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


         (Mark One)
         |X|ANNUAL  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
             EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998
                                       OR
         |_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934
                        For the Transition period from to

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                            Chartwell Re Corporation
             (Exact name of registrant as specified in its charter)

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               DELAWARE                                           41-1652473
     (State or other jurisdiction of                          (I.R.S. Employer
     incorporation or organization)                          Identification No.)

                       Four Stamford Plaza, 107 Elm Street
                           Stamford, Connecticut 06902
              (Address of principal executive offices and zip code)
                                 ---------------
       Registrant's telephone number, including area code: (203) 705-2500

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

    Title of Each Class                Name of Each Exchange on which registered
Common Stock, par value $.01 per share            New York Stock Exchange
Preferred Stock Purchase Rights                   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 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
YES X       NO __
   ---
Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of March 9, 1999 was approximately $177,824,000.

As of March 9, 1999,  there were  9,628,162  shares of Common  Stock,  $0.01 par
value outstanding.

                       Documents Incorporated by Reference
Portions of the  registrant's  definitive  Proxy  Statement  for its 1999 Annual
Meeting of  Stockholders,  which will be filed with the  Securities and Exchange
Commission  within 120 days of the close of the  registrant's  fiscal year ended
December 31, 1998, are incorporated by reference into Part III hereof.

================================================================================


<PAGE>






                            CHARTWELL RE CORPORATION
                                TABLE OF CONTENTS

                                                                           Page
         Item                                                            Number
         ----                                                            ------
PART I
     1.  Business---------------------------------------------------------    1
     2.  Properties-------------------------------------------------------   18
     3.  Legal Proceedings------------------------------------------------   18
     4.  Submission of Matters to a Vote of Security Holders--------------   18

PART II
     5.  Market for the Registrant's Common Stock and Related
         Stockholder Matters----------------------------------------------   19
     6.  Selected Financial Data------------------------------------------   20
     7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations----------------------------------------   21
     7A. Quantitative and Qualitative Disclosures About Market Risk-------   33
     8.  Financial Statements and Supplementary Data----------------------   33
     9.  Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosures ---------------------------------------   33
PART III
     10. Directors and Executive Officers of the Registrant---------------   34
     11. Executive Compensation-------------------------------------------   34
     12. Security Ownership of Certain Beneficial Owners and Management---   34
     13. Certain Relationships and Related Transactions-------------------   34

PART IV
     14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K-   34


                                       ii

<PAGE>


                                                                   
                                     PART I

Item 1. Business

Overview
         Chartwell Re Corporation ("Chartwell" or the "Company") is an insurance
holding company with global  underwriting and service  operations which conducts
its  business  in the  United  States  and in the  Lloyd's  market  through  its
principal  operating  subsidiaries,  Chartwell  Reinsurance  Company ("Chartwell
Reinsurance"),  The Insurance  Corporation  of New York  ("INSCORP"),  Chartwell
Managing  Agents  Limited  ("CMA")  and  Dakota  Specialty   Insurance   Company
("Dakota").  As of December 31, 1998,  Chartwell  had over $1.5 billion of total
assets and stockholders'  equity of $292.9 million.  For the year ended December
31, 1998, Chartwell's gross premiums written amounted to $343.0 million. Of such
amount, $159.2 million, or 46.4%, represented gross reinsurance premiums, $111.1
million,  or 32.4%,  represented gross insurance premiums and $72.6 million,  or
21.2%,  represented  premiums  from Oak  Dedicated  Limited,  Oak  Dedicated Two
Limited and ADIT One Limited, CMA's dedicated Lloyd's corporate capital vehicles
(the "Dedicated CCV's").
         Chartwell  Reinsurance is a broker market reinsurer with $302.9 million
of  policyholders'  surplus which underwrites  treaty  reinsurance for casualty,
property, marine and aviation risks. INSCORP is a primary insurance company with
$131.7  million of  policyholders'  surplus that develops  property and casualty
insurance  programs through specialty  production sources focusing on a specific
line of business and geographic region.  Chartwell and INSCORP are each licensed
or  authorized  to transact  business in 49 states and the District of Columbia.
INSCORP is also approved to transact business in Canada. CMA is the 12th largest
managing  agency at  Lloyd's,  managing  seven  Lloyd's  syndicates  with  total
underwriting capacity of approximately (pound)300 million ($500 million) for the
1999 year of account.  Approximately  46% of CMA  syndicates'  1999  capacity is
supplied by Chartwell,  and it is estimated that approximately 65% of CMA's 1999
premium volume will be derived from non-U.S. sources.

History
         Chartwell Reinsurance was founded in 1979 as a wholly-owned  subsidiary
of Northwestern  National Life Insurance Company ("NWNL").  Chartwell was formed
in 1989 to act as the parent company of Chartwell Reinsurance,  and, in March of
1992,  Chartwell was acquired (the "1992  Acquisition") by an acquisition  group
including members of Chartwell's senior management.
         INSCORP  was  acquired  by  Chartwell  as a  result  of the  merger  of
INSCORP's former parent, Piedmont Management Company Inc. ("Piedmont"), with and
into  Chartwell,  with  Chartwell as the surviving  corporation  (the  "Piedmont
Merger").  The  Piedmont  Merger  was  completed  in  December,  1995,  and upon
consummation  of the  Piedmont  Merger,  Chartwell  assumed  all  of  Piedmont's
obligations under its Contingent  Interest Notes due 2006 (the "CI Notes") which
were issued by Piedmont to its stockholders just prior to the Piedmont Merger.
         In November,  1996, Chartwell Holdings Limited ("Holdings Limited"),  a
newly-formed,  indirect wholly-owned subsidiary of Chartwell,  acquired CMA in a
cash tender  offer for all of the  outstanding  ordinary  shares of Chartwell UK
plc,  formerly Archer Group Holdings plc  ("Chartwell  UK"), the holding company
for CMA.  Chartwell UK was publicly traded on the London Stock Exchange prior to
its acquisition by Chartwell.

Ratings
         Chartwell  Reinsurance  is rated "A"  (Excellent) by A.M. Best Company.
INSCORP  and  Dakota,  its  surplus  lines  subsidiary,   are  both  rated  "A-"
(Excellent) by A.M. Best Company.  All three companies are assigned an A- claims
paying ability rating by Standard & Poor's.  All of CMA's  syndicates  enjoy the
benefit of the ratings of Lloyd's,  which is rated "A"  (Excellent) by A.M. Best
Company and has an A+ claims paying ability rating from Standard & Poor's. These
ratings  are based upon  factors  that may be of  concern to policy or  contract
holders,  agents and  intermediaries,  but may not  reflect  the  considerations
applicable  to an equity  investment in a reinsurance  or insurance  company.  A
change  in any  such  rating  is at the  discretion  of  the  respective  rating
agencies.

                                       1

<PAGE>


Corporate Structure
                               [GRAPHIC OMITTED]

Property and Casualty Reinsurance
         Reinsurance  is an  arrangement  in which  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 one or more insurance  policies.  Reinsurance can benefit a ceding company
in a number of ways,  including  reducing net  liability  exposure on individual
risks,   providing  catastrophe   protection  from  large  or  multiple  losses,
stabilizing financial results and assisting in maintaining  acceptable operating
leverage  ratios.  Reinsurance  also provides a ceding  company with  additional
underwriting  capacity by permitting it to accept larger risks and  underwrite a
greater  number of risks  without a  corresponding  increase  in its capital and
surplus.
         Reinsurance  is  contracted  either  through  treaties  or  facultative
certificates. A reinsurance treaty is an agreement whereby the ceding company is
obligated to cede, and the reinsurer is obligated to assume, a specified portion
or category of risk under all qualifying  policies  issued by the ceding company
during  the  term  of  the  treaty.  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.  Facultative
reinsurance is normally  purchased by insurance  companies for individual  risks
not  covered  under  reinsurance  treaties or for amounts in excess of limits on
risks  covered  under  reinsurance  treaties.  In  the  underwriting  of  treaty
reinsurance, the reinsurer does not evaluate each individual risk assumed, as it
must in the underwriting of facultative  reinsurance,  and generally accepts the
original underwriting decisions made by the ceding insurer.
         Both treaty and facultative  reinsurance can be written on either a pro
rata (also known as quota share or proportional) or excess of loss basis.  Under
pro rata  reinsurance,  the reinsurer  indemnifies the ceding company against an
agreed upon portion or share of the losses and loss adjustment  expenses ("LAE")
incurred by the ceding company under the reinsured policy or policies.  Premiums
that the ceding  company  pays to the  reinsurer  for pro rata  reinsurance  are
proportional to the premiums that the ceding company  receives,  consistent with
the proportional sharing of risk, generally less a ceding commission. The ceding
commission  is  negotiated  between  the  reinsurer  and the  ceding  company to
reimburse  the  ceding  company  for  its  acquisition  costs  relating  to  the
underlying policies and may include a contingent component that varies depending
upon the loss  experience of the  underlying  business.  As a  consequence,  the
underwriting  results of the reinsurer may not parallel the underwriting results
of the ceding company.
         Under excess of loss reinsurance,  the reinsurer indemnifies the ceding
company  against all or a specified  portion of losses and LAE on the  reinsured
policy or policies in excess of a specified  dollar amount,  known as the ceding
company's  retention or reinsurance  attachment  point,  generally  subject to a
negotiated limit. Such reinsurance can cover losses from a single risk or from a
variety of risks in connection with a single occurrence  (generally  referred to
as  catastrophe  coverage).  Excess  of loss  reinsurance  is often  written  in
multiple layers. One or a group of reinsurers  typically assumes that portion of
the risk  immediately  above the ceding  company's  retention  up to a specified
amount, at which point another reinsurer or group of reinsurers  assumes, or the
ceding company retains,  the excess liability.  The reinsurer  assuming the risk
immediately above the ceding company's  retention point is said to write working
layer (or low layer)  reinsurance.  A loss that is  greater  in amount  than the
ceding company's retention will result in a loss to the working layer reinsurer,
but may not  result  in a loss to the  reinsurers  on higher  layers.  Since the
probability of loss for the reinsurer  providing excess of loss coverage differs
from that to which the ceding company is subject,  such reinsurance  coverage is
priced separately from the pricing set by the ceding company with respect to its
own risks.
         Reinsurers  may also  purchase  reinsurance,  known  as  retrocessional
reinsurance,  to cover their own risks  assumed from primary  ceding  companies.
Reinsurance  companies enter into retrocessional  agreements for reasons similar
to those for which ceding companies purchase reinsurance.

                                       2
<PAGE>


Underwriting
         Underwriting  opportunities  presented to Chartwell are evaluated based
upon a number of  factors  including  an  historical  analysis  of  results,  an
estimation of future loss costs based upon an analysis of exposure,  a review of
other  programs  displaying  similar  exposure   characteristics,   the  primary
insurer's underwriting and claims experience and the primary insurer's financial
condition.
         In  general,  prior  to  authorization,  underwriting  submissions  are
reviewed by at least two  underwriters,  including  the manager of the  relevant
underwriting unit. Large,  complex or unusual  submissions are generally further
reviewed by senior management.

Client Segments
         Chartwell has organized its marketing and underwriting  activities into
client  segments  differentiated  from one  another  based on the  nature of the
clientele  and  their  businesses  or  products.   Accordingly,   Chartwell  has
established three principal underwriting units - Reinsurance,  Controlled Source
Insurance and CMA Dedicated Facilities.  The Reinsurance unit is further divided
based upon client  characteristics into four units:  Specialty Accounts,  Global
Accounts,  Regional Accounts and Marine & Aviation Accounts.  Each unit consists
of  specialized,   dedicated  underwriters  who  are  supported  by  Chartwell's
technical  resources  and  personnel,   including  its  actuarial,   claims  and
accounting departments. Chartwell employs a focused cycle management approach to
marketing  and  underwriting  pursuant to which it seeks to emphasize  different
types of business during various phases of the underwriting  cycle.  During soft
markets,   Chartwell  concentrates  on  identifying  and  pursuing  underwriting
opportunities  in  areas   exhibiting   adequate  profit  potential  and  ceding
additional business upon advantageous  terms.  During hard markets,  Chartwell's
general strategy is to expand its premium writings in all market segments.

         The table set forth below shows gross premiums  written by underwriting
client segment for the periods indicated:

                          Gross Premiums Written by Underwriting Client Segment
                                           (Dollars in thousands)
                                           Year Ended December 31,
                          ------------------------------------------------------
                                  1998              1997             1996
                               -------------    -------------   ----------------
                                       % of             % of             % of
                               Amount  Total    Amount  Total    Amount  Total
                               ------  -----    ------  -----    ------  -------
Reinsurance Operations
 Specialty Accounts..........$110,829  32.3%  $140,965   38.9%   $100,817  38.2%
 Global Accounts
  Domestic...................  12,461   3.6     19,658    5.4      19,818  7.5
  International..............  10,530   3.1     22,723    6.3      24,120   9.2
                              -------  ----   --------   -----   -------   -----
 Subtotal Global Accounts....  22,991   6.7     42,381   11.7      43,938  16.7
 Regional Accounts...........  15,069   4.4     24,718    6.8      25,967   9.8
 Marine & Aviation Accounts..  10,358   3.0     28,050    7.7      27,780  10.5
                              -------  ----   --------   ----    --------  -----
  Total Reinsurance.......... 159,247  46.4    236,114   65.1     198,502  75.2
                              -------  ----   --------   ----    --------  -----
Non-Reinsurance Operations
 Controlled Source Insurance..111,131  32.4    106,543   29.4      58,752  22.3
 INSCORP Run-off.............     --    --          --    --        6,584   2.5
 CMA Dedicated Facilities....  72,573  21.2     20,113    5.5         --    --
                              -------  ----   --------   ----    --------  -----
  Total Non-Reinsurance...... 183,704  53.6    126,656   34.9      65,336  24.8
                              -------  ----   --------   ----    --------  -----
TOTAL                        $342,951  100.0% $362,770  100.0%  $263,838  100.0%
                             ========  ======  =======  ======  ======== ======


         The growth of 30.0% in gross premiums  written for the period from 1996
to 1998 is due principally to the development of the Controlled Source Insurance
portfolio,   as  well  as  the  addition  of  premium  income  from  Chartwell's
participation on CMA's syndicates through support of its Dedicated CCV's.

                                       3

<PAGE>


Reinsurance Business

     Chartwell segments its reinsurance  marketing and underwriting  activities
into four specific client units - Specialty Accounts, Global Accounts,  Regional
Accounts and Marine & Aviation Accounts.

         Specialty Accounts.  Specialty Accounts primarily covers  non-standard,
non-traditional  risks  that  require  specialized   underwriting,   claims  and
actuarial  skills.  Currently,  these coverages  include  workers  compensation,
professional  liability,  directors'  and officers'  liability,  surety/fidelity
programs, non-standard automobile, accident & health, political risk, employment
practices  liability  and managing  general  agencies,  as well as coverages for
excess and surplus lines insurers and start-up companies. In addition, Specialty
Accounts writes business arising from the alternative risk transfer segment with
a particular  emphasis in the  professional  liability  and medical  malpractice
areas.

         Global  Accounts.   Global  Accounts  is  principally  engaged  in  two
activities.  Global Accounts  provides  reinsurance to large U.S. based domestic
insurance companies with $100 million or more in surplus which write business in
more than 10 states and writes specific  reinsurance  programs for international
ceding companies  including  reinsurance of select syndicates at Lloyd's and for
other insurers and reinsurers writing non-U.S. risks.

         Regional  Accounts.  Regional  Accounts  includes  reinsurance  of  the
standard risks of insurance  companies that either operate in 10 or fewer states
or have a surplus of $100 million or less.

         Marine  and  Aviation  Accounts.  Marine & Aviation  Accounts  includes
reinsurance of domestic and  international  ceding  companies,  managing general
agencies and select Lloyd's syndicates,  as well as Chartwell's participation in
certain marine & aviation pools. The majority of Chartwell's  marine reinsurance
business  is in the  bluewater  hull  and  energy  areas.  Chartwell's  aviation
business is derived  primarily from  reinsuring  general  aviation and satellite
business.  Business  emanating from INSCORP's  participation  in the marine pool
managed by Navigators Group, Inc. is also included in this client segment.

         Mix of Reinsurance  Business.  Chartwell  writes excess of loss and pro
rata reinsurance as well as casualty clash and property  catastrophe  coverages,
all on a treaty basis.  Chartwell  typically  focuses on the working layers of a
ceding  company's  reinsurance  program.  Chartwell  does  not  currently  write
facultative  reinsurance  but may commence  writing such coverages  depending on
market conditions.
 
         Chartwell's mix of reinsurance  business, on the basis of gross and net
reinsurance  premiums  written,  is set  forth in the  following  table  for the
periods indicated:




                                        4


<PAGE>
<TABLE>
                                                Mix of Reinsurance Business
                                                   (dollars in thousands)
<CAPTION>
                                                        Year Ended December 31,
                        ------------------------------------------------------------------------------------------- 
                             1998               1997               1996             1995              1994
                        ---------------    ---------------    ---------------    ---------------    ---------------
                                  %of                % of               % of               % of               %of 
                        Amount    Total    Amount    Total    Amount    Total    Amount    Total    Amount    Total
                        ------    -----    ------    -----    ------    -----    ------    -----    ------    -----
Gross Premiums Written
Casualty: 
<S>                     <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>        
  Excess of Loss....... $ 29,559  18.6%    $ 36,659  15.5%    $ 32,679  16.5%    $ 40,089  31.6%    $ 32,674  28.1%
  Pro Rata.............   88,899  55.8      134,495  57.0       94,223  47.5       41,570  32.7       43,328  37.2
  Clash................    1,267   0.8        1,983   0.8        1,816   0.8        2,704   2.1        3,498   2.9
                        --------  -----    --------  -----    --------  -----    --------  -----    --------  -----
Total Casualty.........  119,725  75.2      173,137  73.3      128,718   64.8      84,363  66.4       79,500  68.2
                        --------  -----    --------  -----    --------  -----    --------  -----    --------  -----
Property:
  Excess of Loss.......    4,435   2.8       12,912   5.5        6,267    3.2       4,730   3.7        2,656   2.3
  Pro Rata.............   34,772  21.8       49,583  21.0       62,455   31.5      35,841  28.2       31,030  26.7
  Catastrophe..........      315   0.2          482   0.2        1,062    0.5       2,034   1.7        3,210   2.8
                        --------  -----    --------  -----     --------  -----   --------  -----    --------  -----
Total Property.........   39,522  24.8       62,977  26.7       69,784   35.2      42,605  33.6       36,896  31.8
                        --------  -----    --------  -----     --------  -----   --------  -----    --------  -----
Total Gross                 
Premiums Writtten.....  $159,247  100.0%   $236,114  100.0%   $198,502  100.0%   $126,968  100.0%   $116,396  100.0%
                        ========  ======   ========  =====    ========  ======   ========  ======   ========  ======
Net Premiums Written
Casualty:
 Excess of Loss.......  $ 23,740  22.6%    $ 35,143  17.4%    $ 32,567  18.6%    $ 40,043  32.5%    $ 32,680  28.7%
 Pro Rata.............    56,950  54.3      118,446  58.1       81,349  46.6       40,727  33.0       43,319  38.0
 Clash................       919   0.9        1,920   0.9        1,807   1.0        2,691   2.2        3,492   3.1
                        --------  -----    --------  -----    --------  -----    --------  -----    --------  ------
Total Casualty........    81,609  77.8      155,779  76.4      115,723  66.2       83,461  67.7       79,491  69.8
                        --------  -----    --------  -----    --------  -----    --------  -----    --------  ------
Property:
 Excess of Loss.......     2,930   2.8       11,456   5.6        5,941   3.4        4,440   3.6        2,476   2.2
 Pro Rata.............    20,161  19.2       36,251  17.8       51,978  29.8       33,667  27.3       28,928  25.4
 Catastrophe..........       211   0.2          472   0.2        1,016   0.6        1,746   1.4        3,067   2.6
                        --------  -----    --------  -----    --------  -----    --------  -----    --------  -----
Total Property........    23,302  22.2       48,179  23.6       58,935  33.8       39,853  32.3       34,471  30.2
                        --------  -----    --------  -----    --------  -----    --------  -----    --------  -----
Total Net Premiums
Written..............   $ 104,911 100.0%   $203,958  100.0%   $174,658  100.0%   $123,314  100.0%    $113,962  100.0%
                        ========= ======   ========  ======   ========  ======   ========  ======    ========  ======
</TABLE>
    Chartwell's  percentage of property  writings in its overall mix of business
decreased  for the year ended  December  31,  1998 as compared to the year ended
December  31, 1997,  principally  as a result of  increased  competition  in the
property market.
         Ceding  Companies.  During the year ended December 31, 1998,  Chartwell
received approximately 37.9% of its gross reinsurance premiums written from four
groups of ceding companies, of which LDG Reinsurance  Underwriters accounted for
approximately  14.4%,  American  International Group accounted for approximately
11.0%,  Clarendon  Insurance Group accounted for approximately 6.9% and Somerset
Marine  accounted for  approximately  5.6%. No other ceding  company or group of
affiliated  ceding  companies  accounted for more than 5% of  Chartwell's  gross
reinsurance premiums written for the year ended December 31, 1998.
         Brokers.  During the year ended December 31, 1998,  Chartwell  received
approximately  51.8%  of its  gross  reinsurance  premiums  written  from  three
reinsurance brokers, of which AON Reinsurance Agency accounted for approximately
24.2%,  Guy Carpenter & Co., Inc.  accounted for  approximately  15.4%, and E.W.
Blanch Co. accounted for approximately 12.2%. No other broker accounted for more
than 5% of the company's gross  reinsurance  premiums written for the year ended
December 31, 1998.
         In order to  reduce  the  potential  adverse  effect  arising  from the
termination of any specific business relationship, Chartwell seeks business from
a large number of reinsurance  brokers and ceding  companies.  While  management
believes  that its  relationships  with  these  reinsurance  brokers  and ceding
companies are  satisfactory,  the termination of all or a substantial  number of
these  relationships  could have a material  adverse  effect on the business and
operations of Chartwell.

Insurance Operations
         Controlled  Source  Insurance.  Controlled  Source  Insurance  develops
insurance  programs  through  specialty  production  sources  with a focus  on a
specific  line or lines of business,  with a limited  geographic  emphasis,  and
where  the  program  administrator's  compensation  is  adjusted  based  on  the
underwriting results of the business.
         Controlled  Source Insurance gross written  premiums grew 4.3%,  81.3%,
and 9.8% for the years ended December 31, 1998,  1997,  and 1996,  respectively,
over the prior year. The increases in premium  reflect the geographic  expansion
of  existing  programs as well as the  development  of new  programs  during the
periods shown.
                                       5
<PAGE>
         The  table set  forth  below  shows  the  gross  premiums  written  for
Controlled Source Insurance by INSCORP for the periods indicated:

                           Controlled Source Insurance
                   Gross premiums Written by Line of Business
                             (Dollars in thousands)
                                          Year Ended December 31,
              ------------------------------------------------------------------
                                   1998            1997             1996
                            ---------------  ----------------   ----------------
                             Amount  Total     Amount   Total    Amount   Total
                            -------  -----   ----------------   -------  -------
Commercial Multiple Peril..$ 45,737  41.2%   $ 48,404   45.4%    $33,014   56.2%
General Liability..........  31,575  28.4      30,418   28.6      14,889   25.3
Automobile.................  23,354  21.0      22,267   20.9      10,849   18.5
Workers Compensation.......   4,224   3.8       4,169    3.9        --       --
Homeowners and Other.......   6,241   5.6       1,285    1.2        --       --
                           ========  ======  ========  ======    =======  ======
Total.....................$ 111,131  100.0%  $106,543  100.0%    $58,752  100.0%
                           ========  ======  ========  ======    =======  ======

         During the year ended December 31, 1998,  Chartwell wrote approximately
88.7% of its Controlled  Source gross insurance  premiums  through four managing
general  agents,  of  which  Florida  Intracoastal  Underwriters  accounted  for
approximately  41.6%, HDR Insurance Services accounted for approximately  24.5%,
Inter-Reco   accounted  for  approximately  11.7%  and  Professional   Insurance
Underwriters  accounted for approximately 10.9%. No other managing general agent
accounted  for more than 5% of  Chartwell's  Controlled  Source gross  insurance
premiums written for such period.
         In order to  reduce  the  potential  adverse  effect  arising  from the
termination of any specific business  relationship,  Chartwell continues to seek
to establish and develop  relationships  with a large number of managing general
agents.  While  management  believes  that its  relationships  with its managing
general agents are satisfactory,  the termination of all or a substantial number
of these  relationships could have a material adverse effect on the business and
operations of Chartwell.

CMA Dedicated Facilities
         Classes  of  business  covered  by  CMA's  syndicates  include  marine,
non-marine property, non-marine liability, aviation, motor and life. CMA manages
seven  Lloyd's  syndicates  with total  underwriting  capacity of  approximately
(pound)300  million ($500  million) for the 1999 year of account.  Approximately
46% of CMA syndicates' 1999 capacity is supplied by Chartwell.

                   CMA Dedicated Corporate Capital Facilities
                Gross Premiums Written by Lloyd's Market Segment
                            (Dollars in thousands)(1)
                                         Year Ended December 31,
                       --------------------------------------------------
                                  1998                       1997
                       -----------------------      ---------------------
                        Amount     % of Total        Amount    % of Total
                       --------    ----------       -------    ----------
Motor................  $ 36,212      49.9%          $  7,445      37.0%
Non-Marine...........    31,121      42.9              9,969      49.6
Aviation.............     3,194       4.4              1,569       7.8
Marine...............     1,757       2.4                984       4.9
Life.................       289       0.4                146       0.7
                       --------    ---------        ---------  ----------
Total................  $ 72,573     100.0%          $ 20,113     100.0%
                       ========    =========        =========  ==========

(1)Business  at CMA is conducted in pounds  sterling.  The dollar  amounts shown
here have been converted from pounds  sterling at the average  exchange rate for
each of the years  presented.  Data is not shown for years prior to 1997 because
Chartwell  acquired CMA in November 1996, and Chartwell's  consolidated  results
prior to 1997 did not  include  amounts  attributable  to CMA.  All  amounts are
presented in accordance with U.S. GAAP.

Retrocessional Arrangements
         Chartwell utilizes  retrocessions  primarily to provide protection from
large or multiple losses and may in the future use additional  retrocessions  to
increase   underwriting   capacity.   Chartwell  seeks  to  establish  long-term
relationships with its leading  retrocessionaires in order to achieve continuity
and stability of coverage. Chartwell purchases property catastrophe coverage for
its Global,  Regional and Specialty  Accounts  business to provide  coverage for
losses arising from an aggregation  of claims under various  insurance  policies
from a single event. Chartwell's current property catastrophe program, effective
January 1, 1999,  provides  100% coverage for $9.5 million of exposure in excess
of a $2.5 million retention,  with additional coverage provided by reinstatement
provisions. In addition, during 1998, Chartwell purchased a property catastrophe
program to protect  against an  accumulation of losses for Chartwell and INSCORP
from the same event;  this program  provides  100%  coverage for $2.5 million of
exposure  in  excess of a  combined  $2.0  million  retention,  with  additional
coverage  provided  by  reinstatement  provisions.  INSCORP  purchases  specific
reinsurance programs for each of the programs underwritten.

                                       6
<PAGE>

         Chartwell  renewed its  retrocessional  marine program,  as of April 1,
1998, which provides $1.45 million of coverage, per risk or per event, in excess
of a $0.3 million retention,  with additional coverage provided by reinstatement
provisions.
         In 1997 and 1998,  the Company  entered into  aggregate  excess of loss
treaties.  These treaties provide the Company with a layer of protection against
adverse  results in all lines of business in excess of  specified  loss  ratios.
Liabilities held by the Company under such treaties were $37.0 million and $10.5
million at December 31, 1998 and 1997, respectively.
         Since  Chartwell is  contingently  liable with  respect to  reinsurance
ceded in the event  that a  retrocessionaire  is unable to meet its  obligations
assumed  under  a  retrocession  agreement,   the  financial  strength  of  each
retrocessionaire  is  evaluated.  As  of  December  31,  1998,  the  reinsurance
recoverable balance of Chartwell Reinsurance of $86.5 million is attributable to
retrocessional  arrangements  with over 140  retrocessionaires.  At December 31,
1998, Chartwell Reinsurance had a reserve for uncollectable  reinsurance of $3.4
million.
         As of December 31, 1998, the reinsurance recoverable balance of INSCORP
of $156.8 million was attributable to retrocessional  arrangements with over 290
retrocessionaires. At December 31, 1998, INSCORP had a reserve for uncollectable
reinsurance of approximately $3.0 million.

Claims
         Chartwell's  claims  department  analyzes  loss  exposure  in  order to
establish case reserves,  pays claims and assists in the underwriting process by
reviewing the claims activities of prospective  ceding companies.  In performing
these functions,  the claims department  consults with Chartwell's  underwriting
and actuarial  departments.  The claims  department  also assists the accounting
department  in  reporting  Chartwell's  retrocessional  claims  and  in  seeking
collection of such claims on a timely basis.
         In evaluating loss exposure, Chartwell's claims department reviews loss
reports  received  from ceding  companies to confirm that  submitted  claims are
covered under the contract  terms,  establishes  reserves on an individual  case
basis and monitors the adequacy of such  reserves.  The  department  also tracks
industry  loss  activity  as  well  as  other  industry   trends  to  facilitate
management's evaluation of Chartwell's overall risk profile.  Chartwell also has
an  environmental  claims  unit to evaluate  the  complex  toxic tort and latent
injury claims inherited through the Piedmont Merger.

Reserves
         General.  A significant  period of time may elapse between each of: (i)
the  occurrence of an event  causing an insured loss;  (ii) the reporting of the
loss to the  ceding  company;  (iii)  the  reporting  of the loss by the  ceding
company to Chartwell;  (iv) the ceding  company's  adjustment and payment of the
loss;  and  (v)  payment  to the  ceding  company  by  Chartwell.  To  recognize
liabilities  for unpaid  losses,  Chartwell  establishes  loss and loss  expense
reserves which are balance sheet  liabilities  representing  estimates of future
amounts  needed to pay  claims  and  related  expenses  with  respect to insured
events.  Loss and LAE reserves have two components:  case loss and LAE reserves,
which are  estimates of future loss and LAE with respect to insured  events that
have been  reported to the  reinsurer,  and incurred  but not reported  reserves
("IBNR").  IBNR reserves are actuarially  determined and reflect (i) an estimate
of the  ultimate  loss amount that will be paid by the  reinsurer on claims that
have  occurred  but have not yet been  reported  to the  reinsurer  and (ii) the
expected  change in the value of those claims that have already been reported to
the reinsurer.
         When a claim is reported to the ceding  company,  its claims  personnel
establish a liability for the estimated  amount of the ultimate  settlement cost
of the reported claim. The estimate reflects the judgment of the ceding company,
based on the  experience  and knowledge of its claims  personnel,  regarding the
nature and value of the claim.  The ceding company may  periodically  adjust the
amount of case  reserves  as  additional  information  becomes  known or partial
payments are made.
         Upon notification of loss from a ceding company,  Chartwell establishes
case  reserves,  including LAE,  based upon  Chartwell's  share of the amount of
reserves   established  by  the  ceding  company  and  Chartwell's   independent
evaluation of the loss. Where appropriate,  Chartwell  establishes case reserves
in excess of its share of the reserves established by the ceding company.  These
reserves are periodically reviewed by Chartwell's claims department based on its
evaluation  of  reports  from  the  ceding  company  and its  audits  of  claims
activities of the ceding company.
         During the claims settlement period, which may extend over a protracted
period of time,  additional  facts regarding claims and trends may become known.
As Chartwell  becomes aware of new  information,  it may adjust its estimates of
its ultimate liability. The revised estimates of ultimate liability may prove to
be less than or greater than the actual settlement or award amount for which the
claim is finally discharged.

                                       7

<PAGE>
         Actuarial  Methods.  Chartwell  utilizes the two most common methods of
actuarial    evaluation    used    within   the    insurance    industry,    the
Bornhuetter-Ferguson    method   and   the   loss   development    method.   The
Bornhuetter-Ferguson  method involves the application of selected loss ratios to
Chartwell's earned premiums to determine estimates of ultimate expected loss and
LAE for each underwriting year. Multiplying expected losses by underwriting year
by a  selected  loss  reporting  pattern  gives  an  estimate  of  reported  and
unreported IBNR losses.  When the IBNR is added to the loss and LAE amounts with
respect  to claims  that have  been  reported  to date,  an  estimated  ultimate
expected loss results.  This method provides a more stable estimate of IBNR that
is insulated  from wide  variations in reported  losses.  In contrast,  the loss
development method extrapolates the current value of reported losses to ultimate
expected  losses by using selected  reporting  patterns of losses over time. The
selected reporting patterns are based on historical  information (organized into
loss   development   triangles)   and  are  adjusted  to  reflect  the  changing
characteristics of the book of business written by Chartwell.
         Chartwell employs a combination of both methods outlined above. For the
older years,  when reported  losses have generally  stabilized,  Chartwell gives
greater weight to the loss development  result.  For the more recent years, when
reported loss activity is either less reliable in the aggregate or non-existent,
Chartwell  gives  greater  weight to the  Bornhuetter-Ferguson  method.  Because
losses  are  reported  relatively  earlier  for  property  and other  short tail
coverages,   the  weighting  for  those  types  of  coverages  shifts  from  the
Bornhuetter-Ferguson  method to the loss development  method at an earlier point
than for casualty and other long tail coverages.
         In the reserve  setting  process,  Chartwell  includes  provisions  for
inflation  and "social  inflation" if  appropriate,  as losses are generally not
determined  until  some  time  in the  future.  Chartwell  continually  monitors
legislative  activity and  evaluates  the  potential  effect of any  legislative
changes on its reserve liabilities.
         Chartwell's  reserves  are  carried at the full  amount  estimated  for
ultimate  expected losses and LAE without any discount to reflect the time value
of money in accordance  with both  Statutory  Accounting  Practices  ("SAP") and
Generally Accepted Accounting Principles ("GAAP").
         Chartwell's   actuarial  department  regularly  performs  loss  reserve
analyses for  Chartwell  Reinsurance  and INSCORP.  Such loss  reserves are also
reviewed  by  Milliman &  Robertson,  Inc.  ("M&R"),  an  independent  actuarial
consulting firm, which prepared a Statement of Actuarial  Opinion as of December
31, 1998 for each of Chartwell  Reinsurance and INSCORP (the "M&R  Statements").
The M&R  Statements  were  prepared  solely for the use of and only to be relied
upon by  Chartwell  and the  various  state  insurance  departments  with  which
Chartwell files annual statements.  The M&R Statements were not prepared for the
use of investors.
         Chartwell  provides  capital to its  Dedicated  CCV's which support the
underwriting  capacity of the Lloyd's  syndicates  managed by CMA. Loss reserves
for this  business  are  established  using  methods  similar  to those  used by
Chartwell Reinsurance and INSCORP.  CMA, a subsidiary of Chartwell,  has engaged
Bacon & Woodrow London Market Services Ltd.  ("B&W"),  an independent  actuarial
consulting  firm, to review the loss  reserves and prepare an actuarial  opinion
for each of its syndicates,  including the actuarial opinion required by Lloyd's
solvency regulations. The B&W opinions, which are prepared solely for the use of
Lloyd's  regulators and are only to be relied upon by CMA, assist its syndicates
in establishing  appropriate reserve estimates for both the reinsurance to close
and the open years of account.
         Analysis of Reserve  Development.  The  following  table  presents  the
development of reserves of Chartwell Reinsurance for losses and LAE for calendar
years 1988 through  1998.  The first line of the table sets forth the  estimated
liability for losses and LAE for claims  arising in each of the indicated  years
as recorded on the balance sheet of Chartwell Reinsurance as of the end of years
1988-1994, including IBNR. For the years ended December 31, 1995, 1996, 1997 and
1998, the first line includes the consolidated reserves of Chartwell Reinsurance
and INSCORP.  For the years ended December 31, 1997 and 1998 the first line also
includes the loss reserves  associated with the capital provided by Chartwell to
the Dedicated CCV's. The upper portion of the table shows the cumulative amounts
paid as of the end of each successive  year for such claims.  The bottom portion
of the table  also  shows the  re-estimated  amount of the  previously  recorded
liability based on experience as of the end of each succeeding  year,  including
cumulative  payments.  The estimates are readjusted as more information  becomes
known about the  frequency  and  severity of claims for each year.  A redundancy
(deficiency)  exists when the original liability estimate is greater (less) than
the  re-estimated  liability  at the end of a year.  The  cumulative  redundancy
(deficiency) shown in the table is the aggregate net change in estimate over the
period of years  subsequent  to the  calendar  year  reflected at the top of the
particular columns.
         In evaluating  the  information  in the table,  it should be noted that
each amount entered  incorporates  the effects of all changes in amounts entered
for prior periods. Thus, if the 1998 estimate for a previously incurred loss was
$150,000 and the loss was reserved at $100,000 in 1988,  the $50,000  deficiency
(later  estimate  minus original  estimate)  would be included in the cumulative
redundancy (deficiency) in each of the years 1988-1998 shown in table. It should
further  be noted  that the table  does not  present  accident  or  policy  year
development  data.  In addition,  conditions  and trends that have  affected the
development  of liability in the past may not  necessarily  recur in the future.
Accordingly,  it may not be appropriate to extrapolate  future  redundancies  or
deficiencies from the table.

                                       8
<PAGE>
<TABLE>
                                                                  
                            Analysis of Loss and LAE
                               Reserve Development
                             (Dollars in thousands)
<CAPTION>

                             Year Ended December 31,
----------------------------------------------------------------------------------------------------------------------------------
                          1988     1989     1990      1991      1992      1993      1994      1995     1996       1997      1998
                       --------  -------  -------   --------  --------  --------  --------  --------  --------  --------  --------
<S>                    <C>       <C>      <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   
Reserves for Loss and
    LAE(1)             $156,869  $130,939 $126,746  $126,292  $189,386  $201,013  $232,733  $741,467  $747,858  $788,240  $878,617
Cumulative paid as of:
    One year later       39,084   15,946    19,745     9,074    31,354    30,085    46,363   157,172   196,470   154,697
    Two years later      53,101   34,928    26,338    24,227    49,686    57,368    73,462   255,876   297,598
    Three years later    69,914   40,622    39,933    37,935    68,147    73,926    90,999   334,819
    Four years later     75,034   52,514    52,436    51,135    78,135    84,281   101,430
    Five years later     86,463   63,479    62,922    56,822    84,402    90,577
    Six years later      97,020   72,347    68,070    60,207    88,111
    Seven years later   104,840   76,481    70,839    62,689
    Eight years later   108,913   78,808    73,147
    Nine years later    111,223   80,976
    Ten years later     113,341
Reserves re-estimated
as of:
    One year later      158,048  129,333   125,919   126,926   192,496   204,094   233,738   754,286   758,748   766,462
    Two years later     156,185  128,655   127,627   126,193   192,363   206,965   232,964   764,432   730,954
    Three years later   155,224  132,406   128,740   127,102   194,876   205,369   229,253   735,913
    Four years later    161,868  132,783   129,707   127,459   193,369   201,458   224,428
    Five years later    159,912  133,112   129,989   126,004   188,594   197,919
    Six years later     160,195  132,474   129,996   122,525   186,298
    Seven years later   162,142  133,808   127,239   119,309
    Eight years later   163,268  131,627   124,279
    Nine years later    161,525  129,273
    Ten years later     159,171
Cumulative redundancy
(deficiency)             (2,302)   1,666     2,467     6,983     3,088     3,094     8,305     5,554    16,904    21,778
Cumulative %              (1.5%)    1.3%      1.9%      5.5%      1.6%      1.5%      3.6%      0.7%      2.3%      2.8%

---------------
(1)Reserves for loss and LAE are presented net of reinsurance  recoverables  for
the periods 1988 through  1991. In 1992,  Chartwell  adopted SFAS No. 113 which,
among other things,  requires Chartwell to record its reserves for unpaid losses
and  LAE  without   reduction   for  amounts  that  would  be   recovered   from
retrocessionaires.  The amount recoverable from retrocessionaires is recorded as
an asset on Chartwell's  balance  sheet.  The net of such asset and the reserves
for loss and LAE is $639.6, $585.6, $575.5, $561.6, $197.3 and $167.4 million at
December 31, 1998, 1997, 1996, 1995, 1994, 1993, respectively.

</TABLE>







                                       9


<PAGE>

         Net  reserves  on  accident  years  since  1988 have  developed  modest
redundancies or deficiencies.  The gross redundancy of $21.8 million at December
31,  1998  becomes  a net  redundancy  of  $7.4  million  after  accounting  for
reinsurance  recoverables.  (See Note 12 of the Notes to Consolidated  Financial
Statements contained herein).
         Commutation  of treaties  and large loss  payments  distort the payment
patterns  represented in the table. In 1989,  Chartwell  Reinsurance commuted an
assumed treaty for $18.0 million affecting calendar years from 1986 to 1989. The
commutation  ensured that no further adverse development on that treaty occurred
in subsequent  years.  In 1992,  Chartwell  Reinsurance  commuted a retrocession
arrangement  which  resulted  in a  reduction  of net paid  losses for the prior
calendar  years  of  $4.4  million.   In  1993,   Chartwell   Reinsurance   paid
approximately  $12.0 million in gross losses  related to  Hurricanes  Andrew and
Iniki. In 1995,  Chartwell  Reinsurance paid $10.9 million to settle three large
claims  from  business  written  prior to 1986 and to commute a group of assumed
contracts from business written prior to 1995.
         At December 31, 1998,  the GAAP basis  reserves,  before  reduction for
ceded  reinsurance,  were $878.6 million compared to SAP basis reserves,  before
reduction for ceded  reinsurance,  of $878.3  million.  The difference is due to
adjustments for foreign  currency  transactions.  At December 31, 1998, 1997 and
1996, GAAP basis reserves,  net of amounts  recoverable from  retrocessionaires,
were $639.6 million, $585.6 million and $575.5 million,  respectively,  compared
to SAP net  reserves  of $598.9  million,  $548.0  million  and $537.2  million,
respectively.  The  significant  differences  between  GAAP and SAP  amounts are
mainly due to the implementation of Statement of Financial  Accounting Standards
No. 113,  "Accounting  and  Reporting  for  Reinsurance  of  Short-Duration  and
Long-Duration  Contracts" ("SFAS No. 113") (approximately $39.5 million for each
of 1998, 1997 and 1996). The remaining difference relates principally to foreign
exchange adjustments.
         Activity for loss and loss  adjustmen expenses as of December 31, 1998,
1997 and 1996 is herein incorporated by reference to Note 12 of the consolidated
financial statements of Chartwell included elsewhere herein.
         Management  believes that Chartwell's  reserves are adequate.  However,
the process of  estimating  reserves is  inherently  imprecise  and  involves an
evaluation of many variables,  including  potentially  unpredictable  social and
economic  conditions.  Accordingly,  there can be no assurance that  Chartwell's
ultimate  liability  will not vary  significantly  from  amounts  reserved.  The
inherent  uncertainties  of estimating  such reserves are greater for reinsurers
than for primary insurers,  primarily due to the longer-term reporting nature of
the reinsurance business,  the diversity of development patterns among different
types of reinsurance, the necessary reliance on ceding companies for information
regarding  reported  claims  and  differing  reserving  practices  among  ceding
companies.  Reserves  also include  provisions  for latent  injury or toxic tort
claims that cannot be estimated with traditional reserving  techniques.  Because
of inconsistent court decisions in federal and state  jurisdictions and the wide
variation  among  insureds  with  respect  to  underlying  facts  and  coverage,
uncertainty  exists with  respect to these  claims as to  liabilities  of ceding
companies and,  consequently,  reinsurance  coverage.  Management  believes that
Chartwell  Reinsurance's  exposure to such latent losses is lessened  because of
its  relatively  recent  entry into the  reinsurance  business in 1979,  its low
historical  levels  of  premium  volume  prior  to 1985  and its  retrocessional
programs.  In addition,  management  believes that INSCORP's exposure to adverse
development  related to latent losses is lessened because a significant  portion
of the $25 million net reserve strengthening  recorded by INSCORP in 1995 was in
respect of such losses.  In addition,  the amount  payable  under the  Company's
Contingent  Interest  Notes due 2006 (the "CI Notes") is subject to reduction in
the event of such adverse reserve development.
         Reserves for Chartwell's  participation in Lloyd's  syndicates  through
its Dedicated CCV's are included in the 1997 and 1998 year end reserves. Part of
the reserve represents reinsurance to close balances brought forward to the open
years of  account  (for  example,  1995  reinsured  into the  1996  open  year).
Favorable or unfavorable  development of the prior year's reserves can influence
the results of the open years of 1996, 1997 and 1998. Consequently, there can be
no assurance as to the adequacy of reserves and the risk of future developments,
both favorable and unfavorable, exists.

                                       10

<PAGE>

         The following  table  presents a three-year  development of Chartwell's
reserves  for losses and LAE  associated  with  environmental  and other  latent
injury claims. All of the development relates to business written prior to 1984.

                                                        Year Ended December 31,
                                                        (Dollars in thousands)
<TABLE>
<CAPTION>
                                    ------------------------------------------------------------------
                                            1998                  1997                   1996
                                    --------------------  ---------------------  ---------------------
                                      Gross       Net        Gross       Net        Gross       Net
                                    ---------  ----------  ---------   --------  ---------   ---------
<S>                                 <C>       <C>          <C>        <C>         <C>         <C>
Liability, beginning of year....... $ 70,923  $ 48,052     $ 65,717   $ 46,958    $ 66,936    $ 46,450
Incurred during the year...........   15,387    13,244       19,851      8,660       9,482       6,538
Less amount paid during the year...    7,336     6,370       14,645      7,566      10,701       6,030
                                    --------  ---------    ---------  ---------   ---------   --------
Liability, end of year............. $ 78,974  $ 54,926     $ 70,923   $ 48,052    $ 65,717    $ 46,958
                                    ========  =========    =========  =========   =========   ========    
Deficiency for year................ $ 15,387  $ 13,244     $ 19,851   $  8,660    $  9,482    $  6,538
                                    ========  =========    =========  =========   =========   ========
</TABLE>
         At  December  31,  1998,  Chartwell  Reinsurance  carried  loss and LAE
reserves of $351.2  million  ($268.1  million after  reduction  for  reinsurance
recoverable),  of which $10.8 million  gross ($6.6  million after  reduction for
reinsurance  recoverable),  were loss reserves and allocated LAE attributable to
asbestos claims and environmental  pollution  claims.  For the three years ended
December 31, 1998, the effect of asbestos and environmental pollution claims was
not material to Chartwell Reinsurance's results of operations.
         At December 31, 1998,  INSCORP  carried loss and LAE reserves of $394.3
million ($253.8 million after reduction for reinsurance  recoverable),  of which
$68.2 million ($48.3 million after reduction for reinsurance  recoverable)  were
case   reserves  and  allocated  LAE   attributable   to  asbestos   claims  and
environmental pollution claims.
         Of  the  1998  net   deficiency  of  $13.2  million  for  asbestos  and
environmental  reserves,  $11.3  million  results from  development  on business
underwritten by INSCORP prior to the Piedmont Merger and, therefore,  is subject
to the protection provided by the CI Notes, as described below.  However, due to
the favorable development on non-asbestos and non-environmental exposed business
underwritten by INSCORP prior to the Piedmont  Merger,  there was no net adverse
development on the reserves  covered by the CI Notes for the year ended December
31, 1998.

         Reserve   Indemnification   Agreement.  In  connection  with  the  1992
Acquisition,  Chartwell  entered into a reserve  indemnification  agreement (the
"Reserve Indemnification Agreement") with NWNL and its parent company, ReliaStar
Financial Corporation ("RLR"), pursuant to which NWNL and RLR agreed jointly and
severally to provide to Chartwell limited  indemnification and reimbursement for
adverse  development of the net loss and LAE reserves and related  accounts (the
"Covered  Reserves") of Chartwell  Reinsurance  for accident  years ending on or
before  December  31,  1991  (the  "Covered  Years").  Pursuant  to the  Reserve
Indemnification  Agreement as  originally  drafted,  if Chartwell  Reinsurance's
Covered Reserves as of December 31, 1996 for the Covered Years were greater than
its Covered  Reserves as of December  31, 1991,  RLR and NWNL would  jointly and
severally  indemnify and reimburse  Chartwell at that time in an amount equal to
(i) 85% of the first $20 million of such  difference  in excess of $100,000 plus
(ii) 60% of the next $10 million of such  difference,  up to a maximum amount of
$23 million,  representing  18% of loss  reserves as of December  31,  1991.  If
Chartwell Reinsurance's Covered Reserves as of December 31, 1996 for the Covered
Years were less than its Covered  Reserves as of December  31,  1991,  Chartwell
agreed to reimburse  NWNL at that time in an amount equal to fifty percent (50%)
of the first $10  million  of such  difference  in excess of  $100,000,  up to a
maximum amount of $5 million. The Reserve  Indemnification  Agreement,  which by
its terms was  scheduled to be settled as of the end of 1996,  was settled early
by mutual agreement with RLR. On June 28, 1996,  Chartwell received $7.9 million
as a final settlement of the Reserve Indemnification  Agreement.  The settlement
did not materially affect operating results for the year.

         Contingent  Interest Notes.  Upon  consummation of the Piedmont Merger,
Chartwell  assumed all of Piedmont's  obligations  under the CI Notes which were
issued by Piedmont to its stockholders just prior to the Piedmont Merger. The CI
Notes,  which mature on June 30, 2006,  are designed to provide the Company with
protection against adverse development of INSCORP's reserves for losses and loss
adjustment expenses.  In the event there is no adverse development,  the Company
will be required to pay the holders of the CI Notes approximately $55 million in
contingent  interest.  This contingent interest payment is in addition to the $1
million  principal  amount of the CI Notes and interest on such principal amount
at 8% per annum  (collectively,  the "Fixed  Amount")  which the  Company in any
event must pay at maturity or earlier redemption of the CI Notes.

                                       11
<PAGE>

         In  general,  assuming  the CI  Notes  are  settled  at  maturity,  the
contingent interest will be equal to $55 million (a) less an amount equal to (i)
the amount of any adverse  development  of the loss and LAE reserves and related
accounts  (including certain reinsurance  recoverable,  commissions and unearned
premiums) of INSCORP recorded as of March 31, 1995, minus (ii) $25 million,  (b)
plus the amount of certain tax  benefits  received or recorded by Chartwell as a
result of the amount  determined  pursuant  to clause  (a) above.  The amount so
calculated  may not be greater  than $55 million nor less than a minimum  amount
equal to the  lesser of (a) $10  million  less the Fixed  Amount and (b) the tax
benefits  referred to above. In the event that the CI Notes are settled prior to
maturity,  the  foregoing  formula  will in general  apply,  except that the $55
million maximum amount of the CI Notes will be reduced to an amount equal to $55
million  discounted  back from June 30, 2006 at a discount rate of 8% per annum,
compounded  annually,  and the tax benefits  will be  calculated in a prescribed
manner.
         The  carrying  value  of  the  CI  Notes  on  Chartwell's  consolidated
financial  statements at December 31, 1998 was $32.1 million,  representing  the
sum of the aggregate  principal  amount of the CI Notes and the present value as
of such date of the  maximum  amount of  contingent  interest  payable on the CI
Notes at their  stated  maturity in 2006.  During the term of the CI Notes,  the
discounted carrying value of the CI Notes will be increased to reflect accretion
of (i)  interest  on the  principal  amount and (ii) the  discounted  contingent
interest.   To  the  extent  that  adverse  development  of  INSCORP's  reserves
(including  IBNR reserves)  occurs prior to the maturity or redemption of the CI
Notes,  the contingent  interest  payable on the CI Notes (and,  therefore,  the
then-current  carrying value of such CI Notes) will be reduced.  Such reductions
in the  carrying  value of the CI Notes would  offset in part,  in the period in
which such adverse  development  occurs,  any reduction in Chartwell's  GAAP net
income and stockholders'  equity resulting from such adverse reserve development
(that would, however,  still be reflected in Chartwell's statutory  underwriting
results and in the  policyholders'  surplus of INSCORP and, if INSCORP continues
to be a subsidiary thereof, of Chartwell Reinsurance).
         At its option,  Chartwell may settle the CI Notes with shares of Common
Stock of Chartwell instead of payment of cash. For purposes of settlement of the
CI Notes, such Common Stock would be valued at 85% of its average closing market
price over a specified period prior to the settlement date.  However,  Chartwell
may not settle the CI Notes in Common Stock unless (i) such stock is  registered
under the Securities Act (or is otherwise freely tradeable other than by certain
affiliates  of  Chartwell),  (ii) such stock is listed on a national  securities
exchange  or NASDAQ  and (iii) all CI Notes are  settled in such  Common  Stock.
Moreover,  Chartwell may not settle the CI Notes in Common Stock if the CI Notes
are being  settled  following  acceleration  thereof  due to an event of default
under the CI Notes.

Investments
         Chartwell's  investment  policies are  established  and approved by its
Board of  Directors.  Chartwell's  investment  policy is to maintain a portfolio
with an average rating of A or better from Moody's Investors Service ("Moody's")
and to retain such  securities for sale in response to changes in interest rates
and liquidity needs.  However,  it is not Chartwell's  policy to sell securities
merely to generate  profits on short-term  differences in price. The performance
of  Chartwell's  advisors and the fees  associated  therewith  are  periodically
reviewed by both management and the Board of Directors of Chartwell. Investments
by Chartwell Reinsurance, INSCORP and Dakota must comply with the insurance laws
of the  States  of  Minnesota,  New  York and  North  Dakota,  their  respective
domiciliary states.
         Chartwell's investment portfolio consists primarily of investment-grade
fixed maturity debt securities.  As of December 31, 1998, approximately 92.2% of
the  fixed  income  portfolio  (exclusive  of cash and  investments  held by CMA
managed syndicates) was rated A or better by Moody's.


                                       12

<PAGE>


         The  following  table  summarizes  the  investments  of  Chartwell  (at
carrying value):
                       Composition of Investment Portfolio
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                             December 31,
                                                -----------------------------------------------------------------------
                                                         1998                     1997                     1996
                                                ----------------------   ----------------------  -----------------------
                                                  Amount     % of Total   Amount    % of Total    Amount     % of Total
                                                ----------  ----------   ---------   ----------  ---------   -----------
Fixed Income Securities
<S>                                               <C>        <C>         <C>           <C>       <C>           <C>
  Corporate...................................... $240,442   29.5%       $ 225,587     30.8%     $ 200,899     29.8%
  U.S. Government & Government Agency (1)......... 212,088   26.0          240,226     32.8        249,416     37.0
  Obligations of States & Political Subdivisions.. 171,883   21.0          161,544     22.1        134,769     20.0
  Foreign Government & Government Agency..........  28,456    3.5           28,867      3.9         23,807      3.5
  Redeemable Preferred Stocks.....................  37,422    4.6           38,379      5.2         33,773      5.0
Other (2).........................................  36,358    4.5           38,043      5.2         30,896      4.7
Investments Held by CMA Managed Syndicates........  89,228   10.9            --         --           --          --
                                                  ---------  ----------  ---------     -------   ---------   ----------- 
Total Investments................................ $ 815,877  100.0%      $ 732,646     100.0%    $ 673,560     100.0%
                                                  =========  ==========  =========     ========  =========   ===========
Cash & Cash Equivalents.........................  $  60,588               $ 31,607               $  51,134
                                                  =========              =========               =========
</TABLE>

-----------------------------------------
(1) At December 31, 1998,  1997 and 1996,  $98.7,  $107.1 and $170.2  million of
these securities were backed by the full faith and credit of the U.S. Government
and $113.4,  $133.1 and $79.2 million were obligations of issuing agencies.  (2)
Other investments include equity securities and partnership interests.  In 1996,
Chartwell made a commitment to invest $15 million in a private equity fund, High
Ridge Capital  Limited  Partnership,  which makes  investments  in the insurance
industry.  Chartwell has  contributed a total of $9.8 million to this fund as of
December 31, 1998.


         The following table reflects  investment  results for Chartwell for the
periods indicated:

                               Investment Results
                             (Dollars in thousands)
                                                 Year Ended December 31,
                                         ---------------------------------------
                                             1998         1997          1996
                                         ---------------------------------------
Average Invested Assets..................$ 793,912     $ 734,149     $ 727,903
Net Investment Income (1)................$  48,869     $  43,575     $  44,089
Net Effective Yield (2)..................     6.2%          5.9%          6.1%
Net Realized Capital Gains (Losses)......$      29     $     (3)     $   1,157
Effective Yield Including Realized
  Capital Gains (Losses)(3)..............     6.2%          5.9%          6.2%

-------------------
(1) After investment expenses, excluding net realized investment gains (losses).
(2) Net investment  income for the year-end  period divided by average  invested
assets for the same period.
(3) Net  investment  income for the year-end  period plus net  realized  capital
gains  (losses)for  the period divided by average  invested  assets for the same
period.



                                       13

<PAGE>


         The following  table  indicates the  composition of  Chartwell's  fixed
income  portfolio (at carrying  value),  excluding cash and cash equivalents and
cash and investments held by CMA managed syndicates, by rating:

                      Composition of Fixed Income Portfolio
                                  By Rating (1)
                             (Dollars in thousands)
                                                     December 31, 1998
                                                  -----------------------------
                                                    Amount             Percent
                                                  -----------        -----------
U.S. Government and Government Agency 
   Fixed Income Securities....................... $ 212,088              30.7 %
Aaa..............................................   164,399              23.8
Aa  .............................................    92,856              13.5
A   .............................................   163,331              23.7
Baa .............................................    57,617               8.3
                                                  ===========        ===========
    Total........................................ $ 690,291            100.0 %
                                                  ===========        ===========

(1) Rating as assigned by Moody's.  Such ratings are generally assigned upon the
issuance  of the  securities  and  subject to  revision  on the basis of ongoing
evaluations. Ratings in the table are as of the date indicated. Those government
guaranteed   securities  that  are  specifically   rated  are  included  in  the
appropriate rating category.


         Moody's  rating  system  utilizes nine symbols to indicate the relative
investment quality of a rated bond. Aaa rated bonds are judged to be of the best
quality and are considered to carry the smallest  degree of investment  risk. Aa
rated bonds are also  judged to be of high  quality by all  standards.  Together
with Aaa bonds,  these bonds  comprise  what are  generally  known as high grade
bonds.  Bonds  rated A possess  many  favorable  investment  attributes  and are
considered to be upper medium grade obligations.  Baa rated bonds are considered
as medium  grade  obligations;  they are  neither  highly  protected  nor poorly
secured.  Bonds rated Ba or lower (those rated B, Caa, Ca and C) are  considered
to be too speculative to be of investment quality.
         National  Association of Insurance  Commissioners  ("NAIC")  investment
ratings are provided annually at December 31 of each year. At December 31, 1998,
88.6% of Chartwell's fixed maturity investments  (excluding  investments held by
CMA managed  syndicates)  were rated "Class 1," and 11.4% of  Chartwell's  fixed
maturity investments (excluding investments held by CMA managed syndicates) were
rated "Class 2," the two highest ratings assigned by the NAIC.
         The following  table  indicates the  composition of  Chartwell's  fixed
income  portfolio (at carrying  value),  excluding cash and cash equivalents and
cash and  investments  held by CMA managed  syndicates,  by time to maturity (1)
(dollars in thousands):

                                                           December 31, 1998
                                                       -------------------------
                                                         Amount       Percent
                                                       ----------     ----------
One year or less......................................  $ 33,918           4.9%
Over 1 year through 5 years...........................   194,558          28.2
Over 5 years through 10 years.........................   198,138          28.7
Over 10 years through 20 years........................    46,381           6.7
Over 20 years.........................................    79,815          11.6
Mortgage backed securities............................   137,481          19.9
                                                       ==========     ==========
    Total............................................. $ 690,291         100.0%
                                                       ==========     ==========

(1) Based on stated maturity dates without prepayment assumptions.

         Certain  mortgage  backed  securities  are subject to prepayment  risk.
Mortgage  backed  securities  represent  15.7%  of  Chartwell's  total  cash and
investments at December 31, 1998.  During  periods of significant  interest rate
volatility,  the underlying  mortgages may prepay more quickly than anticipated.
If the repayment of principal occurs earlier than anticipated  during periods of
declining interest rates,  investment income may decline due to the reinvestment
of these funds at the lower current  market rates.  Management  does not believe
that the  prepayment  risk  associated  with  Chartwell's  portfolio of mortgage
backed securities is significant.



                                       14


<PAGE>


         The  following   table  sets  forth  certain   information   concerning
Chartwell's mortgage backed investments:

                           Distribution of Mortgage Backed Securities Portfolio
                                               By Type (1)
                                          (Dollars in thousands)
                                                  December 31, 1998
                                          --------------------------------------
                                            Estimated
                                            Market        Amortized
                                            Value          Cost        Par Value
                                          -----------    -----------  ----------
Collateralized Mortgage Obligations.......  $22,563        $22,112      $22,754
Pass-throughs (primarily GNMA,
         FNMA and FHLMC)..................  114,918        112,733      112,314
                                          -----------    -----------  ----------
    Total................................  $137,481       $134,845     $135,068
                                          ===========    ===========  ==========

---------------------
(1) At  December  31,  1998,  agency  backed  securities  represented  97.0%  of
Chartwell's  mortgage  backed  investments.  Other  mortgage  backed  securities
represented 3.0%. These other mortgage backed securities are rated either Aaa or
A which is the highest rating category used by the SVO.

Competition
         The property and casualty  reinsurance and insurance business is highly
competitive.  Competition with respect to the types of reinsurance and insurance
in which  Chartwell  is engaged  is based on many  factors  including  perceived
overall financial  strength of the insurer,  ratings of the insurer by A.M. Best
Company and Standard & Poor's, underwriting expertise, reputation and experience
in the lines  written,  premiums  charged,  other  terms and  conditions  of the
insurance  or  reinsurance  offered,  services  offered,  and  speed  of  claims
payments.
         Chartwell competes with numerous international and domestic reinsurance
and insurance  companies.  These  competitors,  many of which have substantially
greater  financial  and staff  resources  than  Chartwell,  include  independent
insurance and  reinsurance  companies,  as well as  subsidiaries,  affiliates or
insurance or  reinsurance  departments of  established  insurance  companies and
underwriting syndicates.

Insurance Regulation
         General.  Chartwell Reinsurance,  INSCORP and Dakota are subject to the
insurance  laws  and  regulations  of  Minnesota,  New York  and  North  Dakota,
respectively, their domiciliary states, and to administrative supervision by the
regulatory  authorities of such states. In addition,  each is subject to similar
laws,  regulations and supervision in the various states in which it is licensed
or  authorized  to  transact  business,   primarily  with  regard  to  solvency,
accounting practices, reports on financial condition and operations, investments
and reserves.  Under state insurance law,  property and casualty  reinsurers and
surplus lines  insurers are generally not subject to filing or other  regulatory
requirements  applicable to primary insurers with respect to rates, policy forms
or contract  wording.  Licensed  insurers such as INSCORP are required to comply
with all  applicable  filing or  regulatory  requirements.  In  supervising  and
regulating insurance companies,  including reinsurers,  state agencies,  charged
primarily with  protecting  policyholders  and the public rather than investors,
enjoy broad authority and discretion in applying  applicable  insurance laws and
regulations for the protection of policyholders and the public.

         Lloyd's.  Both  CMA and the  Dedicated  CCV's,  as a  Lloyd's  managing
general  agent and  Lloyd's  corporate  members,  respectively,  are  subject to
regulation and supervision by the Council of Lloyd's.  Lloyd's  operates under a
self-regulatory  regime  under  the  Lloyd's  Act 1982 and has the power to set,
interpret and change the rules which govern the operation of the Lloyd's market,
subject to regulation for solvency purposes by the Financial  Services Authority
("FSA").  Lloyd's  prescribes,  in respect of its managing  agents and corporate
members,  certain minimum  standards  relating to their  management and control,
solvency  and  various  other   requirements.   In  addition,   Lloyd's  imposes
restrictions  against persons  becoming  controllers  and major  shareholders of
managing  agents and  corporate  members  without the  consent of Lloyd's  first
having been obtained. The United Kingdom government has established the FSA as a
single  regulator  to  supervise  securities,  banking and  insurance  business,
including  Lloyd's.  When the  Financial  Services  and Market Bill becomes law,
probably in late 2000,  the FSA will have wide  authorization  and  intervention
powers in relation to Lloyd's. A consultation  process has commenced in relation
to Lloyd's regulatory framework.

                                       15

<PAGE>

         Insurance Holding Company Systems Regulations.  Chartwell  Reinsurance,
INSCORP and Dakota and their  affiliates  are subject to regulation  pursuant to
the insurance holding company systems statutes of Minnesota,  New York and North
Dakota.  While the insurance  holding company systems laws and regulations  vary
from state to state,  they generally  require an insurance  holding  company and
insurers and  reinsurers  that are members of such insurance  holding  company's
system to register  with the state  regulatory  authorities,  to file with those
authorities  certain  reports  disclosing  information  including  their capital
structure,  ownership,  financial condition,  certain intercompany  transactions
including material transfers of assets and intercompany business agreements, and
to report material changes in such information.  Such laws may also require that
intercompany   transactions  be  fair  and  reasonable  and  that  an  insurer's
policyholder   surplus   following  a  dividend   distribution   to   affiliated
stockholders be adequate to meet its financial needs.
         In general,  state  insurance  holding  company  systems  statutes also
require  prior notice to, or regulatory  agency  approval of, direct or indirect
changes in control  of  ownership  of a  domestic  insurer or  reinsurer.  Under
Minnesota, New York and North Dakota law, no person, corporation or other entity
may acquire, directly or indirectly, a controlling interest in the capital stock
of a domestic  insurer or  reinsurer  unless such person,  corporation  or other
entity  has  obtained  prior  approval  from the  insurer's  domestic  regulator
("Regulator")  for such acquisition of control.  Pursuant to the Minnesota,  New
York and North Dakota insurance  holding company systems  statutes,  any person,
corporation or other entity acquiring,  controlling or holding with the power to
vote, directly or indirectly, ten percent or more of the voting securities of an
insurance company (or reinsurer), is presumed to have "control" of such company.
The party may rebut this  presumption  by filing with the Regulator a disclaimer
of affiliation.  Other  jurisdictions  where Chartwell  Reinsurance,  INSCORP or
Dakota are licensed to transact  business may have similar  requirements  for an
acquisition of control of insurers or reinsurers  licensed or authorized in such
jurisdictions.   Additional  requirements  in  such  jurisdictions  may  include
relicensing  or  subsequent  approval for renewal of existing  licenses  upon an
acquisition of control.

         Restrictions on Dividends.  The principal source of funds for servicing
debt of the Company and paying dividends to stockholders of Chartwell is derived
from  receipt of  dividends  from its  insurance  subsidiaries.  While  dividend
restrictions  vary from state to state,  they  generally  require  insurers  and
reinsurers  to pay  dividends  only from  earned  surplus,  which is  defined as
unassigned  funds  (surplus) as reported in the  statutory  financial  statement
filed by the insurer or reinsurer with the Regulator for the most recent period.
Subject to such  constraints,  the  insurer or  reinsurer  may  declare  and pay
non-extraordinary  dividends,  subject to  certain  notice  requirements  to the
Regulator, and extraordinary dividends to stockholders subject to certain notice
and approval requirements by the Regulator.  Lastly, with respect to payments of
all  dividends  to  affiliated  shareholders,  following  the  payment of such a
dividend, an insurer's or reinsurer's  policyholders' surplus must be reasonable
in relation to its outstanding liabilities and adequate for its financial needs.
See Item 7,  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations--Liquidity and Capital Resources."
         On  November  25,  1997,  Chartwell  Reinsurance  paid a  $3.0  million
dividend to Chartwell Re Holdings  Corporation  ("Re  Holdings") and on February
24, 1999, Chartwell  Reinsurance paid a $5.5 million dividend to Re Holdings. No
dividends were paid in 1996 or 1998.

         Investment Limitations.  State insurance laws and regulations prescribe
the kind,  quality and  concentration  of investments  that are  permissible for
insurance  and  reinsurance  companies  domiciled in such state.  The purpose of
these laws is to protect the interests of  policyholders,  claimants,  creditors
and the general public by promoting the safety, yield and growth of an insurance
company's  investment  principal,  the liquidity necessary to meet the insurance
company's expected business needs, and investment diversification.  For example,
under Minnesota,  New York and North Dakota law, non-life  insurance  companies,
such as Chartwell  Reinsurance,  INSCORP and Dakota are  authorized to invest in
specifically  prescribed  investments.   Subject  to  certain  conditions,  such
investments include federal,  state and municipal government  obligations,  bank
obligations,  obligations and stocks of corporations and business  trusts,  real
estate and  mortgages on real estate,  collateral  loans,  options,  foreign and
other investments.  Such investment obligations,  however, may not be in default
as to payments of principal  and interest.  Property and casualty  insurance and
reinsurance  companies are subject to risk-based  capital guidelines which could
influence  investment   decisions.   See  "Risk-Based  Capital."  Management  of
Chartwell  believes  that  Chartwell  Reinsurance,  INSCORP  and  Dakota  are in
compliance  with all applicable  state  insurance  investment  laws for non-life
insurance companies.

                                       16

<PAGE>
   
         Regulatory  Examinations.  The  business  and  operations  of Chartwell
Reinsurance,  INSCORP  and Dakota are  subject to  periodic  examination  by the
insurance  departments  of the  jurisdictions  in  which  each  is  licensed  or
authorized to transact business.  The Regulators have broad authority to conduct
examinations  at any time.  The  report  made with  respect  to the most  recent
periodic  examination of Chartwell  Reinsurance is dated as of December 31, 1994
and contained no material adverse findings. The most recent periodic examination
of  INSCORP  was as of  December  31,  1993,  and  the  report  related  to such
examination has not yet been released.  The most recent report of examination of
Dakota is dated as of  November  21,  1996 and  contained  no  material  adverse
findings.

         Risk-Based  Capital.  In order to  enhance  the  regulation  of insurer
solvency,  the NAIC adopted risk-based capital ("RBC") requirements for property
and casualty insurance and reinsurance companies commencing with filings made in
1995  covering  the 1994 year.  These RBC  requirements  are designed to monitor
capital  adequacy and to raise the level of protection  that  statutory  surplus
provides for  policyholders.  The RBC formula  measures four major areas of risk
facing property and casualty insurers:  (i) underwriting risk, which is the risk
of errors in pricing and reserves;  (ii) asset risk,  which is the risk of asset
default  for fixed  income  assets and loss in market  value for equity  assets;
(iii) credit risk,  which is the risk of losses from  unrecoverable  reinsurance
and the inability of insurers to collect agents' balances and other receivables;
and (iv)  off-balance  sheet  risk,  which is  primarily  the  risk  created  by
excessive  growth.  Insurers and reinsurers  having less statutory  surplus than
that  required  by the RBC  formula  will  be  subject  to  varying  degrees  of
regulatory action depending on the level of capital inadequacy.
         The  RBC  formula  provides  a  mechanism  for  the  calculation  of an
insurance company's Authorized Control Level RBC and its total adjusted capital.
The  formula  sets  forth the points at which a  commissioner  of  insurance  is
authorized and expected to take regulatory  action.  The first level is known as
the Company Action Level RBC, which is set at twice the Authorized Control Level
RBC. The second level is the  Regulatory  Action Level RBC, set at 1.5 times the
Authorized Control Level RBC. The third is the Authorized Control Level RBC, and
the  fourth  is the  Mandatory  Control  Level  RBC,  set at 70  percent  of the
Authorized Control Level RBC.
         If an insurance  company's  adjusted capital is higher than or equal to
the  Regulatory  Action  Level RBC but below the Company  Action  Level RBC, the
insurance company must submit to its commissioner of insurance an RBC plan which
shall  contain,  among other  things,  proposals  of  corrective  action.  If an
insurance  company's  adjusted capital is higher than or equal to the Authorized
Control  Level  RBC  but  lower  than  the  Regulatory  Action  Level  RBC,  the
commissioner  of insurance  shall perform any  examination or analysis as deemed
necessary of the insurer's  business and  operations  and issue any  appropriate
corrective orders to address the insurance company's  financial problems.  If an
insurer's  adjusted  capital is higher  than or equal to the  Mandatory  Control
Level RBC but lower than the Authorized  Control Level RBC, the commissioner may
place the insurer under regulatory  control. If the insurance company's adjusted
capital falls below the Mandatory  Control Level RBC, the  commissioner  will be
required to place the insurer under  regulatory  control.  At December 31, 1998,
the adjusted  capital of each of Chartwell  Reinsurance,  INSCORP and Dakota was
higher than the Company Action Level RBC, and as a result,  no regulatory action
is required.  Should a future deficiency occur,  Chartwell will be subject to an
increased  level  of  regulatory   attention  and,   depending  on  the  capital
deficiency,   possibly  to  actual   control  by  the   appropriate   regulatory
authorities.  There can be no assurance that any such  deficiency will not occur
in the future.

    NAIC-IRIS  Ratios.  The  NAIC's  Insurance  Regulatory   Information  System
("IRIS")  was  developed  by a committee of state  insurance  regulators  and is
primarily  intended to assist state  insurance  departments  in executing  their
statutory  mandates to oversee the  financial  condition of insurance  companies
operating in their  respective  states.  IRIS  identifies 11 industry ratios and
specifies "usual values" for each ratio.  Departure by an insurer from the usual
values  on  four or  more  of the  ratios  generally  leads  to  inquiries  from
individual state insurance commissioners as to certain aspects of such insurer's
business.  Departure from a usual value does not necessarily indicate an adverse
condition, but rather a deviation from the norm.
         For the year  ended  December  31,  1998,  Chartwell  Reinsurance  fell
outside the range of usual IRIS  values  with  respect to two ratios and INSCORP
fell  outside  the range of usual IRIS  values  with  respect to one ratio.  The
Company  does  not  believe  such  1998  ratios  are  indicative  of an  adverse
condition. For the year ended December 31, 1998, Dakota did not fall outside the
range of usual IRIS values with respect to any ratio.

                                       17


<PAGE>



Employees
         As of December 31, 1998,  Chartwell  had 326  employees,  including the
employees of its  subsidiary,  CMA. None of these  employees is represented by a
labor union, and Chartwell believes that its employee relations are excellent.

Item 2.  Properties.
         Chartwell  leases  approximately  53,000  square  feet of space for its
principal  executive  offices in Stamford,  Connecticut.  Chartwell  also leases
approximately 39,000 square feet of space in London,  England for the operations
of CMA. INSCORP is located in Jericho, New York,  occupying  approximately 1,150
square feet of office space.  Management  believes  Chartwell's  current  office
space is adequate for its needs.

Item 3.  Legal Proceedings.
         In 1996 and early 1997, the Company entered into certain  assumption of
liability  endorsements  ("ALEs")  pursuant to an agreement  with American Eagle
Insurance  Company  ("American  Eagle"),  which  provided for the  assumption of
certain  policy  liabilities  by the  Company in the event of an  insolvency  of
American Eagle. As part of such arrangements, the Company obtained from American
Eagle a trust fund to collateralize any potential obligations arising out of the
issuance of the ALEs by the  Company.  On December 3, 1997,  American  Eagle was
placed in receivership by the Texas Department of Insurance.
         On June  16,  1998,  the  California  Insurance  Guarantee  Association
("CIGA") filed suit in the Superior Court of California,  County of Los Angeles,
against INSCORP  seeking,  among other things,  a declaratory  judgment that the
ALEs covered  claims arising prior to the dates upon which the ALEs were issued.
On September 1, 1998, the Superior Court of California  granted INSCORP's motion
to strike those portions of CIGA's complaint which sought a general  declaratory
judgment that all claims under  American  Eagle  policies with ALEs attached are
the obligation of INSCORP  rather than CIGA.  CIGA's claim is now solely related
to the specific American Eagle policy and accompanying ALE initially giving rise
to the dispute.
         On December 2, 1998,  CIGA filed a second suit in the Superior Court of
California,  County  of Los  Angeles,  against  INSCORP  seeking  a  declaratory
judgment  with respect to the  obligation  of INSCORP on a second claim  arising
prior  to the  effective  date of the  applicable  ALE.  The  Superior  Court of
California  has found  that the two CIGA cases are  related  cases and they have
been assigned to the same judge.
         The Company  believes,  and has been so advised by counsel handling the
case,  that it has a number of valid defenses to the litigation  pending against
it. Such cases are, and will continue to be, vigorously defended. However, it is
not possible to predict the outcome of such cases. Litigation is subject to many
uncertainties,  and it is  possible  that such cases could be decided or settled
unfavorably.  At this time,  the Company  does not believe  that an  unfavorable
decision or  settlement  of such cases  would  materially  adversely  affect the
Company's results of operations or financial position.
         In addition to the  foregoing  lawsuits,  the Company is subject to the
litigation of disputes and  arbitration in the normal course of their  business.
The Company does not believe that any such pending  litigation or arbitration to
which it is a party, or of which any of its properties or assets are subject, is
likely to have a materially  adverse effect on its current financial position or
results of operations.

Item 4.  Submission of Matters to a Vote of Security Holders.
         There were no matters  submitted to a vote of security  holders  during
the fourth quarter of 1998.




                                       18


<PAGE>

                                     PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
         As of August 29, 1996, the Company's  common stock,  $.01 par value per
share,  commenced  trading on the New York  Stock  Exchange  ("NYSE")  under the
symbol  "CWL."  Prior to such date,  the  Company's  common  stock traded on the
NASDAQ  National  Market under the symbol "CWLR." The following table sets forth
for the periods indicated the high and low closing sales prices per share of the
Company's common stock as reported by the NYSE for consolidated transactions. On
March 9, 1999,  the last reported  sales price of the Company's  common stock on
the NYSE was $20.375 per share.

Fiscal Year ended December 31, 1997:                    High         Low
                                                        ----         ---
First Quarter                                          $28.2500     $25.5000
Second Quarter                                          30.0000      24.7500
Third Quarter                                           36.0000      29.7500
Fourth Quarter                                          35.6875      30.5000

Fiscal Year ended December 31, 1998:
First Quarter                                          $34.3750     $28.5625
Second Quarter                                          34.5000      28.6875
Third Quarter                                           30.8125      25.5000
Fourth Quarter                                          29.6250      22.5000

           As of  December  31,  1998 the  Company's  common  stock  was held by
approximately 2,300 stockholders of record,  including Cede & Co. as nominee for
The Depository Trust Company.
         There were no dividends  declared on the Company's  common stock in the
years 1992 through 1995.  The Company paid quarterly cash dividends of $0.04 per
share in each  quarter of 1998 and 1997 and during  the last three  quarters  of
1996. The declaration and payment of future  dividends will be at the discretion
of the Company's Board of Directors and is subject to certain legal,  regulatory
and other  restrictions.  For a description of the restrictions on the Company's
ability  to pay  dividends,  reference  is made to Item 1,  "Business--Insurance
Regulation--Restrictions  on Dividends" and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."



                                       19



<PAGE>


Item 6.  Selected Financial Data.
         The following table sets forth selected consolidated  financial data of
Chartwell as of and for the periods  indicated.  This table does not include any
historical  operating  financial data relating to CMA prior to December 31, 1996
or Piedmont  prior to  December  31,  1995  because  the  results of  operations
subsequent to the  acquisition of CMA and the Piedmont Merger through the end of
the years indicated were immaterial to Chartwell. The financial data for each of
the five years in the period ended December 31, 1998 is derived from the audited
consolidated  financial  statements  of  Chartwell.  The  following  table  also
includes  selected  data  from the  Statutory  Annual  Statements  of  Chartwell
Reinsurance and INSCORP. The selected consolidated financial data should be read
in conjunction with the consolidated financial statements of Chartwell and notes
thereto and Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," included elsewhere herein.

                                          SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                                   ------------------------------------------------------------------
                                                                Year Ended December 31,
                                                   ------------------------------------------------------------------
                                                      1998            1997         1996          1995          1994
                                                    ---------     ----------    ----------    ----------    ----------
Statement of Operations Data:                            (Dollars in thousands, except per share amounts)
UNDERWRITING OPERATIONS:
<S>                                                  <C>          <C>           <C>           <C>           <C>    
Gross premiums written............................   $342,951     $ 362,770     $ 263,838     $ 126,968     $ 116,396
Net premiums written..............................   217,054        268,260       192,251       123,314       113,962

Premiums earned...................................    229,504       245,700       209,503       120,258       102,698
Net investment income.............................     47,545        42,228        42,995        18,917        13,889
                                                                                              
Net realized capital gains (losses)...............       (339)           (3)        1,106         3,109        (3,495)
                                                     ---------    ----------    ----------    ----------    ----------
    Total revenues................................    276,710       287,925       253,604       142,284       113,092
                                                     ---------    ----------    ----------    ----------    ----------
Loss and loss adjustment expenses................     135,265       160,848       150,621        86,949        78,577
Policy acquisition costs.........................      61,564        72,655        52,030        28,790        24,295
Other expenses...................................      23,989        16,473        15,774         9,694         9,071
                                                     ---------    ----------    ----------    ----------    ----------
    Total expenses...............................     220,818       249,976       218,425       125,433       111,943
                                                     ---------    ----------    ----------    ----------    ----------
Income before taxes - underwriting operations....      55,892        37,949        35,179        16,851         1,149
                                                     ---------    ----------    ----------    ----------    ----------
SERVICE OPERATIONS:
Service and other revenue........................      14,289        28,322         6,167        1,095          1,679
Equity in net earnings of investees..............       5,327         4,794         3,559           -              -
Net investment income............................       1,092         1,104             9           44             29
                                                     ---------    ----------    ----------    ----------    ----------
    Total revenues...............................      20,708        34,220         9,735         1,139         1,708
Expenses.........................................      12,888        18,084         2,233         1,056         1,104
Amortization of goodwill.........................       2,298         2,297             -             -            -
                                                     ---------    ----------    ----------    ----------    ----------
Income before taxes - service operations.........       5,522        13,839         7,502            83           604
                                                     ---------    ----------    ----------    ----------    ----------
CORPORATE:
Net investment income............................         232           243         1,085           946           808
Net realized capital gains (losses)..............         368             -            51            90          (299)
General and administrative expenses..............       2,988         1,903         1,162         1,211             3
Interest and amortization expense................      13,499        12,254        10,135         7,820         7,379
                                                     ---------    ----------    ----------    ----------    ----------
Loss before taxes - corporate....................     (15,887)      (13,914)      (10,161)       (7,995)       (6,873)
                                                     ---------    ----------    ----------    ----------    ----------
Consolidated income (loss) before taxes and
    extraordinary item...........................      45,527        37,874        32,520         8,939        (5,120)
Income tax expense (benefit).....................      15,711        10,611         9,657         2,700        (1,685)
                                                     ---------    ----------    ----------    ----------    ----------
Net income (loss) before extraordinary item......      29,816        27,263        22,863         6,239        (3,435)
Extraordinary item, net of tax...................       -             -            1,874            -            465
                                                     ---------    ----------    ----------    ----------    ----------
Net income (loss) (1)............................      29,816        27,263        20,989         6,239        (3,900)
Less: Preferred dividends and accretion..........        -             -             -               -          1,078
                                                     ---------    ----------    ----------    ----------    ----------  
Net income (loss) attributable to common shares..    $ 29,816     $  27,263      $ 20,989     $   6,239     $  (4,978)
                                                     =========    ==========    ==========    ==========    ==========
 
</TABLE>

                                       20

<PAGE>
<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                     -------------------------------------------------------------------------
                                                         1998         1997             1996          1995          1994
                                                     -----------  ------------    ------------- -------------  -------------
Per Share Data (2):
<S>                                                 <C>           <C>            <C>           <C>           <C>    
Basic earnings (loss) per share..................   $     3.10    $     2.84     $     2.31    $     1.66    $    (0.84)
                                                    ===========   ===========    ===========   ===========   ===========
Weighted average number of common shares
    outstanding..................................    9,625,900     9,601,314      9,081,867     3,755,312     3,760,685
                                                    ===========   ===========    ===========    ==========   ===========
Diluted earnings (loss) per share................   $     3.00    $     2.74     $     2.29    $     1.65    $    (0.84)
                                                    ===========   ===========    ===========   ===========   ===========
Weighted average number  of common and common
    equivalent shares outstanding................    9,948,164     9,965,815      9,177,610     3,791,789     3,760,685
                                                    ===========   ===========    ===========   ===========   ===========
Cash dividends declared..........................   $     0.16    $     0.16     $     0.12          --             --
                                                    ===========   ===========    ===========   ===========   ===========

Insurance Operating Data (GAAP):
Loss ratio.......................................         58.9%         65.5%          71.9%         72.3%         76.5%
Underwriting expense ratio.......................         37.3          36.4           32.3          31.9          32.5
                                                    ===========   ===========    ===========   ===========   ===========
 Combined ratio...................................        96.2%        101.9%         104.2%        104.2%        109.0%
                                                    ===========   ===========    ===========   ===========   ===========

Insurance Operating Data (SAP)(3): 
Loss ratio.......................................         53.8%         65.5%          71.9%         72.9%         75.4%
Underwriting expense ratio.......................         41.2          36.2           35.2          32.5          30.3
                                                    -----------   -----------    -----------   -----------   -----------
Combined ratio...................................         95.0%        101.7%         107.1%        105.4%        105.7%
                                                    ===========   ===========    ===========   ===========   ===========
Statutory net income.............................   $   47,704    $   25,583     $   28,790    $    9,507    $      910
Statutory policyholders' surplus (4).............      302,871       262,606        238,271       188,037       111,845
Net premiums written to surplus ratio............       0.72:1        1.02:1          .81:1        1.02:1        1.02:1
Balance Sheet Data (GAAP)(5):
Total investments and cash(6)....................   $  876,465    $  764,253     $  724,694    $  705,448    $  275,136
Total assets.....................................    1,536,809     1,375,484      1,257,864     1,132,838       410,159
Loss and LAE reserves............................      878,617       788,240        747,858       741,467       232,733
Long term debt...................................      108,477       104,126        107,297        95,000        75,000
Common Stockholders' equity......................   $  292,863    $  260,497     $  225,990    $  152,482    $   56,339
</TABLE>

(1) The net  loss  for the year  ended  December  31,  1994  includes  after-tax
expenses  of  $3.6  million  for  losses  incurred  related  to the  Northridge,
California earthquake and $1.2 million of recapitalization expenses.
(2) All per share amounts have been  calculated in accordance  with Statement of
Financial  Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128  requires  dual  presentation  of basic and diluted  earnings per share data
presented.
(3)  Statutory  data has been derived from the  Statutory  Annual  Statements of
Chartwell Reinsurance, INSCORP, Dakota and ReCor Insurance Company Inc. as filed
with insurance regulatory authorities and prepared in accordance with SAP.
(4) The  statutory  surplus of  Chartwell  Reinsurance  was  increased  by $20.0
million in 1996 from the proceeds of a common stock  offering,  by $67.1 million
in 1995 as a result of the Piedmont Merger and by $30.0 million in 1994 from the
proceeds of the Senior  Notes  offering.  The ratio of net  premiums  written to
surplus ratio for 1995 includes only the premiums of Chartwell  Reinsurance  and
excludes the increase in surplus that resulted from the Piedmont Merger.
(5) Total  assets  and loss and LAE  reserves  are stated  gross of  reinsurance
recoverable in accordance with the requirements of SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration  and  Long-Duration  Contracts." The
balance sheet data at December 31, 1996 reflects the  Acquisition  of CMA and at
December 31, 1995 reflects the Piedmont Merger.
(6)  Includes  Chartwell's  share of cash and  investments  held by CMA  managed
syndicates, totaling $100.2 million for 1998.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
         The  following  discussion  of the  financial  condition and results of
operations  of Chartwell  should be read in  conjunction  with the  consolidated
financial  statements and notes thereto of Chartwell  included elsewhere herein.
The  following  discussion  does not include any  information  relating to CMA's
historical  results  of  operations  prior to  November  19,  1996 or  INSCORP's
historical  results of operations  prior to December 13, 1995.  CMA's results of
operations  for the period from  November  19,  1996 to  December  31, 1996 were
immaterial  to  Chartwell  and,  therefore,  have not been  included.  INSCORP's
results of operations for the period from December 13, 1995 to December 31, 1995
were immaterial to Chartwell; Chartwell has accounted for the Piedmont Merger as
though it had occurred on December 31, 1995.

                                       21

<PAGE>

Recent Industry Performance
         The  property  and  casualty  insurance  and  reinsurance  industry has
historically  been  highly  cyclical.   Demand  for  reinsurance  is  influenced
significantly  by  prevailing  market  conditions,  including  the  underwriting
results of primary  insurers.  The supply of reinsurance is primarily related to
levels of  underwriting  capacity in the  reinsurance  industry and the relative
cost and terms of reinsurance  coverage.  The industry's  profitability  and the
cyclical  trends in the industry can be affected  significantly  by volatile and
unpredictable developments, including the occurrence of natural disasters, other
catastrophic   events,   competitive   pressures  on  pricing  (premium  rates),
fluctuations in interest rates, other variations in the investment  environment,
changes in the judicial system regarding tort law,  general economic  conditions
and trends, such as inflationary pressures,  that may tend to affect the size of
profits and losses experienced by ceding primary insurers and other factors such
as  changes  in tax laws and  regulations.  Many  sectors  of the  industry  are
currently  in a cyclical  downturn  and it cannot be predicted if or when market
conditions will improve or when other sectors may experience a deterioration  in
pricing and terms.
         Commencing  in the  later  part  of the  1980s,  primary  property  and
casualty insurers began to retain more of their business.  This reduction in the
amount of business ceded to reinsurers,  combined with the growth in reinsurance
capacity,  resulted in renewed price competition and less attractive pricing for
reinsurers.  This caused a downturn for the reinsurance  industry,  resulting in
increased underwriting losses which have continued to the present.
         The following table presents the statutory combined ratios of Chartwell
and the  property  and  casualty  reinsurance  industry  during the 1994 to 1998
years. The combined ratio is the sum of the loss ratio (incurred losses and loss
adjustment expenses divided by net premiums earned) and the underwriting expense
ratio (underwriting  expenses divided by net premiums written). A combined ratio
of  over  100%  indicates  unprofitable  underwriting.   Although  an  insurance
company's underwriting may be unprofitable,  the company may be profitable after
including investment income.
                            Statutory Combined Ratios
                             Year Ended December 31,
     -----------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                      1998       1997      1996     1995     1994
                                                     ------     ------    ------   ------- --------
Chartwell (1)
<S>                                                  <C>        <C>       <C>       <C>      <C>    
Loss Ratio.......................................     53.8%      65.5%     71.9%     72.9%    75.4%
Underwriting expense ratio.......................     41.2       36.2      35.2      32.5     30.3
                                                     ------     ------    ------    ------   ------
Combined ratio...................................     95.0%     101.7%    107.1%    105.4%   105.7%
                                                     ======     ======    ======    ======   ======

Property and Casualty Reinsurance Industry (2)
Loss Ratio.......................................     70.7%      69.6%     72.7%     78.2%    76.8%
Underwriting expense ratio.......................     33.7       32.7      30.8      30.1     29.9
                                                     ------     ------    ------    ------   ------
Combined ratio...................................    104.4%     102.3%    103.5%    108.3%   106.7%
                                                     ======     ======    ======    ======   ======
</TABLE>

------------------------------------------
(1) Beginning in 1996, the combined  ratio  includes both Chartwell  Reinsurance
and INSCORP. (2) Source: RAA Underwriting Report for the year ended December 31,
1998.




                                       22

<PAGE>

Consolidated Results of Operations
         Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
         Revenues: Total revenues for the year ended December 31, 1998 decreased
7.6% to $298.0 million,  compared to $322.4 million for the comparable period in
1997. The following table  summarizes  gross and net premiums  written and total
revenues for the periods indicated:
                                                             Revenues
                                                            Year Ended
                                                            December 31,
                                                    ----------------------------
                                                        1998           1997
                                                    -------------  ------------
                                                       (Dollars in thousands)
Gross premiums written............................  $ 342,951       $ 362,770
                                                    ==========      ==========
Net premiums written..............................  $ 217,054       $ 268,260
                                                    ==========      ==========
Premiums earned...................................    229,504         245,700
Net investment income.............................     48,869          43,575
Net realized capital gains (losses)...............         29              (3)
Service and other revenue.........................     14,289          28,322
Equity in net earnings of investees...............      5,327           4,794
                                                    ----------      ----------
      Total......................................   $ 298,018       $ 322,388
                                                    ==========      ==========


Underwriting Operations
         Gross Premiums  Written;  Net Premiums  Written;  Net Premiums  Earned.
Gross premiums written for the year ended December 31, 1998 were $343.0 million,
a decrease of 5.5%  compared to the same period in 1997.  The  decrease in gross
premiums written was principally attributable to the opportunistic  underwriting
of certain  reinsurance  accounts in 1997, which did not renew for 1998, as well
as Chartwell's  response to the persistence of intense price  competition in the
reinsurance  industry. On a consolidated basis, pro forma for the elimination of
the opportunistic  accounts underwritten in 1997, gross premiums written grew by
approximately 16.2% in 1998 compared to 1997.
         Net premiums  written for the year ended  December  31, 1998  decreased
19.1% to $217.1 million, compared to $268.3 million for the same period in 1997.
The decrease in net premiums written was principally attributable to the reasons
described above for the decrease in gross premiums written.  Net premiums earned
for the year ended  December  31, 1998 were $229.5  million,  a decrease of 6.6%
compared to the same period in 1997.

         Loss and Loss Adjustment  Expenses.  The Company's  principal  expense,
loss and LAE related to the settlement of claims was $135.3 million for the year
ended  December 31, 1998, a 15.9%  decrease  compared to $160.8  million for the
comparable  period in 1997.  The  decrease is  principally  attributable  to the
decrease in net premiums  written and the benefits of new reinsurance  programs,
including an aggregate  excess of loss  reinsurance  treaty.  Net losses and LAE
expressed  as a  percentage  of net  earned  premiums  (the loss and LAE  ratio)
improved to 58.9% for the year ended December 31, 1998,  from 65.5% recorded for
the same period in 1997. The  improvement  of 6.6 percentage  points in the loss
and LAE ratio for the year ended  December  31, 1998 was a result of a change in
the mix of business,  the  benefits of the new  reinsurance  programs  described
above and the enhancement of existing reinsurance programs.

         Policy   Acquisition  Costs.   Policy  acquisition  costs,   consisting
primarily of commissions  paid to ceding companies and agents and brokerage fees
paid to  intermediaries,  less  commissions  received on business ceded to other
reinsurers, were $61.6 million for the year ended December 31, 1998, compared to
$72.7 million for the same period in 1997. Policy acquisition costs expressed as
a percentage of net earned premiums (the acquisition expense ratio) decreased to
26.8% from 29.6% in 1997.  The  decrease is  primarily  due to the effect of the
1998 aggregate excess of loss reinsurance treaty.

         Other  Expenses.  Other expenses  related to  underwriting  operations,
which include underwriting and administrative  expenses,  were $24.0 million for
the year ended  December 31, 1998  compared to $16.5 million for the same period
in 1997.  Other  expenses  expressed  as a  percentage  of net  earned  premiums
increased to 10.5% for the year ended December 31, 1998 compared to 6.7% for the
same period in 1997.  The increase  reflects the reduced level of premium volume
and  an  increased  share  of  expenses  related  to  Chartwell's   underwriting
participation on syndicates managed by CMA.

                                       23

<PAGE>

         Net Underwriting  Results.  The Company produced an underwriting profit
(net  premiums  earned  minus  losses,  LAE and  underwriting  expenses) of $8.7
million for the year ended December 31, 1998 as compared to an underwriting loss
of $4.3  million for the same period in 1997.  The  combined  ratio  computed in
accordance  with GAAP for the year ended  December  31, 1998  decreased to 96.2%
from 101.9% for 1997.  Although the loss ratio  component  improved to 58.9% for
the year ended  December  31,  1998 from 65.5%  recorded  for the same period in
1997, the expense ratio  increased to 37.3% for the year ended December 31, 1998
from 36.4% recorded for the same period in 1997, for the reasons noted above.

Service Operations
         Revenue from service  operations,  exclusive of net investment  income,
decreased  to $19.6  million for the year ended  December  31, 1998  compared to
$33.1 million for the same period in 1997. The decline principally  reflects the
decrease in profit commissions, advisory fee revenues and equity in the earnings
of investee  companies.  In March 1998, New London Capital plc ("NLC")  notified
Chartwell Advisers Limited ("Chartwell Advisers") that it chose not to renew the
Advisory Agreement between NLC and Chartwell Advisers (the "Advisory Agreement")
after its  contractual  expiration  on December 31,  1998.  In 1997 and 1998 the
Advisory  Agreement  produced base fees of $1.7 and $1.3 million,  respectively,
and profit commissions of $0.7 and $(0.3) million,  respectively,  for Chartwell
Advisers.  Following  expiration of the Advisory  Agreement,  Chartwell Advisers
will  continue to earn profit  commissions  on the open years of account  (1996,
1997 and 1998) to the extent such years are profitable.

Corporate
         Interest and  Amortization.  Interest and  amortization  expenses  were
$13.5 million for the year ended December 31, 1998 compared to $12.3 million for
the same period in 1997.  Interest and  amortization on the Re Holdings'  10.25%
Senior Notes due 2004 (the "Senior  Notes") was $5.2 million for the years ended
December 31, 1998 and 1997.  Interest and amortization on the Company's CI Notes
was $2.6  million and $2.5  million for the years  ended  December  31, 1998 and
1997,  respectively.  Also included in interest and amortization expense for the
years  ended  December  31,  1998 and  1997 is $4.3  million  and $3.4  million,
respectively, related to a credit facility with First Union National Bank, N. A.
("First  Union")  established  to fund the  acquisition  of CMA and  replace  an
existing $20 million credit facility.

Consolidated
         Net  Investment   Income  and  Net  Realized  Capital  Gains  (Losses).
Consolidated net investment income, exclusive of realized and unrealized capital
gains and losses,  for 1998 was $48.9 million,  an increase of $5.3 million,  or
12.1%,  over 1997. The improvement  principally  reflects the positive cash flow
from  operations of $33.3 million.  The average  annual tax equivalent  yield on
invested assets  (excluding  investment  income from the Dedicated CCV's) before
investment expenses was 6.5% for 1998, as compared to 6.7% for 1997. The Company
realized net capital gains of $29,000 for 1998 compared to net capital losses of
$3,000 for the same period in 1997.

         Income Before Income Taxes. Net income before income taxes increased to
$45.5 million for the year ended December 31, 1998 compared to $37.9 million for
the same period in 1997.  The increase  resulted  primarily  from the  favorable
results in both loss and loss  adjustment  expense and from the  increase in net
investment income.

         Income Tax Expense. The provision for Federal income taxes for the year
ended December 31, 1998  increased to $15.7 million  compared with $10.6 million
for the same period in 1997.  The effective tax rate was 34.5% and 28.0% for the
years ended December 31, 1998 and 1997,  respectively.  The principal  factor in
the decline  below the statutory  rate of 35% for both periods  results from the
benefit  recognized on  investments  in tax-exempt  securities.  During the 1998
period,  the tax benefit was largely offset by a provision for the  repatriation
of earnings of non-U.S. subsidiaries as well as the establishment of a valuation
allowance  of $1.4  million  related to certain  foreign tax  credits  generated
during 1998.

         Net Income.  The Company realized a net profit of $29.8 million for the
year ended December 31, 1998 compared with a net profit of $27.3 million for the
comparable 1997 period because of the factors discussed above.  Basic net income
per share increased 9.2% to $3.10 per share for the year ended December 31, 1998
from $2.84 per share for the year ended  December 31,  1997.  Diluted net income
per share  increased  9.5% to $3.00 per share  from $2.74 per share for the year
ended December 31, 1997.

                                       24

<PAGE>

         Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
         Revenues: Total revenues for the year ended December 31, 1997 increased
21.9% to $322.4 million, compared to $264.5 million for the comparable period in
1996. The following table  summarizes  gross and net premiums  written and total
revenues for the periods indicated:

                                                           Revenues
                                                           Year Ended
                                                          December 31,
                                                --------------------------------
                                                    1997               1996
                                                -------------     --------------
                                                         (Dollars in thousands)
Gross premiums written....................      $    362,770      $    263,838
                                                =============     =============
Net premiums written......................           268,260           192,251
                                                =============     =============
Premiums earned...........................           245,700           209,503
Net investment income.....................            43,575            44,089
Net realized capital gains (losses).......               (3)             1,157
Service and other revenue.................            28,322             6,167
Equity in net earnings of investees.......             4,794             3,559
                                                -------------     -------------
         Total............................      $    322,388      $    264,475
                                                =============     =============


Underwriting Operations
         Gross Premiums  Written;  Net Premiums  Written;  Net Premiums  Earned.
Gross premiums written for the year ended December 31, 1997 were $362.8 million,
an increase of 37.5%  compared to the same period in 1996. The increase in gross
premiums  written  reflects new programs and products  developed during the year
with  ceding  companies  in the  Specialty  Reinsurance  and  Controlled  Source
Insurance  client  segments and the addition of gross premiums  written  through
CMA's two  Dedicated  CCV's.  Gross  premiums  written by the  Global  Accounts,
Regional Accounts and Marine & Aviation Accounts client segments either declined
or remained constant as a result of continued competitive pressures.
         Net premiums  written for the year ended  December  31, 1997  increased
39.5% to $268.3 million, compared to $192.3 million for the same period in 1996.
The increase in net premiums written was principally attributable to the reasons
described above for the increase in gross premiums written.  Net premiums earned
for the year ended December 31, 1997 were $245.7  million,  an increase of 17.3%
compared to the same period in 1996.

         Loss and Loss Adjustment  Expenses.  The Company's  principal  expense,
loss and LAE related to the  settlement  of claims,  was $160.8  million for the
year ended December 31, 1997, a 6.8% increase compared to $150.6 million for the
comparable  period in 1996.  The  increase is  principally  attributable  to the
increase in net premiums written as noted above. Net losses and LAE expressed as
a percentage of net earned premiums (the loss and LAE ratio)  decreased to 65.5%
for the year ended  December 31, 1997 from 71.9% recorded for the same period in
1996. The improvement of 6.4 percentage points in the loss and LAE ratio for the
year ended  December 31, 1997 was a result of a change in the mix of business as
well as the benefits of new reinsurance programs,  including aggregate excess of
loss reinsurance treaties, and the enhancement of existing reinsurance programs.
In addition,  the 1997 results  were not  materially  affected by the run-off of
reinsurance  programs  written by INSCORP prior to December 1995, a factor which
impacted the 1996 results.

         Policy   Acquisition  Costs.   Policy  acquisition  costs,   consisting
primarily of commissions  paid to ceding companies and agents and brokerage fees
paid to  intermediaries,  less  commissions  received on business ceded to other
reinsurers, were $72.7 million for the year ended December 31, 1997, compared to
$52.0 million for the same period in 1996. Policy acquisition costs expressed as
a percentage of net earned premiums (the acquisition expense ratio) increased to
29.6% from 24.8% in 1996.  The increase was  primarily  due to the effect of the
aggregate excess of loss reinsurance treaties entered into in 1997 which reduced
net earned  premium for the year without  providing  any reduction in commission
expenses.  Also  contributing to the increase was the modestly higher commission
structure, as noted above, for proportional business.

                                       25

<PAGE>

         Other  Expenses.  Other expenses  related to  underwriting  operations,
which include underwriting and administrative  expenses,  were $16.5 million for
the year ended  December 31, 1997  compared to $15.8 million for the same period
in 1996.  Other  expenses  expressed  as a  percentage  of net  earned  premiums
decreased to 6.7% for the year ended  December 31, 1997 compared to 7.5% for the
same period in 1996.

         Net Underwriting  Results.  The Company  incurred an underwriting  loss
(net  premiums  earned  minus  losses,  LAE and  underwriting  expenses) of $4.3
million for the year ended December 31, 1997 as compared to an underwriting loss
of $8.9  million for the same period in 1996.  The  combined  ratio  computed in
accordance  with GAAP for the year ended  December 31, 1997  decreased to 101.9%
from 104.2% for 1996.  Although the loss ratio component  improved to 65.5 % for
the year ended  December  31,  1997 from 71.9 % recorded  for the same period in
1996, the expense ratio  increased to 36.4% for the year ended December 31, 1997
from the 32.3 % recorded  for the same  period in 1996,  for the  reasons  noted
above.

Service Operations
         Revenue from service  operations,  exclusive of net investment  income,
increased to $33.1 million for the year ended December 31, 1997 compared to $9.7
million for the same  period in 1996.  The  improvement  reflects  increases  in
advisory  fee  revenues,  equity in the earnings of investee  companies  and the
inclusion,  for the  first  time,  of  profit  commissions  and  fees  from  CMA
operations.  The  1996  amount  includes  a gain of $2.8  million  on a  foreign
exchange option entered into to protect the Company from the increasing value of
the Pound Sterling for the period from inception of the acquisition of CMA until
completion.  In March 1998, NLC notified Chartwell Advisers that it chose not to
renew the Advisory  Agreement after its  contractual  expiration on December 31,
1998. In 1997, the Advisory  Agreement  produced base fees of $1.7 million and a
profit commission of $0.7 million for Chartwell Advisers.  Following  expiration
of the  Advisory  Agreement,  Chartwell  Advisers  will  continue to earn profit
commissions  on the open  years of account  (1996,  1997 and 1998) to the extent
such years are profitable.

Corporate
         Interest and  Amortization.  Interest and  amortization  expenses  were
$12.3 million for the year ended December 31, 1997 compared to $10.1 million for
the same period in 1996.  Interest and amortization on the Senior Notes was $5.2
million for the year ended December 31, 1997 and $6.0 million for the comparable
period in 1996.  Interest and  amortization  on the  Company's CI Notes was $2.5
million  and $2.2  million  for the  years  ended  December  31,  1997 and 1996,
respectively.  Also included in interest and  amortization  expense for the year
ended December 31, 1997 is $3.4 million  related to a credit facility with First
Union  established  to fund the  acquisition  of CMA and replace an existing $20
million credit facility.

Consolidated
         Net  Investment   Income  and  Net  Realized  Capital  Gains  (Losses).
Consolidated net investment income, exclusive of realized and unrealized capital
gains and losses, for 1997 was $43.6 million, a decrease of 1.2% compared to the
same period in 1996.  This decrease is primarily due to a  repositioning  of the
investment  portfolio by increasing  the municipal  sector.  This  repositioning
occurred  late in 1996,  and the full effect was  realized in 1997.  The average
annual tax equivalent  yield on invested assets before  investment  expenses for
1997 and 1996 was 6.7%.
         The Company  realized net capital losses of $3,000 for 1997 compared to
net  capital  gains of $1.2  million in 1996.  The 1996 net  capital  gains were
realized  principally  to  reposition  certain  sectors of the  portfolio and to
modify the portfolio to improve credit quality without sacrificing yield.

         Income Before Income Taxes and  Extraordinary  Item.  Net income before
income taxes and  extraordinary  items  increased to $37.9  million for the year
ended  December 31, 1997  compared to $32.5 million for the same period in 1996.
The  increase  resulted  primarily  from the  increase in earned  premiums,  the
favorable  results in both loss and loss adjustment  expense and other expenses,
and the contributions from CMA to income from service operations.

         Income Tax Expense. The provision for Federal income taxes for the year
ended  December 31, 1997  increased to $10.6 million  compared with $9.7 million
for the same period in 1996.  The effective tax rate was 28.0% and 29.7% for the
years ended December 31, 1997 and 1996,  respectively.  The principal  factor in
the decline below the  statutory  rate of 35.0% for both periods was the benefit
of an increase during late 1996 and early 1997 of investments in  tax-advantaged
securities.


                                       26

<PAGE>
         Net Income Before  Extraordinary Item. Net income before  extraordinary
item increased to $27.3 million for the year ended December 31, 1997 as compared
to $22.9  million  for the same  period in 1996,  and basic  earnings  per share
before extraordinary item increased 12.7% to $2.84 from $2.52 for the year ended
December  31,  1996.  Diluted  earnings  per  share  before  extraordinary  item
increased 10.0% to $2.74 from $2.49.

         Extraordinary  Item,  Net of Income Tax.  The Company  recognized a net
after-tax  extraordinary expense of $1.9 million for the year ended December 31,
1996 for the  write-off  of  unamortized  debt  issuance  costs and a redemption
premium associated with the redemption of 35% of the Senior Notes.

         Net Income.  The Company realized a net profit of $27.3 million for the
year ended December 31, 1997 compared with a net profit of $21.0 million for the
comparable 1996 period because of the factors discussed above.  Basic net income
per share  increased  22.9% to $2.84 for the year ended  December  31, 1997 from
$2.31 per share for the year ended  December  31,  1996.  Diluted net income per
share  increased 19.7% to $2.74 from $2.29 per share for the year ended December
31, 1996.

Liquidity and Capital Resources
         As a holding company, Chartwell's assets consist primarily of the stock
of its  direct  and  indirect  operating  subsidiaries,  Chartwell  Reinsurance,
INSCORP and CMA. Chartwell's cash flow, therefore,  depends largely on dividends
and other  statutorily  permissible  payments from its  operating  subsidiaries.
Chartwell's  sources of funds  consist  primarily of net  premiums,  reinsurance
recoveries,  investment  income  and  proceeds  from  sales and  redemptions  of
investments.  Funds are  applied  primarily  to  payments  of claims,  operating
expenses  and income  taxes and to the purchase of  investments,  largely  fixed
income  securities.  Cash and  short-term  investments  are  maintained  for the
payment of claims and expenses.
         For the years  ended  December  31,  1998,  1997 and 1996,  Chartwell's
consolidated  cash flow provided by operations was $33.3 million,  $28.3 million
and $12.2 million, respectively. The increase in 1998 is due to the inclusion of
Chartwell's  share of the  operating  cash flow of  syndicates  managed  by CMA,
offset  by a  decline  in cash  provided  by the  reinsurance  segment  due to a
reduction  in  premiums  written  and the  collection  of  premiums on a monthly
installment  basis  on  certain  accounts  in the  Controlled  Source  Insurance
segment. The cash flow from operations in 1997 was greater than that in 1996 due
to improved  underwriting  cash flows  comprising  premiums  received  less paid
losses and LAE and underwriting expenses. The 1996 cash flow from operations was
reduced as a result of the run-off of INSCORP's reinsurance reserves.
         Sales of available for sale  investments  were $158.4  million,  $200.8
million and $500.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively.  Trading  activity  increased  during 1996 primarily to modify the
portfolio by sector and to capitalize on some opportunities to improve on credit
quality without  sacrificing yield. There was no unusual trading activity during
1997 and 1998.
         At  December  31,  1998,  the  carrying  value  of  total  investments,
including cash and cash equivalents, increased 14.7%, to $876.5 million compared
to $764.3  million at December  31, 1997.  The primary  reasons for the increase
were cash and  investments  acquired  through the purchase of Oak  Dedicated Two
Limited and the remainder of Archer  Dedicated plc (the holding company for ADIT
One Limited),  positive cash flow from  operations and an increase in the market
value of the investment portfolio.
         Financing activities have also been a source of liquidity for Chartwell
and its  subsidiaries.  On March 17, 1994,  Chartwell  completed the offering of
$75.0  million  principal  amount of the Senior  Notes.  The net proceeds to the
Company after transaction  expenses were $71.9 million. As of December 31, 1998,
$48.8  million in  principal  amount of the Senior Notes were  outstanding.  The
Senior  Notes bear  interest at a rate of 10 1/4% per annum and are due on March
1, 2004.
         In the first half of 1996, the Company  completed a public  offering of
2,725,000  shares of common  stock at $23.00 per share.  The net proceeds to the
Company  were  $58.5  million  after  deduction  of  underwriting  discount  and
expenses.  Of the net proceeds,  $48.5 million was contributed to Re Holdings of
which $20.0  million  was  contributed  to the  statutory  surplus of  Chartwell
Reinsurance  and $28.5  million was used to retire 35% of the Senior  Notes plus
accrued  interest.  The  remaining  funds were  retained  for general  corporate
purposes.  This redemption  reduced  Chartwell's annual expense for interest and
amortization  of debt issuance  costs under the Senior Notes by $2.8 million per
year.
         In connection with the acquisition of CMA, stockholders of Chartwell UK
could elect to receive  Loan Notes in the amount of one Pound  Sterling for each
Pound Sterling of cash consideration.  The aggregate amount of Loan Notes issued
in connection  with the  consummation of the acquisition of CMA was $9.4 million
(denominated in Pounds Sterling).  The Loan Notes, which are guaranteed by First
Union as  described  below,  pay  interest  semi-annually  at the rate per annum
calculated  as one percent  below the  Sterling  London  Interbank  Offered Rate
("LIBOR") and will mature in June,  2002 unless  redeemed at an earlier date. As
of December 31, 1998, $3.8 million of the Loan Notes have been redeemed.

                                       27

<PAGE>
         Also in connection  with the  acquisition  of CMA, Re Holdings  entered
into a new credit facility with First Union,  as agent (the "Credit  Facility").
The Credit  Facility  provides for (i) a Tranche A-1 $20.0 million loan,  (ii) a
Tranche  A-2  $10.0  million  loan,   (iii)  a  Tranche  B  $22.0  million  loan
(denominated  in  Pounds  Sterling)  (Tranche  A-1,  Tranche  A-2 and  Tranche B
collectively,  the "First  Union  Loans"),  and (iv) a $25.0  million  revolving
credit  facility  (subsequently  increased to $60.0  million)  (the "First Union
Revolver").
         The First Union Loans have six-year  terms and the First Union Revolver
has a  five-year  term but may be  extended  with the  consent  of the  lenders.
Tranche  A-1 and A-2 require  repayment  of  principal  starting in year 3, $6.0
million;  year 4, $7.5  million;  year 5, $7.5 million and year 6, $9.0 million.
Tranche B requires repayment of principal starting in year 3, $4.2 million; year
4, $5.3 million; year 5, $5.3 million and year 6, $6.4 million. Borrowings under
the First Union Revolver are available at any time prior to maturity, subject to
minimum funding amounts. Both the First Union Loans and the First Union Revolver
will bear  interest at a rate  selected  by Re Holdings  equal to either (1) the
Base Rate (as defined below) or (2) U.S.  dollar or Sterling LIBOR plus a margin
(the  "Margin"),  as  applicable.  The amount of the Margin  will  depend on the
higher of Re  Holdings'  senior  debt rating by Standard & Poor's or Moody's and
can range  from 0.75% to  1.125%.  Based on Re  Holdings'  current  senior  debt
ratings,  the Margin over LIBOR is currently at 1.00%. The U.S. dollar Base Rate
is the higher of (1) First  Union's  prime  commercial  lending  rate or (2) the
federal  funds  rate plus  0.5%.  The  Sterling  Base Rate is the rate per annum
announced by Midland Bank plc plus the Margin.  Re Holdings will also pay (1) an
unused  commitment  fee equal to 0.25% on the  aggregate  unused  portion of the
revolver,  (2)  utilization  fees for the  issuance  of  letters  of credit  and
guarantees of Loan Notes, issued in connection with the acquisition of CMA, at a
rate per annum of 0.375% (if secured) or the Margin (if unsecured) plus a 0.075%
facing fee,  currently  totaling 1.075% (if unsecured) on the outstanding amount
of potential credit exposure, and (3) certain other fees customary in connection
with  syndicated  loans of this  nature.  All payments of interest and fees with
respect to each of the First Union  Loans shall be made in the same  currency in
which the principal of such loan is required.
         At December 31, 1998,  $20.0  million,  $10.0 million and $15.9 million
were  outstanding  under  the  Tranche  A-1,  Tranche  A-2 and  Tranche B loans,
respectively.  During 1998, the Tranche B loan increased by $1.8 million to fund
the redemption of Loan Notes for the same amount, resulting in a balance of $5.5
million  used to guarantee  the Loan Notes.  A $5.0 million line of credit and a
total of $53.6 million in letters of credit were extended  under the First Union
Revolver.  All amounts  denominated  in Pounds  Sterling were  converted to U.S.
dollars at the rate of  (pound)1=$1.66,  the exchange rate in effect at December
31, 1998.
         On June 30,  1998,  the  Company  entered  into an  interest  rate swap
agreement  (the  "Swap")  for other than  trading  purposes  with First Union to
convert a specific  portion of the  floating  rate loans  outstanding  under the
Credit  Facility to a fixed  rate.  The Swap  requires  the Company to pay First
Union  interest on a notional  amount  equivalent to the  principal  outstanding
((pound)10,280,000  at December 31, 1998) at a fixed annual rate  throughout the
term of the  related  debt  obligation  of 6.85% and for First  Union to pay the
Company  interest equal to the three month LIBOR interest rate determined at the
commencement of each calendar quarter. The Swap terminates on December 31, 2002.
The  weighted  average  LIBOR rate payable by First Union in 1998 under the Swap
was 7.62%.
         The notional  amount set forth in the Swap does not represent an amount
exchanged by the Company and First Union,  and thus is not a measure of exposure
of  the  Company.  Since  First  Union  is not  required  to  collateralize  its
obligations  under the Swap,  the Company is exposed to loss if First Union were
to default on its obligations  under the Swap. The Company does not believe that
any  reasonably  likely change in interest  rates would cause the Swap to have a
material adverse effect on the financial position,  the results of operations or
cash  flows of the  Company.  The Swap was  reviewed  with and  approved  by the
Company's Board of Directors.
         Upon  consummation  of  the  Piedmont  Merger,   Chartwell  became  the
successor  to  Piedmont  under  the CI  Notes.  The CI Notes  were  issued in an
aggregate  principal  amount of $1 million,  which principal  amount will accrue
interest at a rate of 8% per annum,  compounded annually. Such interest will not
be payable until  maturity or earlier  redemption of the CI Notes.  In addition,
the CI Notes will  entitle  the  holders  thereof to  receive  at  maturity,  in
proportion to the principal amount of the CI Notes held by them, an aggregate of
from $10 million up to $55 million in contingent interest.  Settlement of the CI
Notes may be made by payment of cash or, under certain specified conditions,  by
delivery of shares of the Company's  common  stock.  The CI Notes mature on June
30, 2006.
         Chartwell and its subsidiaries may incur additional indebtedness in the
future, subject to the limitations contained in the Senior Notes indenture,  the
agreements governing the Credit Facility and the CI Notes indenture.

                                       28

<PAGE>

         The agreements  governing the Senior Notes, the CI Notes and the Credit
Facility  significantly restrict the ability of Re Holdings to make dividend and
other payments to Chartwell. Further, dividend payments by Chartwell Reinsurance
and INSCORP are subject to limits under the laws of the States of Minnesota  and
New York, respectively. Under the applicable provisions of the insurance holding
company laws of the State of  Minnesota,  Chartwell  Reinsurance  may, upon five
days notice to the  Commissioner  of Insurance  of the State of Minnesota  ("the
Commissioner") following the declaration of dividends to stockholders,  and upon
at least ten days notice to the  Commissioner  prior to dividend  payments,  pay
dividends  without the  approval  of the  Commissioner,  unless such  dividends,
together with other  dividends paid within the preceding  twelve months,  exceed
the greater of (i) 10% of Chartwell  Reinsurance's  policyholders' surplus as of
the end of the prior calendar year or (ii) Chartwell Reinsurance's statutory net
income,  excluding  realized  capital  gains,  for the prior  calendar year. Any
dividend in excess of the amount  determined  pursuant to the foregoing  formula
would be  characterized  as an  "extraordinary  dividend"  requiring  the  prior
approval  of the  Commissioner.  In any case,  the maximum  amount of  dividends
Chartwell  Reinsurance may pay is limited to its earned  surplus,  also known as
unassigned  funds.  As of December  31,  1998,  Chartwell  Reinsurance  reported
unassigned  funds,  as  defined,  in the amount of $103.8  million.  Up to $30.3
million is available under the foregoing formula for the payment of dividends by
Chartwell Reinsurance without regulatory approval in 1999. On November 25, 1997,
Chartwell  Reinsurance  paid a  $3.0  million  dividend  to Re  Holdings  and on
February  24, 1999,  Chartwell  Reinsurance  paid a $5.5 million  dividend to Re
Holdings. Chartwell Reinsurance paid no dividends in 1996 or 1998.
           Under New York law,  which is  applicable  to  INSCORP,  the  maximum
ordinary dividend payable in any twelve month period without the approval of the
Superintendent may not exceed the lesser of (a) 10% of policyholders  surplus as
shown on the  company's  last  annual  statement  or any more  recent  quarterly
statement or (b) the  company's  adjusted net  investment  income.  Adjusted net
investment  income is defined  as net  investment  income for the twelve  months
preceding  the  declaration  of the  dividend  plus the  excess,  if any, of net
investment  income  over  dividends  declared or  distributed  during the period
commencing  thirty-six  months prior to the  declaration or  distribution of the
current  dividend and ending twelve months prior thereto.  In any case, New York
law permits the payment of an ordinary  dividend by an insurer or reinsurer only
out of earned  surplus.  Moreover,  notwithstanding  the receipt of any dividend
from INSCORP,  Chartwell  Reinsurance may make dividend  payments to Re Holdings
only to the extent permitted under the Minnesota provisions described above.
         In  addition  to the  foregoing  limitation,  the  New  York  Insurance
Department,  as is its  practice  in any change of control  situation,  required
Chartwell  to  commit to  preclude  the  acquired  New  York-domiciled  insurer,
INSCORP,  from  paying any  dividends  for two years after the  Piedmont  Merger
without prior regulatory approval. The foregoing restriction expired on December
13, 1997.  INSCORP paid no dividends in 1997 or 1998.
         The maximum dividend permitted by law is not indicative of an insurer's
actual  ability to pay  dividends,  which may be  constrained  by  business  and
regulatory  considerations,  such as the impact of dividends  on surplus,  which
could  affect an  insurer's  ratings  or  competitive  position,  the  amount of
premiums  that  can  be  written  and  the  ability  to  pay  future  dividends.
Furthermore,  beyond  the  limits  described  in the  preceding  paragraph,  the
Commissioner  and  Superintendent  have  discretion  to  limit  the  payment  of
dividends  by  insurance   companies   domiciled  in  Minnesota  and  New  York,
respectively.
         Management  believes that current  levels of cash flow from  operations
and assets held at the holding company level provide the Company with sufficient
liquidity  to meet its  operating  needs in the  short  term  (over  the next 12
months).  Management  expects  Chartwell  to be able  to  continue  to meet  its
operating needs after the next 12 months from internally  generated funds. Since
the ability of Chartwell to meet its  obligations  in the long term (beyond such
12-month  period) is dependent  upon such factors as market  changes,  insurance
regulatory changes and economic  conditions,  no assurance can be given that the
available  net cash flow will be sufficient  to meet its  operating  needs.  The
Company expects that, in order to repay the principal amount of the Senior Notes
on maturity or otherwise,  it will be required to seek  additional  financing or
engage in asset  sales or similar  transactions,  and would be  required to take
similar actions in order to repay the CI Notes on maturity or otherwise,  in the
event it chose or was required to settle the CI Notes in cash rather than common
stock.  There can be no assurance that sufficient funds for any of the foregoing
purposes would be available to the Company at such time.

Market Risk Disclosures
         Chartwell's   primary  market  risk  exposures  are:  foreign  currency
exchange  risk, in  particular  the U.S.  dollar to the British pound  sterling;
interest  rate risk on fixed and  variable  rate U.S.  dollar and British  pound
sterling denominated short and long-term instruments; and equity price risk.

                                       29

<PAGE>
         Foreign Currency Exchange Rate Risk:  Foreign currency risk is the risk
that  Chartwell  will incur  economic  losses due to adverse  changes in foreign
currency  exchange  rates.  This  risk  arises  from  Chartwell's  international
operations,  debt  obligations  denominated  in foreign  currencies  and foreign
equity  investments.  At December 31, 1998,  Chartwell  had a net  investment of
approximately  $33.2  million in  foreign  subsidiaries,  $26.8  million in debt
obligations denominated in foreign currencies and $3.3 million in foreign equity
investments.
         A portion of  Chartwell's  reinsurance  operations  is  denominated  in
international  currencies,  particularly  the  British  pound  sterling  and the
Canadian dollar.  This exchange rate exposure is somewhat mitigated by investing
the premiums received in currencies in which the liabilities are denominated.
         Based upon data as at December 31, 1998,  management  estimates  that a
10% immediate  unfavorable change in each of the foreign currency exchange rates
to which  Chartwell  is exposed  would  decrease  the fair value of its  foreign
denominated instruments by approximately $2.9 million.  Chartwell's net exposure
to exchange rates consist of $19.7 million to the British pound  sterling,  $5.3
million to the  Canadian  dollar and an  aggregate  of $3.7 million to all other
foreign currencies.

         Interest  Rate  Risk:   Chartwell's  fixed  maturity   investments  and
indebtedness  are subject to interest  rate risk.  Increases  and  decreases  in
prevailing  interest rates  generally  translate into decreases and increases in
the  fair  value of fixed  maturity  investments  and the  interest  payable  on
Chartwell's  outstanding  variable  rate debt. On occasion,  Chartwell  utilizes
stand-alone  derivatives to manage and mitigate the volatility of interest rates
on certain of its interest rate sensitive  instruments.  Additionally,  the fair
value  of  interest  rate   sensitive   instruments   may  be  affected  by  the
creditworthiness   of  the  issuer,   prepayment  option,   relative  values  of
alternative  investments,  liquidity of the  investment and other general market
conditions.
         The table  below  summarizes  the  estimated  effects  of  hypothetical
increases and decreases in interest  rates. It is assumed that the changes occur
immediately  and uniformly to each category of  instrument  containing  interest
rate risks. The hypothetical changes in market interest rates reflect what could
be  deemed  best or worst  case  scenarios.  Significant  variations  in  market
interest  rates  could  produce  changes  in the  timing  of  repayments  due to
prepayment  options  available.  The  fair  value of such  instruments  could be
affected and therefore  actual results might differ from those  reflected in the
table, which follows:
<TABLE>
<CAPTION>
                                                                            Estimated Fair Value      Hypothetical
                                                   Hypothetical Change       After Hypothetical    Percentage Increase
                              Fair Value at         in Interest Rate             Change in             (Decrease) in
                              December 31, 1998     (bp=basis points)          Interest Rate       Stockholders' Equity
                              -----------------    -------------------       -----------------     -------------------
Assets: (1)                                                      (dollars in thousands)
--------------------------
<S>                             <C>                <C>                           <C>                      <C>        
U.S Treasury Securities         $212,467           100 bp decrease              $221,863                    3.2%
and Obligations of US                              100 bp increase               202,243                   (3.5)
Government Corporation                             200 bp increase               191,429                   (7.2)
and Agencies                                       300 bp increase               172,585                  (13.6)

Other fixed maturity            $479,071           100 bp decrease              $504,577                    8.7%
investments                                        100 bp increase               451,318                   (9.5)
                                                   200 bp increase               421,962                  (19.5)
                                                   300 bp increase               370,807                  (37.0)
Liabilities:
--------------------------
Borrowings Under                $112,162           100 bp decrease              $112,315                    0.3%
Investment Agreements                              100 bp increase               112,012                   (0.3)
and other debt                                     200 bp increase               111,862                   (0.5)
                                                   300 bp increase               111,713                   (0.8)
</TABLE>
(1) Excludes investments held by CMA managed syndicates.

Equity Price Risk: The  carrying  values of investments  subject to equity price
risks are based on quoted market prices or management's  estimates of fair value
as of the balance  sheet date.  Market  prices are subject to  fluctuation  and,
consequently,  the amount  realized in the subsequent  sale of an investment may
significantly  differ from the reported market value.  Fluctuation in the market
price of a security may result from perceived changes in the underlying economic
characteristics of the investee,  the relative price of alternative  investments
and general market  conditions.  Furthermore,  amounts realized in the sale of a
particular  security  may be affected by the  relative  quantity of the security
being sold.
         Chartwell's common equity portfolio of $36.4 million primarily consists
of long term  strategic  minority  positions in illiquid  equity  securities  of
managing general agents of Controlled Source Insurance. A 10% immediate decrease
in the market prices of all equity  securities held by Chartwell at December 31,
1998, would result in an approximate 1.2% decrease in Chartwell's  stockholders'
equity.
                                       30

<PAGE>

         The above  analyses  do not take into  account  any  correlation  among
foreign currency exchange rates, or any correlation among various markets (i.e.,
the fixed income markets and foreign exchange and equity  markets).  Chartwell's
actual experience may differ from the results noted above due to the correlation
assumptions  utilized,  or if  events  occur  that  were  not  included  in  the
methodology,  such as significant  liquidity or market events.  The selection of
the amount of increases or decreases in currency exchange rates,  interest rates
and equity values in the above analyses  should not be construed as a prediction
of future market events,  but rather, to illustrate the potential impact of such
an event.

Year 2000 Compliance
         The Year 2000 issue is the result of computer  programs  being  written
using two digits rather than four to define the  applicable  year. The Company's
computer equipment,  software and devices with imbedded technology that are time
sensitive  may recognize a date using "00" as the year 1900 rather than the year
2000.  This  could  result  in  a  system  failure  or  miscalculations  causing
disruptions of operations,  including, among other things, a temporary inability
to process  transactions  or engage in other  normal  business  activities.  The
consequences   to  the  Company  of  such  failures   could   include   business
interruption, lost revenue or illiquidity. The magnitude of the financial impact
of such potential failures on the Company is not known at this time.
         The Company  believes that it has identified all  significant  computer
hardware and software  applications  and devices with  imbedded  time  sensitive
technology  that are employed by the Company in its operations that will require
modification to ensure Year 2000 Compliance.  The Company is using both internal
and external resources to test all significant computer systems and applications
and to make the  modifications  necessary for Year 2000 Compliance.  The testing
and modification  process,  which is proceeding on schedule, is 95% complete and
is expected to be fully completed by June 30, 1999. The testing and modification
process has not materially interfered with the Company's Information  Technology
operations or the operations of the Company .
         In addition,  the Company has contacted all of its significant business
partners and service vendors to determine their Year 2000 Compliance  readiness,
as well as the extent to which the Company is vulnerable to any third party Year
2000  issues.  However,  there can be no  guarantee  that the  systems  of other
companies on which the Company's systems rely will become Year 2000 compliant in
a timely  manner,  or that the  failure  by a third  party to  become  Year 2000
compliant would not have a material adverse effect on the Company.
         The Company is revising  its  existing  disaster  recovery  contingency
plans to address issues  specific to the Year 2000 problem.  These revisions are
expected to be completed by June 30, 1999. Such plans are intended to enable the
Company to  continue  to  operate  by  performing  certain  processes  manually,
changing vendors and repairing or replacing existing systems, where feasible.
         The total cost to the Company to test and modify all systems to be Year
2000  compliant  has  not  been,  and is not  expected  to be,  material  to its
financial  position or results of  operations  in any given year.  To date,  the
Company has budgeted $50,000 to accomplish its Year 2000 testing and remediation
goals  and   approximately  50%  of  the  amount  budgeted  has  been  expended.
Expenditures  to fund Year 2000 testing and  modification  have to date and will
continue to be funded from operating cash flows.
         The  anticipated  completion  dates  for Year 2000  compliance  and the
Company's  contingency  plans and the cost  estimates for the  completion of the
Company's Year 2000 compliance  program are based on management's best estimates
utilizing current data regarding  available  resources,  coordination with third
parties and other relevant  factors and  information  about systems  conversion.
However,  there can be no assurance that these  estimates will be achieved,  and
actual results could differ from the current plan.
         In  addition,  the  Company  may also  have  material  exposure  in its
property and casualty operations to claims related to the Year 2000 issue. It is
not yet  possible  to  determine  whether  such  claims  might  be made  against
insurance or reinsurance  contracts in which the Company participates or if such
claims will be held to have merit.
         Readers are cautioned that forward-looking statements contained in this
description of the Company's  treatment of the Year 2000 issue should be read in
conjunction with the Company's  disclosures  under the heading  "Cautionary Note
Regarding Forward-Looking Statements" below.

                                       31
<PAGE>


Accounting Standards
Accounting for Derivative Instruments and Hedging Activities - SFAS No. 133
         In June 1998, the Financial  Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards ("SFAS") No. 133,  "Accounting for
Derivative  Instruments and Hedging Activities," which becomes effective for the
Company  January 1, 2000.  SFAS No. 133  establishes  accounting  and  reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other  contracts,  and for hedging  activities.  The Company will be
required to recognize all  derivatives  as either assets or  liabilities  in the
statement of financial position and measure those instruments at fair value. The
accounting  for a change in the fair value of a derivative  in earnings or other
comprehensive  income will depend on the intended use of the  derivative and the
resulting  designation.  Derivatives  can be  designated  as (a) a hedge  of the
exposure to changes in the fair value of a  recognized  asset or  liability or a
firm  commitment,  (b) a hedge  of the  exposure  to  variable  cash  flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment  in  foreign   operations,   an  unrecognized  firm  commitment,   an
available-for-sale  security,  or  a  foreign  currency  denominated  forecasted
transaction.
         The difference between a derivative's  previous carrying amount and its
fair value at the date of  implementation of SFAS No. 133 shall be reported as a
transition adjustment.  Such adjustment shall be reported in net income or other
comprehensive  income  as the  effect of a change in  accounting  principle  and
presented in a manner similar to the cumulative effect of a change in accounting
principle  in  accordance  with APB Opinion No. 20,  "Accounting  Changes."  The
Company is currently  reviewing the impact of the implementation of SFAS No. 133
on its financial statements.

Disclosures About Segments of an Enterprise and Related Information Footnotes -
SFAS No. 131
         In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information  Footnotes," which became effective for
the Company  beginning  January 1, 1998. SFAS No. 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  issued to  shareholders.  It also  establishes  standards  for  related
disclosures  about products and services,  geographic areas and major customers.
The adoption of SFAS No. 131 had no impact on the Company's  financial  position
or results of operations.  Prior year segment  information has been reclassified
to conform to the SFAS No. 131 requirements.

Reporting Comprehensive Income - SFAS No. 130
         In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive
Income," which became effective for the Company  beginning January 1, 1998. SFAS
No. 130 establishes  standards for reporting and display of comprehensive income
and its  components  (revenues,  expenses,  gains and  losses)  in a full set of
general-purpose  financial  statements.  This Statement  requires that all items
that are required to be recognized under  accounting  standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence  as other  financial  statements.  It does  not  require  a
specific  format for that  financial  statement  but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. The adoption of SFAS No. 130 had no impact on the Company's
financial  position or results of operations.  Prior year  financial  statements
have been reclassified to conform to the SFAS No. 130 requirements.


Regulatory Accounting Practices
         In March 1998,  the National  Association  of  Insurance  Commissioners
adopted the Codification of Statutory  Accounting  Principles  ("Codification").
The  Codification,  which is intended to standardize  regulatory  accounting and
reporting for the  insurance  industry,  is proposed to be effective  January 1,
2001. However,  statutory accounting  principles will continue to be established
by individual  state laws and permitted  practices and it is uncertain  when, or
if, the states of Minnesota,  New York and North Dakota will require adoption of
Codification for the preparation of statutory financial statements.  The Company
has not  finalized  the  quantification  of the effects of  Codification  on its
statutory financial statements.

Effects of Inflation
         The effects of  inflation on Chartwell  are  considered  in pricing and
estimating reserves for unpaid losses and loss adjustment  expenses.  The actual
effects of inflation on  Chartwell's  results  cannot be  accurately  determined
until ultimate losses are settled. However, based on the actual results reported
to date,  management  believes that premium rates and loss  reserves,  including
reserves  for  losses  that  have been  incurred  but not  reported,  adequately
incorporate the effects of inflation. See Item 1, "Business--Reserves."

                                       32

<PAGE>

Cautionary Note Regarding Forward-Looking Statements
         This  Annual  Report  on Form  10-K  contains  statements  that  may be
considered to be "forward-looking  statements" within the meaning of Section 27A
of the  Securities  Act of 1933, as amended,  and Section 21E of the  Securities
Exchange Act of 1934, as amended.
         Such statements may include, without limitation, insofar as they may be
considered  to  be  forward-looking   statements,   certain  statements  in  (i)
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations--Consolidated  Results of  Operations - Year Ended  December 31, 1998
Compared  With Year Ended  December  31,  1997" and  "--Consolidated  Results of
Operations - Year Ended  December 31, 1997 Compared With Year Ended December 31,
1996" concerning (A) certain  relationships  among gross premiums  written,  net
premiums  written and net premiums earned and (B) the development of reserves in
respect of all or a portion of the Company's insurance and reinsurance business;
(ii) "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" concerning the potential effects of
certain events on the Company's  indebtedness and portfolios of fixed income and
equity instruments, foreign currency exposure, derivatives positions and certain
other types of  instruments;  (iii)  "Management's  Discussion  and  Analysis of
Financial  Condition  and  Results  of   Operations--Market   Risk  Disclosures"
concerning  the  potential  effects of changes in the equity  markets,  interest
rates and currency exchange rates; (iv) "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Compliance"  concerning
the costs  and  effects  of Year  2000  compliance;  (v) such  other  statements
contained in this Annual  Report that may be  considered  to be  forward-looking
statements; and (vi) variations of the foregoing statements wherever they appear
in this Annual Report.
         All  forward-looking  statements address matters that involve risks and
uncertainties.  Accordingly,  there are or will be important  factors that could
cause  actual  results  to  differ  materially  from  those  indicated  in  such
statements.  The Company believes that these include the following non-exclusive
factors:

i.   the  impact  of  changing  market  conditions  on  the  Company's  business
     strategy;
ii.  the effects of increased competition on pricing,  coverage terms, retention
     of customers and ability to attract new customers;
iii. greater severity or frequency of the types of large or catastrophic  losses
     which the Company's subsidiaries insure or reinsure;
iv.  faster or more adverse loss  development  experience than that on which the
     Company's underwriting, reserving and investment practices are based;
v.  changes in the Company's retrocessional arrangements;
vi.  developments in global  financial  markets which could adversely affect the
     performance of the Company's investment portfolio;
vii. litigation,  regulatory or tax developments that could adversely affect the
     Company's business;
viii. risks associated with the introduction of new products and services; and
ix.  the impact of mergers and acquisitions.

         The facts set forth above should be considered  in connection  with any
forward-looking statement contained in this Annual Report. The important factors
that could affect such forward-looking statements are subject to change, and the
Company does not intend to update any forward-looking statement or the foregoing
list of important factors. By this cautionary note, the Company intends to avail
itself  of the safe  harbor  from  liability  with  respect  of  forward-looking
statements provided by Section 27A and Section 21E referred to above.

Item 7A. Quantitative and Qualitative  disclosures About Market Risk
     See "Market Risk Disclosures" contained in Item 7. Management's  Discussion
and Analysis of Financial Condition and Results of Operations.

Item 8.  Financial Statements and Supplementary Data.
         See the  Consolidated  Financial  Statements  and Notes thereto and the
Schedules  on pages F-1 through  F-26 and S-1  through S-7  included in Part IV,
Item 14.

Item 9.  Changes  in  and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosures.
         None.

                                       33


<PAGE>


                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.
         The  information  called  for by  Item  10 is  incorporated  herein  by
reference to the  Registrant's  definitive  proxy  statement for its 1999 Annual
Meeting of  Stockholders  (the "Proxy  Statement")  which will be filed with the
Securities  and  Exchange  Commission  pursuant  to  Regulation  14A  under  the
Securities  Exchange  Act of 1934,  as  amended,  not later  than 120 days after
December 31, 1998.

Item 11.  Executive Compensation.

          The  information  called  for by  Item 11  is  incorporated  herein by
reference to the Proxy Statement referred to above in Item 10.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.
          The  information  called for  by  Item 12  is  incorporated  herein by
reference to the Proxy Statement  referred to above in Item 10.

Item 13.  Certain Relationships and Related Transactions.
          The  information  called for  by  Item 13  is  incorporated herein by
reference to the Proxy Statement  referred to above in Item 10.

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
              (a) Financial  Statements and Schedules--The  financial statements
     and schedules listed in the accompanying Index to Financial  Statements and
     Schedules on page F-1 are filed as part of this Annual Report on Form 10-K.
              (b)  Exhibits--The  exhibits listed in the  accompanying  Index to
     Exhibits are filed as part of this Annual Report on Form 10-K.
              (c)  Reports on Form 8-K-- None




                                       34

<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934,  the  registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Stamford, State of
Connecticut, on March 22, 1999.
                                                      CHARTWELL RE CORPORATION

                                                      By  /s/ Charles E. Meyers
                                                  -----------------------------
                                                     Charles E. Meyers
                                                     Senior Vice President and
                                                     Chief Financial Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed by the following  persons in the  capacities  and on
the dates indicated.

Signatures                            Title                             Date
----------                            -----                             ----


/s/ Richard E. Cole  
------------------------        Chief Executive Officer and       March 22, 1999
    Richard E. Cole             Chairman of the Board of
                                Directors (Principal
                                Executive Officer)

/s/ Charles E. Meyers           Senior Vice President and         March 22, 1999
------------------------        Chief Financial Officer
    Charles E. Meyers           (Principal Financial Officer


                                                                    
/s/ Richard B. Primerano        Vice President and Controller     March 22, 1999
------------------------        (Principal Accounting Officer)
    Richard B. Primerano      
 

/s/ Steven J. Bensinger         Director                          March 22, 1999
------------------------
    Steven J. Bensinger


/s/ Jacques Q. Bonneau          Director                          March 22, 1999
------------------------
    Jacques Q. Bonneau


/s/ David J. Callard            Director                          March 22, 1999
------------------------      
    David J. Callard


/s/ Robert M. DeMichele         Director                          March 22, 1999
------------------------
    Robert M. DeMichele


/s/ Greg S. Feldman             Director                          March 22, 1999
------------------------
    Greg S. Feldman


/s/ Stephen L. Green            Director                          March 22, 1999
------------------------
    Stephen L. Green


 /s/ Frank E. Grzelecki         Director                          March 22, 1999
------------------------
     Frank E. Grzelecki


/s/ William R. Miller           Director                          March 22, 1999
------------------------    
    William R. Miller




                                       35

<PAGE>


Signatures                            Title                             Date
----------                            -----                             ----


/s/ Lunsford Richardson, Jr.    Director                          March 22, 1999
----------------------------   
Lunsford Richardson, Jr.


/s/ Stuart Smith Richardson     Director                          March 22, 1999
----------------------------
    Stuart Smith Richardson

/s/ John Sagan                  Director                          March 22, 1999
----------------------------
    John Sagan























                                       36

<PAGE>



                                  



                            CHARTWELL RE CORPORATION

Index to Financial Statements
Independent Auditors' Report.............................................    F-2
Consolidated Balance Sheets at December 31, 1998 and 1997................    F-3
Consolidated Statements of Operations for the Years Ended
     December 31, 1998, 1997 and 1996....................................    F-4
Consolidated Statements of  Stockholders' Equity for the
     Years Ended December 31, 1998, 1997 and 1996........................    F-5
Consolidated Statements of Cash Flows for the Years Ended 
     December 31, 1998, 1997 and 1996....................................    F-6
Notes to Consolidated Financial Statements for the Years Ended
     December 31, 1998, 1997 and 1996....................................    F-7


Index to Schedules
Schedule I   --  Summary of Investments--Other than 
     Investments in Related Parties......................................    S-1
Schedule II  --  Condensed Financial Information of
     Registrant-Balance Sheets...........................................    S-2
Schedule II  --  Condensed Financial Information of 
     Registrant-Statements of Operations.................................    S-3
Schedule II  --  Condensed Financial Information of 
     Registrant-Statements of Cash Flows.................................    S-4
Schedule IV  --  Reinsurance.............................................    S-5
Schedule V   --  Valuation and Qualifying Accounts.......................    S-6
Schedule VI  --  Supplemental Information Concerning
     Property/Casualty Insurance Operations..............................    S-7





















                                      F-1




<PAGE>




                          INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Chartwell Re Corporation
Stamford, Connecticut

           We have  audited  the  accompanying  consolidated  balance  sheets of
Chartwell Re Corporation and  subsidiaries as of December 31, 1998 and 1997, and
the related  consolidated  statements of operations,  stockholders'  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
on page F-1. These financial  statements and financial  statement  schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial  statements and financial  statement 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,  such  consolidated  financial  statements  present
fairly,  in all  material  respects,  the  financial  position of  Chartwell  Re
Corporation  and  subsidiaries as of December 31, 1998 and 1997, and the 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,  such  financial  statement  schedules,  when
considered in relation to the basic consolidated financial statements taken as a
whole,  present  fairly  in all  material  respects  the  information  set forth
therein.






DELOITTE & TOUCHE LLP
Parsippany, New Jersey

February 2, 1999


















                                      F-2




<PAGE>

                                     

                            CHARTWELL RE CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                  (dollars in thousands, except share amounts)

                                                           1998          1997
                                                        ----------     ---------
ASSETS:
Investments:
  Fixed maturities:
     Held to maturity (market value 1998,
     $31,786; 1997, $37,421)...........................$  30,539       $  36,630
     Available for sale (amortized cost 1998, 
     $637,747; 1997, $645,108).........................  659,752         657,973
  Other investments....................................   36,358          38,043
Investments held by managed syndicates.................   89,228
Cash and cash equivalents..............................   49,657          31,607
Cash and cash equivalents held by 
     managed syndicates................................   10,931
                                                       -----------     ---------
           Total investments and cash..................  876,465         764,253
Accrued investment income..............................   10,723          10,677
Premiums in process of collection......................  143,879         126,537
Reinsurance recoverable:   on paid losses..............   19,746          34,502
                           on unpaid losses............  239,059         202,593
Prepaid reinsurance....................................   40,933          29,929
Goodwill...........   .................................   58,467          61,006
Deferred policy acquisition costs......................   24,084          26,100
Deferred income taxes..................................   27,129          33,298
Deposits..............  ...............................   19,975          19,040
Other assets...........................................   76,349          67,549
                                                       -----------    ----------
           Total assets...............................$1,536,809    $  1,375,484
                                                       ===========     =========
LIABILITIES:
Loss and loss adjustment expenses......................$  878,617     $  788,240
Unearned premiums......................................   108,495        111,149
Contingent interest notes..............................    32,130         29,747
Other reinsurance balances.............................    53,323         33,723
Accrued expenses and other liabilities.................    62,888         47,967
Long term debt.........................................   108,477        104,126
                                                       -----------    ----------
           Total liabilities........................... 1,243,930      1,114,952
                                                       -----------    ----------

COMMITMENTS AND CONTINGENCIES (Note 14)
MINORITY INTEREST......................................        16             35
                                                       -----------    ----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share; 
     authorized 5,000,000 shares; no shares
     issued or outstanding.............................
Common stock, par value $0.01 per share; 
     authorized 20,000,000 shares; shares issued
     and outstanding 9,627,891 and 9,609,799 
     in 1998 and 1997, respectively.....................       96             96
Additional  paid-in capital.............................  212,156        211,864
Accumulated other comprehensive income:
  Net unrealized appreciation of investments............   12,534          8,741
  Foreign currency translation adjustment...............      362            348
Retained earnings.......................................   67,715         39,448
                                                       -----------    ----------
       Total stockholders' equity.......................  292,863        260,497
                                                       -----------   -----------
       Total liabilities and stockholders' equity......$1,536,809    $ 1,375,484
                                                       ===========   ===========
                 See notes to consolidated financial statements.


                                      F-3

<PAGE>

                            CHARTWELL RE CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                  (dollars in thousands, except share amounts)

<TABLE>
<CAPTION>

                                                                           1998            1997            1996
                                                                       --------------  -------------- ---------------
UNDERWRITING OPERATIONS:
<S>                                                                       <C>              <C>            <C>    
Premiums earned........................................................   $  229,504       $ 245,700      $  209,503
Net investment income..................................................       47,545          42,228          42,995
Net realized capital gains (losses)....................................        (339)             (3)           1,106
                                                                          -----------     -----------    ------------
           Total revenues..............................................      276,710         287,925         253,604
                                                                          -----------     -----------    ------------
Loss and loss adjustment expenses......................................      135,265         160,848         150,621
Policy acquisition costs...............................................       61,564          72,655          52,030
Other expenses.........................................................       23,989          16,473          15,774
                                                                          -----------     -----------    ------------
           Total expenses..............................................      220,818         249,976         218,425
                                                                          -----------     -----------    ------------
Income before taxes - underwriting operations..........................       55,892          37,949          35,179
                                                                          -----------     -----------    ------------
SERVICE OPERATIONS:
Service and other revenue..............................................       14,289          28,322           6,167
Equity in net earnings of investees....................................        5,327           4,794           3,559
Net investment income..................................................        1,092           1,104               9
                                                                          -----------     -----------    ------------
           Total revenues..............................................       20,708          34,220           9,735
                                                                          -----------     -----------    ------------
Other expenses.........................................................       12,888          18,084           2,233
Amortization of goodwill...............................................        2,298           2,297
                                                                          -----------     -----------    ------------
           Total expenses..............................................       15,186          20,381           2,233
                                                                          -----------     -----------    ------------
Income before taxes - service operations...............................        5,522          13,839           7,502
                                                                          -----------     ------------   ------------
CORPORATE:
Net investment income..................................................          232             243           1,085
Net realized capital gains.............................................          368                              51
General and administrative expenses....................................        2,988           1,903           1,162
Interest expense.......................................................       12,244          11,263           9,412
Amortization expense...................................................        1,255             991             723
                                                                          -----------     -----------    ------------
Loss before taxes - corporate..........................................     (15,887)        (13,914)        (10,161)
                                                                          -----------     -----------    ------------
Consolidated income before taxes and extraordinary item................       45,527          37,874          32,520
Income tax expense.....................................................       15,711          10,611           9,657
                                                                          -----------     -----------    ------------
Net income before extraordinary item...................................                       27,263          22,863
                                                                              29,816
Extraordinary item, net of tax.........................................                                        1,874
                                                                          -----------     -----------    -----------
Net income                                                                $   29,816       $  27,263      $   20,989
                                                                          ===========     ===========    ============
Per Share Data:
Basic earnings per share:
Net income before extraordinary item...................................    $    3.10        $   2.84        $   2.52
Extraordinary item, net of income tax..................................                                         0.21
                                                                          -----------     -----------    ------------
Net income                                                                 $    3.10        $   2.84        $   2.31
                                                                          ===========     ===========    ============
Weighted average number of common shares outstanding...................    9,625,900       9,601,314       9,081,867
                                                                          ===========     ===========    ============
Diluted earnings per share:
Net income before extraordinary item...................................    $    3.00        $   2.74        $   2.49
Extraordinary item, net of income tax..................................                                         0.20
                                                                          -----------     -----------    ------------
Net income                                                                 $    3.00        $   2.74        $   2.29
                                                                         ============     ===========    ============
Weighted average number of common and common equivalent shares
      outstanding......................................................    9,948,164       9,965,815       9,177,610
                                                                         ============     ===========    ============
                        See notes to consolidated financial statements.

</TABLE>
                                      F-4
<PAGE>

<TABLE>

                            CHARTWELL RE CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                             (dollars in thousands)
                                                                                   Accumulated Other
                                                                                Comprehensive Income
                                                                            ---------------------------
                                                                             Net                                           
                                                                             Unrealiz.                                              
                                                                             Apprec./      Foreign
                                                Common Stock     Additional  (Deprec.)     Currency                  Total
                                            ------------------   Paid-in     of            Translation   Retained    Stockholders'
                                              Shares    Amount   Capital     Investments   Adjustment    Earnings    Equity
                                            ---------  -------   ----------  -----------   -----------  ----------   --------------
<S>                                         <C>        <C>       <C>         <C>           <C>           <C>         <C>
          
Balance, December 31, 1995................  6,858,811  $    69   $  153,305  $  5,219      $      9      $  (6,120)  $ 152,482
Comprehensive income:
  Net income for the period...............                                                                  20,989      20,989
  Unrealized appreciation/(depreciation)
    during the period (net of tax of                                                         (7,897)                    (7,897)
($4,252))................................. 
  Reclassification adjustment for gains
    included in net income (net of tax of                                                     1,157                      1,157
$623)..................................... 
  Foreign currency translation adjustment.                                                    1,905                      1,905
                                            ---------  -------    ---------  -----------   -----------   ----------  -----------
Total comprehensive income................                                     (6,740)        1,905       20,989        16,154
Issuance of common stock..................  2,725,000       27       58,477                                             58,504
Common dividends - declared and paid......                                                                (1,150)       (1,150)
                                            ---------  -------    ---------  -----------   -----------   ----------  -----------
Balance, December 31, 1996................  9,583,811  $    96    $ 211,782  $ (1,521)     $  1,914      $ 13,719    $ 225,990
                                            =========  =======    =========  ===========   ===========   ==========  ===========

Balance, December 31, 1996................  9,583,811  $    96    $ 211,782  $ (1,521)     $  1,914      $ 13,719    $ 225,990
                                                                                     
Comprehensive income:
  Net income for the period...............                                                                 27,263       27,263
  Unrealized appreciation/(depreciation)     
    during the period (net of
    tax of $5,528)........................                                     10,265                                   10,265
  Reclassification adjustment for gains                    
    included in net income (net of tax of                                                                                   (3)
$(2)).....................................                                         (3)
  Foreign currency translation adjustment.                                                   (1,566)                    (1,566)
                                           ----------  -------    ---------  -----------   -----------   ----------  ------------
Total comprehensive income................                                     10,262        (1,566)       27,263       35,959
Issuance of common stock..................     25,988                    82                                                 82
Common dividends - declared and paid......                                                                 (1,534)      (1,534)
                                           ----------  -------    ---------  -----------   -----------   ----------  ------------
Balance, December 31, 1997................  9,609,799  $    96    $ 211,864  $  8,741      $    348      $ 39,448    $ 260,497
                                           ==========  =======    =========  ===========   ===========   ==========  ============

Balance, December 31, 1997................  9,609,799  $    96    $ 211,864  $  8,741      $    348      $ 39,448    $ 260,497
Comprehensive income:
  Net income for the period...............                                                                 29,816       29,816
  Unrealized appreciation/(depreciation)
    during the period (net of tax of $2,037)                                    3,783                                    3,783
  Reclassification adjustment for gains   
    included in net income (net of tax of                                          10                                       10
$5)
  Foreign currency translation adjustment.                                                        14                        14
                                           ----------  -------    ---------  -----------   -----------   ----------  ------------ 
Total comprehensive income................                                      3,793             14       29,816       33,623
Issuance of common stock..................     18,092                   292                                                292
Common dividends - declared and paid......                                                                 (1,549)      (1,549)
                                            =========  =======    =========  ===========   ===========   ==========  ============
Balance, December 31, 1998................  9,627,891  $    96    $ 212,156  $ 12,534      $     362     $ 67,715    $   292,863
                                            =========  =======    =========  ===========   ===========   ==========  ============

                   See notes to consolidated financial statements.

</TABLE>

                                      F-5
<PAGE>
<TABLE>




                            CHARTWELL RE CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                             (dollars in thousands)
<CAPTION>

                                                                           1998            1997            1996
                                                                         -----------     ----------    ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                       <C>              <C>             <C>   

      Net premiums collected...........................................   $  203,434       $ 174,864       $ 126,456
      Net losses and loss adjustment expenses..........................    (172,771)       (150,682)       (136,753)
      Overhead expenses................................................     (28,132)        (21,203)        (17,166)
      Service and other revenue........................................        1,868         (3,954)           5,992
      Net income taxes paid............................................     (12,000)         (6,982)         (5,378)
      Interest received on investments.................................       51,716          44,876          43,652
      Interest paid....................................................      (9,963)         (9,071)         (7,415)
      Other, net.......................................................        (884)             413           2,847
                                                                          -----------     -----------     -----------
           Net cash provided by operating activities...................       33,268          28,261          12,235
                                                                          -----------     -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of held to maturity securities.........................                        (596)         (8,105)
      Purchases of available for sale securities.......................    (164,082)       (275,794)       (640,182)
      Maturities of held to maturity securities........................        7,280           1,850             430
      Maturities of available for sale securities......................        8,639          31,415          20,729
      Sales of available for sale securities...........................      158,416         200,792         500,706
      Investment in Oak Dedicated Two Limited, net of cash acquired....     (23,048)
      Investment in Archer Dedicated plc, net of cash acquired.........      (4,600)
      Net cash from sale of Syndicate 866..............................       10,041
      Investment in Chartwell UK plc, net of cash acquired.............                                     (47,968)
                                                                          -----------     -----------     -----------
           Net cash used in investing activities.......................      (7,354)        (42,333)       (174,390)
                                                                          -----------     -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Net proceeds from issuance of common stock.......................                                       58,503
      Issuance of long term debt.......................................        5,624             693          48,057
      Redemption of long term debt.....................................      (1,710)         (3,476)        (48,280)
      Dividends paid...................................................      (1,549)         (1,534)         (1,150)
      Other, net.......................................................          292              82
                                                                          -----------     -----------     -----------
           Net cash provided by (used in) financing activities.........        2,657         (4,235)          57,130
                                                                          -----------     -----------     -----------
           Effect of exchange rate on cash.............................          410         (1,220)             346
                                                                          -----------     -----------     -----------
      Net increase (decrease) in cash and cash equivalents.............       28,981        (19,527)       (104,679)
      Cash and cash equivalents at beginning of year...................       31,607          51,134         155,813
                                                                          -----------     -----------     -----------
      Cash and cash equivalents at end of year.........................   $   60,588       $  31,607       $  51,134
                                                                          ===========     ===========     ===========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
      Net income.......................................................    $  29,816       $  27,263       $  20,989
      Adjustments to reconcile net income to net cash provided by
         operating activities:
           Extraordinary item..........................................                                        1,874
           Equity in net earnings of investees.........................      (3,445)         (4,794)         (3,559)
           Net realized capital (gains) losses.........................         (29)               3         (1,158)
           Contingent interest.........................................        2,383           2,206           2,045
           Deferred policy acquisition costs...........................        2,016         (8,197)             906
           Unpaid loss and loss adjustment expenses....................      (1,045)          40,382           6,391
           Unearned premiums...........................................      (2,654)          29,550         (8,974)
           Other reinsurance balances..................................        8,596          10,438           6,475
           Reinsurance recoverable.....................................     (21,710)        (34,951)         (6,710)
           Amortization of goodwill....................................        2,381           2,476             132
           Deferred income taxes.......................................        6,169          12,020         (2,499)
           Net change in receivables and payables......................        8,920        (45,627)         (1,882)
           Other net...................................................        1,870         (2,508)         (1,795)
                                                                          -----------     -----------     -----------
           Net cash provided by operating activities...................    $  33,268       $  28,261       $  12,235
                                                                          ===========     ===========     ===========
                        See notes to consolidated financial statements.

</TABLE>
                                      F-6
<PAGE>




                            CHARTWELL RE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a) Basis of  Presentation--Chartwell Re Corporation (the "Company") is
an insurance  holding  company  which  conducts  business  through its principal
indirectly  owned  operating   subsidiaries,   Chartwell   Reinsurance   Company
("Chartwell  Reinsurance"),  The Insurance  Corporation of New York  ("INSCORP")
(formerly,  The  Reinsurance  Corporation  of New York) and  Chartwell  Managing
Agents Limited ("CMA"), a managing agency in the Lloyd's  marketplace which is a
wholly-owned subsidiary of Chartwell UK plc ("Chartwell UK").
         The  consolidated  financial  statements  include  the  accounts of the
Company and all  subsidiaries.  All significant  inter-company  transactions and
accounts have been eliminated in consolidation.
         Due to custom and practice in the Lloyd's  market,  the fiscal year end
for  Chartwell UK is  September  30.  Therefore,  the Company  consolidates  the
results of Chartwell  UK and  subsidiaries  on a one quarter lag.  There were no
events  affecting  Chartwell  UK during the period from  October 1, 1998 through
December 31, 1998 which would have a material  impact on the financial  position
of the Company.
         Investments  in companies in which the Company owns 20 to 50 percent of
the voting  common  stock or has the ability to exercise  significant  influence
over the  operating  and  financial  policies of the investees are accounted for
under the equity method.
         (b)  Investments--Fixed  maturity  securities are categorized as either
assets held to maturity or as  available  for sale.  Securities  on deposit with
state regulatory authorities are designated as held to maturity and are recorded
at  amortized  cost.  The  Company has both the ability and intent to hold these
securities  until their maturity.  All  investments  designated as available for
sale are stated at  aggregate  market  value with  unrealized  appreciation  and
depreciation  reported as a separate  component of stockholders'  equity, net of
applicable deferred income taxes.
         Realized  gains and losses on sales of securities are determined on the
specific identification method. Investment income is recognized when earned.
         (c)  Investments  and  Cash  and  Cash   Equivalents  Held  By  Managed
Syndicates  - The Company has  included in the  consolidated  balance  sheet its
pro-rata  share of the  investments  and cash and cash  equivalents  held by CMA
managed  syndicates.  Such pro-rata  share is determined  based on the Company's
percentage of capacity owned through its dedicated corporate capital vehicles.
         (d) Cash and Cash Equivalents--The  Company considers all highly liquid
investments  with a maturity of three  months or less when  purchased to be cash
equivalents.
         (e)  Premiums  Earned  and  Unearned   Premiums--   Premiums,   net  of
reinsurance  ceded,  are  recognized as income  ratably  during the terms of the
related insurance and reinsurance  contracts.  Unearned and prepaid  reinsurance
premium  reserves are  established  to cover the  unexpired  portion of premiums
written.  Such reserves are computed by pro rata methods for direct business and
are established based on reports received from ceding companies for reinsurance.
         The Company  estimates and accrues for unreported  premiums and losses,
as well as premium and commission  adjustments on retrospectively rated or other
experience rated reinsurance  contracts,  based on the difference  between total
costs before and after the experience  under the contract (the  with-and-without
method).  These  estimates of experience to date are based on  statistical  data
with subsequent adjustments recorded in the period in which they become known.
         (f) Profit Commissions--Profit commissions earned on business emanating
from Lloyd's syndicates are estimated,  earned and recorded using studies of the
profitability  of the business  underwritten.  Profit  commission  estimates are
continually monitored and reviewed. As new information is received,  changes are
reflected  in current  operations  with final  settlement  three years after the
underwriting year to which it relates.
         (g) Deferred Policy  Acquisition  Costs--Acquisition  costs,  comprised
primarily of  commissions,  are deferred and amortized  over the period in which
the related premiums are earned.  Deferred policy acquisition costs are reviewed
to determine  that they do not exceed  recoverable  amounts,  after  considering
investment income.
         (h)   Deposits--Deposits   are  those  premiums  paid  in  relation  to
reinsurance  contracts  which do not  qualify  as a  transfer  of risk under the
Company's  accounting  policies.  The deposits earn interest at the  contractual
amounts set forth in the reinsurance contracts.
         (i) Loss and Loss Adjustment  Expenses--The liability for loss and loss
adjustment  expenses  ("LAE") is based on reports and individual  case estimates
and  additional  estimates  provided by the Company's  claims  department.  This
liability  also  includes an amount for loss and LAE  incurred  but not reported
based on past  experience  of the  Company  and the  reinsurance  and  insurance
industries.  These  estimates  are regularly  reviewed  and, as new  information
becomes known, the liability is adjusted as necessary. Such adjustments, if any,
are reflected in results of operations in the period in which they become known.

                                      F-7
<PAGE>

          (j) Income Taxes--Income taxes are  accounted  for using the asset and
liability  method  pursuant  to  Statement  of  Financial  Accounting  Standards
("SFAS") No. 109,  "Accounting for Income Taxes."  Deferred taxes are recognized
for  the  tax  consequences  of  "temporary  differences"  by  applying  enacted
statutory tax rates  applicable to future years to differences  arising  between
the financial  statement  carrying  amounts and the tax bases of existing assets
and liabilities. SFAS No. 109 requires the recognition of future tax benefits to
the extent that realization of such benefits is "more likely than not."
         Provision for U.S. income  taxes on undistributed earnings  of  foreign
subsidiaries is made only on those amounts in excess of the funds  considered to
be permanently  reinvested.  Repatriation of undistributed  earnings of non-U.S.
subsidiaries is done only when it is tax efficient to do so.
         (k)  Goodwill--Goodwill  represents the unamortized  excess of purchase
price  over the fair  value of net  assets of  acquired  entities.  Goodwill  is
amortized  generally on a  straight-line  basis over periods not to exceed forty
years. On a periodic basis, the Company  estimates the future  undiscounted cash
flows of the  business to which it relates in order to ensure that the  carrying
value of goodwill has not been  impaired.  If  impairment  exists,  the carrying
amount of the  goodwill  is reduced by the  estimated  shortfall  of cash flows.
Amortization  charged to  operations  for each of the years ended  December  31,
1998,  1997 and 1996 was  $2,381,000,  $2,476,000  and  $132,000,  respectively.
Accumulated  amortization  of  goodwill  at  December  31,  1998  and  1997  was
$6,593,000 and $4,679,000 respectively. Approximately $1,575,000 and $2,042,000,
respectively, of accumulated amortization at December 31, 1998 and 1997 reflects
the effect of foreign currency fluctuations on goodwill related to Chartwell UK.
         (l)  Insurance   Brokerage  Assets  and  Liabilities  -  The  following
fiduciary  assets and liabilities  maintained by the Company's  insurance agency
subsidiaries  on behalf of the insureds are  presented  net in the  consolidated
financial statements at December 31, 1998 and 1997 (in thousands):

                                                  1998          1997
                                              -----------    -----------
Cash........................................$    6,132      $   6,397           
Accounts receivable.........................$   20,566      $  19,559           
Accounts payable............................$  (26,698)     $ (25,956)
                                                                  

         (m)  Comprehensive  Income--In  June  1997,  the  Financial  Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting  Comprehensive Income,"
which became effective for the Company  beginning  January 1, 1998. SFAS No. 130
established  standards for reporting and display of comprehensive income and its
components   (revenues,   expenses,   gains  and   losses)  in  a  full  set  of
general-purpose  financial  statements.  Comprehensive  income  consists  of net
income, foreign currency translation adjustment and net unrealized  appreciation
(depreciation) of investments and is presented in the Consolidated  Statement of
Stockholders'  Equity.  The  adoption  of  SFAS  No.  130 had no  impact  on the
Company's  financial  position or results of  operations.  Prior year  financial
statements have been reclassified to conform to the SFAS No. 130 requirements.
         (n) Per Share  Data--Basic  and  diluted  earnings  per share have been
calculated in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings
per share are calculated based upon the weighted average number of common shares
outstanding.  Diluted  earnings per share are calculated based upon the weighted
average  number  of  shares  outstanding  increased  to  include  the  number of
additional  common  shares  that would  have been  outstanding  if all  dilutive
potential common shares had been issued. The 1996 basic and diluted earnings per
share do not  include  the  results of  Chartwell  UK because  their  results of
operations  subsequent to the acquisition of Chartwell UK to the end of the year
were  immaterial to Chartwell.  The  following is a  reconciliation  of weighted
average  common  shares  outstanding  to  weighted  average  common  and  common
equivalent  shares  outstanding  for the years ended December 31, 1998, 1997 and
1996:

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

Weighted average common shares outstanding.... 9,625,900   9,601,314   9,081,867
Dilutive effect of:
      Common Stock Options....................   231,157     258,458      64,554
      Common Stock Warrants...................    91,107     106,043      31,189
                                              -----------   ---------  ---------

Weighted average common and common 
      equivalent shares outstanding........... 9,948,164   9,965,815  9,177,610
                                              ===========  =========  ==========
                                     


                                       F-8

<PAGE>

         (o)  Minority   Interest--Minority  interest  represents  the  minority
stockholders'  proportionate  share of the  equity of  certain  subsidiaries  of
Chartwell UK.
         (p)  Foreign  Currency  Translation--  Adjustments  resulting  from the
translation of the financial statements of non-U.S. subsidiaries to U.S. dollars
are  reported  as a  separate  component  of  stockholders'  equity.  Assets and
liabilities denominated in foreign currency are translated at the exchange rates
in effect at the balance  sheet date.  Results of operations  are  translated at
average exchange rates during each period.
         (q)  Disclosure  about Fair Value of Financial  Instruments  - SFAS No.
107,  "Disclosures  About  Fair  Value  of  Financial   Instruments,"   requires
disclosures of the estimated fair market value of certain financial instruments.
In cases where quoted market prices are not readily  available,  fair values are
based on estimates that use present value or other valuation techniques.
         (r) Management  Estimates--The  consolidated  financial statements have
been prepared in accordance with generally accepted  accounting  principles.  In
preparing the consolidated financial statements,  management is required to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the consolidated  statements of the financial condition and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ
from those  estimates.  The Company's  most  significant  estimates  concern the
liability for loss and LAE, described above.
         (s) New  Accounting  Standards--In  June 1998, the FASB issued SFAS No.
133,  "Accounting  for Derivative  Instruments  and Hedging  Activities,"  which
becomes  effective  for the Company  January 1, 2000.  SFAS No. 133  establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts,  and for hedging activities.
The Company will be required to recognize  all  derivatives  as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  The accounting for a change in the fair value of a derivative in
earnings or other  comprehensive  income will depend on the  intended use of the
derivative and the resulting designation. Derivatives can be designated as (a) a
hedge of the  exposure  to changes in the fair  value of a  recognized  asset or
liability or a firm  commitment,  (b) a hedge of the  exposure to variable  cash
flows  of a  forecasted  transaction,  or (c) a hedge  of the  foreign  currency
exposure  of a net  investment  in  foreign  operations,  an  unrecognized  firm
commitment,  an  available-for-sale  security, or a foreign currency denominated
forecasted transaction.
         The difference between a derivative's  previous carrying amount and its
fair value at the date of  implementation of SFAS No. 133 shall be reported as a
transition adjustment.  Such adjustment shall be reported in net income or other
comprehensive  income as the effect of a change in  accounting  principle and be
presented in a manner similar to the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, "Accounting Changes."

         The Company is currently reviewing  the impact of the implementation of
SFAS No. 133 on its financial statements.
         (t)  Reclassification--Certain  account  balances  from  prior  years'
presentations   have  been   reclassified  to  conform  with  the  current  year
presentation.

2.       ACQUISITIONS AND DISPOSITIONS

Chartwell UK Acquisition
         On November 19, 1996, Chartwell Holdings Limited ("Holdings  Limited"),
a newly-formed, indirect wholly-owned subsidiary of the Company acquired 100% of
the outstanding stock (the "Acquisition") of Chartwell UK (formerly Archer Group
Holdings  plc) in  exchange  for cash and loan notes  ("Loan  Notes").  The Loan
Notes,  guaranteed by First Union National Bank N.A., pay interest semi-annually
at one percent  below the Sterling  London  Interbank  Offered  Rate  ("Sterling
LIBOR") and, unless previously  redeemed or purchased,  mature in June 2002. The
Loan Notes are transferable, subject to certain restrictions, but are not listed
on any exchange.  Prior to the Acquisition,  Chartwell UK was publicly traded on
the London Stock Exchange.
         The  Acquisition  has been  accounted for under the purchase  method of
accounting.  Accordingly,  the  purchase  price was  allocated to the net assets
acquired based on the preliminary determination of the respective fair values at
the date of acquisition,  which were estimated based upon information  available
at December  31,  1996.  During 1997,  the Company  decreased  the fair value of
tangible net assets acquired by  approximately  $6,642,000,  as more information
became available. Goodwill of approximately $58,936,000,  representing the final
determination  of the fair value of net assets acquired over the purchase price,
is being amortized on a straight-line basis over twenty-five years.


                                      F-9

<PAGE>


         The purchase price presented at the U.S. Dollar  equivalent at the date
of  acquisition,  was  determined  to be  $60,289,000  and was  allocated to the
respective net assets and liabilities received as follows (in thousands):

Historical book value of Chartwell UK.........................     $  6,044
                                                                ------------
Acquisition adjustments:
      Deferred taxes..........................................      (1,666)
      Accrued expenses........................................      (8,072)
      Other assets............................................        5,047
                                                                ------------
                                                                    (4,691)
Fair value adjustment - Goodwill..............................       58,936
                                                                ============
Total purchase price..........................................     $ 60,289
                                                                ============


         Results of Chartwell  UK's  operations  from the date of acquisition to
December 31, 1996 were not material to the consolidated  financial statements of
the  Company  and,  accordingly,  have  not  been  included  in  such  financial
statements.

Other Transactions
         On  September  30, 1998,  Chartwell  Reinsurance  acquired  100% of the
outstanding  stock of Oak Dedicated Two Limited (formerly LIMIT (No. 8) Limited)
in exchange for cash of  (pound)3.3  million ($5.4  million).  Oak Dedicated Two
Limited is a corporate  member of Lloyd's which  underwrites a total capacity of
(pound)41.7  million ($69.2  million) for the 1998 year of account on syndicates
managed by CMA.
         On October 28, 1998,  Holdings Limited commenced the acquisition of the
remaining 70.8% of the Ordinary Shares and the remaining 69.3% of the Preference
Shares of Archer  Dedicated  plc  ("Archer")  in exchange for cash of (pound)5.7
million  ($9.5  million).  Archer is a holding  company for ADIT One Limited,  a
Lloyd's  dedicated  corporate  capital vehicle formed in 1994 to provide a means
for investors to participate  exclusively in underwriting on syndicates  managed
by CMA.  ADIT One Limited  underwrote a total  capacity of  (pound)45.4  million
($75.4 million) for the 1998 year of account on syndicates managed by CMA.
         On September  10,  1998,  Chartwell UK sold the business of Shead Motor
Policies at Lloyd's  ("Syndicate 866") and Archer Personal Lines in exchange for
cash of (pound)6.1 million ($10.0 million).

Pro Forma Information
         The  following  pro  forma  unaudited   consolidated  income  statement
information for the Company for the year ended December 31, 1996 is presented as
though the acquisition of Chartwell UK, the issuance of 2,725,000  common shares
through a public  offering  (See Note 15) and the  redemption  by  Chartwell  Re
Holdings  Corporation  ("Re Holdings") of 35% of its  outstanding  10.25% Senior
Notes due 2004  ("Senior  Notes")  (See Note 13) had occurred on January 1, 1996
(in thousands, except per share amount):

                                                                     1996
                                                              --------------
Total revenues................................................ $     292,627
Net income....................................................        25,484

Basic earnings per share...................................... $        2.66
Diluted earnings per share....................................          2.63

         This  pro  forma   financial   information   has  been   prepared   for
informational   purposes  only  and  includes   certain   adjustments   such  as
amortization  expense as a result of  goodwill  and certain  other  adjustments,
together with related income tax effects. The pro forma financial information is
not necessarily  indicative of the results of operations as they would have been
had the transactions been consummated on the assumed dates.


                                      F-10

<PAGE>

3.    BUSINESS SEGMENTS

     In June 1997, the FASB issued SFAS No. 131,  "Disclosures About Segments of
an Enterprise and Related Information Footnotes," which became effective for the
Company  beginning  January 1, 1998. SFAS No. 131 establishes  standards for the
way public business  enterprises  report  information about operating  segments,
products and services,  geographic areas and major customers in annual financial
statements and related footnote disclosures. The adoption of SFAS No. 131 had no
impact on the Company's financial position or results of operations.  Prior year
segment  information  has been  reclassified  to  conform  to the  SFAS No.  131
requirements.
         The Company's  operations have been classified into four segments.  The
Reinsurance,  Controlled Source Insurance and CMA Dedicated  Facilities segments
include the pre-tax results of the insurance and reinsurance entities over which
management of the Company is responsible for making all underwriting  decisions,
including Chartwell  Reinsurance,  INSCORP, Oak Dedicated Limited, Oak Dedicated
Two Limited and ADIT One Ltd. The insurance and reinsurance  operations of these
entities have been  separated  among the three segments based upon the nature of
the clientele and their business or products.
         The Reinsurance  products  include treaty  reinsurance  written through
reinsurance brokers for casualty and, to a lesser extent, property risks as well
as for marine and aviation  risks.  The  Controlled  Source  Insurance  products
include  property and  casualty  insurance  written  through  specialty  program
administrators. The CMA Dedicated Facilities products include marine, non-marine
property,  non-marine liability,  aviation, motor and life business underwritten
by Lloyd's syndicates.
         The  Service  Operations  segment  includes  the pre-tax  results  from
services or capital provided to or investments in insurance  entities over which
management of the Company does not influence the underwriting  decisions and the
pre-tax results of Chartwell  Advisers  Limited and CMA, net of related goodwill
amortization.  Corporate items relate primarily to capital costs associated with
the  Company's  debt  as well  as  unallocated  employee  expenses  incurred  in
connection with the investigation of possible acquisition targets.
         The accounting policies of the operating segments are the same as those
described in Note 1 of Notes to Consolidated  Financial Statements.  The measure
of profitability  of the insurance  segments is composite  underwriting  result,
which  represents  gross profit margin on insurance  products  before  insurance
administrative expenses and consists of premiums, less loss and LAE, acquisition
costs and commissions.  The measure of  profitability of the service  operations
segment is net income (loss) before taxes,  excluding  non-recurring  investment
and foreign exchange gains and losses.
         Assets for each segment are reported based on a specific identification
basis. The insurance segments' assets primarily consist of cash and investments,
premiums  in  process  of  collection,   reinsurance  recoverable  and  deferred
acquisition costs. The service operations  segment's assets primarily consist of
cash and investments, goodwill and service receivables.




                                      F-11
<PAGE>

<TABLE>

         Summarized  financial  information  concerning the Company's  operating
segments is shown in the following table (in thousands):
<CAPTION>

                                                     Controlled         CMA
                                                       Source        Dedicated       Service
                                     Reinsurance     Insurance      Facilities      Operations    Corporate       Total
                                    --------------  --------------  ------------   ------------  ------------    ---------
1998
<S>                                    <C>              <C>            <C>             <C>            <C>        <C>
Segment profit or loss:
  Total revenues                       $  156,234       $  48,681      $  71,795       $  20,708      $   600    $ 298,018
  Net investment income                    34,541           6,125          6,879           1,092          232       48,869
  Composite underwriting result            20,859           5,988          5,828                                    32,675
  Income (loss) before taxes               44,582           6,016          5,294           5,522      (15,887)      45,527
Segment assets:
  Deferred acquisition costs               17,592           6,492                                                   24,084
  Goodwill                                  1,532           5,032          8,123          43,780                    58,467
  Total assets                            671,991         591,341        195,169          45,887       32,421    1,536,809

1997
Segment profit or loss:
  Total revenues                       $  227,814       $  39,787      $  20,324       $  34,220      $   243    $ 322,388
  Net investment income                    36,053           5,851            324           1,104          243       43,575
  Composite underwriting result             9,467           2,013            717                                    12,197
  Income (loss) before taxes               35,097           3,047          (195)          13,839      (13,914)      37,874
Segment assets:
  Deferred acquisition costs               18,201           7,899                                                   26,100
  Goodwill                                  1,568           5,179                         54,259                    61,006
  Total assets                            676,263         575,534         14,950          59,511       49,226    1,375,484

1996
Segment profit or loss:
  Total revenues                       $  233,264       $  20,340                      $   9,735      $ 1,136    $ 264,475
  Net investment income                    37,093           5,902                              9        1,085       44,089
  Composite underwriting result             5,323           1,529                                                    6,852
  Income (loss) before taxes               34,160           1,019                          7,502      (10,161)      32,520
Segment assets:
  Deferred acquisition costs               11,928           5,975                                                   17,903
  Goodwill                                  1,625           5,304                         52,609                    59,538
  Total assets                            696,042         444,094                         87,800       29,928    1,257,864

</TABLE>

         Because of the nature of the insurance and reinsurance industries,  the
Company has no individual  or group which would be considered a major  customer.
The Company's principle areas of operation include the United States, the United
Kingdom and, to a limited  extent,  Canada and  continental  Europe.  Geographic
information is presented below (in thousands):

<TABLE>
<CAPTION>
                                                                        United       
                                                     United States      Kingdom      Other Foreign    Consolidated
                                                     --------------  --------------  --------------  --------------
                        1998
<S>                                                     <C>              <C>             <C>            <C>    

Total revenue........................................   $  210,334       $  85,390       $   2,294      $  298,018
Income before taxes..................................       42,900             380           2,247          45,527
Net income (loss)....................................       29,070           (616)           1,362          29,816
Identifiable net assets..............................    1,297,558         211,175          28,076       1,536,809
                        1997
Total revenue........................................   $  270,800       $  48,130       $   3,458      $  322,388
Income before taxes..................................       28,853           5,057           3,964          37,874
Net income...........................................       22,263           2,310           2,690          27,263
Identifiable net assets..............................    1,250,477          97,281          27,726       1,375,484
                        1996
Total revenue........................................   $  259,427       $   2,124       $   2,924      $  264,475
Income before taxes..................................       27,956             992           3,572          32,520
Net income...........................................       17,711             699           2,579          20,989
Identifiable net assets..............................    1,169,387          60,755          27,722       1,257,864

</TABLE>

                                      F-12
<PAGE>



4.       INVESTMENTS

         The  amortized  cost and  estimated  market  values of  investments  in
securities with fixed maturities were as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                              
                                                                       Gross Unrealized       Estimated      
                                                       Amortized     ---------------------     Market      Carrying
                                                         Cost          Gains       Losses       Value       Amount
                                                     ------------    ----------   ---------   -----------  ----------
December 31, 1998 
Held to maturity:
  U.S. Treasury securities and obligations of U.S.
<S>                                                     <C>           <C>         <C>        <C>          <C>    
      government and government agencies.............   $  19,248     $    379    $          $  19,627    $  19,248
  Obligations of states and political subdivisions...       1,862           16                   1,878        1,862
  Debt securities issued by foreign governments......       8,376          807                   9,183        8,376
  Corporate securities...............................       1,053           45                   1,098        1,053
                                                        ---------    -----------  --------   ----------   ---------- 
Subtotal.............................................      30,539        1,247                  31,786       30,539
                                                        ---------    -----------  --------   ----------   ----------
Available for sale:
  U.S. Treasury securities and obligations of U.S.
      government and government agencies.............      56,841        2,618          6       59,453       59,453
  Obligations of states and political subdivisions...     163,369        6,652                 170,021      170,021
  Debt securities issued by foreign governments......      19,144          940          4       20,080       20,080
  Corporate securities...............................     227,775        8,224        704      235,295      235,295
  Redeemable preferred stock.........................      35,773        1,732         83       37,422       37,422
  Mortgage backed securities.........................     134,845        2,728         92      137,481      137,481
                                                        ---------    -----------  --------   ----------   ----------
Subtotal.............................................     637,747       22,894        889      659,752      659,752
                                                        ---------    -----------  --------   ----------   ----------
Total ...............................................   $ 668,286     $ 24,141    $   889    $ 691,538    $ 690,291
                                                        =========    ===========  ========   ==========   ==========

December 31, 1997
Held to maturity:
  U.S. Treasury securities and obligations of U.S.
      government and government agencies.............   $  20,594     $     95    $   107    $  20,582    $  20,594
  Obligations of states and political subdivisions...       1,868           11                   1,879        1,868
  Debt securities issued by foreign governments......      13,013          773         26       13,760       13,013
  Corporate securities...............................       1,155           45                   1,200        1,155
                                                        ---------    -----------  --------   ----------   ----------
Subtotal.............................................      36,630          924        133       37,421       36,630
                                                        ---------    -----------  --------   ----------   ----------


Available for sale:
  U.S. Treasury securities and obligations of U.S.
      government and government agencies.............      58,922          604          77       59,449       59,449
  Obligations of states and political subdivisions...     155,109        4,578          11      159,676      159,676
  Debt securities issued by foreign governments......      15,342          513           1       15,854       15,854
  Corporate securities                                    212,143        4,415         461      216,097      216,097
  Redeemable preferred stock.........................      36,780        1,602           3       38,379       38,379
  Mortgage backed securities.........................     166,812        2,064         358      168,518      168,518
                                                        ---------    -----------  ---------  -----------  -----------
Subtotal.............................................     645,108       13,776         911      657,973      657,973
                                                        ---------    -----------  ---------  -----------  -----------
Total ...............................................   $ 681,738    $  14,700    $  1,044   $  695,394   $  694,603
                                                        =========    ===========  =========  ===========  ==========


</TABLE>

                                      F-13
<PAGE>

         The amortized cost and estimated  market value of securities with fixed
maturities at December 31, 1998 and 1997,  by  contractual  maturity,  are shown
below (in thousands). Expected maturities may differ from contractual maturities
because  borrowers  may have the  right to call or  prepay  obligations  with or
without call or prepayment penalties.
<TABLE>
<CAPTION>

                                                                  Held to Maturity         Available for Sale
                                                               -----------------------    -----------------------
                                                                             Estimated                 Estimated
                                                                Amortized      Market     Amortized      Market
                                                                   Cost        Value         Cost        Value
                                                                ----------   ---------   -----------  -----------
December 31, 1998
<S>                                                              <C>         <C>         <C>          <C>    
Due in one year or less.......................................   $ 11,287    $ 11,334    $  22,516     $ 22,631
Due after one year through five years.........................     13,538      14,350      176,799      181,020
Due after five years through ten years........................      1,172       1,436      189,474      196,966
Due after ten years...........................................      4,542       4,666      114,113      121,654
Mortgage backed securities....................................                             134,845      137,481
                                                                ----------   ---------   -----------  ----------
                                                                 $ 30,539    $ 31,786    $ 637,747    $ 659,752
                                                                ==========   =========   ===========  ==========
December 31, 1997
Due in one year or less.......................................   $  8,763    $  8,856    $  13,106     $ 13,187
Due after one year through five years.........................     17,332      17,566      170,525      172,485
Due after five years through ten years........................      6,007       6,514      175,901      180,650
Due after ten years...........................................      4,528       4,485      118,764      123,133
Mortgage backed securities....................................                             166,812      168,518
                                                                ----------   ---------   -----------  ----------
                                                                 $ 36,630    $ 37,421    $ 645,108    $ 657,973
                                                                ==========   =========   ===========  ==========
</TABLE>

         Proceeds from sales of available for sale securities  (excluding  fixed
income  security   paydowns  and  calls)  during  1998,   1997,  and  1996  were
$90,588,000,   $77,339,000  and  $281,712,000,   respectively.  Gross  gains  of
$788,000,  $523,000 and $3,421,000 and gross losses of $759,000,  $526,000,  and
$2,264,000  were  realized on those sales  during the years ended  December  31,
1998, 1997 and 1996, respectively.

     Sources of net  investment  income for the years ended  December  31, 1998,
1997 and 1996 were as follows (in thousands):
                                                1998          1997         1996
                                               ------         ------      -----
Investment income:
  Fixed maturities.........................  $ 40,684      $ 39,752     $ 43,344
  Equity securities........................     2,618         2,841        1,150
  Other....................................     6,546         1,985          587
                                             ----------    ----------   --------
Total investment income....................    49,848        44,578       45,081
Investment expenses........................      (979)       (1,003)       (992)
                                             ----------    ----------   --------
Net investment income......................  $ 48,869      $ 43,575     $ 44,089
                                             ==========    ==========   ========
Realized gains (losses) on investments:
  Fixed maturities.........................  $    232       $    (4)    $    373
  Equity securities........................      (203)            1          784
                                             ----------    ----------   --------
Net realized capital gains (losses)........  $     29       $    (3)    $  1,157
                                             ==========    ==========   ========

         The net unrealized appreciation  (depreciation) of investments included
as a separate component of stockholders' equity at December 31, 1998 and 1997 is
as follows (in thousands):

                                                       1998         1997
                                                     ----------  ----------
Difference  between  market  value  and 
 amortized cost of available for sale portfolio:
   Fixed maturities.............................     $ 22,005    $ 12,865
   Equity securities............................       (2,721)        583
                                                     ----------  ----------
                                                       19,284      13,448
Deferred tax benefit (expense)..................       (6,750)     (4,707)
                                                     ----------  ----------
Net unrealized appreciation (depreciation)
   of investments...............................     $ 12,534    $  8,741
                                                     ==========  ==========

                                      F-14
<PAGE>

         Unrealized   appreciation   (depreciation)  of  investments  in  equity
securities  at December 31, 1998 and 1997  includes  gross  unrealized  gains of
$1,026,000  and  $1,513,000,   respectively,  and  gross  unrealized  losses  of
$3,747,000 and $930,000, respectively.
         At  December  31,  1998  and  1997,  bonds  with a  carrying  value  of
approximately  $35,895,000 and $36,630,000,  respectively,  were on deposit with
state  regulatory  authorities,  as required by law.  The Company also had cash,
cash equivalents and bonds totaling $16,449,000 and $18,681,000,  in trusts held
for the benefit of ceding companies at December 31, 1998 and 1997, respectively.
         At  December  31,  1998 and  1997,  the  Company  had  $17,105,000  and
$15,914,000, respectively, of investments held in collateral accounts subject to
certain restrictions in conjunction with a loan guarantee and a letter of credit
arrangement (Note 14).
         At December  31, 1998 and 1997,  the Company had loaned  securities  of
approximately  $12,819,000 and $14,443,000,  respectively,  at fair market value
under a security lending agreement administered through U.S. Bank, the Company's
primary custodian.  In connection with these transactions,  the Company holds as
collateral  securities  with a fair value equal to 102% of the fair value of the
securities lent to others. Such collateral  securities are marked to market on a
daily basis and  borrowers  are  required  to supply  additional  collateral  to
prevent any  collateral  from falling below 102% of the fair value of the loaned
securities.

5.       FAIR VALUE AND FINANCIAL INSTRUMENTS

         The following  methods were used in estimating  fair value  disclosures
for  significant  financial  instruments.  Cash  equivalents  approximate  their
carrying amount due to the short duration of those  investments.  Fixed maturity
securities are based upon quoted market information. The fair value of long term
debt at December 31, 1998 and 1997 which bears interest at a fixed rate is based
upon  current  rates  offered  to the  company  for  debt of  similar  remaining
maturity.  The fair value of debt at  December  31,  1998 and 1997  which  bears
interest at a variable rate is assumed to equal the carrying  value of the debt.
The  carrying  amounts and fair values of the  Company's  significant  financial
instruments are as follows (in thousands):
                                            1998                    1997
                                    ----------------------  --------------------
                                    Carrying                Carrying
                                     Amount   Fair Value     Amount   Fair Value
                                    --------  ----------    --------  ----------
Assets:
  Cash and cash equivalents.......  $ 60,588  $  60,588     $  31,607  $  31,607
  Fixed maturity securities.......   690,291    691,538       694,603    695,394
Liabilities:
  Long-term debt..................   108,477    112,162     $ 104,126  $ 109,722
  CI Note.........................   32,130      32,130        29,747     29,747
  Interest Rate Swap..............                  539

         On June 30,  1998,  the  Company  entered  into an  interest  rate swap
agreement  (the  "Swap")  for other than  trading  purposes  with First Union to
convert a specific  portion of the  floating  rate loans  outstanding  under the
Credit  Facility to a fixed  rate.  The Swap  requires  the company to pay First
Union  interest on a notional  amount  equivalent to the  principal  outstanding
((pound)10,280,000  at December 31, 1998) at a fixed annual rate  throughout the
term of the  related  debt  obligation  of 6.85% and for First  Union to pay the
Company  interest equal to the three month LIBOR interest rate determined at the
commencement of each calendar quarter. The Swap terminates on December 31, 2002.
The  weighted  average  LIBOR rate payable by First Union in 1998 under the Swap
was 7.62%.  The Swap is valued based on a mathematical  approximation  of market
values  derived from  proprietary  models as of a given date and calculated on a
mid-market basis excluding any bid/offered  spread that would be reflected in an
actual price quotation.
         The notional  amount set forth in the Swap does not represent an amount
exchanged by the Company and First Union,  and thus is not a measure of exposure
of  the  Company.  Since  First  Union  is not  required  to  collateralize  its
obligations  under the Swap,  the Company is exposed to loss if First Union were
to default on its obligations  under the Swap. The Company does not believe that
any reasonably  likely change in interest rates would,  as a result of the Swap,
have a  material  adverse  effect on the  financial  position,  the  results  of
operations  or cash flows of the Company.  The Swap was reviewed and approved by
the Company's Board of Directors.
         The  Company  entered  into a foreign  exchange  option  during 1996 to
protect  itself from the increasing  value of the British Pound Sterling  during
the period  commencing  from the initiation of the Acquisition to the closing of
the  transaction.   During  that  period,  the  Pound  Sterling  appreciated  by
approximately  6%  relative  to the  U.S.  Dollar,  resulting  in a gain of $2.8
million upon settlement of the option.

                                      F-15

<PAGE>

6.      FEDERAL INCOME TAXES

       The Company and it's majority owned U.S. subsidiaries file a consolidated
Federal  income tax return.  The 1998,  1997 and 1996  current  income taxes are
based upon regular taxable income.

       Consolidated  income before taxes and extraordinary  items for the years
ended  December  31,  1998,  1997  and  1996  consisted  of  the  following  (in
thousands):

                                              1998         1997         1996
                                            -------      --------      --------
United States...........................   $ 42,900      $ 28,853     $ 27,956
Foreign.................................      2,627         9,021        4,564
                                            -------      --------     ---------
  Total.................................   $ 45,527      $ 37,874     $ 32,520
                                           ========      ========     =========

     The components of income tax expense (benefit) for the years ended December
31, 1998, 1997 and 1996 are as follows (in thousands):
                                              1998         1997         1996
                                            -------      --------     ---------
U.S. Taxes:
Current................................... $  6,589      $  2,301     $  9,573
Deferred..................................    4,090         4,793         (929)
                                           --------      --------     ---------
                                             10,679         7,094        8,644
                                           --------      --------     ---------
Foreign Taxes:
Current...................................    5,032         2,183        1,013
Deferred..................................                  1,334
                                           --------      --------     ---------
                                              5,032         3,517        1,013
                                           --------      --------     ---------
Total U.S. and foreign income
     tax expense.......................... $ 15,711      $ 10,611     $  9,657
                                           ========      ========     =========

         The  difference  between  actual  income  tax  expense  and the  amount
computed by applying the statutory  Federal income tax rate of 35% for the years
ended December 31, 1998, 1997 and 1996, is as follows (in thousands):

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

Income tax expense at statutory rate.....  $ 15,934      $ 13,256     $ 11,382
Non-taxable investment income............    (2,773)       (2,598)      (1,400)
Foreign operations.......................       219          (682)
Amortization of goodwill.................       833           833           11
Valuation allowance......................     1,367
Other, net...............................       131          (198)        (336)
                                           --------      ---------    ---------
                                           $ 15,711      $ 10,611     $  9,657
                                           ========      =========    =========

      As of December 31, 1998, the Company and all includible  subsidiaries have
U.S. net operating loss  carryforwards  of  $15,717,000  which will be available
(subject to the annual  limitation  discussed  below) to offset regular  taxable
income during the carryforward  period (expiring 2007). The net operating losses
were generated by INSCORP prior to its  acquisition by the Company.  Due to this
change in ownership, as defined by Section 382 of the Internal Revenue Code, the
amount of net operating loss available to offset future taxable income each year
is limited to a maximum of $3,483,000.

      The  Company  provides  income  taxes  on the  undistributed  earnings  of
non-U.S.  subsidiaries  except to the extent that such  earnings are  considered
permanently  reinvested  outside the United  States.  It is not  practicable  to
determine the amount of income or withholding tax that would be payable upon the
remittance of those earnings.  However, the Company does not anticipate that the
income  or  withholding  tax  that  would  be  payable  upon  remittance  of the
undistributed  earnings  of  the  non-U.S.  subsidiaries  would  aggregate  to a
material amount.

                                      F-16

<PAGE>

     The tax effects of the temporary differences comprising  the  Company's net
deferred tax asset at December 31, 1998 and 1997 are as follows (in thousands):
                               
                                                          1998          1997
                                                       ----------    ----------

Deferred tax assets:
  Discounting of loss reserves......................   $ 32,846      $ 37,429
  Unearned premiums.................................      4,729         5,686
  Deposit accounting................................        715           980
  Allowance for uncollectible reinsurance...........      1,225         1,225
  Net operating losses..............................      5,375         6,802
  Purchase accounting adjustments...................      5,245         6,354
  Others, net.......................................      5,177         1,917
                                                       ----------    ----------
Gross deferred tax assets...........................     55,312        60,393
Less: Valuation allowance............................    (1,367)
                                                       ----------    ----------
Deferred tax assets after valuation allowance.......     53,945        60,393
                                                       ----------    ----------

Deferred tax liabilities:
  Deferred acquisition costs........................      8,429         9,135
  Earned but not reported premiums net of
     loss and expense...............................      3,223         3,141
  Unrealized appreciation of investments............      6,750         4,707
  Accrued market discount...........................         52           609
  Profit commission.................................        696         3,149
  Equity investment adjustments.....................      7,066         5,581
  Others, net.......................................        600           773
                                                       ----------    ----------
Gross deferred tax liabilities......................     26,816        27,095
                                                       ----------    ----------
Net deferred asset..................................   $ 27,129      $ 33,298
                                                       ==========    ==========

         During 1998, the Company  recorded a valuation  allowance of $1,367,000
to reduce its deferred tax asset in accordance  with the provisions of SFAS 109.
The  valuation  allowance is necessary  because  sufficient  uncertainty  exists
regarding the  realizability  of certain  foreign tax credits  generated  during
1998.  The  Company  will  periodically  review the  adequacy  of the  valuation
allowance and will recognize benefits only as the reassessment indicates that it
is "more likely than not" that these  benefits will be realized.  Realization of
the related tax benefits  will depend upon the  recognition  of future  earnings
from foreign  operations or a change in circumstances that cause the recognition
of these benefits to become "more likely than not."

7.       EMPLOYEE BENEFIT PLANS

         Eligible  employees  of  the  Company  may  participate  in  a  defined
contribution plan (the "Plan")  established by the Company.  Under the Plan, the
Company makes a matching  contribution  equal to 50% of each  employee's  pretax
contribution, not to exceed 6% of the employee's compensation.  Amounts expensed
under  the Plan for the  years  ended  December  31,  1998,  1997 and 1996  were
$209,000, $188,000 and $168,000, respectively.
         Certain  members of  management  will receive a supplement  to the Plan
payable at the earlier of age 65 or employment termination.  The supplement will
be equal to the aggregate  contributions  made with respect to the employee to a
trust established by the Company. Annual contributions to the trust are 13.5% to
20.0% of the employee's  base salary as stated in their  employment  agreements.
The amounts  expensed in 1998, 1997 and 1996 for the obligation  under this plan
amounted to $206,500 each year.
         Chartwell UK operates  contributory  defined contribution plans for its
U.K.  employees.  The  level  of the  contribution  varies  between  5% and  20%
dependent  upon the age of each  participant  at the  beginning of each calendar
year. The amount expensed in 1998 and 1997 for the obligation  under these plans
amounted to $2,305,000 and $2,523,000, respectively.

                                      F-17

<PAGE>

8.       RELATED-PARTY TRANSACTIONS

         The Company  holds an equity  investment  in certain  managing  general
agents ("MGAs") through which it writes  Controlled  Source Insurance  business.
Such  investments  are  accounted for under the equity  method.  At December 31,
1998,  the  carrying   values  of  the   investments  in  Florida   Intracoastal
Underwriters (25% owned), HDR Insurance Services (20% owned) and Inter-Reco (49%
owned) were $1,281,000, $894,000 and $181,000, respectively. For the years ended
December 31, 1998, 1997 and 1996, the Company incurred $21,554,000,  $19,536,000
and $10,038,000,  respectively,  of commission expense payable to these MGAs. At
December 31, 1998 and 1997,  the Company's  consolidated  balance sheet includes
$19,332,000 and $10,811,000,  respectively,  of agents' balances receivable from
these MGAs including  installment premiums deferred and not yet due. The current
portion of balances due from these MGAs are settled on a monthly basis.
         During 1992, Chartwell  Reinsurance entered into a reinsurance contract
with Old American Insurance  Company,  then a related party. For the years ended
December  31,  1997  and  1996,  Chartwell  Reinsurance  earned  $3,819,000  and
$1,716,000  of premium on this  contract  and  incurred,  prior to the effect of
reinsurance  ceded $2,750,000 and $1,506,000 in loss and LAE,  respectively.  At
December 31, 1997,  the loss and LAE liability for this contract was  $1,141,000
and unearned  premiums  were  $569,000,  respectively.  Old  American  Insurance
Company is no longer a related party.

9.       RESTRICTION ON PAYMENT OF DIVIDENDS

         The ability of the Company to pay cash  dividends  to  shareholders  is
dependent upon the amount of dividends received from Re Holdings,  whose ability
to pay  dividends  is  dependent  upon the  amount of  dividends  received  from
Chartwell Reinsurance and Holdings Limited.  Chartwell  Reinsurance's ability to
pay cash  dividends to the Company is, in turn,  restricted by law or subject to
approval  of  the  insurance  regulatory  authorities  of  Minnesota,  Chartwell
Reinsurance's  state of domicile.  Insurance  regulatory  authorities  recognize
statutory accounting practices for the ability of an insurer to pay dividends to
its shareholders.
         Under  the  insurance  laws  of the  State  of  Minnesota,  payment  of
dividends by Chartwell Reinsurance in any year is limited to the greater of: (i)
10% of capital and surplus as of the prior year end as  determined in accordance
with  statutory  accounting  practices;   or  (ii)  statutory  net  income  from
operations  of  the  next  preceding  year  excluding  realized  capital  gains.
Notwithstanding the foregoing, Chartwell Reinsurance may pay dividends only from
its earned surplus,  also known as unassigned  funds.  The maximum dividend that
can be paid without prior  approval of the  Minnesota  Department of Commerce in
1999 is $30.3 million.
         On  November  25,  1997,  Chartwell  Reinsurance  paid a  $3.0  million
dividend to Re Holdings. On February 24, 1999, Chartwell Reinsurance paid a $5.5
million dividend to Re Holdings. No dividends were paid in 1996 or 1998.
         In addition, under the insurance laws of the State of New York, INSCORP
may pay  dividends to Chartwell  Reinsurance  only out of its  statutory  earned
surplus.  The  maximum  amount  of  cash  dividends  INSCORP  may pay out of its
statutory  earned  surplus,  without prior  regulatory  approval,  is subject to
statutory  restrictions imposed by New York State Insurance Law. Generally,  the
maximum  amount  that  may be paid in any  twelve  month  period  without  prior
approval is the lesser of net  investment  income as defined or 10% of statutory
surplus to policyholders.
         In addition to the foregoing  limitation,  the New York State Insurance
Department, as is its practice in any change of control situation,  required the
Company to commit to preclude  INSCORP from paying any  dividends  for two years
from the date of its merger with the Company without prior regulatory  approval.
The two year period  ended on December  13,  1997.  INSCORP paid no dividends in
1997 or 1998.
         The  capital  and  surplus  of  Chartwell  Reinsurance  on the basis of
statutory accounting practices was $302,871,000 and $262,606,000 at December 31,
1998 and 1997,  respectively.  Net  income  of  Chartwell  Reinsurance  based on
statutory accounting principles was $23,791,000,  $10,239,000 and $6,156,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
         The capital and surplus of INSCORP on the basis of statutory accounting
practices  was  $131,747,000  and  $113,677,000  at December  31, 1998 and 1997,
respectively. Net income of INSCORP based on statutory accounting principles was
$22,627,000,  $14,234,000 and $22,270,000 for the years ended December 31, 1998,
1997 and 1996, respectively.

                                      F-18

<PAGE>
10.      REINSURANCE ASSUMED AND CEDED

         The  Company  cedes  a  portion  of  its  risks  by  utilizing  various
retrocessional  contracts.  These  contracts do not relieve the Company from its
obligations  to  policyholders.  The Company  regularly  evaluates the financial
condition  of its  reinsurers  and  monitors  concentration  of credit risk with
respect to amounts recoverable under these contracts.


       The effect of  reinsurance on premiums written and earned at December 31,
1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>                                            
                                      1998                       1997                       1996
                             ----------------------     -----------------------  ------------------------
                               Written      Earned       Written       Earned       Written      Earned
                             ----------------------     -----------------------  ------------------------
<S>                          <C>          <C>          <C>           <C>          <C>          <C>
Primary insurance.........   $ 116,853    $ 116,109    $ 105,635     $  86,343    $  68,308    $  66,709
Reinsurance assumed.......     226,098      228,288      257,135       245,662      195,530      210,871
Reinsurance ceded.........    (125,897)    (114,893)     (94,510)      (86,305)     (71,587)     (68,077)
                             ----------   ----------   ----------    ----------    ---------   ----------

Net premiums..............   $ 217,054    $ 229,504    $ 268,260     $ 245,700    $ 192,251    $ 209,503
                             ==========   ==========   ==========    ==========   ==========   ==========
</TABLE>

         Certain of the Company's  large assumed  reinsurance  programs were not
renewed for 1998.  During 1997, the Company's  earned premiums  related to these
programs were $48.2 million.
     The effect of  reinsurance on loss and LAE for the years ended December 31,
1998, 1997 and 1996 is a decrease of $74,498,000,  $70,135,000 and  $45,908,000,
respectively.
         In 1997 and 1998,  the Company  entered into  aggregate  excess of loss
treaties.  These treaties provide the Company with a layer of protection against
adverse  results in all lines of business in excess of  specified  loss  ratios.
Liabilities held by the Company under such treaties were $37.0 million and $10.5
million at December 31, 1998 and 1997, respectively.
         The reinsurance  recoverable  balance on paid and unpaid losses and LAE
from any single  entity or company in excess of 5% of the total at December  31,
1998 were as follows:  London Life and Casualty  Company,  $51,009,000  (19.7%),
Centre Reinsurance  (Bermuda) Limited,  $16,608,000  (6.4%), and Western General
Insurance Ltd., $15,017,000 (5.8%).
         In the  normal  course of  business,  the  Company  enters  into  trust
agreements effecting funds held arrangements or obtains letters of credit issued
by  banks  on  behalf  of the  retrocessionaires  which  are not  registered  as
"authorized  reinsurers"  with the  Minnesota  Department of Commerce or the New
York State Insurance Department. The letters of credit or trust agreements serve
as collateral to the extent of their limit for the  contingent  liability  which
exists in the event that the  retrocessionaire is unable to meet its obligations
assumed  under  a  retrocession   agreement.   Reinsurance   recoverables   with
"unauthorized  reinsurers" totaled  $153,709,000 and $119,768,000 as of December
31, 1998 and 1997,  respectively.  The respective  portions  collateralized were
$145,815,000 and $111,319,000.
         Included in deposits on the balance sheet at December 31, 1998 and 1997
are  $12,306,000  and   $11,548,000,   respectively,   deposited  with  European
International  Reinsurance Limited and $7,669,000 and $7,492,000,  respectively,
deposited with Centre Reinsurance  (Bermuda) Limited,  both of which are secured
by letters of credit as described in the preceding paragraph.

11.      PERMITTED STATUTORY ACCOUNTING PRACTICES

         Chartwell  Reinsurance,  INSCORP and Dakota prepare statutory financial
statements in accordance with accounting  principles and practices prescribed or
permitted  by  their  respective   domiciliary   state  insurance   departments.
Prescribed practices include state laws, regulations, and general administrative
rules,  as well as a variety of  publications  of the  National  Association  of
Insurance  Commissioners  ("NAIC").  Permitted  statutory  accounting  practices
encompass all  accounting  practices  that are not  prescribed;  such  practices
differ from state to state,  may differ from company to company  within a state,
and may change in the future.  In March 1998, the NAIC adopted the  Codification
of Statutory Accounting Principles ("Codification").  The Codification, which is
intended to  standardize  regulatory  accounting and reporting for the insurance
industry,  is  proposed  to be  effective  January 1, 2001.  However,  statutory
accounting  principles will continue to be established by individual  state laws
and  permitted  practices  and it is  uncertain  when,  or  if,  the  states  of
Minnesota,  New York and North Dakota will require  adoption of Codification for
the preparation of statutory financial statements. The Company has not finalized
the  quantification  of the effects of Codification  on its statutory  financial
statements.

                                      F-19
<PAGE>
12.      LOSS AND LAE
         The following table presents the activity in the liability for loss and
LAE for the years indicated (in thousands):
                                                 1998        1997        1996
                                             ----------   ----------  ----------
Loss and LAE at beginning of year..........  $ 788,240    $ 747,858    $ 741,467
Less reinsurance recoverables..............    202,593      172,377      179,854
                                             ----------   ----------  ----------
  Net balance at beginning of year.........    585,647      575,481      561,613
                                             ----------   ----------  ----------
Add provision for loss and LAE for
claims occurring during:
  Current year.............................    142,665      163,003      152,338
  Prior years..............................    (7,400)      (2,155)      (1,717)
                                             ----------   ----------  ----------
  Total incurred loss and LAE..............    135,265      160,848      150,621
                                             ----------   ----------  ----------
Less losses and LAE payments for claims 
occurring during:
  Current year.............................     42,102       45,286       29,554
  Prior Years..............................    130,669      105,396      107,199
                                             ----------   ----------  ----------
  Total paid loss and LAE..................    172,771      150,682      136,753
                                             ----------   ----------  ----------
Loss and LAE acquired as of acquisition date of:
  Oak Dedicated Two Limited................     50,293
  Archer Dedicated PLC.....................     41,124
                                             ----------   ----------  ----------
  Total loss and LAE acquired..............     91,417
                                             ----------   ----------  ----------
Net balance at end of year.................    639,558      585,647      575,481
Plus reinsurance recoverables..............    239,059      202,593      172,377
                                             ==========   ==========  ==========
Loss and LAE at end of year................  $ 878,617    $ 788,240    $ 747,858
                                             ==========   ==========  ==========

           As a result of changes in estimates of insured events in prior years,
the net  provision  for loss and LAE decreased by  $7,400,000,  $2,155,000,  and
$1,717,000 in 1998, 1997 and 1996, respectively.  These amounts, which represent
a decrease of 1.3%,  0.4% and 0.3% of the net loss and LAE at the  beginning  of
1998, 1997 and 1996, respectively,  are the result of normal reserve development
inherent  in the  uncertainty  of  establishing  loss and LAE  liabilities.  The
slightly larger  redundancy in 1998 is attributable to favorable  development in
asbestos and environmental reserves, which are in runoff.
         The  liabilities  include  provisions  for latent  injury or toxic tort
claims that cannot be estimated  with  traditional  reserving  techniques.  Case
reserves,  including LAE, have been established  upon  notification of loss from
ceding companies. In addition, the Company establishes additional liabilities in
excess of its share of the reserve  established  by the ceding  company to cover
exposures  on  both  known  and  unasserted   claims.   These   liabilities  are
periodically reviewed by the Company's claims department. In the reserve setting
process,  the Company also includes provisions for social inflation (i.e. awards
by judges and juries  that have  progressively  increased  in recent  years) and
evaluates  the  potential  effect  of any  legislative  changes  on its  reserve
liabilities.  However,  because of  inconsistent  court decisions in federal and
state  jurisdictions  and the wide  variation  among  insureds  with  respect to
underlying facts and coverage,  uncertainty  exists with respect to these claims
as to liabilities of ceding companies and, consequently, reinsurance coverage.
         At December 31, 1998,  the Company  carried case reserves and allocated
LAE  attributable to asbestos claims and  environmental  pollution claims in the
amount of $78,974,000  ($54,926,000 after reduction for reinsurance recoverable)
of which $10,752,000  ($6,645,000  after reduction for reinsurance  recoverable)
related to Chartwell  Reinsurance and $68,222,000  ($48,281,000  after reduction
for reinsurance recoverable) related to INSCORP. The net deficiency attributable
to  asbestos  claims and  environmental  pollution  claims  for the years  ended
December  31,  1998,  1997 and 1996 was $13.2  million,  $8.7  million  and $6.5
million, respectively. All of the net deficiency for the 1996 and 1997 years and
$11.3 million of the net deficiency  for the 1998 year results from  development
on business underwritten by INSCORP prior to its acquisition and, therefore,  is
subject to the  protection  provided by the CI Notes,  as  discussed in Note 13.
Management  believes  that  Chartwell  Reinsurance's  exposure to  asbestos  and
environmental losses is lessened because of its relatively recent entry into the
reinsurance  business in 1979, its low historical levels of premium volume prior
to 1985, and its retrocessional programs
         Environmental  claims are  particularly  challenging  to a  reinsurance
company.  Such claims involve  underlying  coverage disputes between the insured
party  and  its  insurer;  substantial  legal  defense  costs;  questions  as to
occurrences and  aggregation of claims and "late notice"  issues.  Environmental
liability  suits often  contain  multiple  party and multiple  site actions that
result in varied adjudications among insureds and their insurers. Such a complex
setting  forces the parties to find a reasonable  basis for settling the claims.
These widely varying  settlements  involving  primary  insurers force challenges
upon the  reinsurer  with respect to the extent to which they should  follow the
settlements of their ceding  companies.  Accordingly,  there can be no assurance
that  the  Company's  ultimate  liability  for  losses  and LAE  will  not  vary
significantly from amounts reserved.
                                      F-20
<PAGE>
13.      DEBT

       (a) Long-term debt--The components of long-term debt at December 31, 1998
and 1997 are as follows (in thousands):
                                                      1998          1997
                                                   ----------    ----------
Senior notes....................................   $  48,750     $  48,750
Bank loan.......................................      56,303        51,198
Other...........................................       3,424         4,178
                                                   ----------    ----------
Total...........................................   $ 108,477     $ 104,126
                                                   ==========    ==========


         On March  17,  1994,  the  Company  completed  a public  offering  (the
"Offering") of 10.25% Senior Notes due 2004,  having a total principal amount of
$75,000,000.   The  net  proceeds  to  the  Company   from  the  Offering   were
approximately  $71,934,000 after deducting expenses related to the Offering.  Of
the net  proceeds,  $30,000,000  was  contributed  to the  statutory  surplus of
Chartwell  Reinsurance  and  $23,400,000  was used to retire the Company's  then
outstanding  senior term loan. The remaining  funds were retained by the Company
for general  corporate  purposes,  which included the payment of interest on the
Senior Notes.
         On April 8, 1996,  Re  Holdings  redeemed  35% of the Senior  Notes for
$28,300,000,  including the redemption premium. Due to this early extinguishment
of debt, the Company  recognized an  extraordinary  loss of  $1,874,000,  net of
applicable income taxes of $1,000,000.  This extraordinary charge represents the
redemption  premium  and  35% of the  remaining  original  debt  issuance  costs
relating to the Senior Notes.
         On December  13, 1995,  the Company  entered  into a  $20,000,000  loan
agreement  with Fleet Bank (the "Fleet  Loan"),  with a variable  interest  rate
based upon the  Eurodollar  rate plus a margin  based upon the S&P rating of the
Notes,  scheduled  to expire on  December  13,  2002.  The Fleet Loan was repaid
during 1996.
         On November 14, 1996,  Re Holdings  entered into a new credit  facility
with First Union  National  Bank,  N.A.,  ("First  Union") as agent.  The credit
facility  provides  for a term loan in two  tranches,  A & B, (the "First  Union
Loans"),  with outstanding balances of $30,000,000 and $15,858,000  (denominated
in Pounds Sterling),  respectively at December 31, 1998 and outstanding balances
of $30,000,000  and  $13,983,000 at December 31, 1997. In addition,  at December
31, 1998,  $5,467,000  of the Term B Loan was used to guarantee  the Loan Notes.
Both loans are subject to a quarterly  repayment  schedule,  commencing on March
31, 1999 and ending on December 31, 2002.  Re Holdings used  $20,000,000  of the
First Union Loans to repay all outstanding borrowings under the $20,000,000 loan
agreement  with Fleet Bank.  Portions of the  remainder of the First Union Loans
were drawn down in cash by Re Holdings and  contributed to Holdings  Limited for
the  purchase of  Chartwell  UK, and portions  were  utilized to  guarantee  the
obligations  of  Holdings  Limited  under  the  Loan  Notes  (the  "First  Union
Guarantee").  The holders of Loan Notes may require the Company to redeem all or
part of their  holdings in June or December of each year.  As the Loan Notes are
redeemed  ("Loan Note  Redemptions"),  the First Union  Guarantee is reduced and
replaced  with loan  proceeds to fund the Loan Note  Redemptions.  During  1998,
$1,800,000  of Loan  Note  Redemptions  occurred,  resulting  in an  outstanding
balance of Loan Notes of $5,467,000 at December 31, 1998.
         Re Holdings  currently has a $60,000,000  Revolving  Credit  Commitment
from  First  Union  (the  "First  Union  Revolver"),  which was  increased  from
$35,000,000 in October of 1997.  The First Union Revolver  replaced Re Holdings'
$10,000,000 revolving credit facility from Fleet Bank (under which no borrowings
were  outstanding).  The First Union Revolver may be used to provide  additional
Loan Note  guarantees,  to support  underwriting  at  Lloyd's  by the  Company's
subsidiaries or for other general corporate purposes. At December 31, 1998, $1.4
million of the First Union credit facility was unused, $53.6 million was used to
finance unsecured letters of credit,  and $5.0 million was used to secure a line
of credit.  All obligations of Re Holdings under the First Union credit facility
are guaranteed by the Company.
         The other portion of long-term debt primarily  represents capital lease
obligations.
         The Company's  long-term debt agreement  contains general covenants and
restrictions  as well as financial  covenants  relating to, among other  things,
minimum earned surplus,  minimum statutory surplus,  minimum net worth,  certain
financial ratios,  and maintenance of minimum cash and cash equivalent  balances
on the books of the borrower.

                                      F-21
<PAGE>

         Annual  maturities of long-term  debt  outstanding at December 31, 1998
are as follows (in thousands):

1999.................................................    $  10,799
2000.................................................       14,271
2001.................................................       13,845
2002.................................................       20,812
2003.................................................            0
Future Years.........................................       48,750
                                                     --------------
                                                        $  108,477
                                                     ==============

          (b)  Contingent   Interest   Notes--In   conjunction   with  the  1995
acquisition  of  INSCORP  (the  "Merger"),   the  Company  assumed  all  of  the
obligations  under the  Contingent  Interest  Notes (the "CI Notes") of Piedmont
Management Company Inc. ("Piedmont"), INSCORP's former parent. The CI Notes were
issued  immediately  prior to the  Merger to protect  the  Company  against  the
possibility of adverse  development of INSCORP's reserves for losses and LAE and
long-tail casualty exposures (Note 12). The CI Notes were issued in an aggregate
principal amount of $1 million, with principal accruing interest at a rate of 8%
per annum, compounded annually. Such interest will not be payable until maturity
or earlier  redemption of the CI Notes.  In addition,  the CI Notes will entitle
the holders  thereof to receive at  maturity,  in  proportion  to the  principal
amount of the CI Notes held by them,  an aggregate of from $10 million up to $55
million  in  contingent  interest.  Settlement  of the CI  Notes  may be made by
payment of cash or, under certain specified conditions, by delivery of shares of
the Company's  common  stock.  The CI Notes mature on June 30, 2006. At December
31, 1998,  the CI Notes are recorded at the present value of the amount which is
reasonably  determined  to be payable at  maturity.  The Company  believes  that
INSCORP's  reserves for loss and loss  adjustment  expenses  are an  appropriate
estimate of projected  ultimate losses and loss  adjustment  expenses to be paid
and therefore, at this time, the maximum amount of contingent interest on the CI
Notes  is  presently  expected  to be paid at  maturity.  The CI  Notes  contain
covenants  which are similar in nature to those  provided  for in the  Company's
long-term debt.

         (c) Capital  Leases - During 1996,  the Company began  leasing  certain
facilities  and  equipment  under  agreements  which are  classified  as capital
leases. The leases have original terms of 3 to 5 years and have purchase options
at the end of the original  lease term. At the end of the term,  the Company may
purchase the equipment for a mutually agreeable price, renew the lease or return
the equipment to the lessor and enter into a new lease.  Leased  capital  assets
include  the  buildout  costs  of the  Company's  leased  office  space  for its
principal  executive  offices,  furniture and  equipment,  and  electronic  data
processing  hardware  and  software  and are  included  in Other  Assets  in the
consolidated  balance  sheet  at  December  31,  1998 and  1997 as  follows  (in
thousands):

                                                         1998          1997
                                                     ------------   -----------
Office space build-out costs.........................$    884       $ 1,179
Furniture and equipment..............................   2,302         2,648  
EDP hardware and software............................     569         1,137  
                                                     ------------   -----------
                                                     $  3,755       $ 4,964
                                                     ============   ===========

         Leased  capital   assets  are  amortized  to  interest   expense  on  a
straight-line  basis over the original  lease term.  For the year ended December
31, 1998,  the Company  recorded  $312,000 of interest  expense  related to such
leased assets.  Future minimum payments,  including  principal and interest,  by
year and in the aggregate,  under  non-cancelable  capital leases are as follows
(in thousands):

1999.................................................$       1,771
2000.................................................        1,440
2001.................................................        1,014
2002.................................................          435
                                                     -------------
                                                     $       4,660
                                                     =============

                                      F-22
<PAGE>

14.      COMMITMENTS AND CONTINGENCIES

         Operating  leases--The  Company  leases  office space for its principal
executive offices in the U.S. and U.K. under non-cancelable, renewable operating
leases expiring on July 31, 2006 and December 24, 2008,  respectively.  The rent
expense has been accounted for on a straight-line  basis after amortization of a
rent abatement allowance (on the U.S. lease).  Rental expense for 1998, 1997 and
1996 was $2,521,000, $2,828,000 and $1,386,000, respectively. The future minimum
rental payments,  exclusive of escalation clauses,  under the existing leases as
of December 31, 1998 are as follows (in thousands):

1999.................................................  $     2,489
2000.................................................        1,450
2001.................................................        1,560
2002.................................................        1,628
2003.................................................        1,725
Future Years.........................................        5,903


         Line of credit--The Company has a $60 million revolving credit facility
with First Union,  of which $1.4 million was unused,  $53.6  million was used to
finance unsecured letters of credit,  and $5.0 million was used to secure a line
of credit as of December 31, 1998.
         Loan  guarantees  and letters of  credit--At  December  31,  1998,  the
Company has  outstanding  loan guarantees and standby letters of credit totaling
$4,353,000  and  $68,905,000,  respectively.  The loan  guarantees  and  standby
letters of credit are in force for five years, for which the Company pays annual
fees of $562,000.  The loan  guarantees and letters of credit provide capital to
NLC Name No. 6 Limited, Riverside Underwriters Plc and Oak Dedicated,  corporate
members of Lloyd's,  to participate in certain  Lloyd's  syndicates for the 1995
Underwriting  Year  and  thereafter.  The  investments  in NLC  Name  No.  6 and
Riverside  Underwriters  Plc,  which amount to $16,429,000 at December 31, 1998,
are  included  in other  assets  with  corresponding  amounts  included in other
liabilities for the loan guarantees and letters of credit.
         Limited Partnership  Investment--In 1996, the Company made a commitment
to invest $15  million in a private  equity  fund,  High Ridge  Capital  Limited
Partnership,  which makes  investments  in the insurance  industry.  The Company
contributed a total of $9.8 million and $3.8 million to this fund as of December
31, 1998 and 1997, respectively.
         American  Eagle--In  1996 and early  1997,  the  Company  entered  into
certain  assumption of liability  endorsement  ("ALE")  agreements with American
Eagle Insurance Company ("American  Eagle"). On December 3, 1997, American Eagle
was placed in receivership by the Texas  Department of Insurance.  The Company's
contingent liability under these agreements was originally secured by $3,600,000
of funds held in trust.  As of December 31, 1998,  $1,200,000 of such funds have
been paid to the Company as  reimbursement  for losses incurred under the ALE's.
Since a significant  portion of the  Company's  liabilities  in connection  with
American Eagle are  colateralized by this trust fund,  management of the Company
does  not  presently  believe  that any  residual  exposure  resulting  from the
receivership  of American  Eagle is likely to have a material  adverse effect on
its financial position or results of operations.
          Lloyd's Names  exposure--The  Company's  balance sheet at December 31,
1998 includes a provision for potential exposure to certain of the Names who had
participated on syndicates  managed by CMA. The provision was established by the
Company based on actuarial  projections  of the expected  deterioration  for the
applicable  years of account.  Management  believes at the present time that the
provisions related to such potential exposure is sufficient.
          Other--The Company, Chartwell Reinsurance, INSCORP and CMA are subject
to the litigation of disputes in the normal course of their business. Management
does not believe that any pending  litigation  or  arbitration  to which it is a
party,  or of which any of its  properties  or assets are subject,  is likely to
have a materially adverse effect on its current financial position or results of
operations.

15.        PREFERRED AND COMMON STOCK

         The Company  completed a public offering of 2,725,000  shares of common
stock at $23.00 per share during the first half of 1996. The net proceeds to the
Company were $58,503,000 after deduction of underwriting  discount and expenses.
Of the net  proceeds,  $48,500,000  was  contributed  to Re  Holdings,  of which
$20,000,000  was contributed to the statutory  surplus of Chartwell  Reinsurance
and $28,500,000 was used to retire 35% of Re Holdings'  outstanding Senior Notes
plus accrued  interest (Note 13). The remaining  funds were retained for general
corporate purposes.

                                      F-23
<PAGE>

         In 1997,  the Board of Directors of the Company  approved a stockholder
rights plan.  Stockholders of record as of the close of business on May 22, 1997
received a dividend of one preferred  share  purchase right (a "Right") for each
outstanding  share of common  stock of the Company.  The Rights  attached to the
common  stock  certificates  then  outstanding  and  no  separate   certificates
representing the Rights were issued. The Rights expire on May 22, 2007.
         The Rights are  exercisable  only if a person or group  (other than the
Company,  certain affiliates of the Company and certain  inadvertent  beneficial
owners) either (i) acquired beneficial ownership of 20% or more of the Company's
common  stock or (ii)  commenced  or  announced  the intent to commence a tender
offer or exchange  offer that would lead to beneficial  ownership by a person or
group of 20% or more of the  Company's  common  stock.  Each Right  entitles its
holder to purchase 1/100 of a share of Junior Participating Cumulative Preferred
Stock at a purchase  price of $120,  subject to adjustment  from time to time to
prevent dilution.
         In  certain  cases  where an  acquirer  purchased  more than 20% of the
Company's  common  stock,  the Rights would allow  stockholders  (other than the
acquirer)  to purchase  shares of the  Company's  common  stock at 50% of market
price.  If the Company were acquired in a merger or other  business  combination
transaction,  under certain  circumstances  the Rights could be used to purchase
shares  in the  acquirer  at  50%  of  the  market  price.  Subject  to  certain
conditions, if a person or group acquired 20% but less than 50% of the Company's
common stock, the Company's board of directors could exchange each Right held by
stockholders (other than the acquirer) for one share of common stock. The Rights
can be redeemed by the  Company's  board of directors for $.001 per Right at any
time prior to the acquisition by any person or group of beneficial  ownership of
20% or more of the Company's common stock.

16.      STOCK OPTION PLANS AND COMMON STOCK WARRANTS

         During 1997, the Company  adopted the 1997 Omnibus Stock Incentive Plan
(the "1997  Plan") as the  successor  to the 1993 Stock  Option  Plan (the "1993
Plan")  which was adopted on October 15, 1993.  Under the 1993 Plan,  options to
acquire  1,000,000  shares of Common  Stock  were  authorized  to be  granted to
officers,  key  employees  and  directors  of the  Company  and  its  designated
subsidiaries.  Upon adoption of the 1997 Plan,  no further  awards shall be made
under the 1993 Plan and  107,000 of  previously  authorized  non-granted  shares
under the 1993 Plan  became  available  under the 1997 Plan.  The  Company  also
authorized an additional 800,000 shares to be granted under the 1997 Plan. Under
both plans, the options become exercisable at various dates.
         A total of  50,000  shares  are  available  for  grants of  options  to
non-employee  directors  until  December  31,  2006 under the 1996  Non-Employee
Directors Stock Option Plan. An option to purchase 1,000 shares of the Company's
Common Stock was granted to all  non-employee  directors in office at January 1,
1996 and  will be  granted  to all  non-employee  directors  on the date of each
annual meeting of  stockholders.  The options are  exercisable  after six months
from the grant date at a price equal to the fair value of the Company's stock on
the date of grant. The options expire ten years after the grant date.

         The total  number of options  available  to  purchase  shares of Common
Stock under the Company's stock option plans at December 31, 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>


                                              1998                     1997                      1996
                                     ----------------------   ----------------------    -----------------------
                                                  Weighted                  Weighted                 Weighted
                                                   Average                  Average                  Average
                                                  Exercise                  Exercise                 Exercise
                                      Shares        Price     Shares        Price        Shares      Price
                                     ---------   ---------    --------    ----------    ---------   -----------
<S>                                   <C>         <C>         <C>          <C>           <C>         <C>

Outstanding, beginning of year......  1,275,300   $ 24.55       876,400    $  21.92      672,900     $  21.00
Granted.............................    316,500     29.36       431,000       29.65      203,500        24.95
Exercised...........................   (15,000)     21.43       (22,400)      21.04
Cancelled...........................   (61,750)     29.42        (9,700)      22.01
                                      ---------               ----------                -------- 
Outstanding, end of year............  1,515,050     25.39     1,275,300       24.55      876,400        21.92
                                      ==========              ===========               ======== 
Options exercisable at end of year..    820,725                 665,040                  554,060
                                      ==========              ===========               ======== 
</TABLE>

                                      F-24
<PAGE>

         The Company  applies the  provisions of APB Opinion No. 25  "Accounting
for Stock  Issued to  Employees"  in  accounting  for its  stock  option  plans.
Accordingly,  no  compensation  expense has been  recognized for options granted
under its stock  option  plans and the Company  has adopted the  disclosure-only
provisions  of SFAS No. 123,  "Accounting  for  Stock-Based  Compensation."  Had
compensation  cost for the Company's  stock option plans been  determined  based
upon the fair value at the grant date for awards  under these  plans  consistent
with the methodology prescribed under SFAS No. 123, the Company's net income and
EPS amounts for the years ended December 31, 1998, 1997 and 1996 would have been
as follows (in thousands, except per share data):

                                                 1998         1997        1996
                                             ----------    ---------   ---------
Net income:
  As reported............................    $ 29,816      $27,263      $20,989
  Pro Forma..............................      27,850       26,270       20,709
Basic EPS:
  As reported............................     $  3.10        $2.84        $2.31
  Pro Forma..............................        2.89         2.74         2.28
Diluted EPS:
  As reported............................     $  3.00        $2.74        $2.29
  Pro Forma..............................        2.80         2.64         2.26

         The  Black-Scholes  Option  Pricing Model was used to estimate the fair
values of options granted during 1998,  1997 and 1996. The assumptions  used for
these grants included a 10-year average expected life for all years, zero-coupon
U.S.  Government  risk free interest  rates of 5.26%,  5.76% and 6.43% for 1998,
1997 and  1996,  respectively,  current  dividend  yield  rates of 1.00% for all
years,  and  volatility  of 30.63%,  32.34% and 39.35% for 1998,  1997 and 1996,
respectively.  The weighted  average fair values of options  granted  during the
years 1998, 1997 and 1996 were $13.46, $14.29 and $13.59, respectively.

       At December 31, 1998, there were warrants outstanding for the purchase of
335,002 shares of Common Stock at prices of $21 and $22 per share.

17.      EMPLOYEE STOCK PURCHASE PLANS

         The Company  established  an Employee  Stock Purchase Plan which became
effective  January 1, 1996.  Participating  employees are permitted to purchase,
annually,  shares of the Company's Common Stock through payroll deductions in an
amount  ranging  from 2% to 10% of the  employee's  base pay (as  elected by the
employee).  The purchase price for shares purchased in a particular plan year is
equal to the  lesser of (i) 85 percent  of the fair  market  value of the Common
Stock on the  beginning  of such plan year or (ii) 85 percent of the fair market
value  of the  Common  Stock  at the end of such  plan  year.  The  Company  has
authorized  100,000  shares of common stock for purchase under the plan of which
13,692,  11,587 and 12,381 were  purchased in January  1999,  February  1998 and
January 1997, respectively.
         Chartwell UK  established  an Employee Stock Purchase Plan which became
effective May 1, 1997.  Participating  employees  contribute savings to the Plan
ranging from (pound)5 to (pound)250 per month (as elected by the  employee).  At
the end of three years, the employees may use their savings to buy shares in the
Company at a price equal to 85% of the fair value of the Company's  Common Stock
as of the inception of the three year period.

                                      F-25

<PAGE>

18.   QUARTERLY FINANCIAL DATA (UNAUDITED)

         Summarized quarterly financial data is as follows (in thousands, except
per share data):

                                         First      Second    Third     Fourth
                                        Quarter     Quarter   Quarter   Quarter
                                       ---------  ---------  ---------  --------
For the year ended December 31, 1998
  Premiums earned......................$ 52,743   $ 56,430   $ 59,333  $ 60,998
  Net investment income................  11,892     12,173     12,182    12,622
  Net realized capital gains (losses)..      99        (39)       199     (230)
  Income tax expense...................   3,070      3,335      3,448     5,858
  Net income...........................   7,367      7,392      7,634     7,423
  Stockholders' equity................. 269,170    278,600    291,008   292,863
  Basic earnings per share.............    0.77       0.77       0.79      0.77
  Diluted earnings per share...........    0.73       0.74       0.77      0.75

For the year ended December 31, 1997
  Premiums earned......................$ 61,785   $ 73,890   $ 59,002  $ 51,023
  Net investment income................  10,210     11,202     10,943    11,220
  Net realized capital gains (losses)..     (20)       (29)       112       (66)
  Income tax expense...................   2,577      2,848      2,857     2,329
  Net income...........................   6,487      6,705      6,987     7,084
  Stockholders' equity................. 222,305    236,550    248,264   260,497
  Basic earnings per share.............    0.68       0.70       0.73      0.74
  Diluted earnings per share...........    0.66       0.68       0.69      0.70


                                      F-26
<PAGE>



                            CHARTWELL RE CORPORATION
                        SCHEDULE I-SUMMARY OF INVESTMENTS
                    OTHER THAN INVESTMENTS IN RELATED PARTIES
                              At December 31, 1998
                                 (in thousands)
                   Column A                   Column B   Column C     Column D
-------------------------------------------  ----------  ---------    ----------
                                                                      Amount at
                                                                     which shown
                                                                        in the
                                                         Fair          balance
                                              Cost       Value          sheet
                                    -------------------------------------------
Fixed Maturities:
 Bonds:
   United States Government and government
   agencies and authorities (1).............  $ 206,820   $ 212,467   $  212,088
      States, municipalities and political
      subdivisions (1)......................    165,231     171,899      171,883
      Foreign governments...................     27,520      29,263       28,456
      All other corporate bonds.............    232,942     240,487      240,442
  Redeemable preferred stock................     35,773      37,422       37,422
                                              ---------   ---------   ----------
         Total fixed maturities.............    668,286     691,538      690,291
                                              ---------   ---------   ----------
  Equity Securities-Common stocks of
      insurance  companies/partnership
      interests.............................     33,637      36,358       36,358
                                              ---------   ---------   ----------
         Total investments (2).............   $ 701,923   $ 727,896   $  726,649
                                              =========   =========   ==========

-------------------------------------
(1)Balance sheet value differs from column B and C because  category  includes a
combination of securities "Held to Maturity" and "Available for Sale." See Notes
1b and 4 of the audited consolidated financial statements.
(2)Excludes investments held by CMA managed syndicates.









                                      S-1

<PAGE>




                            CHARTWELL RE CORPORATION
           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                 BALANCE SHEETS
                                 (in thousands)
                                                             December 31,
                                                      --------------------------
                                                          1998           1997
                                                      -------------  -----------
ASSETS:
Investment in and receivable/payable 
     from/to subsidiaries............................ $  311,847      $  275,311
Cash and cash equivalents............................        269           2,073
Other assets.........................................     12,879          12,866
                                                      -------------   ----------
                                                      $  324,995      $  290,250
                                                      =============   ==========
LIABILITIES:
Contingent interest notes...........................  $   32,130       $  29,747
Other liabilities...................................           2               6
                                                      -------------   ----------
      Total liabilities.............................      32,132          29,753
                                                      -------------   ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00 per share;
     authorized 5,000,000 shares;...................
Common stock, par value $.01 per share; shares 
     issued and outstanding 9,627,891 and 9,609,799
     in 1998 and 1997, respectively.................          96              96
Additional  paid-in capital.........................     212,156         211,864
Net unrealized appreciation of investments..........      12,534           8,741
Foreign currency translation adjustment.............         362             348
Retained earnings...................................       67,715         39,448
                                                      -------------   ----------
      Total stockholders' equity....................      292,863        260,497
                                                      -------------   ----------
                                                      $  324,995      $  290,250
                                                      =============   ==========

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





                                      S-2

<PAGE>






                            CHARTWELL RE CORPORATION
           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF OPERATIONS
                                 (in thousands)
                                             1998           1997           1996
                                           ---------     ----------     --------
REVENUES:
Net investment income.....................  $   45       $    118       $    491
Other income..............................                                 2,802
                                           ----------    ----------     --------
      Total revenues......................      45            118          3,293
                                           ----------    ----------     --------
EXPENSES:
Interest and amortization.................   2,782          2,618          2,358
General expenses..........................     320            127            119
                                           ----------     ----------    --------
      Total expenses......................   3,102          2,745          2,477
                                           ----------      ---------    --------
Income (loss) before federal income
   taxes and equity in earnings of
   subsidiaries...........................  (3,057)        (2,627)           816
                                           ----------      ----------   --------

Federal income taxes:  
  Current.................................     360         (1,442)           241
  Deferred................................                   (149)
                                           ----------      ----------   --------
     Total income tax expense (benefit)...     360         (1,591)           241
                                           ----------      ----------   --------
Income (loss) before equity in undistributed
  income of subsidiaries..................  (3,417)        (1,036)           575
Equity in undistributed income of 
  subsidiaries............................  33,233         28,299         20,414
                                           ----------     ----------   ---------
Net income............................... $ 29,816       $ 27,263      $  20,989
                                          ===========    ===========   =========

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




                                      S-3

<PAGE>


                            CHARTWELL RE CORPORATION
           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                    1998        1997       1996
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income taxes (paid) recovered..............$   (810)     $  191   $  (210)
  Interest received on investments...............      45         113       494
  Overhead expenses..............................    (319)       (151)
  Service and other revenue......................                 525
  Other, net.....................................      33        (807)      758
                                                 ---------   ---------  --------
      Net cash provided by (used in)
      operating activities.......................  (1,051)       (129)    1,042
                                                 ---------   ---------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital contributions and advances
    to subsidiaries..............................     504       2,865   (20,000)
  Cash from acquisitions of Chartwell UK
    net of  epenses paid.........................                       (40,912)
                                                 ---------   ---------  --------
      Net cash provided by (used in) 
      investing activities.......................     504       2,865   (60,912)
                                                 ----------  ---------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of common stock.....                        58,503
  Dividends paid.................................  (1,549)     (1,534)   (1,150)
  Other, net.....................................    292           82
                                                 ----------  ---------  --------
      Net cash provided by (used in)
      financing activities.......................  (1,257)     (1,452)   57,353
                                                 ----------  ---------- --------
Net increase (decrease) in cash and
  cash equivalents...............................  (1,804)      1,284    (2,517)
Cash and cash equivalents at 
  beginning of year..............................   2,073         789     3,306
                                                 ----------  --------- ---------
Cash and cash equivalents at end of year.........$    269    $  2,073  $    789
                                                 ==========  =========  ========
RECONCILIATION OF NET INCOME TO NET CASH
  PROVIDED BY (USED IN) OPERATING ACTIVITIES:
  Net income.....................................$ 29,816    $ 27,263  $ 20,989
  Adjustments to reconcile net income to 
  net cash provided by
      operating activities.......................
      Equity in undistributed earnings of 
         subsidiaries............................ (33,233)    (28,299)  (20,414)
      Contingent interest........................   2,383       2,206     2,045
      Net change in other assets and liabilities.    (391)     (1,105)   (1,578)
      Other, net.................................     374        (194)
                                                 ----------  ---------  --------
      Net cash provided by (used in)
        operating activities                     $ (1,051)   $   (129)  $ 1,042
                                                 ==========  =========  ========

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


                                      S-4



<PAGE>

<TABLE>



                            CHARTWELL RE CORPORATION
                            SCHEDLE IV - REINSURANCE
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (in thousands)
<CAPTION>

                  Column A                    Column B   Column C    Column D     Column E     Column F
-------------------------------------------   --------   --------    ----------   ---------   -----------
                                                                       Assumed                 Percentage
                                                         Ceded to       from                   of amount
                                              Gross        other       other         Net       assumed to
                                              amount     companies   companies      amount         net
                                              ---------  ---------   ----------   ---------   -----------
<S>                                           <C>        <C>         <C>          <C>          <C>    
1998
Premiums earned:
  Property and casualty insurance...........  $116,109   $114,893    $228,288     $229,504      99.5%
                                              ---------  ---------   ---------    ---------    ----------
      Total premiums........................  $116,109   $114,893    $228,288     $229,504      99.5%
                                              =========  =========   =========    =========    ==========

1997
Premiums earned:
  Property and casualty insurance...........  $ 86,343   $ 86,305    $245,662     $245,700     100.0%
                                              ---------  ---------   ---------    ---------    ----------
      Total premiums........................  $ 86,343   $ 86,305    $245,662     $245,700     100.0%
                                              =========  =========   =========    =========    ==========

1996
Premiums earned:
  Property and casualty insurance...........  $ 66,709   $ 68,077    $210,871     $209,503     100.7%
                                              ---------  ---------   ---------    ---------    ----------
      Total premiums........................  $ 66,709   $ 68,077    $210,871     $209,503     100.7%
                                              =========  =========   =========    =========    ==========

</TABLE>







                                      S-5


<PAGE>

<TABLE>



                            CHARTWELL RE CORPORATION
                  SCHEDLE V - VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (in thousands)
<CAPTION>
                  Column A             Column B          Column C         Column D     Column E
                  --------             --------          --------         --------     --------
                                                              Additions                                        
                                       Balance at    Charged to     Charged                Balance
                                       Beginning     Costs and     to Other   Deductions   at End
                                       of Period     Expenses      Accounts   Describe     of Period
<S>                                   <C>            <C>           <C>        <C>          <C>    

Year Ended December 31, 1998
Reinsurance recoverable:
  Allowance for Uncollectible
      Reinsurance (1)................. $  6,394      $    8                                 $  6,402
                                                                                         

Year Ended December 31, 1997
Reinsurance recoverable:
  Allowance for Uncollectible
      Reinsurance (1)..................$  5,731      $  663                                 $  6,394

Year Ended December 31, 1996
Reinsurance recoverable:
  Allowance for Uncollectible
      Reinsurance (1)................. $  5,717      $   14                                 $  5,731

</TABLE>

(1) The Company has a  reinsurance  agreement  which  protects  the Company from
certain  uncollectible  reinsurance  balances.  Uncollectible  amounts have been
ceded to said  contract and are  reflected  as  reinsurance  recoverable  in the
balance sheet. Deductions to reserve represent subsequent collections of amounts
deemed uncollectible.
















                                      S-6


<PAGE>

<TABLE>


                                      
                            CHARTWELL RE CORPORATION
       SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
                              INSURANCE OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<CAPTION>
                                                                                       
                                                                                Claims and
                                                                                Claim Adjust. 
                                                                                Expenses
                                                                                Incurred 
                                                                                Related to  
                             Reserves                                        ----------------   
                             for Unpaid                                                          Amort.    Paid
                     Deferr. Claim and  Disc.                                                   of Defer. Claims            
Affiliation          Policy  Claim      if any                       Net                        Policy    & Claims  Other   Net
with                 Acquis. Adjust.    Deduct.    Unearn.  Earned   Invest   Curr.    Prior    Acquis.   Adjust.   Operat. Premiums
Registrant           Costs   Exp.(1)    Column(C)  Prem.    Prem.    Income   Year     Year     Costs     Expenses  Exp.    Written 
                     ------  ---------  --------  ------   -------  ------   -------  ------   --------  --------  ------  ---------
<S>                 <C>      <C>        <C>     <C>       <C>       <C>      <C>      <C>       <C>      <C>       <C>     <C>
Years Ended:
December 31, 1998...$24,084  $878,617           $108,495  $229,504  $48,869  $142,665 $(7,400)  $61,564  $172,771  $39,865 $217,054
December 31, 1997... 26,100   788,240            111,149   245,700   43,575   163,003  (2,155)   72,655   150,682   36,460  268,260
December 31, 1996... 17,903   747,858             81,599   209,503   44,089   152,338  (1,717)   52,030   136,753   19,169  192,251
</TABLE>



(1) The Company  adopted SFAS No. 113 which,  among other  things,  requires the
Company to record its reserves for unpaid  losses and LAE without  reduction for
amounts that would be recovered from  retrocessionaires.  The amount recoverable
from  retrocessionaires  is recorded as an asset on the Company's balance sheet.
The net of such asset and the  reserves  for loss and LAE is $639.6,  $585.6 and
$575.5 million at December 1998, 1997 and 1996, respectively.







                                      S-7


<PAGE>

                                INDEX TO EXHIBITS

Exhibits
--------

3.1       Restated Certificate of  Incorporation  of  Chartwell  Re Corporation.
          Incorporated by reference to Exhibit 3.1 to Chartwell Re Corporation's
          Registration Statement on Form S-1 (File No. 333-678).

3.2       Amended and Restated By-laws of Chartwell Re Corporation. Incorporated
          by reference to Exhibit 3.2 to Chartwell Re Corporation's Registration
          Statement on Form S-1 (File No. 333-678).

4.1       Rights  Agreement,  dated  as of May  22, 1997,  between  Chartwell Re
          Corporation  and Fleet National Bank of  Connecticut. Incorporated by
          reference  to Exhibit  4.1 to Chartwell Re Corporation's  Registration
          Statemen on Form 8-K filed with the Securities and Exchange Commission
          on June 5, 1997 (File No. 1-12502).

4.2       Indenture, dated   as  of  March  17, 1994,   between  Chartwell  Re
          Corporation and Bankers Trust Company, as  Trustee,  for the 10 1/4% 
          Senior  Notes  due  2004  (the  "Senior  Notes").  Incorporated   by
          reference  to Exhibit 4.1 to  Chartwell Re Corporation's  Registration
          Statement on Form S-1 (File No. 33-75386).

4.3       First  Supplemental  Indenture,  dated as of December 12, 1995,  among
          Chartwell  Re  Corporation,  Chartwell Re   Holdings Corporation  and
          Bankers Trust Company, as Trustee, for the Senior Notes.  Incorporated
          by reference to Exhibit 4.3 to Chartwell Re Corporation's Registration
          Statement on Form S-1 (File No. 333-678).

4.4       Second Supplemental Indenture, dated as of December 12, 1995, between
          Chartwell Re  Holdings  Corporation  and  Bankers  Trust  Company, as
          Trustee,  for the Senior Notes.  Incorporated  by reference to Exhibit
          4.4 to Chartwell Re  Corporation's Registration Statement on  Form S-1
          (File No. 333-678).

4.5       Indenture,  dated as of December 1, 1995,  between  Chartwell  Re
          Corporation, as the successor to Piedmont Management Company Inc., and
          Fleet Bank, as Trustee, for the Contingent Interest Notes due June 30,
          2006 (the "CI  Notes").  Incorporated  by  reference to Exhibit 4.5 to
          Chartwell Re  Corporation's  Registration  Statement on Form S-1 (File
          No. 333-678).

4.6       First  Supplemental  Indenture, dated as of December 13, 1995,  among
          Piedmont Management Company, Chartwell Re Corporation and Fleet Bank,
          as Trustee under the CI Notes.  Incorporated  by reference to Exhibit
          4.6 to Chartwell Re Corporation's Registration Statement on Form S-1 
          (File No. 333-678).

10.1      First Amended and Restated Credit Agreement,  dated as of November 14,
          1996 among  Chartwell  Re  Holdings  Corporation,  the  Lenders  named
          therein,  First Union National Bank of North Carolina, as Agent and as
          an Issuing Bank,  First Union National Bank,  (London  Branch),  as an
          Issuing Bank as amended by the First  Amendment  to First  Amended and
          Restated Credit Agreement, dated as of January 24, 1997 by and between
          Chartwell Re Holdings  Corporation,  the Lenders named therein,  First
          Union National Bank of North  Carolina,  as Agent and as Issuing Bank,
          and First Union  National  Bank (London  Branch),  as an Issuing Bank.
          Incorporated   by   reference   to  Exhibit   10.1  to   Chartwell  Re
          Corporation's  Annual Report on Form 10-K for the year ended  December
          31, 1996 (File No. 1-12502).

<PAGE>

10.2      Second Amendment to First Amended and Restated Credit Agreement, dated
          as of October 30, 1997, among Chartwell Re Holdings  Corporation,  the
          Lenders  named  therein,  First Union  National  Bank, as Agent and as
          Issuing  Bank,  and First Union  National  Bank (London  Branch) as an
          Issuing Bank.  Incorporated by reference to Exhibit 10.39 to Chartwell
          Re  Corporation's  Annual  Report  on Form  10-K  for the  year  ended
          December 31, 1997 (File No. 1-12502).

10.3      Third  Amendment to First  Amended and Restated  Credit  Agreement and
          Acknowledgement,  dated as of December  1, 1998,  among  Chartwell  Re
          Holdings  Corporation.  Chartwell  Reinsurance  Company,  Chartwell Re
          Corporation,  Chartwell  Holdings Limited,  the Lenders named therein,
          First Union  National  Bank, as Agent and as an Issuing Bank and First
          Union National Bank (London Branch), as an Issuing Bank.

10.4      Stockholders  Agreement,  dated  as  of  December  13,  1995,  between
          Chartwell  Re  Corporation  and  the  security  holders  named  in the
          schedule of holders  attached  thereto.  Incorporated  by reference to
          Exhibit 10.3 to Chartwell Re Corporation's  Registration  Statement on
          Form S-1 (File No. 333-678).

10.5      Registration Rights Agreement,  dated as of December 13, 1995, between
          Chartwell  Re  Corporation  and  the  security  holders  named  in the
          schedule of holders  attached  thereto.  Incorporated  by reference to
          Exhibit 10.4 to Chartwell Re Corporation's  Registration  Statement on
          Form S-1 (File No. 333-678).

10.6      Common  Stock  Purchase  Warrant,  dated  March  6,  1992,  issued  by
          Chartwell  Re   Corporation   to  Wand   Partners   (Chartwell)   L.P.
          Incorporated   by   reference   to  Exhibit   10.34  to  Chartwell  Re
          Corporation's Registration Statement on Form S-1 (File No. 33-75386).

10.7      Common Stock  Purchase  Warrant,  dated  December 31, 1992,  issued by
          Chartwell to Wand Partners (Chartwell) L.P.  Incorporated by reference
          as Exhibit 10.35 to Chartwell Re Corporation's  Registration Statement
          on Form S-1 (File No. 33-75386).

10.8      Common Stock  Purchase  Warrant,  dated  December 31, 1992,  issued by
          Chartwell to John Sagan. Incorporated by reference to Exhibit 10.36 to
          Chartwell Re  Corporation's  Registration  Statement on Form S-1 (File
          No. 33-75386).

10.9      Form of Common Stock Purchase  Warrants,  dated March 17, 1994, issued
          by Chartwell Re Corporation to Wand/Chartwell  Investments L.P. and to
          the holders of the Series A Stock, the Series B Stock and the Series C
          Stock of  Chartwell  Re  Corporation.  Incorporated  by  reference  to
          Exhibit 4.2 to Chartwell  Re  Corporation's  Quarterly  Report on Form
          10-Q for the quarter ended March 31, 1994 (File No. 1-12502).

10.10     1993 Stock Option Plan of Chartwell Re  Corporation.  Incorporated  by
          reference to Exhibit 10.14 to Chartwell Re Corporation's  Registration
          Statement on Form S-4 (File No. 33-97010).*

10.11     Chartwell  Re   Corporation   1995  Employee   Stock   Purchase  Plan.
          Incorporated   by   reference   to  Exhibit   4(c)  to   Chartwell  Re
          Corporation's Registration Statement on Form S-8 (File No. 33-80975).*


<PAGE>

10.12     Chartwell  Re  Corporation  1996  Non-Employee  Director  Stock Option
          Plan.  Incorporated  by  reference  to Exhibit  4(c) to  Chartwell  Re
          Corporation's   Registration   Statement   on  Form  S-8   (File   No.
          333-12203).*

10.13     Chartwell  Re   Corporation   1997  Omnibus  Stock   Incentive   Plan.
          Incorporated  by reference to Exhibit A to Chartwell Re  Corporation's
          Definitive  Proxy  Statement on Schedule 14A filed with the Securities
          and Exchange Commission on April 11, 1997.*

10.14     Rules  of  the  Chartwell  Re  Corporation   Sharesave   Scheme  1997.
          Incorporated   by   Reference   to  Exhibit   10.43  to  Chartwell  Re
          Corporation's  Annual Report on Form 10-K for the year ended  December
          31, 1997 (File No. 1-12502).*

10.15     Form of Change of Control  Agreement  between  Chartwell  Re  Holdings
          Corporation and senior officers of Chartwell Re Holdings  Corporation.
          Incorporated   by   Reference   to  Exhibit   10.32  to  Chartwell  Re
          Corporation's  Annual Report on Form 10-K for the year ended  December
          31, 1997 (File No. 1-12502).*

10.16     Employment  Agreement  between Chartwell Re Corporation and Richard E.
          Cole.  Incorporated  by  reference  to Exhibit  10.19 to  Chartwell Re
          Corporation's Registration Statement on Form S-1 (File No. 33-75386).*

10.17     Employment  Agreement  between  Chartwell Re Corporation and Steven J.
          Bensinger.  Incorporated by reference to Exhibit 10.20 to Chartwell Re
          Corporation's Registration Statement on Form S-1 (File no. 33-75386).*

10.18     Employment  Agreement  between Chartwell Re Corporation and Jacques Q.
          Bonneau.  Incorporated  by reference to Exhibit  10.21 to Chartwell Re
          Corporation's Registration Statement on Form S-1 (File No. 33-75386).*

10.19     Fourth  Amendment to the  Employment  Agreement  between  Chartwell Re
          Corporation  and  Richard  E. Cole,  dated as of  December  31,  1997.
          Incorporated by Reference to Exhibit 10.33 to Chartwell Re Corporation
          's Annual  Report on Form 10-K for the year ended  December  31,  1997
          (File No. 1-12502).*

10.20     Fourth Amendment to  the  Employment  Agreement  between  Chartwell
          Re Corporation and Steven J. Bensinger, dated as of December 31, 1997.
          Incorporated   by   reference   to  Exhibit   10.34  to  Chartwell  Re
          Corporation's  Annual Report on Form 10-K for the year ended  December
          31, 1997 (File No. 1-12502).*

10.21     Fourth  Amendment  to  the  Employment  Agreement  between   Chartwell
          Re Corporation and Jacques Q. Bonneau,  dated as of December 31, 1997.
          Incorporated   by   reference   to  Exhibit   10.35  to  Chartwell  Re
          Corporation's  Annual Report on Form 10-K for the year ended  December
          31, 1997 (File No. 1-12502).*

10.22     Fifth Amendment to the Employment  Agreement between Chartwell Re
          Corporation and Richard E. Cole, dated as of August 4, 1998.*

10.23     Fifth Amendment to the Employment  Agreement between Chartwell Re
          Corporation and Steven J. Bensinger, dated as of August 4, 1998.*


<PAGE>

10.24     Fifth Amendment to the Employment  Agreement between Chartwell Re
          Corporation and Jacques Q. Bonneau, dated as of August 4, 1998.*

10.25     Sixth Amendment  to  the  Employment  Agreement between  Chartwell  Re
          Corporation and Richard E. Cole,  dated as of December 30, 1998.*

10.26     Sixth Amendment to the Employment  Agreement between Chartwell Re
          Corporation and Steven J. Bensinger,  dated as of December  30, 1998.*

10.27     Sixth Amendment to the Employment  Agreement between Chartwell Re
          Corporation and Jacques Q  Bonneau, dated as  of  December  30, 1998.*

10.28     Trust  Agreement, dated as of June 20, 1994, by and  between  Shawmut
          Bank CT  (currently  known as State  Street Bank & Trust Company) and
          Chartwell Re Corporation.  Incorporated by Reference to  Exhibit 10.38
          to Chartwell's Annual Report on Form 10-K for the year ended  December
          31, 1997 (File No. 1-12502).*

10.29     First Amendment to Trust Agreement, dated as of August 4, 1998, by and
          between  State  Street   Bank  and Trust   Company and  Chartwell  Re
          Corporation.*

10.30     Workers  Compensation   Retrocessional Stop  Loss   Agreement,  dated
          September 30, 1997, by and between both Chartwell  Reinsurance Company
          and  The  Insurance  Corporation  of  New  York  and  Western  General
          Insurance Ltd. Incorporated by Reference to Exhibit 10.40 to Chartwell
          Re  Corporation's  Annual  Report  on Form  10-K  for the  year  ended
          December 31, 1997 (File No. 1-12502).

10.31     Aggregate  Excess of Loss  Reinsurance  Treaty among  Chartwell
          Reinsurance Company, Dakota Specialty Insurance Company, The Insurance
          Corporation  of New York and  London  Life  and  Casualty  Reinsurance
          Corporation,  dated as of July 1, 1997. Incorporated by Reference to
          Exhibit 10.41 to Chartwell Re Corporation's Annual Report on Form 10-K
          for the  year  ended  December  31,  1997  (File  No. 1-12502).

10.32     Aggregate   Excess  of Loss   Reinsurance   Treaty   among   Chartwell
          Reinsurance Company, Dakota Specialty Insurance Company, The Insurance
          Corporation  of  New  York,  Drayton  Company  Limited,  Chartwell  Re
          Holdings Corporation, London Life and Casualty Reinsurance Corporation
          of Western General Insurance Ltd, dated October 1, 1998.

10.33     Tax  Allocation  Agreement,  dated  December  13,  1995,  by and among
          Chartwell Re Corporation,  Chartwell Re Holdings Corporation,  Drayton
          Company  Limited,   Chartwell  Reinsurance  Company,  The  Reinsurance
          Corporation  of  New  York  and  The  ReCor  Insurance   Company  Inc.
          Incorporated   by   Reference  to  Exhibit  10.28  to   Chartwell  Re
          Corporation's Annual  Report on Form 10-K for the year ended  December
          31,  1997 (File No. 1-12502).

12.1      Computation of ratio of earnings to fixed charges.

21.       Subsidiaries of Chartwell Re Corporation.

27.1      Financial Data Schedule

-------------------------
*Management contract, compensatory plan or arrangement