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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 [FEE REQUIRED]
For the fiscal year ended December 31, 1994.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
incorporation or organization) Identification No.)
180 Maiden Lane, New York, New York 10038
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 212-440-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $1.00 per share New York, Midwest and Pacific
Stock Exchanges
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 of the registrant held by
non-affiliates of the registrant as of March 27, 1995 was $1,044,020,289.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 27, 1995.
55,498,057 shares of Common Stock
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement, filed with the Securities
and Exchange Commission and mailed to shareholders on March 29, 1995, in
connection with a May 9, 1995 Special Meeting of Shareholders, including
registrant's Management's Discussion and Analysis of Financial Condition and
Results of Operations, Consolidated Financial Statements and Notes to the
Consolidated Financial Statements, are incorporated by reference into Parts
I, II and III of this Report.
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PART I
Item 1. Business
General Information
The Continental Corporation ("Continental"), a New York corporation
incorporated in 1968, is an insurance holding company. Its best known
subsidiary, The Continental Insurance Company, was organized in 1853. The
principal business of Continental is the ownership of a group of property and
casualty insurance companies. Continental's other principal subsidiaries and
affiliates provide investment management, claims adjusting and risk management
services. In 1993, Continental sold its premium financing operations; in 1992,
Continental instituted a plan to withdraw from the traditional assumed
reinsurance and marine reinsurance businesses and the indigenous international
and international marine insurance businesses. The results of these operations
are reported as discontinued and previously reported information has been
restated accordingly.
On December 6, 1994, Continental entered into an Agreement and Plan of Merger
(the "Merger Agreement") under which CNA Financial Corporation ("CNA") will
acquire Continental through a merger of a wholly-owned CNA subsidiary with and
into Continental (the "CNA Merger"). Under the Merger Agreement, each share of
Continental common stock outstanding prior to the Merger (other than certain
shares held by Continental and its subsidiaries), will be converted into the
right to receive $20.00 in cash, without interest, upon consummation of the
Merger. The proposed CNA Merger is subject to satisfaction of certain
conditions, including approval by Continental's shareholders and various
regulatory authorities, and is required to be consummated prior to December 31,
1995. Consummation of the proposed CNA Merger is expected in the first half of
1995.
Re-engineering Strategy
Continental's results over the past several years have been adversely
affected by a variety of factors, including a downturn in the insurance
industry, a number of severe catastrophic losses and a high expense structure.
In the first quarter of 1994, Continental experienced a substantial increase in
weather-related losses not officially designated as catastrophic and a
substantial increase in large losses. The cumulative effect of these factors
resulted in a significant reduction in statutory surplus of Continental's
insurance company subsidiaries, and Continental's shareholders' equity. In
1994, Continental also experienced a reduction in the value of its investment
portfolio resulting from increased interest rates, which also affected
shareholders' equity.
In early 1994, Continental began reviewing all aspects of its operations in
order to develop a plan to address these concerns. Following its review,
Continental began to implement a restructuring plan designed to increase the
profitability of its underwriting businesses, shift the focus of its business to
more profitable lines, reduce its expense structure, reduce its exposure in
catastrophe-prone areas, reduce its premium to surplus ratio, strengthen its
balance sheet and improve its capital position.
As part of its re-engineering efforts, Continental has taken several steps
that it believes will enhance the profitability of its insurance underwriting
operations. In June 1994, Continental began to curtail its property writings of
commercial and personal package business, especially in catastrophe-prone areas,
and to alter the scope and breadth of its property coverages and exposures.
Continental has also increased rates in catastrophe-prone areas. Continental
also began shifting the mix of its business towards those areas in which
management believes Continental can achieve an underwriting profit without a
pre-determined target for business mix. As part of those efforts, Continental
restructured its Agency & Brokerage Group and formed in its place two new, more
focused operating groups -- Commercial Lines and Personal Lines. These two
groups compete in separate arenas and require different sets of resources. They
are now structured on a product management basis, which Continental believes
will provide enhanced customer service and operating efficiencies. Continen-
tal's Special Operations Group will remain focused on specialty commercial
lines. This will allow Continental to focus more clearly on underwriting profit
by product and industry.
Continental is also focusing on increasing its profitability through changes
in its distribution system by raising the standards for its agents. Continental
is taking steps to increase the level of business that is distributed through
agents that maintain the lowest loss ratios, decrease the level of business
distributed through non-key agents and terminate unprofitable agents.
To reduce its operating expenses, in March 1994, Continental's senior
management approved a definitive plan (the "First Quarter Plan") to re-engineer,
as noted above, the operations of Continental's Agency & Brokerage division
(including home office, field claims and underwriting), selected operations of
Continental's Special Operations Group, particularly its multinational unit and
several corporate staff divisions, including Human Resources, Corporate Claims,
Actuarial, Finance and Legal. The locations identified for re-engineering were
Cranbury, New Jersey; New York, New York; Duluth, Georgia; Chicago, Illinois;
Dallas, Texas; Glens Falls, New York; Overland Park, Kansas; Rancho Cordova,
California; Columbus, Ohio; York, Pennsylvania and certain overseas locations.
The First Quarter Plan provided for the elimination of 680 positions (net of new
hires and transfers and resulting from approximately 1,200 terminations), from a
total workforce of 12,255 at year end 1993, within one year from approval of the
plan, as well as the achievement of business-related expense savings by the
first quarter of 1995. During 1994, substantially all of the employees
identified for termination in the First Quarter Plan were notified that their
positions had been eliminated. The First Quarter Plan included severance
packages for all affected employees, as well as extended benefits and
outplacement counseling for many of them.
The First Quarter Plan re-engineering efforts also included vacating leased
space at 27 locations. As of December 31, 1994, all of these locations had been
effectively vacated. Continental's underwriting results for 1994 included a $45
million restructuring charge (the "Restructuring Charge") relating to the First
Quarter Plan, which included $29 million for expected severance and related
benefit costs and $16 million in expected lease vacation and other associated
costs.
Also, to further reduce its operating expenses, Continental reconsidered its
staffing needs in the second quarter and developed a plan in the third quarter
(the "Third Quarter Plan") that would result in a further net reduction of
approximately 1,100 positions (in addition to the terminations of approximately
1,200 under the First Quarter Plan). Continental's 1994 underwriting results
include a $14 million additional staff reduction charge (the "Additional Staff
Reduction Charge"), which included expected severance and related benefit costs.
During 1994, substantially all employees identified for termination in the Third
Quarter Plan were notified that their positions had been eliminated. Management
believes that the re-engineering actions taken under the First Quarter Plan and
the Third Quarter Plan will create annual pre-tax savings of about $120 million,
compared with Continental's reported 1993 expenses.
Continental has also taken steps to strengthen its balance sheet by
eliminating dividends on its common stock and raising additional equity capital.
In addition, in order to strengthen the capital base of its domestic insurance
subsidiaries, during 1994, Continental deployed $510 million of capital to its
domestic insurance subsidiaries from non-domestic insurance subsidiaries,
investments held at the holding company level and capital raised by Continental.
In August 1994, Continental's Board of Directors, citing the need to further
strengthen the Corporation's capital base, eliminated the quarterly cash
dividend of $.25 per share on the Corporation's common stock. Continental will
be prohibited under certain provisions of its preferred stock instruments from
paying common stock dividends for three years and will be restricted from paying
common stock dividends thereafter under certain circumstances.
Pursuant to a separate agreement (the "CNA Securities Purchase Agreement")
executed at the time of entering into the Merger Agreement, CNA and its
affiliate Continental Casualty Company ("CCC") acquired for $275 million in cash
(i) $200 million in aggregate liquidation value of two
2
series of 9.75% non-convertible preferred stock, redeemable under certain
circumstances at the liquidation value plus an additional amount reflecting any
increase in the per share price of Continental's common stock over $15.75 based
on an average market price during a period relating to the notice of redemption;
(ii) an option, which is exercisable only after termination of the Merger
Agreement, to acquire $125 million in liquidation value of another series of
9.75% non-convertible preferred stock; and (iii) $75 million in liquidation
value of a series of 12% non-convertible preferred stock, maturing in ten years
and redeemable under certain circumstances. The option and its underlying
preferred stock will be redeemable under certain circumstances at an additional
amount reflecting any increase in the per share price of the common stock over
$17.75 based on an average market price during a period relating to the notice
of redemption and, in the case of the underlying preferred stock, the
liquidation value. The 9.75% preferred stock will mature in forty years, with a
right of the holders to require redemption in 15 years, and may be redeemed by
Continental under certain circumstances. If the CNA Merger is not completed,
CNA may, subject to regulatory approvals, exchange approximately $166 million of
the $200 million liquidation value 9.75% preferred stock for another series of
preferred stock that would be convertible into approximately 19% of
Continental's currently outstanding common shares (approximately 16% on a fully
diluted basis) at an initial conversion price, subject to adjustment, of $15.75.
Following such exchange, CNA would be entitled to nominate up to four members of
Continental's Board of Directors. CNA would also be subject to certain
standstill agreements and restrictions on transfer. (For a more detailed
description of the securities purchased by CNA see Continental's Proxy
Statement, filed with the Securities and Exchange Commission and mailed to
shareholders on March 29, 1995, in connection with a May 9, 1995 Special Meeting
of Shareholders (the "Proxy Statement") at pages 36 - 43.)
The capital investment by CNA, which was completed on December 9, 1994, took
the place of a proposed $200 million investment in Continental by Insurance
Partners L.P. ("IP"). In connection with the execution of the Merger Agreement
and the CNA Securities Purchase Agreement, Continental terminated a securities
purchase agreement with IP (the "IP Securities Purchase Agreement") and an
agreement under which an affiliate of IP was to purchase Continental Asset
Management Corp., Continental's asset management subsidiary. (See the Proxy
Statement at pages 13 - 14.)
Of the $275 million CNA capital investment, $235 million was contributed by
Continental to its domestic insurance companies, as part of the $510 million
deployment of capital. $25 million was used to fund termination fees (including
$7 million of expenses) payable to IP upon termination of the IP Securities
Purchase Agreement, and $10 million was used to pay severance benefits to
Richard M. Haverland, former director and Vice Chairman of Continental, pursuant
to his employment agreement with Continental, upon his resignation upon
termination of the IP Securities Purchase Agreement. The remainder of such
proceeds was used to pay certain expenses in connection with Continental's
capital infusion efforts and the CNA Merger.
Continental has also sold non-strategic businesses. In 1994, Continental
sold The Continental Insurance Company of Canada ("CI") and its wholly-owned
subsidiaries ("CI Canada"), a major property and casualty insurer in Canada,
which wrote $320 million of premiums in 1994. (See pages 6 - 7 herein.) In
1995, Continental sold Casualty Insurance Company and its wholly-owned subsid-
iary ("Casualty"), the leading writer of workers' compensation insurance in
Illinois, which wrote $385 million of premiums in 1994. (See page 9 herein.)
In mid-1994, Continental also entered into a quota-share agreement (the
"Quota Share Cession") to reinsure a portion of its domestic personal lines with
a major U.S. reinsurer. From July 1, 1994 through December 31, 1995, the
quota share participation is 50% of the covered lines. Continental ceded
written premiums of $325 million in 1994, and expects to cede premiums related
to this agreement of approximately $300 million in 1995. The Quota Share
Cession will help Continental lower its premium-to-surplus ratio and further
reduce its exposure to catastrophes subject to the agreement's catastrophe
coverage limits.
3
These actions have already had the following results: Continental's work
force has been reduced by 2,898 employees (including 2,300 from planned
reductions in force), from 12,255 employees at December 31, 1993 to 9,357 at
December 31, 1994; more selective underwriting has reduced net premiums written
by approximately $435 million as at December 31, 1994 from 1993 levels; the
Quota Share Cession has reduced net premiums written by $325 million as at
December 31, 1994 from 1993 levels; sales of businesses are expected to reduce
net premiums written by an additional approximately $705 million from 1994
levels; the capital position of Continental's domestic insurance subsidiaries
has been strengthened by the deployment of $510 million of capital to such
insurance subsidiaries from non-domestic insurance subsidiaries, investments
held at the holding company level and capital raised by Continental; and
Continental's capital position has been improved by the elimination of dividends
on Common Stock. Continental expects that these and similar actions, if
continued, would, barring unexpected adverse events such as have occurred in
the past, result in a significant improvement in its financial condition and
profitability. Continental's restructuring efforts have not, however, been
fully implemented, and there can be no assurance that implementation of such
efforts would result in future profitability or a significant improvement in
Continental's financial condition.
Under the Merger Agreement, Continental is required to conduct its business
in the ordinary course and use all reasonable efforts to preserve intact its
business organizations and relationships with third parties and to keep
available the services of the present officers and key employees. (See Proxy
Statement at pages 25 - 26.) As a result, Continental will not implement
further premium reduction or other restructuring efforts pending the CNA merger.
If the CNA Merger is not approved by Continental's shareholders, the Board of
Directors of Continental would consider what action should be taken in the
interests of Continental's shareholders, including implementing further
restructuring efforts, as well as continuing as an independent company, or
exploring the sale of Continental or of an additional minority interest in
Continental. If restructuring efforts were resumed, there can be no assurance
that the financial condition and profitability of Continental would improve to
the same extent as anticipated when the Merger Agreement was executed. If the
CNA Merger is not approved by Continental's shareholders, CCC will continue to
own Continental's preferred stock and will be entitled to seek the necessary
regulatory approvals to convert certain of those shares into shares that would
give it voting and other rights. CNA will retain its option to purchase certain
other preferred stock of Continental. Continental would seek to raise an
additional $100 million in capital through the sale of either non-convertible
preferred stock or senior notes. (See "Miscellaneous" commencing on page 35
herein.) Even with further restructuring efforts and the additional
investments, Continental would likely continue to have little surplus cushion
available for adverse events, such as additional high catastrophe losses,
adverse loss development or further reductions in the value of its investment
portfolio, and a high debt to capital ratio. Continental would also be subject
to any adverse market consequences resulting from a failure of the CNA Merger to
be consummated.
4
Financial Information Relating to Business Segments
Continental's revenues from insurance operations accounted for approximately
98% of Continental's consolidated revenues for the year ended December 31, 1994,
and approximately 97% and 98% of consolidated revenues for each of the years
ended December 31, 1993 and 1992, respectively. The following table sets forth
certain information with respect to Continental's business segments for each of
the last three years:
Year Ended December 31, (2)
-----------------------------------------
1994 1993 1992
---------- ----------- -----------
(millions)
Revenues:
Agency & Brokerage Commercial . . $ 2,164.5 $ 2,121.3 $ 1,919.5
Agency & Brokerage Personal . . . 704.0 861.6 777.4
Specialized Commercial . . . . . . 1,560.6 1,433.2 1,201.1
---------- ----------- -----------
Total Premiums Earned . . . . . . . 4,429.1 4,416.1 3,898.0
Net Investment Income (1) . . . . . 490.8 514.3 559.5
Realized Capital Gains (1). . . . . 76.7 110.3 222.3
---------- ----------- -----------
Insurance Operations . . . . . . . 4,996.6 5,040.7 4,679.8
Corporate & Other Operations . . . 104.8 133.0 117.2
---------- ----------- -----------
Total . . . . . . . . . . . . . . $ 5,101.4 $ 5,173.7 $ 4,797.0
========== =========== ==========
Income (Loss) from Continuing Operations before Income
Taxes:
Agency & Brokerage Commercial . . . $ (853.6) $ (234.8) $ (281.0)
Agency & Brokerage Personal . . . . . (96.1) (78.1) (127.0)
Specialized Commercial . . . . . . . (475.1) (92.5) (173.6)
---------- ----------- -----------
GAAP Underwriting Loss . . . . . . . (1,424.8) (405.4) (581.6)
Net Investment Income (1) . . . . . . 490.8 514.3 559.5
Realized Capital Gains (1). . . . . . 76.7 110.1 222.3
---------- ----------- -----------
Insurance Operations . . . . . . . . (857.3) 219.0 200.2
Corporate & Other Operations . . . . (150.2) (41.1) (69.5)
---------- ----------- -----------
Total . . . . . . . . . . . . . . . $ (1,007.5) $ 177.9 $ 130.7
========== =========== ==========
Identifiable Assets:
Insurance Operations . . . . . . . . $ 14,186.7 $ 15,471.9 $ 15,113.5
Corporate & Other Operations . . . . 1,694.7 583.9 149.9
---------- ----------- -----------
Total Assets from Continuing
Operations . . . . . . . . . . . 15,881.4 16,055.8 15,263.4
Net Assets of Discontinued
Operations . . . . . . . . . . . . 88.2 84.6 310.5
---------- ----------- -----------
Total Assets . . . . . . . . . . . $ 15,969.6 $ 16,140.4 $ 15,573.9
========== =========== ==========
____________________
(1) Distinct investment portfolios are not maintained for each insurance
segment, and, accordingly, allocation of assets, net investment income and
realized capital gains to each insurance segment is not performed.
(2) Certain reclassifications have been made to the prior years' financial
information to conform to the 1994 presentation.
5
General Information Relating to Business Segments
Continental's insurance operations (the "Insurance Operations") are comprised
of three segments: Agency & Brokerage Commercial, Agency & Brokerage Personal
and Specialized Commercial. These operations are conducted by Continental's
property and casualty insurance subsidiaries. One or more of these companies is
licensed or admitted to conduct business in each state or territory of the
United States and in each province or territory of Canada. The Insurance
Operations generated 98% of consolidated revenues for 1994, including 87% from
premiums earned and 11% from investment activities (net investment income and
realized capital gains). Continental's other segment is Corporate & Other
Operations, which principally includes investment management, claims adjusting
and risk management services.
Agency & Brokerage Commercial
Continental's Agency & Brokerage Commercial segment focuses on the production
of property and casualty insurance coverage in the United States and Canada
through independent insurance agents and brokers, almost all of whom also
represent other companies. In 1994, the Agency & Brokerage Commercial segment
included: (1) the new Commercial Lines group; (2) Continental Risk Management
Services operations; (3) Continental Canada's commercial lines operations; and
(4) commercial lines operations of First Insurance Company of Hawaii, Ltd., a
60%-owned Continental subsidiary ("First of Hawaii"). For the fiscal year ended
December 31, 1994, the Agency & Brokerage Commercial segment produced 49.8% of
Continental's consolidated written premiums. In 1994, premiums on its com-
mercial multi-peril policies represented 57.8% of the segment's written premi-
ums. Other principal lines written by the Agency & Brokerage Commercial segment
include workers' compensation, commercial automobile, general liability, boiler
and machinery, and fire & allied lines.
Continental's Agency & Brokerage Commercial segment is structured on a
product management basis. Agency & Brokerage Commercial operations consist of
five regional offices containing underwriters and support personnel and a
network of approximately 30 territorial offices responsible for sales and
underwriting.
Continental Risk Management Services operations market custom-tailored
casualty coverages to Continental's large commercial accounts, including primary
and excess coverage for workers' compensation, general liability and commercial
automobile risks. Such operations also provide claims management, loss control
and actuarial services for its clients.
Continental's Canadian operations, which are considered part of North
American operations and which write commercial and personal property and
casualty coverages in Canada, included the following during 1994: (1) CI
Canada, which was sold as of December 31, 1994; and (2) branch offices of two of
Continental's U.S. property and casualty companies. In October 1994,
Continental entered into an agreement to sell CI Canada to Fairfax Financial
Holdings Limited, a Canadian financial services company ("Fairfax"), for 130
million Canadian dollars, debt securities of Fairfax with a face value of 25
million Canadian dollars and a contingent payment of up to 10 million Canadian
dollars based on the performance of CI Canada through December 31, 1999. The
approximate U.S. dollar equivalents at the exchange rate on December 31, 1994,
are $95 million, $18 million and $7 million, respectively. Due to the
uncertainty of future performance, no provision has been made in Continental's
Consolidated Financial Statements for any potential gain from the contingent
payment from Fairfax to Continental. Continental provided a guarantee of up to
40 million Canadian dollars for adverse loss development on accident years 1993
and prior, which, based on current actuarial reviews, is not expected to be
utilized. The entities sold accounted for 10.3% of Agency &
6
Brokerage Commercial's written premiums in 1994. The sale was closed as of
December 31, 1994, and Continental recognized a $10 million loss on the
transaction. Subsequent to that sale, Continental's Canadian operations
consist of its two remaining branch offices in Canada.
First of Hawaii is a property and casualty insurer in the Hawaiian Islands.
As of December 31, 1994, The Tokio Marine and Fire Insurance Company, Ltd., a
Japanese insurance company, owns the remaining 40% of the outstanding shares of
First of Hawaii.
The Agency & Brokerage Commercial segment's 1994 underwriting results
decreased $619 million from 1993, primarily due to the segment's $269 million
share of a $480 million charge to establish, for the first time, loss and loss
expense reserves and a reinsurance recoverable charge related to incurred but
not reported asbestos-related, other toxic tort and environmental pollution
claims (the "Environmental IBNR Charge"); its $70 million share of a $200
million charge to strengthen Continental's commercial multi-peril and workers'
compensation reserves (the "Reserve Strengthening Charge") (see "Reserves for
Unpaid Losses and Loss Expenses" commencing on page 22 herein); a $31 million
charge for an additional provision for uncollectible premiums receivable (the
"Premiums Receivables Charge"); increases in non-catastrophe weather-related
losses and large losses; its $29 million share ($17 million in loss expenses and
$12 million in insurance operating expenses) of the Restructuring Charge; its
$21 million share of a $73 million provision for other assets; its $9 million
share ($1 million in loss expenses and $8 million in insurance operating
expenses) of the Additional Staff Reduction Charge; and a $35 million increase
in net reported environmental losses and loss expenses. The segment's premiums
earned increased $43 million from 1993, primarily due to increases in premiums
from growth in certain non-package standard commercial lines, partially offset
by the Premiums Receivable Charge. The segment's losses and loss expenses in-
creased $619 million, primarily due to the Environmental IBNR Charge; the
Reserve Strengthening Charge; increases in non-catastrophe weather-related
losses and large losses; the Restructuring Charge; the increase in net reported
environmental losses and loss expenses; and inflation in loss costs. Insurance
operating expenses increased $43 million, primarily due to the Restructuring
Charge, Additional Staff Reduction Charge, the provision for other assets and a
$21 million decrease in servicing carrier income, partially offset by expense
savings realized as a result of Continental's 1994 re-engineering.
Agency & Brokerage Personal
Continental's Agency & Brokerage Personal segment also focuses on the
production of property and casualty insurance coverage in the United States and
Canada through independent insurance agents and brokers, almost all of whom also
represent other companies. The Agency & Brokerage Personal segment includes:
(1) the new Personal Lines group, including employee accounts; (2) Continental's
Canadian personal lines operations; and (3) personal lines operations of First
of Hawaii, each of which is discussed above. For the fiscal year ended Decem-
ber 31, 1994, the Agency & Brokerage Personal segment produced 12.8% of
Continental's consolidated written premiums. Premiums on its personal package
policies represented 48.5% of the segment's written premiums. Other principal
lines written by the Agency & Brokerage Personal segment include automobile,
homeowners, and fire & allied lines.
Agency & Brokerage Personal operations consist of five regional offices,
four of which are shared with Agency & Brokerage Commercial, and an automated
business center that handles underwriting and processing of its personal lines.
CI Canada, which was sold as of December 31, 1994, accounted for 20% of
Agency & Brokerage Personal's written premiums in 1994.
7
The Agency & Brokerage Personal segment's 1994 underwriting results decreased
$18 million from 1993, primarily due to a $25 million increase in catastrophe-
related charges, the segment's $13 million share ($9 million in loss expenses
and $4 million in insurance operating expenses) of the Restructuring Charge, its
$10 million share of the provision for other assets and its $5 million share
($1 million in loss expenses and $4 million in insurance operating expenses) of
the Additional Staff Reduction Charge, partially offset by better loss
experience (excluding catastrophe losses) and a decrease in relative
underwriting expenses. The segment's premiums earned decreased $158 million
from 1993, primarily due to the cession of $170 million of domestic personal
lines business under a quota share agreement with General Reinsurance
Corporation (the "Quota Share Cession") and a decrease in the amount of risk
accepted, partially offset by price increases. The segment's losses and loss
expenses decreased $89 million, primarily due to the Quota Share Cession and the
decrease in the amount of risk accepted, partially offset by the increase in
catastrophe losses, the Restructuring Charge and inflation in loss costs. The
segment's insurance operating expenses improved $51 million, primarily due to a
$61 million decrease in commission expenses resulting from the Quota Share
Cession and expense savings realized as a result of the re-engineering,
partially offset by the Restructuring Charge, the Additional Staff Reduction
Charge and the provision for other assets.
Specialized Commercial
Continental's Specialized Commercial segment provides specialized commercial
coverages, principally in marine and aviation, workers' compensation, fidelity &
surety, excess and specialty, accident and health, medical malpractice,
customized financial coverage and multinational lines. This segment accounted
for 37.4% of Continental's consolidated written premiums for the 1994 fiscal
year. The Specialized Commercial segment included during 1994: (1) Marine
Office of America Corporation, a Continental subsidiary ("MOAC"); (2) a 37%
participation in the operations of Associated Aviation Underwriters ("AAU"),
which was reduced to a 25% participation by March 1995; (3) Continental Excess &
Select and other specialty operations; (4) Casualty Insurance Company, a
Continental subsidiary sold in February 1995 ("Casualty"); (5) Continental
Financial Institutions operations; (6) Continental Guaranty operations;
(7) Continental Credit operations; (8) Continental Insurance HealthCare opera-
tions; (9) The Continental Insurance Company of Puerto Rico ("Continental Puerto
Rico"); (10) The Continental Insurance Company (Europe) Limited, a Continental
subsidiary ("Continental Insurance (Europe)") and (11) Lombard Insurance Company
Limited and its subsidiary Lombard General Insurance Limited (together, the
"Lombard Entities"), which were sold in January 1995.
MOAC underwrites and manages ocean and inland marine insurance coverages,
automobile warranty coverages and service repair warranty coverages for
technical equipment through branch offices located throughout the United States.
It also concentrates on developing package policies for the transportation,
distribution and manufacturing industries. MOAC supports all of these coverages
with specialized claims handling, surveying, loss control and recovery services.
AAU writes insurance for many segments of the aviation industry through
branch offices located throughout the United States. Associated Aviation
Underwriters, Inc., in which Continental has a 50% interest, manages AAU.
Continental Excess & Select and other specialty operations are active in the
excess and specialty lines markets. Their principal types of coverage are stop-
loss protection on group health insurance programs, professional liability
insurance for lawyers, accountants and other classes of professionals, excess
liability insurance, directors' and officers' liability insurance and industry
targeted programs of liability insurance for the railroad, mining, skiing,
biotechnology and pharmaceutical industries.
8
Continental Excess & Select operations also provide support services to
Continental's other excess liability and specialty lines operations.
Casualty and its subsidiary, Workers' Compensation and Indemnity Company of
California, were Continental subsidiaries engaged in writing certain preselected
classes of workers' compensation exposures in Illinois, Wisconsin, Indiana,
Michigan and southern California. In February 1995, Continental sold the stock
of Casualty to Fremont General Corporation for $225 million in cash and a
$25 million note. In 1995, Continental will recognize a pre-tax gain of
approximately $50 million from the sale of Casualty. The entities sold
accounted for 24.7% of the Specialized Commercial segment's written premiums in
1994.
Continental Financial Institutions operations provide highly specialized
coverages for financial institutions, from fidelity bonds to directors' and
officers' liability and professional liability insurance, as well as a range of
fidelity products for commercial businesses. Continental Guaranty operations
are a major provider of surety coverages. Continental Credit operations provide
credit insurance. The financial institutions, guaranty and credit operations
were previously divisions of a Continental subsidiary, Continental Guaranty &
Credit Corporation, which is no longer doing business as a separate corporate
entity.
Continental Insurance HealthCare operations primarily provide medical
malpractice insurance. Such operations also provide claims and risk management
services to insureds and other clients.
Continental Puerto Rico assumes business in Puerto Rico, primarily by way of
a quota-share reinsurance agreement with an unaffiliated entity, Puerto-Rican
American Insurance Company ("PRAICO"). In 1994, the quota-share participation
of Continental Puerto Rico was 8.1% of the net premiums written by PRAICO.
Continental Insurance (Europe) services some U.S. multinational companies.
In January 1995, pursuant to an agreement with Carlingford Gibbs Holdings
Limited, Continental sold the Lombard Entities, which were primarily engaged
in the business of writing business in Hong Kong. Proceeds from the sale
approximated $48 million, comprised of a $17 million dividend from Lombard
to Continental, and $31 million in cash at the closing. Continental does not
expect that this sale will have a significant impact on its results of
operations, financial condition or liquidity.
The Specialized Commercial segment's 1994 underwriting results decreased
$383 million from 1993, primarily due to the segment's $211 million share of the
Environmental IBNR Charge and its $130 million share of the Reserve
Strengthening Charge, partially offset by a $13 million decrease in catastrophe
losses. The segment's 1994 premiums earned increased $128 million from 1993 due
to price increases and acceptance of new risks in certain lines. Premiums
earned increased $69 million in domestic marine, $60 million in specialty
casualty, $41 million in workers' compensation in selected markets and
$11 million in aviation. These increases were partially offset by a $68 million
decrease in customized financial coverages and a $29 million decrease in
multinational business. The segment's losses and loss expenses increased
$457 million, despite the $13 million decrease in net catastrophe losses,
primarily due to the Environmental IBNR Charge; the Reserve Strengthening
Charge; inflation in loss costs and the increase in the amount of risk accepted.
Insurance operating expenses increased $54 million, primarily due to growth in
business written.
9
Corporate & Other Operations
The Corporate & Other Operations segment includes Continental's corporate
operating expenses and the operations of Continental's non-insurance
subsidiaries. Continental's non-insurance subsidiaries primarily include: (1)
Continental Asset Management Corp. ("CAM"); (2) Continental Loss Adjusting
Services, Inc. ("CLAS"); (3) Continental Rehabilitation Resources, Inc. ("CRR");
(4) Ctek, Inc. ("Ctek"); (5) California Central Trust Bank Corporation
("CalTrust"); and (6) Settlement Options, Inc. ("Settlement Options").
CAM, a Continental subsidiary registered under the Investment Advisers Act of
1940, as amended, provides investment advisory services to Continental, its
subsidiaries, its employee benefit plans, certain affiliates and unrelated
parties under investment advisory agreements. Continental has had preliminary
discussions relating to a possible sale of CAM. Continental does not expect the
sale of CAM to have a significant impact on its financial position, results of
operations or liquidity.
CLAS provides claims services for Continental's subsidiaries and other
customers. Its wholly-owned subsidiary, CRR, provides case management and
vocational rehabilitation for injured employees of insureds and other clients.
Ctek engages in risk evaluation and improvement activities designed to help
insureds and other clients reduce or control losses to property, equipment,
materials and human resources.
CalTrust is a limited service bank whose activities are restricted to the
acceptance of deposits, investment of depository funds and acting as trustee
and/or third party administrator for employee benefit plans. Continental and
CNA have determined, in order that CNA not become subject to regulation under
the Bank Holding Company Act, as amended (the "BHC Act"), to dispose of CalTrust
and, if a sale is not completed prior to the Merger, to transfer ownership of
CalTrust to an independent trustee (the "Trustee") subject to an irrevocable
voting trust agreement. A change in control of CalTrust requires prior notice
to and approval of the Board of Governors of the Federal Reserve System (the
"Board") and of the California Superintendent of Banks (the "Superintendent").
Continental has requested and received confirmation from the Board Staff that,
if Continental proceeds in the manner described above, the Staff would not
recommend that the Board require the prior approval of the Board to effect the
Merger nor that the Board take any action against CNA under the BHC Act as a
result of the Merger. Continental has submitted to the Superintendent an
application for exemption of the transfer of CalTrust to the voting trust from
the notice and approval requirements. Continental intends to sell CalTrust
whether or not the Merger is consummated. Continental does not expect the sale
of CalTrust to have a significant impact on its financial position, results of
operations or liquidity.
The following table sets forth certain information with respect to CalTrust's
deposit liabilities for each of the last three years ended December 31:
10
1994 1993 1992
---------- ----------- -----------
% % %
Average Average Average
Average Interest Average Interest Average Interest
Balance Rate Balance Rate Balance Rate
(millions, except percentages)
Savings Deposits
(representing Total
Interest-Bearing
Time and Savings
Deposits) . . . . . . . . $ 120.7 2.7% $ 123.1 2.8% $ 121.9 3.4%
======= ====== ======= ====== ======= ======
Settlement Options is a general insurance agency which consults with property
and casualty claim organizations on personal injury losses to reduce settlement
costs by arranging structured claim settlements, and purchases annuities to fund
these future periodic payment obligations.
Corporate and Other Operations generated a loss, before income tax benefits,
of $150 million for 1994, an increase in loss of $109 million from 1993. This
increase in losses was primarily due to a $43 million charge for fees and
expenses paid in connection with Continental's capital infusion efforts and the
Merger Agreement (see "Re-engineering Strategy" commencing on page 1 herein);
Corporate and Other Operations' $36 million share of the provision for other
assets; a $30 million decrease in investment results (a $15 million decrease in
net investment income and a $15 million decrease in realized capital gains); and
higher corporate operating expenses, partially offset by an $8 million decrease
in corporate interest expense.
Discontinued Operations
In 1993, Continental completed the sale of its premium financing
subsidiaries, AFCO Credit Corporation, AFCO Acceptance Corporation and CAFO Inc.
(collectively, "AFCO"), to Mellon Bank Corporation ("Mellon"). Proceeds from
the sale approximated $220 million, comprised of a $120 million dividend from
AFCO to Continental and $100 million in cash from Mellon Bank. In addition, the
sale agreement provides for a contingent payment to Continental based on AFCO's
premium finance growth through December 31, 1998, for a potential maximum
payment to Continental of up to $78 million. No provision has been made in
Continental's Consolidated Financial Statements for any potential gain from this
contingent payment from Mellon Bank. Continental realized a 1993 gain from the
sale of approximately $36 million, net of income taxes. Also in 1993,
Continental had an additional $15 million of income, net of income taxes, from
its discontinued premium financing operations and a loss of $2 million, net of
income tax benefits, from its discontinued insurance operations.
In 1993, results and net assets of the premium financing operations, which
were previously reported in the Corporate & Other Operations segment, were
classified in Continental's Consolidated Financial Statements as discontinued.
Previously reported information has been restated accordingly.
In 1994, Continental recognized an additional after-tax gain of $3.5 million,
relating to the sale of its premium financing operations, as a result of final
tax elections made for 1993. In addition, in 1994, Continental reduced various
tax liabilities related to previously discontinued insurance operations and
realized $36 million in additional income. The reduction in the various tax
liabilities
11
is a direct result of a recent review of Continental's tax position and the
development of the discontinued operations over the last two years.
The following table sets forth certain information with respect to operating
results of the discontinued premium financing operations for each of the last
three years:
Year Ended December 31,
1994 1993 1992
--------- --------- ---------
(millions)
Total Revenues . . . . . . . . . . . $ -- $ 92.4 $ 103.0
Total Expenses . . . . . . . . . . . -- 75.4 79.5
--------- --------- ---------
Income before Income Taxes . . . . . -- 17.0 23.5
Income Taxes . . . . . . . . . . . . -- 1.7 4.7
Gain on Disposal of Discontinued
Premium Financing Operations,
Net of Income Taxes . . . . . 3.5 36.0 --
--------- --------- ---------
Net Income from Discontinued Premium
Financing Operations . . . . . $ 3.5 $ 51.3 $ 18.8
========= ========= =========
During 1992, Continental instituted a program to withdraw from the
traditional assumed reinsurance and marine reinsurance businesses, as well as
the indigenous international and international marine insurance businesses.
Continental has been accomplishing this withdrawal by running off the insurance
reserves of certain of these discontinued operations and selling the remaining
operations (all of which were sold by September 30, 1993). The results and net
assets of the aforementioned operations have been classified in Continental's
Consolidated Financial Statements as discontinued.
Continental's subsidiaries, Continental Reinsurance Corporation
International Limited ("CRC-I") and East River Insurance Company (Bermuda) Ltd.
("ERIC"), both of which are continuing entities, manage a substantial portion of
the assets and reserves of the discontinued operations, except reserves which
were recorded in foreign operations as a requirement of law. In 1992,
substantially all of the business of Continental's reinsurance subsidiary,
Continental Reinsurance Corporation, was discontinued, and substantially all of
its insurance reserves, along with an equivalent amount of assets, were
transferred to CRC-I and ERIC.
The traditional assumed reinsurance and marine reinsurance businesses were
autonomous from Continental's primary Insurance Operations. The product,
customer base and distribution system also varied significantly from
Continental's primary Insurance Operations. Before discontinuance, these
businesses generally included proportional and non-proportional, facultative and
treaty, and property and casualty insurance and reinsurance. The primary method
of reinsurance distribution was through the broker market and the customer base
consisted of other insurance and reinsurance companies. With the exception of a
portion of the indigenous international insurance business, the discontinued
insurance operations were comprised of separate legal entities. The discon-
tinued insurance operations maintained distinct investment portfolios since the
companies were domiciled in jurisdictions outside the United States and were
required by local law to have separately maintained and managed portfolios.
Indigenous international insurance was comprised of risks that are located
in countries outside the
12
United States and Canada, underwritten by companies domiciled or branches
licensed outside the United States or Canada, where the insured is a person or
company located outside the United States or Canada. This business was
generally written and reported on a monoline basis. In contrast, Continental's
United States and Canadian operations generally had focused on package business,
and Continental's multinational operations (now included in the Specialized
Commercial segment) wrote monoline coverage. Continental's United States and
Canadian operations and multinational operations (other than Casualty) write
monoline coverages, such as workers' compensation insurance, generally as an
accommodation to obtain package business or as specialized coverages like excess
liability and surety.
Monoline personal lines coverages, such as secure home policies, were
usually distributed and marketed by savings institutions as part of a mortgage
package. Thus, it was only through prearranged participation, or brokered after
mortgage sales, that such a product was sold.
For commercial risks, the distribution and marketing of indigenous
international insurance was primarily on a co-insurance basis taking a
participation percentage from a lead underwriter. Due to this standard overseas
distribution system, the nature of selling this product was vastly different
from the domestic practice of more direct links to insureds. Therefore,
Continental's focus was on developing relationships with the various
underwriters and brokers, rather than directly marketing to the insureds'
agents. The servicing of the business was also substantially different, as the
claims adjusting services were not administered directly by Continental.
The international marine business was underwritten by companies domiciled or
branches licensed outside the United States and Canada. The international
marine business had a different class of customer and marketing structure, which
relied upon the syndication procedures used by the Institute for London
Underwriting ("ILU"). The distribution and servicing of such business was also
unique. The international marine operations consisted of a small group of
underwriters and a collection group using third-party claims services. The ILU
is an underwriting center as well as a funds clearing house for claims
processing and settlement. Continental acted as a participant in part of a
layer of each policy, rather than as a direct underwriter and claims servicer.
Thus, systems needs and direct expenses associated with the production of
business are different from Continental's domestic marine business. This
difference in the method of marketing and distribution for international marine
insurance substantially reduces Continental's records keeping requirements. In
contrast, domestic marine insurance is underwritten in a similar manner to other
domestic lines of business and has similar reporting requirements.
The following table sets forth certain information with respect to operating
results of the discontinued insurance operations for each of the last three
years:
13
Year Ended December 31,
1994 1993 1992
---- ---- ----
(millions)
Total Revenues . . . . . . . . $ 62.7 $282.2 $549.8
Total Expenses . . . . . . . . 62.7 285.5 740.0
------ ------ ------
Loss before Income Tax Benefits -- (3.3) (190.2)
Income Tax Benefits . . . . . . (36.0) (0.7) (9.7)
Loss on Disposal of Discontinued
Insurance Operations, Net of
Income Tax Benefits . . . . . -- -- (13.0)
------ ------ ------
Net Income (Loss) from
Discontinued Insurance
Operations . . . . . . . . . $ 36.0 $ (2.6) $(193.5)
====== ====== ======
The following table sets forth certain information with respect to net
assets of the discontinued insurance operations for each of the last two years:
December 31,
1994 1993
---- ----
(millions)
Assets:
Cash and Investments . . . $ 733.5 $1,166.5
Other Assets . . . . . . . 806.7 528.4
------- -------
1,540.2 1,694.9
------- -------
Liabilities:
Outstanding Losses and Loss
Expenses . . . . . . . . . 1,154.6 1,346.0
Unearned Premiums . . . . . 1.4 3.0
Other Liabilities . . . . . 296.0 261.3
------- -------
1,452.0 1,610.3
------- -------
Net Assets: . . . . . . . . . $ 88.2 $ 84.6
======= =======
14
Of the $1,155 million in Gross Outstanding Losses and Loss Expenses at
December 31, 1994, Continental currently plans the following: (1) $973 million
of Gross Outstanding Losses and Loss Expenses are recorded by ERIC and CRC-I
(Continental intends to run off these insurance reserves, and to support the
reserves, which are carried at economic value in accordance with Bermuda law
(the jurisdiction in which such reserves are reinsured), with an equal amount of
reinsurance assets and earning assets held in trust by ERIC and CRC-I); and
(2) $182 million of Gross Outstanding Losses and Loss Expenses, which
Continental intends to run off, are recorded in foreign operations as a
requirement of local regulations (these reserves are carried at their nominal
amounts, in accordance with the regulations of the countries where such reserves
are recorded).
Additional Business Information
Each of Continental's insurance segments principally provides its own claims
service through internal loss-adjusting operations. Designated employees of
these operations have authority to settle claims, subject to limits on authority
and, in large cases, to review by senior officers.
Continental's Insurance Operations purchase reinsurance on certain risks
which they insure, principally to (1) reduce liability on individual risks; (2)
protect against catastrophe losses; (3) enable them to write additional
insurance in order to diversify risks; and (4) reduce their total liability in
relation to statutory surplus. The costs of reinsurance, including catastrophe
coverages, are generally increased by adverse loss experience in prior periods.
(For additional information concerning Continental's reinsurance arrangements,
see "Reinsurance" commencing on page 30 herein.)
The industry as a whole has experienced underwriting losses for the past
several years. These losses are generally attributable to price competition,
which has prevented premium rate increases from keeping pace with losses and
loss expenses, and an unusually high level of catastrophe losses. According to
A.M. Best Company's ("A.M. Best") Review and Preview, which follows and reports
on the industry's financial results, the industry's aggregate underwriting loss
for 1993 was $23 billion.
The underwriting profitability of property and casualty insurers is affected
by many factors, including price competition; the cost and availability of
reinsurance; administrative and other expenses; the incidence of natural
disasters; and insurance regulators' willingness to grant increases in those
rates which they control. Loss frequency and severity trends are influenced by
economic factors, such as a company's business mix; inflation rates; medical
cost inflation; employment levels; crime rates; general business conditions;
regulatory measures; and court decisions that define and expand the risks and
damages covered by insurance. The incidence of natural disasters has adversely
affected the underwriting profitability primarily of multi-peril, homeowners,
and fire & allied lines of business. The underwriting profitability of workers'
compensation and commercial and personal automobile business is adversely
affected by (1) lower price levels and higher assumed risks due to mandated
participation in state involuntary programs by companies writing such business;
and (2) the medical cost inflation rate, which, though decreasing, is still
higher than the overall inflation rate.
A key component of underwriting profitability is controlling costs. The
Insurance Operations have attempted to control their discretionary and loss
costs by (1) implementing technological advances; (2) changing their
distribution systems and marketing methods; (3) instituting policies designed to
increase employees' productivity; (4) changing the mix of agency and brokerage
relationships; (5) reducing writings of certain less profitable classes of
risks; and (6) becoming more selective in the acceptance of risks.
15
An indicator of underwriting profitability of property and casualty insurers
is a company's "combined ratio". The combined ratio is the sum, expressed as a
percentage, of (i) the ratio of incurred losses and loss expenses to premiums
earned (the "loss ratio"); and (ii) the ratio of sales commissions, premium
taxes, and administrative and other underwriting expenses to premiums written
(the "expense ratio"). When the combined ratio is below 100%, underwriting
results are generally considered profitable; when the ratio is over 100%,
underwriting results are generally considered unprofitable. Because the
combined ratio does not reflect net investment income, which is a significant
component of an insurance company's operating results, an insurance company's
operating results for a line of business may be profitable even though the
combined ratio for that line of business exceeds 100%. (For information
concerning net investment income, see "Investment and Finance" commencing on
page 32 herein.)
The following table sets forth certain information (presented in accordance
with statutory accounting practices) with respect to the underwriting results of
the Insurance Operations for the commercial and personal lines of insurance
written by them for each of the last three years. Information as to premiums
written includes premiums on insurance policies directly written and on policies
assumed from other insurers, pools and associations, in each case net of
premiums ceded to others in connection with reinsurance purchased.
16
Year Ended December 31,
1994 1993 1992
Line of Business
----------------
COMMERCIAL (millions, except percentages)
Multi-Peril
Premiums Written (% of total) $1,198.1 (28.8%) $1,277.5 (28.3%) $1,042.5 (25.8%)
Premiums Earned . . . . . . $1,309.3 $1,232.5 $1,023.6
Loss Ratio . . . . . . . . 85.1% 74.3% 72.3%
Expense Ratio . . . . . . . 35.2% 35.3% 37.4%
Combined Ratio . . . . . . 120.3% 109.6% 109.7%
Workers' Compensation
Premiums Written (% of total) $ 874.0 (21.0%) $ 915.1 (20.2%) $ 879.0 (21.7%)
Premiums Earned . . . . . . $ 910.0 $ 941.1 $ 847.9
Loss Ratio . . . . . . . . 96.4% 94.7% 103.5%
Expense Ratio . . . . . . . 22.8% 19.2% 14.7%
Combined Ratio . . . . . . 119.2% 113.9% 118.2%
General Liability
Premiums Written (% of total) $ 528.8 (12.7%) $ 496.1 (11.0%) $ 361.6 (8.9%)
Premiums Earned . . . . . . $ 515.2 $ 459.0 $ 331.3
Loss Ratio . . . . . . . . 167.9% 66.3% 69.6%
Expense Ratio . . . . . . . 28.6% 27.0% 29.5%
Combined Ratio . . . . . . 196.5% 93.3% 99.1%
Inland/Ocean Marine
Premiums Written (% of total) $ 396.6 (9.5%) $ 323.1 (7.1%) $ 262.5 (6.5%)
Premiums Earned . . . . . . $ 378.2 $ 298.3 $ 263.3
Loss Ratio . . . . . . . . 81.8% 75.2% 68.3%
Expense Ratio . . . . . . . 32.2% 35.6% 46.4%
Combined Ratio . . . . . . 114.0% 110.8% 114.7%
Automobile
Premiums Written (% of total) $ 235.1 (5.6%) $ 273.7 (6.1%) $ 297.1 (7.4%)
Premiums Earned . . . . . . $ 260.6 $ 270.0 $ 299.9
Loss Ratio . . . . . . . . 84.2% 71.1% 75.9%
Expense Ratio . . . . . . . 27.3% 32.4% 36.9%
Combined Ratio . . . . . . 111.5% 103.5% 112.8%
Fidelity/Surety
Premiums Written (% of total) $ 134.4 (3.2%) $ 140.9 (3.1%) $ 120.3 (3.0%)
Premiums Earned . . . . . . $ 136.6 $ 138.7 $ 112.1
Loss Ratio . . . . . . . . 66.3% 42.8% 44.9%
Expense Ratio . . . . . . . 50.1% 49.9% 58.2%
Combined Ratio . . . . . . 116.4% 92.7% 103.1%
Fire & Allied Lines
Premiums Written (% of total) $ 128.0 (3.1%) $ 77.0 (1.7%) $ 99.3 (2.5%)
Premiums Earned . . . . . . $ 127.6 $ 75.9 $ 101.8
Loss Ratio . . . . . . . . 77.2% 90.0% 100.0%
Expense Ratio . . . . . . . 31.8% 33.4% 32.6%
Combined Ratio . . . . . . 109.0% 123.4% 132.6%
Other
Premiums Written (% of total) $ 139.7 (3.3%) $ 132.2 (2.9%) $ 165.8 (4.1%)
Premiums Earned . . . . . . $ 140.6 $ 124.6 $ 153.7
Loss Ratio . . . . . . . . 67.4% 73.0% 71.6%
Expense Ratio . . . . . . . 51.6% 46.3% 48.6%
Combined Ratio . . . . . . 119.0% 119.3% 120.2%
Total Commercial
Premiums Written (% of total) $3,634.7 (87.2%) $3,635.6 (80.4%) $3,228.1 (79.9%)
Premiums Earned . . . . . . $3,778.1 $3,540.1 $3,133.6
Loss Ratio . . . . . . . . 97.1% 77.6% 80.4%
Expense Ratio . . . . . . . 31.5% 30.8% 32.2%
Combined Ratio . . . . . . 128.6% 108.4% 112.6%
17
Year Ended December 31,
1994 1993 1992
Line of Business
----------------
PERSONAL (millions, except percentages)
Automobile
Premiums Written (% of total) $ 367.8 (8.8%) $ 605.8 (13.4%) $ 556.3 (13.8%)
Premiums Earned . . . . . . . $ 476.3 $ 586.2 $ 535.3
Loss Ratio . . . . . . . . . 81.5% 75.3% 75.2%
Expense Ratio . . . . . . . . 35.4% 33.5% 36.6%
Combined Ratio . . . . . . . 116.9% 108.8% 111.8%
Homeowners
Premiums Written (% of total) $ 145.8 (3.5%) $ 246.1 (5.5%) $ 226.6 (5.6%)
Premiums Earned . . . . . . . $ 204.8 $ 239.9 $ 217.7
Loss Ratio . . . . . . . . . 85.3% 87.9% 89.6%
Expense Ratio . . . . . . . . 20.8% 25.8% 29.6%
Combined Ratio . . . . . . . 106.1% 113.7% 119.2%
Other
Premiums Written (% of total) $ 18.8 (0.5%) $ 32.9 (0.7%) $ 30.4 (0.7%)
Premiums Earned . . . . . . . $ 25.9 $ 32.8 $ 29.4
Loss Ratio . . . . . . . . . 60.0% 45.7% 89.5%
Expense Ratio . . . . . . . . 23.8% 26.4% 32.2%
Combined Ratio . . . . . . . 83.8% 72.1% 121.7%
Total Personal
Premiums Written (% of total) $ 532.4 (12.8%) $ 884.8 (19.6%) $ 813.3 (20.1%)
Premiums Earned . . . . . . . $ 707.0 $ 858.9 $ 782.4
Loss Ratio . . . . . . . . . 81.8% 77.7% 79.7%
Expense Ratio . . . . . . . . 31.0% 31.1% 34.5%
Combined Ratio . . . . . . . 112.8% 108.8% 114.2%
TOTAL INSURANCE OPERATIONS
Premiums Written (% of total) $ 4,167.1 (100.0%) $4,520.4 (100.0%) $4,041.4 (100.0%)
Premiums Earned . . . . . . . $ 4,485.1 $4,399.0 $3,916.0
Loss Ratio (1) . . . . . . . 94.7% 77.6% 80.2%
Expense Ratio (1) . . . . . . 31.4% 30.9% 32.7%
Combined Ratio (1) . . . . . 126.1% 108.5% 112.9%
(1) The comparable GAAP loss, expense and combined ratios for
the years ended December 31, 1994, 1993 and 1992 were
99.4%, 32.8% and 132.2%; 77.3%, 31.9% and 109.2%; and
81.1%, 33.8% and 114.9%, respectively. The difference between
the GAAP loss ratio for Continental's Insurance
Operations and the statutory loss ratio at December 31, 1994
largely resulted from establishing an $80 million asset
relating to Environmental Claims for GAAP purposes and fully
reserving that amount as not recoverable.
Approximately 61.3% of direct premiums written by the
Insurance Operations during 1994 were written in nine states and
Canada. Canada accounted for 10.2% of direct written premiums;
New York, 10.3%; California, 8.1%; Illinois, 8.8%; New Jersey,
5.6%; Texas, 5.1%; Pennsylvania, 4.1%; Ohio, 3.9%; Michigan,
2.7%; and Hawaii, 2.5%. No other state, country or political
subdivision accounted for more than 2.5% of such premiums. The
percentages do not reflect premiums received or paid in
connection with reinsurance transactions.
18
Continental is taking steps to shift its business mix towards those areas in
which management believes Continental can achieve an underwriting profit without
a predetermined target for business mix in order to increase profitability.
Continental is significantly reducing the level of new business in its personal
lines and standard commercial lines groups, which are focusing instead on their
renewal business. Continental is also taking steps to curtail renewal business
in unprofitable lines and industries. In 1994, the loss and expense ratios for
the Insurance Operations increased 17.1 and 0.5 percentage points, respectively,
from the prior year, primarily as a result of the Environmental IBNR Charge, the
Reserve Strengthening Charge and the Restructuring Charge. Underwriting results
for the Insurance Operations produced statutory combined ratios for their
personal and commercial lines of 112.8% and 128.6%, respectively, in 1994,
compared with 108.8% and 108.4%, respectively, in 1993.
Many states require property and casualty insurers to participate in "plans",
"pools" or "facilities" which provide coverages for defined risks at rates
required by regulators which insurers otherwise would be unwilling to underwrite
in view of the nature of the risks and the claims experience of the insureds or
the insurance classes of which they are members. Continental provides for its
share from its participation in these pools and associations, as well as its
participation in voluntary pools and associations, based upon results reported
to it by these organizations. In 1994, these involuntary writings totaled
approximately $236 million, or approximately 5.7% of the Insurance Operations'
total written premiums. The statutory underwriting loss on this business was
$30 million during 1994, accounting for approximately 2.8% of Insurance
Operations' statutory underwriting loss. In 1994, 35.5%, and 62.0% of these
writings were attributable to automobile and workers' compensation businesses,
respectively. (For additional information concerning such pools and
associations, see "Regulation" commencing on page 20 herein.)
Competition
The property and casualty insurance industry is highly competitive.
Continental's Insurance Operations compete with other stock companies, specialty
insurance organizations, mutual insurance companies, and other underwriting
organizations. As reported by the Insurance Information Institute in 1994, an
educational, fact-finding and communications organization, the property and
casualty industry in the United States is comprised of approximately 900 leading
insurance organizations, none of which has a market share larger than 12% and
the top ten of which account in the aggregate for less than 45% of the market.
Companies in the United States also face competition from foreign insurance
companies and from "captive" insurance companies and "risk retention" groups
(i.e., entities established by insureds to provide insurance for themselves).
In the future, the industry, including Continental's Insurance Operations, may
face increasing insurance underwriting competition from banks and other
financial institutions.
Based upon the 1994 edition of Best's Aggregates and Averages for the
calendar year 1993, Continental's domestic property and casualty companies
collectively ranked eleventh in overall premium volume among United States
property and casualty insurers. In addition, such companies are among the
leading twenty in such categories as commercial multi-peril, aircraft,
farmowners, homeowners, fire & allied lines, ocean marine and inland marine
lines, and among the leading twenty-five in commercial automobile lines.
Because of the relatively large size and underwriting capacity of Continental's
property and casualty companies, many opportunities are available to them that
are not available to smaller companies.
The competitive focus of Continental's Insurance Operations is to (1) offer
combinations of superior products, services and premium rates; (2) distribute
their products efficiently; and (3) market
19
them effectively. Reliance upon these factors varies from line to line of
insurance and from product to product within lines of insurance. Rates are not
uniform for all insurers and vary according to the respective types of insurers
and methods of operation. Continental's Insurance Operations have traditionally
marketed their products principally through independent agents and brokers.
This system of marketing is facing increased competition from financial
institutions and other companies that market their insurance products directly
to the consumer. In response to this competition, Continental has implemented
several programs designed to develop a more concentrated and productive agency
and brokerage force by eliminating duplication of functions, shifting its mix of
business towards those areas in which management believes it can achieve
underwriting profit without a pre-determined target for business mix, terminat-
ing producers of unprofitable business, reducing its exposure to catastrophes
and providing added incentives and improved support to its more productive
producers. Such incentives include assurances of continuing representation;
expanded promotional and marketing assistance; specialized account handling;
training; and, in certain cases, financial assistance in connection with agency
and brokerage expansion. Consequently, Continental's Insurance Operations have,
over the past several years, placed computer terminals with many of their most
productive producers, which permit producers to transmit information directly to
Continental's computer centers and to receive policies, endorsements and other
personal lines services overnight. In response to market conditions,
Continental has also developed package personal and commercial policies for
customers having standard risk exposures, customized products for certain
classes of business and industries, and a strong distribution network comprised
largely of selected producers with professional sales skills and product
knowledge in Continental's targeted markets.
Regulation
Continental's property and casualty companies are subject to regulation by
government agencies in the states and foreign jurisdictions in which they do
business. The nature and extent of such regulation vary from jurisdiction to
jurisdiction, but typically involve the establishment of premium rates for many
lines of insurance; standards of solvency and minimum amounts of capital and
surplus which must be maintained; limitations on types of investments;
restrictions on the size of risks which may be insured by a single company;
licensing of insurers and their agents; deposits of securities for the benefit
of policyholders; approval of policy forms; methods of accounting; mandating
reserves for losses and loss expenses; and filing of annual and other reports
with respect to financial condition and other matters. In addition, state
regulatory examiners perform periodic examinations of insurance companies. Such
regulation is generally intended for the protection of policyholders rather than
security holders.
Most states also require property and casualty insurers to become members of
insolvency associations or guaranty funds, which generally protect policyholders
against the insolvency of an insurer writing insurance in the state. Members of
the associations must contribute to the payment of certain claims made against
insolvent insurers. Maximum contributions required by law in any one year vary
generally between 1% and 2% of annual premiums written by a member in that
state.
Continental's domestic insurance subsidiaries are subject to various state
statutory and regulatory restrictions, applicable generally to each insurance
company in its state of incorporation, that limit the amount of dividends and
other distributions that those subsidiaries may pay to Continental. Each of the
states in which one or more of these subsidiaries is domiciled has enacted a
formula that governs the maximum amount of dividends that such subsidiaries may
pay without prior regulatory approval. These formulas, which are substantially
similar, limit such dividends on such factors as policyholders' surplus, net
income, net investment income and/or unassigned surplus. These restrictions
will, under certain circumstances, significantly reduce the maximum amount of
dividends and other distributions
20
payable to Continental by its domestic insurance subsidiaries without approval
by state regulatory authorities. Some restrictions require that dividends,
loans, and advances in excess of stated levels be approved by state regulatory
authorities. During 1994, Continental's domestic insurance subsidiaries paid it
$70 million in dividends. 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. As of December 31, 1994, under the restrictions
currently in effect, the maximum amount available for payment of dividends to
Continental by its domestic insurance subsidiaries during the year ending
December 31, 1995 without regulatory approval is estimated to be $71 million.
(See Note 18 to Consolidated Financial Statements included in the Proxy
Statement at page F-44.) Continental anticipates that dividends from its domes-
tic 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 1995.
Although the federal government does not directly regulate the business of
insurance, federal initiatives often affect the insurance business in a variety
of ways. For example, pollution liability for insurers could be affected by
federal initiatives relating to environmental pollution liability issues. In
addition, the significant costs of natural catastrophes may prompt responsive
legislation to expand the federal role in the funding of amelioration of future
catastrophes. Other current proposals that may affect insurers are tort reform
initiatives, where legislation aimed at tightening standards for suit, limiting
punitive damages and reducing the liability of product sellers could have a
positive impact in reducing costs associated with litigation in the claims
handling process; legislation related to the availability and affordability of
insurance products in certain areas; initiatives relating to the ability of
banks to provide insurance products; and proposals relating to health care
reform or change.
The National Association of Insurance Commissioners ("NAIC") has developed
several model initiatives to strengthen the existing state regulatory system,
including uniform accreditation of state insurance regulatory systems;
limitations on the payment of dividends by property and casualty insurance
companies; adoption of risk-based capital standards; actuarial certification of
reserves; and independent audits of insurer financial statements. Adoption of
such initiatives will be on a state-by-state basis. Continental favors stronger
solvency standards, but recognizes that more regulation, at either the state or
federal level, will increase the cost of providing insurance coverage. In the
fourth quarter of 1993, the NAIC adopted a risk based capital ("RBC") standard
for use by state insurance regulators. RBC is intended to be a "tool" for
regulators to assess the capital adequacy of property and casualty insurers and
to take action when capital under the standard is judged to be inadequate. The
NAIC developed a model law which has been adopted by various states, including
several of Continental's domiciliary states. Each state that adopts the model
law will provide certain additional enforcement powers to its insurance
regulators. As of December 31, 1994 and the date of this report, Continental
believes that its domestic insurance subsidiaries have sufficient levels of
capital for their respective operations based upon the RBC standards in effect
and as applied by relevant state authorities and as applied to Continental's
1994 statutory financial statements.
Insurance companies, including Continental's property and casualty companies,
are also affected by a variety of state and federal legislative and regulatory
measures and judicial decisions that define and extend the risks and benefits
for which insurance is sought and provided. These include redefinitions of risk
exposure in areas such as product liability; environmental damage; and employee
benefits, including pensions, workers' compensation and disability benefits. In
addition, individual state insurance departments may prevent premium rates for
some classes of insureds from reflecting the level of risk assumed by the
insurer for those classes. Such developments may result in short-term adverse
effects on the profitability of various lines of insurance. Longer-term adverse
effects on
21
profitability can be minimized, when possible, only through repricing of
coverages or limitation or cessation of the affected business.
Reinsurers and international insurance companies are subject to licensing
requirements and other regulation in the jurisdictions in which they do
business. United States regulation of licensed reinsurers is similar to the
regulation of domestic property and casualty insurers, except that regulation of
reinsurers does not extend to rates, policy forms, or, generally, participation
in insolvency funds. Countries outside of the United States have varying levels
of regulation of insurance and reinsurance companies.
Reserves for Unpaid Losses and Loss Expenses
Continental's insurance subsidiaries establish reserves to cover their
estimated liability for losses and loss expenses with respect to reported and
unreported claims incurred (including for the first time, in 1994, unreported
"Environmental Claims," as defined below) as of the end of each accounting
period, after taking into effect salvage and subrogation claims. In
establishing such reserves with respect to the period then ended, loss reserves
recorded in prior periods are updated to reflect improved estimates of losses
and loss expenses as actual experience develops and payments are made.
The losses and loss expense reserves of Continental's insurance subsidiaries
are estimates of the liability determined by using individual case-basis
estimates on reported claims and statistical projections and industry
measurement techniques for unreported claims. The statistical projection models
used to estimate non-environmental unreported claims reflect changes in the
volume of business written, as well as claim frequency and severity.
Adjustments to these models are also made for changes in the mix of business,
claims processing and other items which affect the development patterns over
time. Such statistical projections of ultimate net costs are used to adjust the
amount estimated for individually established non-environmental case reserves,
as well as to establish estimates for the amount needed for non-environmental
unreported claims. (For a discussion of the techniques used for unreported
Environmental Claims, see discussion at page 24 herein.)
For more mature accident years, inflation is implicitly considered in such
projections based on actual patterns of reported claims, loss payments and
case-basis reserves. For relatively immature accident years, in addition to
actual loss patterns, explicit assumptions are made for changes in claim
severity and frequency based on the type of claims, nature of the related risks,
industry trends and related cost indices.
Continental conducts an annual fourth quarter in-depth review of its core
(non-environmental) reserves using loss and loss adjustment expense information.
Its 1994 fourth quarter review was completed in December 1994 on loss and loss
adjustment information updated as of September 30, 1994. Upon completion of the
annual fourth quarter review and a special review of workers' compensation
reserves conducted in connection with the sale of Casualty, Continental
strengthened its reserves by $200 million. Of the $200 million in additional
loss and loss adjustment reserves, $100 million of the reserves was primarily
due to a higher than anticipated number of claims and adverse loss development
in case reserves in multi-peril and various smaller programs (primarily auto)
and an increase in the number of large cases and adverse loss development in
case reserves in the surety program. The other $100 million of additional loss
and loss adjustment expense reserves were established in workers' compensation
as a result of the annual fourth quarter review, the review conducted in
connection with the sale of Casualty and negotiations with respect to such sale.
22
Continental's reserves for losses and loss adjustment expenses include
reserves for "Environmental Claims." Continental employs what it believes to be
a broad definition of "Environmental Claims." "Environmental Claims" include
reported and unreported claims or lawsuits, for which coverage is or may be
alleged, arising from exposure to hazardous substances or materials originating
from a site that is the subject of an investigation or cleanup pursuant to
state or federal environmental legislation; claims or lawsuits involving
allegations of bodily injury or property damage arising out of the discharge or
escape of a pollutant or contaminant; and claims or lawsuits alleging bodily
injury or property damage as a result of exposure over a period of time to
products or substances alleged to be harmful or toxic. Based upon reviews of
claim frequency, exposure trends and relevant legal issues relating to types of
claims, Continental periodically revises the definition of Environmental Claims.
In 1994, Continental broadened the definition of Environmental Claims to include
claims arising from certain railroad exposures involving asbestos-related claims
and other toxic tort claims, including repetitive stress and noise-induced
hearing loss claims. Railroad exposure claims involving environmental pollution
claims had previously been classified as Environmental Claims. The
classification of asbestos-related and other toxic tort railroad exposure claims
as Environmental Claims resulted in the reclassification of reserves relating to
such claims to the gross reserves for Environmental Claims and gave rise to the
increase in reserves for asbestos-related and other toxic tort claims from
December 31, 1993 to January 1, 1994. (See the table entitled "Asbestos-
Related, Other Toxic Tort and Environmental Pollution Claims" on page 26.)
Claims falling under the above categories are classified into two general claim
types: (1) asbestos-related and other toxic torts; and (2) environmental
pollution. The table on page 26 sets forth information regarding the amounts of
the reserves for Environmental Claims at December 31, 1994, 1993 and 1992 and
payments of losses and loss expenses on such claims in each of those years.
These reserves represent Continental's current best estimates of the probable
cost to resolve such reported and unreported claims, either through settlement,
litigation or alternative dispute resolution. The amounts in the table reflect
the gross and net undiscounted estimated liability. (For information concerning
reinsurance relating to Environmental Claims, see "Reinsurance" commencing on
page 30 herein.) Such reserves incorporate factors specifically relevant to
Environmental Claims, including the nature and scope of policy coverage; the
number of claimants, defendants and co-insurers; the timing and severity of
injuries or damage; and the relevant jurisdiction and case law. Continental has
managed its reported Environmental Claims from its centralized Environmental
Claims Department since 1981. Continental believes that its centralized
approach to handling reported Environmental Claims gives Continental the best
practicable ability to determine its liability.
Prior to the third quarter of 1994, Continental did not establish reserves
for incurred but not reported Environmental Claims ("Environmental IBNR
Claims") because the existence of significant uncertainties (including
difficulties in determining the frequency and severity of potential claims and
in predicting the outcome of judicial decisions as case law evolves regarding
liability exposure, insurance coverage and interpretation of policy language)
and the absence of standard techniques to measure exposure did not allow
ultimate liabilities to be reasonably estimated in accordance with accepted
actuarial standards.
While Continental continues to believe that it is not possible to reasonably
estimate ultimate liabilities for Environmental IBNR Claims, it has concluded
that different measurement techniques, based on industry averages, for
estimating a reserve for Environmental IBNR Claims have been sufficiently
developed, and accepted in the insurance industry, to permit Continental to
determine a reasonable gross estimate for Environmental IBNR Claims. However,
due to the continuing level of uncertainty involved with environmental
exposures, Continental may incur future charges for Environmental IBNR Claims,
which may be material to Continental's financial position, results of operations
or liquidity.
23
Included in Continental's liability for outstanding losses and loss expenses
are gross undiscounted reserves of $834 million for Environmental Claims. At
December 31, 1994, the gross undiscounted reserves for losses and loss expenses
were $354 million ($264 million at December 31, 1993) for reported Environmental
Claims, and a gross undiscounted reserve of $480 million was established for
losses and loss expenses for Environmental IBNR Claims ($0 million at December
31, 1993). The $354 million represents Continental's current best estimate for
reported Environmental Claims. The $480 million represents Continental's best
estimate for its Environmental IBNR Claims, using a measurement technique
believed to be reasonable, based upon information currently available. However,
it is not possible at this time to estimate the amount of additional liability
related to Environmental IBNR Claims that is at least reasonably possible to
exist.
Included in Continental's reinsurance assets are amounts due for reported
Environmental Claims of $175 million at December 31, 1994 ($105 million at
December 31, 1993). A reinsurance asset of $80 million was recorded in
conjunction with the establishment of the reserves for Environmental IBNR
Claims, but was fully reserved for as not recoverable due to the degree of
uncertainty in the collectibility of such amounts.
The technique utilized by Continental involves measuring total net reserves
for reported Environmental Claims and Environmental IBNR Claims in terms of the
number of years such reserves could fund the net annual payments for these
claims. Such technique is consistent with that utilized by an insurance rating
agency and by the actuarial profession in some of its discussion papers for its
preliminary work with respect to such liabilities. At the end of 1992, the
industry was at a net environmental reserve to net environmental paid ratio
("Survival Ratio") of six times such paid losses, which had been increasing and
was expected to increase further. At December 31, 1994, Continental's net
Environmental Claims reserves would comprise approximately nine times its
historical average net paid losses and loss expenses for these claims.
Net losses and loss expenses incurred include charges for reported
Environmental Claims and Environmental IBNR Claims of $573 million, $56 million
and $81 million for 1994, 1993 and 1992, respectively. The 1994 increase is
primarily related to the establishment of the reserves for the Environmental
IBNR Claims.
Continental has not marketed nor been in the business of providing
environmental pollution coverages, with the exception of a program which was in
effect from 1981 to 1985, which provided such coverage on a claims-made basis.
There are currently two claims pending under policies written under this program
for which Continental has established case reserves which reflect Continental's
estimate of the probable ultimate cost of these claims. The allowable reporting
period under all policies written under this program has expired.
The 1980 enactment of the Comprehensive Environmental Response, Compensation,
and Liability Act, as amended by the Superfund Amendments and Reauthorization
Act of 1986, as well as similar state statutes, resulted in environmental
pollution claims brought thereafter under standard form general liability
policies. While most environmental pollution claims have arisen out of
policyholders' obligations under federal and state regulatory statutes, claims
have also been brought against policyholders by private third-parties alleging
pollution-related property damage and/or bodily injury. Consistent with the
broad range of entities which may become subject to designation as "Potentially
Responsible Parties" under state and federal environmental statutes, insureds
presenting such claims for coverage under general liability policies span a
broad spectrum of commercial policyholders. Most of Continental's environmental
pollution claims result from general liability policies written prior to 1986.
Certain provisions of Continental's, and the industry's, standard form general
liability policies written prior to 1986 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. Policies written after 1986
have not been subject to such wide-ranging challenges by policyholders and/or
differing
24
interpretations by the courts. Continental has consistently maintained during
coverage litigation that its general liability policies did not provide coverage
for environmental pollution liability.
Asbestos-related claims have generally arisen out of product liability and
railroad exposure coverage provided by Continental under general liability
policies written prior to 1986. Thereafter, asbestos-product exclusions were
included in general liability policies. Asbestos-related bodily injury
litigation developed during the late 1970's. Initially, the majority of
defendant-insureds making claims under general liability policies were involved
in the mining, processing, distribution and sale of raw asbestos. By 1985, the
category of defendants grew to include companies which produced a variety of
products containing asbestos, including roofing materials, tile, refractory
products, asbestos-containing clothing, and brake and clutch friction products.
Continental had written primary general liability coverage for only two major
asbestos manufacturers, and had settled all liabilities under those policies by
1989. Continental had written excess insurance coverage for several other
asbestos manufacturers. In addition, Continental had written primary general
liability coverage for companies which produce products containing asbestos.
Claims which fall in the other toxic tort category have generally arisen out
of product liability and railroad exposure coverage under general liability
policies. These claims involve a variety of allegations of bodily injury as a
result of exposure over a period of time to products alleged to be harmful or
toxic, such as silica, lead-based paint, pesticides, dust, acids, gases, noise,
chemicals, silicone breast implants and pharmaceutical products, as well as
repetitive stress and noise-induced hearing loss claims.
Typically, the coverage provided by Continental for all of the above claim-
types represents a portion of the total insurance coverage available to a
policyholder for such claims. Whenever appropriate, Continental actively seeks
out opportunities to participate in cost-sharing agreements with other insurance
carriers, stipulating an equitable allocation of expenses and indemnity pay-
ments. Cost-sharing agreements are presently in effect with respect to
litigation concerning a large majority of Continental's asbestos-related and
other toxic tort litigation.
As of December 31, 1994, there were approximately 2,311 pending environmental
pollution claims involving approximately 892 policyholders, and environmental
pollution-related coverage disputes involving approximately 329 policyholders in
421 actions. Approximately 1,465 environmental pollution claims closed or
settled during 1994. Continental defines a "claim" as the potential financial
exposure to a policy year based on an analysis of relevant factors, and which
arises out of a policyholder's potential liability at a single site or multiple
sites.
A three-year asbestos-related, other toxic tort and environmental pollution
loss reserve activity analysis is set forth below:
25
Asbestos-Related, Other Toxic Tort
and Environmental Pollution Claims
----------------------------------
Year Ended December 31,
1994 1993 1992
----------- ----------- -----------
(millions)
Asbestos-related and Other Toxic Tort
Claims:
Gross Reserves as of January 1 (1) $ 165.6 $ 85.6 $ 76.8
Gross Incurred Losses and Loss
Adjustment Expenses . . . . . . 287.6 46.0 45.0
Gross Payments for Losses and Loss
Adjustment Expenses . . . . . . (52.7) (40.3) (36.2)
----------- ----------- -----------
Gross Reserves as of December 31 $ 400.5 $ 91.3 $ 85.6
=========== =========== ===========
Environmental Pollution Claims:
Gross Reserves as of January 1 . $ 172.2 $ 161.5 $ 144.9
Gross Incurred Losses and Loss
Adjustment Expenses . . . . . . 319.9 68.7 64.2
Gross Payments for Losses and Loss
Adjustment Expenses . . . . . . (58.6) (58.0) (47.6)
----------- ----------- -----------
Gross Reserves as of December 31 $ 433.5 172.2 161.5
=========== =========== ===========
Gross Claims Reserves as of December 31:
Asbestos-related and Other Toxic
Tort . . . . . . . . . . . . . $ 400.5 $ 91.3 $ 85.6
Environmental Pollution . . . . . 433.5 172.2 161.5
Less Reinsurance . . . . . . . . (174.9) (105.3) (79.5)
----------- ----------- -----------
Net Claims Reserves as of December 31 . . . . . . . $ 659.1 158.2 167.6
=========== =========== ===========
___________________________
(1) The increase in gross reserves from December 31, 1993 to January 1, 1994,
resulted from a reclassification of reserves to this category as a result of
Continental's broadening, in 1994, of the definition of Environmental Claims
to include claims arising from certain railroad exposures involving
asbestos-related and other toxic tort claims.
As of December 31, 1994, Continental's $834 million gross loss and loss
adjustment expense reserve for reported and unreported Environmental Claims
included gross loss adjustment expense reserves of $318 million, or 38% of such
total reserves (as of December 31, 1993, $54 million, or 21% of such total
reserves). The amount of Continental's gross loss adjustment expense reserves
for reported Environmental Claims and Environmental IBNR Claims as of December
31, 1994, constituted 26% of Continental's total gross loss adjustment expense
reserves.
In accordance with individual state insurance laws, certain of Continental's
property and casualty subsidiaries discount certain workers' compensation
pension reserves. The rate of discount varies by
26
jurisdiction and ranges from 3.0% to 5.0%. The statutory discount on workers'
compensation reserves at December 31, 1994, 1993 and 1992 is $509 million, or
7.1% of statutory reserves; $525 million, or 7.9% of statutory reserves; and
$522 million, or 8.0% of statutory reserves, respectively. The discount
includes an additional discount on the reserves at December 31, 1994, 1993 and
1992 for incurred but not reported claims of $143 million, $127 million and $187
million, respectively, for losses reported to Continental through its
participation in joint reinsurance pools. In 1994, individual state insurance
laws changed to restrict the discount on certain workers' compensation pension
reserves. In addition, for the purpose of reporting on a generally accepted
accounting principles ("GAAP") basis, these subsidiaries have discounted
workers' compensation pension reserves since 1984 at a rate of 7% to reflect as-
sumed market yields. Discounting at a rate of 7% in 1994, 1993 and 1992 reduced
total reserves for losses at the end of such years by $680 million, or 9.3%;
$696 million, or 10.5%; and $693 million, or 10.6%, respectively.
As a result of the discounting of workers' compensation reserves, the
ultimate net cost of the losses would, without taking other factors into
account, be projected to exceed the amount of the carried reserves by the amount
of the discount. The total amount of this excess will emerge as current year
incurred losses develop over many years. If such excess had been reflected in
the table on page 28 as development of prior year reserves, it would have added
$34 million, or 0.6%; $39 million, or 0.7%; and $52 million, or 0.9%,
respectively, to the 1993, 1992 and 1991 cumulative deficiencies as of December
31, 1994. However, the yields on these subsidiaries' investment portfolios have
historically been greater than the discount rate, and any deficiency due to the
discounting of such reserves should be more than offset by investment income.
The table on page 28 shows the annual adjustment to historical reserves for
each year since 1984. The reserves for unpaid losses and loss expenses are set
forth on a cumulative basis for the year specified and all prior years.
Although amounts paid for any year are reflected in the re-estimated ultimate
net loss at the end of such year, there is no direct correlation in the
development patterns between the two portions of the table because the re-
estimated ultimate net loss includes adjustments for unpaid losses and loss
expenses as well. Finally, an adjustment to an unpaid claim for a prior year
will also be reflected in the adjustments for all subsequent years. For
example, an adjustment made in 1990 for 1984 loss reserves will be reflected in
the re-estimated ultimate net loss as a subsequent development for each of the
years 1984 through 1989.
27
Ten-Year Loss Development Presented Net of Reinsurance
With Supplemental Gross Data (1)(2)
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(millions)
NET LIABILITY AS OF
END OF YEAR . . . . $2,946.6 $3,464.4 $4,038.9 $4,686.3 $5,339.5 $6,045.0 $5,963.1 $5,901.9 $5,806.5 $5,915.8 $6,608.2
PAID AS OF:
One Year Later . 1,114.9 1,386.6 1,407.5 1,558.0 1,754.0 2,030.1 2,073.1 2,225.1 2,013.7 2,299.9
Two Years Later . 1,813.8 2,152.1 2,295.6 2,591.6 2,876.0 3,388.2 3,381.7 3,411.3 3,368.2
Three Years Later 2,284.5 2,727.4 2,940.3 3,292.2 3,688.5 4,331.9 4,240.8 4,390.0
Four Years Later 2,648.9 3,157.6 3,399.2 3,810.8 4,270.7 4,942.3 4,970.8
Five Years Later 2,929.6 3,461.1 3,756.0 4,191.0 4,659.6 5,448.0
Six Years Later . 3,117.9 3,709.0 4,022.3 4,429.9 4,995.0
Seven Years Later 3,299.6 3,907.8 4,185.4 4,679.4
Eight Years Later 3,449.8 4,031.4 4,397.5
Nine Years Later 3,552.7 4,208.7
Ten Years Later . 3,699.3
NET LIABILITY
RE-ESTIMATED AS OF:
End of Year . . . 2,946.6 3,464.4 4,038.9 4,686.3 5,339.5 6,045.0 5,963.1 5,901.9 5,806.5 5,915.8 6,608.2
One Year Later . 3,149.9 3,512.2 4,080.8 4,810.5 5,444.7 6,066.6 6,059.6 6,027.2 5,807.6 6,768.9
Two Years Later . 3,229.7 3,704.0 4,293.8 4,972.3 5,466.4 6,167.3 6,111.2 6,073.1 6,591.0
Three Years Later 3,395.3 3,958.1 4,499.1 5,021.4 5,584.3 6,284.8 6,171.5 6,898.7
Four Years Later 3,551.4 4,170.9 4,558.7 5,145.4 5,649.4 6,404.6 6,944.5
Five Years Later 3,687.4 4,263.6 4,688.2 5,182.1 5,720.2 7,104.7
Six Years Later . 3,760.3 4,392.0 4,772.8 5,220.4 6,373.8
Seven Years Later 3,861.5 4,510.3 4,814.9 5,873.3
Eight Years Later 3,948.5 4,550.9 5,481.9
Nine Years Later 3,975.2 5,196.7
Ten Years Later . 4,589.3
NET CUMULATIVE
DEFICIENCY . . . . 1,642.7 1,732.3 1,443.0 1,187.0 1,034.3 1,059.7 981.4 996.8 784.5 853.1
GROSS LIABILITY AS OF
END OF YEAR . . . . 9,066.2 9,068.7 10,278.4
REINSURANCE
RECEIVABLES . . . . 3,259.7 3,152.9 3,670.2
NET LIABILITY AS OF
END OF YEAR . . . . 5,806.5 5,915.8 6,608.2
GROSS RE-ESTIMATED
LIABILITY - LATEST 9,703.2 10,040.3
RE-ESTIMATED RECOV-
ERABLE - LATEST . . 3,112.2 3,271.4
NET RE-ESTIMATED
LIABILITY - LATEST 6,591.0 6,768.9
GROSS CUMULATIVE
DEFICIENCY (3) . . 637.0 971.6
---------------
(1) Information for each year from 1984 - 1991 has been restated to
reflect accounting for Continental's traditional assumed
reinsurance and marine reinsurance businesses and indigenous
international and international marine insurance businesses as
discontinued operations. See "Discontinued Operations" commencing
on page 11 herein.
(2) The reserves of foreign subsidiaries are translated into United
States dollars at the exchange rates as of each year-end. Foreign
exchange factors tend to improve or adversely affect the reserve
development (ultimate loss as compared to initial estimated
liability) of foreign subsidiaries depending upon the relative
movement of the exchange rates.
(3) The gross reserves include direct written business and assumed
business. In 1993, Continental commuted a reinsurance agreement,
which had the effect of decreasing assumed business and
reinsurance receivables by $208 million, but did not affect net
reserves. This commutation pertains to certain business arising
in 1992 and prior years.
28
Reconciliation of Net Reserves for Losses and Loss Expenses
from a Statutory Accounting Principles Basis to a Generally Accepted
Accounting Principles Basis for the Last Two Years
With Supplemental Gross Data
1994 1993
------------ -----------
(millions)
Total Net Statutory Reserves . . . . . . . . . . . . . . . . . . . . . . $ 7,462.5 $ 7,029.0
Less: Net Reserves of Discontinued Operations . . . . . . . . . . . . . 783.7 936.6
------------ -----------
Net Statutory Reserves of Continuing Operations . . . . . . . . . . . . . 6,678.8 6,092.4
Adjustments to a Generally Accepted Accounting Principles Basis:
Primarily Discounting of Workers' Compensation Pension Reserves . . (150.6) (176.6)
Environmental Reserves . . . . . . . . . . . . . . . . . . . . . . . 80.0 --
------------ ---------
Net Reserves on a Generally Accepted Accounting Principles Basis . . . . 6,608.2 5,915.8
Reinsurance Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 3,670.2 3,152.9
------------ -----------
Gross Reserves on a Generally Accepted Accounting Principles Basis . . . $ 10,278.4 $ 9,068.7
============ ===========
Reconciliation of Net Reserves for Losses and Loss
Expenses for the Last Three Years
With Supplemental Gross Data
1994 1993 1992
------ ------ ------
(millions)
Net Reserves as of January 1 . . . . . . . . $ 5,915.8 $ 5,806.5 $ 5,901.9
---------------- ------------ -------------
Incurred Related to:
Current Year . . . . . . . . . . . . . . 3,547.8 3,413.0 3,036.3
Prior Years . . . . . . . . . . . . . . 853.1 1.1 125.3
---------------- ------------ -------------
Total Incurred . . . . . . . . . . . . . . . 4,400.9 3,414.1 3,161.6
---------------- ------------ -------------
Paid Related to:
Current Year . . . . . . . . . . . . . . 1,183.3 1,291.1 1,031.9
Prior Years . . . . . . . . . . . . . . 2,299.9 2,013.7 2,225.1
---------------- ------------ -------------
Total Paid . . . . . . . . . . . . . . . . . 3,483.2 3,304.8 3,257.0
---------------- ------------ -------------
Less Sale of Canadian Subsidiaries . . . . . (225.3) -- --
---------------- ------------ -------------
Net Reserves as of December 31 . . . . . . . 6,608.2 5,915.8 5,806.5
Plus Reinsurance Receivables . . . . . . . . 3,670.2 3,152.9 3,259.7
---------------- ------------ -------------
Gross Reserves . . . . . . . . . . . . . . . $ 10,278.4 $ 9,068.7 $ 9,066.2
================ ============ =============
The following table shows the changes in the last three years in
Continental's estimates of its liability for insured events of prior
years, including the extent to which such changes relate to asbestos-
related, other toxic tort and environmental pollution claims:
29
Components of Reserve Development
For the Last Three Years
Reserve Increase (Decrease)
at December 31,
1994 1993 1992
-------- -------- --------
(net basis, millions)
Asbestos-related and Other Toxic Tort . . . . $ 271.0 $ 22.4 $ 33.3
Environmental Pollution . . . . . . . . . . . 301.5 33.5 47.6
---------------- ------------ -------------
Subtotal . . . . . . . . . . . . . . . . . . 572.5 55.9 80.9
All Other . . . . . . . . . . . . . . . . . . 280.6 (54.8) 44.4
---------------- ------------ -------------
Total . . . . . . . . . . . . . . . . . . . . $ 853.1 $ 1.1 $ 125.3
================ ============ =============
The increase in Continental's estimate of its liabilities for
insured events of prior years for total Environmental Claims
during each of the years 1994, 1993 and 1992 was 13.0%, 1.6% and
2.6%, respectively, of Continental's net incurred losses and loss
expenses for such years.
As a result of insured events in prior years, the provision
for claims and claim adjustment expenses (net of reinsurance
recoveries of $3,670 million and $3,153 million in 1994 and 1993,
respectively) increased by $853 million in 1994, primarily due to
a $573 million increase in asbestos-related, other toxic tort and
environmental pollution claims (including $480 million for
establishment of reserves for Environmental IBNR Claims in the
third quarter of 1994); an $80 million increase resulting from
higher than anticipated number of claims and adverse loss
development in case reserves in multi-peril and various smaller
programs (primarily auto) and an increase in the number of large
cases and adverse loss development in case reserves in the surety
program; and $100 million of additional loss and loss adjustment
expense reserves established in workers' compensation, primarily
as a result of Continental's annual fourth quarter review of
reserves and reviews conducted in connection with the sale of
Casualty and negotiations with respect to such sale.
The $55 million reduction for the provision for claims and
claim adjustment expenses other than asbestos-related and other
toxic tort and environmental pollution claims in 1993 was
primarily due to a decrease in the medical cost inflation rate
trends in comparison to prior years, which was anticipated to
primarily benefit the provision for claims and claim adjustment
expenses relating to Continental's workers' compensation
business, which is most affected by medical costs.
Reinsurance
In the ordinary course of business, Continental cedes
business, on both a pro rata and excess of loss basis, 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 assumes business from other reinsurance
organizations, primarily through its participation in voluntary
and involuntary risk-sharing pools.
30
For a table showing premiums written, premiums earned and
losses and loss expenses information (direct, assumed and ceded)
for the years ended December 31, 1994, December 31, 1993 and
December 31, 1992 see the Proxy Statement at page F-31.
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 which do not meet its credit quality standards.
Continental does not believe that there is a significant solvency
risk concerning its reinsurers. 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. During 1994, Continental charged $135 million to
earnings for uncollectible reinsurance (which includes an $80
million charge for the reinsurance asset recorded in conjunction
with the establishment of the reserve for Environmental IBNR
Claims that was fully reserved for as not recoverable), compared
with $15 million in 1993 and $41 million in 1992. Continental
has not incurred any significant reinsurance write-offs
associated with its corporate catastrophe reinsurance program.
Continental has in place various reinsurance arrangements
with respect to its current operations. These arrangements are
subject to retention, coverage limits and other policy terms.
Some of the principal treaty arrangements which are presently in
effect are: (1) an excess-of-loss treaty reducing Continental's
liability on individual property losses; (2) a blanket casualty
program reducing Continental's liability on third party liability
losses; (3) a clash casualty program reducing Continental's
liability on multiple insured/single event losses; and (4) 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.
Continental also has in place an aggregate excess-of-loss
reinsurance contract with a limit of $400 million. This
agreement was purchased in 1992 from National Indemnity Insurance
Company. It covers losses and allocated loss expenses for 1991
and prior policy years. The business covered includes all lines
of business written by Continental's domestic property and
casualty insurance subsidiaries, with specific exclusions for
nuclear exposure, war risks, business written through the
Workers' Compensation Reinsurance Bureau and involuntary market
pools, insolvency and guarantee fund assessments, taxes,
unallocated loss adjustment expenses, and extra-contractual
obligations.
Effective July 1, 1994, Continental entered into a quota
share agreement (previously referred to as the Quota Share
Cession) to reinsure a portion of its domestic personal lines
business with General Reinsurance Corporation. From July 1, 1994
through December 31, 1995, the quota share participation is 50%
of covered lines. Continental ceded premiums related to the
Quota Share Cession of $325 million in 1994 and expects to cede
written premiums of approximately $300 million in 1995. This
arrangement will help Continental lower its premium-to-surplus
ratio and further reduce its exposure to catastrophes subject to
the agreement's catastrophe coverage limits.
Continental does not maintain any reinsurance arrangements
whose coverage is limited solely to reported and unreported
Environmental Claims, as defined above. The amounts of
reinsurance receivables and recoverables that are reflected in
Continental's Consolidated Financial Statements arose under a
variety of reinsurance arrangements put in place generally from
1963 through 1986, which generally are the years in which
Continental's general liability policies were alleged to provide
coverage for those types of claims. As most of Continental's
reserves for asbestos-related, other toxic
31
tort and environmental pollution claims have arisen out of
general liability policies written prior to 1986 (after which
such policies have not generally been subject to wide-ranging
challenges by policyholders and/or differing interpretations by
courts in various jurisdictions), a majority of reinsurance
receivables and recoverables arising out of such claims in 1992,
1993 and 1994 related to reinsurance arrangements put into place
prior to 1986. These reinsurance arrangements include primary
casualty treaty arrangements, excess of loss and umbrella
casualty treaty arrangements, property treaty arrangements and
various facultative agreements.
Investment and Finance
Reserves and surplus balances constitute a pool of funds
which are invested by insurance companies. Investment results
combined with underwriting results produce operating income or
losses. Continental's overall operating results in the insurance
business are significantly affected by the performance of its
investment portfolio.
The following table sets forth the investment results of
Continental and its subsidiaries for each of the past three
years:
Average Net Investment Current Realized
Year Investments (1) Income (2) Yield Capital Gains
(millions, except percentages)
1994 . . . . $ 8,695.4 $504.2 5.8% $ 76.0
1993 . . . . $ 8,817.0 $542.3 6.2% $ 124.5
1992 . . . . $ 8,314.4 $589.9 7.1% $ 215.6
(1) Average of investments at beginning and end of
calendar year, excluding operating cash, but
including cash equivalents. Bonds and redeemable
preferred stocks are reported at fair value, except
for those investments intended to be held to
maturity, which are reported at cost.
(2) Net investment income after deduction of investment
expenses, but before realized capital gains and
applicable income taxes.
The following table sets forth the amortized cost and
estimated fair value of Continental's investment portfolio as at
December 31 of the years indicated:
32
1994 1993 1992
Net
Net Net Unrealized
Amortized Unrealized Amortized Unrealized Amortized Gain
Cost Fair Value Gain (Loss) Cost Fair Value Gain (Loss) Cost Fair Value (Loss)
(millions)
Fixed Maturities
U.S. Treasury
Securities $ 1,515.0 $ 1,442.4 $ (72.6) $ 1,647.9 $ 1,706.5 $ 58.6 $1,432.6 $ 1,453.3 $ 20.7
U.S. Agency Securities 70.3 67.2 (3.1) 25.3 27.1 1.8 46.0 46.7 0.7
Tax-Exempt Securities 666.2 626.7 (39.5) 1,325.2 1,418.6 93.4 724.8 763.6 38.8
Canadian Government,
Provincial
and Municipal
Securities 482.4 455.1 (27.3) 518.0 559.0 41.0 476.7 487.2 10.5
Other International
Securities 623.3 612.3 (11.0) 646.8 689.9 43.1 743.5 767.5 24.0
Corporate Securities 1,170.2 1,115.1 (55.1) 1,148.7 1,193.1 44.4 1,313.0 1,326.7 13.7
Mortgage-Backed
Securities 1,516.3 1,431.8 (84.5) 1,255.1 1,270.3 15.2 1,299.7 1,337.5 37.8
Redeemable Preferred
Stocks 45.5 44.4 (1.1) 48.9 51.9 3.0 55.6 57.6 2.0
---------- --------- --------- --------- --------- --------- -------- --------- --------
$ 6,089.2 $ 5,795.0 $ (294.2) $ 6,615.9 $ 6,916.4 $ 300.5 $6,091.9 $ 6,240.1 $ 148.2
========== ========= ========= ========= ========= ========= ======== ========= ========
Equity Securities
Common Stocks 92.3 117.2 24.9 500.8 653.7 152.9 583.6 737.9 154.3
Nonredeemable Preferred
Stocks 4.6 3.7 (0.9) 99.2 105.4 6.2 176.1 170.9 (5.2)
---------- --------- --------- --------- --------- --------- -------- --------- --------
$ 96.9 $ 120.9 $ 24.0 $ 600.0 $ 759.1 $ 159.1 $ 759.7 $ 908.8 $ 149.1
========== ========= ========= ========= ========= ========= ======== ========= ========
Other Long-Term
Investments 530.4 537.7 7.3 387.9 395.9 8.0 340.2 340.2 --
---------- --------- --------- --------- --------- --------- -------- --------- --------
Other Short-Term
Investments 1,794.8 1,794.8 -- 1,071.0 1,071.0 -- 647.9 647.9 --
---------- --------- --------- --------- --------- --------- -------- --------- --------
Fixed Maturities Held to
Maturity -- -- -- -- -- -- 354.5 383.7 29.2
---------- --------- --------- --------- --------- --------- -------- --------- --------
Total Investments $ 8,511.3 $ 8,248.4 $ (262.9) $ 8,674.8 $ 9,142.4 $ 467.6 $8,194.2 $ 8,520.7 $ 326.5
========== ========= ========= ========= ========= ========= ======== ========= ========
The value of Continental's investment portfolio has been
negatively impacted by recent increases in interest rates, which
resulted in a reduction in the fair value of Continental's fixed
income securities.
Continental is shifting its investment focus from an objective
of total return to an objective to maximize pre-tax investment
income and minimize volatility of shareholders' equity.
Accordingly, Continental is continuing to reduce the equity and
non-investment grade bond components of its portfolio and reduce
the average maturity of the taxable fixed income investments.
Presently, Continental also intends to enter into derivative
investments primarily as economic hedges against the fixed income
portfolio.
All investments are made in accordance with applicable state
investment laws; further, Continental employs strict internal
guidelines limiting its investments in any particular issue and
in any particular industry. Continental also maintains short-
term investments and cash equivalents for the current and
anticipated near-term liquidity needs of its operations.
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 Moody's rating of Aa1,
Moody's second highest of ten investment grade ratings (or its
Standard & Poor's equivalent). Continental's fixed maturities
available-for-sale had a balance sheet fair value of $5,795
million at December 31, 1994 (compared with a fair value of
$6,916 million at December 31, 1993) and included mortgage-backed
securities with a fair value of $1,432 million and an amortized
cost of $1,516 million at December 31, 1994 (compared with a fair
value of $1,270 million and an amortized cost of $1,255 million
at December 31, 1993). Continental's mortgage-backed securities
have an average Moody's rating of Aaa, Moody's highest rating (or
its Standard & Poor's equivalent), and an average life of
7 years. Continental has an insignificant investment in col-
lateralized mortgage obligations which put the return of
principal at risk if interest rates or prepayment patterns
fluctuate.
33
At December 31, Continental's fixed maturities available-for-
sale portfolio classified by Moody's rating was as follows:
Percentage of Fixed Maturities
Available-for-Sale Portfolio
----------------------------------------------
Moody's Rating 1994 1993
-------------- ------- -------
Aaa........................ 62.1% 62.0%
Aa......................... 15.0 15.7
A.......................... 15.2 11.2
Baa........................ 7.2 9.6
Below Baa.................. 0.5 1.5
------- -------
100.0% 100.0%
======= =======
At December 31, 1994, the fixed maturities portfolio included
an immaterial amount of securities, the fair value of which is
expected to be lower than its carrying value for more than a
temporary period; such investments have been recorded in Conti-
nental's Consolidated Balance Sheets (see the Proxy Statement at
p. F-18) at their net realizable value.
At December 31, 1994, Continental's equity securities had a
fair value of $121 million, which represented a $608 million
decrease from the fair value at September 30, 1994, primarily due
to sales, in the fourth quarter, of $615 million of Continental's
appreciated equity securities. As a result of those fourth
quarter sales, Continental recognized $102 million of realized
capital gains.
In 1994, Continental held derivative financial investments for
the purposes of enhancing income and total return and/or hedging
long-term investments. Presently, it is Continental's intent to
enter into derivative financial investments primarily as economic
hedges against the fixed income portfolio. At December 31, 1994,
the total notional value of Continental's derivative financial
investments amounted to $184 million, and included futures
contracts, interest rate swap agreements, options and foreign
currency forward contracts. The notional amounts of such
instruments as of December 31, 1994 and 1993, respectively, were
as follows: foreign currency forward contracts of $3 million and
$0 million; interest rate swaps of $33 million and $208 million;
options of $25 million and $0 million; and futures contracts of
$123 million and $123 million. Continental does not participate
in these types of financial instruments as an intermediary, and
believes it limits its credit risk of non-performance by any
counterparty to an insignificant amount.
Continental has forward contracts in place to hedge the cash
proceeds from the sale of CI Canada. These forward contracts
expire in 1995 and at December 31, 1994 had an unrealized gain
of $1 million with respect to them.
At December 31, 1994, Continental also had a $109 million
investment in privately-placed direct mortgages, which are
included in "Other Long-Term Investments at Fair Value" in
Continental's Consolidated Balance Sheets (see the Proxy
Statement at page F-18).
The NAIC is currently developing an Investments of Insurers
Model Act, which, if adopted by state regulatory authorities,
would establish uniform limitations upon the type and amounts of
investments insurers may hold. Based upon the current proposals
of this Model Act, which are subject to review and change,
Continental does not believe a uniform standard would
significantly affect the current investment mix or operations of
its insurance subsidiaries.
Unrealized appreciation on investments available-for-sale
decreased $731 million, before income taxes, from December 31,
1993 primarily as a result of a loss in value due to increased
interest rates
34
and sales of equity securities. Unrealized appreciation on fixed
maturities decreased $595 million. Unrealized appreciation on
common stocks decreased $128 million, while unrealized
appreciation on nonredeemable preferred stocks decreased $7
million. Unrealized appreciation on other long-term assets
decreased $1 million. In addition, unrealized appreciation on
investments held by discontinued operations decreased $44
million, before income taxes, from December 31, 1993.
In recent years, a small portion of Continental's investment
funds has been committed to alternative areas of investment
(i.e., other than Continental's traditional areas). Continental
currently invests in alternative areas including limited
partnerships, venture capital partnerships and international
diversification investments. As of December 31, 1994, the total
investment in these areas represented approximately 5% of
Continental's investment portfolio.
Continental, through its former participation in the Municipal
Bond Insurance Association, issued guarantees of financial
obligations. During 1986, this association was reorganized as a
corporation named MBIA, Inc. Continental's net par value
exposure at December 31, 1994 on guarantees issued before the
reorganization was $1.1 billion (1993 - $1.4 billion), all of
which has been reinsured by MBIA, Inc. In addition, Continental
has issued financial guarantees of limited partners' obligations,
municipal lease obligations, industrial development bonds and
other obligations. Continental's net par value exposure on these
guarantees at December 31, 1994 was $133 million (1993 - $151
million). The maturity dates of these obligations range between
one and twelve years. Continental continually monitors its
exposure relating to financial guarantees. Continental does not
believe that its exposures relating to financial guarantees are
material.
Miscellaneous
During 1994, Continental extended the maturity on its
revolving credit facility from December 30, 1994 to December 31,
1995. In addition, the revolving credit facility was increased
by $60 million and provides for borrowings of up to $210 million
from a syndicate of banks. Funds borrowed through the facility
may be used for general corporate purposes, but Continental has
used and intends to use the facility primarily as an alternative
to traditional sources of short-term borrowings. At December 31,
1994, Continental had a $205 million balance outstanding under
the facility. Under the revolving credit agreement, Continental
is required, among other things, not to exceed a modified debt to
capital ratio (debt plus shareholders' equity, excluding net
unrealized appreciation/(depreciation) of investments, plus
redeemable preferred stocks) of 45%, for the period through June
29, 1995, and 40%, thereafter, and to maintain a minimum level of
statutory surplus for its domestic insurance subsidiaries of
$1,400 million, for the period through June 29, 1995, and $1,465
million, thereafter. At December 31, 1994 (the most recent date
of compliance calculations), Continental's modified debt to
capital ratio was approximately 40.1% and statutory surplus for
its domestic insurance subsidiaries was $1,468 million.
In March 1993, Continental sold a total of $150 million of a
total of $350 million of Notes (which provided $148 million of a
total of $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 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. As described above
(see "Re-engineering Strategy" commencing on page 1), during
1994, Continental sold preferred stock and an option for $275
million in cash. Pursuant to its obligations under the CNA
Securities Purchase Agreement, Continental will endeavor to raise
additional capital of approximately $100 million, through the
issuance of either preferred stock or notes, if the CNA Merger is
not consummated. If such addition-
35
al funds are not raised within 360 days after termination of the
Merger Agreement or if the annual dividend rate or interest rate
on such securities exceeds 13%, then the annual rate of
cumulative cash dividends on Continental's 9.75% preferred stock
will be increased to a rate of 10.75%. Continental does not
currently contemplate incurring additional borrowings other than
for the purpose of reducing amounts outstanding under its
revolving credit facility.
During the first quarter of 1995, Continental redeemed its
Series A and Series B Preferred Stock. Continental will pay a total
of $2.1 million in connection with that redemption.
As of December 31, 1994, Continental and its subsidiaries had
approximately 9,357 employees, compared with 12,255 at December
31, 1993. Continental and its subsidiaries consider their em-
ployee relations to be satisfactory.
Item 2. Properties
Continental's subsidiaries lease office space in various
cities throughout the United States and in other countries. The
following table sets forth certain information with respect to
the principal office buildings owned or leased by Continental's
subsidiaries:
36
Amount of
Building Owned
and Occupied or
Leased by
Continental or its
Subsidiaries (net
of third-party
Size (in square subleases) (in
Location feet) (1) square feet) Principal Usage Operations
180 Maiden Lane, 1,066,740 605,777 Principal Executive Corporate/Insurance
New York, New York(2) Offices of Operations/Asset
Continental Management
1 Continental Drive 490,993 490,993 Property, Casualty Insurance Operations
Cranbury, New Jersey Insurance Offices
200 S. Wacker Drive, 331,904 290,104 Property, Casualty Insurance Operations
Chicago, Illinois Insurance Offices
1111 E. Broad St., 197,537 197,537 Property, Casualty Insurance Operations
Columbus, Ohio Insurance Offices
1100 Ward Avenue, 186,492 95,450 First Insurance Com- Insurance Operations
Honolulu, Hawaii(2) pany of Hawaii, Ltd.
Headquarters
333 Glen Street, 158,700 158,700 Property, Casualty Insurance Operations
Glens Falls, New York Insurance Offices;
Residual Market
Center
3501 State Highway 129,965 129,965 Data Processing Systems
No. 66, Neptune, New Facilities
Jersey
(1) Represents the amount of space owned, occupied by or
leased to Continental or its subsidiaries. To the extent not
occupied by Continental or its subsidiaries, such space is or
is intended to be subleased to third parties.
(2) Represents property owned in fee by Continental's
subsidiaries and held subject to mortgages. (See Note 12
to Consolidated Financial Statements included at pages
F-33-F-34 of the Proxy Statement.)
Item 3. Legal Proceedings
Continental's subsidiaries are routinely party to litigation
incidental to their business, as well as other litigation of a
nonmaterial nature. Management regularly evaluates the liability
of Continental and its subsidiaries associated with such litiga-
tion. The status of such litigation is reviewed in consultation
with Continental's in-house legal staff, Corporate Claims Depart-
ment and Environmental Claims Department, and their respective
outside counsel, all of whom have extensive experience in
handling such matters. Based upon the foregoing evaluative
process, Continental makes a determination as to the effect that
such litigation may have upon its financial condition on a
consolidated basis. In the opinion of Continental, no individual
item of litigation, or group of related items of litigation
(including asbestos-related, other toxic tort and environmental
pollution matters), taken net of claims reserves established
therefore and giving effect to reinsurance, is likely to result
in judgments for amounts material to the financial condition of
Continental and its subsidiaries on a consolidated basis. In
light of Continental's recent operating results, it is possible
that litigation judgments or settlements may have a material
impact on results of operations and liquidity.
37
A Continental subsidiary and other workers' compensation
carriers are involved in the Maine Workers' Compensation
---------------------------
Assessment Litigation, which is currently pending in Maine State
---------------------
Superior Court. This litigation is a collection of various
appeals and proceedings from the Maine Bureau of Insurance, and
involves the statutory reconciliation of the residual market pool
for workers' compensation. The impacted policy years are 1988
through 1992 which are to be re-examined annually through 1999.
For each of those years, the Bureau of Insurance is to conduct a
"Fresh Start" proceeding, in which a determination is to be made
as to whether the residual market was operating at a deficit for
the policy year in question and if so, which portion of the
deficit is to be paid by surcharges to the employers/insureds and
which portion of the deficit is to be assessed to the servicing
and other insurance carriers. The statute requires the Maine
Superintendent of Insurance to determine whether the carriers
used "good faith best efforts" to depopulate the residual market
in order to allocate a percentage (up to 50%) of the deficit
against the carriers. 90% of the portion allocated to the
carriers will be assessed to the approximately twelve (12)
servicing carriers (which includes Continental subsidiary) on a
roughly per capita basis subject to possible exceptions and
adjustments for which new rules are being promulgated by the
Superintendent in another proceeding.
In several decisions beginning in October 1994, a Maine court
(the state Superior Court) in the first judicial appellate review
ruling on the validity of any of the underlying administrative
proceedings, upheld a significant portion of the Superintendent's
methodology and dollar deficit determinations, while invalidating
certain other findings challenged by the carriers. Thus far the
Commissioner has found deficits for the policy years 1989, 1990,
and 1991. No deficit for policy year 1992 has been found, and
policy year 1993 will not be considered until the 1995 "Fresh
Start" proceedings. For the years 1989 through 1991, the
Superintendent ruled that based upon insufficient depopulation
efforts, the maximum permitted 50% of the deficit was to be
allocated to carriers, with the other 50% being surcharged to
employers/insureds. Each of the separate "Fresh Start"
decisions, which form the basis of the Superintendent's
allocations, have been appealed. In addition, the
Superintendent's allocation of $40 million of the combined 1988
through 1991 deficit, servicing carrier performance and
investment yield issues has been challenged.
Those decisions all are currently pending on appeal to the
Maine Law Court. The amount of the deficit for prior years
1989-1992 is still being litigated, and remains to be determined.
The Continental subsidiary will be liable for a certain percentage
of any such deficit, which percentage will be determined in a
separate proceeding and is dependent on a combination of residual
and voluntary workers' compensation market shares. In light of
Continental's recent operating results, an adverse decision in
this action may have a material impact on results of operations
and liquidity.
In May 1994 and subsequently, a purported class action
entitled Weatherford Roofing et al. v. Employers National
------------------------------------------------
Insurance Company, et al. and related actions, were instituted in
-------------------------
state court in Dallas, Texas. They involve alleged assigned risk
overburden ("ARO") and other over-charges levied by insurance
carriers writing workers compensation business in the State of
Texas from May 15, 1987 through April 1, 1992. During that
period, the residual market pool for workers' compensation
generated deficits which were assessed to carriers in relation to
their voluntary written workers' compensation premium.
Continental subsidiaries had a total Texas workers' compensation
premium volume of approximately $530 million during that period.
The action seeks to certify a class of all commercial
insureds who were allegedly overcharged on workers' compensation
policies and in some cases, other casualty insurance policies,
purchased during said period. The fourteenth amended complaint
currently names some 260 insurance carrier defendants who wrote
such coverage in the State of Texas during that same time. Two
defendant groups, Hartford and St. Paul, have entered into
settlements totalling about $25 million. Nine (9) Continental
companies are named as defendants. Plaintiff's claim breach of
contract and fraud as well as violations of the Texas Deceptive
Trade Practices Act ("DTPA"), the
38
deceptive practices and other provisions of the Texas Insurance
Code, and the state antitrust act. Plaintiffs' seek actual
damages, enhanced and/or treble damages and attorneys fees, as
well as injunctive relief. At the present time the complaints
have been served and answers and other defenses interposed. The
plaintiff's motion for class certification is being opposed.
Although, Continental intends to defend this action
vigorously, in light of Continental's recent operating
results, an adverse result in this action may have a material
impact on results of operations and liquidity.
Beginning on December 7, 1994, five purported class actions
were filed in New York State Supreme Court, New York County,
against Continental and directors of Continental by persons
claiming to be stockholders of Continental. The plaintiffs in
these actions allege that directors of Continental breached their
fiduciary duties when they approved the Merger Agreement with CNA
and its affiliate, Chicago Acquisition Corp., by, among other
things, agreeing to the Merger at an unfair and inadequate price,
failing to adequately "shop" Continental and failing to maximize
value for Continental's shareholders. The plaintiffs in two of
these actions have also named CNA as a defendant, and allege that
CNA aided and abetted the breaches of fiduciary duty. The
plaintiff in another of these actions alleges that directors of
Continental also violated Sections 715 and 717 of the NYBCL
(which relate to the duties of officers and directors). The
plaintiffs in one or more of these purported class actions seek,
among other relief, an injunction prohibiting the Merger, other
injunctive relief and unspecified monetary damages. Counsel for
the plaintiffs in these actions have advised counsel for
Continental that they intend to serve a single, consolidated
amended complaint.
Continental does not believe that this litigation is likely to
have a material adverse effect on the financial condition or
results of operations of Continental because, based on its review
of the complaints that have been filed, the underlying facts and
the applicable law, Continental believes that the claims against
it and its directors have no merit and that it is highly unlikely
that an injunction will be issued or that damages will be awarded
against Continental or its directors in an amount that would have
a material adverse effect on the financial conditions or results
of operations of Continental.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1994, no matter was submitted to
a vote of Continental's shareholders.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
Continental's Common Stock has traded on the New York Stock
Exchange since May 27, 1968 (symbol: CIC). The Common Stock also
trades on the Midwest Stock Exchange and the Pacific Stock
Exchange.
The following table sets forth, for the calendar periods
indicated, the high and low sale prices per share of
Continental's Common Stock as reported by the NYSE.
39
Common Stock
------------
High Low
---- ---
Calendar 1993
First Quarter 29-1/2 24-3/4
Second Quarter 31-1/4 24-3/8
Third Quarter 34-5/8 30-3/8
Fourth Quarter 33 27-1/2
Calendar 1994
First Quarter 28-1/2 22-1/8
Second Quarter 23-5/8 14-1/8
Third Quarter 19-7/8 13-3/8
Fourth Quarter 19-1/8 12
On October 12, the day prior to the announcement of the IP
Securities Agreement, the closing sales price of the Common Stock
on the New York Stock Exchange was $13.50 per share. On
December 5, 1994, the day prior to the announcement of the
proposed CNA Merger, the high, low and closing sales prices of
the Common Stock on the New York Stock Exchange were $14.375,
$14.125 and $14.375 per share, respectively.
As of March 27, 1995, there were approximately 11,750
registered holders of Continental's Common Stock.
Continental paid $0.50, $1.00 and $2.20 per share in dividends
in the first nine months of 1994 and in 1993 and 1992,
respectively. In August 1994, the Board of Directors, citing the
need to further strengthen Continental's capital base, eliminated
the quarterly cash dividend on the Common Stock. Continental is
prohibited under certain provisions of its preferred stock from
paying Common Stock dividends until December 9, 1997, and will be
restricted from paying Common Stock dividends thereafter under
certain circumstances.
Material appearing under the captions "Summarized Consolidated
Quarterly Financial Data (Unaudited)", "Selected Consolidated
Financial Information" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financial
Resources and Liquidity", and Notes 16 and 18 to Consolidated
Financial Statements included in Continental's Proxy Statement is
incorporated herein by reference.
Item 6. Selected Financial Data
Material appearing under the caption "Selected Consolidated
Financial Information" included in the Proxy Statement is
incorporated herein by reference.
40
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Material appearing under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
included in the Proxy Statement is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements and related Notes, and
material appearing under the captions "Independent Auditors' Re-
port", "Report on Financial Statements" and "Summarized
Consolidated Quarterly Financial Data (Unaudited)" included in
the Proxy Statement are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Within the 24 months prior to the date of its most recent
financial statements, Continental did not file a report on Form
8-K reporting a change of accountants.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors of the Registrant
Name Title Age
---- ----- ---
Ivan A. Burns Director 60
Alec Flamm Director 68
Irvine O. Hockaday, Jr. Director 58
John E. Jacob Director 60
John P. Mascotte Director, Chairman of the Board and 55
Chief Executive Officer
John F. McGillicuddy Director 64
Richard de J. Osborne Director 60
John W. Rowe, M.D. Director 50
Patricia Carry Stewart Director 66
Adrian M. Tocklin Director, President and
Chief Operating Officer 43
41
Francis T. Vincent, Jr. Director 56
Michael Weintraub Director 56
Anne Wexler Director 65
All Directors of Continental are elected to serve for terms to
expire at the meeting of the Board of Directors following the
next Annual Meeting of Shareholders and until their successors
shall have been elected.
Ivan Burns is a former Executive Vice President-Administration
and Director (1989-90) of CPC International Inc., and was
President of its Corn Wet Milling Division (1985-87). From 1983
to 1985 he had been Chairman of the Board and Chief Executive
Officer of ACF Industries, Inc. He has been a Continental
Director since 1983. Committees: Compensation and Nominating.
Alec Flamm is a former Vice Chairman (1985-86), President and
Chief Operating Officer (1982-85) and Director (1981-86) of Union
Carbide Corporation. Mr. Flamm has been a Continental Director
since 1983. He is also a director of Imcera Group, formerly the
International Minerals and Chemicals Corporation. Committees:
Compensation (Chair), Executive and Public Affairs.
Irvine O. Hockaday, Jr. has been President and Chief Executive
Officer of Hallmark Cards, Inc. since 1986, and a Director since
1978. Prior to joining Hallmark Cards, Inc., he was President and
Chief Executive Officer of Kansas City Southern Industries, Inc.
Mr. Hockaday has been a Continental Director since 1989. He also
is a Director of The Ford Motor Company and Dow Jones Inc.
Committees: Audit and Investment.
John E. Jacob has been Executive Vice President and Chief
Communications Officer of Anheuser Busch Companies, Inc. since
1994. From 1982 to 1994, he was President and Chief Executive
Officer of the National Urban League. He has been a Continental
Director since 1985. Mr. Jacob also is a Director of Coca Cola
Enterprises, Inc., Anheuser-Busch Companies, Inc. and LTV
Corporation. Committees: Audit (Chair), Executive and Public
Affairs.
John P. Mascotte has been Chairman and Chief Executive Officer
of Continental since 1982. From 1992 through 1994, he also acted
as President, a position he held during the period 1981-1984.
Mr. Mascotte is also the chief executive officer and director of
several subsidiaries of the Corporation. Mr. Mascotte has been a
Continental Director since 1981. He also is a Director of
Hallmark Cards, Inc., Chemical Banking Corporation, Chemical
Bank, Business Men's Assurance Company of America and American
Home Products Corporation. Committee: Executive (Chair).
John F. McGillicuddy is the retired Chairman of the Board and
Chief Executive Officer of Chemical Banking Corporation and
Chemical Bank. Prior to the merger on January 1, 1992 of
Manufacturers Hanover Corporation and Chemical Banking
Corporation, Mr. McGillicuddy had been Chairman and Chief
Executive Officer of Manufacturers Hanover Corporation and
Manufacturers Hanover Trust Company, positions he had held since
1979. Mr. McGillicuddy is a Director of Chemical Banking
Corporation and Chemical Bank. He has been a Continental
Director since 1975. Mr. McGillicuddy also is a Director of UAL
Corporation, USX Corporation, Empire Blue Cross and Blue Shield
and Kelso & Company. Committees: Audit, Executive, Investment
and Nominating (Chair).
42
Richard de J. Osborne has been Chairman, Chief Executive
Officer and President of ASARCO Incorporated since 1985. He has
been a Continental Director since 1992. Mr. Osborne is a
Director of ASARCO and Schering-Plough Corporation, Chairman and
a Director of American Mining Congress, a Director and former
Chairman of International Copper Association, Chairman and a
Director of Copper Development Association, and a Director of the
United States Chamber of Commerce, the Americas Society and the
Council of the Americas. He also is President and a Director of
the American-Australian Association and a member of the Council
on Foreign Relations, the Economic Club of New York and The
Conference Board. Committees: Audit, Executive and Investment.
John W. Rowe, M.D., has been President of Mount Sinai Medical
Center and Mount Sinai School of Medicine since 1988. He was
formerly a Professor of Medicine at Harvard Medical School (1974-
1988). He has been a Continental Director since 1993. Dr. Rowe
is a member of the Board of Directors of the American Board of
Internal Medicine and the New York Academy of Medicine. He is a
past President of the Gerontological Society of America and the
American Federation for Aging Research, and a member of the
Institute of Medicine of the National Academy of Sciences.
Committees: Compensation and Public Affairs.
Patricia Carry Stewart is a former Vice President of The Edna
McConnell Clark Foundation (1974-1992). She has been a
Continental Director since 1976. Ms. Stewart is also a Director
of Bankers Trust Company, Bankers Trust N.Y. Corporation, and
Melville Corporation. She serves as a Trustee and Vice Chairman
of the Board of Cornell University, a member of the Council on
Foreign Relations and a director and Vice Chairman of the Board
of the Community Foundation for Palm Beach and Martin Counties.
Committees: Investment (Chair) and Nominating.
Adrian M. Tocklin has been a Director, President and Chief
Operating Officer of Continental since July 1994. Prior to that
time, she served as Executive Vice President of Continental and
President, Continental Risk Management Services, since November
1992, and as Senior Vice President, Corporate Claims, of
Continental (July 1988-November 1992).
Francis T. Vincent, Jr. is a former Commissioner of Major
League Baseball (1989-1992). From 1979 to 1989, he served as
Executive Vice President of The Coca-Cola Company and Chief
Executive Officer, Chairman of the Board and President of
Columbia Pictures Industries, Inc., formerly a subsidiary of The
Coca-Cola Company. Mr. Vincent has been a Continental Director
since 1992. He also is a Director of Time-Warner Corp., Culbro
Corp. and Oakwood Homes Corp. Committees: Compensation and
Nominating.
Michael Weintraub is a private investor. He has been a
Continental Director since 1976. Mr. Weintraub also is a
Director of NationsBank Corporation and IVAX Corporation and a
trustee of the Miami Heart Research Institute. Committees:
Audit and Investment.
Anne Wexler has been Chairman of The Wexler Group, a
Washington, D.C., government relations consulting firm, 1981.
She has been a Continental Director since 1990. Ms. Wexler is
also a Director of American Cyanamid Corporation, Comcast
Corporation, Dreyfus Index Funds and the New England Electric
System. She is a member of the I.B.M. Public Responsibility
Committee, the Board of Visitors of the University of Maryland
School of Public Affairs, the Carter Center of Emory University,
the Council on Foreign Relations and the Visiting Committee of
the JFK School of Government at Harvard University. Committees:
Compensation and Public Affairs (Chair).
The Continental Board of Directors has established six
Committees, described below. With the exception of the Executive
Committee, all Board Committees are comprised entirely of
independent Directors of Continental.
43
The Executive Committee is authorized, to the extent permitted
by New York law, to exercise powers of the Board during intervals
between Board meetings. The Executive Committee has five
members: Messrs. Mascotte (Chair), Flamm, Jacob, McGillicuddy
and Osborne. The Committee met three times in 1994.
The Audit Committee consists of five members: Messrs. Jacob
(Chair), Hockaday, McGillicuddy, Osborne and Weintraub. The
Audit Committee reviews the annual financial statements of
Continental, reviews the adequacy of its system of internal
accounting controls and procedures, reviews the plan and scope of
the annual audit of Continental, and considers other matters in
relation to the internal and external auditing of Continental.
The Audit Committee meets with Continental's independent
certified public accountants, internal auditors and financial and
legal personnel in connection with the Committee's reviews. It
recommends to the Board of Directors the appointment of the
independent certified public accountants. The Audit Committee
met five times in 1994.
The primary function of the Investment Committee is to review
and evaluate Continental's investment policies and to recommend
to the Board of Directors such changes as may be appropriate.
The Investment Committee has five members: Ms. Stewart (Chair)
and Messrs. Hockaday, McGillicuddy, Osborne and Weintraub. It
met four times in 1994.
The Compensation Committee is responsible for remuneration
arrangements for Directors and senior management, for awards and
other matters under Continental's Annual Management Incentive
Plan and Long Term Incentive Plan and for compensation and
benefit plans for Continental employees generally. The
Compensation Committee has five members: Messrs. Flamm (Chair),
Burns and Vincent, Dr. Rowe and Ms. Wexler. It met eleven times
in 1994.
The Nominating Committee recommends as nominees for election
as Directors of Continental at the Annual Meeting of
Shareholders. The Nominating Committee consists of four members:
Messrs. McGillicuddy (Chair), Burns and Vincent and Ms. Stewart.
It met one time in 1994.
The Public Affairs Committee has four members: Ms. Wexler
(Chair) and Messrs. Flamm, Jacob and Dr. Rowe. Its function is
to review Continental's policies on public issues relating to its
business, and to report to the Board of Directors on the
Committee's findings. The Public Affairs Committee met three
times in 1994.
Each Director who is not an executive officer of the
Corporation receives an annual retainer of $25,000 and 100 shares
of Continental common stock, and a meeting fee of $1,000 for each
Board and Committee meeting which he or she attends (except that
in 1995, each such director received cash in lieu of shares).
Chairpersons of Committees receive additional annual retainers as
follows: Audit Committee -- $6,000; Compensation, Investment,
Nominating and Public Affairs Committees -- $5,000. Directors who
are also Continental executive officers receive no fees for
serving as Directors of the Corporation. Each Director (who is
not an executive officer) who retires from the Board after
attaining the age of 70, or by reason of disability, with a
minimum of five years' service as director receives thereafter,
annually for the same number of years as the Director served on
the Board, subject to a maximum of ten years, the annual retainer
at the time such Director retires or is disabled.
44
Item 10(b). Executive Officers of the Registrant
Name Title Age
---- ----- ---
John P. Mascotte Director, Chairman of the Board and Chief Executive 55
Officer
Adrian M. Tocklin Director, President and Chief Operating Officer 43
Wayne H. Fisher Senior Executive Vice President and President, 50
Special Operations Group
Steven J. Smith Executive Vice President, Office of the Chairman 50
Bruce B. Brodie Senior Vice President and Chief Information Officer 40
J. Heath Fitzsimmons Senior Vice President and Chief Financial Officer 52
James P. Flood Senior Vice President, Corporate Claims 44
William F. Gleason, Jr. Senior Vice President, General Counsel and Secretary 58
John F. Kirby Senior Vice President 48
Arthur J. O'Connor Senior Vice President, Corporate Communications and 42
Investor Relations
Sheldon Rosenberg Senior Vice President and Chief Actuary 45
Kenneth B. Zeigler Senior Vice President, Human Resources 46
Francis M. Colalucci Vice President and Treasurer 50
William A. Robbie Vice President and Chief Accounting Officer 43
Timothy P. Mitchell Senior Vice President 45
Salvadore Ricciardone Senior Vice President 46
All Executive Officers of Continental are elected to serve for
terms to expire at the meeting of the Board of Directors follow-
ing the next Annual Meeting of Shareholders and until their
successors shall have been elected.
John P. Mascotte has been a Director since February 1981 and
Chairman of the Board and Chief Executive Officer of Continental
since December 1982. From 1992 through 1994, he also acted as
President, a position he held during 1981 - 1984.
Adrian M. Tocklin has been a Director, President and Chief
Operating Officer of Continental since July 1994. Prior to that
time, she served as Executive Vice President of Continental and
President, Continental Risk Management Services, since November
1992, and as Senior Vice President, Corporate Claims, of
Continental (July 1988 - November 1992).
Wayne H. Fisher has been a Senior Executive Vice President of
Continental since July 1994 and has been President, Special
Operations Group, since January 1988. Before that time, he was
an
45
Executive Vice President (December 1990 - July 1994) and a Senior
Vice President of Continental (December 1988 - December 1990).
Steven J. Smith has been an Executive Vice President, Office
of the Chairman, of Continental since February 1985.
Bruce B. Brodie has been Senior Vice President and Chief
Information Officer of Continental since October 1993. Before
that time, he served as Chief Financial Officer for the Special
Operations Group (April 1990 - October 1993) and Vice President,
Office of the Chairman, of Continental (January 1989 - April
1990).
J. Heath Fitzsimmons has been Senior Vice President and Chief
Financial Officer of Continental since January 1990. Before that
time, he was Vice President, Finance, of Continental (February
1989 - December 1989).
James P. Flood has been Senior Vice President, Corporate
Claims, of Continental since November 1992. Before that time, he
served as Vice President, Environmental Claims, of Continental
(March 1988 - October 1992).
William F. Gleason, Jr. has been Senior Vice President,
General Counsel and Secretary of Continental since January 1983.
John F. Kirby has been a Senior Vice President of Continental
since January 1990 and a Senior Vice President of The Continental
Insurance Company since March 1987.
Arthur J. O'Connor has been Senior Vice President, Corporate
Communications and Investor Relations, of Continental since
November 1992 and served as Vice President, Corporate Communica-
tions and Investors Relations, of Continental (January 1988 -
November 1992).
Sheldon Rosenberg has been Senior Vice President and Chief
Actuary of Continental since February 1994. Before that time, he
served as Vice President and Chief Actuary of The Continental
Insurance Company (April 1992 - February 1994), Vice President
and Actuary of The Continental Insurance Company (April 1990 -
March 1992) and Vice President and Chief Financial Officer of the
Special Operations Group (April 1988 - March 1990).
Kenneth B. Zeigler has been Senior Vice President, Human
Resources, of Continental since December 1991. Before that time,
he served as Senior Vice President and President of the Marine
and International Group (January 1990 - November 1991).
Previously, he had been President of Continental International
(July 1988 - December 1990).
Francis M. Colalucci has been Vice President and Treasurer of
Continental since May 1991. Before that time, he was Vice Presi-
dent and Controller of The Continental Insurance Company
(November 1980 - May 1991).
William A. Robbie has been Vice President and Chief Accounting
Officer since June 1992 and served as Vice President, Financial
Reporting (June 1990 - June 1992). Before that time, he served
as Vice President and Treasurer of Monarch Life Insurance Co. and
Vice President and Corporate Controller of Monarch Capital Corp.
(August 1988 - June 1990).
Timothy P. Mitchell has been Senior Vice President and Chief
Underwriting Officer of Continental since August 1994. Prior to
that time, he was Executive Vice President of Underwriting and
46
Production, Continental Risk Management Services (November 1992 -
August 1994), Chief Underwriter, Special Operations Group
(February 1991 - November 1992) and President, Continental Health
Care (June 1986 - February 1991).
Salvadore J. Ricciardone has been a Senior Vice President of
Continental since September 1994 and the President of
Continental's Commercial Lines Group since August 1994. Prior to
that time, he was Senior Vice President for the Product
Management Division of Continental's Agency & Brokerage Group
(May 1994-August 1994), Vice President and Manager of the Midwest
Region (1992-1994) Vice President and Regional Manager of
Continental's North Atlantic Region (N.J., N.Y.C. and Long
Island) (1991 - 1992) and Regional Vice President of Garden State
Region (N.J.) (1989-1991).
47
Item 11. Executive Compensation
The Summary Compensation Table, which appears below, provides
information concerning all forms of compensation for the three-
year period 1992-1994 for the CEO and the four other most highly
compensated Continental executive officers for services to
Continental and its subsidiaries in all capacities. The three
tables following the Summary Compensation Table provide further
detail regarding compensation earned by these executive officers
in 1994.
Summary Compensation Table
Long-Term Compensation
Awards Payouts
Annual Compensation Number of
Other Securities
Annual Underlying All Other
Name and Principal Compen- Options/ LTIP Compen-
Position Year Salary Bonus sation(a) SARs(#) Payouts sation(b)
John P. Mascotte . . . 1994 $735,192 $ 0 $21,166 0 $ 0 $33,727
Chairman and CEO 1993 $696,538 $332,500 $15,791 16,300 $ 0 $41,792
1992 $675,000 $ 0 $11,425 20,000 $ 0 $40,500
Charles A. Parker . . . 1994 $461,538 $ 0 $24,786 0 $ 0 $961,185(c)
Executive Vice 1993 $440,769 $136,000 $21,311 7,500 $ 0 $26,446
President 1992 $430,000 $ 0 $13,319 15,000 $ 0 $25,800
Adrian M. Tocklin . . . 1994 $368,077 $ 0 $16,795 0 $ 0 $14,705
President and 1993 $288,462 $120,000 $ 7,526 6,000 $ 0 $17,464
Chief Operating 1992 $230,577 $ 0 $ 4,906 18,000 $ 0 $13,883
Officer
Wayne H. Fisher . . . . 1994 $362,115 $ 0 $28,568 0 $ 0 $15,758
Senior Executive Vice 1993 $333,077 $128,000 $ 9,078 7,000 $ 0 $19,985
President 1992 $304,808 $ 0 $ 6,790 24,000 $ 0 $17,191
Steven J. Smith . . . . 1994 $326,923 $ 0 $12,527 0 $ 0 $15,018
Executive Vice 1993 $310,769 $128,000 $11,052 9,000 $ 0 $18,646
President 1992 $300,000 $ 0 $ 7,821 9,000 $ 0 $18,000
(a) Includes tax gross-ups for the taxable value of
unreimbursed personal use of company cars and
chauffeur services on behalf of named executives,
which, in 1994, were as follows: Mr. Mascotte:
$15,130; Mr. Parker: $18,750; Ms. Tocklin:
$16,022; Mr. Fisher: $22,532; and Mr. Smith:
$6,491.
(b) Represents Continental's contributions to
Incentive Savings Plan and Supplemental Savings
Plan, respectively, on behalf of named executives
which, in 1994, were as follows: Mr. Mascotte:
$6,923 and $26,804; Mr. Parker: $6,923 and
$14,262; Ms. Tocklin: $6,923 and $7,782; Mr.
Fisher: $6,923 and $8,835; and Mr. Smith: $6,923
and $8,095.
(c) Includes $940,000 separation pay paid in February
1995. See page 51 herein.
48
Continental did not grant any Incentive or Non-Qualified stock options
after February 18, 1994. The grants made on February 18, 1994 were
reported in Continental's Annual Report to Shareholders for the Year 1993.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at F.Y.-End(#) at F.Y.-End(a)
Shares Acquired on Exercisable/Un- Exercisable/Un-
Name Exercise(#) Value Realized($) exercisable exercisable
J. Mascotte . . . . . 0 $0 148,250/8,150 $0/$0
C. Parker . . . . . . 0 $0 85,050/3,750 $0/$0
A. Tocklin . . . . . 0 $0 49,300/3,000 $0/$0
W. Fisher . . . . . . 0 $0 70,650/3,500 $0/$0
S. Smith . . . . . . 0 $0 62,700/4,500 $0/$0
(a) Calculated at $19.00 closing price for 12/30/94.
49
The table below shows estimated annual retirement benefits payable under
Continental's Retirement and Supplemental Retirement Plans as a straight
life annuity at age 65 to persons in specified compensation and years-of-
service classifications.
Pension Plan Table
Final Five-
Year Average
Covered
Compensation Years of Credited Service at Retirement
15 20 25 30 35 40
-- -- -- -- -- --
$ 1,300,000 $ 306,500 $ 408,700 $ 510,900 $ 613,100 $ 715,200 $ 715,200
1,200,000 282,800 377,100 471,400 565,700 659,900 659,900
1,100,000 259,100 345,500 431,900 518,300 604,600 604,600
1,000,000 235,400 313,900 392,400 470,900 549,300 549,300
900,000 211,700 282,300 352,900 423,500 494,000 494,000
800,000 188,000 250,700 313,400 376,100 438,700 438,700
750,000 176,200 234,900 293,600 352,400 411,100 411,100
700,000 164,300 219,100 273,900 328,700 383,400 383,400
650,000 152,500 203,300 254,100 305,000 355,800 355,800
600,000 140,600 187,500 234,400 281,300 328,100 328,100
550,000 128,800 171,700 214,600 257,600 300,500 300,500
500,000 116,900 155,900 194,900 233,900 272,800 272,800
450,000 105,100 140,100 175,100 210,200 245,200 245,200
400,000 93,200 124,300 155,400 186,500 217,500 217,500
Please note that the final five-year average covered
compensation includes incentive compensation as well as base
salary. The compensation included in calculating pension
benefits takes into account the compensation listed in the
Summary Compensation Table, but is generally less than such
amounts due to the use of a five year average. The benefits
listed in the preceding table are not subject to deduction for
Social Security or other offset amount.
For the executive officers named in the preceding compensation
tables, the respective years of service at the end of 1994 are as
follows: Mr. Mascotte: 23.9 years; Mr. Parker: 24.75 years;
Ms. Tocklin: 20 years; Mr. Fisher: 12.3 years; and Mr. Smith:
18.6 years. The years of credited service stated for such
executive officers include eleven years, nine years, zero years,
zero years and seven years, respectively, credited by employment
arrangements; supplemental benefits with respect to those years
are to be paid from Continental's general funds.
The Executive Severance Plan was established by the Board in
1988 to help assure a continuing dedication by certain senior
executives of Continental to their duties notwithstanding any
occurrence of a tender offer or other takeover bid. The
Compensation Committee of the Board determines the senior
executives who participate in the Plan. Presently, 15 executive
officers are participants in the Plan.
If a change in control of Continental occurs and a
participant's employment terminates within two years after such
change of control for any reason other than retirement,
disability, death or
50
certain criminal convictions, under The Executive Severance Plan
the participant shall receive a payment equal to 299.9% of the
average of his or her annual compensation paid during the five
preceding years minus the amount of benefits to which such
participant is entitled under The Long Term Incentive Plan, the
Annual Management Incentive Plan, the Executive Termination
Program or any other plan or agreement of Continental, which are
accelerated by, or contingent on, a change of control. The
amount of such accelerated or contingent benefits for any
participant could be determined only after any change of control.
The average annual compensation paid during the five preceding
years to the named executive officers is as follows: Mr.
Mascotte: $885,405; Mr. Parker: $517,255; Ms. Tocklin:
$286,095; Mr. Fisher: $355,890; and Mr. Smith: $377,816. The
Board may not amend or terminate the Plan to relieve the
Corporation of its obligation to pay any amounts to which a
participant has become entitled. No amendment or termination may
become effective, without the consent of all the participants,
within two years after a change of control of Continental or at
any time after the Board has reason to believe a change of
control may occur.
The Executive Termination Program (the "Program"), adopted by
the Board of Directors effective September 22, 1994, codified
Continental's severance policies and its policies relating to
reductions in work force and other involuntary terminations as
they applied to senior executives. The Program provides
severance benefits to participants in the event of the
involuntary termination of their employment other than for cause
or upon retirement before a change in control such as the CNA
Merger. Under the Program, a participant will receive a payment
equal to twice the annualized base pay the executive is receiving
on the date he or she began participation in the Program or on
the date of termination of employment, if greater, if the
participant's employment is terminated by Continental other than
by reason of willful misconduct, normal retirement or disability
or by the participant following a reduction in grade level
responsibilities or base salary by more than 15%. The Program
may not be amended or terminated until January 1, 1997.
Under Continental's Annual Management Incentive Plan, each
participant who is involuntarily terminated in the year in which
a change of control occurs (but following the change of control)
will receive a prorated bonus in respect of his services for that
year based on a percentage of the midpoint of his salary grade
established by the compensation committee of the Board of
Directors under that plan.
In connection with the voluntary early retirement of Mr.
Charles A. Parker, Mr. Parker and Continental entered into a
Separation Agreement, effective as of December 30, 1994 (the
"Separation Agreement"). Pursuant to the Separation Agreement,
Mr. Parker and Continental agreed among other things that Mr.
Parker would receive the amount he would have been entitled to in
accordance with the Program ($940,000 or twice his annualized
base pay) as if he continued to be a participant in the Program
and, upon a change in control prior to September 30, 1995, the
difference between (x) the amount he would have been entitled to
receive pursuant to the Plan, if he had remained a participant in
the Plan on and after such change of control, and (y) $940,000.
No executive officers of Continental served on the
Compensation Committee in 1994.
51
Item 12. Security Ownership of Certain Beneficial Owners and
Management
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Directors and Executive Officers
The following table sets forth information regarding
beneficial ownership, as of March 27, 1995, of Common Stock of
Continental by directors of Continental, Continental's five most
highly compensated executive officers and Continental's directors
and executive officers as a group.
Amount and Nature Percent of
of Beneficial Outstanding
Ownership Common Stock
--------------------- ------------
Ivan A. Burns 3,600 *
Alec Flamm 600 *
Irvine O. Hockaday, Jr. 1,100 *
John E. Jacob 612 *
John P. Mascotte 173,213 (a) *
John F. McGillicuddy 5,100 *
Richard de J. Osborne 1,100 *
John W. Rowe, M.D. 400 *
Patricia Carry Stewart 600 *
Adrian M. Tocklin 53,358 (a) *
Francis T. Vincent, Jr. 1,100 *
Michael Weintraub 7,100 *
Anne Wexler 600 *
Wayne H. Fisher 77,632 (a) *
Steven J. Smith 68,242 (a) *
Charles A. Parker 85,050 (a)(b) *
All Directors and Executive
Officers as a group (28) 2,708,205 (a)(c) 4.8%
(a) The numbers of Continental's shares shown as beneficially
owned by Messrs. Mascotte, Parker, Fisher and Smith and Ms.
Tocklin and all directors and executive officers as a group
include 156,400, 85,050, 74,150, 67,200, 52,300 and 749,650
stock options, respectively, granted under Continental's
Long Term Incentive Plan to such executive officers and all
executive officers as a group, which are exercisable or
become exercisable prior to May 26, 1995.
(b) Mr. Parker retired effective February 1, 1995.
(c) The number of the Common Shares shown includes 1,915,344
shares held by the Continental Incentive Savings and
Retirement Plans, for which a subsidiary of Continental
shares investment power.
* Less than 1% of Continental's outstanding shares of Common
Stock.
52
Other Ownership of Continental Common Stock
The following table sets forth information, as of December 31,
1994, concerning persons known to Continental to be the
beneficial owners of more than 5% of the outstanding shares of
Continental's voting stock.
Amount and Percent
Nature of Beneficial of
Name/Address Ownership Class
CNA Financial Corporation 10,616,566(a) 16.1%
CNA Insurance Company
CNA Plaza
Chicago, Illinois
The Prudential Insurance 6,469,512(b) 11.6%
Company of America
Prudential Plaza
Newark, New Jersey
Norwest Corporation 4,675,936(c) 8.4%
Norwest Center
Sixth and Marquette
Minneapolis, Minnesota
_______________
(a) CNA reports that 100,000 of such shares are held by CCC, a
subsidiary of CNA, and that 10,516,566 of such shares are
issuable upon the exchange of the Series T preferred shares
held by CCC into shares of Series E Preferred Stock and the
conversion thereof. CNA also reports that CCC has acquired
shares of Series F Preferred Stock and an option to acquire
Series G Preferred Stock. Shares of such New Preferred are
redeemable at prices that reflect any increase in the per
share market price of the Common Stock over $15.75 and
$17.75, respectively. CNA reports that Loews Corporation
("Loews"), 667 Madison Avenue, New York, New York, owns
approximately 84% of CNA and is a "controlling" person of
CNA under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). CNA reports that CNA, CCC and Loews
share voting authority and investment authority with
respect to all such Common Shares. CNA reports that
Laurence A. Tisch and Preston B. Tisch, Co-Chairmen of the
Board and Co-Chief Executive Officers of Loews, together
own approximately 31.5% of Loews and may be deemed to be
"controlling" persons of Loews under the Exchange Act. At
the Effective Time, each Preferred Share that is issued and
outstanding immediately prior to the Effective Time shall
be converted, at CNA's option, into either (a) the right to
receive a cash payment equal to the liquidation preference
of such share, plus any accrued and unpaid dividends on
such share, at the Effective Time or (b) one share of
preferred stock of CNA or its affiliate, having the same
terms, designations, preferences, limitations, privileges
and relative rights as the Preferred Shares, except that in
the case of convertible Preferred Shares, if any, the
shares shall be convertible into such consideration as
would have been received by the holder of such stock had
such stock been converted into Common Stock immediately
prior to the Effective Time. At CNA's option and sole dis-
cretion, effective immediately prior to the Effective Time,
any or all Preferred Shares owned by or held in treasury of
Continental or CNA or any subsidiary thereof may be
cancelled and extinguished in lieu of the conversion
referred to above.
53
(b) The Prudential Insurance Company of America reports that it
has sole voting authority with respect to 28,812 shares,
shared voting authority with respect to 6,441,300 shares,
sole investment authority with respect to 28,812 shares and
shared investment authority with respect to 6,442,700
shares.
(c) Norwest Corporation reports that it has sole voting
authority with respect to 4,390,680 shares, shared voting
authority with respect to 21,256 shares, sole investment
authority with respect to 4,661,590 shares and shared
investment authority with respect to 6,026 shares.
Continental's management knows of no other beneficial owner of
more than 5% of any class of voting security of Continental.
Item 13. Certain Relationships and Related Transactions
Mr. Osborne, a director of Continental, is Chairman, Chief
Executive Officer and President of ASARCO Incorporated. ASARCO
rents office space from Continental under a lease expiring April
30, 2002, with an annual rent of $3,063,117.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as part of this Report.
(1) The following items, all of which have been
incorporated herein by reference to the material in the Proxy
Statement as described under Item 8 of this Report.
Consolidated Statements of Income for the years ended
December 31, 1994, 1993 and 1992
Consolidated Balance Sheets at December 31, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1993 and 1992
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Independent Auditors' Report
Selected Consolidated Financial Information
Summarized Consolidated Quarterly Financial Data
(Unaudited)
54
(2) The following items are filed with this Report:
Independent Auditors' Report
Consolidated:
Page No.
--------
Schedule I -- Summary of Investments Other Than Investments in Related
Parties at December 31, 1994 . . . . . . . . . . . . . 65
II -- Condensed Parent Financial Statements: . . . . . . . . . . . . . . 66
-- Statements of Income for the years ended December 31, 1994, 1993 and
1992
-- Balance Sheets at December 31, 1994 and 1993
-- Statements of Cash Flows for the years ended December 31, 1994, 1993
and 1992
III -- Supplementary Insurance Information for the years
ended December 31, 1994, 1993 and 1992 . . . . . . . . 69
IV -- Reinsurance Information for the years ended December
31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . 70
V -- Valuation and Qualifying Accounts for the years ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . 71
VI -- Supplemental Information for Property-Casualty
Insurance Underwriters for the years ended December
31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . 72
(3) The following is a list of exhibits hereto
required to be filed by Item 601 of Regulation S-K of the
Securities and Exchange Commission (the "SEC"), each of which
is attached as an Exhibit or incorporated by reference from
the document or documents indicated.
2(a) -- Agreement and Plan of Merger, dated as of December 6,
1994, among Continental, CNA Financial Corporation ("CNA")
and CNA Acquisition Corp. (the "Merger Agreement"), filed
under Exhibit 2(a) to the Continental's Form 8-K, dated
December 9, 1994 (the "December 9, 1994 8-K").
3(a) -- Certificate of Incorporation of Continental, as
amended, as filed with the Secretary of the State of
New York on April 6, 1989, filed under Exhibit 3(a)
to Continental's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 (the "1993 Form
10-K"), and Certificate of Amendment to Certificate
of Incorporation, as filed with the Secretary of
State of the State of New York on December 7, 1994,
filed under Exhibit 3 to Continental's Form 8-K,
dated December 16, 1994 (the "December 16, 1994 8-
K").
(b) -- By-Laws of Continental, as amended through December 17,
1992 as filed under Exhibit 3(b) to the 1993 Form 10-K.
55
4(a) -- Supplemental Indenture No. 3 dated as of March 1, 1993
from Continental to The Bank of New York, as Trustee, with
respect to the issuance of $150 million of 7.25% Notes due
March 1, 2003 filed on March 3, 1993 as Exhibit 1 to
Report on Form 8-K.
(10)(a) -- The Long Term Incentive Plan of Continental (amended and
restated as of December 1, 1993) as filed under Exhibit
10(a) to the 1993 Form 10-K.
(b) -- The Annual Management Incentive Plan of Continental
(amended and restated as of January 1, 1993) as filed
under Exhibit 10(b) to the 1993 Form 10-K.
(c) -- The Incentive Savings Plan of Continental (amended and re-
stated as of January 1, 1994) as filed under Exhibit 10(c)
to the 1993 Form 10-K.
(d) -- The Retirement Plan of Continental (amended and restated
as of January 1, 1994) as filed under Exhibit 10(d) to the
1993 Form 10-K.
(e) -- Receivables Purchase and Sale Agreement dated as of Decem-
ber 15, 1994, among The Continental Insurance Company
("Continental Insurance"), Boston Old Colony Insurance
Company ("Boston"), The Buckeye Union Insurance Company
("Buckeye"), Casualty Insurance Company ("Casualty"), Com-
mercial Insurance Company of Newark, N.J. ("Commercial"),
The Continental Insurance Company of New Jersey
("Continental - NJ"), Continental Lloyd's Insurance
Company ("Lloyd's"), The Fidelity and Casualty Company of
New York ("Fidelity"), Continental Reinsurance Corporation
("Continental Re"), Firemen's Insurance Company of Newark,
New Jersey ("Firemen's"), The Glens Falls Insurance Com-
pany ("Glens Falls"), Kansas City Fire and Marine
Insurance Company ("Kansas City"), The Mayflower Insurance
Company, Ltd. ("Mayflower"), National-Ben Franklin
Insurance Company of Illinois ("N-BF"), Niagara Fire
Insurance Company ("Niagara"), Pacific Insurance Company
("Pacific") and Workers' Compensation and Indemnity
Company of California ("Workers'"), collectively as
Sellers, and Corporate Receivables Corporation, Falcon
Asset Securitization Corporation ("Falcon"), Sheffield
Receivables Corporation ("Sheffield") and Atlantic Asset
Securitization Corp. ("Atlantic"), collectively as Pur-
chasers, and Citicorp North America, Inc. ("Citicorp"), as
Agent.
(f) Trade Receivables Purchase and Sale Agreement dated as of
December 28, 1984, As Amended, and As Amended and Restated
as of December 30, 1994, among continental Insurance,
Boston, Buckeye, Casualty, Commercial, Continental-NJ,
Lloyd's, Continental Re, Fidelity, Firemen's, Glens Falls,
Kansas City, Mayflower, N-BF, Niagara, Pacific, Workers',
collectively as Seller, and CIESCO, as Investor, and
Citibank, N.A. ("Citibank") and Citicorp, Individually and
as Agent.
(g) Executive Termination Program, adopted September 22, 1994,
as filed under Exhibit 10(e) to Continental's Form 8-K,
dated October 18, 1994 (the "October 18, 1994 8-K").
56
(h) Credit Agreement dated as of December 30, 1993 (the
"Credit Agreement"), among Continental, the Several
Lenders from Time to Time Parties Hereto, Chemical Bank
("Chemical") and Citibank, as Co-Agents and Chemical, as
Administrative Agent.
(i) Amendment dated March 30, 1994, to the Credit Agreement
among Continental, the Several Lenders from Time to Time
Parties Hereto, Chemical and Citibank, as Co-Agents and
Chemical, as Administrative Agent.
(j) Second Amendment to the Credit Agreement, dated as of June
30, 1994, among Continental, the Several Lenders from Time
to Time Parties Hereto, Chemical and Citibank, as Co-
Agents and Chemical, as Administrative Agent.
(k) Third Amendment to the Credit Agreement, dated as of
September 29, 1994, among Continental, the Several Lenders
from Time to Time Parties Hereto, Chemical and Citibank,
as Co-Agents and Chemical, as Administrative Agent.
(l) Fourth Amendment to the Credit Agreement, dated as of
November 23, 1994, among Continental, the Several Lenders
from Time to Time Parties Hereto, Chemical and Citibank,
as Co-Agent and Chemical, as Administrative Agent.
(m) Fifth Amendment to Credit Agreement, dated as of December
22, 1994, among Continental, the Several Lenders from Time
to Time Parties Hereto, Chemical and Citibank, as Co-Agent
and Chemical as Administrative Agent.
(n) Agreement, dated as of July 1, 1994,
between Fidelity and General Reinsurance Corporation.
(o) Stock Purchase Agreement, dated December 16, 1994,
among FCIC, FGC, Buckeye and Continental.
(p) Stock Purchase Agreement dated as of June 30, 1993, among Continental,
Continental Insurance, Continental Re and Mellon as filed under Exhibit 10(f)
to the 1993 Form 10-K.
(q) Share Purchase Agreement dated as of June 30, 1993 (the "Unionamerica Stock Purchase
Agreement"), among Unionamerica Acquisition Company Ltd. ("Unionamerica"), Unionamerica
Holdings Ltd. ("Unionamerica Holdings") and Continental as filed under Exhibit 10(g) to
the 1993 Form 10-K.
(r) Amendment dated September 1, 1993 to the Unionamerica Share Purchase
Agreement, among Unionamerica, Unionamerica Holdings and Continental as filed
under Exhibit 10(h) to the 1993 Form 10-K.
(s) Stock Purchase Agreement dated as of July 28, 1993 (the "Alleghany Stock
Purchase Agreement"), among Alleghany Corporation ("Alleghany"), Continental,
Goldman, Sachs & Co. ("Goldman") and certain funds which Goldman either
controls or of which it is a general partner (together, the "GS Investors";
Continental and the GS Investors together referred to as the "URHC
Stockholders"), Underwriters Re Holdings Corp. ("Underwrit-
57
ers Holdings") and Underwriters Re Corporation ("Underwriters") as filed under Exhibit
10(i) to the 1993 Form 10-K.
(t) Amendment dated October 7, 1993, to the Alleghany Stock Purchase Agreement,
among Alleghany, Continental, the GS Investors, Underwriters Holdings and Un-
derwriters as filed under Exhibit 10(j) to the 1993 Form 10-K.
(u) Stock Purchase Agreement dated as of July 28, 1993 (the "GS Investors Stock
Purchase Agreement"), among Continental and the GS Investors as filed under
Exhibit 10(k) to the 1993 Form 10-K.
(v) Management Stock Purchase Agreement dated as of July 28, 1993 (the
"Management Agreement"), among Continental, Underwriters Holdings,
Underwriters and certain Management Stockholders, as supplemented as filed
under as Exhibit 10(m) to the 1993 Form 10-K.
(w) Amendment dated as of October 7, 1993, to the Management Agreement, among
Continental, Underwriters Holdings, Underwriters and certain Management
Stockholders as filed under as Exhibit 10(n) to the 1993 Form 10-K.
(x) Securities Purchase Agreement, dated as of December 6, 1994, between
Continental and CNA as filed under Exhibit 10(b) to the December 9, 1994 8-K.
(y) Stock Option, dated December 9, 1994, granted to CNA, as filed under Exhibit
10(c) to the December 16, 1994 8-K.
(z) Amendment to Stock Option, dated January 5, 1995.
(aa) Letter Agreement dated October 6, 1993, among Continental and the GS
Investors, relating to the GS Investors Stock Purchase Agreement as filed
under Exhibit 10(l) to the 1993 Form 10-K.
(bb) Purchase Agreement dated October 12, 1994, between The Continental Insurance
Company of Canada, The Dominion Insurance Corporation and Firemen's Insurance
Company of Newark, New Jersey and Continental Reinsurance Corporation and
Continental Reinsurance Corporation International Limited and The Continental
Corporation and Fairfax Financial Holdings Limited, as filed under Exhibit
10(f) to the October 18, 1994 8-K.
(cc) Receivables Purchase and Sale Agreement dated as of December 14, 1993, among
Continental Insurance, Boston, Buckeye, Casualty, Commercial, Continental-NJ,
Lloyd's, Fidelity, Continental Re, Firemen's, Glens Falls, Kansas City,
Mayflower, N-BF, Niagara, Pacific and Workers', collectively as Sellers,
and Corporate Asset Funding Company, Inc., CIESCO, L.P., Falcon, Sheffield,
Atlantic and Credit Lyonnais, collectively, as Purchas-
58
ers, and Citicorp, as Agent, filed under Exhibit 10(e) to Continental's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(dd) -- Participation Agreement, dated as of December 29, 1994 among Buckeye, First
Fidelity Bank, N.A. ("First Fidelity") and The CIT Group/Equipment Financing, Inc.,
with the following exhibits and schedules:
-- Master Lease, dated December 29, 1994 between First Fidelity and Buckeye.
-- Schedule of Leased Equipment No. 1 (to Master Lease), dated December 29, 1994
between Buckeye and First Fidelity.
-- Prime Master Lease, dated as of December 29, 1994 between Buckeye and First
Fidelity.
-- Schedule of Leased Equipment No. 1 (to Prime Master Lease), dated December
29, 1994, between Buckeye and First Fidelity.
(ee) -- Participation Agreement, dated as of December 29, 1994 among The Continental
Insurance Company, First Fidelity and The CIT Group/Equipment Financing, Inc.
-- Master Lease, dated as of December 29, 1994 between First Fidelity Bank, N.A.
and The Continental Insurance Company.
-- Prime Master Lease, dated as of December 29, 1994 between The Continental
Insurance Company and First Fidelity.
-- Schedule of Leased Equipment No. 1 (to Master Lease), dated December 29, 1994
between First Fidelity and The Continental Insurance Company.
-- Schedule of Leased Equipment No. 1, dated December 29, 1994 (to Prime Master
Lease) between The Continental Insurance Company and First Fidelity.
(ff) -- Participation Agreement, dated as of December 29, 1994 among Firemen's, First
Fidelity Bank, N.A. and The CIT Group/Equipment Financing, Inc., with the
following exhibits and schedules:
-- Master Lease, dated December 29, 1994 between First Fidelity and Firemen's.
-- Prime Master Lease, dated as of December 29, 1994 between Firemen's and First
Fidelity.
-- Schedule of Leased Equipment No. 1 (to Master Lease), dated December 29, 1994
between Firemen's and First Fidelity.
-- Schedule of Leased Equipment No. 1 (to Prime Master Lease), dated December 29,
1994 between First Fidelity and Firemen's.
59
(gg) -- Lease Guaranty to First Fidelity Bank, N.A.
(hh) -- Merger Agreement. See Exhibit 2(a).
(11) -- Continental's Statement re Computation of Per Share Earnings.
(21) -- Subsidiaries of Continental.
(23) -- Consent of KPMG Peat Marwick LLP.
(28) -- Statutory Loss Development of Property and Casualty Insurance and Reinsurance
Subsidiaries, filed in paper form only pursuant to Regulation 311 of
Regulation S-T.
(b) Continental filed three Reports on Form 8-K during the
last quarter of the period covered by this Report. The Report on
Form 8-K dated October 18, 1994 (the "October Report"), reported
that, on October 13, 1994, Continental had entered into a
definitive agreement to sell $200 million in preferred stock,
convertible into about 19.9% of its then currently outstanding
common stock, to Insurance Partners, L.P. ("IP"); in connection
with that proposed transaction, Continental's board of directors
had elected Richard M. Haverland vice chairman and a director of
Continental Corporation; upon completion of the proposed
transaction, Mr. Haverland would be named chairman and chief
executive officer, succeeding John P. Mascotte, who would resign;
and Continental had entered into a separate agreement to sell IP
the operations of Continental Asset Management Corp.,
Continental's investment management subsidiary. The October
Report reported that Continental had announced that it would
strengthen its reserves by $400 million pre-tax by establishing,
for the first time, loss reserves for incurred but not reported
asbestos-related, environmental pollution and other toxic-tort
claims; and that Continental would take an additional pre-tax
charge of $164 million for reinsurance recoverables and other
assets.
The October Report also reported that on October 11, 1994,
Continental entered into an agreement in principle with Fremont
General Corporation ("FGC") to sell Casualty to Fremont for
$250 million; and on October 12, 1994, Continental entered into
an agreement with Fairfax Financial Holdings Limited relating to
the sale of certain Continental subsidiaries in Canada. Finally,
the October Report reported that, on September 22, 1994,
Continental adopted an Executive Termination Program.
The Report on Form 8-K, dated December 9, 1994, reported
that, on December 6, 1994, Continental entered into a merger
agreement under which CNA Financial Corporation ("CNA Financial")
will acquire Continental through a merger with a wholly-owned CNA
subsidiary and that, under a separate agreement, CNA has agreed
to invest $275 million in Continental.
The Report on Form 8-K, dated December 16, 1994 (the
"December 16 Report"), reported that, on December 9, 1994,
Continental consummated the sale of certain Continental
securities to Continental Casualty Company ("CCC"), a subsidiary
of CNA, for a cash purchase price of $275 million, pursuant to a
previously announced securities purchase agreement, dated as of
December 6, 1994, with CNA. The December 16 Report reported that
CCC acquired approximately $165 million in liquidation value of
Continental's 9.75% Cumulative Preferred Stock, Series T (the
"Series T Stock"), and approximately $34 million in liquidation
value of Continental's 9.75% Cumulative Preferred Stock, Series
F. Each of the Series F Stock and the Series T Stock is
redeemable under certain circumstances at a price reflecting any
increase in the per share price of Continental's common
60
stock over $15.75. CCC also received an option to acquire $125
million in liquidation preference of another series of
Continental's 9.75% Cumulative Preferred Stock, Series G. The
option and its underlying preferred stock will be redeemable
under certain circumstances at a price reflecting any increase in
the per share price of the common stock over $17.75. The 9.75%
preferred stock will mature in 40 years, with a right of the
holders to require redemption in 15 years, and may be redeemed by
Continental under certain circumstances. In addition, CCC
acquired $75 million in liquidation value of Continental's 12%
Cumulative Preferred Stock, Series H, maturing in 10 years and
redeemable under certain circumstances.
61
SIGNATURES
Pursuant to the Requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 30, 1995
THE CONTINENTAL CORPORATION
By /s/ John P. Mascotte
----------------------
(John P. Mascotte)
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
Senior Vice President
J. Heath Fitzsimmons and Chief Financial Officer March 30, 1995
-----------------------------------------
(J. Heath Fitzsimmons)
Vice President
William A. Robbie and Chief Accounting Officer March 30, 1995
-----------------------------------------
(William A. Robbie)
Ivan A. Burns Director March 30, 1995
-----------------------------------------
(Ivan A. Burns)
Alec Flamm Director March 30, 1995
-----------------------------------------
(Alec Flamm)
Irvine O. Hockaday, Jr. Director March 30, 1995
-----------------------------------------
(Irvine O. Hockaday, Jr.)
John E. Jacob Director March 30, 1995
-----------------------------------------
(John E. Jacob)
Director, Chairman of
John P. Mascotte the Board and Chief Executive Officer March 30, 1995
-----------------------------------------
(John P. Mascotte)
John F. McGillicuddy Director March 30, 1995
-----------------------------------------
(John F. McGillicuddy)
62
Richard de J. Osborne Director March 30, 1995
-----------------------------------------
(Richard de J. Osborne)
John W. Rowe, M.D. Director March 30, 1995
-----------------------------------------
(John W. Rowe, M.D.)
Patricia Carry Stewart Director March 30, 1995
-----------------------------------------
(Patricia Carry Stewart)
Director, President
Adrian M. Tocklin and Chief Operating Officer March 30, 1995
-----------------------------------------
(Adrian M. Tocklin)
Francis T. Vincent, Jr. Director March 30, 1995
-----------------------------------------
(Francis T. Vincent, Jr.)
Director
-----------------------------------------
(Michael Weintraub)
Anne Wexler Director March 30, 1995
-----------------------------------------
(Anne Wexler)
63
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
THE CONTINENTAL CORPORATION:
Under date of February 16, 1995, we reported on the consolidated
balance sheets of The Continental Corporation and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1994 as contained in the
Proxy Statement. These consolidated financial statements and our
report thereon are incorporated by reference in the 1994 annual
report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related financial statement schedules as listed in Item 14(a)(2).
These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set
forth therein.
As discussed in Note 2 to the consolidated financial statements, The
Continental Corporation and subsidiaries changed their methods of
accounting for multiple-year retrospectively rated reinsurance con-
tracts and for the adoption of the provisions of the Financial
Accounting Standards Board's Statements of Financial Accounting
Standards ("SFAS") 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.
SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," and No. 109, "Accounting for Income Taxes"
were adopted in 1992.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
New York, New York
February 16, 1995
SCHEDULE I
THE CONTINENTAL CORPORATION
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES (1)
December 31, 1994
(millions)
Column A Column B Column C Column D
Balance
Type of Investment Cost Fair Value Sheet
FIXED MATURITIES:
BONDS:
United States Government and
Government Agencies . . . . . . . . . . . . . . . . . . . . $2,943.9 $2,789.6 $2,789.6
States Municipalities and
Political Subdivisions . . . . . . . . . . . . . . . . . . . 666.2 626.7 626.7
Foreign Governments . . . . . . . . . . . . . . . . . . . . . 797.8 763.7 763.7
Public Utilities . . . . . . . . . . . . . . . . . . . . . . . 110.2 106.9 106.9
All Other Corporate . . . . . . . . . . . . . . . . . . . . . 1,525.6 1,463.7 1,463.7
-------- -------- --------
Total Bonds . . . . . . . . . . . . . . . . . . . . . . . . 6,043.7 5,750.6 5,750.6
-------- -------- --------
REDEEMABLE PREFERRED STOCKS . . . . . . . . . . . . . . . . . . . 45.5 44.4 44.4
-------- -------- --------
Total Fixed Maturities . . . . . . . . . . . . . . . . . . . . 6,089.2 $5,795.0 5,795.0
-------- -------- --------
EQUITY SECURITIES:
COMMON STOCKS:
Public Utilities . . . . . . . . . . . . . . . . . . . . . . . 4.0 5.2 5.2
Banks Trusts and Insurance Companies . . . . . . . . . . . . . 32.3 43.3 43.3
All Other Corporate . . . . . . . . . . . . . . . . . . . . . 56.0 68.7 68.7
-------- -------- --------
Total Common Stocks . . . . . . . . . . . . . . . . . . . . 92.3 117.2 117.2
-------- -------- --------
OTHER PREFERRED STOCKS . . . . . . . . . . . . . . . . . . . . . . 4.6 3.7 3.7
-------- -------- --------
Total Equity Securities . . . . . . . . . . . . . . . . . . . 96.9 120.9 120.9
-------- -------- --------
OTHER LONG-TERM INVESTMENTS:
Mortgages Receivable . . . . . . . . . . . . . . . . . . . . . . . 109.0 109.0
Certificates of Deposit . . . . . . . . . . . . . . . . . . . . . 29.7 29.7
Venture Capital Investments . . . . . . . . . . . . . . . . . . . 45.9 45.9
Investment in Minority Affiliates . . . . . . . . . . . . . . . . 2.6 2.6
Other Notes and Participations . . . . . . . . . . . . . . . . . . 25.2 25.2
Investments in Limited Partnerships . . . . . . . . . . . . . . . 318.0 325.3 325.3
-------- -------- --------
Total Other Long-Term Investments . . . . . . . . . . . . . . 530.4 537.7
-------- --------
OTHER SHORT-TERM INVESTMENTS:
Money Market Instruments . . . . . . . . . . . . . . . . . . . . . 1,794.8 1,794.8
-------- -------- --------
Total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,511.3 $8,248.4
---------
======== ========== ========
_____________________
(1) All fixed maturities are carried at fair value.
65
SCHEDULE II
THE CONTINENTAL CORPORATION - PARENT
STATEMENTS OF INCOME (1)
Year Ended December 31,
(millions)
1994 1993 1992
---- ---- ----
REVENUES:
Net Investment Income . . . . . . . . . . . . . . . . . . . $ 1.4 $ 15.2 $ 17.7
Realized Capital Losses . . . . . . . . . . . . . . . . . . (0.6) (3.0) (6.0)
Equity in Earnings (Loss) of Subsidiaries . . . . . . . . . (898.5) 177.8 221.1
Equity in Earnings (Loss) of Discontinued Operations,
Net of Income Taxes (Benefits) . . . . . . . . . . . . . . 39.5 48.7 (174.7)
Other Revenues . . . . . . . . . . . . . . . . . . . . . . . -- 61.4 6.4
--------- --------- -------
Total Revenues . . . . . . . . . . . . . . . . . . . . . . (858.2) 300.1 64.5
--------- --------- -------
EXPENSES:
Interest Expense . . . . . . . . . . . . . . . . . . . . . . 40.9 48.6 49.5
Other Expenses . . . . . . . . . . . . . . . . . . . . . . . 68.9 24.9 59.0
--------- --------- -------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . 109.8 73.5 108.5
--------- --------- -------
Income (Loss) before Income Taxes
and Net Cumulative Effect of
Changes in Accounting Principles . . . . . . . . . . . . . (968.0) 226.6 (44.0)
--------- --------- -------
Total Income Taxes (Benefits) (2) . . . . . . . . . . . . . (365.1) 18.2 28.7
--------- --------- -------
Income (Loss) Before Net Cumulative
Effect of Changes in
Accounting Principles . . . . . . . . . . . . . . . . . . (602.9) 208.4 (72.7)
--------- --------- -------
Net Cumulative Effect of Changes
in Accounting Principles . . . . . . . . . . . . . . . . . -- 1.6 (11.0)
--------- --------- -------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . $(602.9) $ 210.0 $(83.7)
========= ========= =======
_______________________
(1) See Notes to Consolidated Financial Statements included in
Continental's Proxy Statement, first filed with the Securities and
Exchange Commission and mailed to shareholders on March 29, 1995, in
connection with a May 9, 1995 Special Meeting of Shareholders (the
"Proxy Statement").
(2) Represents Income Taxes (Benefits) for continuing operations.
66
SCHEDULE II
(Continued)
THE CONTINENTAL CORPORATION - PARENT
BALANCE SHEETS (1)
DECEMBER 31,
(millions, except par values and share amounts)
1994 1993
---- ----
ASSETS:
Fixed Maturities Available-for-Sale at Fair Value (Amortized Cost -$0.0; 1993 - $40.2) $ -- $ 39.8
Equity Securities Available-for-Sale at Fair Value (Cost - $1.6; 1993 - $15.2) . . . . 1.6 15.3
Short-Term Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 9.0
Other Long-Term Investments at Fair Value . . . . . . . . . . . . . . . . . . . . . . -- 6.1
Investment in Stocks of Subsidiaries:
Insurance Subsidiaries - Equity Basis . . . . . . . . . . . . . . . . . . . . . . 1,855.6 2,697.7
Discontinued Operations - Equity Basis . . . . . . . . . . . . . . . . . . . . . . 88.2 84.6
Other Subsidiaries - Equity Basis . . . . . . . . . . . . . . . . . . . . . . . . 143.0 146.6
Cash and Cash Equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 0.1
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.3 19.1
-------- --------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,120.0 $3,018.3
======== ========
LIABILITIES:
Short-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 205.3 $ 223.5
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347.5 346.8
Intercompany Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.4 94.9
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273.1 170.0
-------- --------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 929.3 835.2
-------- --------
Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
-------- --------
REDEEMABLE PREFERRED STOCKS:
Series T, at fair value (828,100 shares authorized and issued) $200 per share
liquidation value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164.9 --
Series F, at fair value (171,900 shares authorized and issued) $200 per share
liquidation value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.1 --
Series H, at fair value (375,000 shares authorized and issued) $200 per share
liquidation value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74.6 --
Series G Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 --
-------- --------
Total Redeemable Preferred Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . 275.0 --
-------- --------
SHAREHOLDERS' EQUITY:
Preferred Stock, $4 Par Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 0.3
Common Stock, $1 Par Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65.7 65.7
Authorized Shares: 100,000,000
Issued Shares: 65,724,192; 1993 - 65,720,419
Outstanding Shares: 55,484,187; 1993 - 55,331,060
Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612.9 613.2
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 981.3 1,612.5
Net Unrealized Appreciation (Depreciation) on Investment . . . . . . . . . . . . . . (283.9) 322.1
Cumulative Foreign Currency Translation Adjustment . . . . . . . . . . . . . . . . . (95.7) (61.1)
Common Stock in Treasury, at Cost
(10,240,005 Shares; 1993 - 10,389,359 Shares) . . . . . . . . . . . . . . . . . . . (364.9) (369.6)
-------- --------
Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915.7 2,183.1
-------- --------
Total Liabilities, Commitments and Contingencies
Redeemable Preferred Stocks, and Shareholders' Equity . . . . . . . . . . . . . $2,120.0 $3,018.3
======== ========
__________________
(1) See Notes to Consolidated Financial Statements included in the
Proxy Statement.
67
SCHEDULE II
(Continued)
THE CONTINENTAL CORPORATION - PARENT
STATEMENTS OF CASH FLOWS (1)(2)
Year Ended December 31,
(millions)
1994 1993 1992
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . $(602.9) $ 210.0 $ (83.7)
Adjustments to Reconcile Net Income (Loss)
to Net Cash (Used in) Provided
from Operating Activities:
Realized Capital Losses . . . . . . . . . . . . . . . . . . 0.6 3.0 6.0
Equity in (Earnings) Loss of
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . 862.5 (177.8) (221.1)
Equity in (Earnings) Loss of
Discontinued Operations . . . . . . . . . . . . . . . . (39.5) (48.7) 174.7
Deferred tax benefit . . . . . . . . . . . . . . . . . . . . (352.8) (2.4) (21.9)
Other-Net . . . . . . . . . . . . . . . . . . . . . . . . . 21.6 76.5 100.7
-------- -------- -------
Net Cash Provided from (Used in) Operating
Activities . . . . . . . . . . . . . . . . . . . . . . . (110.5) 60.6 (45.3)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of Investments Purchased . . . . . . . . . . . . . . . (90.8) (72.0) (197.8)
Proceeds from Investments Sold . . . . . . . . . . . . . . . 143.8 111.9 94.8
Proceeds from Investments Matured . . . . . . . . . . . . . -- 0.2 3.0
Proceeds from Sales of Subsidiaries . . . . . . . . . . . . 50.4 330.0 --
Investment in Subsidiaries . . . . . . . . . . . . . . . . . (452.0) (399.3) --
Net Decrease in Long-Term Investments . . . . . . . . . . . 6.1 0.4 2.8
Net (Increase) Decrease in Short-Term Investments . . . . . (4.3) 98.3 (103.8)
Dividends Paid by Subsidiaries . . . . . . . . . . . . . . . 69.5 120.0 168.0
-------- -------- -------
Net Cash Provided from (Used in) Investing
Activities . . . . . . . . . . . . . . . . . . . . . . . . (277.3) 189.5 (33.0)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Borrowings from (Repayments to)
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 154.1 (1.4) 22.3
Increase (Decrease) in Long-Term Debt . . . . . . . . . . . 0.7 (1.8) (301.4)
Increase (Decrease) in Short-Term Debt . . . . . . . . . . . (18.2) (48.8) 275.2
Issuance of Long-Term Debt . . . . . . . . . . . . . . . . . -- 150.0 200.0
Retirement of Debt . . . . . . . . . . . . . . . . . . . . . -- (281.7) --
Sale of Treasury Shares . . . . . . . . . . . . . . . . . . 4.4 10.5 8.0
Dividends to Shareholders . . . . . . . . . . . . . . . . . (28.3) (59.4) (123.1)
Proceeds from Sales (Redemption) of Redeemable Preferred Stock 275.0 (20.5) --
-------- -------- -------
Net Cash Provided from (Used in) Financing
Activities . . . . . . . . . . . . . . . . . . . . . . . 387.7 (253.1) 81.0
-------- -------- -------
Net Increase (Decrease) in Cash and Cash Equivalents. . . . . . (0.1) (3.0) 2.7
Cash and Cash Equivalents at Beginning of Year. . . . . . . . . 0.1 3.1 0.4
-------- -------- -------
Cash and Cash Equivalents at End of Year. . . . . . . . . . . . $ -- $ 0.1 $ 3.1
========= ======== =======
Supplemental Cash Flow Information:
Federal, Foreign and State Taxes Paid . . . . . . . . . . . $ -- $ 4.5 $ 11.0
========= ======== =======
Interest Paid . . . . . . . . . . . . . . . . . . . . . . . $ 33.4 $ 56.9 $ 45.6
========= ======== =======
Non-Cash Transactions:
Preferred Stock paid as dividends by subsidiary . . . . . . $ 18.0 $ -- $ --
========= ======== =======
Preferred stock contributed as additional investment in
subsidiary $ 18.0 $ -- $ --
========= ======== =======
______________________
(1) See Notes to Consolidated Financial Statements included in
Continental's Proxy Statement.
(2) Certain reclassifications have been made to the prior year's financial
information to conform to the 1994 presentation.
68
SCHEDULE III
THE CONTINENTAL CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
(millions)
Column A Column B Column C Column D Column E Column F Column G Column H
Outstanding
Deferred Losses Other Policy Losses
Policy and Claims and Net and
Acquisition Loss Unearned Benefits Premiums Investment Loss
Segment Costs Expenses Premiums Payable Earned Income (1) Expenses
Year Ended December
31, 1994:
Agency & Brokerage
Commercial . . . . $ 171.8 $ 5,922.5 $ 919.1 -- $ 2,164.4 -- $ 2,282.6
Agency & Brokerage
Personal . . . . . 66.3 663.2 354.1 -- 704.1 -- 578.4
Specialized Commercial 145.8 3,692.7 798.4 -- 1,560.6 -- 1,539.9
-------- --------- --------- --------- --------- ---------- ---------
Insurance Operations 383.9 10,278.4 2,071.6 4,429.1 $ 490.8 4,400.9
Corporate & Other . . -- -- -- -- -- 13.4 --
-------- --------- --------- --------- --------- ---------- ---------
Total $ 383.9 $10,278.4 $ 2,071.6 -- $ 4,429.1 $ 504.2 $ 4,400.9
======== ========= ========= ========= ========= ========== =========
Year Ended December
31, 1993:
Agency & Brokerage
Commercial . . . . $ 237.0 $ 5,366.7 $ 1,152.6 -- $ 2,121.3 -- $ 1,663.9
Agency & Brokerage
Personal . . . . . 119.1 837.6 578.3 -- 861.6 -- 667.5
Specialized Commercial 137.9 2,864.4 678.8 -- 1,433.2 -- 1,082.7
-------- --------- --------- --------- --------- ---------- ---------
Insurance Operations 494.0 9,068.7 2,409.7 -- 4,416.1 $ 514.3 3,414.1
Corporate & Other . . -- -- -- -- -- 28.0 --
-------- --------- --------- --------- --------- ---------- ---------
Total $ 494.0 $ 9,068.7 $ 2,409.7 -- $ 4,416.1 $ 542.3 $ 3,414.1
======== ========= ========= ========= ========= ========== =========
Year Ended December
31, 1992:
Agency & Brokerage
Commercial . . . . $ 226.9 $ 5,544.1 $ 1,120.5 -- $ 1,919.5 -- $ 1,562.2
Agency & Brokerage
Personal . . . . . 112.8 982.6 556.7 -- 777.4 -- 623.8
Specialized Commercial 127.8 2,539.5 629.0 -- 1,201.1 -- 975.6
-------- --------- --------- --------- --------- ---------- ---------
Insurance Operations 467.5 9,066.2 2,306.2 -- 3,898.0 $ 559.5 3,161.6
Corporate & Other . . -- -- -- -- -- 30.4 --
-------- --------- --------- --------- --------- ---------- ---------
Total $ 467.5 $ 9,066.2 $ 2,306.2 -- $ 3,898.0 $ 589.9 $ 3,161.6
======== ========= ========= ========= ========= ========== =========
Column A Column I Column J Column K
Amortization
of Deferred Other
Policy Insurance
Acquisition Operating Premiums
Segment Costs Expenses Written
Year Ended December
31, 1994:
Agency & Brokerage
Commercial . . . . $ 716.3 $ 19.1 $ 1,883.9
Agency & Brokerage
Personal . . . . . 206.7 15.1 480.8
Specialized Commercial 460.4 35.4 1,595.3
--------- --------- ---------
Insurance Operations 1,383.4 69.6 3,960.0
Corporate & Other . . -- -- --
--------- --------- ---------
Total $1,383.4 $ 69.6 $ 3,960.0
========= ========= =========
Year Ended December
31, 1993:
Agency & Brokerage
Commercial . . . . $ 669.5 $ 22.7 $ 2,168.2
Agency & Brokerage
Personal . . . . . 269.1 3.2 887.5
Specialized Commercial 431.9 11.0 1,482.1
--------- --------- ---------
Insurance Operations 1,370.5 36.9 4,537.8
Corporate & Other . . -- -- --
--------- --------- ---------
Total $1,370.5 $ 36.9 $ 4,537.8
========= ========= =========
Year Ended December
31, 1992:
Agency & Brokerage
Commercial . . . . $ 607.9 $ 30.4 $ 1,895.5
Agency & Brokerage
Personal . . . . . 280.7 (0.1) 808.3
Specialized Commercial 394.1 5.0 1,315.2
--------- --------- ---------
Insurance Operations 1,282.7 35.3 4,019.0
Corporate & Other . . -- -- --
--------- --------- ---------
Total $1,282.7 $ 35.3 $ 4,019.0
========= ========= =========
______________________
(1) Distinct investment portfolios are not maintained for individual
insurance segments; accordingly, insurance segments results are
shown in the aggregate.
69
SCHEDULE IV
THE CONTINENTAL CORPORATION
REINSURANCE INFORMATION
(millions, except percentages)
Column A Column B Column C Column D Column E Column F
Earned Premiums
-------------------------------------------------------------------------------
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed
Amount Companies Companies Amount to Net
Year Ended December 31, 1994:
Premiums:
Property and casualty
insurance $ 5,169.6 $ 1,297.2 $ 556.7 $ 4,429.1 12.6%
--------- --------- --------- --------- ---------
Total premiums . . . . . $ 5,169.6 $ 1,297.2 $ 556.7 $ 4,429.1 12.6%
========= ========= ========= ========= =========
Year Ended December 31, 1993:
Premiums:
Property and casualty
insurance $ 5,125.8 $ 1,213.9 $ 504.2 $ 4,416.1 11.4%
--------- --------- --------- --------- ---------
Total premiums . . . . $ 5,125.8 $ 1,213.9 $ 504.2 $ 4,416.1 11.4%
========= ========= ========= ========= =========
Year Ended December 31, 1992:
Premiums:
Property and casualty
insurance $ 4,764.3 $ 1,334.0 $ 467.7 $ 3,898.0 12.0%
--------- --------- --------- --------- ---------
Total premiums . . . . $ 4,764.3 $ 1,334.0 $ 467.7 $ 3,898.0 12.0%
========= ========= ========= ========= =========
70
SCHEDULE V
THE CONTINENTAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS (1)
(millions)
Column A Column B Column C Column D Column E
Additions
------------------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts Deductions (1) Period
Year Ended December 31, 1994:
Investment Reserve . . . . . . . . . . $27.0 $ 9.0 -- $ 10.0 $ 26.0
Allowance for doubtful accounts-loans
and accounts receivable . . . . . . . $43.3 $ 15.5 -- $ 24.9 $ 33.9
Allowance against reinsurance
assets . . . . . . . . . . . . . . . $26.4 $135.1(2) -- $ 56.7 $104.8(2)
Year Ended December 31, 1993:
Investment Reserve . . . . . . . . . . $35.0 $ 20.3 -- $ 28.3 $ 27.0
Allowance for doubtful accounts-loans
and accounts receivable . . . . . . . $31.3 $ 30.9 -- $ 18.9 $ 43.3
Allowance against reinsurance
assets . . . . . . . . . . . . . . . $41.8 $ 15.0 -- $ 30.4 $ 26.4
Year Ended December 31, 1992:
Investment Reserve . . . . . . . . . . $35.0 $ 10.0 -- $ 10.0 $ 35.0
Allowance for doubtful accounts-loans
and accounts receivable . . . . . . . $26.8 $ 22.7 -- $ 18.2 $ 31.3
Allowance against reinsurance
assets . . . . . . . . . . . . . . . $27.8 $ 41.0 -- $ 27.0 $ 41.8
____________________________
(1) Represents write-offs of amounts determined to be uncollectible, net of
recoveries.
(2) Includes the establishment of an $80 million reinsurance GAAP asset for
environmental claims fully reserved for as not recoverable.
71
SCHEDULE VI
THE CONTINENTAL CORPORATION
SUPPLEMENTAL INFORMATION
(For Property-Casualty Insurance Underwriters)
(millions)
Column A Column B Column C Column D Column E Column F Column G
Deferred Outstanding Discount
Affiliation Policy Losses if any, Net
with Acquisition and Loss Deducted in Unearned Premiums Investment
Registrant Costs Expenses Column C Premiums Earned Income (1)
Year Ended December 31, 1994:
(a) Consolidated
property-casualty
entities . . . . . . . . $383.9 $10,278.4 $680.4 $2,071.6 $4,429.1 $490.8
Year Ended December 31, 1993:
(a) Consolidated
property-casualty
entities . . . . . . . . $494.0 $ 9,068.7 $696.0 $2,409.7 $4,416.1 $514.3
Year Ended December 31, 1992:
(a) Consolidated
property-casualty
entities . . . . . . . . $467.5 $ 9,066.2 $692.8 $2,306.2 $3,898.0 $559.5
Column A Column H Column I Column J Column K
Loss and
Loss Expenses Amortization
Incurred Related to of Deferred
Affiliation (i) (ii) Policy Paid Loss
with Current Prior Acquisition and Loss Premiums
Registrant Year Year Costs Expenses Written
Year Ended December 31, 1994:
(a) Consolidated
property-casualty
entities . . . . . . . . $3,547.8 $853.1 $1,383.4 $3,483.2 $3,960.0
Year Ended December 31, 1993:
(a) Consolidated
property-casualty
entities . . . . . . . . $3,413.0 $ 1.1 $1,370.5 $3,304.8 $4,537.8
Year Ended December 31, 1992:
(a) Consolidated
property-casualty
entities . . . . . . . . $3,036.3 $125.3 $1,282.7 $3,257.0 $4,019.0
______________________________
(1) Distinct investment portfolios are not maintained for individual
segments; accordingly, insurance segments results are shown in the
aggregate.
72
EXHIBIT INDEX
PAGE
2(a) -- Agreement and Plan of Merger, dated as of December 6,
1994, among Continental, CNA Financial Corporation ("CNA")
and CNA Acquisition Corp. (the "Merger Agreement"), filed
under Exhibit 2(a) to the Continental's Form 8-K, dated
December 9, 1994 (the "December 9, 1994 8-K").
3(a) -- Certificate of Incorporation of Continental, as
amended, as filed with the Secretary of the State of
New York on April 6, 1989, filed under Exhibit 3(a)
to Continental's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993 (the "1993 Form
10-K"), and Certificate of Amendment to Certificate
of Incorporation, as filed with the Secretary of
State of the State of New York on December 7, 1994,
filed under Exhibit 3 to Continental's Form 8-K,
dated December 16, 1994 (the "December 16, 1994 8-
K").
(b) -- By-Laws of Continental, as amended through December 17,
1992 as filed under Exhibit 3(b) to the 1993 Form 10-K.
4(a) -- Supplemental Indenture No. 3 dated as of March 1, 1993
from Continental to The Bank of New York, as Trustee, with
respect to the issuance of $150 million of 7.25% Notes due
March 1, 2003 filed on March 3, 1993 as Exhibit 1 to
Report on Form 8-K.
(10)(a) -- The Long Term Incentive Plan of Continental (amended and
restated as of December 1, 1993) as filed under Exhibit
10(a) to the 1993 Form 10-K.
(b) -- The Annual Management Incentive Plan of Continental
(amended and restated as of January 1, 1993) as filed
under Exhibit 10(b) to the 1993 Form 10-K.
(c) -- The Incentive Savings Plan of Continental (amended and re-
stated as of January 1, 1994) as filed under Exhibit 10(c)
to the 1993 Form 10-K.
(d) -- The Retirement Plan of Continental (amended and restated
as of January 1, 1994) as filed under Exhibit 10(d) to the
1993 Form 10-K.
(e) -- Receivables Purchase and Sale Agreement dated as of Decem-
ber 15, 1994, among The Continental Insurance Company
("Continental Insurance"), Boston Old Colony Insurance
Company ("Boston"), The Buckeye Union Insurance Company
("Buckeye"), Casualty Insurance Company ("Casualty"), Com-
mercial Insurance Company of Newark, N.J. ("Commercial"),
The Continental Insurance Company of New Jersey
("Continental - NJ"), Continental Lloyd's Insurance
Company ("Lloyd's"), The Fidelity and Casualty Company of
New York ("Fidelity"), Continental Reinsurance Corporation
("Continental Re"), Firemen's Insurance Company of Newark,
New Jersey ("Firemen's"), The Glens Falls Insurance Com-
pany ("Glens Falls"), Kansas City Fire and Marine
Insurance Company ("Kansas City"), The Mayflower Insurance
Company, Ltd. ("Mayflower"), National-Ben Franklin
Insurance Company of Illinois ("N-BF"), Niagara Fire
Insurance Company ("Niagara"), Pacific Insurance Company
("Pacific") and Workers' Compensation and Indemnity
Company of California ("Workers'"), collectively as
Sellers, and Corporate Receivables Corporation, Falcon
Asset Securitization Corporation ("Falcon"), Sheffield
Receivables Corporation ("Sheffield") and Atlantic Asset
Securitization Corp. ("Atlantic"), collectively as Pur-
chasers, and Citicorp North America, Inc. ("Citicorp"), as
Agent.
(f) Trade Receivables Purchase and Sale Agreement dated as of
December 28, 1984, As Amended, and As Amended and Restated
as of December 30, 1994, among continental Insurance,
Boston, Buckeye, Casualty, Commercial, Continental-NJ,
Lloyd's, Continental Re, Fidelity, Firemen's, Glens Falls,
Kansas City, Mayflower, N-BF, Niagara, Pacific, Workers',
collectively as Seller, and CIESCO, as Investor, and
Citibank, N.A. ("Citibank") and Citicorp, Individually and
as Agent.
(g) Executive Termination Program, adopted September 22, 1994,
as filed under Exhibit 10(e) to Continental's Form 8-K,
dated October 18, 1994 (the "October 18, 1994 8-K").
(h) Credit Agreement dated as of December 30, 1993 (the
"Credit Agreement"), among Continental, the Several
Lenders from Time to Time Parties Hereto, Chemical Bank
("Chemical") and Citibank, as Co-Agents and Chemical, as
Administrative Agent.
(i) Amendment dated March 30, 1994, to the Credit Agreement
among Continental, the Several Lenders from Time to Time
Parties Hereto, Chemical and Citibank, as Co-Agents and
Chemical, as Administrative Agent.
(j) Second Amendment to the Credit Agreement, dated as of June
30, 1994, among Continental, the Several Lenders from Time
to Time Parties Hereto, Chemical and Citibank, as Co-
Agents and Chemical, as Administrative Agent.
(k) Third Amendment to the Credit Agreement, dated as of
September 29, 1994, among Continental, the Several Lenders
from Time to Time Parties Hereto, Chemical and Citibank,
as Co-Agents and Chemical, as Administrative Agent.
(l) Fourth Amendment to the Credit Agreement, dated as of
November 23, 1994, among Continental, the Several Lenders
from Time to Time Parties Hereto, Chemical and Citibank,
as Administrative Agent.
(m) Fifth Amendment to Credit Agreement, dated as of December
22, 1994 among Continental, certain lenders and Chemical
and Citibank as Administrative Agent.
(n) Agreement, dated as of July 1, 1994, between Fidelity
and General Reinsurance Corporation.
(o) Stock Purchase Agreement, dated December 16, 1994, among
FCIC, FGC, Buckeye and Continental.
(p) Stock Purchase Agreement dated as of June 30, 1993, among
Continental, Continental Insurance, Continental Re and
Mellon as filed under Exhibit 10(f) to the 1993 Form 10-K.
(q) Share Purchase Agreement dated as of June 30, 1993 (the
"Unionamerica Stock Purchase Agreement"), among
Unionamerica Acquisition Company Ltd. ("Unionamerica"),
Unionamerica Holdings Ltd. ("Unionamerica Holdings") and
Continental as filed under Exhibit 10(g) to the 1993 Form
10-K.
(r) Amendment dated September 1, 1993 to the Unionamerica
Share Purchase Agreement, among Unionamerica, Unionamerica
Holdings and Continental as filed under Exhibit 10(h) to
the 1993 Form 10-K.
(s) Stock Purchase Agreement dated as of July 28, 1993 (the
"Alleghany Stock Purchase Agreement"), among Alleghany
Corporation ("Alleghany"), Continental, Goldman, Sachs &
Co. ("Goldman") and certain funds which Goldman either
controls or of which it is a general partner (together,
the "GS Investors"; Continental and the GS Investors
together referred to as the "URHC Stockholders"),
Underwriters Re Holdings Corp. ("Underwrit-
ers Holdings") and Underwriters Re Corporation ("Underwriters") as filed under
Exhibit 10(i) to the 1993 Form 10-K.
(t) Amendment dated October 7, 1993, to the Alleghany Stock Purchase Agreement,
among Alleghany, Continental, the GS Investors, Underwriters Holdings and Un-
derwriters as filed under Exhibit 10(j) to the 1993 Form 10-K.
(u) Stock Purchase Agreement dated as of July 28, 1993 (the "GS Investors Stock
Purchase Agreement"), among Continental and the GS Investors as filed under
Exhibit 10(k) to the 1993 Form 10-K.
(v) Management Stock Purchase Agreement dated as of July 28, 1993 (the
"Management Agreement"), among Continental, Underwriters Holdings,
Underwriters and certain Management Stockholders, as supplemented as filed
under as Exhibit 10(m) to the 1993 Form 10-K.
(w) Amendment dated as of October 7, 1993, to the Management Agreement, among
Continental, Underwriters Holdings, Underwriters and certain Management
Stockholders as filed under as Exhibit 10(n) to the 1993 Form 10-K.
(x) Securities Purchase Agreement, dated as of December 6, 1994, between
Continental and CNA as filed under Exhibit 10(b) to the December 9, 1994 8-K.
(y) Stock Option, dated December 9, 1994, granted to CNA, as filed under Exhibit
10(c) to the December 16, 1994 8-K.
(z) Amendment to Stock Option, dated January 5, 1995.
(aa) Letter Agreement dated October 6, 1993, among Continental and the GS
Investors, relating to the GS Investors Stock Purchase Agreement as filed
under Exhibit 10(l) to the 1993 Form 10-K.
(bb) Purchase Agreement dated October 12, 1994, between The Continental Insurance
Company of Canada, The Dominion Insurance Corporation and Firemen's Insurance
Company of Newark, New Jersey and Continental Reinsurance Corporation and
Continental Reinsurance Corporation International Limited and The Continental
Corporation and Fairfax Financial Holdings Limited, as filed under Exhibit
10(f) to the October 18, 1994 8-K.
(cc) Receivables Purchase and Sale Agreement dated as of December 14, 1993, among
Continental Insurance, Boston, Buckeye, Casualty, Commercial, Continental-NJ,
Lloyd's, Fidelity, Continental Re, Firemen's, Glens Falls, Kansas City, Mayflower,
N-BF, Niagara, Pacific and Workers', collectively as Sellers, and Corporate Asset
Funding Company, Inc., CIESCO, L.P., Falcon, Sheffield, Atlantic and Credit
Lyonnais, collectively, as Purchas-
ers, and Citicorp, as Agent, filed under Exhibit 10(e) to Continental's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(dd) -- Participation Agreement, dated as of December 29, 1994 among Buckeye, First
Fidelity Bank, N.A. ("First Fidelity") and The CIT Group/Equipment Financing, Inc.,
with the following exhibits and schedules:
-- Master Lease, dated December 29, 1994 between First Fidelity and Buckeye.
-- Schedule of Leased Equipment No. 1 (to Master Lease), dated December 29, 1994
between Buckeye and First Fidelity.
-- Prime Master Lease, dated as of December 29, 1994 between Buckeye and First
Fidelity.
-- Schedule of Leased Equipment No. 1 (to Prime Master Lease), dated December
29, 1994, between Buckeye and First Fidelity.
(ee) -- Participation Agreement, dated as of December 29, 1994 among The Continental
Insurance Company, First Fidelity and The CIT Group/Equipment Financing, Inc.
-- Master Lease, dated as of December 29, 1994 between First Fidelity Bank, N.A.
and The Continental Insurance Company
-- Prime Master Lease, dated as of December 29, 1994 between The Continental
Insurance Company and First Fidelity.
-- Schedule of Leased Equipment No. 1 (to Master Lease), dated December 29, 1994
between First Fidelity and The Continental Insurance Company
-- Schedule of Leased Equipment No. 1, dated December 29, 1994 (to Prime Master
Lease) between The Continental Insurance Company and First Fidelity.
(ff) -- Participation Agreement, dated as of December 29, 1994 among Firemen's, First
Fidelity Bank, N.A. and The CIT Group/Equipment Financing, Inc., with the
following exhibits and schedules:
-- Master Lease, dated December 29, 1994 between First Fidelity and Firemen's.
-- Prime Master Lease, dated as of December 29, 1994 between Firemen's and First
Fidelity.
-- Schedule of Leased Equipment No. 1 (to Master Lease), dated December 29, 1994
between Firemen's and First Fidelity.
-- Schedule of Leased Equipment No. 1 (to Prime Master Lease), dated December 29,
1994 between First Fidelity and Firemen's.
(gg) -- Lease Guaranty to First Fidelity Bank, N.A.
(hh) -- Merger Agreement. See Exhibit 2(a).
(11) -- Continental's Statement re Computation of Per Share Earnings.
(21) -- Subsidiaries of Continental.
(23) -- Consent of KPMG Peat Marwick LLP.
(28) -- Statutory Loss Development of Property and Casualty Insurance and Reinsurance
Subsidiaries, filed in paper form only pursuant to Regulation 311 of
Regulation S-T.