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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, 1996

|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the Transition period from to

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Commission file no. 0-28188
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Chartwell Re Holdings Corporation
(Exact name of registrant as specified in its charter)

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DELAWARE 06-1438493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Four Stamford Plaza, 107 Elm Street
Stamford, Connecticut 06912-0043
(Address of principal executive offices and zip code)

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Registrant's telephone number, including area code: (203) 705-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
(Title of class)

_______________
(Title of class)

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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]

Documents Incorporated by Reference

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The Registrant meets the conditions set forth in General Instruction
J(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the
reduced disclosure format.

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CHARTWELL RE HOLDINGS CORPORATION
TABLE OF CONTENTS

Page
Item Number
---- ------
PART I
1. Business............................................................ 1
2. Properties.......................................................... 21
3. Legal Proceedings................................................... 21
4. Submission of Matters to a Vote of Security Holders................. 21

PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters................................................. 21
6. Selected Financial Data............................................. 21
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 21
8. Financial Statements and Supplementary Data......................... 30
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures................................ 31

PART III
10. Directors and Executive Officers of the Registrant.................. 31
11. Executive Compensation.............................................. 31
12. Security Ownership of Certain Beneficial Owners
and Management...................................................... 31
13. Certain Relationships and Related Transactions...................... 31

PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 31

PART I

Item 1. Business
Overview

Chartwell Re Holdings Corporation ("Chartwell" or the "Company") is a
wholly-owned subsidiary of Chartwell Re Corporation ("Chartwell Re"). Chartwell
was formed in 1995 to act as an intermediate holding company for Chartwell Re
and, as such, it conducts business through its four principal operating
subsidiaries, Chartwell Reinsurance Company ("Chartwell Reinsurance"), The
Insurance Corporation of New York ("INSCORP") (formerly, The Reinsurance
Corporation of New York), Chartwell Advisers Limited ("Chartwell Advisers") and
its recently acquired Lloyd's of London ("Lloyds") managing agency, Archer
Managing Agents Limited ("Archer"). Chartwell Reinsurance was founded in 1979 as
a wholly-owned subsidiary of Northwestern National Life Insurance Company
("NWNL") and, in March of 1992, was acquired (the "1992 Acquisition") by an
acquisition group including members of Chartwell's senior management.

Chartwell Reinsurance underwrites treaty reinsurance through
reinsurance brokers for casualty and, to a lesser extent, property risks.
INSCORP, under previous ownership, had historically been engaged in underwriting
reinsurance business; however, in recent years it had begun to develop a book of
select specialty property and casualty insurance underwritten through program
administrators. Since acquiring INSCORP in December 1995, Chartwell has enhanced
and developed INSCORP's book of specialty insurance business and renewed select
portions of INSCORP's reinsurance business through Chartwell Reinsurance. For
the year ended December 31, 1996, over 75% of the combined gross premiums
written by Chartwell and INSCORP constituted reinsurance.

Chartwell Advisers acts as the exclusive advisor for syndicate
selection to New London Capital plc, a non-affiliated publicly traded company
formed to underwrite at Lloyd's through a group of wholly-owned subsidiaries
which are limited liability corporate members at Lloyd's.

Chartwell's other subsidiaries include Drayton Company Limited
("Drayton") and Dakota Specialty Insurance Company ("Dakota"). Drayton, which
was acquired by Chartwell Re in 1995, is a Bermuda-domiciled insurer which is
not currently writing new business. Chartwell Re is managing the resolution of
Drayton's remaining claims and assets in a controlled winding-up (or "run-off")
of Drayton's old business. Dakota is a newly-formed, indirect wholly-owned
subsidiary of Chartwell, which will be the company's non admitted entity writing
surplus lines business.

As of December 31, 1996, Chartwell had total assets of approximately
$1.2 billion and stockholder's equity of $232.0 million. Chartwell Reinsurance
and INSCORP are rated "A" (Excellent) and "A-" (Excellent), respectively, by
A.M. Best Company, Inc. ("A.M. Best"), an independent rating entity serving the
insurance industry. In addition, both companies are assigned an A- claims paying
ability rating by Standard & Poor's Insurance Rating Services.

In November, 1996, Chartwell Holdings Limited ("Holdings Limited"), a
newly-formed, indirect wholly-owned subsidiary of Chartwell, acquired (the
"Acquisition") Archer Group Holdings plc ("Archer Holdings") via a cash tender
offer for all of the outstanding ordinary shares of Archer Holdings (the "Archer
Shares"). Archer Holdings was publicly traded on the London Stock Exchange prior
to the Acquisition and is the parent company of Archer. The largest part of
Archer revenue is derived from fee-based revenue on capacity managed and profit
commissions on syndicate results. Archer is one of the largest managing agencies
in the Lloyd's marketplace with approximately 4% of Lloyd's total underwriting
capacity for the 1997 year of account. Archer manages a group of 10 Lloyd's
syndicates (six non-marine, one marine, one aviation, one motor and one life)
with 1997 capacity of approximately (pound)380 million. Approximately 76% of
Archer syndicates' 1997 premium volume will be derived from non-U.S. sources.
Approximately 52.1% of the 1997 capacity is supplied by corporate capital.

The aggregate consideration paid to complete the Acquisition was $60.3
million based on the exchange rates in effect at the time of the cash outlay.
The Acquisition included a Loan Note alternative whereby stockholders of Archer
Holdings could elect to receive a (pound)1 Loan Note for each (pound)1 of cash
consideration. The aggregate amount of Loan Notes issued in connection with the
consummation of the Acquisition was $9.4 million (denominated in Pounds
Sterling). The Loan Notes are guaranteed by First Union National Bank of North
Carolina ("First Union"), pay interest semi-annually at the rate per annum
calculated as one percent below the Sterling London Interbank Offered Rate
("LIBOR") and will mature in June, 2002.

The purchase price for the Archer Shares was funded from Chartwell's
existing resources and from a new credit facility with First Union, as agent.
The credit facility provides for a term loan in two tranches, A & B, of $30.0
million principal amount and $22.0 million (denominated in Pounds Sterling)
principal amount, respectively, (the "First Union Loans") and a $25.0 million
(subsequently increased to $35.0 million) principal amount revolving credit
facility (the "First Union Revolver" and collectively with the First Union
Loans, the "New Credit Facilities"). Chartwell used $20.0 million of the First
Union Loans to repay all outstanding borrowings under a credit agreement (the
"Fleet Loan") between Chartwell and Fleet National Bank of Connecticut
("Fleet"). Portions of the remainder of the First Union Loans were drawn down in
cash by Chartwell and contributed to Holdings Limited for the purchase of Archer
Shares, and portions were utilized in the form of bank guarantees of the
obligations of Holdings Limited under the Loan Notes. The First Union Revolver
replaced Chartwell's $10.0 million revolving credit facility from Fleet (the
"Fleet Revolver") (under which no borrowings were outstanding). The First Union
Revolver may be used to provide additional Loan Note guarantees, to support
underwriting at Lloyd's by Chartwell's subsidiaries or for other general
corporate purposes. All obligations of Chartwell under the New Credit Facilities
are guaranteed by Chartwell Re. For additional information on the financing of
the Acquisition, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."

INSCORP was acquired by Chartwell as a result of the merger of
INSCORP's former parent, Piedmont Management Company Inc. ("Piedmont"), with and
into Chartwell Re with Chartwell Re as the surviving corporation (the "Merger").
The Merger

was completed in December, 1995 pursuant to an Agreement and Plan of Merger
between Chartwell Re and Piedmont (the "Merger Agreement"). Upon consummation of
the Merger, Chartwell Re assumed all of Piedmont's obligations under its
Contingent Interest Notes due 2006 (the "CI Notes") which were issued by
Piedmont to its stockholders just prior to the Merger. Further, as of the
effective date of the Merger, Chartwell Re refinanced Piedmont's existing bank
debt with the Fleet Loan. As described above in connection with the Acquisition,
the Fleet Loan was repaid in full using a portion of the money borrowed under
the First Union Loans.

As a result of the Acquisition and related transactions, the current
corporate structure of Chartwell, its parent and its subsidiaries is as follows:

[CHART]

Corporate Strategy

The corporate strategy of Chartwell Re, Chartwell's parent company, is
to achieve profitable growth through (i) expansion, (ii) diversity, (iii)
globalization and (iv) stability.

Chartwell Re regularly evaluates additional opportunities for the
acquisition of books of business or of reinsurance or specialty insurance
companies as going concerns, for business combinations with other reinsurance or
insurance concerns, for the provision of insurance related advisory services to
third parties and the expansion of its portfolio of fee-based revenue sources.
There can be no assurance, however, that any suitable business opportunities
will arise.

Property and Casualty Reinsurance

Reinsurance is an arrangement in which an insurance company, the
reinsurer, agrees to indemnify another insurance company, the ceding company,
for all or a portion of the insurance risks underwritten by the ceding company
under one or more insurance policies. Reinsurance can benefit a ceding company
in a number of ways, including reducing net liability exposure on individual
risks, providing catastrophe protection from large or multiple losses,
stabilizing financial results and assisting in maintaining acceptable operating
leverage ratios. Reinsurance also provides a ceding company with additional
underwriting capacity by permitting it to accept larger risks and underwrite a
greater number of risks without a corresponding increase in its capital and
surplus.

Reinsurance is contracted either through treaties or facultative
certificates. A reinsurance treaty is an agreement whereby the ceding company is
obligated to cede, and the reinsurer is obligated to assume, a specified portion
or category of risk under all qualifying policies issued by the ceding company
during the term of the treaty. Facultative reinsurance arrangements are
separately negotiated for each insurance policy to be reinsured and result in a
facultative certificate under which the ceding company cedes, and the reinsurer
assumes, all or part of the risk under a specific insurance policy. Facultative
reinsurance is normally purchased by insurance companies for individual risks
not covered under reinsurance treaties or for amounts in excess of limits on
risks covered under reinsurance treaties. In the underwriting of treaty
reinsurance, the reinsurer does not evaluate each individual risk assumed, as it
must in the underwriting of facultative reinsurance, and generally accepts the
original underwriting decisions made by the ceding insurer.

Both treaty and facultative reinsurance can be written on either a pro
rata (also known as quota share or proportional) or excess of loss basis. Under
pro rata reinsurance, the reinsurer indemnifies the ceding company against an
agreed upon portion or share of the losses and loss adjustment expenses ("LAE")
incurred by the ceding company under the reinsured policy or policies. Premiums
that the ceding company pays to the reinsurer for pro rata reinsurance are
proportional to the premiums that the ceding company receives, consistent with
the proportional sharing of risk, generally less a ceding commission. The ceding
commission is negotiated between the reinsurer and the ceding company to
reimburse the ceding company for its acquisition costs relating to the
underlying policies and may include a contingent component that varies depending
upon the loss experience of the underlying business. As a consequence, the
underwriting results of the reinsurer may not parallel the underwriting results
of the ceding company.

In reinsurance written on an excess of loss basis, the reinsurer
indemnifies the ceding company against all or a specified portion of losses and
LAE on the reinsured policy or policies in excess of a specified dollar amount,
known as the ceding company's retention or reinsurance attachment point,
generally subject to a negotiated limit. Such reinsurance can cover losses from
a single risk or from a variety of risks in connection with a single occurrence
(generally referred to as catastrophe coverage). Excess of loss reinsurance is
often written in multiple layers. One or a group of reinsurers typically assumes
that portion of the risk immediately above the ceding company's retention up to
a specified amount, at which point another reinsurer or group of reinsurers
assumes, or the ceding company retains, the excess liability. The reinsurer
assuming the risk immediately above the ceding company's retention point is said
to write working layer (or low layer) reinsurance. A loss that is greater in
amount than the ceding company's retention will result in a loss to the working
layer reinsurer, but may not result in a loss to the reinsurers on higher
layers. Since the probability of loss for the reinsurer providing excess of loss
coverage differs from that to which the ceding company is subject, such
reinsurance coverage is priced separately from the pricing set by the ceding
company with respect to its own risks.

Reinsurers may also purchase reinsurance, known as retrocessional
reinsurance, to cover their own risks assumed from primary ceding companies.
Reinsurance companies enter into retrocessional agreements for reasons similar
to those for which ceding companies purchase reinsurance.

Marketing and Underwriting Strategy

The principal elements of Chartwell's marketing and underwriting
strategy are: (i) a client segment focus; (ii) a cycle management approach to
marketing and underwriting; (iii) a commitment to the broker market; (iv)
conservative risk management; and (v) superior client service, coupled with
broad market acceptance.

Client Segment Approach. Chartwell has organized its marketing and
underwriting activities into client segments differentiated by the nature of
their businesses. Accordingly, Chartwell has established five underwriting
units, four of which are focused on reinsurance clients; Specialty Accounts,
Global Accounts, Regional Accounts, Marine & Aviation Accounts and the fifth,
Controlled Source Insurance Accounts, is dedicated to specialty insurance
program opportunities. The units consist of specialized, dedicated underwriters
who are supported by Chartwell's technical resources and personnel, including
its actuarial, claims and accounting departments. Management believes that this
client segment approach enhances Chartwell's ability to operate successfully
throughout the underwriting cycle by enabling Chartwell to: (i) focus its
underwriting expertise; (ii) recognize and react quickly to changing market
conditions that affect each segment; (iii) allocate its underwriting capacity to
those segments with greater profit potential; (iv) evaluate and control risk
exposure efficiently; and (v) identify and service the needs of brokers and
ceding companies within each segment.

Chartwell's gross premiums written amounted to $263.8 million for the
year ended December 31, 1996. Of such amount, $198.5 million, or 75.2%,
represented gross reinsurance premiums and $65.3 million, or 24.8%, represented
gross insurance premiums and run-off of INSCORP's reinsurance portfolio. Prior
to the acquisition of Piedmont, Chartwell's premium was derived exclusively from
reinsuring ceding companies in its four underwriting client segments focused on
reinsurance; Specialty Accounts, Global Accounts, Regional Accounts and Marine &
Aviation Accounts.

Specialty Accounts, which represented 50.8%, 47.7% and 46.2% of gross
reinsurance premiums written by Chartwell during the years ended December 31,
1996, 1995 and 1994, respectively, primarily covers non-standard,
non-traditional risks that require specialized underwriting, claims and
actuarial skills. Currently, these coverages include workers compensation,
professional liability, directors and officers liability, surety/fidelity
programs, non-standard auto and coverages for excess and surplus lines insurers.
In addition, Specialty Accounts writes business arising from the alternative
risk transfer segment with a particular emphasis in the professional liability
and medical malpractice areas. The alternative risk transfer business accounted
for 11.5% of Specialty Accounts premium in 1996 and 7.5% in 1995.

Since business written by Specialty Accounts is inherently more complex
than the business written by Chartwell's other underwriting units, capacity for
this business tends to be more restricted, and pricing is generally less
competitive. The Specialty

Accounts unit is designed to provide Chartwell with opportunities to underwrite
attractive lines and classes of risks throughout the underwriting cycle.

Global Accounts, which represented 22.1%, 30.2% and 34.1% of gross
reinsurance premiums written during the years ended December 31, 1996, 1995 and
1994, respectively, is principally engaged in two activities. First, Global
Accounts provides reinsurance to large U.S. based domestic insurance companies
with $100 million or more in surplus and which write business in more than 10
states. These insurers generally purchase reinsurance for standard risks on the
basis of price and availability. Chartwell's participation in this segment will
vary significantly depending on prevailing market conditions. The domestic
portion represented 45.1%, 54.7%, and 55.8% of Global Accounts gross reinsurance
premiums written during the years ended December 31, 1996, 1995 and 1994,
respectively. Second, Global Accounts writes specific reinsurance programs for
international ceding companies including reinsurance of select syndicates at
Lloyd's and for other insurers and reinsurers writing non-U.S. risks. The
international portion represented 54.9%, 45.3%, and 44.2% of Global Accounts
gross reinsurance premiums written during the years ended December 31, 1996,
1995 and 1994, respectively.

Regional Accounts, which represented 13.1%, 13.2% and 16.8% of gross
reinsurance premiums written during the years ended December 31, 1996, 1995 and
1994, respectively, provides reinsurance for the standard risks of regional
insurers with less than $100 million in surplus and which write standard lines
in 10 or fewer states. Chartwell seeks to enhance its business by establishing
long-term relationships with regional insurers through its commitment to
superior client service. These insurers generally purchase reinsurance to
provide essential capacity and reinsurance protection. As compared to Global
Accounts, Regional Accounts clients typically exhibit less price sensitivity in
purchasing reinsurance and require greater underwriting, claims and
administrative services.

Marine & Aviation Accounts, which represented 14.0%, 8.9% and 2.9% of
gross reinsurance premiums written during the years ended December 31, 1996,
1995 and 1994, respectively, had historically been included in the Regional
Accounts client segment for reporting purposes. However, due to the increasing
size of the portfolio and the inherent specific needs of ceding companies in
this segment, this area is now recognized as a separate client segment. The
Marine & Aviation Accounts client segment represents Chartwell's marine and
aviation reinsurance business, including its participation in certain marine &
aviation pools. The majority of Chartwell's marine reinsurance business is in
the bluewater hull and energy areas, whereas Chartwell's aviation business is
derived primarily from reinsuring general aviation and satellite business.
Business emanating from INSCORP's participation in the marine pool managed by
Navigators Group, Inc. is also included in this client segment.

Controlled Source Insurance Accounts consists generally of homogeneous
books of specialty insurance business with a limited geographic focus which are
controlled by program administrators. In 1996, this business consisted primarily
of INSCORP's portfolio of controlled source business acquired from Piedmont in
the Merger. Throughout the year, Chartwell reviewed each program extensively and
brought a number of changes to the original pricing, underwriting and
reinsurance programs which had a positive impact on INSCORP's retention.
Although a majority of the insurance programs underwritten are expected to be
produced by specialty retail or wholesale brokers, Chartwell's management
believes business may also originate from reinsurance intermediaries and
Chartwell's current ceding companies. In general, Chartwell intends to avoid
programs which would compete directly with companies it reinsures.

Cycle Management. Chartwell employs a focused cycle management approach
to marketing and underwriting pursuant to which it seeks to emphasize different
types of business during various phases of the underwriting cycle. Management
believes that most segments of the insurance market behave independently and,
therefore, careful monitoring and selection of lines of business will enhance
Chartwell's potential for profit even as the industry as a whole moves through a
broad underwriting cycle. During soft markets, Chartwell concentrates on
identifying and pursuing underwriting opportunities in areas exhibiting adequate
profit potential. During hard markets, Chartwell's general strategy is to expand
its premium writings in all market segments.

Commitment to Broker Market. As a broker market reinsurer, Chartwell
has the flexibility to: (i) access a broad range of underwriting submissions
from numerous ceding companies with various reinsurance needs; (ii) vary levels
of participation on reinsurance programs depending on prevailing market
conditions; and (iii) control expenses by minimizing fixed costs associated with
maintaining a direct sales force since brokerage commissions are paid by
Chartwell only on business actually underwritten. Chartwell's access to the
broker market may also provide it with additional opportunities to write
specialty program insurance business through the Controlled Source Insurance
Accounts segment.

Conservative Risk Management. Chartwell seeks to manage risk exposures
by offering maximum limits of $2.0 million on any one casualty risk and $1.0
million on any one property risk (in each case excluding loss adjustment
expenses) subject to certain exceptions as approved by the Chief Underwriting
Officer and, in certain cases, by the Chief Executive Officer. For the business
written during the years ended December 31, 1996 and 1995, the average line per
contract written by Chartwell was approximately $284,000 and $260,000,
respectively. Chartwell may elect to increase its maximum limits based upon
market conditions.

In writing casualty reinsurance, Chartwell uses a variety of means to
control the inherent long tail nature of these risks. It is the general practice
of Chartwell to reinsure professional liability lines of business or coverages
with known or suspected latent exposures only if the original business is
written on a claims made policy form or if the reinsurance is provided on a
claims made basis. This practice curtails the accumulation of claims across
several policy periods and reduces the time period in which claims on a specific
policy are reported and can be fully estimated. As a result, loss cost estimates
become more predictable and the likelihood of producing an acceptable
underwriting result improves. In instances where Chartwell is unable to
participate in such business on a claims made basis, it will normally require
the inclusion of sunset clauses or loss ratio caps. Sunset clauses limit the
period in which losses may be reported, and loss ratio caps impose a ceiling on
the loss amount permitted under any one contract.

Superior Client Service. Management also believes that Chartwell has
developed strong working relationships with brokers and ceding companies because
of its high level of service tailored to the individual needs of each of its
client segments. Chartwell, in coordination with brokers, provides underwriting
assistance to ceding companies in structuring and pricing reinsurance programs
and furnishes ceding companies with operational reviews of their underwriting
and claims activities. In addition, Chartwell is committed to the prompt payment
of claims. As an indication of this commitment, during the three years ended
December 31, 1996 Chartwell paid approximately 99% of all approved claims on
active business within two working days of receiving the payment request.
Management believes that these factors enhance its ability to attract and retain
business.

Underwriting

Chartwell's underwriting approach with respect to new and renewal
business is to assess the potential profitability of each individual reinsurance
proposal. This assessment includes an historical analysis of results and an
estimation of future loss costs based upon an analysis of exposure and a review
of other programs displaying similar exposure characteristics. Management
utilizes this assessment, in combination with an evaluation of the structure,
terms and conditions of the proposed reinsurance to determine the level of
Chartwell's participation, if any.

Chartwell Reinsurance's underwriting policies are subject to a
two-tiered review process. Policies for each client segment are initially
formulated by the respective unit managers in response to the specific
reinsurance requirements of each segment. These policies are then subject to
review and approval by Chartwell Reinsurance's Underwriting Committee (composed
of the Chief Underwriting Officer, the Chief Executive Officer, the President,
the Chief Actuary, the Claims Manager and other senior underwriters) to assure
conformity with Chartwell Reinsurance's objectives and quality standards.
Chartwell's senior management regularly evaluates the general state of the
insurance and reinsurance market by client segment, class of business and
geographic region.

In general, prior to authorization, submissions are reviewed by at
least two underwriters, including the manager of the relevant underwriting unit.
Chartwell's underwriting policy mandates that large, complex or unusual
submissions are further reviewed by the Chief Underwriting Officer, and, if
warranted, the Chief Executive Officer of Chartwell. Submissions requiring
actuarial and claims assessments are referred to those departments for review.

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

Gross Premiums Written by Underwriting Client Segment
(Dollars in thousands)
Year Ended December 31,

------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
-------- ---------- -------- ---------- -------- ----------

Specialty Accounts ......... $100,817 50.8% $ 60,529 47.7% $ 53,807 46.2%
Global Accounts
Domestic ................. 19,818 10.0 21,010 16.5 22,136 19.0
International ............ 24,120 12.1 17,400 13.7 17,535 15.1
-------- -------- -------- -------- -------- --------
Subtotal Global Accounts ... 43,938 22.1 38,410 30.2 39,671 34.1
Regional Accounts .......... 25,967 13.1 16,738 13.2 19,541 16.8
Marine & Aviation Accounts . 27,780 14.0 11,291 8.9 3,377 2.9
-------- -------- -------- -------- -------- --------
Total Reinsurance ........ 198,502 100.0% $126,968 100.0% $116,396 100.0%
-------- ======== ======== ======== ======== ========
Controlled Source
Insurance Accounts......... 58,752
--------
INSCORP Run-Off ............ 6,584
--------
Total....................... $263,838
========

The growth of 127% in gross premiums written for the period from 1994
to 1996 is due to the addition of the Controlled Source Insurance portfolio and
the retention of selected INSCORP reinsurance contracts as a result of the
Piedmont merger. The continued growth of Chartwell's reinsurance client base as
a result of growth in statutory surplus and execution of the Company's plan also
contributed.

Specialty Accounts. The table set forth below shows the distribution of
gross premiums written for Specialty Accounts by line of business for the
periods indicated:

Specialty Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)

Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
-------- ---------- -------- ---------- -------- ----------

Workers Compensation ....... $ 27,477 27.3% $ 132 0.2% $ 162 0.3%
Automobile Liability ....... 26,317 26.1 18,308 30.2 17,119 31.8
Professional Liability ..... 21,642 21.5 24,910 41.2 21,472 39.9
General Liability .......... 14,176 14.1 12,505 20.7 13,114 24.4
Surety & Other ............. 6,724 6.7 4,674 7.7 1,940 3.6
Accident and Health ........ 4,481 4.4
-------- -------- -------- -------- -------- --------
Total ...................... $100,817 100.0% $ 60,529 100.0% $ 53,807 100.0%
======== ======== ======== ======== ======== ========

Specialty Accounts represented 50.8%, 47.7%, and 46.2% of gross
reinsurance premiums written by Chartwell for the years ended December 31, 1996,
1995 and 1994, respectively. Specialty Accounts currently writes workers'
compensation, professional liability, non-standard automobile, specialty
commercial automobile, medical malpractice, fidelity, surety, general liability
coverages on an excess and surplus lines basis and other non-standard coverages.
Specialty Accounts also writes casualty reinsurance for the alternative risk
market.

Gross premiums written for Specialty Accounts increased in 1996 by
66.6% over 1995 due to the expansion into the workers compensation line as a
result of favorable reform in certain jurisdictions and the retention of certain
INSCORP treaties, particularly in the automobile liability line. Chartwell
believes that the legislative reforms enacted in certain jurisdictions in the
workers compensation area combined with increasing cost control in the medical
area have resulted in opportunities in this area.

Professional liability premiums decreased slightly in 1996 from 1995
due to continued competition in this line, while premiums associated with
fidelity, surety and accident and health business increased due to the expansion
of relationships with clients in these areas.

Gross premiums written by Specialty Accounts increased 12.5% in the
year ended December 31, 1995 compared with 1994, primarily because of
Chartwell's development of business with leading writers of specialized risks.

Global Accounts. The table set forth below shows the distribution of
gross premiums written for Global Accounts by line of business for the periods
indicated:

Global Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,

Property ..................... $17,755 40.4% $19,526 50.8% $15,755 39.7%
Automobile Physical Damage ... 12,680 28.9 7,714 20.1 5,033 12.7
Automobile Liability ......... 8,904 20.3 7,417 19.3 12,151 30.6
General Liability ............ 2,649 6.0 2,597 6.8 6,011 15.2
Other Casualty ............... 1,950 4.4 1,156 3.0 721 1.8
------- ------- ------- ------- ------- -------
Total ........................ $43,938 100 % $38,410 100.0% $39,671 100.0%
======= ======= ======= ======= ======= =======

Global Accounts represented 22.1%, 30.2%, and 34.1% of gross
reinsurance premiums written by Chartwell for the years ended December 31, 1996,
1995, and 1994, respectively. Global Accounts includes reinsurance of the
standard risks of domestic insurance companies with surplus in excess of $100
million that write business in more than 10 states. Such companies generally
purchase coverage on the basis of price and availability and the risks involved
are generally larger and more volatile than those of Regional Accounts. In this
segment, Chartwell typically writes a large number of treaties with a relatively
small participation in any

one treaty. In hard markets, when overall industry capacity is generally
reduced, Chartwell is able to increase its level of participation in such
treaties, which, in combination with price increases, results in an increased
volume of premiums written.

Global Accounts also reinsures certain syndicates at Lloyd's and other
insurers and reinsurers writing non-U.S. risks. There is currently an emphasis
by Global Accounts on this business in response to the opportunities created by
the restructuring taking place at Lloyd's and favorable international market
conditions for certain Global Accounts lines.

Since 1994, the split of Global Accounts premium has shifted from 56%
domestic and 44% international to 45% domestic and 55% international, reflecting
more favorable market conditions in the international area. In 1996, automobile
physical damage and liability premiums increased over 1995 as a result of an
expansion in the U.K. motor line due to improved market conditions combined with
a stronger currency exchange. This contrasted to the reduction in premium in
this line, particularly the liability portion, in 1995 as a result of increased
pricing competition in this area. Property premiums decreased in 1996 from 1995
as a result of increasing competition in this line both in the domestic and
international marketplace.

Regional Accounts. The table set forth below shows the distribution of
gross premiums written for Regional Accounts by line of business for the periods
indicated:

Regional Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,

Property ........... $11,023 42.5% $ 5,118 30.6% $12,731 65.2%
General Liability .. 8,264 31.8 5,620 33.6 3,134 16.0
Workers Comp ....... 3,698 14.2 3,138 18.7 2,403 12.3
Automobile Liability 2,982 11.5 2,862 17.1 1,273 6.5
------- ----- ------- ----- ------- -----
Total .............. $25,967 100.0% $16,738 100.0% $19,541 100.0%
======= ===== ======= ===== ======= =====

Regional Accounts represented 13.1%, 13.2%, and 16.8% of gross
reinsurance premiums written by Chartwell for the years ended December 31, 1996,
1995 and 1994, respectively. Regional Accounts includes reinsurance of the
standard risks of insurance companies that either operate in 10 or fewer states
or have a surplus of $100 million or less.

Regional Accounts premiums in 1996 grew 55.1% over 1995 levels and in
1995 decreased by 14.3% from 1994 levels. The increase for 1996 over 1995 was
due in large part to the retention of selected INSCORP accounts and to a lesser
extent to the expansion of business relationships with existing or new regional
ceding companies. The decrease in premiums in 1995 from 1994 in the property
lines was due primarily to the non-renewal of a significant participation in a
large regional property program as a result of deteriorating results and
unattractive pricing prospects as well as a reduction in property catastrophe
premiums from regional companies.

Management believes that the business of smaller, regional insurers is
generally less cyclical and therefore less volatile than that of Global Accounts
or Specialty Accounts clients. Although profit margins in this segment are
typically lower, these coverages generally entail less risk to the reinsurer and
underwriting results generally have a higher degree of certainty due to the
nature of the risks reinsured. Chartwell seeks to enhance its business by
establishing long-term relationships with regional insurers through its
commitment to superior client service.

Regional Accounts' clients are generally less sensitive to price than
Global Accounts' clients in purchasing reinsurance, but require greater
underwriting, claims and administrative advice and services from reinsurers than
Global Accounts' clients. As contrasted with certain of its competitors, a
senior underwriter heads Chartwell's efforts to develop business with regional
insurers and oversees the provision of services to these clients.

Marine and Aviation Accounts. The table set forth below shows the
distribution of gross premiums written for Marine & Aviation Accounts by line of
business for the periods indicated:

Marine & Aviation Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,

Marine..... $24,245 87.3% $ 5,034 44.6% $ 1,002 29.7%
Aviation... 3,535 12.7 6,257 55.4 2,375 70.3
------- ----- ------- ----- ------- -----
Total...... $27,780 100 % $11,291 100.0% $ 3,377 100.0%
======= ===== ======= ===== ======= =====

As a result of the increasing premium volume combined with the specific
needs of ceding companies in this area, Chartwell decided to separate this area
into a specific client segment. Marine & Aviation Accounts represented 14.0%,
8.9% and 2.9% of gross reinsurance premiums written by Chartwell for the years
ended December 31, 1996, 1995 and 1994, respectively.

The Marine & Aviation Accounts client segment represents Chartwell's
marine and aviation reinsurance business, including its participation in certain
marine and aviation pools. The majority of Chartwell's marine reinsurance
business is in the bluewater hull and energy areas with a lesser emphasis on
liability, cargo and yacht business, whereas Chartwell's aviation business is
derived predominantly from reinsuring general aviation and satellite business.
Business emanating from INSCORP's participation in the marine pool managed by
Navigators Group, Inc. is also included in this client segment.

In response to attractive market conditions in the marine area, the
company added underwriting resources in late 1994 which accounted for the 402.4%
growth in 1995 over 1994. Premium volume increased by 381.6% in 1996 over 1995
largely due to the retention of the Navigators marine pool participation which
had been written by INSCORP in the past and the continued development of the
marine reinsurance portfolio.

Aviation premiums decreased in 1996 from 1995 due to premium
adjustments associated with a loss rated program wherein the projected ultimate
premiums developed lower than anticipated due to favorable loss development.
Premium levels increased in 1995 over 1994 due to increased rate levels and
participations on certain programs.

Controlled Source Insurance Accounts. The table set forth below shows
the gross premiums written for Controlled Source Insurance Accounts by INSCORP
for the periods indicated:

Controlled Source Insurance Accounts
Gross Premiums Written by Line of Business
(Dollars in thousands)
Year Ended December 31,

------------------------------------------------------------------
1996 1995(1) 1994(1)
-------------------- -------------------- --------------------
Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total
-------- ---------- -------- ---------- -------- ----------

Commercial Multiple Peril... $33,014 56.2 % $25,196 47.1 % $19,157 40.3%
General Liability .......... 14,889 25.3 15,506 29.0 14,100 29.7
Automobile ................. 10,849 18.5 12,821 23.9 14,257 30.0
------- ------- ------- ------- ------- -----
Total ...................... $58,752 100.0 % $53,523 100.0 % $47,514 100.0%
======= ======= ======= ======= ======= =====

- ----------
(1) Under ownership by Piedmont

Controlled Source Insurance Accounts premiums grew 9.8%, 12.6%, and
9.7% for the years ended December 31, 1996, 1995, and 1994 respectively over the
prior year. In 1996, premium was developed through five production sources
encompassing six specialty programs with the addition of one new program in the
fourth quarter. The increases in premium reflect the geographic expansion of
existing programs as well as the development of new programs during the periods
shown. Controlled Source Insurance Accounts develops insurance programs from
specialty production sources with a focus on a specific line or lines of
business, with a limited geographic emphasis, and where the program
administrator's compensation is adjusted based on the underwriting results of
the business.

Premiums from Commercial Multiple Peril increased 72.3% in 1996 over
1994 levels, principally as a result of the rate increases and a reduction in
available capacity in the Florida market for superior construction properties
insured under such programs, the withdrawal from the market of INSCORP's largest
competitor, combined with the ability to add reinsurance capacity in order to
maintain acceptable net aggregate property exposures. Premiums from the
automobile liability line decreased by 23.9% since 1994 primarily as a result of
shifting business from INSCORP paper to an affiliated ceding company's paper.
This planned progression of moving business from INSCORP to the affiliated
ceding company occurred as a result of the continued licensing efforts of the
affiliated company and achievement of an A.M. Best rating of "A-" (Excellent).

Mix of Business

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

Mix of Business - Reinsurance
(Dollars in thousands)
Year Ended December 31,

-------------------------------------------------------------------------------------------
1996 1995 1994 1993
-------------------- -------------------- -------------------- --------------------
Percentage Percentage Percentage Percentage
Amount of Total Amount of Total Amount of Total Amount of Total
-------- ---------- -------- ---------- -------- ---------- -------- ----------
Gross Premiums Written
Casualty:

Excess of Loss ............. $ 32,679 16.5% $ 40,089 31.6% $ 32,674 28.1% $ 23,622 33.7%
Pro Rata ................... 94,223 47.5 41,570 32.7 43,328 37.2 28,542 40.7
Clash ...................... 1,816 0.8 2,704 2.1 3,498 2.9 1,710 2.4
-------- ----- -------- ----- -------- ----- -------- -----
Total Casualty ............... 128,718 64.8 84,363 66.4 79,500 68.2 53,874 76.8
-------- ----- -------- ----- -------- ----- -------- -----
Property:
Excess of Loss ............. 6,267 3.2 4,730 3.7 2,656 2.3 1,369 2.0
Pro Rata ................... 62,455 31.5 35,841 28.2 31,030 26.7 10,105 14.4
Catastrophe ................ 1,062 0.5 2,034 1.7 3,210 2.8 4,781 6.8
-------- ----- -------- ----- -------- ----- -------- -----
Total Property ............... 69,784 35.2 42,605 33.6 36,896 31.8 16,255 23.2
-------- ----- -------- ----- -------- ----- -------- -----
Total Gross Premiums Written $198,502 100.0% $126,968 100.0% $116,396 100.0% $ 70,129 100.0%
======== ===== ======== ===== ======== ===== ======== =====
Net Premiums Written
Casualty:
Excess of Loss ............. $ 32,567 18.6% $ 40,043 32.5% $ 32,680 28.7% $ 23,797 34.1%
Pro Rata ................... 81,349 46.6 40,727 33.0 43,319 38.0 28,560 40.9
Clash ...................... 1,807 1.0 2,691 2.2 3,492 3.1 1,729 2.5
-------- ----- -------- ----- -------- ----- -------- -----
Total Casualty ................. 115,723 66.2 83,461 67.7 79,491 69.8 54,086 77.5
-------- ----- -------- ----- -------- ----- -------- -----
Property:
Excess of Loss ............. 5,941 3.4 4,440 3.6 2,476 2.2 1,223 1.8
Pro Rata ................... 51,978 29.8 33,667 27.3 28,928 25.4 9,859 14.1
Catastrophe ................ 1,016 0.6 1,746 1.4 3,067 2.7 4,659 6.6
-------- ----- -------- ----- -------- ----- -------- -----
Total Property ................. 58,935 33.8 39,853 32.3 34,471 30.2 15,741 22.5
-------- ----- -------- ----- -------- ----- -------- -----
Total Net Premiums Written . $174,658 100.0% $123,314 100.0% $113,962 100.0% $ 69,827 100.0%
======== ===== ======== ===== ======== ===== ======== =====

--------------------
1992
--------------------
Percentage
Amount of Total
-------- ----------
Gross Premiums Written
Casualty:
Excess of Loss ................ $18,024 42.6%
Pro Rata ...................... 11,215 26.5
Clash ......................... 2,936 6.8
------- -----
Total Casualty .................. 32,175 75.9
------- -----
Property:
Excess of Loss ................ 2,912 6.9
Pro Rata ...................... 2,787 6.6
Catastrophe ................... 4,469 10.6
------- -----
Total Property .................. 10,168 24.1
------- -----
Total Gross Premiums Written... $42,343 100.0%
======= =====
Net Premiums Written
Casualty:
Excess of Loss ................ $17,769 44.8%
Pro Rata ...................... 11,198 28.3
Clash ......................... 2,880 7.3
------- -----
Total Casualty .................... 31,847 80.4
------- -----
Property:
Excess of Loss ................ 2,221 5.6
Pro Rata ...................... 2,505 6.3
Catastrophe ................... 3,049 7.7
------- -----
Total Property .................... 7,775 19.6
------- -----
Total Net Premiums Written .... $39,622 100.0%
======= =====

Chartwell increased its percentage of property writings in its overall
mix of business for the year ended December 31, 1996 as compared to the year
ended December 31, 1995, principally as a result of continued expansion of
business in the international property marketplace and auto physical damage
associated with UK motor business written in Global Accounts. Chartwell
increased the amount of pro rata casualty business written in 1996 over 1995
primarily as a result of opportunities associated with workers compensation
programs from specialty writers.

During the year ended December 31, 1996, Chartwell received
approximately 39% of its gross reinsurance premiums written from four groups of
ceding companies, of which AON Corporation Group accounted for approximately
14%, American International Group accounted for approximately 12% through 28
treaties with 16 member companies, Somerset Marine accounted for approximately
7% and affiliates of Clarendon Insurance Group accounted for approximately 6%.
No other ceding company or group of affiliated ceding companies accounted for
more than 5% of Chartwell's gross reinsurance premiums written for the year
ended December 31, 1996, and no one reinsurance treaty accounted for more than
14% of Chartwell's gross reinsurance premiums written for such period.

During the year ended December 31, 1996, Chartwell received
approximately 53% of gross reinsurance premiums written from 5 reinsurance
brokers, of which AON Reinsurance Agency accounted for approximately 23%, E.W.
Blanch Co. accounted for approximately 11%, Alexander Reinsurance
Intermediaries, Inc. accounted for approximately 7%, Guy Carpenter & Co., Inc.

accounted for approximately 6%, and Willis Faber North America accounted for
approximately 6%. No other broker accounted for more than 5% of the company's
gross reinsurance premiums written for the year ended December 31, 1996.

In order to reduce the potential adverse effect arising from the
termination of any specific business relationship, Chartwell seeks business from
a large number of reinsurance brokers and ceding companies. While management
believes that its relationships with these reinsurance brokers and ceding
companies are excellent, the termination of all or a substantial number of these
relationships could have a material adverse effect on the business and
operations of Chartwell.

Retrocessional Arrangements

Chartwell utilizes retrocessions primarily to provide protection from
large or multiple losses and may in the future use additional retrocessions to
increase underwriting capacity. Chartwell seeks to establish long-term
relationships with its leading retrocessionaires in order to achieve continuity
and stability of coverage. Chartwell purchases property catastrophe coverage for
Global, Regional and Specialty Accounts business to provide coverage for losses
arising from an aggregation of claims under various insurance policies from a
single event. Chartwell's current property catastrophe program, effective
January 1, 1997, provides 100% coverage for $9.5 million of exposure in excess
of a $2.5 million retention.

Chartwell entered into a 10% quota share retrocession agreement
effective January 1, 1994, which was renewed at January 1, 1997, for its
non-standard automobile liability business written in Specialty Accounts. Under
this agreement, Chartwell will cede 10% of the premiums, losses and expenses
associated with that business. The amounts ceded under this agreement may be
greater than 10% (subject to a maximum of 40%) if Chartwell's overall premiums
to surplus ratio exceeds certain levels.

In recognition of the development of its marine portfolio, Chartwell
renewed its retrocessional marine program, as of April 1, 1996, which provides
$1.8 million of coverage, per risk or per event, in excess of a $0.3 million
retention. In addition, INSCORP provides specific reinsurance programs for each
of the programs underwritten.

Since Chartwell is contingently liable with respect to reinsurance
ceded in the event that a retrocessionaire is unable to meet its obligations
assumed under a retrocession agreement, the financial strength of each
retrocessionaire is evaluated. As of December 31, 1996, the reinsurance
recoverable balance of Chartwell Reinsurance of $36.0 million is attributable to
retrocessional arrangements with approximately 149 retrocessionaires. At
December 31, 1996, Chartwell Reinsurance had a reserve for uncollectable
reinsurance of $2.7 million.

As of December 31, 1996, the reinsurance recoverable balance of INSCORP
of $166.1 million was attributable to retrocessional arrangements with
approximately 460 retrocessionaires. At December 31, 1996, INSCORP had a reserve
for uncollectable reinsurance of approximately $3.0 million.

Claims

Chartwell's Claims Department analyzes loss exposure in order to
establish case reserves, pays claims and assists in the underwriting process by
reviewing the claims activities of prospective ceding companies. In performing
these functions, the claims department consults with Chartwell's underwriting
and actuarial departments. The claims department also assists the accounting
department in reporting Chartwell's retrocessional claims and in seeking
collection of such claims on a timely basis.

In evaluating loss exposure, Chartwell's Claims Department reviews loss
reports received from ceding companies to confirm that submitted claims are
covered under the contract terms, establishes reserves on an individual case
basis and monitors the adequacy of such reserves. The department also tracks
industry loss activity as well as other industry trends to facilitate
management's evaluation of Chartwell's overall risk profile.

Through its claims audit program, Chartwell provides advice and
direction regarding claims policy and administration, systems, procedures and
staffing to its ceding companies. Chartwell's policy of communicating its audit
findings to the management of ceding companies has served to reinforce and
enhance our client relationships.

During 1996, Chartwell established an Environmental Claims Unit to
evaluate the complex toxic tort and latent injury claims inherited through the
Merger. All claims defined in the following manner are handled by this unit:

1) Any claim involving either or both bodily injury and property damage
arising from contact with, inhalation of, or ingestion of a toxic
substance, gas, vapor, dust or free floating particle, or a
pharmaceutical product manufactured, sold, distributed or otherwise
placed into the claimant's environment.

2) Any claim involving damages to buildings, property, landfills, waste
sites, natural resources (e.g. rivers, harbors etc.) in which a
potentially hazardous substance or product had been installed,
deposited, discharged, escaped, dispersed or released.

On these losses, Chartwell's Environmental Claims Unit is performing
the appropriate due diligence review, which includes the physical inspection of
its cedent's claims files, additional informational requests, the research of
pertinent coverage issues and, where possible, the settlement of disputed losses
on a discounted basis.

Reserves
General

A significant period of time may elapse between each of: (i) the
occurrence of an event causing an insured loss; (ii) the reporting of the loss
to the ceding company; (iii) the reporting of the loss by the ceding company to
Chartwell; (iv) the ceding company's adjustment and payment of the loss; and (v)
payment to the ceding company by Chartwell. To recognize liabilities for unpaid
losses, Chartwell establishes loss and loss expense reserves which are balance
sheet liabilities representing estimates of future amounts needed to pay claims
and related expenses with respect to insured events. Loss and LAE reserves have
two components: case loss and LAE reserves, which are estimates of future loss
and LAE with respect to insured events that have been reported to the

reinsurer, and incurred but not reported reserves ("IBNR"). IBNR reserves are
actuarially determined and reflect (i) an estimate of the ultimate loss amount
that will be paid by the reinsurer on claims that have occurred but have not yet
been reported to the reinsurer and (ii) the expected change in the value of
those claims that have already been reported to the reinsurer.

When a claim is reported to the ceding company, its claims personnel
establish a liability for the estimated amount of the ultimate settlement cost
of the reported claim. The estimate reflects the judgment of the ceding company,
based on the experience and knowledge of its claims personnel, regarding the
nature and value of the claim. The ceding company may periodically adjust the
amount of case reserves as additional information becomes known or partial
payments are made.

Upon notification of loss from a ceding company, Chartwell establishes
case reserves, including LAE, based upon Chartwell's share of the amount of
reserves established by the ceding company and Chartwell's independent
evaluation of the loss. Where appropriate, Chartwell establishes case reserves
in excess of its share of the reserves established by the ceding company. These
reserves are periodically reviewed by Chartwell's claims department based on its
evaluation of reports from the ceding company and its audits of claims
activities of the ceding company.

During the claims settlement period, which may extend over a protracted
period of time, additional facts regarding claims and trends may become known.
As Chartwell becomes aware of new information, it may adjust its estimates of
its ultimate liability. The revised estimates of ultimate liability may prove to
be less than or greater than the actual settlement or award amount for which the
claim is finally discharged.

Actuarial Methods

Chartwell has an experienced in-house actuarial staff that performs
analyses of Chartwell's historical claims and underwriting experience.
Chartwell's methods for determining and establishing reserves are continually
reviewed and updated.

Chartwell utilizes the two most common methods of actuarial evaluation
employed within the insurance industry, the Bornhuetter-Ferguson method and the
loss development method. The Bornhuetter-Ferguson method involves the
application of selected loss ratios to Chartwell's earned premiums to determine
estimates of ultimate expected loss and LAE for each underwriting year.
Multiplying expected losses by underwriting year by a selected loss reporting
pattern gives an estimate of reported and unreported IBNR losses. When the IBNR
is added to the loss and LAE amounts with respect to claims that have been
reported to date, an estimated ultimate expected loss results. This method
provides a more stable estimate of IBNR that is insulated from wide variations
in reported losses. In contrast, the loss development method extrapolates the
current value of reported losses to ultimate expected losses by using selected
reporting patterns of losses over time. The selected reporting patterns are
based on historical information (organized into loss development triangles) and
are adjusted to reflect the changing characteristics of the book of business
written by Chartwell.

Chartwell employs a combination of both methods outlined above. For the
older years, when reported losses have generally stabilized, Chartwell gives
greater weight to the loss development result. For the more recent years, when
reported loss activity is either less reliable in the aggregate or non-existent,
Chartwell gives greater weight to the Bornhuetter-Ferguson method. Because
losses are reported relatively earlier for property and other short tail
coverages, the weighting for those types of coverages shifts from the
Bornhuetter-Ferguson method to the loss development method at an earlier point
than for casualty and other long tail coverages.

In the reserve setting process, Chartwell includes provisions for
inflation and "social inflation" if appropriate, as losses are generally not
determined until some time in the future. Chartwell continually monitors
legislative activity and evaluates the potential effect of any legislative
changes on its reserve liabilities.

Chartwell's reserves are carried at the full amount estimated for
ultimate expected losses and LAE without any discount to reflect the time value
of money in accordance with both Statutory Accounting Practices ("SAP") and
Generally Accepted Accounting Principles ("GAAP").

Chartwell's actuarial department regularly performs loss reserve
analyses for Chartwell Reinsurance and INSCORP. Such loss reserves are also
reviewed by Milliman & Robertson, Inc. ("M&R"), an independent actuarial
consulting firm, which prepared a Statement of Actuarial Opinion as of December
31, 1996 for each of Chartwell Reinsurance and INSCORP (the "M&R Statements").
The M&R Statements were prepared solely for the use of and only to be relied
upon by Chartwell and the various state insurance departments with which
Chartwell files annual statements. The M&R Statements were not prepared for the
use of investors.

Analysis of Reserve Development

The following table presents the development of reserves of Chartwell
Reinsurance for losses and LAE for calendar years 1986 through 1996. The first
line of the table sets forth the estimated liability for losses and LAE for
claims arising in each of the indicated years as recorded on the balance sheet
of Chartwell Reinsurance as of the end of years 1986-1994, including IBNR. For
the years ended December 31, 1995 and 1996, the first line includes the
consolidated reserves of Chartwell Reinsurance and INSCORP. The upper portion of
the table shows the cumulative amounts paid as of the end of each successive
year for such claims. The bottom portion of the table also shows the
re-estimated amount of the previously recorded liability based on experience as
of the end of each succeeding year, including cumulative payments. The estimates
are readjusted as more information becomes known about the frequency and
severity of claims for each year. A redundancy (deficiency) exists when the
original liability estimate is greater (less) than the re-estimated liability at
the end of a year. The cumulative redundancy (deficiency) shown in the table is
the aggregate net change in estimate over the period of years subsequent to the
calendar year reflected at the top of the particular columns.

In evaluating the information in the table, it should be noted that
each amount entered incorporates the effects of all changes in amounts entered
for prior periods. Thus, if the 1990 estimate for a previously incurred loss was
$150,000 and the loss was reserved at $100,000 in 1984, the $50,000 deficiency
(later estimate minus original estimate) would be included in the cumulative
redundancy (deficiency) in each of the years 1986-1990 shown in table. It should
further be noted that the table does not present accident or policy year
development data. In addition, conditions and trends that have affected the
development of liability in the past may not necessarily recur in the future.
Accordingly, it may not be appropriate to extrapolate future redundancies or
deficiencies from the table.

Analysis of Loss and LAE
Reserve Development
(Dollars in thousands)
Year Ended December 31,

-----------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992
---- ---- ---- ---- ---- ---- ----

Reserves for Loss and LAE (1) .... $ 81,094 $ 135,818 $ 156,869 $ 130,939 $ 126,746 $ 126,292 $ 189,386
Cumulative paid as of:
One year later ................. 11,339 15,557 39,084 15,946 19,745 9,074 31,354
Two years later ................ 23,620 51,108 53,101 34,928 26,338 24,227 49,686
Three years later .............. 54,996 62,624 69,914 40,622 39,933 37,935 68,147
Four years later ............... 63,743 76,432 75,034 52,514 52,436 51,135 78,135
Five years later ............... 74,093 79,158 86,463 63,479 62,922 56,822
Six years later ............... 73,978 88,789 97,020 72,347 68,070
Seven years later ............. 79,723 97,869 104,840 76,481
Eight years later .............. 86,928 105,579 108,913
Nine years later ............... 94,059 109,376
Ten years later ................ 96,919
Reserves re-estimated as of:
One year later ................. 89,490 135,624 158,048 129,333 125,919 126,926 192,496
Two years later ................ 94,678 137,539 156,185 128,655 127,627 126,193 192,363
Three years later .............. 94,552 134,107 155,224 132,406 128,740 127,102 194,876
Four years later ............... 98,013 136,649 161,868 132,783 129,707 127,459 193,369
Five years later ............... 101,386 143,223 159,912 133,112 129,989 126,004
Six years later ............... 108,561 142,078 160,195 132,474 129,996
Seven years later ............. 108,646 146,443 162,142 133,808
Eight years later .............. 118,433 149,830 163,268
Nine years later ............... 126,055 152,695
Ten years later ................ 128,884
Cumulative redundancy (deficiency) $ (47,790) $ (16,877) $ (6,399) $ (2,869) $ (3,250) $ 288 $ (3,983)
Cumulative % ..................... (58.9%) (12.4%) (4.1%) (2.2%) (2.6%) (0.2%) (2.1%)

---------------------------------------------------
1993 1994 1995 1996
---- ---- ---- ----

Reserves for Loss and LAE (1) .... $ 201,013 $ 232,733 $ 741,467 $ 747,858
Cumulative paid as of:
One year later ................. 30,085 46,363 157,172
Two years later ................ 57,368 73,462
Three years later .............. 73,926
Four years later ...............
Five years later ...............
Six years later ...............
Seven years later .............
Eight years later ..............
Nine years later ...............
Ten years later ................
Reserves re-estimated as of:
One year later ................. 204,094 233,738 754,286
Two years later ................ 206,965 232,964
Three years later .............. 205,369
Four years later ...............
Five years later ...............
Six years later ...............
Seven years later .............
Eight years later ..............
Nine years later ...............
Ten years later ................
Cumulative redundancy (deficiency) $ (4,356) $ (231) $ (12,819)
Cumulative % ..................... (2.2%) (0.1%) (1.7%)

- ----------

(1) Reserves for loss and LAE are presented net of reinsurance
recoverables for the periods 1986 through 1991. In 1992, Chartwell adopted SFAS
No. 113 which, among other things, requires Chartwell to record its reserves for
unpaid losses and LAE without reduction for amounts that would be recovered from
retrocessionaires. The amount recoverable from retrocessionaires is recorded as
an asset on Chartwell's balance sheet. The net of such asset and the reserves
for loss and LAE is $575.5, $561.6, $197.3, $167.4 and $153.4 million at
December 31, 1996, 1995, 1994, 1993 and 1992, respectively.

Chartwell Reinsurance entered the property and casualty reinsurance
market in 1979. Because Chartwell reinsurance was a new participant in the
reinsurance market, the business available to Chartwell Reinsurance prior to
1986 was not of the same quality as that available to more established market
participants and was thus subject to relatively greater loss potential.
Chartwell's entrance into the market also occurred during a period of extreme
price competition when the industry as a whole underestimated significantly the
potential for loss on business written. Thus, Chartwell Reinsurance and the
reinsurance industry have experienced considerable adverse loss development for
business written prior to 1986.

In the latter part of 1984, Chartwell Reinsurance began to strengthen
management resources and to re-underwrite its business in order to position
itself for an upturn in the underwriting cycle. In addition, Chartwell
Reinsurance established an internal actuarial function at the end of 1986.
Deficiencies in balance sheet loss reserves in 1986 and 1987 were affected
significantly by facultative business written prior to 1986 and an assumed
treaty from one client that has been commuted. Deficiencies arising from these
two sources of business for 1986 and 1987 totaled $20.3 million and $13.5
million, respectively. The remaining loss reserve deficiencies have developed
from casualty pro rata and casualty excess treaties. This adverse development is
attributable primarily

to business written prior to 1985 when policy forms did not typically limit
coverages for latent liabilities relating to asbestos and environmental
pollution claims. After adjustment for the adverse development attributable to
the two previously described business sources, the remaining balance sheet loss
reserves have been relatively stable since December 31, 1987. Reserves on
accident years since 1986 have developed modest redundancies or deficiencies,
except for 1987 and 1988 which have developed redundancies of approximately
$22.6 million and $10.9 million, respectively, since the initial recording.

Chartwell Reinsurance has commuted two significant treaties which
distort the payment patterns represented in the table. In 1989, Chartwell
Reinsurance commuted an assumed treaty for $18.0 million affecting calendar
years from 1986 to 1989. The commutation ensured that no further adverse
development on that treaty occurred in subsequent years. In 1992, Chartwell
Reinsurance commuted a retrocession arrangement which resulted in a reduction of
net paid losses for the prior calendar years of $4.4 million. In 1993, Chartwell
Reinsurance paid approximately $12.0 million in gross losses related to
Hurricanes Andrew and Iniki. In 1995, Chartwell Reinsurance paid $10.9 million
to settle three large claims from business written prior to 1986 and to commute
a group of assumed contracts from business written prior to 1995.

The gross deficiency of $12.8 million at December 31, 1996 becomes a
net redundancy of $1.7 million after accounting for reinsurance recoverables.
(See Note 11). At December 31, 1996, the GAAP basis reserves, before reduction
for ceded reinsurance, were $747.9 million compared to SAP basis reserves,
before reduction for ceded reinsurance, of $749.1 million. The difference is due
to adjustments for foreign currency transactions. At December 31, 1996, 1995 and
1994, GAAP basis reserves, net of amounts recoverable from retrocessionaires,
were $575.5, $561.6 and $197.3 million, respectively, compared to SAP net
reserves of $537.2, $532.2 and $179.2 million, respectively. The differences
between GAAP and SAP amounts are due to the implementation of Statement of
Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" (SFAS No. 113)
($39.5, $36.1 and $22.2 million for 1996, 1995 and 1994, respectively), the
recognition of future amounts recoverable under a reserve indemnification
agreement entered into by the Company in 1992 (the "Reserve Indemnification
Agreement") ($3.7 and $4.1 million for 1995 and 1994, respectively) and a
foreign exchange adjustment of $1.2 and $2.9 million in 1996 and 1995,
respectively.

Activity for loss and loss adjustment expenses as of December 31, 1996,
1995 and 1994 is herein incorporated by reference to Note 11 of the consolidated
financial statements of Chartwell included elsewhere herein.

Management believes that Chartwell's reserves are adequate. However,
the process of estimating reserves is inherently imprecise and involves an
evaluation of many variables, including potentially unpredictable social and
economic conditions. Accordingly, there can be no assurance that Chartwell's
ultimate liability will not vary significantly from amounts reserved. The
inherent uncertainties of estimating such reserves are greater for reinsurers
than for primary insurers, primarily due to the longer-term reporting nature of
the reinsurance business, the diversity of development patterns among different
types of reinsurance, the necessary reliance on ceding companies for information
regarding reported claims and differing reserving practices among ceding
companies. Reserves also include provisions for latent injury or toxic tort
claims that cannot be estimated with traditional reserving techniques. Because
of inconsistent court decisions in federal and state jurisdictions and the wide
variation among insureds with respect to underlying facts and coverage,
uncertainty exists with respect to these claims as to liabilities of ceding
companies and, consequently, reinsurance coverage. Management believes that
Chartwell Reinsurance's exposure to such latent losses is lessened because of
its relatively recent entry into the reinsurance business in 1979, its low
historical levels of premium volume prior to 1985 and its retrocessional
programs. In addition, management believes that INSCORP's exposure to adverse
development related to latent losses is lessened because a significant portion
of the $25 million net reserve strengthening recorded by INSCORP in 1995 was in
respect of such losses. In addition, the amount payable under the Contingent
Interest Notes (the "CI Notes") is subject to reduction in the event of such
adverse reserve development.

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

Year Ended December 31,
----------------- ----------------- -----------------
1996 1995 1994
----------------- ----------------- -----------------
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
(Dollars in thousands)

Liability, beginning of year ... $66,936 $46,450 $ 8,955 $ 4,942 $ 7,136 $ 4,459
Incurred during the year ....... 9,482 6,538 723 469 2,105 756
Less amount paid during the year 10,701 6,030 691 443 286 273
Purchased liabilities (1) ...... 57,949 41,482
------- ------- ------- ------- ------- -------
Liability, end of year ......... $65,717 $46,958 $66,936 $46,450 $ 8,955 $ 4,942
======= ======= ======= ======= ======= =======
Deficiency for year ............ $ 9,482 $ 6,538 $ 723 $ 469 $ 2,105 $ 756
======= ======= ======= ======= ======= =======

- ----------
(1) Represents liabilities assumed as a result of the merger of Chartwell and
Piedmont.

At December 31, 1996 and 1995, Chartwell Reinsurance carried loss and
LAE reserves of $310.0 and $262.2 million, respectively ($276.7 and $228.1
million after reduction for reinsurance recoverable), of which $8.0 and $9.0
million gross, respectively ($4.9 and $4.9 million after reduction for
reinsurance recoverable), were loss reserves and allocated LAE attributable to
asbestos claims and environmental pollution claims. For the three years ended
December 31, 1996, the effect of asbestos and environmental pollution claims was
not material to Chartwell Reinsurance's results of operations.

At December 31, 1996 and 1995, INSCORP carried loss and LAE reserves of
$437.9 and $475.2 million ($298.8 and $315.4 million after reduction for
reinsurance recoverable), of which $57.7 and $57.9 million ($42.1 and $41.5
million after reduction for reinsurance recoverable) were case reserves and
allocated LAE attributable to asbestos claims and environmental pollution
claims.

The 1996 net deficiency of $6.5 million for asbestos and environmental
reserves results from development on business underwritten by INSCORP prior to
the Merger and, therefore, is subject to the protection provided by the CI
Notes, as described below. However, due to the favorable development on
non-asbestos and environmental exposed business underwritten by INSCORP prior to
the Merger, there was no net adverse development on the reserves covered by the
CI Notes for the year ended December 31, 1996.

Reserve Indemnification Agreement

In connection with the 1992 Acquisition, Chartwell Re entered into the
Reserve Indemnification Agreement with NWNL and its parent company, ReliaStar
Financial Corporation ("RLR") pursuant to which NWNL and RLR agreed jointly and
severally to provide to Chartwell Re limited indemnification and reimbursement
for adverse development of the net loss and LAE reserves and related accounts
(the "Covered Reserves") of Chartwell Reinsurance for accident years ending on
or before December 31, 1991 (the "Covered Years"). Pursuant to the Reserve
Indemnification Agreement as originally drafted, if Chartwell Reinsurance's
Covered Reserves as of December 31, 1996 for the Covered Years were greater than
its Covered Reserves as of December 31, 1991, RLR and NWNL would jointly and
severally indemnify and reimburse Chartwell Re at that time in an amount equal
to (i) 85% of the first $20 million of such difference in excess of $100,000
plus (ii) 60% of the next $10 million of such difference, up to a maximum amount
of $23 million, representing 18% of loss reserves as of December 31, 1991. If
Chartwell Reinsurance's Covered Reserves as of December 31, 1996 for the Covered
Years were less than its Covered Reserves as of December 31, 1991, Chartwell Re
agreed to reimburse NWNL at that time in an amount equal to fifty percent (50%)
of the first $10 million of such difference in excess of $100,000, up to a
maximum amount of $5 million. The Reserve Indemnification Agreement, which by
its terms was scheduled to be settled as of the end of 1996, was settled early
by mutual agreement with RLR. On June 28, 1996, Chartwell Re received $7,900,000
as a final settlement of the Reserve Indemnification Agreement. The settlement
did not materially affect operating results for the year.

Contingent Interest Notes

The CI Notes are designed to provide Chartwell Re with protection
against adverse development of INSCORP's reserves for losses and loss adjustment
expenses. In the event that there is no adverse development, Chartwell Re will
be required to pay the holders of the CI Notes approximately $55 million in
contingent interest. This contingent interest payment is in addition to the $1
million principal amount of the CI Notes and interest on such principal amount
at 8% per annum (collectively, the "Fixed Amount") which Chartwell Re in any
event must pay at maturity or earlier redemption of the CI Notes.

In general, assuming the CI Notes are settled at maturity, the
contingent interest will be equal to $55 million (a) less an amount equal to (i)
the amount of any adverse development of the loss and LAE reserves and related
accounts (including certain reinsurance recoverable, commissions and unearned
premiums) of INSCORP recorded as of March 31, 1995, minus (ii) $25 million, (b)
plus the amount of certain tax benefits received or recorded by Chartwell Re as
a result of the amount determined pursuant to clause (a) above. The amount so
calculated may not be greater than $55 million nor less than a minimum amount
equal to the lesser

of (a) $10 million less the Fixed Amount and (b) the tax benefits referred to
above. In the event that the CI Notes are settled prior to maturity, the
foregoing formula will in general apply, except that the $55 million maximum
amount of the CI Notes will be reduced to an amount equal to $55 million
discounted back from June 30, 2006 at a discount rate of 8% per annum,
compounded annually, and the tax benefits will be calculated in a prescribed
manner.

Investments

Chartwell's long term investment objectives are primarily to maximize
after-tax operating return and secondarily to actively manage the portfolio for
total return when fixed income securities market rates allow such activity.
Complementing these two objectives, Chartwell's investment policy also seeks to
achieve appropriate diversification and safety of principal while maintaining
sufficient liquidity in cash and short term investments to meet its obligations
on a timely basis. Chartwell's investment portfolio consists primarily of
investment-grade fixed maturity debt securities. As of December 31, 1996,
approximately 96.1% of the bond portfolio was rated A or better by Moody's.

J.P. Morgan Investment Management Inc. and Scudder Insurance Asset
Management, a division of Scudder, Stevens & Clark, act as investment advisors
to Chartwell. Pursuant to investment management agreements with Chartwell, these
advisors implement the investment policies established and approved by the Board
of Directors of Chartwell. Chartwell's investment policy is to maintain a
portfolio with an average rating of A or better from Moody's and to retain such
securities for sale in response to changes in interest rates and liquidity
needs. However, it is not Chartwell's policy to sell securities merely to
generate profits on short-term differences in price. The performance of these
advisors and the fees associated therewith are periodically reviewed by both
management and the Board of Directors of Chartwell. Investments by Chartwell
Reinsurance, INSCORP and Dakota must comply with the insurance laws of the
States of Minnesota, New York and North Dakota, their respective domiciliary
states.

The following table summarizes the investments (at carrying value) of
Chartwell for 1996 and 1995 and Chartwell Re for 1994:

Composition of Investment Portfolio
(Dollars in thousands)
December 31,

Fixed Income Securities
Corporate ...................................... $200,899 29.8% $199,068 36.2% $ 67,745 28.4%
U.S. Government and Government Agency (1) ...... 249,416 37.0 251,373 45.7 143,935 60.4
Obligations of States and Political Subdivisions 134,769 20.0 50,715 9.2 22,124 9.3
Foreign Government and Government Agency ....... 23,807 3.5 14,642 2.7 4,049 1.7
Redeemable Preferred Stocks .................... 33,773 5.0
Other(2) ......................................... 30,896 4.7 33,837 6.2 278 0.2
-------- ---------- -------- --------- -------- ---------
Total Investments ................................ $673,560 100.0% $549,635 100.0% $238,131 100.0%
======== ========== ======== ========= ======== =========
Cash & Cash Equivalents(3) ....................... $ 50,343 $152,507 $ 37,005
======== ======== ========

- ----------
(1) At December 31, 1996, 1995 and 1994, $214.3, 151.8 and $75.8 million of
these securities were backed by the full faith and credit of the U.S.
Government and $35.7, $99.6 and $68.1 million were obligations of issuing
agencies.

(2) At December 31, 1995, INSCORP's $379.9 million investment portfolio included
equity securities carried at $32.3 million. Previous to this, Chartwell had
a limited amount of equity investments. In 1996, Chartwell made a commitment
to invest $15 million in a private equity fund, High Ridge Capital Limited
Partnership, which fund makes investments in the insurance industry.

(3) In the period between August 7, 1995 and December 13, 1995, the management
of Piedmont began selling investments that would not be compatible with
Chartwell's investment policy. The proceeds from these sales along with
other operating cash flows were invested in cash equivalent securities to
allow Chartwell a maximum amount of flexibility to reinvest these funds in a
manner consistent with its investment policy.

The following table reflects investment results for Chartwell for 1996
and for Chartwell Re for 1995 and 1994:

Investment Results(1)
(Dollars in thousands)

Year Ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
Average Invested Assets .................. $ 716,004 $ 299,307 $ 259,054
Net Investment Income(2) ................. $ 43,598 $ 19,907 $ 14,726
Net Effective Yield(3) ................... 6.2% 6.7$ 5.7%
Net Realized Capital Gains (Losses) ...... $ 1,157 $ 3,199 $ (3,794)
Effective Yield Including Realized
Capital Gains (Losses)(4) ............... 6.3% 7.7% 4.2

(1) Because the Merger was completed on December 13,1995, the foregoing table of
Investment results does not included invested assets or investment income of
INSCORP for 1995 or 1994.

(2) After investment expenses, excluding net realized investment gains (losses).

(3) Net investment income for the year-end period divided by average invested
assets for the same period.

(4) Net investment income for the year-end period plus net realized capital
gains (losses) for the period divided by average invested assets for the
same period.

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

Composition of Fixed Income Security Portfolio
By Rating (1)
(Dollars in thousands)

December 31, 1996
--------------------
Amount Percent
------ -------
U.S. Government and Government Agency
Fixed Income Securities ............................... $ 249,416 38.8
Aaa/Aa.................................................. 210,514 32.8
A/Baa................................................... 132,820 20.7
Ba...................................................... 16,141 2.5
Redeemable Preferred Stock ............................. 33,773 5.2
--------- -----
Total............................................ $ 642,664 100.0%
========= =====
- ----------
(1) Rating as assigned by Moody's. Such ratings are generally assigned upon the
issuance of the securities and are subject to revision on the basis of
ongoing evaluations. Ratings in the table are as of the date indicated.
Those government guaranteed securities that are specifically rated are
included in the appropriate rating category.

Moody's rating system utilizes nine symbols to indicate the relative
investment quality of a rated bond. Aaa rated bonds are judged to be of the best
quality and are considered to carry the smallest degree of investment risk. Aa
rated bonds are also judged to be of high quality by all standards. Together
with Aaa bonds, these bonds comprise what are generally known as high grade
bonds. Bonds rated A possess many favorable investment attributes and are
considered to be upper medium grade obligations. Baa rated bonds are considered
as medium grade obligations; they are neither highly protected nor poorly
secured. Bonds rated Ba or lower (those rated B, Caa, Ca and C) are considered
to be too speculative to be of investment quality.

National Association of Insurance Commissioners ("NAIC") investment
ratings are provided annually at December 31 of each year. At December 31, 1996
and 1995, 95.5% and 97.9% respectively, of Chartwell's fixed maturity
investments were rated "Class 1," and the remaining 4.5% and 2.1%, respectively,
of Chartwell's fixed maturity investments were rated "Class 2," the two highest
ratings assigned by the NAIC.

The following table indicates the composition of Chartwell's fixed
income security portfolio (at carrying value) by time to maturity (1):

December 31, 1996
-------------------
Amount Percent
1 year or less ......................................... $ 21,078 3.3%
Over 1 year through 5 years ............................ 158,592 24.7
Over 5 years through 10 years .......................... 169,504 26.4
Over 10 years through 20 years ......................... 56,880 8.8
Over 20 years .......................................... 57,154 8.9
Mortgage backed securities ............................. 179,456 27.9
-------- -----
Total ........................................ $642,664 100.0%
======== =====

- ----------
(1) Based on stated maturity dates with no repayment assumptions.

Certain mortgage backed securities are subject to prepayment risk.
Mortgage backed securities represent 24.8% of Chartwell's total investments and
cash and 27.9% of Chartwell's fixed income securities portfolio at December 31,
1996. During periods of significant interest rate volatility, the underlying
mortgages may prepay more quickly than anticipated. If the repayment of
principal occurs earlier than anticipated during periods of declining interest
rates, investment income may decline due to the reinvestment of these funds at
the lower current market rates. The risk is similar to corporate bonds being
called prior to maturity due to lower interest rates. Management does not
believe that the prepayment risk associated with Chartwell's portfolio of
mortgage backed securities is significant.

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

Distribution of Mortgage Backed Securities Portfolio
By Type (1)
(Dollars in thousands)

December 31, 1996
------------------------------
Estimated
Market Amortized
Value Cost Par Value
----- ---- ---------
Collateralized Mortgage Obligations ........... $ 57,336 $ 57,040 $ 58,306
Pass-throughs (primarily GNMA, FNMA and FHLMC) 122,120 122,707 122,230
-------- -------- --------
Total ......................................... $179,456 $179,747 $180,536
======== ======== ========

- ----------
(1) At December 31, 1996, agency backed securities represented 91.8% of
Chartwell's mortgage backed investments. Other mortgage backed securities
represented 8.2% . These other mortgage backed securities are rated either
Aaa or A as assigned by Moody's. Such ratings equate with the NAIC's
Securities Valuation Office ("SVO") rating Class 1 which is the highest
rating category used by the SVO.

Competition

The reinsurance and insurance business is highly competitive.
Competition with respect to the types of reinsurance and insurance in which
Chartwell is engaged is based on many factors including perceived overall
financial strength of the insurer, ratings of the insurer by A.M. Best,
underwriting expertise, reputation and experience in the lines written, premiums
charged, other terms and conditions of the reinsurance offered, services
offered, and speed of claims payments.

Chartwell competes with numerous international and domestic reinsurance
and insurance companies. These competitors, many of which have substantially
greater financial and staff resources than Chartwell, include independent
reinsurance companies, as well as subsidiaries, affiliates or reinsurance
departments of established insurance companies and underwriting syndicates. As
indicated by data compiled by A.M. Best, broker market reinsurers and direct
reinsurers historically wrote 70% and 30%, respectively, of the aggregate net
treaty premiums written in the United States. Chartwell competes directly with
other broker market reinsurers for business obtained through reinsurance brokers
and, because reinsurance brokers must compete with direct writers for business
from ceding companies, Chartwell also competes indirectly with direct writers.

While the reinsurance industry has traditionally had relatively low
barriers to entry, the reinsurance industry, including the broker market, is
currently undergoing consolidation. Management believes that in the next few
years fewer reinsurance brokerage firms will place a greater proportion of the
brokered business. In addition, because of concerns regarding financial security
and the ease of administration, reinsurance brokers will also seek to reduce the
number of reinsurance companies with which they place

business. Chartwell's management believes that, as a consequence, a reinsurer's
relative financial strength will, in the future, be of greater importance as a
competitive factor. Management believes that the increase of Chartwell
Reinsurance's statutory surplus to $238 million at year end 1996 has enhanced
its position in the marketplace.

Currently, Chartwell Reinsurance and INSCORP are rated "A" (Excellent")
and "A-" (Excellent), respectively, by A.M. Best. The ratings assigned by A.M.
Best are based upon factors of concern to policyholders, agents and
intermediaries and are not directed toward the protection of investors. Change
in any such rating is at the discretion of A.M. Best.

Chartwell may, in the future, face additional competition from other
well-capitalized companies or from market participants that may, in the future,
devote more of their capital to the reinsurance business.

Insurance Regulation
General

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

Insurance Holding Company Systems Regulations

Chartwell and Chartwell Reinsurance are subject to regulation pursuant
to the insurance holding company systems statutes of Minnesota. INSCORP is also
subject to regulation pursuant to the insurance holding company laws of New
York, as is Chartwell as INSCORP's parent. Dakota is subject to similar holding
company requirements pursuant to North Dakota law. While the insurance holding
company systems laws and regulations vary from state to state, they generally
require an insurance holding company and insurers and reinsurers that are
members of such insurance holding company's system to register with the state
regulatory authorities, to file with those authorities certain reports
disclosing information including their capital structure, ownership, financial
condition, certain intercompany transactions including material transfers of
assets and intercompany business agreements, and to report material changes in
such information. Such laws may also require that intercompany transactions be
fair and reasonable and that an insurer's policyholder surplus following a
dividend distribution to affiliated stockholders be adequate to meet its
financial needs.

In general, state insurance holding company systems statutes also
require prior notice to, or regulatory agency approval of, direct or indirect
changes in control of ownership of a domestic insurer or reinsurer. Under
Minnesota, New York and North Dakota law, no person, corporation or other entity
may acquire, directly or indirectly, a controlling interest in the capital stock
of a domestic insurer or reinsurer unless such person, corporation or other
entity has obtained prior approval from the insurer's domestic regulator
("Regulator") for such acquisition of control. Pursuant to the Minnesota, New
York and North Dakota insurance holding company systems statutes, any person,
corporation or other entity acquiring, controlling or holding with the power to
vote, directly or indirectly, ten percent or more of the voting securities of an
insurance company (or reinsurer), is presumed to have "control" of such company.
The party may rebut this presumption by filing with the Regulator a disclaimer
of affiliation. Other jurisdictions where Chartwell Reinsurance, INSCORP or
Dakota are licensed to transact business may have similar requirements for an
acquisition of control of insurers or reinsurers licensed or authorized in such
jurisdictions. Additional requirements in such jurisdictions may include
relicensing or subsequent approval for renewal of existing licenses upon an
acquisition of control.

Restrictions on Dividends

The principal source of funds for servicing debt of the Company is
derived from receipt of dividends from Chartwell Reinsurance. Under Minnesota
insurance law, Chartwell Reinsurance may pay dividends only from its earned
surplus, which is defined as unassigned funds (surplus) as reported in the
statutory financial statement filed by Chartwell Reinsurance with the Minnesota
Department of Commerce for the most recent period. As of December 31, 1996,
Chartwell Reinsurance reported unassigned funds (surplus) in the amount of $54.5
million. Subject to such constraints, Chartwell Reinsurance may declare and pay
non-extraordinary dividends, subject to certain notice requirements to the
Commissioner, and extraordinary dividends to stockholders subject to certain
notice and approval requirements by the Commissioner. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." With respect to payments of all
dividends to affiliated shareholders, following the payment of such a dividend,
Chartwell Reinsurance's policyholders' surplus must be reasonable in relation to
its outstanding liabilities and adequate for its financial needs.

For 1997, Chartwell Reinsurance is permitted to declare and pay
ordinary dividends to the Company in the aggregate amount of $23.8 million,
subject to the notice requirements on dividend declarations and payments. No
dividends were paid in 1996, 1995 or 1994.

North Dakota law provides that a licensed insurer may pay dividends
from earned surplus without the prior approval of the Regulator. At December 31,
1996, $146,179 was available for the payment of an ordinary dividend.

For a description of the dividend restrictions applicable to INSCORP,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."

Investment Limitations

State insurance laws and regulations prescribe the kind, quality and
concentration of investments that are permissible for insurance and reinsurance
companies domiciled in such state. The purpose of these laws is to protect the
interests of policyholders, claimants, creditors and the general public by
promoting the safety, yield and growth of an insurance company's investment
principal, the liquidity necessary to meet the insurance company's expected
business needs, and investment diversification. For example, under Minnesota,
New York and North Dakota law, non-life insurance companies, such as Chartwell
Reinsurance, INSCORP and Dakota are authorized to invest in specifically
prescribed investments. Subject to certain conditions, such investments include
federal, state and municipal government obligations, bank obligations,
obligations and stocks of corporations and business trusts, real estate and
mortgages on real estate, collateral loans, options, foreign and other
investments. Such investment obligations, however, may not be in default as to
payments of principal and interest. Under Minnesota law, non-life insurance
companies may invest unrestricted surplus in securities or property of any kind,
without limitation, except as may be imposed on business corporations in
general. Non-life insurance companies are subject to recently adopted risk-based
capital guidelines which could influence investment decisions. See "--Risk-based
Capital." Management of Chartwell believes that Chartwell Reinsurance, INSCORP
and Dakota are in compliance with all applicable state insurance investment laws
for non-life insurance companies.

Regulatory Examinations

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

Risk-based Capital

In order to enhance the regulation of insurer solvency, the NAIC
adopted risk-based capital requirements for property and casualty insurance and
reinsurance companies commencing with filings made in 1995 covering the 1994
year. These RBC requirements are designed to monitor capital adequacy and to
raise the level of protection that statutory surplus provides for policyholders.
The RBC formula measures four major areas of risk facing property and casualty
insurers: (i) underwriting risk, which is the risk of errors in pricing and
reserves; (ii) asset risk, which is the risk of asset default for fixed income
assets and loss in market value for equity assets; (iii) credit risk, which is
the risk of losses from unrecoverable reinsurance and the inability of insurers
to collect agents' balances and other receivables; and (iv) off-balance sheet
risk, which is primarily the risk created by excessive growth. Insurers and
reinsurers having less statutory surplus than that required by the RBC formula
will be subject to varying degrees of regulatory action depending on the level
of capital inadequacy.

The RBC formula provides a mechanism for the calculation of an
insurance company's Authorized Control Level RBC and its total adjusted capital.
The formula sets forth the points at which a commissioner of insurance is
authorized and expected to take regulatory action. The first level is known as
the Company Action Level RBC, which is set at twice the Authorized Control Level
RBC. The second level is the Regulatory Action Level RBC, set at 1.5 times the
Authorized Control Level RBC. The third is the Authorized Control Level RBC, and
the fourth is the Mandatory Control Level RBC, set at 70 percent of the
Authorized Control Level RBC.

If an insurance company's adjusted capital is higher than or equal to
the Regulatory Action Level RBC but below the Company Action Level RBC, the
insurance company must submit to its commissioner of insurance an RBC plan which
shall contain, among other things, proposals of corrective action. If an
insurance company's adjusted capital is higher than or equal to the Authorized
Control Level RBC but lower than the Regulatory Action Level RBC, the
commissioner of insurance shall perform any examination or analysis as deemed
necessary of the insurer's business and operations and issue any appropriate
corrective orders to address the insurance company's financial problems. If an
insurer's adjusted capital is higher than or equal to the Mandatory Control
Level RBC but lower than the Authorized Control Level RBC, the commissioner may
place the insurer under regulatory control. If the insurance company's adjusted
capital falls below the Mandatory Control Level RBC, the commissioner will be
required to place the insurer under regulatory control. At December 31, 1996,
the adjusted capital of each of Chartwell Reinsurance and INSCORP was higher
than the Company Action Level RBC, and as a result no regulatory action is
required. Should a future deficiency occur, Chartwell will be subject to an
increased level of regulatory attention and, depending on the capital
deficiency, possibly to actual control by the appropriate regulatory
authorities. There can be no assurance that any such deficiency will not occur
in the future.

Possible Legislative and Regulatory Changes

The insurance and reinsurance industry is regulated at the state level.
In recent years, numerous proposals for regulatory and legislative change have
been considered by the states and the NAIC reflecting the concern of the NAIC
with the financial

solvency of insurers. Issues recently examined by the NAIC include asset
valuation reserves, loss reserve discounting, solvency surveillance and
risk-based capital.

The NAIC has recognized reinsurance as an area to which it needs to
devote substantive attention. Various model laws or regulations applicable to
reinsurance have been adopted or are under active consideration, including
proposed revisions to the model laws on credit for reinsurance and proposed
model laws on accounting and reporting changes. It is not possible to predict
the future impact of changing state laws, regulations and other non-statutory
regulatory requirements relating to these issues on the operations of Chartwell.

Certain states have adopted, or are considering the adoption of, laws
and regulations that limit the right of offset by reinsurers. In general, offset
is the right of a debtor to set off and apply against any financial obligation
of such debtor to a creditor any financial obligation of such creditor owed to
the debtor. The right of offset may become important to a reinsurer when a
ceding company or retrocessionaire of such reinsurer becomes insolvent.

There is currently no direct federal regulation of insurance or
reinsurance. The issue of insurance regulation and insurer solvency has
previously been the focus of substantial activity both by Congress and certain
federal agencies. However, there are no present proposals before Congress which
would provide for federal regulation of domestic reinsurers.

Employees

As of December 31, 1996, Chartwell had 628 employees, including the
employees of its newly acquired subsidiary, Archer. None of these employees is
represented by a labor union, and Chartwell believes that its employee relations
are excellent.

Item 2. Properties.

Chartwell leases approximately 53,000 square feet of space for its
principal executive offices in Stamford, Connecticut. Chartwell also leases
approximately 68,000 square feet of space in London, England for the operations
of Archer. INSCORP is located in Jericho, New York, occupying approximately
1,150 square feet of office space.

Management believes Chartwell's current office space is adequate for its needs.

Item 3. Legal Proceedings.

Chartwell, Chartwell Reinsurance, INSCORP and Archer are subject to the
litigation of disputes in the normal course of their business. In addition,
Chartwell Reinsurance and INSCORP are subject to arbitration proceedings in the
normal course of its business because its reinsurance agreements generally
provide for the resolution of disputes with reinsureds pursuant to arbitration.
Chartwell does not believe that any pending litigation or arbitration to which
it is a party, or of which any of its properties or assets are subject, is
likely to have a materially adverse effect on its current financial position or
results of operations.

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

Information required by Item 4 has been omitted because the Registrant
meets the conditions set forth in General Instruction J(1)(a) of Form 10-K and
is therefore filing this Form 10-K with the reduced disclosure format.

PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.

Information required by Item 5 has been omitted because the Registrant
meets the conditions set forth in General Instruction J(1)(a) of Form 10-K and
is therefore filing this Form 10-K with the reduced disclosure format.

Item 6. Selected Financial Data.

Information required by Item 6 has been omitted because the Registrant
meets the conditions set forth in General Instruction J(1)(a) of Form 10-K and
is therefore filing this Form 10-K with the reduced disclosure format.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations Recent Industry Performance

The property and casualty insurance and reinsurance industry has
historically been highly cyclical. Demand for reinsurance is influenced
significantly by prevailing market conditions, including the underwriting
results of primary insurers. The supply of reinsurance is primarily related to
levels of underwriting capacity in the reinsurance industry and the relative
cost and terms of reinsurance coverage. The industry's profitability and the
cyclical trends in the industry can be affected significantly by volatile and
unpredictable developments, including the occurrence of natural disasters, other
catastrophic events, competitive pressures on pricing (premium rates),
fluctuations in interest rates, other variations in the investment environment,
changes in the judicial system regarding tort law, general economic conditions
and trends, such as inflationary pressures, that may tend to affect the size of
profits and losses experienced by ceding primary insurers and other factors such
as changes in tax laws and regulations. Many sectors of the industry are
currently in a cyclical downturn and it cannot be predicted if or when market
conditions will improve or when other sectors may experience a deterioration in
pricing and terms.

Inadequate pricing during the latter 1970s and early 1980s led to
increased underwriting losses and a decline in underwriting capacity.
Reinsurance rates and terms improved substantially during the mid-1980s as
primary insurers, which had been adversely affected by the soft market of the
previous several years, increased their demand for reinsurance. Reinsurers

achieved improved underwriting results and, consequently, the supply of
reinsurance capacity increased, both from existing companies and new entrants.

Commencing in the latter part of the 1980s, primary property and
casualty insurers began to retain more of their business. This reduction in the
amount of business ceded to reinsurers, combined with the growth in reinsurance
capacity, resulted in renewed price competition and less attractive pricing for
reinsurers. This caused a downturn for the reinsurance industry, resulting in
increased underwriting losses which have continued to the present.

The financial information contained in this section for the years ended
December 31, 1995 and 1994 represents the results of Chartwell Re, the parent
and predecessor company of Chartwell. The financial information for the year
ended December 31, 1996 represents the results of Chartwell.

The following table presents the statutory combined ratios of
Chartwell, the property and casualty reinsurance industry and the property and
casualty insurance industry during the 1992 to 1996 years. The combined ratio is
the sum of the loss ratio (incurred losses and loss adjustment expenses divided
by net premiums earned) and the underwriting expense ratio (underwriting
expenses divided by net premiums written). A combined ratio of over 100%
indicates unprofitable underwriting. Although an insurance company's
underwriting may be unprofitable, the company may be profitable after including
investment income. Due to the implementation of SFAS No. 113, the statutory
combined ratio of Chartwell Reinsurance as shown below differs significantly in
1992 from its GAAP combined ratio.

Statutory Combined Ratios

Year Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----

Chartwell (1)
Loss Ratio ................................... 71.9% 72.9% 75.4% 76.7% 67.9%
Underwriting Expense Ratio ................... 35.2 32.5 30.3 37.2 52.3
----- ----- ----- ----- -----
Combined Ratio ............................... 107.1% 105.4% 105.7% 113.9% 120.2%
===== ===== ===== ===== =====
Property and Casualty Reinsurance Industry (2)
Loss Ratio ................................... 72.7% 78.2% 76.8% 76.9% 87.7%
Underwriting Expense Ratio ................... 30.8 30.1 29.9 29.9 31.3
----- ----- ----- ----- -----
Combined Ratio ............................... 103.5% 108.3% 106.7% 106.8% 119.0%
===== ===== ===== ===== =====
Property and Casualty Insurance Industry (3)
Loss Ratio ................................... 79.8% 80.0% 82.0% 79.5% 88.1%
Underwriting Expense Ratio ................... 27.2 27.2 27.4 27.4 27.5
----- ----- ----- ----- -----
Combined Ratio ............................... 107.0% 107.2% 109.4% 106.9% 115.6%
===== ===== ===== ===== =====

- ----------
(1) Beginning in 1996, the combined ratio includes both Chartwell Reinsurance
and INSCORP. On a stand alone basis, Chartwell Reinsurance's loss ratio,
expense ratio and combined ratio were 73.2%,32.0% and 105.2%, respectively.

(2) Source: RAA Underwriting Report for the year ended December 31, 1996.

(3) Source: A.M. Best Publication, Best's Aggregates and Averages,
Property-Casualty, 1996 Edition. Ratios shown are calculated after dividends
to policyholders. Ratios for 1996 are preliminary and are from Best's
Review: Property/Casualty, January 1997 Edition.

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

Consolidated Results of Operations
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995

Revenues: Total revenues for the year ended December 31, 1996 increased
81% to $261.2 million, compared to $144.5 million for the comparable period in
1995. The accompanying table summarizes gross and net premiums written and total
revenues for the periods indicated:

Revenues
Year Ended
December 31,
-----------------------
(Dollars in thousands) 1996 1995
---- ----

Gross premiums written............................ $263,838 $126,968
======== ========
Net premiums written ............................. $192,251 $123,314
======== ========
Premiums earned .................................. $209,503 $120,258
Net investment income ............................ 43,598 19,907
Net realized capital gains ....................... 1,157 3,199
Service operations ............................... 6,935 1,095
-------- --------
Total .................... $261,193 $144,459
======== ========

Underwriting Operations

Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the year ended December 31, 1996 were $263.8 million,
an increase of 108% compared to the same period in 1995. The increase in gross
premiums written was attributable to business acquired in the Merger and
continued growth with existing and new clients in all client segments. Business
emanating from the Merger consisted of: (i) a seasoned book of specialty
insurance business which is the basis for the Controlled Source Insurance
business, (ii) a marine pool (Navigators Marine Pool) which is included with
Chartwell's other marine and aviation business in the Marine & Aviation Accounts
client segment; (iii) certain of INSCORP's reinsurance contracts which met
Chartwell's underwriting standards and which were renewed in Chartwell
Reinsurance, primarily in the Regional and Specialty Accounts client segments;
and (iv) certain of INSCORP's reinsurance contracts that were not renewed
because they did not meet Chartwell's underwriting standards and which are
classified below as "INSCORP Run-off." Specialty Accounts gross premiums written
for the year ended December 31, 1996 increased 66.6% over the prior year due to
expansion of existing clients and development of new clients, particularly in
the workers compensation line, as a result of favorable legislative and economic
developments in certain jurisdictions. Global Accounts continued to focus on
expansion in the international marketplace rather than the large domestic
insurance marketplace in response to market conditions. Growth in Regional
Accounts and Marine & Aviation accounts was mainly attributable to the retention
of INSCORP contracts and, to a lesser extent, expansion with new and current
clients. Controlled Source Insurance Accounts grew as a result of the expansion
of current programs in response to market opportunities. The distribution of the
Company's gross premiums written among its underwriting client segments was as
follows:

Gross Premiums Written by Underwriting Client Segment

December 31,
-----------------------
(Dollars in thousands) 1996 1995
---- ----
Specialty .................................. $100,817 $ 60,529
Global:
Domestic ................................ 19,818 21,010
International ........................... 24,120 17,400
-------- --------
Subtotal Global ............................ 43,938 38,410
Regional ................................... 25,967 16,738
Marine & Aviation .......................... 27,780 11,291
-------- --------
Total Reinsurance ........................ 198,502 $126,968
-------- ========
Controlled Source .......................... 58,752
--------
INSCORP Run-off ............................ 6,584
--------
$263,838
========

Net premiums written for the year ended December 31, 1996 increased 56%
to $192.3 million, compared to $123.3 million for the same period in 1995. The
increase in net premiums written was principally attributable to the reasons
described above for the

increase in gross premiums written. Net premiums earned for the year ended
December 31, 1996 were $209.5 million, an increase of $89.2 million or 74%
compared to the same period in 1995.

Loss and Loss Adjustment Expenses. The Company's principal expense,
loss and loss adjustment expenses ("LAE") related to the settlement of claims,
was $150.6 million for the year ended December 31, 1996 a 73% increase compared
to $86.9 million for the comparable period in 1995. The increase is principally
attributable to the increase in earned premiums as noted above. Net losses and
LAE expressed as a percentage of net earned premiums (the loss and LAE ratio)
improved to 71.9% for the year ended December 31, 1996 from 72.3% recorded for
the same period in 1995. The improvement of 0.4 percentage points in the loss
and LAE ratio for the year ended December 31, 1996 was due to an increase in the
amount of proportional business written by the Company which generally has a
lower loss and LAE ratio than excess of loss business but modestly higher
commissions.

Policy Acquisition Costs. Policy acquisition costs, consisting
primarily of commissions paid to ceding companies and brokerage fees paid to
intermediaries, less commissions received on business ceded to other reinsurers,
were $52.0 million for the year ended December 31, 1996, compared to $28.8
million for the same period in 1995. Policy acquisition costs expressed as a
percentage of net earned premiums (the acquisition expense ratio) increased to
24.8% from 23.9% in 1995. The increase is due both to the INSCORP Run-off and to
a modestly higher commission structure, as noted above, for proportional
business.

Other Expenses. Other expenses related to underwriting operations,
which include underwriting and administrative expenses, were $15.8 million for
the year ended December 31, 1996 compared to $9.7 million for the same period in
1995. Other expenses expressed as a percentage of net earned premiums decreased
to 7.5% for the year ended December 31, 1996 compared to 8.0% for the same
period in 1995.

Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses) of $8.9
million for the year ended December 31, 1996 as compared to an underwriting loss
of $5.2 million for the same period in 1995. The combined ratio for the years
ended December 31, 1996 and 1995 computed in accordance with GAAP was 104.2% for
both years. Although the loss ratio component improved to 71.9% for the year
ended December 31, 1996 from 72.3% recorded for the same period in 1995, the
expense ratio increased to 32.3% for the year ended December 31, 1996 from the
31.9% recorded for the same period in 1995, for the reasons noted above. On a
pro forma basis, as if the Merger occurred on January 1, 1995, the expense ratio
decreased to 32.3% for the year ended December 31, 1996 compared to 34.9% for
the same period in 1995, and the combined ratio decreased to 104.2% for the year
ended December 31, 1996 compared to 120.8% for the same period in 1995. The pro
forma loss and LAE ratio for the year ended December 31, 1995 includes a
strengthening of INSCORP's net loss reserves of $25.0 million for losses
incurred but not reported with respect to INSCORP's business written in prior
years. This reserve strengthening, which was undertaken by Piedmont prior to the
Merger, increased the Company's pro forma loss and LAE ratio by 10.1 percentage
points for the year.

Service Operations

Revenue from service operations increased to $6.9 million for the year
ended December 31, 1996 compared to $1.1 million for the same period in 1995.
The improvement reflects increases in advisory fee revenues, equity in the
earnings of investee companies acquired in the Merger and development of new
fee-based revenue sources during the year.

Corporate Operations

Interest and Amortization. Interest and amortization expenses were $7.8
million for the years ended December 31, 1996 and 1995. Interest and
amortization on the Company's 10.25% Senior Notes due 2004 (the "Senior Notes")
was $6.0 million for the year ended December 31, 1996 and $8.0 million for the
comparable period in 1995. The 1996 amount was reduced due to the redemption of
35% of the principal amount of outstanding Senior Notes on April 8, 1996.
Interest expense for the year ended December 31, 1996 also includes $1.4 million
of interest and amortization expense on a $20.0 million bank facility
established on the date of Merger and $0.5 million of interest and amortization
related to the Archer acquisition.

Consolidated

Net Investment Income and Net Realized Capital Gains (Losses).
Consolidated net investment income, exclusive of realized and unrealized capital
gains and losses, for 1996 was $43.6 million, an increase of $23.7 million, or
119%, over the same period in 1995. The improvement reflects the continued
positive cash flow from operations of $14.7 million offset by a decline in the
value of marked-to-market investments of $10.0 million. In addition, on June 28,
1996, Chartwell Re received $7.9 million in settlement of the Reserve
Indemnification Agreement which increased the Company's invested asset base. The
average annual tax equivalent yield on invested assets before investment
expenses increased to 6.7% for 1996 compared to 6.8% for the same period in
1995.

The Company realized net capital gains of $1.2 million for 1996
compared to $3.2 million for the same period in 1995. Both the 1996 and 1995 net
capital gains were realized principally to reposition certain sectors of the
portfolio and to modify the portfolio to improve credit quality without
sacrificing yield.

Income Before Income Taxes and Extraordinary Item. Net income before
income taxes and extraordinary items increased to $31.7 million for the year
ended December 31, 1996 compared to $8.9 million for the same period in 1995.
The increase resulted primarily from the increase in earned premiums, the
favorable results in both loss and loss adjustment expense and in other
expenses, and from the increases in net investment income and service and other
revenue.

Income Tax Expense. The provision for Federal income taxes for the year
ended December 31, 1996 increased to $9.3 million compared with $2.7 million for
the same period in 1995. The effective tax rate was 29.4% and 30.2% for the
years ended December 31, 1996 and 1995, respectively. The principal factor in
the decline below the statutory rate of 35% for both periods was the benefit of
investments in tax-advantaged securities which increased in the 1996 period.

Net Income Before Extraordinary Item. Net income before extraordinary
item increased to $22.4 million for the year ended December 31, 1996 as compared
to $6.2 million for the same period in 1995. The largest components of this
increase were increases in net investment income and income from service
operations as described above

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

Net Income. The Company realized a net profit of $20.5 million for the
year ended December 31, 1996 compared with a net profit of $6.2 million for the
comparable 1995 period because of the factors discussed above.

Year Ended December 31, 1995 Compared With Year Ended December 31, 1994

Revenues: Total revenues for the year ended December 31, 1995 increased
25% to $144.5 million, compared to $115.3 million for the comparable period in
1994. The accompanying table summarizes gross and net premiums written and total
revenues for the periods indicated:

Revenues
Year Ended
December 31,
---------------------------
(Dollars in Thousands) 1995 1994
---- ----
Gross premiums written ...................... $ 126,968 $ 116,396
========= =========
Net premiums written ........................ $ 123,314 $ 113,962
========= =========
Premium earned .............................. $ 120,258 $ 102,698
Net investment income ....................... 19,907 14,726
Net realized capital gains (losses) ......... 3,199 (3,794)
Service operations .......................... 1,095 1,679
--------- ---------
Total ................... $ 144,459 $ 115,309
========= =========

Underwriting Operations

Gross Premiums Written; Net Premiums Written; Net Premiums Earned.
Gross premiums written for the year ended December 31, 1995 were $127.0 million,
an increase of 9.1% compared to the same period in 1994. The increase in gross
premiums written was attributable to premium growth on the underlying reinsured
business, increased participations on existing client treaties, and the
establishment of new programs and client relationships in all of Chartwell's
underwriting segments. Specialty Accounts volume increased over 1994 levels due
to the expansion of relationships with existing clients and the addition of new
programs in the fidelity, surety and accident and health lines. Global Accounts
volume decreased from 1994 levels due to a decrease in general liability
premiums because of continued competitive pressures on rates while property
premiums continued to grow. Gross premiums written for automobile coverage
decreased as a result of developing competition in the United Kingdom
marketplace for United Kingdom motor business. Regional Accounts volume
decreased from 1994 levels primarily due to non-renewal of a large account that
experienced deteriorating underwriting results. Chartwell elected to non-renew
such account at the expiring term since other reinsurers did not support a rate
increase. Marine & Aviation Accounts volume increased from 1994 levels primarily
due to expansion into the marine market, an increase in aviation premiums due to
increased rate levels on certain programs and expansion of existing business
relationships.

The distribution of Chartwell's gross premiums written among its
underwriting client segments was as follows (in millions):

Gross Premiums Written by Underwriting Client Segment

December 31,
-----------------------------
(Dollars in Thousands) 1995 1994
------------- -------------
Specialty ............................ $ 60,529 $ 53,807
Global:
Domestic .......................... 21,010 22,136
International ..................... 17,400 17,535
-------- --------
Subtotal Global ...................... 38,410 39,671
Regional ............................. 16,738 19,541
Marine & Aviation .................... 11,291 3,377
-------- --------
$126,968 $116,396
======== ========

Net premiums written for the year ended December 31, 1995 increased
8.2% to $123.3 million compared to $114.0 million for the same period in 1994.
Net premiums earned increased 17.1% to $120.3 million from $102.7 million in
1994. The increases in net premiums written and net premiums earned were
primarily attributable to the reasons noted above. The lower percentage increase
of premiums written compared to premiums earned is attributable to the delayed
effect on premiums earned of the higher percentage increase in premiums written
experienced in 1994.

Loss and Loss Adjustment Expenses. Losses and loss adjustment expenses
("LAE") incurred increased 10.7% to $86.9 million for 1995 from $78.6 million in
1994. This increase was primarily attributable to the increase in loss reserves
established as a result of the growth in earned premiums. Net losses and LAE
expressed as a percentage of net earned premiums (the loss and LAE ratio)
decreased to 72.3% for 1995 from 76.5% for the 1994 period. Net losses and LAE
for 1994 were increased by $5.5 million, and the loss and LAE ratio increased by
5.4 percentage points for the same period as a result of the Northridge,
California earthquake. Chartwell did not incur a significant loss from either
domestic or international catastrophic activity occurring in 1995.

Policy Acquisition Costs. Policy acquisition costs, primarily brokerage
fees paid to reinsurance intermediaries and commissions paid to ceding companies
less commissions received from retrocessionaires, increased 18.5% to $28.8
million for 1995 from $24.3 million for 1994. Expressed as a percentage of net
premiums earned, acquisition expenses were relatively unchanged at 23.9% for
1995 and 23.7% for 1994. This increase was primarily due to the decrease in the
loss and loss adjustment ratio of 4.2 percentage points for the year ending
December 31, 1995, which caused an increase in the contingent commission expense
component of policy acquisition costs.

Other Expenses. Other expenses relating to the underwriting operations,
which include underwriting and administrative expenses, increased to $9.7
million for 1995 from $9.1 million for 1994. This increase was primarily due to
a 7.0% growth in salary expense encompassing both new hires and continuing staff
salary requirements and increased bonus expenses. Expressed as a percentage of
net premiums earned, other expenses decreased to 8.0% in 1995 from 8.8% for
1994. This decrease was primarily due to the higher growth in net premiums
earned compared to a lower increase in overhead expense.

Net Underwriting Results. The Company incurred an underwriting loss
(net premiums earned minus losses, LAE and underwriting expenses) of $5.2
million for the year ended December 31, 1995 as compared to an underwriting loss
of $9.2 million for the same period in 1994. The combined ratio for the years
ended December 31, 1995 and 1994 computed in accordance with GAAP was 104.2% and
109.0%, respectively. The loss ratio component improved to 72.3% for the year
ended December 31, 1995 from 76.5% recorded for the same period in 1994, and the
expense ratio improved to 31.9% for the year ended December 31, 1995 from the
32.5% recorded for the same period in 1994, for the reasons noted above. On a
pro forma basis, as if the Merger occurred on January 1, 1995, the expense ratio
for the year ended December 31, 1995 was 34.9%, and the combined ratio was
120.8%. The pro forma loss and LAE ratio for the year ended December 31, 1995
included strengthening of INSCORP's net loss reserves of $25.0 million for
losses incurred but not reported with respect to INSCORP's business written in
prior years. This reserve strengthening, which was undertaken by Piedmont prior
to the Merger, increased the Company's pro forma loss and LAE ratio by 10.1
percentage points for the year.

Service Operations

Income from service operations, primarily from Chartwell Advisers,
decreased to $1.1 million for 1995 from $1.7 million in 1994. The service
revenue for 1994 included certain one-time fees earned by Chartwell Advisers
related to the start-up of New London Capital plc.

Corporate Operations

Interest and Amortization. Interest and amortization increased by 6.0%
to $7.8 million in 1995 from $7.4 million in 1994. The 1995 expense amount
includes $8.0 million of interest and amortization on the Senior Notes, $0.1
million of interest on bank debt and other amortization offset by $0.3 million
of savings from an interest rate swap which was terminated during the second

quarter of 1995. The 1994 expense amount includes $0.9 million of interest and
amortization on a senior term loan and certain subordinated debentures which
were outstanding prior to the Senior Notes issuance on March 17, 1994, $6.4
million of interest and amortization on Chartwell's Senior Notes and a one-time
cash conversion incentive payment of $0.8 million associated with certain
refinancing transactions completed concurrently with Chartwell's issuance of the
Senior Notes, as discussed under "--Liquidity and Capital Resources" below (the
Senior Notes issuance and the use of proceeds thereof and the foregoing
transactions being herein collectively referred to as the "1994 refinancing"),
offset by $0.7 million of savings from the interest rate swap.

Consolidated

Net Investment Income and Net Realized Capital Gains (Losses). Net
investment income, exclusive of realized and unrealized capital gains and
losses, increased by 35.2% to $19.9 million in 1995 from $14.7 million in 1994
as a result of additional invested assets from operating activities and improved
investment income return. The net investment income return (net investment
income excluding both realized and unrealized gains and losses) based on average
invested assets increased to 6.8% in 1995 from 6.3% in 1994. This increase was
primarily due to an increase in market interest rates in the second half of
1994.

The Company realized net capital gains of $3.2 million in 1995 compared
to net capital losses of $3.8 million for the same period in 1994. The 1995 net
capital gains were realized principally to reposition certain sectors of the
portfolio and to modify the portfolio to improve credit quality without
sacrificing yield.

Income Before Income Taxes and Extraordinary Item. Net income before
income taxes and extraordinary items increased to $8.9 million for the year
ended December 31, 1995 compared to a loss of $5.1 million for the same period
in 1994. The increase resulted primarily from the increase in earned premiums,
the favorable results in both loss and loss adjustment expense and in other
expenses, and from the increases in net investment income and service and other
revenue.

Income Tax Expense (Benefit). The provision for Federal income taxes in
1995 increased to a $2.7 million expense compared with a $1.7 million benefit in
1994. The primary reason for the increase in 1995 compared with the same period
in 1994 was the increase in income before taxes discussed above. The effective
Federal tax rate was 30.2% for 1995 and 32.9% in 1994.

Net Income (Loss) Before Extraordinary Item. Results of operations
before extraordinary item increased to a profit of $6.2 million in 1995 from a
loss of $3.4 million in 1994 because of the factors discussed above.

Extraordinary Item, Net of Income Tax. Chartwell recognized a net
after-tax extraordinary expense of $0.5 million in 1994 for the write-off of
unamortized debt issuance costs resulting from Chartwell's 1994 refinancing.

Net Income (Loss). Chartwell realized a $6.2 million net profit in 1995
compared with a net loss of $3.9 million in 1994 because of the factors
discussed above.

Preferred Dividends and Accretion. Preferred dividends and accretion
were $1.1 million for 1994. Such amount includes a 4% cash conversion incentive
payment of $0.8 million made to preferred stockholders associated with
Chartwell's 1994 refinancing. All of the preferred stock was converted to common
stock as part of the 1994 refinancing.

Liquidity and Capital Resources

Chartwell is a wholly-owned subsidiary of Chartwell Re and is Chartwell
Re's only directly owned subsidiary. As a holding company, Chartwell's assets
consist primarily of the stock of its direct and indirect subsidiaries,
Chartwell Reinsurance, INSCORP, Archer, and Chartwell Advisers. Chartwell's cash
flow, therefore, depends largely on dividends and tax sharing payments from
Chartwell Reinsurance. Chartwell Reinsurance's sources of funds consist
primarily of net premiums, reinsurance recoveries, investment income and
proceeds from sales and redemptions of investments. Funds are applied primarily
to payments of claims, operating expenses and income taxes and to the purchase
of investments, largely fixed income securities. Cash and short-term investments
are maintained for the payment of claims and expenses. Chartwell Reinsurance's
ability to pay cash dividends to the Company is restricted by law or subject to
approval of the insurance regulatory authority of Minnesota, Chartwell
Reinsurance's state of domicile. The Minnesota authority recognizes only
statutory accounting practices for the ability of an insurer to pay dividends to
its stockholders.

For the years ended December 31, 1996, 1995 and 1994, Chartwell's
consolidated cash flow provided by operations was $14.7 million, $23.0 million
and $30.2 million, respectively. The 1996 cash flow from operations was reduced
as a result of the run-off of INSCORP's reinsurance reserves. The primary
contributors to the positive cash flow for the 1995 period were underwriting
cash flow (i.e., premiums received less paid losses and LAE and underwriting
expenses) and investment income received. The 1995 cash flow provided by
operations was reduced by $10.9 million due to the payment of three unusually
large claims from business written prior to 1985 and the commutation of a group
of assumed contracts.

Sales of available-for-sale investments were $500.7 million, $330.6
million and $238.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Trading activity increased during the second and third quarters of
1995 primarily to modify the portfolio by sector and to capitalize on some
opportunities to improve on credit quality without sacrificing yield. Much of
the activity that occurred in 1994 was due to changes in Chartwell Re's
investment guidelines which called for a repositioning of the portfolio into
higher yielding securities as interest rates trended upward, particularly at the
short-end of the yield-curve. During this period, Chartwell Re kept durations
short and reduced its exposure to corporate bonds by selling longer maturity
corporate bonds in favor of shorter maturity securities.

At December 31, 1996, the carrying value of total investments,
including cash and cash equivalents, increased by $21.8 million, or 3.1%, to
$723.9 million compared to $702.1 million at December 31, 1995. The primary
reasons for the increase were (i) a capital contribution from its parent company
of $48.5 million, (ii) positive cash flow from operations of $14.7 million and
(iii) assets relating to the Archer Acquisition of $9.6 million,

offset by (i) $28.3 million for the retirement of 35% of the Senior Notes plus
accrued interest, (ii) the decline in the market value of the investment
portfolio of $10.0 million pre-tax and (iii) $16.4 million for the cost of
purchasing Archer shares.

At December 31, 1996, 88.8% of Chartwell's total investments (including
cash and cash equivalents) consisted of fixed income securities, of which 96.1%
were rated "A" or better (or "A-1" for commercial paper) by Moody's. While
uncertainties exist regarding interest rates and inflation, Chartwell attempts
to minimize such risks and exposures by balancing the duration of reinsurance
liabilities with the duration of assets in its investment portfolio. The current
market value of Chartwell's fixed maturity investments is not necessarily
indicative of their future valuation. Chartwell does not have any investments in
real estate or high-yield bonds and does not have any non-income producing fixed
income investments. The Company's fixed income securities portfolio at December
31, 1996 was comprised primarily of U.S. Treasury and government agency,
mortgage pass-through securities, and corporate and municipal bonds.

Financing activities have also been a source of liquidity for
Chartwell, its parent and its subsidiaries. On March 17, 1994, Chartwell Re
completed the offering of $75.0 million principal amount of the Senior Notes.
Net proceeds of $71.9 million (after transaction expenses) were received by
Chartwell Re and were used as follows:

o $30.0 million was contributed to the statutory surplus of Chartwell
Reinsurance.
o $23.4 million was used to retire the remaining amount outstanding under
the senior term loan at par.
o $18.5 million, the remaining proceeds, was held by Chartwell Re for
working capital.

Concurrently with the Senior Notes offering, as part of the 1994
refinancing, (i) all outstanding shares of two series of Chartwell Re's
preferred stock were converted to Common Stock, (ii) all outstanding shares of
the remaining series of preferred stock were redeemed for a nominal
consideration and (iii) the holders of certain warrants issued in connection
with Chartwell Re's subordinated debentures referred to above exercised their
right to acquire Common Stock and in connection therewith, all the outstanding
subordinated debentures were retired.

On May 17, 1995, Chartwell Re terminated an interest rate swap
transaction it had entered into in April 1994 with a notional amount of $37.5
million to hedge the 10.25% fixed interest rate on the Senior Notes. The effect
on the financial statements of this swap was a reduction of interest expense of
$0.3 million for the year ended December 31, 1995 and $0.7 million in 1994.

In connection with the establishment prior to the Merger of Chartwell
as an intermediate-level holding company for Chartwell Re's operations, all of
Chartwell Re's obligations under the Senior Notes were assumed by Chartwell, and
Chartwell Re was released from any further obligations under the Senior Notes.

In the first half of 1996, Chartwell Re completed a public offering of
2,725,000 shares of common stock at $23.00 per share. The net proceeds to
Chartwell Re were $58.5 million after deduction of underwriting discount and
expenses. Of the net proceeds, $48.5 million was contributed to the Company of
which $20.0 million was contributed to the statutory surplus of Chartwell
Reinsurance and $28.5 million was used to retire 35% of the Senior Notes plus
accrued interest. This redemption reduced Chartwell's annual expense for
interest and amortization of debt issuance costs under the Senior Notes by $2.8
million per year. As a result of the offering, Standard & Poor's improved its
rating with respect to the Senior Notes to BBB- from BB and Moody's improved its
rating to Ba1 from Ba2.

Due in part to the Merger and the above transactions, the statutory
surplus of Chartwell Reinsurance, determined in accordance with SAP, increased
from $81.1 million at December 31, 1993 to over $238.0 million at December 31,
1996.

In connection with the Merger, the Company entered into the Fleet Loan
and the Fleet Revolver. At the time of the Merger, the Company borrowed the full
amount under the Fleet Loan and used the proceeds to repay in full Piedmont's
existing bank debt. The Fleet Loan had a seven year term (subject to two
one-year extensions) and required equal annual repayments of principal after the
first year. At December 31, 1996, there was no outstanding balance under this
bank facility because it was replaced by the New Credit Facilities described
below.

In connection with the Acquisition, the Company entered into the New
Credit Facilities. The New Credit Facilities provide for (i) a Term A-1 $20.0
million loan, (ii) a Term A-2 $10.0 million loan, (iii) a Term B $22.0 million
loan (denominated in Pounds Sterling), and (iv) a $25.0 million revolving credit
facility (subsequently increased to $35.0 million).

On November 14, 1996 the Company borrowed the full amount under the
Term A-1 loan and used the proceeds to repay the Fleet Loan in full. On November
25, 1996 the Company borrowed the full amount under the Term A-2 loan, $11.6
million under the Term B loan, and $5.1 million under the First Union Revolver
to acquire Archer Shares. In addition, on November 29, 1996 the Company accessed
an additional $10.3 million under the Term B loan to guarantee certain Loan
Notes used to acquire Archer Shares. Subsequently, the Company paid down $1.7
million of the First Union Revolver in order to provide capacity to issue
certain letters of credit in connection with the capitalization of Oak Dedicated
Limited, a corporate vehicle formed by Chartwell Re to provide capacity to
selected syndicates managed by Archer. Letters of credit, denominated in Pounds
Sterling, totaling $22.1 million were issued on November 29, 1996 and are
currently outstanding. The amounts denominated in Pounds Sterling were converted
to U.S.

Dollars at the rate of 1.7125 per (pound)1, the rate in effect on December 31,
1996.

The First Union Loans have six-year terms and the First Union Revolver
has a five-year term but may be extended for one year with the consent of First
Union. Term Loans A-1 and A-2 require repayment of principal starting in year 3,
$6.0 million; year 4, $7.5 million; year 5, $7.5 million and year 6, $9.0
million. Term Loan B requires repayment of principal starting in year 3, $4.5
million; year 4, $5.5 million; year 5, $5.5 million and year 6, $6.7 million.
Borrowings under the First Union Revolver are available at any time prior to
maturity, subject to minimum funding amounts. Both the First Union Loans and the
First Union Revolver will bear interest at a rate selected by the Company equal
to either (1) the base rate (as defined below) or (2) London Interbank Offered
Rate ("LIBOR") plus a margin (the "Margin"). The amount of the Margin will
depend on the higher of the

Company's senior debt rating by Standard & Poor's or Moody's. The margin can
range from 0.50% to 0.875%. Based on the Company's current senior debt ratings,
the Margin over LIBOR would be 0.75%, compared to the margin under the Company's
prior credit agreement with Fleet of 1.15%. The base rate is the higher of (1)
First Union's prime commercial lending rate or (2) the federal funds rate plus
0.5%. the Company will also pay (1) an unused commitment fee equal to 0.25% on
the aggregate unused portion of the revolver, (2) utilization fees for the
issuance of letters of credit and Loan Note guarantees at a rate per annum of
0.375% (if secured) or the Margin (if unsecured) on the outstanding amount of
potential credit exposure, and (3) certain other fees customary in connection
with syndicated loans of this nature.

At December 31, 1996, $20.0 million, $10.0 million, $11.6 million and
$3.3 million was outstanding under the Term A-1, Term A-2, Term B loans and the
First Union Revolver, respectively. In addition, at December 31, 1996, $10.3
million was used under the Term B loan to guarantee the Loan Notes and $21.7
million of letters of credit were extended under the First Union Revolver.

Upon consummation of the Merger, Chartwell Re became the successor to
Piedmont under the CI Notes. The CI Notes do not require any interest payments
until maturity or earlier redemption or repurchase. Under certain circumstances,
the CI Notes may be settled by delivery of shares of common stock.

Chartwell and its subsidiaries may incur additional indebtedness in the
future, subject to the limitations contained in the Senior Notes indenture and
the agreements governing the New Credit Facilities.

Chartwell is largely dependent upon receipt of dividends and other
statutorily permissible payments from its subsidiaries to meet its obligations,
including the obligation to pay interest and principal on the Senior Notes and
under the New Credit Facilities. Further, dividend payments by Chartwell
Reinsurance and INSCORP are subject to limits under the laws of the States of
Minnesota and New York, respectively. Under the applicable provisions of the
insurance holding company laws of the State of Minnesota, Chartwell Reinsurance
may, upon five days notice to the Commissioner following the declaration of
dividends to stockholders, and upon at least ten days notice to the Commissioner
prior to dividend payments, pay dividends to Chartwell without the approval of
the Commissioner, unless such dividends, together with other dividends paid
within the preceding twelve months, exceed the greater of (i) 10% of Chartwell
Reinsurance's policyholders' surplus as of the end of the prior calendar year or
(ii) Chartwell Reinsurance's statutory net income, excluding realized capital
gains, for the prior calendar year. Any dividend in excess of the amount
determined pursuant to the foregoing formula would be characterized as an
"extraordinary dividend" requiring the prior approval of the Commissioner. In
any case, the maximum amount of dividends Chartwell Reinsurance may pay is
limited to its earned surplus, also known as unassigned funds. As of December
31, 1996, Chartwell Reinsurance reported unassigned funds in the amount of $54.5
million. Up to $23.8 million is available under the foregoing formula for the
payment of dividends by Chartwell Reinsurance without regulatory approval in
1997. Chartwell Reinsurance paid Chartwell no dividends in 1996, 1995 or 1994.

Under New York law, which is applicable to INSCORP, the maximum
ordinary dividend payable in any twelve month period without the approval of the
Superintendent may not exceed the lesser of (a) 10% of policyholders surplus as
shown on the company's last annual statement or any more recent quarterly
statement or (b) the company's adjusted net investment income. Adjusted net
investment income is defined as net investment income for the twelve months
preceding the declaration of the dividend plus the excess, if any, of net
investment income over dividends declared or distributed during the period
commencing thirty-six months prior to the declaration or distribution of the
current dividend and ending twelve months prior thereto. In any case, New York
law permits the payment of an ordinary dividend by an insurer or reinsurer only
out of earned surplus. Moreover, notwithstanding the receipt of any dividend
from INSCORP, Chartwell Reinsurance may make dividend payments to the Company
only to the extent permitted under the Minnesota provisions described above.

In addition to the foregoing limitation, the New York Insurance
Department, as is its practice in any change of control situation, has required
Chartwell to commit to preclude the acquired New York-domiciled insurer,
INSCORP, from paying any dividends for two years after the change of control
without prior regulatory approval.

The maximum dividend permitted by law is not indicative of an insurer's
actual ability to pay dividends, which may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect an insurer's ratings or competitive position, the amount of
premiums that can be written and the ability to pay future dividends.
Furthermore, beyond the limits described in the preceding paragraph, the
Commissioner and Superintendent have discretion to limit the payment of
dividends by insurance companies domiciled in Minnesota and New York,
respectively.

Management believes that current levels of cash flow from operations
and assets held at the holding company level provide the Company with sufficient
liquidity to meet its operating needs in the short term (over the next 12
months), including the payment of interest on the Senior Notes and the New
Credit Facilities. Management expects Chartwell to be able to continue to meet
its operating needs after the next 12 months from internally generated funds.
Since the ability of Chartwell to meet its obligations in the long term (beyond
such 12-month period) is dependent upon such factors as market changes,
insurance regulatory changes and economic conditions, no assurance can be given
that the available net cash flow will be sufficient to meet its operating needs.
The Company expects that, in order to repay the principal amount of the Senior
Notes on maturity or otherwise, it will be required to seek additional financing
or engage in asset sales or similar transactions. There can be no assurance that
sufficient funds for any of the foregoing purposes would be available to the
Company at such time.

Accounting Standards
Accounting for Stock-Based Compensation - SFAS No. 123

In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," which became effective for Chartwell
Re beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. Chartwell Re will continue to
apply APB Opinion No. 25 to its stock based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per
share. (See Note 15).

Long-Lived Assets - SFAS No. 121

In March 1995, the FASB issued SFAS No. 121, "Accounting For the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which is effective for the financial statements of Chartwell for the year ended
December 31, 1996. SFAS No. 121 requires impairment of property, plant and
equipment, identifiable intangibles and goodwill to be considered whenever
evidence suggests a lack of recoverability. The implementation of SFAS No. 121
did not have a material effect on the financial condition or results of
operations of Chartwell.

Derivative Financial Instruments - SFAS No. 119

In October 1994, the FASB issued SFAS No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments", which
was effective for the financial statements of Chartwell for the year ended
December 31, 1994. SFAS No. 119 requires more complete disclosure about the
amounts, nature and terms of derivative financial instruments. For entities that
hold derivative financial instruments for purposes other than trading, it
requires disclosures about those purposes and about how the instruments are
reported in the financial statements. If a purpose for holding the derivative
financial instrument is to hedge anticipated transactions, SFAS No. 119 requires
disclosure about the anticipated transactions, any hedging gain or loss deferred
and the transactions or other events that result in the recognition of the
deferred amounts.

Regulatory Accounting Practices

Management does not believe that current accounting changes being
contemplated by regulatory authorities, if implemented, would have a significant
effect on the operations or liquidity of Chartwell.

Effects of Inflation

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

NAIC-IRIS Ratios

The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily intended
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies 11 industry ratios and specifies "usual
values" for each ratio. Departure by an insurer from the usual values on four or
more of the ratios generally leads to inquiries from individual state insurance
commissioners as to certain aspects of such insurer's business. Departure from a
usual value does not necessarily indicate an adverse condition, but rather a
deviation from the norm.

For the year ended December 31, 1996, Chartwell Reinsurance fell
outside the range of usual IRIS values with respect to the Change in Writings
ratio. This unusual value resulted from continued growth with existing and new
clients in all client segments.

For the year ended December 31, 1996, INSCORP fell outside the range of
usual IRIS values with respect to the Change in Writings ratio, due to the
non-renewal of its reinsurance portfolio, as well as for the Two-Year Overall
Operating ratio and the Two-Year Reserve Development to Surplus ratio. The
unusual values for these ratios were primarily caused by a $25.0 million
strengthening in net reserves for losses incurred but not reported in calendar
year 1995 with respect to INSCORP's business written in prior years.

Item 8. Financial Statements and Supplementary Data.

See the Consolidated Financial Statements and Notes thereto and the
Schedules on pages F-1 through F-21 and S-1 through S-7 included in Part IV,
Item 14.

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

PART III

Items 10 through 13

Information required by Items 10 through 13 has been omitted because
the Registrant meets the conditions set forth in General Instruction J(1)(a) of
Form 10-K and is therefore filing this Form 10-K with the reduced disclosure
format.

PART IV

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

(a) Financial Statements and Schedules--The financial
statements and schedules listed in the accompanying Index to Financial
Statements and Schedules on page F-1 are filed as part of this Annual
Report on Form 10-K.

(b) Exhibits--The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Annual Report on Form 10-K.

(c) Reports on Form 8-K--On November 20, 1996, the Company
filed with the Securities and Exchange Commission a Current Report on
Form 8-K reporting under Item 2-Acquisition or Disposition of
Assets-the Company's acquisition of Archer Group Holdings plc. On
February 3, 1997, the Company filed a Current Report on Form 8-K/A
which amended Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits - of the above mentioned report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Stamford, State of
Connecticut, on March 28, 1997.

CHARTWELL RE HOLDINGS CORPORATION

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

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

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

/s/ Richard E. Cole Chief Executive Officer and Chairman of the March 28, 1997
- ---------------------------- Board of Directors (Principal Executive
Richard E. Cole Officer)

/s/ Charles E. Meyers Senior Vice President and Chief Financial March 28, 1997
- ---------------------------- Officer (Principal Financial Officer)
Charles E. Meyers

/s/ Richard B. Primerano Vice President and Controller (Principal March 28, 1997
- ---------------------------- Accounting Officer)
Richard B. Primerano

/s/ Steven J. Bensinger Director March 28, 1997
- ----------------------------
Steven J. Bensinger

/s/ Jacques Q. Bonneau Director March 28, 1997
- ----------------------------
Jacques Q. Bonneau

CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)

Index to Financial Statements

Independent Auditors' Report .................................................................. F-2
Consolidated Balance Sheets at December 31, 1996 and 1995 ..................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 .... F-4
Consolidated Statements of Common Stockholder's Equity for the Years Ended
December 31, 1996, 1995 and 1994 .............................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 .... F-6
Notes to Consolidated Financial Statements for the Years Ended December 31, 1996, 1995 and 1994 F-7

Index to Schedules

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

F-1

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholder
Chartwell Re Holdings Corporation
Stamford, Connecticut

We have audited the accompanying consolidated balance sheets of
Chartwell Re Holdings Corporation and subsidiaries as of December 31, 1996 and
1995, the related consolidated statements of operations, common stockholder's
equity, and cash flows for the year ended December 31, 1996, the consolidated
statements of operations, stockholder's equity and cash flows of Chartwell Re
Corporation (Predecessor) and subsidiaries for the years ended December 31, 1995
and 1994. Our audits also included the financial statement schedules listed in
the Index on page F-1. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedules based on our audits.

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

In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Chartwell Re
Holdings Corporation and subsidiaries as of December 31, 1996 and 1995, the
results of their operations and their cash flows for the year ended December 31,
1996, and the results of operations and cash flows of Chartwell Re Corporation
(Predecessor) and subsidiaries for the years ended December 31, 1995 and 1994
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

DELOITTE & TOUCHE LLP
Parsippany, New Jersey

February 5, 1997

F-2

CHARTWELL RE HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(dollars in thousands, except share amounts)

ASSETS: 1996 1995

Investments:
Fixed maturities:
Held to maturity (market value 1996, $36,620;
1995, $27,965) ..................................................... $ 36,043 $ 26,691
Available for sale (amortized cost 1996, $609,368;
1995, $481,175) .................................................... 606,621 489,107
Other investments ...................................................... 30,896 33,837
Cash and cash equivalents ................................................ 50,343 152,507
----------- -----------
Total investments and cash ..................................... 723,903 702,142
Accrued investment income ................................................ 10,529 7,759
Premiums in process of collection ........................................ 86,351 73,620
Reinsurance recoverable: on paid losses .................................. 29,767 15,580
on unpaid losses ................ 172,377 179,854
Prepaid reinsurance ...................................................... 21,733 18,212
Goodwill ................................................................. 52,609
Deferred policy acquisition costs ........................................ 17,903 18,809
Deferred income taxes .................................................... 42,160 39,517
Deposits ................................................................. 18,135 17,481
Other assets ............................................................. 69,757 47,373
----------- -----------
$ 1,245,224 $ 1,120,347
=========== ===========

LIABILITIES:
Loss and loss adjustment expenses ........................................ $ 747,858 $ 741,467
Unearned premiums ........................................................ 81,599 90,573
Other reinsurance balances ............................................... 15,085 4,689
Accrued expenses and other liabilities ................................... 51,763 20,190
Long term debt ........................................................... 107,297 95,000
----------- -----------
Total liabilities ............................................. 1,003,602 951,919
----------- -----------
COMMMITMENTS AND CONTINGENCIES (Note 13)

MINORITY INTEREST ........................................................ 9,469

COMMON STOCKHOLDER'S EQUITY
Common stock, par value $1.00 per share; authorized 1,000 shares; shares
issued and outstanding 100
Additional paid-in capital ............................................. 217,866 169,320
Net unrealized appreciation (depreciation) of investments .............. (1,379) 5,219
Foreign currency translation adjustment ................................ 1,291 9
Retained earnings (deficit) ............................................ 14,375 (6,120)
----------- -----------
Total common stockholder's equity .............................. 232,153 168,428
----------- -----------
$ 1,245,224 $ 1,120,347
=========== ===========

See notes to consolidated financial statements.

F-3

CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(dollars in thousands, except per share amounts)

Chartwell Re Corporation
(Predecessor)
-----------------------
1996 1995 1994

UNDERWRITING OPERATIONS:
Premiums earned .............................................. $ 209,503 $ 120,258 $ 102,698
Net investment income ........................................ 42,995 18,917 13,889
Net realized capital gains (losses) .......................... 1,106 3,109 (3,495)
----------- ----------- ---------
Total revenues ........................................... 253,604 142,284 113,092
----------- ----------- ---------
Loss and loss adjustment expenses ............................ 150,621 86,949 78,577
Policy acquisition costs ..................................... 52,030 28,790 24,295
Other expenses ............................................... 15,774 9,694 9,071
----------- ----------- ---------
Total expenses .......................................... 218,425 125,433 111,943
----------- ----------- ---------
Income before taxes - underwriting operations ................ 35,179 16,851 1,149
----------- ----------- ---------
SERVICE OPERATIONS:
Service and other revenue .................................... 3,367 1,095 1,679
Equity in net earnings of investees .......................... 3,559
Net investment income ........................................ 9 44 29
----------- ----------- ---------
Total revenues .......................................... 6,935 1,139 1,708
----------- ----------- ---------
Expenses ..................................................... 2,233 1,056 1,104
----------- ----------- ---------
Income before taxes - service operations ..................... 4,702 83 604
----------- ----------- ---------
CORPORATE:
Net investment income ........................................ 594 946 808
Net realized capital gains (losses) .......................... 51 90 (299)
General and administrative expenses .......................... 1,043 1,211 3
Interest expense ............................................. 7,367 7,466 6,999
Amortization expense ......................................... 410 354 380
----------- ----------- ---------
Loss before taxes - Corporate ................................ (8,175) (7,995) (6,873)
----------- ----------- ---------

Consolidated income (loss) before taxes and extraordinary item 31,706 8,939 (5,120)
Income tax expense (benefit) ................................. 9,337 2,700 (1,685)
----------- ----------- ---------
Net income (loss) before extraordinary item .................. 22,369 6,239 (3,435)
Extraordinary item, net of tax ............................... 1,874 465
----------- ----------- ---------
Net income (loss) ............................................ 20,495 6,239 (3,900)
Less: Preferred dividends and accretion ..................... 1,078
----------- ----------- ---------
Income (loss) attributable to common shares .................. $ 20,495 $ 6,239 $ (4,978)
=========== =========== =========

Per Share Data:
Net income (loss) before extraordinary item .................. $ 1.66 $ (0.84)
=========== =========
Weighted average number of common shares
outstanding ................................................. 3,755,312 3,760,685
=========== =========

See notes to consolidated financial statements.

F-4

CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(dollars in thousands)

Chartwell Re Corporation
(Predecessor)
--------------------

1996 1995 1994

COMMON STOCK
Balance at beginning of year ....................... $ 38 $ 20
Issuance of common stock ........................... 31 18
--------- --------
Balance at end of year ............................. $ 69 $ 38
========= ========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ....................... $ 169,320 $ 77,254 $ 41,232
Issuance of common stock ........................... 48,546 76,051 36,105
Cancellation of common stock ....................... (83)
--------- --------- --------
Balance at end of year ............................. $ 217,866 $ 153,305 $ 77,254
========= ========= ========
UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENTS, NET OF TAX
Balance at beginning of year ....................... $ 5,219 $ (8,608) $ 697
Change in net unrealized appreciation (depreciation) (6,598) 13,827 (9,305)
--------- --------- --------
Balance at end of year ............................. $ (1,379) $ 5,219 $ (8,608)
========= ========= ========
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance at beginning of year ....................... $ 9 $ 14 $ (10)
Change in foreign currency translation adjustment .. 1,282 (5) 24
--------- --------- --------
Balance at end of year ............................. $ 1,291 $ 9 $ 14
========= ========= ========
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year ....................... $ (6,120) $ (12,359) $ (7,381)
Accretion of discount on preferred stock ........... (30)
Net income (loss) .................................. 20,495 6,239 (3,900)
Preferred dividends - Declared and paid ............ (1,612)
- Accrued ...................... 564
--------- --------- --------
Balance at end of year ............................. $ 14,375 $ (6,120) $(12,359)
========= ========= ========
TOTAL COMMON STOCKHOLDER'S EQUITY
Balance at beginning of year ....................... $ 168,428 $ 56,339 $ 34,558
Issuance of common stock ........................... 48,546 76,082 36,123
Change in net unrealized appreciation (depreciation) (6,598) 13,827 (9,305)
Accretion of discount on preferred stock ........... (30)
Net income (loss) .................................. 20,495 6,239 (3,900)
Preferred dividends - Declared and paid ............ (1,612)
- Accrued ...................... 564
Cancellation of common stock ....................... (83)
Translation adjustment ............................. 1,282 (5) 24
--------- --------- --------
Balance at end of year ............................. $ 232,153 $ 152,482 $ 56,339
========= ========= ========

See notes to consolidated financial statements.

F-5

CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(dollars in thousands)

Chartwell Re Corporation
(Predecessor)
---------------------
1996 1995 1994

CASH FLOWS FROM OPERATING ACTIVITIES:
Net premiums collected ....................................... $ 126,456 $ 87,324 $ 79,482
Net losses & loss adjustment expenses ........................ (136,753) (56,813) (46,871)
Overhead expenses ............................................ (17,166) (9,488) (10,853)
Service and other revenue .................................... 3,190 1,095 1,011
Net income taxes (paid) recovered ............................ (5,168) (543) 1,056
Interest received on investments ............................. 43,158 19,107 12,351
Interest paid ................................................ (7,415) (7,219) (4,952)
Other, net ................................................... 8,443 (10,485) (1,009)
--------- --------- ---------
Net cash provided by operating activities ............... 14,745 22,978 30,215
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash from acquisitions of Piedmont Management Company, Inc.
and Drayton Company Limited ................................... 135,937
Investment in Archer Group Holdings, net of cash required ..... (39,156)
Purchases of Held-to-maturity Securities ...................... (8,105) (1,724) (9,167)
Purchases of Available-for-sale Securities .................... (640,182) (374,961) (303,859)
Maturities of Held-to-maturity Securities ..................... 430 1,054 30
Maturities of Available-for-sale Securities ................... 20,729 5,216 1,570
Sales of Available-for-sale Securities ........................ 500,706 330,563 238,646
--------- --------- ---------
Net cash (used in)provided by investing activities .... (165,578) 96,085 (72,780)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from parent ................................ 48,546
Net proceeds from senior notes offering ......................... 71,934
Issuance of Long-term debt ...................................... 48,057
Redemption of Long-term debt .................................... (48,280) (25,900)
Conversion incentive ............................................ (1,537)
Dividends paid .................................................. (828)
Other, net ...................................................... (250) 139
--------- --------- ---------
Net cash provided by (used in) financing activities .... 48,323 (250) 43,808
--------- --------- ---------
Effect of exchange rate on cash ................. 346 (5) 24
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ................. (102,164) 118,808 1,267
Cash and cash equivalents at beginning of year ....................... 152,507 37,005 35,738
--------- --------- ---------
Cash and cash equivalents at end of year ............................. $ 50,343 $ 155,813 $ 37,005
========= ========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 20,495 $ 6,239 $ (3,900)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Extraordinary item ......................................... 1,874 465
Net realized capital gains ................................. (1,158) (3,199) 3,794
Deferred policy acquisition costs .......................... 906 (1,502) (2,980)
Deferred income taxes ...................................... (4,234) 2,461 (227)
Unpaid loss and loss adjustment expenses ................... 6,391 28,205 31,720
Unearned premiums .......................................... (8,974) 5,805 12,500
Other reinsurance balances ................................. 6,475 (4,494) 1,524
Reinsurance recoverable .................................... (6,710) 1,395 (890)
Net change in receivables and payables ..................... (2,143) (11,067) (11,602)
Other, net ................................................. 1,823 (865) (189)
--------- --------- ---------
Net cash provided by operating activities .......... $ 14,745 $ 22,978 $ 30,215
========= ========= =========

See notes to consolidated financial statements.

F-6

CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. ACQUISITIONS

Formation of Chartwell Re Holdings Corporation

Chartwell Re Holdings Corporation ("Chartwell" or the "Company") is
a wholly-owned subsidiary of Chartwell Re Corporation ("Chartwell Re" or the
"Predecessor") and was formed in 1995 to act as an intermediate holding company
for Chartwell Re following the merger with Piedmont Management Company Inc.
("Piedmont") described below. All subsidiaries of Chartwell Re were contributed
to the Company and the Company assumed the liability for the long-term debt of
Chartwell Re.

For accounting purposes, the formation of Chartwell and the
contribution of all Chartwell Re's subsidiaries and the assumption of Chartwell
Re's long term debt is treated as if it occurred on December 31, 1995. As such
the consolidated statements of operations, stockholder's equity and cash flows
of Chartwell Re for each of the years in the two year period ended December 31,
1995 have been included in these financial statements.

Archer Group Holdings Acquisition

On November 19, 1996, Chartwell Holdings Limited ("Holdings
Limited"), a newly-formed, indirect majority-owned subsidiary of the Company
acquired 100% of the outstanding stock (the "Acquisition") of Archer Group
Holdings plc ("Archer Holdings") in exchange for cash and loan notes ("Loan
Notes"). The Loan Notes, guaranteed by First Union National Bank N.A., pay
interest semi-annually at one percent below the Sterling London Interbank
Offered Rate ("Sterling LIBOR") and mature in June 2002. The Loan Notes are
transferable, subject to certain restrictions, but are not listed on any
exchange. Prior to the Acquisition, Archer Holdings was publicly traded on the
London Stock Exchange. It is the parent company of Archer Managing Agents
Limited ("Archer"), a managing agency in the Lloyd's of London ("Lloyd's")
marketplace.

The Acquisition has been accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based on the respective fair values at the date of acquisition.
Goodwill of approximately $52,294,000, representing the excess of net assets
acquired over the purchase price, is being amortized on a straight-line basis
over twenty-five years.

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

Historical book value of Archer Holdings ..................... $ 6,044
--------
Acquisition adjustments:
Deferred taxes ............................................. (1,666)
Accrued expenses ........................................... (1,430)
Other assets ............................................... 5,047
--------
1,951
Fair value adjustment - Goodwill ............................. 52,294
--------
Total purchase price ......................................... $ 60,289
========

The purchase has been reflected in the consolidated balance sheet of
the Company as of December 31, 1996. Archer Holdings' fiscal year end is
September 30. Results of Archer Holdings' operations from the date of
acquisition to December 31, 1996 were not material to the consolidated financial
statements of the Company and, accordingly, have not been included in such
financial statements.

Chartwell Re directly owns 35% of Holdings Limited. Such minority
interest is presented in the consolidated balance sheet.

Piedmont Management Company Merger

On December 13, 1995, Chartwell Re acquired The Insurance
Corporation of New York ("INSCORP") (formerly, The Reinsurance Corporation of
New York) as a result of a merger with INSCORP's former parent, Piedmont,
whereby Piedmont was merged with and into Chartwell Re (the "Merger"), with
Chartwell Re as the surviving corporation. As consideration for the Merger,
Chartwell Re issued an aggregate of 3,103,499 shares of common stock to the
shareholders of Piedmont, representing 45.25% of the outstanding common stock of
Chartwell Re immediately following the Merger.

Piedmont was a financial services holding company, the principal
subsidiaries of which were INSCORP and Lexington Global Asset Managers Inc.
("Lexington"). Immediately prior to the merger, Piedmont spun off Lexington to
its shareholders,

F-7

thereby excluding it from the Merger. INSCORP, the acquired operating company of
Piedmont, is a property and casualty insurance company.

The acquisition of Piedmont was accounted for under the purchase
method of accounting. Accordingly, the purchase price was allocated to the net
assets acquired based on respective fair values at the date of acquisition.
Goodwill of approximately $5,389,000 is being amortized on a straight line basis
over forty years.

The purchase price was determined to be $80,256,000 and was
allocated to the respective net assets and liabilities received as follows (in
thousands):

Historical book value of Piedmont after
giving effect to the Spin-off of Lexington, the CI
Notes dividend and certain pre-Merger events ................. $ 80,233
--------
Merger adjustments:
Deferred taxes ................................................ 1,313
Other assets .................................................. (8,158)
Accrued liabilities ........................................... (904)
--------
(7,749)
--------
Fair value adjustments:
Investments .................................................. 2,383
Goodwill ..................................................... 5,389
--------
7,772
--------
Total purchase price ........................................ $ 80,256
========

Upon consummation of the Merger, Chartwell Re assumed all of
Piedmont's obligations under the Contingent Interest Notes (the "CI Notes"). The
CI Notes were issued immediately prior to the Merger to protect Chartwell Re
against the possibility of adverse development of INSCORP's reserves for losses
and loss adjustment expenses (LAE), particularly with respect to INSCORP's
potential exposures for environmental impairment, asbestos-related and latent
injury claims and other long-tail casualty exposures (Notes 11 and 12).

The purchase has been reflected in the consolidated balance sheet of
the Company as of December 31, 1995. Results of Piedmont's operations from the
date of acquisition to December 31, 1995 were not material to the consolidated
financial statements of Chartwell Re.

Drayton Acquisition

On May 31, 1995, Chartwell Re acquired 100% of the outstanding stock
of Drayton Company Limited (Drayton) in exchange for a nominal cash payment.
Drayton is a Bermuda based insurer which is not currently writing new business.
The Company is managing the resolution of Drayton's remaining claims and assets
in a run-off of Drayton's old business.

The acquisition was accounted for under the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based on respective fair values at the date of acquisition. Negative
goodwill of approximately $498,000, representing the excess of net assets
acquired over the purchase price, is being amortized on a straight-line basis
over the estimated run-off period of five years. Results of Drayton's operations
from the date of acquisition to December 31, 1995 were included in Chartwell
Re's consolidated results. The historical results of Drayton for the periods
prior to the date of acquisition were not material and as such have not been
included in the pro forma unaudited consolidated income statement information
contained in this note.

The following pro forma unaudited consolidated income statement
information for the Company for the year ended December 31, 1996 and for
Chartwell Re for the year ended December 31, 1995 is presented as though the
acquisition of Archer Holdings, the acquisition of Piedmont, and the redemption
of 35% of the outstanding 10.25% Senior Notes due 2004 ("Senior Notes") (See
Note 12) had occurred on January 1, 1995 (in thousands, except per share
amount):

1996 1995

Total revenues ............................... $ 289,336 $ 324,925
Net income (loss) ............................ $ 24,990 $ (6,074)
Income (loss) per common share ............... $ (0.89)

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

F-8

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation--The Company is an insurance holding
company which conducts business through its principal operating subsidiaries,
Chartwell Reinsurance Company ("Chartwell Reinsurance"), INSCORP, Archer and
Chartwell Advisers Limited ("Chartwell Advisers") .

The Company owns 100% of the common stock of Chartwell Reinsurance,
Drayton, Chartwell Advisers and Dakota Specialty Insurance Company ("Dakota").
Chartwell Reinsurance owns 100% of the common stock of INSCORP and 65% of the
common stock of Holdings Limited. Chartwell Advisers acts as the exclusive
advisor to a non-affiliated company formed to underwrite at Lloyd's through a
group of wholly-owned subsidiaries that are limited liability corporate members
of certain selected Lloyd's syndicates. Dakota is a newly-formed, indirect
wholly-owned subsidiary, which will be the Company's non admitted entity writing
surplus lines business.

The consolidated financial statements include the accounts of the
Company and all subsidiaries. All significant inter-company transactions and
accounts have been eliminated in consolidation.

Investments in companies in which the Company owns 20 to 50 percent
of the voting common stock or has the ability to exercise significant influence
over the operating and financial policies of the investees are accounted for
under the equity method.

(b) Investments--Fixed maturity securities are categorized as either
assets held to maturity or as available for sale. Securities on deposit with
state regulatory authorities are designated as held to maturity and are recorded
at amortized cost. The Company has both the ability and intent to hold these
securities until their maturity. All investments designated as available for
sale are stated at aggregate market value with unrealized appreciation and
depreciation reported as a separate component of stockholder's equity, net of
applicable deferred income taxes.

Realized gains and losses on sales of securities are determined on
the specific identification method. Investment income is recognized when earned.

(c) Cash and Cash Equivalents--The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.

(d) Premiums Earned and Unearned Premiums-- Premiums, net of
reinsurance ceded, are recognized as income ratably during the terms of the
related insurance and reinsurance contracts. Unearned and prepaid reinsurance
premium reserves are established to cover the unexpired portion of premiums
written. Such reserves are computed by pro rata methods for direct business and
are established based on reports received from ceding companies for reinsurance.

The Company estimates and accrues for unreported premiums and
losses, as well as premium and commission adjustments on retrospectively rated
or other experience rated reinsurance contracts, based on the difference between
total costs before and after the experience under the contract (the
with-and-without method). These estimates of experience to date are based on
statistical data with subsequent adjustments recorded in the period in which
they become known.

(e) Profit Commissions--Profit commissions earned on business
emanating from Lloyd's syndicates are estimated, earned and recorded using
studies of the profitability of the business underwritten. Profit commission
estimates are continually monitored and reviewed. As new information is
received, changes are reflected in current operations with final settlement
three years after the underwriting year to which it relates.

(f) Deferred Policy Acquisition Costs--Acquisition costs, comprised
primarily of commissions, are deferred and amortized over the period in which
the related premiums are earned.

(g) Deposits--Deposits are those premiums paid in relation to
reinsurance contracts which do not qualify as a transfer of risk under the
Company's accounting policies. The deposits earn interest at the contractual
amounts set forth in the reinsurance contracts.

(h) Loss and Loss Adjustment Expenses--The liability for loss and
LAE is based on reports and individual case estimates and additional estimates
provided by the Company's claims department. The liability also includes an
amount for loss and LAE incurred but not reported based on past experience of
the Company and the reinsurance and insurance industries. These estimates are
regularly reviewed and, as new information becomes known, the liability is
adjusted as necessary. Such adjustments, if any, are reflected in results of
operations in the period in which they become known.

(i) Income Taxes--Deferred income tax assets result from temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements. These differences will result in taxable or
deductible amounts in future years.

(j) Goodwill--Goodwill represents the unamortized excess of purchase
price over the fair value of net assets of acquired entities. Goodwill is
amortized generally on a straight-line basis over periods not to exceed forty
years. Amortization charged to operations for the years ended December 31, 1996,
1995 and 1994 was $(11,754), $(11,754) and $46,438, respectively.

(k) Insurance Brokerage Assets and Liabilities - The following
fiduciary assets and liabilities maintained by the Company's insurance agency
subsidiaries on behalf of the insureds and the insurance companies are presented
net in the consolidated financial statements at December 31, 1996 (in
thousands):

Cash .................................................... $ 13,839
Accounts Receivable ..................................... $ 18,599
Accounts Payable ........................................ $(32,438)

F-9

(l) Business Segments--The Company's operations have been classified
into two business segments. The Underwriting Operations segment includes the
pre-tax results of the insurance entities over which management of the Company
is responsible for making all underwriting decisions. This segment consists
primarily of the premiums, losses, expenses and investment results of Chartwell
Reinsurance and INSCORP. The Service Operations segment includes the pre-tax
results from services or capital provided to or investments in insurance
entities over which management of the Company does not influence the
underwriting decisions. The Service segment will also include the operations of
Archer. Corporate items relate primarily to capital costs associated with the
Company's debt as well as unallocated employee expenses incurred in connection
with the investigation of possible acquisition targets.

The statement of operations has been classified to present the total
revenue and pre-tax results of each segment. This segmentation highlights the
increasing importance of the Service segment to the Company. The identifiable
assets of each of the segments as well as the unallocated corporate assets is
summarized as follows (in thousands):

1996 1995
---------- ----------
Underwriting operations .................. $1,140,136 $1,099,745
Service operations ....................... 87,800 5,827
Corporate ................................ 17,288 14,775
---------- ----------
Total assets ......................... $1,245,224 $1,120,347
========== ==========

(m) Results per Common Share--Earnings per common share in 1995 were
calculated based upon the weighted average number of common shares outstanding
excluding the effect of common stock equivalents which would not be materially
dilutive. The 1995 earnings per share do not include the results of Piedmont
because their results of operations subsequent to the Acquisition and the Merger
to the end of the year indicated were immaterial to Chartwell Re. Pro forma
income (loss) per common share is presented in 1994. Such computation includes
the conversion of certain preferred stock and the exercise of certain warrants,
both of which occurred in connection with the 1994 refinancing. Common
equivalent shares from the exercise of stock warrants and options remaining
outstanding have not been included as their effect on earnings per share would
be antidilutive.

(n) Minority Interest--Minority interest primarily represents the
minority stockholder's proportionate share of the equity of Holdings Limited.

(o) Foreign Currency Translation-- Adjustments resulting from the
translation of the financial statements of Chartwell Advisers and Holdings
Limited (which are denominated in Pounds Sterling) to U.S. dollars are reported
as a separate component of stockholder's equity. Assets and liabilities
denominated in foreign currency are translated at the exchange rates in effect
at the balance sheet date. Results of operations are translated at average
exchange rates during each period.

(p) Disclosure about Fair Value of Financial Instruments - Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments," requires disclosures of the estimated fair market value
of certain financial instruments. In cases where quoted market prices are not
readily available, fair values are based on estimates that use present value or
other valuation techniques.

(q) Management Estimates--The consolidated financial statements have
been prepared in accordance with generally accepted accounting principles. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated statements of the financial condition and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ
from those estimates.

(r) Reclassification-- Certain account balances from prior years
presentation have been reclassified to conform with the current year
presentation.

F-10

3. INVESTMENTS

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

Gross Unrealized Estimated
Amortized ------------------ Market Carrying
Cost Gains Losses Value Amount
-------- ------- ------- -------- --------

December 31, 1996:
Held to maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ......... $ 18,841 $ 92 $ 314 $ 18,619 $ 18,841
Obligations of states and political subdivisions 1,895 10 1 1,904 1,895
Debt securities issued by foreign governments .. 14,545 832 81 15,296 14,545
Corporate securities ........................... 762 39 801 762
-------- ------- ------- -------- --------
Subtotal ........................................... 36,043 973 396 36,620 36,043
-------- ------- ------- -------- --------

Available for sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ......... 73,419 281 1,602 72,098 72,098
Obligations of states and political subdivisions 132,906 848 900 132,854 132,854
Debt securities issued by foreign governments .. 8,139 129 48 8,220 8,220
Corporate securities ........................... 181,384 1,337 2,501 180,220 180,220
Redeemable Preferred Stock ..................... 33,773 33,773 33,773
Mortgage backed securities ..................... 179,747 1,026 1,317 179,456 179,456
-------- ------- ------- -------- --------
Subtotal ........................................... 609,368 3,621 6,368 606,621 606,621
-------- ------- ------- -------- --------

Total .............................................. $645,411 $ 4,594 $ 6,764 $643,241 $642,664
======== ======= ======= ======== ========

December 31, 1995:
Held to maturity:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ......... $ 13,596 $ 690 $ 2 $ 14,284 $ 13,596
Obligations of states and political subdivisions 2,110 70 2,180 2,110
Debt securities issued by foreign governments .. 10,155 513 26 10,642 10,155
Corporate securities ........................... 830 29 859 830
-------- ------- ------- -------- --------
Subtotal ........................................... 26,691 1,302 28 27,965 26,691
-------- ------- ------- -------- --------

Available for sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ......... 97,885 2,018 12 99,891 99,891
Obligations of states and political subdivisions 47,882 733 9 48,606 48,606
Debt securities issued by foreign governments .. 4,362 124 4,486 4,486
Corporate securities ........................... 166,017 2,224 351 167,890 167,890
Mortgage backed securities ..................... 165,029 3,370 165 168,234 168,234
-------- ------- ------- -------- --------
Subtotal ........................................... 481,175 8,469 537 489,107 489,107
-------- ------- ------- -------- --------

Total .............................................. $507,866 $ 9,771 $ 565 $517,072 $515,798
======== ======= ======= ======== ========

F-11

The amortized cost and estimated market value of securities with
fixed maturities at December 31, 1996 and 1995, by contractual maturity, are
shown below (in thousands). Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.

Held to Maturity Available for Sale
-------------------- --------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
-------- -------- -------- --------

December 31, 1996:
Due in one year or less .............. $ 1,618 $ 1,647 $ 19,378 $ 19,460
Due after one year through five years 26,187 26,478 132,431 132,405
Due after five years through ten years 6,218 6,595 164,331 163,286
Due after ten years .................. 2,020 1,900 113,481 112,014
Mortgage backed securities ........... 179,747 179,456
-------- -------- -------- --------

$ 36,043 $ 36,620 $609,368 $606,621
======== ======== ======== ========
December 31, 1995:
Due in one year or less .............. $ 3,065 $ 3,075 $ 14,820 $ 14,856
Due after one year through five years 18,014 19,241 126,899 127,976
Due after five years through ten years 5,365 5,390 90,372 91,641
Due after ten years .................. 247 259 84,055 86,400
Mortgage backed securities ........... 165,029 168,234
-------- -------- -------- --------

$ 26,691 $ 27,965 $481,175 $489,107
======== ======== ======== ========

Proceeds from sales of investments in securities with fixed
maturities (excluding security paydowns and calls) during 1996, 1995, and 1994,
all of which were classified as available for sale, were $281,712,000,
$326,353,000 and $234,082,000, respectively. Gross gains of $2,683,000,
$4,805,000 and $1,222,000 and gross losses of $2,284,000 $1,275,000 and
$5,016,000 were realized on those sales during the years ended December 31,
1996, 1995 and 1994, respectively.

Major categories of net investment income for the years ended
December 31, 1996, 1995 and 1994 were as follows (in thousands):

1996 1995 1994
Investment income:
Fixed maturities ...................... $ 43,344 $ 20,468 $ 15,331
Equity securities ..................... 1,150 1 1
Mortgage loans ........................ 5 19
Other ................................. 96 123
-------- -------- --------
Total investment income ................. 44,590 20,597 15,351
Investment expenses ..................... (992) (690) (625)
-------- -------- --------
Net investment income ................... $ 43,598 $ 19,907 $ 14,726
======== ======== ========

Realized gains (loss) on investments:
Fixed maturities ...................... $ 373 $ 3,530 $ (3,794)
Equity securities ..................... 784 (331)
-------- -------- --------
Net realized capital gains (losses) ..... $ 1,157 $ 3,199 $ (3,794)
======== ======== ========

F-12

The net unrealized appreciation (depreciation) of investments
included as a separate component of common stockholder's equity at December 31,
1996 and 1995 is as follows (in thousands):

1996 1995
Difference between market value and amortized cost of
available for sale portfolio:
Fixed maturities ................................... $(2,747) $ 7,932
Equity securities .................................. 629 (25)
------- -------
(2,118) 7,907
Deferred tax benefit (expense) .......................... 739 (2,688)
------- -------
Net unrealized appreciation (depreciation) of investments $(1,379) $ 5,219
======= =======

Unrealized appreciation (depreciation) of investments in equity
securities at December 31, 1996 and 1995 includes gross unrealized gains of
$913,000 and $31,000 respectively, and gross unrealized losses of $ 284,000 and
$56,000, respectively.

At December 31, 1996 and 1995, bonds with a carrying value of
approximately $36,043,000 and $26,691,000 respectively, were on deposit with
state regulatory authorities, as required by law. The Company also had cash,
cash equivalents and bonds totaling $9,747,000 and $7,718,000 in a trust held
for the benefit of one ceding company at December 31, 1996 and 1995.

At December 31, 1996 and 1995, the Company had $7,000,000, held in
commercial paper of 90-days or less maturity and rated not less than A-1 as
defined by Standard & Poor's or P-1 as defined by Moody's Investors Service,
Inc. in accordance with certain debt covenants executed in conjunction with the
Senior Notes. At December 31, 1996 and 1995, the Company also had $19,319,000
and $19,007,000, respectively, of investments held in collateral accounts
subject to certain restrictions in conjunction with a loan guarantee and a
letter of credit arrangement (Note 4).

At December 31, 1996 and 1995, the Company had loaned securities of
approximately $53,936,000, and $91,765,000, respectively, at fair market value
under a security lending agreement administered through First Trust, the
Company's primary custodian. In connection with these transactions, the Company
holds as collateral securities with a fair value equal to 102% of the fair value
of the securities lent to others. Such collateral securities are marked to
market on a daily basis and borrowers are required to supply additional
collateral to prevent any collateral from falling below 100% of the market value
of the loaned securities.

In November 1995, the Financial Accounting Standards Board ("FASB")
allowed companies to transfer securities prior to December 31, 1995 out of the
held to maturity classification to available for sale without "tainting" their
investment portfolio. At November 30, 1995, the Company transferred bonds with
an amortized cost of $14,982,000 and a market value of $16,730,000 from held to
maturity to available for sale, increasing stockholder's equity by $1,748,000.

4. FAIR VALUE AND FINANCIAL INSTRUMENTS

The following methods were used in estimating fair value disclosures
for significant financial instruments. Cash equivalents approximate their
carrying amount due to the short duration of those investments. Fixed maturity
securities are based upon quoted market information. The fair value of long term
debt at December 31, 1996 is based upon current market price.

The carrying amounts and fair values of the Company's significant
financial instruments are as follows (in thousands):

1996 1995
---- ----
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- -------- -------- --------
Assets:
Cash and cash equivalents ... $ 50,343 $ 50,343 $152,507 $152,507
Fixed maturity securities ... 642,664 643,241 515,798 517,072
Liabilities:
Long-term debt .............. $107,297 $108,500 $ 95,000 $ 98,188

At December 31, 1996 the Company has outstanding loan guarantees and
letters of credit totaling $7,400,000 and $31,681,000, respectively. The loan
guarantees and standby letters of credit are in force for five years, for which
the Company pays annual fees of approximately $229,000. The loan guarantees and
letters of credit provide capital to NLC Name No. 6 Limited, Navigators plc and
Oak Dedicated Limited, corporate members of Lloyd's, to participate in certain
Lloyd's syndicates for the 1995 Underwriting Year and thereafter. Chartwell
Advisers provides advisory services to the parent company of NLC Name No. 6. The
investments in NLC Name No. 6 and Navigators plc, which amount to $16,954,000,
are included in other assets with corresponding amounts included in other
liabilities for the loan guarantee and letters of credit.

F-13

The Company has guaranteed obligations of certain affiliates
totaling $1,500,000 at December 31, 1996. The fair value of the contractual
liability is considered to be immaterial.

On April 8, 1994, Chartwell Re entered into an interest rate swap
agreement (the "Swap") for other than trading purposes with Salomon Brothers
Holding Company (Salomon) to convert a portion of its 10.25% fixed rate Senior
Notes (Note 12) to floating rate based on the six-month U.S. Dollar London
Interbank Offered Rate (US LIBOR). The Swap required Salomon to pay Chartwell Re
interest on a notional amount of $37,500,000 at the fixed rate of 6.95% and
Chartwell Re to pay interest at 4.44% for the first year and thereafter at the
six-month US LIBOR rate which reset on a semiannual basis. On May 17, 1995,
Chartwell Re terminated this swap transaction at no cost. For the years ended
December 31, 1995 and 1994, Chartwell Re recorded a reduction in interest
expense of $300,000 and $685,000, respectively, in connection with this Swap.

5. FEDERAL INCOME TAXES

For 1996, the Company will file a consolidated Federal income tax
return with its parent and all includable subsidiaries. The 1996 and 1994
current income taxes are based upon regular taxable income. The 1995 current
income taxes are based upon alternative minimum taxable income.

As of December 31, 1996, for Federal income tax purposes, the
Company and all includable subsidiaries had available net operating loss
carryforwards of approximately $22,600,000 which will begin expiring in 2007.
Such net operating loss carryforwards were generated by INSCORP prior to its
acquisition by the Company. Due to the change in ownership, as defined by
Section 382 of the Internal Revenue Code, a maximum of $3,400,000 of the net
operating loss can be utilized on an annual basis by the Company and its
includable subsidiaries.

The components of income tax expense (benefit) for the years ended
December 31, 1996, 1995 and 1994 are as follows (in thousands):

1996 1995 1994

Current ............................... $ 9,550 $ 222 $(1,708)
Deferred .............................. (213) 2,478 23
-------- ------ -------
Total Federal, foreign and state
income tax expense (benefit) ........ $ 9,337 $2,700 $(1,685)
======== ====== =======

The difference between actual income tax expense and the amount
computed by applying the statutory Federal income tax rate of 35%, 34% and 34%
for the years ended December 31, 1996, 1995 and 1994, respectively, is as
follows (in thousands):

1996 1995 1994
Income tax expense (benefit)
at statutory rate ................. $ 11,097 $ 3,039 $(1,742)
Nontaxable investment income ........ (1,400) (342) (238)
Nondeductible interest expense ...... 256
Amortization of goodwill ............ (35) (4) 16
Other - net ......................... (325) 7 23
-------- ------- -------
$ 9,337 $ 2,700 $(1,685)
======== ======= =======

F-14

The deferred income tax expense (benefit) for the years ended
December 31, 1996, 1995 and 1994 consisted of the following (in thousands):

1996 1995 1994

Discounting of loss reserves ............................ $ 1,314 $(1,665) $ (710)
Deposit accounting ...................................... (130) (15) 554
Earned but not reported premiums, net of loss and expense (458) 4 279
Deferred acquisition costs .............................. 317 511 1,013
Unearned premiums ....................................... (865) (389) (716)
Difference between carrying value and tax basis of
investments sold ...................................... (21) (71)
Tax benefit of carryforwards ............................ (4,473) 3,655 (2,371)
Other - net ............................................. 4,082 398 2,045
------- ------- -------
$ (213) $ 2,478 $ 23
======= ======= =======

The deferred income tax asset at December 31, 1996 includes the
acquired balances from Archer and subsidiaries. An analysis of the components
for 1996 and 1995 is as follows (in thousands):

1996 1995
Deferred tax assets:
Discounting of loss reserves ............................... $35,126 $32,845
Unearned premiums .......................................... 4,434 5,148
Unrealized depreciation on investments ..................... 739
Deposit accounting ......................................... 1,130 1,224
Allowance for uncollectible reinsurance .................... 1,225 1,259
Tax benefit carryforwards .................................. 8,512 9,358
Other ...................................................... 815 1,322
------- -------
51,981 51,154
------- -------
Deferred tax liabilities:
Deferred acquisition costs ................................. 6,266 6,395
Earned but not reported premiums net of loss and expense ... 2,189 1,682
Unrealized appreciation of investments ..................... 2,688
Accrued market discount .................................... 636 538
Other ...................................................... 730 334
------- -------
9,821 11,637
------- -------
Deferred income taxes, net ................................... $42,160 $39,517
======= =======

Realization of the deferred tax asset is dependent on the Company
generating sufficient taxable income to realize the benefits of the net deferred
tax assets. Although realization is not assured, management believes it is more
likely than not that the entire net deferred tax asset will be realized and as
such no valuation allowance has been recorded at December 31, 1996 or 1995.

6. EMPLOYEE BENEFIT PLANS

Eligible employees of the Company may participate in a defined
contribution plan (the "Plan") established by Chartwell Re. Under the Plan, the
Company makes matching contributions equal to 50% of employee's pretax
contributions, not to exceed 6% of the employees' compensation. Amounts expensed
under the Plan for the years ended December 31, 1996, 1995 and 1994 were
$168,000, $92,000, and $72,000, respectively.

Certain members of management will receive a supplement to the Plan
payable at the earlier of age 65 or employment termination. The supplement will
be equal to the aggregate contributions made with respect to the employee to a
trust established by the Company. Annual contributions to the trust are 13.5% to
20.0% of the employee's base salary as stated in their employment agreements.
The amounts expensed in 1996, 1995 and 1994 for the obligation under this plan
amounted to $206,500, $168,500, and $168,500, respectively.

The Archer Group operates contributory defined contribution plans
for its UK employees. The level of the contribution varies between 5% and 20%
dependent upon the age of each participant at the beginning of each calendar
year.

F-15

7. RELATED-PARTY TRANSACTIONS

In 1992, Chartwell Re entered into agreements with affiliates
whereby they would provide financial and advisory services. The net amounts paid
to these affiliates by Chartwell Re for these services were $60,000 and $313,000
in 1995 and 1994, respectively. Such agreements were terminated as of December
31, 1995.

During 1992, Chartwell Reinsurance entered into a reinsurance
contract with a related party. For the years ended December 31, 1996, 1995 and
1994, Chartwell Reinsurance earned $1,716,000, $2,606,000, and $4,359,000 of
premium on this contract and incurred, prior to the effect of reinsurance ceded,
$1,506,000, $2,688,000, and $3,039,000 in loss and LAE, respectively. At
December 31, 1996 and 1995 the loss and LAE liability for this contract was
$694,000 and $730,000 and unearned premiums were $224,000 and $86,000,
respectively.

8. RESTRICTION ON PAYMENT OF DIVIDENDS

The ability of the Company to pay cash dividends to Chartwell Re is
dependent upon the amount of dividends from Chartwell Reinsurance. Chartwell
Reinsurance's ability to pay cash dividends to the Company is, in turn,
restricted by law or subject to approval of the insurance regulatory authorities
of Minnesota, Chartwell Reinsurance's state of domicile. Insurance regulatory
authorities recognize statutory accounting practices for the ability of an
insurer to pay dividends to its shareholders.

Under the insurance laws of the State of Minnesota, payment of
dividends by Chartwell Reinsurance in any year is limited to the greater of: (i)
10% of capital and surplus as of the prior year end as determined in accordance
with statutory accounting practices; or (ii) statutory net income from
operations of the next preceding year excluding realized capital gains.
Notwithstanding the foregoing, Chartwell Reinsurance may pay dividends only from
its earned surplus, also known as unassigned funds. The maximum dividend that
can be paid without prior approval of the Minnesota Department of Commerce in
1997 is $23,827,000.

In addition, under the insurance laws of the State of New York,
INSCORP may pay dividends to Chartwell Reinsurance only out of its statutory
earned surplus. The maximum amount of cash dividends INSCORP may pay out of its
statutory earned surplus, without prior regulatory approval, is subject to
statutory restrictions imposed by New York State Insurance Law. Generally, the
maximum amount that may be paid in any twelve month period without prior
approval is the lesser of net investment income as defined or 10% of statutory
surplus to policyholders.

In addition to the foregoing limitation, the New York Insurance
Department, as is its practice in any change of control situation, has required
Chartwell to commit to preclude INSCORP from paying any dividends for two years
from the date of its merger with the Company without prior regulatory approval.

The capital and surplus of Chartwell Reinsurance on the basis of
statutory accounting practices was $238,271,000 and $188,037,000 at December 31,
1996 and 1995, respectively. Net income of Chartwell Reinsurance based on
statutory accounting principles was $6,156,000, $9,507,000 and $910,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.

The capital and surplus of INSCORP on the basis of statutory
accounting practices was $98,685,000 and $75,563,000 at December 31, 1996 and
1995, respectively. Net income of INSCORP based on statutory accounting
principles was $22,270,000 for the year ended December 31, 1996.

9. REINSURANCE CEDED

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

The effect of reinsurance on premiums written and earned at December
31, 1996, 1995 and 1994 is as follows (in thousands):

1996 1995 1994
---- ---- ----
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
Primary insurance .. $ 68,307 $ 66,709
Reinsurance assumed 195,530 210,871 $126,968 $123,506 $116,396 $105,198
Reinsurance ceded .. 71,586 68,077 3,654 3,248 2,434 2,500
-------- -------- -------- -------- -------- --------

Net premiums ....... $192,251 $209,503 $123,314 $120,258 $113,962 $102,698
======== ======== ======== ======== ======== ========

The effect of reinsurance on loss and LAE for the years ended
December 31, 1996, 1995 and 1994 is a decrease of $45,908,000, $1,616,000 and
$4,145,000, respectively.

The reinsurance recoverable balance on paid and unpaid losses and
LAE from any single entity or company in excess of 5% of the total at December
31, 1996 were as follows: Centre Reinsurance (Bermuda) Limited, $15,241,000
(7.5%) and Navigators Insurance Company, $12,206,000 (6.0%).

In the normal course of business, the Company enters into trust
agreements effecting funds held arrangements or obtains letters of credit issued
by banks on behalf of the retrocessionaires which are not registered as
"authorized reinsurers" with the Minnesota Department of Commerce or the New
York State Insurance Department. The letters of credit or trust

F-16

agreements serve as collateral to the extent of their limit for the contingent
liability which exists in the event that the retrocessionaire is unable to meet
its obligations assumed under a retrocession agreement. Reinsurance recoverables
with "unauthorized reinsurers" totaled $55,264,000 and $58,694,000 as of
December 31, 1996 and 1995, respectively. The respective portions collateralized
as described above were $51,247,000 and $49,581,000.

Included in deposits on the balance sheet at December 31, 1996 and
1995 are $11,120,000 and $10,700,000, respectively, deposited with European
International Chartwell Reinsurance Limited and $7,015,000 and $6,800,000,
respectively, deposited with Centre Reinsurance (Bermuda) Limited, both of which
are secured by letters of credit as described in the preceding paragraph.

10. PERMITTED STATUTORY ACCOUNTING PRACTICES

Chartwell Reinsurance prepares its statutory financial statements in
accordance with accounting principles and practices prescribed or permitted by
the Minnesota Department of Commerce. INSCORP prepares its statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the New York State Insurance Department. Prescribed practices
include state laws, regulations, and general administrative rules, as well as a
variety of publications of the National Association of Insurance Commissioners
(NAIC). Permitted statutory accounting practices encompass all accounting
practices that are not prescribed; such practices differ from state to state,
may differ from company to company within a state, and may change in the future.
Furthermore, the NAIC has a project to codify statutory accounting practices,
the result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project will likely change the
definitions of what comprises prescribed versus permitted statutory accounting
practices, and may result in changes to the accounting policies that insurance
and reinsurance enterprises use to prepare their statutory financial statements.

11. LOSS AND LAE

The following table presents the activity in the liability for loss
and LAE for the years indicated (in thousands):

1996 1995 1994

Loss and LAE
at beginning of year ......................... $ 741,467 $232,733 $201,013
Less reinsurance recoverables .................. 179,854 35,432 33,618
--------- -------- --------
Net balance at beginning of year ............ 561,613 197,301 167,395
--------- -------- --------
Add provision for loss and LAE for
claims occurring during:
Current year ................................. 152,338 86,470 77,716
Prior years .................................. (1,717) 479 861
--------- -------- --------
Total incurred loss and LAE ................. 150,621 86,949 78,577
--------- -------- --------
Less losses and LAE payments for
claims occurring during:
Current year ................................. 29,554 11,797 18,997
Prior years .................................. 107,199 45,016 29,674
--------- -------- --------

Total paid loss and LAE ..................... 136,753 56,813 48,671
--------- -------- --------

Loss and LAE acquired as of acquisition date of:
Drayton ...................................... 4,741
INSCORP ...................................... 329,435
--------- -------- --------
Net balance at end of year ..................... 575,481 561,613 197,301
Plus reinsurance recoverables .................. 172,377 179,854 35,432
--------- -------- --------

Loss and LAE
at end of year ............................... $ 747,858 $741,467 $232,733
========= ======== ========

As a result of changes in estimates of insured events in prior
years, the net provision for loss and LAE decreased by $1,717,000 in 1996,
increased by $479,000 in 1995 and increased by $861,000 in 1994. These amounts,
which represent a decrease of 0.2% and increases of 0.2% and 0.4% of the gross
loss and LAE at the beginning of 1996, 1995 and 1994, respectively, are the
result of normal reserve development inherent in the uncertainty of establishing
loss and LAE liabilities.

The liabilities include provisions for latent injury or toxic tort
claims that cannot be estimated with traditional reserving techniques. Case
reserves, including LAE, have been established upon notification of loss from
ceding companies. In addition, the Company establishes additional liabilities in
excess of its share of the reserve established by the ceding company to cover
exposures on both known and unasserted claims. These liabilities are
periodically reviewed by the Company's claims department. In the reserve setting
process, Chartwell also includes provisions for social inflation (i.e. awards by
judges and juries

F-17

that have progressively increased in recent years) and evaluates the potential
effect of any legislative changes on its reserve liabilities. However, because
of inconsistent court decisions in federal and state jurisdictions and the wide
variation among insureds with respect to underlying facts and coverage,
uncertainty exists with respect to these claims as to liabilities of ceding
companies and, consequently, reinsurance coverage.

At December 31, 1996, the Company carried case reserves and
allocated LAE attributable to asbestos claims and environmental pollution claims
in the amount of $65,717,000 ($46,958,000 after reduction for reinsurance
recoverable) of which $8,027,000 ($4,880,000 after reduction for reinsurance
recoverable) related to Chartwell Reinsurance and $57,690,000 ($42,078,000 after
reduction for reinsurance recoverable) related to INSCORP. Management believes
that Chartwell Reinsurance's exposure to asbestos and environmental losses is
lessened because of its relatively recent entry into the reinsurance business in
1979, its low historical levels of premium volume prior to 1985, and its
retrocessional programs. In addition, management believes that Chartwell's
exposure to adverse reserve development at INSCORP related to asbestos and
environmental losses is lessened because the CI Notes are designed to provide
Chartwell Re with protection against such adverse development of INSCORP's
reserves for losses and LAE. For the three years ended December 31, 1996, the
effect of asbestos and environmental pollution claims was not material to the
Company's results of operations.

Environmental claims are particularly challenging to a reinsurance
company. Such claims involve underlying coverage disputes between the insured
party and its insurer; substantial legal defense costs; questions as to
occurrences and aggregation of claims and "late notice" issues. Environmental
liability suits often contain multiple party and multiple site actions that
result in varied adjudications among insureds and their insurers. Such a complex
setting forces the parties to find a reasonable basis for settling the claims.
These widely varying settlements involving primary insurers force challenges
upon the reinsurer with respect to the extent to which they should follow the
settlements of their ceding companies. Accordingly, there can be no assurance
that the Company's ultimate liability for losses and LAE will not vary
significantly from amounts reserved.

In 1992, an indemnification agreement (the Reserve Indemnification
Agreement) was entered into with NWNL and its parent company, ReliaStar
Financial Corp. (RLR) (formerly The NWNL Companies, Inc.), which indemnified the
parties for subsequent development in Chartwell Reinsurance's December 31, 1991
balances of loss and loss adjustment expenses, the statutory provision for
uncollectible reinsurance and the collectibility of reinsurance recoverable on
losses paid, among other items, up to an aggregate of $23.0 million.

At December 31, 1995, the consolidated balance sheet included assets
related to the Reserve Indemnification Agreement of $3,733,000 included in
reinsurance recoverable on unpaid losses and $3,795,000 included in other
assets.

On June 28, 1996, Chartwell Re received $7,900,000 as settlement of
the receivable arising from the Reserve Indemnification Agreement. The Reserve
Indemnification, which by its terms was scheduled to be settled as of the end of
1996, was settled early by mutual agreement with RLR. The settlement did not
materially affect operating results for the year ended December 31, 1996.

12. DEBT

(a) Long-term debt--The components of long-term debt at December 31,
1996 and 1995 are as follows (in thousands):

1996 1995

Senior notes ............................ $ 48,750 $75,000
Bank loan ............................... 45,149 20,000
Other ................................... 13,398
-------- -------
Total ................................... $107,297 $95,000
======== =======

On March 17, 1994, Chartwell Re completed a public offering (the
"Offering") of 10.25% Senior Notes (the "Senior Notes") due 2004, having a total
principal amount of $75,000,000. The net proceeds to Chartwell Re from the
Offering were approximately $71,934,000 after deducting expenses related to the
Offering. Of the net proceeds, $30,000,000 was contributed to the statutory
surplus of Chartwell Reinsurance and $23,400,000 was used to retire Chartwell
Re's then outstanding senior term loan. The remaining funds were retained by
Chartwell Re for general corporate purposes, which included the payment of
interest on the Senior Notes.

On April 8, 1996, the Company redeemed 35% of the Senior Notes for
$28,300,000, including the redemption premium. Due to this early extinguishment
of debt, the Company recognized an extraordinary loss of $1,874,000, net of
applicable income taxes of $1,000,000. This extraordinary charge represents the
redemption premium and 35% of the remaining original debt issuance costs
relating to the Senior Notes.

Due to the early extinguishment of a senior term loan in 1994,
Chartwell Re recognized an extraordinary non-cash charge in 1994 of
approximately $465,000, after applicable federal income tax effects of
approximately $250,000, representing the write-off of the remaining original
debt issuance costs associated with such senior term loan.

On December 13, 1995, Chartwell Re entered into a $20,000,000 loan
agreement with Fleet bank (the "Fleet Loan"), with a variable interest rate
based upon the Eurodollar rate plus a margin based upon the S&P rating of the
Notes, expiring on December 13, 2002.

F-18

The purchase of Archer Holdings was funded largely from a new credit
facility with First Union National Bank, N.A., as agent. The credit facility
provides for a term loan in two tranches, A & B, (the "First Union Loans") of
$30,000,000 principal amount and $22,000,000 (denominated in Pounds Sterling)
principal amount, respectively, due December 31, 2002, and a $25,000,000
principal amount (subsequently increased to $35,000,000) revolving credit
facility (the "First Union Revolver"). The Company used $20,000,000 of the First
Union Loans to repay all outstanding borrowings under the Fleet Loan. Portions
of the remainder of the First Union Loans were drawn down in cash by the Company
and contributed to Holdings Limited for the purchase of Archer Holdings, and
portions were utilized to guarantee the obligations of Holdings Limited under
the Loan Notes. The First Union Revolver replaced the Company's $10,000,000
revolving credit facility from Fleet Bank (under which no borrowings were
outstanding). The First Union Revolver may be used to provide additional Loan
Note guarantees, to support underwriting at Lloyd's by the Company's
subsidiaries or for other general corporate purposes. All obligations of the
Company under the Credit Facilities will be guaranteed by Chartwell Re.

The other portion of long-term debt includes capital lease
obligations of $3,840,000, and $9,558,000 of Loan Notes (denominated in Pounds
Sterling) issued in conjunction with the purchase of Archer Holdings. The Loan
Notes, guaranteed by First Union National Bank N.A., pay interest semi-annually
at one percent below Sterling LIBOR and mature in June 2002. The Loan Notes are
transferable, subject to certain restrictions, but are not listed on any
exchange.

The Company's long-term debt agreement contains general covenants
and restrictions as well as financial covenants relating to, among other things,
minimum earned surplus, minimum statutory surplus, minimum net worth, certain
financial ratios, and maintenance of minimum cash and cash equivalent balances
on the books of the borrower.

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

Office space buildout costs ................................. $ 887
Furniture and equipment ..................................... 3,260
EDP hardware and software ................................... 900
------
$5,047
======

Leased capital assets are amortized on a straight-line basis over
the original lease term. Future minimum payments, by year and in the aggregate,
under non-cancelable capital leases are as follows (in thousands):

1997 .................................................. $1,640
1998 .................................................. 1,761
1999 .................................................. 829
2000 .................................................. 604
2001 .................................................. 646
------
$5,480
======

F-19

13. COMMITMENTS AND CONTINGENCIES

Operating leases--The Company leases office space for its principal
executive offices in the U.S. and UK under non-cancelable, renewable operating
leases expiring on July 31, 2006 and December 24, 2008, respectively. The rent
expense has been accounted for on a straight-line basis after amortization of a
rent abatement allowance (on the U.S. lease). Rental expense for 1996, 1995 and
1994 was $1,386,000, $562,000 and $579,000, respectively. The future minimum
rental payments, exclusive of escalation clauses, under the existing leases as
of December 31, 1996 are as follows (in thousands):

1997 ..................................................... $ 1,062
1998 ..................................................... 1,659
1999 ..................................................... 1,712
2000 ..................................................... 1,798
2001 and thereafter ...................................... 10,277
-------
$16,508
=======

Line of credit--The Company has a $25,000,000 revolving credit
facility from a financial institution, of which $3,300,000 was borrowed and
$21,700,000 was used to obtain unsecured letters of credit at December 31, 1996.

Loan guarantees and letters of credit--At December 31, 1996 the
Company has outstanding loan guarantees and letters of credit totaling
$7,400,000 and $31,681,000, respectively. The loan guarantees and standby
letters of credit are in force for five years, for which the Company pays annual
fees of $229,000. The loan guarantees and letters of credit provide capital to
NLC Name No. 6 Limited, Navigators plc and Oak Dedicated, corporate members of
Lloyd's, to participate in certain Lloyd's syndicates for the 1995 Underwriting
Year and thereafter. Chartwell Advisers provides advisory services to the parent
company of NLC Name No. 6. The investments in NLC Name No. 6 and Navigators plc,
which amount to $16,954,000, are included in other assets with corresponding
amounts included in other liabilities for the loan guarantees and letters of
credit.

The Company has guaranteed obligations of certain affiliates
totaling $1,500,000 at December 31, 1996.

Assumption of liability endorsements--On April 3, 1996 INSCORP
entered into an agreement (the "ALE Agreement") with American Eagle Insurance
Company ("American Eagle") whereby INSCORP has agreed to provide assumption of
liability endorsements ("ALEs") for various classes of liability insurance
including marine, aviation and artisan contractor business written by American
Eagle. INSCORP received $700,000 from American Eagle during 1996 in relation to
the agreement, of which $525,000 was earned during 1996.

INSCORP will assume all obligations of American Eagle under policies
to which ALEs were issued in the event American Eagle is declared insolvent. On
December 31, 1996, a capital investment of $35,000,000 was made by an outside
investor to American Eagle Group, Inc. of which $17,000,000 was contributed to
the surplus of American Eagle. As a result, at December 31, 1996, American Eagle
reported net admitted assets of $141,800,000 and statutory surplus of
$25,600,000. By an Amendment Agreement dated March 24, 1997, INSCORP will only
provide ALE's for American Eagle liability insurance policies covering marine
and artisan contractor business.

14. PUBLIC STOCK OFFERING

Chartwell Re completed a public offering of 2,725,000 shares of
common stock at $23.00 per share during the first half of 1996. The net proceeds
to Chartwell Re were $58,504,000 after deduction of underwriting discount and
expenses. Of the net proceeds, $48,546,000 was contributed to the Company, of
which $20,000,000 was contributed to the statutory surplus of Chartwell
Reinsurance and $28,500,000 was used to retire 35% of the Company's outstanding
Notes plus accrued interest (Note 12). The remaining funds were retained for
general corporate purposes.

15. STOCK OPTION PLAN AND COMMON STOCK WARRANTS

The 1993 Stock Option Plan (the "Stock Option Plan") was adopted on
October 15, 1993. Options to acquire 1,000,000 shares of Common Stock of
Chartwell Re have been authorized to be granted to officers, key employees and
directors of Chartwell Re and its designated subsidiaries pursuant to the Stock
Option Plan. The options become exercisable from the current date through
September 24, 2001, and at December 31, 1996, options to purchase 567,660 shares
of Common Stock of Chartwell Re were vested. The exercise price for the options
granted during 1996 ranges from $21.50 to $25.25 per share. The exercise price
for all other outstanding options is $21.00 per share.

The number of options available to purchase shares of Common Stock
of Chartwell Re under the Stock Option Plan at December 31, 1996 and 1995 are as
follows:

1996 1995
-------- -------

Outstanding, beginning of year ................. 672,900 600,100
Granted ........................................ 193,500 82,800
Canceled ....................................... (10,000)
-------- -------
Outstanding, end of year ....................... 866,400 672,900
======== =======

In February 1996, the Compensation Committee approved the
acceleration of the vesting date of 132,280 options. At December 31, 1996 there
were warrants outstanding for the purchase of 375,423 shares of Common Stock of
Chartwell Re at prices of $21 and $22 per share.

A total of 50,000 shares are available for grants of options to
non-employee directors of Chartwell Re until December 31, 2006 under the 1996
Non-Employee Directors Stock Option Plan. An option to purchase 1,000 shares of
Chartwell Re's

F-20

common stock was granted to all non-employee directors of Chartwell Re in office
at January 1, 1996 and will be granted to all non-employee directors of
Chartwell Re on the date of each annual meeting of stockholders. The options are
exercisable after six months from the grant date at a price equal to the fair
market value of Chartwell Re's stock on the date of grant. The options expire
ten years after the grant date. During 1996, 10,000 of such options were
granted.

In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which became effective for Chartwell Re beginning
January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages, but does not require,
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to apply APB
Opinion No. 25, which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. Chartwell Re will continue to apply APB
Opinion No. 25 to its stock-based compensation awards to employees. There was no
compensation cost recognized in income by Chartwell Re for stock options granted
during 1996. Chartwell Re estimates the fair value of stock options granted
under the binomial method, basing calculations of expected dividends and
expected volatility on historical movements in the market value of its common
stock and on historical dividends. The pro forma effect on net income and
earnings per share of Chartwell Re of stock options granted during the year had
the fair value based method of accounting been used is immaterial.

16. EMPLOYEE STOCK PURCHASE PLAN

Chartwell Re established an Employee Stock Purchase Plan which
became effective January 1, 1996. Participating employees are permitted to
purchase, annually, shares of Chartwell Re's Common Stock through payroll
deductions in an amount ranging from 2% to 10% of the employee's base pay (as
elected by the employee). The purchase price for shares purchased in a
particular plan year is equal to the lesser of (i) 85 percent of the fair market
value of the Common Stock on the beginning of such plan year or (ii) 85 percent
of the fair market value of the Common Stock at the end of such plan year.
Chartwell Re has authorized 100,000 shares of its common stock for purchase
under the plan of which 12,361 were purchased on January 2, 1997.

17. QUARTERLY FINANCIAL DATA (UNAUDITED)

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

First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------

For the year ended December 31, 1996
Premiums earned ...................... $ 56,243 $ 48,961 $ 47,982 $ 56,317
Net investment income ................ 10,636 10,656 11,674 10,632
Net realized capital gains ........... 921 81 155
Income tax expense ................... 2,145 2,458 2,744 1,990
Net income ........................... 5,293 4,176 6,444 4,582
Common stockholder's equity .......... 184,150 211,729 220,366 232,153

For the year ended December 31, 1995
Premiums earned ...................... $ 32,786 $ 28,581 $ 25,988 $ 32,903
Net investment income ................ 4,821 4,547 5,375 5,164
Net realized capital gains ........... 67 1,336 304 1,491
Income tax expense ................... 615 960 577 548
Net income ........................... 1,316 1,764 1,463 1,696
Common stockholders' equity .......... 62,088 69,083 70,663 168,428
Earnings per share ................... 0.35 0.47 0.39 0.45

F-21

CHARTWELL RE HOLDINGS CORPORATION
SCHEDULE I-SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
At December 31, 1996
(In Thousands)

Column A Column B Column C Column D
-------- -------- -------- --------
Amount at which
shown in the
Cost Value balance sheet
---- ----- ---------------

Fixed Maturities:
Bonds:
United States Government and government agencies and
authorities(1) .................................. $251,107 $249,183 $249,416
States, municipalities and political subdivisions(1) 134,821 134,778 134,769
Foreign governments ................................ 23,724 24,568 23,807
All other corporate bonds .......................... 201,986 200,939 200,899
Redeemable preferred stock ............................ 33,773 33,773 33,773
-------- -------- --------
Total fixed maturities ..................... 645,411 643,241 642,664
-------- -------- --------
Equity Securities- Common stocks of banks, trusts and
insurance companies ................................... 29,870 30,896 30,896
-------- -------- --------
Total investments ............................ $675,281 $674,137 $673,560
======== ======== ========

- ----------
(1) Balance sheet value differs from column B and C because category includes
a combination of securities "Held to Maturity" and "Available for Sale".
See Notes 2b and 3 of the audited financial statements.

S-1

CHARTWELL RE HOLDINGS CORPORATION
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(In thousands)

Year Ended December 31,
------------------------
1996 1995

ASSETS:
Fixed maturities - available for sale (amortized cost 1995, $3,731) ...... $ $ 3,777
Other investments ........................................................ 792 1,738
Investment in and receivable/payable from/to subsidiaries ................ 292,612 250,223
Cash and cash equivalents ................................................ 8,317 8,707
Other assets ............................................................. 33,328 2,790
--------- ---------
$ 335,049 $ 267,235
========= =========
LIABILITIES:
Long term debt ........................................................... $ 96,807 $ 95,000
Other liabilities ........................................................ 6,089 3,807
--------- ---------
Total liabilities .................................................. 102,896 98,807
--------- ---------

COMMON STOCKHOLDER'S EQUITY:
Common stock, par value $1.00 per share;
authorized 1,000 shares; shares issued
and outstanding 100
Additional paid-in capital ............................................... 217,866 169,320
Net unrealized (depreciation) appreciation of investments ................ (1,379) 5,219
Foreign currency translation adjustment .................................. 1,291 9
Retained earnings (deficit) .............................................. 14,375 (6,120)
--------- ---------
Total common stockholder's equity .................................. 232,153 168,428
--------- ---------
$ 335,049 $ 267,235
========= =========

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

S-2

CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECMEBER 31, 1996, 1995 AND 1994
(In thousands)

CHARTWELL RE
CORPORATION
PREDECESSOR
----------------------
1996 1995 1994

REVENUES:
Net investment income ....................................... $ 651 $ 946 $ 808
Other income ................................................ 1,203
Realized gains (losses) ..................................... 51 90 (299)
-------- -------- --------
Total revenues ................................. 1,905 1,036 509
-------- -------- --------
EXPENSES:
Interest & amortization ..................................... 7,835 7,820 7,379
General expenses ............................................ 2,144 1,211 3
-------- -------- --------
Total expenses ................................. 9,979 9,031 7,382
-------- -------- --------
Loss before federal income taxes, equity in earnings of
subsidiaries and extraordinary item ...................... (8,074) (7,995) (6,873)
-------- -------- --------
Federal Income taxes:
Current .................................................. (2,783) (2,729) 66
Deferred ................................................. (2,131)
-------- -------- --------
Total income tax benefit ....................... (2,783) (2,729) (2,065)
-------- -------- --------
Loss before equity in undistributed income of
subsidiaries and extraordinary item ...................... (5,291) (5,266) (4,808)
Equity in undistributed income of subsidiaries .............. 27,660 11,505 1,373
-------- -------- --------
Income (loss) before extraordinary item ..................... 22,369 6,239 (3,435)
Extraordinary item, net of tax .............................. 1,874 465
-------- -------- --------
Net income (loss) ........................................... $ 20,495 $ 6,239 $ (3,900)
======== ======== ========

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

S-3

CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(In thousands)

CHARTWELL RE
CORPORATION
(PREDECESSOR)
----------------------
1996 1995 1994

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income taxes (paid) recovered ................................ $ 1,941 $ 5,193 $ 1,286
Interest received on investments ................................. 485 1,058 584
Interest paid .................................................... (7,415) (7,219) (4,951)
Net realized capital gains (losses) .............................. 51 90 (299)
Other, net ....................................................... (5,817) (756) (437)
-------- -------- --------
Net cash used in operating activities ....................... (10,755) (1,634) (3,817)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contributions and advances to subsidiaries ................ (18,058) (7,446) (30,000)
Cash from acquisition of Piedmont, net of expense paid ............ (672)
Cost of investments acquired ...................................... (3,789) (18,161)
Proceeds of investments sold ...................................... 4,723 6,344 11,691
-------- -------- --------
Net cash used in investing activities ..................... (13,335) (5,563) (36,470)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock .......................... 48,546
Net proceeds from Senior Notes offering ............................. 71,934
Issuance of long-term debt .......................................... 48,057
Redemption of long-term debt ........................................ (73,109) (25,900)
Conversion incentive ................................................ (1,537)
Dividends paid ...................................................... (828)
Other, net .......................................................... (82)
-------- -------- --------
Net cash provided by financing activities .................. 23,494 43,587
-------- -------- --------
Effect of exchange rate on cash ..................... 206 (5) 24
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ..................... (390) (7,202) 3,324
Cash and cash equivalents at beginning of year ........................... 8,707 10,508 7,184
-------- -------- --------
Cash and cash equivalents at end of year ................................. $ 8,317 $ 3,306 $ 10,508
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES:
Net income (loss) .................................................... $ 20,495 $ 6,239 $ (3,900)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Equity in undistributed earnings of subsidiaries ............... (27,650) (11,505) (1,373)
Net realized capital (gains) losses ............................ 51 (90) 299
Conversion incentive charged to net income ..................... 753
Deferred income taxes .......................................... (1,008) 4,118 (892)
Net change in other assets and liabilities ..................... (2,643) (396) 1,296
-------- -------- --------
Net cash used in operating activities .................. $(10,755) $ (1,634) $ (3,817)
======== ======== ========

The condensed financial statements should be read in conjunction with the
consolidated financial statements and

S-4

CHARTWELL RE HOLDINGS CORPORATION
SCHEDULE IV--REINSURANCE

Years Ended December 31, 1996, 1995 and 1994
(In Thousands)

Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Percentage
Ceded to Assumed from of amount
other other assumed
Gross Amount companies companies Net amount to net
------------ --------- ----------- ---------- ----------

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

CHARTWELL RE CORORATION (PREDECESSOR)

1995
Premiums earned:
Property and casualty insurance .. $ 0 $ 3,248 $123,506 $120,258 102.7%
-------- -------- -------- -------- ------
Total premiums ............ $ 0 $ 3,248 $123,506 $120,258 102.7%
======== ======== ======== ======== ======

1994
Premiums earned:
Property and casualty insurance .. $ 0 $ 2,500 $105,198 $102,698 102.4%
-------- -------- -------- -------- ------
Total premiums ............ $ 0 $ 2,500 $105,198 $102,698 102.4%
======== ======== ======== ======== ======

S-5

CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)

SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 1996, 1995 and 1994
(In Thousands)

Column A Column B Column C Column D Column E
-------- -------- ----------------------- -------- --------
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Deductions End of
Period Expenses Accounts Describe Period
------------ ---------- ---------- ---------- ----------

Year Ended December 31, 1996:
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1) ................... $5,717 $14 $5,731
Deposits:
FASB 113 Valuation Allowance ............ $1,502 $1,502

Year Ended December 31, 1995:
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1) ................... $2,649 $68 $3,000(2) $5,717
Deposits:
FASB 113 Valuation Allowance (3) ........ $1,502 $1,502

Chartwell Re Corporation (Predecessor)
Year Ended December 31, 1994:
Reinsurance recoverable:
Allowance for Uncollectible
Reinsurance (1) ................... $2,767 $118 $2,649
Deposits:
FASB 113 Valuation Allowance ............ $1,802 $300 $1,502

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

(2) Allowance for uncollectible reinsurance on the books of INSCORP at the date
of acquisition.

(3) Decrease in FASB 113 Valuation Allowance relates to a contract which was
commuted in 1994.

S-6

CHARTWELL RE HOLDINGS CORPORATION
CHARTWELL RE CORPORATION (PREDECESSOR)
SCHEDULE VI-SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
Years Ended December 31, 1996, 1995 and 1994

Reserves for
Deferred Unpaid Claim
Policy and Claim Discount if Net
Acquisition Adjustment any, deducted Unearned Earned Investment
Affiliation with Registrant Costs Expenses(1) in Column C Premiums Premiums Income
--------------------------- ----------- ------------ ------------- -------- -------- ----------

Years Ended:
December 31, 1996 .................. $ 17,903 $747,858 $ 81,599 $209,503 $ 43,598
Chartwell Re Corporation (Predecessor)
December 31, 1995 .................. 18,809 741,467 90,573 120,258 19,907
December 31, 1994 .................. 5,607 232,733 23,880 102,698 14,726

Claims and Claim
Adjustment Expenses
Incurred Related to
-------------------
Amortization
of Deferred Paid Claims
Policy and Claim Other Net
Current Acquisition Adjustment Operating Premiums
Affiliation with Registrant Year Prior Year Costs Expenses Expenses Written
--------------------------- ------- ---------- ------------ ----------- --------- --------

Years Ended:
December 31, 1996 .................. $152,338 $ (1,717) $ 52,030 $136,753 $ 19,050 $192,251
Chartwell Re Corporation (Predecessor)
December 31, 1995 .................. 86,470 479 28,790 56,813 11,961 123,314
December 31, 1994 .................. 77,716 861 24,295 46,871 10,178 113,962

- ----------
(1) The Company adopted SFAS No. 113 which, among other things, requires the
Company to record its reserves for unpaid losses and LAE without reduction
for amounts that would be recovered from retrocessionaires. The amount
recoverable from retrocessionaires is recorded as an asset on the Company's
balance sheet. The net of such asset and the reserves for loss and LAE is
$575.5, $561.6 and $197.3 million at December 31, 1996, 1995 and 1994,
respectively.

S-7

INDEX TO EXHIBITS

Exhibits
- --------

3.1 Incorporated by reference to Exhibit 3.1 to Chartwell's Annual Report
on Form 10-K for the year ended December 31, 1995.

3.2 Incorporated by reference to Exhibit 3.2 to Chartwell's Annual Report
on Form 10-K for the year ended December 31, 1995.

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

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

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

10.1 First Amended and Restated Credit Agreement, dated as of November 14,
1996 among Chartwell, a Delaware corporation, First Union, Fleet Bank,
Royal Bank of Scotland, CIBC/Wood Gundy, Credit Lyonnais (collectively,
the "Lenders"), First Union as agent for the Lenders, and First Union
National Bank (London Branch), as amended by the First Amendment to
First Amended and Restated Credit Agreement, dated as of January 24,
1997 by and between Chartwell, the Lenders, First Union as agent for
the Lenders, and First Union National Bank (London Branch).

10.2 Advisory Agreement, dated November 15, 1993, among Chartwell
Advisers, NLC, the Companies set forth in Schedule 1 attached thereto
and Chartwell Re. Incorporated by reference to Exhibit 10.39 to
Chartwell Re's Registration Statement on Form S-1 (File No. 33-75386).

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

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

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

10.6 Employment Agreement between Chartwell Re and Michael H. Hayes.
Incorporated by reference to Exhibit 10.1 to Chartwell Re's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1994.

10.7 Form of Incentive Agreement with Jacques Q. Bonneau. Incorporated by
reference to Exhibit 10.13 to Chartwell Re's Registration Statement on
Form S-4 (File No. 33-97010).

10.8 Reserve Indemnification Agreement. Incorporated by reference to Exhibit
10.2 to Chartwell Re's Registration Statement on Form S-1 (File No.
33-75386).

10.9 Amendment No. 1 to Reserve Indemnification Agreement. Incorporated by
reference to Exhibit 10.3 to Chartwell Re's Registration Statement on
Form S-1 (File No. 33-75386).

10.10 Consent to Assignment of Reserve Indemnification Agreement, dated March
6, 1992, from NCI and NWNL to CRCA and Amerisure. Incorporated by
reference to Exhibit 10.4 to Chartwell Re's Registration Statement on
Form S-1 (File No. 33-75386).

10.11 Tax Allocation Agreement, dated December 13, 1995, by and among
Chartwell, Chartwell Re, Drayton, Chartwell Reinsurance, RECO and The
Recor Insurance Company, Inc. Incorporated by reference to Chartwell
Re's 1995 Annual Report on Form 10-K.

11.1 Computation of Earnings per Share for the years ended December 31,
1996, 1995 and 1994.

12.1 Computation of Earnings to Fixed Charges.

21. Subsidiaries of Chartwell.

27.1 Financial Data Schedule