of net premiums written by American Indemnity during
the periods indicated.


                              NET PREMIUMS WRITTEN
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                        ------------------------------------------------------------------------
                                                                1998                       1997                      1996
                                                        -------------------        -------------------       -------------------
<S>                                                     <C>            <C>         <C>            <C>        <C>            <C>
Personal automobile ................................    $14,411        25.0%       $15,598        25.3%      $17,844        25.9%
Commercial multiple peril ..........................     12,620        21.9         13,911        22.6        15,973        23.2
Commercial automobile ..............................     12,282        21.3         14,974        24.4        16,272        23.6
Other liability ....................................      7,092        12.3          5,786         9.4         7,646        11.1
Homeowners multiple peril ..........................      6,488        11.3          6,133        10.0         5,506         8.0
Fire and allied lines ..............................      3,385         5.9          3,667         6.0         3,506         5.1
Inland marine ......................................      1,251         2.2          1,361         2.2         1,366         2.0
All other ..........................................         50         0.1             58         0.1           750         1.1
                                                        =======       =====        =======       =====       =======       =====
     Net premiums written ..........................    $57,579       100.0%       $61,488       100.0%      $68,863       100.0%
                                                        =======       =====        =======       =====       =======       =====
</TABLE>


         In April 1998, A. M. Best Company assigned the Company a rating of B
(Adequate). The Company cannot predict whether this rating will eventually be
changed. Although some mortgage lenders will not accept property insurance
written by B rated insurers, the Company has not seen any reduction in the
number of its property policies which can be attributed to this rating. In the
event that any mortgage lenders take exception to any American Indemnity
property policies, the Company has arranged for a cut-through endorsement
(guaranty bond) from American Reinsurance Company which will meet the standards
of mortgage lenders.

UNDERWRITING RESULTS

         A common industry measurement of property-casualty insurance
underwriting results is the "statutory combined ratio." This ratio is the sum of
(1) the ratio of losses and loss adjustment expenses to premiums earned ("loss
and loss adjustment expense ratio"); (2) the ratio of underwriting expenses to
premiums written ("underwriting expense ratio"); and (3) the ratio of statutory
retrospective premium adjustments on workers' compensation policies to premiums
written ("retrospective premium adjustment ratio"). When the statutory combined
ratio is under 100%, underwriting results are profitable. Federal income taxes,
investment income, deferred policy acquisition costs and other non-underwriting
income and expenses are not reflected in the statutory combined ratios.


                                       4
<PAGE>   5




         The following table sets forth the Company's statutory combined ratios
for the periods indicated.

                            STATUTORY COMBINED RATIOS
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                            YEARS ENDED DECEMBER 31,
                                                                                 -------------------------------------------------
                                                                                   1998                 1997                1996
                                                                                 -------              -------              -------
<S>                                                                              <C>                  <C>                  <C>
Premiums earned ..................................................               $62,080              $64,052              $64,579
Statutory losses incurred ........................................                40,278               41,025               38,505
Loss adjustment expenses incurred ................................                 9,031               13,411                7,360
    Loss ratio ...................................................                  64.9%                64.0%                59.6%
    Loss and loss adjustment expense ratio .......................                  79.3                 84.8                 70.9
    Underwriting expense ratio ...................................                  41.7                 36.4                 36.4
    Retrospective premium adjustment ratio .......................                   0.7                 (0.9)                 0.8
                                                                                  ======              =======              =======
        Statutory combined ratio .................................                 121.7%               120.3%               108.1%
                                                                                  ======              =======              =======
</TABLE>


LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

         RESERVES FOR INSURED EVENTS. American Indemnity maintains a provision
for losses and loss adjustment expenses to cover the ultimate net cost of losses
on reported and unreported claims. The estimation of unpaid losses and loss
adjustment expenses is perhaps the most crucial and important aspect affecting
underwriting results of the Company and the industry as a whole. The Company
follows the practice of reserving for losses for reported and unreported claims
and for related loss adjustment expenses, in each case based on the terms and
limits of liability as specified in the Company's policies. There has not been a
significant change in reserving assumptions or methodologies during the year,
nor a material change in the geographic locations of business produced.

         With respect to reported claims, the Company establishes reserves on a
case-by-case basis, based on the best available evidence as to the cost of the
claim. When the reserve for a particular case is set initially, it is based on
current estimated costs, such as automobile or home repair costs for property
damage claims and, in the case of liability claims, the Company's claims
adjuster's and the handling attorney's best estimate of the settlement costs, as
well as such attorney's judgment as to the climate of the courts with respect to
the size of judgments. While there is no explicit provision made for inflation,
these reserves are reviewed continually on a case-by-case basis to determine if,
for example, updated cost information on property claims or revised estimates
based on new information received in the course of settling or litigating a
claim require the reserve to be adjusted. In this manner, the reserve is updated
implicitly to reflect additional costs resulting from inflation or from changing
social conditions, such as changes in the size of judgments for liability
claims.

         In addition to reserving for reported claims, the Company establishes
reserves for incurred but unreported claims. These reserves are based on
historical experience with respect to the probable number and nature of claims
arising from losses not yet reported. In addition, if an event occurs with
respect to which the Company believes that all losses have not been reported,
the Company adjusts the reserve for losses incurred but not reported. This
adjustment of the reserve for incurred but unreported claims is based on the
average severity of claims reported with respect to such an event, historical
experience with respect to the average claim severity of like occurrences, the
judgment of the Company's claims adjusters and an estimate of the probable
number of claims that will arise from such an event.

         Loss adjustment expense reserves are established based on the Company's
historical experience with respect to loss adjustment expenses paid and
incurred, as well as an experience-based provision for those loss adjustment
expenses not directly assignable to specific claims which are known as
unallocated loss adjustment expenses. Unallocated loss adjustment expenses are
the overhead costs associated with claim handling and administration, such as
salaries of clerical personnel.

         For each year end since 1987, the Company has obtained an independent
actuarial review of its reserves for insured events. As of December 31, 1998,
management believes that the Company's reserves for losses and loss adjustment
expenses are reasonable and near the mid-point of the reserve range estimated by
the Company's independent actuary. For years prior to 1997, the Company's
reserves were within the reserve range developed by the Company's independent
actuary and, as a result, no significant adjustments were made to the Company's
reserves during these years. As of December 31, 1997, using methodology
consistent with that used in prior years, the Company analysis indicated that
the Company's reserves were below the reserve


                                       5
<PAGE>   6
range. After extensive review of the data and discussions with the Company's
independent actuary, management believed it to be prudent to further increase
reserves. Loss and loss adjustment expenses were impacted by a total of
approximately $7,700,000 during 1997, which was the amount required to increase
reserves to near the mid-point of the actuarial range. Loss reserves were
increased in all lines of business, with the most significant increases in the
lines of business with significant casualty exposure such as commercial
multi-peril, automobile liability and other liability.

         The Company establishes reserves for reported losses based upon
historical experience and upon a case-basis evaluation of the type of loss,
knowledge of the circumstances surrounding each loss and the policy provisions
relating to the type of loss. The amount of reserves for unreported losses is
determined by estimating unreported losses on the basis of historical and
statistical information for each line of insurance with respect to the probable
number and nature of losses arising from occurrences which have not yet been
reported. Established reserves are closely monitored and are adjusted as needed.

         Loss reserves are estimates at a given time of the ultimate amount
expected to be paid on incurred losses based on facts and circumstances known
when the estimates are made. Reserves are not discounted. The settlement period
on insurance losses may be many years, and as additional facts regarding
individual losses become known, it often becomes necessary to refine and adjust
the estimates of liability on a loss.

         One factor influencing the predictability of loss reserves, as well as
the underwriting results of the Company, is the amount of net property losses
incurred resulting from weather-related catastrophes. Weather-related
catastrophe losses are an ever present aspect of the property-casualty insurance
business. The cost to the Company of such losses in 1998 was approximately
$2,300,000, compared with $470,000 for 1997 and $3,525,000 for 1996.

         With respect to losses for insured events, the Company continues to
limit the potential effects of large losses on underwriting results by
maintaining what it believes to be adequate treaty, facultative and catastrophe
reinsurance. See Note 6 of "Notes to Consolidated Financial Statements" in the
Company's 1998 Annual Report to Stockholders (the "Annual Report") incorporated
herein by reference.





         The following table presents the changes in loss reserves for the three
most recent years.


                  RECONCILIATION OF CONSOLIDATED LOSS RESERVES
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                                    YEARS ENDED DECEMBER 31,
                                                                                             --------------------------------------
                                                                                                  1998         1997        1996
                                                                                                 -----        -----       -----
<S>                                                                                              <C>          <C>          <C>
Beginning reserve, net ..................................................................        $45,440      $36,833      $39,191
                                                                                                 -------      -------      -------
Provision for:
         Insured events of the current year .............................................         45,366       44,016       44,431
         Insured events of prior years ..................................................          4,127        7,820        1,777
                                                                                               ---------    ---------    ---------
         Incurred loss and loss adjustment expenses .....................................         49,493       51,836       46,208
                                                                                                --------     --------     --------
Payments for losses and loss adjustment expenses:
         Attributable to insured events of the current year .............................         23,385       21,708       24,941
         Attributable to insured events of prior years ..................................         22,294       21,521       23,625
                                                                                                --------     --------     --------
         Total payments .................................................................         45,679       43,229       48,566
                                                                                                --------     --------     --------
Ending reserve, net .....................................................................        $49,254      $45,440      $36,833
                                                                                                 =======      =======      =======
</TABLE>


                                       6

<PAGE>   7



         The following table presents the Company's loss reserve development for
the ten years ended December 31, 1998:

            CONSOLIDATED LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
                             (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                             YEARS ENDED DECEMBER 31,
                                                ----------------------------------------------------------------------------------
                                                 1989     1990    1991    1992     1993    1994     1995    1996     1997    1998
                                                 ----     ----    ----    ----     ----    ----     ----    ----     ----    ----
<S>                                             <C>      <C>     <C>     <C>      <C>     <C>      <C>     <C>      <C>     <C>
LIABILITY FOR UNPAID CLAIMS AND CLAIM
   ADJUSTMENT EXPENSE (1)...................... 51,624   54,449  47,643  43,407   40,841  40,293   39,191  36,833   45,440  49,254

PAID (CUMULATIVE) AS OF:
   One year later.............................. 26,186   25,009  25,514  21,184   20,375  22,759   23,625  21,521   22,294    --
   Two years later............................. 36,055   39,030  35,756  29,795   31,375  32,389   33,613  34,575     --      --
   Three years later........................... 44,317   45,892  40,170  36,068   36,407  37,503   40,591    --       --      --
   Four years later............................ 48,515   48,736  42,984  39,180   38,909  41,641     --      --       --      --
   Five years later............................ 50,044   50,500  44,914  40,438   41,114    --       --      --       --      --
   Six years later............................. 51,324   51,824  45,772  42,164     --      --       --      --       --      --
   Seven years later........................... 52,491   52,538  47,436    --       --      --       --      --       --      --
   Eight years later........................... 52,935   54,118    --      --       --      --       --      --       --      --
   Nine years later............................ 54,330     --      --      --       --      --       --      --       --      --

LIABILITY RE-ESTIMATED AS OF (1):
   One year later.............................. 52,934   53,674  48,803  44,183   42,135  42,700   40,968  44,653   49,567    --
   Two years later............................. 54,949   57,612  51,887  46,609   45,516  46,267   48,576  48,821     --      --
   Three years later........................... 56,414   59,599  52,202  48,749   47,640  50,242   49,825    --       --      --
   Four years later............................ 57,264   59,693  52,947  50,016   50,017  51,118     --      --       --      --
   Five years later............................ 57,112   60,474  53,737  51,085   49,445    --       --      --       --      --
   Six years later............................. 57,552   60,995  54,681  50,814     --      --       --      --       --      --
   Seven years later........................... 57,957   61,788  54,373    --       --      --       --      --       --      --
   Eight years later........................... 58,475   61,629    --      --       --      --       --      --       --      --
   Nine years later............................ 58,232     --      --      --       --      --       --      --       --      --

REDUNDANCY (DEFICIENCY)........................ (6,608) (7,180) (6,730)  (7,407) (8,604) (10,825) (10,634)(11,988) (4,127)    --

Gross liability - end of year..................                                                            55,602   71,055  71,796
Reinsurance recoverable........................                                                            18,769   25,615  22,542
Net liability - end of year....................                                                            36,833   45,440  49,254
Gross re-estimated liability - latest..........                                                            74,193   77,598
Re-estimated recoverable - latest..............                                                            25,372   28,031
Net re-estimated liability - latest............                                                            48,821   49,567
Gross cumulative deficiency....................                                                           (18,591) (6,543)
</TABLE>

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

(1)    The re-estimated liability shown above has been reduced (increased) by
       retrospective premium adjustments which were subsequently collected from
       (paid to) workers' compensation policyholders as follows (dollars in
       thousands): 1989, $838; 1990, $(2,229); 1991, $(1,004); 1992, $(2,454);
       1993, $(1,958); 1994, $(2,223); 1995, $(623); 1996, $170; and 1997,
       $(580). Since these amounts are reported separately from incurred losses
       in the Company's financial statements prepared in accordance with
       generally accepted accounting principles and its statutory financial
       statements, they are reconciling items between this table and Schedule P
       of the statutory financial statements. Additionally, in accordance with
       generally accepted accounting principles, accruals have been made for the
       Company's estimated assessments from the Texas Workers' Compensation
       Insurance Facility, and the liability for unpaid claims and claim
       adjustment expenses has been increased by the following amounts (dollars
       in thousands): 1989, $4,060; 1990, $4,958; 1991, $2,415; and 1992, $603,
       and the re-estimated liability shown above has been increased (decreased)
       by the following amounts (dollars in thousands): 1989, $751; 1990, $401;
       1991, $(366); 1992, $(642); 1993, $(214); 1994, $42; 1995, $54; and 1996,
       $91. Such amounts are also reconciling items between this table and
       Schedule P of the statutory financial statements.


                                       7
<PAGE>   8



         In evaluating the above table, it should be noted that each amount
includes the effects of all changes in amounts for prior periods. For example,
the amount of the deficiency related to losses settled in 1992, but incurred in
1989, will be included in the cumulative deficiency amount for years 1989, 1990
and 1991. Conditions and trends that have affected development of the reserves
in the past may not necessarily occur in the future. Accordingly, it is not
appropriate to extrapolate future redundancies or deficiencies based on this
table.

         Loss reserves amounted to approximately $49,254,000 at December 31,
1998. In view of the variability inherent in the calculation of loss reserves,
should the ultimate net cost of American Indemnity's losses prove to be
substantially greater than its loss reserves, its operations, earnings and
surplus could be adversely affected. The Company believes, however, that its
aggregate loss and loss adjustment expense reserves are reasonable and adequate
to cover the ultimate net cost of losses and loss adjustment expenses on
reported and unreported claims.

NARRATIVE DESCRIPTION OF BUSINESS

   GENERAL

         The Company, through American Indemnity, is a multiple-line property
and casualty insurer. The lines of insurance written by American Indemnity
include automobile, homeowners multiple peril, workers' compensation, fire and
allied lines, commercial multiple peril, inland marine and general casualty
lines. American Indemnity does not write certain high-risk specialty lines, such
as medical and other professional malpractice and directors' and officers'
liability, although it is exposed to a certain extent to such risks through
pooling arrangements required of insurance companies by various state regulatory
authorities.

         The insurance written by American Indemnity is produced through
approximately 522 agencies. All such agencies are permitted to, and usually do,
represent other insurance companies. In addition, American Indemnity maintains
five service offices in three states to service its agencies and policyholders.
In five other states, the Company has a marketing representative. During the
second quarter of 1998, the Company began offering nonstandard personal
automobile insurance in Illinois.

         American Indemnity competes with individual companies and with groups
of affiliated companies, many of which have nationwide organizations, more
diversified lines of insurance coverage, greater financial resources, larger
sales forces and more widespread agency relationships. Competitors include both
stock and mutual companies and other underwriting organizations.

         As of December 31, 1998, the Company and American Indemnity had 147
home office employees and 76 employees in the field.

   REINSURANCE

         American Indemnity follows the customary practice of reinsuring with
other insurance companies a portion of certain risks under the policies it has
written. This practice is referred to as "ceding." Such reinsurance is
maintained to protect American Indemnity against the severity of individual
claims as well as against unusually serious occurrences in which a number of
claims produce an aggregate extraordinary loss. Although reinsurance does not
discharge American Indemnity from its primary liability for the full amount of
the policies, it does make the assuming reinsurer liable to American Indemnity
to the extent of the reinsured portion of risks. The statutes and regulations of
various states permit the primary insurer, in its financial statements, to treat
risks, to the extent properly reinsured, as though they were risks for which the
primary insurer is not liable.

         American Indemnity has reinsurance contracts, known as reinsurance
"treaties," under which certain types of policies are automatically reinsured
without the need for individual approval by the reinsurer of each risk covered.
Other reinsurance contracts provide for "facultative" reinsurance which is
handled on an individual policy or risk basis and requires the specific
agreement of the reinsurer as to each risk insured.


         During 1998, property insurance risks were reinsured under treaty
arrangements whereby $900,000 of losses in excess of $100,000 are automatically
reinsured. Effective January 1, 1999, American Indemnity's retention for
property risks increased to $150,000 from $100,000. During 1998, American
Indemnity carried excess catastrophe reinsurance which covered 95% of all losses
with respect to windstorm, hurricane and hail suffered within any two separate
72 hour periods within a 12 month interval up to $36,000,000 in excess of
$4,000,000. Although the excess catastrophe reinsurance agreement remains in
effect, the aggregate excess reinsurance provision under this agreement was
terminated effective January 1, 1999. Such aggregate excess reinsurance
provision had been in effect for three years without any claims being made
against it, and the Company elected to cancel that provision to save
approximately $1,600,000 per year in reinsurance costs. The aggregate excess
reinsurance provision that was cancelled covered 95% of all property and
automobile losses up to $4,000,000 in excess of $2,000,000, subject to a
$200,000 per occurrence retention. The Company has never had an individual
catastrophe loss in excess of $6,300,000; however, there can be no assurance
that a greater loss could not occur in the future.


                                       8
<PAGE>   9

         All claims on automobile liability and casualty insurance over $175,000
up to $2,000,000 are automatically reinsured under a treaty. All claims on
non-standard personal automobile risks in Illinois are reinsured under a fifty
percent quota share reinsurance agreement.

INVESTMENTS

         American Indemnity invests its capital surplus and reserve funds in
securities and other investments authorized by applicable state laws and
regulations and receives income from such investments in the form of interest,
dividends and capital gains. The principal objective of the Company's investment
portfolio is to provide capital for American Indemnity's insurance underwriting
operations. The securities comprising American Indemnity's investment portfolio
consist primarily of taxable government and government agencies and authorities
bonds, tax-exempt state and municipal bonds, corporate bonds, and preferred and
common stocks.

         The invested assets of the Company at December 31, 1998 are set forth
on Schedule I hereto.

         The following table sets forth the investment results of the Company,
exclusive of investments in subsidiaries, for each of the three years ended
December 31, 1998 (dollars in thousands).


<TABLE>
<CAPTION>
                            AVERAGE CASH                                      ANNUAL PERCENTAGE                  NET CAPITAL
                          AND INVESTMENTS                                         EARNED ON                    GAINS (LOSSES)
                -------------------------------------         NET         -------------------------        ------------------------
                              INVEST-                      INVESTMENT     INVESTMENTS   INVESTMENTS                         UNREAL-
    YEAR        CASH          MENTS(1)        TOTAL        INCOME(2)       AND CASH      ONLY               REALIZED        IZED
------------   ------        ---------        -------      ----------     -----------   -----------        ---------       --------
<S>            <C>           <C>              <C>          <C>               <C>            <C>            <C>              <C>
1996........   $4,566        $86,388          $90,954      $4,592            5.05%          5.32%          $  658           $  (304)
1997........    6,262         87,902           94,164       4,368            4.64           5.00            1,482             4,445
1998........    8,998         86,718           95,716       4,709            4.92           5.43            1,601            (1,005)
</TABLE>

-------------
(1)      The average of amounts at beginning and end of year with securities
         valued at market value.

(2)      Net investment income is after deduction of investment expenses and
         before net realized gains and losses.

REGULATION AND OTHER RESTRICTIONS

         American Indemnity, similar to other insurance companies, is subject to
regulation and supervision by the insurance regulatory authority of each state
or other jurisdiction in which it is licensed to do business. These regulatory
authorities have broad administrative powers relating to the granting and
revocation of licenses to transact business, the licensing of agents, the
approval of policy forms and rates, the form and content of mandatory financial
statements, reserve requirements and the types of investments which may be made.
Detailed annual reports must be filed with the appropriate regulatory
authorities and the books and records of American Indemnity are subject to their
examination.

         The Insurance Holding Company System Regulatory Act (the "Texas Act")
regulates insurance companies authorized to do business in the State of Texas
which are members of an insurance holding company system. Under the Texas Act,
no insurance company may pay dividends within any twelve-month period which
exceed the greater of 10% of such insurer's statutory surplus as regards
policyholders, as reported at the end of the preceding calendar year, or the
statutory net investment income of such insurer for such year, without the
consent of the Commissioner of Insurance of the State of Texas. Furthermore,
only such earnings of American Indemnity determined on the statutory basis,
exclusive of restricted surplus and special surplus funds, are available for
distribution as cash dividends and are subject to declaration by American
Indemnity's Board of Directors and to such restrictions imposed by law or
regulation on the payment of dividends. For amounts available for payment of
dividends by American Indemnity, see Note 7 of "Notes to Consolidated Financial
Statements" in the Annual Report.


                                       9
<PAGE>   10



         The National Association of Insurance Commissioners (the "NAIC") has
established various model laws, regulations and guidelines as part of its
regulatory oversight of insurance companies. The NAIC Model Insurance Company
System Regulatory Act (the "NAIC Model Act") contains restrictions regarding
payment of dividends which differ from restrictions under Texas law. The NAIC
Model Act requires that no insurance company may pay any extraordinary dividend
or make any other extraordinary distribution to its shareholders until thirty
days after the commissioner of insurance has received notice of the declarations
thereof and has not within that period disapproved the payment, or until the
commissioner of insurance has approved the payment within the thirty-day period.
An extraordinary dividend or distribution includes any dividend or distribution
of cash or other property, whose fair market value together with that of other
dividends or distributions made within the preceding twelve months exceeds the
lesser of 10% of its statutory surplus as regards to policyholders as of the end
of the preceding calendar year or the net income, not including realized capital
gains, for such year. An insurance company may carry forward net income from the
previous two calendar years that has not already been paid out as dividends.

         Additionally, under the Texas Act, a Texas insurance company may not
enter into transactions with any member of its holding company system involving
sales, purchases, exchanges, loans or extensions of credit, or investment,
involving either more than 5% of its admitted assets or 25% of its surplus,
whichever is the lesser, as of the end of the prior calendar year, without the
approval of the Commissioner of Insurance of the State of Texas. Certain other
states in which American Indemnity is authorized to do business have enacted
statutes similar to the Texas Act, but such statutes typically provide that they
are inapplicable, in whole or in part, to insurance companies which are subject
to similar regulations in their state of domicile.

         American Indemnity, similar to other insurance companies, maintains its
accounts in accordance with statutory insurance practices, which differ in some
respects from generally accepted accounting principles followed by other
business enterprises in determining financial position and results of
operations. Since these differences have been adjusted to present the Company's
consolidated financial statements filed as a part of this report in conformity
with generally accepted accounting principles (see Notes 1 and 7 of "Notes to
Consolidated Financial Statements" in the Annual Report), such consolidated
financial statements do not necessarily disclose American Indemnity's financial
position for purposes of regulation and supervision by the supervising agencies
of each state or jurisdiction in which American Indemnity is licensed to do
business.

         In accordance with the insurance laws of Texas and the rules and
practices of the NAIC, American Indemnity is examined periodically by examiners
of the state of Texas and (on an "association" or "zone" basis) by
representatives of the other states in which it is licensed to do business. The
most recently completed examination was made by the state of Texas as of
December 31, 1996.

ITEM 2.  PROPERTIES.

         The home office facilities consist of two adjacent and connected
buildings owned by American Indemnity with an aggregate of 152,000 square feet
located in the business section of Galveston, Texas. The Company's home office
facilities are 99.9% occupied by the Company and 0.1% leased to other parties.
All other facilities of the Company consist of a total of five service offices
in three states that are leased by American Indemnity for terms of one to five
years. The Company believes that its leased and owned properties are adequate
for its current needs.

ITEM 3.  LEGAL PROCEEDINGS.

         None, except in the ordinary course of business.

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

         None.


                                       10
<PAGE>   11




                                     PART II

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

         The information set forth under the captions "Per Share Market and
Dividend Information" and "Common Stock" in the Annual Report is incorporated
herein by reference. Reference is also made to "Regulation and Other
Restrictions" under Item 1 of this Form.

ITEM 6.  SELECTED FINANCIAL DATA.

         The information set forth under the caption "Five Year Comparative
Summary of Selected Financial Data" in the Annual Report is incorporated herein
by reference.

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

         The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.

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

         The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations- Results of
Operations-Quantitative and Qualitative Market Risk Disclosures" in the Annual
Report is incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The information set forth under the captions "Consolidated Balance
Sheets", "Consolidated Statements of Income", "Consolidated Statements of Cash
Flows", "Consolidated Statements of Stockholders' Equity", "Notes to
Consolidated Financial Statements", "Independent Auditors' Report" and "Selected
Quarterly Financial Data" in the Annual Report is incorporated herein by
reference.

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.

                                   DIRECTORS



                                       11
<PAGE>   12

         The following table sets forth information with respect to each person
nominated for election as a Class II director and each person whose term of
office as a director will continue, if the Merger is not consummated, after the
annual meeting of stockholders. Except for J. Fellman Seinsheimer, III, William
C. Levin, M.D. and Harris L. Kempner, Jr., who owned beneficially 29.5%, 2.2%
and 1.2%, respectively, of the outstanding shares of Common Stock at April 28,
1999, each nominee and director owned less than 1% of the outstanding shares of
Common Stock at such date. The table has been prepared from information obtained
from the respective nominees and directors.

<TABLE>
<CAPTION>
                                                                                                                   SHARES OF
                                                                                                                    COMMON
                                                                                                                     STOCK
                                                                                                                  BENEFICIALLY
                                                                                                SERVED AS          OWNED ON
                                                                   PRINCIPAL                    DIRECTOR           APRIL 28,
NAME                                          AGE                 OCCUPATION                      SINCE             1999(1)
----                                        ------  --------------------------------------      ---------        -------------
<S>                                         <C>      <C>                                        <C>              <C>
                                         CLASS II - NOMINEES FOR TERMS EXPIRING IN 2002
Jack T. Currie(2)(3)......................    70     Investments                                    1977           7,751(4)

Synott L. McNeel(3)(5)....................    75     Investments                                    1973           8,000(6)

J. Fellman Seinsheimer, III(2)(3).........    58     President and Chief Executive                  1973         578,205(7)
                                                       Officer of the Company

                                        CLASS III - DIRECTORS WHOSE TERMS EXPIRE IN 2000
Fred C. Burns(2)..........................    61     Managing Partner - John L.                     1997           2,000(6)
                                                       Wortham & Son, L.L.P.
Harris L. Kempner, Jr.(8).................    59     President - Kempner Capital                    1991          22,611(4)(9)
                                                       Management, Inc.
William C. Levin, M.D.....................    82     Consultant in Hematology                       1973          42,587(10)

                                         CLASS I - DIRECTORS WHOSE TERMS EXPIRE IN 2001
Henry W. Hope(2)(8).......................    58     Partner - Fulbright & Jaworski L.L.P.          1977           4,479(4)

James W. McFarland, Ph.D(5)...............    53     Dean - A.B. Freeman School of                  1994           3,500(11)
                                                       Business, Tulane University
Marvin L. West(5)(8)......................    70     Management Consultant                          1980           3,053(11)
</TABLE>

(1)  Unless otherwise indicated below, each director or nominee has sole voting
     and investment power with respect to the shares attributed to him.

(2)  Member of the Nominating and Management Development Committee of the Board
     of Directors.

(3)  Member of the Executive Committee of the Board of Directors.

(4)  Includes 4,000 shares issuable on the exercise of options.

(5)  Member of the Audit Committee of the Board of Directors.

(6)  Includes 2,000 shares issuable on the exercise of options.

(7)  Does not include 270 shares owned of record by his sons, as to which Mr.
     Seinsheimer disclaims any beneficial ownership or interest. See Notes (1)
     and (3) under Item 12 "Security Ownership of Certain Beneficial Owners and
     Management".

(8)  Member of the Compensation Committee of the Board of Directors.

(9)  Includes 18,611 shares held by the H. Kempner Trust, of which Mr. Kempner
     is a beneficiary, is one of five trustees and shares voting and investment
     power.

(10) Includes 4,000 shares issuable upon the exercise of options, but does not
     include 471,770 shares beneficially owned by the Family Trust, of which Dr.
     Levin is a co-trustee. See Note (2) under Item 12 "Security Ownership of
     Certain Beneficial Owners and Management".

(11) Includes 3,000 shares issuable on the exercise of options.


                                       12
<PAGE>   13

Fred C. Burns joined John L. Wortham & Son in 1963 and was elected Partner in
1970. He became Managing Partner in 1985. Mr. Burns serves as a director of
Chase Bank of Texas, The Council of Insurance Agents and Brokers, Assurex
Development Corporation and is a registered principal of the National
Association of Securities Dealers.

Jack T. Currie has been engaged in managing personal investments since January
1986. Prior to 1986, he was engaged in the merchant banking and investment
banking businesses. Mr. Currie is also a member of the Boards of Directors of
SM&R Growth Fund, SM&R Equity Income Fund, SM&R Balanced Fund, Inc. and
Stewart & Stevenson Services, Inc.

Henry W. Hope has been a partner in the law firm of Fulbright & Jaworski L.L.P.
since 1975.

Harris L. Kempner, Jr. has served as a Trustee of H. Kempner Trust Association
of Galveston since 1964 and as President of Kempner Capital Management, Inc.
since 1981. He serves on the Boards of Directors of Imperial Holly Corp., TNP
Enterprises and Cullen Frost Bankers, Inc.

William C. Levin, M.D. served as President of the University of Texas Medical
Branch at Galveston from 1974 until his retirement in September 1987. He served
as the Ashbel Smith Professor at the University until his retirement from that
position in September 1992 and now serves as a consultant in hematology.

James W. McFarland is dean and professor at Tulane University's A.B. Freeman
School of Business, positions he has held since 1988. Prior to that time, he was
dean of the College of Business Administration at the University of Houston. He
is a member of the Boards of Directors of Sizeler Property Investors, Inc. and
Stewart Enterprises, Inc. and serves on the Audit and Compensation Committees of
both companies. Mr. McFarland also serves on the Audit, Executive and
Compensation Committees of Sizeler Property Investors, Inc. In addition, Mr.
McFarland is a member of the Board of Directors of Petroleum Helicopters Inc.
and serves on the Audit Committee of that company.

Synott L. McNeel served as Senior Vice President, Secretary and Treasurer of the
Company from January 1983 until his retirement on December 31, 1993. Prior to
that time he served as Senior Vice President and Treasurer of the Company since
1973.

J. Fellman Seinsheimer, III has served as President and Chief Executive Officer
since July 1992. He served as President and Chief Operating Officer from January
1983 to July 1992, and prior to that time was Executive Vice President and
Secretary of both the Company and American Indemnity, the Company's principal
insurance subsidiary.

Marvin L. West has served as a management consultant since July 1991. From
November 1988 until July 1991, Mr. West handled personal investments. Mr. West
served as Chairman of the Board and President of Westheimer National Bank from
July 1984 until November 1988.

J. Fellman Seinsheimer, III is the son and William C. Levin, M.D. is the
brother-in-law of Mr. Seinsheimer, Jr., the principal stockholder of the
Company.

The Board has an established Executive Committee, Audit Committee, Nominating
and Management Development Committee and Compensation Committee. The Executive
Committee performs various tasks in the management of the business and affairs
of the Company and may exercise all of the powers of the Board when it is not in
session except those reserved by law to the Board. The Audit Committee
recommends the selection of and confers with the Company's independent
accountants regarding the scope and adequacy of annual audits and other review
procedures, reviews reports from the independent accountants relating to the
annual audits and quarterly reviews, and meets with such independent accountants
and the Company's internal auditors and financial personnel to review such
reports and the adequacy of the Company's financial controls, accounting
principles and policies. The Audit Committee also reviews compliance with the
Company's reporting obligations and certain Company policies. The Compensation
Committee is responsible for reviewing and recommending to the Board the
compensation for the executive officers and directors of the Company and for
administering the Company's employee stock option plans. The primary function of
the

                                       13
<PAGE>   14
Nominating and Management Development Committee is to review management's
recommendations for persons to serve as the Company's executive officers and as
members of the Board and committees of the Board (other than the Nominating and
Management Development Committee), together with such other nominees as it may
choose to consider, and to recommend to the Board the persons nominated by the
Committee for such positions. If the Merger is not consummated, the Nominating
and Management Development Committee will consider for the annual meeting of
stockholders to be held in 2000 nominees for director recommended by
stockholders that are submitted in writing, together with adequate information
regarding such person's biographical data and qualifications, addressed to the
Nominating and Management Development Committee at the address of the Company's
principal executive office and received no later than November 24, 1999. The
Nominating and Management Development Committee periodically considers executive
management development and succession matters.

         During 1998, the Board held five meetings, the Executive Committee held
one meeting , the Audit Committee held four meetings, the Nominating and
Management Development Committee held one meeting and the Compensation Committee
held one meeting. During 1998, each incumbent director attended 75% or more of
the total number of meetings of the Board and the committees on which he served.

                               EXECUTIVE OFFICERS

         The following table lists the persons serving as the executive officers
of the Company as of April 28, 1999, and who have been nominated for re-election
to such positions at the directors' meeting to be held following the Annual
Meeting of Stockholders. If elected and if the Merger is not consummated, the
persons named below are expected to serve in the position stated until the next
annual meeting of the directors and until their successors are elected and
qualified. Both officers have been continually employed by the Company in an
executive capacity for the last five years. Mr. Apgar is 45 years of age and has
been employed with American Indemnity Company in various capacities since April
1974, most recently as Vice President and Controller. Mr. Apgar beneficially
owns 500 shares of Common Stock, which represents less than 1% of the shares of
Common Stock outstanding as of April 28, 1999.

<TABLE>
<CAPTION>
                                                    SERVED AS
                                                     OFFICER
               NAME                                   SINCE                         POSITION
-------------------------------------------         ---------         -------------------------------------
<S>                                                   <C>             <C>
J. Fellman Seinsheimer, III................           1973            President and Chief Executive Officer
Phillip E. Apgar, C.P.A....................           1994            Vice President, Treasurer and Chief
                                                                      Financial Officer
</TABLE>

                      COMPLIANCE WITH SECTION 16(a) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors and persons who own more than 10% of a
registered class of the Company's equity securities to file Form 3, Form 4 and
Form 5 reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by the regulation to furnish the Company with copies of all Section
16(a) reports they file.

         To the Company's knowledge, based solely on a review of Forms 3 and 4
and amendments thereto furnished to the Company during its most recent fiscal
year, and Forms 5 and amendments thereto furnished to the Company with respect
to its most recent fiscal year, and written representations from reporting
persons that no Form 5 was required, all Section 16(a) filing requirements were
complied with.

                                       14
<PAGE>   15
ITEM 11.    EXECUTIVE COMPENSATION.

                             EXECUTIVE COMPENSATION

                      REPORT OF THE COMPENSATION COMMITTEE
                            OF THE BOARD OF DIRECTORS

         This report is presented by the Compensation Committee (the
"Committee") of the Board of Directors of the Company relating to the
compensation policies of the Company for its executive officers. This report
sets forth the major components of executive compensation and the basis by which
the 1998 compensation determinations were made by the Committee and the Board of
Directors with respect to the executive officers of the Company.

         The compensation programs of the Company as they apply to executive
officers are generally administered by or under the direction of the Committee
and are reviewed on an annual basis to insure that remuneration levels and
benefits are competitive and reasonable in light of the overall performance of
the Company in recent years. The Committee is composed of three directors who
are not employees of the Company or its subsidiaries and is responsible for
recommending to the full Board of Directors compensation for the executive
officers of the Company. Stock based compensation decisions for the Company's
executive officers are in each case made by the full Board of Directors of the
Company following recommendations by the Committee.

                                       15



<PAGE>   16



COMPENSATION POLICIES

         In determining compensation for the Company's executive officers, the
Committee and the Board seek to ensure that the executive officers are
effectively compensated in terms that are both internally equitable and
externally competitive. Compensation decisions should include consideration of
all factors relevant to these decision, including the performance of the
specific officer under consideration, the financial condition and results of
operations of the Company, conditions prevailing generally in the Company's
industry during the applicable periods and the Company's performance in light of
such conditions. Management's recommendations are requested and considered by
the Committee.

COMPENSATION PROGRAM CONSIDERATIONS

         In 1998, compensation for the Company's executive officers consisted
primarily of base salary and certain other benefits, including contributions to
the Company's cash balance retirement plan and to the Company's 401(k) plan. The
Committee and the Board considered certain of these components as follows.

         Base Salary -- Base salary levels are determined principally on the
factors mentioned above, as well as the Company's past compensation practices,
compensation practices in the applicable geographic region and by comparison
with companies that are similar to the Company. The most important factor in the
Committee's determination is the Committee's understanding and perception of how
the particular officer performed during the preceding periods under the
circumstances as they existed at such times.

         In early 1998, the Company obtained updated compensation information
from two outside firms with respect to both the Chief Executive Officer and the
Chief Financial Officer (the "compensation survey"). This compensation survey
illustrated that the executive officers' base salaries were at or below the
average or predicted base salaries, as well as the total compensation levels, as
shown in the compensation survey for the officers' respective positions. While
the companies used in the compensation survey are not known by the Committee,
the Committee believes that they are not the companies comprising the indices
utilized in the performance graph.

         In general, base salary levels and increases in these levels reflect
the Committee's view of the contribution made by the particular executive
officer based on, among other things, the factors listed above. These factors
are typically subjective. No quantifiable goals or standards are established,
although the compensation survey provides certain benchmarks considered by the
Committee for compensation levels. The Committee does not believe that
profitability of the Company in any one year should be determinative of
compensation levels. However, profitability and other results of operations of
the Company must be considered, as well as the performance of the Company
relative to other companies in the industry. The Committee noted the
disappointing results for 1997, as well as 1995, although it recognized the
significant improvement in 1996 over 1995. Though discussions at previous Board
meetings, the Committee was aware of the matters that contributed to the 1995
and 1997 results. The Committee discussed other items of operations of which it
was aware, including the Company's experiences in converting to its new computer
system. Also noted was management's recommendation that no increases in
compensation be given to executive officers in 1998 and that this was consistent
with management's position in the past. Following discussion on these and other
matters, the Committee recommended no adjustment in the base salaries for the
executive officers in 1998.

         Stock Options -- The Committee and the Board believe that stock options
provide a valuable incentive to the key employees of the Company, particularly
those having substantial responsibility for the future and success of the
Company. By providing an opportunity to increase their ownership of Company
stock, the interests of the stockholders and those key personnel will become
more closely aligned. Stock options provide the option holder with additional
incentive to remain in the Company's employ and to bring about greater growth
and success of the Company. Options also provide a means to tie compensation
more closely to the Company's financial performance to the extent reflected in
the price of the Company's Common Stock. The Chief Executive Officer currently
has no options outstanding, although the Chief Financial Officer has outstanding
options granted several years ago.


                                       16

<PAGE>   17


         Following the discussion noted above, the Committee determined that no
option grants for the executive officers would be recommended to the Board at
the time of these actions by the Committee, but may be considered later in the
year.

         Other Matters -- The Company has various other employee benefit plans
and executive officers participate in these on the same terms as eligible,
non-executive employees, subject to any legal limits on such participation.
These include the cash balance retirement plan and 401(k) Plan adopted by the
Company's subsidiary and an automobile bonus plan whereby employees are
compensated for taxes incurred for personal use of company automobiles.

1998 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER

         In considering the compensation for J. Fellman Seinsheimer, III, the
President and Chief Executive Officer of the Company, the Committee considered
the performance of the Company in 1997, its most recently completed fiscal year,
as well as in previous periods. The Committee recognizes that performance of
Company personnel during difficult periods can be more important, and can
provide a greater contribution, than during more prosperous periods,
notwithstanding results that are not satisfactory. Nevertheless, the Committee
believes the results of the Company must be considered along with other
operational issues. Following discussion of these and the matters mentioned
above, the Committee determined that there should be no upward or downward
adjustment in the base compensation of the Chief Executive Officer.

SUMMARY

         The Committee believes that the annual compensation for the Company's
executive officers appropriately reflects the contribution of such officers to
the Company and is reflective of the individual performance and the financial
performance of the Company.

                          COMPENSATION COMMITTEE OF THE
                               BOARD OF DIRECTORS

                                  Henry W. Hope
                             Harris L. Kempner, Jr.
                                 Marvin L. West

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Harris L. Kempner, Jr., a director of the Company, is Chairman Emeritus
of the Board of United States National Bank, which serves as the principal
banking institution for the Company. Henry W. Hope, a director of the Company,
is a partner in the law firm of Fulbright & Jaworski L.L.P., which serves as
corporate and securities counsel to the Company.

         The full Board of the Company approves all stock grants to employees,
including the executive officers. Mr. Seinsheimer, III the sole employee
director of the Company, abstains from voting with respect to such matters. Mr.
Seinsheimer, III, however, does make recommendations to the Compensation
Committee and the full Board with regard to compensation for certain employees
and stock option grants for all employees of the Company.

SUMMARY OF COMPENSATION

         The following table summarizes compensation information concerning each
of the Company's executive officers for each of the three years ended December
31, 1998.


                                       17
<PAGE>   18

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                 Long Term
                                                                                                Compensation
                                            Annual Compensation                                   (Awards)
                                  -----------------------------------------                     ------------
                                                                                 Other             Shares
                                                                 Annual         Underlying      All Other
                                                  Salary          Bonus       Compensation        Options      Compensation
Name and Principal Position           Year         ($)             ($)           ($)(1)             (#)           ($)(2)
                                      ----        -------        -------      ------------      ------------   ------------
<S>                                   <C>         <C>            <C>          <C>               <C>            <C>
J. Fellman Seinsheimer, III           1998        212,500          --            15,728             --            4,764
President and Chief                   1997        212,500          --            12,911             --            6,107
Executive Officer                     1996        206,400          --            14,254             --            6,192

Phillip E. Apgar, C.P.A.              1998        117,276          --            12,659             --            3,518
Vice President, Treasurer             1997        117,276          --            10,975             --            3,372
and Chief Financial Officer           1996        113,850          --            12,148             --            3,416
</TABLE>

(1)  Amounts represent tax gross-ups for the lease value and expenses relating
     to the use of Company automobiles. The dollar value of all other
     perquisites and personal benefits were less than the lesser of either
     $50,000 or 10% of the total annual salary and bonus for each named
     executive officer and therefore have been excluded.

(2)  Amounts represent matching contributions made by the Company under the
     Company's 401(k) Plan.

Each executive officer of the Company holds office until the regular meeting of
directors following the annual meeting of stockholders or until his successor is
elected and qualifies.

COMPENSATION OF DIRECTORS

         Directors of the Company who are not employed by the Company or its
subsidiaries receive $1,200 for each meeting of the Board attended by such
director and $50 to $300 for each meeting of the Company's subsidiaries' Boards
of Directors on which such persons may serve. Committee members serving on
established committees of the Board receive $300 for each meeting attended. The
Company does not pay director or committee fees to persons who also serve as
officers of the Company.

         Non-employee directors also receive options every other year to
purchase 1,000 shares of the Company's Common Stock pursuant to the 1997
Non-Employee Director Stock Option Plan (the "1997 Director Plan"), which was
approved by the Company's stockholders in April 1997. See "Option Grants and
Exercises". Each option is exercisable for a term of ten years from the date of
grant, subject to earlier termination as set forth in the plan. Prior to 1997,
options to purchase an aggregate of 22,000 shares were granted to non-employee
directors under the Company's 1992 Non-Employee Director Stock Option Plan (the
"1992 Director Plan"). Upon approval of the 1997 Director Plan by the Company's
stockholders, the 1992 Director Plan terminated and the remaining 3,000 shares
then reserved for issuance under the 1992 Director Plan were reclassified as
authorized but unissued shares of the Company's Common Stock. All options
previously granted under the 1992 Director Plan will continue for the remainder
of their respective terms.

OPTION GRANTS AND EXERCISES

         The Company currently maintains two plans pursuant to which options to
purchase shares of the Company's Common Stock are outstanding or available for
future grants.

         In April 1992, the Company's stockholders approved the 1992 Employee
Stock Option Plan (the "1992 Option Plan"). Options to purchase up to an
aggregate of 100,000 shares may be granted under the 1992 Option Plan at no less
than the fair market value of the shares of Common Stock on the date of grant
for incentive stock options, and no less than 85% of the fair market value of
the shares of Common Stock on the date of grant for non-incentive stock options.
Under the 1997 Director Plan, 25,000 shares were reserved for the grant of
options. The selection of non-employee directors to whom options are to be
granted, the number of shares subject to an option, the date of grant, the


                                       18
<PAGE>   19


exercise price and the term of an option are specified in the 1997 Director
Plan. Options to purchase 1,000 shares and 8,000 shares were granted under the
1992 Director Plan and the 1997 Director Plan in January 1997 and January 1998,
respectively. As of April 28, 1999, there were 100,000 shares available for the
grant of options under the 1992 Option Plan and 17,000 shares under the 1997
Director Plan.

AGGREGATED OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998

         The following table sets forth information concerning each exercise of
stock options during the year ended December 31, 1998 by each of its executive
officers and the value of unexercised in-the-money options at December 31, 1998.

                       OPTION EXERCISES AND OPTION VALUES

<TABLE>
<CAPTION>
                                                                       Number of Shares
                                                                    Underlying Unexercised                Value of Unexercised
                                                                            Options                      In-the-money Options at
                                                                     at December 31, 1998                   December 31, 1998
                                                                 ------------------------------      ------------------------------
                                     Shares
                                    Acquired        Value
                                   On Exercise    Realized       Exercisable      Unexercisable      Exercisable      Unexercisable
             Name                      (#)           ($)             (#)               (#)               (#)               (#)
             ----                  -----------    --------       -----------      -------------      -----------      -------------
<S>                                <C>            <C>            <C>              <C>                <C>              <C>
Phillip E. Apgar...............         --           --             3,000              --                -0-               --
</TABLE>

PERFORMANCE GRAPH

         The following graph compares the yearly percentage change in the
Company's cumulative total stockholder return on Common Stock with the
cumulative total return of the NASDAQ U.S. Market Index and the Dow Jones
Property and Casualty Insurance Industry Index for the five years ended December
31, 1998. The graph assumes that the value of the investment in the Company's
Common Stock and each index was $100 at December 31, 1993 and that all dividends
were reinvested.

                 COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
               AMONG THE COMPANY, THE NASDAQ U.S. MARKET INDEX AND
          THE DOW JONES PROPERTY AND CASUALTY INSURANCE INDUSTRY INDEX

                 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

<TABLE>
<CAPTION>
MEASUREMENT PERIOD                           NASDAQ            DOW JONES
(FISCAL YEAR COVERED)        AIFC            U.S.              P & C
<S>                          <C>             <C>               <C>
1993                         100             100               100
1994                          79              98               105
1995                          79             138               147
1996                          83             170               177
1997                         113             209               261
1998                          87             293               282
</TABLE>

PENSION PLAN

         Effective January 1, 1988, American Indemnity established a
noncontributory, retirement plan (the "Plan") carried and funded through a group
annuity covering substantially all full-time employees over 21 years of age who
have more than one year of service. The Plan was amended January 1, 1992 to
comply with the Tax Reform Act that was effective January 1, 1989. Effective
January 1, 1996, the Plan was converted to a Cash Balance Plan and the


                                       19
<PAGE>   20

Company contributes for each participant 5% of such person's salary. In
addition, the Cash Balance Plan provides for 6% interest per annum on such cash
balance. Similar to the pre-1996 Plan, an annuity at retirement, which is based
upon stated plan factors, is available as an alternative to the lump sum payment
of the cash balance. The following table sets forth estimated cash balances and
estimated annuities at an assumed retirement age of 65 and assumed annual salary
growth of 4%.

PROJECTED CASH BALANCES

                SALARY AT JANUARY 1, 1998, OR HIRE DATE IF LATER

<TABLE>
<CAPTION>
                                         $20,000       $40,000      $60,000        $80,000         $100,000
                                         --------      --------     --------      ----------      ----------
<S>                                      <C>           <C>          <C>           <C>             <C>
Age at January 1, 1998, or hire
date if later
25....................................   $274,251      $548,502     $822,753      $1,097,004      $1,371,255
35....................................    125,013       250,026      375,039         500,052         625,065
45....................................     50,806       101,612      152,418         203,224         254,030
55....................................     15,532        31,064       46,596          62,128          77,660
</TABLE>


PROJECTED ANNUAL ANNUITY

                SALARY AT JANUARY 1, 1998, OR HIRE DATE IF LATER

<TABLE>
<CAPTION>
                                         $20,000       $40,000      $60,000        $80,000         $100,000
                                         --------      --------     --------      ----------      ----------
<S>                                      <C>           <C>          <C>           <C>             <C>
Age at January 1, 1998, or hire
date if later
25....................................    $25,760       $51,520      $77,280        $103,040        $128,800
35....................................     11,742        23,484       35,226          46,968          58,710
45....................................      4,772         9,544       14,316          19,088          23,860
55....................................      1,459         2,918        4,377           5,836           7,295
</TABLE>

         The benefits under the Cash Balance Plan would be supplemented by the
benefits, if any, from the Plan as in effect prior to January 1, 1996 and any
benefit which was earned under previous plans prior to January 1, 1988. The
compensation covered by the Plan includes all salary costs, excluding bonuses,
for all employees who have reached the age of 21. Such compensation includes the
salaries set forth in the salary column of the Summary Compensation Table. Upon
retirement at an assumed retirement age of 65, the estimated annual and lump sum
benefit payable under the Cash Balance Plan would be approximately $15,000 and
$159,600, respectively, for J. Fellman Seinsheimer, III and approximately
$39,000 and $420,000, respectively, for Phillip E. Apgar. As of April 28, 1999,
Mr. Seinsheimer, III and Mr. Apgar are the only employees of the Company whose
annual salaries exceed the range of salaries reflected in the tables above.

KEY EXECUTIVE SEVERANCE AGREEMENTS

         J. Fellman Seinsheimer, III, the President and Chief Executive Officer
of the Company and American Indemnity Company ("American Indemnity"), a
subsidiary of the Company, and Eugene Hornstein, First Vice President of
American Indemnity, have each entered into a Key Executive Severance Agreement
("Executive Agreement") with the Company and American Indemnity. Each officer's
Executive Agreement was effective as of February 7, 1983 and provides that if in
the event that a third person or group commences a tender or exchange offer,
circulates a proxy to stockholders, or takes other steps to effect a change in
control of the Company, such officer will not voluntarily leave the employ of
the Company or American Indemnity, as the case may be, and will continue to
perform the duties of his office until such time as such third person has
abandoned or terminated his efforts to effect a change of control or until a
change of control has occurred. In the event that such officer's employment with
the Company or any of its subsidiaries


                                       20
<PAGE>   21
terminates for any reason (either voluntary or involuntary, other than as a
consequence of his death, disability or willful misconduct) within two years
after a change of control of the Company, the Company or American Indemnity, or
both, will (i) pay to such officer as compensation for services rendered to the
Company and its subsidiaries a lump sum in cash equal to five times the highest
aggregate compensation paid or payable to such officer with respect to any 12
consecutive month period during the three years ending with the date of such
officer's termination, and (ii) continue to provide such officer, for a period
of 15 years from the date of his termination, with such life, accident, medical
and long-term disability insurance plans of the Company and its subsidiaries as
provided to him prior to the change of control, unless and until he obtains
other employment that provides comparable coverage. For purposes of each
officer's Executive Agreement, a change of control of the Company will result
from the occurrence of either of the following events: (i) a third person,
including a "group" as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended, becomes the beneficial owner of shares of the Company
having 25% or more of the total number of votes that may be cast for the
election of directors of the Company; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination of the foregoing
transactions, the persons who were directors of the Company before any of such
transactions shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company. The Executive Agreements also
provide that, for a period of one year following any voluntary termination
(except one following a change in control of the Company) by an officer who is a
party to the agreement, that such officer will not participate in any business
which is in competition with the business of the Company and its subsidiaries
within a defined geographic area. Except during the pendency of or following a
change in control, the Board of Directors may determine that an officer who is a
party to an Executive Agreement is no longer a "key executive" of the Company or
American Indemnity and thereupon terminate such officer's Executive Agreement.
If the terms of the Executive Agreements had been activated during the Company's
1998 fiscal year, the amount which would have been payable to Mr. Seinsheimer is
approximately $1,062,500 and to Mr. Hornstein is approximately $496,000. Such
payments, if required to be made during 1998, would have had an adverse impact
on the 1998 reported results of operations; however, they would not have had an
adverse effect on the overall financial condition of the Company.

         In connection with the negotiations between the Company and United Fire
& Casualty Company leading up to the execution of the acquisition agreement
referred to Item 1 "Business -- General Development of Business" above, the
agreement with Mr. Seinsheimer has been superseded by an employment agreement
(the "Employment Agreement") entered into between Mr. Seinsheimer and United
Fire as of March 4, 1999, which becomes effective as of the effective time of
the Merger. The Employment Agreement provides that, upon closing of the Merger,
Mr. Seinsheimer's Key Executive Severance Agreement will terminate. The
Employment Agreement further provides for a three year term of employment,
commencing on the date of closing of the Merger, at Mr. Seinsheimer's current
annual salary. Mr. Seinsheimer will also receive comparable health insurance
benefits from United Fire until age 65. If United Fire terminates Mr.
Seinsheimer's employment prior to the end of the three year term for any reason
other than willful misconduct, United Fire is obligated to continue to pay Mr.
Seinsheimer's salary until the end of such three year term. Mr. Hornstein's
Executive Agreement has not been superseded or modified in connection with the
Merger, and remains in effect.

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

The following table sets forth as of April 28, 1999, (i) the ownership of Common
Stock by each person known by management of the Company to be the beneficial
owner of more than 5% of the outstanding shares of Common Stock, and (ii) the
number of shares of Common Stock owned by all executive officers and directors
of the Company as a group.

<TABLE>
<CAPTION>

NAME AND ADDRESS OF                              NUMBER OF SHARES              PERCENT
BENEFICIAL OWNER                                BENEFICIALLY OWNED              CLASS
-------------------                             ------------------             -------
<S>                                                 <C>                        <C>

J. F. Seinsheimer, Jr.(1).......................     576,880                    29.4%
4809 Woodrow
Galveston, Texas 77551

Irma K. Seinsheimer Trust(2)(3).................     471,770                    24.0%
2201 Market Street
Galveston, Texas 77550

American Finance Company of Galveston(2)(3).....     464,095                    23.6%
United States Securities Corporation
One American Indemnity Plaza
Galveston, Texas 77550

J. Fellman Seinsheimer, III(3)..................     578,205                    29.5%
One American Indemnity Plaza
Galveston, Texas 77550

Dimensional Fund Advisors Inc.(4)...............     116,100                     5.9%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401

Franklin Resources, Inc.(5).....................     160,000                     8.2%
777 Mariners Island Blvd.
San Mateo, California 94404

Tweedy, Browne Company LLC(6)...................     199,320                    10.2%
52 Vanderbilt Avenue
New York, New York 10017

Executive officers and directors as
 a group (10 persons)(7)........................     672,236                    34.3%
</TABLE>

(1) J. F. Seinsheimer, Jr. resigned as a member of the Board of Directors on
    April 24, 1995 and was named Chairman Emeritus. As of April 28, 1999, Mr.
    Seinsheimer, Jr. shared voting and dispositive power over 38,095 shares
    (1.9%) of the Company's Common Stock with his son, J. Fellman Seinsheimer,
    III, and United States National Bank of Galveston as co-trustees of the
    Jessie Lee Seinsheimer Trust (the "Seinsheimer Trust"). Mr. Seinsheimer,
    Jr. is the sole beneficiary under the Seinsheimer Trust until his death, at
    which time the remainder will be divided among his children. Additionally,
    pursuant to powers of attorney granted by Mr. Seinsheimer, Jr. to his son,
    J. Fellman Seinsheimer, III, Messrs. Seinsheimer will share voting and
    dispositive power over the 67,015 shares (3.4%) of the Company's Common
    Stock owned of record by Mr. Seinsheimer, Jr. Mr. Seinsheimer, Jr., as
    co-trustee of the Irma K. Seinsheimer Trust, as described further in Note 2
    below, may be deemed to be the beneficial owner of an additional 471,770
    shares of Common Stock beneficially owned by such trust.

(2) The Irma K. Seinsheimer Trust (the "Family Trust") is the beneficial owner
    of 471,770 shares of Common Stock. Of the 471,770 shares (24.0%) of Common
    Stock beneficially owned, 7,675 shares (0.4%) are owned of record and
    464,095 shares (23.6%) are owned by two corporations controlled by the
    Family Trust, namely American Finance Company of Galveston and United States
    Securities Corporation, that owned of record 289,764 shares (14.8%) and
    174,331 shares (8.9%) of the Company's Common Stock, respectively. Mr.
    Seinsheimer, Jr. and William C. Levin, M.D. (a director of the Company) are
    co-trustees of the Family Trust and as such have shared voting and
    dispositive power with respect to the shares controlled by the Family Trust.
    However, Mr. Seinsheimer, Jr. exercises sole voting and dispositive power
    over the 7,675 shares owned of record by the Family Trust. Dr. Levin
    exercises no voting or dispositive power over, has no pecuniary interest in
    and disclaims any beneficial ownership or interest in the shares of Common
    Stock beneficially owned by the Family Trust.

(3) As of April 28, 1999, J. Fellman Seinsheimer, III owned of record 9,000
    shares (0.5%) of the Company's Common Stock, which does not include 270
    shares owned of record by his sons, as to which he disclaims any beneficial
    ownership or interest. Pursuant to the Powers of Attorney granted by J. F.
    Seinsheimer, Jr. to his son, J. Fellman Seinsheimer, III, the Messrs.
    Seinsheimer share voting and dispositive power over 67,015 shares (3.4%) of
    the Company's Common Stock owned of record by J. F. Seinsheimer, Jr.
    Additionally, J. Fellman Seinsheimer, III, J. F. Seinsheimer, Jr. and United
    States National Bank of Galveston, as co-trustee of the Seinsheimer Trust,
    share voting and dispositive power over 38,095 shares (1.9%) of the
    Company's Common Stock owned by such trust. Additionally, as President of
    American Finance Company of Galveston and United States Securities
    Corporation, which corporations owned of record 289,764 shares (14.8%) and
    174,331 shares (8.9%) of Common Stock, respectively, J. Fellman Seinsheimer,
    III has shared voting and dispositive power over an aggregate of 464,095
    shares owned by such corporations.

(4) Based upon information contained in a Schedule 13G filed with the Securities
    and Exchange Commission and other information provided by Dimensional
    Fund Advisors Inc., a registered investment advisor ("Dimensional").
    According to such information, as of December 31, 1998, all of such shares
    are held in portfolios of DFA Investment Dimensions Group Inc., a registered
    open-end investment company (the "Fund"), or in series of The DFA
    Investment Trust Company, a Delaware business trust (the "Trust"), or the
    DFA Group Trust and the DFA Participation Group Trust, investment vehicles
    for qualified employee benefit plans, for all of which Dimensional serves as
    investment manager. Dimensional exercises sole dispositive power and sole
    voting power with respect to all such shares. The Company has been advised
    by Dimensional that Dimensional disclaims beneficial ownership of all such
    shares.

(5) Based upon information contained in a Schedule 13G filed with the Securities
    and Exchange Commission by Franklin Resources, Inc. ("FRI"), the
    parent holding company of certain direct and indirect investment advisory
    subsidiaries (the "Advisory Subsidiaries"). The Advisory Subsidiaries
    advise one or more open or closed-end investment companies or other managed
    accounts which beneficially owned 160,000 shares of Common Stock. The
    Advisory Subsidiaries are granted sole voting and investment power over such
    shares by the advisory clients, and, as a result, the Advisory Subsidiaries
    may be deemed to be the beneficial owner of the 160,000 shares of Common
    Stock. FRI and Charles B. Johnson and Rupert H. Johnson, Jr., the principal
    stockholders of FRI, also may be deemed to be the beneficial owner of the
    160,000 shares of Common Stock. Each of FRI, Charles B. Johnson, Rupert H.
    Johnson, Jr. and the Advisory Subsidiaries disclaim beneficial ownership of
    all such shares.

(6) Based upon information contained in a Schedule 13D filed with the Securities
    and Exchange Commission and other information provided by Tweedy,
    Browne Company LLC ("TBC"). TBC is a registered investment advisor
    beneficially owning 199,320 shares of Common Stock, of which TBC exercises
    shared dispositive power with respect to all such shares and sole voting
    power with respect to 184,506 such shares. Additionally, certain of the
    general partners of TBC may be deemed to have sole power to vote certain
    shares and shared power to direct the disposition of all the shares of
    Common Stock held in the TBC Accounts.

(7) Based upon information furnished by directors and executive officers.
    Includes 26,000 shares issuable on exercise of options.

                                       21
<PAGE>   22
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                               OTHER TRANSACTIONS

         Harris L. Kempner, Jr., a director of the Company, is Chairman Emeritus
of the Board of United States National Bank, which serves as the principal
banking institution for the Company.

         Henry W. Hope, a director of the Company, is a partner in the law firm
of Fulbright & Jaworski L.L.P., which serves as corporate and securities counsel
to the Company.

         Eugene Hornstein, in his capacity as First Vice President of American
Indemnity, received compensation from such company in the amount of $93,840 as a
base salary, $2,811 in matching contributions made by the Company under the
Company's 401(k) Plan and a $2,500 bonus included as earnings in connection with
the loss of his Company automobile for the fiscal year ending December 31, 1998.
Mr. Hornstein is the son-in-law of William C. Levin, M.D., a director of the
Company.

         Matthew W. Seinsheimer, in his capacity as Assistant Vice President of
American Indemnity, received compensation from such company in the amount of
$57,450 as a base salary and $1,795 in matching contributions made by the
Company under the Company's 401(k) Plan. Mr. Seinsheimer is the son of J.
Fellman Seinsheimer, III, president and chief executive officer of the Company.
Mr. Seinsheimer resigned from the Company on October 30, 1998.

         See Notes (1) and (3) under Item 12 "Security Ownership of Certain
Beneficial Owners and Management" for information concerning J. Fellman
Seinsheimer, III's shared power to vote and dispose of shares of Common Stock
owned of record by his father, Mr. Seinsheimer, Jr., and shares of Common Stock
held by the Seinsheimer Trust.


                                       22
<PAGE>   23




                                     PART IV

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

       (a)    DOCUMENTS FILED AS A PART OF THIS REPORT.

1.     FINANCIAL STATEMENTS

       The financial statements listed below appear in the Annual Report. Such
financial statements are incorporated herein by reference.

         Consolidated Balance Sheets, December 31, 1998 and 1997

         Consolidated Statements of Income for the Three Years Ended December
         31, 1998

         Consolidated Statements of Cash Flows for the Three Years Ended
         December 31, 1998

         Consolidated Statements of Stockholders' Equity for the Three Years
         Ended December 31, 1998

         Notes to Consolidated Financial Statements



2.     FINANCIAL STATEMENT SCHEDULES


<TABLE>
<CAPTION>
                                                                                                PAGE
                                                                                                ----
<S>                                                                                             <C>
       Schedule I -        Summary of Investments - Other Than Investments
                           in Related Parties, December 31, 1998 ..........................      S-1

       Schedule II -       Condensed Financial Information of Registrant:
                           Balance Sheets, December 31, 1998 and 1997 .....................      S-2
                           Statements of Income for the Three Years Ended
                           December 31, 1998 ..............................................      S-3
                           Statements of Cash Flows for the Three Years Ended
                           December 31, 1998 ..............................................      S-4

       Schedule VIII -     Valuation and Qualifying Accounts,
                           December 31, 1998 and 1997 .....................................      S-5
</TABLE>



       All other schedules are omitted because they are not required or because
       the required information is included in the financial statements or
       related footnotes.


                                       23
<PAGE>   24




3.  EXHIBITS

    The Company undertakes to furnish to any stockholder so requesting a copy of
any of the following exhibits upon payment to the Company of the reasonable
costs incurred by the Company in furnishing any such exhibit.

         2.1      Agreement and Plan of Merger, dated March 4, 1999, by and
                  among the Company, United Fire & Casualty Company and AI
                  Acquisition Corporation (Exhibit 2.1 to the Company's Current
                  Report on Form 8-K, filed March 10, 1999, is incorporated by
                  reference herein).

         3.1.     Certificate of Incorporation of the Company, as amended
                  (Exhibit 3.1 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 1989, is incorporated by reference
                  herein).

         3.2.     By-Laws of the Company, as amended (Exhibit 3.2 to the
                  Company's Annual Report on Form 10-K for the year ended
                  December 31, 1992 is incorporated by reference herein).

         4.1.     See Exhibit Nos. 3.1 and 3.2 for provisions of the Certificate
                  of Incorporation, as amended, and the By-Laws, as amended, of
                  the Company defining the rights of the holders of the Common
                  Stock.

         +10.1.   The Company's Key Executive Severance Plan (Exhibit 10.3 to
                  the Company's Annual Report on Form 10-K for the year ended
                  December 31, 1990, is incorporated by reference herein).

         +10.2.   Form of Key Executive Severance Agreement (Exhibit 10.4 to the
                  Company's Annual Report on Form 10-K for the year ended
                  December 31, 1990, is incorporated by reference herein).

         +10.3.   The Company's 1992 Employee Stock Option Plan (Exhibit 4.4 to
                  the Company's Registration Statement on Form S-8 (No.
                  33-47359), is incorporated by reference herein).

         +10.4.   Form of the Company's Non-Incentive Stock Option Agreement
                  (Exhibit 4.5 to the Company's Registration Statement on Form
                  S-8 (No. 33-47359), is incorporated by reference herein).

         +10.5.   Form of the Company's Incentive Stock Option Agreement
                  (Exhibit 4.6 to the Company's Registration Statement on Form
                  S-8 (No. 33-47359), is incorporated by reference herein).

         +10.6.   The Company's 1992 Non-Employee Director Stock Option Plan
                  (Exhibit 4.4 to the Company's Registration Statement on Form
                  S-8 (No. 33-47546), is incorporated by reference herein).

         +10.7.   Form of the Company's Non-Employee Director Stock Option
                  Agreement (Exhibit 4.5 to the Company's Registration Statement
                  on Form S-8 (No. 33-47546), is incorporated by reference
                  herein).

         +10.8.   The Company's 1997 Non-Employee Director Stock Option Plan
                  (Exhibit 4.4 to the Company's Registration Statement on Form
                  S-8 (No. 333-42439), is incorporated by reference herein).

         +10.9.   Form of the Company's Non-Employee Director Stock Option
                  Agreement (Exhibit 4.5 to the Company's Registration Statement
                  on Form S-8 (No. 333-42439), is incorporated by reference
                  herein).

         *13.1.   Portions of the Company's Annual Report to Stockholders for
                  the fiscal year ended December 31, 1998.

         21.1.    List of the Company's Subsidiaries (Exhibit 22.1 to the
                  Company's Annual Report on Form 10-K for the year ended
                  December 31, 1990, is hereby incorporated by reference
                  herein).

         *23.1.   Consent of Independent Auditors.

        **24.1.   Powers of Attorney.

        **27.1    Financial Data Schedule.

----------

*        Filed herewith.

**       Previously filed.

+        Management contract or compensatory plan or arrangement required to be
         filed pursuant to Item 14 of Form 10-K.

       (b)    REPORTS ON FORM 8-K.

                None.



                                       24
<PAGE>   25
                                   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.

                                        AMERICAN INDEMNITY FINANCIAL CORPORATION



                                    By: /s/ VAUGHN V. VAUGHAN
                                       -----------------------------------------
Dated July 12, 1999                    Vaughn V. Vaughan
                                       Vice President, Treasurer and
                                       Chief Financial Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on the 29th day of March, 1999, by the
following persons on behalf of the Registrant and in the capacities indicated.


<TABLE>
<CAPTION>
              SIGNATURE                                             TITLE
              ---------                                             -----
<S>                                                   <C>
/s/  J. FELLMAN SEINSHEIMER, III                        PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
----------------------------------------------------      (PRINCIPAL EXECUTIVE OFFICER)
    (J. FELLMAN SEINSHEIMER, III)

/s/  VAUGHN V. VAUGHAN                                 VICE PRESIDENT, TREASURER AND
----------------------------------------------------   CHIEF FINANCIAL OFFICER
          VAUGHN V. VAUGHAN                               (PRINCIPAL FINANCIAL OFFICER AND
                                                          PRINCIPAL ACCOUNTING OFFICER)

       WILLIAM C. LEVIN, M.D.*                        DIRECTOR
----------------------------------------------------
       (WILLIAM C. LEVIN, M.D.)

       HARRIS L. KEMPNER, JR.*                        DIRECTOR
----------------------------------------------------
       (HARRIS L. KEMPNER, JR.)

           MARVIN L. WEST*                            DIRECTOR
----------------------------------------------------
           (MARVIN L. WEST)

            JACK T. CURRIE*                           DIRECTOR
----------------------------------------------------
           (JACK T. CURRIE)

            HENRY W. HOPE*                            DIRECTOR
----------------------------------------------------
           (HENRY W. HOPE)

          SYNOTT L. MCNEEL*                           DIRECTOR
----------------------------------------------------
          (SYNOTT L. MCNEEL)

      JAMES W. MCFARLAND, PH.D.*                      DIRECTOR
----------------------------------------------------
     (JAMES W. MCFARLAND, PH.D.)

            FRED C. BURNS*                            DIRECTOR
----------------------------------------------------
           (FRED C. BURNS)


*By: /s/  J. Fellman Seinsheimer, III
     -----------------------------------------------
    (J. Fellman Seinsheimer, III, pursuant to Power
    of Attorney)
</TABLE>


                                       25
<PAGE>   26



                          INDEPENDENT AUDITORS' REPORT


AMERICAN INDEMNITY FINANCIAL CORPORATION:

         We have audited the consolidated financial statements of American
Indemnity Financial Corporation and subsidiaries (the "Company") as of December
31, 1998 and 1997, and for each of the three years in the period ended December
31, 1998, and have issued our report thereon dated March 19, 1999; such
consolidated financial statements and report are included in your 1998 Annual
Report to Stockholders and are incorporated herein by reference. Our audits also
included the financial statement schedules of the Company, listed in Item 14.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.




DELOITTE & TOUCHE LLP

Houston, Texas
March 19, 1999


                                       26
<PAGE>   27



                                                                      SCHEDULE I

            AMERICAN INDEMNITY FINANCIAL CORPORATION AND SUBSIDIARIES

                       SUMMARY OF INVESTMENTS - OTHER THAN
                         INVESTMENTS IN RELATED PARTIES


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                       DECEMBER 31, 1998
                                                                       -----------------------------------------------------
                                                                                                               AMOUNT
                                                                                                           AT WHICH SHOWN
                                                                                             MARKET        IN THE BALANCE
                              TYPE OF INVESTMENT                          COST(a)            VALUE              SHEET
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                <C>                <C>
Fixed maturities:
   Bonds
     United States government and government
       agencies and authorities .......................................    $21,209,268       $21,631,169        $21,631,169
     Mortgage-backed securities issued by U.S.
       government agencies and authorities ............................     21,476,324        21,546,319         21,546,319
     Collateralized mortgage obligations ..............................      9,772,422         9,833,412          9,833,412
     States, municipalities and political subdivisions ................      1,119,869         1,207,010          1,207,010
     All other.........................................................     12,025,991        12,609,642         12,609,642
                                                                          ------------      ------------       ------------
         Total fixed maturities .......................................     65,603,874        66,827,552         66,827,552
                                                                           -----------       -----------        -----------

Equity securities:
   Common stocks
     Public utilities .................................................    $ 4,467,773       $ 6,515,439        $ 6,515,439
     Banks, trusts and insurance companies ............................      2,452,982         3,967,098          3,967,098
     Industrial, miscellaneous and all other ..........................      4,386,973         5,112,512          5,112,512
   Nonredeemable preferred stocks .....................................      1,127,601         1,136,433          1,136,433
                                                                          ------------      ------------       ------------
         Total equity securities ......................................     12,435,329        16,731,482         16,731,482
                                                                           -----------       -----------        -----------
         Total investments ............................................    $78,039,203       $83,559,034        $83,559,034
                                                                           ===========       ===========        ===========
</TABLE>


----------

(a)      Original cost of equity securities and, as to fixed maturities,
         original cost, reduced by repayments and adjusted for amortization of
         premium or accrual of discount.



                                      S-1
<PAGE>   28



                                                                     SCHEDULE II

                    AMERICAN INDEMNITY FINANCIAL CORPORATION
                              (PARENT COMPANY ONLY)

                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT


                                 BALANCE SHEETS


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                                              DECEMBER 31,
                                                                                   ------------------------------------
                                                                                         1998              1997
-----------------------------------------------------------------------------------------------------------------------
                                             ASSETS

<S>                                                                                   <C>
CURRENT ASSETS:
   Bonds........................................................................      $                 $     298,331
   Cash and cash equivalents ...................................................            282,984            37,704
   Receivable from affiliate ...................................................             54,926            37,037
                                                                                      -------------     -------------
                  Total current assets .........................................            337,910           373,072
INVESTMENTS IN SUBSIDIARIES AND AFFILIATE - At equity, including
   unrealized appreciation in market value of investments held
   by subsidiaries .............................................................         32,476,029        39,292,839
                                                                                        -----------       -----------
                  TOTAL ASSETS .................................................        $32,813,939       $39,665,911
                                                                                        ===========       ===========

                                           LIABILITIES

Accounts Payable ...............................................................      $         573     $       1,010
                                                                                      -------------     -------------

                                      STOCKHOLDER'S EQUITY

Common stock, $3.33 1/3 par value, authorized 2,500,000 shares;
  outstanding shares, 1,962,410 at December 31, 1998 and 1997 ..................        $ 6,541,351       $ 6,541,351
Preferred stock, authorized 2,000,000 shares; none outstanding .................
Paid-in surplus ................................................................         13,097,668        13,097,668
Unrealized appreciation in market value of investments held by
  subsidiaries and affiliate....................................................          5,519,831         6,525,256
Retained earnings (substantially all of which represent equity in
  undistributed earnings of subsidiaries and affiliate) ........................          7,654,516        13,500,626
                                                                                        -----------       -----------
                  TOTAL ........................................................        $32,813,366       $39,664,901
                                                                                        -----------       -----------

TOTAL LIABILITIES AND EQUITY ...................................................        $32,813,939       $39,665,911
                                                                                        ===========       ===========
</TABLE>


                                      S-2
<PAGE>   29



                                                                     SCHEDULE II

                    AMERICAN INDEMNITY FINANCIAL CORPORATION
                              (PARENT COMPANY ONLY)

                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                              STATEMENTS OF INCOME


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                    YEARS ENDED DECEMBER 31,
                                                                          -----------------------------------------
                                                                              1998          1997           1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>            <C>
INCOME:
   That portion of the equity in earnings of wholly
    owned subsidiaries which is equal to the amount
    of dividends received during the year .............................   $              $   725,583    $   215,876
   Investment income ..................................................         7,476         16,896         21,110
                                                                          -----------    -----------    -----------
                  Total ...............................................         7,476        742,479        236,986
EXPENSES ..............................................................        60,090         50,624         46,938
                                                                          -----------    -----------    -----------
INCOME BEFORE FEDERAL INCOME TAX AND EQUITY IN
   EARNINGS OF WHOLLY OWNED SUBSIDIARIES ..............................       (52,614)       691,855        190,048

CREDIT FOR FEDERAL INCOME TAX - CURRENT ...............................       (17,889)       (12,950)          (702)
                                                                          -----------    -----------    -----------
INCOME BEFORE EQUITY IN EARNINGS OF
    WHOLLY OWNED SUBSIDIARIES .........................................       (34,725)       704,805        190,750
 INCOME (LOSS) OF WHOLLY OWNED SUBSIDIARIES AND AFFILIATE, IN EXCESS OF
  DIVIDENDS RECEIVED ..................................................    (5,811,385)    (6,585,979)     1,757,203
                                                                          -----------    -----------    -----------
 NET INCOME (LOSS) ....................................................   $(5,846,110)   $(5,881,174)   $ 1,947,953
                                                                          ===========    ===========    ===========

 BASIC AND DILUTED NET INCOME (LOSS) PER SHARE ........................   $     (2.98)   $     (3.00)   $      1.00
                                                                          ===========    ===========    ===========
</TABLE>


                                      S-3
<PAGE>   30



                                                                     SCHEDULE II

                    AMERICAN INDEMNITY FINANCIAL CORPORATION
                              (PARENT COMPANY ONLY)

                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                                                YEARS ENDED DECEMBER 31,
                                                                       -----------------------------------------
                                                                           1998           1997           1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>            <C>            <C>
 OPERATING ACTIVITIES:
   Net income (loss) ...............................................   $(5,846,110)   $(5,881,174)   $ 1,947,953
   Adjustments to reconcile net income
    to net cash flows from operating activities:
      Excess of equity in income of
        subsidiaries and affiliate over dividends received therefrom     5,811,385      6,585,979     (1,757,203)
      Realized investment gains (losses) ...........................                                      (7,911)
      Decrease (Increase) in accrued investment income .............                          596          6,299
      Increase in receivable from affiliate ........................       (17,889)        (9,749)          (702)
      Other ........................................................          (437)        (3,082)           127
                                                                       -----------    -----------    -----------
                  Net cash flow from operating activities ..........       (53,051)       692,570        188,563
                                                                       -----------    -----------    -----------

 INVESTING ACTIVITIES:
   Sales and maturities of bonds ...................................       550,000        715,000        929,898
   Purchase of bonds ...............................................      (251,669)      (899,655)      (558,626)
                                                                       -----------    -----------    -----------
                  Net cash flow from investing activities ..........       298,331       (184,655)       371,272
                                                                       -----------    -----------    -----------

FINANCING ACTIVITIES:
   Cash dividends paid to stockholders .............................                     (588,725)      (584,650)
   Proceeds received from exercise of stock options ................                       70,959         30,624
                                                                       -----------    -----------    -----------
                  Net cash flow from financing activities ..........                     (517,766)      (554,026)
                                                                       -----------    -----------    -----------
   Net Increase (Decrease) in Cash and Cash Equivalents ............       245,280         (9,851)         5,809
   Cash and Cash Equivalents - January 1 ...........................        37,704         47,555         41,746
                                                                       -----------    -----------    -----------
   Cash and Cash Equivalents - December 31 .........................   $   282,984    $    37,704    $    47,555
                                                                       ===========    ===========    ===========
</TABLE>


                                      S-4
<PAGE>   31




                                                                   SCHEDULE VIII

                    AMERICAN INDEMNITY FINANCIAL CORPORATION
                              (PARENT COMPANY ONLY)

                        VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
------------------------------------------------ --------------------- ------------------- ------------------ --------------------
                                                      BALANCE AT                                                    BALANCE AT
                  DESCRIPTION                         BEGINNING            ADDITIONS          DEDUCTIONS               END
                                                      OF PERIOD                                                     OF PERIOD
------------------------------------------------ --------------------- ------------------- ------------------ --------------------
<S>                                              <C>                    <C>                <C>                 <C>
Year Ended December 31, 1998:
    Allowance for doubtful accounts..........             $500                  $380               $(500)              $380
Year Ended December 31, 1997:
    Allowance for doubtful accounts..........               --                   500                  --                500
</TABLE>



                                      S-5
<PAGE>   32

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number            Description
------            -----------
<S>               <C>
2.1               Agreement and Plan of Merger, dated March 4, 1999, by and
                  among the Company, United Fire & Casualty Company and AI
                  Acquisition Corporation (Exhibit 2.1 to the Company's Current
                  Report on Form 8-K, filed March 10, 1999, is incorporated by
                  reference herein).

3.1.              Certificate of Incorporation of the Company, as amended
                  (Exhibit 3.1 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 1989, is incorporated by reference
                  herein).

3.2.              By-Laws of the Company, as amended (Exhibit 3.2 to the
                  Company's Annual Report on Form 10-K for the year ended
                  December 31, 1992 is incorporated by reference herein).

4.1.              See Exhibit Nos. 3.1 and 3.2 for provisions of the Certificate
                  of Incorporation, as amended, and the By-Laws, as amended, of
                  the Company defining the rights of the holders of the Common
                  Stock.

+10.1.            The Company's Key Executive Severance Plan (Exhibit 10.3 to
                  the Company's Annual Report on Form 10-K for the year ended
                  December 31, 1990, is incorporated by reference herein).

+10.2.            Form of Key Executive Severance Agreement (Exhibit 10.4 to the
                  Company's Annual Report on Form 10-K for the year ended
                  December 31, 1990, is incorporated by reference herein).

+10.3.            The Company's 1992 Employee Stock Option Plan (Exhibit 4.4 to
                  the Company's Registration Statement on Form S-8 (No.
                  33-47359), is incorporated by reference herein).

+10.4.            Form of the Company's Non-Incentive Stock Option Agreement
                  (Exhibit 4.5 to the Company's Registration Statement on Form
                  S-8 (No. 33-47359), is incorporated by reference herein).

+10.5.            Form of the Company's Incentive Stock Option Agreement
                  (Exhibit 4.6 to the Company's Registration Statement on Form
                  S-8 (No. 33-47359), is incorporated by reference herein).

+10.6.            The Company's 1992 Non-Employee Director Stock Option Plan
                  (Exhibit 4.4 to the Company's Registration Statement on Form
                  S-8 (No. 33-47546), is incorporated by reference herein).

+10.7.            Form of the Company's Non-Employee Director Stock Option
                  Agreement (Exhibit 4.5 to the Company's Registration Statement
                  on Form S-8 (No. 33-47546), is incorporated by reference
                  herein).

+10.8.            The Company's 1997 Non-Employee Director Stock Option Plan
                  (Exhibit 4.4 to the Company's Registration Statement on Form
                  S-8 (No. 333-42439), is incorporated by reference herein).

+10.9.            Form of the Company's Non-Employee Director Stock Option
                  Agreement (Exhibit 4.5 to the Company's Registration Statement
                  on Form S-8 (No. 333-42439), is incorporated by reference
                  herein).

*13.1.            Portions of the Company's Annual Report to Stockholders for
                  the fiscal year ended December 31, 1998.

21.1.             List of the Company's Subsidiaries (Exhibit 22.1 to the
                  Company's Annual Report on Form 10-K for the year ended
                  December 31, 1990, is hereby incorporated by reference
                  herein).

*23.1.            Consent of Independent Auditors.

**24.1.           Powers of Attorney.

**27.1            Financial Data Schedule.
</TABLE>


----------

*        Filed herewith.

**       Previously filed.

+        Management contract or compensatory plan or arrangement required to be
         filed pursuant to Item 14 of Form 10-K.