March 30, 1999


Securities and Exchange Commission
Washington, D.C.  20549


Gentlemen:

Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,  we are
transmitting herewith the attached Form 10-K for TIG Holdings, Inc.

Should you have any questions regarding this submission, please do not hesitate
to contact me at (972)831-5013.


/s/Patricia S. Pickard
Senior Vice President and Controller,
TIG Insurance Company 
(Principal Accounting Officer)

<PAGE>

--------------------------------------------------------------------------------
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

                 Annual Report Pursuant to Section 13 or 15 (d)
                     of the Securities Exchange Act of 1934

--------------------------------------------------------------------------------
For the Fiscal Year Ended                             Commission File Number
   December 31, 1998                                          1-11856

                               TIG HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)

      Delaware                                            94-3172455
(State of Incorporation)                       (IRS Employer Identification No.)

            65 East 55th Street, 28th Floor, New York, New York 10022
               (Address of principal executive offices) (zip code)

                             Telephone: 212-446-2700

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

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

  Common Stock, $0.01 Par Value           Registered -- New York Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act: None

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

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  twelve  (12)  months  and (2) has been  subject  to such  filing
requirements for the past 90 days. Yes X No

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

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant as of March 8, 1999, was $821,735,162.

The number of shares  outstanding  of the  issuer's  common stock as of March 8,
1999:

Common  Stock,  $0.01  Par  Value;  51,319,226  shares  outstanding,   excluding
16,258,097 Treasury Shares.

Documents Incorporated by Reference:

Portions  of  the  definitive   proxy  statement  for  the  Special  Meeting  of
Stockholders  held on March, 8, 1999, are hereby  incorporated by reference into
Parts II and III.

                          Exhibit Index is on page ___.

<PAGE>

                                      INDEX
--------------------------------------------------------------------------------

PART I

Item 1.      Description of Business.........................................1
     1.1     General.........................................................1
     1.2     Reinsurance.....................................................2
     1.3     Commercial Specialty............................................5
     1.4     Custom Markets..................................................8
     1.5     Other Lines.....................................................10
     1.6     Reserves........................................................11
     1.7     Regulation......................................................17

Item 2.      Business Properties.............................................19

Item 3.      Legal Proceedings...............................................20

Item 4.      Submission of Matters to a Vote of Security Holders.............21

PART II

Item 5.      Market for Registrant's Common Equity and Related
             Shareholder Matters.............................................22

Item 6.      Selected Financial Data.........................................23

Item 7.      Management's Discussion and Analysis of Financial Condition
             and Results of  Operations......................................24

     7.1     Consolidated Results............................................24
     7.2     Reinsurance.....................................................28
     7.3     Commercial Specialty............................................30
     7.4     Custom Markets..................................................33
     7.5     Other Lines.....................................................35
     7.6     Exposure Management.............................................37
     7.7     Investments.....................................................41
     7.8     Liquidity and Capital Resources.................................44
     7.9     Financial Condition.............................................46
     7.10    Year 2000.......................................................48
     7.11    Forward-Looking Statements......................................50
     7.12    Glossary........................................................51

Item 7A.     Disclosure Concerning Market Risk...............................55

Item 8.      Financial Statements and Supplementary Data.....................56

Item 9.      Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosures............................99

PART III

Item 10.     Directors and Executive Officers of the Registrant.............100

Item 11.     Executive Compensation.........................................110

Item 12.     Security Ownership of Certain Beneficial 
             Owners and Management..........................................110

Item 13.     Certain Relationships and Related Transactions.................110

PART IV

Item 14.     Exhibits, Financial Statement Schedules and 
             Reports on Form 8-K............................................111


<PAGE>

                                     PART I

--------------------------------------------------------------------------------
ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------------------------------------------------------
1.1 GENERAL
--------------------------------------------------------------------------------

TIG Holdings,  Inc. ("IG Holdings") is a holding company  organized in 1993 as a
Delaware corporation.  Prior to April 27, 1993, TIG Holdings was wholly-owned by
Transamerica Corporation ("Transamerica").  On April 27, 1993, an initial public
offering of TIG Holdings'  common stock closed,  reducing to 27%  Transamerica's
ownership interest. In December 1993,  Transamerica sold this remaining interest
through a secondary  public offering.  TIG Holdings is primarily  engaged in the
business of property/casualty  insurance and reinsurance through its 14 domestic
insurance  subsidiaries  (collectively  "TIG" or "the Company"),  one or more of
which  is  licensed  to  write  substantially  all  lines  of  property/casualty
insurance in all states of the United States.  Reinsurance  products are offered
through  TIG  Reinsurance  Company  ("TIG  Re")  which  is  based  in  Stamford,
Connecticut.  Primary  property/casualty  insurance products are offered through
TIG Insurance  Company ("TIG  Insurance")  and the remaining  general  insurance
subsidiaries.  Primary  products are marketed  through two  operating  segments,
Commercial Specialty and Custom Markets, which are based in Irving, Texas.

As of  December  31,  1998,  TIG  had  approximately  1,100  salaried  employees
providing sales, underwriting,  claims and service support in 43 active offices.
Of direct premium  written by TIG in 1998, 21% was written in California,  9% in
Florida, 7% in Michigan, 6% in New York, and 5% in Hawaii. No other geographical
area, including foreign operations, accounted for more than 5% of direct premium
written.  Premium produced through Aon Corporation and its subsidiaries ("Aon"),
an  unaffiliated  company that owns among other  businesses  numerous  insurance
agencies and brokers, accounted for 34%, 32% and 23% of consolidated net premium
written  in  1998,  1997  and  1996,  respectively.   Premium  produced  by  Aon
significantly  increased in 1997 due to the  acquisition by Aon early in 1997 of
another of TIG's significant producers.

The following table sets forth  consolidated net premium written,  classified by
statutory line of business:

<TABLE>
                                             Years Ended December 31,
                                     ------------------------------------------
 (In millions)                               1998          1997          1996
-------------------------------------------------------------------------------
 <S>                                         <C>           <C>           <C> 
 Reinsurance operations
    net premium written                     $418          $515          $548
-------------------------------------------------------------------------------
 Workers' compensation                       359           295           260
 Automobile liability                        213           236           244
 General liability                           132           135           110
 Automobile physical damage                   86           118           133
 Commercial multiple peril                    45            45            59
 Lloyd's Syndicates                           79            29             -
 Homeowners                                   11            33            80
 Other                                        75            30            95
-------------------------------------------------------------------------------
 Primary operations net premium written    1,000           921           981
-------------------------------------------------------------------------------
 Total net premium written                $1,418        $1,436        $1,529
-------------------------------------------------------------------------------
</TABLE>

Financial  information about TIG's operating  segments is set forth in Note P of
the Consolidated Financial Statements at Item 8 of this Form 10-K. A description
of TIG's three operating segments, Reinsurance,  Commercial Specialty and Custom
Markets,  follows at Items 1.2,  1.3, and 1.4,  respectively.  Lines of business
that have been de-emphasized are discussed at Item 1.5. Statements  contained in
the Description of Business and elsewhere in this document that are not based on
historical   information  are  forward-looking   statements  and  are  based  on
management's  projections,  estimates and assumptions.  Management would like to
caution  readers  regarding  its  forward-looking  statements  (see  Item 7.11 -
Forward-Looking  Statements).  Key industry terms that appear in the Description
of Business  and  elsewhere in this  document are defined at Item 7.12.  Certain
reclassifications  of prior  years'  amounts  have been made to conform with the
1998 presentation.


                                       1
<PAGE>
                                     PART I

--------------------------------------------------------------------------------
1.2 REINSURANCE
--------------------------------------------------------------------------------

Products.  Reinsurance is a form of insurance  whereby an insurance company (the
"reinsurer")   agrees  to  indemnify  another  insurance  company  (the  "ceding
company") for all or a portion of the insurance risks underwritten by the ceding
company  under an  insurance  policy or  policies.  There are two basic types of
reinsurance agreements:  treaty contracts and facultative certificates. A treaty
is an  agreement  under  which the ceding  company is  required  to cede and the
reinsurer  is required to assume a specified  portion or category of risks under
all  qualifying  policies  issued by the ceding  company  during the term of the
treaty contract.  Facultative reinsurance arrangements are separately negotiated
for  each  insurance  policy  to  be  reinsured  and  result  in  a  facultative
certificate under which the ceding company cedes, and the reinsurer assumes, all
or part of the risk under a specific insurance policy.

Reinsurance  can be written on either a pro-rata or excess of loss basis.  Under
pro-rata reinsurance,  the reinsurer receives a predetermined  percentage of the
insurance  premium  charged by the ceding  company  and  indemnifies  the ceding
company  against a  predetermined  percentage of the losses and loss  adjustment
expenses ("LAE") incurred by the ceding company under the covered primary policy
or policies.  Under excess of loss reinsurance,  the reinsurer,  in return for a
negotiated  premium,  indemnifies  the ceding company against all or a specified
portion  of  losses  and LAE on  underlying  insurance  policies  in excess of a
specified dollar amount, known as the ceding company's  retention,  subject to a
negotiated policy limit.  Excess of loss reinsurance is often written in layers,
with one or a group of reinsurers assuming the risk for each layer. The layer or
layers just above the ceding  company's  retention are termed "working  layers".
Excess of loss also includes  contracts which are a proportional share of excess
of loss policies written over the policyholders primary coverage.  The following
table shows TIG Re's net premium written by statutory line of business:

<TABLE>
                                                    Years Ended December 31,
                                              ---------------------------------
 (In millions)                                  1998          1997         1996
 ------------------------------------------------------------------------------
 <S>                                            <C>           <C>          <C>
 General liability                              $94           $77          $88
 Property                                        91           118           95
 Automobile liability                            67           107           80
 Errors and omissions                            41            46           88
 Workers' compensation                           38            49           33
 Umbrella                                        31            31           32
 Directors and officers                          22            25           26
 Automobile physical damage                      22            23           21
 Medical malpractice                              7            34           85
 Accident and health                              5             5            -
-------------------------------------------------------------------------------
 Total net premium written                     $418          $515         $548
-------------------------------------------------------------------------------
 Percentage of consolidated
    net premium written                         29%           36%          36%
-------------------------------------------------------------------------------
</TABLE>

Approximately 46%, 42% and 52% of TIG Re's net premium written in 1998, 1997 and
1996,  respectively,  was written on an excess of loss basis.  TIG Re's  primary
strategy for excess of loss treaties is to take large  participations in working
layers of a limited number of programs. By assuming a significant  participation
in each  treaty,  TIG Re  exercises  significant  control  over  the  terms  and
structure  of each  treaty.  Management  believes  that its  emphasis on writing
excess of loss treaties in lines of business for which it has specific expertise
improves its underwriting  results by allowing it to price  reinsurance based on
its own underwriting  rather than on the premium charged by the primary insurer.
TIG Re  generally  seeks  to  write  treaties  with  working  or low  layers  of
attachment,  where losses are more quantifiable and which typically carry higher
premium.

                                       2
<PAGE>
                                     PART I

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

Approximately 54%, 58% and 48% of TIG Re's net premium written in 1998, 1997 and
1996,  respectively,  was written on a pro-rata basis. TIG Re's philosophy is to
provide pro-rata coverages when the ceding company's  underwriting  capabilities
are  considered  superior  and where the  relationship  with the ceding  company
provides  an  opportunity  for  long-term  profitability.  Pro-rata  coverage is
preferred  in certain  segments of the  reinsurance  market where low limits are
sold by the ceding company.  Non-standard auto is the prime example of this type
of business.  Certain other highly volatile lines such as directors and officers
liability  also merit a pro-rata  position  as the  losses  are  infrequent  but
potentially  large. The reinsurer would thus want to capture a pro-rata share of
the premium to cover this volatile exposure.

The decrease in automobile  liability  net premium  written in 1998 is primarily
due to the  non-renewal  of one large  account  within  the  Traditional  Treaty
business unit (see Item 7.2 - Reinsurance).  The decrease in medical malpractice
and errors and omissions net premium  written in 1997 is due to the  termination
or  reduced  participation  in  several  significant  treaties (see  Item 7.2 - 
Reinsurance).

Distribution  System.  TIG  Re's  predominant  source  of  business  is  through
reinsurance intermediaries.  TIG Re writes through approximately 86 brokers, the
largest of which  accounted for  approximately  32%, 31% and 26% of TIG Re's net
premium written in 1998, 1997 and 1996,  respectively.  The five largest brokers
accounted for 81%, 65% and 71% of TIG Re's net premium  written  during the same
periods. There was no change in the top three brokers in 1998 from 1997 or 1996.
In early 1997, Aon Corporation acquired TIG Re's largest broker. Aon Corporation
and its  subsidiaries  accounted  for 32%,  31% and 19% of TIG Re's net  premium
written in 1998,  1997 and 1996,  respectively.  There are no  commitments  that
require  subsidiaries  of Aon Corporation to continue to place business with TIG
Re.

TIG Re has  approximately  775 insurance  company  "clients".  TIG Re's top five
insurance company clients  represented 33% of TIG Re's 1998 net premium written,
exclusive of business assumed from TIG Insurance. Approximately $48 million, $58
million and $50 million of TIG Re's net premium  written in 1998, 1997 and 1996,
respectively, was assumed from the Commercial Specialty operating segment of TIG
Insurance.  Of premium assumed from TIG Insurance,  $43 million, $49 million and
$18 million was "reverse  flow" business in 1998,  1997 and 1996,  respectively.
Reverse flow is an alternative  distribution mechanism whereby TIG Re works with
a reinsurance  intermediary to identify a primary insurer to the transaction who
will issue the primary policy and then cede a significant portion of the risk to
TIG Re. During the second  quarter of 1998, TIG Re announced that the management
and  reporting  of  reverse  flow  business  would  be  transferred  at  natural
expiration to the Commercial Specialty operating segment of TIG Insurance.

TIG Re maintains a London  office,  which  operates as a branch and  underwrites
stipulated  classes  of  general  insurance  business  in the U.K.  Net  premium
produced by the London  office was $73  million,  $64 million and $29 million in
1998, 1997 and 1996,  respectively.  Approximately 76% of the 1998 London office
net premium written pertained to international risks.

During 1996, TIG Re established a fully integrated Lloyd's vehicle with a wholly
owned  managing  agent that  manages,  and a wholly  owned  corporate  name that
provides sole support for syndicate 1218. The formation of syndicate 1218 allows
TIG Re to write insurance and reinsurance worldwide.  The syndicate produced net
written  premium of $23  million  in 1998 and $13  million in 1997 and has stamp
capacity  of  (pounds)  25  million  (approximately  $40  million)  for the 1999
account. The syndicate allows TIG Re expanded access to international non-marine
casualty and property business.

                                       3
<PAGE>
                                    PART I

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

In late 1996,  TIG Re  established  a new business unit composed of eight branch
offices  dedicated  to the  marketing  and  underwriting  of direct  facultative
reinsurance  on an automatic  and  individual  risk basis.  This  initiative  is
designed  to  diversify  TIG Re's  premium  base by  allowing it access to a new
market  segment  that  will  broaden  its  product  base  and  provide  for  new
opportunities.  The facultative unit produced net premium written of $37 million
in 1998  and $23  million  in 1997.  During  the  first  quarter  of  1999,  the
Facultative business unit was sold to Gerling Global Reinsurance  Corporation of
America.

During 1996, TIG Re was approved as a licensed reinsurer in Canada. In addition,
during 1997,  TIG Re established a Miami branch as the center for expansion into
the Latin America market place. Satellite offices will be opened in target areas
depending on the political  environment,  the insurance and reinsurance  market,
and licensing requirements.  Currently,  TIG Re has opened a satellite office in
Santiago,  Chile.  The Latin  America unit  produced  net premium  written of $5
million in 1998.

Competition.  Competition  in the  highly  competitive  reinsurance  market  has
intensified  during  the past  several  years as a result  of an  oversupply  of
capital in both the  reinsurance  and  primary  insurance  markets.  Reinsurance
prices and  conditions  are not  normally  subject to the same state  regulation
applicable to the primary  insurance market because  reinsurers  contract solely
with  other  insurance  companies.  Reinsurers  compete  based on many  factors,
including the financial  strength of the reinsurer,  the A.M. Best Co.  ("Best")
rating of the  reinsurer,  premium  charged,  other terms and  conditions of the
reinsurance offered,  services offered,  timeliness of claims payments,  ongoing
business relationships, reputation and experience. Based on net premium written,
TIG Re is the eleventh largest property/casualty  reinsurer in the United States
as of September 30, 1998,  according to the Reinsurance  Association of America.
TIG Re has a stand-alone  rating of "A" (Excellent) by Best and a financial size
category X which corresponds to policyholder surplus levels from $500 million to
$750 million.  The ratings assigned by Best are based upon factors of concern to
policyholders,  agents and intermediaries.  The rating is under review (see Item
7.9 - Financial Condition).

TIG  Re  competes  with  independent  reinsurance  companies,   subsidiaries  or
affiliates of established domestic or worldwide insurance companies, reinsurance
departments of certain primary insurance companies, and underwriting syndicates.
TIG Re,  as a broker  market  reinsurer,  competes  with the four  major  direct
marketers of  reinsurance.  TIG Re also competes with a number of reinsurers who
write  reinsurance  through  brokers,   although  in  most  instances,   TIG  Re
participates on treaties with one or more of these companies as a co-reinsurer.


                                       4
<PAGE>
                                     PART I

--------------------------------------------------------------------------------
1.3 COMMERCIAL SPECIALTY
--------------------------------------------------------------------------------

Products.  Commercial  insurance  policies are generally  issued to business and
governmental entities, organizations, associations and individual professionals.
Commercial   coverages  provide  protection  against  property  loss  and  legal
liability for injuries to other persons or damage to their property arising from
the policyholder's  business operations.  Workers' compensation products provide
benefits  to  employees  as  mandated  by  state  laws  for   employment-related
accidents,  injuries or illness.  The  principal  benefits  provided by workers'
compensation  policies  are  medical  and  indemnity.   Medical  benefits  cover
physician, hospitalization and rehabilitation expenses incurred as a result of a
work related injury while  indemnity  benefits  compensate the employee for lost
wages.  The table  below  shows  Commercial  Specialty  net  premium  written by
statutory line of business:

<TABLE>
                                                      Years Ended December 31,
                                                   ----------------------------
 (In millions)                                       1998       1997      1996
-------------------------------------------------------------------------------
 <S>                                                 <C>        <C>       <C> 
 Workers' compensation                               $358       $305      $203
 Other liability                                      148        127       108
 Lloyd's syndicates                                    79         29        -
 Automobile liability                                  39         40        29
 Commercial multiple peril                             38         35        24
 Other accident and health                             21         26        25
 Medical malpractice                                   15          6         1
 Automobile physical damage                            14         14        20
 Products liability                                    12         14         9
 Ocean marine                                          10          9         6
 Inland marine                                         10         10         6
 Other                                                  3        (2)         9
-------------------------------------------------------------------------------
 Total net premium written                           $747       $592      $440
-------------------------------------------------------------------------------
 Percentage of consolidated net premium written        53%        41%       29%
-------------------------------------------------------------------------------
</TABLE>

Commercial  Specialty  offers  products that are  distinctive  due to the unique
nature of risks covered or due to the discrete  composition  of insured  groups.
Significant  business units include Sports and Leisure,  Workers'  Compensation,
Lloyd's  Syndicates,   Primary  Casualty,   Excess  Casualty  and  Special  Risk
Operations   ("SRO").   The  Sports  and  Leisure  unit  offers   coverages  for
professional  and  amateur  sports  events  and  represents  26%  of  Commercial
Specialty 1998 net premium written. The unit offers spectator  liability,  legal
liability to participants and participant accident coverages, including property
and liability  packages for a variety of activities such as motorsports,  fairs,
festivals, ice skating rinks, stadiums,  arenas, gaming facilities,  ski resorts
and  bowling  facilities.  In  addition,  the book  includes  retail  operations
associated  with  sports and leisure  activities,  such as  motorcycle  and boat
dealerships  and marinas.  In 1998,  the typical  casualty  retention on any one
policy or event was $2 million.  Effective January 1, 1999,  casualty retentions
were reduced to $1 million.



                                       5
<PAGE>
                                     PART I

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

The Workers' Compensation business unit produced approximately 43% of Commercial
Specialty  net  premium  written  in  1998.   Among  the  products  offered  are
non-participating  plans, sliding scale and group participating plans,  deferral
plans and small deductible  plans. TIG primarily  targets workers'  compensation
premium growth in states where  management  believes that reasonable  reform has
occurred and a favorable long-term operating environment exists. During 1998 and
1997,  this unit  built upon its  template  underwritten  workers'  compensation
business  by focusing on  reducing  the  overall  cost of workers'  compensation
injuries. This was accomplished through a series of occupational care management
initiatives including:  formation of an occupational medical management and case
management  company;  entering into a long-term  strategic  relationship  with a
general  agent that will also  provide  loss  management  services to TIG;  and,
establishment  of 24 hour  toll free  injury  reporting  and early  intervention
services.  Management  believes  that  these  initiatives,  combined  with TIG's
contracted network of Preferred  Provider  Organizations and medical bill review
platform,  have positioned TIG as a leader in managed care workers' compensation
services.  Approximately 33%, 33% and 65% of workers'  compensation business was
underwritten using the template approach in 1998, 1997 and 1996, respectively.

Net premium  written by state for the  Workers'  Compensation  business  unit of
Commercial Specialty (excluding incidental workers' compensation premium written
by other units) is shown in the table below:

<TABLE>
                                                Years Ended December 31,
                                    -------------------------------------------
 (In millions)                            1998          1997          1996
 ------------------------------------------------------------------------------
 <S>                                      <C>           <C>           <C>    
 Florida                                  $40           $24            $2
 Illinois                                  38            36            65
 California                                32            30            21
 Texas                                     17            12             3
 Wisconsin                                 16            15            13
 Georgia                                   14            14             2
 Massachusetts                             14            10             -
 New York                                  12            12             3
 Pennsylvania                              12            14             1
 Arizona                                   11             7             1
 All Other                                115           113            88
 -------------------------------------------------------------------------------
 Total net premium written               $321          $287          $199
 -------------------------------------------------------------------------------
</TABLE>

The Primary  Casualty unit focuses on commercial auto,  professional  liability,
construction  and marine programs.  These programs  generally offer a customized
package of  coverages  designed for a specific  "niche"  market and are produced
through a limited number of program  administrators  and general agents ("GAs").
The Excess  Casualty unit  principally  offers lead umbrella and excess umbrella
policies. Lead umbrella policies provide liability protection for manufacturing,
financial  and  service  businesses  above the limits of the  primary  coverage.
Excess umbrella  policies provide similar coverage above the lead excess limits.
The SRO unit  focuses  on  excess  property,  healthcare  liability  and  excess
casualty  coverages.  The standard  retention on a primary casualty policy is $1
million. For excess casualty policies,  retentions vary from $1 million up to $5
million in limited cases.

Distribution System. Commercial Specialty and Workers' Compensation programs are
generally marketed through selected program  administrators and GAs which have a
demonstrated knowledge of the particular specialty class, the coverages offered,
the  competition,  and  the  pricing.   Management's  objective  is  to  develop
profitable strategic long-term  relationships with these producers by developing
tailored  programs for these key  producers  and  providing  exemplary  service.
Management  believes  that  these  strategic  relationships  will  enable TIG to
maintain an optimal cost structure  while  developing  specialized  underwriting
expertise.  TIG sometimes has exclusive  contracts with GAs.  Sports and Leisure
business is produced  under an exclusive  contract  with K&K  Insurance  Agency,
Inc., a wholly-owned subsidiary of Aon Corporation. TIG's strategic relationship
with Aon  Corporation,  which  includes  lines of business other than Sports and
Leisure,  accounted for  approximately 46% of Commercial  Specialty  operations'
1998 net premium written, compared to 51% in 1997 and 54% in 1996.


                                       6
<PAGE>
                                     PART I

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

The majority of excess  casualty  policies are marketed  through 9 hub locations
throughout  the  United  States  that  work with  large  national  and  regional
independent  agents and  brokers.  In addition,  a regional  office in Hartford,
Connecticut  assists with sales,  underwriting and administrative  functions for
specialty program business.

In December  1996,  TIG  Insurance  purchased  a majority  interest in a Lloyd's
managing  agency,  which manages three  syndicates.  In addition,  TIG Insurance
established  a  corporate  name with an  approximate  60%  share of the  managed
syndicates' 1999 stamp capacity,  which has increased from an approximate  share
of stamp capacity of 40% in 1998 and 18% in 1997.  Stamp capacity in 1999 totals
(pounds) 206 million  (approximately $340 million).  The syndicates  principally
write marine, property, and aviation business.

Competition.  The commercial  insurance market remains highly competitive across
all property/casualty  lines of business.  TIG competes with other specialty and
multi-line  property/casualty  companies  and  specialty  workers'  compensation
carriers,  some of which are  substantially  larger and have  greater  financial
resources than TIG. With respect to Commercial Specialty lines of business,  TIG
distinguishes  itself  versus its  competitors  through the  application  of its
expertise  in finding  value added  solutions  to products  and services for its
select distribution  (producer) partners. With respect to workers' compensation,
management's  strategy has been to distinguish  TIG from its competitors in four
areas:  dedicated  workers'  compensation   underwriting,   state  and  substate
segmentation,  dedicated and local market-focused claims expertise and intensive
loss  management.  Recent  legislative  reforms in most states have restored the
price/cost balance in the workers' compensation system. These reforms, affecting
benefits,   fraud  and  managed  care  policies,  have  significantly  increased
competition in the workers' compensation market.


                                       7
<PAGE>
                                     PART I

--------------------------------------------------------------------------------
1.4  CUSTOM MARKETS
--------------------------------------------------------------------------------

Products.  Custom Markets products provide property and liability  coverages for
individuals and small businesses.  Automobile  policies cover liability to third
parties for bodily injury and property damage,  and cover physical damage to the
insured's own vehicle  resulting from collision or various other causes of loss.
Homeowners/commercial    property    policies    protect    against    loss   of
dwellings/buildings  and contents  arising from a variety of perils,  as well as
liability arising from ownership or occupancy.

In the third  quarter of 1998, a contract  dispute arose between the Company and
MBNA America Bank, N.A., the producer of an automobile  insurance program within
the Custom Markets operating  segment ("the MBNA program").  The dispute related
to  certain  underwriting  and  pricing  changes  to be made  by TIG to  produce
contractually  guaranteed  rates of return.  In September 1998, the MBNA program
was terminated by MBNA ("MBNA").  MBNA elected under the termination  provisions
of the agency  contract  to  require  TIG to  provide a renewal  market  through
September 1, 1999. Results for this unit will continue to be reported within the
Custom  Markets  operating  segment.  The  financial  results of this action are
further discussed at Item 7 - Management's  Discussion and Analysis of Financial
Condition and Results of  Operations  and Note C to the  Consolidated  Financial
Statements at Item 8.

The following  table shows Custom Markets net premium  written by statutory line
of business:

                                                     Years Ended December 31,
                                                -------------------------------
 (In millions)                                       1998       1997      1996
-------------------------------------------------------------------------------
 Automobile liability                                $173       $116      $44
 Automobile physical damage                            74         42       29
 Homeowners                                            11          9       10
 All other                                             22         18       16
-------------------------------------------------------------------------------
 Total net premium written                           $280       $185      $99
-------------------------------------------------------------------------------
 Percentage of consolidated net premium written        20%        13%       6%
-------------------------------------------------------------------------------

Approximately 49% of 1998 automobile policies written by Custom Markets were for
non-standard  risks.  Non-standard  auto  policies are purchased by insureds who
have  difficulty  obtaining  insurance  through  normal  distribution  channels,
because  of  characteristics  that  place  them in a higher  risk  profile.  For
preferred and standard  automobile  policies,  substantially  all have liability
coverage and over 77% have comprehensive and collision  coverage.  Preferred and
standard  automobile  policies  are  template  underwritten  for  insureds  with
"acceptable"   driving  records  and  insureds  who  have  standard  performance
automobiles.   With  the  exception  of  Hawaii  business,  all  personal  lines
automobile policies are template underwritten.

Standard and upscale homeowners' lines are primarily written in Hawaii. Standard
homeowners'  policies provide maximum property limits of $350,000 with a minimum
required limit of $50,000.  A liability  limit of $100,000 is typical but may be
increased in $100,000  increments up to $500,000.  The Excel upscale homeowner's
policy  provides  property  limits of up to $10 million with the same  liability
limits applicable as standard homeowners' policies.

The small business owner's product consists  primarily of small package policies
and business owners policies  ("BOP"),  both having premiums of $50,000 or less.
Both  products  are  written  for  low to  medium  hazard  classes.  The  BOP is
completely automated and is template  underwritten.  Template BOP eligibility is
restricted  to  property  location  limits of $10  million  for  lessors'  risk,
$5million  for retail  risks,  $3 million  for  office  risks,  and a $3 million
property  aggregate  limit for all other eligible  classes.  Commercial  package
policies  have a property  location  limit of $25 million,  which  includes auto
physical damage.  Maximum net retention on any one policy is $1 million.  During
1998, the BOP book of business was placed in runoff due to the unit's failure to
meet profitability standards.



                                       8
<PAGE>
                                     PART I

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

Distribution  System.  The distribution of Custom Markets net premium written by
state is displayed in the following table:

                                                   Years Ended December 31,
                                           ------------------------------------
  (In millions)                                1998         1997        1996
 ------------------------------------------------------------------------------
  California                                   $86          $66          $31
  Hawaii                                        56           58           55
  Florida                                       29            9            -
  Pennsylvania                                  21            5            -
  Texas                                         13           19            7
  Minnesota                                     11            5            -
  Other                                         64           23            6
 ------------------------------------------------------------------------------
  Total net premium written                   $280         $185          $99
 ------------------------------------------------------------------------------

Custom  Markets'  principal   distribution  strategy  is  to  develop  strategic
relationships  with general agents ("GAs") and other key distribution  partners.
GAs are the  predominate  production  source for California and Hawaii.  Premium
production in other states is generated  through a number of sources,  including
GAs,  alternative  distribution  channels  and a limited  number of  independent
retail agents.  Of the 59 production  sources in 1998, 12 generated  premiums in
excess of $5 million.  As additional  states are implemented in the non-standard
and  alternative  distribution  channels,  the  geographic  distribution  of net
premium written is expected to shift.

Competition.  TIG's Custom Markets  operations  compete  against direct writers,
national  (upscale)  companies  and  regional  companies,   some  of  which  are
substantially  larger and have greater financial resources than TIG. Competition
is  principally  based on price  (including  differentiation  on policy  limits,
coverages offered,  and deductibles),  agent  commissions,  customer service and
claims handling reputation.

                                       9
<PAGE>
                                    PART I

--------------------------------------------------------------------------------
1.5  OTHER LINES
--------------------------------------------------------------------------------

Products.  Other Lines principally  includes the Independent  Agents unit, which
was sold in December 1997, commercial products which have been placed in run-off
due to failure to meet profitability standards and inter-divisional  reinsurance
activity.  Most Other  Lines net premium  written  represents  contractually  or
regulatory  required renewals.  The following table shows net premium written by
statutory line of business:

                                                 Years Ended December 31,
                                              ---------------------------------
 (In millions)                                  1998         1997         1996
-------------------------------------------------------------------------------
 Automobile liability                           $ -          $48          $154
 Automobile physical damage                      (1)          54            86
 Commercial multiple peril                       (2)          (1)           17
 Fire and allied lines                            -            3             5
 Homeowner                                        -           70            79
 Other                                          (24)         (30)          101
-------------------------------------------------------------------------------
 Total net premium written                     ($27)         $144         $442
-------------------------------------------------------------------------------
 Percentage of consolidated 
    net premium written                         (2%)          10%          29%
-------------------------------------------------------------------------------

On December 31, 1997,  TIG completed the sale of the Retail  Independent  Agents
business (See Item 7.1 - Consolidated Results). As a result, net premium written
has declined to $0 in 1998 from $155 million in 1997 and $262 million in 1996.

In February 1996, TIG announced the reorganization of its commercial  operations
and plans to exit certain  lines of business  that failed to meet  profitability
standards.  Net premium  written  from lines of business  placed in run-off as a
result  of this  restructure  has  significantly  decreased  over time from $140
million in 1996 to $4 million in 1997 and ($1) in 1998.


                                       10
<PAGE>
                                     PART I

--------------------------------------------------------------------------------
1.6  RESERVES
--------------------------------------------------------------------------------

General.  The  reserve  liabilities  for   property/casualty   losses  and  loss
adjustment  expenses represent  estimates of the ultimate net cost of all unpaid
losses and LAE  incurred  through  December 31 of each year.  The  reserves  are
determined  using  estimates  of  losses  for  individual  claims  ("case  basis
reserves") and statistical projections of reserves for incurred but not reported
("IBNR")  claims,  allocated LAE and unallocated LAE. Both TIG Insurance and TIG
Re  maintain   actuarial   departments   that  evaluate  the  adequacy  of  each
subsidiary's loss and LAE reserves. Oversight is provided by TIG Holdings' chief
actuary. As described below,  reserve procedures differ somewhat between primary
insurance and reinsurance.

TIG Insurance. The claims department of TIG Insurance oversees the establishment
of case basis reserves for all primary lines  policies and is managed  centrally
from TIG's offices in Irving,  Texas.  As of December 31, 1998,  TIG's dedicated
claims  staff  totaled  approximately  160, of which 75 are located in 7 offices
across  the United  States  and the  remainder  are  located  in Irving,  Texas.
Approximately   two-thirds   of  the  primary  lines  claims  are  processed  by
approximately  80 third party  administrators  located across the United States.
The adequacy of case basis  reserves is evaluated by TIG  Insurance's  actuarial
department, which concentrates on those lines of business (third party liability
coverages and workers'  compensation) for which claims settle over a long period
of time. The actuarial  evaluation uses accepted actuarial reserving  techniques
that combine  quantitative  and  qualitative  information.  The loss  projection
procedures used in this analysis implicitly  incorporate the effect of inflation
on loss payments expected to be made in the future. Accident year methodology is
used to calculate  IBNR reserves  that provide for both case reserve  deficiency
and late reported claims emergence.

The IBNR reserve is based on the historical  emergence of reported  claims.  The
calculations  make  appropriate  adjustments  for  changes in rate  adequacy  in
instances  where  premiums are used in the reserve  calculations.  The effect of
inflation  is   implicitly,   and   sometimes   explicitly,   reflected  in  the
calculations.

LAE is comprised of allocated and unallocated  expenses.  Allocated LAE reserves
are based on long-term historical relationships of paid loss adjustment expenses
to ultimate  incurred  losses.  By using  incurred  losses as a base,  inflation
assumptions  applicable  to loss  reserves  apply  equally to allocated  expense
reserves. Unallocated LAE reserves are based on historical relationships of paid
unallocated  expenses to paid  losses for some lines of  business  and by direct
projection of claim closures and average unallocated LAE costs for others.

TIG Re. Case basis reserves for TIG Re are  established  based on bordereaux and
individual  case  estimates   received  from  ceding  companies  and  additional
estimates provided by TIG Re's claims department, which consists of 15 employees
located in Stamford, Connecticut. Loss reserves are based upon underwriting year
projections  that  provide  for both  case  reserve  deficiency  as well as late
reported claim emergence.  Analyses are conducted either by class of business or
by individual  program/account.  Supplemental ceding company information is used
to increase the  reliability of the  estimates.  The actuarial  evaluation  uses
accepted   actuarial   reserving   techniques  that  combine   quantitative  and
qualitative  information.  The  calculations  make  appropriate  adjustments for
changes in rate  adequacy in  instances  where  premiums are used in the reserve
calculations.  The effect of inflation is implicitly,  and sometimes explicitly,
reflected in the calculations.  Losses and allocated LAE are typically projected
together.

Unallocated  LAE  reserves  are  based  upon  historical  relationships  of paid
unallocated loss adjustment  expenses to paid losses. The inflation  assumptions
built into the loss  reserves  are  presumed  to apply to the  unallocated  loss
adjustment expense reserves as well.


                                       11
<PAGE>
                                     PART I

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

Inherent  Uncertainties.  The process of estimating reserves involves the active
participation   of  an   experienced   actuarial   staff  with  input  from  the
underwriting, claims, reinsurance, financial and legal departments.  Management,
using  the  advice  of loss  reserve  specialists,  makes a  judgment  as to the
appropriate amount to record in the financial  statements.  Because reserves are
estimates of ultimate losses and LAE,  management monitors reserve adequacy over
time,  evaluating new information as it becomes known and adjusting reserves, as
necessary. Such adjustments are reflected in current operations.

The inherent  uncertainty in estimating  reserves is increased when  significant
changes  occur.  Examples of such  changes  include:  (i) changes in  production
sources for existing lines of business;  (ii) writings of significant  blocks of
new business; (iii) changes in economic conditions; and (iv) changes in state or
federal laws and regulations,  particularly  insurance reform measures.  TIG has
experienced  significant  changes in each of these areas during the past several
years.  The  inherent  uncertainties  in  estimating  reserves  are greater with
respect to  reinsurance  than for primary  insurance due to the diversity of the
development  patterns  among  different  types  of  reinsurance  contracts,  the
necessary reliance on ceding companies for information regarding reported claims
and differing reserving practices among ceding companies.

Management considers many factors when setting reserves,  including: (i) current
legal interpretations of coverage and liability;  (ii) economic conditions;  and
(iii) internal  methodologies  that analyze TIG's experience with similar cases,
information  from ceding  companies  and  historical  trends,  such as reserving
patterns, loss payments,  pending levels of unpaid claims and product mix. Based
on these  considerations,  management  believes that adequate provision has been
made for TIG's loss and LAE  reserves.  Actual  losses and LAE paid may deviate,
perhaps substantially, from such reserves.


                                       12
<PAGE>
                                     PART I

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

Analysis of Loss and Loss Adjustment  Expense  Development.  The following table
shows the cumulative  amount paid against the previously  recorded  liability at
the end of each succeeding year and the cumulative  development of the estimated
liability for the ten years ended December 31, 1998:

<TABLE>
---------------------------------------------------------------------------------------------------------------------
  (In millions)                1988    1989    1990   1991    1992    1993    1994    1995    1996    1997    1998
---------------------------------------------------------------------------------------------------------------------
  <S>                         <C>     <C>    <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
  Net estimated ultimate
       liability for losses   $1,501  $1,668 $1,916  $2,085  $2,437  $2,738  $2,721  $2,752  $2,634  $2,531  $2,312
  and LAE
---------------------------------------------------------------------------------------------------------------------
  Cumulative paid as of:
       One year later           580    646     719     794     787     796     778     882     837     999
       Two years later          925   1,035  1,210   1,286   1,316   1,304   1,368   1,405   1,481
       Three years later      1,160   1,338  1,508   1,641   1,650   1,681   1,678   1,808
       Four years later       1,328   1,493  1,727   1,848   1,895   1,857   1,920
       Five years later       1,405   1,627  1,856   2,010   1,981   2,001
       Six years later        1,484   1,698  1,952   2,044   2,080
       Seven years later      1,521   1,748  1,948   2,117
       Eight years later      1,553   1,721  1,998
       Nine years later       1,532   1,755
       Ten years later        1,578

  Net liability re-estimated
  as of:
       One year later         1,525   1,712  1,946   2,343   2,582   2,663   2,697   2,768   2,709   2,556
       Two years later        1,538   1,752  2,129   2,459   2,598   2,638   2,700   2,824   2,669
       Three years later      1,549   1,850  2,209   2,512   2,559   2,608   2,700   2,770
       Four years later       1,637   1,871  2,263   2,465   2,525   2,602   2,642
       Five years later       1,646   1,929  2,228   2,436   2,505   2,575
       Six years later        1,674   1,915  2,212   2,425   2,504
       Seven years later      1,660   1,904  2,209   2,432
       Eight years later      1,660   1,907  2,220
       Nine years later       1,657   1,920
       Ten years later        1,672
---------------------------------------------------------------------------------------------------------------------
  Net cumulative redundancy
       (deficiency)           ($171)  ($252) ($304)  ($347)   ($67)   $163     $79    ($18)   ($35)   ($25)
---------------------------------------------------------------------------------------------------------------------
  Gross liability - end of                                   $3,405  $3,845  $3,873  $3,886  $3,760  $3,935  $4,100
  year
  Reinsurance recoverable                                            (1,107) (1,152) (1,134) (1,126) (1,404) (1,788)
                                                              (968)
  Net liability - end of year                                $2,437  $2,738  $2,721  $2,752  $2,634  $2,531  $2,312

  Gross re-estimated                                         $3,331  $3,421  $3,586  $3,890  $3,772  $3,917
  liability
  Re-estimated recoverable                                                     (944) (1,120) (1,103) (1,361)
                                                               (827)   (846)
  Net re-estimated liability                                 $2,504  $2,575  $2,642  $2,770  $2,669  $2,556

  Gross cumulative redundancy
       (deficiency)                                             $74    $424    $287     ($4)   ($12)     $18
---------------------------------------------------------------------------------------------------------------------
</TABLE>

Conditions  and trends that have affected the  development of these reserves and
payments in the past will not necessarily recur in the future.  Accordingly,  it
would not be  appropriate  to use this  cumulative  history  to  project  future
performance. The re-estimated liability portion of the preceding table shows the
year by year  development  of the previously  estimated  liability at the end of
each succeeding year.


                                       13
<PAGE>
                                     PART I
--------------------------------------------------------------------------------

The variability in reserve estimates was affected in 1988 and subsequent periods
as a result of TIG's  acquisition  of  Fairmont  Insurance  Company,  a workers'
compensation  insurer  in 1987.  The  acquisition  resulted  in  TIG's  existing
workers' compensation operation being merged into the Fairmont operation and new
operating  procedures and automation  support being developed to integrate these
two  dissimilar  operations.  In 1994, TIG  centralized  its  reinsurance  ceded
program and increased minimum retentions that changed the pattern of net reserve
development for some business units.  For the Sports and Leisure  business unit,
excess of loss covers will attach at higher amounts, lengthening the development
tail.

The   re-estimated   liabilities   are  increased  or  decreased  as  additional
information  becomes  known  about the  frequency  and  severity  of claims  for
individual years. The increases or decreases are reflected in the current year's
operating earnings. Each column shows the reserve held at the indicated calendar
year end and cumulative  data on  re-estimated  liabilities for the year and all
prior years making up that calendar year end liability.  The effect on income of
the change during the current period (i.e., the difference between the estimated
one year  later) is shown in the  following  table  for each of the  three  most
recent years as "Increase  (decrease) in estimated  ultimate  losses and LAE for
prior years' claims".

Rollforward  of Net  Liability  for  Loss  and  Loss  Adjustment  Expenses.  The
following  table  provides a  reconciliation  of beginning and ending  liability
balances, net of reinsurance recoverable, for the years indicated:

                                                  Years Ended December 31,
                                            -----------------------------------
(In millions)                                 1998          1997          1996
-------------------------------------------------------------------------------
 Net liability for losses and LAE
   at beginning of year                     $2,531        $2,634        $2,752
-------------------------------------------------------------------------------
 Provision for losses and LAE
   for current year claims                   1,016         1,076         1,122
 Increase (decrease) in estimated
   ultimate losses and LAE for
     prior years' claims                        25            75            16
-------------------------------------------------------------------------------
 Total losses and LAE incurred               1,041         1,151         1,138
-------------------------------------------------------------------------------
 Loss and LAE payments for claims
    attributable to:
        Current year                           313           417           374
        Prior years                            999           837           882
-------------------------------------------------------------------------------
           Total losses and LAE payments     1,312         1,254         1,256
       Retroactive reinsurance assumed          52             -             -
-------------------------------------------------------------------------------
 Balance December 31, net of 
    reinsurance recoverable                  2,312         2,531         2,634
 Reinsurance recoverable, excluding 
    amounts recoverable on
      retroactive reinsurance 
        ceded of $210 million in 1998        1,788         1,404         1,126
-------------------------------------------------------------------------------
 Gross loss and LAE reserves                $4,100        $3,935        $3,760
-------------------------------------------------------------------------------

In 1998, TIG recognized  unfavorable prior year loss and LAE reserve development
of $25 million, of which unfavorable development of $24 million was attributable
to TIG Insurance and $1 million of unfavorable  development was  attributable to
TIG Re. The unfavorable  development in TIG Insurance is primarily  attributable
to  $11  million  of  development  in  unallocated  LAE  costs  related  to  the
termination of programs in Other Lines, unallocated LAE reserve strengthening of
$7 million,  and $6 million of unfavorable  loss and allocated LAE  development.
Retroactive  reinsurance  assumed represents reserves assumed from third parties
for  insurable  events that have  already  occurred in exchange  for cash and/or
investment  consideration.  These  reserves  relate  to new  programs  in  TIG's
workers'  compensation lines and Lloyd's  Syndicates.  No additional premiums or
return premiums have been accrued as a result of prior years affects.


                                       14
<PAGE>
                                     PART I

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

In 1997, TIG recognized  unfavorable prior year loss and LAE reserve development
of  $75  million,   of  which  unfavorable   development  of  $106  million  was
attributable to TIG Re reserve  strengthening  and favorable  development of $31
million was attributable to TIG Insurance.  The reserve  strengthening by TIG Re
in  December  1997 was  based on  actuarial  evaluations  of loss  data  through
September  30,  1997,  which  incorporated  enhancements  to TIG Re's  actuarial
process  and  previously  unavailable  data.  This  intensive  actuarial  review
indicated that reserving  issues were  concentrated in a limited number of large
proportional  programs,  the majority of which were  restructured or non-renewed
effective  January 1, 1997. TIG Re also increased 1997 accident year reserves by
$39 million as a result of the September  30, 1997  actuarial  study.  The total
$145 million  reserve  increase  recorded by TIG Re in December  1997 was net of
corporate aggregate stop loss reinsurance coverage,  including $40 million under
a 1995 intercompany agreement with TIG Insurance.  The favorable prior year loss
reserve  development  of $31 million for primary  lines written by TIG Insurance
was  principally  attributable  to continuing  favorable  workers'  compensation
development.  The majority of this favorable  development was reallocated to the
1997  accident  year for  workers'  compensation  and  various  other  lines for
statutory reporting purposes.  The assumption by TIG Insurance in Other Lines of
$40  million  in  losses  under  the  aforementioned   intercompany  reinsurance
agreement  was  principally  offset  by a $27  million  cession  to a  corporate
aggregate stop loss reinsurance treaty.

The unfavorable loss and LAE reserve  development for prior years in 1996 of $16
million is due primarily to adverse  development  in Other Lines.  In connection
with the February 1996 restructuring,  TIG completed a re-evaluation of loss and
LAE reserves  related to run-off lines using  additional loss  development  data
received  during the first  quarter of 1996.  This data  confirmed  adverse loss
development  trends  observed in the second half of 1995 and was a consideration
in the decision to exit  certain  lines of  business,  as discussed at Note B - 
Summary of Significant  Accounting  Policies.  As a result of this re-evaluation
and  management's  belief that the  restructuring  decision will make the claims
settlement process less consistent and more volatile, TIG increased loss and LAE
reserves  by $31  million  in the  first  quarter  of 1996  for  run-off  lines,
principally   for  long  haul   trucking  and  large   accounts.   This  reserve
strengthening was partially offset by continuing  favorable  development of 1993
and prior years' workers' compensation reserves.

Environmental Reserves. TIG's reserves include an estimate of ultimate liability
for  asbestos-related  matters,  environmental  pollution,  toxic tort and other
non-sudden and accidental  claims for which ultimate  values cannot be estimated
using traditional  reserving  techniques.  Establishing reserves with respect to
environmental  liabilities is one of the most difficult aspects of the reserving
process. The legal definition and assignment of responsibility for environmental
damage vary widely by state and are still evolving.  Defense costs on individual
claims are often much greater than the claims costs  themselves.  Assignment  of
damages to the time  covered by a  particular  policy can be difficult to assess
and may ultimately be assigned  judicially.  Claims frequently emerge long after
the policy has expired.

TIG Insurance's  environmental  claims activity is predominately  from hazardous
waste and  pollution-related  claims arising from commercial  insurance polices.
TIG has not written  primary  coverage for the major oil or chemical  companies.
Most of TIG Insurance's  pollution claims are from small, regional operations or
local  businesses  involved  with  disposing  wastes  at dump  sites  or  having
pollution  on their  own  property  due to  hazardous  material  use or  leaking
underground   storage  tanks.   These  insureds   include  small   manufacturing
operations, tool makers, automobile dealerships,  contractors, gasoline stations
and real estate developers.

TIG Re was formed in  December  1987 and has no pre-1985  liabilities.  Prior to
1985, policy forms did not typically limit coverage for latent  liabilities such
as pollution, asbestos and other long-tail environmental liabilities. After that
date,  policy forms began to limit exposures to such  liabilities.  As a result,
management believes that TIG Re has minimal exposure to such liabilities.


                                       15
<PAGE>
                                     PART I

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

The  following  table  presents  selected data on  environmental  losses and LAE
incurred and reserves outstanding:
<TABLE>

                                                  Years Ended December 31,  
(In millions, except                           --------------------------------
 number of outstanding claims)                    1998       1997       1996
-------------------------------------------------------------------------------
<S>                                               <C>        <C>        <C>    
Net liability for environmental  losses
  and LAE at the beginning of the year             $34        $39        $48 
Incurred losses and LAE                              3          6          2
Loss and LAE payments                               (8)       (11)       (11)
-------------------------------------------------------------------------------
Net liability for environmental losses 
  and LAE at end of year                            29         34         39
Reinsurance recoverable                             21         18         24
-------------------------------------------------------------------------------
Gross environmental reserves                       $50        $52        $63
-------------------------------------------------------------------------------
Number of outstanding claims(1)                    531        531        545
-------------------------------------------------------------------------------
</TABLE>
1)  Indicates  the  number  of  impacted  insured  accounts  and not  individual
    claimants.

Gross  and net  environmental  loss  and LAE  reserves  declined  by 4% and 15%,
respectively, in 1998 as compared to 1997.

An  affiliate  of  Transamerica  has agreed to pay 75% of up to $119  million of
reserve  development and newly incurred claims up to a maximum  reimbursement of
$89  million on  policies  written  prior to January  1, 1993,  with  respect to
certain  environmental claims involving paid losses and certain LAE in excess of
TIG's  environmental  loss and LAE reserves at December 31, 1992.  Environmental
reserves at  December  31, 1998 are  predominantly  related to policies  written
prior to 1993. At December 31, 1998, the Transamerica  affiliate has incurred no
liability under this agreement.

Management regularly  reassesses the adequacy of environmental  reserves as part
of the reserve review process.  Based upon information  available on the date of
this  report and the  aforementioned  agreement  with  Transamerica,  management
believes  that stated  environmental  reserves  are  adequate  and the  ultimate
resolution  of  environmental  claims  incurred as of December 31, 1998 will not
materially  impact  TIG's   consolidated   financial   position  or  results  of
operations.


                                       16
<PAGE>
                                     PART I

--------------------------------------------------------------------------------
1.7 REGULATION
--------------------------------------------------------------------------------

General. TIG's  property/casualty  insurance companies are subject to regulation
by  governmental  agencies  in the states in which they  conduct  business.  The
nature and extent of this regulation varies among  jurisdictions,  but typically
involves the following:  (1) prior approval of the  acquisition of control of an
insurance  company  or  any  company  controlling  an  insurance  company,   (2)
regulation of certain transactions entered into by an insurance company with any
of its  affiliates,  (3) approval of premium  rates for many lines of insurance,
(4) standards of solvency and minimum  amounts of capital and surplus which must
be  maintained,  (5)  limitations  on types  and  amounts  of  investments,  (6)
restrictions on the size of risks which may be insured by a single company,  (7)
licensing  of insurers and their  agents,  (8)  deposits of  securities  for the
benefit of policyholders,  (9) approval of policy forms,  methods of accounting,
establishing  reserves  for losses and LAE,  and (10) filing of annual and other
reports with  respect to financial  condition  and other  matters.  In addition,
state  regulatory  examiners  perform  periodic  financial  and  market  conduct
examinations   of  insurance   companies,   primarily  for  the   protection  of
policyholders.

As  a  result  of  the  regulatory   supervision  of  TIG's  insurance   company
subsidiaries  under the California  Insurance  Holding Company System Regulatory
Act, and other similar acts in states where TIG has domestic  insurance  company
subsidiaries (the "Holding Company Act"), the insurance company subsidiaries are
required to report  information  about TIG  Holdings.  The  Holding  Company Act
contains certain reporting  requirements including those requiring the insurance
companies to file information  relating to TIG's capital  structure,  ownership,
financial   condition   and  general   business   operations  of  its  insurance
subsidiaries.  The Holding  Company Act contains  reporting  and prior  approval
requirements with respect to certain transactions among affiliates.

Restrictions   on  Dividends  from  Insurance   Subsidiaries.   TIG's  insurance
subsidiaries are subject to various state statutory and regulatory restrictions,
applicable  generally to each insurance company in its state of domicile,  which
limit the amount of dividends or  distributions  by an insurance  company to its
shareholders. The restrictions are generally based on certain levels of surplus,
investment income and operating income, as determined under statutory accounting
practices.  If insurance  regulators determine that payment of a dividend or any
other  payment  to an  affiliate  (such  as a  payment  under  a tax  allocation
agreement)  would,  because of the financial  condition of the paying  insurance
company or otherwise,  be detrimental to such insurance company's  policyholders
or creditors,  the  regulators may block payment of such dividends or such other
payment to the  affiliates  that would  otherwise  be  permitted  without  prior
approval.

Subject to the requirements  discussed below, the California Insurance Code (the
"California Code") permits the payment of dividends in any year which,  together
with other dividends or  distributions  made within the preceding 12 months,  do
not exceed  the  greater  of (1) 10% of  statutory  surplus as of the end of the
preceding  year or (2) the  statutory net income for the  preceding  year,  with
larger dividends ("extraordinary  dividends") payable only upon prior regulatory
approval.  All  extraordinary  dividends  must be reported  to the  commissioner
thirty days prior to payment.  In  addition,  California  law  requires  that an
insurer report all dividends  within five days of  declaration  and at least ten
days prior to payment.  The interim period allows the  California  Department of
Insurance (the  "Department")  time to take regulatory  action if it so chooses,
with respect to the dividend declared.


                                       17
<PAGE>
                                     PART I

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

The California Code provides that stock  property/casualty  insurers may declare
dividends only from earned  surplus.  "Earned  surplus" is defined as unassigned
funds,  as  required  to be  reported on the  insurer's  annual  statement.  The
California  Code  prohibits  dividends  from  being  paid out of earned  surplus
derived from  unrealized net  appreciation of assets or derived from an exchange
of assets, unless either such earned surplus has been realized or the assets are
currently  realized in cash. An exception to the  prohibition  allows payment of
dividends  if,  following  the  dividend,   the  insurer's  surplus  as  regards
policyholders  is (1) reasonable in relation to its outstanding  liabilities and
(2) adequate to the insurer's  financial  needs, as prescribed in the California
Code, and the insurance commissioner's prior approval has been obtained.

In June 1993,  the California  Department of Insurance  permitted TIG Insurance,
TIG's lead insurer,  to record a  quasi-reorganization  of its statutory capital
accounts.  The effect of the  quasi-reorganization  was to  increase  the earned
surplus of TIG  Insurance  to zero from a negative  $285 million and to decrease
contributed surplus by the same amount. This transaction significantly increased
TIG Insurance's  future dividend  paying  capability as insurance  companies may
only pay dividends from earned surplus.

Certain other  intercompany  transactions  between an insurance  company and its
affiliates,  including  sales,  loans,  or investments  that in any twelve month
period  aggregate  at least 3% of its  admitted  assets or 25% of its  statutory
capital  and  surplus,  are also  subject  to prior  notice  to state  insurance
regulatory  authorities.  Service  agreements  and  reinsurance  agreements  are
included within such requirements.

Codification. 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 TIG uses to prepare its  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 TIG,
the  insurance  regulatory  bodies of states in which TIG writes  business  must
adopt  Codification  as the  prescribed  basis of accounting  on which  domestic
insurers must report their statutory-basis  results to the Insurance Department.
At this time it is anticipated that the State of California,  which is the state
of domicile for TIG Insurance  Company,  the primary insurer for TIG, will adopt
Codification.  Management has not yet determined the impact of  Codification  on
TIG's statutory-basis financial statements.

Risk-Based  Capital Rules. The National  Association of Insurance  Commissioners
("NAIC")  adopted  a  formula  to  calculate   risk-based  capital  ("RBC")  for
property/casualty   insurance  companies.  The  primary  objective  of  the  RBC
requirements  is to raise the safety net that  statutory  surplus  provides  for
policyholder  obligations.  The RBC rules do not have a material impact on TIG's
business or on its financial  condition.  The statutory "risk adjusted"  capital
for each of TIG's  insurance  subsidiaries  as of  December  31,  1998  exceeded
minimum requirements.

Guaranty   Associations   and   Involuntary   Markets.   Most   states   require
property/casualty   insurers   to  become   members  of   insolvency   funds  or
associations, which generally protect policyholders against the insolvency of an
insurer writing insurance in the state.  Members of the fund or association must
contribute  to the payment of certain  claims made against  insolvent  insurers.
Maximum contributions  required by law in any one year vary between 1% and 2% of
annual  premium  written by a member in that state.  Assessments  from  guaranty
funds  were $1  million  for 1998,  1997 and 1996.  Most of these  payments  are
recoverable through future policy surcharges and premium tax reductions.

Provision  of  coverage  for  less  desirable  risks  through  participation  in
mandatory  programs is also  required by most  states.  TIG's  participation  in
assigned  risk pools and similar  plans  mandated now or in the future,  creates
downward  pressure on earnings.  Involuntary  costs were  insignificant in 1998.
Involuntary costs increased  underwriting losses by $2 million and $9 million in
1997 and 1996, respectively.

                                       18
<PAGE>

                                     PART I
--------------------------------------------------------------------------------
ITEM 2.  BUSINESS PROPERTIES
--------------------------------------------------------------------------------

TIG's  business   properties   include  55  lease  locations,   which  represent
approximately  671,000  square feet. TIG occupies  approximately  275,000 square
feet of space in  Irving,  Texas for which the lease  expires in 2009 and may be
extended by TIG for two renewal  periods of five years each.  All of TIG's other
existing leases expire by the end of 2007.


                                       19
<PAGE>
                                    PART I

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

TIG's insurance  subsidiaries are routinely  engaged in litigation in the normal
course of their  business.  As a liability  insurer,  the Company  defends third
party claims brought  against its insureds.  As an insurer,  the Company defends
against coverage claims. In the opinion of TIG, based upon information available
at the  date of this  report,  no  individual  item of  litigation,  or group of
similar  items  of  litigation  (including  asbestos-related  and  environmental
pollution  matters  and the matters  referred  to below),  taken net of reserves
established  therefor and giving effect to insurance and reinsurance,  is likely
to result in judgments  for amounts  material to TIG's  consolidated  results of
operations or financial condition.

On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict
of $28 million for punitive  damages  against TIG Insurance  Company  ("TIC") in
Talbot Partners v. Cates  Construction,  Inc. and TIC (the "Talbot  Case").  The
award  arose out of TIC's  handling  of a surety  bond  claim on a  construction
project.  On March 28, 1997,  the  California  Court of Appeal reduced the trial
court's  punitive damage award to $15 million.  On July 23, 1997, the California
Supreme Court granted TIC's  petition to review the Court of Appeal's  decision.
Management  believes  that the ultimate  liability  arising from the Talbot Case
will not materially impact consolidated operating results.

On February 12, 1998, a purported class action complaint,  naming TIG and two of
its executive  officers as defendants,  was filed in the United States  District
Court for the Southern  District of New York on behalf of persons who  purchased
TIG common  stock  during the period from  October 21, 1997 to January 30, 1998,
when TIG announced its fourth quarter 1997 results.  The complaint  alleges that
TIG violated the federal securities laws by misrepresenting  the adequacy of its
underwriting and monitoring  standards and loss reserves,  and that three of its
officers and directors sold shares at prices that were artificially  inflated as
a result of the alleged misrepresentations. Plaintiffs seek unspecified monetary
damages,  including  punitive damages.  Management  believes that the lawsuit is
without merit and it will be vigorously defended.

On July 17, 1998, TIG Premier Insurance Company ("TIG Premier"), a subsidiary of
TIC,  filed a complaint and jury demand against MBNA America Bank,  N.A.  d.b.a.
MBNA Insurance  Services  ("MBNA") in federal court in the Northern  District of
Texas that was based on an agency  agreement  between  TIG Premier and MBNA (the
"Agency  Agreement")  pursuant to which TIG Premier offered an insurance program
that was marketed by MBNA to its customers. In its complaint, TIG Premier sought
a declaratory  relief  judgment  declaring  that TIG could reduce the commission
payable to MBNA and  lengthen  the 5-year term of the Agency  Agreement in order
to, at a minimum,  reduce TIG  Premier's  underwriting  losses and  improve  the
possibility  of TIG  Premier's  achieving  the agreed upon 15%  minimum  rate of
return.  On August 19, 1998,  TIG filed an amended  complaint  seeking  monetary
damages for MBA's  repudiation  and breach of the Agency  Agreement,  including,
without  limitation,  the underwriting  losses that TIG Premier incurred and the
minimum 15% rate of return over the entire five-year  initial term of the Agency
Agreement,  in an amount to be determined at trial. In its amended answer, dated
August 31, 1998, MBNA instituted a counterclaim against TIG Premier based on TIG
Premier's  alleged  breach  and  repudiation  of the Agency  Agreement,  seeking
damages in an amount not less than $100  million.  Management  believes that the
liability  arising  from this  case,  if any,  will not  materially  impact  the
Company's consolidated results of operations or financial condition.

On December 9, 1998, a purported  shareholder  class action was commenced in the
Delaware  Court of  Chancery  against the  Company,  its  directors  and Fairfax
Financial   Holdings,   Ltd.  The  complaint  alleges,   inter  alia,  that  the
consideration  to be  paid  pursuant  to the  Merger  Agreement  is  unfair  and
inadequate and that the terms of the Merger  Agreement were arrived at without a
full and thorough investigation by the directors. The complaint seeks injunctive
relief,  including  a  judgment  enjoining  the  transaction,  and the  award of
unspecified  compensatory  damages.  The  Company  believes  that the  action is
without merit and intends to defend the action vigorously.


                                       20
<PAGE>
                                     PART I

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

TIG's Federal income tax returns are routinely  audited by the Internal  Revenue
Service  (IRS)  and  provisions   are  made  in  the  financial   statements  in
anticipation of the results of these audits.  Following a routine federal income
tax audit in September 1997, the IRS issued a Statutory Notice of Deficiency for
the tax year 1993 and a Revenue Agents Report for 1994 asserting a tax liability
of  approximately  $170  million  excluding  interest.  The IRS's  asserted  tax
adjustments  principally relate to the acquisition made by TIG under the Section
338(h)(10)  election of April 27, 1993 in conjunction  with TIG's Initial Public
Offering and primarily generate temporary differences by creating income in 1993
with  corresponding  deductions  in 1993 and  future  tax  years.  TIG  strongly
disagrees  with the IRS'  position  and, on December 11,  1997,  TIG filed a Tax
Court  Petition  challenging  it. In  connection  with the  Statutory  Notice of
Deficiency  issued  by the IRS for the 1993  tax  year,  TIG made a $40  million
advance tax payment in December 1997,  which has been reflected as a current tax
asset.  While  the  timing  of cash tax  payments  may be  impacted,  management
believes that revisions to TIG's recorded tax  liability,  if any,  arising from
the IRS'  audit  will not  materially  impact  consolidated  net  income  or the
financial condition of the Company.


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

There  were  no  matters  submitted  to a  vote  of  security  holders,  through
solicitation of proxies or otherwise, during the fourth quarter of 1998.



                                       21
<PAGE>

                                    PART II

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

The principal  market in which TIG  Holdings'  common stock is traded is the New
York Stock Exchange. There were 492 shareholders of record on December 31, 1998,
representing  approximately  20,000 beneficial  owners.  Information  concerning
restrictions  on the ability of TIG Holdings'  subsidiaries to transfer funds to
TIG Holdings in the form of cash  dividends is set forth in Item 7.8 - Liquidity
and Capital  Resources - Liquidity  Restrictions  and Note J to the Consolidated
Financial Statements at Item 8.

The closing market price and cash  dividends  paid by calendar  quarter for 1998
and 1997 are as follows:
<TABLE>

                          1998                            1997
           --------------------------------   --------------------------------
             Market Price        Dividend        Market Price        Dividend
           ------------------                 -------------------
Quarter     High       Low       per Share      High      Low        per Share
-------------------------------------------------------------------------------
<S>        <C>       <C>           <C>         <C>      <C>           <C>  
  1        $33.938   $24.625       $0.15       $38.000  $31.750       $0.15
  2        $27.250   $23.000       $0.15       $31.938  $26.625       $0.15
  3        $24.250   $12.875       $0.15       $35.000  $30.125       $0.15
  4        $15.813   $11.813       $0.15       $36.375  $31.063       $0.15
-------------------------------------------------------------------------------
Year end closing     $15.563                            $33.188
  price
-------------------------------------------------------------------------------
</TABLE>

The closing  price of TIG  Holdings'  common stock on March 8, 1999 was $16.063.
For the period from  January 1, 1999  through  March 8, 1999,  the high  closing
market price was $16.063 and the low closing market price was $15.500.

Merger with Fairfax Financial Holdings Limited. On December 3, 1998, the Company
announced  the proposed  merger of FFHL,  Inc.,  a  wholly-owned  subsidiary  of
Fairfax Financial Holdings Limited (Fairfax), with TIG Holdings, Inc. Fairfax is
a financial services holding company that, through its subsidiaries,  is engaged
in property, casualty and life insurance and reinsurance,  investment management
and  insurance  claim  management.  The  merger  will be the  culmination  of an
evaluation  of  strategic  alternatives  initiated  by the  Company's  Board  of
Directors  in an effort to  determine  the course of action that was in the best
interest of the Company and its  stockholders.  Under the  Agreement and Plan of
Merger (the  "Agreement"),  Fairfax  has agreed to convert  each share of common
stock of the Company issued and outstanding  immediately  prior to the effective
time (as  defined in the  Agreement)  into the right to receive  $16.50 in cash,
without  interest.  A copy of the Agreement was included in the definative Proxy
Statement  for the  March 8,  1999  special  meeting  of  stockholders.  At that
meeting, the stockholders approved the merger agreement.  The obligations of the
Company and Fairfax to effect the merger are subject to, among other things, the
condition that necessary insurance regulatory approvals are obtained.


                                       22
<PAGE>
                                     PART II

--------------------------------------------------------------------------------
ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------

The  following  information  should  be  read  in  conjunction  with  Item  7 - 
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  and with the audited  Consolidated  Financial  Statements  and notes
thereto at Item 8 - Financial Statements and Supplementary Data.

<TABLE>

(In millions except per share data)                       1998        1997        1996         1995        1994
--------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>         <C>         <C>           <C>         <C>    
Consolidated Results:
Net premium earned                                      $1,447      $1,466      $1,539        $1,618      $1,549
Net investment income                                      235         290         290           268         249
Net investment and other gain (loss)                       (12)          1          (4)          (11)        (20)
                                                      --------------------------------------------------------------
   Total revenues                                        1,670       1,757       1,825         1,875       1,778
                                                      --------------------------------------------------------------
Insurance claims and operating expenses                  1,567       1,631       1,604         1,677       1,696
Corporate expenses                                          81          44          37            37          37
Interest expense                                            23          20           9             6           -
Restructuring charges                                        -           -         100             -           -
                                                      --------------------------------------------------------------
   Total expenses                                        1,671       1,695       1,750         1,720       1,733
                                                      --------------------------------------------------------------
Income (loss) before tax                                   ($1)        $62         $75          $155         $45
Net income                                                  $8         $52         $79          $118         $52
--------------------------------------------------------------------------------------------------------------------
GAAP Ratios:
Loss and LAE ratio                                        72.0        78.6        74.0          72.9        76.1
Underwriting expense ratio                                34.7        31.8        30.0          31.0        33.6
Policyholder dividend ratio                                1.6         0.9         0.2           0.9         1.2
                                                      --------------------------------------------------------------
Combined ratio                                           108.3       111.3       104.2         104.8       110.9
--------------------------------------------------------------------------------------------------------------------
Per Share Results:
Basic net income per common share                        $0.13       $0.97       $1.36         $1.91       $0.79
Basic weighted average common shares                      50.9        51.8        56.4          60.8        63.1
Diluted net income per common share                      $0.13       $0.94       $1.32         $1.90       $0.78
Diluted weighted average common shares                    51.2        53.5        58.3          61.4        63.2
--------------------------------------------------------------------------------------------------------------------
Financial Position:
Investments                                             $3,894      $4,192      $4,233        $4,550      $3,919
Total assets                                             7,215       6,867       6,476         6,683       6,116
Reserves for losses and LAE                              4,100       3,935       3,760         3,886       3,873
Notes payable                                              125         122         123           120           -
Mandatory redeemable preferred stock                        25          25          25            25          25
Mandatory redeemable capital securities                    125         125           -             -           -
Shareholders' equity                                     1,127       1,163       1,207         1,376       1,042
--------------------------------------------------------------------------------------------------------------------
Common Stock:
Market high                                            $33.938     $38.000     $34.000       $28.500     $23.250
Market low                                              11.813      26.625      26.250        18.625      17.250
Market close                                            15.563      33.188      33.875        28.500      18.750
Common shares outstanding net of treasury stock           51.0        51.0        53.9          59.6        62.0
Dividends declared per common share                      $0.60       $0.60       $0.20         $0.20       $0.20
Book value per common share                             $22.10      $22.82      $22.41        $23.09      $16.81
--------------------------------------------------------------------------------------------------------------------
Statutory Results:
Combined Surplus                                          $964      $1,013        $975          $952        $901
                                                      --------------------------------------------------------------
Net income                                                $131        $121        $184          $136         $13
                                                      --------------------------------------------------------------
Loss and LAE ratio                                        72.1        78.6        73.8          72.9        76.4
Underwriting expense ratio                                34.5        32.1        30.2          30.7        32.1
Policyholder dividends ratio                               1.0         0.8         1.0           1.7         1.9
                                                      --------------------------------------------------------------
Combined ratio                                           107.6       111.5       105.0         105.3       110.4
Net premium written to surplus ratio                      1.5X        1.4X        1.6X          1.7X        1.8X
--------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       23
<PAGE>
                                    PART II

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

The following discussion provides  management's  assessment of financial results
and  material  changes  in  financial  position  for TIG  Holdings,  Inc.  ("TIG
Holdings") and its subsidiaries  (collectively "TIG") and presents  management's
expectations for the near term. The analysis focuses on the performance of TIG's
three major operating  segments,  Reinsurance,  Commercial  Specialty and Custom
Markets,  and its investment  portfolio,  which are discussed at Items 7.2, 7.3,
7.4 and 7.7,  respectively.  Lines of  business  that  have  been  de-emphasized
("Other  Lines") are discussed at Item 7.5. For a better  understanding  of this
analysis,  reference  should  be  made  to  Item 8 -  Financial  Statements  and
Supplementary Data.

TIG Holdings would like to caution  readers  regarding  certain  forward-looking
statements  in the  Management's  Discussion  and Analysis and elsewhere in this
Form 10-K (see Item 7.11- Forward-Looking  Statements).  Key industry terms that
appear  in the  Management's  Discussion  and  Analysis  and  elsewhere  in this
document  are defined at Item 7.12.  Certain  reclassifications  of prior years'
amounts have been made to conform to the 1998 presentation.

Overview.  Net income  decreased  by $44  million or 85% in 1998 as  compared to
1997.  1998 results were impacted by a number of  adjustments  and expenses that
totaled $120 million  pre-tax or $78 million after tax.  These  adjustments  and
expenses were composed of the following:  a) $48 million of pre-tax  adjustments
and expenses related to a program within the Custom Markets  operating  segment,
which was placed in run-off in the third  quarter  of 1998.  This  included  the
recognition  of a premium  deficiency  of $33 million  (See Notes B and C to the
Consolidated Financial Statements) and underwriting losses of $15 million, which
reflected  revised  loss  incurred and  reinsurance  benefit  assumptions;  b) a
provision for reinsurance  recoverable of $30 million; c) an increase in premium
receivable  allowances  for TIG Re and Other Lines of $5 million and $3 million,
respectively;  and d) other pre-tax adjustments and expenses including severance
for former employees of $15 million,  Year 2000 expenditures of $8 million,  and
other  adjustments  of $11  million.  1997  results  include a $145 million ($94
million after-tax) strengthening of current and prior year loss and LAE reserves
by the Reinsurance  operating  segment (See Item 1.6 - Reserves).  Excluding the
1998  adjustments and expenses and the 1997  strengthening  of current and prior
year  loss and LAE  reserves,  income  declined  by  approximately  $60  million
after-tax or $88 million  pre-tax.  The adjusted  decline in 1998 pre-tax income
was  principally  attributable  to a  decline  in net  investment  income of $55
million,  a  $13  million  increase  in  selling  and  administrative   expenses
(excluding  items  included in the  adjustments  and expenses  described  above)
attributable to various system projects and other  initiatives,  a deterioration
in  investment  gains and losses of $13 million and an increase in  underwriting
losses (excluding items included in adjustments and expenses described above) of
$7 million.

Increased  utilization  of  aggregate  stop  loss and other  finite  reinsurance
coverages  provided an  additional  underwriting  benefit of  approximately  $21
million  in 1998 as  compared  to 1997.  The  increased  utilization  of  finite
reinsurance  coverages is partially in response to favorable  market  conditions
and partially to mitigate the inherent  financial  volatility of a changing book
of business.  In addition,  ceding  commission  income arising from the December
1997 sale of TIG's Independent Agents business benefited underwriting results by
$20 million in 1998. As described  below,  both the sale of  Independent  Agents
business and  increased  utilization  of finite  reinsurance  has had a negative
impact on investment income.


                                       24
<PAGE>
                                     PART II

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

As previously  mentioned,  net investment  income  decreased $55 million in 1998
compared to 1997.  Approximately  $10 million of the decrease is attributable to
net  assets  transferred  in  December  1997  in  connection  with  the  sale of
Independent  Agents  business  while  approximately  $29  million  results  from
increased funds held interest expense  resulting from additional  utilization of
finite reinsurance coverages. The remaining decrease in net investment income is
principally attributable to declining gross market investment yields in 1998 and
a  repositioning  of the  portfolio  in late 1998 in  anticipation  of strategic
alternatives being pursued.

Net  income  decreased  by $27  million or 34% in 1997 as  compared  to 1996 due
primarily to the $145 million  strengthening  of current and prior year loss and
LAE reserves by the Reinsurance operating segment as described above.  Excluding
the $100 million ($65 million after tax) restructuring  charge recorded in 1996,
net income  would have  decreased  by $92  million in 1997 as  compared to 1996.
Interest expense increased by $11 million in 1997 over 1996 from the issuance of
$125 million of mandatory  redeemable  capital  securities  in January 1997 (see
Note H to the Consolidated  Financial Statements at Item 8.). Corporate expenses
increased by $7 million due  primarily to expansion of corporate  actuarial  and
underwriting  staffs and system  initiatives,  including analysis of "Year 2000"
exposures (see Item 7.10 - Year 2000).

The following table shows the major components of net income:
<TABLE>

                                                   Years Ended December 31,
                                                -------------------------------
 (In millions)                                   1998        1997        1996
-------------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>   
 Gross premium written                          $2,141      $1,943      $1,924
-------------------------------------------------------------------------------
 Net premium written                            $1,418      $1,436      $1,529
-------------------------------------------------------------------------------

 Net premium earned                             $1,447      $1,466      $1,539
   Less:
     Losses and LAE incurred                     1,041       1,151       1,138
     Underwriting expenses and policyholder        526         480         466
        dividends
-------------------------------------------------------------------------------
     Underwriting loss                            (120)       (165)        (65)

 Net investment income                             235         290         290
 Net investment and other gain (loss)              (12)          1          (4)
 Interest expense                                  (23)        (20)         (9)
 Corporate expense                                 (81)        (44)        (37)
 Restructuring charges                               -           -        (100)
-------------------------------------------------------------------------------
 Income before tax benefit (expense)                (1)         62          75
 Income tax benefit (expense)                        9         (10)          4
-------------------------------------------------------------------------------

 Net income                                         $8         $52         $79
-------------------------------------------------------------------------------
</TABLE>

Consideration  of Strategic  Alternatives.  In October 1998,  the Company made a
public announcement that it was actively considering strategic alternatives with
its investment banker,  Goldman Sachs,  including,  among other alternatives,  a
sale of the Company.  As a result, in December 1998, the Company signed a merger
agreement with Fairfax Financial Holdings Limited ("Fairfax"),  in which Fairfax
will  acquire TIG in a cash merger  (see Note C to the  Consolidated  Financials
Statements at Item 8).

Closing of Offices and  Termination  of Employment of Certain  Officers.  During
1998,  the  Company  decided  to  downsize  executive  offices in New York City,
consolidating  corporate  functions with its corporate  headquarters  in Irving,
Texas.  In  addition,  the Company  decided to close its staff  counsel  offices
located  throughout the continental  United States and outsource  supervision of
claims litigation previously performed by these offices.


                                       25
<PAGE>
                                    PART II

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

As a result of the closing of the company's  executive offices in new York City,
the employment of certain  executive or senior  officers of TIG was  terminated.
These  executive  or  senior  officers  included  Peter M.  Acton,  Senior  Vice
President and General  Counsel,  and Louis J. Paglia,  Senior Vice President and
Treasurer.  In addition,  Edwin G. Pickett,  Executive  Vice President and Chief
Financial Officer of the Company,  resigned his position. For the purpose of the
severance  agreement  between  TIG and Mr.  Pickett,  the  circumstances  of his
resignation met the agreement's definition of involuntary  termination,  thereby
entitling Mr. Pickett to all benefits  provided by the severance  agreement.  In
addition,  Cynthia B. Koenig,  Controller of TIG Insurance also left the Company
effective January 1, 1999.

Sale of  Independent  Agents  Business Unit. On December 31, 1997, TIG completed
the sale of the Independent  Agents business unit to Nationwide Mutual Insurance
Company  ("Nationwide").  This  unit  produced  gross  premium  written  of $247
million, $286 million and $299 million in 1998, 1997 and 1996, respectively.  As
of December 31, 1997, all  Independent  Agents  business was 100% reinsured by a
subsidiary of Nationwide,  including outstanding loss and LAE reserves, unearned
premium  reserves  and  premium  receivables.   Under  the  purchase  agreement,
Nationwide  assumed the risk of loss and LAE reserve  development and receivable
collectibility.  To  allow  Nationwide's  subsidiary  time to  make  appropriate
regulatory  filings,  TIG agreed to write  Independent  Agents business and cede
such business 100% to the Nationwide subsidiary without penalty through December
31,  1999,  and  thereafter  if necessary  at an  increased  cost.  In addition,
approximately  300 employees of the Independent  Agents unit became employees of
Nationwide on December 31, 1997. As the sale was  principally  effected  through
reinsurance transactions,  TIG recognized no capital gain or loss (See Note C to
the Consolidated Financial Statements at Item 8).

Premium. The following table displays net premium written by operating segment:
<TABLE>

                                                     Years Ended December 31,
                                                 ------------------------------
 (In millions)                                     1998       1997       1996
-------------------------------------------------------------------------------
<S>                                                <C>        <C>        <C> 
 Reinsurance                                       $418       $515       $548
 Commercial Specialty                               747        592        440
 Custom Markets                                     280        185         99
-------------------------------------------------------------------------------
 Ongoing Lines                                    1,445      1,292      1,087
 Other Lines                                        (27)       144        442
-------------------------------------------------------------------------------
 Total                                           $1,418     $1,436     $1,529
-------------------------------------------------------------------------------
</TABLE>

Growth in on-going lines net premium  written was 12% in 1998 and 19% in 1997 as
compared to the  corresponding  prior year.  The increase in Ongoing Lines' 1998
and 1997 net  premium  written  is the result of TIG's  marketing  focus for all
operating  segments,  particularly  Commercial  Specialty and Custom Markets, to
develop  "program"  business.  Programs are typically  characterized as having a
controlled  production source,  homogenous risks and a market niche.  Management
believes that programs, focused on specific market segments, have lower and more
predictable  loss costs  relative to the total market,  and a more variable cost
structure,  which will ultimately provide higher operating margins. The declines
noted in Reinsurance operations are primarily attributable to competitive market
conditions and TIG's unwillingness to accept underpriced risks.

Highly  competitive  market conditions in both reinsurance and primary insurance
products continued in 1998.  Oversupply of capital in the insurance industry has
resulted  in  significant  downward  pricing  pressure,  making it  increasingly
difficult to write business that meets TIG's profitability  standards;  however,
TIG will  continue to invest in new business  initiatives  that meet its focused
"program"  criteria.  Continuing soft market conditions are expected to increase
the  time   required  for  new   business   initiatives   to  achieve   targeted
profitability.

TIG Re's chairman retired effective  February 2, 1998. Michael Wacek, a seasoned
insurance executive,  was appointed President and Chief Executive Officer of TIG
Re in February 1998. The retirement of the former  Chairman and the  appointment
of the new Chief  Executive  Officer  could impact,  positively  or  negatively,
existing   producer   relationships   and  the   availability  of  new  business
opportunities. 


                                       26
<PAGE>
                                    PART II

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

GAAP Combined Ratio. A key measure of an insurance company's  performance is its
combined ratio.  The following table shows the components of TIG's  consolidated
combined ratio for its active operating segments on a consolidated GAAP basis:
<TABLE>

                                                  GAAP Ratio
                                        --------------------------------
                                            1998       1997      1996
    --------------------------------------------------------------------
     <S>                                    <C>        <C>       <C> 
     Loss and LAE                           72.0       78.6      74.0
     Commission expense                     20.7       20.6      19.7
     Premium related expense                 2.6        3.0       3.3
     Operating expense                      11.4        8.2       7.0
    --------------------------------------------------------------------
     Total underwriting expense             34.7       31.8      30.0
     Policyholder dividends                  1.6        0.9       0.2
    --------------------------------------------------------------------
     Combined ratio                        108.3      111.3     104.2
    --------------------------------------------------------------------
</TABLE>

Reserve  strengthening for current and prior accident years recorded in 1997 for
Reinsurance and in 1996 for Other Lines (see Item 1.6 - Reserves) increased both
the loss and LAE ratio  and  combined  ratio by 9.9  percentage  points  and 2.0
percentage  points for 1997 and 1996,  respectively,  leading to the comparative
decline in 1998.  Favorable loss  experience in Commercial  Specialty and Custom
Markets partially offset the TIG Re reserve  strengthening in 1997. Increases in
the  commission  ratio for 1998 and 1997  reflect a shift in business mix toward
specialty  programs  produced by GAs. The 1998 and 1997 operating  expense ratio
increases are primarily due to start up costs  incurred for new programs in each
of the  operating  segments  (see  Items  7.2 -  Reinsurance,  7.3 -  Commercial
Specialty and 7.4 - Custom Markets).

Restructuring Charges. In February 1996, TIG announced the reorganization of its
commercial operations and plans to exit certain lines of business that failed to
meet profitability  standards. As a result of this reorganization,  TIG took the
following   actions:   1)  combined  its  Specialty   Commercial   and  Workers'
Compensation  divisions  to  form  a new  operating  segment  called  Commercial
Specialty,  2) consolidated  field offices,  3) identified lines of business for
non-renewal or cancellation for which 1995 net premium written was approximately
$190 million,  4) formed a run-off division (called "Other Lines") to administer
contractually  required  policy  renewals for run-off lines of business,  and 5)
outsourced  to  third  party  service  providers  or  otherwise  terminated  the
responsibilities  of  approximately  600 employees.  TIG recorded a $100 million
accrual in the first quarter of 1996 for estimated  restructuring  charges.  The
remaining  reserve  at  December  31,  1998,  is $3  million  (see Note B to the
Consolidated Financial Statements at Item 8 for further discussion).


                                       27
<PAGE>
                                     PART II

--------------------------------------------------------------------------------
7.2 REINSURANCE
--------------------------------------------------------------------------------

Premium.  TIG's  reinsurance  operations are conducted  through TIG Re, which is
based in Stamford,  Connecticut.  TIG Re's products and distribution  system are
described at Item 1.2 -  Reinsurance.  The table below shows premium  production
for TIG Re by business unit:
<TABLE>

                                              Years Ended December 31,
                                 ----------------------------------------------
 (In millions)                         1998             1997             1996
-------------------------------------------------------------------------------
 <S>                                   <C>              <C>              <C> 
 Specialty Casualty                    $192             $207             $340
 London Branch & Syndicate 1218          96               77               29
 Traditional Treaty                      73              106               63
 Reverse Flow                            68               79               66
 Facultative                             37               23                -
 Specialty Property                      21               48               50
 Finite                                  16               31               21
 Latin America                            5                -                -
 Other                                  (90)             (56)             (21)
-------------------------------------------------------------------------------
 Net premium written                   $418             $515             $548
 Gross premium written                 $545             $591             $576
-------------------------------------------------------------------------------
 Retention ratio                       76.7%            87.1%            95.1%
-------------------------------------------------------------------------------
</TABLE>

Change in gross premium written was (8%) in 1998 and 3% in 1997 in comparison to
the  corresponding  prior  year.  Competitive  market  conditions  continued  to
intensify  in 1997,  especially  in TIG Re"s  core  Specialty  Casualty  market.
Re-underwriting  initiatives  instituted  by TIG Re in  response  to soft market
conditions  and  re-evaluations  of current  treaty  profitability  resulted  in
non-renewal or reduced  participation in three  significant  Specialty  Casualty
programs.

Soft market conditions have continued to persist during 1998. The decline in the
Specialty  Property unit primarily  reflects $22 million of net premium  written
associated  with two  significant  programs that were not renewed as part of the
re-underwriting  initiative noted above. Premiums declined by $33 million within
the Traditional  Treaty business unit due to the non-renewal or the reduction in
participation of several large accounts.  During the second quarter of 1998, the
Company announced that the management and reporting of the Reverse Flow business
unit would be  transitioned  at natural  expiration to the Commercial  Specialty
operating segment of TIG Insurance.

New  business  comprised  $109  million,  $190  million and $135  million of net
premium  written  in 1998,  1997 and 1996,  respectively.  The  majority  of new
business is attributable to production in marketing segments  established during
the past  several  years  such as the London  Branch,  Lloyd's  Syndicate  1218,
Facultative and Latin America.  However,  management  believes that  competitive
market  conditions  will continue and that TIG Re's gross premium written may be
lower in 1999 than 1998.  During  the first  quarter  of 1999,  the  Facultative
business unit was sold to Gerling Global Reinsurance Corporation of America.

The 10.4 percentage point decrease in the retention ratio in 1998 as compared to
1997  and  the  8.0  percentage  point  decrease  in  1997  compared  to 1996 is
principally  attributable  to increased  premium ceded under aggregate stop loss
reinsurance  treaties.  Included in the 1998 results, is a change in the premium
written recognition for various aggregate stop loss contracts,  in response to a
request made by the  Connecticut  Insurance  Department  during their  triennial
examination.  The impact of this  adjustment  was an increase  to ceded  written
premiums of $27.2  million  with no impact on ceded earned  premiums.  Other net
premium written is reduced by aggregate stop loss  reinsurance  premium cessions
of TIG Re not applicable to a specific line of business (see Item 7.6 - Exposure
Management).


                                       28
<PAGE>
                                    PART II

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

Underwriting  Results.  The following  table  summarizes  TIG Re's  underwriting
results:
<TABLE>

                                                   Years Ended December 31,
                                        ---------------------------------------
 (In millions)                            1998          1997          1996
-------------------------------------------------------------------------------
 <S>                                      <C>           <C>           <C> 
 Net premium earned                       $491          $516          $534
 Less:
   Net loss and LAE incurred               331           506           386
   Commission expense                      134           134           136
   Premium related expense                   3             2             1
   Other underwriting expense               53            37            25
-------------------------------------------------------------------------------
 Underwriting loss                        ($30)        ($163)         ($14)
-------------------------------------------------------------------------------

 GAAP ratios:
-------------------------------------------------------------------------------
   Loss and LAE                           67.5          97.9          72.3
   Commission expense                     27.4          25.9          25.4
   Other underwriting expens              11.2           7.6           4.9
-------------------------------------------------------------------------------
   Combined ratio                        106.1         131.4         102.6
-------------------------------------------------------------------------------
</TABLE>

During 1998, TIG Re commuted  various assumed and ceded treaties,  including one
with TIG  Insurance,  the  effect of which was an  increase  to net loss and LAE
incurred of $5 million.  In  addition,  a  favorable  arbitration  award and the
benefit from an unplanned  novation  transaction  reduced the 1998 incurred loss
and LAE; the  combined  effect of theses two  transactions  was a benefit to net
loss and LAE incurred of $5 million.  The increase in other underwriting expense
is partially  attributable  to an increase in the  allowance  for  uncollectible
premiums of $5 million,  recorded during the third quarter of 1998. In addition,
start-up  and  expansion  costs of $4  million  related  to the  London  Branch,
Syndicate  1218  and the  Latin  American  initiatives  are  included  in  other
underwriting expenses.

TIG Re  strengthened  reserves  for  current  and prior  accident  years by $145
million in December 1997 based on actuarial evaluations as of September 30, 1997
(see Item 1.6 -  Reserves).  The  reserve  increase  was net of $40  million  of
reinsurance  benefit under the 1995  inter-company  reinsurance  treaty with TIG
Insurance.  Losses  ceded  by TIG Re  under  the  1995  reinsurance  treaty  are
reflected in the  operations of TIG  Insurance  through Other Lines loss and LAE
incurred.  The $12 million increase in 1997 other underwriting expense over 1996
is principally  attributable  to start-up costs  associated with the Facultative
business  unit which was formed in late 1996.  For 1997,  the  Facultative  unit
produced $13 million of earned premium; however, operating expenses increased by
$7 million and underwriting  loss increased by $5 million in 1997 as compared to
1996.

                                       29
<PAGE>
                                     PART II

--------------------------------------------------------------------------------
7.3 COMMERCIAL SPECIALTY
--------------------------------------------------------------------------------

Premium.  Commercial Specialty provides  specialized  insurance products through
six main  business  units:  Workers'  Compensation,  Sports &  Leisure,  Primary
Casualty, Lloyd's Syndicates,  Excess Casualty and Special Risk Operations. Most
Commercial Specialty units are based in Irving,  Texas. TIG's marketing strategy
and distribution systems are described at Item 1.3 - Commercial  Specialty.  The
table below shows the  distribution of Commercial  Specialty net premium written
by business unit:
<TABLE>

                                                 Years Ended December 31,
                                             ----------------------------------
 (In millions)                                1998          1997          1996
-------------------------------------------------------------------------------
 <S>                                          <C>           <C>           <C> 
 Workers' Compensation                        $321          $287          $199
 Sports and Leisure                            195           183           169
 Primary Casualty                              100            94            68
 Lloyd's Syndicates                             79            29             -
 Excess Casualty and SRO                        35            37            21
 Other                                          17           (38)          (17)
-------------------------------------------------------------------------------
     Net premium written                      $747          $592          $440
     Gross premium written                  $1,028          $792          $605
-------------------------------------------------------------------------------
     Retention ratio                          72.7%         74.7%         72.7%
-------------------------------------------------------------------------------
</TABLE>

Commercial Specialty net premium written increased 26% in 1998 compared to 1997.
This increase is primarily  attributable  to Workers'  Compensation  and Lloyd's
Syndicates.  The  increase  in  Workers'  Compensation  is  attributable  to TIG
entering  into a  strategic  relationship  in the third  quarter  of 1997 with a
general agent that writes  program  business and also  provides loss  management
services.  This  relationship  contributed $97 million in net premium written in
1998  compared  to $87 million in 1997.  Also  contributing  to the  increase in
Workers' Compensation is an increase in the commission rate paid to producers in
specific programs.  The increased  production in Lloyd's Syndicates is primarily
due  to  increased   participation  in  the  capacity  of  the  syndicates  from
approximately 18% in 1997 to 41% in 1998.

Commercial Specialty net premium written increased 34% in 1997 compared to 1996.
This increase was  primarily  derived from  increases in Workers'  Compensation,
Primary  Casualty  and  the new  Lloyd's  Syndicates.  The  growth  in  Workers'
Compensation  was  driven  by the  assumption  of an  existing  book of  program
business.  Growth in Primary  Casualty comes from new programs in  Construction,
Marine and Energy,  and  Professional  lines.  The  increases  noted for Lloyd's
Syndicates  are due to the  acquisition  of a  majority  interest  in a  Lloyd's
managing  agency as  described  at Item 1.3 -  Commercial  Specialty.  Other net
premium written represents allocations of corporate aggregate stop loss coverage
not applicable to a specific business unit (see Item 7.6 - Exposure Management).


                                       30
<PAGE>
                                    PART II

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

Underwriting   Results.  The  table  below  presents  underwriting  results  for
Commercial Specialty operations:
<TABLE>

                                                    Years Ended December 31,
                                              ---------------------------------
 (In millions)                                     1998      1997       1996
-------------------------------------------------------------------------------
 <S>                                               <C>       <C>         <C> 
 Net premium earned                                $702      $500        $416
   Less:
      Net loss and LAE incurred                     499       322         288
      Commission expense                            124        98          80
      Premium related expense                        24        19          18
      Other underwriting expense                     77        46          33
      Policyholder dividends                         23        13           2
-------------------------------------------------------------------------------
  Underwriting gain (loss)                         ($45)       $2         ($5)
-------------------------------------------------------------------------------

 GAAP ratios:
-------------------------------------------------------------------------------
 Loss and LAE                                       71.1     64.6         68.9
 Commission expense                                 17.7     19.5         18.9
 Premium related expense                             3.5      3.8          4.1
 Other underwriting expense                         10.9      9.1          7.3
 Policyholder dividends                              3.3      2.7          3.3
-------------------------------------------------------------------------------
 Combined ratio                                    106.5     99.7        102.5
-------------------------------------------------------------------------------
</TABLE>

Commercial  Specialty's  underwriting  results  deteriorated $47 million in 1998
compared  to  1997.  The   deterioration   is  primarily  due  to  1998  reserve
strengthening  of $54 million,  primarily for workers'  compensation and primary
casualty  lines.  This  strengthening  was reduced by $35 million for  corporate
aggregate stop loss  reinsurance  benefits,  which were triggered as a result of
the strengthening.  Additionally, 1997 results include favorable prior year loss
reserve  development  in Workers'  Compensation  (see Item 1.6 - Reserves  for a
further discussion of the 1998 and 1997 reserve  developments),  contributing to
the comparative  deterioration.  The 1998 underwriting  results include benefits
realized as a result of changes in the Managed  Compensation  unit's reinsurance
strategy.  As  described  in  Item  7.6  -  Exposure  Management,   the  Managed
Compensation  unit reduced its net  retention to $100  thousand  from $1 million
effective April 1, 1998 and effective  January 1, 1998 the unit purchased finite
reinsurance  that allows the unit to stay  competitive with other insurers whose
states of domicile  allow  discounting of workers'  compensation  loss reserves.
These  changes  improved   Commercial   Specialty's   underwriting   results  by
approximately  $37  million in 1998  compared  to 1997.  Excluding  the  reserve
development in each period and the benefits derived from reinsurance strategies,
Commercial  Specialty's  underwriting  results  deteriorated  approximately  $49
million.  This  deterioration  is  primarily  due to pricing  pressures  in most
business units due to soft market conditions and increased underwriting expenses
to  support  new  business  initiatives  and  the  development  of new  business
processes.

Commercial Specialty's underwriting results improved $7 million in 1997 compared
to 1996.  The  improvement is primarily  derived from favorable  prior year loss
reserve development  in  Workers'  Compensation  as  discussed  at  Item  1.6 - 
Reserves.  Also  contributing to the  improvement  are generally  improving loss
trends in Workers'  Compensation,  including favorable  involuntary  results, as
more states enacted  workers'  compensation  reforms.  Partially  offsetting the
favorable  loss  reserve  development  and loss  trends is an  increase in other
underwriting  expenses  as a result of  additional  staff  costs  related to the
startup of various Commercial Specialty programs.

                                       31
<PAGE>
                                     PART II

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

The GAAP commission  expense ratio declined 1.8 points in 1998 and increased 0.6
points in 1997 as compared to the corresponding prior year. The 1998 decrease is
primarily due to a change in the  classification of payments to a large producer
within Managed  Compensation to more accurately  reflect services performed from
commission expense to unallocated loss adjustment expense.  The 1997 increase is
primarily attributable to increased corporate aggregate stop loss cessions which
do not carry a ceding commission.

                                       32
<PAGE>
                                    PART II

--------------------------------------------------------------------------------
7.4  CUSTOM MARKETS
--------------------------------------------------------------------------------

Premium.  Custom Markets  provides  personal lines and small business  insurance
products  through  three main business  units:  Non-Standard  Auto,  Alternative
Distribution  and  Small  Business.   Custom  Markets  distribution  system  and
marketing  strategy are described at Item 1.4 - Custom Markets.  The table below
presents premium production by major product for Custom Markets operations:
<TABLE>

                                                     Years Ended December 31,
                                                 ------------------------------
 (In millions)                                    1998        1997        1996
-------------------------------------------------------------------------------
 <S>                                              <C>         <C>          <C>
 Non-standard Automobile                          $113        $86          $38
 Alternative Distribution                           99         36            1
 Small Business                                     68         69           64
 Other                                               -         (6)          (4)
-------------------------------------------------------------------------------
     Net premium written                          $280       $185          $99
     Gross premium written                        $303       $212         $113
-------------------------------------------------------------------------------
     Retention ratio                              92.4%      87.3%        87.6%
-------------------------------------------------------------------------------
</TABLE>

Custom Markets net premium  written  increased by 51% in 1998 and 87% in 1997 as
compared to the  corresponding  prior year.  The increased  production  noted in
Alternative Distribution, which includes the MBNA lines discussed in Item 1.4 - 
Custom Markets, is due to this unit having been formed in late 1996 with limited
production in 1997. The increase noted in Non-standard Automobile is principally
due to new general agent relationships in California and Texas.

Underwriting  Results.  The following table summarizes  underwriting results for
Custom Markets operations:
<TABLE>
                                                   Years Ended December 31,
                                              ---------------------------------
 (In millions)                                     1998      1997       1996
-------------------------------------------------------------------------------
<S>                                                <C>       <C>         <C>
 Net premium earned                                $276      $158        $95
 Less:
    Net loss and LAE incurred                       240       108         55
    Commission expense                               62        31         18
    Premium related expense                           7         9          4
    Other underwriting expense                       30        22         12
-------------------------------------------------------------------------------
 Underwriting gain (loss)                          ($63)       $6       ($12)
-------------------------------------------------------------------------------

 GAAP ratios:
-------------------------------------------------------------------------------
 Loss and LAE                                      86.7      68.3         58.0
 Commission expense                                22.3      19.7         18.6
 Premium related expense                            2.8       5.9          4.4
 Other underwriting expense                        11.0      13.8         12.6
-------------------------------------------------------------------------------
 Combined ratio                                   122.8     107.7         93.6
-------------------------------------------------------------------------------
</TABLE>

Custom Markets  underwriting losses increased by $51 million in 1998 compared to
1997.  This   deterioration  is  principally  due  to  $48  million  of  pre-tax
adjustments and expenses related to the placement of the MBNA program in run-off
in the third  quarter of 1998.  These  adjustments  and  expenses  included  the
recognition  of a premium  deficiency  of $33 million  (See Notes B and C to the
Consolidated  Financial  Statements at Item 8), and  underwriting  losses of $15
million,  which incorporated  revised loss and reinsurance benefit  assumptions.
The premium  deficiency  adjustment was based on an analysis by management  that
estimated  future  earned  premium from  existing  Custom  Markets  business and
mandatory  renewals  related to the MBNA program.  The estimate of future earned
premium and  related  losses  incorporated  management's  expectations  that all
filings  relating  to  corrective  pricing  actions  initiated  in 1998  will be
completed by April 1999. Should management's  estimates of future earned premium
and losses vary from actual results,  future operating results could be impacted
either positively or negatively by the MBNA program.

                                       33
<PAGE>
                                     PART II

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

Excluding the 1998 adjustments and expenses,  Custom Markets  underwriting  loss
increased  by $3 million  in 1998 as  compared  to 1997.  The  deterioration  is
primarily  due to higher  losses  in  short-tailed  property  lines in the Small
Business unit and in the Alternative  Distribution  unit in the first six months
of the year.

Custom Markets underwriting loss increased by $18 million in 1997 as compared to
1996,  principally  as a  result  of  program  start up  costs  incurred  in the
Alternative  Distribution  unit,  which began operations in late 1996 and had an
underwriting   loss  of  $14  million  for  1997.  The  remaining   increase  in
underwriting loss resulted from lower profitability for the Hawaii unit in 1997,
as the Hawaii unit benefited from favorable loss experience in 1996.

                                       34
<PAGE>
                                     PART II

--------------------------------------------------------------------------------
7.5 OTHER LINES
--------------------------------------------------------------------------------

Other Lines  principally  includes the results of  Independent  Agents  personal
lines that were sold in 1997,  commercial lines that have been placed in run-off
due  to  failure  to  meet  profitability  standards  and  aggregate  stop  loss
reinsurance  activity not related to a specific operating segment.  See Item 1.5
for a description of business placed in run-off.
<TABLE>
                                                   Years Ended December 31,
                                              ---------------------------------
 (In millions)                                  1998         1997         1996
-------------------------------------------------------------------------------
<S>                                             <C>          <C>          <C> 
 Gross premium written                          $265         $348         $630
-------------------------------------------------------------------------------
 Net premium written                            ($27)        $144         $442

 Net premium earned                             ($22)        $292         $494
 Less:
    Net loss and LAE incurred                    (29)         215          410
    Commission expense                           (21)          39           69
    Premium related expense                        3           13           27
    Other underwriting expense                     6           16           39
    Dividends to policyholders                     1            1            1
-------------------------------------------------------------------------------
       Underwriting gain (loss)                  $18           $8         ($52)
-------------------------------------------------------------------------------
</TABLE>

Premium.  As  discussed  at Item 7.1 -  Consolidated  Results  and Note C to the
Consolidated  Financial  Statements at Item 8, TIG's Independent Agents business
unit was sold and all business 100% reinsured  effective December 31, 1997. As a
result,  net premium written and earned for the Independent  Agents unit will be
zero for all periods  subsequent to the sale, as will all loss,  loss adjustment
expenses and underwriting expenses. Excluding the impact of the unearned premium
cession  upon  the  sale of the  unit and  increased  allocations  of  corporate
aggregate  stop  loss  reinsurance  premium,  Independent  Agents  1997  premium
approximated that of 1996. Excluding the Independent Agents unit, non-renewal of
Other Lines business has generally  progressed at a faster rate than  originally
expected  by  TIG  management.   The  rapid  elimination  of  this  business  is
attributable  to pro-active  efforts by TIG in assisting  producers with placing
their business with other insurance carriers. As a result, TIG has in many cases
avoided lengthy cancellation notice periods. These efforts will continue in 1999
with gross premium written expected to continue to decline.  Net premium written
in 1998 is negative due to premium  receivable  write-offs and retro adjustments
on certain policies.

Underwriting  Results.  Other  Lines  underwriting  gain of $18  million in 1998
compares to an  underwriting  gain in 1997 of $8  million.  The results for 1998
include the  following  adjustments  and  expenses:  $30 million in  reinsurance
recoverable  allowances  and  write-offs;  $10 million in  additional  losses to
strengthen  reserves for prior accident years; $3 million in premium  receivable
allowances;  $3 million for the write-off of certain capitalized software; and a
reduction in losses  incurred of $34 million as a result of the commutation of a
reinsurance treaty with TIG Re (see Item 7.2 - Reinsurance).  In addition,  1998
results  include  $20 million in ceding  commissions  related to the sale of the
Independent  Agents unit and $29 million in net benefit from aggregate stop loss
reinsurance.  The results for 1997 include the following:  $40 million in losses
assumed from TIG Re as discussed at Item 1.6 - Reserves;  $18 million in reserve
releases  relating to prior  accident  years;  $37  million in net benefit  from
aggregate  stop  loss  reinsurance;  a $19  million  underwriting  gain  in  the
Independent  Agents unit; and an increase in losses incurred of $13 million as a
result of the commutation of a reinsurance treaty.

                                       35
<PAGE>
                                    PART II

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

Excluding  the  1998  adjustments  and  expenses,   Independent   Agents  ceding
commission and net benefit from aggregate  stop loss  reinsurance,  and the 1997
reserve  adjustments,  Independent Agents  underwriting gain and the net benefit
from aggregate stop loss  reinsurance and  commutation of a reinsurance  treaty,
Other Lines underwriting loss of $19 million in 1998 compares to an underwriting
loss  of $13  million  in  1997.  The  deterioration  of  results  is  primarily
attributable to higher incurred losses in short-tail property lines.

Other Lines 1996  underwriting  loss of $52 million includes the following:  $31
million in loss and LAE reserve  strengthening;  $9 million in net benefit  from
aggregate  stop loss  reinsurance;  and a $15 million  underwriting  loss in the
Independent Agents unit. Excluding the reserve  adjustments,  Independent Agents
underwriting  results and net benefit from aggregate stop loss  reinsurance from
the results of both 1997 and 1996, and the  commutation of a reinsurance  treaty
in 1997,  Other Lines  underwriting  loss of $13 million in 1997  compares to an
underwriting  loss of $15  million  in  1996.  The  improvement  in  results  is
primarily attributable to the general decline in underwriting expenses resulting
from the  overall  decline  noted in  premium  written  and the  elimination  of
overhead costs.

Independent  Agents  underwriting  results  improved by $34 million in 1997 over
1996. The principal  components of the improvement  include reduced  catastrophe
premium  costs of $8  million,  reduced  catastrophe  loss costs of $4  million,
favorable loss  experience  excluding  catastrophes of $10 million and favorable
adjustments of premium related and operating  expenses of $12 million  resulting
from procedures performed in connection with the 100% reinsurance of Independent
Agents business.


                                       36
<PAGE>
                                     PART II

--------------------------------------------------------------------------------
7.6  EXPOSURE MANAGEMENT
--------------------------------------------------------------------------------

General  Reinsurance   Program.  For  primary  lines,  TIG  Insurance  purchases
reinsurance  to allow it to insure  larger risks while  controlling  exposure to
larger losses and catastrophes.  Each year, the primary  reinsurance  program is
modified based upon changes in business mix, coverage  availability and pricing.
Reinsurance  purchased may include both treaty and  facultative  coverages.  TIG
Insurance's  ceded reinsurance  agreements are generally  structured on a treaty
basis whereby all risks meeting certain  criteria are  automatically  reinsured.
During 1998, TIG Insurance  enhanced the  decentralized  reinsurance  purchasing
function  for  all  primary  operating  segments  and  generated  new  operating
controls.  During  1998,  TIG  Insurance  made  minor  modifications  to certain
retention levels and entered into some new treaty agreements.  Also during 1998,
TIG Insurance  commuted one aggregate stop loss reinsurance  treaty that was not
utilized to date.

Excluding  corporate  aggregate stop loss covers,  TIG Re purchases  reinsurance
(retrocessional  cover) and  aggregate  stop loss coverage  separately  from TIG
Insurance's primary operations.  TIG Re purchases property  catastrophe coverage
and several retrocessional coverages for specific treaties or programs. In 1995,
TIG Re purchased  aggregate stop loss  reinsurance  coverage from TIG Insurance,
similar to external  reinsurance  purchased in 1996 and 1997. This inter-company
aggregate stop loss contract was commuted during 1998.

Both  TIG  Insurance  and TIG Re work in  concert  in  establishing  reinsurance
security  standards to mitigate  the credit  exposure  arising from  potentially
uncollectible  reinsurance.  The financial  acceptability  of these exposures is
monitored  vigorously  and the Company  removed a number of reinsurers  from its
approved list during 1998.  Additionally,  TIG  Insurance  implemented a Dispute
Resolution Committee during 1998 to address any reinsurance recoverables,  which
are  disputed due to coverage or  interpretation  issues.  Reinsurance  contract
terms are  reviewed  annually  and  renegotiated  in the  interim if required to
remain in compliance with program needs. Continuity in reinsurance relationships
is a high priority for TIG.  Reinsurers  are subject to licensing and regulation
in the  jurisdictions in which they conduct  business.  Countries outside of the
United States have varying  levels of  regulation  of insurance and  reinsurance
companies. Many states allow financial statement credit for reinsurance ceded to
a reinsurer that is licensed in another state or foreign jurisdiction,  provided
such reinsurance meets certain financial requirements or the insurer is provided
with  collateral  (usually  in the form of a letter of  credit)  to  secure  the
reinsurer's obligations.  To maintain its ability to receive financial statement
credit,  TIG  typically  requires  its  reinsurers  to be licensed in the ceding
insurer's  state of domicile or to submit  collateral in a form and in an amount
sufficient to secure the reinsurer's  obligations to TIG.  Reinsurance  does not
legally  discharge an insurer from its primary  liability for the full amount of
the policies it writes.  If a reinsurer fails to meet its obligations  under the
reinsurance  agreement,  the ceding  company  is  required  to pay the loss.  At
December 31, 1998 and 1997,  TIG had an allowance of $33 million and $9 million,
respectively for potentially unrecoverable reinsurance.

                                       37
<PAGE>
                                    PART II

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

TIG's largest non-affiliated reinsurers are as follows:
<TABLE>

                                        Reinsurance Recoverable
                                            at December 31,           
                                      ---------------------------      Best's
 (In millions)                           1998           1997          Rating (1)
----------------------------------------------------------------- -------------- 
<S>                                      <C>            <C>            <C> 
Zurich Reinsurance Centre, Inc           $229           $198            A
Nationwide Ins Co of America              169            174           (2)
Underwriters Reinsurance Co               152            122            A+
London Life & Casualty Re Corp            137             96            A
American Reinsurance Company              118            167            A++
General Reinsurance Corp                  113             93            A++
All others                              1,162            679
--------------------------------------------------------------- ----------------- 
Total reinsurance recoverable          $2,080         $1,529
--------------------------------------------------------------- ----------------- 
</TABLE>

   1) The ratings are taken from the Best's Key Rating Guide, 1998 Edition.
   2) No  independent  A.M.  Best rating has been  assigned  due to the sale of
      this company on December 31, 1997 to Nationwide Mutual Insurance Company.


Reinsurance  recoverable increased by $551 million or 36% in 1998 as compared to
1997.  The increase is  principally  attributable  to increases in  recoverables
under aggregate stop loss reinsurance treaties.

Catastrophe  Reinsurance.  TIG is exposed to multiple insured losses arising out
of a single occurrence, such as a natural or man-made catastrophe. Such an event
may generate  insured losses in any or all of TIG's  operating  segments.  TIG's
exposure to catastrophe  losses arises  principally  from hurricane,  windstorm,
earthquake,  fire and  explosion.  TIG  Insurance  manages its  exposure to such
losses from an  underwriting  perspective by limiting the  accumulation of known
risks in  exposed  areas,  and from per  risk  and  operating  segment  specific
catastrophe reinsurance.  Additionally,  TIG utilizes the RMS Inc. IRAS model to
monitor  its  exposure  to various  loss  scenarios  and gross and net  probable
maximum losses  ("PML").  Initiatives  are underway to expand the utilization of
this analytical tool within TIG's underwriting operations.

After  consideration  of  reinsurance   reinstatement   premium,  TIG  Insurance
effectively  retained  approximately  95% of the first $50  million of the total
aggregate  catastrophe  loss and 5% of losses in excess of $50  million for 1997
and 1996.  In 1995,  TIG Re  entered  into a  separate  catastrophe  reinsurance
agreement  providing  $25 million in excess of a $15 million  retention  for TIG
Re's  property  program  through  1997.  In  addition,  TIG  Re  entered  into a
catastrophe  reinsurance  agreement on January 1, 1998, providing $40 million in
excess of $10 million retention for non-U.S. or Canadian property losses through
1998.

Effective  January  1, 1998,  TIG  Insurance  elected to retain all  catastrophe
exposure without the benefit of catastrophe reinsurance.  TIG Insurance's single
largest PML is  approximately  $27 million as of January 1, 1999.  TIG Insurance
monitors  geographical   exposure   accumulations  and  will  purchase  property
catastrophe  coverage when certain  trigger  points are reached.  As long as TIG
Insurance  continues  to write  Independent  Agents  policies on a direct  basis
ceding 100% to Nationwide (see Item 7.1 - Consolidated  Results),  TIG Insurance
will retain contingent  exposure for catastrophes  impacting  Independent Agents
business.

No major catastrophe  losses were incurred by TIG in 1998, 1997 or 1996. As with
all  property/casualty  insurers,  TIG  expects  to pay some  losses  related to
catastrophes and prices its products accordingly. Total gross catastrophe losses
aggregated  $13  million,  $5 million  and $15  million in 1998,  1997 and 1996,
respectively.  Total net catastrophe costs, including reinsurance  reinstatement
premium,  aggregated  $1 million,  $5 million and $11 million in 1998,  1997 and
1996, respectively.

                                       38
<PAGE>
                                     PART II

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

Losses from coverages other than property insurance may also occur from an event
giving rise to  catastrophic  property  losses.  For example,  an  earthquake or
explosion could cause workers'  compensation  losses as well as property losses.
TIG has  estimated  a PML for such an event  and  coordinates  its  underwriting
guidelines  and  reinsurance  covers to limit its probable  maximum  loss. It is
possible  that the PML  estimated  by TIG may either  understate  or  overstate,
perhaps to a  significant  degree,  the  possible  losses to TIG which  could be
generated by insured loss events. TIG is working with its Catastrophe Management
Committee to refine the analysis of these ancillary exposures and to enhance the
Company's ability to mitigate these factors.

Aggregate  Stop  Loss  Reinsurance.  Both  TIG  Insurance  and  TIG Re  purchase
aggregate stop loss reinsurance to protect against  unanticipated  exposures not
considered in other  reinsurance  coverages.  In addition,  aggregate  stop loss
coverage  can be utilized to cover  exposure  to large  deductibles  under other
reinsurance  treaties,   especially  catastrophe  treaties,  and  mitigate  risk
inherent in a changing book of business.  TIG's aggregate stop loss  reinsurance
treaties generally provide excess of loss protection on all business written for
losses  incurred  in excess of a specified  loss  retention  ratio  ("attachment
point"). Stop loss reinsurance is "umbrella" protection, which is utilized after
all other specific reinsurance coverages have been exhausted.

TIG has consistently  maintained aggregate stop loss protection in various forms
since 1994.  Coverages provide benefit of 70% to 100% of losses in excess of the
attachment point. Premium cessions are generally made on a funds withheld basis.
Funds withheld balances  generally bear interest at rates of 6.75% to 8.50% (see
Item 7.7 - Investments).  At December 31, 1998 and 1997, funds withheld balances
related to aggregate stop loss reinsurance  contracts were $361 million and $264
million, respectively,  while related reinsurance recoverable balances were $658
million and $466 million, respectively.

Loss Portfolio Reinsurance.  Effective January 1, 1998, the Company entered into
a loss  portfolio  reinsurance  agreement on a funds held basis for loss and LAE
reserves of $265 million  related to certain run-off  programs.  The gain of $22
million  was  deferred  and will be  amortized  into  income as losses are paid.
Amortization  of the deferred  gain of $8 million was recorded as a reduction of
incurred losses in 1998. The contract covers 80% of any adverse loss development
incurred  in  excess  of $280  million  up to a  maximum  of $343  million.  Any
additional   future  benefit  from  the  contract   triggered  by  adverse  loss
development  will also be  deferred  and  amortized  into  income as the related
losses are paid. Funds held bear interest at 1.7% per quarter beginning April 1,
1998.  Related interest on funds held of $10 million was recorded as a reduction
of net investment income in 1998.

Under this reinsurance  arrangement,  the reinsurer has the right to convert the
treaty to a funds  transferred  basis  from a funds held basis if the S&P rating
for TIG falls below A+. As a result of this  provision,  and the  downgrading of
TIG's rating to below A+, effective January 1, 1999, TIG Insurance established a
trust  agreement  of $177  million  with  Norwest  Bank for the  benefit  of the
reinsurer, in lieu of funds transferred.

Other Transactions.  During 1998, in response to favorable market conditions for
obtaining reinsurance coverage and to mitigate the inherent financial volatility
of a changing book of business,  TIG increased the utilization of aggregate stop
loss and other  finite  reinsurance  coverages  by  entering  into  several  new
contracts  with  reinsurance  providers.  In  addition  to  the  loss  portfolio
reinsurance  agreement  mentioned  above,  the  Company  also  purchased  finite
reinsurance  for  workers'   compensation  programs  that  allows  TIG  to  stay
competitive  with other insurers  whose state of domicile  allow  discounting of
workers'   compensation  loss  reserves.   The  Company  also  purchased  finite
reinsurance to provide  aggregate stop loss coverage for all lines.  The pre-tax
net benefit provided by these contracts,  including additional interest costs on
withheld funds, was $36 million for 1998.


                                       39
<PAGE>
                                     PART II

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

During 1998, the Company commuted certain  reinsurance  treaties,  including one
between TIG  Insurance  and TIG Re, as well as others with third  parties,  that
generated a net benefit for TIG  Insurance  of $34 million and a net benefit for
TIG Re of $2 million.

In response to favorable  pricing  conditions and to mitigate  volatility in the
Company's exposure to losses in new workers'  compensation  lines, TIG Insurance
utilized  reinsurance  to  reduce  its net  retention  on  most of its  workers'
compensation lines from $1 million to $100 thousand during 1998.


                                       40
<PAGE>
                                     PART II

--------------------------------------------------------------------------------
7.7 INVESTMENTS
--------------------------------------------------------------------------------

Investment  Mix.  Management  continues to emphasize a  conservative  investment
strategy by  maintaining a portfolio of primarily  high-quality,  fixed maturity
investments.  In accordance with SFAS 115, TIG's entire fixed maturity portfolio
has been  classified  as  available-for-sale.  As a result,  all fixed  maturity
investments are recorded in TIG's financial statements at fair value. Unrealized
gains and losses on fixed maturity  investments  and related hedges are recorded
net of tax  directly in  shareholders'  equity.  See Note D to the  Consolidated
Financial Statements at Item 8 for further discussion. Following is a summary of
TIG's investment portfolio by type of investment.
<TABLE>

                                                  December 31,
                                -----------------------------------------------
                                         1998                   1997
                                -----------------------------------------------
                                              % of                     % of
                                   Market     Market       Market      Market
(In millions)                      Value     Portfolio     Value      Portfolio
-------------------------------- ----------- ----------- ----------- -----------
<S>                                <C>          <C>        <C>          <C>  
United States government bonds      $1,574      40.4%      $1,014       24.2%
Corporate and other bonds              837      21.5        1,282       30.6
Mortgage-backed securities             643      16.5          941       22.4
Municipal bonds                        564      14.5          637       15.2
-------------------------------- ----------- ----------- ----------- -----------
Total fixed maturity investments     3,618      92.9        3,874       92.4
Short-term and other investments       276       7.1          318        7.6
-------------------------------- ----------- ----------- ----------- -----------
Total invested assets               $3,894     100.0%      $4,192      100.0%
-------------------------------- ----------- ----------- ----------- -----------
</TABLE>

In 1998, TIG reduced its investment in high yield and mortgage-backed securities
in favor of U.S.  Treasuries and short-term  investments.  As a result, the book
yield of the  portfolio  decreased to 7.0% for the year ended  December 31, 1998
from 7.4% for the year ended December 31, 1997. Invested assets declined by $298
million at December 31, 1998,  as compared to December 31, 1997 (see Item 7.8 - 
Liquidity and Capital Resources and Item 7.1 - Consolidated Results).

Less than 17% of TIG's portfolio consists of mortgage-backed  securities ("MBS")
as of December 31, 1998. United States federal  government and government agency
mortgages  now  represent  approximately  69%  of  TIG's  exposure  to MBS as of
December  31,  1998,  offering  AAA credit  quality.  A risk  inherent to MBS is
prepayment risk related to interest rate  volatility.  The underlying  mortgages
may be repaid  earlier or later than  originally  anticipated,  depending on the
repayment and  refinancing  activity of the underlying  homeowners.  Should this
occur,  TIG would  receive  paydowns on  principal  amounts  which may have been
purchased  at a premium  or  discount,  and  TIG's  investment  income  would be
affected by any  adjustments to  amortization  resulting  from the  prepayments.
TIG's  consolidated  financial  results  have not been  materially  impacted  by
prepayments of MBS. In addition,  interest rate volatility can affect the market
value of MBS. Substantially all MBS held in the portfolio can be actively traded
in the public market.

Derivatives/Hedges.  In the normal  course of business,  TIG may choose to hedge
some of its  interest  rate risk with futures  contracts  and/or  interest  rate
swaps.  Alternatively,  derivative financial instruments may also be utilized to
enhance  prospective  returns.  TIG's interest rate swap arrangements  generally
provide that one party pays interest at a floating rate in relation to movements
in an underlying index, and the other party pays interest at a fixed rate. While
TIG is exposed to credit risk in the event of nonperformance by the other party,
nonperformance   is  not   anticipated   due  to  the   credit   rating  of  the
counterparties. No futures contract positions were open at December 31, 1998, or
December 31, 1997.  However,  positions were opened and closed during 1998, 1997
and prior years.  The deferral  method has been used to account for these closed
futures contracts.  Under the deferral method, gains and losses from derivatives
are deferred on the balance sheet and recognized in earnings in conjunction with
the earnings  recognition of the designated  items.  There were no interest rate
swaps at December 31,  1998,  and $14 million  notional  face amount of interest
rate swaps at December 31, 1997. All TIG derivative  financial  instruments were
with  financial  institutions  rated  "A" or  better by one or more of the major
credit rating agencies.

                                       41
<PAGE>
                                    PART II

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

Investments  in  TBA's.  TIG  routinely  enters  into  commitments  to  purchase
securities on a "To Be Announced" ("TBA") basis for which the interest rate risk
remains with TIG until the date of delivery and payment. Delivery and payment of
securities  purchased  on a TBA basis can take  place a month or more  after the
date of the  transaction.  These  securities are subject to market  fluctuations
during  this period and it is the  Company's  policy to  recognize  any gains or
losses  only  when  they  are  realized.   TIG  maintains  cash  and  short-term
investments  with a  fair  value  exceeding  the  amount  of  its  TBA  purchase
commitments.  At  December  31,  1998,  there were no TBA  purchase  commitments
compared to TBA  commitments  of $24 million with a fair value of $26 million at
December 31, 1997.

Investment  Life and  Duration.  TIG's  objective  is to maintain  the  weighted
average  life  of its  investment  portfolio  between  8 and 12  years  and  the
weighted-average  duration  between 4 and 7 years.  At December  31,  1998,  the
weighted average life of TIG's  investment  portfolio was 12.0 years compared to
10.7 years at December 31, 1997.  At December  31,  1998,  the weighted  average
duration of TIG's  investment  portfolio was 6.8 years  compared to 5.4 years at
December 31, 1997.

Unrealized gains. The unrealized gain on investments decreased by $17 million on
a pre-tax  basis  during  1998.  The  following  is a summary of net  unrealized
gains/losses by type of security:
<TABLE>
                                                   December 31,
                                            ------------------------
(In millions)                                   1998        1997      Change
-------------------------------------------------------------------------------
<S>                                             <C>        <C>          <C>
 Municipal bonds                                $42        $41          $1
 Mortgage-backed securities                       8          8           -
 United States government bonds                 104         73          31
 Corporate bonds and other                      (20)        29         (49)
-------------------------------------------------------------------------------
 Net unrealized gains (losses)                 $134        $151        ($17)
-------------------------------------------------------------------------------
 Net unrealized gains (losses), net of tax      $87         $98        ($11)
-------------------------------------------------------------------------------
</TABLE>

Investment  Income.  The  following  table  displays  the  components  of  TIG's
investment  income and mean  after-tax  investment  yields.  The yields  include
interest earned and dividends received and exclude realized investment gains and
losses.  These  yields are  computed  using the average of the  month-end  asset
balances during the period.

<TABLE>
                                              Years Ended December 31,
                                  ---------------------------------------------
(In millions)                            1998           1997           1996
-------------------------------------------------------------------------------
<S>                                      <C>            <C>            <C>    
Fixed maturity investments:
    Taxable                              $233           $264           $264
    Tax-exempt                             36             33             34
Short-term and other investments           11              8              6
-------------------------------------------------------------------------------
Total gross investment income             280            305            304
Investment expenses                        (4)            (3)            (3)
Interest expense on funds 
    withheld and other                    (41)           (12)           (11)
-------------------------------------------------------------------------------
Total net investment income              $235           $290           $290
-------------------------------------------------------------------------------
After-tax net investment yield            4.1%           4.8%           4.6%
-------------------------------------------------------------------------------
</TABLE>

                                       42
<PAGE>
                                     PART II

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

Investment Quality. The table below shows the rating distribution of TIG's fixed
maturity investment portfolio:
<TABLE>

                                                    December 31,
                                  ---------------------------------------------
Standard & Poor's/Moody's                  1998                    1997
--------------------------------- ---------------------------------------------
                                                 % of                   % of
                                     Market     Market      Market     Market
(In millions)                        Value     Portfolio    Value     Portfolio
--------------------------------- ------------ ----------- -------- -----------
<S>                                  <C>         <C>        <C>         <C>  
 AAA/Aaa                             $2,815      77.8%      $2,541      65.6%
 AA/Aa                                  211       5.8%         261       6.7%
 A/A                                    176       4.9%         209       5.4%
 BBB/Baa                                159       4.4%         220       5.7%
 Below BBB/Baa                          257       7.1%         643      16.6%
--------------------------------- ------------ ----------- -------- -----------
 Total fixed maturity investments    $3,618     100.0%      $3,874     100.0%
--------------------------------- ------------ ----------- -------- -----------
</TABLE>

TIG  minimizes  the credit risk of its fixed  maturity  portfolio  by  investing
primarily in investment grade securities; however, management has authorized the
purchase of high yield,  less than investment  grade  securities up to statutory
limitations.  The  Company's  high yield  portfolio  is comprised of bonds whose
issuers  are  subjected  to  rigorous  credit   analysis,   including  tests  of
prospective  profitability,  liquidity,  leverage,  and interest coverage.  This
analysis is updated regularly as financial  results are released,  and bonds are
constantly  evaluated for their value. During the last half of 1998,  Management
significantly  reduced the Company's  investment  in  securities  that are below
investment  grade  in  anticipation  of  the  implementation  of  the  strategic
alternatives  discussed in Note C to the  Consolidated  Financial  Statements at
Item 8. The  funds  obtained  from the  disposition  of  these  securities  were
re-invested in higher quality, lower risk and lower yield securities.

The  information  on credit  quality  in the  preceding  table is based upon the
higher of the rating assigned to each issue of fixed income securities by either
Standard & Poor's  Rating  Service  or Moody's  Investor  Services,  Inc.  Where
neither  Standard & Poor's nor  Moody's  has  assigned a rating to a  particular
fixed maturity issue, classification is based on 1) ratings available from other
recognized rating services,  2) ratings assigned by the National  Association of
Insurance  Commissioner's  Securities  Valuation  Office (the  "SVO"),  or 3) an
internal  assessment of the  characteristics of the individual  security,  if no
other rating is available.

The SVO assigns bond ratings for most publicly  held bonds.  The SVO ratings are
used by insurers when preparing  their annual  statutory  financial  statements.
State  departments  of  insurance  use the bond rating data when  attempting  to
determine whether an insurer's  holdings are sound.  Investments must fit within
certain regulatory  guidelines of an insurer's domiciliary state in order for an
insurer to be licensed to do business in that state.  The SVO ratings range from
"1" to "6", with "1" and "2" being higher quality,  "3" being medium grade,  and
"4" through "6" being lower grade obligations. As of December 31, 1998 and 1997,
approximately  93% and 84%,  respectively,  of TIG's  portfolio,  measured  on a
statutory carrying value basis, was invested in securities rated as "1" or "2".

                                       43
<PAGE>
                                    PART II

--------------------------------------------------------------------------------
7.8 LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------

Liquidity is a measure of an entity's  ability to secure enough cash to meet its
contractual  obligations and operating needs. TIG requires cash primarily to pay
policyholders' claims, operating expenses,  policyholder dividends, and interest
expense. Generally,  premium is collected months or years before claims are paid
under the policies  purchased by the premium.  These funds are used first to pay
current  claims and  expenses.  The balance is invested in securities to augment
the investment income generated by the existing portfolio. Historically, TIG has
had, and expects to continue to have, more than sufficient  funds to pay claims,
operating expenses, policyholder dividends, and interest expense.

Cash  Flow  From  Operating  Activities.  The  following  table  summarizes  the
significant components of cash flow from operations:
<TABLE>

                                               Years Ended December 31,
                                  ---------------------------------------------
(In millions)                           1998           1997            1996
-------------------------------------------------------------------------------
<S>                                     <C>            <C>             <C> 
Reinsurance operations                  $22            $119            $161
Primary operations and corporate         62              74              36
-------------------------------------------------------------------------------
Ongoing operations                       84             193             197
Other Lines operations                 (175)           (181)           (199)
-------------------------------------------------------------------------------
Total                                  ($91)            $12             ($2)
-------------------------------------------------------------------------------
</TABLE>

The  reduction  in  Reinsurance  operations  cash  flow in both 1998 and 1997 is
primarily  attributable to slowing premium production as a result of soft market
conditions,  the non-renewal or reduced participation on several large accounts,
and an increase in paid losses. The increase in paid losses is due to a shift in
business mix to lines with relatively shorter loss payout patterns and increased
paid loss  trends  on  accounts  that  have  subsequently  been  non-renewed  or
participations  reduced.  In addition,  the commutation of a reinsurance  treaty
with a third  party  increased  paid losses for 1998 by $83  million,  while the
commutation of a reinsurance  treaty between TIG Re and TIG Insurance  decreased
paid loss in 1998 by $36 million (see Item 7.2 - Reinsurance).

Primary  operations  and  corporate  cash flow declined  slightly in 1998.  This
decline is due to offsetting factors.  Significantly  increased  expenditures on
general  operating  expenses,  including  debt  interest and tax  payments,  and
increased loss payments were partially offset by increased premium receipts. The
increase in primary and corporate cash flow in 1997 is due to increased  premium
receipts  and lower  paid  losses,  and  improvements  in the  timing of premium
receivable  and  reinsurance  recoverable  collections.   These  increases  were
partially  offset by  increased  payments  for taxes and an  increase in general
operating  expenses,  including  debt  interest.  In  addition,  the  cession of
Independent  Agents  unearned  premium  reserves  (see  Item 7.1 -  Consolidated
Results) reduced primary operations cash flow by $29 million.

The decrease in negative  cash flow in Other Lines for 1998  compared to 1997 is
primarily  due to the $40 million  tax payment  made in 1997 (see Item 3 - Legal
Proceedings),  which did not recur in 1998,  offset  in part by  increased  loss
payments.  Other Lines operations  negative cash flow improved  slightly in 1997
compared to 1996. This improvement is principally  driven by a reduction in paid
losses and other operating  expenses  partially offset by the planned decline in
premium  writings.  In addition,  Other Lines  operations cash flow for 1997 was
reduced by the $40 million  tax deposit  mentioned  above,  which was  partially
offset by $26 million in funds received in commutation of a reinsurance treaty.

Investment  Liquidity.  At December 31, 1998, TIG had $224 million in short-term
investments  compared to $308 million at December 31, 1997.  In addition,  as of
December 31, 1998, TIG expects to realize $585 million,  $440 million,  and $304
million in cash flow from  principal  and interest  payments over the next three
years,  respectively,  from its  investment  portfolio.  TIG has  structured its
investment  portfolio to manage the impact of market interest rate  fluctuations
on  liquidity.  Investments  and cash held at the  holding  company  totaled $75
million as of December 31, 1998.


                                       44
<PAGE>
                                     PART II

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Notes  Payable.  In December 1995, as amended and restated in 1997, TIG Holdings
established  an unsecured  revolving  line of credit with maximum  borrowings of
$250 million.  During first quarter 1998, TIG borrowed $70 million  against this
facility.  At  December  31,  1998 and 1997,  TIG  Holdings  had no  outstanding
borrowings under this facility. Interest of $2.5 million was paid in 1998.

In December  1995,  TIG Insurance  Company  entered into a five-year $50 million
credit  facility  of  which  approximately  $27  million  and  $24  million  was
outstanding  as of December 31, 1998 and 1997,  respectively.  The facility is a
direct  financing  arrangement  with a  third  party  related  to the  sale  and
leaseback of certain  fixed assets.  Interest of $1.6 million,  $1.6 million and
$1.4 million was paid on this facility in 1998, 1997 and 1996, respectively.

In addition,  TIG Holdings had $98 million of 8.125% notes  payable  maturing in
2005 outstanding at December 31, 1998 and 1997.  Interest of $8 million was paid
in 1998, 1997 and 1996 on these notes.

In January 1997,  TIG Capital Trust I, a statutory  business trust created under
Delaware law as a trust subsidiary of TIG Holdings, completed a private offering
of $125 million of 8.597% mandatory redeemable capital securities.  TIG Holdings
issued $128.75 million in 8.597% Junior  Subordinated  Debentures to TIG Capital
Trust I  (including  approximately  $3.75  million  with  respect to the capital
contributed to the Trust by TIG Holdings).  All of the net proceeds  received by
TIG  Holdings  from the  issuance of the  debentures  are being used for general
corporate  purposes  which includes  repurchases of TIG Holding's  common stock.
Interest of $10.7  million and $4.9 million was paid on the  debentures  in 1998
and 1997, respectively.

Liquidity  Restrictions.  Certain restrictions exist on the payment of dividends
by insurance  subsidiaries that may limit TIG Holdings' ability to receive funds
from its subsidiaries.  Dividends from its insurance  subsidiaries represent the
principal  long-term source of liquidity to TIG Holdings.  TIG Holdings received
cash dividends of $175 million and $145 million from its insurance  subsidiaries
in 1998 and  1997,  respectively.  As of  December  31,  1998,  $96  million  of
dividends  was  available  for  payment  to  TIG  Holdings  from  its  insurance
subsidiaries  during 1999 without  restriction  (see Item 1.7 - Regulation).  In
December 1997, TIG Holdings contributed $70 million in capital to TIG Insurance,
which was paid in early 1998.

                                       45
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                                    PART II

--------------------------------------------------------------------------------
7.9 FINANCIAL CONDITION
--------------------------------------------------------------------------------

Key balance sheet data is presented below:
<TABLE>

                                                Years Ended December 31,
                                     ------------------------------------------
(In millions)                              1998          1997          1996
-------------------------------------------------------------------------------
<S>                                      <C>           <C>            <C>   
Investments (See Item 7.7)               $3,894        $4,192         $4,233
Reinsurance recoverable (See Item 7.6)    2,080         1,529          1,264
Income tax asset (See Note G at Item 8)     129           140            102
Loss and loss expense reserves
    (See Item 1.6)                        4,100         3,935          3,760
Shareholders' equity                      1,127         1,163          1,207
-------------------------------------------------------------------------------
Combined statutory surplus
    (see Note O at Item 8)                 $964        $1,013           $975
Net premium written to statutory
    surplus ratio                           1.5x          1.4x           1.6x
-------------------------------------------------------------------------------
</TABLE>

Shareholders' Equity. Shareholders' equity decreased by $36 million during 1998,
primarily  as a  result  of  dividends  paid  to  shareholders,  treasury  share
repurchases, and a decrease in net unrealized investment gains, partially offset
by net income and  issuance  of common  stock (see  Consolidated  Statements  of
Changes in Shareholders'  Equity at Item 8).  Unrealized  investment gains as of
December  31, 1998 were $87 million  (net of tax)  compared to $98 million as of
December 31, 1997.  Book value per share  decreased  from $22.82 at December 31,
1997 to $22.10 at December 31, 1998.  Approximately 500,000 unallocated Employee
Stock  Ownership  shares have been excluded from  outstanding  common shares for
purposes of computing book value per common share at December 31, 1998 and 1997,
respectively.

As of December 31, 1998,  the TIG Holdings Board of Directors  authorized  stock
repurchases  of up to 18.75 million shares of TIG Holdings  common stock.  Under
the  repurchase  plan,  repurchases  may be made  from  time to time on the open
market at prevailing market prices or in privately negotiated transactions.  The
first  repurchases of stock were made in April 1994.  Through December 31, 1998,
repurchases  of 16.3  million  shares of stock have been made at an average cost
per share of $28.34, for an aggregate cost of $461 million.

Capacity.   A  key   measure  of  both   strength   and  growth   capacity   for
property/casualty  insurers  is the ratio of net  premium  written to  statutory
policyholders' surplus. At December 31, 1998, TIG's net premium-to-surplus ratio
was 1.5,  higher  than the  industry  average of 1.0,  but within an  acceptable
range.  Insurance  regulators  generally accept a ceiling for this ratio of 3.0;
therefore,  at its current  ratio,  TIG has the  capacity to grow by writing new
business in its targeted markets.

Ratings.  Both TIG  Insurance  (including  subsidiaries  which  cede 100% of net
premium  written to TIG  Insurance)  and TIG Re are rated "A"  ("Excellent")  by
Best.  Best's  ratings are based on an analysis of the  financial  condition and
operating  performance of an insurance company as they relate to the industry in
general.  However,  TIG Re's "A" rating is under  review,  reflecting  potential
business disruption created by market  uncertainties during the upcoming renewal
season.  The review status is "developing",  reflecting the favorable  near-term
implications  of a committed  owner with  significant  financial  flexability in
Fairfax (see Note C to the  Consolidated  Financial  Statements  at Item 8). The
continuation of the "A" ratings is contingent upon the timely  completion of the
merger with Fairfax. A delay, non-closure or material change in the terms of the
transaction  as announced  would cause A.M.  Best to revisit the rating.  An "A"
rating is Best's third highest of 15 rating classifications.

                                       46
<PAGE>
                                     PART II

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

TIG and  individual  insurance  company  members  of the TIG group have a claims
paying rating of "A" from Standard & Poor's Insurance  Rating Services  ("S&P").
The assigned rating reflects S&P's opinion of the operating  insurance company's
financial  capacity  to  meet  the  obligations  of its  insurance  policies  in
accordance with their terms. The "A" rating assigned to TIG is the sixth highest
of ten ratings in the "secure claims paying ability" category.

The  Company's  notes  payable  are rated  "Baa2" and the  mandatory  redeemable
capital securities are rated "Ba1" by Moody's Investor Services, Inc.


                                       47
<PAGE>
                                    PART II

--------------------------------------------------------------------------------
7.10  YEAR 2000
--------------------------------------------------------------------------------

The Year 2000 issue  relates to the ability or inability  of systems  (including
computer hardware,  software and embedded microprocessors) to properly interpret
date information  relating to the year 2000 and beyond.  Many existing  systems,
including many of TIG's existing systems,  use only the last two digits to refer
to a year  (i.e.,  "98" is used for  1998).  Therefore,  these  systems  may not
properly  recognize  a year  that  begins  with  "20"  instead  of  "19". If not
corrected, these systems could fail or create erroneous results.

Specific  information  technology systems that are utilized by TIG, and by third
parties  with whom TIG has business  relationships,  include  policy,  claim and
reinsurance  processing  and  administration,   accounting,  payroll,  financial
reporting,  product  development,  rate and form  development  and  maintenance,
business planning, tax, accounts receivable,  accounts payable and numerous word
processing and  spreadsheet  programs.  In addition,  TIG and third parties with
which TIG has a business  relationship  are  dependent  on many  non-information
technology based systems, such as utility, communication and security systems.

TIG's State of  Readiness.  TIG has  conducted an  extensive  review of its core
processing  computer systems,  including computer hardware and software vendors,
to identify  and  address all  changes,  testing and  implementation  procedures
required to make such systems Year 2000 compliant. The Company has a coordinated
process  to  facilitate  the  necessary  changes,   testing  and  implementation
procedures.  TIG has completed and  implemented all of the required code changes
of its Year 2000 system remediation  project.  TIG expects necessary third party
software  implementation  and testing of its computer systems to be completed by
March 31, 1999. TIG will continue testing its internal  systems,  as well as its
internal  systems'  abilities to operate with the systems of key third  parties,
during the remainder of 1999.

TIG has processing or significant business relationship  dependencies with third
parties including,  without  limitation,  general agents,  brokers,  third party
administrators,   banks,   general  suppliers  and   facility-related   vendors.
Determination  of any action  required is expected to be completed in the second
quarter of 1999,  and TIG will continue to monitor Year 2000 issues  relating to
such key third parties during the remainder of 1999.  Notwithstanding efforts by
TIG to assess the third  party's  systems,  there can be no guarantee  that such
systems will be Year 2000 compliant.

The Cost to Address TIG's Year 2000 Issues.  TIG budgeted a total of $10 million
for costs related to Year 2000 system  modifications.  As of year end 1998, $9.5
million has been expensed in the year  incurred.  The  remainder  (approximately
$500 thousand) will be expensed in 1999.  The 1999 amount  represents  less than
1.5% of the  annual  TIG  Information  Systems  budget.  These  costs  primarily
represent costs to assess, remediate code, and test such code changes.

In addition to the costs incurred for Year 2000 system  modifications,  TIG will
incur  expenses in  ascertaining  whether key third  parties with which it has a
material relationship are Year 2000 compliant.  TIG estimates that such expenses
will not exceed $1.5 million.  This amount  includes both IT and non IT portions
of this project.

All  estimates of future  costs  related to assessing  and  achieving  Year 2000
compliance  are  based  on  management's  best  estimates  and  there  can be no
guarantee that actual amounts expended will not differ from such estimates.

The Y2K Project has caused no  significant  deferrals of other IT projects which
in any way impact the financial condition or results of operations of TIG.


                                       48
<PAGE>
                                     PART II

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

The Risks of TIG's Year 2000 Issues.  There has not been any material processing
disruptions  to  date.  Internal  testing  provides  TIG  with a high  level  of
confidence  that in a most  reasonably  likely worst case scenario these systems
will not cause material disruption on a forward-looking basis.

The potential losses that TIG  policyholders may incur which stem from Year 2000
problems will be business risks which are not insurable under standard  property
and  casualty  policies.  A most  reasonably  likely worst case  scenario  would
anticipate  that it is possible  that  certain TIG  policies  may be reformed by
judicial decisions to cover Year 2000 losses,  which were not contemplated.  TIG
does not believe that such losses will have a material impact on TIG's financial
results.  To date, TIG has not incurred any losses  relating to Year 2000 claims
under its insurance and reinsurance policies.

Although the Company has taken the actions  described  above to address the Year
2000 problem,  a most reasonable likely worst case scenario indicates that there
is always a possibility that the Company may suffer some disruptions as a result
of the Year 2000 problem.

TIG's Contingency  Plans. The Company has a comprehensive  contingency plan that
addresses  alternatives  for solving the Year 2000 problem  should the Company's
adopted process prove inadequate.  TIG continues to evaluate and modify the plan
as necessary for all of the Company's operations and processes.

                                       49
<PAGE>
                                    PART II

--------------------------------------------------------------------------------
7.11  FORWARD-LOOKING STATEMENTS
--------------------------------------------------------------------------------

TIG Holdings would like to caution  readers  regarding  certain  forward-looking
statements  in the  Management's  Discussion  and Analysis and elsewhere in this
Form 10-K. Statements which are based on management's projections, estimates and
assumptions  are  forward-looking  statements.  The words  "believe",  "expect",
"anticipate"  and  similar   expressions   generally  identify   forward-looking
statements.  While TIG Holdings  believes in the veracity of all statements made
herein,  forward-looking  statements  are  necessarily  based  upon a number  of
estimates and assumptions that, while considered reasonable by TIG Holdings, are
inherently   subject  to   significant   business,   economic  and   competitive
uncertainties and contingencies, including without limitation:

     *    changes in interest rates which could impact  investment  yields,  the
          market value of invested assets and ultimately product pricing

     *    changes in the  frequency  and  severity of  catastrophes  which could
          impact net income, reinsurance costs and cash flow

     *    increased  competition  (on the  basis of  price,  services,  or other
          factors) which could generally reduce  operating  margins or result in
          loss of key producer relationships

     *    regulatory and legislative  changes which could increase the Company's
          overhead costs,  increase federal and state tax assessments,  restrict
          access to profitable  markets or force  participation  in unprofitable
          markets

     *    delays in regulatory approvals for rate and form filings

     *    changes in ratings  assigned to TIG which could impact  demand for the
          Company's products

     *    changes in loss payment  patterns which could impact cash flow and net
          investment income

     *    changes in estimated  overall  adequacy of loss and LAE reserves which
          could impact net income,  statutory  surplus adequacy and management's
          decision to continue certain product lines

     *    changes in general  market or economic  conditions  which could impact
          the demand for the Company's  products and loss frequency and severity
          for certain lines of business

     *    loss of key management  personnel  which could impact the  development
          and  execution  of the  Company's  business  strategy  and  impact key
          customer and vendor relationships

     *    inability  of the Company or third  parties  with whom the Company has
          material relations to address Year 2000 issues on a timely basis

     *    change  in  strategic  business  plans  due to  sale,  restructure  or
          recapitalization of the Company

Many of these  uncertainties  and  contingencies can affect TIG's actual results
and could cause its actual results to differ  materially from those expressed in
any forward-looking statements made by, or on behalf of, TIG.

                                       50
<PAGE>
                                     PART II

--------------------------------------------------------------------------------
7.12  GLOSSARY
--------------------------------------------------------------------------------

Agent:  An  insurer's  representative  authorized  to market a Company's  policy
coverages for a commission.

Aggregate Stop Loss Reinsurance:  A form of reinsurance that generally  provides
protection on all business or a specified portion of business for losses and LAE
incurred in excess of a specified loss retention ratio. This form of reinsurance
is often used as "umbrella" protection that is utilized after all other specific
reinsurance coverages have been exhausted.

Bordereaux:  A detailed  report of reinsurance  premiums or  reinsurance  losses
furnished  periodically by the reinsured.  A loss bordereaux contains a detailed
list of claims and claims expenses  outstanding and paid by the reinsured during
the reporting period and the amount of reinsurance indemnity applicable thereto.

Broker/intermediary: One who negotiates contracts of insurance or reinsurance on
behalf of an insured party, receiving a commission from the insurer or reinsurer
for placement and other services rendered.

Capacity:  The percentage of surplus, or the dollar amount of exposure,  that an
insurer or reinsurer is willing to place at risk. Capacity may apply to a single
risk, a program, a line of business or an entire book of business.

Casualty  insurance:  Insurance  which is  primarily  concerned  with the losses
caused by injuries to third persons (i.e., not the  policyholder)  and the legal
liability imposed on the insured resulting  therefrom.  It includes,  but is not
limited to,  employers'  liability,  workers'  compensation,  public  liability,
automobile  liability,  personal liability and aviation liability insurance.  It
excludes  certain  types of loss that by law or custom are  considered  as being
exclusively  within  the  scope of other  types  of  insurance,  such as fire or
marine.

Catastrophe:  An event that is designated to be a "catastrophe"  by the Property
Claims  Service  Division of American  Services  Group,  an  industry  body.  It
generally  defines  events which are estimated to cause more than $25 million in
insured  property  damage and which affect a significant  number of insureds and
insurers.

Catastrophe  reinsurance:  A form of excess of loss property  reinsurance which,
subject to a specified  limit,  indemnifies the ceding company for the aggregate
amount of losses in excess of a specified  retention for losses resulting from a
particular  catastrophic  event.  The actual  reinsurance  document  is called a
"catastrophe cover."

Ceded  reinsurance;  Ceding  company:  When a  company  reinsures  its risk with
another, it "cedes" business and is referred to as the "ceding company."

Combined ratio: A combination of the  underwriting  expense ratio,  the loss and
LAE ratio, and the policyholder  dividends ratio,  determined in accordance with
statutory accounting practices. A combined ratio below 100.0 generally indicates
profitable underwriting results. A combined ratio over 100.0 generally indicates
unprofitable underwriting results.

Direct  premium  written:  Premium for insurance  written on a company's  policy
forms during a given period.

Excess  of loss:  A generic  term  describing  insurance  or  reinsurance  which
indemnifies  the  policyholder  against all or a specified  portion of losses on
underlying  insurance policies in excess of a specified dollar amount,  called a
"layer" or "retention."

Facultative  reinsurance:  The  reinsurance of all or a portion of the insurance
coverage  provided by a single  policy.  Each  policy  reinsured  is  separately
negotiated.

                                       51
<PAGE>
                                     PART II

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

General Agent: A licensed property/casualty  broker/agent who under the terms of
a written  contract  with an  insurer  manages  the  transaction  of one or more
classes of insurance  written by the insurer and  generally  has the power to 1)
appoint,  supervise,  and terminate local agents, 2) accept or decline risks and
3) collect premium moneys from producing broker/agents or from the insured.

Generally accepted accounting principles ("GAAP"):  Accounting principles as set
forth in opinions of the Accounting  Principles Board of the American  Institute
of Certified Public Accountants and/or in statements of the Financial Accounting
Standards Board and/or their  respective  successors and which are applicable in
the circumstances as of the date in question.

Gross  premium  written:   Total  premium  for  direct  insurance   written  and
reinsurance assumed during a given period.

Incurred but not reported ("IBNR")  reserves:  Reserves for estimated losses and
LAE which have been incurred but not reported to the insurer  (including  future
developments on losses that are known to the insurer).

Incurred  losses:  The total losses  sustained by an insurance  company  under a
policy or policies,  whether paid or unpaid. Incurred losses include a provision
for claims that have occurred but have not yet been reported to the insurer.

Independent Agent: A licensed property/casualty agent who usually represents two
or more  insurance  companies  in a sales and  service  capacity  typically  for
personal lines  homeowners and automobile  coverages and is paid on a commission
basis.

Loss adjustment  expenses  ("LAE"):  The expenses of settling claims,  including
legal and other fees,  and the portion of general  expenses  allocated  to claim
settlement costs.

Loss development: The emergence of actual loss data as compared to estimates for
specific accident years and for specific lines of business.

Loss and LAE ratio:  The ratio of  incurred  losses  and LAE to earned  premium,
determined in accordance with statutory accounting practices.

Loss and LAE reserves:  Liabilities  established  by insurers and  reinsurers to
reflect the estimated cost of claims payments that the insurer or reinsurer will
ultimately  be required to pay with respect to insurance or  reinsurance  it has
written.  Reserves are  established  for losses and for LAE, and consist of case
reserves and IBNR reserves.

Net premium earned:  The portion of net premium  written in a particular  period
that is recognized for accounting purposes as income during that period.

Net premium  written:  Direct  premium  written  plus assumed  reinsurance  less
premium on ceded business for a given period.

PML (probable maximum loss): The largest loss the underwriter considers possible
based upon the underwriter's experience and judgment.

Policyholder  dividends  ratio:  The ratio of dividends paid to policyholders to
earned premium, determined in accordance with statutory accounting practices.

                                       52
<PAGE>
                                    PART II

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

Premium-to-surplus  ratio:  The  ratio  of  statutory  net  premium  written  to
statutory surplus.

Primary  Insurance:  The insurance  coverage  provided  under the primary policy
issued  by  the  primary  insurer  to  the  primary  insured  (sometimes  called
"underlying insurance").

Program business:  Tailored products developed for a particular industry segment
(i.e.,   sporting  events,   trucking)  or  distribution   system  (i.e.,  trade
associations,  affinity groups).  Programs are often developed and controlled by
GAs.

Property  insurance:  Insurance  that  provides  coverage  to a  person  with an
insurable interest in tangible property for that person's
property loss, damage or loss of use.

Reinstatement   premium:   The  premium  charged  for  the  restoration  of  the
reinsurance  limit of a  catastrophe  treaty to its full amount after payment by
the reinsurer of losses as a result of an occurrence.

Reinsurance:   The  practice  whereby  one  party,  called  the  reinsurer,   in
consideration of a premium paid to it agrees to indemnify another party,  called
the reinsured, for part or all of the liability assumed by the reinsured under a
policy or  policies  of  insurance  which it has issued.  The  reinsured  may be
referred to as the original or primary insurer,  the direct writing company,  or
the ceding company.  Reinsurance does not legally  discharge the primary insurer
from its liability to the insured.

Reserve  strengthening:  The  building  or  enhancement  of loss  reserves to an
actuarially  determined level considered adequate to cover all future claims for
policies in force, generally for a specific accident year or line of business.

Retention:  The amount or portion of risk which an insurer or reinsurer  retains
for its own  account.  Losses in excess of the  retention  level are paid by the
reinsurer or  retrocessionaire.  In pro-rata  treaties,  the  retention may be a
percentage of the original  policy's limit. In excess of loss  reinsurance,  the
retention is a dollar amount of loss, a loss ratio, or a percentage of loss.

Risk-based capital: A regulatory measurement of statutory capital and surplus to
analyze continuation of operations at existing levels, taking into consideration
various inherent risks.

Stamp  capacity:  The  syndicate's  premium limit for the relevant  underwriting
year.

Statutory  accounting  practices  ("SAP"):  Rules and  procedures  prescribed or
permitted by state insurance regulatory  authorities for recording  transactions
and preparing financial  statements.  Statutory accounting  principles generally
reflect a liquidating, rather than a going concern, concept of accounting.

Statutory  surplus:  The  excess  of  admitted  assets  over  total  liabilities
(including loss reserves), determined in accordance with SAP.

Template   underwriting:   A  process  by  which  homogeneous  business  can  be
underwritten using standardized guidelines.

Treaty  participation:  The  portion of risk  exposure  an insurer or  reinsurer
accepts under an insurance  contract.  The insurer or reinsurer with the largest
participation is the lead insurer and therefore has the ability to influence the
terms of the contract.


                                       53
<PAGE>

                                     PART II

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

Treaty  reinsurance:  The  reinsurance  of a specified type or category of risks
defined in a  reinsurance  agreement (a "treaty")  between a primary  insurer or
other reinsured and reinsurers.  Typically,  in treaty reinsurance,  the primary
insurer or reinsured  is  obligated  to offer and the  reinsurer is obligated to
accept a  specified  portion of all such type or  category  of risks  originally
underwritten by the primary insurer or reinsured.

Unallocated  loss  adjustment  expenses  ("ULAE"):   The  expenses  incurred  in
connection with  investigation  and adjustment of claims that cannot be directly
allocated to any specific claims.

Underwriting:  The  insurer's  process of reviewing  applications  submitted for
insurance  coverage,  deciding  whether  to accept  all or part of the  coverage
requested and determining the applicable premium.

Underwriting  expense ratio:  The ratio of underwriting  expenses to net premium
written, determined in accordance with statutory accounting practices.

Underwriting  expenses:  The aggregate of policy  acquisition  costs,  including
commissions,  and the portion of  administrative,  general,  and other  expenses
attributable to underwriting operations.

Underwriting  results:  The measure of profitability of the insurance operations
of an insurer,  calculated as the result of earned  premium,  less losses,  loss
expenses, and underwriting  expenses.  Underwriting results is an indicator of a
company's underwriting success.

Working layer  reinsurance:  Reinsurance  which  absorbs the losses  immediately
above the reinsured's  retention layer. A working layer reinsurer will pay up to
a certain dollar amount of losses over the insured's retention, at which point a
higher layer  reinsurer (or the ceding  company)  will be liable for  additional
losses.  Working  layer  reinsurance  is also known as low layer  excess of loss
reinsurance.

                                       54
<PAGE>
                                    PART II

--------------------------------------------------------------------------------
ITEM 7A.  DISCLOSURES CONCERNING MARKET RISK
--------------------------------------------------------------------------------

Market Risk.  Market risk is the risk of loss  arising  from adverse  changes in
market rates and prices,  such as interest  rates,  foreign  exchange  rates and
other relevant market rate or price changes. The volatility and liquidity in the
markets in which the related  underlying  assets are traded  directly  influence
market  risk.  The  following  is a  discussion  of TIG's  primary  market  risk
exposures and how those exposures are currently managed as of December 31, 1998.
TIG's market risk sensitive instruments are entered into for purposes other than
trading.

The  primary  market risk to the  investment  portfolio  is  interest  rate risk
associated with fixed maturity  securities.  TIG's exposure to foreign  exchange
and equity price risks is not significant.

The primary  market risk for TIG's  long-term  debt is interest rate risk at the
time of  refinancing.  TIG's  long-term  debt  includes  $100  million of 8.125%
non-callable  Notes  maturing  in 2005  and $125  million  of  8.597%  mandatory
redeemable capital securities maturing in 2027.

Sensitivity  Analysis.  Sensitivity  analysis is defined as the  measurement  of
potential loss in future earnings, fair values or cash flows of market sensitive
instruments resulting from one or more selected hypothetical changes in interest
rates  and  other  market  rates  or  prices  over a  selected  time.  In  TIG's
sensitivity  analysis  model, a hypothetical  change in market rates is selected
that is  expected  to reflect  reasonably  possible  near-term  changes in those
rates. "Near term" is defined as a period of time going  forward up to one year
from the date of the consolidated financial statements.

In this  sensitivity  analysis  model,  TIG uses  fair  values  to  measure  its
potential loss. The sensitivity  analysis model includes the following financial
instruments:  fixed maturities,  short-term securities,  commercial paper, notes
payable,  fixed rate  capital  securities  and  mandatory  redeemable  preferred
securities.  The primary  market risk to TIG's market  sensitive  instruments is
interest rate risk. The sensitivity analysis model uses a 100 basis point change
in interest rates to measure the hypothetical  change in fair value of financial
instruments included in the model.

For invested  assets,  duration  modeling is used to  calculate  changes in fair
values.  Duration on invested  assets is adjusted to call, put and interest rate
reset features.  Duration on tax exempt securities is adjusted for the fact that
the yield on such  securities  is less  sensitive  to changes in interest  rates
compared to Treasury securities. Invested asset portfolio duration is calculated
on a weighted basis using holdings as of December 31, 1998.

For  long-term  debt,  the change in fair  value is  determined  by  calculating
hypothetical  December 31,1998 ending prices based on yields adjusted to reflect
a 100 basis point change,  comparing such  hypothetical  prices to actual ending
prices, and multiplying the difference by the par or shares outstanding.

The  sensitivity  analysis  model used by TIG's produces a loss in fair value of
market sensitive instruments of $235 million based on a 100 basis point increase
in interest  rates as of December  31, 1998.  This loss value only  reflects the
impact  of an  interest  rate  increase  on the fair  value  of TIG's  financial
instruments,   which   constitute   approximately   53%  of  total   assets  and
approximately 5% of total  liabilities.  As a result,  the loss value excludes a
significant  portion of TIG's consolidated  balance sheet which would materially
mitigate the impact of the loss in fair value  associated with a 100 basis point
increase in interest  rates.  These  non-financial  instruments  include premium
receivable  balances,  reinsurance  recoverables,  claims and claims  adjustment
expense reserves and unearned premium reserves.

                                       55
<PAGE>
                                     PART II
--------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------------------------------

                                                                           Page

Report of Independent Auditors..............................................57

Consolidated Balance Sheets at December 31, 1998 and 1997...................58

Consolidated Statements of Income for each of the three
years in the period ended December 31, 1998 ................................59

Consolidated Statements of Comprehensive Income
for each of the three years in the period 
ended December 31, 1998.....................................................60

Consolidated Statements of Changes in Shareholders' Equity
for each of the three years in the period
ended December 31, 1998 ....................................................61

Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998.................................62

Notes to Consolidated Financial Statements..................................63



                                       56
<PAGE>
                                    PART II

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

                         REPORT OF INDEPENDENT AUDITORS



Board of Directors
TIG Holdings, Inc.



     We  have  audited  the  accompanying  consolidated  balance  sheets  of TIG
Holdings,  Inc.  and  subsidiaries  as of December  31,  1998 and 1997,  and the
related consolidated statements of income,  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
TIG  Holdings,  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.



                                                    ERNST & YOUNG LLP



Dallas, Texas
February 3, 1999


                                       57
<PAGE>

                                     PART II

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

                               TIG HOLDINGS, INC.
                           CONSOLIDATED BALANCE SHEETS
<TABLE>

                                                                                                 December 31,
                                                                                           --------------------------
  (In millions, except share data)                                                            1998         1997
  ---------------------------------------------------------------------------------------- ----------- --------------
  <S>                                                                                       <C>            <C>    
  Assets
        Investments:
                 Fixed maturities, at market (cost: $3,484 in 1998 and $3,725 in 1997)       $3,618       $3,874
                 Short-term and other investments (cost: $276 in 1998 and $316 in 1997)         276          318
  ---------------------------------------------------------------------------------------- ----------- --------------
                               Total investments                                              3,894        4,192
        Cash                                                                                     72           18
        Accrued investment income                                                                50           56
        Premium receivable (net of allowance of $13 in 1998 and $5 in 1997)                     521          453
        Reinsurance  recoverable  on paid losses (net of  allowance of $13 in 1998
           and $6 in 1997)                                                                       82          125
        Reinsurance recoverable on unpaid losses (net of allowance of $20 in 1998             1,998        1,404
           and $3 in 1997)
        Deferred policy acquisition costs                                                       137          155
        Prepaid reinsurance premium                                                             188          177
        Income taxes                                                                            129          140
        Other assets                                                                            144          147
  ---------------------------------------------------------------------------------------- ----------- --------------

                              Total assets                                                   $7,215       $6,867
  ---------------------------------------------------------------------------------------- ----------- --------------

  Liabilities
         Reserves for:
                 Losses                                                                      $3,659       $3,459
                 Loss adjustment expenses                                                       441          476
                 Unearned premium                                                               719          738
  ---------------------------------------------------------------------------------------- ----------- --------------
                               Total reserves                                                 4,819        4,673
          Reinsurance premium payable                                                            80           61
          Funds held under reinsurance agreements                                               564          319
          Notes payable                                                                         125          122
          Other liabilities                                                                     350          379
  ---------------------------------------------------------------------------------------- ----------- --------------
                               Total liabilities                                             $5,938       $5,554
  ---------------------------------------------------------------------------------------- ----------- --------------

  Mandatory redeemable 8.597% capital securities of subsidiary trust                            125          125

  Mandatory redeemable preferred stock                                                           25           25

  Shareholders' Equity
         Common stock - par value $0.01 per share
                 (authorized:  180,000,000 shares; issued and outstanding:
                   67,574,664 shares in 1998 and  66,955,288 shares in 1997)                  1,274        1,257
         Retained earnings                                                                      229          253
         Accumulated other comprehensive income:
                 Net unrealized gain on fixed maturity investments, net of taxes                 87           98
                 Net unrealized loss on foreign exchange, net of taxes                          (2)           (2)
  ---------------------------------------------------------------------------------------- ----------- --------------
                                                                                              1,588        1,606

         Treasury stock (16,258,097 shares in 1998 and 15,597,021 shares in 1997)             (461)         (443)
  ---------------------------------------------------------------------------------------- ----------- --------------
                 Total shareholders' equity                                                  $1,127       $1,163
  ---------------------------------------------------------------------------------------- ----------- --------------

                 Total liabilities and shareholders' equity                                  $7,215       $6,867
  ---------------------------------------------------------------------------------------- ----------- --------------
</TABLE>

   See Notes to Consolidated Financial Statements.

                                       58
<PAGE>
                                    PART II

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

                               TIG HOLDINGS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
                                                                                Years Ended December 31,
                                                                           -----------------------------------
     (In millions, except share data)                                         1998        1997        1996
    ---------------------------------------------------------------------- ----------- ----------- -----------
     <S>                                                                     <C>         <C>         <C>    
     Revenues
            Net premium earned                                               $1,447      $1,466      $1,539
            Net investment income                                               235         290         290
            Net investment and other gain (loss)                               (12)           1          (4)
    ---------------------------------------------------------------------- ----------- ----------- -----------
                    Total revenues                                            1,670       1,757       1,825
    ---------------------------------------------------------------------- ----------- ----------- -----------

     Losses and expenses
            Net losses and loss adjustment expenses incurred                  1,041       1,151       1,138
            Policy acquisition and other underwriting expenses                  502         466         463
            Dividends to policyholders                                           24          14           3
            Corporate expenses                                                   81          44          37
            Interest expense on long-term debt                                   23          20           9
            Restructuring charges                                                 -           -         100
    ---------------------------------------------------------------------- ----------- ----------- -----------
                   Total losses and expenses                                  1,671       1,695       1,750
    ---------------------------------------------------------------------- ----------- ----------- -----------

            Income (loss) before income tax benefit (expense)                    (1)         62          75
            Income tax benefit (expense)                                          9         (10)          4
    ---------------------------------------------------------------------- ----------- ----------- -----------

                    Net income                                                   $8         $52         $79
    ---------------------------------------------------------------------- ----------- ----------- -----------
     Net income per common share:
                    Basic                                                     $0.13       $0.97       $1.36
                    Diluted                                                   $0.13       $0.94       $1.32
    ---------------------------------------------------------------------- ----------- ----------- -----------

     Dividends per common share                                               $0.60       $0.60       $0.20
    ---------------------------------------------------------------------- ----------- ----------- -----------
</TABLE>

      See Notes to Consolidated Financial Statements.



                                       59
<PAGE>

                                     PART II

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


                               TIG HOLDINGS, INC.
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>

                                                                                           Years Ended December 31,
                                                                                     -------------------------------------
 (In millions)                                                                          1998        1997         1996
------------------------------------------------------------------------------------ ----------- ------------ ------------
<S>                                                                                     <C>         <C>          <C>    

 Net income                                                                              $8           $52         $79

 Other comprehensive income (loss):
      Unrealized gains (losses) on securities, net of reclassification adjustment       (17)           71         (88)
      Foreign currency translation adjustments                                            -            (1)          -
------------------------------------------------------------------------------------ ----------- ------------ ------------
 Other comprehensive income (loss), before income taxes                                 (17)           70         (88)

 Provision for income taxes related to other comprehensive income (loss) items            6           (25)         30

------------------------------------------------------------------------------------ ----------- ------------ ------------
 Other comprehensive income (loss)                                                      (11)           45         (58)

 Comprehensive income (loss)                                                            ($3)          $97         $21
------------------------------------------------------------------------------------ ----------- ------------ ------------

 Other comprehensive income (loss):
     Unrealized gain (loss) during year, net of tax expense of $5                       $10
     Reclassification adjustment, net of tax benefit of $11                             (21)
------------------------------------------------------------------------------------ -----------
 Other comprehensive income (loss)                                                     ($11)
------------------------------------------------------------------------------------ -----------
</TABLE>

 See Notes to Consolidated Financial Statements.



                                       60
<PAGE>

                                     PART II

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

                               TIG HOLDINGS, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>

                                                                                  Years Ended December 31,
                                                                          -----------------------------------------
   (In millions)                                                              1998          1997          1996
  ----------------------------------------------------------------------- ------------- ------------- -------------
   <S>                                                                       <C>           <C>           <C>    
   Common Stock
          Balance at beginning of year                                       $1,257        $1,198        $1,186
                  Common stock issued                                            10            42             9
                   Income tax benefit from stock options exercised                -            13             -
                  Conversion of Class A common stock                              -             -             1
                  Amortization of unearned compensation                           7             4             2
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                              1,274         1,257         1,198
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Class A common stock
          Balance at beginning of year                                            -             -             1
                  Conversion of Class A common stock                              -             -            (1)
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                                  -             -             -
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Retained earnings
          Balance at beginning of year                                          253           234           168
                  Net income                                                      8            52            79
                  Common stock dividends                                        (30)          (31)          (11)
                  Preferred stock dividends                                      (2)           (2)           (2)
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                                229           253           234
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Accumulated other comprehensive income
          Balance at beginning of year                                           96            51           109
                  Change in unrealized gain (loss) on fixed maturity
                       investments                                              (11)           46           (58)
                  Change in net unrealized loss on foreign exchange               -            (1)            -
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                                 85            96            51
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Treasury stock
          Balance at beginning of year                                         (443)         (276)          (88)
                  Treasury stock purchased                                      (18)         (167)         (188)
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                               (461)         (443)         (276)
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Total shareholders' equity at end of year                                 $1,127        $1,163        $1,207
  ----------------------------------------------------------------------- ------------- ------------- -------------
</TABLE>
      See Notes to Consolidated Financial Statements.




                                       61
<PAGE>
                                     PART II

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

                               TIG HOLDINGS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>

                                                                                   Years Ended December 31,
                                                                           -----------------------------------------
    (In millions)                                                              1998          1997          1996
   ----------------------------------------------------------------------- ------------- ------------- -------------
    <S>                                                                        <C>           <C>           <C>    
    Operating Activities
           Net income                                                           $8           $52            $79
           Adjustments to reconcile net income to cash provided
                 by (used in) operating activities:
                 Changes in:
                               Accrued investment income                         6             1             (1)
                               Premium receivable                              (68)          (33)           (11)
                               Reinsurance recoverable                        (551)         (265)           (43)
                               Deferred policy acquisition costs                18           (11)             -
                               Prepaid reinsurance premium                     (11)          (72)             6
                               Income taxes                                     11           (62)           (11)
                               Loss reserves                                   200           374            (73)
                               Loss adjustment expense reserves                (35)          (44)           (53)
                               Unearned premium reserves                       (19)           42            (16)
                               Reinsurance premium payable                      19           (27)            19
                               Funds held under reinsurance agreements         245            64            104
                               Other assets and other liabilities               54            (9)           (26)
           Net investment and other (gain) loss                                 12            (1)             4
           Other                                                                20             3             20
   ----------------------------------------------------------------------- ------------- ------------- -------------
                               Net cash provided by (used in) operating        (91)           12             (2)
    activities
   ----------------------------------------------------------------------- ------------- ------------- -------------

    Investing Activities
           Purchases of fixed maturity investments                          (4,091)       (2,884)        (1,920)
           Sales of fixed maturity investments                               3,465         2,822          1,907
           Maturities and calls of fixed maturity investments                  817           365            252
           Sale of Independent Agents business                                   -          (120)             -
           Net decrease (increase) in short-term investments and other          42          (169)           (28)
           Other                                                               (51)           (6)            (5)
   ----------------------------------------------------------------------- ------------- ------------- -------------
                               Net cash provided by investing activities       182             8            206
   ----------------------------------------------------------------------- ------------- ------------- -------------

    Financing Activities
           Borrowing on line of credit                                          70             -              -
           Repayments on line of credit                                        (70)            -              -
           Common stock issued                                                  10            42              9
           Income tax benefit from stock options exercised                       -            13              -
           Mandatory redeemable capital securities issued                        -           125              -
           Acquisition of treasury stock                                       (18)         (167)          (188)
           Common stock dividends                                              (30)          (31)           (11)
           Preferred stock dividends                                            (2)           (2)            (2)
           Increase (decrease) in notes payable                                  3            (1)             3
   ----------------------------------------------------------------------- ------------- ------------- -------------
                               Net cash used in financing activities           (37)          (21)          (189)
   ----------------------------------------------------------------------- ------------- ------------- -------------
           Increase (decrease) in cash                                          54            (1)            15
           Cash at beginning of period                                          18            19              4
   ----------------------------------------------------------------------- ------------- ------------- -------------
                               Cash at end of period                           $72           $18            $19
   ----------------------------------------------------------------------- ------------- ------------- -------------
</TABLE>
     See Notes to Consolidated Financial Statements.

                                       62
<PAGE>

                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE A. DESCRIPTION OF BUSINESS
--------------------------------------------------------------------------------

TIG Holdings is primarily engaged in the business of property/casualty insurance
and reinsurance  through its 14 domestic  insurance  subsidiaries,  collectively
"TIG" or "the  Company".  Of  direct  premium  written  by TIG in 1998,  21% was
written in California,  9% in Florida, 7% in Michigan, 6% in New York, and 5% in
Hawaii. No other geographical area, including foreign operations,  accounted for
more  than 5% of  direct  premium  written.  A  description  of  each  operating
segments' principal products follows (see also Note P - Operating Segments).

Reinsurance.  TIG's reinsurance operations are conducted through TIG Reinsurance
Company  ("TIG Re").  Reinsurance  is a form of insurance  whereby the reinsurer
(i.e.,  TIG Re) agrees to  indemnify  another  insurance  company  (the  "ceding
company") for all or a portion of the insurance risks underwritten by the ceding
company under an insurance  policy or policies.  TIG Re writes both pro-rata and
excess of loss  coverages.  TIG Re provides  pro-rata  coverages when the ceding
company's  underwriting  capabilities  are  considered  superior  and  where the
relationship  with the ceding  company  provides an  opportunity  for  long-term
profitability.  TIG Re's primary strategy for excess of loss treaties is to take
large  participations  in working  layers of a limited  number of  programs.  By
assuming  a  significant   participation  in  each  treaty,   TIG  Re  exercises
significant  control  over the  terms and  structure  of each  treaty.  TIG Re's
predominant  source of  business  is  through  reinsurance  intermediaries.  Net
premium written for the Reinsurance operating segment comprised 29%, 36% and 36%
of consolidated  net premium written for the years ended December 31, 1998, 1997
and 1996, respectively.

Commercial Specialty.  Commercial Specialty coverages provide protection against
property  loss and legal  liability  for injuries to other  persons or damage to
their property arising from the policyholder's  business operations.  Commercial
Specialty  primarily develops and markets insurance programs where the nature of
the risk does not lend itself to traditional  commercial insurance.  Significant
programs include Sports and Leisure,  with products for professional and amateur
sports  events;  Workers'  Compensation,  which provides  liability  coverage to
employers for payment of employee  benefits  associated with employment  related
accidents  as  mandated  by state  laws;  Primary  Casualty,  which  focuses  on
commercial  auto,  professional  liability,  construction  and marine  programs;
Excess  Casualty which offers lead umbrella and excess  umbrella  policies;  and
participation in three Lloyd's of London syndicates  writing marine, UK property
and aviation business.  Commercial  Specialty products are principally  marketed
through large general agents,  with which TIG sometimes has exclusive  marketing
contracts.  Net premium written for the Commercial  Specialty  operating segment
comprised  53%, 41% and 29% of  consolidated  net premium  written for the years
ended December 31, 1998, 1997 and 1996, respectively.

Custom Markets.  Custom  Markets'  principal  products are standard  automobile,
non-standard  automobile,  homeowners  and  small  business  owner's  insurance.
Automobile  policies  cover  liability  to third  parties for bodily  injury and
property damage and physical damage to the insured's own vehicle  resulting from
collision  or various  other  causes of loss.  Homeowners  and small  commercial
property  policies  protect  against  loss of  dwellings/buildings  and contents
arising from a variety of perils, as well as liability arising from ownership or
occupancy.   Custom  Markets'   products  are  distributed   through   strategic
relationships  with general agents ("GAs") and other key distribution  partners.
Net premium written for the Custom Markets  operating segment comprised 20%, 13%
and 6% of  consolidated  net premium  written for the years ended  December  31,
1998, 1997 and 1996, respectively.


                                       63
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

Basis of  Presentation.  The consolidated  financial  statements are prepared in
accordance with generally accepted  accounting  principles  ("GAAP") and include
the  accounts  of  TIG  Holdings,   Inc.  and  its  subsidiaries.   Intercompany
transactions are eliminated in consolidation. Certain reclassifications of prior
years' amounts have been made to conform with the 1998 presentation.

Financial statements prepared in accordance with GAAP require management to make
estimates  and  assumptions  that  affect  amounts  reported  in  the  financial
statements and accompanying  notes.  Such estimates and assumptions could change
in the future as more  information  becomes  available,  which could  impact the
amounts reported and disclosed herein.

Segment  Reporting.  Effective  January 1, 1998, the Company  adopted  Financial
Accounting Standards Board's ("FASB") Statement of Financial Accounting Standard
No. 131,  "Disclosures about Segments of an Enterprise and Related  Information"
("Statement  131").  Statement 131 superseded FASB Statement No. 14,  "Financial
Reporting  for Segments of a Business  Enterprise".  Statement  131  establishes
standards for the way that public business  enterprises report information about
operating  segments  in annual  financial  statements  and  requires  that those
enterprises  report selected  information  about  operating  segments in interim
financial  reports.   Statement  131  also  established  standards  for  related
disclosures about products and services,  geographic areas, and major customers.
The adoption of Statement 131 did not affect  results of operations or financial
position (See Note P - Operating Segments).

Reporting  Comprehensive Income. As of January 1, 1998, the Company adopted FASB
Statement of Financial  Accounting  Standard No. 130,  "Reporting  Comprehensive
Income" ("Statement 130"). Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption of
this  Statement  had no  impact on the  Company's  net  income or  shareholders'
equity.  Statement  130  requires  unrealized  gains or losses on the  Company's
available-for-sale  securities and the foreign currency translation adjustments,
which prior to adoption were reported separately in shareholders'  equity, to be
included in other  comprehensive  income.  Prior year financial  statements have
been presented in conformity with the requirements of Statement 130.

Earnings per Share ("EPS"). In December 1997, the Company adopted FASB Statement
of  Financial   Accounting  Standard  No.  128,  "Earnings  Per  Share",   which
established a new calculation of EPS. Prior period amounts have been restated to
conform with the new requirements.  Basic earnings per share is calculated based
upon the weighted average common shares  outstanding during the period. In order
to calculate EPS,  unallocated Employee Stock Ownership Plan ("ESOP") shares and
treasury  shares are deducted from the  outstanding  common shares.  For diluted
EPS,  Class A common  stock and common  stock  options  (See Note K -  Incentive
Compensation  Plans) increase weighted average shares  outstanding to the extent
that they are dilutive. To obtain net income attributable to common shareholders
for EPS  computations,  the annual preferred stock dividend is deducted from net
income.  The following  schedule  presents the  calculation of Basic and Diluted
EPS:
<TABLE>

(In millions, except per shares data               1998       1997      1996
----------------------------------------------- ---------- --------- ----------
<S>                                                <C>        <C>       <C>    
Numerator:
   Net Income                                        $8        $52       $79
   Less:  Preferred stock dividends                   2          2         2
----------------------------------------------- ---------- --------- ----------
   Income available to common  shareholders          $6        $50       $77
----------------------------------------------- ---------- --------- ----------
Denominator:
   Weighted average shares outstanding
       for basic EPS                               50.9       51.8      56.4
   Effect of dilutive options                        .3        1.7       1.9
----------------------------------------------- ---------- --------- ----------
   Adjusted weighted average shares for
       diluted EPS                                 51.2       53.5       58.3
Basic EPS                                          $0.13      $0.97      $1.36
----------------------------------------------- ---------- --------- ----------
Diluted EPS                                        $0.13      $0.94      $1.32
----------------------------------------------- ---------- --------- ----------
</TABLE>

                                       64
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Investments. Fixed maturity investments are classified as available for sale, as
TIG has no  positive  intent to hold such  securities  until  maturity,  and are
carried at market value.  Equity securities and other long-term  investments are
also carried at market value while  short-term  investments are carried at cost,
which approximates  market value.  Market value is based principally upon quoted
market prices.  Quoted market prices are available for  substantially  all fixed
maturity investments and equity securities. The difference between the aggregate
market value and amortized cost of securities, after deferred income tax effect,
is reported in accumulated other comprehensive income as unrealized gain or loss
and, accordingly, has no effect on net income (see Note D - Investments).

Interest on fixed maturity  investments is recorded as income when earned and is
adjusted  for any  amortization  of  purchase  premium or  accrual of  discount.
Realized gains and losses on the sale of investments are generally determined on
a  first-in-first-out  basis.  Realized losses are recorded when an investment's
fair  value is below  book  value  and the  decline  is  considered  other  than
temporary.

In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting  for  Derivative  Instruments  and Hedging  Activities"  ("Statement
133"),  which is required to be adopted in years  beginning after June 15, 1999.
The Statement  permits early  adoption as of the beginning of any fiscal quarter
after its issuance.  The Company  expects to adopt the new  Statement  effective
January 1, 2000.  The  Statement  will  require  the  Company to  recognize  all
derivatives on the balance sheet at fair value.  Derivatives that are not hedges
must be adjusted to fair value  through  income.  If the  derivative is a hedge,
depending on the nature of the hedge,  changes in the fair value of  derivatives
will  either be offset  against  the change in fair value of the hedged  assets,
liabilities,  or firm  commitments  through  earnings  or  recognized  in  other
comprehensive  income  until the hedged  item is  recognized  in  earnings.  The
ineffective  portion of a derivative's  change in fair value will be immediately
recognized in earnings.  The Company has not yet  determined  what the effect of
Statement 133 will be on the earnings and financial position of the Company.

Stock Compensation.  TIG adopted Statement of Financial  Accounting Standard No.
123,  "Accounting  for  Stock-Based  Compensation"  ("Statement  123") effective
January 1, 1996.  Statement 123 establishes  financial  accounting and reporting
standards for stock-based  employee  compensation plans. TIG elected to continue
to account for employee  stock-based  compensation  as prescribed by APB Opinion
No. 25,  "Accounting  for Stock  Issued to  Employees"  and to provide pro forma
disclosures in the Notes to Consolidated  Financial Statements of the effects of
Statement  123 on net income  and  earnings  per share  (see Note K -  Incentive
Compensation  Plans). There was no effect on net income or earnings per share as
a result of adopting Statement 123.

Recognition  of Premium  Revenues.  Premium,  including  premium on  reinsurance
contracts,  is earned  principally  on a  pro-rata  basis  over the terms of the
policies,  which  are  generally  not  more  than  one  year.  Unearned  premium
represents the portion of premium  written  applicable to the unexpired terms of
policies in force.

                                       65
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Loss and loss  adjustment  expense  reserves.  The  liability  for loss and loss
adjustment  expenses ("LAE") is based on an evaluation of reported losses and on
estimates of incurred but not reported ("IBNR") losses. The reserve  liabilities
are  determined  using  estimates  of losses for  individual  claims (case basis
reserves) and statistical projections of reserves for IBNR. Management considers
many factors when setting reserves including:  (i) current legal interpretations
of  coverage  and  liability;  (ii)  economic  conditions;  and  (iii)  internal
methodologies   which  analyze  TIG's   experience  with  similar  cases,   with
information from ceding companies,  and with historical trends such as reserving
patterns, loss payments, pending levels of unpaid claims, and product mix. Based
on these  considerations,  management  believes that adequate provision has been
made for TIG's loss and LAE  reserves.  Actual  losses and LAE paid may deviate,
perhaps substantially, from such reserves. Adjustments to the reserves resulting
from  subsequent  developments  or revisions  to the  estimate are  reflected in
results of operations in the period in which such adjustments  become known. The
liability is reported net of estimated  salvage and subrogation  recoverables of
$26 million and $31 million at December 31, 1998 and 1997, respectively. Certain
liabilities  for  unpaid  losses  related  to  long-term  workers'  compensation
coverage are discounted to present value.  The workers'  compensation  indemnity
reserves subject to discounting and the related discount are as follows:
<TABLE>

                                                    December 31,
                                     -----------------------------------------
(In millions)                                 1998                 1997
------------------------------------ -------------------- --------------------
<S>                                           <C>                  <C> 
Subject to tabular reserving                  $263                 $231
Discount (3.5% in 1998 and 1997)                40                   31
------------------------------------ -------------------- --------------------
Discounted indemnity reserves                 $223                 $200
------------------------------------ -------------------- --------------------
</TABLE>

Deferred  Policy  Acquisition  Costs.  Acquisition  costs that vary with and are
primarily  related to the  production  of new business  consist  principally  of
commissions,  premium taxes, and other expenses  incurred at policy issuance and
renewal.  The costs are generally  deferred and amortized ratably over the terms
of the underlying  policies.  Anticipated losses,  loss expenses,  and remaining
costs of servicing  the policies are  considered  in  determining  the amount of
costs to be deferred. Anticipated investment income is considered in determining
whether a premium deficiency exists. Amortization of deferred policy acquisition
costs  totaled $425  million,  $391 million and $347 million for the years ended
December 31, 1998, 1997 and 1996, respectively.

Premium  Deficiency  Recognition.  A premium  deficiency  is  recognized  for an
operating  segment  when the sum of expected  claim  costs and claim  adjustment
expenses, expected dividends to policyholders, maintenance costs and unamortized
acquisition  costs exceeds  future  earned  premiums  related to  non-cancelable
in-force  policies  and  related   anticipated   investment  income.  A  premium
deficiency  is  first  recognized  by  charging   unamortized   deferred  policy
acquisition  costs to expense and then  accruing a liability  for any  remaining
deficiency.

Participating  Insurance  Business.  Dividends  to  policyholders,  which relate
primarily to workers'  compensation  policies,  are accrued during the period in
which the related premium is earned.  Approximately  7%, 7% and 4% in 1998, 1997
and 1996,  respectively,  of TIG's  total gross  written  premium was subject to
participation in such dividends.

                                       66
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Other Assets. Property,  leasehold improvements and furniture and equipment with
a  cost  of $44  million  and  $40  million  at  December  31,  1998  and  1997,
respectively,  are included in other assets.  These balances are carried at cost
less  accumulated  depreciation  of $31 million and $24 million at December  31,
1998 and 1997,  respectively.  Depreciation is computed under the  straight-line
method over the estimated  useful lives of the assets over periods  ranging from
three to ten years. Depreciation expense, including amortization of assets under
capital  lease,  totaled $9 million in 1998,  1997 and 1996.  Goodwill and other
intangible  assets with a cost of $21 million are also  included in other assets
net of  accumulated  amortization  of $4 million and $3 million at December  31,
1998 and 1997,  respectively.  These  balances are amortized on a  straight-line
basis over periods  ranging from 10 to 20 years.  Amortization  expense  totaled
$1.4  million,   $0.6  million  and  $0.5  million  in  1998,   1997  and  1996,
respectively.  TIG's  accounting  policy  governing the  measurement of goodwill
impairment  includes an annual analysis of the  recoverability of goodwill as of
each balance sheet date.

Restructuring Charges. In February 1996, TIG announced the reorganization of its
commercial operations and plans to exit certain lines of business that failed to
meet profitability  standards. As a result of this reorganization,  TIG took the
following   actions:   1)  combined  its  Specialty   Commercial   and  Workers'
Compensation  divisions  to  form  a new  operating  segment  called  Commercial
Specialty;  2)  identified  field  offices for  consolidation  and  closure;  3)
identified  lines of business for non-renewal or cancellation for which 1995 net
premium written was  approximately  $190 million;  4) formed a run-off  division
(called "Other Lines") to administer  contractually required policy renewals for
run-off lines of business, and 5) outsourced to third party service providers or
otherwise  terminated the  responsibilities of approximately 600 employees.  The
consolidation/closure  of field  offices was  completed  by December  31,  1996,
although various lease obligations remain at December 31, 1998.

TIG  recorded  a $100  million  accrual  in first  quarter  1996  for  estimated
restructuring charges comprised of severance of $17 million,  contractual policy
obligations of $37 million, office lease termination of $18 million,  furniture,
equipment and capitalized software write-downs of $12 million, and a reserve for
litigation and credit issues related to terminated  producers of $16 million. In
1997, TIG re-evaluated the $100 million restructuring charge. Although the total
amount of the  restructuring  charge  remained  unchanged,  the components  were
revised  to  the  following:   severance  of  $13  million;  contractual  policy
obligations of $43 million; office lease terminations of $16 million; furniture,
equipment and capitalized software write-downs of $10 million; and a reserve for
litigation  and credit issues  related to  terminated  producers of $18 million.
Severance  costs were less than  originally  estimated due to the  employment of
certain TIG  associates  by third party  service  providers.  The  reduction  in
severance  was  effectively  offset by increased  costs for  contractual  policy
obligations  associated with outsourcing  contracts.  The revised  estimates for
leases, asset write-downs,  and producer credit issues reflect minor adjustments
to original  assumptions  based on activity through  December 31, 1998.  Charges
against the  restructure  accrual of $97 million have been recorded  since March
1996 and are comprised of $13 million in severance,  $43 million in  contractual
policy obligations, $13 million in lease termination costs, $10 million in asset
write-downs and $18 million  related to producer credit issues.  At December 31,
1998, TIG's exit plan was substantially  complete with the remaining restructure
accrual of $3 million projected to be paid out over the next two to three years.
Net premium  written for 1998,  1997, and 1996 from lines of business  placed in
run-off as a result of the 1996  restructure  was ($1)  million,  $4 million and
$140 million, respectively.

                                       67
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Guaranty  Funds  and  Similar  Assessments.  TIG is  assessed  amounts  by state
guaranty funds to cover losses of  policyholders  of insolvent or  rehabilitated
insurance  companies,  by  state  insurance  oversight  agencies  to  cover  the
operating  expenses of such agencies and by other similar  legislated  entities.
These mandatory  assessments may be partially  recovered  through a reduction in
future premium taxes in certain  states.  The Company  currently  expenses these
assessments as they are levied.  Effective  January 1, 1999, the Company will be
required to adopt the  provisions  of AICPA  Statement  of  Position  97-3 ("SOP
97-3"),  under which these  assessments are required to be accrued in the period
in which they have been  incurred.  The effects of  initially  adopting SOP 97-3
will be recorded as the cumulative  effect of a change in accounting  principle.
TIG has not determined the impact that the adoption of SOP 97-3 will have on its
financial condition or results of operations.

                                       68
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE C.  SIGNIFICANT TRANSACTIONS AND EVENTS
--------------------------------------------------------------------------------

Premium  Deficiencies  Recognition.  In third quarter  1998, a contract  dispute
arose  between the Company  and MBNA  America  Bank,  N.A.,  the  producer of an
automobile  insurance  program  within the Custom  Markets  division  ("the MBNA
program").  The dispute related to certain underwriting and pricing changes made
by TIG to produce  contractually  guaranteed rates of return. In September 1998,
the MBNA program was  terminated.  The producer  elected  under the  termination
provisions  of the agency  contract to require  TIG to provide a renewal  market
through September 1, 1999. As a result,  TIG recognized a premium  deficiency of
$33 million in third quarter 1998 related to future earned premium from existing
Custom Markets business and mandatory  renewals  through  September 1, 1999, for
the MBNA  program.  The premium  deficiency  was recorded in TIG's third quarter
1998  income   statement  by  expensing  all  Custom  Markets   deferred  policy
acquisition costs, which totaled $19 million,  and establishing  additional loss
reserves of $14 million.  At December 31,  1998,  $7 million of this  additional
loss reserve remained.  Net premium written for the MBNA program was $88 million
and $30 million for the years ended December 31, 1998 and 1997, respectively.

Merger with Fairfax Financial Holdings Limited. On December 3, 1998, the Company
announced  the proposed  merger of FFHL,  Inc.,  a  wholly-owned  subsidiary  of
Fairfax Financial Holdings Limited (Fairfax), with TIG Holdings, Inc. Fairfax is
a financial services holding company that, through its subsidiaries,  is engaged
in property, casualty and life insurance and reinsurance,  investment management
and  insurance  claim  management.  The  merger  will be the  culmination  of an
evaluation  of  strategic  alternatives  initiated  by the  Company's  Board  of
Directors  in an effort to  determine  the course of action that was in the best
interest  of the  Company  and its  stockholders.  Under the  merger  agreement,
Fairfax has agreed to convert each share of common  stock of the Company  issued
and  outstanding as of the date that the Certificate of Merger is filed with the
State of Delaware into the right to receive $16.50 in cash, without interest. On
March 8, 1999, at a Special Meeting of  Stockholders of TIG Holdings,  Inc., the
stockholders  are expected to vote on the merger  agreement.  The obligations of
the Company and Fairfax to effect the merger are subject, among other things, to
the condition  that necessary  insurance  regulatory  approvals  shall have been
obtained.

Closing of Offices.  During  1998,  the Company  decided to close its  executive
offices in New York City,  consolidating  corporate functions with its corporate
headquarters  in Irving,  Texas.  In addition,  the Company decided to close its
staff counsel  offices  located  throughout  the United States and outsource the
supervision  of claims  litigation  previously  performed by these  offices.  In
conjunction  with these closings,  accruals for lease  obligations and severance
and related  costs  totaling $15 million were  recorded as Corporate  Expense in
1998.

Sale of  Independent  Agents  Business  Unit. On December 31, 1997, TIG sold the
Independent Agents unit of its Retail Division, based in Battle Creek, Michigan,
for $65 million in cash to Nationwide Mutual Insurance  Company  ("Nationwide").
The purchase  price was adjusted  for the surplus of TIG  Countrywide  Insurance
Company ("CIC"),  which was included in the sale, after giving effect to certain
transactions.  There was no  capital  gain or loss  recognized  on the sale.  At
closing,  TIG entered into several  reinsurance  arrangements with CIC and ceded
all outstanding  loss and LAE reserves,  unearned  premium  reserves and premium
receivables  related to the  Independent  Agents unit at book  value.  Under the
purchase  agreement,  Nationwide  assumed  the  risk  of loss  and  LAE  reserve
development and receivable  collectibility.  To allow CIC and Nationwide time to
make appropriate regulatory filings, TIG agreed to continue to write Independent
Agents business and cede such business 100% to CIC for two years, or longer,  if
needed. TIG has also agreed to provide transition assistance services to CIC for
the  processing  of this  business for a period of up to two years.  Independent
Agents gross  premium  written for the years ended  December 31, 1998,  1997 and
1996 totaled $247 million, $286 million and $299 million,  respectively.  During
1998,  TIG  recognized  $20 million in ceding  commission  from the  Independent
Agents book of business.


                                       69
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE D.  INVESTMENTS
--------------------------------------------------------------------------------

Market Value and Amortized  Cost of Invested Assets:
<TABLE>
                                                                 December 31, 1998
                                       ----------------------------------------------------------------------
                                                                                                     % of
                                            Market       Amortized     Unrealized    Unrealized      Market
  (In millions)                              Value          Cost         Gains         Losses      Portfolio
  ------------------------------------- -------------- ------------- ------------- ------------- -------------
  <S>                                        <C>           <C>             <C>          <C>           <C>  
  Municipal bonds                            $564          $522            $42          $ -           14.5%
  Mortgage-backed securities                  643           635             10           (2)         16.5
  United States government bonds            1,574         1,470            106           (2)         40.4
  Corporate and other bonds                   837           857             20          (40)         21.5
  ------------------------------------- -------------- ------------- ------------- ------------- -------------
      Total fixed maturity investments      3,618         3,484            178          (44)         92.9
  Short-term and other investments            276           276              -            -           7.1
  ------------------------------------- -------------- ------------- ------------- ------------- -------------
      Total invested assets                $3,894        $3,760           $178         ($44)         100.0%
  ------------------------------------- -------------- ------------- ------------- ------------- -------------
</TABLE>

<TABLE>

                                                                  December 31, 1997
                                         ---------------------------------------------------------------------
                                                                                                     % of
                                            Market      Amortized     Unrealized    Unrealized      Market
  (In millions)                              Value         Cost         Gains         Losses      Portfolio
  -------------------------------------- ------------- ------------- ------------- ------------- -------------
  <S>                                        <C>           <C>           <C>          <C>           <C>  
  Municipal bonds                            $637          $596          $42          ($1)          15.2%
  Mortgage-backed securities                  941           933           11           (3)          22.4
  United States government bonds            1,014           941           77           (4)          24.2
  Corporate and other bonds                 1,282         1,255           41          (14)          30.6
  -------------------------------------- ------------- ------------- ------------- ------------- -------------
      Total fixed maturity investments      3,874         3,725          171          (22)          92.4
  Short-term and other investments            318           316            3           (1)           7.6
  -------------------------------------- ------------- ------------- ------------- ------------- -------------
      Total invested assets                $4,192        $4,041         $174         ($23)         100.0%
  -------------------------------------- ------------- ------------- ------------- ------------- -------------
</TABLE>

Less than 17% of TIG's portfolio consists of mortgage-backed  securities ("MBS")
as of December 31, 1998. United States federal  government and government agency
mortgages  represent  approximately  69% of TIG's exposure to MBS as of December
31, 1998, offering AAA credit quality. A risk inherent to MBS is prepayment risk
related to interest  rate  volatility.  The  underlying  mortgages may be repaid
earlier or later than  originally  anticipated,  depending on the  repayment and
refinancing activity of the underlying mortgage holders.  Should this occur, TIG
would receive  paydowns on principal  amounts which may have been purchased at a
premium or  discount,  and TIG's  investment  income  would be  affected  by any
adjustments to amortization  resulting from the prepayments.  TIG's consolidated
financial  results have not been  materially  impacted by prepayments of MBS. In
addition,  interest  rate  volatility  can  affect  the  market  value  of  MBS.
Substantially all MBS held in the portfolio can be actively traded in the public
market.

In the normal  course of business,  TIG may choose to hedge some of its interest
rate risk with futures  contracts  and/or  interest  rate swaps.  Alternatively,
derivative  financial  instruments  may also be utilized to enhance  prospective
returns.  TIG's interest rate swap arrangements generally provide that one party
pays  interest  at a floating  rate in relation to  movements  in an  underlying
index,  and the other party pays interest at a fixed rate.  While TIG is exposed
to credit risk in the event of nonperformance by the other party, nonperformance
is not anticipated due to the credit rating of the counterparties. There were no
interest rate swaps at December 31, 1998,  and $14 million  notional face amount
of  interest  rate swaps at  December  31,  1997.  From time to time,  TIG sells
futures contracts to hedge its interest rate and market exposures on thirty-year
U.S.  Treasury  bonds.  Risks arise from  movements  in the  futures  contracts'
values.  Futures  contracts are carried at market  value,  with gains and losses
recognized as  adjustments to the carrying  value of the hedged  investment.  No
futures  contract  positions  were open at December  31, 1998 or 1997.  However,
positions were opened and closed during 1998, 1997 and prior years. The deferral
method has been used to account for these closed  futures  contracts.  Under the
deferral  method,  gains and losses from derivatives are deferred on the balance
sheet and recognized in earnings in conjunction with the earnings recognition of
the designated  items.  The deferred loss from futures  contracts was $5 million
and $4 million at December 31, 1998 and 1997, respectively.

                                       70
<PAGE>

                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

TIG  routinely  enters  into  commitments  to  purchase  securities  on a "To Be
Announced" ("TBA") basis for which the interest rate risk remains with TIG until
the date of delivery and payment.  Delivery and payment of securities  purchased
on a TBA basis can take place a month or more after the date of the transaction.
These securities are subject to market fluctuations during this period and it is
the  Company's  policy  to  recognize  any  gains or  losses  only when they are
realized.  TIG  maintains  cash and  short-term  investments  with a fair  value
exceeding  the amount of its TBA  purchase  commitments.  At December  31, 1998,
there were no TBA  purchase  commitments,  compared  to TBA  commitments  of $24
million with a fair value of $26 million at December 31, 1997.

TIG has no material  non-income  producing  investments and has no geographic or
other concentrations of investment risk which have not been disclosed.  Invested
assets of TIG, carried at $836 million and $620 million at December 31, 1998 and
1997, respectively,  were either on deposit with government agencies as required
by law in various states in which TIG insurance subsidiaries conduct business or
were held as collateral for various  business  transactions.  Invested assets of
TIG's participation in Lloyd's Syndicates totaling $32 million and $8 million at
December 31, 1998 and 1997,  respectively,  including cash of $11 million and $5
million for each respective period, are held in trust in accordance with Lloyd's
of London regulations (see Note N - Commitments and Contingencies).

The estimated  market value and amortized cost of the portfolio,  by contractual
maturity,  at December 31, 1998 are presented  below.  Expected  maturities will
differ from contractual  maturities as certain  borrowers have the right to call
or prepay obligations.
<TABLE>

                                                        Market      Amortized
(In millions)                                            Value         Cost
--------------------------------------------------- ------------- -------------
<S>                                                      <C>           <C> 
Due in one year or less                                  $133          $133
Due after one year through five years                     309           309
Due after five years through ten years                  1,137         1,143
Due after ten years                                     1,396         1,264
Mortgage-backed securities                                643           635
--------------------------------------------------- ------------- -------------
Total fixed maturity investments                       $3,618        $3,484
--------------------------------------------------- ------------- -------------
</TABLE>

Components of Net Investment Income

<TABLE>
                                                     Years Ended December 31,
                                                -------------------------------
(In millions)                                      1998       1997      1996
----------------------------------------------- ---------- --------- ----------
<S>                                                <C>        <C>       <C> 
Fixed maturity investments                         $269       $297      $298
Short-term and other investments                     11          8         6
----------------------------------------------- ---------- --------- ----------
Total gross investment income                       280        305       304
Investment expenses, interest and other             (45)       (15)      (14)
----------------------------------------------- ---------- --------- ----------
Total net investment income                        $235       $290      $290
----------------------------------------------- ---------- --------- ----------
</TABLE>

Net Investment and Other Gain (Loss)

<TABLE>
                                                      Years Ended December 31,
                                                -------------------------------
(In millions)                                       1998       1997      1996
----------------------------------------------- ---------- --------- ----------
<S>                                                 <C>        <C>       <C>    
Fixed maturity investments
   Gross gains                                      $67        $38       $37
   Gross losses                                     (75)       (22)      (41)
Other losses                                         (4)       (15)        -
----------------------------------------------- ---------- --------- ----------
Net investment and other gain (loss) before tax     (12)         1        (4)
Less related taxes                                    4          -         1
----------------------------------------------- ---------- --------- ----------
Net investment and other gain (loss),
   net of taxes                                     ($8)        $1       ($3)
----------------------------------------------- ---------- --------- ----------
</TABLE>



                                       71
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE E.  LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
--------------------------------------------------------------------------------

Activity in the loss and loss  adjustment  expense reserve account is summarized
as follows:
<TABLE>

   (In millions)                                                                 1998           1997          1996
   -------------------------------------------------------------------------- ------------- -------------- -------------
   <S>                                                                          <C>            <C>            <C>   
   Balance January 1, net of reinsurance recoverables                           $2,531         $2,634         $2,752
   Incurred related to:
        Current year                                                             1,016          1,076          1,122
        Prior year                                                                  25             75             16
   -------------------------------------------------------------------------- ------------- -------------- -------------
   Total losses and LAE incurred                                                 1,041          1,151          1,138
   -------------------------------------------------------------------------- ------------- -------------- -------------
   Loss and LAE payments related to:
        Current year                                                               313            417            374
        Prior year                                                                 999            837            882
   -------------------------------------------------------------------------- ------------- -------------- -------------
   Total losses and LAE payments                                                 1,312          1,254          1,256
   Retroactive reinsurance assumed                                                  52              -              -
   -------------------------------------------------------------------------- ------------- -------------- -------------
   Balance December 31, net of reinsurance recoverable                           2,312          2,531          2,634
   Reinsurance recoverable, excluding amounts recoverable on retroactive
        reinsurance ceded of $210 million in 1998                                1,788          1,404           1,126
   -------------------------------------------------------------------------- ------------- -------------- -------------
   Gross loss and LAE reserves                                                  $4,100         $3,935         $3,760
   -------------------------------------------------------------------------- ------------- -------------- -------------
</TABLE>

In 1998, TIG recognized  unfavorable prior year loss and LAE reserve development
of $25 million, of which unfavorable development of $24 million was attributable
to TIG Insurance and $1 million of unfavorable  development was  attributable to
TIG Re. The unfavorable  development in TIG Insurance is primarily  attributable
to  $11  million  of  development  in  unallocated  LAE  costs  related  to  the
termination of programs in Other Lines, unallocated LAE reserve strengthening of
$7 million,  and $6 million of unfavorable  loss and allocated LAE  development.
Retroactive  reinsurance  assumed represents reserves assumed from third parties
for  insurable  events that have  already  occurred in exchange  for cash and/or
investment  consideration.  These  reserves  relate  to new  programs  in  TIG's
workers'  compensation lines and Lloyd's  Syndicates.  No additional premiums or
return premiums have been accrued as a result of prior years affects.

In 1997, TIG recognized  unfavorable prior year loss and LAE reserve development
of  $75  million,   of  which  unfavorable   development  of  $106  million  was
attributable to TIG Re reserve  strengthening  and favorable  development of $31
million was attributable to TIG Insurance.  The reserve  strengthening by TIG Re
in  December  1997 was  based on  actuarial  evaluations  of loss  data  through
September  30,  1997,  which  incorporated  enhancements  to TIG Re's  actuarial
process  and  previously  unavailable  data.  This  intensive  actuarial  review
indicated that reserving  issues were  concentrated in a limited number of large
proportional  programs,  the majority of which were  restructured or non-renewed
effective  January 1, 1997. TIG Re also increased 1997 accident year reserves by
$39 million as a result of the September  30, 1997  actuarial  study.  The total
$145 million  reserve  increase  recorded by TIG Re in December  1997 was net of
corporate aggregate stop loss reinsurance coverage,  including $40 million under
a 1995 intercompany agreement with TIG Insurance.  The favorable prior year loss
reserve  development  of $31 million for primary  lines written by TIG Insurance
was  principally  attributable  to continuing  favorable  workers'  compensation
development.  The majority of this favorable  development was reallocated to the
1997  accident  year for  workers'  compensation  and  various  other  lines for
statutory reporting purposes.  The assumption by TIG Insurance in Other Lines of
$40  million  in  losses  under  the  aforementioned   intercompany  reinsurance
agreement  was  principally  offset  by a $27  million  cession  to a  corporate
aggregate stop loss reinsurance treaty.


                                       72
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The unfavorable loss and LAE reserve  development for prior years in 1996 of $16
million is due primarily to adverse  development  in Other Lines.  In connection
with the February 1996 restructuring,  TIG completed a re-evaluation of loss and
LAE reserves  related to run-off lines using  additional loss  development  data
received  during the first  quarter of 1996.  This data  confirmed  adverse loss
development  trends  observed in the second half of 1995 and was a consideration
in the  decision to exit  certain  lines of  business, as discussed at Note B - 
Summary of Significant  Accounting  Policies.  As a result of this re-evaluation
and  management's  belief that the  restructuring  decision will make the claims
settlement process less consistent and more volatile, TIG increased loss and LAE
reserves  by $31  million  in the  first  quarter  of 1996  for  run-off  lines,
principally   for  long  haul   trucking  and  large   accounts.   This  reserve
strengthening was partially offset by continuing  favorable  development of 1993
and prior years' workers' compensation reserves.

TIG's   reserves   include  an  estimate  of  TIG's   ultimate   liability   for
asbestos-related  matters,   environmental  pollution,   toxic  tort  and  other
non-sudden and accidental  claims for which ultimate  values cannot be estimated
using traditional reserving  techniques.  TIG's environmental claims activity is
predominately  from hazardous  waste and  pollution-related  claims arising from
commercial  insurance  policies.  Most of TIG's pollution  claims are from small
regional  operations or local businesses  involved with disposing wastes at dump
sites or having pollution on their own property due to hazardous material use or
leaking  underground  storage  tanks.  In  connection  with the  initial  public
offering of TIG Holdings'  common stock  ("IPO"),  an affiliate of  Transamerica
agreed  to pay  75% of up to $119  million  of  reserve  development  and  newly
incurred  claims,  up to a maximum  reimbursement  of $89  million,  on policies
written  prior to January 1, 1993 with respect to certain  environmental  claims
involving paid losses and certain LAE in excess of TIG's  environmental loss and
LAE  reserves at December  31, 1992.  At December  31,  1998,  the  Transamerica
affiliate had incurred no liability under this agreement.


                                       73
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE F.  REINSURANCE
--------------------------------------------------------------------------------

<TABLE>
                                               Years Ended December 31,
                                         --------------------------------------
(In millions)                               1998         1997          1996
---------------------------------------- -----------  ------------ ------------
<S>                                        <C>        <C>            <C>    
 Written premium:
    Direct                                 $1,367      $1,221        $1,274
    Assumed                                   774         722           650
    Ceded                                    (723)       (507)         (395)
---------------------------------------- ----------- ------------ -------------
    Net                                    $1,418      $1,436        $1,529
---------------------------------------- ----------- ------------ -------------
Earned premium:
    Direct                                 $1,323      $1,232        $1,307
    Assumed                                   840         667           632
    Ceded                                    (716)       (433)         (400)
---------------------------------------- ----------- ------------ -------------
    Net                                    $1,447      $1,466        $1,539
---------------------------------------- ----------- ------------ -------------
Incurred losses and LAE:
    Gross                                  $1,494      $1,751        $1,417
    Ceded                                    (453)       (600)         (279)
---------------------------------------- ----------- ------------ -------------
    Net                                    $1,041      $1,151        $1,138
---------------------------------------- ----------- ------------ -------------
</TABLE>

TIG  reinsures  portions of its policy risks with other  insurance  companies or
underwriters  and remains liable under these  contracts.  Reinsurance is used to
transfer  some  policy  risks such that the amount of  individual  claims can be
limited to a fixed  percentage or amount.  Reinsurance is also utilized to limit
the amount of claims related to catastrophes. This strategy allows TIG to insure
larger risks while controlling exposure to large losses.  Reinsurance agreements
currently  in place  are  structured  on both a treaty  basis,  where  all risks
meeting a certain  criteria are  automatically  reinsured,  and on a facultative
basis, where each policy reinsured is separately negotiated. Amounts recoverable
from  reinsurers are estimated in a manner  consistent  with the claim liability
associated  with  the  reinsured  policy.  As a  part  of its  overall  business
strategy,  TIG also  engages  in  assumed  reinsurance  transactions,  primarily
through TIG Re, a wholly-owned subsidiary.

Reinsurance  contracts do not relieve TIG from its obligations to policyholders.
Failure of reinsurers to honor their  obligations could result in losses to TIG;
accordingly,  allowances are established for amounts  estimated to be ultimately
uncollectible.  TIG  evaluates  the financial  condition of its  reinsurers  and
monitors  concentrations of credit risk arising from similar geographic regions,
activities,  or economic  characteristics  of the  reinsurers  to  minimize  its
exposure to  significant  losses from  reinsurer  insolvencies.  At December 31,
1998, TIG held collateral related to reinsurance  amounts in the form of letters
of credit  totaling $317 million,  trust funds totaling $310 million,  and funds
held totaling $564 million.

Effective January 1, 1998, the Company entered into a loss portfolio reinsurance
agreement  on a funds  held  basis  for loss and LAE  reserves  of $265  million
related to certain  run-off  programs.  The gain of $22 million was deferred and
will be amortized into income as losses are paid.  Amortization  of the deferred
gain of $8 million was recorded as a reduction of incurred  losses in 1998.  The
contract covers 80% of any adverse loss  development  incurred in excess of $280
million up to a maximum of $343 million.  Any additional future benefit from the
contract  triggered  by  adverse  loss  development  will also be  deferred  and
amortized into income as the related  losses are paid.  Funds held bear interest
at 1.7% per quarter  beginning April 1, 1998.  Related interest on funds held of
$10 million was recorded as a reduction of net investment income in 1998.

Under this reinsurance  arrangement,  the reinsurer has the right to convert the
treaty to a funds  transferred  basis  from a funds held basis if the S&P rating
for TIG falls below A+. As a result of this  provision,  and the  downgrading of
TIG's rating to below A+, effective January 1, 1999, TIG Insurance established a
trust  agreement  of $177  million  with  Norwest  Bank for the  benefit  of the
reinsurer, in lieu of funds transferred.

                                       74
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

During  1998,  in  response  to  favorable   market   conditions  for  obtaining
reinsurance  coverage  and to mitigate the inherent  financial  volatility  of a
changing book of business,  TIG increased the utilization of aggregate stop loss
and other finite  reinsurance  coverages by entering  into several new contracts
with  reinsurance  providers.  In  addition  to the loss  portfolio  reinsurance
agreement  mentioned above,  the Company also purchased  finite  reinsurance for
workers'  compensation  programs that allows TIG to stay  competitive with other
insurers whose state of domicile allow discounting of workers' compensation loss
reserves.  The Company also purchased  finite  reinsurance to provide  aggregate
stop loss  coverage  for all lines.  The pre-tax  net benefit  provided by these
contracts,  including  additional  interest  costs on  withheld  funds,  was $36
million for 1998.

During 1998, the Company commuted certain  reinsurance  treaties,  including one
between TIG  Insurance  and TIG Re, as well as others with third  parties,  that
generated a net benefit for TIG  Insurance  of $34 million and a net benefit for
TIG Re of $2 million.

In response to favorable  pricing  conditions and to mitigate  volatility in the
Company's exposure to losses in new workers'  compensation  lines, TIG Insurance
utilized  reinsurance  to  reduce  its net  retention  on  most of its  workers'
compensation lines from $1 million to $100 thousand during 1998.


                                       75
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE G. INCOME TAXES
--------------------------------------------------------------------------------

TIG files a consolidated  federal  income tax return.  At December 31, 1998, TIG
had a net operating  loss  carryover of $261 million,  of which $34 million will
expire in 2008, $96 million will expire in 2009, $6 million will expire in 2011,
$110  million  will  expire  in  2012,  and $15  million  will  expire  in 2013.
Additionally,  TIG has a $1 million capital loss carryover, which will expire in
2003.  For the tax years ended  December 31, 1998,  1997 and 1996,  TIG made tax
payments of $1 million,  $40 million (related to the $40 million advance payment
discussed below), and $1 million, respectively.

The components of the income tax asset balance are as follows:
<TABLE>

                                                        December 31,
                                             ----------------------------------
(In millions)                                      1998              1997
-------------------------------------------- ---------------- -----------------
<S>                                                <C>               <C>
Current asset                                      $43               $57
Net deferred tax asset                              86                83
-------------------------------------------- ---------------- -----------------
Total                                             $129              $140
-------------------------------------------- ---------------- -----------------
</TABLE>

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
TIG's  deferred tax assets and  liabilities as of December 31, 1998 and 1997 are
shown in the following table:
<TABLE>
                                                        December 31,
                                             ----------------------------------
(In millions)                                       1998             1997
-------------------------------------------- ---------------- -----------------
<S>                                                <C>              <C>    
 Deferred tax assets:
 Discounting of reserves for losses
   and loss adjustment expenses                     $154             $158
 Net operating loss carryforward                      91               70
 Discounting of unearned premium reserves             35               38
 Expense reserves                                     13               20
 Policyholder dividends                               10                7
 Restructuring and other liabilities                   7                5
 Postretirement benefits other than pensions           7                8
 Capital loss carryforward                             -                7
 Business in force                                     -                7
 Other, net                                           10                8
--------------------------------------------- ---------------- ----------------
   Total deferred tax assets                         327              328
--------------------------------------------- ---------------- ----------------

 Deferred tax liabilities:
 Section 338 - marketable securities                 124               130
 Deferred policy acquisition costs                    44                53
 Unrealized gain - marketable securities              48                52
 Section 338 - other                                  25                10
--------------------------------------------- ---------------- ----------------
   Total deferred tax liabilities                    241               245
--------------------------------------------- ---------------- ----------------
   Net deferred tax asset                            $86               $83
--------------------------------------------- ---------------- ----------------
</TABLE>


                                       76
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In accordance with the provisions of Statement of Financial  Accounting Standard
No. 109,  "Accounting  for Income  Taxes",  TIG's  management  has  reviewed its
deferred  tax asset  balance and  concluded  that it is more likely than not the
entire deferred tax asset will be realized.  Management's conclusion is based on
its  expectation  that  sufficient  taxable  income will be  generated in future
periods within the carryforward  period. TIG has reported profits in 1997, 1996,
1995 and 1994,  and is expected to be profitable in the future.  If TIG does not
achieve its  anticipated  earnings  level in future  periods but  maintains  the
earnings  level  sustained  over the past  four  years and  converts  all of its
tax-exempt  securities into taxable  securities,  it anticipates that all of its
net operating  loss and 90% of its existing  deferred tax asset will be utilized
by the year 2002.

Components of the income tax benefit (expense) are as follows:
<TABLE>

                                          Years Ended December 31,
                                         -----------------------------
 (In millions)                               1998     1997       1996
 ---------------------------------------- --------- --------- ---------
 <S>                                         <C>      <C>        <C> 
 Current expense                             ($4)     ($9)       ($9)
 Deferred benefit (expense)                   13       (1)        13
 ---------------------------------------- --------- --------- ---------
    Total income tax benefit (expense)        $9     ($10)        $4
 ---------------------------------------- --------- --------- ---------
</TABLE>

The exercise of stock options  granted under the Company's  various stock option
plans gives rise to  compensation  which is includable in the taxable  income of
the  applicable  employees  and  deductible by the Company for federal and state
income tax purposes. Such compensation results from increases in the fair market
value  of the  Company's  common  stock  subsequent  to the date of grant of the
applicable exercised stock options.  Accordingly,  in conformity with Accounting
Principles  Board  Opinion No. 25, such  compensation  is not  recognized  as an
expense for financial accounting purposes and the related tax benefits are taken
directly to Additional Paid-in Capital.  Additional Paid-in Capital,  which is a
component of Common Stock in the accompanying consolidated financial statements,
was  increased  $13  million  during  1997 as a result of the  exercise  of such
options.  Tax benefits from the exercise of stock options by employees  were not
material in 1998 and 1996 (see Note K - Incentive Compensation Plans).


                                       77
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The  components  of benefit  (expense)  for total  deferred  income taxes are as
follows:
<TABLE>

                                                     Years Ended December 31,
                                                   ---------------------------
(In millions)                                        1998      1997     1996
-------------------------------------------------- -------- --------- --------
<S>                                                  <C>       <C>      <C>    
 Discounting of reserves for losses and
     loss adjustment expenses                         ($4)      ($9)     ($5)
 Discounting of unearned premium reserves              (3)       (4)       1
 Net operating loss carryforward                       21        35      (11)
 Expense reserves                                      (7)       17        -
 Restructuring charges                                  2       (15)      16
 Capital loss carryforward                             (7)      (10)       3
 Business in force                                     (7)       (7)      (6)
 Policyholder dividends                                 3         1       (4)
 Tax liability adjustment                               -         5       20
 Investment book / tax differences                      6        (2)      (4)
 Deferred policy acquisition costs                      9        (1)      (1)
 Other                                                  -       (11)       4
--------------------------------------------------- -------- -------- --------
   Total deferred income tax benefit (expense)        $13       ($1)     $13
--------------------------------------------------- -------- -------- ---------
</TABLE>

The reconciliation of income tax computed at the U.S. federal statutory rates to
total income tax benefit (expense) is as follows:
<TABLE>

                                                    Years Ended December 31,
                                                 -----------------------------
(In millions)                                      1998      1997      1996
------------------------------------------------ --------  --------  ---------
<S>                                                <C>      <C>        <C>  
Federal income tax expense at statutory rates      $ -      ($22)      ($26)
Tax-exempt investment income                         9         9          9
Tax liability adjustment                             -         5         20
Other                                                -        (2)         1
------------------------------------------------ --------  --------  ---------
Total income tax benefit (expense)                  $9      ($10)        $4
------------------------------------------------ --------  --------  ---------
</TABLE>

TIG's Federal income tax returns are routinely  audited by the Internal  Revenue
Service  (IRS)  and  provisions   are  made  in  the  financial   statements  in
anticipation of the results of these audits.  Following a routine federal income
tax audit by the IRS, in September  1997,  the IRS issued a Statutory  Notice of
Deficiency  for the tax year 1993 and a Revenue Agents Report for 1994 asserting
a tax liability of  approximately  $170 million  excluding  interest.  The IRS's
asserted tax adjustments principally relate to the acquisition made by TIG under
the Section 338(h)(10)  election of April 27, 1993 in conjunction with TIG's IPO
and primarily  generate  temporary  differences by creating  income in 1993 with
corresponding  deductions in 1993 and future tax years.  TIG strongly  disagrees
with the  IRS's  position  and,  on  December  11,  1997,  TIG filed a Tax Court
Petition  challenging it. In connection with the Statutory  Notice of Deficiency
issued  by the IRS for the 1993 tax year,  TIG made a $40  million  advance  tax
payment in December 1997 that has been  reflected as a current tax asset.  While
the  timing of cash tax  payments  may be  impacted,  management  believes  that
revisions to TIG's  recorded tax liability,  if any,  arising from the IRS audit
will not materially impact consolidated net income or financial condition.

In March 1996, TIG entered into  settlement  agreements  with the IRS on several
outstanding audit  assessments,  resulting in a  redetermination  of certain tax
liabilities related to tax years prior to TIG's initial public offering in April
1993. A $20 million deferred tax benefit was recognized in first quarter of 1996
as a result of the redetermination.


                                       78
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE H. FINANCING ARRANGEMENTS
--------------------------------------------------------------------------------

Notes Payable.  In April 1995, TIG Holdings  issued $100 million of 8.125% Notes
maturing in 2005.  Interest is payable on a  semi-annual  basis,  and a lump sum
principal  repayment for the non-callable notes is due April 15, 2005.  Included
in the restrictive  covenants are limitations on the disposition of the stock of
TIG Insurance Company ("TIC"), limitations on liens and conditions on the merger
of the  Company.  If the merger of the  Company  with  Fairfax  is  consummated,
management  expects these conditions will be met. Interest expensed and paid was
$8  million  in 1998,  1997 and 1996.  These  Notes are the  senior  debt of the
Company and have liquidation preference over other debt.

Sale - Leaseback.  In December  1995, TIG Insurance  Company  entered into a $50
million credit facility,  of which approximately $27 million and $24 million was
outstanding  as of December 31, 1998 and 1997,  respectively.  The facility is a
direct  financing  arrangement  with a  third  party  related  to the  sale  and
leaseback of certain fixed assets,  excluding data processing equipment. The net
book value of these assets is $23 million at December 31, 1998,  and $18 million
at December 31, 1997, which includes accumulated depreciation of $24 million and
$19 million at December 31, 1998 and 1997, respectively. The initial draw of $22
million  against the facility in December 1995 is being  amortized  over 5 years
with interest at 5.9% payable  quarterly.  Subsequent draws against the facility
are amortized  over 5 years and interest,  based on a fixed or floating rate, is
payable quarterly. Interest rates during 1998 ranged from 5.9% to 7.7%. Interest
expensed and paid was $1.6 million for 1998 and 1997, and $1.4 million for 1996.

At December 31, 1998,  approximate  future  minimum  lease  payments  under this
facility are as follows:
<TABLE>

  (In millions)             Principal           Interest             Total
---------------------- --------------------- ----------------    -------------
  <S>                         <C>                 <C>                 <C>     
  1999                        $8.8                $1.5                $10.3
  2000                         9.1                 0.9                 10.0
  2001                         4.7                 0.4                  5.1
  2002                         3.0                 0.2                  3.2
  2003                         1.4                   -                  1.4
---------------------- --------------------- -------------------- ------------
  Total                      $27.0                $3.0                $30.0
---------------------- --------------------- -------------------- ------------
</TABLE>

Line of  Credit.  In  December  1995 (as  amended  and  restated  in 1997),  TIG
established  an unsecured  revolving  line of credit with maximum  borrowings of
$250  million.  Included in the  restrictive  covenants are  limitations  on the
disposition  of  significant  subsidiaries  of TIG,  limitations  on  liens  and
limitations on the merger of the Company. The merger of the Company with Fairfax
(see Note C -  Significant  Transactions  and Events)  would create an "event of
default",  and as such,  the Company  intends to terminate the facility prior to
completion  of the sale.  During the first  quarter of 1998,  TIG  borrowed  $70
million against this facility.  The full amount of the five-year credit facility
was available for general corporate  purposes as of December 31, 1998.  Interest
of $2.5 million was expensed and paid in 1998. The interest rate on the facility
is  determined  at the time of each  individual  borrowing  and is based  upon a
senior debt ratings grid,  currently either LIBOR plus 30 basis points, Prime or
CD rate plus 42.5 basis points. For utilization  greater than 50%, the LIBOR and
CD rates increase by 5 basis points.

Capital  Securities.  In January of 1997,  TIG Capital Trust I ("TIG Capital" or
the "Trust"),  a statutory business trust created under Delaware law and a trust
subsidiary  of TIG  Holdings,  completed a private  offering for $125 million of
8.597% mandatory redeemable capital securities maturing in 2027. TIG Holdings is
the initial holder of 100% of the common  securities of TIG Capital.  Holders of
the  capital   securities   of  the  Trust  have  a  preference   under  certain
circumstances over the holders of common securities of the Trust with respect to
cash distributions and amounts payable on liquidation, redemption, or otherwise.

                                       79
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

TIG Holdings issued $128.75 million in 8.597% Junior Subordinated  Debentures to
TIG Capital Trust I (including  approximately  $3.75 million with respect to the
capital  contributed to the Trust by TIG Holdings).  Included in the restrictive
covenants  are  conditions  on the merger of the  Company.  If the merger of the
Company with Fairfax is consummated, management expects these conditions will be
met.  TIG  Holdings  guaranteed  the payment of  distributions  and  payments on
liquidation or redemption of the capital securities but only in each case to the
extent of funds  held by the  Trust.  The  guarantee  does not cover  payment of
distributions  when  the  Trust  does  not  have  sufficient  funds  to pay such
distributions.  The net proceeds  received by TIG Holdings  from the issuance of
the debentures were used for general corporate purposes including repurchases of
the Company's common stock.  Interest expense was $10.7 million and $9.9 million
in 1998 and 1997, respectively. Interest paid was $10.7 million and $4.9 million
in 1998 and 1997, respectively.



                                       80
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE I. MANDATORY REDEEMABLE PREFERRED STOCK
--------------------------------------------------------------------------------

In April 1993, in connection  with it's IPO, TIG Holdings  issued 250,000 shares
of non-voting mandatory redeemable preferred stock with a cumulative annual cash
dividend   rate   of   $7.75   per   share   and   an   aggregate    liquidation
preference/redemption  value of $25 million plus  accrued and unpaid  dividends.
The  preferred  stock must be  redeemed  on April 27,  2000.  With each  regular
quarterly  dividend declared on the preferred shares,  each holder also receives
one non-transferable right (a "Right").  Each Right will constitute the right to
receive an  additional  amount to the extent that the regular  cash  dividend to
which the related Right was, in whole or in part,  not made out of TIG Holdings'
current or  accumulated  earnings and profits,  as calculated for federal income
tax purposes.  In such event,  the holder of a Right will be entitled to receive
an amount which, when taken together with the regular cash dividend to which the
Right was related,  would cause the net after-tax return to such holder to equal
what the net after-tax return on the mandatory  redeemable preferred stock would
have been had the regular cash dividend been paid entirely out of the current or
accumulated  earnings  and profits of TIG  Holdings.  During  1998,  TIG paid an
additional  $1 million in respect to these Rights in connection  with  dividends
declared on the mandatory  redeemable preferred stock during 1997. No additional
payments were required during 1997 and 1996.

If the  merger  of  the  company  with  Fairfax  is  consummated (see  Note C - 
Significant  Transactions  and Events),  each share of  preferred  stock that is
issued and  outstanding  immediately  prior to the merger will be converted into
the right to receive one share of preferred  stock of the entity  surviving  the
merger, with the same terms as the original shares.


--------------------------------------------------------------------------------
NOTE J. SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------

Authorized Capital Stock. TIG Holdings' authorized capital stock consists of one
million shares of $0.01 par value Class A convertible  common stock, 180 million
shares of $0.01 par value common stock, and 15 million shares of $0.01 par value
preferred stock.

Class A Common Stock. In April 1993, TIG Holdings issued 224,600 shares of Class
A common stock of which 81,191 had been canceled as of April 1996. In accordance
with the terms of their  issuance,  the remaining  143,409 Class A common shares
were  converted  to common  shares in 1996 (see Note K - Incentive  Compensation
Plans).  As of  December  31,  1998,  no  shares  of  Class A common  stock  are
outstanding.

Subsidiary  Dividend  Restrictions.  Payment of dividends to TIG Holdings by its
insurance subsidiaries is subject to certain restrictions.  State insurance laws
limit the amount that may be paid without  prior notice or approval by insurance
regulatory  authorities.  As of December 31, 1998,  $96 million of dividends are
currently available for payment to TIG Holdings from its insurance  subsidiaries
during  1999  without   restriction.   Cash  dividends  paid  by  the  insurance
subsidiaries  in 1998,  1997 and 1996 were $175  million,  $145 million and $130
million, respectively.



                                       81
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE K. INCENTIVE COMPENSATION PLANS
--------------------------------------------------------------------------------

As of December 31, 1998, the Company has three stock based  compensation  plans,
which are described below. The Company adopted  Statement 123 effective  January
1,  1996 and has  elected  to  continue  to  account  for  employee  stock-based
compensation  as  prescribed  by APB  Opinion  No. 25 (See  Note B - Summary  of
Significant  Accounting Policies).  If the merger of the Company with Fairfax is
consummated  (see Note C - Significant  Transactions  and Events),  participants
will become fully vested,  cash  distributions will be made and these plans will
terminate.

The 1996 Long-Term  Incentive Plan. The 1996 Long-Term Incentive Plan (the "1996
Plan")  provides  for  awards  of  stock  options,  stock  appreciation  rights,
restricted stock grants,  restricted stock units and/or  performance  units. The
maximum number of shares of Common Stock for which awards may be granted or paid
out under the 1996 Plan is five million shares plus,  effective January 1, 2000,
the Limitation  Amount.  The "Limitation  Amount" is 1.5% of the total number of
issued and  outstanding  shares of Common  Stock as of  January  1, 2000,  plus,
effective each January 1 thereafter  through and including January 1, 2006, 1.5%
of the total number of issued and outstanding  shares of Common Stock as of such
January  1.  In  addition  to the  shares  available  for  grant  as  previously
mentioned,  two million shares of Common Stock will be available  solely for the
grant of awards to employees in connection  with  acquisitions of other entities
or  businesses  by the Company.  As of December  31,  1998,  there were no stock
appreciation  rights,  restricted stock units or performance units  outstanding.
The 1996 Plan was  originally to terminate on the date of the  Company's  annual
meeting of  shareholders  in 2006;  however,  if the merger of the Company  with
Fairfax is consummated,  the plan will be terminated.  Thereafter, no awards may
be granted. Stock options under the 1996 Plan typically have a term of ten years
from the date of the  grant  and vest in equal  annual  installments  over  four
years.  Restricted stock grants typically vest in equal annual installments over
three years.  The weighted average fair value of restricted stock granted during
the year was $31.47.

The 1996  Non-Employee  Directors  Compensation  Program.  The 1996 Non-Employee
Directors Compensation Program (the "1996 Program") provides for awards of stock
options and  restricted  share  units.  These  awards are not to exceed  200,000
shares.  As of December 31, 1998,  there were 33,873  restricted share units and
stock options  representing  the right to acquire 67,746 shares of common stock.
Each restricted share unit converts into one share of common stock based upon an
irrevocable election made by each non-employee director. The 1996 Program was to
terminate on the close of business on the date of the Company's  annual  meeting
of shareholders in 1999;  however,  if the merger of the Company with Fairfax is
consummated,  the program will be terminated.  Restricted  share units and stock
options  granted prior to the date of the annual meeting of shareholders in 1997
will vest in three  substantially equal installments on the dates of each annual
meeting of shareholders in 1997, 1998 and 1999. Restricted share units and stock
options  granted on or after the date of the 1997 annual meeting of shareholders
but prior to the date of the 1998 annual  meeting of  shareholders  will vest in
two equal  installments  on the dates of each annual meeting of  shareholders in
1998 and 1999.  Restricted share units and stock options granted on or after the
date of the 1998  annual  meeting of  shareholders  but prior to the 1999 annual
meeting of  shareholders  were originally to vest in one installment on the date
of the 1999 annual meeting of shareholders. The maximum term of any stock option
granted will be ten years from the date of grant.

The 1993 Long-Term  Incentive Plan. The 1993 Long-Term Incentive Plan (the "1993
Plan")  provides  for  awards  of  stock  options,  stock  appreciation  rights,
restricted stock grants and/or  performance units  (collectively  referred to as
"awards"). These awards are not to exceed 15 million shares in the aggregate. As
of December 31, 1998,  there were no stock  appreciation  rights or  performance
units outstanding.  The 1993 Plan terminated May 2, 1996, except with respect to
outstanding  awards, with the approval of the 1996 Plan. Stock options under the
1993 Plan  originally  had a term of ten years from the date of grant and vested
in equal annual  installments  over four years,  while  restricted  stock grants
vested in equal annual installments over three years.

                                       82
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In connection with the IPO, TIG and Transamerica agreed that TIG employees could
surrender their options to purchase  Transamerica  common stock by May 14, 1993,
and receive options to purchase TIG Holdings common stock, retaining the taxable
spread, vesting schedule and term of the surrendered  Transamerica stock options
as of the IPO closing date.  Options  relating to 820,498 shares of common stock
were issued in connection  with this  agreement and are included in  outstanding
options in the following table.

A summary of the status of the Company's three stock based compensation plans as
of December 31, 1998 and changes  during the three years ended December 31, 1998
is presented below:

<TABLE>

                                     Restricted        Class A
                                       Shares          Shares        Options
--------------------------------- --------------- --------------- -------------
<S>                                  <C>               <C>         <C> 
Outstanding at January 1, 1996         28,860          35,793      11,011,182
Granted                               110,170               -       1,476,736
Exercised/Earned                      (25,436)        (35,793)       (383,594)
Forfeited or canceled                 (14,380)              -        (472,089)
--------------------------------- --------------- --------------- -------------
Outstanding at December 31, 1996       99,214               -      11,632,235
--------------------------------- --------------- --------------- -------------
Granted                                71,319               -       2,090,117
Exercised/Earned                      (33,972)              -      (2,994,788)
Forfeited or canceled                 (11,268)              -        (262,820)
--------------------------------- --------------- --------------- -------------
Outstanding at December 31, 1997      125,293               -      10,464,744
--------------------------------- --------------- --------------- -------------
Granted                               178,045               -       1,580,832
Exercised/Earned                      (51,435)              -        (464,952)
Forfeited or canceled                 (14,984)              -        (649,466)
--------------------------------- --------------- --------------- -------------
Outstanding at December 31, 1998      236,919               -      10,931,158
--------------------------------- --------------- --------------- -------------
</TABLE>

The weighted  average option  exercise  price was $25.74,  $25.06 and $22.74 for
options  outstanding  at December 31,  1998,  1997 and 1996,  respectively.  The
weighted  average option  exercise  price was $30.50 for options  granted during
1998,  $21.95 for options  exercised in 1998 and $29.11 for options forfeited in
1998.

The weighted  average fair value of options  granted during 1998 was $8.48.  The
fair value of each  option  grant is  estimated  on the date of grant  using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 2.95  percent,  1.70 percent and 1.75 percent;  expected  volatility of .289,
 .220,  and .201;  risk free interest rate of 5 percent,  6 percent and 7 percent
and expected life of 7 years for all years. 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.   If  the  merger  of  the  Company  with  Fairfax  is
consummated, all outstanding options will be cancelled.

If the fair value of the stock compensation granted had been accounted for under
SFAS 123,  the  proforma net loss for 1998 would have been $7.2 million or $0.14
per basic share;  net income for 1997 would have been $41.1 million or $0.76 per
basic share or $0.74 per diluted share;  and net income for 1996 would have been
$74.5 million or $1.29 per basic share or $1.26 per diluted share.  For purposes
of proforma  disclosures,  the estimated fair value of the stock compensation is
amortized to expense over the stock compensation's vesting period. The effect on
net income of the stock compensation  amortization for the years presented above
is not likely to be  representative  of the effects on  reported  net income for
future years.


                                       83
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table summarizes  information about stock options  outstanding and
exercisable at December 31, 1998:

<TABLE>

                                      Options Outstanding               Options Excercisable
                                --------------------------------- ------------------------------


   Range of           Number     Weighted-Avg.    Weighted-Avg.      Number        Weighted-Avg.
   Exercise         Outstanding   Remaining         Exercise       Exercisable@     Exercise 
    Prices          @ 12/31/98  Contractual Life     Price          12/31/97          Price
----------------- ------------- ---------------- ---------------- -------------- ---------------
<S>                 <C>         <C>               <C>              <C>             <C>       
$14.00 to $19.00      290,179        7.6             $17.21            90,179        $16.78
$19.01 to $24.00    6,588,942        4.7             $22.33         6,382,162        $22.37
$24.01 to $29.00      731,475        7.0             $26.15           377,950        $26.09
$29.01 to $34.00    2,813,924        8.6             $32.77         1,045,950        $32.51
$34.01 to $39.00      506,638        8.2             $35.37           419,239        $34.89
------------------ ------------- ---------------- ---------------- ------------- ---------------
$14.00 to $39.00   10,931,158        6.1             $25.74         8,315,480        $24.39
------------------ ------------- ---------------- ---------------- ------------- ---------------
</TABLE>


Total  compensation  cost  recognized in the income  statement  for  stock-based
employee compensation awards was $4.6 million, $1.8 million and $1.0 million for
1998, 1997 and 1996, respectively.


--------------------------------------------------------------------------------
NOTE L. RETENTION AND SEPARATION PROGRAMS FOR CERTAIN EXECUTIVES
--------------------------------------------------------------------------------

Special  Severance Plan.  Under this plan, which became effective as of June 18,
1998,  each  designated  participant  (each an officer or key employee)  will be
entitled to receive special severance  benefits (in lieu of normal severance) if
his or her  employment  with the Company or its  affiliates is terminated  under
specified  circumstances  within two years  following a Change in Control of the
Company. The amount of each participant's  special severance has been determined
by the  Compensation  Committee of the Board of  Directors.  In addition to this
severance benefit,  each participant will be entitled to receive an amount equal
to the sum of (x) the unvested portion (if any) of his or her accounts under the
Company's  qualified and  nonqualified  defined  contribution  plans and (y) the
contributions   which  the   Company   would  have  made  or  credited  to  such
participant's  plan accounts (based upon the amounts  contributed or credited to
such accounts in the year prior to the year in which the participant  terminates
employment,  or, in the case of  qualified  and  nonqualified  savings  (401(k))
accounts, based upon the then current employer matching contributions being made
to such accounts) for a specified period following employment  termination.  The
participant  will also be eligible to continue to participate (on the same basis
as if  still  actively  employed)  in the  Company's  health,  dental  and  life
insurance  plans  for a finite  period  following  employment  termination.  The
maximum  aggregate  amount of severance  benefits  that would be payable in cash
pursuant to this severance plan is approximately $16 million.

Retention  and Bonus Plan.  In addition,  pursuant to a Retention and Bonus Plan
approved by the Board in July 1998, the designated  participants are entitled to
certain payments if they continue their employment until the earlier of June 30,
2000 or a Change of Control of the  Company.  The  maximum  aggregate  amount of
benefits that would be payable in cash pursuant to this plan is approximately $5
million.

                                       84
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE M. EMPLOYEE BENEFIT PLANS
--------------------------------------------------------------------------------

TIG  Holdings'  employee  benefit plans (the  "Plans")  include the  Diversified
Savings and Profit  Sharing  Plan and the Employee  Stock  Ownership  Plan.  TIG
Holdings  adopted  the ESOP and  Profit  Sharing  Restoration  Plans,  effective
January 1, 1994, and the Diversified Savings Restoration Plan, effective January
1, 1997.  TIG Holdings may amend,  terminate,  or suspend  contributions  to the
Plans at any time as it may deem advisable. TIG Holdings is the administrator of
the  Plans.  Any  subsidiary  of TIG  Holdings  participating  in the  Plans may
withdraw at any time with the consent of the TIG  Holdings'  Board of Directors.
The Board of Directors of TIG Holdings has fiduciary  responsibilities  relating
to the interpretation and operation of the Plans.

Diversified  Savings  and Profit  Sharing  Plan.  As of  January  1,  1997,  the
Diversified  Savings  Plan and Profit  Sharing Plan were  combined  into the TIG
Holdings,  Inc. Diversified Savings and Profit Sharing Plan (the "DS&PSP).  The
DS&PSP is qualified  under Section 401 (a) of the Internal  Revenue Code ("IRC")
and the trust  established to hold the assets of the DS&PSP is tax-exempt  under
Section 501 (a) of the IRC. An employee vests 25% after one year of service, 50%
after two years of service  and 100% after  three  years of  service.  While the
assets are maintained in a single trust, the record keeping,  contributions  and
participant   qualifications   remain  as  if  under  two  separate  plans,  the
Diversified Savings Plan (the "DSP") and the Profit Sharing Plan (the "PSP").

The DSP is available  to all salaried  employees.  Most  employees  who elect to
participate  may  contribute  up to 12% of their pre-tax  salary,  plus bonuses,
commissions,  and overtime pay ("Employee Compensation") for each calendar year.
TIG Holdings administers the DSP and will make matching contributions to the DSP
in an amount equal to 75% of the  participant's  contribution up to a maximum of
6% of Employee Compensation. Certain IRC required limitations may be imposed for
participants who are treated as "highly  compensated  employees" for purposes of
the IRC.  Generally,  an employee vests in the matching  employer  contributions
based upon years of service. Employer matching contributions were $3 million for
1998, 1997 and 1996.

The PSP benefits  eligible  employees of TIG  Holdings.  Eligible  employees are
those who either were  employed by TIG Holdings on December 31 each year or were
employed  during the plan year but died  prior to the plan year end.  Generally,
each  salaried  employee  is  eligible  to  participate  in the PSP. No employee
contributions  are  permitted  to  be  made  to  the  PSP.  The  amount  of  any
contribution  for any calendar  year made by TIG Holdings  will be determined at
the sole discretion of the TIG Holdings' Board of Directors.  For 1998, 1997 and
1996 plan years,  TIG contributed on behalf of each  participant an amount equal
to the sum of (i) two percent of the  participant's  Employee  Compensation,  as
defined,  for the Plan Year and (ii) four  percent of the  participant's  annual
Employee  Compensation in excess of a determined wage base. In addition,  if the
merger of the Company  with  Fairfax is  consummated  (see Note C -  Significant
Transactions  and Events),  the 1% contribution for the ESOP 1998 plan year will
be contributed to the PSP in 1999. Contributions were $2 million, $2 million and
$1 million for 1998, 1997 and 1996, respectively.

                                       85
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Diversified  Savings and Profit Sharing  Restoration Plan.  Effective January 1,
1997,  TIG  Holdings  adopted  the  TIG  Holdings,   Inc.   Diversified  Savings
Restoration  Plan and combined it with the existing  Profit Sharing  Restoration
Plan. The TIG Holdings,  Inc. Diversified Savings and Profit Sharing Restoration
Plan (the  "DS&PS  Restoration  Plan") is an  unfunded  plan for the  purpose of
providing  deferred  compensation  for a select  group of  management  or highly
compensated  employees whose  allocations under the qualified DS&PSP are limited
by the annual  restrictions as determined by the Internal  Revenue Code.  Highly
compensated  employees will be eligible for  participation  immediately upon the
date of hire if annual  earnings,  including  bonus in the year  paid,  exceed a
specified  threshold.  The threshold for each year will be the amount of the cap
on compensation that may be taken into account under the qualified plan for that
year, or such greater  amount as may be  determined  by the TIG  Holdings,  Inc.
Benefits Committee in its discretion.  A Participant vests 25% after one year of
service,  50% after two years of service  and 100% after three years of service.
Participants' accounts are credited for the difference between the dollar amount
credited to the participants'  account under the qualified DS&PSP and the amount
that would have been  credited in the absence of the  restrictions  noted above.
Participants'  accounts  are  adjusted  for  gains,  losses and  earnings  as if
invested  in the same manner as such  associate's  account  under the  qualified
DS&PSP. Liabilities due to the participants were approximately $3 million and $2
million as of December 31, 1998 and 1997.

Employee  Stock  Ownership  Plan.  Most  salaried   employees  are  eligible  to
participate  in the ESOP.  Generally,  TIG Holdings  will  contribute,  for each
calendar  year,  an amount  equal to one  percent of Employee  Compensation,  as
defined, on behalf of each participant  employed on the last working day of that
year or who was employed but died during the year.  Employees  who were actively
employed on April 27, 1993  received an initial  allocation of 100 shares of TIG
Holdings  common stock in which they were  immediately  fully vested.  Effective
January 1, 1995,  all  active  associates  who did not  previously  receive  the
initial  allocation  of  shares  in 1993  were  eligible  for 100  shares of TIG
Holdings,  Inc.  common stock upon  attainment  of six months of service.  These
shares were allocated to the associates' accounts as of the last day of the plan
year.  No  employee  contributions  are  permitted  to be made to the  ESOP.  An
employee vests 25% after one year of service, 50% after two years of service and
100% after three years of service.  In April 1993, the ESOP borrowed $24 million
from TIG Holdings to purchase 1,124,754 newly issued shares of common stock. The
loan obligation of the ESOP is considered unearned employee compensation, and as
such, is recorded as a reduction of TIG Holdings'  shareholders' equity. As loan
repayments  are made by the  ESOP,  common  stock  is  released  to  participant
accounts.  Unearned  compensation  is  amortized  based on the  number of shares
committed to be released and  compensation  expense is  recognized  based on the
current market price.  Dividends  paid on  unallocated  shares are considered as
employer  contributions.  Compensation  expense of $2 million was  recognized in
1997 and 1996, respectively.  At December 31, 1998, 189,330 shares are allocated
and 360,752 shares are in suspense. As of December 31, 1998, the market value of
unallocated  shares was $6 million.  As noted below, no annual  contribution was
made to the ESOP plan for the 1998 plan year.  Contributions to the ESOP were $1
million and $2 million for 1997 and 1996. A  participant's  ESOP account will be
distributed in full shares of common stock or cash after termination of service.

If the merger of the Company with Fairfax is consummated,  the 1% ESOP 1998 plan
year  contribution  will be made to the PSP in 1999.  The 100 shares  allocation
will be terminated as of December 31, 1998, and a cash  distribution  outside of
the plan will be made to those affected  employees in lieu of allocating  shares
to their accounts. If the merger of the Company with Fairfax is consummated, TIG
expects to merge the ESOP plan into the DS&PSP.

                                       86
<PAGE>
                              TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

ESOP  Restoration  Plan.  The TIG  Holdings,  Inc. ESOP  Restoration  Plan is an
unfunded plan for the purpose of providing  deferred  compensation  for a select
group of management or highly compensated  employees whose allocations under the
qualified  ESOP plan are limited by annual  restrictions  as  determined  by the
Internal Revenue Code. Highly compensated  employees whose allocations under the
qualified  plan are limited by the Internal  Revenue Code  restrictions  will be
eligible for participation immediately upon the date of hire if annual earnings,
including bonus in the year paid,  exceed a specified  threshold.  The threshold
for each year will be the  amount of the cap on  compensation  that may be taken
into account under the qualified  plan for that year, or such greater  amount as
may  be  determined  by  the  TIG  Holdings,  Inc.  Benefits  Committee  in  its
discretion.  A  Participant  vests 25% after one year of service,  50% after two
years of service and 100% after three years of service.  Participants'  accounts
are credited in dollar amounts for the difference  between the cash value of the
stock that would have been  allocated  to the  participant's  account  under the
qualified  ESOP  plan and the cash  value of the  stock  that  would  have  been
allocated in the absence of the restrictions noted above. Participants' accounts
are adjusted for gains, losses and earnings as if invested in the same manner as
such associate's  account under the qualified ESOP plan.  Liabilities due to the
participants  were less than $1 million as of December 31, 1998,  1997 and 1996.
If the merger of the Company with Fairfax is  consummated,  TIG expects to merge
the ESOP Restoration Plan into the DS&PSP Restoration Plan.

Postretirement  Benefits Other Than Pensions. TIG participated in Transamerica's
defined  benefit  health  care plan that  provided  postretirement  benefits  to
eligible  retirees of Transamerica  and affiliates.  TIG assumed all liabilities
with respect to its retirees and active  employees at the date of the IPO. These
liabilities are a component of the Company's  employee  healthcare  plan, and as
such,  no plan  assets  are  specifically  identified  for this  unfunded  plan.
Contributions for these contributory plans are adjusted annually.  Consideration
for the adjustments  include  deductibles and coinsurance.  Medical benefits are
based  on the  employee's  length  of  service  and age at  retirement  from the
Company.

A summary of the components of net periodic other postretirement benefit cost is
as follows:
<TABLE>
                                                     Years Ended December 31,
                                                  ----------------------------
(In millions)                                       1998      1997       1996
------------------------------------------------- --------  --------  ---------
<S>                                                 <C>       <C>        <C> 
Service cost - benefits earned during the period    $ -       $ -        $0.3
Interest cost on projected benefit obligation        1.9       1.7        1.4
Amortization of prior service cost                  (0.1)     (0.1)      (0.1)
Amortization of loss                                 0.3       0.2         - 
------------------------------------------------- --------  --------  ---------
Net periodic other postretirement benefit cost      $2.1      $1.8       $1.6
------------------------------------------------- --------  --------  ---------
</TABLE>

                                       87
<PAGE>
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following  table sets forth the amounts  recognized in the balance sheet for
other postretirement benefit plans:
<TABLE>

 (In millions)                                        1998            1997
----------------------------------------------- ---------------- --------------
 <S>                                                 <C>             <C>   
 Change in benefit obligation:
 Benefit obligation at beginning of year              $25.6          $20.6
 Interest cost                                          1.9            1.7
 Actuarial gain                                         2.4            5.5
 Benefits paid                                         (2.3)          (2.2)
----------------------------------------------- ---------------- --------------
 Benefit obligation at end of year                    $27.6          $25.6
----------------------------------------------- ---------------- --------------

 Funded status                                       ($27.6)        ($25.6)
 Unrecognized prior service cost                       (0.5)          (0.6)
 Unrecognized net actuarial loss                        7.3            5.2
----------------------------------------------- ---------------- --------------
 Accrued benefit cost                                ($20.8)        ($21.0)
----------------------------------------------- ---------------- --------------

 Reconciliation of accrued postretirement
     benefit cost
 Accrued benefit cost as of prior year end            ($21.0)        ($21.3)
 Employer contributions during the year                  2.3            2.1
 Net periodic benefit cost for the year                 (2.1)          (1.8)
----------------------------------------------- ---------------- --------------
 Accrued benefit cost as of year end                  ($20.8)        ($21.0)
----------------------------------------------- ---------------- --------------
</TABLE>

The  weighted  average  annual  assumed rate of increase in the health care cost
trend rate is 6.0 percent for 1998 and will  decrease to 5.0 percent in 1999 and
remain at that level thereafter.  The health care cost trend rate assumption has
a significant effect on the amounts reported.

Increasing the trend rate by one  percentage  point would increase the actuarial
present value obligation for postretirement  medical benefits as of December 31,
1998,  by $2  million,  and the  aggregate  of the  service  and  interest  cost
components of net periodic postretirement benefit cost by $0.2 million for 1998.
Decreasing the trend rate by one  percentage  point would decrease the actuarial
present value obligation for postretirement  medical benefits as of December 31,
1998,  by $2  million,  and the  aggregate  of the  service  and  interest  cost
components of net periodic postretirement benefit cost by $0.2 million for 1998.
The  weighted  average  discount  rate used in  determining  the  postretirement
benefit obligation was 7.0% at December 31, 1998 and 1997.


--------------------------------------------------------------------------------
NOTE N. COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------

Leases.  Future  minimum  rental  commitments  as of  December  31, 1998 for all
noncancelable operating leases are as follows:

<TABLE>

 (In millions)
----------------------------------- -------------------------
 <S>                                              <C>
   1999                                           $32
   2000                                            28
   2001                                            19
   2002                                            13
   2003                                            10
   Thereafter                                      38
 ----------------------------------- -------------------------
                                                  140
   Sublease rental income                         (14)
------------------------------------ -------------------------
   Net commitments                               $126
------------------------------------ -------------------------
</TABLE>

                                       88
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Substantially  all of the  leases are for rental of office  space,  the  initial
terms of which range from one to 20 years.  Total rental expense for 1998, 1997,
and 1996 was $22 million, $18 million and $17 million, respectively. As a result
of the  reorganization  of TIG's  commercial  operations in the first quarter of
1996, certain lease termination costs in the amount of $18 million were incurred
and are included in the $100 million  restructuring  charges recorded in 1996 as
discussed in Note B - Summary of Significant Accounting Policies.

Litigation.  TIG's insurance subsidiaries are routinely engaged in litigation in
the normal course of business. As a liability insurer, the Company defends third
party claims brought  against its insureds.  As an insurer,  the Company defends
against coverage claims. In the opinion of TIG, based upon information available
at the  date of this  report,  no  individual  item of  litigation,  or group of
similar  items  of  litigation  (including  asbestos-related  and  environmental
pollution  matters  and the matters  referred  to below),  taken net of reserves
established  therefor and giving effect to insurance and reinsurance,  is likely
to result in judgments  for amounts  material to TIG's  consolidated  results of
operations or financial condition.

On January 11, 1994, a Los Angeles County Superior Court jury returned a verdict
of $28 million for punitive  damages  against TIG Insurance  Company  ("TIC") in
Talbot Partners v. Cates  Construction,  Inc. and TIC (the "Talbot  Case").  The
award  arose out of TIC's  handling  of a surety  bond  claim on a  construction
project.  On March 28, 1997,  the  California  Court of Appeal reduced the trial
court's  punitive damage award to $15 million.  On July 23, 1997, the California
Supreme Court granted TIC's  petition to review the Court of Appeal's  decision.
Management  believes  that the ultimate  liability  arising from the Talbot Case
will not materially impact consolidated operating results.

On February 12, 1998, a purported class action complaint,  naming TIG and two of
its executive  officers as defendants,  was filed in the United States  District
Court for the Southern  District of New York on behalf of persons who  purchased
TIG common  stock  during the period from  October 21, 1997 to January 30, 1998,
when TIG announced its fourth quarter 1997 results.  The complaint  alleges that
TIG violated the federal securities laws by misrepresenting  the adequacy of its
underwriting and monitoring  standards and its loss reserves,  and that three of
its officers and directors sold shares at prices that were artificially inflated
as a result  of the  alleged  misrepresentations.  Plaintiffs  seek  unspecified
monetary  damages,  including  punitive  damages.  Management  believes that the
lawsuit  is  without  merit,  and the  Company's  position  will  be  vigorously
defended.

On July 17, 1998, TIG Premier Insurance Company ("TIG Premier"), a subsidiary of
TIC,  filed a complaint and jury demand against MBNA America Bank,  N.A.  d.b.a.
MBNA Insurance  Services  ("MBNA") in federal court in the Northern  District of
Texas that was based on an agency  agreement  between  TIG Premier and MBNA (the
"Agency  Agreement")  pursuant to which TIG Premier offered an insurance program
that was marketed by MBNA to its customers. In its complaint, TIG Premier sought
a declaratory  relief  judgment  declaring  that TIG could reduce the commission
payable to MBNA and  lengthen  the 5-year term of the Agency  Agreement in order
to, at a minimum,  reduce TIG  Premier's  underwriting  losses and  improve  the
possibility  of TIG  Premier's  achieving  the agreed upon 15%  minimum  rate of
return.  On August 19, 1998,  TIG filed an amended  complaint  seeking  monetary
damages for MBA's  repudiation  and breach of the Agency  Agreement,  including,
without  limitation,  the underwriting  losses that TIG Premier incurred and the
minimum 15% rate of return over the entire five-year  initial term of the Agency
Agreement,  in an amount to be determined at trial. In its amended answer, dated
August 31, 1998, MBNA instituted a counterclaim against TIG Premier based on TIG
Premier's  alleged  breach  and  repudiation  of the Agency  Agreement,  seeking
damages in an amount not less than $100  million.  Management  believes that the
liability  arising  from this  case,  if any,  will not  materially  impact  the
Company's consolidated results of operations or financial condition.


                                       89
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

On December 9, 1998, a purported  shareholder  class action was commenced in the
Delaware Court of Chancery against the Company,  its directors and Fairfax.  The
complaint alleges, inter alia, that the consideration to be paid pursuant to the
Merger  Agreement  is unfair  and  inadequate  and that the terms of the  Merger
Agreement  were  arrived at  without a full and  thorough  investigation  by the
directors. The complaint seeks injunctive relief, including a judgment enjoining
the transaction,  and the award of unspecified compensatory damages. The Company
believes  that the  action is  without  merit and  intends  to defend the action
vigorously.

On  December  11,  1997,  TIG  filed a Tax  Court  Petition  challenging  an IRS
Statutory Notice of Deficiency for the tax year 1993 and a Revenue Agents Report
for 1994 (see Note G - Income Taxes).

London Market  Activity.  Through  various  indirect  subsidiaries,  the Company
became a limited  liability  participant  in the  Lloyd's of London  ("Lloyd's")
market  in  1997.  As a  prerequisite  to  admittance  to  the  Lloyd's  market,
irrevocable  letters of credit  totaling  $123 million,  collateralized  by $105
million of the Company's  investment  securities,  were provided in favor of the
Society and Council of Lloyd's at December 31, 1997.  At December 31, 1998,  the
irrevocable  letters  of  credit  were  collateralized  by $137  million  of the
Company's  investment  securities.  The letters of credit effectively secure the
syndicate's 1998 results and future contingent obligations of the Company should
the Lloyd's underwriting  syndicates in which the Company participates incur net
losses. The Company's contingent liability to the Society and Council of Lloyd's
is limited to the amount of the letters of credit.


                                       90
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE O. REGULATORY MATTERS
--------------------------------------------------------------------------------

Regulatory  Risk-Based  Capital.  The  states  of  domicile  of TIG's  insurance
subsidiaries  impose  minimum  risk-based  capital   requirements  on  insurance
companies  which  were  developed  by  the  National  Association  of  Insurance
Commissioners  ("NAIC").  The formulas for  determining the amount of risk based
capital specify various weighting factors that are applied to financial balances
or various levels of activity based on the perceived degree of risk.  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
risk-based capital,  as defined by the NAIC.  Enterprises below specific trigger
points or ratios are classified  within certain  levels,  each of which requires
specified corrective action. The levels and ratios are as follows:

<TABLE>

                                       Ratio of Total Adjusted Capital to
                                       Authorized Control Level Risk-Based
 Regulatory Event                        Capital (Less Than or Equal to)
----------------------------------- -------------------------------------------
<S>                                         <C>                           
 Company action level                       2.0 (or 2.5 with negative trends)
 Regulatory action level                    1.5
 Authorized control level                   1.0
 Mandatory control level                    0.7
----------------------------------- -------------------------------------------
</TABLE>

At December 31, 1998, the statutory  "risk-based" capital for each TIG insurance
subsidiary was such that no action (company or regulatory) would be required. As
of December  31,  1998,  TIG was  required to maintain  minimum  capital of $656
million to avoid triggering a company action level regulatory event.

Permitted  Statutory  Accounting  Practices.   TIG's  statutory-basis  financial
statements are prepared in accordance  with accounting  practices  prescribed or
permitted by the domiciliary state insurance department. Currently, "prescribed"
statutory accounting  practices are interspersed  throughout the state insurance
law and regulations, the NAIC's "Accounting Practices and Procedures Manual" and
a variety of other NAIC publications. "Permitted" statutory accounting practices
encompass all accounting  practices that are not prescribed;  such practices may
differ from state to state,  may differ from company to company  within a state,
and may change in the future.

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 TIG uses to prepare its  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 TIG,
the  insurance  regulatory  bodies of states in which TIG writes  business  must
adopt  Codification  as the  prescribed  basis of accounting  on which  domestic
insurers must report their statutory-basis  results to the Insurance Department.
At this time it is anticipated that the State of California,  which is the state
of domicile for TIG Insurance  Company,  the primary insurer for TIG, will adopt
Codification.  Management has not yet determined the impact of  Codification  on
TIG's statutory-basis financial statements.

                                       91
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Statutory amounts for TIG's significant insurance subsidiaries are as follows:
<TABLE>

                                              Years Ended December 31,
                                     -----------------------------------------
 (In millions)                            1998          1997          1996
------------------------------------ ------------- ------------- -------------
 <S>                                     <C>            <C>           <C>    
 Statutory Net Income (Loss):
 Primary operations                        $37          $143           $88
 Reinsurance operations                     94           (22)           96
------------------------------------ ------------- ------------- -------------
    Total                                 $131          $121          $184
------------------------------------ ------------- ------------- -------------
</TABLE>

<TABLE>
                                                     December 31,
                                     -----------------------------------------
 (In millions)                            1998          1997          1996
------------------------------------ ------------- ------------- -------------
 <S>                                      <C>           <C>           <C>    
 Statutory Surplus:
 Primary operations                       $417          $505          $460
 Reinsurance operations                    547           508           515
------------------------------------ ------------- ------------- -------------
    Total                                 $964        $1,013          $975
------------------------------------ ------------- ------------- -------------
</TABLE>

In June 1993,  the  California  Department of Insurance  permitted TIG Insurance
Company  ("TIC"),  TIG's lead  insurer to record a  quasi-reorganization  of its
statutory capital accounts. This permitted statutory accounting practice differs
from   prescribed   statutory   accounting   practice.   The   effect   of   the
quasi-reorganization  was to increase  the earned  surplus of TIC to zero from a
negative  $285 million and to decrease  contributed  surplus by the same amount.
This transaction significantly increased TIC's future dividend paying capability
as insurance companies may only pay dividends from earned surplus.

                                       92
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE P.  OPERATING SEGMENTS
--------------------------------------------------------------------------------

Management of the Company monitors and evaluates the results of operations based
upon  the  performance  of its  three  major  operating  segments,  Reinsurance,
Commercial  Specialty and Custom Markets, as well as lines of business that have
been de-emphasized (Other Lines).  Reinsurance  Operations are conducted through
TIG Re and  include  those  transactions  in which TIG Re  agrees  to  indemnify
another  insurance  company  for  all  or  a  portion  of  the  insurance  risks
underwritten by that company under an insurance  policy or policies.  Commercial
Specialty  generally  provides  coverage to business and governmental  entities,
organizations,  associations and individual  professionals.  Commercial workers'
compensation  products  provide  benefits to employees as mandated by state laws
for payment of benefits  associated with employment related accidents,  injuries
or illnesses. Custom Markets coverages provide protection to individuals through
non-standard  automobile  physical  damage and  liability  programs,  homeowners
property lines and small business owners liability programs. Other Lines include
both commercial and personal programs that TIG has identified for non-renewal or
cancellation.

Management  evaluates the financial  performance of its operating segments based
upon the underwriting gain or loss  ("underwriting  results")  generated by each
operating  segment.  Underwriting  results  include earned premium less loss and
loss adjustment  expenses  incurred,  policy  acquisition and other underwriting
expenses  incurred (which  includes  commissions,  premium related  expenses and
other acquisition expenses), and policyholder dividends. The accounting policies
of the  operating  segments  are the same as those  described  in the summary of
significant  accounting  policies  (See  Note  B of the  Consolidated  Financial
Statements).

The  Company  does not  maintain  separate  balance  sheet  data for each of its
operating  segments.  Accordingly,  management  does not review and evaluate the
financial results of its operating segments based upon balance sheet data.

                                       93
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following  tables present the relevant  financial  results for the operating
segments for each year:
<TABLE>

                                                                               1998
                                           ------------------------------------------------------------------------------
                                            Reinsurance      Commercial        Custom          Other
      (In millions)                          Operations      Specialty        Markets          Lines          Total
      ------------------------------------ --------------- --------------- --------------- -------------- ---------------
      <S>                                       <C>              <C>             <C>           <C>             <C>   
      Net premium earned                         $491            $702            $276          ($22)           $1,447
      Net losses and loss adjustment
           expenses incurred                     (331)           (499)            (239)          28            (1,041)
      Policy acquisition and other
           underwriting expenses                 (190)           (225)            (100)          13              (502)
      Dividends to policyholders                    -             (23)              -            (1)              (24)
      ------------------------------------ --------------- --------------- --------------- -------------- ---------------
           Net underwriting gain (loss)          ($30)           ($45)            ($63)         $18             ($120)
      ------------------------------------ --------------- --------------- --------------- -------------- ---------------
</TABLE>

<TABLE>
                                                                               1997
                                           ------------------------------------------------------------------------------
                                            Reinsurance      Commercial        Custom          Other
      (In millions)                          Operations      Specialty        Markets          Lines          Total
      ------------------------------------ --------------- --------------- --------------- -------------- ---------------
      <S>                                        <C>             <C>            <C>            <C>            <C>   
      Net premium earned                         $516            $500           $158           $292           $1,466
      Net losses and loss adjustment
           expenses incurred                     (505)           (323)          (108)          (215)          (1,151)
      Policy acquisition and other
           underwriting expenses                 (174)           (162)           (62)           (68)            (466)
      Dividends to policyholders                    -             (14)             -              -              (14)
      ------------------------------------ --------------- --------------- --------------- -------------- ---------------
           Net underwriting gain (loss)         ($163)             $1           ($12)            $9            ($165)
      ------------------------------------ --------------- --------------- --------------- -------------- ---------------
</TABLE>

<TABLE>
                                                                               1996
                                           ------------------------------------------------------------------------------
                                            Reinsurance      Commercial        Custom          Other
      (In millions)                          Operations      Specialty        Markets          Lines          Total
      ------------------------------------ --------------- --------------- --------------- -------------- ---------------
      <S>                                       <C>             <C>             <C>            <C>            <C>   
      Net premium earned                        $534            $416            $95            $494           $1,539
      Net losses and loss adjustment
           expenses incurred                    (386)           (289)           (55)           (408)          (1,138)
      Policy acquisition and other
           underwriting expenses                (162)           (131)           (34)           (136)            (463)
      Dividends to policyholders                   -              (2)             -              (1)              (3)
      ------------------------------------ --------------- --------------- --------------- -------------- ---------------
           Net underwriting gain (loss)         ($14)            ($6)            $6            ($51)            ($65)
      ------------------------------------ --------------- --------------- --------------- -------------- ---------------
</TABLE>

The  following  table  reconciles  the  underwriting  results for the  operating
segments  to income  before  income tax  benefit  (expense)  as  reported in the
Consolidated Statements of Income:
<TABLE>

      (In millions)                                             1998                 1997                 1996
      -------------------------------------------------- -------------------- -------------------- --------------------
      <S>                                                       <C>                  <C>                  <C>  
      Net underwriting loss                                     ($120)               ($165)               ($65)
      Net investment income                                       235                  290                 290
      Net investment and other gain (loss)                        (12)                   1                  (4)
      Corporate expenses                                          (81)                 (44)                (37)
      Interest expense on long-term debt                          (23)                 (20)                 (9)
      Restructuring charges                                         -                    -                (100)
      -------------------------------------------------- -------------------- -------------------- --------------------

           Income (loss) before income taxes                      ($1)                 $62                 $75
      -------------------------------------------------- -------------------- -------------------- --------------------
</TABLE>

                                       94
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The company  writes  premium  primarily in the United  States,  Canada and Great
Britain, as reflected in the following table:

<TABLE>
                                                    Net Premiums Written
                                               ------------------------------
(In millions)                                    1998      1997       1996
---------------------------------------------- --------  --------  ----------
<S>                                             <C>       <C>       <C>   
 United States                                  $1,227    $1,322    $1,496
 Great Britain/Lloyd's Syndicates                  175       106        29
 Canada                                              9         8         4
 Other                                               7         -         -
---------------------------------------------- --------  --------  ----------
 Total                                          $1,418    $1,436    $1,529
---------------------------------------------- --------  --------  ----------
</TABLE>

A large portion of the Company's premium is produced through Aon Corporation and
its subsidiaries (Aon).  Premium produced through Aon accounted for 34%, 32% and
23% of consolidated  net premium written for 1998, 1997 and 1996,  respectively,
and has been  reported  throughout  the  Reinsurance,  Commercial  Specialty and
Custom Markets segments.

                                       95
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE Q.  INTERIM FINANCIAL DATA (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
                                                                                 Quarter
                                                             ------------------------------------------------
     (In millions)                                              First       Second      Third       Fourth       Total
     --------------------------------------------- --------- ------------ ----------- ----------- ----------- ------------
     <S>                                             <C>        <C>         <C>         <C>         <C>          <C>
     Summary of Quarterly Results:
     Revenues                                        1998         $427        $435        $439        $369       $1,670
                                                     1997          429         435         453         440        1,757
                                                     1996          455         457         460         453        1,825

     Pre-tax income (loss)                           1998           47          43         (75)       (16)           (1)
                                                     1997           54          57          55       (104)           62
                                                     1996          (82)         49          53         55            75

     Net income (loss)                               1998           33          30         (47)        (8)            8
                                                     1997           36          39          40        (63)           52
                                                     1996          (31)         34          37         39            79
     --------------------------------------------- --------- ------------ ----------- ----------- ----------- ------------

     Basic Earnings per Common Share:
          Net income (loss)                          1998        $0.64       $0.57      ($0.93)    ($0.16)        $0.13
                                                     1997        $0.67       $0.74       $0.77     ($1.24)        $0.97
                                                     1996       ($0.53)      $0.58       $0.67      $0.70         $1.36

     Diluted Earnings per Common Share:
          Net income                                 1998        $0.62       $0.56        N/A         N/A         $0.13
                                                     1997        $0.64       $0.72       $0.74        N/A         $0.94
                                                     1996         N/A        $0.56       $0.65       $0.68        $1.32
     --------------------------------------------- --------- ------------ ----------- ----------- ----------- ------------
</TABLE>

In the first quarter of 1996, an after-tax  restructuring  charge of $65 million
was taken for costs related to management's  decision to restructure  operations
(see Note B - Summary of Significant Accounting Policies). In the fourth quarter
of 1997 the Company  recognized net unfavorable  current and prior year loss and
LAE reserve development of $145 million in its Reinsurance  Operations (see Note
E - Loss and Loss Adjustment  Expense Reserves) and sold the Independent  Agents
unit of its Retail Division (see Note C - Significant  Transactions  and Events)
as a result  of which  favorable  adjustments  of policy  acquisition  and other
underwriting expenses totaling $8 million were recorded. In the third quarter of
1998,  the Company  recognized a net charge of $104  million  that  included $47
million in exit costs  relating  to the  termination  of the MBNA  program,  $38
million in allowances  for  uncollectible  reinsurance  recoverable  and premium
receivable,  $6 million in severance  related costs for former employees and $13
million in other  operating  costs (see Note C -  Significant  Transactions  and
Events).  In the fourth quarter of 1998,  the Company  recognized $10 million in
severance  and related  charges in  conjunction  with several  staffing  changes
initiated at the end of the year.

                                       96
<PAGE>
                                    PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

--------------------------------------------------------------------------------
NOTE R.  YEAR 2000 (UNAUDITED)
--------------------------------------------------------------------------------

The Year 2000 issue  relates to the ability or inability  of systems  (including
computer hardware,  software and embedded microprocessors) to properly interpret
date information  relating to the year 2000 and beyond.  Many existing  systems,
including many of TIG's existing systems,  use only the last two digits to refer
to a year  (i.e.,  "98" is used for  1998).  Therefore,  these  systems  may not
properly  recognize  a year  that  begins  with  "20"  instead  of  "19". If not
corrected, these systems could fail or create erroneous results.

Specific  information  technology systems that are utilized by TIG, and by third
parties  with whom TIG has business  relationships,  include  policy,  claim and
reinsurance  processing  and  administration,   accounting,  payroll,  financial
reporting,  product  development,  rate and form  development  and  maintenance,
business planning, tax, accounts receivable,  accounts payable and numerous word
processing and  spreadsheet  programs.  In addition,  TIG and third parties with
which TIG has a business  relationship  are  dependent  on many  non-information
technology based systems, such as utility, communication and security systems.

TIG's State of  Readiness.  TIG has  conducted an  extensive  review of its core
processing  computer systems,  including computer hardware and software vendors,
to identify  and  address all  changes,  testing and  implementation  procedures
required to make such systems Year 2000 compliant. The Company has a coordinated
process  to  facilitate  the  necessary  changes,   testing  and  implementation
procedures.  TIG has completed and  implemented all of the required code changes
of its Year 2000 system  remediation  project (the "Y2K  Project").  TIG expects
necessary  third  party  software  implementation  and  testing of its  computer
systems  to be  completed  by March 31,  1999.  TIG will  continue  testing  its
internal systems, as well as its internal systems' abilities to operate with the
systems of key third parties, during the remainder of 1999.

TIG has processing or significant business relationship  dependencies with third
parties including,  without  limitation,  general agents,  brokers,  third party
administrators,   banks,   general  suppliers  and   facility-related   vendors.
Determination  of any action  required is expected to be completed in the second
quarter of 1999,  and TIG will continue to monitor Year 2000 issues  relating to
such key third parties during the remainder of 1999.  Notwithstanding efforts by
TIG to assess the third  party's  systems,  there can be no guarantee  that such
systems will be Year 2000 compliant.

The Cost to Address TIG's Year 2000 Issues.  TIG budgeted a total of $10 million
for costs related to Year 2000 system  modifications.  As of year end 1998, $9.5
million has been expensed in the year  incurred.  The  remainder  (approximately
$500 thousand) will be expensed in 1999.  The 1999 amount  represents  less than
1.5% of the  annual  TIG  Information  Systems  budget.  These  costs  primarily
represent costs to assess, remediate code, and test such code changes.

In addition to the costs incurred for Year 2000 system  modifications,  TIG will
incur  expenses in  ascertaining  whether key third  parties with which it has a
material relationship are Year 2000 compliant.  TIG estimates that such expenses
will not exceed $1.5 million.  This amount  includes both IT and non IT portions
of this project.

All  estimates of future  costs  related to assessing  and  achieving  Year 2000
compliance  are  based  on  management's  best  estimates  and  there  can be no
guarantee that actual amounts expended will not differ from such estimates.

The Y2K Project has caused no  significant  deferrals of other IT projects which
in any way impact the financial condition or results of operations of TIG.

                                       97
<PAGE>
                                     PART II
                               TIG HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Risks of TIG's Year 2000 Issues.  There has not been any material processing
disruptions  to  date.  Internal  testing  provides  TIG  with a high  level  of
confidence  that in a most  reasonably  likely worst case scenario these systems
will not cause material disruption on a forward-looking basis.

The potential losses that TIG  policyholders may incur which stem from Year 2000
problems will be business risks which are not insurable under standard  property
and  casualty  policies.  A most  reasonably  likely worst case  scenario  would
anticipate  that it is possible  that  certain TIG  policies  may be reformed by
judicial decisions to cover Year 2000 losses,  which were not contemplated.  TIG
does not believe that such losses will have a material impact on TIG's financial
results.  To date, TIG has not incurred any losses  relating to Year 2000 claims
under its insurance and reinsurance policies.

Although the Company has taken the actions  described  above to address the Year
2000 problem,  a most reasonably likely worst case scenario indicates that there
is always a possibility that the Company may suffer some disruptions as a result
of the Year 2000 problem.

TIG's Contingency  Plans. The Company has a comprehensive  contingency plan that
addresses  alternatives  for solving the Year 2000 problem  should the Company's
adopted process prove inadequate.  TIG continues to evaluate and modify the plan
as necessary for all of the Company's operations and processes.


                                       98
<PAGE>
                                     PART II
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Not applicable.


                                       99
<PAGE>
                                   PART III

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

Directors Continuing in Office Until 1999

     Jon W. Rotenstreich (age 55) has been a director of the Company since 1993.
Principal  Occupation:  Chairman of the Board and Chief Executive Officer of the
Company  since 1993.  From 1992 to 1993,  Mr. Rotenstreich  was President of Jon
Rotenstreich  Consultants,   Inc.  From  1986  to  1991,   Mr. Rotenstreich  was
President, Chief Investment Officer and a director of Torchmark Corporation,  an
insurance  company,  and President,  Chief  Executive  Officer and a director of
United Investors Management Corporation,  which was a majority-owned  subsidiary
of Torchmark  Corporation.  From 1982 to 1986,  Mr. Rotenstreich  served as Vice
President and Treasurer of International  Business Machines Corporation.  For 18
years prior to joining IBM,  Mr. Rotenstreich  served in various  capacities  at
Salomon Brothers Inc, including Managing Director.

     Harold  Tanner  (age 66) has been a director  of the  Company  since  1993.
Principal  Occupation:  President of Tanner & Co.,  an investment  banking firm.
Mr. Tanner also serves as a member of the Advisory Committee of Warburg,  Pincus
Capital  Company, L.P.  and as  Chairman  of the Board of  Trustees  of  Cornell
University.

Directors continuing in Office Until 2000

     Joel  S. Ehrenkranz (age 63) has been a director of the Company since 1993.
Principal  Occupation:  Senior  Partner in the New York law firm of Ehrenkranz &
Ehrenkranz LLP, where he has been a partner since 1962. Mr. Ehrenkranz is also a
trustee of the Mount Sinai Medical Center, the New York University School of Law
and the Whitney Museum of American Art.

     The Rt. Hon.  Lord Moore (age 61) has been a director of the Company  since
1997.  Principal  Occupation:  European  Chairman  and a director of The Monitor
Company, a strategic consulting company,  since October 1990.  Previously,  Lord
Moore held various  ministerial  posts in the Government of the United  Kingdom,
most  recently as Secretary of State for Social  Security from July 1988 to July
1989 and as Secretary of State for Health and Social Security from 1987 to 1988.
Lord Moore is also the Chairman and a director of Credit Suisse Asset Management
(U.K.) Holdings Limited,  Credit Suisse Asset Management Limited,  Credit Suisse
Asset Management  (Australia)  Ltd.,  Deputy Chairman and a director Rolls Royce
PLC, and a director of the following  corporations:  BEA Associates,  Inc.; Blue
Circle Industries PLC; Marvin & Palmer  Associates;  The Central European Growth
Fund  Plc;  Camelot  Group Plc and GTECH  Holdings  Corporation.  He is also the
President  of  The  Energy  Saving  Trust  Limited,   a  not-for-profit   energy
conservation organization, and a Governor of the London School of Economics.

     William  W. Priest,  Jr. (age 57) has been a director of the Company  since
1994. Principal Occupation:  Chief Executive Officer of BEA Associates, Inc., an
investment  counseling firm,  which he initially  joined in 1972.  Mr. Priest is
also a member of the Board of Trustees of the Duke  University  Fuqua  School of
Business and a past member of the State of New Jersey Investment Council.

     Ann  W. Richards  (age 65) has been a director of the  Company  since 1995.
Principal Occupation: Senior Advisor in the Washington, D.C. law firm of Verner,
Liipfert,  Bernhard,  McPherson and Hand since 1995.  Ms. Richards served as the
45th  Governor of the State of Texas from 1991 to 1995.  From 1982 to 1990,  she
served as Texas State Treasurer.  Ms. Richards is also a director of J.C. Penney
Company,  Inc.  and Grupo  Modello  and a member of the Board of Trustees of the
Aspen Institute, an international non-profit educational institution.


                                      100
<PAGE>
                                    PART III

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

Directors continuing in Office Until 2001

     George  B. Beitzel  (age 70) has been a director of the Company since 1993.
In 1987,  Mr. Beitzel  retired  from his position as Senior Vice  President  and
director  of  International  Business  Machines  Corporation,   where  he  spent
substantially all of his professional life. Principal Occupation:  a director of
the following corporations: Bankers Trust New York Corporation; Bitstream, Inc.;
Computer Task Group, Inc.; Phillips Petroleum Company; Xillix Technologies Corp.
and  Rohm  and  Haas  Company.  Mr. Beitzel  is also  Chairman  of the  Colonial
Williamsburg Foundation and Chairman Emeritus of Amherst College.

     George  D. Gould  (age 71) has been a director of the  Company  since 1996.
Principal  Occupation:  Vice  Chairman  of  Klingenstein,  Fields & Company,  an
investment management firm, since August 1989. From 1985 through 1988, Mr. Gould
was Undersecretary for Finance of the United States Treasury  Department.  Prior
to 1985,  Mr. Gould  was a general  partner with  Wertheim & Co. and Chairman of
Madison  Resources.  Mr. Gould is also a director of Federal Home Loan  Mortgage
Corporation and Illinois Central Corp.

     Mary R.  Hennessy  (age 46) has been a director of the Company  since 1998.
Principal Occupation: President and Chief Operating Officer of the Company since
1998.  From 1996 to 1997,  Ms. Hennessy  was Executive  Vice President and Chief
Underwriting  Officer of the Company.  From 1988 to 1996 Ms.  Hennessy served as
President,  Am-Re  Services,  Inc.,  Senior Vice  President  and Chief  Actuary,
American Re-Insurance  Company, and Chairman and Chief Executive Officer,  Am-Re
Consultants, Inc., a subsidiary of American Re, Inc.


                                      101
<PAGE>
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              CERTAIN INFORMATION REGARDING THE EXECUTIVE OFFICERS

     The following table shows certain  information,  as of  December 31,  1998,
concerning each executive  officer of the Company,  except those persons who are
also  nominees  for  director  or who also serve as  directors.  Each  executive
officer is elected  annually  by the Board of  Directors  of the  Company or the
Board of Directors of one of its subsidiaries and serves at the pleasure of such
board  of  directors.  Except  as  indicated  under  "Employment  and  Severance
Agreements and Change-in-Control  Arrangements" below, there are no arrangements
or understandings between any executive officer and any other person pursuant to
which such executive officer was elected.


                         Name and Principal Occupation
                            and Business Experience
                            for the Past Five Years

Peter M. Acton,  57, Senior Vice  President  and General  Counsel of the Company
from July 1996 through December 1998; Associate General Counsel of International
Business Machines Corporation, 1994 to 1996; IBM Group Counsel, 1986 to 1994.

Cynthia B. Koenig,  41,Controller of TIG Insurance  Company, a subsidiary of the
Company  ("TIC"),  from July 1997 through  December  1998;  Vice  President  and
Assistant Controller of TIC from 1995 to June 1997; SEC Manager of TIC from 1993
to 1995.

Louis J. Paglia,  41,  Senior Vice  President  and Treasurer of the Company from
April 1993 through  December 1998;  Consultant,  Jon  Rotenstreich  Consultants,
Inc.,  1992 to 1993;  Vice  President  and Chief  Financial  Officer,  Emisphere
Technologies,  Inc., a biopharmaceutical  company,  1992; Principal,  Investment
Banking  Division,  Morgan  Stanley  & Co.  Incorporated,  1990  to  1992;  Vice
President,  Investment Banking Division, Morgan Stanley & Co. Incorporated, 1988
to 1990.

Edwin G. Pickett,  52,  Executive  Vice President of the Company from March 1996
through  December  1998;  Chief  Financial  Officer of the  Company  since 1993;
Executive Vice President and Chief Financial Officer, USF&G Corporation, 1991 to
1993; various management positions, USF&G Corporation, 1989 to 1991.

Orest B. Stelmach, 37, Senior Vice President and Chief Investment Officer of the
Company since May 1993;  Vice  President,  ALIAC, a subsidiary of Aetna Life and
Casualty Company, 1990 to 1993; various investment management positions,  ALIAC,
1985 to 1990.

Michael G. Wacek, 42,  President and Chief Executive  Officer of TIG Reinsurance
Company,  a subsidiary of the Company,  since February 1998;  Managing Director,
St. Paul  Reinsurance Co. Ltd. and Director,  St. Paul Management  Ltd., 1993 to
1998; various management  positions,  St. Paul Reinsurance Co. Ltd. and St. Paul
Management Ltd., 1989 to 1993.


                                      102
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Employment and Severance Agreements and Change-in-Control Arrangements

     Prior to the closing of the initial public  offering of the Common Stock on
April 27, 1993,  the Company  entered  into an  employment  agreement  with Jon
W. Rotenstreich (the "Employment  Agreement") pursuant to which Mr. Rotenstreich
is employed  as the  Chairman  of the Board and Chief  Executive  Officer of the
Company and of TIG Insurance  Group, a subsidiary of the Company,  ("TIG").  The
Company has agreed to employ Mr. Rotenstreich for the period  commencing on the
closing of the initial  public  offering of the Common Stock on April  27, 1993,
and ending on the earlier to occur of (i) the  fourth  anniversary of such date,
or  (ii) the  first day of the month  next  following  Mr.  Rotenstreich's  65th
birthday.  Mr. Rotenstreich's  employment period will be automatically  extended
each year unless Mr.  Rotenstreich  or the Company gives  written  notice to the
contrary.  Upon a change of control (as defined in the Employment  Agreement and
as described  below),  the employment  period will be extended to the earlier of
(i) the fourth  anniversary  of the change of control,  or (ii) the first day of
the month next following Mr. Rotenstreich's 65th birthday.

     Mr. Rotenstreich's  initial  base  salary  was set forth in his  Employment
Agreement at $600,000.  During 1996 and for the first time since  entering  into
the  Employment  Agreement,  Mr.  Rotenstreich's  base salary was  increased  as
permitted  in the  Employment  Agreement.  No  increase  in base  salary for Mr.
Rotenstreich was made in 1998. See "Certain Information  Regarding the Executive
Officers  --  Compensation  Committee  Report on  Executive  Compensation."  Mr.
Rotenstreich  is entitled to  participate  in and receive all benefits under any
and all bonus, short- or long-term incentive,  savings and retirement plans, and
welfare benefit plans,  practices,  policies and programs maintained or provided
by the Company and/or its subsidiaries for the benefit of senior executives.

     Under the Employment  Agreement,  Mr. Rotenstreich received a non-qualified
stock  option  to  purchase  3,500,000  shares of  Common  Stock.  The per share
exercise  price of such  options  equals the price to the public in the  initial
public offering of the Common Stock ($22.625). Such options have a ten-year term
and  became  exercisable  with  respect  to  100%  of the  aggregate  number  of
underlying  shares on  October 19,  1996.  If Mr.  Rotenstreich's  employment is
terminated  by reason of death,  disability  (as  defined in the 1993  Long-Term
Incentive Plan) or retirement (as defined in the 1993 Long-Term Incentive Plan),
the  unexercised  portion of his option may be  exercised at any time during the
four-year period  commencing on the date of termination.  If Mr.  Rotenstreich's
employment is  terminated  by reason of death,  by the Company due to disability
(as  defined  in the  Employment  Agreement)  or for  cause (as  defined  in the
Employment  Agreement) or by Mr. Rotenstreich without good reason (as defined in
the Employment Agreements),  he or his legal representative will be entitled to,
among other  things,  his base salary  through the date of  termination  and any
deferred compensation and accrued vacation pay not yet paid by the Company.




                                      103
<PAGE>
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     If, prior to a change of control, the Company terminates Mr. Rotenstreich's
employment  (other than for cause or disability) or he terminates his employment
for good reason (as defined in the Employment Agreement), he will be entitled to
the amounts  specified in the preceding  sentence,  plus the base salary for the
period from the date of termination  through the end of the  employment  period.
If,  after a change  of  control,  the  Company  terminates  Mr.  Rotenstreich's
employment (other than for cause or disability), or he terminates his employment
for good reason,  he will be entitled to,  among other  things,  the base salary
through the date of termination, a payment equal to three times the base salary,
any deferred compensation and accrued vacation not yet paid by the Company and a
special  retirement  benefit equal to the difference  between (a) the retirement
benefits Mr. Rotenstreich would have received if he had remained employed by the
Company for the remainder of the  employment  period and (b) the  actual benefit
that he will  receive.  If Mr.  Rotenstreich's  employment  is terminated by the
Company for cause, or if he voluntarily  terminates his employment  without good
reason, for a period of three years he may not engage in any business that is in
competition  with the Company or its subsidiaries or solicit or offer employment
to any person  that has been  employed by the  Company  during the three  months
prior  to  such  solicitation  or  offer.   Additionally,   if  any  payment  or
distribution  to Mr.  Rotenstreich  by the Company,  any subsidiary or affiliate
would be subject to any "golden  parachute  payment"  excise tax or similar tax,
then he will be entitled to receive an additional  gross-up payment in an amount
such that after payment of all taxes by Mr.  Rotenstreich  attributable  to such
additional  gross-up  payment,  he  retains  an amount  equal to the  excise tax
imposed upon such parachute payments.


                                      104
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     A "change  of  control"  of the  Company  for  purposes  of the  Employment
Agreement will be deemed to occur (i) (A) upon the acquisition by an individual,
entity,  or  group  of the  beneficial  ownership  of  20% or  more  of  (1) the
outstanding  Common  Stock,  or (2) the  combined  voting power of the Company's
voting securities;  provided,  however, that the following acquisitions will not
constitute a "change of control":  (x) any  acquisition by any employee  benefit
plan of the Company or any affiliate or (y) any  acquisition by any  corporation
if,  immediately  following such  acquisition,  more than 80% of the outstanding
common  stock and the  outstanding  voting  securities  of such  corporation  is
beneficially  owned by all or substantially all of those who,  immediately prior
to such  acquisition,  were the  beneficial  owners of the Common  Stock and the
Company's  voting  securities  (in  substantially  similar  proportions as their
ownership of such Company securities  immediately prior thereto); or (ii) if the
individuals  who, on the date of the closing of the initial  public  offering of
the Common Stock,  constituted  the Company's board of directors (the "Incumbent
Board")  cease for any reason to  constitute at least a majority of the board of
directors; provided, however, that any individual becoming a director subsequent
to the date of the closing of the initial  public  offering of the Common  Stock
whose election, or nomination for election,  was approved by at least a majority
of the  directors  then  serving  and  comprising  the  Incumbent  Board will be
considered a member of the Incumbent Board, but excluding, for this purpose, any
individual whose initial assumption of office occurs as a result of an actual or
threatened  election  contest  or other  actual or  threatened  solicitation  of
proxies or consents;  or (iii) upon approval by the Company's  stockholders of a
reorganization,  merger or  consolidation,  other than one with respect to which
all or substantially  all of those who were the beneficial  owners,  immediately
prior to such reorganization,  merger or consolidation,  of the Common Stock and
the  Company's  voting  securities  beneficially  own,  immediately  after  such
transaction, more than 80% of the outstanding common stock and voting securities
of the corporation  resulting from such transaction (in  substantially  the same
proportions as their ownership,  immediately prior thereto,  of the Common Stock
and the Company's  voting  securities);  or (iv) upon  approval by the Company's
stockholders  of (A) a  complete  liquidation  or  dissolution of the Company or
(B) the sale or other  disposition of all or substantially  all of the assets of
the Company, other than to a subsidiary of the Company or (v) upon the taking of
certain actions by Transamerica Corporation, which are no longer applicable.

     At the time of his  employment by the Company as Senior Vice  President and
Chief Financial Officer,  Edwin G. Pickett entered into a severance  arrangement
pursuant to which he will receive a payment equal to eighteen months of his then
current  compensation and automatic  vesting of his accounts under the Company's
various  employee  benefit plans in the event of his involuntary  termination by
the Company. For this purpose,  involuntary termination includes resignation due
to a significant diminution of authority,  position or responsibilities  without
his consent.

     Prior to the closing of the initial public  offering of the Common Stock on
April 27, 1993, TIG Reinsurance Company, a subsidiary of the Company ("TIG Re")
entered into an employment  agreement with William  G. Clark,  pursuant to which
Mr. Clark  was employed as the Chairman and Chief  Executive  Officer of TIG Re.
Mr. Clark's  employment  agreement provided for a term of employment expiring on
the first day of the next month following  Mr. Clark's 65th birthday.  Mr. Clark
retired from his duties with TIG Re and from the Company's Board of Directors in
February 1998. Pursuant to his employment agreement, for two years following his
retirement, Mr. Clark is prohibited from, directly or indirectly, (i) soliciting
for employment  certain  employees of the Company and its  subsidiaries and (ii)
soliciting  or diverting  the business of certain  customers and insureds of the
Company or its subsidiaries.

     Additional information required by this item, including but not limited to,
employment  arrangements  for Ms.  Mary  Hennessy  and  Mr.  Michael  Wacek,  is
incorporated by reference from the section entitled "Interest of Certain Persons
in the Merger" in the  definitive  proxy  statement  for its special  meeting of
stockholders held on March 8, 1999.



                                      105
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Summary Compensation Table

     The following table sets forth the compensation paid by the Company and its
subsidiaries for services in all capacities during each of the last three years,
or such shorter  employment period as is applicable,  to (i) the Company's Chief
Executive Officer and (ii) the four most highly  compensated  executive officers
of the Company or its subsidiaries,  other than the Chief Executive Officer, for
the year ended December 31, 1998 (collectively, the "Named Executive Officers").
<TABLE>

                                                                                 Long-term
                                             Annual Compensation            Compensation Awards
                                     ------------------------------------ ------------------------

                                                           Other Annual   Restricted  Securities
         Name and                                          Compensation     Stock     Underlying      All Other
    Principal Position       Year    Salary($) Bonus($)        ($)        Awards($)   Options(#)   Compensation($)
<S>                         <C>      <C>       <C>             <C>        <C>         <C>               <C>     

Jon W. Rotenstreich         1998(1)   800,000      0            0         225,014(3)     50,000         93,632(4)
   Chairman of the Board    1997      800,000   350,000         0          305,559      593,021         106,192
   and Chief Executive      1996      800,000   450,000         0          200,025       75,000          65,566
   Officer

Mary R. Hennessy            1998(1)   537,121      0         191,661(2)   225,014(3)    300,000         71,033(4)
   President and Chief      1997      400,000   225,000      380,000             0       10,000          36,692
   Operating Officer        1996       50,378      0            0          300,625      200,000           1,512

Edwin G. Pickett(5)         1998(1)   530,430      0            0          50,029(3)     20,000         62,045(4)
   Former Executive Vice    1997      467,500   200,000         0          101,853      110,823          66,855
   President and Chief      1996      467,500   250,000         0           75,023       40,000          40,121
   Financial Officer

Michael G. Wacek            1998(1)   429,546   170,000         0         2,000,030(3)  200,000         26,542(4)
   President and Chief
   Executive Officer of
   TIG Reinsurance Co.

Orest B. Stelmach           1998(1)   350,000   200,000         0          175,019(3)    20,000         48,507(4)
  Senior Vice President &   1997      275,000   175,000         0          125,010       52,804          40,792
  Chief Investment Officer  1996      259,082   185,000         0          128,588       18,000          27,246
</TABLE>


(1)  All items on the "1998" line  represent  amounts paid or granted during the
     year 1998,  except the cash bonus  which was earned in 1998 but was paid in
     1999.

(2)  Represents tax  reimbursement  payments made to Ms.  Hennessy in connection
     with excise tax liability arising out of her termination of employment with
     her former employer.

(3)  Represents  the value on the date of grant of restricted  stock awards made
     in 1998 as follows:  Mr.  Rotenstreich:  6,742 shares; Ms. Hennessy:  6,742
     shares;  Mr.  Pickett:  1,499 shares;  Mr. Wacek:  59,926  shares;  and Mr.
     Stelmach:  5,244 shares.  At December 31, 1998,  the  aggregate  restricted
     stock holdings for each of the Named Executive  Officers had a value (based
     on a  December  31,  1998  closing  market  price  of the  Common  Stock of
     $15.5313) as follows: Mr. Rotenstreich - $361,118; Ms. Hennessy - $260,025;
     Mr. Pickett - $113,689; Mr. Wacek - $930,729; and Mr. Stelmach - $198,148.


                                      106
<PAGE>
                                    PART III

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(4)  Includes (i) employer  contributions  in  connection  with the  diversified
     savings  portion  ("DSP") of the Company's  Diversified  Savings and Profit
     Sharing Plan (the "Plan"),  of $6,433 to Mr. Wacek's  account and of $7,200
     to each of the other Named Executive  Officer(s);  (ii) an allocation under
     the  Employee  Stock  Ownership  Plan  ("ESOP")  of $1,600  for each  Named
     Executive Officer(s); (iii) employer contributions under the profit sharing
     portion of the Plan of $5,032 for each Named Executive  Officer(s);  (iv) a
     credit  under the  profit  sharing  portion  of the  Company's  Diversified
     Savings and Profit Sharing  Restoration  Plan (the  "Restoration  Plan") of
     $33,600 to Mr. Rotenstreich's  account;  $24,085 to Ms. Hennessy's account;
     $20,300 to Mr.  Pickett's  account;  $10,782 to Mr.  Wacek's  account;  and
     $14,600 to Mr.  Stelmach's  account;  (v) a credit under the Company's ESOP
     Restoration  Plan of $8,400 to Mr.  Rotenstreich's  account;  $6,021 to Ms.
     Hennessy's account;  $5,075 to Mr. Pickett's account; $2,695 to Mr. Wacek's
     account;  and $3,650 to Mr. Stelmach's account; and (vi) a credit under the
     Company's  diversified  savings  plan  portion of the  Restoration  Plan of
     $37,800 to Mr. Rotenstreich's  account;  $27,095 to Ms. Hennessy's account;
     $22,838 to Mr. Pickett's  account;  and $21,900 to Mr. Stelmach's  account.
     All of the above information is as of December 31, 1998.

(5)  Mr.  Pickett  terminated  his duties with the Company and its  Subsidiaries
     effective  December 31, 1998. See "Employment and Severance  Agreements and
     Change-In-Control Arrangements".



                                      107
<PAGE>
                                   PART III

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

Option Grants in Last Fiscal Year

     The following table sets forth  information  concerning stock option grants
made  during  1998 to the  Named  Executive  Officers.  These  grants  are  also
reflected in the Summary Compensation Table.
<TABLE>

                                   Individual Grants(1)
                       ---------------------------------------------
                              Securities          Percent of Total     Exercise
                              Underlying         Options Granted to    or Base                            Weighted
                               Options              Employees in        Price                             Average
        Name                Granted(#)(2)           Fiscal Year      ($/share)(3)   Expiration Date    Fair Value(4)
 <S>                      <C>                         <C>              <C>          <C>                    <C>  
 Jon W. Rotenstreich      New Stock Options 
                               50,000                  3.2%            $33.3750     January 21, 2008       $424,000

 Mary R. Hennessy        New Stock Options
                              100,000                  6.3%            $33.3750     January 21, 2008       $848,000
                              200,000                 12.6%            $17.4063      August 17, 2008     $1,696,000

 Edwin G. Pickett      New Stock Options
                                20,000                 1.3%            $33.3750     January 21, 2008       $169,600
                       Ownership Maintenance
                           Stock Options
                                9,706                   .6%            $23.8125     January 11, 2005        $82,307
                                4,453                   .3%            $23.8125     January 17, 2004        $37,761
                                2,693                   .2%            $23.8125    November 29, 2003        $22,837

 Michael G. Wacek        New Stock Options
                               200,000                12.6%            $33.3750    January 21 , 2008     $1,696,000

 Orest B. Stelmach     New Stock Options
                                20,000                12.6%            $33.3750     January 21, 2008       $169,600

</TABLE>

(1)  The Company did not grant any stock appreciation  rights during 1998 or any
     prior year.

(2)  All  options  granted  on  January 21,  1998 and  August  17,  1998  become
     exercisable as to 25% of the shares  covered  thereby on each of the first,
     second,  third and fourth  anniversary  of the grant and  contain a feature
     pursuant to which  Ownership  Maintenance  Stock Options will be granted to
     the  optionee in the event such  optionee  pays the  exercise  price and/or
     associated required tax withholdings by actual or constructive  delivery of
     shares of Common Stock to the Company. The number of shares of Common Stock
     represented by the Ownership  Maintenance Stock Option will be equal to the
     number of shares of Common Stock so delivered and the term of the Ownership
     Maintenance  Stock Option will be equal to the remaining term of the option
     exercised.  Ownership Maintenance Stock Options are not exercisable for the
     first 6 months from the date of grant. The exercise price of each Ownership
     Maintenance  Stock Option will be equal to the fair market value of a share
     of Common Stock on the date of grant of such option. Vesting of options may
     be accelerated upon the occurrence of certain events, including retirement,
     as described in the Company's Long-Term Incentive Plans.


                                      108
<PAGE>
                                    PART III

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(3)  The exercise price of the options granted is equal to the fair market value
     of a share of Common Stock on the date of grant.

(4)  The weighted  average fair value of options  granted during 1998 was $8.48.
     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes  option-pricing model with the following weighted-average
     assumptions used for grants in 1998, 1997 and 1996, respectively:  dividend
     yield of 2.95 percent,  1.70 percent and 1.75 percent;  expected volatility
     of .289,  .220, and .201;  risk free interest rate of 5 percent,  6 percent
     and 7 percent  and  expected  life of 7 years for all  years.  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. If
     the merger of the Company  with  Fairfax is  consummated,  all  outstanding
     options will be cancelled.


                                      109
<PAGE>
                                   PART III

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Aggregated  Option  Exercises  in Last  Fiscal  Year and Fiscal  Year end Option
Values

     The  following  table sets forth  information  concerning  all exercises of
stock options during 1998 by the Named Executive Officers and the year end value
of their  unexercised  stock  options.  The  Company  has not  granted any stock
appreciation rights.
<TABLE>

                            Shares                           Number of Securities             Value of Unexercised
                           Acquired         Value       Underlying Unexercised Options        In-the-Money Options
                              on          Realized          at Fiscal Year End (#)         at Fiscal Year end ($)(1)
                                                                                         -------------------------------
         Name           Exercises (#)        ($)       Exercisable     Unexercisable     Exercisable    Unexercisable
<S>                     <C>                 <C>         <C>               <C>                <C>             <C>
Jon W. Rotenstreich         0                 0         3,545,609         163,475            0               0
Mary R. Hennessy            0                 0           102,500         407,500            0               0
Edwin G. Pickett          18,712           $62,779        371,579               0 (2)        0               0
Michael G. Wacek            0                 0              0            200,000            0               0
Orest B. Stelmach           0                 0            63,118          51,700            0               0
</TABLE>


(1)  For the  purpose of the table  above,  options  are  "in-the-money"  if, on
     December 31,  1998,  the fair market value of the Common  Stock  ($15.5313)
     exceeded the exercise  price of such options.  The value of such options is
     calculated by determining the difference between the aggregate market price
     of the Common  Stock  covered by the options on  December 31,  1998 and the
     aggregate exercise price of such options.

(2)  The vesting of Mr.  Pickett's  options was accelerated upon his termination
     on December 31, 1998.

Additional  information  required by this item is incorporated by reference from
the section entitled  "Security  Ownership of Management and Certain  Beneficial
Owners"  in  the  definitive   proxy   statement  for  the  special  meeting  of
stockholders held on March 8, 1999.

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

Information  required by this item is incorporated by reference from the section
entitled "Certain  Information  Regarding the Executive  Officers" in Item 10 of
this Form 10-K.

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

Information required by this item is incorporated by reference from the sections
entitled "Security Ownership of Management and Certain Beneficial Owners" in the
definitive proxy statement for its special meeting of stockholders held on March
8, 1999.

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

Not applicable.


                                      110
<PAGE>
                                     PART IV

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

                                                                           Page
(a) (1) Financial Statements

Consolidated Balance Sheets at December 31, 1998 and 1997....................58

Consolidated Statements of Income for
each of the three years in the period ended December 31, 1998 ...............59

Consolidated Statements of Comprehensive Income for each of the three
years in the period ended December 31, 1998..................................60

Consolidated Statements of Changes in Shareholders' Equity for each
of the three years in the period ended December 31, 1998 ....................61

Consolidated Statements of Cash Flows for
each of the three years in the period ended December 31, 1998 ...............62

Notes to Consolidated Financial Statements.................................. 63

(a)(2) Financial Statement Schedules

Schedule II. Condensed Financial Information of
Registrant - TIG Holdings, Inc. (Parent Company Only).......................113
Schedule III. Supplementary Insurance Information ..........................118
Schedule IV. Reinsurance ...................................................120
Schedule V. Valuation Accounts .............................................121


All other schedules specified by Article 7 of Regulation S-X are not required
pursuant to the related instructions or are inapplicable and, therefore,
have been omitted.

(a)(3) Exhibits.............................................................122

Exhibit 12. Computation of Ratio of
Consolidated Earnings to Fixed Charges and Preferred Stock Dividends,
unaudited.................................................................. 128

A copy of exhibits not included with this Form 10-K may be obtained upon request
and  payment  of the cost of  reproduction  to the  Secretary  at the  Company's
principal  executive office, 65 East 55th Street, 28th Floor, New York, New York
10022.


                                      111
<PAGE>
                                    PART IV

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(b) Reports on Form 8-K

During the last quarter of the fiscal year ended  December 31, 1998, the Company
filed  (i) a  Current  Report  on Form 8-K  dated  December  3,  1998  reporting
information  under Item 5 with respect to the Company entering into an Agreement
and Plan of Merger dated as of December 3, 1998 among Fairfax Financial Holdings
Limited ("Fairfax"), FFHL, Inc. and the Company which provides for the merger of
FFHL, Inc., a wholly owned subsidiary of Fairfax, with and into the Company, and
(ii) a Current Report on Form 8-K dated  December 3, 1998 reporting  information
under  Item 5 with  respect  to the to the  issuance  of a Press  Release of the
Company dated December 3, 1998  announcing  that the Company had entered into an
Agreement  and Plan of  Merger  dated  as of  December  3,  1998  among  Fairfax
Financial  Holdings  Limited  ("Fairfax"),  FFHL,  Inc.  and the  Company  which
provides for the merger of FFHL,  Inc., a wholly  owned  subsidiary  of Fairfax,
with and into the Company.

During the first quarter of the fiscal year ended December 31, 1999, the Company
filed (i) a Current Report on Form 8-K dated March 8, 1999 reporting information
under Item 7 with  respect to the  issuance  of a Press  Release of the  Company
dated March 8, 1999 announcing that the shareholders of the Company approved the
Agreement  and Plan of  Merger  dated  as of  December  3,  1998  among  Fairfax
Financial  Holdings  Limited  ("Fairfax"),  FFHL,  Inc.  and the  Company  which
provides for the merger of FFHL,  Inc., a wholly  owned  subsidiary  of Fairfax,
with and into the Company,  and (ii) a Current Report on Form 8-K dated March 8,
1999 reporting  information  under Item 7 with respect to the release of certain
financial information of the Company.



                                      112
<PAGE>
                                     PART IV

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

                         TIG HOLDINGS, INC.                       SCHEDULE II
                            CONDENSED BALANCE SHEETS
                              (Parent Company Only)

<TABLE>

                                                                                                  December 31,
                                                                                       -----------------------------------
        (In millions)                                                                        1998              1997
        ------------------------------------------------------------------------------ ----------------- -----------------
        <S>                                                                                 <C>                <C>    
        Assets
             Investments:
                       Fixed maturity investments, at market (cost: $50 in
                            1998 and $15 in 1997)                                             $50               $16
                       Short-term and other investments, (cost: $25 in 1998 and 1997)          25                23
        ------------------------------------------------------------------------------ ----------------- -----------------
                                 Total investments                                             75                39
        ------------------------------------------------------------------------------ ----------------- -----------------
               Investment in subsidiaries                                                   1,259             1,392
               Accrued investment income                                                        -                 1
               Income taxes                                                                    96                80
               Other assets                                                                    20                13
        ------------------------------------------------------------------------------ ----------------- -----------------

                       Total assets                                                        $1,450            $1,525
        ------------------------------------------------------------------------------ ----------------- -----------------

        Liabilities and Shareholders' Equity
               Notes payable                                                                  $99               $98
               Junior Subordinated debentures                                                 129               129
               Contribution payable to subsidiary                                               -                70
               Accounts payable and other liabilities                                          70                40
        ------------------------------------------------------------------------------ ----------------- -----------------
                       Total liabilities                                                      298               337
        ------------------------------------------------------------------------------ ----------------- -----------------

        Mandatory redeemable preferred stock                                                   25                25

        Shareholders' Equity
               Common stock - par value $0.01 per share (authorized:
                       180,000,000; shares issued and outstanding: 67,574,664 shares
                       in 1998 and 66,955,288 shares in 1997)                                1,274             1,257
               Retained earnings                                                               229               253
               Accumulated other comprehensive income:
                      Net unrealized investment gain, net of taxes                              (4)               (4)
                      Net unrealized gain or investment in subsidiaries                         89               100
        ------------------------------------------------------------------------------ ----------------- -----------------
                                                                                             1,588             1,606
                     Treasury stock (16,258,097 shares in 1998 and 15,597,021
                          shares in 1997)                                                     (461)             (443)
        ------------------------------------------------------------------------------ ----------------- -----------------
                       Total shareholders' equity                                            1,127             1,163
        ------------------------------------------------------------------------------ ----------------- -----------------

                       Total liabilities and shareholders' equity                           $1,450            $1,525
        ------------------------------------------------------------------------------ ----------------- -----------------
</TABLE>

These financial  statements  should be read in conjunction with the Consolidated
financial Statements and the accompanying notes thereto.


                                      113
<PAGE>
                                                               PART IV

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

                         TIG HOLDINGS, INC.                         SCHEDULE II
                         CONDENSED STATEMENTS OF INCOME
                              (Parent Company Only)


<TABLE>
                                                                                   Years Ended December 31,
                                                                           -----------------------------------------
        (In millions)                                                          1998          1997          1996
        ------------------------------------------------------------------ ------------- ------------- -------------
        <S>                                                                    <C>           <C>           <C>
        Revenues
               Net investment income                                            $3            $6             $7
               Net investment and other loss                                    (9)          (12)             -
        ------------------------------------------------------------------ ------------- ------------- -------------
                       Total revenues                                           (6)          (6)              7
        ------------------------------------------------------------------ ------------- ------------- -------------
        Expenses
               Selling and administration expenses                              86            48             37
               Interest expense                                                 21            18              8
               Restructuring charges                                             -            -             100
        ------------------------------------------------------------------ ------------- ------------- -------------
                       Total expenses                                          107            66            145
        ------------------------------------------------------------------ ------------- ------------- -------------
        Loss before income tax benefit                                        (113)          (72)          (138)
        Income tax benefit                                                      46            24             76
        ------------------------------------------------------------------ ------------- ------------- -------------
                       Loss before equity in earnings of subsidiaries          (67)          (48)           (62)
        Equity in earnings of subsidiaries                                      75           100            141
        ------------------------------------------------------------------ ------------- ------------- -------------
               Net income                                                       $8           $52            $79
        ------------------------------------------------------------------ ------------- ------------- -------------
</TABLE>

These financial  statements  should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes thereto.


                                      114
<PAGE>

                                     PART IV

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

                         TIG HOLDINGS, INC.                         SCHEDULE II
                  CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
                              (Parent Company Only)

<TABLE>
                                                                                             Year Ended December 31,
(In millions)                                                                             1998        1997        1996
-------------------------------------------------------------------------------------- ----------- ----------- ------------
<S>                                                                                       <C>         <C>         <C>  
Net income                                                                                  $8         $52          $79

Other comprehensive income (loss):
          Unrealized gains (losses) on securities, net of reclassification adjustment        1          (1)           -
          Unrealized gains (losses) on investment in subsidiaries                          (11)         46          (58)
-------------------------------------------------------------------------------------- ----------- ----------- ------------
Other comprehensive income (loss), before income taxes                                     (10)         45          (58)

Provision for income taxes related to other comprehensive income (loss) items               (1)          -            -
-------------------------------------------------------------------------------------- ----------- ----------- ------------

Other comprehensive income (loss)                                                          (11)         45          (58)
-------------------------------------------------------------------------------------- ----------- ----------- ------------

Comprehensive income (loss)                                                                ($3)        $97          $21
-------------------------------------------------------------------------------------- ----------- ----------- ------------



Other comprehensive income (loss):
     Holding gain (loss) during year                                                        $ -
     Reclassification adjustment                                                              1
-------------------------------------------------------------------------------------- -----------
Other comprehensive income                                                                   $1
-------------------------------------------------------------------------------------- -----------
</TABLE>

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



                                      115
<PAGE>
                                     PART V

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

                         TIG HOLDINGS, INC.                         SCHEDULE II
             CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                              (Parent Company Only)

<TABLE>

                                                                                  Years Ended December 31,
                                                                          -----------------------------------------
   (In millions)                                                              1998          1997          1996
  ----------------------------------------------------------------------- ------------- ------------- -------------
  <S>                                                                        <C>           <C>           <C>    
   Common Stock
          Balance at beginning of year                                       $1,257        $1,198        $1,186
                  Common stock issued                                            10            42             9
                   Income tax benefit from stock options exercised                -            13             -
                  Conversion of Class A common stock                              -             -             1
                  Amortization of unearned compensation                           7             4             2
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                              1,274         1,257         1,198
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Class A common stock
          Balance at beginning of year                                            -             -             1
                  Conversion of Class A common stock                              -             -            (1)
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                                  -             -             -
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Retained earnings
          Balance at beginning of year                                          253           234           168
                  Net income                                                      8            52            79
                  Common stock dividends                                        (30)          (31)          (11)
                  Preferred stock dividends                                      (2)           (2)           (2)
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                                229           253           234
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Accumulated other comprehensive income
          Balance at beginning of year                                           96            51           109
                  Change in unrealized gain (loss) on fixed maturity
                       investments                                              (11)           46           (58)
                   Change in unrealized gains (loss) on investment in
                       subsidiaries                                             (11)           46           (58)
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                                 85            96            51
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Treasury stock
          Balance at beginning of year                                         (443)         (276)          (88)
                  Treasury stock purchased                                      (18)         (167)         (188)
  ----------------------------------------------------------------------- ------------- ------------- -------------
          Balance at end of year                                               (461)         (443)         (276)
  ----------------------------------------------------------------------- ------------- ------------- -------------
   Total shareholders' equity at end of year                                 $1,127        $1,163        $1,207
  ----------------------------------------------------------------------- ------------- ------------- -------------
</TABLE>

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

                                      116
<PAGE>
                                     PART IV

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

                         TIG HOLDINGS, INC.                         SCHEDULE II
                        CONDENSED STATEMENTS OF CASH FLOW
                              (Parent Company Only)

<TABLE>


                                                                                      Years Ended December 31,
                                                                              -----------------------------------------
      (In millions)                                                               1998          1997          1996
      ----------------------------------------------------------------------- ------------- ------------- -------------
      <S>                                                                         <C>           <C>           <C>    
      Operating Activities
             Net income                                                             $8           $52           $79
             Adjustments to reconcile net income to net
                   cash provided by operating activities:
                   Changes in:
                            Income taxes                                           (16)          (48)          (58)
                           Accrued investment income                                 -            (1)            1
                           Equity in earnings of subsidiaries                      (75)         (100)         (141)
                           Dividends received from subsidiaries                    199           145           130
                           Other                                                    43           (23)           54
      ----------------------------------------------------------------------- ------------- ------------- -------------
                                   Net cash provided by operating activities       159            25            65
      ----------------------------------------------------------------------- ------------- ------------- -------------
      Investing Activities
              Purchases of fixed maturity investments                             (109)         (123)          (67)
              Sales of fixed maturity investments                                   74            96           187
              Maturities and calls of fixed maturities investments                   1            11             5
              Purchases of common stock investments                                (39)           (3)           (2)
              Sales of common stock investments                                     29            11             -
              Net change in short-term investments                                   2             8             4
              Capital contributions to subsidiaries                                (70)            -             -
              Other                                                                 (7)           (5)            2
      ----------------------------------------------------------------------- ------------- ------------- -------------
                           Net cash provided by (used in) investing               (119)           (5)          129
                               activities
      ----------------------------------------------------------------------- ------------- ------------- -------------
      Financing Activities
              Junior Subordinated debentures issued                                  -           125             -
              Net proceeds from issuance of common stock                            10            42             8
              Income tax benefit from stock options exercised                        -            13             -
              Acquisition of treasury stock                                        (17)         (167)         (188)
              Common stock dividends                                               (31)          (31)          (12)
              Preferred stock dividends                                             (2)           (2)           (2)
      ----------------------------------------------------------------------- ------------- ------------- -------------
                           Net cash used in financing activities                   (40)          (20)         (194)
      ----------------------------------------------------------------------- ------------- ------------- -------------
              Increase (decrease) in cash                                            -             -             -
              Cash at beginning of period                                            -             -             -
      ----------------------------------------------------------------------- ------------- ------------- -------------
              Cash at end of period                                                 $-            $-           $ -
      ----------------------------------------------------------------------- ------------- ------------- -------------
</TABLE>

These financial  statements  should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes thereto.



                                      117
<PAGE>
                                     PART IV

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

                         TIG HOLDINGS, INC.                        SCHEDULE III
                       SUPPLEMENTARY INSURANCE INFORMATION


<TABLE>





                                             Future Policy          
                                               Benefits,                  Other Policy                                 Benefits,   
(In millions)                    Deferred       Losses,                      Claims                                     Claims,   
                                  Policy      Claims and                       and                         Net         Losses and
                                Acquisition      Loss        Unearned       Benefits       Premium      Investment     Settlement
(In millions)                     Costs        Expenses (1)  Premium (1)     Payable       Revenue      Income (2)      Expenses
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
<S>                                <C>            <C>           <C>           <C>            <C>            <C>          <C>  
Year Ended December 31, 1998
Primary:                                                                   
     Commercial Specialty           $82            $ -           $ -          $ -            $702           $ -          $499      
     Custom Markets                   7              -             -                          276             -           239      
     Other Lines                      -              -             -            -             (22)            -          (28)      
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
             Total Primary           89          2,595           544            -             956           110           710      
Reinsurance                          48           1505           175            -             491           122           331      
Parent                                -              -             -            -               -             3             -      
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
     Total                          137          4,100           719            -           1,447           235         1,041      
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 

Year Ended December 31, 1997
Primary:
     Commercial Specialty            72              -             -            -             500             -           322      
     Custom Markets                  16              -             -            -             158             -           108      
     Other Lines                      1              -             -            -             292             -           215      
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
             Total Primary           89          2,351           512            -             950           156           645      
Reinsurance                          66          1,584           226            -             516           128           506      
Parent                                -              -             -            -               -             6             -      
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
     Total                          155          3.935           738            -           1,466           290         1,151      
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
Year Ended December 31, 1996
Primary:
     Commercial Specialty            45              -             -            -             416             -           289      
     Custom Markets                   3              -             -            -              95             -            55      
     Other Lines                     32              -             -            -             494             -           408      
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
             Total Primary           80          2,418           470            -           1,005           163           752      
Reinsurance                          64          1,342           226            -             534           120           386      
Parent                                -              -             -            -               -             7             -      
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
     Total                         $144         $3,760          $696           $-          $1,539          $290        $1,138      
------------------------------ ------------- -------------- ------------- -------------- ------------- ------------- ------------- 
</TABLE>

(1)  Ceded unearned  premium,  loss and LAE reserves are not  identifiable  on a
     segment basis.  Thus, net unearned premium reserves,  loss reserves and LAE
     reserves cannot be separately stated.

(2)  Investable  asset  information is not  maintained on a segment  basis.  Net
     investment  income is based  upon each  unit's  (Primary,  Reinsurance  and
     Parent) investable assets.

(3)  Other   operating   expense  are   allocated   primarily  on  the  specific
     identification basis. Where indirect expenses cannot be directly related to
     a segment,  these expenses are reallocated on a rational basis depending on
     the nature of the expense (e.g., premium written, head count, etc.).


                                      118
<PAGE>
                                     PART IV

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

                               TIG HOLDINGS, INC.           SCHEDULE III-cont'd
                       SUPPLEMENTARY INSURANCE INFORMATION

<TABLE>


                               Amortization
                                of Deferred
                                  Policy         Other
                               Acquisition     Operating    Net Premium
(In millions)                     Costs        Expenses(3)    Written
------------------------------ ------------- -------------- ------------- 
<S>                                <C>            <C>           <C>           

Year Ended December 31, 1998
Primary:                                                                   
     Commercial Specialty           $193           $32          $747
     Custom Markets                   80            20           280
     Other Lines                       1          (14)          (27)
------------------------------ ------------- -------------- ------------- 
------------------------------ ------------- -------------- ------------- 
             Total Primary           274            38         1,000
Reinsurance                          151            39           418
Parent                                 -            81             -
------------------------------ ------------- -------------- ------------- 
     Total                           425           158         1,418
------------------------------ ------------- -------------- ------------- 

Year Ended December 31, 1997
Primary:
     Commercial Specialty           132            30           592
     Custom Markets                  33            29           185
     Other Lines                     87           (18)          144
------------------------------ ------------- -------------- ------------- 
             Total Primary          252            41           921
Reinsurance                         139            34           515
Parent                                -            44             -
------------------------------ ------------- -------------- ------------- 
     Total                          391           119         1,436
------------------------------ ------------- -------------- ------------- 
Year Ended December 31, 1996
Primary:
     Commercial Specialty           101            29           441
     Custom Markets                  23            11            99
     Other Lines                     81            55           441
------------------------------ ------------- -------------- ------------- 
             Total Primary          205            95           981
Reinsurance                         142            20           548
Parent                                -            37             -
------------------------------ ------------- -------------- ------------- 
     Total                         $347          $152        $1,529
------------------------------ ------------- -------------- ------------- 
</TABLE>

(1)  Ceded unearned  premium,  loss and LAE reserves are not  identifiable  on a
     segment basis.  Thus, net unearned premium reserves,  loss reserves and LAE
     reserves cannot be separately stated.

(2)  Investable  asset  information is not  maintained on a segment  basis.  Net
     investment  income is based  upon each  unit's  (Primary,  Reinsurance  and
     Parent) investable assets.

(3)  Other   operating   expense  are   allocated   primarily  on  the  specific
     identification basis. Where indirect expenses cannot be directly related to
     a segment,  these expenses are reallocated on a rational basis depending on
     the nature of the expense (e.g., premium written, head count, etc.).


                                      119
<PAGE>


                                     PART IV

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

                                TIG HOLDINGS, INC.                  SCHEDULE IV
                                   REINSURANCE

<TABLE>



                                                                              Other
                                                                           Companies and                Percentage
                                                              Ceded to      Involuntary                 of Amount
                                                 Gross         Other           Pools      Net Amount    Assumed to
(In millions)                                    Amount      Companies                                     Net
--------------------------------------------- ------------- ------------- -------------- ------------- -------------
<S>                                              <C>            <C>            <C>         <C>           <C>   

Year Ended December 31, 1998
       Property and Casualty premium             $1,323         $716           $840        $1,447        58.05%
--------------------------------------------- ------------- ------------- -------------- ------------- -------------

Year Ended December 31, 1997
       Property and Casualty premium             $1,232          $433           $667        $1,466        45.50%
--------------------------------------------- ------------- ------------- -------------- ------------- -------------

Year Ended December 31, 1996
       Property and Casualty premium             $1,307          $400           $632        $1,539        41.07%
--------------------------------------------- ------------- ------------- -------------- ------------- -------------
</TABLE>


                                      120
<PAGE>

                                     PART IV

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

                          TIG HOLDINGS, INC. SCHEDULE V
                               VALUATION ACCOUNTS


<TABLE>

                                                                     Additions
                                                           ------------------------------
                                             Balance at     Charged to      Charged to                        Balance at
                                            Beginning of     Costs and    Other Accounts                    End of Period
(In millions)                                  Period        Expenses                      Deductions (1)
------------------------------------------ --------------- -------------- --------------- ----------------- ---------------
<S>                                             <C>              <C>          <C>              <C>               <C>   
Year Ended December 31, 1998
      Allowance for doubtful accounts -
         premium receivable                      $5              $8           $ -               $ -               $13
      Allowance for doubtful accounts -
         reinsurance recoverable on paid
             losses                               6              10             -                (3)               13
      Allowance for doubtful accounts -
         reinsurance recoverable on
             unpaid losses                        3              20             -                (3)               20
------------------------------------------ --------------- -------------- --------------- ----------------- ---------------
                     Total                      $14             $38           $ -               ($6)              $46
------------------------------------------ --------------- -------------- --------------- ----------------- ---------------

Year Ended December 31, 1997
      Allowance for doubtful accounts -
         premium receivable                      $4              $1           $ -                $-                $5
      Allowance for doubtful accounts -
         reinsurance recoverable on paid
             losses                               6               -             -                 -                 6
      Allowance for doubtful accounts -
         reinsurance recoverable on
             unpaid losses                        3               -             -                 -                 3
------------------------------------------ --------------- -------------- --------------- ----------------- ---------------
                     Total                      $13              $1           $ -               $ -               $14
------------------------------------------ --------------- -------------- --------------- ----------------- ---------------
</TABLE>

(1)  Deductions   represent   the   write-off  of  specific   amounts  due  from
     policyholders or reinsurers.


                                      121
<PAGE>
                                    PART IV

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

Exhibit 2.1:  Agreement and Plan of Merger dated as of December 3, 1998, between
TIG Holdings,  and Fairfax Financial Holdings Limited (incorporated by reference
from Appendix A in the  definitive  proxy  statement for the special  Meeting of
Stockholders on March 8, 1999).

Exhibit 3.l:  Amended and Restated  Certificate of Incorporation of TIG Holdings
as filed with the Delaware Secretary of State on April 16, 1993 (incorporated by
reference to Exhibit 3.1 to TIG Holdings'  Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993).

Exhibit  3.2:  Amended  and  Restated  Bylaws of TIG  Holdings as adopted by TIG
Holdings'  Board of  Directors  on May 18, 1993  (incorporated  by  reference to
Exhibit  3.2 to TIG  Holdings'  Registration  Statement  on Form  S-8,  File No.
33-63148).

Exhibit 4.1:  Certificate of  Designation of TIG Holdings  relating to the $7.75
Cumulative  Preferred Stock of TIG Holdings as filed with the Delaware Secretary
of State on April 16,  1993  (incorporated  by  reference  to Exhibit 4.1 to TIG
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993).

Exhibit 4.2:  Indenture dated as of April 1, 1995,  between TIG Holdings and the
First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit
4.2 to Registration Statement No. 33-90594, filed March 24, 1995).

Exhibit 4.3: Junior Subordinated Indenture,  dated January 30, 1997, between TIG
Holdings and The Chase Manhattan Bank, as Trustee  (incorporated by reference to
Exhibit 4.3 to TIG Holding' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).

Exhibit  4.4:  Certificate  of Trust of TIG Capital  Trust I, dated  January 24,
1997,  between TIG Holdings,  and The Chase Manhattan Bank, Chase Manhattan Bank
of  Delaware,  as  Trustees  (incorporated  by  reference  to Exhibit 4.4 to TIG
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).

Exhibit 4.5: Capital  Securities  Guarantee  Agreement,  dated January 30, 1997,
between TIG Holdings and The Chase Manhattan Bank, as Trustee  (incorporated  by
reference to Exhibit 4.5 to TIG Holdings'  Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).

Exhibit 4.6: Trust Agreement,  dated January 24, 1997,  between TIG Holdings and
The  Chase   Manhattan  Bank,   Chase  Manhattan  Bank  Delaware,   as  Trustees
(incorporated  by reference to Exhibit 4.6 to TIG Holdings'  Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997).

Exhibit  4.7:  Amended and  Restated  Trust  Agreement  dated  January 30, 1997,
between TIG Holdings the  Administrators  named therein and The Chase  Manhattan
Bank, Chase Manhattan Bank Delaware,  as Trustees  (incorporated by reference to
Exhibit 4.7 to TIG Holdings' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997).

Exhibit 4.8:  Form of Capital  Securities  Certificate  of TIG Capital  Trust I,
(included as Exhibit E to Exhibit 4.7).

Exhibit  10.1:  Master  Leasing  Agreement  dated  December 1, 1995  between BLC
Corporation as Lessor,  and TIG Insurance  Company,  as Lessee  (incorporated by
reference to Exhibit 10.1 to TIG  Holdings'  Annual  Report on Form 10-K for the
year ended December 31, 1995).


                                      122
<PAGE>
                                    PART IV

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

Exhibit 10.2: Trade Name and Service Mark License Agreement dated April 16, 1993
by and between  Transamerica and TIG Insurance Group  (incorporated by reference
to Exhibit 10.5 to TIG Holdings'  Quarterly  Report on Form 10-Q for the quarter
ended March 31, 1993).

Exhibit  10.3:  Employment  Agreement  dated  April 19,  1993 by and between TIG
Holdings and Jon W. Rotenstreich  (incorporated by reference to Exhibit 10.10 to
TIG  Holdings'  Quarterly  Report on Form 10-Q for the  quarter  ended March 31,
1993).

Exhibit  10.4:  Employment  Agreement  dated  April 19,  1993 by and between TIG
Holdings and Don D. Hutson  (incorporated  by reference to Exhibit  10.11 to TIG
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993).

Exhibit  10.5:  Employment  Agreement  dated  March  23,  1993  by  and  between
Transamerica Reinsurance Company and William G. Clark (incorporated by reference
to Exhibit 10.12 to TIG Holdings'  Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993).

Exhibit  10.6:  Employment  Agreement  dated  March  23,  1993  by  and  between
Transamerica   Reinsurance  Company  and  Edwin  M.  Millette  (incorporated  by
reference to Exhibit 10.18 to TIG  Holdings'  Annual Report on Form 10-K for the
year ended December 31, 1994).

Exhibit 10.7: Letter to Edwin M. Millette re: Employment Agreement (incorporated
by reference to Exhibit  10.19 to TIG  Holdings'  Annual Report on Form 10-K for
the year ended December 31, 1994).

Exhibit  10.8:  Letter from TIG Holdings to Edwin G. Pickett dated June 15, 1993
and June 22, 1993 concerning certain provisions of Mr. Pickett's employment with
TIG Holdings  (incorporated  by reference to Exhibit 10.32 to Amendment No. I to
TIG Holdings' Annual Report on Form 10-K for the year ended December 31, 1993).

Exhibit 10.9: TIG Holdings,  Inc. 1993 Non-Employee  Directors  Restricted Share
Program  (incorporated by reference to Exhibit 10.21 to TIG Holdings'  Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993).

Exhibit  10.10:  Amendment to TIG  Holdings,  Inc. 1993  Non-Employee  Directors
Restricted  Share  Program  (incorporated  by  reference  to  Exhibit  10.22  to
Amendment No. I to TIG  Holdings'  Annual Report on Form 10-K for the year ended
December 31, 1993).

Exhibit  10.11:  TIG Holdings,  Inc.  Common Stock  Restricted  Share  Agreement
(incorporated  by  reference  to  Exhibit  4.1  to  TIG  Holdings'  Registration
Statement on Form S-8, File No. 33-66650).

Exhibit 10.12: TIG Holdings, Inc. 1993 Long-Term Incentive Plan (incorporated by
reference to Exhibit  10.13 to TIG Holdings'  Quarterly  Report on Form 10-Q for
the quarter ended March 31, 1993).

Exhibit 10.13: TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated by
reference to Exhibit  10.14 to TIG Holdings'  Quarterly  Report on Form 10-Q for
the quarter ended March 31, 1993).

Exhibit 10.14:  Employee Stock  Ownership Plan Trust  Agreement  dated April 27,
1993 by and between TIG Holdings and Bank of America  National Trust and Savings
Association,  as trustee  (incorporated  by  reference  to Exhibit  10.15 to TIG
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993).


                                      123
<PAGE>
                                     PART IV

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

Exhibit  10.15:  Loan and Stock Purchase  Agreement  dated April 27, 1993 by and
between TIG Holdings and Bank of America National Trust and Savings Association,
as trustee of the TIG Holdings, Inc. Employee Stock Ownership Plan (incorporated
by reference to Exhibit 10.16 to TIG Holdings' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993).

Exhibit 10.16:  TIG Holdings,  Inc.  Diversified  Savings Plan  (incorporated by
reference to Exhibit  10.17 to TIG Holdings'  Quarterly  Report on Form 10-Q for
the quarter ended March 31, 1993).

Exhibit 10.17:  Diversified Savings Plan Trust Agreement dated April 27, 1993 by
and  between  TIG  Holdings  and Bank of  America  National  Trust  and  Savings
Association,  as trustee  (incorporated  by  reference  to Exhibit  10.18 to TIG
Holdings' Quarterly Report on Form 10-Q for the quarter ended March 31, 1993).

Exhibit 10.18: TIG Holdings,  Inc. Employee Profit Sharing Plan (incorporated by
reference to Exhibit  10.19 to TIG Holdings'  Quarterly  Report on Form 10-Q for
the quarter ended March 31, 1993).

Exhibit 10.19:  Profit Sharing Plan Trust  Agreement dated April 27, 1993 by and
between TIG Holdings and Bank of America National Trust and Savings Association,
as  trustee  (incorporated  by  reference  to  Exhibit  10.19  to TIG  Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993).

Exhibit 10.20: Amendment No. 3 dated February 16, 1995 to each of Employee Stock
Ownership  Plan,  Employees'  Profit Sharing Plan and  Diversified  Savings Plan
(incorporated  by reference to Exhibit 10.34 to TIG  Holdings'  Annual Report on
Form 10K for the year ended December 31, 1994).

Exhibit 10.21: Credit Agreement, dated as of December 14, 1995, by and among TIG
Holdings, the lenders party thereto, Chemical Bank, as the Administrative Agent,
and  Morgan   Guaranty  Trust  Company  of  New  York,  as  the  Document  Agent
(incorporated  by reference to Exhibit 10.21 to TIG  Holdings'  Annual Report on
Form 10-K for the year ended December 31, 1995).

Exhibit  10.22:  Office Lease dated October 4, 1993 by and between T-Las Colinas
Towers  Corp.  and TIC  (incorporated  by  reference  to  Exhibit  10.28  to TIG
Holdings' Registration Statement on Form S-1, File No. 33-71818).

Exhibit  10.23:  Amendment No. I dated November 7, 1994 to each of TIG Holdings,
Inc.  Employee  Stock  Ownership  Plan,   Employees'  Profit  Sharing  Plan  and
Diversified  Savings Plan  (incorporated  by  reference to Exhibit  10.32 to TIG
Holdings' Annual Report on Form 10-K for the year ended December 31, 1994).

Exhibit 10.24:  Amendment No. 2 dated December 14, 1994 to each of TIG Holdings,
Inc.  Employee  Stock  Ownership  Plan,   Employees'  Profit  Sharing  Plan  and
Diversified  Savings Plan  (incorporated  by  reference to Exhibit  10.33 to TIG
Holdings' Annual Report on Form 10-K for the year ended December 31, 1994).

Exhibit 10.25:  Environmental  Reimbursement  of Loss Agreement  dated April 27,
1993 by and between Transamerica Insurance Company and Pyramid Insurance Company
of Bermuda,  Ltd.  (incorporated  by reference to Exhibit 10.2 to TIG  Holdings'
Quarterly Report on Form 10-Q for the quarter ended March 31, 1993).


                                      124
<PAGE>
                                    PART IV

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

Exhibit 10.26: TIG Holdings, Inc. 1996 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to TIG Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).

Exhibit  10.27:  TIG  Holdings,   Inc.  1996   Non-Employee   Directors  Program
(incorporated by reference to Exhibit 10.2 to TIG Holdings'  Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).

Exhibit 10.28: TIG Holdings, Inc. Annual Incentive Compensation Plan for Certain
Executives  (incorporated by reference to Exhibit 10.4 to TIG Holdings Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).

Exhibit  10.29:  TIG Holdings Inc. 1993  Long-term  Incentive  Plan Stock Option
Agreement  (incorporated by reference to Exhibit 10.4 to TIG Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).

Exhibit 10.30: TIG Holdings, Inc. 1993 Long-term Incentive Plan Restricted Share
Award  Agreement  (incorporated  by reference  to Exhibit 10.5 to TIG  Holdings'
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).

Exhibit 10.31:  TIG Holdings,  Inc. 1996  Long-Term  Incentive Plan Stock Option
Agreement  (incorporated by reference to Exhibit 10.6 to TIG Holdings' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).

Exhibit  10.32:  TIG Holdings,  Inc. 1996  Long-Term  Incentive  Plan  Executive
Non-Qualified Stock Option Agreement  (incorporated by reference to Exhibit 10.7
to TIG  Holdings'  Quarterly  Report on Form 10-Q for the quarter ended June 30,
1996).

Exhibit  10.33:  TIG  Holdings,  Inc. ESOP  Restoration  Plan  (incorporated  by
reference to Exhibit 10.7 to TIG  Holdings'  Annual  Report on Form 10-K for the
year ended December 31, 1996).

Exhibit 10.34: TIG Holdings,  Inc. Profit Sharing Restoration Plan (incorporated
by reference to Exhibit  10.34 to TIG  Holdings'  Annual Report on Form 10-K for
the year ended December 31, 1996).

Exhibit 10.35:  Amendment  effective  January 1, 1997 to the TIG Holdings,  Inc.
Diversified  Savings Plan  (incorporated  by  reference to Exhibit  10.35 to TIG
Holdings' Annual Report on Form 10-K for the year ended December 31, 1996).

Exhibit 10.36:  Amendment  effective  January 1, 1997 to the TIG Holdings,  Inc.
ESOP  Restoration  Plan  (incorporated  by  reference  to  Exhibit  10.36 to TIG
Holdings' Annual Report on Form 10-K for the year ended December 31, 1996).

Exhibit 10.37:  Amendment  effective  January 1, 1997 to the TIG Holdings,  Inc.
Profit Sharing Plan (incorporated by reference to Exhibit 10.37 to TIG Holdings'
Annual Report on Form 10-K for the year ended December 31, 1996).

Exhibit 10.38:  Separation  Agreement (in  replacement of employment  agreement)
dated May 1, 1997, between TIG Holdings Inc., and Don D. Hutson (incorporated by
reference to Exhibit 10.1 to TIG Holdings' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).


                                      125
<PAGE>
                                     PART IV

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

Exhibit 10.39: TIG Holdings, Inc. 1996 Long-Term Incentive Plan Restricted Share
Award  Agreement  (incorporated  by reference  to Exhibit 10.1 to TIG  Holdings'
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).

Exhibit 10.40: Tax Reimbursement  Agreement dated November 11, 1996, between TIG
Holdings and Mary R. Hennessy  (incorporated by reference to Exhibit 10.2 to TIG
Holdings'  Quarterly  Report on Form 10-Q for the quarter  ended  September  30,
1997).

Exhibit 10.41:  Purchase and Sale  Agreement  dated as of September 30, 1997, by
and between  TIG  Insurance  Company and  Nationwide  Mutual  Insurance  Company
(incorporated by reference to Exhibit 10.3 to TIG Holdings'  Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997).

Exhibit 10.42:  Amended and Restated  Credit  Agreement dated as of December 17,
1997 among TIG Holdings, the lenders party thereto, the letter of credit issuing
lenders named therein, The Chase Manhattan Bank (successor to Chemical Bank), as
Administrative  Agent  and  Morgan  Guaranty  Trust  Company  of  New  York,  as
Documentation Agent.

Exhibit  10.43:  TIG Holdings,  Inc. 1996  Long-Term  Incentive Plan Share Award
Agreement.

Exhibit 10.44: TIG Holdings,  Inc. 1996 Long-Term Incentive Plan Executive Stock
Option Agreement.

Exhibit  10.45:  Agreement  dated  as of  January  16,  1998,  by an  among  TIG
Reinsurance Company, TIG Holdings and Michael G. Wacek.

Exhibit 10.46:  Transition  Services  Agreement  dated June 11, 1998 between TIG
Holdings,  Inc. and Edwin G. Pickett  (incorporated by reference to Exhibit 10.1
to TIG Holdings'  Quarterly  Report on Form 10-Q for the quarter ended September
30, 1998).

Exhibit 10.47:  Employment Agreement dated August 18, 1998 between TIG Holdings,
Inc.  and Mary R.  Hennessy  (incorporated  by  reference to Exhibit 10.2 to TIG
Holdings'  Quarterly  Report on Form 10-Q for the quarter  ended  September  30,
1998).

Exhibit 12: Statement re: Computation of Ratio of Consolidated Earnings to Fixed
Charges and Preferred Stock Dividends.

Exhibit 21: Subsidiaries of TIG Holdings.

Exhibit 23.1: Consent of Ernst & Young LLP

Exhibit 24.1: Powers of Attorney.


                                      126
<PAGE>
-------------------------------------------------------------------------------












                                   EXHIBIT 12




                                      127
<PAGE>


                                     PART IV

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

                          TIG HOLDINGS, INC.                         EXHIBIT 12
                  COMPUTATION OF RATIO OR CONSOLIDATED EARNINGS
                 TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
                                   (unaudited)

<TABLE>

                                                                              Years Ended December 31,
                                                           --------------------------------------------------------------
(In millions)                                                      1998                 1997                 1996
---------------------------------------------------------- -------------------- -------------------- --------------------
<S>                                                                <C>                  <C>                  <C>    
Earnings:
     Pre-tax income (loss) from continuing operations              ($1)                  $62                  $75
     Fixed charges, excluding preferred
          stock dividends                                           29                    25                   16
---------------------------------------------------------- -------------------- -------------------- --------------------
                Earnings                                           $28                   $87                  $91
---------------------------------------------------------- -------------------- -------------------- --------------------

Fixed charges:
     Interest expense                                              $23                   $20                   $9
     Interest portion of operating leases,
          net of subleasing income                                   6                     5                    7
     Preferred stock dividends requirements                          2                     2                    2
---------------------------------------------------------- -------------------- -------------------- --------------------
               Fixed Charges                                       $31                   $27                  $18
---------------------------------------------------------- -------------------- -------------------- --------------------

Ratio of earnings to fixed charges                                 0.9                   3.2                  5.1
---------------------------------------------------------- -------------------- -------------------- --------------------
</TABLE>





                                      128
<PAGE>








                                   EXHIBIT 21




                                      129
<PAGE>

                              TIG Holdings, Inc.
                              List of Subsidiaries


                                                                     State of
                                                                  Incorporation

TIG Holdings, Inc.                                                  Delaware
       TIG Insurance Group                                          California
           Rusco Services, Inc.                                     California
           TIG Holdings 3, Inc.                                     Delaware
                  PwC Financial Solutions, LLC                      Delaware
           TIG Insurance Company                                    California
                  TIG Holdings 4, Inc.                              Delaware
                  TIG Premier Insurance Company                     California
                  Countrywide Corporation                           Texas
                         Industrial County Mutual                   Texas
                  TIG Lloyds Insurance Company                      Texas
                  TIG Indemnity Company                             California
                  TIG Insurance  Company of Texas                   Texas
                  TIG Reinsurance Company                           Connecticut
                         Investment Subsidiary Two Corporation      Delaware
                         Investment Subsidiary Three Corporation    Delaware
                         Investment Subsidiary Four Corporation     Delaware
                         TIG Re UK Holdings Company                 Delaware
                  Fairmont Insurance Company                        California
                  TIG American Specialty Insurance Company          Texas
                  TIG Insurance Company of Colorado                 Colorado
                  TIG Insurance Corporation of America              Michigan
                  TIG Insurance Company of Michigan                 Michigan
                  TIG Insurance Company of New York                 New York
                  Investment Subsidiary One Corporation             Delaware
                  TIG Specialty Insurance Company                   California






                                      130
<PAGE>

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











                                  EXHIBIT 23.1


                                      131
<PAGE>

                       CONSENT OF INDEPENDENT AUDITORS


We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-61564) pertaining to the TIG Holdings,  Inc. 1993 Long-Term Incentive
Plan, in the Registration  Statement (Form S-8 No.  33-61970)  pertaining to the
TIG Holdings, Inc. Diversified Savings Plan, in the Registration Statement (Form
S-8  No.  33-63148)  pertaining  to the TIG  Holdings,  Inc.  1993  Non-Employee
Directors  Restricted Share Program, in the Registration  Statement Form S-8 No.
33-66650)  pertaining to the Common Stock  Restricted  Share  Agreement,  in the
Registration Statement (Form S-3 No. 33-90594) of TIG Holdings, Inc. and related
Prospectus  pertaining to the  registration  of $100,000,000 of 8 1/8% Notes due
2005, in the Registration  Statement (Form S-8 No. 333-18281)  pertaining to the
TIG Holdings,  Inc.  Diversified  Savings Restoration Plan in the Post Effective
Amendment No. 1 to the Registration Statement (Form S-8 No. 33-61564) pertaining
to the TIG Holdings,  Inc. 1993 Long-Term Incentive Plan, the TIG Holdings, Inc.
1996  Long-Term  Incentive  Plan,  the TIG  Holdings,  Inc.,  1996  Non-Employee
Directors  Compensation  Program  and  the TIg  Holdings,  Inc.  September  1996
Consultant Stock Option  Agreement,  in the Registrtion  Statement (form S-8 No.
333-15735)  pertaining to the TIG Holdings,  Inc. 1996 Long-Term Incentive Plan,
the TIG Holdings, Inc. September 1996 consultanct Stock Option Agreement and the
Registration  Statement (Form F-9 No. 333-10122) of Fairfax Financial  Holdings,
Limited and related Prospectus pertaining to the registration of $275,000,000 of
7.375%  Notes due March 15,  2006,  of our report  dated  February  3, 1999 with
respect to the consolidated  financial statements and schedules of TIG Holdings,
Inc.  and  subsidiaries  included in the Annual  Report (Form 10-K) for the year
ended December 31, 1998.

                                             /s/Ernst & Young LLP


Dallas, Texas
March 30, 1999


                                      132
<PAGE>


















                                  EXHIBIT 24.1

                                Power of Attorney
                           From the Board of Directors



                                      133
<PAGE>




                               POWER OF ATTORNEY

     KNOW ALL MEN BY THEIR PRESENCE,  that each person whose  signature  appears
below constitutes and appoints Jon W. Rotenstreich,  John D. Swanson and William
Henry  Huff,  III (each of them with full  power of  substitution  and with full
power to act without the other) his or her true and lawful attorneys-in-fact and
agent for the undersigned in such person's name, place and stead, in all and all
capacities,  to sign an  Annual  Report  for  1998 on Form  10-K and any and all
subsequent  amendments  thereto  and to file them so signed,  with all  exhibits
thereto,  and any and all other  documents  in  connection  therewith,  with the
Securities and Exchange Commission,  hereby granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform any and
all  acts  and  things  requisite  and  necessary  to be done in and  about  the
premises, as fully to all intends and purposes as he or she might or could do in
person,  hereby  ratifying and  confirming all that said  attorneys-in-fact  and
agents or any of them, of their substitutes, may lawfully do or cause to be done
by virtue hereof.

Dated: March 30, 1999


By:    /s/JON W. ROTENSTREICH*                  By:    /s/MARY R. HENNESSY*
Name:  Jon W Rotenstreich                       Name:  Mary R. Hennessy
Title: Director, Chairman of the Board          Title: President,
       and Chief Executive Officer                     Chief Operating Officer
       (Principal Executive Officer)                   and Director


By:    /s/JOHN D. SWANSON*                      By:    /s/PATRICIA S. PICKARD*
Name:  John D. Swanson                          Name:  Patricia S. Pickard
Title: Senior Vice President a                  Title: Senior Vice President
       Chief Financial Officer                         and Controller of
       (Principal Financial Officer)                   TIG Insurance Company
                                                       (Principal Accounting
                                                        Officer)

By:    /s/GEORGE B. BIETZEL*                    By: /s/JOEL S. EHRENKRANZ*
Name:  George B Bietzel                         Name: Joel S. Ehrenkranz
Title: Director                                 Title:   Director


By:    /s/GEORGE D. GOULD                       By:    /s/THE RT. HON.LORD MOORE
Name:  George D. Gould                          Name:  The Rt. Hon. Lord Moore
Title: Director                                 Title: Director


By:    /s/WILLIAM W. PRIEST, JR.                By:    /s/ANN W. RICHARDS
Name:  William W. Priest, Jr.                   Name:  Ann W. Richards
Title: Director                                 Title: Director


By:    /s/HAROLD TANNER
Name:  Harold Tanner
Title: Director


                                      134
<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.

                                    TIG HOLDINGS, INC.



                                    By:    /s/PATRICIA S. PICKARD       
                                    Name:  Patricia S. Pickard
                                    Title: Senior Vice President
                                           and Controller of
                                           TIG Insurance Company
                                           (Principal Accounting Officer)

Date: March 30, 1999

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


By: /s/JON W. ROTENSTREICH*                By:  /s/GEORGE B. BEITZEL*
    Jon W. Rotenstreich                         George B. Beitzel
    Chairman of the Board and                   Director
    Chief Executive Officer and Director
    (Principal Executive Officer)          By:  /s/JOEL S. EHRENKRANZ*
                                                Joel S. Ehrenkranz
                                                Director
By: /s/MARY R. HENNESSY*    
    President, Chief Operating Officer     By:  /s/THE RT. HON. LORD MOORE*
    and Director                                The Rt. Hon. Lord Moore
                                                Director

By: /s/JOHN D. SWANSON*                    By:  /s/WILLIAM W. PRIEST, JR.*
    Senior Vice President and                   William W. Priest, Jr. 
    Chief Financial Officer                     Director
    (Principal Financial Officer)
                                           By:  /s/ANN W. RICHARDS*
                                                Ann W. Richards
                                                Director

                                           By:  /s/HAROLD TANNER*
                                                Harold Tanner
                                                Director





Date:  March 30, 1999

By:  /s/WILIAM H. HUFF, III
     William H. Huff, III
     Attorney-in-Fact



                                      135
<PAGE>