SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5686
The Continental Corporation
(Exact name of registrant as specified in its charter)
New York 13-2610607
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
180 Maiden Lane, New York, New York 10038
(Address of principal executive offices)
(Zip Code)
(212) 440-3000
(Registrant's telephone number, including area code)
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
The number of shares outstanding of each of the issuer's
classes of common stock as of May 12, 1994 is as follows:
55,414,151 shares of Common Stock
Page 1 of 26 Pages
The Exhibit Index is located on Page 23
THE CONTINENTAL CORPORATION
INDEX
Page
Part I- Financial Information
Item 1 - Financial Statements:
Consolidated Statements of Income - Three Months
Ended March 31, 1994 and 1993 3 - 4
Consolidated Balance Sheets -
March 31, 1994 and December 31, 1993 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7 - 14
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 20
Part II - Other Information 21
Signature 22
Exhibit Index 23
Exhibit 1 24 - 25
Exhibit 23 26
THE CONTINENTAL CORPORATION
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(millions, except share and per share amounts)
Three Months Ended
March 31,
1994 1993
Revenues:
Premiums $ 1,104.1 $1,049.2
Net Investment Income 122.1 141.1
Realized Capital Gains 32.0 21.0
Other Revenues 21.8 22.2
Total Revenues 1,280.0 1,233.5
Expenses:
Losses and Loss Expenses 978.0 823.5
Insurance Operating Expenses 377.2 338.0
Other Expenses 30.9 31.7
Interest on Corporate Borrowings 8.8 14.1
Total Expenses 1,394.9 1,207.3
Income (Loss) from Continuing
Operations before Income Taxes (114.9) 26.2
Income Taxes (Benefits):
Current (22.7) 6.8
Deferred (2.3) 0.5
Total Income Taxes (Benefits) (25.0) 7.3
Income (Loss) from Continuing Operations (89.9) 18.9
Income from Discontinued Operations,
Net of Income Taxes - 3.7
Income (Loss) before Net Cumulative
Effect of Changes in Accounting Principles (89.9) 22.6
Net Cumulative Effect of Changes
in Accounting Principles - 1.6
Net Income (Loss) $ (89.9) $ 24.2
Net Income (Loss) Available
to Common Shareholders $ (89.9) $ 23.4
(Continued)
CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
(millions, except share and per share amounts)
Three Months Ended
March 31,
1994 1993
Per Common Share:
Income (Loss) from Continuing Operations $ (1.62) $ 0.33
Income from Discontinued
Operations, Net of Income Taxes $ - $ 0.07
Net Cumulative Effect of Changes
in Accounting Principles $ - $ 0.03
Net Income (Loss) $ (1.62) $ 0.43
Dividends Declared $ 0.25 $ 0.25
Weighted Average Shares of
Common Stock Outstanding 55,417,104 55,003,579
See Notes to Consolidated Financial Statements.
THE CONTINENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions, except par values)
March 31, December 31,
1994 1993
Assets:
Investments:
Fixed Maturities Available-for-Sale at Fair Value
(Amortized Cost: 1994-$6,658.1; 1993-$6,615.9) $ 6,642.4 $ 6,916.4
Equity Securities Available-for-Sale at Fair Value
(Cost: 1994-$622.5; 1993-$600.0) 734.8 759.1
Other Long-Term Investments
(Cost: 1994-$502.9; 1993-$387.9) 517.0 395.9
Other Short-Term Investments 676.3 1,071.0
Total Investments 8,570.5 9,142.4
Cash and Cash Equivalents 94.7 58.5
Premiums Receivable 1,245.2 1,021.0
Accrued Interest and Dividends 119.7 160.7
Reinsurance Receivables 2,995.4 3,152.9
Prepaid Reinsurance Premiums 327.1 321.5
Reinsurance Recoverable 298.3 329.0
Deferred Policy Acquisition Costs 486.0 494.0
Property and Equipment, Net 459.1 463.5
Deferred Tax Asset 168.8 41.7
Other Assets 667.1 950.8
Net Assets of Discontinued Operations 67.0 84.6
Total Assets $15,498.9 $16,220.6
Liabilities:
Outstanding Losses and Loss Expenses $ 8,958.0 $ 9,068.7
Unearned Premiums 2,401.6 2,409.7
Short-Term Debt 223.2 229.1
Long-Term Debt 777.0 774.4
Accounts Payable and Accrued Expenses 111.2 107.9
Accrued Employee Benefits 283.2 308.3
Other Liabilities 949.1 1,139.4
Total Liabilities 13,703.3 14,037.5
Commitments and Contingencies - -
Shareholders' Equity:
Preferred Stock - $4 par value 0.3 0.3
Common Stock - $1 par value 65.7 65.7
Paid-in Capital 612.1 613.2
Retained Earnings 1,509.0 1,612.5
Net Unrealized Appreciation of Investments 71.9 322.1
Cumulative Foreign Currency Translation Adjustment (96.9) (61.1)
Common Stock in Treasury at Cost (366.5) (369.6)
Total Shareholders' Equity 1,795.6 2,183.1
Total Liabilities, Commitments and
Contingencies and Shareholders' Equity $15,498.9 $16,220.6
See Notes to Consolidated Financial Statements.
THE CONTINENTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
Three Months Ended
March 31,
1994 1993
Cash Flows From Operating Activities:
Income (Loss) from Continuing Operations $ (89.9) $ 18.9
Adjustments to Reconcile Income (Loss) from Continuing
Operations to Net Cash Provided from (Used in)
Continuing Operating Activities:
Realized Capital Gains (32.0) (21.0)
Outstanding Losses and Loss Expenses (110.7) 79.6
Unearned Premiums (8.1) 52.9
Premiums Receivable (224.2) (311.8)
Reinsurance Recoverable 30.7 16.7
Prepaid Reinsurance Premiums (5.6) (42.9)
Reinsurance Receivables 157.5 (7.4)
Depreciation and Amortization 12.3 10.6
Other-Net 93.5 22.2
Net Cash Used in Continuing Operating Activities (176.5) (182.2)
Net Cash Used in Discontinuing Operating Activities (0.5) (5.8)
(177.0) (188.0)
Cash Flows From Investing Activities:
Net Purchase of Property and Equipment (7.9) (12.1)
Cost of Investments Purchased (955.0) (1,734.1)
Proceeds from Investments Sold 649.5 1,718.5
Proceeds from Investments Matured 263.4 161.3
Net (Increase) Decrease in Long-Term Investments (114.9) 25.1
Net Decrease (Increase) in Short-Term Investments 394.7 (32.3)
Increase in Net Receivable on
Sale of Securities - (6.6)
Net Cash Provided from Investing Activities 229.8 119.8
Cash Flows From Financing Activities:
Proceeds from Treasury Shares Sold 2.0 1.0
Dividends to Shareholders (13.6) (13.9)
Issuance of Long-Term Debt - 150.0
Decrease in Short-Term Debt (5.9) (60.6)
Other Increase in Long-Term Debt .9 1.0
Net Cash (Used in) Provided from
Financing Activities (16.6) 77.5
Net Increase in Cash and Cash Equivalents 36.2 9.3
Cash and Cash Equivalents at Beginning of Year 58.5 111.5
Cash and Cash Equivalents at End of Period $ 94.7 $ 120.8
See Notes to Consolidated Financial Statements.
THE CONTINENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The consolidated financial statements include The Continental
Corporation and its majority-owned subsidiaries (collectively,
"Continental"). These financial statements have been prepared in
conformity with generally accepted accounting principles
and are unaudited. These interim statements necessarily rely
heavily on estimates. In the opinion of management, all material
adjustments have been made.
Note 2: Investments
Fixed maturities available-for-sale consist of bonds and preferred
stocks, presented at fair value, that management may not hold
until maturity. Equity securities available-for-sale are comprised
of common stocks and nonredeemable preferred stocks which
are reported at fair value.
Other investments are comprised of money market instruments,
mortgages receivable and certificates of deposit, which are
reported at amortized cost; notes receivable, time deposits,
federal funds sold and securities purchased under resale agreements,
which are reported at cost; venture capital investments, which are
reported at lower of cost or market; investments in minority
affiliates, which are reported under the equity method of
accounting; and investment in limited partnerships, which are
reported at fair value. These other investments are classified as short
term if their original maturity date is within one year of the
balance sheet date. All investment transactions are recorded on
the settlement date.
Realized gains and losses on the sales of investments are included
as a component of revenues, based upon the specific identification method.
Provisions for impairments of investments that are considered other than
temporary are reported as realized capital losses. Unrealized gains and
losses on investments reported at fair value, net of related deferred taxes,
are reflected in shareholders' equity.
At March 31, 1994, Continental did not invest in the securities of
any issuer, except securities issued/backed by U.S. or Canadian government
agencies, in excess of 10% of total shareholders' equity.
Note 3: Changes in Accounting Principles
The net cumulative effect of changes in accounting principles is
comprised of the following:
(millions, except per share amounts)
Three months ended
March 31, 1993
Net Cumulative Effect of the Change in
Accounting for Postemployment Benefits $ (3)
Net Cumulative Effect of the Change in
Accounting for Retrospectively Rated
Reinsurance Contracts 5
Net Cumulative Effect of Changes in
Accounting Principles $ 2
Per Common Share:
Net Cumulative Effect of the Change in
Accounting for Postemployment Benefits (0.06)
Net Cumulative Effect of the Change in
Accounting for Retrospectively Rated
Reinsurance Contracts 0.09
Net Cumulative Effect of Changes in
Accounting Principles $ 0.03
Note 3: Changes in Accounting Principles, continued
Effective January 1, 1993, Continental adopted SFAS No. 112,
"Employers' accounting for Postemployment Benefits", Emerging Issues
Task Force Issue No. 93-6, "Accounting for Multiple-Year Retrospectively
Rated Contracts By Ceding and Assuming Enterprises" and SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts".
In addition, effective December 31, 1993, Continental adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", which did
not change the way Continental accounts for investments or have a material
impact on its 1993 financial results.
Note 4: Restructuring Charge
First quarter 1994 net loss includes a $45 million restructuring charge to
re-engineer the field claims operations of Continental's Agency & Brokerage
division and several corporate staff units. The $45 million restructuring
charge includes $29 million in severance and related benefits and $16 million
in lease termination and other associated costs. These and other planned
re-engineering efforts will eliminate 680 positions from a total company
workforce of 12,255 employees as well as achieve business related expense
savings. As of the date of this filing, 178 employees have been notified that
their positions have been eliminated. Continental has also implemented
additional cost saving measures in several employee benefit programs.
The purpose of this re-engineering is to improve service and achieve
annual savings of about $75 million.
Note 5: Income Taxes
The provision for income taxes from continuing operations was as
follows:
Three Months Ended
(millions) March 31,
1994 1993
Current Tax Expenses (Benefit):
U.S. Federal $ (23) $ 6
State and Local - -
Foreign - -
Total Current Expenses (Benefit) (23) 6
Deferred Tax Expenses (Benefit):
U.S. Federal $ - $ -
Foreign (2) 1
Total Deferred Expenses (Benefit) (2) 1
Total Income Taxes (Benefit) $ (25) $ 7
In the first quarter 1994 and 1993 there was no reduction in income
taxes through the utilization of tax net operating loss carryforwards
and tax credit carryforwards.
Unused domestic net operating loss carryforwards at March 31, 1994,
available for use in future years on a tax return basis,
amount to $351 million for regular tax and expire at various stages
through the year 2006. There are no operating loss
carryforwards available for use in future years with respect to AMT.
Continental also has a foreign tax credit, general business credit
and AMT credit carryforwards of $31 million, $10 million
and $21 million respectively; the foreign tax and general business
credits expire at various stages through the year 2000.
Note 5: Income taxes, continued
Set forth below are the significant differences between the U.S.
federal income tax rate and the effective tax rates as reflected
in the accompanying Consolidated Statements of Income:
Three Months Ended
March 31,
(millions, except percentages)
1994 1993
% of % of
Pretax Pretax
Amount Income Amount Income
Income (Loss) from Continuing
Operations Before Income Taxes $ (115) $ 26
Statutory Federal Corporate Tax (Benefit) $ (40) (35%) $ 9 34%
Increases (Reductions) in
Taxes Resulting from:
Tax-Exempt Interest (6) (5) (5) (19)
Dividends Received Deduction (1) (1) (2) (8)
Foreign Income at Higher Rates (2) (2) 3 12
Change in Valuation Allowance 46 40 - -
Current Alternative Minimum Tax Benefit (23) (20) - -
Other 1 1 2 8
Total Income Taxes (Benefit) $ (25) (22%) $ 7 27%
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1993 and March 31, 1994, and the
provision for deferred income taxes under SFAS #109 for the
three months ended March 31, 1994 and 1993 are presented on pages
10 and 11.
A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax asset will not be realized.
The valuation allowance for deferred tax assets was $136 million at
December 31, 1993. The net change in the valuation allowance for
deferred tax assets was an increase of $46 million, resulting in
a $182 million valuation allowance at March 31, 1994.
Note 5: Income Taxes, continued
Deferred
(millions) Balance Tax(Expense) Balance
December 31, 1993 Benefit March 31, 1994
Deferred Tax Assets:
Unearned Premium Reserve $ 127 $ (1) $ 126
Loss Reserve Discounting 245 1 246
Adoption of SFAS No. 106 70 - 70
Net Operating Loss Carryforward - 45 45
Tax Credit Carryforwards 73 - 73
Real Estate Basis Differences 47 (1) 46
Allowance for Bad Debts 16 1 17
Capital Leases 15 - 15
Provision for Early Retirement 15 - 15
Other Items 28 - 28
Total Gross Deferred Tax Assets 636 45 681
Valuation Allowance (136) (46) (182)
Net Deferred Tax Assets 500 (1) 499
Deferred Tax Liabilities:
Deferred Acquisition Costs 154 1 153
Accrual for Retrospectively 13 1 12
Rated Premiums
Audit Premiums 43 - 43
Installment Receivables 18 - 18
Other Items 65 1 64
Total Gross Deferred
Tax Liabilities 293 3 290
Net Deferred Tax Asset before
Unrealized Appreciation 207 2 209
Deferred Taxes on Unrealized
Appreciation (165) - (40)
Deferred Tax Asset $ 42 $ 2 $ 169
Note 5: Income Taxes, continued
Deferred
(millions) Balance Tax(Expense) Balance
December 31, 1992 Benefit March 31, 1993
Deferred Tax Assets:
Unearned Premium Reserve $ 112 $ 1 $ 113
Loss Reserve Discounting 269 56 325
Adoption of SFAS No. 106 68 - 68
Net Operating Loss Carryforward - 20 20
Tax Attribute Carryforwards 76 (20) 56
Real Estate Basis Differences 50 - 50
Allowance for Bad Debts 22 - 22
Capital Leases 15 - 15
Provision for Early Retirement 14 - 14
Other Items 35 (3) 32
Total Gross Deferred Tax Assets 661 54 715
Valuation Allowance (159) - (159)
Net Deferred Tax Assets 502 54 556
Deferred Tax Liabilities:
Deferred Acquisition Costs 140 (1) 141
Accrual for Retrospectively 13 - 13
Rated Premiums
Audit Premiums 42 - 42
Discounted Reserves for
Workers' Compensation - (24) 24
Installment Receivables 15 - 15
Other Items 92 (30) 122
Total Gross Deferred
Tax Liabilities 302 (55) 357
Net Deferred Tax Asset before
Unrealized Appreciation 200 (1) 199
Deferred Taxes on Unrealized
Appreciation (101) - (147)
Deferred Tax Asset $ 99 $ - $ 52
Note 6: Long-Term Debt
In March 1993, Continental completed a public offering of $150
million of 7.25% Notes due March 1, 2003. These Notes
(which provided $148 million of a total $346 million in cash, net
of offering and underwriting costs) were sold under
Continental's shelf registration of up to $400 million of debt
securities with the Securities and Exchange Commission.
Continental may sell additional debt securities (with varying
maturities, interest rates and other terms) under the shelf
registration from time to time over the next twelve months as
market conditions warrant. During first quarter 1993,
Continental used $50 million of proceeds from sales under the shelf
registration to reduce parent company short-term borrowings.
In July, 1993 Continental used $282 million of net proceeds to retire
its outstanding 9 3/8% Notes. Continental intends to register for
the sale of up to an additional $100 million of debt securities.
Continental plans to use the net proceeds from any subsequent sales to
further reduce its short-term borrowings.
Note 7: Preferred Stock
The Series A and Series B preferred stocks are convertible into
common stock at the rate of 2.2 shares of common stock for
each share of preferred stock. The number of common shares
reserved for conversion of these preferred stocks is 120,089.
Note 8: Employee Stock Options and Performance Awards
Continental has a Long-Term Incentive Plan under which it grants
performance awards and issues stock options to key
employees. Nine million shares of common stock, the maximum
number of shares which may be issued under the Plan, have
been reserved for issuance. Continental has granted both incentive
stock options and nonqualified stock options under the Plan.
No stock option has been granted with an exercise price below the
market price of Continental's common stock at the time of grant.
Performance awards are payable in either cash or shares of
Continental's common stock in amounts based on Continental's
performance for four-year award cycles determined by the
Compensation Committee of the Board of Directors. As of March
31, 1994, 727,341 of such shares were reserved for possible payment
of such awards.
The stock options are accounted for as common stock equivalents and
are used in computing earnings per share. Options for 4,565,718 shares
(at a weighted average exercise price of $29.74 per share) were outstanding,
of which 2,737,088 were then exercisable. During the three months ended
March 31, 1994, options for 4,700 shares were exercised.
Note 9: Discontinued Operations
In December 1993, Continental completed the sale of its premium
financing operations, AFCO Credit Corporation, AFCO Acceptance Corporation
and their Canadian affiliate CAFO Inc., to Mellon Bank Corporation.
Continental realized a $36 million gain from this sale, net of income taxes.
The 1993 results and net assets of these premium financing operations, which
were previously reported in the Corporate & Other Operations segment, have
been classified as discontinued in the accompanying Consolidated Financial
Statements. Also included in discontinued operations are the traditional
assumed reinsurance and marine reinsurance businesses, as well as, the
indigenous international and international marine insurance businesses
which were discontinued in 1992. Continental intends to run-off the reserves
of certain of these discontinued insurance operations and sell the remaining
insurance operations.
The financial statements reflect the operating results and balance
sheet items of the discontinued operations separately from
continuing operations. Operating results of the discontinued
operations were as follows:
Note 9: Discontinued Operations, continued
Insurance Operations
Three Months Ended
March 31,
(millions) 1994 1993
Total Revenues $ 180 $ 117
Total Expenses 180 117
Income before Income Taxes - -
Income Taxes - -
Income (Loss) from
Discontinued Operations $ - $ -
Premium Financing Operations
Three Months Ended
March 31,
(millions) 1994 1993
Total Revenues $ - $ 25
Total Expenses - 20
Income before Income Taxes - 5
Income Taxes - 1
Income from Discontinued
Premium Financing Operations $ - $ 4
Net assets of discontinued insurance operations at March 31, 1994
and December 31, 1993 were as follows:
Insurance Operations
March 31, December 31,
(millions) 1994 1993
Assets
Cash and Investments $1,030 $1,167
Other Assets 654 528
1,684 1,695
Liabilities
Outstanding Losses and Loss Expenses 1,314 1,346
Unearned Premiums 2 3
Other Liabilities 301 261
1,617 1,610
Net Assets $ 67 $ 85
Note 10. Commitments and Contingencies (Outstanding Losses and Loss Expenses)
Included in Continental's liability for outstanding losses and loss
expenses are gross undiscounted reserves for asbestos-related,
other toxic tort and environmental pollution claims of $267 million
at March 31, 1994 ($275 million at March 31, 1993). Included in Continental's
reinsurance assets are amounts due for asbestos-related, other toxic tort and
environmental pollution claims of $103 million at March 31, 1994
($96 million at March 31, 1993). Net losses and loss expenses include
charges for asbestos-related, other toxic tort and environmental pollution
claims of $18 million for both first quarter 1994 and 1993.
Most of Continental's environmental pollution claims result from
general liability policies written prior to 1986. Certain
provisions of these policies have been subject to wide-ranging
challenges by policyholders and/or differing interpretations by
courts in various jurisdictions, with inconsistent conclusions as
to the applicability of coverage for environmental pollution
claims. Asbestos-related claims have generally arisen out of
product liability coverage provided by Continental under general
liability policies written prior to 1983. Thereafter,
asbestos-product exclusions were included in general liability
policies. Other toxic tort claims have also generally arisen out
of product liability coverage under general liability policies.
These claims involve a variety of allegations of bodily injury
arising from exposure over a period of time to products alleged
to be harmful or toxic.
Continental does not establish reserves for unreported asbestos-related,
other toxic tort and environmental pollution claims because of significant
uncertainties, which do not allow liabilities to be reasonably estimated.
Such uncertainties include difficulties in determining the frequency and
severity of such potential claims and in predicting the outcome of judicial
decisions, as case law evolves regarding liability exposure, insurance
coverage and interpretation of policy language. At this time, the future
financial impact of unreported asbestos-related, other toxic tort and
environmental pollution claims cannot be reasonably estimated, and no
assessment can be made with respect to the ultimate impact thereof on
Continental's results of operations or financial condition in the future
although this impact could be material.
The actuarial profession is addressing environmental liabilities
(e.g., unreported asbestos-related, other toxic tort and environmental
pollution claims) and is in the initial stage of developing standards,
but has not yet scheduled publication of a discussion draft. Other
uncertainties may be clarified through the debate, extension or modification
of the Comprehensive Environmental Response, Compensation, and Liability Act
(Superfund) in 1994. Congress is considering legislation based upon a
modification of the Clinton Administration's proposed Superfund Reform Act.
The legislation would amend Superfund and establish an environmental
insurance fund which would have the authority to make offers to settle
insurance coverage claims for Superfund liabilities recognizing the intended
use of sites. The fund would be financed by taxes on property and casualty
insurance companies. These developments will continue to be monitored and
assessed by Continental.
Note 11: Subsequent Event (Planned Sales of Subsidiaries)
Continental has announced its intention to sell Continental Canada, a major
property and casualty insurer in Canada; and Casualty Insurance, the leading
writer of workers' compensation in Illinois with operations in neighboring
mid-west states and California.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business Operations: Continental's principal business is property
and casualty insurance. These Insurance Operations are comprised of
three segments: Agency & Brokerage Commercial, Agency & Brokerage Personal
and Specialized Commercial. The results of Continental's non-insurance
operations, including investment management, claims adjusting and risk
management, are reported in the Corporate & Other Operations
segment. Insurance Operations generated 98% of first quarter
1994 consolidated revenues, including 86% from premiums earned and
12% from investment activities (net investment income and realized
capital gains). In 1993, Continental sold its premium financing operations;
the results of which are reported as discontinued.
Results of Operations - First quarter 1994 compared with first quarter 1993.
Summary: The net result for first quarter 1994 was a $90 million
loss from continuing operations, including a one-time $45 million charge
to restructure the field claims operations and several corporate staff units.
This restructuring and other cost saving measures are expected to produce
annual savings of about $75 million (see "Restructuring Charge"). The net
result for first quarter 1993 included $19 million of income from
continuing operations, $3 million of income from discontinued
operations and a $2 million benefit from the cumulative effect of
changes in accounting principles.
Insurance Operations: Insurance Operations had a first quarter 1994
loss before income taxes of $100 million, $137 million worse than first
quarter 1993. First quarter underwriting results were down $139 million
while investment results improved $2 million, including an $11 million
increase in realized capital gains and a $9 million decrease in net
investment income.
The $139 million decrease in underwriting results was primarily due
to a substantial increase in weather-related losses not
officially designated as catastrophic, a substantial increase in
large losses, a $15 million increase in catastrophe losses, and the
$45 million restructuring charge ($26 million in loss expenses and
$19 million in insurance operating expenses). Premiums earned increased
$55 million, primarily due to growth in commercial and personal package
business and certain specialty commercial lines resulting from both price
increases and a modest acceptance of new risk. Losses and loss expenses
increased $155 million, primarily due to the aforementioned increases in
non-catastrophe weather-related losses, large losses and
catastrophe losses; the restructuring charge; inflation in loss
costs; and the increase in the amount of risk accepted. Insurance
operating expenses increased $39 million, primarily due to the
restructuring charge, modest growth in business written, and
a $10 million decrease in servicing carrier income (which is
recorded as a reduction in commission expenses) reflecting a
decrease in the amount of business serviced.
First quarter 1994 underwriting results included pretax catastrophe
losses of $99 million, compared with $84 million in first
quarter 1993. The first quarter 1994 catastrophe losses included
$43 million from January snow and ice storms and $30 million from the
California earthquake; the first quarter 1993 catastrophe losses included
$44 million from the East Coast blizzard.
The insurance segments' first quarter premiums earned and underwriting
results were as follows:
(millions)
Premiums Earned Underwriting Results
INSURANCE SEGMENT* 1994 1993 1994 1993
Agency & Brokerage Commercial $ 522 $ 497 $ (169) $ (74)
Agency & Brokerage Personal 226 210 (45) (22)
Specialized Commercial 356 342 (37) (16)
Total Insurance Operations $1,104 $1,049 $ (251) $ (112)
* Distinct investment portfolios are not maintained for individual
insurance segments; accordingly, Insurance Operations' investment results
are explained in aggregate below.
The Agency & Brokerage Commercial segment's first quarter 1994
underwriting results were $95 million worse than first quarter 1993,
primarily due to a substantial increase in non-catastrophe weather-related
losses, a substantial increase in large losses, a $17 million increase in
catastrophe losses, and the segment's $29 million share of the restructuring
charge ($17 million in loss expenses and $12 million in insurance operating
expenses). Premiums earned increased $25 million, primarily due to
both price increases and a modest acceptance of new risk primarily
in the commercial package line. Losses and loss expenses
increased $95 million, primarily due to the aforementioned
increases in non-catastrophe weather-related losses, large losses
and catastrophe losses; the restructuring charge; inflation in
loss costs; and the increase in the amount of risk accepted.
Insurance operating expenses increased $25 million, primarily due
to the restructuring charge and a $10 million decrease in
servicing carrier income.
The Agency & Brokerage Personal segment's first quarter 1994
underwriting results were $23 million worse than first quarter
1993, primarily due to a $10 million increase in catastrophe losses
and the segment's $13 million share of the restructuring
charge ($9 million in loss expenses and $4 million in insurance
operating expenses). Premiums earned increased $16 million,
primarily due to an increase in the personal package line
reflecting price increases partially offset by a small decrease in
the acceptance of new risk. Losses and loss expenses increased $27
million, primarily due to the aforementioned increase in
catastrophe losses; the restructuring charge; an increase in
non-catastrophe weather-related losses and inflation in loss costs.
These increases were partially offset by better loss experience in
the personal lines coverages not subject to catastrophes. Insurance
operating expenses increased $12 million, including the restructuring charge.
The Specialized Commercial segment's first quarter 1994
underwriting results were $21 million worse than first quarter
1993, primarily due to a substantial increase in large losses partially
offset by a $12 million decrease in catastrophe losses. Premiums
earned increased $14 million, due to both price increases and
acceptance of new risk in certain lines. Premiums earned
increased $16 million in specialty casualty, $15 million in
domestic marine and $14 million in workers' compensation in
selected markets. These increases were partially offset by a $25
million decrease in multinational business and a $12 million
decrease in customized financial coverages. Losses and loss
expenses increased $33 million, despite the decrease in catastrophe
losses, primarily due to the aforementioned increase in large
losses, inflation in loss costs and the increase in the amount of
risk accepted. Insurance operating expenses increased $2 million
primarily due to the segment's share of the restructuring charge.
First quarter 1994 net investment income for Insurance Operations
was $119 million, down $9 million from first quarter 1993,
primarily due to the reinvestment of proceeds from sales,
redemptions and maturities of fixed income securities into lower
available short-term and intermediate-term yields. Fixed income
securities include short-term investments, fixed maturities
investments and nonredeemable preferred stock and comprise 86% of
Continental's investments.
First quarter 1994 realized capital gains for Insurance Operations
were $32 million, compared with $21 million for first quarter
1993. Sales of appreciated securities in the fixed income portfolio
produced $16 million of net realized capital gains, compared
with $13 million in first quarter 1993. Sales of appreciated
securities in the common stock portfolio produced $16 million of
net realized capital gains, compared with $8 million in first
quarter 1993.
Corporate & Other Operations: Corporate & Other Operations had a
first quarter 1994 loss before income taxes of $15 million, $4 million
worse than first quarter 1993, primarily due to a $10 million decrease
in investment income partially offset by a $5 million decrease in corporate
interest expense.
Income Taxes: In first quarter 1994, Continental recorded federal
and foreign income tax benefits of $23 million and $2 million, respectively,
but virtually no state and other income tax benefit or expense. In first
quarter 1993, Continental recorded federal and foreign income tax expenses
of $6 million and $1 million, but virtually no state and other income tax
benefit or expense. The first quarter 1994 income tax benefits reflect the
quarter's operating losses.
Discontinued Operations: In first quarter 1993, discontinued premium
financing operations had income, net of income taxes, of $4 million.
Other Developments
Economic Issues: Price levels in the property and casualty insurance markets
are cyclical and materially affect Continental's underwriting results.
Continental's strategy is to write business in those areas in which
management believes Continental has a competitive advantage. The property
and casualty industry's apparent capacity to provide insurance coverage,
at present, substantially exceeds demand for that coverage. Despite the first
quarter 1994 decline in the domestic stock and bond markets, the overall
strength of these markets during the current pricing cycle continues to
exacerbate the perception of overcapacity by increasing the value of the
industry's investments. It is not possible to determine when the insurance
markets will permit more adequate pricing. During first quarter 1994,
Continental's premiums written (which will be earned ratably over the term
of the applicable policies) increased a modest 3% over first quarter 1993.
The slowdown in growth from 1993's 12% increase in premiums written reflects
more competitive pricing for new business in certain lines and Continental's
unwillingness to write business when management believes that prices are
inadequate relative to loss costs. Continental will continue its efforts to
obtain adequate prices; increase writings in its commercial and personal
package business and certain specialty commercial lines; and control costs.
Premiums, net income and cash flow will depend on the degree to which
Continental successfully implements its strategy.
Inflation generally increases the cost of losses covered by insurance
contracts. However, the effect of inflation varies by line of business.
Since the overall rate of inflation has been relatively constant and
historically normal in recent years, such effects have been less significant
than in previous years, except in medical care costs. The medical cost
inflation rate, while now generally decreasing in anticipation of enactment
of a comprehensive health care reform program, is still higher than the
overall inflation rate. Lines of insurance involving medical care costs,
such as automobile, workers' compensation and medical malpractice, comprised
41% of Continental's 1994 first quarter premiums earned. The method used by
Continental to estimate individual case reserves and reserves for unreported
claims implicitly considers the effect of inflation in the projection of
ultimate costs.
Asbestos-Related, Other Toxic Tort and Environmental Pollution Claims:
Included in Continental's liability for outstanding losses and loss expenses
are gross undiscounted reserves for asbestos-related, other toxic tort and
environmental pollution claims of $267 million at March 31, 1994
($275 million at March 31, 1993). Included in Continental's reinsurance
assets are amounts due for asbestos-related, other toxic tort and
environmental pollution claims of $103 million at March 31, 1994 ($96
million at March 31, 1993) (see "Reinsurance"). Net losses and loss
expenses include charges for asbestos-related, other toxic tort and
environmental pollution claims of $18 million for both first quarter 1994
and 1993.
Most of Continental's environmental pollution claims result from
general liability policies written prior to 1986. Certain
provisions of these policies have been subject to wide-ranging
challenges by policyholders and/or differing interpretations by
courts in various jurisdictions, with inconsistent conclusions as
to the applicability of coverage for environmental pollution
claims. Asbestos-related claims have generally arisen out of
product liability coverage provided by Continental under general
liability policies written prior to 1983. Thereafter, asbestos-product
exclusions were included in general liability policies. Other
toxic tort claims have also generally arisen out of product
liability coverage under general liability policies. These claims
involve a variety of allegations of bodily injury arising from
exposure over a period of time to products alleged to be harmful or toxic.
Continental does not establish reserves for unreported asbestos-related,
other toxic tort and environmental pollution claims because of significant
uncertainties, which do not allow liabilities to be reasonably estimated.
Such uncertainties include difficulties in determining the frequency and
severity of such potential claims and in predicting the outcome of judicial
decisions, as case law evolves regarding liability exposure, insurance
coverage and interpretation of policy language. At this time, the future
financial impact of unreported asbestos-related, other toxic tort and
environmental pollution claims cannot be reasonably estimated, and no
assessment can be made with respect to the ultimate impact thereof on
Continental's results of operations or financial condition in the future
although this impact could be material.
The actuarial profession is addressing environmental liabilities
(e.g., unreported asbestos-related, other toxic tort and environmental
pollution claims) and is in the initial stage of developing standards,
but has not yet scheduled publication of a discussion draft. Other
uncertainties may be clarified through the debate, extension or modification
of the Comprehensive Environmental Response, Compensation, and Liability
Act (Superfund) in 1994. Congress is considering legislation based upon
a modification of the Clinton Administration's proposed Superfund Reform Act.
The legislation would amend Superfund and establish an environmental
insurance fund which would have the authority to make offers to settle
insurance coverage claims for Superfund liabilities recognizing the intended
use of sites. The fund would be financed by taxes on property and casualty
insurance companies. These developments will continue to be monitored
and assessed by Continental.
Restructuring Charge: First quarter 1994 underwriting results
included a $45 million restructuring charge to re-engineer the
field claims operations of Continental's Agency & Brokerage
division and several corporate staff units. The $45 million
restructuring charge includes $29 million in severance and related
benefits and $16 million in lease termination and other associated costs.
These and other planned re-engineering efforts will eliminate 680 positions
from a total company workforce of 12,255 employees as well as achieve
business-related expense savings. As of the date of this filing,
178 employees have been notified that their positions have been eliminated.
Continental has also implemented additional cost saving measures in several
employee benefit programs. The purpose of this re-engineering is to improve
service and achieve annual savings of about $75 million.
Planned Sales of Subsidiaries: Continental has announced its intention to
sell Continental Canada, a major property and casualty insurer in Canada;
and Casualty Insurance, the leading writer of workers' compensation in
Illinois with operations in neighboring mid-west states and California.
Continental believes that the sales of these subsidiaries and the
restructuring described above will further increase its competitive
strength and provide additional capital for its strategic lines of business.
Discontinued Operations: In December 1993, Continental completed the sale
of its premium financing operations, AFCO Credit Corporation, AFCO Acceptanc
e Corporation and their Canadian affiliate CAFO Inc., to Mellon Bank
Corporation. Continental realized a $36 million gain from this sale,
net of income taxes. The 1993 results and net assets of these premium
financing operations, which were previously reported in the Corporate & Other
Operations segment, have been classified as discontinued in the accompanying
Consolidated Financial Statements.
New Accounting Pronouncements: Effective January 1, 1993, Continental adopted
SFAS No. 112, "Employers' Accounting for Postemployment Benefits,
" Emerging Issues Task Force issue No. 93-6, "Accounting for Multiple-Year
Retrospectively Rated Contracts by Ceding and Assuming Enterprises,"
and SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts". The cumulative change to Continental's results
for first quarter 1993 from these adoptions was a net benefit of $2 million.
In addition, effective December 31, 1993, Continental adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
which did not change the way Continental accounts for investments or have
a material impact on its 1993 financial results.
Financial Resources and Liquidity
Cash Flow Analysis: Operating activities for first quarter 1994
used $176 million in cash and cash equivalents, whereas
operating activities for first quarter 1993 used cash and cash
equivalents of $182 million. The principal causes for the decrease
in cash used by operations were a $119 million increase in premiums
collected, a $20 million increase in investment income
received and a $33 million decrease in underwriting expenses paid,
partially offset by a $166 million increase in losses and
loss expenses paid.
Investing activities for first quarter 1994 provided $230 million
in cash and cash equivalents, whereas investing activities for
first quarter 1993 provided $120 million in cash and cash
equivalents. Increases in investments are reported as uses of cash
and cash equivalents, and proceeds from sales, redemptions and
maturities of investments are reported as provisions of cash
and cash equivalents. The increase in cash provided by investing
activities is primarily due to higher 1994 net sales of
securities as a result of decreased cash provided by financing
activities.
Financing activities for first quarter 1994 used $17 million in
cash and cash equivalents, whereas financing activities for first
quarter 1993 provided cash and cash equivalents of $77 million.
Increases in borrowings are reported as provisions of cash
and cash equivalents, while decreases in borrowings and payments
of dividends are reported as uses of cash and cash equivalents.
The increase in cash used by financing activities is primarily due
to a $6 million reduction in short-term borrowings in first quarter
1994 and the issuance of $150 million of Notes in first quarter 1993,
partially offset by a $60 million reduction in short-term borrowings
in first quarter 1993. In addition, dividends paid to shareholders
amounted to $14 million for both first quarter 1994 and 1993.
As a result of the operating, investing and financing activities
described above, cash and cash equivalents provided by continuing
operations increased $22 million from first quarter 1993.
Liquidity: To meet its cash obligations, including claims payments,
operating expenses, interest and principal payments on debt,
declared shareholder dividends and taxes, Continental holds cash
reserves, short-term money market instruments and other fixed
income securities with maturities of less than one year.
In March 1993, Continental sold $150 million of a total of $350
million of Notes (which provided $148 million of a total
$346 million in cash, net of offering and underwriting costs)
outstanding under its shelf registration of up to $400 million of
debt securities with the Securities and Exchange Commission.
During 1993, Continental used $282 million of the net proceeds from
these sales to retire its outstanding 9 3/8% Notes due July 1, 1993
and $50 million of net proceeds from these sales to reduce corporate
short-term borrowings. Continental intends to sell an additional $50
million of debt securities under its existing shelf registration and
to register for the sale of up to an additional $100 million of debt
securities. It plans to use the net proceeds from these sales to further
reduce its short-term borrowings.
During first quarter 1994, Continental's insurance subsidiaries
paid it $31 million in dividends. Several states in which these
insurance subsidiaries are domiciled have enacted more stringent
dividend restrictions based on percentages of surplus and net
income from operations. These restrictions will, under certain
circumstances, significantly reduce the maximum amount of
dividends and other distributions payable to Continental by its
subsidiaries without approval by state regulatory authorities.
To the extent that its insurance subsidiaries do not generate
amounts available for distribution sufficient to meet Continental's
cash requirements without regulatory approval, Continental would
seek approval for additional distributions. Under the
restrictions currently in effect, the maximum amount available for
payment of dividends to Continental by its insurance
subsidiaries during the year ending December 31, 1994 without
regulatory approval is estimated to be $207 million in addition
to the $31 million paid during first quarter 1994. Continental
anticipates that dividends from its insurance subsidiaries,
together with cash from other sources, will enable it to meet its
obligations for interest and principal payments on debt, corporate
expenses, declared shareholder dividends and taxes in 1994.
In 1993, Continental entered into a revolving credit facility,
providing for borrowings of up to $150 million from a syndicate
of banks. Funds borrowed through the facility may be used for
general corporate purposes, but Continental intends to use the
facility primarily as an alternative to existing sources of
short-term borrowings. At March 31, 1994, Continental had not
borrowed any funds through the facility.
Investments: Fixed maturities available-for-sale consist of certain
bonds and redeemable preferred stocks that management may
not hold until maturity and which have an average Standard & Poor's
rating of AA (or its Moody's equivalent). Continental's
fixed maturities available-for-sale had a balance sheet fair value
of $6,642 million at March 31, 1994 (compared with a fair
value of $6,362 million at March 31, 1993) and included
mortgage-backed securities with a fair value of $1,271 million and
an amortized cost of $1,295 million at March 31, 1994 (compared
with a fair value of $1,069 million and an amortized cost
of $1,043 million at March 31, 1993). Continental's
mortgage-backed securities have an average Standard & Poor's rating
of AAA (or its Moody's equivalent) and an average life of 6.0
years. Continental has an insignificant investment in
collateralized mortgage obligations which put the return of
principal at risk if interest rates or prepayment patterns
fluctuate.
At March 31, 1994, the fixed maturities portfolio included an
immaterial amount of securities, the fair value of which is
expected to be lower than their carrying value for more than a
temporary period; such investments have been recorded in the
accompanying Consolidated Balance Sheets at their net realizable
value.
Continental also maintains an equity securities portfolio, the fair
value of which was $735 million at March 31, 1994. At
March 31, 1994, Continental also had a $109 million investment in
privately placed direct mortgages, which are included in
the balance sheet caption "Other Long-Term Investments."
Unrealized appreciation on investments decreased $357 million,
before income taxes, from December 31, 1993. Unrealized
appreciation on fixed maturities decreased $316 million. Unrealized
appreciation on common stocks decreased $43 million,
while unrealized appreciation on nonredeemable preferred stocks
decreased $4 million. Unrealized appreciation on other
long-term investments increased $6 million. In addition, unrealized
appreciation on investments held by discontinued operations
decreased $28 million, before income taxes, from December 31, 1993.
Continental's book value per share at March 31, 1994 was $32.37,
compared with $39.40 at December 31, 1993, reflecting
a $4.52 per share decline in the net unrealized appreciation of
investments (primarily due to the rise in interest rates during
first quarter 1994), the $1.62 per share first quarter 1994 loss,
a $0.64 per share worsening of the foreign currency translation
adjustment and a $0.25 per share shareholder dividend payment.
Reinsurance: In the ordinary course of business, Continental cedes
business to other insurers and reinsurers. Purchasing
reinsurance enables Continental to limit its exposure to
catastrophic events and other concentrations of risk. However,
purchasing reinsurance does not relieve Continental of its
obligations to its insureds. Continental reviews the
creditworthiness of its reinsurers on an ongoing basis.
To minimize potential problems, Continental's policy is to purchase
reinsurance only from carriers who meet its credit quality standards.
It has also taken and is continuing to take steps to settle existing
reinsurance arrangements with reinsurers who do not meet its credit
quality standards. Continental does not believe that there
is a significant solvency risk concerning its reinsurance claims.
In addition, Continental regularly evaluates the adequacy of
its reserves for uncollectible reinsurance. Continental believes
that it makes adequate provisions for the ultimate collectibility
of its reinsurance claims and therefore believes these net
recoveries to be probable.
Continental has in place various reinsurance arrangements with
respect to its current operations. These arrangements are subject
to retentions, coverage limits and other policy terms. Some of the
principal treaty arrangements which are presently in effect
are an excess of loss treaty reducing Continental's liability on
individual property losses, a blanket casualty program reducing
Continental's liability on third party liability losses, a clash
casualty program reducing Continental's liability on multiple
insured/single event losses, and a property catastrophe program,
with a net retention of $50 million in both 1994 and 1993,
reducing its liability from catastrophic events. Continental also
uses individual risk facultative and other facultative agreements
to further reduce its liabilities.
Sale of Premiums Receivable: In December, 1993, Continental sold
$513 million of premiums receivables balances. This sale
accelerated the cash flow from the sold receivables, increasing
cash provided by operations in 1993, but reducing cash by $259
million for first quarter 1994, when this portion of the
receivables would have been collected. As a result, the balance
sheet caption "Premiums Receivable" at March 31, 1994 is lower by $254
million than it otherwise would have been. In the event
that the receivables are not collected, Continental's credit risk
is limited to the amount that the purchasers of such receivables
hold as a deposit ($15 million at March 31, 1994).
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.
There were no matters submitted to a vote of security-holders
during the three months ended March 31, 1994.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
See the Exhibit Index included herein.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by this
report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
The Continental Corporation
(Registrant)
Dated: May 13, 1994 By s\William A. Robbie
William A. Robbie
Vice President and
Chief Accounting Officer
Mr. Robbie has signed this Report on behalf of the Registrant in
his capacity as a duly authorized officer and as the chief
accounting officer of the Registrant.
EXHIBIT INDEX
The following is a list of exhibits hereto required to be filed by
Item 601 of Regulation S-K.
Exhibit No.
(11) Statement Re: Computation of Per Share Earnings. Exhibit 1
EXHIBIT 1
THE CONTINENTAL CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(millions, except share and per share amounts)
Three Months Ended
March 31,
1994 1993
Income (Loss) from Continuing Operations $ (89.9) $ 18.9
Adjusted for:
Preferred Stock Dividends - 0.8
Income (Loss) from Continuing Operations
Available to Common Shareholders (89.9) 18.1
Income (Loss) from Discontinued
Operations, Net of Income Taxes - 3.7
Income (Loss) Available to Common
Shareholders before Net
Cumulative Effect of Changes
in Accounting Principles (89.9) 21.8
Net Cumulative Effect of Changes
in Accounting Principles - 1.6
Net Income (Loss) Available
to Common Shareholders $ (89.9) $ 23.4
Weighted Average Shares of
Common Stock Outstanding:
Primary 55,417,104 55,003,579
Fully Diluted 55,538,335 55,579,935
(Continued)
EXHIBIT 1
THE CONTINENTAL CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS, CONTINUED
(millions, except share and per share amounts)
Three Months Ended
March 31,
1994 1993
Earnings Per Share:
Income (Loss) Per Common Share
from Continuing Operations
Primary (1) $ (1.62) $ 0.33
Fully Diluted (2) $ (1.62) $ 0.33
Income (Loss) from Discontinued
Operations, Net of Income
Taxes
Primary (1) - $ 0.07
Fully Diluted (2) - $ 0.07
Net Cumulative Effect of Changes
in Accounting Principles
Primary (1) - $ 0.03
Fully Diluted (2) - $ 0.03
Net Income Per Common Share
Primary (1) $ (1.62) $ 0.43
Fully Diluted (2) $ (1.62) $ 0.43
(1) Per share amounts are computed on the weighted average number
of common equivalent shares outstanding during the
period. Common equivalent shares include the dilutive effect of
stock options and shares which would become issuable
pursuant to performance awards. Dividend requirements on all
preferred shares are deducted from earnings to derive common
earnings, upon which primary per share earnings are based.
(2) Fully diluted per share amounts are computed on the weighted
average number of common equivalent shares outstanding
during the period, increased by the assumed conversion of all
convertible securities as of the beginning of each period. Fully
diluted earnings amounts are based on earnings after deduction of
preferred dividends on shares which are not convertible, but
before deduction of dividends on convertible preferred shares.
Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
The Continental Corporation:
We consent to incorporation by reference in the registration
statement No. 33-43824 on Form S-3 of The Continental Corporation
and the registration statement No. 2-97474 on Form S-8 of The
Continental Corporation of our reports dated February 10, 1994,
relating to the consolidated balance sheets of The Continental
Corporation and subsidiaries as of December 31, 1993 and 1992,
and the related consolidated statements of income, shareholders'
equity, and cash flows and related schedules for each of the
years in the three-year period ended December 31, 1993, which
reports appear in or are incorporated by reference in the
December 31, 1993 annual report on Form 10-K of The Continental
Corporation.
Our reports refer to The Continental Corporation and subsidiaries
change in methods of accounting for multiple-year retrospectively
rated reinsurance contracts and for the adoption of the
provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits," No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," and No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," in 1993. The Continental
Corporation and subsidiaries adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and No. 109,
"Accounting for Income Taxes,"in 1992.
KPMG Peat Marwick
New York, New York
March 25, 1994