<PAGE>
<PAGE>



                       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 0-15022

                         FRONTIER INSURANCE GROUP, INC.
             (Exact name of Registrant as specified in its charter)
<TABLE>
<S>                                                         <C>
          DELAWARE                                            14-1681606
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                            Identification No.)

195 LAKE LOUISE MARIE ROAD, ROCK HILL, NEW YORK               12775-8000
(Address of principal executive offices)                      (Zip Code)

       Registrant's telephone number, including area code: (914) 796-2100

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

                                               Name of Each Exchange
     Title of Each Class                        on which Registered 
Common Stock, $.01 par value                  New York Stock Exchange
</TABLE>

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.

           [x] Yes                                    [ ] 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. [ ]

The aggregate market value of the voting stock (Common Stock, $.01 par value)
held by nonaffiliates of the Registrant was $439,327,720 on March 17, 1999,
based on the closing sales price of the Common Stock on such date.

The aggregate number of shares of the Registrant's Common Stock, $.01 par value,
outstanding on March 17, 1999, was 36,233,214.

                      Documents incorporated by reference:

                                      None




 

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<PAGE>






"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are not historical facts, and involve
risks and uncertainties that could cause actual results to differ materially
from those expected and projected. Such risks and uncertainties include the
following: general economic conditions and conditions specific to the property
and casualty insurance industry including its cyclical nature, regulatory
changes and conditions, rating agency policies and practices, competitive
factors, claims development and the impact thereof on loss reserves and the
Company's reserving policies, the adequacy of the Company's reinsurance
programs, developments in the securities markets and the impact on the Company's
investment portfolio, the success of the Company's acquisition program, changes
in generally accepted accounting principles and the risk factors listed herein
and from time to time in the Company's Securities and Exchange Commission
filings. Accordingly, there can be no assurance that the actual results will
conform to the forward-looking statements in this Annual Report.

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

                                     PART I

ITEM 1. BUSINESS.

DESCRIPTION OF BUSINESS

Frontier Insurance Group, Inc. (the "Company"), a Delaware corporation
incorporated in 1986, is an insurance holding company which, through its direct
and indirect wholly-owned subsidiaries, conducts business in all 50 states, the
District of Columbia, Puerto Rico, Mexico, Greece, Guam and the Virgin Islands
as a specialty insurer underwriting various specialty property/casualty
coverages. These specialty coverages include medical and dental malpractice,
surety, general liability, non-standard automobile, manufactured housing,
workers' compensation, environmental and pollution liability, and credit-related
and other specialty insurance products. The principal subsidiaries through which
the Company offers such coverages include Frontier Insurance Company
("Frontier"), Frontier Pacific Insurance Company ("Frontier Pacific"), Lyndon
Insurance Group ("Lyndon"), United Capitol Insurance Company ("United Capitol"),
Western Indemnity Insurance Company ("Western"), Regency Insurance Company
("Regency") and Acceleration Life Insurance Company ("Acceleration"), all of
which, other than Frontier and Frontier Pacific, were purchased since May 1996
(see Note C of the Notes to the Consolidated Financial Statements).

The Company's business strategy is to achieve an underwriting profit by
identifying niche markets and specialty insurance programs which it believes
afford favorable opportunities for profitability due to limited potential
competition and the Company's innovative underwriting and value added services,
including coverage enhancements, risk management, loss control and specialized
claims management.

                                      2


 

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<PAGE>



REPORTABLE SEGMENTS



The Company currently writes in excess of 150 insurance programs through six
reportable segments: Health Care; Surety; Alternative Risk; Specialty Programs;
Environmental, Excess and Surplus Lines; and Personal and Credit-Related. The
Company's reportable segments are divisions that offer different types of
coverages and are managed separately because of the specialized nature of the
related products underwritten for each division.

The following chart provides examples by reportable segment and customer type,
of typical niche markets/programs underwritten by the Company:

<TABLE>
<CAPTION>
SEGMENT             CUSTOMER TYPE                      COVERAGE/LINE OF BUSINESS               HYPOTHETICAL CLAIM
<S>                 <C>                                <C>                                     <C>
Health Care         Doctors and dentists               Professional liability                  Patient injured

Health Care         Social service agencies            Professional liability,                 Client sues agency or professional
                                                       general liability, fire

Surety             Small-construction contractors      Surety bonds                            Electrician or plumber fails to
                                                                                               complete job

Surety             Importers                           Customs bonds                           Importer fails to pay duty

Alternative Risk   Self-insured employers              Excess workers'                         Workers' compensation loss
                                                       compensation/employer's                 exceeds employer's self-
                                                       liability                               insured retention

Specialty          Crane operators                     General liability                       Crane damages a third-party's 
Programs                                                                                        property

Specialty          Alarm installers                    General liability                       House is burglarized
Programs                                                                                        through faulty alarm installation

Environmental,     Environmental remediation           Professional liability                  Site remains contaminated after
  Excess and       contractors                                                                  contractor completed
  Surplus Lines                                                                                      remediation project

Personal and       Borrowers from financial            Credit-related property                 Damage to property taken as
Credit-Related      institutions                                                                collateral

</TABLE>

Health Care Division

This segment underwrites a full range of property and casualty products for
healthcare providers and related companies and institutions. Products offered
include general liability, commercial multi-peril and medical malpractice
coverages. Additionally, this segment serves the medical professional community
through the design and distribution of products and services which target the
unique exposures of medical and dental professional risks, and include such
exposures as physicians, internists, dentists, chiropractors, psychiatrists and
other specialists. This division also underwrites a specialty program for
physicians unable to attain traditional malpractice coverages due to excessive
malpractice claims, professional disciplinary proceedings and/or drug or
alcohol abuse. Additionally, this segment offers and underwrites a program
for daycare liability.

Physician and dental coverages are generally marketed by the Company through
endorsed national, state or county societies. Such societies include, the
International Chiropractors' Association, the American Academy of Child and
Adolescent Psychiatrists, the New York Society of Internal Medicine, and The
Academy of General Dentistry. Physicians covered under the social services care
facilities are employees of the facility. Other coverages in this segment are
produced by specialty independent agents and brokers. The business produced by
this segment is underwritten primarily through Frontier, Frontier Pacific, and
Western.


                                       3


 

 <PAGE>
<PAGE>






Surety Division

This segment underwrites bonds for small contractors, customs bonds, contractor
license bonds, bail bonds, license and permit bonds, landfill, subdivision, and
self insured employers' workers' compensation bonds.

License and permit bonds are primarily produced by a Company's wholly-owned
subsidiary . Bail bonds are produced by a 50% owned bail agency and customs
bonds are produced by a specialty bond agent that has an exclusive underwriting
agreement with the Company. All other business for this segment is produced
through independent agents and brokers.

The business produced by this segment is predominantly underwritten through
Frontier Pacific and Frontier.

Alternative Risk Division

This segment underwrites excess workers' compensation and stop loss coverage for
self-insured medical and group accident and health plans. In addition, a full
range of risk management services, including the formation and management of
off-shore captive and rent-a-captive insurance entities, which underwrite a
broad range of coverages, is provided by this segment.

Stop loss coverages are produced by agents specializing in these types of
coverages. All other coverages, including those written through captive and
rent-a-captive arrangements, are produced by independent specialty agents and
brokers.

The business produced by this segment is predominantly underwritten through
Frontier.

Specialty Programs Division

This segment produces a wide variety of specialty coverages, including
manufactured housing, crane operators, pest control, artisan contractors,
childrens' summer camps, alarms and guards, outdoor recreation, demolition
contractors, nonstandard auto physical damage and white water rafting.

The manufactured housing program is produced by an independent agency
specializing in this type of coverage. The nonstandard auto physical damage
coverage is predominantly produced by a 50% owned managing general agency. All
other business is produced by program agency underwriters that are experts in
underwriting the underlying coverages.

The business produced by this segment is predominantly underwritten through
Frontier, Frontier Pacific, and Regency.

Environmental, Excess and Surplus Lines Division

This segment underwrites, predominantly, commercial general liability, pollution
and professional liability for contractors, consultants and engineers engaged in
the remediation of environmentally impaired properties, including those
contractors and consultants involved in the abatement of asbestos. This segment
also provides pollution liability for facilities engaged in managing waste or
the use of hazardous substances.

Commercial general liability coverage is also provided to residential and
commercial contractors, predominantly in California, as well as product
liability coverage for manufacturers and distributors of a wide array of
products. This segment also underwrites property and ocean marine coverages.


                                       4


 

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<PAGE>






The Company's environmental coverages are produced by various specialty program
administrators, two wholly-owned subsidiaries, and contracted brokers.
California residential and commercial contractors and ocean marine coverages
are produced by an independent program administrator. Property and products
liability coverages are produced predominantly by contracted surplus lines
brokers.

The business produced by this segment is predominantly underwritten through
United Capitol.

Personal and Credit-Related Division

This segment underwrites coverages for collateral protection, extended warranty,
extended service contracts, credit property, involuntary unemployment,
non-standard auto physical damage, residual value, mechanical breakdown, credit
life, credit property, and credit accident and health.

The nonstandard auto physical damage program is in run-off and was previously
written through managing general agents. Extended warranty and service contracts
are primarily distributed through financial institutions and auto dealers. Other
coverages written in this segment are produced through independent agents and
brokers.

These coverages are underwritten primarily through Lyndon, Acceleration and
Regency.

Segment Results

The Company evaluates segment performance based on profit or loss before the
effects of the Zurich Reinsurance (North America), Inc. ("Zurich N.A.")
reinsurance agreements, (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Zurich Reinsurance (North America) Stop
Loss Agreements"), investment income (including capital gains/losses and net
or interest on funds held), interest expense, other corporate expenses and
income taxes. The accounting policies of the reportable segments are principally
the same as those described in Note B to the Consolidated Financial Statements,
except certain amounts are allocated to the segments based upon allocation
methods deemed appropriate by management, including time studies, square
footage, number of personnel and premiums written and earned.

The following is a summary of premiums earned and profit (loss) by segment:

<TABLE>
<CAPTION>
                                      1998             1997             1996
                                    --------------------------------------------
                                                   (in thousands)
<S>                                   <C>              <C>              <C> 
Premiums earned by segment:
  Health Care                         $197,170         $167,447         $164,909
  Surety                                73,790           64,788           54,010
  Alternative Risk                      35,312           35,747           23,735
  Specialty Programs                    70,131           58,316           45,469
  Environmental, Excess and            
   Surplus  Lines                       54,517           34,459            9,768
  Personal and Credit-Related          108,945           43,729            2,230
  Less premiums ceded under Zurich 
   N.A. stop loss agreements           (46,811)         (37,642)         (34,132)
                                    --------------------------------------------
Net premiums earned                   $493,054         $366,844         $265,989
                                    ============================================

Segment profit (loss):
  Health Care                       $(224,666)         $(41,163)         $(2,377)
  Surety                               11,563            15,366           10,558
  Alternative Risk                      3,174             4,447            2,980
  Specialty Programs                   (7,705)            2,090              137
  Environmental, Excess and    
   Surplus Lines                        9,866            10,010            2,775
  Personal and Credit-Related           7,146             9,711             (706)
                                    --------------------------------------------
  Total segment profit (loss)        (200,622)              461           13,367
  Reconciling items:
   Net effect of Zurich N.A.
    agreements, excluding interest
    on funds held                      58,828             2,349            8,302
   Total net investment income         76,538            60,344           38,933
   Interest expense                   (11,931)          (11,842)          (4,247)
   Other corporate (expenses)        
    income, net                       (13,688)           (5,463)             304
                                    --------------------------------------------
Consolidated income (loss) before    
  income taxes                       $(90,875)          $45,849          $56,659
                                    ============================================
</TABLE>



                                       5


 

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<PAGE>






Although the Company considers returns on investments in the overall management
of its operations, assets are not allocated to individual segments for
analytical purposes . (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Asset Portfolio Review".)

Other corporate expenses include expenses of the parent cCompany and directly
owned non-insurance subsidiaries, reduced by other miscellaneous income.

RISK FACTORS

Adequacy of Loss Reserves

Liabilities for unpaid losses and loss adjustment expenses are estimated
utilizing methods and procedures which management believes are reasonable and
in compliance with regulatory requirements. These liabilities are necessarily
subject to the impact of developments in the frequency and severity of claims,
as well as numerous other factors, such as judicial and legislative trends and
actions, economic factors and changes in estimates based on these factors.
Most or all of these factors are not directly quantifiable, particularly on a
prospective basis. Over the extended period of time during which losses are
reported and settled, these liabilities may not conform to the assumptions
underlying management's estimates and, accordingly, may vary significantly from
the estimated amounts included in the financial statements. To the extent that
the emerging loss experience varies from such estimates, these liabilities are
adjusted to reflect actual experience. These adjustments, to the extent they
occur, are reported in the period recognized.

In December 1998, the Company increased its liabilities for unpaid losses and
loss adjustment expenses by $155 million to reflect revised estimates for these
liabilities. This increase was recognized in the fourth quarter of 1998 and
resulted in a corresponding charge to pre-tax earnings. (See Note H of the Notes
to the Consolidated Financial Statements.)

Emphasis on Insurance Company Ratings

Increased public and regulatory concerns with the financial stability of
insurers have resulted in a greater focus by policyholders and their insurance
agents upon insurance company ratings and a potential competitive advantage for
carriers with higher ratings. Rating organizations periodically review the
financial performance and condition of insurers and reevaluate their ratings.
A.M. Best Company, Inc. ("A.M. Best") has currently rated all of the Company's
insurance subsidiaries as A- ("Excellent"), except for Lyndon Life and Gulfco
Life which they have rated as B++ ("Very Good") and Acceleration which they
have rated B+ ("Very Good"). The Company cannot assure that its insurance
subsidiaries will maintain their ratings and any downgrade could materially
adversely affect their operations.

Highly Competitive Market

The property and casualty insurance business is highly competitive with respect
to a number of factors, including overall financial strength of the insurer,
ratings by rating agencies, premium rates, policy terms and conditions, services
offered, reputation and broker compensation. Although the Company's business
strategy is to achieve an underwriting profit by identifying niche markets
and specialty programs that it believes afford favorable opportunities for
profitability due to limited potential competition, the Company nevertheless
encounters competition from carriers engaged in insuring risks in the broader 
lines of business that encompass niche markets and specialty programs. The 
Company expects that type of competition will increase as it expands its 
operations.



                                       6


 

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<PAGE>






Fluctuations in Industry Results

The financial results of property and casualty insurers historically have been
subject to significant fluctuations. Profitability is affected significantly by
volatile and unpredictable developments (including catastrophes), changes in
loss reserves resulting from changing legal environments as different types of
claims arise and judicial interpretations develop relating to the scope of
insurers' liability, fluctuations in interest rates and other changes in the
investment environment which affect returns on invested capital, and
inflationary pressures that affect the size of losses. Further, underwriting
results have been cyclical in the property and casualty insurance industry, with
protracted periods of overcapacity accompanied by lower premium rates and
operating results followed by periods of undercapacity accompanied by higher
premium rates and operating results. The property and casualty insurance
industry is currently experiencing a protracted period of overcapacity and lower
premium rates, and the Company cannot assure when or if this period will end
and when premium rates will increase.

Reliance Upon Reinsurance

To moderate the impact of unusually severe or frequent losses, the Company's
insurance subsidiaries cede (i.e., transfer) a portion of their gross premiums
to reinsurers in exchange for the reinsurers' agreements to share covered losses
with the subsidiaries. Although reinsurance makes the assuming reinsurer liable
to the extent of the risk ceded, the Company's insurance subsidiaries are not
relieved of their primary liability to their insureds and, therefore, bear a
credit risk with respect to their reinsurers. Although the Company's insurance
subsidiaries place reinsurance only with reinsurers they believe to be
financially sound, the Company cannot assure that these reinsurers will pay
all reinsurance claims on a timely basis, if at all. Further, although the
Company believes our insurance subsidiaries are adequately reinsured, it cannot
be certain that they will continue to be able to obtain reinsurance on
satisfactory terms.

Dependence Upon Investment Income

Similar to other property and casualty insurance companies, the Company depends
on income from its investment portfolio for a substantial portion of our
earnings. A significant decline in investment yields could have a material
adverse effect on the Company's financial results.

Concentration in Ownership

Mr. Harry W. Rhulen, Chairman of the Board and President of the Company, members
of Mr. Rhulen's family and other directors and officers of the Company owned, as
of March 1999, approximately 25% of the outstanding shares of Common Stock. As a
result, these persons are in a position to influence the Company's management
and affairs and, collectively, may be able to prevent a proposed change in
control of the Company.

Restrictions Under Insurance Regulations

The Company subject to regulation under applicable insurance statutes, including
insurance holding company statutes, of the various states in which its insurance
subsidiaries write insurance. Insurance regulation is intended to provide
safeguards for policyholders rather than to protect investors in insurance
companies or their holding companies. Regulators oversee matters relating to
trade practices, policy forms, claims practices, mandated participation in
shared markets, types and amounts of investments, reserve adequacy, insurer
solvency, minimum amounts of capital and surplus, transactions with related
parties and changes in control. The rates that the Company's insurance
subsidiaries can charge for certain lines of business are also subject to
regulation and, therefore, may not keep pace with inflation. Changes in any
of these laws and regulations could materially adversely affect the Company's
operations.



                                       7


 

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<PAGE>






Dependence Upon Dividends and Other Distributions from Subsidiaries

Because the Company is a holding company, its ability to pay dividends or fund
other expenditures depends significantly on the payment of dividends and
management fees to it by its subsidiaries. However, the Company's insurance
subsidiaries are subject to regulations designed to protect their solvency that
restrict the amount of dividends or other distributions they may make to the
Company. In addition, the Company's current policy involves the retention by
its insurance subsidiaries of their capital for growth rather than the payment
of dividends.

REINSURANCE ACTIVITIES

The Company assumes business under reinsurance treaties and through mandatory
participation in various states' residual market pools and reinsurance
facilities. The Company assumes, primarily on a quota share basis, homeowners',
commercial auto, other liability and contract surety business also assumes ocean
marine and international property business, over 90% of which is retroceded to
other insurers.

The Company cedes business under various reinsurance agreements which are
generally related to specific programs. Reinsurance serves the purposes of
limiting losses, minimizing exposure to catastrophes, providing additional
capacity for future growth and facilitating relationships with other insurance
entities. The Company purchases reinsurance primarily on an excess of loss basis
for individual loss occurrences in excess of specified dollar amounts or loss
ratios. In addition, since 1995, the Company has had in place an aggregate
excess of loss agreement, for specific lines of business, to limit loss and loss
adjustment expense ("LAE") ratios to contractually agreed benchmarks. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Zurich Reinsurance (North America) Stop Loss Agreements"). Effective
December 31, 1998, the Company terminated the 1998-1999 stop loss agreement as
it relates to the 1999 accident year. (see Note I of the Notes to the
Consolidated Financial Statements) The Company generally reinsures its business
with reinsurers who are admitted to do business in the jurisdictions in which
its insurance subsidiaries are licensed and which have an A.M. Best rating of A-
or higher. Security is obtained from reinsurers who do not meet these criteria.

Certain business produced by the Company's Alternative Risk division is
reinsured by captive or rent-a-captive facilities. Under the terms of such
reinsurance programs, which are by the Company, the producing agents will
participate in the underwriting experience of their own business by purchasing
preferred shares in a captive reinsurance company. In addition, premiums ceded
to the captive will be used to purchase a letter of credit or deposited into a
trust fund to secure the liabilities ceded to the reinsurer.



                                       8


 

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The following table summarizes as of December 31, 1998 the maximum amount of
loss typically retained by the Company's insurance subsidiaries (exclusive of
facultative reinsurance and the aggregate excess of loss agreement with Zurich
N.A.):

<TABLE>
<CAPTION>

                                    MAXIMUM
                                 RETAINED LOSS
                                      PER
                                  OCCURRENCE/
                                 RISK/PRINCIPAL
                                 ---------------
                                 (in thousands)

<S>                                   <C> 
Property lines                     $   500
Casualty lines (excluding
  medical malpractice, health
  specialties, and social
  services)                          1,000

Medical malpractice, health          
  specialties and social
  services                           1,000(1)
Workers' compensation                1,000
Surety                               1,000(2)
Umbrella liability                   1,000
Group accident and health              450
Excess workers' compensation         1,000(3)
Earthquake                           2,500
Homeowners'                          2,000(2)
Ocean marine                           250
Directors' and officers'             
liability                            1,000
Commercial auto liability              250
Nonstandard auto liability              25
</TABLE>

(1)  For certain risks and policy years, the maximum retained loss per
     occurrence is $0.5 million and, on a very limited basis, $2 million.

(2)  Does  not  reflect  Company's  co-insurance  participation  in
     amounts ceded in excess of its retention.

(3)  Subject  to  a   catastrophe   retention  of  $3  million  per
     occurrence.

DISTRIBUTION

The Company relies on multiple distribution channels to market its insurance
products, primarily through independent insurance agencies and brokerage firms,
no one of which accounts for more than 5% of such premiums. The following
tables set forth for the three years ended December 31, 1998, the gross and
net premiums written produced by internal and affiliated sources, independent
agencies and brokerage firms:

<TABLE>
<CAPTION>
                            1998                    1997                        1996
                -----------------------------------------------------------------------------
                PREMIUMS       PERCENT      PREMIUMS      PERCENT      PREMIUMS      PERCENT
                WRITTEN        OF TOTAL     WRITTEN       OF TOTAL     WRITTEN       OF TOTAL

                -----------------------------------------------------------------------------
                                        (dollar amounts in thousands)
<S>                <C>         <C>         <C>             <C>         <C>           <C> 
Gross premiums:
  Internal and
  affiliated       $104,957     12.6%       $79,772        13.6%        $78,411       19.5%

All others          728,201     87.4        507,863        86.4         324,388       80.5
                   -----------------------------------------------------------------------
Total              $833,158    100.0%      $587,635       100.0        $402,799      100.0%
                   =======================================================================
                   
Net premiums:
  Internal and 
  affiliated        $65,627     12.5%       $60,776        15.6%        $56,511      18.1%
All others          461,378     87.5        328,240        84.4         255,352      81.9
                   ----------------------------------------------------------------------
Total              $527,005    100.0%      $389,016       100.0        $311,863     100.0%
                   ======================================================================

</TABLE>


                                       9


 

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<PAGE>






Internally and affiliated produced premiums include business written through the
Company's wholly-owned agencies, as well as agencies in which the Company holds
a noncontrolling equity interest. All other premiums are produced through
independent insurance agencies and brokerages specializing in particular
coverages.

OPERATING RATIOS

Statutory Combined Ratio

The statutory combined ratio is the traditional measure of underwriting
experience for property/casualty insurance companies. The combined ratio is
obtained by adding an expense ratio to a loss and LAE ratio. The expense ratio
is defined as the ratio of other underwriting expenses incurred to net premiums
written and the loss and LAE ratio is defined as the ratio of losses and LAE
incurred to net premiums earned. Generally, if the statutory combined ratio is
below 100%, an insurance company has an underwriting profit and if it is above
100%, the insurer has an underwriting loss.

The following table reflects the consolidated statutory loss ratios, expense
ratios and combined ratios of the Company's primary property and casualty
insurance operating subsidiaries, Frontier, Frontier Pacific, United Capitol
from May 1996, Regency from September 1996 and, from July and December 1997,
Lyndon Property Insurance Company ("Lyndon Property") and Western, respectively,
determined in accordance with statutory accounting practices for the years
indicated:
<TABLE>
<CAPTION>

                      1998    1997    1996    1995    1994
                     ----------------------------------------

<S>                    <C>     <C>     <C>     <C>     <C>  
Loss and LAE ratio     95.0%   65.2%   58.7%   60.0%   69.9%
       
Expense ratio          38.2    35.7    32.2    31.1    28.2
                     ========================================
Combined ratio        133.2%  100.9%   90.9%   91.1%   98.1%
                     ========================================
</TABLE>

The combined ratios in 1998 and 1997 reflect the effects of increased reserves
of approximately $155 million and $35 million, respectively, primarily related
to the Company's medical malpractice business. (See Note H of the Notes to the
Consolidated Financial Statements)

Premium-to-Surplus Ratio

While there are no statutory provisions governing premium-to-surplus ratios,
regulatory authorities regard this ratio as an important indicator since the
lower the ratio, the greater the insurer's ability to withstand abnormal loss
experience. Guidelines established by the National Association of Insurance
Commissioners ("NAIC") provide that an insurer's premium-to-surplus ratio is
satisfactory if it is below 3 to 1. However, in consideration of maintaining
Frontier's current A.M. Best rating of A- ("Excellent"), the Company has
committed to maintain a premium-to-surplus ratio for Frontier no greater than
1.75 to 1.



                                       10


 

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<PAGE>






The following table sets forth the ratio of net premiums written during the year
to policyholders' surplus at the end of the year for the Company's property and
casualty subsidiaries for the years indicated:

<TABLE>
<CAPTION>
                            1998       1997         1996       1995         1994
                         ---------------------------------------------------------
                                     (dollar amounts in thousands)
<S>                        <C>         <C>         <C>         <C>         <C>      
Frontier:
  Net premiums written     
   during the year         $287,733   $275,127   $255,446   $205,614   $179,058
  Policyholders' surplus
   at end of year          $251,841   $276,390   $262,899   $171,361   $104,871
  Ratio                      1.14/1      .99/1      .97/1     1.20/1     1.71/1

Frontier Pacific:
  Net premiums written     
   during the year         $ 28,170   $ 30,282   $ 32,040   $ 15,143   $  8,230
  Policyholders' surplus   
   at end of year          $ 34,920   $ 31,171   $ 25,985   $ 17,155   $ 16,127
  Ratio                       .81/1      .97/1     1.23/1      .88/1      .51/1

United Capitol:
  Net premiums written     
   during the year         $ 61,855   $ 40,793   $ 25,930   $ 10,981   $ 17,051
  Policyholders' surplus   
   at end of year          $ 65,966   $ 60,122   $ 53,355   $ 68,026   $ 61,750
  Ratio                       .94/1      .68/1      .49/1      .16/1      .28/1

Lyndon Property:
  Net premiums written     
   during the year         $ 79,805   $ 45,167   $ 72,043   $ (41,623) $  (2,225)
  Policyholders' surplus   
   at end of year          $100,296   $ 90,989   $ 71,104   $  54,054  $  90,762
  Ratio                       .80/1      .50/1     1.01/1         N/A        N/A

Western:
  Net premiums written     
   during the year         $  23,396  $ 32,064   $  33,010  $  34,635  $  30,347
  Policyholders' surplus   
   at end of year          $  35,935  $ 34,348   $  50,000  $  45,873  $  41,048
  Ratio                        .65/1     .93/1       .66/1      .76/1      .74/1

Regency:
  Net premiums written     
   during the year         $  13,418  $  4,942   $   4,489  $   4,441  $   4,804
  Policyholders' surplus   
   at end of year          $   8,133  $ 10,341   $   5,105  $   4,667  $   4,521
  Ratio                       1.65/1     .48/1       .88/1      .95/1     1.06/1

Lyndon Southern:
  Net premiums written     
   during the year         $   1,602        --   $      --  $     --   $     --
  Policyholders' surplus   
   at end of year          $   3,137  $  3,495   $   3,495  $     --   $     --
  Ratio                        .51/1       N/A         N/A       N/A        N/A
</TABLE>

Loss and LAE Reserves

Significant periods of time, ranging up to several years, may elapse between the
occurrence of an insured loss, the reporting of the loss to the Company and its
payment of such loss. Medical malpractice and general liability usually have a
much longer period of time between occurrence of a loss and payment than
property lines. To recognize liabilities for unpaid losses, the Company
establishes reserves, which are balance sheet liabilities representing estimates
of amounts needed to pay claims and related expenses with respect to insured
events that have occurred, including those not yet reported ("IBNR").


                                       11


 

 <PAGE>
<PAGE>






When a claim is reported, the Company's claims adjusting personnel establish a
formula loss and LAE reserve based on historical average claim costs. As more
information related to the claim is obtained, claims adjusting personnel update
the formula reserve to a case basis reserve. This case basis reserve is an
estimate of the amount of ultimate payment of the claims , based on the
Company's reserving practices and the experience and knowledge of such personnel
regarding the nature and value of the specific type of claim. Additionally,
reserves are established by the Company on an aggregate basis to provide for
IBNR losses and to maintain the overall adequacy of reserves. Reserves and
payments on high exposure cases are reviewed and approved by a claims ommittee
comprised of members of senior management, claims examiners, attorneys and
underwriters. The Company does not discount its reserves either on the basis of
generally accepted accounting practices ("GAAP") or statutory accounting
practices.

The reserves for losses and LAE are estimated using loss evaluations and
actuarial projections and represent estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year. These estimates
are subject to the effects of trends in claims severity and frequency and are
continually reviewed. As part of this process, historical data is reviewed and
consideration is given to the anticipated impact of various factors, such as
legal developments, changes in social attitudes, and economic conditions,
including the effects of inflation and anticipated subrogation recoveries. As
experience develops and other data becomes available, these estimates are
revised, as required, resulting in increases or decreases in reserves for
insured events of prior years. Future adjustments, if any, will be reflected in
the results of operations in the period recognized.

The following table reflects the Company's property and casualty loss and LAE
reserve development, net of estimated subrogation recoverable through December
31, 1998, for each of the preceding ten years:



<TABLE>
<CAPTION>

                          1988      1989     1990      1991     1992      1993    1994     1995       1996      1997      1998
                          -------------------------------------------------------------------------------------------------------
                                                           (amounts in thousands)

<S>                      <C>      <C>      <C>       <C>       <C>     <C>      <C>       <C>       <C>       <C>       <C>
  Reserves for unpaid 
   losses and LAE        $64,971  $92,384  $120,096  $161,263 $185,074 $216,486 $263,202  $294,393  $373,606  $483,539  $  632,850
  Reserves reestimated 
   at December 31:
      1 year later        67,486   93,419   119,875   162,121  188,387  230,360  255,689   289,914   386,893   618,054
      2 years later       68,793   91,457   120,550   158,746  196,005  229,334  252,678   314,558   492,247        --
      3 years later       66,532   91,527   115,310   163,537  191,401  214,712  282,016   399,069        --        --
      4 years later       66,656   86,508   114,790   154,217  172,654  234,172  345,459        --        --        --
      5 years later       64,254   87,795   107,907   133,768  182,660  276,137       --        --        --        --
      6 years later       64,700   79,459    88,803   142,630  214,006       --       --        --        --        --
      7 years later       55,300   62,667    91,777   168,342       --       --       --        --        --        --
      8 years later       42,687   66,438   113,268        --       --       --       --        --        --        --
      9 years later       45,492   82,694        --        --       --       --       --        --        --        --
      10 years later      59,144      --         --        --       --       --       --        --        --        --

  Cumulative redundancy
  (deficiency)             5,827    9,690     6,828    (7,079) (28,932) (59,651) (82,257) (104,676) (118,641) (134,515)
  Cumulative amount of
  liability paid through
  December 31:
      1 year later         9,611   16,823     8,129    41,486   38,300   56,986   80,507   102,160   147,013   216,534
      2 years later       20,006   13,230    35,864    62,175   74,113  113,471  148,513   195,052   274,307       --
      3 years later       11,196   32,987    45,973    80,888  112,017  154,548  204,252   263,107        --       --
      4 years later       24,825   39,166    58,043   104,672  139,333  188,495  233,254        --        --       --
      5 years later       30,919   50,406    74,659   122,863  161,417  198,801       --        --        --       --
      6 years later       39,664   61,276    86,405   137,059  163,429       --       --        --        --       --
      7 years later       47,784   67,429    93,835   133,519       --       --       --        --        --       --
      8 years later       50,119   71,769    89,686        --       --       --       --        --        --       --
      9 years later       53,676   64,145        --        --       --       --       --        --        --       --
     10 years later       46,150       --        --        --       --       --       --        --        --       --
  Net reserve--December 31                                                                          $373,606  $483,539  $  632,850
  Reinsurance recoverables                                                                           165,467   283,727     439,545
                                                                                                    ------------------------------
  Gross reserve                                                                                     $539,073  $767,266  $1,072,395
                                                                                                    ==============================
</TABLE>



                                       12


 

 <PAGE>
<PAGE>






The loss and LAE reserves of Frontier, Frontier Pacific, United Capitol, Lyndon
Property, Lyndon Southern, Western and Regency as reported in their Annual
Statements prepared in accordance with statutory accounting practices and filed
with state insurance departments are identical with those reflected in the
Company's financial statements prepared in accordance with GAAP included herein,
before elimination of intercompany transactions. For additional disclosures
regarding loss and LAE reserves, see Note H of the Notes to the Consolidated
Financial Statements.

INVESTMENTS

The Company's investment portfolio is managed in a conservative manner to
provide portfolio credit quality, diversification and liquidity. The Company's
investment strategy is to maximize after-tax income while limiting investments
primarily to investment grade securities with high liquidity characteristics.

The Company has established investment guidelines approved by the Board of
Directors. In establishing such guidelines, consideration was given to projected
surplus, estimated duration of liabilities, liquidity needs, projected tax
status, expected rates of return on various asset classes, expected inflation,
and correlation of returns among asset classes. The guidelines diversification
of assets, credit quality, duration limits, and exposure to single issuers. In
addition, all insurance subsidiaries must meet the applicable state regulatory
requirements with respect to their investments.

The investment portfolio is divided into two major components. The majority of
invested assets are maintained in the core portfolio which consists primarily of
high quality investment grade fixed income securities and cash equivalents,
principally U.S. Government and agency securities, corporate and municipal
obligations, mortgage-backed and asset-backed securities and sinking fund
preferred stock. At December 31, 1998, the core portfolio represented 90.7% of
the total investment portfolio and had an average credit rating from Moody's of
Aa1.

The other major component of the investment portfolio is an aAlternative
investment portfolio which consists of asset classes other than investment grade
fixed income securities and is designed to provide income and potential capital
appreciation. Alternative investment portfolio asset classes include convertible
bonds and convertible preferred stock, BB rated bonds, preferred stock, limited
partnership interests, and common stock. At December 31, 1998, the alternative
investment portfolio represented 9.3% of the total investment portfolio.

Most of the core portfolio is managed internally. Investment advisory firms are
retained to manage asset classes, primarily in the alternative investment
portfolio. Currently, the Company retains Asset Allocation and Management
Company, General Re/New England Asset Management Company, Hartford Investment
Management Company, and Wellington Management L.P. to manage portions of the
investment portfolio within the investment strategy and guidelines
establishedprovided by the Company.



                                       13


 

 <PAGE>
<PAGE>






The following table contains information concerning the Company's fixed maturity
and equity investment portfolio all of which were classified as available for
sale at December 31, 1998:

<TABLE>
<CAPTION>

                                                     FAIR    CARRYING    PERCENT
                                         COST (1)    VALUE     VALUE     OF TOTAL
                                         ----------------------------------------
                                              (dollar amounts in thousands)
<S>                                      <C>         <C>      <C>       <C>
Fixed maturity
securities:
  U.S. Treasury securities and
   obligations of U.S. Government
   corporations and agencies          $   69,951   $   72,371  $   72,371     5.8%
  Obligations of states and  political
   subdivisions                          330,276      342,344     342,344    27.2
  Corporate securities                   381,053      393,091     393,091    31.3
  Mortgage-backed securities             384,659      391,278     391,278    31.1
                                      -------------------------------------------
Total fixed maturity securities        1,165,939    1,199,084   1,199,084    95.4
Equity securities                         49,973       57,328      57,328     4.6
                                      -------------------------------------------
  Total                               $1,215,912   $1,256,412  $1,256,412   100.0%
                                      ===========================================

</TABLE>

(1) Original cost of equity securities and, as to fixed maturities, original
    cost reduced by repayments and adjusted for amortization of premiums or
    accrual of discounts.

The following table sets forth a profile of the Company's fixed maturity
investment portfolio by rating at December 31, 1998:

<TABLE>
<CAPTION>
                                   FAIR    CARRYING   PERCENT
S&P/MOODY'S RATING                 VALUE     VALUE   OF TOTAL
---------------------------------------------------------------
                                 (dollar amounts in thousands)

<S>                               <C>         <C>        <C>
AAA/Aaa (including U.S.           
Treasuries of $52,894)          $  638,094  $  638,094    53.2% 
AA/Aa                              201,221     201,221    16.8
A/A                                239,840     239,840    20.0
BBB/Baa                             91,368      91,368     7.6
All other                           28,561      28,561     2.4 
                                -------------------------------
  Total                         $1,199,084  $1,199,084   100.0%
                                ===============================

<CAPTION>

The following table sets forth the maturity profile of the Company's portfolio
of fixed maturity investments at December 31, 1998:


</TABLE>
<TABLE>
<CAPTION>
                                   FAIR       CARRYING    PERCENT
MATURITY                           VALUE        VALUE    OF TOTAL
------------------------------------------------------------------
                                     (dollar amounts in thousands)

<S>                               <C>       <C>           <C>
Due in one year or less           $   17,724  $   17,724      1.4%
Due after one year to five years     271,676     271,676     22.7
Due after five years to ten years    232,430     232,430     19.4
Due after ten years                  285,976     285,976     23.9
Mortgage-backed securities           391,278     391,278     32.6
                                 ================================
  Total                           $1,199,084  $1,199,084    100.0%
                                 ================================
</TABLE


                                       14


 

 <PAGE>
<PAGE>






The following table summarizes the Company's investment results for the five
years ended December 31, 1998, calculated using the mean of total investments as
of the first and last day of each calendar quarter:



</TABLE>
<TABLE>
<CAPTION>
                                 1998     1997      1996       1995      1994
                            ----------------------------------------------------
                                         (dollars amounts in thousands)
<S>                            <C>       <C>       <C>       <C>       <C>
Total net investment income    $76,538   $60,344   $38,933   $30,055   $22,975
Average annual pre-tax yield       6.6%      6.4%      6.4%      6.4%      6.6%
Average annual after-tax yield     4.7%      4.6%      4.8%      4.9%      5.4%
Effective federal
  income tax rate on
  total net investment income     28.6%     26.9%     24.8%     23.7%     19.8%
  
</TABLE>

REGULATION AND PREMIUM RATES

The Company's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they transact business
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance commissioners. Such regulation generally is designed to
protect policyholders rather than investors and relates to such matters as the
standards of solvency which must be met and maintained; the licensing of
insurance companies and their agents; the nature and examination of the affairs
of insurance companies, which includes periodic market conduct examinations by
the regulatory authorities; annual and other reports, prepared on a statutory
basis, required to be filed with respect to the financial condition of insurance
; establishment and maintenance of reserves for unearned premiums and losses;
restrictions on dividends and other distributions; and requirements regarding
numerous other matters. (See "Managements Discussion and Analysis of Financial
Condition and Results of Operations--Solvency and Surplus Matters.")

Regulatory requirements applying to premium rates vary from state to state, but
generally provide that rates not be "excessive, inadequate or unfairly
discriminatory." In general, the Company's insurance subsidiaries must file all
rates for insurance directly underwritten with the insurance department of each
state in which they operate on an admitted basis.

Subject to regulatory requirements, the Company's management determines the
premium rates for its policies based on a variety of factors, including loss and
LAE experience, inflation, taxes , and anticipated changes in the legal
environment. Methods for arriving at prices vary by type of business, exposure
assumed and size of risk. Underwriting profitability is affected by the accuracy
of these estimates and the willingness of insurance regulators to approve
changes in those rates which they control, and by such other matters as
underwriting selectivity and expense control.

The Company is also subject to statutes governing insurance holding company
systems in various jurisdictions. Typically, such statutes require the Company
to file information periodically with the state insurance regulatory
authorities, including information concerning its capital structure, ownership,
financial condition and general business operations. Under the terms of
applicable state statutes, any person or entity desiring to purchase more than a
specified percentage (commonly 10%) of the Company's outstanding voting
securities is required to obtain regulatory approval for the purchase. Article
15 of the New York Insurance Law relating to holding companies, to which the
Company is subject, requires, inter alia, disclosure of transactions between
Frontier and the Company or any of its subsidiaries, that such transactions
satisfy certain standards, including that they be fair, equitable and
reasonable, and that certain material transactions be specifically
nondisapproved by the New York Department of Insurance (the "Department").
Further, prior approval by the Department is required of affiliated sales,
purchases, exchanges, loans or extensions of credit, or investments, any of
which involve 5% or more of Frontier's admitted assets as of the preceding
December 31st. In addition, any documents relating to the offering of securities
by the Company, the proceeds of which will be used for, or in the operations of
Frontier, must be approved by the Department. With respect to Frontier Pacific,
United Capitol, Lyndon, Western, Regency and Acceleration, the laws of their
states of domicile with respect to holding companies are substantially
equivalent to that of New York.


                                       15


 

 <PAGE>
<PAGE>





In their ongoing effort to improve solvency regulation, the NAIC and individual
states have enacted certain laws and statutory financial statement reporting
requirements. For example, NAIC rules require audited statutory financial
statements as well as actuarial certification of loss and LAE reserves therein.
Other activities are focused on greater disclosure of an insurance company's
reliance on reinsurance and changes in its reinsurance programs and stricter
rules on accounting for certain overdue reinsurance. In addition, the NAIC has
implemented risk-based capital ("RBC") requirements for insurance companies. An
insurance company that does not meet threshold RBC measurement standards could
be required to reduce the scope of its operations and ultimately could become
subject to statutory receivership proceedings. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Solvency and Surplus
Matters.") These regulatory initiatives and the overall focus on solvency may
intensify the restructuring and consolidation of the insurance industry. It is
also possible that Congress may enact legislation regulating the insurance
industry. While the impact of these regulatory efforts on the Company's
operations cannot be quantified until enacted, the Company believes it will be
adequately positioned to compete in an environment of more stringent regulation.

COMPETITION

Health Care Division

The business in this segment is highly competitive, principally in terms of
price and extent of coverage. In New York State, there are three major
competitors, as well as a number of other insurers, writing medical malpractice
insurance for physicians . However, the Company benefits from the endorsement or
approval of various medical associations, many of whose physician members are
insured by the Company. Moreover, the Company's program, unlike those of its
competitors, is limited to specified classes of physicians. Dental malpractice
coverage in all jurisdictions is significantly more competitive than medical
malpractice with respect to rates and terms of coverage. Although the Company's
underwriting strategy is to underwrite specialty programs for niche markets, it
nevertheless encounters competition from carriers engaged in insuring risks in
the broader lines of business which encompass niche programs.

Surety Division

The Company, through this segment, is one of the top ten surety underwriters
in the United States. There are approximately 200 active surety companies,
each which underwrite in excess of $3 million in annual premiums.

This segment faces competition from the large national multi-line carriers as
well as smaller, regional mono-line and multi-line companies. Underwriting
terms, commissions and pricing are the primary competitive factors.

Alternative Risk Division

Due to the diversity of the programs underwritten, this segment faces
competitive pressures from a variety of sources, ranging from specialty niche
carriers, to the more traditional, standard carriers.

The market for both excess and primary workers' compensation, a significant
portion of this segment's business, has become increasingly competitive over the
past few years. In response to this competitive environment, the Company has
focused on underwriting very specialized books of business from select
producers, thereby attempting to avoid the more competitive lines.

Other lines of business underwritten by this segment also face significant
competition, which the Company attempts to avoid by focusing on specialty
niches.



                                       16


 

 <PAGE>
<PAGE>






Specialty Programs Division

This segment is facing strong competition in many of its program lines due to
the continued soft pricing in the property/casualty market. Size of accounts is
a key factor contributing to the competitive pricing for this segment with most
medium (approximately $25,000 or more in premiums) to large accounts being
difficult to renew at current and adequate rates. The Company's strategy in
retaining and attracting these accounts is to provide superior service, enhanced
coverages, and risk management assistance, rather than attempting to compete on
price alone, and to utilize specialized agents with national prominence in their
respective product lines as producers.

Smaller accounts (less than $10,000 in premiums), which make up over half of the
programs underwritten by this segment, tend to be less sensitive to price. By
providing superior service and enhanced coverages, this segment has experienced
strong premium growth with respect to such smaller accounts.

Environmental, Excess and Surplus Lines Division

This segment has limited competition with respect to environmental coverages due
to a shortage of experienced underwriters who possess both the environmental and
insurance knowledge required to successfully underwrite this class of business.
Currently, there are four major competitors underwriting such coverages. The
Company employs, and continues to seek, underwriters with a high degree of both
environmental and insurance knowledge.

The competition in California with respect to coverage for residential and
commercial contractors is fairly limited due to past poor experience by
insurance companies in this class. The Company has been successful writing this
coverage by utilizing a highly restrictive manuscript policy form and
implementing stringent underwriting controls.

Coverages for property, product liability and ocean marine are highly
competitive. The Company attempts to limit its underwriting risks through the
utilization of manuscripted policy forms and endorsements, deductibles,
self-insured retentions and individual risk pricing.

Personal and Credit-Related Division

This segment focuses on providing products for insurance programs with respect
to credit, sales finance and loan transactions which are marketed through banks,
credit unions, finance companies, automobile dealers and recreational vehicle
dealers. Products include extended service contracts, credit life and
disability, credit property, involuntary unemployment, residual value, GAP and
collateral protection. Business for this segment is produced internally by
direct sales, general agents, other insurance companies, third party
administrators and brokers.

This segment has a limited number of competitors with competition primarily
related to service, financial strength and relationships. In the credit-related
market, the number of competitors continues to decline due to consolidations.

EMPLOYEES

The Company currently has approximately 1,250 full-time employees, eight of whom
are executive management, and 64 part-time employees. The Company is not a party
to any collective bargaining agreement and believes its relationship with its
employees to be good.



                                       17




 <PAGE>
<PAGE>






ITEM 2. PROPERTIES

The Company owns a three-story office building in Rock Hill, New York, in which
its executive offices and insurance operations for Frontier are located, a
one-story building in Rock Hill, New York, which it uses for storage, a portion
of which is rented, and a one-story  office  building in Charlotte, North
Carolina from which Regency conducts its operations. The Company also
owns an airplane and a hanger at a local airport.

The Company leases office space at 39 locations in 18 states at an aggregate
monthly rental of approximately $376,000.

ITEM 3. LEGAL PROCEEDINGS

See "Management's  Discussion and Analysis of Financial Condition
and Results of Operations--Shareholder Litigation".

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

Not applicable.



                                       18


 

 <PAGE>
<PAGE>






                                     PART II

ITEM 5.  MARKET FOR THE  REGISTRANT'S  COMMON  STOCK AND RELATED 
         SECURITY HOLDER MATTERS

The Company's Common Stock is traded on the New York Stock Exchange under the
symbol FTR. The following table sets forth the high and low sales prices for the
Company's Common Stock, as reported by the New York Stock Exchange, for each
calendar quarter during the periods indicated, as adjusted to reflect stock
dividends paid and stock splits:

<TABLE>
<CAPTION>
                             HIGH       LOW
                          --------------------
<S>                        <C>        <C>
1997:

  First quarter             $20.28    $16.65
  Second quarter             29.77     19.60
  Third quarter              35.45     27.16
  Fourth quarter             35.68     18.18

1998:

  First quarter             $25.11    $20.34
  Second quarter             25.39     20.73
  Third quarter              23.75     12.63
  Fourth quarter             18.50     11.63

1999:

  First quarter (through    $15.25    $12.13
   March 17, 1999)
</TABLE>


On March 17,1999, the Company had approximately 1,315 holders of record of its
Common Stock, which did not include beneficial owners for shares registered in
nominee or street name.

During 1998, the Company declared four quarterly cash dividends of $.07 per
share, constituting the twenty-fourth consecutive quarterly cash dividend.
During 1997, the Company declared one quarterly cash dividend of $.065 and three
quarterly cash dividends of $.07 per share. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Solvency and Surplus
Matters" for restrictions on the payment of dividends by the Company's insurance
subsidiaries).



                                       19


 

 <PAGE>
<PAGE>









ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data are derived from the Company's
consolidated financial statements and should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included elsewhere in this Annual Report.

Income Statement Data:


<TABLE>
<CAPTION>
                                                          1998        1997        1996        1995        1994
                                                        --------------------------------------------------------
                                                                     (DOLLAR AMOUNTS IN THOUSANDS)
 
<S>                                                     <C>         <C>         <C>         <C>         <C>
Revenues:
     Gross premiums written                             $833,158    $587,635    $402,799    $264,314    $198,892
                                                        ========================================================
     Net premiums written                               $527,005    $389,016    $311,863    $220,757    $187,288
                                                        ========================================================
     Net premiums earned                                $493,054    $366,844    $265,989    $196,220    $156,755
     Net investment income                                73,528      56,122      37,226      30,035      24,453
     Net realized capital gains (losses)                   3,010       4,222       1,707          20      (1,478)
     Net proceeds from Company owned life insurance
       policy                                              4,400          --          --          --          --
                                                        --------------------------------------------------------
     Total revenues                                      573,992     427,188     304,922     226,275     179,730
Expenses:
     Losses and loss adjustment expenses                 442,853     234,568     155,991     119,255     110,918
     Amortization of policy acquisition costs,
       underwriting and other expenses                   210,083     134,929      88,025      62,845      47,482
     Minority interest in income of subsidiary trust      10,966      11,017       2,277          --          --
     Interest expense                                        965         825       1,970         895          --
                                                        --------------------------------------------------------
     Total expenses                                      664,867     381,339     248,263     182,995     158,400
                                                        --------------------------------------------------------
Income (loss) before income taxes                        (90,875)     45,849      56,659      43,280      21,330
Income tax expense (benefit)                             (40,833)     13,567      16,592      12,069       4,350
                                                        --------------------------------------------------------
Net income (loss)                                       $(50,042)   $ 32,282    $ 40,067    $ 31,211    $ 16,980
                                                        ========================================================
Net income (loss) per share -- basic                    $  (1.34)   $    .94    $   1.26    $    .99    $    .54
                                                        ========================================================
Net income (loss) per share -- diluted                  $  (1.34)   $    .92    $   1.23    $    .98    $    .54
                                                        ========================================================
Cash dividends declared per share                       $    .28    $    .28    $    .25    $    .24    $    .23
                                                        ========================================================
</TABLE>
 
Balance Sheet Data:
 
<TABLE>
<CAPTION>
                                                                         DECEMBER 31
                                              ------------------------------------------------------------------
                                                 1998          1997          1996          1995          1994
                                              ------------------------------------------------------------------
                                                                (DOLLAR AMOUNTS IN THOUSANDS)
<S>                                           <C>           <C>           <C>           <C>           <C>
Total investments                             $1,459,312    $1,249,823    $  838,320    $  552,714    $  407,618
Total assets                                   2,553,777     2,009,666     1,259,227       777,616       601,604
Liabilities for gross unpaid losses and
  loss adjustment expenses                     1,092,282       780,044       539,073       367,436       312,637
Total liabilities                              1,992,404     1,389,258       823,700       547,883       411,340
Guaranteed preferred beneficial interest in
  Company's convertible subordinated
  debentures                                     167,153       166,703       166,953            --            --
Total shareholders' equity                       394,220       453,705       268,574       229,733       190,264
------------------------
Supplemental diluted earnings per share
  data:
     Realized capital gains (losses) -- net
       of tax                                 $      .05    $      .06    $      .04    $       --    $     (.03)
     Operating income (loss)                       (1.39)          .86          1.19           .98           .57
                                              ------------------------------------------------------------------
Net income (loss)                             $    (1.34)   $      .92    $     1.23    $      .98    $      .54
                                              ==================================================================
Book value per share                          $    10.70    $    12.16    $     8.34    $     7.29    $     6.05
                                              ==================================================================
Statutory combined ratio                           133.2%        100.9%         90.9%         91.1%         98.1%
GAAP combined ratio                                131.9%        101.0%         91.8%         92.7%        101.0%
Ratio of earnings to combined fixed charges
  and preferred stock dividends                     (6.3)x         4.7x         13.3x         39.1x          N/A

</TABLE>


                                       20


 

 <PAGE>
<PAGE>






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

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Annual Report.

RESULTS OF OPERATIONS

The following table sets forth the Company's net premiums earned by principal
lines of insurance for the three years indicated and the dollar amount and
percentage of change therein from year to year:




<TABLE>
<CAPTION>
                                                                INCREASE (DECREASE)
                                                          --------------------------------
                                                          1998 TO 1997      1997 TO 1996
                           1998       1997      1996      AMOUNT    %      AMOUNT       %
------------------------------------------------------------------------------------------
                                            (dollar amounts in thousands)          
<S>                     <C>         <C>       <C>       <C>       <C>      <C>        <C>
General liability       $ 131,545   $111,515  $ 78,641  $ 20,030   18.0%   $32,874     41.8%
Medical malpractice       107,149    109,470   105,217    (2,321)  (2.1)     4,253      4.0
Surety                     66,119     56,327    51,368     9,792   17.4      4,959      9.7
Workers' compensation      11,338      6,724     7,025     4,614   68.6       (301)    (4.3)
Commercial multi-peril     28,470     16,465    11,006    12,005   72.9      5,459     49.6
Commercial earthquake       5,708      7,522     8,217    (1,814) (24.1)      (695)    (8.5)
Specialty personal lines   57,241     27,975     4,122    29,266  104.6     23,853    578.7
Credit-related products    50,079     15,068        --    35,011  232.4     15,068       --
Other                      35,405     15,778       393    19,627  124.4     15,385  3,914.8
                        ----------------------------------------          --------
  Total                 $ 493,054   $366,844 $ 265,989  $126,210   34.4%  $100,855     37.9%
                        ========================================          ========
</TABLE>

The following table sets forth the expense components of the Company's combined
ratio calculated as a percentage of net premiums earned on the basis of
generally accepted accounting principles ("GAAP Combined Ratio") for the three
years indicated:


<TABLE>
<CAPTION>
 
                                      1998     1997      1996
                                   ---------------------------
<S>                                <C>         <C>       <C>
Losses                                58.0%     45.9%     36.5%
Loss adjustment expenses ("LAE")      37.0      19.7      22.2
                                    --------------------------
Losses and LAE                        95.0      65.6      58.7
Underwriting and other operating      
 expenses                             36.9      35.4      33.1
                                    --------------------------
GAAP Combined Ratio                  131.9%    101.0%    91.8%
                                    ==========================

</TABLE>

CALENDAR YEAR 1998 COMPARED TO CALENDAR YEAR 1997

A variety of factors accounted for the 34.4% growth in net premiums earned, the
principal factor being increases in the Company's core and new program
businesses in the general liability, surety, workers' compensation, and
commercial multi-peril lines of business. Net premiums earned also grew due
to the acquisitions of Lyndon in May 1997 and Acceleration in January 1998,
which provide credit-related products, Western in December 1997, which offers
medical malpractice coverage and Environmental Commercial Insurance Agency, Inc.
("ECI") in December 1997 which produces policies for environmental risks in
the general liability line. This increase was partially offset by a decrease
in medical malpractice business, commercial earthquake business, the planned
decrease in a general liability program for apartment owners and to increased
premiums ceded under the aggregate excess of loss reinsurance treaty.

The increase in general liability net premiums earned was primarily attributable
to increased business written in the Environmental, Excess and Surplus Lines
Division, primarily due to the acquisition of ECI, and to increased writings in
the Specialty Programs Division in various programs such as camp, pest control
and artisan contractors. These increases were partially offset by decreases in
the Specialty Programs Division, primarily due to a discontinued program for
apartment owners, and to decreased writings of excess workers' compensation
in the Alternative Risk Division due to competition.



                                       21




<PAGE>
<PAGE>





Medical malpractice net premiums earned in the Health Care Division decreased,
primarily due to the sale of the Florida physicians business in December 1997.
This decrease was partially offset by the increase in business from the
acquisition of Western, and to increased writings for physicians, dentists and
psychiatrists due to geographic expansion.

The growth in the surety line was primarily attributable to expanded writings
of license and permit bonds, service contract bonds, customs bonds, lost
instrument bonds, self insured workers' compensation bonds, landfill bonds and
subdivision bonds, partially offset by a decrease in the contract bond business
for small contractors due to increased price competition.

Net premiums earned for the workers' compensation line increased due to
increased writings in the Alternative Risk Division, primarily in the captive
and rent-a-captive programs, and to business acquired in the Western acquisition
and written in the Health Care Division.

The growth in commercial multi-peril net premiums earned was due to increased
writings in the Health Care Division, primarily in day care and other health
care facilities and institutions.

Net premiums earned in the commercial earthquake line written in the Alternative
Risk Division decreased primarily due to the planned decrease in this program.

The growth in specialty personal lines and credit-related products was due to
increased volume as a result of the acquisitions of Lyndon and Acceleration and
to increased business in the mobile homeowners program.

Net premiums earned in the other lines of business increased, primarily due to
an increase in volume written in the Alternative Risk, Specialty Programs, and
Health Care Divisions, primarily in the group accident and health, ocean marine,
international property and commercial auto liability lines of business.

Net investment income before realized capital gains and losses increased 31.0%
due principally to increased cash flow from operations and the contribution to
net investment income from the acquisitions made in 1997, partially offset by
the interest charge on funds held by the Company for the benefit of the
reinsurer of the Company's aggregate excess of loss reinsurance contract.

Total revenues increased 34.4% as a result of the above.

Total expenses increased 74.4%, compared to the 34.4% increase in net premiums
earned. Losses and LAE increased 88.8% as a result of a 66.5% increase in losses
and a 141.5% increase in LAE. Amortization of policy acquisition costs,
underwriting and other expenses increased 55.7% as a result of a 46.9%
increase in amortization of policy acquisition costs and a 70% increase in
underwriting and other expenses.

The increase in losses and LAE was primarily due to a $155 million reserve
strengthening in the medical malpractice, general liability and surety lines of
business. The increase in medical malpractice losses and LAE was primarily due
to poor results in business written for individual physician malpractice in
various states, primarily in the state of Ohio, and to adverse reserve
development in the large account program. The increase in losses and LAE in
the general liability and surety lines was primarily due to adverse reserve
development in LAE for accident years prior to 1998 in the Alternative
Risk, Health Care, and Specialty Programs Divisions for general liability and
for surety in the Surety Division.



                                       22


 

 <PAGE>
<PAGE>






Amortization of policy acquisition costs, underwriting and other expenses
("Expenses") increased in the Health Care Division primarily due to the
acquisition of Western and to increases in staffing, and marketing expenses.
Expenses in the Surety Division increased due to increased policy acquisition
costs and to the move of this division to Nashville early in the fourth quarter
of 1998. The increases in Expenses in the Alternative Risk and Environmental,
Excess and Surplus Lines Divisions were in direct proportion to the
increase in net premiums earned. Expenses in the Specialty Programs Division
increased due to the costs associated with the opening of a new start-up
operation and to increased staffing and marketing costs. Expenses in the
Personal and Credit-Related Division increased due to the acquisition of
Acceleration in January 1998, partially offset by the recognition of $8.3
million of amortization of the excess of net assets over the purchase price
associated with the Lyndon acquisition.

Expenses increased due to a $10 million charge to cancel the aggregate excess
stop loss agreement for the 1999 treaty year, an increase of approximately
$3.5 million in the allowance for doubtful accounts and a $0.3 million
restructuring charge related to the closing of one of the Company's Health
Care Division Offices.

The increase in interest expense was primarily the result of additional
borrowings under the line of credit during 1998.

The foregoing changes resulted in a net loss before taxes of $90.9 million for
the year ended 1998 versus net income before taxes of $45.8 million for 1997.

CALENDAR YEAR 1997 COMPARED TO CALENDAR YEAR 1996

A variety of factors accounted for the 37.9% growth in net premiums earned, the
principal factor being increases in the Company's core and new program
businesses in the general liability, surety, medical malpractice and commercial
multi-peril lines of business. Net premiums earned also grew due to the
acquisitions of Lyndon, which writes personal lines and credit-related products,
United Capitol, which provides general liability coverage for environmental and
artisan contractors and, to a lesser degree Western, which offers medical
malpractice coverage. This increase was partially offset by a decrease in
workers' compensation, particularly the cotton gin program and social service
programs that the Company discontinued during 1996 due to price competition.

The increase in general liability net premiums earned was primarily attributable
to increase business written in the Environmental, Excess and Surplus Lines
Division, primarily due to the acquisition of United Capitol, growth in programs
in the Specialty Programs Divisions, primarily in the artisan's contractor and
demolition contractor programs, and to growth in the excess employers' liability
program in the Alternative Risk Division. These increases were partially offset
by decreases in the specialty programs division, primarily due competition in
the crane operators' liability program and to decreased writings for umbrella
coverages.

Medical malpractice net premiums earned in the Health Care Division increased
4.1%, primarily attributable to an increase in the number of physicians insured
in the programs for psychiatrists and alternative risks, geographical expansion
in Ohio, Texas, Michigan, and Illinois and growth in the dental program endorsed
by the Academy of General Dentistry and, to a lesser degree, the acquisition of
Western in December 1997. These increases were partially offset by a decrease in
Florida business due to rate increases, the sale of the Florida medical
malpractice business and from the reclassification of certain medical
malpractice business to the general liability line.

The 9.8% growth in the surety line was primarily attributable to expanded
writings of license and permit bonds, service contract bonds, customs bonds,
lost instrument bonds, self insured workers' compensation bonds, landfill
bonds and subdivision bonds. The growth in the Surety Division was partially
offset by decrease in the contract bond business for small contractors due to
price competition.



                                       23


 

 <PAGE>
<PAGE>






Net premiums earned for the workers' compensation line decreased primarily as a
result of decreases in the specialty niche programs for the cotton gin and feed
lots written in the Specialty Programs Division and in the Health Care Division
in programs associated with social services due to price competition. This
decrease was partially offset by increases in the captive and rent-a-captive
programs written in the Alternative Risk Division.

The growth in the commercial multi-peril net premiums earned was due to
increased writings in the Health Care Division, primarily due to an increase in
business written for day care and other healthcare related facilities and
institutions.

Net premiums earned in the commercial earthquake line written in the Alternative
Risk Division decreased 8.6%, primarily due to the planned decrease in this
business.

The growth in specialty personal lines and in the credit-related products lines
was due to increased volume written in the Personel and Credit-Related Division
as a result of the acquisition of Lyndon and to increased business in the mobile
homeowner's program.

Net premiums earned in the other lines of business increased, primarily due to
an increase in volume written in the Alternative Risk, Specialty Programs, and
Health Care Division, primarily in the group accident and health, ocean marine,
international property and commercial auto liability lines.

Net investment income before realized capital gains and losses increased 50.8%
due principally to increases in invested assets resulting from proceeds of the
Common Stock offering in August 1997, the Convertible Trust Originated Preferred
Securities ("Convertible TOPrS") offering in October 1996, cash flow from
operations and the contribution to net investment income from the acquisitions
made in 1997, partially offset by the interest charge on funds held by the
Company for the benefit of the reinsurer of the Company's aggregate excess of
loss reinsurance contract.

Total revenues increase 40.1% as a result of the above.

Total expenses increased 53.6%, compared to the 37.9% increase in net premiums
earned. Losses and LAE increased at a 50.4% rate as a result of a 70.0% increase
in losses and a 18.1 % increase in LAE. Amortization of policy acquisition
costs, underwriting and other expenses increased 53.2% rate as a result of a
45.2% increase in amortization of policy acquisition costs and a 68.1% increase
in underwriting and other expenses.

The increase in losses and LAE was primarily due to a $35 million reserve
increase in the medical malpractice line in the Health Care Division, primarily
due to adverse reserve development in accident years prior to 1995.

Amortization and policy acquisition costs, underwriting and other expenses
("Expenses") increased in the Health Care Division,  primarily due to the
acquisition of Western in December 1997 and to increased staffing and
marketing expenses related to expansion, and salary increases. Expenses in the
Personal and Credit-Related Division increased due to the acquisition of
Lyndon in 1997 and Regency in 1996, partially offset by the recognition of $5.8
million of the amortization of the excess of net assets over the purchase price
associated with the Lyndon acquisition. Expenses in the Environmental, Excess
and Surplus Lines Division increased primarily due to the acquisition of United
Capitol in 1996 and to increased staffing and marketing expenses related to
expansion. Expenses in the Surety, Specialty Programs and Alternative Risk
Divisions increased due to increased staffing and marketing expenses related to
expansion, and salary increases.



                                       24


 

 <PAGE>
<PAGE>






The decrease in interest expense was primarily the result of the repayment and
termination of the line of credit in the fourth quarter of 1996, partially
offset by the interest expense associated with the draw-down of $62 million from
a revolving credit facility that the Company obtained on June 3, 1997.

The foregoing changes resulted in net income before taxes of $45.8 million for
the year ended 1997, a 19.1% decrease from the comparable 1996 period.


ASSET PORTFOLIO REVIEW

The Company invests primarily in fixed income securities with the objective of
maximizing after-tax investment income and total investment returns within
approved investment guidelines. The core investment portfolio contains fixed
maturity securities which are rated investment grade. At December 31, 1998, the
Company held investment grade rated securities with a carrying value of $1.17
billion, representing 97.6% of total fixed maturity investments. Fixed maturity
investments with credit ratings below investment grade, which are maintained as
part of the alternative iInvestment portfolio, totaled $28.6 million at December
31, 1998 and represented the 2.4% balance of the total fixed maturity
investments.

At December 31, 1998 and 1997, the Company's fixed maturity investments included
mortgage-backed securities of $391.3 million and $368.6 million, respectively,
which are subject to risks associated with variable prepayments of the
underlying mortgage loans that differ from typical fixed maturities. Securities
that have an amortized cost greater than par value that are backed by mortgages
that prepay faster than expected will incur a reduction in yield, while
securities that have an amortized cost less than par value that are backed by
mortgages that prepay faster than expected will generate an increase in yield.
The degree to which a security is susceptible to either gains or losses is
influenced by the difference between amortized cost and par value, the relative
sensitivity of the underlying mortgages backing the assets to prepayment risk
and the repayment priority of the securities in the overall structure of a
securitization.

The Company limits the extent of its credit risk by purchasing securities backed
by stable collateral with enhanced priority in the securitization structure. The
credit risk is minimized as the majority of the Company's mortgage-backed
portfolio is guaranteed by U.S. government-sponsored entities or are supported
in the securitization structure by junior securities resulting in bonds with
high investment grade ratings. The portfolio is actively managed to minimize the
Company's exposure to prepayment and extension risk. As of December 31, 1998,
the Company's asset and mortgage-backed holdings were rated Aa1 and Aaa,
respectively, by Moody's.


The alternative investment portfolio includes investments in limited
partnerships with carrying values of $27.3 million and $17.8 million at December
31, 1998 and 1997, respectively. The partnerships have varying investment
strategies and these investments were made by the Company with the objective of
long-term capital appreciation. The investments generally contain lock-up
provisions which require the Company to hold the investments for a specified
time horizon and have limited liquidity.

LIQUIDITY AND CAPITAL RESOURCES

The Company is a holding company, receiving cash principally through sales of
its securities, borrowings and management fees charged to its subsidiaries.
The Company's insurance subsidiaries are subject to dividend restrictions as
described in Note Q of the Notes to the Consolidated Financial Statements. The
ability of insurance companies to underwrite insurance is based on maintaining
liquidity and capital resources sufficient to pay claims and expenses as they
become due.

                                       25


 

 <PAGE>
<PAGE>






The liquidity needs of the Company's insurance subsidiaries are generally met
through cash provided by operating activities. However, during 1998, additional
funds of approximately $62.6 million were contributed to the insurance
subsidiaries as a result of significant reserve strengthening and the need to
maintain certain minimum surplus levels. Such funds were obtained through the
Company's $150 million credit facility with Deutsche Bank AG, New York Branch,
of which $58 million remained available to the Company at December 31, 1998.
Under the terms of the credit facility, the Company is subject to certain
financial and non-financial covenants, some of which restrict its ability to
dispose of assets, incur additional indebtedness and require the maintenance
of a minimum level of consolidated shareholders' equity.

Cash flow needs at the holding company level primarily include corporate
operating expenses and interest payments on outstanding debt, for which funding
is provided through management fees charged to the Company's subsidiaries. Net
proceeds of $144.5 million from a Common Stock offering in 1997 and $166.7
million from the sale of Convertible TOPrS during 1996 provided the principal
funding for the strategic acquisitions completed during the three years ended
December 31, 1998 (see Note C of the Notes to the Consolidated Financial
Statements).

The Company has authorized a stock repurchase plan for up to 3 million shares of
its Common Stock under which it repurchased 668,300 shares at a cost of $8.5
million during 1998. Although the Company plans to continue to repurchase its
Common to the extent market conditions make such repurchases strategically
advantageous, it has no commitment or obligation to purchase any particular
number of shares and the program may be suspended at the Company's discretion.

The Company continually monitors existing and alternative financing sources to
support the Company's capital and liquidity needs, including, but not limited to
debt issuance and preferred or Common Stock issuance.

RATING AGENCIES

Ratings assigned by nationally recognized agencies are major factors in the
Company's ability to market the products of its insurance subsidiaries to its
agents and customers since rating information is broadly disseminated and
generally used throughout the industry.

All of the Company's insurance subsidiaries, except Lyndon Life, Gulfco Life and
Acceleration, are currently rated A- ("Excellent") by A.M. Best Company, Inc.
("A.M. Best"). A.M. Best's current ratings for Lyndon Life and Gulfco Life are
B++ ("Very Good"), and its rating for Acceleration is B+("Very ). Standard &
Poor's ("S&P") has assigned a financial strength rating of A+ ("Strong") to all
of the Company's insurance subsidiaries, except for Regency, which is rated A
("Strong") and Acceleration and Gulfco, which have not been assigned ratings by
S&P.


In order to maintain Frontier's current rating with A.M. Best, the Company has
made certain commitments, including maintaining a minimum statutory surplus
level of $250 million and limiting its premium-to-surplus ratio to no more
than 1.75 to 1.

A.M. Best's and S&P's ratings are based on an analysis of financial condition
and operations of an insurance company as they relate to the industry in
general, are not designed for the protection of investors and do not constitute
recommendations to buy, sell, or hold any security.

SOLVENCY AND SURPLUS MATTERS

In its ongoing effort to improve solvency regulation, the NAIC and individual
states have enacted certain laws and financial statement changes. The NAIC has
adopted Risk-Based Capital ("RBC") requirements for insurance companies to
evaluate the adequacy of statutory capital and surplus in relation to investment
and insurance risks, such as asset quality, mortality and morbidity, asset and
liability matching, benefit and loss reserve adequacy, and other business
factors. The RBC formula is used by state insurance regulators as an early



                                       26



 

 <PAGE>
<PAGE>






warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines minimum capital standards that supplement the current system
of low fixed minimum capital and surplus requirements on a state-by-state basis.
Regulatory compliance is determined by a ratio of the enterprise's regulatory
total adjusted capital, as defined by the NAIC, to its authorized control level
RBC, as defined by the NAIC. Companies below specific trigger points or ratios
are classified within certain levels, each of which requires specific corrective
action. The levels and ratios are as follows:


YYY


<TABLE>
<CAPTION>

                                       RATIO OF TOTAL ADJUSTED
                                        CAPITAL TO AUTHORIZED
                                          CONTROL LEVEL RBC
  REGULATORY EVENT                     (LESS THAN OR EQUAL TO)
---------------------                 ------------------------
<S>                                            <C>
Company action level                              2*
Regulatory action level                           1.5
Authorized control level                          1
Mandatory control level                           0.7

</TABLE>

*Or, 2.5 with negative trend.


At December 31, 1998 and 1997, the ratios of total adjusted capital to
authorized control level RBC for the Company's insurance subsidiaries were in
excess of 2.5 to 1.

In addition, state insurance statutes typically place restrictions on the
maximum amount of dividends or other distributions that may be made by insurance
companies to their shareholders without obtaining prior regulatory approval.
Such restrictions are typically related to the insurance companies statutory
capital and surplus. (See Note Q of the Notes to the Consolidated Financial
Statements.)

In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Ccompany's insurance subsidiaries use to prepare their
statutory-basis financial statements. Codification will require adoption by the
various states before it becomes the prescribed statutory basis of accounting
for insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company's insurance subsidiaries, their
respective state of domicile must adopt Codification as the prescribed basis of
accounting for domestic insurers to report their statutory-basis results to the
insurance department. At this time, it is unclear which of the various states
will adopt Codification. Management has not yet determined the impact of
Codification on the statutory surplus of the Company's insurance subsidiaries.

The thrust of these regulatory efforts is to improve the solvency of insurance
companies. These regulatory initiatives, and the overall focus on solvency, may
intensify the restructuring and consolidation of the insurance industry. While
the impact of these regulatory efforts on the Company's operations cannot be
quantified until enacted, the Company believes it will be adequately positioned
to compete in an environment of more stringent regulation.

ZURICH REINSURANCE (NORTH AMERICA) STOP LOSS AGREEMENTS

Effective January 1, 1995, the Company entered into a stop loss reinsurance
agreement with Zurich Reinsurance (North America), Inc. ("Zurich N.A."),
formerly Centre Reinsurance Company of New York for accident years
commencing 1995. Under the agreement, Zurich N.A. provides reinsurance
protection within certain accident year and contract aggregate dollar limits for
losses and LAE in excess of a predetermined ratio of these expenses to net
premiums earned for a given accident year for all subject business. The loss and
LAE ratio above which the reinsurance provides coverage is 66%, 65%, and 64% for
accident years 1995 through 1997, respectively. The maximum amount recoverable
for an accident year is 175% of the reinsurance premium paid for the accident
year, or $162.5 million in the aggregate for the three years. As of December 31,
1998, the Company had exceeded the aggregate limits of the contract. (See Note I
of the Notes to the Consolidated Financial Statements.)


                                       27


 

 <PAGE>
<PAGE>





Effective January 1, 1998, the Company entered into a stop loss reinsurance
agreement with Zurich N.A. for the 1998 and 1999 accident years. The new
agreement included selected programs underwritten by United Capitol, Western,
and selected core programs of Frontier and Frontier Pacific, which were not part
of the original 1995-1997 reinsurance agreement. Under the terms of the new
agreement, Zurich N.A. provided reinsurance protection within certain contract
aggregate dollar limits for losses and LAE in excess of a predetermined ratio of
these expenses to earned premiums for a given accident year for the covered
insurance programs.

Effective  December 31, 1998, the Company and Zurich N.A. agreed to terminate
this agreement for the 1999 accident year. (See Note I of the Notes to the
Consolidated Financial  Statements.)



LITIGATION WITH THE STATE OF NEW YORK

Over the past decade, the Company has been engaged in litigation with the State
of New York as to whether physician medical school faculty members at the State
University of New York ("SUNY") engaged in the clinical practice of medicine at
a SUNY medical school facility, corollary to such physicians' faculty
activities, were within the scope of their employment by SUNY, and thereby
protected against malpractice claims arising out of such activity by the State,
or by the Company under its medical malpractice policies insuring the SUNY
physicians. As a result of favorable judicial decisions, the Company recorded
subrogation recoverables for claims previously paid and reserves established
with respect to such malpractice claims of approximately $19 million on December
31, 1995 and $13 million on June 30, 1996. The Company and the State reached
an agreement with respect to 83 cases pursuant to which the State paid $15
million to the Company in September 1998 and the Company agreed to forego
$5.1 in interest. As a result, the amount of subrogation recoverables recorded
at December 31, 1998 amounted to approximately $12 million.

Discussions are continuing with respect to the cases not included in the
agreement with the State and, to the extent the amount of the actual recovery
varies from the recorded subrogation recoveries of $12 million, such difference
will be reported in the period recognized. The Company is continuing to defend
all SUNY faculty members against malpractice claims that have been asserted and
is maintaining reserves adjusted for the anticipated recoveries.


IMPACT OF INFLATION

Property and casualty insurance premiums are established before the amount of
losses and LAE, or the extent to which inflation may affect such expenses, are
known. Consequently, the Company attempts, in establishing its premiums, to
anticipate the potential impact of inflation. However, for competitive and
regulatory reasons, the Company may be limited in raising its premiums
commensurate with anticipated inflation, in which event the Company, rather than
its insureds, would absorb inflation costs. Inflation also affects the rate of
investment return on the Company's investment portfolio with a corresponding
effect on the Company's investment income.

THE YEAR 2000

The Company has a committee comprised of senior management from the corporate
office and from each of its subsidiaries to develop and implement a uniform and
complete Year 2000 compliance plan. An assessment of all systems that could be
affected by Year 2000 issues has been completed. For its information technology
("IT") exposures, the Company is nearing completion of the remediation of its
systems. Those remediated systems which have been implemented have been tested
for compliance for: 20th century system dates with current and 21st century data
and, with the exception of one system, 21st century system dates with 20th and
21st century data. Processes and procedures are currently in place to ensure
that all future IT development and testing follow Year 2000 standards; that all
projects undertaken in the interim deliver Year 2000 compliant solutions; that
all future third-party hardware and software acquisitions are Year 2000
compliant; and that all commercial third-party service providers, including
agents and program administrators, are queried regarding their Year 2000
compliance plans.


                                       28




<PAGE>
<PAGE>


To date, the costs related to Year 2000 compliance efforts are approximately $2
million and have been expensed as incurred. Total costs are not expected to
exceed $3 million and will continue to be funded out of operating cash flows.
However, anticipated costs could be adversely affected by the continued need for
availability of personnel and system resources, as well as any failure by
third-party vendors, service providers, or agencies to properly address Year
2000 issues. The impact of achieving Y2K compliance has not caused a significant
delay in other IT related development efforts.


The Company has also conducted a comprehensive review of its underwriting
guidelines and is seeking regulatory approval of an endorsement to be added to
all commercial property and casualty policies which would clarify that coverage
is not afforded losses resulting from Year 2000 noncompliance by insureds. Upon
approval, this endorsement is being added to each policy at either issuance or
renewal. Underwriting policy and protocol have been developed to address
nonapproving states and business situations that cannot be endorsed. To date,
the Company has received endorsement approval from 41 states and the District of
Columbia. For these reasons, the Company believes its exposure to Year 2000
claims will not be material to its operations or financial condition. However,
due to social and legal trends, it is impossible to predict what, if any,
exposure insurance companies generally may have relating to Year 2000 claims.

A contingency plan is currently being developed which will delineate the
Company's responsibilities in the event that Year 2000 compliance is not
achieved due to internal or external factors. These plans involve, among other
things, manual workarounds, additional paper-based report development and
adjusting staffing strategies. The Company recognizes the need for a contingency
plan, but given the status of its current Y2K efforts does not anticipate having
to rely on the plan. The Company expects to continue to conduct periodic tests
of its systems throughout 1999 to complete testing for various conditions, and
to further ensure continued Year 2000 compliance is maintained.

The Company believes it has an effective program in place to resolve Year 2000
issues in a timely manner. However, risks remain that as yet untested or
undiscovered computer system problems will emerge. In addition, disruptions in
the economy generally resulting from the Year 2000 could also materially
adversely affect the Company, rendering it unable to receive premiums or settle
its insureds' claims in a timely manner. In addition, the Company could be
subject to litigation for claims related to its insureds' Year 2000 exposures.

ENVIRONMENTAL ISSUES

The Company, through its subsidiary United Capitol, in the ordinary course of
business, writes insurance on accounts which have hazardous, unique or unusual
risk characteristics. Since United Capitol's organization in 1986, its liability
policies have included an absolute pollution coverage exclusion, except for
policies specifically designed and underwritten to cover environmental exposures
pollution. In addition, United Capitol's product liability and other primary
general liability policies contain exclusions for coverage of claims for bodily
injury or property damage caused by exposure to asbestos, other than for the
policies providing coverage to asbestos abatement contractors for third party
claims alleging bodily injury or property damage as a result of exposure to
asbestos. Employees of the insured contractor and others required to be in the
abatement area are excluded from coverage.

Although the Company believes that such policies, together with the Company's
general, professional and other liability policies, do not subject it to
material exposure for environmental pollution claims, there can be no assurance
of the Company's continued protection in view of the expansion of liability for
environmental claims in recent litigation in the insurance industry.


                                       29


 

 <PAGE>
<PAGE>






SHAREHOLDER LITIGATION

Following the Company's November 5, 1994 announcement of its third-quarter
financial results, the Company was served with seven purported class actions
alleging violations of federal securities laws by the Company and, in some
cases, by certain of its officers and directors. In September 1995, a pre-trial
order was signed which consolidated all actions in the Eastern District of New
York, appointed three law firms as co-lead counsel for the plaintiffs and set
forth a timetable for class certification, motion practice and discovery. In
November 1995, plaintiffs served a consolidated amended complaint alleging
violations by the Company of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10(b)(5) thereunder, seeking to impose controlling person
liability on certain of the Company's officers and directors, and further
alleging insider sales, all premised on negative financial information that
should have been publicly disclosed earlier. Plaintiffs seek an unspecified
amount in damages to be proven at trial, reasonable attorney fees and expert
witness costs. In April 1997, the Court certified the class. Plaintiffs have
subpoenaed documents and deposed outside auditors and analysts. Plaintiffs have
also taken depositions from current or former officers, directors and employees
of the Company. The Company believes the suit is without merit, has retained
special legal counsel to contest this suit vigorously and believes that the
Company's exposure to liability, if any, thereunder would not have a material
adverse effect on the Company's financial condition.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET 
RISK

Frontier's investment portfolio is subject to market risk arising from the
potential change in the value of the various securities held within the
portfolio. Market risk comprises many factors, such as interest rate risk,
liquidity risk, prepayment risk, credit risk and equity price risk. Analytical
tools and monitoring systems are in place to assess these market risks. The
market risks which most affect the Company's investment portfolio are interest
rate risk and equity price risk.

Interest rate risk is the price sensitivity of a fixed income security or
portfolio to changes in interest rates. Table 1 below sets forth the impact of
hypothetical interest rate changes on the fair value of fixed maturity
securities held at December 31, 1998. The sensitivity analysis measures the
change in fair values arising from immediate changes in selected interest rate
scenarios. Hypothetical parallel shifts in the yield curve of plus or minus 50
and 100 basis points (bp) were employed in the . Additionally, based upon the
yield curve shifts, estimations of prepayment speeds for the mortgage-backed
securities and the likelihood of call or put options being exercised were also
employed in this analysis.

           TABLE 1--SENSITIVITY ANALYSIS (IN THOUSANDS)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
         ASSET           +100 BP     +50 BP         BASE       -50 BP      -100 BP
--------------------------------------------------------------------------------------
<S>                      <C>          <C>         <C>           <C>          <C>
U.S. Treasury and
  government agency     $   70,419    $   71,387  $    72,371   $   73,375   $   74,403
---------------------------------------------------------------------------------------
Mortgage-backed            380,409       386,220      391,278      395,472      399,359
---------------------------------------------------------------------------------------
Municipal securities       327,806       335,341      342,344      350,852      358,894
---------------------------------------------------------------------------------------
Corporate securities       377,386       385,041      393,091      401,632      410,733
---------------------------------------------------------------------------------------
  Total                 $1,156,020    $1,177,989   $1,199,084   $1,221,331   $1,243,389
---------------------------------------------------------------------------------------
</TABLE>

Table 2 details the effect on fair value for a positive or negative 10% price
change on the Company's common equity portfolio.


                     TABLE 2 (IN THOUSANDS)

<TABLE>
<CAPTION>
---------------------------------------------------
       ASSET           +10%      BASE      -10%
---------------------------------------------------

<S>                  <C>       <C>       <C>    
Common equity        $63,061   $57,328   $51,595
---------------------------------------------------
</TABLE>


                                       30


 

 <PAGE>
<PAGE>






ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See List of Financial Statements and Financial Statement Schedules
on Page F-1.

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 following table lists each director and each executive officer of the
Company, together with their respective age and office(s) held:

<TABLE>
<CAPTION>

        NAME         AGE                  OFFICE
------------------------------------------------------------------

<S>                   <C>                                       
Harry W. Rhulen       35  President, Chief Executive Officer and
                          Chairman of the Board

Suzanne Rhulen        38  Executive Vice President--Chief
Loughlin                   Administrative Officer
                           and Director

Patrick W. Kenny      56  Executive Vice President--Finance and
                          Planning

James W. Satterfield  50  Executive Vice President--Chief
                          Operating Officer

Joseph P. Loughlin    39  Executive Vice President--Chief Claims
                          Officer

Richard F. Seyffarth  51  Executive Vice President--Chief
                          Investment Officer

Douglas C. Moat       67  Executive Vice President--Mergers and
                           Acquisitions and Director

Mark H. Mishler       40  Vice President--Chief Financial Officer
Peter L. Rhulen       60  Director
Lawrence B. O'Brien   58  Director
Alan Gerry            70  Director
Paul B. Guenther      58  Director
</TABLE>

Harry W. Rhulen, a director of the Company since October 1997, was elected
President and Chief Executive Officer in January 1998 and Chairman of the Board
in February 1998 following the illness and subsequent death of his father,
Walter A. Rhulen, the former Chairman of the Board, President and Chief
Executive Officer of the Company. Mr. Harry Rhulen has been an employee of the
Company since June 1989, was elected a Vice President in June 1990, Executive
Vice President in October 1996 and Chief Operating Officer in May 1997.

Suzanne Rhulen Loughlin was elected Executive Vice President- Chief
Administrative Officer and Director in February 1998. Prior thereto, Ms.
Loughlin was the managing attorney of the Company's in-house law firm of Dubois,
Billig, Loughlin, Conaty and Weisman since 1992, and an employee of the Company
since January 1991.

Patrick W. Kenny was elected Executive Vice President--Finance and Planning
upon joining the Company in September 1998. From 1994 to 1998, Mr. Kenny was the
Senior Vice President of Corporate Development for SS&C Technologies, Inc., the
Chief Financial Officer of Aetna Life and Casualty from 1988 to 1994, and prior
thereto had been a Senior Audit Partner of KPMG Peat Marwick, where he spent 21
years.


                                       31


 

 <PAGE>
<PAGE>






James W. Satterfield was elected Executive Vice President--Chief Operating
Officer in 1998, having been President of United Capitol since 1996. Prior
thereto, Mr. Satterfield held various executive officer positions in the
insurance industry with URC Environmental Specialty Underwriters, The Home
Insurance Company and Reliance Reinsurance.

Joseph P. Loughlin was elected Executive Vice President - Chief Claims Officer
in February 1998 and has been the Corporate Secretary since 1993. Mr. Loughlin
served as a member of the Company's in-house law firm of Dubois, Billig,
Loughlin, Conaty and Weisman since 1990, and as the managing attorney for the
Company's legal offices in Ft. Lauderdale and Orlando and a Vice President of
Frontier responsible for medical malpractice claims since January 1997.

Richard E. Seyffarth was elected Executive Vice President - Chief Investment
Officer in February 1998, having joined the Company in 1996. Prior thereto, Mr.
Seyffarth served as Vice President of The Home Insurance Company for over seven
years.

Douglas C. Moat has been a director of the Company since August 1991 and since
February 1998, has served as Executive Vice President--Mergers and Acquisitions.
Mr. Moat, a JD, CLU, and FLMI, is Chairman of the Manhattan Group, Inc., an
insurance and financial services firm, and has over 40 years experience in
insurance and financial services sales and management, including 13 years as a
private consultant. During his career, he has held positions as Executive Vice
President, The Home Group; Director--Financial Services Corporate Staff, ITT
Corp.; Vice President, USLIFE Corp., and President of USLIFE's mutual fund
subsidiary; Vice President, The Glens Falls Group and the National Life
Assurance Company of Canada. Mr. Moat is a member of the New York State Bar
Association, serves on several insurance and banking committees, and writes and
speaks extensively on insurance topics, often acting as an expert witness.

Mark H. Mishler was elected Vice President -Chief Financial Officer of the
Company in May 1997, having been the Vice President - Finance and Treasurer
since October 1996, the Vice President and Controller of Frontier since 1995
and an employee of the Company since 1987. Mr. Mishler has more than 17 years
experience in the insurance business.

Peter  L.  Rhulen  has  been  a  director  of the  Company  since
commencement  of its  operations  in July  1986.  Mr.  Rhulen was
formerly Vice Chairman of Markel/Rhulen,  a position he held from
October 1989 to September 1992.

Lawrence E. O'Brien has been a director of the Company since June 1990 and a
member of the Audit Committee since that date. Mr. O'Brien, a CPCU, is the
President of O'Brien Management Company, Inc., an insurance consulting firm, a
position he has held since January 1988, and was a co-founder and a director of
Underwriter Management Associates, a managing general insurance agency with
which he had been associated since its inception in 1983 until its sale in
September 1990. From 1976 to 1987, Mr. O'Brien was Executive Vice President of
Associated Risk Managers, a New York statewide affiliation of independent
insurance agents marketing specialized insurance programs.

Alan Gerry was elected a director of the Company in March 1996. Mr. Gerry was
the founder, Chairman of the Board and Chief Executive Officer of Cablevision
Industries Corporation, the eighth largest multiple cable system operator in the
United States until its merger with Time Warner Entertainment in January 1996,
and now acts as a private investor. Mr. Gerry was a founding member of the Board
of the Cable Alliance for Education and is a past President of the New York
State Cable Television Association.


                                       32


 

 <PAGE>
<PAGE>





Paul B. Guenther, was elected a director of the Company in March 1998 and is
also a member of the Audit Committee. Mr. Guenther currently serves as the
Chairman of the Philharmonic-Symphony Society of New York, a position he has
held since September 1996. Prior thereto, Mr. Guenther served as the President
of PaineWebber Incorporated from 1988 to 1994, and from 1994 through 1995 served
as the President of PaineWebber Group, Inc. Mr. Guenther also serves as
Chairman of the Board of Trustees of Fordham University, is on the Board of
Overseers for the Columbia University Business School and other charitable
entities. Mr Guenther is also a director of Consolidated Freightways and
serves as an advisory Committee member and investor in Walden Capital
Partners LP.


Mr. Harry Rhulen and Ms. Suzanne Loughlin are brother and sister, Mr. Joseph
Loughlin is the husband of Suzanne Loughlin, and Mr. Peter Rhulen is their
uncle.

All directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified. Officers are elected annually
and serve at the pleasure of the Board of Directors, subject to rights, if any,
under contracts of employment.


                                       33


 

 <PAGE>
<PAGE>





ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation earned by the
Company's Chief Executive Officer and its four other most highly compensated
executive officers during the year ended December 31, 1998 and the two preceding
years.


                  SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
---------------------------------------------------------------------
                            ANNUAL         LONG-TERM          ALL
    NAME AND             COMPENSATION    COMPENSATION        OTHER
   PRINCIPAL            SALARY   BONUS       AWARDS       COMPENSATION
    POSITION      YEAR    ($)     ($)      OPTION (#)         ($)(1)
---------------------------------------------------------------------
<S>               <C>   <C>      <C>      <C>                <C>
Harry W. Rhulen   1998  $459,000 $   -    1,025,356(2)(5)    $34,100
  President,      1997   188,000  150,000    15,400(4)        17,500
   Chief          1996   126,000   65,000                     14,000
   Executive
   Officer and
   Chairman of
   the Board

Douglas C. Moat   1998   250,000  100,000   30,644(2)(3)      5,000
  Executive       1997      -        -         -                -
   Vice           1996      -        -         -                -
   President
                  

James W.          1998   284,000  100,000   21,216(2)        21,400
Satterfield       1997   257,000   75,000    5,500(4)        19,500
  Executive       1996    90,000  100,000   11,000(6)           200
   Vice
   President
                 

Richard F.        1998   193,000  100,000     14,300(2)      14,400
Seyffarth         1997   143,000   40,000      4,400(4)       9,500
  Executive       1996    38,000      -        6,600(7)         800
   Vice           
   President

Mark H. Mishler   1998   209,000   75,000     15,714(2)      16,000
  Vice            1997   143,000   30,000     11,000(4)      16,300
   President,     1996   106,000   60,000         -          11,300
   Treasurer
   and Chief
   Financial
   Officer

Walter A.         1998      -        -           -            -
  Rhulen*         1997   519,000  200,000    275,000(8)     59,800
  Former          1996   500,000  415,500          -        30,000
   President,
   Chief Executive
   Officer and
   Chairman of
   the Board

</TABLE>

*Deceased January 31, 1998.
-----------
(1) Represents the allocable amount accrued for contribution by the Company to
    its profit sharing plan and the allocable amount of the Company's
    contribution to its 401k plan. The allocable amount accrued for contribution
    to the Company's profit sharing plan for Messrs. Rhulen, Moat, Satterfield,
    Seyffarth and Mishler was $15,700, $5,000, $10,000, $6,700 and $7,600,
    respectively, and the allocable amount contributed to the Company's 401k
    Plan for Messrs. Rhulen, Satterfield, Seyffarth and Mishler was $18,400,
    $11,400, $7,700 and $8,400, respectively.

(2) Exercisable cumulatively at the rate of 25% of the underlying shares per
    year, commencing December 31, 1999, by Messrs Rhulen, Moat, Satterfield,
    Seyffarth and Mishler with respect to 35,356, 19,644, 21,216, 14,300 and
    15,714 shares, respectively.

(3) 11,000 shares exercisable through December 31, 2000.

(4) Exercisable cumulatively at the rate of 25% of the underlying shares per
    year, commencing May 22, 1998.

(5) 990,000 shares exercisable at prices ranging from $30.00 to $50.00 through
    December 31, 2004.

(6) Exercisable through August 13, 2001.

(7) Exercisable cumulatively at the rate of 25% of the underlying shares per
    year, commencing November 21, 1998.

(8) Exercisable through December 31, 2001 by the Estate of Walter A. Rhulen.

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


                                       34


 

 <PAGE>
<PAGE>





The following table sets forth certain information concerning options granted
during 1998 to the individuals named in the Summary Compensation table:



<TABLE>
<CAPTION>
                                             OPTION GRANTS IN 1998

                                                                      POTENTIAL REALIZABLE VALUE
                      NUMBER OF  % OF TOTAL                           OF ASSUMED ANNUAL RATES OF
                      SECURITIES   OPTIONS                             STOCK PRICE APPRECIATION
                      UNDERLYING   GRANTED  EXERCISE                        FOR OPTION TERM
                        OPTIONS    TO ALL     PRICE       EXPIRATION   ------------------------
       NAME           GRANTED(#) EMPLOYEES  ($/SHARE)       DATE          5%($)         10%($)
-----------------------------------------------------------------------------------------------
<S>                   <C>         <C>      <C>            <C>           <C>            <C>
Harry W. Rhulen        35,356      1.9       12.88        12/31/03       125,766        277,909
                      990,000     54.6     30.00-50.00    12/31/04             -             -

Douglass C. Moat       19,644      1.1       12.88        12/31/03        69,876        154,408
                       11,000      0.6       20.80        12/31/00        36,057         75,716

James W. Satterfield   21,216      1.2       12.88        12/31/03        75,468        166,764

Richard F. Seyffarth   14,300      0.8       12.88        12/31/03        50,867        112,403

Mark H. Mishler        15,714      0.9       12.88        12/31/03        55,897        123,517
</TABLE>

The following table presents the value of unexercised options held at December
31, 1998 by the individuals named in the Summary Compensation Table:

                       OPTIONS VALUE TABLE

<TABLE>
<CAPTION>

                                                  VALUE OF
                                                 UNEXERCISED
                          NUMBER OF             IN-THE-MONEY
                     UNEXERCISED OPTIONS         OPTIONS AT
                       AT YEAR-END (#)         YEAR-END ($)*
                      EXERCISABLE (E)/        EXERCISABLE (E)/
     NAME            UNEXERCISABLE (U)       UNEXERCISABLE (U)
--------------------------------------------------------------
<S>                    <C>                     <C>
Harry W. Rhulen         1,226,776(E)(1)           21,481 (E)
                           46,904(U)                   - (U)

Douglas C. Moat            17,050(E)              21,481 (E)
                           19,644(U)                   - (U)

James W.Satterfield        12,375(E)                  - (E)
                           25,341(U)                  - (U)

Richard F. Seyffarth        4,400(E)                  - (E)
                           20,900(U)                  - (U)

Mark H. Mishler             8,800 E)              21,481(E)
                           23,964(U)                  - (U)
</TABLE>

*   Values are calculated by subtracting the exercise price from the fair market
    value of the stock at year end.

(1) Includes  226,875 shares  purchasable at $20.66 per share upon
    exercise  of options  granted  to Mr.  Walter A.  Rhulen,  and
    gifted to his son, Mr. Harry W. Rhulen.


                                       35




<PAGE>
<PAGE>





ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
MANAGEMENT

The following table sets forth the beneficial ownership of the Company's Common
Stock at December 31, 1998 by (i) each person known by the Company to own
beneficially five percent or more of such shares, (ii) each director, (iii) each
person named in the Summary Compensation Table under "Executive Compensation" on
page 37, and (iv) all directors and executive officers as a group, together with
their respective percentage ownership of the outstanding shares:


<TABLE>
<CAPTION>
                                AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
                              ------------------------------------------------
                                                ACQUIRABLE
                               CURRENTLY         WITHIN 60         PERCENT OF
   NAME AND ADDRESS              OWNED            DAYS (1)         OUTSTANDING
------------------------------------------------------------------------------
<S>                          <C>               <C>                   <C>
Harry W. Rhulen                178,534(3)        1,226,776(6)         3.8%
Peter L. Rhulen(2)           1,672,156(4)             -               4.5
Lawrence E. O'Brien             62,462               6,050             *
Alan Gerry                      30,000               6,050             *
Douglas C. Moat                 21,713              17,050             *
Paul B. Guenther                20,500                -                *
Suzanne R. Loughlin            211,891(5)          234,575(6)         1.2
James W. Satterfield            10,608              12,375             *
Richard F. Seyffarth             7,650               4,400             *
Mark H. Mishler                 11,850               8,800             *
Wellington Management
  Company
 75 State Street        
 Boston, MA 02109            2,980,008(7)              --             8.1
All directors and
  executive officers
  as a group (12
  persons)                   2,264,039           1,757,126           10.9
</TABLE>
-----------------------------
* Less than 1%

(1) Reflects  number of shares of  Common  Stock  acquirable  upon
    exercise of options.

(2) Address  is  195  Lake  Louise  Marie  Road,   Rock  Hill,  NY
    12775-8000.

(3) Includes 8,883 and 1,144 shares owned by a daughter and son of Mr. Harry W.
    Rhulen, respectively, for whom he acts as custodian under the Uniform Gifts
    to Minors Act. Does not include 15,642 shares owned by Mr. Rhulen's wife,
    as to which Mr. Rhulen disclaims beneficial ownership.

(4) Does not include 26,432 shares and 22,810 shares owned respectively,
    by Mr.Rhulen's spouse and The Eileen and Peter Rhulen Foundation,Inc., for
    which Mr. Rhulen acts as President. Mr. Rhulen disclaims beneficial
    ownership of such shares.

(5) Includes 49,544 shares owned by the children of Ms. Suzanne R. Loughlin,
    for whom she acts as custodian under the Uniform Gifts to Minors Act. Does
    not include 25,389 shares owned by Ms. Loughlin's husband, as to which Ms.
    Loughlin disclaims beneficial ownership.

(6) Includes  226,875 shares  purchasable at $20.66 per share upon
    exercise of options  granted to the late Mr. Walter A. Rhulen,
    his and her father,  and gifted to each of them.

(7) Information is from Schedule 13G, dated December 31, 1998, filed by
    Wellington Management Company, which reflects shared dispositive power with
    respect to 2,980,008 shares.


                                       36


 

<PAGE>
<PAGE>





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



In June 1998, the Company guaranteed a loan of $1.25 million for Thomas J.
Dietz, an executive officer of the Company, which guarantee was outstanding on
December 31, 1998.

In August 1998, the Company guaranteed a loan of $1.0 million and, in December
1998, guaranteed an additional $0.8 million for Peter L. Rhulen, a director of
the Company, which $1.8 million of guarantees was outstanding on December 31,
1998.

In November 1998, the Company acquired 180 shares of the capital stock of Metro
Partners, Inc. ("Metro Partners") from Metro Partners, representing 30% of Metro
Partners' outstanding capital stock, for $600,000. Thereafter and during 1998,
the Company loaned approximately $1.0 million at an 8.75% interest rate to Metro
Partners, delivered a $250,000 letter of credit to Metro Partners' landlord as
collateral for its real estate lease, and purchased $500,000 of Metro Partners'
preferred stock. Metro Partners, organized in 1998, provides administrative
services to insurance agents and brokers. Douglas C. Moat, an executive officer
and director of the Company, and Peter L. Rhulen, a director of the Company,
are principal shareholders (Mr. Rhulen with members of his immediate family and
Mr. Moat through a corporation in which he is a principal shareholder) and
directors of Metro Partners.

During 1998, the Company loaned an aggregate of $150,000 at a 6.5% interest rate
to, and guaranteed a loan of $150,000 for, Film Backers, a company in which
Anthony Rhulen, the brother of Harry Rhulen and Suzanne Loughlin, is a
principal. The loans and guarantee were outstanding on December 31, 1998.

In December 1998, the Company initiated a program to facilitate the purchase of
its Common Stock by key managment executives. Under the program, a financial
insitution will loan funds to the executive for such purchase in an annual
amount up to 200% of the executive's salary, depending on the executive's level
of responsibility at the Company. The shares purchased will be pledged with
the financial institution as collateral for the loan by the executive, who will
be responsible for its repayment and payment of the related interest. The
Company will guarantee the loan as long as the executive is in the employ of the
Company. The Company has also agreed to grant the executive an option on
December 31st of each year to purchase an equivalent number of shares at the
fair market value on such date as the executive purchased during the calendar
year under the program, twenty-four management executives have elected to
participate in this program. Pending finalization of the loan documents with
the financial institution, the Company provided a loan facility for the 
participating management executives. Mr. Richard Seyffarth, an Executive Vice
President of the Company and its Chief Investment Officer acted as the 
nominee for such management executives to borrow funds on their behalf. 
Through December 31, 1998, an aggregate of $2,250,000 was borrowed pursuant to
this loan facility and 176,653 shares of Common Stock were purchased on the 
New York Stock Exchange with the proceeds on the behalf of the twenty-four
management executives participating in the program. The Company's eight
executive officers are participating in the program and on December 31, 1998,
loans outstanding from the Company on their behalf were as follows: Mr. Harry
W. Rhulen, $225,000; Ms. Suzanne Rhulen Loughlin $100,000; Mr. Patrick W.
Kenny, $150,000; Mr. James W. Satterfield, $135,000; Mr. Joseph P. Loughlin,
Esq., $87,500; Mr. Richard F. Seyffarth, $91,000; Mr. Douglas C. Moat, $125,000;
and Mr. Mark H. Mishler, $100,000. Once the arrangements with the financial
institution are finalized, the loan proceeds from the financial institution
will be applied to repay the loans by the Company.

                               PART IV

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

(a) List of documents filed as part of this Report.

    (1), (2) Financial Statements and Schedules.

    See  List of  Financial  Statements  and  Financial  Statement
    Schedules on page F-1.

    (3) The list of exhibits required to be filed with this Report is set forth
    in the Index to Exhibits herein.

(b) Reports on Form 8-K.

    Report on Form 8-K for an event (the issuance of a press release announcing
    pre-tax reserve, reinsurance and restructuring charges) which occurred
    December 16, 1998.

(c) Exhibits.

    See Index to Exhibits

                                       37



<PAGE>
<PAGE>



                     ANNUAL REPORT ON FORM 10-K
             ITEM 8, ITEM 14(a)(1) and (2), (c), and (d)
   LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
             FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                    FINANCIAL STATEMENT SCHEDULES
                    YEAR ENDED DECEMBER 31, 1998
                   FRONTIER INSURANCE GROUP, INC.
                        ROCK HILL, NEW YORK
 



 

 <PAGE>
<PAGE>





                        Form 10-K--Item 14(a)(1) and (2)
                 Frontier Insurance Group, Inc. and Subsidiaries
         List of Financial Statements and Financial Statement Schedules

The following consolidated financial statements and supplemental data of
Frontier Insurance Group, Inc. and subsidiaries are included in Item 8:
<TABLE>
<S>                                                                          <C>
Consolidated Balance Sheets--December 31, 1998 and 1997...................... F-3
Consolidated Statements of Operations and Comprehensive Income--Years Ended
  December 31, 1998, 1997 and 1996........................................... F-5
Consolidated Statements of Shareholders' Equity--Three Years Ended
  December 31, 1998.......................................................... F-6
Consolidated Statements of Cash Flows--Years Ended
  December 31, 1998, 1997 and 1996........................................... F-7
Notes to the Consolidated Financial Statements............................... F-8
Supplemental Data--Quarterly Results of Operations (Unaudited)............... F-35

The following consolidated financial statement schedules of Frontier Insurance
Group, Inc. and subsidiaries are included in Item 14(a):

Schedule II--Condensed Financial Information of Registrant.................. F-36
Schedule IV--Reinsurance.................................................... F-39
Schedule V--Valuation and Qualifying Accounts............................... F-40
Schedule VI--Supplemental Information Concerning
  Property/Casualty Insurance Operations.................................... F-41
</TABLE>

All other schedules for which provision is made in Article 7 of Regulation S-X
are not required under the related instructions, are inapplicable, or required
information is included in the consolidated financial statements, and therefore,
have been omitted.



                                      F-1


 

 <PAGE>
<PAGE>






                  Report of Independent Auditors

Board of Directors and Shareholders
Frontier Insurance Group, Inc.

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

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

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

                                             /S/ Ernst & Young LLP

New York, New York
March 31, 1999
                                      F-2


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
                           Consolidated Balance Sheets
                          (dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                   DECEMBER 31
                                                 1998           1997
                                              ----------------------
<S>                                            <C>            <C>
ASSETS
Investments:

Fixed maturity securities, available for sale  $1,199,084     $1,079,740
  Equity securities, available for sale            57,328         20,281
  Limited investment partnerships                  27,291         17,758
  Equity investees                                 16,930         14,108
  Real estate and mortgage loans                    9,131            368
  Short-term investments                          149,548        117,568
                                               -------------------------
Total investments                               1,459,312      1,249,823

Cash                                               28,335         11,804
Premiums and agents' balances receivable,
less allowances for doubtful accounts
(1998--$6,025; 1997--$2,791)                      114,389         96,196
Reinsurance recoverables on:
  Paid losses and loss adjustment expenses         30,626         21,460
  Unpaid losses and loss adjustment expenses      448,424        291,734

Prepaid reinsurance premiums                      137,790        111,927
Accrued investment income                          16,517         14,970
Federal income taxes recoverable                   24,775          7,292
Deferred policy acquisition costs                  96,597         55,634
Deferred federal income taxes                      46,434         29,045
Property, equipment and software                   54,188         48,298
Intangible assets                                  54,782         29,885
Other assets                                       41,608         41,598
                                              --------------------------
TOTAL ASSETS                                   $2,553,777     $2,009,666
                                              ==========================

</TABLE>

See notes to the consolidated financial statements.


                                      F-3


 

 <PAGE>
<PAGE>





                 Frontier Insurance Group, Inc. and Subsidiaries
                     Consolidated Balance Sheets (continued)
              (dollar amounts in thousands, except per share data)

<TABLE>
<CAPTION>

                                                   DECEMBER 31
                                                 1998       1997
                                              ----------------------
<S>                                             <C>        <C>     
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:

Policy liabilities:

  Unpaid losses                                 $831,839   $635,719
  Unpaid loss adjustment expenses                260,443    144,325
  Unearned premiums                              507,046    404,042
                                               ----------------------
Total policy liabilities                       1,599,328  1,184,086

Funds withheld under reinsurance contracts       182,211    111,879
Bank debt                                         92,000          -
Reinsurance balances payable                      35,773     33,953
Cash dividend payable to shareholders              2,578      2,375
Other liabilities                                 80,514     56,965
                                              ----------------------
TOTAL LIABILITIES                              1,992,404  1,389,258

Guaranteed preferred beneficial interest in
 Company's convertible subordinated
 debentures                                      167,153    166,703
  
Shareholders' equity:
  Preferred Stock, par value $.01 per share
   (shares authorized and unissued;
   1,000,000)                                         -          -
  Common Stock, par value $.01 per share
   (shares authorized: 1998--150,000,000;
   1997--50,000,000                 
   shares issued: 1998--37,594,709;
   1997--37,419,298)                                 376        340
  Additional paid-in capital                     450,347    367,914
  Accumulated other comprehensive income,
   net of tax                                     26,635     20,238
  Retained earnings (deficit)                    (73,833)    65,995
                                              ----------------------
                                                 403,525    454,487
Treasury Stock--at cost (1998--766,912
  shares; 1997--99,495 shares)                    (9,305)      (782)
                                              ----------------------
TOTAL SHAREHOLDERS' EQUITY                       394,220    453,705
                                              ----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $2,553,777 $2,009,666
                                              ======================
</TABLE>



See notes to the consolidated financial statements.


                                      F-4


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
         Consolidated Statements of Operations and Comprehensive Income
              (dollar amounts in thousands, except per share data)

<TABLE>
<CAPTION>

                                           YEAR ENDED DECEMBER 31
                                          1998       1997       1996
                                        ------------------------------
<S>                                    <C>       <C>       <C>     
REVENUES
Premiums earned                        $493,054  $366,844  $265,989
Net investment income                    73,528    56,122    37,226
Net realized capital gains                3,010     4,222     1,707
                                        ------------------------------
Total net investment income              76,538    60,344    38,933
Net proceeds from company owned life
 insurance policy                         4,400         -         -
                                        ------------------------------
  Total revenues                        573,992   427,188   304,922

EXPENSES

Losses                                  274,748   164,972    97,058
Loss adjustment expenses                168,105    69,596    58,933
Amortization of policy acquisition
 costs                                  122,813    83,586    57,540
Underwriting and other expenses          87,270    51,343    30,485
Minority interest in income of 
 consolidated subsidiary trust           10,966    11,017     2,277
Interest expense                            965       825     1,970
                                        ------------------------------
  Total expenses                        664,867   381,339   248,263
                                        ------------------------------
  Income (loss) before income taxes     (90,875)   45,849    56,659

Provision for income taxes:
  State                                     743     2,053       723
  Federal                               (41,576)   11,514    15,869
                                        ------------------------------
Total income tax expense (benefit)      (40,833)   13,567    16,592
                                        ------------------------------
  Net income (loss)                     (50,042)   32,282    40,067
Other comprehensive income (loss),
  net of tax                              6,397    15,431    (3,148)
                                        ------------------------------
  Total comprehensive income (loss)    $(43,645)  $47,713   $36,919
                                        ==============================

Earnings (loss) per common share:
  Basic                                  $(1.34)     $.94     $1.26
                                        ==============================
  Diluted                                $(1.34)     $.92     $1.23
                                        ==============================

Weighted average common shares outstanding (in thousands):

  Basic                                  37,293    34,195    31,797
  Diluted                                37,293    42,845    33,706

</TABLE>


See notes to the consolidated financial statements.




                                      F-5


 

 <PAGE>
<PAGE>







                 Frontier Insurance Group, Inc. and Subsidiaries
                 Consolidated Statements of Shareholders' Equity
              (dollar amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                            THREE YEARS ENDED DECEMBER 31, 1998
                                                 -----------------------------------------------------------------------------------
                                                                             ACCUMULATED
                                                               ADDITIONAL       OTHER         RETAINED                    TOTAL
                                                  COMMON        PAID-IN     COMPREHENSIVE     EARNINGS      TREASURY  SHAREHOLDERS'
                                                  STOCK         CAPITAL         INCOME       (DEFICIT)       STOCK       EQUITY
                                                ------------------------------------------------------------------------------------
<S>                                               <C>         <C>            <C>            <C>             <C>        <C>
Balances at January 1, 1996                      $     260     $ 167,457     $   7,955      $  54,849      $ (788)     $ 229,733
  Net income                                          --            --            --           40,067          --         40,067
  Common stock dividend (10%)                           28        45,208          --          (45,236)         --            --
  Stock options exercised                                2         1,101          --             --            --          1,103
  Issuance of common stock related 
   to acquisition                                        4         8,071          --             --            --          8,075
  Change in net unrealized gains
   on investments (net of tax)                        --            --          (3,148)          --            --         (3,148)
  Cash dividends paid and accrued                     
   ($.25 per share)                                   --            --            --           (7,256)         --         (7,256)
                                               -------------------------------------------------------------------------------------
Balances at December 31, 1996                          294       221,837         4,807         42,424        (788)       268,574
  Net income                                          --           --            --            32,282          --         32,282
  Stock options exercised                                1         1,582         --              --            --          1,583
  Issuance of common stock related   
   to public offering                                   45       144,482          --             --            --        144,527 
  Change in net unrealized gains      
    on investments (net         
    of tax)                                           --           --           15,431           --            --         15,431 
  Cash dividends paid and accrued                                                                                              
   ($.275 per share)                                  --           --             --           (8,711)         --         (8,711)
  Reissuance of treasury stock                        --              13          --             --             6             19
                                               -------------------------------------------------------------------------------------
Balances at December 31, 1997                          340       367,914        20,238         65,995        (782)       453,705
  Net loss                                            --           --             --          (50,042)         --        (50,042)
  Stock options exercised                                2         1,946          --             --            --          1,948
  Change in net unrealized gains 
   on investments (net of tax)                        --           --            6,397           --            --          6,397 
  Cash dividends paid and accrued 
   ($.28 per share)                                   --           --             --           (9,965)         --         (9,965)
  Common stock dividend (10%)                           34        79,787          --          (79,821)         --             --
  Net (Purchase) reissuance of treasury stock         --              12          --             --        (8,523)        (8,511)
  Tax benefit from disqualifying dispositions         --             688          --             --            --            688
                                               -------------------------------------------------------------------------------------
Balances at December 31, 1998                    $     376     $ 450,347     $  26,635      $ (73,833)    $(9,305)      $394,220
                                               =====================================================================================
</TABLE>

See notes to the consolidated financial statements.


                                      F-6


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows
                          (dollar amounts in thousands)

 <TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                               1998       1997        1996
                                                             ---------------------------------
<S>                                                            <C>         <C>        <C>    
OPERATING ACTIVITIES
Net income (loss)                                              $(50,042)   $32,282    $40,067
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
   Increase in policy liabilities                               349,508    127,568    145,636
   Increase in reinsurance balances                            (173,640)   (26,953)   (35,473)
   Increase in agents' balances and premiums receivable         (17,497)   (12,796)   (21,402)
   Increase in deferred policy acquisition costs                (40,963)   (20,318)   (14,366)
   Increase in accrued investment income                         (1,314)        (7)    (1,369)
   Deferred federal income tax expense (benefit)                (23,714)     2,800      2,279
   Depreciation and amortization                                 19,185      7,417      3,687
   Realized capital gains                                        (3,010)    (4,222)    (1,707)
   Other                                                         67,443    (10,627)      (895)
                                                             ---------------------------------
Net cash provided by operating activities                       125,956     95,144    116,457

INVESTING ACTIVITIES
Proceeds from sales of fixed maturity securities                140,221    102,409    129,523
Proceeds from calls, paydowns and maturities of fixed
 maturity securities                                            163,161    108,768    191,888
Proceeds from sales of equity securities                         31,117     18,738     15,256
Purchases of fixed maturity  securities                        (387,952)  (285,634)  (430,713)
Purchases of equity securities                                  (59,876)   (21,396)    (5,533)
Purchases of wholly-owned subsidiaries, net of cash acquired    (43,756)  (138,293)   (28,996) 
Purchases of mortgage loans and real estate investments          (8,922)         -          -
Short-term investments, net                                       9,001     26,673   (108,889)
Purchases of property, equipment and software                   (11,110)   (14,673)   (10,609)
Purchases of limited investment partnerships                    (10,512)   (15,571)         -
Purchases of equity investees                                    (5,495)   (10,303)        (2)
Other                                                              (978)       176        430
                                                               -------------------------------
Net cash used in investing activities                          (185,101)  (229,106)  (247,645)

FINANCING ACTIVITIES
Proceeds from (costs of) guaranteed preferred beneficial
  interest in Company's convertible subordinated 
  debentures                                                          -       (455)   166,914
Proceeds from bank borrowings                                    92,000     62,000      7,100
Repayment of bank borrowings                                          -    (62,000)   (33,792)
Issuance of common stock                                          1,948    146,110      1,103
Cash dividends paid                                              (9,761)    (8,240)    (6,920)
Reissue (purchase) of treasury stock                             (8,511)        19          -
                                                             ---------------------------------
Net cash provided by financing activities                        75,676    137,434    134,405
                                                             ---------------------------------
Increase in cash                                                 16,531      3,472      3,217
Cash at beginning of year                                        11,804      8,332      5,115
                                                             ---------------------------------
Cash at end of year                                             $28,335    $11,804     $8,332
                                                             =================================
</TABLE>

See notes to the consolidated financial statements.



                                      F-7


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
                 Notes to the Consolidated Financial Statements
                                December 31, 1998


NOTE A--ORGANIZATION AND BASIS OF PRESENTATION

Organization

Frontier Insurance Group, Inc. (with its subsidiaries, the "Company"), is
principally a specialty property and casualty insurer operating in all 50
states, the District of Columbia, Puerto Rico, Greece, Guam, and the Virgin
Islands. The Company's principal lines of business and related net premiums
earned are disclosed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations" of the Company's
1998 Form 10-K. Primarily all lines of business written by the Company are
marketed through independent agents. Also, refer to "Business--Description
of Business--Reportable Segments" of the Company's 1998 Form 10-K for
additional disclosures regarding the Company's reportable segments.

Basis of Presentation

The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") which, as to insurance
companies, differ from the statutory accounting practices prescribed or
permitted by regulatory authorities. The consolidated financial statements
include the accounts and operations of Frontier Insurance Group, Inc. and all
subsidiaries in which the ownership interests exceed 50%. All significant
intercompany accounts and transactions have been eliminated in consolidation.

NOTE B--SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies followed by the Company are as follows:

Use of Estimates

The preparation of financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.

Recognition of Premium Revenues

Property and casualty premiums are earned pro rata over the terms of the related
insurance policies. Credit life premiums are earned over the life of the
contracts, principally using the sum-of-the-months-digits method, warranty
insurance premiums are earned as the related losses are incurred, while credit
accident and health premiums are principally recognized using the mean of the
sum-of-the-months-digits method and the pro-rata method over the time period to
which the premiums relate.


                                      F-8


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)

NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Investments

Investments in fixed maturity and equity securities are classified as
available-for-sale and reported at fair value with unrealized gains and losses
included in other comprehensive income, net of deferred federal income taxes.
Fair values for fixed maturity and equity securities are based on quoted market
prices, where available, or estimated using values obtained from independent
pricing services. For mortgage backed securities, the Company considers
estimates of future principal prepayments in the calculation of the constant
effective yield necessary to apply the interest method. If a difference arises
between theprepayments anticipated and actual prepayments received, the Company
recalculates the effective yield to reflect the actual payments received and the
anticipated future payments.

Limited investment partnerships and investments in entities for which the
Company has a 20% to 50% interest or less than a 20% interest but has the
ability to exercise significant control ("equity investees") are accounted for
using the equity method.

Mortgage loans are reported at unpaid principal balances and investment real
estate is reported at cost, net of accumulated depreciation.

Short-term investments are carried at cost, which approximates fair value.

Realized gains and losses from the sales or liquidation of investments are
determined using the specific identification method. Changes in the fair value
of investments are reflected as accumulated other comprehensive income in
shareholders' equity, net of deferred federal income tax.

Property, Equipment and Software

Property, equipment and software is stated at cost, net of accumulated
depreciation and amortization computed on a straight-line basis over estimated
useful lives ranging from 3 to 31.5 years. At December 31, 1998 and 1997, the
related accumulated depreciation and amortization on property, equipment and
software was $19,769,000 and $15,075,000, respectively. During 1998, 1997 and
1996, depreciation and amortization expense related to property, equipment and
software was $4,702,000, $3,963,000 and $3,413,000, respectively.

In April 1993, the Company put into service and began to occupy its new home
office facility. In July 1998, the Company completed the construction and began
to occupy an addition to its home office building. The cost of the facility's
construction was financed internally by the Company. However, to receive
favorable tax status, title to the facility (including the recently completed
addition) resides with the County of Sullivan Industrial Development Agency
("IDA") which, in turn, issued to the Company its twenty-year bonds with a face
value equal to the total cost of the facility. Under the provisions of related
agreements, title to the facility reverts to the Company on maturity of the
bonds, or sooner for a nominal fee, should the Company so desire. Accordingly,
as a result of these agreements, the home office facility is included with
property, equipment and software in the balance sheets. As of December 31,
1998, the outstanding par value of the IDA bonds was $30,670,000, which
approximates the carrying values of the Company's home office.

                                      F-9



<PAGE>
<PAGE>



                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)



NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intangible Assets

Insurance renewal rights and goodwill are stated at cost, net of accumulated
amortization, computed on a straight-line basis over estimated useful lives
ranging from two to seven years for insurance renewal rights and five to fifteen
years for goodwill. The present value of future profits ("PVFP") associated with
the purchase of Acceleration was approximately $20,500,000 and is carried at
cost, net of accumulated amortization, computed based on unearned premiums
at the time of purchase. The Company assesses the recoverability of
intangible assets by determining whether the amortization of the balance over
its remaining life can be recovered through the undiscounted future operating
cash flows of the acquired operations or assets. At December 31, 1998 and 1997,
the related accumulated amortization on intangible assets was $19,071,000 and
$4,770,000, respectively. During 1998, 1997 and 1996, amortization expense
relating to intangible assets was $14,301,000, $2,744,000 and $1,437,000,
respectively.

Deferred Policy Acquisition Costs

Recoverable policy acquisition costs that vary with and are directly related to
the production of business, such as commissions and premium taxes, net of
reinsurance allowances, are deferred and amortized as the related premiums are
earned. Anticipated losses, loss adjustment expenses ("LAE"), and policy
maintenance expenses, based on historical and current experience, are considered
in determining the recoverability of such deferred policy acquisition costs.
When the anticipated losses, LAE, acquisition and policy maintenance expenses
exceed the related unearned premiums, after consideration of anticipated
investment income, a provision for the indicated deficiency is recorded.

Unpaid Losses and LAE

The liabilities for unpaid property and casualty losses and LAE represent the
estimated liabilities for reported claims, claims incurred but not yet reported
("IBNR"), and the related LAE. The liabilities for property and casualty unpaid
losses and LAE are determined using case-basis evaluations and actuarial
analyses and represent estimates of the ultimate expected cost of all losses and
LAE unpaid at the balance sheet dates.

The liabilities for unpaid losses and LAE have been reduced by estimated salvage
and subrogation recoverable and have not been reduced from their ultimate values
by the effects of discounting estimated ultimate payments to their present
value.


                                      F-10


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Reinsurance

Assumed and ceded reinsurance premiums, commissions, and unpaid losses are
accounted for based principally on the reports received from the ceding
insurance companies and in a manner consistent with the terms of the related
reinsurance agreements. Liabilities for unpaid losses, LAE and unearned premiums
are stated gross of ceded reinsurance recoverables. Deferred policy acquisition
costs are stated net of the amounts of reinsurance ceded, as are premiums
earned, losses and LAE incurred, and amortized acquisition costs.

Contingent Reinsurance Commissions

Contingent reinsurance commissions are accounted for on an earned basis and are
accrued in accordance with the terms of the applicable reinsurance agreement
based on the estimated level of profitability relating to the subject business.
The profitability of the reinsured business is continually reviewed and as
adjustments become necessary they are reflected in current operations.
Contingent reinsurance commissions are included in other assets and other
liabilities.

Income Taxes

Income tax provisions are based on income reported for financial statement
purposes, adjusted for permanent differences between financial and taxable
income. Deferred federal income taxes are recognized using the liability method,
whereby tax rates are applied to the temporary differences between the financial
reporting and tax bases of assets and liabilities. Deferred federal income tax
assets and liabilities are adjusted for changes in tax rates or laws, and the
adjustment is reflected in income during the period in which such change is
enacted.

Cash and Cash Equivalents

Short-term investments are not considered to be cash equivalents for the
purposes of preparing the statements of cash flows.

Impact of Recently Issued Accounting Standards

In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 97-3 Accounting by Insurance and
Other Enterprises for Insurance-related Assessments ("SOP 97-3"). SOP 97-3
establishes standards for accounting for guaranty fund and certain other
insurance related assessments. SOP 97-3 is effective for fiscal years beginning
after December 15, 1998 and requires any impact of adoption to be reported as a
change in accounting principle. The adoption of this statement is not expected
to have a material effect on the Company's results of operations or financial
condition.



                                      F-11


 

 <PAGE>
<PAGE>







                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE B--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In March 1998, the AICPA issued SOP 98-1, Accounting For the Costs of Computer
Software Developed For or Obtained for Internal use. The Company will adopt the
SOP on January 1, 1999. The SOP will require the capitalization of certain costs
incurred after the date of adoption in connection with developing or obtaining
software for internal use. The Company currently expenses such costs as
incurred. The adoption of this statement is not expected to have a material
effect on the Company's results of operations or financial condition.

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
this statement will have a significant effect on earnings or the financial
position of the Company.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 1998
presentation.

NOTE C--ACQUISITIONS

During 1996, 1997 and 1998, the Company completed the following acquisitions,
all of which were accounted for under the purchase method:

In May 1996, the Company purchased United Capitol Holding Company ("United
Capitol Holding") and its wholly-owned subsidiaries, United Capitol Insurance
Company ("United Capitol"), United Capitol Managers, Inc. (renamed Olympic
Underwriting Managers, Inc.) and Fischer Underwriting Group, Inc., for
$31,020,000, which exceeded the fair value of the net assets acquired by
approximately $7,700,000. These entities underwrite specialty risks such as
asbestos abatement, environmental liability and directors' and officers'
liability.

In September 1996, the Company purchased Regency Insurance Company ("Regency")
an underwriter of non-standard automobile and manufactured housing insurance and
Emrol Installment Premium Discount, Inc. ("Emrol") in exchange for 523,788
shares of the Company's Common Stock, which had a market value per share of
$15.42 on June 11, 1996, the effective date of the agreement. The purchase
price, which was inclusive of $221,000 of capitalized acquisition costs,
exceeded the fair value of the net assets acquired by approximately $2,400,000.
Emrol finances premiums primarily for policyholders of Regency.

In June 1997, the Company purchased Lyndon Property Insurance Company and its
six subsidiaries, Lyndon Life Insurance Company, Twin Mercury Life Insurance
Company, Gulfco Life Insurance Company, Lyndon Southern Insurance Company,
Lyndon - DFS Warranty Services, Inc. and Lyndon General Agency of Texas, Inc.
(collectively, "Lyndon") for approximately $92,000,000. The Company also
included $420,000 of capitalized acquisition costs in the purchase price. The
total cost was less than the fair value of the net assets acquired by
$29,421,000. Lyndon provides credit-related and specialty insurance products for
financial institutions and specialty insurance markets.


                                      F-12


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE C--ACQUISITIONS (CONTINUED)

In December 1997, the Company purchased Western Indemnity Insurance Company
("Western") for approximately $48,452,000, which exceeded the fair value of net
assets acquired by approximately $15,754,000. The purchase price is subject to a
downward adjustment if the seller (Galtney Group) does not meet specified
premium writing targets of $75,000,000 over a three year period, capped at
$2,000,000. Western is a specialized carrier in the health care provider market,
underwriting both physician and hospital coverages.

In December 1997, the Company, through United Capitol, purchased Environmental
and Commercial Insurance Agency, Inc. ("ECI") for $4,500,000. The purchase
price exceeded the fair value of the net assets acquired by $4,208,000. ECI is
an underwriting manager of environmental errors and omissions and construction
specialties and places the majority of its written business with United Capitol.

In January 1998, the Company, through Lyndon, purchased Acceleration Life
Insurance Company, Dublin International Limited and Acceleration National
Services Corporation (collectively, "Acceleration") from Acceleration National
Insurance Company ("ANIC") for approximately $30,258,000. The purchase price
exceeded the fair value of net assets acquired, which included approximately
$20,500,000 in PVFP, by approximately $9,900,000. Acceleration underwrites
credit life and credit accident and health insurance primarily through auto
dealers. In conjunction with this transaction, the Company also purchased a book
of warranty business for $10,300,000 and a separate reinsurance agreement was
executed with ANIC, whereby ANIC transferred the unearned premiums and loss
reserves and related assets to the Company as of January 1, 19988.

During 1998, the Company purchased several small insurance agencies specializing
in the sale of surety and title insurance. The combined purchase price of these
acquisitions was approximately $5,030,000 and consisted almost entirely of
goodwill. The operations of these agencies are not material to the Company's
consolidated financial statements.


                                      F-13


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE C--ACQUISITIONS (CONTINUED)

The assets acquired, liabilities assumed and the related goodwill of the
companies purchased in 1998, 1997 and 1996, are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
1998                     ACCELERATION   OTHER    TOTAL
                         ------------------------------
<S>                        <C>       <C>       <C>     
Purchase price             $ 40,558  $  5,030  $ 45,588
Assets acquired:
  Invested assets            67,998      --      67,998
  Other assets               67,798       313    68,111
                          -----------------------------
Total assets acquired       135,796       313   136,109
Liabilities assumed:
  Unpaid losses and LAE      13,625      --      13,625
  Other liabilities          91,538       237    91,775
                          -----------------------------
Total liabilities assumed   105,163       237   105,400
                          -----------------------------
Net assets acquired          30,633        76    30,709
                          -----------------------------
Excess of purchase price
  over net assets
  acquired                 $  9,925  $  4,954  $ 14,879
                          =============================

<CAPTION>
1997                                 LYNDON     WESTERN        ECI      TOTAL
                                   --------------------------------------------
<S>                                <C>         <C>        <C>        <C>
Purchase price                     $  92,420   $  48,452  $   4,500  $ 145,372
Assets acquired:
  Invested assets                    205,677     101,597        445    307,719
  Other assets                       183,517      42,811      1,728    228,056
                                   --------------------------------------------
Total assets acquired                389,194     144,408      2,173    535,775
Liabilities assumed:
  Unpaid losses and LAE               51,233      87,491       --      138,724
  Other liabilities                  216,120      24,219      1,881    242,220
                                  --------------------------------------------
Total liabilities assumed            267,353     111,710      1,881    380,944
                                  --------------------------------------------
Net assets acquired                  121,841      32,698        292    154,831
                                  --------------------------------------------
Purchase price (under)
  over net assets
  acquired                         $ (29,421)  $  15,754  $   4,208  $  (9,459)
                                  =============================================

<CAPTION>
                                    UNITED   REGENCY
1996                                CAPITOL    AND      TOTAL
                                    HOLDING   EMROL
                                   ---------------------------
<S>                                <C>        <C>      <C>     
Purchase price                     $31,020    $8,296   $39,316
Assets acquired:
  Invested assets                   74,966     4,168    79,134
  Other assets                      49,797    11,833    61,630
                                   ---------------------------
Total assets acquired              124,763    16,001   140,764
Liabilities assumed:
  Unpaid losses and LAE             84,823     4,163    88,986
  Other liabilities                 16,604     5,944    22,548
                                   ---------------------------
Total liabilities assumed          101,427    10,107   111,534
                                   ---------------------------
Net assets acquired                 23,336     5,894    29,230
                                   ---------------------------
Excess of purchase price
  over net assets
  acquired                         $ 7,684   $ 2,402   $10,086
                                   ===========================

</TABLE>


                                      F-14


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)



NOTE C--ACQUISITIONS (CONTINUED)

The following summarizes the Company's pro forma unaudited results of operations
for the years ended December 31, 1997 and 1996, assuming the purchases of
Lyndon, Western and ECI had been consummated as of January 1, 1997 and United
Capitol Holding, Regency and Emrol had been consummated as of January 1, 1996
(in thousands, except per share data):


<TABLE>
<CAPTION>
                                           1997      1996
                                         --------------------
                                             (Unaudited)
<S>                                     <C>       <C>     
Net premiums earned                     $430,307  $386,910
Net investment income (including net
  capital gains and losses)               69,495    54,262
Other revenues                                 -        55
                                         ------------------
  Total revenues                         499,802   441,227

Losses and LAE                           271,772   208,498
Amortization of policy acquisition costs 102,395    52,540
Underwriting and other expenses           66,495    61,431
Minority interest in income of
  consolidated subsidiary trust           11,017     2,277
Interest expense                           3,187     5,715
                                         --------------------
  Total expenses                         454,866   330,461
                                         --------------------

Income before income taxes                44,936   110,766
Income tax expense                        11,689    29,360
                                         --------------------
  Net income                             $33,247   $81,406
                                         ====================
Earnings per common share:
  Basic                                  $  .97     $ 2.53
                                         ====================
  Diluted                                $  .95     $ 2.43
                                         ====================
</TABLE>

The foregoing pro forma financial information has been prepared for
informational purposes only. It includes certain adjustments for all years
relating to investment income and amortization of goodwill, in addition to
adjustments for 1997 and 1996 relating to interest expense, amortization of
policy acquisition costs and PVFP which is included in underwriting and other
expenses, together with the related income tax effects. The pro forma financial
information is not necessarily indicative of the results of operations had the
transactions been consummated on the assumed dates.


                                      F-15


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE D--EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings
(loss) per common share (amounts in thousands, except per share data):

<TABLE>
<CAPTION>
                                      1998       1997       1996
                                    ------------------------------
<S>                                 <C>        <C>       <C>
NUMERATOR
Net income (loss)                   $(50,042)  $ 32,282  $ 40,067
                                    =============================
Numerator for basic earnings
  (loss) per share--income (loss) 
  available to common shareholders  $(50,042)  $ 32,282  $ 40,067
Effect of dilutive securities:
  Minority interest in income of
   consolidated subsidiary trust        --        7,027     1,480
                                    -----------------------------
Numerator for diluted earnings
  (loss) per share--income (loss)
  available to common shareholders
  after assumed conversions         $(50,042)   $39,309   $41,547
                                    =============================

DENOMINATOR
Denominator for basic earnings
  (loss) per share--weighted  
  average shares                      37,293     34,195    31,797
Effect of dilutive securities:
  Convertible Trust Originated 
   Preferred Securities                 --        8,094     1,685
  Employee stock options                --          556       224
                                    -----------------------------
Dilutive potential common shares        --        8,650     1,909
                                    -----------------------------
Denominator for diluted earnings
  (loss) per share--adjusted 
  weighted-average shares and
  assumed conversions                 37,293     42,845    33,706
                                    =============================
Earnings (loss) per common share:
  Basic                             $  (1.34)  $    .94  $   1.26
                                    =============================
  Diluted                           $  (1.34)  $    .92  $   1.23
                                    =============================
</TABLE>

The weighted average shares outstanding have been adjusted retroactively to
reflect the effects of stock splits and stock dividends. For additional
disclosures regarding the Convertible Trust Originated Preferred Securities and
employee stock options, see Notes K and N, respectively.


                                      F-16


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE E--COMPREHENSIVE INCOME

During 1998, the Company adopted Financial Accounting Standards Board's
Statement No. 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this statement has no impact on net income or
shareholders' equity. Statement 130 requires unrealized gains or losses, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to requirements of Statement 130.

The components of comprehensive income (loss) for each of the years ended
December 31, are as follows (in thousands):

<TABLE>
<CAPTION>

                                      1998      1997      1996
                                   ------------------------------

<S>                                 <C>        <C>        <C>     
Net income (loss)                   $(50,042)  $ 32,282   $ 40,067

Other comprehensive income (loss):

  Net unrealized gains (losses)        9,965     23,740     (4,844)
  Deferred taxes related to net
   unrealized (gains) losses          (3,568)    (8,309)     1,696
                                   -------------------------------
Total other comprehensive income
  (loss)                               6,397     15,431     (3,148)
                                   -------------------------------
Total comprehensive income (loss)   $(43,645)  $ 47,713   $ 36,919
                                    ==============================
</TABLE>

For 1998, the reclassification adjustment for realized capital gains and losses
previously included in accumulated other comprehensive income and related
deferred tax expense was $2,157,000 and $755,000, respectively.

The components of accumulated other comprehensive income for each of the years
ended December 31, are as follows (in thousands):

<TABLE>
<CAPTION>

                                           1998        1997
                                         --------------------
<S>                                       <C>        <C>     
Net unrealized gains                      $ 41,100   $ 31,135
Deferred federal income taxes              (14,465)   (10,897)
                                         --------------------
Total  accumulated  other  comprehensive
  income                                  $ 26,635   $ 20,238
                                         ====================
</TABLE>

                                      F-17


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE F--INVESTMENTS

The major categories of total net investment income are summarized as follows
(in thousands):

<TABLE>
<CAPTION>
                                                1998     1997     1996
                                               --------------------------
<S>                                            <C>     <C>     <C>    
Interest, dividends and equity in earnings:
  Fixed maturity securities                    $74,127  $55,520 $37,623
  Equity securities                              1,646      832   1,190
  Limited investment partnerships                  838      637       -
  Equity investees                               1,805      179       2
  Short-term and other investments               6,652    8,433   3,830
Interest expense on funds held                 (10,017)  (7,160) (4,307)
                                               --------------------------
  Investment income before expenses             75,051   58,441  38,338
Less investment expenses                         1,523    2,319   1,112
                                               --------------------------
  Net investment income                         73,528   56,122  37,226

Net realized capital gains (losses):
  Fixed maturity securities                      3,958    2,495   1,245
  Equity securities                              3,009    1,727     462
  Other investments                             (3,957)       -       -
                                              --------------------------
Total net realized capital gains                 3,010    4,222   1,707
                                              --------------------------
Total net investment income                    $76,538  $60,344 $38,933
                                              ==========================
</TABLE>

Gross realized capital gains on sales of available-for-sale securities in 1998,
1997 and 1996 were $7,947,000, $4,552,000 and $3,814,000, respectively. Gross
realized capital losses on sales of available-for-sale securities in 1998, 1997
and 1996 were $1,643,000, $1,126,000 and $1,884,000, respectively.

The change in net unrealized gains (losses) on fixed-maturity securities was
$6,945,000, $21,204,000 and $(6,350,000) in 1998, 1997 and 1996, respectively;
the corresponding amounts for equity securities were $4,330,000, $625,000 and
$1,508,000.

At December 31, 1998, bonds and notes with an amortized cost of $48,939,000 were
on deposit with various regulatory authorities to meet statutory requirements.


                                      F-18


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE F--INVESTMENTS (CONTINUED)

Investments in available-for-sale securities are summarized as follows (in
thousands):

<TABLE>
<CAPTION>

                                                GROSS     GROSS
                                             UNREALIZED  UNREALIZED   FAIR
                                        COST    GAINS     LOSSES     VALUE
                                   ---------------------------------------
<S>                                <C>        <C>        <C>      <C>    
AT DECEMBER 31, 1998 
Fixed maturity securities:
    U.S. Treasury securities
     and obligations of U.S. 
     government corporations 
     and agencies                  $   69,951  $ 2,458  $    38  $   72,371
    Obligations of states and 
     political subdivisions           330,276   12,128       60     342,344
    Corporate securities              381,053   15,220    3,182     393,091
    Mortgage-backed securities        384,659    7,428      809     391,278
                                   ----------------------------------------
  Total fixed maturity
    securities                      1,165,939   37,234    4,089   1,199,084
  Equity securities                    49,973    8,405    1,050      57,328
                                   ----------------------------------------
    Total                          $1,215,912  $45,639  $ 5,139  $1,256,412
                                   ========================================

  AT DECEMBER 31, 1997
Fixed maturity securities:
    U.S. Treasury securities
     and obligations of U.S. 
     government corporations
     and agencies                  $   69,561  $ 1,255   $   21    $ 70,795
    Obligations of states and 
     political subdivisions           283,064    9,219      237     292,046
    Corporate securities              339,138    9,742      590     348,290
    Mortgage-backed securities        361,777    7,333      501     368,609
                                   ----------------------------------------
  Total fixed maturity        
    securities                      1,053,540   27,549    1,349   1,079,740
  Equity securities                    17,256    3,512      487      20,281
                                   ----------------------------------------
    Total                          $1,070,796  $31,061   $1,836  $1,100,021
                                   ========================================
</TABLE>

At December 31, 1998, the amortized cost and fair value of fixed maturity
securities, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>

                                      AMORTIZED   FAIR
                                        COST      VALUE
                                      --------------------

<S>                                   <C>        <C>    
Due in one year or less             $  17,336   $   17,724
Due after one year to five years      263,136      271,676 
Due after five years to ten years     224,583      232,430
Due after ten years                   276,225      285,976
Mortgage-backed securities            384,659      391,278
                                    ----------------------
  Total                             $1,165,939  $1,199,084
                                    ======================

</TABLE>


                                      F-19


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE F--INVESTMENTS (CONTINUED)

At December 31, 1998 and 1997, the cost of the Company's investments in limited
partnerships was $25,888,000 and $15,571,000, respectively. At December 31,
1998, the Company had unfunded commitments to certain individual partnerships of
$12,000,000 to be funded over the next several years.

At December 31, 1998 and 1997, the total cost of the Company's investment in
equity investees was approximately $17,154,000 and $14,384,000, respectively.

NOTE G--INCOME TAXES

The components of federal income tax (benefit) expense are as follows (in
thousands):

<TABLE>
<CAPTION>

                                 1998      1997      1996
                               ---------------------------
<S>                            <C>         <C>     <C>    
Federal income tax (benefit)
 expense:
  Current                      $(17,862)   $8,714  $13,590
  Deferred                      (23,714)    2,800    2,279
                               ---------------------------
Total federal income tax       $(41,576)  $11,514  $15,869
 (benefit) expense             ===========================
</TABLE>

A reconciliation of federal income tax, based on the prevailing corporate income
tax rate of 35%, to the federal income tax expense reflected in the accompanying
financial statements is as follows (in thousands):

                                 1998      1997      1996
                               -----------------------------
Tax rate applied to pre-tax
 income (loss)                 $(31,806)   $16,047   $19,831
Add (deduct) tax effect of:
Tax-exempt interest income       (4,709)    (3,770)   (3,026)
Proceeds from COLI death
 benefits                         1,750)      --          --
  Dividends received deduction     (809)      (846)     (752)
  State income taxes               (260)      (718)     (253)
  Other                          (2,242)       801        69
                               ------------------------------
Federal income tax             
 (benefit) expense             $(41,576)   $11,514   $15,869
                               ==============================

                                      F-20




 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE G--INCOME TAXES (CONTINUED)

Significant components of the Company's deferred federal income tax assets and
liabilities at December 31, are as follows (in thousands):

<TABLE>
<CAPTION>

                                               1998      1997
                                             --------------------
<S>                                           <C>       <C>   
Deferred federal income tax assets:
  Reserve discounting, including salvage
    and subrogation                          $38,437   $36,790 
  Unearned premium reserve                    17,560    24,086
  Net operating loss carryforward             34,703         -
  Alternative minimum tax credit               1,450         -
  Other                                        2,375     1,402
                                             --------------------
Total deferred federal income tax assets      94,525    62,278
Deferred federal income tax liabilities:
  Deferred policy acquisition costs           25,405    19,472
  Goodwill                                     2,807         -
  Net unrealized gains                        14,465    10,897
  Other                                        5,414     2,864
                                             --------------------
Total deferred federal income tax
  liabilities                                 48,091    33,233
                                             --------------------
Net deferred federal income tax asset        $46,434   $29,045
                                             ====================
</TABLE>

Deferred federal income taxes result from timing differences in the recognition
of certain income and expenses for tax and financial statement purposes and
are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                        1998      1997      1996
                                      ------------------------------
<S>                                    <C>      <C>       <C>    
Reserve discounting, including
 salvage and subrogation              $ (1,647) $(1,866)  $   119
Unearned premium reserve                 6,526     (582)   (3,211)
Net operating loss carryforward        (34,703)       -         -
Alternative minimum tax credit          (1,450)       -         -
Deferred policy acquisition costs        5,933    2,933     4,666
Goodwill                                 2,807        -         -
Other                                   (1,180)   2,315       705   
                                      ------------------------------
   Total deferred  federal income tax
    expense (benefit)                 $(23,714)  $2,800    $2,279
                                      ==============================
</TABLE>

As of December 31, 1998, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $99,000,000, which expires in 2018.

Federal income tax payments (refunds) amounted to $(1,401,000), $13,928,000 and
$17,021,000 in 1998, 1997 and 1996, respectively.

State income taxes represent the amount of current state income taxes incurred.



                                      F-21


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)



NOTE H--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

The liabilities for unpaid losses and LAE are estimated by management utilizing
methods and procedures which they believe are reasonable. These liabilities are
necessarily subject to the impact of future changes in claim severity and
frequency, as well as numerous other factors. Although management believes that
the estimated liabilities for unpaid losses and LAE are reasonable, because of
the extended period of time over which such losses are reported and settled, the
subsequent development of these liabilities may not conform to the assumptions
inherent in their determination and, accordingly, may vary from the estimated
amounts included in the accompanying financial statements. To the extent that
the actual emerging loss experience varies from the assumptions used in the
determination of these liabilities, they are adjusted to reflect actual
experience. Such adjustments, to the extent they occur, are reported in the
period recognized.

The anticipated effect of inflation is implicitly considered when estimating
reserves for losses and LAE. Although anticipated price increases due to
inflation are considered in estimating the ultimate claim costs, the increase in
average severities of claims is caused by a number of factors that vary with the
types of policies written. Average severities are projected based on historical
trends adjusted for implemented changes in underwriting standards, policy
provisions, and general economic trends. Those anticipated trends are monitored
based on actual development and are adjusted as necessary. The effects of such
adjustments are reported in the period recognized.

The Company writes insurance on accounts which have hazardous, unique or unusual
risk characteristics. These liability policies generally exclude absolute
pollution coverage, except for policies providing pollution liability coverage
to contractors involved in the remediation of pre-existing pollution. The
Company believes that such risks do not represent a material exposure related to
environmental pollution claims but there can be no assurance of the Company's
continued protection in view of the expansion of liability for environmental
claims in recent litigation in the insurance industry.

The Company's property and casualty subsidiaries have exposure to insured losses
caused by hurricanes, windstorms and other catastrophic events, primarily in
Florida and North Carolina, and has earthquake exposure limited to California.
A continuous assessment of the catastrophic exposures is made to ensure that
liabilities associated with the events can be minimized.

The liabilities for unpaid losses and LAE as of December 31, 1998 and 1997, and
the incurred losses and LAE for each of the years ended December 31, 1998, 1997
and 1996 are as follows (in thousands):

<TABLE>
<CAPTION>

                              1998                        1997                    1996
                       ---------------------------------------------------------------------
                                     INCURRED                    INCURRED        INCURRED
                       RESERVES   LOSSES AND LAE  RESERVES     LOSSES AND LAE  LOSSES AND LAE
                       ---------------------------------------------------------------------

<S>                    <C>            <C>         <C>            <C>               <C>     
Property and casualty  $1,072,395     $431,915    $767,266       $231,588          $155,991
Credit life                19,887       10,938      12,778          2,980             --
                       ---------------------------------------------------------------------
Totals                 $1,092,282     $442,853    $780,044       $234,568          $155,991
                       =====================================================================

</TABLE>


                                      F-22


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE H--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)

The following table sets forth a reconciliation of the beginning and ending
property and casualty loss and LAE reserve balances, net of reinsurance ceded,
for each of the three years in the period ended December 31, 1998 (in
thousands):

<TABLE>
<CAPTION>

                                                             1998      1997      1996
                                                         ------------------------------ 

<S>                                                        <C>        <C>        <C>      
Net reserves for losses and LAE, beginning of year         $ 483,539  $ 373,606  $ 294,393
Total acquired reserves                                         --       76,023     53,008
                                                         ---------------------------------
 Incurred losses and LAE for claims relating to:
  Current year                                               297,400    218,301    160,470
  Prior years                                                134,515     13,287     (4,479)
                                                         ---------------------------------
Total incurred losses and LAE                                431,915    231,588    155,991
                                                         ---------------------------------
Loss and LAE payments for claims relating to:
  Current year                                                66,070     50,665     27,626
  Prior years                                                216,534    147,013    102,160
                                                         ---------------------------------
Total payments                                               282,604    197,678    129,786
                                                         ---------------------------------
Net reserves for losses and LAE, end of year                 632,850    483,539    373,606
Total reinsurance recoverable on unpaid losses and LAE       439,545    283,727    165,467
                                                         ---------------------------------
Gross reserves for losses and LAE, end of year            $1,072,395   $767,266   $539,073
                                                         =================================
</TABLE>

The net $134,515,000 increase in prior years' reserves was primarily
attributable to a $155,000,000 reserve strengthening, resulting from an in-depth
actuarial analysis of the Company's loss and LAE reserves completed during the
fourth quarter of 1998. This analysis indicated significant deficiencies in
loss and LAE reserves in the Company's medical malpractice line of business for
individual physician related coverages in various states where the business is
written, primarily in Ohio, and LAE reserve development related to general
liability and surety lines.

The net $13,287,000 increase in prior years' reserves in 1997 was attributed to
reserve strengthening of $35,000,000. Included in the net development was a
decrease in prior year reserves in the general liability line of business
written by United Capitol.

The net $4,479,000 decrease in prior years' reserves in 1996 was the result of
favorable claims development on the workers' compensation line of business.
Included in the net development is an increase in prior years' reserves of
approximately $13,000,000 which was entirely offset by subrogation recoverables
recognized in connection with a favorable court ruling in 1995.


                                      F-23


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE H--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)

Litigation with the State of New York

Over the past decade, the Company has been engaged in litigation with the State
of New York as to whether physician medical school faculty members at the State
University of New York ("SUNY") engaged in the clinical practice of medicine at
a SUNY medical school facility, corollary to such physicians' faculty
activities, were within the scope of their employment by SUNY, and thereby
protected against malpractice claims arising out of such activity by the State,
or by the Company under its medical malpractice policies insuring the SUNY
physicians. As a result of favorable judicial decisions, the Company recorded
subrogation recoverables for claims previously paid and reserves established
with respect to such malpractice claims of approximately $19,000,000 on December
31, 1995 and $13,000,000 on June 30, 1996. The Company and the State have
reached an agreement with respect to 83 cases pursuant to which the State paid
$15,000,000 to the Company in September 1998, and the Company agreed to forego
$5,100,000 in interest which it had previously reserved for at December 31,
1997. As a result of the foregoing, the amount of subrogation recoverables
recorded at December 31, 1998 amounted to $12,000,000.

Discussions are continuing with respect to the cases not included in the
agreement with the State and, to the extent the amount of the actual recovery
varies from the recorded subrogation recoverable of $12,000,000, such difference
will be reported in the period recognized. The Company is continuing to defend
all SUNY faculty members against malpractice claims that have been asserted and
is maintaining reserves adjusted for the anticipated recoveries.


NOTE I--REINSURANCE

The Company's insurance subsidiaries assume and cede reinsurance with other
companies and are members of various pools and associations. A large portion of
the reinsurance is effected under contracts known as treaties and in some
instances negotiated on an individual risk basis, also known as facultative
reinsurance. These contracts consist of excess of loss and catastrophe contracts
which protect against losses over stipulated amounts arising from any one
occurrence or event.

Effective January 1, 1995, the Company entered into a three year stop loss
reinsurance agreement with Zurich N.A. Under the agreement, Zurich N.A. provides
reinsurance protection within certain accident year and contract aggregate
dollar limits for losses and LAE in excess of a predetermined ratio of these
expenses to net premiums earned for a given accident year for specified classes
of business. The loss and LAE ratio above which the reinsurance provides
coverage is 66%, 65%, and 64% for accident years 1995 through 1997,
respectively. The maximum amount recoverable for an accident year is 175% of the
reinsurance premium paid for the accident year, or $162,500,000 in the aggregate
for the three years. As of December 31, 1998, the Company had exceeded the
aggregate limits of the agreement.


                                      F-24


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE I--REINSURANCE (CONTINUED)

Effective January 1, 1998, the Company entered into a stop loss reinsurance
agreement with Zurich N.A. for the 1998 and 1999 accident years. The new
agreement includes selected programs underwritten by United Capitol, Western,
and additonal selected core programs of Frontier and Frontier Pacific, which
were not part of the original 1995-1997 reinsurance agreement. Under the terms
of the new agreement, Zurich N.A. provides reinsurance protection within certain
contract aggregate dollar limits for losses and LAE in excess of a predetermined
ratio of these expenses to earned premiums for a given accident year for covered
insurance programs.

Effective December 31, 1998, the Company and Zurich N.A. agreed to terminate
this agreement as it relates to the 1999 accident year. As consideration, the
Company agreed to pay Zurich N.A. a $10,000,000 termination fee, limit the
aggregate treaty maximum to $85,000,000, and modify the terms to limit the
period of claim cession to December 31, 1999. Accordingly, the Company will
account for any future claim cessions under the treaty after December 31, 1998,
retrospectively.

Although reinsurance companies are liable to the Company for amounts reinsured,
the Company remains liable to its insureds for the full amount of the policies
written whether or not the reinsurance companies meet their obligations. To
minimize its exposure to significant losses from reinsurance insolvencies, the
Company evaluates the financial condition of its reinsurers and monitors
concentration of credit risk from similar geographic regions, activities or
economic characteristics of the reinsurers. At December 31, 1998, the Company
had outstanding gross reinsurance recoverables of $226,405,000 from its largest
reinsurer, Zurich N.A.; however, under the terms of the reinsurance
arrangements, the Company is withholding $159,175,000 of funds due Zurich N.A.
Accordingly, the net outstanding recoverable from Zurich N.A. is $67,230,000. Of
the remaining net reinsurance recoverables balance, approximately 26% is due
from three reinsurers; one rated A++ (Superior), one rated A+ (Superior) and one
rated A (Excellent) by A.M. Best Company, Inc.

In 1998, 1997 and 1996 the Company recognized and accrued reinsurance
contingent profit commissions earned of $455,000, $792,000 and $773,000,
respectively. 

The effect of reinsurance on premiums written and earned is as follows (in
thousands):

<TABLE>
<CAPTION>

                      1998                     1997                  1996
                -----------------------------------------------------------------
                WRITTEN     EARNED      WRITTEN     EARNED     WRITTEN     EARNED
                -----------------------------------------------------------------
<S>           <C>         <C>         <C>         <C>         <C>        <C>      
Direct        $ 784,629   $ 735,407   $ 566,496   $ 532,248   $ 394,057  $ 332,345
Assumed          48,529      46,859      21,139      29,353       8,742      7,287
Ceded          (306,153)   (289,212)   (198,619)   (194,757)    (90,936)   (73,643)
             ---------------------------------------------------------------------
Net premiums  $ 527,005   $ 493,054   $ 389,016   $ 366,844   $ 311,863  $ 265,989
             =====================================================================

</TABLE>


                                      F-25


 

 <PAGE>
<PAGE>







                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE I--REINSURANCE (CONTINUED)

The effect of reinsurance ceded reduced incurred losses and LAE as
follows (in thousands):

<TABLE>
<CAPTION>

                                1998       1997      1996
                              ------------------------------

<S>                           <C>       <C>       <C>    
Incurred losses               $247,593  $118,489  $56,597
Incurred LAE                    44,156    17,739   18,240
</TABLE>


NOTE J--CREDIT FACILITY AND OTHER DEBT

In June 1997, the Company entered into a five year, $100,000,000 revolving loan
credit facility agreement with Deutsche Bank AG, New York Branch ("Deutsche
Bank"). Under the terms of the agreement, the Company is subject to certain
financial and nonfinancial covenants. In addition, the Company pays a quarterly
commitment fee at an annual rate of .125%, which is being expensed as incurred.
During 1997, the Company borrowed $62,000,000 under this agreement at an initial
floating interest rate of 6.04% per annum, based on Eurodollar interest rates,
which was fully repaid in August 1997. During 1998, the Company borrowed
$92,000,000 at LIBOR-based interest rates ranging from 5.385% to 5.975%, which
amount was outstanding at December 31, 1998. Also, during 1998, the Company
increased the facility to $150,000,000, and extended the maturity to June 2003.

During 1996, the Company extinguished a total of $33,792,000 in debt, which
arose from borrowings related to a previous credit facility agreement with the
Bank of New York. The Bank of New York credit facility agreement was terminated
in 1996.

During 1998, 1997 and 1996, the Company paid interest of $699,000, $825,000 and
$1,970,000, respectively.



NOTE K--GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S
        CONVERTIBLE SUBORDINATED DEBENTURES 

In October 1996, the Company completed a $172,500,000 offering of 3,450,000
shares of 6 1/4% Convertible Trust Originated Preferred Securities ("TOPrS")
through its wholly-owned consolidated subsidiary, Frontier Financing Trust, a
statutory business trust formed by the Company for the sole purpose of issuing
the TOPrS and investing the proceeds thereof in an equivalent amount of 6 1/4%
Convertible Subordinated Debentures (the "Debentures") of the Company which
mature on October 16, 2026. Under the terms of the offering, the Company is
subject to certain financial and non-financial covenants. The initial
purchasers' discount of $4,744,000 was deducted from the proceeds of the
offering. The Company also incurred $1,032,000 of additional offering costs in
connection with this transaction, resulting in net proceeds of $166,724,000 to
the Company. The total offering costs have been capitalized and are being
amortized on a straight-line basis over a 30 year period, in conjunction with
the maturity date of the Debentures. The TOPrS are carried on the balance sheet
net of the unamortized offering costs, which, at December 31, 1998 and 1997,
amounted to approximately $5,347,000 and $5,800,000, respectively.



                                      F-26


 

 <PAGE>
<PAGE>







                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE K--GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S
        CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)

The TOPrS are mandatorily redeemable under certain conditions and amounts due to
holders are fully and unconditionally guaranteed by the Company. The Debentures
(the sole assets of the trust) are subordinate to all Company debt and to the
claims of creditors and policyholders of the Company's subsidiaries. The TOPrS
are convertible into shares of the Company's Common Stock at an initial
conversion rate of 2.3461 shares of Company Common Stock for each preferred
share, which is equivalent to a conversion price of $21.30 per share (or
8,093,842 shares of Common Stock in total). Holders of the TOPrS have no voting
rights.

The Debentures are redeemable by the Company, at its option, in whole or in part
at a redemption price on or after October 16, 1999, provided the closing price
of the Company's Common Stock is at least 150% of the per share conversion
price, for a minimum of 20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to the notice of redemption
or anytime on or after October 16, 2000. The Company has the right to defer
interest payments on the Debentures at any time by extending the interest
payment date for up to 20 consecutive quarters, but not beyond the maturity date
of the Debentures.

Holders of the TOPrS are entitled to receive cumulative cash distributions at an
annual rate of 6 1/4% of the liquidation amount of $50 per share, accruing from
the date of original issuance and payable quarterly in arrears. Such
distributions are made from interest received on the Debentures, which have
terms that parallel the terms of the TOPrS. During 1998, 1997 and 1996, the
Company recorded expenses related to the cumulative cash distributions net of
amortization of capitalized offering costs of $184,000, $205,000 and $39,000,
respectively. The corresponding expenses are reported as "Minority interest in
income of consolidated subsidiary trust" in the accompanying consolidated
statements of operations and comprehensive income.


NOTE L--RELATED PARTY TRANSACTIONS

In April 1994, the Company completed the acquisition of certain assets of
Spencer Douglass Insurance Associates, Inc. constituting the Company's
California license and permit bond insurance agency business for $3,200,000. In
conjunction with the purchase, the Company entered into a five-year consulting
agreement with the seller, R. Spencer Douglass III ("Douglass"), for $360,000
per year.

In May 1995, the Company and Douglass formed a California limited liability
company, Douglass/Frontier LLC ("Douglass/Frontier"), a bail bond insurance
agency. The Company and Douglass, who is also an employee of Douglass/Frontier,
share equally in the results of Douglass/Frontier. In addition, Douglass owns
two retail bail bond agencies that produce business for Douglass/Frontier, which
in 1998, 1997 and 1996 amounted to less than 3% of the gross bail bond premiums
produced by Douglass/Frontier.

All of the Company's bail bond business is produced through Douglass/Frontier.
In 1998, 1997 and 1996, premiums written through Douglass/Frontier amounted to
approximately $1,054,000, $3,744,000 and $7,608,000, respectively, and the
related premium balances due the Company at December 31, 1998 and 1997, were
$83,000 and $2,225,000, respectively.


                                      F-27


 

 <PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE L--RELATED PARTY TRANSACTIONS (CONTINUED)

At December 31, 1997, Douglass/Frontier had notes payable to the Company of
approximately $8,200,000. During 1998, such notes were repaid from the proceeds
of an $8,200,000 bank loan obtained directly by Douglass/Frontier and guaranteed
by the Company. Additionally, during 1998, the Company issued a guaranty for a
$2,200,000 personal obligation of Douglass. Such guarantees were outstanding at
December 31, 1998.

All of the Company's homeowners' multi-peril business is produced by Tower Hill
Insurance Group ("Tower Hill"), a managing general agency specializing in such
business, whose principal owner is also an officer and director of Regency.
During 1998, 1997 and 1996, premiums written through Tower Hill were
approximately $27,972,000, $7,170,000 and $2,233,000, respectively, and the
related commissions paid to Tower Hill were $7,622,000, $1,809,000 and $558,000,
respectively. The premium balances due the Company at December 31, 1998 and
1997, were $2,981,000 and $115,000, respectively.

During 1998, the Company purchased, at a cost of $600,000, a 30% interest in
Metro Partners Inc. ("Metro Partners"), a management agency which provides
various administrative services to insurance agencies and brokers. Two of the
principals of Metro Partners serve as directors of the Company. In addition,
the Company purchased $500,000 of Metro Partners preferred stock, and
delivered a letter of credit for $250,000 to Metro Partners' landlord as
collateral for its real estate lease. At December 31, 1998, the Company has
notes receivable from Metro Partners of $1,021,000 at a stated interest rate of
8.75%.

The Company owns a 50% interest in Ward Insurance Services ("Ward"), a personal
auto line producer. During 1998, total premiums produced by Ward for
the Company werewas $11,066,000 and the related commissions paid to Ward
$2,213,000. At December 31, 1998, premium balances due the Company amounted to
$3,745,000 and other receivable balances due from Ward were $308,000.


At December 31, 1998 and 1997, the Company owned a 50% interest in Terramar
Insurance Agency (the "Agency") and a 19.9% interest in Terramar Insurance
Company ("Terramar"). Business produced through the Agency is written by the
Company's insurance subsidiaries. Approximately 90% of such business is ceded to
Terramar. During 1998 and 1997, premiums produced by the Agency were $18,277,000
and $6,860,000 and commissions paid to the Agency were $6,054,000 and
$3,544,000, respectively. Premium balances due the Company were $3,925,000 and
$1,923,000 at December 31, 1998 and 1997, respectively. In addition, at 
December 31, 1998 Terramar owed the Company $1,500,000 as a result of a loan
made during the year.

In December 1998, the Company initiated a program to facilitie the purchase
of its Common Stock by key management executives. Under the program, a
financial institution will loan funds to the executive for such purchase and
the shares purchased will be pledged with the financial institution as
collateral for the loan by the executive, who will be responsible for its
repayment and payment of the related interest. The Company will guarantee the
loan as long as the executive is in the employ of the Company. Pending
finalization of the loan documents with the financial institution, the Company
provided a loan facility for the participating management executives. An
Executive Vice President of the Company acted as the nominee for such 
management executives to borrow funds on their behalf and through December 31,
1998, an aggregate of $2,250,000 was borrowed pursuant to this loan facility
and 176,653 shares of Common Stock were purchased on behalf of the management
executives participating in the program. Once the arrangements with the
financial institution are finalized, the loan proceeds form the financial
institution will be applied to repay the loans by the Company.

                                      F-28

<PAGE>
<PAGE>



                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE L--RELATED PARTY TRANSACTIONS (CONTINUED)

During 1998, the Company issued guarantees on loans issued by banks for an
officer and a director for $1,250,000 and $1,800,000, respectively.

NOTE M--PREFERRED AND COMMON STOCK

The Company's Preferred Stock may be issued from time to time by the Board of
Directors in one or more series and classes and with such dividend rights,
conversion rights, voting rights, redemption provisions, liquidation
preferences, and other rights and restrictions as the Board of Directors may
determine.

During 1998, the Company's shareholders approved an increase in the number of
shares of the Company's authorized Common Stock from 50,000,000 to 150,000,000.

NOTE N--STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.

The Company has adopted stock option plans (the "Plans") under which 1,435,789
shares of Common Stock are reserved for issuance upon exercise of options
granted pursuant to the Plans. Under the Plans, incentive stock options may be
granted to employees and nonqualified stock options may be granted to employees,
directors, and such other persons as the Board of Directors (or a committee
appointed by the Board) determines will assist the Company's business endeavors,
at exercise prices equal to at least 100% of the fair market value of the common
stock on the date of grant. Incentive stock options granted under the Plans are
not exercisable until one year after grant and expire five years after the date
of grant. In addition to selecting the optionees, the Board (or such committee
designated by the Board) determines the number of shares subject to each option,
the expiration date and vesting periods of nonqualified stock options and
otherwise administers the Plans. Certain of the Company's officers are
ineligible to participate in the Plans. Incentive stock options have been
granted at various times and for varying amounts.


                                      F-29




<PAGE>
<PAGE>







                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE N--STOCK OPTIONS (CONTINUED)

In 1998, the Company granted the President and Chairman of the Board, and an
Executive Vice President, separate stock options outside the Plans to purchase
990,000 and 495,000 shares, respectively, of the Company's Common Stock at
prices ranging from $30.00 to $50.00 per share, exercisable at any time through
December 31, 2004. In August 1998, the Executive Vice President resigned and
under the terms of the option grant, the 495,000 shares were forfeited and
canceled. Accordingly, the option to purchase 990,000 shares was outstanding
at December 31, 1998.

In 1998, the Company also granted an Executive Vice President a separate stock
option outside the Plans to purchase 235,000 shares of the Company's Common
Stock at prices ranging from $17.00 to $43.00 exercisable at any time, which
option was outstanding at December 31, 1998.

In 1997, the Company granted the then President and Chairman of the Board, since
deceased, a separate stock option outside the Plans to purchase 275,000 shares
of the Company's Common Stock at $36.36 per share at any time through December
31, 2001, which option was outstanding at December 31, 1998.

During 1993, the Company granted the then President and Chairman of the Board,
since deceased, and a Vice President, separate stock options outside of the
Plans to purchase 907,500 and 163,350 shares, respectively, of the Company's
Common Stock at $20.66 per share at any time through December 31, 1999, which
options were outstanding at December 31, 1998.

Pro forma information regarding net income and earnings per share is required by
FASB Statement 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996 respectively: risk-free interest rates of 4.97%, 6.58% and 6.20%;
a dividend yield of 2.18%, 1.25% and 1.25%; volatility factors of the expected
market price of the Company's Common Stock of .337, .335 and .25; and an
expected life of the option of 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.


                                      F-30




<PAGE>
<PAGE>






                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE N--STOCK OPTIONS (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands, except per share data):

<TABLE>
<CAPTION>

                                      1998      1997      1996
                                    ------------------------------

<S>                                 <C>       <C>       <C>    
Pro forma net income                $(50,372) $32,064   $39,813
Pro forma basic earnings (loss)
 per common share                     $(1.35)  $  .94    $ 1.25
Pro forma diluted earnings (loss)
 per common share                     $(1.35)   $ .91    $ 1.23

</TABLE>

For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period and does not include
grants prior to January 1, 1995. As such, the pro forma net income (loss) and
earnings (loss) per share are not indicative of future years.

A summary of the Company's stock option activity, and related information for
each of the three years ended December 31, follows:
<TABLE>
<CAPTION>
                                  1998                        1997                        1996
                    --------------------------------------------------------------------------------------------
                          OPTIONS  WEIGHTED-AVERAGE    OPTIONS     WEIGHTED-AVERAGE  OPTIONS    WEIGHTED AVERAGE
                            (000)   EXERCISE PRICE      (000)       EXERCISE PRICE    (000)      EXERCISE PRICE
                    --------------------------------------------------------------------------------------------

<S>                      <C>            <C>              <C>            <C>            <C>            <C>  
Outstanding at       
 beginning of year       1,036          $  19            715            $  11          768            $   9
Granted                    635             13            500               25          152               15
Exercised                 (175)            11           (150)              11         (183)               6
Canceled                   (84)            18            (29)              15          (22)              10
                         -----                         -----                         -----                  
Outstanding at end  
 of year                 1,412             17          1,036               17          715               11
                         =====                         =====                         =====
Exercisable at end      
 of year                   317             16            257               11          238               11
                         =====                         =====                         =====

</TABLE>

The weighted average fair value of options granted during 1998, 1997 and 1996
were $4.83, $8.81 and $4.66, respectively.

                       Options Outstanding and Exercisable
                                 by Price Range
                             as of December 31, 1998
<TABLE>
<CAPTION>

                               OPTIONS OUTSTANDING                                     OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------------------------------
                        OUTSTANDING    WEIGHTED-AVERAGE                         EXERCISABLE
    RANGE OF          AS OF DECEMBER      REMAINING        WEIGHTED AVERAGE    AS OF DECEMBER   WEIGHTED AVERAGE
 EXERCISE PRICES         31, 1998      CONTRACTUAL LIFE     EXERCISE PRICE         31, 1998     EXERCISE PRICE
  ---------------------------------------------------------------------------------------------------------------

<S>                        <C>                <C>              <C>                   <C>            <C>  
$ 5.01 - $10.00           202,303            1.2              $ 8.57                132,224        $8.57
$10.01 - $15.00           573,276            4.7               13.64                 27,224        12.92
$15.01 - $20.00            67,950            3.2               17.45                 33,550        17.00
$20.01 - $25.00           558,479            4.1               23.96                121,929        23.81
$25.01 - $30.00             6,600            3.2               27.27                  1,649        27.27
$30.01 - $35.00             3,575            3.6               30.63                    893        30.63
                        ---------                                                 --------       
                        1,412,183            3.9              $17.29               $317,469       $15.85
                        =========                                                  ========       

</TABLE>


                                      F-31



<PAGE>
<PAGE>





                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE O--COMMITMENTS AND CONTINGENCIES

At December 31, 1998, the future minimum payments under noncancellable operating
leases are as follows (in thousands):

<TABLE>

                              <S>                    <C>     
                             1999                    $4,507  
                             2000                     4,322   
                             2001                     4,003   
                             2002                     3,308   
                             2003                     2,707   
                             Thereafter               3,006   
                                                    =======  
                             Total                  $21,853  
                                                    =======  
</TABLE>                        




These leases are for the rental of office space, the initial terms of which run
five years, with a negotiated renewal option at the end of the term. Total
rental expense for 1998, 1997, and 1996 amounted to $4,666,000, $2,580,000 and
$1,112,000, respectively.

Following the Company's November 5, 1994 announcement of its third-quarter
financial results, the Company was served with seven purported class actions
alleging violations of federal securities laws by the Company and, in some
cases, by certain of its officers and directors. In September 1995, a pre-trial
order was signed which consolidated all actions in the Eastern District of New
York, appointed three law firms as co-lead counsel for the plaintiffs and set
forth a timetable for class certification motion practice and discovery. In
November 1995, plaintiffs served a consolidated amended complaint alleging
violations by the Company of section 10(b) of the Securities Exchange Act of
1934 and Rule 10(b)(5) thereunder, seeking to impose controlling person
liability on certain of the Company's officers and directors, and further
alleging insider sales all premised on negative financial information that
should have been publicly disclosed earlier. Plaintiffs seek an unspecified
amount in damages to be proven at trial, reasonable attorneys fees' and expert
witness costs. In April 1997, the Court certified the class. Plaintiffs have
subpoenaed documents and deposed outside auditors and analysts. Plaintiffs have
also taken depositions from current or former officers, directors and employees
of the Company. The Company believes the suit is without merit, has retained
special legal counsel to contest this suit vigorously and believes that the
Company's exposure to liability if any, thereunder would not have a material
adverse effect on the Company's financial condition.

The Company is involved in other unrelated litigation which is considered
incidental to its business. The ultimate outcome of all litigation is not
expected to be material in relation to the Company's financial position and
results of operations.

The Company's insurance subsidiaries record guaranty assessments when such
assessments are billed by the respective guaranty funds. In addition, each
insurance subsidiary's policy is to accrue for any significant insolvencies when
the loss is probable and the assessment amount can be reasonably estimated. In
the case of most insurance insolvencies, the ability of each insurance
subsidiary to reasonably estimate the insolvent insurer's liabilities or develop
a meaningful range of the insolvent's liabilities is significantly impaired by
inadequate financial data with respect to the state of the insolvent company as
supplied by the guaranty funds.

                                      F-32



 

 <PAGE>
<PAGE>








                 Frontier Insurance Group, Inc. and Subsidiaries
           Notes to the Consolidated Financial Statements (continued)


NOTE O--COMMITMENTS AND CONTINGENCIES (CONTINUED)

On November 10, 1994, the Company authorized a stock repurchase program to
purchase up to 1,000,000 shares of its Common Stock. On June 30, 1998, the
Company amended the stock repurchase program to permit the purchase of up to
3,000,000 shares of its Common Stock at such times and prices the Company deems
advantageous in compliance with SEC Rule 10b-18 at the joint determination of
the Chairman of the Board and Chief Investment Officer. There is no commitment
or obligation on the part of the Company to purchase any particular number of
shares, and the program may be suspended at any time at the Company's
discretion. In 1998, in conjunction with this repurchase program, the Company
acquired 668,300 shares at a cost of $8,530,000. Any shares so repurchased will
be held as treasury shares and be available for general corporate purposes.



NOTE P--STATUTORY FINANCIAL INFORMATION

A comparison of the consolidated amounts of the insurance subsidiaries'
policyholders' surplus as of December 31, 1998 and 1997, and net income (loss)
for each of the years ended December 31, 1998, 1997 and 1996, on a statutory
accounting practices ("SAP") basis as reported to insurance regulatory
authorities, and the GAAP shareholders' equity and net income included in
the accompanying consolidated financial statements, is as follows (in
thousands):
<TABLE>
<CAPTION>

                                    1998                                1997          1996
                      ----------------------------------------------------------------------------------
                                              NET                             NET              NET
                      SURPLUS/EQUITY     INCOME (LOSS)    SURPLUS/EQUITY  INCOME (LOSS)   INCOME (LOSS)
                      ==================================================================================
 <S>                     <C>             <C>                <C>             <C>           <C>          
Insurance
   subsidiaries'                                                                
   consolidated SAP
   amounts               $396,205           $(70,889)       $412,069        $32,730        $28,874
                      ==================================================================================

 Insurance
   subsidiaries'        
   consolidated GAAP
   amounts               $612,723           $(32,373)       $573,103        $41,970        $41,099


 Parent company, its
   noninsurance       
   subsidiaries and
   eliminations          (218,503)           (17,669)       (119,398)        (9,688)        (1,032)
                      ----------------------------------------------------------------------------------
 Consolidated GAAP      
   amounts               $394,220           $(50,042)       $453,705        $32,282        $40,067
                      ==================================================================================

</TABLE>


NOTE Q--DIVIDEND AND CAPITAL RESTRICTIONS

The Company's insurance subsidiaries are subject to certain regulatory
supervision by their respective domiciliary states. Such regulation is generally
designed to protect policyholders and includes such matters as maintenance of
minimum statutory surplus and restrictions on the payments of dividends. At
December 31, 1998, the amount of restricted net assets of the Company's
insurance subsidiaries was approximately $357,600,000 and the maximum dividend
that may be paid to the Company in 1998 without regulatory approval was
approximately $38,600,000.

Additionally, the insurance subsidiaries are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under those requirements,
the amount of capital and surplus maintained by the insurance subsidiaries is
to be determined based on the various risk factors related to it. At December
31, 1998, the Company met the RBC requirements.


                                      F-33


<PAGE>
<PAGE>




                Frontier Insurance Group, Inc. and Subsidiaries
       
           Notes to the Consolidated Financial Statements (continued)



NOTE R--EMPLOYEE BENEFIT PLANS

The Company sponsors an employee savings plan (401(k)) whereby the Company
contributes a base of 2% of the salary of all full-time employees and matches
50% of the employee's personal contribution up to 2% of the employee's salary.
The maximum Company contribution, base and match, is 4% of an employee's salary.
In addition, the Company has a noncontributory profit sharing plan. At the
discretion of the Board of Directors, the Company may contribute up to 4% of the
eligible salaries of full-time employees who have completed one year of service.

The Company's total expense related to employee benefit plan contributions for
1998, 1997 and 1996 was $4,203,000, $2,635,000 and $1,691,000, respectively.

NOTE S--SUBSEQUENT EVENTS

In January 1999, the Company entered into a reinsurance agreement with Everest
Reinsurance Company for new and renewal policies written in its medical
malpractice book of business. Under the terms of the agreement, the reinsurer
assumes losses in the amount of $750,000 per insured/per occurrence, in excess
of $250,000 per insured/per occurrence. The agreement provides for the Company
to retain a corridor deductible under certain specific conditions. The
reinsurer's exposure in excess of the corridor deductible is unlimited.

Effective February 3, 1999, the Company entered into a 3.5 year interest rate
swap agreement for a notional amount of $45,000,000. Under the terms of the
agreement, the Company will pay a fixed interest rate of 5.21% and receive the
LIBOR interest rate it currently pays under its line of credit facility.

From January 1, 1999 through March 29, 1999, in connection with its stock
repurchase program, the Company acquired an additional 1,866,100 shares of its
Common Stock at an aggregate cost of $22,605,000. Additionally, on
March 29, 1999, the Company borrowed $15,000,000 under its Deutsche Bank
credit facility.


                             F-34





<PAGE>
<PAGE>






         Frontier Insurance Group, Inc. and Subsidiaries

                        Supplemental Data

           Quarterly Results of Operations (Unaudited)

The following is a summary of unaudited quarterly results of operations for 1998
and 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
                                                 1998                                  1997
                               -------------------------------------------------------------------------------
                                  1ST         2ND      3RD       4TH       1ST      2ND     3RD       4TH
                               -------------------------------------------------------------------------------
<S>                            <C>         <C>       <C>       <C>       <C>      <C>     <C>       <C>     
Net premiums earned            $117,212    $122,576  $128,001  $125,265  $77,807  $76,017  $103,216  $109,804
Total net investment income      20,850      20,724    15,525    19,439   12,614   13,319    14,786    19,625
Net income (loss)                17,743      17,465    14,193   (99,443)  11,904   15,419    14,758    (9,799)

Earnings (loss) per common share:
  Basic                             .52         .47       .38     (2.69)     .37      .48       .43     (.26)
  Diluted                           .47         .42       .35     (2.69)     .34      .42       .38     (.26)
</TABLE>

Due to changes in the number of average Common Stock and equivalent shares
outstanding, quarterly earnings per share may not add to the totals for the
years.

In the fourth quarters of 1998 and 1997, the Company increased reserves by
approximately $155,000,000 and $35,000,000, respectively. Such increases were
primarily due to adverse experience in the Company's medical malpractice line of
business (see Note H of the Notes to the Consolidated Financial Statements).
Other charges incurred during the fourth quarter of 1998, included $10,000,000
related to the termination of the Company's 1998-1999 stop loss reinsurance
agreement (see Note I of the Notes to the Consolidated Financial Statements),
and to an increase of approximately $3,500,000 in the allowance for doubtful
accounts and and a $300,000 restructuring charge related to the closing of
one of the Company's Health Care Division offices.


                                      F-35



 

 <PAGE>
<PAGE>






            Schedule II-Condensed Financial Information of Registrant

                 Frontier Insurance Group, Inc. (Parent Company)

                                 Balance Sheets
              (dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
                                                         DECEMBER 31
                                                     1998          1997
                                                  ------------------------
<S>                                               <C>            <C>      
ASSETS
Investments in subsidiaries                       $ 623,854      $ 581,002
Fixed maturity securities                             3,335           --
Equity securities, available for sale                 2,948           --
Equity investees                                     12,574         11,938
Short-term investments                               11,716          5,550
Cash (overdraft)                                     (1,356)         2,498
Property, equipment and software, less
  accumulated depreciation and amortization
 (1998--$6,950; 1997--$4,985)                        11,790          6,974
Intangible assets, less accumulated
  amortization (1998--$3,173; 1997--$2,237)           1,157          1,621
Other assets                                         15,687         18,482
                                                  -------------------------
TOTAL ASSETS                                       $681,705       $628,065
                                                  =========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Convertible subordinated debentures due to      
   subsidiary trust                                $167,153       $166,703
  Bank debt                                          92,000           --
  Accrued expenses and other liabilities             25,754          5,282
  Cash dividend payable to shareholders               2,578          2,375
                                                  --------------------------
TOTAL LIABILITIES                                   287,485        174,360

Shareholders' equity:
  Preferred stock, par value $01 per share;
   (authorized and unissued: 1,000,000 shares)         --             --
  Common stock; par value $.01 per share;
   (shares authorized: 1998--150,000,000;
   1997--50,000,000, shares issued:                                    
   1998--37,594,709; 1997--37,419,298)                  376            340
  Additional paid-in capital                        450,347        367,914
  Accumulated other comprehensive income, net        
   of tax                                            26,635         20,238
  Retained earnings (deficit)                       (73,833)        65,995
                                                  -------------------------
                                                    403,525        454,487
  Treasury stock--at cost (1998--766,912
   shares; 1997--99,495 shares)                      (9,305)          (782)
                                                  -------------------------
Total shareholders' equity                          394,220        453,705
                                                  -------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY         $681,705       $628,065
                                                  ==========================
</TABLE>

These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.


                                      F-36


 

 <PAGE>
<PAGE>






      Schedule II-Condensed Financial Information of Registrant (continued)

                 Frontier Insurance Group, Inc. (Parent Company)

                Statements of Operations and Comprehensive Income
                          (dollar amounts in thousands)
<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31
                                       1998      1997      1996
                                     ------------------------------
<S>                                   <C>        <C>       <C>   
REVENUES
Dividend income from subsidiary       $   --     $ --     $1,500
Investment income (including net      
  realized gains (losses))            (1,116)    4,125     1,256
Net proceeds from company owned life   
  insurance policy                     4,400       --        --
                                     ------------------------------
  Total revenues                       3,284     4,125     2,756

EXPENSES
Operating and administrative          22,061     7,018       582
Interest expense                      11,931    11,842     4,169
                                     ------------------------------
  Total expenses                      33,992    18,860     4,751
                                     ------------------------------
Loss before federal income tax
  benefit and equity in              
  undistributed income (loss) of
  subsidiaries                       (30,708)  (14,735)   (1,995)
Federal income tax benefit (1)       (11,298)   (5,324)   (2,337)
                                     ------------------------------
  Income (loss) before equity in
   undistributed income              
   (loss) of subsidiaries            (19,410)   (9,411)      342
Equity in undistributed income       
  (loss) of subsidiaries             (30,632)   41,693    39,725
                                     ------------------------------
  Net income (loss)                  (50,042)   32,282    40,067
Other comprehensive income (loss),
  net of tax                           6,397    15,431    (3,148)
                                     ==============================
  Total comprehensive income (loss) $(43,645)  $47,713   $36,919
                                     ==============================
</TABLE>

(1)  Under the terms of its tax-sharing agreement with its subsidiaries, income
     tax provisions for the individual companies are computed on a
     separate company basis. Accordingly, the Company's income tax benefit
     reflects the utilization of the parent company separate return loss to
     reduce the consolidated taxable income of the Company and its subsidiaries
     or, for 1998, the deferred tax benefit of its share of the consolidated net
     operating loss carryforward.

     These condensed financial statements should be read in conjunction with the
     accompanying consolidated financial statements and notes thereto.


                                      F-37



 

 <PAGE>
<PAGE>






      Schedule II-Condensed Financial Information of Registrant (continued)

                 Frontier Insurance Group, Inc. (Parent Company)

                            Statements of Cash Flows
                          (dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31
                                              1998           1997               1996
                                           ---------------------------------------------
<S>                                         <C>            <C>                 <C>     
OPERATING ACTIVITIES
Income (loss) before equity in
  undistributed income                      
  of subsidiaries                           $(19,410)      $ (9,411)         $     342
Adjustments to reconcile net income
  (loss) to net cash provided by
  (used in) operating activities:
   Change in federal income taxes             (3,242)        (2,796)            (1,558)
   Change in due from subsidiaries             9,752         (2,407)              (215)
   Depreciation and amortization               3,353          2,618              2,287
   Net realized losses                         2,857           --                  --
   Other                                      13,819         (1,522)            (1,692)
                                           ---------------------------------------------
Net cash provided by (used in)
  operating activities                         7,129        (13,518)              (836)

INVESTING ACTIVITIES
Capital contributions to
 subsidiaries                                (62,580)       (29,644)           (69,800)
Purchases of wholly-owned subsidiaries        (5,030)      (140,499)              (221)
Short-term investments, net                   (6,166)        58,352            (62,726)
Change in other investments                   (5,630)        (9,001)                (2)
Purchases of property, equipment and
  software                                    (6,781)        (1,362)            (2,181)
Other                                           (472)           314                 (8)
                                           ---------------------------------------------
Net cash used in investing activities        (86,659)      (121,840)          (134,938)

FINANCING ACTIVITIES
Proceeds from convertible debentures            --             --              166,914
Proceeds from bank borrowings                 92,000         62,000              7,100
Repayment of bank borrowings                    --          (62,000)           (32,100)
Issuance of common stock                       1,948        146,110              1,103
Cash dividends paid                           (9,761)        (8,240)            (6,920)
Reissuance (purchases) of treasury stock      (8,511)            19               --
Other                                           --             (455)              --
                                           ---------------------------------------------
Net cash provided by financing
  activities                                  75,676        137,434            136,097
                                           ---------------------------------------------
Increase (decrease) in cash                   (3,854)         2,076                323
Cash at beginning of year                      2,498            422                 99
                                           ---------------------------------------------
Cash (overdraft) at end of year             $ (1,356)      $  2,498          $     422
                                           ==============================================
</TABLE>


These condensed financial statements should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.



                                      F-38



 

 <PAGE>
<PAGE>






                             Schedule IV-Reinsurance

                 Frontier Insurance Group, Inc. and Subsidiaries

                          (dollar amounts in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
          COL. A                     COL. B                       COL. C                         COL. D              COL. E
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    PERCENTAGE
                                                        CEDED TO            ASSUMED                                  OF AMOUNT
                                                         OTHER             FROM OTHER              NET              ASSUMED TO
       DESCRIPTION                   DIRECT             COMPANIES           COMPANIES             AMOUNT                NET
---------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                 <C>                 <C>                 <C>                  <C> 
YEAR ENDED DECEMBER 31, 1998
Premiums written
  General liability                   $180,881            $ 45,948            $    547            $135,480             0.4%
  Medical malpractice                  139,408              35,980                 715             104,143             0.7
  Specialty personal lines             123,619              72,511               8,332              59,440            14.0
  Credit related products               93,461              46,768              17,383              64,076            27.1
  Surety                                91,956              16,144                 633              76,445             0.8
  Workers' compensation                 40,854              31,533               1,995              11,316            17.6
  Commercial earthquake                 20,614              11,471                  37               9,180             0.4
  Other                                 93,836              45,798              18,887              66,925            28.2
                                    ------------------------------------------------------------------------------
Total                                 $784,629            $306,153            $ 48,529            $527,005             9.2%
                                    ==============================================================================
YEAR ENDED DECEMBER  31, 1997
Premiums written:
  General liability                   $165,471            $ 40,434            $  5,480            $130,517             4.2%
  Medical malpractice                  120,867              20,597                 134             100,404             0.1
  Specialty personal lines              67,477              40,543               8,136              35,070            23.2
  Credit related products               45,144              32,778                 310              12,676             2.4
  Surety                                75,862              14,620                 626              61,868             1.0
  Workers' compensation                 24,196              17,565                 715               7,346             9.7
  Commercial earthquake                 14,688               6,726                --                 7,962          --
  Other                                 52,791              25,356               5,738              33,173            17.4
                                    ------------------------------------------------------------------------------
Total                                 $566,496            $198,619            $ 21,139            $389,016             5.4%
                                    ==============================================================================
YEAR ENDED DECEMBER 31, 1996
Premiums written:
  General liability                   $108,984            $ 19,443            $  4,439            $ 93,980             4.7%
  Medical malpractice                  139,233              19,580                --               119,653          --
  Specialty personal lines               7,405               6,772                  32                 665             4.8
  Surety                                65,074               8,749                 307              56,632             0.5
  Workers' compensation                 25,125              19,176                 304               6,253             4.9
  Commercial earthquake                 16,396               4,637                 145              11,904             1.2
  Other                                 31,840              12,579               3,515              22,776            15.4
                                    ------------------------------------------------------------------------------
Total                                 $394,057            $ 90,936            $  8,742            $311,863             2.8%
                                    ==============================================================================
</TABLE>

                                      F-39



 

 <PAGE>
<PAGE>






                  Schedule V--Valuation and Qualifying Accounts

                 Frontier Insurance Group, Inc. and Subsidiaries
                          (dollar amounts in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
              COL. A                     COL. B                  COL. C                    COL. D          COL. E
---------------------------------------------------------------------------------------------------------------------
                                                               ADDITIONS
                                                     ---------------------------------
                                                        (1)                (2)                
                                        BALANCE AT    CHARGED TO        CHARGED TO                       BALANCE AT
                                       BEGINNING OF     COSTS             OTHER          DEDUCTIONS        END OF
            DESCRIPTION                   PERIOD     AND EXPENSES   ACCOUNTS--DESCRIBE    DESCRIBE         PERIOD
----------------------------------------------------------------------------------------------------------------------
<S>                                        <C>          <C>           <C>                  <C>              <C>   
Year ended December 31, 1998:
 Reserves and allowances deducted
  from asset accounts:
   Allowance for doubtful accounts         $2,791       $3,311                             $ 77(A)          $6,025
   Allowance for possible
    reinsurance uncollectible amounts         310          150                              310(A)             150

Year ended December 31, 1997:
 Reserves and allowances deducted
  from asset accounts:
   Allowance for doubtful accounts         $2,285       $  541                            $  35(A)          $2,791
   Allowance for possible
    reinsurance uncollectible amounts         517           66                              273(A)             310

Year ended December 31, 1996:
 Reserves and allowances deducted
  from asset accounts:
   Allowance for doubtful accounts         $3,391       $  365                           $1,471(A)          $2,285
   Allowance for possible                    
    reinsurance uncollectible amounts         115          402                              --                 517

</TABLE>

(A) Amounts charged off. 

                                      F-40

<PAGE>
<PAGE>



                 Schedule VI-Supplemental Information Concerning
                     Property/Casualty Insurance Operations

                 Frontier Insurance Group, Inc. and Subsidiaries
                              (Net of Reinsurance)
                          (dollar amounts in thousands)


<TABLE>
<CAPTION>
                             
                                                          DECEMBER 31                               
----------------------------------------------------------------------------------------------------------------------------------
         COL. A                 COL. B              COL. C              COL. D              COL. E           COL. F         COL. G
----------------------------------------------------------------------------------------------------------------------------------
                                                    UNPAID
                                                    CLAIMS            DISCOUNT,
                               DEFERRED              AND                IF ANY
      AFFILIATION               POLICY              CLAIM              DEDUCTED                                             NET
          WITH               ACQUISITION          ADJUSTMENT              IN               UNEARNED         EARNED      INVESTMENT
      REGISTRATION              COSTS              EXPENSES            COLUMN C            PREMIUMS        PREMIUMS       INCOME
----------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                    <C>                 <C>                 <C>              <C>             <C>
Registrant and
  consolidated
  subsidiaries:
     1998                      $ 96,597            $643,858                                $369,256         $493,054     $76,538
     1997                        55,634             488,310                                 292,115          366,844      60,344
     1996                        32,871             373,606                                 153,325          265,989      38,933
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                       YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------------------------------------
                                        COL. H                       COL. I              COL. J              COL. K
----------------------------------------------------------------------------------------------------------------------------------
                                     CLAIMS AND CLAIM
                                    ADJUSTMENT EXPENSES
                                     INCURRED RELATED TO
----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                 <C>             <C>                   <C>                  <C>          
                                                                     AMORTIZATION           PAID
                                                                          OF               CLAIMS
                                                                       DEFERRED             AND
                                  (1)                 (2)               POLICY             CLAIM
                                CURRENT               PRIOR          ACQUISITION          ADJUSTMENT            PREMIUMS
                                  YEAR                YEAR               COSTS             EXPENSES             WRITTEN
----------------------------------------------------------------------------------------------------------------------------------
Registrant and
  consolidated
  subsidiaries:
     1998                       $297,400            $134,515            $122,813            $282,604            $527,005
     1997                        218,301              13,287              83,586             197,678             389,016
     1996                        160,470              (4,479)             57,540             129,786             311,863
 
</TABLE>


                                      F-41




 <PAGE>
<PAGE>







                                   SIGNATURES

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

                                            FRONTIER INSURANCE GROUP, INC. 

                                       By:  /s/ HARRY W. RHULEN  
                                            -------------------------
                                            Harry W. Rhulen
                                            Chairman of the Board and President

                                       Date: March 31, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual
report on Form 10-K has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
        Signature and Title                                 Date
        -------------------                                 -----
<S>                                                        <C> 
   /s/ HARRY W. RHULEN                                 March 31, 1999
------------------------------------
           Harry W. Rhulen
  Chairman of the Board, President
            and Director
    (Principal Executive Officer)

   /s/ SUZANNE RHULEN LOUGHLIN                         March 31, 1999
------------------------------------
       Suzanne Rhulen Loughlin
      Executive Vice President
            and Director

   /s/ DOUGLAS C. MOAT                                 March 31, 1999
------------------------------------
           Douglas C. Moat
      Executive Vice President
            and Director

   /s/ PETER L. RHULEN                                 March 31, 1999
------------------------------------
           Peter L. Rhulen
              Director

   /s/ LAWRENCE E. O'BRIEN                             March 31, 1999
         Lawrence E. O'Brien
              Director

   /s/ ALAN GERRY                                      March 31, 1999
------------------------------------
             Alan Gerry
              Director

   /s/ PAUL B. GUENTHER                                March 31, 1999
------------------------------------
          Paul B. Guenther
              Director

   /s/ MARK H. MISHLER                                 March 31, 1999
------------------------------------
           Mark H. Mishler
   Vice President - Treasurer and
       Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>



                                      
<PAGE>
<PAGE>

 

                         FRONTIER INSURANCE GROUP, INC.

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

                                   EXHIBITS TO

                           ANNUAL REPORT ON FORM 10-K

                            FOR THE FISCAL YEAR ENDED

                                DECEMBER 31, 1998



<PAGE>
<PAGE>


<TABLE>
<CAPTION>
                                INDEX TO EXHIBITS

<S>                                                                                                          <C>
 3.1(a)    Copy of Registrant's Restated Certificate of Incorporation........................................(1)
           
 3.2       Copy of Registrant's By-Laws as amended...........................................................(2)

 4.1       Indenture dated as of October 16, 1996 between the Registrant and The Bank
               of New York, as trustee, with form of Debenture attached as Exhibit A thereto.................(6)

10.1       Copy of Registrant's Stock Option Plan, including forms of option.................................(1)

10.6       Copy of Registrant's Profit Sharing Plan..........................................................(2)

10.10      Copy of Registrant's 1992 Incentive and Non-Incentive
               Stock Option Plan.............................................................................(3)

10.12      Description of Registrant's Executive Bonus Plan..................................................(4)

10.14      Stock Purchase Agreement dated February 29, 1996 among Frontier Insurance
               Company Acquisition Corp. and, for purposes of Section 2.3(c) and Article 11 only,
               Capsure Holdings Corp.........................................................................(5)

10.15      United Capitol Holding Company and Subsidiaries Financial Statements as of
               December 31, 1995 and 1994 (with Independent Auditors' Report thereon)
               and Unaudited Interim Condensed Consolidated Financial Statements as of
               March 31, 1996................................................................................(5)

10.15(a)   Stock Purchase Agreement dated March 28, 1997 between Mercury Finance
               Company and Frontier Insurance Group, Inc.....................................................(7)

10.15(b)   First Amendment to Stock Purchase Agreement dated May 29, 1997....................................(7)

10.15(c)   Second Amendment to Stock Purchase Agreement dated June 3, 1997...................................(7)

10.16      Frontier Insurance Group, Inc. and Subsidiaries' Unaudited Pro Forma
               Condensed Consolidated Statements of Income for the Year Ended December
               31, 1995 and Three Months Ended March 31, 1996, and Balance Sheet as of
               March 31, 1996 together with the related Notes thereto........................................(7)

10.16(a)   Credit Agreement dated June 3, 1997 between Frontier Insurance Group, Inc.
               and Deutsche Bank AG, New York Branch and/or Cayman Islands Branch,
               individually and as administrative agent, ("Deutsche Bank Credit Agreement")..................(7)

10.16(b)   First Amendment to Deutsche Bank Credit Agreement dated April 2, 1998.............................

10.16(c)   Second Amendment to Deutsche Bank Credit Agreement dated October 1, 1998..........................

10.16(d)   Third Amendment to Deutsche Bank Credit Agreement dated December 30, 1998.........................
</TABLE>



<PAGE>
<PAGE>


<TABLE>
<S>                                                                                                          <C>
10.17      Amended and Restated Declaration of Trust dated as of October 16,
               1996 among Registrant, as sponsor. Walter A. Rhulen and Peter H.
               Foley, as regular trustees. The Bank of New York, as property
               trustee, and The Bank of New York (Delaware), as Delaware
               trustee, with the terms of the Preferred Securities
               attached as Annex I thereto, and the form of Preferred Security attached as
               Exhibit A-1 thereto...........................................................................(6)

10.17(a)   Stock Purchase Agreement dated October 3, 1997 among The Galtney Group,
               Inc., Galtney Holdings, Inc., Healthcare Insurance Services, Inc. and Registrant..............(9)

10.18      Preferred Securities Guarantee Agreement dated as of October 16, 1996 between
               the Registrant and The Bank of New York, as trustee for the benefit of the holders
               from time to time of the Preferred Securities.................................................(6)

10.18(a)   Asset Purchase Agreement dated December 1, 1997 by and between Medical
               Professional Liability Agency, Ltd. and FPIC Insurance Company, Inc. and for
               purposes of Sections 5.1, 5.2, 5.3 and 5.4 only, Frontier Insurance Company...................(8)

10.19      Registration Rights Agreement dated as of October 16, 1996 among Registrant,
               Frontier Financing Trust, and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
               & Smith Incorporated, Donaldson , Lufkin & Jenrette Securities Corporation,
               Oppenheimer & Co., Inc. and Stephens Inc., as representatives of the initial
               purchasers of the Preferred Securities........................................................(6)

10.19(a)   Stock Acquisition Agreement dated October 20, 1997 among Lyndon Insurance
               Group, Inc., Lyndon Life Insurance Company and ACCEL International Corporation................(8)

10.20      Asset Purchase Agreement dated October 20, 1997 among Lyndon Property
               Insurance Company, ACCEL International Corporation and Acceleration National
               Insurance Company.............................................................................(9)

10.21      Amended copy of Registrant's 1992 Incentive and Non-Incentive Stock Option Plan...................(9)

10.22      Copy of Employment Agreement between Registrant and Harry W. Rhulen..............................

12         Statement RE:  Computation of Ratio of Earnings to Fixed Charges.................................

21(a)      List of Registrant's Subsidiaries.................................................................

23         Consent of Independent Auditors...................................................................

27         Financial data schedule...........................................................................

28         Schedule P of Annual Statement for year ended December 31, 1998, filed as a paper
               format exhibit on Form SE pursuant to Section 232.311 of Regulation ST, of Frontier
               Insurance any, Frontier Pacific Insurance Company, Lyndon Property Insurance
               Company and Western Indemnity Insurance Company, as filed with the New York
               State Department of Insurance, the California Department of Insurance, the Missouri
               Department of Insurance and the Texas Department of Insurance respectively....................
</TABLE>

----------------
(1)  Filed as the same numbered Exhibit to the Registrant's Registration
     Statement on Form S-1 (File No. 33-7340) and incorporated herein by
     reference.

(2)  Filed as the same numbered Exhibit to the Registrant's Annual Report on
     Form 10-K for the year ended December 31, 1988 and incorporated herein by
     reference.

(3)  Filed as the same numbered Exhibit to the Registrant's Annual Report on
     Form 10-K for the year ended



<PAGE>
<PAGE>




     December 31, 1992 and incorporated herein by reference.

(4)  Filed as the same numbered Exhibit to the Registrant's Annual Report on
     Form 10-K for the year ended December 31, 1993 and incorporated herein by
     reference.

(5)  Filed as the same numbered Exhibit to the Registrant's Report on Form 8-K
     dated May 22, 1996 and incorporated herein by reference.

(6)  Filed as the same numbered Exhibit to the Registrant's Report on Form 8-K
     dated October 16, 1996 and incorporated herein by reference.

(7)  Filed as the same numbered exhibit to the Registrant's Report on Form 8-K
     dated June 3, 1997 and incorporated herein by reference.

(8)  Filed as the same numbered exhibit to the Registrant's Report on Form 8-K
     dated December 1, 1997 and incorporated herein by reference.

(9)  Filed as the same numbered exhibit to the Registrant's Report on Form 10-K
     dated December 31, 1997 and incorporated herein by reference.


<PAGE>