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

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

                                    FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 [X] No [ ]

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

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

         (2) The Registrant's definitive Proxy Statement with respect to the
Registrant's Annual Meeting of Stockholders proposed to be held June 2, 1999
(portions of which are incorporated into Part III hereof).

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



<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 ..................................................................... 11
ITEM   12.      Security Ownership of Certain Beneficial Owners and Management ............................. 11
ITEM   13.      Certain Relationships and Related Transactions ............................................. 11

                                                       PART IV

ITEM   14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 12
SIGNATURES ................................................................................................. 14
INDEPENDENT AUDITORS' REPORT ............................................................................... 15
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 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 by June 30, 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. As of December 31, 1997, 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 as a result of these reserve increases and
other changes in reserves during the year.

         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. Effective January 1, 1999, the aggregate excess reinsurance under
this agreement was terminated. 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.

         The information set forth under the captions "Election of Directors",
"Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's Proxy Statement with respect to the
Company's 1999 Annual Meeting of Stockholders (the "Proxy Statement"), is
incorporated herein by reference.

ITEM 11.   EXECUTIVE COMPENSATION.

         The information set forth under the caption "Executive Compensation" in
the Proxy Statement is incorporated herein by reference.

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

         The information set forth under the captions "Principal Stockholders",
"Election of Directors" and "Executive Officers" in the Proxy Statement is
incorporated herein by reference.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information set forth under the caption "Other Transactions" in the
Proxy Statement is incorporated herein by reference.


                                       11
<PAGE>   12




                                     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.


                                       12
<PAGE>   13




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.

+        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.



                                       13
<PAGE>   14



                                   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/  PHILLIP E. APGAR
                                       -----------------------------------------
Dated March 29, 1999                            Phillip E. Apgar
                                       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/ PHILLIP E. APGAR                         VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER
----------------------------------------------------      (PRINCIPAL FINANCIAL OFFICER AND
          (PHILLIP E. APGAR)                              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)

                                                      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/  PHILLIP E. APGAR                     
     -----------------------------------------------
    (Phillip E. Apgar, pursuant to Power of Attorney)
</TABLE>


                                       14
<PAGE>   15



                          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


                                       15
<PAGE>   16



                                                                      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>   17



                                                                     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>   18



                                                                     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>   19



                                                                     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>   20




                                                                   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>   21


                 
                                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.

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